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England and Wales Court of Appeal (Civil Division) Decisions
You are here: BAILII >> Databases >> England and Wales Court of Appeal (Civil Division) Decisions >> Jaffray & Ors v Society of Lloyd's  EWCA Civ 1101 (26 July 2002)
Cite as:  EWCA Civ 1101
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COURT OF APPEAL (CIVIL DIVISION)
ON APPEAL FROM THE HIGH COURT OF JUSTICE
QUEEN’S BENCH DIVISION COMMERCIAL COURT
London, WC2A 2LL
B e f o r e :
LORD JUSTICE ROBERT WALKER
LORD JUSTICE CLARKE
| JAFFRAY & ORS||Appellants|
- and -
SOCIETY OF LLOYD’S
Smith Bernal Reporting Limited, 190 Fleet Street
London EC4A 2AG
Tel No: 020 7421 4040, Fax No: 020 7831 8838
Official Shorthand Writers to the Court)
Mr Gordon Nardell and Mr Giles Richardson (instructed by Grower Freeman) for others of the appellants
Sir William Jaffray Baronet, Mrs Heather Adams, Mr Sydney Butler, Mr Richard Carter, Mr Cary Harrison and Mrs Ann Strong appeared in person
Mr Charles Aldous QC, Mr Richard Jacobs QC and Mr David Foxton (instructed by Freshfields) for the respondent
Mr Colin Edelman QC (instructed by Barlow, Lyde & Gilbert) appeared on behalf of Equitas (intervening)
AS APPROVED BY THE COURT
Crown Copyright ©
|I INTRODUCTORY||Overview ..............................................................
||1 to 14|
|The threshold fraud issue ......................................
||15 to 30|
|The judgment below ..............................................
||31 to 48|
|II LEGAL ISSUES||The tort of deceit ....................................................
||49 to 69|
|Corporate knowledge, intention and bad faith .......
||70 to 74|
|Approach of the Court of Appeal .....................
||75 to 79|
|III THE FACTS||The claimants and their witnesses ..........................
||80 to 95|
|Working members of the Lloyd’s community .......
||96 to 122|
|Chronological summary: before 1982 ....................
||123 to 148|
|Chronological summary: 1982 ...............................
||149 to 180|
|The Lloyd’s Act 1982 ............................................
||181 to 201|
|Chronological summary: 1983-8 ...........................
||202 to 266|
|Chronological summary: since 1988 .....................
||267 to 284|
THE ALLEGED REPRESENTATIONS
Recapitulation of pleaded case ..............................
The brochures ........................................................
The judge’s reasoning ...........................................
Representations as to the audit system .................
The globals ............................................................
285 to 287
288 to 297
298 to 308
309 to 325
326 to 343
THE AUDIT SYSTEM: WAS THE REPRESENTATION TRUE?
Reserves and RITC ...............................................
345 to 362
363 to 373
374 to 378
LLOYD’S STATE OF MIND
Before Neville Russell letter .................................
After Neville Russell letter ....................................
The names’ case (summary and discussion) ........
Lloyd’s case ...........................................................
Conclusions as to 1982 ..........................................
Evidence as to 1983-8 ...........................................
Discussion as to 1983-8 ........................................
Conclusions as to 1983-8 ......................................
General Conclusions .............................................
380 to 385
386 to 390
391 to 409
410 to 426
427 to 432
433 to 471
472 to 474
475 to 480
RELIANCE AND INDUCEMENT
VIII FAIR TRIAL
Correct approach ...................................................
The Alleged unfairness ..........................................
The Relevant circumstances ..................................
Unacceptable pressure ...........................................
The Documents: disclosure and trial bundles ........
Redaction and relevance .......................................
Confidentiality: general .........................................
Attorney’s reports ..................................................
Equitas reserving figures ......................................
Finality statements ................................................
LUNMA minutes ..................................................
Adverse inferences ...............................................
Witness statements ...............................................
Timetable for final submissions ............................
Role of litigants in person .....................................
Disregard of submissions of litigants in person....
Relationships between Lloyds, Equitas & LUNMA
Conclusions on fair trial ........................................
482 to 484
486 to 495
496 to 497
498 to 510
511 to 518
519 to 526
527 to 529
530 to 535
536 to 537
538 to 550
551 to 554
555 to 560
561 to 569
570 to 571
572 to 574
575 to 577
578 to 579
580 to 582
583 to 586
||................................................................................||587 to 589|
Lord Justice Waller:
“We consider that the impossibility of determining the liability in respect of asbestosis falls into this category [ie requires to be reported to the Committee] and we accordingly ask for your instructions in this respect.”
The threshold fraud issue
“The Threshold Fraud Point refers to the issue whether Lloyd’s made representations which it knew to be untrue and/or as to which it was reckless whether they were true or false and whether such representations were communicated to the Names and if so, when.”
The order of 30 June 1998 further contained directions as to which names should be bound by a determination of the threshold fraud point. Thereafter all concerned proceeded on the basis that the trial would be limited to the threshold fraud point as defined, subject only to some refinement as follows.
“(i) Certain members of the Council and/or Committee of Lloyd’s: Sir Peter Green, F Barber, Richard Ballantyne, D J Barham, J R K Beckett, I R Binney, P G Bird, B J Brennan, A H Chester, M H Cockell, D E Coleridge, P T Daniels, R D Hazell, C O Gibb, C D D Gilmour, A W Higgins, V V Hudson, R J Kiln, W N M Lawrence, S R Merrett, Sir Peter Miller, C K Murray, E E Nelson, A Parry, I R Posgate, Sir David Rowland, C H A Skey (including, where relevant, their membership of Audit and Membership Committees and their statements in the Global Reports and Accounts as LUNMA Chairmen respectively during the Relevant Period). The Names say that where any one or more of these persons acted during any year between 1978 and 1988 as Chairman or a Deputy Chairman of the Committee/Council of Lloyd’s they carried special responsibilities in the oversight and administration of the Lloyd’s market and had particular influence which was likely to be decisive in matters relevant to the problem of asbestos-related claims.
(ii) K E Randall.
(iii) H R Rokeby-Johnson, Robin Jackson, Bryan Kellett and Michael Williams (the other LUNMA Chairmen who contributed to the Global Reports and Accounts in the Relevant Period).
(iv) Certain members of the Asbestos Working Party during the Relevant Period (E E Nelson, H R Rokeby-Johnson, R A G Jackson, D Tayler, C H A Skey). ”
“If Lloyd's owe a duty by statute or contract, then the preliminary issue will be decided in favour of the plaintiffs. But if no duty was imposed by statute or contract it does not appear to me that a duty could have arisen in tort. If statute or contract between Lloyd's and a name do not impose an obligation on Lloyd's to convey information to a name concerning his managing agent, an obligation to convey information could not arise just because and whenever information was obtained by Lloyd's.”
At the trial of the preliminary issues before Gatehouse J,  2 Lloyd's Rep 620, the question whether Lloyd's owed a duty of care in tort was not pursued: see p 623.
“(a) a duty to take reasonable steps to alert the plaintiff names about matters which might seriously affect their underwriting interests and (b) a duty to impose a premium income monitoring system even if it was only an ad hoc system of monthly monitoring of the syndicates managed by an agent in trouble.”
“This led to the limited proposition that it is the duty of a regulator to exercise its powers and discretions in good faith and that where the regulator secures for itself contractual powers and discretions it is a necessary legal incident of such contract that (unless expressly excluded) the regulator will exercise its powers and discretions in good faith. A well-known example is Weinberger v Inglis,  AC 606, in which this proposition was assumed by the House of Lords. The duty extends no wider, said Mr Simon. Whether an attempt expressly to exclude any duty of good faith could survive the Unfair Contract Terms Act 1977 was not canvassed and, in any case, does not arise; Lloyd’s accepted (obviously correctly) an unqualified duty to act in good faith. But I know very little about the self-regulating bodies which, it is claimed, constituted a type or category of contractual relationship and I do not feel able to say that there is such a type, of which Lloyd’s contract with a Name is an example. I remain of opinion that the Lister v Romford principle has no application.”
(1) that Lloyd’s would regulate and direct the business of insurance at Lloyd’s with care and diligence and/or lawfully;
(2) that Lloyd’s would manage and superintend the affairs of the Society with care and diligence;
(3) that Lloyd’s would advance and protect the interests of members of Lloyd’s in connection with the business carried on by them with care and diligence and/or lawfully; and
(4) that Lloyd’s would collect, publish and diffuse intelligence and information to members of Lloyd’s including the defendant in connection with the business carried on by them, with care and diligence and/or lawfully.
(1) that Lloyd’s would comply with the provisions of the Lloyd’s Acts 1871-1982, any subordinate legislation made thereunder and any direction given or provision or requirements made or imposed by the Council or any person(s) or body acting on its behalf pursuant to such legislative authority;
(2) that Lloyd’s would regulate the business of insurance at Lloyd’s lawfully and/or in good faith and/or with reasonable care and diligence; and
(3) that Lloyd’s would advance and protect the interests of members of Lloyd’s in connection with the business carried on by them as members of Lloyd’s lawfully and/or in good faith; and with reasonable care and diligence.”
“1. Implied terms
Mr Beveridge said that agreements by which members of an organisation agreed to be bound by its rules and regulated by a committee or similar body were a type of contract into which certain obligations on the part of the organisation (if corporate) or its committee were customarily implied. He said that the powers of regulation were regarded as fiduciary and had to be exercised in good faith and for the purpose intended by the rules. From this he said it was a short step to the implication of a duty to members to exercise regulatory powers with reasonable care.
In my view the fallacy of this argument is to confuse the extent of the powers conferred on the organisation or committee with its contractual obligations to its members. The fiduciary nature of the powers means that a purported exercise of those powers in bad faith or for an improper purpose will be invalid. It does not follow that the mere invalid exercise of the power will be a breach of contract for which the organisation is liable in damages, although it may mean that the organisation will be unable to justify an act (such as depriving an expelled member of the benefits of membership) which would be wrongful in the absence of a valid exercise of the power. Once it is appreciated that an improper exercise of the power is not in itself a breach of contract but simply a nullity, the basis for implying a contractual obligation not to act otherwise than in good faith and for a proper purpose disappears. A fortiori, there can be no foundation on which to build an implied term to exercise the power with reasonable care.”
The judgment below
“Lloyd’s did not call a number of witnesses whose witness statements were exchanged. In reaching the conclusions set out in this judgment I have had regard to the fact that Lloyd’s did not call these witnesses and I have considered whether any adverse inferences should be drawn.”
The most important uncalled witness in this category was probably Mr Randall. It appears that the judge must have decided not to draw any adverse inference from the failure to call the witnesses, since the judge did not again refer to this point in his judgment.
“(i) Could have confidence in Lloyd’s as an institution to safeguard his/her interests;
(ii) Could trust those who were chosen by Lloyd’s to regulate the Lloyd’s market and manage its affairs;
(iii) Because of the way in which Lloyd’s regulated and monitored underwriting accounts year by year:
(a) could rely on syndicate accounts;
(b) could in underwriting and/or deciding whether to remain a member of Lloyd’s have confidence in the audited syndicate results, for results of past years;
(c) could be sure that Lloyd’s as part of its regulatory duties would ensure that when prospective liabilities were reinsured by one syndicate year into another, such liabilities were being fairly assessed and quantified as between the two syndicate years.”
“(a) that the Lloyd’s market was in a sound financial condition;
(b) that Names could safely join Lloyd’s and/or continue their membership of Lloyd’s and/or increase their Premium Income Limit with confidence that known and projected claims had been prudently and adequately reserved to ultimate.”
“(i) The whole of each Brochure must be considered.
(ii) The starting point is the actual words used in the Brochures.
(iii) A useful question is as follows: What would a reasonable applicant for membership of Lloyd’s/Name understand when reading the Brochure as a whole?
(iv) The alleged representations are not contained in any of the express words used in the Brochures.
(v) The alleged representations (a) are not necessary to give business efficacy; (b) do not represent the obvious, but unexpressed, intention of the parties; and (c) are inconsistent with the express words used in the Brochures.”
In relation to the globals his stated reasons were very similar. In relation to both he summarised his reasoning by observing that the alleged representations were unclear in their terminology, did not accord with the administrative structure and governance of the Lloyd’s market and the regulatory background, and were inconsistent with what the documents in question had actually said.
(i) “The Committee/Council of Lloyd’s was generally entitled to assume that auditors were performing their duties competently.”
(ii) At the annual meetings when Mr Lawrence, Mr Nelson, Mr Rokeby-Johnson and Mr Jackson addressed the panel auditors about asbestos-related claims, they “did so (in the case of Mr Nelson probably did so) honestly and responsibly.”
(iii) “ ... the Murray Lawrence letter and the Randall letter were an honest response to the issues raised by the Neville Russell letter.”
(iv) The view that RITC should be left to managing agents and auditors, and should not be second-guessed by the Council, was “representative of the then current thinking of the Committee/Council, and in my judgment reflected the distinction between the role of the Committee/Council and the duties and responsibilities of managing agents/underwriters and auditors of individual syndicates.”
II LEGAL ISSUES
The tort of deceit
i) that Lloyd’s made the representation;
ii) that the representation was material;
iii) that the representation was untrue;
iv) that when it made the representation, Lloyd's knew or believed that it was untrue or made it recklessly, careless whether it be true or false;
v) that when it made the representation, Lloyd's intended that the representation should be relied upon by the name;
vi) that the name in fact relied upon the representation; and
vii) that the name has suffered loss as a result.
It is convenient to consider each of those ingredients in turn in the context of a case of this kind.
i) The Representation
“It is well established in law that the question whether any kind and if so what particular representation was made depends upon an objective assessment of what was said or done and its likely effect on the alleged representee in the context in which the particular parties were concerned. In other words, what would the documents and exchanges relied upon have conveyed to a prudent banker in the position of the plaintiff banks?”
In the instant case we are not concerned with the prudent banker, who is already versed in the world of banking, but with prospective names who may have no previous knowledge of the world of insurance.
“… if the facts are not equally known to both sides, then a statement of opinion by one who knows the facts best involves very often a statement of a material fact, for he impliedly states that he knows facts which justifies his opinion.”
That principle has recently been considered by Evans-Lombe J in Barings Plc v Coopers & Lybrand  EWHC 461 (Ch) at paragraphs 46 to 50.
“… it suffices for the application of the principle if it appears that, between the two parties, one is better equipped with information or the means of information than the other.”
In that case it was held that the test was met where the vendor’s solicitors expressed an opinion in sale particulars as to an important aspect of the property about which the purchaser could know nothing. Lord Evershed continued at p 643:
“What would be the effect of this language upon the mind of a possible purchaser? Clearly, I should have thought, it would flow from the language used and would be intended to be understood by a reader of the particulars that persons who knew the significance of this matter and who were experienced and competent to look into it were expressing a belief founded upon substantial and reasonable grounds.”
ii) The materiality of the representation
“For a plaintiff to succeed in the tort of deceit it is necessary to prove that (1) the representation was fraudulent, (2) it was material and (3) it induced the plaintiff to act (to his detriment). A representation is material when its tendency, or its natural and probable result, is to induce the representee to act on the faith of it in the kind of way in which he is proved to have in fact acted.”
iii) The Truth of the Representation
iv) Lloyd's knowledge, belief or recklessness
“I think the authorities establish the following propositions: First, in order to sustain an action in deceit, there must be proof of fraud, and nothing short of that will suffice. Secondly, fraud is proved when it is shewn that a false representation has been made (1) knowingly, or (2) without belief in its truth, or (3) recklessly, careless whether it be true or false. Although I have treated the second and third as distinct cases, I think the third is but an instance of the second, for one who makes a statement under such circumstances can have no real belief in the truth of what he states. To prevent a false statement from being fraudulent, there must, I think, always be an honest belief in its truth. And this probably covers the whole ground, for one who knowingly alleges that which is false, has obviously no such honest belief. Thirdly, if fraud is proved, the motive of the person guilty of it is immaterial. It matters not that there was no intention to cheat or injure the person to whom the statement was made.”
“15-07 Continuing Representations The tort is complete only when the representation is acted upon. Where there is an interval between the time when the representation is made and the time when it is acted upon, and the representation relates to an existing state of things, the representation is deemed to be repeated throughout the interval. …. If, during the interval of time between making the representation and the plaintiff acting upon it, the defendant perceives the statement to be false or circumstances change to render it false, liability may be incurred.
15-22 Defendant’s later knowledge … where the defendant does not acquire knowledge of the untruth of his statement until after it has been made, but comes aware of it before the plaintiff has acted upon it, it follows from general principle that he is bound to communicate the truth and will be answerable in damages if he does not.
15-23 Statement becoming untrue ex post facto Where the statement complained of was in fact true at the time when made, but before being acted upon by the party to whom it was made had been rendered untrue by reason of a fact coming into existence to the knowledge of the party making it, the balance of authority is in favour of regarding it as deceit.”
Those paragraphs seem to us accurately to summarise the relevant principles and are potentially relevant on the facts here because one view of the facts is that some of the representations in the brochures may have been true when they were made but may have become untrue subsequently. We shall return to these principles below, in so far as necessary in the light of our conclusions on the facts.
“In considering whether the elements in the tort of deceit had been established the judge correctly directed himself as to the relevant standard of proof by reference to the statement of Lord Nicholls of Birkenhead in Re H (Minors) (Sexual Abuse: Standard of Proof)  AC 563, 586 that:
“… the more serious the allegation the less likely it is that the event occurred and, hence, the stronger should be the evidence before the court concludes that the allegation is established on the balance of probability. Fraud is usually less likely than negligence.”
See also eg Hornal v Neuberger  1 QB 247 and The Ikarian Reefer  2 Lloyd's Rep 68 per Cresswell J at pp 71-2 and the cases there cited.
v) Lloyd's intention
“To establish liability in deceit it is incumbent on the representee to show that the representor intended his statement to be understood by the representee in the sense in which it is false.”
The court relied upon Akerhielm v De Mare  AC 789, per Lord Jenkins, giving the advice of the Judicial Committee of the Privy Council, at 805 and upon Gross v Lewis Hillman Ltd  Ch 189. Thus, if the representor honestly believes the statement to be true in the sense in which he intended it to be understood it he will not be liable in deceit.
Corporate knowledge, intention and bad faith
“Any proposition about a [body corporate] necessarily involves a reference to a set of rules. A [body corporate] exists because there is a rule (usually in a statute) which says that a persona ficta shall be deemed to exist and to have certain of the powers, rights and duties of a natural person. But there would be little sense in deeming such a persona ficta to exist unless there were also rules to tell one what acts were to count as acts of the [body corporate]. It is therefore a necessary part of corporate personality that there should be rules by which acts are attributed to the [body corporate]. These may be called “the rules of attribution”. ”
i) Did the defendant intend the representation to be understood in a particular way?
ii) Did the defendant intend the representation to be acted on?
iii) Did the defendant know that it was false, or was the defendant reckless as to its truth or falsity?
“ ... they identify those people with de facto control over the insertion, or not, [in the brochures and the globals] of any health warning or qualification: the people with knowledge of the systemic defects in asbestos reserving, who chose not to disclose that to the members of the Committee and Council who were reliant on them.”
The names have criticised the judge for equating the positions of the Council and the (post-1982) Committee because the external members of the Council were in a state of ignorance, since asbestos-related problems were never discussed in Council.
Approach of the Court of Appeal
“(1) The burden of showing that the trial Judge was wrong lies on the appellant. …
(2) When questions of the credibility of witnesses who have given oral evidence arise the appellant must establish that the trial Judge was plainly wrong. Once again there is a long line of authority emphasizing the restricted nature of the Court of Appeal’s power to interfere with a Judge’s decision in these circumstances though in describing that power different expressions have been used. In SS Hontestroom v SS Sagaporak …  AC 37 at p 47 Lord Sumner said:
“None the less not to have seen the witnesses puts appellate Judges in a permanent position of disadvantage as against the trial Judge and unless it can be shown that he has failed to use or has palpably misused his advantage, the higher Court ought not to take the responsibility of reversing conclusions so arrived at merely on the results of their own comparisons and criticisms of the witnesses and of their own view of the probabilities of the case.”
Finally in Mersey Docks and Harbour Board v Proctor  AC 253 at p 258, Viscount Cave LC said:
“In such a case … it is the duty of the Court of Appeal to make up its own mind not disregarding the judgment appealed from and giving special weight to that judgment in cases where the credibility of witnesses comes into question, but with full liability to draw its own inferences from the facts proved or admitted and to decide accordingly.”
(3) When a party has been acquitted of fraud the decision in his favour should not be displaced except on the clearest grounds. This proposition is not in contest and is supported by the House of Lords in Akerhielm v De Mare  AC 789 at p 806, where the earlier authority of Glasier v Rolb (1889) 42 ChD 436 is cited.”
“Every appeal will be limited to a review of the decision of the lower court unless –
(a) a practice direction makes different provision for a particular category of appeal; or
(b) the court considers that in the circumstances of an individual appeal it would be in the interests of justice to hold a re-hearing.”
Neither party invited the court to say that it should hold a re-hearing within the meaning of rule 52.11(1)(b) (and not a review).
III THE FACTS
The claimants and their witnesses
Working members of the Lloyd’s community
“Mr Rayment struck me as a highly conscientious claims man who worked tirelessly to assist the market in relation to the handling of asbestos-related and other long-tail claims. I was greatly assisted by his evidence.”
Chronological summary: before 1982
“A fibrous silicate material which achieved wide usage by reason of its physical properties such as the ability to withstand fierce heat, corrosion and decay under almost every condition of temperature and moisture. Its uses included roofing, plasterboard and fireproof wallboard, floor tiles, an ingredient in paints and sealants, car brake linings and clutch facings.”
Exposure to asbestos is a causative factor in many diseases, including mesothelioma, lung cancer, gastric cancer and asbestosis. These diseases are typically contracted by workmen who have been exposed to asbestos at their workplace, especially in shipbuilding and the construction, insulation and demolition of buildings of all sorts. Some conditions developed only after prolonged exposure but the most serious (mesothelioma) could result from even a single brief exposure. An important epidemiological study was published in the United States by Dr Selikoff and others in 1964.
“Q Do you remember whether pollution was one of the concerns that you had when you were arranging the run-off reinsurance in 1974, or were you worried about particular types of liabilities or at that stage were you thinking that you wanted to deal with the whole of the back years?
A I think my – I cannot call them “doubts” – certainties about the likely run-off of casualty underwriting in the United States overall more than any specific thing. I do not believe that we were aware of the depths and heights and horrors of asbestos, for instance, back then. The potential in this new law was there so it would have been part of it, but I think you were thinking about medical malpractice, trains, cars, all the contractors, all the stuff that had been written quite gaily for all these years, I was thinking much more of that. The overall rather than the particular.”
“He had been concerned for some time, having known Mr Outhwaite, Mr Merrett and Mr Meacock as intelligent underwriters, that he could find no answer to the question of why they wrote the run-off policies. He could only conclude that they had written those policies on the basis of certain information, which raised the question of whether all information that was in the hands of those that ceded the run-offs was made available to Mr Outhwaite. This was one of the specific questions raised in the early days of Mr Donner’s enquiries. He emphasised that the doctrine of caveat emptor was not relevant in the context of insurance, although it had been suggested to him at a previous meeting that it did apply. Mr Donner said that he believed that he now knew approximately what had happened and that he would explain this to Mr Lord and would be able to produce corroborative evidence. Focusing on the period of 1981 and 1982, Mr Donner recalled that the insurance market worldwide faced an unparalleled series of losses from asbestos-related diseases. Some American insurance companies talked openly of going into liquidation and Lloyd’s also faced a difficult position. At the time that the 1979 account was being closed at December 1981, there were two practical alternatives available to underwriters with an asbestos involvement. The first was to make full provision for the losses in line with information then available which would have resulted in many syndicates remaining open and some going out of business. The alternative was to roll the losses forward so that claims arose in the future and future Names had to pay. This involved massaging the audit at December 1981. The Lloyd’s panel of auditors made clear their view of the gravity of the situation to some individuals in senior positions of authority at Lloyd’s and there was general talk of these losses breaking Lloyd’s. Senior people in the Market concluded that they could not face this and there was a considered decision by some of those in authority, underwriters and auditors to view the 1979 account as far as asbestos claims were concerned in the most favourable light possible. The result of this would have been to roll forward the losses to later years.”
