So what is Lloyd’s of London insurance? For most of its history, Lloyd’s was neither an insurance company nor an incorporated group. Instead, it consisted of approximately 17,000 members, including underwriters, insurance brokers who brought business to the underwriters, and investors, known as “names.” The underwriters accepted insurance lines of business on behalf of syndicates, of which the “names” were members.
At one time, many American insurance producers and risk managers were reluctant to place insurance with the Lloyd’s organization because they were not familiar with it or its history and the underwriting and placement procedures it employed. American insurance professionals and private investors have since developed a much better understanding of the organization and, as a result, a much greater degree of participation with this historic marketplace.
One reason for the increased familiarity with Lloyd’s is negative, because of allegations of business improprieties that could cause irreparable harm to the organization. Another is that the United States has rapidly become a major source of business to the Lloyd’s organization.
Currently, about half of Lloyd’s underwriting business consists of U.S. based clients. This review proposes to take some of the mystery out of Lloyd’s, discuss how its facilities operate and touch on some current events.
The history of Lloyd’s began with Edward Lloyd’s coffeehouse in 1688. His clientele included merchants and ship owners who had both cargo and vessels needing insurance protection when at sea. Mr. Lloyd’s establishment quickly evolved into a meeting place where these businessmen searched for insurance brokers to place coverage for a variety of “perils of the sea” through financial arrangements with wealthy and reputable businessmen.
Character and integrity were important because these wealthy businessmen “underwriters,” who agreed to invest in the ships and cargoes, put up their personal fortunes as collateral to pay their share of any covered claim. On the other hand, these underwriters shared in the profits if the voyage was successful and without an incident.
Note: The term “underwriter,” according to some accounts, came from the practice of persons agreeing to insure a ship and/or its cargo by writing his name (signature) “under” the name of the applicable vessel.
Lloyd’s of London has long been identified with British history and the growth of worldwide commerce. Lloyd’s is an international insurance market, located in London, England. Its members cooperate and compete with one another and with other insurance organizations. There are four major market groups at Lloyd’s:
In addition, Lloyd’s has a market that handles short and long term life insurance.
What is Lloyd’s of London insurance? The Corporation of Lloyd’s is a society incorporated under the Act of Parliament of 1871. The Corporation is not an insurance market or placement facility itself. It provides the premises, shipping information services, administrative staff and other facilities that enable the Lloyd’s insurance market arrangement to transact insurance business efficiently and effectively. These transactions are actually done by thousands of Lloyd’s members.
Many current members are not British citizens and this is a testimony to the growing international make-up of the organization. Approximately one-third of the membership is actively involved in insurance transactions in the market. The remaining members are considered not active, meaning that they provide capital but do not actively place business in any Lloyd’s market. The underwriters are members of approximately 1,000 underwriting syndicates and only they can accept and transact business.
The number of Lloyd’s members and syndicates changes periodically. There was a significant reduction in numbers of both members and syndicates after Lloyd’s suffered serious underwriting losses in its accounts in 1988, 1989 and 1990. Each syndicate is managed by an underwriting agent and his representative occupies a “box” or office space in the underwriting room at Lloyd’s, accepting business on behalf of the members of that syndicate. Some agents underwrite for more than one syndicate. Most syndicates are involved with writing either Marine or Non-Marine business but some write both.
The financial liability structure supporting a Lloyd’s policy is unique and unmatched anywhere else in the financial world. Lloyd’s maintains substantial deposits of money and financial instruments in the United States in order to guarantee prompt payment of covered losses and claims.
The nature of the Lloyd’s financial commitment is what has supported the organization’s response to their claims obligations throughout its history. However, in recent years problems have developed as a result of their unique financial approach to claim payments. The major areas and features of their financial requirements include:
Historically, policyholders with legitimate claims were guaranteed that the obligation to pay would be met, regardless of the cost to the “name” or syndicate that accepted the risk. Under the strict rules of Lloyd’s, every underwriting member is liable up to the full extent of the personal assets for the share of the risks accepted. If the personal assets are insufficient to respond to losses or demands for payment, then the Lloyd’s organization contributes the difference necessary to meet the shortfall from its reserve funds.
What is Lloyd’s of London insurance? Individuals elected to membership in Lloyd’s must make an initial deposit of cash or certain approved securities. The amount of this deposit is based on the anticipated volume of business to be underwritten and it must always keep pace with the volume of business accepted. The Committee of Lloyd’s, elected by its members to administer and attend to its financial affairs, establishes the maximum annual premium income for each member.
