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2002 WL
1654876 Court of
Appeal (Civil Division) A3/2000/3863A; A3/2000/3863B; A3/2001/2013/A; A3/2002/0069; A3/2002/0069B; A3/2002/0069C; A3/2000/3863; A3/2001/0162; A3/2001/0957; A3/2001/1913; A3/2001/2013; A3/2001/0163 Before: Lord Justice Waller, Lord Justice Robert
Walker and Lord Justice Clarke On Appeal from the High Court of Justice Queen’s
Bench Division Commercial Court (Cresswell J) Representation Mr Simon
Goldblatt QC and Mr Vincent Nelson QC (instructed by More Fisher Brown) for
certain of the appellants. Mr Gordon
Nardell and Mr Giles Richardson (instructed by Grower Freeman) for others of
the appellants. Sir William
Jaffray Baronet, Mrs Heather Adams, Mr Sydney Butler, Mr Richard Carter, Mr
Cary Harrison and Mrs Ann Strong appeared in person. Mr Charles
Aldous QC, Mr Richard Jacobs QC and Mr David Foxton (instructed by Freshfields)
for the respondent. Mr Colin
Edelman QC (instructed by Barlow, Lyde & Gilbert) appeared on behalf of
Equitas (intervening). JUDGMENT Lord Justice Waller: I Introductory Overview 1. This is the
judgment of the court (to which we have all made a substantial contribution) on
an appeal from an order of Cresswell J made in the commercial court on 3
November 2000. The judge decided what has become known as the threshold fraud
issue (described below) adversely to the claimant names. He refused permission
to appeal but permission on limited grounds was granted by this court on 8
October 2001, with the rest of the application for permission to appeal being
adjourned to the appeal hearing. 2. It is easy
to understand the depth of feeling of those names who became members of Lloyd’s
between 1977 and 1987. They joined Lloyd’s at a time when there were many
syndicates infected with asbestos-related risks which were persistently
underestimated. The procedure at Lloyd’s was that each year’s accounts were, at
the end of a three-year period, closed into the next year’s accounts. The
effect was that the new names inherited losses of massive proportions. 3. Policies
written in the fifties and sixties were coming alive again. Claims were being
made in the 1970s and for many years thereafter by persons who suffered from
cancer and other diseases caused by inhalation of asbestos during the 1940s and
1950s. Those claims were succeeding against producers and producers were
claiming on policies written long before the names ever became members of
Lloyd’s. Lloyd’s syndicates were claiming on reinsurances taken out with other
Lloyd’s syndicates long before the names became members. Courts in the United
States were apparently holding producers liable on any basis that gave the
claimant the best prospect of succeeding in his or her claim, and were allowing
producers to succeed on claims under their policies on any basis that would
lead to insurers or reinsurers having to pay. 4. The names
say that by the time they joined Lloyd’s it was known by those in the market
and at the centre of Lloyd’s that there were unquantifiable but potentially
massive losses in the pipeline for which proper reserves had never been made,
and about which the names were not warned. Indeed they say they were given the
impression that all was under control and properly reserved for. 5. Many actions
have been brought against members’ agents and managing agents, and indeed
against auditors. Some have succeeded by compromise or at trial, although not
always with full recovery. The thrust of the actions has been to allege that
the names were exposed to these losses only because of bad underwriting or poor
advice and (so far as both the underwriters and the auditors are concerned)
through failures relating to the RITC (reinsurance to close). It is said either
that the premiums paid on reinsurances to close were totally inadequate in
various years or that the reality was that certain years should never have been
closed, leaving the names on those years to suffer the losses but not new
names. 6. Attempts
have also been made to render the Corporation of Lloyd’s itself liable.
Previous decisions have established first that there is no room for the
imposition on Lloyd’s of a duty of care by statute or common law, and second
that there is no room for the implication of terms in the contract between
Lloyd’s and names who became external members of Lloyd’s. See Ashmore v
Corporation of Lloyd’s [1992] 2 Lloyd’s Rep. 620; Ashmore v Corporation of
Lloyd’s (No 2) [1992] 1 WLR 446; and Society of Lloyd’s v Clementson and v
Mason [1994] CLC 71; [1995] CLC 117[; Times L. Rep. 11 Jan. 1994]. 7. In this
action what is in issue is whether Lloyd’s are liable for making fraudulent
misrepresentations. It is a fact to which the judge referred that the major
part of the Lloyd’s litigation has been settled by the R&R Settlement (see
paragraphs 280ff below), and this action is brought by a limited number of
names that have refused to accept that offer. We stress that no inference
should be drawn against the names who have chosen to continue with this action
from any refusal to accept that offer, and indeed we do not understand Lloyd’s
(through Mr Charles Aldous QC) to be suggesting that it should. 8. What is
alleged (putting it shortly) is that in brochures issued by Lloyd’s and in
global accounts (“globals”) issued by Lloyd’s certain representations
were made as to the quality of the Lloyd’s regulatory procedures and in
particular the audit procedures described in the brochures as
“rigorous”. It is alleged that the names relied on those representations
in making their decisions to join Lloyd’s, and in their decisions to remain
members and/or increase their underwriting capacity. It is alleged that those
representations were untrue. Lloyd’s (it is said) did not have the quality of
regulatory procedures, and in particular auditing procedures, which it was
asserting it had. Furthermore it is said that those making the representations
appreciated that fact. 9. The key to
the names’ case is a letter, “the Neville Russell letter”, written on
behalf of a number of panel auditors on 24 February 1982. It will be necessary
to look at that letter in detail, but for the present it is enough to set out
the penultimate paragraph which said:-- “We
consider that the impossibility of determining the liability in respect of
asbestosis falls into this category [ie requires to be reported to the
Committee] and we accordingly ask for your instructions in this respect.” 10. The names
say that that letter establishes that it was in 1982 “impossible” to
close accounts fairly because of the totally unquantifiable impact of
asbestosis. The names say that Lloyd’s instead of facing up to that fact (a)
sent out to underwriting agents (and then it is asserted only to managing
agents) another key document (“the Murray Lawrence letter”) together
with a letter to auditors signed by Mr Randall (then a senior employee of
Lloyd’s), which in effect encouraged syndicates and auditors to continue to
close their accounts although, as they all knew, no RITC could be fairly estimated;
and (b) continued with the representations that the audit procedures were
rigorous, thus allowing names to remain in ignorance of the fact that (as the
names would allege) the audit procedures were not such as to enable any proper
check on the assessment of the RITC. 11. The names’
case has some potency when put as starkly as we have so far put it. But many
names have gone further, and indeed in this case some names go further. They
have suggested a dishonest conspiracy amongst those running Lloyd’s to keep quiet
about the impact of asbestosis so as to enable the numbers at Lloyd’s to be
increased so as to bring in more names to share the burden — “recruit to
dilute”. As part of that dishonest conspiracy it has been suggested first
that the cynical response to the Neville Russell letter was to produce the
Murray Lawrence letter either as a letter for the file or at least as a letter
with limited circulation so that the problem remained as far as possible
undiscovered. It was said that members of the Committee of Lloyd’s looked after
their own interests by reinsuring the liabilities of their own syndicates but
left others to suffer. It has been alleged that Lloyd’s dishonestly fixed the
minimum percentages for reserves so as to enable the syndicates to continue to
close their accounts, and continue to declare profits. It has been alleged
through Mr Bradley that as early as 1974 individuals at the centre of Lloyd’s
knew the extent to which the asbestosis losses would rise and set about
protecting their own syndicates and deliberately inflicted the losses on new
names. This dishonest conspiracy was said to have continued over eleven years,
each group of committee men and members of Council in succession carrying on a
scheme designed to keep Lloyd’s afloat by disguising the extent of the problem
from the individual names. The depth of feeling of the names has been such that
almost any conduct of those at the centre has been interpreted by them as
having an improper motive. Many of the allegations which were chased down at
the trial took time and energy, although none succeeded and many have been
abandoned on this appeal. 12. On this
appeal the grand conspiracy theory is not alleged. Furthermore although Sir
William Jaffray in his submissions clung faintly to the point, it cannot be
plausibly asserted that Lloyd’s dishonestly recommended low minimum percentages
as reserves. The allegation of a limited circulation of the Murray Lawrence
letter is persisted in, but in reality it is not a key point in the essential
case which the names make. 13. We believe
that the other points have detracted and do detract from what is essentially a
straightforward case, which (as we should say at the outset) cannot be
dismissed lightly. There is no question but that by brochures, and to a lesser
extent globals issued by Lloyd’s throughout the relevant period, the impression
was being given to any reader that Lloyd’s was an institution that could be
relied on with controls and in particular auditing controls which were of a
high order. There is furthermore no question but that history demonstrated that
many syndicates were throughout the period under-reserved. The syndicates were
in fact under-reserved in the 1950s and 60s when workmen were breathing in the
asbestos dust. They were also under-reserved through the 1970s and 1980s, as
the building up of claims was to demonstrate. Thus it was that new names were
on any view taking on claims for which inadequate premiums had been paid to
them by their predecessors on the RITCs. Issues arise as to whether the
impressions given by the brochures amount to representations, and as to whether
those representations were relied on by the names, but the central question
seem to us in reality to be — was it at any time appreciated by those at the
centre of Lloyd’s that syndicates’ accounts were being closed when in fact no
fair assessment of the RITC premium could be made? If that was appreciated, and
yet a false impression was being created so far as names were concerned, it
would be the basis for a strong claim of deceit. 14. To
understand the names’ case and the Lloyd’s answer it is necessary now to go
into much more detail. The history needs to be spelt out, and the important
characters identified. It is also necessary to address in some detail certain
factual issues which underlie consideration of the case that representations
were made, that they were relied on, that they were untrue, and that they were
known to be untrue. The threshold fraud issue 15. The trial
before the judge was limited to a single issue which was defined in an order
made by Colman J on 30 June 1998 as follows: “The
Threshold Fraud Point refers to the issue whether Lloyd’s made representations
which it knew to be untrue and/or as to which it was reckless whether they were
true or false and whether such representations were communicated to the Names
and if so, when.” The order of
30 June 1998 further contained directions as to which names should be bound by
a determination of the threshold fraud point. Thereafter all concerned proceeded
on the basis that the trial would be limited to the threshold fraud point as
defined, subject only to some refinement as follows. 16. Paragraph 4
of a further order made by Colman J on 16 March 1999 provided that the trial be
limited to three selected individual claimants, namely Sir William Jaffray, who
joined Lloyd’s in 1982, Mrs Dona Evans, who joined in 1988 and an individual
claimant who joined Lloyd’s in 1979 to be nominated by Sir William, or perhaps
by the names. Captain Hindle was subsequently chosen. There were thus three
sample names. By paragraph 4 of a further order made by Cresswell J, on 1 July
1999, it was directed that the issues to be determined would include, in
addition to those ordered by Colman J on 30 June 1998, the question whether
each of the sample names relied upon any of the pleaded misrepresentations
during the relevant period. 17. The relevant
period was defined by paragraph 1 of that order as 1978 to 1988. The order also
identified those individuals against whom allegations of fraud were made. As
set out in chapter 7(1) of the judgment under the heading the Names’ Pleaded
Case, they were the following: “(i)
Certain members of the Council and/or Committee of Lloyd’s: Sir Peter Green, F
Barber, Richard Ballantyne, D J Barham, J R K Beckett, I R Binney, P G Bird, B
J Brennan, A H Chester, M H Cockell, D E Coleridge, P T Daniels, R D Hazell, C
O Gibb, C D D Gilmour, A W Higgins, V V Hudson, R J Kiln, W N M Lawrence, S R
Merrett, Sir Peter Miller, C K Murray, E E Nelson, A Parry, I R Posgate, Sir
David Rowland, C H A Skey (including, where relevant, their membership of Audit
and Membership Committees and their statements in the Global Reports and
Accounts as LUNMA Chairmen respectively during the Relevant Period). The Names
say that where any one or more of these persons acted during any year between
1978 and 1988 as Chairman or a Deputy Chairman of the Committee/Council of
Lloyd’s they carried special responsibilities in the oversight and
administration of the Lloyd’s market and had particular influence which was
likely to be decisive in matters relevant to the problem of asbestos-related
claims. (ii) K E
Randall. (iii) H R
Rokeby-Johnson, Robin Jackson, Bryan Kellett and Michael Williams (the other
LUNMA Chairmen who contributed to the Global Reports and Accounts in the
Relevant Period). (iv) Certain
members of the Asbestos Working Party during the Relevant Period (E E Nelson, H
R Rokeby-Johnson, R A G Jackson, D Tayler, C H A Skey).” 18. In these
circumstances it was, as we understand it, common ground at the trial that the
only cause of action being considered by the judge was the tort of deceit based
upon various alleged fraudulent misrepresentations which we identify further
below. Both Lloyd’s and all relevant names were to be bound by the decision
made on the issues determined, which included whether the names had established
the ingredients of the tort of deceit on the facts, subject to questions of
reliance and loss. Issues of reliance were to be determined only in the case of
each of the three sample names. Issues of loss were to be postponed for later
decision if necessary. 19. No other
issues fell for determination at the trial. It follows that, in the absence of
permission being obtained from this court to raise new issues, no other issues
fall for decision in this appeal. On 8 October 2001 this court, then consisting
of Lord Phillips MR, Waller LJ and Clarke LJ, granted permission to appeal
against the decision of the judge on the threshold fraud point, and stood over
to the hearing of the full appeal the question whether permission to appeal
should be granted on the ground of unfair trial. That is a distinct point which
we deal with in Part VII below. 20. The names
subsequently sought to include in the appeal for which they had permission a
number of points which were not advanced before the judge. However, on 21
January 2002, having heard and read detailed submissions on all sides, we
directed that the appeal be limited to an appeal on the threshold fraud point.
The reasons for that decision are set out in the judgment of Waller LJ given on
that day. As explained in that judgment, it will ultimately be a matter for the
judge to decide the extent to which (if at all) further points can be raised by
the names in the light of this judgment. 21. It is of
great importance to have in mind throughout that we are concerned in this
appeal only with the names’ case in deceit. It follows that in order to succeed
the names must establish the ingredients of the tort of deceit. We are not
considering other possible causes of action, including allegations of negligent
misrepresentation. That is not only because of the way the threshold fraud
issue was formulated as a preliminary issue in these proceedings but also
because of the way in which the courts have decided other actions against
Lloyd’s. 22. For example,
the question whether Lloyd’s owed names a duty of care was raised in Ashmore v
Corporation of Lloyd’s [1992] 1 WLR 446. In the course of his consideration
whether Gatehouse J should have ordered a preliminary issue which included the
question whether Lloyd’s owed names a duty of care, Lord Templeman said at pp
451H-452A: “If
Lloyd’s owe a duty by statute or contract, then the preliminary issue will be
decided in favour of the plaintiffs. But if no duty was imposed by statute or
contract it does not appear to me that a duty could have arisen in tort. If
statute or contract between Lloyd’s and a name do not impose an obligation on
Lloyd’s to convey information to a name concerning his managing agent, an
obligation to convey information could not arise just because and whenever
information was obtained by Lloyd’s.” At the trial
of the preliminary issues before Gatehouse J, [1992] 2 Lloyd’s Rep 620, the
question whether Lloyd’s owed a duty of care in tort was not pursued: see p
623. 23. Gatehouse J
also considered the question whether certain terms should be implied into the
contract or whether duties in similar terms were imposed by statute. The
specific duties contended for by the plaintiffs were “(a) a
duty to take reasonable steps to alert the plaintiff names about matters which
might seriously affect their underwriting interests and (b) a duty to impose a
premium income monitoring system even if it was only an ad hoc system of monthly
monitoring of the syndicates managed by an agent in trouble.” 24. He concluded
against the plaintiffs, and made this observation in relation to good faith at
p 631: “This
led to the limited proposition that it is the duty of a regulator to exercise
its powers and discretions in good faith and that where the regulator secures
for itself contractual powers and discretions it is a necessary legal incident
of such contract that (unless expressly excluded) the regulator will exercise
its powers and discretions in good faith. A well-known example is Weinberger v
Inglis , [1919] AC 606, in which this proposition was assumed by the House of
Lords. The duty extends no wider, said Mr Simon. Whether an attempt expressly
to exclude any duty of good faith could survive the Unfair Contract Terms Act
1977 was not canvassed and, in any case, does not arise; Lloyd’s accepted
(obviously correctly) an unqualified duty to act in good faith. But I know very
little about the self-regulating bodies which, it is claimed, constituted a
type or category of contractual relationship and I do not feel able to say that
there is such a type, of which Lloyd’s contract with a Name is an example. I
remain of opinion that the Lister v Romford principle has no application.” 25. In Society of
Lloyd’s v Clementson and v Mason [1994] CLC 71 ; [1995] CLC 117 the terms
contended for by Mr Clementson and Mr Mason respectively were in the following
form: “Clementson 1. that
Lloyd’s would regulate and direct the business of insurance at Lloyd’s with
care and diligence and/or lawfully; 2. that
Lloyd’s would manage and superintend the affairs of the Society with care and
diligence; 3. that
Lloyd’s would advance and protect the interests of members of Lloyd’s in
connection with the business carried on by them with care and diligence and/or
lawfully; and 4. that
Lloyd’s would collect, publish and diffuse intelligence and information to
members of Lloyd’s including the defendant in connection with the business
carried on by them, with care and diligence and/or lawfully. Mason 1. that
Lloyd’s would comply with the provisions of the Lloyd’s Acts 1871-1982, any
subordinate legislation made thereunder and any direction given or provision or
requirements made or imposed by the Council or any person(s) or body acting on
its behalf pursuant to such legislative authority; 2. that
Lloyd’s would regulate the business of insurance at Lloyd’s lawfully and/or in
good faith and/or with reasonable care and diligence; and 3. that
Lloyd’s would advance and protect the interests of members of Lloyd’s in
connection with the business carried on by them as members of Lloyd’s lawfully
and/or in good faith; and with reasonable care and diligence.” 26. The decision
of Saville J that no such terms fell to be implied was upheld by the Court of
Appeal. Observations in relation to the obligation of Lloyd’s to act in good
faith were made by Saville J, Steyn LJ and Hoffmann LJ. We do not understand
there to be a difference between them, but Hoffmann LJ spelled out the position
in this regard at pp 133-134: “1. Implied terms Mr Beveridge
said that agreements by which members of an organisation agreed to be bound by
its rules and regulated by a committee or similar body were a type of contract
into which certain obligations on the part of the organisation (if corporate)
or its committee were customarily implied. He said that the powers of
regulation were regarded as fiduciary and had to be exercised in good faith and
for the purpose intended by the rules. From this he said it was a short step to
the implication of a duty to members to exercise regulatory powers with
reasonable care. In my view
the fallacy of this argument is to confuse the extent of the powers conferred
on the organisation or committee with its contractual obligations to its
members. The fiduciary nature of the powers means that a purported exercise of
those powers in bad faith or for an improper purpose will be invalid. It does
not follow that the mere invalid exercise of the power will be a breach of
contract for which the organisation is liable in damages, although it may mean
that the organisation will be unable to justify an act (such as depriving an
expelled member of the benefits of membership) which would be wrongful in the
absence of a valid exercise of the power. Once it is appreciated that an
improper exercise of the power is not in itself a breach of contract but simply
a nullity, the basis for implying a contractual obligation not to act otherwise
than in good faith and for a proper purpose disappears. A fortiori, there can
be no foundation on which to build an implied term to exercise the power with
reasonable care.” 27. We shall
return below (paragraphs 303ff) to the reasons given by Saville J and this
court for rejecting the implied terms proposed in Clementson because in chapter
22, where the judge gave his reasons for rejecting the names’ case that Lloyd’s
made a series of fraudulent representations to names and prospective names, he
relied upon some of the reasoning in Clementson. 28. It is no
doubt because of the decisions and reasoning in some of these cases that we are
not concerned with a case which alleges that Lloyd’s are liable to the names
because of a breach of contract. Nor are we concerned with the breach of an
alleged duty of care, whether committed in bad faith or otherwise. In
particular, we are not concerned with a case based upon the allegation that
Lloyd’s fraudulently failed to disclose material facts to prospective names.
Any such case is not within the threshold fraud issue. 29. This is
important because a significant amount of the argument of the litigants in
person, and particularly Sir William Jaffray, sought to advance just such a
case. For example it was said that Lloyd’s motto is “Fidentia”, that
Lloyd’s owed the names a duty of the utmost good faith and that Lloyd’s was in
breach of that duty in that it fraudulently failed to give information to
prospective names as to the risks associated with asbestos related claims
because it knew that, if it did, prospective names would be put off.
Submissions along these lines were advanced with great vigour and conviction,
but they cannot assist the names in this appeal because in order to establish
the tort of deceit the names must establish relevant fraudulent
misrepresentations. Mere omissions are not sufficient. 30. It follows
that, in so far as it is said that the appeal should be allowed on the ground
that the judge reached the wrong decision, we focus in this judgment solely
upon the threshold fraud point and thus on the tort of deceit. The judgment below 31. The trial
occupied 64 days between 6 March and 14 July 2000, after the judge (who was
already very familiar with the case through his case-management
responsibilities) had spent some considerable time pre-reading. There were ten
days of oral opening submissions and over 40 days of oral evidence. There was a
huge volume of documentary evidence. The parties put in lengthy written closing
submissions and produced numerous agreed (or partly agreed) statements of fact
on particular topics. In opening this appeal Mr Simon Goldblatt QC referred to
the judge having had to assess about two million spoken words, and about twenty
million written words. 32. The conduct
of a trial of such length, with so great a volume of written material, would in
any circumstances have been a heavy burden for any judge. Cresswell J’s burden
was increased by the number of litigants in person who were appearing before
him (in addition to the three teams of counsel) and by the strength of the
names’ feelings which pressed on the crowded court-room throughout the trial.
The judge had to deal with frequent interruptions for ' housekeeping' points
and peripheral issues of every sort. Often he had to begin the day by
complaining of letters which had been sent to him either by litigants in person
or by non-litigating names, and directing (unfortunately to little effect) that
names should not attempt to communicate with him otherwise than in open court.
On occasions (especially during the oral evidence of Sir Peter Miller) the
judge had to give a stern warning that any attempt to intimidate or insult a
witness amounted to a serious contempt of court. 33. It will be
necessary to return to the course of the trial in more detail in connection
with the application for permission to appeal on the ground that the names have
not received a fair trial. For the present it is sufficient to say that the
complete transcript of the trial conveys a strong first impression that
Cresswell J performed a very difficult task with enormous patience and good
humour, and sensibly gave the litigants in person a great deal of latitude
(while showing firmness on those occasions when it was called for). 34. When he
reserved judgment on 14 July 2000 the judge said that he hoped to deliver
judgment in the last week of October or the first week of November. He achieved
that aim. On 3 November 2000 he handed down a judgment divided into 25 chapters
and four appendices, extending to 635 pages in all. 35. In preparing
his judgment the judge had the benefit of five lengthy statements of facts
which had been wholly or largely agreed between the parties. These dealt with
(i) the administrative structure and governance of Lloyd’s and its insurance
market; (ii) the regulatory background as regards accounts and auditing; (iii)
the rules and procedures governing admission to underwriting membership; (iv)
the chronology of information relevant to asbestos-related claims between
1978-88 (“the relevant period”); and (v) cases in the United States
concerned with asbestos-related claims during the relevant period. There was
also prepared a chronology of matters relevant to Lloyd’s treatment of
asbestos-related liability during the relevant period (this was not agreed).