This passage gives the general flavour of actual and alleged events (especially during 1981 and 1982) which this court, like the judge, has had to look at in some detail.
“The one certain fact about the asbestos litigation is that at present we cannot estimate the number of claims that will eventually be brought against your assureds. We do know that the number of lawsuits has increased dramatically each year since 1973. While some experts believe the number and severity of claims will peak within the next year or two, there are others such as The National Cancer Institute who estimate more than two million people will die from asbestos-related cancer. It should be noted that anticipated claims were taken into account to some extent in arriving at the figures recommended above.”
“ ... the Market split into two camps; one supporting the manifestation approach and the other that of exposure.”
This letter may reflect the genesis of the Asbestos Working Party (“AWP”) which was formed in 1980 (see paragraph 135) and of which Mr Nelson was a leading member.
“He suggested that consideration should be given to breaking down the “All Other” Account in order to extract the very Long Tail business and that premium income was not the appropriate yardstick upon which to base the reserves for the older Accounts.”
||general liability||general liability||general liability|
income & gains
income & gains
These figures also show how far the overall profit was coming to depend on investment income and gains. Sir Peter Green (who was Chairman from 1980 to 1983 inclusive and was knighted in June 1982) wrote in his statement preceding the accounts:
“To those whose business is insurance these figures are something of a paradox. While satisfactory enough as a return on capital they are, from a professional point of view, a cause for some concern. It is a sobering thought that pure underwriting profit in 1980 accounted for only £22 million or 8.25% of the overall profit and did not cover the management expenses. ”
“Q: Can I ask you one thing linked to that. At the time when the placing was taking place the ultimate position on the 1969 and previous liabilities looked very much more like a banking operation for a payment of, say, I think it was in the region of $20 to 25 million, there was an ultimate liability of $35 million ----
A: A perceived ultimate liability, not an ultimate liability.
Q: Yes. A projected ultimate of $25 million [?$35 million] and that was projected to be reached by about 1980. Then by 1977 or 1978 that ultimate position had been projected to reach $90 million. There was a sort of sea change in the projection within a reasonably short time of its placement. Do you recall any underlying reason for that dramatic change?
A: It is called asbestos.
Q: Had that just come into a -----
A: I think if you look, as I recall, at Hady Wakefield’s projections, take out asbestos and they were about right. They were remarkably accurate. The thing that turned the coracle upside-down was asbestos, which was enormous.”
“ ... their putting up reserves which do take into account a projection of something in the region of four years. Not unnaturally the size of the figures that would then be recommended would be very large and if indeed the Market wishes that the matter be dealt with in this manner it is also necessary that people such as [attorneys H and I] and others also approach the problem in the same way. Inevitably the impact of projected reserves on our Market will be substantial and I feel that it would be extremely difficult for the leads to make this type of determination by reason of the implications which it carries.”
“The Deputy Chairman, Mr Gibb, has requested that Auditors be informed of the following “facility” which has been offered to certain Syndicates in Lloyd’s and which was intended as a form of reinsurance when a Syndicate was closing its Accounts, particularly those with a long tail element where the settlement in respect of the year-end provision might not be made for many years.
The following is an example of how the reinsurance would operate:-
“A Syndicate had known outstandings of £100,000 and an IBNR Load of the same amount – total provision £200,000. On the basis that the top 10% slice of the reserve (£20,000) would not be needed for (say) 10 years £10,000 the Syndicate would be indemnified for £20,000 in excess of £180,000 aggregate losses after 10 years. The anticipated reinsurance recoveries of £20,000 would be deduced from the total audit provision for an outlay of £10,000. Payment of the recovery would be guaranteed by a Letter of Credit for £20,000 payable in 10 years time.”
I am to advise you that the Audit Committee does not consider such a reinsurance recovery can be used to reduce a Syndicate’s Audit provision because all anticipated recoveries brought into account at the end of the third year must be immediately available.”
The appellants’ case is that this letter was describing so-called ‘time and distance’ (“T and D”) policies and was expressing disapproval of their use for the stated purpose; nevertheless, the appellants say, they continued to be used for that purpose to the knowledge of members of Lloyd’s Committee and (after 1982) Council.
“As matters continue to develop, and indemnity payments are claimed from the levels of coverage underwritten in London, a record will be maintained by the LUNCO [Lloyd’s Underwriters’ Non-Marine Claims Office] of the transactions that take place.
It will be apparent to you that there is a need to observe confidentiality in respect of the information which is available, and for this reason when your representative visits the LUNCO office, it will be necessary for that person to identify the accounts in which you participate. Your auditors may also want to see the information, however, in view of the need for confidentiality, it will be necessary for them to be accompanied by your own representative.
It was emphasised to you in the circulation of year end reserves that, in view of the uncertainties of the future, it is difficult at this stage to provide the Market with any meaningful projection of the developments that are likely to take place over the coming years in regard to this problem. However, the number of claims is likely to escalate and for this reason I must emphasise that future deterioration is inevitable.”
“3) On top of all this we have to absorb the impact of ‘DES’ ‘Agent Orange’ and most important of all “Asbestosis”. We do not wish to go into the question of coverage and how it may or may not apply in this memorandum but suffice it to say that collectively they must make a major impact on the enclosed loss ratios – and indeed probably on the pre-1966 figures as well.
4) The original premium base is being severely affected by competition and/or rate cutting.
5) If the ‘exposure’ theory is upheld in “Asbestos” cases we fear it will be impossible ever to close our books with any certainty.
The problem therefore is obvious – how to rate contracts of this nature when you don’t know the record for, say, 10 or even 20 years and on a reducing P.I. to boot. The easy (and maybe correct) answer is to say you can’t and stop writing the class. If we did others in the London Market could follow suit to the detriment of the market place as a whole.”
“The Chairman proposed that the Meeting should discuss the desirability of circulating the Market with a report for the valuation of outstanding claims for audit purposes at year end. Mr Ayliffe believed that Attorneys should make recommendations for year end purposes but it was for the individual Underwriters to determine the figures used when closing the account. He was concerned that reserves currently carried on files, were lower than would have been the case under normal circumstances. Those concerned were looking for recommendations from the Working Party before final decisions were made. This view was supported by Mr Jackson, who thought that a figure of US$125,000 per average claim was more realistic than the present figure of US$75,000 currently used as a yardstick.”
and at the end of the meeting
“In summary, the Chairman stated: -
a) The Audit Committee were reluctant to identify individual situations for audit purposes. The Asbestosis situation was well known in the Market and they believe that the Underwriters were aware of the potential problems.
b) Attorneys should be invited to give a view on the present valuation of an average, individual claim and should indicate an additional expense allowance. They should also provide information on the likely eventual number of claims which could develop.”
“ii) Very Long Tail Business
Where a Syndicate underwrites a very long tail business such as product liability and excess casualty reinsurance business, Auditors are asked to pay particular attention to the effect that such business will have on the reserves to be created bearing in mind the greatly increased cost of claims on older years of account due to inflation etc.”
This letter is significant because it marks the beginning of exchanges between the panel and the Committee which are of central importance to the case. (There had been comparable exchanges the year before in respect of the 1979 accounts, but there was a growing sense of concern which reached a peak by the time of the 1981 accounts.)
“There are numerous well informed people who profess to believe that claims filed to date represent only the beginning of a potential flood of asbestos litigation. The Secretary of Health, Education and Welfare of the United States recently stated that 67,000 people each year will die from exposure to asbestos products during the next thirty years. We know that between 8,000,000 and 11,000,000 workers have variously been exposed to asbestos in the United States since the beginning of World War II and of this group 4.5 million have worked in shipyards. Most of the shipyard workers have been exposed to asbestos and it is estimated by the United States Government that one third of all those heavily exposed to asbestos have died or are likely to die of asbestos-related diseases. Although the assured’s involvement with products containing asbestos does not appear to be as substantial as other defendants in these matters, it may be that in the future the assured regularly will be included among the growing group of frequently named defendants.”
“Obviously claims from the asbestos-related diseases are catastrophic and disastrous so far as the whole Insurance Industry is concerned but this fact alone does not automatically qualify them to be treated as ‘a catastrophe’ ...”
“Mr Kiln reported that claims were being made on notices as far back as 1947 where underwriters had been involved in direct insurances or reinsurances of companies covering liabilities of companies subject to Asbestosis claims.
Mr Lawrence reported that a databank was being produced which would contain details in respect of the 10 or 12 major assureds with all years of cover. The loss adjusters would then be able to make some estimate of underwriters’ lines on such risks. Projections of claims for 3 or 5 years hence would be made, and also loss expenses for 2 or 3 years ahead; both such items would be in respect of direct business only. From the databank it would be possible to obtain a list of major companies and look at their reinsurers, to give a rough estimate as to the exposure in respect of reinsurance business.
Mr Kiln pointed out that he did not wish to see mention of these specific claims in the Audit Instructions.
Mr Holland [of Ernst & Whinney] requested that an indication should be given to Auditors as to how the databank report was fragmented, so that they may know what to look for. Mr Lawrence replied by stating that a Market Meeting would be held soon enabling all to be appraised of the situation.
It was agreed that there would be a further meeting of the Panel early next year to consider asbestosis and any other business not concluded at this meeting.”
Another note of the meeting began this section
“The potential claims in connection with asbestosis make computer leasing appear insignificant by comparison.”
Chronological summary: 1982
“There are to be no specific audit instructions other than a reference to the incidence of late claims arising from product and disease insurance. There have been some 15,000 claims notified (increasing at the rate of 400 per month). By mid to end 1980s it is expected there will be some 25,000 claims in total. E E Nelson thought that the estimate by the Prudential of 2 million claims was well wide of the mark. The Committee of Lloyd’s has set up a database whereby the full details of all known syndicates liable are stated. At present loss reserves have been based on an average cost per claim of $125,000 plus expenses of £10,000 per claimant. Currently this means a total claim of $2.025 billion. On an exposure basis 40% is with the London companies and Lloyd's, on a manifestation basis it is 10%. E E Nelson also reminded the Panel Auditors of three other product claims requiring consideration; Agent Orange; Love Canal; and DES.”
“Clearly, the foregoing decisions are a bit of a nonsense and the London Market is currently in the process of appealing to the US Supreme Court to obtain a sensible ruling.”
But in the event the United States Supreme Court refused petitions in all three cases (an appeal to the Court of Appeals for the First Circuit in Eagle-Picher having been largely unsuccessful in June 1982).
From the replies that are coming in from our clients certain facts are emerging with great consistency:
1 A very few clients have probably very little exposure.
2 The remainder are unable to quantify their ultimate liability with even a remote degree of accuracy for the following reasons:
(i) Advices so far are 15,000 – maximum would be 11,000,000.
(ii) Courts have not decided on whether exposure or manifestation basis is applicable.
(iii) The losses are being apportioned over carriers on an “industry” basis. If one of the carriers has losses going right through its insurance cover (as is highly likely) then it could well go into bankruptcy. That company’s share of the industry loss would then be apportioned over the remaining companies.
(iv) Although many insurers are covered by reinsurance, I don’t get the impression that many have been able to get very far with this.
(v) Similarly, Syndicates will pick up the losses on their own reinsurance writings, which are likely to fly round the market with some speed. None of these appear to be notified so far. One particular Syndicate has been mentioned more than once as being involved in writing the reinsurance of other people’s run-offs.
(vi) The data bank established has very little value so far.
Very early in March we will need to meet again with the other auditors to agree our approach.”
“Further to my memo of 17 February I think that we should pay immediate attention to the instructions contained within the document “Instruction for the guidance of Lloyd’s auditors”.
We never strictly follow this clause to the letter because if we did we would never get our audits complete, but in view of the Asbestosis problem I think we should follow the letter of the paragraph absolutely.
What I have in mind particularly is the instruction “if there are any other factors which affect or may affect the adequacy of the reserves, then the auditor must report to the Committee and obtain their instructions before issuing his Syndicate Solvency Report”.
This seems the obvious course of action in this particular case and I think we should proceed as soon as possible.”
“Reserves for Asbestosis and other latent diseases
I have arranged for the item to be put on the Agenda of both the Membership Committee and the Audit Committee when further consideration will be given to the basis of reserving and whether new Names should be warned that specific syndicates are carrying a liability for such risks.
I will advise you of the outcome of these discussions.”
“A substantial proportion of our Syndicate clients have losses, or potential losses, arising from asbestosis and related diseases.
It appears that although, in respect of direct insurance of the main carriers and reinsurance of American insurers, Syndicates have received some notification of outstanding claims, they are unable to quantify their final liability with a reasonable degree of accuracy for the following reasons:
(i) You have informed us that there have been approximately 15,000 individual claimants. Total exposure to the problem appears to be considerably in excess of this figure.
(ii) The Courts have not yet finally decided on whether the exposure or manifestation basis is applicable.
(iii) The losses are being apportioned over carriers on an “industry” basis. If one of the carriers has losses in excess of its insurance cover (as seems likely) then it could go bankrupt. It appears that its share of the industry loss could be apportioned over the remaining companies.
(iv) Most Syndicates are not very certain of their reinsurance recoveries.
(v) Most Syndicates will incur losses on their own writings of reinsurance business. Very little of this has been advised so far.
The Audit Instructions (Clause 3) require that if there are any factors which may affect the adequacy of the reserves, then the auditor must report to the Committee and obtain their instructions before issuing his Syndicate Solvency Report.
We consider that the impossibility of determining the liability in respect of asbestosis falls into this category and we accordingly ask for your instructions in this respect.”
“The Chairman raised the question of the letters which had recently been circulated to Underwriters by the Panel Auditors. He believed the Auditors appreciated that it was not possible for Underwriters to be precise in their reply although he was disturbed at the ignorance displayed by certain syndicates on the question of Asbestosis generally.”
“Mr Chester said that he had spoken to Mr Nelson with regard to this matter who had put forward the following suggestion:
a) with regard to direct business, underwriters should reserve their known claims plus a margin of 30% and their expenses.
b) with regard to reinsurance assumed they should allow for one loss per assured per each year of account.
c) on Underwriters own reinsurances it was suggested that they approach the matter on the same basis as (b) above; Mr Nelson thought that this would be the basis on which the excess of loss market would settle any claims.
With regard to the question of whether claims should be reserved on an exposure or manifestation basis it was considered that whichever basis produced the worst result should be adopted.
d) the letter from the auditors also stated that the losses were being apportioned over carriers on an “industry basis”. If one of the carriers had losses in excess of its insurance cover then it could go bankrupt. It appeared to auditors that its share of the industry loss might then be apportioned over the remaining companies.
e) the auditors’ letter also stated that many syndicates lacked information regarding their reinsurance recoveries. Mr Nelson considered that recoveries might be determined on the formula for reinsurance assumed business as set out above.
Having discussed Mr Nelson’s views, the Audit Committee considered that it would not be possible or desirable for them to give a definite answer as to the amount or basis of reserves syndicates should carry. It was a matter for the underwriter of each syndicate to determine his potential liability and agree this with his auditor. It was, however, necessary for a full discussion to take place with Panel Auditors so that where possible general guidance could be given and it was agreed that a meeting should be arranged in this regard at the earliest opportunity.
Mr Chester then raised the question of the reinsurance of underwriters’ asbestosis liability in the Lloyd’s Market (ie effectively amounting to reinsurance of the Asbestosis “tail”) and expressed concern that such liabilities could fall on comparatively few syndicates. Mr Merrett considered that it would be inappropriate for such reinsurances to go unnoted and unreserved by Panel Auditors and that it would be improper for a syndicate taking such reinsurances without telling its own Names. It was stressed that auditors should make any enquiries they deemed necessary with regard to the open years and that they should ensure that whatever position they consider is necessary should be created over and above the minimum percentage reserves.
It was agreed that this matter should also be raised with Panel Auditors at next week’s meeting.”
The appellants have suggested that Mr Merrett’s contribution, as recorded in the minutes, can now be seen to have been highly questionable.
“(i) Business written direct by Lloyd’s
(ii) Reinsurance of asbestosis risks written by companies
(iii) Where Lloyd’s syndicates had reinsured their liability with outside companies.”
Mr Nelson explained the controversy as between manifestation, exposure or a combination of the two. The minutes record the auditors’ views and the subsequent discussion:
“The main worry raised by auditors was the widely differing views taken by syndicates and that the real purpose of their letter was an attempt to seek some uniformity in the Lloyd’s Market for dealing with this matter. They considered that it would be grossly unfair for syndicates on basically the same risk to treat their reserves on an entirely different basis. Auditors were also concerned that not only may they reserve too little but that they may ask the closing year to carry too great a reserve. Part of the auditors’ job was to ensure that there was equity between the account accepting the reinsurance and the closing account.
Mr Chester asked auditors for their opinion on leaving the 1979 account open. Auditors thought that although this would solve the problem of equity between years of account it would still leave the problem of quantification in that Names could still be asked to put up substantial sums of money.
Mr Nelson then said that in his view a figure of 50,000 new claims over the next 10 years would seem to be realistic and that the reports of up to 2,000,000 new claims could well be an exaggeration.
Mr Randall then said that perhaps Lloyd’s could consider issuing guidelines on the basis of the 50,000 figure and that where asbestosis formed a material part of a syndicates accounts (say 10%) then consideration should be given to leaving the account open.
Auditors said that they would be reassured with guidance of this sort. It was, however, suggested that in those cases where consideration was being given to leaving the account open applications should in any case be made to the Committee for instructions.”
“The following is a personal appraisal and opinion regarding the Asbestosis problem and is based on my own experience as Chairman of the Asbestosis Committee in 1981, two formal meetings with the Panel Auditors and various private conversations which I have had with individuals in the Market. There is little doubt now that this problem is every bit as serious as was expected by the Asbestosis Committee, and the information on claims involvement which has been made available in the LUNCO office has identified the extent of Lloyd’s involvement.
There is no doubt in my mind that Panel Auditors are extremely nervous of their position regarding the audit at 31st December 1981. They consider the situation to be unique and not one where they alone should bear the responsibility of deciding the amounts which should be reserved at year end.
Whilst they would agree that most Underwriters are co-operating fully, there are some who by design or ignorance are not complying. Auditors are going so far as to suggest that all Syndicate accounts must be qualified and some seek an instruction that all accounts must be left open at this year end. To my mind, neither of these should be acceptable to the Committee [of Lloyd’s].
If this view is supported, then I believe it is incumbent upon us to give clear and concise instructions as to how the audit should be conducted in certain areas and thus bear a share of the responsibility to Names for which they are entitled.”
“Managing and Members’ Agents must advise their Names at year end of their Asbestosis position overall and the manner in which the claim has been handled by them.”
At the end of Mr Nelson’s proposals Mr Randall wrote,
“+ ? Position of New Names.”
“There has obviously been much discussion within the market regarding asbestosis and other potential loss developments on old years. These problems obviously present difficulties to the Underwriter closing the account, and to the Managing Agent and Panel Auditor. I have, however, heard that one or more Panel Auditors have approached the Lloyd’s Audit Committee for specific guidance with regard to the figures which should be allocated to asbestosis claims, and I am sufficiently disturbed by the possibility that this should be true for me to write this letter.
I am concerned because a request for your guidance in this matter seems to suggest:
a) that it is possible to set a figure to close an account that will be proved closely accurate in the future;
b) that one or more Panel Auditors may have lost confidence in their own abilities.”
The letter strongly urged that RITC was ultimately a matter for the experience and judgment of the active underwriter,
“ ... but regardless of this all of us should surely acknowledge that even our best endeavours may be found to be far too much or far too little at some later date.”
This letter has been referred to as the ‘Bannockburn’ letter from a postscript whose casual anti-semitism may or may not reflect the tone of Lloyd’s in the 1980s.
“The decision was taken not to refer specifically to Asbestosis risks in the Rota brief.”
“The attached draft will, it is believed, assist Auditors in agreeing the reserves to be created at 31st December 1981, although it is still possible that a few individual syndicates may feel it necessary to approach the Committee for further instructions. It is also likely that a number of syndicate accounts will be left open at the discretion of the Managing Agent concerned.
The letter also covers the position with regard to the open years.
In all cases it is felt that Agents must advise Names regarding the basis of reserving and also advise Names on the open years which will assume the liability.
The Committee is asked to agree that a letter along the lines of the attached may be issued to Agents. Before publishing the letter, however, it is recommended that there should be further informal discussion with Auditors to confirm that the letter provides an adequate degree of “comfort” to enable them to complete their Audit discussions.”
“The Committee was advised that six firms on the Lloyd’s Panel of Auditors covering the large majority of syndicates had requested instructions, in accordance with Clause 3 of the Audit Regulations, as to the basis on which syndicates should provide for Asbestosis liabilities as at 31st December 1981.
The main area of concern centred around the need for syndicates to make searching enquiries regarding their potential exposure, both direct and by way of reinsurance written, to enable them to make adequate provision in their accounts at 31st December 1981. There appeared to be substantial differences in approach both as to the amount of research carried out and the intended IBNR loadings as at 31st December.
Without guidelines from the Committee, Auditors believe that there was a real danger that Managing Agents and Auditors would not be able to agree the closing reserves and that some syndicate results may be qualified by Auditors. It was also pointed out that there could be wide discrepancies regarding the approach adopted by individual syndicates.
A draft letter had been prepared for the Committee’s agreement and discussion ensued on its content.
It was pointed out that the draft had already been discussed with three of the Auditors concerned and that in the case of two firms it was regarded as of vital importance that the Committee should stipulate a minimum percentage for the IBNR loading. They also considered that the Committee should issue some guidance to Agents with regard to whether syndicates should close at the end of the third year or remain open. It was felt that the term “a material proportion” was too vague and that a specific percentage should be quoted.
In discussing this matter the Committee felt that it was in no position to stipulate a minimum percentage for the IBNR loading as this could vary from syndicate to syndicate depending on the cover given to insurers and its own reinsurance programme. Mr Nelson said that in respect of at least one large manufacturer syndicates had already reserved up to the policy limits and that no further IBNR would be necessary in this case.
Certain Members of the Committee were unhappy that the Committee was instructing Agents that they must tell their Names of their syndicate’s involvement in Asbestosis. It was therefore decided that the wording in this regard should be amended so that Agents would be strongly advised to inform their Names of their involvement in Asbestosis.
It was also pointed out to the Committee that certain syndicates had indicated their intention to discount the reserve for Asbestosis to reflect possible future investment earnings and that Auditors had requested a statement in any letter from the Committee specifically banning this practice. The Committee whilst agreeing that such practice should not be allowed in the case of Asbestosis decided that to refer to one particular part of the reserve might lead underwriters to take the view that such a practice of discounting was being encouraged or condoned by the Committee.
With the exception of the points mentioned above the Committee agreed that the draft letter should be forwarded as soon as possible to the Market but that a separate letter from the Manager of the Underwriting Agents & Audit Department should be sent to Auditors in reply to their letter requesting guidance. This would set out more fully the Committee’s reasons for the approach it had adopted to the problem.”
“Asbestosis – Lloyd’s Audit at 31st December 1981
Potential claims arising in connection with Asbestosis represent a major problem for insurers and reinsurers. It is therefore all the more important that the reserves created in the Lloyd’s Audit at the 31st December 1981, fairly reflect the current and foreseeable liabilities of all syndicates.
I should stress that the responsibility for the creation of adequate reserves rests with Managing Agents who will need to liaise closely with their Auditors. Clearly, individual circumstances will vary, but it is felt that the following broad guidelines may be helpful to Underwriters, Managing Agents and Auditors in agreeing equitable reserves as at 31st December 1981, and ensuring, so far as possible, a reasonably consistent approach to this problem.
1. Reserves for Asbestosis liabilities should be separately identified and disclosed to Auditors. This applies for both the closing and open years.
2. Substantial information has been built up in the LUNCO Office regarding direct business and all Underwriters should check the information available to ensure that their own records are as complete as possible. This information should also be made available to the syndicate auditors.
3. It is in the area of reinsurance writings that the information available may be least complete. Nevertheless, the Committee believes that some information is now available within the Market and Underwriters and Managing Agents should discuss with their Auditors the steps they have taken to quantify and reserve for losses which may arise on an Excess of Loss or Pro Rata basis as a reinsurance of American or other insurers. In this connection, Underwriters should attempt to identify reinsureds on whom Asbestosis claims are likely to fall and to seek their opinion as to the basis on which they intend to submit claims on their reinsurance contracts together with the reserves which they are carrying at the present time and an estimate of possible future liabilities.
