[1997] 265  L.R.L.R. 

QUEEN'S BENCH DIVISION (COMMERCIAL COURT) 

 Apr. 3, 4, 5, 6, 7, 12, 24, 26, 27, May 1, 2, 3, 4, 9, 10, 11, 15, 16, 17, 18, 22, 23, 24, 25, 26, June 6, 7, 8, 9, 12, 13, 14, 15, 19, 20, 21, 22, 26, 27, 28, 29, 30, July 3, 4, 5, 6, 10, 11, 12, 13, 25, 26, 27, 28; Oct. 31, 1995 

HENDERSON v. MERRETT SYNDICATES LTD. AND OTHERS AND ERNST & WHINNEY 

HALLAM-EAMES v. SAME 

HUGHES AND OTHERS v. MERRETT SYNDICATES LTD. AND OTHERS

MERRETT AND ERNST & WHINNEY 

Before Mr. Justice Cresswell 

Reinsurance - Lloyd's litigation - Negligent underwriting - Duty of care - Run-off contracts and reinsurance to close contracts - Claims against managing agents, members' agents and auditors in contract and tort - Auditors alleged contributory negligence - Issues as to limitation - Limitation Act, 1980 s. 32. 

Each of the plaintiffs in these actions was an underwriting member of Lloyd's participating in Syndicates 418/417 for one or more underwriting years between 1980 and 1985 (inclusive). 

Up to Jan. 1, 1986 Merrett Syndicates Ltd. (MSL) was a combined agent - a managing agent of 418/417 and also a members' agent. From Jan. 1, 1986 MSL operated solely as a members' agent and Merrett Underwriting Agency Ltd. (MUAM) became the managing agent of 418/417. At all material times Mr. Stephen Merrett was the active underwriter of 418/417. 

The claims in these actions against Merretts and the members' agents related to the writing of 11 run-off contracts, and the plaintiffs alleged that each of the contracts was negligently written. The plaintiffs also claimed against Ernst & Whinney (E&W) the syndicate auditors to 418/417 alleging that the members' agents, Merretts and E & W negligently closed each of the six years of account 1979-1984 by way of a reinsurance to close (RITC) into the following year. 

MSL and/or MUAM had sole control and management of 418/417 and sole conduct of its underwriting and the defendant members' agents merely performed the duties of members' agents in relation to the participation of their Names on 418/417.

Each of the plaintiffs entered into an underwriting agency agreement in relation to his or her participation 

[1997] 266  L.R.L.R. Henderson v. Merrett Syndicate (Q.B. (Com. Ct.)) 

in 418/417. Prior to the coming into effect of the Agency Agreements Byelaw (No. 1 of 1985) on Jan. 1, 1987 the form of agreement was prescribed by MSL/MUAM. After the coming into effect of the byelaw the agreement was as prescribed by the byelaw. 

     To the extent that the defendant members' agents were members' agents in relation to the participation of any of the plaintiffs in 418/417 that participation was pursuant to a sub-agency agreement which prior to the coming into effect of the byelaw was as prescribed by MSL/MUAM and after the coming into effect of the byelaw was as required by the byelaw. 

     Between June, 1978 and December, 1982 11 run-off contracts were written by 418/417. A run-off contract was a policy of reinsurance by which a syndicate or company was reinsured against outstanding and future liabilities claims and expenses in respect of business written into past underwriting years of account. 

     Between 1982 and 1987, 418/417's 1979 year of account, and each subsequent year of account until its 1984 year of account, was closed by way of a RITC into the following year of account. The effect of the succession of RITCs was that the underwriting members of 418/417's 1980, 1981, 1982, 1983, 1984 and 1985 years of account successively agreed to indemnify the Names on the immediately preceding year of account against all known and unknown liabilities of the reinsured members arising out of the insurance business written or reinsured into the reinsured year of account. 

     As against E&W the plaintiffs contended that as syndicate auditors E&W had the responsibility to ensure that accounting policies were applied consistently from one year of account to the next; that the amount of any item to be included in an indemnity account for a closed year was determined on a prudent basis; that all charges and income relating to a closed year of account were taken into account without regard to the state of receipt or payment and that accounting policies were adopted in respect of items affecting more than one year of account so as to ensure a treatment which was equitable as between the members of the syndicate effected. The plaintiffs contended that there was an implied term of reasonable skill and care and/or a duty of care in tort to like effect and in particular a duty of care and skill in assessing whether the RITC premium was equitable. 

     E&W argued that the Names had no contract with and had no contractual claim against E&W. As to tort E&W contended that the only duty owed by E&W to the Names on the succeeding year (when there was a RITC) was to act with such care and skill as was to be expected of a Lloyd's panel auditor in carrying out the work necessary to give, and in giving the form of opinion or report in fact given. 

     The defendants raised issues of limitation contending that claims by direct Names against combined agents in contract and tort by the pre-1984 joiners in the Hallam-Eames action were barred; that the claims by the indirect Names against managing agents in tort by the pre-1984 and the 1984 joiners in the Hallam-Eames actions (but not the 1984 joiners in the Henderson actions) were statute barred and that claims by indirect Names against members' agents in contract by the pre-1984 and the 1984 joiners in the Hallam-Eames actions but not the 1984 joiners in the Henderson actions) were statute barred. E&W alleged that the claims by the pre-1984 and the 1984 joiners in the Hallam-Eames action (but not the 1984 joiners in the Henderson actions) were statute barred. 

The plaintiffs relied on s. 32 of the Limitation Act 1980 which provided inter alia: 

(1). . .where in the case of any action for which a period of limitation is prescribed by this act, either (a) the action is based on fraud of the defendant; or (b) any fact relevant to the plaintiff's right of action has been deliberately concealed from him by the defendant. . .the period of limitation shall not begin to run until the plaintiff has discovered the fraud, concealment. . .or could with reasonable diligence have discovered it. 

The plaintiffs alleged deliberate concealment.  

E&W alleged that they were entitled to claim that the damages the plaintiffs suffered were as a result partly of their own fault and they sought to rely on s. 1 of the Law Reform (Contributory Negligence) Act, 1945.  

-Held, by Q.B. (Com. Ct.) (Cresswell, J.), that (1) the writing of the run-off contracts (Ballantyne, Verrall, Fireman's Fund, Dolling Baker, Toomey, Gooda Walker, Humm, Burdett and Judd) were negligent; there was a failure to adhere to the standard of skill and care reasonably to be expected of Merretts at the time and with the knowledge that Merretts had or should have had; the contract exposed the plaintiffs to potentially huge liabilities, unlimited in time or amount, which were not capable of reasonable quantifications on the material before the deputy underwriter Mr. Emney; there was insufficient placing or other information available at the time the note was considered to enable a reliable assessment to be made with a reasonable degree of confidence of 417's ultimate net retained potential liability under the contract; and Merrett failed to obtain all the information including in particular INBR (incurred but not reported) loss reserves for both asbestos and non-asbestos claims and the methodology behind the IBNR factors (see p. 324, cols. 1 and 2; p. 326, cols. 1 and 2; p. 332, cols. 1 and 2; p. 333, cols. 1 and 2; p. 334, cols. 1 and 2; p. 336, col. 2); 

 (2) there was no or no adequate system for detecting or monitoring the aggregation in 418/417 of particular risks included in the business ceded under the contract and there was inadequate reinsurance cover against the liabilities assumed (see p. 324, cols. 1 and 2; p. 326, col. 2; p. 332, col. 1; p. 333, cols. 1 and 2; p. 334, col. 1; p. 335, col. 1; p. 336, col. 2); 

 (3) in all the circumstances Merretts decisions to close years 1, 2 and 3 was not a decision that no reasonably well-informed and competent underwriter/managing agents could have made; and the criticisms that could be made of Merretts in years 1, 2 and 3 did not lead to the conclusion that year 1 should have been left open (see p. 330, col. 2; p. 341, cols. 1 and 2; p. 342, col. 1; p. 347, col. 2; p. 348, col. 1); 

 (4) the plaintiffs' claims against E&W in respect of years 1, 2 and 3 also failed; and the plaintiffs had not 

[1997] 267  L.R.L.R. Henderson v. Merrett Syndicate (Q.B. (Com. Ct.))  

established that E&W should have disclaimed an opinion on the grounds of fundamental uncertainty in years 1, 2 and 3 (see p. 331, cols. 1 and 2; p. 342, col. 1; p. 349, col. 1); 

     (5) as to years 4, 5 and 6, given Merretts knowledge of the fundamental uncertainties, Merretts and in particular Mr. Merrett knew that a reinsurance to close figure could not be arrived at with a reasonable degree of accuracy/within a zone of reasonableness and Merretts should accordingly have left the years open (see p. 361, col. 1; p. 381, col. 1; p. 393, col. 2); 

     (6) E&W should have realized that a reinsurance to close figure could not be arrived at within a zone of reasonableness; E&W should have disclaimed an opinion on the grounds of fundamental uncertainty and if they had done so Merretts would have had no alternative but to leave the years open (see p. 361, cols. 1 and 2; p. 381, col. 2; p. 393, col. 2); 

     (7) in all the circumstances a reasonably competent Lloyd's managing agent specializing in the writing of longtail risks would have recognized in years 4, 5 and 6 that a reinsurance to close within a zone of reasonableness could not be ensured or even contemplated without evidence as to the run-off contracts similar in form to that relating to 418/417's book of business; the relevant circumstances included, inter alia, the fact that 11 run-off contracts formed a constituent part of the 1982/1983/1984 accounts, the extent of the exposures (including asbestos and pollution risks) and the amount of net outstandings referable to the run-off account (see p. 366, col. 1; p. 384, col. 2; p. 385, col. 1; p. 395, col. 2); 

     (8) Merretts had inadequate information in relation to the run-off contracts to justify the closure of years 4, 5 and 6; had they obtained the necessary further information this would have served to underline the uncertainties and to confirm that it was not possible to arrive at a RITC within a zone of reasonableness (see p. 366, col. 2; p. 384, col. 1; p. 396, col. 1 ); 

     (9) Merretts carried out no or no adequate margin of error calculations in relation to the reserves in respect of 418/417's own book and the books of  each of the 11 cedents to reflect the fundamental uncertainties as to the future development of (i) asbestos bodily injury claims, (ii) asbestos property damage claims and (iii) pollution claims; had they carried out adequate margin of error calculations these would have served to confirm that it was not possible to arrive at a RITC figure with a reasonable degree of accuracy (see p. 370, col. 1; p. 384, col. 1; p. 397, col. 2; p. 398, col. 1); 

     (10) it was incumbent on E&W to review a sample of the attorneys' reports to test the representations made by Merretts; had E&W reviewed a sample of the attorneys' reports for this purpose in years 4, 5 and 6 this would have served to confirm the extent of the fundamental uncertainties as to the future developments of asbestos bodily injury claims, asbestos, property damage claims and pollution claims (see p. 370, col. 2; p. 384, col. 2; p. 397, col. 1); 

     (11) E & W carried out no or no adequate margin of error tests in relation to the reserves in respect of 418/417's own books and the books of each of the 11 cedents to reflect the fundamental uncertainties as to the future developments of asbestos bodily injury claims, asbestos property damage claims and pollution claims; had they done so these would have served to confirm that E&W should have disclaimed an opinion on the grounds of fundamental uncertainty (see p. 372, col. 1; p. 385, col. 1; p. 398, col. 1);  

 (12) a reasonably competent Lloyd's panel/recognized auditor in years 4, 5 and 6 would have disclaimed an opinion on the grounds of fundamental uncertainty (see p. 372, col. 1; p. 385, col. 1; p. 398, col. 2); 

 (13) if year 4 had been left open the overwhelming probability was that the 1982 account would not have been closed at Dec. 31, 1985 and Dec. 31, 1986; had year 4 been left open this would have revealed to the Names the nature and extent of the fundamental uncertainties to which 418/417 was subject; Merretts would have faced enormous pressure from members' agents representing Names on subsequent years not to close the 1982 year and the probability was that Merretts would have been compelled to accede to such pressure (see p. 385, col. 2; p. 398, col. 2; p. 399, col. 1); 

 (14) as to contributory negligence, having regard to the relevant agency/sub-agency agreements, the audit engagement, the regulatory regime and in particular to the role of the managing agents/underwriter on the one hand and the role of the auditors on the other hand in relation to a RITC it could not be considered that the plaintiffs, on a time construction of s. 1 of the 1945 Act suffered damage as a result partly of their own fault; and having regard to the complex structure of Lloyd's and in particular the duties of the managing agent the underwriters and the syndicate auditors in relation to a RITC E & W's submission that the plaintiffs were contributorily negligent would be rejected; if that was wrong then in all the circumstances it was not just or equitable that the damages should be reduced having regard to the plaintiffs' share in the responsibility for the damage (see p. 402, col. 1);  

 (15) as to limitations, for MSL to state in their letter of Apr. 14, 1985 to all their direct Names that the late notification of the size of the losses resulting from the run-off contracts was due to two main reasons i.e. that virtually every contract had seen an unprecedented deterioration in the later months of 1994 and that the full impact of this deterioration could not be fully assessed until the insurers had completed their own assessment, was to conceal from the plaintiffs Merretts many serious failures in years 1, 2 and 3 and the fact that year 3 accounts were materially inaccurate (see p. 404, col. 2; p. 405, col. 1); 

 (16) there was a deliberate concealment of the position in relation to the run-off contracts by Merretts up to about early April, 1985 (see p. 40, col. 1; p. 406, col. 2); 

 (17) with regard to seven of the run-off contracts i.e. Ballantyne, Verrall, Fireman's Fund, Dolling-Baker, Toomey, Gooda and Humm) the plaintiffs did not discover the concealment until after the commencement of these proceedings, nor could they with reasonable diligence have discovered it earlier; Merretts deliberately concealed from the plaintiffs inter alia the fact that the run-off contracts exposed the plaintiffs to potentially huge liabilities which were not capable of reasonable quantification on the material before Mr. Emney; in case of these seven contracts the limitation period   

[1997] 268  L.R.L.R. Henderson v. Merrett Syndicate (Q.B. (Com. Ct.)) 

was postponed and the defence of limitation failed (see p. 406, col. 2); 

     (18) Merretts deliberately concealed from the plaintiffs the central fact that the years 4 and 5 as at June 4, 1985 and June 2, 1986 exposed the plaintiffs to potentially huge liabilities which were not capable of reasonable quantification on the information available to Merretts at that date; at those dates Merretts and in particular Mr. Merrett knew the central fact that a RITC figure could not be arrived at with a reasonable degree of accuracy; and the information as to the run-off contracts was wholly inadequate; the plaintiffs did not discover the central fact until at the earliest May 15, 1992 nor could they with reasonable diligence have discovered it earlier; the relevant limitation period was postponed and Merretts' defence of limitation failed (see p. 411, cols. 1 and 2); 

     (19) in the particular circumstances of the case the plaintiffs could not rely on s. 32(1) of the 1980 Act as against the members' agents; the members' agents played no part in managing or controlling 418/417 or in the conduct of the underwriting on behalf of the plaintiffs; and the plaintiffs' submission that Merretts could only have committed the acts of deliberate concealment, so far as indirect Names were concerned, qua agent of the defendant members' agents would be rejected; s. 32 did not serve to postpone the limitation period as against the members' agents (see p. 413, cols. 1 and 2); 

     (20) as to the claims against Mr. Merrett personally, although the probability was that Mr. Merrett knew more about the run-off contracts than he accepted in his statement or in his evidence there was no justification in making a finding against Mr. Merrett personally in respect of the writing of the run-off contracts; it was not possible to determine Mr. Merrett's precise involvement in the writing of each contract and there had not been any or any adequate expert assistance as to the practice at Lloyd's at the material time as to the extent to which the active underwriter was subject to a duty to supervise his deputy (see p. 414, col. 1); 

     (21) as to the years 4, 5 and 6 RITCs, Mr. Merrett as active underwriter owed a duty of care in tort to the reinsuring Names (whether direct or indirect) to exercise reasonable care and skill in the exercise of his functions as active underwriter; Mr. Merrett was in breach of that duty of care; and the relevant limitation period was postponed in respect of years 4 and 5 and Mr. Merrett's defence of limitation failed (see p. 414, col. 2). 

     The following cases were referred to in the judgment: 

AWA Ltd. v. Daniels trading as Deloitte Haskins & Sells & Others, (1992) 7 A.C.S.R. 579; (1992) 10 A.C.L.C. 1643; 

Aitken (P.J.) v. Stewart Wrightson Members Agency Ltd., [1995] 2 Lloyd's Rep. 618; 
Applegate v. Moss, [1971] 1 Q.B. 406; 
Bolam v. Friern Hospital Management Committee, [1957] 1 W.L.R. 582; 
Caudle (B.F.) v. Sharp, [1995] L.R.L.R. 80; 
Deeny v. Gooda Walker Ltd., [1996] L.R.L.R. 183; 
De Meza v. Apple, [1974] 1 Lloyd's Rep. 508; 
Eckersley v. Binnie, (C.A.) [1988] 18 Con.L.R. 1; 
Fletcher v. National Mutual Life Nominees Ltd., [1990] 1 N.Z.L.R. 97; 
Hedley Byrne & Co. Ltd. v. Heller & Partners Ltd., (H.L.) [1963] 1 Lloyd's Rep. 485; 
Henderson v. Merrett Syndicates Ltd. (Sub nom The Lloyd's Litigation The Merrett Gooda Walker and Feltrim cases), (H.L.) [1994] 2 Lloyd's Rep. 468; [1995] 2 A.C. 145; (C.A.) [1994] 2 Lloyd's Rep. 468; 
Kane (H.E.) Agencies Ltd. v. Coopers & Lybrand, (1983) 23 C.C.L.T. 233; 
Maynard v. West Midland Regional Health Authority, (H.L.) [1984] 1 W.L.R. 634; 
Moonacre, The [1992] 2 Lloyd's Rep. 501;  
Nelson Guarantee v. Hodgson, [1958] N.Z.L.R. 609; 
Pacific Acceptance Corporation v. Forsythe, (1970) 92 W.N. (N.S.W.) 29; 
Revelstoke Credit Union v. Miller, (1984) 28 C.C.L.T. 17; 
Saif Ali v. Sydney Mitchell & Co., (H.L.) [1980] A.C. 198; 
Sheldon v. Outhwaite, (H.L.) [1995] 2 Lloyd's Rep. 197; [1995] 2 W.L.R. 570; 
Simonius Vischer & Co. v. Holt & Thompson, [1979] 2 N.S.W.L.R. 322; 
Superhulls Cover Case, [1990] 2 Lloyd's Rep. 431;  
Walker v. Hungerfords, (1987) 44 S.A.S.R. 532; 
West Coast Finance Ltd. v. Gunderson Stokes
Walton & Co., (1975) 56 D.L.R. 461; 44 D.L.R. (3d.) 232; 
Wilsher v. Essex A.H.A., (C.A.) [1987] 1 Q.B. 730. 
 
This was an action by the plaintiff Names, Mr. Ian McIntosh Henderson, Mr. William Hallam-Eames and Ms Elise Heckman Hughes and other Names listed in the schedule to the writ of summons claiming damages against the defendants Merrett Syndicates Ltd. and other agencies listed in the schedule to the writ of summons, Ernst & Whinney and Mr. Stephen Roy Merrett in respect of 11 run-off contracts which the plaintiffs alleged had been negligently written and in respect of six years'  

[1997] 269  L.R.L.R. Henderson v. Merrett Syndicate (Q.B. (Com. Ct.))    Cresswell, J. 

of account 1979-1984 which the plaintiffs alleged had been negligently closed by way of a reinsurance to close into the following year. 

     Mr. A. Boswood, Q.C., Mr. B. Doctor, Mr. A. Wales and Mr. T. Macey-Dare (instructed by Messrs. More Fisher Brown) for the Names; Mr. A. Temple, Q.C., Mr. J. Rowland and Mr. A. Christie (instructed by Messrs. Reynolds Porter Chamberlain) for Merretts; Mr. Roger Toulson, Q.C. and Mr. C. Edelman, Q.C. (instructed by Messrs. Oswald Hickson Collier) for the Members' agents; Mr. C. Clarke, Q.C., Mr. M. Howard and Mr. H. Davies (instructed by Messrs. McKenna & Co.) for the auditors Ernst & Whinney. 

     The further facts are stated in the judgment of Mr. Justice Cresswell. 

     Judgment was reserved. 

Tuesday, Oct 31, 1995 

     JUDGMENT 

     Mr. Justice CRESSWELL:

     CONTENTS 

1. THE PARTIES AND THE CLAIMS 
2. THE SCHEME OF THE JUDGMENT 
3. THE ROLE OF MEMBERS' AGENTS AND MANAGING AGENTS AT LLOYD'S 
4. THE RUN-OFF CONTRACTS 
5. THE CLOSING OF THE YEARS OF ACCOUNT 
6. THE CAUSES OF ACTION 
7. THE SPEECHES OF THE HOUSE OF LORDS IN HENDERSON V. MERRETT SYNDICATES LTD 
8. THE 1985 NAMES 
9. DIRECT NAMES/COMBINED AGENTS: CONTRACT AND TORT 
10. INDIRECT NAMES/MANAGING AGENTS: TORT 
11. INDIRECT NAMES/MEMBERS AGENTS: CONTRACT 
12. INDIRECT NAMES/MEMBERS AGENTS: TORT
13. E&W'S DUTIES 
14. STANDARD OF CARE 
15. LIMITATION 
16. THE WITNESSES 
17. THE REGULATORY REGIME FOR THE YEARS ENDED 31.12.80-1986 
18. THE NEVILLE RUSSELL LETTER AND THE RESPONSE 
19. RITC - SOME GENERAL PRINCIPLES 
20. IDENTIFICATION OF 418/417'S EXPOSURE IN RESPECT OF DEFENDANTS IN THE ASBESTOSIS LITIGATION 
21. NOTIFICATION OF ASBESTOS-RELATED LOSSES 
22. PERCEPTION AND THE MATERIALS AVAILABLE TO MERRETTS AND E&W 
23. THE WRITING OF THE RUN-OFF CONTRACTS 
24. THE WRITING OF THE PROVINCIAL RUN-OFF CONTRACT 
25. THE WRITING OF THE UNIVERSAL RUN-OFF CONTRACT 
26. THE WRITING OF THE BALLANTYNE RUN-OFF CONTRACT 
27. THE WRITING OF THE VERRALL RUN-OFF CONTRACT 
28. THE WRITING OF THE FIREMAN'S FUND RUN-OFF CONTRACT 
29. YEAR 1: THE CLOSURE OF 1979 INTO 1980 AS AT 31.12.81 (MERRETTS' AND E&W'S REPORTS DATED 4.5.82) 
30. THE WRITING OF THE DOLLING-BAKER, TOOMEY, GOODA AND HUMM RUN-OFF
CONTRACTS 
31. THE WRITING OF THE BURDETT RUN-OFF CONTRACT 
32. THE WRITING OF THE JUDD RUN-OFF CONTRACT 
33. YEAR 2: THE CLOSURE OF 1980 INTO 1981 AS AT 31.12.82 (MERRETTS' AND E&W'S REPORTS DATED 4.5.83) 
34. YEAR 3: THE CLOSURE OF 1981 INTO 1982 AS AT 31.12.83 (MERRETTS' AND E&W'S REPORTS DATED 15.5.84) 
35. YEAR 4: THE CLOSURE OF 1982 INTO 1983 AS AT 31.12.84 (MERRETTS' AND E&W'S REPORTS DATED 4.6.85) 
36. YEAR 5: THE CLOSURE OF 1983 INTO 1984 AS AT 31.12.85 (MERRETS' AND E&W'S REPORTS DATED 2.6.86) 
37. YEAR 6: THE CLOSURE OF 1984 INTO 1985 AS AT 31.12.86 (MERRETTS' AND E&W'S REPORTS DATED 21.5.87) 
38. CONTRIBUTORY NEGLIGENCE  
39. LIMITATION 
40. THE CLAIMS AGAINST MR. MERRETT PERSONALLY 
41. THE RESULT 
APPENDICES 
1. CHRONOLOGY 

[1997] 270  L.R.L.R. Henderson v. Merrett Syndicate (Q.B. (Com. Ct.))    Cresswell, J. 

2. AGREED LIST OF UNITED STATES AUTHORITIES 
3. SPECIMEN FORMS OF AGREEMENT 

1. THE PARTIES AND THE CLAIMS 

     Each of the plaintiffs in these actions was an underwriting member of the Society of Lloyd's ("Lloyd's"), participating in Lloyd's Syndicate 418/417 ("418/417") for one or more underwriting years between 1980 and 1985 (inclusive), or sues as an administrator or executor of a deceased name who so participated in 418/417. The number of plaintiffs in the actions and the years of account in which each of them participated in 418/417, are broadly as set out in Table 1 below (at p. 415 post) which was helpfully prepared by Merretts' solicitors.

     Up to Jan. 1, 1986, Merrett Syndicates Ltd. ("MSL") was a combined agent - it was the managing agent of 418/417 and was also a members' agent. From Jan. 1, 1986, Merrett Underwriting Agency Management Ltd. ("MUAM") became the managing agent of 418/417, and MSL operated solely as a members' agent. At all material times the active underwriter of 418/417 was Mr. Stephen Merrett ("Mr. Merrett"). Until about June, 1985 Mr. John Emney ("Mr. Emney") acted as deputy underwriter and excess of loss underwriter for the syndicate. Mr. Emney was dismissed by Merretts in 1985. (Throughout the judgment the term "Merretts" is used to refer to one or more of MSL, MUAM, Mr. Merrett or Mr. Emney and should be read as the context requires). 

     The defendant underwriting agencies who acted as the members' agents for the plaintiffs during the period 1979-1987 and/or who have assumed the liabilities of members' agents who so acted, are identified in the schedules to the writs in the actions. 

     The defendants Ernst & Whinney ("E&W") were a firm of chartered accountants who were engaged to act, and acted, as syndicate auditors to 418/417. 

     The claims in these actions against Merretts and the members' agents relate to the writing of 11 run-off contracts listed in Table 2 below (at p. 416 post). The claims against Merretts, the members' agents and E&W relate to six reinsurances to close ("RITCs") listed in Table 3 below (at p. 417 post). The relevant plaintiffs contend that each of the 11 run-off contracts was negligently written and that each of the six years of account 1979-1984 was negligently closed by way of a RITC into the following year. The 1985 year of account was left open.  The defendants deny liability on a number of grounds. The limitation issues that arise are summarized in Table 4 below (at p. 418 post). 

 I was told when this case was opened:  

. . .the amounts involved are frightening. The declared loss in the 1993 syndicate accounts for the 1985 open year is £163,739,000. Chatset currently estimate a further deterioration of 400% of stamp. If that were correct, the total loss for the 1985 year would be £723,199,000, a loss of between £50,000 and £55,000 for each £10,000 of line on the syndicate.  

2. THE SCHEME OF THE JUDGMENT 

The scheme of the judgment is as follows. 

Sections 1-22 deal with introductory matters and sections 23-37 address the 11 run-off contracts and the six RITCs. 

Section 3 considers the manner in which underwriting business at Lloyd's was carried on at the
material times, the role of members' agents and managing agents and the contractual structure. 

Section 4 identifies the 11 run-off contracts and section 5 of the 6 RITCs the subject of claims in these actions. 

Section 6 refers to the causes of action relied on.  

Section 7 refers to the decision of the House of Lords in Henderson v. Merrett Syndicates Ltd. 
 
Sections 8 to 13 consider the position of and the duties of various parties as follows: 

8 - The 1985 Names. 

9 - Direct Names/combined agents: contract and tort. 

10 - Indirect Names/managing agents: tort. 

11 - Indirect Names/members' agents: contract. 

12 - Indirect Names/members' agents: tort. 

13 - E&W's duties. 

Section 14 deals with the standard of care. 

Section 15 summarizes the limitation issues. 

Section 16 considers the evidence of the witnesses.

Section 17 considers the regulatory regime for the years ended Dec. 31, 1980-1986. 

Section 18 sets out the Neville Russell letter and the response thereto. 

Section 19 considers some general principles as to RITC. 

Section 20 considers the question of the identification of 418/417's exposure in respect of defendants in the asbestosis litigation in the United States and section 21 considers notification of asbestos-related losses. 

[1997] 271  L.R.L.R. Henderson v. Merrett Syndicate (Q.B. (Com. Ct.))    Cresswell, J. 

     Section 22 considers perception of asbestos and pollution claims and the materials available to Merretts and E&W. 

     Section 23 contains some general comments on the writing of the run-off contracts. 

     From this point the judgment follows a strict chronological sequence. The 11 run-off contracts and the six RITCs are considered in turn in the chronological order in which the 11 run-off contracts were written and the six years were closed. Thus section 24 (Provincial), 25 (Universal), 26 (Ballantyne), 27 (Verrall) and 28 (Fireman's Fund) consider the writing of the first 5 run-off contracts. 

     Section 29 considers the year 1 RITC. 

     Sections 30 (Dolling-Baker, Toomey, Gooda and Humm), 31 (Burdett) and 32 (Judd) consider the writing of the remaining 6 run-off contracts. 

     Sections 33 (year 2 RITC), 34 (year 3 RITC), 35 (year 4 RITC), 36 (year 5 RITC) and 37 (year 6 RITC) consider the remaining 5 RITCs. 

     Sections 38 considers contributory negligence and 39 limitation. Section 40 considers the personal liability of Mr. Merrett. 

     Section 41 summarizes the result. 

3. THE ROLE OF MEMBERS' AGENTS AND MANAGING AGENTS AT LLOYD'S 

     This section of the judgment is drawn from an agreed statement of facts. 

General role 

     At all material times, the manner in which underwriting business at Lloyd's was carried on was as follows. 

     There were two types of underwriting agents, namely members' agents and managing agents. Combined agents perform both the role of members' agents and the role of managing agents. 

     The main duties of managing agents were to manage the syndicate or syndicates of which they were managing agents and to conduct the underwriting on behalf of those Names who were members of the syndicates. The management of the syndicate and the conduct of the underwriting on behalf of the Names was controlled and carried on exclusively by the managing agents of the syndicate. The managing agents employed the "active underwriter" being the person with principal authority to accept risks on behalf of the syndicate or syndicates managed by the managing agents of which he or she was designated as the active underwriter. 

     The main duties of members' agents were to assist candidates for membership of Lloyd's in the making of their application for membership, to discuss and agree with each of the Names for whom they acted the syndicates on which the Name should be placed and the allocation of the Name's premium limit as between syndicates, to seek to arrange the participation of their Names in syndicates as so discussed and agreed and generally to look after the interests of their Names and act as a channel between managing agents and their Names. Save when acting as managing agents, members' agents played no part in managing or controlling syndicates or in the conduct of the underwriting on behalf of names.  

At all material times underwriting agents were only entitled to carry on business as such at Lloyd's if they were approved by Lloyd's to act as underwriting agents at Lloyd's and in order to be so approved, each underwriting agent would be required to undertake, inter alia, to conform to any requirements which might from time to time be introduced by Lloyd's. Such requirements were set out, inter alia, in the Lloyd's Manual for Underwriting Agents which provided as follows:  

Section A. 

CONDUCT OF UNDERWRITING AGENTS. 

1.GENERAL 

1.The Corporation of Lloyd's requires Underwriting Members to conduct insurance business at Lloyd's through syndicates and through the medium of Underwriting Agents approved by the Committee of Lloyd's. The names of approved Agents are contained in a list of approved Lloyd's Underwriting Agents kept by the Committee.. . . 

4.There are two types of Agents - a Members' Agent who acts in all respects for the Name except the managing of the syndicate, and a Managing Agent (who may also be a Members' Agent) who manages the syndicate and conducts the underwriting. A Managing Agent writing for his own Names and for Names provided under a Sub-Agency Agreement is commonly said to be writing for "a Group". A Members' Agent who provides Names in this way delegates the underwriting duties for the Names to the Managing Agent, who for this purpose is a Sub-Agent.. . . 
 
3.DUTIES OF AN AGENT. 

1.The main duties of an Agent may be summarised as follows: 

(i) Management of the Syndicate 

(a) to appoint, control and manage the underwriting staff; 

(b) to endeavour to ensure that the amount of business written for the syndicate is within the permitted Premium Limits of its Members;  

[1997] 272  L.R.L.R. Henderson v. Merrett Syndicate (Q.B. (Com. Ct.))    Cresswell, J. 

(c) to manage the Premiums Trust Fund; 

(d) to effect the Reinsurance to Close. (With discretion to keep an account open); 

(e) to comply with the Audit and other regulations; 

(f) to accept responsibility for the underwriting and the records. 

(ii) Service to Names 

(a) to advise and discuss with prospective Names the prospects and past results (shown in the form approved by the Committee of Lloyd's) of various syndicates in which he can place Names; 

(b) to co-operate with the sponsor in submitting applications for Membership to the Committee; 

(c) to agree with the Names the allocation of Premium Limits as between syndicates; 

(d) to keep Names informed of the progress of the underwriting, and to arrange to provide annual audited accounts to them; 

(e) to manage the Special Reserve Fund and Personal Reserves and, if the Name and the Agent so desire, to assist in the investment of these Funds and the Lloyd's Deposit; 

(f) to arrange reserves for Names; 

(g) to handle requests by Names for advice on taxation matters; 

(h) to take all reasonable steps to ensure that Names comply with their undertakings to the Committee; 

(i) to pass on to the names any relevant information or instructions contained in correspondence from the Committee of Lloyd's.. . . 

2. A Managing Agent performs all the duties in A3.1(i) and A3.1(ii) for his direct Names, and he may perform the underwriting duties in A3.1(i) for Names provided through a Members' Agent.. . . 

3. A Members' Agent will be approved by the Committee only if he is prepared to perform the duties listed in A3.1(ii) which fall to an Agent who is not necessarily managing a syndicate but is looking after the interests of Names and acting as a channel between the Managing Agent and the Name.. . . 

Further by Lloyd's Byelaw No. 4 of 1984 "Underwriting Agents" made on May 14, 1984, provision was made for a system of registration specifying  those underwriting agents at Lloyd's permitted to act solely as members' agents, those underwriting agents at Lloyd's permitted to act solely as managing agents and those underwriting agents at Lloyd's permitted to act as both members' agents and managing agents. The byelaw defined a members' agent as being an underwriting agent which acted on behalf of a Name but did not perform any of the functions of a managing agent and defined a managing agent as being an underwriting agent which performed for the name one or more of the following functions: (i) underwriting contracts of insurance at Lloyd's; (ii) reinsuring such contracts in whole or in part; (iii) paying claims on such contracts. 

 Accounting functions 

  At all material times the respective roles of members' agents and managing agents with regard
 to syndicate accounts were as follows. 

  The managing agent was responsible for keeping accounting records and for the production of annual audited accounts for the syndicates which it managed and the members' agent played no part in the preparation of such accounts or any of the work required therefor. 

  On the basis of the annual audited syndicate accounts and solvency reports provided by managing agents, auditors appointed by the members' agents prepared and submitted solvency reports to Lloyd's in respect of each of their Names. 

  The respective functions of members' agents and managing agents were set out, inter alia, in the
 Lloyd's Manual for Underwriting Agents which provided, inter alia, as follows: 

 10. ACCOUNTS. 

 1. Duties of Managing Agent with regard to the
 Accounts. 

 (i) The basic accounting procedures to be carried
 out are: 

 (a) the processing of all advices received from Lloyd's Policy Signing Office and other sources
 relevant to the underwriting affairs of the Syndicates, into: 

 (i) accounting media - Books of Account, Control Ledgers. 

 (ii) statistical data. 

 (b) the receipt of premiums and the payment of claims 

 (c) the recording of outstanding claims 

 (d) the assessment of the reinsurance premium to close an account 

 (e) the preparation of final and audited underwriting figures at the 31st 

 [1997] 273  L.R.L.R. Henderson v. Merrett Syndicate (Q.B. (Com. Ct.)) Cresswell, J. 

 December of each year for the closing and the then
 open underwriting years of account 

 (f) compliance with the audit requirements of the Committee of Lloyd's and the filing by the Syndicate Auditors of the necessary certificates to the Committee of Lloyd's. 

 2. Responsibilities of the "Group" Managing Agent to the Members' Agent.. . . 

 (iii) Since the Members' Agent has delegated full powers of underwriting to the Managing Agent, he is entirely dependent upon the Managing Agent for the essential accounting and statistical data to enable him to produce the Accounts to his name. 

 The respective functions of members' agents and managing agents were further set out in byelaws made under the Lloyd's Act, 1982. 

 (1) The 1983 Annual Reports of Syndicate's Byelaw (No. 2 of 1984) 

     2. Every Managing Agent which managed a Syndicate at 31st December 1983 shall produce in
 respect of such Syndicate - 

 (a) an annual report signed by at least one director or partner as the case may be, of the underwriting agent and the active underwriter of the Syndicate prepared in accordance with paragraph 3 below; 

 (b) a report by the active underwriter and the Managing Agent (or separate reports by each of them) on the business transactions for the account of the underwriting members who underwrote through that Syndicate during any relevant year of account and other matters of specific interest including comments on the progress of open years. . . 

     3. (a) Subject to sub-paragraph (c) below, an annual report shall be prepared in respect of any relevant year of account for each underwriting member who underwrote any insurance business through the Syndicate during any relevant year of account. 

     (b) The annual report shall be made up to 31st December 1983 and shall comprise: 

 (i) In respect of each year of account being closed at 31st December 1983, an underwriting account showing the net result arising therefrom and how that net result has been arrived at; 

 (ii) In respect of each open year of account, an underwriting account showing the balance
 carried forward at 31st December 1983 and how that balance has been arrived at; 

 (iii) A balance sheet; 

 (iv) Such notes as are necessary for a proper understanding of the underwriting accounts and balance sheet specified in (i) (ii) and (iii) above; and 

 (v) Any additional commentary which the Managing Agent considers appropriate. 

  (c) The annual report may, instead of being prepared separately for each underwriting member who underwrote through the Syndicate, show the combined figures for all or some of such underwriting members;. . . 

  5. (a) The Managing Agent shall procure that all annual reports. . .prepared under paragraphs 3. .
 .above shall be audited and reported upon by an accountant approved for the purposes of Section 83(4) of the Insurance Companies Act 1982.. . . 

  6. Not later than 15th June 1984 the Managing Agent shall - 

 (a) Send to each underwriting member who underwrote through the Syndicate during any year of account to which the annual report relates and for whom the Managing Agent acts as Members' Agent a copy of the documents prepared under paragraph 2 above in respect of that underwriting member; 

 (b) Send to every other underwriting agent who acts as Members' Agent for any underwriting member who underwrote through the Syndicate during any relevant year of account - 

 (i) Two copies of the documents prepared under paragraphs 2(a) and 2(b) for each such underwriting member for whom the Members' Agent so acts . . . 

 A copy of the audit report shall be attached to every copy of an annual report sent in pursuance of sub-paragraph (a), (b). . . 

  7. (a) Subject to sub-paragraph (b) below, every Members' Agent which receives copies of any
 documents from a Managing Agent pursuant to paragraph 6(b) above shall within one month
 thereafter send one copy of those documents to the underwriting member for whom they have been prepared. 

  (b) A Members' Agent which is entitled to receive copies of documents pursuant to paragraph 6(b) above in respect of two or more Syndicates through which an underwriting member underwrites may comply with this paragraph by sending one copy of all such documents to 

 [1997] 274  L.R.L.R. Henderson v. Merrett Syndicate (Q.B. (Com. Ct.))    Cresswell, J. 

 that underwriting member within one month after the Members' Agent receives the last of such copies. 

 (2) The Syndicate Accounting Byelaw (No. 7 of 1984) 

     2. Accounting Records 

 (a) Every Managing Agent shall cause accounting records to be kept in accordance with this paragraph in respect of each Syndicate for the time being managed by it. 

 (b) The accounting records shall be sufficient to show and explain the transactions entered into on behalf of the members of the Syndicate. 

 (c) The accounting records shall be such as to - 

 (i) be capable of disclosing with reasonable accuracy at any time the financial position at that
 time of each member of the Syndicate; and 

 (ii) enable the Managing Agent to ensure that every annual report, personal account, Managing Agent's report and other documents prepared by it complies with all applicable requirements of the Lloyd's Syndicate accounting rules. 

     4. Duties of Managing Agents with respect to Reports and Accounts 

 (a) Every Managing Agent shall in each year, in respect of each Syndicate managed by it at 31st
 December of the preceding year - 

 (i) prepare an annual report or reports complying with paragraphs 5 and 7 below. . . 

 (iii) prepare a Managing Agent's report complying with paragraph 10(a) below; and 

 (iv) procure that the active underwriter of the Syndicate prepare an underwriter's report complying with paragraph 10(b) below. . . 

 (c) Every Managing Agent shall procure that every annual report. . .prepared under the Lloyd's
 Syndicate Accounting Rules shall be audited and reported upon by the Syndicate Auditor of the
 Syndicate to which it relates. . . 

 5. Annual Reports 

 (a) Subject to sub-paragraph (c) below, an annual report shall be prepared for each underwriting member who was a member of the Syndicate during any year of account other than a year of account which has beenclosed before 1st January of the year which ended on the reference date. 

(b) The annual report shall comprise - 

(i) an underwriting account in respect of each year of account closed at the reference date or at any time during the year ended on the reference date; 

(ii) an underwriting account in respect of each year of account left open at the reference date; 

(iii) a balance sheet as at the reference date;. . . 

(v) such other information as is necessary for a proper understanding of the annual report; 

and may include any such further information (not being misleading or inconsistent with the remainder of the annual report) as the Managing Agent may consider appropriate.. . . 

 7. Form and Content of Annual Reports and Personal Accounts 

(a) (i) Every underwriting account prepared in respect of a closed year of account under paragraph 5(b)(i) above shall give a true and fair view of the profit or loss for that year of account of the underwriting member or members for whom it is prepared. . . 

(b) Sub-paragraph (a) overrides all other requirements of the Lloyd's Syndicate Accounting Rules as to the matters to be included in an annual report or a personal account; and accordingly - 

(i) If an underwriting account. . .drawn up in accordance with those requirements would not
provide sufficient information to comply with sub-paragraph (a) above, any necessary additional
information must be provided in that underwriting account. . .or in a note thereto. . . 

 13. Distribution of Annual Reports. . . 

(a) Every Managing Agent shall send copies of the documents required under paragraph 4 above to each underwriting member to whom they relate, or to his Members' Agent, in accordance with sub-paragraphs (b) and (c) below. 

(b) Two copies of each annual report and of each personal account prepared in respect of an underwriting member who is a member of a Syndicate through the agency of a Members' Agent. . . shall be sent to that

 [1997] 275  L.R.L.R. Henderson v. Merrett Syndicate (Q.B. (Com. Ct.))    Cresswell, J. 

 Members' Agent not later than the prescribed date. 

 (c) A copy of each annual report. . .prepared in respect of any other underwriting member shall be sent to the member not later than the prescribed date. 

 (d) Every Members' Agent which receives copies of any document under sub-paragraph (b) above shall not later than the prescribed date send one copy of the document to the underwriting member for whom it has been prepared.. . . 

 The role of the defendant members' agents 

     MSL and/or MUAM had sole control and management of 418/417 and sole conduct of its underwriting and the defendant members' agents did not take any part in the management or control of 418/417 or the conduct of its underwriting and were not authorized by Lloyd's so to do but merely were authorized to perform and performed the duties of members' agents in relation to the participation of their Names on 418/417. 

 The contractual structure 

     Lord Goff in Henderson v. Merrett Syndicates Ltd., [1994] 2 Lloyd's Rep. 468; [1995] 2 A.C. 145
 summarized the contractual structure as follows: 

     Each Name entered into one or more underwriting agency agreements with an underwriting agent, which was either a members' agent or a combined agent. Each underwriting agency agreement governed the relationship between the Name and the members' agent, or between the Name and the combined agent in so far as it acted as a members' agent. If however the Name became a member of a syndicate which was managed by the combined agent, the agreement also governed the relationship between the Name and the combined agent acting in its capacity of managing agent. In such a case the Name was known as a direct Name. If however the Name became a member of a syndicate which was managed by some other managing agent, the Name's underwriting agent (whether or not it was a combined agent) entered into a sub-agency agreement under which it appointed the managing agent its sub-agent to act as such in relation to the Name. In such a case the Name was known as an indirect Name. 

     As regards the indirect Names the position was as follows. Each of the plaintiffs entered into an underwriting agency agreement in relation to his or her participation in 418/417. Prior to the coming into effect of the Agency Agreements Byelaw (No. 1 of 1985) on Jan. 1, 1987, the form of underwriting agency agreement between the defendant members' agents and those of the plaintiffs for whom they  acted as members' agents in relation to participation in 418/417 was prescribed by MSL and/or MUAM. A specimen agreement is at Appendix 3 to this judgment. After the coming into effect of the byelaw, the form of underwriting agency agreement between the defendant members' agents and those of the plaintiffs for whom they acted as members' agents in relation to participation 418/417 was as required by the byelaw. 

  To the extent that the defendant members' agents were the members' agents in relation to the participation of any of the plaintiffs in 418/417, that participation was pursuant to a sub-agency agreement made between the plaintiffs' respective members' agent and MSL and/or MUAM. Prior to the coming into effect of the byelaw, each such sub-agency agreement was in the form prescribed by MSL and/or MUAM. A specimen agreement is at Appendix 3. After the coming into effect of the byelaw, each such sub-agency agreement was in the form required by the byelaw. 

  By the form of underwriting agency agreement prescribed by MSL and/or MUAM, it was provided, inter alia, as follows: 

  1. The Agent shall act as the Underwriting Agent for the Name for the purposes of underwriting at Lloyd's through the sub-agency of Merrett Syndicates Limited (hereinafter called "the Sub-Agent") for the account of the Name policies and contracts of insurance reinsurance and guarantee relating to all classes of insurance business which with the sanction of the Committee of Lloyd's may be transacted at Lloyd's by the Syndicate.. . . 

  4. The Agent shall have full power and authority to appoint and employ the Sub-Agent to carry on and manage the underwriting and to delegate to or confer upon the Sub-Agent all or any of the powers authorities discretions and rights given to the Agent by this Agreement including the powers contained in this Clause.. . . 

  6. (a) The Agent shall have sole control and management of the underwriting and absolute
 discretion as to the acceptance of risks and settlement of claims. . . 

  7. The following provisions shall apply concerning the Accounts of the Underwriting: 

 (a) The Agent shall keep such usual and proper underwriting books accounts and memoranda as are kept by Underwriting Agents at Lloyd's and the Agent shall from time to time arrange for the accounts to be audited on the Name's behalf and furnish to the Committee of Lloyd's the figures

 [1997] 276  L.R.L.R. Henderson v. Merrett Syndicate (Q.B. (Com. Ct.))    Cresswell, J. 

 and Audit Certificate required by the Committee of Lloyd's according to their regulations regarding annual audit. The Agent shall send to the Name a copy of the accounts as soon as reasonably practicable after the end of each calendar year.. . . 

 (e) The Syndicate Account of any calendar year shall not be closed before the expiration of the two calendar years next following the calendar year in question and in order to close the Syndicate Account of any year the Agent may: 

 (i) reinsure all or any outstanding liabilities in such manner and by debiting such Account with such sum as the Agent shall in the absolute discretion of the Agent think fit as a premium for reinsurance and crediting the reinsurance premium to the Syndicate Account of the next succeeding year or 

 (ii) reinsure all or any outstanding liabilities of such account into the Account of any other year then remaining open or in any other manner which the Agent thinks fit or 

 (iii) allow the whole or part of a Syndicate Account of any year to remain open until its outstanding liabilities shall have run off. . . 

 By the form of sub-agency agreement prescribed by MSL and/or MUAM it was provided, inter alia, as follows: 

 . . .The Agent delegates to the Sub-Agent the exercise of all such powers authorities discretions and rights conferred upon the Agent by the Underwriting Agency Agreement as it may be in any way necessary for the Sub-Agent to have to enable the Sub-Agent or any underwriter or agent appointed by the Sub-Agent to carry on the underwriting for the Name and to close the accounts of the Names.. . . 

 6. Subject to the provisions of Clause 7 hereof, the underwriting shall be conducted and the accounts thereof shall be kept and made up and the profits ascertained in such a manner as the Sub-Agent may for the time being think fit and the Sub-Agent shall have the sole control and management of the Underwriting and sole discretion as to the acceptance of risks and the compromise or settlement of claims. 

 7. The Sub-Agent shall conduct and manage the Underwriting in accordance with and observe the
 provisions of the Underwriting Agency Agreement. . . 

 13. (a) The Sub-Agent shall keep such books of account as are usual and proper for Underwriting 
Agents at Lloyd's. . .Such books shall be the propertyof the Sub-Agent.. . . 

 (c) As soon as practicable after the end of each year the Sub-Agent shall provide the Agent with an audited statement of account applicable to the accounts of the Names in respect of each year's
underwriting and the Sub-Agent shall be responsible for furnishing to the Committee of Lloyd's all the figures and Audit Certificates required in respect of each of the Names by the Committee of Lloyd's according to their regulations regarding annual Audits. 

The form of underwriting agency agreement required by the byelaw, provided, inter alia, as follows:  

 2. . . .(a) The Agent shall act as the underwriting agent for the Name for the purpose of underwriting at Lloyd's for the account of the Name such classes and descriptions of insurance business,. . . as may be transacted by the Syndicate. . . 

4. . . .(b) . . .the Agent shall have the following customary and/or special powers in connection with
the conduct. . .of the underwriting business:. . . 

(g) Delegation of Agent's powers:  

Power, subject to any requirements of the Council, to appoint (or) employ any person, firm or body corporate to carry on or manage the underwriting business or any part thereof, and to delegate or to confer upon any person, firm or body corporate all or any of the powers, authorities and discretions given to the Agent by the Agreement including this power of delegation and the other powers contained in this paragraph.. . . 

5. Control of underwriting business: 

(a) The Agent shall have the sole control and management of the underwriting business. . . 

6. Provisions relating to accounts and accounting records: 

 The following provisions shall apply concerning the accounts and accounting records of the
underwriting business: 

(a) The Agent shall comply with, or procure compliance with, the byelaws, regulations, or requirements of the Council from time to time dealing with accounting to underwriting members of Lloyd's... . 

The form of sub-agency agreement required by the byelaw provided, inter alia, as follows: 

 2. The Sub-Agent shall act as sub-agent for the Agent for the purpose of conducting in the names
and for the account of each of the Agent's Names that part of the underwriting business as 

 [1997] 277  L.R.L.R. Henderson v. Merrett Syndicate (Q.B. (Com. Ct.))    Cresswell, J. 

 defined in Clause 2(a) of the Agency Agreement which is to be transacted by such Name as a member of the Syndicate. . . 

     5. (a) The Agent delegates to the Sub-Agent the performance of all such duties and the exercise of all such powers, authorities and discretions imposed or conferred upon the Agent by the Agency Agreement. . .as it may be appropriate or necessary for the Sub-Agent to perform or exercise for the purpose of carrying on the Syndicate underwriting business.. . . 

     7. (a) The Sub-Agent shall conduct the Syndicate business in such manner as to comply with the provisions of the Agency Agreement and Lloyd's byelaws and regulations and as to have regard for Lloyd's Codes of Conduct or similar forms of guidance for the Lloyd's market.. . . 

 4. THE RUN-OFF CONTRACTS 

     Between June, 1978 and December, 1982 11 run-off contracts were written by 418/417. A run-off contract is a policy of reinsurance by which a syndicate or insurance company is reinsured, subject to the terms of the policy, against outstanding and potential future liabilities, claims and expenses in respect of business written into past underwriting years or into such past years of account as are specified in the policy. 

     Particulars of the 11 run-off contracts are set out in Table 2 below (at p. 416 post). In the late 1980s there was litigation/arbitration relating to a number of the run-off contracts. The column headed final outcome shows the result. 

 5. THE CLOSING OF THE YEARS OF ACCOUNT 

     "Reinsurance to close" ("RITC") means an agreement under which underwriting members who
 are members of a syndicate for a year of account agree with underwriting members who comprise that or another syndicate for a later year of account that the reinsuring members will indemnify the reinsured members against all known and unknown liabilities of the reinsured members arising out of the insurance business underwritten through that syndicate and allocated to the closed year, in consideration of a premium and the assignment to the reinsuring members of all the rights of the reinsured members arising out of or in connection with that insurance business. In computing a reinsurance to close the premium arrived at will take account of two elements: known outstanding claims and claims incurred but not reported ("IBNR"). The amount charged by way of premium in respect of reinsurance to close should, where the reinsuring members and the reinsured members were members of the same syndicate for different years of account, be equitable between them, having regard to the nature and amount of the liabilities reinsured. 

 Between 1982 and 1987, 418/417's 1979 year of account, and each subsequent year until its 1984 year of account, was closed by way of an RITC into the following year of account. The effect of the
succession of RITCs is that the underwriting members of 418/417's 1980, 1981, 1982, 1983, 1984 and 1985 years of account have successively agreed to indemnify the Names on the immediately preceding year of account against all known and unknown liabilities of the reinsured members arising out of the insurance business written or reinsured into the reinsured year of account. 

The succession of RITCs is shown in Table 3 below (at p. 417 post). 

6. THE CAUSES OF ACTION 

 The direct Names claim against the combined agents in contract and tort (and against Mr. Merrett in tort only). 

 The indirect Names claim against the managing agents in tort (and certain of the indirect Names claim against Mr. Merrett in tort). The indirect Names claim against the members' agents in contract and tort.  

 The plaintiffs claim against the auditors in contract and tort. Before considering these causes of action it is convenient to refer to a further cause of action in misrepresentation/failure to report or disclose. 

 The plaintiffs allege that in its conduct and management of the underwriting as managing agents
of 418/417, and/or as the active underwriter of 418/417, Merretts and/or Mr. Merrett respectively
misrepresented, or at least failed adequately to report or disclose to the plaintiffs, information in their possession which was evidently material to the plaintiffs' assessment of their underwriting as members of 418/417 for years of account between 1980 and 1985 (inclusive), and/or to the conduct of that underwriting. 

 Paragraph 11(3) of the amended points of claim in the Hallam-Eames actions states that - 

. . .if and insofar as any defendant seeks to rely upon a defence of limitation. . .and succeeds in establishing that defence, each affected name will claim damages against Merretts, Mr. Merrett and his or her relevant members' agent, for the loss arising by reason of (the alleged misrepresentation/failure to report or disclose). 

This alternative plea calls for further evidence beyond that adduced to date. I will if necessary give further directions in this connection after delivery of this judgment. 

 [1997] 278  L.R.L.R. Henderson v. Merrett Syndicate (Q.B. (Com. Ct.))    Cresswell, J. 

 7. THE SPEECHES OF THE HOUSE OF LORDS IN HENDERSON V. MERRETT SYNDICATES LTD. 

     I refer to the full report of the speeches of the House of Lords in Henderson v. Merrett Syndicates Ltd., [1994] 2 Lloyd's Rep. 468; [1995] 2 A.C. 145. This decision determined a number of preliminary issues in these actions. The effect of the decision of the House of Lords is summarized in sections 8 to 11 to below. This summary is not however a substitute for reference to the full report. 

 8. THE 1985 NAMES 

     When Names on the 1985 underwriting year reinsured Names on the 1984 year, although the 1984 names were running off their business, the 1985 Names were writing new insurance business which could only be done pursuant to the 1985 byelaw form of agreement in force as from Jan. 1, 1987. 

 9. DIRECT NAMES/COMBINED AGENTS: CONTRACT AND TORT 

     MSL ceased to be a combined agent on Jan. 1, 1986. There is a contract between the direct names and the combined agent, in the terms of the pre-1985 byelaw form of agency agreement, in which a term is to be implied that the agents will exercise reasonable skill and care in the exercise of their functions as managing agents under the agreement. That duty of care is no different from the duty of care owed by the combined agents to the direct Names in tort on the Hedley Byrne (Hedley Byrne & Co. v. Heller & Partners Ltd., [1963] 1 Lloyd's Rep. 485) principle. 

 10. INDIRECT NAMES/MANAGING AGENTS: TORT

     The claims of the indirect Names arise in the context of the pre and post 1985 byelaw forms of
 agency agreements. There is to be implied into the sub-agency agreements a duty upon the managing agents to exercise reasonable skill and care. There is no material difference between the relevant contractual duty and the duty of care owed by the managing agents to the indirect Names in tort on the Hedley Byrne principle. 

 11. INDIRECT NAMES/MEMBERS' AGENTS: CONTRACT 

     Under an implied term in the pre-1985 byelaw forms of agency agreements and under the form
 prescribed by the 1985 byelaw, members' agents are responsible to indirect Names for any failure to exercise reasonable skill and care on the part of the managing agents to whom underwriting was delegated by the members' agents. For these purposes underwriting includes the assessment and effecting of any RITC and the fixing of the premium therefore. 

 12. INDIRECT NAMES/MEMBERS' AGENTS: TORT 

  In P.J. Aitken v. Stewart Wrightson Members Agency Ltd., [1995] 2 Lloyd's Rep. 618, (Pulbrook 334) Mr. Justice Potter held on agreed facts that the members' agents did not owe a non-delegable duty of care to the indirect Names in tort. Pending appeal the plaintiffs reserve their position on this. The point was not argued before me. 

 13. E&W's DUTIES 

 The plaintiffs' submissions 

  The plaintiffs contend that E&W were engaged by them contractually and that, as syndicate auditors, had the responsibility to ensure: 

  (1) that accounting policies were applied consistently from one year of account to the next, so as to ensure the consistent treatment of like items in each year of account; 

  (2) that the amount of any item to be included in an underwriting account for a closed year of account was determined on a prudent basis; 

  (3) that all income and charges relating to a closed year of account were taken into account without regard to the date of receipt or payment; 

  (4) that accounting policies were adopted in respect of items affecting more than one year of
 account so as to ensure a treatment which was equitable as between the members of the syndicate affected. In particular, the amount charged by way of premium in respect of RITC had, where the reinsuring members and the reinsured members were members of the same syndicate for different years of account, to be equitable as between them having regard to the nature and amount of the liabilities reinsured. 

  The plaintiffs contend that there was an implied term of reasonable skill and care and/or a duty of care in tort to like effect, and in particular a duty of care and skill in assessing whether the RITC premium was equitable in the terms set out above. This duty was owed to all Names on the year into which the previous year was closed. 

  The plaintiffs further contend that at all material times such implied term and/or duty imposed at least the following specific obligations on the syndicate auditors: 

  (i) an obligation to consider the appropriateness of the method adopted by the managing agents 
to assess the IBNR element of the RITC premium 

 [1997] 279  L.R.L.R. Henderson v. Merrett Syndicate (Q.B. (Com. Ct.))    Cresswell, J. 

 having regard to the concept of equity between the Names on the different years of account; and/or 

     (ii) an obligation to ensure that the underlying assumptions and the method of computation used were appropriate and consistent with previous years so as to produce a premium which was equitable between years of account; and/or 

     (iii) an obligation to identify the assumptions made and the evidence available to support the
 validity of those assumptions and/or to identify the factors taken into account by the managing agents; and/or 

     (iv) an obligation to test the validity of the assumptions made by the managing agents by reference to the criteria of equity and/or prudence and/or consistency. 

     The Names contend that the assessment and/or effecting of the RITC and the decision to close the year was made by Mr. Merrett and/or Merretts and participated in and/or approved by E&W. 

 E&W's submissions 

     E&W submit that the Names had no contract with and have no contractual claim against E&W. As to tort E&W's submissions are as follows. The only duty in tort owed by E&W to the Names on the succeeding year (when there is a RITC) was to act with such reasonable care and skill as was to be expected of a Lloyd's panel auditor in carrying out the work necessary to give, and in giving, the form of opinion or report in fact given. In respect of the years 1981, 1982 and 1983 E&W did not provide (and were not engaged to provide) a qualitative opinion on the syndicate accounts. In respect of the years 1984, 1985 and 1986 E&W did express a qualitative opinion that the annual report gave a true and fair view of the closed year of account profit. 

     In respect of all of the years 1981-1986 E&W compiled a syndicate solvency report. 

     Accordingly E&W's duty (so far as presently relevant) was to take reasonable care in taking the
 steps necessary to give and in giving: 

     (a) In respect of all years, the opinion in the syndicate solvency report- 

 . . .that the profit or loss of the closed underwriting account. . .and the estimated surplus or deficiency of the open underwriting accounts has/have been arrived at after valuing all assets and calculating all liabilities in accordance with the current Instructions. . .; 

     (b) in respect of 1981, 1982, 1983, the compliance opinion in fact given; 

     (c) in respect of 1984, 1985 and 1986 the opinion that the accounts gave a true and fair view of the closed year of account loss. In respect of (a), the duty was, in essence, to take care to see that the agent had discharged his responsibilities for establishing reserves in a reasonable manner, so as to be in a position to give the opinion in the syndicate solvency report. This did not involve the auditor in approving or expressing an opinion on the RITC. It required the auditor to ensure that the managing agent had used the highest of the two or three alternative tests. In the case of a non-marine syndicate the first (Lloyd's percentages) and third (RITC) tests were "given" figures. By virtue of the second test (total of estimated outstanding liabilities including an element to take care of unnoted and unknown liabilities) the auditor had to ensure that the agent had discharged his responsibility in a reasonable manner consistent with available information. 
 
 In respect of (b) no serious question arises. Merretts' books were properly kept and the accounts
were in agreement with them. 

 In respect of (c) the critical feature for present purposes is the reinsurance to close. The duty is not accurately expressed, whether in relation to the period before or after "true and fair view" reporting, as a duty to make, participate in, or approve the decision to close or leave open the year of account. It was a duty to form (and express) an opinion, or decline to do so, on a decision made by the underwriter.  

Conclusion 

 In view of my findings as to years 1, 2 and 3 below it is unnecessary to express an opinion as to the extent of E&W's duties in years 1 to 3, save to say (a) that having regard to E&W's functions in respect of the syndicate accounts and syndicate solvency report the duties were wider than those contended for by E&W but (b) weight has to be given to the fact that the opinion required was not a true and fair view opinion. Even if the plaintiffs' submissions were accepted in full, I do not consider that E&W were negligent in years 1, 2 and 3.  

 As to years 4, 5 and 6 E&W accept that they owed a duty of care in tort to the reinsuring Names to act with such reasonable care and skill as was to be expected of a Lloyd's panel/recognized auditor in carrying out the work necessary to give, and in giving, the true and fair opinion. It was, as E&W point out, a duty to form and express an opinion, or decline to do so, on a decision made by the managing agent/underwriter.  

 In view of the fact that E&W accept that they owed a duty of care in tort as set out above, the question whether the contract of engagement was with the managing agents (as E&W contend) or with the names (as the plaintiffs contend) is academic and it is unnecessary to express an opinion on this point.  

 [1997] 280  L.R.L.R. Henderson v. Merrett Syndicate (Q.B. (Com. Ct.))    Cresswell, J. 

 14. STANDARD OF CARE 

     I turn to consider the standard of care required of Merretts and E&W. 

     In Bolam v. Friern Hospital Management Committee, [1957] 1 W.L.R. 582 at p. 587 Mr. Justice McNair said that a professional: 

 . . .is not guilty of negligence if he has acted in accordance with a practice accepted as proper by a responsible body of medical men skilled in that particular art. . .Putting it the other way round, a man is not negligent, if he is acting in accordance with such a practice, merely because there is a body of opinion who would take a contrary view. . .Finally, bear this in mind, that you are now considering whether it was negligent for certain action to be taken in August 1954, not in February 1957; and in one of the well-known cases on this topic it has been said you must not look with 1957 spectacles at what happened in 1954. 

 In Saif Ali v. Sydney Mitchell & Co., [1980] A.C. 198 at p. 220D Lord Diplock said: 

     No matter what profession it may be, the common law does not impose on those who practise it any liability for damage resulting from what in the result turns out to have been errors of judgment, unless the error was such as no reasonably well-informed and competent member of that profession could have made. So too the common law makes allowances for the difficulties in the circumstances in which professional judgments have to be made and acted upon. 

 In Maynard v. West Midlands Regional Health Authority, [1984] 1 W.L.R. 634, Lord Scarman at p.
 638H said: 

     There is seldom any one answer exclusive of all others to problems of professional judgments. A Court may prefer one body of opinion to the other; but that is no basis for a conclusion of negligence. 

 In Wilsher v. Essex AHA, [1987] 1 Q.B. 730 at p. 747A-C Lord Justice Mustill said: 

     The risks which actions for professional negligence bring to the public as a whole, in the shape of an instinct on the part of the professional man to play for safety, are serious and are now well recognised. Nevertheless, the proper response cannot be to temper the wind to the professional man. If he assumes to perform a task, he must bring to it the appropriate care and skill. What the courts can do, however, is to bear constantly in mind that, in those situations which call for the exercise of judgment, the fact that in retrospect the choice actually made can be shown to have turned out badly is not in itself a proof of negligence; and to remember that the duty of care is
not a warranty of a perfect result. 

In Eckersley v. Binnie, [1988] 18 Con.L.R. 1 at p. 79Lord Justice Bingham said: 

 In defining the duty of the first defendants the judge correctly ruled that the standard of care required was that of reasonably competent engineers specialising in the design of water transfer systems, including tunnels, applying the standards appropriate at the time of design, construction and operation. The law requires of a professional man that he live up in practice to the standard of the ordinary skilled man exercising and professing to have his special professional skill. He need not possess the highest expert skill; it is enough if he exercises the ordinary skill of an ordinary competent man exercising his particular art. So much is established by Bolam v Friern Hospital Management Committee which has been applied and approved time without number.  

Lord Justice Bingham then quoted the passage from Saif Ali set out above and continued: 

. . .From these general statements it follows that a professional man should command the corpus of knowledge which forms part of the professional equipment of the ordinary member of his profession. He should not lag behind other ordinary assiduous and intelligent members of his profession in knowledge of new advances, discoveries and developments in his field. He should have such awareness as an ordinarily competent practitioner would have of the deficiencies in his knowledge and the limitations on his skill. He should be alert to the hazards and risks inherent in any professional task he undertakes to the extent that other ordinarily competent members of the profession would be alert. He must bring to any professional task he undertakes no less expertise, skill and care than other ordinarily competent members of his profession would bring, but need bring no more. The standard is that of the reasonable average. The law does not require of a professional man that he be a paragon, combining the qualities of polymath and prophet. 

 In deciding whether a professional man has fallen short of the standards observed by ordinarily skilled and competent members of his profession, it is the standards prevailing at the time of his acts or omissions which provide the relevant yardstick. He is not, as the judge in this case correctly observed, to be judged by the wisdom of hindsight. This of course means that knowledge of an event which happened later should not be applied when judging acts and omissions which took place before that event, a 

 [1997] 281  L.R.L.R. Henderson v. Merrett Syndicate (Q.B. (Com. Ct.))    Cresswell, J. 

 very relevant consideration here because  knowledge of the Abbeystead catastrophe has (as the evidence shows) had a profound educational effect. It is proper and necessary to investigate very
 carefully the events leading up to this methane explosion to ascertain what assessment was made of the methane explosion risk, and why; but it is necessary if the defendants' conduct is to be fairly judged, that the making of this detailed retrospective assessment should not of itself have the effect of magnifying the significance of the methane risk as it appeared or should reasonably have appeared to ordinarily competent practical men with a job to do at the time. 

     I venture to state these familiar propositions because, against the background of a calamity such as this, it is easy and tempting to impose too high a standard in order to see that the innocent victims of the disaster are compensated by the defendants' insurers. Many would wish that the right to recovery in such cases did not depend on proof of negligence. But so long as it does, defendants are not be held negligent unless they are in truth shown to have fallen short of the standards I have mentioned. 

 In The Lloyd's Litigation: The Merrett, Gooda Walker and Feltrim Cases, [1994] 2 Lloyd's Rep. 468
 at p. 474 Sir Thomas Bingham, M.R. said: 

     I would, however, observe that any successful claim against the agent in negligence would, as in any other case, have to show a failure to show the standard of skill and care reasonably to be expected of such an agent at the time and with the knowledge that he had or should have had. His judgment could not be impugned simply because events showed it to be wrong. A decision taken under cl. 7(e)(i) could not easily be challenged. 

 In Deeny v. Gooda Walker Ltd., [1996] L.R.L.R. 183 Mr. Justice Phillips said: 

     The first proposition [The standard of skill and care to be exercised by a member of a professional calling is the degree of skill and care ordinarily exercised by reasonably competent members of that profession or calling] does not remove from the Judge the determination of the standard of skill and care that ought properly to be demonstrated. As the authors of the third edition of Jackson and Powell on Professional Negligence point out at p.39: 

     It is for the court to decide what is meant by "reasonably competent" members of the profession. They may or may not be equated with practitioners of average competence. . . Suppose a profession collectively adopts extremely lax standards in some aspects of its work. The court does not regard itself as bound by those standards and will not acquit practitioners of negligence simply because they have complied with those standards. . . 

As to the second proposition [The existence of a common practice over an extended period of time by persons habitually engaged in a particular business is strong evidence of what constitutes the exercise of reasonable skill and care] the particular business with which this action is concerned is the business of underwriting. More particularly, this action is concerned with one area of underwriting, excess of loss reinsurance. At the heart of the action lies one aspect of excess of loss underwriting, the writing of spiral business. That was a business that developed rapidly in the period of eight years or so that led up to the events with which this action is concerned. Only a relatively small proportion of Lloyd's underwriters specialised in writing spiral business. The London market no longer writes spiral business - at least on the scale and in the manner which developed in the last decade. In those circumstances I do not consider that one can automatically regard the practices of those who wrote spiral business as constituting strong evidence of what constituted the exercise of reasonable skill and care. It is necessary to approach this case with the possibility in mind that, for many involved, a significant involvement in spiral business may not have been compatible with competent underwriting. 

 I set out below propositions relevant to the present case derived from the above authorities: 

 1. As to MSL (to the extent that they acted as managing agents) and MUAM the standard of care required was that of reasonably competent Lloyd's managing agents specialising in the writing inter alia of long tail risks. 

 2. As to E&W the standard of care required was that of reasonably competent Lloyd's panel/recognised auditors. 

 As to MSL (to the extent that they acted as managing agents), MUAM and E&W: 

 3. The standards prevailing at the time of the alleged acts or omissions provide the relevant yardstick. The defendants are not to be judged by the wisdom of hindsight. Knowledge of an event which happened later should not be applied when judging alleged acts or omissions which took place before that event. In judging the case in relation to the writing of 11 run-off contracts and the 6 RITCs it is vitally important to have regard only to the relevant knowledge at the material times. 

 4. Further, it is necessary to bear constantly in mind that in those situations which call for the exercise of judgment, the fact that in retrospect the 

 [1997] 282  L.R.L.R. Henderson v. Merrett Syndicate (Q.B. (Com. Ct.))    Cresswell, J. 

 choice actually made can be shown to have turned out badly is not in itself proof of negligence. The duty of care is not a warranty of a perfect result. The law does not impose liability for damage resulting from what in the result turn out to have been errors of judgment unless the error was such as no reasonably well-informed and competent member of the relevant profession could have made. 

     5. Any successful claim against the managing agents/auditors in negligence would have to show a failure to adhere to the standard of skill and care reasonably to be expected of such agents/auditors at the time and with the knowledge that they had or should have had. Their judgment could not be impugned simply because events showed it to be wrong. 

     6. A professional person should command the corpus of knowledge which forms part of the professional equipment of the ordinary member of his profession. He should keep abreast of other ordinary assiduous and intelligent members of his profession in knowledge of developments in his field. He should have such awareness as an ordinarily competent practitioner would have of the deficiencies in his knowledge and the limitations on his skill. He should be alert to the hazards and risks in any professional task that he undertakes to the extent that other ordinarily competent members of the profession would be alert. 

     7. The defendants are not to be held to have been negligent if they acted in accordance with a practice accepted as proper by a responsible body of managing agents/auditors skilled in the relevant field. There is seldom any one answer exclusive of all others to problems of professional judgments. A Court may prefer one body of opinion to another; but that is no basis for a finding of negligence. 

     8. The defendants were required in practice to live up to the standard of the ordinary skilled persons exercising and professing to have the relevant special professional skills. The standard is that of the reasonable average. This does not remove from the Judge the determination of the standard of skill and care that ought properly to be demonstrated. 

 15. LIMITATION 

 Names/Agents 

     Save in all cases for the plea in par. 11(3) of the amended points of claim
 (misrepresentation/non-disclosure): 

     Subject to s. 14A (tort) and s. 32 (contract and tort) of the Limitation Act, 1980 claims by direct Names against combined agents in contract and tort by the pre-1984 joiners in the Hallam-Eames actions are statute-barred. 

  Subject to s. 14A and s. 32 claims by indirect Names against managing agents in tort by the pre-1984 and the 1984 joiners in the Hallam-Eames actions (but not the 1984 joiners in the Henderson actions) are statute-barred. 

  Subject to s. 32 claims by indirect Names against members' agents in contract by the pre-1984 and the 1984 joiners in the Hallam-Eames actions (but not the 1984 joiners in the Henderson actions) are statute-barred. 

 Names/Auditors 

  The Names assert claims in contract and tort against E&W. E&W assert that the only duty arises in tort. Subject to s. 14A (tort) claims by names against E&W by the pre-1984 and the 1984 joiners in the Hallam-Eames actions (but not the 1984 joiners in the Henderson actions) are statute-barred. 

  The limitation position and issues are set out in Table 4 below (at p. 418 post). I return to the subject of limitation in section 39 below. 

 16. THE WITNESSES 

  I turn to consider the witnesses in the order in which they gave evidence. 

 Mr. James Ayliffe 

  Mr. Ayliffe joined MSL as non-marine claims manager in 1977. He was appointed a director of MSL in 1978 and was a director of MUAM from January, 1986. He became a name on Syndicate 418/417 in 1978. 

  Mr. Ayliffe served on a number of Lloyd's market committees including the management board of LUNCO and the non-marine association claims committee of which he was chairman from 1965 to 1978. 

  Mr. Ayliffe was a founder member of the asbestos working party ("AWP") (which was set up in 1980). He was one of the two London market representatives instructed to work with the U.S. insurance industry and asbestos producers on the asbestos claims council. In 1985 he was appointed as the London director to the board of the asbestos claims facility ("ACF") which was established that year. He retired from that post in May 1988. Mr. Ayliffe served on the AWP claims committee for the years 1983 to 1988 and the AWP reinsurance claims committee from 1983 to 1988. He was also a member of the special LMX committee dealing with problems associated with delayed response of certain outward reinsurers to asbestos-related claims. 

  Mr. Ayliffe was also a founder member and the initial chairman of the London market environmental claims group set up in 1984 and served on 

 [1997] 
283 
 L.R.L.R. 
Henderson v. Merrett Syndicate (Q.B. (Com. Ct.))    Cresswell, J. 

the environmental claims reinsurance group for the years 1985 to 1988. 

     Mr. Ayliffe was appointed a director of Toplis & Harding (Asbestos Services) Ltd. in 1984 and continued to serve as a director of its successor company, Toplis & Harding (Market Services) Ltd. until early 1989. He retired from Merretts in 1988. On his retirement he was awarded the Freedom of the City of London for services to the Lloyd's insurance market. 

     Mr. Ayliffe said that he had no involvement in the assessment of strict IBNR as that was the responsibility of the underwriter Mr. Merrett, though he said that with his fellow directors he approved the relevant accounts. 

     He said that it never crossed his mind that the nature of the problems of asbestos and pollution were such as to make it impossible for the underwriter to reach a responsible and fair IBNR or to make it unfair to close any of the relevant years of account. 

     Mr. Ayliffe plainly had very considerable specialist knowledge as to the problems of asbestos and pollution. His witness statement contained a number of passages dealing with the perception of the market as to the problems of asbestos and pollution claims at different periods in time. While in no way doubting Mr. Ayliffe's considerable experience and expertise I consider that it is far safer to base my analysis of the perception of these problems at the material times on the contemporary documents. By way of example what Mr. Ayliffe said in October, 1985 (see section 36 below) should be compared with the relevant passages in his witness statement. 

     Mr. Ayliffe was not concerned with the claims handling of the run-off contracts and said that he first heard about these in about 1984. A striking feature of Mr. Ayliffe's evidence was that he was very reluctant even to comment on the run-off contracts. 

 Mr. David Hart 

     Mr. Hart has been a Fellow of the Institute of Actuaries since 1970 and a member of the Institute's general insurance study group from 1974. He was a founder member of the London market actuaries group in 1982 and was chairman in 1990/91. He was a member of the Institute's general insurance joint committee from 1989 to 1992. 

     Mr. Hart joined MSL in August, 1982. He was responsible to the underwriter of Syndicate 799, Mr. Jackson. His role at 799 was to assist Mr. Jackson on the RITC and to deal with whatever statistical or actuarial tasks were allocated to him. Mr. Hart regarded himself as working full time for Mr. Jackson and was only seconded to special projects for 418/417. 

 Mr. Hart was the first actuary to be employed by a Lloyd's underwriting agency. 

 Mr. Hart edited a monograph entitled "Lloyd's and the London Market" by London market actuaries group (two editions in 1989). Chapter 6 is entitled Claims and Estimating Reserves. Paragraph 6.18 et seq. deals with asbestos and latent disease claims.  

 In par. 4 to 6 of his witness statement Mr. Hart explains why traditional actuarial or statistical
approaches were not applicable to reserving for asbestos and other latent disease claims. In the result Mr. Hart acknowledged that his actuarial qualification was of marginal relevance to the assessment of an IBNR. It was not Mr. Hart's function to form a view as to the likely future development of asbestos and pollution claims. As he said:  

. . .I was not in a position to suggest that asbestos would run-off over another 3, 5 or 7 years. I did not know. 

In this connection he was dependent on what he was told by other personnel at Merretts. 

 Mr. Hart said that the decision whether or not to close a year or to leave it open was not one in which he would be involved, save to the extent that he would provide some figures to the underwriter, whose decision it was.  

 Mr. Hart did not know that 417/418 had written any of the run-off contracts until about late March, 1985. When shortly thereafter he conducted a review with Mr. Randall, they found it was a struggle to get even the most basic data. 

Mr. Stephen Merrett 

 Mr. Merrett started work in the London insurance market in 1962 as a marine broker. In 1964 he joined the marine box of Merretts as a trainee underwriter, covering all classes of business handled by the marine syndicate at that time. In 1971 he became joint active underwriter of 418/417 with Mr. Richard Outhwaite. He became sole active underwriter in 1974 on Mr. Outhwaite's departure. During the course of more than 20 years underwriting experience Mr. Merrett has been involved in the underwriting and leading of risks across many classes of business. Most of these classes have included both direct insurance and reinsurance or retrocession business. Mr. Merrett has been a Name on 418/417 since 1968.  

 During the course of his underwriting career Mr. Merrett has been involved with Lloyd's governance and with market issues, technical, regulatory and structural. He was elected to the committee of Lloyd's to serve from 1981 to 1984 inclusive, and  

 [1997] 284  L.R.L.R. Henderson v. Merrett Syndicate (Q.B. (Com. Ct.))    Cresswell, J. 

 therefore became a member of the Council of Lloyd's after the passage of the 1982 Lloyd's Act. He was re-elected for a second term on the Council from 1987 to 1991, and a third in 1993. He served as a deputy chairman in 1993. Mr. Merrett has served on many of the committees and subcommittees of the council and committee of Lloyd's, including finance and general purposes, membership, audit (subsequently members solvency), accounting and auditing standards and financial guarantee. Mr. Merrett was a member of the Higgins working party which reviewed the relationship between Names, managing agents and members' agents after the passage of the 1982 Act, and the Rowland task force, whose report encompassed the radical change in the structure of the market since 1990. Mr. Merrett served on the committee of the Lloyd's marine underwriters association from 1974 to 1993 and for two years he was chairman. In 1978 at the request of Lloyd's he undertook the management of the Sasse Agency and Syndicates after the agency had been suspended from trading following substantial losses. 

     Mr. Merrett has provided expert evidence for Lloyd's in a number of contexts including testimony at the committee stages in both Houses on the Lloyd's Bill in 1981. Mr. Merrett is currently chairman of the Lloyd's "Superfund" working party. 

     Mr. Merrett had a distinguished father who provided very valuable services to the market. 

     Mr. Merrett is a highly intelligent man who has extremely wide experience of the market as appears from the above. Mr. Holland of E&W described him as having a forceful personality. 

     I regret to say that I have serious reservations about many aspects of Mr. Merrett's evidence and serious reservations about his approach as underwriter to 418/417. 

     Mr. Merrett said that Mr. Emney was at the outset responsible for the management of the run-off contracts including the underwriting, the recording and the handling and management of claims. In 1985 it was the board's view that Mr. Emney had not fulfilled his duties properly and that was why, when he withdrew his resignation, he was dismissed. As to the writing of the run-off contracts the minutes of the meeting of the audit committee held on Mar. 2, 1982 (H1/471A) attended by Mr. Merrett recorded: 

     Mr. Chester then raised the question of the reinsurance of underwriters' asbestosis liability in
 the Lloyd's Market (i.e. 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. . . 

 I do not accept Mr. Merrett's explanation of this passage in the minutes (Day 15/141-144). It is in my view plain that the reference to "telling its own Names" is in the context of a syndicate which had written run-off contracts. The point of concern was that such liabilities could fall on comparatively few syndicates. In fact Merretts did not tell E&W about the writing of the run-off contracts until year 3 (when reference was made to only six out of 11). I reject Mr. Merrett's evidence that E&W were told about the writing of the run-off contracts prior to year 3. The first the plaintiffs heard about the writing of the run-off contracts was on Apr. 18, 1985. 

  On May 4, 1982 Mr. Merrett signed a letter in response to E&W's latent disease questionnaire for year 1 (D1/146) which failed to mention the run-off contracts. When asked about this letter Mr. Merrett said that it was wholly consistent with his having informed E&W of the existence of the run-off contracts. The letter of May 4, 1982 was seriously misleading and I reject Mr. Merrett's explanation (Day 15/138-9). Mr. Merrett was in no doubt as to the importance of informing E&W about the run-off contracts (see the meeting on Mar. 2, 1982 above). The latent disease questionnaire in year 2 (D2/174) asked a specific question about: 

 . . .OTHER EXPOSURE TO LATENT DISEASES. Evidence that syndicates have taken steps to
 identify, quantify and record as above any other known or potential liabilities in respect of writing of. . . (c) Run-off Account containing latent disease liability. 

 Mr. Merrett replied in a letter dated Apr. 28, 1983 (D2/170): 

 . . .Other exposures to latent Disease. This syndicate (417) does not as a matter of policy write these classes of business, other than on a very incidental basis, very seldom. 

 On the same date Mr. Merrett wrote in respect of 418:

  Latent Diseases. The reports have been obtained, and records retained in accordance with the
 reinsurance to close claims analysis exercise: we have no knowledge of any other reinsurance contract which might become involved. We have no other known or known potential liabilities and no material recoveries. 

 Neither of these letters referred to the fact that by Apr. 28, 1983 all 11 run-off contracts had been written. When asked about the letters dated Apr. 28, 1983 Mr. Merrett said: 

 [1997] 285  L.R.L.R. Henderson v. Merrett Syndicate (Q.B. (Com. Ct.))    Cresswell, J. 

 . . .Had I been in any doubt as to (E&W's) knowledge of those contracts and had I wished to make certain that they had a record in writing of our having written them then I suppose I would have written in those terms; but given that, to my belief, they were already aware of the contracts then the necessity to make specific reference fell away. (Day 17/12-13.) 

 Again I reject Mr. Merrett's attempted explanation of these very serious failures. 

     In his witness statement Mr. Merrett said: 

 (paragraph 59). . .With one exception, none of the contracts written was perceived as having a substantial exposure to asbestos claims at the date that they were written. The exception was the
 Fireman's Fund contract. . . 

 (paragraph 60)In November 1981 it was already more than 10 years since any of the original business had been written. Furthermore, Fireman's Fund was an insurer of greater sophistication than other cedants, and from their own direct exposures well able to evaluate the Sturge reserving levels. I believed that the retrocession could be safely written with a very substantial probability of profit. 

 Mr. Merrett's oral evidence was to very different effect (Day 16/9/9-/14/11) and his explanation for the inconsistency unconvincing (Day 15/118/9-122/17). 

     Merretts did not call Mr. Emney to give evidence. As a result I consider that I have been inhibited in getting to the truth about the writing of the run-off contracts. The probability is that Mr. Merrett knew more about the writing of the run-off contracts than he accepted in his statement or in his evidence. 

     As to the six RITCs Mr. Merrett correctly accepted that his duties in this connection were the most important function that he fulfilled each year as underwriter of 418/417. The amount charged by way of premium in respect of reinsurance to close had to be equitable as between the reinsuring members and the reinsured members, having regard to the nature and amount of the liabilities reinsured. Compliance with "equity between Names" had to be demonstrated by the underwriter and the managing agent in determining the RITC. I find that Mr. Merrett gave inadequate time and attention to the RITCs particularly in years 4, 5 and 6, and this must have been apparent to E&W. It was not enough to rely on Mr. Ayliffe, Mr. Hart and Mr. Randall. Mr. Ayliffe had no involvement in the assessment of strict IBNR as that was the responsibility of Mr. Merrett. It was not Mr. Hart's function to form a view as to the likely future development of asbestos and pollution claims. Further the decision whether or not to close a year was not one in which Mr. Hart would be involved, save to the extent that he would provide figures to Mr. Merrett, whose decision it was. Mr. Randall said that in 1985 and subsequent years he was in no position to form an opinion as to the likely development of asbestos-related claims or pollution claims and was totally dependent on the advice received from others. 

 Mr. Merrett's evidence in relation to Mr. Rokeby-Johnson's letter of July 16, 1982 (D6/444, quoted below) was unconvincing (see Day 16/63/23-67/5). 

 In relation to the RITCs particularly in years 4, 5 and 6 Mr. Merrett was subject to conflicts of interest inherent in the system. Significant commercial disadvantages would flow from leaving the year open. The letter dated Apr. 14, 1985 and the reports in the year 4 accounts contain a mixture of truth, half-truth and falsehood. But the letter dated Apr. 18, 1985 stated: 

. . .in the current underwriting climate, it is our intention significantly to expand. . .418. . . 
 
Mr. Merrett knew from his very considerable experience that 418/417 in year 4 was subject to deep-rooted problems and uncertainties as to the future development of (i) asbestos bodily injury claims (ii) asbestos property damage claims and (iii) pollution claims not only in respect of 418/417's own book going back to 1953, but also in respect of the books of the 10 cedants. Further the information as to the run-off contracts was wholly inadequate. I find that Mr. Merrett knew that a reinsurance to close figure could not be arrived at in year 4 with a reasonable degree of accuracy and yet he was determined to close the account. Similar considerations applied in years 5 and 6.  

Mr. Kenneth Randall 

 Mr. Randall first became involved in the insurance industry in 1974 when he joined the Corporation of Lloyd's as deputy corporation accountant. He had previously qualified as a certified accountant. In 1979 he became responsible for the Lloyd's audit department which dealt, inter alia, with the review of the solvency of Lloyd's members and security behind the Lloyd's policy of insurance. In 1982 he additionally became head of the special investigation department at Lloyd's looking into various market problems such as Alexander Howden, PCW and Brooks & Dooley among others. In 1983 he became the head of regulatory services and as such was the principal point of contact between the Lloyd's market and the Corporation of Lloyd's and between the Corporation of Lloyd's and the Department of Trade and Industry in respect of, inter alia, solvency. He was also the principal point of contact between the Corporation of Lloyd's and the panel auditors. He was a 

 [1997] 286  L.R.L.R. Henderson v. Merrett Syndicate (Q.B. (Com. Ct.))    Cresswell, J. 

 member of the Lloyd's audit committee and chairman and/or a member of several of the Fisher task groups set up in 1980 to follow up the various suggestions made in the Fisher report. 

     Mr. Randall joined Merretts at the beginning of 1985. His initial appointment was as managing director of MSL. He was also appointed a director of Merrett Holdings Plc. He was subsequently appointed managing director of MUAM when that company assumed the managing agency function from MSL as at Jan. 1, 1986. In 1987 Mr. Randall was appointed group chief executive and managing director of the Merrett Group. He left the Merrett Group in August, 1991 and set up an independent insurance consultancy, Randall Insurance Services Ltd., of which he is chief executive. 

     Mr. Randall said that after he left Merretts his office was cleared: 

 . . .and no-one seems to be sure what happened to all the papers in it - there was an entire series of cupboards and filing cabinets stacked full of files and reports of various sorts and they have all disappeared. 

 In fairness to Mr. Randall he had only been with Merretts a very short time when the problems in relation to the run-off contracts came to light. Mr. Randall said that in 1985 and subsequent years he was in no position to form an opinion as to the likely development of asbestos-related claims or pollution claims and was in this connection totally dependent on the advice received from others. 

     After making full allowance for the difficulties that Mr. Randall faced including those referred to above, I have a number of reservations about his evidence. In particular I consider that Mr. Randall was at times included to go further than was justified in seeking to defend the approach of the Merrett defendants. 

 Mr. Newman and Mr. Ringer 

     Two United States attorneys were called to give evidence. Mr. Newman gave evidence on behalf of the plaintiffs and Mr. Ringer gave evidence on behalf of the Merrett defendants. Mr. Ringer's evidence was also relied upon by E&W. Mr. Newman and Mr. Ringer prepared and agreed Appendix 2 to this judgment and I am grateful to them for this assistance. 

     Mr. Newman's and Mr. Ringer's experience and qualifications are set out in their statements. 

     Mr. Ringer's witness statement extended to 134 pages (his statement in reply to 29 pages). Mr. Ringer frankly accepted that the opinions set out in his statements were largely based upon the research he had conducted. He said he did have some anecdotal evidence learnt contemporaneously but would not consider that to have been sufficient to base an opinion on. He relied upon the documents and various other materials that his research had located. I have marked reservations about Mr. Ringer's witness statement, save where the statement contains matters that are agreed between the parties. The statement contains numerous assertions which should have been qualified so as to make it clear that the opinions expressed were based upon research and not on any contemporary experience. Mr. Ringer confirmed that the two attorneys between them had collected a good representative sample of the material available in the United States at the material times. In my view the most accurate reflection of perception in the United States in the 1980s is found in the contemporary materials and particularly the attorneys' reports. 

  In par. 53 of his statement Mr. Ringer said that based on the 10-k and annual reports of the nine
 U.S. insurers he had reviewed all nine believed that their reserves were adequate to cover current and future asbestos bodily injury (and environmental liability) claims up to and including 1988 and that only at the 1989 year end did the first qualifications appear. I refer below in connection with Mr. Knowlton's evidence to the fundamental distinctions between the considerations applicable to and circumstances of a U.S. insurance company and a Lloyd's syndicate such as 418/417. For the purposes of any comparison between a U.S. insurance company and 418/417 it is necessary to compare net assets, exposure to asbestos-related claims (direct, reinsurance and retrocession), the extent of any reinsurance protections, the proportion of the reserves for asbestos-related claims to the total reserves and the fact that a U.S. insurance company is not concerned with equity between Names. Further 418/417 wrote 11 run-off contracts with a resultant funnelling of asbestos and pollution risks into the syndicate. 

  In par. 105 of his statement Mr. Ringer said: 

 . . .the unanticipated surge of claims by workers in trades other than shipbuilding and insulation goes a long way to explain why the Conning & Co. 1982 predictions became obsolete by the late 1980s. 

 The extent to which at any moment in time there were claims by workers in trades other than shipbuilding and insulation is shown by the contemporary documents and particularly the attorneys' reports. I have to consider the perception of asbestos-related claims (and pollution claims) at 17 different points in time (11 run-off contracts and six RITCs). The best guide is found in the contemporary documents and particularly the attorneys' reports. It is possible to point to "surges" but what 

 [1997] 287  L.R.L.R. Henderson v. Merrett Syndicate (Q.B. (Com. Ct.))    Cresswell, J. 

 matters for present purposes is the state of perception at the 17 different points in time. 

 Mr. Floyd Knowlton 

     Mr. Knowlton was called to give evidence on behalf of Merretts. He commenced employment with Travelers Insurance Co. Inc. in 1960. He remained with Travelers until 1989 when he moved to ITT Hartford Insurance Group. In 1979 Mr. Knowlton transferred to the strategic claims operations of Travelers. In April, 1979 he was asked to oversee Travelers' recently established department set up to deal exclusively with asbestos claims. In 1981 he was appointed vice-president. In late 1984 he was placed in charge of the strategic claim division which included large liability claims as well as the environmental unit. He remained in that position with Travelers until 1989 when he transferred to ITT Hartford to take up the position of director of environmental claims and litigation. He is presently a vice-president with ITT Hartford. Mr. Knowlton, in preparing his statement, did not have access to contemporary materials at Travelers. 

     In my view the most reliable indications of Mr. Knowlton's perception in the 1980's are to be found in the contemporary documents. As at April, 1983 (H4/294C) Mr. Knowlton is reported as saying: 

 . . .Asbestos is the single biggest problem we find in the industry. But the numbers aren't anywhere near the numbers that the Chicken Littles are saying. 

 In an article in "The Brief" in August, 1983 (H4/296C) Mr. Knowlton wrote: 

     The growth in asbestos claims that began in the late 1970s has become an explosion. The 1,100 claims that the Travelers Companies had in 1977 has grown to more than 60,000, which represent some 20,000 persons claiming some kind of injury due to exposure to asbestos fiber or an asbestos product. And 500 new claimants are being added monthly, a rate that is expected to continue through the end of the twentieth century, and perhaps longer. . .What makes asbestos different? There are several reasons: First, there is generally a long latent period between exposure to asbestos and any discernible injury; with related substances such as Agent Orange and DES, second generation claimants are even involved. It isn't like an automobile accident involving an instant, identifiable injury clearly involving individuals. . .Second, there is no experience pattern with asbestos claims. We know only that hundreds of thousands of people have been exposed to asbestos and some will manifest a disease. Third, many of these claims arise out of an occupational exposure. Thus, both the tort system and the workers' compensation system are involved. Neither wants to shoulder the burden of the other. Fourth, if insurance policies are involved, it isn't clear which apply or what role the policy holder plays if he was uninsured or his coverage exhausted. . .There is one common denominator in these decisions: coverage has been applied liberally and broadly and in favor of policy holders. This is not unusual in this type of case, but it can hardly be viewed as the guiding principle of law in these cases. . .Various reports have sought to quantify future claims. Among the diverse ones are a report done by Epidemiology Resources, Inc., . . .August 1982. . .; "Disability Compensation for Asbestos-Associated Diseases in the U.S.,". . .by Dr. . . Selikoff. . .under a contract with the Department of Labor and released on June 18, 1982; and "The Potential Impact of Asbestos on the Insurance Industry," published by Conning & Co., a Hartford brokerage firm, in September 1982. 

Mr. Knowlton's perception as at January, 1985 is referred to below. 

As at May, 1987 (Mr. Ringer's file 4/27) Mr. Knowlton is recorded as saying:  

 It causes me to think that this is going to go on forever. . .because the workers now suing have been in industries where they have been exposed to many products in addition to asbestos, insurers will have to conduct more investigations to determine whether there is an asbestos-related injury and whether it was caused by a policy-holder's product, notes Mr. Knowlton. . .As a result, legal and administrative costs could be very significant, he says. However, the indemnity payments in these cases may not be as large as for shipyard workers, Mr. Knowlton  added. 

The fact that it is far safer to rely on Mr. Knowlton's perception as reflected in contemporary documents as opposed to some passages in his witness statement is illustrated by the following example.  

 Paragraph 32 of Mr. Knowlton's witness statement: 

 I recollect that in the early 1980's there were some pessimists who predicted that property damage claims would present a bigger problem for insurers than bodily injury claims. However, neither I nor others at Travelers nor, to my knowledge, my associates at other insurance companies. shared that view at the time. 

should be contrasted with Mrs. Rowe's contemporary record of a conversation with Mr. Knowlton on Jan. 31, 1985: 

. . .Knowlton said the asbestos BI problem may be more or less under control, but he feels the P.D. will be at least as large - and may in turn spark more B.I. claims. . .(12/478). 

 [1997] 288  L.R.L.R. Henderson v. Merrett Syndicate (Q.B. (Com. Ct.))    Cresswell, J. 

 Mr. Knowlton refers in his witness statement to changes in the type of claimant (par. 23(2)), changes in the number of defendants (par. 27) and the development of class actions (par. 26). 

     The nature and extent of these changes and developments are most accurately reflected in the attorneys' reports from time to time. Mr. Knowlton says in par. 30 of his statement: 

 . . .In my own case, and I believe that to be reasonable and typical in the industry, the perception that reserving "to ultimate" was no longer possible developed during 1989 and 1990. By that time I had taken the view that reserving for these types of claims would have to be done on a simple projection of future payment streams covering a limited period of time. 

     There are fundamental distinctions between the considerations applicable to and the circumstances of a U.S. insurance company such as Travelers (not concerned with equity between two sets of Names, able to adjust reserves from year to year, net assets amounting to billions of dollars, primary layers/excess layers with extensive reinsurance protections, very little reinsurance exposure) and a Lloyd's syndicate such as 418/417. When asked whether he was able to provide any indication as to the proportion that asbestos reserves bore to total reserves at Travelers, Mr. Knowlton said that at the Hartford asbestos is probably 1 per cent. or 2 per cent. of the total reserves of some U.S. $9 billion and that Travelers and Hartford are about the same size. 

     Mr. Knowlton provided a valuable description of the extremely detailed approach adopted by Travelers in relation to reserving asbestos-related
 claims. 

 Mrs. Phillippa Rowe 

     Mrs. Rowe was called, as an expert witness on claims handling and managing, by the plaintiffs. After graduating in 1974 in Economics from Cambridge she spent 15 years in Lloyd's employed by R.J. Kiln. In 1981 she qualified as a Fellow of the Chartered Insurance Institute by examination. She is a Chartered Insurance practitioner. Her time at R.J. Kiln was spent almost entirely in the claims department where for most of her career she was claims manager. She was responsible to the extent shown by the contemporary documents for the calculation of the RITC figures, including estimates for IBNR. Since 1989 she has been practising independently as senior partner in her own firm. Mrs. Rowe was expert in claims handling and managing but made no claim to have any expertise in underwriting decisions. 

     Mrs. Rowe based her report on a reading of limited materials. In par. 4 of her report she said she had studied the various copy RITC files, in particular the "pruned" RITC files. Thus by way of example Mrs. Rowe did not read the E&W audit files (D1-13). 

 Mrs. Rowe was cross-examined at length as to the approach adopted by the Kiln Syndicate 510/511. The defendants rely on a number of points derived from this cross-examination. I will consider the position of the Kiln Syndicate below.  

 Mrs. Rowe said she became aware that 418/417 had written some of the same run-off contracts as the Outhwaite syndicate, once the Outhwaite run-off contracts became a subject of general discussion. She was asked whether it occurred to her at that stage that 418/417 would have an insoluble reserving and closing problem. She said that she believed it did and that at some of the reserving discussion meetings between the underwriter of Kiln 510/511 the conversation went along the following lines:  

. . .If our figures are this big, and still developing, how on earth do people with bigger portfolios, let alone run-off contracts, manage?  

 The essence of Mrs. Rowe's criticism of Merretts was as follows. She said that in her opinion they did not do as much analysis of their account as was possible. She said that the principal heads of analysis that she conducted, but Merretts did not conduct, comprised statistical triangulations of all sections of the account (including eventually separate triangulations for asbestos-related claims), graphical projections of those triangulations and close analysis of the direct casualty account from virtually complete records. Mrs. Rowe said that Merretts did not do as much analysis of their accounts as possible; had they done that analysis, coupled with the much greater knowledge that people like Mr. Ayliffe had of the underlying nature of the asbestos problems in the market, they would have come to the conclusion earlier that they should not close. Mrs. Rowe added that the larger the impact of asbestos-related claims (including in particular asbestos-related claims deriving from the run-off contracts which were even harder to estimate) the more any uncertainty was likely to damage the syndicate. Kiln was in the fortunate position that it could close in the years in question. She did not believe that 418/417 was in the same position. She was asked what approach she would have adopted if Kiln had written run-off contracts. She said that for each run-off contract she would want to be able to do the same exercise as she did for Kiln's own book of business, if she were to have any comfort at all in closing a syndicate with a run-off contract in it.  

 Although Mrs. Rowe's evidence must be approached with care having regard in particular to 

[1997] 289  L.R.L.R. Henderson v. Merrett Syndicate (Q.B. (Com. Ct.))    Cresswell, J. 

 the extent of her expertise and her limited consideration of the materials in the case, I formed the impression that she was a sincere and generally a reliable witness. For the reasons set out below I consider that there are marked distinctions between the position of the Kiln syndicate and 418/417. 

     I should record that the materials before the Court in relation to the Kiln syndicate were not complete. I accept Mrs. Rowe's evidence that there are a number of relevant materials missing from the files relating to the Kiln Syndicate. I was left with the impression that Mrs. Rowe was thorough in her statistical analysis of Kiln's own book of business. It should not be assumed that she would have reached the same conclusions as those arrived at in relation to Kiln if she had been concerned with 418/417's own book of business plus the 11 run-off contracts. 

 Kiln 510/511 

     There were marked differences between 418/417's own book of business and the book of business written by Kiln 510/511. Further Kiln did not write any run-off contracts. 

     From 1963 to approximately 1968 the Kiln Syndicate wrote a small book of direct U.S. casualty insurance. Nearly all of this was written under market line slips and in particular the Price Forbes line slip. Nearly all of it was high level excess umbrella business and none of it was primary business. That book ceased in 1968 or 1969. The Kiln Syndicate was mostly a reinsurance syndicate, and had always written some reinsurance of U.S. casualty business. In the 1970's that was predominantly either the casualty element of global or package reinsurances or the reinsurance of claims made and medical malpractice business. From the 1980's onwards, the element of global business disappeared, and from then on virtually all of the syndicate's U.S. casualty business was on a claims made or a high level clash basis. There was a specific programme of outward insurance to protect the direct book, which consisted of an excess cession treaty protecting each year of account, covering each line written. It varied from between 75 and 80 per cent. of the syndicate's line, in excess of 25 or 20 per cent. of the line, with unlimited reinstatements as to the original business and that in turn enured to the benefit of an excess of loss protection, with a very low deductible, about U.S.$10,000 each and every loss, also with unlimited reinstatements. Thus the per loss retention of the syndicate was approximately U.S.$5000 or U.S.$10,000 any one casualty loss. The syndicate's total casualty book was never more than about 10 per cent. of the book at its maximum. 

     Mrs. Rowe said: 

. . .we did not have the sort of book that would inevitably respond to every casualty problem that
surfaced [(Day 26/123) and] we were known in the market as almost entirely a short tail syndicate (Day 27/93). 

For other points of distinction between 418/417 and 510/511 see the plaintiffs' closing submissions 21/15.  

 A chart prepared on behalf of the plaintiffs contrasted the stamp capacity and RITC gross of credit for T&D in the case of 418/417 and Kiln 510/511. 

 In the chairman's report dated May 3, 1995 Mr. C. K. Murrey, Chairman of R. J. Kiln & Co. Ltd. wrote: 

 Syndicate 510 is certainly one of the few if not the only syndicate that wrote a general Non-Marine account in the 1960's and that does not owe its survival to a reinsurance policy purchased from the Outhwaite Syndicate or from one of the very few markets that offered this cover. Our survival is due to the fact that we have always attempted to keep our acceptance of liability business in the United States to a low percentage of our overall account and because our total group capacity has grown from approximately £1 m in 1963 to approximately £500 m today. 

Mrs. Rowe described 510/511's general approach to reserves as follows: 

 We started with noted outstandings received from professionals, lawyers, adjusters, and the like. . .We made no attempt. . .to interfere with those figures. . .Before applying any projections to our total figures, we then put in our own specific IBNR, or supplementary reserves, which was the syndicate's own judgment of where those specific claims should be reserved. . .We then did a statistical projection on the total figures. . .(Day 26/22).  

 The defendants rely on a number of contemporary documents from Kiln's files including inter alia the following which relate to the years ended Dec. 31, 1984-1986: 

 (i) The 510/511 RITC as at Dec. 31, 1984 Supplementary Reserves 

 (a) Asbestos - bodily injury claims 

N1/358 

Last year we loaded our noted asbestos figures by 100%. . .This year. . .I. . .suggest a 50% IBNR. In addition I am not removing our old "expense" reserves. . . 

 (b) Asbestos - property damage 

N1/359: 

To date, one reinsured. . .and one insured. . .have advised potential P.D. claims. We have no 

 [1997] 290  L.R.L.R. Henderson v. Merrett Syndicate (Q.B. (Com. Ct.))    Cresswell, J. 

 reserves. . .We know that several other reinsurers. . .anticipate P.D. claims. . .At the moment we have no way of predicting what our involvement will be and I therefore am making no suggestions for supplementary reserves. . . 

     (c) Pollution/Toxic Waste/Clean-up Costs 

 N1/361: 

     American insurers forecast that this class of claims will be the "next asbestosis" - and possibly bigger . . . Some claims have already been made on the Lloyd's market . . . Shell . . . reserving this in (our attorneys) most pessimistic assumptions . . . produces NIL to . . . 510/511 . . . For neither of these claims do I think we need any extra reserves added to our noted outstandings . . . Nor, at this stage, am I suggesting any other supplementary reserves - we have far too little information to make a sensible suggestion. 

     A chart prepared on behalf of the Merrett defendants compares the position as at Dec. 31, 1984 and Dec. 31, 1989 in relation to asbestos, pollution and property damage. 

     (ii) The 510/511 RITC as at Dec. 31, 1985 Supplementary/Specific IBNRs 

     (a) Asbestos - bodily injury claims 

 N2/41: 

     Claims are also being made against insurers from some new sources. . .Claims from various American railroad companies. . .last year's 50% load on noted outstandings as an asbestosis IBNR is still reasonable and should be continued but now applied to all years. . . 

 but see N2/100: 

 Moreover our history of asbestos "specific IBNRs" has been a load of 100% for 1983 when reserve information was rudimentary and a load of 50% for (1984) when we thought nearly all exposures were reserved. A load of 50% again when reserves have increased again and the "Facility" has taken effect is not therefore justifiable; 

     (b) Asbestos - property damage 

 N2/44 

     We have received new advices this year on account of US Gypsum. . .These reserves are precautionary only. . .We know that several other reinsureds. . .anticipate P.D. claims . . . though few have formally been made. . .We should begin establishing IBNRs for expenses, but we are still not in a position to forecast our loss IBNR which is still "unknowable". 

     (c) Pollution/Toxic Waste/Clean-up Costs 

 N2/45: 

  We have several more advices since last year end, both directly and by way of reinsurance. . .I therefore think it appropriate . . .to begin setting up "expense" IBNRs although it is still impossible to predict the outcome of the claims themselves. 

 See further the document at p. 102 of bundle N3 which summarizes the syndicate's RITC as at Dec. 31, 1985. 

  (iii) The 510/511 RITC as at Dec. 31, 1986 

  (a) Asbestos - bodily injury claims 

 N2/147: 

 . . .plaintiffs' attorneys are actively seeking both new claimants and new target defendants . . . The IBNR for claims is now included in our graphs and estimated ultimate losses for all long tail business. . .It would. . . be illogical to include a further specific amount. . . 

  (b) Asbestos - property damage 

 N2/149: 

  We continue to receive new advices. . .I think we should begin establishing IBNRs for expenses, but we are still not in a position to forecast our loss IBNR which is still "unknowable". . . 

  (c) Pollution/Toxic Waste/Clean-up Costs 

 N2/149: 

 We continue to receive new advices, but largely without reserves - at least for our years of
 involvement . . . I think it is appropriate to continue setting up "expense" IBNRs. 

  According to the figures at N2 pp. 282 to 284 as at Dec. 31, 1987 the cumulative total of asbestos bodily injury claims amounted to 471 (a claim being defined as the total claim for one insured for one policy year or for one reinsured in respect of one insured for one policy year). As to asbestos property damage the total number was 41 and as to pollution - EPA the total number was 182. 

  I have carefully considered the contemporary documents relating to 510/511 and with these in mind I have given appropriate weight to Mrs. Rowe's evidence in relation to each of the six 418/417 RITCs. As Mr. Ayliffe said attempts to compare one syndicate with another in terms of the impact of asbestos etc. are liable to be a trap for the unwary because no syndicate is the same as another. Every syndicate has a different historical background. 

  There are numerous points of distinction between 418/417 and 510/511 including the fact that 418/417's own book of U.S. casualty business was far greater than 510/511's own book and the fact that 510/511 did not write any run-off contracts. I should not be taken to accept that the approach adopted by 510/511 in respect of its own particular 

 [1997] 291  L.R.L.R. Henderson v. Merrett Syndicate (Q.B. (Com. Ct.))    Cresswell, J. 

 book of business was necessarily appropriate in every respect. Nor do I accept without reservation the totality of Mrs. Rowe's evidence. However it should not be assumed that Mrs. Rowe would have reached the same conclusions as those arrived at in relation to Kiln if she had been concerned with 418/417's own book plus the 11 run-off contracts. 

 Mr. David Neil 

     Mr. Neil was called, as an expert witness on underwriting practice, by the plaintiffs. 

     In 1980 Mr. Neil was employed as active underwriter of non-marine Syndicate 939 (Octavian). The business underwritten by Mr. Neil at Syndicate 939 included North American casualty which was all written on a treaty excess of loss basis and included general liability among other categories of business. He was also a director of Octavian Underwriting Ltd., a joint members' and managing agency and Octavian Syndicate Management Ltd., an underwriting managing agency. Syndicate 939 in 1981 was relatively small, under £2 m. stamp capacity. In 1986 the capacity was approximately £13 m. and grew to £35 m. by 1991. A number of paragraphs in Mr. Neil's witness statement are open to criticism. I give some examples as follows. Paragraph 83 did not make express reference to Mr. McNamara's schedules. Mr. Neil's research as to par. 114 (comparison with Outhwaite) was inadequate. Mr. Neil withdrew the criticism in the first sentence of par. 122 in the light of the McNamara schedule for year 4. Despite the terms of par. 130 et seq., Mr. Neil stated in evidence that he had no criticism to make of Merretts' use of time and distance policies. Paragraph 138 should be read in the light of his supplementary statement. Mr. Neil accepted that the second sentence of par. 143 was not justified. Paragraphs 189 and 190 did not refer to Mr. Merrett's witness statement in these proceedings. To his credit Mr. Neil was ready to withdraw criticisms if they could not be justified and to acknowledge errors. 

     As to the six RITCs Mr. Neil advanced a fundamental criticism of Merretts as follows. It was, he maintained, impossible to establish an IBNR within a reasonable degree of accuracy for those syndicates with substantial exposure to asbestos-related claims over a large number of years. This fundamental criticism applied particularly to 418/417 because it was one of the heaviest U.S. casualty syndicates in Lloyd's. In making this criticism Mr. Neil drew attention to the size and scale of 418/417's account, the number of years over which the business was written (1953 onwards), the type of business written, the number of claims, the source of those claims and the difficulty of identifying how many claimants there would be in the future, the number of years which would see claims in the future, and the amount that each claimant might recover. 

 Mr. Neil advanced a number of general and detailed criticisms in relation to the writing of the 11 run-off contracts. 

 The defendants rely on certain passages in Mr. Neil's cross-examination e.g. Day 29/137-138 as to whether or not objective justifiability is needed in setting an IBNR. In my view Mr. Neil was at times confused by terminology in some of the answers he gave in particular in the passage referred to above. I consider this subject further under the heading "RITC - Some General Principles" section 19 below.  

 I found Mr. Neil's evidence in relation to the run-off contracts far more compelling than Mr. Rome's evidence on that subject for the reasons set out below. Although I have a number of reservations about Mr. Neil's evidence in relation to the six 418/417 RITCs, in my view his fundamental criticism in respect of years 4, 5 and 6 was sound.  

Octavian 939 

 The defendants relied on a number of matters drawn from an analysis of the approach adopted by Mr. Neil as underwriter of Syndicate 939. In my view there are very marked differences between 418/417 and Syndicate 939 and because of these differences any comparison of the approach adopted in respect of 418/417 on the one hand and 939 on the other is of limited value. Some of 939's business was workmens' compensation business, subject to restrictive clauses. The majority of the rest of the business was clash cover business (for a description see Day 33/118/25 et seq.). Syndicate 417 was an underwriter of direct insurance business. Syndicate 939 did not write any direct insurance business. 417 started writing business in 1953, 939 in 1981. Syndicate 939 had extensive reinsurance protections (a low level reinsurance programme - within the first $20,000 there were limited reinstatements, after that 939 had unlimited reinstatements). The principal source of asbestos losses so far as 939 was concerned was LMX business. Syndicate 939's 1990 year of account was left open at Dec. 31, 1993 due to:  

. . .the material uncertainty surrounding the syndicate's exposure to a large North American reinsurance company's Non-proportional Marine Treaty and Personal Stop Loss Business. . . .Whilst Syndicate 939 did not commence underwriting until 1981 significant amounts of asbestosis and environmental pollution claims are being received through casualty business written in the early 1980's. This area was previously reserved as part of the core account, however due to the size and frequency of new claims advice(s) a separate IBNR reserve was set up at the end of 

 [1997] 292  L.R.L.R. Henderson v. Merrett Syndicate (Q.B. (Com. Ct.))    Cresswell, J. 

 1992. An amount of £1,383K has been reserved with respect to 1990 and prior as at 31 December 1993.  The IBNR reserve is set at 200% of outstanding claims. (see N3/392, 398). 

 Mr. Neil said that the figures relating to asbestos and pollution "would have been no reason to keep the 1990 year of account open". Mr. Neil thought that paids as at Dec. 31, 1993 amounted to U.S.$300,000. As at Dec. 31, 1993 the total reserve for estimated future liabilities in respect of the 1990 year amounted to £39,468,055 of which the net outstanding claims in respect of asbestosis and pollution amounted to £691,746 and the IBNR amounted to £1,383,492. 

     For other points of distinction between 418/417 and 939 see the plaintiffs' closing submissions 21/22. 

 Mr. Christopher Rome 

     Mr. Rome was called as an expert witness on underwriting practice by Merretts. 

     Mr. Rome was the underwriter of Syndicate 662 and a director of C. W. Rome (Underwriting Agency) Ltd., L. G. Cox & Co. Ltd. and Gammell Kershaw & Co. Ltd. These companies are all managing agents of marine syndicates at Lloyd's. Mr. Rome joined Lloyd's on leaving school in 1955. He was appointed the active underwriter of Syndicate 926 in 1972. In 1979 he founded C. W. Rome (Underwriting Agency) Ltd. and Syndicate 662 was formed. He continued as underwriter of both syndicates and they were merged in 1989 as 662. The syndicate ceased trading at the end of 1993. Mr. Rome was a director until 1988 of Bolton Ingham (Agency) Ltd. which was a managing and members' agency acting for two marine and one non-marine syndicates. The non-marine Syndicate 231 had written a long tail book of business and remained open for two or three years as a result of uncertainty on computer leasing. This syndicate had a significant number of asbestos claims. Mr. Rome has been actively involved in writing a wide range of business for over 30 years. He has been a leader, inter alia, of energy, hull, cargo, war and contingency business. 

     Mr. Rome has served on a number of Lloyd's and industry committees. In 1988 Mr. Rome was asked by the then chairman of the Lloyd's underwriting agents' association to join a working party under the leadership of Mr. Martin Hunter of Freshfields, who had been appointed to consider the underwriting by Mr. Outhwaite of a number of reinsurance contracts. Mr. Rome provided an expert report in the case of Stockwell v. Outhwaite although he was not in the event called to give evidence as the case was settled out of Court (see B. F. Caudle v. Sharp, [1995] L.R.L.R. 80 at p. 86 - the report records that a sum of £116 m. was accepted by the names in full and final settlement of their claims against the agents). 

 Mr. Rome as underwriter of Syndicate 662 was one of the underwriters on the errors and omissions line slips. A line on some of the layers of the lines slip would inevitably be exposed to successful claims in the Lloyd's litigation. As a Name on Syndicate 662 Mr. Rome is potentially at risk personally in relation to the result of this case. In subsequent years he wrote a substantial line on a stop loss contract which would be a substantial beneficiary if the plaintiffs in this action succeed. Further in the event of the litigation succeeding he would be able to make
recoveries against the excess of loss programme. Thus he said he had a financial interest in the matter which he could not assess. In fairness to Mr. Rome he disclosed in par. 13 of his witness statement that he was one of the underwriters on the errors and omissions line slips. It is of course most unusual for an expert witness to have a financial interest in the result of the case. I do not suggest that this consciously affected Mr. Rome's evidence.  

 I have, however, a number of reservations about his evidence for other reasons. In my view Mr. Rome's evidence about the writing of the run-off contracts was unrealistic and unreasonably defensive. He said that if there were criticisms to be made of the writing of the run-off contracts they were not such as to lead him to believe that the writing of any of the run-off contracts was professionally incompetent. On the basis of such evidence as has survived he concluded that he could properly have written those contracts individually and in the aggregate. Paragraph 153 of his statement in relation to Sturge was materially inaccurate (see Day 34/91 et seq.). The sentence in par. 138 of his statement:  

. . .it is hard to see what other enquiries Mr. Merrett or Mr. Emney could have made to improve their knowledge of the risks under consideration. . .  

is not supportable. 

 Mr. Rome's statement did not contain any detailed critical analysis of the RITCs in years 1 to 6. Again I found his evidence at times in this connection unreasonably defensive. By way of example he said that if the underwriter and the auditors had known that the Ballantyne contract had deteriorated within three years of writing, to the extent that the incurred position had reached a deficit of U.S.$2.5 m., he would not have expected them to be unduly concerned. I do not consider it was realistic to describe this contract as "one contract of many thousands of contracts, which form part of the accounts of that syndicate". 

 [1997] 293  L.R.L.R. Henderson v. Merrett Syndicate (Q.B. (Com. Ct.))    Cresswell, J. 

     As to a comparison between the business of 418/417 and Syndicate 662, Mr. Rome said that 418/417 was substantially larger than 662. Syndicates 418/417 had written more business and had probably written larger lines. He added that it was impossible for the Court to form more than a general impression of the relative sizes and exposures of these syndicates to each other. 

 Mr. B. Thomas Florence and Mr. John Ryan 

     Reports from Mr. B. Thomas Florence (on behalf of Merretts but also relied on by E&W) and Mr. John Ryan (on behalf of Merretts) were subject to Civil Evidence Act notices. 

 Mr. Paul McNamara 

     Mr. McNamara is a partner with the firm of Ernst & Young. In the period from 1980 to 1987 he was the audit partner responsible for the audit of Merretts' accounts and solvency reports, together with Mr. Nigel Holland. 

     Mr. McNamara qualified as a chartered accountant in 1973. In 1979 he was admitted as a partner in E&W. In September, 1979 E&W merged with Baker Sutton & Co. and Mr. McNamara became involved with some of the insurance clients of the former Baker Sutton firm, and in particular the audit of the syndicates managed by Merretts. In addition he became involved with the audit of Syndicates 401 (Cuthbert Heath), 317/661 (R. H. M. Outhwaite), 518 (Salter and Outhwaite) and 552 (Mander Thomas and Cooper). In 1983 Mr. McNamara led a team which made a successful proposal in a competitive tender for the audits of syndicates managed by Norman Frizzell Underwriting Ltd (Syndicates 979, 975 and 850). In 1983 Mr. McNamara became responsible for the audits of two further syndicates which had commenced underwriting in 1983: 672 (I. C. A. Agnew Underwriting) and 321 (Outhwaite and Green). Mr. McNamara also became the audit partner for a syndicate formed by Mr. David Mann, formerly of Merretts, for the 1984 year of account. 

     In 1982 Mr. McNamara assisted with the Lloyd's enquiry into PCW and WMD Underwriting
 Agencies. 

     From 1987 until 1992 Mr. McNamara was the partner in charge of the U.K. insurance industry group of E&W and subsequently Ernst & Young. Mr. McNamara has served on the Lloyd's accounting and auditing standards committee. 

     I was very impressed with the candid manner in which Mr. McNamara gave his evidence. He responded frankly to detailed questioning. E&W were placed in a difficult position by the "shattering news" of early April, 1985. They did however become aware that 417 was party to a portfolio of six run-off contracts in the course of the year 3 audit. The six run-off contracts were not given adequate attention by E&W in year 3. The breakdown in communication and organization in the course of the year 3 audit was exacerbated by Merretts' failure to disclose the run-off contracts written by 418 and the Judd run-off contract. It is never pleasant to have to make a finding of negligence against a professional man and it is with particular regret that I feel compelled to make a finding of negligence against E&W in years 4, 5 and 6 for the reasons set out below. I make the finding after appropriate allowance for all the difficulties that Mr. McNamara faced, particularly in year 4. I am bound to say that given the deadlines that apply to all Lloyd's syndicates and the particular problems that emerged in relation to 418/417 and Outhwaite 317/661, Mr. McNamara appears to me to have been subject to an unduly heavy burden of work, particularly in year 4. 

Mr. Hill 

 Mr. Hill's statement was put in evidence on the basis identified at Day 43/61. 

Mr. Nigel Holland 

 Mr. Holland is now retired. He qualified as a chartered accountant in 1951 and became a partner of Baker Sutton & Co. in 1960. When Baker Sutton & Co. merged with E&W in 1979 he became a partner in E&W. He retired in August, 1988.  

 By the mid-1970s the major part of Mr. Holland's workload was insurance related. His curriculum vitae summarizes his Lloyd's and insurance related experience. 

 Mr. Holland first became involved with the audit of the Merrett Syndicates in about 1957. As Mr. Holland was becoming increasingly involved with Lloyd's committees and enquiries in the early 1980s, culminating in his appointment in January, 1983 as one of two inspectors with respect to the Alexander Howden affair, Mr. McNamara took over principal responsibility for the audit of the Merrett Syndicates from the year end Dec. 31, 1982. From that year end onwards Mr. Holland's role was limited to that of "client partner". His involvement with the audit itself post-1981 was limited. He did not become involved with the detailed auditing, nor did he review the work that was conducted.  

The expert evidence on auditing standards and practice 

Mr. Frank Attwood 

 Mr. Attwood was called as an expert witness on behalf of the plaintiffs. 

 In 1974 Mr. Attwood became a partner in Robson Rhodes. Since 1989 he has been the chief executive officer of R. S. M. International, the  

 [1997] 294  L.R.L.R. Henderson v. Merrett Syndicate (Q.B. (Com. Ct.))    Cresswell, J. 

 worldwide accounting group of which Robson Rhodes is the U.K. member. He is a representative of the I.C.A.E.W. on the joint international committee of chartered accountants. From about 1979 to 1983 he was his firm's representative on the international professional standards committee, which was the committee responsible for setting standards for international auditing work throughout the world (being appointed chairman during his later years of involvement). In 1976 he became the author of the 15th edition of the standard text "de Paula's Principles of Auditing" (Pitman) and has also been the author of the 16th and 17th editions. In 1978 he was asked by the I.C.A.E.W. to write an introductory text to the discussion drafts of the proposed auditing standards. 

     Mr. Attwood became a member of the auditing practice committee in 1980. He was asked by the A.P.C. to become its representative on the C.C.A.B. Lloyd's sub-committee in 1982. At about that time Robson Rhodes was in the process of obtaining "recognition" by Lloyd's for the purposes of undertaking syndicate audits. 

     In 1984, Mr. Attwood became the chairman of the newly formed A.P.C. Lloyd's working party, charged with the development of auditing guidance in relation to Lloyd's syndicates, following the recent byelaw changes at Lloyd's and the publication by the A.P.C. in 1980 of the auditing standards and guidelines. That role continued until the publication in 1992 of Practice Note No. 2, "The Lloyd's Market", by the then auditing practices board. Previously the working party had produced the audit brief "Lloyd's Syndicates" in 1986, and several additional practice notes providing guidance on specific topics, all of which then became combined in "The Lloyd's Market" publication. In 1985 Mr. Attwood became a member of the I.C.A.E.W. insurance sub-committee. 

     In 1982 Mr. Attwood was partner-in-charge of Robson Rhodes London office. Initially his role was as "second" or "support" partner to the audit partner responsible for work for the John Townsend group of companies, then comprising a Lloyd's broker, a members' agent, a managing agent and two marine syndicates with incidental non-marine syndicates (275/276 and 575/645). In about 1985 he took over lead responsibility for that client and remained involved with its syndicate audits for two years until the group's divestment of its managing agency activities. 

     Mr. Attwood was an extremely impressive witness. He has very considerable professional standing and knowledge. He was prepared to withdraw a criticism if it was not justified or supportable. 

     It is necessary in considering Mr. Attwood's evidence to bear in mind (a) that he had limited experience as a panel/recognized auditor (b) that his own standards in years 1 to 3 may to some extent be above the reasonable average (c) that at times his approach tended to be slightly over-purist/over-technical and (d) the approach adopted in relation to 275/276 as to which see below. 

 As to the appropriate materiality level or maximum level of tolerance of error in 418/417's RITC premium, whereas on the one hand I consider that the level adopted by Mr. Attwood was somewhat strict for a long tail syndicate, on the other hand I do not accept the very much higher percentages contended for by E&W and their experts.  

 While it is important to make appropriate allowance for the above I was left with the firm impression that Mr. Attwood's evidence was soundly based by reference to appropriate professional standards (by way of example only I refer to his evidence in relation to the need for audit evidence and the appropriate approach to management representations). I was particularly struck by an important point made by Mr. Attwood in the course of his evidence (Day 48/132/4): 

 Asbestosis and environmental pollution. . .were on a continuum where at one point one approach to reserving was appropriate, and at (a later) point in time matter(s) changed such that a different approach was what appeared to me to be appropriate.  

Syndicate 275/276 

 E&W rely on a number of points derived from an examination of the audit of Syndicate 275/276. I have made appropriate allowance for these in my findings as set out below. It is however most important to remember that the 1981 year of account was left open as at Dec. 31, 1983. The 275/276 accounts at Dec. 31, 1983 stated:  

. . .During 1983 the number of latent disease advices notified to the syndicates has risen to such a level that we have had to increase substantially our reserves. Moreover, because of the uncertainty surrounding the size and timing of any latent disease claim settlements we have decided that the fairest course of action as far as the Members of syndicate 275/6 are concerned is to leave open the 1981 account for at least a further 12 months. It is currently impossible to fix an accurate reinsurance premium to enable us to close it. Notwithstanding the above we have had to make our best estimate of the requirement to cover these potential losses and as a result the figures for 1981 will show a loss of 10.05% of the allocated premium income after taking credit for capital appreciation, investment income and after deducting all syndicate and Names' expenses. However, if outstanding claims are  

 [1997] 295  L.R.L.R. Henderson v. Merrett Syndicate (Q.B. (Com. Ct.))    Cresswell, J. 

 settled for less than the reserve plus its attributable investment earnings there will be a balance to be remitted to the Names. Conversely, of course, if our estimate is too low then the loss will be greater. (Emphasis added (R3/64-2)). 