The first three of these statements were supplemented by numerous appendices
and supporting documents. 36. The judge
drew on this material in the narrative parts of his judgment, the scheme of
which is summarised in chapter 4. The chapters most directly derived from the
statements of facts are chapters 10 (administrative structure and governance),
11 (regulatory background for the auditing and accounting regime), 12 (rules
and procedures governing membership), 13 (RITC — general principles and the
role of the managing agents/underwriter), 14 (RITC — the role of the auditors)
and 16 (overview of the nature and development of asbestos-related claims).
There is a useful glossary and list of abbreviations and acronyms in chapter 3. 37. This
background material is likely to be familiar to most of those who will read
this judgment, and so it is unnecessary to reproduce it here at length. As
factual material it is largely uncontroversial (although part of the
appellants’ case is that the judge erred, in deciding that there had been no
representations made by Lloyd’s, by placing too much weight on the
constitutional and regulatory framework and too little on what was actually
said in the brochures and global reports on which the appellants relied). 38. For the
purposes of this appeal the most important chapters of the judgment are chapter
15 (the witnesses) and chapter 22 (analysis and conclusions on the issue of
threshold fraud). It is in those chapters that the reader looks to find the
reasons for the judge’s conclusions, and it is mainly on what is said (or omitted)
in those chapters that the grounds of appeal have focused. 39. In chapter
15 the judge identified all the witnesses who had given evidence orally or by
witness statement, and gave an indication (sometimes quite detailed, but in
most cases brief) of the topics covered in their evidence. The judge was to
some degree critical of several of the witnesses for the names (including Mr
Stockwell, Mrs Mackenzie-Smith, Mr Steel and Mr Bradley, of whom the judge was
most critical). The judge commented favourably on the evidence of Mr Fredjohn,
Sir Eddie Kulukundis and Mr Sturge. In relation to each of the three sample
names the judge said that he was not persuaded that he or she relied on any of
the alleged fraudulent misrepresentations. He did not enlarge on his reasons
beyond saying that Sir William Jaffray probably relied on conversations with
his two successive members’ agents (and possibly also on conversations with his
cousin) and that Mrs Evans probably relied on conversations with her members’
agent. 40. The judge
did not make any adverse comments on any of the witnesses for Lloyd’s, beyond
using the word “surprisingly” to describe Sir Peter Miller’s evidence
that he was not aware that twenty years or more may elapse between exposure to
asbestos and the manifestation of serious asbestos-related illness. The judge
made favourable comments about the evidence of a number of the Lloyd’s
witnesses, including Sir Peter (“articulate”), Sir David Rowland
(“highly articulate”), Mr Lord (“impressive”), Mr Murray
(“a highly professional and skilful underwriter”), Mr Keeling
(“a particularly astute underwriter”) and Mr Rayment (“a highly
conscientious claims man … I was greatly assisted by his evidence”). In
relation to Mr Lawrence the judge made a clear finding that he accepted as
accurate his evidence about the distribution of the Murray Lawrence letter. 41. At the end
of chapter 15 the judge added this observation: “Lloyd’s
did not call a number of witnesses whose witness statements were exchanged. In
reaching the conclusions set out in this judgment I have had regard to the fact
that Lloyd’s did not call these witnesses and I have considered whether any
adverse inferences should be drawn.” The most
important uncalled witness in this category was probably Mr Randall. It appears
that the judge must have decided not to draw any adverse inference from the
failure to call the witnesses, since the judge did not again refer to this
point in his judgment. 42. In chapter
22 the judge began by referring to his summaries of the competing cases and the
relevant legal principles (chapters 7, 8 and 9). He reminded himself of the
names’ pleaded case as to the alleged misrepresentations. It was pleaded that
the brochures represented that a name joining Lloyd’s: “(i)
Could have confidence in Lloyd’s as an institution to safeguard his/her
interests; (ii) Could
trust those who were chosen by Lloyd’s to regulate the Lloyd’s market and
manage its affairs; (iii) Because
of the way in which Lloyd’s regulated and monitored underwriting accounts year
by year: (a) could
rely on syndicate accounts; (b) could in
underwriting and/or deciding whether to remain a member of Lloyd’s have
confidence in the audited syndicate results, for results of past years; a. could be
sure that Lloyd’s as part of its regulatory duties would ensure that when
prospective liabilities were reinsured by one syndicate year into another, such
liabilities were being fairly assessed and quantified as between the two
syndicate years.” 43. It was also
pleaded that the globals represented to a name who read them: “(a)
that the Lloyd’s market was in a sound financial condition; (b) that
Names could safely join Lloyd’s and/or continue their membership of Lloyd’s
and/or increase their Premium Income Limit with confidence that known and
projected claims had been prudently and adequately reserved to ultimate.” 44. The judge
then stated his conclusion that neither the brochures nor the globals made the
alleged representations. In relation to the brochures the first five of his stated
reasons (elaborated in three further subparagraphs) were as follows: “(i) The
whole of each Brochure must be considered. (ii) The
starting point is the actual words used in the Brochures. (iii) A
useful question is as follows: What would a reasonable applicant for membership
of Lloyd’s/Name understand when reading the Brochure as a whole? (iv) The
alleged representations are not contained in any of the express words used in
the Brochures. (v) The
alleged representations (a) are not necessary to give business efficacy; (b) do
not represent the obvious, but unexpressed, intention of the parties; and (c)
are inconsistent with the express words used in the Brochures.” In relation
to the globals his stated reasons were very similar. In relation to both he
summarised his reasoning by observing that the alleged representations were
unclear in their terminology, did not accord with the administrative structure
and governance of the Lloyd’s market and the regulatory background, and were
inconsistent with what the documents in question had actually said. 45. The judge
then went on, in case he was wrong about the absence of any representations, to
find that the other ingredients of the tort of deceit had not been made out: in
particular, that fraud (in the relevant sense) had not been made out. He
observed that the names’ case was limited to the alleged known impossibility of
proper reserving for asbestos-related claims, as part of a wider picture which
included pollution and other long-tail claims, several catastrophic losses
between 1987 and 1990, and the LMX spiral. He also observed (and this is, we
think, a dominant and recurring theme of the judgment) that the names’ case
must be judged against the way the Lloyd’s market and the Lloyd’s regulatory
system operated. 46. He developed
this theme by reference to a number of topics as follows: (a) market
associations; (b) the role of the DTI; (c) minimum percentage reserves; (d)
developments in the Lloyd’s regulatory environment for auditing and accounting;
(e) managing agents; (f) panel or registered auditors; (g) meetings of panel
auditors; (h) members’ agents; and (i) the Rota committee. In this and the
following sections of the chapter the judge made four important findings of
fact (or conclusions representing his assessment of the facts): (i) “The
Committee/Council of Lloyd’s was generally entitled to assume that auditors
were performing their duties competently.” (ii) At the
annual meetings when Mr Lawrence, Mr Nelson, Mr Rokeby- Johnson and Mr Jackson
addressed the panel auditors about asbestos- related claims, they “did so
(in the case of Mr Nelson probably did so) honestly and responsibly.” (iii)
“… the Murray Lawrence letter and the Randall letter were an honest
response to the issues raised by the Neville Russell letter.” (iv) The view
that RITC should be left to managing agents and auditors, and should not be
second-guessed by the Council, was “representative of the then current
thinking of the Committee/Council, and in my judgment reflected the distinction
between the role of the Committee/Council and the duties and responsibilities
of managing agents/underwriters and auditors of individual syndicates.” 47. The judge
then considered three particular contentions which had been relied on by the
names as part of their case: the allegation that Lloyd’s deliberately chose not
to make an independent investigation and assessment of the overall exposure of
the Lloyd’s market to asbestos-related claims (the so- called 'back of an
envelope' issue); the allegation that Lloyd’s deliberately followed a policy of
expanding its membership in order to place part of the burden of
under-reserving on new names who were not told of the risks (the so- called
'recruit to dilute' policy); and the allegation that the 1979 year of account
should have been left open by syndicates affected by asbestos-related claims.
The judge rejected all of these contentions. On the 'back of an envelope' point
he relied on the evidence of Mr Rayment and Mr Lord as to the task being both
enormously complicated (as was shown by the Equitas reserving project) and
inappropriate to the Lloyd’s system. On the 'recruit to dilute' policy he said
that it was a matter for agents, not for Lloyd’s. On the closure of the 1979
year of account he referred to his own judgment in the Merrett case and also to
the Kerr report on syndicate 418/417’s closed year. 48. The judge
concluded that if he were wrong in his view that no representation had been
made, the claim would still fail, especially on the issue of fraud. The judge
did not in that part of his judgment add to his brief findings (in chapter 15)
as to the failure to prove reliance on the part of the three sample names. Nor
did he add to what he had said in chapter 9 (relevant legal principles) as to
the representor’s intention to convey a false meaning, or as to the issue of
attribution of intention to a corporation (he cited, without comment, a passage
from Meridian Global Funds Management Asia Ltd v Securities Commission [1995] 2
AC 500, 506). He did not in terms deal with the reference in the early
brochures to a 'rigorous audit', a fact which no doubt reflects the way in
which the names’ case has developed in this court. II Legal Issues The tort of deceit 49. The names
rely upon a number of representations which they say are contained in various
Lloyd’s brochures and in annual statements known as globals. In the case of
each alleged representation, in order to recover damages for deceit a name must
establish the following: i. that
Lloyd’s made the representation; ii. that the
representation was material; iii. that the
representation was untrue; iv. that when
it made the representation, Lloyd’s knew or believed that it was untrue or made
it recklessly, careless whether it be true or false; v. that when
it made the representation, Lloyd’s intended that the representation should be
relied upon by the name; vi. that the
name in fact relied upon the representation; and vii. that the
name has suffered loss as a result. It is
convenient to consider each of those ingredients in turn in the context of a
case of this kind. i) The Representation 50. The names
must establish that Lloyd’s made the representation alleged, which involves two
questions, namely whether a relevant representation was made and, if so,
whether Lloyd’s made it. As to the second question, since the alleged
representations are all contained either in the brochures or in the globals,
and since both the brochures and the globals were prepared and published by
Lloyd’s, we do not think that there can be any doubt that a representation
contained in either publication was made by Lloyd’s. 51. As to the
first question, namely whether a relevant representation was made, the
representation must be a representation as to a past or existing fact and not
as to the future: see eg Yorkshire Insurance Co v Craine [1922] 2 AC 542 per
Lord Atkinson, giving the judgment of the Judicial Committee of the Privy
Council, at p 553. 52. Whether any
of the alleged representations was made involves a consideration of each
brochure or set of globals relied upon in order to see what the words used in
the relevant document mean. The particular words used must of course be read in
their context, which involves considering them in the context of the particular
brochure or set of globals as a whole. Further, just as the words used must not
be read in isolation, so the document must itself be considered against the
relevant surrounding circumstances. In particular, it is necessary to have
regard to the purpose for which the document came into existence, why the
statements contained in it were made and by whom they were intended to be read. 53. It follows
that the words used may have a meaning other than their literal meaning. They
may also have a meaning which is not expressly stated, but which is implicit.
However, as we see it, their meaning, whether explicit or implicit, should be
arrived at by a process of construction and, subject to one point, not by a
process of implication. In particular, whether the relevant document contains a
particular representation does not depend upon a process of implication of the
kind which is appropriate in answering the question whether a particular term
is to be implied into a contract. 54. Mr Goldblatt
submitted that the test is simply whether an ordinary person in the position of
a prospective or existing name would have understood the document in question,
read as a whole, to carry or contain the representation contended for. We
agree. There has been some debate as to what attributes should be given to the
person reading the brochure as a prospective name. In this regard Mr Goldblatt
submitted that the ordinary person of reasonable intelligence in the position
of a prospective (or indeed existing) name should not be treated as someone with
previous knowledge of the insurance market generally or Lloyd’s in particular.
Again we agree. 55. The point
seems to us to be well demonstrated by the following statement made by Langley
J in Sumitomo Bank Ltd v Banque Bruxelles Lambert SA [1997] 1 Lloyd’s Rep 487
at 515: “It is
well established in law that the question whether any kind and if so what
particular representation was made depends upon an objective assessment of what
was said or done and its likely effect on the alleged representee in the context
in which the particular parties were concerned. In other words, what would the
documents and exchanges relied upon have conveyed to a prudent banker in the
position of the plaintiff banks?” In the
instant case we are not concerned with the prudent banker, who is already
versed in the world of banking, but with prospective names who may have no
previous knowledge of the world of insurance. 56. There is one
respect in which the courts have sometimes spoken of implied representations.
This can be seen, for example, in the judgment of Bowen LJ in Smith v Land and
House Property Corporation (1884) 28 Ch D 7, where he said at p 15: “… if
the facts are not equally known to both sides, then a statement of opinion by
one who knows the facts best involves very often a statement of a material
fact, for he impliedly states that he knows facts which justifies his
opinion.” That
principle has recently been considered by Evans-Lombe J in Barings Plc v
Coopers & Lybrand [2002] EWHC 461 (Ch) at paragraphs 46 to 50. 57. As
Evans-Lombe J observed at paragraph 49, in Brown v Raphael [1958] Ch 636 Lord
Evershed MR said at p 642: “… it
suffices for the application of the principle if it appears that, between the
two parties, one is better equipped with information or the means of
information than the other.” In that case
it was held that the test was met where the vendor’s solicitors expressed an
opinion in sale particulars as to an important aspect of the property about
which the purchaser could know nothing. Lord Evershed continued at p 643: “What
would be the effect of this language upon the mind of a possible purchaser?
Clearly, I should have thought, it would flow from the language used and would
be intended to be understood by a reader of the particulars that persons who
knew the significance of this matter and who were experienced and competent to
look into it were expressing a belief founded upon substantial and reasonable
grounds.” 58. Those cases
were considered by this court in the context of section 20 of the Marine
Insurance Act 1906 (applied in a non-marine context) in Economides v Commercial
Assurance Co Plc [1998] QB 587, where (at p 599B) Simon Brown LJ stressed that
in the passage from the judgment of Bowen LJ in the Smith case quoted above
Bowen LJ had said that in circumstances in which the representor knows the
facts a statement of opinion will very often amount to a statement of fact
“for he impliedly states that he knows facts which justify his
opinion”. As to Brown v Raphael, Simon Brown LJ said (at p 598H to 599A)
that the representation there, purporting as it did to come from the vendor’s
solicitors, would inevitably carry with it the implication that there were
reasonable grounds to support the belief. 59. These cases
seem to us to show that all depends upon the circumstances. In each case it is
necessary to ask the question identified above, namely what would the
reasonable person in the position of the representee understand by the words
used in the document. In our opinion there is no rule of law that any
particular statement carries with it any particular implication. All depends
upon the particular statement in its particular context. So, here, as already
stated, the question is whether the particular brochure or set of globals
relied upon would be reasonably understood by the ordinary applicant for
membership of Lloyd’s to have the meaning alleged. That meaning might either be
explicit in the words used or implicit (and in that sense implied) from the
words used. We shall return in Part IV below to the distinction between a
representation and an implied term in a contract. ii) The materiality of the representation 60. Although it
is doubted (with some force) in paragraph 6-040 of volume 1 of the 28th edition
of Chitty on Contract and in paragraph 15-36 of the 18th edition of Clerk &
Lindsell on Torts, the traditional view is that in order to succeed in the tort
of deceit the claimant must prove that the representation was material. Thus,
in Downs v Chappell [1997] 1 WLR 426 Hobhouse LJ, with whom Roch and Butler
Sloss LJJ agreed, said at p.433: “For a
plaintiff to succeed in the tort of deceit it is necessary to prove that (1)
the representation was fraudulent, (2) it was material and (3) it induced the
plaintiff to act (to his detriment). A representation is material when its
tendency, or its natural and probable result, is to induce the representee to
act on the faith of it in the kind of way in which he is proved to have in fact
acted.” iii) The Truth of the Representation 61. The representation
must be untrue or, in other words, false. iv) Lloyd’s knowledge, belief or recklessness 62. If a
representation is shown to be untrue or false, it must further be shown that
Lloyd’s knew or believed it to be false or that Lloyd’s made it careless
whether it be true or false. As the judge put it, in order to prevent a false
statement from being fraudulent, there must be an honest belief in its truth.
The position was summarised thus by Lord Herschell in his classic statement in
Derry v Peek (1889) 14 App Cas 337 at p 374: “I think
the authorities establish the following propositions: First, in order to
sustain an action in deceit, there must be proof of fraud, and nothing short of
that will suffice. Secondly, fraud is proved when it is shewn that a false
representation has been made (1) knowingly, or (2) without belief in its truth,
or (3) recklessly, careless whether it be true or false. Although I have
treated the second and third as distinct cases, I think the third is but an
instance of the second, for one who makes a statement under such circumstances
can have no real belief in the truth of what he states. To prevent a false
statement from being fraudulent, there must, I think, always be an honest
belief in its truth. And this probably covers the whole ground, for one who
knowingly alleges that which is false, has obviously no such honest belief.
Thirdly, if fraud is proved, the motive of the person guilty of it is
immaterial. It matters not that there was no intention to cheat or injure the
person to whom the statement was made.” 63. There is a
further principle which may be of relevance here. In the 18th edition of Clerk
& Lindsell the editors say: “15-07
Continuing Representations The tort is complete only when the representation is
acted upon. Where there is an interval between the time when the representation
is made and the time when it is acted upon, and the representation relates to
an existing state of things, the representation is deemed to be repeated
throughout the interval. …. If, during the interval of time between making
the representation and the plaintiff acting upon it, the defendant perceives
the statement to be false or circumstances change to render it false, liability
may be incurred. 15-22
Defendant’s later knowledge … where the defendant does not acquire knowledge
of the untruth of his statement until after it has been made, but comes aware
of it before the plaintiff has acted upon it, it follows from general principle
that he is bound to communicate the truth and will be answerable in damages if
he does not. 15-23
Statement becoming untrue ex post facto Where the statement complained of was
in fact true at the time when made, but before being acted upon by the party to
whom it was made had been rendered untrue by reason of a fact coming into
existence to the knowledge of the party making it, the balance of authority is
in favour of regarding it as deceit.” Those
paragraphs seem to us accurately to summarise the relevant principles and are
potentially relevant on the facts here because one view of the facts is that
some of the representations in the brochures may have been true when they were
made but may have become untrue subsequently. We shall return to these
principles below, in so far as necessary in the light of our conclusions on the
facts. 64. As to the
standard of proof, in Goose v Wilson Sandford & Co (No 2) [2001] Lloyd’s
Rep PN 189, Morritt LJ, giving the judgment of the court, said in paragraph 39
at p 198: “In
considering whether the elements in the tort of deceit had been established the
judge correctly directed himself as to the relevant standard of proof by
reference to the statement of Lord Nicholls of Birkenhead in Re H (Minors)
(Sexual Abuse: Standard of Proof) [1996] AC 563, 586 that: “… the
more serious the allegation the less likely it is that the event occurred and,
hence, the stronger should be the evidence before the court concludes that the
allegation is established on the balance of probability. Fraud is usually less
likely than negligence.” See also eg
Hornal v Neuberger [1957] 1 QB 247 and The Ikarian Reefer [1993] 2 Lloyd’s Rep
68 per Cresswell J at pp 71-2 and the cases there cited. 65. Where an
individual has the relevant knowledge, belief or recklessness, before that
knowledge, belief or recklessness could be imputed to Lloyd’s it would be
necessary to identify the legal basis upon which it could be so imputed to
Lloyd’s as a corporate body. The names allege fraud against a total of 33
individuals identified above. We shall return, so far as necessary, below to
the question whose knowledge, belief or recklessness would be the knowledge,
belief or recklessness of Lloyd’s, and to the associated question whether
Lloyd’s is liable in deceit in respect of the deceit of any one or more individuals.
It is convenient, before doing so, to consider the facts in detail and to set
out the conclusions which we have reached as to the facts relevant to these
questions. v) Lloyd’s intention 66. This is an
important ingredient of the tort because it is one of the features of the tort
which has led to it being considered as involving fraud on the part of the
tortfeasor. As the judge observed in chapter 9(2) under the heading the Tort of
Deceit, the tortfeasor does not have to be dishonest in the sense in which that
word is used in the criminal law. On the other hand it is no defence to a
charge of knowingly making a false statement that the person who made it
believed that he was justified in doing so or that no harm would come of it or
that it would be for the best: see eg Standard Chartered Bank v Pakistan
National Shipping Corporation (No 2) [2000] 1 Lloyd’s Rep 218 per Evans LJ at
221. 67. The
tortfeasor must intend the representation to be acted upon: see eg Clerk &
Lindsell at paragraph 15-27 but compare Chitty at paragraph 6-42. Moreover, in
Goose v Wilson Sandford & Co (No 2) Morritt LJ said in paragraph 41 at p
199: “To
establish liability in deceit it is incumbent on the representee to show that
the representor intended his statement to be understood by the representee in
the sense in which it is false.” The court
relied upon Akerhielm v De Mare [1959] AC 789, per Lord Jenkins, giving the
advice of the Judicial Committee of the Privy Council , at 805 and upon Gross v
Lewis Hillman Ltd [1970] Ch 189. Thus, if the representor honestly believes the
statement to be true in the sense in which he intended it to be understood it
he will not be liable in deceit. vi) Reliance 68. Each of the
three particular names must establish that he or she relied upon the
representation concerned in the sense that he or she was influenced to become
or remain a member of Lloyd’s in reliance upon it. It is not necessary for us
to discuss here any distinction that there may be between inducement and
reliance: cf Downs v Chappell per Hobhouse at p.433. vii) Loss 69. In order to
recover damages each name would in the future have to establish that he or she
suffered loss as a result. We are not, however, concerned with the question of
loss in this appeal. Corporate knowledge, intention and bad faith 70. The
allegation of deceit is made against the Corporation of Lloyd’s itself, that is
as a body corporate incorporated under the Lloyd’s Act 1982 (“the 1982
Act”) and earlier legislation. The names’ case does not depend on vicarious
liability. That brings into play the 'rules of attribution' as explained by
Lord Hoffmann giving the opinion of the Privy Council in Meridian Global Funds
Management Asia Ltd v Securities Commission [1995] 2 AC 500, 506: “Any
proposition about a [body corporate] necessarily involves a reference to a set
of rules. A [body corporate] exists because there is a rule (usually in a
statute) which says that a persona ficta shall be deemed to exist and to have
certain of the powers, rights and duties of a natural person. But there would
be little sense in deeming such a persona ficta to exist unless there were also
rules to tell one what acts were to count as acts of the [body corporate]. It
is therefore a necessary part of corporate personality that there should be
rules by which acts are attributed to the [body corporate]. These may be called
“the rules of attribution”.” 71. As appears
from our analysis of the tort of deceit, the state of mind of a person alleged
to have made a fraudulent misrepresentation may arise on more than one point
(in addition to the bare fact of whether the defendant was the person who made
the representation, on which no issue arises here): i. Did the
defendant intend the representation to be understood in a particular way? ii. Did the
defendant intend the representation to be acted on? iii. Did the defendant know
that it was false, or was the defendant reckless as to its truth or falsity? 72. As indicated
in paragraph 65 above, we think it better to reach our conclusions on a number
of factual issues before going far into the rules of attribution as they would
apply to the allegations made against Lloyd’s in this case. But it may be
useful to give a brief summary of the opposing submissions. In this context it
must be borne in mind that (as explained below in more detail) the governing
body of Lloyd’s was, until 31 December 1982, the Committee. Thereafter it was
the Council, but much of the important decision- making was delegated to the
Committee, which consisted of the members of the Council other than the
external members (that is Council members who were not working names). 73. Both sides
have accepted that the general principles which apply are those stated by the
Privy Council in Meridian Global, as anticipated, to some extent, by this court
in El Ajou v Dollar Land Holdings plc [1994] 2 AER 685. But the names have in
their submissions put forward alternative tests with the common characteristic
(as stated in their skeleton argument, paragraph 153) that “…
they identify those people with de facto control over the insertion, or not,
[in the brochures and the globals] of any health warning or qualification: the
people with knowledge of the systemic defects in asbestos reserving, who chose
not to disclose that to the members of the Committee and Council who were
reliant on them.” The names
have criticised the judge for equating the positions of the Council and the
(post-1982) Committee because the external members of the Council were in a
state of ignorance, since asbestos-related problems were never discussed in
Council. 74. Lloyd’s on
the other hand, have submitted that the names would have to establish the
relevant state of mind in a majority of the members of the Committee or Council
present when the decision was taken to approve any particular brochure or set
of globals. For this they rely on the decision of the House of Lords in Jones v
Swansea City Council [1990] 3 AER 737 and on The Ardent [1997] 2 Lloyd’s Rep
547. In Jones the claimant brought an action for misfeasance in public office
(a tort involving dishonesty) against the Swansea City Council, alleging bad
faith against every member of the Labour group on the council. This court (by a
majority) reversed the trial judge and the House of Lords restored his
judgment. The case turned ultimately on a pleading point and the assistance
which it gives is therefore limited. If it were necessary to go further into
this point we would start from a position of some scepticism as to whether a
process of counting heads would be the right approach. Approach of the Court of Appeal 75. In this case
the judge acquitted of fraud both Lloyd’s and all the individuals against whom
allegations of fraud had been made. The names say that he was wrong to do so.
