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Jay Bradford Worries Lloyd’s Challenge Could Create Crisis

7 min read

Insurance Commissioner Jay Bradford says Lloyd’s of London underwriters are approved to sell insurance in Arkansas.

That sounds like it should settle the underlying issue in a lawsuit filed last year in Saline County Circuit Court.

Instead, the suit — in which Little Rock attorney Gene Ludwig seeks class status for potentially thousands of policyholders — keeps moving forward, and Bradford says he’s worried that it could create a crisis in the Arkansas insurance market. 

Ludwig is representing more than a dozen named plaintiffs against several brokers who sold surplus lines of insurance through the Lloyd’s of London marketplace. 

The lawsuit argues that thousands of policies should be invalidated because, under Ludwig’s reading of the law, the Lloyd’s of London underwriters weren’t approved by the Arkansas Insurance Department.

Ludwig is seeking to recover all the premiums that were paid for policies between April 2005 and March 2011 — provided no claims were paid — plus unspecified damages. He alleged the brokers violated the Arkansas Surplus Lines Insurance Act and the Arkansas Deceptive Trade Practices Act. 

Bradford has vigorously disagreed with the allegations and said the Lloyd’s underwriters were approved — he even issued a bulletin in July that reiterated his point. And even though the Insurance Department isn’t named as a defendant in the case, Bradford wants to intervene because success by Ludwig could create havoc in the insurance market in Arkansas.

“Effectively, the relief Plaintiffs seek would de facto invalidate all policies of insurance placed with” the Lloyd’s of London insurance market, Bradford said in his motion for the AID to intervene in the case. “The policies cover a wide range of risks in Arkansas, including many owned by or related to the State of Arkansas itself. They protect not only the insureds, but also potential third-parties who may have liability claims.”

If the litigation drags on, it “could cut off access to the world’s largest insurance market,” Bradford said in the filing. “This could have a dramatic impact on the ability of the citizens of Arkansas to obtain insurance, increasing premiums, and/or reducing the coverage available.”

Saline County Circuit Judge Gary Arnold has scheduled a hearing on Dec. 4 to determine if the AID can intervene. 

Meanwhile, one of the attorneys for the insurance brokers, David Wilson of Little Rock, has asked Arnold to simply throw the case out of court for the simple reason that the insurance they sold was approved by the AID and the National Association of Insurance Commissioners.

Wilson declined to comment, but one of the defendants issued a statement to Arkansas Business saying the brokers did nothing wrong.

“As surplus lines insurance brokers, we have followed the instructions of the Arkansas Department of Insurance and acted consistently with its policies and procedures,” Michael Alexander, vice president of Argenia LLC of Little Rock, said in the statement.

He also said that all claims have been properly paid, so there hasn’t been “any harm to any Arkansas citizen.” 

In fact, during the proposed class period — April 2005 to March 2011— underwriters at Lloyd’s incurred approximately $362 million in losses and expenses in Arkansas while collecting premiums of about $360 million. Those figures were compiled by Lawrence Powell, a professor of finance at the University of Arkansas at Little Rock, who was hired by the defendants to prepare the report. 

Ludwig, however, said in an email to Arkansas Business that payment of claims isn’t relevant to his lawsuit.

“Are the defendants telling you that they can sell illegal policies, collect money for them and keep the money after they are caught so long as no victim makes a claim on the illegal policy?” he said.

Although Ludwig’s lawsuit originally included all policyholders, he later amended it to remove those who had made claims. The defense says this is because invalidating all the policies would mean that those policyholders who made claims and received settlements would have to repay the settlements in exchange for getting their premiums back — almost always a losing prospect.

Wilson, in his court filings, attacked Ludwig for carving out the exception to the potential class members. 

“The Plaintiffs fail to explain, however, how the Policies for which they do seek relief can be invalid on their face and warrant various causes of action, while other policies placed in the same period with the same purportedly ‘unapproved’ group of insurers can remain valid,” Wilson said in his motion. “At its core then, the Plaintiffs’ own Complaint admits that the Polices at issue here had value; … and that any alleged ‘damages’ can only be had for those insureds who simply did not seek the coverage their insurers would have afforded, had they needed it.”