 Mr. John Whiter 

     Mr. Whiter was called as an expert witness on behalf of E&W. His evidence was relied on by Merretts. Mr. Whiter's evidence addressed years 4 to 6. 

     Mr. Whiter has since February, 1994 been the finance director of the Benfield Group Ltd., a company whose principal subsidiaries consist of a Lloyd's broker, specializing in reinsurance, and a reinsurance company. For over 18 years until January, 1994 Mr. Whiter was a partner in the accountancy firm Neville Russell. 

     In the latter part of 1982, Mr. Whiter led the team which investigated the "P.C.W. affair" on behalf of Minet Holdings Plc. While a partner in the London office of Neville Russell, Mr. Whiter's clients included a number of Lloyd's syndicates, Lloyd's underwriting agencies and Lloyd's brokers. Among the Lloyd's syndicate clients for whom he was responsible as audit partner were 12 syndicates managed by R. W. Sturge & Co. (in respect of the audits as at Dec. 31, 1986 and subsequent years) and three syndicates (marine and non-marine) managed by Roberts & Hiscox Ltd. (in respect of the audits as at Dec. 31, 1983 and subsequent years) and, on a joint audit basis, three syndicates managed by F. L. P. Secretan & Co. (in respect of the audit as at Dec. 31, 1983 only). These audits included non-marine and incidental non-marine syndicates which had a material exposure to latent diseases and pollution. Certain of the Sturge and Hiscox syndicates had the benefit of run-off contracts. From about 1983 Mr. Whiter became responsible for the management of Neville Russell's syndicate book-keeping department. This department was responsible, on a sub-contract basis, for the book-keeping of a number of Lloyd's syndicates. At that time, the department dealt with approximately 80 syndicates including Outhwaite 317/661 and Secretan 367. 

     Mr. Whiter became managing partner of the
 London office in 1988 and senior partner of the
 London office in 1992, which role he retained until
 he left in January, 1994. 

     Mr. Whiter is a defendant in the Secretan case which forms part of the Lloyd's litigation (long tail category). It is of course most unusual to find that an expert witness has a direct financial interest in the result of another case in which similar issues arise, but I recognize that there are a limited number of auditors with the requisite experience to give expert evidence in the Lloyd's litigation. I do not suggest that Mr. Whiter's interest in the Secretan case consciously affected his evidence. I regret however that I have serious reservations about Mr. Whiter's evidence. It seemed to me that he was concerned to defend without reservation everything that E&W did in the years 4 to 6. I consider that at times Mr. Whiter's answers were evasive. Some of his evidence was unrealistic. By way of example I refer to Mr. Whiter's evidence (Day 49/p. 169/line 2): 

 [Q.] Would you say that the systems operated by Merretts for the "recording and control of. . .claims" had been adequate in relation to claims under the run-off contracts as at 31st December 1983 when I remind you 4.65 m. worth of claims were not recognised at all? [A.] In the context of the total claims for the syndicate, probably that would not qualify as a breakdown in the system of recording. . .  

By way of further example Mr. Whiter said in relation to the run-off contracts in year 4 that he would have been prepared to express an opinion provided he had the outstandings and the paids - he would not have needed anything else. It is to be noted that the reserves in respect of 10 of the run-off contracts in year 4 amounted to £55 m. Mr. Whiter added that information as to the reinsurance cover available to the cedants would be helpful but not necessary.  

 I consider that at times Mr. Whiter's approach was not logical. I refer by way of example to par. 123 of his witness statement where he said:  

 The nature and extent of the uncertainty and its impact on the syndicate may be such that leaving the year open is the only reasonable course. However, this is more likely to be the case where the uncertainty is expected to be resolved or substantially reduced within a certain period . . .  

Mr. Ralph Sharp 

 Mr. Sharp was called as an expert witness on behalf of E&W. His evidence was also relied on by Merretts. Mr. Sharp's evidence addressed years 1 to 3.  

 Mr. Sharp is the managing director of Archer Holdings Plc, a position he has held since August, 1983. In 1976 he was admitted to partnership with Futcher Head & Gilberts a firm of chartered accountants who had the fourth or fifth largest market share of work done for Lloyd's syndicates for the later 1970s until he left in December, 1983. After resigning from Futcher Head & Gilberts in December, 1983 Mr. Sharp was admitted to partnership in Spicer & Oppenheim London in January, 1984. Spicer & Oppenheim were also chartered accountants and panel auditors. Mr. Sharp took a  

 [1997] 296  L.R.L.R. Henderson v. Merrett Syndicate (Q.B. (Com. Ct.))    Cresswell, J. 

 substantial part of the insurance practice of Futcher Head & Gilberts (including a number of their staff) with him to Spicer and Oppenheim. He was the head of the insurance group of Spicer & Oppenheim and Touche Ross & Co. from approximately 1986 until he resigned from the merged partnership in December, 1990. In his practice as an accountant Mr. Sharp was responsible for the audit of a number of syndicates with exposure to U.S. casualty business including the Murray Lawrence syndicates, the Dolling-Baker syndicate 544 and the Frizzell syndicates. A number of the syndicates that Mr. Sharp audited which closed their years as at Dec. 31, 1982 and Dec. 31, 1983 had the benefit of run-off contracts. 

     On Jan. 1, 1991 Mr. Sharp became the managing director of Castle Underwriting Agents Ltd. who are Lloyd's managing agents, who were responsible for a number of non-marine syndicates. He held that position until he was appointed as managing director of Archer Holdings Plc in August, 1993, which is one of the two publicly quoted Lloyd's underwriting agents. 

     Mr. Sharp was the chairman of G. W. Run-Off Ltd. from its creation in October, 1991 until April, 1993. G. W. Run-Off Ltd. was a run-off company established to manage the run-off of the Gooda Walker syndicates. 

     Mr. Sharp was a member of the working party established by the A.P.C. of the C.C.A.B. in approximately 1984 which produced the audit brief entitled "Lloyd's Syndicates". Mr. Sharp became a member of the Institute of Chartered Accountants insurance industry sub-committee from 1991. 

     Mr. Sharp became a member of Lloyd's on Jan. 1, 1992. 

     In October, 1993 Mr. Sharp was appointed as the chairman of the Micro Reserving group, which is part of the Lloyd's Equitas project. On Jan. 1, 1995 the Micro Reserving group and the Macro Reserving group were merged and are now called the "Inwards Group". Mr. Sharp is chairman of the combined group. 

     Of the syndicates under the management of Archer the Alec Sharp syndicate 839 leads a number of the higher layers on the members' agents' E&O slip. Syndicate 741 (and possibly other syndicates) under the management of Archer has a line on an auditors' E&O line slip. I do not suggest that these matters influenced Mr. Sharp's evidence. I do however have certain reservations about Mr. Sharp's evidence. By way of example I refer to par. 53 of his supplementary report where in dealing with the Ballantyne run-off contract he said: 

 . . .418/417, on the other hand, being much bigger and carrying reserves of some US$141.5m (£90.7m) was entitled at that stage to treat this as a contract which did not require a specific reserve and such an approach was one which a reasonably competent auditor would have been entitled to accept. 

Further I consider, again by way of example, that some of Mr. Sharp's answers in respect of par. 3 of Mr. Murray Lawrence's letter were unsafisfactory.  

The witnesses Merretts did not call 

Merretts did not call either Mr. Emney who scratched the 11 run-off contracts or Mr. Jackson who was the underwriter of 799. Both Mr. Emney and Mr. Jackson could have given me considerable assistance on important issues in this case for reasons explained elsewhere in this judgment.  

 I give one example as to Mr. Emney. In relation to the most significant of the 11 run-off contracts (Sturge/Fireman's Fund) written by 417 (37.5 per cent.) and Merrett Syndicate 421 (12.5 per cent.) Mr. Emney said in the 421 loss review:  

[A]. It had become a highly political issue, in a sense, I suppose. It was more of an exercise to get Bowrings out of the shit than to place a risk - if you will pardon my French. 
 
 [Q]. Did you feel that you were being pressurized to write that contract against your better judgment? [A]. Mr. Merrett wrote the contract, I did not write it, I may have put the stamp on the slip and wrote the line, but it was Mr. Merrett's decision to write it and undoubtedly Bowrings were looking for a bit of a help out on something which was, for them, a very hot potato, as I think they were being threatened with all sorts of suits by the Fireman's Fund etc.. . .  

This evidence to the 421 loss review was wholly inconsistent with Mr. Merrett's account in evidence before me. In reaching my conclusions as to the writing of run-off contracts I have disregarded Mr. Emney's evidence on all prior occasions (including the evidence referred to above), but I am left with a considerable sense of disquiet having only heard from Mr. Merrett.  Further I regret having to make findings against Mr. Emney without having heard from him. 

17. THE REGULATORY REGIME FOR THE YEARS ENDED 31ST DECEMBER 1980-1986 

Auditing Standards, Auditing Guidelines, etc. 

 The following Standards and Guidelines are relevant for the purposes of this case. 

 Auditing Standards and Guidelines - explanatory foreword (issued April, 1980) provided: 

Scope of Auditing Standards and Auditing Guidelines - Auditing Standards prescribe the basic principles and practices which members are expected to follow in the conduct of an audit. 

 [1997] 297  L.R.L.R. Henderson v. Merrett Syndicate (Q.B. (Com. Ct.))    Cresswell, J. 

 Unless otherwise indicated in the text. Auditing Standards apply whenever an audit is carried out. Each Auditing Standard will consist of a text to which there may be added an explanatory note. Explanatory notes have the same status and purpose as Auditing Guidelines (see paragraph 5 below). 

 It would be impracticable to establish a code of rules sufficiently elaborate to cater for all situations and circumstances which an auditor might encounter. Such a code could not provide for innovations in business and financial practice and might hinder necessary development and experiment in auditing practice. In the observance of Auditing Standards, therefore, the auditor must exercise his judgment in determining both the auditing procedures necessary in the circumstances to afford a reasonable basis for his opinion and the wording of his report. 

 The glossary of terms in the appendix stated: 

 The following terms in the Explanatory Foreword to Auditing Standards and Guidelines, in the Auditing Standards or in the Auditing Guidelines are used with the following meanings: 

 Audit - the independent examination of, and expression of opinion on, the financial statements of an enterprise by an appointed auditor in pursuance of that appointment and in compliance with any relevant statutory obligation. 

 The Auditor's Operational Standard (issued April, 1980) provided: 

 Planning, controlling and recording 

 2. The auditor should adequately plan, control and record his work. . . 

 Audit Evidence 

 4. The auditor should obtain relevant and reliable audit evidence sufficient to enable him to draw reasonable conclusions therefrom. . . 

 The Auditing Standard: Qualifications in Audit Reports (issued 1980) provided: 

 Part 1 - Statement of auditing standard. . . 

 3. The nature of the circumstances giving rise to a qualification of opinion will generally fall into one of two categories: 

 (a) where there is an uncertainty which prevents the auditor from forming an opinion on a matter (uncertainty); or  (b) where the auditor is able to form an opinion on a matter but this conflicts with the view given by the financial statements (disagreement). 

 Each of these categories gives rise to alternative forms of qualification depending upon whether the subject-matter of the uncertainty or disagreement is considered to be fundamental so as to undermine the view given by the financial statements taken as a whole. 

4. The forms of qualification which should be used in different circumstances are shown below. 

Nature of circumstances   Material but not fundamental   Fundamental  Uncertainty   "Subject to"     opinion   Disclaimer of     opinion  Disagreement  "Except" opinion     Adverse opinion

- In a disclaimer of opinion the auditor states that he is unable to form an opinion as to whether the financial statements give a true and fair view. 

- In an adverse opinion the auditor states that in his opinion the financial statements do not give a true and fair view. 

- In a "subject to" opinion the auditor effectively disclaims an opinion on a particular matter which is not considered fundamental. 

- In an "except" opinion the auditor expresses an adverse opinion on a particular matter which is not considered fundamental. . . 

Part 2 - Explanatory note. . . 

 8. Circumstances giving rise to uncertainties include the following:. . . 

(b) Inherent uncertainties. Inherent uncertainties result from circumstances in which it is not possible to reach an objective conclusion as to the outcome of a situation due to the circumstances themselves rather than to any limitation of the scope of audit procedures. This type of uncertainty may relate to major litigation, the outcome of long-term contracts or doubts about the ability of the enterprise to continue as a going concern. Inherent uncertainties will not normally include instances where the auditor is able to obtain adequate evidence to support estimates and use his experience to reach an opinion as to their reasonableness: for example as regards collectability of debts or realisability of stock . . . 

Materiality 

 20. In deciding whether to qualify his audit opinion, the auditor should have regard to the materiality of the matter in the context of the financial statements on which he is proposing to report. In general terms a matter should be judged to be material if knowledge of the matter would be likely to influence the user of the financial statements. Materiality may be considered in the context of the financial statements as a whole, the balance sheet, the profit and loss account, or individual items within the financial statements. In addition, depending upon the 

 [1997] 298  L.R.L.R. Henderson v. Merrett Syndicate (Q.B. (Com. Ct.))    Cresswell, J. 

nature of the matter, materiality may be considered in relative or absolute terms. 

     21. If the auditor concluded that, judged against the criteria he believes to be most appropriate in the circumstances, the matter does not materially affect the view given by the financial statements, he should not qualify his opinion. 

     22. Where the auditor has decided that a matter is sufficiently material to warrant a qualification in his audit report, a further decision is required as to whether or not the matter is fundamental, so as to require either an adverse opinion or a disclaimer of opinion on the financial statements as a whole. An uncertainty becomes fundamental when its impact on the financial statements is so great as to render the financial statements as a whole meaningless. A disagreement becomes fundamental when its impact on the financial statements is so great as to render them totally misleading. The combined effect of all uncertainties and disagreements must be considered. 

     23. It is emphasised that the adverse opinion and the disclaimer of opinion are the extreme forms of the two main categories of qualification of opinion arising from disagreement and uncertainty. In most situations the "except" or "subject to" form of opinion will be the appropriate form to use; the adverse opinion and the disclaimer should be regarded as measures of last resort. 

The Auditing Guideline: Planning, controlling and recording (issued April, 1980) provided: 

2. In order to ensure that an audit is carried out effectively and efficiently, the work needs to be planned, controlled and recorded at each stage of its progress. Planning, controlling and recording are considered separately below although they are not mutually exclusive. . . 

     6. In order to plan his work adequately the auditor needs to understand the nature of the business of the enterprise, its organisation, its method of operating and the industry in which it is involved, so that he is able to appreciate which events and transactions are likely to have a significant effect on the financial statements. 

The Auditing Guideline - Audit Evidence (issued April, 1980) provided: 

Background 

The nature of audit evidence. . . 

     3. The sources and amount of evidence needed to achieve the required level of assurance are questions for the auditor to determine by exercising his judgment in the light of the opinion called for under the terms of his engagement. He will be influenced by the materiality of the matter being examined, the relevance and reliability of evidence available from each source and the cost and time involved in obtaining it. Often the auditor will obtain evidence from several sources which, together, will provide him with the necessary assurance. . . 

Reliability. . . 

 6. Although the reliability of audit evidence is dependent upon the particular circumstances, the following general presumptions may be found helpful:

(a) documentary evidence is more reliable than oral evidence; 

(b) evidence obtained from independent sources outside the enterprise is more reliable than that
secured solely from within the enterprise;  

(c) evidence originated by the auditor by such means as analysis and physical inspection is more reliable than evidence obtained from others. 

 7. The auditor should consider whether the conclusions drawn from differing types of evidence are consistent with one another. When audit evidence obtained from one source appears inconsistent with that obtained from another, the reliability of each remains in doubt until further work has been done to resolve the inconsistency. However, when the individual items of evidence relating to a particular matter are all consistent, then the auditor may obtain a cumulative degree of assurance higher than that which he obtains from the individual items. . . 

Techniques of audit testing. . . 

 (c) Enquiry - seeking relevant information from knowledgeable persons inside or outside the enterprise, whether formally or informally, orally or in writing. The degree of reliability that the auditor attaches to evidence obtained in this manner is dependent on his opinion of the competence, experience, independence and integrity of the respondent.  

The Auditing Guideline - Representations by Management (issued July, 1983) provided: 

 Oral representations will be made throughout the audit in response to specific enquiries. Whilst
representations by management constitute audit evidence, the auditor should not rely solely on the unsupported oral representations of management as being sufficient reliable evidence when they relate to matters which are material to the financial statements. 

In most cases, oral representations can be corroborated by checking with sources independent of the enterprise or by checking with other evidence obtained by the auditor, and therefore do not need to be confirmed in writing. 

[1997] 299  L.R.L.R. Henderson v. Merrett Syndicate (Q.B. (Com. Ct.))    Cresswell, J. 

     However, in certain cases, such as where knowledge of the facts is confined to management or where the matter is principally one of judgment and opinion, the auditor may not be able to obtain independent corroborative evidence and could not reasonably expect it to be available. In such cases, the auditor should ensure that there is no other evidence which conflicts with the representations by management and he should obtain written confirmation of the representations. 

     Where written representations are obtained, the auditor will still need to decide whether in the circumstances these representations, together with such other audit evidence as he has obtained, are sufficient to enable him to form an unqualified opinion on the financial statements. 

 (See also in this connection I.C.A.E.W. Statements on Auditing No. 18 Audit problems of the smaller company (issued November, 1972) pars. 5 and 6 and Auditing Guideline-Exposure Draft Management Representations (issued February, 1982)). 

     As to the audit brief, published by the A.P.C. of the C.C.A.B. based on the Lloyd's byelaws and the law as at Jan. 1, 1986, see below. 

     Auditing Standards: Explanatory foreword (issued April, 1980 but revised January, 1989) stated: 

19. Audit Briefs. Audit Briefs are issued by the Auditing Practices Committee. They are informative publications on subjects of topical interest and are intended to assist auditors in the discharge of their duties or to stimulate debate on important auditing issues. They do not require the approval of the Councils of the Accountancy Bodies for issue, and they do not have the same authority as either Auditing Standards or Auditing Guidelines. 

(Practice Note No. 2 - The Lloyd's Market was issued in July, 1992). 

Pre Dec. 31, 1980 

     In 1978 the Fisher working party, chaired by Sir Henry Fisher, was established to report on "Self-regulation at Lloyd's". The report was published in May, 1980 and Chapter 23 dealt with the audit regime. 

December 31, 1980 

     The regulatory regime for the solvency audit and the audit of the syndicate accounts was as follows:- 

     A. Section 73, Insurance Companies Act, 1974 

     B. Rule 16, Assurance Companies Rules, 1950 (1950 No. 533) 

     C. Instructions for guidance of Lloyd's auditors at Dec. 31, 1980 

     D. Solvency letter for Dec. 31 1980 audit 

     E. Section A10 and section F of the manual for underwriting agents. 

Of these only the documents at A and E are relevant for succeeding years. 

Ernst & Whinney contend that the document at E above was, as its name suggests, directed to underwriting agents, not to auditors, and was not binding on either underwriting agents or auditors. Nor, in that sense, did it constitute part of the regulatory regime for any audit. 

The plaintiffs contend that the manual constituted and/or reflected good practice within the market for both underwriting agents and auditors prior to the adoption of the true and fair view form of audit report. In that sense it formed part of the regulatory regime. The plaintiffs further contend that Ernst & Whinney regarded it as setting out the proper practice within the market - see Mr. Holland's evidence at Day 43/115-116 esp./115/10-11: 

. . .The requirements for the first three years were the requirements indicated in the agents' manual. 

Mr. Attwood also gave evidence that the manual was one source of Ernst & Whinney's professional responsibility, being one of the documents they would have had regard to in accepting instructions to undertake audit work - Day 45/63. 

The members' agents contend that auditors were aware that Lloyd's were telling agents that they should see that everything was done to enable their auditors to sign the audit certificate by the prescribed date and that this involved ensuring (inter alia) that the information required by auditors to enable them to satisfy themselves as to the proposed reinsurance to close an account was available by early April (par. 1.4 J5/32). Panel auditors must have known that this reflected the expectation and understanding of the market, viz. that it was part of the auditors' job to satisfy themselves as to the proposed RITC. 

The document at B above was revoked in 1982 by the Lloyd's (Audit Certificate) Regulations, 1982 and the documents at C and D were revised annually. 

December 31, 1981 Audit: RITC 1979 into 1980 (Year 1) 

The regulatory regime for the solvency audit and the audit of the syndicate accounts was as follows: 

A. Section 73 Insurance Companies Act, 1974 

B. The Lloyd's (Audit Certificate) Regulations, 1982 (1982 No. 136) 

 [1997] 300  L.R.L.R. Henderson v. Merrett Syndicate (Q.B. (Com. Ct.))    Cresswell, J. 

C. Instructions for guidance of Lloyd's auditors at Dec. 31, 1981 

D. Solvency letter for Dec. 31, 1981 

E. Manual for underwriting agents 

A. Section 73 of the Insurance Companies Act, 1974 (which came into force on Aug. 31, 1974) provided: 

. . .(4) The accounts of every underwriter shall be audited annually by an accountant approved by the Committee of Lloyd's or the managing body of the association, as the case may be, and the auditor shall furnish a certificate in the prescribed form to the Committee or managing body 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. 

The auditor referred to in sub-s. (4) is the auditor appointed by the members' agent and not the syndicate auditor. 

B. The Lloyd's (Audit Certificate) Regulations 1982 (which came into force on Mar. 8, 1982) set out the required form of the certificate mentioned in s. 73(4) ICA, 1974 to be provided by the auditor appointed by the members' agent in respect of each Name. 

C/D. Document D was issued on a covering letter to document C and the two should be read together.

C. The instructions for the guidance of Lloyd's auditors (The "Blues") provided, inter alia, as follows: 

(A) The Syndicate Auditor - the Syndicate Auditor must. . . 

(viii) satisfy himself that all necessary information has been supplied. 

(ix) satisfy himself that the accounting records appear to have been properly kept. 

(x) satisfy himself that the Underwriting Records have been examined in accordance with these instructions. 

(xi) complete a Syndicate Solvency Report (in duplicate) in the form set out below for submission to the Auditor appointed by the Member's Agent and to the Committee of Lloyd's by not later than 30th April 1982. . . 

3. The Syndicate Auditor is required to examine the settlements on the Underwriting Accounts for 1980 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 committee 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. . .  

6. The estimated cost as at the 31st December 1981, of winding up the Underwriting Accounts for 1981 and previous years must, subject to the provisions of Clause 3 of these Instructions, be assessed on the basis set out overleaf, and all percentage reserves must be calculated on the premium income (as defined in Clause 5) attaching to the respective Years of Account. . . 

Marine: - 

1979 and previous years' Account: - A reserve to be created equal to whichever be the greater of the following alternative tests, viz: - 

(1) The aggregate of the undermentioned percentage reserves: - . . . 

(2) The amount of the reinsurance premium charged to close the 1979 Account as at 31st December 1981, including any previous years reinsured into that Account. 

1980 and 1981 Accounts. . . 

Non-Marine: - 

1979 and previous years' Accounts: - A reserve to be created equal to whichever be the greatest of the following three tests, viz: - 

(1) The aggregate of the undermentioned percentage reserves: -. . . 

(2) The total of the estimated outstanding liabilities on the above Accounts as at 31st December 1981, which must include an element to take care of unnoted and unknown liabilities. 

(3) The amount of the reinsurance premium charged to close the 1979 Account as at 31st December 1981, including any previous years reinsured into that Account. 

1980 and 1981 Accounts. . . 

[1997] 301  L.R.L.R. Henderson v. Merrett Syndicate (Q.B. (Com. Ct.))    Cresswell, J. 

The notes to cl. 6 included the following: - 

Note (1): - In forming an opinion as to the liabilities as at 31st December 1981, the Syndicate Auditor shall satisfy himself that the latest information reasonably obtainable has been acquired by the managing agent responsible for the syndicate records. 

D. The solvency letter for Dec. 31, 1981 (the "Whites") contained explanatory notes to document C above. In particular, as regards cl. 3 of the audit instructions it provided, inter alia, as follows: - 

(i) This Clause, the provisions of which apply to the reserves to be created on all years, is regarded by the Committee 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 1981 that the reinsurance premium charged to close the 1978 Account (and all previous years reinsured therein) at 31st December 1980 has been inadequate. Similar reports are also required where it appears at 31st December 1981 that the audit reserve created as at 31st December, 1980 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 1978 and previous years' Accounts at 31st December 1980; or, in the case of an Account which has not been closed, the reserve created as at 31st December 1980; (b) the settlements on those Accounts during 1981 and (c) the reserve created on those years at 31st December 1981. 

     Such reports, which are for the information of the Committee, 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, 1981, including: - . . . 

(c) Risks which include liability for latent diseases and products liability. 

(d) Cases where a Syndicate has taken over the run-off of another Syndicate's accounts. 

As to matters to be reported the solvency letter provided: - 

(v) Stop Loss Reinsurance Business. - The Auditor must report to the Committee where the volume of  

(a) Personal Stop Loss reinsurance business and/or 

(b) Whole Account Stop Loss reinsurance business of Companies and other individuals who keep their Accounts on a three year or longer basis accepted by a Syndicate exceeds 1% of that Syndicate's Net Premium Income. 

E. Sections A.10 and Section F of the Manual for Underwriting Agents provided inter alia as follows: - 

Section A 

10.1 Duties of Managing Agent with regard to the Accounts. 

(i) The basic accounting procedures to be carried out are: - 

. . .(d) the assessment of the reinsurance premium to close an account 

(e) the preparation of final and audited underwriting figures at the 31st December of each year for the closing and the then open underwriting years of account 

(f) compliance with the audit requirements of the Committee of Lloyd's and the filing by the Syndicate Auditors of the necessary certificates to the Committee of Lloyd's. . . 

10.4 An Agent should. . .send to each Name: - 

(i) Separate Underwriting Accounts for each class of business conducted for him under a separate Syndicate. . . 

(ii) A Syndicate Balance Sheet. 

(iii) A Certificate from a firm of auditors on the Lloyd's panel of Auditors certifying: - 

(a) That in their opinion the books have been properly kept. 

(b) That they have examined the Balance Sheet and Underwriting Accounts with the books and that they have been properly drawn up in accordance with the books. 

(c) That they have verified the investments and cash balances. 

(d) That they have received all the information and explanations they have required. 

The Agents and their Auditors may amplify, to any extent required, to cover such items as (a) the basis on which the Auditor has accepted the reinsurance to close, (b) the fact that the Audit Certificate has been sent to the Committee of 

[1997] 302  L.R.L.R. Henderson v. Merrett Syndicate (Q.B. (Com. Ct.))    Cresswell, J. 

Lloyd's and (c) the accounts are drawn up in accordance with the Agency Agreements. . . 

Section F 

The Audit 

1. General 

1.1. The Audit of Underwriters' Account must be conducted by a Firm of Accountants approved by the Committee of Lloyd's. . . 

1.4 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 an Account is available by early April. . . 

December 31, 1982 Audit: RITC 1980 into 1981 (Year 2) 

(a) The regulatory regime 
 
The regulatory regime for the solvency audit and the audit of the syndicate accounts was as follows: - 

A. Sections 83-86 Insurance Companies Act, 1982 

B. Insurance (Lloyd's) Regulations, 1983 (1983 No. 224) 

C. Instructions for guidance of Lloyd's auditors at Dec. 31, 1982 

D. Solvency letter for Dec. 31, 1982 audit 

E. Manual for underwriting agents 

(b) Other materials 

Following the report of the Fisher working party, Lloyd's established task groups to consider the recommendations which had been made. In December, 1982 task group 4 produced a consultative document on "The Annual Financial Report for Underwriting Members of Lloyd's" which included a draft Lloyd's accounting manual. Neither document was binding on the managing agents or auditors or, in that sense, constituted part of the regulatory regime as at Dec. 31, 1982 audit. The plaintiffs contend that the draft Lloyd's accounting manual represented or reflected the professional practice to be observed by Lloyd's panel auditors. The members of the task group included Mr. K. E. Randall and Mr. N. F. Holland. 

A. Section 83 of the Insurance Companies Act, 1982 (which came into force on Mar. 28, 1983) replaced s. 73 ICA, 1974, though the relevant provisions are in similar terms. In particular, sub-ss. (4) and (5) provided that: 

(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. 

Again, the reference to "auditor" in sub-s. (4) is a reference to the auditor appointed by the members' agent. 

B. The Insurance (Lloyd's) Regulations, 1983 (1983 No. 224) (which came into force on Mar. 22, 1983) revoked the Lloyd's (Audit Certificate) Regulations, 1982. Regulation 4/Schedule 2 of the 1983 regulations set out the new required form of audit certificate to be provided by the auditor appointed by the members' agent under s. 83, ICA, 1982. The new certificate was identical to the previous certificate save that "underwriters" became "underwriting members" and "the Committee of Lloyd's" became "the Council of Lloyd's". 

C and D. Document D was issued as a covering letter to Document C and the two should be read together. 

C. The Instructions for Guidance of Lloyd's Auditors at Dec. 31, 1982 were broadly similar to those issued for the previous year save inter alia for the following alterations. 

Clause 2 now provided as follows: - 

(A) The Syndicate Auditor - It is the responsibility of every Syndicate Auditor, to report on the solvency of a Syndicate and the participation of each member therein. The Syndicate Auditor, in the discharge of this duty, must, inter alia: - 

i) examine the systems operated by the managing agent for the recording and control of premiums, returns, claims, salvage recoveries and associated reinsurance transactions and satisfy himself as to the adequacy of the accounting and other systems in force throughout the financial year. Where an Auditor believes that these systems are not adequate he must - 

(a) perform such alternative auditing procedures as he considers necessary in order to enable him to complete and sign the Syndicate Solvency Report. 

[1997] 303  L.R.L.R. Henderson v. Merrett Syndicate (Q.B. (Com. Ct.))    Cresswell, J. 
 
(b) make recommendations without delay to the Managing Agent on improvements to systems and controls. . . 

(x) satisfy himself that all necessary information has been supplied. 

(xi) satisfy himself that the underwriting records have been examined in accordance with these Instructions. 

(xii) undertake such other procedures as he considers necessary to enable him to complete and sign the Syndicate Solvency Report. 

(xiii) complete and sign a Syndicate Solvency Report in the form set out below for submission to the Council of Lloyd's and to the Auditor appointed by the Members' Agent by not later than 29th April 1983. 

Clause 6 now began: - 

6. It is the responsibility of the Managing 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. 

D. The Solvency letter was broadly similar to that issued for the previous year. 

E. Manual for underwriting agents (see year 1 above). 

December 31, 1983 Audit: RITC 1981 into 1982 (Year 3) 

(a) The regulatory regime 

The regulatory regime for the solvency audit and the audit of the syndicate accounts was as follows: -

A. Sections 83-86 Insurance Companies Act, 1982 

B. Insurance (Lloyd's) Regulations, 1983 (1983 No. 224) 

C. Instructions for guidance of Lloyd's auditors at Dec. 31, 1983 

D. Solvency letter for Dec. 31, 1983 audit 

E. Byelaw No 2 of 1984 

F. Byelaw No 3 of 1984 

G. Manual for underwriting agents 

(b) Other materials 

On Dec. 2, 1983 Lloyd's published a provisional Lloyd's accounting manual. It was produced by the accounting and auditing standards committee of the Council of Lloyd's and relied heavily upon the draft accounting manual produced by task group 4 a year earlier. As with the draft accounting manual, the provisional accounting manual was not binding. But in a letter dated Feb. 1, 1984 the chairman of Lloyd's invited panel auditors to encourage their clients to\ comply with its spirit in preparing the 1983 reports and suggested a proposed form of report. The
plaintiffs contend that the provisional accounting manual represented or reflected good practice to be observed by Lloyd's panel auditors. 

E&W did this and their report this year tracked the proposed wording suggested by the chairman in his letter. 

A. Sections 83-86 ICA, 1982 (see above). 

B. Insurance (Lloyd's) Regulations, 1983 (see above). 

C. and D. Document D was issued as a covering letter to Document C and the two should be read together. 

C. The Instructions for guidance of Lloyd's auditors at Dec. 31, 1983 were broadly similar to those issued for the previous year save inter alia for the following alterations. 

Clause 2 now provided: 

(A) The Syndicate Auditor 

It is the responsibility of every Syndicate Auditor, to report on the solvency of a Syndicate and the participation of each member therein. 

The Syndicate Auditor, in the discharge of this duty, must, inter alia: - 

i) examine the systems operated by the managing agent for the recording and control of premiums, returns, claims, salvage recoveries and associated reinsurance transactions and satisfy himself as to the adequacy of the accounting and other systems in force throughout the financial year.  

Where an Auditor believes that these systems are not adequate he must - 

a) perform such alternative auditing procedures as he considers necessary in order to enable him to complete and sign the Syndicate Solvency Report.  

b) make recommendations without delay to the Managing Agent as to improvements to systems and controls. A report summarising these recommendations (and approved by the Syndicate Auditor) must be sent by the Managing Agent to every Members' Agent having Names participating on the Syndicate. This report must be sent to all such Members' Agents within 14 days of receipt and in any event by no later than 15th May 1984. Members' Agents in turn must make these Reports immediately available to the auditors who conduct the solvency test of their Members. A report from the Syndicate Auditor shall also be required by the Council of
Lloyd's in a specified form.  

[1997] 304  L.R.L.R. Henderson v. Merrett Syndicate (Q.B. (Com. Ct.))    Cresswell, J. 

D. The solvency letter was broadly similar to that of the year before. 

E. Byelaw No. 2 of 1984. The 1983 annual reports of syndicates byelaw came into force on Feb. 13, 1984. 

F. Byelaw No. 3 of 1984. Disclosure of Interests came into force on Apr. 9, 1984. 

December 31, Audit : RITC 1982 into 1983 (Year 4)

The regulatory regime for the solvency audit and the audit of the syndicate accounts was as follows: 

A. Sections 83-86 Insurance Companies Act, 1982 

B. Insurance (Lloyd's) Regulations, 1983 (1983 No. 224) 

C. Instructions for guidance of Lloyd's auditors at Dec. 31, 1984 

D. Solvency letter for Dec. 31, 1984 Audit 

E. Byelaw No.2 of 1984 

F. Byelaw No. 3 of 1984 

G. Byelaw No. 6 of 1984 

H. Byelaw No. 7 of 1984 and explanatory notes dated Oct. 8, 1984 

I. Byelaw No. 10 of 1984 and explanatory notes dated Dec. 10, 1984 

J. Manual for underwriting agents. 

A. Sections 83-86 ICA, 1982 (see above) 

B. Insurance (Lloyd's) Regulations, 1983 (see above). 

C. and D. Document D was issued as a covering letter to Document C and the two should be read together. 

C. The instructions for guidance of Lloyd's auditors at Dec. 31, 1984 were broadly similar to those issued for the previous year save inter alia for the following alterations. 

Note (1) to cl. 6 contained the following additional provision: 

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. The solvency letter was broadly similar to that issued for the previous year save inter alia for the following alteration: 

Clause 6 

(i) Basis of Reserving - Active Underwriters, Underwriting Agents and Auditors are reminded that: - 

(a) The scales of minimum percentage reserves represent the absolute minimum requirement for Syndicate. 

(b) The percentage must be regarded as the base to which additional provision must be made to take cognisance of a Syndicate's own experience, its estimated outstandings (included I.B.N.R.), the mix of the Account between the longer and shorter tail elements, changes in portfolio etc. 

(c) Some Syndicates will be required to reserve sums greatly in excess of the minimum percentage reserves; this will occur particularly where the longer tail types of business represent a substantial proportion of the Account. 

(d) Any Syndicate reserving at or near the minimum percentage will need to demonstrate to its Auditors that this represents an adequate provision. 

(ii) Information Provided to Auditors - in view of (i) above, Auditors must ensure that they are provided with all the information required to enable them to form an opinion on the extent to which the Syndicates for which they act require to create reserves in excess of the minimum percentages. 

E. Byelaw No. 2 of 1984 (see above). 

F. Byelaw No. 3 of 1984 (see above). 

G. Byelaw No. 6 of 1984 Syndicate Premium Income came into force on Aug. 6, 1984. 

H. Byelaw No. 7 of 1984 and explanatory notes dated Oct. 8, 1984. 

The byelaw was published on Oct. 10, 1984 and came into force on Jan. 1, 1985 subject to the following transitional provision: 

18. (b) Paragraph 7(a) above (requirement to give true and fair view) shall not apply to any annual report or personal account made up to a date earlier than 1st January 1985, and accordingly the syndicate auditor's report on any annual report or personal account made up to a date earlier than that date shall not be required to state whether in the opinion of the syndicate auditor a true and fair view is given of the matters referred to in paragraph 11 (c)(i) or (as the case may be) 11 (c)(ii) of this byelaw. 

The byelaw provided inter alia as follows: 

4. Duties of Managing Agents with respect to Reports and Accounts. 

(a) Every managing agent shall in each year, in respect of each syndicate managed by it at 31st December of the preceding year - 

[1997] 305  L.R.L.R. Henderson v. Merrett Syndicate (Q.B. (Com. Ct.))    Cresswell, J. 

(i) prepare an annual report or annual reports complying with paragraph 5 and 7 below. . . 

(c) Every managing agent shall procure that every annual report and personal account prepared by it under the Lloyd's syndicate accounting rules shall be audited and reported upon by the syndicate auditor of the syndicate to which it relates. . . 

7. Form and Content of Annual Reports and Personal Accounts 

(a) (i) Every underwriting account prepared in respect of a closed year of account under paragraph 5(b)(i) above shall give a true and fair view of the profit or loss for that year of account of the underwriting member or members for whom it is prepared. 

8. Approval of Annual Reports 

(a) Every annual report shall be approved by - 

(i) a resolution of the directors of or partners in the managing agent of the syndicate to which it relates; and 

(ii) the active underwriter of that syndicate. 

11. Audit 

(a) The syndicate auditor shall make a report on every annual report audited by him to the
 underwriting member or members for whom it has been prepared. 

(b) The syndicate auditor shall make a report on every personal account audited by him to the underwriting member for whom it has been prepared.

(c) The report shall state whether in the opinion of the syndicate auditor the annual report or personal account (as the case may be) has been properly prepared in accordance with the requirements of the Lloyd's syndicate accounting rules and, without prejudice to the foregoing, whether a true and fair view is given - 

(i) in the case of any annual report which includes an underwriting account in respect of a closed year of account, of the profit or loss for that year of account of the underwriting member or members for whom it has been prepared: 

(ii) in the case of any personal account, of the net result of the underwriting member for whom it has been prepared. 

(d) The syndicate auditor shall in preparing any report under this paragraph carry out such investigations as will enable him to form an opinion as to the following matters - 

(i) whether proper accounting records have been kept by the managing agent in respect of the
 syndicate; and (ii) whether the annual report or personal account to which his report relates is in agreement with the accounting records; 

and if the syndicate auditor is of the opinion that proper accounting records have not been kept by the managing agent in respect of the syndicate, or if the annual report or any personal account to which his report relates is not in agreement with the accounting records, the syndicate auditor shall state that fact in his report. 

(e) The syndicate auditor shall, in preparing his report on any annual report or personal account under this paragraph, consider whether the information given in the managing agent's and underwriter's reports prepared under paragraph 4(a)(iii) and (iv) above in respect of any period to which that annual report or personal account relates is consistent with that annual report or personal account, and, if the syndicate auditor is of the opinion that it is not, he shall state that fact in his report. 

(f) Every syndicate auditor shall have a right of access at all times to the accounting records
maintained by the managing agent in respect of the syndicate and shall be entitled to require from the managing agent and its executives such information and explanations as he thinks necessary for the performance of his duties.  

(g) If the syndicate auditor has not obtained all the information and explanations which, to the best of his knowledge and belief, are necessary for the purposes of his audit, he shall state that fact in his report. . .  

Schedule 1 Interpretation provided: 

"Reinsurance to close" means an agreement under which underwriting members ("the reinsured members") who are members of a syndicate for a year of account ("the closed year") agree with underwriting members who comprise that or another syndicate for a later year of account ("the reinsuring members") that the reinsuring members will indemnify the reinsured members against all known and unknown liabilities of the reinsured members arising out of insurance business underwritten through that syndicate and allocated to the closed year in consideration of - 

(i) a premium; and 

(ii) the assignment to the reinsuring members of all the rights of the reinsured members arising out of or in connection with that insurance business (including without limitation the right to receive all future premiums, recoveries and other monies receivable in connection with that insurance business).  

[1997] 306  L.R.L.R. Henderson v. Merrett Syndicate (Q.B. (Com. Ct.))    Cresswell, J. 

Schedule 3 contained "Fundamental Principles and Statements of Account Policies". In particular it provided that: 

1. Accounting policies shall be applied so as to ensure consistent treatment of like items in respect of each year of account and shall be applied consistently from one year of account to the next. 

2. The amount of any item included in an underwriting account for a closed year of account shall be determined on a prudent basis. 

3. All income and charges relating to a closed year of account shall be taken into account in the underwriting account prepared in respect of that year of account, without regard to the date of receipt or payment. 

4. The accounting policies in respect of items which affect more than one year of account shall be such as to ensure a treatment which is equitable as between the members of the syndicate affected; and in particular the amount charged by way of premium in respect of reinsurance to close shall, where the reinsuring members and the reinsured members are members of the same syndicate for different years of account, be equitable as between them, having regard to the nature and amount of the liabilities reinsured. 

The explanatory notes dated Oct 10, 1984 stated inter alia: 

6. Whilst the decision whether to close a year of account of a syndicate is the responsibility of the managing agent in consultation with the underwriter, it is strongly recommended that no year of account should be closed before the managing agent determines whether the syndicate auditor intends to give a qualified audit opinion in respect of that year of account. It is important to note that the recommendation applies to qualifications in general and is not restricted to any qualification which an auditor may propose in relation to the reinsurance to close. . . 

 As to par. 11 of the byelaw (report of the syndicate auditor) the explanatory notes stated: 

14. Paragraph 11 requires the syndicate auditor to give his opinion on two major matters: 

(a) whether the annual report gives a true and fair view of the profit or loss for the closed year of account and complies with the Lloyd's syndicate accounting rules; and. . . 

15. Where the syndicate auditor is unable to form an opinion as to the matters set out in paragraph 14 above or is of the opinion that some aspects of the annual report or personal accounts does not comply with the Lloyd's syndicate accounting rules then he will qualify his audit report accordingly and indicate the grounds for such qualification. The syndicate auditor would also qualify his report if he were unable: 

(a) to obtain all the necessary information and explanations he required; 

(b) to confirm that proper accounting records have been maintained; or 

(c) to confirm that the annual report or personal accounts were in agreement with the records. 

In the absence of a reference to any of these matters the syndicate auditor's confirmation thereof is implicit in an unqualified audit report. 

As to the provisions and requirements of par. 2 of and Schedule 2 to the byelaw the explanatory notes provided, inter alia, that: 

23. The managing agent should be able to draw up accounts at any time during the financial year though these need only be reasonably accurate, ie. there is no requirement for such accounts to comply with the detailed Lloyd's syndicate accounting rules not to give a true and fair view. However, insofar as is practicable, the accounting records should be sufficient to enable the agent to arrive at an estimated figure for reinsurance to close based on information reasonably available at any particular time. The method adopted in producing such an estimate will be a matter for judgment but a detailed computation as is carried out when a year of account is closed is not necessarily required. . . 

As to Schedule 3 par. 4 - items to be determined on an equitable basis where transactions affect members participating in more than one year account - the explanatory notes provided: 

The need for policies to be adopted which ensure an equitable treatment as between two or more different sets of members of a syndicate is fundamental to the preparation of the annual report. This is particularly the case in the determination of a premium to close a year of account by reinsurance into a subsequent year of account of the same syndicate. 

I. Byelaw No. 10 of 1984 syndicate audit arrangements came into force on Dec. 10, 1984. 

December 31, 1985 Audit: RITC 1983 into 1984 (Year 5) 

The regulatory regime for the solvency audit and the audit of the syndicate accounts was as follows: 

A. Sections 83-86 Insurance Companies Act, 1982 

B. Insurance (Lloyd's) Regulations, 1983 (1983 No. 224) 

[1997] 307  L.R.L.R. Henderson v. Merrett Syndicate (Q.B. (Com. Ct.))    Cresswell, J. 

C. Instructions for guidance of Lloyd's auditors at Dec. 31, 1985 

D. Solvency letter for Dec. 31, 1985 audit 

E. Byelaw No. 2 of 1984 

F. Byelaw No. 3 of 1984 

G. Byelaw No. 6 of 1984 

H. Byelaw No. 7 of 1984 

I. Further explanatory notes to Byelaw No. 7 of 1984 

J. Byelaw No. 10 of 1984 

K. Byelaw No. 6 of 1985 

L. Manual for underwriting agents. The plaintiffs' position is that this was superseded by the Syndicate Accounting Byelaw No. 7 of 1984 which came into force on Jan. 1, 1985. The manual ceased to be relevant thereafter. 

A. Sections 83-86 ICA, 1982 (see above). 

B. Insurance (Lloyd's) Regulations 1983 (see above). 

C. and D. Document D was issued as a covering letter to Document C and the two should be read together. 

C. Instructions for guidance of Lloyd's auditors at Dec. 31, 1985 were broadly similar to those issued for the previous year save inter alia for the following alteration. A new second sentence was added to cl. 6 so that Clause 6 read: 

6. It is the responsibility of the Managing 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. Such reserves shall not be discounted for the time value of money. . . 

D. The solvency letter was broadly similar to that issued for the previous year save inter alia for the following alterations. The notes to cl. 6 were amended to read: 

 (i) Basis of Reserving - Active Underwriters. Underwriting Agents and Auditors are reminded that: - 

. . .d) Discounting of reserves is not permitted for solvency purposes (see (ii) below). 

(ii) Calculation of net reserves - On closing each Year of Account, Syndicates must establish a net reserve for solvency purposes, being the gross reserve less outward reinsurance recoveries, using the following definitions: - 

(a) The gross reserve shall be the monetary amount that is expected ultimately to be payable in order to discharge all liabilities in respect of the Years of Account covered by the reinsurance to close and shall be inclusive of all costs and expenses (legal and other) associated with such payment and shall take account of anticipated receipts other than reinsurance recoveries. Such amount shall include the estimated effects of inflation, currency exposure and other factors which may influence the final monetary settlement between the date at which the reserve is established and the dates when the final payments will be made, except that no discount shall be permitted for the time value of money and, therefore, all future investment returns shall be disregarded.  

(b) The outward reinsurance recoveries shall be the net monetary amounts that are expected ultimately to be received from reinsurers in respect of the Years of Account covered by the reinsurance to close. The estimated net recoverable amounts will, therefore, take account of any costs and expenses associated with such recovery and of the probability of failure to collect any part of any reinsurance for whatever reason. Account must also be taken of any additional amounts that may be payable to reinsurers. The full net reserves for solvency purposes, for any account remaining open after the normal closing date for that account, shall be established at each year end in a manner identical to that adopted for a closing account. In calculating the provisions at the end of the first and second years of each Underwriting Account, the Managing Agents and Auditors should have in mind the reserves that will be required at the end of Year 3 for each Account in accordance with the above. 

E. Byelaw No. 2 of 1984 (see above). 

F. Byelaw No. 3 of 1984 (see above). 

G. Byelaw No. 6 of 1984 (see above). 

H. Byelaw No. 7 of 1984 (see above). 

I. Further explanatory notes to Byelaw No. 7 of 1984 were published on Dec. 9, 1985. The notes were entitled "Explanatory Notes - Reinsurance To Close". The introduction stated that the explanatory notes were a guide only and did not override the requirements of the byelaw. The explanatory notes states: 

8. Schedule 3 includes as a fundamental principle the requirement that the treatment of items affecting more than one year of account (eg. investment income, syndicate expenses) shall be such as is equitable as between the members participating in each year of account. In paragraph 4 of Schedule 3 the premium in respect of reinsurance to close is given as an example where an equitable treatment is required having regard to the nature and amount of the liabilities reinsured. Compliance with "equity between Names" must therefore be demonstrated by the underwriter and managing agent in determining the reinsurance to close. . . 

Section III Factors relevant in determining the Reinsurance to Close. 

[1997] 308  L.R.L.R. Henderson v. Merrett Syndicate (Q.B. (Com. Ct.))    Cresswell, J. 

10. Whatever method is adopted by an underwriter in computing a reinsurance to close the premium arrived at will take account of two elements: 

(a) Known outstanding claims; and 

(b) Claims incurred but not reported (IBNR) . . . 

11. Where at its normal date of closure a year of account is left open the underwriting account for such a run-off account must nevertheless include an amount to meet known and unknown outstanding liabilities. Such amount will be determined not only at the normal date of closure but also at subsequent year ends during the course of the run-off. In carrying out such an exercise the same considerations as apply to a reinsurance to close (with the exception of equity between Names) will be relevant notwithstanding the fact that the objective is not to determine the final profit or loss for the year of account. . . 

IBNR 

17. The determination of the IBNR element requires the exercise by the underwriter of judgment as to the level of IBNR which is appropriate. Paragraphs 18 to 24 set out a number of matters which may fall to be considered in computing the IBNR. 

Business written by the syndicate 

18. The nature of the business written by the syndicate will be one of the main factors affecting the size and relative importance of the IBNR element of the reinsurance to close. Different classes of business will give rise to different considerations. 

19. Paragraph 28 of the explanatory notes accompanying the byelaw refers to the maintenance of information relating to underwriting transactions analysed by class of business and the need for the managing agent and underwriter to specify the appropriate "classes" for the purpose of such analysis. In determining the relevant classes for his syndicate the underwriter will have regard to a number of factors. In addition to any subdivision of the account by business, these may include some or all of the following: 

(a) the likely claim settlement pattern (long v short tail); 

(b) the nature of business accepted (direct/facultative v reinsurance treaties); 

(c) the method of accepting business (eg. by binding authority, line slips, etc.); 

(d) the geographical location of risks; and 
 
(e) the currency in which risks are denominated. 

20. Having established the nature of the account and the manner in which records are maintained the underwriter will be in a position to identify the considerations which apply to different classes. 

Loss experience 

21. The loss experience of the different classes of business can then be reviewed by the underwriter both as to the current year of account and the previous years reinsured therein. In carrying out such a review the underwriter may have regard to the loss ratio of the current year and previous years of account whether on an incurred or on a paid basis. In order to perform such an exercise the underwriter will accumulate run-off statistics over a number of years. In addition comparison by year of account of the reinsurance to close brought forward with settlements and movements in the level of outstanding claims in the calendar year will provide further information as to the required level of the carry forward reinsurance. 

22. Statistics of this nature provide a basis of comparison with previous years of account giving an indication of the experience of the account to date and its likely outcome. Where the underwriter makes use of projections and other statistical methods and these are based on premium data the validity of comparisons made will depend upon the extent to which the underlying data are themselves comparable, eg. differences in the premium rates ruling for the same degree of risk may undermine the usefulness of comparisons based on such data were no allowance to be made for changes in market rates. 

23. The underwriter's knowledge and experience of the market generally and the particular classes written by the syndicate will be particularly important in the interpretation of the statistical data. The extent to which the syndicate writes (or wrote in previous years) risks in respect of which losses are subject to significant delays in notification will be a major factor in assessing the IBNR provision. Risks falling into this category are generally associated with long tail business although a similar effect can occur in connection with business which is primarily short tail particularly where the syndicate acts as reinsurer. The identification of the extent of the claims may itself be a complex and lengthy exercise. Where losses on such risks are substantial there is generally an impact throughout the market as Lloyd's syndicates may have participated in the risks in question in a number of ways - on direct business, as reinsurers of the original insurers or in the form of retrocession. The interplay of the different layers at which particular policies at each stage operate will generally add to the complexity of the situation. . . 

[1997] 309  L.R.L.R. Henderson v. Merrett Syndicate (Q.B. (Com. Ct.))    Cresswell, J. 

Change in Factors affecting the Syndicate 

26. Having identified factors such as those discussed in paragraphs 12 to 25, the underwriter will determine their relative importance. In many cases this will be assessed by the extent to which they represent a deviation from previous practice or a new development, either in the environment generally or as regards the business approach of the syndicate. Special consideration may need to be given to the interpretation of statistical information where there have been changes of underwriter during the period under review. 

27. The degree to which the relative importance of these factors has changed over a period of time (or is likely to change in the future) therefore becomes an important stage in the development by the underwriter of the key assumptions on which he is to base the computation of the reinsurance to close, particularly where such computation involves the use of projection and other statistical techniques. . . 

SECTION IV DOCUMENTATION. . . 

29 . . .It is clear therefore that the reinsurance to close must be supported by records setting out the manner and bases upon which the final figure was determined in sufficient detail to "show and explain" the nature of the transaction. 

30. The records supporting the reinsurance to close computation can be considered under a number of headings: 

- details of outstanding claims; 

- statistical data; 

- assumptions and conclusions; and 

- analysis supporting the final figures. 

These are discussed in more details below. . . 

Assumptions and conclusions 

34. As part of the process of determining the IBNR the underwriter will have considered many factors such as those highlighted in section III above. However it is important that this more judgmental aspect of the reinsurance to close exercise is documented to the same standard as is adopted in relation to outstanding claims. The documentation supporting the final reinsurance to close premium should cover all aspects of the calculation and explain fully the development of the final figure in order to comply with the requirements referred to in paragraph 29. 

35. Documentation should therefore include a record of the overall factors taken into account by the underwriter in arriving at his approach to the reinsurance to close. This should cover those factors which the underwriter considers have a significant impact on the year of account and may refer to those which do not and the reasons why such conclusions were drawn. In addition  the conclusions drawn from the use of statistical techiques and the assumptions based on these conclusions which are to be applied in the calculation of the IBNR element of the reinsurance to close should be recorded by the underwriter. 

Analysis supporting the final figure 

36. Having performed and documented the various stages referred to above the final reinsurance to close figure needs to be supported by analyses linking the various constituent elements, eg: 

(a) calculations of IBNR/loading amounts; 

(b) analysis of the reinsurance to close between outstanding claims and IBNR amounts; 

(c) summary of the final figure by appropriate classes/currencies; 

(d) formal approval of the final figure by the underwriter and the managing agent; and 

(e) preparation of a formal policy document for the reinsurance to close and where appropriate arranging for this to be sealed at LPSO. . . 

J. Byelaw No. 10 of 1984 (see above). 

K. Byelaw No. 6 of 1985 The Reinsurance To Close Byelaw. This byelaw commenced on Dec. 9, 1985. 

December 31, 1986 Audit: RITC 1984 into 1985 (Year 6) 

(a) The regulatory regime 
  
The regulatory regime for the solvency audit and the audit of the syndicate accounts was as follows: 

A. Sections 83-86 Insurance Companies Act, 1982 

B. Insurance (Lloyd's) Regulations, 1983 (1983 No. 224) 

C. Instructions for the annual solvency test of underwriting members of Lloyd's - 31.12.1986 

D. Byelaw No. 2 of 1984 

E. Byelaw No. 3 of 1984 

F. Byelaw No. 6 of 1984 

G. Byelaw No. 7 of 1984 

H. Byelaw No. 10 of 1984 

I. Byelaw No. 6 of 1985. 

J. Manual for underwriting agents - for the plaintiffs' position, see L under the materials for the end 1985 audit. 

A. Sections 83-86 ICA, 1982 (see above). 

B. Insurance (Lloyd's Regulations, 1983 (see above). 

C. Instructions for the annual solvency test of underwriting members of Lloyd's - Dec. 31, 1986. Whereas in previous years the instructions 

[1997] 310  L.R.L.R. Henderson v. Merrett Syndicate (Q.B. (Com. Ct.))    Cresswell, J. 

and the solvency letter were separate documents, these were combined for the first time this year in a single document. The contents were reformulated but were broadly similar to those of the Instructions and the solvency letter. 

D. Byelaw No. 2 of 1984 (see above). 

E. Byelaw No. 3 of 1984 (see above). 

F. Byelaw No. 6 of 1984 (see above). 

G. Byelaw No. 7 of 1984 (see above). 

H. Byelaw No. 10 of 1984 (see above). 

I. Byelaw No. 6 of 1985 (see above). 

(b) Other material 

The audit brief was published by the auditing practices committee ("APC") of the consultative
 committee of accounting bodies ("CCAB") in 1986 and was specifically addressed to the auditing of Lloyd's syndicates. The status of this document was described in the revised explanatory forward to the auditing standards and auditing guidelines issued in January, 1989 in the following terms: 

Audit Briefs are issued by the Auditing Practices Committee. They are informative publications on subjects of topical interest and are intended to assist auditors in the discharge of their duties or to stimulate debate on important auditing issues. They do not require the approval of the Councils of the Accountancy Bodies for issue, and they do not have the same authority as either Auditing Standards or Auditing Guidelines. 

The plaintiffs contend that the audit brief represented or reflected good practice for the
 conduct of the audits in years 3 to 6. Mr. McNamara accepted that the audit brief "broadly accorded with best practice that had emerged, certainly in my firm" (Day 43/42). See also E&W Insight No. 32 June 1986. 

The audit brief provided inter alia: 

Materiality 

33. Byelaw No. 7 of 1984 requires an annual report to be prepared in respect of each member of the syndicate although these may be presented in a combined form for groups of members comprising the whole or part of the syndicate. This combined reporting represents a device of convenience and should not, of itself, influence the auditor's perception of materiality. In selecting materiality levels, the auditor should have regard to the impact of syndicate transactions on the personal account of each syndicate member. That is to say, he should look behind the syndicate to its constitution, as well as to the syndicate as a whole, in making judgments relating to materiality. . . 

Reinsurance to close 

43. The auditor will need to be satisfied that the premium for the reinsurance to close a year of
account is 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 involves the exercise of significant professional judgment and draws on the full experience of the underwriter. The managing agent should ensure that adequate documentation is prepared showing what has been taken into account and what judgment has been exercised. Because of the significance of the reinsurance to close. Lloyd's has issued explanatory notes to Byelaw No. 7 of 1984 giving guidance relating to its computation and the related documentation. More detail on the audit of this area is given in paragraphs 71 to 79. . . 

54. The solvency test requires the estimation of further liabilities relating to open years of account in accordance with instructions issued by Lloyd's. Although the auditor's work on the solvency test position falls outside the scope of the audit of the annual report the approach adopted will be similar to that applied to the audit of the outstanding liabilities underlying the reinsurance to close. . .  

Audit evidence 

60. Paragraph 4 of The auditor's operational standard states that "the auditor should obtain relevant and reliable audit evidence sufficient to enable him to draw reasonable conclusions therefrom". Since the audit report on syndicate financial statements is expressed in true and fair terms, the auditor will need to ensure that he has gathered evidence of sufficient quality to support such an opinion. . . 

Reinsurance to close 

71. The reinsurance to close a year of account is normally the area of greatest audit difficulty, because it is derived with the benefit of a substantial degree of underwriting judgment. In common with all accounting estimates, it is one of a range of possible outcomes and the audit approach should recognise that the objective is to ensure that the reinsurance to close is within a zone of reasonableness rather than an arithmetically accurate figure.  

72. The degree of subjectivity involved in the estimation of the reinsurance to close will vary from syndicate to syndicate, and the auditor will 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  

[1997] 311  L.R.L.R. Henderson v. Merrett Syndicate (Q.B. (Com. Ct.))    Cresswell, J. 

the premium for the reinsurance to close to fall. 

73. There are two basic components of the  reinsurance to close. The first is an assessment of  the amount of known outstanding claims, and the second is an estimate of the amount of claims which have not yet been notified to the underwriter, but which will emerge in the future (claims incurred but not reported). 

74. The auditor's approach to known outstanding claims may include the following procedures: 

(a) checking a listing of outstanding claims against the underwriter's claims records and any supporting documentation; 

(b) confirming estimates have been made in respect of business derived from binding authorities, line slips and covers; 

(c) reviewing movements in claims during the year and since initial notifcation; 

(d) reviewing the records for the period subsequent to the year end to ensure there are no material claims notifications or other information which would affect the assessment of the reinsurance to close; 

(e) reviewing completeness of reinsurance recoveries due on outstanding claims; 

(f) checking in detail calculations where reinsurance recoveries are due on outstanding claims by reference to cover notes/closings. 

75. The auditor's approach to claims incurred but not reported may include the following procedures: 

(a) testing and evaluating the quality of the statistical information available to the underwriter. Run-off statistics should be prepared on a consistent basis. They should be analysed by year of account, class of business and currency. The auditor's testing of the run-off statistics should include a reconciliation back to the accounting records; 

(b) consideration of the provision made by the underwriter in the light of the statistical information and reinsurance protection available, and particularly the assumptions adopted by the underwriter. 

76. The results derived from statistical techniques should be treated with a degree of caution, since historically derived data may not be an accurate guide as to uncertain future events. Furthermore, the statistics may be distorted by changes in the pattern of business, alterations in settlement experience, variations in premium and exchange rates and changes in underwriter. The auditor should, therefore, ascertain from the underwriter the underlying basis for his estimate of claims incurred but not reported, so that appropriate additional evidence can be collected to support the computation. 

77. In assessing the reinsurance to close, the auditor will also need to consider the impact of the
syndicate's reinsurance protection programme. He should satisfy himself that all premiums have been paid or provided for against these policies in the reinsurance to close. In particular, the auditor should consider whether outstanding amounts have been provided where a burning cost or reinstatement premium exists or is likely to arise.  

78. In considering the amount of credit taken for reinsurance recoveries, the auditor should have
regard to their collectability. Therefore in reviewing the security provided by the syndicate's reinsurance programme, the auditor will need to consider the nature and quality of the protection offered by the reinsurers.  

79. Other matters the auditor might consider as a part of the audit of the reinsurance to close include the following:  

(a) The syndicate may have reinsured the run-off of other syndicates or companies and the auditor must satisfy himself that due account has been taken of the liabilities which are likely to arise under such contracts. This evidence will usually take a similar form to that relating to the syndicate's own business.  

(b) Where the determination of the premium for the reinsurance to close in relation to long tail business by the underwriter involves discounting technique (either explicitly or implicitly), the auditor should review the reasonableness of all underlying assumptions and ensure full disclosure of the basis adopted. . . 

18. THE NEVILLE RUSSELL LETTER AND THE RESPONSE 

Pursuant to the audit instructions as at Dec. 31, 1981 on Feb. 24, 1982 Neville Russell (another leading firm of Lloyd's auditors) wrote a letter to the manager of the audit department of Lloyd's on behalf of themselves and, inter alia, E&W. In my view Lloyd's responses to this letter constituted important guidance to managing agents and auditors. The Neville Russell letter stated:  

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 

[1997] 312  L.R.L.R. Henderson v. Merrett Syndicate (Q.B. (Com. Ct.))    Cresswell, J. 

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. 

In response to the Neville Russell letter, Mr. Ken Randall, in his capacity as manager of the underwriting agents and audit department at Lloyd's, wrote a letter dated Mar. 18, 1982 inter alia to E&W as follows: 

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 31 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. 

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. 

This letter is being sent to all Panel Auditors. 

The attached letter dated Mar. 18, 1982 from the deputy chairman Mr. Murray Lawrence stated: 

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 

[1997] 313  L.R.L.R. Henderson v. Merrett Syndicate (Q.B. (Com. Ct.))    Cresswell, J. 

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.  

This letter has been sent to all Underwriting Agents and Active Underwriters, with copies for information to all Panel Auditors. 

19. RITC - SOME GENERAL PRINCIPLES 

I turn to consider some general principles in relation to RITC and the role of the managing
agents/underwriter and of the auditors.  

"Reinsurance to Close" means an agreement under which underwriting members who are members of a syndicate for a year of account agree with underwriting members who comprise that or another syndicate for a later year of account that the reinsuring members will indemnify the reinsured members against all known and unknown liabilities of the reinsured members arising out of the insurance business underwritten through that syndicate and allocated to the closed year, in consideration of a premium and the assignment to the reinsuring members of all the rights of the reinsured members  

[1997] 314  L.R.L.R. Henderson v. Merrett Syndicate (Q.B. (Com. Ct.))    Cresswell, J. 

arising out of or in connection with that insurance business. 

In computing a reinsurance to close the premium arrived at will take account of two elements: known outstanding claims and claims incurred but not reported (IBNR). 

If a year is closed into a succeeding year the RITC is final. There is no mechanism for correcting past inaccuracies or inequities. 

The role or the managing agents/underwriter 

The following propositions are largely derived from the regulatory materials referred to in s. 17 above. 

1. The amount charged by way of premium in respect of reinsurance to close should, where the reinsuring members and the reinsured members were members of the same syndicate for different years of account, be equitable as between them, having regard to the nature and amount of the liabilities reinsured. Compliance with "equity between Names" had to be demonstrated by the underwriter and managing agent in determining the reinsurance to close. 

2. By year 4 it was strongly recommended that whilst the decision whether to close a year of account of a syndicate was the responsibility of the managing agent in consultation with the underwriter, no year of account should be closed before the managing agent determined whether the syndicate auditor intended to give a qualified audit opinion in respect of that year of account. 

3. The determination of the IBNR element required the exercise by the underwriter of judgment as to the level of IBNR which was appropriate, having regard to all relevant materials and after appropriate enquiries. The further explanatory notes to byelaw No. 7 of 1984 published on Dec. 12, 1985 set out in pars. 18 to 24 a number of matters which might fall to be considered in computing the IBNR. These include the nature of the business written by the syndicate as one of the main factors affecting the size and relative importance of the IBNR element of the reinsurance to close. Different classes of business gave rise to different considerations. The further explanatory notes also stated that the reinsurance to close must be supported by records setting out the manner and bases upon which the final figure was determined in sufficient detail to "show and explain" the nature of the transaction. The further explanatory notes also provided that it was important that the process of determining the IBNR, the more judgmental aspect of the reinsurance to close exercise, was documented to the same standard as was adopted in relation to outstanding claims. Documentation should include a record of the overall factors taken into account by the underwriter in arriving at his approach to the reinsurance to close. This should cover those factors which the underwriter considered had a significant impact on the year of account and might refer to those which did not and the reasons why such conclusions were drawn. Although the further explanatory notes were published on Dec. 9, 1985, the matters referred to derived from the notes probably reflected the approach that ought properly to have been followed in earlier years and in particular from year 4. 
  
4. If the amount to be charged by way of premium in respect of the RITC could not be arrived at with a reasonable degree of accuracy having regard to the nature and amount of the liabilities reinsured, the account should be left open. 

5. Where at its normal date of closure a year of account is left open an amount to meet known and unknown outstanding liabilities must nevertheless be included. The same considerations as apply to a reinsurance to close (with the exception of equity between Names) will be relevant notwithstanding the fact that the objective is not to determine the final profit or loss for the year of account. 

I wish to add one footnote which follows from the above propositions. If the amount to be charged by way of premium in respect of the RITC could not be arrived at with a reasonable degree of accuracy it would be fundamentally wrong, instead of leaving the account open, to close the account and seek to expand the syndicate in the hope that by doing so the (expanded) syndicate would be able to weather the difficulties. 

The role of the auditors 

The following propositions are derived from the regulatory materials referred to in section 17 above. 

1. The auditors should obtain relevant and reliable audit evidence sufficient to enable them to draw reasonable conclusions therefrom (Operational Standard (issued April, 1980)). 

2. As to the nature of audit evidence, the sources and amount of evidence needed to achieve the required level of assurance were questions for the auditors to determine by exercising their judgment in the light of the opinion called for under the terms of their engagement. They would be influenced by the materiality of the matter being examined, the relevance and reliability of evidence available from each source and the cost and time involved in obtaining it (The Auditing Guideline - Audit Evidence (issued April, 1980)). 

3. As to representations by management, in certain cases, such as where knowledge of the facts was confined to management or where the matter 

[1997] 315  L.R.L.R. Henderson v. Merrett Syndicate (Q.B. (Com. Ct.))    Cresswell, J. 

was principally one of judgment and opinion, the auditors might not be able to obtain independent corroborative evidence and could not reasonably expect it to be available. In such cases, the auditors should ensure that there was no other evidence which conflicted with the representations by management and should obtain written confirmation of the representations. (The Auditing Guideline - Representations by Management (issued July, 1983)). 

4. For the purposes of the present case, from year 4 the report should state whether a true and fair view was given in the accounts. 

5. As from year 4 the syndicate auditors should qualify their report if they were unable to obtain all the necessary information and explanations required. In the absence of a reference to these matters the syndicate auditors' confirmation thereof was implicit in an unqualified audit report. 

 (The following propositions are derived from the audit brief. Although the brief is based on the Lloyd's byelaws and the law as at Jan. 1, 1986 I find that it reflected the approach that ought properly to have been followed from year 4 (see in this connection Mr. Attwood's evidence, E&W Insight No. 32 June, 1986 and Mr. McNamara (Day 43/42/20 et seq)).) 

6. In selecting materiality levels, the auditor should have regard to the impact of syndicate transactions on the personal account of each syndicate member; he should look behind the syndicate to its constitution, as well as to the syndicate as a whole, in making judgments relating to materiality. 

7. 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. 

8. The auditor's operational standard stated that "the auditor should obtain relevant and reliable audit evidence sufficient to enable him to draw reasonable conclusions therefrom". Since the audit report on syndicate financial statements was 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. 

9. The reinsurance to close a year of account was normally the area of greatest audit difficulty, because it was derived with the benefit of a substantial degree of underwriting judgment. In common with all accounting estimates, it was one of a range of possible outcomes and the audit approach should recognize that the objective was to ensure that the reinsurance to close was within a zone of reasonableness rather than an arithmetically accurate figure. (See also par. 5 of Mr. Randall's letter of Mar. 18, 1982.) 

10. 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 part of his assessment of the appropriate range within which he would expect the premium for the reinsurance to close to fall. 

11. The results derived from statistical techniques should be treated with a degree of caution, since historically derived data might not be an accurate guide as to uncertain future events. The auditor should, therefore, ascertain from the underwriter the underlying basis for his estimate of claims incurred but not reported, so that appropriate additional evidence could be collected to support the computation. 

12. Other matters the auditor might consider as a part of the audit of the reinsurance to close included the following. 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. 

Mr. Attwood's evidence provides material support for the above propositions, particularly insofar as they apply to auditors. Further support for the above propositions is found in Mr. Holland's lecture of Jan. 21, 1986 entitled "Setting the scene" as part of an E&W seminar for clients, "The RITC process" (D12/253 et seq): 

"True and Fair" requires a realistic presentation. It requires that it is done in an objective manner. It has to be pertinent to the operations of the entity. It has to be based on the best information available and it has to be arrived at after reasonable enquiry.. . .We think it is important at the end of the work on the reinsurance to close that the underwriter and managing agent should prepare a memorandum to summarize the work that has been undertaken, the assumptions that have been made, the evidence that was available in support of those assumptions, the tests that were carried out and the conclusions that were reached on those tests. . . When they [the working papers] are gathered together for filing and are reviewed, I would hope that there would be clear proof that in arriving at the amount of the reinsurance to close equity, prudence and consistency have all been applied. Equity means that the underwriter, in particular, has to look at 

[1997] 316  L.R.L.R. Henderson v. Merrett Syndicate (Q.B. (Com. Ct.))    Cresswell, J. 

 that premium and decide that for the year being closed it is a fair premium for the Names concerned to be paying for their outstanding liabilities to be assumed by somebody else. I think he then has to walk round the other side of the table and look at it afresh from the point of view of the assuming Names as to whether or not it is a fair premium to accept for writing that liability. I think there needs to be evidence that he is satisfied on both those aspects. 

The materials referred to above, while distinguishing between the respective functions of the managing agents/underwriter and the auditors, show the interplay between those functions. 

Objective Justifiability 

The defendants rely on certain passages in Mr. Neil's evidence e.g. Day 29/137-138 as to whether or not objective justifiability is needed in setting an IBNR. I have already said that in my view Mr. Neil was at times confused by terminology in some of the answers that he gave. If and to the extent that any of his evidence was inconsistent with the above propositions I reject it. Although the determination of the IBNR element required the exercise by the underwriter of judgment that judgment plainly had to be exercised having regard to all relevant materials and after appropriate enquiries. I accept the plaintiffs' submission that the judgment must not be uninformed or exercised in an information vacuum or exercised without reference to the range of potential outcomes. 
 
A reasonable degree of accuracy/zone of reasonableness 

The audit brief referred to "a zone of reasonableness rather than an arithmetically accurate figure". Mr. Randall's letter of Mar. 18, 1982 stated: 

. . .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 of error in the calculation. 

Considerable evidence was devoted to the appropriate materiality level or maximum level of tolerance of error in 418/417's RITC premium. Whereas on the one hand I consider that the level adopted by Mr. Attwood was somewhat strict for a long tail syndicate, on the other hand I do not accept the very much higher percentages contended for by E&W and their experts. I do not consider that it is necessary or appropriate to make a precise finding (in terms of a particular percentage) as to the appropriate materiality level in 418/417's RITC premium. It is plain that an assessment had to be made by the managing agents/underwriter and the auditors as to the width of the margin of error in the RITC calculations. 

20. IDENTIFICATION OF 418/417's EXPOSURE IN RESPECT OF DEFENDANTS IN THE ASBESTOSIS LITIGATION 

Could Merretts discover at each year end from their own records or other sources whether in respect of any known/actual defendant in the asbestosis litigation they had insured that defendant direct or by facultative reinsurance, treaty reinsurance or retrocession? 

 As to the above question the plaintiffs' case was as follows. It is not possible to say whether Merretts could have discovered at each year end from their own records whether or not they had any potential liability to a known/actual defendant to the asbestosis litigation. The E&W note in year 4 at D6/589 shows that they had some documents but not others. That is not to say that they ought not to have kept appropriate records, nor does it touch on the topic of whether they could have obtained such information from brokers or other sources. If they  could have, they did not do so. If they could not have, because no such information was available anywhere and Merretts simply had to wait until an assured made a claim, then it follows that they knew that they would face liabilities which they were unable to identify until a claim was received.  

As to the above question Merretts' case was as follows. 

It would have been possible to identify nearly all policies to which 417 subscribed during the period 1953 to 1979 from the syndicate's underwriting records (shared with syndicate 799 for U.S. casualty business). Two possible qualifications are (i) that the occasional record may have gone missing but this would be exceptional and (ii) that some binding authorities/line slips were written for which full declarations might not exist. This was not a particular problem in relation to the major asbestos defendants since, with the notable exception of U.S. Gypsum, these defendants were not placed in the market through such facilities (and in any event major involvements were researched and notified to the market through Toplis & Harding).  

Thus it would have been possible to identify from their own records (or from brokers if there was some difficulty) whether Syndicate 417 had participated on a known defendants' programme of direct insurance. So far as the major defendants were concerned this was not necessary because these involvements were researched by the brokers and advised to the market at a very early stage. Other defendants' positions would be researched by  

[1997] 317  L.R.L.R. Henderson v. Merrett Syndicate (Q.B. (Com. Ct.))    Cresswell, J. 

the brokers as and when they advised involvement to the market. 

On reinsurances Merretts could determine whether they had written a line on the reinsurance programme of an American domestic insurer or reinsurer, but that information did not tell them what exposures that insurer or reinsurer had to known defendants to the asbestos litigation. The major domestic insurers all had some involvement. Again their involvements were reported upon to the market at a very early stage (that is not to say that the perception as to their ultimate losses was foreseen - it clearly was not). Mr. McNamara's schedule at year 2 lists many reinsurance policies (although many have a NIL reserve). Syndicate 417 had some retrocession policies for U.S. reinsurers but otherwise retrocessions were not significant. Facultative reinsurance was not significant to syndicate 417 in asbestos-related claims. 

As to Merretts' knowledge of the policy terms, in later years (from the late 1960s onwards) the majority of policy forms were standardized so that the market could identify relevant policy terms by knowing the form used. In earlier years this was less so. Identification of policy terms in the early years could not be done by Merretts, but had to be researched by the broker. 

For the purposes of this judgment I am, save where otherwise stated, content to accept Merretts' case as set out above. There was a limit to the extent to which these matters were explored in evidence. 

21. NOTIFICATION OF ASBESTOS-RELATED LOSSES 

Merretts say the procedure was as follows. 
 
Direct claims 

At the very early stages of asbestos-related claims (i.e. in the mid to late 70s) an insured (who claimed to be covered by the London market) facing asbestos bodily injury claims by plaintiffs in the U.S. would first notify their U.S. broker of its exposure to these types of claims. The U.S. broker would then notify the London broker in writing of the exposure to such claims. Initially such notifications were extremely generalised. The response of the London broker would be to identify the lead underwriter (or one of the lead underwriters) providing coverage to the particular insured. The broker would then take the loss notification to the lead underwriter (or the claims manager of that syndicate) to obtain instructions. Almost without exception the first step would be for the lead underwriter to direct the claim be referred to a U.S. attorney to advise. The nominated attorney would then investigate the insured to establish the years of  insurance coverage, the layers of such insurance protection, the extent of London market involvement, the number of claims made to date against the insured, the details of settlements and outstanding case reserves, the nature of the products giving rise to the losses and obtain general background information on the assured and its products. Having ascertained this information the attorney would make a first report to the market including giving advice on coverage issues and allocation of reserves (e.g. manifestation or exposure). That advice would list the years of coverage, the layers of coverage, how the claims reserve should be allocated between years and the number of claims paid and outstanding. 

The report was received by the market via the broker. Upon receipt of the report the broker would identify from slips who were the participating syndicates on the years of coverage identified by the attorneys and disseminate the report and policy information to all involved syndicates. After the AWP had assumed responsibility for the handling of asbestos claims on behalf of the market, Toplis & Harding, were appointed to co-ordinate the distribution of the reports, so that it was Toplis & Harding who disseminated the information to all involved syndicates, having obtained the information on syndicate participation from the brokers. 

As the system developed in the early 1980s identification of participants and dissemination of the information became more efficient. However, by 1980-81 certain major defendants had been identified. Nearly all of their direct coverage in London had been identified and the underwriters participating on layers exposed to claims had been notified of their participation. Attorneys' reports were available for all such defendants and reserve recommendations were circulated to the market at year end 1981 and at subsequent year ends. 

Reinsurance 

Reinsurance claims were dealt with in a similar fashion. Once a reinsured notified its brokers of potential involvements with asbestos claims, that notification would be directed through the London broker to a leading underwriter on that reinsurance programme. Attorneys would then be instructed to report and advise. The attorneys' report would list years of cover, layers of reinsurance and principal involvements (e.g. Johns Manville, GAF etc.). Such reports would advise on the likelihood of claims invading the reinsurance programme and, if appropriate, make reserve recommendations. The AWP did not immediately involve itself in reinsurance claims but by 1983 it had taken over responsibility for these as well. The Wellington agreement and the ACF set up under it enabled a good data base of reinsureds' involvements to be established, and 

[1997] 318  L.R.L.R. Henderson v. Merrett Syndicate (Q.B. (Com. Ct.))    Cresswell, J. 

improved the ability of the market to set reserves on reinsurances. 

In the early period 1980-1981 LUNCO would advise the market of reinsurance claims on 1971 and post policies; pre-1971 policies would be advised through the broker and then by Toplis & Harding. In about 1982 LUNCO was requested by the AWP to stop advising reserves so that all asbestos-related claims, both direct and reinsurances, would be advised in the same way through Toplis & Harding. Thereafter LUNCO's only role was to send out cards on reinsurances covered by their system with no reserves advised but with instructions for the establishment of letters of credit where required under the terms of the reinsurances. 

As with direct insurances, by year end 1981 certain major domestic insurers who had reinsurances placed in the London market had been identified (Travelers, Home, CNA, Aetna and others), their reinsurers identified and notified, attorneys instructed and the reinsured's perceived exposure to underlying insureds reported upon with reserve recommendations if any. Underwriters in London were dependent upon the quality of the reinsured's information for reserving purposes and in particular to identify those underlying insureds which the reinsured expected to give rise to claims on the reinsurance. 

There was essentially no difference between the way in which reinsurance and retrocession claims were dealt with. Retrocession claims were advised later than reinsurance claims. 

Recording claims 

According to Merretts the procedure was as follows. Every risk underwritten by Merretts which was the subject of an attorney's report giving reserve recommendations (even where the recommendation may have been nil) was notified to Merretts, initially by the brokers and subsequently by Toplis and Harding. No syndicate in Lloyd's would receive a copy of the attorney's report unless they had participated on the risk. With the attorney's report they would receive a schedule setting out each year that they had participated in the risk which was the subject of the attorney's report together with their percentage participation. 

The system did not require Merretts to recognize that they had incurred any loss; that information would accompany the attorney's report. What Merretts had to do was to take the reserve recommended by the attorneys and apply the syndicate's share as set out in the accompanying schedule. 

On the receipt of an attorney's report containing a reserve recommendation (including a nil recommendation) Merretts would write up a manual claims card recording that claim. 

If the attorney's report showed a policy burning then Merretts would receive notification of that policy by receiving both the attorney's report and the schedule showing their participation on those policies which were burning. Secondly, it was not possible for intervening years in which Merretts participated to be missed since the schedule accompanying the attorney's report identified all years of coverage and all the syndicate's participation. If a policy could not be located by the broker but there was reason to believe one existed (e.g. years 1950-55 and 1957-1963 had been identified and traced but nothing for 1956) then Merretts could consult with underwriting records to locate it. 

22. PERCEPTION AND THE MATERIALS AVAILABLE TO MERRETTS AND E&W 

I turn to consider perception and the materials available to Merretts and E&W. It is vitally important to consider perception (separately) at the time of the writing of each of the 11 run-off contracts and at the time of each of the six RITCs and to distinguish between the perception of and the materials available to Merretts and the perception of and the materials available to E&W. Where materials are drawn on which would probably have been available only to Merrets or E&W this is indicated in brackets. Where witnesses gave evidence as to perception which was inconsistent with the contemporary documents, my findings as to perception are based on the contemporary documents. The contemporary documents are a far surer guide. 

Merretts 

Mr. Merrett accepted that the best source of up-to-date information about the asbestosis problem was to be found in the attorney's reports (Day 16/98). 

Further Mr. Jackson and Mr. Ayliffe were particularly well placed to receive information as to the development of asbestos and pollution claims. Mr. Jackson was a member of the market AWP from the outset and was chairman from 1984. Mr. Ayliffe was a founder member of the AWP, subsequently a director of the ACF and the founder and initial chairman of the Lloyd's environmental claims group.
  
Mr. Merrett said that he was a regular reader of insurance periodicals such as Lloyd's List and Business Insurance, and of the Financial Times, the Economist and the Wall Street Journal. As such he was aware of those developments which were receiving press attention and evaluated the significance of what he read. As to attorneys' reports, 

[1997] 319  L.R.L.R. Henderson v. Merrett Syndicate (Q.B. (Com. Ct.))    Cresswell, J. 

there were numerous attorneys' reports in Merretts' possession. Many of these repeated comments made in previous reports. The chronology, Appendix 1 to this judgment, refers to examples of some attorneys' reports. The chronology is drawn from a document prepared by the plaintiffs which purported to identify - 

. . .documents or information. . .actually in the possession of the respective defendant shown against the entry. 

I have made a number of revisions to the chronology in the light, inter alia, of a revised chronology
 provided on behalf of Merretts. If I have inadvertently referred to an attorney's report which was not in the possession of Merretts, the probability is that there were other reports in their possession to similar effect. 

The availability and system for circulation of attorney's reports from time to time is reflected in the chronology and in particular in the following entries: the letter from the AWP dated Feb. 10, 1981; the meeting of the AWP Aug. 10, 1981; the letter from the AWP dated Dec. 1, 1981; the letter from the AWP dated Feb. 16, 1982; Mr. Murray Lawrence's letter of Mar. 18, 1982 see above, par. 2; the attorney's report dated Jan. 20, 1983 and the letter from the AWP dated Apr. 27, 1983. 

E&W 

E&W accept that the knowledge which a reasonably competent syndicate auditor should have acquired includes knowledge from the following sources of information: 

(i) Any guidance or instructions from Lloyd's. 

(ii) Any information given out at meetings with panel/recognized auditors. 

(iii) Any information given to the auditor by his client. 

(iv) Underwriter's and managing agent's reports and other information derived from other underwriters
 and agencies and other insurance clients. 

(v) The Lloyd's global accounts. 

As to attorneys' reports, copies of attorneys' reports in Merretts' possession were generally available to E&W (see T13/125). (As to a particular point made by E&W with reference to J11/26/462, there appear to be very few examples of attorneys' reports marked: 
 
. . .this report is not to be made available to brokers, reinsurers, auditors or any other parties. 

Mr. Attwood in his reports and evidence as to audit evidence and reliance on specialists and management representations said that, in his view,  because of the uncertain nature of the asbestos liabilities and the materiality of amounts involved, the representations by Merretts as to the future development of these liabilities had to be corroborated by independent evidence before the representations could be accepted. Mr. Attwood singled out attorney's reports as a source of such corroboration. The same point applied to pollution liabilities albeit from a later point in time. I refer in this connection to the auditing guidelines - representations by management (issued July, 1983) sup. 

E&W submit that it was not incumbent upon, nor would it have been a realistic exercise for, a reasonably competent auditor at any time to review the entirety of all attorneys' reports in Merretts' possession. E&W did refer to a sample of reports to see that the figures which Merretts were carrying for outstandings tallied with the figures recommended by the attorneys. 

I accept that it was not incumbent upon E&W to review the entirety of all such reports in Merretts' possession, but the attorneys' reports provided important independent evidence as to the nature, extent and development of asbestos and pollution claims from time to time. 
  
Having regard, inter alia, to the extent of the asbestos and (subsequently) pollution problems, the extent of the exposure of 418/417's own book (and subsequently the cedants') to these problems, the materiality of the reserves in connection with asbestos (and subsequently pollution), the critical importance of any assessment as to the future nature extent and development of these claims, and in the case of later years the inaccuracy of previous estimates, I accept Mr. Attwood's evidence that it was incumbent upon E&W to review a sample of the attorneys' reports to test the representations made by Merretts. I recognize that the attorneys' reports emphasized that they made no attempt to project an IBNR factor in respect of claims which had yet to be filed, but they contained extremely important
 independent information as illustrated below. 

In my analysis of perception in relation to each of the six years I have distinguished between documents available to Merretts and documents available to E&W. In the case of the attorneys' reports I have referred to samples from the numerous reports in Merretts' possession. E&W were on my finding only obliged to review a sample and in doing so might well have reviewed reports other than those to which I have referred. However many of these reports repeated comments made in previous reports and, if E&W did not review the reports to which I refer below, the probability is that they would have read other reports in Merretts' possession to similar effect. 

[1997] 320  L.R.L.R. Henderson v. Merrett Syndicate (Q.B. (Com. Ct.))    Cresswell, J. 

E&W were entitled to have regard to Mr. Ayliffe's and Mr. Jackson's knowledge and expertise in relation to asbestos and pollution problems, but the contemporary documents provide the best guide as to the limited extent to which these matters were in fact discussed with Mr. Ayliffe and Mr. Jackson in the context of 418/417. Further for the reasons set out above any such representations needed to be tested. 

As to AWP minutes, reports and communications, at a panel auditors meeting on Jan. 15, 1982 panel auditors were informed that Lloyd's had set up a database in respect of asbestos claims and were told that the information was available to auditors with written authority from syndicate clients. (See also in this connection the letter from the AWP dated Feb. 16, 1982). However in the light of the evidence that AWP minutes, reports and communications were not shown to E&W I have disregarded these materials in examining E&W's knowledge in years 1 to 6. In addition I have taken a similar approach in respect of certain miscellaneous publications and reports. 

23. THE WRITING OF THE RUN-OFF CONTRACTS 

I set out below some general comments on the writing of the run-off contracts. The 11 individual
 contracts are considered in turn below. 

1. The plaintiffs' pleaded case includes inter alia the following allegations. 

 (i) No limitations were placed either on the amount or on the duration of 418/417's liability to pay claims within the terms of the policies. If (which the plaintiffs deny) an ordinarily competent underwriter would ever have written such policies, he would have done so only if the placing or other information available at the time each risk was considered was such as to enable him reliably to assess with a reasonable degree of competence the reinsurer's ultimate net retained potential liability under each of the policies. Neither Mr. Merrett, nor Mr. Emney, nor anyone else at Merretts could or did have in relation to any of the run-off policies written, such information as would enable such a reliable assessment to be made. 

(ii) Mr. Merrett, Mr. Emney and/or Merretts had no, or no adequate, system for detecting or monitoring the possible aggregation in 418/417 of particular risks included in the business ceded under the run-off policies. In failing to implement any such system, Merretts paid inadequate regard to the risk of potentially disastrous aggregation in 418/417. 

 (iii) By reason of the uncertainty over the volume, quantum and timing of asbestos-related claims, the potential for substantial further claims arising from other types of latent disease or com plaints, and the yet further uncertainty generated by the spectre of pollution-related claims, Mr. Merrett, Mr. Emney and/or Merretts ought to have appreciated that there was no material on the basis of which a reliable or proper assessment of the ultimate outcome of accounts with a significant U.S. casualty exposure could be made and that those cedants who were looking to obtain the benefit of run-off cover were doing so, in large measure, precisely because of the uncertainty and the consequent inability to make a reliable assessment of the ultimate outcome of their accounts. It was, in the circumstances, unsafe to reinsure the run-off liabilities of cedants.    

(iv) Mr. Merrett, Mr. Emney and/or Merretts failed to obtain adequate reinsurance cover or other
security against the liabilities assumed under the run-off policies. 

(v) Before writing any of the run-off policies, Mr. Merrett and/or Mr. Emney failed to make any, or any adequate, enquiries or investigation as to the extent of the asbestosis problem for insurers and the implications thereof. 

2. It is not in dispute that it was Mr. Emney's scratch which formally bound 418/417 on all 11 run-off contracts; nor is it in dispute that he played a substantial role in the decision to write the contracts. Despite this, Merretts did not call Mr. Emney to give evidence. The fact that Mr. Emney was not called by Merretts for tactical reasons has not made the task of doing justice between the parties any easier. Mr. Emney could have assisted the Court on a number of issues including, by way of example only, the question of which materials constituted the placing information and the role of Mr. Merrett in the writing of the policies. 

3. The plaintiffs contend that Mr. Merrett took part in the decision to write each run-off, or the run-offs as a whole, to the extent that he should be held personally liable for such conduct. The plaintiffs submit that there are three extraordinary aspects of this part of the case, which bear on this question:  

(a) The writing of the run-offs by 418/417 was withheld from E&W (as to six until late in the audit of year 3 in 1984 and as to the remaining five until April, 1985) and was not within the knowledge of the directors of MSL (apart from Mr. Emney and Mr. Merrett and possibly Mr. Smaje) until 1985. (I reject Mr. Merrett's evidence that the auditors had knowledge of the run-off contracts prior to the dates accepted by E&W.) 

(b) When the "shattering news" as to the deterioration on the run-off contracts broke in April, 1985, no inquiry of any sort was instituted by the agency to determine who was responsible and how it had come about that the contracts had been written.  

[1997] 321  L.R.L.R. Henderson v. Merrett Syndicate (Q.B. (Com. Ct.))    Cresswell, J. 

(c) After they were written the claims made under them were not handled by the claims manager, Mr. Ayliffe, or his department. Before the news broke in April, 1985, they were apparently handled by Mr. Emney who thus added claims handling to his underwriting duties, both being in a field (U.S. casualty business) which was not his primary area of expertise. 

As regards the liability of Merretts (and the members' agents) the question of whether it was Mr. Emney alone or in conjunction with Mr. Merrett who wrote the run-off contracts is immaterial. The plaintiffs submit that in order to make good the claim against Mr. Merrett, it is not necessary to go so far as showing that Mr. Merrett scratched the slip, or even that he personally made the decision to write every policy. They accept that it is not possible to determine his precise involvement in the writing of each contract, but say that it is clear that he was aware that they were being written, that he had given the go-ahead in a general way, that he was certainly involved in the details of at least some individual contracts, that they could not have been written without his consent, and that he has been less than frank over the precise extent of his involvement. The plaintiffs accept that as the active underwriter on 418/417 Mr. Merrett was not required to assess every risk himself and make the decision to accept or not, but he was in overall control. They submit that it is quite unbelievable that a man of Mr. Merrett's personality and presence would have simply allowed Mr. Emney to enter this field and write this sort of business without keeping a close eye on what was going on. 

4. Mr. Merrett said in his witness statement (par. 77): 

It is my current view, formed with hindsight, that a more critical eye should have been brought to bear on the contracts as they were written, and that we should have decided at an earlier stage that the risk that the exposures of the cedants were understated was sufficient to decide that the aggregate exposure to this book of business was enough before all 11 contracts had been written. 

When giving evidence Mr. Merrett did not accept that the writing of the run-off contracts was a "colossal gamble" but referred to - 
 
. . .an attempt, which in hindsight was severely misplaced, to provide a service to other syndicates on a basis that would be distinctly profitable to our Names. 

Mr. Randall said that in 1985 Mr. Merrett described the writing of the run-off contracts as "an underwriting blunder".  

5. Mr. Merrett accepted that in order to write a run-off contract a view had to be taken as to the ultimate outcome of the cedant's account. He said that broadly speaking he assumed that such a view was formed by Mr. Emney simply because it would have been imprudent and inconsistent with due care and skill to have written the contracts without forming such a view. He added that with the exception of Verrall he was unable, save in the general terms referred to, to explain the methodology which was used in relation to the run-off contracts.  

Mr. Merrett further accepted (as I find correctly) that it was of vital importance that either the cedant's IBNR should be known or the basis on which the IBNR was created should be known. Mr. Merrett explained that by this he meant that it was necessary to know the material on which the cedants had reached their IBNR, the individual constituent parts, how they addressed it, the information that they would have put into their calculations (triangulations, statistical projections) and the basis on which outstandings were established. This information was necessary so that an assessment could be formed as to where the claims might end up. Without such adequate information to form a view as to where the account was likely to end up, or its equivalent in another form, a run-off contract would not be competently or prudently written. Mr. Merrett added that the underwriter should satisfy himself that the cover became purely notional at a level which was going to impact catastrophically on an individual Name. Mr. Rome accepted that the data and evidence which he had seen did not tell him what view Mr. Emney formed as to the outcome or ultimate outcome of the accounts being ceded. 

6. The information which Mr. Neil considered was essential to assess the run-off contracts before writing them is set out in par. 187 of his report. The information included - 

. . .IBNR loss reserves for both asbestos claims and non asbestos claims and the methodology behind the IBNR factors. 

(Mr. Neil's par. 187(g) should be read as referring only to direct business). He comments in par. 184 that:  

Having read the underwriting information contained in most of the run-off files, I find much of it to be incomplete, of very poor quality, and inadequate. . .IBNR was not required as information in all cases. Obviously, the main reason for not giving IBNR was because the cedants themselves did not know how to reserve for IBNR claims and this is the reason why they were seeking to purchase run-off cover. 

[1997] 322  L.R.L.R. Henderson v. Merrett Syndicate (Q.B. (Com. Ct.))    Cresswell, J. 

I prefer Mr. Neil's evidence in relation to the run-off contracts to that of Mr. Rome. In my view Mr. Rome's evidence about the writing of the run-off contracts was unrealistic and unreasonably defensive (see above). 

7. When asked whether he considered it was consistent with skill, prudence and competence not to keep copies of the placing information in relation to the run-off contracts, Mr. Merrett accepted that prudence would have dictated a more extensive retention philosophy with reference to the contracts. Merretts' failure to keep full and careful records of the placing information in relation to the run-off contracts has caused difficulty not only in this litigation but in earlier litigation and arbitration. (See further in this connection the affidavit of Mr. Randall sworn in the Dolling-Baker litigation 1988 Folio 3514: C53/3 196.) 

8. The plaintiffs accept that there could have been few if any syndicates or persons whose knowledge of the asbestos problem, as it impinged on the London market, exceeded or even approached that of Mr. Ayliffe and Mr. Jackson. When asked whether Mr. Jackson would have written the 11 run-off contracts Mr. Merrett said: 

. . .I do not think so, no. He may have written some of them, but he was not writing a London market reinsurance book at all. . . 

When asked whether he thought Mr. Jackson would have taken on these risks had he been writing a London market reinsurance book Mr. Merrett added - 

. . .there is no reason to suppose he would not have taken on Judd, for example. I would not want to go much further up the list. 

 Mr. Merrett also said that to the best of his knowledge Mr. Jackson was not consulted in respect of any of the 11 run-off contracts (and this is what the Names were told on May 25, 1990 F6/337). Nor was Mr. Ayliffe consulted. 

9. Six of the run-off contracts were written after Mr. Murray Lawrence's letter dated Mar. 18, 1982 quoted in section 18 sup. (and see also cl. 3(iii) of the audit instructions in year 1). Five of the run-off contracts were written within three months of the year 1 audit. 

10. In an article in Lloyd's List dated Dec. 8, 1982 Mr. David Mann, a director of MSL wrote: 

Within the Lloyd's market, where very strong opinions are usually to be found, conjecture regarding the ultimate quantum of asbestosis and other latent disease losses has stimulated a relatively new and fascinating level of reinsurance trading. The activity involving unlimited "run-off" reinsurance protection against the uncertainty of development of these very long "tail" losses is an example of such unusual innovation. The syndicates in Lloyd's which have recently chosen to assume the worst potential of the latent disease phenomenon demonstrate that London is still the source of the most interesting and speculative initiatives. Very few reinsurance markets have found themselves able to apply rating judgment to these most volatile risks except on the basis of a limit of liability. The consensus of opinion, even in London, appears to judge the unlimited aspects of such risk assumption as involving totally unacceptable long term characteristics in view of the premiums available. (Emphasis added.) 
  
11. Mr. Chester at a meeting of the audit committee of Lloyd's on Mar. 2, 1982 (H1/471A) commented on the particular dangers of a concentration of exposure to asbestos-related claims in a small number of syndicates. Mr. Merrett was present at this meeting. Further Mr. Chester at a panel auditors meeting on Mar. 9, 1982 (J7/92(3)) said that the writing of run-off contracts could lead to the funnelling of a large amount of liability into a small number of Names and added that consideration was being given to asking the market to stop writing such reinsurances in the open years. Merretts were not represented on Mar. 9, 1982 but the point about funnelling should have been obvious to them. 
  
12. The run-off contracts were not protected by adequate reinsurance. When asked whether he discussed with Mr. Emney what reinsurance would be necessary for the 11 run-off contracts Mr. Merrett said that: 

. . .at that time it was agreed between us that it was not a matter of arbitraging, that we should either accept that the risks were risks that we could write and run or we should not write them; but after some time he discussed with me the advantages of taking out some reinsurance. 

13. Mr. Merrett said that the view in 1985 was that Mr. Emney had not fulfilled his duties properly and that essentially was why, when he withdrew his resignation, he was dismissed. When asked in what respects Mr. Emney did not fulfill his duties properly Mr. Merrett said that: 

. . .we had reservations at that stage, and substantial reservations as to the underwriting of the individual contracts, as to whether that had been done with the necessary care and attention and conservatism.  

Although Mr. Merrett referred to Mr. Emney drinking too much he said he was never aware of Mr. Emney doing any underwriting when he was the worse for drink. 

14. According to Mr. Merrett if no run-off contracts had been written - 

[1997] 323  L.R.L.R. Henderson v. Merrett Syndicate (Q.B. (Com. Ct.))    Cresswell, J. 

. . .it is a reasonable expectation that the syndicate would be trading and that there would be losses arising out of the 417 domestic account, but the subsequent position of the syndicate would have been very different. 

24. THE WRITING OF THE PROVINCIAL RUN-OFF CONTRACT 

The plaintiffs do not persist with their contention that the writing of the Provincial contract was per se negligent for the following reasons and on the following basis. The plaintiffs accept that it is not possible to know with reasonable certainty what Merretts knew about the asbestos problem prior to the writing of the Provincial contract. They say there are indications that Merretts must have known of the looming problem and the uncertainties surrounding it. The plaintiffs also say that it is clear that by the time of the writing of the endorsements to this contract, much more was known, but no separate case of negligence was pleaded in this respect. The plaintiffs add that the abandonment of the allegations of negligence in relation to Provincial does not mean that, once written, it could be ignored as a factor when each of the later contracts came to be written because the nature of the asbestos problem in relation to the Provincial contract would have put Merretts on notice of the problem generally, because of the way the account progressed. Nor does the abandonment detract from the plaintiffs' submissions regarding the closing of the years. 

25. THE WRITING OF THE UNIVERSAL RUN-OFF CONTRACT 

When asked in cross-examination: 

Is it your position that no competent underwriter would have written the Universal contract or are you simply saying "one can see where it went wrong, but I do not say it was incompetent by standards at the time"? 

Mr. Neil replied: 

I am not sure it was incompetent by the standards of the time. I am saying that I believe further information should have been sought regarding potential asbestos exposures, and, had that information been sought, it may have made the underwriter think twice about writing it. 
 
The writing of the Universal contract was an error of judgment, but given the date at which it was written
 and Mr. Neil's evidence, the error was not such as no reasonably well-informed and competent underwriter could have made. 
 
26. THE WRITING OF THE BALLANTYNE RUN-OFF CONTRACT 

Perception as at July 30, 1981 

As at July 30, 1981 the future development and extent of asbestos-related claims were subject to considerable uncertainty. I refer to the chronology, Appendix 1 to this judgment (which in the case of attorney's reports lists some examples of reports in Merretts' possession). As to the U.S. cases at the above date see Appendix 2 to this judgment. 

The nature and extent of the uncertainties as at July 30, 1981 were known to Merretts. The broad nature and extent of the uncertainties as at July 30, 1981 included the following: 

(a) As to uncertainties disclosed by materials dated prior to Jan. 1, 1981 in Merretts' possession see the chronology. The AWP was established in 1980 - see the letter dated Aug. 5, 1980. 

(b) As at Feb. 10, 1981 (Merretts only) a letter from the AWP to active underwriters stated that during the past year the number of cases in suit has increased from about 5500 to in excess of 8000 and at this stage it is not possible to project how many more claims will be filed. 

(c) As at April, 1981 an attorney's report referred to asbestos in public schools and added that this creates an additional potential plaintiff pool of many millions. Possibly more important are the potential property damage claims by school districts in order to make school buildings once again "safe". The same report stated that an Illinois jury has recently awarded U.S.$500,000, U.S.$375,000 of that punitive, to the spouse of an asbestos worker in a law suit based on loss of consortium. This appears to be the first award of punitive damages in an asbestos suit and, if indicative of a trend, greatly increases the potential liabilities of companies and their insurers. 
  
(d) The Commercial Union position paper dated May 12, 1981 and Dr. Selikoff's 1981 report (both Merretts only) are referred to in Mr. Ayliffe's witness statement (par. 59). According to Mr. Ayliffe these reports were viewed with scepticism (par. 60). But as the contemporary documents show there were (quite apart from the paper and the report) widely differing views. 

The plaintiff's and Merretts' cases 

The plaintiffs' case in respect of Ballantyne is set out in their closing submissions. Merretts accept that the writing of Ballantyne is open to criticism but they do not accept that it was negligently written for the reasons set out in their submissions. 

[1997] 324  L.R.L.R. Henderson v. Merrett Syndicate (Q.B. (Com. Ct.))    Cresswell, J. 

Ballantyne conclusions 

1. I refer to the general comments on the writing of the run-off contracts set out above. 

2. As to perception of asbestos-related claims at the date of this contract see above. 

3. As to the U.S. cases as at the date of this contract see Appendix 2 to this judgment. 

4. As to the dispute as to the information provided at the date of placing, in the absence of evidence from Mr. Emney I am not satisfied on a balance of probabilities that any further information was provided beyond that agreed to have been provided. The true position is particularly difficult to assess in the absence of proper record keeping by Merretts and evidence from the person who scratched the risk. 

5. I prefer the evidence of Mr. Neil to that of Mr. Rome in relation to this contract. 

6. I find that in all the circumstances the writing of this contract was negligent. There was a failure to adhere to the standard of skill and care reasonably to be expected of Merretts at the time and with the knowledge that Merretts had or should have had. The central reason for the finding of negligence is
 that this contract exposed the plaintiffs to potentially huge liabilities, unlimited in time or amount, which were not capable of reasonable quantification on the material before Mr. Emney. There was insufficient placing or other information available at the time the risk was considered to enable a reliable assessment to be made with a reasonable degree of confidence of 417's ultimate net retained potential liability under the contract. Merretts failed to obtain all the information referred to in par. 187 of Mr. Neil's report including in particular IBNR loss reserves for both asbestos claims and non-asbestos claims and the methodology behind the IBNR factors. 

I also refer to the detailed points made by Mr. Neil in relation to the material before Mr. Emney. The finding of negligence is made for the central reason set out above. In addition it is to be noted that there was no or no adequate system for detecting or monitoring the aggregation in 418/417 of particular risks included in the business ceded under the contract and there was inadequate reinsurance cover against the liabilities assumed. 

27. THE WRITING OF THE VERRALL RUN-OFF CONTRACT 

Perception as at Sept. 18, 1981 

See above for perception as at July 30, 1981. 

 The plaintiffs' case 

The plaintiffs' case in respect of Verrall is set out in their closing submissions. 

Merretts' case 

Merretts' submit that it is obvious from Mr.Emney's working paper that a view was taken as to the ultimate outturn of this contract. 

Verrall conclusions 

It is to be noted that this contract was avoided for material non-disclosure. 

1. I refer to the general comments on the writing of the run-off contracts set out above. 

2. As to perception of asbestos-related claims at the date of this contract see above. 

3. As to the U.S. cases as at the date of this contract see Appendix 2 to this judgment. 

4. As to the dispute as to the information provided at the date of placing, in the absence of evidence from Mr. Emney I am not satisfied on a balance of probabilities that any further information was provided beyond that agreed to have been provided. The true position is particularly difficult to assess in the absence of proper record keeping by Merretts and evidence from the person who scratched the risk. 

5. I prefer the evidence of Mr. Neil to that of Mr. Rome in relation to this contract. 

6. I find that in all the circumstances the writing of this contract was negligent. There was a failure to adhere to the standard of skill and care reasonably to be expected of Merretts at the time and with the knowledge that Merretts had or should have had. The central reason for the finding of negligence is that this contract exposed the plaintiffs to potentially huge liabilities, unlimited in time or amount, which were not capable of reasonable quantification on the material before Mr. Emney. There was insufficient
placing or other information available at the time the risk was considered to enable a reliable assessment to be made with a reasonable degree of confidence of 418's ultimate net retained potential liability under the contract. Merretts failed to obtain all the information referred to in par. 187 of Mr. Neil's report including in particular IBNR loss reserves for both asbestos claims and non-asbestos claims and the methodology behind the IBNR factors.  

I also refer to the detailed points made by Mr. Neil in relation to the material before Mr. Emney. The finding of negligence is made for the central reason set out above. In addition it is to be noted that there was no or no adequate system for detecting or monitoring the aggregation in 418/417 of particular risks included in the business ceded under the contract and there was inadequate reinsurance cover against the liabilities assumed. 

[1997] 325  L.R.L.R. Henderson v. Merrett Syndicate (Q.B. (Com. Ct.))    Cresswell, J. 

For the avoidance of doubt I have arrived at the above finding without having any regard whatsoever to the conclusions of the arbitrators as to the writing of this contract. 

28. THE WRITING OF THE FIREMAN'S FUND RUN-OFF CONTRACT 

Perception as at Nov. 13, 1981 

As at Nov. 13, 1981 the future development and extent of asbestos-related claims were subject to considerable uncertainty. I refer to the chronology, Appendix 1 to this judgment (which in the case of attorney's reports lists some examples of reports in Merretts' possession). As to the U.S. cases at the above date see Appendix 2 to this judgment. 

The nature and extent of the uncertainties as at Nov. 13, 1981 were known to Merretts. 

The broad nature and extent of the uncertainties as at Nov. 13, 1981 included the following: 

 (a) As to perception at July 30, 1981 see above. 

(As to the advisory panel of auditors meeting Nov. 10, 1981 (E&W only) see the chronology.) 

 (b) As at November, 1981 an attorney's report referred to a huge increase in the number of claims brought against one assured. As at Nov. 1, 1981, notices of a total of 4656 claims against the assured in 28 American jurisdictions had been received. At June 30, a total of 6210 law suits involving 7877 individual claimants had been filed against the assured. Since June 30, 1981 the assured experienced an additional 300 new claims each month for a current total of approximately 9000 claims. The report added that there are numerous well informed people who believe that the claims filed to date represent only the beginning of a potential flood of asbestos litigation. 

The plaintiffs' case 

The plaintiffs' case in respect of Fireman's Fund is set out in their closing submissions. 

Merretts' case 

Merretts submit that Mr. Neil plainly thought that the Fireman's Fund broking memorandum (C9/25) was a reasonably comprehensive document. There were bound to have been discussions. 

Merretts referred to the following passage in Mr. Neil's cross-examination (Day 33/43): 

 [Q.] Given the comprehensive nature of that document, do you think that that, plus oral discussion, would necessarily mean that this was still an incompetent contract to write? [A.] Although it may be a comprehensive document it does lead to further questions. It is a good document for the broker to give the underwriter, and the third paragraph on page 27 would spark some more questions from the underwriter. O.K., these problems of asbestos and products related claims, you are telling me the syndicate had made major reserves. What are they? Why have they done this? Is there IBNR in these reserves? Presumably there is. What IBNR factors are being used?  

Merretts accept that the writing of Fireman's Fund is open to criticism but they do not accept that it was negligently written. 

Fireman's Fund conclusions 

Mr. Merrett accepted that the Fireman's Fund contract was the largest and most risky contract of the 11 run-off contracts (Day 18/27/16). It was suggested in cross-examination of Mr. Rome that the subsequent settlement cost the Names approximately U.S.$159 m. (Day 34/106/3). 

Mr. Merrett said that in the 1950s and 1960s the non-marine market for casualty business was dominated by two or three syndicates which included Sturge (Day 16/64/23). 

In his witness statement Mr. Merrett said (par. 60 J1/1/38): 

 In November 1981 it was already more than 10 years since any of the original business had been written. Furthermore, Fireman's Fund was an insurer of greater sophistication than other cedants, and from their own direct exposures well able to evaluate the Sturge reserving levels. I believed that the retrocession could be safely written with a very substantial probability of profit. 

This statement is to be contrasted with Mr. Merrett's evidence when cross-examined (Day 16/9/10-14/11). At pp. 14/15 Mr. Merrett said:  

If there was no more information available to the underwriters then, unless they had considerably
greater knowledge of the Sturge syndicate than I had, I would have thought it imprudent to go ahead with the underwriting without further information, and particularly without taking a view from either Mr. Rokeby-Johnson or Mr. Coleridge. 

When asked whether Mr. Rokeby-Johnson was wrong when he said in his letter dated July 16, 1982 that:  

. . .the content of a Lloyd's underwriter's book of business. . .makes it impossible to quantify the final outcome of these huge and complex claims with any degree of accuracy. . . 

Mr. Merrett said: 

[1997] 326  L.R.L.R. Henderson v. Merrett Syndicate (Q.B. (Com. Ct.))    Cresswell, J. 

. . .I think, if one is addressing the Sturge syndicate uniquely, then it is a reasonable statement. I think it is an accurate statement with reference to Sturge. 

It is to be noted that Mr. Mann the deputy underwriter on 799 in about September, 1981 - 

. . .declined to quote on the coverage (re: Sturge run-off account). He cited the asbestosis exposure and their already heavy involvement as the main reason. He pointed out that the known identified exposures to Sturge on asbestosis could easily run to excess of $40,000,000 (v. $10,000,000 currently reserved) and felt that Merretts' current exposure prevented him from exposing the syndicate to additional exposure from that source. (See the inter office memorandum dated Sept. 21, 1981 from Mr. Brown to Mr. Isom H1/367). 

Thus 799 was not prepared to write this risk in about September, 1981 but 417 wrote it in November, 1981. 

My conclusions are as follows: 

1. I refer to the general comments on the writing of the run-off contracts set out above. 

2. As to perception of asbestos-related claims at the date of this contract see above. 

3. As to the U.S. cases as at the date of this contract see Appendix 2 to this judgment. 

4. As to the dispute as to the information provided at the date of placing, in the absence of evidence from Mr. Emney I am not satisfied on a balance of probabilities as to the content of any further information provided beyond that agreed to have been provided. The true position is particularly difficult to assess in the absence of proper record keeping by Merretts and evidence from the person who scratched the risk. 

5. I prefer the evidence of Mr. Neil to that of Mr. Rome in relation to this contract. 

6. I find that in all the circumstances the writing of this contract was negligent. There was a failure to adhere to the standard of skill and care reasonably to be expected of Merretts at the time and with the knowledge that Merretts had or should have had. The central reason for the finding of negligence is that this contract exposed the plaintiffs to potentially huge liabilities, unlimited in time or amount, which were not capable of reasonable quantification on the material before Mr. Emney. There is insufficient placing or other information available at the time the risk was considered to enable a reliable assessment to be made with a reasonable degree of confidence of 417's ultimate net retained potential liability under the contract. Merretts failed to obtain all the information referred to in par. 187 of Mr. Neil's report including in particular IBNR loss reserves for both asbestos claims and non-asbestos claims and the methodology behind the IBNR factors. I also refer to the detailed points made by Mr. Neil in relation to the material before Mr. Emney. The finding of negligence is made for the central reason set out above. In addition it is to be noted that there was no or no adequate system for detecting or monitoring the aggregation in 418/417 of particular risks included in the business ceded under the contract and there was inadequate reinsurance cover against the liabilities assumed.  

29. YEAR 1: THE CLOSURE OF 1979 INTO 1980 AS AT DEC. 31, 1981 (MERRETTS' AND E&W's REPORTS DATED MAY 4, 1982). 

In May, 1982, 418/417's 1979 year of account was closed by way of an RITC into the 1980 year of account; and it was reported on by Merretts on May 4, 1982. 

In the 1981 annual report and accounts for 418/417 was a note by E&W to the Accounts to the effect that the reinsurance had been calculated by the underwriter and complied with the requirements of the Council of Lloyd's. 

As to the regulatory regime for the year ended Dec. 31, 1981 see above. 

PERCEPTION AS AT YEAR 1  

As at May 4, 1982 the future development and extent of asbestos related claims was subject to considerable uncertainty. I refer to the chronology, Appendix 1 to this judgment (which in the case of attorneys' reports lists some examples of reports in Merrets' possession). As to the U.S. cases at the above date see Appendix 2 to this judgment. 

The nature and extent of the uncertainties as at May 4, 1982 were known to Merretts and E&W, alternatively in the case of E&W would have been known to E&W had necessary and appropriate audit tests and enquiries been carried out and conducted.  

The broad nature and extent of the uncertainties as at May 4, 1982 were reflected in the following
materials.  

Where materials are drawn on which would probably have been available only to Merretts or
E&W this is indicated in brackets.  

(a) As to perception/uncertainties as at Nov. 13, 1981 see above. 

(b) As at November, 1981 an attorney's report stated that an assured reported that it had 11,315 open cases and that new cases were being filed at the rate of approximately 100 per week. The report added that it is our observation that in cases where  

[1997] 327  L.R.L.R. Henderson v. Merrett Syndicate (Q.B. (Com. Ct.))    Cresswell, J. 

the plaintiff is able to make out a prima facie cause of action, juries do find liability. 

 (c) As at November, 1981 an attorney's report in respect of assureds stated that the asbestos cases manifestly represent grave potential exposure to the asbestos manufacturers and producers of the past 40 to 50 years. The situation must be viewed as one of certain liability. A major problem concerns the fact that it is impossible to predict with certainty the number of products liability claims that would be made against the assured. The number of potential claims would appear to be staggering. 

 (d) As at December, 1981 (Merretts only) a letter from the AWP to all interested underwriters stated that Johns-Manville have exhausted their primary cover. Owens-Corning has recently been reported as having exhausted its primary domestic insurance with a result that claims will shortly be presented to interested underwriters in London. The database currently shows 14,526 individual claimants but on the basis of various projections which the working party is not in a position to verify, the total claimants will, in the end significantly exceed this number. During the period since the setting up of the working party there has been a substantial increase in the number of suits filed. New suits currently reported now average 300-400 per month which is indicative of the increasing severity of this problem to the asbestos industry and its insurers. It is not possible at this stage to perceive any clear indication of the likely development in the future. 

(e) As at January, 1982 (Merretts only) the notes of comments made at a meeting of the AWP recorded that no one knows what the real reserve situation is. 

 (f) As at January, 1982 (E&W only) a note of a panel auditors meeting recorded that policies giving rise to claims were issued between 1945 and 1975 with a certain number going back prior to 1945. The note also included the following information. There have been some 15,000 claims notified but they are increasing at the rate of 400 per month. It is difficult to guess what the final number of claims will amount to, but it was suggested that by the mid to end 1980's we should expect some 25,000 in total. (An aside by someone stated that the Prudential were guessing at a figure of 2 m. claims. Mr. Nelson (a member of the AWP) said he considered this figure to be well wide of the mark). At the moment the loss reserves have been set up on a basis of an average cost per claim, based on the statistics available, of U.S.$125,000 plus expenses of U.S.$10,000 per claimant. Currently this means a total claim of U.S.$2,025,000,000. On an exposure basis 40 per cent. is with London companies and Lloyd's whereas on a manifestation basis it is 10 per cent. As far as the IBNR factor is concerned, it  is suggested that a view should be taken as to what can come forward within the next five to six years. 

(g) As at February, 1982 (Merretts only) a letter from the AWP to all interested underwriters stated that in view of the uncertainties of the future, it is difficult to provide any meaningful projection of the developments that are likely to take place over the coming years in regard to this problem and added that the number of claims is likely to escalate and future deterioration is inevitable. 
  
(h) The Neville Russell letter (E&W only) dated Feb. 20, 1982 is quoted in full sup. 

(i) As at March, 1982 (E&W only) Mr. Nelson told a meeting of panel auditors that at present 400 new claims per month were being advised and that if this were projected over a 10 year basis would lead to approximately 50,000 claims. Mr. Nelson added that in his view a figure of 50,000 new claims over the next 10 years would seem to be realistic and that reports of up to 2 m. new claims could well be an exaggeration. (See also Mr. Chester's remarks about run-off contracts - "funnelling of a large amount of liability into a small number of names" and "consideration was being given to asking the market to stop writing such reinsurances".) 

(j) As at March, 1982 (E&W only) an internal letter from Mr. Bolger referred to the fact that in the White letter accompanying this year's Lloyd's audit instructions the attention of auditors is drawn to risks which include liability for latent diseases and products liability when assessing the adequacy of reserves. Major losses under these categories have been known in the Lloyd's market for some time. The letter also stated the following. It is understood that there are 40 insureds of which 19 are direct in the London market. In respect of 15 of these, all the slips placed in the London market have been found. The total number of cases in litigation is in the region of 15,000 and this number is growing by approximately 400 per month. The product was readily available between 1945 and 1975. The pattern in Lloyd's is that up to 1962 syndicates have insured American carriers direct, and thereafter they have covered American companies by reinsurance in the London market. The size of the asbestosis problem became apparent some two years ago when it was agreed that normal assessments of settlements were not suitable. Estimates have been made on the basis of an average cost per claim together with an estimate of expenses. The average was said to be U.S.$125,000 plus U.S.$10,000 for expenses. 

(k) The letter dated Mar. 18, 1982 from Mr. Randall of Lloyd's to E&W and the enclosure (a copy of Mr. Murray Lawrence's letter of Mar. 18, 

[1997] 328  L.R.L.R. Henderson v. Merrett Syndicate (Q.B. (Com. Ct.))    Cresswell, J. 

1982 to all underwriting agents and active underwriters) are quoted in full in section 18 above. 

A DESCRIPTION OF THE YEAR 1 RITC 

The RITC for 1981 (prior to credit for the roll over policy) broke down as follows (rounded): 

417418417/418

Net outstandings    £11.5     £ 9.5 £21 m
IBNR£ 5.8     £20.1 £26 m
Total      £17.3     £29.6 £47 m
Net U/W result      £ .29     £ 4.9

The make-up of this figure is in J10/Schedule A and see Pie Chart 1. 

SYNDICATE 417 

Outstandings 

The agency had prepared for it by Dataloyd a print out of outstanding claims (I04). Reserves were based on recommendations from attorneys. 417 used a parallel recording system to that used by Syndicate 799. Of the reinsurance recoveries, some were automatically calculated by the computer because identification of the relevant reinsurance cover was included in the underwriting reference. Some were "manual specific" i.e. had to be based on a review by the agency of relevant claims data and the result manually input. Recoveries in respect of aggregate losses were manually input. 

From this material Mr. de Silva of Merretts prepared a summary of net outstandings by currency, classification of business (short or long tail) and year of account: D1, pp. 188-190. Mr. Wheatley of Merretts identified policies upon which claims or potential claims had been notified in respect of asbestosis risks, recording where applicable outstandings on a gross and net basis. Merretts also checked their records with the AWP computer records [D2/202]. Additional manual input was provided by the marine box staff in respect of those sections of the account written at the marine box. Mr. Wheatley took the syndicate's share of 100 per cent. of outstandings as reported by U.S. attorneys (hence the reference at the RITC meeting to 417's share of the "market report figures"): p. 178(i). He made the necessary amendments to the I04: p. 229 and pp. 148-174. This showed gross outstandings of U.S.$8.858 m. and net outstandings of U.S.$5.276 m. (derived from 162 policies and calculated on the higher of the exposure and manifestation bases). The details of the relevant policies are attached to the workings: D1, pp. 152-174. The policies were both direct policies and reinsurance policies. 

For a comparison of 417 and 799's asbestosis outstandings gross and net see D1 p. 178(1). 

E&W reviewed outstandings: Schedule BA1(b) (J10/2) and Hill, par. 24 and pp. 203-204: see the audit programme for O.C.R. at p. 203. In particular they reviewed and performed cross-checks on Mr. Wheatley's figures which produced U.S.$5.276 m.: see D1, pp. 204 and 229-233. 

IBNR 

A loading of 50 per cent. was applied to total net outstandings in respect of all business as the loading for 417 as a whole: see the figures for "asbestos" and "others" under "loading" in Schedule A (J10/1): and Mr. Hulme's schedule at D1, p. 184. (The figure of £100,000 "additional" on Schedule A (J10/1) was added to cover a late discovered understatement of an outstanding on the 1973 account: D1, p. 179(1)). 

Pages 177-179 contain notes of the RITC meeting of Mar. 30, 1982 at which the 50 per cent. loading was agreed. 

At Dec. 31, 1980 (the previous year end) the agency had taken a 50 per cent. figure and had also added, by way of IBNR, a lump sum figure of £1 m. for asbestosis in respect of which there were then no outstandings, no claims in respect of asbestosis having been recorded at that date: p. 177(1). 

Mr. Wheatley's exercise had identified net outstandings in respect of asbestosis of U.S.$5.276 m., which applying the 50 per cent. load to net outstandings, produced a load of U.S.$2,638,000 (£1.381 m.). What had previously been a loading unrelated to any specific asbestosis claim (none having been recorded) was now, therefore, directly related to such claims. Ten of the 12 assureds on Mr. Wheatley's list were on the list of 19 asbestos producers or manufacturers subsequently identified at D2/277 (insured either directly or by way of reinsurance of the main U.S. carriers such as CNA, Home and Travelers). The list of D2/277 (Databank Reserves) in its heading refers to a meeting in a U.S. attorneys' office on Sept. 8, 1992. Reference was made to "19 risks insured in the London market" at the panel auditors' meeting on Jan. 15, 1982 (J7 p. 87). The evidence does not establish whether the 19 risks referred to at this meeting were the same as the 19 assureds identified at D2/277. 

The minutes of the RITC meeting record (D1/178(1)): 

The question of indirect asbestosis claims on 417 (i.e. as a result of reinsurance treaties accepted by 417) was raised. It was felt by the underwriter that net £5.2m should cover all claims not otherwise caught "direct": - this was particularly supported by the fact that the outstandings had been loaded by 50% and bearing in mind the nature of the business written by the syndicate. 

Mr. Hulme's schedule (D1, p. 184) shows that the result of using 50 per cent. as at Dec. 31, 1981 was that a deficiency of £1.97 m. arose on the back 

[1997] 329  L.R.L.R. Henderson v. Merrett Syndicate (Q.B. (Com. Ct.))    Cresswell, J. 

years. Although asbestosis reserves ($5.2 m. + £2.7 m. = U.S.$7.9 m.) were circa £4 m., an increase of £3 m. on the previous year, the back year deficiency on reserves was only £1.97 m. The AU38 showed a figure of £1.84 m. for the deficiency in the back year reserves. 

The loadings adopted exceeded the Lloyd's percentage reserves: p. 181-182. 

The total reserves in respect of asbestos for 417 amounted to £4.14 m. of a total RITC for 418/417 of £46.93 m.: see J10/Schedule A. Thus asbestos reserves constituted approximately 9 per cent. of the total RITC. 

The RITC is recorded in several places: e.g. p. 133 and 181-182. The AU 17 dated Apr. 23, 1982 signed by Merretts is at D1 p. 118. 

SYNDICATE 418 

Outstandings 

There is no equivalent of LUNCO in the marine market. Merretts kept manual records at the box recording claims above a noting level. Information in these records was derived from (1) brokers' notifications, (2) market information, (3) settlements from LPSO and (4) reinsurance collection notes. At the end of the year the box claims' staff prepared a summary of the claims (net of recoveries) based on these records. This summary was submitted to Mr. Merrett and the auditors. Mr. Merrett reviewed it and amended it if necessary. He had maintained over many years his own record ("the Red Book") which was multi-columned to show the development from year to year. The Red Book for 1981 is at D1, p. 66-94 and a summary of it at D1, p. 65. The steps taken by E&W to review outstandings are set out in Schedule BA2(b) (J10/2). The Holme Schedule is at D1, p. 29. 

IBNR 

The agency used the Lloyd's percentage reserves as an IBNR figure. (E&W did the relevant calculations for them). This was added to the sum of (i) outstanding claims (above a noting level) net of facultative and class X/L reinsurances (but no other); and (ii) 25 per cent. of specific reinsurance recoveries (a figure determined by the agency which had been used in previous years) to allow for the potential irrecoverability of reinsurance. In other words they allowed for only 75 per cent. recovery under the reinsurances. 

The precise make up of the RITC is shown at D1, p. 28. D1, p. 63 has a summary of the gross claims and the claims net of facultative reinsurance. D1, p. 62 calculates the 25 per cent add-back. In addition there was a specific loading for asbestos, which at the RITC meetings is referred to as U.S.$500,000, but was in the event U.S.$250,000: D1,p. 57: item 3(a). 
 
The Notes of the RITC Meeting are at D1, p. 27. 