4. The Committee is aware of the legal argument whether liability arises on the basis of “exposure” or “manifestation”. It is not, however, for the Committee to express an opinion as to which is correct. For the purpose of reserves at 31st December 1981 Managing Agents are strongly advised to carry a reserve which is the higher of the alternatives.
5. An IBNR “loading” should be carried for those claims not specifically advised but which could come to light in the years ahead. The decision regarding the appropriate IBNR percentage is a matter for the Agent and his Auditor to resolve dependent upon the circumstances of each case. It would be inappropriate for the Committee to lay down a minimum loading but, it appears that this loading should be substantial to reflect unreported cases on the direct account and incomplete information on the reinsurance account. Credit may, of course, be taken in respect of reinsurance recoveries, but Agents should verify, so far as possible, that reinsurers have been identified and have agreed to accept claims on the basis submitted. In the event that there are any disagreements with reinsurers these should be discussed with Auditors. (The normal guidelines regarding the admissibility of reinsurance recoveries obviously will apply).
6. A syndicate which has written a run-off or stop loss in respect of an Asbestosis account which has been signed into an open year, should advise the details to its Auditors and where appropriate, the open year reserves should be increased.
7. A syndicate underwriting London Market Excess of Loss business should make particular and comprehensive efforts to ascertain the extent of its possible liability going beyond those claims which have been advised at 31st December 1981, and these should be fully disclosed to and discussed with Syndicate Auditors. The same requirement should apply to specialist Personal Stop Loss syndicates.
8. Where the reserve for Asbestosis represents a material proportion of the total reserves of the syndicate, Agents should consider whether or not to leave the account open. It is the Agent’s responsibility to ensure that the reserves provided for Asbestosis are sufficient to meet the Syndicate’s liabilities regardless of whether the account is closed or left open.
9. Managing and Members Agents are strongly advised to inform their Names of their involvement with Asbestosis claims and the manner in which their syndicates’ current and potential liabilities have been covered.
I would urge you to discuss the contents of this letter with your Auditor before deciding what further action, if any, is necessary for you to take.
If you should have any enquiries with regard to this matter would you please contact Mr M Bowmer (Extension 3299) or Mr K E Randall (Extension 3124).
This letter has been sent to all Underwriting Agents and Active Underwriters, with copies for information to all Panel Auditors.”
“Asbestosis – Lloyd’s Audit at 31st December 1981
Several Panel Auditors have approached the Committee for instructions under Clause 3 of the Instructions for the Guidance of Lloyd’s Auditors regarding the basis on which syndicates should provide for Asbestosis liabilities in their accounts at 31st December 1981.
I attach a copy of a letter which is being circulated to all Active Underwriters and Underwriting Agents setting out broad guidelines which should be followed in this regard.
The Committee has decided that it is inappropriate to specify a minimum IBNR loading to apply across the Market; the IBNR loading is regarded as a matter for Managing Agents to resolve depending upon the particular circumstances of each syndicate. Nevertheless the Committee wishes me to stress that, unless there are sound reasons to the contrary regarding any specific case, the loading should be very substantial to reflect unreported cases on the direct account and, possibly, incomplete information on the reinsurance account. The Committee also believes that the reserve (including the IBNR loading) should be maintained in full and not discounted to reflect possible future investment earnings.
One of the main reasons why the Committee does not feel it is appropriate to lay down a specific IBNR loading factor is that in a number of cases syndicates will have reserved up to the maximum of policy limits and a substantial IBNR loading, in addition to this figure, might be regarded as excessive.
Auditors will no doubt give special attention to the question of whether or not the Agent has decided to leave an account open in cases where the reserve for Asbestosis represents a material proportion of the total reserves of the syndicate or where there is a wide margin for error in the basis of calculation of the closing reserves due to a lack of current information.
Where it is decided that an account should be left open, your attention is particularly drawn to Clause 6 Note 1 of the Instructions for the Guidance of Lloyd’s Auditors regarding the reserves which are being created for the purposes of assessing Members’ solvency.
If you should have any queries with regard to this matter would you please contact Mr M Bowmer (Extension 3299) or myself (Extension 3124).
This letter is being sent to all Panel Auditors.”
“Herewith the latest epistle on Asbestosis. I cannot believe that at some stage we are not going to find a Syndicate where this is a major problem. If any partner is unhappy about a particular situation I suggest he lets me know and we will try and organise a PSP type meeting so that a view can be formed and the partner can then talk to his client knowing that he has the full backing of his colleagues.
Of the Syndicates I have seen so far I am pleased at the very responsible manner shown by our clients in dealing with this problem and I am even more delighted at the amount of reinsurance protection that is available.”
“We regard these reinsurances very much as ‘sleep at night’ cover as, in spite of the complexity of the situation (21 major assureds with identifiable insurers into 3 figures) we feel our reserving is conservative in light of the information available to us at this moment in time.”
“ ... a letter had been sent to all Underwriters with regard to Asbestosis. Since that letter had been circulated there had been little or no reaction from the Market.”
However the statement of agreed facts (as to the chronology of asbestos-related claims) cites numerous syndicate reports, published during May 1982, which give information as to asbestos-related claims and reserves. Some refer to the advice given by the Committee of Lloyd’s in the Murray Lawrence letter.
“ ... between $4 bn and $10 bn with the lower end of this range appearing most probable at the present time”
“Our work suggests that the primary companies which are involved have already done significant reserve strengthening on currently known claims and have also established loss reserves for incurred-but-not-reported claims. In the light of emerging knowledge on the business, we anticipate that additional reserve strengthening may be required in the future. On the other hand we believe that there is a possibility that numerous excess and reinsurance carriers may be greatly understating their potential liabilities for this exposure at the present time.”
It identified the American insurance companies thought to be the primary carriers with the largest exposure and added that on an excess basis Lloyd’s might have a potentially large exposure. It predicted that claims would peak during the 1980’s and would be minimal by 2010.
“ ... under-reserving – particularly due to the problems of latent disease and other late developing problems”
as one of ‘various scenarios’ which ‘we can all dream up’. He referred to the risk of major insolvencies among insurers as being likely to lead to
“ ... increased regulation of our business, which I believe would be extremely harmful to our industry.”
“The Committee was informed that, for a number of years, comment had been received from Panel Auditors that it was inappropriate to draw their attention to specific Market problems thereby encouraging Auditors to rely upon these advices rather than their own auditing enquiries with their clients. In view of these comments, the Audit Committee had recommended that a number of the items which appeared under Clause 3 of the “White Regulations” should be either deleted or amended.”
Certain of the relevant subparagraphs were amended or deleted but that referring to latent diseases was left unaltered.
The Lloyd’s Act 1982
“Nevertheless, the principle that Names should be able to make fully informed decisions, on the basis of full disclosure by agents of the limits of their independence, is a vital one. We dealt at some length in chapters four and five with the improvements we would like to see in the recruitment process.”
“From the evidence submitted to us, however, we have identified six aspects of the current system about which there is concern on the part of Names and others closely associated with the Lloyd’s market. These are:
(i) the effectiveness of the existing controls over commissions in relation to those introducing new Names:
(ii) the quality of the basic introductory information about membership provided by Lloyd’s to prospective Names:
(iii) the sufficiency of the information available to assist Names in making informed choices between agents:
(iv) the level of the means test set by Lloyds’:
(v) the absence of any formal ‘know your client’ rules: and
(vi) the efficacy of the Lloyd’s procedures (and in particular the Rota committee interview) in ensuring that prospective Names are fully aware of the consequences of their decision to join the Society.”
i) The Audit Committee was a policy and advisory committee reporting to the Committee of Lloyd’s on matters affecting the solvency of members and the security of policies. It existed from 1960 until 1983 when it was replaced by the Members’ Solvency and Security Committee (renamed in 1986 as the Solvency and Security Committee).
ii) The Membership Committee existed from 1977 until the end of 1985 as a policy and advisory committee on matters relating to membership requirements.
iii) The Accounting and Auditing Standards Committee was set up in 1983, effectively taking over the work of two bodies known as the Fisher task groups 4 and 15. Its functions included defining required standards for accounting and auditing, for reporting of information to names. It was also concerned with the introduction of manuals.
“(1) This section shall only exempt the Society from liability in damages at the suit of a member of the Lloyd’s community.
(2) [defines ‘Lloyd’s community’ so as to include current and past members]
(3) Subject to subsections (1), (4) and (5) of this section, the Society shall not be liable for damages whether for negligence or other tort, breach of duty or otherwise, in respect of any exercise of or omission to exercise any power, duty or function conferred or imposed by Lloyd’s Acts 1871 to 1982 or any byelaw or regulation made thereunder –
(a) in so far as the underwriting business of any member of the Society or the costs of his membership or the business of any person as a Lloyd’s broker or underwriting agent may be affected; or
(b) in so far as relates to the admission or non-admission to, or the continuance of, or the suspension or exclusion from, membership of the Society; or
(c) in so far as relates to the grant, continuance, suspension, withdrawal or refusal of permission to carry on business at Lloyd’s as a Lloyd’s broker or an underwriting agent or in any capacity connected therewith; or
(d) in so far as relates to the exercise of, or omission to exercise, disciplinary functions, powers and duties; or
(e) in so far as relates to the exercise of, or omission to exercise, any powers, functions or duties under byelaws made pursuant to paragraphs (21), (22), (23), (24) and (25) of Schedule 2 to this Act;
unless the act or omission complained of –
(i) was done or omitted to be done in bad faith; or
(ii) was that of an employee of the Society and occurred in the course of the employee carrying out routine or clerical duties, that is to say duties which do not involve the exercise of any discretion.
(4) [no exemption for death or personal injury]
(5) [no exemption for defamation]
(6) [‘the Society’ includes its officers, employees and delegates]”
“(4) The accounts of every underwriter shall be audited annually by an accountant approved by the Committee of Lloyd’s and the auditor shall furnish a certificate in the prescribed form to the Committee and the Secretary of State.
(5) The said certificate shall in particular state whether in the opinion of the auditor the value of the assets available to meet the underwriter’s liabilities in respect of insurance business is correctly shown in the accounts, and whether or not that value is sufficient to meet the liabilities calculated –
(a) in the case of liabilities in respect of long term business, by an actuary; and
(b) in the case of other liabilities, by the auditor on a basis approved by the Secretary of State.
(6) Where any liabilities of an underwriter are calculated by an actuary under subsection (5) above, he shall furnish a certificate of the amount thereof to the Committee of Lloyd’s and to the Secretary of State, and shall state in his certificate on what basis the calculation is made; and a copy of his certificate shall be annexed to the auditor’s certificate.”
Section 84(1) provided for the general solvency requirements in sections 32, 33 and 35 to apply to “the members of Lloyd’s taken together” subject to modifications made by statutory instrument (from January 1983 the Insurance (Lloyd’s) Regulations 1983). This was sometimes referred to as the global annual solvency test. Section 86 required an annual statutory statement of business (SSOB) to be filed.
|year||number of names
“The Committee of Lloyd’s has been gravely concerned in the past when organisations unconnected with Lloyd’s have distributed literature relating to Underwriting Membership and offered to introduce the recipients to Underwriting Agents. There can be no objection to the publication of articles about Lloyd’s, provided that the information given is factually correct, but the Committee considers that any attempt to introduce applicants for Membership of Lloyd’s other than by the traditional method of personal recommendation by existing Members can do Lloyd’s nothing but harm.
It is very important that prospective Members are correctly advised from the time when they first show an interest in Membership. The attention of Underwriting Agents is drawn to the danger of legal action if a Member maintains subsequently that he or she was misinformed at the time of making application.”
This part of the Manual also drew attention to regulatory requirements in other jurisdictions.
“Apart from these particular matters, however, the investigations drew attention to an absence of understanding on the part of many working members of the principles of the law of agency. The Lloyd’s investigators into PCW told the Corporation (in a letter dated 20 January 1984) that it was apparent to them that many members of the Lloyd’s community in senior positions ‘were not even vaguely aware’ of the legal obligations on agents to act at all times in the best interests of their principals, not to make secret profits at their principals’ expense and to disclose fully all matters affecting their relationship with their principals.”
|number of syndicates||total open years||total open years for non-marine syndicates
( ) denotes minimum with known latent liability
|overall||general liability||general liability||general liability|
income & gains
|underwriting loss||investment income & gains|
Thus for each year of account the market as a whole made a profit, after inclusion of investment income and gains, but general liability business produced a substantial loss even after crediting investment income and gains.
Chronological summary: 1983 - 8
“ ... the interlinked reasons why things looked so different at the end of the 1980s and in the early 1990s, from the way in which they had looked in the early 1980s.”
The judge’s account has not been challenged in this court. In brief summary he identified the following reasons:
i) Various defences which had been regarded as likely to negative liability in many cases proved to be of little assistance in United States courts.
ii) The sheer volume of claims made it increasingly difficult to scrutinise claims in depth.
iii) Insured producers were increasingly reluctant to contest liability in case publicity led to more claims against them (the judge instanced Keene Corporation which was forced into bankruptcy though it had, according to its management, never sold as much as $1m-worth of asbestos products).
iv) Insurers had little success in disputes with their insured on issues of coverage.
v) Asbestos-related litigation was very lucrative for American lawyers, who actively recruited claimants (even to the extent of installing mobile x-ray units in workplaces) and cast their nets wider and wider to bring in new categories of defendants.
vi) Some producers (notably Owens Corning) contributed to this process and themselves encouraged the joinder of other defendants in order to spread the liability. The 14 defendant producers identified by the London market early in 1982 eventually increased to over 250.
vii) Apart from claims for bodily injury, there were also (from about mid-1983) an increasing number of property damage claims based on the proposition that the use of asbestos in building had reduced the value of the building so as to amount to an actionable loss. In June 1983 two actions for property damage were commenced against Dana Corporation. One was brought on behalf of all schools in Pennsylvania, and the other on behalf of over 100,000 public and private schools in other parts of the United States.
“It takes a brave man, or a foolish one, to forecast the outcome of the open years. For what it is worth I would personally expect the bottom line on each to show a deterioration on the preceding one.”
“ ... policies which parade as ordinary reinsurance policies but which, either by their express terms or as a result of some undisclosed understanding between the parties, in fact contain no genuine or significant element of risk. In their most extreme form they enable a Syndicate from time to time at its discretion to place funds by way of ‘premiums’ with a reinsurer, usually overseas, with the right for the Syndicate at any time to call for repayment of those funds, together with interest, by way of ‘claims’.”
“The obvious case for such a policy would be for a Syndicate’s asbestosis liabilities. These losses are coming in at a frightening rate and for many Syndicates a full reserve would bring massive losses to Names in 1981/1982 Accounts. This type of loss may settle very slowly if every case is contested through the Courts OR it may settle very quickly as Underwriters attempt to reach a compromise with their assureds or re-assureds. In the former case, the Reinsurer will make profits, in the latter, there exists the probability of severe losses.
It cannot be too strongly stressed that had these policies not been available there is a question as to whether some Syndicates could have survived. If they are ruled as being inadmissible and funds have to be brought back at a time of bad results, then some may well go under.
These policies must be fought for. The effect of bringing back a ‘roll-over’ is one thing. This would be quite another.”
i) It reported the formation of Toplis & Harding (Asbestos Services) Ltd as a service company, initially in order to avoid attorney reports being passed through brokers (with adverse implications for discovery of documents in actions in the United States).
ii) Attorney H emphasised that its recommendations for reserving were based on known claims outstanding “and no attempt has been made to project an IBNR factor”.
iii) The letter explained the “unique” practical and logistical problems of handling asbestos-related claims and referred to continuing negotiations (which eventually led to the Wellington Agreement and the establishment of the Asbestos Claims Facility).
“The evidence can only be anecdotal, but it seems to me (and to others with whom I have discussed the question) that market members are beginning to think that, having kept their heads down and let the blast of the past 18 months blow over them, and having taken a great deal in the way of uprooting and rearranging from an imposed outsider – you – they can now successfully fight back in defence of their traditional ways of work, that by obstinacy they can blanket your reforming power, and in short that they can dive back into a cosy system that will be not much noticed by Press and Parliament – or, one supposes, the Names. If anyone is thinking like that – and I believe that more and more people are – they are profoundly wrong, and in my judgment most dangerously so for the future. I hope that I do not need to emphasise the consequences of, for instance, disappointing the Revenue’s expectations in the matter of disclosure, or conniving at the concealment from Names of information which, if they were company shareholders, they would be statutorily entitled to have.”
“As to syndicate accounting I believe in all honesty it can be said that we have made great progress in arranging for the publication of syndicate accounts and by incorporating by byelaw certain basic essentials which will go to Council on 13 February. I do not share your view that the AASC memorandum represents a substantial defeat. Disclosure is the name of the game and disclosure is what we are achieving. There is an inevitability about the work of accountants in this field which even the high Tories on the Committee know they cannot reverse.”
It would be wrong to attach much weight to these observations by individuals who did not give evidence, but they give something of the flavour of the position a year on from the coming into force of the 1982 Act.
“It is rapidly becoming apparent that the potential claims arising from asbestos will dwarf any claim in the history of our industry. It is very sad that in the United States to date under half of the money paid by our industry has ended in the hands of the injured party, the balance is in the capacious coffers of the more rapacious lawyers: for this reason we support, and I very much hope all our industry will support, the concept of a claims handling facility set up by the insurers and manufacturers to look after the interests of the injured.”
We will come back to this report and to other reports by LUNMA chairmen in considering the globals (paragraphs 326ff below).
“In virtually every year since I became an underwriter the committee have found it necessary to increase the [minimum recommended] percentages. When one considers the billions of dollars now being paid out, on claims such as asbestosis, claims totally unprovided for out of the years in which they fell. When one considers further, such losses as environmental pollution claims, now beginning to be presented in respect of waste, haphazardly dumped over decades. When one considers the ever changing attitudes of courts, especially in the USA, but also here, and around the world, towards all accepted ideas of negligence and the duty of care owed to others, towards the interpretation of policy forms, towards our right to rely on exclusions, all of which will affect unsettled claims currently being handled.
When one considers all these factors, it is clear that what properly concerns underwriters is not the question of whether we are over, or under reserved. We are under reserved. What concerns us is, how the industry can survive its under reserving.”
“I can think of no syndicate since 1946 with a volume of business in long-tail which has stopped underwriting and on which the run-off has been contained within its original RITC taking interest into account.”
“It is vital that Underwriters and management do study and understand the problem in a technical sense. The days are gone when reserving can be done on a case-by-case basis plus something extra for luck. Our industry must cope if it is to continue to serve society in the way society demands of us and we are to remain solvent.”
At the end of his paper he acknowledged the assistance of a distinguished actuary, Mr Sidney Benjamin. It is apparent that during the relevant period active underwriters, claims directors and auditors were becoming more aware of the assistance which they could obtain from actuaries in reserving for non-life business.
“1. The number of present and expected asbestos related claims is enormous, and the problems they are creating for the producers and insurers are unprecedented, both in terms of the total dollars involved and of the human resources needed to handle these claims.
2. The considerable liberalisation and wide divergence in judicial interpretations on such critical issues as coverage triggers and continuing defence obligations have shaken insurers’ confidence in their traditional approaches to policy wordings and risk evaluation.
3. The emergence of complex multiparty litigation drawing in laundry lists of producers and their insurers has escalated the cost of pleading and defending each aspect of each claimant’s case to the point where it now takes nearly $2.00 of costs to recover $1.00 of damages.
4. Against this background of judicial uncertainty, already catastrophic losses, and the reality of massive property damage claims yet to come, the task of fixing meaningful reserves and managing cashflow to pay claims will continue to demand virtual clairvoyance and a near reckless courage from executives involved at primary level, as well as from their reinsurer counterparts.
You might well ask if we are getting it right. I will show you how we propose to do just that.”
He then went on to explain about the AWP and the proposed Asbestos Claims Facility.
“I suspect that if 418/417 had left its 1982 year open, this would have had a marked effect on the Lloyd’s market and underlined the depth of the problems represented by asbestos-related and pollution claims. The extent to which subsequent events would have taken a different course is a matter of speculation, but the effect would have been significant.”
“But the fact remains that poor accounting practices and inadequate audits, together with a tax climate that encouraged sub rosa arrangements, had all contributed to a situation in which a few Lloyd’s agents milked their Names of up to £100m. Many at Lloyd’s have asked “where were the auditors?”, in the second part of this talk I propose to address that question.”
“For a number of reasons, therefore, there was a continuing risk, not always avoided, that the panel auditors at Lloyd’s lacked independence from their clients: some kept the books; some were too dependent upon Lloyd’s for their fee income; together they formed a small group specialising in an arcane area of accounting work; and the different interests of Names and their agents were not necessarily adequately reflected in the audit arrangements.
But there was a more difficult problem, the panel auditors were not in fact charged with carrying out an audit at all. Their duty was to assist by providing the Annual Solvency Certificate which merely shows that each Name has sufficient assets to meet his liabilities calculated in accordance with the formulae laid down by the Committee of Lloyd's. Agents, underwriters and the Committee of Lloyd's were all under the misapprehension that the work done by the panel auditors was an audit in the sense which you and I would understand it. But it was not, a fact which the auditors themselves, to give them their due, had protested from the very beginning. The accounts of an underwriting syndicate, and the determination of its profit, depends upon how much reserve is necessary to close the account. The figures for the closing reserve is provided by the underwriter in the form of the “reinsurance to close”. Some of the panel auditors at Lloyd’s were still living in the days of “inventory at director’s valuation” which used to be the way in which profit was calculated in manufacturing companies in the UK 30 years ago: they did not consider it part of their duty to audit the reinsurance to close.”
“ ... the need for increased membership as a result of the shortage of capacity and the conflicting adverse publicity arising from reported underwriting losses for recent years.”
“Although we believed that this would take some years, the end was now in sight, and the way in which we would reach the end had been put in place. ... No-one foresaw the way in which asbestos claims would take off, as they did, in the years following the Wellington Agreement.”
“There are plenty of horrors in the pipeline and they must be reserved even if figures are not available. The ‘true and fair’ requirement should assist in this.
It is perhaps fortunate that the overpayment of past profits is falling for recoupment from a far larger number of current Names. This may not always be the case and if new Names won’t join, or old Names resign from the old syndicates which have back year problems the situation may become critical.”
“In the past, Underwriters had used inadequate techniques, resulting in inadequate reserving. The Market had been ‘saved’ by high interest rates and a soft reinsurance Market and it was vital that Lloyd’s became more professional in its approach, in particular by taking actuarial advice.”
“Figures such as these make it obvious that underwriters must take stringent remedial action as indeed they are. It is worth repeating that a combination of three things is needed, particularly in the all-important American casualty business; first, a realistic rating level; second, a reformed policy wording embracing, where needed, a claims-made basis for claims and an overall limit, including legal costs; and third, a measure of tort law reform. Without real progress in all three areas, it is hardly to be wondered at if underwriters increasingly withdraw from this class of business, with the result that certain industries will be left without the insurance coverage which they need to continue in business, to the detriment of society in general.”
It will be apparent that all those proposals related to future underwriting, rather than to the past. Mr Hazell, the chairman of LUNMA, made similar observations (but referred to the ACF as a hopeful development).
“My own views on the paramount necessity of an independent Chief Executive, with appropriate terms of reference, responsible directly to the Council have not changed and, therefore, I would find it impossible to continue in office were those terms to be significantly altered. At the same time, the argument is a perfectly proper one for a self-regulatory body and, by resigning at this time, I remove an obstacle to the Council’s freedom of discussion and to my freedom to argue for the retention of the position of the Chief Executive with independent powers without any suggestion of self-interest.”
“To consider whether the regulatory arrangements which are being established at Lloyd’s under the 1982 Lloyd’s Act provide protection for the interests of members of Lloyd’s comparable to that proposed for investors under Financial Services Bill.”
“The US based liability account has yet again been the cause of most of the market’s difficulties as, once again, it was necessary for underwriters to increase reserves for asbestos related losses. Although the Asbestos Claims Facility – set up with the support of Lloyd’s – is making significant savings in the legal costs involved, this is to some extent offset by there being no slowing down in the number of new suits being brought.
It is also encouraging that most observers believe that, at least as far as Lloyd’s is concerned, 1983 could be seen as the beginning of the end of the really bad results. Whilst I would not anticipate that my successor would be able to report an underwriting profit for 1984 I would expect an improvement over the past few years. The very badly needed premium rate increases were beginning to take effect by the middle of 1984. These increases, which have been more obviously applied on US business than in the rest of the world have become, as each successive month passed, more substantial.”
