Lloyds of London The Curious Case of Equitas Re

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Oct 2004

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Editor's Note:

Editor's Note: This article is a follow-up to the author's article
"Meltdown at Lloyd's: A Few Topical Issues," which
appeared in the September 2004 issue. The author's own technical
terms (including references to the RRC series of "Reconstruction and
Renewal" documents) are defined in the Master Glossary downloadable
from <a href="http://www.astorlaw.com">http://www.astorlaw.com</a>. The reader should note the considerable legal complexity of the
Lloyd's enterprise and the "Equitas" construct, of which
the present article conveys only an indication.<a href="#1" name="1a">1</a>
</blockquote>

<h4>Equitas Re: An Insolvency Diversion?</h4>

By 1996, the insurance enterprise colloquially known
as "Lloyd's of London" was insolvent, having sold an
indeterminate number of unlimited general liability policies—in
effect, live and subsisting blank checks for asbestos, pollution and health
hazard risks—to U.S. corporate EquitasRe-assured-at-Lloyd's in
the 1950s through the early 1990s. Many of those checks remain valid and
current. Some remain yet to be physically found. After a reserving exercise
at Lloyd's costing millions of pounds,<a href="#2" name="2a">2</a> a number was finally arrived
at purporting to be a fair quantification of the Lloyd's
enterprise's previously allegedly unquantifiable<a href="#3" name="3a">3</a> exposure to
those extant policies. Having been quantified, why those liabilities could
not then simply remain at Lloyd's is a question that has not been
answered satisfactorily.

The Lloyd's enterprise then needed a device
that would give the false impression to the policyholders concerned that it
had extricated itself from those liabilities and had validly transferred
them—by means legally binding on relevant policyholders—out of
the enterprise to an entity of less ample means than itself. This entity
could then plausibly bargain with policyholders to pay them materially less
than 100 percent of their true value, thus sparing its own and the
Lloyd's enterprise's assets. International insurance
practitioners around in 1996 will well remember the crisis. Equitas
Reinsurance Limited<a href="#4" name="4a">4</a>—apparently the world's largest
reinsurance company—was the device set up by the Council of
Lloyd's, in close cooperation with insurance regulators in a number
of jurisdictions.

The Council of Lloyd's then collected the
necessary reserve from various sources—principally from such members
of Lloyd's as were then left holding<a href="#5" name="5a">5</a> the liabilities (some of whom
persist in refusing to pay their so-called "Equitas
premium")—capitalised Equitas Re<a href="#6" name="6a">6</a> accordingly, and procured
Equitas Re to sell 100 percent whole-account reinsurance compulsorily to
those members.<a href="#7" name="7a">7</a>

<blockquote><blockquote>
<hr>
<big><center>
Settling at Equitas Re appears and can easily be made to seem—falsely —a "win-win" outcome for both sides.
</center></big>
<hr>
</blockquote></blockquote>

<h4>Old-year Liabilities Then Vanish...</h4>

Though it had and has no fresh money of its
own—so is no more than a mere adjunct of the already closed and
insolvent Lloyd's financial system<a href="#8" name="8a">8</a>—Equitas Re and its now
self-averredly unstable security are the pretext on which U.K. and some
U.S. state insurance regulators then allowed, and continue to allow,<a href="#9" name="9a">9</a> the
Lloyd's enterprise to take 100 percent credit on its balance sheet
for all those ceded liabilities.<a href="#10" name="10a">10</a> In various adroit regulatorily approved
moves concluded on or around Sept. 3, 1996, the Lloyd's enterprise
and its closed financial system thus went from being (unquantifiably or
quantifiably) insolvent one minute to having no relevant balance-sheet
liabilities at all the next. From that date, the Lloyd's enterprise
was magically rendered solvent. Ed Muhl, then New York superintendant of
insurance, summarised the insurance regulator's dilemma by frankly
admitting that regulatory obstruction of the Equitas construct would have
been commercially unwise.<a href="#11" name="11a">11</a>

<h4>...But Cedant Still Personally Liable</h4>

In erecting and effecting this back-office
engineering between relevant members of Lloyd's and Equitas Re, no
one bothered to involve the EquitasRe-assured-at-Lloyd's. No
EquitasRe-assured-at-Lloyd's was personally privy to any of the legal
instruments setting up Equitas Re or empowering it to sell reinsurance or
manage relevant claims. As with any conventional outward reinsurance, the
EquitasRe-reinsured member of Lloyd's still remains contractually
liable to the policyholder for the entirety of the ceded business,<a href="#12" name="12a">12</a> regardless
of enterprise-level balance sheet accounting ruses. No relevant instrument
novates any ceded liability away from any relevant member of Lloyd's
and into Equitas Re personally. The EquitasRe-assured-at-Lloyd's is
still insured at Lloyd's, with the extensive enterprise-level
securitisation entailed and regardless of the particular individual
member's personal financial condition.

