A federal judge in Newark has denied a motion to dismiss a suit accusing underwriters at Lloyd’s of London of conspiring to increase revenue and profits by concealing a lack of competition for its U.S. insurance customers.
U.S. District Judge Claire Cecchi denied the motion to dismiss by 28 insurance syndicates affiliated with Lloyd’s, finding that the plaintiffs adequately pleaded elements of racketeering, conspiracy and unjust enrichment.
The suit was filed by two purchasers of Lloyd’s policies—Lincoln Adventures, a corporation that owns a 68-foot yacht, and Michigan Multi-King, an operator of fast-food restaurants. According to the suit, Lloyd’s syndicates maintain a facade of competition in which brokers represent to insureds that they will seek coverage for insurance risks in a market of independent competitors. But, in fact, the organization is dedicated to maximizing volume and profits for entities that function like divisions of one corporation, the plaintiffs claim.
According to the complaint in Lincoln Adventures v. Certain Underwriters of Lloyd’s of London, Lloyd’s is not a single insurance company, but an insurance market, in which insurers, called syndicates, purportedly compete for business. The syndicates, including the defendants, are comprised of members, which may be insurance companies, limited partnerships, individuals and other entities. The suit claims the syndicates made secret payments to Lloyd’s brokers, in excess of normal brokerage commission, often exceeding 40 percent of premiums.
In addition, Lloyd’s syndicates enter into subscription agreements for risk with other so-called competitors, in which a lead underwriter sets the price and terms to which a risk is to be underwritten, the plaintiffs assert. Other syndicates align their pricing and terms with the leader, enabling the syndicates to charge premiums that were higher than they would have been otherwise, the plaintiffs claim.
In declining the defendants’ motion to dismiss, Cecchi said the plaintiffs have adequately pleaded a pattern of mail or wire fraud in furtherance of the fraudulent scheme. Cecchi said the defendants represent that syndicates compete for business, and Lloyd’s has represented to the public and to the plaintiffs that its brokers act in their clients’ best interests with respect to insurance prices and terms and without conflict of interest.
Cecchi rejected defendants’ arguments that the conduct cannot constitute a scheme to defraud because the business practices of Lloyd’s are public knowledge. At the case’s current stage, the court is limited to considering the complaint and any documents integral or expressly relied on in the complaint, and agreements among syndicates on pricing and commissions do not fall into that category, Cecchi said.
Defendants also asserted that statements at issue in the case are “business puffery” and cannot support an allegation of mail or wire fraud. Cecchi disagreed, finding that a case cited by defendants concerned statements of opinion, whereas the brokers and Lloyd’s are accused of making false statements of fact. The defendants also argued that nondisclosure of compensation agreements is not actionable because the plaintiffs did not establish any duty to disclose broker compensation or any fiduciary relationship between defendants and policyholders. But Cecchi said that claim misapprehends the plaintiffs’ allegations.
“This scheme is not based on defendants’ failure to disclose information to insurance customers that it had a duty to disclose. Rather, as described above, the alleged scheme is based on defendants’ affirmative misrepresentations,” the judge said. The compensation agreements are relevant to the scheme because the allegation that Lloyd’s brokers received substantial undisclosed compensation from defendants shows that they may have misled clients when they represented that they had no conflicts of interest. Thus, whether defendants themselves had an obligation to disclose anything to Plaintiffs is not essential to this theory.”
An attorney for the Lloyd’s of London syndicates, Mark Haefner of Walsh Pizzi O’Reilly Falanga in Newark, declined to comment. The syndicates are also represented by lawyers from Ropes & Gray. Lawyers from Robbins Geller Rudman & Dowd in San Diego, representing the plaintiffs, did not return calls.