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Lloyd’s Reinsurance Law Reports [1996]
L.R.L.R. 310 [note
discrepancy between this citation for the print version and the LexisUK
version, which starts below] Queen’s
Bench Division (Commercial Court) Feb. 21,
27, 29, Mar. 4, 6, 7, Apr. 16, 1996 Wynniatt-Husey
v. R. J. Bromley (Underwriting Agencies) PLC., H.G. Chester & Co. Ltd. and
Ruth Barbara Bromley JUDGE: Before Mr. Justice Langley Reinsurance —
Lloyd’s litigation — Negligent
underwriting — Duty of care — Names
incurred losses — Whether underwriter, managing agent and
members’ agent in
breach for failing to exercise reasonable skill and care in conduct of
and control and management of underwriting business —
Whether managing agents in breach for failing to exercise reasonable care in
supervision of underwriter. The plaintiffs were Names on Syndicate 475 at
Lloyd’s for one or more of the underwriting years 1987 to
1991. The first plaintiffs (the Bromley Agency) were the managing agen ts of
Syndicate 475 from Feb. 1, 1987 to dec. 1, 1991, and also acted as
members’ agents for some of the plaintiff Names. The third
defendant, Mrs. Bromley, was the widow and executrix of Mr. Bromley who was the
active underwriter of Syndicate 475 from the formation of the syndicate in 1983
until his dismissal by the board of the Bromley Agency in May, 1991. The second defendants (the Chester Agency) were the
managing agents of Syndicate 475 until February, 1987 when they were replaced
as such b ny the Bromley Agency. The Names alleged that Mr. Bromley was negligent in
exposing them to a risk of losses on catastrophes which was improper and
unjustified. They submitted that any prudent underwriter writing, as was Mr.
Bromley, excess of loss business in the London market should have planned and
monitored carefully the risk of aggregation of the exposure (i.e. the probable
maximum loss) (PML) of the syndicate to that risk which could arise in the
event of the worst case catastrophe which could sensibly be envisaged and then
acquired the level of vertical reinsurance protection sufficient to ensure that
in the event of such a catastrophe the syndicate was in fact exposed to a net
loss no greater than was reasonably to be expected by the Names. The Names argued tht Mr. Bromey did not in fact plan
or monitor the aggregate exposure of the syndicate in any meaningful sense and
never calculated a PML, alternatively if he did,m and in any event, he negligently
exposed the Names to a level of exposure which was quite unjustified in
particular as regareds the level of XL on XL and whole account business which
he wrote. The Names complained that the syndicate was presented as a general
marine synsdicate writing a “balanced” book of business both
in terms of the proportion of XL business written as against other business and
as regards the proportion of foreign (i.e., non-LMX) busines within the XL
account. The plaintiffs’ claims against the
various defendants were (1) against Mrs. Bromley as executrix damages for
breach of a duty of care in tort that Mr. Bromley would conduct the
underwriting business of the syndicates with skill care and caution reasonably
to be expected of a competent and prudent underwriter sengaged in LMX business. (2) Against the Bromley Agency in their capacity as
managing agents, for damages for breach of a duty of care in tort in relation
to the control and management of the underwriting business for the year 1989
and on the basis of vicarious liability for the conduct by Mr. Bromley of the
underwriting in that year, and for damages for breach of contract in 1990 and
1991 years for failing to control and manage the underwriting business of the
syndicate with the skill and care reasonably to be expected of a managing age
ncy carrying on business at Lloyd’s and on the same basis in
tort as for 1989. (3) Against the members’ agents
includig the Bromley and Chester Agencies for damages for breach of contract in
respect of the 1989 underwriting year only on the basis that the
members’ agen ts agreed (by implication) to ensure that the
underwriting busines of the syndicate would be carried onb with reasonable
skill and care. (4) Agaimnst the Chester Agency for breach of a duty
of care in tort to exercise reasonable care in the supervision of Mr. Bromley
and the Bromley Agency said to arise from the terms of an undertaking given by
the Chester Agen cy to Lloyd’s at the time (February, 1987)
when the Bromley Agency succeeded it as managing agents of the syndicate (the
discrete claim). — Held,
by Q.B. (Com. Ct.) (Langley, J.),
that (1) the purpose of coding the risks was to enable the underwriter to
assess the PML; the true position was t hat provided the XL of XL aggregates
coded XX were covered, Mr. Bromley bought such further protection as he
considered was available at a reasonable price and without reference to any or
any meaningful assessment of PML; as a matter of fact Mr. Bromley made no or no
meaningful assessment of the PML of the syndicate in any of the years, 1989,
1990 and 1991 (see p. 325, col. 2; p. 327, cols. 1
and 2); (2) it was not appropriate simply to apply a 100 per
cent. PML to the totality of the whole account because Mr.