They invite us to say that, contrary to the conclusions of the judge, who had
the advantage of seeing many witnesses give evidence over a number of days,
many of the individuals were guilty and so was Lloyd’s as an institution. 76. The correct
approach of the Court of Appeal to this kind of case has been considered many
times in the past. It is, we think, sufficient to refer to the way in which
this court identified the approach in The Ikarian Reefer [1995] 1 Lloyd’s Rep
455, where in the event the court reversed the decision of the trial judge that
the plaintiff insured shipowners had not deliberately scuttled their vessel or
cast her away. Giving the judgment of the court, Stuart-Smith LJ addressed the
correct approach as follows (at pp 458-9): “(1) The
burden of showing that the trial Judge was wrong lies on the appellant. … (2) When
questions of the credibility of witnesses who have given oral evidence arise
the appellant must establish that the trial Judge was plainly wrong. Once again
there is a long line of authority emphasizing the restricted nature of the
Court of Appeal’s power to interfere with a Judge’s decision in these
circumstances though in describing that power different expressions have been
used. In SS Hontestroom v SS Sagaporak … [1927] AC 37 at p 47 Lord Sumner said:
SU11“None the less not to have seen the witnesses puts appellate Judges in
a permanent position of disadvantage as against the trial Judge and unless it
can be shown that he has failed to use or has palpably misused his advantage,
the higher Court ought not to take the responsibility of reversing conclusions
so arrived at merely on the results of their own comparisons and criticisms of
the witnesses and of their own view of the probabilities of the case.” …. Finally in
Mersey Docks and Harbour Board v Proctor [1923] AC 253 at p 258, Viscount Cave
LC said: SU11“In such a case … it is the duty of the Court of Appeal to
make up its own mind not disregarding the judgment appealed from and giving
special weight to that judgment in cases where the credibility of witnesses
comes into question, but with full liability to draw its own inferences from
the facts proved or admitted and to decide accordingly.” (3) When a
party has been acquitted of fraud the decision in his favour should not be
displaced except on the clearest grounds. This proposition is not in contest
and is supported by the House of Lords in Akerhielm v De Mare [1959] AC 789 at
p 806, where the earlier authority of Glasier v Rolb (1889) 42 ChD 436 is
cited.” 77. Another way
of putting essentially the same approach is to say, as was said in Gross v
Lewis Hillmann [1970] Ch 445 at 459C-460B, that the Court of Appeal must be
completely satisfied that the judge was wrong. It follows that the names have a
difficult task in front of them, but that does not mean that in an appropriate
case it is not the duty of this court to reverse a trial judge who has
acquitted a party of fraud. As already stated, it did so in The Ikarian Reefer.
Another example of a well-known case in which this court reversed the conclusions
of the trial judge based on the credibility of the witnesses is Armagas Ltd v
Mundogas SA, The Ocean Frost, [1985] 1 Lloyd’s Rep 1. 78. We recognise
that all those cases were decided when the Rules of the Supreme Courtwere in
force, which provided by RSC Order 59 rule 3that “an appeal to the Court
of Appeal shall be by way of rehearing”. The present appeal is governed by
the CPR , which by rule 52.11(1) provides: “Every
appeal will be limited to a review of the decision of the lower court unless --
(a) a
practice direction makes different provision for a particular category of
appeal; or (b) the court
considers that in the circumstances of an individual appeal it would be in the
interests of justice to hold a re- hearing.” Neither party
invited the court to say that it should hold a re-hearing within the meaning of
rule 52.11(1)(b) (and not a review). 79. Equally
neither party submitted that the traditional principles stated above should not
apply, or that the approach should be different depending on whether the appeal
were treated as a review or a re-hearing. We are inclined to think that in this
class of case the position should be the same. In any event we shall follow the
principles stated above in our approach to this appeal. III The Facts 80. In the
following sections of this judgment we identify the individual protagonists and
other important witnesses on both sides, and proceed to a chronological summary
of the development of asbestos-related claims and losses. Changes in the
governance of Lloyd’s, and other important events, are noted as they occurred.
The chronological summary starts before the beginning of the relevant period
and continues (with some digressions and deviations from strict chronological
sequence) until the inception of this litigation. It is largely drawn from
undisputed documentary material, although there are many disputed issues as to
the inferences which the judge did or did not draw from the documents. Parts of
the summary are covered again, in more detail, in Parts IV, V and VI of this
judgment. But some degree of repetition is unavoidable in such a complex case. The claimants and their witnesses 81. There were
216 claimants (almost all of whom were in fact counterclaimants in actions
commenced by Lloyd’s) concerned in the threshold fraud issue. Under the
case-management orders directing that issue three individuals — Captain Donald
Hindle, Sir William Jaffray Baronet and Mrs Dona Evans — were selected as
sample cases for the issue of reliance. Sir William has appeared as a litigant
in person and so have some other appellants who were not selected as sample
cases: Mrs Heather Adams (appearing by her husband), Mr Sydney Butler, Mr
Richard Carter, Mr Cary Harrison and Mrs Ann Strong. We summarise the
circumstances in which these persons became names, and then identify the most
important non-party witnesses who gave evidence for the claimants. 82. Mrs Adams
was admitted as a name in 1977 and started underwriting in 1978. She did not
give evidence at trial but according to her husband she asked to be put on
low-risk syndicates but found herself on the Merrett and Outhwaite syndicates.
Mr Adams made well-structured and moderate submissions to the court. 83. Captain
Hindle had a distinguished career as a sea captain, commanding the two biggest
ships in the world. He stopped going to sea in 1979 but continued working as an
expert consultant, based in Malaysia. He was admitted as a name in 1978 with an
initial premium limit of £100,000 spread equally between three marine and two
non-marine syndicates. The judge doubted whether he was ever an appropriate
candidate for membership of Lloyd’s. Captain Hindle frequently increased his
premium limit, ultimately (in 1989) to £1.5m. He made profits for every year
until 1986 for which he had records (those for 1981 and 1982 were lost). 84. Sir William
Jaffray, Baronet (who was born in 1951 and succeeded his father in 1953) was
admitted as an external name late in 1981. He began underwriting in 1982 with a
premium limit of £200,000 (increased to £300,000 in 1985 and later further
increased). Initially he made some profits but he suffered substantial losses
in numerous years from 1983, particularly on Gooda Walker syndicates. He made
submissions which were carefully prepared and eloquently delivered, but not
always relevant to the issues before the court. 85. Mr Butler
became a name in 1986 and began underwriting in 1987 on a Poland syndicate
which had no E & O cover. He did not give evidence at trial but he made
clear and forceful submissions in this court. 86. Mrs Evans
became a name in 1987 and began underwriting in 1988, with R W Sturge as her
members’ agent. She was then married but she has since divorced. She has been a
prominent member of names’ action groups. She gave evidence at trial. The judge
doubted whether she was ever an appropriate candidate for membership of
Lloyd’s. 87. Mr Carter is
a chartered surveyor and property consultant. He became a name in 1988 and
began underwriting in 1989. His first and worst losses arose in his first year
of underwriting from his participation in the parallel marine and non-marine
Feltrim syndicates. He made clear submissions which were no less effective for
being moderately expressed. 88. Mr Harrison
is an American resident in London. He is retired. He has a liability to a bank
which guaranteed, and has discharged, his liability to Lloyd’s. He forcefully
submitted that he would have preferred to conduct his own case separately
rather than being what he called a 'free rider' in the group litigation. 89. Having
identified the sample names and the litigants in person who appeared in this
court we will mention briefly some of the most important witnesses for the
names. Mr Christopher Stockwell became a Lloyd’s underwriter in 1979 and joined
the Outhwaite (Combined) Agency. He was the first-named claimant in the action
against Mr Richard Outhwaite which Saville J tried in 1991 (and which was
settled before judgment). He was a prominent campaigner throughout the Lloyd’s
litigation. The judge had serious reservations about his evidence and gave
substantial reasons for his reservations. 90. Mrs
Catherine Mackenzie-Smith became a name in 1974. She is a member of the bar and
has also been prominent in Lloyd’s action groups. Her evidence was directed
mainly to her contact with, and information which she derived from, another
barrister who was also a name, Mr John Osbrey-Taylor (who died in 1999). The
judge said that Mrs Mackenzie-Smith found it difficult to distinguish between
the role of a witness and that of an advocate. 91. Mr Roger
Bradley was a working name who joined Janson Green in 1967. In 1977 he became
an equal partner and joint underwriter in the Bryan P Barrie Underwriting
Agency, on syndicates 901 (marine) and 921 (non-marine). From 1993 he began to
work (after some years of hardship) for the Names Defence Association. The
judge found his evidence unsatisfactory (for reasons set out at some length in
the judgment). 92. Mr Colin
Mackinnon was the active underwriter on marine syndicate 927 and was also
underwriter on two specialist stop-loss syndicates. Mr Mackinnon’s witness
statement was quite short (relating to his having no recollection of seeing the
Murray Lawrence letter before 1995) but he did in the course of his
cross-examination answer many questions about practice and procedures at
Lloyd’s. The judge described him as an articulate witness. 93. Mr Robin
Kingsley became a working name in 1959. In 1976 or 1977 he became founder
chairman of three members’ agencies. He was also from 1977 to 1989 a director
of Hardcastle Underwriting Agencies Ltd, a managing agency later renamed
Cutler. One of his members’ agencies arranged for Sir William Jaffray’s
underwriting between 1982 and 1987, when Sir William changed his members’
agent. Mr Kingsley was cross-examined on various topics. He stated in his
witness statement that he did not see the Murray Lawrence letter until the
early 1990’s. 94. Mr Anthony
(generally known as Charles) Sturge left A L Sturge & Co in 1972 and formed
Chatset (a specialised information service about Lloyd’s syndicates) in 1981.
He gave evidence about the market’s perception at different times of
asbestos-related problems. The judge described him as a careful witness who
gave a reasonably balanced account. 95. There were
numerous other witnesses for the names including two individuals who were the
first external names to serve on the Council of Lloyd’s after the coming into
force of the Lloyd’s Act 1982. They were Mr Dennis Fredjohn, whom the judge
described as a distinguished industrialist and a generally reliable witness,
and Sir Eddie Kulukundis, a well-known philanthropist whom the judge described
as an impressive witness. Working members of the Lloyd’s community 96. The
reamended defence and counterclaim (quoted in paragraph 17 above) names 33
individuals, all working members of the Lloyd’s community at some time during
the relevant period, whose knowledge ought (it is pleaded) to be imputed to the
Society of Lloyd’s so as to arrive at a finding of bad faith against the corporation
itself. Nine of these individuals are dead. All but five of them were at some
time members of the Committee or (after its institution in 1983) the Council of
Lloyd’s and some served as Chairman or as one of the two Deputy Chairmen (after
1983 the Chief Executive was also designated as a third Deputy Chairman). Six
of them gave oral evidence at trial (and the witness statement of Mr
Rokeby-Johnson was admitted under CPR 33.2). Others had made witness statements
which were exchanged (and were, it seems, read by the judge) but they were not
in the event called to give evidence. In the following paragraphs we identify,
in alphabetical order, some of the working members of the Lloyd’s community who
appear most frequently in our chronological summary. Those who are impugned in
the pleadings are denoted by an asterisk. The specialised committees
established by Lloyd’s at different periods are summarised in paragraph 188
below. 97. Mr Frank
Barber* was on the Committee of Lloyd’s in 1978-80 and 1982 and on the Council
and Committee in 1983-5 and 1987. He was Deputy Chairman in 1983-4. He was a
member of the Membership Committee in 1978. He was on the Committee of LUNMA
(Lloyd’s Underwriters Non-Marine Association) in 1978-80. 98. Mr Arthur
Chester* (deceased) was on the Committee of Lloyd’s in 1978 and 1980-2 and on
the Council and Committee in 1983. He was on the Audit Committee in 1980-3,
chairing it in 1980, 1982 and 1983. 99. Mr Michael
Cockell* was on the Council and Committee of Lloyd’s in 1984-7 being Deputy
Chairman in 1986. He was on the Audit Committee in 1984. He was on the
Committee of LUNMA in 1978-85 and 1987, being Deputy Chairman of LUNMA in 1982
and Chairman in 1983. 100. Mr David
Coleridge* was on the Council and Committee of Lloyd’s in 1983- 6 and 1988,
being Deputy Chairman in 1985 and Chairman in 1988. He was on the Committee of
LUNMA in 1978-85 and 1987, being Deputy Chairman in 1982 and Chairman in 1983. 101. Mr Ian Hay
Davison was appointed as the first Chief Executive of Lloyd’s in 1983, the year
in which the Lloyd’s Act 1982 came into force. He was an accountant who had had
a distinguished business career. His appointment was widely believed to have
been influenced by the Bank of England, which was concerned to improve and
modernise the regulation of the Lloyd’s market. Relations between Mr Davison
and the Council of Lloyd’s were not entirely harmonious and he resigned early
in 1986 (being succeeded by Mr Alan Lord). Mr Davison subsequently wrote a book
entitled 'A View of the Room' about his time at Lloyd’s. A copy of this book
was provided to the court (as it had been provided to the judge) but (like the
judge) we have not read it (except for a few excerpts which were actually put
to witnesses in cross-examination, and so appear on the transcript). 102. Mr Charles
Gibb* (deceased) was on the Committee of Lloyd’s in 1978-81, being Deputy
Chairman in 1978-80. He was on the Membership Committee in 1978. 103. Sir Peter
Green* (deceased) was on the Committee of Lloyd’s in 1979-82, being Deputy Chairman
in 1979 and Chairman in 1980-2. He was then the first Chairman of the
newly-instituted Council and Committee in 1983. He was therefore very closely
involved in the promotion of the Bill which became the Lloyd’s Act 1982. He was
knighted in 1982. Subsequently disciplinary proceedings were taken against him
over a matter in which he had a serious conflict of interest and he was
censured and resigned from Lloyd’s. 104. Mr Robin
Jackson* was never on the Council or Committee of Lloyd’s but he was between 1980
and 1988 a leading member of LUNMA (of which he was Chairman in 1986) and of
the AWP (Asbestosis Working Party) of which he was Chairman from 1984 to 1988.
He began his career in 1956 with C T Bowring Group, a firm of Lloyd’s brokers.
He worked in the United States from 1960 to 1971 underwriting reinsurance of
liability business (referred to in the United States as casualty business). He
returned to England in 1971 as chief underwriter for an American insurer. In
1976 he became the active underwriter for the Merrett non-marine syndicate
(later called syndicate 799). He stopped full-time underwriting in 1988 but
remained as a consultant until 1990. During the relevant period he was very
closely involved in the problems of asbestos- related claims, and from 1994-6
he worked on the Equitas Project. It was suggested to the court, without
contradiction, that he and Mr Rayment (see paragraph 117 below) were probably
as knowledgeable about asbestos-related claims as anyone at Lloyd’s. Mr Jackson
gave evidence which the judge summarised without any comment (whether
favourable or adverse). 105. Mr Richard
Keeling was during the 1970’s deputy underwriter to Mr Lawrence (see paragraph
108 below) on syndicate 360 (a composite syndicate which later split, the
non-marine element becoming syndicate 362). As Mr Lawrence took on other
commitments Mr Keeling assumed more responsibility and was formally appointed
active underwriter of syndicate 362 in 1984, a position he occupied until the
end of 1996. Mr Keeling gave evidence and the judge described him as a
particularly astute underwriter. His evidence covered, among other topics, the
allegations made against Mr Lawrence, including the reinsurance which Mr
Lawrence effected with the Outhwaite and Meacock syndicates and disputes which
arose over that reinsurance cover. 106. Mr Bryan
Kellett* was a member of the Members’ Solvency and Security Committee
(“MSSC“ — the successor of the Audit Committee) of Lloyd’s in 1985-
6. He was a leading member of the Committee of LUNMA in 1983-88, being Chairman
in 1987. He was on the Council and Committee after the end of the relevant
period. He had set up his own non-marine syndicate 993/994 in 1973 and he was
an active underwriter until the end of 1989. He gave evidence about his own underwriting
activities (which included writing run-off policies) and about a meeting with
the Inland Revenue in 1984. The judge made no particular comment on his
evidence except to say that his remarks to the Inland Revenue (“we are
under-reserved”) had to be seen in the context in which they were made. 107. Mr Robert
Kiln* (deceased) was on the Committee of Lloyd’s in 1978, 1979 and 1981. He was
on its Audit Committee in 1979, 1981 and 1982, being Chairman of that committee
in 1979 and 1981. He had set up syndicate 510/511 in 1963 and was its active
underwriter until 1974, with Mr Murray as his deputy. In his witness statement
Mr Murray described Mr Kiln as a man of the highest integrity and 'the least
greedy of men', a view supported by a statement of Mr Holman put in by Mr
Harrison. 108. Mr Murray
Lawrence* is of central importance in this matter, since it was he who as
Deputy Chairman wrote the 'Murray Lawrence letter' dated 18 March 1982 in
indirect response to the 'Neville Russell letter' dated 24 February 1982. Mr
Lawrence was on the Committee of Lloyd’s in 1979-82 (being Deputy Chairman in
1982) and on the Council and Committee of Lloyd’s in 1984-8, being Deputy
Chairman in 1984-7 and Chairman in 1988. He was also on the committee of LUNMA
in 1978-83, being Chairman in 1978. He had become active underwriter on
composite syndicate 360 in 1970 and from 1980 (after syndicate 360 split) he
was active underwriter of syndicate 362. In 1979 Mr Lawrence became Chairman of
the Computer Leasing Working Party. In 1982 he placed an unlimited liability
run-off policy (with an excess of $55m) with the Outhwaite and Meacock
syndicates (which underwrote two-thirds and one-third respectively). This later
led to disputes and arbitrations. In 1985 Mr Lawrence set up his own managing
agency, Murray Lawrence and Partners, which was incorporated in 1989. Mr
Lawrence gave evidence and was cross-examined over four days. The judge
summarised his evidence and expressly accepted his evidence as to the
distribution of the Murray Lawrence letter but did not otherwise comment on its
quality. 109. Mr Alan Lord
became Chief Executive of Lloyd’s in March 1986 in succession to Mr Davison. He
held that position until 1992. He had (as the judge said) previously had a
distinguished career with the Inland Revenue, the Treasury, the Department of
Trade and Industry and Dunlop, as well as serving on the Court of the Bank of
England. The judge described Mr Lord as an impressive witness. 110. Mr Stephen
Merrett* was a leading underwriter whose agency was successfully sued for
negligence by names who were on his syndicate. He was on the Committee of
Lloyd’s in 1981-2 and on the Council and the Committee in 1983-4 and 1987-8. He
was on the Audit Committee (or its successor the MSSC) in 1982-5 and 1988 (being
Chairman in 1985 and 1988) and on the Membership Committee in 1981. He was on
the committee of LUNMA in 1981-3. 111. Sir Peter
Miller* began work with Thomas R Miller & Son, a Lloyd’s broking firm
concerned with marine business, in 1954. Throughout his career he was mainly
concerned with marine liability broking, and he became Chairman of the
Committee of Lloyd’s Insurance Brokers in 1976. He was on the Committee of
Lloyd’s in 1978-80 and 1982 and (after the Lloyd’s Act 1982 came into force) on
the Council and Committee of Lloyd’s in 1983-88. He succeeded Sir Peter Green
as Chairman and held that office in 1984-7. He was on the Membership Committee
in 1979-80. He gave evidence at trial and the judge described him as an
articulate witness. 112. Mr Colin Murray*
was with C T Bowring from 1953 to 1963 and then joined Mr Kiln’s agency as
deputy underwriter to syndicate 510/511 (set up by Mr Kiln). Mr Murray became
active underwriter in 1974. He was on the Committee of LUNMA from 1979 to 1984.
