Lloyd's Of London Falling Down

By John Greenwald

Hoping to earn income to help pay for her children's tuition, Dona Evans invested in Lloyd's of London in 1987. The legendary insurance giant was recruiting fresh capital--in fact, Lloyd's was desperate for it--and Evans jumped at the chance to become a Lloyd's Name, as the elite 300-year-old institution calls its investors. In Britain, being a Name was a sure thing; you became economic royalty, even if you weren't one of the many Names who held real titles.

Still, Evans was worried about reports that Lloyd's was facing a rising tide of claims from asbestos-industry workers who were dying of lung diseases--cancer and asbestosis--caused by exposure to the building material. Tut, tut, said a Lloyd's executive who dismissed the risk and explained that while the Names "were of course liable in theory for losses right down to their cufflinks, in practice it never happens because it's all reinsured."

Fast-forward to the present. Lloyd's has indeed been rocked by ruinous asbestos claims, and managed to survive only with the help of a pliant Parliament. But a stone-broke Evans has lost her home. Thousands of Names have been wiped out financially. Some committed suicide. Even such notables as brokerage founders Charles Schwab and Dan Lufkin have been exposed to the loss of millions in what has been called the biggest and baldest swindle in history, perpetrated behind the clubby doors of the world's most respected insurance organization.

Evans is fighting it out, party to a huge lawsuit born of Lloyd's alleged perfidy, which comes to trial in London next week. The suit was filed on behalf of dissident Names who have refused to join a 1996 settlement, claiming that Lloyd's, facing insurmountable losses, duped them by concealing the billions of dollars of asbestos claims it knew to be in the pipeline. "I believed I could trust Lloyd's to look after my interests in much the same way I would trust my bank," says Evans, who lives in London. As a result, she says, "I pledged my house and lost everything."

Lloyd's denies any wrongdoing and will defend itself vigorously. The insurance behemoth "has never been found guilty of fraud," says spokesman Adrian Beeby. Lloyd's has already beaten back a welter of legal actions in Britain. But it faces more charges on this side of the Atlantic. The U.S. Attorney in New York City has made Lloyd's the target of an intensive criminal investigation. And in a pivotal case due for trial early next year before a California state court in Los Angeles, a father and two daughters who lost heavily in Lloyd's have brought allegations of fraud that closely parallel the London charges.

TIME's European edition last week published a 23-page investigative report on Lloyd's by author David McClintick, whose books include the 1983 best seller Indecent Exposure, about embezzlement and power games at Columbia Pictures. The TIME report lends some support to assertions that top Lloyd's execs were aware of the devastating impact that the asbestos claims were likely to have, even as Lloyd's was feverishly recruiting unsuspecting new Names to help absorb the losses.

The TIME investigation tracked the alleged conspiracy through the labyrinthine structure of Lloyd's, which is not an insurance company like, say, Allstate, but a vast insurance exchange that evolved from Edward Lloyd's wharfside coffeehouse in the 17th century. As then, members bid for underwriting business, although today they do so from a four-story-high, block-square trading room in London. These underwriters form syndicates that are in turn backed by Names--investors who range from British notable Camilla Parker Bowles to U.S. business tycoons like Lufkin and Schwab, columnist Robert Novak, Supreme Court Justice Stephen Breyer and smaller fry like Evans. Names are required to risk their entire personal wealth when they back Lloyd's policies in exchange for the right to a slice of underwriting profits. Atop the whole shebang sits the Council of Lloyd's, a ruling body of 18 exchange members who regulate the market.

It's this Council that has orchestrated a conspiracy for more than two decades, says Sir William Jaffray, the lead Name in the upcoming London trial. "By the late 1970s," he told TIME, "the Committee [Council] of Lloyd's knew they were facing a crisis, and by 1982 the hierarchy knew that Lloyd's was bust. The only way they could keep going was to suppress the asbestos information, cook the books to ensure they were still showing profits, and go after new investors."

Evidence in a number of lawsuits indicates that many new recruits wound up on syndicates that were heavily exposed to asbestos claims, allowing key insiders--including Murray Lawrence, a future chairman of Lloyd's, who would serve from 1988 to 1990--to quietly lay off their own risks. "It has been a classic Ponzi scheme, in my opinion," British investor John Finlay told a House of Commons committee in 1995.

Lloyd's troubles began in the U.S., in Beaumont, Texas, where in 1969 a dying insulation installer named Clarence Borel sued 11 asbestos companies for failing to warn him about the hazards of handling the material. Four years later, a federal appeals court held the companies liable. The lawyers did the rest, opening the floodgates to damage claims that would eventually bring down huge asbestos companies like Johns Manville Corp., which restructured itself after a trip through bankruptcy court. The insurer of last resort--the party most exposed to the torrent of claims--was Lloyd's of London.

To withstand the financial exposure, the Jaffray suit says, Lloyd's launched its biggest recruitment drive ever. Veddy British recruiters fanned out across the U.S., enlisting the aid of big brokers like E.F. Hutton (now part of Citigroup) to line up prospects. The number of Names soared from about 6,000 in the mid-1960s to 14,000 in 1978 and exceeded 34,000 by the late 1980s. These were discount Names too, Lloyd's having lowered the net worth needed to become a Name to substantially below $1 million. The lower bar gave entry to investors such as Shirley Cook, a third-grade teacher from Texas, and Elizabeth Bencsics, the wife of an electrician in New Mexico, who lost big chunks of their life savings. "At school we were taught that there was nothing more honorable than Lloyd's of London," Bencsics says. "I was thrilled to be part of it."