Syndicate 418's 1979 account made an underwriting profit of £4.86 m. including a surplus from the years reinsured into that account (as appears from D1, p. 29:  see the figure of £3.5 m. under the first "Total"). 

The AU17 Certificate for 418 is at A(A)(1) Tab 28.  

Run-off Contracts 

By Dec. 31, 1981 the following four run-off contracts had been written into the following years of account: 

      1978     Provincial     418
      1980     Universal      418
      1981     Verrall 418
      Ballantyne     417

Of these only Provincial fell to be considered as a constituent of the RITC as at Dec. 31, 1981. No claim on that appeared in the claims box summary or in the Red Book. The oustandings in relation to Provincial as at Dec. 31, 1981 were U.S.$802,852. The application of Lloyd's audit minima percentages applied to the Provincial premium produced a loading of U.S.$254,758 which was included in the overall IBNR for 418. 

E&W requested Merretts to complete what was referred to as the Latent Disease Questionnaire in respect of both 417 and 418: D1, p. 22 ( - enclosure to E&W letter of Feb. 17, 1982 D1, p. 20 which drew attention to cl. 3(iii) of the Lloyd's white letter dated Feb. 1, 1983). Mr. Merrett's response for 417 stated inter alia, that: 

I would only anticipate receiving asbestos losses from either direct products or workers compensation policies, or treaty casualty reinsurances. (D1/146). 

Mr. Merrett's response for 418 stated: "There is insignificant exposure on this syndicate to latent diseases." (D1/254) 

E&W's stop loss reinsurance questionnaire (D1, p. 252-3) asked whether Syndicate 418/417 (inter alia) had written whole account stop loss insurance in excess of 1 per cent. of the NPI of the syndicate. Mr. Merrett's response was no - D1, p. 145; and E&W reported accordingly with form AU.38: p. 135. 

YEAR 1 RITC - CONCLUSIONS 

Some criticisms of Merretts in Year 1 
 
1. Merretts failed to comply with the guideline in par. 6 of Mr. Lawrence's letter - 

[1997] 330  L.R.L.R. Henderson v. Merrett Syndicate (Q.B. (Com. Ct.))    Cresswell, J. 

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. 

Merretts failed to advise E&W of the Universal, Ballantyne and Verrall contracts (as to Provincial see below) and also failed to consider whether the open year reserves should be increased. 

2. Merretts failed to comply in relation to the Provincial, Universal, Ballantyne and Verrall run-off contracts with cl. 3(iii)(c) and (d) of the solvency/White letter dated Feb. 1, 1982 (J5/55) - 

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, 1981 including: -
 
. . .(c) Risks which include liability for latent diseases and products liability. (d) Cases where a Syndicate has taken over the run-off of another Syndicate's accounts. 

3. Merretts' replies to the latent diseases questionnaire were seriously misleading. In the case of 418 (D1/254) Merretts failed to inform E&W that a loss had been notified in the sum of U.S.$802,852 in respect of Provincial and failed to identify 418's exposure pursuant to the Universal and Verrall contracts. Merretts' answer in relation to 417 (D1/146) failed to identify 417's exposure pursuant to the Ballantyne contract. 

(See also Merretts' answer on the Form AU17.) 

4. 418 subscribed to 50 per cent. of the Provincial contract. Its share of outstandings for the Provincial contract at Dec. 31, 1981 was U.S.$802,852. The contract was reserved at Lloyd's Audit minima - U.S.$254,758. There was no amount for Provincial included in the outstandings. Had the Provincial contract been reserved on the basis adopted for 417 (i.e. an uplift of 50 per cent.) this would have produced U.S.$1,204,278. The difference between the Lloyd's Audit minima reserve and the amount which would have been reserved on the basis adopted for 417 is U.S.$949,520. 

5. It is unclear on the evidence as to the extent to which Merretts complied with the guideline in par. 3 of Mr. Murray Lawrence's letter - 

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. 

Conclusions 

(a) Merretts 

It is important to remember that the plaintiffs' case is that year 1 should have been left open (and no alternative case is advanced that if year 1 was to be closed it should only have been closed at a higher premium than that in fact adopted).  

I do not consider that in all the circumstances Merretts' decision to close year 1 was a decision that no reasonably well-informed and competent underwriter/managing agent could have made. I so find inter alia for the following reasons and having regard to the following circumstances:  

1. Asbestos-related claims 

The perception of asbestos personal injury and property damage claims is considered separately at each of years 1 to 6. These six sections of the judgment show the developing problem. The position as at year 1 should be contrasted with the position in subsequent years. As to perception as at May 4, 1982 see above. The approximate number of personal injury claims/claimants as at May 4, 1982 is there stated. Property damage claims were at a relatively early stage. 

418/417's incurreds in respect of asbestos claims (main account) in year 1 were U.S.$5.276 m. 

2. Pollution claims 

Merretts carried reserves in respect of Love Canal from 1979. As to the relevant legislation see the chronology, Appendix 1 to this judgment. CERCLA was passed in 1980. The Shell claim (see below) was first notified in October, 1983. By year 4 pollution claims were recognized to be the next major problem for the market. The perception of pollution claims in year 4 is to be contrasted with perception in prior years. In year 1 the only substantive pollution claim in existence was Love Canal. 

3. The run-off contracts 

In year 1 only the Provincial run-off contract fell to be considered as a constituent of the RITC as at Dec. 31, 1981. The figure of U.S. $1,204,278 (£630,512) see above, should be contrasted with the RITC premium in fact set for 418/417 of £47 m. 

4. The plaintiffs' criticisms 

As to the plaintiffs' criticisms of Merretts as at year 1, I have already held that some of these are well-founded (see above). The list of criticisms set out above does not purport to be exhaustive. However I do not consider that the criticisms that can be made of Merretts in year 1 lead to the conclusion that year 1 should have been left open. 

[1997] 331  L.R.L.R. Henderson v. Merrett Syndicate (Q.B. (Com. Ct.))    Cresswell, J. 

The plaintiffs advance seven principal criticisms of Merretts. 

As to the first, I do not consider that no attempt whatsoever was made to calculate an IBNR loading to infinity for asbestosis claims. While there are criticisms which can be made of Merretts' approach and while I should not be taken to accept that the RITC as at year 1 received the attention that it should have received from Merretts, it does not follow that year 1 could not have been competently closed. 

As to the second principal criticism (there was no justification for the use of the 50 per cent. loading in respect of asbestosis claims), Mr. Murray Lawrence's letter in referring to an "IBNR loading" and "the appropriate IBNR percentage" (par. 5) reflected the then practice of the market as to percentage loadings for IBNR. I should not be taken to accept that 50 per cent. was in all the circumstances the appropriate load for year 1 in respect of asbestosis claims, but the plaintiffs have tied their case to the question whether or not the year could properly have been closed, as opposed to the quantum of the load. 

As to the third principal criticism (no consideration was given to leaving the 1979 account open) I consider that the decision to close the year involved implicit consideration of the alternative. 

As to the fourth principal criticism (whole account stop loss) in view of the conflicting evidence as to the true meaning of this expression, I disregard this point. 

As to the fifth principal criticism (see the response to the first and second principal criticisms above). 

I have dealt with the sixth principal criticism above. 

(b) E&W 

As to E&W in year 1 it is important to remember that E&W were seriously misled by Merretts as to the run-off contracts (see criticisms 1-4 under the heading "Some Criticisms of Merretts in Year 1" above). Further the case against E&W in year 1 must be judged in the light of their perception of asbestos-related claims as at May 4, 1982 (see above). 

It follows from my conclusions in relation to Merretts, that the plaintiffs' claim against E&W in respect of year 1 must also fail. It is accordingly unnecessary to consider the plaintiffs' detailed criticisms of E&W in year 1. Although I have noted that Mr. Attwood's standards in years 1 to 3 may to some extent be above the reasonable average, I accept Mr. Attwood's central contentions as to the need for appropriate audit evidence. I should not be taken to accept that E&W's audit approach and work in year 1 is not open to criticism. The plaintiffs have however tied their case to the question whether or not the year could properly have been closed, as opposed to the quantum of the premium. I do not consider that the plaintiffs have established that E&W should have disclaimed an opinion on the grounds of fundamental uncertainty in year 1.  

30. THE WRITING OF THE DOLLING-BAKER, TOOMEY, GOODA AND HUMM RUN-OFF
CONTRACTS 

Perception as May 25, 1982, May 27, 1982, June 14, 1982 and June 29, 1982 

As at the above dates the future development and extent of asbestos-related claims were subject to considerable uncertainty. I refer to the chronology, Appendix 1 to this judgment (which in the case of attorneys' reports lists some examples of reports in Merretts' possession). As to the U.S. cases at the
above date see Appendix 2 to this judgment.  

The nature and extent of the uncertainties as at the above dates were known to Merretts. As to
perception as at May 4, 1982 see above.  

DOLLING-BAKER - WRITTEN May 25, 1982 

The plaintiffs' case 

The plaintiffs' case in respect of Dolling-Baker is set out in their closing submissions. 

Merretts' case 

Merretts' submit that it is obvious that there was significant non-disclosure in respect of the Dolling-Baker contract. When cross-examined Mr. Neil said (Day 33/50) that he would criticise the Dolling-Baker syndicate for the removal of par. 4 from C/13/50. 

Further Merretts accept that the writing of Dolling-Baker is open to criticism but they do not
accept that it was negligently written.  

Dolling-Baker conclusions 

1. I refer to the general comments on the writing of the run-off contracts set out above. 

2. As to perception of asbestos-related claims at the date of this contract see above. 

3. As to the U.S. cases as at the date of this contract see Appendix 2 to this judgment. 

4. As to the dispute as to the information provided at the date of placing, in the absence of evidence from Mr. Emney I am not satisfied on a balance of probabilities that any further information was provided beyond that agreed to have been provided. The true position is particularly difficult to assess in the absence of proper record keeping by Merretts and evidence from the person who scratched the risk. 

[1997] 332  L.R.L.R. Henderson v. Merrett Syndicate (Q.B. (Com. Ct.))    Cresswell, J. 

5. I prefer the evidence of Mr. Neil to that of Mr. Rome in relation to this contract. 

6. I find that in all the circumstances the writing of this contract was negligent. There was a failure to adhere to the standard of skill and care reasonably to be expected of Merretts at the time and with the knowledge that Merretts had or should have had. The central reason for the finding of negligence is that this contract exposed the plaintiffs to potentially huge liabilities, unlimited in time or amount, which were not capable of reasonable quantification on the material before Mr. Emney. There was insufficient placing or other information available at the time the risk was considered to enable a reliable assessment to be made with a reasonable degree of confidence of 417's ultimate net retained potential liability under the contract. Merretts failed to obtain all the information referred to in par. 187 of Mr. Neil's report including in particular IBNR loss reserves for both asbestos claims and non-asbestos claims and the methodology behind the IBNR factors. 

I also refer to the detailed points made by Mr. Neil in relation to the material before Mr. Emney. The finding of negligence is made for the central reason set out above. In addition it is to be noted that there was no or no adequate system for detecting or monitoring the aggregation in 418/417 of particular risks included in the business ceded under the contract and there was inadequate reinsurance cover against the liabilities assumed. 

TOOMEY - WRITTEN MAY 27, 1982 

The plaintiffs' case 

The plaintiffs' case in respect of Toomey is set out in their closing submissions. 

Merretts' case 

Merretts point to Mr. Neil's answers in cross-examination (Day 33/56/66) but these are to be contrasted with his evidence in re-examination (Day 34/22). Merretts submit that Toomey was on the border (and should not be regarded as being negligent). 

Toomey conclusions 

In a letter dated Jan. 31, 1989 (C15/241 at 243) Mr. Toomey wrote: 

. . .At no time was a figure given by us for an IBNR. On the placing file is a schedule of incurred loss totals for the underwriting years 1966 to 1970 as at year end 1977, 1978, 1979, 1980 & 1981, together with the Syndicate Auditor's IBNR figure as at year end 1977, 1978, 1979 & 1980. In view of the outcome of the IBNR projections prior to year-end 1981 we felt unable to calculate an IBNR to infinity for these underwriting years 1966 to 1970 as at December 31st,1981; We therefore wished to cap the run-off of these underwriting years by way of aggregate reinsurance, in excess of the known outstandings, at a known and final cost. In fact, some years after the placing, you came to the box in person and asked me to give you an IBNR to infinity. I then explained to you that I didn't know how to, and that was the very reason why we had decided to cease writing casualty business some 20 years ago and then paid the premium hereon to end the uncertainty over the 1966 to 1970 years during which our casualty writings ceased.  

My conclusions are as follows: 

1. I refer to the general comments on the writing of the run-off contracts set out above. 

2. As to perception of asbestos-related claims at the date of this contract see above. 

3. As to the U.S. cases as at the date of this contract see Appendix 2 to this judgment. 

4. As to the dispute as to the information provided at the date of placing, in the absence of evidence from Mr. Emney I am not satisfied on a balance of probabilities that any further information was
provided beyond that agreed to have been provided. The true position is particularly difficult to assess in the absence of proper record keeping by Merretts and evidence from the person who scratched the risk.  

5. I prefer the evidence of Mr. Neil to that of Mr. Rome in relation to this contract. I have paid careful regard to Mr. Neil's evidence in cross-examination and re-examination referred to above. 

6. I find that in all the circumstances the writing of this contract was negligent. There was a failure to adhere to the standard of skill and care reasonably to be expected of Merretts at the time and with the knowledge that Merretts had or should have had. The central reason for the finding of negligence is that this contract exposed the plaintiffs to potentially huge liabilities, unlimited in time or amount, which
were not capable of reasonable quantification on the material before Mr. Emney. There was a manuscript schedule C/15/4/43 giving "loadings for IBNR" on 1966-1970 accounts as at Dec. 31, 1977-1980 inclusive but not as at Dec. 31, 1981 - see in this connection C15/241 at 243. There was insufficient placing or other information available at the time the risk was considered to enable a reliable assessment to be made with a reasonable degree of confidence of 417's ultimate net retained potential liability under the contract. Merretts failed to obtain all the information referred to in par. 187 of Mr. Neil's report including in particular up-to-date IBNR loss reserves for both 

[1997] 333  L.R.L.R. Henderson v. Merrett Syndicate (Q.B. (Com. Ct.))    Cresswell, J. 

asbestos claims and non-asbestos claims and the methodology behind the IBNR factors. 

I also refer to the detailed points made by Mr. Neil  in re-examination as to the material before Mr. Emney. The finding of negligence is made for the central reason set out above. In addition it is to be noted that there was no or no adequate system for detecting or monitoring the aggregation in 418/417 of particular risks included in the business ceded under the contract and there was inadequate reinsurance cover against the liabilities assumed. 

GOODA - WRITTEN JUNE 14, 1982 

The plaintiffs' and Merretts' cases 

The plaintiffs' case in respect of Gooda is set out in their closing submissions. 

Merretts accept that the writing of Gooda is open to criticism but they do not accept that it was
 negligently written for the reasons set out in their submissions. 

Gooda conclusions 

1. I refer to the general comments on the writing of the run-off contracts set out above. 

2. As to perception of asbestos-related claims at the date of this contract see above. 

3. As to the U.S. cases as at the date of this contract see Appendix 2 to this judgment. 

4. As to the dispute as to the information provided at the date of placing, in the absence of evidence from Mr. Emney I am not satisfied on a balance of probabilities that any further information was provided beyond that agreed to have been provided. The true position is particularly difficult to assess in the absence of proper record keeping by Merretts and evidence from the person who scratched the risk. 

5. I prefer the evidence of Mr. Neil to that of Mr. Rome in relation to this contract. 

6. I find that in all the circumstances the writing of this contract was negligent. There was a failure to adhere to the standard of skill and care reasonably to be expected of Merretts at the time and with the knowledge that Merretts had or should have had. The central reason for the finding of negligence is that this contract exposed the plaintiffs to potentially huge liabilities, unlimited in time or amount, which were not capable of reasonable quantification on the material before Mr. Emney. There was insufficient placing or other information available at the time the risk was considered to enable a reliable assessment to be made with a reasonable degree to confidence of 417's ultimate net retained potential liability under the contract. Merretts failed to obtain all the information referred to in par. 187 of Mr. Neil's report including in particular IBNR loss reserves for both asbestos claims and non-asbestos claims and the methodology behind the IBNR factors. 

I also refer to the detailed points made by Mr. Neil in relation to the material before Mr. Emney. The finding of negligence is made for the central reason set out above. In addition it is to be noted that there was no or no adequate system for detecting or monitoring the aggregation in 418/417 of particular risks included in the business ceded under the contract and there was inadequate reinsurance cover against the liabilities assumed. 

HUMM - WRITTEN JUNE 29, 1982 

The plaintiffs' and Merretts' cases. 

The plaintiffs' case in respect of Humm is set out in their closing submissions. 

Merretts accept that the writing of Humm is open to criticism but they do not accept that it was negligently written for the reasons set out in their submissions. 

Humm conclusions 

1. I refer to the general comments on the writing of the run-off contracts set out above. 

2. As to perception of asbestos-related claims at the date of this contract see above. 

3. As to the U.S. cases as at the date of this contract see Appendix 2 to this judgment. 

4. As to the dispute as to the information provided at the date of placing, in the absence of evidence from Mr. Emney I am not satisfied on a balance of probabilities that any further information was provided beyond that agreed to have been provided. The true position is particularly difficult to assess in the absence of proper record keeping by Merretts and evidence from the person who scratched the risk. 

5. I prefer the evidence of Mr. Neil to that of Mr. Rome in relation to this contract. 

6. I find that in all the circumstances the writing of this contract was negligent. There was a failure to adhere to the standard of skill and care reasonably to be expected of Merretts at the time and with the knowledge that Merretts had or should have had. The central reason for the finding of negligence is that this contract exposed the plaintiffs to potentially huge liabilities, unlimited in time or amount, which were not capable of reasonable quantification on the material before Mr. Emney. There was insufficient placing or other information available at the time the risk was considered to enable a reliable assessment to be made with a reasonable degree of confidence of 418's ultimate net retained potential liability under the contract. Merretts failed to obtain all the information referred to in par. 187 of Mr. Neil's report including in particular IBNR loss reserves for both asbestos  

[1997] 334  L.R.L.R. Henderson v. Merrett Syndicate (Q.B. (Com. Ct.))    Cresswell, J. 

claims and non-asbestos claims and the methodology behind the IBNR factors. 

I also refer to the detailed points made by Mr. Neil in relation to the material before Mr. Emney. The finding of negligence is made for the central reason set out above. In addition it is to be noted that there was no or no adequate system for detecting or monitoring the aggregation in 418/417 of particular risks included in the business ceded under the contract and there was inadequate reinsurance cover against the liabilities assumed. 

31. THE WRITING OF THE BURDETT RUN-OFF CONTRACT 

Perception as at July 28, 1982 

As at July 28, 1982 the future development and extent of asbestos-related claims were subject to considerable uncertainty. I refer to the chronology, Appendix 1 to this judgment (which in the case of attorneys' reports lists some examples of reports in Merretts' possession). As to the U.S. cases at the above date see Appendix 2 to this judgment. 

The nature and extent of the uncertainties as at July 28, 1982 were known to Merretts. As to perception at June 29, 1982 see above. Further as at July, 1982 a letter from Mr. Rokeby-Johnson of Sturge to Winchester Bowring (not seen by E&W until later see below) stated: 
 
. . .I would like to remind you of the content of a Lloyd's Underwriter's Book of Business which makes it impossible to quantify the final outcome of these huge and complex claims with any degree of accuracy. Not only were we involved in the direct writing of casualty business from the Unites States and, indeed, worldwide, but we also had very considerable commitments in the writing of casualty treaties not only to original and excess writers but also to professional reinsurers like the General Re-insurance Corporation. Finally we have an involvement in the reinsurance arrangements of a few Lloyd's syndicates and London Companies. . . 

Asbestosis. The claims arising from the ingestion of asbestos fibres by all those involved in handling this material seem likely to be the biggest claim ever to confront the insurance industry not only in the United States but also throughout the world. Various attempts have been made to quantify the potential final sum of all payments and some very large figures have emerged. Over 7,000 people actually die each year in the United States from asbestosis and it is expected that this figure will soon increase to 9,000 or 10,000 - these deaths and disablements will continue to be reported for the next decade or more and if it is reasonable to suggest that the average settlement of each claim is of the order of $100,000 includ-  ing costs and expenses and that the number of serious claimants may reach 100,000 or more the final claim would be $10 billion at least. On these figures it is not impossible to forecast Sturge gross involvement at $40,000,000 - $50,000,000. 
 
The plaintiffs' and Merretts' cases 

The plaintiffs' case in respect of Burdett is set out in their closing submissions. 

The plaintiffs' accept that in the case of Burdett Mr. Emney did have the cedant's/its auditors' assessment of the IBNR. 

Merretts accept that the writing of Burdett is open to criticism but they do not accept that it was negligently written. 

Burdett conclusions 

1. I refer to the general comments on the writing of the run-off contracts set out above. 

2. As to perception of asbestos-related claims at the date of this contract see above. 

3. As to the U.S. cases as at the date of this contract see Appendix 2 to this judgment. 

4. As to the dispute as to the information provided at the date of placing, in the absence of evidence from Mr. Emney I am not satisfied on a balance of probabilities that any further information was provided beyond that agreed to have been provided. The true position is particularly difficult to assess in the absence of proper record keeping by Merretts and evidence from the person who scratched the risk.

5. I prefer the evidence of Mr. Neil to that of Mr. Rome in relation to this contract. 

6. I find that in all the circumstances the writing of this contract was negligent. There was a failure to adhere to the standard of skill and care reasonably to be expected of Merretts at the time and with the knowledge that Merretts had or should have had. The central reason for the finding of negligence is that this contract exposed the plaintiffs to potentially huge liabilities, unlimited in time or amount, which were not capable of reasonable quantification on the material before Mr. Emney. Despite the fact that Mr. Emney did have the cedant's/its auditor's assessment of the IBNR there was insufficient placing or other information available at the time the risk was considered to enable a reliable assessment to be made with a reasonable degree of confidence of 417's ultimate net retained potential liability under the contract. Mr. Emney failed to obtain all the information referred to in par. 187 of Mr. Neil's report including in particular the methodology behind the IBNR factors. I refer to the detailed points made by Mr. Neil in relation to the material before Mr. Emney (see J2 

[1997] 335  L.R.L.R. Henderson v. Merrett Syndicate (Q.B. (Com. Ct.))    Cresswell, J. 

and J3 of his report). The finding of negligence is made for the central reason set out above. In addition it is to be noted that there was no or no adequate system for detecting or monitoring the aggregation in 418/417 of particular risks included in the business ceded under the contract and there was inadequate reinsurance cover against the liabilities assumed. 

32. THE WRITING OF THE JUDD RUN-OFF CONTRACT 

Perception as at Dec. 29, 1982 

As at Dec. 29, 1982 the future development and extent of asbestos-related claims were subject to considerable uncertainty. I refer to the chronology, Appendix 1 to this judgment (which in the case of attorneys' reports lists some examples of reports in Merretts' possession). As to the U.S. cases at the above date see Appendix 2 to this judgment. 

The nature and extent of the uncertainties as at Dec. 29, 1982 were known to Merretts. As to perception at July 28, 1992 see above. Further: 

 (a) As at September, 1982 a report by Conning & Co. (Merretts only) which is referred to in Mr.
 Ayliffe's statement stated: 

The insurance industry's ultimate liability is estimated to be between $4 billion and $10 billion with the lower end of this range appearing most probable at the present time. . .the general pattern of recognition of the exposure theory has emerged. . .Generally, the impact on the insurance industry is not expected to be catastrophic because of the long period over which the claims will be experienced. However, the impact upon individual companies could well be severe since there appears to be significant concentrations of coverage in a limited number of insurance companies and their reinsurers. . .we believe that there is a possibility that numerous excess and reinsurance carriers may be greatly understating their potential liabilities. . .Specific insurance company liabilities for asbestos claims could not reasonably be projected with any accuracy because of the many legal questions which still need to be resolved.. . .Thus far, the courts have tended to maximize the available insurance coverages in their insurance policy interpretations. . .It is difficult to accurately estimate not only the number of current asbestos claimants but also the number of potential claimants as a result of the lack of consistency in published reports of current outstanding claims as well as the long latency period for the disease which is believed to be between 20 and 30 years. As an example of the problem of determining current claim count figures, the estimates as seen in trade journals and other publications suggest that there are currently between 25,000 and 50,000 outstanding asbestos claimants. Insurance company officials indicate that the actual number is probably closer to 50,000. These figures are misleading because of the multiple counting of claims by insurance companies as explained below. . . 

With this as a back-drop, using various sources of information, we estimate that there are currently between 15,000 and 20,000 claimants involved in asbestos litigation. Although published figures indicate a range of between 25,000 and 50,000, the fact that Johns-Manville reports having 16,000 claimants seems to make the 15,000-20,000 range appear more credible at the present time since they have been subject to the bulk of the litigation and have been named in most of the lawsuits. This projected range ignores, however, expected future claim count escalation which again is difficult to project due to the long latency period for asbestos diseases and the continued use of asbestos in recent years. It should be noted that claims against Johns-Manville are currently increasing at the rate of about 400 per month. Before proceeding to project future claim count escalation, it should be noted that the various warning labels and other safety precautions put into place during the late 1960's and 1970's will tend to have a positive impact on future claim incidence as we look out over the next 25-30 years.. . .we believe that claim incidence rates will not be as severe after 1990 as in recent years but new claims will nonetheless continue to be reported. . .Based on the above incidence rates, between 83,000 and 178,000 asbestos claims can be expected during the next 28 years. Recognizing that not all of these claimants will be successful in either obtaining a judgement or a settlement, we assume that
 approximately 50% of these claims will be closed without payment. (The 50% probability of a successful claim is based on several studies which have been done on claims which have already been settled and is confirmed by the fact that many claims are now being turned down because they are judged not to be the "direct" result of asbestos exposure.) This leaves a range of successful claimants of between 40,000 and 90,000. . .reserves for IBNR asbestos claims do not exhibit a real sense of
 accuracy from our perspective. 

(b) As at December (Merretts only), 1982 an article by Mr. David Mann director MSL in Lloyd's List stated: 

. . .Within the Lloyd's market, where very strong opinions are usually to be found, conjecture regarding the ultimate quantum of asbestosis and other latent disease losses has stimulated a relatively new and fascinating level 

[1997] 336  L.R.L.R. Henderson v. Merrett Syndicate (Q.B. (Com. Ct.))    Cresswell, J. 

of reinsurance trading. The activity involving unlimited "run-off" reinsurance protection against the uncertainty of development of these very long "tail" losses is an example of such unusual innovation. The syndicates in Lloyd's which have recently chosen to assume the worst potential of the latent disease phenomenon demonstrate that London is still the source of the most interesting and speculative initiatives. Very few reinsurance markets have found themselves able to apply rating judgment to these most volatile risks except on the basis of a limit of liability. The consensus of opinion, even in London, appears to judge the unlimited aspects of such risk assumption as involving totally unacceptable long term characteristics in view of the premiums available. 

     (c) As at December, 1982 an attorney's report stated the following in respect of two class action suits pending against GAF and numerous other defendants filed in Pennsylvania. The actions allege property damage caused by the presence of asbestos materials in schools and other public buildings. The class actions are in the very early preliminary stages and we are at this time unable to evaluate the overall merits of the actions, the potential damages, or the assured's possible exposure. The property damage claims cannot be reflected in the claims information system which is established for bodily injury claims, and separate reserve provisions for the property damage claims will be established. 

The plaintiffs' case 

The plaintiffs' case in respect of Judd is set out in their closing submissions. 

The plaintiffs accept that in the case of Judd Mr. Emney did have the cedant's/its auditors' assessment of the IBNR. 

Merretts' case 

Merretts submit that Mr. Neil's criticism of the Judd contract is particularly misplaced. Mr. Emney had the following protection: 

(a) The assessment of the cedant's RITC; 

(b) A buffer of 50 per cent. excess the RITC; 

(c) The time value of money from the time when the payment was made until the excess point was reached, if at all; and 

(d) The benefit of an underlying run-off protection in respect of asbestos losses underwritten by Mr.
 Outhwaite for 33 per cent. 

Judd conclusions 

1. I refer to the general comments on the writing of the run-off contracts set out above. 

2. As to asbestos-related claims at the date of this contract see above. 
  
3. As to the U.S. cases as at the date of this contract see Appendix 2 to this judgment. 

4. As to the dispute as to the information provided at the date of placing, in the absence of evidence from Mr. Emney I am not satisfied on a balance of probabilities that any further information was provided beyond that agreed to have been provided. The true position is particularly difficult to assess in the absence of proper record keeping by Merretts and evidence from the person who scratched the
 risk. 

5. I prefer the evidence of Mr. Neil to that of Mr. Rome in relation to this contract. 

6. I find that in all the circumstances the writing of this contract was negligent. There was a failure to adhere to the standard of skill and care reasonably to be expected of Merretts at the time and with the knowledge that Merretts had or should have had. The central reason for the finding of negligence is that this contract exposed the plaintiffs to potentially huge liabilities, unlimited in time or amount, which were not capable of reasonable quantification on the material before Mr. Emney. Despite the fact that Mr. Emney did have the cedant's/its auditor's assessment of the IBNR there was insufficient placing or other information available at the time the risk was considered to enable a reliable assessment to be made with a reasonable degree of confidence of 417's ultimate net retained potential liability under the contract. Mr. Emney failed to obtain all the information referred to in par. 187 of Mr. Neil's report including in particular the methodology behind the IBNR factors. I refer to the detailed points made by Mr. Neil in relation to the material before Mr. Emney (see K4, K5 and K6 of his report). The finding of negligence is made for the central reason set out above. In addition it is to be noted that there was no or no adequate system for detecting or monitoring the aggregation in 418/417 of particular risks included in the business ceded under the contract and there was inadequate reinsurance cover against the liabilities assumed. 

33. YEAR 2: THE CLOSURE OF 1980 INTO 1981 AS AT DEC. 31, 1982 (MERRETTS' AND E&W'S REPORTS DATED MAY 4, 1983 

In May, 1983, 418/417's 1980 year of account was closed by way of an RITC into the 1981 year of account; and it was reported on by Merretts on May 4, 1983. 

In the 1982 annual report and accounts for 418/417 was a note by E&W to the accounts to the effect that the reinsurance had been calculated by the underwriter and complied with the requirements of the Council of Lloyd's. 

[1997] 337  L.R.L.R. Henderson v. Merrett Syndicate (Q.B. (Com. Ct.))    Cresswell, J. 

As to the regulatory regime for the year ended Dec. 31, 1982 see above. 

PERCEPTION AS AT YEAR 2 

As to developments and changes in perception in previous years see above. 

As at May 4, 1983 the future development and extent of asbestos-related claims were subject to considerable uncertainty. 

I refer to the chronology, Appendix 1 to this judgment (which in the case of attorneys' reports lists some examples of reports in Merretts' possession). As to the U.S. cases at the above date see Appendix 2 to this judgment. 

The nature and extent of the uncertainties as at May 4, 1983 were known to Merretts and E&W, alternatively in the case of E&W would have been known to E&W had necessary and appropriate audit tests and enquiries been carried out and conducted. 

The broad nature and extent of the uncertainties as at May 4, 1983 were reflected in the following materials. 

Where materials are drawn on which would probably have been available only to Merretts or E&W this is indicated in brackets. 

 (a) As at January, 1983 (Merretts only) a press release agreed at a meeting of the Asbestos Claims Council referred to 20,000 claims pending and tens of thousands more expected over 30 years. The press release added that the ultimate cost in insurance payments will be in billions of dollars and, if past experience is repeated, half the insurance payments will be spent on legal fees and related defence costs. 

(b) As at January, 1983 (Merretts only) a letter from attorneys to the AWP referred to the continuing increase in suits arising from asbestos-related claims and added the following. While certain coverage issues have yet to be considered by the Courts, some have reached a final determination which have most emphatically demonstrated the courts desire to maximize coverage. Suits continue to be reported at approximately 500 per month. Some indications exist to suggest that the severity of injury and/or disease suffered by plaintiffs is less serious than had formerly been the case, although it is much too early to draw any firm conclusions. It is likely that considerable activity will develop in regard to damage allegedly existing in buildings which incorporated asbestos. 

 (c) As at February, 1983 (E&W only) minutes of a panel auditors meeting recorded the following. In June, 1982 the U.S. Labour Department gave the following statistics: 21 million workers have been significantly exposed to asbestos in the last 40 years. 8200-9700 deaths from cancer attributed to asbestosis per annum for the next 20 years. 3000 products in daily use contain asbestos. U.S.$38 billion total claims for deaths expected. At present there are 25,000 plus claims on the data base for direct asbestosis claims. There are on file: 19 major companies assured, 39 lesser companies assured and 200 minor companies assured. Johns-Manville went into bankruptcy on Aug. 26, 1982 with 4000 closed cases plus 17,000 cases outstanding. They are expected to get 52,000 cases by the end of the century. Other points made included the following. In U.S. "double dip" can occur: a plaintiff can sue the employer as well as the holding company. "Downwind" claims are by those who have got asbestosis by wind borne dust. Friable asbestos has been used in buildings that must now be removed. 

A DESCRIPTION OF THE YEAR 2 RITC 

The RITC for 1982 (prior to credit for the roll over) broke down as follows: 

417     418      417/418
Net Outstandings     £20.2   £15.63    £35.8 m
IBNR £12.3   £25.95    £38.2 m
Total£35.5   £41.58    £74   m
Net underwriting     (£3.5)   £5.0 (including
result   £1.2  on back years)

See J/10 Schedule A and see Pie Chart 2. 

SYNDICATE 417 

Outstandings 

Merretts had the I04 print out of outstanding claims, as before, and from this they prepared an initial outstanding claims summary: (D2, p. 292-293) in currency and by year of account. 

As before Merretts identified the net outstandings in respect of asbestosis risks. By this stage asbestosis claims details, i.e. details of assureds/reassureds who had made claims or given advices of claims (or, say Merretts, potential claims) and of the relevant policies were maintained on a separate computer system which was operated by the staff of 799. (Merretts assert that the database sought to identify every policy perceived to be at risk to asbestos claims and gave details of loss advices and policies where claims had not been made and attorneys had advised a nil reserve. According to E&W the database identified those policies in respect of which a claim had been received or a TBA notified and may have included policies where attorneys had advised a nil reserve.) Merretts also compared their own records with the AWP records on asbestosis claims: see p. 170. 

There had been a substantial increase in asbestosis and (for the first time) DES claims arising from direct business during the year (see below). The  

[1997] 338  L.R.L.R. Henderson v. Merrett Syndicate (Q.B. (Com. Ct.))    Cresswell, J. 

minutes of the first RITC meeting on Mar. 10, 1983 record: 

On asbestosis the deterioration reflect(s) new advices of direct losses and increased reserves rather than R/I treaty business in. It was considered by U/Writers that full exposure had been set up now; the deterioration was in line with 799 but the latter syndicate had seen benefit of much better protection. (D2/202 (i).) 

The substantial increase in outstanding U.S.$ claims (from U.S.$18.6 m. to U.S.$30.05 m.) is shown at D2, p. 240. Asbestosis outstandings had substantially increased from U.S.$5.276 m. to U.S.$13.754 m., i.e. an increase of U.S.$8.478 m. (see Schedule A J10/1). 

E&W took steps to review the outstandings: see Schedule BA3(b): (J10/2) and the audit programme (p. 193) (J10/2), including (i) obtaining Merretts' lists of asbestosis outstandings which were checked to the supporting documents. (ii) ensuring that the listing reflected all the attorneys' reports received during 1982, and (iii) ensuring that the total outstandings for asbestosis and DES claims were included in the list: see Tests 11, 12 and 13 on D2, p. 194. The resulting outstanding claims analysis is at D2, p. 211. E&W's analysis of asbestos outstandings is at p. 242-243. 

IBNR 

The agency initially proposed a loading of 50 per cent. of net outstanding plus "Special loading" for asbestos: see Mr. Hulme's schedule at D2, p. 308-309, producing a total RITC of c £30.3 m. At that amount the RITC would have shown a back year deterioration before roll over of £11.7 m. 

At the first RITC meeting on Mar. 10, 1983 Mr. Merrett confirmed that comparison had been made with the AWP records at LUNCO (as was also done the previous year). The notes continue - 

The current R/I to close, on the basis of outstandings + 50% load, amounted to £30 m. However, in view of the substantial deterioration there was a need to be cautious about the future (particular[ly] as asbestosis is expected to deteriorate further) and to consider the need for topping up the back years (p. 203 (i)). 

E&W agreed to examine the deterioration on asbestos by comparing the December 1981/December 1982 provision on a policy by policy basis within years of account of all policies thought to be exposed to asbestosis claims, with a view to seeing whether there was under or over reserving. This produced Mr. McNamara's schedule relating to Syndicate 417's exposure to asbestos: D2, p. 244-276. The purpose of this exercise - was described in Partners' Notes at D2, p. 289-291: The draft underwriting result before any roll-over adjustment shows a loss of approximately £10 m. This is a staggering loss which is apparently attributable to increased Asbestosis claims and claims in respect of "DES". We were given some considerable analysis of their Asbestosis obligations last year and we were considered to have taken a prudent view. There has however been a substantial deterioration in respect of the earlier years with outstandings rising as much as ten times and generally four times. A review of the position must address itself to two particular objectives. 

(a) What policies are we now getting claims on for which no provision was made last year - we must be
certain that our provisions do not exceed the aggregate for any line.  

(b) We must assess what our further exposure could be in respect of any further claims for which current provisions do not exhaust the line. We should note that our provisioning basis is outstandings + 50% IBNR. Where the outstandings are equal to the maximum exposure for any year then the 50% loading should be seen as an additional loading for another year. Similarly where part of the loading would bring the total claims up to the maximum for a year then any further loading is surplus.. . .See also D2 p. 39.  

Mr. McNamara's schedules recorded the policies on which claims had been notified or on which attorneys advised that claims might arise. The schedules set out: (i) the policies; (ii) outstandings at Dec. 31, 1981/Dec. 31, 1982; (iii) the maximum exposure under the policy; (iv) the syndicate's proportion of (ii) and (iii); (v) the amount paid at Dec. 31, 1982. 

As to (iii) the plaintiffs say that this was theoretical only, because claims could exceed policy limits, because of the absence of aggregate limits, costs in addition to limits or reinstatements (reinsurances only). Merretts agree that this is correct but say that there was no detailed evidence as to the significance of this, which they dispute. 

The plaintiffs say the number of lines/policies identified increased from 162 as at Dec. 31, 1981 to 334 as at Dec. 31, 1982. Merretts say the following. While it is possible to count the number of entries on Mr. Wheatley's schedule at Dec. 31, 1981 and to count the number of entries on the first McNamara schedule at Dec. 31, 1982, it is not possible to draw the conclusion that the number of policies  "identified" by Merretts had changed as a result of that simple count. While it is likely that some new policies were identified during the calendar year 
[1997] 339  L.R.L.R. Henderson v. Merrett Syndicate (Q.B. (Com. Ct.))    Cresswell, J. 

1982, there was a change of methodology between the Wheatley schedule and the McNamara schedule. The claims department at Merretts recorded all involvements in policies identified by attorneys and advised to the market through brokers and Toplis & Harding. Thus involvements in policies with nil reserve recommendations would have been recorded at Dec. 31, 1981 but Mr. Wheatley did not enter nil reserves on his schedule. The McNamara schedule entered policies with nil reserves (although it is not now clear whether all policies with nil reserves were entered or only those which were perceived to be at risk). 

Mr. McNamara then considered the possible future deterioration taking into account the deterioration that had already occurred. He either marked the last column with a XX, meaning thereby that an IBNR for further deterioration was needed, or put down a figure. 

The maximum further exposure excluding expenses on the policies identified in the McNamara schedules was U.S.$40.6 m. The loadings produced by this exercise are listed at D2, p. 310(1). These loadings amounted to U.S.$9.8 m. which was approximately 25 per cent. of the U.S. $40.6 m. The defendants say the loadings were based on a full provision for lines currently burning with an additional provision for (a) lines adjacent and (b) low level lines of other reinsureds. The plaintiffs say that the loadings were not made on a full provision basis, that only a selected number of policies were provided for and that there was no assurance that the lines/policies identified were complete. Merretts say there is no basis on which to question whether or not the lines/policies identified were complete. Merretts accept that it remains unclear whether or not the McNamara schedule included all lines/policies recorded in Merretts files or whether those that were perceived not to be at risk of claims were omitted. E&W accept that they did not perform an audit test in order to verify the completeness of the policy list contained in the schedule. 

A figure of U.S.$16.2 m. (£10 m.) was reached by adding to the U.S.$9.8 m. U.S.$3 m. (30 per cent.) for expenses and U.S.$3.4 m. for new claims or further erosion of liability on existing notifications towards the maximum. D2 310(1) shows that "no account [was] taken of whole account protections under aggregate extension clauses" in respect of 1974 et seq. - see further D2/205(1). 

In the event the loading used was £12.3 m. arrived at as follows: 

Asbestos:     £10 m ($16.2 m): i.e. 117% on outstandings of £8.49 m ($13.75 m). Plus  £1.18 m (p.210) making 138% see below. The £10 m loading for asbestos was allocated as to £7.5 m to liabilities and £2.5 m to expenses: p. 207-9. 

DES: £500,000 ($810,000) on outstandings of £2.141 m ($3.469 m)

Other: £1.8 m on outstandings of £9.5 m.

The total RITC (prior to the credit from the rollover) was £32.5 m. (£20.2 m. outstanding and £12.3 m. loading), an increase of £2.2 m. over the original proposal by Merretts of £30.3 m. 
 
The second RITC meeting was on Mar. 23, 1983. (D2, p. 205) at which the RITC was agreed. 

The additional loading of £1.18 m. arose because - D2, p. 210 - various subsequently discovered overstatements of outstandings or understatements of recoveries were not adjusted for. This was left "as a buffer for possible deterioration on asbestosis etc" (D2/210). 

The make up of the RITC is shown on Schedule A (J10/1) and at D2, pp. 191-192. The total reserves in respect of asbestos for 417 amounted to £18.48 m. (U.S.$29.95 m.) being 25 per cent. of the total RITC for 418/417 (being £74 m.). 

Roll over 

The agency brought into account £8.2 m. (U.S. $13.284 m.) from a roll over facility as a credit against old year deteriorations. The cover note is at D2, p. 295. This was reported in the underwriter's report: E1, p. 7(20) as follows: 

The reality behind the figures is that there has been a further significant deterioration in the position of the old years: the settlement on the 1980 year itself is reasonably satisfactory but the provision made for the old years has been substantially strengthened by the utilisation of a "roll over" policy.. . . 

SYNDICATE 418 

Outstandings 

The agency calculated outstandings in the same way as before and the steps taken to review them by E&W were similar: Schedule BA4(a) and (b) (J10/2). The Red Book is at D2, pp. 106-126. The outstanding claims summary is at D2, p. 96. A small proportion of claims - U.S.$250,000 + £20,000 were asbestosis related: D2, pp. 99, 100, 106 and 137. An additional £100,000 general reserve was added - semble in respect of the  

[1997] 340  L.R.L.R. Henderson v. Merrett Syndicate (Q.B. (Com. Ct.))    Cresswell, J. 

Royal, a U.S. primary insurer. D2/99 records "John Emney is reviewing maximum liability to asbestosis". 

IBNR 

Merretts approach was the same as that adopted in the previous year. The Hulme Schedule is at D2, p. 94.

The Notes of the RITC meeting of Mar. 17, 1983 are at D2, p. 92(1)-(2). 

Run-Off Contracts 

By Dec. 31, 1982, the following 10 run-off contracts had been written into the following years of account: 

1978    Provincial 418
1980    Universal418
1981    Ballantyne 417
            Verrall  418
1982    Burdett  417
            Dolling-Baker     417
            Gooda    417
            Humm     418
            Fireman's Fund    417
            Toomey   417

Of these only the first two fell to be considered as a constituent part of the RITC of 1980 into 1981. No reference was made in the claims box schedule to outstanding losses on run-off contracts and no losses on the run-off contracts were apparent in the Red Book. The outstandings as at Oct. 31, 1982 in relation to Provincial and Universal were - U.S. $1,888,158 (see C26/293, initialled by Mr. Emney on Feb. 28, 1983, which shows exposures for Asbestosis, DES, Agent Orange and Love Canal totalling U.S.$52 m. - 50 per cent. = $26 m.). The application of the loadings used for 417's own book would according to the plaintiffs have produced a reserve of £2,289,738 and according to Merretts and E&W £2,734,436. The application of Lloyd's audit minima to the Provincial and Universal premium produced a loading of U.S.$486,801 which was included in the overall IBNR for 418. 

E&W sent Merretts a latent disease questionnaire in substantially the same form as that of the previous year. This year, however, the questionnaire specifically requested evidence that syndicates had taken steps to identify and quantify known or potential liabilities in respect of inter alia run-off accounts containing latent disease liability: D2/63. In relation, inter alia, to that request the answer for 417 stated: 
  
This syndicate does not as a matter of policy write these classes of business other than on a very incidental basis, very seldom. (D2/170). 

The answer for 418 to the questionnaire stated: 

Latent Diseases. The reports have been obtained, and records retained in accordance with the reinsurance to close claims analysis exercise: we have no knowledge of any other reinsurance contracts which might become involved. We have no other known or known potential liabilities and no material recoveries. (D2/60). 

The answer to the other matters questionnaire (D2, p. 61 & 172) was negative. On this occasion the question was posed separately for each syndicate and was: "Has the Syndicate written business in excess of 1% of the Syndicate net premium income?". 
 
Syndicate 421 

The agency answered "yes" to the questionnaire on other matters in respect of this syndicate and gave details of nine contracts, including the six contracts which were written into 417 as well as 421 (D2 p. 358). But the response to the 421 questionnaire did not indicate that 417 was also a party to those run-offs. 

The percentage calculation for the purpose of the stop loss questionnaire is at D2/360. At 421's RITC meeting on Mar. 1, 1983 "it was agreed that E&W would set up a permanent file of risks written to monitor the run-offs" D2/201A. In fact no such file was set up. 

YEAR 2 RITC - CONCLUSIONS 

Some criticisms of Merretts in Year 2 

1. Merretts failed to comply with the guideline in par. 6 of Mr. Murray Lawrence's letter - 

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. 

Merretts failed to advise E&W of the Ballantyne, Verrall, Fireman's Fund/Sturge, Dolling-Baker, Toomey, Gooda, Humm and Burdett run-off contracts (as to Provincial and Universal see below) and also failed to consider whether the open year reserves should be increased. 

2. Merretts failed to comply in relation to the run-off contracts with cl. 3(iii)(a) and (b) of the solvency/white letter dated Feb. 1, 1983 (J5/221) - 

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 

[1997] 341  L.R.L.R. Henderson v. Merrett Syndicate (Q.B. (Com. Ct.))    Cresswell, J. 

December, 1982: (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. . . 

3. Merretts' replies to the latent diseases questionnaire were seriously misleading. In the case of 418 Merretts failed to inform E&W that a loss had been notified and initialled by Mr. Emney on Feb. 28, 1983 in the sum of U.S.$1,888,158 as at Oct. 31, 1982 in respect of Provincial/Universal (C26/293). Further the answers to the questionnaires D2/60 and 170 failed to inform E&W that 418/417 had written any of the run-off contracts. (See also Merretts' answer on the Form AU17.) 

4. The application of the loadings used for 417's own book to the Provincial and Universal contracts would according to the plaintiffs have produced a reserve of £2,289,738 and according to Merretts and E&W £2,734,436. The application of Lloyd's audit minima to the Provincial and Universal premium produced a loading of U.S.$486,801 which was included in the overall IBNR for 418. 

5. It is unclear on the evidence as to the extent to which Merretts complied with the guideline in par. 3 of Mr. Murray Lawrence's letter - 

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. 

(See also the new form of question as to reinsurance writings on the latent disease questionnaire and the answer thereto.) 

6. Mr. McNamara's general IBNR of 10 per cent. (D2/310(1)) represented a judgment which should
 have been made by the underwriter and not the auditor. 

Conclusions 

(a) Merretts 

It is again important to remember that the plaintiffs' case is that year 2 should have been left open (and no alternative case is advanced that if year 2 was to be closed, it should only have been closed at a higher premium than that in fact adopted). 

I do not consider that in all the circumstances Merretts' decision to close year 2 was a decision that no reasonably well-informed and competent underwriter/managing agent could have made. I so find inter alia for the following reasons and having regard to the following circumstances: 

1. Asbestos-related claims 

The perception of asbestos personal injury and property damage claims is considered separately at  each of years 1 to 6. These six sections of the judgment show the developing problem. The position at year 2 should be contrasted with the position in subsequent years. As to perception at May 4, 1983 see above. The approximate number of personal injury claims/claimants as at May 4, 1983 is there stated. Property damage claims were still at a relatively early stage. 

418/417's incurreds in respect of asbestos claims (main account) in year 2 were U.S.$14.511 m. as against U.S.$5.276 m. in year 1 (see "a staggering loss" above - D2/289-291). 

2. Pollution claims 

Merrets carried reserves in respect of Love Canal from 1979. As to the relevant legislation see the chronology, Appendix 1 to this judgment. CERCLA was passed in 1980. The Shell claim (see below) was first notified in October, 1983. By year 4 pollution claims were recognized to be the next major problem for the market. The perception of pollution claims in year 4 is to be contrasted with the perception in prior years. In year 2 the Love Canal claim remained the only substantive pollution claim. The precautionary reserve recommendation of U.S.$100,000 at the 1981 year end remained in place. 

3. The run-off contracts 

In year 2 only the Provincial and Universal run-off contracts fell to be considered as a constituent of the RITC as at Dec. 31, 1982. The alternative figures of £2,289,738 (the plaintiffs) and £2,734,436 (Merretts and E&W) see above, should be contrasted with the RITC premium in fact set for 418/417 of £74 m. 
 
4. The plaintiffs' criticisms 

As to the plaintiffs' criticisms of Merretts as at year 2, I have already held that some of these are well-founded (see above). The list of criticisms set out above does not purport to be exhaustive. However I do not consider that the criticisms that can be made of Merretts in year 2 lead to the conclusion that year 2 should have been left open. 

The plaintiffs advance seven principal criticisms of Merretts. 

As to the first, I do not accept that no attempt was made to calculate an IBNR loading for asbestos or other latent disease claims to infinity. While there are criticisms which can be made of Merretts' approach and while I should not be taken to accept that the RITC as at year 2 received the attention that it should have received from Merretts, it does not follow that year 2 could not have been competently closed. 
  
As to the second principal criticism (Merretts encouraged E&W in the fallacy that it was possible 

[1997] 342  L.R.L.R. Henderson v. Merrett Syndicate (Q.B. (Com. Ct.))    Cresswell, J. 

to identify full exposures in respect of asbestosis, and set up loadings by reference to those exposures, when this could not be done) although there are criticisms which can be made of Mr. McNamara's schedule, I do not consider that these lead to the conclusion that year 2 could not properly be closed. 

The plaintiffs withdrew their third principal criticism. 

As to the fourth principal criticism (no consideration was given to leaving the 1980 account open) the increase in incurreds from U.S.$5.276 m. to U.S.$14.511 m. was a matter of very considerable concern. I consider however that the decision to close the year involved implicit consideration of the alternative. 

As to the fifth and seventh principal criticisms I have dealt with these above. 

As to the sixth principal criticism (whole account stop loss business) I disregard this point for the reasons given under year 1 above. 

(b) E&W 

As to E&W in year 2 it is important to remember that E&W were seriously misled by Merretts as to the run-off contracts (see criticisms 1 to 4 under the heading "Some Criticisms of Merretts in Year 2" above). I do not accept the plaintiffs' submission that E&W should have discovered the existence of the run-off contracts during their audit work in year 2. Further the case against E&W in year 2 must be judged in the light of their perception of asbestos-related claims as at May 14, 1983. 

It follows from my conclusions in relation to Merretts, that the plaintiffs' claim against E&W in respect of year 2 must also fail. It is accordingly unnecessary to consider the plaintiffs' detailed criticisms of E&W in year 2. Although I have noted that Mr. Attwood's standards in years 1 to 3 may to some extent be above the reasonable average, I accept Mr. Attwood's central contentions as to the need for appropriate audit evidence. I should not be taken to accept that E&W's audit approach and work in year 2 is not open to criticism. By way of example Mr. McNamara's general IBNR of 10 per cent. (D2/310(1)) represented a judgment which should have been made by the underwriter and not the auditor. The plaintiffs have however tied their case to the question whether or not the year could properly have been closed, as opposed to the quantum of the RITC premium. I do not consider that the plaintiffs have established that E&W should have disclaimed an opinion on the grounds of fundamental uncertainty in year 2. 

34. YEAR 3: THE CLOSURE OF 1981 INTO 1982 ASAT DEC. 31, 1983 (MERRETTS' AND E&W'S REPORTS DATED MAY 15, 1984 

In May, 1984, 418/417's 1981 year of account was closed by way of an RITC into the 1982 year of account; and it was reported on by Merretts on May 15, 1984. 

In the 1983 annual report and accounts for 418/417 were: 

(1) A report dated May 15, 1984, in which E&W stated inter alia: 

Our audit has been carried out in accordance with approved auditing standards and we have received all the information and explanations we require.  

In our opinion: 

(a) The annual reports and each personal account have been prepared in compliance with the accounting policies set out in note 1. 

(b) The personal accounts fairly reflect each underwriting member's result arising out of the 1981
underwriting account.  

(2) Notes to the accounts in which it was stated that the reinsurance had been calculated by the underwriter and complied with the requirements of the Council of Lloyd's. 

As to the regulatory regime for the year ended Dec. 31, 1983 see above. 

PERCEPTION AS AT YEAR 3 

As to developments and changes in perception in previous years see above. 

As at May 15, 1984 the future development and extent of asbestos-related claims were subject to considerable uncertainty. I refer to the chronology, Appendix 1 to this judgment (which in the case of attorneys' reports lists some examples of reports in Merretts' possession). As to the U.S. cases at the above date see Appendix 2 to this judgment.  

The nature and extent of the uncertainties as at May 15, 1984 were known to Merretts and E&W, alternatively, in the case of E&W, would have been known to E&W had necessary and appropriate audit tests and enquiries been carried out and conducted. 

The broad nature and extent of the uncertainties as at May 15, 1984 were reflected in the following
materials. 

Where materials are drawn on which would probably have been available only to Merretts or E&W this is indicated in brackets. (a) As at June, 1983 an attorney's report referred to a second school district class action filed in Pennsylvania naming a total of 50 defendants. The report added 

[1997] 343  L.R.L.R. Henderson v. Merrett Syndicate (Q.B. (Com. Ct.))    Cresswell, J. 

that the allegations in the national complaint, which state that approximately 110,000 public and private schools are involved, are similar to the allegations made in the Pennsylvania class action.

 (b) As at June, 1983 (Merretts only) a letter from attorneys to the AWP referred to the ACF and  reported as follows. The benefits most certainly will be spelled out in significant economies attainable in both indemnity and defence as well as general claims handling. We are reminded almost daily by the press that upwards of 20,000 asbestos cases have been filed to date (the Lloyd's CIS indicates 27,548 as of May 22, 1983). While overall numbers may differ depending whose predictions you read, unquestionably, with increasing surveillance an improvement in diagnostic techniques, we can reasonably anticipate that by the end of the day upwards of 50,000 will have been filed. With the average indemnity now exceeding U.S.$100,000 per case, at the current rate that will equate to a total loss of over U.S.$5 billion. Defence expenditures at a 1 to 1 ratio (which is not the current experience) will equal that number. More realistically they will at least double, and more probably quadruple. It is,
 therefore, our view that the facility, with certain modifications currently being addressed by Working party members, is essential to the London market to assist the market to see the thousands of asbestos products liability claims to their final conclusion. 

(c) As at November, 1983 an attorney's report in respect of U.S. Gypsum recommended in addition to bodily injury reserves a precautionary reserve for each policy period for potential property damage losses. 

(d) As at December, 1983 (E&W only) E&W Insight gave details as to the extent of asbestosis claims in the U.S. and attendant litigation as follows. Approximately 24,000 claims have been filed in each of which an average of 20 defendant companies have been named. Some 12 insurers are involved in defending litigation while another 15 to 20 have made payments. Costs and compensation are expected to escalate over future years. 

(e) As at January, 1984 an attorney's report dealing with coverage issues stated that the producers of asbestos products unquestionably will contend that all of the potential triggers apply, perhaps even a continuing trigger from date of first sale to date of last possible connection to damage, à la Keene. 

(f) As at January, 1984 an attorney's report stated that property damage was now evolving into a major issue. 

 (g) As at March, 1984 (E&W only) notes of an E&W meeting recorded that the number of claims is difficult to determine but may be in the region of 25,000. New claims are still coming in at roughly 500 per month and the peak may not occur until 1990. 

(h) As at March, 1984 an attorney's report stated about U.S.$1 billion in compensation and litigation expenses had been spent by the end of 1982 on more than 20,000 open and closed asbestos product liability claims. Many times that number of people have been exposed to asbestos, and the potential liability of the defendant firms runs into billions of dollars. Three major corporations have already filed Chapter 11 bankruptcy petitions.  

(i) As at April, 1984 (not E&W, probably Merretts) a letter from Mr. Rokeby-Johnson of Sturge & Co. stated that asbestos is proving to be the most expensive claim in insurance history and perhaps will prove to be the tip of the iceberg. One hope is that the ACF will come into being and at least would drastically reduce legal costs and achieve realistic settlement levels. There are currently over 30,000 claims and they are still being filed at the rate of 500 per months with no sign of abating. The media are now seriously coming to grips with the School District cases which could alone cost U.S.$4 billion without considering other industries which, without the same public sympathy, could still prove very expensive.  

A DESCRIPTION OF THE YEAR 3 RITC 

The RITC for 1983 (pre-roll over) breaks down as follows: 

417     418     417-418
Net Outstandings£28.3   £14.83    £43.1 m
IBNR£16     £31.52    £47.5 m
Total  £44.3   £46.35    £90.6 m
Net underwriting result  (£3.8)  £3.6

See J10/Schedule A and Pie Chart 3. 

SYNDICATE 417 

Outstandings 

The agency's approach to outstandings was as before as was E&W's review: Schedule BA5(a) & (b) (J10/2). The audit programme is at D3, p. 191, (and D4, p. 250 is an index of E&W's work on outstanding claims). The major losses on the year were in respect of asbestosis, DES, and, for the first time, Agent Orange and DDT, and a detailed analysis of those claims was made. The preliminary list of total outstandings is at D4, p. 555-556. The final E&W list of the I04 printout is at D4, p. 270(1). The final figures which agree to the accounts are recorded at D4, p. 271.  

The asbestosis outstandings had increased from U.S.$13.76 m. to U.S.$15.9 m. (p. 240), an increase 

[1997] 344  L.R.L.R. Henderson v. Merrett Syndicate (Q.B. (Com. Ct.))    Cresswell, J. 

of U.S.$2.14 m. (or 13 per cent. of the previous year's asbestosis IBNR of U.S.$16.2 m.), less than the U.S.$8.48 m. increase of the year before: see pp. 286-287 (analysed at pp. 288-296 including agreement to attorneys' reports). The specific risk analysis (D3/182) recorded that: 
 
The major losses are in respect of Asbestosis, DES, Agent Orange and DDT (latter two are new to
 1983). Asbestosis has moved considerably in 1983. . . 

IBNR 

The agency again proposed a loading of 50 per cent. of net outstandings: see the Hulme schedule at D4, p. 565. This produced an RITC of £42.8 m. and showed a back year deterioration (before roll over) of £15.1 m. Mr. McNamara's schedules were updated in order, again, to test Merretts' proposals: see D4, pp. 297-330. The 1982 column (Dec. 31, 1982) was amended to 1982/1983, with the amended outstandings for 1983 shown under the 1982 figure. A feature of Mr. McNamara's schedules was that there were almost no new assureds identified on them but adverse deterioration was arising from some assureds from additional years of liability. The plaintiffs say the number of lines/policies identified increased from 334 to 361. Merretts say the following. The question of counting the number of lines/policies on this schedule is possible (although not straightforward): but that is not the same as the question whether or not Merretts had identified more lines/policies between the two year ends. The increase in the number of lines/policies between the two schedules may simply reflect a changed perception of those lines/policies at risk. The increase in the number of policies on the McNamara schedule at Dec. 31, 1983 is small. It appears that 17 reinsurance policies were added to the list, 11 of which were reinsurances of the Travelers. These were higher layers of coverage provided to Travelers which obviously had previously been thought not to be exposed (notably since lower layers were recorded in the previous year with nil reserves). Travelers had previously advised its reinsurers that it did not expect its reinsurance recoveries to rise significantly. 

The notes of the RITC meeting on Mar. 26, 1984 are at D4, p. 258. At the meeting the RITC was agreed at £47 m. on the basis of previous discussions between Mr. Merrett and E&W and subject to completion of certain outstanding audit work. 

In the event the loadings used, following a specific review by E&W of each of the major loss areas, were as follows: 

ASBESTOS: 

Net Outstandings:      £10,985 m$15.9 m
Specific Layer loading £ 4 m  $ 5.8 m
Non-Specific loading   £ 4 m  $ 5.8 m
Expenses loading£ 1 m  $ 1.45 m

Total loading £ 9 m (82%)    $ 13.05 m

DES: 

Net outstandings:  £2.132 m     $3.092 m
Loading   £533,187 (25%) $773,000

DDT: 

Net Outstandings:  £685,906     $995,000
Loading   £200,000 (29%) $290,000

AGENT ORANGE: 

Net Outstandings:   £2,413,530 (10%)     $3.500 m
Loading    £  241,000 (10%)     $350,000

Others: 

 Net Outstandings:     £ 13.897 m
 Loading      £  6.948 m (50%)

See Schedule A (J10/1) and D4, p. 240. 

These outstandings and loadings totalled £47.0 m., from which was deducted £2.7 m. in respect of Excess of loss reinsurance recoveries. That produced a net figure of £44.35 m. (an increase of £1.55 m. from the original Merretts' proposal). Recoveries of £11.4 m. were deducted under the roll over policy, producing a final figure of £32.93 m. The total of £20 m. reserves for asbestosis was about 22 per cent. of the RITC for 418/417 of £90.6 m. (pre-roll over).  

Asbestosis 

The loading for asbestosis set out in Mr. McNamara's schedules - D4, pp. 297-330 - is summarized in the third column on D4, p. 271. This produced a figure of U.S.$5.8 m. (£4 m.), to which expenses of £1 m. (U.S.$1.45 m.) were added). The expenses figure was less than before because expenses in excess of limits were included in the I04 print-out of outstandings: pp. 331 and 243.  

A further general loading of another £4 m. (U.S.$5.8 m.) - compare the previous year's U.S.$3.4 m. - was then added as a non-specific loading to deal with new claims, or policies not yet "burning or adjacent to the fire".  

[1997] 345  L.R.L.R. Henderson v. Merrett Syndicate (Q.B. (Com. Ct.))    Cresswell, J. 

DES 

The DES outstanding claims at Dec. 31, 1982 were U.S.$3,469,000 and at Dec. 31, 1983 U.S.$3,092,000: a drop of about U.S.$377,000: see Schedule A (J10/1) for these two years. (The drop is not reflected in the net sterling decrease of only £8,435 - D4, p. 342 - because of the deterioration in the £/$ ratio (U.S.$1.62/£ to U.S.$1.45/£).) 

DDT 

DDT was a new species of claim this year. The relevant claim was against Olin Corporation (a primary producer) arising from alleged leakage of DDT into a water supply. The loading was £200,000: D4, p. 340. 

Agent Orange 

The method of calculation of outstandings and 10 per cent. IBNR is set out at D4, pp. 266-269. At this stage negotiations to resolve claims were at an advanced stage and a major settlement was, in fact, concluded in May, 1984. 

Other 

The loading taken was 50 per cent. of outstandings. 

Roll-over 

Syndicate 417 again took to credit its roll-over protection in the sum of £11.419 m. 

SYNDICATE 418 

Outstandings 

The agency's approach to outstandings was as before. Mr. Merrett included in his Red Book - D3, pp. 93-116 - a reserve of U.S.$250,000 in respect of asbestosis related claims now recorded in the claims box summary identified in the previous year as claims arising out of 1951 and 1952. The outstanding claims are summarized at D3, p. 88. E&W carried out a similar review to that carried out in previous years. See Schedules BA6(a) and (b) (J10/2). 

IBNR 

The agency's proposal - D3, p. 127 - was again major net outstandings, net of facultative reinsurance, plus Lloyd's audit reserves plus 25 per cent. reinsurance disallowance. The RITC meeting is at D4, p. 258(1). 

Run-off contracts 

By now all the run-off contracts had been written: 
   1978    Provincial418
   1980    Universal 418
   1981    Ballantyne417
               Verrall 418
   1982    Burdett 417
               Dolling Baker    417
               Gooda   417
               Humm    418
               Fireman's Fund   417
               Toomey  417
    1983   Judd    417

Of these only the first four were a constituent part of the RITC. The outstandings as at Dec. 31, 1983 on the four contracts were as follows:  

* incurreds figure, not net outstandings.

Thus the 417 outstandings should have included U.S.$2,023,229 in respect of the Ballantyne run-off contract. Mr. McNamara accepted that on the balance of probabilities no outstandings were shown in respect of Ballantyne and thus there was no IBNR in respect of Ballantyne and I so find. I reject Merretts' contention that Ballantyne was reserved at U.S.$792,339 (B1/354) or any other figure. It is common ground that the application of Merretts' loadings in year 3 would have resulted in a reserve of U.S.$6,437,807. The 418 outstandings should have included U.S.$2.575 m. in respect of Provincial plus Universal. In fact there was no amount for Provincial or Universal included in the outstandings. It is common ground that the application of the loadings used for 417's own book in year 3 in the case of Provincial and Universal would have resulted in a reserve of U.S.$4,340, 582 and in the case of Verrall a reserve of U.S.$3,156,616. Provincial and Universal and Verrall were reserved at Lloyd's minima amounting to U.S.$832,000. U.S. $6,437,807 + 4,340,582 + 3,156,616 - 832,000 converted to sterling (£1:$1.45) = £9,036,555. 

In the last six months of 1983 incurreds on the Fireman's Fund contract increased by U.S.$12.7 m. from U.S.$47.7 m. to U.S.$60.4 m. - (D4/397) which produced an incurred to 417 (1982 open year) of U.S.$5.2 m. before specific run-off contract 

[1997] 346  L.R.L.R. Henderson v. Merrett Syndicate (Q.B. (Com. Ct.))    Cresswell, J. 

reinsurances. As to Fireman's Fund see further D3/174, D4/568 and D4/570. 

E&W accept that they became aware that Syndicate 417 was party to a portfolio of six run-off policies written in 1981 and 1982: (see the policies highlighted above). 

421's RITC meeting on Mar. 16, 1984 which refers to Ballantyne written into 417 and 421 is at D4/591. D4/569 (a 421 E&W document) records that copies of the placing slips of "all the (421) run-offs. . .now on 417 file". D4/568 dated Apr. 18, 1984 refers to the Fireman's Fund run-off - "Watch this policy for 1984 Audit" and also states: 

Merretts have taken out a specific R/I for their Run-off Portfolio (6 Policies of which [Fireman's Fund] represents cira 50% of the total PI of the Portfolio). 

See also the reference at D4/567 to: 

John Emney keeps separate file on each special deal and receives quarterly returns from the broker giving details of claims paid and outstanding together with comments by the broker (as appropriate) - considered to be adequate monitoring. 

E&W sent Merretts a latent diseases questionnaire in substantially the same form as that of the previous year. In response to the specific request concerning inter alia run-off accounts the answer for 417 stated: 

This syndicate does not, as a matter of policy, write these classes of business other than on a very incidental basis, on the rare occasion. (D3/219) 

The answer for 418 to the questionnaire stated: 

Latent Diseases. The reports have been obtained, and records retained in accordance with the reinsurance to [close] claim analysis exercise: we have no knowledge of any other reinsurance contract which might become involved. We have no other known or known potential liabilities and no material recoveries. (D3/79) 

Mr. Merrett's response - undated - to the whole account stop loss questionnaire for 417 (D3, p. 221) and 418 (D3, p. 80) was negative. The form of the question was different viz: 

Has the Syndicate written: 

(b) Whole Account Stop Loss reinsurance business of companies and other individuals who keep their accounts on a three year or longer basis? 

If the answer is yes, please provide details of individual policies where the income from such reinsurances for any of the three years of account is greater than 1% of the net premium income for the whole Syndicate for that year. 

The AU17 for 418 is at D3, p. 73 and for 417 at D3, p. 218. 

The AU38(a) form - Apr. 30, 1984 - s. 6, at D3, p. 53 records: 

We understand that neither Personal Stop Loss reinsurance business nor Whole Account Stop Loss reinsurance business of companies and other individuals who keep their Accounts on a three year or longer basis is written by this Syndicate. 

That answer is derived from the agency's response to the questionnaire. E&W accept that the AU38(a) form was inaccurately filled in. (Merretts do not accept that the AU38(a) was inaccurate since it is their position that the reference to whole account stop loss was not understood by Mr. Merrett as a reference to run-off contracts. Further Merretts say the question was not directed at run-off contracts.) 
 
YEAR 3 RITC CONCLUSIONS 

Some criticisms of Merretts in year 3 

1. Merretts failed to comply with the guideline in par. 6 of Mr. Murray Lawrence's letter - 

 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.  

Merretts failed to advise E&W of the Humm and Judd run-off contracts (as to Provincial, Universal and Verrall see below) and also failed to increase the open year reserves in respect of any of the relevant run-off contracts as appropriate. In the last six months of 1983 incurreds on the Fireman's Fund contract increased by U.S.$12.7 m. from U.S. $47.7 m. to U.S.$70.4 m. - (D4/397) which produced an incurred to 417 (1982 open year) of U.S.$5.2 m. before specific run-off contract reinsurances. As to Fireman's Fund see further D3/174, D4/568 and D4/570.  

2. In respect of the four run-off contracts written into 418 and Judd (417) Merretts failed to comply with cl. 3(iii)(a) and (b) of the white letter dated Dec. 16, 1983 (J5/314) - 

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, 1983 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. 

[1997] 347  L.R.L.R. Henderson v. Merrett Syndicate (Q.B. (Com. Ct.))    Cresswell, J. 

As to the remaining six run-off contracts (417) see below under E&W and compare Merretts' answers to the latent disease questionnaires (below). 

3. Merretts' answers to the latent disease questionnaires (D3/79-418, D3/219-417) failed to refer to the run-off contracts (cf. 421's responses to the same questionnaire D4/587 and the other matters questionnaire D4/584-5). Mr. McNamara described the answers as "most unsatisfactory". 

4. Of the 11 run-off contracts only Provincial, Universal, Ballantyne and Verrall were a constituent part of the RITC. The outstandings as at Dec. 31, 1983 on those contracts were as follows: 

* incurreds figure, not net outstandings.

Thus the 417 outstandings should have included U.S.$2,023,229 in respect of the Ballantyne run-off contract. C5/67 scratched by Mr. Emney on Apr. 9, 1984 (showing Ballantyne outstandings) should have been shown to E&W. Mr. Holland and Mr. McNamara agreed that the failure to do so was disgraceful/most unsatisfactory. Mr. McNamara accepted that on the balance of probabilities no outstandings were shown in respect of Ballantyne and thus there was no IBNR in respect of Ballantyne and I so find. I reject Merretts' contention that Ballantyne was reserved at U.S.$792,339 (B1/354) or any other figure. It is common ground that the application of Merretts' loadings in year 3 would have resulted in a reserve of U.S.$6,437,807. 

The 418 outstandings should have included U.S.$2,575,000 in respect of Provincial and Universal. There was no amount for Provincial or Universal included in the outstandings. It is common ground that the application of the loadingsused for 417's own book in year 3 would, in the case of Provincial and Universal, have resulted in a reserve of U.S.$4,340,582 and in the case of Verrall a reserve of U.S.$3,156,616. Provincial and Universal and Verrall were reserved at Lloyd's minima amounting to U.S.$832,000. U.S.$6,437,807 + 4,340,582 + 3,156,616 - 832,000 converted to sterling (£1:$1.45) = £9,036,555. The total reserve for the four contracts would have been £9,610,348. 

The net underwriting result as in fact shown in the accounts was 417 (£3.8 m.); 418 £3.6 m. The accounts showed a profit transferred to Names' personal accounts of £8.672 m. (before Names' personal expenses). E&W say that on the assumption (a) that the year 2 RITC had included a run-off reserve of £2.733 m. and (b) that the year 3 RITC had included a run-off reserve of £9.036 m. the profit after personal expenses would have been £32,000 (as opposed to £4.97 m.). The plaintiffs say (i) that on the assumption (a) that the year 2 RITC had included a run-off reserve of £2.289 m. and (b) that the year 3 RITC had included a run-off reserve of £9.036 m. the loss after personal expenses would have been £343,983 and (ii) that on assumption (b) only the loss after personal expenses would have been £2.5 m. - in each case as opposed to the £4.9 m. profit shown in the accounts. It follows that Merretts should have recognized that the year 3 accounts were seriously inaccurate. (See also Merretts' answers on the Form AU17 D3/73 and 218).   

5. Paragraph 9 of Mr. Murray Lawrence's letter stated: 

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. 

The year 3 accounts did not mention the run-off contracts. 

6. It is unclear on the evidence as to the extent to which Merretts complied with the guideline in par. 3 of the Murray Lawrence letter -  

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. 

(See also the question as to reinsurance writings on the latent disease questionnaire (probably as for year 2) and the answer thereto.) 

Conclusions 

(a) Merretts 

 It is again important to remember that the plaintiffs' case is that year 3 should have been left open (and no alternative case is advanced that if year 3 was to be closed, it should only have been closed at a higher premium than that in fact adopted).  

I am not persuaded on a balance of probabilities that in all the circumstances Merretts' decision to close year 3 was a decision that no reasonably well-informed and competent underwriter/managing agent could have made although the answer is less clear than in years 1 and 2. 

I so find inter alia for the following reasons and having regard to the following circumstances: 

[1997] 348  L.R.L.R. Henderson v. Merrett Syndicate (Q.B. (Com. Ct.))    Cresswell, J. 

1. Asbestos-related claims 

The perception of asbestos personal injury and property damage claims is considered separately at each of years 1 to 6. These six sections of the judgment show the developing problem. The position at year 3 should be contrasted with the position in subsequent years. As to perception at May 15, 1984 see above. The approximate number of personal injury claims/claimants as at May 15, 1984 is there stated. Property damage arising out of the use of asbestos was now developing into a major issue. 

418/417's incurreds in respect of asbestos claims (main account) in year 3 were U.S.$16.88 m. as against U.S.$14.511 m. in year 2. Accordingly the increase in incurreds in year 3 was U.S.$2.369 m. as opposed to the corresponding increase of U.S.$9.235 m. in year 2. Merretts (and E&W) were entitled to take some comfort from the comparatively modest increase in year 3. (By contrast it will be noted that in year 4 incurred claims increased very substantially to U.S.$27.072 m., as to which see below). 

2. Pollution claims 

Merretts carried reserves in respect of Love Canal from 1979. As to the relevant legislation see the chronology, Appendix 1 to this judgment. CERCLA was passed in 1980. The Shell claim was first notified in October, 1983. By year 4 pollution claims were recognized to be the next major problem for the market. In year 3 clear warning signs were beginning to emerge. 

3. The run-off contracts 

Of the 11 run-off contracts only Provincial, Universal, Ballantyne and Verrall fell to be considered a constituent part of the year 3 RITC. The figure of £9,610,348 (see above) should be contrasted with the RITC premium in fact set for 418/417 of £90.6 m. 

4. The plaintiffs' criticisms 

As to the plaintiffs' criticisms of Merretts as at year 3, I have already held that some of these are well-founded (see above). The failures in respect of the run-off contracts were extremely serious. I have given anxious consideration to this aspect of the case but on balance I do not consider that the criticisms that can be made of Merretts in year 3 necessarily lead to the conclusion that year 3 should have been left open. 

The plaintiffs advance five principal criticisms of Merretts. As to the first I do not accept that no attempt was made to calculate an IBNR loading for asbestos or other latent claims (own book) to infinity. While there are criticisms which can be made of Merretts' approach and while I should not be taken to accept that the RITC as at year 3 received the attention that it should have received from Merretts, it does not follow that year 3 could not have been competently closed.  

As to the second principal criticism, although there are criticisms which can be made of Mr. McNamara's schedules I do not consider that these lead to the conclusion that year 3 could not properly be closed. 

As to the third principal criticism (no consideration was given to leaving the 1983 account open) I consider that the decision to close the year involved implicit consideration of the alternative. 

As to the fourth and fifth principal criticisms these are dealt with above. 

(b) E&W 

As to E&W, E&W accept that they became aware that 417 was party to a portfolio of six run-off contracts written in 1981 and 1982. 421's RITC meeting on Mar. 16, 1984 which refers to Ballantyne written into 417 and 421 is at D4/591. D4/569 (a 421 E&W document) records that copies of the placing slips of "all the (421) run-offs. . .now on 417 file". D4/568 dated Apr. 18, 1984 refers to the Fireman's Fund run-off - "Watch this policy for 1984 Audit" and also states - 

Merretts have taken out a specific R/I for their Run-off Portfolio (6 Policies of which [Fireman's Fund] represents circa 50% of the total PI of the Portfolio).  

See also the reference at D4/567 to - 

John Emney keeps separate file on each special deal and receives quarterly returns from the broker giving details of claims paid and outstanding together with comments by the broker (as appropriate) - considered to be adequate monitoring. 

Although only one of these (Ballantyne) was a constituent part of the RITC, the six run-off contracts were not given adequate attention by E&W in year 3. There was a breakdown in communication and organization in the course of the audit as a result of which inter alia Mr. Jones' work on the run-off contracts (D4/568), the slips (D4/569), Mr. Rokeby-Johnson's letter (D4/409) and the U.S.$12.7 m. increase in the Sturge incurreds between June 30, 1983 and Dec. 31, 1983 (D4/397) were not given appropriate attention by an E&W partner. 

As to this year it is important to remember that E&W were in part seriously misled by Merretts as to the run-off contracts (see criticisms 1 to 4 under the heading "Some Criticisms of Merretts in Year 3" above). Although there was a breakdown in communication and organization in the course of the audit as set out above this was exacerbated by 

[1997] 349  L.R.L.R. Henderson v. Merrett Syndicate (Q.B. (Com. Ct.))    Cresswell, J. 

Merretts' failure to disclose the run-off contracts written by 418 and the Judd run-off contract. 

It follows from my conclusions in relation to Merretts, that the plaintiffs' claim against E&W in respect of year 3 must also fail. It is accordingly unnecessary to consider further the plaintiffs' detailed criticisms of E&W in year 3. Although I have noted that Mr. Attwood's standards in years 1 to 3 may to some extent be above the reasonable average, I accept Mr. Attwood's central contentions as to the need for appropriate audit evidence. E&W's audit approach and work in year 3 is open to criticism inter alia for the reasons set out above. The plaintiffs have however tied their case to the question whether or not the year could properly have been closed, as opposed to the quantum of the RITC premium. I am not persuaded that E&W should have disclaimed an opinion on the grounds of fundamental uncertainty in year 3. 

35. YEAR 4: THE CLOSURE OF 1982 INTO 1983 AS AT DEC. 31, 1984 (MERRETTS' AND E&W'S REPORTS DATED JUNE 4, 1985) 

In years 4, 5 and 6 the plaintiffs make a number of principal criticisms of Merretts and E&W and further detailed submissions. Merretts' and E&W's responses are set out in their opening and closing submissions. I do not propose to summarize the extensive and detailed submissions of the parties (save where there is particular reason to do so). I have carefully considered all the submissions. 

As to changes in stamp capacity, names etc. see Table 1 below (at p. 415 post). In June, 1985, 418/417's 1982 year of account was closed by way of an RITC into the 1983 year of account; and it was reported on by Merretts, on June 4, 1985. 

In the 1984 annual report and accounts for 418/417, were: 

 (1) A report dated June 4, 1985, in which E&W as auditors, stated (E1/20) inter alia: 

We have examined the annual report of syndicate 418/422 and of syndicate 417 set out on pages 14 to 45, together with the personal account of each underwriting member. Our audit has been carried out in accordance with the approved auditing standards. In our opinion: 

(a) the annual report and personal accounts comply with Lloyd's syndicate accounting rules; 

(b) the annual report gives a true and fair view of the 1982 closed year of account loss; and 

(c) the personal accounts for each member gives a true and fair view of that member's net result. 

(2) Notes to the accounts in which it was stated(E1/28) inter alia: 

Reinsurance to close. 

The reinsurance to close, which is calculated by the underwriter, comprises estimated outstanding liabilities, including claims incurred but not reported, net of estimated reinsurance recoveries relating to the closing year and all previous years of account. The ultimate claims settlements, net of reinsurance, are estimated on the basis of previous claims history and case by case review of notified losses. The reinsurance to close an underwriting account is effected with the next underwriting account.  

And at E1/43: 

Full provision has been made for all known outstanding claims and additionally a substantial sum has been included to cover incurred but not reported losses (IBNR). The figures include a significant reserve in respect of "special risks" or "run-off" contracts which are described in the underwriter's report. 

Since many of the outstanding losses will not be settled for some years, it has been possible to purchase specific excess of loss reinsurance protection (sometimes described as "time and distance reinsurance").. . .In calculating the net premium for the reinsurance to close the account, credit has been taken in full for anticipated recoveries under this policy which are collectable in the period 1992 to 1998. 

As to the regulatory regime for the year ended Dec. 31, 1984 see section 17 above. 

It was in this year that the "shattering news" of the losses under the run-off contracts broke in about early April, 1985. (See Day 39/78 and Mr. Randall's memorandum to Mr. Merrett of Apr. 15, 1985 which referred to "the shattering news of the last 10 days"). There had been no mention of the shattering news at the RITC meeting on Mar. 28, 1985 (D5/251(1)).  

Perception as at year 4 

As to developments and changes in perception in previous years see above. Perception in year 4 must be judged against this background.  

As at June 4, 1985 the future development and extent of (a) asbestos personal injury and (b) asbestos property damage and (c) pollution claims were in each case subject to very considerable uncertainty. 

I refer to the chronology, Appendix 1 to this judgment (which in the case of attorneys' reports lists some examples of reports in Merretts' possession). As to the U.S. cases at the above date see Appendix 2 to this judgment.  

[1997] 350  L.R.L.R. Henderson v. Merrett Syndicate (Q.B. (Com. Ct.))    Cresswell, J. 

The nature and extent of the uncertainties as at June 4, 1985 were known to Merretts and E&W, alternatively in the case of E&W would have been known to E&W had necessary and appropriate audit tests and inquiries been carried out and conducted. 

The broad nature and extent of the uncertainties as at June 4, 1985 were reflected in the following materials. Where materials are drawn on which would probably have been available only to Merretts or E&W this is indicated in brackets. 

Asbestos personal injury claims 

Asbestos-related claims constituted the most serious claims problem ever encountered by the insurance industry. 

(a) As at May, 1984 (Merretts only) Mr. Robin Jackson of Merretts described asbestos as the most serious claims problem ever encountered by the industry and added the following. The seriousness of it is not only the actual quantum of claims but more so in the policy interpretation. The basic rule is quite clear, it is to maximize coverage to the original insured. 

 (b) As at May, 1984 (Merretts only) Mr. Jackson of Merretts, as chairman of the AWP, in a letter to underwriters at interest referred to the steadily increasing volume of claims. 

 (c) As at August, 1984 (Merretts only) Mr. Jackson in an article in reinsurance referred to the avalanche of claims and to the fact that generally each original claimant sues seven or eight insureds - you may only have 30 to 40,000 claimants but you can multiply by 6 of 7 if you take each of them separately and have a separate defence each time. 

(d) As at October, 1984 (E&W only) E&W Insight stated that the latest estimate from Lloyd's is that asbestosis is likely to cost the market £1.5 billion - this figure should be regarded as a minimum. 

(e) As at October, 1984 (Merretts only) an article in the Financial Times stated that asbestosis and other asbestos-related injuries in the U.S. have already turned out to be the largest natural disaster to hit world insurance and reinsurance markets. It is estimated that there are more than 30,000 individual claims at various stages of processing and about 500 claims are being made per month. The insurance industries are still not able to quantify the ultimate cost of asbestos-related claims - estimates range from £8 billion to as much as £50 billion. 

(f) As at December, 1984 Mr. Robin Jackson at a meeting of panel auditors said that discussions had been taking place with the USA in order to introduce a facility with the original asbestos producers. New advices of losses were still being notified at the rate of approximately 6000 per year. U.S.$50 m. had been paid out on claims in 1984. In the early stages direct losses were notified, then in 1983 reinsurance losses were quantified and 1984 was the year for retrocessional claims. 

(g) As at January, 1985 (Merretts only) Mr. Ayliffe of Merretts received a letter enclosing a recent article which stated that in the last three or four years, the number of claims filed by railroad workers alleging asbestos disease has far exceeded the total of such actions in the entire history of the American railroad industry. 

(h) As at March, 1985 an attorney's report referred to some 30,000 outstanding claims which, from past experience, will increase by some 5000 new suits each year. During the last year the anticipated increase in reinsurance involvement has developed. It is reasonable to expect this trend to continue as the overall cost of the asbestos problem increases and more cedants' potential exposure exceeds retentions. In addition, it is inevitable that the market will develop a further up-surge in retrocessional involvements. 

(i) Mr. Jackson's testimony - see below. 

Asbestos property damage claims 

These claims were evolving into a major loss issue. They constituted a serious problem yet fully to develop and were subject to burgeoning litigation in the U.S.A. 

(a) As at October, 1984 an attorney's report referred to a myriad of coverage issues and stated that all the factors referred to rendered the assessment of precise property damage reserves most difficult if not impossible at this time. 

(b) As at November, 1984 an attorney's report referred to a myriad of problems in assessing coverage and stated that it was difficult if not impossible to assess property damage reserves at this time. 

(c) As at December, 1984 an attorney's report stated that a myriad of other coverage issues exist in addition to the date of loss question, principal of which are the number of occurrences, whether there is consequential damage beyond damage to the product itself and, if so, the amount thereof. All of these factors render the assessment of precise property damage reserves most difficult if not impossible at this time. 

(d) As at March, 1985 an attorney's report stated that during the course of the past year there have developed new issues in regard to damage to property allegedly caused by asbestos containing 

[1997] 351  L.R.L.R. Henderson v. Merrett Syndicate (Q.B. (Com. Ct.))    Cresswell, J. 

materials, which create unique coverage issues which have yet to be addressed. In 1984 there was a continuing increase in the number of property damage actions filed against the producers of asbestos products. As an illustration, in the Maryland action, brought on behalf of the Mayor and City Council of Baltimore, the plaintiffs seek damages of U.S.$225,000,000 and in addition seek an unspecified amount of punitive damages and costs. 

(e) Mr. Jackson's testimony - see below. 

Mr. Jackson's testimony 

As at March, 1985 (Merretts only) Mr. Robin Jackson in testimony as chairman of the AWP to the Senate Labour and Human Relations Committee's Sub-Committee on Labour stated that - 

 . . .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.. . .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 the executives involved at primary level, as well from their re-insurer counterparts. (Emphasis added.) 

Mr. Jackson then added: 

. . .You might well ask if we are getting it right. I will show you how we propose to do just that. . . 

and referred to the proposed asbestos claims facility. While appropriate allowance must be made for the occasion on which these remarks were made their significance is obvious. 

Pollution claims 

Pollution claims were recognized to be the next major problem for the market. 

(a) the EPA list as at August, 1983 (Merretts only) obtained by Mr. Ayliffe identified 406 sites. Some of the site names on this list identified companies that were Merretts' assureds. 

(b) As at March, 1984 (Merretts only) a letter to Mr. Ayliffe referred to the New York Times report on toxic waste sites. The office of technology assessment has found 10,000 sites that qualify for priority action, and it estimates that the cost of clean-up may reach U.S.$100 billion. That office observes that the EPA has only 528 sites on its priority list and has given "remedial clean-up attention" to only 30 per cent. of them. The EPA disputes those figures, saying there are 800 sites on its current priority list with another 1200 likely to be added. The general accounting office is preparing its own report on the toxic waste programme that will be issued shortly. One official in the office estimates that there are potentially some 378,000 sites, though most would not qualify for priority treatment.  

(c) As at April, 1984 (Merretts only) Lloyd's List reported that Lloyd's syndicates faced potential claims running into tens and perhaps hundreds of millions of dollars as a result of environmental pollution in the United States. The EPA is continuing to identify and investigate thousands of hazardous waste sites. Mr. Robin Jackson said the London market should be concerned about these developments because during the 1950s and 1960s it was much more involved in direct business from the U.S. and at much lower limits than now.  

(d) As at April, 1984 (not E&W, probably Merretts) a letter from Mr. Rokeby-Johnson stated that the EPA is currently very active, under both political and public pressure to "clean-up America", listing various National Priority sites, and has been the instigator of the School District Cases. London is receiving preliminary advices of claims with great regularity, but it will be some time for proper evaluation to take place. One case that has received certain publicity is U.S. Army v. Shell but again evaluation of this problem will take time.  

(e) As at December, 1984 (Merretts only) a telex from Mr. Ayliffe to a U.S. attorney recognized that EPA claims might arise from the insured being either an owner/operator of a waste site, or a transporter of toxic waste or a generator of toxic waste. A telex to the same attorney in the same month (Merretts only) stated that the list in the telex identifies the assureds which either have reported claims arising from hazardous waste disposal sites or, although not yet reporting claims, are listed by the EPA as potentially responsible parties in connection with the first 539 significant sites. The list also provides information concerning whether the assured is an owner/operator, transporter or generator and the name of the site, its location and a brief description. We are aware that other claims exist in connection with Olin, Monsanto and Uni Royal accounts.  

(f) As at December, 1984 a meeting of panel auditors was told that the next major problem for the
market will be pollution claims.  

[1997] 352  L.R.L.R. Henderson v. Merrett Syndicate (Q.B. (Com. Ct.))    Cresswell, J. 

(g) As at February, 1985 (Merretts only) a letter from Toplis and Harding signed inter alia by Mr. Ayliffe to insurers at interest stated: 

The steady increase in the number of advices being received in the Market from insureds who have potential problems relating to environmental pollution emphasises the need to establish inter market coordination. . .Bearing in mind that the Market is presently involved in excess of 300 sites which constitute problem areas, it is essential that a system be put into place which can provide an index open to all London participants which records the name of Insured, site designation and the name of the
 Counsel acting on that account. At the present time the Environmental Protection Agency of the U.S. Government have designated some 783 dump sites as locations subject to special investigation. Quite apart from the damage to persons and property that may arise beyond the area of the site, it has been estimated that the average cost of clean up at any one site will amount to $6.5M. . .Legislation, such as the Compensation Environmental Response, Compensation & Liability Act has provided that liability for the cost of clean up will be imposed on a joint and several basis with the dump site owner and major dumpers being the initial target of the Government. In a number of instances there can be in excess of one hundred dumpers and transporters of industrial waste involved at one dump site. Control will need to be exercised to ensure that the legal profession does not precipitate mass litigation under contribution theories. Recent budgetary increases granted by the Federal authorities to the Environmental Protection Agency will permit them steadily to increase the site designations in which they are actively involved. This general background leads the Claims Group to conclude that it is
 essential that the Market addresses the implications without delay. 

(h) Merretts' letter of Apr. 14, 1985 to the direct Names stated: 

. . .417 has been badly affected by the significant number of claims advices in respect of pollution and seepage and also asbestos-related items. . .there has been a particularly severe deterioration in the last
 quarter of 1984. 

(i) Mr. Cassells' note dated Mar. 26, 1985 and Mr. McNamara's notes on 417 RITC (E&W
 only) are quoted below. 

A DESCRIPTION OF THE YEAR 4 RITC 

The RITC for 1984 breaks down as follows: 

417 418 Total
£'000      £'000      £'000
     Main Account
     - Net Outstandings      41,926     13,765     55,691
     - IBNR                         31,307     31,573     62,880
                                         73,233     45,337    118,571

     Run-Off Account
     - Net Outstandings     11,268     12,169     23,437
     - IBNR                         18,381     13,200     31,581
                                         26,649     25,369     55,018
                                       102,882     70,706    173,589

     Roll-over/Asbestos
     related Claims Account             (10,462)-      (10,462)

     Time & Distance
     Credit                                         (44,526)-      (44,526)
                                         47,894      70,706   118,600
     Net underwriting result                 (9,293)    (11,813)
     per account

 See J10/Schedule A and Pie Chart 4 (J10/1). This was the year in which Mr. Merrett wrote his letter of Apr. 18, 1985: I4D/103. 

The 1982 Names paid £22.7 m. by way of premium for the T&D policy. If the T&D had not been purchased and assuming no discounting of reserves the 1982 Names would have paid the 1983 Names a further £67 m. i.e. a total of £163.127 m. In fact the 1983 Names received £95.9 m. and the benefit of the T&D. 

SYNDICATE 417 

Outstandings 

The work done by Merretts was similar to that of the previous year: Schedule B1(a) (J10/2). In addition Mr. Hart and Miss Ruby prepared a schedule giving an explanation by year of the major movements on major outstanding asbestos-related claims and identifying potential for future deterioration: CB154, D6, pp. 359-362. Further (see below) Merretts obtained some limited outstanding claims information from cedants on the run-off contracts. E&W's review of Merretts' work was similar - Schedule B1(b) (J10/2). The specific risk analysis programme is at D5, p. 137. The audit programme is at D5, pp. 139/137. Mr. Cassells' tests are at D6/587 et seq. At D6/589 (Test 2) Mr. Cassells recorded: 

It was felt that there was no valid way of testing the completeness of the (outstandings) claims records, as a sample required for this would require to be extracted from a complete list of policies for which 799/417 participated. While reports exist for Asbestos detailing all Lloyd's policies so far exposed, no such independent information exists for any of the other areas involved (DES, Agent Orange, etc), 

[1997] 353  L.R.L.R. Henderson v. Merrett Syndicate (Q.B. (Com. Ct.))    Cresswell, J. 

and the Asbestos report would still require interpretation by clients staff to identify those policies on which 417 or 799 are involved. . . 

(Merretts say Mr. Cassells' note was wrong in two respects. First there was independent information detailing Lloyd's policies exposed to DES and Agent Orange and other similar claims. Second, Toplis & Harding notified all syndicates of their involvement on all policies identified by the attorneys as covering the assured in question. On occasions when brokers were in difficulty tracing a particular slip then Merretts would research their underwriting records to provide that information.) 

The RITC meeting of Mar. 28, 1985 is at D5/251-252. A feature of the account was a deterioration in asbestos claims and the emergence of pollution claims including the major claim "Shell Rocky Mountain". Shell Rocky Mountain was first advised in 1983. 1984 was the first year that there were separate reserves for pollution "clean-up" claims arising under CERCLA, primarily Shell Rocky Mountain. Outstandings were U.S.$5.073 m. 

The total for asbestos outstandings increased from U.S.$15.9 million (Dec. 31, 1983) to U.S.$21.5 million (Dec. 31, 1984) (D5 256) (per Mr. Merrett's statement p. 100 U.S.$20.79 m.), a deterioration of U.S.$5.6 m. (of which U.S.$1.5 m. was for the prospective Johns Manville settlement D5 p. 252): D6, p. 280. This was 193 per cent. of the deterioration in 1983 (U.S.$2.9 m.). See further Table 6 below taken from the E&W Schedule C(J10). An Analysis by D. Hart/K. Ruby of Deterioration in Asbestos Claims is at D6/359. Six of the producers identified on D6/362 accounted for U.S.$9.991 m. of deterioration in incurred position. U.S.$4 m. consisted of new advices which had been received on policies for which no provision had previously been made (D5, p. 256). Some of that was asbestos property damage where according to E&W's notes "there is great uncertainty as to the liability of insurers": see p. 256 (last paragraph) (See also references to PD in D6/359-362.) (Merretts say that other views indicated that insurers believed they had substantial defences to property damage claims and rely on the evidence of inter alia Mr. Knowlton and Mr. Ayliffe.) 

The ACF was in prospect (the agreement was in fact signed in June of 1985) and it was believed that that agreement would dramatically reduce costs. 

IBNR 

Merretts initially proposed a loading of 50 per cent. applied to total net outstandings in respect of all business excluding run-off/special contracts of £62.88 m. plus a special loading for run-offs of £35 m.: see Mr. Hulme's Schedule at D5, p. 253. This produced an RITC of £97.88 m. and showed a back year deterioration (excluding the run-off contracts and before roll over and T&D credits) of £25.4 m. In a later schedule - CB1/D, D5, p. 212 - in addition to a loading of 50 per cent. applied to total net outstandings there was a further loading of U.S.$12 m. in respect of Shell and asbestos, (of which according to the defendants U.S.$7.5 m. was pollution and U.S.$4.5 m. asbestos: Mr. Merrett par. 178), together with reserves in respect of the run-off contracts of £960,000 and U.S.$40 m. (of which U.S.$6 m. was a general run-off loading). This schedule was prepared by Mr. Wallis of the agency. It takes to credit the benefit of the roll over fund of £10.46 m. The total figure for RITC, after that credit, is £92.42 m. The same information appears on E&W's Schedule CB1/B, D5, p. 210 (together with the deduction for the time and distance policy: see below). In the event Merretts proceeded with the £92.42 m. figure as
follows: 

Footnote 1: includes asbestos and pollution. 

£102,882 - 10,462 = £92,420 

E&W prepared by comparison/review and after discussion with the agency staff the schedule at CB1/C, D5, p. 211 ("E&W's review schedule"). This showed an alternative approach to loading for 417's own book by class of business, i.e. a more risk specific methodology. As to the run-off contracts D5/211 included the reserves in the agency's £92.42 m. figure. E&W's review schedule finally produced (before crediting the T&D policy) an RITC of £93.445 m. i.e. approximately £1 m. more. But it is clear that at an earlier stage E&W's calculations produced a figure of £90.599 m.: see D5, p. 256. As stated above in the event neither of 

[1997] 354  L.R.L.R. Henderson v. Merrett Syndicate (Q.B. (Com. Ct.))    Cresswell, J. 

these figures was adopted and Merretts proceeded with the £92.4 m. figure sup. (see D5/210). 

The following paragraphs comment on the make up of the £93.445 m. in E&W's review schedule: (see also Mr. McNamara's note at D5, pp. 256-260, but with the caveat that that document is referring to a calculation which produced £90.599 m.). 

ASBESTOS 

O/S U.S.$21,514,709: Loading: U.S.$14,770,000 & Can.$300,000: (c. 68 per cent.) 

The notes of the RITC meeting on Mar. 28, 1985 are at D5/251(1). The figures appearing in E&W's Review Schedule (D5, p. 211) for asbestos loading are U.S.$14,770,000 and Can.$300,000. Those figures were reached by the following process: 

 (i) Mr. McNamara had produced his schedule of suggested loadings for review purposes: CB151 series, D6, pp. 288-314. 

That contains the following details: 

1. Details of outstandings as at Dec. 31, 1981/1982/1983/1984; 

2. movement in outstandings in the year; 

3. changes in the outstandings (movement in outstandings + paid in year); 

4. payment figures in the year and to date; 

5. incurred figures i.e. outstandings plus paid to date amounts; 

6. deterioration to come; 

7. ultimate incurred figures, i.e. (5 + 6); 

In respect of this schedule Mr. McNamara made suggested loadings, recorded at D6, p. 352, which produced U.S.$6.2 m. 

The following assureds listed on D2/277 appear for the first time in Mr. McNamara's Schedule: Keene, U.S. Gypsum and National Gypsum. (The plaintiffs say the number of lines/policies identified increased from 361 to 448. For the reasons set out above Merretts do not accept the plaintiffs' contentions. Merretts accept that Keene, U.S. Gypsum and National Gypsum appear for the first time on Mr. McNamara's schedule. As to these three Merretts say the following. The Keene entries (2) are both reinsurances or retrocessions. Syndicate 417's involvement with Keene was very small, its maximum exposure being U.S.$30,000. The U.S. Gypsum involvements are reserves not for BI but PD. The policies appearing on Mr. McNamara's Schedule at this year end were above those which were expected to be impacted by BI claims but were advised to carry a precautionary reserve (no claims having at that stage been made against the policy by the assured) in respect of PD. As to National Gypsum those policies that have been researched by Merretts show the reserves related to PD claims rather than BI claims.)   

(ii) The suggested loadings were then compared with Merretts' analysis of potential for further deterioration (D6, p. 359), attorneys' reports, prior year files and claims records cards and information gained in discussions with Merretts' personnel. (See CB150-1, D6, p. 285). 

(iii) The upshot of that exercise is set out in the CB152 series of documents: D6, pp. 315-351. (Merretts say that Mr. McNamara's schedule contained policies subject to claims or notifications for asbestosis and policies thought to be at risk to such claims or notifications and the defendants say each policy subject to claims or notifications for asbestosis was analysed individually for exposure. The plaintiffs say that E&W could not check whether all the policies subject to asbestosis claims were correctly identified. E&W accept that no audit test was performed to check the completeness of the schedule but the defendants say that there is no evidence to suggest that the list of policies was incomplete.) In the course of this exercise consideration was given to individual policies, the calculation of what was described in the schedules as maximum exposure on the policies identified with particular reference to costs (D6, p. 367), retentions reducing such exposure (D6, p. 368), the construction of policy wording and aggregate limits (D6, p. 371). The work done is summarized at D6, p. 285. As to the cards created by Merretts see D6/363. The plaintiffs say the calculation of maximum exposure was subject to uncertainties inter alia because (a) on some policies there was a continuing obligation to pay costs in excess of indemnity limits and (b) of other points referred to in D6/285 and 257. Merretts accept that the calculation of maximum exposure was subject to the uncertainties mentioned. Merretts say the following. These were not a significant factor for Syndicate 417. There were no London market policies where there was a continuing defence obligation when indemnity limits had been exhausted. Policies without aggregate limits were the exception so far as 417 was concerned and the policies where costs were in addition to indemnity were limited (as distinct from a continuing obligation to pay defence costs after exhausting indemnity limits). As to E&W's treatment of expenses see D6/286, 288, 363-364 and 367-368. E&W accept that at this year end, they became aware that in the case of the Owens Corning policies it was possible to pay out several times to policy indemnity limit due to the lack of an aggregate limit in the policy (D5/257), however this was presented to E&W as the exception, rather than the rule (D6/371). A suggested loading was reached which was added as a last column to Mr. McNamara's schedules i.e. CB151 series: D6, pp. 288-314. The total is U.S.$10,770,000: D6, p. 283. The work was done by Mr. Cassells, a member of the audit team. That 

[1997] 355  L.R.L.R. Henderson v. Merrett Syndicate (Q.B. (Com. Ct.))    Cresswell, J. 

work is supported by the details of p. 315 ff. In carrying out the calculation he took account of the fact that, in two cases, costs were recoverable in excess of indemnity limits: pp. 364/286E. In those cases he increased the maximum exposure on the Schedule by 100 per cent. or 120 per cent.: these figures were derived inter alia from the AWP Databank Reserve. 

(iv) Mr. Hill had previously considered (D6, p. 278) in very broad terms a loading of U.S.$10 m. (U.S.$6.2 m., the suggested figure at step (i) above rounded up - D6, p. 352) for deterioration on existing exposure and U.S.$10 m. for future exposure, making U.S.$20 m. in all. 

(v) In the event a loading figure of U.S.$14.7 m. and Can.$300,000 (£12.9 m. in all) was adopted in E&W's review schedule: CB150A-B (D5 p. 211 and D6, p. 278-279). The make up of the specific and general loadings is at CB150-0b (D6, p. 281). The specific loading of U.S.$10,770,000 and Can.$300,000 is at DB150-0d, (D, p. 283). These are the figures which appear in the final column of Mr. McNamara's schedules CB151, D6, p. 288 ff. The general loadings (CB150-0b) for further adverse deterioration were as follows (p. 282): 

Reinsurance of major producers     $3 m
Attorneys' Fees in excess of           $.5 m 
exposure limits
Sundry (Others)                              $.5 m
Total                                                $4 m.

See D6, pp. 282 and 286 

 (vi) E&W accepted as reasonable Mr. Merrett's view that a further U.S.$10 m. for future exposure - see (iv) above - was too severe, particularly in the light of the substantial loadings on specific outstandings U.S.$10.77 m. compared with U.S.$5.8 m. at Dec. 31, 1983). 

AGENT ORANGE 

O/S U.S.$61,948: Load 10 per cent.: U.S.$6195 

E&W established that the reserves carried forward in respect of Agent Orange from the previous year of U.S.$3.8 m. were more than adequate. They had been set up to cover U.S. exposure on the basis of attorneys' reports which suggested that liability would fall on the manufacturers for the years in which Agent Orange had been manufactured for the U.S. Army. In May, 1984 a settlement of the class action took place. This involved payments by the manufacturers in the years in which Agent Orange was actually shipped to Vietnam. As a result there was a payment in the year of U.S.$1.459 m.; the previous reserves of U.S.$3.5 m. + 10 per cent. were too high; the claims outstanding constituted U.S.$61,948 being a small amount of U.S. domestic liability and a number of claims by individuals  opting out of the Vietnam class settlement: see D5, p. 225. Hence E&W put a 10 per cent. figure: CB1/C-p. 211: see D5, pp. 225-7. 

DES 

O/S U.S.$3,632,000: Load 50 per cent.: U.S.$1,816,000 

The relevant documents are CB3/1-4: D5, pp. 288-231. These show a deterioration of the RITC brought forward of U.S.$1.6 m. (including a 25 per cent. load) or U.S.$571,465 without loading. An additional 25 per cent. loading was applied for the reasons expressed at CB3/4, D5, p. 231: (a note of discussions with Miss Karen Ruby) namely that there was scope for deterioration of existing years because: 

1. Companies involved are increasingly exhausting lower layers of insurance with other products liability claims now arising. As such exposures are now arising on the higher layers which 417 tends to write; 

2. Additional claims are continuing to arise on existing years; 

3. Cases are now being decided and awards have generally been higher than expected. 

DDT 

O/S U.S.$1,193,474: Load 30 per cent.: U.S.$358,044 

The only significant movement in the year was a new reserve of U.S.$218,926 in respect of 1955: D5, p. 232-3. No claims were paid in the year. The result was a net deterioration of U.S.$198,915 or (with loading of circa 50 per cent., U.S.$505,655). The load for the purposes of the E&W review schedule was increased from a provisional figure of U.S.$290,000 (according to Merretts the load used at the previous year end) (29.15 per cent. of O/S) - D5, p. 232 - to U.S.$358,044 D5, p. 211 - (30 per cent. of (higher) outstandings). 

SHELL/EPA 

O/S U.S.$5,072,672: Load: U.S.$9 m. (U.S.$2,500,000 for Shell and U.S.$6,600,000 for other EPA) 

(See generally D6/257-9). Environmental pollution emerged as a significant issue in the context of the RITC. An outstanding reserve of U.S.$5 m. had been fixed by Merretts for the Shell Rocky Mountain claim (for which only a precautionary advice had been received in 1983). The claim was in respect of contamination to a local water supply and other damage to the environment said to have been caused by toxic effluents which percolated from a 27 acre site part of which was leased by Shell from the U.S. Army at Rocky Mountain Arsenal near Denver, Colorado. The U.S. Army had used the site 

[1997] 356  L.R.L.R. Henderson v. Merrett Syndicate (Q.B. (Com. Ct.))    Cresswell, J. 

for development of chemical weapons. Shell had used it for chemical production. This reserve of U.S.$5 m. assumed a total cost of U.S.$250 m. to the market spread over a number of policy years of cover and then apportioned to the policies hit in each year. The attorney's report is at J11/25/437: see also D6, p. 533. 

The reserve was on what was described by Merretts/E&W as a "worst realistic" basis. That was the second worst possible scenario for Merretts. The first relevant question in determining reserves was whether for each year there was one occurrence or 10 occurrences (arising from the 10 separate
 locations at the site from which pollution had or might have arisen). If the latter the primary insurances would respond up to their limits in respect of each of the 10 sites each year before the London market responded as excess insurers. If the former, the London market would respond sooner. Merretts reserves assumed the former. The second question was whether to take the exposure as being from 1947 to 1983 or from 1952 to 1975 (1952 being the beginning of the period when Shell was the lessee and 1975 being the date of a cease and desist order after which non-disclosure defences arose:
 J11/26/496). Merretts took the latter. Hence the reserve was on "the worst realistic scenario" (p. 234) and the "second worst possible scenario" (p. 257). As to Merretts' tighter reinsurance programme from 1975 see D5/258. 

As a result of discussion an additional reserve of U.S.$2.5 m. was added, equivalent to a total cost from the ground up of U.S.$413 m. - D5, p. 235 (Attwood, I4d, ref: 109). 417's maximum exposure (which would assume a total cost of U.S.$558 m.) would have called for an additional reserve of U.S.$3,483,675 (instead of the U.S.$2.5 m.). CB5/1, D5, p. 235 and 237. 

There was then added a further loading of U.S.$6,500,000 for "other EPA" covering the possibility of two further major losses of up to 50 per cent. of the size of Shell (U.S.$6.5 m.). 

In fact to date nothing has been paid on the Shell claim (except costs). 

The plaintiffs say that the estimates of cost of clean-up vary widely (J11/25/435) and that the worst possible basis was not used, but only what was considered by Merretts/E&W to be the "worst realistic" basis, and that the insurers' defence costs were estimated (at U.S.$1.2 m. plus disbursements) and reserved for one year only. Further the plaintiffs say that 417 was not in a position to estimate its "ultimate exposure" to Shell because it had not yet identified all the policies, direct or indirect, on which it was exposed. Merretts say that 417 (and the other Merrett Syndicates exposed) knew all of the direct policies issued to Shell. Because of the nature of the account there was little reinsurance involvement for 417. See also D6/532. Merretts saythat the "worst realistic" basis was in fact the worst case to the Merrett Syndicates. 

"Other": Load 50 per cent. + U.S.$2 m. for 1977-1982 years 

All "other" business was loaded 50 per cent. on net outstanding figures with a specific provision of U.S.$2 m. which was the load for years of account 1977 to 1982. 

The above paragraphs have commented on the make up of the £93.445 m. in E&W's review schedule. 

The run-off contracts 

Mr. Randall's memorandum to Mr. Merrett of Apr. 15, 1985 referred to "the shattering news of the last 10 days". All of the run-off contracts save Judd formed part of the RITC. The agency (Mr. Randall and Mr. Hart) sought and obtained details from each of their cedants, either direct or through brokers and auditors of (i) outstandings at Dec. 31, 1984, and (ii) net settlements during 1984: see Mr. Hart, par. 17. To the product of that figure they applied a loading CB200-1, D6, p. 373. The documents on E&W's files which reflect the agency's exercise are found at D6/382 et seq. 

The loading for each cedant was calculated by Mr. Hart on a "Syndicate 799 basis". This involved using development factors from which to derive ultimate losses. These factors consisted of the loadings used for 799 in the underwriting years covered by the relevant run-off policies divided by the net outstandings, i.e. the percentage which the 799 loading represented of the 799 outstandings. The 799 loadings were determined by Mr. Jackson, who adjusted loadings which had been derived from the application of percentages (calculated subject as below from RAA development statistics) to incurreds, to take account of the characteristics of 799's book of business. As to 1964 and prior see Mr. McNamara Day 40 p. 4-6. 

The aggregate of the outstandings for all the relevant 417 contracts save Burdett was U.S.$19,792,077 and of the loadings was U.S.$14,439,030: Schedule D (J10/4). For Burdett there were nil outstandings to the contract but Merretts adopted a loading of £946,626 (ibid). These figures of U.S.$19,792,077, U.S.$14,439,030 and £946,626 appear on the schedule at D6, p. 373. The total for 417 is U.S.$34,231,107 + £946,626. The figures also appear on D5, p. 211 under "Specials" and on D5, pp. 210 and 212 (where U.S.$34,231,107 is rounded to U.S.$34 m. and £946,626 to £960,000).  

The total reserve for all the run-off contracts (on which 417/418 and 421 participated) produced by 

[1997] 357  L.R.L.R. Henderson v. Merrett Syndicate (Q.B. (Com. Ct.))    Cresswell, J. 

this exercise was U.S.$77,230,000 + £1,200,000: p. 379. 

Mr. Hart later prepared revised loadings, in an attempt to take account of the differences between 799 and the cedants: such as 799's more comprehensive reinsurance programme and the fact that all of the contracts save Universal and Provincial covered reinsurer insolvency: D6, pp. 377-378 and 440. (This was because it was only in the case of Universal and Provincial that the cover was for the excess of a net retained line as opposed to cover in respect of a net ultimate loss.) D6 p. 440 dated Apr. 29, 1985 records a discussion between Mr. Cassells and Mr. Hart - 

The loading on 1967-69 was too light (indeed (Mr. Hart) believed) that the Sturge run-off would be generally under reserved using his "799" projection) and the use of the pre-1966 1.53 factor would be more appropriate. Using 1.53 as a factor would increase the loading by. . .$6,961,538 of which 417's share was U.S.$2,610,577. See further p. 440 for Mr. Cassells' conclusion. 

The revised loadings produced increases in the figures for loading of £4.38 m. for 417 and £1 m. for 418: D6, pp. 379 and 380. 

In the event, in the light of this work, an additional U.S.$10 m. was added as a block reserve: U.S.$6 m. to 417 and U.S.$4 m. to 418. (Approximately the ratio of the totals for 418 and 417 on D6, p. 380). (See further D5/260). 

The methodology involved is summarized at pp. 377-379. The result of the loading was to produce an IBNR loading which represented approximately 100 per cent. of known outstanding claims: see p. 8 of Schedule A (J10/1). 

E&W carried out certain tests in respect of the compilation of the agency's run-off reserving schedules (CB202-212) at D6, pp. 382-443 and checked the 799 loadings which Mr. Hart had applied. 

Schedule D (J10/4) shows, firstly, the compilation of the RITC in respect of the run-off contracts for 1984 and succeeding years. Thus, for 1984 it shows the outstandings and IBNR figures, (which are also at D6, p. 373) and the special loadings of U.S.$6 m. on 417 and U.S.$4 m. on 418. The hading "Total per Merrett" contains the figures on D5, p. 212. 

The second half of Schedule D (beginning at p. 1 of 13) shows, in respect of each run-off contract, for the years 1984-1986 the cumulative paid claims, the outstandings, the incurred to syndicate figures, the IBNR (all 100 per cent. figures) and the IBNR as a percentage of outstandings, the claims being broken down into constituent elements. For 1984 the IBNR percentage is Mr. Hart's original percentage (i.e. before the exercise referred to above). 

Run-off reinsurance recoveries 

U.S.$6,721,000 was credited in the RITC calculations in respect of recoveries under the reinsurance contracts protecting the run-offs. The contracts are at CB213-1 (D6, p. 458) and CB214-1 (D6, p. 462). The method of reaching the U.S.$6,721,000 is explained at CB215-1 (D6, p. 468): the calculations are at D6, pp. 468-476. 

Accordingly the RITC calculation in respect of the run-off contracts written by 417 can be summarized as follows: 

                        $'000    £'000
Outstandings  19,792   17,062
Less Reinsurance
recoveries       (6,721)  (5,794)
                        13,071   11,268
IBNR
- Specific load (excl. Burdett)    14,208   12,248
- BurdettN/A960
- General load 6,000    5,172
                       20,208   18,380
               Total 29,648

Roll over 

In early 1984 the proceeds of the roll over policy were repatriated and held in an asbestosis-related claims suspense account and in this, and succeeding, years the asbestosis claims were paid from this account and the balance remaining off-set against the reinsurance to close premium. The revised balance on the account of £10.46 m. was carried forward: the calculations were checked by E&W against the agency's records: D5, p. 200.  

Time and distance policy 

Merretts took out a time and distance policy in respect of the 417 part of the 1982 account producing cover of U.S.$78 m. for a premium of U.S.$26.4 m. to cover losses settled after Jan. 1, 1985 in respect of the 1982 account. This produced a net benefit of U.S.$51.6 m./£44.5 m. (£67.24 m. minus £22.71 m.). The policy is at CB12-1 (D5, p. 262ff). Claims were payable from Feb. 15, 1992 with aggregate limits per year. 

E&W stipulated - see the note at D5, p. 254 - that the timing of recovery under any T&D policy should be such that - 

. . .at no time were the funds carried forward left in the Syndicate in respect of the 1982 accounts and prior (be) inadequate to meet the claims as and when they fell due. 

Merretts produced cash flow forecasts to demonstrate that the timing of recoveries would be sufficient to match the timing of payments of claims that 

[1997] 358  L.R.L.R. Henderson v. Merrett Syndicate (Q.B. (Com. Ct.))    Cresswell, J. 

were projected to be payable over the years ahead. These cashflow forecasts allowed for the acceleration of claims outflow because of the ACF. The criteria for allocating the payments are at D6, p. 476. The actual cashflows are D9, p. 973 and 974. 

A note as to the operation of the time and distance policy (Note 6) appear in the accounts: Accounts E1, p. 43. (The T&D was also referred to in the underwriter's report E1 p. 14.) 

SYNDICATE 418 

Outstandings 

The work done on outstandings was similar to that done in previous years: see schedule B2 (a) and (b) (J10/2). The audit programme is at D5, p. 28. Mr. Merrett's Red Book is at D5, pp. 53-81. (It included a reserve of U.S.$250,000 for asbestos). The outstanding claims summary is at D5, p. 51. Of the total RITC for 418 of £70.7 m., £25.4 m. was in respect of the run-offs (£14.4 m. outstanding, £13.2 m. loading, less £2.2 m. insurance recoveries). The effect of the reserves for the run-off contracts was to cause significant underwriting losses on 418. 

IBNR 

Merretts proposed - see Mr. Hulme's Schedule D5, p. 92/3 - a IBNR based, as before, on (1) Lloyd's minimum reserves, (2) major outstandings plus specific asbestos loading of U.S.$250,000 and (3) bad debt reserve (now of 10 per cent.) on reinsurance recoveries. The noting level was increased by Merretts from £20,000/U.S.$50,000 to £100,000/U.S.$100,000 for the 1980, 1981 and 1982 years of account: Mr. Merrett, par. 180. (The plaintiffs say additional IBNR was not calculated for unnoted, therefore unrecorded, claims resulting from this change in practice which led to a reduction of recorded outstanding claims. E&W accept that no additional IBNR was determined for unnoted claims resulting from the change in noting level at this year end. E&W say it was not necessary for the agency to do so because the existing methodology (outstandings + Lloyd's minimum percentages + bad debt reserves) provided adequate reserves.) The bad debt reserve was reduced from 25 per cent. to 10 per cent. An E&W document (D5 p. 47) dated May, 1985 calculated that the effect of the two changes was to decrease noted outstandings by £6.2 m. 

The make up of the RITC is set out at CB1/2, D5, p. 89 and tabulated at Schedule A p. 8 (J10/1) (Note that the figure of U.S.$37,424,000 in the first line if U.S.$44,824,000 (line 1 on D5, p. 89) minus U.S.$7,400,000 (line 4 on p. 89); and the line "Recoveries" is an amalgam of the third and fifth lines on page 89. "Others under the heading "Loading" means Lloyd's Audit Reserves.)  The reserving methodology for the run-off contracts in respect of Syndicate 418 was the same as in respect of Syndicate 417 (see above) Schedule D1 (J10/4) shows the figures for outstandings of U.S.$16,712,000, IBNR of U.S.$11,311,000 and additional IBNR of U.S.$4 m. 

The RITC calculations (D5/89-90) in respect of the run-off contracts written by 418 can be summarized as follows: 
                        $'000     £'000
Outstandings  16,712    14,407
Less reinsurance
recoveries      (2,596)   (2,238)
                        14,116    12,169
IBNR
- Specific load  11,311     9,752
- General load   4,000     3,448
                         15,311    13,200
Total                 29,427    25,369

The AU17 form is at D5 p. 37. 

The draft AU38(a) forms are at D5, pp. 34, 35 and 38. In the draft form an error occurred in the way in which credit was taken for the T&D. E&W credited the back years with 86 per cent. of the benefit of the T&D but did not debit those years with the corresponding proportion of the cost of the T&D. E&W accept that that was a mistake and therefore under-stated the deterioration in the back years by
approximately £19.5 m.  

Summary of Year 4 Reserves 

On the assumption that the asbestos outstandings increased to U.S.$21,514,709, the reserves in respect of asbestos for 417 amounted to £31.70 m. (U.S.$36.772 m.) (main account) and the reserves in respect of asbestos for 418 amounted to £215,517 (U.S.$250,000) (main account). 

The reserves in respect of pollution for 417 amounted to £12.994 m. (U.S.$15.073 m.) (main account). The reserves in respect of pollution for 418 were nil (main account).  

In relation to the run-off contracts, no precise breakdown of the reserves between asbestos and pollution for 418/417's share of the contracts at Dec. 31, 1984 or any subsequent year is available, as no apportionment of the contract deductible was made between the various types of claim. In addition, in 1984, no breakdown of the additional U.S.$10 m. load between asbestos, pollution or any other type of claim is available. The plaintiffs say that the reserves in respect of the run-off contracts (before reinsurance recoveries and the U.S.$10 m. additional load) amounted to £26.1 m. (U.S.$30.3 m.) asbestos and £9.9 m. (U.S.$11.5 m.) pollution. E&W say that the reserves in respect of the run-off 

[1997] 359  L.R.L.R. Henderson v. Merrett Syndicate (Q.B. (Com. Ct.))    Cresswell, J. 

contracts (before reinsurance recoveries and the U.S.$10 m. additional load) amounted to £21.73 m. (U.S.$25.20 m.) asbestos and £8.22 m. (U.S.$9.54 m.) pollution. 

     The reserves for asbestos 418/417 (main account) represented 18 per cent. of the RITC for 418/417 (before T&D and roll over); the reserves for pollution (418/417 main account) represented 7 per cent. of the RITC for 418/417 (before T&D and roll over); the total reserves for the run-off contracts (being £55.018 m.) represented 32 per cent. of the RITC for 418/417 (before T&D and roll over). 

418/417'S INTERNAL CONTROL PROCEDURES, SYSTEMS AND RESOURCES - YEAR 4 

Before setting out my conclusions as to the Year 4 RITC it is convenient to consider by way of background 418/417's internal control procedures, systems and resources. The contemporary documents show that as at year 4 there were serious deficiencies and that these deficiencies were known to Merretts and to E&W. 

1. At a meeting between Merretts and E&W on June 29, 1984 (I4E/213 to discuss the audit as at Dec. 31, 1984) it was agreed by Merretts that the current arrangement whereby E&W carried out an internal control procedure and even calculated the reinsurance to close figures for Merretts was totally unsatisfactory. There was as E&W noted a lack of understanding, and therefore commitment, within the agency as to the requirements of this work. 

2. The specific risk analysis dated November, 1984 (D5/137) recorded that 417's system for the recording of claims was the same as that for 799, though with the major difference that the fortunes of 799 were closely followed and monitored by Mr. Jackson and Mr. Hart whereas there was no one taking such interest and responsibility in 417. This reflected a fundamental deficiency so far as 418/417 was concerned. Mr. Hart was given certain responsibilities in relation to 417's RITC and Mr. Randall, when he joined Merretts, was to take an overview. But subsequent documents reflect continuing deficiencies as below. Further neither Mr. Hart nor Mr. Randall was an underwriter and what was needed, but lacking, was detailed involvement by Mr. Merrett. 

3. The notes of the RITC meeting on Mar. 28, 1985 record that it was again necessary for E&W to carry out a detailed review of asbestosis positions on years, layers and insureds as Merretts were unequipped to respond on this matter (D5/251(1)). A memorandum by Mr. Hill recorded that: 

. . .a considerable amount of work has been done (by us!) to establish realistic data for known claims
 (D6/278). 

4. Mr. Randall's memorandum of May 15, 1985 (G/56) which refers to the problems of the run-off contracts as "the shattering news of the last 10 days" states that there was an urgent need to formalize reporting arrangements within the group. The "shattering news" demonstrated that the systems operated by Merretts for the recording and control of claims were seriously inadequate. E&W should have made recommendations without delay to Merretts as to improvements to systems and controls. I find that a report summarizing these recommendations (and approved by E&W) should have been sent to every members' agent having Names participating on 418/417 no later than May 15, 1985. (See instructions for guidance of Lloyd's auditors at Dec. 31, 1984 (J6/491 cl. 2Ai)b)). Mr. McNamara accepted that there was a case for such a letter (Day 42/103).  

5. E&W's management letter of July 19, 1985 (G/70) which informed Merretts of certain matters which had come to E&W's attention during the course of the audit as at Dec. 31, 1984 recorded inter alia the
following:  

3. REINSURANCE TO CLOSE 

3.1 We are concerned at the lack of specific designated responsibility for the claims management for syndicate 417. Such management should include responsibility for the completeness and accuracy of outstanding claims records (both gross and net) and the establishment of adequate statistics from which IBNR loadings can be determined. We consider that the establishment of adequate management responsibility for this syndicate is now imperative given the nature of certain of the business it has written and the difficulties that have been encountered. 

3.2 At the present time, certain of the outstanding claims and related reinsurance recoveries of syndicate  17 are dealt with by syndicate 799 personnel. However, we have found the quality and completeness of the data concerned for syndicate 417 to be of an inadequate standard. It has been necessary for our audit staff to allocate a considerable amount of time to establishing the outstanding claims and potential reinsurance recoveries to be reflected in determining the reinsurance to close. Our work has indicated a number of errors and inaccuracies in the records maintained and the assumptions made, and in our view this is primarily due to this lack of appropriate management responsibility. We also consider that you should review the current staffing arrangements for controlling the outstanding claims records to ensure that adequate resources at the right level of seniority are allocated. (Emphasis added.) 

[1997] 360  L.R.L.R. Henderson v. Merrett Syndicate (Q.B. (Com. Ct.))    Cresswell, J. 

It is extraordinary that this letter did not address in detail the problems that had emerged in relation to the run-off contracts. 

6. The notes of a meeting between Mr. Hill of E&W and Mr. Randall and Mr. McCann of Merretts on Aug. 30, 1985 recorded (D7/290): 

. . .it was commented upon by both Ken Randall and Peter McCann that, in the past, the accounting department had had little or no involvement in the calculation of reinsurances to close; this had been left to the relevant underwriters and their support staff supplemented by assistance from Ernst & Whinney which had varied from a review function to a comprehensive calculation and documentation function. . .Syndicate 417 has always been recognised as a problem syndicate and has always resulted in a heavy involvement by Ernst & Whinney in preparing the calculations of the reinsurance to close; this syndicate was materially adversely affected by asbestosis and had, for the last few years, shown substantial deterioration at the closing of each successive year of account. 