He was on the Council and Committee of Lloyd’s in 1983-6, and on the MSSC in
1985-6 (being Chairman in 1986). He gave evidence at trial. The judge described
him as a highly professional and skilled underwriter and said that he was
assisted by his evidence. He attached particular importance to Mr Murray’s
evidence about the influential character of the Conning Report (a report
produced in 1982 on the impact of asbestos-related diseases on the insurance
industry). 113. Mr Edward
Nelson* was closely involved in the problems of asbestos- related diseases
between 1978 and 1983. He was on the Committee of Lloyd’s in 1980-2 and on the
Council and Committee in 1983. He was on the Audit Committee in 1982-3 and on
the Membership Committee in 1980-3 (being Chairman in 1983). He was a founder
member of the AWP (1980-3) and its first chairman (1980-1). He was on the
committee of LUNMA in 1978-83 being Deputy Chairman in 1978 and Chairman in
1979. Later a disciplinary committee of Lloyd’s found him guilty of
discreditable conduct. 114. Mr Alan
Parry* was on the Committee of Lloyd’s in 1979-82 and on the Council and
Committee in 1987-8, being Deputy Chairman in 1987-8. 115. Mr Ian
Posgate* was a controversial figure who was implicated in some of the more
serious scandals at Lloyd’s. He was on the Committee of Lloyd’s in 1982 and on
the Council and Committee in 1983-4. 116. Mr Kenneth
Randall* was a senior employee of Lloyd’s who was in that capacity in
attendance at the Audit Committee in 1980-4 and the Membership Committee in
1984. He was closely involved in the preparation of the Murray Lawrence letter
in March 1982. He was perhaps the most surprising of those whose witness
statements were exchanged but who were not in the event called to give
evidence. 117. Mr Keith
Rayment worked in the claims department of R W Sturge, a Lloyd’s underwriting
agency, from 1969 to 1990. He was concerned with non- maritime business,
primarily that of syndicate 210, and in 1979 he became claims director of that
syndicate. From 1980 he was concerned almost exclusively with long-tail United
States casualty business. He was a member of the AWP from 1983 (having joined
its claims sub-committee in 1981) and he also sat on its reinsurance
sub-committee. He was a director of Topliss & Harding (Asbestos Services)
Ltd, a service company established by the AWP. He was involved (between 1982
and 1985) in negotiations for the Wellington Agreement which was finally
concluded in June 1985. He had an exceptional knowledge of the insurance
implications of asbestos-related diseases. He was himself a name from 1980 to
1990. The judge spoke most highly of his evidence: “Mr
Rayment struck me as a highly conscientious claims man who worked tirelessly to
assist the market in relation to the handling of asbestos-related and other long-tail
claims. I was greatly assisted by his evidence.” 118. Mr Ralph
Rokeby-Johnson* was a leading underwriter who was active underwriter of Sturge
syndicate 210 from 1974 to 1987. He was a member of the AWP from its inception
in 1980, being Deputy Chairman in 1981-2 and 1983-8 and Chairman in 1982-3. He
was on the committee of LUNMA from 1978 to 1987, being Deputy Chairman in 1983
and Chairman in 1984. 119. Sir David
Rowland* began working at Lloyd’s with Matthews Wrightson, insurance brokers,
in 1956. From 1964 he was involved in the management of Matthews Wrightson and
other companies with which that company merged. He was on the Council and
Committee of Lloyd’s in 1987-90, and then served on the task force
investigating the future capital structure of Lloyd’s. He was Chairman from
1993 to 1997. In the early part of 1995, as Chairman, he gave evidence to the
House of Commons Select Committee which in May 1995 produced a report entitled
'Financial Services Regulation: Self-Regulation at Lloyd’s of London'. It was
under his chairmanship and guidance that R&R took place. Sir David Rowland
gave evidence at trial and the judge described him as a highly articulate
witness. 120. Mr Charles
Skey* was a member of the Committee of Lloyds in 1978-81. He was a founder
member of the AWP and was on the committee of LUNMA from 1978-85. 121. Mr Don
Tayler* (deceased) was a member of the AWP from 1980 to 1983. He was its first
deputy chairman (1980-1) and its second chairman (1982). He was the active
underwriter of Pulbrook syndicate 90 and as such he effected reinsurance (early
in 1982) for the syndicate’s old years. It was suggested that he used 'inside'
information for this purpose. Sir David Rowland (who was chairman of the
holding company of the Pulbrook managing agency) described him as a sensible,
serious and cautious underwriter. Mr Tayler died in 1983. 122. The other
individuals impugned in the pleadings were Mr Richard Ballantyne, Mr David
Barham, Mr Richard Beckett (deceased), Mr Ivor Binney, Mr Patrick Bird, Mr Brian
Brennan (deceased), Mr Peter Daniels, Mr Charles Gilmour, Mr Richard Hazell, Mr
Alec Higgins (deceased) and Mr Michael Williams. Chronological summary: before 1982 123. Asbestos is
(as the judge stated in chapter 3), “A
fibrous silicate material which achieved wide usage by reason of its physical
properties such as the ability to withstand fierce heat, corrosion and decay
under almost every condition of temperature and moisture. Its uses included
roofing, plasterboard and fireproof wallboard, floor tiles, an ingredient in
paints and sealants, car brake linings and clutch facings.” Exposure to
asbestos is a causative factor in many diseases, including mesothelioma, lung
cancer, gastric cancer and asbestosis. These diseases are typically contracted
by workmen who have been exposed to asbestos at their workplace, especially in
shipbuilding and the construction, insulation and demolition of buildings of
all sorts. Some conditions developed only after prolonged exposure but the most
serious (mesothelioma) could result from even a single brief exposure. An
important epidemiological study was published in the United States by Dr
Selikoff and others in 1964. 124. Claims by
workers against their employers for asbestos-related injury were covered by
Lloyd’s under third party general liability policies extending to cover product
liability. Until the advent of asbestos-related claims, such policies had been
profitable for underwriters. That changed dramatically with the rapid growth in
the manifestation of asbestos-related diseases and changes in tort law in the
United States. The first landmark case establishing strict liability was Borel
v Fibreboard 493 F2d 1076, decided by the Federal Court of Appeals for the
Fifth Circuit in 1973. But during the 1970s the number of claims was still
relatively small and most were settled for modest sums. Rather under 1000 had
been filed in US Federal Courts by 1980 (that figure must be compared with
about 100,000 claims by the end of the relevant period in 1988, and about 450,000
claims by 2000). 125. Mr Bradley
gave evidence of a conversation at a golf match in 1973 at which Mr
Rokeby-Johnson spoke of asbestos as “going to change the wealth of
nations” but the judge found his evidence to be unreliable. Mr
Rokeby-Johnson’s own evidence (given in 1996 to the Syndicate 210 Loss Review
Committee) about his perception in 1974 was as follows: “Q Do
you remember whether pollution was one of the concerns that you had when you
were arranging the run-off reinsurance in 1974, or were you worried about
particular types of liabilities or at that stage were you thinking that you
wanted to deal with the whole of the back years? A I think my
-- I cannot call them “doubts” — certainties about the likely
run-off of casualty underwriting in the United States overall more than any
specific thing. I do not believe that we were aware of the depths and heights
and horrors of asbestos, for instance, back then. The potential in this new law
was there so it would have been part of it, but I think you were thinking about
medical malpractice, trains, cars, all the contractors, all the stuff that had
been written quite gaily for all these years, I was thinking much more of that.
The overall rather than the particular.” 126. Not all
experienced lead underwriters took a pessimistic view during the 1970s. Between
1974 and 1982 three well-known underwriters, Mr Outhwaite, Mr Merrett and Mr
Meacock wrote run-off contracts which involved heavy exposure to
asbestos-related risks. In consequence several syndicates including Outhwaite
syndicates 317 and 661 incurred very heavy losses which were the subject of an
inquiry conducted by Freshfields. Claims in respect of run-off losses featured
largely in litigation brought by names against managing agents and members’ agents.
The first case which went to trial was Stockwell v Outhwaite, which went to
trial in October 1991 but was settled in January 1992 before judgment. Three of
the cases went together to the House of Lords and have contributed to the
development of the English law of tort (Henderson v Merrett Syndicates [1995] 2
AC 145). 127. The run-off
contracts (and in particular those written by Outhwaite syndicates 317 and 661)
are covered in chapter 17 of the judgment. They are an important strand in this
tangled story, because as well as producing very large losses they led to
suspicions of malpractice by insiders, including those who had special
knowledge of asbestos-related problems from their work on the Asbestos Working
Party (see paragraph 138 below). These suspicions were raised by a working
member of Lloyd’s, Mr John Donner, and were investigated by Lloyd’s during
November and December 1989. (Mr Donner was to have been called by the names but
his ill-health prevented that. His witness statement was put in evidence but
Lloyd’s attacked its credibility.) 128. The
investigators appointed by Lloyd’s did not find the suspicions substantiated
but the interviews which were conducted are a valuable source of evidence which
can be tested against the contemporary documents. At a meeting on 20 December
1989 Mr Donner said that his real concern was not to suggest conspiracy: “He had
been concerned for some time, having known Mr Outhwaite, Mr Merrett and Mr
Meacock as intelligent underwriters, that he could find no answer to the
question of why they wrote the run-off policies. He could only conclude that
they had written those policies on the basis of certain information, which
raised the question of whether all information that was in the hands of those
that ceded the run-offs was made available to Mr Outhwaite. This was one of the
specific questions raised in the early days of Mr Donner’s enquiries. He
emphasised that the doctrine of caveat emptor was not relevant in the context
of insurance, although it had been suggested to him at a previous meeting that
it did apply. Mr Donner said that he believed that he now knew approximately
what had happened and that he would explain this to Mr Lord and would be able
to produce corroborative evidence. Focusing on the period of 1981 and 1982, Mr
Donner recalled that the insurance market worldwide faced an unparalleled
series of losses from asbestos- related diseases. Some American insurance
companies talked openly of going into liquidation and Lloyd’s also faced a
difficult position. At the time that the 1979 account was being closed at
December 1981, there were two practical alternatives available to underwriters
with an asbestos involvement. The first was to make full provision for the
losses in line with information then available which would have resulted in
many syndicates remaining open and some going out of business. The alternative
was to roll the losses forward so that claims arose in the future and future
Names had to pay. This involved massaging the audit at December 1981. The Lloyd’s
panel of auditors made clear their view of the gravity of the situation to some
individuals in senior positions of authority at Lloyd’s and there was general
talk of these losses breaking Lloyd’s. Senior people in the Market concluded
that they could not face this and there was a considered decision by some of
those in authority, underwriters and auditors to view the 1979 account as far
as asbestos claims were concerned in the most favourable light possible. The
result of this would have been to roll forward the losses to later years.”
This passage
gives the general flavour of actual and alleged events (especially during 1981
and 1982) which this court, like the judge, has had to look at in some detail. 129. On 28
October 1977 the active underwriters of over fifty syndicates initialled a
memorandum of agreement as to the negotiation of a settlement of claims in
respect of asbestosis made against Bell Asbestos. This document was relied on
as showing that in 1977 the market already had general knowledge of
asbestos-related risks. In February 1979 there was produced the first edition
of the Asbestos Litigation Report, a publication which subsequently appeared at
monthly intervals. 130. The growth
in asbestos-related claims gave rise to acute differences of legal opinion as
to whether liability under general liability policies was related to the period
of exposure or to the time when the disease manifested itself (after a time
lapse which could be as long as 20 years). The impact of these developments was
discussed at an important meeting held on 19 June 1979 at the offices of US
attorneys (referred to for reasons of confidentiality as H) instructed on
behalf of Lloyd’s underwriters. Representatives of attorneys G, K and I were
also present. The attorneys made a joint recommendation of a gross reserve of
$75,000 for every claim. Their summary stated: “The one
certain fact about the asbestos litigation is that at present we cannot
estimate the number of claims that will eventually be brought against your
assureds. We do know that the number of lawsuits has increased dramatically
each year since 1973. While some experts believe the number and severity of
claims will peak within the next year or two, there are others such as The
National Cancer Institute who estimate more than two million people will die
from asbestos-related cancer. It should be noted that anticipated claims were
taken into account to some extent in arriving at the figures recommended
above.” 131. By the end
of 1979 (the year in which Captain Hindle began underwriting) there were
several declaratory actions on foot seeking to clarify the basis of liability.
A letter dated 10 December 1979 to Mr Nelson (as chairman of LUNMA) referred to
“… the
Market split into two camps; one supporting the manifestation approach and the
other that of exposure.” This letter
may reflect the genesis of the Asbestos Working Party (“AWP”) which
was formed in 1980 (see paragraph 135) and of which Mr Nelson was a leading
member. 132. At a meeting
of the Committee of Lloyd’s on 14 December 1979 Mr Lawrence (who later became a
Deputy Chairman and in 1988 Chairman) drew attention to the problem of
long-tail business being aggregated with other types of business under the
rubric of “All other” business. The minutes record that “He
suggested that consideration should be given to breaking down the “All
Other” Account in order to extract the very Long Tail business and that
premium income was not the appropriate yardstick upon which to base the
reserves for the older Accounts.” 133. In the five
years spanning the start of the relevant period the results of general
liability insurance at Lloyd’s were in striking contrast to the general
profitability of all classes of business combined. That appears from the
five-year summary set out in Lloyd’s global accounts 1982, the first to appear
in the new format. (In considering these and other tabulated figures it is
necessary to keep constantly in mind the built-in time-lag resulting from the
Lloyd’s system of keeping every accounting year open for a further two years,
followed normally by RITC into the next open year. So when new names were shown
the results for the last seven closed years the figures would be between four
and ten years old.) TABULAR OR GRAPHIC MATERIAL SET FORTH AT
THIS POINT IS NOT DISPLAYABLE 134. These
figures also show how far the overall profit was coming to depend on investment
income and gains. Sir Peter Green (who was Chairman from 1980 to 1983 inclusive
and was knighted in June 1982) wrote in his statement preceding the accounts: 135. “To
those whose business is insurance these figures are something of a paradox.
While satisfactory enough as a return on capital they are, from a professional
point of view, a cause for some concern. It is a sobering thought that pure
underwriting profit in 1980 accounted for only £22 million or 8.25% of the
overall profit and did not cover the management expenses.” 136. The
documentary evidence shows that during the 1970s the problems on the general
liability side were identified primarily with computer leasing rather than
asbestos-related risks. A Computer Leasing Working Party (chaired by Mr
Lawrence) was formed in 1978. But by 1980 that had changed. Computer leasing
problems were mostly in the past by about 1982. Mr Rokeby-Johnson’s evidence in
1996 put it as follows: “Q: Can
I ask you one thing linked to that. At the time when the placing was taking
place the ultimate position on the 1969 and previous liabilities looked very
much more like a banking operation for a payment of, say, I think it was in the
region of $20 to 25 million, there was an ultimate liability of $35 million — A: A
perceived ultimate liability, not an ultimate liability. Q: Yes. A
projected ultimate of $25 million [?$35 million] and that was projected to be
reached by about 1980. Then by 1977 or 1978 that ultimate position had been
projected to reach $90 million. There was a sort of sea change in the
projection within a reasonably short time of its placement. Do you recall any
underlying reason for that dramatic change? A: It is
called asbestos. Q: Had that
just come into a — A: I think if
you look, as I recall, at Hady Wakefield’s projections, take out asbestos and
they were about right. They were remarkably accurate. The thing that turned the
coracle upside-down was asbestos, which was enormous.” 137. The
appellants have drawn attention to numerous documents dating from 1980 and 1981
(including both internal Lloyd’s documents and letters from attorney G,
attorney H and other attorneys) showing that asbestos-related claims were by
then being recognised as a very serious and unpredictable problem. At the end
of 1980 claims were being filed in the United States at the rate of about 100 a
month (although a letter dated 24 December 1980 from attorney H to Mr Nelson
reported that 286 claims had been filed so far that month, and by 1982 the
monthly average was about 400; the letter identified three categories of claim
and suggested settlements of up to $50,000, $100,000 to $250,000 and up to
$450,000 for the three categories). 138. On 27 March
1980 Mr Jim Ayliffe of Merrett-Dixey syndicates (who was very knowledgeable
about asbestos-related risks and later was on the claims subcommittee of the
AWP) wrote to Mr Jackson reporting on his visit, shortly before Christmas 1979,
to a meeting of the Non-Marine Association. He stated that it became apparent
that that association’s committee did not fully appreciate the impact which
asbestos-related disease would have. Mr Ayliffe wrote that so far reserve
recommendations had been based on known cases only. American attorneys were
seeking guidance and support from the market to “…
their putting up reserves which do take into account a projection of something
in the region of four years. Not unnaturally the size of the figures that would
then be recommended would be very large and if indeed the Market wishes that
the matter be dealt with in this manner it is also necessary that people such
as [attorneys H and I] and others also approach the problem in the same way.
Inevitably the impact of projected reserves on our Market will be substantial
and I feel that it would be extremely difficult for the leads to make this type
of determination by reason of the implications which it carries.” 139. On 1 April
1980 the Manager of Lloyd’s Underwriting Agents and Audit Department wrote to
panel auditors in the following terms: “The
Deputy Chairman, Mr Gibb, has requested that Auditors be informed of the
following “facility” which has been offered to certain Syndicates in
Lloyd’s and which was intended as a form of reinsurance when a Syndicate was
closing its Accounts, particularly those with a long tail element where the
settlement in respect of the year-end provision might not be made for many
years. The following is an example of how the reinsurance would operate:-- “A
Syndicate had known outstandings of £100,000 and an IBNR Load of the same
amount — total provision £200,000. On the basis that the top 10% slice of the
reserve (£20,000) would not be needed for (say) 10 years £10,000 the Syndicate
would be indemnified for £ 20,000 in excess of £180,000 aggregate losses after
10 years. The anticipated reinsurance recoveries of £20,000 would be deduced
from the total audit provision for an outlay of £10,000. Payment of the
recovery would be guaranteed by a Letter of Credit for £20,000 payable in 10
years time.“ I am to
advise you that the Audit Committee does not consider such a reinsurance
recovery can be used to reduce a Syndicate’s Audit provision because all
anticipated recoveries brought into account at the end of the third year must
be immediately available.” The
appellants’ case is that this letter was describing so-called 'time and
distance' (“T and D”) policies and was expressing disapproval of
their use for the stated purpose; nevertheless, the appellants say, they
continued to be used for that purpose to the knowledge of members of Lloyd’s
Committee and (after 1982) Council. 140. In August
1980 some leading non-marine underwriters formed the AWP. This was an
unofficial but influential group whose primary function was to collect and
disseminate information about asbestos-related claims and problems. Another
function was to work towards a common market view on problems about coverage
(these problems included, but were not limited to, the exposure/manifestation
debate). The AWP had no agency or other formal relationship with Lloyd’s and
its membership was not limited to those working in the Lloyd’s market (although
its chairman regularly wrote, as he was entitled to do, on Lloyd’s headed
writing paper) and some members of the Lloyd’s community appeared to think that
it had official status. It continued in existence until 1996. Most of its early
meetings were attended and minuted by Mr Stephen Mitchell, a solicitor and
partner in Elborne Mitchell. Much of the work was carried out by the claims
subcommittee (later called the direct claims subcommittee) and the reinsurance
subcommittee; these met more frequently than the full AWP committee. 141. The AWP was
not a secret body — indeed its purpose was to provide information — but it
had to respect the confidentiality of much of the information which it
obtained. That is illustrated by a letter dated 16 February 1982 written to all
interested underwriters by Mr Tayler, the chairman of AWP. The last three
paragraphs of the letter were as follows: “As
matters continue to develop, and indemnity payments are claimed from the levels
of coverage underwritten in London, a record will be maintained by the LUNCO
[Lloyd’s Underwriters’ Non-Marine Claims Office] of the transactions that take
place. It will be apparent to you that there is a need to observe
confidentiality in respect of the information which is available, and for this
reason when your representative visits the LUNCO office, it will be necessary
for that person to identify the accounts in which you participate. Your
auditors may also want to see the information, however, in view of the need for
confidentiality, it will be necessary for them to be accompanied by your own
representative. It was
emphasised to you in the circulation of year end reserves that, in view of the
uncertainties of the future, it is difficult at this stage to provide the
Market with any meaningful projection of the developments that are likely to
take place over the coming years in regard to this problem. However, the number
of claims is likely to escalate and for this reason I must emphasise that
future deterioration is inevitable.” 142. On 30
September 1980 Mr Skey (who was on the Committee of Lloyd’s and the AWP) wrote
in an internal memorandum (after stating other concerns) “3) On
top of all this we have to absorb the impact of 'DES’ 'Agent Orange' and most
important of all “Asbestosis”. We do not wish to go into the question
of coverage and how it may or may not apply in this memorandum but suffice it
to say that collectively they must make a major impact on the enclosed loss
ratios — and indeed probably on the pre-1966 figures as well. 4) The
original premium base is being severely affected by competition and/or rate
cutting. 5) If the
'exposure' theory is upheld in “Asbestos” cases we fear it will be
impossible ever to close our books with any certainty. The problem
therefore is obvious — how to rate contracts of this nature when you don't
know the record for, say, 10 or even 20 years and on a reducing P.I. to boot.
The easy (and maybe correct) answer is to say you can't and stop writing the
class. If we did others in the London Market could follow suit to the detriment
of the market place as a whole.“ 143. The minutes
of an AWP meeting on 28 November 1980, chaired by Mr Nelson, record: “The
Chairman proposed that the Meeting should discuss the desirability of
circulating the Market with a report for the valuation of outstanding claims
for audit purposes at year end. Mr Ayliffe believed that Attorneys should make
recommendations for year end purposes but it was for the individual
Underwriters to determine the figures used when closing the account. He was
concerned that reserves currently carried on files, were lower than would have
been the case under normal circumstances. Those concerned were looking for
recommendations from the Working Party before final decisions were made. This
view was supported by Mr Jackson, who thought that a figure of US$125,000 per average
claim was more realistic than the present figure of US$75,000 currently used as
a yardstick.“ and at the
end of the meeting “In
summary, the Chairman stated: — a) The Audit
Committee were reluctant to identify individual situations for audit purposes.
The Asbestosis situation was well known in the Market and they believe that the
Underwriters were aware of the potential problems. b) Attorneys
should be invited to give a view on the present valuation of an average,
individual claim and should indicate an additional expense allowance. They
should also provide information on the likely eventual number of claims which
could develop.” 144. The minutes
of the first meeting of the AWP in 1981 are (for reasons which we need not go
into here) available only in a severely redacted form. The parts which the
court has been permitted to see show a general agreement that asbestos-related
risks were quite different from those of computer leasing: “when the
floodgates open the syndicates would not be able to cope” (Mr W W
Maitland). It was thought appropriate for a member of the Committee of Lloyd’s
to serve on the AWP; this had been agreed by the Audit Committee. Mr Ayliffe
was recorded as thinking that there should be a “bland report”
informing the market that all the information received from attorneys was
available for inspection (but Mr Ayliffe is also recorded as taking the view,
contrary to the majority, that figures should be published). 145. On 2
February 1981 Mr Randall (the manager of what was then the Underwriting Agents
and Audit Department, and the only individual accused of bad faith who was at
one stage an employee of Lloyd’s) wrote to all the members of the panel of
auditors sending their formal instructions in respect of the accounts for 1980.
In the covering letter he stated, “ii) Very Long Tail Business Where a
Syndicate underwrites a very long tail business such as product liability and
excess casualty reinsurance business, Auditors are asked to pay particular
attention to the effect that such business will have on the reserves to be
created bearing in mind the greatly increased cost of claims on older years of
account due to inflation etc.” This letter
is significant because it marks the beginning of exchanges between the panel
and the Committee which are of central importance to the case. (There had been
comparable exchanges the year before in respect of the 1979 accounts, but there
was a growing sense of concern which reached a peak by the time of the 1981
accounts.) 146. On 20 April
1981 attorney G wrote a long letter of advice to Mr Ayliffe. The letter is
remarkable for suggesting what appears (by comparison with attorney H’s advice)
a very low average cost per claim of $2,500. This appears to reflect the
position of the particular insured (as one only of multiple defendants). But
the letter also contained a dire warning about the scale of the problem: “There
are numerous well informed people who profess to believe that claims filed to
date represent only the beginning of a potential flood of asbestos litigation.