Bromley’s coding system was inadequate or he could not have
known what was in nthe account or the extent of the risk of accumulatiojn; the
prudent underwriter would have had the requisite coding sysem or knowledge to
make the proper assessment, it was clear on the evidence that for primary
business or business wheree the cedant did not write XL business a reduced PML
was appropriate and there was no reason and no evidence to suggest that the
whole account would not have inckuded such business (see
p. 328, col. 2; p. 329, col. 1); (3) it would not be right whooly to ignore the outcome
or estimated outcome to the syndicate in [*311]
considering the PML which a prudent underwriter should have assessed, it did
provide some limited evidence that the business written by Mr. Bromley was not
as exposed to aggregation as that of the major players in the LMX market;
lilmited because while the prudent underwriter could have had it in mind he
could not have made any real assessment of it in advance (see
p. 330, col. 1). (4) the appropriate PML factors were on business coded
XX (XL of XL) a PML of 100 per cent.; on business coded XY (whole account)
where the XL content was 20 to 25 per cent. or more (effectively 35 per cent.
of the aggregates in the years 1989, 1990 and 1991) a PML of 100 per cent.; on
business coded XY (whoke account) other than the 35 per cent. aggreagates the
appropriate PML was not capable on the evidence, of an assessment with any real
degree of certainty; the minimum prudent PML factor for the aggregates forming
the balance of 65 per cent. of the whole account was 60 per cent., as regards
non-London accounts, for U.S. XL of XL, 100 per cent. and 25 per cent. for U.S.
whole account business; for Bermuda 100 per cent. (see p. 330, cols. 1 and 2, p. 331, cols. 1 and 2). (5) a prudent underwriter should have kept under
regular review the aggregates he was writing or being asked to write relative
to the level of protection he had acquired; he sahould have had in mind at all
times what his protections and aggregates were and ensured that there was
sufficient level of cover to match
his PML less only the risk of loss to which it was appropriate to expose his
Names (see p. 332, col. 1); (6) the documentary evidence supported the
plaintiffs’ case that the syndicate was presented as one in
which the XL account played a significant part bytr a part which was balanced
not only by the other accounts but also within itself, the
“target” increase in XL premium
percentage in 1989 and 1990 was attributed to rate increases not iincreases in
exposure; there was no suggestion that any unprotected exposurae was bieng
run let alkone any exceptional exposure and it was difficult to see how Mr. Bromley
could say with apparent confidence that claims for Hurricane Hugo and 90A would
be within the protection programme if he thought or knew he was in factg
running an unprotected exposure (see p. 333,
col. 2); (7) the picture of the syndicates’
account presented by Mr. Bromley as one aiming for 33 per cent. XL business by
premium income rising to 45 per cent. and 43 per cent. in 1989 and 1990 by
reason of rate increases would fully justify a figure of 50 per cent. maximum
on a risk reward approach to the issue (see p. 335,
cols. 1 and 2; p. 336, cols. 1 and 2); (8 the minimum required of Mr. Bromley actingh as a
prudent underwriter would have been to assess the PML at any date which might
be material; to have ensured that either the business was not written or
reinsurance protection was acquired to the extent necessary to ensure that at
any material time the syndicate was not exposed to an unprotected risk on that
PML greater than 50 per cent. of the stamp capacity; and to have done so by ensuring
that the risk of such exposure arose only at the top of and not at some
intermediate stage in the protection programme which should have been acquired
ito achieve the outcome (see p. 336, cols. 1 and 2); (9) to the extent that Mr. Bromley did not achieve