7. It is clear from documents in subsequent years that Merretts' failed to address adequately the deficiencies referred to above. In their management letter dated Oct. 6, 1986 (G/191) E&W endorsed their previous recommendation that an appropriate person should be appointed to manage the affairs of 418/417. E&W noted that while there had been some improvement during the year, they did not consider that the resources committed were yet adequate to fulfil the important management responsibility in respect of the reinsurance to close. In a memorandum to the board of MUAM dated Oct. 22, 1986 (G/198) to which E&W's letter of Oct. 6, 1986 was attached, Mr. Randall wrote: 

. . .Members of the Board will be aware of the increase over the last year in staff numbers in the accounts area. Members may not appreciate the archaic systems which we have been trying to replace. For example, until 1985 the group maintained handwritten general ledgers which must have made us almost unique as an organisation responsible for turnover running into hundreds of millions. When I joined Merretts I was shocked that so little financial and management information was available. . .Aside from the accounts department itself, I remain very concerned that the syndicate staff do not appreciate the importance of the year end and the timetables; I have now witnessed two year ends when in some areas tasks are not given the priority they deserve.. . .In the case of syndicate 417 we have yet to identify the person responsible for co-ordinating the year end work from an underwriting point of view. We simply have to sharpen up in these areas; the Board must take its responsibilities seriously and give me the support (actions not words!) that is needed. . . 

On June 23, 1987 (G/235) Mr. Randall in a memorandum to the directors of Merrett Holdings Plc on the subject of claims and reinsurance functions referred to the fact that at the last meeting of the board he had outlined his concerns about the poor quality of the records and the weaknesses in internal organization for dealing with outstanding claims and reinsurance recoveries. Mr. Randall had concluded that special attention was needed to deal with the present and continuing problems of 418/417 and that responsibility should rest fully with the underwriter for ensuring that all aspects of the claims and reinsurance functions were operating properly. Mr. Randall added: 

The problems for syndicates 417, 418 and 799 may be summarised as follows: 

i) The figures are now huge. . . 

ii) The outstanding claims go back many years and there have been numerous changes in personnel over the years. 

iii) The records are poor and in some cases non-existent. 

iv) The syndicates have grown to a size where individuals or groups have specialised and there is no-one co-ordinating the problems for the syndicates as a whole. In those areas where the syndicate no longer underwrites a particular class of business, there is often no-one willing to take responsibility for the run-off.  

v) There have been massive problems in dealing with asbestos and environmental claims with the result that responsibility for monitoring outstanding claims on syndicates 417 and 799 has been sadly neglected and the staff now assigned to maintain the records are far too junior and inexperienced. . . 

Mr. Randall proposed the establishment of a new department, the "Claims and Reinsurance Administration Department" to assume responsibility for the maintenance of outstanding claims information and the collection of reinsurance recoveries. 

YEAR 4 RITC - CONCLUSIONS 

As to Merretts' and E&W's knowledge of asbestos and pollution problems and uncertainties as at June 4, 1985 see above. 

 In year 4, 418/417 was subject to fundamental uncertainties as to the future development of (i) asbestos bodily injury claims (ii) asbestos property damage claims and (iii) pollution claims, not only in respect of its own book going back to 1953 but also in respect of the books of the 10 cedants (whose years of account reinsured are set out at Table 2 post). Thus the uncertainties that had 

[1997] 361  L.R.L.R. Henderson v. Merrett Syndicate (Q.B. (Com. Ct.))    Cresswell, J. 

obtained in previous years had very substantially increased. The uncertainties were compounded by the fact that Merretts had inadequate information in relation to the 10 run-off contracts to justify the closure of year 4. Further E&W failed to require Merretts to obtain the necessary information. 

In the estimation of the reinsurance to close regard should be had to the accuracy of previous estimates in considering whether it was possible to ensure that the reinsurance to close was within a zone of reasonableness. Further as Mr. Attwood pointed out asbestosis and environmental pollution were on a continuum where at one point in time one approach to reserving may have been appropriate but at a later point in time it was necessary to have regard to subsequent changes and adopt a different approach. 

As to asbestos claims 418/417 main account, the incurred claims as at Dec. 31, 1983 amounted to U.S.$16.88 m. The corresponding figure as at Dec. 31, 1984 was U.S.$27.072 m. (see Table 6). It is to be noted that within a year the incurred claims (U.S. $27.072 m.) were less than U.S.$3 m. below 418/417's estimate as at Dec. 31, 1983 of all claims to ultimate (U.S.$29.93 m.). It should have been apparent to both Merretts and E&W that the methodology adopted in year 3 for reserving for these claims was inaccurate to an unacceptable degree. 

Merretts 

Given Merretts' knowledge of the fundamental uncertainties referred to above and of the additional uncertainties reflected in the detailed points as to Merretts set out below, I find that Merretts and in particular Mr. Merrett knew that a reinsurance to close figure could not be arrived at with a reasonable degree of accuracy/within a zone of reasonableness, and that Merretts should accordingly have left the year open. Having carefully considered all the evidence and formed an impression of the witnesses, I find that Merretts and in particular Mr. Merrett, while they knew that a reinsurance to close figure could not be arrived at with a reasonable degree of accuracy because of the extent of the uncertainties known to them, were nevertheless determined to close the year for commercial reasons. The commercial reasons included the commercial disadvantages of not closing and the perceived stigma attached to leaving the year open. The commercial considerations were seen to be more important than the principle of equity between Names. Further had
 Merretts declined to leave the year open E&W
 should have disclaimed an opinion on the grounds
 of fundamental uncertainty. Had they done so I find
 that on a balance of probabilities Merretts would
 have had no alternative but to leave the year open. Mr. Neil maintained that it was impossible toestablish an IBNR within a reasonable degree of accuracy for those syndicates with substantial exposure to asbestos-related claims over a large number of years. This fundamental criticism applied particularly to 418/417 because it was one of the heaviest U.S. casualty syndicates in Lloyd's. In making this criticism Mr. Neil drew attention to the size and scale of 418/417's account, the number of years over which the business was written (1953 onwards), the type of business written, the number of claims, the source of those claims and the difficulty of identifying how many claimants there would be in the future, the number of years which would see claims in the future, and the amount that each claimant might recover. Mr. Neil made it clear that the strength of his criticism increased from year to year. By year 4 10 run-off contracts formed a constituent part of the RITC. I find that Mr. Neil's fundamental criticism was valid in year 4.  

I was not referred to any document which explained to the board how the RITC had been calculated in years 4, 5 or 6. The absence of such material is profoundly unsatisfactory given the responsibilities of the managing agents. 

The documents do not suggest that Mr. Merrett himself spent any more than a very limited amount of
time on the year 4 RITC.  

E&W 

As to E&W I accept the broad criticisms in relation to year 4 in Mr. Attwood's reports, as refined in his evidence. E&W should have realized that a reinsurance to close figure could not be arrived at within a zone of reasonableness. Given all the uncertainties referred to above and the detailed points set out below E&W should have disclaimed an opinion on the grounds of fundamental uncertainty. 

It is extraordinary that there was apparently no further formal RITC meeting between Merretts and E&W after the meeting on Mar. 28, 1985 (which preceded "the shattering news" G/56). Mr. McNamara was involved with several other audits at the same time and had particular problems with Outhwaite 317/661. 

The "shattering news" demonstrated that the systems operated by Merretts for the recording and control of claims were seriously inadequate. E&W should have made recommendations without delay to Merretts as to improvements to systems and controls. A report summarizing these recommendations (and approved by E&W) should have been sent to every members' agent having names participating on 418/417 no later than May 15, 1985. (See Instructions for Guidance of Lloyd's Auditors at Dec. 31, 1984 (J6/491 cl. 2A i) b)). 

[1997] 362  L.R.L.R. Henderson v. Merrett Syndicate (Q.B. (Com. Ct.))    Cresswell, J. 

I turn to consider some detailed points in relation to (A) Merretts and (B) E&W. Although it is necessary to refer at times to E&W in (A) and Merretts in (B) I have of course given separate consideration to their respective cases. 

(A) Merretts 

Merretts' own book 

Asbestos 

The marked deterioration in outstandings is referred to above. The scale of the deterioration demonstrated that the methodology employed in year 3 could not be relied upon to ensure a reinsurance to close within a zone of reasonableness. 

The notes of the RITC meeting on Mar. 28, 1985 (D5/251(1)) recorded that the principal observation was a very marked deterioration in reinsurance brought forward much of which seemed to be a response to asbestosis and other latent diseases. Mr. Merrett is recorded as having - 

. . .expressed surprise that the AWP was still finding so many new advices, with indications that there was more to come. 

The total for asbestosis outstandings was up from U.S.$16 m. at December, 1983 to U.S.$22 m. at December, 1984. Despite the inclusion in the IBNR at December, 1983 of U.S.$6 m. for "fill-in" claims and U.S.$6 m. for new advices these now appeared inadequate. 

Mr. Cassells' note of May 5, 1985 (D6/286) stated that - 

. . .future deterioration of reinsurances where exposure exists but no notification has been received is quite likely to be a significant area of deterioration in the near future (Karen Ruby suggests American domestic insurance companies especially). The large payments now being made to major producers will probably prompt a number of new notifications by reinsureds. 

Mr. McNamara's notes on 417 reinsurance to close (D5/256) recorded that it had been necessary to make a further provision for insurance policies for which no claim had been made or notified. This area presented some difficulty as in the last year there had been no less than U.S.$4 m. of new advices on policies for which there was no provision whatsoever in previous years. Mr. McNamara's notes recognized that the provisions made in respect of asbestos - 

. . ."may well prove to be inadequate" and recorded that in 1984 there was a substantial increase in notified losses and not only that, the number of sufferers who are making claims has risen from 500 per month to 700 per month. 

The notes concluded: 

In the last two years noted outstandings have more than doubled and hence a provision of only 60% on outstandings at this time, must be regarded as the bare minimum and we consider therefore that the potential over-reserving in respect of EPA has to be considered in the context of potential under-reserving in respect of asbestos losses. 

Asbestos property damage 

Mr. McNamara's notes on 417 reinsurance to close (D5/256) referred to uncertainty over new advices relating not to bodily injury claims but to the potential for property damage claims, particularly claims against U.S. Gypsum and National Gypsum. Mr. McNamara recorded that at this time there was great uncertainty as to the liability of insurers in respect of such claims. 

Pollution 

Mr. Cassells' note dated Mar. 26, 1985 (D6/593) on EPA stated: 

(i) Only Durex and Shell Oil are reserved all others are unknown. 

(ii) All are USA and no case law is yet available. Attorneys have only been working on these for a few months and no estimates are available.  

(iii) Pollution exclusion clauses in policies are invalid as they specify "sudden+accidental"
pollution. 

(iv) Liability will depend on insured's position [owner operator, generator of rubbish, haulier] and the extent of their knowledge of the circumstances. Over 100 insureds are involved on certain cases and many go back over a long period. . . 

(v) The EPA may pursue punitive damages awards, but these are uninsurable in many states and are in
any case covered by exclusion clauses.  

(vi) It is believed by attorneys that liability will be determined as joint and several. . . 

(vii) The uncertainty in this area is similar to that surrounding asbestosis in 1977. 

Conclusion The test has highlighted the following for discussion with the underwriter. . .the list of EPA possible claims and their likely size. . . 

The notes of the RITC meeting on Mar. 28, 1985 (D5/251(1)-(2)) recorded that provision had been set up for the first time in respect of Shell, Rocky Mountain. As with most syndicates, no previous reserve had been established specifically because of a lack of market information. Mr. Cassells (D5/235) recorded: 

[1997] 363  L.R.L.R. Henderson v. Merrett Syndicate (Q.B. (Com. Ct.))    Cresswell, J. 

As a result of audit meetings it was felt that reserves on Shell may be inadequate/unrealistic, and an additional loading of $2.5m has been added. . . 

OTHER EPA: Highly subjective area due to lack of info. Suggested scenario at moment is 2 further major losses of up to 50% size of Shell loss say $6.5m. 

Mr. McNamara's notes on 417 reinsurance to close (D5/258) recorded: 

1984 has seen considerable alarm being created about environmental protection claims. The Shell claim in Rocky Mountain is but the first of many examples which have arisen and there are other cases being talked about including Stringfellow, Times Beach, Shell Netherlands, Boeing, Union Carbide and no doubt many others. Merretts have taken the view that their syndicate, which has written general liability risks back over many years, with very little reinsurance protection is particularly exposed to other pollution seepage claims, particularly if they are to be settled on an exposure basis. As it stands at the moment, the Keene decision in the United States courts is the prevailing legal interpretation of liability and it therefore seems appropriate to follow its premise at this time. There is also the continuing attitude in the United States that they are insurers of deep pockets and therefore they should be made to pay on whatever basis generates the greatest amounts of money for insureds and sufferers. 

Mr. Ayliffe accepted in cross-examination that by at least the closure of the 1982 account as at Dec. 31, 1984 EPA was perceived as being potentially very serious indeed. 

The run-off contracts 

(a) The plaintiffs' case 

The plaintiffs' case is that the reserves set for the run-off contracts and, in particular, the IBNR reserve for future claims on those contracts was arbitrary and without rational or justifiable basis. The plaintiffs submit that there was no justification for the use of the 799 loadings. Merretts adopted the 799 loadings for the run-off contracts in the absence of any other approach which they could adopt, not because it was an acceptable and justifiable way to proceed. E&W failed to seek or obtain the necessary audit evidence so at to be satisfied of the validity of Merretts' approach. In summary the plaintiffs' reasons for submitting that there was no justification for the use of 799 loadings are as follows: 

(1) The 799 loadings were themselves set by Mr. Jackson on the basis of factors which were unique to the particular circumstances of Syndicate 799. 
(2) Merretts had insufficient (if any) knowledge of the cedants' books of business to conclude that there was the high degree of similarity in terms of lines, layers, years of account written, outwards reinsurance protection available, original assureds and reinsureds, split of business between direct and reinsurance, premium income by year of account and split by currency which was necessary before a comparison with the affairs of another syndicate could justifiably be made. E&W neither sought nor obtained audit evidence so as to satisfy themselves that a high degree of similarity between 799's book of business and the run-off cedants' books of business existed. 

  (3) The approach adopted of applying a percentage to the amount of known outstandings on each of the run-off contracts meant that the validity of the IBNR reserve was a function of the validity of the reserve for known outstandings in the sense that if the known outstandings figure was wrong or understated, the resulting IBNR reserve would similarly be wrong or too low. E&W took no steps to audit the figures coming forward from the run-off cedants as to the level of their known outstandings despite the fact that the figures received from the cedants were, in the main, unaudited and despite the fact that Merretts knew that some of the cedants (e.g. Mr. Dolling-Baker), were having great difficulty in processing the number of new claims which were being presented to them. 

The plaintiffs submit that Merretts should have undertaken a detailed investigation so as to obtain full, complete and proper information from each of the run-off cedants falling within the categories of information set out in par. 7.4.2 of Mr. Attwood's report and the E&W should have sought audit evidence that Merretts had done this. The plaintiffs further submit that the terms on which the run-off contracts had been written (unlimited in amount and in temporal duration) coupled with the lack of significant outwards reinsurance protection necessitated the taking of such detailed and extensive enquiries before any reserve could properly be set. This is particularly the case in circumstances where the net outstandings plus IBNR in respect of the run-off account amounted to £55.018 m. 

(b) The defendants' case 

Merretts reject the criticisms advanced by the plaintiffs and maintain that the approach they adopted was entirely appropriate, inter alia, for the following reasons. 

Merretts accept that the use of the 799 factors was partly pragmatic. Syndicate 799 factors were immediately available. This was also a rational and reasonable decision. The first question was whether in principle one could use any other comparator to which the answer - in principle - must be that it 

[1997] 364  L.R.L.R. Henderson v. Merrett Syndicate (Q.B. (Com. Ct.))    Cresswell, J. 

was acceptable. Syndicate 799 had a heavily exposed U.S. liability account which was severely impacted by asbestos and pollution claims. It was recognized as having a very strong reinsurance programme. Adjustments were made to allow for this. Reference was made to the differences between the various syndicate accounts and in particular to the so-called "golden years" of 799 but these were years that did not apply to the years used as comparators for the run-off contracts. The criticisms are disingenuous. Any syndicate with significant exposure to U.S. liability business was going to be substantially afflicted with asbestos and pollution claims. Taking, as an analogue, a syndicate known to be one of the market leaders in such business with perhaps the best knowledge of the problem in the market was a rational approach. It was rational and sensible, in the same way as adopting market statistics published by the RAA or adopting and adapting Lloyd's audit minima derived from market sources. None of these is perfect but each is an acceptable method for estimating that which cannot be done with scientific precision. 

E&W reject the criticisms advanced by the plaintiffs and maintain that the approach they adopted was appropriate, inter alia, for the following reasons. 

E&W were faced with a stark question: namely whether or not Merretts' approach was one which they could regard as reasonable or whether, alternatively, they were bound to refuse to give an unqualified report. In E&W's submission they could, acting competently, think that this was a reasonable approach in admittedly difficult circumstances. The message which Merretts were giving to E&W was that 799 was an appropriate analogue and, indeed, erred on the side of caution since 799 was a long tail, non-marine syndicate (going back to the 1950s) which tended to write more heavily exposed classes of U.S. casualty business than most others in the market and had done so for a long time and thus had an exposure to latent disease at least as high as that of the cedants (taken as a whole). Further, whether or not 799 was an appropriate analogue, was a question in relation to which E&W would necessarily have to be guided by Merretts. E&W could also properly take the view that 799 was itself properly reserved. 

As to Mr. Attwood's contention as set out in par. 7.4.2 of his report, this suggestion sets the high water mark of theorizing over practicality. The universal practice of the market at the time was to assess an RITC covering reinsurance liabilities on the footing of figures for incurreds provided by cedants who owed their reinsurers a duty of the utmost good faith in reporting and had no reason to understate outstandings. There are many examples of writings in relation to which an RITC has to be, andhabitually was, fixed on the basis of reported figures, e.g. quota share contracts; excess of loss reinsurancecontracts or other treaty business which may also have been written over a period of years; risks writtenunder binding authorities; and risks written by foreign insurers fronting for Lloyd's in countries where Lloyd's was not an admitted insurer. 

It was, by the standards at the time, perfectly competent for E&W not to refuse to give a true and fair opinion because full scale discovery and audit of cedants had not been carried out. 

Even if there was a books and records clause (which there was not in the case of every contract) it would not have been feasible for such an audit to be carried out by the cedants' auditors and E&W at the same time. 

Further there is no evidence that, even if E&W had carried out a full scale audit of the cedants, that would have affected the decision to close. The probability is the opposite as the events of the two following years show. 

(c) Analysis and conclusions 

(i) The correct approach 

It is elementary that the writing of 11 run-off contracts, exposed to U.S. casualty risks and in particular to asbestos-related and pollution claims, (10 of which formed a constituent part of 1982 account) served to increase very substantially, but to an extent which cannot be expressed mathematically, the uncertainties and difficulties attaching to any subsequent RITC of which the run-off contracts formed a considerable part - the more so as the run-off contracts were unlimited in time and amount and were not protected by adequate reinsurance.  

I find that the correct approach to reserving for the run-off contracts was stated by Mrs. Rowe. I accept Mrs. Rowe's evidence (Day 27/201-202) that if she had been concerned with a syndicate which had written run-off contracts: 

(I) would have wanted to see the same materials for each run-off contract as I had for the syndicate itself. . .In other words for each run-off contract. . .if I were to have any comfort at all in closing a syndicate with a run-off contract in it. I would want to be able to do the same exercise for each run-off contract as I did for my own syndicate.  

I prefer Mrs. Rowe's evidence as above to that of Mr. Rome (and to that of Mr. Neil to the extent that
his evidence conflicts with the above).  

Mr. Attwood's evidence as to auditors' duties was to similar effect. I accept Mr. Attwood's evidence (his
report par. 7.4.2) that he would have  

[1997] 365  L.R.L.R. Henderson v. Merrett Syndicate (Q.B. (Com. Ct.))    Cresswell, J. 

expected an auditor to have required the managing agents to obtain the following information on each of the run-off contracts, for determining an RITC: 

(a) the particular circumstances of the reassured syndicates, categories of business written, type of policies written and identification of problem risks needing attention; 

(b) an assessment of completeness of the syndicate records and ability to identify policies and exposures which were likely to be the subject of future claims; 

(c) identification of direct and reinsurance policies affected by latent disease, pollution and other special situations, including exposure limits; 

(d) identification of reinsurance cover available to the syndicates and assessment of recovery prospects; 

(e) assurance that historical development patterns and data had been properly compiled and were reliable for use by Merretts; 

(f) identification of maximum and likely losses on special claims; 

(g) based on the above, a conclusion as to whether the information gathered was sufficiently complete to ascertain the underlying level of exposures as a base from which to estimate the IBNR; and 

(h) determination of appropriate IBNR given specific circumstances of the syndicate's book of
 business. 

As Mr. Attwood said if the above information could not be obtained, it is difficult to see how a proper evaluation of future liabilities could be made. 

Mr. McNamara accepted that in year 4 the audit comprised the affairs not of one syndicate but of 11 syndicates. In a letter dated Dec. 12, 1990 Mr. McNamara listed the data that would have been required to support a reinsurance to close the 1985 underwriting account. He distinguished between two tiers of data (a) underlying information prepared in respect of the historical data of syndicate 418/417 and the cedant syndicates and (b) projections for each syndicate based on the underlying data. Significantly his letter drew no distinction between the information required in respect of the historical data of syndicate 418/417 and the cedant syndicates. As to (a) his letter stated: 

The first stage is to generate adequate underlying data or sufficient background information so as to demonstrate that key issues have been addressed. The matters which we believe should be considered/recorded are as follows: 

(i) The premium income by underwriting year of each syndicate with a split, if  possible, between short tail and long tail business. 

(ii) The reinsurance programmes for the third party liability and general programmes including identification of number of reinstatements and extent of programme exhaustion. 

(iii) The impact of absence of aggregate extension clauses in the reinsurance programmes. 

(iv) A review of the security attaching to the reinsurance programme with the identification of 

(a) security at Lloyd's or Best's 1"A" rated companies. 

(b) insolvent (or equivalent) insurers. 

(v) An appraisal of the procedures adopted by the cedants to record gross outstanding claims and
 associated reinsurance recoveries. 

(vi) Development by calendar year of incurred losses on; 

(a) Asbestos bodily injury. 

(b) Asbestos property damage. 

(c) Pollution. 

(d) DES. 

(vii) Identification of other major losses causing deterioration (e.g. FELA). 

(viii) Development statistics by underwriting year excluding special losses identified in (vi) and (vii) above. 

(ix) A listing of maximum possible exposure on a policy by policy basis for known asbestos and pollution losses. 

(x) The impact if any, of inward and outward reinstatement premium costs. 

(xi) The impact of combined single limits for asbestos claims (mainly post-1966). 

(xii) The impact of pollution exclusion clauses being effective from 1970. 

(xiii) Claims, settlements, statistics of recent years.. . . 

Although Mr. McNamara said in evidence that his letter was designed to "torpedo" any subsequent closure of the 1985 year, I consider that Mr. McNamara's letter provides material support for Mr. Attwood's evidence referred to above. In particular it draws no distinction between the information required in relation to 418/417's own book and the information required from the cedants. (For Mr. Hart's comments dated Jan 25, 1993 on the letter dated Dec. 18, 1990 see I4G/296.) 

In subsequent years Merretts and E&W recognized the need for considerably more information 

[1997] 366  L.R.L.R. Henderson v. Merrett Syndicate (Q.B. (Com. Ct.))    Cresswell, J. 

than they had in year 4. In addition to Mr. McNamara's letter of Dec. 18, 1990 I refer to the following. As to the questionnaire to cedants in year 5 see below. A document dated Sept. 7, 1987 (D11/790) from Merretts' files records that Merretts requested the cedants to report every six months on paid and outstanding claims, both gross and net of reinsurance recoveries, breaking the information down over years of account. It continues: 

. . .a number of audits are being carried out at our instigation to test the accuracy of the information provided to us against the records of the reinsured company or syndicate. It is our intention that in due course, all contracts will be the subject of regular review of this type. 

See also G/215. 

Further the audit brief provides support for Mr. Attwood's evidence. Paragraph 79 stated: 

Other matters the auditor might consider as a part of the audit of the reinsurance to close include the following: 

(a) The syndicate may have reinsured the run-off of other syndicates or companies and the auditor must satisfy himself that due account has been taken of the liabilities which are likely to arise under such contracts. This evidence will usually take a similar form to that relating to the syndicate's own business. . .(emphasis added). 

Although the audit brief is based on the Lloyd's Byelaws and the law as at Jan. 1, 1986 I find that it reflected the approach that ought properly to have been followed as at year 4. (See in this connection Mr. Attwood's evidence, E&W Insight No. 32 June 1986 and Mr. McNamara (Day 43/42/20 et seq.).) As to Mr. Attwood's and Mr. Sharp's involvement with the preparation of the audit brief see above. 

Although the evidence of Mr. Attwood and several of the materials referred to above are directed to the duties of auditors, they serve to confirm Mrs. Rowe's evidence as set out above. 

I find that in all the circumstances a reasonably competent Lloyd's managing agent specializing in the writing of long tail risks would have recognized in year 4 that a reinsurance to close within a zone of reasonableness could not be ensured or even contemplated without evidence as to the run-off contracts similar in form to that relating to 418/417's own book of business. The relevant circumstances include inter alia the fact that by this time 10 run-off contracts formed a constituent part of the 1982 account, the extent of the exposures (including asbestos and pollution risks) and the amount of the net outstandings referable to the run-off account (£23.437 m./U.S.$27.187 m. - Compare the outstandings in respect of the run-off contracts in year 1 (U.S.$0.8 m.); year 2 (U.S.$1.88 m.); and year 3 (U.S.$4.6 m.). The defendants say that it would have been difficult and/or impracticable to obtain this level of information but the need for this information was the result of the decision to write these particular run-off contracts. Whatever may have been the practice of the market in relation to reserving for other reinsurance liabilities, the nature and scale of these particular contracts required the approach referred to above. 

It follows that Merretts had inadequate information in relation to the run-off contracts to justify the closure of year 4. It is not clear on the evidence that they could have obtained the necessary information but had they done so this would have served to underline the extent of the uncertainties referred to above and to confirm that it was not possible to arrive at a RITC within a zone of reasonableness.  

(ii) The investigation undertaken by Merretts and the nature of the information obtained 

After "the shattering news" Mr. Randall and Mr. Hart carried out an investigation in considerable haste. Mr. Randall and Mr. Hart were not underwriters and I find that the investigation lacked sufficient input from an underwriter.  

I refer to the documents resulting from the investigation carried out by Mr. Randall and Mr. Hart
which show the limited extent of the information obtained. I should not be taken to accept that the
investigation was as extensive as suggested by Mr. Randall and Mr. Hart in their witness statements. The materials obtained and the documents produced by them speak for themselves. (Mr. Randall said that he had not seen the placing files by March, 1987.) Mr. Randall and Mr. Hart did not produce a formal report for the Merretts board following the investigation, despite the obvious significance of the matters under investigation.  

Mr. Randall said that one of the most extraordinary features of the run-off contracts was the reluctance of the cedants to put themselves to trouble to supply Merretts with information right up to 1991. It proved impossible to establish a database in respect of the cedants on the same basis as for Merretts own book.  

For examples of uncertainties in relation to the cedants as a result of lack of information see (iv) below. 

(iii) Uncertainties evidenced by what the cedants were saying 

Concerns expressed by at least three of the cedants underlined the fundamental uncertainties. 

1. Mr. Merrett accepted that the Fireman's Fund/Sturge contract was the largest and most risky contract of all. In a letter dated July 16, 1982 (D6/444-E&W audit file for year 4) Mr. Rokeby-Johnson of R. W. Sturge & Co. wrote:  

[1997] 367  L.R.L.R. Henderson v. Merrett Syndicate (Q.B. (Com. Ct.))    Cresswell, J. 

Secondly I would like to remind you of the content of a Lloyd's Underwriter's book of business which makes it impossible to quantify the final outcome of these huge and complex claims with any degree of accuracy. Not only were we involved in the direct writing of casualty business from the United States and, indeed, worldwide, but we also had very considerable commitments in the writing of casualty treaties not only to original and excess writers but also to professional re-insurers like the General Re-insurance Corpn., finally we have an involvement in the reinsurance arrangements of a few Lloyd's Syndicates and London Companies. 

Asbestosis 

The claims arising from the ingestion of asbestos fibres by all those involved in handling this material seem likely to be the biggest claim ever to confront the insurance industry not only in the United States but also throughout the world. Various attempts have been made to quantify the potential final sum of all payments and some very large figures have emerged. Over 7,000 people actually die each year in the United States from asbestosis and it is expected that this figure will soon increase to 9,000 or 10,000 - these deaths and disablements will continue to be reported for the next decade or more and if it is reasonable to suggest that the average settlement of each claim is of the order of $100,000 including costs and expenses and that the number of serious claimants may reach 100,000 or more the final claim would be $10 billion at least. On these figures it is not impossible to forecast the Sturge gross involvement at $40,000,000 - forecast the Sturge gross involvement at $40,000,000-$50,000,000. (emphasis added). 

2. As to Dolling-Baker a Winchester Bowring memorandum dated Apr. 2, 1985 (C13/214) records: 

. . .Dolling-Baker telephoned to say that he will be getting the last figures for the above [run-off contract] this week. . .and have unaudited figures available for John Emney on 12th April. He also said that he has taken on a retired former broker accounts man for three months to review his Asbestosis figures. Until this review is complete he is retaining his end November reserves but expects those to rise between 50 and 100%.. . . 

A memorandum dated Apr. 9, 1985 bearing Mr. Dolling-Baker's initials (C13/227) states: 

The attached schedule is the total of the incurred Asbestosis Claims recorded at 30.11.84. Advices are constantly being received resulting in the amount at 31.12.84, obviously being higher. I am not prepared to estimate the approximate amount at 31.12.84. 

In a letter from Mr. Dolling-Baker to Winchester Bowring dated Apr. 15, 1985 (C13/247) Mr. Dolling-Baker wrote: 

I appreciate your comment that Dick Outhwaite is not looking for "any extra to reserve" but I must repeat my Friday's statement, the Asbestosis amounts are at 30.11.84 and an inspired guess could put at least another $1,000,000 on this total to up-date it to 31.12.84. Please don't forget I have not suggested, nor can I, what the ultimate loss will be. (Emphasis added.) 

This letter was scratched by Merretts on Apr. 29, 1985. 

In a letter from Mr. Dolling-Baker to Winchester Bowring dated Apr. 29, 1985 (C13/250) Mr. Dolling-Baker wrote: 

In addition to the information in my letter of the 15th April. . .I am given to understand as at Friday 26th April there is something in the region of another 250 claims files for one broker due to be shown at my claims box. It is intimated a large proportion of those could be for the first time. Obviously the amounts involved have yet to be quantified. 

 This letter was scratched by Mr. Emney on behalf of Merretts with the annotation "please advise amounts involved as soon as you (can)". 

  3. In a letter dated Jan. 31, 1989 (see I5/241) Mr. Toomey wrote to Mr. Randall as follows: 

 . . .In view of the outcome of IBNR projections prior to year-end 1981 we felt unable to calculate an IBNR to infinity for these Underwriting years 1966 to 1970 as at December 31st, 1981; we therefore wished to cap the run-off of these Underwriting years by way of aggregate reinsurance, in excess of the known outstandings, at a known and final cost. In fact, some years after the placing, you came to the box in person and asked me to give you an "IBNR to infinity". I then explained to you that I didn't know how to, and that was the very reason why we had decided to cease writing Casualty business some 20 years ago and then paid the premium hereon to end the uncertainty over the 1966 to 1970 years during which our Casualty writings ceased. 

It is to be noted that this letter was written in 1989. The probability is that the reference to Mr. Randall visiting the box in person was a reference to the investigation carried out in April, 1985. Although this letter was written well after the closure of year 4 it must have been obvious to a reasonably competent Lloyd's managing agent (and to a reasonably competent Lloyd's panel/recognized auditor) in early 1985 that many if not all of the cedants 

[1997] 368  L.R.L.R. Henderson v. Merrett Syndicate (Q.B. (Com. Ct.))    Cresswell, J. 

had entered into the run-off contracts broadly for the reasons expressed by Mr. Toomey and in particular because they wished to put an end to the uncertainties involved in reserving accounts exposed to latent disease claims. 

In par. 91 of his report Mr. Rome stated that the development of the run-off market 1979 to 1983 resulted from a number of factors including growing concerns in the market about long tail liability risks, particularly in respect of latent disease claims. (See also B. F. Caudle & Others v. Sharp [1995] .R.L.R.
 80 at p. 86 par. 10.18). 

(iv) Some examples of uncertainties in relation to the cedants as a result of lack of information. 

I refer to my findings set out above as to the nature and extent of information which should have been obtained from the cedants, particularly by reference to par. 7.4.2 of Mr. Attwood's report. I set out below some examples of uncertainties in relation to the cedants as a result of lack of information. 

1. No information as to TBAs was obtained from the cedants (see for example Mr. Sharp's evidence
 as to the importance of TBA's (Day 51/95)). 

2. In several cases the information obtained by Merretts did not identify whether the particular cedant was exposed to the Shell risk. 

3. Merretts did not undertake any exercise to identify the extent to which the cedants were exposed to the principal defendants in the asbestos litigation. There was no information in relation to any of the cedants comparable to that contained in Mr. McNamara's schedules. 

4. When the example was put to Mr. Randall he accepted that Merretts in early 1985 did not go through the Dolling-Baker account to a level of detail that included lines, layers, insureds and reinsureds. Mr. McNamara accepted that E&W did not have any audit evidence as to (a) the split of business written by the cedant syndicates by currency (b) the split of business written by the cedant syndicates as between direct business, reinsurance business and retrocession business and (c) the lines written by the cedant syndicates, showing whether they were exposed on primary
 layers, or on high excess of loss layers. 

5. There was at best limited information as to the quality of the systems and controls operated by the cedants. (418/417 was seen as a flagship syndicate and yet see above as to its own serious failures in years 1, 2 and 3 in relation to the run-off contracts.) 

6. Some of the cedants' figures for paids and outstandings were unaudited. 

7. There was no information as to whether any of the cedants had written policies with a continuing obligation to pay costs in excess of indemnity limits (Cf. D6/286; D6/364; D6/367). There was no information as to whether any of the cedants had written policies which lacked aggregate limits (Cf. D5/257 and D6/371). There was no evidence as to whether any of the cedants had employed attorneys to investigate the books of original insurers reinsured by the cedant (Cf. D6/595). 

8. When the example was put to Mr. Hart he could not point to any document in relation to Provincial and Universal which showed their reserving practice. 

9. Mr. Hart accepted that the placing information in almost all cases was not on the file. 

(v) The use of 799 as an analogue was inappropriate

The use of 799 as an analogue (even allowing for the additional U.S.$10 m. block reserve) was inappropriate (as was subsequently recognized see below) and was no substitute for the approach referred to in par. 7.4.2 of Mr. Attwood's report. Without prejudice to this conclusion some of the difficulties and uncertainties inherent in the use of 799 as an analogue are referred to in 1 to 8 below. 

1. Mr. Ayliffe (Day 13/72/23 et seq.) accepted that attempts to compare one syndicate with another in terms of the impact of asbestos etc. on their books are liable to be "a trap for the unwary" because no syndicate is the same as another. Every one is different. Its historical background is different. See also Mr. Hart (Day 14/112), Mr. McNamara (Day 39/109) and Mr. Whiter (Day 50/55/4 et seq.).  

2. Mr. Merrett accepted that the use of 799 as an analogue was a "rough and ready exercise" (although he maintained that 799 was a reasonable point of comparison for the run-off contracts taken as a whole). Mr. Hart referred to a "broadbrush comparison". In his notes on Syndicate 417 - reinsurance to close (D5/259) Mr. McNamara recorded: 

(Mr. Hart's) projections were based primarily on the factors used in determining the IBNR for Syndicate 799. This was regarded as the only known set of factors that could be used as it is generally recognised that the forecasting of losses in this field is not subject to normal actuarial projection. 

3. In his note headed Matters for Partner Attention dated Apr. 23, 1986 (D8/512) Mr. Potkins of E&W, working on the year 5 audit, wrote:  

With regard to all run-off contracts the loadings are arrived at using a fixed % for each risk (e.g. Asbestosis = 60% etc.) the same % being used for the same risk on all contracts. Merretts 

 [1997]  369  L.R.L.R. Henderson v. Merrett Syndicate (Q.B. (Com. Ct.))    Cresswell, J. 

justification for this basis is not very well defined and revolves around stating that the "799 basis" used for y/e 31.12.84 is not seen as appropriate due to the unique nature of many of the run-offs, implying that the underlying account need not be comparable to that of 799. The loadings are still under review as at the above date and this should be borne in mind when assessing the figures currently on CB200. (Emphasis added.) [See Mr. McNamara Day 40/130]. 

4. In a note dated Apr. 28, 1985 (D6/377) Mr. Cassells described the loadings as - 

. . .necessarily subjective and based on more restricted information than would be the case with the syndicate's own business. 

In a note dated Apr. 29, 1985 (D6/440) Mr. Cassells concluded: 

 (a) the "799" based loading for Sturge 1967-1969 years is inadequate. (b) The loadings for other run-offs on this basis may well be equally inadequate. . . 

 Without further work and information E&W did not know the extent to which the loadings for the other run-off contracts were "equally inadequate". In a note dated May 6, 1985 (D6/374) Mr. Cassells described the loadings as "clearly light". 

5. By way of example, as to the inadequacy of the loading in respect of Ballantyne see Day 14/114-115. Mr. Hart's attempt to justify the loading given to Ballantyne was by reference to a perception ("the asbestos problem was largely behind us") which does not accord with the contemporary documents (see above). See further below as to E&W's graphs. 

6. The plaintiffs submit that no evidence exists in support of the assumption that the 799 portfolio mix of business (let alone the cedants' portfolio mix) was basically similar to that for the RAA factors (see G/247a at 247e). The plaintiffs further submit that it was impossible to assess loadings based on the RAA factors in respect of 799's years of account prior to 1965 because the data necessary was not available (see G/247e). The document as to RAA factors obtained by Mr. Cassells D6/577 states at p. 579: 

The trends during the 1970s and early 1980s are obvious. The implications for the rest of the 1980's are uncertain. In particular, reserving for latent injury cases, e.g. asbestosis and black lung, will be challenging. It seems likely that there will be further deterioration. If reinsurance or high deductible casualty business is undertaken the magnitude of these loss development factors and the fact that these factors can change dramatically must be recognized. Loss development patterns are a product of micro-economic and macro-economic considerations. These factors are exacerbated for the reinsurer by his leveraged position. 

7. Mr. Cassells' notes on the 799 audit dated May 19, 1985 (D6/576) record: 

. . .Thus while there is ample proof to suggest that Robin Jackson is right in respect of these years equally the risk if he is wrong is also large (circa £10m increase in RI to Close if RAA factors used). Conclusion the RAA report backs up much of what we believe about Syndicate 799's portfolio business and highlights many of the problems inherent in reserving for it. 

8. Mr. McNamara accepted that 799 had a number of characteristics peculiar to it - Day 39/110 et seq. (a large proportion of indirect business; 1969 and prior were particularly bad years for asbestos, DES and Agent Orange; different protection levels for differing years; prior to 1961 the syndicate wrote large lines with no reinsurance protection; thereafter 799's outward reinsurance programme was of enormous significance). 

According to Mr. Cassells' note dated D6/560: 

56% of all gross [799] claims are treated as recoverable from reinsurers. 

(see further D6/593 as to "the new pre-75 Stop Loss" which did not apply to asbestosis). Thus 799 had far greater reinsurance protection than 418/417 although 799's protection was not evenly spread between the years. (For Mr. McNamara's description of 799's "unlimited sideways reinsurance cover down to a very low level" see Day 36/129/3). Mr. McNamara was unable to say whether any of the cedants would have had outward reinsurance protection on the scale of 799. 

Mr. Hart prepared revised loadings in an attempt to take account of the differences between 799 and the cedants but this was no substitute for the approach which should have been adopted. 

9. The notes of the 799 RITC meeting on Mar. 29, 1985 (D6/567-9) record that £3 m. of 799's reserves in respect of the "golden years" (1977-1980) were reallocated to 1965 and prior. The notes also record: 

Paul McNamara felt that the back years needed some better way of reserving because past experience had demonstrated the need to increase the IBNR each year. It was noted that 1975 and prior accounts have been given some new protection (paid out of the 1982 premium income) in the form of stop loss reinsurance on losses other than asbestosis. The proposed reallocation of reserves from the "golden years" into these back years was seen as an appropriate way of dealing with the matter for this year. 

I have disregarded this point for the following reasons. Merretts say only four of the run-off 

[1997] 370  L.R.L.R. Henderson v. Merrett Syndicate (Q.B. (Com. Ct.))    Cresswell, J. 

contracts (Dolling-Baker, Gooda, Judd and Burdett) had any exposure to the golden years and that the process by which the run-off contracts were reserved would not have included any of the effects of the golden years save to the limited extent that these four contracts had some exposure to one or more of the golden years. 

Finally the plaintiffs pointed out that Merretts did not call Mr. Jackson, the key person (see D6/599) who could give evidence as to how the 799 factors were arrived at (and their applicability or otherwise to the cedants). 
 
Margin of error calculations 

Merretts carried out no or no adequate margin of error calculations in relation to the reserves in respect of 418/417's own book and the books of each of the 10 cedants (where the information was in any event inadequate) to reflect the fundamental uncertainties as to the future development of (i) asbestos bodily injury claims (ii) asbestos property damage claims and (iii) pollution claims. Had Merretts carried out adequate margin of error calculations these would have served to confirm that it was not possible to arrive at a RITC figure with a reasonable degree of accuracy. 

(B) E&W 

In year 4 E&W knew or should have realized, inter alia, the following six matters. 

1. Merretts had failed to comply with the white letters in years 1, 2 and 3 in relation to the run-off contracts. 

2. Merretts' replies to the latent disease questionnaires in years 1, 2 and 3 were inaccurate and seriously misleading. 

3. Merretts did not tell E&W about the writing of the run-off contracts until year 3 (when reference was made to only 6 out of 11). 

4. On Merretts' methodology there had been an under-reserving in year 1 of about U.S.$949 m., in year 2 of about U.S.$3.2/3.9 m. and in year 3 of about U.S.$13.103 m. (= £9.036 m.). 

5. As to 418/417 asbestos claims main account, the incurred claims as at Dec. 31, 1983 amounted to U.S.$16.88 m. Within a year the incurred claims were less than U.S.$3 m. below 418/417's estimate as at Dec. 31, 1983 of all claims to ultimate (see above). 

6. There was a breakdown in communication and organization in the course of the year 3 audit as a result of which, inter alia, Mr. Jones' work on the run-off contracts, the slips, Mr. Rokeby-Johnson's letter and the U.S.$12.7 m. increase in the Sturge incurreds between June 30, 1983 and Dec. 31, 1983 were not given appropriate attention by an E&W partner.

As to E&W's knowledge of asbestos and pollution problems and uncertainties as at June 4, 1985 see above. E&W's knowledge was far less extensive than Merretts'. Mr. Attwood in his reports and evidence said that, in his view, because of the uncertain nature of the asbestos liabilities and the materiality of the amounts involved, representations made by Merretts as to the future development of these liabilities had to be corroborated by independent evidence before the representations could be accepted. Mr. Attwood singled out attorney's reports as a source of such corroboration. The same point applies to pollution liabilities. Having regard to the extent of the asbestos and pollution problems, the extent of the exposure of 418/417's own book and the books of the 10 cedants to these problems, the materiality of the reserves in connection with asbestos and pollution, the critical importance of any assessment as to the future nature extent and development of these claims, the inaccuracy of previous estimates and points 1 to 5 above, I accept Mr. Attwood's evidence that it was incumbent upon E&W to review a sample of the attorneys' reports to test the representations made by Merretts. Had E&W reviewed a sample of attorneys' reports for this purpose this would have served to confirm the extent of the fundamental uncertainties as to the future development of asbestos bodily injury claims, asbestos property damage claims and pollution claims. 

418/417's own book 

The section under the heading (A) Merretts is repeated insofar as it applies to E&W. 

The run-off contracts 

As to the plaintiffs' and E&W's cases see above. As to the correct approach see above (under the heading (A) Merretts, The run-off contracts, (c) analysis and conclusions (i) The correct approach). E&W failed to require Merretts to obtain the necessary information as to each of the 10 run-off contracts, being evidence similar in form to that relating to 418/417's own book. It follows that E&W had inadequate audit evidence in relation to the run-off contracts to justify the opinion given. Mr. McNamara accepted that in year 4 there were practical difficulties in doing the exercise in the period of time available. It is not clear on the evidence that E&W could have obtained the necessary audit evidence in accordance with Mr. Attwood's par. 7.4.2, but had they done so this would have served to underline the extent of the uncertainties referred to above and to confirm that E&W should have disclaimed an opinion on the grounds of fundamental uncertainty. 

E&W were aware of the investigation undertaken by Merretts and the nature of the information 

[1997] 371  L.R.L.R. Henderson v. Merrett Syndicate (Q.B. (Com. Ct.))    Cresswell, J. 

obtained (see (c)(ii) above). As to uncertainties evidenced by what the cedants were saying the letter dated July 16, 1982 written by Mr. Rokeby-Johnson of R. W. Sturge & Co. was on E&W's audit file for year 4 (D6/444). This letter referred to the most significant of the run-off contracts. As to the examples of uncertainties in relation to the cedants as a result of lack of information ((c)(iv) above), E&W were or should have been aware of these. For the very limited materials on E&W's files relating to the accounts of the cedants see D6/372-457. As to the use of 799 as an analogue (see c(v) above) E&W should have appreciated that this was inappropriate and no substitute for the approach referred to in par. 7.4.2 of Mr. Attwood's report. E&W were aware of the difficulties and uncertainties inherent in the use of 799 as an analogue to the extent to which the points in (c)(v) above refer to E&W. I add the following further points which relate to E&W. 

1. D5/211-E&W's review schedule did not involve any separate review of the run-off contracts but simply included the figure Merretts had put forward. 

2. E&W's true and fair opinion in so far as it related to the run-off account (net outstandings £23.437 m. plus IBNR £31.581 m. = £55.018 m.) was by reference to the very limited and inadequate materials at D6/372-457. The limited and inadequate materials relating to 10 cedants should be compared with the extensive materials relating to 418/417's own book reviewed by E&W - see D5 and 6. 

Mr. Attwood said (Day 47/43-44) 

 [A.] I think. . .Mr. Hart says that he spent a substantial amount of time on this exercise over a two week period . . . that seems to me to respond very specifically to my point that here we have on one hand E&W spending hundreds if not thousands of hours looking at the situation relating to 417/8, 799 and now we have someone who spends two weeks looking into the situation of let us say 10 different run-offs, because I think one of them was a replication of another, but 10 different situations, a day on each. I think there is no comparison as to the amount of data which Mr. Hart and Mr. Randall would have been able to obtain by comparison with a proper audit investigation or a proper audit. 

3. The plaintiffs rely upon the graph exercise which Mr. McNamara undertook in relation to the run-offcontracts - see the graphs at D6/400 Burdett; D6/409 Dolling-Baker; D6/417 Verrall; D6/423 Ballantyne; D6/438 and 439 Sturge. In his supplementary witness statement at pars. 106(g) and (h) (p. 47) Mr. McNamara sought to minimize the significance of the graphs as a "crude exercise" which "did not lead me to any specific conclusions". The plaintiffs submit that in fact the graphs, crude though they may have been, ought to have led Mr. McNamara to the alarming realization that the 799 loadings produced reserves which were manifestly inadequate if the rate of progression of claims on uncertain of the contracts (especially Dolling-Baker, Verrall and Fireman's Fund 1966 and prior) continued in the future as it had done to date - Day 40/21/21-/22/22: 

 If you continue that existing rate of progression to the point at which you stop, that is to say the total sum which you have to pay claims on Dolling-Baker of $19,186,125, see page 408, bearing in mind - of course I understand the point about the excess point, but the total, we discussed this with Mr. Hart, output is $19,186,125? [A.] Yes. 

[Q.] If you project claims at the existing rate of progress, you run out of money at the end of 1986? [A.] I am with you now. I understand exactly what you say, and somewhere about there. 

[Q.] Well, you do. I have done it. It is just a question of taking your ruler. It runs out, actually, almost exactly at the end of 1986. If you do it on page 417 on Verrall, we see the rather startling rate of progression of claims on Verrall - anyone can check this by simply taking a ruler and doing it - the money runs out before the end of 1985. Do you see? [A.] I see that. 

[Q.] If you do it on Fireman's Fund for the 1966 and prior segment of the account, as we can see at page 438, the loaded incurred figure, and paid figure, totalling $41,357,826 is reached in the first quarter of 1985. . . 

When asked what relationship reserves of this order might bear to the issue of equitable treatment, Mr. McNamara's evidence was as follows - Day 40/22/23-/23/4: 

Did it not strike you that there was something odd, Mr. McNamara, about providing reserves to ultimate, when, if you simply continued the existing rate of progression on these accounts, the money was going to run out in some cases before the end of the year? [A.] Well, as I have said in my statement, these graphs really did not go anywhere in our thought process. 

In my view there is considerable force in the plaintiffs' submissions. The graphs served to demonstrate that the use of 799 as an analogue was inappropriate. 
  
4. When asked what consideration did E&W give in years 4, 5 and 6: 

. . .to the absence of the very audit evidence in the case of the cedants which they deemed essential in the case of 417's own book. 

[1997] 372  L.R.L.R. Henderson v. Merrett Syndicate (Q.B. (Com. Ct.))    Cresswell, J. 

Mr. McNamara frankly said "not a consequential amount" although he maintained that what was done on 417 "was not regarded as essential across the piece" (Day 37/32/1). 

5. The calculation of the reinsurance to close in respect of the run-off contracts written into 421 followed the same approach as that adopted for 417. In his notes on reinsurance to close: Syndicate 421 dated May 15, 1985 (D6/516(1)) Mr. McNamara referred to "the considerable uncertainty surrounding the estimates made". In his notes on reinsurance to close: Syndicate 418 of the same date (D6/516(2)) Mr. McNamara wrote: 

Furthermore, the run-off contracts written by this syndicate are proving to be particularly exposed to latent disease losses and there has to be every probability that the reserves provided in respect of them may prove to be inadequate in the longer term. Nevertheless, it is hoped that the approach taken this year is sufficiently prudent and it will not be necessary to augment the reserve for some considerable period of time. (emphasis added) 

(See also the Notes on 417 D5/259-60 including the passage quoted above and the reference to the further provision of U.S.$6 m. - "it is not easy to form any basis on which to make this assumption".) 
 
Margin of error tests 

E&W carried out no or no adequate margin of error tests in relation to the reserves in respect of 418/417's own book and the books of each of the 10 cedants (where the information was in any event inadequate) to reflect the fundamental uncertainties as to the future development of (i) asbestos bodily injury claims (ii) asbestos property damage claims and (iii) pollution claims. Had E&W carried out adequate margin of error calculations these would have served to confirm that E&W should have disclaimed an opinion on the grounds of fundamental uncertainty. (See in this connection the graph exercise referred to above which should have been seen as a red flag.) 

Summary of conclusions - E&W 

For the reasons set out above I have with regret come to the conclusion that a reasonably competent Lloyd's panel/recognized auditor in year 4 would have disclaimed an opinion on the grounds of fundamental uncertainty. Without prejudice to all the points made in the detailed analysis above I refer in particular to: 

(1) the fundamental uncertainties as to the future development of (i) asbestos bodily injury claims (ii) asbestos property damage claims and (iii) pollution claims as reflected in the materials available to E&W; 
 
(2) the numerous references to uncertainties in the contemporary documents relating to the audit quoted/referred to above; 

(3) the significance of the additional uncertainties in relation to pollution claims which became apparent in year 4; 

(4) the fact that all the fundamental uncertainties had to be considered not only in respect of 418/417's own book going back to 1953 but also in respect of the books of the 10 cedants. There had been a
funnelling of these claims with their attendant uncertainties into 418/417; 

(5) the inaccuracies of previous estimates in years 1, 2 and 3; 

(6) E&W's failure to test or test adequately the representations made by Merretts as to the future development of asbestos personal injury, asbestos property damage and pollution claims; 

(7) the fact that the incurred asbestos claims (418/417 main account) at Dec. 31, 1984 (U.S.$27.072 m.) were less than U.S.$3 m. below 418/417's estimate as at Dec. 31, 1983 of all claims to ultimate; 

(8) E&W's failure to require Merretts to obtain the necessary information as to each of the 10 run-off contracts with the result that E&W had inadequate audit evidence in relation to these contracts; 

(9) the uncertainties as evidenced by what Mr. Rokeby-Johnson of Sturge was saying in relation to the most significant run-off contract (D6/444);  

(10) the uncertainties in relation to the cedants as a result of lack of information; 

(11) the inappropriate use of 799 as an analogue; 

(12) the fact that E&W's opinion in so far as it related to the run-off account (net outstandings + IBNR = £55.018 m.) was by reference to very limited and inadequate materials; 

(13) the graph exercise which served to demonstrate that the use of 799 as an analogue was inappropriate and which should have been seen as a red flag; 

(14) the fact that had adequate margin of error calculations been carried out these would have served to confirm that it was not possible to arrive at a RITC within a zone of reasonableness; 

(15) the fact that the reserve for asbestos-related and pollution claims represented a material proportion of the total reserves of the syndicate (see par. 8 of Mr. Murray Lawrence's letter of Mar. 18, 1982);  

(16) the background of Merretts' failures in years 1, 2 and 3 with the result (a) that on Merretts' methodology (which was itself open to question) there had been under-reserving in year 3 of about 

[1997] 373  L.R.L.R. Henderson v. Merrett Syndicate (Q.B. (Com. Ct.))    Cresswell, J. 

U.S.$13.103/£9.036 m. and (b) that the year 3 accounts were seriously inaccurate. 

For completeness I should mention the Form AU 38(a), the T&D policy and 317/661. These matters have not played any part in my conclusions as to year 4. 

The Form AU 38(a) 

Form AU38(a) required the auditors to provide Lloyd's with an answer as to the following question: 

The reserves created for the 1981 and prior Accounts as at 31st December 1983 do/do not appear to have been adequate. 

The reserves created for 1981 and prior as at Dec. 31, 1983 had been £96,023,486. According to the answer apparently given by E&W in the Form AU38(a) one year later (ie. Dec. 31, 1984), the reserves which had been created for 1981 the previous year had been inadequate, but only by £652,566. The Form AU 38(a) actually filed with Lloyd's has not been found. 

E&W accept that this answer was misleading because an error occurred in the way in which credit was taken for the T&D. E&W credited the back years with 86 per cent. of the benefit of the T&D but did not debit those years with the corresponding proportion of the cost of the T&D. As a result the deterioration in the back years was according to E&W understated by approximately £19.5 m. The plaintiffs contend that the true deterioration was far greater but accept that they are unable, on the evidence before the Court, to suggest that giving Lloyd's the figure for which they contend (£58,411,186) would have produced any particular reaction on Lloyd's part. 

In view of the plaintiffs' concession the most that can be said is that E&W's admitted error indicates a lack of care on their part. 

The use and accounting treatment of the T&D policy 

A considerable amount of evidence was directed to this subject. As against Merretts the plaintiffs say that the true extent of the deterioration in year 4 was masked by the use of the T&D policy. However the plaintiffs accept that an informed reader of the accounts might have understood the effect of the T&D. 

As against E&W the plaintiffs submit that E&W had inadequate audit evidence to satisfy themselves as to the timing and pattern of claims and as to the amount of future liability. The plaintiffs further submit that in circumstances where E&W had nothing more than necessarily highly subjective payment patterns, E&W ought not to have signed off on accounts in which full credit was taken for the anticipated future recoveries under the T&D policy. 

E&W submit that the significance of this issue is extremely limited because the plaintiffs' case is that no fair RITC premium could be set whether or not a T&D policy was taken out. It is not their case that the taking out of the T&D policy made some crucial difference. E&W further submit that no case is, nor could sensibly be made, that if there had been no T&D, or if the T&D policy had been reported differently, the year would not have closed. 

I have disregarded the use and accounting treatment of the T&D policy in reaching my conclusions in relation to year 4. 

Comparison with Outhwaite Syndicate 317/661 

I have not had any regard to any comparison between 418/471 and Outhwaite Syndicate 317/661 in reaching my conclusions in relation to year 4. 317/661 wrote many more run-off contracts. When it was suggested to Mr. McNamara in cross-examination that this syndicate had hardly any liability to asbestos and other latent claims in its own book, Mr. McNamara answered that 317/661's liability was predominantly in respect of run-off contracts. I refer again to Mr. Ayliffe's evidence about comparison between syndicates (see above). 

36. YEAR 5: THE CLOSURE OF 1983 INTO 1984 AS AT 31.12.85 (MERRETTS' AND E&W'S REPORTS DATED 2.6.86) 

As to changes in stamp capacity, names etc. see Table 1 below (at p. 415 post). In June, 1986, 418/417's 1983 year of account was closed by way of an RITC into the 1984 year of account; and it was reported on by Merretts on June 2, 1986. 

In the 1985 annual report and accounts for 418/417, were inter alia: 

(1) A report dated June 2, 1986, in which E&W, as auditors, reported on the 1983 closed year in identical terms to those set out in respect of year 4 above (save that the annual report was reported as giving a true and fair view of the 1983 closed year of account profit); 

(2) Notes to the accounts, under accounting policies in which statements in all material respects identical to those set out at in respect of year 4 above were also made. 

As to the regulatory regime for the year ended Dec. 31, 1985 see section 17 above. 

PERCEPTION AS AT YEAR 5 

As to developments and changes in perception in previous years see above. Perception in year 5 must
be judged against this background. 

As at June 2, 1986 the future development and extent of (a) asbestos personal injury and 

[1997] 374  L.R.L.R. Henderson v. Merrett Syndicate (Q.B. (Com. Ct.))    Cresswell, J. 

(b) asbestos property damage and (c) pollution claims were in each case subject to very considerable uncertainty. 

I refer to the chronology, Appendix 1 to this judgment (which in the case of attorneys' reports lists  some examples of reports in Merretts' possession). As to the U.S. cases at the above date see Appendix 2 to this judgment. 

The nature and extent of the uncertainties as at June 2, 1986 were known to Merretts and E&W, alternatively in the case of E&W would have been known to E&W had necessary and appropriate audit tests and enquiries been carried out and conducted. 

The broad nature and extent of the uncertainties as at June 2, 1986 were reflected in the following materials. 

Where materials are drawn on which would probably have been available only to Merretts or E&W this is indicated in brackets. 

Asbestos Personal Injury Claims 

On June 19, 1985 the asbestos claims facility (the Wellington agreement) had been signed by 34 asbestos producers and 16 of their insurers. The gist of the facility was as follows: 

a. The Keene exposure basis of coverage was to be adopted. 

b. The 34 producers participating in the ACF were to participate in all outstanding claims against all facility producers in a fixed share: (N.B. Not all producers joined). 

c. The assured could exhaust all earlier policy years before applying the less favourable coverage in later years. 

d. There was a cap on the liability of those policies which had no aggregate limit. 

e. There was to be a central claims facility which would handle claims against the participating producers and establish liability and insurance shares. 

Asbestos was seen as giving rise to the U.S.'s and the world's greatest occupational disease compensation problem. As at July, August and October, 1985 (Merretts only) Mr. Ayliffe said in the course of seminars held in Europe (addressed by Mr. Ayliffe and Mr. Rayment of Sturge): 

Exposure to asbestos and consequent litigation involve potentially enormous personal and economic stakes. Approximately 24,000 people have filed products liability law suits claiming asbestos-related injury as of March 1983. Many times that number have been exposed to asbestos. The severity of the asbestos problem is such that the Chairman of the Asbestos Working Party in London has identified it is the most serious  problem ever to be encountered by the insurance industry. . .It did not take long for the Unions to recognise that there was now a way of getting compensation for their members which did not require them to go through the workman's compensation route and get minimum compensation
 even if they qualified. . .They started in a small way. . .For the past 3 or 4 years we have seen those actions running at a level of approximately 500 new law suits per month. Over the past year, that rate has increased to approximately 750 new law suits per month. We have at the present time no real feeling how long it will be before we have seen a peaking of the legal activity that has been gradually
 developing, but we now have had filed approximately 45,000 separate actions by individuals. The problem that asbestos produced from the injury aspect, was obviously the latency period. The time from the first exposure of the individual to an environment that has asbestos dust in the air, to the point when the individual can show a physical disability arising from the accumulation of that dust or fibre, can range between 20 and 40 years. . .If we therefore assume say a 30 year exposure, it is likely to be the end of the century before we see a major fall off in claims being filed in regard to asbestos exposure. Not all claims arise from individuals exposed in their work place. . .Family members who have been exposed. . .we have claims from persons who live near existing plants that use asbestos. . .The decisions on coverage interpretation coming from the US Courts have been, from the insurers' point of view, ever increasing and broad in their findings and in the context of the asbestos problem, I think you have to recognise that nearly every decision that has come down has, to an extent, been insured orientated. . .so the present situation is that we are now forced to accept that the Keene situation is not an aberration, it is a fact of life with which we have to live.. . .There are not a few insurers who have equal concerns about their ability to remain financially solvent due to problems that have been gradually developing in the asbestos matter. . .The Facility as it is now becoming a much stronger voice (it's one voice speaking for 55% of all defendants in the asbestos scene), can now produce much more meaningful statistics that all of us badly need, to get a handle as to where we stand in regard to our potential exposure, whether we are direct writers, reinsurers or involved in retrocessions.. . .We have in formation the ability to contain the extreme wastage of money on legal costs that we had in the past. . . The big difficulty is none of us know how long it will be before evidence comes through that the 

[1997] 375  L.R.L.R. Henderson v. Merrett Syndicate (Q.B. (Com. Ct.))    Cresswell, J. 

asbestos issue appears to be fully under control. . .(emphasis added) 

In my judgment the passage quoted above from the seminars addressed by Mr. Ayliffe and Mr. Rayment reflects the fundamental uncertainties in year 5 (and serves to confirm my conclusions in relation to year 4 as to the very considerable uncertainty as to the future development and extent of asbestos personal injury claims). 

In addition: 

 (a) As at August, 1985 (Merretts only) a draft AWP report stated the following. There has been a noticeable increase in the rate at which new suits are being filed which raises the annual rate to 8500 new cases per year. There are likely to be noticeable variations between different producer insureds. The recommendations do not make any allowance for IBNR and the market should not lose sight of the fact that new filings are being reported at a rate of 700 per month. 

 (b) As at August, 1985 an attorney's report stated the following. Many factors complicate the setting of year and reserves at this time. In addition to the imponderables which have arisen, it has yet to be demonstrated that the necessary co-operation will be afforded by the plaintiff Bar to enable the ACF to achieve its objective of providing a viable cost-effective alternative to the tort system. Due to these uncertainties it is your counsel's recommendation that the market maintains a conservative approach in establishing reserves for the coming closing. There has been a noticeable increase in the rate at which new suits are being filed which raises the annual rate to 8500 new cases per year. Our recommendations do not make any allowance for IBNR. New filings are being reported at a rate of 700 cases per month. 

(c) As at September, 1985 (Merretts only) a letter from the AWP to insurers at interest stated that it was too soon to measure the impact of the ACF; there has been acceleration of new claims filed currently running at 8500 per year. 

(d) As at September, 1985 (Merretts only) the minutes of a meeting of the directors of MSL recorded the following. New claims were arising at the rate of approximately 700 cases per month. After the exhaustion of insurance protection in any year, the tendency of the U.S. Courts to move claims to immediately preceding years where protection had not been exhausted, created potential hazards in reserving. While recent claims are of a "less serious" nature and the claims facility is now available, such of these advantages could be eroded by inflation. It was extremely dangerous to make positive statements at the Names' meeting. 

 (e) As at October 1985 (E&W only) the audit planning memorandum for the year ended Dec. 31,  1985 recorded that it is rapidly becoming apparent that the potential claims arising from asbestosis will dwarf any claim in the history of the non-marine market. 

(f) As at October, 1985 (Merretts only) a memorandum from Mr. Randall stated that the trends indicated by the early reports (approximately 20 per cent. to date) look encouraging but there is potential for further deterioration on the large numbers of reports not yet seen and the impact could vary quite significantly from syndicate to syndicate. 

(g) As at December, 1985 (E&W only) a report to the assignment partner recorded the following. Last year saw a marked deterioration in the number of asbestos claims; the number of sufferers making claims having risen from 500 to 700 per month. This year the number of claims per month has risen to 1000 per month. It is hoped that the claims facility will eventually result in a reduction in costs per claim, although these effects will not be seen for the first year. 

(h) As at February, 1986 (E&W only) a meeting between Lloyd's and recognized auditors was informed of the following. In the non-marine market, the ACF which was signed in June, 1985 by 34 producers will lead to a revision in reserves at June 31, 1985. There are at present about 46,000 claims in the market. Claims are being notified at the rate of about 1000 per month but now appear to be "cheaper". On expense costs, as a result of the ACF, defence costs have fallen to about 20-25 per cent. but the facility is making a charge of about 10 per cent. which is to be borne in the direct market only. The Johns-Manville money invested in New York includes a London Market share of about U.S.$110 m. This money is soon to be dispersed and this will represent a large cash outflow in 1986 on both direct claims and retrocessions. 

(i) As at April, 1986 (Merretts only) Mr. Jackson in an address in Berlin stated that the reinsurance industry is facing the greatest crisis in its history. 

(j) As at May, 1986 (Merretts only) a letter from Mr. Jackson, chairman of the AWP to insurers at interest stated the following. It is too early at this stage to project the reserve movement the London market is likely to see at the coming year-end, however there are now in excess of 40,000 claims outstanding, and new suits filed over the past year have reached a level of 1000 filings per month. There has in addition been an increase in the average per case settlement level achieved by the ACF, which is in part affected by the recent resolution of a major class action in Texas. If no relief develops in these trends, it is likely that reserves will see a further deterioration. 

(k) As at June, 1986 (E&W only) E&W Insight stated that it is understood that by about the end of 

[1997] 376  L.R.L.R. Henderson v. Merrett Syndicate (Q.B. (Com. Ct.))    Cresswell, J. 

March, 1986 some 8000 claims had been cleared from an initial notification to the facility of about 52,000 claims. 

Asbestos property damage claims 

As to asbestos property damage claims as at July, August and October, 1985 (Merretts only) Mr. Rayment, at the seminars referred to above, stated: 

Asbestos property damage claims. . .perhaps a greater liability, certainly more difficult to evaluate at this stage, is asbestos property damage. Reports say that it could be much larger than the bodily injury claims that we are seeing to date. We fear that ultimately there may be claims from utility companies, even house owners which have got insulation in their roofs or wherever. Certain examinations have been done just of small areas of private house owners and over 60% have got asbestos contained within their houses. The claims alone against Johns-Manville (who currently still reside in chapter 11 of the bankruptcy laws) exceed $50 billion. . .The unique thing about the Johns-Manville bankruptcy was that there was another creditor group, the future plaintiffs group. This body represented those out there who have a cause of action in the future but at the moment do not know this. So there is a committee set up to protect those claimants as well. . . 

In addition: 

 (a) As at August, 1985 an attorney's report stated that the market is aware that the ACF does not address property damage. The property damage issue of loss attachment date continues to be difficult because there are no appellate court coverage decisions which can be looked to for guidance. 

(b) As at October, 1985 an attorney's report stated that the property damage issues are no closer to a solution now than they were at year end 1984. Further, property damage is not yet addressed by the facility agreement. Producers are arguing for a Keene type of spread going from first installation through discovery, whereas insurers are maintaining that the date of occurrence should be tied into discovery. Since there is still uncertainty with respect to the property damage issues, the assessment of reserves continues to be most difficult. 

(c) As at February, 1986 (E&W only) the recognized auditors' meeting was told that asbestosis will also extend into property damage claims. 

(d) As at May, 1986 (Merretts only) a letter from Mr. Jackson to insurers at interest referred to the growing asbestos property damage problem. 

Pollution claims 

(a) As at September, 1985 (Merretts only) a letter to Mr. Jackson from US attorneys enclosed an updated booklet (165 pages) containing a list of companies that had been identified by the EPA as being potentially responsible parties at hazardous waste disposal sites in the U.S. An earlier booklet had been sent to Mr. Jackson the previous year. The letter stated: 

OVERVIEW OF EPA PROGRAM 

The booklet contains an introductory overview of the EPA clean-up program. The overview sets forth in summarized form the year-end statistical information provided by the EPA. This information underscores the broad scope and the magnitude of the EPA hazardous waste disposal site clean-up program. . .  

As of late 1984, the EPA had identified 18,884 potential hazardous waste disposal sites. Of these sites, EPA personnel completed preliminary assessments of 10,767 sites and 8,117 sites were awaiting preliminary assessments. Of the 10,767 sites for which preliminary assessments had been completed, 7,016 required site inspections and 3,751 required no site inspections. Of the 7,016 sites that required inspections, 3,601 were actually inspected by the end of September, 1984 and 3,415 were awaiting inspection at that time. Of the 3,601 sites that were actually inspected, 1,732 had been assigned a hazardous rank score and 1,869 were awaiting assignment of a hazardous rank score. Of the 1,732 inspected sites assigned a hazardous rank score, some 815 sites were included or were proposed for inclusion on the National Priority List. All of these latter sites are contained in the booklet. 

Obviously, the mills of the EPA grind slowly but exceedingly fine, and I note that our source at the EPA believe that the total number of identified sites will eventually increase to 22,000 under the EPA's present identification program. Furthermore, as if the EPA did not have enough on its plate, we have confirmed that it is seeking to expand its jurisdiction to other types of sites, such as leaking underground storage tanks, mine tailings, and sites located on federal lands. This latter area of potential interest would eventually include Department of Defense sites such as the Rocky Mountain Arsenal. 

If the efforts of the EPA continue at their current pace, with or without expanded jurisdiction, it is clear that the number of EPA claims that will be pursued against companies in the United States will increase markedly during the foreseeable future. Thus far, the EPA's efforts have been hindered somewhat by political and budgetary considerations, and most of the claims 

[1997] 377  L.R.L.R. Henderson v. Merrett Syndicate (Q.B. (Com. Ct.))    Cresswell, J. 

that are being processed through the EPA system have not yet reached the enforcement or cost recovery stage in substantial numbers. Accordingly, we anticipate that an increasing number of new claim notices are likely to be received by Underwriters as the governmental process inexorably moves toward the enforcement phase of its program. 

(b) As at September, 1985 (Merretts only) the minutes of a meeting of the directors of MSL recorded that the pollution and seepage claims problem was potentially serious but much would depend on the attitude and interpretation of the U.S. Courts to cases put before them. 

(c) As at October, 1985 (E&W only) the audit planning memorandum referred to above recorded
 that 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. Such subjects require constant reappraisal of the reserves set up in the past to deal with future claims. 

(d) As at December, 1985 (E&W only) a report to the assignment partner stated that environmental protection claims are causing some concern at the present time in view of the large number and settlement amounts. 

(e) As at February, 1986 (E&W only) the recognised auditors' meeting was told the following: environmental pollution claims will see an uplift of about 5 per cent. for legal costs. 1985 is not expected to see much movement on the Shell Rocky Mountain claim but the years 1986-1988 should see a greater movement. 

(f) As at February, 1986 (Merretts only) a letter from the environmental claims group ("ECG") stated the following. In our last letter dated Nov. 19, 1985 the ECG said that there were more than 15 declaratory judgment actions involving London underwriters already proceeding in various U.S. Courts. There are now more than 20 such actions. One of the differences between pollution and other matters currently facing underwriters is the great diversity of the problem. Where in asbestos we are concerned with the bodily injury and property damage claims brought in respect of the products of some 20 major assureds, pollution involves potentially hundreds or thousands of different assureds being sued by many different parties in respect of different types of injuries and damage. Underwriters have already been asked to give discovery of documents in the Shell Rocky Mountain litigation, Diamond Shamrock Dioxin litigation and a number of others. (Mr. Ayliffe was a member of the ECG.) 

(g) Mr. McNamara's notes on review of run-off contracts (D9/896) (E&W only) referred to "the list of
noted toxic waste sites". 

A DESCRIPTION OF THE YEAR 5 RITC 

A notional reserving exercise was carried out at the half year by way of trial run for the exercise at the year end. 

A summary of the reserving methodology was provided for the Revenue. In the case of Syndicate 417 it is at D9, p. 814-825; in the case of Syndicate 418 it is at D9, p. 827-836. 

The RITC for 418/417 breaks down as follows: 

                                 417      418     Total 
                                ˙'000    ˙'000    ˙'000
Main Account
- Net outstandings 35,040   16,653   51,693
- IBNR                    23,206   23,762   46,968 
                               58,246   40,415   98,661

Run-off Account
- Net outstandings  16,623   10,356   26,979
- IBNR                     15,363    9,052   24,415
                                 31,986   19,408   51,394 
                                90,232   59,823  150,055 
Roll-over/Asbestos 
related claims Account   (7,665)     -     (7,665) 
Time & Distance Credit  (53,793)     -    (53,793)
                                     28,774    59,823  88,597 
Net underwriting 
Result per Account      (3,138)   17,287
SYNDICATE 417 
Outstandings 

The work carried out was similar to the work carried out before: Schedule B3(a) (J10/2) has the details. So also was the E&W work on outstandings: Schedule B3(b). The audit programme on the RITC is at p. 408. The 417 print-out of outstanding claims proved to be inaccurate in several respects and amendments had to be made. 

There had been an increase in the level of outstandings for asbestosis in the year from U.S.$21.51 m. (as to Merretts figure see Year 4 above) to U.S.$23.265 m., an increase of U.S.$1.7 m., considerably less than the previous year's increase of U.S.$5.6 m. (D6, p. 280). The total new notings for asbestosis were U.S.$4.8 m.: D8, p. 614. Of these U.S.$1.2 m. were outstandings in respect of Fibreboard, in respect of which Fireman's Fund had been reserving on a manifestation basis but were held liable on an exposure basis. Further - see Schedule C (J10/3) and Table 6 below - the rate of increase in incurred claims was as follows. From 1981-1982 (418/417 combined) the increase in incurred claims was U.S.$9.3 m.; from 1982-3 it was U.S.$2.4 m.; from 1983-1984 it was U.S.$10.19 m.; from 1984-1985 it was U.S.$6.6 m.; (from 1985-6 it was U.S.$5.3 m.). 

 [1997]  378  L.R.L.R.  Henderson v. Merrett Syndicate (Q.B. (Com. Ct.))    Cresswell, J. 

 IBNR 

The make-up of the RITC is set out at p. 11 of Schedule A (J10/1) which is principally derived from the document headed "Merretts final version" at D8, p. 581. That is Merretts' tabulation of the RITC showing a net premium of ˙28,773,550, the figure that went into the accounts. E&W's schedule at D8, p. 580 CB/O produced a net premium of ˙28,885,944, a difference of ˙112,394 (the difference analysed at D8, p. 583, was principally due to Merretts rounding certain U.S. $ figures and is immaterial). The loadings used in relation to the specific categories appear at D8, p. 586. 

For the first time Merretts decided to apply different loadings to specific classes of business, viz: 

 Risk      %O/S      Loading
 Asbestos  $'000      $'000 
1953-65   607,373      4,424 
1966-68   504,572      2,286 
1969-83   60      11,018      6,611 
Adjustment  302 181 23,265     13,502
 
DES                      503,990      1,995 
Agent                  2515739 
Orange 
DDT                 25950 237 
EPA                    755,119      3,839 
                               33,481    19,612

(Different figures are found at D9 p. 816 and D8 p. 586. The plaintiffs accept that the differences are not material. Merretts say that in aggregate the outstandings are within U.S.$5,000 but the split is different.) 

E&W's review of Merretts' IBNR followed a similar pattern: Schedule B3(d) (J10/2). The audit programme is at D8, p. 408. The RITC meetings on May 1, 1986 and May 6, 1986 are at D8, p. 274-280. 
 
LOADINGS 
 
Asbestos 
     
E&W's working papers in relation to asbestos loading have not survived. Mr. Hart's rationale - witness statement pars. 42 and 49, was as follows. The increase in gross outstandings in 1985 for Syndicates 799 and 417 combined represented 15 per cent. of the total outstandings at Dec. 31, 1985. According to Mr. Hart's witness statement (par. 49), Merretts took the view that there was "the equivalent of a further four more years development of claims at the same rate" as occurred during 1985. That would be a maximum of 60 per cent. of  outstandings. In relation to the years 1966-68 the lower 50 per cent. figure was chosen because the reinsurance protection was stronger. 

Mr. McNamara reviewed the proposed loading. He recognized that they constituted Merretts' "considered judgment of what is required but are generally highly arbitrary" - See summary review memorandum p. 6. 

He compared - D8, p. 611 - figures which he had estimated for further deterioration on individual policies, where there had been notifications of claims, with the figures reached by applying a 60 per cent. factor for IBNR. His figures totalled U.S.$6.6. m. (Mr. McNamara's schedules for the year do not survive). The reserve set up by the agency by using 60 per cent. (mainly) was U.S.$13.5 m. In effect, therefore, U.S.$6.9 m. (U.S.$13.5 m. - U.S.$6.6 m.) was provided for new or increased advices. In 1985 there had been U.S.$4.8 m. of new or increased advices in respect of the years 1953 to 1979: D8, p. 614. 

DES/Agent Orange/DDT 

In the case of DES there had been an increase in notifications (matching the coming of age of the offspring of takers of the drug, which itself, had been removed from the market in the 60s). The agency expected a settlement to occur shortly. Neither DDT nor Agent Orange were significant in the context of the RITC. In respect of the Agent Orange claim there had been the class settlement in 1984 and the reserve of 25 per cent. related primarily to costs in relation to on going appeals. 

SHELL/EPA 

Merrett's took the view (see the minutes of the marine box management meeting of Sept. 9, 1986 - D7, p. 27), that the 417 reserves created for Shell/EPA as at Dec. 31, 1984 would prove to be over-pessimistic. The loading reached after discussions between Mr. Randall, Mr. Jackson and Karen Ruby, was reduced to 75 per cent. of outstandings (U.S.$5.119 m., almost exclusively Shell) which was according to the defendants equivalent to nine years further similar deterioration at the same rate as had occurred in 1985 (Mr. Hart, par. 53). The defendants say little movement had taken place in the market in the way of claims and there had been no new advice of any significance nor any claims paid. The plaintiffs say the following. As soon as superfund was set up, the liability to clean up existed, with the possibility of claims being made against insurers. However by 1985, there had not yet been sufficiently co-ordinated action to identify and evaluate the quantum of claims. Advices had been received from insureds regarding potential problems (see Toplis & Harding Feb. 18, 1985: H2/134-8) but no effort was made to identify 

[1997]  379  L.R.L.R.  Henderson v. Merrett Syndicate (Q.B. (Com. Ct.))    Cresswell, J. 

policies covering sites or assureds. Merretts acknowledged that they had received TBA claims, but did not identify burning and adjacent exposures (even to the limited extent of Mr. McNamara's asbestos exercise). The number of noted or TBA EPA claims (e.g. Love Canal, Lockheed etc. D6:592, and Stringfellow, Times Beach, Shell Netherlands etc. D5:258) cannot now be established (see D9:896 "there is significant uncertainty regarding the trend in pollution claims and a substantial loading having regard to the list of toxic waste sites is necessary"). 

Others 

The agency applied loadings based on RAA factors on a sliding scale. But the IBNR on the pre-1975 years of account was equivalent to 20 per cent. of outstandings. This loading was intended to take account of the possibility that some of the latent disease and environmental claims within the outstandings for those years might not have been specifically identified. For the years 1975 to 1983 the agency applied individual loading factors to each year arrived at after consultation with Mr. Hart. 

The run-off contracts 

In respect of the run-off contracts there had been an increase in incurred losses in respect of DES and asbestosis (see J/10 Schedule D p. 13). By now Merretts had developed their own computer system (per the plaintiffs a spreadsheet which recorded data received) for monitoring data from cedants from whom they had obtained information following a questionnaire (substantially drafted by Mr. McNamara) sent round by Mr. Randall the previous autumn. Print-outs containing the information on an incurred basis are at p. 622F. They give a break down of paid and outstanding claims. The figures are broken down as between asbestosis, Shell, DES, DDT, Agent Orange, pollution, Dalkon Shield and Other. See also J10/Schedule D which breaks the figures down into paid/outstanding/IBNR (a loading on outstandings). 

Merretts considered three possible loadings on outstandings in respect of the run-off contracts and adopted the following (D8, p. 620): 

Asbestos: 60 per cent. 
Shell/EPA: 75 per cent. 
DES: 50 per cent. 
DDT: 25 per cent. 
Agent Orange: 25 per cent. 
Dalkon Shield: 15 per cent. 
Other: 15 per cent. 

These are essentially the same loadings as applied to the Syndicate's own business, save that  the asbestosis loading was 60 per cent. throughout. 

A summary of the figures for outstandings and IBNR in relation to the run-off contracts is in Schedule D (J10/4). The underlying documents are CB 200/0 at D8, p. 617/618 (summary of reserves and apportionment) and the CB 201 series at D8, p. 622ff.

Mr. McNamara reviewed the proposed loadings on the run-offs. His notes on review of run-off contracts (D9 p. 896 par. 3) state: 

Merretts have applied various loadings in respect of the different categories of outstandings. The loadings are their considered judgment of what is required for further deterioration but are generally highly arbitrary. Nevertheless the 60% loading for asbestos which is the dominant outstanding loss heading can be correlated to both the experience of 417, where we are able to do a more detailed projection of future developments, and also syndicate 975 where the managing agent has done a very extensive exercise and applied a loading of 65%. . . 

(The plaintiffs say there are no audit working papers or exercises evidencing the correlation. E&W say Mr. McNamara was the audit partner in respect of the audit of Syndicate 975, and had therefore reviewed the approach being adopted by Syndicate 975.) 

Syndicate 975 (Frizzell) was a non-marine syndicate which had underwritten liability business for several years prior to 1970. In essence Frizzell had looked at the potential for worsening of known claims and claims with nil reserves, the trend of new advices and multiplied the number of new advices anticipated by the average cost to their Syndicate per new advice. This produced a figure for IBNR which represented 58 per cent. of outstandings. J8 contains the exercise: p. 33-37. 

Syndicate 975's 1983 year was in fact left open. Syndicate 975 had ceased to trade in 1985 and had reduced in size in 1984. 

Mr. McNamara also reviewed the data in relation to the run-off contracts individually to consider how they might develop: see D9, p. 896-897: par. 6ff. In particular he compared the loading with the level of deterioration in incurred losses during 1985. The run-off contracts were specifically considered, initially at the meeting on May 1, 1986 - D7, p. 274 at 277 - and then at the meeting on May 6, 1986: p. 278. 

Roll over 

The balance of the roll over fund (after using part to pay asbestos claims) was carried forward in the sum of U.S.$11.115 m. (˙7.7 m.). The relevant workings are at D8, p. 601. 

[1997]  380  L.R.L.R.  Henderson v. Merrett Syndicate (Q.B. (Com. Ct.))    Cresswell, J. 

Time and distance 

The time and distance recovery of U.S.$78 m. (˙53.8 m.) was again taken to credit (the premium accrued as at Dec. 31, 1984 having been paid during the year): D8, p. 581. The time and distance policy was referred to in the accounts: E1, p. 106. 

The AU38(a) form for 418/417 is at D7, p. 162. The AU17 form is at D7 p. 171. 

SYNDICATE 418 

Outstandings 

The work carried out by the agency in relation to outstandings was similar to that carried out in previous years: Schedule B4(A) (J10/2). By now the marine claims outstanding summary was computerized: see D7, p. 227 (manual) and D7, p. 197 (computer). E&W's steps in reviewing the outstandings were similar: Schedule B4(b) (J10/2). The bad debt provision was dealt with on an item by item basis: D7, p. 194. 

IBNR 

This year the managing agents determined the RITC (apart from the run-offs) by calculations which initially assumed that, in respect of the several audit categories of marine business (time, voyage, liability etc.) the size of the account was broadly similar from year to year and the pattern of settlement likely to be similar also. Thus, for the purpose of fixing a reserve for the 1983 year of account time section, the initial assumption was that it would settle next year, i.e. 1986 (its fourth year) in much the same way as the 1982 year of account had settled in 1985 (its fourth year) and that in 1987 (its fifth year) it would settle in much the same way as the 1981 year of account had settled in 1985 (its fifth year). Similarly it was assumed that the 1982 year of account (already closed into 1983, now closing into 1984) would settle next year, i.e. 1986, its fifth year, in much the same way as the 1981 account had settled in 1985, its fifth year and that in 1987, its sixth year, it would settle in much the same way as the 1980 account had settled in 1985, its sixth year, etc. 

The initial proposal of the agency is at D7, p. 265-270 from which it can be seen that - e.g. for the time account 1983 - the total outstandings, (i.e. the ultimate loss) is taken to be the amount settled in 1985 relating to 1982 and prior years (U.S.$2.67 m.) and a loading is derived by deducting from these figures, (slightly increased to ˙3 m.) noted outstandings. 

The methodology, as finally adopted, is explained in the summary of reserves made for the Inland Revenue at D9, p. 830 from which it can be seen that the ˙2.67 m. was considered inadequate and a final reserve of ˙4.106 m. was fixed for the  1982 time account: see D9, p. 852 where O/S of ˙372,414 plus IBNR of ˙3,734,000 makes ˙4,106,144. In short, starting from a basic assumption, Merrett made changes reflecting circumstances applicable to individual years, so as to deduce an ultimate loss from which, by deduction of noted outstandings, an IBNR could be fixed. E&W extensively reviewed the workings of the ultimate loss ratio. 

The RITC is set out in Schedule A (J10/1) and at D7, p. 261. The RITC meeting is at D7, p. 274-280. The AU38(a) form is at D7, p. 162; the AU17 form is at D7, p. 171. 

Summary of Year 5 Reserves 

The reserves in respect of asbestos for 417 amounted to ˙25.36 m. (U.S.$36.77 m.) (main account). The outstandings in respect of asbestos for 418 amounted to ˙1.08 m. (U.S.$1.57 m.) (main account). There was no specific IBNR reserve in respect of asbestos for 418 (main account). 

The reserves in respect of pollution for 417 amounted to ˙6.18 m. (U.S.$8.96 m.) (main account). The reserves in respect of pollution for 418 were nil (main account). 

The plaintiffs say that the reserves in respect of the run-off contracts (before reinsurance recoveries) amounted to ˙33.9 m. (U.S.$49.2 m.) asbestos and ˙7.5 m. (U.S.$10.8 m.) pollution. Merretts say that the reserves in respect of the run-off contracts (before reinsurance recoveries) amount to ˙27.84 m. (U.S.$40.37 m.) asbestos and ˙6.25 m. (U.S.$9.06 m.) pollution. E&W say that the reserves in respect of the run-off contracts (before reinsurance recoveries) amounted to ˙27.41 m. (U.S.$39.74 m.) asbestos and ˙5.98 m. (U.S.$8.67 m.) pollution. 

The reserves for asbestos (418/417 main account) represented 18 per cent. of the RITC for 418/417 (before T&D and rollover); the reserves for pollution 418/417 main account) represented 4 per cent. of the RITC for 418/417 (before T&D and rollover); the total reserves for the run-off contracts (being ˙51.39 m.) represented 34 per cent. of the RITC for 418/417 (before T&D and rollover). 

418/417'S INTERNAL CONTROL PROCEDURES, SYSTEMS AND RESOURCES - YEAR 5 

The contemporary documents show that as at year 5 there were serious deficiencies in 418/417's internal control procedures, systems and resources and that these deficiencies were known to Merretts and E&W. I refer to the section on this subject in year 4 above. What was needed, but lacking, was detailed involvement by Mr. Merrett in the RITC process. 

[1997]  381  L.R.L.R.  Henderson v. Merrett Syndicate (Q.B. (Com. Ct.))    Cresswell, J. 

YEAR 5 RITC - CONCLUSIONS 

As to Merretts' and E&W's knowledge of asbestos and pollution problems and uncertainties as at June 2, 1986 see above. 

418/471 in year 5 was subject to fundamental uncertainties as to the future development of (i) asbestos bodily injury claims (ii) asbestos property damage claims and (iii) pollution claims, not only in respect of its own book going back to 1953 but also in respect of the books of the 11 cedants (whose years of account reinsured are set out at Table 2 above). Looked at overall the uncertainties in year 5 were no less than those that obtained in year 4. 

The uncertainties were compounded by the fact that there was inadequate information in relation to the run-off contracts to justify the closure of year 5 (albeit that there was considerably more information than in year 4). 

As to asbestos claims 418/417 main account, the incurred claims as at Dec. 31, 1984 amounted to U.S.$27.072 m. The corresponding figure as at Dec. 31, 1985 was U.S.$33.745 m. (see Table 6). 

Merretts 

Given Merretts' knowledge of the fundamental uncertainties referred to above and of the additional uncertainties reflected in the detailed points as to Merretts set out below, I find that Merretts and in particular Mr. Merrett knew that a reinsurance to close figure could not be arrived at with a reasonable degree of accuracy/within a zone of reasonableness, and that Merretts should accordingly have left the year open. Having carefully considered all the evidence and formed an impression of the witnesses, I find that Merretts and in particular Mr. Merrett, while they knew that a reinsurance to close figure could not be arrived at with a reasonable degree of accuracy because of the extent of the uncertainties known to them, were nevertheless determined to close the year for commercial reasons. The commercial reasons were seen to be more important than the principle of equity between names. Further had Merretts declined to leave the year open E&W should have disclaimed an opinion on the grounds of fundamental uncertainty. Had they done so I find that on a balance of probabilities Merretts would have had no alternative but to leave the year open. I find that Mr. Neil's fundamental criticism (see above under year 4) was valid in year 5. 

The documents do not suggest that Mr. Merrett himself spent any more than a very limited amount of time on the year 5 RITC.  E&W 

As to E&W I accept the broad criticisms in relation to year 5 in Mr. Attwood's reports, as refined in his evidence. E&W should have realized that a reinsurance to close figure could not be arrived at within a zone of reasonableness. Given all the uncertainties referred to above and the detailed points set out below E&W should have disclaimed an opinion on the grounds of fundamental uncertainty. 

I turn to consider some detailed points in relation to (A) Merretts and (B) E&W. Although it is necessary to refer at times to E&W in (A) and Merretts in (B) I have of course given separate consideration to their respective cases. 

(A) Merretts 

Merretts' own book 

Asbestos 

In reaching the conclusion that as at June 2, 1986 the future development and extent of asbestos-related claims were subject to very considerable uncertainty I have placed primary reliance on the contemporary documents. 

Mr. Hart at par. 49 of his witness statement said: 

In relation to asbestos, we thought that the equivalent of a further 4 more years' development of claims at about the same rate was to be expected. We took this view on the basis of discussions with Robin Jackson, Jim Ayliffe and Karen Ruby. Over 1985, the increase in gross outstandings for syndicates 799 and 417 combined represented approximately 15% of the total outstandings at that date. Therefore, assuming the equivalent of a further 4 more years' development at the same rate, a loading of 60% was required. 

Of those persons whose advice was said by Mr. Hart to have led to this loading being adopted, the only one to give evidence was Mr. Ayliffe. His evidence, when asked about the above passage in Mr. Hart's witness statement was as follows (Day 13/122/22 et seq.): 

From my point of view. . .I have no recollection of these discussions, so I am really telling you what the situation would have been at the beginning of 1986. That was at a time when we had hoped we had seen indications that the asbestos problem was "peaking", I think, is the word we have used. We had nothing more than the indications which we spoke of this morning. I think it would have been my conclusion, if those assumptions turned out to be the correct approach, that we would see a down turn in the amount of losses in the future. But I do not think 

[1997]  382  L.R.L.R.  Henderson v. Merrett Syndicate (Q.B. (Com. Ct.))    Cresswell, J. 

anybody would be able to project at that time whether or not we had real grounds for coming to any firm conclusion. The indications were there. We took encouragement from the indications. (Emphasis added.) 

When Mr. Ayliffe's evidence as above was put to Mr. Hart, he agreed with it (Day 14/133-134). When Mr. Ayliffe's evidence was put to Mr. Randall he said "I believe that is the impression that I got the time" (Day 24/49). 

It is to be remembered that Mr. Ayliffe said in the course of the seminars held in Europe in July, August and October, 1985: 

. . .We have at the present time no real feeling how long it will be before we have seen a peaking of the legal activity that has been gradually developing.. . .If we. . .assume say a 30 year exposure, it is likely to be the end of the century before we see a major fall off in claims being filed in regard to asbestos exposure. . .The big difficulty is none of us know how long it will be before evidence comes through that the asbestos issue appears to be fully under control. (Emphasis added.) 

It is of course possible to point to conflicting indicators. The defendants point for example to the reduced rate of increase in incurreds (see Table 6 below) and the perceived advantages of the ACF, but when all relevant considerations are balanced fundamental uncertainties remained as reflected in Mr. Ayliffe's statement in Europe. There is an important difference between hope and the degree of certainty required to ensure a reasonable degree of accuracy for the purposes of a RITC. 

In the environmental considerations document of December, 1985 (D8/402) E&W recorded: 

. . .Last year saw a marked deterioration in the number of asbestos claims; the number of sufferers making claims having risen from 500 to 700 per month. This year the number of claims per month has risen to 1,000 per month. The claims facility which was being promoted last year has now become effective and it is hoped that it will eventually result in a reduction in costs per claim, although these effects will not be seen for the first year. 

As to further matters relevant to asbestos see under the heading run-off contracts below. 

Asbestos property damage 

Mr. Rayment, who accompanied Mr. Ayliffe to the seminars referred to above, described asbestos property damage claims as - 

. . .perhaps a greater liability, certainly more difficult to evaluate at this stage. . .Reports say that it could be much larger than the bodily injury claims that we are seeing to date. . .  Pollution 

The uncertainties in relation to pollution in year 5 were greater than in year 4. The state of the U.S. authorities is set out in Appendix 2 to this judgment. Mr. Ayliffe referred in Europe to the experience of insurers before the U.S. Courts in the context of the asbestos problem. The attitude of the U.S. Courts to the proposed defences to pollution claims was at best uncertain. 

The run-off contracts 

As to the correct approach see year 4 above. 

In a document entitled Matters for Partner Attention Mr. Potkins of E&W wrote: 

2. With regard to all run-off contracts the loadings are arrived at using a fixed percentage for each risk (e.g. asbestosis = 60% etc.) the same percentage being used for the same risk on all contracts. Merretts' justification for this basis is not very well defined and revolves around stating that the "799 basis" used for y/e 31.12.84 is not seen as appropriate due to the unique nature of many of the run-offs, implying that the underlying account need not be comparable to that of 799. . . 

4. Regarding all run-offs, the loadings used have changed 3 times and the basis for the set finally arrived at appears to be "what is seen as reasonable having regard to market trends and other available sources of information". (Emphasis added). 

Mr. McNamara commented in respect of 2: 

. . .see my notes regarding comparability with 417 and 975 [and in respect of 4] as a general premise basis quite appropriate; although there remains substantial judgment. 

D8/260 sets out three versions of the loadings. Mr. Potkins' note states that various versions of the loadings were considered with version 3 being the current "final" set. 

The notes of the RITC meeting on May 1, 1986 (D7/274) record: 

(Mr.) Randall felt that there had been a realistic appraisal of the numbers this year using the monitoring system which had been set up during 1985. The loadings had been kept up at last year's levels so that the full weight of paids and new outstandings had been taken as deterioration. The problem in looking at these two syndicates (417 and 421) was that the gearing of syndicate 421 was very different to that of syndicate 417 and that syndicate 421 also had significant stamp changes between the years of account. 

In the course of this meeting Mr. Randall offered his initial comments on the run-off contracts. 

[1997]  383  L.R.L.R.  Henderson v. Merrett Syndicate (Q.B. (Com. Ct.))    Cresswell, J. 

Despite the round-robin letter to the cedants (see for example the letter dated Sept. 9, 1985 to Burdett J/203) the notes of this meeting and further documents indicate that the information from cedants was unsatisfactory in year 5 (albeit that considerably more in formation was obtained than in year 4). 

Further uncertainties in relation to the run-off accounts were referred to in the notes of the meeting held on May 6, 1986 (D7/278). In his notes on review of run-off contracts (D9/896) Mr. McNamara recorded: 

Merretts have applied various loadings in respect of the different categories of outstandings. The loadings are their considered judgment of what is required for further deterioration but are generally highly arbitrary. Nevertheless the 60% loading for asbestos which is the dominant outstanding loss heading can be correlated to both the experience of 417, where we are able to do a more detailed projection of future developments, and also syndicate 975 where the managing agent has done a very extensive exercise and applied a load of 65%. Where we consider further refinements may be needed in future years based on the pattern of new advices and settlements it is not possible to be more scientific at this stage. In respect of the asbestosis outstandings it is noticeable that apart from the expected notifications of losses from Fireman's Fund for a reinsurance of Fibreboard there have been additional new advices from some new less prominent insureds. The rate of new advices does appear to have slowed down in 1985 but there is, of course, no certainty that this will continue. For 1984 Merretts made a forecast of two more major environmental pollution claims equivalent in cost to Shell. This has been downgraded this year to a loading of 75%. There is significant uncertainty regarding the trend in pollution claims and a substantial loading having regard to the list of noted toxic waste sites is necessary. (Emphasis added.) 

Mr. McNamara referred to a substantial increase in incurred losses during the year for Ballantyne. 

As to the quality of information provided by the cedants Mr. McNamara recorded that for Sturge the quality of information provided was not wholly satisfactory as the analysis of the outstanding claims was incomplete. As to Toomy, Gooda and Dolling-Baker Mr. McNamara recorded that the quality of information provided on paid claims was inadequate particularly as they relate to "other". There was also some deficiency in information in relation to Judd.  The summary review memorandum dated May 31, 1986 contained similar general comments on the subject of the run-off contracts. 

Mr. Randall said that Merretts had some difficulty getting analysis of the actual paid losses by category and had been unable to construct a database by policy of the asbestos exposures of the run-off contracts. He added that in other respects he thought Merretts were satisfied they had a sufficient amount of information and referred to "cartons full of information". 

A number of other documents showed the unsatisfactory nature of information from the cedants. As to Dolling-Baker a document dated Apr. 19, 1986 (D9/768) stated: 

These figures have been extracted. . .from information supplied to us by the Reassured. It is the most up-to-date detail available and is as yet unaudited and still should be considered E&OE and WP until such time as they have been approved by auditors. The breakdown of these figures will be given once figures are audited. 

As to Gooda, a cedant which was considered to have good records, Mr. Randall accepted that there were difficulties in obtaining the necessary information and deficiencies in the information provided - see C17/401- the letter dated Jan. 9, 1986 points 2, 3 and 4. 

In the letter dated Feb. 19, 1986 in respect of Judd (D8/680) it was said that the syndicate maintained comprehensive records of major latent disease involvements which could be scrutinized by Merretts at any time. There is no evidence that Merretts took advantage of this offer in year 5. 

There was very marked deterioration in the dollar provisions in respect of the run-off contracts between years 4 and 5 (after allowance for the addition of Judd in year 5) - see for example D10/404 (where 421 is also shown). D10/404 also identifies the different rates of deterioration as between the particular cedants. A comparison of the different rates of deterioration as between each of the 11 cedants and 418/417's own book at year 5 shows that an approach to loading which was undifferentiated as between each of the cedants and 418/417 could not safely be adopted. 

For the reasons set out under year 4 above, in all the circumstances, a reasonably competent Lloyd's managing agent specializing in the writing of long tail risks would have recognized in year 5 that a reinsurance to close within a zone of reasonableness could not be ensured or even contemplated without evidence as to the run-off contracts similar in form to that relating to 418/417's own book of business. The relevant circumstances include inter alia the fact that 11 run-off contracts formed a constituent part of the 1983 account, the extent of 

[1997]  384  L.R.L.R.  Henderson v. Merrett Syndicate (Q.B. (Com. Ct.))    Cresswell, J. 

the exposures (including asbestos and pollution risks) and the amount of the net outstandings referable to the run-off account (˙26.979 m./U.S.$39.1 m.). 

The defendants say that it would have been difficult and/or impracticable to obtain this level of information but the need for this information was the result of the decision to write these particular run-off contracts. Whatever may have been the practice of the market in relation to reserving for other reinsurance liabilities, the nature and scale of these particular contracts required the approach referred to above. 

It follows that Merretts had inadequate information in relation to the run-off contracts to justify the closure of year 5 (albeit that they had considerably more information than in year 4). Had they obtained the necessary further information this would have served to underline the extent of the uncertainties referred to above and to confirm that it was not possible to arrive at a RITC within a zone of reasonableness. 

Margin of error calculations 

Merretts carried out no or no adequate margin of error calculations in relation to the reserves in respect of 418/417's own book and the books of each of the 11 cedants (where the information was in any event inadequate) to reflect the fundamental uncertainties as to the future development of (i) asbestos bodily injury claims (ii) asbestos property damage claims and (iii) pollution claims. Had Merretts carried out adequate margin of error calculations these would have served to confirm that it was not possible to arrive at a RITC figure with a reasonable degree of accuracy. 

(B) E&W 

As to E&W's knowledge of asbestos and pollution problems and uncertainties as at June 2, 1986 see above. E&W's knowledge was far less extensive than Merretts'. Mr. Attwood in his reports and evidence said that, in his view, because of the uncertain nature of asbestos liabilities and the materiality of the amounts involved, the representations made by Merretts as to the future development of these liabilities had to be corroborated by independent evidence before the representations could be accepted. Mr. Attwood singled out attorneys' reports as a source of such corroboration. The same point applies to pollution liabilities. Having regard to the extent of the asbestos and pollution problems, the extent of the exposure of 418/417's own book and the books of the 11 cedants to these problems, the materiality of the reserves in connection with asbestos and pollution, the critical importance of any assessment as to the future nature extent and development of these claims and the inaccuracy of  previous estimates, I accept Mr. Attwood's evidence that it was incumbent upon E&W to review a sample of the attorneys' reports to test the representations made by Merretts. Had E&W reviewed a sample of attorneys' reports for this purpose in year 5, this would have served to confirm the extent of the fundamental uncertainties as to the future development of asbestos bodily injury claims, asbestos property damage claims and pollution claims. 

418/417's own book 

The section under the heading (A) Merretts is repeated insofar as it applies to E&W. I add the following points. 

Asbestos 

E&W should have reviewed a sample of attorneys' reports to test the representations made by Merretts. 

Asbestos property damage 

The environmental considerations document of December, 1985 recorded that there were known uncertainties with regard to potential new advices for property damage claims. 

Pollution 

E&W knew of the list of noted toxic waste sites and that there was significant uncertainty regarding the trend in pollution claims (see D9/896 quoted above). 

The run-off contracts 

The section under the heading Merretts is repeated insofar as it applies to E&W. 

As to the correct approach see year 4 above. 

There was very marked deterioration in the dollar provisions in respect of the run-off contracts between years 4 and 5 (after allowance for the addition of Judd in year 5) - see for example D10/404 (where 421 is also shown). D10/404 also identifies the different rates of deterioration as between the particular cedants. A comparison of the different rates of deterioration as between each of the 11 cedants and 418/417's own book at year 5 shows that an approach to loading which was undifferentiated as between each of the cedants and 418/417 could not safely be adopted. 

Although there was considerably more information available this year than in year 4, E&W failed to require Merretts to obtain all the necessary information as to each of the 11 run-off contracts, being evidence similar in form to that relating to 418/417's own book. It follows that E&W had inadequate audit evidence in relation to the run-off contracts to justify the opinion given. Had E&W obtained all the necessary audit evidence (see Mr. Attwood's par. 7.4.2) this would have served to 

[1997]  385  L.R.L.R.  Henderson v. Merrett Syndicate (Q.B. (Com. Ct.))    Cresswell, J. 

underline the extent of the uncertainties referred to above and to confirm that E&W should have disclaimed an opinion on the grounds of fundamental uncertainty. 

In the notes on review of run-off contracts quoted above, Mr. McNamara referred to syndicate 975 (Frizzell) where the managing agent was said to have done a very extensive exercise and applied a load of 65 per cent. But Frizzell left their 1983 year open. I have already referred to the dangers of comparing any two syndicates. Further it is to be noted that Frizzell said: 

Like many other syndicates in this situation we have to concede that there is little guidance available to us on how many further claims might materialise. [(J8/42.)] 

Our first conclusion is that the uncertainty associated with estimating future developments coupled with the fact that the 1984 syndicate was reduced in size, makes it impossible to close 1983 and prior Accounts into the 1984 Account. . .In normal circumstances, when the estimate of all outstanding claims has been made, this amount is paid as a premium to the Syndicate of the next year in return for that Syndicate accepting the responsibility for the unpaid claims of all previous years. If, however, the estimation of all outstanding claims contains a greater degree of uncertainty than is normal or reasonable, the Managing Agent may decide to "freeze" the position of the latest Account by leaving it open. (J8/40). 

Margin of error tests 

E&W carried out no or no adequate margin of error tests in relation to the reserves in respect of 418/417's own book and the books of each of the 11 cedants (where the information was in any event inadequate) to reflect the fundamental uncertainties as to the future development of (i) asbestos bodily injury claims (ii) asbestos property damage claims and (iii) pollution claims. Had E&W carried out adequate margin of error calculations there would have served to confirm that E&W should have disclaimed an opinion on the grounds of fundamental uncertainty. 

Summary of conclusions - E&W 

For the reasons set out above I have with regret come to the conclusion that a reasonably competent Lloyd's panel/recognized auditor in year 5 would have disclaimed an opinion on the grounds of fundamental uncertainty. Without prejudice to all the points made in the detailed analysis above I refer in particular to: 

(1) the fundamental uncertainties as to the future development of (i) asbestos bodily injury claims (ii) asbestos property damage claims and (iii) pollution  claims as reflected in the materials available to E&W; 

(2) the references to uncertainties in the contemporary documents relating to the audit quoted/referred to above; 

(3) the particular significance of the additional uncertainties in relation to pollution claims which became apparent in year 5; 

(4) the fact that all the fundamental uncertainties had to be considered not only in respect of 418/417's own book going back to 1953 but also in respect of the books of the 11 cedants. There had been a funnelling of these claims with their attendant uncertainties into 418/417; 

(5) the inaccuracies of previous estimates; 

(6) E&W's failure to test or test adequately the representations made by Merretts as to the future development of asbestos personal injury, asbestos property damage and pollution claims; 

(7) E&W's failure to require Merretts to obtain all the necessary information as to each of the 11 run-off contracts with the result that E&W had inadequate audit evidence in relation to these contracts (albeit that there was considerably more information than in year 4); 

(8) the fact that had adequate margin of error calculations been carried out these would have served to confirm that it was not possible to arrive at a RITC within a zone of reasonableness; 

(9) the fact that the reserve for asbestos-related and pollution claims represented a material proportion of the total reserves of the syndicate (see par. 8 of Mr. Murray's Lawrence's letter of Mar. 18, 1982). 

The consequence of leaving year 4 open 

Further but without prejudice to all my findings set out above in relation to year 5, if year 4 had been left open (as I have held it should have been), I find that the overwhelming probability is that the 1982 account would not have been closed as at Dec. 31, 1985. Had year 4 been left open this would have revealed to the Names the nature and extent of the fundamental uncertainties to which 418/417 was subject. Quite apart from other considerations Merretts would have faced enormous pressure from members' agents representing Names on subsequent years not to close the 1982 year. The probability is that Merretts would have been compelled to accede to such pressure. 

See in this connection the E&W meeting in respect of Outhwaite 317 on May 9, 1985 (I4G/302) where Mr. McNamara said: 

. . .in view of the uncertainties. . .it would be inevitable that we would have to give a form of opinion that was tantamount to a disclaimer and

[1997]  386  L.R.L.R.  Henderson v. Merrett Syndicate (Q.B. (Com. Ct.))    Cresswell, J. 

that as a consequence, the account would be likely to be left open probably for many years to come. 

Syndicate 421 

Syndicate 421 left its 1983 account open for the following reasons: 

The main problem once again relates to the book of run-off contracts; the substantial reserves in respect of these contracts created at 31st December 1985 represents a very large proportion of the total reserves of the syndicate. Given our experience over the last twelve months during which we have seen further movement in the figures advised to us by reassureds, we are led to the conclusion that this "gearing" leaves us with some difficulty in predicting with sufficient accuracy the appropriate level of reserves on what was, in 1983, a very small syndicate. . .Whilst the decision to leave the 1983 account open will result in reduced investment earnings for 1984, it does, of course, ensure that the later years are not affected by further adjustments relating to the run-off contracts. . . 

I add the above reference to 421 for completeness but for the avoidance of doubt I record that I have not paid any regard to 421 in reaching my conclusions set out above in relation to 418/417. 

37. YEAR 6: THE CLOSURE OF 1984 INTO 1985 AS AT DEC. 31, 1986 (MERRETTS' AND E&W'S REPORTS DATED MAY 21, 1987) 

As to changes in stamp capacity, Names etc. see Table 1 below (at p. 415, post). In May, 1987, 418/417's 1984 year of account was closed by way of an RITC into the 1985 year of account; and it was reported on by Merretts, on May 21, 1987. 

In the 1986 annual report and accounts for 418/417 were inter alia: 

(1) A report dated May 21, 1987 in which E&W, as auditors reported on the 1984 closed year again in identical terms to those set out in respect of year 4 above (save that the annual report was reported as giving a true and fair view of the 1984 closed year of account profit); 

(2) Notes to the accounts, under accounting policies, in which statements in all material aspects identical to those set out in respect of year 4 above were again made, save that the second passage had been expanded to read: 

Full provision has been made for all known outstanding claims and additionally a substantial sum has been included to cover incurred but not reported losses (IBNR). The figures include a significant reserve in respect of "special risks" or "run-off" contracts which were described in  detail in the Underwriter's report accompanying the 1982 underwriting account. 

In assessing the provision for these risks, information has been received from each reinsured of the losses outstanding at 31st December 1986 to which has been added a substantial further provision for IBNR. In arriving at the IBNR provision, the Underwriter has made his estimate on the basis of the non-marine classes of business known to have been written by the reinsureds and his knowledge and experience of such syndicates in the market. Consideration has been given to the effect of variations in amount and timing of payment of claims. 

At 31st December 1984 it was recognised that many of the outstanding losses would not be settled for some years and a specific excess of loss reinsurance protection (sometimes described as "time and distance reinsurance") was purchased. Under this policy potential recoveries in the period 1992 to 1998 of U.S.$78 million were available to the syndicate for a premium, charged to the 1982 account of $26,350,000. 

For the 1984 account the policy limit was increased to U.S.$118 million for an additional premium of U.S.$24,775,000, the recoveries under the additional policy being collectable in the period 1990 to 2000. In calculating the net premium to close the 1984 account credit has been taken in full for these recoveries. . . 

As to the regulatory regime for the year ended Dec. 31, 1986 see above. 

PERCEPTION AS AT YEAR 6 

As to developments and changes in perception in previous years see above. Perception in year 6 must be judged against this background. 

As at May 21, 1987 the future development and extent of (a) asbestos bodily injury and (b) asbestos property damage and (c) pollution claims were in each case subject to very considerable uncertainty. 

I refer to the chronology, Appendix 1 to this judgment (which in the case of attorneys' reports lists some examples of reports in Merretts' possession). As to the U.S. cases at the above date see Appendix 2 to this judgment. 

The nature and extent of the uncertainties as at May 21, 1987 were known to Merretts and E&W, alternatively in the case of E&W would have been known to E&W had necessary and appropriate audit tests and enquiries been carried out and conducted. 

The broad nature and extent of the uncertainties as at May 21, 1987 were reflected in the following materials. 

[1997]  387  L.R.L.R.  Henderson v. Merrett Syndicate (Q.B. (Com. Ct.))    Cresswell, J. 

Where materials are drawn on which would probably have been available only to Merretts or E&W this is indicated in brackets. 

Asbestos personal injury claims 

(a) As at July, 1986 (Merretts only) at a meeting of the AWP Mr. Ayliffe reported on the recent annual meeting of the ACF. At present there were 40,700 outstanding cases. 4050 new cases had been notified to the facility during the months of January to April. This was continuing the 1000 new cases a month rate which had been experienced at the commencement of ACF operations. This was unexpected. It had been felt that notifications of new cases would fall off once the facility was established. 

(b) As at August, 1986 (Merretts only) a letter from Toplis & Harding to members of the AWP enclosed a draft report proposed to be submitted by attorneys. The draft report stated that the rate of new law suits filed showed a steady increase to an average filing rate of 900 new cases per month during the course of the current year. 40,000 outstanding claims were yet to be addressed, and although there is evidence to indicate that more current filings relate to cases of less serious disability, the continuing up-surge of claims continues to be of concern. This difficulty is further heightened by the recent amendment to the New York Statute of Limitations in respect of certain hazardous products including disability arising out of the use of asbestos. The amendment allows claimants who were formerly time barred a 12 month period in which to file an action. While it is difficult to foresee how much activity may now develop out of New York State, some observers have reported that up to 5000 new filings can be expected, mainly arising from the Brooklyn Shipyards. 

(c) As at August, 1986 an attorney's report stated that from a recent analysis conducted by the facility, the rate at which new law suits were filed has steadily increased from about 500 per month, which had been the consistent level over 1984/1985, to an average filing of 900 cases per month during the course of the current year. Although there is evidence to indicate that more current filings relate to cases of less serious disability, the continuing up-surge of claims continues to be of concern. 

(d) As at September, 1986 (Merretts only) a letter from Mr. Jackson, as chairman of the AWP, to the Guardian Royal Exchange stated that, as in the past, many imponderables continue to exist in projecting reserves for asbestos claims, the most significant being whether there is now developing a change in the severity levels in more recent filings.  The letter also referred to the substantial volume of new filings. 

(e) As at September, 1986 (Merretts only) the minutes of a MUAM board meeting recorded that the number of new losses being reported to the ACF is approximately 100 per cent. higher than anticipated but the potential deterioration is ameliorated by the following factors. The new claims tend to be for less serious physical injury; many assureds have now exhausted their insurance protection; it is anticipated that actual costs of settlement will fall particularly in view of the dramatic drop in defence costs from U.S.$80 m. to 70 m. However, the scope for deterioration on retrocessions is still difficult to assess. 

(f) As at February, 1987 Mr. Jackson addresed a recognized auditors meeting as to the continuing concern with asbestos. New cases are being advised at 1500 per month, which is higher than previously. The ACF means that expenses are down. It had been hoped that there would be a drop in claims in 1986 but this has not been evident. 900 new cases per month were reported in 1985, while 1500 new cases were reported in November and December, 1986. The facility settled claims at a higher rate than was expected. During the course of 1986 the London market expended approximately U.S.$70 m. in facility billings and to some extent this figure was affected by accelerated cash-flow. Known claims will account for 25-30 per cent. increases in asbestos reserves at year end Dec. 31, 1986. Much of this increase will come from reinsurance and retrocessional contracts. 

(g) As at February, 1987 (Merretts only) a letter from Mr. Jackson, chairman of the AWP to the insurers at interest dated Feb. 27, 1987 stated the following. There had been a substantial increase in the number of new law suits which arise from asbestos related causes. During the course of the first half of 1986 new cases were arising at the rate of approximately 900 new cases per month but as the end of the year approached a significant increase in new filings became apparent reaching a level of approximately 1500 new cases for both November and December. The average cost of settlement per claim being achieved by the ACF has yet to reduce to the level which was the basis of the claimant reserve used in the calculations for year end reserves. There are a number of reasons why indemnity levels have not been capable of being reduced, the most significant being the aggressive attitude adopted by the Courts in the Texas class action and the material effect this has had upon the overall average settlement costs. Once again it has not to date proved possible to reduce the substantial outlay in regard to costs which are being incurred through the liaison counsel acting on behalf of the 

[1997]  388  L.R.L.R.  Henderson v. Merrett Syndicate (Q.B. (Com. Ct.))    Cresswell, J. 

ACF. There are a number of reasons that bear upon this issue, the most significant of which is the pressure being exerted by various courts to speed up the number of cases which are addressed during the coming months. With this increased activity it appears unlikely that we shall see any meaningful reduction of legal costs during the present year. The main area of concern is the substantial increase that has developed in new filings which are clearly arising as a result of an all out effort by the plaintiff bar in conjunction with the unions to canvas claimants from industries with only a remote asbestos involvement. Mass screening is developing in the tyre industry where pulmonary problems are said to exist due to an exposure to talc which may contain minimal quantities of asbestos and which is used in the moulding process. Similar screening activities are now being reported from the steel industry. The letter quoted an extract from a recent Wall Street Journal article which summed up this new form of ambulance chasing. It is significant that claims that are generated in this fashion arise from individuals who have little or no disability and even assuming that liability was to fall upon asbestos producers - which is questionable - the measure of damages should be minimal. For some time it has been the perception of the facility that the quality of more recent filings was less serious than formerly. The average indemnity levels which we are experiencing in the facility reflect the severity of claims arising some five years ago and it would be reasonable to anticipate some reduction to develop as we start to address more recent cases. I emphasized this point at a recent meeting of Panel Auditors as a consideration that needs to be kept in mind in endeavouring to address future loss development. The problems arising out of asbestos related claims continue to become more serious with the passage of time. Indeed many producers are now being forced to recognize the present trends are such that they must now contemplate that there will be a future point in time at which they exhaust all insurance coverage. The majority of claims arise from asbestos exposure in an occupational environment and for employees in certain occupations such as shipyards and railroads they already have protection afforded for occupation disease under existing federal legislation. In the event that a Bill were to be passed by the House supporting this objective it would greatly ease the burdens being imposed upon asbestos producers under the strict product liability theories. 
 
Asbestos property damage claims 

The Asbestos Hazard Emergency Response Act was passed in 1986. (a) As at August, 1986  (Merretts only) the draft report enclosed with the letter from Toplis & Harding referred to above stated that although there has been a steady increase in the number of property damage suits filed during the past year, there still exist many imponderables from a reserve stand-point. 

(b) As at September, 1986 an attorney's report referred to the general overall increase in property damage litigation and the fact that certain of the target defendants had been found liable for substantial damages. 

Pollution claims 

On Nov. 17, 1986 the Superfund Amendments and Reauthorization Act was signed. 

The environmental claims reinsurance group (ECRG) held its first meeting on Feb. 26, 1987. Mr. Ayliffe was a member. 

(a) As at August, 1986 (Merretts only) a letter from Toplis & Harding to members of the AWP stated that the Senate House Conference is now moving towards completion. It has agreed to impose a strict timetable upon EPA. The EPA must complete preliminary assessment of 23,000 potential sites by Jan. 1, 1988. These must be followed by site inspections at all sites by Jan. 1, 1989. Following this the EPA must increase the number of priority sites to 1600. EPA does not even consider there to be an issue as to whether costs of remedial work are covered by liability insurance policies. Their view is that there is no question that such coverage exists under past liability policies. 

(b) As at November, 1986 (Merretts only) a letter from U.S. attorneys to Merretts re Superfund Amendments and Reauthorization Act, 1986 stated the following. The Act's effect will clearly be to increase the pace and level of clean-up activity against persons and companies with environmental exposure. The Act will significantly increase potential liability exposure of the insurance and reinsurance communities. The potential aggregate exposure is difficult to quantify at present. It is likely to depend on judicial interpretations. Congressional sources indicate that the ultimate cost of the various clean-up programmes will be between U.S.$20 billion and U.S.$100 billion. Further recoveries of a substantial portion may be sought from insurers. Assuming, for the purposes of discussion that 75 per cent. is recovered, the loss by industry might range from U.S.$15 billion to U.S.$75 billion. In time, further recoveries of a substantial portion of that sum may be sought from insurers, and, even if discounted by a factor of 50 per cent., the net potential aggregate exposure of the insurance and reinsurance industry may range 

[1997]  389  L.R.L.R.  Henderson v. Merrett Syndicate (Q.B. (Com. Ct.))    Cresswell, J. 

from U.S.$7.5 billion to U.S.$37.5 billion. While these figures cannot be predicted with accuracy at this time, it is clear that, given the potential exposure, vigorous cost containment activities and close monitoring of clean-up site expenses will be significant in reducing the aggregate exposure. Equally important will be protection of contract rights and defences. 

(c) As at January, 1987 (Merretts only) a letter from attorneys to the ECRG enclosed an updated priority list, identifying some 90 assureds. 

(d) As at February, 1987 at the meeting of recognized auditors referred to above it was stated that environmental pollution will account for increases in some reserves. The market will end up paying a lot on pollution but policy wordings may give us better defences than on asbestos. It appears inevitable that we are likely to see a continued growth in the involvement of the London market as new losses are reported. There appears to be a trend developing in the Court findings arising out of various EPA coverage litigation which demonstrates more respect for the intent of insurers - namely that the seepage and pollution exclusion means what it says and that the date of damage cannot reasonably pre-date the time of discovery. 

(e) As at April, 1987 (Merretts only) a letter from attorneys to the ECRG stated the following. We have proposed, and the ECG has approved, the creation of a priority list of assureds with pollution claims. The priority list will include assureds whose pollution claims pose an imminent potential exposure to underwriters, involve a declaratory judgment action against underwriters, or require an indemnity or expense reserve. Because of the significant potential exposure of the pollution claims included on the priority list, it is imperative that the market be kept fully informed. The London market faces an enormous problem with the presentation of pollution claims. There are already many more assureds concerned with pollution than were concerned with asbestos. The number of pollution coverage lawsuits involving underwriters already exceeds the number brought during the whole of the asbestos problem. 

A DESCRIPTION OF THE YEAR 6 RITC 

By now Merretts were preparing much of the supporting documentation for the RITC e.g. the documents at D11, p. 554 and the McNamara schedules at D10, 317-341. This was the year in which MUAM became the managing agent. 

The RITC breaks down as follows:  417      418      Total  
                                                        ˙'000    ˙'000     ˙'000     
Main Account     
- Net outstandings                        37,018   18,843    55,861     
- IBNR                                           22,623   18,004    40,627  
                                                      59,641   63,847    96,488     
Run-off Account     
- Net outstandings                         22,246   12,197    34,443     
- IBNR                                            20,257    5,692    25,949
                                                       42,503   17,889    60,392 
                                                    102,144   54,736   156,880    
Roll-over/Asbestos     
related claimes Account                 (3,030)     -      (3,030) 
Time & Distance Credit                  (62,989)     -     (62,989)  
                                                        36,125   54,736    90,861   
Net underwriting result     
per Account                                      (6,119)  12,157

Footnote 1 of D11 page 795.

The basis of the reserving is explained in the summary     for the Inland Revenue which, in the case of 417 is D11, p.     782 and in the case of 418 D11, p. 795. 

SYNDICATE 417 

Outstandings 

The work carried out was similar to that which had been     carried out previously: Schedule B5(a) (J10/2). See also     was E&W's work on outstandings: Schedule B5(b) (J10/2).     The audit programme is at D10, p. 304. An audit rationale     is at CA1/A, D11, p. 527-530. 

E&W produced for this year spread sheets analysing     improvements and deteriorations by class of business per     year of account: see D11, pp. 533-542 (sterling) and pp.     543-548 (dollars). The spread sheets for Canadian dollars     and combined currency do not survive. Merretts and     E&W say the allocation of the settlement figures     produced by Merretts per year were not reliable for that     purpose and so the spread sheets were only used for     comparing 1985 and 1986 outstandings: p. 531. The     plaintiffs have further criticisms of these spreadsheets. 

IBNR 

The RITC for 1984 is set out in a number of documents.     D11, p. 597 - CB1/A - has the RITC in summary form. D11,     pp. 598 and 599 - CB1/B & C - have the same information     in detailed form. Schedule A (J10/1) p. 16 expresses in     readable tabular form the contents of pp. 598 and 599. This     reconciles to p. 13 of Schedule A which tabulates (in     effect) p. 597. The RITC meeting is at D10 p. 176. 

The loadings on net outstandings (both for 417's own     business and run-off contracts) were as follows (p. 572): 

[1997]  390  L.R.L.R.  Henderson v. Merrett Syndicate (Q.B. (Com. Ct.))    Cresswell, J. 

Asbestosis  70% Shell- DDT/EPA     200% Agent Orange10% DES20% Other    Property -    Other    RAA Loadings (converted to an outstanding basis): see p. 577, pp. 582 & 787.    Run-offs 25% Specials    Underwriters' opinion based (excl. Bussell)      upon an esamination of each contract: D11, p. 788. Bussell     p. 573 LMX - 1978 onwards   IBNR on a contract by contract basis. LMX - 1977 & prior   No loadings to outstandings of $4,135,000.

The working papers - CA9 - in relation to the change of loading (see p. 528) cannot be found. But it is clear from CA5/5-8 D11, pp. 558-561 that E&W considered the change and their observations are there set out. 

Asbestosis 

The outstanding claims had reduced from U.S.$23,265,000 to U.S.$21,538,000 (less recoveries of U.S.$5,435,000). The rate of increase of incurred claims was reduced. For 1985 the incurred claims (for 417/418) were U.S.$33.7 m. For 1986 they were U.S.$39.0 m. - an increase of U.S.$5.3 m. compared with an increase of U.S.$6.6 m. the year before: see J10, Schedule C. 

The minutes of the RITC meeting on Mar. 16, 1987 record under the heading asbestos: 

There had been a review of the movement in incurreds during calendar year 1986. The assumption had been made that this movement represented 20% of the total deterioration to come. Therefore a further 4 times movement in incurreds had to be provided for. Expressed as a percentage factor on outstandings as at 31 December 1986 gives a loading of 70%. (Mr. Merrett) indicated that the above assumption was based on the view that asbestos claims were starting to tail off because the use of the product had stopped a long time ago and there had been a concerted effort to discover claimants. (The following was added in manuscript by Mr. McNamara) The 4 times factor is subjective but the effect on the direct result of the year is small as a large IBNR last year. I have seen some falling off elsewhere in incurred trend so that may be reasonable.  This approach was originally adopted by Mr. Hart in his paper at D11, p. 574. The mathematics for the loading on net outstandings was as follows: 

($21,538,000 - $5,435,000*) - 70% = $11,272,000. 

*Asbestos recovery: p. 598. 

