Hundreds of U.S. investors who face unexpected heavy losses as Lloyd's of London underwriters must take their suit against the insurance giant to England, a federal appeals court ruled Tuesday.
In an 8-3 decision, the 9th U.S. Circuit Court of Appeals said the investors were bound by their contract agreement to try all disputes under English law, in English courts.
That means, among other things, that they cannot get out of insurance contracts that have saddled them with losses for asbestos illnesses covered by Lloyd's, said Eugene I. Goldman, a lawyer for the investors. Their suit claimed Lloyd's secretly shifted asbestos losses to their syndicates and never told them such liability was possible.
Under British law, Lloyd's cannot be sued for negligence and can be sued for fraud only if it actively lied and not if it merely concealed the truth, Goldman said. He said the ruling would be appealed to the Supreme Court.
But Harvey L. Pitt, a lawyer for Lloyd's, said the Supreme Court has already denied review of several other appellate rulings in the insurer's favor on the same issue. All seven appeals courts to consider the question have agreed that the suit must be heard in England.
Â"All of those people have got an opportunity to litigate issues in London, and indeed many of them already have,Â" Pitt said. Â"There are parties in the United Kingdom who can respond in damages, if any wrongdoing occurred.Â"
But Goldman said most of the agents who ran the investors' syndicates are bankrupt, and any who remain solvent would be required to pay damages to Lloyd's before reimbursing U.S. investors.
The U.S. Securities and Exchange Commission also argued in favor of the investors, saying U.S. securities laws should apply to securities sold in the United States.
Out of 34,000 investors worldwide, Lloyd's said 94 percent have accepted a settlement of their suits. Goldman said Tuesday's case, originally filed in San Diego, involved about 650 U.S. investors, of whom about half have settled.
Known as Â"names,Â" the investors supply a modest amount of underwriting capital to individual Lloyd's syndicates, collect annual returns on their investments and post letters of credit to cover potential losses, which can be unlimited.
When staggering long-term losses for asbestos and toxic pollution materialized, the investors sued under U.S. securities laws, which allow contract cancellation and damages for failing to disclose important information. The suit also included a triple-damage racketeering claim.
Lloyd's denied it was selling securities and also pointed to the contract clause which investors had to travel to England to sign
referring all disputes to British courts and British law.
U.S. District Judge Irma Gonzalez ruled in the insurer's favor but was overruled last March by a 9th Circuit panel, which ruled 2-1 that the contract clause was void. But a majoriy of the entire court then referred the case to Tuesday's 11-judge panel, which reinstated Gonzalez's ruling.
The court relied on a 1972 Supreme Court ruling that said contract clauses refrring disputes to particular courts and laws should normally be upheld in Â"freely negotiated private international agreements.Â"
The investors signed the agreement in England, with English entities in an English insurance market, and will have Â"sufficient protectionÂ" under English law, said the opinion by Judge Alfred Goodwin.
Dissenting Judge Sidney Thomas said U.S. securities laws are drafted so that their protections Â"cannot be ignored ... even when a salesperson managed to obtain an investor's waiver.Â" He said the investments were solicited in America and had little connection with England, whose investor protection laws are Â"markedly inferiorÂ" to U.S. laws.
By Bob Egelko
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