The Secretary of Health, Education and Welfare of the United States recently
stated that 67,000 people each year will die from exposure to asbestos products
during the next thirty years. We know that between 8,000,000 and 11,000,000
workers have variously been exposed to asbestos in the United States since the
beginning of World War II and of this group 4.5 million have worked in
shipyards. Most of the shipyard workers have been exposed to asbestos and it is
estimated by the United States Government that one third of all those heavily
exposed to asbestos have died or are likely to die of asbestos-related
diseases. Although the assured’s involvement with products containing asbestos
does not appear to be as substantial as other defendants in these matters, it
may be that in the future the assured regularly will be included among the
growing group of frequently named defendants.” 147. In June 1981
the AWP sent out to over 150 syndicates (and also to over 50 insurance
companies outside the Lloyd’s market) a form of general authority conferring on
the AWP a limited power to handle and agree claims. By 22 June 1981 68
underwriters had signed unconditionally. Another 6 had signed conditionally and
8 had declined to sign. 148. In September
and December 1981 two discussion documents on asbestos- related problems were
produced. They were referred to at trial as the 'White Papers’. Each was signed
by ten leading members of Lloyd’s, including Mr Lawrence, Mr Murray and Mr
Skey. They discussed the difficulties of key concepts (such as 'causative
agency', 'common origin' and 'common cause') in the context of reinsurance in
respect of latent risks. In that context the second paper observed, “Obviously
claims from the asbestos-related diseases are catastrophic and disastrous so
far as the whole Insurance Industry is concerned but this fact alone does not
automatically qualify them to be treated as 'a catastrophe' …” 149. On 10
November 1981 there was an important meeting between members of the Committee
of Lloyd’s (including Mr Kiln, in the chair, and Mr Lawrence, with Mr Randall
also present) and representatives of 15 different firms of chartered
accountants who were panel auditors. There are several sets of minutes of this
meeting prepared by different participants. The Lloyd’s minutes record under
the heading 'Any Other Business — Asbestosis’: “Mr Kiln
reported that claims were being made on notices as far back as 1947 where
underwriters had been involved in direct insurances or reinsurances of companies
covering liabilities of companies subject to Asbestosis claims. Mr Lawrence
reported that a databank was being produced which would contain details in
respect of the 10 or 12 major assureds with all years of cover. The loss
adjusters would then be able to make some estimate of underwriters’ lines on
such risks. Projections of claims for 3 or 5 years hence would be made, and
also loss expenses for 2 or 3 years ahead; both such items would be in respect
of direct business only. From the databank it would be possible to obtain a
list of major companies and look at their reinsurers, to give a rough estimate
as to the exposure in respect of reinsurance business. Mr Kiln
pointed out that he did not wish to see mention of these specific claims in the
Audit Instructions. Mr Holland
[of Ernst & Whinney] requested that an indication should be given to
Auditors as to how the databank report was fragmented, so that they may know
what to look for. Mr Lawrence replied by stating that a Market Meeting would be
held soon enabling all to be appraised of the situation. It was agreed
that there would be a further meeting of the Panel early next year to consider
asbestosis and any other business not concluded at this meeting.” Another note
of the meeting began this section “The
potential claims in connection with asbestosis make computer leasing appear
insignificant by comparison.” 150. The databank
referred to in these minutes was known as the Claims Information System. It was
developed in 1981 by Alexander Grant & Co on instructions from the Claims
Committee of the AWP. It stored information on US claims under more than 40
different heads, as described in chapter 16 of the judgment. Chronological summary: 1982 151. 1982 was the
year in which Sir William Jaffray began underwriting. It is also of central
importance in this case. The first three months call for particularly close
attention. Counsel for the appellants, and several of the litigants in person,
referred to it as the pivotal period, and counsel for Lloyd’s did not dissent
from this description. It was common ground that if at any stage there was a
decision (for which Lloyd’s must bear responsibility) to mislead external names
and prospective names about the unquantifiable risks of asbestos-related
claims, or if there was ever a moment at which those at the centre of Lloyd’s
should have appreciated that the audit system might not involve making
reasonable estimates of outstanding liabilities, it must have occurred during
the early months of 1982 when the Neville Russell letter and the Murray
Lawrence letter were written. 152. In
paragraphs 143 and 147 above we have noted exchanges between responsible
officers and officials of Lloyd’s and the panel of auditors. At the meeting
held on 10 November 1981 it had been agreed to hold a further meeting in the
new year in order to consider (among other topics) asbestosis. The further
meeting took place on 15 January 1982. Again, there are several different
minutes of the meeting prepared by different participants. 153. One note
(made on 25 January 1982 by Mr P B Milne of Littlejohn Fraser) recorded Mr
Nelson as having advised the auditors in terms which the judge summarised as
follows: “There
are to be no specific audit instructions other than a reference to the
incidence of late claims arising from product and disease insurance. There have
been some 15,000 claims notified (increasing at the rate of 400 per month). By
mid to end 1980s it is expected there will be some 25,000 claims in total. E E
Nelson thought that the estimate by the Prudential of 2 million claims was well
wide of the mark. The Committee of Lloyd’s has set up a database whereby the
full details of all known syndicates liable are stated. At present loss
reserves have been based on an average cost per claim of $125,000 plus expenses
of £10,000 per claimant. Currently this means a total claim of $2.025 billion.
On an exposure basis 40% is with the London companies and Lloyd’s, on a
manifestation basis it is 10%. E E Nelson also reminded the Panel Auditors of three
other product claims requiring consideration; Agent Orange; Love Canal; and
DES.” 154. The note
also referred to three important legal decisions in the United States. These
were the decision of the Court of Appeals for the Sixth Circuitin INA v Forty-Eight
Insulations Inc (5 March 1981, 633 F 2d 1212) upholding the exposure basis of
liability; Eagle-Picher Industries Inc v Liberty Mutual Insurance Company (14
August 1981, 523 F Suppl. 110) in which the District Courtapplied the
manifestation basis; and Keene Corporation v INA (1 October 1981, 513 F Suppl
47) in which the Court of Appeals for the District of Columbia Circuit adopted
the so-called 'triple trigger' basis of liability, which was more favourable to
claimants than either the simple exposure test or the simple manifestation
test. The note commented, “Clearly,
the foregoing decisions are a bit of a nonsense and the London Market is
currently in the process of appealing to the US Supreme Court to obtain a
sensible ruling.” But in the event the United States Supreme Court refused
petitions in all three cases (an appeal to the Court of Appeals for the First
Circuit in Eagle- Picher having been largely unsuccessful in June 1982). 155. By 3
February Neville Russell and three other firms of panel auditors had agreed a
form of questionnaire which was distributed to underwriters. It should be noted
that there were in all fifteen panel firms, but Neville Russell and the other
firms who joined in the Neville Russell letter (mentioned below) had between them
over four-fifths of the syndicate audit work. The questionnaire asked for
information under five heads: (i) direct writing or reinsurance of main
carriers; (ii) other exposure to asbestosis; (iii) IBNR (Incurred but not
reported); (iv) reinsurances; and (v) other latent disease claims. 156. The general
nature of the responses to the questionnaire appears from a memorandum sent by
Mr A M Blake, the senior partner of Neville Russell to his syndicate partners: “Asbestosis From the
replies that are coming in from our clients certain facts are emerging with
great consistency: 1 A very few
clients have probably very little exposure. 2 The remainder are unable to
quantify their ultimate liability with even a remote degree of accuracy for the
following reasons: (i) Advices
so far are 15,000 — maximum would be 11,000,000. (ii) Courts
have not decided on whether exposure or manifestation basis is applicable. (iii) The
losses are being apportioned over carriers on an “industry” basis. If
one of the carriers has losses going right through its insurance cover (as is
highly likely) then it could well go into bankruptcy. That company’s share of
the industry loss would then be apportioned over the remaining companies. (iv) Although
many insurers are covered by reinsurance, I don't get the impression that many
have been able to get very far with this. (v)
Similarly, Syndicates will pick up the losses on their own reinsurance
writings, which are likely to fly round the market with some speed. None of
these appear to be notified so far. One particular Syndicate has been mentioned
more than once as being involved in writing the reinsurance of other people’s
run-offs. (vi) The data
bank established has very little value so far. Very early in
March we will need to meet again with the other auditors to agree our
approach.” 157. Two days
later Mr Blake wrote another memorandum to his partners: “Further
to my memo of 17 February I think that we should pay immediate attention to the
instructions contained within the document “Instruction for the guidance
of Lloyd’s auditors”. We never
strictly follow this clause to the letter because if we did we would never get
our audits complete, but in view of the Asbestosis problem I think we should
follow the letter of the paragraph absolutely. What I have
in mind particularly is the instruction “if there are any other factors
which affect or may affect the adequacy of the reserves, then the auditor must
report to the Committee and obtain their instructions before issuing his
Syndicate Solvency Report“. This seems
the obvious course of action in this particular case and I think we should
proceed as soon as possible.” 158. On 22
February Mr Randall sent a memorandum to Mr Lawrence headed “1982
Audit”. The second item was: “Reserves for Asbestosis and other
latent diseases I have
arranged for the item to be put on the Agenda of both the Membership Committee
and the Audit Committee when further consideration will be given to the basis
of reserving and whether new Names should be warned that specific syndicates
are carrying a liability for such risks. I will advise
you of the outcome of these discussions.” 159. That was the
immediate background to the Neville Russell letter dated 24 February 1982 which
Mr Blake wrote in his firm’s name to Mr Randall as manager of Lloyd’s audit
department. Neville Russell stated that they were writing on behalf of five
other firms of panel auditors. The main part of the letter was as follows: “A
substantial proportion of our Syndicate clients have losses, or potential
losses, arising from asbestosis and related diseases. It appears
that although, in respect of direct insurance of the main carriers and
reinsurance of American insurers, Syndicates have received some notification of
outstanding claims, they are unable to quantify their final liability with a
reasonable degree of accuracy for the following reasons: (i) You have
informed us that there have been approximately 15,000 individual claimants.
Total exposure to the problem appears to be considerably in excess of this
figure. (ii) The
Courts have not yet finally decided on whether the exposure or manifestation
basis is applicable. (iii) The
losses are being apportioned over carriers on an “industry” basis. If
one of the carriers has losses in excess of its insurance cover (as seems
likely) then it could go bankrupt. It appears that its share of the industry
loss could be apportioned over the remaining companies. (iv) Most
Syndicates are not very certain of their reinsurance recoveries. (v) Most Syndicates
will incur losses on their own writings of reinsurance business. Very little of
this has been advised so far. The Audit
Instructions (Clause 3) require that if there are any factors which may affect
the adequacy of the reserves, then the auditor must report to the Committee and
obtain their instructions before issuing his Syndicate Solvency Report. We consider
that the impossibility of determining the liability in respect of asbestosis
falls into this category and we accordingly ask for your instructions in this
respect.“ 160. This letter
provoked a good deal of discussion, both formal and informal, and various views
were expressed. The eventual consequence was the despatch of another important
letter, the Murray Lawrence letter dated 18 March 1982, written by Mr Lawrence,
then the Deputy Chairman of Lloyd’s. There was an issue at trial of who were
the intended recipients of the letter, and whether it was in fact sent to them.
It is also necessary to look closely at what happened in the period of about
three weeks between these two letters. 161. On 1 March
there was a meeting of the AWP chaired by Mr Tayler. The minutes record: “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.” 162. On the
following day there was a meeting of Lloyd’s Audit Committee, chaired by Mr
Chester, with Mr Randall present. The Neville Russell letter was at the top of
the agenda. The minutes record the discussion as follows: “Mr
Chester said that he had spoken to Mr Nelson with regard to this matter who had
put forward the following suggestion: a) with
regard to direct business, underwriters should reserve their known claims plus
a margin of 30% and their expenses. b) with
regard to reinsurance assumed they should allow for one loss per assured per
each year of account. c) on
Underwriters own reinsurances it was suggested that they approach the matter on
the same basis as (b) above; Mr Nelson thought that this would be the basis on
which the excess of loss market would settle any claims. With regard
to the question of whether claims should be reserved on an exposure or
manifestation basis it was considered that whichever basis produced the worst
result should be adopted. d) the letter
from the auditors also stated that the losses were being apportioned over
carriers on an “industry basis”. If one of the carriers had losses in
excess of its insurance cover then it could go bankrupt. It appeared to
auditors that its share of the industry loss might then be apportioned over the
remaining companies. e) the
auditors’ letter also stated that many syndicates lacked information regarding
their reinsurance recoveries. Mr Nelson considered that recoveries might be
determined on the formula for reinsurance assumed business as set out above. Having
discussed Mr Nelson’s views, the Audit Committee considered that it would not
be possible or desirable for them to give a definite answer as to the amount or
basis of reserves syndicates should carry. It was a matter for the underwriter
of each syndicate to determine his potential liability and agree this with his
auditor. It was, however, necessary for a full discussion to take place with
Panel Auditors so that where possible general guidance could be given and it
was agreed that a meeting should be arranged in this regard at the earliest
opportunity. Mr Chester
then raised the question of the reinsurance of underwriters’ asbestosis
liability in the Lloyd’s Market (ie effectively amounting to reinsurance of the
Asbestosis “tail”) and expressed concern that such liabilities could
fall on comparatively few syndicates. Mr Merrett considered that it would be
inappropriate for such reinsurances to go unnoted and unreserved by Panel
Auditors and that it would be improper for a syndicate taking such reinsurances
without telling its own Names. It was stressed that auditors should make any
enquiries they deemed necessary with regard to the open years and that they
should ensure that whatever position they consider is necessary should be
created over and above the minimum percentage reserves. It was agreed
that this matter should also be raised with Panel Auditors at next week’s
meeting.” The
appellants have suggested that Mr Merrett’s contribution, as recorded in the
minutes, can now be seen to have been highly questionable. 163. On 9 March
1982 members of the Audit Committee (Mr Chester and Mr Nelson, accompanied by
Mr Randall and his assistant) met with representatives of the six firms of
panel auditors on whose behalf the Neville Russell letter had been written. The
Audit Committee minutes record that Mr Nelson explained that the problem had
three aspects: “(i)
Business written direct by Lloyd’s (ii)
Reinsurance of asbestosis risks written by companies i. Where
Lloyd’s syndicates had reinsured their liability with outside companies.” Mr Nelson
explained the controversy as between manifestation, exposure or a combination
of the two. The minutes record the auditors’ views and the subsequent
discussion: “The
main worry raised by auditors was the widely differing views taken by
syndicates and that the real purpose of their letter was an attempt to seek
some uniformity in the Lloyd’s Market for dealing with this matter. They
considered that it would be grossly unfair for syndicates on basically the same
risk to treat their reserves on an entirely different basis. Auditors were also
concerned that not only may they reserve too little but that they may ask the
closing year to carry too great a reserve. Part of the auditors’ job was to
ensure that there was equity between the account accepting the reinsurance and
the closing account. Mr Chester
asked auditors for their opinion on leaving the 1979 account open. Auditors
thought that although this would solve the problem of equity between years of
account it would still leave the problem of quantification in that Names could
still be asked to put up substantial sums of money. Mr Nelson
then said that in his view a figure of 50,000 new claims over the next 10 years
would seem to be realistic and that the reports of up to 2,000,000 new claims
could well be an exaggeration. Mr Randall
then said that perhaps Lloyd’s could consider issuing guidelines on the basis
of the 50,000 figure and that where asbestosis formed a material part of a
syndicates accounts (say 10%) then consideration should be given to leaving the
account open. Auditors said
that they would be reassured with guidance of this sort. It was, however,
suggested that in those cases where consideration was being given to leaving
the account open applications should in any case be made to the Committee for
instructions.” 162. During the
next few days Mr Randall had at least one further meeting with representatives
of the six firms of panel auditors. On 12 March Mr Nelson produced an
eight-page memorandum (headed ’strictly Private and Confidential --
Implications of Asbestosis Involvement for the Audit of Lloyd’s Syndicates at
31.12.81'). This document was considered and annotated by Mr Randall and then
passed by him (on 15 March) to Mr Lawrence (then one of the two Deputy Chairmen
of Lloyd’s) for a meeting of the 'O' Group (see paragraph 189 below) held on 15
or 16 March. 163. The opening
paragraphs of Mr Nelson’s memorandum were as follows: “The
following is a personal appraisal and opinion regarding the Asbestosis problem
and is based on my own experience as Chairman of the Asbestosis Committee in
1981, two formal meetings with the Panel Auditors and various private
conversations which I have had with individuals in the Market. There is little
doubt now that this problem is every bit as serious as was expected by the
Asbestosis Committee, and the information on claims involvement which has been
made available in the LUNCO office has identified the extent of Lloyd’s
involvement. There is no
doubt in my mind that Panel Auditors are extremely nervous of their position
regarding the audit at 31st December 1981. They consider the situation to be
unique and not one where they alone should bear the responsibility of deciding
the amounts which should be reserved at year end. Whilst they
would agree that most Underwriters are co-operating fully, there are some who
by design or ignorance are not complying. Auditors are going so far as to
suggest that all Syndicate accounts must be qualified and some seek an
instruction that all accounts must be left open at this year end. To my mind,
neither of these should be acceptable to the Committee [of Lloyd’s]. If this view
is supported, then I believe it is incumbent upon us to give clear and concise
instructions as to how the audit should be conducted in certain areas and thus
bear a share of the responsibility to Names for which they are entitled.” 164. The appeal
bundles contain a copy of Mr Nelson’s memorandum annotated by Mr Randall. Mr
Randall’s manuscript comments show some of his thinking at the time. He agreed
with Mr Nelson that the final decision to leave a year open must be the
underwriting agent’s. He wrote 'Expand?' against Mr Nelson’s proposal, “Managing
and Members’ Agents must advise their Names at year end of their Asbestosis
position overall and the manner in which the claim has been handled by
them.” At the end of
Mr Nelson’s proposals Mr Randall wrote, “+ ?
Position of New Names.” 165. On 15 March
1982 Mr Lawrence initialled a memorandum for consideration by 'O' Group. This
is one of the very few documents in the appeal bundles which refer to 'O' Group
as such. Its terms suggest that Mr Randall’s comments on Mr Nelson’s memorandum
were approved by Mr Lawrence. 166. On the same
day Mr Murray (then the active underwriter of the Kiln syndicates) wrote a
letter headed '1979 Reinsurance to Close'. The letter was formally addressed to
the Chairman of the Audit Committee (who was Mr Chester) but it begins 'Dear
Murray' (Mr Lawrence being in 1982 the Deputy Chairman with responsibility for
auditing matters). The letter began, “There
has obviously been much discussion within the market regarding asbestosis and
other potential loss developments on old years. These problems obviously
present difficulties to the Underwriter closing the account, and to the
Managing Agent and Panel Auditor. I have, however, heard that one or more Panel
Auditors have approached the Lloyd’s Audit Committee for specific guidance with
regard to the figures which should be allocated to asbestosis claims, and I am
sufficiently disturbed by the possibility that this should be true for me to
write this letter. I am
concerned because a request for your guidance in this matter seems to suggest: a) that it is
possible to set a figure to close an account that will be proved closely
accurate in the future; a. that one
or more Panel Auditors may have lost confidence in their own abilities.” The letter
strongly urged that RITC was ultimately a matter for the experience and
judgment of the active underwriter, “… but
regardless of this all of us should surely acknowledge that even our best
endeavours may be found to be far too much or far too little at some later
date.” This letter
has been referred to as the 'Bannockburn' letter from a postscript whose casual
anti-semitism may or may not reflect the tone of Lloyd’s in the 1980s. 167. We have been
shown no written record of what happened at the meetings of 'O' Group on 15 and
16 March. On 16 March there was a meeting of the Membership Committee, chaired
by Mr Bird, which considered the topic (brought forward from a previous
cancelled meeting) of what changes (if any) should be made to the standard
questions put to candidates at Rota meetings. The minutes record two small
changes which were agreed and then state, “The
decision was taken not to refer specifically to Asbestosis risks in the Rota
brief.” 168. On 17 March
there was a formal meeting of the Committee of Lloyd’s with Mr Peter Green in
the chair. Committee members present included Mr Brennan and Mr Lawrence (the
Deputy Chairmen) Mr Barber, Mr Barham, Mr Bird, Mr Chester, Mr A W Higgins, Mr
Miller, Mr Nelson and Mr Posgate. The Committee had a memorandum and a draft
letter prepared by Mr Randall, who was present for the relevant part of the
meeting. The Committee did not, it seems, have copies of the Neville Russell
letter itself. The final paragraphs of the memorandum stated, “The
attached draft will, it is believed, assist Auditors in agreeing the reserves
to be created at 31st December 1981, although it is still possible that a few
individual syndicates may feel it necessary to approach the Committee for
further instructions. It is also likely that a number of syndicate accounts
will be left open at the discretion of the Managing Agent concerned. The letter
also covers the position with regard to the open years. In all cases
it is felt that Agents must advise Names regarding the basis of reserving and
also advise Names on the open years which will assume the liability. The Committee
is asked to agree that a letter along the lines of the attached may be issued
to Agents. Before publishing the letter, however, it is recommended that there
should be further informal discussion with Auditors to confirm that the letter
provides an adequate degree of “comfort” to enable them to complete
their Audit discussions.” 169. The minutes
of the discussion and the Committee’s decision must be set out in full: “The
Committee was advised that six firms on the Lloyd’s Panel of Auditors covering
the large majority of syndicates had requested instructions, in accordance with
Clause 3 of the Audit Regulations, as to the basis on which syndicates should
provide for Asbestosis liabilities as at 31st December 1981. The main area
of concern centred around the need for syndicates to make searching enquiries
regarding their potential exposure, both direct and by way of reinsurance
written, to enable them to make adequate provision in their accounts at 31st
December 1981. There appeared to be substantial differences in approach both as
to the amount of research carried out and the intended IBNR loadings as at 31st
December. Without
guidelines from the Committee, Auditors believe that there was a real danger
that Managing Agents and Auditors would not be able to agree the closing reserves
and that some syndicate results may be qualified by Auditors. It was also
pointed out that there could be wide discrepancies regarding the approach
adopted by individual syndicates. A draft
letter had been prepared for the Committee’s agreement and discussion ensued on
its content. It was
pointed out that the draft had already been discussed with three of the
Auditors concerned and that in the case of two firms it was regarded as of
vital importance that the Committee should stipulate a minimum percentage for
the IBNR loading. They also considered that the Committee should issue some
guidance to Agents with regard to whether syndicates should close at the end of
the third year or remain open. It was felt that the term “a material
proportion” was too vague and that a specific percentage should be quoted.