<h4>Over to Equitas Re</h4>

Over then to Equitas Re to handle<a href="#13" name="13a">13</a> and front
claims on the spirited-away pre-1993 Lloyd's non-life liabilities. In
its current operations, one minute the company claims imminent insolvency
(in settlement negotiations), the next it avers solvency (to insurance
regulators). One minute it claims it is completely independent of the
Lloyd's enterprise; not so on examining the constitution of Equitas
Holdings Ltd., which stipulates a preferred share owned by Lloyd's
and a "Lloyd's director" appointed by Lloyd's. One
minute it claims to be the EquitasRe-assured's-at-Lloyd's
sole recourse; not so when sued personally as assumption reinsurer in U.S.
federal or state court, which proceedings it defends by averring that it is
a mere reinsurer and run-off agent. No wonder the
EquitasRe-assured-at-Lloyd's is confused.

In addition to this day-to-day smoke and mirrors,
Equitas Re's principal agenda, in which it also succeeds admirably,
is to give EquitasRe-assureds-at-Lloyd's the overriding false
impression that the Lloyd's enterprise is no longer liable to pay
their claims. The more it can thus manage to distract and materially
shortchange EquitasRe-assureds-at-Lloyd's, the more it will spare the
Lloyd's enterprise and current Lloyd's enterprise assets. The
Lloyd's enterprise hopes that a day of reckoning will never come.

Alternatively, if and when remaining
EquitasRe-reinsured liabilities do return to the enterprise's balance
sheet—whether by regulatory diktat or through Equitas Re becoming
insolvent—the enterprise hopes that they will then not be on a scale,
or of an order, sufficient to threaten enterprise-level insolvency, and or
that the enterprise itself will by then be in a financial condition less
parlous than in 1996 and more able to withstand them.

<h4>Foreground Summarised</h4>

Averring that it—rather than the Lloyd's
enterprise with its famous "chain of security"—is now the
EquitasRe-assured-at-Lloyd's' sole recourse, Equitas Re's
standard message comprises four principal points: (1) We are impecunious;
accept our offer of materially less than 100 percent of your
entitlement—ideally no more than 37 percent—while we still have
the money;<a href="#14" name="14a">14</a> (2) we are about to go insolvent, at which point you will
have to prove our insolvency; (3) you have no recourse to the Lloyd's
enterprise, or it is wholly impracticable to invoke it; (4) as a last
resort, you will have to collect against each individual relevant member of
Lloyd's for his insignificant discrete participation on your
insurance contract.

This contrived message perplexes the
EquitasRe-assured-at-Lloyd's, not yet admitted to the mystery of
precisely how the supposedly superior securitisation blandished by the
famous "Lloyd's of London" came to just disappear in the
first place, and laboring under the misapprehension that he has, by some
due process yet to be revealed, been validly dispossessed of his recourse
rights to the Lloyd's enterprise.

He looks to insurance regulators, his own lawyers and
his Lloyd's broker to protect him from such nonsense, but is badly
served by each. No insurance regulator gainsays Equitas Re's sales
pitch, or even appears interested in Equitas Re's persistent
predictions of its own imminent insolvency.

