Insurers may cough up for tobacco industry lawsuits

The insurance industry could soon face massive claims from tobacco manufacturers seeking to spread the $300bn cost of settling an avalanche of lawsuits in US courts.

Tobacco industry leaders, it was revealed last week, have begun secret talks with the anti-smoking lobby lawyers in hopes of getting immunity from litigation. In return, the tobacco firms would pay up to $300bn (pounds 185bn) in compensation over 25 years. The compensation is said to be equivalent to a quarter of the US tobacco industry's annual revenues.

The attempt to strike a deal may not work. It is felt that to grant the industry the blanket immunity it is seeking might be unconstitutional. But it may well have been prompted partly by the industry's growing conviction that the insurance companies would have to cough up a large proportion of the money. This would arise from claims under general liability insurance policies - some of them written as long ago as the 1930s.

The tobacco companies might also be seeking a settlement because they do not relish the prospect of fighting lawsuits on a second front - suing insurance companies at the same time as defending themselves against all the other court actions. These are coming both from individuals and from more than 20 state governments and local authorities across the US suing for the cost of health care and welfare attributed to tobacco use.

Until recently it had been thought that policy exclusion clauses meant the tobacco giants had no insurance cover against any court awards. Last month, however, the attorney-general for Louisiana - pursuing the state's healthcare cost reimbursement suit against the tobacco companies - decided to drag the insurance industry into the case.

It named more than 100 insurance companies as co-defendants in its action. The names include Royal Insurance, Zurich Insurance, Allianz and Lloyd's of London. Louisiana's attorney-general's office has discovered more than 750 general liability insurance policies written from 1950 to 1997 covering a number of tobacco manufacturers, wholesalers and vending companies.

This development has seriously worried the tobacco companies. The prospects of insurance companies becoming defendants might mean the tobacco companies might lose control of their own defence. Their insurance company co-defendants might force them to disclose more embarrassing evidence of their past strategies. In the past stolen secret or internal tobacco industry documents have been disclosed during court hearings. They showed the tobacco companies attempting to suppress their own research on the health effects of smoking and the addictiveness of nicotine.

Michael Broughton, BAT Industries' chief executive, whose offshoot, Brown & Williamson, is among the leading defendants in the US litigation, is believed to be privately convinced the company has considerable valid insurance cover in place. At next Friday's annual meeting in London he may be willing to clarify the company's position to shareholders.

Meanwhile two insurance analysts at merchant bankers Schroders, Paul Hodges and Bruce Davidson, have produced a lengthy research document strongly arguing that for the tobacco companies, and BAT in particular, "comprehensive general liability insurance coverage probably exists for a variety of tobacco-related claims".

Mr Hodges says: "It is probable that insurance coverage is available up to the late 1960s and, in some cases, beyond. This factor may significantly diminish the financial impact upon tobacco companies."

The Schroders research has been circulating among financial institutions for several weeks. There is no suggestion that BAT disagrees with its findings. This is perhaps not surprising since Schroders concludes BAT shares to be "outstanding value" at 528p.

"We believe a balanced valuation of BAT Industries indicates a share price of 670p to 830p per share," Mr Hodges says. The current stock market value of BAT implies a "negative valuation" of the group's US tobacco interests of 173p a share, he adds. He believes those tobacco interests are worth pounds 5bn - or 160p a share. His calculations, he points out, make no allowance for the effect of any possible demerger of the tobacco and insurance interests.

BAT Industries' investor relations director, Ralph Edmondson, says Mr Hodges has done "a clever and novel piece of research". He adds: "It is based on the idea there is sufficient latitude in the language of old general liability insurance policies written in the Sixties and earlier to allow for grounds for making an insurance claim." But he stressed Brown and Williamson had excluded insurance cover for personal injuries for many years.