Lloyd's warns LAX, MTA may have to shut.

But officials say their liability coverage is OK

L.A. COUNTY - Airports and transit agencies in Los Angeles and San Francisco might find themselves without needed liability insurance and "might have to close" if the California Department of Corporations succeeds in its attempt to freeze Lloyd's of London bank funds, according to Lloyd's.

But officials with Los Angeles International Airport and the Metropolitan Transportation Authority disagree.

The corporations department sued Lloyd's alleging that the insurer defrauded 500 California investors known as "names," who underwrite Lloyd's policies, and who were hit with huge losses in the early 1990s. Six other U.S. slates have filed similar actions against Lloyd's, which is in the final stages of a $4.5 billion restructuring.

Lloyd's filed a motion in federal court March 27 seeking dismissal of the lawsuit, claiming that many local government agencies, hospitals and nuclear power plants "would find it difficult or impossible" to secure certain types of insurance if Lloyd's wasn't providing them.

At LAX and the MTA, Lloyd's provides "excess liability" coverage that kicks in when a claim is too large for the primary insurer, which actually purchases the Lloyd's policy as "reinsurance" against a catastrophic claim.

In a statement released through its public relations agency, Lloyd's also said it would be unable to pay claims for Metro Rail construction damage in Los Angeles if its funds are frozen. Lloyd's provides excess liability coverage on the Red Line construction project, where more than 1,000 business and property owners along Hollywood Boulevard are claiming more than $1 billion in damage.

"Effectively, what that (freezing) does is make the policies null and void," said Jon Kaufman, Lloyd's spokesman at the P.R. agency Solem & Associates in San Francisco.

State seeks freeze

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 the names.

But Lloyd's said freezing the money would keep the company from paying claims.

Last month, officials with the Los Angeles County Metropolitan Transportation Authority insisted the DOC/Lloyd's case would not affect them, even if the funds were frozen. Last week, MTA Chief Financial Officer Ronny Goldsmith said the MTA's insurance brokers at Sedgwick James still don't think there's cause for concern.

"They (the brokers) don't know what adverse impact that (freeze) would have on us," said Goldsmith. "Right now, their position is there would be no adverse impact."

LAX spokesman Tom Winfrey said Lloyd's is "really not a factor for us" because the airport's excess liability coverage from Lloyd's applies only to catastrophic and extremely costly claims.

'Margin of safety'

"They're at the very top level of our coverage," said Winfrey. "We have hundreds of millions of dollars (in coverage) before they kick in. We'd have a very good margin of safety (without Lloyd's coverage)."

The MTA's coverage from Lloyd's, on the other hand, kicks in after a claim exceeds a few million dollars and caps at $100 million per occurrence.

In a related matter, the MTA late last month effectively trashed a Request for Proposals process it was using to select a new insurance broker and signed an exclusive deal with Sedgwick James, claiming Lloyd's was pressuring the MTA to choose this broker.

MTA Chief Executive Joe Drew was very vague about the matter in public, saying only that Lloyd's had "legal concerns" about choosing another broker that were somehow connected to the Hollywood Boulevard claim.

Goldsmith had written a memo to the board saying Lloyd's had expressed reluctance about continuing as the MTA's excess liability carrier if another broker was chosen.

She maintained last week that Lloyd's was "very concerned that we were going to the open market," that the concerns were related to "existing litigation," and that Lloyd's had recommended the MTA use either Sedgwick James or one other firm in New York.

Lloyd's had no official comment on that issue.

Meanwhile, a "desist and refrain" order issued against Lloyd's in the DOC case has already prevented Lloyd's from communicating with its California names about the restructuring plan. The names' approval is necessary for Lloyd's to implement the restructuring, which it must do to survive as a company.

Major factor in market

Lloyd's has more than 19,000 California policyholders. It holds about 18 percent of the "reinsurance" policies purchased by primary liability insurers.

California Insurance Commissioner Chuck Quackenbush, in a motion he filed in the DOC case, claimed that the proposed freeze on Lloyd's funds would lead to the technical insolvency of some 15 insurance companies that bought reinsurance from Lloyds.

Lloyd's also has about 17 percent of the "surplus lines" market in California. This includes exotic forms of insurance usually carried by extremely wealthy people, such as kidnapping insurance to pay for ransom, and insuring the bodies of professional athletes.