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LONDON-Lloyd's of London could face continued litigation by U.S. members in U.S. courts if a federal appeals court ruling is upheld.
In a decision handed down earlier this month, the 9th U.S. Circuit Court of Appeals in San Francisco overturned a lower court ruling that members' disputes with Lloyd's can be heard only in English courts, paving the way for litigation from U.S. members who refused to accept the settlement under Lloyd's reconstruction and renewal plan.
A Lloyd's spokesman said it plans to file an appeal with the 9th Circuit by the end of this week.
If the court accepts the petition, it will schedule a hearing "en banc," which will include the chief judge from the circuit and 10 of the circuit judges hearing the appeal.
"The decision made does not affect R&R," said the spokesman. "It is a recruitment issue."
Nearly 300 U.S. Lloyd's members were party to the long-running action, which called for their Lloyd's memberships to be declared null and void under securities laws and demanded rescission, meaning they would not be liable for any losses incurred through their membership of Lloyd's.
In all, 576 U.S. members of Lloyd's did not accept the settlement offer, and Lloyd's has issued writs against 247 of them. However, until the appeal to the latest decision has been heard, Lloyd's will be unable to collect the cash it says the non-accepting U.S. members owe. Lloyd's was unable to say how much U.S. members owe.
If the 9th Circuit decision is upheld on appeal, Lloyd's would owe the members damages of up to $1 billion under anti-racketeering laws, contends the American Names Assn.
Lloyd's, however, is confident the decision will be overturned, as it "flies in the face of five previous circuit hearings," said the Lloyd's spokesman.
Separately, Lloyd's will be back in the U.K. High Court at the end of this week to test allegations of fraud by two members, Dennis Leighs and David Wilkinson.
Messrs. Leighs and Wilkinson had refused to pay their premium to Equitas Ltd., the reinsurer of Lloyd's pre-1993 liabilities, on the grounds that they had not accepted Lloyd's settlement offer. Although the High Court found against them on two counts last month (BI, Feb. 24), it decided to separately hear their argument that Lloyd's had acted fraudulently by concealing information on the scale of losses.
Lloyd's intends to argue that even were fraud to be proved, rescission-the complete voiding of Lloyd's membership-is not possible because irrespective of under what circumstances members joined Lloyd's, they subsequently entered into third-party contracts that override any other consideration. Also, it will argue that the two defending members are bound by the "pay now, sue later" principle in the Equitas reinsurance contracts. That principle says they must pay the Equitas premium first, then pursue their fraud claims.
The hearing is scheduled to last two days.
Meanwhile, the U.K. Department of Trade and Industry has issue a third solvency test for Lloyd's to strengthen policyholder protection. In answer to a Parliamentary question, Minister for Trade Anthony Nelson said he had been considering whether any steps were needed to strengthen Lloyd's solvency after the R&R plan had gone through.
"I have concluded that it would be appropriate to introduce an additional solvency test for Lloyd's, supplementing those already specified in the legislation," said Mr. Nelson.
Currently, Lloyd's is subject to two solvency tests, one covering the whole of the market and the other at individual members' level, which ensures they have enough assets to cover their liabilities. The new third test will also be applied at members' level, requiring each to have a margin of solvency in addition to meeting their estimated liabilities.
The new solvency margin for individuals is the same as the one applied to Lloyd's globally: the greater of either 16% of the total annual premiums or 23% of average annual claims over a three-year period.
This test "will provide policyholders with an additional degree of protection against adverse developments, and will also encourage a prompt response should financial difficulties ever begin to develop at Lloyd's in the future," said Mr. Nelson.