that outcome he fell below the standard of care to be expected of a prudent
underwriter and was in brech of the duty which he owed to the Nemes; the
Bromley Agency as managing agents would also be lkiable to the Names as would
the memvbers; agents for the 1878 year (see p. 336,
col. 2). (10) the amended points of claim clearly and
unequivocally alleged a continuing obligation on Mr. Bromley to monitor and
control the syndicatesֻ aggregates PML and protection on a
continuing basisd, and a breach ofa that obligation; Mr. Bromley should at all
times have taken steps to secure the level of protection for the syndicate or
should have declined to write bvusiness which if written would have increased
the unprotected exposure of the syndicate above that level; if he failed to do so that itself was a
breach of duty at each date it applied (see p. 337,
col. 2; p. 338, col. 1); (11) the only claims which might yet give rise to a
limitation defence by the members’ agents were those the
subject of the 6th writ (i.e. the claim would be barred if the breach of
contract occurred b efore May 15, 1989) (see p. 338,
col. 2); (12) the discrete claim against the Chester Agency
failed; the plaintiffs failed to establish the duty of care on which they relied;
there was no evidence that the Names or their agents were at any time aware of
or in any way relied on the terms of the undertaking given to
Lloyd’s by the Chester Agency; the undertaking did not
create an obliglation on the Cheser Agency to superv ise the Bromley Agen cy
but only to provide such administrataive or management support as the Bromley
agency or Lloyd’s considered necessary from time to time;
and there was no evidence that either the Bromley Agency or Lloyd’s
did consider such support to be necessary (see p. 338,
col 2); (13) Mr. B romley and the Bromley Agency were
responsible to the members’ agents for the proper conduct of
the syndicate’s underwritings; the
memgers’ agents were enteitled to the indemnity they claimed
against the Bromley Agency as managing agents of the syndicate and from the
estate of Mr. Bromley (see p. 339, cols. 1 and 2). —
— — The
following cases were referred to in the judgment: Arbuthnott
v. Feltrim Underwriting Agencies Ltd., Mar. 10, 1995 Unreported; Bell
v. Peter Browne & Co. (C.A.) [1990] 2 Q.B. 495; Berriman
(Sir David) v. Rose Thomson Young (Underwriting) Ltd. [1996] L.R.L.R. 426; Deeny
v. Gooda Walker Ltd., [1996] L.R.L.R. 183; [1995] 1 W.L.R. 1206; Iron
Trade Mutual Insurance Co. Ltd. v. J. K. Buckenham Ltd., [1989] 2
Lloyd’s Rep. 85; [*312]
Lee
(Paula) Ltd. v. Robert Zehil & Co. Ltd., [1983] 2 All E.R. 390; Merrett
Gooda Walker and Feltrim decisions, The (H.L.) [1994] 2
Lloyd’s Rep. 468; Saif
Ali v. Syndney Mitchell & Co., (H.L.) [1980] A.C. 198; Société
Commerciale de Réassurance v. Eras (International) Ltd. (C.A.)
[1992] 1 Lloyd’s Rep. 570; World
Navigator, The [1991] 2 Lloyd’s Rep. 23. —
— — This was an action by the plaintiff Names represented
by Mr. Ralph Ernest Wynniatt-Husey claiming against the defendants, R. J.
Bromley (Underwriting Agencies) Plc, H. G. Chester & Co. Ltd. and Mrs. Ruth
Barbara Bromley (the widow and executrix of the estate of Mr. Roy John Bromley
deceaed) damages for losses incurred by the pliantiffs caused by the alleged
negligent underwriting of the defendants in failing to obtain sufficient
vertical reinsurance protection to tprotect th Names agisnst catastrophe losses
thus exposing them ot an unjustified risk of loss. Mr. Kenneth Rokison, Q.C. and Mr. Nicholas Hamblen
(instructed by Messrs. Frere Cholmely Bischoff) for the Names; Mr. Julian
Flaux, Q.C., and Miss Sarah Cockerill (nstructed by Messrs. Cameron Markby
Hewitt) for the Bromley Agency and Mrs. Bromley in her capacity as executrix;
Mr. Simon Bryan (instructed by Messrs. Elborne Mitchell) for certain of the
members’ agents. The Chester Agency were not represented. The further facts are stated in the judgment of Mr.
