State Insurance Officials Fault Suing of Lloyd’s

A lawsuit brought by the state Department of Corporations against Lloyd’s of London last week inadvertently threatens the solvency of 15 California insurance companies and could weaken many others, state insurance regulators said Tuesday.

Insurance Department officials criticized their counterparts at Corporations for not providing notice of their plans to sue the British insurance giant. The action “caught us completely off-guard,” spokesman Richard Wiebe said Tuesday.

Lawyers for the two agencies are discussing how to amend the lawsuit to avoid harming domestic insurers and their policyholders while still protecting the California investors that the Corporations Department contends were defrauded by Lloyd’s. They had not reached agreement as of late Tuesday, however.

The lawsuit, filed Feb. 21 in Los Angeles Superior Court, contends that Lloyd’s defrauded 500 Californians by inducing them to invest in the London insurance market without disclosing the potential risks. The investors have lost some $100 million to date and stand to lose much more, the suit states.

The Corporations Department seeks a court order barring Lloyd’s from collecting any more money from Californians. It also seeks to put a hold on Lloyd’s $10-billion account at Citicorp to ensure that there is money to make restitution to the investors. A hearing on the request is scheduled this morning.

But freezing the fund would keep Lloyd’s from making legitimate payouts on reinsurance policies held by U.S. insurance companies, Wiebe said. As a reinsurer, Lloyd’s accepts a portion of the risk on policies written by conventional insurers.

Wiebe said a freeze could render such contracts worthless, plunging 15 California insurers into technical insolvency and shrinking the surplus--or cushion against losses--of about 60 others.