Yet by the early 1980s Lloyd's had begun to fear not only the onset of asbestos losses but future litigation arising from the recruitment drive. Its answer was to persuade Parliament to grant the company immunity from lawsuits by the Names--something the lawmakers might not do were they to get wind of the insurer's financial problems. And so, according to the London suit, Lloyd's duly set out to cook the books. The complex scheme allegedly involved closing the books prematurely on growing losses to conceal them.

That was good enough for an unwitting Parliament, which in 1982 gave Lloyd's its exemption from future lawsuits. The insurer could thenceforth be held liable for damages only if a plaintiff could prove "bad faith," something that is difficult to establish under British law.

The Bank of England was less awed by Lloyd's than Parliament. In fact, it grew alarmed by what it was hearing and in that same year launched a top-secret inquiry into Lloyd's. The bank concluded, in a letter to Lloyd's chairman, Peter Green, that if the insurer collapsed, it would threaten the entire British banking system. As an insider told TIME: "This was a significant factor behind the continued recruitment, or indeed the increased rate of recruitment, of Names."

In an effort to stabilize Lloyd's worsening condition, the Bank of England exerted its influence to have an outsider, Ian Hay Davison, named chief executive officer in 1983. But the real power remained with chairman Green, a richly corrupt official who in 1986 was found guilty by a tribunal of Lloyd's members of "gross negligence" and "discreditable conduct." Davison lasted only two years as Lloyd's CEO, and later published a bitter book describing the experience.

By the late 1980s the signs of trouble at Lloyd's had surfaced enough to alert investors. News accounts noted that a growing number of Lloyd's Names were cashing in their investments. Lloyd's finally acknowledged the extent of the asbestos calamity in 1991, when it reported a loss of $980 million. The jarring news accompanied a cash call to unlucky Names who had backed the affected syndicates. Lloyd's reported loss climbed to $3.85 billion in 1992, in part as a result of disasters ranging from the Exxon Valdez oil spill to the San Francisco earthquake of 1989. The 1993 loss was even more dismal: $4.4 billion.

The disclosures of Lloyd's true financial condition set off a frenzy of lawsuits and government probes on both sides of the Atlantic. British police were swamped by reports of fraud. "We were hearing the same thing from every direction," a senior law-enforcement source told TIME. "There was worry that the whole insurance business of the U.K. could collapse." In Washington the Securities and Exchange Commission launched two separate investigations of Lloyd's in 1991, only to halt both a year later in what former chairman Richard Breeden describes as deference to British court actions.

The growing legal storm lashed Citibank in New York, where some $12 billion of Lloyd's North American reserves were on deposit. Paul Cohen, a supervising examiner for the New York State insurance department, declared in 1995 that the reserves were "seriously deficient" and "unlikely to cover all losses" at Lloyd's. Cohen accused Citibank of permitting Lloyd's to shift assets from the accounts of Names who owed nothing to pay the obligations of those Names who did--in violation of the Names' contracts with Lloyd's and trust agreements with Citibank. Citibank declined comment, citing pending litigation.

In Britain, Lloyd's has been protected by its own act of Parliament and by an abiding fear of the insurer's still formidable clout. "Lloyd's has more power than the government," says a knighted landowner and victim of a bad Lloyd's investment. "We are scared. People are frightened. This is not the England I knew."

Even as Lloyd's deflected the lawsuits, it hounded its Names to pay the price. Some did. Roy Bromley, a ruined Name, balanced a shotgun on the ledge of open French windows at his London home and shot himself in the chest. Richard Burgoyne shot himself at his home in 1993--his wife and two sons, ages 8 and 11, found his body in their living room. Estimates of Lloyd's-related suicides range from a dozen to more than 30. The gentlemen at Lloyd's acknowledge only seven.

Reeling from financial pressure and haunted by the specter of suicides, thousands of Names agreed to a 1996 settlement Lloyd's concocted in response to legal actions and growing public outrage. Called Reconstruction and Renewal, the settlement created a reinsurance company known as Equitas that assumed responsibility for all of Lloyd's pre-1993 obligations. At the same time, Lloyd's reduced and capped the pre-1993 debts of Names who agreed to pay up and waive all claims against the company. But this global deal has raised more questions than it has answered. A committee of the House of Commons derided it as little more than a scheme "to shore up an institution reeling from past failings." Today the structure of the settlement looks fragile, its future in doubt and its legality under fire.

Lloyd's too is struggling mightily. It is a shadow of its former self, with estimated losses of nearly $200 million for 1998 and 1999 combined. Corporations now account for 80% of Lloyd's capital, leaving the Names to play only a minor role. But even with this corporate cash, Lloyd's capacity to write insurance is lower today than it was in 1990. Meanwhile, Lloyd's share of the worldwide insurance market has fallen from 10% at the beginning of the 20th century to less than 2% today. Even the insurer's name has been diminished. No longer the sonorously alliterative Lloyd's of London, since 1997 it has been just Lloyd's.

The company publicly exudes confidence, the stiffest of upper lips. "Our future vision is of a Society containing strong, well-managed, increasingly independent businesses operating to very high standards," says a recent Lloyd's brochure titled Priorities for Growth 2000-2003.

Very nice, that, but Lloyd's now faces a trial that threatens to expose its darkest doings. "Finally, Lloyd's is in the dock and will have to answer the tough questions it has been dodging for years," says former Name Clive Francis, a retired Royal Air Force pilot. How well Lloyd's responds to those questions could determine whether the institution that once was part of the very bedrock of Britannia has any future at all.