Justice Langley Judgment was reserved., Tuesday
Apr. 16, 1996 —
— — A Introduction These proceedings concern allegations
of negligent underwriting of London Market Excess of Loss (LMX) reinsurance
substantially in the underwriting years 1989 and 1990. The Plaintiffs were Names or
underwriting members of Marine Syndicate 475 at Lloyds for one or more of the
underwriting years 1987 to 1991. The first-named Defendants, to whom I shall
refer as the Bromley Agency, were the Managing Agents of Syndicate 475 from 1
February 1987 to 1 December 1991. During that period the Bromley Agency also
acted as Members Agents for some of the Plaintiff Names. The second group of
Defendants are HG Chester & Co Limited, to whom I shall refer as the
Chester Agency, and various other Members Agents for some of the Plaintiff
Names during the period 1987 to 1991. The Chester Agency were also the Managing
Agents of Syndicate 475 until February 1987 when they were replaced as such by
the Bromley Agency. The third-named Defendant is the widow and executrix of Roy
John Bromley (“Mr Bromley”) who was the active underwriter of
Syndicate 475 from the formation of the Syndicate in 1983 until his dismissal
by the Board of the Bromley Agency in May 1991. The Names were represented by
Mr Rokison QC. Mr Flaux QC appeared for the Bromley Agency and Mrs Bromley in
her capacity as executrix and Mr Bryan appeared for certain of the Members
Agents. The Chester Agency, which is in liquidation, were not represented. B. The Claims As a consequence of earlier
Orders made by this Court the proceedings before me and to which this judgment
relates have a limited compass. First, all questions of quantum, both of amount
and principle, were excluded. Second, issues which arise on the pleadings as to
the adequacy of the extent of the “horizontal” [*313] reinsurance protections of the
Syndicate were also excluded from the trial, albeit the Names allege
substantial losses were suffered by the Syndicate as a result of the inadequacy
of those protections. Further, in the course of
presenting the case for the Names, Mr Rokison made it plain that the real issue
for determination at this stage is whether or no Mr Bromley’s
underwriting was negligent in the years 1989 and 1990 in that he failed to
obtain sufficient “vertical” reinsurance protection to
protect the Names against catastrophe losses in those years and thereby exposed
them to an unjustified risk of loss. Mr Rokison accepted that the court was not
concerned with the years 1987 and ..8 and whilst maintaining that the
underwriting was negligent in 1991 he acknowledged that the results of the
Syndicate in that year (as in the years 1987 and 1988) were not such as to give
rise or at least to be likely to give rise to any loss from a want of vertical
reinsurance protection. Although the path is now well
trodden I should perhaps explain that by “vertical” protection
I mean the maximum amount or upper limit of the reinsurance protection
available to the Syndicate against a catastrophe loss arising from damage to a
high value property such as an oil rig or an accumulation of claims arising
from one event such as a hurricane in the USA, and by “horizontal”
protection I mean the number of reinsurance protections available to the
Syndicate to protect it against a number of such events occurring in the same
underwriting year. C. The Legal Basis Of The
Claims C.1 Duty Of Care The legal basis of the claims
made against the various Defendants which are now before the Court can be
summarised as follows: (1) Against Mrs Bromley as
executrix damages for breach of a duty of care in tort that Mr Bromley would
conduct the underwriting business of the Syndicate with the skill care and
caution reasonably to be expected of a competent and prudent underwriter
engaged in LMX business; (2) Against the Bromley
Agency, in their capacity as Managing Agents, for damages for breach of a duty
of care in tort in relation to the control and management of the underwriting
business of the Syndicate for the year 1989 and on the basis of vicarious
liability for the conduct by Mr Bromley of the underwriting in that year; and
for damages for breach of contract in the 1990 (and 1991) years for failing to
control and manage the underwriting business of the Syndicate with the skill
and care reasonably to be expected of a Managing Agency carrying on business at
Lloyd’s and on the same basis in tort as for 1989; (3) Against the Members
Agents, including the Bromley and Chester Agencies where acting in that
capacity, for damages for breach of contract in respect of the 1989
underwriting year only on the basis that the Members Agents agreed (by
implication) to ensure that the underwriting business of the Syndicate would be
carried on with reasonable skill and care. (4) Against the Chester Agency
for breach of a duty of care in tort to exercise reasonable care in the
supervision of Mr Bromley and the Bromley Agency said to arise from the terms
