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Lloyd's settles lengthy Central Fund dispute

Posted On: Jun. 17, 2007 12:00 AM CST

LONDON—Lloyd's of London has settled a dispute with two brokerages over a reinsurance program for the market's Central Fund.

Lloyd's announced it had settled with London-based brokerages Benfield Group Ltd. and Aon Ltd., a London-based unit of Chicago-based Aon Corp.

The terms of the settlement were not disclosed.

Benfield announced that the settlement will result in a net charge to the reinsurance brokerage of about £8 million ($15.9 million).

"We are very pleased that this matter is now behind us. Aon's contribution to the global settlement and the financial impact for Aon reflects its role in the placement," Aon said in a statement.

In March 2005, Lloyd's settled a long-running dispute with the six former reinsurers of its Central Fund for £152 million ($261.2 million) but "reserved the right to pursue others involved in the placement of the policy for the shortfall."

The original dispute arose after the six former reinsurers of the Central Fund--which is financed by levies on syndicates and is intended to meet the liabilities of syndicates if they are unable to do so--stopped paying claims on the policy.

According to sources, the reinsurers stopped paying claims because of a dispute over whether Lloyd's was within its rights to use the policy to make payments to U.S. trust funds, which the market must hold because it is an alien reinsurer in the United States.

The policy, purchased in 1999, was intended to meet unrecovered losses to the Lloyd's Central Fund where those losses exceeded £100 million ($198.8 million) in any one year, subject to a £350 million ($695.8 million) limit. The aggregate maximum payout over the policy period was £500 million ($994.1 million).

In January 2005, Lloyd's announced that an arbitration panel had found that Lloyd's had correctly interpreted the wording of the policy.

However, the arbitration panel also said that the lead reinsurer--a unit of Swiss Reinsurance Co.--was entitled to avoid the contract because of the way Lloyd's had presented the risk.

Last week, Lloyd's announced it had reached a settlement with the two brokers.

"The settlement we have reached with Aon and Benfield enables us to lay this matter to rest and continue our excellent relationships with both organizations," Lloyd's Director and General Counsel Sean McGovern said in a statement.