How Not to Make a Shilling in Insurance

When the esteemed Lloyd's of London came calling for investors, some Arizonans took a pounding

A decade ago, it was perhaps the ultimate experience for an American Anglophile: What better way to indulge one's fascination for things English than to join one of that country's most storied, exclusive clubs?

To become a "Name" at Lloyd's of London--to become an investor in the 300-year-old insurance institution--gave hundreds of Americans not only a steady profit but also entree to a strata of British society few outsiders could attain.

American Names were told they had become a part of a British business institution which prided itself on honesty and good-faith dealing. And how could an investor feel differently when he took the requisite trip to London and was ushered into an antiquated chamber by liveried attendants for a rite of initiation? There, a panel of bewigged Lloyd's committeemen questioned the prospective Yank and then, with just the right touch of melodrama, a committeeman put his hand into a box and pulled out a piece of paper with the one word: "Yea."

Americans who negotiated this mostly ceremonial process found themselves suddenly welcome among an elite international jet set. They were part of an institution that had made its name first in marine insurance, underwriting centuries of empire-building, and later expanded into specialized markets of surplus insurance, where almost anything is insurable--even Betty Grable's famous legs, which were insured during World War II by Lloyd's for a reported $1 million.

In the postwar era, invitations to join Lloyd's as a Name--a province traditionally reserved for Britain's well-heeled and titled--was opened to the less affluent in Britain, and, later, to foreigners. During the 1970s and 1980s, Americans joined in droves, and enjoyed sizable profits year after year.

Only after a series of natural and manmade disasters struck Lloyd's did the realization begin to dawn that American and other international investors had fallen victim to what some say is the largest fraud in world history.

American Names, who had gladly accepted the prospect of unlimited liability as Lloyd's underwriters, faced losses many times their original investments. Names who had thought they were joining relatively safe and profitable insurance syndicates found out they had instead been exposed to the most extreme of risks: asbestos and pollution claims emerging from policies written decades earlier.

Losses among the 2,900 American Names alone have been estimated at more than a billion dollars--or about a half-million dollars each on original investments that averaged about $40,000.

And while Lloyd's itself has struggled to recover from years of losses, analyses by business and insurance experts have found several areas of blame, including antiquated underwriting practices and negligence.

But the most serious charge against Lloyd's has been leveled by Names who say they were the victims of outright fraud. Lloyd's insiders had known that the catastrophic losses were coming as early as the late '60s, the Americans claim, when the institution went looking for new members specifically to absorb those losses.

Despite compelling evidence which backs up these claims, no government entity appeared willing to prosecute the venerable insurance market. Not the British government, which by fiat has bestowed a kind of immunity on Lloyd's, nor American securities regulators, who proved reluctant to take on the insurance giant.

But then, last year, two government entities proclaimed that they could prove fraud and intended to punish Lloyd's on behalf of their citizens.

Those entities were the states of Arizona and Illinois.

Charles de Trenck looks as if he should be strolling the deck of a 1940s cruise liner rather than sitting in the unromantic clubhouse of a Scottsdale condominium complex.

The 75-year-old wears a double-breasted jacket, a silk handkerchief sticking prominently out of its pocket. He has a round face with vaguely Churchillian features, and he speaks with an accent that is hard to place.

Born of German parents in what is today the Czech Republic, de Trenck grew up in Italy and England. When he became a Name in the 1970s, he was running a bank in Switzerland.

"Lloyd's was a wonderful thing to belong to then. Not now, of course. Now it means you're a sad jerk," he says with a self-deprecating laugh.

De Trenck moved to Arizona in 1979--"What should I tell you? I love the cactus."--and was one of the founding members of Founders Bank. He had retired from a lifetime of successful banking only to find that his investments in Lloyd's were wiping out much of what he'd set aside.

"It was absolutely fraud," de Trenck says.
He says he was assured by Lloyd's agents that he would not be exposed to asbestos and pollutions claims, only to find out that he had been lied to.

"I think it was the biggest Ponzi scheme I've ever seen in international business."

De Trenck claims that Lloyd's agents exposed Names to unreasonable risk during the 1980s to produce illusory, short-term profits. But when a series of oil-rig explosions and hurricanes came in 1988 and 1989, that shortsightedness spelled disaster.

De Trenck says he's already paid Lloyd's 250,000 pounds, and Lloyd's says he owes another 525,000 pounds (about $800,000). Lloyd's controls an additional 87,000-pound letter of credit that de Trenck expects will be drawn down soon, he says.

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