If a member exceeds the established and approved premium limits, the Committee requires an increase in the deposit to align it with the larger premium volume. These deposits are held in trust and are available only as security for incurred losses and other underwriting liabilities.
As suggested in the paragraph above, all premiums payable to a member in connection with underwriting business at Lloyd’s are placed in a trust fund. This arrangement is in accordance with a trust deed approved by the United Kingdom Department of Trade and Industry. The trust funds can be withdrawn for only the following specific reasons:
If a member becomes insolvent, all remaining available trust funds are used to pay any liabilities owed to that member’s policyholders. The general creditors of a member have no claim on that member’s trust funds until all outstanding policyholder obligations have been completely met. Underwriting loss reserves are increased and added to from the underwriting profits of a member.
The Central Fund is intended to meet the remaining underwriting liability of a member declared insolvent or having inadequate security and personal assets to meet his underwriting commitments. It is funded by a levy or assessment applied to every member or syndicate. These funds amount to many millions of British pounds and exist to protect the interests of Lloyd’s insureds, not its members. A member is still responsible for his liabilities to the full extent of his personal assets.
Each Lloyd’s member is subject to an annual audit. The goal and objective of the audit is to determine any weaknesses or shortcomings in the financial structure of the syndicate. The Committee of Lloyd’s examines the underwriting accounts of each member. If the audit reveals insufficient funds or assets, the member must either provide additional security in amounts required by the Committee or cease all underwriting operations.
Lloyd’s is unique in this area in that it uses a three-year accounting method. That method is based on underwriting years of the account, each covering risks where the premium was accounted for during a specific calendar year. Losses paid during the second and third years of coverage revert back to the original year of the account, rather than being debited to the year of loss payment.
No collected premiums are released from an underwriting year of account as a profit until after the end of the third year. At that time, the account is closed and the required reserves carried forward to a later year to meet any losses for that year that have not already been settled.
The annual audit requires a check of loss experience for both open and closed years at their respective stages of development or maturity. Open years are checked at the 12th, 24th and 36th months of their existence. It is believed that the three-year method has a number of advantages when compared to a one-year system. The three-year method makes closing an account after 36 months more accurately reflect mature losses and earned premium and any return premiums accounted for more accurately.
With this approach, a greater proportion of losses on the account will have been settled and remaining outstanding losses will be more accurately measured. Finally, this approach provides a more accurate means to establish loss reserves at the end of each year.
What is Lloyd’s of London insurance? The Lloyd’s market typically transacts tens of millions of premium dollars every day. The business they handle comes from every continent and most of the countries on earth. There are very few places where contacts with the Lloyd’s market, be they insurance company offices, individuals or brokers, cannot be found. Authorized Lloyd’s brokers are the only acceptable means to access the Lloyd’s market.
When a Lloyd’s broker begins to arrange coverage on behalf of a client (for example, on an insurance office in the United States), he puts a few brief details about the risk on a “slip.” The slip is a relatively simple document that gives the basic details of the risk to be placed. The broker then goes into the Underwriting Room of Lloyd’s and approaches one or more lead syndicate underwriters who specialize in the type of risk he is trying to place.
The underwriter asks pertinent questions about the risk and at some point suggests a rate for the exposure. Bargaining then takes place and the broker tries to get the lowest price and the best coverage terms for his client. If the rate is too high, the broker can and will approach other underwriters to try to get lower or more competitive rates.
When all parties agree on a premium or rate, the underwriter “takes a line” by writing on the “slip” the share of the risk he accepts for his syndicate, along with the premium or rate and his initials. If the cover required is large, as is often the case, the “lead” underwriter usually accepts part of the risk instead of all of it. The broker then moves around the Underwriting Room with the “slip” and attempts to persuade other underwriters to take portions of the risk at the same rate or premium until the commitments cover 100% of the risk or exposure.
At times, the broker will “over complete” the risk. This is done to provide room for needed future limit increases as well as to give as many underwriters as possible the opportunity to participate on the risk. The proportion of participation by each syndicate is then adjusted so that the coverage totals 100% and there is room and allowance for future increases without necessarily involving other underwriters.
In this manner, if there is a loss, it “lightethe rather easilie upon many than heavilie upon fewe” (a load is more easily shared and carried by many instead of one shared and carried by only a few). This very early concept of insurance and risk sharing enabled Lloyd’s to withstand the stress and pressure of substantial claims throughout most of its history. The degree of trust and confidence between brokers and underwriters is illustrated by the “slip.” Initially, the “slip” is the only written evidence of an agreement to insure between the parties. The broker knows that a legitimate claim will be honored, if necessary and before an insurance policy is issued, when the “slip” contains the initials of the underwriters.
