LLOYD'S of London, the society of insurance underwriters with worldwide interests, is facing the deepest crisis in its 300-year history.
Hundreds of its members, known as "Names," are staging a revolt to try to stop Lloyd's from using their cash pledges to pay out on insurance claims.
The rebels are protesting losses believed by City of London sources to total at least 2 billion British pounds (US$3.5 billion) over the last three years, and alleging that Lloyd's agents and brokers improperly used investors' funds in extremely high-risk insurance syndicates.
In a bid to head off a crisis of confidence, Lloyd's chairman David Coleridge asked Sir David Walker, head of the watchdog Securities and Investment Board, to direct inquiries into alleged malpractice in the insurance market. But the appointment failed to mollify the rebel Names, thought to number 1,000.
On Monday about 200 of the rebels ordered the law firm Michael Freeman & Co. to issue writs seeking High Court injunctions to prevent Lloyd's from using their funds to meet claims. Their move followed a successful request for injunctions by eight rebellious Names last week. If the High Court rules in favor of the Names, Lloyd's will be forced to dip into its 450 million British pounds contingency fund, part of which is already earmarked to meet claims on which insurance syndicates have defaulted. Unlimited liability system
Under the Lloyd's system, Names pledge their personal fortunes on an unlimited liability basis. In the early 1980s this earned investors high profits, but in the last five years a series of huge insurance claims worldwide has helped to turn a sweet system sour.
The scale of the problem emerged last year when a loss for 1988 (Lloyd's accounts are published three years in arrears) of 500 million British pounds was revealed, after 21 years of unbroken profits.
The Piper Alpha North Sea oil rig disaster (claims totaled 700 million British pounds), Hurricane Hugo (2.4 billion British pounds), the San Francisco earthquake (730 million British pounds), and bad weather across Europe, the United States, and Japan (6 billion British pounds), converted easy pickings into losses for many of the 31,000 Lloyd's names.
If their losses were caused purely by misfortune, the Names would not have much to complain about; before committing their capital to Lloyd's, Names are told about the risks. But many of them insist that they are victims of skulduggery. They claim that Lloyd's insiders, so-called "working Names," put their own assets into secure trusts while using the pledges of outside Names to fund what one broker described as the "catastrophe business."
The pressure on Lloyd's is made more acute by the fact that dozens of members of the House of Commons and House of Lords are among aggrieved Names, who would be driven into bankruptcy if the cash calls are honored.
Much wider issues are at stake, however. In three centuries Lloyd's has never refused to pay a valid insurance claim. Under the unlimited liability system there was always cash to meet claims. Lloyd's reputation in jeopardy
Now, says one City of London stockbroker, that reputation is "in jeopardy."
"Lloyd's has made huge losses lately, and suddenly its methods of operating have become deeply suspect," he says.
On Tuesday Mr. Coleridge told Sir William Clarke, chairman of the ruling Conservative Party's finance committee, that the reputation of Lloyd's had to be defended. But a finance committee member told the Lloyd's chairman that calls on the funds of aggrieved Names should be frozen until after the Walker inquiry, which is expected to last several months.
A Lloyd's source said that its assets total 18 billion British pounds, but conceded that much of that consists of pledges by Names who might be tempted to join the rebels if confidence in the organization frays.