“Part of the premium paid for the Reinsurance to Close may correspond with known, noted and quantified losses and therefore the element of risk assumed by the Reinsuring syndicate may be minimal. A significant part, however, of the Reinsurance to Close relates to an assessment of likely future claims or expenses which by their nature cannot be quantified within a narrow margin with any proven degree of certainty. This pure risk premium is at present assumed by Names with no requirement for related assets of any sort. I believe that a figure corresponding to 25% of the Solvency test minimum percentages would probably be an appropriate figure to deem to be Premium Income for Premium Income limit purposes when such Premium is received as Reinsurance to Close premium.”
“1.5 Progress achieved, however, is not by itself enough unless it leads to an affirmative answer to our question – do the regulatory arrangements now in place at Lloyd’s provide protection for Names comparable to that proposed for investors under the Financial Services Act? Our answer to that question is that, notwithstanding the major progress made by the Council of Lloyd’s since January 1983, they do not.
1.6 We have detected a number of shortcomings in particular areas of regulation at Lloyd’s. Here, Lloyd’s arrangements fall below the standard that will be acceptable elsewhere in the financial services field. More fundamentally, the constitution of Lloyd’s does not currently provide for that degree of involvement of independent outsiders and that degree of detached scrutiny of the activities of market practitioners that will be a feature of the regime under the Financial Services Act. The checks and balances at Lloyd’s are not, in our view, so firmly in place. The balance of initiative rests too much with the working members.”
“Thank you for your letter of the 7th May. I was stating the “outside” or Revenue view of the reinsurance to close which did appear to them an “incredible privilege”. It was abused by some underwriters as the mass of rollovers demonstrated and some underwriters were carrying forward large sums of money more based on a wet finger in the wind than on any statistical basis.
However, that was not the point of my letter, neither was the alarm at the growing regulations within Lloyd’s. That is a necessary result of having relatively poor Names with unlimited liability. Of course they need massive protection – especially given, as you say, the ignorance of the basic tenets of the laws of agency of some very senior agents including your predecessor in office. I find it a pity that you should preach to me on this subject considering my long opposition to the business methods of the man you used to refer to as “my illustrious predecessor” and to Posgate and others.
Just when the press was beginning to be more favourable to Lloyd’s it is a tragedy that Sir Peter Green’s sentence should be announced and be so light which has been very rightly criticised. I know that you will rush to state that this was the sentence of an independent regulatory authority – but it should have been different. “No charge against Sir Peter and Peter Valentine involved dishonesty or lack of good faith or deliberate or knowing misconduct” I read in my newspapers. Why not?
We have seen people severely punished for repairing yachts at their syndicate’s expense and other similar trivial offences – and yet we are seen to slap the wrist of a major offender. Clearly nobody tried to press the case against Sir Peter and when I read in my newspaper that Langton stated that such “behaviour was common practice in the 1970’s and was not then regarded as serious enough to constitute discreditable or disgraceful misconduct" I am speechless. There were agents and underwriters who did not have baby syndicates or interests in off-shore reinsurance companies and I suspect that they were in the majority. But to have the fact that many were breaking the law as any form of mitigating circumstance is deeply offensive to those that chose not to break the law. I always thought that ignorance of the law was no defence.
We have this new definition of “negligence” in Lloyd’s. Posgate was found guilty of “gross negligence” for removing money from one syndicate which he did not own and paying it by way of reinsurance to the syndicate in the management of which he had a significant interest, and now Sir Peter Green is similarly found guilty of “serious or gross negligence” for allowing syndicate money to line his own pocket. When will somebody say theft and press the proper charges.
Enough of that matter. You state that the Council has debated the question of unlimited liability twice and committed itself to its continuation. The Council and former Committee of Lloyd’s have a track record second to none for lack of foresight which has been well illustrated by the recent debacles in Lloyd’s. Radical reform is out of the question until forced by circumstances, so let us continue to raise our capital from housewives with bank guarantees on the family home and suffer from the consequences at each downturn in the market.”
“This class of business, much of which comprises policies issued to insureds in the United States of America, continues to be adversely affected by certain features of the legal system of that country.
One such feature is the contingent fee system whereby lawyers are rewarded by sharing in the damages which they are able to secure for their clients, often leading to spurious cases being pursued. Another is the system of awards by juries in civil damages cases where they are encouraged to think of the insurance industry as having a “deep pocket” from which victims may be compensated, regardless of whether or not there is fault on the part of insured defendants.”
“ ... the Solvency Test Instructions should stress more firmly than currently that the minimum percentage reserves are the absolute minimum to be reserved and that most syndicates should be reserving at levels significantly above the minima particularly in the case of ‘long’ long-tail business.”
“Mr Merrett reported that the Annual meeting of the recognised Auditors had recently taken place and had seemed to have proceeded satisfactorily. Mr Robin Jackson, however, had been referred to as a pessimist as regards Asbestos/Environmental pollution. Mr Merrett had tried to explain that Mr Jackson was in fact being optimistic considering the background against which he was working.”
Mr Jackson’s anxieties at that time appear from a paper dated 7 March 1988 which he wrote on ‘Asbestos Related Claims – The Reinsurance Response’. He was concerned at the prospect of a general failure of reinsurers to honour their commitments promptly.
“I enclose the latest report from the Asbestos Working Party which illustrates that that area of claims is still accelerating. You will also be aware that pollution claims are now coming in thick and fast and as further illustration I enclose a graph of our outstandings on our policy with Outhwaite.
I think these figures demonstrate that within a month or two Outhwaite’s auditors must blow the whistle. I think that the Regulatory Authorities at Lloyd’s should get a firm grip of this before the media does and before the solvency of the Lloyd’s policy is brought into serious question.”
“ ... that as regards the solvency position Lloyd’s should not double guess the auditors, and that there were no grounds to justify Lloyd’s intervention on ‘fit and proper’ criteria, and that it was an unattractive option for Lloyd’s itself to intervene and offer a cap on the policies.”
“5.6.1 the problem of open years affected the membership as it existed at the moment. Though Names were informed when they joined the Society as to the possibility of open years it had never been considered much of a problem. However, Agents should take the problem more seriously now and make their Names aware of the likelihood of open years;
5.6.2 it was symptomatic of the Society as a whole that the Underwriters of the time did not really know the full implications of the business that they were writing and to a certain extent the whole Society was now at risk from events since the 1950s;
5.6.3 Managing Agents would continue to see open years as an easy way out provided they were allowed to continue in business whilst managing syndicates with open years. The Society may be able to live with the events of the past, but if Managing Agents were allowed to continue trading it was essentially the same as allowing Names to pay for their losses by instalments;”
“The difficulties associated with long tail liability business highlighted by the chairman of the non-Marine Association have resulted in both an underwriting loss and an overall loss. This business is now, however, being written at rates that better reflect the present climate and with policy wordings appropriate to the changed circumstances.”
Mr Williams, the chairman of LUNMA said in his statement:
“Our two main areas of difficulty are in asbestos-related claims and environmental impairment.
The rate of new asbestos-related claims rose steeply, from an average 700 per month in 1985 to 2,000 per month in 1987, due largely to intensive publicity from the plaintiff bar and the seeking out of new industries with an “asbestos connection”. There are, however, grounds for future optimism as the rate of increase has declined markedly in recent months.”
Again, about half of the entire RITC of £4bn was in respect of outstanding liability claims.
“First I should make it absolutely clear that I make no pretence whatsoever that the reserves my Committee accepted last year, or the alterations we propose now, are correct. All that can be said with certainty is that in no area of their business have Lloyd’s Underwriters been so substantially and so consistently under-reserved as in the liability accounts.
Asbestos related claims have been with us for some time now, but only recently has there been a serious threat of a substantial volume of such claims falling on marine policies. At present, the P & I Clubs appear to be in the front line, but to what extent they – and their reinsurers in the marine market at Lloyd’s – will eventually be involved is unknown. Asbestos was widely used in the construction of ships, but to what extent and over what policy years ship builders and ship repairers policies will be involved no one knows.”
“5.13 The LMX market had made the position much worse. The basis upon which reinsurance claims were paid on Alicia and the October storms was slower than on any other claims in the market because the brokers' obligation to fund had been removed and there was practically no pressure for special settlements. Each turn of the payment cycle took at least two or three months, ie the time between payment by an underwriter and collection from his reinsurer. This operated to delay the time when the ultimate payers became aware of their obligations.
5.14 The burden of the three losses was now beginning to come together with the same syndicates, and thus the same Names, being affected. The amounts involved were immense in relation to the syndicate cash balances and those syndicates had a heavy drain upon their resources for the three separate losses. The position had been reached where some syndicates were significantly through their reinsurance protection for three successive years and yet their Names knew nothing about it.
5.15 The answer was not to be found through the regulatory route but by managing agents establishing the position of their managed syndicates by requiring the underwriters of those syndicates to produce a worst case scenario. This information could then be passed on to the members’ agencies. Agents should be made aware of the questions they needed to ask and reminded that, whilst it was natural to focus upon Piper Alpha, the same questions were relevant to Alicia and the October storms. If there was a heavy un-notified net loss to Names for three years then the Names should be told.”
This was a clear warning of the ‘LMX-spiral’ which became an increasingly obvious problem after the end of the relevant period.
Chronological summary: since 1988
“14.8 We have carefully considered all the events in 1980 to 1982 on which the Names rely in support of their contentions that 1979 should have been kept open, culminating in the Neville Russell letter in February and the Murray Lawrence letter in March of 1982. But we are not persuaded that these arguments fairly or adequately reflect the overall market perception (or lack of perception) of the likely future dimension of the asbestosis claims experienced at the time ... The choice appears to us therefore to lie between the conclusion that the entire market with long-tail US liabilities was negligent in closing 1979 or that the allegation of negligence in this regard is based on hindsight. In our view the latter conclusion is more likely to be correct.
14.9 Looking at the matter broadly, we have therefore concluded that Names ... are unlikely to establish that the 1979 year of account ought not to have been closed into 1980 in the calendar year 1982 and we have reached the same conclusion in relation to the closure in 1983 and 1984 of the years 1980 and 1981. From the calendar year 1985 onwards the closure of earlier years for syndicates with accrued long-tail liabilities arising out of US casualty business gradually became more questionable, although the circumstances varied as between different syndicates, and the case against closure was not necessarily progressively uniform. In this connection it must be remembered that the full impact of asbestosis and pollution liabilities for the market was only felt in the late 1980s.”
The judge noted that the report did not suggest that the Council or the Committee had been at fault, let alone guilty of dishonesty. (To have done so would not have been within the panel’s terms of reference.)
“Unless we take radical action now to produce a solution which is acceptable to our policy holders, our regulators, and to you, our membership, I do not believe that the Society will be able to survive in anything like its present form.”
“The key elements of the R&R Plan were providing all Names with the opportunity of “finality” through an acceleration and expansion of the Equitas project (as the NewCo project was, by then, known) and a settlement which would include an estimated £2 billion of debt credits to reduce the cost of finality. The proposals as set out in the Settlement Offer document in July 1996 were accepted by almost 95% of the Names. Between May 1995 and the making of the Offer in July 1996 various committees were established to review the proposals from the Names’ standpoint. These included the Names Committee, under the chairmanship of Sir Adam Ridley (Deputy Chairman of the Association of Lloyd’s Members), which considered how to achieve a fair allocation of the debt credits. The Validation Steering Group was also established under the chairmanship of Sir David Berriman, representing the Association of Lloyd’s Members, and including representatives of the Litigating Names Committee and the Lloyd’s Names Associations’ Working Party. Its terms of reference included an evaluation of the comparative advantages and disadvantages of alternatives to the R&R Plan and an examination of the powers of Lloyd’s to implement R&R and of the Council’s duties to members and policyholders in so doing. The Group was independently advised by Slaughter and May.”
IV THE ALLEGED REPRESENTATIONS
Recapitulation of pleaded case
“(i) could have confidence in Lloyd's as an institution to safeguard his/her interests;
(ii) could trust those who were chosen by Lloyd's to regulate the Lloyd's market and manage its affairs;
(iii) because of the way in which Lloyd's regulated and monitored underwriting accounts year by year:
(a) could rely on syndicate accounts;
(b) could in underwriting and/or in deciding whether to remain a member of Lloyd's have confidence in the audited syndicate results, for results of past years;
(c) could be sure that Lloyd's as part of its regulatory duties would ensure that when prospective liabilities were reinsured by one syndicate year into another, such liabilities were being fairly assessed and quantified as between two syndicate years.”
“(a) that the Lloyd's market was in a sound financial condition; and
(b) that names could safely join Lloyd's and/or continue their membership of Lloyd's and/or increase their Premium Income Limit with confidence that known and projected claims has been prudently and adequately reserved to ultimate.”
“This confidential brochure is intended for the sole use of the person to whom it has been issued by the Committee of Lloyd’s and may be shown by the recipient only to his personal advisers. The brochure is intended to inform the recipient and his advisers of many general facts concerning the organisation and operation of Lloyd’s and is not intended to be an offer of Membership of Lloyd’s nor the solicitation of an application for Membership of Lloyd’s. This brochure should be read in conjunction with other materials provided to the recipient in the process of his application for Membership of Lloyd’s. Any question with respect to materials contained herein should be addressed to the Agent and/or Member who is sponsoring the application for Membership of Lloyd’s.”
“1.2 Insurance is a risk business
Although the Lloyd’s market as a whole has produced an overall profit during each of the previous five closed years, there have been years in which the market as a whole has suffered an overall loss. However, even in years when the market makes an overall profit, some syndicates show losses. The insurance business is a risk business and is cyclical in nature. There can be no assurance that any Member will make a profit in any given year, and over a period of years a Member must be prepared to incur a loss in one or more of those years.”
“2.4 The Committee deals with all matters affecting the general interest of Lloyd’s eg the provision and maintenance of suitable premises including the Underwriting Room for the purpose of carrying on the business conducted at Lloyd’s: the prescribing of conditions governing Membership: the framing of rules relating to the stringent security requirement with which all Members must comply: supervision of the overall conduct of the Annual Audit of Underwriters’ Accounts: the maintenance of a system of worldwide shipping intelligence: and the monitoring of legislative, regulatory and judicial development in most countries of the world. To this end, the Committee is served by a staff of about 2,000, comprising administrative, clerical, printing, catering, liveried and artisan personnel.”
“2.7 Whilst in the early days of Lloyd’s each Underwriter underwrote his own risks, the development of Syndicates resulted in the current practice of each Member appointing an Underwriting Agent or Agents, who employ an Underwriter to write business for all the members of the Syndicate or, alternatively, delegate the underwriting to another Underwriting Agent under a Sub-Agency Agreement. The functions of the Underwriting Agent are of vital concern to Members because the Agent is in complete control of the underwriting affairs of his Names, and has to deal with the complications of taxation, reserves, investments and the running of the Agency, in addition maintaining accounting procedures and statistical data on the current trends of underwriting. The Underwriting Agent is responsible for advising the Member as to which syndicates to join and conducting his Lloyd’s business on his behalf, which involves, among other things, keeping him fully informed of the progress of his underwriting activities, as well as keeping regularly in touch with the syndicates to which the Member belongs. The Agent will also be responsible for the investment of premium income received for the Member’s account. (See “Investment of Premiums” at 9). The Agent may however make arrangements for some of his duties to be carried out by another agent. The Underwriting Agent has a duty to his Names on the one hand to conduct the underwriting affairs in as efficient a manner as possible, and to the Committee of Lloyd’s on the other to see that its requirements are complied with on behalf of the Names of whom he acts.”
The remainder of paragraph 2 describes the underwriting agency agreement and the roles of syndicates and Lloyd's brokers.
“6.1 In order to be eligible to underwrite insurance at Lloyd’s, an individual must apply and be accepted as a Member of Lloyd’s. An application is made through an Underwriting Agent with the sponsorship of an existing Member of Lloyd’s, to whom the potential Member is well known. The potential Member must also be known to at least one other Member, who may be his proposed Agent. Not all those who seek to become Members of Lloyd’s are admitted. Applications for Membership must be completed by a date set each year, generally in the early summer ...
6.3 The Means Test is a continuing requirement during the time a Member remains active in underwriting at Lloyd’s and the Member is required to confirm his means every four years and to notify the Committee of Lloyd’s should his net worth fall below the required level as a result of his own voluntary act. …
6.5 If the Means Test is passed and the other aspects of the potential Member’s application are in order, he will be asked to travel to London to be interviewed by members of the Committee of Lloyd’s who form the “Rota Committee”. Among other things, the Rota Committee inquire as to, and assure themselves of, the applicant’s awareness and understanding of the concept of unlimited liability. They request the applicant to reaffirm that he is possessed of the assets set forth in his application. Additionally, the Rota Committee will assure themselves that the applicant appreciates that there is no guaranteed return and that he understands that underwriting is a high risk business which can bring losses instead of profits. They will also stress the importance the Committee attaches to the applicant meeting the active underwriters of the syndicates he is joining before he commences underwriting. Those applicants who are approved by the Rota Committee must thereafter be elected by the full Committee of Lloyd’s.
6.6 In applying for Membership of Lloyd’s it is most important that a potential Member should choose an Underwriting Agent whose view of the manner in which he should conduct his insurance business is compatible with that of the potential Member. Each Underwriting Agent at Lloyd’s will provide a potential Member with a description of his agency as well as the syndicates which he is considering recommending to the potential Member and the policy for the investment of premium income which is adopted by the syndicate’s Managing Agent. Once an Underwriting Agent is chosen he will help the potential Member through the application procedure. He will also advise the potential Member on which syndicates to join for his first year at Lloyd’s and the maximum premium income to accept on each syndicate. These syndicates must be named during the application procedure and their financial results for the past seven closed years provided in the form set out at the end of this brochure. Although the Agent is in complete control under the terms of the Underwriting Agency Agreement and must have a free hand in order to conduct the business efficiently and, to the best of his ability, profitably, the Member is always free to raise with him any questions about his Underwriting affairs.”
Section 6.2 deals with sponsorship and section 6.4 defines what are readily available assets for the purposes of the means test.
“10.3 The Lloyd’s system of accounting is on a three-year basis. This means that the profit or loss with respect to a given syndicate’s year of account is determined only as at the end of the third year of its life when a reasonable estimate can be made of the ultimate income, claims and expenses which will be received or incurred with respect to policies signed during the year of account. The year of account is opened on January 1st. Insurance policies are then signed on behalf of the syndicate during the entire year. Premiums on these policies may be received during the first year or they may be received during the second, the third or future calendar years. They will then be allocated back to the appropriate open year of account provided they are received before the account is closed at the end of the third year. Regardless of when they are collected they are considered income for that year of account. Likewise, expenses and payment of claims with respect to the policies written during that year of account are allocated to the year of account, provided this has not been closed. At the end of each of the first and second calendar years of an account, an estimate is made of the anticipated liabilities (see “Lloyd’s Audit” 12.3), in order to determine whether the account concerned is projecting a surplus or deficiency based on the income received and claims made at those stages. A similar exercise is carried out in respect of the account which is at the end of its third calendar year.
10.4 The estimated outstanding liability is calculated in accordance with the provision of the Audit Instructions. The estimate must provide for liabilities in respect of claims reported but not settled, and claims, which may have been incurred but have not yet been reported with respect to policies attaching to the year of account. Once this liability has been estimated on the account at the end of its third calendar year, it must be reinsured by a valid policy of reinsurance before the account can be closed. The reinsurance will normally be accepted by the syndicate’s next year of account, but provision can be made for the reinsurance to be placed in the market or the account to remain open for a further year or years. Once the closing reinsurance is effected, the profit or loss for the year of account is determined and, if there is a profit, it is credited to the members of the syndicate, but if there is loss, members are debited with their share of the loss.
10.5 During the three-year period before the profit or loss with respect to a year of account is determined and before all liabilities are paid on behalf of the syndicate for such year of account, the premiums are held or invested on behalf of the members of the syndicate. Such investments generally earn capital appreciation and income which is taken into account in determining the profit or loss for the year of account.”
“11. CLOSING REINSURANCE
When the estimated outstanding liability on a year of account is determined at the end of the third year pursuant to the provisions of the Lloyd’s audit, a syndicate will usually close the account by reinsuring such liability into a later year of the syndicate. This is accomplished by the members of the old syndicate paying a reinsurance premium to the new syndicate. The new syndicate then assumes any further liability which may be incurred as a result of claims on the policies written by the old syndicate. Being an estimate of future liability, the reinsurance premium may or may not eventually be proven accurate. In certain cases it has been inadequate and the new syndicate has suffered losses in excess of the reinsurance premium received; in such cases Members in the new syndicate would suffer a loss on the reinsurance to close.”
“12.1 Pursuant to the United Kingdom Insurance Companies Act under which Lloyd’s operates, each Member’s underwriting accounts must be submitted annually as at each December 31 to a rigorous audit conducted by a member of a panel of chartered accountants approved by the Committee of Lloyd’s. This audit is carried out in accordance with the “Instructions for the Guidance of Lloyd’s Auditors” (referred to as the “Audit Instructions”) issued annually by the Committee of Lloyd’s with the approval of the British Department of Trade. If, after taking into account all assets including those referred to in “Description of Security” at 8 (but excluding the Central Fund and Guarantee Policies), a Member’s accounts do not conform to the standard of solvency required, he will be obliged to provide additional funds, or to cease underwriting. In conducting the annual audit, the Managing Agent and active underwriter of the Syndicate together with the panel auditor, determine the reserves necessary to be created on the syndicate’s accounts including the amount required to close the account at the end of its third year. Once this latter amount is determined, the account may be closed and reinsured into a later year of the syndicate, as described under “Closing Reinsurance” at 11.
12.2 The Audit Instructions, the provisions of which are reviewed each year by the Committee of Lloyd’s, set out the basis upon which the syndicate auditor must carry out the annual audit of Underwriters’ accounts. The Lloyd’s Audit is primarily a test of solvency and the Audit Instructions deal, in particular, with the method to be adopted in calculating the outstanding liabilities as at the year end (i.e. the audit reserves) and the assets which may be taken into account to meet those estimated liabilities.
12.3 For the purpose of estimating liabilities, Underwriting accounts are divided into audit categories representing subdivisions of the business underwritten in the four main markets (i.e. Marine, Non-Marine, Motor and Aviation) and scales of audit reserves, expressed as percentages of premium income, are set out in the Audit Instructions for each of the audit categories. These percentage reserves, which are based on the general claims experience of the markets, are an absolute minimum requirement and if the claims experience of a syndicate demonstrates that a higher provision is needed, it must reserve that higher figure. In addition, an alternative audit test based on the syndicate’s estimate of the outstanding liabilities as at December 31 (which must include a provision for unknown and unnoted losses) is prescribed in respect of the third and subsequent years of an account should this prove to be higher than the percentage reserves.
12.4 The Audit Instructions require that the assets taken into account for the solvency test are valued at the year end. In the case of the Premiums Trust Fund, these may include cash with approved Banks or Discount Houses, certain types of investment specified in the British Trustee Investment Act and their equivalent where the funds are invested in the non-U.K. obligations. Premiums Trust Fund moneys may also be invested in other securities which are readily realisable. These latter securities may not, however, exceed 40% of the Trust Fund, plus net amounts due from Lloyd’s Brokers. Other assets which may be taken into account include balances due from Lloyd’s Brokers and the Members’ personal funds, e.g. Special Reserve Fund, personal reserves and Lloyd’s deposits, but, in the case of the Lloyd’s deposit, subject to the restrictions referred to under “Description of Security” 8.3.”
The judge’s reasoning
“(i) The whole of each brochure must be considered.
(ii) The starting point is the actual words used in the brochures.
(iii) A useful question is as follows: what would a reasonable applicant for membership of Lloyd's or name understand when reading the brochure as a whole?
(iv) The alleged representations are not contained in any of the express words used in the brochures.
(v) The alleged representations (a) are not necessary to give business efficacy; (b) do not represent the obvious, but unexpressed, intentions of the parties; and (c) are inconsistent with the express words used in the brochures.
(vi) In [Clementson] the names argued that their contract with Lloyd's was subject to implied terms, such as
(1) that Lloyd's would regulate and direct the business at Lloyd's with care and diligence and/or lawfully;
(2) that Lloyd's would manage and superintend the affairs of the Society with care and diligence;
(3) that Lloyd's would advance and protect the interests of members of Lloyd's in connection with the business carried on by them with care and diligence and/or lawfully.
