In a decision that has broad implications for Lloyds of London, a federal judge in Baltimore ruled yesterday that the British insurer must pay claims filed against it by a McLean, Va., computer leasing firm.
What makes the decision significant is that the McLean company, Federal Leasing Inc., is but one of many such leasing firms filing a massive number of claims under the policy.
It has been estimated that Lloyds could ultimately face claims of as much as half a billion dollars, which would make it by far the biggest loss in the venerable insurance combine's long history.
Under the policy, Lloyds agreed to pay any losses incurred by banks or other investors that financed the purchase of computers by leasing firms like FLI, if the users of those computers cancelled their lease within a specified period of time.
Using the policy, firms like FLI became middle-men between financial institutions and users. FLI, in its suit filed last summer against Lloyds, claimed it used the policy to finance about $130 million worth of computer equipment. It then leased the computers to state, federal and local governments.
Other firms similarly used the policy to get financing for computers that were leased to some of the country's biggest companies.
The policy was first issued by Lloyds in 1974 and was dropped in 1977. Lloyds' problems began last year, when IBM announced a whole new line of computers that were smaller, faster, and about 50 percent cheaper than anything already on the market.
Corporation and governments soon began cancelling their leases in order to buy the new IBM line of computers. That trend has continued right up to the present, and the banks and other financial institutions have turned to the leasing firms for reimbursement. Those firms, in turn, have filed claims with Lloyds, which so far has been slow to pay.
In his 35-page decision, U.S. District Court Judge Alexander Harvey II ordered Lloyds to honor a March 13, 1978, agreement with FLI for payment of claims.
"As FLI correctly asserted, the basic purpose of the indemnity insurance was to provide for the immediate payment for proper claims asserted by the investors because of termination," Harvey said in his opinion.