There are additional considerations for an Executor when administering an estate where the deceased was a Name at Lloyd’s.
In the administration of an estate, the Executor or PR must make full provision for liabilities before he makes any distribution to the beneficiaries, or face the risk of personal liability if a creditor makes a claim and the retained assets are insufficient to meet the debt. This rule applies to both existing debts and debts that may contingent, where the liability is unascertained and has not fallen due.
For the Executors or PRs of an estate where the deceased was a Name at Lloyd’s (a “Name”) the estate will contain truly contingent liabilities. There would be the potential for one or more claims brought by policy holders and it would be impossible to know when or if they might arise. Further, the value of any such claims is impossible to quantify as a Name has unlimited liability as against the policy holder.
As is widely known, the 1980s and 1990s were turbulent times for Lloyd’s of London. Following several high profile incidents, including the Piper Alpha oil disaster, Names suffered massive losses and the institution that was founded in 1688 came close to collapse.
It was rescued by a process of reinsurance of 1992 and prior obligations (specifically non-life obligations, that is, anything other than life insurance policies) were transferred into a new special purpose vehicle called Equitas in September 1996, at a cost of over $21bn. The exact mechanism by which this was achieved was fairly complicated and requires a certain knowledge of the structure and administration of Lloyd’s syndicates. The result, however, was straightforward. Equitas became the underwriter for all policies held by syndicates for policies taken out in 1992 or before.
The problem with this was, that should Equitas fail or be unable to meet any liability, the original Names would still find themselves liable for any shortfall. This presented a problem to executors of the estates of deceased Names. The usual options open to executors would be to either (1) retain an amount judged by a Court to be suitable under the circumstances to cover any contingent liabilities or (2) to accept an indemnity from the beneficiaries, by way of security over the legacy, of an amount considered suitable. With no way of knowing what future liabilities there might be, when they might occur and how the liability might be quantified, the executors could not withhold, nor ask for security over, an amount sufficient to cover these potential claims. Essentially, the prudent executor would be forced to retain the entire estate.
This was clearly unsatisfactory and so the case of Re Yorke (1997) was brought by the executors of an estate of a deceased Name, joined by a residuary legatee and a potential creditor policy holder.
In Re Yorke
In considering the questions put before him, Lindsay J held that the Court should be able to sanction the distribution of the estate by the executors without requiring any retention or security from the beneficiaries. It is clear that he was trying to achieve:
“..a fair balance between, on the one side, the injustice of beneficiaries being kept out of benefit on account of liabilities that cannot be quantified and which may never come to anything and, on the other, the risk of the unknown and contingent creditors who have paid for cover finding their matured debts unmet.”
Following the judgment in Re Yorke, Executors and PRs have been able to make an application to Court to obtain an Order permitting them to distribute the estate and at the same time absolving themselves from personal liability.
Is Re Yorke sufficient?
A Re Yorke Order does provide comfort to the executors, however, what it does not do is protect the executors in the situation where Equitas fails or is unable to meet a claim. In this situation, the liability would fall back onto the Name or in the case of a deceased Name, the executors.
For this reason, a further reinsurance of Equitas to the tune of £7bn was undertaken beginning in 2006, and was completed in two tranches. The second tranche include an application to the UK courts to effect a transfer of business under a Part VII Transfer of the Financial Services & Market Act 2000. The application was approved in 2009. Whereas previously, the Names remained the underwriters for the open policies but were themselves insured by Equitas, now Equitas became the underwriter of the transferring policies through a statutory procedure not dissimilar to the process of novation. This means that currently no Name has any liability under English law and all jurisdictions of the EEA (that is the European Union plus Iceland, Norway and Liechtenstein) for claims on their 1992 and prior non-life Lloyd’s business.
Following the 2006 reinsurance, the finality long hoped for had been achieved certainly in respect of any contingent claims arising under English law or from within the EEA. However, there may still remain a liability as regards claims made from outside of the EEA, notably the US (for historic reasons going back to plans made in anticipation of the Second World War, Lloyd’s syndicates often had significant exposure to the US market).
The position of claims outside the EEA therefore remains the same as prior to the Part VII Transfer. They should be covered by Equitas (as reinsurer for the original Names) but should Equitas fail or be unable to meet the claim, the liability would fall back on the Name. These claims are protected, to an extent, by the fact that Equitas itself has been reinsured by the National Indemnity Company, a member of Warren Buffet’s Berkshire Hathaway group. This should result in any shortfall being met by them. However, this merely moves the liability up another branch of the tree. Should NIC be unable to meet Equitas’ liabilities the liability would fall back down the tree until landing on the original Name.
For underwriting years post 1992 the situation is different. For any claims made regarding these years there is a fund called the Lloyd’s New Central Fund which was setup to make good the unpaid liabilities of a member of Lloyds in respect of post 1992 years. However, it must be borne in mind that use of the fund is ultimately at the discretion of the Council of Lloyd’s. If there was a situation where a claim was not settled out of the New Central Fund or other Lloyd’s assets, the liability would fall back on the estate.
Should Re Yorke Orders still be used?
The short answer is, yes, probably but Executors and PRs should take advice in respect of the estate under their charge.
A Re Yorke Order will protect the executor or PR from any claim brought by a creditor regardless of the underwriting year it relates to or the geographical location of the claimant.
There is a cost attached to making an application for a Re Yorke Order and so the executor must weigh the risk of a potentially unlimited claim against the costs of achieving such an order.
In recent years most Lloyds names have operated through limited liability structures such as Limited Liability Partnerships where underwriting losses are subject to a cap or NameCos which are normally UK registered private limited Liability companies. The objective of these structures is to avoid the situation that was faced by the Equitas Names, with their unlimited personal liability.
It might also be worth considering obtaining Executors’ Insurance. These policies cover a wide range of risks related to the administration of an estate and can often be a worthwhile investment. However, care must be taken if being considered for protection against the present situation. Some policies specifically exclude claims brought by foreign residents. This would, therefore, provide no further protection than that offered by the Part VII Transfer.
Another option might be to apply to the Court for directions seeking sanction for distributing the estate on a particular basis, for example the taking of security or the retention of a particular sum to cover contingent claims. If the Executor or PR obtains the Court’s approval and acts on the directions of the Court, they will be absolved from personal liability even if the security or retention transpires to be inadequate. Costs of such applications would again, usually be payable out of the estate.
It is true that the risk of a claim against an estate by reason of the Deceased having been a Name is now small, but with a potentially unlimited liability and the ability to recover the costs of the application from the estate, a prudent Executor or PR is well-advised to seriously consider obtaining a Re Yorke Order or at the very least take specialist legal advice before deciding not to.
For more information please contact Lucinda Brown
or Daniel Curtis