Agencies clash over reinsurer Lloyd's; MTA claim in peril?

State Insurance Commissioner Chuck Quackenbush, in an attempt to save several local insurance companies from insolvency and policyholders from losing out on pending claims payments, last week filed court documents seeking to stop the state Department of Corporations from freezing assets of Lloyd's of London.

"If successful, the Corporations Department action would halt claims payments to thousands of injured people and invalidate the insurance contracts of over 19,000 businesses and individuals in California," said a statement released by Quackenbush, announcing his filing of an intervention petition in a case brought against Lloyd's by the California DOC.

Financially and legally troubled Lloyd's of London is in the final stages of a $4 billion restructuring plan that still needs approval from its "names" - people who invested in the company by agreeing to assume its liability risks and putting up collateral to guarantee coverage, and who arc now largely disgruntled over losses.

Meanwhile, seven U.S. states, including California, have filed actions against Lloyd's alleging that it defrauded American "names."

The California DOC, in its case, is seeking to freeze billions of dollars in Lloyd's American Trust Fund, at Citibank in New York, and in the Lloyd's Central Fund in London, to guarantee there will be money available to pay off 500 California "names," who the state alleges were defrauded.

Locally, probably the biggest pending claim against a Lloyd's "reinsurance" policy is from the Metropolitan Transportation Authority and its primary liability insurer, Argonaut Insurance Co., in connection with the $1 billion-plus lawsuit filed by more than a thousand business and property owners in Hollywood damaged by Metro Rail construction.

Other local businesses and individuals with Lloyd's coverage include airlines, health plans, hospitals, corporate executives and directors, doctors and homeowners.

Quackenbush claimed freezing the funds would lead to the technical insolvency of some 15 insurance companies that buy "reinsurance" from Lloyds - in effect, insuring against losses on their insurance coverage - and would short-change people who have valid, pending insurance claims.

Quackenbush also asked the court to lift a "desist and refrain" order issued against Lloyd's that prohibits Lloyd's from selling securities or from "any exchange of securities ... with its existing security holders or ... in connection with any merger or consolidation or purchase of assets."

Dismissal sought

"The effect of the order is to seriously and needlessly disrupt, if not entirely halt, Lloyd's efforts to reorganize its financial structure," reads the intervention complaint filed by Quackenbush in U.S. District Court. "The order therefore is jeopardizing the interests of California claimants and ceding insurers who depend on the strength of Lloyd's financial condition for payment of their insurance and reinsurance claims."

Quackenbush also seeks dismissal of the DOC's case.

Despite Quackenbush's concern that the asset freeze and the DOC order would keep Lloyd's from paying claims and from restructuring, which the company needs to do to survive at all, MTA officials maintained last week that they don't think Lloyd's problems will affect their claims, even if the funds are frozen.

Jerry Schneiderman, chairman of Hollywood Damage Control & Recovery Inc. - the group that brought the $1 billion action against the MTA - said he doesn't believe Lloyd's will be able to pay the MTA claims, but he thinks the federal government will probably bail out U.S. insurers that reinsured through Lloyd's and/or bail out the MTA.

HDC&R's attorney, Jack Girardi, said he supports "anything that would keep the Lloyd's money available," such as the Quackenbush action, but further noted that the MTA's contractors, also defendants in the lawsuit, have insurance "adequate to handle the litigation."

Richard Wiebe, spokesman for the state insurance department, estimated that Lloyd's has about 17 percent of the "surplus lines" market in California - about twice as much as the next largest carrier.

Additional coverage

"Surplus lines" are exotic forms of insurance, such as to cover the ransom costs for a kidnapping or to insure a major baseball pitcher's arm for injury. They often include "wrap-around" coverage for homeowners and other policyholders looking to bolster their existing insurance.

According to the insurance department, Lloyd's market shares in California for particular types of surplus coverage are: 92 percent of the group health market; 92 percent of the kidnap ransom market; 33 percent of the corporate officers and directors liability market; 26 percent of all commercial property risk coverage; 76 percent of the homeowners market.

Lloyd's also has a substantial share of local "excess" insurance policies, which is one layer of coverage that covers a large institution, typically a hospital. And Lloyd's currently has about 18 percent of the reinsurance market in California.

Bill McDonald, assistant commissioner of the Department of Corporations enforcement division, said competitors of Lloyd's would no doubt pick up Lloyd's reinsurance business.

But Gerald J. Sullivan, a Los Angeles-based insurance broker who has written policies through Lloyd's covering about 250 hospitals in California, countered that other insurers are not about to pick up "working claims." He further noted Lloyd's coverage also extends to individual commercial airlines, which potentially could keep individual planes grounded if they do not have in-force liability coverage.

Wiebe disputed the notion that other reinsurance companies would pick up all of Lloyd's coverage.

"There's a finite amount of reinsurance out there," he said, noting Quackenbush has already tied up $2 billion of the world's reinsurance capacity by placing it on hold at various insurance companies, including Lloyd's, for his proposed California Earthquake Authority - a $10.5 billion public-private pool for earthquake coverage.