(Merretts say the bulk of the new entries relate to reinsurance and retrocessional policies; it has not been possible to research these entries fully, but it is apparent that many of these are not new policies but further specific reserves being notified). See also D11/561. 

Shell 

The outstanding figure for the Shell Rocky Mountain claim was U.S.$3,150,000 (D11, p. 598) which was the Syndicate's share on a worst case basis as outlined in attorneys' reports. Accordingly there was no separate IBNR. This was based on a total quantum of U.S.$300 m. (compared with U.S.$250 m. in the previous year). This was at a time when there was increasing doubt about the validity of the Shell claim. According to E&W's notes of the RITC meeting Mr. Merrett said that: 

. . .in 1987 there was to be a case in London for Shell to demonstrate that it did have a claim; any subsequent case was likely to run for many years: D11, p. 570. 

(Merretts say that it is extremely unlikely that Mr. Merrett said this. The Shell litigation was in the U.S.A. and Mr. Merrett would have known this as he had deposed as a witness in the case. E&W accept that the passage quoted may have been a mistaken reference to the coverage action in San Francisco). 

Other EPA/DDT 

Mr. Hart adopted a similar approach to "other" EPA as he did to asbestos: D11, p. 576. He looked at the increase in incurred claims in 1986 (of U.S.$3 m. gross), took the view it might last for another five years, making U.S.$15 m. in all which would produce a 200 per cent. loading on outstandings i.e. twice the U.S.$7 m. which is the aggregate of the total at D11, p. 580. 

In his memorandum Mr. Hart said - 

. . .It is, I believe, anyone's guess for how long such a level of activity will continue but I believe we would be very optimistic to assume anything less than 5 years. 

The minutes of the RITC meeting on Apr. 16, 1987 record the following under the heading EPA: 

Including Love Canal, DDT etc. The same basis as for Asbestos has been adopted and this gave a loading factor on outstandings of 200%. There was a lack of case law and attorneys' 

[1997]  391  L.R.L.R.  Henderson v. Merrett Syndicate (Q.B. (Com. Ct.))    Cresswell, J. 

reports were recommending resistance to claims. Slips had included exclusion to pollution claims but it was recognised that some courts in the United States were overriding these exclusions. (Mr. McNamara added in manuscript) The 200% is again highly subjective but gives some opportunity for deterioration to be covered. 

When applied to final net outstandings of U.S.$1,976,000 (U.S.$3,750,000-U.S.$1,774,000 - D11, p. 598) the resulting loading was U.S.$3,952,000. (The plaintiffs repeat their criticisms referred to in year 5 sup.) 

DDT 

The same approach was adopted as with EPA so that the loading was U.S.$1,864,000 i.e. 200 per cent. of (U.S.$1,005,000-U.S.$73,000): D11, p. 598. 

DES 

A loading of 20 per cent. overall was considered adequate. Merretts believed that they were fully reserved in respect of DES, for which there were gross outstandings of U.S.$5,174,000 - D11, p. 598 (or D11, 555) - and in respect of which a settlement with Eli Lilly was in progress (and was reached in 1986). The IBNR loading was 10 per cent. on all save Eli Lilly, 25 per cent. for Eli Lilly, say 20 per cent. overall: see D11, p. 575 of Mr. Hart's notes and the RITC meeting at D10, p. 176. In the event no significant deterioration took place from then onwards. 

Agent Orange 

This had ceased to be an issue. A large number of claims had been settled. There were outstandings of U.S.$56,000 (D11, p. 599) set off by reinsurance recoveries of U.S.$97,000, producing a net balance in favour of the syndicate. Merretts added 10 per cent. for fees and odds and ends. 

Run-off contracts 

Merretts applied (broadly) the same loadings to run-off contracts as they did in respect of the syndicate's main account. (D11/790). 

Schedule D (J10/4) shows the amount of the loadings for the run-off contracts for 1986 and, in respect of individual cedants the percentage for different categories of business. The base information from cedants was now produced six monthly and Merretts were testing the accuracy of the information provided against cedants' records. Where detailed information had not been provided by cedants, incurreds were determined by Merretts from the information available supplemented by Merretts' own knowledge. 

The audit file containing E&W's review of the run-off contracts cannot be found. E&W verified  the loss information compiled by the agency back to the submissions of the cedants D11/756-780: and the information derived from the cedants is tabulated at D11, p. 806-817. 

Possible closure of the account 

At the RITC meeting (typed notes D11, p. 569, MSS notes at D11, p. 590) Mr. McNamara raised the question whether 418/417 ought to be left open given levels of uncertainty. 

The minutes of the RITC meeting on Apr. 16, 1987 record: 

(Mr. McNamara) looked at 417 specifically. There was a long-tail on the business. The funds stood at ˙100 m (before T + D) yet income was only ˙9 m p.a. He questioned if it was appropriate to keep the account open. (Mr. Randall) indicated that this had been considered; however, the ability of 417 to meet claims was not a problem, its size being such that it can stand peaks and troughs in settlements. 421 has a far greater gearing problem. 417 RITC is now greater than 418 RITC even though 417 is a small part of the stamp. 418 RITC is considered to be well known and controlled. Following further discussion, it was agreed that there was no case to keep the account open because the syndicate had shown the ability to withstand problems in the past and that a material error in the reserving (e.g. ˙20 m) is only equivalent to 10% on the capacity of 417/418 combined. 

Time and distance policy 

The agency increased the time and distance policy cover by U.S.$40 m. to U.S.$118 m. for an additional premium of U.S.$24.8 m. Mr. Hart produced a schedule setting out projected cash flows for the various types of business - D11, p. 712 - in order to show that the timing of the recoveries under the T&D policy would match the payment of claims in the future. J14/tab.17 of the attachments to Hart's statement contains details of the method of calculating the time of payment of losses. 

The schedule was checked by E&W. The net effect of the additional protection less the additional premium was to reduce the losses for 1984 by ˙10.2 m. 

The T&D policy was referred to in the accounts: E2, p. 255, note 6. This note expressly referred to the net benefit of the policy since (unlike in 1984) the additional benefit might not otherwise have been apparent. The T&D policy was also referred to in the managing agent's report: E2, p. 211. 

[1997]  392  L.R.L.R.  Henderson v. Merrett Syndicate (Q.B. (Com. Ct.))    Cresswell, J. 

Suspense account 

The balance of the asbestos suspense account was taken into account namely ˙3 m.: D11, p. 682. 

SYNDICATE 418 

Outstandings 

The agency's approach to determining outstandings was similar to the previous year: Schedule B6(a) (J10/2). The outstandings summary (on computer) is at D10, p. 75-112. It includes reserves of U.S.$1,673,000 for asbestosis related claims viz: 

$000     R/I Sturge      
350     p. 79    N.Y. Shipbuilders 
3          p. 78    Avondale shipyard    
1967   350     p. 84    
1968   450     p. 85    
1969   520     p. 86      
         1,673
     
There was also U.S.$200,000 for environmental pollution: D10, p. 98 and U.S.$435,000 for toxic substances: D10, p. 96. Merretts made a specific bad debt provision reached by an item by item review: D10, p. 140. 

The RITC is set out in tabular form at Schedule A, p. 13 (J10/1) and in manuscript at D10, p. 140 (which reconciles to the outstandings summary at D10, p. 75). 

E&W's review of outstandings was similar to the previous year: Schedule B6(b). The audit programme is at D10, p. 68. 

IBNR 

To determine the IBNR on the general account the agency adopted, on the recommendation of Mr. Randall, a different approach, called the "chain ladder" approach. It is summarized in the explanation to the Inland Revenue at D11, p. 799. 

In essence they took the data available for the years of account 1975-1984 on outstanding claims as at the third to 12 years. From this - see D11, p. 799 - they were able to calculate the ratio between incurred claims at the end of one year and those incurred at the end of the previous year. Thus for the 1975 year of account outstanding claims at 11 years were - see D11, p. 801 - ˙17,674,000 which was 101.41 per cent. of ˙17,601,000 outstanding for the previous year. From this they deduced the average relationship (expressed as a percentage) of incurred claims at the end of any year, n, to the incurred claims at the end of the previous year (n-1): see line (a). They then calculated the relationship between the incurred claims  in any one year and the claims incurred by the twelfth year (assumed to be final): line (b). Thus, on average, year 12 claims would be 99.35 per cent. of year 11 claims. Year 10 claims would be 100.13 per cent. of year 12 claims being, 100.79 per cent. of 99.35. This is because on average claims at year 11 are 100.79 per cent. of year 10 and claims at year 12 are 99.35 per cent. of year 11. Likewise outstanding claims at year 9 would be 98.97 per cent. of the year 12 figure, being 98.84 per cent. of 100.13 (i.e. the ratio of year 10 to year 9 multiplied by the ratio of the year 10 to year 12). From this an ultimate loss was projected by multiplying the outstanding claims at any given year by the percentage necessary to project the claims to year 12. This produced a reserve of ˙14,825,000. The agency took the view that the use of ratios which supposed a decrease in incurreds in a later year would produce an unacceptable distortion in the prediction. So a second calculation was done - D11, p. 802 whereby 100 per cent. was substituted in line (a) on those occasions where a lower figure had previously appeared. This produced a loading of ˙18,005,000. 

Run-offs 

In respect of the run-off contract the reserving method was the same as for Syndicate 417. 

RITC meeting 

The minutes of the meeting are at D10, p. 171 or 173. At the meeting Mr. McNamara raised a concern that no reserve had been included for 1974 and prior and that claims, such as pollution, arising out of policies written in old years might be notified. Mr. Merrett said that the agency had considered the impact of pollution and that the impact of notification on such years had been fairly light, and that the reinsurance programme was in good shape so that single loss damage (into which category pollution fell) was still covered. Following discussion E&W accepted the agency's determination of 418 RITC to be reasonable. 

The AU38(a) for the combined syndicates is at D10, p. 252. The solvency report for 418 is at D10, p. 262. The solvency report for 417 is at D10, p. 448. 

Summary of year 6 reserves 

The reserves in respect of asbestos for 417 amounted to (plaintiffs) ˙22.17 m./(defendants) 18.49 m. (U.S.$32.81 m./27.38 m.) (main account). The outstandings in respect of asbestos for 418 amounted to ˙1.13 m. (U.S.$1.67 m.) (main account). There was no specific IBNR reserve in respect of asbestos for 418 (main account). 

The reserves in respect of pollution for 417 amounted to (plaintiffs) ˙7.33 m./(defendants) 6.13 

[1997]  393  L.R.L.R.  Henderson v. Merrett Syndicate (Q.B. (Com. Ct.))    Cresswell, J. 

m. (U.S.$10.85 m./9.08 m.) (main account). The reserves in respect of pollution for 418 amounted to ˙.135 m. (U.S.$.2 m.) (main account). 

The plaintiffs say that the reserves in respect of the run-off contracts (before reinsurance recoveries) amounted to ˙36.36 m. (U.S.$53.85 m.) asbestos and ˙12.48 m. (U.S.$18.47 m.) pollution. Merretts say that the reserves in respect of the run-off contracts (before reinsurance recoveries) amounted to ˙30.9 m. (U.S.$45.75 m.) asbestos and ˙8.93 m. (U.S.$13.21 m.) pollution. E&W say that the reserves in respect of the run-off contracts (before reinsurance recoveries) amounted to ˙27.9 m. (U.S.$41.29 m.) asbestos and ˙8.98 m. (U.S.$13.28 m.) pollution. 

The reserves for asbestos (418/417 main account) represented 15/13 per cent. of the RITC for 418/417 (before T&D and rollover); the reserves for pollution (418/417 main account) represented 5/4 per cent. of the RITC for 418/417 (before T&D and rollover). The total reserves for the run-off contracts (being ˙60.39 m.) represented 39 per cent. of the RITC for 418/417 (before T&D and rollover). 

418/417'S INTERNAL CONTROL PROCEDURES, SYSTEMS AND RESOURCES - YEAR 6 

The contemporary documents show that as at year 6 there were serious deficiencies in 418/417's internal control procedures, systems and resources and that these deficiencies were known to Merretts and E&W. 

I refer to the section on this subject in year 4 above. What was needed, but lacking, was detailed involvement by Mr. Merrett in the RITC process. 

YEAR 6 RITC - CONCLUSIONS 

As to Merretts' and E&W's knowledge of asbestos and pollution problems and uncertainties as at May 21, 1987 see above. 

418/417 in year 6 was subject to fundamental uncertainties as to the future development of (i) asbestos bodily injury claims (ii) asbestos property damage claims and (iii) pollution claims, not only in respect of its own book going back to 1953 but also in respect of the books of the 11 cedants (whose years of account reinsured are set out at Table 2 below). Looked at overall the uncertainties in year 6 were certainly no less than those that obtained in years 4 and 5. 

The uncertainties were compounded by the fact that there was inadequate information in relation to the run-off contracts to justify the closure of year 6 (albeit that there was considerably more information than in year 4).  As to asbestos claims 418/417 main account, the incurred claims as at Dec. 31, 1985 amounted to U.S.$33.745 m. The corresponding figure as at Dec. 31, 1986 was U.S.$39.043 m. (see Table 6). 

Merretts 

Given Merretts' knowledge of the fundamental uncertainties referred to above and of the additional uncertainties reflected in the detailed points as to Merretts set out below, I find that Merretts and in particular Mr. Merrett knew that a reinsurance to close figure could not be arrived at with a reasonable degree of accuracy/within a zone of reasonableness, and that Merretts should accordingly have left the year open. Having carefully considered all the evidence and formed an impression of the witnesses, I find that Merretts and in particular Mr. Merrett, while they knew that a reinsurance to close figure could not be arrived at with a reasonable degree of accuracy because of the extent of the uncertainties known to them, were nevertheless determined to close the year for commercial reasons. The commercial reasons were seen to be more important than the principle of equity between names. Further had Merretts declined to leave the year open E&W should have disclaimed an opinion on the grounds of fundamental uncertainty. Had they done so I find that on a balance of probabilities Merretts would have had no alternative but to leave the year open. I find that Mr. Neil's fundamental criticism was valid in year 6 (see above under year 4). 

The documents do not suggest that Mr. Merrett himself spent any more than a very limited amount of time on the year 6 RITC. Mr. Hill's manuscript notes taken at the RITC meeting on Apr. 16, 1987 (D11/591) indicate that Mr. Merrett left the meeting (which started at 8 35 a.m. and finished at 10 31 a.m.) at 9 33 a.m. before the critical discussion as to whether or not the year should be left open took place. 

E&W 

As to E&W I accept the broad criticisms in relation to year 6 in Mr. Attwood's reports, as refined in his evidence. E&W should have realized that a reinsurance to close figure could not be arrived at within a zone of reasonableness. Given all the uncertainties referred to above and the detailed points set out below E&W should have disclaimed an opinion on the grounds of fundamental uncertainty. 

I turn to consider some detailed points in relation to (A) Merretts and (B) E&W. Although it is necessary to refer at times to E&W in (A) and Merretts in (B) I have of course given separate consideration to their respective cases. 

 [1997]  394  L.R.L.R.  Henderson v. Merrett Syndicate (Q.B. (Com. Ct.))    Cresswell, J. 

(A) Merretts 

Merretts' own book 

Asbestos 

Mr. Hart's undated memorandum (D11/574) recorded:

Loadings: 

(a) Asbestos Increase in incurred in 1986 was 15% gross. If at the end of 1985 we had taken the view that 20% of the overall increase in incurred would be during 1986, (i.e. 4 more similar years to come, or equivalent) then this would result in an overall gross incurred to 417 (ex. run-offs) at 31.12.86 of approximately $52.5m? say $50m. This implies a gross IBNR now of $15m. i.e. 70% . . . 

If alternatively we had taken the view that 33% of the overall increase in incurred would be during 1986 (i.e. 2 more similar years to come) then this would result in an overall gross incurred at 31.12.86 of approx. $44m. (42% loading) . . . 

I think this latter assumption is too optimistic, especially having spoken to Karen Ruby, who believes that 1987 could be a bad year for bodily injury claims (? + 40%) and property damage and railroads are only just starting. On that basis, even a $50m ultimate looks decidedly low. 

On about Mar. 7, 1987 Mr. Hart had seen the memorandum from Mr. Jackson to the market dated Feb. 27, 1987 (see above). When he was cross-examined about his undated memorandum he said: 

[Q.]. . .This is how you arrive at your 70% loading for asbestos? [A.] Yes. 

[Q.] And you still took the view, evidently, from the fact that it was a loading of less than 100%, that the worst of asbestos was behind you? [A.] Correct. . . 

[A.]. . .I think this note was prepared as a discussion document. 

[Q.] Yes. [A.] And that was the debating point at which we started, and, as it happened, it was also the point at which we finished. It was very much a note prepared for discussion. (Day 41/135-136).. . . 

[Q.] You seriously stand there and tell us, through the spectacles you wore, in the light of that document (i.e. Mr. Jackson's memorandum of 27.2.87), you considered a 70% loading was accurate? [A.] I put forward the document containing 70% as a discussion document. 

[Q.] Not believing it to be adequate? [A.] I believed at the time it was at the lowest end of possible adequacy. I said in the document itself that even a 50 million ultimate looks decidedly  low. I do not think there is any question that I am aware of the fact that it could be worse. 

[Q.] Just so. What it really comes to is that a stab at it or a guesstimate of 70% looks decidedly low, that is what it amounts to, does it not? [A.] I think that that can be seen from that document. (Day 14/140-141) 
In the course of his evidence Mr. Ayliffe referred to the substantial increase in the rate of new filings subsequent to the ACF. He said: 

We had to assess whether or not that was a meaningful increase or whether or not there had been cases held back by the plaintiff bar pending the establishment of this new organisation. We took the view that it was most probably the latter. The quality of the losses then being filed was of less severity than had been seen formerly. So although we had more claims in number we (were) not necessarily conscious of a serious deterioration in the overall problem. . . 

[Q.]. . .As I have understood your statement, expanded in the way that you have just done . . ., despite the increase in filings, the numerical increase in the rate of filings as at December 1986 you remained of the view that the problem had peaked and were of the view that the acceleration of claims was not an increase in the overall size of the problem. Is that fair? [A.] I think it is an over-emphasis on the word "peaked". 

[Q.] Right. [A.] We were assessing the situation as at that particular time; and we still felt there were indications that we may be seeing the worst behind us. I would say no more than that. (Day 13/146-148). 

Mr. Randall was also asked about deterioration: 

[Q.]. . .How the deterioration, consisting in the fact that the number of new claims was approximately 100% higher than anticipated, would be ameliorated by the factors which are listed in your proof and also at the board minute, only time would tell, would it not, Mr. Randall? [A.] Yes, Sir (Day 24/83). 

Mr. Hart accepted that no exercise was performed by Merretts in an attempt to quantify the consequences of, on the one hand, the decrease in the seriousness of asbestos claims that were being made against, and on the other hand, the increase in the number of such claims. 

The notes of the RITC meeting on Apr. 16, 1987 record: 

(iv) Asbestos - there had been a review of the movement in incurreds during calendar year 1986. The assumption had been made that this movement represented 20% of the total deterioration to come. Therefore a further 4 times

[1997]  395  L.R.L.R.  Henderson v. Merrett Syndicate (Q.B. (Com. Ct.))    Cresswell, J. 

movement in incurreds had to be provided for. Expressed as a percentage factor on outstandings as at 31 December 1986 gives a loading of 70%. SRM indicated that the above assumption was based on the view that asbestos claims were starting to tail off because the use of the product had stopped a long time ago and there had been a concerted effort to discover claimants (Mr. McNamara added in manuscript - the 4 times factor is subjective but the effect on the direct result of the year is small as a large IBNR last year. I have seen some tailing off elsewhere in incurred trend so this may be reasonable). 

When asked about - 

. . .the view that asbestos claims were starting to tail off because the use of the product had stopped a long time ago and there had been a concerted effort to discover claimants. . . 

Mr. Hart accepted that "there seems to be discrepancy there". 

Asbestos property damage 

Although Mr. Jackson's letter as chairman of the AWP to insurers at interest dated June 10, 1987 (G/230) came after the closure of year 6 on May 21, 1987 the probability is that certain of the views as to asbestos property damage claims in that letter were held by Mr. Jackson as at May 21, 1987 including for example the growing concern at the steadily increasing number of claims and the following sentence: 

Quite apart from the liberal approach that can be anticipated when the Courts come to address the many substantial coverage issues that arise, the quantum in the underlying actions is very significant. 

Pollution 

In his undated memorandum (D11/574) Mr. Hart recorded: 

(d) DDT/EPA . . . It is, I believe, any one's guess for how long such a level of activity will continue, but I believe it would be very optimistic to assume anything less than 5 years. (emphasis added). 

When he was asked about this passage Mr. Hart said: 

[Q.]. . .What it really comes to is that a stab at it or a guesstimate of 70% looks decidedly low, that is what is amounts to, does it not? [A.] I think that that can be seen from that document. 

[Q.] Yes. Likewise, we need not go over the ground again, perhaps, likewise in relation to environmental pollution, EPA, which you dealt with over the page at 576, where you actually say, and I reminded you at the outset that "it was  anyone's guess as to how long such a level of activity will continue". It is in the same category of an estimate, is it not? [A.] Yes. 

[Q.] Yes. [A.] That was dependent very much upon future court decisions. . .(Day 14/140-141). 

The notes of the RITC meeting on Apr. 16, 1987 record: 

(v) EPA - including Love Canal, DDT etc. The same basis as for asbestos had been adopted and this gave a loading factor on outstandings of 200%. There was a lack of case law and attorneys reports were recommending resistance to claims. Slips had included exclusion to pollution claims but it was recognised that some courts in the United States were over-riding these exclusions. (Mr. McNamara added in manuscript - the 200% is again highly subjective but gives some opportunity for deterioration to be covered). 

The run-off contracts 

As to the correct approach see year 4 above. 

Merretts applied (broadly) the same loadings to the run-off contracts as they did in respect of the syndicate's main account (D11/790). 

As to the difficulties of obtaining information from the cedants in year 6 see D11/770 Dolling-Baker, 774 Toomey and 778 Fireman's Fund/Sturge and Day 41/52 et seq. 

There was very marked deterioration in the dollar provisions in respect of the run-off contracts between years 4, 5 and 6 (after allowance for the addition of Judd in year 5) - see for example D10/404 (where 421 is also shown). D10/404 also identifies the different rates of deterioration as between the particular cedants. A comparison of the different rates of deterioration as between each of the 11 cedants and 418/417's own book at year 6 shows that an approach to loading which was undifferentiated as between each of the cedants and 418/417 could not safely be adopted. 

For the reasons set out under year 4 above, in all the circumstances, a reasonably competent Lloyd's managing agent specializing in the writing of long tail risks would have recognized in year 6 that a reinsurance to close within a zone of reasonableness could not be ensured or even contemplated without evidence as to the run-off contracts similar in form to that relating to 418/417's own book of business. The relevant circumstances include, inter alia, the fact that 11 run-off contracts formed a constituent part of the 1984 account, the extent of the exposures (including asbestos and pollution risks and the amount of the net outstandings referable to the run-off account (˙34.443 m./U.S.$50.975 m.). 

[1997]  396  L.R.L.R.  Henderson v. Merrett Syndicate (Q.B. (Com. Ct.))    Cresswell, J. 

The defendants say that it would have been difficult and/or impracticable to obtain this level of information but the need for this information was the result of the decision to write these particular run-off contracts. Whatever may have been the practice of the market in relation to reserving for other reinsurance liabilities, the nature and scale of these particular contracts required the approach referred to above. 

It follows that Merretts had inadequate information in relation to the run-off contracts to justify the closure of year 6 (albeit that they had considerably more information than in year 4). Had they obtained the necessary further information this would have served to underline the extent of the uncertainties referred to above and to confirm that it was not possible to arrive at a RITC within a zone of reasonableness. 

It is to be noted that in this year Merretts began to appreciate the need for more evidence from the cedants. In the minutes of the MUAM board meeting on Feb. 17, 1987 (G/200) Mr. Randall noted that: 

There are five contracts with a Merrett/Outhwaite interest and we have agreed jointly to: 

(a) instigate a claims audit; and 

(b) review the original information given at the time of the placing. 

Similar action would be taken where Merrett Syndicates have sole involvement. The objective is to ensure that the reinsurance we provide is not being used as a "blank cheque". 

In the minutes of a meeting of the directors of Merrett Holdings PLC on Apr. 30, 1987 (G/208) the following is recorded under the heading run-off contracts: 

After lengthy discussion, it was agreed that the significant impact of the losses on the members of the syndicates justified regular audits of the reinsureds records and claims and reinsurance handling procedures. In addition, specific staffing requirements within the syndicate/agency to monitor progress were to be investigated. 

Further a document entitled Syndicate 417 reinsurance to close The 1984 account dated Sept. 7, 1987 (D11/790) prepared by Merretts recorded that: 

We have therefore requested the reinsureds to report every six months on paid and outstanding claims, both gross and net of reinsurance recoveries, breaking the information down over years of account. A number of audits are being carried out at our instigation to test the accuracy of the information provided to us against the records of the reinsured company or syndicate. It is our intention that in due course, all contracts will be the subject of regular review of this type.  Express consideration of the decision whether to close or not and margin of error calculations 

The notes of the RITC meeting on Apr. 16, 1987 recorded: 

KPM looked at 417 specifically. There was a long-tail on the business. The fund stood at ˙100m. (Before T+D) yet income was only ˙9m pa. He questioned if it was appropriate to keep the account open. KR indicated that this had been considered; however, the ability of 417 to meet claims was not a problem, its size being such that it can stand peaks and troughs in settlements. 421 has a far greater gearing problem. 417 RITC is now greater than 418 RITC even though 417 is a small part of the stamp. 418 RITC is considered to be well known and controlled. Following further discussion, it was agreed that there was no case to keep the account open because the syndicate had shown the ability to withstand problems in the past and that a material error in the reserving (eg ˙20m.) is only equivalent to 10% on the capacity of 417/418 combined. 

In his witness statement Mr. Merrett said - 

. . .we reviewed what we perceived to be the greatest predictable adverse movement from our estimate: we reviewed that figure, $20m, against the combined stamp of syndicate 418/417 and determined that the variation of 10%, even if it transpired, was tolerable. We therefore decided that although the range of final outcomes appeared larger than before, it in no way prevented the proper closing of the year. 

It is to be remembered that according to Mr. Hill's note Mr. Merrett was not present at this point in the discussion. When giving evidence about the same passage in the minutes Mr. Randall's evidence was as follows: 

[Q.]. . .it is my clients' recollection - that what was then under consideration was the extent to which the reserves, as reached by the process previously described, might realistically be regarded as erring and the agency's conclusion was that the. . .worst realistic margin of error was the figure that appears there, that is to say the 20 million. Does that ring a bell? [A.] No, Sir, I read this to be a for instance. 20 million is a big number and 20 million, given - I am adding extra words, because I think I would have expressed these extra words - given the size of the fund and its earning potential and the capacity of the syndicate, then even an error, as large as 20 million is an acceptable error, a potential error, that this syndicate could withstand. 

Merretts carried out no or no adequate margin of error calculations in relation to the reserves in respect of 418/417's own book and the books of 

[1997]  397  L.R.L.R.  Henderson v. Merrett Syndicate (Q.B. (Com. Ct.))    Cresswell, J. 

each of the 11 cedants (where the information was in any event inadequate) to reflect the fundamental uncertainties as to the future development of (i) asbestos bodily injury claims (ii) asbestos property damage claims and (iii) pollution claims. Had Merretts carried out adequate margin of error calculations these would have served to confirm that it was not possible to arrive at a RITC figure with a reasonable degree of accuracy. I refer to the references above to "anyone's guess", "guesstimates" and "indications". 

(B) E&W 

As to E&W's knowledge of asbestos and pollution problems and uncertainties as at May 21, 1987 see above. E&W's knowledge was far less extensive than Merretts'. Mr. Attwood in his reports and evidence said that, in his view, because of the uncertain nature of asbestos liabilities and the materiality of the amounts involved, the representations made by Merretts as to the future development of these liabilities had to be corroborated by independent evidence before the representations could be accepted. Mr. Attwood singled out attorneys' reports as a source of such corroboration. The same point applies to pollution liabilities. Having regard to the extent of the asbestos and pollution problems, the extent of the exposure of 418/417's own book and the books of the 11 cedants to these problems, the materiality of the reserves in connection with asbestos and pollution, the critical importance of any assessment as to the future nature extent and development of these claims and the inaccuracy of previous estimates, I accept Mr. Attwood's evidence that it was incumbent upon E&W to review a sample of the attorneys' reports to test the representations made by Merretts. Had E&W reviewed a sample of attorneys' reports for this purpose in year 6, this would have served to confirm the extent of the fundamental uncertainties as to the future development of asbestos bodily injury claims, asbestos property damage claims and pollution claims. 

418/417's own book 

The section under the heading (A) Merretts is repeated in so far as it applies to E&W. Mr. Hart's undated memorandum (D11/574) was seen by E&W. 

Asbestos 

There is an audit working paper at D11/561 where the following was noted: 

SJM said 20% based on view that asbestos is beginning to tail off re. surprises (new O/S) because asbestos stopped being used. Also, attorneys in USA were actually asking [therefore] reducing risk. Also people died [therefore]       cheaper. Plus facilities making it more predictable and      speedier. 

The 417 summary review memorandum (D10/271(1))      recorded: 

The level of asbestosis claims has started to tail off      because the use of the product stopped a long time ago      and because there has already been a concerted effort to      discover claimants. 

E&W should have reviewed a sample of attorneys'      reports to test the representations made by Merretts. 

Pollution 

In an undated note on EPA (D10/315) Mr. Hill of E&W      noted: 

Substantial new noteds problems: 

(i) Only about 15 underlying insureds on asbestos; rises      to 200 est on EPA 

(ii) Impossible to identify all exposures/insureds at this      stage 

(iii) Asbestos on an occurrence basis therefore      aggregating can cap losses. EPA on a separate each loss      basis. No aggregating; many small losses 

(iv) Losses can be small, but defence costs enormous      therefore costs are for "proving a point" rather defending      punitive claims 

(v) Aggregate extensions don't work! 

(vi) London wrote EPA as a primary market where as      asbestos was little primary in London. 

E&W appreciated that the US Courts might not give      effect to the exclusion clauses. An undated note      (D11/560) recorded: 

Other EPA - including Love Canal (chemical waste). 

generally DDT (sep. on 417). DALKON SHIELD ??

Taken same sort of view as asbestos - ie how incurred      moved in (12 months). Take 20% [again in yr?] & when      worked out, gives 200% on present o/s. 

Reasons are: 

(a) EPA's other than Shell - no case law. 

(b) Attorney's are recommending that claims are resisted. 

Also, slips signed have an exclusion clause on EPA (on      other hand, courts may ignore this). (therefore) very      little left. (Emphasis added.) 

The run-off contracts 

The section under the heading Merretts is repeated in      so far as it applies to E&W. 

As to the correct approach see year 4 above. 

[1997]  398  L.R.L.R.  Henderson v. Merrett Syndicate (Q.B. (Com. Ct.))    Cresswell, J. 

There was very marked deterioration in the dollar provisions in respect of the run-off contracts between years 4, 5 and 6 (after allowance for the addition of Judd in year 5) - see for example D10/404 (where 421 is also shown). D10/404 also identifies the different rates of deterioration as between the particular cedents. A comparison of the different rates of deterioration as between each of the 11 cedents and 418/417's own book at year 6 shows that an approach to loading which was undifferentiated as between each of the cedents and 418/417 could not safely be adopted. 

Although there was considerably more information available this year than in year 4, E&W failed to require Merretts to obtain all the necessary information as to each of the 11 run-off contracts, being evidence similar in form to that relating to 418/417's own book. It follows that E&W had inadequate audit evidence in relation to the run-off contracts to justify the opinion given. Had E&W obtained all the necessary audit evidence (see Mr. Attwood's par. 7.4.2) this would have served to underline the extent of the uncertainties referred to above and to confirm that E&W should have disclaimed an opinion on the grounds of fundamental uncertainty. 

The summary review memorandum for 418 (D10/10(1)) recorded: 

Incurred loss information in respect of these contracts has been provided by [many of] the reinsureds following the issue of formalised requests by Merretts from 1985 onwards. [Where detailed information has not been provided, incurreds have been determined from best info available supplemented by Merretts knowledge of the business]. These have been tested by us on the basis that the reinsureds [& supplemental] information represents the best available assessment. Loadings have been applied to the various types of losses on the basis of a common approach arrived at for all Merrett syndicates. 

Margin of error tests 

E&W carried out no or no adequate margin of error tests in relation to the reserves in respect of 418/417's own book and the books of each of the 11 cedants (where the information was in any event inadequate) to reflect the fundamental uncertainties as to the future development of (i) asbestos bodily injury claims (ii) asbestos property damage claims and (iii) pollution claims. Had E&W carried out adequate margin of error calculations these would have served to confirm that E&W should have disclaimed an opinion on the grounds of fundamental uncertainty.  Summary of conclusions - E&W 

For the reasons set out above I have with regret come to the conclusion that a reasonably competent Lloyd's panel/recognized auditor in year 6 would have disclaimed an opinion on the grounds of fundamental uncertainty. Without prejudice to all the points made in the detailed analysis above I refer in particular to: 

(1) the fundamental uncertainties as to the future development of (i) asbestos bodily injury claims (ii) asbestos property damage claims and (iii) pollution claims as reflected in the materials available to E&W. 

(2) the references to uncertainties in the contemporary documents relating to the audit quoted/referred to above. 

(3) the particular significance of the additional uncertainties in relation to pollution claims which became apparent in year 6. 

(4) the fact that all the fundamental uncertainties had to be considered not only in respect of 418/417's own book going back to 1953 but also in respect of the books of the 11 cedants. There had been a funnelling of these claims with their attendant uncertainties into 418/417. 

(5) the inaccuracies of previous estimates. 

(6) E&W's failure to test or test adequately the representations made by Merretts as to the future development of asbestos personal injury, asbestos property damage and pollution claims. 

(7) E&W's failure to require Merretts to obtain all the necessary information as to each of the 11 run-off contracts with the result that E&W had inadequate audit evidence in relation to these contracts (albeit that there was considerably more information than in year 4). 

(8) the fact that had adequate margin of error calculations been carried out these would have served to confirm that it was not possible to arrive at a RITC within a zone of reasonableness. 

(9) the fact that the reserve for asbestos-related and pollution claims represented a material proportion of the total reserves of the syndicate (see par. 8 of Mr. Murray Lawrence's letter of Mar. 18, 1982). 

The consequence of leaving year 4 open 

Further but without prejudice to all my findings set out above in relation to year 6, if year 4 had been left open (as I have held it should have been), I find that the overwhelming probability is that the 1982 account would not have been closed at Dec. 31, 1986. Had year 4 been left open this would have revealed to the names the nature and extent of the fundamental uncertainties to which 418/417 was 

[1997]  399  L.R.L.R.  Henderson v. Merrett Syndicate (Q.B. (Com. Ct.))    Cresswell, J. 

subject. Quite apart from other considerations Merretts would have faced enormous pressure from members' agents representing names on subsequent years not to close the 1982 year. The probability is that Merretts would have been compelled to accede to such pressure. (See in this connection 14G/302). 

38. CONTRIBUTORY NEGLIGENCE 

The Law Reform (Contributory Negligence) Act 1945 provides: 

1. Apportionment of liability in case of contributory negligence. 

(1) Where any person suffers damage as the result partly of his own fault and partly of the fault of any other person or persons, a claim in respect of that damage shall not be defeated by reason of the fault of the person suffering the damage, but the damages recoverable in respect thereof shall be reduced to such an extent as the court thinks just and equitable having regard to the claimant's share in the responsibility for the damage. . . 
 
4.. . ."Fault" means negligence, breach of statutory duty or other act or omission which gives rise to a liability in tort or would, apart from this Act, give rise to the defence of contributory negligence. . . 
 
If, as I have found, the plaintiff succeed in their allegation that E&W were negligent in years 4, 5 and 6 and thereby caused the plaintiffs damage, E&W rely on s. 1(1) of the 1945 Act. 
 
E&W's submissions 

E&W do not seek to prove that some or all of the individual names had actual personal knowledge of the alleged deficiencies in the RITCs and were, as a result of a failure to look after their own interests in the light of such actual knowledge, personally at fault. E&W do, however, contend that they are entitled to claim that the damages suffered by the plaintiffs were "as the result partly of (their) own fault" for three reasons: 

(1) Names (direct and indirect) had delegated the entire conduct of their business as a Name on 418/417 to Merretts who wrote the RITC on their account. For the purposes of determining whether the plaintiffs were at fault, they cannot properly disassociate themselves from Merretts. 

(2) Indirect Names had delegated the entire conduct of their underwriting business to their members' agents in the first place. They, therefore, also cannot disassociate themselves from their particular members's agent. The damages were caused as a result of the fault of the members' agents because (a) they are contractually responsible for the acts of Merretts to whom they sub-delegated their responsibilities; (b) Merretts' knowledge falls to be imputed to them. Armed with that imputed knowledge, they were in a position to and should have stopped each of the RITCs. 

(3) The knowledge of Merretts is to be treated as the knowledge of the names, whether they are direct or indirect Names. As a matter of law the Names are to be treated as if they knew all the facts relating to the RITCs. Accordingly, they were personally at fault in that armed with their imputed knowledge they did nothing to stop any of the RITCs. 

As to the fault of Merretts, E&W submit that while the acts of a servant or agent for which a principal is vicariously liable to a third party would be a basis for reducing the principal's damage pursuant to the Act, it does not follow, as the plaintiffs contend, that such a circumstance is the only case where a principal is liable. Ultimately, it is submitted that issue is largely one of common sense, as evidenced by the Superhulls Cover case, [1990] 2 Lloyd's Rep. 431. E&W further submit the following. The fact that the plaintiffs delegated the entire conduct of their business without any right to interfere is a reason for associating the plaintiffs with the acts of their agents. The only relevant question is whether when Merretts were at fault, their fault is to be treated as the fault of the plaintiffs in the context of their relationship with and claim against E&W. As to the fault of the members' agents and of the plaintiffs themselves, E&W refer to art. 102 in Bowstead and submit that it follows that the knowledge of Merretts regarding the status of the RITCs and the allegedly uncertain nature of the assessment of the reserves for asbestos and pollution liabilities falls to be treated as the knowledge of the plaintiffs, whether they are direct or indirect names, and of the members' agents. Armed with such knowledge the plaintiffs and the members' agents were at fault in failing to do anything to prevent the RITCs. 

The plaintiffs' submissions 

The plaintiffs submit that s. 1 of the 1945 Act has no application inter alia for the following reasons. 

1. The question which arises is whether a principal who is the plaintiff can have his damages reduced because of the contributory negligence of his agent. On first principles, if the agent is his servant the answer must be in the affirmative. This is because the actions of his servant are in law his actions. In the case of a director, the case is even stronger because the actions of the director are the actions of the company, as the company cannot act other than through its directors. Thus the contributory negligence of the director is the contributory negligence of the company and questions of agency do not arise. This is subject to a rider as follows - 

[1997]  400  L.R.L.R.  Henderson v. Merrett Syndicate (Q.B. (Com. Ct.))    Cresswell, J. 

even where on general principles the contributory negligence of an agent can be ascribed to a principal, i.e. in the master/servant context, the Courts are reluctant to apply the general rule in circumstances where the defendant's breach of duty concerns the very relationship of the master to his servant. This arises in the case of negligence by auditors. If the auditor's employment covers the detection of defaults by the plaintiff's servants or directors, it is anomalous that the plaintiff master/company can be held guilty of contributory negligence where that negligence might have been avoided if the auditor/defendant had not been in breach of his obligations. If, however, the agent is an independent contractor, on the same first principles, the plaintiff is not responsible for the contributory negligence of his agent. The managing agents and the members' agents are independent contractors of the plaintiffs, and there can be no question of any "ascribing" of their contributory negligence to the plaintiffs. 

2. The doctrine of identification has no application where there would be no vicarious liability for the negligence of the agent. Further the plaintiffs would not be vicariously liable for the negligence of the managing agents because inter alia the contractual relationship between the plaintiffs and the managing agents through the chain of agency and sub-agency agreements specifically precludes any involvement or interference by the name with the agents' conduct of the underwriting of insurance business. Further the managing agent was obliged to have regard to the interests of two distinct sets of names ensuring that any RITC premium set for closure of the year was likely to ensure equitable treatment between them. This is not consistent with the managing agent acting on behalf of the potential reinsuring names in the same sense as when conducting the day to day business of 418/417's year of account. 

3. Even if (contrary to the plaintiff's primary case) this is a case in which it is possible as a matter of principle for the plaintiffs recovery to be reduced having regard to the negligence of the managing agents, the Court has a discretion to decide by what amount if any it would be just and equitable to reduce the plaintiffs' damages. This is a case in which it would be wholly unjust and inequitable to reduce the amount of the plaintiffs' recovery against the auditors. The whole rationale of the plaintiffs employing independent auditors to report to them on the state of the syndicate's financial position was that there should be an independent evaluation of the managing agents' statements as to the financial consequences of their actions on behalf of the plaintiffs. It makes a nonsense of the purpose for which the auditors were employed if the Names' claim against the auditors is defeated by reason of the very negligence to which the auditors  were supposed to be alerting the Names. The proper mechanism by which E&W can ensure that the fault of the managing/members' agents is reflected in the amount E&W have to pay to the plaintiffs, is by seeking contribution pursuant to s. 1 of the Civil Liability (Contribution) Act, 1978. 

The English authorities 

In De Meza v. Apple, [1974] 1 Lloyd's Rep. 508 Mr. Justice Brabin held in a case where an auditor was employed by solicitors to complete consequential loss insurance certificates that the plaintiffs had been contributorily negligent in failing to take action in respect of a particular certificate. The solicitors were partly to blame for not noticing the mistake in the figures. 

In the Superhulls Cover case sup., issues arose as to whether brokers were in breach of duty for failing to inform insurers that certain reinsurance was subject to a 48 months clause and whether the insurers themselves were contributorily negligent. Mr. Justice Phillips held the following. The duties broken by the broker did not lie exclusively in contract; there were concurrent remedies in contract and in tort. A broker who sought to persuade an insurer to write a line of original insurance by informing him that specific reinsurance cover was available, was in a relationship with the insurer which gave rise to a duty of care in tort. Although the insurers owed no duty to the brokers to read the insurance wording with reasonable skill and care and to draw attention to any inadequacies in the cover, an insurer who was exercising reasonable skill and care in relation to the business he was conducting would have noticed the 48 month clause and would have queried its presence and effect with the brokers. The insurers were contributory negligent in that they failed to exercise reasonable care in carrying out what they accepted were customary checks on the manner in which the brokers had performed their duty, and the insurers' damages were accordingly reduced by 20 per cent. (cf. The Moonacre, [1992] 2 Lloyd's Rep. 501). 

The Australian, Canadian and New Zealand Authorities 

The New Zealand Contributory Negligence Act, 1947 is modelled on the 1945 Act as are the statutes adopted by the jurisdictions within Australia. The Canadian legislation is similar in that it applies where there has been "fault" or "negligence" on the part of the defendant. I refer to a number of Australian, Canadian and New Zealand Authorities. 

Nelson Guarantee v. Hodgson, [1958] N.Z.L.R. 609, Mr. Justice McCarthy. 

Pacific Acceptance Corporation v. Forsythe, (1970) 92 W.N. (N.S.W.) 29, Mr. Justice Moffit. 

[1997]  401  L.R.L.R.  Henderson v. Merrett Syndicate (Q.B. (Com. Ct.))    Cresswell, J. 

West Coast Finance Ltd. v. Gunderson, Stokes, Walton & Co., 44 D.L.R. (3d) 232, Mr. Justice MacDonald and on appeal at (1975) 56 D.L.R. 461. 

In Simonius Vischer & Co. v. Holt & Thompson, [1979] 2 N.S.W. L.R. 322 (New South Wales Court of Appeal) Mr. Justice Moffitt said: 

Where the action for professional negligence is against an auditor, it is difficult to see how a finding of contributory negligence, according to usual concepts, could be made. If, as where the audit is of a public company, the audit contract or the undertaking of an audit is found to impose a duty to be exercised so as to safeguard the interests of the shareholders, it is difficult to see how the conduct of any servant or director could constitute the relevant negligence, so as to defeat the claim against the auditor, whose duty is to check the conduct of such persons and, where appropriate, report it to the shareholders. A somewhat parallel difficulty appears to be involved even where the audit undertaken is of a business carried on by partners. Consideration would need to be given to the scope of the audit contract. It would be relevant to determine whether the auditor's duty under the particular contract was to audit the business carried on, not only by executives but also working partners, and to report to all and each partner. 

Samuels J.A. said that the submission that a defence of contributory negligence was open to the defendants raised questions of considerable interest and complexity which were not necessary to resolve for reasons which he gave. 

H. E. Kane Agencies Ltd. v. Coopers & Lybrand, (1983) 23 C.C.L.T. 233, Mr. Justice Hoyt. 

In Revelstoke Credit Union v. Miller, (1984) 28 C.C.L.T. 17, McEachern C.J.S.C. said at p. 52: 

While the Australian cases are interesting, I do not think I should apply them in this case for a number of reasons. First, it does not appear that an apportionment of fault was considered in the Pacific Acceptance case. Secondly it appears that the director in [ Simonius] were acting dishonestly, in breach of their authority, and their misconduct should not properly be attributed to the owner any more than the misconduct of Mr. MacLean should be attributed to the plaintiff in this case. Thirdly, the judgment of Macdonald J. in the West Coast case is consonant with the provisions of the Negligence Act, which, by s. 1, commands me to apportion damage or loss caused by the fault of two or more persons, and provides further that: 
 
. . .liability to make good the damage or loss shall be in proportion to the degree in which each person was at fault. . .  I have found that the plaintiff's loss after early March, 1979 was caused by the concurrently operating negligence of both the auditors and Mr. Rafuse. The negligence of the latter is properly attributed to the plaintiff so each party should make good the loss in proportion to the degree in which each was at fault. 

Walker v. Hungerfords, (1987) 44 S.A.S.R. 532. 

Fletcher v. National Mutual Life Nominees Ltd., [1990] 1 N.Z.L.R. 97, Mr. Justice Henry. 

Extensive consideration of the defence of contributory negligence in the context of inadequate internal controls is found in the judgment of Rogers C.J. in AWA Ltd. v. Daniels trading as Deloitte Haskins & Sells and Others, (1992) 7 A.C.S.R. 579 and (1992) 10 A.C.L.C. 1643. Rogers, C.J. held inter alia that AWA was guilty of contributory negligence, viz., the failure to meet the standard of care to which it was required to conform for its own protection and which was a legally contributing cause, together with the auditors' default, in bringing about the loss. In such a case, damages were required to be reduced to such an extent as the Court thinks just and equitable. 

At p. 833 he said: 

I cannot accept that a corporation is entitled to abdicate all responsibility for proper management of the financial aspects of its operation and then, when loss is suffered, to seek to attribute the entirety of the blame to its auditors. 

Conclusions as to contributory negligence 

The present case is concerned with the unusual and complex commercial structure of Lloyd's and in particular the duties of the managing agent, the underwriter and the syndicate auditors in relation to a RITC, having regard not only to the relevant agency/sub-agency agreements and the audit engagement but also to the regulatory regime described in s. 17 above. The Superhulls Cover case was concerned with a very different situation (insurers were held to have been contributorily negligent in failing to exercise reasonable care in carrying out customary checks on the manner in which brokers had performed their duty) and is distinguishable. Equally many of the Australian, Canadian and New Zealand authorities are concerned with the question whether there was contributory negligence in very different, but more common, commercial contexts e.g. claims against auditors for failure to detect fraud by an employee where there were inadequate internal controls. 

I refer to section 19 entitled "RITC - Some General Principles" above and in particular to the role of the managing agents/underwriter and the role of the auditors. Having regard to the relevant 

[1997]  402  L.R.L.R.  Henderson v. Merrett Syndicate (Q.B. (Com. Ct.))    Cresswell, J. 

agency/sub-agency agreements, the audit engagement, the regulatory regime described above and in particular to the role of the managing agents/underwriter on the one hand and the role of the auditors on the other hand in relation to a RITC, I do not consider that the plaintiffs on a true construction of s. 1 of the 1945 Act suffered "damage as a result partly of (their) own fault". I refer in particular to the following matters: 

1. While the decision whether to close the year of account of the syndicate was the responsibility of the managing agent in consultation with the underwriter, no year of account should be closed before the managing agent determined whether the syndicate auditor intended to give a qualified audit opinion in respect of that year of account. 

2. As to the role of the auditors in relation to a RITC see section 19 above. 

3. The regulatory regime (s. 17 above) contained detailed provisions as to the respective accounting and other functions of members' agents, managing agents and syndicate auditors. As to the distinct functions of members' agents and managing agents see section 3 above. 

4. For a flow chart as to the role of members' agents, managing agents and syndicate auditors as to syndicate accounts, the syndicate solvency report and the audit certificate see Table 5 at p. 420 post. 

Having regard to the unusual and complex structure of Lloyd's and in particular to the four matters set out above I reject E&W's submissions. In the relevant context the negligence of Merretts' in relation to the three RITCs is not properly attributable to the plaintiffs. If contrary to the foregoing I am wrong in the above conclusion I would in the alternative hold that in all the circumstances it is not just or equitable that the damages should be reduced having regard to the plaintiffs' share in the responsibility for the damage. 

In reaching this conclusion I have given separate consideration to each of years 4, 5 and 6. 

For completeness I should add that I also reject E&W's submissions as to fault of the members' agents and of the names themselves. The members' agents did not know the true facts. A few wrote to the effect that year 4 should be left open - see for example G13-14 and G15. Merretts were however determined to close year 4 (82-83). 

39. LIMITATION 

The limitation issues are summarized in section 15 above and are set out in Table 4 below. 

I turn to consider s. 32 of the Limitation Act 1980 in the context of claims by the pre-1984 joiners and the 1984 joiners in the Hallam-Eames  actions against Merretts and the members' agents. Section 32 is not relied on against E&W. 

By agreement between and at the request of the parties, consideration of s. 14A of the 1980 Act is to be left to a further hearing after delivery of this judgment. The alternative plea in misrepresentation/failure to report or disclose (see s. 6) calls for further evidence beyond that adduced to date and will if necessary be subject to further directions, again after delivery of this judgment. 

Section 32 of the Limitation Act, 1980 

As to s. 32 of the 1980 Act it is important to distinguish between the plaintiffs' case as to deliberate concealment against the managing agents on the one hand and the members' agents on the other hand. Further in considering the plaintiffs' case as to s. 32, it is necessary to distinguish between the case as to the writing of the run-off contracts and the RITCs. Section 32 of the Limitation Act, 1980 provides: 

(1) Subject to sub-sections (3) and (4A) below, where in the case of any action for which a period of limitation is prescribed by this Act, either - 

(a) the action is based upon the fraud of the defendant; or 

(b) any fact relevant to the plaintiff's right of action has been deliberately concealed from him by the defendant; or 

(c) the action is for relief from the consequences of a mistake; 

the period of limitation shall not begin to run until the plaintiff has discovered the fraud, concealment or mistake (as the case may be) or could with reasonable diligence have discovered it. 

References in this sub-section to the defendant include references to the defendant's agent and to any person through whom the defendant claims and his agent. . . 

The plaintiffs allege deliberate concealment. 

In Sheldon v. Outhwaite Ltd., [1995] 2 Lloyd's Rep. 197; [1995] 2 W.L.R. 570 the question at issue was whether or not the plaintiffs could rely, for the purposes of s. 32 of the Limitation Act, 1980, upon deliberate concealment by the defendants of matters relevant to the plaintiffs' cause of action which occurred after the accrual of the cause of action. The majority of the House of Lords answered this question in the affirmative. 

Lord Keith said at p. 215, col. 1; 574H: 

The past history of the limitation legislation and cases decided under it provide uncertain and conflicting guidance on the issue under consideration. In my opinion it must be decided 

[1997]  403  L.R.L.R.  Henderson v. Merrett Syndicate (Q.B. (Com. Ct.))    Cresswell, J. 

upon an examination of s. 32 itself, taken in its context, particularly since the section derives from s. 7 of the Limitation Amendment Act, 1980, the Act in which it now appears being a consolidation enactment. Recourse to the antecedents of a consolidation statute should only be had when there is a real difficulty or ambiguity incapable of being resolved by classical methods of construction ( Farrell v. Alexander, [1977] A.C. 59, per Lord Wilberforce at p. 73). 

Lord Browne-Wilkinson said at p. 217, col. 1; p. 578B: 

For myself, I do not find it absurd that the effect of s. 32(1) is to afford to the plaintiff a full six year period of limitation from the date of the discovery of the concealment. In such a case, the plaintiff must have been ignorant of the relevant facts during the period preceding the concealment: if he knew of them, no subsequent act of the defendant can have concealed them from him. If the defendant then deliberately takes a step to conceal the relevant facts (a step which is by ordinary standards morally unconscionable if not necessarily legally fraudulent) it does not seem to me absurd that a plaintiff who has been prevented by the dishonourable conduct of the defendant from learning of the facts on the basis of which to found his action should be afforded the full six year period from the date of the discovery of such concealment to bring his action . . . The 1980 Act is a consolidating Act, and, unless there is an ambiguity, it is not permissible to construe consolidating Acts in the light of their statutory history. . . 

Lord Nicholls said at p. 222, col. 1; p. 585F: 

. . .The defendants' contention is that par. (b) applies only when the concealment takes place from the outset. . .Self-evidently, this contention produces an absurd result. It draws a distinction between initial concealment and subsequent concealment which lacks all rhyme and reason. If initial concealment should stop time running, so equally should subsequent concealment. The underlying mischief is the same. This contention means that the professional person who realises he has been negligent will be positively encouraged to take steps to hide his errors from his client. If he can do so for six years, he will be home and dry. Of course, if a plaintiff is aware of all facts relevant to his right of action, there cannot be subsequent "concealment" of them from the plaintiff. He already knows the position. But if he does not, and the defendant takes steps deliberately aimed at keeping the plaintiff in the dark, there is as much need to prevent the defendant from gaining a limitation advantage as the defendant who conceals the position from the outset. . .I prefer the views of my noble and learned friends Lord Keith of Kinkel and Lord Browne-Wilkinson. 

"Any fact relevant to the plaintiff's right of action" 

In Hallam-Eames v. Merrett Syndicates Ltd. Lord Justice Hoffmann (as he then was) gave the judgment of the Court in an appeal from an order of Mr. Justice Gatehouse which declared, pursuant to R.S.C., O. 14A, that certain claims in tort by the plaintiffs arising out of their losses as members of 418/417 were statute-barred. The appeal was concerned only with s. 14A of the Limitation Act, 1980. In that context Lord Justice Hoffmann said: 

What, on these principles, are the facts which constitute the negligence of which the Names complain? It would in our view be incomplete to say that it was the writing of the run-off reinsurance policies or the RITCs or the certification of the syndicate accounts. These facts in themselves do not amount to acts of which the Names would even prima facie be entitled to complain. It is necessary to add the allegation that the run-off policies and RITCs exposed the Names to potentially huge liabilities and that the certified accounts attributed values to IBNRs, none of which were in fact capable of reasonable quantification. 

The passage quoted above, although written in the context of s. 14A of the 1980 Act, provides valuable guidance as to what constitutes a fact relevant to the plaintiffs' right of action in the context of s. 32. Before considering the writing of the run-off contracts and the RITCs it is necessary to set out certain background matters. 

Background 

1. In a letter dated Apr. 18, 1985 to all the direct Names of MSL who participated on managed syndicates during 1982 and subsequent years of account Merretts set out a summary of the 1982 account estimated results. Under the heading "Summary of 1982 Account estimated results" the letter stated: 

. . .We anticipate that syndicate 418/422/417 (capacity in 1982 ˙80.78m) will produce an overall loss in the range ˙12m to ˙17m giving rise to a loss of between ˙7,500 and ˙10,000 before personal expenses for an example share of ˙50,000. 

The year 4 accounts dated June 4, 1985 show (after T&D) a closed year of account loss of approximately ˙11 m. The year 4 accounts also show a net underwriting loss after T&D credit of ˙21.1 m. and to the informed reader a loss before T&D credit of approximately ˙65 m. 

[1997]  404  L.R.L.R.  Henderson v. Merrett Syndicate (Q.B. (Com. Ct.))    Cresswell, J. 

2. The letter of Apr. 18, 1985 also stated under the heading "The Run-Off Contracts": 

. . .The contracts were outside the traditional scope of our business and it is quite simply the fact that, in hindsight, they represent poor underwriting judgement. 

I regret the late notification of the size of the losses resulting from these contracts. There are two main reasons for this: 

(i) virtually every contract has seen an unprecedented deterioration in the later months of 1984 - again principally related to asbestosis and seepage and pollution claims, 

(ii) the full impact of this deterioration could not be fully assessed until the insurers concerned had completed their own assessments and taken credit for their own relevant reinsurance protections. The figures which were required to calculate the full impact of the deterioration have been supplied to us only within the last few days. 

We have investigated each contract and steps are being taken to achieve more timely accounting and secure efficient servicing of the underlying risks. 

The statement that there were two main reasons for the late notification of the size of the losses failed to set out the true position having regard inter alia to the following: 

(i) In years 1 and 2 Merretts failed to inform E&W of the fact that the run-off contracts had been written and in year 3 Merretts only informed E&W of six out of 11 contracts. I refer to the criticisms of Merretts in years 1, 2 and 3 above. 

(ii) In year 3 Merretts failed to increase the open year reserves in respect of the run-off contracts as appropriate. In the last six months of 1983 incurreds in the Fireman's Fund contract increased by U.S.$12.7 m. from U.S.$47.7 m. to U.S.$60.4 m. which produced an incurred to 417 (1982 open year) of U.S.$5.2 m., before specific run-off contract reinsurances. 

(iii) Provincial, Universal, Ballantyne and Verrall were a constituent part of the RITC in year 3. The 417 outstandings should have included U.S.$2,023,229 in respect of the Ballantyne run-off contract. C5/67 scratched by Mr. Emney on Apr. 9, 1984 (showing Ballantyne outstandings) should have been shown to E&W. No outstandings were shown in respect of Ballantyne and thus there was no IBNR in respect of Ballantyne. The application of Merretts' loadings in year 3 would have resulted in a reserve of U.S.$6,437,807. The 418 outstandings should have included U.S.$2,575,000 in respect of Provincial and Universal. There was no amount for Provincial or Universal included in the outstandings. The application of the loadings used for 417's own book in year 3 in the case of  Provincial and Universal would have resulted in a reserve of U.S.$4,340,582 and in the case of Verrall a reserve of U.S.$3,156,616. Provincial, Universal and Verrall were in fact only reserved at Lloyd's minima amounting to U.S.$832,000. Thus there was on Merretts' methodology under-reserving of U.S.$13.103 m. (˙9.036 m.). 

(iv) As a result of the above the year 3 accounts were seriously inaccurate (see year 3 above). 

Accordingly, to say as at Apr. 18, 1985 that the late notification of the size of the losses resulting from the run-off contracts was due to the two main reasons stated, was to conceal from the plaintiffs Merretts' many serious failures in years 1, 2 and 3 and the fact that the year 3 accounts were materially inaccurate. In the course of a series of meetings of syndicate members in October and November, 1985 Merretts did state: 
 
We had no adequate awareness of the run-off book of policies that had been written or of the way in which the accounts that those policies were protecting were rapidly deteriorating. We admit that our controls were at fault in this case. We have taken considerable steps to ensure that the controls we have in place are fully utilized. . .We are now confident that our controls are wholly adequate. There was absolutely no doubt in our minds at the time that we gave the positive forecast that we were giving you our best view and it was a matter of very considerable disturbance to us when other material came to light. 

This limited statement did not disclose the true position in years 1, 2 and 3 as set out above. 

The writing of the run-off contracts 

As to the writing of the run-off contracts, the plaintiffs' case is that Merretts deliberately concealed from the plaintiffs, inter alia, the fact that the run-off contracts exposed the plaintiffs to potentially huge liabilities which were not capable of reasonable quantification on the material before Mr. Emney. The minutes of the meeting of the audit committee held on Mar. 2, 1982 (H1/471A) attended by Mr. Merrett recorded: 

Mr. Chester then raised the question of the reinsurance of underwriters' asbestosis liability in the Lloyd's Market (i.e. 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. . . 

[1997]  405  L.R.L.R.  Henderson v. Merrett Syndicate (Q.B. (Com. Ct.))    Cresswell, J. 

I do not accept Mr. Merrett's explanation of this passage in the minutes (Day 15/141-144). It is in my view plain that the reference to "telling its own Names" is in the context of a syndicate which had written run-off contracts. The point of concern was that such liabilities could fall on comparatively few syndicates. In fact Merretts did not tell E&W about the writing of the run-off contracts until year 3 (when reference was made to only six out of 11). The first the plaintiffs heard about the writing of the run-off contracts was on Apr. 18, 1985 - see the letter dated Apr. 18, 1985 and the meeting on the same day. 

There was deliberate concealment of the position in relation to the run-off contracts by Mr. Emney of Merretts up to about early April, 1985. The significance of the deteriorating position could not have escaped him. Although regrettably I have not heard from Mr. Emney I am driven to the conclusion that the concealment was deliberate. I am extremely troubled by Mr. Merrett's part. I have referred to the series of failures on the part of Merretts in years 1, 2 and 3 above. Mr. Merrett was the active underwriter of 418/417. The consideration of the RITC was the most important function he performed for the syndicate each year. He knew about the writing of the run-off contracts and the developing problem with asbestos-related claims. He maintained that E&W knew about the run-off contracts prior to year 3 when they did not. How could he have failed to check the position as to the run-off contract in years 1, 2 and 3? 

The letter dated Apr. 18, 1985 stated under the heading "The Run-Off Contracts": 

. . .At the time of the underwriting, the terms were assessed as attractive and special reinsurance protection was arranged. That protection has turned out to be quite inadequate. The contracts were outside the traditional scope of our business and it is quite simply the fact that, in hindsight, they represent poor underwriting judgement. 

In the series of meetings with syndicate members in October and November, 1985 Merretts stated: 

. . .we have no intention of going back into the writing of run-off contracts as a book of business because we believe that that was a mistake. 

In Hallam-Eames v. Merrett Syndicates Ltd. sup. Lord Justice Hoffmann quoted part of the passage set out above from the letter of Apr. 18, 1985 and said in the context of s. 14A of the 1980 Act: 

This statement, with its reference to hindsight and poor judgement, is not quite a confession of negligence but comes very close. 

I have carried out an investigation of the circumstances surrounding the writing of the letter and the other information which the plaintiffs were being  given. I have of course paid careful regard to Lord Justice Hoffman's observations but the letter dated Apr. 18, 1985 and the reports in the year 4 accounts contain a mixture of truth, half-truth and falsehood. In my judgment in using the words - 

. . .it is quite simply the fact, in hindsight, (the run-off contracts) represent poor underwriting judgement. . . 

Merretts were careful to avoid any admission of negligence. The law does not impose liability for damage resulting from what in hindsight turn out to have been errors of judgment, unless of course the error was such as no reasonably well-informed and competent member of the relevant profession could have made. The managing agent's and underwriter's reports in the accounts as at Dec. 31, 1984 stated: 

During 1981 a number of proposals were made to us of a quite different kind, and some of them were accepted after careful consideration. The basis of these contracts was that we would take on the unlimited liability of other syndicates in respect of years which had been "closed" for some time - mostly for 1975 and before - at our evaluation of the risk that the claims known to be outstanding in those accounts, and other claims not yet reported, might exceed by a substantial margin the level that the syndicate's managers and their auditors expected them to reach. It is apparent that although a cautious view was taken of the likely development of the accounts as then perceived, the contracts were not given the searching scrutiny they should have been and there was insufficient consideration both of the "worst case" development possibilities and the way in which in those circumstances the aggregate exposure of the syndicate to the book of business would be too large a part of the whole. The nature of such policies, in that they protect an aggregate of losses rather than individual losses, means that the ordinary reinsurance programme which protects the syndicate against losses written individually but arising on a number of policies does not respond. Therefore specific aggregate protection was purchased, so that should there be an unforeseen deterioration it would be mitigated. However, the deterioration that has taken place is substantially greater than was believed possible at the time and thus the reinsurance is inadequate. (Emphasis added.) 

The question as to what material was before Mr. Emney when he wrote a particular run-off contract, including in particular whether he obtained IBNR loss reserves for asbestos and non-asbestos claims and the methodology behind the IBNR factors, is of central importance to any claim in respect of the writing of the run-off contracts. Mr. Merrett (as I 

[1997]  406  L.R.L.R.  Henderson v. Merrett Syndicate (Q.B. (Com. Ct.))    Cresswell, J. 

find correctly) accepted that it was of vital importance that either the IBNR should be known or the basis on which the IBNR was created should be known. By this he meant that it was necessary to know the material on which the cedants had reached their IBNR, the individual constituent parts, how they addressed it, the information that they would have put into their calculations and the basis on which outstandings were established. This information was necessary so that an assessment could be formed as to where the claims might end up. Without adequate information to form a view as to where the account was likely to end up, or its equivalent in another form, a run-off contract could not be completely or prudently written. 

Further I have accepted Mr. Neil's evidence, in par. 187 of his report, as to the information that was essential to assess the run-off contracts before writing them. This included IBNR loss reserves for both asbestos and non-asbestos claims and the methodology behind the IBNR factors. 

The statement that - 

. . .the basis of these contracts was that we would take on the unlimited liability of other syndicates in respect of years which had been "closed" for some time. . .at our evaluation of the risk that the claims known to be outstanding in those accounts, and other claims not yet reported, might exceed by a substantial margin the level that the syndicate's managers and their auditors expected them to reach. . . 

pre-supposed that at the time of placement Merretts had obtained from the cedants the syndicate's managers' and auditors' expectation of the level that (a) the outstanding claims and (b) the claims not yet reported (IBNR) would reach. Mr. Merrett confirmed that this was how the passage in question would have been read (Day 18/24). This statement was false to the following extent. 417 had written Ballantyne, Fireman's Fund, Dolling-Baker, Toomey, Gooda, Burdett and Judd. 418 wrote Provincial, Universal, Verrall and Humm. With the exception of the last two 417 contracts (Burdett and Judd), Mr. Emney did not have the cedant's or their auditors' assessment of the IBNR (in the case of Toomey there was a manuscript schedule C/15/4/43 giving "loadings for IBNR" on 1966-1970 accounts as at Dec. 31, 1977 - 1980 inclusive but not as at Dec. 31, 1981 - see in this connection C15/241 at 243). 

In the letter dated Apr. 18, 1985 the run-off contracts had been treated together as a portfolio. Although strictly speaking the passage referred to above from the managing agent's and underwriter's reports appeared under the Syndicate 417 heading there was no suggestion that any other approach  had been adopted in respect of the run-off contracts written by 418. 

Accordingly the above statement in the underwriter's report in the accounts was, as Merretts knew, materially untrue as to nine run-off contracts and was, I find, deliberately made to conceal the true facts and deliberately aimed at keeping the Names in the dark. It was intended to negative the other statements made about the writing of the contracts and to fortify the explanation in the letter dated Apr. 18, 1985 that it was only - 

. . .in hindsight (that) they represent poor underwriting judgement. (Emphasis added.) 

I make the above finding having carefully considered Mr. Merrett's evidence including his unsatisfactory and unconvincing evidence at Day 18/23-30. 

I have already found that the writing of Provincial and Universal was not negligent. Burdett and Judd have to be distinguished for the reasons given above.

In the case of the remaining seven run-off contracts the plaintiffs did not discover the concealment until after the commencement of these proceedings, nor could they with reasonable diligence have discovered it earlier. I find that in the case of the remaining seven run-off contracts Merretts deliberately concealed from the plaintiffs inter alia the fact that the run-off contracts exposed the plaintiffs to potentially huge liabilities which were not capable of reasonable quantification on the material before Mr. Emney. Accordingly in the case of these seven contracts the limitation period is postponed and the defence of limitation fails. 

Merretts and the year 4 RITC and the year 5 RITC 

The plaintiffs' case is that Merretts deliberately concealed from the plaintiffs the fact that the year 4 RITC and the year 5 RITC exposed the plaintiffs to potentially huge liabilities which were not capable of reasonable quantification on the information available as at June 4, 1985 (year 4) and June 2, 1986 (year 5). 

The year 4 RITC 

The letter dated Apr. 18, 1985 stated under the heading "Summary of 1982 Account estimated results": 

. . .N.B. The losses disclosed above have been calculated after making full allowances for anticipated future claims. 

The letter also stated under the heading "The Run-Off Contracts": 
At this stage we have enough information to give a firm range of loss estimates and will be sending

[1997]  407  L.R.L.R.  Henderson v. Merrett Syndicate (Q.B. (Com. Ct.))    Cresswell, J. 

you a report of the full circumstances shortly. [Emphasis added.) 

For the reasons set out under year 4 above Merretts did not have "enough information" to give a firm range of loss estimates. The underwriter's report in the accounts as at Dec. 31, 1984 stated under the heading Syndicate 418: 

The 1982 Account. 

It has been necessary to establish loss reserves in the account against the loss exposures provided by three "run-off" contracts protecting other underwriters against unlimited deterioration in their old years of account. We have been advised of the current predictions of the parties concerned as to what those accounts are likely to have to pay over many years, and those amounts substantially exceed the margins which they were required to retain before collecting claims under our policies. After investigating the general content of those accounts, and making a series of conservative assumptions for their development, including the future appearance of further individual catastrophes, we have determined an appropriate level of reserve. (Emphasis added.) 

The report in respect of 417 stated: 

The calculation of the syndicate's reinsurance to close, by which we mean the determination of the appropriate premium charged to the year being closed and paid to the subsequent year for the risk transferred of future claims developing in the old years and those already recorded proving more expensive than currently anticipated, is always a difficult exercise for us; we have acquired, for better or worse substantial experience in making the calculation largely because our managed syndicates writing non-marine business have substantial business US casualty exposure. On the basis of that experience, we have calculated what we believe to be a conservative premium for the 1983 syndicate to receive for the "run-off" book as well as for the balance of the old years exposures: by "conservative" I mean that we have added margins at each stage in the calculations because of the various probabilities or possibilities or deterioration in the currently advised figures. The substantial benefit of the investment earning of the fund now switches to the 1983 year. 

I consider that the two passages quoted above as to the run-off contracts would reasonably have been read to apply to all the run-off contracts. 

It was quite untrue to say that Merretts had - 

. . .been advised of the current predictions of the parties concerned as to what those accounts are likely to have to pay over many years.  Mr. Randall accepted that this passage was unfortunate, that he could not explain it and that it overstated the position. Mr. Randall referred to Gooda and Judd but even in these cases Merretts had not been advised of the cedants' current predictions as to what the accounts were likely to have to pay over many years. The statement as to - "the current predictions of the parties" should be contrasted with what some of the cedants were in fact saying - see the heading "Uncertainties evidenced by what the cedants were saying" in year 4 (section 35) above. I find that this statement was untrue to the knowledge of Merretts and in particular Mr. Merrett and was made to conceal the relevant facts and was deliberately aimed at keeping the Names in the dark. 

The statements in the letter dated Apr. 18, 1985 

. . .The losses disclosed above have been calculated after making full allowances for anticipated future claims. . . 
 
and the references in the accounts to "a series of conservative assumptions for their development" and "we have calculated what we believe to be a conservative premium for. . .the 'run-off' book as well as for the balance of the old years exposures" were, I find, deliberately misleading to the knowledge of Merretts and in particular Mr. Merrett and should be contrasted with the fundamental uncertainties etc. in year 4 set out above. I find that these statements were also made to conceal the relevant facts and were deliberately aimed at keeping the Names in the dark. 

In the course of the judgment in Hallam-Eames v. Merrett Syndicates Ltd. sup. Lord Justice Hoffmann in the context of s. 14A of the Limitation Act, 1980 said: 

. . .the accounts show that over successive years, the RITC premium was on each occasion substantially larger than in the year before. We do not however think that this should necessarily have led a Name to infer that the estimate in the previous year was wrong: it could have been because of business written in the pure year or for other reasons. And in any case, even if the previous estimates had been wrong, the fact that until 1985 was left open, RITCs continued to be written on the basis of certified accounts would have led Names to believe that the IBNRs were regarded as reasonably quantifiable. 

The year 5 RITC 

The managing agent's and underwriter's reports in year 5 did not in any way contradict the passages quoted above from the year 4 accounts. 

The managing agent's report in the accounts as at Dec. 31, 1985 stated: 

[1997]  408  L.R.L.R.  Henderson v. Merrett Syndicate (Q.B. (Com. Ct.))    Cresswell, J. 
 
. . .Syndicate 417. . .as you are already aware, this syndicate has had to bear a heavy cost in respect of claims for asbestos-related and similar injuries and there was further deterioration on the old years when we came to review the provisions at the close of the 1983 account. In addition, the further run-off contract written into the 1983 year produced a substantial loss. . .We have undertaken a major review of the reserves created for prior years and have strengthened them accordingly, as is reflected in the increase in the reinsurance to close the 1983 account over the 1982 account. . . 

Subsequent statements and events 

The managing agent's report in the accounts as at Dec. 31, 1986 stated: 

. . .Syndicate 417. The result for 1984 is disappointing and is worse than anticipated when we reported a year ago. The loss arises principally through a further deterioration of reserves for pollution and asbestos-related claims in both the direct account and on the so called run-off contracts. The expectancy of increased claims arise largely through a reassessment of reported claims and prudent loadings thereon. Whilst there has been some acceleration on settlements on asbestos cases, we believe it may be many years before the syndicate will be called upon to settle its obligations for latent disease and environmental claims. We have therefore deemed it appropriate, to purchase more "time and distance" reinsurance which effectively allows the benefit of the future investment earnings relating to those reinsurance premiums to be taken by the 1984 Names. The syndicate accounts show the financial effect of this transaction which mitigates to a considerable degree the full effect of the deterioration. We have adopted a prudent basis for reserving against future claims for latent diseases and pollution; our reserves assume that the older years will see some further deterioration in the years ahead. . . 

In the underwriter's report in the same accounts it is stated: 

417. . .The old years, including the run-off contracts (and this also applies to those run-off contracts in 418) have been examined with care and there has been some need to provide for eventual settlements at a higher level than estimated a year ago. The overall position, and in particular the predicted cashflow, gives us no specific concern. 

In a memorandum to the directors of MUAM dated Apr. 11, 1988 Mr. Randall wrote: 

. . .It is clear. . .that there has been some deterioration in advised reserves for asbestos and  pollution claims affecting both 417's old years and the run-off contracts, but the uncertainty as to the outcome of issues is greater than ever. 

The issues still to be debated by the Board include: what is the appropriate level of reserve to be carried for asbestos property damage claims and EPA claims given the conflicting legal decision so far available? Do the various scenarios produce such wide variations that we cannot properly arrive at a reliable basis for computing the reinsurance to close? 

In connection with the run-off contracts, we are continuing our investigations and there appear to be grounds for supposing less than full disclosure by a number of the cedants at the time the policies were written. The reserves already carried on these contracts are very substantial indeed and we must consider whether any failure to inform, whether accidental or deliberate, makes it appropriate that contracts should be renegotiated or even rescinded; meanwhile there must remain a question as to whether we have a satisfactory basis for computing the reinsurance to close. 

We will need to develop and discuss these issues over the next week or so. 

In terms of dealing with market queries, the following guidelines should be followed: 

No information should be volunteered. 

In answer to specific questions you should indicate: that no decisions have been taken but there are material areas of doubt surrounding the basis for reserving for EPA claims and in particular, in relation to the run-off contracts. . . 

In the note dated May 23, 1988 Mr. Hart recorded: 

Syndicate 417 - Reinsurance to close as at 31.12.87. It was decided to leave the account open in view of the uncertainties involved in the run-off contracts and environmental pollution claims. . . 

The plaintiffs submit that in subsequent annual reports and correspondence a whole series of statements were made to names calculated to give them the impression that it was only the necessity of resolving the disputes over the run-off contracts that was preventing the 1985 underwriting year from being closed. In a letter dated May 20, 1988 to members' agents MUAM wrote: 

The principal reasons for leaving the account open relate to the 11 so called run-off contracts. . .Over recent months we have undertaken detailed "audits" of the cedants' records which have given rise to renewed concern that certain of the reassureds may not have fully disclosed their exposure to future claims at the 

[1997]  409  L.R.L.R.  Henderson v. Merrett Syndicate (Q.B. (Com. Ct.))    Cresswell, J. 

point when the run-off reinsurances were written. A major investigation has been underway for some time. . .We aim to complete the investigation with the minimum of delay and hope to be able to close the 1985 account at next year end, by which time it should be clear whether or not we have been successful in establishing reduced liability under the contracts. 

The managing agent's report in the accounts as at Dec. 31, 1987 stated: 

Syndicates 418/422/417. Not only is the overall result for the year disappointing at around breakeven, but the 1985 account is to remain open for the time being. The Syndicates are exposed both on their direct writings and via the run-off contracts, to substantial asbestos and environmental claims. The run-off contracts are dealt with below including an explanation of the difficulties we face in setting the reserves for such items. It is the liabilities emerging on the run-off contracts which create the great uncertainty, and in the circumstances the decision to leave open the 1985 account is the only fair course to take. Provided progress is made over the next few months in renegotiation of some of the large contracts, we are hopeful that it will be possible to close the account at next year end . . . 

The managing agent's report in the same accounts added: 

. . .We face two major problems in assessing our exposure on the run-off contracts. First, there have been relatively few environmental pollution claim cases brought to trial. Those cases which have been heard have produced conflicting decisions, some of which are still the subject of appeal. A similar problem exists with asbestos property claims, where insurers will contend that removal of asbestos products from buildings should not expose policies to property damage claims. In this uncertain environment it is difficult to reach conclusions on where to pitch the year end reserves. In the case of the run-off contracts there is the added problem that we get these claims "second-hand". Overall our objective is reserve on a conservative basis making provision for all advised claims with a significant further allocation for IBNR. 

Secondly, during the last year we have undertaken a number of "audits" of cedants' records to validate the claims being lodged under the run-off contracts. In some cases we have been concerned about the way in which the run-off is being managed by cedants. More disturbing, we have unearthed further information which casts doubt on whether we were fully advised about  the known losses and potential for future claims at the time when we underwrote the policies. 

Ernst & Whinney have been instructed by our legal advisors to undertake a thorough review of the claims data provided at the time of placing and to compare that information with the cedants' records to determine whether that was all the cedant knew or ought to have known at the time the run-off contract was signed. We are already in discussion with certain of the reassureds, and in one case we believe the grounds for claiming non-disclosure are so strong that we have allowed no IBNR in drawing up the accounts to 31 December 1987. 

We do not think it appropriate to list publicly details of all 11 contracts but in summary the accumulated losses at 31 December 1987 total. . .$109m (418/417). . . 

The underwriter's report in the same accounts stated: 

Syndicates 418/422 (Marine). You will have seen that I took the view that the 1985 account should be left open. . .The reason is quite simple and positive. Our further study of the run-off account written in both 418 and 417 indicate that on a number of them information material to the underwriting may not have been provided to the underwriter when the contracts were written. Only in one case have we adjusted our reserve at this stage to provide for some of the saving we expect to achieve by agreement to renegotiate the contracts; it is too early to make adjustments on others, but to close the year without making any other adjustment would in my view be to fail to meet the obligations we have to account properly to our Names. The amounts that may be deducted from our present reserve by renegotiation would be material to the result of the 1985 year. 

In a letter dated Dec. 30, 1988 to Names MSL wrote: 

At this stage it is impossible to say whether or not the commencement of litigation will impact the ability of MUAM to close the 1985 account of syndicate 418/417 as at 31 December 1988. I will keep you advised of any significant developments. 

In a letter dated May 5, 1989 to members' agents MUAM wrote: 

The Board has reluctantly come to the conclusion that it would not be appropriate to close the 1985 Account at this stage. Whilst very substantial progress has been made in connection with the excess of loss contracts, there are some cases remaining where there are issues in dispute which are being referred to arbitration or where litigation has been commenced. 

[1997]  410  L.R.L.R.  Henderson v. Merrett Syndicate (Q.B. (Com. Ct.))    Cresswell, J. 

The managing agent's report in the accounts as at Dec. 12, 1988 stated: 

. . .We had expected to be able to close the 1985 Account of Syndicates 418/417 but progress on resolving disputes has been slower than we hoped. We will continue to work towards closing that year at the earliest possible date. . .It is necessary to enter a word of caution about potential liabilities for environmental claims arising on business written many years ago. There is still considerable confusion because of the inconsistency of decisions in the US courts regarding the liability of insurers to meet the cost of environmental clean-up. We are able to report that a number of the recent key cases have been decided in favour of insurers although there are appeals awaited. . . 

A note of issues covered at various Names' meetings held throughout June and July, 1989 recorded Merretts as stating: 

A year ago it had been hoped to close the 1985 year at 31 December 1988 provided good progress could be made regarding settlement of the 11 run-off contracts. . .The board's intention is to close the 1985 account of 418/417 as soon as the outcome of the seven run-off disputes is clearer; uncertainty over asbestos and pollution losses is not expected to delay closure once the outcome of the run-off disputes is known. 

In a letter dated Feb. 5, 1990 to Names MSL wrote: 

The managing agent has always maintained that once these disputes have been resolved, one way or the other, win or lose, the year of account will be closed. 

The letter referred to the favourable decision in the Verrall arbitration and continued: 

A second arbitration is currently in progress and one of the disputes which is in litigation is scheduled to be heard in the High Court in April. This means that by May/June it is unlikely that there will be sufficient certainty with regard to the disputed contracts to enable the managing agent to close the 1985 account as at 31st December 1989. It is much more likely that the year will close as at 31st December 1990, with the close of the 1988 account, by which time all bar one of the dispute should have been resolved. . . 

It is to be noted that this letter, in reporting the favourable result in Verrall, did not refer to the finding of the arbitrators that: 

For the Claimant to accept a risk, which was known to include exposure to latent disease including asbestosis, which at that time was causing such concern in the Market, without initiating a detailed dialogue with (the cedant) was, in our view, foolhardy to say the least of it and bordered on conduct which could be described as grossly negligent. 

In a letter to members' agents dated May 23, 1990 MUAM stated: 

Prospects for closing 418. Last year we indicated that we hoped to remove sufficient areas of doubt to enable us to close the 1985 year of account as at 31 December 1990; progress made in the last 12 months gives further encouragement in this direction although this cannot be guaranteed. 

The managing agent's report in the accounts as at Dec. 31, 1989 stated: 

Our objective with regard to the open year has always been to achieve a greater degree of certainty as to the syndicates' potential liabilities before computing a reinsurance to close figure. We indicated to members' agents in December last year that we hoped to remove sufficient areas of doubt to enable us to close the account at 31st December 1990, and recent progress gives further encouragement in this direction although Names should not take this to be a certainty. 

Notes of a meeting of Names participating in the 1983 account of Syndicate 421 on May 25, 1990 record: 

418/417 would not be closing its 1985 account as at 31 December 1989, but it was the present hope and reasonable expectation that it would be possible to close as at 31 December 1990. 

In a letter dated Aug. 10, 1990 to members' agents MUAM wrote: 

. . .We continue to hope to be able to close the 418 open year as at 31 December 1990. . . 

In a further letter dated Aug. 10, 1990 to members' agents MUAM reported as to the seven contracts which had been or were being disputed through arbitration or litigation and said for the first time: 

. . .members are fully entitled to take the view that they may wish to take their own independent legal advice concerning any aspect of the run-off contracts including the conduct of the Managing Agencies. . . 
A letter dated February, 1991 sent by Mr. Robson to Names stated: 

The managing agent continues to express its hope that it will be in a position finally to close this account as at 31 December 1990 and the very considerable recent progress made with regard to the resolution of the disputed run-off contracts provides encouragement in this respect. . . 

A similar comment is found in Mr. Robson's memorandum entitled 1988 results-update of Apr. 23, 1991. 

[1997]  411  L.R.L.R.  Henderson v. Merrett Syndicate (Q.B. (Com. Ct.))    Cresswell, J. 

The underwriter's report in the accounts as at Dec. 31, 1990 stated: 

The dominant feature of this account during the last twelve months has been the increase in the notification of reserve potentials for pollution. . .The combination of these. . .has led us to conclude that the account should not be closed as at 31st December 1990. We expect to make significant progress in the next twelve months. . . 

The managing agent's report in the accounts as at Dec. 31, 1991 stated: 

It remains a matter of great regret for us that we are faced with such uncertainties as to the future claims development of a significant part of this account that we are unable to assess an equitable reinsurance to close premium. It is in the nature of that uncertainty that we cannot foresee at what date it would be sufficiently reduced to enable us to close, but it remains true that as soon as we believe that we can properly do so we will close it. 

Conclusion - year 4 RITC 

I find that Merretts deliberately concealed from the plaintiffs the central fact that the year 4 RITC as at June 4, 1985 exposed the plaintiffs to potentially huge liabilities which were not capable of reasonable quantification on the information available to Merretts as at that date. I refer to the detailed analysis of the uncertainties as at June 4, 1985 - see year 4 above. I find that as at that date Merretts and in particular Mr. Merrett knew the central fact that a reinsurance to close figure could not be arrived at with a reasonable degree of accuracy. The information before Merretts and Mr. Merrett as at June 4, 1985 showed the extent of the fundamental uncertainties as to the future development of (i) asbestos bodily injury claims (ii) asbestos property damage claims and (iii) pollution claims not only in respect of 418/417's own book going back to 1953 but also in respect of the books of the 10 cedants. Further the information as to the run-off contracts were wholly inadequate. 

Instead of telling the Names the true position (and leaving the account open) Merretts and in particular Mr. Merrett deliberately concealed the true position and deliberately kept the Names in the dark in the letter of Apr. 18, 1985 and in the managing agent's and underwriter's reports. The plaintiffs did not discover the central fact until at the earliest May 15, 1992 (the date of the accounts as at Dec. 31, 1991) nor could they with reasonable diligence have discovered it earlier. When the 1985 year was left open the series of documents referred to above gave the misleading impression that Merretts intended to close the 1985 year as soon as the outcome of the disputes as to the run-off contracts  was clearer. Merretts said that uncertainty over asbestos and pollution was not expected to delay closure once the outcome of the run-off disputes was known. It was not until the accounts as at Dec. 31, 1991 that the Names were told: 

. . .we are faced with such uncertainties as to the future claims development of a significant part of this account that we are unable to assess an equitable reinsurance to close premium. 

In truth Merretts and in particular Mr. Merrett knew in year 4 that the liabilities were not capable of reasonable quantification and the fundamental uncertainties were no less in subsequent years. 

Conclusion - year 5 RITC 

I also find that Merretts deliberately concealed from the plaintiffs the central fact that the RITC as at June 2, 1986 exposed the plaintiffs to potentially huge liabilities which were not capable of reasonable quantification on the information available to Merretts as at that date. I refer to the detailed analysis of the uncertainties as at June 2, 1986 - see year 5 above. I find that as at that date Merretts and in particular Mr. Merrett knew the central fact referred to above. The information before Merretts and Mr. Merrett as at June 2, 1986 showed the extent of the fundamental uncertainties referred to above. Further the information as to the run-off contracts although far more extensive than in year 4 was still inadequate. 

Instead of telling the Names the true position (and leaving the account open) Merretts and in particular Mr. Merrett represented that the year could properly be closed - see further the managing agent's report. In this way the true facts were deliberately concealed and the Names were deliberately kept in the dark. The plaintiffs did not discover the central fact until at the earliest May 15, 1992 nor could they with reasonable diligence have discovered it earlier. When the 1985 year was left open the series of documents referred to above gave the misleading impression that Merretts intended to close the 1985 year as soon as the outcome of the run-off disputes was clearer and served to keep the Names in the dark as to the true prospects of closing the 1985 year. Merretts said that uncertainty over asbestos and pollution was not expected to delay closure once the outcome of the run-off disputes was known. In truth Merretts and in particular Mr. Merrett knew in year 5 that the liabilities were not capable of reasonable quantification and the fundamental uncertainties were no less in subsequent years. 

Accordingly the relevant limitation period is postponed and Merretts' defence of limitation fails. 

[1997]  412  L.R.L.R.  Henderson v. Merrett Syndicate (Q.B. (Com. Ct.))    Cresswell, J. 

SECTION 32 OF THE LIMITATION ACT 1980 AND THE MEMBERS' AGENTS 

The plaintiffs also rely on s. 32 of the 1980 Act as against the members' agents. They refer in particular to the words: 

References in this sub-section to the defendant include references to the defendant's agent and to any person through whom the defendant claims and his agent. 

The plaintiffs' submissions 

The plaintiffs' submissions included the following: 

1. The members' agents' liability arises solely because of their contractual responsibility, under the scheme then in force at Lloyd's, for acts done by Merretts as their sub-agents. The fact that they were kept as ignorant as the plaintiffs themselves is neither here nor there. 

2. The question of imputing to a principal responsibility for the acts of his agent arises, in the general law of agency, when a third party seeks to make the principal liable for wrongs committed by the agent (see generally Bowstead 15th ed. art. 97 pp. 389 et seq.) but this question has nothing to do with any of the issues in this case. 

3. The sole question is whether, if there was deliberate concealment, it was deliberate concealment by "the defendant's agent" within s. 32(1). The answer is in the affirmative because Merretts can, in the circumstances of this case, only have committed the acts of deliberate concealment, sofar as indirect Names are concerned, qua agent of the defendant members' agents. 

4. The present case is a fortiori to Applegate v. Moss, [1971] 1 Q.B. 406 where Lord Justice Edmund-Davies said: 

The defendant contracted directly with the plaintiffs that he would, for the consideration of ˙1900, erect a "dwelling house in accordance with the plans and specification hereto annexed". In my judgment it does not lie in his mouth to say that what was done by his builder was not done by his "agent" within the meaning of section 26(b). 

In the scheme in force at Lloyd's at the time the managing agent was, for all purposes connected with the underwriting, the sub-agent of the members agent. 

The members agents' submissions 

The members agents' submissions included the following: 

1. The managing agent's and underwriter's reports relied upon are not, nor are they deemed to be, reports of the members' agents.   2. Section 32(1) applies where a fact relevant to the plaintiffs' right of action has been deliberately concealed from him by the defendants' agent acting as such. It cannot apply if on ordinary principles of agency law the act is not to be imputed to the principal. On principle and authorities the relevant conduct cannot be imputed to the members' agents. 

3. The matter has to be seen both in the context of the general law of agency and in the proper factual context i.e. in the context of the agency and sub-agency agreements, the surrounding regulatory framework (which gave different specific functions to members' agents, managing agents and auditors) and the matters contained in the agreed statement of facts (see section 3 above). The ordinary law of agency does not hold a principal liable for the acts of an agent outside the scope of his agency, and s. 32 is to be construed in the same way. An agent cannot be said to be acting within the course of his agency if on ordinary principles of agency law his acts are not to be imputed to the principal. Either his acts (or omissions) are on ordinary principles of agency law to be imputed to the principal or they are not. If they are not, it cannot be said that the agent is nevertheless acting as the principal's agent or within the course of his agency. 

4. The function of reporting on the syndicate is not imposed on the member's agent. It is imposed by the Lloyd's regulatory structure on the managing agent, the underwriter and the syndicate auditors. The function of the member's agent is to procure that such reports are obtained and sent to the names. When the managing agent (or the underwriter or the auditor) reports, it is not the member's agent who is thereby reporting (by the managing agent or by the underwriter or by the syndicate auditor). It is the managing agent who is reporting, in discharge of an obligation imposed on the managing agent, not the member's agent. The managing agent is appointed by the member's agent under the sub-agency agreement, and he in turn appoints the syndicate auditor. But it is a fallacy to say that the managing agent therefore reports as the agent of the member's agent. He reports as the managing agent of the syndicate. 

5. The complaint is not that the members' agents (by the managing agents) deliberately concealed relevant facts from the Names, but that the managing agents deliberately concealed relevant information from the members' agents. It may be a permissible plea against the managing agents that they deliberately concealed information from the members' agents acting in the capacity of agents for the Names. It cannot be said that the members' 

[1997]  413  L.R.L.R.  Henderson v. Merrett Syndicate (Q.B. (Com. Ct.))    Cresswell, J. 

agents, by the managing agents, misled the members' agents. 

Conclusion 

I do not consider that in the particular circumstances of the present case the plaintiffs can rely on s. 32(1) of the 1980 Act as against the members' agents. The words "references. . .to the defendant include references to the defendant's agent" have to be applied in the relevant context. 

I refer to section 3 above which is drawn from an agreed statement of facts as to the role of managing agents, members' agents, and the contractual structure. The contractual structure should not be considered in isolation. It is necessary to have regard to the regulatory regime which identifies the respective roles and functions of members' agents and managing agents (and also syndicate auditors). 

The members' agents played no part in managing or controlling 418/417 or in the conduct of the underwriting on behalf of the plaintiffs. Merretts were responsible for keeping accounting records and for the production of annual audited accounts for 418/417 and the members' agents played on part in the preparation of such accounts or in any of the work required therefor. On the basis of the annual audited accounts and solvency reports provided to them by Merretts in respect of 418/417, auditors appointed by the members' agents prepared and submitted solvency reports to Lloyd's in respect of each of the members' agents' Names. 

I refer to section 17 above entitled "The Regulatory Regime for the years ended Dec. 31, 1980-1986". The respective functions of Merretts and the members' agents were set out inter alia in the Lloyd's Manual for Underwriting Agents, Byelaw No. 2 of 1984 and Byelaw No. 7 of 1984. The manual pointed out, inter alia, that since the member's agent delegated full powers of underwriting to the managing agent, he was entirely dependent upon the managing agent for the essential accounting and statistical data to enable him to produce the accounts to his Names. Byelaw No. 2 of 1984 contained detailed provisions requiring the managing agent to produce an annual report and a report by the active underwriter in specified terms. Byelaw No. 7 of 1984 dealt specifically with the duties of managing agents with respect to reports and accounts. Paragraph 4 provided that every managing agent should in each year prepare an annual report, a managing agent's report and procure that the active underwriter prepare an underwriter's report all in specified terms. Some of the relevant provisions are quoted above. 

I do not accept the plaintiffs' submission that in the circumstances of this case Merretts can only have committed the acts of deliberate concealment, so far as indirect Names are concerned, qua agent  of the defendant members' agents. This submission ignores the detailed and complex regulatory regime referred to above which contains detailed provisions as to the respective functions of managing agents and members' agents (and syndicate auditors). Having regard, inter alia, to the particular duties imposed from time to time on managing agents with respect to reporting, I do not consider that s. 32 serves to postpone the limitation period as against the members' agents. 

40. THE CLAIMS AGAINST MR. MERRETT PERSONALLY 

I turn to consider the claims against Mr. Merrett personally. It is important to note that Mr. Merrett is not sued in his personal capacity in the Henderson actions. The claims against Mr. Merrett and the limitation issues that arise are summarized in Table 4 below. 

The submissions on behalf of Mr. Merrett 

The submissions on behalf of Mr. Merrett were as follows. Mr. Merrett owed a limited duty of care in tort to the Names, both direct and indirect. That limited duty was in relation to the underwriting acts which Mr. Merrett personally performed as active underwriter, not as agency director. Thus, if Mr. Merrett personally underwrote any of the run-off contracts and if he did so negligently, he would be in breach of a duty of care in tort owed to the Names. If Mr. Emney wrote the run-off contracts negligently the agency would be vicariously liable for his negligence, but Mr. Merrett would not be personally liable for the alleged breach of some duty to supervise. He would not be personally liable for incompetence on the part of his deputy. As to the RITC, this was not a personal activity undertaken by Mr. Merrett. His involvement was twofold (a) as a director of the managing agency and (b) as active underwriter. Mr. Merrett would not be personally liable for these joint decisions which were taken as a director. 

The plaintiffs' submissions 

The plaintiffs' submissions are set out in a document entitled "The Personal Liability of (Mr. Merrett)". I refer to some of these submissions below.

The writing of the run-off contracts 

It is not in dispute that it was Mr. Emney's scratch which formally bound 418/417 on all 11 run-off contracts; nor is it in dispute that he played a substantial role in the decision to write the contracts. The fact that Mr. Emney was not called by Merretts has not made the task of doing justice between the parties any easier. Mr. Emney could have assisted the Court on a number of issues, 

[1997]  414  L.R.L.R.  Henderson v. Merrett Syndicate (Q.B. (Com. Ct.))    Cresswell, J. 

including the role of Mr. Merrett in the writing of the run-off contracts. The plaintiffs contend that Mr. Merrett took part in the decision to write each run-off, or the run-offs as a whole, to the extent that he should be held personally liable for such conduct. The plaintiffs submit that there are three extraordinary aspects of this part of the case (withholding of the writing of the run-offs from E&W, the absence of a formal inquiry after the "shattering news" in April, 1985 and the fact that prior to 1985 claims were apparently handled by Mr. Emney). The plaintiffs submit that in order to make good the claim against Mr. Merrett, it is not necessary to go so far as showing that Mr. Merrett scratched the slip, or even that he personally made the decision to write every policy. They accept that it is not possible to determine his precise involvement in the writing of each contract, but say that it is clear that he was aware that they were being written, that he had given the go-ahead in a general way, that he was certainly involved in the details of at least some individual contracts, that they could not have been written without his consent, and that he has been less than frank over the precise extent of his involvement. The plaintiffs accept that as the active underwriter on 418/417 Mr. Merrett was not required to assess every risk himself and make the decision to accept or not, but he was in overall control. They submit that it is quite unbelievable that a man of Mr. Merrett's personality and presence would have simply allowed Mr. Emney to enter this field and write this sort of business without keeping a close eye on what was going on. 

Although the probability is that Mr. Merrett knew more about the run-off contracts than he accepted in his statement or in his evidence, I do not consider that I would be justified in making a finding against Mr. Merrett personally in respect of the writing of the run-off contracts for two principal reasons. First, as the plaintiffs accept, it is not possible to determine Mr. Merrett's precise involvement in the writing of each contract. Second, as the focus of the case was against Merretts, I have not had any or any adequate expert assistance as to practice at Lloyd's at the material time as to the extent to which the active underwriter was subject to a duty to supervise his deputy. 

The Year 4, 5 and 6 RITCs 

The Syndicate Accounting Byelaw (No. 7 of 1984) (see section 17 above) identified the duties of the active underwriter. Every annual report had to be approved by the active underwriter (in addition to a resolution of the directors of the managing agent). Mr. Merrett wrote an underwriter's report in each set of accounts. The explanatory notes to the Byelaw summarized the relevant practice -  . . .The decision whether to close a year of account of a syndicate is the responsibility of the managing agent in consultation with the underwriter. . . 

I find that this represented the position at years 4, 5 and 6. As to the six RITCs Mr. Merrett correctly accepted that this was the most important function that he fulfilled each year as underwriter of 418/417. I find that Mr. Merrett as active underwriter owed a duty of care in tort to the reinsuring Names (whether direct or indirect) to exercise reasonable skill and care in the exercise of his functions as active underwriter. For the reasons set out in sections 35, 36 and 37 above Mr. Merrett was in breach of that duty of care. For the reasons set out in section 39 above (s. 32 of the 1980 Act/Deliberate concealment) the relevant limitation period is postponed in respect of years 4 and 5 and Mr. Merrett's defence of limitation fails. 

41. THE RESULT 

The claims against Merretts in respect of seven run-off contracts (Ballantyne, Verrall, Fireman's Fund, Dolling-Baker, Toomey, Gooda and Humm) and the year 4, 5 and 6 RITCs (82-83, 83-84 and 84-85 respectively) succeed. The claims against Merretts in respect of the Burdett and Judd run-off contracts are statute-barred (subject to section 14A of the 1980 Act and the plea in misrepresentation/non-disclosure). 

The claims against Mr. Merrett in respect of the year 4, 5 and 6 RITCs succeed. 

The claims against the members' agents in respect of the year 6 RITC 84-85 and the year 5 RITC 83-84 (Henderson actions) succeed. The claims against the members' agents in respect of the year 5 RITC 83-84 (Hallam-Eames actions) and the year 4 RITC 82-83 are statute-barred (subject to the plea in misrepresentation/non-disclosure). 

The claims against E&W in respect of the year 6 RITC 84-85 and the year 5 RITC 83-84 (Henderson actions) succeed. The claims against E&W in respect of the year 5 RITC 83-84 (Hallam-Eames actions) and the year 4 RITC 82-83 are statute-barred (subject to s. 14A of the 1980 Act). 

All claims not mentioned above fail. 

I will give further directions with a view to determining the remaining issues as to section 14A of the 1980 Act, the plea in misrepresentation/non-disclosure and contribution claims between defendants. Damages will be assessed in accordance with the findings set out above. 

[1997]  415  L.R.L.R.  Henderson v. Merrett Syndicate (Q.B. (Com. Ct.))    Cresswell, J. 

[1997]  416  L.R.L.R.  Henderson v. Merrett Syndicate (Q.B. (Com. Ct.))    Cresswell, J. 

[1997]  417  L.R.L.R.  Henderson v. Merrett Syndicate (Q.B. (Com. Ct.))    Cresswell, J. 

[1997]  418  L.R.L.R.  Henderson v. Merrett Syndicate (Q.B. (Com. Ct.))    Cresswell, J. 

[1997]  419  L.R.L.R.  Henderson v. Merrett Syndicate (Q.B. (Com. Ct.))    Cresswell, J. 

[1997]  420  L.R.L.R.  Henderson v. Merrett Syndicate (Q.B. (Com. Ct.))    Cresswell, J. 

[1997]  421  L.R.L.R.  Henderson v. Merrett Syndicate (Q.B. (Com. Ct.))    Cresswell, J. 

APPENDIX 1 

CHRONOLOGY 

[The abbreviation [A] is used to refer to a firm of US attorneys] 

1964 
["The Occurrence of Asbestosis among Insulation Workers in the United States" published by Selikoff, Churg & Hammond. Ann. N.Y. Acad. Sci. 132, 139] [L1/10/358] 

Oct-64 

[An International Conference on the Biological Effects of Asbestos to review the data and discuss the problems, sponsored by The New York Academy of Sciences.] [H3/13] 

26-Sep-77 MER. 

Circular letter from RJ Kiln & Co. Ltd to reinsurers, enclosing a further letter and memorandum, copied to Robin Jackson: "DES/Steilbene" [J11/348-355] 

1978 MER. 

[A] Draft Report. "Asbestosis disease and the liability of manufacturers of asbestos insulation products" 

Asbestosis has been recognised as a disease for well over 50 years. 

It has been reported that in at least one fourth of the adults who died in an urban area in the U.S. and other industrialised countries that asbestos bodies were found in the lungs upon pathological examination. Disease caused by asbestos is rarely manifested in less than 10 to 20 years from onset of exposure. 

(II) Case Law Development: Strict Liability.. . .It has, therefore, become widely accepted that in today's market place a manufacturer is held accountable for a product which proves to be unreasonably dangerous. The concept of strict liability has, as we all know, gained rapid acceptance throughout the various jurisdictions in the United States. . . 

(B) Strict Liability as a concept was applied by the Federal District Court sitting in Texas (Clarence Borel v. Fibreboard Paper Products Corp.), in the first of the asbestosis cases which went to trial. This case has unquestionably been the precipitating factor in the great bulk if not all of the cases filed thereafter.. . . The Plaintiff began his working career as an insulation worker in 1956. During the course of his working life he was employed by various insulation contractors, mostly in Texas, until he became disabled in 1969. The Court found that his disability was attributable to the disease, asbestosis.. . .The Court recognised that Texas had adopted the Strict Liability concept as embodied in  the Re-statement.. . .On the issue of the manufacturer's knowledge of the dangers associated with the use of insulation products containing asbestos fibres, the Court recalled the history of the disease as testified to during trial and stated that based thereon the conclusion is apparent that those dangers have been recognised as such for well over 50 years.. . . In support of this conclusion the court cited the testimony given by Dr IJ Selikoff, Mount Sinai School of Medicine, before the 90th Congress in 1968.. . .Regarding damages and in response to the Defendants' argument that since the Plaintiff was unable to show with any degree of preciseness how much damage is attributable to each one, that recovery should be denied, the Court stated "where several Defendants are shown to have each caused some harm, the burden of proof. . .shifts to each Defendant to show what portion of the harm he caused. If the Defendants are unable to show any reasonable basis for division, they are jointly and severally liable for the total damage." Regarding the contention that the claim was barred by the statute of limitations, the Court observed that the Texas Supreme Court has adopted the "discovery" concept in medical malpractice cases whereby it is recognised that a ". . .cause of action does not accrue until the injury is discovered or in the exercise of reasonable diligence should have been discovered.". . .The Circuit Court has thereupon affirmed the decision of the District Court.. . .The defendants, Fibreboard et al., filed a motion for a Rehearing. This was denied. . .Certiorari was denied by the U.S. Supreme Court. The finding in the Borel case was followed in the case of John H. Karjala v. John-Manville Products Corp et al which was tried by a Federal District Court in Minnesota resulting in a plaintiff's verdict of $200,000.. . . 

(19) Attention must now be focused upon the insurance coverage problems arising therefrom. These problems immediately become apparent when one considers that the exposure to asbestos dust has been continuous over an extended period, and that the current injuries are a cumulative result of that exposure. The most immediate problem is, which year shall be charged with the loss? Is it the year wherein the action is instituted; the year wherein the disease process manifests itself; the year of the first exposure; the year of diagnosis; or some combination of one or more of the foregoing. As at this writing I have not uncovered any prior judicial opinion which may be used as guidance or authority, persuasive or otherwise, under the circumstances. Of course there have been other cases involving parallel issues, but not asbestosis. The results of those other cases have varied. 

(22) One or multiple occurrences 

(24) Manifestation or discovery equals date of occurrence is the most simplistic solution. Whether 

[1997]  422  L.R.L.R.  Henderson v. Merrett Syndicate (Q.B. (Com. Ct.))    Cresswell, J. 

or not this will be adopted by the Courts remains to be seen. We may not have long to wait for I have learned that the Insurance Company of North America has instituted litigation against one of its insureds in the U.S. District Court, Eastern District of Michigan, and against another in the Court of Common Pleas, Ohio, seeking a Declaratory Judgment. . . .The INA Policy provided in pertinent part as follows "this insurance applies only to bodily injury or property damage which occurs during the policy period within the policy territory." Since the policy expired on October 31, 1972, and since the bodily injury resulting from exposure to asbestos fibres occurs for the purpose of insurance coverage at a time when such injury becomes manifest, that is, the date on which the condition is known to or should have been known by the claimant or the date on which it is medically diagnosed, which ever comes first. 

(26) Aggregates. Once the loss date issue is resolved, attention must then be focused upon the application of aggregate coverages during a given policy year. 

(30) What does the future have in store? Recently a Bill was introduced into the House of Representatives. . .aimed at the industry-wide problems associated with the use and manufacture of asbestos products. . .What form the Bill may eventually emerge in, if anything, from the legislative forum is sheer speculation. 

(33) Insofar as the filing of cases is concerned, that seems to have peaked out, and conceivably from hereon in we will see a reduction in filings. I hasten to add, however, that there is no current clear cut trend evidencing such a fact. [H1/1-35] 

15-June-78 

PROVINCIAL RUN-OFF CONTRACT WRITTEN (418 50%) C1/3 

Aug-78 MER. 

[A] letter to underwriters at interest. (Assured. . .). First Bordereau rendition on the asbestosis case thus far instituted against the GAF Corporation. Prior to its acquisition of Ruberoid in 1967 GAF had not manufactured any products containing asbestos whereas from some time in the 1930's Ruberoid was engaged in the manufacture and sale of various insulation products containing asbestos.. . .In INA's unsuccessful application for a Declaratory Order against Forty-Eight Insulations Inc the Court held there was damage during each of the periods of coverage, accordingly, each insurer at risk at the time the damage occurred was a primary insurer.. . .The Court therefore found that damage did in fact occur during each exposure, thus there was damage during each of the periods of coverage, thereby triggering the necessary predicate for  defence and indemnity. It follows that where an insured was uninsured during any period of exposure, then the insured is required to pay for that period of time. The Court reviewed the implications of adopting the exposure theory.. . .The Court took note of a dissimilar position espoused by the U.S. District Court, Eastern District of Louisiana in the case of Porter v. American Optical which held that the manifestation of the disease process was the date which fixed the time when the loss arose under the policies provided by the insurers. 

In view of the finding of the INA case which rationale could have eventually became the law of these many asbestos cases, at least in so far as Federal jurisdictions throughout the country are concerned, loss data, therefore, must be complied from both an exposure stand point and from a manifestation and/or diagnosis approach, at least until such time as appellate procedures in both the INA and Hartford cases have been exhausted, and hopefully the Courts will find an unified approach. To prepare for this eventuality, we have recommended that underwriters establish an arbitrary reserve of $200,000 for each year of account. [H1/36-43] 

30-Nov-78 MER. 

Memorandum prepared by Jim Ayliffe and John Heath. Following joint discussions, it is our. . . (?) market that the London insurers respond by accepting the date of diagnosis as the correct basis for attachment. In addition to the points in M+M report of 15-Nov-78, it is necessary to bear in mind (a) the difficulty in providing effective evidence that the underwriting intent was other than to provide coverage based on diagnosis (b) it is anticipated that the Courts will attempt to find coverage for the insured. This would mean that any evidence of lack of insurance, inadequacy of coverage or inability to trace older coverages will be decided in the insureds favour.. . .Should any underwriter have any further comment can they please contact either Mr. Jim Ayliffe or Mr. John Heath in view of the urgency. [H1/47] 

12-Dec-89 MER. 

Inter-departmental memo from CJ Ayliffe to RAG Jackson. "Asbestos and related matters". "The dilemma which has faced the insurance industry arose out of the decision referred to in a case know as INA v. Forty Eight Insulations.. . .The Judgment had the benefit of being very precise and carefully reasoned, and it came over clearly that the Judge regarded each day's exposure to asbestosis dust as constituting a separate injury on the theory that the claimant was injured every time he ingested a minute quantity of dust.. . .This has been the first case to express a contrary opinion to the practice that has until now governed the attachment of 

[1997]  423  L.R.L.R.  Henderson v. Merrett Syndicate (Q.B. (Com. Ct.))    Cresswell, J. 

claims arising out of long term products exposure and not unnaturally it has been given some considerable publicity.. . .At equal relevance is the fact that at a similar time a further case was being heard in another State where the Court held that the manifestation of a disease process was necessary in order to invoke policy coverage. That is from the point of view of judiciary we have two completely conflicting opinions, both of which are under appeal.. . .These pending declaratory relief actions only tend to illustrate the facts that the law is in an unsettled state at the present time. . .It must be realised that the issue with which we are concerned is not limited to the attachment of asbestosis claims but, in fact will relate to the manner in which all long term products exposures would attach in the future and the implications are therefore very serious. Whatever our personal view may be on the rights or wrongs of exposure verses manifestation it is my feelings we have to look beyond the immediate problem and consider how best the industry can cope with the problem and still have the ability to provide the coverages which are needed. [H1/48-50] 

14-Dec-78 MER. 

Memo from RAG Jackson of Merrett Dixey Syndicates Limited. Asbestosis. Following yesterday's meeting I thought it a good idea to spell out, in writing, some of the points we raised, even though they may be a repetition of the written comments of yesterday. We have tried to consider the issue from the point of view of the intent behind the policy language of the standard USA Comprehensive General Liability forms in use during the period that claimants have been "exposed" to asbestos products. We think that the developments of this language favours our interpretation. . .therefore, read in its simplest form the latest policy conditions cover: "Sickness or Disease which occurs during the period caused by continuous and repeated exposure to conditions". The continuous and repeated exposure to conditions clearly does not have to occur during the period of the policy. Simply the sickness or disease has to occur during the covered period. The question then becomes when has the disease or sickness been contracted, which is not necessarily the time of exposure to asbestos products. . .We recognise that in the Forty-Eight Insulations case the court sought to argue that the bodily injury arose at each exposure, but, for the reasons already stated feel that their conclusions were not in line with the interests of the insurance industry.. . .Ultimately the final decision must be that of the court, but in the meantime, we consider that it would be helpful if the Market could make a collective response on Eagle-Picher which would reflect what has been the practice and intent of the insurers. It is essential that Mendes & Mount be advised of the position to be adopted by those involved no later than the morning of December 18.. . . [J11/1] 

22-Dec-78 

Wall Street Journal: Group claims millions of school children have been exposed to asbestos hazard. [H3/39] 

28-Dec-78 MER. 

Merrett inter-departmental memo from D Chambers. Asbestosis etc. The intent of the standard USA CGL policy is that it covers injuries occurring during the policy period. Occurrence is, in more recent policies described as "including injurious exposure to conditions which result during the policy period in bodily injury". The question is, therefore, when did the injury take place. The time the injury is manifested is not the same thing as the time the injury was received. If it had been intended to insure when injury is manifested the policy would have said so, but in fact it specifically insures injuries occurring during the policy period. . .The 48 Judgment agrees with this in its general consideration of when one gets asbestosis, and which policies pay. The simplification of the wording in Mr Jackson's note seems to be wrong - the policies state that they will cover bodily injury caused by an occurrence during the policy period (occurrence includes injurious exposure to conditions). The occurrence must happen during the policy period and so must the bodily injury. The occurrence is a long term exposure to asbestos. The bodily injury happened over the same period so liability falls on the series of policies during which exposure occurred. . . 

["Mr. Jackson's note" is the RAG Jackson memo dated 14-Dec-78: see above] [J11/1] 

25-Jun-79 

Business Insurance: Insurers re-coil in wake of asbestos claims. Plagued by a massive amount of litigation over injuries to asbestos workers, most insurers had stopped underwriting the trouble-maker and, once burned, are taking a harder line on other product risks, especially hazardous materials. "Hopefully we have learned the lesson that insurers have to learn" said John J. Dwyer, National Account Director for Aetna Life and Casualty. The lesson: definitive data can, because of something external to the insurance relationship, be thrown off. . .The asbestos claims could eventually be removed from litigation if a compensation board is established to handle future claims as proposed by U.S. Rep. Millicent Fenwick (R-N.J.), whose home district includes a major facility of Johns-Manville, the nation's largest asbestos producer. Under Ms. Fenwick's scheme, the government would pay asbestos claims from the time the law is enacted through the end of that year. The government could

[1997]  424  L.R.L.R.  Henderson v. Merrett Syndicate (Q.B. (Com. Ct.))    Cresswell, J. 

then sue the manufacturers for claims paid during that interim period, explained Lawrence Rosenshein, her aide. Future claims would be paid by the compensation board from funds collected from asbestos producers, manufacturers of products containing asbestos and the tobacco industry, since smoking increases the likelihood of someone exposed to asbestos contracting asbestos or other disabling diseases. For asbestos producers, the fund's assessment would be 2% of sales for the corresponding quarter 15 years prior. Manufacturers of products containing asbestos would be assessed 1% of sales and there would be a levy of three-tenths of 1% of sales against tobacco manufacturers. [H3/44-5 I3B/FF] 

Jul-79 MER. 

Draft Letter from [A] concerning a meeting held at the office of [A] On Tuesday June 19, 1979 at the request of London Underwriters, between representatives of 4 leading US law firms involved with asbestosis, to discuss "Reserving Asbestosis Claims for London Insurers". General discussions were first held concerning recent developments in the asbestos litigation field. In particular was the recent holding by a Texas Federal Court entering summary judgment without trial against certain asbestos products manufacturers to the effect that their products were defective and unreasonably dangerous. The theory employed by the Court was collateral estoppel based on Borel v. Fibreboard. The decision obviously represents an unfavourable portent for the future. Also discussed were the two new declaratory judgment actions brought by GAF and Celotex against Lloyd's Underwriters and other insurers in California and Florida. These actions involve the issue of when coverage attaches for the asbestosis claim. It was noted that there are two cases on this issue presently on appeal in the US Courts of Appeal which will not be decided in the near future. The attention of the meeting then turned to the various US asbestos companies which are both involved in the asbestosis litigation and directly insured in the London market. The attorneys present at the meeting indicated a direct London interest in the following asbestos manufacturing companies: Johns-Manville, HK Porter, PPG, Armstrong Cork, Flintcote, Eagle Pitcher, GAF (Ruberoid), Uniroyal, US Gypsum, Corning Glass, Combustion Engineering, Celotex, and Richard Klinger. It would appear that the following asbestos producing companies are likewise directly insured in the London market: Johns-Manville, General Dynamics (Asbestos Corporation), Advocate Mines and Bell Asbestos. A lengthy discussion then (ensued) as to an evaluation of the probable exposure to each of these assureds for their asbestosis claims.. . .Other comments expressed reflecting on this issue include the general feeling that  probably the most dangerous cases had not been settled as of yet and the fact that with inflation it could be expected that both verdicts and settlements in the future would be more expensive than the current experience. In addition, it was noted certain extremely unfavourable letters and admissions had been discovered in some of the asbestos cases and that these letters were now publicised among the Plaintiff's bar. Such letters and admissions reflect that certain assureds attempt to discourage the dissemination of knowledge concerning the dangers of asbestos dust and manifestly are harmful on the issues of liability and punitive damages. 

Reserve recommendations: Based upon the above factors and our review of the situation this is our joint recommendation that the direct London insurers establish a gross reserve of $75,000 on each of the asbestosis claimants. As indicated this would relate to each claimant but not to each assured ie. the great majority of claimants had brought suit against many different assureds and other asbestos suppliers and manufacturers. We did not intend for the direct London insurers to establish a $75,000 on each claim against each of its individual assureds.. . .It is very important to observe that we have not included Johns-Manville, or any of its subsidiaries, in our recommended reserves. The reason for this exclusion is, first of all, because our information is that Johns-Manville did not become directly insured in the London market until 1978. Furthermore, it appears that Johns-Manville occupies a central position in the asbestos litigation which will involve special considerations.. . .Another comment concerning this reserve is that it does not purport to apply to reinsurance interests.. . .Summary: 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 law suits has increased dramatically each year since 1973. Whilst some experts believe the number and severity of claims will peak within the next year or two, there are other such as the National Cancer Institute who estimate more than 2 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 figures recommended. (Letter from File D 63 page 3541). [H1/51-7] 

Sep-79 MER. 

Letter from [A] to [A]. Reserving Asbestosis Claims. Confirming our telephone conversations, Underwriters agree with out joint recommendation that the direct London insurers establish a gross reserve of $75,000 on each of the asbestosis claimants. However, because of their direct excess participation on Johns-Manville, they desire that Johns-Manville be carried at 20% and that the 

[1997]  425  L.R.L.R.  Henderson v. Merrett Syndicate (Q.B. (Com. Ct.))    Cresswell, J. 

following reductions be made. . .20% for Johns-Manville is $15,000 thereby bringing the total to $75,000. Underwriters say that we all recognise that this provisional basis of apportionment will only hold good pending discovery process on various accounts but they are content to accept year end reserving applying this formula as an interim measure.. . . [J11/8] 

Oct-79 MER. 

Letter from [A] Assured;. . .Love Canal claims We now submit our full report regarding this matter and confirm our Oct 5th, 1979 telex advice that a purported class action has been filed against the assured in the city of Niagara Falls. [J11/22/4] 

13-Nov-79 

Financial Times: Scale of awards goes soaring. [H3/67] 

10-Dec-79 MER. 

Letter from CJ Ayliffe to E.E. Nelson Chairman, Non-Marine Association, Lloyd's Underwriters Non-Marine Association. I have been expressing concern at a number of declaratory release actions which have been filed against underwriters at Lloyd's arising out of the long term product situation which currently faced the market. This problem surfaced in regard to asbestosis when we were faced with suits filed by the two insureds in circumstances where the domestic first excess layer adopted a different view on the attachment of loss than that which had been up to then adopted by the primary carrier. The result was that the insureds, having been denied ongoing reimbursement, were left with little alternative other than to file suit. Interestingly enough in the suit filed in respect of GAF and Eagle Pitcher the insureds were taking contrary views in pleading their case with their carriers, and it became apparent that in the interests of this market it would be helpful if we could reach a common approach to attachment throughout the Lloyd's market to enable us to respond. Although many discussions took place at that time it ultimately proved impossible to get a common approach in the market and, as you are aware, the markets split into two camps: One supporting the manifestation approach and the other that of exposure. As a result of this split in the market it became necessary for each view to be separately represented in the ongoing handling of the defence preparation and to this extent the market is now incurring a duplication of legal expense and effort. . .a more recent development, but basically an extension of the same problem, are the losses we have outstanding in connection with DES. . .it was with this developing background that I called an informal meeting last week of claims settlers to discuss whether it is possible to arrive at some method whereby we can respond to the insureds  need and yet at the same time preserving the basic issue of where attachment ultimately should fall.. . .Whilst it was fully appreciated that in any discussions of this nature there could be no market mandate it was nevertheless recommended that a small Working Party be set up who would have the authority to explore, both with the insureds and domestic companies, some form of solution that would eliminate the proliferation of Declaratory Relief suits by reason of the industry's inability at the present time to provide indemnity to many long standing accounts in this market. [H1/58-61] 

Dec-79 MER. 

Letter from [A] to underwriters at Lloyd's. Assured:. . .The captioned matter was referred to this firm in May 1979 to protect underwriters' interests in connection with various asbestos-related bodily injury claims recently brought against the above named assured. Since that time we have had great difficulty in ascertaining the precise coverage provided by underwriters to the assured. This absence of coverage information has in turn made it difficult to obtain the requisite claims investigation from the assured who understandably wanted a commitment as to coverage from underwriters and their other liability insurers before revealing any critical claims information.. . .We ask herein for authority from underwriters to acknowledge coverage to the assureds for certain periods and layers for which we have no written documentation. 

(70) Although its main products do not contain asbestos, the assured in past years has manufactured and distributed certain products with anywhere from a .25% to 14% asbestos content. . .Our Bordereau No. 1 enclosed herewith reflects that to date there have been 363 individual claimants who have filed 336 law suits against the insured.. . .However, the great majority of the law suits are in a preliminary stage of development which precludes a realistic appraisal of the assured's exposure at this time.. . .Opinion as to liability: the asbestosis cases as a class manifestly represent grave potential exposure to the asbestos producers of the past 40-50 years. It would appear that there may be convincing evidence against many of these producers to the effect that they did not take reasonable steps to warn the users of their products from the known dangers of asbestos and in some instances even purposefully concealed these dangers. 

(73) Reserve: the problem with establishing loss payment reserves in the asbestos related cases is that at this point it is uncertain as to what basis will ultimately be used to determine the applicable liability coverage for each individual loss. If the American Courts eventually rule that coverage 

[1997]  426  L.R.L.R.  Henderson v. Merrett Syndicate (Q.B. (Com. Ct.))    Cresswell, J. 

attaches on the date of the manifestation of disease, then we do not believe that underwriters will be required to make any loss payments on behalf of the assured. If on the other hand American Courts adopt an exposure theory of coverage then we believe that underwriters will be required to make substantial loss payments under this assured. [H1/58-61] 

[This report was supplied by Robin Jackson to W Beckett on 4 December 1989 - see L1/11] 

1980 

The Comprehensive Environmental Response, Compensation and Liability Act ("CERCLA"). 

Jan-80 MER. 

Letter from [A] to the interested insurers. Assured. . .Since our last report the number of claims filed against this assured has increased dramatically and we anticipate that the assured will be named in a substantial number of future claims. Because of this marked increase in the number of claims we are now of the opinion that it would be prudent for underwriters to establish a loss payment reserve for each of the 13 years when they were on risk for this assured. We still have not been able to obtain complete information or documentation as to the details of coverage provided by underwriters. 

Asbestos cases: at the time of our last report 10 law suits involving 34 individual wrongful death and bodily injury claims had been brought against the assured as the result of its manufacture and sale of certain asbestos products. Since that time please be advised that an additional 33 asbestos-related suits involving 437 individual claims have been filed against the assured. 

(80) Opinion as to liability: The asbestos-related claims as a class clearly represents serious potential exposure to the asbestos producers of the past 30 years. 

(81) Reserve calculations: The problem with establishing loss payment reserves in these cases is that at this point it is uncertain as to what basis will ultimately be used to determine the applicable liability coverage for each individual loss. If the American courts eventually rule that coverage attaches on the date of the manifestation of disease, then we do not believe that underwriters will be required to make any loss payments on behalf of this assured.. . .If on the other hand, American Courts adopt an exposure theory of coverage then we believe that underwriters could be required to make substantial loss payments under their policies on this assured. . .Underwriters will recall that at the meeting of the London Insurers' American Counsel in New York in June 1979 it was agreed that each asbestos related claim should be evaluated for reserve purposes at $75,000. It was further agreed that this assured should bear a 2% portion of  this reserve or a $1,500 reserve for each claim. We therefore recommend that our gross exposure reserve on the asbestos claims. . .equals a gross asbestos reserve of $2,868,000. [H1/76-84] 

Jan-80 MER. 

[A] letter to underwriters at interest. Assured:. . .We have, as underwriters are aware, conferred with other legal representatives, and based upon these discussions as well as communications with underwriters, a preliminary reserve of $75,000 per asbestos claimant 20% of which is ascribed to Johns-Manville, has been agreed.. . .The litigated cases present a different picture. As an illustration, four cases tried in December in the US District Court, Virginia, involving shipyard workers at the Newport News Facility, resulted in Plaintiff's verdicts in the sum of $435,000 each. The damages recovered were compensatory only. . .Of further interests in connection with the Virginia cases generally is the fact that a Federal Judge had ruled that the US Government is not liable to asbestos manufacturers for injuries to shipyard workers at the Norfolk Naval Shipyard.. . .As underwriters know, the Travelers' reserves are structured on the "exposure" theory which approach is concurred in by Johns-Manville.. . .Lastly, the loss date issue is no closer to a resolution now than it was 12 months ago. The INA v. Forty Eight Insulations case which Travelers cites as the basis for its establishing reserves on the "exposure theory", has been orally argued before the sixth circuit court of appeal. It's not anticipated that a decision will be forthcoming before the Springtime. The case which adopted the "manifestation" theory, Porter v. American Optical, is still being briefed, thus the fifth circuit court of appeal has not as yet scheduled arguments. [H1/85-88] 

[This report was supplied by Robin Jackson to W Beckett on 4 December 1989 - see L1/11] 

Jan-80 MER. 

Telex from [A] to Sedgwick Forbes. The Travelers and J-M have agreed to the application of exposure theory for loss attachment purposes. Reserve Travelers established in accord this theory set forth in report without comment, as we have not as yet accomplished a review of the 4,000 plus pending actions. Underwriters' policies recited can only be invoked if exposure theory becomes law of all asbestos cases. This issue still unresolved. Additionally Travelers has taken posture its policies for years 1951 through 1953 written on aggregate basis, but as we pointed out this also in doubt. Therefore in view a severe question regarding loss date and questions regarding aggregates for years 1951 through 1953, concluded best approach would be to leave it to each Syndicate's discretion whether or not to establish reserves consonant with those 

[1997]  427  L.R.L.R.  Henderson v. Merrett Syndicate (Q.B. (Com. Ct.))    Cresswell, J. 

established by Travelers or on some other basis, each of which at this time could be equally appropriate. [H1/89] 

27-Mar-80 MER. 

