I often think about the wisdom contained in the classic, "The Snake", about the fatal naiveté of a woman who succoured a snake back to health, only to receive a fatal bite in the end. That parable struck me when I read this story about Lloyds of London balking at paying a £30 million reinsurance judgment to North Korea after agreeing to underwrite under the terms of North Korean law:

North Korea, the last Stalinist dictatorship, is fighting a £30 million legal battle with insurance syndicates at Lloyd’s of London, which accuse it of making fraudulent claims in an attempt to prop up its collapsing economy.

Supporters of North Korea’s claim say that the insurers are trying to renege on a risky contract. It is also suggested that they failed to differentiate between North Korea, one of the most repressive and isolated countries, and South Korea, its rich democratic neighbour, when the contract was signed.

The state-owned Korea National Insurance Corporation (KNIC) is demanding €44 million in a London court from a group of reinsurers, including Lloyd’s syndicates, for damage caused in a catastrophic helicopter crash in 2005.

The North Koreans have supplied exhaustive documentation and their claims have been authenticated by independent loss adjusters and upheld in a North Korean court. But the reinsurers argue that the nature of the regime makes it impossible to trust and that the claim is a fraudulent one intended to bring in desperately needed foreign exchange.

“It’s not possible for the North Korean regime to do anything legitimate,” says Michael Payton, of the law firm Clyde & Co, who is representing a group of reinsurers, including Allianz of Germany. “We are very concerned about the circumstances of the claimed loss.”

To start with, Lloyd's of London is probably correct in its skepticism. A few weeks ago, I blogged on the scam that Kim Jong-Il was running on insurers in order to gain hard currency, now that the US has shut down their counterfeiting fence. Kim has raked in over $150 million already in insurance fraud, primarily life insurance, because he has control of all of the official agencies that would substantiate any claims. At the time, I warned that the reinsurance market would bear the brunt of Kim's fraud and suggested that they declare any claim without independent verification as baseless.

And that's exactly what Lloyd's intends to do, but unfortunately, their contract forces them to accept North Korean courts as the authority having jurisdiction for any dispute. Why they accepted these terms is a question they have yet to answer, but the fact is that they did, and they have been accepting the premiums for nine years on this policy. Until their client insurer filed the claim, they seem to have been satisfied with the arrangement.

The case sounds ludicrous. The North Korean insurer, KNIC, paid a claim for a helicopter transport company that had supposedly suffered an accident. According to the claim, a helicopter carrying a pregnant mother of triplets from an island without proper medical facilities. On the way back, the helicopter crashed into a warehouse of relief goods intended for the poor, creating a fire that destroyed most of it and presumably killed the pregnant woman and her unborn children. All that's missing is a dog, and we could have a Lifetime channel movie, or perhaps a country song had it happened down in San Antone.

However, North Korean courts -- which LoL contractually accepted as the authority in disputes -- upheld the evidence of the loss and demanded Lloyd's pay the bill. Lloyd's cashed the checks for the premiums after doing business with North Korea and accepting its laws despite knowing the nature of the regime and their control of the courts. They had to know that they were embracing a snake for a long time before it finally sunk its fangs into LoL's pocketbook.

This should be an object lesson to any capital firm: deal with dictators at your peril. If for some reason the lure of the business is too much to resist, be sure to write the contract so that your business doesn't rely on the whim of some kleptocrat looking for any hard cash he can find. If businesses can't do that, then don't scold the snake for biting you when the inevitable happens.

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» Lloyds and North Korea from Tim Worstall
For some unknown reason my old school has traditionally provided a stream of people for the Lloyds insurance market. This does not reflect well upon the education they received: The accident took place in April 2005 when, it is claimed, [Read More]

Tracked on January 26, 2007 8:21 AM