The alleged (derived) representations are re-workings of the implied terms rejected in Clementson.”
“(vii) As to the first alleged representation (“could have confidence as an institution to safeguard his/her interests”) it is (a) unclear in its terminology; (b) does not accord with the administrative structure and governance of the Lloyd's market and the regulatory background for the auditing and accounting regime at Lloyd's; and (c) is inconsistent for example with the following express statements in the brochures.”
The judge then quoted from paragraph 2.7 of the 1980 brochure, which described the functions of the underwriting agent and was in almost identical terms to paragraph 2.7 of the 1981 brochure quoted above. The judge concluded subparagraph (vii) as follows:
“See further for example “Membership – The Issues” December 1986 under the heading “Key Membership Issues.
See also Gatehouse J in Ashmore (No 2).”
The reference to the 1986 document is a reference to the 1986 brochure, by which time rather more elaborate brochures were issued by the Council of Lloyd's but had the same purpose as the earlier brochures, which was to provide information to potential new members. They contained much the same information. Although the judge did not quote from the 1986 brochure, it seems to us that he probably had in mind in particular a similar passage about the role of the members’ agent as appears in the earlier brochures.
“(viii) Similarly the second alleged representation (“could trust those who were chosen by Lloyd's to regulate the Lloyd's market and manage its affairs”) and the third alleged representation (“because of the way in which Lloyd's regulated and monitored underwriting accounts year by year, (a) could rely on syndicate accounts; (b) could in underwriting and/or in deciding whether to remain a member of Lloyd's have confidence in the audited syndicate results, for results of past years; and (c) could be sure that Lloyd's as part of its regulatory duties would ensure that when prospective liabilities were reinsured by one syndicate year into another, such liabilities were being fairly assessed and quantified as between two syndicate years”) are (a) unclear in their terminology; (b) do not accord with the administrative structure and governance of the Lloyd's market and the regulatory background for the auditing and accounting regime at Lloyd's; and (c) are inconsistent for example with the following express statements in the brochures.”
“11. CLOSING REINSURANCE
Whilst paid claims will, of course, be known and information available on known (but unpaid) claims, it will also be necessary to estimate the value of any unknown claims which may arise in the future and be attributable to that year of account. The computation of the overall figure of outstanding claims is a major exercise for the managing agent and his underwriter and will be a crucial element in determining whether that year of account shows a profit or a loss. Once this liability has been estimated it must be reinsured by a policy of reinsurance in order that the account can be closed. The reinsurance will normally be accepted by the syndicate’s next year of account, but provision can be made for the reinsurance to be placed with other syndicates or for the account to remain open for a further year or years. The latter course will be adopted where the agent and his underwriter feel that it is not practicable, at that time, to predict with any reasonable degree of certainty the future claims which will arise on that year of account ... The quantification of the reinsurance to close is an estimate of future liability and the reinsurance premium may or may not eventually be proved accurate. In certain cases it has been found to have been inadequate and Members participating on the account which has accepted the reinsurance have suffered a loss on the reinsurance to close.”
Finally the judge set out similar parts of the December 1986 brochure to which we refer briefly below.
“… it seems to me that whatever test is applied, there is no need for the implication of any of the suggested terms. The undertaking is wholly efficacious as it is expressed and wholly carries through its object, namely contractually to bind the individual to the rules etc of the Society. Since this was the bargain that the parties were making, they could not on any sensible view have regarded the suggested implied terms as a necessary part of the individual’s promise to comply with the rules. The contract is not incomplete; its nature does not require that further unexpressed rights and obligations should be implied into it.”
The judge quoted a further passage in Saville J’s judgment in which, albeit obiter, he rejected what he called the unfounded assumption that Lloyd's was in some way responsible for a name’s underwriting.
“... I would be content to accept the judge’s reasoning as my own. … It was in no way necessary to the efficacy of the contract that Lloyd’s should regulate and direct the business in its market with reasonable care ... Mr Mason was subjecting himself to the regulatory jurisdiction of a body of which he was becoming a member and consisting of his fellow members. For the management of his underwriting business he would look to his own agents and not to Lloyd’s. In contractual terms there was no more to it than that ...”
The judge’s quotation from the judgment of Steyn LJ included the following at pp 132-3:
“... I take the view that there are four reasons which cumulatively make it impossible to imply any of the suggested implied terms ... Thirdly, the Lloyd’s system operates on the fundamental premise that a name entrusts his affairs, and in the process his fortune, to his managing agents. The name has remedies both in contract and in tort against the managing agent: Henderson v Merrett Syndicates Ltd ... Names assume substantial risks but at all material times names have done so in return for the advantage of their money, by way of underwriting and investment, “working twice”, added to which there have been the prospects of substantial taxation advantages. Historically becoming a name at Lloyd’s proved very profitable business. But the negative side of the bargain has always been that the name relies on, and assumes the risk of, the honesty and skill of his managing agent. Manifestly in the Lloyd’s system there is no assumption of responsibility by Lloyd’s to supervise the investment or underwriting decisions of managing agents That does not mean that Lloyd’s has a licence to act in bad faith, for improper purposes or otherwise in an unlawful manner. But that merely means that such action would be ultra vires ...
... I would reject the argument that any of the terms put forward in this case are capable of being implied. I am driven to this conclusion by three distinctive features of the relationship between a name and Lloyd’s: namely (1) that the sole purpose of the general undertaking is to commit a name to the regulatory system of Lloyd’s; (2) that it is prima facie inappropriate to imply such terms in a relationship between names inter se; and (3) that the Lloyd’s system operates on the basis that names look for protection of their interests solely to their managing agents and not Lloyd’s. While the Council and Committee of Lloyd’s are empowered to regulate the market Lloyd’s does not assume any responsibility to protect names from the breaches of duty of their agents. The suggested implied terms are not needed. On the contrary, the Lloyd’s system, as underpinned by the Lloyd’s Act, would be rendered unworkable if such terms were to be implied.”
Representations as to the audit system
(1) “Pursuant to the … Act … each Member’s underwriting accounts must be submitted annually as at each December 31 … to a rigorous audit conducted by a member of a panel of chartered accountants approved by the Committee of Lloyd's.”
(2) “This audit is carried out in accordance with … the “Audit Instructions” issued annually by the Committee of Lloyd's with the approval of the … Department of Trade.”
(3) “In conducting the annual audit, the Managing Agent and active underwriter of the Syndicate together with the panel auditor, determine the reserves necessary … including the amount required to close the account at the end of the third year.”
(4) “The Audit Instructions, the provisions of which are reviewed each year by the Committee of Lloyd's, set out the basis on which the syndicate auditor must carry out the annual audit of Underwriters’ accounts.”
(5) “The Lloyd's Audit is primarily a test of solvency and the Audit Instructions deal, in particular, with the method to be adopted in calculating the outstanding liabilities as at the year end (ie the audit reserves) and the assets which may be taken into account to meet those outstanding liabilities.”
(6) Percentage reserves are “an absolute minimum requirement and if the claims experience of a syndicate demonstrates that a higher provision is needed, it must reserve that higher figure.”
(7) “An alternative audit test based on the syndicate’s estimate of the outstanding liabilities as at December 31 (which must include a provision for unknown and unnoted losses) is prescribed in respect of the third and subsequent years of an account should this prove to be higher than the percentage reserves.”
“MAJOR FINANCIAL ASPECTS
Occasionally, an account is left open at the end of the third year and is not closed by reinsurance. This may happen for a number of reasons, but will primarily result from major uncertainty as to future levels of liability. Full liability remains with the members participating in such accounts even if they resign from Lloyd’s or die, until the accounts are closed by reinsurance: this may take years.
The past results of the market and of individual syndicates must be regarded as a historic record and may be a poor guide to future prospects. Previously profitable business may subsequently lose money and vice versa; the nature of business written changes; reserves created against future claims may prove inadequate, as may a syndicate’s reinsurance protection.”
ACCOUNTING AND INFORMATION TO NAMES
A package of detailed rules has been established by the Council of Lloyd’s governing the form and manner in which managing the members’ agents are required to account and report.
Each calendar year, managing agents must produce financial statements in respect of each syndicate they manage. These financial statements comprise a syndicate annual report made up of :
- underwriting accounts covering the closed year and each open year,
- a balance sheet,
- a seven year summary of results,
- accompanying notes including disclosure of interest information;
- a personal account for each member showing his own result;
- a managing agent’s report; and
- an underwriter’s report covering closed and open years and future developments.
Lloyd’s requires that the syndicate annual report shall give a true and fair view of the profit or loss for a closed year of account and that a Name’s personal account shall give a true and fair view of the member’s net result. The requirement to report in true and fair terms does not extend to the open years’ accounts because the figures showing the open years merely reflect cumulative cash transactions to date.
Syndicate annual reports are subject to independent audit. The syndicate auditors – who must be approved by Lloyd’s – are appointed by the managing agent to act on behalf of the Names.
The reinsurance to close represents a premium payable under contract by Names in one year of account to a succeeding, usually the next, year of account of the same syndicate or (rarely) some other syndicate. The contract transfers by reinsurance all outstanding risks and benefits relating to the closing year and all previous years of account to the succeeding year, in consideration for which an equitable premium is paid.
The calculation of the premium for the reinsurance to close involves the exercise of significant professional judgment and draws on the full experience of the active underwriting in assessing the outstanding known claims, claims incurred but not reported to the syndicate any further claims which are likely to arise. Each year the Council of Lloyd’s sets minimum percentages of premium income which must be reserved for each category of business and which are approved by the Department of Trade and Industry.
In determining the reinsurance to close, the managing agent and active underwriter must have regard to the interests of the Names paying the premium and those of the Names accepting the premium: the premium must be equitable between the different groups of members. The syndicate auditor is required to pay particular attention to the calculation of the reinsurance to close in drawing up his report.”
“(vi) The alleged representations are (a) unclear in their terminology; (b) do not accord with the administrative structure and governance of the Lloyd's market and the regulatory background for the auditing and accounting regime at Lloyd's; and (c) are inconsistent with express statements in the documents. By way of example I refer to the passages quoted in chapter 19 from the Aggregate Results/Global Reports and Accounts as at 31.12.81 to 31.12.87.
(vii) As to the second alleged representation, Lloyd's accepts that a representation was made that such figures represented an accurate aggregate of the audited trading results of all syndicates in the market. The Notes to the Accounts in the Globals made it quite clear that the figures were no more than an aggregate of such syndicate results.”
Probably no report of this nature would be complete without some reference to the serious problems which have arisen and which are likely to persist arising from asbestosis.
Many commentators have tried to put a figure on how much this will actually cost but in my opinion it is totally impossible to quantify. Policy wordings have been construed in many different ways, most of them to the detriment of insurers. Many of the syndicates in Lloyd’s started underwriting after the asbestosis losses had become apparent and so should be unaffected, whilst others may well have seen the danger coming and have taken steps to minimise the total impact.
One thing is certain and that is the fee bills will be enormous; for instance, in respect of one of the assureds, for every $1.5m being paid in indemnity, $2.4m is being paid in fees. There is some indication, however, of a slowdown in advice of new claims, so we are hoping that the peak has passed.”
“I am pleased to say that this year we are presenting Lloyd’s Global figures in a much improved and more comprehensive form...
Another important innovation is the inclusion in the underwriting accounts of separate figures for the reinsurance provision made to close the 1980 and previous accounts. At £2113 million, this is the underwriting agents’ best assessment of the outstanding liabilities of the syndicates under their management. ...
The figures show that for the 1980 year of account Lloyd’s made a profit of £264 million. ...
It will be noted ... that the known assets of Lloyd’s at present exceed the statutory requirement by more than five times. ...
One aspect of the Lloyd’s figures which is indicative of confidence in Lloyd’s is the ratio of membership to premium income. In 1970, 6,000 members earned premiums worth just over £786 million. Ten years later, although the membership has tripled, Lloyd’s premium income had gone up by nearly five times. ...”
I look at 1980 as the worst non-maritime underwriting result since the mid-1960s, brought about by the gradual decline since those days in commercial sanity bolstered by the insidious buffer of historically high interest rates. ...
It may prove in time that 1980 was the year when many syndicates were able to reserve for their asbestos and trauma-related potential. It would be appropriate if I explained how difficult it is to comment on the asbestos situation in a way that would be useful. It must be understood that extremely onerous and sensitive discussions and negotiations are continually taking place. There is always the potential danger of punitive damages, so I cannot helpfully comment in detail on these subjects. It takes a brave man, or a foolish one, to forecast the outcome of the open years. For what it is worth I would personally expect the bottom line on each to show a deterioration on the preceding one.”
“I am pleased to report Lloyd’s Global results for 1981... it is pleasing to be able to record a substantial profitable result for 1981 of almost £152 million ... the reinsurance to close increased from £2.1 billion to £2.7 billion. ... It is easy to be pessimistic in today’s insurance world. I remain an unrepentant optimist ... I believe that while we still have to go through the troughs of 1982 and 1983, Lloyd’s will emerge having avoided the worst of the losses now being reported by so many of its competitors, particularly in the US market. I predict a future in which Lloyd’s will maintain and improve its position in the insurance industry.
“We who underwrite at Lloyd’s have certain advantages over our competitors – for instance our business is truly international and we have the ability to change the content of our account swiftly. Nevertheless, it is impossible for most of us to perform entirely differently from others in our market place with the exception of small specialists. It is well known that non-marine underwriting has been very difficult and over-competitive in the early 1980s and our results demonstrate this. I will be surprised if my successors have better results to show for the underwriting years 1982 and 1983 when they are closed ...
It is rapidly becoming apparent that the potential claims arising from asbestos will dwarf any claim in the history of our industry. It is very sad that in the United States to date under half of the money paid by our industry has ended in the hands the injured party, the balance is in the capacious coffers of the more rapacious lawyers: for this reason we support, and I very much hope all our industry will support, the concept of a claims handling facility set up by the insurers and manufacturers to look after the interests of the injured. ...
All these subjects require a re-appraisal of the reserve set up in the past to deal with future claims and it will not have escaped your notice that these reserves are constantly being strengthened by Lloyd’s underwriters and the more prudent members of our industry.
I believe we are on the threshold of a time of opportunity for sensible underwriting: the ignorant or innocent capacity has been taught its lesson again. I only hope that this time we will not see the usual peaks and troughs and that common sense will have greater longevity. I fear that my hopes will not be well founded.”
Of the seven major classes of business, three show a substantial improvement as compared with last year, three show a substantial deterioration and one a modest deterioration. While the marine account is the best for some years and four of the other six major accounts show reasonable profits, the general (non-marine) liability account shows an enormous loss. One wonders what Mr Micawber, with his nose for which side of the financial line happiness lay, would have made of that particular result. Certainly his recipe for putting things to rights by waiting “in case anything turned up” cannot commend itself to the underwriters whose duty it is to correct this disastrous state of affairs. Figures such as these make it obvious that underwriters must take stringent remedial action as indeed they are. It is worth repeating that a combination of three things is needed, particularly in the all important American casualty business; first, a realistic rating level; second, a reformed policy wording embracing, where needed a claims made basis for claims and overall limit, including legal costs; and third, a measure of tort law reform. Without real progress in all three areas, it is hardly to be wondered at if underwriters increasingly withdraw from this class of business, with the result that certain industries will be left without the insurance coverage which they need to continue in business, to the detriment of society in general. ...”
“The figures produced for the close of the 1982 Account do not make happy reading from the non-marine market’s viewpoint, producing an overall loss of £219m after taking into account substantial investment earnings. It must be remembered when reviewing these figures that they relate to the experience of the insurance market of three years ago when the insurance industry generally was at it lowest ebb for very many years, if not in its entire history.
Undoubtedly, much of the blame for these poor results can be attributed to the need for underwriters to increase reserves for outstanding losses in the light of the more liberal attitudes adopted by the American courts, very often in pursuit of the deep pocket theory. This is particularly apparent, but is not unique, in relation to those claims affecting asbestosis and pharmaceutical products. New laws regarding liability following pollution and other forms of environmental impairment could also produce problems for underwriters as these new laws appear to apply retroactively, thus making it very difficult to underwrite against such circumstances. It is to be hoped that the newly formed asbestosis facility, which after many years of being discussed has now been established, will enable settlement of claims to be made as a faster rate with a consequent saving of legal expenses. ...”
A document entitled ‘ALM. 1982 Lloyd’s Syndicate Results’ published in September 1985 stated that Lloyd’s Global Report and Accounts 1984 “have been distributed to all Names this year for the first time”.
“While 1983 is still within the trough of poor results ... it is nevertheless pleasing to be able to report at least an overall profit of £36 million or £179 million excluding the PCW syndicates..
For 1983, of the nine statutory categories in which we make our returns, eight show an overall profit ranging from the modest to the satisfactory. The ninth tells a different story. As last year, the general liability account generates approximately 12 per cent of the total premium income for 1983 – and, for the same year, produces 100 per cent of our losses. Were the underwriting environment for this class of business not to have improved it would be inconceivable that any underwriter would remain in the class.”
“It is disappointing to report that, once again, the non-marine market has produced an overall loss after taking account of investment earnings. The loss of £231 million is somewhat higher than 1982 and represents a loss of 21 per cent on a total non-marine premium income of £1,074 million. Although the overall market results of the year 1983 on its own were thoroughly unsatisfactory, they have been exacerbated by the need of a number of syndicates to set aside additional reserves in respect of latent disease claims such as asbestos for the prior closed years of account. The year also suffered a number of catastrophes including winter weather losses and Hurricane ‘Alicia’ in the United States. ... Hurricane ‘Alicia’ ...may untimely turn out to be the largest loss yet suffered by the market from one storm.
The US based liability account has yet again been the cause of most of the market’s difficulties as, once again, it was necessary for underwriters to increase reserves for asbestos-related losses. Although the Asbestos Claims Facility – set up with the support of Lloyd’s – is making significant savings in the legal costs involved, this is to some extent offset by there being no slowing down in the number of new suits being brought. …
In summary, after some very gloomy reports from my predecessors, I genuinely believe I can be considerably more optimistic than has been possible for a long time. I hope that over the next few years the non-marine market will be able to return to the kind of results of which underwriters may be proud. It should not be assumed, however, that non-marine underwriting has suddenly become easy: it is just that some badly needed corrections have been made and will continue to be made enabling underwriters to be more in control of their own destinies.”
“ ... the overall results for 1984, constitute a record profit for the Lloyd’s market of almost exactly £300 million, excluding PCW, while the outlook for 1985, at least overall, looks likely to improve on that figure and 1986 is spoken of, almost reverently, as a vintage year ...
However, there is one factor which continues to dominate the whole Lloyd’s market and indeed it is perhaps no exaggeration to say it continues to dominate the whole world insurance scene. I refer, of course, to the general liability account. I have in previous years drawn attention to the enormous losses made in this area and I must do so again. The overall loss on this account shows a welcome reduction from last year’s figure. However, I have to say that the problems facing those underwriting this account, while perhaps reduced as a result of the reforms in the law of tort in the United States, are nevertheless far from solved. Two facts seem to me to stand out; first, that this account produces 12 per cent of Lloyd’s premium income and almost 100 per cent of our losses. Second, almost exactly 50 per cent of our reinsurance to close (£2,000 million out of £4,000 million in round figures) has to be devoted to the claims outstanding within this account; on a premium income base of some £400 million any under-reserving must have a sharply disadvantageous effect. In spite of all the efforts that have been made, quite extraordinary court awards and judicial interpretations continue to come from, in particular, the American scene.
There are two quite different problems in the whole of this area. First, whether the amounts put aside to meet these claims will be sufficient, a problem of the past which underwriters must do their best to solve. Second, how far it is prudent to commit underwriting resources in the future to a class of business hedged about with such dangers and uncertainties. The problem extends beyond the insurance industry; society, that is to say the general public and its political leaders, will have to reflect and should, sooner rather than later act to clarify how they feel that their damaged citizens should be fairly compensated.”
“The results of the non-marine market are, once again, dominated by the loss in the general liability section, which for the 1984 year of account amounts to £170 million on a premium income of £365 million. A substantial proportion of that loss results from the need, as in previous years, to add to the reinsurance to close item as the result of reassessment of liabilities on business written in prior closed years of account. This class of business, much of which comprises policies issued to insureds in the United States of America, continues to be adversely affected by certain features of the legal system of that country. One such feature is the contingent fee system whereby lawyers are rewarded by sharing in the damages which they are able to secure for their clients, often leading to spurious cases being pursued. Another is the system of awards by juries in civil damages cases where they are encouraged to think of the insurance industry as having a “deep pocket” from which victims may be compensated, regardless of whether or not there is fault on the part of insured defendants.
The problems are considerably compounded by the time which may elapse between the occurrence giving rise to injury and an eventual court ruling that this was in some way due to the negligence of the policyholder. Thus, underwriters of this class of business are faced with two problems. Firstly, they are being called upon to indemnify insureds in respect of losses for which they had not expected to be held liable. Secondly, the computations of the amounts – which will be needed to pay losses already incurred and which should be charged as premium on new business – will be based on an inadequate and unreliable data ...”
“Over the past twelve months, two events have served to emphasis the vital role played by insurance and by the Lloyd’s market in particular. The devastation created by the storm of October 1987 which cut a swathe across southern England and Western Europe is being described as the world’s largest insured loss, estimated to be 3 billion US dollars. More recently, in July this year, the dangers inherent in offshore oil production were brought into stark focus by the explosion which destroyed the North Sea oil production platform, Piper Alpha, involving tragic loss of life. ... The deterioration in the claims experience over the past twelve months, together with the need to provide for the development of past year claims, especially in relation to long-tail liability business in the United States, have particularly affected the 1985 account results. This emphasises the crucial need to provide for future liabilities by way of full and appropriate reinsurance to close at the end of each year. The same problems are also reflected in the number of syndicates with years of account left open at the end of 1987. At the end of December 1987 there were 76 syndicates with a total of 120 years of account left open. Problems associated with asbestosis and pollution risks, together with other US liability business appear to account for the vast majority of the run-off years. To have so many syndicates left open must be considered unacceptable to underwriters, members and agents alike. Consideration is, therefore, being given by the Council of Lloyd’s to ways of dealing with this problem. ...
The difficulties associated with long-tail liability business highlighted by the Chairman of the Non-Marine Association have resulted in both an underwriting loss and an overall loss. This business is now, however, being written at rates that better reflect the present climate and with policy wordings appropriate to the changed circumstances. ...
It is clear that Lloyd’s faces an abundance of opportunities in the years ahead...
I am, therefore, optimistic for the future of Lloyd’s market place. ...”
“The 1985 result is, disappointingly, a deterioration on 1984, showing an overall loss of £5.3 million equivalent to 0.4 per cent on an income of some £1,331 million and an underwriting loss of £84.2 million. The result includes the well-publicised Outhwaite syndicates 317/661 for the 1982 account in run-off, accounting for some £85.4 million of losses without which the 1985 results would have shown a profit. ...
Our two main areas of difficulty are in asbestos-related claims and environmental impairment.
The rate of new asbestos-related claims rose steeply from an average 700 per month in 1985 to 2.000 per month 1987, due largely to intensive publicity from the plaintiff bar and the seeking out of new industries with an “asbestos connection”. There are, however, grounds for future optimism as the rate of increase has declined markedly in recent months. The second major factor in the development of back years is the incidence of environmental pollution claims in the US. Claims for clean-up costs of dump sites are being made for circumstances in which it was never the intention of the insurer or the expectation of the insured that coverage should apply; in many cases insureds deliberately dumped waste knowing it to be harmful to the environment; in other cases dumping occurred at sites licensed for the purpose at the time. Depressing though this may sound, I should point out that underwriters are confident that there are excellent defences to these claims and they will oppose them with the utmost vigour. ... ”
V THE AUDIT SYSTEM: WAS THE REPRESENTATION TRUE?
Reserves and RITC
“3. The Syndicate Auditor is required to examine the settlements on the Underwriting Accounts for 1981 and each previous year in relation to the reserves previously created to wind up such Accounts. If the result of that examination shows that the general pattern of claims experience on the Underwriting Accounts for the years in question is such as to demonstrate that the reserves previously created are likely to prove inadequate to meet the cost of winding up those Accounts, or if there are any other factors which affect or may affect the adequacy of the reserves, then the Auditor must report to the Council and obtain their instructions before issuing his Syndicate Solvency Report.