A hearing on the defendants’ motion to dismiss the case is set for Dec. 11. 

It Started With a Storm 

The roots of Ludwig’s lawsuit can be traced to a wind and rainstorm in May 2011. Ray and Debra Hudson said their boat marina on the Little Maumelle River in Little Rock was ruined during the storm. But when they made a claim through their supplemental insurance coverage through Lloyd’s of London, it was denied. The Hudsons turned to Ludwig for help suing the Lloyd’s underwriter, but he couldn’t determine who that was. In 2012 Ludwig filed a lawsuit naming dozens of entities he thought were the underwriters of the policy. 

“Despite great effort, I was unable to identify their alien insurers so that I could sue them,” Ludwig said in his statement to Arkansas Business. 

Eventually, Ludwig asked that the case be dismissed, which it was in November 2012. 

“I thought to myself: ‘This is wrong. This can’t be legal,’” Ludwig told Arkansas Business. “It turns out there is a law against it.” 

A Self-Regulating Market 

Founded in Britain in 1680, Lloyd’s of London is a self-regulating insurance market that relies on individual investors worldwide (known as “Names”) along with several hundred companies, to provide the money for underwriting insurance.

The Lloyd’s market writes a variety of high-risk and emerging-risk exposures that most other surplus lines won’t insure, according to the report that Powell, the UALR professor, put together for the defendant brokers.

Lloyd’s of London, though, is not the insurer. It’s simply a name that stands for the market, similar to the New York Stock Exchange, “where various insurers, called ‘Names,’ ‘underwriters,’ or ‘members,’ … subscribe to a percentage of risk of insurance contracts that are issued,” Ludwig said in his court filing.

Ludwig said in the filing that Lloyd’s of London consists of “syndicates,” which aren’t companies but are “are made up of hundreds of individuals called ‘members’ that actually insure the risk under the Policies.” 

And this is where the problem comes in: The Arkansas Surplus Lines Act requires that the members be approved by the state insurance commissioner and that their names appear on the National Association of Insurance Commissioners list of approved insures.

But “the Arkansas Insurance Commissioner does not know the identity of the members, does not approve the members as insurers and their names are not on the NAIC list of approved insurers,” Ludwig said in the filing, “and in fact, their identity is confidential and not subject to public disclosure.”

The problem arises because there can be hundreds and even thousands of members insuring the risk on a single policy, where the members have several, not joint, liability. (Under several liability, the underwriter would be responsible only for its obligation, and under joint liability, any party could be liable for the full amount of the judgment.)

“This arrangement has been successful in making it difficult, if not impossible, for the insured to identify and sue the actual insurer on a claim, which frustrates the legislative purpose of the Arkansas Surplus Lines Act,” Ludwig wrote.

Bradford’s Response 

Bradford said in his court filing that he and the Insurance Department have approved the names in the Lloyd’s of London market as surplus line insurers when acting through syndicates on the NAIC list. 

Bradford issued a bulletin on July 7 to clarify that Lloyd’s of London surplus policies have been verified by the NAIC and approved. 

The eligibility of Lloyd’s of London underwriters “is based on a comprehensive application process as well as detailed financial analysis by NAIC staff, under the supervision of a panel of state regulators that comprise the Surplus Lines Financial Analysis Working Group,” Bradford said in the bulletin. 

In addition, he pointed out in his motion to intervene in the Saline County case, the commission is the entity that has the authority to enforce all laws relating to insurance.

“Even if Plaintiffs are correct that the Defendant Brokers placed insurance with unapproved insurers, it is the province of the Commissioner, not Plaintiffs, to enforce the provisions of the Arkansas Insurance Code,” Bradford said in his filing.

But Ludwig disagreed.

“The Commissioner readily testified to the obvious: Judge Arnold is the one to decide whether defendants placed illegal policies,” Ludwig wrote to Arkansas Business. “The Commissioner must follow Arkansas law too.”

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