Lloyd's Names may sue for £8bn compensation

Brussels begins legal action against the Government over 'lax' regulation of the insurance market in the 1980s

The names at Lloyd's of London have this week had their first piece of good news in a long time. The group, who had to pay out millions of pounds when the market was hit by massive liabilities in the early Nineties, have seen a glimmer of hope that they might yet receive compensation for their losses.

This has come from the European Union, which yesterday wrote to the Government saying it had "concerns about the supervision and regulation of Lloyd's" when it was overseen by the Department of Trade and Industry in the 1980s. This was the time when the society's syndicates wrote bumper amounts of business, including large swathes of asbestos-related business in the US.

The EU is considering evidence presented by a group of Names that the DTI did not adequately oversee Lloyd's at this time, allowing it to continue trading even though auditors could not guarantee its solvency due to the unended nature of the asbestos claims.

If the EU finds evidence that the monitoring of Lloyd's was inadequate it will take the case to the European Court of Justice, which could in turn force the Government to improve current regulation.

The case could mark a surprise change of fortunes for Names, the well-heeled individuals who underwrote Lloyd's traditionally on the basis of unlimited liability.

Some 34,000 Names from the 1980s have been involved in acrimonious legal battles with the management of Lloyd's in a bid to try to recoup some of the £15bn of claims they faced for liabilities between 1988 and 1992. In the last few years, all but 150 Names in the UK and 800 worldwide have now given up on the litigation and accepted a compromise to pay a reduced amount of their liabilities.

But if the European court rules that the British regulatory authorities failed to enforce the 1973 insurance directorate over Lloyd's, which requires companies to have enough reserves to cover liabilities, the Government will be forced to pay compensation. Names estimate that the total compensation figure could be £8bn.

The Names will have to wait up to two years for the EU case to filter through the system and will then have to raise the money to embark on yet more legal action under the Human Rights Act to establish how much compensation the Government must pay.

Christopher Stockwell, chairman of the Lloyd's Names Association, said: "We have been gathering Names together throughout the year and fully expect to sue the Government. If the EU hands a reasoned opinion to the Court of Justice [the next step in legal proceedings] we expect it to be upheld as the court normally backs reasoned opinions it receives."

Most Names realise that the case will be difficult to prove. As well as arguing Lloyd's was allowed to trade when its solvency could not be guaranteed, they have also been trying to prove through the British courts that senior Lloyd's managers knew that the asbestos business would be far costlier than was generally thought and yet did not alert the syndicates writing the business. "If the 20,000 Names who joined Lloyd's in the 1980s had realised what the thumping losses would be, they would not have become Names," Mr Stockwell said.

So far, the Names have failed to prove there was a cover-up. The action proposed this week is different because it will target the regulators for failing to spot the malpractice and because it will be the first time the European courts will rule on Lloyd's.

One senior City lawyer said that the European court could easily disagree with the British courts, which have been criticised for being too pro-City. "It is becoming more possible to sustain allegations of misconduct or breaches of regulation under European law than in the commercial court in London [part of the High Court] because Europe has begun taking a broad approach to look at the wider picture," the lawyer said.

The most relevant precedent would be the Spanish fishing boats case earlier this year, when a group of private individuals successfully used the European court to overrule a national government's policy and force it to pay compensation. In February, the court forced the Government to pay £55m to fishermen after the shipping company Factortame successfully argued that Britain's ban on other countries fishing in its water contravened EU law.

But the Factortame case is different from the Lloyd's one because the Spanish fishermen could be treated as a homogenous group while the Names, who joined at different times and invested in different syndicates, might not be able to be lumped together. If so, there has not yet been a clear precedent of an individual successfully suing the Government for breaking EU commercial law.

There is also the possibility that the EU will take the same view at Britain's judiciary and decide that Lloyd's could not have known how big the asbestosis claims would become. One Lloyd's underwriter said: "Given that the US has changed the law about who can claim over asbestos-related illnesses right up until this year it would have been impossible for anyone to know in the Eighties how many people would be able to claim. And if the EU decides the UK regulators were negligent it will have to find the same for most other countries in the EU because their regulators dealt with insurers facing the asbestosis problem in the same way."

Even if the EU drops the case, the effect will be damaging both for Lloyd's and the Government. This case is not against Lloyd's, so the organisation will not have to find compensation from funds which have already been depleted this year by £1.9bn of World Trade Centre claims. But it brings the spotlight back to Lloyd's past problems and may make some companies looking for insurance or reinsurance shun Lloyd's. The developments are also worrying for the Government, which denies that it messed up regulation of Lloyd's. But as the case follows similar claims over the Equitable Life crisis, the public's confidence in financial services will be further undermined.