In years past, all insurance policies at Lloyd’s had to be personally signed by the individual underwriters accepting a share of the risk. Today, the Lloyd’s Policy Signing Office checks policies and compares them against the “slips,” signs them on behalf of the involved syndicates and marks them with its official seal.
The hub for underwriting activities at Lloyd’s of London is its modern headquarters building. The 20-story glass and steel building is located in the heart of the London financial district and is home to between 4,000 and 4,500 brokers and underwriters. The London Insurance Market Network is the name given to the vast array of electronic technology used at Lloyd’s and throughout the London market.
It includes a number of services, such as electronic mail, electronic data interchange, interactive inquiries and access to commercial information databases, among others. This screen-based electronic interchange allows the Network to embrace the North American market to include standardized information, requests for quotes, claims advice, settlement services and funds transfers.
Electronic technology has replaced much of the personal contact that used to be essential to making coverage commitments characteristic of the Lloyd’s system for more than three centuries. In spite of this development, personal contact, communication and commitments continue because these characteristics are part of the trust and integrity of the Lloyd’s arrangement and system.
The Underwriting Room at Lloyd’s has retained the traditional layout and arrangement of functions that existed when it first began. One wall is devoted to the Casualty Board, referred to as the “chamber of horrors.” This is where special reports, faxes and telegrams from around the world are posted with news of maritime and aviation casualties and more general disasters and occurrences such as strikes, floods, earthquakes, hurricanes or tornadoes and catastrophic fires.
The underwriters take special note of these events and the events of a given day profoundly affect the atmosphere and working of the Lloyd’s insurance market. This information is the result of the work of the Lloyd’s Intelligence Department, widely recognized as the world’s fastest and most accurate news gathering system. Reports are compiled and submitted by Lloyd’s brokers, not insurance producers, around the world and are dispatched by the latest or most effective method of communication.
The center of the Room contains a lectern that holds the Casualty Book. This is a large volume in which a clerk enters the major marine casualties of the day, as they occur, using a traditional quill pen. In the middle of this unique and unusual business setting are men wearing livery, a distinctive uniform worn by male servers, and called “waiters” as was the case with the staff in the original coffeehouse.
What is Lloyd’s of London insurance? Lloyd’s is a blend of the old, traditional methods and the new, including the latest technological developments, that produces a product based on modern techniques superimposed on time-tested methods. For example, “calling,” which is the way brokers contact their colleagues, dates back to the original coffeehouse days when a boy read notices from a pulpit.
At a later date, a waiter called the names of brokers through a megaphone. Today, a microphone is used at the Caller’s Rostrum. When a broker hears his name over a speaker system, he signals his location using screens in the Rostrum and in the Gallery using an electronic system.
Underwriters in the Room sit at wooden pew-like desks, known as “boxes.” These are another survivor of the original coffeehouse days. Most underwriters occupy surprisingly small spaces, but millions of premium dollars can be transacted in even the smallest box each year. Marine, Motor and Aviation business is transacted on the ground floor. Non-Marine boxes and business transactions occur in the immense gallery that circles the upper story of the Room.
Lloyd’s maintains its long-standing traditions and habits because they are practical and still work. A waiter is easily recognized when needed. The Casualty Book as devised is a practical and handy work reference. In a city where floor space is precious and carries premium prices, the boxes are as inexpensive, practical and convenient a use of space as anything and a more convenient and accessible arrangement in which to transact business could not be devised.
The accumulated knowledge, expertise and skill of the individuals both in the boxes and between the different syndicates is a particular and special strength of the organization. It creates a special environment for the free and spontaneous exchange of ideas. In addition, Lloyd’s takes a special and deserved pride in its history, its trappings and its traditions.
Below are a few examples of real life claims that made it to court:
SMI Realty Management Corporation (SMI) wrote “all risks” property coverage for the period January 9, 1999-2000 with Underwriters At Lloyd’s London (Lloyd’s) covering the Rutledge Apartments, a complex managed by SMI. SMI discovered foundation damage at the complex in September 1999. SMI filed a property loss notice with the Lloyd’s agent and attributed the foundation damage to underground plumbing leaks. Lloyd’s denied the claim. SMI sued on December 9, 2002 and alleged the damage was due to a sewer pipe leak covered by the policy. The suit also cited breach of contract and breach of Lloyd’s duty of good faith and fair dealing.