In discussing
this matter the Committee felt that it was in no position to stipulate a
minimum percentage for the IBNR loading as this could vary from syndicate to
syndicate depending on the cover given to insurers and its own reinsurance
programme. Mr Nelson said that in respect of at least one large manufacturer
syndicates had already reserved up to the policy limits and that no further
IBNR would be necessary in this case. Certain
Members of the Committee were unhappy that the Committee was instructing Agents
that they must tell their Names of their syndicate’s involvement in Asbestosis.
It was therefore decided that the wording in this regard should be amended so
that Agents would be strongly advised to inform their Names of their
involvement in Asbestosis. It was also
pointed out to the Committee that certain syndicates had indicated their
intention to discount the reserve for Asbestosis to reflect possible future
investment earnings and that Auditors had requested a statement in any letter
from the Committee specifically banning this practice. The Committee whilst
agreeing that such practice should not be allowed in the case of Asbestosis
decided that to refer to one particular part of the reserve might lead
underwriters to take the view that such a practice of discounting was being
encouraged or condoned by the Committee. With the
exception of the points mentioned above the Committee agreed that the draft
letter should be forwarded as soon as possible to the Market but that a
separate letter from the Manager of the Underwriting Agents & Audit
Department should be sent to Auditors in reply to their letter requesting
guidance. This would set out more fully the Committee’s reasons for the approach
it had adopted to the problem.” 170. The draft
letter, which was approved with few amendments, became known as the Murray
Lawrence letter, sent out signed by Mr Lawrence on 18 March 1982. It too must
be set out in full: “Asbestosis — Lloyd’s Audit at 31st
December 1981 Potential
claims arising in connection with Asbestosis represent a major problem for
insurers and reinsurers. It is therefore all the more important that the
reserves created in the Lloyd’s Audit at the 31st December 1981, fairly reflect
the current and foreseeable liabilities of all syndicates. I should
stress that the responsibility for the creation of adequate reserves rests with
Managing Agents who will need to liaise closely with their Auditors. Clearly,
individual circumstances will vary, but it is felt that the following broad
guidelines may be helpful to Underwriters, Managing Agents and Auditors in
agreeing equitable reserves as at 31st December 1981, and ensuring, so far as
possible, a reasonably consistent approach to this problem. 1. Reserves
for Asbestosis liabilities should be separately identified and disclosed to
Auditors. This applies for both the closing and open years. 2.
Substantial information has been built up in the LUNCO Office regarding direct
business and all Underwriters should check the information available to ensure
that their own records are as complete as possible. This information should
also be made available to the syndicate auditors. 3. It is in
the area of reinsurance writings that the information available may be least
complete. Nevertheless, the Committee believes that some information is now
available within the Market and Underwriters and Managing Agents should discuss
with their Auditors the steps they have taken to quantify and reserve for losses
which may arise on an Excess of Loss or Pro Rata basis as a reinsurance of
American or other insurers. In this connection, Underwriters should attempt to
identify reinsureds on whom Asbestosis claims are likely to fall and to seek
their opinion as to the basis on which they intend to submit claims on their
reinsurance contracts together with the reserves which they are carrying at the
present time and an estimate of possible future liabilities. 4. The
Committee is aware of the legal argument whether liability arises on the basis
of “exposure” or “manifestation”. It is not, however, for
the Committee to express an opinion as to which is correct. For the purpose of
reserves at 31st December 1981 Managing Agents are strongly advised to carry a
reserve which is the higher of the alternatives. 5. An IBNR
“loading” should be carried for those claims not specifically advised
but which could come to light in the years ahead. The decision regarding the
appropriate IBNR percentage is a matter for the Agent and his Auditor to
resolve dependent upon the circumstances of each case. It would be
inappropriate for the Committee to lay down a minimum loading but, it appears
that this loading should be substantial to reflect unreported cases on the
direct account and incomplete information on the reinsurance account. Credit
may, of course, be taken in respect of reinsurance recoveries, but Agents
should verify, so far as possible, that reinsurers have been identified and
have agreed to accept claims on the basis submitted. In the event that there
are any disagreements with reinsurers these should be discussed with Auditors.
(The normal guidelines regarding the admissibility of reinsurance recoveries
obviously will apply). 6. A
syndicate which has written a run-off or stop loss in respect of an Asbestosis
account which has been signed into an open year, should advise the details to
its Auditors and where appropriate, the open year reserves should be increased.
7. A
syndicate underwriting London Market Excess of Loss business should make
particular and comprehensive efforts to ascertain the extent of its possible
liability going beyond those claims which have been advised at 31st December
1981, and these should be fully disclosed to and discussed with Syndicate
Auditors. The same requirement should apply to specialist Personal Stop Loss
syndicates. 8. Where the
reserve for Asbestosis represents a material proportion of the total reserves
of the syndicate, Agents should consider whether or not to leave the account
open. It is the Agent’s responsibility to ensure that the reserves provided for
Asbestosis are sufficient to meet the Syndicate’s liabilities regardless of
whether the account is closed or left open. 9. Managing
and Members Agents are strongly advised to inform their Names of their
involvement with Asbestosis claims and the manner in which their syndicates’
current and potential liabilities have been covered. I would urge
you to discuss the contents of this letter with your Auditor before deciding
what further action, if any, is necessary for you to take. If you should
have any enquiries with regard to this matter would you please contact Mr M
Bowmer (Extension 3299) or Mr K E Randall (Extension 3124). This letter
has been sent to all Underwriting Agents and Active Underwriters, with copies
for information to all Panel Auditors.” 171. Mr Randall’s
accompanying letter of 18 March (sent to panel auditors only) was 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 31st
December 1981. I attach a
copy of a letter which is being circulated to all Active Underwriters and
Underwriting Agents setting out broad guidelines which should be followed in
this regard. The Committee has decided that it is inappropriate to specify a
minimum IBNR loading to apply across the Market; the IBNR loading is regarded
as a matter for Managing Agents to resolve depending upon the particular
circumstances of each syndicate. Nevertheless the Committee wishes me to stress
that, unless there are sound reasons to the contrary regarding any specific case,
the loading should be very substantial to reflect unreported cases on the
direct account and, possibly, incomplete information on the reinsurance
account. The Committee also believes that the reserve (including the IBNR
loading) should be maintained in full and not discounted to reflect possible
future investment earnings. One of the
main reasons why the Committee does not feel it is appropriate to lay down a
specific IBNR loading factor is that in a number of cases syndicates will have
reserved up to the maximum of policy limits and a substantial IBNR loading, in
addition to this figure, might be regarded as excessive. Auditors will
no doubt give special attention to the question of whether or not the Agent has
decided to leave an account open in cases where the reserve for Asbestosis
represents a material proportion of the total reserves of the syndicate or
where there is a wide margin for error in the basis of calculation of the
closing reserves due to a lack of current information. Where it is
decided that an account should be left open, your attention is particularly
drawn to Clause 6 Note 1 of the Instructions for the Guidance of Lloyd’s
Auditors regarding the reserves which are being created for the purposes of
assessing Members’ solvency. If you should
have any queries with regard to this matter would you please contact Mr M
Bowmer (Extension 3299) or myself (Extension 3124). This letter
is being sent to all Panel Auditors.” 172. One
immediate reaction from a panel auditor appears from an internal memorandum
made on 19 March by Mr Holland of Ernst & Whinney: “Herewith
the latest epistle on Asbestosis. I cannot believe that at some stage we are
not going to find a Syndicate where this is a major problem. If any partner is
unhappy about a particular situation I suggest he lets me know and we will try
and organise a PSP type meeting so that a view can be formed and the partner
can then talk to his client knowing that he has the full backing of his
colleagues. Of the
Syndicates I have seen so far I am pleased at the very responsible manner shown
by our clients in dealing with this problem and I am even more delighted at the
amount of reinsurance protection that is available.” 173. On 2 April
1982 Mr Lawrence wrote an internal memorandum, marked private and confidential,
to senior staff at his agency. He referred to the problems of asbestosis and
(without going into detail) to the reinsurance protection which he and his
colleagues had recently arranged. He wrote, “We
regard these reinsurances very much as ’sleep at night' cover as, in spite of
the complexity of the situation (21 major assureds with identifiable insurers
into 3 figures) we feel our reserving is conservative in light of the
information available to us at this moment in time.” 174. On 6 April
there was a meeting of the Audit Committee. Mr Randall reported that “… a
letter had been sent to all Underwriters with regard to Asbestosis. Since that
letter had been circulated there had been little or no reaction from the
Market.” However the
statement of agreed facts (as to the chronology of asbestos- related claims)
cites numerous syndicate reports, published during May 1982, which give
information as to asbestos-related claims and reserves. Some refer to the
advice given by the Committee of Lloyd’s in the Murray Lawrence letter. 175. On 28 June
1982 attorney H wrote a long letter to Mr Tayler (as chairman of the AWP)
referring to the “enormity” of the asbestos problem. The letter
stated that there were about 15,000 pending lawsuits and that they were
increasing at the rate of 500 a month. Most of these lawsuits had multiple
defendants (the average number of defendants was twenty, according to a later
letter). All the correspondence from attorneys at this time reflected the
difficulty and expense of managing the claims, especially because of
uncertainties as to the principles on which liability and coverage were to be
determined. Efforts to resolve these difficulties eventually led (although only
after long and complex negotiations) to the establishment of the Asbestos
Claims Facility under the so-called Wellington Agreement (see paragraph 230
below). 176. In August
1982 Johns Manville, an industrial company which was facing more claims than
any other assured, sought protection under Chapter 11 of the United States
federal bankruptcy law. In the following month Conning & Company, an
American investment analyst, published a report 'The Potential Impact of
Asbestos on the Insurance Industry'. This was a detailed study which appears to
have been read, and highly regarded, by many members of the Lloyd’s community. 177. The Conning
report estimated the entire insurance industry’s ultimate liability at “…
between $4 bn and $10 bn with the lower end of this range appearing most
probable at the present time” It stated, “Our
work suggests that the primary companies which are involved have already done
significant reserve strengthening on currently known claims and have also
established loss reserves for incurred-but-not- reported claims. In the light
of emerging knowledge on the business, we anticipate that additional reserve
strengthening may be required in the future. On the other hand we believe that
there is a possibility that numerous excess and reinsurance carriers may be
greatly understating their potential liabilities for this exposure at the
present time.” It identified
the American insurance companies thought to be the primary carriers with the
largest exposure and added that on an excess basis Lloyd’s might have a
potentially large exposure. It predicted that claims would peak during the
1980’s and would be minimal by 2010. 178. On 1 October
1982 Mr Rokeby-Johnson succeeded Mr Tayler as chairman of the AWP. At about the
same time Mr Lawrence made a speech in Chicago to the American Management
Association. The speech (as reported in the Lloyd’s Log for November 1982)
contained an ambiguous reference to “…
under-reserving — particularly due to the problems of latent disease and other
late developing problems” as one of
'various scenarios’ which 'we can all dream up'. He referred to the risk of
major insolvencies among insurers as being likely to lead to “…
increased regulation of our business, which I believe would be extremely
harmful to our industry.” 179. On 9
December 1982 the Committee of Lloyd’s considered the wording of the
instructions to auditors. The minutes record, “The
Committee was informed that, for a number of years, comment had been received
from Panel Auditors that it was inappropriate to draw their attention to
specific Market problems thereby encouraging Auditors to rely upon these
advices rather than their own auditing enquiries with their clients. In view of
these comments, the Audit Committee had recommended that a number of the items
which appeared under Clause 3 of the “White Regulations” should be
either deleted or amended.” Certain of
the relevant subparagraphs were amended or deleted but that referring to latent
diseases was left unaltered. 180. On 10 and 11
December there was a conference at Leeds Castle attended by all or most of
those who were to form the first Council of Lloyd’s on the coming into force of
the 1982 Act on 1 January 1983. The conference appears to have been concerned
largely with questions of governance and procedure. There seems to have been no
formal discussion of asbestos-related problems. The Lloyd’s Act 1982 181. In this
section we cover, with some deviation from chronological sequence, the
enactment of the Lloyd’s Act 1982 and associated matters. At the beginning of
the 1980’s the statutory framework regulating Lloyd’s was under review. The
Society of Lloyd’s traced its origins to the 17th century and was formally
established by a deed of association in 1811. Before the enactment of the 1982
Act it was regulated by the Lloyd’s Act 1871 as supplemented and amended by
three later Acts. Its affairs were managed by its Committee, subject to the
ultimate control of the Society in general meeting. The constitution and
operation of Lloyd’s and its insurance market have been the subject of three inquiries
and reports by committees chaired by eminent persons, namely Lord Cromer
(1969), Sir Henry Fisher (1980) and Sir Patrick Neill (1987). There have also
been numerous internal inquiries, reviews and disciplinary proceedings. The
Cromer report (which was not published generally until 1986) was the precursor
to a significant increase in the number of external names. The Fisher report
was delivered in May 1980 and was the precursor to the 1982 Act, following on
an extraordinary meeting of Lloyd’s held on 4 November 1980. 182. It is
convenient to mention here two topics discussed in these reports which, while
not directly relevant to the issues in the appeal, recur frequently in the
documentary evidence. These are 'divestment' and 'divorce', as they were often
referred to (see paragraphs 8.5 to 8.22 of the Neill report, in a chapter
headed 'Conflicts of Interest'). Divestment referred to the separation of
ownership and control of managing agents from ownership and control of Lloyd’s
brokers, and divorce referred to the separation of managing agents and members’
agents (whose functions were often combined in a single firm). 183. As regards
brokers and managing agents, Cromer had noted conflicts of interest which could
not be ignored, but made no firm recommendation for divestment. Fisher
discussed the matter at length (chapter 12) and made firm recommendations to
achieve, within five years, that no managing agency company should be
recognised if there were direct or indirect shareholding links between it and
non-Lloyd’s insurance interests. Neither Cromer nor Fisher dealt with divorce
of managing and members’ agents. 184. The Neill
report recorded (paragraphs 8.6 and 8.7) the outcome of the Fisher
recommendations. When the Bill which became the Lloyd’s Act 1982 was before the
House of Commons Sir Peter Green argued for the issue of divestment to be left
to the new Council, which might be able to avoid conflicts of interest without
complete divestment. But that was not accepted and a mandatory provision for divestment
within five years was included. 185. As regards
divorce Neill did not make any specific recommendation. But the report made a
general recommendation which is very pertinent to this appeal (paragraph 8.22):
“Nevertheless,
the principle that Names should be able to make fully informed decisions, on
the basis of full disclosure by agents of the limits of their independence, is
a vital one. We dealt at some length in chapters four and five with the
improvements we would like to see in the recruitment process.” 186. Those
chapters had repeatedly stressed the need for prospective names, and external
names after admission, to have access to information and advice. It was stated
in paragraph 4.8: “From
the evidence submitted to us, however, we have identified six aspects of the
current system about which there is concern on the part of Names and others
closely associated with the Lloyd’s market. These are: (i) the
effectiveness of the existing controls over commissions in relation to those
introducing new Names: (ii) the
quality of the basic introductory information about membership provided by
Lloyd’s to prospective Names: (iii) the
sufficiency of the information available to assist Names in making informed
choices between agents: (iv) the
level of the means test set by Lloyds’: (v) the
absence of any formal 'know your client' rules: and i. the
efficacy of the Lloyd’s procedures (and in particular the Rota committee
interview) in ensuring that prospective Names are fully aware of the
consequences of their decision to join the Society.” 187. The 1982 Act
(which came into force on 1 January 1983) made extensive changes in the
constitution of Lloyd’s. It provided for a Council to manage the Society’s
affairs and to regulate the business of insurance at Lloyd’s. The Council was
empowered to make byelaws for the proper and better execution of the Society’s
statutory functions (subject to challenge at a general meeting). The Council at
first consisted of 16 working names, 8 external names and 3 names nominated by
the Council and confirmed by the Governor of the Bank of England. The 1982 Act
also provided for the continuation of the Committee, which consisted of the
working names on the Council and to which the Council could delegate certain of
its functions. 188. There were
also numerous specialised committees whose responsibilities broadly reflected
the departmental organisation of the Society’s staff. Until 1983 Lloyd’s had a
department for membership services, whose responsibilities included the
introduction of new names, brokers and underwriting agents, and audit. After
1983 these responsibilities (together with regulation) became those of the head
of regulatory services. The specialised committees with responsibilities in
these areas were as follows: i. The Audit
Committee was a policy and advisory committee reporting to the Committee of
Lloyd’s on matters affecting the solvency of members and the security of
policies. It existed from 1960 until 1983 when it was replaced by the Members’
Solvency and Security Committee (renamed in 1986 as the Solvency and Security
Committee). ii. The
Membership Committee existed from 1977 until the end of 1985 as a policy and
advisory committee on matters relating to membership requirements. iii. The
Accounting and Auditing Standards Committee was set up in 1983, effectively
taking over the work of two bodies known as the Fisher task groups 4 and 15.
Its functions included defining required standards for accounting and auditing,
for reporting of information to names. It was also concerned with the
introduction of manuals. 189. There was
also an unofficial committee or group known as the 'O' group consisting of the
Chairman, the Deputy Chairman, the Chief Executive and heads of departments. It
met from time to time and its meetings seem not to have been minuted. Some
witnesses suggested that important and confidential matters were considered at
its meetings. 190. Section 14
of the 1982 Act conferred on Lloyd’s a qualified immunity from suit which has
had an important impact on all the litigation against Lloyd’s. The relevant
provisions of section 14 are as follows: “(1)
This section shall only exempt the Society from liability in damages at the
suit of a member of the Lloyd’s community. (2) [defines
'Lloyd’s community' so as to include current and past members] (3) Subject
to subsections (1), (4) and (5) of this section, the Society shall not be
liable for damages whether for negligence or other tort, breach of duty or
otherwise, in respect of any exercise of or omission to exercise any power,
duty or function conferred or imposed by Lloyd’s Acts 1871 to 1982 or any
byelaw or regulation made thereunder — (a) in so far
as the underwriting business of any member of the Society or the costs of his
membership or the business of any person as a Lloyd’s broker or underwriting
agent may be affected; or (b) in so far
as relates to the admission or non-admission to, or the continuance of, or the
suspension or exclusion from, membership of the Society; or (c) in so far
as relates to the grant, continuance, suspension, withdrawal or refusal of
permission to carry on business at Lloyd’s as a Lloyd’s broker or an
underwriting agent or in any capacity connected therewith; or (d) in so far
as relates to the exercise of, or omission to exercise, disciplinary functions,
powers and duties; or (e) in so far
as relates to the exercise of, or omission to exercise, any powers, functions
or duties under byelaws made pursuant to paragraphs (21), (22), (23), (24) and
(25) of Schedule 2 to this Act; unless the
act or omission complained of — (i) was done
or omitted to be done in bad faith; or (ii) was that
of an employee of the Society and occurred in the course of the employee
carrying out routine or clerical duties, that is to say duties which do not
involve the exercise of any discretion. (4) [no
exemption for death or personal injury] (5) [no
exemption for defamation] (6) ['the
Society' includes its officers, employees and delegates]” 191. The position
of the Lloyd’s market under the general law regulating the conduct of insurance
business was covered by special provisions (sections 15(4) and 83 to 86) in the
Insurance Companies Act 1982, replacing comparable provisions in the Insurance
Companies Act 1974(which remained in force until 28 January 1983). The most
important provisions, so far as now relevant, were in section 83, subsections
(4) to (6) of which (as in force during the relevant period) provided as
follows: “(4) The
accounts of every underwriter shall be audited annually by an accountant
approved by the Committee of Lloyd’s and the auditor shall furnish a
certificate in the prescribed form to the Committee and the Secretary of State.
(5) The said
certificate shall in particular state whether in the opinion of the auditor the
value of the assets available to meet the underwriter’s liabilities in respect
of insurance business is correctly shown in the accounts, and whether or not
that value is sufficient to meet the liabilities calculated — (a) in the
case of liabilities in respect of long term business, by an actuary; and (b) in the
case of other liabilities, by the auditor on a basis approved by the Secretary
of State. (6) Where any
liabilities of an underwriter are calculated by an actuary under subsection (5)
above, he shall furnish a certificate of the amount thereof to the Committee of
Lloyd’s and to the Secretary of State, and shall state in his certificate on
what basis the calculation is made; and a copy of his certificate shall be
annexed to the auditor’s certificate.” Section 84(1)
provided for the general solvency requirements in sections 32, 33 and 35 to
apply to “the members of Lloyd’s taken together” subject to
modifications made by statutory instrument (from January 1983 the Insurance
(Lloyd’s) Regulations 1983). This was sometimes referred to as the global
annual solvency test. Section 86 required an annual statutory statement of
business (SSOB) to be filed. 192. Throughout
the 1970s and 1980s the number of underwriting names increased year by year.
The following figures give a general picture of the increase. TABULAR OR
GRAPHIC MATERIAL SET FORTH AT THIS POINT IS NOT DISPLAYABLE 193. By the
beginning of the 1980s the Committee of Lloyd’s had some concerns about the
manner in which external names were recruited. That is reflected in the revised
version of its Manual for Underwriting Agents published in 1980: “The
Committee of Lloyd’s has been gravely concerned in the past when organisations
unconnected with Lloyd’s have distributed literature relating to Underwriting Membership
and offered to introduce the recipients to Underwriting Agents. There can be no
objection to the publication of articles about Lloyd’s, provided that the
information given is factually correct, but the Committee considers that any
attempt to introduce applicants for Membership of Lloyd’s other than by the
traditional method of personal recommendation by existing Members can do
Lloyd’s nothing but harm. … It is very
important that prospective Members are correctly advised from the time when they
first show an interest in Membership. The attention of Underwriting Agents is
drawn to the danger of legal action if a Member maintains subsequently that he
or she was misinformed at the time of making application.” This part of
the Manual also drew attention to regulatory requirements in other
jurisdictions. 194. The
procedure for candidates’ admission as names had always included a personal
interview, called a Rota interview (although increasing numbers of candidates
led to this procedure being abbreviated at one period). The general purpose of
the interview was to ensure that the candidate understood what he or she was
undertaking, and to assist in this process Lloyd’s produced an official
brochure (the terms of which, in successive editions, are relied on by the
appellants). Many names referred in their evidence to the formality and
solemnity of the interviews; some described them as intimidating. 195. In 1980
there had been discussion as to whether computer leasing problems should be
specifically mentioned to candidates who were proposing to join non-marine
syndicates, and the practice was changed so as not to mention them. In 1982 a
similar question arose in relation to asbestos risks, and it was a subject of
discussion early in 1982, in particular at a meeting of Lloyd’s Membership
Committee held on 16 March 1982. We will return to this episode. 196. Soon after
the 1982 Act had received the Royal Assent, and before it came into force,
Lloyd’s was shaken by the first two of a series of scandals which came to light
between 1982 and 1986. One was the scandal concerning the Alexander Howden
group which led to claims for breach of fiduciary duty and misrepresentation
against Mr Kenneth Grob and Mr Allan Page (the Chairman and Finance Director
respectively of Howden) and other colleagues of theirs. The other, even more
notorious, and generally referred to as 'PCW', was concerned with the
activities of Mr Peter Dixon and Mr Peter Cameron-Webb and dealings (ostensibly
by way of reinsurance) with offshore companies in which they and their
associates were interested. It was estimated that at least £29m was
misappropriated in this way. 197. The Neill
report recorded the investigations established by Lloyd’s and commented
(paragraph 3.22) “Apart
from these particular matters, however, the investigations drew attention to an
absence of understanding on the part of many working members of the principles
of the law of agency. The Lloyd’s investigators into PCW told the Corporation
(in a letter dated 20 January 1984) that it was apparent to them that many
members of the Lloyd’s community in senior positions 'were not even vaguely
aware' of the legal obligations on agents to act at all times in the best
interests of their principals, not to make secret profits at their principals’
expense and to disclose fully all matters affecting their relationship with
their principals.” 198. These
matters, and the negligence and mismanagement of many Lloyd’s agents, are
covered in some detail in chapter 24 of the judgment. The Howden and PCW
scandals are not directly in issue in these proceedings. But it is easy to
understand that the indignation of non-working names who have been ruined
should have been further inflamed by the very large sums misappropriated by a
handful of Lloyd’s insiders. Moreover dealing with these scandals may have made
it easier for the authorities at Lloyd’s to overlook other problems, and the
adverse publicity may have made them preoccupied with their public image. 199. As the judge
described in chapters 13 and 14 of his judgment and as we describe below in
more detail, insurance business at Lloyd’s is undertaken on an annual basis,
and the accounts for each year are normally kept open for the next two years
and then closed by the process of RITC. If at the end of those two years it is
decided not to close the account (normally because it is impossible to make any
reasonable estimate of the outstanding risk) the year remains open and the
account is said to go into run-off. The traditional Lloyd’s system was therefore
well-adapted to ’short-tail' business but not well adapted to 'long-tail'
business, as asbestos-related risks showed themselves to be. 200. The number
of open years increased steadily during the relevant period, especially for
non-marine syndicates subject to asbestos-related liabilities. That appears
from the following figures (which would need various qualifying footnotes for
complete accuracy, but give the general picture without the need for
footnotes):
201. ( ) denotes
minimum with known latent liability 202. The same
trend was reflected in the global results for 1981 to 1985, which (in the same
format as at paragraph 133 above) can be summarised as follows (with a repeated
caveat as to the time-lag before the results were known):
203. Thus for
each year of account the market as a whole made a profit, after inclusion of
investment income and gains, but general liability business produced a
substantial loss even after crediting investment income and gains. 204.