Memorandum from CJ Ayliffe to RAG Jackson. "Handling of asbestosis claims in the Lloyd's market". You will recall that I discussed with you the developing problems that face our market in regard to long term products exposures. . .Shortly before Christmas I was asked to attend an NMA meeting to generally discuss this matter and at which time it became apparent that many members of the Committee did not fully appreciate the impact which asbestosis will have with the developing momentum which we are assured will exist over at least the next 5 years. Recent developments in connection with asbestosis tend to emphasise the need to collate the markets' approach to various problems that are developing.. . .Another issue which has recently been raised relates to the attitude which London wished to adopt in projecting potential exposure three or four years hence. We are advised by most major insureds that the frequency of loss reports will continue at much the current levels for at least 5 years to come, and, to be realistic, if we accept this information as reliable, it would appear that we should now be calculating what the ultimate cost would be to the market some 5 years hence. So far reserve recommendations for the market have been based upon cases which are presently known. Lord Bissell, who is now involved in reviewing the re-insurance of the Home for the account of Johns-Manville, are seeking guidance and support from the market as to their putting up reserves which do take into account a projection of something in the region of 4 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 Mendes and Mount, Peterson Ross 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 other problem which presently exists is that although we have only 5,000 cases in suit at the present time most cases name all the major companies with whom we are involved. . .We must ensure there is no duplication of effort of those who represent our interest. At the time I saw the NMA Committee it was felt that it would be beneficial for a small group to be set up who would have the ability to monitor developments as they affect the market and to collate the different information that was coming from various sources. [H1/90-91]  7-Apr-80 

Business Insurance: Asbestos manufacturer sues insurers. [H3/80] 

9-Apr-80 MER. 

Letter from Lumley, Dennant & Company Inc. (Signatures on it indicate wide circulation) We enclose a copy of the letter dated 6th December 1979 to the above assured (Owens Corning Fibre Glass) which is self explanatory and which we believe comes about because of the possibility of asbestosis claims being made under the umbrella coverage which has been written for a number of years. [H1/92-94] 

14-Apr-80 

Business Insurance: 9 accept asbestos settlements. [H3/81] 

24-Apr-80 

Lloyd's List: Court rulings may provoke claims flood. A flood of claims on asbestosis in the United States is expected to hit the London insurance market in future years and a recent decision by the California Supreme Court has further highlighted the trend. Several Lloyd's syndicates have already begun to increase their reserves to meet asbestos claims which may arise from cover taken out many years ago because the disease takes time to affect the worker.. . .The California Court case, although it is not directly about asbestos but about the controversial drug DES, establishes a new basis of liability, called by the Court "industry wide". This has sometimes been described as "enterprise liability". Its findings mean that the person who has been injured does not have to identify specifically the manufacturer of the product as long as the harm has been proved. If the Defendant manufacturers could have made the substance which caused the injury at the right time, then it and the others involved will have to share the cost of damages in proportion to their market shares.. . .One of the main problems that insurers have in planning and then reserving for claims is that the illness often does not show for many years.. . .In Britain two leading lawyers in defending asbestos cases have predicted that there will be even more claims in the United States than originally expected. Mr David McIntosh and Mr Bernard Seigne of Davies, Arnold & Cooper, have handled upwards of 1,200 cases during the last 15 years and are now involved in about 360. Writing in the magazine Product Liability International, they say: "The unfortunate message to be read from the UK experience of asbestosis claims is that the US explosion is likely to be even larger than has been predicted to date and that it will inevitably include many borderline cases which will need defending on diagnostic grounds." [H3/86-87] 

30-Apr-80 MER. 

[1997]  428  L.R.L.R.  Henderson v. Merrett Syndicate (Q.B. (Com. Ct.))    Cresswell, J. 

Letter from Stephen Merrett to Names enclosing accounts of the syndicates as at 31.12.79. A particular example of the insurance industry's delayed recognition of substantial exposure to losses, perhaps in years "closed" a long time ago, the asbestosis problem, is mentioned by Robin Jackson in his report. You may have seen or heard comment on recent activity in the United States Courts on the filing of numerous suits and in particular on attempts to determine whether the liability of insurers is on policies current at the time when the claimant began to contract the disease by his "exposure" to the dust, or on the policies current when the claimant became aware of his disease by its "manifestation". If "exposure" is adopted there may be many claims made on policies current in the 1940's or even earlier, and it is inevitable that some insurers will have made inadequate provisions for such losses against those years. It would be prudent to support that other substances or work processes will increasingly be found by Courts to have damaged employees and others, and the exposure of the insurance industry to third party actions and Employers' Liability Workmen's Compensation claims against policy holders is very considerable indeed. [L2/25/451] 

May-80 MER. 

Letter from [A] to the interested insurers. Report No.. . .re: reinsurance of the. . .Insurance Company first and second casualty excess of loss treaties. Assured: Johns-Manville Corporation. Claims: various asbestos and product liability claims. We submit to the London reinsurers our first report concerning the asbestos-related bodily injury claims brought against the above named assured in numerous jurisdictions throughout the United States. We have recently reviewed all of the reinsured's Home Office files and have conferred with both the reinsured and with the assured's primary insurer on several occasions concerning this risk. We have in addition discussed this assured's potential liabilities with many knowledgeable and involved specialists and lawyers throughout the country. It is our present opinion that this risk presents grave exposure to the excess reinsurers on both the first and second casualty excess of loss treaties covering the 1963-1974 period. 

General background of assured.. . .There is no doubt that the assured was the largest free-world producer of asbestos fibre and one of the largest manufacturers of asbestos products.. . .The assured first began putting cautionary labels on its asbestos products in 1964 and claims it had no knowledge of dangers to outside users of its insulation products prior to that time. However, there is no doubt but that the assured was settling asbestos-related workmans compensation claims brought by its own employees as early as 1933. In this regard  Plaintiff attorneys throughout the United States have copies of the 1976 deposition of Dr Kenneth Smith, the assured's corporate medical director between 1952 and 1966 who testified he told the assured's executives as early as 1952 that insulation workers were exposed to the same potential hazards as its own mining and manufacturing employees. Dr Smith testified that he urged the assured to use a warning label on all of its asbestos products but that his advices were rejected. In addition Plaintiff attorneys have unearthed some letters written by the assured's executives as long ago as 1934 indicating they had direct knowledge of the hazards of breathing asbestos fibres. 

We have reviewed every claim that had been advised to the reinsured as of March 1980 and can report that the reinsured's files reflect 4,323 claims in suit against this assured.. . .New claims against the assured are now being brought on the average of 100 per month. The primary insurer has been trying to set up a satisfactory computer loss run which, if successful, should indicate the precise position as to the number of claims and paid losses and expenses at any given moment. The reinsured will provide us with this material when available. Meanwhile the reinsured has been filing these claims alphabetically but has not yet organised the claims so that meaningful statistics could be obtained. It is for this reason that we felt it necessary to compile the enclosed Bordereau which both we and the reinsured will now use to try to stay abreast of the changing aggregate positions. 

Allocations of loss payments and deductible: Both the assured and its primary insurers between 1947 and 1976, the Traveler's insurance company, have adopted an exposure theory of coverage for the asbestos-related bodily injury claims.. . .A second major problem with the primary's allocations concerns the effect being given to the loss and expense $5,000 deductible per claim carried by the assured since 1966. We have see no evidence whatsoever that such a deductible has ever been applied or collected by the primary insurer. In addition, there is a related problem that the reinsured has argued that this deductible should apply to each claim per year of exposure. Both the assured and primary insurer maintain that one deductible applies to each claim only. 

Current aggregate position: the reinsured advises that there is no accurate information available as for the primary insurers underlying aggregate position at the present time. We were advised by the primary insurers several months ago that the underlying aggregates were between 20-30% exhausted in past years. However, statistics prepared by Marsh & McLennan taken from the primary's stat runs as of September, 1979 indicated on the average only loss payments by the primary in the $67,000 to $87,000 

[1997]  429  L.R.L.R.  Henderson v. Merrett Syndicate (Q.B. (Com. Ct.))    Cresswell, J. 

range in the 1963 to 1974 periods. Of singular importance here is the fact that both the assured and its primary insurer now insist that the primary's separate underlying products liability aggregate has been exhausted in the 1970, 1971, 1972 and 1973 periods. In this regard we note that the assured filed suit on March 31, 1980 against the reinsured and 26 other insurance companies seeking a clarification of coverage issues but also claiming that it itself had paid $800,000 to 12 claimants alleging property damage. The assured maintained that the reinsured, as its product liability excess insurer, has refused to indemnify it for these paid claims and has wrongfully asserted that it had no duty to indemnify the assured because the underlying aggregate carried by the Travelers was not exhausted. Opinion as to liability. The asbestosis cases as a class manifestly represent serious potential exposure to the asbestos producers of the past 40-50 years. It would appear that there may be convincing evidence against many of these producers to the effect that they did not take reasonable steps to warn the users of their products from the known dangers of asbestos and in some cases even purposefully concealed these dangers. We believe that this assured is the major defendant in these cases. It was the largest producer of raw asbestos fibre and probably the largest manufacturer of asbestos insulation products used in the construction and shipbuilding industries. The assured, however, has additional exposure beyond the direct actions brought against it by injured plaintiffs. This is because the assured has been sued for indemnity or contribution by several other asbestos insulation manufacturers to whom the assured sold asbestos fibre. 

Problems re reserving asbestos claims: There are several difficult problems involved in recommending loss payments and expense reserves in the asbestosis cases. First of all, it is uncertain at this point as to what basis American Courts will ultimately use to determine the applicable liability coverage for each individual loss. A second problem concerns the status of the underlying aggregates carried by the primary insurer.. . .A third problem involves the applicability of the assureds deductible from 1966 onward, and a fourth problem is the ever present possibility of punitive damages in these cases.. . .Finally, the most insoluble problem of all stems from the fact that due to the long latency periods of the asbestosis diseases it is impossible to predict the number of claims that will ultimately be brought against the assured. 

Recommendations for future handling: We must again stress to the excess reinsurers that the above suggested per year ground up bodily injury exposure reserve of $2,228,448 relates only to those claims known by the reinsured thus far. It does not take into account future bodily injury claims to be  brought against this assured. In this regard we should comment that the assured believes the number of claims has now peaked and that because of improved working conditions there should be progressively less claims in the future. On the other hand, there are numerous well informed people who profess to believe that the claims filed to date represent only the tip of the iceberg in this asbestos litigation. The Secretary of Health, Education and Welfare of the United States [Califano] recently stated that 67,000 each year will die from exposure to asbestos during the next 30 years. We know that between 8 and 11 million workers have been exposed to asbestos in the United States since the beginning of World War II and that of these 4.5 million people have worked in shipyards. Most of these shipyard workers were heavily exposed to asbestos and it is estimated by HEW that a third of those heavily exposed have died or are likely to die of asbestos-related cancer.. . .We recommend that each underwriter on the first second and third excess of loss treaties be shown this report. We also strongly recommend that each underwriter take all of these factors into account in determining the loss reserves to be posed on these claims. [H1/95-108] 

0-Jun-80 

The Asbestos School Hazard Detection Control Act: It offered technical guidance and assistance to schools who were concerned with the potential health effects of asbestos. 

24-June-80 

Lloyds List: Defendants fight ship yard asbestosis case award. [H3/99] 

4-Jul-80 MER. 

Letter from RAG Jackson to EE Nelson. I have been trying to get hold of you for some time to talk about asbestosis.. . .Jim Ayliffe. . .wrote you a letter on the 10th December about the seriousness of this problem. Since that time as you are probably aware it has become even more serious a problem particularly as the split between the exposure and manifestation. . .has become embittered. . .a number of people have persuaded me to be the catalyst in getting a working party under-way and it is to this end that Jim Ayliffe and I have been speaking to a number of people in the market. [H1/109-110] 

9-JUL-80 

UNIVERSAL RUN-OFF CONTRACT WRITTEN (418 50%) [C4/3] 

Jul-80 MER. 

Letter from [A] to underwriters at risk. Assured:. . .Nature of claim: asbestosis. Current development in asbestosis litigation. Reserves: Since our last report of May 28, 1980 we have received approximately 

[1997]  430  L.R.L.R.  Henderson v. Merrett Syndicate (Q.B. (Com. Ct.))    Cresswell, J. 

500 additional cases naming the assured as a Defendant. This brings the total number of cases in which the assured is named as a defendant to approximately 2,300.. . .The average disposition cost of an asbestos claim to all defendants continues to total approximately $67,000. . .therefore, we suggest that underwriters increase the gross loss reserve to $460,000 from the ground up for each and every policy year they were on the risk. [H1/113-8] 
 
5-Aug-80 MER. 
 
Letter from the Asbestos Working Party (including RAG Jackson). "Handling of asbestosis claims in the Lloyd's Market". As you are no doubt aware the problems of our markets involvement in the claims arising out of asbestosis have been gathering momentum over the past 6 months to the extent that there are now 6 declaratory relief actions pending and more could arise. You should be aware that during the course of last year discussions took place with those law firms representing the Market's interest to ensure that there was a standard approach to the manner in which reserves were established, and following discussions with each of the firms involved it was agreed that for the present reserve recommendations to the Market would be based upon an average cost of $75,000 per claimant. Bearing in mind that in most suits that have been issued there are multiple defendants a percentage scale was arrived at which embraced the major direct writings within the London Market, and by application of the scale percentage attaching to any particular insured we have been able to ensure that no duplication of reserve arose in regard to the different insureds named in any particular suit. The following represents some of the issues which require to be considered:. . .4. Bearing in mind that well informed sources indicate that the frequency with which new cases are filed is likely to continue at the present level for at least five years consideration needs to be given to the basis which we require our representatives to adopt in their reserve recommendations to the market. Johns-Manville had indicated that in their opinion there are likely to be between 2,400 and 3,000 cases filed in each of the next 10 years and similar statements, although somewhat less pessimistic, have been made by other major firms involved in this litigation. This then raises the problem of whether or not our representatives should be taking into account in their reserve calculations forward projections of claims in regard to both direct and reinsurance business. Bearing in mind the substantial increases in costs over the coming years it will be immediately apparent that reserve projections in this manner will have a serious impact on the Market as a whole and yet, on the other hand, not to acknowledge the fact that reserves will inevitably increase  would be irresponsible. . .it is unreasonable to expect matters to be controlled by the few leads involved and it has therefore been proposed that a joint inter market working party be established which would have the responsibility of considering the day to day problems that have and will develop as this litigation proceeds.. . .The following have been suggested as members of this working party and have agreed to serve: HR Rokeby-Johnson, EE Nelson, RAG Jackson, CHA Skey, D Tayler.. . .It must be emphasised that the potential involved here is so large and the issue so complicated that we cannot allow a "muddle through somehow approach". Recently with one of the insureds, Eagle Picher, taking depositions of a number of London underwriting representatives it has become clear that the split in the market is serious and that the legal costs involved are going to be astronomical. [H1/119-122] 

Aug-80 MER. 

Letter number . . . from [A] to the insurers at interest. Assured: . . . Claim: Asbestos-related claim review. 
 
Even assuming no further delays on the part of the assured, it will no doubt be several months before we are able to assimilate the data on these thousands of claims and render out final report to underwriters. [H1/123-126] 

25-Aug-80 

Business Insurance Waste liability spills forth Waste Liability Spills Forth.. . .undefined liability for cleanup of old dumps under decade-old liability policies. . .estimated 1200 abandoned waste dumps.. . . 

Law suits filed against Hooker by Love Canal residents have hit $3 billion.. . . 

Insurance companies are also worried about the bill. Many acknowledge they have no idea what their ultimate involvement in the cleanup will be. [H3/104-106 I3B/HH] 

27-Aug-80 MER. 

Meeting of the Asbestosis Claims Working Party. Present: C J Ayliffe etc. E E Nelson elected Chairman. In the Chairman's absence Mr Ayliffe opened the meeting by emphasising to members that the purpose of the Working Party was to deal with overall market problems and it was therefore important that there should be seen to be complete impartiality in regard to the manifestation/exposure attitudes that exist.. . .Present indications are that the rate at which law suits are being reported will continue for at least the next 5 years, and that projections indicate that by that time there will be some 25,000 cases in being.. . .Mr Ayliffe suggested that the first meeting should consider three issues which were: 1. The manner in which we require our attorneys to approach the question of 

[1997]  431  L.R.L.R.  Henderson v. Merrett Syndicate (Q.B. (Com. Ct.))    Cresswell, J. 

reserves, bearing in mind the indications of the steady increase in suits over the next few years.. . .A general discussion followed on the three issues and the salient points were:. . .d) It was recognized that whatever approach was adopted by a particular Underwriter or Company they would undoubtedly use their discretion on posting reserves which produced to them their highest involvement, even though that reserve may not necessarily be in line with the position that they were advocating. e) It was important not to adopt an unreasonably pessimistic approach which could mislead the Market in considering the reserve problem. Before making recommendations to the Market it was felt essential to canvass the views of all attorneys involved in this problem in order that the Working Party could digest the various views that are expressed and then formulate some responsible approach to the manner in which reserve projections should be approached if it was accepted that by the time the views of the various firms of attorneys had been received it would most probably be too late to issue any recommendation that would have the effect of materially inflating reserves for the purpose of the year end closing. Nevertheless it was felt that it was more responsible to take the time to give reasoned consideration to the problem rather than adopting the alternative course of simply setting reserves on a full projection at full costs basis.. . . 

Recommendations. The Working Party agreed that: a) A course of action to determine reserves should be recommended to the Market which, if possible, should be provided prior to the year end closing. It was reported that Mr Orgelfinger of Mendes & Mount will be in London during the course of the coming week and has offered to generally discuss the problems of asbestosis with the Working Party and a meeting has now been set to take place on Friday 5 September. [I4C/56] 

Aug-80 MER. 

Letter from C J Ayliffe to [A]. I recently attended the first meeting of the Working Party and one of the initial points to which we wish to give consideration to the approach which the market should be adopting towards the question of reserves: we are acutely aware that some positive instructions should be given to all attorneys involved in this matter in order that we achieve uniformity of handling. It was the view of my colleagues that it would be helpful in considering this question if each of the firms that are involved can give their own independent assessment of how they see, from the accounts which they are handling, the likely development in the future as more and more suits come in. Of equal relevance to this issue is the current reserving basis that has been adopted by the Market and the point in time that this will need adjusting upwards to take care of inflationary  trends, and also the likelihood that costs incurred in defending these actions will shortly become the burden of excess Underwriters as primary aggregates become exhausted. It seems to me that the knowledge you have of the number of cases that have been filed to date and the average cost of those that have been settled, both in regard to indemnity and defence costs, should give us an initial basis on which to work. The more intangible aspects of this problem relate to development of loss reports in the future, and in this regard it would be helpful if you could relay the views that have been conveyed to you by those accounts which you are handling, and perhaps express your own feelings on how you see the future developing in this overall problem. It would be helpful if you could provide me with a response to this enquiry not later than the end of September in order that the Working Party may analyse the results of the enquiries to consider what recommendations should be made to the Market and indeed to those attorneys who are representing our interests. [I4C/57] 

2-Sept-80 

Lloyd's List: Lloyd's to look into asbestosis. A working party has been set up at Lloyd's to help coordinate the handling by underwriters of the thousands of asbestosis claims which are arising in the United States. [H3/108] 

Sep-80 MER. 
 
Letter from [A] to CJ Ayliffe, Merrett Dixey Syndicates. Re. . .You are no doubt aware of this tremendous volume of pending litigation involving asbestos, the high rate of new filings, and what appear to be increasing verdicts. These general factors, combined with the preliminary information gathered in our claims review, leads us to be concerned that the present method of reserving (as we understand it) may be under-estimating the exposure of underwriters. [H1/127-9] 
 
Oct-80 MER. 
 
Letter from [A] to underwriters at Lloyds, c/o Merrett Dixey syndicates. Attention: CJ Ayliffe. We can provide data as to the loss payments and costs incurred by certain of the American assureds thus far in the trial and settlement of asbestos claims. We believe that these statistics form a reasonable basis from which to estimate probable future loss payments and expenses to be made on behalf of these assureds. The resolution of the manifestation v. exposure issue obviously is of monumental significance. We note that in regard to Johns-Manville, Lloyds would be on risk on 31% of all of the years of alleged exposure by the asbestos claimants. However, Lloyds would be on risk on only 7% of the claims if the manifestation rule is adopted and this percentage would no doubt decrease with future claims under the manifestation rule. 

[1997]  432  L.R.L.R.  Henderson v. Merrett Syndicate (Q.B. (Com. Ct.))    Cresswell, J. 

Estimate as to the number of future claims: It is widely accepted that asbestos liability will be the most significant legal and loss cost issue in the history of the insurance industry. This is because of the almost incredible widespread use of this mineral with its unique combination of heat resistant and tensile strength characteristic. It is estimated that there are as many as 3,000 different products in daily use throughout the world containing asbestos. There is no reasonably priced material which can outperform this product and its use is so necessary that despite its obvious dangers it still has not been banned by the United States government.. . .The number of potential future claims is staggering. The secretary of the Health, Education and Welfare Department of the United States stated on April 26th, 1978 that he estimated 8 to 11 million American workers were exposed to asbestos since the beginning of World War 2. Dr Selikoff, a renowned scientist in the field, predicted 20,000 asbestos related deaths per year in the United States until the turn of the century.. . .Similarly in 1978 a study by 3 federal agencies projected that in the next 30 years 13-18% of cancer deaths would be asbestosis related.. . .In any event it is our opinion that due to the long latency period of the asbestos diseases we can continue to expect thousands of new asbestos claims at least into the 1990's. This is because it does not appear that any strict safety precautions were taken in the insulation trades or asbestos manufacturing industries prior to the late 1960's and early 1970's. Most of the claims files to date have involved insulation workers in either the ship building or construction trade industries. However, there were an estimated 4 million people employed in the ship building industry during World War 2 and we believe it is reasonable to expect many additional future claims from this source. For example, we note that there have been more than 950 law suits filed in Pennsylvania Courts by former workers in the Philadelphia Naval ship yards. We are advised there are several thousand more claims likely to originate from this source. The same can be said for the 300 suits pending in Mississippi and the 190 suits pending in Connecticut and the 1,600 suits pending in Los Angeles which all arise from asbestos diseases sustained by shipyard workers in Hawaii, but we estimate that claimant attorneys predict that 500 suits will eventually be brought in that area. We also anticipate a greater level of additional suits in the Virginia, San Francisco and Seattle areas. Similarly, very few claims have been brought to date in industrial areas such as Chicago, St. Louis, Detroit and Pittsburgh. Yet, we note that more than 270 suits have been brought in industrial New Jersey and more than 100 suits have been brought in Ohio and 82 suits have been filed in Knoxville, Tennes  see. It is only reasonable to assume that a great number of claims will ultimately come from all of the major industrial areas. 

Prior asbestos verdicts and settlements. Despite the 8,000 or more cases filed to date there have to our knowledge been only about 25 asbestos products cases tried to verdict thus far. The results are surprisingly even with both the plaintiffs and defendants winning fifty percent of the time. However, Underwriters should mark the size of several of the jury verdicts in favour of the plaintiffs.. . .It would seem evident from the size of these awards that the asbestos claims can be presented in such a manner so that a jury believes the asbestos producers and manufacturers did not properly warn of the hazards of their products. 

Prospects of indemnity relief from other sources: Several of the asbestos product manufacturers have attempted to seek indemnity or contribution relief by bringing third party actions against the companies who supplied the manufacturers with the raw asbestos. We believe these third party actions could be deemed to have merit and represent a serious potential exposure to the suppliers.. . .A second mode of indemnity or contribution relief attempted by the asbestos manufacturers has been against the United States Government. Underwriters should note the federal government contributed substantially to the 1977 Tyler, Texas $20,000,000 settlement with 445 asbestos workers. Since that time, however, the United States Department of Justice has vigorously refused to contribute to any asbestos settlement. The Department has a staff of more than 60 attorneys defending more than 92 indemnity and contribution claims brought against the United States Government. Johns-Manville and Keene Corp. have appealed the dismissal of their indemnity claims against the U.S. Government arguing that their asbestos products were fabricated precisely as instructed by the United States Government. They also argued that it was the Government that was responsible for the unsafe conditions in the shipyards. In this regard it should be noted that the United States General Accounting Office reported to the Congress that the U.S. Navy did not follow safe work practices at the Norfolk Naval Shipyard in Virginia and at the Long Beach Naval Shipyard in California. We believe it not unlikely that sooner or later courts will permit indemnity or contribution actions against the United States Government which could provide some relief to the asbestos manufacturers.. . . 

The potential claims against asbestos employers: since the early 1930's awards have been paid in workman's compensation cases for asbestos related diseases. However, it was believed until recently that the sole remedy of these employees was under the local Compensation Act. The Supreme Court of 

[1997]  433  L.R.L.R.  Henderson v. Merrett Syndicate (Q.B. (Com. Ct.))    Cresswell, J. 
 
California in the Rudkin case, however, recently ruled that an employee can sue Johns-Manville directly for fraud in concealing the dangers of working with asbestos. This decision, if followed elsewhere, could open the door to a great number of suits under the employers liability policies. 
 
The possibility of intervention by US Government:. . .In 1977 an "Asbestos Health Hazards Compensation Act" was introduced into the House of Representatives but was never brought to a vote. This bill was re-introduced in 1979 in the 96th Congress calling for the establishment of a compensation program in lieu of tort remedies for persons afflicted by asbestos related diseases, which would be similar to the Black Lung Program for coal miners. Benefits would have been funded by the United States Government, asbestos suppliers, miners, manufacturers, etc., as well as by the tobacco industry. Subsequently, in June, 1980 a bill was introduced by Senator Hart of Colorado which utilized the state Workman's Compensation scheme as its basis. This bill also would eliminate third party litigation. Hearings on this bill were scheduled for September, 1980. If the state benefits currently being paid to the disabled employee would be less than the federal minimum then the difference would be paid by the last private or public employer who exposed the worker to asbestos. It is believed that support for the Hart bill is mixed in the asbestos industry and that the insurance industry has not taken a position.. . .It would appear that any federal relief to insurers is fairly remote at the present time. 

Conclusion: It is our view that Underwriters for the time being can continue to reserve each claim on the $75,000 basis previously suggested by their counsel. However, we believe that more sophisticated information is now available and that a reallocation of percentages among the various assureds would now be useful. As indicated we believe the number of claims will continue to increase for the next several years. We believe it mandatory that all layers on each risk be advised and that, if possible, projections be made by using a multiplier of probable future claims times the known past loss and expense factor.. . .We believe that eventually the asbestos manufacturers will obtain substantial indemnity help from the asbestos suppliers and from the U.S. Government. But we doubt any U.S. Government legislative assistance in the near future.. . . [H1/130-141 I3A/0] 

1-Oct-80 

Letter from Winchester Bowring Ltd to executive vice president Firemans' Fund Insurance Co. Re: RW Surge Run-off reinsurance. The increase in outstanding losses is approximately $7 million, of which $6 million applies to 1966 and prior sec-  tion.. . .If you wish to consider the possibility of our arranging further reinsurance for you, along the lines mentioned in my letter of 31st July, I would still be very pleased to hear from you - obviously the increase in outstanding losses will not ease the situation, but I do believe that the concept of arranging a possible "funding" programme or "stop loss" protection remains the same. [H1/142] 

Oct-80 MER. 

Letter from [A] to Merrett Dixey Syndicates Attention: CJ Ayliffe. Re: asbestos claims.. . .Turning our attention first to the settled cases, it is to be observed that we have compiled settlement data, both from a manifestation and on exposure standpoint, for the years 1953 through 1979. This data will portray that which has occurred in the past and provide some insight as to what may be expected in the future.. . .With regard to future developments in the overall asbestos problem, one can come up with very dire projections depending on the statistics drawn upon to support these projections. Underwriters are no doubt aware of the comments made by the former secretary of Health, Education and Welfare, Joseph Califano, to effect that an estimated 8-11 million workers have been exposed to asbestos since the beginning of World War II. Dr Selikoff, a renowned expert, has predicted 20,000 asbestos related deaths per year in the United States until the year 2000. 

In our experience thus far, new law suits continue to be filed at the rate of approximately 100 per month or 1200 per year.. . . 

(144) Legislatively, we do not look upon those prospects as having any significant relief for insurers.

Our conclusions are twofold: 1. We will experience an increase in jury awards which, coupled with inflationary trends, will force settlements higher; and 2. there does not appear to be any legislative relief on the immediate horizon and even if it should be forthcoming, there is no telling that cost-wise there will be any benefit enuring to insurers. Qualitatively, therefore, it is essential that current reserve recommendations be adjusted to reflect future potentials. Quantitatively is always open to argument. Our present general per injury reserve is $75,000. To increase this to $100,000 represents a 33% increase which, whilst seemingly steep at first flush, upon closer scrutiny is not inordinately so and, of major significance should sustain us through the mid-point of the 1980's. In sum, therefore, our present recommendation is that underwriters should increase the "market agreed" figure to $100,000. [H1/143-149] 

Oct-80 MER. 

[1997]  434  L.R.L.R.  Henderson v. Merrett Syndicate (Q.B. (Com. Ct.))    Cresswell, J. 
 
Letter from [A] to Merrett Dixey Syndicates, Attention CJ Ayliffe. Re. Asbestosis litigation. As I see it, asbestos litigation is continuing to develop at an unpredictable rate. The new claims flow into our office at a rate of approximately 50 to 75 a month and sometimes higher. It is significant that the flow of new claims appears to be undiminished, if not increasing. The publicity which asbestosis related injury is receiving in the American Press is very substantial. This, along with the deteriorating defence posture which some key manufacturers have presented, only goes to encourage plaintiff's counsel. Thus, in this writers opinion, the problem is presently one of unpredictable size both from the aspect of numbers of Plaintiffs and potential value. Dr Selikoff, in a January 1980 speech in Chicago predicted there would be 20,000 asbestos related deaths in the US until the year 2000.. . .I therefore see the defence picture darkening rather than lightening.. . . 
 
The committee should also be concerned with property damage claims from property owners who claim that the value of their buildings were diminished by virtue of the inclusion of asbestos in structural components thereof. Such claims may include costs of removing the asbestos and they have a potential value which could be very substantial. I would recommend the property damage claims be monitored separately. [H1/150-152 I3B/CC] 

Oct-80 MER. 
 
Report from [A] to Merrett Dixey Syndicates, attention CJ Ayliffe. In my earlier letter I observed another area where the Working Party might find our comments useful and that is with regard to our experience with percentages of fault that were assigned to the various insulation manufacturers involved in asbestos litigation. [H1/161-2] 
 
Nov-80 MER. 
 
[A] sends to RAG Jackson a copy of the recent decision in Insurance Company of North America v 48 Insulations. [H1/162A] 
 
10-Nov-80 MER. 
 
Letter from CJ Ayliffe to EE Nelson re: Asbestosis Working Party. My concern basically stems from the fact that all attorneys who are handling the asbestos problem are aware that the working party is giving consideration to the difficult question that is raised by the manner in which reserves should be approached. . .. My basic concern on this problem is that whilst I am as conscious as you of the delicate manner in which the year end reserves must be handled, and also fully agree that our obligation must be to provide to the markets sufficient background information to enable them to make the final decision, I am nevertheless concerned that reserves now are possibly lower than  they would have been had the working party not come into being. In the case of matters being handled by Mendes and Mount, as I have said, it has been made clear to me to that it would have been their recommendation that reserves be increased on a per claim basis and, equally, so far as Lord, Bissel are concerned the reserves they would have put forward would have taken into account some form of projection. Neither of these developments have taken place due to the belief that a Working Party would be providing guidance, and if matters were left as they now stand it would effectively mean that we would be explaining to the Market the imponderables and that any loadings that individual Boxes decided to apply would be attached to reserves which would have already been higher had we not become involved in this problem. . .. [H1/166-8] 

Nov-80 MER. 

Letter from [A] to the insurers at interest. Letter number. . .Assured. . .Tampa claims review: As we have previously noted, the assured has more than 4,000 open claims files, and this figure is growing by approximately 100 each week. In addition, there are more than 500 settled claims files, and claims continued to be settled on a daily basis. The assured claims file possess only the most rudimentary organisation, and we do not believe there is any manner of obtaining the information required by underwriters other than by proceeding with a claim by claim review of each file. Aetna Casualty is alone among the insurers in having paid a significant number of claims. Yet we can confirm that neither Aetna or any other insurer has ever reviewed the insureds claims files. We have reliable but unconfirmed information that Aetna simply paid claims in a possibly deliberate attempt to exhaust its coverage so as to be able to close its files. We are further informed that Aetna has indeed exhausted its limits for certain policy years. If this is so, any information obtained from Aetna, assuming its availability, could not be relied upon in formulating or implementing any rational claim handling policies. 

Forty Eight Insulations decision: As underwriters are no doubt aware, the Court of Appeals for the 6th circuit has recently affirmed the decision of the lower Court in the Forty Eight Insulations case.. . .In Forty Eight Insulations, the Court did not hesitate to state that it was basing its decision on a mode designed to provide the maximum available insurance coverage.. . .Finding that medical testimony strongly supports the exposure argument and that "cumulative disease cases are different from ordinary accidents or diseases", the Court found that the parties reasonably would have expected that coverage would parallel the theory of liability.. . .Liability among the insurers, says the Court, is not 

[1997]  435  L.R.L.R.  Henderson v. Merrett Syndicate (Q.B. (Com. Ct.))    Cresswell, J. 
 
joint and several, but rather is individual and proportionate. Therefore, if an insurer can show that no exposure to asbestos products manufactured by its assured took place during certain years, it is not liable for those years. However, the valve is effectively closed when the Court makes the burden of demonstrating this exculpating factor purely the insurers'. This burden will be well nigh impossible to carry in many situations. [H1/169-182] 
 
12-Nov-80 
 
Lloyd's List: Tobacco firms should share asbestosis claims. [H3/117] 
 
28-Nov-80 MER. 
 
Meeting of the Asbestos Working Party following the meeting of 8/11/80 Present inter alia CJ Ayliffe and RAG Jackson. 
 
(3) 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 $125,000 per average claim was more realistic than the present figure of $75,000 currently used as a yard stick.. . .Mr. Jackson was also concerned some underwriters did not appreciate the likely number of cases expected to develop. He further commented on the fact that the audit committee would not be making specific reference to asbestosis reserves at year end. Messrs Rokeby-Johnson, Skey, Tayler, Kemp and Froude thought that $125,000 was excessive and that $100,000 more realistic. They were not in favour of making projections of the eventual numbers involved, but did agree that attorneys should provide information on this matter.. . .Mr Heath was in general agreement with Mr Jackson and said that it appeared the number of new cases was more than doubling in each successive year from 1976 onwards.. . .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. [H1/163-165; 183-187] 
 
Dec-80 MER. 
 
Letter from [A] to E. Nelson. Re: Asbestos claims. 
 
. . .A review of the closed asbestos claims handled by our office reveals that the average case settlement price is $67,000; that sum being comprised of contributions from various defendants. Considering factors such as inflation, publicity given asbestos settlements and awards by the media. . .one can expect future settlements to increase substantially to $100,000. . .While newly stated causes of action will add defendants to the litigation (i.e United States government, former employers, tobacco industry etc.) and may serve to lessen the amount each asbestos manufacturer must pay toward a particular settlement, the average settlement package will quite likely continue to increase in size. 
 
In this writers opinion it is likely that an average asbestos settlement will approach $100,000 per claim over the next few years, with an additional $10,000 allocated for expenses.. . .Asbestos claims are multiplying rapidly. We receive an average of 50 claims per month. As respects the advent of workers' suits against their employers, we note that in the case of Judith Ferriter v. Daniel O'Connel Sons Inc. the Massachusetts Supreme Court held that the spouse and children of an injured worker have a right to sue the worker's employer based upon an allegation of negligence, even though the worker had accepted workmens' compensation payments. The Supreme Court of California. . .and Appellate Courts in Delaware and Texas. . .have recently held that former employees, as well as their spouses may recover from former employers, based on theories of intentional or wilful misconduct. These decisions may substantially increase the number of asbestos related claims that will be brought, and, of course, raise some further coverage questions especially regarding the allegations of wilfulness. 
 
It is difficult to project the number of claims that will be filed in the years to come. Doctor Selikoff in a recent speech predicted that there could be as many as 20,000 asbestos related deaths in the United States before the year 2000. In the next 6 to 8 years, 1,000 new claims may be filed each year. To continually revise and update this figure, I would recommend the Committee review the trends in case law and new causes of action developed by Plaintiffs, on at least a semi-annual basis. [H1/192-3] 
 
Dec-80 MER. 
 
Report from [A] to E E Nelson, KF Alder (Underwriting Agency) Limited. Unquestionably, as with 

[1997]  436  L.R.L.R.  Henderson v. Merrett Syndicate (Q.B. (Com. Ct.))    Cresswell, J. 

other areas of tort liability, the dollar amount of settlements has increased since the seminal case of Borel. The Borel jury returned a verdict of $79,000 in 1972. 

Since that time there have been several multi-million dollar awards and for that matter, there also have been several defendants verdicts . . . it is currently our best judgment that underwriters should increase reserves to $125,000 per claim, and we so recommend. This amount would include an item of defence expenses, then, barring drastic change in the liability posture, that sum could very well see us through to 1983-1984. We would hesitate to say that this figure should carry us into the peak years, which may very well be 6 or 7 years hence. With respect to claim frequency, it has been our observation that cases are being filed on the average at the rate of approximately 100 per month, or 1,200 per year.. . .We currently do not foresee any marked increase in this number, nor on the other hand do we anticipate a sharp reduction. The foregoing comments must be considered "guarded" because over the past 10 days, we have seen a sharp increase in filings. As an illustration, for GAF alone, some 286 cases have been filed since December 1st.. . .As to when these cases may peak, it certainly does not appear that that has occurred; it would be our "guestimate" that such will not occur until, at the earliest, mid 1985. [H1 188-191] 

Jan-81 MER. 

Report number. . .from [A] to the interested reinsurers. . .We now attach as an Appendix to this report a copy of our report number. . .which will provide some background information for the reinsurers through Sedgwick North America Limited.. . .We regret to advise the excess reinsurers that the situation has materially worsened since our last report. The number of claims against the insured has increased sharply and there have been several large settlements made and verdicts returned against the insured which portend purely for future litigations. In addition, the United States Court of Appeals for the sixth circuit handed down its decision last October in the INA v. Forty Eight Insulations case holding that liability coverage for the asbestos-related bodily injury claims attaches on the date of exposure to the products rather than on the much later date of manifestation of disease.. . .Finally we must report that the primary insurer is now maintaining that aggregate limits on three of its annual periods have been exhausted and it cautions that the exhaustion of its limits for all other years is imminent. It thus appears that the Reinsured may become in effect a primary insurer with defence obligations in the very near future. For these reasons we are recommending herein a substantial reserve increase to the excess reinsur-  ers.. . . The primary insurer maintained that an adverse relationship exists between itself and the reinsured and that therefore the reinsured is not entitled to review the individual bodily injury claims files. Hence the reinsured has not seen the primary insurers loss runs and does not know the precise number of claims or the current number of closed claims or average loss payments and expenses. . .. Recommendations for future handling: We request each reinsurer to carefully consider his own reserve on these claims. In this connection we should emphasize that the above recommended reserve does not attempt to include loss or expense reserves for future bodily injury claims that may subsequently be brought against the assured. Please refer to page 14 of our report number 1 where we set forth estimates of others indicating the possibility that a great number of claims maybe brought in the future. Similarly, the indicated reserve does not take into account the indemnity or contribution claims that may have been brought by other asbestos manufacturers against the assured as a supplier of the asbestos which is alleged to be an inherently dangerous product. [H1/194-203] 

Jan-81 MER. 

Lloyd's Underwriters' Nonmarine Claims Office, (LUNCO) circular no.1. Circulates reports of [A] asbestos related claim review correspondence. [H1/204-5] 

10-Feb-81 MER. 

Letter from the Asbestos Working Party to active underwriters. A significant decision was given recently in the appeal in one of such actions, INA v. Forty Eight Insulations Inc. which, in affirming the trial Court Judgment, adopted the exposure theory by a majority of 2 to 1. . .. Lloyd's has been actively involved in another declaratory relief action, the Eagle Picher case which was tried in Boston towards the end of 1980. Judgment is expected at any time now. . .. In all the circumstances it is reasonable to assume that the manifestation against exposure issue will not be resolved in the near future. With the approach of the year-end attention has focused upon claims reserves particularly bearing in mind the following: 

(1) the rising trend of settlement figures and the effect upon them of inflation in the U.S.; 

(2) as underlying aggregates are exhausted some insurers may look to excess carriers to absorb defence costs; and 

(3) during the past year the number of cases in suit had increased from about 5,500 to in excess of 8,000 and at this stage it is not possible to project how many more claims will be filed. Your U.S. legal representatives are now engaged in calculating potential loss figures on known claims in light 

[1997]  437  L.R.L.R.  Henderson v. Merrett Syndicate (Q.B. (Com. Ct.))    Cresswell, J. 

of the latest information available. . .. It cannot be emphasised too strongly that you should make yourself aware of the contents of these reports. . .. The working party has been advised that circulation of the lawyer's reports in the manner customary in the market may jeopardise the legal privilege from production by which they are otherwise protected. 

The working party has accordingly arranged that the reports will be available for inspection by appointment at the offices of Solicitors Elborne Mitchell in circumstances in which the legal privilege is preserved. [H1/206-207 I4C/63] 

Feb-81 ? MER. 

Report from [A] to underwriters at Lloyd's. Assured:. . .Overview of the asbestos problem: We believe it is appropriate here to briefly discuss the magnitude of the asbestos claims situation in the United States in order to provide the excess reinsurers with a framework within which to evaluate the assured's particular situation. It is generally accepted that asbestos liability will be the most significant legal and loss cost issue in the history of the insurance industry. . .. The number of future potential asbestos claims is overwhelming. In April 1978 the Secretary of United States Department of Health, Education and Welfare estimated that 8-11 million American workers have been exposed to asbestos since the beginning of World War II. A study by three agencies in the United States Government projected in 1978 that over the next 30 years, 13% to 18% of all cancer deaths would be asbestos related. In April 1980 the Director of the National Institute for Occupational Safety and Health concluded that 10's of thousands of asbestos deaths occur annually. . .. It is our opinion that we can continue to expect thousands of new asbestos claims at least into the 1990's. . .. There are at present approximately 9,800 claims in suit against this assured.. . . 

Reserve problems in the asbestos related claims: there are several problems involved in recommending loss payments reserves in the asbestos disease cases. The first problem is that it remains uncertain as to what basis will ultimately be used to determine the applicable liability coverage for each individual loss. A second problem concerns the fact that it is impossible to predict with certainty the number of products liability claims that will be made against this assured. Finally, the inconsistency of the underlying primary insurers manifestation theory of coverage and the reinsurers allocation of lost payments on claims under an exposure based theory create a difficult problem which will require resolution. Recommendations for future handling: we must again emphasise to the reinsurers that the above suggested reserves relate only to those claims known to have been made against this assured so  far. The reserves do not consider further future bodily injury claims which may be made against this assured. As indicated earlier in this report there are numerous well informed people who believe that many hundreds or even thousands of additional claims can be expected in the future. We therefore urge each reinsurer to consider each of these factors in the event they wish to establish any reserves to accommodate such future claims. [H1/208-218] 

Feb-81 MER. 

Letter from [A] to underwriters at interest. Assured. . .Several significant developments have recently occurred which warrant underwriters prompt attention. Of immediate concern is the fact that the Travelers as primary insurer for Johns-Manville spanning the years 1947 through 1976 has just about exhausted its aggregate limits. [H1/225-230] 

Feb-81 ? MER. 

[A] to the interested reinsurers. There have been some favourable developments since our last report and we no longer believe that this indemnity claim will ultimately represent exposure to the excess reinsurers herein. 

We are now pleased to report that the trial Court has dismissed the count of the claimants complaint praying for a Declaratory Judgment on all pending as well as potential indemnity claims that the claimant might have against the assured.. . . Since our last report we can advise that on October 21, 1980 the United States Court of Appeals for the sixth circuit handed down its decision in the INA v. Forty Eight Insulations Case previously discussed. The Court of Appeals affirmed the trial Court holding that the date of loss, triggering coverage in the asbestos related bodily injury cases against this claimant was the date when the individual bodily injury claimants were exposed to the alleged defective asbestos products. This decision is certainly favourable to the excess reinsurers here who could be subject to far greater liability under a manifestation rule in the 1975-1978 period. [H1/231-6] 

Mar-81 MER. 

[A] to the interested reinsurers. Reinsured:. . .General review of the asbestos problem: It is generally accepted that asbestos liability will be the most significant legal and loss cost issue in the history of the insurance industry. . .. The number of potential future asbestos claims is alarming. . .. Secretary of HEW. . .8-11 million American workers. . .reasonable to expect hundreds if not thousands of new asbestos claims at least until the 1990's. . .. Asbestos exposures range from a few years to as many as 40 or 50 years.. . . 
  
There are currently no less than 20 Declaratory Judgment actions being litigated between insurers and insureds on this issue in various jurisdictions 

[1997]  438  L.R.L.R.  Henderson v. Merrett Syndicate (Q.B. (Com. Ct.))    Cresswell, J. 

throughout the United States. We now submit a summary of our review of claims brought against each of the 19 individual assureds at risk with the reinsured. . .. Armstrong Cork and Insulation Company: Atlas Chemical Industries: Celotex Corporation: Combustion Engineering Inc: etc 

Conclusion: We wish to emphasise to the excess reinsurers that the reserve calculations herein have been made only on the basis of the claims that have been brought to date against the various assureds. That is why we are recommending only one manifestation or exposure reserve in this report, it should be clear that substantial reserves and other assureds will be required if additional asbestos related bodily injury cases are filed. . .. There are other risks such as Raybestos Manhattan and General Dynamics which could prove dangerous depending upon the development of the law of employers liability. And there are other assureds like Hooker Chemical and Uniroyal which could result in loss payments by the excess reinsurers in the event liability is found for other "exposure" type situations such as Love Canal and Agent Orange. etc. [H1/237-270] 

6-Mar-81 MER. 

Letter from the Asbestosis Working Party to participants on the Johns Manville risk. Reports and recommendations have been deposited at the offices of Elborne Mitchell. Will you please arrange for a representative who has overall authority to make a commitment to review the documents at the earliest opportunity. [H1/271] 

9-March-81 MER. 

Letter from Lloyd's underwriters' non-marine association. Re: USA Hazardous Wastes, Pollution and Environmental Impairment Legislation. Underwriters should be aware of current and proposed legislation and regulations which will create liabilities to onshore facilities. These may impose new liabilities on, or increase existing liabilities of, a broad range of insureds or potential insureds and thereby may effect underwriters' existing direct and reinsurance exposures and future underwriting decisions.. . . 

Statutory sources of liability:. . .Underwriters interested in providing direct insurance or reinsurance or who may already through existing treaty arrangements provide coverage should be aware that the recently issued Superfund legislation will affect the liabilities to which a facility owner or operator may face and may affect the limits of liability facing an insurer under RCRA. The Hazardous Waste Superfund Act may also completely alter the liabilities facing those managing the risks of hazardous wastes. . .. Briefly the Act's basic provisions are as follows: 1. Retroactive liability (potentially strict, joint and several). 2. The Act has only limited defences to liability available. 3. Liability may be limited under certain conditions to. . .  (c) $50,000,000 plus removal costs for any other facility. 4. Due to the direct action provisions of this Act insurers will need to assess their liabilities since they may not assert their policy defences when they become guarantors, and by providing evidence of financial responsibility may face unlimited liability under the terms of the Act. [H1/272-281 I4D/131] 

26-Mar-81 MER. 

Meeting of the Asbestos Working Party: Notes taken by Elborne Mitchell when discussing certain matters with their clients: Present, inter alia, CJ Ayliffe, RAG Jackson. 73 underwriters have attended Elborne Mitchell's office in response to the chairman's letter dated 10th February 1981. 

Working party objectives:. . .(i) the working party will endeavour to provide the market with appropriate information. . .(j) the leading underwriters, with the assistance of Elborne Mitchell acting for the working party, shall seek to create a data bank of all relevant information. [H1/282-4 J11/2/4] 

13-Apr-81 MER. 

Meeting of the Asbestos Working Party: Notes taken by Elborne Mitchell. Present inter alia, CJ Ayliffe, RAG Jackson. 1. Elborne Mitchell notes on meeting 30 March 1981 were accepted as being a fair reflection of the meeting.. . . Total estimates to set up [the data bank] is $280,000 but the running costs are presently unknown. Alexander Grant have been told that the system must be working by October 1981 to supply information to underwriters on which to base to their reserves.. . .The 5th Circuit of U.S. Court of Appeals has reversed the Judgment in Porter v. American Optical and applied the exposure theory of assigning liability. The Court agreed with the reasoning of the 6th Circuit in Ina v. Forty Eight Insulations. [H1/285-6] 

Apr-81 MER. 

Letter [A] to the insurers at interest. This will supplement our report of. . .Recapitulation of Evidex Project - Celotex claims review:. . .Our second step was to review individual claims files at the assureds corporate headquarters in Tampa. This was a project of extreme difficulty, as the assured had no internal system of records that we could utilise. . .. This hurdle overcome, we assembled a team of paralegals who under our supervision reviewed the 4,500 individual claims files of the assured, some of which contained hundreds of claimants. We have always realised that to manage this mass of data would require technical support services in the form of a data processing company. With this in mind, we consulted with and ultimately retained the services of the Evidex Corporation.. . . We understand that the entire London market is considering a consolidated claims review process 

[1997]  439  L.R.L.R.  Henderson v. Merrett Syndicate (Q.B. (Com. Ct.))    Cresswell, J. 

which would encompass all London Insureds. We have discussed this desire with Evidex. 

Recommended reserves: we understand that underwriters generally desire that a value of $125,000 be assigned to each pending asbestos claim, and that a proportion of 8%, or $10,000, be generally assigned to as the Celotex portion thereof.. . .We recommend that underwriters periodically consider the adequacy of the $125,000 figure. $125,000 may well be a reasonable figure to assign to the predicted average settlement in calendar year 1981. It is probably not an accurate prediction as to the ultimate settlement value of all presently pending asbestos claims as it does not reflect inflation or the increasing settlement value borne out by experience.. . .Our recommended reserves have been tentative and based on our belief that the sheer volume of claims makes it very possible that underwriters may face liability, no matter what the specific terms of policies are and no matter what theory of coverage is eventually opted for by the Courts. Our belief in this regard was strengthened by the fact that the terms, conditions, and even the existence of underlying policies is at issue in the Celotex Declaratory Action. . .. As with the manifestation analysis it should be remembered that these calculations do not allow for new claims, for the possibility of underlying exhaustion by a single claim, for the fact that underwriters may desire a reserve based upon a $10,000 rather than a $9,048 Celotex contribution for each case, or for underlying impairment by non-asbestos claims. Again, we believe that precautionary reserves should be set for all families, notwithstanding that statistically it is possible to demonstrate "no expense" for every policy period. 

Keene decision: As underwriters are no doubt aware, the United States District Court for the District of Columbia has recently issued its ruling in the Keene litigation. Basically, the Court followed the Forty Eight Insulation's decision and decided in favour of the exposure position.. . .Importantly, the Court in Keene extended this finding and its decision to Mesothelioma and Bronchial Carcinoma as well as to asbestosis. The Court went on to find that a pro rata obligation to defend and indemnify exists for each insurer on risk during the exposure period. For those periods during which Keene was uninsured, it stands in the same position as do its insurers. . .. Appeals are presently underway.. . . 

Related developments. 4. Asbestos in public schools. The Environmental Protection Agency has recently found that asbestos poses an "unreasonable risk of injury" to school children and school employees. This creates of course an additional potential Plaintiff pool of many millions. Possibly more important are the potential property damage  claims by school districts based upon the necessity for retrofitting non-asbestos products in order to make school buildings once again "safe". 

5. Forty Eight Insulations Appeal. The 6th Circuit Court of Appeals has denied a request for an open hearing on its decision in the Forty Eight Insulations case and has also extended its prior ruling to encompass Mesothelioma and Broncheogenic Carcinoma. As initially announced the ruling affected only asbestosis claims. 

6. Van Buskirk litigation: one of the Defendants in this Philadelphia litigation is the assured, notwithstanding that some, if not all of the Plaintiffs were former Philip Carey employees. The Court has held that since Carey was an asbestos manufacturer, as well as the Plaintiff's employer, it is not entitled to workmen's compensation immunity. Should this ruling become law elsewhere, there could be a significant impact on the coverage provided by underwriters, as employers' liability provisions of insurance policies would then take on a much more significant involvement than has heretofore been the case. 

7. New Jersey Asbestos Workers Settlement. Underwriters are aware that the claims of 890 asbestos workers in New Jersey were recently settled by the establishment of a $9.4 million fund. The average per claimant settlement was $13,500, far below the current national average. It remains to be seen whether "fund" settlement at low levels will become a trend, or whether this is an isolated incident. 

8. Hammond decisions. An Illinois jury has recently awarded $500,000, $375,000 of that punitive, to the spouse of an asbestos worker in a law suit based on loss of consortium. This appears to be the first award of punitive damages in an asbestos suit and, if indicative of a trend, greatly increases potential liabilities of companies and their insurers. [H1/287-309] 

17-Apr-81 

Letter from Anthony M. Lanzone to KF Alder (Underwriting Agency). Attention Ted Nelson. Encloses a copy of the recent proposal authored by the American Re. considering the asbestos claims handling procedures. The enclosure headed "asbestos claims handling procedure" sets as its objective: formulation of a procedure for the unified control of evaluation, negotiation and litigation management by the insurance industry. It envisages "form a national asbestos litigation committee.". . . 

"Why is such an elaborate and un-precedented organisation required: (A) Asbestos litigation is the largest phenomena that has ever hit the casualty insurance industry. The present mechanism is not capable of handling it effectively. (B) Asbestos litigation is going to get much much worse. No one 

[1997]  440  L.R.L.R.  Henderson v. Merrett Syndicate (Q.B. (Com. Ct.))    Cresswell, J. 

knows how bad the problem will ultimately become. (C) Even some prominent members of the bar have stated the waste in defence cost because of the lack of uniform co-ordinated approach is scandalous. This problem will only get worse as time goes by. [H1/310-314] 

Apr-81 ? MER. 

Letter from [A] to the interested insurers. Report no.. . .assured. . .This report will concern not only the asbestos, PVC, SBR and Pesticide cases but will also report on the Agent Orange claims and a new unspecified chemical exposure claim which have been filed since our last report. Because of new coverage information we are now recommending a substantial reduction in the exposure reserves previously suggested.. . .It thus appears at this point that the exposure theory as opposed to the "manifestation" theory will probably prevail in the American Court system in the asbestos cases. This resolution could turn out to be unfavourable to the excess underwriters at risk here in the 1952-196? years. Nevertheless, it would still appear evident that the adoption of the "exposure" theory would not negate application of the assureds per occurrence self-insured retention (SIR). . .. American Courts to our knowledge have not as yet been presented with the issue of interpreting a per occurrence SIR under "exposure" theory of coverage. . .. The rule that ultimately will prevail in the American Court system cannot now be predicted and therefore we recommend herein a conservative approach which accepts the applicability of one SIR for the first year of alleged exposure. . . . 

(329) Agent Orange claims: we are led to believe that Excess Insurers here, through their interests in other assureds, are generally familiar with the nature of the claims arising from usage by the United States armed forces in Vietnam of the chemical defoliant designated as "Agent Orange". . .. Claimants here are the service men who were exposed to Agent Orange and their children. They allege that exposure to this herbicide caused cancer or so damaged the veterans reproductive system that they fathered children suffering from birth defects. . .At the present time over 150 law suits involving in excess of 3,400 individual claimants have been consolidated before the United States District Court for the Eastern District of New York on Long Island. [H1/315-331] 

28-Apr-81 

Victor Levit, managing partner of Long and Levit of California, gives a talk at the invitation of Lloyd's Under 30's Non-Marine Claims Committee entitled: Recent Developments in Insurance Coverage of Asbestos, Agent Orange, DES, Radiation Hazards, and Similar Catastrophic Product Liability  Developments. Recently the American Insurance Association stated that as of February 1, 1981, 25,000 individual Plaintiffs have sued for asbestosis (with 500 additional suits each month); losses and adjustment expenses from these suits alone in 1980 are costing $1.35 million per year compared with $6.35 billion paid in liability premiums (excluding medical malpractice premiums). 

. . .A recent article stated that Johns-Manville, the principal Defendant in most asbestosis suits, is running out of primary insurance for the period 1947-1976, resulting in qualified financial statements by JM's auditors for 1979 and 1980 because the ultimate cost of asbestos litigation to JM is unknown. And this phenomenon is not peculiar to JM. The Wall Street Journal states that Raybestos-Manhattan would also have qualified financial statements for the 1978-1980 period for the same reason. . .and I suspect this may only be the tip of the iceberg. Reputable insurance brokers are saying that the staggering size of toxic latent disease claims, of which asbestosis is only the first, could threaten the solvency of some insurance companies. 

Latency 15-45 years. 

A recent scientific study by Dr Selikoff, considered the dean of medical knowledge as far as asbestosis claims are concerned, stated that the incidence of asbestosis peaked in workers exposed to asbestosis 40-45 years after first exposure. 

(145c) Selikoff's study 40-45 years peak, putting a very great financial burden on many insurers if the exposure theory is accepted. A recent California case indicates that Insurance Company of North America alone has potential exposure of $20 billion. 

(145d) This same case states that the Court is bound to broadly construe the insurance policies to promote coverage in favour of the insured and against the insurer. 

(145g) Two recent cases where the employee and his family not confined to claims for Worker's Compensation. 

The recent New Jersey settlements. It has been reported that a recent settlement in the New Jersey Federal District Court of a consolidated action against a number of defendants, including Johns-Manville, involving 680 workers at a Raybestos - Manhattan Inc. plant in New Jersey involved establishment of a $4.9 million fund with respect to asbestos claims. The trial judge estimated this settlement could save 10 years of trial and that the settlement may set a pattern in toxic substance mass litigation. Reference is also made to a 1978 settlement in Tyler, Texas, of a $20 million fund for 445 asbestos workers. A contrary opinion has also been 

[1997]  441  L.R.L.R.  Henderson v. Merrett Syndicate (Q.B. (Com. Ct.))    Cresswell, J. 

expressed on these recent settlements that such settlements may encourage more suits.. . . 

I believe that there will be many more claims than we can possibly anticipate from toxic substances, that such claims will often take many years to manifest themselves, and that the dollars involved will be far greater than we can possibly imagine. [H3/143-145 I3A/C] 

12-May-81 MER 

Asbestos a Social Problem. A position paper prepared by the environmental issues task force and issued by the Commercial Union Insurance companies. . .. Though the health effects linked to asbestos exposure have been known since early this century, failure and unwillingness to take necessary measures to control its hazardous tendencies have led to a medical situation in which as many as 5.6 million individuals may die from an asbestos-related disease or from complications associated therewith, and in which millions of others may be disabled. . .. The estimated number of cases filed to date ranges as high as 12,000, involving some 25,000 Plaintiffs and more than 260 Defendants. The demands placed on the Courts have been substantial. The judicial process has been impeded in many jurisdictions, affecting asbestos victims and other litigants alike. With the likelihood that many thousands of additional claims will be filed during the next 25-30 years, it is becoming increasingly apparent that our judicial system will be incapable of providing an effective means of relief for those injured by asbestos-related diseases. . .. These factors place severe burdens on those responsible in the first instance for compensating asbestos victims - the members of the insurance and asbestos industries. Viewed objectively, the proliferation of asbestos claims and the costs associated with their administration, defence and payment jeopardizes the financial stability of many of these companies. . .. [L1/10/353 H3/147-168 J11/9/164 I3B/SS] 

A. The victims of asbestos use 1. Work-place Victims The incidence of the various asbestos-related diseases has been most marked among individuals occupationally exposed to asbestos. Though precise numbers are not available, the National Institute of Health has estimated that between 8 and 11 million individuals have been occupationally-exposed to asbestos since the early 1940s. Included in this number are some 4.5 million shipyard workers, approximately 4 million of whom are believed to have been heavily exposed to asbestos. Estimates as to the total number of individuals who will contract an asbestos-related disease are frightening. In 1978, Joseph Califano, the then secretary of the former Department of Health, Education and Welfare warned that as many as 5.6  million Americans may die of cancer or the other diseases associated with asbestos as a result of exposures in shipyards and other work places since World War II. This would compromise roughly one half of those occupationally exposed to asbestos during this period. Dr. Philip L. Polakoff, an Occupational Health Specialist, has estimated that as many as 2.15 million of these individuals will die from one of the asbestos-associated cancers. As most of these cancers will manifest during the next 30-35 years, the per annum average of cancers that may be attributable to asbestos will be 67,000, or about 17% of all cancers detected annually in the United States. 

2. Other Victims . . .Less identifiable but potentially of greater significance in terms of numbers and liability are the millions of individuals who have been and continue to be exposed to asbestos outside of the workplace.. . . The impact of such exposures is not known. However, the frightening possibility exists that a large proportion of the American population could some day be plagued by diseases brought on by their everyday, incidental exposure to asbestos.. . . 

As claimants continue to look to tort litigation as a means of compensation, the system is in danger of coming to a virtual standstill. Continued and proper resolution of these matters by the Courts will necessitate the employment of thousands of additional personnel. . .and will require the expenditure of millions of dollars for capital improvements, equipment and the like. . .. The situation is likely to get worse in the future. Because the incidence of asbestos diseases will increase in coming years, thousands of additional law suits can be anticipated. With increased efforts being undertaken to determine the existence of parties who are responsible for the injuries either by themselves or in concert with others, these cases will witness an endless addition of Defendants and third party Defendants.. . . 

IV.Ramifications of the problem: Compensation of Asbestos Victims A. Workers' Compensation and other "non-fault" programs B. Litigation as a Compensation remedy C. The Nature of asbestos product Liability Litigation. . .. In view of the extensive and heavy use of asbestos products for shipbuilding during World War II and its aftermath, it is apparent the United States Government will play a role in asbestos litigation. Evidence exists to the effect that the government possessed early awareness of the hazards inherent in asbestos use. Despite this, the government not only failed to take those steps necessary to minimize the risks involved in asbestos exposure, but actually fostered the mineral's use. In the effort to win the war, the government condoned careless work practices in naval shipyards, required inclusion of asbestos in 

[1997]  442  L.R.L.R.  Henderson v. Merrett Syndicate (Q.B. (Com. Ct.))    Cresswell, J. 

products sold to it, and actually provided the asbestos to be used for various projects. These activities by the government demonstrate its legal, moral and financial responsibility for many of today's problems. D. Inadequacies of Litigation as a compensation remedy. 

V. Ramifications of the Problem: the effects on the insurance industry and the implications for society A. The Insurance Industry's Financial Distress The proliferation of asbestos litigation and the money that must be expended for legal costs and damages threaten the financial stability of many of the insurance companies that are presently defending and indemnifying the various asbestos Defendants. The problems that these insurers will face will affect not just their insureds, but ultimately society as a whole. It is impossible to assess with exactitude the total liability that the insurance industry will be forced to bear. However, data compiled as to past actions and estimates as to future claims allow rough parameters to be set. . .. If just 1 million asbestos claims are resolved at that average value [$170,000] the insurance industry's liability will be $170 billion. Though the above figures serve to indicate eventualities, they do so without accounting for all possible contingencies. Because future projections are based largely on past performance they do not reflect the impact of inflation. As medical costs and wages rise in future years, losses sustained will be higher and will result in increased liability payments. Similarly, the possibility of high jury awards becoming commonplace will cause chaos among insurers. Though we are aware of only two claimants having obtained jury verdicts in excess of $1 million, that trend towards higher and higher awards will alter this course. Perhaps most important is the fact that we are only now beginning to perceive the enormity of the situation. In view of the previously-mentioned estimates as to occupational exposure to asbestos and the morality rates to date, it is not inconceivable that several million claims will ultimately be filed. Taking into consideration the latency periods for the asbestos diseases, the heavy and continued use of asbestos since the 1940's, and the potential for future medical evidence linking asbestos with other diseases, we can anticipate an increased incidence of asbestos-associated diseases during the next two or three decades. With workers' compensation and public assistance programs remaining as inadequate compensatory sources, a staggering number of asbestos product liability claims may be filed. . .. It is conceivable that the damages that will be ultimately awarded will exceed the combined assets of the insurance and asbestos industries. Because the massive expenditures that asbestos litigation requires exceed the industry's present liquid capitalization, many insurers will be confronted with serious  financial problems.. . . Because underwriters of 30 and 40 years ago did not perceive any great risk from asbestos claims, premiums charged were relatively small.. . .Now, with asbestos claims inundating our judicial system, proponents of the exposure theory are demanding that a group of financial institutions - members of the insurance industry - suddenly provide the resources necessary to cover incurred and anticipated liability. The ability of insurers to handle on an "exposure basis" the thousands and thousands of asbestos cases that will be filed in the future is limited. [L1/10/353 H3/147-168 J11/9/164 I3B/SS] 

VI. Conclusion: The need for federal solution. 

1-Jun-81 MER. 

Dr. Selikoff issues a further report for the US Department of Labor. The report, running to 650 pages, describes in detail the effects of exposure to asbestos and projections of death and partial incapacity which were to be expected as a result of exposure of asbestos. [L1/1/25 I6(2)14] 

Jun-81 MER. 

Letter [A] to the Underwriters at interest. Assured:. . .The enclosed attachments reflect that the Travelers has exhausted its aggregate limits and as a consequence Johns Manville Corporation demands direct, immediate payment from underwriters in the sum of $347,753 on an exposure basis against the following years: [1952-1959]. 

Earlier this year and on January 7 1981 Mr. Von Wald [Corporate Counsel, Johns-Manville Corporation], during a visit to New York called the undersigned relating that he wanted to meet in order to discuss the role that Johns-Manville expected the London excess insurers would play once the primary limits are exhausted. It so happened that Jim Ayliffe was also in New York on that day, accordingly a meeting was arranged between Mr. Von Wald, Jim Ayliffe and the undersigned. During the course of the meeting, Mr. Von Wald announced that the Travelers was at the threshold of exhausting its aggregate products limits of $500,000 per year for all years spanning its coverage from 1947 through 1976, and that Johns-Manville fully expected that the London excess insurers for their years would have to respond to future losses on the same basis that the Travelers had done so with exposure.. . . 

Thereafter, when Jim Ayliffe, Keith Rayment and John Heath were preparing to attend a conference in New York during the week of April 6th on the computerisation programme, the suggestion was put forth that a meeting with Home and Johns Manville would be a good idea. Accordingly, arrangements were made to meet.. . . 

The meeting with Home and Johns Manville had to be postponed. However, a dinner conference with 

[1997]  443  L.R.L.R.  Henderson v. Merrett Syndicate (Q.B. (Com. Ct.))    Cresswell, J. 
 
Von Wald was arranged for the 9th during which limits and attaching levels were considered in detail. It was then agreed that on the following day Messrs Von Wald and Caton would conduct an examination of all the policies and/or slips. On that morning and prior to the examination, they did meet and conferred at some length with Robin Jackson, Jim Ayliffe, Keith Rayment and the undersigned whereupon for the most part a general discussion was had on Johns Manville underwriting that probably took place during the time in question. [H1/340-4] 
 
9-Jun-81 MER. 
 
Letter from the Asbestosis Working Party to the Active Underwriter. Re: Asbestosis. On February 10th I reported to you on recent developments in the United States litigation relating to asbestosis. In addition I informed you that the Working Party had arranged for reports relating to this matter to be available at Elborne Mitchell for your inspection. During the last three months nearly all the London Market Insurers and Re-Insurers concerned with this matter have taken the opportunity to review these reports. Over the last two months London Market Insurers concerned with the direct insurance of Johns-Manville Corporation have authorised certain leading underwriters, when supported by the Working Party, to bind them in relation to Johns-Manville asbestosis claims. . .. It will be necessary for the working party to obtain a general authority to act on behalf of insurers and re-insurers in the London market concerned with asbestosis. . .. It is not the working party's present intention to play a part in the exposure/manifestation controversy. Enclosed with the letter was a "general authority of the working party". [H1/345-8] 
 
0-Jul-81 E & W 
 
E&W INSIGHT. Auditing Standards and Department of Trade Return: The auditing standard on "The Audit Report" only applies to "reports in which the auditor expresses an opinion on financial statements intended to give a true and fair view of the state of affairs, profit or loss and, where applicable, source and application of funds". As the new form of Department of Trade return specified by the Insurance Companies (Accounts and Statements) Regulations 1980 is required to "fairly state the information provided on the basis required by these Regulations" rather than to give a true and fair view, reference to our examination having been carried out in accordance with approved Auditing Standards should not appear in our report. However, an audit is nonetheless being carried out, and it is therefore necessary to comply with the auditor's operational Standard and related Guidelines. 

Intelligence: (a) Loss Reserving Property/Casualty Insurance by Timothy M Peterson, Ernst &  Whinney USA; . . .(d) The Insurance Directory and Year Book (Post Magazine Almanac 1980/81); . . .(g) A comprehensive library of insurance accounts and Department of Trade Returns for non-Ernst & Whinney clients is being built up. [D13/351-355] 

11-Jul-81 

The Economist: Warning: Asbestosis may cost you more than money. In the past two years, there has been a quintupling in the number of law suits in which Johns-Manville, once America's biggest Asbestos producer, is named as Defendant. Law suits against Keene Corporation have risen ten fold.. . .Auditors Coopers & Lybrand qualified both the 1979 and 1980 accounts of Johns-Manville because of the potential liability from law suits. The 1980 accounts of Raybestos-Manhattan were also qualified, and some other asbestos companies must expect the same treatment in future. 

There are roughly 25,000 cases against asbestos companies pending in the American Courts.. . .The Industry is now desperately worried because some courts are awarding punitive damages - in effect, saying that asbestos companies wilfully did not do enough to protect workers against the hazards of asbestos.. . .Some believe that legislation will be needed if great chunks of American industry are not to go bankrupt. [H3/173-4] 

30-Jul-81 

BALLANTYNE RUN-OFF CONTRACT WRITTEN (417 80%) 

Jul-81 MER. 

Letter number. . .from [A] to the insurers at interest. Assured;. . .There have been several noteworthy developments in this litigation since our previous report. [H1/349-365] 

Aug-81 MER. 

Telex from Ayliffe to [A]. Re: reserves on asbestos cases. The working party are now considering the reserve philosophy to be adopted for the coming year end in regard to all the accounts which come direct to London Market and it is our intention to now adopt a reserve per case for each assured based upon average cost of settlements achieved to date plus loading to take care of inflationary trends. [H1/366] 

10-Aug-81 MER. 

Meeting of the Asbestosis Working Party together with solicitors Elborne Mitchell. Present C J Ayliffe. (b) The Chairman reported that Mr Ayliffe had asked for a Working Party Meeting every week. After some discussion it was agreed that the present arrangement would continue, i.e. a meeting should only be called if requested by a member of the Working Party by Thursday of the previous week. However, in future, there would not be more than 

[1997]  444  L.R.L.R.  Henderson v. Merrett Syndicate (Q.B. (Com. Ct.))    Cresswell, J. 

two weeks between meetings.. . .(d) Elborne Mitchell reported that, in response to a request by the Chairman, they had now obtained copies of all the slips in respect of GAF Ruberoid and Owens Corning. They had not been able to obtain the slips for US Gypsum since the brokers were having difficulty in finding some of them. 

3. Reports to the Market: Mr Ayliffe said that a great deal of information was coming to the Leading Underwriters in respect of Asbestosis claims and a central store of this information was required. Mr Ayliffe said that general reports were shown to the Market by the brokers. However any reports of a delicate nature would be reviewed by Elborne Mitchell prior to a decision as to their release to the Market. . . . 

4. . . . Database and Loss Reserves. The Working Party agreed that the above figures should be put into the Database as the basis for future reserves. Mr Continanza pointed out that the reserve figures produced by the Database would be on the basis of known claims only. Mr Maitland emphasised the need to have an estimate of outstanding liabilities for every year of each account. Mr Ayliffe said that the Database would produce figures showing the trend of payments at the end of each quarter. Further, the Database would produce figures which would permit Underwriters to check reinsurance claims coming to London.. . . 

5. US Gypsum: Mr Ayliffe said that the brokers could not find the Slips for the years 1949-1954 for this Assured although US Gypsum held cover notes stating that 100% coverage was placed in the London Market. US Gypsum have 900 claims. [I4C/66] 

18-Sep-81 

21-Sep-81 MER. 

VERRALL RUN-OFF CONTRACT WRITTEN (418 100%) 

Inter Office Memo- Fireman's Fund Insurance Companies from Mr. Brown to Mr. Isom. Re: Sturge run off account. Mr. Wakefield called to day to report on his progress on securing an unlimited run off cover for FFIC. As I told you earlier, Hady has been negotiating with David Mann of the Merrett Syndicates and Dick Outhwaite of the Outhwaite Syndicate. Unfortunately, after much discussion, Mr. Mann has declined to quote on the coverage. He cited the asbestosis exposure and their already heavy involvement as the main reason. He pointed out that the known identified exposures to Sturge on asbestosis could easily run to Excess of $40,000,000 (v. the $10,000,000 currently reserved) and felt that Merrett's current exposure prevented him from exposing the Syndicate to additional exposure from that source.  The preliminary discussions with Mr. Outhwaite have been more productive. He has provided Hady with an initial quote of $10,350,000 for unlimited protection excess of $35,000,000 to FFIC (we currently stand at approximately $35,147,000). . .. They have offered to write 50% and Hady feels that the remaining 50% could be placed at those terms, albeit with some extensive marketing. [H1/367] 

25-Sep-81 MER. 

Letter from Lloyd's Underwriters Non-Marine Association. Re: US re-insurance contracts covering casualty business. The Non-Marine Re-Insurance Committee has given a lot of time and thought to the attitude that they should take as individual Leaders in connection with the renewals of U.S. Re-Insurance Contracts covering casualty business in the light of the latent disease problem. As a result a "discussion paper" has emerged which those Underwriters who have signed it intend to use as a basis for discussion with their re-assureds at the time of the renewal of their programmes. A copy of this paper is enclosed for your information. Discussion document:. . .the potential for losses arising from asbestos products has been known for some time and obviously will continue to be dealt with by the insurance industry for many years to come. The same latent disease characteristics, in some degree or another, are unfortunately common to many elements, compounds, chemical mixtures and products.. . . [H1/368-72] 

10-Nov-81 E & W 

Advisory Panel of Auditors meeting. Attended by, inter alia, NF Holland of Ernst & Whinney. 

1. Notes made by D Stevens of Littlejohn & Co: (10) Any other business. Asbestosis: the potential claims in connection with asbestosis make computer leasing appear [?in]significant by comparison. The claims go back to the 1947 account and, as a result of a Court case in America known as the Keen[e] decision", the insured may claim in both exposure and manifestation if it suits them. 

Murray Lawrence stated that, with regard to Direct Business, there will be a report on the 10 or 12 major assured's, which will show the underwriters' lines for each syndicate on all years of cover. The report will project a number of claims already advised forward for five years in order to show which layers of the policies are exposed. On the reinsurance side, Databank hope to provide a list of major U.S. domestic companies involved in the risk and give a rough shot at some of the exposures. Unfortunately, a loss report will not be available on an overall basis. . .. It cannot be over-emphasised how serious the losses will be as a result of asbestosis and Mr. Lawrence felt that, where syndicates had re-insurance protection, the scale of 

[1997]  445  L.R.L.R.  Henderson v. Merrett Syndicate (Q.B. (Com. Ct.))    Cresswell, J. 

losses may be sufficient to bankrupt the re-insurers. [Handwriting:] It is hoped to have a further meeting of the panel auditors to discuss asbestosis early next year. [H1/373-375 D12/7-10 (see below)] 

10-Nov- 

2. Minutes taken by NF Holland, dated 9 December 1981. 10. 

81 E & W 

Asbestosis: This came up under any other business and Murray Lawrence who is the chairman of the Lloyd's committee handling this matters made a fairly detailed statement. He takes the view that based on the latest decision in the American Courts both exposure and manifestation are a basis for settlement. Accordingly all years covered on both bases are vulnerable for claims. Mendes & Mount are preparing a report in respect of direct business and are going through the 10-12 major assureds covering all years and the losses on each year on all known covers. They will project the figures based on an average claim and will report back early in January on the estimated liability. . .. Hopefully this will give some feel for the loss on direct writing. It will then be up to each syndicate to consider what reinsurance protection it has and to take this into account in arriving at its net losses but, having regard to age of some this protection it will be essential that we look at it to satisfy ourselves that the companies concerned are still in business. On incoming reinsurance Murray could give no help at all. Each syndicate will have to do its own rough shot at exposure and hopefully by the end of the year will start to have some feel for the various sources from which claims will materialise. Murray was pressed to call a meeting of panel auditors early in 1982 to keep them informed of the latest position and he has agreed to talk to Ted Nelson on this to see what can be done. . .. If there are any problems in obtaining information through Ted Nelson then I will certainly speak to Don Taylor with a view to obtaining whatever information I can from him and in this way I hope we can monitor available information in the market. Clearly there are some major losses developing and it will be important that we set up some form of intelligence with a view to pooling all available information from all sources within the London Market. [D12/1/7-10] 

Nov-81 MER. 

Report number . . .from [A] to underwriters at Lloyd's. Assured:. . .We are recommending substantial reserve changes in this report which reflect a huge increase in the number of claims brought against the assured since our last report. 

Summary of Assured's position: Since our last report of January 1980, we have received advices from the American broker regarding 3,753 new  claims brought against this assured by individual claimants in multiple jurisdictions throughout the United States. As of November 1, 1981 we thus had received notices of a total of 4,656 claims against the assured in 28 American jurisdictions. We are not satisfied that these numbers represent the actual number of claims, however. This is because the assured recently has advised us that as of the end of the second quarter of the 1981 calendar year, concluding on June 30, 1981, a total of 6,210 law suits involving 7,877 individual claimants had been filed against the assured. The assured further advises that since June 30, 1981 it has experienced an additional average of 300 new claims each month for a current total of approximately 9,000 claims filed against Flintkote in the asbestos litigation. . .. The coverage issue:. . .the United States Court of Appeals in the Porter vs American Optical and INA vs Forty-Eight Insulations cases respectively have determined that the date of an injured person's exposure to asbestos products triggers coverage under the liability policies issued to asbestos producers and manufacturers. Recently, however in the Eagle-Picher vs Liberty Mutual case [the court] ruled in favour of the "manifestation" theory.. . .And even more recently, the United States Circuit Court of Appeals for Washington DC in the Keene Corporation Case held in favour of still another interpretation finding coverage attached on all years of inhalation exposure as well as during the years when the fibres were present in the human body without inhalation (exposure in residence) and the year of manifestation of disease. 

All four of those decisions are being or will be appealed further and it is hoped by many that the United States Supreme Court will grant Certiorari to hear and finally decide this perplexing issue. 

Recommendation for Future Handling: We must emphasise to the excess insurers that these reserves relate only to those claims known by the assured thus far. It does not take into account future bodily injury claims . . .. there are numerous well informed people who believe that the claims filed to date represent only the beginning of a potential flood of asbestos litigation. We recall that the Secretary of Health, Education and Welfare of the United States reported in 1978 that 67,000 people each year will die from exposure to asbestos products during the rest of the 20th Century. 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 with asbestos-containing insulation materials in shipyards. . .Although the assured's involvement with producers 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 

[1997]  446  L.R.L.R.  Henderson v. Merrett Syndicate (Q.B. (Com. Ct.))    Cresswell, J. 

among the growing group of frequently named defendants in these cases. For these reasons we urge Underwriters to carefully consider all of the factors when establishing reserves herein. [H1/376-393] 

13-Nov-81 

FIREMAN'S FUND RUN-OFF CONTRACT WRITTEN (417 37.5%) 

Nov-81 MER. 

Letter from [A] to the underwriters at interest. Assured:. . .Regarding asbestos litigation generally, a Plaintiff makes out a prima facie case when he has introduced credible evidence to support the following: (1) that the Defendants manufactured, marketed, sold or distributed asbestos insulation products; (2) that the asbestos products manufactured, marketed, sold or distributed were defective and unreasonably dangerous; (3) that the Plaintiff was exposed to any of the Defendants asbestos products. (4) that the Plaintiffs exposure to any of the Defendants asbestos products was sufficient to be a producing cause of certain asbestos-relating lung diseases; (5) that the Plaintiff has or had an asbestos related lung disease (6) that the Plaintiff suffered damages. It is also generally recognised by industry members that when a Plaintiff is in a posture to satisfy the foregoing criteria, that settlement is the conduct of choice rather than chance the uncertainties of a jury trial. Experience has shown that in cases where the Plaintiff is able to make out a prima facie case juries do find liability, and what is more, impose far greater damages than the matter could have been settled for prior to trial. Consequently not only is settlement the conduct of choice, but in addition they are being accomplished on Affidavit type information rather than unnecessarily incur attorney's fees in developing that some information via pre-trial discovery.. . .Reserves: Not accompanying this report but being transmitted directly to underwriters are the Reports of the Asbestos Claims Information System. . .Designed to achieve a computerisation of all asbestos claims. . . .Regarding loss dates for asbestos related products liability cases the scoreboard is as follows: Porter and INA exposure. The Washington DC Circuit recently announced the "triple trigger" concept in the case of Keene v. Ina. To say this is an extension of the "exposure" concept, would be an understatement. One District Court in the case of Eagle-Picher v. Liberty Mutual held that the "manifestation" of the disease is the trigger for insurance coverage. . .. Turning our attention briefly to the Keene opinion, the principal thrust of it stems from the holding that once there is an exposure during a covered period, the insurer at risk at this time is required to respond to the loss for both defence and indemnity. If during the course of trial of the  underlying tort case, it appears that more than one policy applies to the same loss, then evidence of this may be introduced at that trial, providing it does not disrupt the tort victims action. If there is a potential for a disruption of the tort victims action, then the issue as to how the respective insurers should contribute to the loss, pursuant to the "other insurance" clauses of their respective policies, must be tried separately. The Court was of the opinion that the medical evidence introduced at trial supported the conclusion that an asbestos related disease is not the result of repeated mini-injuries to the lungs, but rather the result of one continuous process commencing at initial exposure and ending in ultimate manifestation of a disease. Premised on this predicate the Court stated that coverage is therefore triggered by one of three events: (1) Exposure; (2) Exposure in residence and/or (3) manifestation. If either one of these three events occurs during a policy period, then that policy's coverage is triggered and it must respond for a full defence and indemnity. The Court further held that it is not the responsibility of the assured to respond for uninsured years, provided, of course, the exposure did not cease and manifestation occurred prior to the inception of the policies or that a ". . .disease was known or knowable by Keene at the time it purchased an insurance policy". 

. . .Recently a trial Judge in the U.S. District Court for the Eastern District of Pennsylvania in the case of Commercial Union v. Pittsburgh Corning entered an order on Pittsburgh Corning Motion for partial summary Judgment wherein the Judge took Judicial note ". . .of the indisputable scientific fact that cumulative physical damage resulting from asbestos inhalation occurs prior to manifestation. As a matter of law, such exposure is a covered occurrence during the policy which results in injury. At a minimum the policy language is ambiguous and must be construed against the insurer". The Court also found that the primary insurer, the Travelers, was obligated to defend Pittsburgh Corning without limitation during those years prior to 1966 when the Travelers' policies were "ambiguous" with respect to the defence obligation once policy limits were exhausted. 

. . .In addition to the indemnity and defence expense reserves set forth here and above, we recommend that underwriters establish a $125,000 per year reserve for claims servicing. [H1/393-402] 

Nov-81 MER. 

Letter from [A] to underwriters at interest. Assured:. . .Liability: As of the end of September, 1981, Owens-Corning reported to us that it had 11,315 open cases, and that new cases were being filed at the rate of approximately 100 per week. . . 

[1997]  447  L.R.L.R.  Henderson v. Merrett Syndicate (Q.B. (Com. Ct.))    Cresswell, J. 
 
It is our observation that in cases where the Plaintiff is able to make out a prima facie cause of action, juries do find liability,. . . 

. . .Reserves: Not accompanying this report, but being transmitted directly to underwriters are the reports of the "Asbestos Claims Information Systems". . .. We are pleased to report that these reports are the end result at this point of intensive efforts on the part of outside computer consultants, Alexander Grant and Co., Inc., and members of the Asbestos Claims Sub-committee Messrs CJ Ayliffe and K Rayment, and Mr J Heath, to achieve computerisation of all asbestos claims. [H1/403-410] 

Nov-81 MER. 

Letter from [A] to the interested insurers. Report number. . .Assured:. . .this risk presents substantial exposure to the London Excess Insurers in the 1967-1972 period. We are recommending this reports substantial loss reserve based upon an exposure theory of coverage. We do not believe the excess Insurers here should sustain a loss if the manifestation theory of coverage is deemed to be applicable to these losses. . .. 

Our review of this risk reflects that the primary source of claims against the assured stems from the shipyard facilities along the coastal areas of the United States. This apparently was because several occupational trades often were simultaneously employed in the same dry dock working area where asbestos fibres were in the air and inhaled into the lungs of many workers including those not actually working with asbestos-containing products. 

Regional Developments. The assured believes that if the U.S. Government were judicially compelled to share in the asbestos-related bodily injury loss payments, then national legislation might be forthcoming to help avert the potential financial collapse presently being faced by many asbestos manufacturers and producers. . . 

We are advised by Alexander Grant and Company, the firm engaged by the London Market to consolidate and computerise all of the asbestos claims involving this assured and others, that the 9,955 figure as of June 5, 1981 may not be accurate because of the possibility that some duplication of claims reported may have occurred. We have pressed the computer data firm to advise us immediately once an accurate number count can be confirmed.. . . 

The average loss payment incurred by the assured as of September 16, 1981 for 897 individual claimant files reported as closed since 1975 is $4,190,099 plus $2,095,449 equals $6,285,547 divided by 897 equals $7,007.30. 

Regional Developments. . .  (428) Opinion as to liability: the asbestos cases manifestly represent grave potential exposure to the asbestos manufacturers and producers of the past 40 to 50 years. . .(429) the situation must be viewed as one of certain liability. 

The problems re establishing reserves: there are several acute problems. . .The first problem is that it remains uncertain as to what basis will ultimately be used to determine the applicable liability coverage for each loss. . .. A second major problem concerns the fact that it is impossible to predict with certainty the number of products liability claims that will be made against this assured. Secretary of the HEW estimated that 8-11 million American Workers have been exposed to asbestos since the beginning of World War II. A study by three agencies of the United States Government project that over the next 30 years, approximately 13 to 18% of all cancer deaths would be asbestos-related. The number of potential claims would appear to be staggering. A third problem concerning the establishment of realistic reserves concerns the fact that we do not know as of yet whether the underlying coverage herein was written on an aggregate or per-occurrence basis. If the coverage was written on an aggregate basis we have been unable to obtain any indication thus far that records are being kept so that the impairment of this underlying coverage can be monitored. 

Recommendations for future handling. We must emphasize to the excess insurers that the suggested reserves herein relate only to those claims known to have been made against the assured to date. The reserves do not consider future bodily injury claims that we believe can reasonably be expected to be brought against the assured. 

We therefore urge each of the excess insurers to consider these factors in the event they wish to establish reserves to accommodate such future claims. [H1/411-433 J12/28 I4C/71] 

Nov-81 MER. 

Letter [A] to the underwriters at interest. Assured. . .We wish to advise that we have now received a 6th claim from Johns-Manville seeking reimbursement from underwriters subscribing the policies for the years "7-1-52 to 6-30-60".. . .case of Borel v. Fibreboard. . .prima facie proof. . .. Dr Selikoff studies. [H1/434-438] 

1-Dec-81 MER. 

Letter from the Asbestosis Working Party to all interested underwriters containing a report by Elborne Mitchell summarising the activities of the working party during its first year of existence. Present composition of the working party includes, inter alia CJ Ayliffe and RAG Jackson. Mr Tayler 

[1997]  448  L.R.L.R.  Henderson v. Merrett Syndicate (Q.B. (Com. Ct.))    Cresswell, J. 

succeeded Mr EE Nelson as chairman in September. Mr Rokeby-Johnson is now deputy chairman. The functions of the Working Party include the following: a) to provide a forum for discussing problems relating to asbestosis claims and to seek Market Agreements to assist Underwriters in their handling of claims: b) to advise on coverage matters when requested to do so by the Leading Underwriters: c) to consider facultative re-insurance as well as direct insurance: d) to explore solutions to the asbestosis problem other than by litigation or traditional claims handling: e) to assist in the establishment and development of a database to provide claims information for reserve purposes. 

A claims committee has been established consisting of the senior claims personnel of leading underwriters on the Working Party. Present members of the claims committee are Messrs Ayliffe. . .. A database has been established in the United States by Mendes & Mount with the assistance of Alexander Grant, computer consultants, and Toplis and Harding, Chicago. Reports from your US representatives providing year and reserve information based upon the data base output are now arriving in London and will be circulated by the brokers or otherwise on the instructions of leading underwriters. . .reports to underwriters have been received periodically from the above mentioned lawyers. These reports have been circulated to the interested underwriters in the usual way where they have not contained confidential information. Certain reports have not been circulated but have been retained by the leading underwriters. In the near future a room will be available at LUNCO for inspection of numerous documents and computer printouts.. . .Over the past 9 months the working party has given particular consideration to the following: 1. Johns-Manville exhausted their primary cover.. . . 3. Owens Corning Fibreglass has recently been reported as having exhausted its primary domestic insurance with the result that claims will shortly be presented to interested underwriters in London. Various theories of coverage: exposure v. manifestation. Keene. The data base currently shows 14,526 individual claimants but on the basis of various projections which the working party is not in a position to verify, the total claimants will, in the end significantly exceed this number. 

Conclusions by Ayliffe: During the period since the setting of the Working Party there has been a substantial increase in the number of suits filed and the manner in which this affects individual insureds will be detailed in the year end reports from your US representatives. 

New suits currently reported now average 300-400 per month which is indicative of the increasing  severity of this problem to the asbestos industry and its insurers.. . .Whilst it is not possible at this stage to perceive any clear indication of the likely development in the future, the reserve bases adopted by your US representatives in their year end recommendations do make allowance for likely deterioration in the overall situation. [H1/439-443 J12/28 I4C/71] 

4-Dec-81 MER. 

Letter from Lloyd's underwriters non-marine association enclosing another position paper to be read in conjunction with the September position paper on US reinsurance contracts covering casualty business. . .. Obviously claims from the asbestos related diseases are catastrophic and disastrous so far as whole the Insurance Industry is concerned but this fact alone does not automatically qualify them to be treated as "a catastrophe" or "a loss" within the definition or intent of the excess contracts. [H1/445-451] 

12-Dec-81 

Lloyd's List: Asbestosis may cost insurers more than $1 billion. Insurers in London and the United States, fear that compensation claims arising from the industrial disease asbestosis could well top $1 billion making it the largest ever insurance loss.. . .One asbestos company, Johns-Manville Corporation is at present a Defendant in law suits involving around 11,000 different claimants. A US lawyer has estimated that 11 million people have been exposed to asbestos. [H3/193] 

0-Jan-82 

Paul W. McAvoy: The Economic Consequences of Asbestos Related Disease. By 2015 would be between 154,000 and 450,000 excess deaths from asbestos. Future compensation would be between $8 billion and $87 billion, with most likely estimate being $38 billion. 

0-Jan-82 

Journal of Products Liability. Article by Gerald Oshinsky: Insurance coverage for asbestos tort liability litigation. [H4/274-80] 

11-Jan-82 MER. 

Meeting of the Asbestos Working Party. 

Notes of comments made: DT: some reports are self-explanatory. They point out that (the position) is getting worse plus escalating legal fees. DT: I agree we should be guiding but the reports are quite good and must be left to individual underwriters no one knows what the real reserve situation is. [H1/452] 

25-Jan-82 E & W 

Note of a Panel Auditors Meeting. (on 15.1.82). 

Memorandum to Lloyd's audit partners and staff from PB Milne. Re: Lloyd's audit 31.12.81: Ted Nelson advised on asbestosis: 

[1997]  449  L.R.L.R.  Henderson v. Merrett Syndicate (Q.B. (Com. Ct.))    Cresswell, J. 

(b) Asbestosis arises from Direct but more predominantly from Facultative Reinsurance business (Excess loss of Syndicates and companies.) In addition it will almost inevitably arise in Syndicates which have been reinsured by other syndicates. Care must, therefore, be taken to enquire from Syndicate clients the details of all syndicates reinsured by them and in turn, where RI protection has been effected specifically to cover the running off syndicate, the specific RI protection acquired.. . .

(d). . .Policies giving rise to claims were issued between 1945 and 1975 with a certain number going back prior to 1945. Up to the mid 1960s policies were issued on an "any one incident basis" but after that date on an "aggregate basis" within a policy year. 

(e). There have been some 15,000 claims notified but they are increasing at the rate of 400 per month. It is difficult to guess what the final number of claims will amount to, but it was suggested that by the mid to end 1980's we should expect some 25,000 in total. (An aside by someone stated that the Prudential were guessing at a figure of 2 million claims. Nelson said he considered this figure to be well wide of the mark.) 

(g). Court actions to date have taken the form of 15 declaratory actions to determine whether insurers are liable to assureds. Courts have ruled in three actions: (i) INA 48 Insulations - Decided that liability arises on an exposure basis spread over the period of exposure. (ii) Eagle Picher - Decided that claim should be on a manifestation basis. (iii) Keene - Decided that the insured should collect on both an exposure and manifestation basis to ensure that the maximum benefit accrued to claimant. 

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. 

There is also a move in California to make a Consolidated Declaratory action in four major cases.

(h) The Committee of Lloyds have set up a Database whereby the full details of all known Syndicates liable are stated. There is full computerised information on both an exposure and manifestation basis. 

The information is available in the LUNCO area but auditors must obtain written authority from syndicate clients before the information will be made available to them. At the moment the loss reserves have been set up on a basis of an average cost per claims based on the statistics available of $125,000 plus expenses of $10,000 per claimant. Currently this means a total claim of $2,025,000,000. On an exposure basis 40% is with  London companies and Lloyds whereas on a manifestation basis it is 10%. Loss reserves do not take into account syndicates own protection arrangements.. . . 

(i) The syndicates have their own attorneys preparing reports and guidance should be provided in the form of a reserve view. As far as the IBNR factor is concerned, it is suggested that a view should be taken as to what can come forward within the next 5-6 years. Since it is likely that large figures will arise it is important to ensure that policy limits are not exceeded. 

4. Nelson also reminded us of 3 of the product claims requiring consideration: 

(a) Agent Orange - Bodily injury claims against 5/6 major chemical manufacturers including Dow and Monsanto. Since policies were written with a war exclusion clause and manufactured expressly at US Government instructions the claim would well be passed back to the US Government. However, this pass back would not include children. 

(b) Love Canal - Bodily and Property damage from waste. Hooker Chemical Co. 

(c) Des - Bodily injury - 12 US chemical manufacturers involved but principally Upjohn. 

5. Any queries on the foregoing to PBM or FFDS. It has been decided to require each syndicate client to answer a questionnaire on asbestosis. The format will be decided after our visit to LUNCO and in conjunction with the other main panel auditors. [H1/463-466] 

8-Feb-82 MER. 

Meeting of the Asbestosis Working Party attended by Elborne Mitchell. Present: C J Ayliffe. 2. Reserve Information at the LUNCO Office.. . .Mr Ayliffe agreed to draft a letter informing Underwriters that the office was now open. The letter should also deal with the following matters: (i) Auditors would only be given access to the information if accompanied by syndicate representatives; (ii) The information at the office was merely support for the reports already sent to the Market. 

3. Panel Auditors. The Chairman reported that some auditors' questions were proving difficult for Underwriters to answer on the information available. It would appear that the Audit Committee had not yet given any direction to the auditors. 

9. Other Assureds. Mr Ayliffe reported that the accounts of Eagle-Pitcher had been qualified by their auditors. [I4C/74] 

16-Feb-82 MER. 

Letter from the Asbestos Working Party to all interested underwriters. The arrangements are complete for the establishment of an office at LUNCO where documents and computer print outs can be 

[1997]  450  L.R.L.R.  Henderson v. Merrett Syndicate (Q.B. (Com. Ct.))    Cresswell, J. 

inspected by underwriters.. . .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 emphasis that future deterioration is inevitable. [H1/467-8] 

24-Feb-82 E & W 

The Neville Russell letter quoted in full supra. 

1-Mar-82 MER. 

Meeting of the Asbestosis Working Party. Present: C J Ayliffe. 3. Reserve information at the LUNCO Office. The Chairman stated he was concerned over the reaction from Underwriters regarding the opening of the Claims Office at LUNCO and thought it was fair comment to say there was some disappointment, in particular, many had envisaged the Office would be capable of informing them of individual syndicate participation in respect of the numerous Assureds. Mr Ayliffe stressed that the information would improve, and the lady employed was going through the slips relating to a number of Assureds with the object of drawing up schedules. 4. Panel Auditors. 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.. . .8. Owens Illinois. Mr Ayliffe reported that this Assured had recently found evidence of insurance placed in the London Market on their behalf of brokers, Edwards Lumley. The periods in question being 1957-1960 and 1960-1963. . .9. Home Insurance Co. Mr Rayment reported that the Home had exhausted its retentions regarding Johns-Manville. [I4C/79] 

2-Mar-82 MER 

Meeting of Lloyd's Audit Committee, H1/471A records: - 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 reinsurance to go unnoted and unreserved by Panel Auditors and that it would be improper for a syndicate to take out such reinsurances without telling its own Names. It was stressed that auditors should make any enquir-  ies 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. [H1/471A G321] 

9-Mar-82 E & W 

Meeting of the Lloyd's Panel of Auditors. Present, inter alia, M Bolger of E&W, P B Milne of Littlejohn & Co, K E Randall. The purpose of the meeting was to discuss with Panel Auditors the content of a letter which had been received from them with regard to the reserving for asbestosis at the 31/12/81 audit.. . .Mr Nelson then went on to say that at present 400 new claims per month were being advised and that if this were projected over a 10 year basis would lead to approximately 50,000 claims. Mr Chester then asked auditors for their comments. 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 auditor's 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 the years 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 million 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 Syndicate's account (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.. . .Mr Chester then raised an ancillary matter which was the writing by certain Lloyd's Syndicates of the reinsurance of other syndicates asbestosis liability. He said that this could lead to the funnelling of a large amount of liability into a small number of names. He continued by saying that consideration was being given to asking the Market to stop 

[1997]  451  L.R.L.R.  Henderson v. Merrett Syndicate (Q.B. (Com. Ct.))    Cresswell, J. 

writing such reinsurances in the open years. [L1/16/404] 

11-Mar-82 E & W 

E&W internal letter from MA Bolger to partners and managers involved in syndicate audits. In the white letter accompanying this years Lloyd's audit instructions the attention of auditors is drawn to risks which include liability for latent diseases and products liability when assessing the adequacy of reserves. The fact that there are major losses under these categories has been known in the Lloyd's market for some time and syndicates have created reserves in respect thereof. The subject was raised at a meeting of advisory panel of auditors in November 1981 at which it was decided to hold a special meeting to provide further information for auditors. The special meeting was held in January under the chairmanship of RJ Kiln and auditors were addressed by Mr Ted Nelson, the immediate past chairman of a Lloyd's committee set up to investigation asbestosis losses. The meeting was told that asbestosis was one of a group of diseases which are referred to as latent diseases. These comprise Agent Orange, Love Canal, Des and asbestosis. These losses are principally in US $ and can mainly be classed as products liability claims. The Lloyd's market is meeting claims in non-marine syndicates, in marine-syndicates writing non-marine business and also in aviation syndicates. The losses can arise from direct writings, from the reinsurance of particular US companies, from other reinsurance contracts and in some cases by the acceptance of running-off accounts. . .It is understood there are 40 insureds of which 19 are direct in the London Market. In respect of 15 of these, all the slips placed in the London Market have been found. The total number of cases in litigation is in the region of 15,000 and this number is growing by approximately 400 per month. The product was readily available between 1945 and 1975. The pattern in Lloyd's is that up to 1962 syndicates have insured American carriers direct, and thereafter they have covered American companies by reinsurance in the London Market. The current state of litigation suggests some uncertainty as to who is liable, Courts in the USA having settled cases on both an "exposure" and a "manifestation" basis. There is apparently the possibility of an appeal being made to the Supreme Court but this has, so far, been turned down. The size of the asbestosis problem became apparent some 2 years ago when it was agreed that normal assessments of settlements were not suitable. A committee was set up and in April 1981 a data base was established on computer. . .. Estimates have been made on the basis of an average cost per claim together with an estimate of expenses. The average was said to be $125,000 plus $10,000 for expenses. . .an office  has now been established within LUNCO and the records can be examined by auditors provided they are accompanied by an underwriter. . .In compiling reserves for asbestosis reports have been made available to underwriters by brokers in the usual way setting out policies which have covered the various asbestos insureds. . .this information has enabled underwriters to calculate their maximum exposure on direct writings. The data base which is also limited to direct writings is available as a back-up to records compiled by individual underwriters. Syndicates will have to assess liability on facultative and treaty reinsurance and on any run-off business accepted, and then see what reinsurance protection they have available. In the office, a questionnaire has been prepared which has been sent to clients inviting a representation to us on how reserves have been established for latent disease liability. The questionnaire is similar to one which certain other firms of panel auditors have sent to their clients, there having been some liaison between firms following the panel auditors meeting. As a result of problems that have arisen in quantifying reserves for asbestosis, further meetings between panel auditors and the auditor committee at Lloyd's have taken place. [D12/2/15] 

18-Mar-82 E & W 

Letter from KE Randall of Lloyds to Ernst & Whinney enclosing a copy of the Murray Lawrence letter of 18.3.82 to all underwriting agents and active underwriters. These letters are quoted in full supra. [J7/2/93 H1/476] 

19-Mar-82 E & W 

E&W internal memo from NF Holland to insurance partners and managers underwriting department. Herewith the latest epistle on asbestosis. I cannot believe that at some stage we are not going to find a syndicate where there 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 clients knowing he has the full backing of his colleagues. [D12/2] 

16-Apr-82 E & W 

E&W internal memo from NF Holland to insurance partners. Asbestosis. In view of the well publicised problems in estimating outstanding liabilities in respect of the above claims, and the subjective judgments involved therein, it is imperative that our audit files are adequately documented this year. In particular a) All syndicates were asked to supply certain specific information in relation to asbestosis and other latent diseases. We must insist on clients supplying this information this year in view of the letter issued by Lloyd's on 18 March 1982. b) The 18 March 1982 letter on asbestosis was issued by 

[1997]  452  L.R.L.R.  Henderson v. Merrett Syndicate (Q.B. (Com. Ct.))    Cresswell, J. 
 
the deputy chairman of Lloyd's to the market in which broad guidelines are laid down in arriving at equitable reserves for these risks. Insofar as these guidelines go beyond the information requested in our letter then this information should also be recorded on the file. In particular the following points are covered in Lloyd's letter and do not appear to be specifically covered by our letter. 1. Confirmation that LUNCO office has been visited to check that underwriters records are as complete as possible. 2. Managing agents are strongly advised to carry a reserve which is the higher of the alternative bases (manifestation or exposure) 3. 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 increase the open years reserves accordingly. 4. Syndicates writing London Market excess of loss and personal stop loss should make comprehensive efforts to ascertain the extent of its possible liability beyond losses advised at 31 December 1981. 5. Where the reserve for asbestosis represents a material proportion of the total reserves of the syndicate, agents should consider leaving the account open. However, it is still necessary to ensure that sufficient reserves are set up if any client leaves an account open. [D12/2/18] 
 
17-Apr-82 
 
Washington Post: Hazardous asbestos likely in many of area's old homes. [H3/222] 
 
27-Apr-82 
 
The Washington Post: The asbestos mess. "The likelihood of bankruptcies among manufacturers and insurers, the lack of remedy for the victims and the unmanageable legal mess that is burdening court schedules make it imperative for Congress to stop its endless studying of the problem - this has been going on for years - and take action. [H3/223] 
 
28-Apr-82 MER. 
 
Letter from the Asbestosis Working Party and the chairman of the non-marine reinsurance sub-committee. The non-marine reinsurance sub-committee has recommended that the Asbestosis Working Party make arrangements to add treaty reinsurance asbestosis related claims to the existing computer programme. As the working party has no authority to handle treaty reinsurance matters, this will be a record keeping exercise only. The proposed addition to the computer programme will enable the legal firms handling treaty claims to assess more accurately reinsurers' involvement. [H1/482] 
 
4-May-82 
 
CLOSING OF THE 1979 YEAR AS AT 31.12.81  Asbestos related property damage claims developed from an order made by the US Environmental Protection Agency ("EPA") in May 1982 which required that all schools and similar public buildings constructed prior to January 1979 be tested within 12 months to determine the presence of friable (ie flaking) asbestos. There may have been isolated instances of property damage claims before this order, but this was the origin of the bulk of the subsequent property damage claims. 

13-May-82 

Financial Times: Perils of US Asbestos litigation. "Asbestos claims are the latest and fastest-moving product of the US litigation industry. They run into tens of thousands, necessitate the appointment of additional judges to deal with them, and present a potential threat to [the solvency?] of manufacturing and insurance companies alike. The legal issues generated by these claims are largely unresolved - or, to be more exact, have been resolved differently by different appellate courts. . .. The refusal of the Supreme Court to review the [Keene] case leaves the lower courts free to go their own way, and manufacturers and insurance companies uncertain about their liabilities and claims. . .. That decision represents a financial threat to industry and insurers of such a magnitude that it could be handled only within the assistance of public funds. Commercial Union estimates that, as a result, liability over the next 20 years connected with deaths caused by previous exposure of former asbestos workers could amount to some $38 billion. To this would have to be added claims for injuries that do not result in death, and claims by others, for example those using asbestos products. The combined assets of the asbestos industry and of their insurers would, it is evident, not be enough to meet such claims.. . .The Court [in Keene] went so far as to say that insurers were liable to Keene even during the period its insurance may have lapsed. [H3/226] 

25-May-82 

DOLLING-BAKER RUN-OFF CONTRACT WRITTEN (417 40%) 

27-May-82 

TOOMEY RUN-OFF CONTRACT WRITTEN (417 85%) 

0-Jun-82 

Dr Selikoff and others. Study for US Department of Labor entitled "Disability Compensation for Asbestos-associated Disease in the United States". [I3/AK] 

14-Jun-82 

GOODA MAIN RUN-OFF CONTRACT WRITTEN (417 75%) 

14-Jun-82 

[1997]  453  L.R.L.R.  Henderson v. Merrett Syndicate (Q.B. (Com. Ct.))    Cresswell, J. 

Wall Street Journal Policy Fight: Suits Over Asbestos Touch Off a War Among Insurance Firms Over Who Will Pay Billions. 

. . .Some of 16,000 damage suits have already been filed against these companies, and new cases are piling up at the rate of more than 450 a month. A few experts contend that some insurers could collapse under the weight of asbestos claims. . . .asbestos has been widely used for years in such things as construction products, insulation and brake linings. Between 1940 and 1980, an estimated nine million workers still alive today were exposed to it.. . .Since the hazards of asbestos have emerged, steps have been taken, in manufacturing and installation, to reduce the public's and asbestos workers' exposure, but its uses remain pretty much the same. 

The flood of legal cases is likely to grow. According to a study done for the Labor Department by Dr. Irving Selikoff. . .at least 8,500 workers. . .will die each year until the end of the century from asbestos-related cancers. (The figures haven't yet been published by the government.) 

. . .The fight among insurance companies is likely to get worse. The U.S. Supreme Court has refused to decide between the conflicting theories of liability. This leaves standing a series of often contradictory state and federal court decisions.. . . 

Insurers typically assert that they have adequate reserves to handle the huge asbestos bills, but that view has been challenged by a Yale University economist, Paul W. MacAvoy. Mr. MacAvoy. . .predicts in a study that payments to asbestos disease victims by employers and their insurers are likely to (?) $38 billion - and possibly as much as $90 billion - over the next 35 years. Some insurers, he says, may well face financial ruin. 

Others call such talk nonsense. "As far as I know," says Floyd H. Knowlton, a Travelers vice president, "no carrier, major or minor, is threatened by insolvency." Some outside observers, too, tend to dismiss talk of doom. 

. . .some critics discount it. . . 

Mr. MacAvoy's estimates may or may not be good ones, but they are the only estimates around. None of his critics come up with their own figures, and the individual insurers wrap their asbestos liabilities in a veil of secrecy. "Nobody on the outside knows what the companies' liabilities are," says John Head III, a principal of Morgan Stanley & Co., the securities firm. Even when an insurer such as Commercial Union is known to face extensive asbestos claims, Mr. Head notes, analysts can't be sure, "how much went out the back door" to reinsurers. 

The workers; compensation system of the states was designed to handle job-related injuries, disease  or death. But a University of Connecticut researchers,. . .found that only 30% filed for death benefits under workers' compensation. One reason: Worker's compensation awards don't match the hefty awards made by some juries. Some publicized awards have been substantial: one Texas jury. Some publicized awards have been substantial: one Texas jury awarded a worker $3 million. But insurers say most claims have been settled out of court for much less. [I3D/ZZ] 

14-Jun-82 MER. 

Wall Street Journal: U.S. schools are facing the costly task of locating, fixing asbestos hazards. The EPA estimates that up to 14,000 public and private schools may have potential asbestos hazards.. . .Estimates of the cost of either covering up or removing potential asbestos hazards in the nation's schools run as high as $400 million to $900 million.. . . [I3D/ZZ] 

18-Jun-82 

The Washington Post: Floor tiles cited as source of airborne asbestos fibres. French research report. [H3/228] 

27-Jun-82 

Financial Times: Manville overwhelmed by law suits. Johns-Manville yesterday petitioned for protection under Chapter 11 of the Federal Bankruptcy Code. It is the first time in memory that a constituent of the Dow Jones Industrial Average has taken this step.. . .The Company is now forecasting at least 32,000 more law suits. Mr McKinney said the total costs could exceed $2 billion. [H3/230] 

29-Jun-82 

HUMM RUN-OFF CONTRACT WRITTEN (418 100%) 

7-Jul-82 MER. 

Letter from Elborne Mitchell to the asbestos underwriters concerned per the Asbestos Working Party. We were retained some 18 months ago so that we should, when requested meet with London insurers to discuss the problems arising from asbestos claims. We are not required to do that any longer however we remain available to advise as and when specifically requested. [H1/483] 

15-Jul-82 MER. 

Letter from the asbestosis working party to asbestos underwriters concerned. [H1/484-5] 

16-Jul-82 MER. E & W 

Letter from HR Rokeby-Johnson to Winchester Bowring. Run-off of Sturge non-Marine syndicate. First it must be understood that these claims may be settled on a manifestation basis, an exposure or ingestion basis, or some combination of the alternatives; it is quite possible that the "Keene" decision in Washington DC will have an effect on 

[1997]  454  L.R.L.R.  Henderson v. Merrett Syndicate (Q.B. (Com. Ct.))    Cresswell, J. 

settlement unattractive as it is to the insurance industry and perhaps to common sense. Obviously which theory of settlement wins the day will have a great effect on my re-insurers for the years 1969 and before and even between those who have a greater involvement in the years prior to 1967 and those whose chief interest is the years 1967, 1968 and 1969. It is perfectly possible that settlement could be reached on a different basis on different claims and even on different assureds on the same claim. Sturge keep their statistics on the exposure basis on asbestos. 

Secondly I would like to remind you of the content of a Lloyd's Underwriter's book of business which makes it impossible to quantify the final outcome of these huge and complex claims with any degree of accuracy. Not only were we involved in the direct writing of casualty business from the United States and, indeed, worldwide, but we also had very considerable commitments in the writing of casualty treaties not only to original and excess writers but also the professional reinsurers like the General Re-insurance Corporation. Finally we have an involvement in the reinsurance arrangements of a few Lloyd's syndicates and London companies. 

Asbestosis. The claims arising from the ingestion of asbestos fibres by all those involved in handling this material seem likely to be the biggest claim ever to confront the insurance industry not only in the United States but also throughout the world. Various attempts have been made to quantify the potential final sum of all payments and some very large figures have emerged. Over 7,000 people actually die each year in the United States from asbestosis and it is expected that this figure will soon increase to 9,000 or 10,000 - these deaths and disablements will continue to be reported for the next decade or more and if it is reasonable to suggest that the average settlement of each claim is of the order of $100,000 including costs and expenses and that the number of serious claimants may reach 100,000 or more the final claim would be $10 billion at least. On these figures it is not impossible to forecast the Sturge gross involvement at $40,000,000 - $50,000,000. 

DES. The claim is not going to be settled easily because of the different views of various insurers and insureds about the basis on which the claims should be handled. . . 

Agent Orange. Although there has been some expenditure of money on defence costs this subject has been quiescent for some time. It is hard to imagine that serious claims will have to be met. 

Love Canal. There has been no particular activity on the Love Canal claims since this occurrence was mentioned before. [This letter, together with the letter of 1 November 1982 from Bowrings (GHC  Wakefield and Bowrings) are to be found within the audit working papers of E&W for Syndicate 417 as at 31 December 1983]. [I4E/182 H1/485A D4/408/9 D6/444] 

23-Jul-82 

American Journal of Industrial Medicine: Nicholson, Perkel & Selikoff: Occupational Exposure to Asbestos: Population at Risk and Projected Mortality- 1908-2030. [H3/193A I3 A/K] 

26-Jul-82 

Financial Times: Underwriters prepare for huge asbestosis claims. Insurers face the largest series of claims in their history as victims of the disease asbestosis file suits. By the end of the Century, according to some estimates, the claims could amount to $150 billion (˙85 billion). Insurers, including underwriters at Lloyd's of London, are already involved in or at the periphery of more than 15,000 legal actions. Special reserves are being created by underwriters to deal with the claims.. . .The exposure of Lloyd's on the asbestosis problem is by no means as great, although underwriters there might be liable for anything up to a quarter of whatever is claimed. The likely claims against Lloyd's will exceed by a great margin the amount paid out on computer leasing liability - but the impact of the asbestosis claims will be mitigated by their being spread over many years. The computer leasing claims - more than 14,000 of them - were compressed into three years. Lloyd's identified its difficulties over asbestosis three years ago. Along with other underwriters, those of Lloyd's face a double problem. It insured industrial companies through its own arrangements on legal liability of products and through other contracts, and it reinsured other insurers who had offered liability cover. The main problem for underwriters is extensive litigation as asbestosis victims claim compensation in the Courts. Lloyd's say that the nightmare began in 1971 when a claim was brought in the US against a producer of asbestos. . . "it gives us enormous difficulties in identification of who is responsible for indemnifying the assured," said one underwriter last week. . . "the drawback [of protracted litigation in the US] for insurers is that they are finding it difficult to arrange a fashionable form of reinsurance - retroactive reinsurance cover - on their outstanding liability to do with asbestos claims." [H3/231] 

28-Jul-82 

BURDETT RUN-OFF CONTRACT WRITTEN (417 80%) [C21/1] 

30-Jul-82 

W.I.R. Commercial Union Assurance Co. Ltd. London, considers asbestos litigation a major threat to the property and liability industry. It estimates liability over the next twenty 20 years connected 

[1997]  455  L.R.L.R.  Henderson v. Merrett Syndicate (Q.B. (Com. Ct.))    Cresswell, J. 

with deaths caused by exposure of former asbestos workers could amount to $38,000 million, and that the combined assets of the asbestos industry and their insurers would be insufficient to meet such claims. An average of $233,000 per claim settled has been estimated by a Yale University study, partly financed by Commercial Union. [H3/233] 

2-Aug-82 
 
AW Walker, Projections of Asbestos-Related Disease 1980-2009, Final Report. Epidemiology Resources Inc. Estimated 18,700 excess mesothelioma deaths and 55,120 excess lung cancer deaths through the year 2009. The study foresees 5,963 new mesothelioma suits, 2,660 new lung cancer suits and 27,150 new asbestosis suits. Relied on Johns-Manville by its bankruptcy petition. Estimates between 30,000 and 120,000 new lawsuits related to asbestos. Liability of between $2 billion and $5 billion. [H4/249, 262 & 281W 13A/L 16(11)/107] 
 
28-Aug-82 
 
Financial Times: Manville claims $5,000,000,000. [H3/236] 
 
31-Aug-82 
 
Lloyd's List: Manville faces $2,000,000,000 asbestosis liability. [H3/237] 
 
0-Sep-82 MER. 
 
Report by Conning & Co. Potential Impact of Asbestos on the Insurance Industry. Referred to in the Statement of Mr. Ayliffe, page 34. 
 
The insurance industry's ultimate liability is estimated to be between $4 billion and $10 billion with the lower end of this range appearing most probable at the present time. . .the general pattern of recognition of exposure theory has emerged. . .Generally, the impact on the insurance industry is not expected to be catastrophic because of the long period over which the claims will be experienced. However, the impact upon individual companies could well be severe since there appears to be significant concentrations of coverage in a limited number of insurance companies and their reinsurers. . .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.. . .we believe there is a possibility that numerous excess and reinsurance carriers may be greatly understanding their potential liabilities. . . 
 
Specific insurance company liabilities for asbestos claims could not reasonably be projected with any  accuracy because of the many legal questions which still need to be resolved. 
 
Thus far, the courts have tended to maximize the available insurance coverages in their insurance policy interpretations. 
 
It is difficult to accurately estimate not only the number of current asbestos claimants but also the number of potential claimants as a result of the lack of consistency in published reports of current outstanding claims as well as the long latency period for the disease which is believed to be between 20 and 30 years. As an example of the problem of determining current claim count figures, the estimates as seen in trade journals and other publications suggest that there are currently between 25,000 and 50,000 outstanding asbestos claimants. Insurance company officials indicate that the actual number is probably closer to 50,000. These figures are misleading because of the multiple counting of claims by insurance companies as explained below. 
 
With this as a back-drop, using various sources of information, we estimate that there are currently between 15,000 and 20,000 claimants involved in asbestos litigation. Although published figures indicate a range of between 25,000 and 50,000, the fact that Johns-Manville reports having 16,000 claimants seems to make the 15,000-20,000 range appear more credible at the present time since they have been subject to the bulk of the litigation and have been named in most of the lawsuits. This projected range ignores, however, expected future claim count escalation which again is difficult to project due to the long latency period for asbestos diseases and the continued use of asbestos in recent years. It should be noted that claims against Johns-Manville are currently increasing at the rate of about 400 per month. Before proceeding to project future claim count escalation, it should be noted that the various warning labels and other safety precautions put into place during the late 1960's and 1970's will tend to have a positive impact on future claim incidence as we look out over the next 25-30 years. Specifically, we believe that claim incidence rates will not be as severe after 1990 as in recent years but new claims will nonetheless continue to be reported.. . . 
 
Based on the above incidence rates, between 83,000 and 178,000 asbestos claims can be expected during the next 28 years. Recognizing that not all of these claimants will be successful in either obtaining a judgment or a settlement, we assume that approximately 50% of these claims will be closed without payment. (The 50% probability of a successful claim is based on several studies which have been done on claims which have already been settled and is confirmed by the fact that many claims are now being turned down because they are 

[1997]  456  L.R.L.R.  Henderson v. Merrett Syndicate (Q.B. (Com. Ct.))    Cresswell, J. 
 
judged not to be the "direct" result of asbestos exposure.) This leaves a range of successful claimants of between 40,000 and 90,000. . .Reserves for IBNR asbestos claims do not exhibit a real sense of accuracy from our perspective. [H4/237A 161/5 J11/237 I3A/R] 
 
0-Sep-82 
 
W.I.R. Asbestos: US Government refutes liability. Assistant US Attorney General told a House of Representatives labour standard sub-committee that the Federal Government "will refuse to accept any legal responsibility" for compensation of asbestos victims. Representatives of George Millar, from the sub-committee, said the industry could afford the cost of providing care for asbestos harmed workers.. . .Manville Corporation has released further details of a study which was used to justify its bankruptcy filing last month. The study, by Epidemiology Resources Inc, Boston, estimated a low figure of 30,000 and a high one of 120,000 new law suits related to asbestos health. Manville's estimate of $2,000m based on the lower estimate could go as high as $5,000m based on the higher figure.. . .Dr Irving Selikoff, Cancer Expert at Mount Sinai School of Medicine, New York, has said that the Manville study results were too low. 
 
Agent Orange probe set. "Either through direct reinsurance or excess almost the entire insurance industry is involved in insuring the Agent Orange product." - Leonard Rivkin, Attorney representing Dow Chemical Co. Ltd, an Agent Orange manufacturer. [H4/249] 
 
24-Sep-82 
 
WIR: Asbestos: US Government refutes liability. Manville bankruptcy details. [I6/11/107] 
 
9-Oct-82 
 
Lloyd's List. Manville used two claim assessments. [H4/262] 
 
0-Nov-82 E & W 
 
E&W INSIGHT No. 12. Audit approach: The Committee is preparing four insurance supplements to be used in conjunction with the Guide to the Ernst & Whinney audit approach. These supplements will deal with:. . .(c) Lloyd's Syndicates;. . .It is intended that these supplements will be available in draft form for field-testing on the 1983 audits; as the documentation will not be ready until the new year, 1982 insurance audits must be completed using the integrated audit approach. Intelligence: (d) Financial Times survey on Reinsurance published 6 September. (e) Details of Financial Intelligence & Research's Analysis of the solvency status and underwriting performance of Reinsurance Companies in the London Market (two volumes - ˙245). [D13/361-365] 
 
1-Nov-82 MER.  Letter from Bowring Reinsurance (G H C Wakefield) to the Underwriters at risk. Reinsurance of Fireman's Fund in respect of Sturge run-off. This big increase in the incurred losses is as a result of the Syndicate's re-appraisal of the asbestosis situation and I enclose a copy of a communication from the Underwriter of the Sturge Syndicate to their reinsurers. (Rokeby-Johnson letter dated 16-Jul-82 [see above]) [I4E/182 & 442] 

3-Nov-82 

Lloyd's List: Company files for protection from asbestos claim deluge: Amatex Corporation has filed in Philadelphia for protection under Chapter 11 of the Federal Bankruptcy Code from a deluge of asbestos-related damage suits brought before the company since the mid-1970s. [H4/270] 

30-Nov-82 E & W 

Panel Auditors Meeting. Request for a follow-up meeting on asbestosis. [I4F/246] 

8-Dec-82 MER. 

Lloyd's List: Article by David Mann, Director, Merrett Syndicates: Asbestos Presenting a Growing Loss Potential: "The accumulation of asbestosis claims will obviously have a dramatic effect upon the results of all worldwide insurance and reinsurance markets that have a long tradition of assuming so-called judgment-rated casualty business. . .. 

Settlements made to asbestosis claims will undoubtedly stimulate more claims related to other specific environmental or product-related allegations of cancer causes. Circumstances such as "Agent Orange" defoliation operations during the Vietnam War, the DES drug and the well publicised "Love Canal" toxic waste problem in New York state, are widely recognised examples of the scope of this same phenomenon. This relatively small business area measured in terms of premium is demonstrating a loss potential far in excess of any anticipated development.. . . 

Although many insurers in London, especially in Lloyd's, have established large case reserves, specifically for asbestosis losses, it is undoubtedly in the provision of case reserve loadings for adverse deterioration that many insurers will be considerably tested. Some markets in London, as indeed elsewhere, will probably not have anticipated the measure of likely asbestosis claims. It remains to be seen where deficiencies may exist. Within the Lloyd's market, where very strong opinions are usually to be found, conjecture regarding the ultimate quantum of asbestosis and other latent disease losses has stimulated a relatively new and fascinating level of reinsurance trading. The activity involving unlimited "run off" reinsurance protection against the uncertainty of development of these very long "tail" losses is an example of such unusual innovation. The syndicates in Lloyd's 

[1997]  457  L.R.L.R.  Henderson v. Merrett Syndicate (Q.B. (Com. Ct.))    Cresswell, J. 

which have recently chosen to assume the worst potential of the latent disease phenomenon demonstrate that London is still the source of the most interesting and speculative initiatives. Very few reinsurance markets have found themselves able to apply rating judgment to these most volatile risks except on the basis of a limit of liability. The consensus of opinion, even in London, appears to judge the unlimited aspects of such risk assumption as involving totally unacceptable long term characteristics in view of the premiums available. [H4/281] 

Dec-82 MER. 

[A] letter re: Agent Orange claims. [J11/20/386] 

Dec-82 MER. 

[A] letter Property Damage Litigation against GAF. We have within the past few months become aware of two class action suits pending against GAF and numerous other defendants filed in Pennsylvania. Said actions allege property damage caused by the presence of asbestos materials in schools and other public buildings. . .. 

The class actions are in the very early preliminary stages and we are at this time unable to evaluate the overall merits of the actions, the potential damages, or assured's possible exposure. . . In view of the uncertain status of the claims at the present time, our reserve estimates which are appended to this report do not make provisions for these claims. The property damage claims cannot be reflected in the Claims Information System, which is established for bodily injury claims, and separate reserve provisions for the property damage claims will be established when additional details on assured's potential exposure become known. [J12/9/48] 

29-Dec-82 

JUDD RUN-OFF CONTRACT WRITTEN (417 50%) 

30-Dec-82 

E & W management letter. [14F/255] 

11-Jan-83 MER. 

Press release agreed at meeting of Asbestos Claims Council. To co-ordinate processing the mounting number of asbestos related claims and then speed their disposition, 11 major asbestos insurers and Lloyd's of London have formed the Asbestos Claims Council. "The insurance industry faces overwhelming litigation", said Ray Stahl, chairman of the Council, "with 20,000 claims pending and tens of thousands more expected over 30 years. The flood of asbestos litigation is adversely affecting not only asbestos claimants but others seeking civil resolutions". "The ultimate cost in insurance payments will be in billions of dollars," he added "and, if past experience is repeated, half the insurance payments will be spent on legal fees and related  defence costs". The Council, comprising senior claims executives of the insurers, formalises the objectives they have been pursuing informally: (1) Identification of the objectives as "We are prepared to move rapidly to help solve the complex asbestos claims problems, starting with coordinating claim processing decisions and actions among the insurers". (2) Paragraphs on the people (a long list) with whom the Council will work. Members of the Council and the insurers they represent are, inter alia, James Ayliffe, Lloyd's of London. Raymond Stahl, The Travelers Companies. [H2/1-2] 

Jan-83 MER. 