of an undertaking given by the Chester Agency to Lloyd’s at the time
(February 1987) when the Bromley Agency succeeded it as Managing Agents of the
Syndicate. That undertaking recorded in the preamble that it was the intention
of the Chester Agency and a requirement of Lloyd’s that the Chester
Agency should continue to provide support as necessary to the Bromley Agency by
way of the services of its directors and employees and by its terms the Chester
Agency undertook that it would provide such administrative/management support
to the Bromley Agency as Lloyd’s or the Bromley Agency should from
time to time consider necessary and would provide and not withdraw the services
of two of its employees (a Mr Welch and a Mr Martin) for a period of 5 years or
if unable to do so would provide substitutes of equivalent experience and
skill. In summary, the claims against
Mrs Bromley as executrix are in tort for both 1989 and 1990; against the
Bromley Agency as Managing Agents in tort and vicarious liability for 1989 and
in tort vicarious liability and contract in 1990; against the Members Agents in
contract only and for 1989 only; and a discrete claim against the Chester
Agency for breach of a duty of care in tort said to arise from the undertaking
given to Lloyd’s. The reason for the different
basis of the claims against the Management Agents and Members Agents is the
consequence of the change in the regulatory requirements at Lloyd’s
for the 1990 year which in the light of earlier decisions there is no need to
explain in this judgment. Indeed the consequence of those decisions and in
particular the decision of the House of Lords in The Merrett Gooda Walker and
Feltrim decisions [1994] 3 All ER 506, [1994] 2 Lloyd’s Rep 468 is that
(with the exception of the discrete claim against the Chester Agency) each of
the bases on which the claims are put is, as the Defendants accept, established
in law. Nor in consequence of that decision is it, at least in terms of the
duty owed whether in contract or tort, necessary to consider more than whether
Mr Bromley’s underwriting fell below the standard of a reasonably
competent professional underwriter as regards the level of vertical reinsurance
protection purchased for the syndicate. If it did the Defendants (again leaving
aside the discrete claim against the Chester Agency) are in principle liable on
each of the bases alleged. If not, not. C.2 Standard Of Care As to the standard of care,
that is the standard of a professional underwriter holding himself out as
possessing the skill and experience reasonably required to underwrite a marine
account which, on any view of the evidence, contained a significant proportion
of Excess of Loss (“XL”) and LMX business. There is no
dispute that such business was of a high risk nature. That does not mean in my
judgment that some special and stricter standard of care applies in the sense
that the standard differs from that of a reasonable underwriter but only that
his conduct is to be considered in the context of underwriting an account which
included such business. Nor, in my judgment, is it right to say as Mr Bryan
submitted, that in a case of professional negligence the burden on the
Plaintiffs to prove negligence is a higher or stricter one than in other cases
where negligence is alleged. The test is and remains whether any error of
judgment (if such there was) was such as no reasonably well-informed and
competent underwriter, writing the business Mr Bromley wrote, could have made: Saif
Ali v Sidney Mitchell & Co. [1980] AC 198, [1978] 3 All ER 1033
per [*314] Lord Diplock at page
220D of the former report. Whilst it may in some cases be more difficult to
establish that a judgment which turns out to have been erroneous was negligent
and there may be more room for legitimate differences or ranges of opinion
about matters of judgment the fact remains that professional men are frequently
engaged to exercise and rewarded for the exercise of judgment and if in the
course of that engagement they fall below the standard reasonably to be
expected of them then they will have been negligent. It is of course the case that
the standard of care has to be considered against the standards of the time
when the question arises and a court must eschew hindsight. It is, as I will
explain, one of the perhaps unusual features of this case that it is the
Defendants who say that subsequent events have proved Mr Bromley right or at
least not so wrong as to merit a finding that he was negligent. Just as it
would be wrong to conclude that simply because the Names suffered substantial
losses so Mr Bromley must have been negligent, equally it would be wrong to
conclude that simply because those losses were nowhere near as severe as in
other cases which are now well known therefore he was not negligent. C.3 Breach of Duty Mr Bryan submitted that when
considering the question of breach it was necessary to consider what a
competent underwriter could legitimately have done in relation to vertical