Chronological summary: 1983-8 205. The 1982 Act
came into force on 1 January 1983. Sir Peter Green was the first Chairman of
the newly-constituted Council with Mr Brennan and Mr Barber as Deputy Chairmen.
Mr Ian Hay Davison became the first Chief Executive (as well as being a third
Deputy Chairman). He remained in post until 1986 when he resigned in
circumstances which the Neill Report described as a matter of ' fresh
controversy'. 206. In April 1983
the Chairman wrote to all managing agents, members’ agents and panel auditors
setting out a new scheme for the disclosure of reinsurance arrangements. This
required managing agents to disclose particulars of reinsurance contracts and
arrangements, including 'related party' arrangements which conferred an element
of discretion on the managing agents or the underwriter. 207. By mid-1983
the number of asbestos-related claims had risen to over 27,500 (and it was to
continue to rise relentlessly, repeatedly falsifying all previous estimates).
The judge devoted a section of chapter 16 of his judgment to what he referred
to as “… the
interlinked reasons why things looked so different at the end of the 1980s and
in the early 1990s, from the way in which they had looked in the early
1980s.” The judge’s
account has not been challenged in this court. In brief summary he identified
the following reasons: i. Various
defences which had been regarded as likely to negative liability in many cases
proved to be of little assistance in United States courts. ii. The sheer
volume of claims made it increasingly difficult to scrutinise claims in depth. iii. Insured
producers were increasingly reluctant to contest liability in case publicity
led to more claims against them (the judge instanced Keene Corporation which
was forced into bankruptcy though it had, according to its management, never
sold as much as $1m-worth of asbestos products). iv. Insurers had little
success in disputes with their insured on issues of coverage. v.
Asbestos-related litigation was very lucrative for American lawyers, who
actively recruited claimants (even to the extent of installing mobile x-ray
units in workplaces) and cast their nets wider and wider to bring in new
categories of defendants. vi. Some
producers (notably Owens Corning) contributed to this process and themselves
encouraged the joinder of other defendants in order to spread the liability.
The 14 defendant producers identified by the London market early in 1982
eventually increased to over 250. vii. Apart
from claims for bodily injury, there were also (from about mid-1983) an
increasing number of property damage claims based on the proposition that the
use of asbestos in building had reduced the value of the building so as to
amount to an actionable loss. In June 1983 two actions for property damage were
commenced against Dana Corporation. One was brought on behalf of all schools in
Pennsylvania, and the other on behalf of over 100,000 public and private
schools in other parts of the United States. 208. In September
1983 Lloyd’s presented its global results in a new and clearer form (“the
globals”) which was used throughout the rest of the relevant period. The
globals included a statement by the Chairman and separate reports by the chairmen
of specialised associations of underwriters. Mr Cockell, the chairman of LUNMA,
referred in rather guarded terms to asbestos-related risks and then commented: “It
takes a brave man, or a foolish one, to forecast the outcome of the open years.
For what it is worth I would personally expect the bottom line on each to show
a deterioration on the preceding one.” 209. In October
1983 a question arose as to what should be said at Rota interviews to
prospective Names who were intending to commence underwriting through an agency
which was the subject of investigation. It was decided that the prospective
Names should be given this information. There was no change of policy as
regards information about asbestos. 210. Also in
October 1983 the secretary of LUNMA wrote to Mr Chester (as chairman of the
Audit Committee) giving the views of a LUNMA working party on the proposal
(which Mr Lawrence had raised in 1979) for the subdivision of the “All
Other” category of business. The LUNMA working party did not recommend a
split. 211. In 1984 Mr
Miller became Chairman with Mr Barber and Mr Lawrence as Deputy Chairmen.
During this year the Inland Revenue took an increasingly active interest in
Lloyd’s reinsurance practices (and especially roll-over policies) as a means of
avoiding or evading tax. Mr Miller took a personal interest in this matter and
began by meeting with the Chairman of the Board of Inland Revenue and the
Governor of the Bank of England. Mr Miller aimed at negotiating a general
settlement of a large number of protective assessments to income tax made on
both working and external Names. 212. Mr Barber
was also concerned in preparing for negotiations with the Inland Revenue. He
prepared a memorandum dated 19 January 1984 after interviewing several
underwriters (including Mr Skey, Mr Chester, Mr Outhwaite and Mr Murray) and
brokers. He also interviewed Mr Holland of Ernst & Whinney. In his
memorandum he described roll-over policies as “…
policies which parade as ordinary reinsurance policies but which, either by
their express terms or as a result of some undisclosed understanding between
the parties, in fact contain no genuine or significant element of risk. In
their most extreme form they enable a Syndicate from time to time at its
discretion to place funds by way of 'premiums’ with a reinsurer, usually
overseas, with the right for the Syndicate at any time to call for repayment of
those funds, together with interest, by way of 'claims’.” 213. The
memorandum identified another form of policy, a funding policy. In his
memorandum Mr Barber commented on this type of policy: “The
obvious case for such a policy would be for a Syndicate’s asbestosis
liabilities. These losses are coming in at a frightening rate and for many
Syndicates a full reserve would bring massive losses to Names in 1981/1982
Accounts. This type of loss may settle very slowly if every case is contested
through the Courts OR it may settle very quickly as Underwriters attempt to
reach a compromise with their assureds or re-assureds. In the former case, the
Reinsurer will make profits, in the latter, there exists the probability of
severe losses. It cannot be
too strongly stressed that had these policies not been available there is a
question as to whether some Syndicates could have survived. If they are ruled
as being inadmissible and funds have to be brought back at a time of bad
results, then some may well go under. These
policies must be fought for. The effect of bringing back a 'roll- over' is one
thing. This would be quite another.” 214. Also on 19
January 1984 attorney H reported in a long letter to Mr Jackson (as chairman of
the AWP). The letter covered many topics in detail, including the following: i. It
reported the formation of Toplis & Harding (Asbestos Services) Ltd as a
service company, initially in order to avoid attorney reports being passed
through brokers (with adverse implications for discovery of documents in
actions in the United States). ii. Attorney
H emphasised that its recommendations for reserving were based on known claims
outstanding “and no attempt has been made to project an IBNR factor”.
iii. The letter explained the “unique” practical and logistical
problems of handling asbestos-related claims and referred to continuing
negotiations (which eventually led to the Wellington Agreement and the
establishment of the Asbestos Claims Facility). 215. On 8
February 1984 there was a meeting between the panel auditors and Mr Lawrence
(as Deputy Chairman with responsibility for audit matters) and Mr Jackson (as
chairman of the AWP). The purpose of the meeting was to inform panel auditors
of the latest position and enable them to ask questions. 216. On 9
February the Chief Executive wrote an internal memorandum in response to one
from Mr P A R Brown, the Head of External Relations. Mr Brown’s memorandum had
included the following outspoken passage: “The
evidence can only be anecdotal, but it seems to me (and to others with whom I
have discussed the question) that market members are beginning to think that,
having kept their heads down and let the blast of the past 18 months blow over
them, and having taken a great deal in the way of uprooting and rearranging
from an imposed outsider — you — they can now successfully fight back in
defence of their traditional ways of work, that by obstinacy they can blanket
your reforming power, and in short that they can dive back into a cosy system
that will be not much noticed by Press and Parliament — or, one supposes, the
Names. If anyone is thinking like that — and I believe that more and more
people are — they are profoundly wrong, and in my judgment most dangerously so
for the future. I hope that I do not need to emphasise the consequences of, for
instance, disappointing the Revenue’s expectations in the matter of disclosure,
or conniving at the concealment from Names of information which, if they were
company shareholders, they would be statutorily entitled to have.” 217. Mr Davison’s
more measured response stated, among other things: “As to
syndicate accounting I believe in all honesty it can be said that we have made
great progress in arranging for the publication of syndicate accounts and by
incorporating by byelaw certain basic essentials which will go to Council on 13
February. I do not share your view that the AASC memorandum represents a
substantial defeat. Disclosure is the name of the game and disclosure is what
we are achieving. There is an inevitability about the work of accountants in
this field which even the high Tories on the Committee know they cannot
reverse.” It would be
wrong to attach much weight to these observations by individuals who did not
give evidence, but they give something of the flavour of the position a year on
from the coming into force of the 1982 Act. 218. Negotiations
between Lloyd’s and the Inland Revenue continued throughout 1984. Over 17,000
Names (about 92 per cent of the membership for the 1981 year of account)
received provisional assessments. By April 1984 the Inland Revenue had set up a
separate Lloyd’s unit of its Special Investigation Section. 219. In July 1984
there was an overall settlement of insured claims against Johns Manville. The
total settlement was for $ 315m of which the London market’s share was $94m. Mr
Rayment stated in his witness statement that this had proved to be a good deal.
From the insurer’s point of view that must be correct, since the insured’s
projection (as at mid-1984) of a total of 40,000 claims has proved to be far
too low. 220. In August
1984 the globals for 1983 were published showing an overall profit for 1981 of
£152m but a pure overall underwriting loss (the first for many years) of about
£43.5m. Mr Rokeby-Johnson, the chairman of LUNMA, said in his report, “It is
rapidly becoming apparent that the potential claims arising from asbestos will
dwarf any claim in the history of our industry. It is very sad that in the
United States to date under half of the money paid by our industry has ended in
the hands of the injured party, the balance is in the capacious coffers of the
more rapacious lawyers: for this reason we support, and I very much hope all
our industry will support, the concept of a claims handling facility set up by
the insurers and manufacturers to look after the interests of the
injured.” We will come
back to this report and to other reports by LUNMA chairmen in considering the
globals (paragraphs 326ff below). 221. On 2
November 1984 there was a presentation to the Inland Revenue by a team
representing Lloyd’s. The speakers were Mr Tony Parkington, Head of the
Members’ Solvency and Security Department; Mr Merrett and Mr Kellett as
underwriters with marine and non-marine experience respectively; and Mr Holland
of Ernst & Whinney. The appellants have drawn particular attention to a
passage near the end of Mr Kellett’s address: “In
virtually every year since I became an underwriter the committee have found it
necessary to increase the [minimum recommended] percentages. When one considers
the billions of dollars now being paid out, on claims such as asbestosis,
claims totally unprovided for out of the years in which they fell. When one
considers further, such losses as environmental pollution claims, now beginning
to be presented in respect of waste, haphazardly dumped over decades. When one
considers the ever changing attitudes of courts, especially in the USA, but
also here, and around the world, towards all accepted ideas of negligence and
the duty of care owed to others, towards the interpretation of policy forms,
towards our right to rely on exclusions, all of which will affect unsettled
claims currently being handled. When one
considers all these factors, it is clear that what properly concerns
underwriters is not the question of whether we are over, or under reserved. We
are under reserved. What concerns us is, how the industry can survive its under
reserving.” 222. On 6
December Mr Kiln gave a lecture on 'Reserving Reinsurances to Close and their
Effect on Profits’ at the Insurance Institute of London (subsequently reprinted
as a chapter in his book on reinsurance). He expressed the view that many
syndicates writing long-tail business were regularly under-reserved: “I can
think of no syndicate since 1946 with a volume of business in long-tail which
has stopped underwriting and on which the run-off has been contained within its
original RITC taking interest into account.” 223. Earlier in
the lecture Mr Kiln had said, “It is
vital that Underwriters and management do study and understand the problem in a
technical sense. The days are gone when reserving can be done on a case-by-case
basis plus something extra for luck. Our industry must cope if it is to
continue to serve society in the way society demands of us and we are to remain
solvent.” At the end of
his paper he acknowledged the assistance of a distinguished actuary, Mr Sidney
Benjamin. It is apparent that during the relevant period active underwriters,
claims directors and auditors were becoming more aware of the assistance which
they could obtain from actuaries in reserving for non-life business. 224. At the panel
auditors’ meeting on 19 December 1984 members of the MSSC spoke about factors
affecting reserving as at 31 December 1984. Manuscript annotations on a copy of
the agenda indicate that Mr Jackson spoke on asbestosis and latent diseases,
but there is no further record of what he said. 225. In 1985 the
Lloyd’s office-holders were the same except that Mr Lawrence became senior
Deputy Chairman and Mr Coleridge became junior Deputy. Early in the year there
was a perceived problem of under-capacity in the non-marine market. This was
discussed at a meeting of the LUNMA committee, attended by Mr Miller, on 10
January. The minutes of the meeting show that some of those present (including
Mr Skey and Mr Cockell) thought that the market had begun to turn in favour of
underwriters, and that underwriters wished to take advantage of this. 226. The MSSC was
asked to consider the problem of capacity and reported on it to the Committee
of Lloyd’s in a paper dated 8 February 1985. The MSSC put forward no specific
recommendation beyond its view that deliberate over- writing (that is,
deliberately ignoring premium limits) could not in any circumstances be
acceptable. 227. On 19 March
1985 Mr Jackson, as Chairman of the AWP, gave written testimony to the United
States Senate Sub-Committee on Labor chaired by Senator Nickels. His testimony
was mainly directed to explaining the need for the Asbestos Claims Facility. It
began as follows: “1. The
number of present and expected asbestos related claims is enormous, and the
problems they are creating for the producers and insurers are unprecedented,
both in terms of the total dollars involved and of the human resources needed
to handle these claims. 2. The
considerable liberalisation and wide divergence in judicial interpretations on
such critical issues as coverage triggers and continuing defence obligations
have shaken insurers’ confidence in their traditional approaches to policy
wordings and risk evaluation. 3. The
emergence of complex multiparty litigation drawing in laundry lists of
producers and their insurers has escalated the cost of pleading and defending
each aspect of each claimant’s case to the point where it now takes nearly
$2.00 of costs to recover $1.00 of damages. 4. Against
this background of judicial uncertainty, already catastrophic losses, and the
reality of massive property damage claims yet to come, the task of fixing
meaningful reserves and managing cashflow to pay claims will continue to demand
virtual clairvoyance and a near reckless courage from executives involved at
primary level, as well as from their reinsurer counterparts. You might
well ask if we are getting it right. I will show you how we propose to do just
that.” He then went
on to explain about the AWP and the proposed Asbestos Claims Facility. 228. On 12 April
1985 Mr Randall (who had ceased to be employed by Lloyd’s and was with Merrett
syndicates) disclosed to Lloyd’s the disastrous results of eleven run-off
policies written by Merrett syndicates 418/417. About two-fifths of Merrett
personnel were on these syndicates. Nevertheless the 1982 year was closed into
1983. The judge, who as trial judge in Henderson v Merrett Syndicates [1997]
Lloyd’s LRLR 265 was uniquely knowledgeable about this part of the litigation,
commented in chapter 19 of his judgment: “I
suspect that if 418/417 had left its 1982 year open, this would have had a
marked effect on the Lloyd’s market and underlined the depth of the problems
represented by asbestos-related and pollution claims. The extent to which
subsequent events would have taken a different course is a matter of
speculation, but the effect would have been significant.” 229. On 19 April
1985 Mr Davison gave a lecture to the conference in Paris of the National
Association of Accountants. In his talk he spoke of “the great drive for
new Names” but he described it as having begun in the mid-1970s (not the
early 1980s). He also spoke of scandals at Lloyd’s: “But the
fact remains that poor accounting practices and inadequate audits, together
with a tax climate that encouraged sub rosa arrangements, had all contributed
to a situation in which a few Lloyd’s agents milked their Names of up to £100m.
Many at Lloyd’s have asked “where were the auditors?”, in the second
part of this talk I propose to address that question.” 230. The second
half of the lecture was devoted to the reforms of accounting and auditing
practice. Its criticisms of the earlier position deserve to be set out at some
length: “For a
number of reasons, therefore, there was a continuing risk, not always avoided,
that the panel auditors at Lloyd’s lacked independence from their clients: some
kept the books; some were too dependent upon Lloyd’s for their fee income;
together they formed a small group specialising in an arcane area of accounting
work; and the different interests of Names and their agents were not
necessarily adequately reflected in the audit arrangements. But there was
a more difficult problem, the panel auditors were not in fact charged with
carrying out an audit at all. Their duty was to assist by providing the Annual
Solvency Certificate which merely shows that each Name has sufficient assets to
meet his liabilities calculated in accordance with the formulae laid down by
the Committee of Lloyd’s. Agents, underwriters and the Committee of Lloyd’s
were all under the misapprehension that the work done by the panel auditors was
an audit in the sense which you and I would understand it. But it was not, a
fact which the auditors themselves, to give them their due, had protested from
the very beginning. The accounts of an underwriting syndicate, and the
determination of its profit, depends upon how much reserve is necessary to
close the account. The figures for the closing reserve is provided by the
underwriter in the form of the “reinsurance to close”. Some of the
panel auditors at Lloyd’s were still living in the days of “inventory at
director’s valuation” which used to be the way in which profit was
calculated in manufacturing companies in the UK 30 years ago: they did not
consider it part of their duty to audit the reinsurance to close.” 231. On 13 May
1985 there was a meeting of the Council at which the Chairman, Mr Miller, spoke
to the agenda item 'Attraction of New Names’. The minutes record that he
referred to “… the
need for increased membership as a result of the shortage of capacity and the
conflicting adverse publicity arising from reported underwriting losses for
recent years.” 232. The market’s
recent losses were the focus of attention the very next day, when a meeting
(minuted as 'Lloyd’s Most Sensitive — Outhwaite') was told that the Outhwaite
Agency intended to close the 1982 year of account for syndicate 317, but that
Ernst & Whinney could not give an unqualified syndicate solvency report.
