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Lloyd’s Names: Correspondence

Answer

I have asked the Editor to publish in the Official Report the letters which the Economic Secretary sent to the noble Lord on 31 October and 9 November. The letters have also been placed in the Library of the House.Letter from the Economic Secretary to the Treasury to the noble Lord, Lord Jenkin of Roding, dated 31 October 2005:Thank you for coming to meet Lord McKenzie and me on 19 October. I thought it was a very constructive and helpful meeting and I trust you feel likewise. I agreed to set out in writing to you several points that we discussed about the moratorium to try and clear up some of the misunderstandings that remain around the legislation.Ability of a Name to challenge insurance claimsYou explained that there is significant concern that the process of applying for a Lloyd’s Market Reorganisation Order (LMRO) and in particular the moratorium in regulation 8 may prevent Names challenging the validity of insurance claims against them.I am happy to confirm that this is not the case. First, recognising that there are potential claims which call into question the ability of the Lloyd’s market to continue to meet its regulatory solvency requirements, so that an application for an LMRO should be made, does not imply that the legal validity of those claims has been accepted. That would remain a matter for the members, their agents and other advisers in respect of each insurance contract.Second, the moratorium means that no proceeding can be brought against a Name without the permission of the court. This is designed to protect the Names against opportunistic litigation by policyholders or others. It is also important to ensure order is maintained in dealing with multiple insolvencies or potential insolvencies within the market. It should be noted that the moratorium is worded in terms of ““proceedings or other legal process””. It is not in terms of the ability of a member to do particular things in litigation. Once the proceedings are allowed to go forward, that implies the whole proceedings, including the ability of the member to make the best case he can. It is not designed to and does not remove or fetter a Name’s right or ability to defend an action against him that is allowed to proceed. Take for example the case where a policyholder alleges a Name owes him monies under an insurance policy and the policyholder seeks the permission of the court to commence proceedings against that Name to recover those monies. In the event that the court gives permission to the policyholder to commence litigation against a Name, it is the whole legal process of instituting and pursuing a claim in the court against an identified defendant that is allowed to go ahead—and that necessarily includes the rights of the defendant to defend himself. Any proceeding would then be conducted as if the LMRO did not apply to the litigant. This example extends to any litigation launched against a Name. It is worth reiterating that any moratorium only comes into effect on the making by a court of a Lloyd’s Market Reorganisation Order and that any moratorium is not permanent.The moratorium allows for a ““breathing space”” in which the reorganisation controller can put together a plan for achievement of the objectives of the LMRO without the assets within the market being further depleted by litigation. That process does not involve the reorganisation controller making commitments to third parties which bind members as to their liability under a particular insurance contract.I should add, for clarity, the existence of a LMRO does not prevent a Name commencing or continuing proceedings against others (except those market participants and others specified in regulation 8(1) who would be covered by the moratorium).You mentioned in the meeting that we should consider setting up a process whereby Names are consulted about the need for an LMRO. It appears that this suggestion, at least in part, stemmed from a misunderstanding of the term ‘approved debt’ which I deal with below and thus I hope it is clear that the need for an additional stage to the process in unnecessary. I should, however, make a few more general comments about the suggestion.In the circumstances in which the FSA or the Society would be thinking of applying for a LMRO there would be considerable uncertainty and market turmoil. The moratorium could be expected to facilitate examination of the provenance of particular claims and that examination would continue to be carried out by Managing Agents in the normal way. If questions arise as to whether a LMRO should be applied for, then it would be difficult for FSA in particular to carry out a formal consultation given the urgency of the issue. The moment that any sort of consultation of this sort was begun, one could expect a flurry of opportunistic litigation would begin because the existence of potential problems would be immediately apparent. The FSA would consider the Lloyd’s returns and information similar to the Lloyd’s returns as part of its ongoing supervision of the market to assess whether or not there was an issue with the solvency of Lloyd’s. This would not involve an assessment of each individual’s solvency and individual claims. The assessment of the resources in the market for solvency purposes would be judged by the funds in the market. The decision to make an application for an LMRO would not hang on the validity of one claim subject to proper reserving procedures.Ability of a Name to commence or continue legal proceedingsYou also expressed concern that the legislation would prevent Names from continuing to pursue an action against HM Treasury for its alleged failure to implement European Community obligations for the regulation of the Lloyd’s market (in particular the current ongoing NACDE litigation, Frederick Thomas Poole and others v HM Treasury (““the Poole litigation””)).It is, of course, not the intention of the Treasury to legislate to prevent NACDE or any other Names pursuing a claim against it. I can confirm that this legislation does not, of itself, prevent the Poole litigation, or any other litigation against us continuing. That is because regulation 8(1) applies in respect of actions against Members as opposed to actions by them. Indeed, I can confirm that as part of the early stages of this litigation, there is a court hearing for the Poole litigation on 4 November.On a general note, if, for whatever reason, a Name were unable to meet his liabilities, it may be that the appointment of a receiver or trustee in bankruptcy for that Name would be sought. If appointed, they would need to decide whether or not that Name should continue to pursue any litigation. This is the position regardless of whether or not an LMRO is made, in line with general insolvency law.Approved debtI