Lloyd's has denied wrongdoing in the $400,000 (£276,000) scandal surrounding former Californian insurance commissioner Chuck Quackenbush.

US newspaper reports have said Lloyd's paid the money for the disgraced former commissioner's support at a time when Lloyd's was under fire for allegedly breaching state security laws.

Quackenbush is said to have lobbied against Names, who had complained to the US Securities Commission about Lloyd's activities, at the National Association of Insurance Commissioners.

Allegedly some of Quackenbush's staff disguised the reason for the payment as “educational briefings”. Lloyd's, however, has claimed the money was paid “for work to monitor Lloyd's and gain a greater understanding of its complex financial structure”.

Lloyd's and the International Underwriter's Association also split the cost for Quackenbush to travel from Amsterdam and stay in London, allegedly to discuss how much money syndicates were required to keep in deposit in the US to pay claims.

At the time, it was common for insurance companies to pay for travel or entertainment for the commissioner, although this was changed last September by new commissioner Harry Low.

Newspaper reports have also said the money was paid for the legal advice Quackenbush obtained for Lloyd's in the US, and that the case was being investigated by the FBI.

Lloyd's denied these allegations and said legal expenses incurred were on behalf of Lloyd's policyholders.

An unnamed source, who was heavily involved with Lloyd's activities at the time, said Lloyd's was on reasonably close terms with many of the state insurance commissioners, particularly California, since it played a large part in the California Earthquake Authority.

He said any illegal move would have been foolish.

“Payments were made in good faith,” he said. “Because of the importance of the American market to Lloyd's, you always play the game above board.

“It wouldn't make sense to break the law, get rumbled and never do business there again.”

Lloyd's is licenced to write business in Kentucky, Illinois and the Virgin Islands and is an approved surplus lines provider in all US jurisdictions except Kentucky and the Virgin Islands.

Lloyd's wrote 20% of the US' surplus lines business in 1999.

The US is Lloyd's biggest overseas market, with a gross 1999 premium of £3.31bn.