Every relevant Lloyd's broker brokes claims on
EquitasRe-reinsured insurance contracts at Equitas Re<a href="#15" name="15a">15</a> rather than at
Lloyd's, further shielding the Lloyd's enterprise from its own
liabilities. Some Lloyd's brokers are on record as endorsing Equitas
Re's sales pitch, urging their clients—many of whom mean
nothing commercially to the broker—to take what they can reasonably
get from Equitas Re while Equitas Re still has some money available.
Bolstered by this multiplied and mutually reinforced misinformation from a
variety of apparently independent and disparate sources, Equitas Re has
thus acquired, and retains, a significance among
EquitasRe-assureds-at-Lloyd's wholly disproportionate to its actual
importance. Its St. Mary Axe office is aptly located indeed.<a href="#16" name="16a">16</a>

<h4>Settlements under a Misapprehension</h4>

Often unaware that he is still, and (paradoxically)
always has been, fully securitised at Lloyd's, and that a variety of
specific dedicated and not-dedicated trust and other funds—protected
by Equitas Re's misrepresentations—remain available to pay his
valid claim 100 percent, the EquitasRe-assured-at-Lloyd's instructs
his lawyer to negotiate an acceptable settlement at Equitas Re—with
no thought given to applying to some appropriate claims-handling office at
Lloyd's. The settlement document contains a comprehensive release of
all relevant members of Lloyd's, by which technique Equitas Re
protects, spares and insulates the Lloyd's enterprise, as well as
relevant claims payment securitisation trust funds,<a href="#17" name="17a">17</a> from all further
liability (assuming the settlement agreement is not subsequently voided for
fraud).

Settling at Equitas Re appears and can easily be made
to seem—falsely—a "win-win" outcome for both
sides. Equitas Re emerges looking munificent—which it then uses
self-congratulatorily for public relations purposes—while the
EquitasRe-assured-at-Lloyd's and his lawyer emerge looking pragmatic
and "commercial."<a href="#18" name="18a">18</a> Of the often well-publicised settlements
made at and with Equitas Re, it is presently believed that many
inadvertently fall materially short of the 100 percent pay-out to which the
valid-claimant EquitasRe-assured-at-Lloyd's is and always has been
entitled. Shareholder funds have been compromised. CFOs and boards have
been misled. Some short-changed corporate
EquitasRe-assureds-at-Lloyd's may have or will become insolvent. The
most extraordinary feature of all is the erroneous belief that the
EquitasRe-assured-at-Lloyd's has lost his recourse to the
Lloyd's enterprise.<a href="#19" name="19a">19</a>

The Lloyd's enterprise's ingenious
shortchanging of corporate America—fronted by Equitas Re, abetted by
insurance regulators, assisted by Lloyd's brokers and consummated by
the EquitasRe-assured's-at-Lloyd's own specialist lawyers
giving erroneous information and misconceived advice—may unravel when
Equitas Re does finally go into a formal English-law insolvency process.<a href="#20" name="20a">20</a> At
that juncture:

1. Insolvency at Lloyd's: Equitas Re is the only thing
standing between the Lloyd's enterprise and its extant pre-1993
non-life liabilities, which are still of an order of magnitude capable of
rendering the enterprise insolvent as soon as they return to its balance
sheet. When EquitasRe-reinsured liabilities do bounce back to the
Lloyd's enterprise—if the Council of Lloyd's through
Equitas Holdings' "Lloyd's Director" can no longer
stop Equitas Re's self-prophesied insolvency—the latter will
overnight lose the protection afforded by the Equitas construct and revert
to the overt insolvency that mysteriously vanished from its balance sheet
in 1996, a financial condition then remediable principally not by the
insurance industry or government rescue but by then-current members of
Lloyd's contributing sufficiently to a sufficient Central Fund.<a href="#21" name="21a">21</a> U.K.
and U.S.-state insurance regulators likely having no appetite for further
regulatory sleights of hand, meltdown of the entire Lloyd's
enterprise will follow those members' failure to make those
contributions.

2. Unravelling of Equitas Re settlements: The
EquitasRe-assured-at-Lloyd's who has already settled<a href="#22" name="22a">22</a> a valid
claim on the cheap at Equitas Re under a mistake of fact or law will
attempt to recover the difference between the settlement and the 100
percent he was entitled to all along by suing his lawyer and/or his
Lloyd's broker for malpractice.

While elementary Recourse Due Diligence™ would have instantly
established the existence of relevant expressly available claims-payment
securitisation trust funds,<a href="#23" name="23a">23</a> very few assured-side lawyers appear to
have the skill to perform it. Numerous U.S. law firms will settle
expensively. Some small boutique law firms may be wiped out. To credibly
untangle the underlying technicalities requires legal time and perseverance
of an order that U.S. law firms have self-evidently been reluctant to
deploy, though they unhesitatingly charge their clients for giving
"commercial" and materially erroneous information and advice.
Successful claims of fraudulent malpractice should not be ruled out, for
some U.S. lawyers may have deliberately falsely represented expertise in
this most abstruse field of law, and should never have been handling
Lloyd's or Equitas claims in the first place.

