For Whom the Bell Tolls

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At Lloyd's of London the Lutine Bell salvaged from a wrecked Royal Navy frigate of the same name was traditionally rung once to signify disaster and twice to herald a ship's safe return. The ritual ended in the 1980s, but if ever an excuse to revive it were needed it came last week. After a 20-week courtroom conflict described by Justice Peter Cresswell as "the largest and most complex piece of civil litigation this jurisdiction has ever seen," Lloyd's was found not guilty of defrauding investors. A jubilant Lloyd's chairman Max Taylor refrained from giving the Lutine a double ring, but he was doubly delighted with the result. Not only did the decision close a "distant and troubled chapter in Lloyd's history," he said, but it would allow Lloyd's to "get on with the business of running the world's foremost specialist insurance market." As Taylor put it in an interview with Time, "We couldn't have wished for a more unequivocal decision."

That decision may yet be appealed, but for now the 300-year-old institution is happy to put behind it a damaging two decades of turmoil and litigation that brought predictions of its imminent collapse in the 1980s. Earlier this year Lloyd's found itself dragged into court by a group of its investors the so-called Names, who pledge all their personal wealth to underwrite insurance policies issued by Lloyd's syndicates claiming they were the victims of one of the great swindles of the 20th century. As Time recounted in a special report last February, the Names said they were fraudulently misled about huge potential liabilities resulting from compensation paid to American workers afflicted by asbestosis and lung cancer. They further alleged that the Lloyd's hierarchy was party to the fraud because it knew of the looming problems but allowed its syndicates to under-reserve for the resulting losses thus helping to conceal the true state of affairs from the recruits needed to fund a bailout.

For both sides in the trial the stakes were high. For the Names it was a last-ditch effort to prevent Lloyd's from extracting some $75 million it claimed was still owed in underwriting losses. These "dissident" Names are what remains of an investors' rebellion against Lloyd's cash calls in the late '80s and early '90s as the asbestos and other losses totaling $12 billion started feeding into the system. Back in 1996, 95% of Lloyd's 34,000 Names agreed to a settlement offered by Lloyd's called Reconstruction and Renewal (R&R), which enabled them to cap any future losses by reinsuring themselves through a company called Equitas created by Lloyd's. But some 230 "refuseniks," believing they were the victims of something more than bad luck in the marketplace, refused to sign up for R&R, deciding instead to do battle with Lloyd's in court. Unable to overcome Lloyd's immunity to prosecution for such lesser crimes as negligence, the Names were obliged to escalate the war and charge Lloyd's with fraud.

The stakes for Lloyd's were just as high. In the three centuries since it was founded in Edward Lloyd's Thames-side coffee house, Lloyd's has operated under the watchword "utmost good faith." Were it to be found to have engaged in fraud, even in the semi-distant past, its credibility would be undermined and along with it a premier position in a business where confidence summed up in the Lloyd's motto Fidentia is an essential ingredient.

Last Friday morning, rumors that Lloyd's had won the trial swirled through the corridors of England's Royal Courts of Justice long before the dissident Names trooped in to learn their fate. Despite Lloyd's legal army, the Names believed their side had clearly demonstrated fraud at Lloyd's the institution, as opposed to the syndicates. In court it also emerged that many Names had been ill-served by negligent syndicates. But they failed to prove to the satisfaction of the judge that Lloyd's itself had committed fraud. More specifically the judge rejected the allegation that Lloyd's Council was aware that exposure to asbestos-related claims required reserves "far in excess" of those reported in Lloyd's accounts.

Although disappointed, few Names were stunned by the result. Some saw the decision as a typical example of the Establishment protecting itself. Others, including Sir William Jaffray, who lent his name to the trial, will seek to battle on. They are emboldened by the recent entry into force of the European Convention on Human Rights, which they claim allows Lloyd's to be sued for negligence in lieu of fraud. "It's a severe setback for the Names," Jaffray said after the trial, "but it in no way exonerates Lloyd's. Nobody reading the judgment will be able to trust or do business with Lloyd's again."

The judge indeed handed down some harsh words. Despite all the Lloyd's reforms in the past, he said, "the catalog of failings and incompetence in the 1980s by underwriters, managing agents, members' agents and others ... is staggering (and brought disgrace on one of the City's great markets)." Assessing the tactics employed to recruit Names to syndicates in the mid- to late '80s, he said it was "strongly arguable" that the advice they received was "at best grossly negligent."

Names with no stomach for further court action may take comfort from the judge's assertion that it was "high time" litigation in Britain and elsewhere ceased and exhorted Lloyd's itself to seek a "fair, overall settlement" with the dissidents hammered out perhaps by an independent panel. Lloyd's, still wallowing in red ink (according to market estimates, losses could total as much as $4.5 billion for 1998-2000), has yet to respond. The refuseniks for their part are hoping for a deus ex machina in the form of criminal proceedings launched by U.S. government prosecutors who have been investigating possible mail fraud involving Lloyd's. But Lloyd's remains confident that the arguments that won the case last week will triumph in the future.

With reporting by Helen Gibson/London

TIME: The judge said the catalog of failings and incompetence was "staggering" and brought disgrace on one of the City's great markets. Is it a chastened Lloyd's that goes ahead?

Taylor: You have taken only half of what the judge said. He went on to say that he made no criticism whatsoever of Lloyd's as a regulator. So as far as we are concerned, this is history. The market is utterly different today because of the regulatory reforms that were started in the 1980s and work that has continued ever since.

TIME: So no taint of disgrace adheres to Lloyd's?

Taylor: Absolutely not.

TIME: The judge further said it was time litigation came to an end and suggested an independent review of the remaining cases. Will you respond to his suggestion to "pursue an overall solution"?

Taylor: We will continue to pursue our debts. The precise mechanisms by which we do that are to be determined, and we will certainly take account of the comments made by Judge Cresswell. He also made the point that he has no jurisdiction in this matter and this is simply a suggestion that he has put forward, and we certainly take it as being a helpful suggestion.

TIME: So you will respond positively?

Taylor: We have always known that once we got the result we would need to consider how to carry the debt collection process forward. But that is not something we are going to do in 24 hours.

TIME: You're confident that the judge exonerated Lloyd's of all charges of negligence?

Taylor: He has cleared Lloyd's on fraud and misrepresentation, absolutely.

TIME: In this age of corporate accountability, is it desirable or legitimate for the likes of Lloyd's to be immune from prosecution for anything other than fraud?

Taylor: This is exactly the way that it was dealt with in the Financial Services Act. It is the way it is dealt with in equivalent regulatory environments in this country and elsewhere.

TIME: Does Lloyd's have the right instruments to make sure the problems the judge referred to will not recur?

Taylor: Yes, of course.

TIME: What if anything have you learned from all the losses and litigation of the last decade?

Taylor: We are talking about things that happened 15 to 20 years ago. We regret what happened then, and we said that on many, many occasions. The lessons were learned a long time ago.