protection not what “a paradigm underwriter” would or might
have done. I agree. However Mr Bryan sought to distinguish between what he
called the correct test of the “minimum legal obligation” and
the “minimum reasonable method of performance” referring to
the judgments of Mustill J (as he then was) in Paula Lee Limited v Robert Zehil
& Co. Limited [1983] 2 All ER 390 at 394d and of Parker LJ in the World
Navigator [1991] 2 Lloyd’s Rep 23 at 28R For my part, when the breach
alleged is a want of reasonable care and not for example a failure to deliver a
minimum number of items under a contract of sale, I do not think this
submission of any relevance. In the latter case a Defendant is entitled to say
I was not in breach because I in fact delivered the minimum agreed quantity of
the items or, more usually, that damages for breach of contract are to be
assessed on the basis that I would have delivered only that minimum quantity.
But in the former case where the obligation itself is to take reasonable care
it will be broken if the defendant fails to take the care which is the minimum
reasonably to be expected in the circumstances. In this case I have to
determine the factors which a reasonably competent underwriter should have
taken into account in deciding what level of vertical protection to acquire and
risk to run and applying those factors to determine the minimum level of
vertical cover which should have been acquired by Mr Bromley. If that level is
greater than the level of cover in fact acquired to that extent Mr Bromley will
have been negligent. The consequence in money terms, if any, to the Names are
not a matter for this trial. C.4 Causation The Defendants submit that the
cause of any losses which may be proved was the unprecedented size and number
of the catastrophes which occurred in the years 1987 to 1990, and not any
breach of duty. That, as it seems to me, begs the question: if I conclude that
more vertical protection should have been acquired and, if (which it is not for
me to determine at this trial) had it been acquired certain losses would not
have been suffered at all or would have been suffered only to a reduced extent
then in my judgment those losses or the increased extent of them would plainly
have been caused by the failure to obtain more cover. C.5 Damage As I have said this trial is
not concerned with issues of quantum. However, insofar as the claims are
founded in tort and not in contract it is trite law that there can be no
liability unless any breach of duty, if such there was, caused loss to the
Names. Mr Rokison submits that if a
proper, ie. non-negligent approach to the underwriting of the Syndicate’s
account would have resulted in either less XL business being written or more
vertical cover being acquired then that is of itself damage for the purposes of
the law of tort and in any event on the present estimated figures the likely
losses to the Syndicate in 1989 arising from its exposure to Hurricane Hugo
(the hurricane which struck the Caribbean and East Coast of the USA in
September 1989) and in 1990 arising from the UK and Continental European
windstorm in January 1990 would have been reduced or extinguished. He
acknowledges that in 1991 the chance of any losses from want of vertical cover
are remote. In effect Mr Rokison submits that on a trial limited as this one
is, I can go no further as regards the claims in tort than deciding the
negligence issue and if in strict law that is not, as it is not, determinative
of liability as such so be it. I agree as otherwise, as it seems to me, the
rationale of the agreed split trial ceases to exist That said, I should record
that in particular the Plaintiffs submit that even if the consequences of any
finding I might make as to the proper level of vertical cover were such that
the actual losses to the Names when established were within the parameters of
the extent of risk an underwriter could reasonably [*315]
have allowed the Syndicate to run that would not avail the Defendants if they
would nonetheless have been reduced or eliminated had that level of cover been
in place. The Defendants, for their part, submit that the losses are or are
likely to be such that the Names can have no valid complaint about them. They
also submit that had Mr Bromley sought to acquire more vertical protection the
cost of it would have exceeded and in effect out-balanced any losses which are
likely to arise, but they acknowledge that any calculations of that sort must
await a subsequent hearing if there is to be one. The only comment I would make
is that if the Defendants are right this trial will have served no useful
purpose. D. The Issues The major issue is of course
whether Mr Bromley’s underwriting was negligent in the sense stated
above as regards the level of vertical protection acquired for the Syndicate in
the years 1989 and 1990. There are, however, two subsidiary issues (l) the
discrete duty said to be owed by the Chester Agency and (2) a limitation point.