The Syndicate Auditor should take such steps as he considers requisite to obtain the authority of those interested to make any reports which may become necessary by reason of this instruction..”
(i) This Clause, the provisions of which apply to the reserves to be created on all years, is regarded by the Council as being one of paramount importance and syndicate auditors are therefore requested to pay particular attention to its provisions.
(ii) Syndicate auditors are required, in addition, to report all cases where it appears at 31st December, 1982 that the reinsurance premium charged to close the 1979 Account (and all previous years reinsured therein) at 31st December, 1981 has been inadequate. Similar reports are also required where it appears at 31st December, 1982 that the audit reserve created as at 31st December, 1981 on an Account which has not been closed, has been inadequate. In order to demonstrate the extent of the apparent inadequacy, such reports are to be supported by figures showing – (a) the reinsurance to close the 1979 and previous years’ Accounts at 31st December, 1981; or, in the case of an Account which has not been closed, the reserve created as at 31st December, 1981; (b) the settlements on those Accounts during 1982 and (c) the reserve created on those years at 31st December, 1982.
Such reports, which are for the information of the Council, are on a purely mathematical basis and in no way remove any responsibility from the Auditor in carrying out his examination under Clause 3 of the Audit Instructions and making whatever reports he considers necessary under that Clause.
(iii) Underwriters and Underwriting Agents must bring to the attention of their Auditors any factors which affect or may affect the adequacy of the reserves to be applied as at the 31st December, 1982 including:-
(a) Risks which include liability for latent diseases and products liability.
(b) Cases where a Syndicate has taken over the run-off of another Syndicate’s accounts.
(c) Any reinsurance recoveries in dispute where credit has been taken for the recovery and where there is any doubt over the collectability of reinsurance claims submitted.”
“7.3 The tests for the audit reserves in relation to each category of business were set out in clause 6 of the Audit Instructions. For the year then in its third year of account at 36 months of development and any years of account in run-off, including, in each case, all years reinsured into it, the audit reserves were required (for most categories of business, including non-marine “all other” business) to be the greater of the following:
(i) the application of a specified multiple to the net premium income for the respective year of account. The multipliers were known as the minimum percentage reserves [MPRs]. (For the oldest year of account specified in the Audit Instructions, which was expressed to include all previous years of account, there was an alternative test of outstanding liabilities, including IBNR);
(ii) the total of the outstanding liabilities on each year of account in question as at the year end for the solvency audit, including IBNR; or
(iii) the amount of the RITC for the closing year of account, including any previous years reinsured into that account. (This test did not apply to years of account in run-off).
It is to be noted that:
(i) there was little practical distinction between tests (ii) and (iii);
(ii) the calculation of the reserve figure under test (ii) (or the amount of the RITC under test (iii)) required consideration of the ultimate cost of settling the syndicate’s liabilities; and where a year was not being closed, because it was considered that an equitable RITC could not be set, audit (i.e. solvency) reserves nonetheless had to be calculated. ”
“6. It is the responsibility of the Management Agent to establish reserves in respect of both the Open and Closed years in order to ensure that adequate funds are maintained to discharge all liabilities. The Auditor must ensure that the Agent has discharged his responsibility in this regard in a reasonable manner consistent with available information on outstanding losses, statistics of underwriting performance, market experience and any relevant information and explanations.”
“Mr. Nelson advised the Committee that, with regard to Direct business, there was now a sophisticated and meaningful computer system for all asbestosis business written on a Direct basis. This information was available to both Underwriters and Auditors. With regard to the number of cases being advised this had risen from the original estimate of 15,000 to approximately 25,000 but the average cost, whilst being eroded due to inflation was still within the original estimate of $125,000 plus $10,000 expenses. He also advised the Committee that the controversy as to whether claims will be settled on an exposure or manifestation basis had still not been resolved.
With regard to reinsurance business, due to time constraints, there was little information at present available from the computer but it was hoped that more meaningful figures would be produced next year.”
“The Audit Committee had recommended large increases in the U.S. Dollar scale of reserves and whilst a number of Committee Members considered these increases to be realistic, Mr. Murray pointed out that it could pose problems to Underwriters who wrote a “short” “All Other” Account. Mr. Chester said that the Audit Committee had spent a considerable time looking at the division of the “All Other” Account but that until further audit codes were available there was little likelihood of further divisions. He said that the Audit Committee would need the assistance of the Non-Marine Association in progressing this matter.”
“4. The date decided on by the Committee for the completion of the Audit will be given in the Audit Instructions. Agents should see that everything is done to enable their Auditors to sign the Audit Certificate by the prescribed date. This involves the Agent ensuring –
(i) that the Books of Account are written up and balanced.
(ii) that the information required by Auditors to enable them to satisfy themselves as to the proposed Reinsurance to close on Account is available by early April.
(iii) that in the case of a Composite Group Syndicate, all information required by Agents and Auditors to sections of the Group is made available well in advance of the Audit date.
(iv) that, where necessary, Names’ Audit surpluses in other syndicates under the same Agency are taken into account.
(v) that in the likelihood of a loss or Audit deficiency, reserves have been valued well in advance of the prescribed date.
(vi) that Names are given adequate notice of any additional moneys which may be required for Audit purposes. Whilst it is desirable that a request for additional funds should be accompanied by audited Accounts, this is often impracticable. In the circumstances, a Certificate of Loss, signed by the Auditor, will serve as a temporary substitute for the Accounts. The Accounts, or the Certificate of loss, must be sent to the Name well in advance of the published Audit date.
8. During the course of the Audit, . . . .
(i) the Certificate of Outstanding Liabilities (other than unknown and unnoted losses) at the previous year end. This Certificate is needed to calculate the Audit Reserves; it will be supplied to the Agent by the Auditor and must be completed and returned to the Auditor by the end of March each year.
(ii) the Certificate regarding the adequacy of the Audit Reserves which are being created. This document is of great importance. Before signing it, the Agents should examine the Audit Reserves in the light of past run-off statistics and other relevant facts available to them.”
“(vii) the auditor would need to be satisfied that the premium for the reinsurance to close a year of account was equitable as between the Names on that account and those on the accepting year of account. The determination of the premium for the reinsurance to close involved the exercise of significant professional judgment and drew on the full experience of the underwriter.
(viii) since, from at least 31 December 1985, the audit report on syndicate financial statements was to be expressed in true and fair terms, the auditor would need to ensure that he had gathered evidence of sufficient quality to support such an opinion.
(ix) in relation to the reinsurance to close, the audit approach should recognise that the objective was to ensure that the reinsurance to close was within a zone of reasonableness rather than an arithmetically accurate figure;
(x) the auditor would need to consider such matters as the nature of the syndicate’s business, the overall size of the syndicate, the impact of the reinsurance protection programme, and the accuracy of previous estimates as a part of his assessment of the appropriate range within which he would expect the premium for the reinsurance to close to fall;
(xi) the results derived from statistical techniques should be treated with a degree of caution, since historically derived date might not be an accurate guide to uncertain future events. The auditor should, therefore, ascertain from the underwriter the underlying basis for his estimate of claims incurred but not reported (IBNR), so that appropriate additional evidence could be collected to support the computation; and
(xii) other matters the auditor might consider as a part of the audit of the reinsurance to close included matters specific to the particular syndicate’s business, for example, the syndicate might have reinsured the run-off of other syndicates or companies and the auditor must satisfy himself that due account had been taken of the liabilities which were likely to arise under such contracts. This evidence would usually take a similar form to that relating to the syndicate’s own business. ”
It was the duty of the auditor to satisfy himself as to the adequacy of the RITC.
“23.14 Valuations of this nature depend to a very great extent upon commercial judgments, as to such matters as the volume and value of claims to be expected and as to the quality of reinsurances placed by the Syndicate. A particularly important aspect is the Reinsurance to Close and, although the “audit reserves” laid down in the Lloyd’s Audit Instructions provide minimum percentages, the Managing Agent and Underwriter have to make a proper commercial estimate of the outstanding liabilities to arrive at the premium. Even though the membership of the Syndicate in any two consecutive years may be to a great extent the same, the reinsurance must be regarded as an arm’s length transaction.
23.15 All these judgments can only be made by the Managing Agent or Underwriter. They have the primary responsibility and it cannot be delegated to, or assumed by, the Auditor. However, the Auditor is bound to form his own view on all these matters. He will take account of the particular circumstances relevant to that year and will draw on his own experience and judgment. He will make his own tests as to the adequacy and basis of the provision which has been made by the Reinsurance to Close. In doing so he should have regard to the past history of the Syndicate so far as settlements are concerned and the adequacy or otherwise of past Reinsurances to Close. In addition, he will consider the history of the Syndicate and any changes in Underwriter or underwriting policy.”
“83(4) The accounts of every underwriter shall be audited annually by an accountant approved by the Committee of Lloyd’s and the auditor shall furnish a certificate in the prescribed form to the Committee and the Secretary of State.
(5) The said certificate shall in particular state whether in the opinion of the auditor the value of the assets available to meet the underwriter’s liabilities in respect of insurance business is correctly shown in the accounts, and whether or not that value is sufficient to meet the liabilities calculated.
(a) in the case of liabilities in respect of long term business, by an actuary; and
(b) in the case of other liabilities, by the auditor on a basis approved by the Secretary of State.”
IN THE NAMES OF
Through the agency of
To the Council of Lloyd’s and to the Secretary of State
INSURANCE COMPANIES ACT 1982
We have examined the accounts relating to the insurance business carried on by the above-mentioned Underwriters through the above-named Agency during the year ended 31st December 19....., in accordance with the current Instructions for the guidance of Lloyd’s auditors drawn up by the Council of Lloyd’s and approved by the Secretary of State.
In connection with our examination, we have relied upon a report in respect of the underwriting accounts from accountants approved by the Council of Lloyd’s as auditors of each syndicate in which each underwriter has participated during that year stating that in their opinion all assets have been valued and all liabilities have been calculated in accordance with the said Instructions (liabilities in respect of long term business having been calculated by an actuary) and that the profits or losses arising on the closed accounts and the surpluses or deficiencies arising on the open accounts have been allocated to each Underwriter in accordance with the arrangements for his participation in each such account.
In our opinion the value of the assets, valued in accordance with the said Instructions (in the case of each Underwriter’s Lloyd’s Deposit, as certified by the Council of Lloyd’s), available to meet each Underwriter’s liabilities in respect of his insurance business is correctly shown in the accounts and is sufficient to meet his liabilities in respect of that business.
Dated this.. .. .. .. .. day of .. .. .. ..19.. ..
Accountants approved by the Council of Lloyd’s.”
“The expression (“IBNR”) was current at least by the 1970’s; before, people talked about “loadings”. The Underwriter calculates the IBNR required, having regard to the type of business he engages in and the length of time experience has shown it takes for claims of that description to taper off to extinction. Having thus ascertained the reserve necessary to pay for outstandings and IBNR claims, the Underwriter is in a position to carry out the reinsurance to close. This involves the Underwriter paying the reserve so established as premium to the next open year of the Syndicate, which in return accepts the prior year’s “run off liabilities” to extinction. Any balance is allocated to the closing Syndicate as profit (or loss). The process is repeated 12 months later for the next year, and so on. In performing the RITC the Underwriter is monitored by Auditors appointed by the Agency to safeguard the interest of the Syndicate’s Names. The processes that I have described in this paragraph and will describe later in this section have been followed by Underwriters at least back to the early years of this century.
Having said that, there were no rules as such as to the calculation of RITC in 1981 and the approach of the Auditors was to seek to ensure that the Syndicate’s reserve was not going to prove inadequate to deal with the liabilities transferred to the open year. In practice, the RITC was closely linked with the Solvency Test. The Auditors were obliged to certify the solvency of each Name on the open years and this test relied in part on the assumption that the RITC of the closing year was adequate. These alternative tests were therefore laid down in the Audit Instructions issued annually by Lloyd’s. I append at RHMO 6 a bundle of instructions from 1979 – 1982. At the relevant time (1981/1982) the tests were
(i) the aggregate of different percentages calculated on net premium income. These percentages varied according to the type of business written and year of account and were known as “Lloyd’s minima”. These were set on the basis of general market experience with the knowledge of the DTI.
(ii) Estimated outstanding claims including an element to take care of IBNR.
(iii) The amount of the RITC.
The tests were designed inter alia to establish solvency by a comparison between the assets of the Syndicate and cost of winding it up (represented by the highest of the three tests above).
It was feasible to apply to Lloyd’s for leave to undercut even the Lloyd’s minima where it produced an unrealistically high result. This could happen on, for example, yachting risks.
However, as will be apparent, the Solvency Test and RITC, while theoretically distinct, were in practice closely linked.
The underwriter has an unusual form of dual responsibility as Agent to both the closing Syndicate and the Syndicate reinsuring it to close, which is commented upon elsewhere. His duty is to gauge the reserves as accurately as possible, so that the reserves are sufficient to pay losses but no more. However, on behalf of the new Syndicate he should ensure that the premium they receive does not fall below the required sum. Before 1984, I would have said that the Underwriter had a duty to err on the side of caution in his reserving. In practice, of course, most of the Names on the incoming Syndicate were also on the previous year and the objective was to avoid having to top up those reserves when reserving them in future RITCs. Since 1984, with the introduction of Accounting Bye Law No.7, “the true and fair test” demands that premium and run off liabilities be as nearly matched as possible. This has not really changed the objectives of those concerned as much as caused the Auditors to discharge their role more rigorously. However, although technically this was the Underwriters’ duty, it was for many years the practice at Lloyd’s to build up reserves. Names by definition are likely to pay the highest rate of tax and especially in the days when that rate was high there was some resistance to distributing high profits most of which went to the Exchequer. A means of avoiding this was to make a generous assessment of the RITC premium, thus carrying forward the profit into the open year in the form of reserves. Therefore there was a distinct tendency to err on the side of caution in assessing the RITC premiums.
In 1982 and 1983, this practice was very widespread but as income tax was reduced the practice became less prevalent. In April 1984 the Inland Revenue set its face against what they considered the practice of over conservative reserving, particularly where a “rollover” (which permitted the return of those reserves at will) was concerned. The current attitude and methodology requires very specific calculation of reserves necessary.
The RITC process described above will not apply only if the run off of the would be closing Syndicate is too uncertain to enable the Underwriter to estimate it. In those circumstances, although as the Agent of the closing Syndicate, the Underwriter devoutly wishes the year to be closed, he cannot in conscience accept on behalf of the incoming year liabilities for which a safe premium (i.e. one which he believes should ensure at least that no loss is sustained by the incoming Syndicate) cannot be assessed. Furthermore, as Agent for the ceding Syndicate he would know that a closing could not be fairly achieved. Accordingly, instead of closing after 36 months, such a year would have to be left open until the outcome became sufficiently certain to allow an RITC to take place.
The point cannot be too strongly emphasised: an Underwriter who does not believe that he can estimate the premium for his RITC (i.e. that he cannot estimate liabilities due on notified claims and the IBNR claims for the ceding year) cannot properly close that year. Conversely, if he does close it, that means that he has, to the satisfaction of himself and his auditors, been able to assess and to provide for all future liabilities, including those not yet known to him, and has been able to arrive at a figure that properly reflects all such liabilities.”
VI LLOYD’S STATE OF MIND
Before the Neville Russell letter
“Auditors were confident, however, that with their overall knowledge of the run-off experience of the market as a whole, adequate reserves could be calculated”
At the Audit Committee Meeting on 11 December 1980 discussion is recorded of suggestions by Mr Lawrence, Mr Skey, and Mr Barber concerning reserving for asbestosis, and indeed their concerns (inconsistent it should be emphasised with any lack of good faith) about reserving, and the recommendation was that “Auditors’ attention should be drawn to the effect on reserves of very long-tail business ….”.
“ ... as at 31 December 1980 Audit, there was an increase in the number of cases reported, there being 48 cases where the reinsurance premium charged to close the 1977 and previous years’ accounts appeared to be inadequate after 12 months; this compared to the 40 cases reported at the audit as at 31st December 1979. Where the deficiencies have been substantial, the Deputy Chairman will be writing to the syndicates concerned to obtain explanations for the inadequacies.”
It was also at this stage that in relation to clause 3 of the Audit Instructions it was recommended that the solvency letter should contain specific mention “of the current problem with regard to “latent diseases” (including asbestosis) and “products liability”, although the decision ultimately was to refer to latent diseases but make “no specific mention of asbestosis”.
After the Neville Russell letter
“The current turn in the market and our new regulatory regime will be seen by many as compelling reasons for participating in this market. Indeed it seems that is how most perceive the matter. The latest figures show that new applications for membership for 1986 continue to run 20 per cent above the numbers for 1985. At the same time, about 9,000 existing members are asking to increase their premium income limits for next year. It is, as we all know, almost impossible to speak of the “right” time to join the market. That said I believe that this is one of those times.”
The names’ case (summary and discussion)
“The Panel Auditors expressed grave concerns regarding the question of reserving for asbestos related claims. They commented that if a proper view was taken of reserves needed by syndicates at December 1981 auditors would not be able to sign off the reinsurance to close for the 1979 account of many syndicates which would have to be left open. Alternatively there would need to be such large provisions for future asbestos claims that the market would effectively be bankrupt. They said they wanted to give me advance notice of a formal approach to Lloyd’s for guidance under Lloyd’s audit instructions. I reported on the issues raised by Panel Auditors to Mr Robert Kiln who was or had just ceased to be the chairman of the Lloyd’s Audit Committee, and to Murray Lawrence, who was then the Deputy Chairman of Lloyd’s with responsibility for matters concerning the annual solvency test of Names.”
The suggestion is that these passages support the view that the letter was sent to underwriters and auditors (1) appreciating that they would understand that if insolvency was to be avoided a calculation would have to be done (even though actually impossible) and (2) that if some calculation had to be done anyway, then accounts may as well be closed even though no-one could tell whether the RITC premium was fair.
“I have arranged for the item to be put on the Agenda of both the Membership Committee and the Audit Committee when further consideration will be given to the basis of reserving and whether new Names should be warned that specific syndicates are carrying a liability for such risks.”
“Mr Lord asked when a decision in principle to accept the policy had been reached. The Chairman said that he could not be precise about this but referred to the schedule of dates that had recently been prepared for him by Winchester Bowring and which showed that this must have occurred in the period between about 19 February and 1 March.
Mr Lord referred to concerns that had been expressed to Lloyd’s by the panel auditors at about that time concerning reserves for the 1979 account and asked whether the Chairman’s decision had been affected in any way by knowing of these concerns. The Chairman said that their decision to take the cover under the run-off policy was purely as a precaution against some development that could not possibly be foreseen at the time, for example the possibility that fluorescent bulbs might suddenly be found to cause eye damage or something of that sort.”
“Well, I regarded the fact that if, when we bought this contract in 1982 that if it was ever going to get affected – we bought it as a catastrophe contract, if I can use that in general terms, something quite catastrophic had to happen to make that contract be effective and that catastrophic happening could be one of two things. It could be some new situation coming to light which no-one could have foreseen and I use somewhere else, just to show the sort of stupidity of it; I think it could have been light bulbs that would blind us or it could have been mobile phones, it could have been anything; I want to make the point it could have been something unheard of at that time. The other way it could have been affected would be a catastrophic deterioration of something that was already over the parapet that we didn’t expect. Those were therefore the two things I thought could have affected this contract and, as it happened, we got affected by both. Asbestos catastrophically deteriorated and we had pollution.”
“Mr Lord asked whether the Chairman could recall discussions that took place early in 1982 with Mr Nelson and Mr Randall about how the market might react to the concerns expressed by panel auditors. The Chairman said that he could barely recall the meetings at all, though he had recently refreshed his memory by seeing documents that Mr Hewes had listed for him.
Mr Lord asked whether in any sense the letter of 18 March 1982 which the Chairman had signed in his then capacity as Deputy Chairman had been “for the record” with the expectation that the market might still fail to reserve adequately. The Chairman said that this was not the case. At the time there was great uncertainty within the market as to which syndicates and reinsured companies would be affected by asbestosis claims, for which years and on which basis, given that the Keene decision had not yet been finalised. In no sense was the letter written for the record. He could not speak for the view that individual underwriters in the market might have taken. He simply recalled that the market was advised to take especial care in the matter. Mr Lord noted that it had been suggested that Lloyd’s could not face the losses that might have been involved and that there was a decision to let the future pay. The Chairman said that he could not speak for what views individual underwriters in the market might have taken. He could speak for his own position. He had taken over the syndicate in 1968 and had concluded that the syndicate was severely under-reserved for the past. He had cancelled a lot of contracts with effect from 1 January 1969 and thereafter the syndicate was not heavily involved in US liability business until the 1970’s when they had some involvement in relation to medical malpractice insurance. He had not been in close touch with the way that American casualty business had developed in the intervening period as others in the market might have been.”
“From this line of authority I derive the following principles in the context of the present case:
(1) In certain circumstances a court may be entitled to draw adverse inferences from the absence or silence of a witness who might be expected to have material evidence to give on an issue in an action.
(2) If a court is willing to draw such inferences they may go to strengthen the evidence adduced on that issue by the other party or to weaken the evidence, if any, adduced by the party who might reasonably have been expected to call the witness.
(3) There must, however, have been some evidence, however weak, adduced by the former on the matter in question before the court is entitled to draw the desired inference: in other words, there must be a case to answer on that issue.
(4) If the reason for the witness’s absence or silence satisfies the court then no such adverse inference may be drawn. If, on the other hand, there is some credible explanation given, even if it is not wholly satisfactory, the potentially detrimental effect of his/her absence or silence may be reduced or nullified.”
a) Mr Murray Lawrence certainly had knowledge of asbestos as a problem; the “white papers” dated September 1981 and 4 December 1981 signed by him (see paragraph 146 above) record “Obviously claims from the asbestos related diseases are catastrophic and disastrous so far as the whole insurance industry is concerned….”. There is then the series of meetings with panel auditors, the Neville Russell letter, the Nelson memorandum, and possible discussions with Mr Randall as recorded by Mr Randall.
b) Sir Peter Miller – as far as we can see it is not suggested that Peter Miller had knowledge of anything of relevance as at this stage. He was a marine broker.
c) Mr Frank Barber- he would have the circular letter establishing the AWP, and was at the meeting at which a decision was taken not to mention asbestosis in the audit instructions on 7 December 1981. He must have been generally aware of asbestosis as a market problem.
d) Mr David Barham – from Cuthbert Heath who had a long acquaintance with US casualty business.
e) Mr Patrick Bird – a director of the Kiln Agency, and likely to be aware of the extent to which the Kiln syndicate was affected by asbestos. He was a member of the Membership Committee which decided that asbestosis should not be on the Rota brief.
f) Mr Edward Nelson – he was member of the AWP; he addressed the auditors in March 1981, and 1982; he wrote the Nelson memorandum; there can be no doubt about his in-depth knowledge of the asbestos problem as it appeared in 1981, and his influence as to how to deal with the anxieties of the auditors is clear.
g) Mr Ian Posgate – he must have had some awareness of asbestos as a problem, and it was his evidence given in 1994 which is referred to above.
h) Mr Brian Brennan – he was deceased by the time of the trial; he was on the Audit Committee in 1980 and 1981; he would have been aware of asbestos as a problem since he was a party to the decision (at the meeting on 7 December 1981) that it should not be referred specifically to in the audit instructions.
i) Mr Harry Chester- deceased by the time of the trial; he was on the Audit Committee 1980 - 1983. He was at the meeting of that Committee when the Neville Russell letter was discussed on 2 March 1982; he attended the Auditors’ Panel meeting on 9 March 1982, and he asked the opinion of the auditors on leaving the 1979 account open.
j) Sir Peter Green – deceased by the time of the trial; he was Chairman; Mr Posgate in his 1994 evidence suggested that he had spoken to Sir Peter Green about dealing with the asbestosis problem gently; Mr Lawrence gave evidence that Janson Green was a leader in US casualty business; and Mr Lawrence in evidence suggested that in December 1982 Sir Peter wished to be “up-dated on the whole question of asbestosis” indicating a degree of knowledge prior to that time.
k) Mr Alfred Higgins – deceased by the time of the trial; he was very senior and thus likely to know of problems with US long-tail casualty business.
l) Finally there is Mr Kenneth Randall – as drafter of the Murray Lawrence letter and author of his own, the position of Mr Randall is central. He was recipient of all material documents during the relevant period, and it is unnecessary to recite them again at this juncture.