Letter from [A] to the chairman, Asbestos Working Party, Re. Working Party activities past 12 months in asbestos related problems. RAG Jackson is now deputy chairman. General developments: The continuing increase in suits arising from asbestos related claims and the closer involvement of the London market to the participation in settlements has required the claims committee to have a daily involvement and the working party to meet at frequent intervals. While certain coverage issues have yet to be considered by the Courts, some have reached a final determination which have most emphatically demonstrated the Courts desire to maximise coverage. This was patently evident in the decision of the US Court of Appeals' district of Columbia in October 1981, which expanded the lower Court finding in Keene v. INA.. . . 

Suits continue to be reported at approximately 500 per month.. . .some indications exist to suggest that the severity of injury and/or disease suffered by Plaintiffs is less serious than had formerly been the case, although it is much too early to draw any firm conclusions. All suits are being recorded in the databank, which is proving of considerable assistance to Underwriters' attorneys in developing statistical information vitally essential to the London Market. 

Asbestos claims information office: As the Market is aware, the Working Party has established an information office at Bankside House, Leadenhall Street. That office has up-to-date computer printouts from the databank relating to all claims against the insureds who are of most significance to the London market. These printouts give details of individual claims and the reserves established. Any participant wishing to inspect any of the printouts is invited to do so by appointment. The reserves set out in the attorney's year-end reports relating to these insureds, which are currently being circulated to the Market, are based upon data-bank printouts. 

The Information Office holds an index of all known Market involvements in the direct insurance of 

[1997]  458  L.R.L.R.  Henderson v. Merrett Syndicate (Q.B. (Com. Ct.))    Cresswell, J. 

these insureds. Any Underwriters wishing to confirm his involvement may inspect the index by appointment. . . In addition there is available the fortnightly publication "Asbestos Litigation Reporter" which records all major developments. Property damage: Underwriters should be aware that as a result of an order issued by the Environmental Protection Agency in May last year, it is likely that considerable activity will develop in regard to damage allegedly existing in buildings which incorporated asbestos. The EPA order has mandated that all schools and similar public buildings constructed prior to January, 1979, must be tested within 12 months to determine the presence of friable asbestos. Substantial questions arise regarding both the extent to which any coverage is afforded by wordings issued to insureds, and in the event that coverage is found to exist, the occurrence date for the purpose of attachment. The Working Party will continue to monitor this development, and should remind the Market that many London coverages provide separate limits in respect of property damage. [H2/3-12 J11/303] 

2-Feb-83 E & W 
 
Letter from James Purbrick, Lloyd's Underwriting Agency and Auditor Department to M. Bolger of E&W. Further to the meeting of panel auditors held on 30 November 82, I have now arranged for a "follow up" meeting on asbestosis. On 24 February 1983 at 2.30pm,. . .Mr. Ian Davison and his working party will meet with the panel auditors thereafter at 3.30 [Reply - 7/2/83 from M.A. Bolger] - that Ernst & Whinney would be represented at the meetings by either himself or Nigel Holland. [On the following day Bolger wrote to confirm that it would be Holland]. [D12/3/65-66] 
 
24-Feb-83 E & W 
 
Minutes of Panel Auditors Meeting. H R Rokeby-Johnson, Chairman of AWP: 
 
a) In June 1982 US Labour Dept gave the following statistics: 
     
21 m workers have been significantly exposed to Asbestos in the last 40 years. 8200-9700 deaths from cancer attributed to Asbestosis per annum for the next 20 years. 3000 products in daily use contain Asbestos. $38 billion total claims for deaths expected.
 
b) Alexander Grant of New York are to manage a data bank for direct Asbestosis claims. The input will come from claims attorneys. At present there are 25,000 + claims on the data base. 

Information is available on 1st floor Bankside House. To inspect it one should go with an underwriter. 

There are on file: 19 major cos assured.      39 lesser cos assured.

200 minor cos assured.

c) Johns Manville is the largest chap 11 bankruptcy arising from Asbestosis. Went into bankruptcy 26.8.82 with 4000 closed cases + 17000 o/s.. . .They are expected to get 52,000 cases by the end of the century.

d) Owens Cor[n]ing have 10% of the US market. 

e) The basis of settlement of claims is varied. The following theories are followed: Exposure, manifestation, in the District of Columbia only at present the state Courts have said that the plaintiff may claim in any year - this has worried insurers. 

f) Other points. 

i) In US "Double Dip" can occur: a plaintiff can sue the employer as well as the holding company 

ii) "Down wind" claims: those who have got asbestosis by wind borne dust. 

iii) Buildings: where friable asbestos has been used in buildings that must now be removed. . . 

v) Two reports are available to auditors underwriters Mendes and Mount year end report and the Asbestosis Working Party report. [R3/2/5] 

0-Apr-83 MER. 

Costs of Asbestos litigation. Study published by the Road Institute for Civil Justice. It was mentioned by Mr. Rosow in the lecture he gave on 31 October 1983, which lecture was discussed in the E & W INSIGHT of December 1983. [I4C/92 H4/281A H2/33 D13/380] 

4-Apr-83 

Business Insurance. The asbestos crisis. Some say the insurance industry could be ultimate victim when the dust settles: Will the insurance industry survive the avalanche of asbestos claims hitting it or will it become the controversial mineral's last and largest victim? No-one is sure, but it is clear the industry has never before faced the potential liability brought by asbestos litigation, experts agree. Asbestos companies - and their insurers - already face more than 20,000 claims from workers who say they were injured by exposure to asbestos. . .it is estimated that another 30,000 to 200,000 claims may still be filed. These claims could cost billions of dollars, some estimate, imperilling many primary and excess insurers and reinsurance companies. . ."Asbestos is the single biggest problem we find in the industry," says Floyd Knowlton, at the Travelers Corp. "But the numbers aren't anywhere near the numbers that the Chicken Littles are saying." "It would be premature to say the industry would go bankrupt," adds Dennis Connolly, counsel to the American Insurance Assn. Only under the worst possible scenarios - settlements and jury awards skyrocket and courts adopt policy interpretations that give policyholders the maximum amount of coverage 

[1997]  459  L.R.L.R.  Henderson v. Merrett Syndicate (Q.B. (Com. Ct.))    Cresswell, J. 

would the industry be imperilled, he says. But others, who cite studies that predict tens of thousands will die from asbestos diseases in the next few decades, are not as certain. Insurers like Commercial Union Insurance Co. have long argued that, under certain coverage theories, they won't be able to handle an unprecedented number of claims caused by asbestos and other toxic substances. "Insurance companies are not capable of handling these (claims) on a direct basis" says William E. Bailey, CU's Senior VP and claims counsel, and even those who don't believe the insurance industry as a whole will fail agree that some individual insurers, especially less-capitalised excess insurers and reinsurers, may fall: a major problem, almost all agree, is that no-one has a good handle on what the industries' ultimate will be. "The variables are just unbelievable" says Kent Wilson, a defence attorney with the Chicago law firm of Peterson Ross Schloerb & Sidel. Before any real determination can be made, the industry must know the number of future claims, how much they will cost and how the risk will spread out between primary and excess insurers and reinsurers.. . . 

At least 2 major studies have tried to assess the potential impact of asbestos claims on the insurance industry. Although they reached far different conclusions, both said the impact will be enormous. One by a Professor at the Yale University School of Organisation and Management says the estimated indemnity cost will be $38.2bn compared with a net worth of $11.5bn for the major insurance companies involved. "The large payments that will result from asbestos product liability suits are likely to go beyond the financial capacity of the insurance industry to meet them as well as their other obligations" Professor MacAvoy concludes. "Unless public policy action is adopted, some future claimants will remain uncompensated while certain asbestos and insurance firms will go bankrupt." A study by insurance industry analysts Conning & Co published late last year estimates the potential impact at a much smaller $4bn to $10bn. Conning does not foresee the entire industry going under, but says some insurers could possibly fold. "Generally, the impact on the insurance industry is not expected to be catastrophic because of the long period over which the claims will be experienced", it says. "However, the impact upon individual companies could well be severe since there appears to be significant concentrations of coverage in a limited number of insurance companies and their reinsurers." [H4/294] 

11-Apr-83 

Business Insurance. Some collecting awards though they are not ill: A former worker at a Mississippi shipyard recently won more than $1,000,000 in compensatory and punitive damages for his expo-  sure to asbestos between 1953 and 1971. But the victim, who was diagnosed as having asbestosis had missed 30 fewer days of work in the last 5 years and was currently managing a warehouse in Alabama. [H4/293] 

27-Apr-83 

Letter from the AWP to all insurers at interest. 

The broad discovery ordered by Judge Ira Brown had caused the Working Party to give further consideration on how the Market's interest may best be protected in the continued handling of claims arising from asbestos related products. As a result of consultation with various attorneys who represent London interests, it has been recommended that in order to preserve privilege it will be necessary to remove from the control of brokers all reports on these matters submitted by legal advisers appointed by insurers. Discussions have already taken place with some brokers, and also with the Lloyd's Insurance Brokers Committee, who have advised brokers that they should extract from their claims files all attorney reports produced for insurers and deposit them at the Asbestos Claims Information Office on the 1st floor, Bankside House, Leadenhall Street. 

Arrangements are now in hand to enable the Working Party to deal directly with reporting Counsels, and also to ensure that all participants are kept fully advised by direct circulation of reports. Brokers have undertaken to provide assistance in identifying all subscribers to the various accounts involved, and will of course be processing collections of fees and indemnity in the normal manner. 

The procedure outlined above will apply to both direct and reinsurance claims, and this letter is being written with the support of the Chairman of the NMA Reinsurance Sub-Committee. In order to serve all interests it will be necessary for there to be close coordination in the future handling of direct and reinsurance matters. To this end, all files on asbestos related claims will be maintained at the Asbestos Claims Office, and will be available for review by insurers on the accounts in which they participate. 

The need for direct handling of these matters will not only be time consuming to the Working Party, but will also require that insurers take on the role formerly assumed by the holding broker in handling advices on facultative reinsurance. No doubt you will make the necessary arrangements in this regard. 

4-May-83 

CLOSING OF THE 1980 YEAR AS AT 31.12.82 

Jun-83 MER. 

[1997]  460  L.R.L.R.  Henderson v. Merrett Syndicate (Q.B. (Com. Ct.))    Cresswell, J. 

Letter from [A] to CJ Ayliffe, Merrett's syndicates. Assured:. . .We are aware of a second School District Class Action, which has also been filed in the US District Court for the Eastern District of Pennsylvania. Said action which names a total of 50 defendants, purports to be a class action on behalf of all entities which own or operate on whole or in part any public educational facilities, including religious and non-profit schools as well as public schools throughout the United States. . .. The allegations in the national complaint, which state that approximately 110,000 public and private schools are involved are similar to the allegations made in the Pennsylvania Class Action described above. [H2/19-21] 

Jun-83 MER. 

Letter from [A] to the Chairman, Asbestos Working Party. Re Asbestos Claims Council: Contains text of following news release issued by the Centre for Public Resources. Refers to regular meetings as those involved in asbestos litigation problems to formulate new methods to reduce the enormous complexity and overwhelming costs involved in providing compensation to the thousands of individuals with asbestos related diseases. 

(28) The London Market as it relates to the [asbestos claims] facility. Having had the opportunity of observing events at first hand, we can state that London's Interests have been fully, completely and untiringly represented during these formative stages by Messrs Jim Ayliffe and Keith Rayment who have been participating in claims council meeting since their inception. . .Conclusion: Although some of the members of the Market may be learning of the Facility to the extent set forth herein for the first time, we will be presumptuous enough to conclude that none will have any serious objection to its acceptance, for its acceptance affords the Market benefits not otherwise achievable. The benefits most certainly will be spelled out in significant economies attainable both in indemnity and defence as well as general claims handling. We are reminded almost daily by the press that upwards of 20,000 asbestos cases have been filed to date, (the Lloyd's CIS indicates 27,548 as of May 22, 1983). While overall numbers may differ depending upon whose projections you read, unquestionably, with increasing surveillance and improvement in diagnostic techniques, we can reasonably anticipate that by the end of the day upwards of 50,000 cases will have been filed. . .. With the average indemnity now exceeding $100,000 per case, at the current rate that will equate to a total loss of over 5 billion dollars. Defence expenditures at a one-to-one ratio (which is not the current experience) will equal that number. More realistically they will at least double, and more probably quadruple. It is, therefore, our view that The Facility, with certain modifications  currently being addressed by Working Party members, is essential to the London Market to assist the Market to see the thousands of asbestos products liability claims to their final conclusion. For the Market's benefit we urge its acceptance. [H2/22-32 J12/11 I4C/89] 

Sep-83 MER. 

Letter from [A] to the Interested Insurers and Reinsurers. Pursuant to the request of representatives of the Claims Committee of the London Asbestos Working Party, we provide our summary of the decision reached at the meetings conducted in Chicago on September 6 and 7, 1983. The parties present at these meetings included Messrs. Ayliffe, Health, Kemp and Rayment of the London Market and Messrs of [A] and Messrs of [A]. The meetings first and foremost reviewed and established year-end loss payments and expense reserves for the seventeen direct asbestos assured which are currently tracked by the London computerised Asbestos Claims Information System. . .Following receipt of updated Claims Information System data in early October, 1983, the U.S. attorneys were requested to provide to the Asbestos Working Party through Toplis & Harding (Asbestos Services) Ltd, short letter reports containing year-end loss and cost reserve recommendations for both direct and reinsurance accounts on an exposure and manifestation basis. It was directed that all of these reserve reports shall go forward to the London Market not later than November 21, 1983. Indemnity and expense reserve recommendations shall be separately identified per policy year and particularly where the policies involved are written on a costs-in-addition basis. The reports shall also identify those assureds who face potential loss exposure from asbestos-related property damage claims which may require additional precautionary loss/expense reserve recommendations. . .It was determined that these loss and expense reserve recommendations shall set forth a 100% net reserve figure utilising a ground-up reserve figure per policy period minus underlying coverages and/or self-insured retentions for both direct risks and reinsurance accounts. The reinsurance reserve shall also reflect net retained lines and outgoing facultative placements where applicable so that the reserve recommendations will be a net figure to the London Reinsurers. All reserves will be tied to the original assured's policy periods. All reserve recommendations shall be calculated on the basis of an annual aggregate limit except where specifically shown to be otherwise. It was stressed by the Committee representatives that the U.S. attorneys must adopt a consistent approach to the reserving of the various accounts. Both firms were asked to freely communicate in this regard. The London Market representatives requested that full year-end 

[1997]  461  L.R.L.R.  Henderson v. Merrett Syndicate (Q.B. (Com. Ct.))    Cresswell, J. 

reports serving to justify the reserves previously recommended be forwarded to London not later than the end of January 1984. . . [J12/12] 

0-Oct-83 

Rocky Mountain Arsenal. US Govt brings suit against Shell for clean-up of the site. As a result Shell brings suit against 270 of its insurers. 

Oct-83 MER. 

Letter from [A] to the Underwriters at Interest Assured:. . .Personal Injury. Attached hereto is a schedule of reserves coming through to the various excess layers on the captioned account. Said reserves are for personal injury/wrongful death claims arising out of exposures to asbestos-containing products manufactured by assureds. Underwriters subscribing to Policies should also be mindful of the fact that we have recommended a property damage reserve of $500,000 in connection with the Bay Point bulkhead claim, our file 280,762. Said reserve is on a precautionary basis and is without prejudice as to date of loss. Reserve has not been included in the enclosed schedule. [J12/15] 

Oct-83 MER. 

Letter from [A] to the Underwriters at Interest Assured:. . .Bodily Injury Reserves. These are the following reserves coming through to the following account.. . . Property Damage Consideration has been given to Property Damage. However, since the policies are PL/PD combined and are fully reserved bodily injury, the question becomes mute. . . [J12/16]

Nov-83 MER. 

[A] letter re: Love Canal litigation. [J11/412] 

Nov-83 MER. 

Letter from [A] to the Interested Insurers. Report No. . . .Assured:. . .We submit to the London primary and excess insurers our Report No. 7 [sic] regarding the asbestos-related product liability claims brought against the assured in multiple jurisdictions throughout the United States. This Report will provide only our 1983 year-end loss and expense reserve recommendations to the London insurers. In addition to bodily injury reserves we are also recommending herein a precautionary reserve for each policy period for potential property damage losses which the assured may sustain in the growing nation-wide asbestos-related school and public building property damage litigation. . . [J12/17] 

28-Nov-83 

Business Insurance. Grappling with Pollution Insurance. [H4/300-302] 

Nov-83 MER. 

[A] letter re: Agent Orange litigation. Potential future claims $900,000,000. [J11/21/393]  0-Dec-83 E & W 

E&W INSIGHT No. 19.(387) 2). Asbestosis. The paper by Malcolm Rosow (see Intelligence) gives details as to the extent of asbestosis claims in the US and attendant litigation. Approximately 24,000 claims have been filed in each of which an average of 20 defendant companies have been named. Some 12 insurers are involved in defending litigation while another 15 to 20 have made payments. Costs of some 3,800 closed claims averaged at $95,000 of which only $60,000 represents compensation - the balance being costs of litigation. Costs and compensation are expected to escalate over future years. While the effects of asbestosis claims in the US obviously continue to have implications for London Market Reinsurers, a recent article on the position in the UK commented on the fact that 267 death certificates in 1981 made reference to asbestosis. 3. Other latent disease or product liability claims that may have implications for insurers for 1983 and the future include: (a) Oraflex. . .(c) Love Canal - claims from chemical waste disposal Occidental Petroleum was reported as having submitted an out-of-Court settlement of $25 million. Claimants who were seeking $16,000 million in compensation/punitive damages. (d) Dioxin/Agent Orange. The explosion of the Dioxin plant in Seveso, Italy is the subject of criminal proceedings. However Dioxin was also used in the chemical defoliant agent orange of which Military use was made in Vietnam. Claims of damage to US citizens are still being investigated. 4. Although product liability and latent diseases give rise to many of the long tail claims particularly on US business, medical mal-practice claims are escalating at an even greater rate. [Sets out number of suits in 5 years 1979-1983 for product liability.] These statistics of course give no indication as to the legal basis of the claims involved but provide evidence of the continued willingness to resort to litigation. [D13/380] 

Jan-84 MER. 

Letter from [A] to underwriter at interest. Re: asbestos property damage litigation. Various trigger dates of occurrence or the more limiting term, accident.. . .Under the circumstances, the producers of asbestos products unquestionably will contend that all of the potential triggers apply, perhaps even a continuing trigger from date of first sale to date of last possible connection to damage, a la Keene. In our opinion, absent peculiar facts, there is no basis in the policy wordings or the case law to apply Keene-type reasoning to asbestos-related property damage claims. Whatever the trigger, it is a single, ascertainable event. Continuing damage cases involving multiple periods, like California Union Insurance Company v. Landmark Insurance 

[1997]  462  L.R.L.R.  Henderson v. Merrett Syndicate (Q.B. (Com. Ct.))    Cresswell, J. 

Company, 145 Cal. App. 3d 462 (1983), are inapplicable. We conclude that, in light of the many contradictory judicial decisions on trigger of coverage in property damage cases, the most appropriate trigger in cases involving asbestos products, which are performing the purpose for which they were intended, is the period in which the damage - the diminution in value of the property - first becomes apparent. [H2/57-60] 

Jan-84 MER. 

Letter from [A] to RAG Jackson, Chairman, Asbestos Working Party. RE: Asbestos Working Party activities past 12 months in asbestos-related problems. 

Reinsurance: - The NMA Reinsurance Sub-Committee therefore considered that it would be in the Market's interests if the Reinsurance Market joined forces with the Asbestos Working Party, which at that time was acting solely for the direct Market. 

In view of Counsel's advice that reports from servicing Counsel should not pass through the broker, the Sub-Committee have made increasing use of the Asbestos Working Party's facilities. 

In order to supply reserve recommendations to the Market prior to the year-end, servicing Counsel were instructed to supply a short form report showing reserve and expense recommendations only. Such reports were to be sent direct to the Asbestos Claims Information Office during November and early December. Full detailed reports containing all necessary and relevant information would follow, hopefully early in 1984. 

The Reinsurance Asbestos Claims Sub-Committee study these reports with the object of maintaining continuity in the methods of reporting and to check the accuracy of the reserves: the Market Leaders are consulted and all reports require the Leaders' approval. 

The Asbestos Claims Information Office now maintains the complete record of the Lloyd's and Company Markets, by year and layer, for each individual Reinsurance Contract handled through the Office. 

When a report has been approved by the Leader/s and the Sub-Committee the Asbestos Office circulates the Market. This is done by copy report, together with a schedule showing the amount Underwriters' line is part of; by year and by layer. This procedure maintains the confidentiality, as recommended by Counsel. 

Property damage: - It will be evident from the reports being received by the Market that property damage arising out of the use of asbestos is now developing into a major issue. The Environmental Protection Agency order has caused a substantial number of suits to be filed by municipalities in  respect of public buildings and particularly schools which contain asbestos in their structure. To date litigation activity appears to be limited to this specific area, but bearing in mind the extensive use of asbestos for insulating purposes, it is reasonable to assume that claims over a broader field could develop. 

Difficulties exist from a coverage viewpoint in determining whether insurance contracts respond to such items as repair and replacement of allegedly defective material, inspection fees, loss of use and diminution of value of the property. From a practical viewpoint it is likely that the Courts will find that indemnity is afforded for at least some of these items. Domestic primaries have been influenced by this likelihood, and have been providing defence to Producers subject to reservation of rights. 

Of equal importance to insurers is the manner in which any liability for property damage may attach. Insurers consider that only two bases may exist for determining which contracts respond; either the date of installation or the date of discovery of damage. To date it has not been necessary for Insurers to take a position on attachment of property damage claims. However, the problem will have to be addressed shortly, as a suit has recently been filed by GAF in Los Angeles, which relates solely to property damage. Advice has been received that US Gypsum, one of the leading property damage defendants, has now filed a Declaratory Action against all its Insurers in Cook County, Illinois. 

It is important that there be a uniform approach adopted by the London Market to the coverage issue relating to the attachment of property damage. There have already been indications that Producers may assert that property damage should be allocated over all years from installation to discovery. 

The Facility discussions have yet to address property damage, but every reasonable effort will be made to find a solution short of coverage litigation, which would be very expensive and time consuming. [H2/61-70 J12/67] 

Jan-84 MER. 

Letter [A] to underwriters at interest care of C.J. Ayliffe Re: Asbestos Property Damage Litigation. You have requested advice regarding the date of loss for coverage purposes. The context of your request is that assureds have commenced litigation against you, at least one object of which is to establish an asbestos property damage date of loss for insurance coverage purposes. . . 

For the reasons set forth above, we believe it is proper to assert in litigation that the date of loss under your policies is the date when the underlying claimant recognises that asbestos contained in a building presents a potential hazard to health such 

[1997]  463  L.R.L.R.  Henderson v. Merrett Syndicate (Q.B. (Com. Ct.))    Cresswell, J. 

that the owner has an obligation to take remedial action in connection with the asbestos. . .. It should be recognized there is no controlling decision on the subject in the United States. Until such time as a general rule emerges for this kind of property damage claim, no definitive opinion is possible. [H2/71-74] 

26-Jan-84 E & W 

Meeting of insurance partners and managers of E&W. 3. Nigel Holland stated that it is important that the majority of executives with insurance work have an overall insight into the market and their knowledge and experience is more widely based. 12. Asbestosis will be equally relevant for many London Market companies as it is for Lloyd's syndicates. Nigel Holland informed the meeting that progress towards a settlement involving many of the main manufacturers in the US. was being made and that an announcement to this effect was imminent. The fact that losses may now have to be paid out sooner rather than later may have implications for those companies which have adopted discounting techniques in the past. The chairman of the Asbestosis Working Party is to address a meeting at which E&W will be represented, Nigel Holland will ensure that notes of this meeting are circulated to interested parties. Peter Standish commented that a useful publication entitled "Asbestosis Litigation Reporter" had appeared in the London Market. [D12/4 (135-137)] 

31-Jan-84 MER. 

Letter from RAG Jackson, Chairman of the Asbestos Working Party to underwriters - non-marine market and non ILU. Companies. The matters discussed in this letter concern the most serious claim problem ever encountered by our industry. I cannot over emphasise that it is essential for you to give active consideration to the issues that are addressed, and more particularly, your support to the efforts that are being made to develop a more practical way of handling the asbestos problem. . .discussions with Producers aimed at the establishment of a Claims Facility were reaching a positive conclusion. Final discussions upon the coverage issue took place in San-Fransico on 4th-5th January 1984, at which the two London Market representatives were in attendance. . .agreement in principle has been concluded. . . 

3) Central Facility: Under the proposed plan, all claims will be handled within a Central Claims Facility. . .. It is proposed that there be a market meeting on Monday 13th February 1984. Due to space limitations it is requested that no more than two individuals attend from each underwriting organisation. In conclusion, I feel I must record that the Working Party has been closely associated with the initial concept of the Facility and various  negotiations that have taken place over the past fifteen months. Now that an agreement is developing, you should be aware that members of the Working Party are unanimous in their support to what they consider to be the only practical solution to this difficult problem. [H2/75-79] 

5-Mar-84 E & W 

Meeting of E&W. The main topic of the evening, latent diseases with particular references to asbestosis. 7. Michael Bolger introduced the subject of asbestosis, which is one of the diseases that can arise as a result of exposure to asbestos dust, and has given rise to significant claims under Workers' Compensation and Products Liability Policies (and even under property damage policies where asbestos products have to be physically removed). The problems this presents to the insurance industry are: (a) the question of what triggers the coverage - exposure manifestation or some combination of the two. (b) The length of the latency period (17-18 years). (c) The identification of the relevant insurance policy or carrier. (d) The attitude of the U.S. Courts since the Supreme Court has not set a national standard. 8. There are several theories as to the basis on which liability should attach to a particular insurer: (a) Manifestation. (b) Exposure. (c) Pro-rata.-all insurers share (d) Triple trigger (Keene case). 9. The number of claims is difficult to determine because of double counting, but maybe in the region of 25,000. New claims are still coming in at roughly 500 per month and the peak may not occur until 1990. The main primary insurers are. . .but Lloyd's underwriters are heavily involved in excess lines. 10. A syndicate needs to establish reserves as best it can. To do this it will need to have a proper understanding of policy wordings, and in particular of any aggregate limits written into the policy. Where reinsurance protection is available, careful consideration will need to be given to the adequacy of the security, and an appropriate IBNR estimate will need to be arrived at. Legal costs are soaring, and represent a very significant reserving factor, although the clarification of coverage and the establishment of the claims handling service in the USA should help by reducing litigation. 11. Ernst & Whinney have sent out a questionnaire to clients designed to elicit information as to the sources checked, the records established, the number of losses notified, reserved and settled, reinsurance writings and recoveries and the basis of the IBNR. 12. Steve Abbott stressed the need for our thought processes to be properly documented on file. . .. There is no specific guidance from Lloyd's this year though there was an instruction for the 1981 solvency test that the liabilities should not be discounted. It is generally accepted at Lloyd's that the higher of the amounts arrived at on the exposure or manifestation bases should be 

[1997]  464  L.R.L.R.  Henderson v. Merrett Syndicate (Q.B. (Com. Ct.))    Cresswell, J. 

provided together with legal costs. Reserves must be assessed gross and have reinsurance recoveries deducted. 13. In answer to a question Steve Abbott commented that he was not aware of any syndicate that had kept its accounts open because of asbestosis, although some have done so for computer leasing (which is now basically settled). There may be a need to summon PSP meetings for particular clients during the present audit season. [D12/4 (141-143)] 

11-Mar-84 MER. 

Letter from Ropes & Gray to CJ Ayliffe, Merrett syndicates. Re: toxic waste sites. The New York Times yesterday carried the enclosed report of revised estimates by various agencies of the Federal Government. . .The office of technology assessment has found 10,000 sites that qualify for priority action, and it estimates that the cost of clean-up may reach $100 billion. That office observes that the EPA has only 528 sites on its priority list and has given "remedial clean-up attention" to only 30 per cent. of them. The EPA disputes those figures, saying there are 800 sites on its current priority list, with another 1,200 likely to be added. The general accounting office is preparing it own report on the toxic waste programme that will be issued shortly. One official in the office estimates that there potentially are some 378,000 sites, thought most would not qualify for priority treatment. [H2/80] 

15-Mar-84 E & W 

E&W meeting of insurance partners and managers. 2. In response to a request for any other matters which people felt ought to be raised, Steven Abbott reported that he had obtained a copy of a report by [A] on Agent Orange in relation to Dow chemicals. Although this report gives high figures which might apply on certain assumptions, these are not firm reserve recommendations and the market is treating the document as information rather than as a claims advice. Steve will pass this report to John Philpott so that an appropriate note can be circulated. 3. The increasing tendency to take out aggregate excess of loss reinsurance contracts which were simply banking/saving policies was discussed in the light of the recent publicity surrounding Commercial Union. 5. Peter Standish stated that the insurance partners saw all staff as having a valuable part to play in client maintenance which must precede client development. Clients expect the Ernst & Whinney personnel they meet to know a great deal about the industry. [D12/4/144-5] 

Mar-84 MER. 

[A] report re: DES [J12/26/219] 

Mar-84 MER. 

Letter from [A] to CJ Ayliffe, Merrett syndicates and John Heath. RE: Asbestos insurance coverage cases. Enclosed is a recent note from the Harvard  Law Review dealing with the adjudication of asbestos coverage. I haven't read the Note in its entirety but in general it blatantly asserts that the intent of the contracting parties is irrelevant and the interest of the asbestosis victims is paramount, leading to a conclusion that continuous injury should be the trigger of coverage. I pass it along for your general background information. [H2/81] 

30-Mar-84 MER. 

The Institute for Civil Justice of the Rand Corporation to James Ayliffe, Merrett syndicates. I have enclosed a working draft of our second report on the costs of asbestos litigation. It investigates factors that help explain variation in compensation and expenses. Asbestos litigation is as difficult to do research about as it is important to understand. If you have any comments on the data or their interpretation, I would appreciate receiving them before April 16 when we will begin making final revisions prior to publication. 

Executive\summary: Asbestos-related disease and consequent litigation involve enormous personal and economic stakes: about $1 billion in compensation and litigation expenses had been spent by the end of 1982 on more than 20,000 open and closed asbestos product liability claims. Many times that number of people have been exposed to asbestos, and the potential liability of the defendant firms runs into billions of dollars. Three major corporations have already filed chapter 11 bankruptcy petitions and identify the costs of asbestos litigation as one of the reasons for filing. These costs (both compensation payments and litigation expenses) are a major concern to the claimants, the defendants, their insurers and the public. . .. The asbestos calamity may be unique in scale and intensity, or it may be the forerunner of a wave of environmentally based injury claims of unprecedented dimensions. . .. 

(106) Implications: in summary, the heart of the asbestos litigation problem is its huge scale. Much human suffering is involved. Tens of thousands of the current and future injury claims are worth billions of dollars. The sheer numbers stretch the ability of some Courts to handle the claims, threaten the economic survival of some defendants, and ultimately threaten the ability of the injured parties to receive fair compensation. Because the asbestos problem is immense and because it may influence public reactions to other major health and legal problems, many different responses have been proposed. Several generic lines of reform have been suggested by various people: increased coordination and efficiencies within the existing tort system; establishment of a joint claims facility for settlement negotiation without filing a lawsuit: arbitration; and government-mandated compensation 

[1997]  465  L.R.L.R.  Henderson v. Merrett Syndicate (Q.B. (Com. Ct.))    Cresswell, J. 

systems. We believe that any rational course of action must be based on facts such as those developed by this study. [H2/82-108 H4/307A-307S J11/5 I3A/N] 

6-Apr-84 

WIR. Asbestosis and Beyond: UK Reserving and R-I Enquiry. This refers to the Department of Trade Questionnaire. [H4/314] 

17-Apr-84 

Lloyd's List. Insurers may face waste dump claims. Lloyd's Syndicates face potential claims running into tens and perhaps hundreds of millions of dollars as a result of environmental pollution in the United States.. . .In the biggest action the US Justice Department is suing Shell Oil Co. for $1.8bn (˙1.27bn) for alleged damage to land leased from the US Army at Rocky Mountain Arsenal near Denver, Colorado. Shell has asked for a court ruling that its liability insurers should pay part of the clean up costs at the site and at a tip in Fullerton, California, if it is found liable. Neither case is near judgment, but in the meantime the US Environmental Protection Agency is continuing to identify and investigate thousands of hazardous waste sites.. . .Leading Lloyd's Non-Marine Underwriter Mr. Robin Jackson said the London market should be concerned about these developments because during the 1950s and 1960s it was much more involved in direct business from the US and at much lower limits than now. [H4/315] 

25-Apr-84 probably MER. 

Letter from H Rokeby-Johnson of Sturge & Co to Winchester Bowring. Run-off of Sturge Non-Marine Syndicate I enclose herewith the statistical data at December 31st for transmission to Reinsurers. The industry problem of products related claims as reported to you previously is continuing to pose more questions than are currently being answered and the time has come for a further up-date. The current areas for concern are Asbestos, DES Agent Orange and Environmental claims. Asbestos. It is certainly proving to be the most expensive claim in insurance history and perhaps will prove to be the tip of the iceberg. There is no continuity within the courts as to interpretation of policies other than perhaps "what the assured wants he gets". One hope is that the Asbestos Claims Facility will come into being and at least would drastically reduce legal costs and achieve realistic settlements levels. There are currently over 30 thousand claims and they are still being filed at the rate of 500 per month with no sign of abating. The deterioration in Sturge figures over the last 12 months has almost exclusively been due to inward reinsurance advices and all reserves to date of any moment are strictly for bodily injury, but a serious problem yet fully to develop is Property Damage.  The media are now seriously coming to grips with the School District cases which could alone cost $1.4 billion without considering other industries which, without the same public sympathy, could still prove very expensive.. . . 

DES. DES claims still tend to linger in the unknown and no manufacturer has won a final decision and most have not had their coverage actions heard at all.. . . 

Environmental Claims The EPA is currently very active under both political and public pressure to "clean up America", listing various National Priority sites and has been the instigator of the School District Cases. London is receiving preliminary advices of claims with great regularity, but, it will be some time for proper evaluation to take place. One case that has received certain publicity is US Army v. Shell at Rocky Mouton Arsenal claiming $1.8 billion where Sturge has considerable involvement but again evaluation of this problem will take time.. . . 

Love Canal: Merely a foot note to say that substantial money has been paid but not involving reinsurers and hopefully there will be no involvement for them at all. 

General. My claims director is currently spending most of his time on these problems and is serving on the Asbestos Claims Council with the hope that something can be salvaged and put on to a proper basis for future handling. I regret that this letter does not contain any optimism, but I am sure my reinsurers are only too aware of the increasing problems confronting us daily in America. [Also serving on the Asbestos Claims Council was Mr. Ayliffe of Merretts]. [L2/31/51] 

0-May-84 E & W 

E&W INSIGHT No. 23. Environmental considerations. The following matters are drawn to the attention of Audit staff as a supplement to those reported in INSIGHT 19: 

Non-Marine. The insurance technical section has received a report by Lord Bissell & Brook on the exposure of insurers of the Dow Chemical Company in respect of Vietnam War Veterans claiming injury as a result of agent Orange. This contains figures which are more in the nature of an indication of potential reserves than firm recommendations and the market is understood to be treating the document as information rather than as claims advice. The Financial Times reported on 8 May that seven US chemical companies had agreed to set up a $250 million trust fund to meet claims as part of an out-of-court settlement. [D13/422-6] 

0-May-84 MER. 

Paper presented by Robin Jackson of Merretts, chairman of the Asbestos Working Party to the 

[1997]  466  L.R.L.R.  Henderson v. Merrett Syndicate (Q.B. (Com. Ct.))    Cresswell, J. 

Reinsurance Offices Association. Reported in Reinsurance of August 1984. When the wrangling must end. As we go to press the London Market Asbestosis Working Party is putting the finishing touches to its plans for coping with the avalanche of claims. Robin Jackson explains the problems the Working Party faced: 

About 4 years ago, when asbestos was raising its ugly head and it became quite clear that it was going to be extremely expensive and perhaps even worse for some of us, a time-consuming proposition in the foreseeable future. It was suggested that there should at least be some co-ordination and liaison and passing of information on what was happening with a certain amount of speed around the market, so that everybody if they wished to could be informed of what was going on. . .we have a true market place and it is important, therefore, that everybody be aware of what is going on. . .. As we were getting to a resolution of these meetings which had been going on for 18 months, and Keith Rayment and Jim Ayliffe, London Representatives of the US Asbestosis Claims Counsel had been going over almost every other two or three weeks now for nearly 18 months, it was important that we brought everybody up to date, so in March in London - rather like the provisional meetings in the States were to be with direct insurers - we had a meeting with the direct insurer representatives in London, where we had about 300 people present at two meetings. . .. If I may, I would just like to say a few words as well. There is no doubt that this is the most serious claims problem ever encountered by our industry. The seriousness of it is not only actual quantum of claim but more so in the policy interpretation. As I said earlier, if we could have started at the beginning agreeing on our policies I do not think we would have had quite the same problems that we have had. . .. The basic rule is quite clear, it is to maximise coverage to the original insured. Already existing we have four decisions in different places giving different interpretations of how to maximise coverage, and let us not kid ourselves, we may not like what has gone on, we may not believe that our policies were ever supposed to be interpreted that way, but the Courts are so interpreting them. [L2/29/479-481] 

15-May-84 

CLOSING OF THE 1981 YEAR AS AT 31.12.83 

31-May-84 MER. 

Letter from RAG Jackson, Chairman of the Asbestos Working Party to underwriters at interest. I now wish to take this opportunity to advise you that over this period discussions between Producers and Insurers on the Resolution Committee continued, and a final document has now been prepared which  was generally released to interested parties in the United States on Friday, 18th May. . .I cannot express too strongly the need for unity of approach within the London Market, for there is no question that no further opportunity will arise which can bring to an end the coverage litigation, and at the same time establish a rational and cost-effective way of dealing with the steadily increasing volume of claims that exist. . .. With the increasing involvement of the London Market in asbestos related matters, the development of the Facility and the increasing number of property damage claims, the Asbestos Working party has reached the conclusion that it will be necessary to seek a revised Market Authority to enable us to perform the tasks that lie ahead. . .. As I indicated to the Market in my letter of 31 January, 1984 abets related claims have produced the most serious situation ever confronted by the Insurance Industry. [H2/109-112] 

26-Jun-84 MER. 

Meeting of the Board of Directors of Merrett Holdings PLC. Present: Merrett, Jackson, Hulme, Robson. It was decided to give provisional notice to the R.H.M. Outhwaite (Underwriting Agencies) following the failure of the Underwriters Report on Syndicate 317 to resolve the concern about the liabilities of long-tail sections of the account. [L2/32] 

29-Jun-84 E & W MER. 

Meeting at Merretts between SG Hill of Ernst & Whinney and S Harrison, P McCann and R Ghassemi for a provisional discussion on the 1984 audit of their syndicates.. . .A lengthy discussion followed on the subject of reinsurance to close schedules and it was agreed by Merretts that the current arrangement whereby Ernst & Whinney carried out an internal control procedure and even calculated the reinsurance to close figures for Underwriters was totally unsatisfactory. There was a lack of understanding, and therefore commitment, within the agency as to the requirements of this work.. . .it was agreed that Hill would return to Merretts on Friday 6 July 1984 with examples of the various documents. . .to review the contents thereof with Merretts.. . .With regard to reinsurance to close I propose to go through one of the reinsurance to close sections on an over-view basis to identify the types of information and documentation which are required. It was clear from the discussions that Peter McCann and Stephen Harrison are very concerned with the nature of certain activities we have to perform on our audit. This is not taken as a criticism of our audit but of the agency in not carrying out these tasks themselves. [Memorandum from SG Hill to KP McNamara dated 3 July 1984.] [I4E/213] 

[1997]  467  L.R.L.R.  Henderson v. Merrett Syndicate (Q.B. (Com. Ct.))    Cresswell, J. 

26-Jul-84 

Financial Times. Sedgwick told to provide asbestos insurance facts. Three directors of companies in the Sedgwick group, Britain's biggest insurance broker, have been ordered by the High Court to give evidence in a trial in California arising out of multi-million dollar claims by asbestos victims. [H4/316] 

0-Aug-84 MER. 

Reinsurance Article by RAG Jackson.. . .the Asbestos Working Party is putting the finishing touches to its plans for coping with the avalanche of claims. About 4 years ago, when asbestos was raising its ugly head and it became quite clear that it was going to be extremely expensive, and perhaps even worse for some of us, a time-consuming proposition in the foreseeable future.. . . 

The plaintiff's bar - the true enemy - . . . 

There is no doubt the insurance industry was too slow in the realisation that from the point of view of coverage the courts, if asked, will continue to give an increasingly broad interpretation of how policies will apply. The basic rule is quite clear, it is to maximize coverage to the original insured. Already existing we have four decisions in different places giving different interpretations of how to maximize coverage, and let us not kid ourselves, we may not like what has gone on, we do not believe that our policies were ever supposed to be interpreted that way, but the courts are so interpreting them. The facility offers the only opportunity to provide a rational form of handling which effectively means all the insureds - irrespective of whether they have their day in Court, will be given the coverage on the same basis. The immediate advantages from the insured's point of view are these. . .One chance - The proposed facility is likely to be the one chance we are going to have to get the asbestos problem on to a rational basis. Domestic companies have expressed interest in the facility but if London's insurers and reinsurers can take the initiative and develop all out support it will add a tremendous persuasiveness to those domestic companies who would otherwise sit on the fence. . . 

The grotesque size of our legal fees in continuing this internal wrangling is out of all proportion to what we are achieving, and quite frankly the logistics of this market to handle hundreds of thousands of claims - and it would be hundreds of thousands because generally each original claimant sues seven or eight insureds and as you may only have 30-40,000 claimants but you can multiply by 6 or 7 if you take each of them separately and have a separate defence each time. [H4/316A-D I3B/V] 

28-Aug-84 MER.  Meeting of the Board of Directors of Merrett Holdings PLC. Present: Merrett, Hulme, Emney, Robson. Agency with R.H.M. Outhwaite (Underwriting Agencies) Limited. The Chairman (Merrett) reported that further investigation had revealed that very substantial losses were expected on the non-marine element of business due to asbestos-related claims. In view of the fact that Merrett Names already had a substantial exposure to asbestos-related losses through their participation on syndicate 799 and 417, it was resolved that the provisional notice be confirmed. [L2/33 G/38] 

3-Sept-84 

Letter SR Merrett to M Hussey of the Outhwaite Agency informing him that Merrett Names would no longer support the Outhwaite syndicates 317/661 and saying: 

"As you are aware, our concern has focused upon the 'run-off' contracts protection written which we believe will throw up losses for which reserves will have to be established at the closing of the 1982 account. We are concerned that should there be a further significant deterioration in this part of the account, it will mirror a deterioration in the share of the original business that was written in our own Non-Marine and Incidental Non-Marine syndicate during the 1960s and early 1970s and that the combination of your exposure and ours is too large for the Names concerned to be comfortable with." [Neil para 113] 

0-Oct-84 E & W 

E&W INSIGHT No. 25. Insurance Technical Section. The Insurance Technical Section aims to provide the best service possible for all partners and staff with insurance-related clients. However, given the small resources available to the section (2 professional staff and one administrator), its time needs to be managed very carefully to ensure that priority tasks are executed on a timely basis. Can we therefore ask for all readers of INSIGHT to assist us by co-operating over the following matters: (a) Requests for documentation and modules should be directed in every case to. . .(c) Technical queries which are not urgent. . .should be submitted in writing.. . . 

Agent Orange deal. A $180 million settlement by chemical companies for Vietnam war veterans exposed to Agent Orange has been approved in US Courts. All the major London Market companies and Lloyd's wrote products liability cover for the companies involved. 

Environmental considerations:. . . 

Asbestosis: The latest estimate from Lloyd's is that Asbestosis is likely to cost the Market ˙1.5 billion. As no fixed basis of settlement has yet been agreed, this figure should be regarded as a minimum.. . . 

[1997]  468  L.R.L.R.  Henderson v. Merrett Syndicate (Q.B. (Com. Ct.))    Cresswell, J. 

Lloyd's global result. The 1981 account, closed at 31 December 1983, produced a profit down from ˙264 million to ˙152 million. However, these figures hide an underwriting loss of ˙43.5 million, the first for 14 years. The Chairman, Mr. Peter Miller, has predicted that the next two years will be difficult as well. As was likely, the heaviest losses occurred in the general liability market, particularly industrial diseases. Even after investment income and depreciation the loss in this area amounted to ˙108.6 million. The amount of the reinsurance to close was disclosed for the first time for the 1981 account at ˙1.7 billion. The 1980 comparative was also disclosed at ˙2.1 billion, an increase of nearly 29 per cent. 

Intelligence: (b) The first edition of a new publication called Reinsurance Market Report, published by Risk Research Group Limited. Copies are available.. . .As the firm is subscribing to this publication. . .(c) the insurance technical section receives the following magazines and periodicals: Post Magazine - weekly; Insurance Week - weekly; Marine and Aviation Report - fortnightly; World Insurance Report - fortnightly. Copies of all material referred to in this newsletter may be obtained from Danielle More, Room 411, Beckett House (extension 3466). The present members of the Insurance Technical Section are John Philpot and Raphael Harris. [D13/8/44 O-449 I4D/104] 

8-Oct-84 

The Financial Times. Calculating the cost of asbestos claims. Asbestosis and other asbestos related injuries in the US have already turned out to be the largest natural disaster to hit world insurance and reinsurance markets. It is estimated that there are more than 30,000 individual claims at various stages of processing and about 500 claims are being made per month. The insurance industries are still not able to quantify the ultimate cost of asbestos related claims. Estimates range from ˙8bn to as much as $50bn. . .. Drastic situations require imaginative solutions and the insurers involved hope the proposed Asbestos Claims Facility will go some way to solve the claims handling problems. . .. The prime motivations for creating the facility were the need to find a satisfactory means of solving the various coverage issues and a need to develop a reasonable and practical method of handling meritorious claims at a reasonable cost. [H4/326] 

Oct-84 MER. 

[A] letter re: property damage.. . .myriad of other coverage issues.. . .All of these factors render the assessment of precise property damage reserves most difficult if not impossible at this time. [J12/22/193] 

25-Oct-84  Wall Street Journal. Oil Legacy: In Louisiana, pollution and cancer are rife in the petroleum area. [H4/327-331] 

Oct-84 MER. 

Letter from [A] to the Underwriters at Interest. Assured:. . .We submit herein the following schedules setting forth recommended reserves for asbestos-related personal injury claims asserted against the assured. Pursuant to the Agreement in effect between Eagle-Picher and the London Market as of March 1984, these reserves are based upon implementation of a 5-year "roll-back" wherein the date of occurrence is derived by subtracting 5 years from the actual date of diagnosis. . .Inasmuch as the subject umbrella policies provide for total limits which combine personal injury and property damage losses and the payments in reserves attributable to personal injuries consumed in full policy limits for all layers and all years, we have not recommended separate or additional reserves referable to property damage claims. . . [J12/20] 

Nov-84 MER. 

[A] letter re: property damage. Myriad problems in assessing coverage. Difficult if not impossible to assess property damage reserves at this time. [J12/24/202-4] 

Nov-84 MER. 

Letter from [A] to Underwriters and Insurers at Interest. This document is initialled by or on behalf of R Jackson. Re: Shell Oil Coverage Litigation. Various figures cited for the cost of clean-up.. . . 

We intend to make every effort to achieve early dismissal of these policies either by stipulation with Shell or appropriate motions to the Court. It is premature however to predict the likelihood of our chances of success. [H2/112A J11/434] 

Nov-84 MER. 

[A]: Letter re: property damage. . .myriad of other coverage issues.. . .All of these factors render the assessment of precise property damage reserves most difficult if not impossible at this time. [J12/25/213-8] 

Dec-84 MER. 

Letter from [A] to Underwriters at Interest. Assured:. . .With further reference to the captioned matters, we submit for the Market's consideration the following report pertaining to year-end reserves. 1. Bodily Injury/Property Damage Reserves. . .Predicated upon the acceptance that the primary coverage contained either no aggregate limits or aggregate limits of $10 million for the time periods indicated above, then drawing upon the most recent information provided by the assured as well as data contained in the CIS, no reserves come through to the Market's layers under either the exposure or manifestation approach. . . 

[1997]  469  L.R.L.R.  Henderson v. Merrett Syndicate (Q.B. (Com. Ct.))    Cresswell, J. 

With respect to property damage the Market is aware that the courts have yet to make a determination as to date of occurrence for loss attachment purposes. GAF has filed litigation against insurers in California on this precise issue, however, that case is in its early threshold stages. To like effect U.S. Gypsum has filed suit in Illinois and Keene in Washington D.C. . .Producers support a Keene-attachment which would be continuous from the date of first installation throughout the presence of the asbestos-containing product in the structure. Should the courts reject both discovery and Keene and determine that the date of installation is most appropriate for loss attachment purposes, it is possible that due to rip outs, refurbishments and the like, the installation date could fall at some later point. Therefore, while the Market supports a discovery concept, the Market must be aware that the potential for different attachment dates is present. A myriad of other coverage issues exist in addition to the date of loss question, principal of which are the number of occurrences, whether there is consequential damage beyond damage to the product itself and, if so, the amount thereof. All of these factors render the assessment of precise property damage reserves most difficult if not impossible at this time. Provisionally, we estimate this exposure to be $200,000 per policy year which, in view of the nil reserves recommended herein above with respect to bodily injuries, we would come entirely within the coverage of the first excess layer provided by the Market as written through Messrs. Sedgwick North America and reported under our file reference 290,080. . .. [J12/23] 

Dec-84 

Telex from C.J. Ayliffe to [A]. I refer to our discussion over lunch in regard to the problems which face the Market in coordinating the servicing of claims which arise from hazardous waste. We have arranged a meeting of those insurers who have a major involvement in this problem which will take place towards the end of next week and it would be helpful in our considerations if by that time you could provide me with your comments on your ability to service numerous accounts recognising that inevitably some of those insured will be in conflict. To assist in coordinating the Market's representation it will also be helpful to receive a list of accounts on which you are presently providing a servicing role in regard to E.P.A. claims. Furthermore could I ask that the listing indicates if you are actively involved in conducting the defence of a particular assured. To the extent that information has been developed it would also be helpful to know whether or not the problems in which you are involved arise from the insured being either: A: Owner/operator of Waste site, or B: The trans-  porter of toxic waste, or C: The generator of toxic waste. I await your response with interest. [J13/1] 

Dec-84 MER. 

Telex from [A] to. . .at the Berkeley Hotel. Re: hazardous waste disposal sites. At your request, we have reviewed C. F. Ayliffe's 7 Dec 84 telex message. The following listing identifies the Assureds that we are following which either have reported claims arising from hazardous waste disposal sites or, although not yet reporting claims, are listed by the EPA as potentially responsible parties in connection with the first 539 significant sites. The list also provides information concerning whether the assured is an owner/operator, transporter or generator and the name of the site, its location and a brief description. We note that Marsh & McLennan appears to have contacted its clients and, now, appears to be in the process of repairing claim notices. Other brokers may be embarking on a similar effort. . .In addition, we are aware that other claims exist in connection with Olin, Monsanto and Uniroyal accounts. At present, we are not actively defending any assured in Superfund site litigation. We believe that we would be able to service numerous accounts in the role of servicing or monitoring councils, and, in that role, we do not believe that we would be burdened with a conflict. If anything further is needed, please advise. [J13/2] 

Dec-84 MER. 
 
Letter from [A] to the Interested Insurers. Report No.. . .Assured:. . .We submit herewith our Report No.. . .providing our 1984 year-end asbestos-related bodily injury and property damage reserve recommendation to the London insurers. We are recommending herein substantial increases in our precautionary reserves for the asbestos-related property damage claims. This is because the Assured clearly has become a target defendant in this burgeoning nationwide litigation. . . [J12/21] 

19-Dec-84 E & W 

Meeting of the Panel of Auditors. 

(167) The final part of the meeting was devoted to factors affecting reserving at 31 December 1984 and the meeting was addressed by Stephen Merrett representing the marine market, by Robin Jackson for the non-marine market and Terry Pitron for the aviation market. The main part of this session was devoted to asbestosis, which Robin Jackson addressed. He said that discussions had been taking place with the USA in order to introduce a facility with the original asbestos producers. . .. New advices of losses were still being notified at the rate of approximately 6,000 per year. $50,000,000 has been paid out on claims in 1984. Robin Jackson then made a brief mention of the Manville settlement. He said that the pattern of reserving on 

[1997]  470  L.R.L.R.  Henderson v. Merrett Syndicate (Q.B. (Com. Ct.))    Cresswell, J. 

asbestosis losses was that in the early stages direct losses were notified, then 1983 reinsurance losses were quantified and 1984 was the year for retrocessional claims. Robin concluded by saying that there had been some movement in respect of Agent Orange which perhaps had settled slightly more favourably then was expected. The next major problem for the market will be pollution claims. Stephen Merrett said that there were not many startling developments in the marine market, although some of the pollution claims and in particular the Rocky Mountain Shell claim was a problem for both markets. [D12/4/164-167] 

0-Jan-85 

Rand Institute of Civil Justice Study: Asbestos in the Courts. 

(vii) Period of study late 1983 - early 1985. 

(12) Asbestos suits characteristics quite unlike those of other product liability cases. 

(21) Since 1982 new filings have declined in some jurisdictions remained high in others. 

(24) by the mid-80s, the surge in filings begun in 1978 had ended. . .yet the number of dispositions continues to fall behind the number of new filings. 

(32) The asbestos crisis is far from ending: new filings projected to continue into the next century. In addition new types of asbestos personal injury and property damage cases will continue to be filed in uncertain numbers into the future. 

In addition to the traditional plaintiffs, new types of plaintiff and new types of injury (property damage). 

(41) Cites 1983 Philadelphia Court which notes that litigating with these claimants is like gambling at a casino. 

(114) Seriously injured litigants will be undercompensated, less seriously injured parties overcompensated. [I6(4)/24] 

0-Jan-85 E & W 

E&W INSIGHT No. 26. Environmental considerations. When carrying out work on the environmental considerations input of the SRA work papers, members of staff may like to know that the insurance Technical Section does maintain specific environmental files, relating to all areas of the industry. Accordingly, if you wish to avail yourself of this facility, please speak to a member of the section.. . .A paper, entitled Insurance Industry Scan 1984, has been prepared to summarise many of the more significant developments recorded on these files and will be circulated in early February. [D13/450-461] 

4-Jan-85 E & W 

Meeting of Ernst & Whinney held at the City Office. Present Holland, Bolger, Standish, Hill,  Harris.. . .Nigel Holland stated that historically the reinsurance to close had been on a net basis. True and fair forces the syndicate to gross up their reinsurance to close between the premium element and the claims element. He cited Merretts as an example as having no pattern in their fourth and subsequent year run-off position, although the figures were not particularly large when compared to the reinsurance to close itself. Michael Bolger stated that Lloyd's has a very low expense ratio, and many syndicates will not go to the extra expense of having full risk written records in order to arrive at a "technical" premium accrual.. . .Stephen Hill was quite categoric when he said that if there were no records, then, the auditors should qualify their report. Nigel Holland stated that Davison had felt that a mass of qualified opinions is harmful to Lloyds as a community. He believed that pocket books are being kept at the box, but that they are not related to the accounting records maintained.. . .Peter Standish and Michael Bolger discussed the problems relating to treaty and binding authority business. . .. Nigel Holland stated that historically by ignoring the premium accrual, an extra loading was given to the reinsurance to close. [D12/5/168] 

7-Jan-85 

GOODA ADDENDUM WRITTEN 

22-Jan-85 MER. 

Letter to CJ Ayliffe enclosing recent articles from the Brief including (133B) Asbestos Litigation by R Motley: - "In the last three or four years, the number of claims filed by railroad workers alleging asbestos disease has far exceeded the total of such actions in the entire history of the American railroad industry. These claims reflect a growing awareness of the enormous toll exacted by the railroads' use of asbestos, particularly in the Steam Era.. . .Railroads have long been among the heaviest users of asbestos containing products in American industry". [H2/133A] 

18-Feb-85 MER. 

Letter from Toplis and Harding (asbestos services) Limited to insurers at interest. The steady increase in the number of advices being received in the Market from Insureds who have potential problems relating to environmental pollution emphasises the need establish inter-market co-ordination.. . . Unfortunately, as has been experienced in claims arising from asbestos related injuries, matters involving alleged pollution often extend over many decades, with London placings for individual insureds being handled by various brokers and being subscribed by different markets. . .It is inevitable that environmental pollution will produce many coverage issues for insurers, and if the present indications from the United States can be taken as a 

[1997]  471  L.R.L.R.  Henderson v. Merrett Syndicate (Q.B. (Com. Ct.))    Cresswell, J. 

guide, the London market is likely to become involved in coverage litigation. . . .The coordinated effort that is required in order to address the issues that arise can and must start within the Market. In an effort to explore how this can be achieved, an inter Market group of Claims Managers, whose names are detailed below, have been meeting to exchange views. . . . The purpose of this letter is to give you some insight into the problems that exist and the future developments that are foreseeable; more importantly the manner in which the problems should be addressed within the Market. It must be emphasised that it is not proposed that the active handling and decision making process be removed from the participating Market, but more towards liaison with the Group whose prime task will be to monitor all matters in the general interests of the entire Market. To succeed in this endeavour it is essential that general support is demonstrated, and to determine if this is forthcoming it would be helpful if you could complete the attached letter and return without delay to . . ., Toplis & Harding (Asbestos Services) Ltd., Greenly House, 40 Dukes Place, London, EC3. Signed inter alia, by CJ Ayliffe of Merrett Syndicates Limited. [H2/134-138] 

22-Feb-85 E & W 

Ernst & Whinney note from NF Holland to C Watt. We maintain that a syndicate is a joint venture of one year's duration. Assuming the account is then reinsured, that year ceases. Reinsurance to close, therefore, is not just a matter of what is known at the time but takes into account what is likely to creep out of the woodwork at a later date in order to preserve equity between the closing year and the reinsuring year. A company is an on-going entity and, therefore, any shortfall in the funds one year can be made good in a later year without in any way affecting the entity as such. I accept that an unduly good or bad result may affect the price of shares which, of course, is pertinent for those buying and selling, but I do not believe that it follows that what is good for the companies is necessarily good for Lloyd's. [D12/5/177] 

Mar-85 MER. 

Letter from [A] to RAG Jackson, Chairman, Asbestos Working Party. Report on asbestos working party activities during the past twelve months. 

1. Asbestos Claims Facility. As the market is aware, negotiations aimed at the establishment of the Asbestos Claims Facility have become somewhat protracted.. . .By May 1984 agreement had been reached on all issues within the Resolution Group, and the "agreement concerning asbestos related claims" was released throughout the insurance industry and to all the commercial concerns who had any involvement in the asbestos problem  in the U.S. . .Unfortunately, development of the necessary support has proven to be a slow process, with respect to the insurance industry a number of issues continued to be raised by direct writers who, among other matters, were concerned with the negative attitude being indicated by the reinsurance market.. . .Regrettably as matters stand at present, the absence of participation by the majority of the companies listed above could create gaps of considerable size so as to make the position unacceptable in regard to certain accounts. . .. In the event that the Facility concept were ultimately to collapse, it is important that Underwriters do appreciate the serious problems that could arise in the London Market endeavouring to handle some 30,000 outstanding claims which, from past experience, will increase by some 5,000 new suits each year.. . .during the course of the past year, there have developed new issues in regard to damage to property allegedly caused by asbestos containing materials, which create unique coverage issues which have yet to be addressed. If the solution proposed in respect of bodily injury claims under the Facility Agreement receive the support they deserve, the Facility must be the best forum through which to address resolutions of coverage in regard to Property Damage. This would undoubtedly be a more satisfactory way in which to deal with this particular problem than permitting the courts to adjudicate on the matter, which would only serve to create individual dilemmas by reason of the conflicting rulings that could arise. 

Re-insurance: during the last year the anticipated increase in re-insurance involvement has developed, as is demonstrated the volume of reports now monitored by the Re-insurance Claims Committee [see Toplis and Harding (Asbestos Services) Limited]. It is reasonable to expect this trend to continue as the overall cost of the asbestos problem increases and more cedents' potential exposure exceeds underlying retentions. In addition, it is inevitable that the Market will develop a further up-surge in retrocessional involvements. 

Asbestos declaratory judgment actions:. . .In a more recent decision in the case of Owens Illinois v. Aetna Casualty and Surety, Judge Hogan endorsed the Keene "triple trigger" finding and also held that the decision by Owens Illinois to manufacture and sell the asbestos product, "Kaylo" should be regarded as a single occurrence with the result that only one deductible would apply. 

Asbestos property damage actions: as anticipated, in 1984 there was a continuing increase in the number of property damage actions filed against the producers of asbestos products. . .. As an illustration, in the Maryland action brought on behalf of the Mayor and City Council of Baltimore the Plaintiffs seek actual damages of $225,000,000 and 

[1997]  472  L.R.L.R.  Henderson v. Merrett Syndicate (Q.B. (Com. Ct.))    Cresswell, J. 

in addition seek an unspecified amount of punitive damages and costs.. . . 

Reserves: The Market should be aware that per Claimant reserves on each account continue to be reviewed annually by the Claims Committee together with reporting counsel. Indemnity reserves are adjusted to reflect the historical level of settlements for each account to which is then added a percentage loading - normally 20% - to provide for future inflationary trends. . . It must again be re-affirmed that reserves recommended by your servicing counsel are based on filed claims outstanding for each assured, and no attempt has been made to project an IBNR factor in respect of claims yet to be filed. 

Databank: As has been reported previously, the London Claims Information System (C.I.S.) has proven to be the most flexible system yet devised to monitor Asbestos claims. For some time work has been proceeding on the Claims Facility database with input from Alexander Grant as representative of London's interests. It has now been recognized by both Insurers and Producers that London's system is the only one possible for creating the foundation for the Facility database and, therefore, London will have a much greater say as to the ultimate design of the system. Members of the Claims Committee continue to meet with Alexander Grant to evaluate current requirements and methods in a constant endeavour to reduce costs. Towards this end London now owns the software relating to the Asbestos Databank which, including the purchase, will result in a reduction of costs for 1985 and produce even greater benefits in the long term.. . . [H2/139-150] 

12-Mar-85 E & W 

Meeting of E&W chaired by M. Bolger. Stephen Hill spoke about: (a) the question of Johns-Manville asbestosis settlements was raised. . . (b) the Rocky Mountain claim (Shell chemical waste 1943-44) is still around this year. As this claim involves the US Government there are various bases on which settlement can be made. Paul McNamara is to circulate a confidential memo to partners only regarding this problem.. . . It was also felt important that clients are sent copies of all recent Lloyd's publications prepared by E&W. . .Alan Deeves felt (and Stephen Hill agreed) that syndicates were becoming "little companies". In this respect it was considered that underwriters need educating as to the procedures they should be adopting, and it is our job to educate them. [D12/5/17 8-9] 

19-Mar-85 MER. 

Testimony given by Robin A G Jackson, Chairman, London Asbestos Working Party to Senator Nickels. (Senate Labor and Human Relations Commit-  tee's Sub-Committee on Labor). 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.. . .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 cash-flow to pay claims will continue to demand virtual clairvoyance and a near reckless courage from the 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:. . .Since Domestic USA insurance companies rely heavily upon the availability of proper reinsurance facilities both in the USA and those provided in and through the London Market, the importance of securing all reinsurers' support and cooperation on the Asbestos Claims Facility is therefore paramount. . .. The Asbestos Claims Facility promises to bring order to an otherwise chaotic legal situation while controlling distribution of losses to insurers and ensuring efficient use of the insurance dollars available, not as legal costs, but in proper timely compensation for the victims. . .. The Facility is a good deal for producers, claimants and insurers alike because it will: 

a) set guidelines for handling the fundamental insurance issues of allocating liability and expenses over various policy years; regulating application of deductibles and self-insured retentions; allocating liability for "aggregate" and "any one loss" policy limits; apportioning disputed liabilities between primary, excess, and ultimately, reinsurance carriers; 

b) provide an internal and informal arbitration mechanism for coverage disputes such as continuing defence obligations and applicability of exclusions, as an alternative to costly and protracted litigation; 

c) introduce, by combining the first two benefits, a degree of certainty where none existed before, not only for insurers (and their reinsurers) wishing to determine their eventual asbestos commitment, but also for producers who would for example gain from the release of key personnel committed to claims processing. 

d) offer centralised evaluation, settlement and defence of the numerous future claims arising on a scale which will otherwise swamp existing individual insurer and producer facilities. The opportunity is there for avoiding inefficiency caused by wasteful duplication or duplication of what are, contrary to public belief, finite market resources, and for 

[1997]  473  L.R.L.R.  Henderson v. Merrett Syndicate (Q.B. (Com. Ct.))    Cresswell, J. 

sharing the initial investment and overheads of a single system with other participants; 

e) provide centralised data capture and storage, giving the broadest base for future management exercises on aggregating losses and deductibles, reserving and the like; 

f) achieve consolidation of negotiations, settlements and defences on numerous claims, and thereby reduce overall legal costs, improve the payment of damages to legitimate claimants, and present a "single" defence where literally dozens would have been pleaded before; 

g) eliminate, as one of the Facility's preconditions, punitive damage suits against insurers, and avoid similar actions against producers, by reducing the delays giving rise to such actions and by the Facility itself being evidence of defendants' willingness to resolve claims promptly; 

h) offer to producers an existing mechanism for continued claims handling on their behalf if, and this is a very real possibility for many, their total policy limits available are eventually exhausted by claims. [H2/151-6 I3C/1] 

19-Mar-85 

Meeting of the Directors of Merrett Syndicates Limited. Present: S R Merrett, K E Randall, C J Ayliffe and others. Current Estimates on 1982 Account Results. Syndicate 418/417. The Chairman reported that syndicate 418 appeared to have produced a reasonably good result. However the early indications on syndicate 417 were showing a serious deterioration. A great deal of work was still to be done on syndicate 417 figures but a combined 418/417 bottom line loss could not be ruled out. . . Syndicate 421. John Emney reported that the claims experience on 1982 was exceptionally good and felt that an underwriting profit was likely. However the size of this profit could not be ascertained until more detailed work had been carried out particularly with regard to a number of special risks. [L2/34] 

25-Mar-85 E & W 

Ernst & Whinney meeting chaired by Peter Standish. Standish stated that it was his belief that the existence of a time and distance policy should be disclosed as this was, in effect, a discounting of reserves. He then explained how a time and distance policy worked. John briefly touched on 3 other points: (b) the likelihood that any factor preventing a true and fair report being given may also indicate non-compliance with a specific requirement of the bye-law and hence necessitate qualification in any event. (c) Run-off accounts. It would be noted that if a qualified report is to be given, a full PSP must be convened. . .. Whatever happens, it was felt that as the reinsurance to close brought forward was an agreed figure, the treatment  must be considered by the audit partner, and if necessary a PSP. [D12/5/180 I4D/149] 

12-Apr-8 E & W 

Ernst & Whinney meeting to discuss problems on Lloyd's syndicates. Present inter alia Holland, Bolger, McNamara, Abbott. Peter Standish opened the meeting by stating that the purpose was to discuss where we were on true and fair reporting in terms of bye-law number 7 in general and premium accruals in particular. . . 2. Time and distance policies: It was generally considered that such policies amount to a discounting of the reinsurance to close, and such must be disclosed. . . 5. Qualification of reports. Peter Standish raised the question of whether we can give clean solvency opinion if we give a qualified audit report. It was felt that (a) where there is a specific transgression of the bye-law, we must qualify the syndicate accounts; (b) a non true and fair report amounts to a qualification; (c) if there is a qualification, a PSP must be convened; and (d) a standard qualified report. . .is to be issued covering various circumstances. Michael Bolger spoke at some length on the Neville Russell paper on syndicate audit reports. John Philpott spoke about the problems of run-off accounts. . .. There are attached examples of audit report qualifications. [D12/5/188] 

15-Apr-85 MER. 

Mr. Randall's memorandum to Mr. Merrett refers to "the shattering news of the last ten days". [G/56] 

15-Apr-85 E & W 

Ernst & Whinney meeting. . .Solvency test problems may arise where we are unable to express an unqualified true and fair opinion on the syndicate accounts. . .In cases of non-fundamental uncertainty arising from inadequate premium records, the premium credit which is omitted is likely to outweigh the additional reserve which would be created thus giving rise to a worse view being taken for insolvency purposes which is probably acceptable in the context of the test, although questions arise as to whether names should be advised by their members' agents that they are being penalised. [D12/5/191] 

16-Apr-85 MER. 

Letter from J Robson, Merrett Syndicates Limited, to members of the syndicate. Since I visited the United States in March and talked to many of you about the current underwriting position and in particular the outcome of the 1982 account, it appears that there has been a significant deterioration in some of the business written by marine syndicate 418/417/422 and the non-marine syndicate 421. This will result in an overall loss on the 1982 account. We plan to write to you again during the middle of this week with a more complete picture and details of the loss, by which time we 

[1997]  474  L.R.L.R.  Henderson v. Merrett Syndicate (Q.B. (Com. Ct.))    Cresswell, J. 

shall have a more precise idea of the numbers involved. [L2/35] 

18-Apr-85 MER. 

Merretts letter to Names and meeting with Members' Agents, Great Eastern Hotel. [I4/D/103 G10] 

0-May-85 E & W 

E&W INSIGHT No. 28. John's Manville: In July 1984 certain insurers involved in the insurance of John's Manville Corporation, where significant claims have arisen in connection with asbestos, arranged to establish a claims fund in the USA.. . .Lloyd's issued guidance notes in March,. . .the guidance notes also advocate an accounts treatment of debiting claims paid and crediting interest in respect of treating the syndicate's share of the $77 million as a paid claim and interest accrued on the claims fund. However, the accounts treatment needs careful consideration in the light of true and fair reporting, and a full discussion of the issues involved can be found in Stephen Hill's memo of 12 April which has been distributed to all syndicate executives and assignment leaders. . .. Intelligence: Papers from the fourth General Insurance Seminar, Institute of Actuaries in Australia. [D13/483-9] 

8-May-85 E & W 

K P McNamara paper on 317/661 run-offs. Policies for discussion. During 1984 there has been a very substantial deterioration in outstanding claims which relate to many years ago. The deterioration is related to three major factors; significant further increase in the number of claims for asbestosis; a larger than expected settlement of claims for sufferers from the defoliant used in Vietnam, Agent Orange, and a massive claim from Shell Oil in the USA relating to seepage of chemical warfare products in Colorado which they have been ordered to clean up by the US Environmental Protection Agency. These additional claims have added in the year approximately $70 million to the claims that may have to be paid eventually by Syndicate 317. However, insofar as our client never underwrote the business directly he is not well placed to assess whether the current estimate of outstanding losses is excessively prudent or not. He has made enquiries in respect of one of these contracts which, so far, indicates that the position may be prudent. We are nevertheless left with a major difficulty in determining what the ultimate liability on these contracts is likely to be. Many of the long established syndicates at Lloyd's are having difficulties in assessing the reserves to make in respect of business written many years ago but insofar as the syndicates have expanded greatly in the intervening period the adverse effect of under provision is spread over a greatly increased number of names.  However for Syndicate 317 we are effectly [sic] taking in the adverse run-off for more names than are currently on the syndicate and thus there is uniquely not the dilution that helps the others.. . .The Client's Position:. . .Although it is a standard Lloyd's procedure to close an underwriting account by reinsurance into the following year it is possible to leave an account "open" and thus the 1982 Names stay on risk until such time as it is decided to close the account. It is widely known in the Lloyd's market that Mr Outhwaite has written these run-off contracts, not least by the many people he has insured who believe that he will end up paying out more than he expected. Mr Outhwaite is aware of the controversy surrounding these contracts and also the increased attention created by the substantial losses recently declared by our client, Merrett syndicates. Part of which has arisen from a dozen run-off contracts that they have underwritten some jointly with Mr Outhwaite. Whilst we do not doubt his sincerity in the proposed result for the year we appreciate that he would not wish Names to defect from his syndicate, rather the reverse, which could arise if he declared a significant loss. He has already had Merrett syndicates, who as a sub-agent had placed names on the syndicates, defect following an investigation and he would not wish others to follow.. . .the principal argument put forward by him [Mr Outhwaite] is that the insureds are pessimistic in the notification of the claims outstanding and that it is typical for outstanding claims to reach a peak and then fall out as they are compromised or not pursued. He considers the latter to be particularly relevant in connection with property claims arising on buildings, like schools, built with asbestos linings. However confident he may be it is still necessary for him to consider the adequacy of the IBNR. The client has not produced any documentation or calculations to support the IBNR. Indeed he did not until recently accept the principle of providing the future cost of financing losses provision which he has now effectively made by reducing the IBNR by a corresponding amount. Whilst it is recognised that determining the IBNR is not susceptible to actuarial projection we are in the position of relying on his opinion as to excessive nature of the claims already notified and the ˙34.1 million of IBNR. Our position: Apart from acting as auditors to this syndicate we also act for at least 17 sub-agents who have placed Names on the syndicate. . .the new Lloyd's Regulations effectively stipulate that if we issue a qualified report that the 1982 account will have to be left "open". This course would be highly unpopular with the agent and also the sub-agents for the administrative chaos it would be likely to cause. It has to be recognised that if the account is left open there is every probability that it will remain so until at least 2010 

[1997]  475  L.R.L.R.  Henderson v. Merrett Syndicate (Q.B. (Com. Ct.))    Cresswell, J. 

which creates the difficulties for Names who die, resign etc. However the 1983 Names are already committed and they must receive an equitable premium for the risks they are assuming, particularly those who joined in 1983. There are a series of fundamental issues to address. Firstly whether we are satisfied that the client has done enough to demonstrate that the reserve for IBNR has been calculated after due and careful consideration. Secondly we have to consider disclosure. At the present level of reserve we are assuming an ultimate level of claim payments including IBNR that might be considered by many as being low although the judgment could only be made on the basis of even more limited knowledge than the Underwriter. If however the syndicates were to adopt the level of provision that Merretts were projecting for their run-off contracts then we would need to add approximately ˙40 million to the IBNR or ˙25,000 per name. [I4G/301] 

9-May-85 E & W 

Meeting of E&W partners including Holland and McNamara re Outhwaite Syndicate 317. EOME opened the discussion and enquired whether the numbers had been properly computed by the client particularly in respect of the IBNR. It was admitted that the client had originally been planning to pay out a profit of ˙7 million to the names and the revised figures were showing a distribution of only ˙400,000 and the difference represented adjustments made in respect of points which had been raised in the course of our audit which required the specific adjustment. Nevertheless, it was recognised that the element of IBNR had in one sense remained unaltered and had been initially derived backwards, the figure having first determined what profit the Underwriter wished to pay out. N C L McDonald stated that despite making the adjustments there was still a very large degree of uncertainty because of the sensitivities of the projections to minor changes in the assumptions. He felt that as the initial starting number for the IBNR reserve was unsupportable no matter what changes we had made, the final concluding number still suffered from the inherent defects of the original estimate, as the adjustments we asked to be made represented only specific items and that the original Reinsurance to Close put forward by the client represented an element of the specific and the general and that whilst we had adjusted the specific little change had been made, if any to the general provision despite the client's acceptance of the fact that some interest factor adjustment would have to be made for the payment of claims running ahead of the recovery under the special reinsurance policies. NCLM stressed that he appreciated that we were in an industry dealing with uncertainty and that we naturally expected, but it was nevertheless still possible,  to come to a point whereby the uncertainty was so significant that we would be unable to express a view. He went on to say that insofar as he believed that the Underwriter was not necessarily putting forward a well constructed best estimate of what the outstanding losses are likely to be, that we should in no sense in our audit report, endorse the position taken by the client even in the knowledge that it might well be wrong. . .N F Holland expressed the view strongly that what we did not want to do in our audit opinion was to say that the matter was such that we thought the Reinsurance to Close was understated but that we wished in fact to take a neutral position. KPM supported this view and he appreciated the point that was being made by NFH. If we said it was under-reserved it will be very difficult for us to sign a solvency certificate with an opinion which would have a compounding effect on the overall solvency certificate for the whole of the Lloyd's Market.. . .KPM expressed the view that the professional reader of the accounts would be very much able to form his own view about the adequacy of the Reinsurance to Close if he was able to see that the ratio of the specific element to the IBNR element. It was also agreed that in view of the uncertainties we had, it would be inevitable that we would have to give a form of opinion that was tantamount to a disclaimer and that as a consequence, the account would be likely to be left open probably for many years to come. Note signed by McNamara on 15 May 1985. [I4G/302] 

14-May-85 E & W 

Meeting held at Lloyd's to inform them about the qualification in the audit report of Outhwaite Syndicate 317/661 in their 31 December 1984 accounts. Present, inter alia, K P McNarmara and N B Tyler of E&W. Paul McNamara then explained to Cathy Shorthouse enough of the background for her to understand how we had come to the present position of an audit report with a disclaimer of opinion. He emphasised that the report on the Syndicate's accounts and the report on the Syndicate's solvency position for the 1982 year of account were two entirely separate issues. He agreed that for solvency purposes as the provisions to close 1982 were the Syndicate's best estimate and also that E&W were not saying that this estimate was too low we could sign off the solvency return for the Syndicate. Paul McNamara pointed out that our audit qualification on the accounts was carefully worded to take a middle or neutral view, ie the disclaimer of opinion was purely on the grounds of uncertainty, E&W are not saying they consider the reserves to be either understated or overstated.. . .Maurice Hussey stated that he had discussed the Syndicate's audit report qualification with a number of sub-agents for the Syndicate and they did not disagree with this qualification. Robin Golkes then strongly expressed 

[1997]  476  L.R.L.R.  Henderson v. Merrett Syndicate (Q.B. (Com. Ct.))    Cresswell, J. 
 
his opinion that the 1982 accounts should be closed. He stated that to keep it open was not the best solution as it would not be possible to close it for say 10 years. Cathy Shorthouse then stated that the final decision as to whether a year of account is closed rests entirely with the Managing Agent. She pointed out that discussion on this matter with a Syndicate's auditors would be beneficial but emphasised that the final decision on whether a year of account is closed is the Managing Agent's and not the auditors'.. . .It was thus agreed that the Syndicate could close its 1982 year of account and that the audit report would be qualified with what amounted to a disclaimer of opinion. It was also agreed that the solvency return for the 1982, 1983 and 1984 accounts at 31 December 1984 would be submitted with a clean audit opinion. Note by NB Tyler. [I4G/303] 
 
14-May-85 MER. 
 
Cover Note issued by EW Payne Limited to Merretts summarising Time and Distance policy. [I4D/154] 
 
21-May-85 
 
Letter from MSL (J. Robson) to members. [G15B] 
 
21-May-85 E & W 
 
Note of telephone conversation held on 17/5/85 between Robin Gilkes of Outhwaite Syndicates and NB Tyler of Ernst & Whinney. Tyler said he understood Lloyd's might be reconsidering the ruling they had given E&W and Outhwaite on Tuesday 14 May. At this point Gilkes put the phone down on him. [I4G/305] 
 
21-May-85 
 
Letter from SR Merrett to NC Haydon. We have. . .given serious consideration as to whether the accounts should be kept open. After that consideration, and on the basis of all the information we have concluded that we can quantify an appropriate sum to close the account by reinsurance, and we are therefore proceeding to do so. [G15A] 
 
4-Jun-85 
 
CLOSING OF THE 1982 YEAR AS AT 31.12.84 
 
19-June-85 
 
SIGNING OF WELLINGTON AGREEMENT SETTING UP THE ASBESTOS CLAIMS FACILITY [J11/4] 

24-June-85 

Lloyd's List. Asbestos pact will help cure litigation "epidemic". Soaring legal fees in asbestos cases - already well past the $600,000,000 mark - at last look set to be reined in. . .. The London insurance market is expected to give formal backing to the establishment of the new Asbestos Claims Facility next month.. . .Support by 50 companies and  affected interests, including all the Lloyd's syndicates involved, has nonetheless been greater a giant step forward in dealing with what must be the U.S.'s - and the world's - greatest occupational disease compensation problem. 

Mr. James Ayliffe of Merrett Syndicates, has been nominated London representative, with Mr. Keith Rayment of Sturge an alternate. The two men have been leading proponents of the Facility. Mr. Robin Jackson, chairman of the Asbestos Working Party set by the London market said it was clear that London representatives have committed greatly to the success of negotiations. [H4/393] 

1-Jul-85 MER. E & W 

Letter from Outhwaite to Names. Following the publication of our accounts we have discussed with many agents the implications of the qualified audit report. We have reconsidered the matter and have decided to leave the 1982 year open. [I4G/306] 

19-Jul-85 E & W MER 

Letter from Ernst & Whinney to KE Randall, Merretts. Nigel Holland, E&W. Management letter for the audit of the syndicates for the year ended 31 December 1984. 

3. Reinsurance to Close. 

3.1. We are concerned at the lack of specific designated responsibility for the claims management for syndicate 417. Such management should include responsibility for the completeness and accuracy of outstanding claims records (both gross and net) and the establishment of adequate statistics from which IBNR loadings can be determined. We consider that the establishment of adequate management responsibility for this syndicate is now imperative given the nature of certain of the business it has written and the difficulties that have been encountered. 

3.2 At the present time, certain of the outstanding claims and related reinsurance recoveries of syndicate 417 are dealt with by syndicate 799 personnel. However, we have found the quality and completeness of the data concerned for syndicate 417 to be of an inadequate standard. It has been necessary for our audit staff to allocate a considerable amount of time to establishing the outstanding claims and potential reinsurance recoveries to be reflected in determining the reinsurance to close. Our work has indicated a number of errors and inaccuracies in the records maintained and the assumptions made, and in our view this is primarily due to this lack of appropriate management responsibility. We also consider that you should review the current staffing arrangements for controlling the outstanding claims records to ensure that adequate resources at the right level of seniority are allocated. [I4E/168 G70] 

9-Aug-85 MER. E & W 

[1997]  477  L.R.L.R.  Henderson v. Merrett Syndicate (Q.B. (Com. Ct.))    Cresswell, J. 

Letter from Merretts (P McCann) to KP McNamara, Ernst & Whinney. I detail below our understanding of the major areas of investigation on the run-off contracts for inclusion in your draft letter to reinsureds.. . .If you have any doubts or queries could you speak to Ken (Randall) or David Hart. [I4E/200 (A)31] 

19-Aug-85 MER. 

Telex from Karen Ruby of Merretts to Mendes & Mount. Re. Year-end reserve report. Jim [Ayliffe ?] has reviewed draft report and has made the following amendments which he would like incorporated in a second draft report to be in London in time for Asbestos Working Party Meeting on 22 August.. . .Page 4 para 2 amended to read as follows: "However we must point out that there has been a noticeable increase in the rate at which new suits are being filed which raises the annual rate to 8,500 new cases per year. It is therefore inevitable that an increase in reserves will result but we are hopeful that the facility concept will enable our recommended reserve to be contained at lower level than would otherwise been required for the reasons already stated. For the reasons already stated that are likely to be noticeable variations between different producer insureds. Finally we wish to again emphasise that our recommendations do not make any allowance for IBNR and the market should not lose sight of the fact that new filings are being reported at a rate of 700 cases per month." [H2/157] 

Aug-85 MER. 
 
Letter from [A] to Underwriters at interest. Re year-end reserves various asbestos accounts. On June 19 1985, RAG Jackson executed on behalf of the Market the historic "Agreement Concerning Asbestos-related Claims", which inter alia established the asbestos claims facility. . .. In early 1982 the Claims Committee and Counsel considered that in order to control the ever increasing number of case which were being filed at an alarming rate it would be essential that a data bank be established before the asbestos problem became unmanageable. As a result of a concentrated effort the databank was in operation in sufficient time to address the Market's reserve needs for year end 1982. . . The above points are outlined to demonstrate the many factors which complicate the setting of year end reserves at this time. In addition to the imponderables which have arisen, it has yet to be demonstrated that the necessary co-operation will be afforded by the Plaintiffs' bar to enable the Facility to achieve its objective of providing a viable cost effective alternative to the tort system. Due to these uncertainties it is your counsel's recommendation that the Market maintain a conservative approach in establishing reserves for the coming closing, and to achieve  this we have decided, with the agreement of the Asbestos Working Party, to adopt an average per claim base of $85,000 for our calculation. . ..However we must point out that there has been a noticeable increase in the rate at which new suits are being filed which raises the annual rate to 8,500 new cases per year. . .our recommendations do not make any allowance for IBNR. . .. New filings are being reported at a rate of 700 cases per month.. . . The market is aware that the Facility does not address property damage. The property damage issue of loss attachment date continues to be difficult because there are no appellate court coverage decisions which can be looked to for guidance.. . .The only case thus far involving coverage issues for property damage was decided July 31, 1985 by the United States District Court, District of New Jersey. The trial Judge adopted a Keene type coverage trigger observing that nowhere in the policies at issue could be found language which limited coverage only for the damage which may have occurred during the policy period. [This report was drafted by Mr. Ayliffe.] [H2/158-165 J13/6] 

27-Aug-85 E & W MER. 

Letter from KP McNamara, Ernst & Whinney, to KE Randall, Merretts enclosing a revised draft letter to be sent to each of the insureds for whom Merretts have written the run-off contracts, together with the supporting schedules. The draft letter is attached and there is an appendix stating the standing data required from all reinsureds. Appendix B shows regular information regarding development of the account which is required to be provided on a 6 monthly basis. [I4E/200] 

Sep-95 MER. 

Letter from [A] to RAG Jackson at Merretts. Encloses an updated booklet containing list of companies that had been identified by the Environmental Protection Agency as being potentially responsible parties at hazardous waste disposal sites in the US. An earlier booklet had been sent to Jackson the previous year. It is 165 pages long. [H2/165A] 

5-Sep-85 E & W 

Letter from NF Holland to D Evers of David Evers Limited. Thank you for your letter of 16th August regarding the audit opinion issued in respect of syndicate 317. . . My firm has received a number of enquiries from various agents regarding the issues raised by the audit opinion given in respect of syndicate 317 and although we have heard of several agents wondering why there is a discrepancy in opinion between 317 and syndicate 418/417, your letter is the first occasion in which we have actually been asked to give a formal explanation. As you can imagine, at the time of the audits, this was a matter which concerned us 

[1997]  478  L.R.L.R.  Henderson v. Merrett Syndicate (Q.B. (Com. Ct.))    Cresswell, J. 

considerably and, indeed, it was a matter that was considered by a group of partners within this firm on account of the significance of the issue for the syndicates themselves and also for Ernst & Whinney. I believe the best explanation can be given by drawing your attention to note 2 to the accounts of syndicate 317 which sets out the 3 key points to which the reinsurance to close is sensitive. . . As between syndicate 418/417 and syndicate 317, there is no difference in the question of the problems surrounding the ultimate amount of claims except for one major factor. Syndicate 317 has, in total, almost 60 run-off reinsurance policies whereas syndicate 418/417 is involved in only 12. Inevitably, therefore, the impact of the run-off policies is substantially less as a proportion of the total reinsurance to close in respect of 418/417 than in the case of syndicate 317. You must remember that 1982 was the first account on which we were expressing an opinion as to the truth and fairness of its result. Both underwriters wished to close the account and therefore all the relevant factors that could affect that result needed to be considered and depending on the materiality of the variations of the result so would depend whether or not we could conclude that the result was true and fair. As well as the matters described in note 2, there are uncertainties that attach to the run-off of a long-tail account. In the one extreme are the many lines that will increase for all sorts of reasons over time; in the other extreme are the recoveries, savings or withdrawals of claims. As a consequence the result and the potential extremes of the variations to that result needed to be carefully weighed up and a decision reached as to whether or not those variations were within an acceptable range in relation to the result. In summary, we consider that because of these highly subjective and potentially material variations that it was right to issue a different opinion in respect of 317 compared to syndicate 418/417. You may also care to consider the further position in respect of syndicate 421 where we also did not give an unqualified opinion. The circumstances there, albeit on a smaller scale, were between the position of syndicate 317 and syndicate 418/417. Could I suggest you join me for lunch one day?. . .. [D12/5/197 I4D/112] 

9-Sep-85 MER. 

Minutes of Marine Box Management Meeting. (27) Seepage, pollution. The overall picture looks a little healthier. Reserves in Shell may be over-pessimistic. [D7/25-29] 

11-Sep-85 MER. 

Letter from Merretts to all cedants as per draft letter suggested by McNamara. Dear -, As you will be aware, the above Syndicates 417/421 (the Merrett syndicates) have entered into the above-  mentioned contract, providing in effect whole account stop loss protection for this Syndicate. [I4E/201] 

13-Sep-85 MER. 

Letter from AWP to insurers at interest re: subscriptions for the Asbestos Claims Facility. At this stage difficult to predict impact on reserve movements. Too soon to measure impact of the Facility; there has been acceleration of new claims filed currently running at 8,500 per year. [J11/6/15 5] 

17-Sep-85 MER. 

Meeting of the Directors of MSL Asbestos-related claims.. . .New claims were arising at the rate of approximately 700 cases per month.. . .After the exhaustion of insurance protection in any year, the tendency of the US courts to move claims to immediately preceding years where protection had not been exhausted created potential hazards in reserving. 

v). While recent claims are of a "less serious" nature and the claims facility is now available, much of these advantages could be eroded by inflation. 

Concern was expressed that the full asbestos report would not be available until mid-October at the earliest since the interim review of the 1983 Underwriting Account was largely invalidated if asbestos-related claims could not be included making it extremely dangerous to make positive statements at the Names' meetings. It was agreed that the potential impact of deterioration of asbestos-related claims on syndicate results made investigation into the possibility of updating of the position twice a year, rather than once a year, very urgent. 

. . .The pollution and seepage claims problem was potentially serious but much would depend on the attitude and interpretation of the US Courts to cases put before them. [G84-88] 

24-Sep-85 

Meeting of the Directors of Merrett Syndicates Ltd (MSL). Present: Merrett, Jackson Hulme, Jackson and Randall and others. . .. The delay in receiving the up-dated report on asbestos claims and their potentially significant impact on syndicates 799, 418/417 and 421 now made statements very difficult. However, it was agreed that although a reasonable indication of the likely result was not possible at the meetings, it was essential to give Names confidence that a clear indication would be available reasonably early in the New Year and that there would not be "late surprises" as for the 1982 account. Mr. Randall reported that all the reinsureds on the "special" run-off contracts affecting syndicates 418/417 and 421 have now been circulated with a detailed questionnaire about business written, reinsurance arrangements, required reporting procedures etc. It was envisaged that reserving 

[1997]  479  L.R.L.R.  Henderson v. Merrett Syndicate (Q.B. (Com. Ct.))    Cresswell, J. 

strategy would be greatly assisted with a better flow of information on these contracts. [L2/37] 

Oct and Nov 85 

Meetings of Syndicate members. [F1/127] 

0-Oct-85 E & W 

E&W Audit Planning memorandum for year ended 31 December 1985. The main reason for the large loss in 1982 is the Syndicate's exposure to asbestosis in back years for which there is vastly inadequate reinsurance protection. At the same time, problems have arisen in relation to other "specials" and "run-offs" requiring the creation of additional reserves.. . .General Non-Marine Market. However, it is rapidly becoming apparent that the potential claims arising from asbestosis will dwarf any claim in the history of the Non-Marine Market. It is a fact, however, that in the United States to date under half of the money paid out by the industry has ended up in the hands of the injured party; the balance has ended up in the pockets of the lawyers involved. 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 addition to this considerable problem, the market is also currently dealing with other products - related claims dating back to the Vietnam War and unexpected side effects of certain medicaments. 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 difficult to underwrite against such circumstances. Such subjects require constant reappraisal of the reserves set up in the past to deal with future claims. [I4F/276] 

18-Oct-85 MER. 

Memorandum from Randall to Jackson, Merrett, Robson. Relatively few of the asbestos claims reports have been received and analysed. However, the trends indicated by the early reports (approximately 20 per cent to date) look encouraging and it is to be hoped that the 1985 reserves will be within the IBNR provisions raised last year. However, there is potential for further deterioration on the large numbers of reports not yet seen and the impact could vary quite significantly from syndicate to syndicate. [G92] 

28-Oct-85 MER. 
 
A seminar give by Jim Ayliffe and Keith Rayment in Vienna on "asbestos related claims". [NB: This document has a covering memo from JM Dowlen submitting it as a first draft to CJ Ayliffe and K Rayment for them to change as they wished. The first five out of sixty-seven pages have been corrected (by CJ Ayliffe).]  Jim Ayliffe: Keith Rayment and I have been intimately involved with the subject of our discussion this morning.. . .We have been involved in dealing with problems relating to asbestos claims since the end of the 1970's. . .Keith and I have participated in the London Asbestos Working Party. . .(171) Before I deal with the development of the products law in the USA, I would like to quote to you the opening paragraph in a publication which was put out in 1983, and an additional publication in 1984, by the Institute of Civil Justice in the USA. The reasons why that body, a totally independent organisation became involved in the asbestos problem was the recognition at that time that vast sums of money were being expended in paying lawyers but. . .. The institute did an analysis. . .I think the opening statement in that study puts the whole matter into some sort of perspective: "Exposure to asbestos and consequent litigation involve potentially enormous personal and economic stakes. Approximately 24,000 people have filed products liability law suits claiming asbestos-related injury as of March 1983. Many times that number have been exposed to asbestos.". . .The severity of the asbestos problem is such that the Chairman of the Asbestos Working Party in London has identified it as the most serious problem ever to be encountered by the insurance industry. From a financial impact point of view there is no question that that overview is perfectly correct. To address this problem we have worked diligently over the past few years to find a way of containing the problem, a way in which we can handle the tort litigation and more particularly, a way in which we can use the available funds in a manner which addresses claims and does not enrich lawyers. . .(175) In the 1970's, there was a case brought by. . .a man called Borel, who had suffered work place exposures from the asbestos products supplied to his firm by a number of asbestos suppliers. . .Now that was really the start of our asbestos problem that we know today. . .It did not take long for the Unions to recognise that there was now a way of getting compensation for their members which did not require them to go through the workman's compensation route and get minimum compensation even if they qualified.. . .They started in a small way. . .For the past three or four years we have seen those actions running at a level of approximately 500 new law suits per month. Over the past year, that rate has increased to approximately 750 new law suits per month. We have at the present time no real feeling how long it will be before we have seen a peaking of the legal activity that has been gradually developing, but we now have had filed approximately 45,000 separate actions by individuals. The problem that asbestos produced from the injury aspect, was obviously the latency 

[1997]  480  L.R.L.R.  Henderson v. Merrett Syndicate (Q.B. (Com. Ct.))    Cresswell, J. 
 
period. The time from the first exposure of the individual to an environment that has asbestos dust in the air, to the point when the individual can show a physical disability arising from the accumulation of that dust or fibre, can range between 20 and 40 years.. . .If we therefore assume say a thirty year exposure, it is likely to be the end of the century before we see a major fall off in claims being filed in regard to asbestos exposure. Not all claims arise from individuals exposed in their work place. . .Family members who have been exposed. . .We have claims from persons who live near existing plants that use asbestos. . .(180) A review of the USA Court decisions on insurance policy coverage. . .(183) The decisions on coverage interpretation coming from the US Courts have been, from the insurers' point of view, ever increasing and broad in their findings and in the context of the asbestos problem, I think you have to recognise that nearly every decision that has come down has, to an extent, been insured orientated. . .(184) What we were seeking was equity in the way of our contracts were interpreted. Unfortunately as is typical in the USA, we have not received equity. We have received punitive treatment and our contracts have been expanded far beyond anything that was ever intended when they were written. So the present situation is that we are now forced to accept that the Keene situation is not an aberration, it is a fact of life with which we have to live. . .(186) The concerns facing producers, Plaintiffs, insurers and judiciary, regarding the asbestos problem. . .(187) Asbestos litigation is slowly clogging up the whole operation of justice within the USA. . .(188) From the insurers' point of view. . .the coverage litigation has occupied a tremendous amount of time, effort and expense on the part of the insurance industry. Dare I say, that not only are the producers concerned about their financial ability to respond to asbestos claims. There are not a few insurers who have equal concerns about their ability to remain financially solvent due to problems that have been gradually developing in the asbestos matter.. . .Many insurers can address Asbestos providing it is phased out in the manner in which it has its impact on us. None of us could pay the total cost of asbestos today because we would all be bankrupt. That was the big fear that we had, that unless as an industry we could find a solution, we had the threat of a solution being imposed upon us. (189) That is the background of the problems that all the different parties involved in asbestos claims were facing. . .Let me give you some figures. These come again from the Rand study. The Rand people are an independently financed prestigious body in the USA. They operate under the name of the Institute of Civil Justice. . .Dealing with the total expenditure, the amount expended overall in a similar time-  frame in addressing asbestos-related matters, was just in excess of $1 billion. . . 

Keith Rayment: (190) The formation of the Asbestos Claims Facility. I would like to take up from about half way through Jim Ayliffe's talk this morning. The Keene decision came down in about October 1981. I think from London's standpoint, we saw the writing on the wall in that the Court's main objective was to maximise insurance coverage for the insured and that whatever we did, the Judge would be looking at what was best for the asbestos producer. We felt that we should probably try and make contact with the American domestic insurance companies and the Asbestos producers themselves to see if there was a way we could try and resolve our differences without relying upon the American judiciary. In May 1982, there was a Defence Research Institute seminar on asbestos in Florida, which a number of people from London attended, including Jim Ayliffe and myself. . .We left that meeting in May 1982, somewhat despondent. . .But in October 1982, Jim Ayliffe and myself were invited by the major direct insurers in America to join a committee of insurers at that stage, to endeavour to find alternative solutions to the asbestos problems. (195) How the facility intends to resolve the problem issues. . .(201) Asbestos property damage claims. Unfortunately, this is only half the story. Perhaps a greater liability, certainly more difficult to evaluate at this stage, is asbestos property damage. Reports say that it could be much larger than the bodily injury claims that we are seeing to date.. . .We fear that ultimately there may be claims from utility companies, even house owners which have got insulation in their roofs or wherever. Certain examinations have been done just of small areas of private house owners and over 60% have got asbestos contained within their houses. The claims alone against Johns-Manville (who currently still reside in chapter 11 of the bankruptcy laws) exceed $50 billion.. . .(203) The Johns-Manville bankruptcy. . .The unique thing about the Johns-Manville bankruptcy was that there was another creditor group, the future Plaintiffs group. This body represented those out there who have a cause of action in the future but at the moment do not know this. So there is a committee set up to protect those claimants as well and the Court employed Leon Silvermann to act as their representative. . .(208) Jim Ayliffe: Asbestos related claims: reinsurance issues. (213) Reserving for asbestos insurance and reinsurance claims.. . .That was the professional reinsurers' approach so far as the USA is concerned. It has, I think, produced a degree of comfort to direct writers, it has brought out of the discussion a meaningful relationship on all the parties knowing exactly where they stand. There are a number of spin-off 

[1997]  481  L.R.L.R.  Henderson v. Merrett Syndicate (Q.B. (Com. Ct.))    Cresswell, J. 

benefits that actually evolve out of this which, if anything, benefit the reinsurance industry more than most. One is the area of reserving. The Facility as it is now becoming a much stronger voice (it's one voice speaking for 55% of all defendants in the Asbestos scene), can now produce much more meaningful statistics that all of us badly need, to get a handle as to where we stand in regard to our potential exposures, whether we are direct writers, reinsurers or involved on retrocessions. . .(220). . .All the problems are capable of discussion, but they need to be aired, to be considered, on a commercially sensible basis so that we all know exactly where we stand. We think the Facility has contributed to this because we now have developing a solution to the handling of the original problem. We have in formation the ability to contain the extreme wastage of money on legal costs that we had in the past, the money can now go towards directly settling claims, which is where it should be going. There is a clear line coming through of where the liability of original insurers will attach under their policies. We are able to give a clearer indication as reinsurers how we will respond to that liability and people can now get on with their business of dealing with the Asbestos problem and trying to chart what we do in the future as the problem develops. The big difficulty is none of us know how long it will be before evidence comes through that the asbestos issue appears to be fully under control.. . .The uncertainty is how long it will be with us, in the hope that many of us can continue to withstand its impact over the years to come. [H2/166-238] 

[Also given (H2/237) at Cologne (2/7/85), Hamburg (4/7/85) and Stockholm (19/8.85)]. 

Oct-85 MER. 

Letter from [A] to the Underwriters at Interest. Assured:. . .With further reference to the aforecaptioned account, we submit herewith for your consideration our year and reserve report. 

Bodily Injury. In our general market report of 22 August 1985 [see above] the Market was advised of the signing of the historical Wellington Agreement on June 19, 1985. In that report the Market was provided with a brief history of the past methods employed in reserving for bodily injury and how the methods would be codified under the Facility concept. Without belabouring the Market with a repetition of those comments, we at this time simply allude to the principle points on reserves. The average per claim base has been established at $85,000. Of this sum it is estimated that Facility members will be obliged for 55% Facility members hereafter will share in all cases filed against a Facility member whether named therein or not, but  only to the extent of the producers' Indemnity/Expense generic shares.. . . 

Property Damage. The property damage issues are no closer to a solution now than they were at year-end 1984. Further, property damage is not yet addressed by the Facility Agreement. As Underwriters are aware, producers are arguing for a Keene type of spread going from first installation through discovery, whereas insurers are maintaining that the date of occurrence should be tied into discovery. Keene has in fact recently filed litigation against its excess insurers in the District of Columbia seeking to have the court apply the Keene bodily injury coverage spread to property damage cases. As at this date, only one case has addressed the trigger of coverage for property damage issues. In Lac D'Amiante du Quebec v. American Home Insurance Company, decided in the US District Court of the District of New Jersey, the trial judge held that the "triple trigger" coverage spread applied to both personal injury and property damage claims. This case is presently on appeal, and it is therefore of no precedential value at the present time. . .Since there is still uncertainty with respect to the property damage issues, the assessment of reserves continues to be most difficult. For our 1984 year-end report, we provisionally estimated that this exposure was approximately $200,000 per policy year, and we continue to view this estimate as appropriate. We hasten to add that this is not a reserve recommendation, but is precautionary only, and Underwriters thus may establish those reserves which in their considered judgment are most appropriate under the circumstances. . .. [J13/7] 

6-Nov-85 MER. 

Letter to Insurers at Interest. Re Environmental Claims Group - Pollution Crisis. Further progress report from the ECG following letter circulated in July. . . 

There are more than 15 declaratory judgment actions involving London insurers already proceeding in various US courts.. . . 

There are a substantial number of other declaratory actions against US insurers and the 6 lawyers have been asked by the ECG to file amicus briefs in those cases where US insurers are taking positions which are incompatible with those that London insurers would wish to adopt. [J13/10/125] 

0-Dec-85 E & W 

E&W report to the assignment partner. Asbestos: These provisions are difficult to assess. because there are known uncertainties with respect to the Fireman's Fund (manifestation or exposure), and also with regard to potential new advices for property damage claims. Last year saw a marked deterioration in the number of asbestos claims; the number of sufferers making claims having risen 

[1997]  482  L.R.L.R.  Henderson v. Merrett Syndicate (Q.B. (Com. Ct.))    Cresswell, J. 

from 500 to 700 per month. This year the number of claims per month has risen to 1,000 per month. The claims facility which was being promoted last year has now become effective and it is hoped that it will eventually result in a reduction in costs per claim, although these effects will not be seen for the first year. Agent Orange: Any inadequacy of this reserve is likely to be immaterial. DES, DDT. Environmental Protection Act: This covers the Shell-Rocky Mountain clean-up. The 1984 Reinsurance to close included a reserve of $5 million to which a 50% loading was added. The reserve is based on lawyers' estimates and the eventual claim could be higher, so that the above reserve would be inadequate. Environmental protection claims are causing some concern at the present time in view of the large number and settlement amounts. Merretts have taken the view that their syndicate, which has written general liability risks over many years, with very little reinsurance protection in the early years, is particularly exposed in this area - particular if they are to be settled on an exposure basis. Thus Merretts have decided to provide for two further losses at IBNR, on the same basis as the Shell claim: i.e. $5 million in respect of each loss. (This spreads a claim of $250 million over all the years of Syndicate 417, up to 1975.) While some reserves may appear ultra-conservative, it must be considered against potential under-reserving in the case of asbestos losses. Run-off contracts: Last year, the run-off contracts written into the 1981 and 82 years of account saw marked deterioration. Additional information was sought from reinsureds, to provide the latest information, particularly in respect of various latent disease claims, including asbestos, and also in respect of Shell and the actuary then projected what he felt the IBNR factor should be, based on the factors used for 799. The IBNR provision determined by him was 75% of the then outstanding losses. However, in view of the poor reinsurance protection enjoyed by Syndicate 417, by comparison with 799, together with the experience of 417 itself and knowledge of some of the underlying insureds, such an IBNR provision appeared inadequate. Thus the IBNR provision became 100 per cent. of the outstandings. Syndicate 418:. . .In respect of the run-off contracts the policy adopted has followed Syndicate 417, which is written in greater detail below. A special loading of $4 million was provided at 31.12.84, which brought the overall loading on noted outstanding claims to ˙15.3 million or 90% of noted outstandings. As with Syndicate 417, this is considered prudent in view of the possible inadequacy of the reinsurance programme of the underlying insureds. The run-off contracts, written by Syndicate 418 have proved to be particularly exposed to latent disease losses and it has been recognised that the  reserves provided to date may prove to be inadequate in the long term. [D8/402] 

9-Dec-85 

Financial Times. Break through in Manville asbestos claim wrangle. Although Mr. Silverman has not released details of the settlement plan, it is believed to incorporate elements of previous proposals aimed at providing $2.5 billion for present and future asbestos victims. A further $125,000,000 or more is likely to be allocated for property damage caused to organisations - particularly schools - which have had to remove asbestos insulation from their buildings. [H4/429] 

1986 

The Asbestos Hazard Emergency Response Act: Its purpose was to provide for the establishment of Federal regulations which required inspection for Asbestos-containing material and implementation of appropriate response actions with respect to asbestos items containing material in the Nation's school in a safe and complete manner, to mandate safe and complete periodic reinspection of school buildings follow response actions, where appropriate, and to require the administrator to conduct a study to find out the extent of the dangers to human health posed by asbestos in public and commercial buildings and the means to respond to any such danger 

13-Jan-86 E & W 

Meeting of E&W under the chairmanship of M Bolger. Numerous points were covered on the agenda and brief notes were included extracts from journals were handed out (202). An article appearing in post magazine of 19-26 December 1985 was handed out. A document entitled "industrial diseases" by Dr J Underwood was handed out. A comparison was made between specimen syndicate accounts of A Beckett and M Black. [D12/6/199-208] 

13-Jan-86 E & W 

Article by Dr JG Underwood industrial disease problems (undated by circulated at E&W meeting on 13 January 1986 (D12/202)) and the article contains a section on insurance problems: asbestos diseases. With a description of some of the US legal issues (232-233) it contains predictions of annual deaths. [D12/6/212-236] 

0-Feb-86 E & W 

Ernst & Whinney press release concerning a seminar on reinsurance to close organised by them "recently". Mr. Bolger emphasised that prudence remains all-important, especially vital in the circumstances surrounding long-tail business such as losses arising from asbestosis, pollution and waste disposal. On the related subject of discounting, Mr Nigel Holland, the London-based chairman of the 

[1997]  483  L.R.L.R.  Henderson v. Merrett Syndicate (Q.B. (Com. Ct.))    Cresswell, J. 

Ernst & Whinney International Insurance Committee, warned: "discounting should not be applied in the reinsurance to close calculation unless the amount of the future liability and the timing of the payment can be ascertained to a high level of accuracy. Given the many uncertainties which surround long-tail business, our view is that discounting such reserves can only compound the problem". Ernst & Whinney is one of the five largest international firms of accountants, advisers and consultants and in the UK has one of the larges insurance practices. For further information: Charles Watts - Nigel Holland - Michael Bolger, Ernst & Whinney. [There follows an account of the seminar. Nigel Holland gave an introductory paper. Another speaker stated] (239) as Nigel has stated and Charles Watt will reinforce from the tax viewpoint, it is most important that reinsurance to close is properly calculated and fully documented. As indicated on the slide an underwriter must identify what records he requires to document his reinsurance to close. The records must be adequate, they must be retained as part of the syndicate accounting records and they must be fully reconciled as between box records and those maintained in the agent's office. What should the records to document the RI to close comprise? Inevitably the calculation will be claims based and so as a start the records will include summaries or calculations of: claims reported - outstanding claims; claims not reported - IBNR; reinsurance recoveries in respect of the two other components. I turn now to what the component parts are and how these should be arrived at and recorded, remembering that it is the agent's responsibility to prepare them and to assess the RI. Claims reported: records should be maintained on a case by case basis and estimates should be prepared and reviewed so that claims are evaluated at the cost of settling the claims together with direct expenses and in particular legal costs. . .The outstanding claims should be summarised and the underlying records be readily available for inspection. Statistics should also be maintained to compare reserves established with the eventual cost of settlement of the claims. Claims not reported (IBNR): this represents the most judgmental area of the reinsurance to close calculation. The objective of the overall calculation is to arrive at the ultimate cost of settling liabilities attaching to the business written for a year of account and earlier years reinsured into that year. Different methods are used in the market to arrive at reinsurance to close: - Projections of paid claims; projections of incurred claims (paid and outstanding); projections based on premiums written in order to arrive at an ultimate loss ratio from which a deduction is made of claims settled to date. No one method can give the right answer but the more bases that are used the more  confidence can be placed on the answers obtained. Projections should be carried out gross in the first place. Reinsurance protection is another variable. . .The size and importance of the IBNR will be determined by the nature of the business written. Therefore projections should be carried out separately on different areas of the account segregating major classes and currencies. Care should be taken to ensure that any changes that have occurred in the business mix of the account are fully reflected in the calculations. What is of paramount importance is that the quality of the data used in any of the exercises performed is good and clear and can be readily reconciled to and is consistent with the financial data. . .As I have already said alternative methods should be used and documented in the reinsurance work file. Furthermore the assumptions taken and conclusions drawn should be challenged in the light of current circumstances. . .(245) I was amused to receive from one of our underwriters a missive at the conclusion of the discussions on his reinsurance to close the 1982 account during which we had debated what reserves should be established for the Shell Rocky Mountain Arsenal claims. It was in the form of a photostat of a cartoon depicting two in-mates of one of Her Majesty's prisons. One says to the other "the long and short of it was that generally accepted accounting practises were not as generally accepted as I thought". The underwriter had added a little note to me which read "SRMA to you!". . .True and fair:. . .the tests to be applied as to whether or not the annual report has been prepared to a true and fair standard are the fundamental principles shown on the screen, which we have discussed earlier and of course the reinsurance to close is an integral part of the closed year underwriting account. . .. Discounting- provision for future investment income:. . .Against this background our view is that discounting should not be applied in the reinsurance to close calculation unless the amount of the future liability and the timing of the payments can be ascertained to a high level of accuracy. Given the many uncertainties which surround long tail business, our view is that discounting such reserves can only compound the problem. Lloyd's adopts a three year accounting system and in many cases liabilities which are still outstanding at the end of that period are likely to contain uncertainties as to amount and timing. . .Time and distance policies. Two types. Conclusion: I should like to conclude this paper by emphasising the need to prepare a comprehensive set of schedules to demonstrate how the reinsurance to close has been calculated, that the fundamental accounting principles have been considered in preparing the calculations and their proper disclosure is made to syndicate members in the annual report. [D12/6/237] 

[1997]  484  L.R.L.R.  Henderson v. Merrett Syndicate (Q.B. (Com. Ct.))    Cresswell, J. 

18-Feb-86 

Memorandum from Mr Bolger to insurance partners referring to a recent meeting between Lloyd's and recognised auditors. 

In the non-marine market, the asbestos claims facility which was signed in June 1985 by 34 producers will lead to a revision in reserves at 31 December 1985. There are at present about 46,000 claims in the market. Claims are being notified at the rate of about 1,000 per month but now appear to be "cheaper". On expense costs, as a result of the facility, defence costs have fallen to about 20-25% but the facility is making a charge of about 10% which is to be borne in the direct market only. 

The Johns Manville money invested in New York includes a London Market share of about $110m. This money is soon to be dispersed and this will represent a large cash outflow in 1986 on both direct claims and retrocessions. 

It was reported that asbestosis will also extend into property damage claims. 

Environmental Pollution claims will see an uplift of about 5% for legal costs. 1985 is not expected to see much movement on the Shell Rocky Mountain claim but the years 1986-1988 should see a greater movement. 

21-Feb-86 E & W MER. 

Letter from Lloyd's to all Active Underwriters, Underwriting Agents and Accountants approved by the Council of Lloyd's. Re: annual solvency test of underwriting members - 31 December 1985. [14B/16] 

25-Feb-86 MER. 

Letter from the Environmental Claims Group to insurers at interest. You may recall that in our last letter dated 19 November 1985 the Environment Claims Group (ECG) said that there were more than 15 declaratory judgment actions involving London Underwriters already proceeding in various US Courts. There are now more than 20 such actions. . .. Where in asbestos we are concerned with the bodily injury and property damage claims brought in respect of the products of some 20 major assureds, pollution involves potentially hundreds or thousands of different assureds being sued by many different parties in respect of different types of injuries and damage. Underwriters have already been asked to give discovery of documents in the Shell Rocky Mountain Litigation, Diamond Shamrock Dioxin Litigation and a number of others. Members of the ECG: inter alia, CJ Ayliffe, Merrett Syndicates Limited. [H2/239-241] 

16-18-Apr-86 MER. 

Presentation by Robin Jackson to the European Product Liability Congress of the Cologne Re in Berlin. As is clearly indicated from the enclosures,  the London Market as long ago as 1980 recognised the potential problems that could arise for the reinsurance industry out of asbestos related bodily injury claims. The unique position occupied by London in the International Reinsurance Community has tended to emphasise our predominant involvement for many decades, and it was our perception that in the interests of the reinsurance community it was necessary for London to be seen to be providing leadership in addressing the problems that would arise in the context of asbestos related claims. [L2/30/484] 

17-Apr-86 MER. 

Address by Robin A G Jackson in Berlin. Subject: "asbestos - the London response". (249) We must remember that particularly in the USA an insureds vulnerability to litigation is not only determined by his guilt or involvement in any loss situation, but by the depth of his pocket also. Do not equate the US judicial system with justice. . .(251) Our reinsurance industry is facing the greatest crisis in its history. We cannot allow any continuing bitterness, or any unwillingness to face these problems, to distract us from today's task of dealing with the many other threats to our corporate survival. [H2/242-251] 

19-May-86 E & W 

Draft notes signed by SG Hill on the operation of the asbestosis facility. [D12/6/273-4 & 295-6] 

30-May-86 MER. 

Letter from RAG Jackson, chairman of the Asbestos Working Party to insurers at interests. I forwarded to you under cover of my letter of 7 May a copy of the presentation made on behalf of the London Market to the European Product Liability Congress in Berlin on 16/18 April 1986. . .(254) It is almost a year since the inauguration of the Facility and, bearing in mind the problems that inevitably arise in setting up such a major undertaking, remarkable progress has been made in addressing asbestos claims. . .. It is too early at this stage to project the reserve movement the London Market is likely to see at the coming year-end, however there are now in excess of 40,000 claims outstanding, and the rate of new suits filed over the past year has reached the level of 1,000 filings per month. There has in addition been an increase in the average per case settlement level achieved by the facility, which is in part affected by the recent resolution of a major class action filed in Texas. If no relief develops in these trends, it is likely that reserves will see a further deterioration, particularly when coupled with the growing asbestos property damage problem, which will impact on I.B.N.R. provisions already established. [H2/252-5] 

0-Jun-86 E & W 

[1997]  485  L.R.L.R.  Henderson v. Merrett Syndicate (Q.B. (Com. Ct.))    Cresswell, J. 

E&W INSIGHT No. 32 (492) Audit brief - Lloyd's syndicate. In March 1986 the Auditing Practices Committee of the Consultative Committee of Accountancy Bodies issued an audit brief dealing with Lloyd's syndicates. . .. The issue of this brief, however, has not given rise to any changes in the Ernst & Whinney audit approach for Lloyd's syndicates. . .. The Asbestosis Facility: This facility was set up following the finalisation of an agreement on asbestos-related claims (dated 19 June 1985) in an attempt both to speed up the payment of compensation to claimants and to reduce legal costs associated with such claims.. . .When a claim is settled, it is allocated to those participating in the facility using a complex formula; this recognises the involvement in each policy year to which the settled claim is deemed to relate. There is no distinction as to a definitive producer to whom the claim relates as this is almost impossible to determine accurately, because the claimant may have been exposed to asbestos products from different producers over the relevant time period. Obviously such a basis does mean that certain producers and their insurers are going to contribute towards claims which do not relate to them; however, it must be borne in mind that they will not be bearing the full cost of a claim which does relate to them because of the sharing mechanism. . .. It is understood that, by about the end of March 1986 some 8,000 claims had been cleared from an initial notification to the facility of about 52,000 claims. [D13/490] 

2-Jun-86 

CLOSING OF THE 1983 YEAR AS AT 31.12.85 

19-July-86 MER. 

Meeting of the Asbestos Working Party. Mr. Ayliffe reported on the recent annual meeting of the Asbestos Claims Facility in Princeton on 3 July.. . .At present there were 40,700 outstanding cases. 4,050 new cases had been notified to the Facility during the months of January to April. This was continuing the 1,000 new cases a month rate which had been experienced at the commencement of Facility operations. This was unexpected. It had been felt that notifications of new cases would fall off once the facility was established. 1C Fibreboard:. . .the potential share of costs already incurred which would fall on the London Market, if their policies respond is $15 million. This is by far the largest sum outstanding against the facility. With this and other outstandings the facility will be unable to pay further settlements. 2. Environmental matters: The subject of lobbying was discussed. Mr Jackson reported that he had spoken to the Chairman of Lloyd's on the subject of lobbying. [J12/19] 

30-Jul-86 MER.  Letter from Guardian Royal Exchange to RAG Jackson, Chairman of the Asbestos Working Party. Observations on the recommendations of Mendes & Mount's basis for claims reserving. 1. The notional annual inflation factor of 10% may be in line with general inflation, but I wonder whether this adequately reflects asbestos claims inflation. 3. Mendes and Mount refer to a noticeable upsurge in new filings, therefore the book of outstanding losses will display a clear trend towards a greater proportion of immature losses with an inevitable effect on the average outstanding period. This throws the adequacy of the 20% inflation loading into further question. [H2/256] 

5-Aug-86 MER. 

Letter from Toplis & Harding (asbestos services) to members of the Asbestos Working Party. Encloses a report by Malcolm Aickin circulating a report on his trip to Washington. "Superfund". The Senate House Conference is now moving towards completion. . .. It has agreed to impose a strict timetable upon EPA. The EPA must complete preliminary assessment of 23,000 potential sites by 1st January 1988. . . These must be followed by site inspections at all sites by 1 January 1989. Following this the EPA must increase the number of priority sites to 1,600. . .. It is quite clear from my conversation that EPA does not even consider there to be an issue as to whether costs of remedial work are covered by liability insurance policies. Their view is that there is no question that such coverage exists under past liability policies. [H2/257-263] 

14-Aug-86 MER. 

Letter from Toplis & Harding to members of the Asbestos Working Party. [Encloses a draft report proposed to be submitted by Mendes and Mount] (268) The one remaining area in the context of the year-end reserves relates to property damage. Although there has been a steady increase in the number of suits filed during the past year, there still exist many imponderables from a reserve stand-point . . . No provision has been made in the calculations to provide for future deterioration. Considerations relating to IBNR are matters for the individual attention of each participating insurers. . .. The rate at which new law suits were filed has steadily increased to an average filing rate of 900 new cases per month during the course of the current year. . .40,000 outstanding claims yet to be addressed, and although as already reported above there is evidence to indicate that more current filings relate to cases of less serious disability, the continuing up-surge of claims continues to be of concern. This difficulty is further heightened by the recent amendment to the New York statute of limitations in respect of certain hazardous products 

[1997]  486  L.R.L.R.  Henderson v. Merrett Syndicate (Q.B. (Com. Ct.))    Cresswell, J. 

including disability arising out of the use of asbestos. The amendment allows claimants who were formerly time barred a 12 month period in which to file an action, and whilst it is difficult to foresee how much activity may now develop out of New York state, some observers have reported that up to 5,000 new filings can be expected, mainly arising from the Brooklyn shipyards. [H2/264-269] 

Aug-86 MER. 

[A] report to underwriters at interest. Finally we would like again to emphasize to the Market that the reserve projections are based on the most up to date loss information available, but no provision has been made in the calculations to provide for future deterioration.. . . 

We have been instructed by the Working Party that considerations relating to IBNR are matters for the individual attention of each participating insurer. In conclusion, we would like to make some observations in regard to the number of outstanding lawsuits, and more particularly the increased rate at which these have been filed over the past nine months. From a recent analysis conducted by the Facility, the rate at which new lawsuits were filed has steadily increased from about 500 per month, which had been the consistent level over 1984/5, to an average filing of 900 cases per month during the course of the current year.. . .although there is evidence to indicate that more current filings relate to cases of less serious disability, the continuing upsurge of claims continues to be of concern. This difficulty is further heightened by the recent NY amendment allowing formerly time-barred claimants a 12 month period of extension. Difficult to foresee how much activity may now develop out of NY. [J11/7/160] 

2-Sep-86 MER. 

Letter from RAG Jackson, Chairman of the Asbestos Working Party to CS Restal, Guardian Royal Exchange. The report which you have been receiving outlines the difficulties faced by our US representatives over a year ago. . .quite independent of inflation factors, it was decided to adopt a $85,000 base reserve in the light of our general experience. It was perhaps coincidental that had one applied an annual inflation factor of 10% to the average cost reflected by the Rand Study in 1982, the present day figure would then be approximately $80,000. Nevertheless, it did afford us some additional support for the conclusion that we reached, particularly with the uncertainties that then existed. As is indicated in Mendes & Mount's report, it had formerly been the practice to assess reserves based upon the historical experience of each separate defendant insured, and in those times a loading of approximately 20% was factored into the calculation. Bearing in mind that with the development of  the Facility, claims for some 34 asbestos producers were all handled by one entity, and that economies were anticipated, the loading was dropped as part of the consideration for year end 1985.. . .as in the past many imponderables continue to exist in projecting reserves for claims of this nature, the most significant being whether there is now developing a change in the severity levels in more recent filings. There will shortly be available to the Market the latest Mendes & Mount report outlining the developments during the past year and the changes that are now indicated for forthcoming reserve projections. In summary, indemnity per case reserves will be increased and defence cost-loading will come down, with the net result that little change is likely upon total per case reserves. However, due to the substantial volume of new filings, there will inevitably be some major reserve increases, recommended for this year end. . . .The settling of asbestos reserves is certainly not an exact science, and whilst our attorneys endeavour to reassess the various considerations that arise at yearly intervals, the Working Party has always emphasised to the Market the need to give specific regard to IBNR loadings to reserve recommendations. [I4D/121] 

Sep-86 MER. 

Letter from [A] to the Underwriters at Interest. With further reference to our handling of the above matter, we submit our year-end 1986 reserve report on the above account. While we will in the future be submitting a detailed narrative report explaining the underlying assumptions on which these reserves are based, we submit the following summary for Underwriters' ready reference. 

(i) Bodily Injury. Our recommended asbestos bodily injury reserves are set forth in the attached schedule. While there have been extensive negotiations within the past few months which would result in GAF applying for membership to the Asbestos Claims Facility, formal application has not been made, and it is unknown whether such an application has not been made. Accordingly, instead of reserving on a Facility basis, we are continuing to provide reserves on the exposure and manifestation concepts. . . 

(ii) Property Damage. As will be fully detailed in our narrative report, there have been very few developments involving the assured GAF Corporation with regard to asbestos property damage claims. GAF, which did not manufacture any of the high hazard spray-on asbestos products, has not been found liable in any case and has not settled any property damage cased. GAF has been successful in obtaining dismissal in approximately 10 property damage cases during the past few years. We had previously been suggesting that Underwriters, if they so desired, should consider the 

[1997]  487  L.R.L.R.  Henderson v. Merrett Syndicate (Q.B. (Com. Ct.))    Cresswell, J. 

establishment of a reserve of $200,000 per policy year, where said policies were not otherwise exhausted by bodily injury reserves. In view of the general overall increase by property damage litigation, and in view of the fact that certain of the target defendants have been found liable for substantial damages, we are now recommending that Underwriters establish a reserve of $200,000 per year where policies are not otherwise exhausted by bodily injury claims. . . [J13/16] 

Sep-86 MER. 

Letter from [A] to the Interested Insurers. Report No. . . . Assured: . . . We submit to the London Insurers our Report No.. . . providing our asbestos-related bodily injury and property damage reserve recommendations for year-end 1986. This Assured is a subscriber to the Asbestos Claims Facility and therefore our bodily injury reserve recommendations continue to be predicated upon all claims together with this Assured's generic share for indemnity and defence as determined by the Facility. The underlying considerations and bases for these reserve recommendations were agreed upon at a recent meeting of the Asbestos Working Party and its American counsel and are set forth in a Mendes & Mount letter to the Market dated August 18, 1986 [see above]. This Assured continues to be a principal defendant in the asbestos-related property damage litigation and rather than suggesting precautionary reserves we are now recommending substantial indemnity and costs of defence reserves for these claims. For the convenience of Underwriters we set forth below our gross ground-up bodily injury indemnity and expense reserve recommendations for this Assured in the 1949-1961 and 1966-1972 years. . . [J13/15] 

16-Sep-86 MER. 

Minutes of MUAM Board Meeting. (141) Asbestos related claims: - 

The number of new losses being reported to the claims facility is approximately 100% higher than anticipated but the potential deterioration is ameliorated by the following factors: The new claims tend to be for less serious physical injury; many assureds have now exhausted their insurance protection; it is anticipated that actual costs of settlement will fall particularly in view of the dramatic drop in defence costs from US$280 million to US$70 million. 

