I have a fair amount of experience in litigating coverage disputes under Lloyd’s of London policies. Let’s just say that, because of the labyrinthine structure of the organization (if it IS an “organization”), pursuing coverage under Lloyd’s policies can be like trying to nail Jell-O to a wall.
You can’t just sue “Lloyd’s of London,” for one thing, because Lloyd’s of London itself isn’t an insurance company; it’s an insurance “market.” It’s kind of like getting sick on food you buy from a stall at a farmer’s market. You have to sue the people who own the stall that actually sold you the bad food, not the “market,” which often isn’t a living, breathing legal entity. Then there’s the joy of settling a claim under a Lloyd’s policy for let’s say $500,000, and having your adversary tell you that you’ll only be receiving $50,000, because 90% of the syndicates who underwrote your policy have gone belly-up. And taking testimony from people who work for the syndicates can be fairly confrontational in a charming, cockney kind of way. I think I may hold the record for the shortest deposition of a Lloyd’s claims person ever, which I took over the phone. It was 25 years ago, but as I recall, the guy gave me a hard time about spelling his name for the transcript, and then indicated obliquely but pretty strongly what I could do with my client’s insurance claim. I told him I was in no mood to play games, so if this was the way he intended to conduct himself, he should leave and let me talk to someone who took the process seriously. He accepted my offer to have him vacate the premises, and, amazingly, the next witness was overwhelmingly cooperative. (I think defense counsel, worried about sanctions, told Witness No. 2 to behave. But my BigLaw boss was unhappy anyway. He thought I should’ve stuck to my script with the first guy. That’s part of the reason I’ve owned a small firm for the past 22 years.)
That brings us to the recent decision in Lincoln Adventures, LLC v. Certain Underwriters of Lloyd’s of London, 2017 U.S. Dist. LEXIS 136684 (D.N.J. Aug. 23, 2017), a class action in which a group of business policyholders contend that Lloyd’s underwriters, and the brokers who place Lloyd’s policies (including major brokers like Marsh, Aon and Willis), have been less than honest with the public, and have essentially engaged in a sort of illegal hidden kickback scheme. I want to emphasize here that the allegations have not been proven, and the case is still ongoing. But a recent decision in the case is worth reading, simply for the extensive description of what Lloyd’s is and how it operates.
The Court wrote, for example:
“Lloyd’s of London itself is not an insurance company. Rather, it describes itself as the ‘World’s Specialist Insurance Market’ whose members – insurance companies, limited partnerships, individuals, and other entities – form syndicates, including Defendants, which underwrite insurance policies. Each syndicate maintains and staffs a physical office or stall on the premises of the Lloyd’s Market at Lloyd’s headquarters in London. Syndicates do not sell insurance directly to customers; rather, customers access the Lloyd’s Market through authorized broking firms or other intermediaries of which Lloyd’s approves… Lloyd’s represents to its customers that the Lloyd’s market is competitive. As of January 7, 2016, the Lloyd’s website stated that its syndicates ‘compete for business, thus offering choice, flexibility and continuing innovation.’”
The idea that the Lloyd’s market is “competitive” is the potential problem. According to the plaintiffs, Lloyd’s really isn’t competitive at all: “Plaintiffs contend the Lloyd’s Brokers and coverholders contribute to and conceal the anti-competitive nature of the Lloyd’s Market in exchange for commissions that they do not disclose to their clients. In the Lloyd’s Market, broker compensation can account for nearly 40% of the insurance premiums, and these costs are passed onto insureds. Indeed, according to Defendants’ data, on average, brokerage and commission payments during the relevant time frame were 22% in the Lloyd’s Market, compared to 12% in the United States property and casualty market. According to Plaintiffs, the syndicates can only pass on the costs of these commissions and fees because of the anti-competitive nature of the market.” (A “coverholder” is an insurance intermediary authorized to enter into insurance policies to be underwritten by a particular Lloyd’s syndicate.)
Based on these fairly detailed allegations, the Court ruled that the suit can go forward, despite defendants’ efforts to have it dismissed. The stakes are high, because the plaintiffs have included a claim for violation of the Racketeer Influenced and Corrupt Organizations Act, 18 U.S.C. §1961 et seq., which allows for the recovery of treble damages and attorneys’ fees.
I’ve been resolving insurance claims on the policyholder side for 30 years. So, naturally, I’ve met a lot of insurance brokers and agents over the years, and a lot of them are personal friends. (Except for the select few I’ve had to sue for messing up my clients’ coverage, but that’s another story…) They’re in a tough spot. On the one hand, they’re in the business of selling insurance at competitive rates, so they have to maintain their relationships with the carriers. On the other hand, they’re expected to advocate for their policyholder-clients, both with respect to premium rates and with respect to disputed claims. The courts tell us, in fact, that “insurance intermediaries…must act in a fiduciary capacity to the client because of the increasing complexity of the insurance industry and the specialized knowledge required to understand all of its intricacies….Brokers …hold themselves out as having more knowledge than members of the public with regard to the insurance policies and coverage they procure…A broker is not an ‘order taker’ who is responsible only for completing forms and accepting commissions.” Aden v. Fortsh, 169 N.J. 64, 776 A.2d 792, 803 (2001).
I was also interested in the fact that, in the Lincoln Adventures case, plaintiff’s counsel cited (and the court picked up upon) statements made by Lloyd’s and the defendant brokers on their websites, about the supposedly competitive quotes available through the Lloyd’s market. Social media and websites often provide truckloads of ammunition for savvy lawyers in court. When the marketing department and the legal department aren’t on the same (web) page, look out.
It’ll be interesting to see whether the plaintiffs can prove their case, which, in any event, serves as an excellent warning to insurance professionals of the requirement of transparency in dealing with their clients.