understand that you are happy that a recent official letter on this subject addressed the concern, but I think it is worth answering the point again.There has been concern that regulation 8(4) (which talks about an ““approved debt””) means that Lloyd’s can unilaterally determine whether or not a Name is liable to a policyholder and that any Name would have no opportunity to challenge such a decision.I can reassure you that this is not the case. Regulation 8(4) needs to be read in conjunction with regulation 8(12) that defines the terms used in regulation 8(4). Regulation 8(4), when so read, says a security granted over some of the assets of a Name held at Lloyd’s for the purposes of complying with the regulatory requirements of overseas regulators can be enforced. This regulation is therefore only relevant to Names currently writing business in the market and does not include any Names that are not currently underwriting. It is necessary to ensure that overseas regulators are satisfied with the robustness of the situs arrangements they have established as part of the requirement for Lloyd’s Names to have permission to write insurance in their jurisdiction.Nothing in these regulations prevents an individual seeking to be excluded from the LMRO by application to the Court. An affected market participant could seek to have the order set aside, but to be successful would have to convince the court that the objectives identified in regulation 5 would be met better by stopping the process, rather than by allowing the process of examination and planning that the Regulations provide for to proceed. Other market participants may have different views on the desirability of halting the process and ending the moratorium.Duration of LMROYou noted that the duration of any LMRO is not specified in the legislation.This is correct. We considered whether we should specify the duration of any LMRO in the legislation and decided not to for a number of reasons including:It is not possible to predict with any degree of confidence the precise events that may give rise to the need for an LMRO and thus the precise situation in which it needs to operate. We therefore cannot be clear whether any LMRO would need to be in place for 12 months or longer (or conceivably a shorter period). Given this, we did not want to put an arbitrary figure in the legislation, which may fetter the court’s handling of the matter and mislead as to the likely duration of the matter.We could be comfortable to have a provision without specific duration because the reorganisation controller is an officer of the court and the whole process would be overseen by the courts. Any matter would be before the courts on a continuing basis and the courts would be best placed to consider on each occasion whether or not the LMRO should remain in force. Indeed the court has to be satisfied in the first place that any regulatory solvency requirement is not or may not be met and that the objectives of the LMRO in dealing with such a situation are likely to be achieved. For the duration that this is the view taken by the Court, and only for as long as this is the case, will the LMRO remain in force.I hope that this letter addresses your concerns. Please let me know if there is any further clarification I can provide on these regulations or the directive more generally.Letter from the Economic Secretary to the Treasury to the noble Lord, Lord Jenkin of Roding, dated 9 November 2005Further to my letter of 31 October 2005, I also agreed to write about other issues you raised about the Regulations when we met.Scope of DirectiveYou explained that some do not believe that Equitas and Equitas reinsured Names are within the scope of the Directive and asked for my comments on this issue.It is correct that the Directive does not apply directly to Equitas because it is a reinsurer. As a reinsurer, in the event that Equitas were to fail, outstanding liabilities under insurance contracts reinsured by it would revert to the Names it reinsured. Such Names would be insurers for the purpose of the Directive. They remain liable ultimately if those with whom the contracts were reinsured are unable to meet claims under them and, as Names are part of the association of underwriters known as Lloyd’s. It was therefore necessary to find a way of implementing the Directive that applied certain provisions of it to those Names. Failure to do so would have been a failure to implement the Directive and in particular a failure to the effect required as to priority of insurance claims under Article 10 of the Directive.As part of the association of underwriters known as Lloyd’s, we believed it was appropriate to treat them as insurers for the purposes of insolvency only in the event that the requirements of the Directive were triggered for the association. This means that priority is given to insurance creditors over other unsecured creditors in relation to their unencumbered assets only in circumstances when Equitas is unable to meet its liabilities AND the solvency of the market is in doubt. We have, however, given them the initial benefit of the moratorium once an LMRO is made in the event that the solvency of the market is in doubt.Mutualisation You expressed concern that any LMRO would inevitably have to operate on the basis that Equitas mutualisation would extend to the current and future liabilities of names without redress.An LMRO would not operate to mutualise losses. It is suggested that Equitas has mutualised the losses it has reinsured. That may be the case. However, it is not a matter for the Treasury to interfere with commercial arrangements. That is one of the reasons why the regulations overlay the existing legal position rather than altering it.Payments to the Central FundYou expressed concern about current and past unlimited liability Names being required to make good a central fund shortfall.It is correct that there may be circumstances where Names currently underwriting insurance may be asked to contribute further sums to the New Central Fund to enable the market to continue to write business. It will then be a matter for Names to decide if they want to be able to continue to write business in a Lloyd’s market. However, it is not possible for pre 1996 Names to be required to contribute to the New Central Fund. This is solely a matter for them. The LMRO does nothing to change this.

Secondary information

Type

Written question

Reference

2224; 675 c94-8WA

Session

2005-06

Related items

Deposited Paper HDEP 2005/564
Monday, 21 November 2005
Deposited papers
House of Lords

Subjects

Company liquidations Civil proceedings Liability EU law Insurance companies Insolvency Lloyds of London Treasury Equitas

Legislation

Insurers (Reorganisation and Winding Up) (Lloyds) Regulations 2005

Link

View this Written question on www.publications.parliament.uk