However, the scope for deterioration on retrocessions is still very difficult to assess. [G138] 

6-Oct-86 E & W 

Ernst & Whinney management letter. Areas of audit significance: 1) Reinsurance to Close. This is the most material and subjective figure in the underwriting account of the closed year. There are problem areas, in several of the syndicates, in respect of run-off accounts whereby the liabilities  of other, non-Merrett, syndicates have been reinsured. Last year, for the first time, the Accounts Department at Merretts assumed responsibility for the preparation of the Reinsurance to Close Schedules and will do the same this year . . . We will audit the outstanding claims and the IBNR content using substantive testing and analytical review procedures as well as ensuring consistency of treatment with the previous years. [G191] 

22-Oct-86 MER. 

Merrett internal memo from K E Randall to the MUAM Board. The report is heavily critical for our year end routines and accounts production. With regard to the accounts department itself, the report illustrates the inevitable consequences of failing to plan ahead in terms of staff development and computer systems. 

Members of the board will be aware of the increase over the last year in staff numbers in the accounts area. Members may not appreciate the archaic systems which we have been trying to replace. For example, until 1985 the group maintained handwritten general ledgers which must have made us almost unique as an organisation responsible for turnover running to hundreds of millions. 

When I joined Merretts I was shocked that so little financial and management information was available. As a matter of urgency, computer applications were installed in a number of areas including (what was claimed to be) the widely used Sherwood bookkeeping system. As can be seen from the Ernst & Whinney report, that system contained a number of operational deficiencies which had not been resolved by year end. In other instances the control procedures have clearly been unacceptably weak. . . 

I am satisfied that most of the deficiencies in our finance function are well on the way to resolution but it must be stressed it will take another two years before we can be fully confident that we have in-depth support and expertise and we have still a very long way to go in terms of producing adequate management information. 

Aside from the accounts department itself, I remain very concerned that the syndicate staff do not appreciate the importance of the year end and the timetables; I have now witnessed two year ends when in some areas tasks are not given the priority they deserve. There are some syndicates where there is insufficient delegation and yet others where junior staff are asked to carry far too much responsibility. In the case of syndicate 417 we have yet to identify the person responsible for coordinating the year end work from an underwriting point of view. [G198] 

30-Oct-86 

[1997]  488  L.R.L.R.  Henderson v. Merrett Syndicate (Q.B. (Com. Ct.))    Cresswell, J. 

Reserving commentary provided by Merretts to the Inland Revenue regarding reinsurance to close the 1983 year of account on 417. [I4E/199] 

Nov-86 MER. 

[A] letter to Merretts. Re: Superfund Amendments and Reauthorization Act of 1986. The Act is likely to be viewed as a significant, pro-enforcement statute. Its effect will clearly be to increase the pace and level of clean-up activity against persons and companies with environmental exposure.. . .Conclusion The Act will significantly increase the potential liability exposure of the insurance and reinsurance communities. The potential aggregate exposure is difficult to quantify at present.. . .likely to depend on the judicial interpretations. . .. Congressional sources indicate that the ultimate cost of the various clean-up programmes will be between $20 billion and $100 billion.. . .further recoveries of a substantial portion . . . may be sought from insurers. The amount of actual recoveries from American industry will be somewhat less due to enforcement difficulties, insolvencies, and other factors. However, assuming, for purposes of discussion, that 75% is recovered, the loss by industry might range from $15 billion to $75 billion. In time, further recoveries of a substantial portion of that sum may be sought from insurers, and, even if discounted by a factor of 50%, the net potential aggregate exposure of the insurance and reinsurance industry may range from $7.5 billion to $37.5 billion. While these figures cannot be predicted with accuracy at this time, it is clear that, given the potential exposure, vigorous cost containment activities and close monitoring of clean-up site expenses will be significant in reducing the aggregate exposure. Equally important will be protection of contract rights and defences. [H2/271A-271Z] 

17-Nov-86 

The Superfund Amendments and Reauthorisation Act signed. [H2/271A] 

Dec-86 MER. 

Letter from [A] to the Environmental Claims Group. Re: Summary of Developments in the Law Respecting Environmental Claims Coverage Issues. Introduction. In 1984, we prepared a summary of case law respecting key coverage issues under the Comprehensive Environmental Response, Compensation and Liability Act of 1980 ("CERCLA"). We are in the process of revising our 1984 summary. In the meantime, we report briefly on developments in the law respecting coverage for environmental claims under general liability policies. We caution that even though a particular court decision may appear to be favorable, the federal system of the United States makes it difficult to determine whether a given court's decision apply-  ing the law of a state will be either binding precedent or even persuasive authority for courts of other states addressing the same issues. Also, many cases are litigated in federal court which apply particular state's law. While technically not binding on the state court in question, the federal court decisions usually, but not always, are followed by the state courts in question. The following is a summary of majority positions, minority opinions and perceivable trends in the courts respecting the foregoing coverage issues. We have attached a chart of significant recent decisions, keyed to the various jurisdictions which have addressed the issues and to the applicable state law chosen. . . [J13/18] 

Dec-86 MER. 

Report from [A] re: Shell litigation. Brief summary: difficult to assess the eventual liability of Shell - one claim between $1,000,000,000 and $2,500,000,000. [J11/462] 

Jan-87 MER. 

Letter from [A] to the Environmental Claims Group. Re: Priority List Update. The letter encloses an updated Priority List, identifying some 90 assureds. [J13/17] 

19-Jan-87 E & W 

E&W meeting designed for all UK partners, managers and assignment leaders with insurance clients. Chairman, Nigel Holland. Agenda: "the market" (John Philpott); asbestosis and other latent diseases (Stephen Hill). [D12/7/315] 

26-Jan-87 E & W 

Letter from the Chairman of Lloyd's to syndicate partners, managers and assignment leaders. (PJ Standish's copy). The Accounting and Auditing Standard Committee (AASC) has formulated the attached guidance on time and distance policies. Further consideration is being given to additional disclosures relating to the reinsurance to close in particular where the run-off of prior years of account of the syndicate has been reinsured. The guidance is attached. [D12/7/316] 

4-Feb-87 E & W MER. 

Recognised auditors meeting held at Lloyds. Notes dated 17 February 1987 circulated from MA Bolger to E&W insurance partners and managers. 4. Market issues: The meeting was addressed by representatives of the four principal markets. Points to be watched include the following:. . .Non-Marine: mention was made of the continuing concern with asbestosis. New cases are being advised at the rate of 1,500 per month, which is higher than previously. The claims facility is running which means that expenses are down. R.I. calculation problems have been identified leading to litigation and arbitration. The Johns-Manville facility is earning interest and payment is likely to be made when 

[1997]  489  L.R.L.R.  Henderson v. Merrett Syndicate (Q.B. (Com. Ct.))    Cresswell, J. 

Johns-Manville is out of chapter 11 in 1987. However, if an early settlement is not reached, an extra call from syndicates may be necessary. A market letter advising the interest and appreciation figures will be circulated in good time. Reserves for Shell have increased and further pollution losses have been incurred. 1984 was likely to be a poor result but there is some hope that the open years will be better with the shortening of accounts and the move to claims made settlements. [The proposed time-table (page 336) reveals that the author of these words is R Jackson.] The note by Mr Jackson itself appears at D12/7/346: Main concern is still asbestos. It had been hoped that there would be a drop in claims in 1986 but this has not been evident; 900 new cases per month were reported in 1985, while 1,500 new cases were reported in November and December 1986.. . .The Asbestos Claims Facility settled claims at a higher rate than was expected. During the course of 1986, the London Market expended approximately $70,000,000 in Facility Billings and to some extent, this figure was affected by accelerated cash-flow. It must be emphasised that even though there can be acceleration on a temporary basis, reserves established in underwriters' books would always be well in excess of payments made no matter how accelerated they were. Expressed another way, the payment is easily contained with incurred reserves, even though there is a speed up in the cash going out beyond that which was originally foreseen. . .. Known claims will account for 25-30% increases in asbestos reserves at year end (31.12.86). Much of this increase will come from reinsurance and retrocessional contracts. . . . Environmental pollution: Environmental pollution will account for increases in some reserves. . .. In respect of Shell-Rocky Mountain, reserves will increase by $100 million. The Shell-Rocky Mountain case should come to trial in 1987. The market will end up paying a lot on pollution but policy wordings may give us better defences than on asbestos. It appears inevitable that we are likely to see a continued growth in the involvement of the London Market as new losses are reported. However, on a more encouraging note, it is worth observing that there appears to be a trend developing in the Court findings arising out of various E.P.A. coverage litigation which demonstrates more respect for the intent of insurers - namely that the seepage and pollution exclusion means what it says and that the date of damage cannot reasonably pre-date the time of discovery. DES: Ely Lilly obtained a "Keene" ruling which has been upheld. A settlement of $80 million plus for London's share, will be forthcoming soon. Summary: 1984 account will show desultory results. For 1985, 1986 and 1987 accounts the tail of liability business is shortening. . .it is therefore  anticipated that these accounts will show significantly better results than earlier years. [D12/7 324-6 D12/7 346] 

4-Feb-87 E & W 

Presentation by Mrs C Shorthouse at the recognised auditors' meeting [see above]. (iii) Audit opinions regarding run-off accounts: There are noticeable differences of opinion within the profession as to the most appropriate method of report on run-off accounts. For example, two firms dealt with the uncertainty by emphasis of matter to the effect that names' net results as shown in the personal accounts were true and fair subject to any material adjustments which may be necessary if the amount retained is understated. One firm felt that the uncertainties necessitated a qualification and two firms gave no opinion on the personal accounts. All other firms reported in accordance with bye-law provisions. Lloyd's view remains that auditors should report in true and fair terms. In certain circumstances, an emphasis may be appropriate but should not be included as a matter of course. [I4D/123] 

18-Feb-87 E & W 

Ernst & Whinney management letter to Merretts written as a result of their initial audit work for the audit as at 31/12/86. [I4F/288] 

27-Feb-87 MER. 

Letter from RAG Jackson, Chairman of the Asbestos Working Party, to the Insurers at Interest. I have advised you in earlier letters of the concern expressed by the Facility at the substantial increase in the number of new law suits which arise from Asbestos related causes. During the course of the first half of 1986 new cases were arising at the rate of approximately 900 new cases per month but as we approached the end of the year a significant increase in new filings became apparent reaching a level of approximately 1500 new cases for both November and December. The reserve projection contained in year end reports circulated to the Market were based upon the lower level of new losses than being experienced and assuming that the substantial increase which we are now seeing continues during the course of 1987 it will be apparent to you that this will have a material impact upon the reserves that will be reflected in the year end 1987 reports. Two other significant aspects which bear upon the potential for reserve increases are that the average cost of settlement per claim being achieved by the Facility has yet to reduce to the level of which was the basis of the per claimant reserve used in the calculations for year end reserves. There are a number of reasons why indemnity levels have not been capable of being reduced, the most significant being the aggressive attitude adopted by the Courts in the Texas Class action and the material 

[1997]  490  L.R.L.R.  Henderson v. Merrett Syndicate (Q.B. (Com. Ct.))    Cresswell, J. 
 
effect this has had upon the overall average settlement costs which we have achieved. . . 

An additional consideration that enters into the reserving philosophy relates to the defence cost being incurred by the Facility. Once again it has not to date proved possible to reduce the substantial outlay in regard to costs which are being incurred through the Liaison Counsel acting on behalf of the Facility. There are a number of reasons that bear upon this issue, the most significant of which is the pressure being exerted by various Courts to speed up the number of cases which are addressed during the coming months. With this increased activity it appears unlikely that we shall see any meaningful reduction of legal costs during the present year. The Board have devoted considerable efforts in this area and a budgeting business plan has now been produced setting out revised control procedures which should contain further increases. The tentative goal for 1987 has been set at $89.75m although whether this proves to be attainable must depend upon future litigation activity. One favourable feature arising from the entry of GAF is that with our ability to provide a common defence for all producer members no increased costs will arise and those costs which are incurred will now be allocated over a larger base 

The experience achieved to date within the Facility and the pressures that are now developing will be a major consideration to be taken into account by the representatives of the Working Party when we come to address the basis upon which the 1987 year end reserve projections will be based. The main area of concern is the substantial increase that has developed in new filings which are clearly arising as a result of an all out effort by the plaintiff bar in conjunction with the Unions to canvass claimants from industries with only a remote asbestos involvement. Mass screening is developing in the tyre industry where pulmonary problems are said to exist due to exposure to talc which may contain minimal quantities of asbestos and which is used in the moulding process. Similar screening activities are now being reported from the Steel industry and the following extract from a recent Wall Street Journal article sums up this new form of ambulance chasing. . . 

It is significant that claims that are generated in this fashion arise from individuals who have little or no disability and even assuming that liability was to fall upon asbestos producers - which is questionable - the measure of damages should be minimal. For some time it has been the perception of the Facility that the quality of more recent filings was less serious than formerly. The average indemnity levels which we are experiencing in the Facility reflect the severity of claims arising some five years ago and it would be reasonable to  anticipate some reduction to develop as we start to address more recent cases. I emphasised this point at a recent meeting of Panel Auditors as a consideration that needs to be kept in mind in endeavouring to address future loss development. . . 

The result of the re-evaluation of reserves will effectively reduce those reserves presently carried on post coverage block years based upon the current volume of outstanding claims. As the coverage limits in the Initial Coveral Block became depleted by future settlements GAF will add, on a sequential basis, subsequent years of coverage to expand the insurance available. When these future developments take place and assuming that there is no substantial reduction in the rate of new filings it must follow that there continues to be a potential IBNR exposure to all post Coverage Block years. From the above comments it will be apparent to you that the problems arising out of asbestos related claims continue to become more serious with the passage of time. Indeed many producers are now being forced to recognise the present trends are such that they must now contemplate that there will be a future point in time at which they exhaust all insurance coverage. This serious position has caused producers to renew their efforts in seeking to obtain Federal Government recognition of the dilemma which they face and more particularly to provide some relief to the liabilities which they are now required to address. There are presently pending before the Senate draft bills which provide that where a claimant has a right of action under a Federal statute this will be an exclusive remedy. 

The majority of claims arise from asbestos exposure in an occupational environment and for employees in certain occupations such as Shipyards and Railroads they already have protection afforded for occupation disease under existing Federal legislation. In the event that a Bill were to be passed by the House supporting this objective it would greatly ease the burdens being imposed upon asbestos producers under the strict product liability theories. . . [J13/12] 

10-Mar-87 

Merretts letter to run-off cedants. [C15/209] 

30-Mar-87 

E&W internal memo from Stephen Hill to syndicate audit executives and assignment leaders. Professional standards panel (PSP). The firm's rules relating to qualified or non-standard audit reports reply equally to syndicates as to any other clients. Any qualified or non-standard report relating to a syndicate for which an independent partner review is required would require the approval of the PSP. Managing agents and underwriters reports: The auditors responsibility is to report on these documents on an exception basis only, that is, where he 

[1997]  491  L.R.L.R.  Henderson v. Merrett Syndicate (Q.B. (Com. Ct.))    Cresswell, J. 

considers them to be inconsistent with the content of the syndicate annual reports. However, we owe a duty to our clients to review these reports for compliance with the bye-law and to advise accordingly. . .Asbestosis: the treatment of interest on Johns-Manville payment into Court has been raised with insurance technical sections. It is apparent that a number of different treatments have been operated in the market. I draw your attention to my memo dated 12 April 1985 on this matter a copy of which can be obtained from my secretary. I stress the point made in that memorandum that the treatment set out is a preferred and not a prescribed basis. I am in possession of a letter from Toplis & Harding (asbestosis services) Limited dated 6th November 1986 regarding accelerated cash-flow payments on the asbestos claims facility. This does not add any new light on the matter, I have already disclosed to executives and staff but gives a general review of the subject together with some figures at 31 July 1986. If anyone would like a copy of this letter please let my secretary know. [D12/7/340-5] 

Apr-87 MER. 

Letter from [A] to the environmental claims group. This appears to be an early version of the same letter which was sent on 28/9/87. [H2/272-9] 

30-Apr-87 MER. 

Minutes of Merrett Holdings Plc Board Meeting. 4.1.2. Run-off contracts. . . 

It was agreed that the significant impact of the losses on the members of the syndicates justified regular audits of the reinsured's records and claims and reinsurance handling procedures. In addition, specific staffing requirements within the syndicate/agency to monitor progress were to be investigated. [G208] 

21-May-87 

CLOSING OF THE 1984 YEAR 

25-May-87 

Business Insurance. New Avalanche of Asbestos Claims Hits. The number of new asbestos claims doubled in the last few months to 2,100 per month compared with 1,000 per month at the end of 1985. 

Knowlton: "It causes me to think this is going to go on forever.". . . Leonard Minches, vp claims for Gerling Global Reinsurance Co. said reinsurers are concerned about the increase but they don't yet know whether the increased claims are an acceleration of anticipated claims or were unexpected. . . Tyre workers alone could eventually bring 20,000 claims, Mr Gerry predicts. In addition to tyre workers sheet metal workers are also being screened as part of various medical studies. . .  No-one yet knows how much this new onslaught of claims will cost asbestos producers, insurers and reinsurers. Previously the cost of asbestos bodily injury claims has been estimated anywhere from $4 billion to $100 billion. The new wave of lawsuits not only names the major asbestos manufacturers but also many additional small and large manufacturers that used asbestos in their products. 

. . .Even before this new wave. . .more bankruptcies of asbestos producers had been expected, and the insurance industries ability to fund asbestos claims had been questioned.. . .William Bailey, former vp of Commercial Union says there is not enough insurance to cover all the asbestos claims that will be filed. . . [I6(4)/27] 

8-Jun-87 

Business Insurance. Asbestos firms to gain $275,000,000 from ruling. Three of the asbestos producersinvolved in landmark litigation stand to gain more than $275,000,000 in insurance coverage to pay asbestos claims following San Francis's Superior Court Judge Ira A. Brown's long awaited decision.. . . 

All attorneys generally agree that Judge Brown's decision gives the broadest insurance coverage possible to policy holders for bodily injury asbestos claims. Judge Brown ruled that producers are entitled to recover from all insurers that wrote liability insurance policies for them from the time they claim and was exposed to asbestos through the time of the victims files of claim on until the victims death. In many cases this has been more than 4 decades. Judge Brown also found that every policy figured by an asbestos related bodily injury claim must respond in full to the claim and that policy holders do not have to pay a proportionate share of defence and indemnity costs for periods when they were self-insured or uninsured. But, in a part of the decision that favours insurers, Judge Brown held that under pre 1966 policies, insurers are not liable for defence costs after policy limits have been exhausted. Judge Brown also ruled: insurers bear the burden that proving their policy holders acted intentionally or maliciously in order to deny coverage on the basis the policy only covers losses which are not expected or intended. [H5/481-2] 

10-Jun-87 MER. 

Letter from Toplis & Harding (RAG Jackson) to insurers at interest. No doubt that you will be aware that on 29 May Judge Brown announced his tentative decision on the phase 3 issues in the California co-ordinated action. . .At this early stage our counsels are still assessing the impact of the decision but I can recall that there is substantial concern at the way Court has ruled upon trigger of coverage, particularly in view of their conclusion that the contracts under review were unambiguous. 

[1997]  492  L.R.L.R.  Henderson v. Merrett Syndicate (Q.B. (Com. Ct.))    Cresswell, J. 

Although basically rejecting the Keene rationale the Court finds that injury commences from the date of first exposure and continues until either the death of the claimant or until a claim is notified to the assured. The injury process is considered to continue over the entire period and as there is no basis on which to measure the damage during each policy period the Court has determined that each policy is liable to respond in full. . .We now have to cope with what can only be termed "Super Keene" in California.. . .It will be some time before counsel have completed their analysis of this ruling and its impact upon the many serious latency problems which confront the market. However, it is inevitable that we may expect to see California replacing Washington DC as the forum of choice.. . . [H2/280-4 G230] 

23-Jun-87 MER. 

Merrett internal memo from K E Randall to directors of Merrett Holdings Plc. Claims and reinsurance functions. 1. At the last meeting of the Board, I outlined my concerns about the poor quality of the records and the weaknesses in our internal organisation for dealing with outstanding claims and reinsurance recoveries.. . .4. The problems of Syndicates 417, 418 and 799 may be summarised as follows: (i) The figures are now huge:. . .(ii) The outstanding claims go back many years and there have been numerous changes in personnel over the years. (iii) The records are poor and in some cases non-existent. (iv) The syndicates have grown to a size where individuals or groups have specialised and there is no-one co-ordinating the problems or the syndicates as a whole. (v) There have been massive problems in dealing with asbestos and environmental claims with the result that responsibility for monitoring outstanding claims on Syndicates 417 and 799 has been sadly neglected and the staff now assigned to maintain the records are far too junior and inexperienced. [G235] 

25-Jun-87 MER. 
 
Minutes of MUAM Board Meeting. [G243] 
 
07-Aug-87 
 
Asbestos litigation report: Owens-Corning Fibreglass Withdraws From Facility. All claims after Oct. 3. Owens-Corning Fibreglass informed the Asbestos Facility in a letter Aug. 3 that the company was withdrawing its resignation of the Facility as its sole agent for handling asbestos-injury claims filed after Oct. 3., 1987. It is the first withdrawal by any of the Facility's 51 members. . . [I6(16)195] 
 
17-Aug-87 
 
Business Insurance. Two more federal Judges split on pollution coverage. Federal Courts continue to issue conflicting opinions on whether general liability insurers must provide coverage for pollution claims. [H5/488-9]  Aug-87 MER. 

Letter from [A] to the underwriters at interest. Re: 1987 year-end reserves various asbestos accounts. (287) In our last general report we brought to the markets attention the steady increase in new filings. During the past three years we have seen new filings increase from 700 per month in 1985 to 1,000 per month in the latter half of 1986. During 1987 we have observed further deterioration with new filings thus far averaging 2,000 cases a month and it is significant that from the various sources with whom the facility are in contact they have reached provisional conclusion that it is unlikely there will be any material fall-off over the next 2 years. In trying to determine the reasons that have led to this increased activity one must look to well publicised activity of the Plaintiff Bar in developing new areas from which to enlist clients.. . .However, at this point we fell that it is important to record that there is no tangible evidence to suggest that the existence of the Facility has been the cause for the vast increase in the number of law suits. 

Property damage: This subject is continuing to develop into a major concern for the asbestos manufacturers and the insurance industry. Prior reports have lacked a qualitative and quantitative statistics, however, London's representatives have been able to develop certain basic information over the last 12 months on at least those suits filed to date. With the passage of the Asbestos Hazard Emergency Response Act of 1986, the United States Congress began what is likely to become a long term effort to remove hazardous asbestos from buildings and lessen the risk that people will be harmed by exposure to the fibres.. . .(293) In keeping with the procedures adopted in the past there are no provisions in our projections to address the IBNR potential which we have been advised is a separate consideration for each individual insurer. It is extremely difficult for us to provide any reliable advice as to how the asbestos problem is likely to develop over the ensuing years except to the extent that it now appears that the total insurance limits of most insureds could be consumed by this enormous problem. [H2/285-300] 

26-Aug-87 MER. 

Letter from Toplis & Harding to insurers at interest. At the request of the Chairman of the Asbestos Working Party, I attach his letter dated 26th August together with a copy of the Mendes & Mount Annual report. 

Letter from RAG Jackson, chairman asbestos working party: The Asbestos Working Party have been extremely concerned at the adverse reports reaching us during the course of this year and the potential impact the deteriorating loss situation was likely to have on reserves for the coming year end. In my 

[1997]  493  L.R.L.R.  Henderson v. Merrett Syndicate (Q.B. (Com. Ct.))    Cresswell, J. 
 
last report I warned the market of what was likely to be in store and as it now transpires the situation is perhaps worse than I had feared. Attached to this letter you will find Mendes & Mount annual report upon the developments they and Lord Bissell & Brook perceive over the past year. The most significant feature of the report relates to the basis on which reserves will be projected both in respect of bodily injury and property damage. When the necessary allocations to the various accounts has been completed there is no doubt that substantial increases will fall upon the London Market.. . .(306) As a result of these developments it is apparent that the Facility is at a cross-roads and short of a change of direction could founder.. . .Unfortunately problems tend to come in 3's and I must tell you that it was announced at the last board meeting that a significant producer, Owens Corning Fibreglass, gave the requisite 60 days notice of withdrawal from the Facility in respect of new filings.. . .In the face of all these problems I must report to you that the conspiracy and anti-trust suit being pursued against the facility by a consortium of members of the Plaintiff Bar has now reached a stage where discovery has been served. [H2/301-310] 
 
Sep-87 MER. 
 
Letter from [A] to interested underwriters re environmental claims matters: The London market faces an enormous problem with the presentation of pollution claims. There are already many more assureds concerned with pollution than were concerned with asbestos. The number of pollution coverage lawsuits involving underwriters already exceeds the number brought during the whole of the asbestos problem. [H2/311-318] 
 
28-Sep-87 
 
Lloyd's List. U.S. Courts set to tackle asbestosis in seafarers. The U.S. legal system is preparing to head the way in the international scene in handling the growing number of asbestosis claims from seamen - but the issues involved are complex and daunting. [H5/494] 
 
Nov-87 MER. 
 
Letter from [A] re: DES. . .We note that our recommended reserve for each cancer claim has been significantly reduced this year from last year's reserve of $534,375, based upon our re-evaluation of the historical costs of resolving the Assured's cancer claims. Our DES recommended reserves include reserves on an across-the-board basis for the over 750 DES claims filed pursuant to the New York reopener statute in as much as claim specific information is not available for these newly filed claims. . . [J11/8] 
 
30-Dec-87 MER.  Letter from Toplis & Harding to the Insurers at Interest. The underlying cause of all the problems which we now confront stems from the enormous increase in the volume of new claims which have developed over the past two years. This increased loss activity emanates from the innovative, but often questionable activity of the plaintiff bar in searching for new occupational sources from which to canvas clients; there is no evidence to indicate that the existence of the Facility has generated this activity. Perhaps more to the point it is an acknowledgement that claims arising from the more traditional shipbuilding industry are now on the decline. 

The massive financial burden now facing many producers even from the traditional areas, threatens to exceed the insurance coverage of some of those involved and undoubtedly raises the need prospectively to adjust the allocation formulae to more appropriately imposed share obligations consistent with occupational source.. . .These underlying tensions have effectively split the producers' membership into two groups and the divisions that have developed is impairing the Facility's ability to perform its intended functions. It now appears reasonably certain with that within a short time at least three of the producers referred to above will leave the Facility in the belief that in the outside world they will be able to exercise greater control over their cash-flow.. . .Many complex issues arise in a withdrawal scenario, not least of which will be the re-assignment of defence counsel's role in 65,000 outstanding law suits; waiver of cross claims in the underlying actions and as between a departing producer and the Facility and procedures to address green card and pleural registry obligations.. . . From an indemnity perspective there is every likelihood that settlement levels will increase as Plaintiff attorneys once again develop the flexibility denied to them by the Facility.. . .(323) Discussions are now continuing with reinsurers in the United States, Germany, Sweden, Japan and the Eastern Block and I will keep you posted on any progress made. It is a pity that so many so called professional reinsurers are using negative delaying tactics on such an important matter. They now pretend they do not like the US judicial system works. They should have thought of that before they wrote the business, and not now. This letter is written by Robin Jackson, Chairman, Asbestos Working Party. [H2/319] 

31-Dec-87 MER. 

Environmental Claims Group - Quarterly Law Report Fourth Quarter 1987. Re: Environmental Claims Matters; Quarterly Law Update. . . .viii. Conclusion. While the legislative and administrative branches of government continue to grapple with the mechanics and funding of CERCLA, the 

[1997]  494  L.R.L.R.  Henderson v. Merrett Syndicate (Q.B. (Com. Ct.))    Cresswell, J. 

judiciary is deciding coverage issues at a pace of half a dozen decisions per month. There were no revelations of trends in the current batch of opinions. Rather, they continue their present pattern; some favorable; some not. The bulk of these cases are trial court opinions, which will now wend their way through the appellate process. One thing that is clear, however, is that the battle will continue to be fought state-by-state, court-by-court. We will continue to assert as much influence as possible in pending matters. [J13/21] 

1-Feb-88 

Business Insurance: Superfund unleashes flurry of coverage suits. Litigation over insurance coverage for government-ordered hazardous waste site clean ups eventually may rival asbestos-related coverage lawsuits in terms of time, expense and complexity, attorneys for policy holders and insurers predict. The attorneys warn that the number of pollution clean-up related coverage disputes can be expected to increase as more companies face the prospect of paying hazardous waste site clean-up costs. The major impetus behind these disputes is the Comprehensive Environmental Response, Compensation and Liability Act of 1980. . . Policy holders have not fared well in several recent coverage decisions involving pollution cases. . .However, policy holders are not without some victories. [I6(22)/278] 

3-Mar-88 MER. 

Memorandum K E Randall to S R Merrett and R A G Jackson. Pollution and Asbestos Claims. We are moving slowly towards the production of the 1987 accounts and it is already clear that the reserves for pollution and asbestos have increased significantly beyond the levels I had been expecting. This gives rise to two questions:- 1. Why do they come as a shock to me? (ie have I not been listening, or have I not been told?) 2. Is the basis of reserving appropriate?. . . I am not at all happy about the way information on these cases is passed through MUAM and furthermore, I continue to be concerned that the work of the "market facility" is overseen by underwriters and claims managers with no input from managing agents. (Here I mean agents at large - I am not just referring to MUAM). I recognise that the Lloyd's underwriter regards his position as unique in the business world and I have therefore thought long and hard before putting my thoughts into this note. [G271] 

14-Mar-88 

Business Insurance: 2 more firms quit Asbestos Claims Facility.. . .claims filed by tyre, steel and sheet metal workers have become the most common type of asbestos injury claims filed. The same producers that paid the largest shares for claims filed by shipyard and insulation workers also became liable for the largest share for the new types  of claims. These producers contend that tyre, steel and sheet metal workers were not exposed to their asbestos products. . . [I6(14)/158] 

21-Mar-88 

Business Insurance: Save the Facility. . .We can't fault these asbestos producers for pulling out of the Facility. They have good and valid reasons. A new wave of asbestos claimants who are exposed to asbestos not produced by these six companies has hit the facility. [I6(16)193] 

11-Apr-88 

Memorandum from Randall to MUAM Directors. Rumours are beginning to circulate in the market concerning the possibility that the 1985 account of 418/417 may be 'left open'. It is therefore likely that you will be questioned by staff, brokers and so on. 

We have not yet reached a point when the Board can take firm decisions (or make announcements) in this matter, because final syndicate trading figures are not available. It is clear, however, that there has been some deterioration in advised reserves for asbestos and pollution claims affecting both 417's old years and the run-off contracts, but the uncertainty as to the outcome of issues is greater than ever. 

The issues still to be debated by the Board include: What is the appropriate level of reserve to be carried for Asbestos Property Damage claims and EPC claims given the conflicting legal decisions so far available? Do the various scenarios produce such wide variations that we cannot properly arrive at a reliable basis for computing the reinsurance to close? 

In connection with the run-off contracts, we are continuing our investigations and there appear to be grounds for supposing less than full disclosure by a number of the cedants at the time the policies were written. The reserves already carried on these contracts are very substantial indeed and we must consider whether any failure to inform, whether accidental or deliberate, makes it appropriate that contracts should be renegotiated or even rescinded; meanwhile there must remain a question as to whether we have a satisfactory basis for computing the reinsurance to close. [G278] 

29-Apr-88 MER. E&W 

Meeting between Merretts and E&W to discuss RITC. Brief mention was made of the run-off accounts which had been discussed the previous day and SRM confirmed that a similar approach had been adopted across all three syndicates. However, it was noted that significant changes could follow in the reserves for these contracts as a result of highly probable re-negotiations thereof. It was still being considered by the agency that Syndicate 418 1985 Account would not close at 31 December 1987, as 

[1997]  495  L.R.L.R.  Henderson v. Merrett Syndicate (Q.B. (Com. Ct.))    Cresswell, J. 

it was not realistic to determine a true and fair view on the result because of the impact of uncertainty for the 1985 account Names. Even so, the work being done at this stage would be done as if to a true and fair reporting conclusion and all other business of the syndicate was being assessed on an "as if" closing basis.. . .On Syndicate 418, SRM indicated that it may well be that information becomes available within the next few weeks which will enable him to determine a more final answer in respect of the run-off contracts and Merretts may wish to consider closing when that information becomes available. [I4G/291 & 292] 

20-May-88 MER. 

Letter from MUAM to Members' Agents and Names re: up-date on closing the open year. [F4/184] 

24-May-88 

Sturge Internal memo from P Rawlins to K Leonard and A Jones. I asked to see Ken Randall today to get detailed background on their decision to leave the 1985 account open.. . .The sole reason the account is being left open is that they are seeking to re-negotiate 11 run-off contracts written into this syndicate. . .They expect the discussions to be completed within the next 6 months or so and, whatever their outcome, they are thereafter planning to close 1985. . . [G 17] 

26-May-88 

1985 YEAR LEFT OPEN AS AT 31.12.87 

30-May-88 

Business Insurance: Wellington defections kill Asbestos Claims Facility. . .when the Asbestos Claims Facility was formed, the formula for determining each producer's share of liability was based on the litigation and settlement history of claims filed by shipyard and insulation workers, which at that time was the most common type of asbestos injury claim. Beginning in early 1987, however, claims filed by tyre, steel and sheet metal workers became the most common type of claim filed. . . [I6(16)/194] 

July-88 MER. 

Report from [A] to underwriters at interest. Re 1988 year end reserves asbestos building claims. (330) (c) The underlying property damage law suits: Our records are not necessarily complete but we can confirm that as of May 1988 a total of at least 209 separate asbestos related property damage law suits have been brought against major assureds of the London Market. (d) Potential future claims: We are unable from the information presently available to estimate the number of asbestos property damage law suits that will filed in the future against the assureds on the London Market. We have discussed the question with these assureds but  they too are unable to quantify the number of claims that may be anticipated.. . . 

Review of property damage litigation to date: We have closely followed developments in the underlying property damage litigation and must report to underwriters that although there were some early defence victories most of the recent jury and Court decisions have been adverse to the asbestos manufacturers. We are now not optimistic that the defence will win a fair percentage of these cases.. . .(338) We can report that Johns-Manville in its bankruptcy proceedings has been sued for $62,000,000,000 by 9,031 property damage claimants. 

Conclusion: Asbestos property damage claims continue to present a growing problem to the insurance industry. It is a problem which is at present impossible to accurately quantify. However, EPA projections for both school and non-school buildings suggest significant potential damages. There have ben more than 200 suits filed by building owners to date any many involve thousands of buildings. While there have been only a limited number of settlements and judgements, the amounts paid are in excess of $100,000,000.. . .On basis of the foregoing, we are recommending for the markets year end reserve purposes a total reserve of $4,000,000,000 for property damage indemnity claims, with the caveat that this recommendation does not include any IBNR factor. [H2/325-345] 

Oct-88 

Business Insurance: Asbestos firms launched facility to settle claims. . .The former Asbestos Claims Facility was dissolved earlier this year after seven of the largest asbestos producers withdrew. . .Inflexibility was the main reason the Asbestos Claims Facility died, observers say. . .for example, under the Wellington Agreement the percentage of liability costs paid by each producer was based on historical data on claims paid until 1983 and could not be changed significantly. The Center for Claims Resolution has created a more flexible system for allocating liability costs. The Center's liability formula is based on several time periods and different occupational categories to reflect the changing mix of asbestos cases. . . [I6(16)/200] 

25-May-90 MER. 

Meeting at the Runnymede Hotel of Names participating in 1983 account of Syndicate 421. [I4E/164] 

18-Dec-90 MER. E&W 

Draft letter from K P McNamara, Ernst & Whinney, to Merrett Holdings Plc. Refers to earlier letter of 23 November 1990. I have given some further consideration to what might be appropriate as forming part of the data required to support the Reinsurance to Close the 1985 underwriting 

[1997]  496  L.R.L.R.  Henderson v. Merrett Syndicate (Q.B. (Com. Ct.))    Cresswell, J. 

account.. . .The first stage is to generate adequate underlying data or sufficient background information so as to demonstrate that key issues have been addressed. The matters which we believe should be considered/recorded are as follows: (vi) Development by calendar year of incurred losses on (a) asbestos bodily injury; (b) asbestos property damage; (c) pollution; (d) DES.. . .(ix) A listing of maximum possible exposure on a policy by policy basis for known asbestos and pollution losses.. . .(xi) The impact of combined single limits for asbestos claims (mainly post-1966). (xii) The impact of pollution exclusion clauses being effective from 1970.. . .When you have had the opportunity to evaluate this letter we should discuss how we should proceed with the implementation of our collective decisions. This letter is referred to in David Hart's memorandum of 25 January 1993 as constituting "Paul McNamara's Shopping List, which he considered to enumerate the items which would be a prerequisite to any attempt to close the run-off accounts of these syndicates". [I4G/295] 

APPENDIX 2 

AGREED LIST OF UNITED STATES   AUTHORITIES 
 
TABLE OF CONTENTS 
 
(A) CASES LISTED BY CATEGORY (AND CHRONOLOGICALLY WITHIN EACH CATEGORY) 
 
(1) ASBESTOS BODILY INJURY 
 
(2) ASBESTOS PROPERTY DAMAGE 
 
(3) POLLUTION 
 
(B) ALL CASES LISTED CHRONOLOGICALLY 
 
(A) CASES LISTED BY CATEGORY (AND CHRONOLOGICALLY WITHIN EACH CATEGORY) 
 
ASBESTOS BODILY INJURY CASES 
 
1. Ferrara v. Galluchio, 5 N.Y.2d 16, 176 N.Y.S.2d 996 (June 25, 1958): High Court of the State of New York recognized cancerphobia is a viable cause of action. Medical malpractice action for mental anguish against physician who caused x-ray burns for which plaintiff was told she had to have tissue examined every six months as cancer might develop. Court determined that it was common knowledge among laymen and laywomen that wounds which do not heal over long periods of time frequently become cancerous, and therefore, plaintiff's cancerphobia was justified.  2. Borel v. Fibreboard Products, 493 F.2d 1076 (5th Cir. September 10, 1973), cert. denied, 419 U.S. 869 (October 15, 1974) (JMR 1): Court of Appeals for the Fifth Circuit applied the doctrine of strict liability in asbestos disease cases and subjected producers to joint and several liability. Plaintiffs, in order to state a viable claim, need only show their exposure to defendants asbestos or asbestos containing product and an asbestos-related disease. 
 
3. Porter v. American Optical Corp., Case No. 78-1953 (U.S.C.D. E.D. La. November 11, 1977), aff'd and rev'd in part, 641 F.2d 1128 (5th Cir. April 8, 1981), cert. denied, 454 U.S. 1109 (December 7, 1981), rehearing denied, 455 U.S. 1009 (March 8, 1982): Court of Appeals for the Fifth Circuit reversed District Court's application of the manifestation trigger of coverage and applied the exposure trigger for asbestos bodily injury claims. Court expressly concurred with the 6th Circuit Forty-Eight Insulations decision and held that insurance liability would be prorated among all insurers on risk during exposure period. The insured was held strictly liable under Louisiana products liability law for the manufacture of a respirator that did not protect worker from asbestos. The manufacturer had supplied such respirators to the company since 1953. 
 
4. Insurance Co. of North America v. Forty-Eight Insulations, Inc., 633 F.2d 1212 (6th Cir. Mich. October 21, 1980), op. clarified, 657 F.2d 814 (March 5, 1981), cert. denied, 454 U.S. 1109 (December 7, 1981), rehearing denied, 455 U.S. 1009 (March 8, 1982) (JMR 88): Court of Appeals for the Sixth Circuit applied exposure theory and concluded insurers have duty to defend asbestos bodily injury claims brought against the manufacturers of asbestos. Court held that insurance liability would be prorated among all insurers on risk during exposure period. 
 
4. Keene Corp. v. I.N.A., 513 F. Supp. 47 (D.C.C. January 30, 1981), rev'd 667 F.2d 1034 (D.C. Cir. October 1, 1981), cert. denied, 455 U.S. 1007 (March 8, 1982), rehearing denied, 456 U.S. 951 (April 26, 1982) (JMR 267): District Court applied exposure theory to trigger coverage. District of Columbia Circuit Court of Appeals applied the triple/continuous trigger of coverage and found a duty to defend and coverage for the over 6000 asbestos bodily injury suits against the insured. Court held that "INA's duty to defend Keene in underlying asbestos cases ceases upon the exhaustion of indemnity limits under the pre-1966 policies in question". Court found unambiguous policy language specifically limiting Keene's duty to 

[1997]  497  L.R.L.R.  Henderson v. Merrett Syndicate (Q.B. (Com. Ct.))    Cresswell, J. 
 
defend any suit "with respect to such insurance as is provided by the policy". 
 
6. Eagle-Picher Industries, Inc. v. Liberty Mutual Ins. Co., 682 F.2d 12 (1st Dir. June 30, 1982), cert. denied, 460 U.S. 1028 (March 7, 1983) (JMR 83): Court of Appeals for the First Circuit applied the manifestation theory to trigger coverage for asbestos bodily injury claims. 
 
7. Blue et al. v. Johns-Manville Corp., et al., (10 Phila. 23, 1983) (JMR 24 at 40-41): Pennsylvania trial court commented that litigating against asbestos claimants was like gambling at the local casinos, with juries compensating "minimal [asbestos] injuries" with in excess of a million dollars. This case describes the inappropriateness of the various asbestos litigation doctrines as applied to latent injury asbestos cases. It talks about how the doctrines adopted provide incentives for attorneys to file asbestos claims for claimants who show no signs of injury. Court concluded that asbestos litigation resembled the casinos in Atlantic City. Like the casinos, the Court concluded, the only winners in asbestos litigation were the attorneys. 
 
8. AC and S v. Aetna, 764 F.29 968 (3rd Cir. June 17, 1985) (JMR 82): Court held exposure, exposure in residence and manifestation all trigger coverage (following Keene, 667 F.2d 1034) (triple-trigger). 
 
9. Commercial Union Insurance Co. v. Sepco, 765 F.2d 1543 (11th Cir. July 23, 1985) (JMR 87): Court held exposure triggers coverage (silicosis case). 
 
10. Lac D'Amiante du Quebec, Ltee. v. American Home Assurance Co., 613 F. Supp. 1549 (D.N.J. July 31, 1985), vacated on other grounds, 864 F.2d 1033 (3d Cir. Dec. 28, 1988) (JMR 266): United States District Court of New Jersey adopted the continuous/triple trigger of coverage for asbestos property damage and bodily injury claims. Judge Barry pointed out that "[i]ndeed, the ["[t]housands upon thousands" of] claims currently pending represent only a small percentage of the total number of potential construe these ambiguous policies in favour of the insured and, following Keene, adopt the triple trigger theory. Once coverage is triggered, the insurer is jointly and severally liable for the total amount without proration of losses, the possible effect of "other insurance" clauses. Court of Appeals for the Third Circuit reversed District Court with instructions to dismiss this action, and ruled that the District Court should have abstained from exercising jurisdiction. The lower court decision was questioned in the Third Circuit Court of  Appeals' decision, but no conclusion was reached. 
 
11. Standard Asbestos Manufacturing & Insulating Co. v. Royal Indemnity Ins. Co., No. CV-80-14909, slip op. at 9 (Mo. Cir. Ct. Jackson Co. April 3, 1986) (TRN PP) (JMR 90): Missouri Court applied injury-in-fact trigger and commented with regard to the asbestos coverage issues: 
 
"One of the problems in insurance law is that it is result oriented. In an effort to compensate litigants, the courts have manipulated concepts of contract law and interpretations of insurance contracts and have vastly expanded theories of liability and contractual relationships While the motive may be laudable, the result is that there is no stability in the law and no one can predict the result in any given case." 
 
12. Abex Corp. v. Maryland Casualty, 790 F.2d 119 (D.C. Cir. May 9, 1986) (JMR 85): Court applied "injury-in-fact" trigger under New York law (rejecting Keene's triple trigger as inapplicable since case arose under N.Y. law). 
 
13. City of Greenville & Greenville Water Sys. v. W.R. Grace for South Carolina, 640 F. Supp. 559 (D.S.C. June 11, 1986), aff'd, 827 F.2d 975 (4th Cir. August 28, 1987) (JMR 242): United States District Court and Court of Appeals for the Fourth Circuit upheld jury verdict of $6.4 million in actual damages and $2 million in punitive damages against asbestos manufacturer. The decision was limited to the law of South Carolina which State had given jurisdiction in all asbestos cases to one judge. 
 
14. Clemtex, Inc. v. Southeastern Fidelity Insurance Co., 807 F.2d 1271 (5th Cir. January 21, 1987) (JMR 86): Court applied exposure trigger to case involving silicosis arising under Texas law. 
 
15. Zurich Insurance Co. v. Raymark Industries, 514 N.E.2d 150 (Ill. September 14, 1987) (JMR 84): Court held manifestation triggers coverage. Court concluded manifestation can be either of "disease" (when lungs are significantly impaired) or of "sickness' (a weakened, disordered or unsound condition which has not yet impaired the lungs to the point of being a disease). 
 
16. Lockwood v. AC&S, Inc., 744 P.2d 605 (Washington S. Ct. October 15, 1987) (JMR 167): Court applied drift theory. (Plaintiff was a rigger in a shipyard who worked in same area as insulators installing asbestos.) 
 
17. In re New York City Asbestos Litigation, 542 N.Y.S.2d 118 (N.Y. Sup. Ct. May 9, 1989) (JMR 165): Court adopted drift theory. Exposure is a question of fact for jury. 

[1997]  498  L.R.L.R.  Henderson v. Merrett Syndicate (Q.B. (Com. Ct.))    Cresswell, J. 
 
18. Eagle-Picher v. Balbos, 578 A.2d 228 (Md. App. August 29, 1990) (JMR 164): Court adopted drift theory. No direct exposure needed for plaintiff to get case to jury. 
 
ASBESTOS PROPERTY DAMAGE CASES 
 
1. Dayton Independent School District v. National Gypsum Co., No. B-81-293-CA (E.D. Tex. April, 1981) (TRN CCC) (JMR 271): Suit filed on behalf of eighty-three Texas school districts seeking recovery of the cost of removing asbestos from some 600 schools. Suit filed by the various Texas school districts was dismissed after the parties settled. However, District Court decided the liability of the manufacturer's insurer. Court of Appeals for the Fifth Circuit reversed the finding of liability on the insurer, holding that there was no basis of jurisdiction. Fifth Circuit Court of Appeals held the District Court applied general rules of construction favouring the insured without first applying the substantive decisional law of any specific jurisdiction. District Court's decision was reversed. 
 
2. Johnson County v. United States Gypsum Co., 580 F. Supp. 284 (E.D. Tenn. January 9, 1984) (JMR 244): On breach of warranty issue, defendants prevailed based on statute of limitations. Plaintiff's negligence and strict liability claims survived summary judgment motion. 
 
3. U.S.F. & G. v. Wilkin Insulation, No. 85-010 (Kane Cty., Ill. Cir. Ct. 1987) (JMR 269): Court held physical injury was required for plaintiff to prevail. While the case was reversed in December 1989, the lower court's holding was applicable from 1987-1989. 
 
4. Anderson County Board of Education v. National Gypsum Co., 821 F.2d 1230 (6th Cir. June 5, 1987) (JMR 254): Defendants prevailed before jury against Plaintiff claims of negligence, strict liability, misrepresentation and fraud. Appellate Court held statute of limitations also bars warranty claim - based on state law. 
 
5. City of Greenville v. W.R. Grace & Co., 827 F.2d 975 (9th Cir. August 28, 1987) (JMR 242): Court held while plaintiff can sue based on solely economic loss, plaintiff must show that asbestos was unreasonably dangerous. Also no need to wait for manifestation. 
 
6. Kaiser v. Armstrong World Industries, 678 F. Supp. 29 (D. Puerto Rico December 14, 1987) (JMR 91): Court applied manifestation cases to suit for breach of warranty and negligence against asbestos manufacturer (knowledge seen as similar to manifestation, thereby starting statute of limitations).  7. Carey Canada, Inc. v. Aetna Cas. & Sur. Co., 1988 WL 169287, *5 (D.D.C. March 31, 1988) (TRN EEE): United States District Court of Columbia found coverage and stated: 
 
"The court is aware of no case applying the pollution exclusion in the context of asbestos litigation." 
 
"The majority, if not all, of the underlying claimants' seek recovery for damages caused by [the insured's] product (asbestos) to other property (buildings and buildings materials). In such cases the 'owned products' exclusion is simply inapplicable." 
 
"[C]ourts which have considered the effect of asbestos on buildings in the context of an insurance coverage dispute have uniformly concluded that property damage was sustained." 
 
Court stayed plaintiff's summary judgment motion pending further discovery. After further discovery, plaintiff's summary judgment motion was denied in Carey Canada, Inc. v. California Union, 748 F. Supp. 8 (D.D.C. 1990) (JMR 271). There the Court held there was a genuine issue of fact as to whether release of fibres occurs continuously and the insured had not satisfied the burden of proving its loss occurred within the policy period. 

POLLUTION CASES 
 
1. Lansco, Inc. v. Department of Environmental Protection, 138 N.J. Super. 275, 350 A.2d 520 (Ch. Div. Dec. 4, 1975), aff'd, 145 N.J. Super. 433, 368 A.2d 363 (App. Div. Nov. 30, 1976), cert. denied, 73 N.J. 57, 372 A.2d 322 (January 18, 1977): New Jersey trial court and appellate Division held lessee is strictly liable for oil spill under New Jersey Water Quality Improvement Act of 1971, coverage extended to such statutory liability, spill was neither expected nor intended (and therefore not "sudden" and "accidental") and thus not excluded, and the pollution exclusion did not bar coverage for spill since it only applies to "active polluters." 
 
2. Farm Family Mutual Ins. Co. v. Bagley, 64 A.D.2d 1014, 409 N.Y.S.2d 294 (4th Dep't 1978): Appellate Division of the Supreme Court of New York held question of fact existed as to whether pollution exclusion applied to damage caused by chemicals to crops; insurer must defend the action. 
 
3. United States of America v. Hooker Chemicals & Plastics Corp., et al., Love Canal Landfill (Docket No. Civ. 79-990), Hyde Park Landfill (Docket No. Civ. 79-989), S-Area Landfill (Docket No. Civ. 79-988) and 102nd Street 

[1997]  499  L.R.L.R.  Henderson v. Merrett Syndicate (Q.B. (Com. Ct.))    Cresswell, J. 

Landfill (Docket No. Civ. 79-987) (December 20, 1979) (TRN GGG): Commencement of four actions in the United States District Court for the Western District of New York wherein the Government sought to compel Hooker and Occidental Chemical Corporation to cleanup, and pay for the cost of cleaning up, four hazardous waste sites in Niagara County, N.Y. 
 
4. Allstate Ins. Co. v. Klock Oil Co., 73 A.D.2d 486, 426 N.Y.S.2d 603 (4th Dep't April 8, 1980): Appellate Division of the Supreme Court of New York refused to enforce the pollution exclusion in an environmental claim. "[T]he word 'sudden' as used in liability insurance need not be limited to instantaneous happening." Discharge of gasoline could be both sudden and accidental though undetected for a substantial period of time. Policy at issue expressly insured against risk of property damage from gasoline pumps and tanks. 
 
5. Travelers Indem. Co. v. Dingwell, 12 Envtl. L. Rep. 21,072, 414 A.2d 220 (May 12, 1980): Supreme Judicial Court of Maine held pollution exclusion may not bar coverage and, therefore, insurers have a duty to defend against class action seeking recovery for contamination of well water as a result of the insured's operation of an industrial waste facility. 
 
6. Niagara County v. Utica Mut. Ins. Co., 80 A.D.2d 415, 439 N.Y.S.2d 538 (4th Dep't May 5, 1981): Appellate Division of the Supreme Court of New York held insurer had duty to defend Love Canal action despite pollution exclusion. Pollution exclusion will only be applied to active polluters. 
 
7. Bankers Trust Co. v. Hartford Accid. & Indem. Co. 518 F. Supp. 371 (S.D.N.Y. July 22, 1981), vacated on rehearing, 621 F. Supp. 685 (Nov. 4, 1981) (JMR 365): Court rejected insurers "owned property" exclusion defense to coverage for an environmental claim. Insurer was obligated as a matter of law under policy providing coverage for damage to third party property to pay for work done on premises of insureds' property where it was undisputed that if preventive work had not been done, oil would continue to prevent third party's use of own property, and reasonable result was to prevent further oil seepage. 
 
8. Jackson Township Munic. Utilities Auth. v. Hartford Acc. & Indem. Co., 186 N.J. Super 156, 451 A.2d 990 (Law Div. August 20, 1982): New Jersey trial court held general liability insurer was obligated to pay its insured, a municipal utilities authority, for cost of suit where complaint alleged negligent and intentional contamination and pollution by  municipal authority, since, if discharge was sudden and accidental, pollution exclusion clause in policy would not bar coverage and pollution exclusion would only be applied to "active polluters." Court stated the pollution problem was "likely to recur constantly" due to the more than 10,000 chemical manufacturing facilities in the State of New Jersey alone, and the Court ordered the insurers to provide a defense for $51.5 million class action against town for contamination of wells near a landfill. 
 
9. United States Aviex Co. v. Travelers Ins. Co., 125 Mich. App. 579, 336 N.W.2d 838 (May 5, 1983) (JMR 366): Michigan Court of Appeals held "[the insurer] must defend and indemnify [the insured]" in suits seeking indemnification for costs incurred by the insured in complying with governmental orders to perform clean-up operations. Court rejected the insurer's "owned property" exclusion and "as damages" defenses. Insurer's "owned property" argument failed because under Michigan interpretation of "percolating water", percolating water is not owned by the owner of land under which it flows and so does not fit within the policy's exclusion. 
 
10. United Pacific Ins. Co. v. Van's Westlake Union, Inc., 34 Wash. App. 708, 664 P.2d 1262 (May 23, 1983): Washington Court of Appeals held pollution exclusion does not bar coverage for loss of use of property by third persons caused by gasoline leaking from the insured's underground pipes over several months. Pollution exclusion is merely a restatement of the "occurrence" definition. 
 
11. United States v. Chem-Dyne Corp., 572 F. Supp. 802 (S.D. Ohio October 14, 1983): United States District Court of Ohio held joint and several liability is permitted, but not required, under CERCLA. Defendant companies had moved for early determination that they were not jointly and severally liable for clean-up costs at site. Court held issue of fact existed concerning divisibility of harm and any potential apportionment, and therefore, summary judgment for defendant companies was premature. Court held scope of liability under CERCLA should be determined under federally created uniform law. 
 
12. United States v. Wade, 577 F. Supp. 1326 (E.D.Pa. December 20, 1983): United States District Court of Pennsylvania held joint and several liability permitted under CERCLA, but was not required. Court denied Government's motion for summary judgment, and held that Government was not entitled to common-law 

[1997]  500  L.R.L.R.  Henderson v. Merrett Syndicate (Q.B. (Com. Ct.))    Cresswell, J. 
 
restitution for sums expended in cleaning up site. The presence of evidence raised substantial fact issue as to whether defendants dumped at site precluded summary judgment. 
 
13. United States v. Stringfellow, 20 ERC 1905, 14 Envtl. L. Rep. 20,385, 1984 WL 3206 (U.S.D.C. C.D. Cal. April 5, 1984): United States District Court of California held joint and several liability finding for waste disposal site permitted under CERCLA, RCRA and California state law. Court found that the imposition of joint and several liability was justified after finding that harm caused by the toxic waste disposal site at issue and the effects of the commingling of different wastes was indivisible. District Court had discretion to use equitable factors in apportioning damages in order to mitigate hardships of imposing joint and several liability upon defendants. 
 
14. Buckeye Union Ins. Co. v. Liberty Solvents and Chemicals Co., 17 Ohio App. 3d 127, 477 N.E.2d 1227 (July 1, 1984): Ohio Court of Appeals rejected insurer's "pollution", "completed operations", and "products hazards" exclusion defenses to insured's demand for a defense in an action seeking clean up of a hazardous waste site. "Construing the words 'sudden and accidental' most favorably to the insured and in accordance with the interpretation afforded to the polluters exclusion clause by other jurisdictions, we conclude that the [hazardous waste] release and resultant property damage could be found to be 'sudden and accidental.' " 
 
15. State of New York v. Shore Realty Corp., 759 F.2d 1032, 1044 (2d Cir. April 4, 1985): Court of Appeals for the Second Circuit found retroactive strict liability "without regard to causation" under CERCLA, and under the law of the State of New York, for the cleanup costs of an environmental claim. 
 
16. Shapiro v. Public Service Mut. Ins. Co., 19 Mass. App. 648, 477 N.E.2d 146 (April 22, 1985): Massachusetts Court of Appeals held the insurance industry's standard pollution exclusion clause is ambiguous, required insurer to defend and indemnify environmental claim and awarded attorneys' fees to the insured. 
 
17. United States Fidelity & Guar. Co. v. Armstrong, 479 So. 2d 1164 (Ala. September 20, 1985) (JMR 357): Supreme Court of Alabama held the pollution exclusion did not apply when raw sewage overflowed on property owner's land during course of insureds' construction of sanitary sewage system. The event constituted an "occurrence" within the meaning of the general liability policy, since there was no  evidence that insureds intended discharge of sewage onto land. 
 
18. Atlantic City Municipal Util. Auth. v. Cigna Co., No. A - 1320-8477 (Super. Ct. N.J. App. Div. December 19, 1985) (per curiam) (JMR 361): Court held costs incurred to protect own property not covered pursuant to "owned property" exclusion. Even though insured acted reasonably to avert contamination of waste supply beneath its own land, expenditures were not to discharge legal obligation to damages. 
 
19. Maryland Casualty Co. v. Armco, Inc., 643 F. Supp. 430 (D. Md. September 8, 1986) (JMR 307): Court held "damages" do not include costs in compliance with equitable relief such as cleanup costs. 
 
20. United States v. Conservation Chemical Corp., 653 F. Supp. 152, 200 (W.D. Mo. September 17, 1986) (JMR 362): Court held the United States action against operator of chemical waste disposal facility was action within the claims-made policy period and required coverage by insurer for operator. Percolating groundwater under chemical waste disposal facility was not owned by operator, and, therefore, was not within the owned property exclusion of liability policies that excluded coverage under Missouri law for damage to property owned and controlled by insured. Other exclusions exerted by insurers were questions of fact precluding summary judgment. Owned property exclusion does not apply to damage to third parties. 
 
21. Mraz v. Canadian Universal Ins. Co., 804 F.2d 1325 (4th Cir. November 4, 1986) (JMR 308): Court held insurer had no duty to defend against cleanup because no "occurrence" which is judged by the time injury first manifest themselves - i.e. when discovered. Even without occurrence, no duty because government sought response cost but didn't allege "property damage". 
 
22. Fischer & Porter Co. v. Liberty Mut. Ins. Co., 656 F. Supp. 132 (E.D. Pa. December 5, 1986) (JMR 332): Court held failure to remove tank after its useful life was equivalent to accepting risk of leakage of toxic chemical. Burden of proving sudden accidental occurrence exception fell on the insured. 
 
23. American Motorists Inc. Co. v. General Host Corp., 667 F. Supp. 1423 (D. Kan. July 28, 1987) (JMR 331): Court found no coverage of 75 years worth of pollution resulting from careless operation. Plant had notice of pollution for over 50 years. 
 
24. Detrex Chem. Ins. v. Employers Ins. of Wausau, 631 F. Supp. 438 (N.D. Ohio August 27, 1987) 

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(JMR 387): Court held claim for damages against insured that might result in legal liability is not synonymous with "suit". Insurer has no duty to defend in matters where insured only notified that it was potentially liable for cleanup costs. 
 
25. Centennial Ins. Co. v. Lumberman Mut. Casualty Co. 677 F. Supp. 342 (E.D. Pa. November 17, 1987) (JMR 377): Court held dumping of toxic waste was "occurrence" arising each time waste was dumped. But continuous nature of dumping precluded coverage. 
 
26. Continental Ins. Co. v. Northeastern Pharmaceutical & Chem. Co., 842 F.2d 977 (8th Cir. February 26, 1988) (en banc) (JMR 306): Court held "damages" do not include cleanup costs and other such equitable relief. Court did not address "occurrence" which District Court defined as when injury occurred. 
 
27. International Minerals & Chem. Corp. v. Liberty Mut. Ins., 522 N.E.2d 758 (Ill. App. Ct. March 25, 1988) (JMR 346): Court found no evidence that discharge, dispersal, release or escape was sudden to exempt from pollution exclusion clause. 
 
28. United States Fidelity & Guar. Co. v. Murray Ohio Mfg. Co., 693 F. Supp. 617 (M.D. Tenn. June 30, 1988) (JMR 345): Court found discharge of pollutants was non sudden to relieve insurer of duty to indemnify. 
 
29. United States Fidelity & Guar. Co. v. Star Fire Coals, Inc., 856 F.2d 31 (6th Cir. August 31, 1988) (JMR 344): Court held determination of "sudden and accidental" focuses on discharge of pollutants, not on damages suffered by pollutants. 
 
30. Technicon Electronics v. American Home Assurance Co., 141 A.D.2d 124, 533 N.Y.S.2d 91 (N.Y. App. Div. 2d Dep't October 3, 1988); affirmed, 74 N.Y. 2d 66 (1989) (JMR 350): Court held manufacturer's discharge of toxic wastes over several years not "accidental". 
 
31. Shell Oil Co. v. Accident & Casualty Ins. Co., No. 278953 (Cal. Super. Ct., San Mateo Cty, October 6, 1988) (JMR 373): Court held no coverage if insured intentionally committed an act wherein it should have reasonably known of the high degree of certainty that damage to property of another would occur. 
 
32. State of New York v. Amnro Realty Corp., 697 F. Supp. 99 (N.D. N.Y. October 11, 1988) (JMR 348): Court held insured failed to notify insurers promptly of "occurrence" - 4-year delay unreasonable. 
 
33. Powers Chemco, Inc. v. Federal Ins. Co., 533 N.Y.S.2d 1010 (N.Y. App. Div. 2d Dep't November 14, 1988) (JMR 351): Court held  relevant factor in applying "pollution exclusion" was whether toxic material was discharged into environment unexpectedly and unintentionally or knowingly and intentionally. 

34. Sharon Steel Corp. v. Aetna Casualty & Sur. Co., Civ. No. C-87-2306 (Utah D. Ct. March 9, 1989) (JMR 386): Court held EPA administrative proceeding is not substantially equivalent to court proceeding, so insurer had no duty to defend. 

35. Harter Corp. v. Home Indemnity Co., 713 F. Supp. 231 (W.D. Mich. April 12, 1989) (JMR 388): Court held EPA's threat to hold manufacturer liable for cleanup costs was not "suit seeking damages"; thus no duty to defend. 

36. Diamond Shamrock Chem. Co. v. Aetna Casualty & Surety Co., No. C-3939-84 (N.J. Super. Ct. Ch. Div. April 17, 1989): Court held discharge of waste chemical effluents into river over period of 6 years in violation of statute constituted intentional, planned act not covered by insurance. 

37. County of Broome v. Aetna Casualty & Sur. Co., 146 A.D.2d 337, 540 N.Y.S.2d 620 (3d Dep't May 4, 1989) (JMR 333): Court held discharge of pollutants is not an "occurrence" because insured was "aware" of pollution for years. No evidence that damages were neither expected nor intended. 

38. Alcolac, Inc. v. St. Paul Fire & Marine Ins. Co., 716 F. Sup. 1541 (D. Md. July 21, 1989) (JMR 330): Court held insured's repeated releases of toxic chemicals were not "sudden and accidental" and thus not covered occurrences. 

39. New Hampshire Ins. Co. v. Heekla Mining Co., 791 P.2d 1154 (Colo. Ct. App. October 19, 1989) (JMR 334): Court held insured had constructive notice (per statute) that mining would be harmful to environment. Insured knew or should have known (objective standard). 

(B) ALL CASES LISTED CHRONOLOGICALLY 

June 25, 1958 

Ferrara v. Galluchio, 5 N.Y.2d 16, 176 N.Y.S.2d 996 (June 25, 1958): High Court of the State of New York recognized cancerphobia is a viable cause of action. Medical malpractice action for mental anguish against physician who caused x-ray burns for which plaintiff was told she had to have tissue examined every six months as cancer might develop. Court determined that it was common knowledge among laymen and laywomen that wounds which do not heal over long periods of time 

[1997]  502  L.R.L.R.  Henderson v. Merrett Syndicate (Q.B. (Com. Ct.))    Cresswell, J. 

frequently become cancerous, and therefore, plaintiff's cancerphobia was justified. 

Sept 10, 1973 

Borel v. Fibreboard Products, 493 F.2d 1076 (5th Cir. September 10, 1973), cert. denied, 419 U.S. 869 (October 15, 1974) (JMR 1): Court of Appeals for the Fifth Circuit applied the doctrine of strict liability in asbestos disease cases and subjected producers to joint and several liability. Plaintiffs, in order to state a viable claim, need only show their exposure to defendants asbestos or asbestos containing product and an asbestos-related disease. 

Jan 18, 1977 

Lansco, Inc. v. Department of Environmental Protection, 138 N.J. Super. 275, 350 A.2d 520 (Ch. Div. Dec. 4, 1975), aff'd, 145 N.J. Super. 433, 368 A.2d 363 (App. Div. Nov. 30, 1976), cert. denied, 73 N.J. 57, 372 A.2d 322 (January 18, 1977): New Jersey trial court and Appellate Division held lessee is strictly liable for oil spill under New Jersey Water Quality Improvement Act of 1971, coverage extended to such statutory liability, spill was neither expected nor intended (and therefore not "sudden" and "accidental") and thus not excluded, and the pollution exclusion did not bar coverage for spill since it only applies to "active polluters." 

Nov 11, 1977 

Porter v. American Optical Corp., Case No. 78-1953 (U.S.D.C. E.D. La. November 11, 1977), aff'd and rev'd in part, 641 F.2d 1128 (5th Cir. April 8, 1981), cert. denied, 454 U.S. 1109 (December 7, 1981), rehearing denied, 455 U.S. 1009 (March 8, 1982): Court of Appeals for the Fifth Circuit reversed District Court's application of the manifestation trigger of coverage and applied the exposure trigger for asbestos bodily injury claims. Court expressly concurred with the 6th Circuit Forty-Eight Insulations decision and held that insurance liability would be prorated among all insurers on risk during exposure period. The insured was held strictly liable under Louisiana products liability law for the manufacture of a respirator that did not protect worker from asbestos. The manufacturer had supplied such respirators to the company since 1953. 

1978 

Farm Family Mutual Ins. Co. v. Bagley, 64 A.D.2d 1014, 409 N.Y.S.2d 294 (4th Dep't 1978): Appellate Division of the Supreme Court of New York held question of fact existed as to whether pollution exclusion applied to damage caused by chemicals to crops; insurer must defend the action.  Dec 20, 1979 

United States of America v. Hooker Chemicals & Plastics Corp., et al., Love Canal Landfill (Docket No. Civ. 79-990), Hyde Park Landfill (Docket No. Civ. 79-989), S-Area Landfill (Docket No. Civ. 79-988) and 102nd Street Landfill (Docket No. Civ. 79-987) (December 20, 1979) (TRN GGG): Commencement of four actions in the United States District Court for the Western District of New York wherein the Government sought to compel Hooker and Occidental Chemical Corporation to cleanup, and pay for the cost of cleaning up, four hazardous waste sites in Niagara County, N.Y. 

April 8, 1980 

Allstate Ins. Co. v. Klock Oil Co., 73 A.D.2d 486, 426 N.Y.S.2d 603 (4th Dep't April 8, 1980): Appellate Division of the Supreme Court of New York refused to enforce the pollution exclusion in an environmental claim. "[T]he word 'sudden' as used in liability insurance need not be limited to instantaneous happening." Discharge of gasoline could be both sudden and accidental though undetected for a substantial period of time. Policy at issue expressly insured against risk of property damage from gasoline pumps and tanks. 

May 12, 1980 

Travelers Indem. Co. v. Dingwell, 12 Envtl. L. Rep. 21,072, 414 A.2d 220 (May 12, 1980): Supreme Judicial Court of Maine held pollution exclusion may not bar coverage and, therefore, insurers have a duty to defend against class action seeking recovering for contamination of well water as a result of the insured's operation of an industrial waste facility. 

Oct 21, 1980 

Insurance Co. of North America v. Forty-Eight Insulations, Inc., 633 F.2d 1212 (6th Cir. Mich. October 21, 1980), op. clarified, 657 F.2d 814 (March 5, 1981), cert. denied, 454 U.S. 1109 (December 7, 1981), rehearing denied, 455 U.S. 1009 (March 8, 1982) (JMR 88): Court of Appeals for the Sixth Circuit applied exposure theory and concluded insurers have duty to defend asbestos bodily injury claims brought against the manufacturers of asbestos. Court held that insurance liability would be prorated among all insurers on risk during exposure period. 

April 1981 

Dayton Independent School District v. National Gypsum Co., No. B-81-293-CA (E.D. Tex. April, 1981) (TRN CCC) (JMR 271): Suit filed on behalf of eighty-three Texas school districts seeking recovery of the cost of removing asbestos from some 600 schools. Suit filed by the various Texas 

[1997]  503  L.R.L.R.  Henderson v. Merrett Syndicate (Q.B. (Com. Ct.))    Cresswell, J. 

school districts was dismissed after the parties settled. However, District Court decided the liability of the manufacturer's insurer. Court of Appeals for the Fifth Circuit reversed the finding of liability on the insurer, holding that there was no basis of jurisdiction. Fifth Circuit Court of Appeals held the District Court applied general rules of construction favouring the insured without first applying the substantive decisional law of any specific jurisdiction. District Court's decision was reversed. 

May 5, 1981 

Niagara County v. Utica Mut. Ins. Co., 80 A.D.2d 415, 439 N.Y.S.2d 538 (4th Dep't May 5, 1981): Appellate Division of the Supreme Court of New York held insurer and duty to defend Love Canal action despite pollution exclusion. Pollution exclusion will only be applied to active polluters. 

July 22, 1981 

Bankers Trust Co. v. Hartford Accid. & Indem. Co. 518 F. Supp. 371 (S.D.N.Y. July 22, 1981), vacated on rehearing, 621 F. Supp. 685 (Nov. 4, 1981) (JMR 365): Court rejected insurers "owned property" exclusion defense to coverage for an environmental claim. Insurer was obligated as a matter of law under policy providing coverage for damage to third party property to pay for work done on premises of insureds' property where it was undisputed that if preventive work had not been done, oil would continue to prevent third party's use of own property, and reasonable result was to prevent further oil seepage. 

Oct 1, 1981 

Keene Corp. v. I.N.A., 513 F. Supp. 47 (D.C.C. January 30, 1981), rev'd 667 F.2d 1034 (D.C. Cir. October 1, 1981), cert. denied, 455 U.S. 1007 (March 8, 1982), rehearing denied, 456 U.S. 951 (April 26, 1982) (JMR 267): District Court applied exposure theory to trigger coverage. District of Columbia Circuit Court of Appeals applied the triple/continuous trigger of coverage and found a duty to defend and coverage for the over 6000 asbestos bodily injury suits against the insured. Court held that "INA's duty to defend Keene in underlying asbestos cases ceases upon the exhaustion of indemnity limits under the pre-1966 policies in question". Court found unambiguous policy language specifically limiting Keene's duty to defend any suit "with respect to such insurance as is provided by the policy". 

June 30, 1982 

Eagle-Picher Industries, Inc. v. Liberty Mutual Ins. Co., 682 F.2d 12 (1st Cir. June 30, 1982), cert. denied, 460 U.S. 1028 (March 7, 1983) (JMR 83): Court of Appeals for the First Circuit applied the  manifestation theory to trigger coverage for asbestos bodily injury claims. 

Aug 20, 1982 

Jackson Township Munic. Utilities Auth. v. Hartford Acc. & Indem. Co., 186 N.J. Super 156, 451 A.2d 990 (Law Div. August 20, 1982): New Jersey trial court held general liability insurer was obligated to pay its insured, a municipal utilities authority, for cost of suit where complaint alleged negligent and intentional contamination and pollution by municipal authority, since, if discharge was sudden and accidental, pollution exclusion clause in policy would not bar coverage and pollution exclusion would only be applied to "active polluters." Court stated the pollution problem was "likely to recur constantly" due to the more than 10,000 chemical manufacturing facilities in the State of New Jersey alone, and the Court ordered the insurers to provide a defense for $51.5 million class action against town for contamination of wells near a landfill. 

1983 

Blue et al. v. Johns-Manville Corp., et al., (10 Phila. 23, 1983) (JMR 24 at 40-41): Pennsylvania trial court commented asbestos claimants was like gambling at the local casinos, with juries compensating "minimal [asbestos] injuries" with in excess of a million dollars. This case describes the inappropriateness of the various asbestos litigation doctrines as applied to latent injury asbestos cases. It talks about how the doctrines adopted provide incentives for attorneys to file asbestos claims for claimants who show no signs of injury. Court concluded that asbestos litigation resembled the casinos in Atlantic City. Like the casinos, the Court concluded, the only winners in asbestos litigation were the attorneys. 

May 5, 1983 

United States Aviex Co. v. Travelers Ins. Co., 125 Mich. App. 579, 336 N.W.2d 838 (May 5, 1983) (JMR 366): Michigan Court of Appeals held "[the insurer] must defend and indemnify [the insured]" in suits seeking indemnification for costs incurred by the insured in complying with governmental orders to perform clean-up operations. Court rejected the insurer's "owned property" exclusion and "as damages" defenses. Insurer's "owned property" argument failed because under Michigan interpretation of "percolating water", percolating water is not owned by the owner of land under which it flows and so does not fit within the policy's exclusion. 

May 23, 1983 

United Pacific Ins. Co. v. Van's Westlake Union, Inc., 34 Wash. App. 708, 664 P.2d 1262 (May 23, 

[1997]  504  L.R.L.R.  Henderson v. Merrett Syndicate (Q.B. (Com. Ct.))    Cresswell, J. 

1983: Washington Court of Appeals held pollution exclusion does not bar coverage for loss of use of property by third persons caused by gasoline leaking from the insured's underground pipes over several months. Pollution exclusion is merely a restatement of the "occurrence" definition. 

Dec 20, 1983 

United States v. Chem-Dyne Corp., 572 F. Supp. 802 (S.D. Ohio October 14, 1983): United States District Court of Ohio held joint and several liability is permitted, but not required, under CERCLA. Defendant companies had moved for early determination that they were not jointly and severally liable for clean-up costs at site. Court held issue of fact existed concerning divisibility of harm and any potential apportionment, and therefore, summary judgment for defendant companies was premature. Court held scope of liability under CERCLA should be determined under federally created uniform law. 

Dec 20, 1983 

United States v. Wade, 577 F. Supp. 1326 (E.D.Pa. December 20, 1983): United States District Court of Pennsylvania held joint and several liability permitted under CERCLA, but was not required. Court denied Government's motion for summary judgment, and held that Government was not entitled to common-law restitution for sums expended in cleaning up site. The presence of evidence raised substantial fact issue as to whether defendants dumped at site precluded summary judgment. 

Jan 9, 1984 

Johnson County v. United States Gypsum Co., 580 F. Supp. 284 (E.D. Tenn. January 9, 1984) (JMR 244): In breach of warranty issue, defendants prevailed based on statute of limitations. Plaintiff's negligence and strict liability claims survived summary judgment motion. 

April 5, 1984 

United States v. Stringfellow, 20 ERC 1905, 14 Envtl. L. Rep. 20,385, 1984 WL 3206 (U.S.D.C. C.D. Cal. April 5, 1984): United States District Court of California held joint and several liability finding for waste disposal site permitted under CERCLA, RCRA and California state law. Court found that the imposition of joint and several liability was justified after finding that harm caused by the toxic waste disposal site at issue and the effects of the commingling of different wastes was indivisible. District Court had discretion to use equitable factors in apportioning damages in order to mitigate hardships of imposing joint and several liability upon defendants.  July 1, 1984 

Buckeye Union Ins. Co. v. Liberty Solvents and Chemicals Co., 17 Ohio App. 3d 127, 477 N.E.2d 1227 (July 1, 1984): Ohio Court of Appeals rejected insurer's "pollution", "completed operations", and "products hazards" exclusion defenses to insured's demand for a defense in an action seeking clean up of a hazardous waste site. "Construing the words 'sudden and accidental' most favorably to the insured and in accordance with the interpretation afforded to the polluters exclusion clause by other jurisdictions, we conclude that the [hazardous waste] release and resultant property damage could be found to be 'sudden and accidental.' " 

April 4, 1985 

State of New York v. Shore Realty Corp., 759 F.2d 1032, 1044 (2d Cir. April 4, 1985): Court of Appeals for the Second Circuit found retroactive strict liability "without regard to causation" under CERCLA, and under the law of the State of New York, for the cleanup costs of an environmental claim. 

April 22, 1985 

Shapiro v. Public Service Mut. Ins. Co., 19 Mass. App. 648, 477 N.E.2d 146 (April 22, 1985): Massachusetts Court of Appeals held the insurance industry's standard pollution exclusion clause is ambiguous, required insurer to defend and indemnify environmental claim and awarded attorneys' fees to the insured. 

June 17, 1985 

AC and S v. Aetna, 764 F.29 968 (3rd Cir. June 17, 1985) (JMR 82): Court held exposure, exposure in residence and manifestation all trigger coverage (following Keene, 667 F.2d 1034) (triple-trigger). 

July 23, 1985 

Commercial Union Insurance Co. v. Sepco, 765 F.2d 1543 (11th Cir. July 23, 1985) (JMR 87): Court held exposure triggers coverage (silicosis case). 

July 31, 1985 

Lac D'Amiante du Quebec, Ltee. v. American Home Assurance Co., 613 F. Supp. 1549 (D.N.J. July 31, 1985), vacated on other grounds, 864 F.2d 1033 (3d Cir. Dec. 28, 1988) (JMR 266): United States District Court of New Jersey adopted the continuous/triple trigger of coverage for asbestos property damage and bodily injury claims. Judge Barry pointed out that "[i]ndeed, the ["[t]housands upon thousands" of] claims currently pending represent only a small percentage of the total number of potential claimants." Court predicted that N.J. 

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courts would construe these ambiguous policies in favour of the insured and, following Keene, adopt the triple trigger theory. Once coverage is triggered, the insurer is jointly and severally liable for the total amount without proration of losses, the possible effect of "other insurance" clauses. Court of Appeals for the Third Circuit reversed the District Court with instructions to dismiss this action, and ruled that the District Court should have abstained from exercising jurisdiction. The lower court decision was questioned in the Third Circuit Court of Appeals' decision, but no conclusion was reached. 

Sept 20, 1985 

United States Fidelity & Guar. Co. v. Armstrong, 479 So. 2d 1164 (Ala. September 20, 1985) (JMR 357): Supreme Court of Alabama held the pollution exclusion did not apply when raw sewage overflowed on property owner's land during course of insureds' construction of sanitary sewage system. The event constituted an "occurrence" within the meaning of the general liability policy, since there was no evidence that insureds intended discharge of sewage onto land. 

Dec 19, 1985 

Atlantic City Municipal Util. Auth. v. Cigna co., No. A - 1320-8477 (Super. Ct. N.J. App. Div. December 19, 1985) (per curiam) (JMR 361): Court held costs incurred to protect own property not covered pursuant to "owned property" exclusion. Even though insured acted reasonably to avert contamination of waste supply beneath its own land, expenditures were not to discharge legal obligation to damages. 

April 3, 1986 

Standard Asbestos Manufacturing & Insulating Co. v. Royal Indemnity Ins. Co., No. CV-80-14909, slip op. at 9 (Mo. Cir. Ct. Jackson Co. April 3, 1986) (TNR PP) (JMR 90): Missouri Court applied injury-in-fact trigger and commented with regard to the asbestos coverage issues: 

"One of the problems in insurance law is that it is result oriented. In an effort to compensate litigants, the courts have manipulated concepts of contract law and interpretations of insurance contracts and have vastly expanded theories of liability and contractual relationships. While the motive may be laudable, the result is that there is no stability in the law and no one can predict the result in any given case." 

May 9, 1986 

Abex Corp. v. Maryland Casualty, 790 F.2d 119 (D.C. Cir. May 9, 1986) (JMR 85): Court applied "injury-in-fact" trigger under New York Law  (rejecting Keene's triple trigger as inapplicable since case arose under N.Y. law). 

June 11, 1986 

City of Greenville & Greenville Water Sys. v. W.R. Grace for South Carolina, 640 F. Supp. 559 (D.S.C. June 11, 1986), aff'd, 827 F.2d 975 (4th Cir. August 28, 1987) (JMR 242): United States District Court and Court of Appeals for the Fourth Circuit upheld jury verdict of $6.4 million in actual damages and $2 million in punitive damages against asbestos manufacturer. The decision was limited to the law of South Carolina which State had given jurisdiction in all asbestos cases to one judge. 

Sept 8, 1986 

Maryland Casualty Co. v. Armco, Inc., 643 F. Supp. 430 (D. Md. September 8, 1986) (JMR 307): Court held "damages" do not include costs in compliance with equitable relief such as cleanup costs. 

Sept 17, 1986 

United States v. Conservation Chemical Corp., 653 F. Supp. 152, 200 (W.D. Mo. September 17, 1986) (JMR 362): Court held the United States action against operator of chemical waste disposal facility was action within the claims-made policy period and required coverage by insurer for operator. Percolating groundwater under chemical waste disposal facility was not owned by operator, and, therefore, was not within the owned property exclusion of liability policies that excluded coverage under Missouri law for damage to property owned and controlled by insured. Other exclusions exerted by insurers were questions of fact precluding summary judgment. Owned property exclusion does not apply to damage to third parties. 

Nov 4, 1986 

Mraz v. Canadian Universal Ins. Co., 804 F.2d 1325 (4th Cir. November 4, 1986) (JMR 308): Court held insurer had no duty to defend against cleanup because no "occurrence" which is judged by the time injury first manifest themselves - i.e. when discovered. Even without occurrence, no duty because government sought response cost but didn't allege "property damage". 

Dec 5, 1986 

Fischer & Porter Co. v. Liberty Mut. Ins. Co., 656 F. Supp. 132 (E.D. Pa. December 5, 1986) (JMR 332): Court held failure to remove tank after its useful life was equivalent to accepting risk of leakage of toxic chemical. Burden of proving sudden accidental occurrence exception fell on the insured. 

[1997]  506  L.R.L.R.  Henderson v. Merrett Syndicate (Q.B. (Com. Ct.))    Cresswell, J. 

1987 

U.S.F. & G. v. Wilkin Insulation, No. 85-010 (Kane Cty., Ill. Cir. Ct. 1987) (JMR 269): Court held physical injury was required for plaintiff to prevail. While the case was reversed in December 1989, the lower court's holding was applicable from 1987-1989. 

Jan 21, 1987 

Clemtex, Inc. v. Southeastern Fidelity Insurance Co., 807 F.2d 1271 (5th Cir. January 21, 1987) (JMR 86): Court applied exposure trigger to case involving silicosis arising under Texas law. 

June 5. 1987 

Anderson County Board of Education v. National Gypsum Co., 821 F.2d 1230 (6th Cir. June 5, 1987) (JMR 254): Defendants prevailed before jury against Plaintiff claims of negligence, strict liability, misrepresentation and fraud. Appellate Court held statute of limitations also bars warranty claim - based on state law. 

July 28, 1987 

American Motorists Inc. Co. v. General Host Corp., 667 F. Supp. 1423 (D. Kan. July 28, 1987) (JMR 331): Court found no coverage of 75 years worth of pollution resulting from careless operation. Plant had notice of pollution for over 50 years. 

Aug 27, 1987 

Detrex Chem. Ins. v. Employers Ins. of Wausau, 631 F. Supp. 438 (N.D. Ohio August 27, 1987) (JMR 387): Court held claim for damages against insured that might result in legal liability is not synonymous with "suit". Insurer has no duty to defend in matters where insured only notified that it was potentially liable for cleanup costs. 

Aug 28, 1987 

City of Greenville v. W.R. Grace & Co., 827 F.2d 975 (9th Cir. August 28, 1987) (JMR 242): Court held while plaintiff can sue based on solely economic loss, plaintiff must show that asbestos was unreasonably dangerous. Also no need to wait for manifestation. 

Sept 14, 1987 

Zurich Insurance Co. v. Raymark Industries, 514 N.E.2d 150 (Ill. September 14, 1987) (JMR 84): Court held manifestation triggers coverage. Court concluded manifestation can be either of "disease" (when lungs are significantly impaired) or of "sickness" (a weakened, disordered or unsound condition which has not yet impaired the lungs to the point of being a disease).  Oct 15, 1987 

Lockwood v. AC&S, Inc., 744 P.2d 605 (Washington S. Ct. October 15, 1987) (JMR 167): Court applied drift theory. (Plaintiff was a rigger in a shipyard who worked in same area as insulators installing asbestos.) 

Nov 17, 1987 

Centennial Ins. Co. v. Lumberman Mut. Casualty Co., 677 F. Supp. 342 (E. D. Pa. November 17, 1987) (JMR 377): Court held dumping of toxic waste was "occurrence" arising each time waste was dumped. But continuous nature of dumping precluded coverage. 

Dec 14, 1987 

Kaiser v. Armstrong World Industries, 678 F. Supp. 29 (D. Puerto Rico December 14, 1987) (JMR 91): Court applied manifestation cases to suit for breach of warranty and negligence against asbestos manufacturer (knowledge seen as similar to manifestation, thereby starting statute of limitations).

Feb 26, 1988 

Continental Ins. Co. v. Northeastern Pharmaceutical & Chem. Co., 842 F.2d 977 (8th Cir. February 26, 1988) (en banc) (JMR 306): Court held "damages" do not include cleanup costs and other such equitable relief. Court did not address "occurrence" which District Court defined as when injury occurred. 

March 25, 1988 

International Minerals & Chem. Corp. v. Liberty Mut. Ins., 522 N.E.2d 758 (Ill. App. Ct. March 25, 1988) (JMR 346): Court found no evidence that discharge, dispersal, release or escape was sudden to exempt from pollution exclusion clause. 

March 31, 1988 

Carey Canada, Inc. v. Aetna Cas. & Sur. Co., 1988 WL 169287, *5 (D.D.C. March 31, 1988) (TRN EEE): United States District Court of Columbia found coverage and stated: 

"The court is aware of no case applying the pollution exclusion in the context of asbestos litigation." 

"The majority, if not all, of the underlying claimants' seek recovery for damages caused by [the insured's] product (asbestos) to other property (buildings and buildings materials). In such cases the 'owned products' exclusion is simply inapplicable." 

"[C]ourts which have considered the effect of asbestos on buildings in the context of an insurance coverage dispute have uniformly concluded that property damage was sustained." 

[1997]  507  L.R.L.R.  Henderson v. Merrett Syndicate (Q.B. (Com. Ct.))    Cresswell, J. 

Court stayed plaintiff's summary judgment motion pending further discovery. After further discovery, plaintiff's summary judgment motion was denied in Carey Canada, Inc. v. California Union, 748 F. Supp. 8 (D.D.C. 1990) (JMR 271). There the Court held there was a genuine issue of fact as to whether release of fibres occurs continuously and the insured had not satisfied the burden of proving its loss occurred within the policy period. 

June 30, 1988 
 
United States Fidelity & Guar Co. v. Murray Ohio Mfg. Co., 693 F. Supp. 617 (M.D. Tenn. June 30, 1988) (JMR 345): Court found discharge of pollutants was non sudden to relieve insurer of duty to indemnify. 
 
Aug 31, 1988 
 
United States Fidelity & Guar. Co. v. Star Fire Coals, Inc., 856 F.2d 31 (6th Cir. August 31, 1988) (JMR 344): Court held determination of "sudden and accidental" focuses on discharge of pollutants, not on damages suffered by pollutants. 
 
Oct 3, 1988 

Technicon Electronics v. American Home Assurance Co., 141 A.D.2d 124, 533 N.Y.S.2d 91 (N.Y. App. Div. 2d Dep't October 3, 1988); affirmed, 74 N.Y. 2d 66 (1989) (JMR 350): Court held manufacturer's discharge of toxic wastes over several years not "accidental". 

Oct 6, 1988 

Shell Oil Co. v. Accident & Casualty Ins. Co., No. 278953 (Cal. Super. Ct., San Mateo Cty, October 6, 1988) (JMR 373): Court held no coverage if insured intentionally committed an act wherein it should have reasonably known of the high degree of certainty that damage to property of another would occur. 

Oct 11, 1988 

State of New York v. Amnro Realty Corp., 697 F. Supp. 99 (N.D. N.Y. October 11, 1988) (JMR 348): Court held insured failed to notify insurers promptly of "occurrence" - 4-year delay unreasonable. 

Nov 14, 1988 

Powers Chemco, Inc. v. Federal Ins. Co., 533 N.Y.S.2d 1010 (N.Y. App. Div. 2d Dep't November 14, 1988) (JMR 351): Court held relevant factor in applying "pollution exclusion" was whether toxic material was discharged into environment unexpectedly and unintentionally or knowingly and intentionally.  March 9, 1989 

Sharon Steel Corp. v. Aetna Casualty & Sur. Co., Civ. No. C-87-2306 (Utah D. Ct. March 9, 1989) (JMR 386): Court held EPA administrative proceeding is not substantially equivalent to court proceeding, so insurer had no duty to defend. 

April 12, 1989 

Harter Corp. v. Home Indemnity Co., 713 F. Supp. 231 (W.D. Mich. April 12, 1989) (JMR 388): Court held EPA's threat to hold manufacturer liable for cleanup costs was not "suit seeking damages"; thus no duty to defend. 

April 17, 1989 

Diamond Shamrock Chem. Co. v. Aetna Casualty & Surety Co., No. C-3939-84 (N.J. Super. Ct. Ch. Div. April 17, 1989): Court held discharge of waste chemical effluents into river over period of 6 years in violation of statute constituted intentional, planned act not covered by insurance. 

May 4, 1989 

County of Broome v. Aetna Casualty & Sur. Co., 146 A.D.2d 337, 540 N.Y.S.2d 620 (3d Dep't May 4, 1989) (JMR 333): Court held discharge of pollutants is not an "occurrence" because insured was "aware" of pollution for years. No evidence that damages were neither expected nor intended. 

May 9, 1989 

In re New York City Asbestos Litigation, 542 N.Y.S.2d 118 (N.Y. Sup. Ct. May 9, 1989) (JMR 169): Court adopted drift theory. Exposure is a question of fact for jury. 

July 21, 1989 

Alcolac, Inc. v. St. Paul Fire & Marine Ins. Co., 716 F. Sup. 1541 (D. Md. (mem.) July 21, 1989) (JMR 330): Court held insured's repeated releases of toxic chemicals were not "sudden and accidental" and thus not covered occurrences. 

Oct 19, 1989 

New Hampshire Ins. Co. v. Heekla Mining Co., 791 P.2d 1154 (Colo. Ct. App. October 19, 1989) (JMR 334): Court held insured had constructive notice (per statute) that mining would be harmful to environment. Insured knew or should have known (objective standard). 

Aug 29, 1990 

Eagle-Picher v. Balbos, 578 A.2d 228 (Md. App. August 29, 1990) (JMR 164): Court adopted drift theory. No direct exposure needed for plaintiff to get case to jury. 
 
[1997]  508  L.R.L.R.  Henderson v. Merrett Syndicate (Q.B. (Com. Ct.))    Cresswell, J. 
     
APPENDIX 3 
     
PRE BYE-LAW AGENCY AGREEMENT 

This Agreement is made the day of One thousand nine hundred and 

BETWEEN 

of Lloyd's, Lime Street, London, EC3M 7HA (hereinafter called "the Name") of the one part and 

Underwriting Agents approved by the Committee of Lloyd's whose registered office is at (hereinafter called "the Agent") of the other part 

WHEREAS the Name is or is about to become an Underwriting Member of Lloyd's and it has been arranged that the Agent shall act as the Name's Underwriting Agent at Lloyd's upon the terms hereinafter mentioned. 

NOW IT IS HEREBY DECLARED AND AGREED between the parties hereto as follows: - 

Appointment of the Name's Agent at Lloyd's 

1. THE Agent shall act as the Underwriting Agent for the Name for the purposes of underwriting at Lloyd's through the sub-agency of Merrett Syndicates Limited (hereinafter called "the Sub-Agent") for the account of the Name policies and contracts of insurance reinsurance and guarantee relating to all classes of insurance business which with the sanction of the Committee of Lloyd's may be transacted at Lloyd's by the Syndicate. 

2. (a) THE expression "Syndicate" shall where the context so permits mean the Syndicate or (if more than one) each of the Syndicates at Lloyd's referred to in the first column of the First Schedule hereto as the same shall from time to time be constituted by the Sub-Agent and no subsequent change in the bureau number or name by which the Syndicate is known shall affect the provisions of this Agreement Provided Always that the expression "Marine Syndicate" or any reference to a Marine Syndicate where any Marine Syndicate is for the time being included in the First Schedule hereto shall include any separate Syndicate in which the members of such Marine Syndicate underwrite their Incidental Non-Marine business. 

(b) The Agent is authorised from time to time to decide on behalf of the Name and the Name agrees to be bound by the decision of the Agent as to whether the expression "Syndicate" shall mean: -  (i) A Syndicate or group of Names consisting of members who have themselves appointed the Agent as their Underwriting Agent, or 

(ii) A Syndicate or group of Names consisting of members who have themselves appointed the Agent as their Underwriting Agent and also of other members for whom some other person firm or body corporate is the Underwriting Agent. 

Provided that for the purposes of Clause 17 hereof (taking over) the expression "Syndicate" shall always have the meaning ascribed to it by paragraph (ii) above. 

Date of Joining Syndicate 

3. THE date as on and from which the Name is to be included as a member of the Syndicate shall be the date specified in the second column of the First Schedule hereto. 

Power to Delegate 

4. THE Agent shall have full power and authority to appoint and employ the Sub-agent to carry on or manage the underwriting and to delegate to or confer upon the Sub-Agent all or any of the powers authorities discretions and rights given to the Agent by this Agreement including the powers contained in this Clause. 

5. THE Agent is irrevocably authorised so long as the Agent shall continue to act as agent for the Name: - 

Power to comply with Statutory Provisions and Requirements of Lloyd's 

(a) To comply on behalf of the Name with the requirements prescribed by the Insurance Companies Act 1958 to 1973 the Insurance Companies Act 1974 and/or all other statutory provisions for the time being in force affecting Underwriting Members of Lloyd's and with all requirements and regulations prescribed by Lloyd's 

Power to enter into Agreements on behalf of the Name 

(b) To accede to and sign on behalf of the Name the Agreements specified in the Second Schedule hereto and all other Agreements relating to the underwriting whether with the Corporation of Lloyd's or others to which the Agent may consider it desirable that the Name should become a party 

Power to comply with Foreign Laws 

(c) To comply on behalf of the Name with foreign colonial and local laws ordinances and regulations 

[1997]  509  L.R.L.R.  Henderson v. Merrett Syndicate (Q.B. (Com. Ct.))    Cresswell, J. 

Power to collect money and to make payments 

(d) To collect all premiums and other moneys due to the Name in connection with the underwriting and to pay on behalf of the Name all liabilities outgoings and expenses due from the Name 

Power to accept service of proceedings 

(e) To accept in any part of the world service of all writs notices processes and other communications from time to time requiring to be served on the Name in connection with or arising out of the underwriting. 

Control of Underwriting 

6. (a) THE Agent shall have sole control and management of the underwriting and absolute discretion as to the acceptance of risks and settlement of claims whether such claims shall in the opinion of the Agent be legally enforceable or not. 

(b) The Underwriting shall be conducted in the same manner as may for the time being be adopted by the Agent for the other Names in the same Syndicate. 

(c) The name shall have such share in the risks underwritten on behalf of the Syndicate as the Agent shall from time to time determine The share allocated to the Name shall be as shown from time to time on the Syndicate stamp and such share shall not be substantially altered (other than by reason of the operation of the taking-over provisions contained in Clause 17 hereof) without the consent of the Name 

(d) The Name shall not in any way interfere with the exercise of the aforesaid control or management or discretion. 

Provisions relating to Accounts 

7. THE following provisions shall apply concerning the Accounts of the underwriting: - 

(a) The Agent shall keep such usual and proper underwriting books accounts and memoranda as are kept by Underwriting Agents at Lloyd's and the Agent shall from time to time arrange for the accounts to be audited on the Name's behalf and furnish to the Committee of Lloyd's the figures and Audit Certificate required by the Committee of Lloyd's according to their regulations regarding annual audits The Agent shall send to the Name a copy of the accounts as soon as practicable after the end of each calendar year 

(b) The form of the Accounts whether the same shall be in Syndicate form or otherwise shall be such as the Agent shall from time to time determine 

(c) The Agent may (in accordance with the practice of Lloyd's) irrespective of the date of  acceptance of a risk or of the signing of a policy determine to which year's account the benefit or burden of any insurance shall belong 

(d) Interest and dividends received during any calendar year in respect of deposits or investments made or held under Clause 11 hereof and appreciation or depreciation in the value of such investments as shown by realisations or transfers made during the year or by valuation at the end of the year as the Agent may determine shall unless the Agent otherwise decides be divided between the underwriting accounts open during that year in such proportions as the Agent shall determine 

(e) The Syndicate Account of any calendar year shall not be closed before the expiration of the two calendar years next following the calendar year in question and in order to close the Syndicate Account of any year the Agent may: 

(i) re-insure all or any outstanding liabilities in such manner and by debiting such Account with such sum as the Agent shall in the absolute discretion of the Agent think fit as a premium for reinsurance and crediting the reinsurance premium to the Syndicate Account of the next succeeding year or 

(ii) re-insure all or any outstanding liabilities of such Account into the Account of any other year then remaining open or in any other manner which the Agent thinks fit or 

(iii) allow the whole or part of a Syndicate Account of any year to remain open until its outstanding liabilities shall have run of 

(f) Unless otherwise decided by the Agent no account of the profits or losses of the Syndicate shall be taken except at the Thirty-first day of December in any year and profits shall not be distributed to the Name in respect of any year the accounts whereof remain unclosed. 

(g) The Name or the Name's executors administrators or assigns (hereinafter called "the Representatives") or any public accountant employed by the Name or by the Representatives for the purpose shall be entitled to inspect the underwriting books and accounts of the Name at all reasonable times and to make extracts and copies of any entries therein relating to the underwriting of the Name and such books and accounts shall be the property of the Agent. 

Remuneration 

8. (a) THE Name will pay to the Agent as remuneration for the services of the Agent in respect of the underwriting of the Name in the Syndicate an annual salary payable quarterly in arrear equal to one per cent. of the Premium Limit in respect of the Syndicate from time to time allocated to the Name in steps of ˙5,000 but so that 

[1997]  510  L.R.L.R.  Henderson v. Merrett Syndicate (Q.B. (Com. Ct.))    Cresswell, J. 

the salary payable hereunder shall not be less than ˙250 in respect of each Syndicate. 

(b) The Name will also pay to the Agent as further remuneration a commission of twenty per cent on the profits of each year's underwriting of the Name in the Syndicate. 

(c) The profits upon which commission is payable to the Agent shall be ascertained in accordance with the provisions of Clause 10 hereof and the commission shall be paid when the profits of the year shall have been ascertained. 

Undertaking by the Name to pay all liabilities and outgoings 

9. (a) THE Name shall pay and keep the Agent at all times in funds for the payment of all liabilities expenses and outgoings from time to time payable in connection with the business conducted for the Name which the Agent may consider to be necessary or desirable or which may be required by any regulation or custom of Lloyd's or under any agreements entered into in connection with the underwriting business of the Name under this Agreement including without prejudice to the generality of the foregoing expenses and outgoings incurred by the Agent for (i) seats at Lloyd's and office accommodation and books stationery and other office expenses (ii) remuneration (including bonus) contributions to pensions and Lloyd's fees of any Underwriter Deputy Underwriters clerks or other employees. 

(b) Any liabilities expenses and outgoings which in the opinion of the Agent ought to be shared rateably between the Name and any other member of the Syndicate shall be debited to the Syndicate account and in the case of any liability expense or outgoing which has been incurred in respect of more than one Syndicate the Agent may debit the respective Syndicate accounts with such proportions thereof as the Agent shall determine. 

(c) Any liabilities expenses and outgoings which in the opinion of the Agent ought not to be shared rateably between the Name and any other member of the Syndicate shall be debited to the Name personally. 

Calculation of Commission 

10. FOR the purpose of ascertaining the profits upon which the commission payable under Clause 8 hereof is to be calculated the following provisions shall apply: - 

(a) The profit of each year for each Syndicate shall be taken separately and shall not be affected by the loss of any other year or of any other Syndicate.   (b) No deduction shall be made in respect of any taxes on the profits of the underwriting (whether payable in the United Kingdom or elsewhere) 

(c) The interest and dividends earned on deposits or investments made under Clause 11 hereof shall be taken into account after making provision for United Kingdom income tax at the basic rate for the time being in force. 

(d) Appreciation and depreciation in the value of investments and profit or loss on realisation or transfer of investments shall be taken into account after making provision for any tax on profits or gains which may be or become payable in respect thereof Provided that in the event of a loss arising in any year for the purpose of capital gains tax by reason of depreciation in the value of investments or loss on the realisation or transfer thereof in that year the profits on which commission shall be payable hereunder shall be calculated after allowing against such loss a credit equal to the notional capital gains tax relief thereon at the basic rate of capital gains tax in respect of that year 

(e) Any profit or loss arising from currency exchange shall be taken into account 

(f) The salary payable to the Agent under Clause 8 hereof and all liabilities expenses and outgoings referred to in Clause 9 (b) hereof shall be deducted. 

Operation of the Premiums Trust Deed 

11. (a) ALL premiums and other moneys collected on behalf of the Name shall be held upon the trusts declared in the Lloyd's Premiums Trust Deed commonly (and hereinafter) called "the Premiums Trust Deed" already executed or to be executed by the Name and shall be paid into the banking accounts kept for the purposes of the underwriting carried on for the Syndicate. 

(b) Any moneys standing to the credit of the said banking accounts which in the opinion of the Agent are not required for the current service of the underwriting may be placed on deposit at any banks or discount houses or public or local authorities or building societies or may be invested in such stocks funds shares or securities (including bearer securities) in any part of the world as the Agent may determine and neither the Agent nor any trustee shall be responsible for any loss of principal or interest on such deposits or investments and the whole or any part thereof shall whenever determined by the Agent be withdrawn or realised and the proceeds paid into the said banking accounts Interest or dividends earned on such deposits or investments shall be treated as receipts of the underwriting. 

[1997]  511  L.R.L.R.  Henderson v. Merrett Syndicate (Q.B. (Com. Ct.))    Cresswell, J. 

(c) The power of appointing the original and any new or additional trustee or trustees of the Premiums Trust Deed shall be vested in the Agent and the said banking accounts and any deposits or investments representing moneys not required for the current service of the underwriting shall be held by or stand in the names of or under the control of such trustees but such trustees may authorise a substitute or substitutes from time to time to operate on such banking accounts and without prejudice to the generality of the provisions of Clause 4 hereof the Agent shall have power to appoint or employ the Sub-Agent or any other person firm or body corporate to manage such investments on such terms as the Agent shall think fit with power to delegate to or confer on the Sub-Agent or any other such person firm or body corporate the sole discretion as to the variation and transposition of investments and the power of sale and purchase of investments. 

(d) The powers conferred on the Agent by this or any other Clause of this Agreement shall be exercisable only in accordance with the provisions of the Premiums Trust Deed and subject to the regulations of Lloyd's and any rights or discretions exercisable by the Name under the Premiums Trust Deed shall be exercisable by the Agent on the Name's behalf. 

Profits and reserves 

12. (a) THE Agent may from time to time retain out of the profits of the underwriting which would otherwise be payable to the Name any moneys which the Agent may in the absolute discretion of the Agent (subject to any requirements prescribed by Lloyd's) think desirable to carry to reserve and such moneys may be placed on deposit at any bank or discount house or public or local authorities or building society or may be invested in such stocks funds shares or securities (including bearer securities) in any part of the world as the Agent may determine and the Agent shall not be responsible for any loss of principal or interest on such deposits or investments Interest or dividends earned on any such deposits or investments shall be credited to the Name in respect of the Name's due proportion thereof. 

(b) Any such moneys or the deposits or investments for the time being representing the same shall remain subject to the trusts of the Premiums Trust Deed and accordingly resort may be made to the same for any purpose of the underwriting business and the Name's obligations under this Agreement. 

Termination of Agency 

13. (a) THE agency but not the trusts shall be determined upon the Name ceasing to be an Underwriting Member of Lloyd's or upon the Agent  ceasing to be Underwriting Agents approved by the Committee of Lloyd's 

(b) The agency shall be determinable in respect of the underwriting for the Name in the Syndicate on the Thirty-first day of December of the year specified in the third column of the First Schedule hereto in respect of the Syndicate referred to in the first column thereof or on the Thirty-first day of December of any subsequent year by the Name or the Agent giving to the other not less than six calendar months' previous written notice 

(c) The agency shall be determinable by the Agent giving to the Name not less than forty-eight hours written notice if (i) the Name shall refuse or be unable to pay the Name's debts as they become due or to meet the Name's commercial obligations as they arise or (ii) the Name shall through mental or other infirmity become incapable of managing the Name's affairs or (iii) the Committee of Lloyd's shall at any time call upon the Name to cease from underwriting by reason of a breach of any undertaking given by the Name to Lloyd's 

(d) The giving of a notice to determine the agency shall not affect the authority of the Agent to accept risks and sign and issue policies on behalf or for the account of the Name until the date of the expiry of the notice 

(e) Notwithstanding the termination of the agency the Agent is authorised in respect of risks accepted prior to the termination of the agency to sign and issue policies in the name of the Name so long as the Name shall be an Underwriting Member of Lloyd's or if the Name shall have ceased to be an Underwriting Member of Lloyd's in the names of the Name or of the Representatives or of any Underwriting Members of Lloyd's being members of the Syndicate and for the account of the Name or the Name's estate. 

(f) Notwithstanding anything to the contrary contained in the Agreement: - 

(i) If a bankruptcy petition shall be presented or a receiving order in bankruptcy shall be made against the Name or if the Name shall be adjudicated bankrupt the Name shall forthwith notify the Agent in writing of the happening of any of those events. 

(ii) Upon the making of a receiving order in bankruptcy against the Name the Name's membership of the Syndicate and the Agent's authority to underwrite for the Name shall (subject to the provisions of paragraph (e) of this Clause) forthwith cease and determine with effect from the date on which the receiving order shall have been made. 

[1997]  512  L.R.L.R.  Henderson v. Merrett Syndicate (Q.B. (Com. Ct.))    Cresswell, J. 

Winding-up Underwriting on Termination of Agency 

14. (a) ON cessation of the Agent's authority to underwrite for the Name in respect of the Syndicate the Agent shall be entitled but not obliged to wind up the underwriting of the Name in the Syndicate as agent for the Name or the Representatives and shall be paid as remuneration for so doing a winding-up fee of the amount specified in the fourth column of the First Schedule hereto in respect of the Syndicate referred to in the first column thereof and the Name shall also pay all accountants' fees and other proper disbursements connected with the winding-up The said winding-up fee shall be payable upon the Agent electing to wind up the underwriting 

(b) If the Agent shall elect to wind up the underwriting of the Name in the Syndicate there shall notwithstanding the determination of the agency as aforesaid continue to be vested in the Agent all the powers authorities and discretions conferred upon the Agent by this Agreement save and except the authority to underwrite new risks in the Syndicate on behalf of the Name other than for the purposes of re-insurance under Clause 7(e)(i) and (ii) hereof. 

Brokerage 

15. THE Agent may underwrite on behalf of or for the account of the Name any risk which the Agent may effect as broker and the Agent may as broker effect re-insurance of any risks underwritten on behalf or for the account of the Name and in all such cases the Agent may charge receive and retain all brokerages commissions discounts and other allowances to which the Agent would have been entitled for effecting the insurance or re-insurance or for collecting any losses or claims thereunder if the Agent had not been acting as the Name's Underwriting Agent. 

Agreement not to Constitute a Partnership 

16. NOTHING in this Agreement shall constitute any partnership between the Name and the Agent nor between the Name and any other person or persons whomsover. 

Taking over Provisions 

17. (a) IN this Clause the expression "Name" means the Name and any other member for the time being of the Syndicate 

(b) In the event of any Name by reason of his or her death or for any other reason ceasing to be a Member of the Syndicate on any day other than the 31st day of December in any calendar year, then as between all the Names or their Representatives (including such outgoing Name or his or her Representatives) such outgoing Name shall unless the Agent otherwise decides be deemed to have  ceased to be a Member of the Syndicate at the end of the previous calendar year and accordingly the share of such outgoing Name (in respect of the period from the 1st day of January until the date of such outgoing) shall be divided between all the other Names in the proportions which their shares bore to each other at the date of such outgoing and all such other Names shall indemnify such outgoing Name or his or her Representatives accordingly: provided that in the event that immediately before the death of any Name or immediately before any Name for any other reason ceasing to be a Member of the Syndicate there shall be less than five Members of the Syndicate the provisions of this Clause shall not apply 

(c) In the event of any Name (who has agreed to underwrite as a Member of the Syndicate as from the 1st day of January in any year) not being admitted for any reason to membership of the Syndicate until after the 1st day of January in that calendar year, then as between all the Names or their Representatives (including such incoming Name or his or her Representatives) such incoming Name shall unless the Agent otherwise decides be deemed to have become a Member of the Syndicate on the 1st day of January and accordingly the shares of such incoming Name and of all the other Names (in respect of the period from the 1st day of January until the date of such incoming) shall be the same as they would have been if such incoming Name had become a Member of the Syndicate on the 1st day of January. 

(d) The Agent shall have authority at the end of every year of make-up the books and accounts of the Syndicate and in particular to apportion between the Names the profit or loss shown on the Syndicate Account of any year and to ascertain the shares of the Names in the Syndicate for the purpose of such apportionment upon the bases of paragraphs (b) and (c) of this Clause. 

(e) The Agent shall procure that every Name for the time being shall be bound by the same provisions as those contained in this Clause. 

Arbitration 

18. (a) ANY dispute or difference whatsoever arising at any time out of or in connection with or in relation to this Agreement between the parties hereto or their respective executors administrators successors or assigns and notwithstanding that such dispute or difference 

(i) arises after the termination of this Agreement or 

(ii) involves allegations or charges of any nature or 

(iii) involves or may give rise to a claim or claims by or against any person not a party to this 

[1997]  513  L.R.L.R.  Henderson v. Merrett Syndicate (Q.B. (Com. Ct.))    Cresswell, J. 

Agreement or to any other agreement binding on both the parties hereto and referring such claims to arbitration in the manner provided by this Agreement 

shall be referred to arbitration in London in accordance with this Clause. 

(b) All such disputes or differences shall be referred to a sole arbitrator to be appointed in the absence of agreement between the parties thereto by the Chairman or a Deputy Chairman of Lloyd's for the time being 

(c) The award of the Arbitrator shall be final and binding and he shall have power to obtain call for  receive and act upon any such oral or documentary evidence or information (whether the same be strictly admissible as evidence or not) as he may think fit and in conducting the arbitration and making the Award he shall not be bound by the strict rules of procedure or evidence and save as aforesaid the statutory provisions as to arbitration for the time being in force in England shall apply. 

19. THIS Agreement shall be construed and shall have effect in accordance with the laws of England. 

AS WITNESS the hands of the Name and of a Director of the Agent thereunto duly authorised the day and year first above written. 

[1997]  514  L.R.L.R.  Henderson v. Merrett Syndicate (Q.B. (Com. Ct.))    Cresswell, J. 

[1997]  515  L.R.L.R.  Henderson v. Merrett Syndicate (Q.B. (Com. Ct.))    Cresswell, J. 

[1997]  516  L.R.L.R.  Henderson v. Merrett Syndicate (Q.B. (Com. Ct.))    Cresswell, J. 

PRE BYE-LAW SUB-AGENCY AGREEMENT 

THIS AGREEMENT is made the Sixth day of AprilOne thousand nine hundred and eighty-four BETWEEN PHILIP N. CHRISTIE & COMPANY LIMITED Underwriting Agents approved by the Committee of Lloyd's whose registered office is at 117 FENCHURCH STREET, LONDON EC3M 5AL (hereinafter called "the Agent") of the one part and MERRETT SYNDICATES LIMITED Underwriting Agents approved by the Committee of Lloyd's whose registered office is at ARTHUR CASTLE HOUSE, 33 CREECHURCH LANE, LONDON, E.C.3. (hereinafter called "the Sub-Agent") of the other part. 

WHEREAS 

(1) The Agent is an Underwriting Agent at Lloyd's and is duly authorised to appoint the Sub-Agent as a Sub-Underwriting Agent for the Underwriting Members of Lloyd's whose names are set out in Part I of the Schedule hereto and, 

(2) It has been arranged between the Agent and the Sub-Agent that the Sub-Agent shall act as the Sub-Underwriting Agent for such Underwriting Members of Lloyd's and such other Underwriting Members of Lloyd's for whom the Agent is authorised to act whose names may from time to time be added to Part II of such Schedule with the prior consent of the Agent and the Sub-Agent and upon the terms hereinafter mentioned. 

NOW IT IS HEREBY AGREED AND DECLARED between the parties hereto as follows: - 

1. IN this Agreement the following expressions shall where the context so requires or admits have the following meanings: - 

(a) "The Names" shall mean and include the Underwriting Members of Lloyd's whose names are set out in Part I of the Schedule hereto and all other Underwriting Members of Lloyd's whose names may from time to time be added to Part II of such Schedule with the prior consent of the Agent and the Sub-Agent. 

(b) "Underwriting Agency Agreement" shall mean an Agreement in the form annexed hereto as Appendix A or such other form as may from time to time be agreed between the Agent and the Sub-Agent. 

2. THE Sub-Agent agrees and is retained and authorised to act as Underwriting Sub-Agent for the Agent for the purpose of Underwriting at Lloyd's in the names and for the account of each of the Names policies and contracts of insurance reinsurance and guarantee relating to  all classes of insurance business which with the sanction of the Committee of Lloyd's may be transacted as MARINE Insurance Business and of carrying on for each of the Names the business of MARINE Underwriter at Lloyd's and the appointment of the Sub-Agent shall take effect in respect of each of the Names on and from the date specified in the second column of the Schedule hereto opposite the name of each of the Names. 

3. (a) THE Sub-Agent shall underwrite for the Names or cause them to be Underwritten for as part of the Sub-Agent's Marine Syndicate at Lloyd's Nos. 418/417/422 hereinafter referred to as "the Syndicate" however the same may from time to time be numbered or constituted in the future. 

(b) Each of the Names shall have such share in the Syndicate as the Sub-Agent with the consent of the Agent shall determine. 

4. THE Agent will ensure that each of the Underwriting Members of Lloyd's whose names are set out in the Schedule hereto will enter into an Agreement with the Agent in the form of the Underwriting Agency Agreement. 

5. THE Agent delegates to the Sub-Agent the exercise of all such powers authorities discretions and rights conferred upon the Agent by the Underwriting Agency Agreement as it may be in any way necessary for the Sub-Agent to have to enable the Sub-Agent or any Underwriter or agent appointed by the Sub-Agent to carry on the underwriting for the Names and to close the accounts of the Names. 

6. SUBJECT to the provisions of Clause 7 hereof the Underwriting shall be conducted and the accounts thereof shall be kept and made up and the profits ascertained in such manner as the Sub-Agent may for the time being think fit and the Sub-Agent shall have the sole control and management of the Underwriting and sole discretion as to the acceptance of risks and the compromise or settlement of claims. 

7. THE Sub-Agent shall conduct and manage the Underwriting in accordance with and observe the provisions of the Underwriting Agency Agreement and in particular the provisions concerning the operation of the Premiums Trust Deed. 

8. ALL questions relating to the investment of premiums and other monies not required for the current service of the Underwriting and to the time and manner of paying over profits and the placing of sums to a reserve shall be decided by the Sub-Agent and subject as aforesaid the Sub-Agent shall pay over the profits of the Underwriting to the Agent for distribution to the Names. 

[1997]  517  L.R.L.R.  Henderson v. Merrett Syndicate (Q.B. (Com. Ct.))    Cresswell, J. 
 
9. THE Agent shall pay to the Sub-Agent as remuneration for the services of the Sub-Agent in respect of each of the Names: - 
 
(a) An annual salary in respect of each of the Names (payable quarterly in arrear) equal to 0.90 per cent. of the Premium Limit in respect of the Syndicate from time to time allocated to the Name in steps of ˙5,000 but so that the salary payable hereunder shall not be less than ˙200 per annum. 
 
(b) A commission of 15 per cent. of the profits of each year's Underwriting of each of the Names in the Syndicate such commission to be calculated on the same basis as the commission payable to the Agent under the Underwriting Agency Agreement. 
 
10. THE Agent undertakes (but to such extent only as the Agent shall be able to enforce against a Name the fulfilment of the provisions of the Underwriting Agency Agreement) to put and to keep the Sub-Agent at all times in funds for the payment of all liabilities and outgoings in connection with the business to be conducted hereunder by the Sub-Agent on behalf of each of the Names. 
 
11. (a) THIS Agreement shall be determined in respect of all the Names upon either the Agent or the Sub-Agent ceasing (otherwise than by voluntary liquidation for the purpose of reconstruction or amalgamation) to carry on business as an Underwriting Agent at Lloyd's or to be approved for that purpose by the Committee of Lloyd's. 
 
(b) This Agreement may be determined in respect of all the Names on the Thirty-first day of December One thousand nine hundred and eighty-six or the Thirty-first day of December in any subsequent year by the Agent giving to the Sub-Agent not less than Five calendar months or the Sub-Agent giving to the Agent not less than Seven calendar months' previous notice in writing expiring on the Thirty-first day of December. 
 
(c) This Agreement may be determined in respect of any of the Names by the Agent giving to the Sub-Agent not less than Five calendar months or by the Sub-Agent giving to the Agent not less than Seven calendar months' previous notice in writing expiring on the Thirty-first day of December of the year specified in the third column of the Schedule hereto opposite to the name of such Name or Names or on the Thirty-first day of December of any subsequent year. 
 
(d) This Agreement shall be determined as to any one or more of the Names whose Agreement with the Agent is determined by the  provisions of Clause 13(f) of the Underwriting Agency Agreement or by notice given by the Agent to any of the Names under the provisions of Clause 13(c) of the Underwriting Agency Agreement and such determination shall take effect from the date of the receiving order or at the expiration of any such notice (as the case may be). A copy of any such notice under the said Clause 13(c) shall be sent to the Sub-Agent at the same time as it is given to the Name. The Agent will forthwith notify the Sub-Agent in writing immediately the Agent shall become aware that a bankruptcy petition shall have been served on or a receiving order in bankruptcy shall have been made against any of the Names or that any of the Names shall have been adjudicated bankrupt. 
 
12. WITHOUT prejudice to the generality of Clause 5 hereof all rights given by Clause 14 of the Underwriting Agency Agreement to wind up the underwriting shall be vested in the Sub-Agent who shall be entitled but not obliged to wind up the underwriting in respect of any of the Names in respect of whom this Agreement shall be determined and the Sub-Agent shall be paid as remuneration for so doing the sum specified in the fourth column of the Schedule hereto opposite the name of such Name which sum shall be payable as to one moiety on the date on which the winding up begins and the other moiety on the expiration of 12 calendar months from that date such sums being in addition to all other sums payable to the Sub-Agent under this Agreement. 
 
13. (a) THE Sub-Agent shall keep such books of account as are usual and proper for Underwriting Agents at Lloyd's and the Agent shall be entitled to inspect the same on giving reasonable notice within normal office hours and to make extracts and copies of any entries therein relating to the underwriting conducted by the Sub-Agent under this Agreement. Such books shall be the property of the Sub-Agent. 
 
(b) The sub-Agent shall provide the Agent with a statement of the underwriting figures for each quarter. 
 
(c) As soon as practicable after the end of each year the Sub-Agent shall provide the Agent with an audited statement of account applicable to the accounts of the Names in respect of each year's underwriting and the Sub-Agent shall be responsible for furnishing to the Committee of Lloyd's all the figures and Audit Certificates required in respect of each of the Names by the Committee of Lloyd's according to their regulations regarding annual Audits. 

[1997]  518  L.R.L.R.  Henderson v. Merrett Syndicate (Q.B. (Com. Ct.))    Cresswell, J. 
 
14. THE taking over provisions contained in Clause 17 of the Underwriting Agency Agreement are to apply to the whole of the Syndicate of which the Names are to form part. 
 
15. NOTHING herein contained shall oblige the Agent to appoint the Sub-Agent as the Sub-Underwriting Agent for any Underwriting Members of Lloyd's for whom the Agent may from time to time act as Underwriting Agent. 
 
16. NOTHING herein contained shall constitute any partnership between the Agent and the Sub-Agent or between the Names or any of them and the Sub-Agent. 
 
17. (a) ANY dispute or difference whatsoever arising between the parties hereto or their respective successors or assigns either during the continuance or after the termination of the agency shall be referred to arbitration in London.  (b) A sole arbitrator shall be mutually agreed upon or in default of agreement shall be appointed at the instance of either party by the Chairman or (him failing) a Deputy Chairman of Lloyd's for the time being. 
 
(c) The award of the Arbitrator shall be final and binding and he shall have power to obtain call for receive and act upon any such oral or documentary evidence or information (whether the same be strictly admissible as evidence or not) as he may think fit and in conducting the arbitration and making the award he shall not be bound by the strict rules of procedure or evidence Save as aforesaid the Statutory provisions as to Arbitration for the time being in force in England shall apply. 
 
AS WITNESS The hands of a Director of the Agent and a Director of the Sub-Agent duly authorised the day and year first above written. 

[1997]  519  L.R.L.R.  Henderson v. Merrett Syndicate (Q.B. (Com. Ct.))    Cresswell, J. 

[1997]  520  L.R.L.R.  Henderson v. Merrett Syndicate (Q.B. (Com. Ct.))    Cresswell, J. 

[1997]  521  L.R.L.R.  Henderson v. Merrett Syndicate (Q.B. (Com. Ct.))    Cresswell, J. 

SIGNED BY )  )  )  ) for and on behalf  ) of ) PHILIP N. ) CHRISTIE &) COMPANY LIMITED in the presence    )  DIRECTOR of:-

Witness: Address:
 
Occupation:

SIGNED BY )  )  )  ) for and on behalf  ) of ) MERRETT   ) SYNDICATES) LIMITED
 
in the presence    )  DIRECTOR of:-
 
Witness: Address:
 
Occupation:

THIS AGREEMENT is made theday of One thousand nine hundred and eighty-six 

BETWEEN PHILIP N. CHRISTIE & COMPANY LIMITED 

whose registered office is at 117 Fenchurch Street, London EC3M 5AL (hereinafter called "the Agent") of the one part, MERRETT SYNDICATES LIMITED whose registered office is at Arthur Castle House, 33 Creechurch Lane, London EC3A 5AJ (hereinafter called "the Former Sub-Agent") of the second part and MERRETT UNDERWRITING AGENCY MANAGEMENT LIMITED whose registered office is at Arthur Castle House aforesaid (hereinafter called "the New Sub-Agent") of the third part.  WHEREAS: - 

(A) This Agreement is SUPPLEMENTAL to an Agreement dated 6th April 1984 made between the Agent of the one part and the Former Sub-agent of the other part comprising a Sub-Agency Agreement ("the Sub-Agency Agreement") in respect of Lloyd's Syndicate Nos. 418/417/422 & 799 ("the Syndicates") whereby the Agent appointed the Sub-Agent to underwrite for those Underwriting Members of Lloyd's presently covered by the Sub-Agency Agreement ("the Agent's Names"). 

(B) The parties hereto are Underwriting Agents at Lloyd's approved by the Committee of Lloyd's. 

(C) With effect from 1st January 1986 the management of the said Syndicates has been transferred to the New Sub-Agent by the Former Sub-Agent. 

NOW IT IS HEREBY AGREED as follows: - 

1. WITH effect on and from 1st January 1986 ("the Effective Date") the New Sub-Agent shall be appointed the Sub-Agent of the Agent for all the purposes of and subject to the provisions contained or referred to in the Sub-Agency Agreement in place of the Former Sub-Agent. 

2. (1) THE Agent undertakes with the New Sub-Agent in the terms of Clause (10) of the Sub-Agency Agreement and (save as is provided by sub-Clause (2) below) both the Agent and the New Sub-Agent hereby adopt all the terms of the Sub-Agency Agreement with effect as aforesaid and mutually undertake and agree with one another in the terms of the Sub-Agency Agreement. 

(2) THE Agent and the New Sub-Agent hereby agree that Clause (9) of the Sub-Agency Agreement is hereby amended with effect from 1st January 1986 by substituting the following new sub-paragraph (a) for the existing sub-paragraph (a): - 

"(a) An annual salary in respect of each of the Names (payable quarterly in arrear) equal to 0.60 per cent of the Premium Limit in respect of the Syndicate from time to time allocated to the Name in steps of ˙5,000 but so that the salary payable hereunder shall not be less than ˙150 per annum." 

3. NOTHING herein contained shall prejudice or affect the liability of the Former Sub-Agent in respect of its obligations under the Sub-Agency Agreement arising before the Effective Date but such obligations shall not extend to the closing of the 1983 or any subsequent underwriting accounts or the final preparation of accounts therefor or any administrative services required to be rendered after the Effective Date in respect of the 1983 or any subsequent underwriting accounts all of which shall be obligations of the New Sub-Agent and subject as aforesaid the Former Sub-Agent is hereby released from all duties liabilities and obligations arising on 

[1997]  522  L.R.L.R.  Henderson v. Merrett Syndicate (Q.B. (Com. Ct.))    Cresswell, J. 

or after the Effective Date under the Sub-Agency Agreement. 

SIGNED by ) 
for and on behalf  ) 
of ) 
PHILIP N. ) 
CHRISTIE &) 
COMPANY LIMITED 

in the presence of:-
Director

SIGNED by ) 
WILLIAM   ) 
FRANK     ) 
GOODIER for and on behalf  ) 
of ) 
MERRETT   ) 
SYNDICATES) 
LIMITED 

in the presence of:-
Director 

SIGNED by ) 
KENNETH EDWARD RANDALL
) )

for and on behalf  ) 
of ) 
MERRETT   ) 
UNDERWRITING) 
AGENCY MANAGEMENT LIMITED

in the presence of:-
Director 

DATED 6th April, 1984 

PHILIP N. CHRISTIE & COMPANY LIMITED     
and   
MERRETT SYNDICATES LIMITED 
MARINE    SUB-UNDERWRITING AGENCY AGREEMENT     (SYNDICATE NO. 418/417/422) 

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