At least one major Lloyd's broker is on record
as advising its client EquitasRe-assureds-at-Lloyd's to sell out
prematurely and excessively cheaply at Equitas Re. English law on
brokers' claims broking functions is unambiguously pro-policyholder.
These secondary deep-pocket recoveries may be of material financial help to
foundering U.S. EquitasRe-assureds-at-Lloyd's and their creditors;

3. Full-value claims
recoveries against the Lloyd's enterprise: The Lloyd's enterprise in effect wrote open-ended,
not-time-barred blank checks to corporate America for asbestos, pollution
and health hazard risks. Some of those risks have yet to mature into
claims, with some EquitasRe-assureds-at-Lloyd's yet to succumb to
Equitas Re's efforts to buy back those checks
('commutation'). When it becomes widely realised that
commutation at Equitas Re has been merely a way to protect the
Lloyd's enterprise rather than (as claimed) the commercial, realistic
choice of pragmatists, U.S. holders of APH policies will settle for nothing
less—nor is there any reason why they should settle for anything
less—than 100 percent payout at Lloyd's. Those payouts may well
save some U.S. businesses from bankruptcy. The professional and
transactional rewards to the few U.S. law firms genuinely in command of the
detail will be considerable.

<h4>A Booby Trap at an Insolvent Equitas Re</h4>

A diversionary booby trap lies in wait for
EquitasRe-assureds-at-Lloyd's on Equitas Re's formal
insolvency, and it is important that it be clearly recognised and
decisively defused so that no further material shortchanging occurs. It is
called Equitas Policyholders Trustee Limited.<a href="#24" name="24a">24</a>

Ordinarily, in an insolvency of a conventional
reinsurer, the cedant proves his debt and personally receives a dividend.
In an illogical attempt to prevent each individual relevant member of
Lloyd's from proving against Equitas Re and personally pocketing
insolvency dividends, he was compelled to assign his reinsurance recovery
rights against Equitas Re to Equitas Policyholders Trustee Ltd., which in
its turn is to hold eventual recoveries in trust for relevant
EquitasRe-assureds-at-Lloyd's. When Equitas Re does go into a formal
insolvency process, enter Equitas Policyholders Trustee Ltd. on behalf of
the policyholder. Touchingly wholesome.

<blockquote><blockquote>
<hr>
<big><center>What recoveries from Equitas Re on behalf of the EquitasRe-reinsured member of Lloyd's may eventually accrue to a dedicated protected pot is a question entirely irrelevant to any EquitasRe-assured-at-Lloyd's.
</center></big>
<hr>
</blockquote></blockquote>

EquitasRe-assureds-at-Lloyd's can expect
Equitas Policyholders Trustee Ltd.—owned by Equitas Holdings Ltd.<a href="#25" name="25a">25</a>—to
require, request or invite EquitasRe-assureds-at-Lloyd's to lodge
proofs of claim with it. One can easily imagine relevant
EquitasRe-assured-at-Lloyd's forming creditor committees in relation
to Equitas Re, formulating and lodging proofs of gross and net debt against
Equitas Re, monitoring and giving due credit for dividends paid out of
Equitas Re, being grateful for eventual recoveries from Equitas Re and
formally releasing the Lloyd's enterprise in relation to the
difference.

In reality, however, Equitas Policyholders Trustee
Ltd. is a superfluous front-office intrusion on the straightforward
relationship between the EquitasRe-assured-at-Lloyd's and the
Lloyd's enterprise. It is yet another diversion of the
EquitasRe-assured-at-Lloyd's away from his true quarry and recourse,
the Lloyd's enterprise, for there is no reason in English or any
other law why the EquitasRe-assured-at-Lloyd's need concern himself
with any aspect
of Equitas Re's personal financial condition, especially including
its formal insolvency and whatever companies, trusts and other devices
appear to be on his side.