(Syndicate 317 had written numerous run-off contracts as explained in chapter
17 of the judgment; see also paragraph 127 above). There was a further meeting
on 17 May (with the two Deputy Chairmen) at which allegations were made of
undue pressure being put on auditors by Lloyd’s staff. The outcome was that on
1 July 1985 Mr Outhwaite decided to leave the 1982 year open, while still
expressing the view that it would prove profitable. 233. On 19 June
1985 the Wellington Agreement was signed on behalf of 30 United States insured
producers, 16 United States insurance companies and all interested Lloyd’s
syndicates. There is a full description of the agreement in chapter 16 of the
judgment. It emphasises that although the Asbestos Claims Facility (“the
ACF”) was terminable (and was in fact terminated after a few years) the
compromise of rights and obligations effected by the agreement was permanent. 234. The ACF’s
opening inventory of claims was about 25,000. Mr Jackson and the other members
of the AWP most closely concerned with the Wellington Agreement believed (as Mr
Rayment put it in his witness statement) that “Although
we believed that this would take some years, the end was now in sight, and the
way in which we would reach the end had been put in place. … No-one foresaw
the way in which asbestos claims would take off, as they did, in the years
following the Wellington Agreement.” 235. Claims did
indeed take off after the signing of the agreement. Having run at a steady
monthly rate of 500 or so for about three years, they increased rapidly to 1000
a month in the latter part of 1986 and 2000 a month in 1987 (with 3000 claims
being filed during the month of August 1987). 236. On 5 July
1985 Sir Peter Green, the retired Chairman, began a letter (“the fishing
trip letter”) to Mr Miller. He completed it, it seems, during the course
of the next ten days while he was on a fishing trip. In the letter Sir Peter
Green gave his successor the benefit of his views (which Mr Miller in
cross-examination said he found irritating) as to the terms on which they
should settle with the Inland Revenue. He concluded with his views on the
situation generally: “There
are plenty of horrors in the pipeline and they must be reserved even if figures
are not available. The 'true and fair' requirement should assist in this. It is perhaps
fortunate that the overpayment of past profits is falling for recoupment from a
far larger number of current Names. This may not always be the case and if new
Names won't join, or old Names resign from the old syndicates which have back
year problems the situation may become critical.” 237. At a meeting
of the MSSC held on 19 August 1985, chaired by Mr Merrett, there was a
discussion on RITC in the context of the new syndicate accounting byelaw. Mr
Murray is recorded as having said, “In the
past, Underwriters had used inadequate techniques, resulting in inadequate
reserving. The Market had been ’saved' by high interest rates and a soft
reinsurance Market and it was vital that Lloyd’s became more professional in
its approach, in particular by taking actuverdana advice.” 238. In September
1985 the globals for 1984 were published. The modest overall profit concealed a
pure overall underwriting loss for the 1982 year of account equivalent to 6.5
per cent (against 1.9 per cent for 1981). The general (non-marine) liability
account showed a pure underwriting loss of £ 425m. In his chairman’s statement
Mr Miller described this loss as enormous and stated, “Figures
such as these make it obvious that underwriters must take stringent remedial
action as indeed they are. It is worth repeating that a combination of three
things is needed, particularly in the all- important American casualty
business; first, a realistic rating level; second, a reformed policy wording
embracing, where needed, a claims- made basis for claims and an overall limit,
including legal costs; and third, a measure of tort law reform. Without real
progress in all three areas, it is hardly to be wondered at if underwriters
increasingly withdraw from this class of business, with the result that certain
industries will be left without the insurance coverage which they need to
continue in business, to the detriment of society in general.” It will be
apparent that all those proposals related to future underwriting, rather than
to the past. Mr Hazell, the chairman of LUNMA, made similar observations (but
referred to the ACF as a hopeful development). 239. In October
1985 there was an overall settlement with the Inland Revenue. All the
outstanding assessments were withdrawn in consideration of a sum of £ 43.5m
paid to the Inland Revenue out of central assets of Lloyd’s. Sir Peter Miller
said in his witness statement (perhaps with a degree of understatement) that
there was “a considerable amount of discussion at Council” before
agreement was reached that it was appropriate for this payment to be made out
of the Central Fund (corrected in his oral evidence in chief to 'central
assets’). He does not seem to have been cross-examined on this point. 240. On 11
November 1985 Mr Davison gave notice of his resignation as Chief Executive at
the expiration of his minimum term of office (he had been appointed for an
indefinite term of three to five years). He had carried through many changes
but he felt that the organisational structure was unsound. He said in his
published letter, after referring to a working party chaired by Sir Kenneth
Berrill (one of the nominated members of the Council), “My own
views on the paramount necessity of an independent Chief Executive, with
appropriate terms of reference, responsible directly to the Council have not
changed and, therefore, I would find it impossible to continue in office were
those terms to be significantly altered. At the same time, the argument is a
perfectly proper one for a self- regulatory body and, by resigning at this
time, I remove an obstacle to the Council’s freedom of discussion and to my
freedom to argue for the retention of the position of the Chief Executive with
independent powers without any suggestion of self-interest.” 241. The report
of a working party established in November 1985 to consider discounting of
reserves for solvency purposes — a common topic of discussion at this period
-- referred to “the continuing requirement to expand the capital base of
Lloyd’s from sources not already exposed” as a reason for “assurance
that all undischarged liabilities have been fully reserved”. 242. In 1986 Mr
Miller continued as Chairman with Mr Lawrence and Mr Cockell as Deputy
Chairmen. Mr Alan Lord took up his duties as Chief Executive in March. On 10
January 1986 the Secretary of State (Mr Leon Brittan) announced the appointment
of a Committee of Inquiry into Regulatory Arrangements at Lloyd’s under the
chairmanship of Sir Patrick Neill QC. Its terms of reference were: “To
consider whether the regulatory arrangements which are being established at
Lloyd’s under the 1982 Lloyd’s Act provide protection for the interests of
members of Lloyd’s comparable to that proposed for investors under Financial
Services Bill.” 243. On 29
January 1986 there was the usual annual meeting of auditors (now termed
recognised auditors). Again they were briefed by Mr Jackson on asbestos-
related claims. He described the establishment and operation of the ACF,
stating that there were 46,000 known claims and new claims were running at 1000
a month. He referred to the Johns Manville settlement and also to new
categories of defendants (such as railroads and manufacturers of brake linings)
against whom claims were being made. 244. During June
and July 1986 Mr Miller and other members of the Lloyd’s hierarchy gave oral
evidence to the committee of inquiry chaired by Sir Patrick Neill. The
transcripts contain many candid exchanges. There was ample material on which
the committee could reach its conclusion about “the absence of
understanding on the part of many working members of the principles of the law
of agency”. 245. In 1986 an
American bankruptcy court made an order ensuring wide publicity for the scheme
which it was being asked to confirm. At that time the projection of 44,000
claims (made in 1984) was revised to between 83,000 and 100,000 claims. In the
event 240,000 claims had been received by 1995 and over 400,000 by 2000. 246. The globals
for 1985, published in September 1986, showed an overall profit for the 1983
year of account of £36m (or £179m if PCW losses were disregarded). In his
Chairman’s statement Mr Miller commented that the general liability account
generated about 12 per cent of the premium income but 100 per cent of the
losses. The pure underwriting loss on general liability business was £384m
(that is about 10 per cent less than for 1982). Mr Jackson, the chairman of
LUNMA, said in his statement, “The US
based liability account has yet again been the cause of most of the market’s
difficulties as, once again, it was necessary for underwriters to increase
reserves for asbestos related losses. Although the Asbestos Claims Facility --
set up with the support of Lloyd’s — is making significant savings in the
legal costs involved, this is to some extent offset by there being no slowing
down in the number of new suits being brought. It is also
encouraging that most observers believe that, at least as far as Lloyd’s is
concerned, 1983 could be seen as the beginning of the end of the really bad
results. Whilst I would not anticipate that my successor would be able to
report an underwriting profit for 1984 I would expect an improvement over the
past few years. The very badly needed premium rate increases were beginning to
take effect by the middle of 1984. These increases, which have been more
obviously applied on US business than in the rest of the world have become, as
each successive month passed, more substantial.” 247. On 2
December 1986 Mr Murray, as chairman of the SSC, wrote formally to the Chairman
of Lloyd’s, Mr Miller, under the heading ’solvency & Security'. He said that
his committee had not yet made formal recommendations but that he wanted to
pass on his personal concerns. Having identified five areas of concern he
proposed five possible changes of practice. On one of these (RITC) he observed,
“Part of
the premium paid for the Reinsurance to Close may correspond with known, noted
and quantified losses and therefore the element of risk assumed by the
Reinsuring syndicate may be minimal. A significant part, however, of the
Reinsurance to Close relates to an assessment of likely future claims or
expenses which by their nature cannot be quantified within a narrow margin with
any proven degree of certainty. This pure risk premium is at present assumed by
Names with no requirement for related assets of any sort. I believe that a
figure corresponding to 25% of the Solvency test minimum percentages would
probably be an appropriate figure to deem to be Premium Income for Premium
Income limit purposes when such Premium is received as Reinsurance to Close
premium.” 248. In 1987 the
office-holders were the same except that Mr Parry replaced Mr Cockell as junior
Deputy Chairman. Early in the new year Sir Patrick Neill’s Committee of Inquiry
presented their report, making 70 recommendations for changes in the
constitutional framework and operating procedures at Lloyd’s. The judge quoted
the general commendation in paragraph 1.4 of the report but not the next two
paragraphs: “1.5
Progress achieved, however, is not by itself enough unless it leads to an
affirmative answer to our question — do the regulatory arrangements now in
place at Lloyd’s provide protection for Names comparable to that proposed for
investors under the Financial Services Act? Our answer to that question is
that, notwithstanding the major progress made by the Council of Lloyd’s since
January 1983, they do not. 1.6 We have
detected a number of shortcomings in particular areas of regulation at Lloyd’s.
Here, Lloyd’s arrangements fall below the standard that will be acceptable
elsewhere in the financial services field. More fundamentally, the constitution
of Lloyd’s does not currently provide for that degree of involvement of
independent outsiders and that degree of detached scrutiny of the activities of
market practitioners that will be a feature of the regime under the Financial
Services Act. The checks and balances at Lloyd’s are not, in our view, so
firmly in place. The balance of initiative rests too much with the working
members.” 249. The core
recommendation, for reducing the number of working members on the Council and
increasing the number of nominated members, was accepted at a special meeting
of the Council on 22 January. The minutes indicate that acceptance was less
than whole-hearted on the part of Mr Miller (who said that the logic of the
recommendation was open to challenge) and Mr Lawrence (who said that it was a
shock, but could have been very much worse). 250. At the end
of January the affair of the Outhwaite run-off policies took a new turn when Mr
Outhwaite announced that he was challenging the basis on which some of the
policies had been effected. This led to some contentious arbitrations (and
litigation which reached the House of Lords after the English arbitrator signed
his final interim award in Paris: see Hiscox v Outhwaite [1991] 2 Lloyd’s Rep 1,
435). 251. The briefing
for recognised auditors took place on 4 February. Again Mr Jackson spoke and
answered questions on asbestos-related claims and associated matters. He
reported that there had been no drop in claims: 1500 claims had been made in
each of November and December 1986. The ACF was achieving settlement of claims
at a faster rate than had been expected. Known claims would account for 25 to
30 per cent increases in asbestos reserves at 31 December 1986. Much of that
increase would come from reinsurance and retrocessional contracts. 252. On 12 May
1987 Mr R R S Hiscox, the senior director of Roberts & Hiscox Ltd, wrote to
the Chairman protesting at the leniency of the sentence which had been imposed,
in disciplinary proceedings, on Sir Peter Green. The judge quoted briefly from
the letter but its raw eloquence deserves to be set out in full as the view of
one very experienced Lloyd’s insider: “Thank
you for your letter of the 7th May. I was stating the “outside” or
Revenue view of the reinsurance to close which did appear to them an
“incredible privilege”. It was abused by some underwriters as the
mass of rollovers demonstrated and some underwriters were carrying forward
large sums of money more based on a wet finger in the wind than on any statistical
basis. However, that
was not the point of my letter, neither was the alarm at the growing
regulations within Lloyd’s. That is a necessary result of having relatively
poor Names with unlimited liability. Of course they need massive protection --
especially given, as you say, the ignorance of the basic tenets of the laws of
agency of some very senior agents including your predecessor in office. I find
it a pity that you should preach to me on this subject considering my long
opposition to the business methods of the man you used to refer to as “my
illustrious predecessor” and to Posgate and others. Just when the
press was beginning to be more favourable to Lloyd’s it is a tragedy that Sir
Peter Green’s sentence should be announced and be so light which has been very
rightly criticised. I know that you will rush to state that this was the
sentence of an independent regulatory authority — but it should have been
different. “No charge against Sir Peter and Peter Valentine involved
dishonesty or lack of good faith or deliberate or knowing misconduct” I
read in my newspapers. Why not? We have seen
people severely punished for repairing yachts at their syndicate’s expense and
other similar trivial offences — and yet we are seen to slap the wrist of a
major offender. Clearly nobody tried to press the case against Sir Peter and
when I read in my newspaper that Langton stated that such “behaviour was
common practice in the 1970’s and was not then regarded as serious enough to
constitute discreditable or disgraceful misconduct” I am speechless. There
were agents and underwriters who did not have baby syndicates or interests in
off-shore reinsurance companies and I suspect that they were in the majority.
But to have the fact that many were breaking the law as any form of mitigating
circumstance is deeply offensive to those that chose not to break the law. I
always thought that ignorance of the law was no defence. We have this
new definition of “negligence” in Lloyd’s. Posgate was found guilty
of “gross negligence” for removing money from one syndicate which he
did not own and paying it by way of reinsurance to the syndicate in the
management of which he had a significant interest, and now Sir Peter Green is
similarly found guilty of “serious or gross negligence” for allowing
syndicate money to line his own pocket. When will somebody say theft and press
the proper charges. Enough of that matter. You state that the Council has
debated the question of unlimited liability twice and committed itself to its
continuation. The Council and former Committee of Lloyd’s have a track record
second to none for lack of foresight which has been well illustrated by the
recent debacles in Lloyd’s. Radical reform is out of the question until forced
by circumstances, so let us continue to raise our capital from housewives with
bank guarantees on the family home and suffer from the consequences at each
downturn in the market.” 253. The Council
of Lloyd’s met on 5 August 1987 with Mr Miller in the chair and the Committee
of Lloyd’s met on 19 August with Mr Lawrence in the chair. The minutes of these
meetings illustrate what had since 1983 become the practice as to approval of
the globals. The Council considered a paper on this subject and then delegated
formal approval of the globals to the Committee. The Committee received
coloured proofs of the final document but was in a position to require changes
(for instance on 19 August 1987 there was discussion about a passage in the
Chairman’s statement dealing with tort reform; we shall return to this below --
paragraph 463). 254. The globals
disclosed an overall profit for the 1984 year of account of £279m (or £300m
excluding PCW) and a pure overall underwriting profit of £ 138m. But for
general liability business there was a pure underwriting loss of £257m (and a
net loss of £170m). In his Chairman’s statement Mr Miller repeated what he had
said about the account producing 12 per cent of the premiums and 100 per cent
of the losses. He also observed that also exactly half of the RITC (£2,000m out
of £4,000m in round figures) was for general liability claims. Mr Kellett, the
chairman of LUNMA, said in his statement, “This
class of business, much of which comprises policies issued to insureds in the
United States of America, continues to be adversely affected by certain
features of the legal system of that country. One such
feature is the contingent fee system whereby lawyers are rewarded by sharing in
the damages which they are able to secure for their clients, often leading to
spurious cases being pursued. Another is the system of awards by juries in
civil damages cases where they are encouraged to think of the insurance
industry as having a “deep pocket” from which victims may be
compensated, regardless of whether or not there is fault on the part of insured
defendants.” 255. At meetings
of the SSC on 17 September and 12 October 1987, chaired by Mr Lawrence, there
were discussions about problems with the solvency test. At the September
meeting the minutes record Mr Lawrence suggesting “that almost every old
non-marine syndicate would be expected to have shown inadequacies in reserves
of some degree”. At the October meeting the SSC were told of LUNMA’s view
that “… the
Solvency Test Instructions should stress more firmly than currently that the minimum
percentage reserves are the absolute minimum to be reserved and that most
syndicates should be reserving at levels significantly above the minima
particularly in the case of 'long' long- tail business.” 256. In 1988 Mr
Lawrence was Chairman with Mr Coleridge and Mr Parry as Deputy Chairmen. Mr
Lord continued as Chief Executive (and was also a Deputy Chairman). This was
the year in which Mrs Evans began underwriting. She had been admitted in 1987
having seen a brochure dated December 1986 and the previous two or three years’
globals. 257. At a meeting
of the Committee on 27 January 1988 Mr Merrett expressed concern that the AWP
was reporting substantial increases in asbestos-related and pollution-related
claims, but that the SSC did not have access to figures showing the overall
position. It could rely only on reports of individual syndicates. Mr Merrett
said that Lloyd’s needed greater comfort that agents were adopting adequate
figures, and that this was a problem that needed to be addressed centrally. 258. Mr Merrett
spoke again about these claims at a Committee meeting on 10 February 1988. The
minutes record: “Mr
Merrett reported that the Annual meeting of the recognised Auditors had
recently taken place and had seemed to have proceeded satisfactorily. Mr Robin
Jackson, however, had been referred to as a pessimist as regards
Asbestos/Environmental pollution. Mr Merrett had tried to explain that Mr
Jackson was in fact being optimistic considering the background against which
he was working.” Mr Jackson’s
anxieties at that time appear from a paper dated 7 March 1988 which he wrote on
'Asbestos Related Claims — The Reinsurance Response'. He was concerned at the
prospect of a general failure of reinsurers to honour their commitments
promptly. 259. On 16 March
1988 Mr Hiscox had a meeting with the Chief Executive, Mr Lord, to express his
concerns about the Outhwaite syndicate’s unwillingness to meet run-off claims.
Mr Hiscox suggested some form of central settlement, since in his view the
Outhwaite problem was potentially far more serious than PCW. On the following
day he wrote to Mr Lord: “I
enclose the latest report from the Asbestos Working Party which illustrates
that that area of claims is still accelerating. You will also be aware that
pollution claims are now coming in thick and fast and as further illustration I
enclose a graph of our outstandings on our policy with Outhwaite. I think these
figures demonstrate that within a month or two Outhwaite’s auditors must blow
the whistle. I think that the Regulatory Authorities at Lloyd’s should get a
firm grip of this before the media does and before the solvency of the Lloyd’s
policy is brought into serious question.” 260. The
Outhwaite problem was considered at a Council Meeting on 13 April when the
Chairman (Mr Lawrence) reported the Committee’s unanimous view “…
that as regards the solvency position Lloyd’s should not double guess the
auditors, and that there were no grounds to justify Lloyd’s intervention on
'fit and proper' criteria, and that it was an unattractive option for Lloyd’s
itself to intervene and offer a cap on the policies.” 261. On 8 June
1988 LUNMA (in the person of Mr M V Williams) made its first- ever presentation
to the full Council of Lloyd’s. The text of the presentation is remarkable for
containing no single reference to asbestos-related claims, and only one
reference to long-tail claims. Nor does there seem to have been any mention of
the matters in the ensuing discussion. The minutes of the meeting also show one
of the earliest mentions in Council of the possibility of switching from
unlimited to limited liability. A working party was established to consider
this topic. 262. On 20 June
1988 Freshfields circulated to the steering committee of members’ agents a
report on Outhwaite syndicates 317/661. They criticised Mr Outhwaite but
expressed the view that an action against him or his agency would be unlikely
to succeed. The steering committee provided a forum for members’ agents and
their Names, many of whom were asking questions about Lloyd’s regulation (as
appears, for instance, from a letter to the Chairman written on 24 June 1988 by
Mr Peter Rawlins of Sturge). 263. In July 1988
the Piper Alpha oil production platform in the North Sea suffered a disastrous
explosion and fire with heavy loss of life. Within days it was declared a
constructive total loss and the total liability was later estimated at £1.4bn.
This summary has concentrated on asbestos-related claims but it must be borne
in mind that in the late 1980s the Lloyd’s market had to deal with several
other catastrophic losses. 264. At its
meeting on 27 July 1988 the Committee had before it a paper on run-off years of
account as at the end of 1987. The paper stated that (with certain exceptions)
there were 76 syndicates with years in run-off, the total open years being 120.
Of these 56 per cent were attributed to asbestos-related and other United
States general liability business, and a further 13 per cent to Outhwaite and
Merrett run-off policies. (These figures match roughly but not precisely with
those at paragraph 200 above, which are taken from a detailed document in the
'Open Years’ bundle prepared by Freshfields). 265. The paper on
open years was fully discussed by the Committee (the minutes of the discussion
occupy four closely-typed pages). The first three points noted in the minutes
were as follows: “5.6.1
the problem of open years affected the membership as it existed at the moment.
Though Names were informed when they joined the Society as to the possibility
of open years it had never been considered much of a problem. However, Agents
should take the problem more seriously now and make their Names aware of the
likelihood of open years; 5.6.2 it was
symptomatic of the Society as a whole that the Underwriters of the time did not
really know the full implications of the business that they were writing and to
a certain extent the whole Society was now at risk from events since the 1950s;
3. Managing
Agents would continue to see open years as an easy way out provided they were
allowed to continue in business whilst managing syndicates with open years. The
Society may be able to live with the events of the past, but if Managing Agents
were allowed to continue trading it was essentially the same as allowing Names
to pay for their losses by instalments;” 263. At a Council
meeting on 3 August 1988 there was discussion of adverse press publicity about
the resignations of Names. During 1988 994 Names had given notice of
resignation so far. The Chairman (Mr Lawrence) and Sir Peter Miller spoke of
using the forthcoming globals press conference as an opportunity to counter
adverse publicity. 264. The globals
for 1987 disclosed an overall profit of £211m for the 1985 year of account.
General liability business showed an overall loss of £268m and a pure
underwriting loss of £354m (of which the Outhwaite syndicates produced about
£84m). Mr Lawrence said in his Chairman’s statement: “The
difficulties associated with long tail liability business highlighted by the
chairman of the non-Marine Association have resulted in both an underwriting
loss and an overall loss. This business is now, however, being written at rates
that better reflect the present climate and with policy wordings appropriate to
the changed circumstances.” Mr Williams,
the chairman of LUNMA said in his statement: “Our two
main areas of difficulty are in asbestos-related claims and environmental
impairment. The rate of
new asbestos-related claims rose steeply, from an average 700 per month in 1985
to 2,000 per month in 1987, due largely to intensive publicity from the
plaintiff bar and the seeking out of new industries with an “asbestos
connection”. There are, however, grounds for future optimism as the rate
of increase has declined markedly in recent months.” Again, about
half of the entire RITC of £4bn was in respect of outstanding liability claims. 265. In October
1988 Mr C W Rome, the chairman of the Lloyd’s Underwriters Association, was
asked to justify changes proposed by his committee to the minimum percentage
reserves for the marine liability account. In a letter dated 5 October to the
Members’ Security and Solvency Department he wrote, “First I
should make it absolutely clear that I make no pretence whatsoever that the
reserves my Committee accepted last year, or the alterations we propose now,
are correct. All that can be said with certainty is that in no area of their
business have Lloyd’s Underwriters been so substantially and so consistently
under-reserved as in the liability accounts. Asbestos
related claims have been with us for some time now, but only recently has there
been a serious threat of a substantial volume of such claims falling on marine
policies. At present, the P & I Clubs appear to be in the front line, but
to what extent they — and their reinsurers in the marine market at Lloyd’s --
will eventually be involved is unknown. Asbestos was widely used in the
construction of ships, but to what extent and over what policy years ship
builders and ship repairers policies will be involved no one knows.” 266. At a
Committee meeting on 12 October 1988 Mr Merrett raised a topic minuted as
'Aggregation of Liability'. After referring to Hurricane Alicia (in 1983) the
October storms (of 1987) and Piper Alpha he stated, as recorded in the minutes,
“5.13
The LMX market had made the position much worse. The basis upon which
reinsurance claims were paid on Alicia and the October storms was slower than
on any other claims in the market because the brokers’ obligation to fund had
been removed and there was practically no pressure for special settlements.
Each turn of the payment cycle took at least two or three months, ie the time
between payment by an underwriter and collection from his reinsurer. This
operated to delay the time when the ultimate payers became aware of their
obligations. 5.14 The
burden of the three losses was now beginning to come together with the same
syndicates, and thus the same Names, being affected. The amounts involved were
immense in relation to the syndicate cash balances and those syndicates had a
heavy drain upon their resources for the three separate losses. The position
had been reached where some syndicates were significantly through their
reinsurance protection for three successive years and yet their Names knew
nothing about it. 5.15 The
answer was not to be found through the regulatory route but by managing agents
establishing the position of their managed syndicates by requiring the
underwriters of those syndicates to produce a worst case scenario. This
information could then be passed on to the members’ agencies. Agents should be
made aware of the questions they needed to ask and reminded that, whilst it was
natural to focus upon Piper Alpha, the same questions were relevant to Alicia
and the October storms. If there was a heavy un-notified net loss to Names for
three years then the Names should be told.” This was a clear warning of
the 'LMX-spiral' which became an increasingly obvious problem after the end of
the relevant period. Chronological summary: since 1988 267. Events since
the end of 1988 are not strictly relevant to the issue raised in this appeal.
But the judge summarised the salient events in his judgment (chapter 20) and we
should do the same. 268. There are
some general themes which are constantly reflected in the documentary evidence
from 1989 and the early 1990’s. These are a rising tide of continuing losses,
with direct liabilities on asbestos-related and other long- tail business being
caught up or overtaken by LMX and personal stop-loss liabilities; a comparable rising
tide of litigation as claims for breach of duty were made by names against
managing agents (for negligent underwriting) and members’ agents (for negligent
portfolio selection); and increasing disquiet about the constitution and
governance of Lloyd’s, especially in relation to unlimited liability of names,
the management of the market, and self-regulation. 269. 1989 was
dominated by the continuing controversy over the Outhwaite run- off policies
and there was an unusually large number of questions at the Society’s general
meeting on 28 June 1989. One of the most persistent questioners was Mr John
Donner, whose concerns and circumstances in which the run-off policies were
written led to the Council establishing a panel (chaired by the Chief
Executive, Mr Lord) to investigate the allegations. We have already set out (in
paragraph 128 above) the substance of Mr Donner’s complaint as he explained it
to the panel on 20 December 1989. < | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||