A professional engineer inspected the complex for Lloyd’s and attributed the foundation damage to sewer leaks due to corrosion and deterioration of the cast iron sewer system over the 35 years since the complex was built. SMI’s hired professional engineer and expert stated the cause of the leak was not known but felt it was due to a broken sewer line over a comparatively short period of time and not corrosion or deterioration over a long period. Lloyds filed a motion for summary judgment that contended the claim was not covered because of the finding of their engineer. SMI responded that the exclusion relied on by Lloyd’s, and the term “leakage” in particular, was ambiguous and contrary to the findings of their expert. SMI contended that there was a genuine issue of material fact as to whether the loss fell under the exclusion. Lloyd’s filed a reply that contended the term was not ambiguous. After a hearing, the trial court signed an order granting Lloyd’s motion for summary judgment. SMI appealed.
“Leakage” was not defined in the policy and each party offered its own definition. Ambiguity did not arise simply because the parties had conflicting definitions or interpretations. The decision as to whether a policy term was ambiguous was a question of law for the court to decide. The critical question in this case was whether SMI’s interpretation of the term in the exclusion was reasonable.
The appellate court determined that the Lloyd’s reading of the exclusion was one reasonable interpretation but it was not the only reasonable interpretation and did not serve to make SMI’s reading of it unreasonable. The court also disagreed with Lloyd’s contention that to accept SMI’s interpretation of the term would be to read the term out of the contract and render it superfluous. Lloyd’s argued that to accept SMI’s contention and to construe the exclusion for “leakage” to mean only damage caused by leakage occurring gradually would be superfluous and the loss excluded by the phrase in the exclusion “any other gradually occurring loss.” The court stated that the relevant phrases of the exclusion could be read to avoid superfluities.
The Lloyd’s interpretation of the term “leakage” was reasonable but that did not mean that SMI’s reading of it was unreasonable. The fact that SMI’s reading of leakage was limited to leakage occurring gradually was not an unreasonable interpretation, in view of the word choice and construction of the language used by Lloyd’s in drafting the exclusion. As a result, the exclusionary language and especially the term “leakage” was ambiguous and was construed in favor of SMI. By offering the expert opinion that the foundation damage occurred as a result of a broken sewer line over a relatively short period of time, SMI created a genuine issue of material fact regarding coverage. The appellate court held the trial court did not properly grant summary judgment, sustained SMI’s single issue in this case, reversed the judgment of the trial court and remanded the cause for further proceedings. Note: The Chief Justice dissented with this opinion.
SMI Realty Management Corporation, Appellant, v. Underwriters At Lloyd’s London, Appellee. Texas Court of Appeals. No. 01-03-01340-CV. Filed August 31, 2005. Appeal from the 281st District Court, Harris County. Reversed and remanded. 2005 CCH Personal and Commercial Liability Cases. Paragraph 64, 014.
The Kentucky Housing Corporation, a political subdivision of the Commonwealth of Kentucky, renewed an employment agreement with its executive director which was ratified and approved by its board members. Acting through the board members, it fired the man four months later and, allegedly, refused to pay benefits under the agreement.
The terminated official brought a wrongful discharge/breach of contract suit against the corporation, its directors and officers. Lloyd’s of London denied coverage, based on the “insured v. insured” exclusion in the directors and officers liability policy it had issued. A stipulated settlement and dismissal of the action was entered, whereupon Lloyd’s sought a federal court declaration that the D&O policy did not provide coverage. The insureds counterclaimed and sought damages, settlement costs, charges and expenses that they incurred.
The pertinent exclusion barred coverage of a suit brought by “any persons who were, now are, or shall be….(directors).” The court found it clear that the position held by the terminated employee was within the scope of “officers and directors,” as defined in the policy. At issue here was whether the exclusion applied when the terminated person brought suit after his discharge.
The court concluded that there was no ambiguity in the “insured v. insured” exclusion upon which Lloyd’s based its denial. Although the man who brought the lawsuit was not one of the “directors/officers” when he did so, he had been up to the time of his discharge. Hence, the pertinent exclusion barred coverage of his complaint.
The motion of the insurer for summary judgment was granted; that of the corporation, its directors and officers was denied.
(FOSTER ET AL., Plaintiffs v. KENTUCKY HOUSING CORP. ET AL., Defendants. United States District Court for the Eastern District of Kentucky at Frankfort. No. 92-115. April 13, 1994. CCH 1994 Fire and Casualty Cases, Paragraph 4943.)
We hope this article on what is Lloyd’s of London insurance? has been informative. If you have a higher risk business, you might have or need a policy underwritten by Lloyd’s of London.