“Q It is saying, isn’t it, “we consider it impossible to determine the liability in respect of asbestos; this is a factor which may affect the adequacy of the reserves. Please, Committee, tell us what to do.” It is as simple as that, isn’t it?
A No. My reading, Mr Goldblatt, is: they summarise on the first page, points that have been made to them in previous meetings with the representatives of the Audit Committee. They have said that those are difficult to do because they had certainly indicated to either the Corporation people, people concerned, that what was worrying them was the complete difference, different ways that syndicates were approaching the sort of problems that had been set out on page 1, and that if they didn’t have guidance on those points – how to deal with them – then they would have an impossible task in finding the right results for the syndicates, because they found syndicates on the same risks dealing with them in totally different ways. So this was the guidance that they were seeking under Clause 3.
Q That is a gloss which you put on the letter, maybe from subsequent talks, but it is not what the letter says is it?
A Well, in my memory, Mr Goldblatt, it was made clear to us by either Mr Randall or somebody else, that having talked with the auditors this was the problem; it was the total lack of common approach across the market to these problems that made their task impossible.”
“The main worry raised by the auditors was the widely differing views taken by syndicates and that the real purpose of their letter was an attempt to seek some uniformity in the Lloyd’s market for dealing with the matter.”
In any event it is said the Audit Committee were not prepared to accept it was “impossible” to calculate reserves. The Murray Lawrence letter stressed asbestosis as a “major problem for insurers and reinsurers”; the importance of reserves “fairly reflecting the current and foreseeable liabilities of all syndicates”; that an “IBNR loading should be carried for those claims not specifically advised but which could come to light in the years ahead”; the decision for the IBNR percentage was for the agent and his auditor to resolve; “where the reserve for asbestosis represents a material proportion of total reserves of the syndicates, Agents should consider whether or not to leave the account open”. The Randall letter to the auditors drew attention to the guidelines of the Murray Lawrence letter; stressed that “the [IBNR] loading should be very substantial to reflect unreported cases on the direct account and, possibly incomplete information on the reinsurance account”; it should not be discounted to reflect possible future investment earnings; special attention would have to be paid to the assessment of reserves in the situation in which an account was left open, and where they were being created for the purposes of assessing a member’s solvency. Taken together, the letters read as if it was believed that there was a system that could be applied and would work provided people realised the seriousness of the problem, and the letters did not read as if accounts must be closed at all costs nor as though certificates of solvency must be produced at all costs. Further, they gave clear instructions that names should be informed.
“There are several of these reports out there that were certainly written - the one I can remember is the Commercial Union one - was really, I think, written to try and accelerate tort reform in the United States of America. I think you had some agenda setting out there other than actually finding out what the ultimate figure was. It is quite interesting that the Commercial Union figures ... You see the figures out of the Commercial Union report. I am not sure there were 11 million, but there were quite lurid figures out there - that was not the figures Commercial Union reserved on. They were not the figures Commercial Union reported to their reinsurers.”
“Q. Did you feel - I know you were not involved in the exercise, but did you feel that Mr Rokeby-Johnson in conjunction with his auditors, was in a position to set an equitable RITC in order to close the accounts of that syndicate?
A. I would spend a considerable amount of my time leading up to the end of the year in conjunction with the auditors, almost permanently based in our office, and I believe we did a very thorough and exhaustive job in, I believe, putting all the facts before Mr Rokeby-Johnson and the auditors for the purpose of the RITC.
Q. I understand that. Following that exercise, were you aware that Mr Rokeby-Johnson is closing the year of account in conjunction with the auditors having set an IBNR?
Q. Did you personally feel that although you were not involved in the exercise Mr Rokeby-Johnson in conjunction with the auditors could arrive at an equitable RITC?
A. I believe so, yes.”
Mr Aldous also referred us to the evidence of Mr Murray, Mr Jackson, Mr Keeling and Mr Archard.
“I would like to conclude this statement on a personal note. I fully understand and can appreciate the upset felt by the names in this action. Like them, I too joined Lloyd’s after the majority of the insurances and reinsurances which caused losses had been underwritten. For me, it was made worse in that I had spent nearly twenty years attempting to sort out the problems we had or inherited, rather than enjoying the results of the business. Like the names I also lost a lot of money.
When I gave up the chairmanship of LMCS in October 1988 I decided I would have no further involvement in past problems. I was therefore very reluctant to become involved in this action. However, I did not feel I could allow the appalling allegations against me and others to go unchallenged. It is difficult, in a matter of pages, to explain just how much time and effort I gave to the problem of asbestos, writing to and talking to the market and its insureds and reinsureds about asbestos problems, to make sure that as many people as possible understood the seriousness of the issues at stake.
To be involved in this action after these efforts is insulting. I categorically deny that I made any efforts or took any actions to withhold information from anybody on this subject, nor did anybody suggest I should do so, to allege otherwise is outrageous.
As I have said, like others in the insurance industry, we at Lloyd’s in good faith, underestimated the ultimate cost of asbestos losses. Nobody denies that. What I do strongly deny is any wrongdoing in any of my dealings in asbestos matters.”
Mr Aldous also relied on the evidence of Mr Lord, ultimately Chief Executive of Lloyd’s and not charged with dishonesty, and the evidence of Mr Fredjohn called by the names, who gave evidence of the integrity of the persons at the centre of Lloyd’s with whom they were involved.
Conclusions as to the position in 1982, and the Murray Lawrence letter
Evidence as to 1983-8
“Reports on Inadequate Reinsurance
Auditors are required to report all cases where the reinsurance to close an Account (or the reserves created at the end of the third year of an Account) has appeared, after 12 months, to have been inadequate.
As at the 31 December, 1981 Audit, there was an increase in the number of cases reported, there being 63 cases where the reinsurance premium charged to close the 1978 and previous years’ Accounts appeared to be inadequate after 12 months; this compared with 48 cases reported at the Audit as at 31st December, 1980. Of the 63 reported cases 19 revealed an inadequacy of 15% or over and it is intended that these be followed up to ascertain the reason for the inadequacy.”
“REPORT ON INADEQUATE REINSURANCES
THE COMMITTEE CONFIRMED the recommendation of the Audit Committee that, as soon as possible after the 31.12.82 Solvency Test had been completed, a review should be carried out of all those Syndicates where a report had been received in respect of an inadequacy in the reinsurance to close from the previous year, 31.12.81. It was expected that this review would commence at the end of June and, having first been considered by the Audit Committee, would be submitted to the Committee of Lloyd’s.”
At that Committee were present 15 persons including eleven against whom charges of dishonesty are made. At first sight it may seem strange that the review was not to take place until June 1983, but it would seem that that was dictated by the fact that the Solvency Test and RITC for the current year should be completed first.
“REPORT ON INADEQUATE REINSURANCES (CLAUSE 3)
At a previous meeting of the Audit Committee, a report was circulated setting out those Syndicates which appeared to have created inadequate audit reserves on the Accounts which had closed at the previous 31st December. The Audit Committee had requested that for those Syndicates which had reported a figure of 15% or over, the inadequacy should be looked at in relation to the capacity and premium income of the Syndicate concerned.
The information was then laid before the Committee.
On consideration of the figures, the Audit Committee felt that although in some cases the figures appeared to be extremely high, it was, in general, felt that the circumstances and reasons for these figures had to be taken into account. One of the main reasons for the high apparent inadequacies was the asbestosis increase on closing reinsurance. The MSS Committee did, however, feel that where an apparent inadequacy arose and the Syndicate had also an overwriting situation, this should be followed up.”
“NON MARINE “ALL OTHER” U.S. DOLLAR
The reserves for this exceptionally long-tailed account look very weak indeed, particularly at the end of years 1 to 4 but also throughout the tail. There is prima facie evidence in Table 3 that the minimum reserves have not been shown to be adequate, and the full picture is yet to emerge, as the estimated ultimate cost as at years 7, 8, 9 etc based on the minimum audit reserves will probably be shown to be too optimistic. GAD believe that strengthening is needed in the tail, and also in the first four years. Objections to minimum reserves of more than 100 per cent of premiums received would need to be resisted: the premium rates and the actual experience are both relevant. To the extent that there is implied discounting for future income (as was discussed at your meeting with Vernon Lane) we think it better to face this openly and declare the underlying assumptions.
. . . . . . .
I should however be grateful if you would confirm that the comments in this letter will be taken into account in reviewing the reserving system. I understand from our conversation that Lloyd’s has commissioned a report from a consulting actuary on this subject. As the Secretary of State has a statutory duty to approve the basis of the calculation of general business liabilities at Lloyd’s, I think it would be desirable for the Department to be consulted about the proposals at an early stage, as you have done in respect of the Premium Trust Deed.”
“Non-Marine “All Other” U.S. Dollar
It is agreed that the scale of audit reserves looks weak compared with the run-off date in the Tables and the observations made by G.A.D. have been noted. As you know, it has been argued that it is reasonable to keep the reserves at or around their present level, having regard to the future earnings on the retained fund. It is acknowledged that this avoids declaring the underlying assumptions and does not deal with the problem of the wide mix of business comprised in this category. We are continuing to examine the means by which this account may be subdivided, but it has not yet been possible to agree appropriate groupings of the sub-classes to which separate scales of audit reserves might be applied. It is also hoped that the studies which are being conducted under the guidance of Mr Sidney Benjamin (consulting Actuary) will help to overcome the problem of those Syndicates whose accounts do not follow the pattern of the overall settlement figures for the Market.
I confirm that the comments in your letter will be further considered when the reserves to be applied to Underwriters’ accounts as at 31st December 1984 are reviewed. As you know, we carried out the review last year at an earlier stage than in previous years. It is very important for the Market that this exercise is carried out at the earliest possible stage and I think you should be aware that we are aiming for an even earlier review this year. The prompt attention your Department has given this matter has been greatly appreciated and I trust it will be possible for this to continue.
I have mentioned above the review that is being carried out by the Working Party under the chairmanship of Mr Sidney Benjamin into possible alternate methods for determining the minimum audit reserves. The initial report of the Working Party has been presented to the members of the Members’ Solvency & Security Committee who have decided that the proposals should be further tested before any recommendation is made with regard to their implementation.”
“Despite the difficulties, the underwriter will eventually, after detailed study of the figures and in consultation with his staff, arrive at a figure, which I can only describe as being his assessment of the real worth of the reinsurance he is to effect. As with any other reinsurance, he must know what he thinks its worth, in order to know what he is prepared to pay for it. Performing, as I have said, his last duty for the Members of the closing year’s syndicate, he must endeavour to pay no more than this price, and if possible less. If he could effect a reinsurance to close with another party, for less than his assessment of its worth, he should do so and will be in breach of his duty if he pays more to any other party, including the following year’s syndicate.
The reality, however, is that any third party would inevitably want more. It is in the nature of one underwriter, looking at another’s account, to take a hard view of all the evidence that points to deteriorating results, and to pay scant regard to factors seeming to show improvement.
I have, myself, written the run-off of other syndicates where they have been unable for various reasons to effect it with a following year. Free from the normal constraints I have taken a commercial view and loaded on every bit I could before setting the premium. In all cases the original underwriters have thought mine a very high price, but these run-offs cost me dearly, before I in turn reinsured them with yet another syndicate at what I thought was a very high price, paid only because there was no alternative market. The losses are now costing them dearly.
And the underwriter certainly won’t be doing his duty to the assuming year’s members, if he, as their underwriter, takes on the liability at less than his assessment of its worth.
Thus the reinsurance to close, would, in most cases continue to be placed with the following year of account. At what the underwriter believes to be its true worth, and what history will more probably show to be too little.”
“. . . . we are working, through our Accounting and Auditing Standards Committee . . . . towards a comprehensive and more stringent approach to the auditing of Syndicates. The number of underwriting Members at 1st January 1984 was 23,438 and the signs are that more than 4,500 will come forward for Membership in 1985. At the same time, approximately 5,500 existing Members increased their underwriting commitments with effect from 1st January 1984, at which date the total of Members’ deposits and Special Reserve Funds amounted to £1,289m. This amounted to 38% of overall Premium Income Limits and may be compared favourably with the figures ten years ago when the corresponding amount represented 17.1% of Premium Income Limits. As the Market turns, Lloyd’s is therefore well placed to take proper commercial advantage of that turn. I ask you to remember who will be responsible for that success which lies within our grasp. It will not be the Council, it is not the activity of regulation which creates wealth but rather the activity which is being regulated .... I cannot end this section of my address without a mention of reinsurance to close. The Revenue has a right and duty to satisfy itself as to the validity of the sums of money involved. The Underwriter has a right and duty to try to ensure that an adequate premium is charged for the transfer of obligations from one set of Names to another. The problem of adequate reserves for past liabilities is critical for the whole insurance industry. This is an age when no mere extrapolation of past claims experience has validity .... the reinsurance to close is fundamental .... and in these circumstances, Underwriters must pursue a prudent reserving policy. At the same time Underwriters must not use purely arbitrary or speculative judgments and I welcome the increased sophistication of the calculations leading to the final figure for the reinsurance to close.”
“a) where satisfactory explanations had not been given, letters should be sent to the Managing Agents of the Syndicates where the inadequacies exceeded 15%, requesting a full explanation of why the inadequacies had occurred and what steps had been taken to avoid a recurrence.
b) in all cases where the inadequacies were greater than 30%, and for Syndicate 702, the active Underwriter and a Director of the Managing Agency should be interviewed by the Chairman of the M.S.S. Committee.”
“Scales of Percentage Reserves
a) The scales represent the absolute minimum requirement for any Syndicate.
b) The percentages must be regarded as the base to which additional provision must be made to take cognisance of a Syndicate’s own experience, its estimated outstanding (included I.B.N.R.), the mix of the account between the longer and shorter tail elements, changes in portfolio, etc.
c) In view of this position it is proposed to add the following to Note 1 of Clause 6 of the “Instructions for the Guidance of Lloyd’s Auditors”:-
“The Auditor must also have regard to the fact that the scales of percentage reserves set out in this Clause represent the absolute minimum requirement for any Syndicate and have been compiled on this basis. Where professional judgment and statistical evidence so suggest, provision must be made over and above the minimum percentage reserves to take account of the particular circumstances of individual Syndicates.”
d) As a result of the above factors some Syndicates will be required to reserve sums greatly in excess of the percentages.
e) Any syndicate reserving at or near the minimum percentage will need to demonstrate to their Auditors that this represents an adequate provision.”
“Against this background of judicial uncertainty, already catastrophic losses, and the reality of massive property damage claims yet to come, the task of fixing meaningful reserves and managing cash flow to pay claims will continue to demand virtual clairvoyance and a near reckless courage from executives involved at primary level, as well as from their reinsurer counter-parts. You might well ask if we are getting it right. I will show you how we propose to do just that.”
“The 1982 Act gave us new and sufficient powers, so we must look at what we have achieved by passing byelaws in relation to the underwriting agency system.
Firstly, we are insisting upon improvements in the auditing of syndicate accounts and in the reporting thereof. This will ensure that any improper behaviour or other problem are identified and, therefore, dealt with much more rapidly.
Secondly, by insisting upon very full disclosure, we have highlighted the accountability enshrined in the law of agency, which requires the agent to respond to his principal for his care over the principal’s interests. A central file of syndicate results is now available for inspection.
Thirdly, we have introduced a new standard agency agreement which must be used throughout the market from 1st January 1987.
Fourthly, we have codified and immensely strengthened our processes for the approval of underwriting agents. I believe that the impact and importance of the “fit and proper test” for directors and underwriters and Boards of directors cannot be over-estimated.
Next, we are insisting that each managing agent has a system to monitor his premium income and we review the results produced.
In all these matters, I consider that it is important to realise the essential difference between regulators like the Council of Lloyd’s or the Department of Trade, for that matter, and a monitor. There is and there must be a limit to what regulators can do. Neither the Department of Trade nor Lloyd’s set out to monitor the day to day activities of the market. A regulator generally works on a post-facto basis. Therefore the objectives of good regulation must surely be to try to ensure that the right controls are in place and functioning correctly and to see as far as possible that the individual syndicates and their managing agents are run by fit and proper people, fully accountable to the members for whom they are undertaking.
The measures I have listed and many other reforms add up, in my view, to a modern and efficient system of regulation in which Names may readily put their trust. The events of the pasty few months will have affected some peoples decision to become members of Lloyd’s. The current turn in the market and our new regulatory regime, however, will be seen by many as compelling reasons for participating in this market. Indeed, it seems that this is how most perceive the matter. The latest figures show that new applications for membership for 1986 continue to run 20 per cent above the numbers for 1985. At the same time, about 9,000 existing members are asking to increase their premium income limits for next year. It is, as we all know, almost impossible to speak of the “right time to join the market.” That said, I believe that this is one of those times.”
The transcript of the questions and answers after the speech shows that many names raised concerns, especially in regard to PCW.
“The figures produced for the close of the 1982 Account do not make happy reading from the non-marine market’s viewpoint, producing an overall loss of £219m after taking into account substantial investment earnings. It must be remembered when reviewing these figures that they relate to the experience of the insurance market of three years ago when the insurance industry generally was at its lowest ebb for very many years, if not in its entire history.
Undoubtedly, much of the blame for these poor results can be attributed to the need for underwriters to increase reserves for outstanding losses in the light of the more liberal attitudes adopted by the American courts, very often in pursuit of the deep pocket theory. This is particularly apparent, but is not unique, in relation to those claims affecting asbestosis and pharmaceutical products. New laws regarding liability following pollution and other forms of environmental impairment could also produce problems for underwriters as these new laws appear to apply retroactively, thus making it very difficult to underwrite against such circumstances. It is to be hoped that the newly formed asbestosis facility, which after many years of being discussed has now been established, will enable settlement of claims to be made at a faster rate with a consequent saving of legal expenses.”
“In the main the syndicates identified were reasonably predictable, including syndicate 895, five former PCW managed syndicates (plus the two stoploss syndicates impacted by PCW losses) and two Robert Napier syndicates formerly managed by Oakeley Vaughan. Fifteen of the twenty-four syndicates affected no longer underwrite.
Of the non-marine syndicates, many explain the inadequacies as being due to under reserving in respect of latent disease, product and environmental liability and pollution claims. Furthermore, three of the six marine syndicates attribute the deficiencies in reserving to the same type of problems. Interestingly, three syndicates refer to a specific reinsurance contract with Transit Casualty Insurance Company of California.
It is intended that letters will be sent, where appropriate, to those agents whose syndicate returns indicated apparent deficiencies greater than 15%.
These letters should express concern at the apparent deficiency and seek further, more detailed, explanations of the circumstances. Additionally the letter should request detail of what steps are being taken to improve reserving techniques in future years.”
“Mr Kellett drew attention to the section of the paper dealing with inadequacies of reserves and asked the SSC what further action should be taken in respect of those syndicates with large inadequacies. The secretary explained that the Department had written to the managing agents concerned and in some cases this would result in an interview with a Deputy Chairman”
The Chairman of that Committee at this time was Mr Murray.
“NON-MARINE - ROBIN JACKSON
It had been hoped that there would be a drop in claims in 1986 but this has not been evident; nine hundred new cases per month were reported in 1985, while fifteen hundred new cases per month were reported in November and December 1986.”
“. . .
the overall results for 1984, constitute a record profit for the Lloyd’s market of almost exactly £300 million, excluding PCW, while the outlook for 1985, at least overall, looks likely to improve on that figure and 1986 is spoken of, almost reverently, as a vintage year . . .
However, there is one factor which continues to dominate the whole Lloyd’s market and indeed it is perhaps no exaggeration to say it continues to dominate the whole world insurance scene. I refer, of course, to the general liability account. I have in previous years drawn attention to the enormous losses made in this area and I must do so again. The overall loss on this account shows a welcome reduction from last year’s figure. However, I have to say that the problems facing those underwriting this account, while perhaps reduced as a result of the reforms in the law of tort in the United States, are nevertheless far from solved. Two facts seem to me to stand out; first, that this account produces 12 per cent of Lloyd’s premium income and almost 100 per cent of our losses. Second, almost exactly 50 per cent of our reinsurance to close (£2,000 million out of £4,000 million in round figures) has to be devoted to the claims outstanding within this account; on a premium income base of some £400 million any under-reserving must have a sharply disadvantageous effect. In spite of all the efforts that have been made, quite extraordinary court awards and judicial interpretations continue to come from in particular, the American scene.
There are two quite different problems in the whole of this area. First, whether the amounts put aside to meet these claims will be sufficient, a problem of the past which underwriters must do their best to solve. Second, how far it is prudent to commit underwriting resources in the future to a class of business hedged about with such dangers and uncertainties ...”
We have already quoted from Mr Kellett’s statement in these globals (paragraph 251 above).
“A large proportion of the “over 15%” inadequacies relate to the non-marine syndicates and 4 of the 7 marine syndicates relate to pollution and asbestosis claims. Once again the difficulty of providing the right level of reserves for longer tail business is highlighted. While syndicates must be careful not to over-provide for long-tail due to revenue investigations, under-reserving must be avoided to retain parity between Names where an account is closed to a more recent year of account.
Although the number of syndicates whose reserves appear inadequate has remained reasonably stable over the last three years including those greater than 15% (24, 26 and 22 in 1984, 1985 and 1986 respectively), the level of the inadequacies is worrying, particularly those greater than 40%. Approximately one-third of the syndicates with inadequate reserves last year greater than 15% have recurred in 1986. MSSD intends to write to the agents and their auditors and, if considered appropriate, request that a meeting is arranged with the Senior Deputy Chairman to discuss their reserving.”
“Mr Merrett expressed concern that substantial increases in asbestosis/pollution claims were being notified by the Asbestosis Working Party and Environmental Claims Group. However, the Solvency and Security Committee did not have access to figures showing the overall position but had to rely upon the reports of individual syndicates. The level of reserving could be anticipated to require significant increases for next year and future years and Lloyd’s needed greater comfort than at present that Agents were adopting adequate figures in their accounts. In Mr Merrett’s view this was a problem that needed to be addressed centrally........ In the ensuing discussion the following points were made: ..... (v) The level of reserving was a matter for the Managing Agents and should not become a matter of instructions from Lloyd’s centrally. (vi) The political aspects of the matter should not be ignored and pressure should be maintained on Washington, on the basis of the basic question of “Who should clean up America”. ..... At the conclusion of the discussion it was AGREED that:- ..... (iii) The Chairman, Mr Merrett and Mr Hazell would ..... discuss the matter on an informal basis with the Chairmen of the Market Associations.”
“Mr Merrett reported that the Annual meeting of the recognised Auditors had recently taken place and had seemed to have proceeded satisfactorily. Mr Robin Jackson, however, had been referred to as a pessimist as regards Asbestos/Environmental pollution. Mr Merrett had tried to explain that Mr Jackson was in fact being optimistic considering the background against which he was working.”
During 1988 more syndicates left accounts open – for example Mr Merrett left his 1985 year open. Inadequacies were again reported for 1984 as compared with 1985. The total (according to S1) was about £95m.
“Paragraph 1(d) of our Terms of Reference
2. We consider that Mr Outhwaite may fairly be criticised for:-
(a) failing to identify sufficiently precisely the basis of the figures, presented with the placing information supplied by the cedant for the purpose of writing the run-off policies, leading to inadequate analysis (Section V, paragraphs 51 and 52);
(b) not investigating more thoroughly the nature of the asbestosis problem and its potential magnitude (Section V, paragraphs 60-64); and
(c) writing a substantial number of run-off policies into Syndicate 661 without giving sufficient weight to the consequent aggregation of risks (Section V, paragraphs 74 and 75).
3. Having regard to these criticisms, we consider that a substantial case based on breach of duty could be made out in relation to the writing of the run-off policies. However, in the light of all the evidence, and the advice we have received from our expert advisers, it is our opinion that a court action against Outhwaites or Mr Outhwaite based on this cause of action, would be unlikely to succeed. It is ultimately for the Names and their advisers to decide whether or not to pursue any remedies. We hope that the material we have assembled will assist them in making their decision.”
“Present market conditions, uncomfortable though they may be, are overshadowed by the need to provide for the development of past year claims, some as yet un-notified and unquantified, springing mainly from long-tail liability business in the United States. The deterioration in claims in this area over the past 12 months and the provisions that have had to be made as a result, have reduced in many instances the anticipated profit last year for the 1985 account. They are, in addition, responsible for the two current major problem areas in the market namely syndicate number 317 (Outhwaite) for the 1982 account and number 553 (Warrilow) for the 1984 account.”
