Seminar draws together lessons from the Lloyd’s crisis
The Centre for Commercial Law Studies (CCLS), based at Queen Mary University of London (QMUL), held a sold-out seminar on Tuesday 17 November on the legal aspects of the crisis that threatened to engulf Lloyd’s of London insurance market twenty years ago.
Over a period of five years, huge insurance losses had been heavily concentrated on a few syndicates, meaning big losses for thousands of Lloyd’s members. As they all had unlimited liability, some were faced with bills they could not meet. Eventually, the solvency of the whole market was threatened.
“The story is full of valuable legal lessons,” said Andrew Duguid, author of the definitive book on the crisis, On The Brink, published last year by Palgrave Macmillan.
The lessons include the value of: operating under an agreed framework of law, in this case, English law; clearly established contractual obligations; a constitution giving robust powers to a responsible authority, in this case the Lloyd’s Council; being advised and guided by imaginative and capable legal experts, in this case leading City firm Freshfields and others; the extra risks involved in US trading; and wider lessons about leadership, patience, negotiation and compromise.
The seminar was also addressed by several legal experts intimately involved in different roles during the crisis, and by Sir Adam Ridley who played a critical role in devising a solution.
A packed audience heard how the English courts:
- managed a series of complex hearings about allegations made by 'action groups' of Lloyd's Names
- in ground-breaking judgments, found that some action groups were right: some market professionals had been negligent and spectacularly incompetent, awarding record amounts of compensation to the members of Lloyd’s, often known as ‘Names’
- also required Names to meet all their obligations to pay insurance claimants
- dismissed claims of fraud
Meanwhile, the market's future was threatened by rising debts. These key court decisions defined the boundaries within which Lloyd's - advised by Freshfields - was able to orchestrate a package deal solution to the crisis.
At a late stage the deal was the subject of a judicial review hearing in England, which ruled that the Council of Lloyd's was acting within its powers in every respect, including the imposition of part of its package. In a last minute drama, a US court’s injunction to prevent the offer being made to American Names, was swiftly overturned by the Federal appeal court in Baltimore.
According to Mr Duguid: “An independent legal review confirmed Lloyd's analysis that there was no easy alternative to the reconstruction proposed, whereby all genuine insurance claimants would be paid in full.”
He added: “The reconstruction of Lloyd's went ahead, with £15 billion of old liabilities transferred to a new reinsurance vehicle, Equitas, in the largest operation of its kind ever undertaken. This was so well managed that eventually Warren Buffet decided to reinsure it, finally removing the shadow of past losses from the Names.”
He concluded: “Meanwhile the Lloyd's market underwent a transformation. Corporate membership largely replaced Names and new high standards of supervision were rigorously enforced. The result is a British success story of growth, innovation and a steady profits.”
The seminar was entitled The Lloyd's Crisis and Its Resolution – Legal Aspects. Speakers included:
- Andrew Duguid, author of On the Brink, How a Crisis Transformed Lloyd's of London. Director at Lloyd's throughout the crisis, and also Secretary to the Council of Lloyd's
- Graham Nicholson, Chief Legal Advisor, Bank of England; previously with Freshfields Bruckhaus Deringer (advising Lloyd’s, in particular regarding Equitas)
- Adam Ridley, member of the Council of Lloyd’s and of the Lloyd’s Regulatory Board from 1997 to 1999, subsequently Chair of the independent "Names' Committee" set up by Lloyd's and Chair until 2014 of the Trustees of Equitas
- Julian Burling, Barrister, Serle Court; Counsel to Lloyd’s 1995 to 2010. Author of Lloyd’s: Law and Practice
- Robert P. Mollen, Partner, Fried Frank. US special counsel to Lloyd's in connection with Reconstruction and Renewal
The event was chaired by Professor Charles Goodhart, London School of Economics, and was organised by Dr Miriam Goldby and Professor Rosa Lastra, Insurance Law Institute, Centre for Commercial Law Studies, QMUL, and Dr Eva Micheler, Systemic Risk Centre and Law and Financial Markets Project, LSE.