There is simply no instrument—contract, trust
deed, statute, statutory instrument, regulation, byelaw<a href="#26" name="26a">26</a> or anything
else—depriving an EquitasRe-assured-at-Lloyd's of his full
securitisation at Lloyd's or requiring him to in any way treat or be
concerned with Equitas Re. Equitas Re's formal insolvency is a
back-office affair solely between the Lloyd's enterprise and Equitas
Re of—at least for as long as the entire Lloyd's enterprise
remains solvent—no formal relevance, concern or interest to any
Lloyd's EquitasRe-assured-at-Lloyd's. Equitas Re's
personal financial condition is particularly utterly irrelevant to the
Lloyd's enterprise's liability to pay claims on insurance
contracts sold at Lloyd's, whoever happens to have subsequently
reinsured that liability.

<h4>Bottom Line</h4>

In reality, the EquitasRe-assured-at-Lloyd's
has never been a creditor of, and has no legal relationship whatever with,
Equitas Re. He can and should recourse for payment of 100 percent of his
valid claim directly to Lloyd's enterprises, which, under pressure
from angry EquitasRe-assureds-at-Lloyd's, will likely be forced to
make its own claims-handling facilities available to them rather than
compel their recourse to an insolvent and irrelevant Equitas Re.
Readmitting this surreptitiously engineered underclass of Lloyd's
policyholder to the proper claims-handling facilities at Lloyd's will
be one of the immediate challenges following Equitas Re's apparently
imminent insolvency. What recoveries from Equitas Re on behalf of the
EquitasRe-reinsured member of Lloyd's may eventually accrue to a
dedicated protected pot is a question entirely irrelevant to any
EquitasRe-assured-at-Lloyd's. Such recoveries may help the
Lloyd's enterprise in the back office, but they are no substitute for
its own full and immediate payment in the front office of every valid claim
on every EquitasRe-reinsured insurance contract.

Equitas Re's formal overt<a href="#27" name="27a">27</a>
insolvency—which itself habitually foretells in settlement
discussions, as a negotiation ploy—thus promises to be an insurance
insolvency lawyer's jamboree of years of inappropriate front-office,
mid-office and back-office<a href="#28" name="28a">28</a> litigation and arbitration, and pandemic
obfuscation, confusion, misunderstanding and misconception if the
insurance insolvency bar is not careful. Lawyer beware.

<hr>
<h3>Footnotes</h3>

<a name="1">1</a> A detailed
account of the Lloyd's enterprise is at Astor's
Law of Lloyd's, 2nd Ed. (ISBN 1 873994
41 9). A detailed account of Equitas Re is at Astor's
Equitas Re Handbook (ISBN 1 873994 26 5). A
detailed account of insolvency at Lloyd's and Equitas Re is at Astor's Insolvency at Lloyd's and Equitas Re (ISBN 1 873994 76 1). <a href="#1a">Return to article</a>

<a name="2">2</a> See Equitas NLs 1-5; R&R
1-14; S&M, etc. <a href="#2a">Return to article</a>

<a name="3">3</a> Salient
parts of the story are set out in detail at Lloyd's
v Jaffray [2000], CLC 725 (Cresswell J), and Ibid. [2002] EWCA Civ. 1101
(court of appeal). <a href="#3a">Return to article</a>

<a name="4">4</a> Incorporated
in England and Wales, number 3136300. Its one £100 ordinary share is
owned by Equitas Holdings Ltd. Where appropriate, the phrase "Equitas
Re" as used in this article refers to Equitas Ltd., incorporated in
England and Wales, number 3173352, all of whose all 780,000,001 £1
ordinary shares are owned by Equitas Re. <a href="#4a">Return to article</a>

<a name="5">5</a> Principally
through an ingenious back-office "pass the parcel" device
intrinsic to insurance business at Lloyd's called
reinsurance-to-close, summarised at Astor, Richard J., "Equitas Under English Law": An English Lawyer
Replies (August 2003; <a href="http://www.astorlaw.com">http://www.astorlaw.com</a>). <a href="#5a">Return to article</a>

<a name="6">6</a> Actually,
the principal operating company is another company, Equitas Ltd.,
incorporated in England and Wales, number 3173352. All its 780,000,001
£1 ordinary shares are owned by Equitas Re. <a href="#6a">Return to article</a>

<a name="7">7</a> See R&R 1-14; RRCs 1, 4,
5, 7 and 17, and other documents in the RRC series. <a href="#7a">Return to article</a>