“Over the past twelve months, two events have served to emphasise the vital role played by insurance and by the Lloyd’s market in particular. The devastation created by the storm of October 1987 which cut a swathe across southern England and Western Europe is being described as the world’s largest insured loss, estimated to be 3 billion US dollars. More recently, in July this year, the dangers inherent in offshore oil production were brought into stark focus by the explosion which destroyed the North Sea oil production platform, Piper Alpha, involving tragic loss of life. The deterioration in the claims experience over the past twelve months, together with the need to provide for the development of past year claims, specially in relation to long-tail liability business in the United States, have particularly affected the 1985 account results. This emphasises the crucial need to provide for future liabilities by way of full and appropriate reinsurance to close at the end of each year. The same problems are also reflected in the number of syndicates with years of account left open at the end of 1987. At the end of December 1987 there were 76 syndicates with a total of 120 years of account left open. Problems associated with asbestosis and pollution risks, together with other US liability business appear to account for the vast majority of the run-off years. To have so many syndicates left open must be considered unacceptable to underwriters, members and agents alike. Consideration is, therefore, being given by the Council of Lloyd’s to ways of dealing with this problem.”
Discussion as to 1983-8
i) The history of more and more years being left open must have brought home to Lloyd’s that syndicates could not in fact calculate reserves including IBNRs.
ii) In addition, the history of the year by year increase in the amount of reserves for past years exemplified by the annual analysis of the inadequacy in reserves reported by the auditors must have brought home to those at the centre that it was in fact impossible to calculate reserves.
iii) Mr Kellett’s statement in his presentation to the Inland Revenue “We are under reserved. What concerns us is how the industry can survive its under reserving.”
iv) A draft paper dated 24 July 1985 prepared for O Group by Head of Finance and Market Services, Mr JAW Moir, suggested in the context of Outhwaite, PCW and the Solvency Test in 1985 that it was open to Lloyd’s to “encourage, cajole, bully or instruct auditors to sign an unqualified solvency report on all troubled syndicates”. Mr Lawrence in cross-examination stated that the passage did not reflect his experience of the relationship between the auditors and Lloyd’s, and further stated that it would have been quite unthinkable.
v) A conversation in November 1986 about which Mr Steel gave evidence in which Mr Lawrence was overheard to say (according to Mr Steel) “You bloody brokers, Lloyd’s is nearly bust”. The judge found it difficult to place reliance on this conversation and in particular as to its date. The judge also pointed out that Mr Steel increased his underwriting in 1986 and 1988.
vi) On 24 November 1983 it was minuted that “the Lloyd’s Audit was a specific and limited exercise designed to monitor the solvency of syndicates and of the individual names … It is now recognised that the Lloyd’s Audit is in this sense a misnomer, and it is now known as the Lloyd’s Solvency Test.”
vii) On 26 July 1984 at a meeting of LUNMA Mr Smith, supported by Mr Hazell and Mr Jackson, affirmed that the standard of auditors was alarmingly low.
viii) In a speech by Mr Ian Hay Davison in Paris in April 1985, Mr Davison (who was not called to give evidence), is recorded as being critical of the standard of auditing. He suggested possible lack of independence and that auditors may just have been accepting the underwriter’s word for the RITC.
ix) Mr Randall was reported as expressing surprise at the position after the sending out of the Murray Lawrence letter, and suggested in evidence to the Donner Inquiry that panel auditors appeared to have turned a blind eye to the adequacy of reserves in the context of asbestos.
x) The names attacked the credibility of Mr Lawrence and Sir Peter Miller in particular. Sir William Jaffray produced a sustained and detailed attack on Sir Peter Miller’s evidence (see his statements of 9 and 30 January 2002). He suggested that Sir Peter was not frank with the court about the losses he had suffered over the relevant period and in particular about the effect of stop-loss policies. He was critical of the views expressed by Sir Peter on the brief for the Rota interview. He suggested many aspects on which the evidence of Sir Peter should not be accepted, including Sir Peter’s assertion that he had no reason to doubt the accuracy of the figures contained in the audited syndicated accounts, and that Sir Peter and others on the Council or Committee were unaware of the under-reserving for asbestos related claims. Sir William also produced a detailed attack on the statements of Mr Skey, Mr Parry and Mr Maitland (see Sir William’s statements of 4 and 5 February 2002). But, since none of those witnesses was called and their statements were thus excluded, the attacks are misplaced.
xi) Reliance was also placed by Sir William and Mr Adams in particular on certain triangulations. They referred us to the Annual Review of Lloyd’s Market Reserves for 31 December 1992. The explanatory notes explain the purpose of these triangulations. They explain first that they were produced “to assist the Committee of Lloyd’s in reviewing the minimum scales of solvency reserves, details of premiums, claims and percentage settlement have been obtained in respect of syndicates (other than life syndicates where the percentage test is not applied) for 1991 and previous years according to class of business concerned”. The notes then explain each of the tables and in particular, so far as concerned Table 2 (which was the table relied on by Sir William and Mr Adams), the note explains:-
“Table 2 sets out the cumulative settlement for each year of account as a percentage of premium income shown in Table 1. For year 3 and subsequent years the settlement is expressed as a percentage of the premium income at the end of year 3.”
Table 2 is a triangulation showing the very substantial deterioration which took place on old years where the paid claims were measured against premium. The picture on the document produced by Mr Adams and Sir William is as at 1991 but they made the point that if the picture were looked at as at 1986, for example, the deterioration on the old years was already substantial.
These figures were produced to assist Lloyd’s in calculating MPRs. They do show a dramatic deterioration. They do not however demonstrate what the reserving policy was in any syndicate at any particular time.
i) He reminded us of the evidence of Mr Tovey and Mrs Stynes. Mrs Stynes was a Chartered Accountant with previous experience in the auditing of insurance companies and Lloyd’s syndicates between 1979 and 1981. In late 1981 she went to Ernst & Whinney where again, at least in part, her experience was in providing audit partners with support in the auditing of Lloyd’s syndicates. She joined the Corporation of Lloyd’s in February 1984 in the Accounting and Auditing Review Department. The whole of her evidence was relevant but in particular she said “We believed that the syndicates themselves and their auditors were doing their job properly, and that the results could be relied upon for the purposes of the aggregation exercise which we undertook. Had I felt that the regime for production and auditing of accounts was unsound, or the syndicate results could not be relied upon, then I would not have been content to go forward as I did.” Mr Tovey was also an experienced accountant who joined Lloyd’s in 1984. He refuted in his evidence any question of dishonesty as far as he was aware.
ii) Mr Aldous relied on the evidence of people who gave evidence on behalf of the names, notably Mr Fredjohn who never suggested that the Council of Lloyd’s, or any members of it, believed there was a systemic problem, or that auditors could not be trusted. He relied also on the evidence of Sir Peter Miller, Sir David Rowland, Mr Jackson, Mr Keeling, Mr Lawrence, Mr Kellett, and Mr Murray. He rejected the attack made on the credibility of these witnesses, particularly in respect of Sir Peter Miller. The information on his losses was originally supplied by his members’ agent and when supplied to More Fisher Brown by Freshfields, was expressly said to be subject to correction. Indeed Mr Aldous pointed out that when Sir Peter was cross-examined by Mr Goldblatt (day 31 pages 4802-4807) Mr Goldblatt, although somewhat sarcastic about the original production of figures without the stop-loss information in them, did not in fact suggest to Sir Peter that he had been untruthful.
iii) Mr Aldous in this context emphasised how the number of claims escalated over the years, rising between 1982 and 1984 and then rising even more dramatically thereafter. The market, he submitted, simply did not foresee that degree of escalation. The fact that reserves were shown to be inadequate does not show that the system was not working, indeed the fact that inadequacies were being monitored and consideration was given to concerns about those inadequacies demonstrates the opposite. The sheer detail of the documents recording the consideration given to auditing each and every year is quite contrary to any possibility that there was any person who simply did not believe that the system worked. As regards the triangulations, they demonstrate how a dramatic deterioration did occur on the old years in the late 1980s, but they do not demonstrate that the syndicates were under-reserving.
Conclusions as to 1983-8
VII RELIANCE AND INDUCEMENT
VIII FAIR TRIAL
“(1) These Rules are a new procedural code with the overriding objective of enabling the court to deal with cases justly.
(2) Dealing with a case justly includes, so far as practicable –
(a) ensuring that the parties are on an equal footing;
(b) saving expense;
(c) dealing with the case in ways which are proportionate –
(i) to the amount of money involved;
(ii) to the importance of the case;
(iii) to the complexity of the issues; and
(iv) to the financial position of each party;
(d) ensuring that it is dealt with expeditiously and fairly; and
(e) allotting to it an appropriate share of the court’s resources, while taking into account the need to allot resources to other cases.”
“Article 6 – Right to a Fair Trial
1. In the determination of his civil rights and obligations … , everyone is entitled to a fair and public hearing within a reasonable time by an independent and impartial tribunal established by law.”
No-one suggests that the trial in this case was not before an independent and impartial tribunal established by law, but it is submitted that an important feature of a fair trial is that there should be equality of arms. The approach of the European Court of Human Rights (“the ECHR”) to this aspect of Article 6 can be seen from its decision in Apeh Üldözötteinek Szövetsége v Hungary (Application no 32367/96) given on 5 October 2000.
“39. The Court recalls that under the principle of equality of arms, as one of the features of the wider concept of a fair trial, each party must be afforded a reasonable opportunity to present his case under conditions which do not place him at a disadvantage vis-à-vis his opponent (see the Dombo Beheer BV v the Netherlands judgment of 27 October 1993, Series A no 274, p 19, § 33). In this context, importance is attached to appearances (see, mutatis mutandis, the Borgers v Belgium judgment of 30 October 1991, Series A no 214-B, p 31, § 24, and the authorities cited therein).
Article 6 § 1 guarantees in principle the opportunity for the parties to a criminal or civil trial to have knowledge of and comment on all evidence adduced or observations filed, even by an independent member of the national legal service, with a view to influencing the court’s decision (see, among other authorities and mutatis mutandis, the following judgments: McMichael v the United Kingdom, 24 February 1995, Series A no 307-B, pp 53-4, § 80; Kerojärvi v Finland, 19 July 1995, Series A no 322, p 16, § 42; and Lobo Machado v Portugal, 20 February 1996, Reports, 1996-I, pp 206-207, § 31).
42. As regards the failure to notify the applicants of the submissions by the Attorney General’s Office at second instance, the Court notes the Government’s assertion that these submissions had no bearing on the merits of the case. However, it is to be recalled that the principle of equality of arms does not depend on further, quantifiable unfairness flowing from a procedural inequality. It is a matter for the parties to assess whether a submission deserves a reaction and it is inadmissible for one party to make submissions to a court without the knowledge of the other and on which the latter has no opportunity to comment. It was therefore unfair that the applicants were not notified of the submissions made to the Supreme Court by the Attorney General’s Office (see, mutatis mutandis, the Bulut v Austria judgment of 22 February 1996, Reports 1996-II, p 359, § 49 in fine.).”
The ECHR held that in those circumstances there was a breach of Article 6.
“83. … (3) The court then has to decide whether, on an objective appraisal, the material facts give rise to a legitimate fear that the judge might not have been impartial. If they do, the decision of the judge must be set aside. (4) The material facts are not limited to those which were apparent to the applicant. They are those which are ascertained upon investigation by the court. (5) An important consideration in making an objective appraisal of the facts is the desirability that the public should remain confident in the administration of justice.
85. … The court must first ascertain all the circumstances which have a bearing on the suggestion that the judge was biased. It must then ascertain whether those circumstances would lead a fair-minded observer to conclude that there was a real possibility, or a real danger, the two being the same, that the tribunal was biased.”
That test was a modification of the test previously laid down in R v Gough  AC 646. It was a modification which was subsequently approved, subject to a further modification, by the House of Lords in Porter v Magill: Lord Hope (with whom the other members of the House agreed) put the question thus at paragraph 103:
“The question is whether the fair-minded and informed observer, having considered the facts, would conclude that there was a real possibility that the tribunal was biased.”
See also Taylor v Lawrence  EWCA Civ 90,  2 All ER 353 per Lord Woolf CJ, giving the judgment of the court, at paragraphs 60 and 61.
i) a party is entitled to present his case under conditions which do not place him at a disadvantage vis-à-vis his opponent;
ii) in order to decide whether the trial has been fair or unfair, it is appropriate to take into consideration all the circumstances of the case, including differences between the resources of the parties and the importance of the case for them;
iii) the proper approach is to ask whether, on an objective appraisal, both a reasonable observer and a reasonable litigant in the position of any of the parties would be left with a legitimate fear that the conduct of the trial was such as to place that party at a disadvantage which was more than trivial or illusory, as in Kremzow v Austria (1993) 17 EHRR 322, paragraphs 73-75; and
iv) once inequality of arms in this sense is established, it is not necessary to identify further, quantifiable unfairness, in order to hold that the trial was unfair.
The alleged unfairness
“12. At the outset of the trial the learned judge expressed his determination that the hearing should conclude by the middle of July 2000. That decision placed unacceptable pressure on the Names and their small team of legal advisers who were unable within the available time scales adequately to consider and assimilate the documentation used at the trial (estimated at over 60,000 pages). The difficulty of assimilating documents was aggravated by extensive and unnecessary redaction.
13. The vast majority of the documentation was in the possession of Lloyd’s. In an order dated 30th June 1998 Mr Justice Colman ordered that disclosure was to be completed by 31st March 1999. Notwithstanding this order the learned judge permitted Lloyd’s to control the rate at which discovery, disclosure and the provision of copying documentation to the Names and their legal representatives was made. By way of example, as at 31st March 1999 Lloyd’s had listed 21,262 documents for discovery of which 20,120 were irrelevant. Between the deadline for completion of discovery and the commencement of trial, Lloyd’s listed a further 26,095 documents for inspection. During the hearing lists 24 and 33 were served as primary discovery more than 12 months after the final date for discovery. Thus, disclosure continued at all stages up to and throughout the hearing giving the Names and their counsel insufficient opportunity of assimilating (for the presentation of their case and the examination of the witnesses) the documents so disclosed.
14. During the hearing:
a. Equitas submitted figures to the Court relating to the quantum of asbestos-related liability affecting the Lloyd’s market, contending that the figures were commercially confidential and should not be disclosed in open court. The figures were revealed to the Names’ legal advisers under a confidentiality order which wrongly prohibited their disclosure to the lay client and to litigants in person. The Names’ legal advisers wished to make submissions in open court regarding the figures so disclosed but the learned judge wrongly refused to permit such submissions to be made.
b. Finality Statements relating to the underwriting of the 33 individuals set in paragraph 1 of the Re-Re-Amended Particulars of Claim were disclosed by Lloyd’s with the learned judge’s consent on condition that they could be seen by the litigants legal advisers but not by the litigants or their specialist advisers.
15. The learned judge:
a. wrongly treated the Minutes of Market Association Committee (and LUNMA in particular) as not being in the possession or power of Lloyd’s;
b. wrongly permitted Lloyd’s to select those Minutes of Committee and Council to be the subject of discovery, when all Minutes during the Relevant Period ought to have been available for inspection;
c. failed to draw adverse inferences against witnesses central to the case whom Lloyd’s elected not to call, notwithstanding that witness statements for such witnesses had been served on behalf of Lloyd’s and that the learned judge had refused to require those witnesses to be summoned to court to testify;
d. imposed a timetable for final submissions which required the Names to answer Lloyd’s closing argument without having heard, or read through, it;
e. substantially disregarded the submissions of litigants in person, notwithstanding that the material furnished, in particular by Mr Holman, was inconsistent with the distribution of the Murray Lawrence letter to members’ agents.”
The relevant circumstances
(a) the deadline for notification by names who wished to join the action be extended to 5 January 2000;
(b) names considering participating in the trial should be permitted to inspect the pleadings;
(c) More Fisher Brown were to remain the nominated or lead solicitors in the actions;
(d) names who did not wish to instruct More Fisher Brown were entitled to instruct solicitors or counsel of their choice or to appear in person, provided that such names:
(i) would adopt the evidence adduced by the lead solicitors and would not adduce additional evidence;
(ii) would adopt the cross-examination of the lead solicitors and counsel;
(iii) would be permitted to make written closing submissions and such oral closing submissions as the trial judge allowed;
(iv) would be provided at Lloyd’s cost with access to a set of trial bundles and an office at Lloyd’s solicitors where the bundles could be reviewed;
(v) would become subject to the various confidentiality orders previously made in the proceedings; and
(vi) would have several liabilities for their proportionate share of Lloyd’s costs;
(e) joining names could seek any further directions that they saw fit to seek;
(f) any prospective name who joined the action and who did not formally instruct More Fisher Brown to act on his or her behalf had to communicate with More Fisher Brown to enable them to consider whether any additional point should be advanced as part of the threshold fraud issue; and
(g) a copy of the order was to be sent by Freshfields to all prospective names who had made contact with Freshfields, the court or More Fisher Brown to indicate an interest in joining the action.
“But by far and away our primary complaint, if it is necessary to identify a complaint about acts or omissions by the judge ...; if there is a complaint to be made, if I can put it in this slightly colloquial way, the judge failed to get a grip at an early stage of the pre-trial process, and by the time we came in it was too late, the damage had been done.
It may well be that one can conceive of some Herculean effort that could have been made by a judge to rescue things; it was not made. So we say of the judge during the trial process that yes, he sought to achieve fairness, as Mr Goldblatt stresses, but in a sense he was condemned to making the best of a bad job. He had hobbled himself.”
“It may be that Lloyd's Names are putting themselves under pressure by propounding this timetable. There is no room for doubt about it: a trial date of 4 October is undoubtedly going to impose pressure on both sides. We recognise that. But we adopt the line that it is salutary for that pressure to be applied because it will enable the parties to concentrate on the things that matter and to discard the peripheral matters.”
Lloyd's said that it would not be ready by then and pressed for a date in November 1999 at the earliest. In the event by the order of 16 March 1999 the court provided for a trial window of 11 October to 8 November 1999. Mr Goldblatt at that time indicated that it was practicable to complete the trial within 12 weeks.
The documents: disclosure and trial bundles
“MR JUSTICE CRESSWELL: If you consider that your clients’ case is impaired in any way and you have not had the opportunity to cover the matter you must tell me so and we will recall the witness, or otherwise provide for the problem.
MR GOLDBLATT: I shall not hesitate to rise to my feet and shall be ready to do so when necessity demands.”
Redaction and relevance
“The problem we have was that it was left by the judge to Lloyd's to assess relevance, not just to assess whether a claim for privilege could be made out, but to assess relevance, and we say that in the special circumstances of this case and these documents, that was an abdication of responsibility by the judge. He should have allowed inspection of documents, redacted to preserve privilege if necessary, so that the Names themselves could select what it was that they wanted to rely on or not rely on.”
We are unable to accept those submissions.
“Confidentiality is important because of the danger of disclosure to actual and potential claimants and because of the commercially sensitive nature of the information with respect to competitors. Although the information in some of the Attorney’s Reports may be old, this concern must remain strong. To illustrate the first point: estimates of the costs to dispose of APH cases, if known, could easily influence APH claimants’ attorneys in determining the level of their demand. The gross extent of coverage remaining to an assured would likewise be of interest to them. Insureds will take the view that such information are matters of utmost confidentiality and disclosure could adversely affect the costs of disposing of the cases, the competitive position of the companies, the price of their shares and may even ultimately concern the survival of the companies themselves”.
Equitas reserving figures
“There is provision for lead counsel and lead solicitors in this case; the important thing, as it seems to me, [is that] Mr Goldblatt as lead counsel should have access to this information and I’m sure that the litigants in person will realise that it is much better that this material should come in and that Mr Goldblatt should have access to it and be able to deploy it as he thinks appropriate subject to the restrictions, than that it should not be available to the Court at all”.
“13. The object of the strict confidentiality was, as I understand is common ground, to prevent information being disclosed which would be potentially damaging to Lloyd’s and the whole Lloyd’s market including Names party to this litigation.
14. The purpose for which Sir William Jaffray and those who ally themselves to him seek to have this order set aside appears from the following paragraph from a witness statement dated 1st October which he has filed with the court:
“The reserving information will show the calculations used to ensure Equitas was adequately capitalised in 1996, and the discussions which took place with the DTI. The DTI’s initial estimates of capital required for Equitas were substantially reduced to get Equitas approved by the accepting Names in the R&R scheme. We contend the Equitas reserving figures will establish three things: (1) that Lloyd’s and Lloyd’s syndicates had been consistently under-reserving for APH claims year in and year out for approximately 30 years and (2) that with connivance with the DTI and Lloyd’s Equitas was deliberately under-capitalised to bring in the accepting Names and (3) that progressive deterioration of APH claims through to the present day will show Equitas is insolvent and unable to meet its liabilities, thereby proving that claims on old policies written on 1967 and post years of account continue to bleed into the future.”
“18. That then, as it seems to me, is the material material to this application. I consider that the application should be refused for the following reasons.
19. First, it comes too late. Equitas has provided confidential information in reliance on the order and the undertakings given pursuant to it to which no objection was raised at the time. I think it would be quite wrong to accede to an order designed to enable the litigants in person to have access to information that was provided on that basis. I say that, although it is by no means certain that if the order was set aside that result would follow.
20. Second, this was an order made in group litigation. Group litigation proceeds on the basis that legal representatives will have the conduct of the litigation and that litigants in person will play only a limited role relying upon the professionals to protect their interests.
21. Third, the reasons for seeking to obtain this information are, for the most part, not relevant to the litigation. The fact that there was under-reserving is relevant but that, as I understand it, is not in issue. For myself, I do not see how attempting to show that Equitas was under-capitalised or is insolvent could properly further the Names’ case on the issues raised by this litigation.
22. Finally, it does not seem to me that the Names have been prejudiced by this order. The lawyers with conduct of the litigation can make use of the information provided by Equitas, albeit subject to the measures in the order designed to ensure that it remains confidential.
23. I should indicate that Mr Goldblatt has intimated to the Court that he will in due course urge that the constraints imposed upon him by the order were prejudicial, but he did not feel it right to support the attack being made on the order, the order being one to which he agreed, on this application. As I see the matter at present I do not see the basis upon which the Names can say they were prejudiced. So, for those reasons, I would dismiss that part of the application.”
“It follows that it would be inappropriate to pursue, because we take the view that the cost of pursuit in relation to what we have been hearing from [Barlow Lyde & Gilbert] would not be justified within the context of the action”. [Transcript, 10 December 1999, page 106]
Timetable for final submissions
Role of litigants in person
Disregard of submissions of litigants in person
Relationship between Lloyd's, Equitas, LMCS and LUNMA
Conclusions on fair trial
“… the right approach is not to treat consideration of these complaints as if [the court] were hearing an appeal from individual orders of the judge, but rather to stand back and look at the trial process as a whole, and ask whether the Names enjoyed not only the substance but also the appearance of a fair trial, and in doing that, [the court] will be adhering to the spirit of the approach which Article 6, now part of domestic law, requires a court to whom complaints about the fairness of a trial are made."
“Permission to appeal will only be given where –
(a) the court considers that the appeal would have a real prospect of success; or
(b) there is some other compelling reason why the appeal should be heard.”
Having heard very full argument on this question we have reached the clear conclusion that the names cannot satisfy either limb of this test. The application for permission to appeal is therefore refused.
i) There was a representation in the 1981 brochure that there was in place a rigorous system of auditing which involved the making of a reasonable estimate of outstanding liabilities including unknown and unnoted losses. (Paragraph 321)
ii) Subsequent brochures contained essentially the same representation, even though the word ‘rigorous’ no longer appeared. (Paragraph 323)
iii) The 1981 brochure also contained a representation that Lloyd’s believed that such a system was in place. So did subsequent brochures. (Paragraphs 321 and 323)
iv) The globals contained no relevant representations. (Paragraphs 326 to 343)
v) The representations in i) and ii) were, during the relevant period, untrue. (Paragraphs 375 and 376)
vi) The names have however failed to prove that Lloyd’s did not believe the representations to be true or that they either knew that they were or became untrue or were reckless as to whether they were true or untrue. (Section VII)
vii) It follows that the judge was right to determine the threshold fraud issue in favour of Lloyd’s and to hold that Lloyd’s is not liable to the names in the tort of deceit. It further follows that the appeal on the merits, which the names had permission to bring, fails and must be dismissed.