<a name="8">8</a> Indeed, it
is even more a closed system than the current Lloyd's enterprise. At
least the latter, purporting since 1996 to do business as usual, has fresh
premium income. Equitas Re, on the other hand, has no premium income. <a href="#8a">Return to article</a>

<a name="9">9</a> Relevant
proposed provisions in CP 04/7 (importing EquitasRe-reinsured liabilities
back to the Lloyd's enterprise's balance sheet as contingent
liabilities) are still framed as options, not requirements; see, e.g., Ibid., §§2.99-2.100
(p. 34). <a href="#9a">Return to article</a>

<a name="10">10</a> See, e.g., LLD,
§12.3.3R(4). <a href="#10a">Return to article</a>

<a name="11">11</a> See his talk to the New York
Law School Center for International Law Symposium, "Implications of
the Reconstruction of Lloyd's of London," Nov. 6, 1996 (found
at <a href="http://www.nyls.edu/CIL/lloyds.htm">http://www.nyls.edu/CIL/lloyds.htm<…;, July 25, 2001), pp. 3-6 of 28. <a href="#11a">Return to article</a>

<a name="12">12</a> English
law has no assumption reinsurance doctrine. <a href="#12a">Return to article</a>

<a name="13">13</a> See, generally, RRC 4,
§9. <a href="#13a">Return to article</a>

<a name="14">14</a> Moser,
Scott, "Equitas Claims," Address to the Insurance Institute of
London, Jan. 14, 1999:

<blockquote>
One of the things you learn in kindergarten is to
share. What happens if we just share? We would need to pay $36.84 on the
first day to produce the equivalent of $100 after 10 years, but neither of
us would incur any legal costs. The result is a claimant that receives
$36.84 instead of $17.19, and an Equitas that pays $36.84 instead of
$66.08. Even if the claimant would have won $175 at Year 10—75
percent more—the net present value of that sum on Day 1 is only
$35.73, still less than the $36.84 in my sample compromise. And even if we
would only have had to pay $50 in Year 10, only half of the $100 we
thought, the cost to us as of Day 1 would have been $38.96, still more than
the cost of my sample Day 1 compromise. Thus, for both sides, any risk that
the value we arrive at early may be wrong is far more than offset by a deal
in which the parties share the benefits of settling early.
</blockquote>

See, also, Mealey's Seminar, Friday, Nov. 16, 2001, "Presentation by Scott Moser,
Equitas Claims Director," at Mealey's
Litigation Report: Insurance, Dec. 11,
2001, p. 27, 28. <a href="#14a">Return to article</a>

<a name="15">15</a> As well as
being a reinsurer, Equitas Re is exclusive run-off agent of the
EquitasRe-reinsured liabilities; see,
respectively, RRC 4, §§3 and 9. <a href="#15a">Return to article</a>

<a name="16">16</a> J.W. Wells
& Co., Family Sorcerers, was (and perhaps still is) located at 70 St.
Mary Axe; see
Gilbert, W.S., The Sorcerer (1877). See, also, of possible relevance to the Lloyd's enterprise more
generally, Ibid.,
Act I: Alexis Pointdextre: "I have sent for you to consult you on a very important
matter. I believe you advertise a Patent Oxy-Hydrogen Love-at-first-sight
Philtre?" Mr. Wells: "Sir, it is our leading article." Alexis: "Now, I want to
know if you can confidently guarantee it as possessing all the qualities
you claim for it in your advertisement?" Wells: "Sir, we are not in the
habit of puffing our goods. Ours in an old-established house with a large
family connection, and every assurance held out in the advertisement is
fully realised." <a href="#16a">Return to article</a>

<a name="17">17</a> Self-regulators-at-Lloyd's
are then able plausibly to represent to U.S. state insurance regulators
that the regulatorily stipulated minimum levels of claims-payment
securitisation trust funds maintained in the United States to pay
EquitasRe-reinsured liabilities are too high and should be reduced. <a href="#17a">Return to article</a>

<a name="18">18</a> Some
EquitasRe-assured-at-Lloyd's-side lawyers, espousing the present
value of money, argue that whatever the precise technical legal details of
recourse at or not at Lloyd's, commercial reality demands that the
EquitasRe-assured-at-Lloyd's take now a reasonable offer from Equitas
Re rather than spend the years apparently required in litigation or
arbitration to get a decision or award against underwriters at
Lloyd's capable of being banked at a relevant claims payment
securitisation trust fund. The specialist lawyer is often stuck for an
honest answer when asked whether the client has made a fully informed
decision to be materially shortchanged at Equitas Re—in particular,
whether the client has been fully informed and advised (1) that he is still
fully securitised at Lloyd's, (2) that the standard Equitas Re line
is materially incorrect, and (3) of the existence, sufficiency,
availability and accessibility of relevant trust fund monies furnished by
the Lloyd's enterprise specifically to pay his claim in full. <a href="#18a">Return to article</a>

<a name="19">19</a> Recalling
Mackay, Charles, Extraordinary Popular
Delusions and the Madness of Crowds (Bentley,
London, 1852), p. 177 ("The Crusades" chapter): "Every age has its
peculiar folly, some scheme, project or phantasy into which it plunges,
spurred on either by the love of gain, the necessity of excitement or the
mere force of imitation." <a href="#19a">Return to article</a>

<a name="20">20</a> For a
summary of relevant English law insurance insolvency processes
(administration, CVA, provisional liquidation, liquidation, insolvent
scheme of arrangement, etc.), see Astor's Principles of
Insurance Insolvency Law (ISBN 1 873994 61 3)
and Astor's Insolvency at Lloyd's
and Equitas Re (ISBN 1 873994 76 1). <a href="#20a">Return to article</a>

<a name="21">21</a> See, e.g., [Old] Central Fund
Byelaw (No. 4 of 1986) as amended; New Central Fund Byelaw (No. 23 of 1996)
as amended. In the present context, "Byelaw" means a byelaw
made by the Council of Lloyd's (see Lloyd's Act 1982, s.3) under Lloyd's Act
1982, s.6(2). <a href="#21a">Return to article</a>

<a name="22">22</a> Whether a
particular settlement agreement itself can be vitiated for fraudulent
non-disclosure (if it be the case) by Equitas Re of the
EquitasRe-assured's-at-Lloyd's recourse to the Lloyd's
enterprise depends on the case, but the possibility should not be ruled
out. <a href="#22a">Return to article</a>

<a name="23">23</a> Including,
for example, LATF, etc. and, by default, the Central Fund. <a href="#23a">Return to article</a>

<a name="24">24</a> Incorporated
in England and Wales with members' liability limited by shares,
number 3243970. Its one £100 ordinary share is owned by Equitas
Holdings Ltd. <a href="#24a">Return to article</a>

<a name="25">25</a> Incorporated
in England & Wales, number 3136296. It owns all the shares in both
Equitas Re and Equitas Policyholders Trustee. Its one £1 preference
share is owned by the corporation. Its two £50 ordinary shares are
owned by EquitasRe-reinsurance trustees, who hold those shares under the
trust set out in RRC 17. <a href="#25a">Return to article</a>

<a name="26">26</a> The New
Central Fund Byelaw, §§8(3)(b) and 8(4)(b); so-called
"ringfences" are mere back-office political gestures between
Lloyd's and members of Lloyd's, not binding on, or even
addressed to, any assured-at-Lloyd's. In any event, the provisions
are probably ultra vires. <a href="#26a">Return to article</a>

<a name="27">27</a> Equitas
Re's overt insolvency—viz., its entry into a formal English-law insolvency process
such as administration, provisional liquidation, liquidation or insolvent
scheme of arrangement—is to be distinguished from the somewhat covert
insolvency that the so-called "Proportionate Cover Plan" is
designed to protect it from. See the relevant provisions at RRC 4, Sch. 3
("Operation of proportionate cover") (and the parallel
provisions in relation to Equitas Ltd. at RRC 5, Sch. 3 ("Operation
of retrocession plan")). <a href="#27a">Return to article</a>

<a name="28">28</a> On the
front, mid- and back offices at Lloyd's, see Astor, Richard J.,
"Liability on an Insurance Contract Made at Lloyd's," Torts, Insurance & Compensation Law Section Journal (New York State Bar Association), Winter 2004, Vol.
33, No. 1, pp. 18-25. <a href="#28a">Return to article</a>

Journal Authors

Richard Astor

Journal Date

Friday, October 1, 2004 - 12:00

Bankruptcy Rule

2004