The latter arises in particular in the case of the Members Agency against whom
the only claim is in contract for the year 1989. These proceedings were
commenced by the Names in six separate Writs (subsequently ordered to be
consolidated) as more Names gave their support to the claims. The first Writ
was issued on 23 August 1993. The second on 20 October 1993, the third on 14
June 1994, fourth on 28 October 1994, fifth on 19 December 1994 and the sixth
and last on 15 May 1995. The relevant limitation period is six years from the
breach of contract if such there was. The first relevant claim is in respect of
the 1989 underwriting year. It is necessary therefore to consider, if I find
there were breaches, when they occurred. Although the Plaintiffs have sought to
rely in their pleadings on s 14A(6) of the Limitation Act 1980 as an answer to
the limitation plea on the basis that the Names had no knowledge of the
material facts about the claim or other matters relevant to the action prior to
three years before the issue of the Writs that is, on the authorities, no
answer where the claim is founded and only founded on a breach of contract and
not in tort: Iron Trades Mutual v Buckenham [1989] 2 Lloyd’s Rep 85
and Scor v Eras [1992] 2 All ER 82, [1992] l Lloyd’s Rep 570. I should
also mention that, in the event they are held liable to the Plaintiffs, the
Members Agents claim an indemnity or contribution of 100% from the Bromley
Agency, the estate of Mr Bromley and the Chester Agency. E. Summary of The Parties
Cases on Negligence Essentially the Names’
case is that Mr Bromley was negligent in exposing them to a risk of losses on
catastrophes which was improper and unjustified. They say that any prudent
underwriter writing, as was Mr Bromley, Excess of Loss Business in the London
Market should have planned and monitored carefully the risk of aggregation of
the exposures in the Excess of Loss business he wrote, then considered the
practical maximum exposure (PML) of the Syndicate to that risk which could
arise in the event of the worst case catastrophe which could sensibly be
envisaged and then acquired the level of vertical reinsurance protection
sufficient to ensure that in the event of such a catastrophe the Syndicate was
in fact exposed to a net loss no greater than was reasonably to be expected by
the Names having in mind the nature of the Syndicate, what they were told about
it, and what they should have been told about it on the basis they were
properly advised by their Members Agents. The Names put the last figure at no
greater than 50% of the Stamp capacity of the Syndicate in the relevant year. The Names’ case is
that Mr Bromley in fact did not plan or monitor the aggregate exposure of the
Syndicate in any meaningful sense and never calculated a PML, alternatively if
he did and in any event he negligently exposed the Names to a level of exposure
which was quite unjustified in particular as regards the level of XL on XL and
whole account business which he wrote. They also say the Syndicate was
presented as a general marine Syndicate writing a “balanced” book
of business both in terms of the proportion of XL Business written as against
other business and as regards the proportion of foreign (ie non-LMX) business
within the XL account. The Defendants case is that,
in the unfortunate circumstance of Mr Bromley’s death, and on the
evidence available, it is not possible to second guess what Mr Bromley did; the
calculation of a PML and the level of exposure reasonably to be retained are
matters uniquely for the judgment of the particular underwriter who will know
his book of business, that Mr Bromley as an experienced XL underwriter must in fact
have approached and on the evidence did approach those questions by way of a
judgment of the PML and the best evidence that his judgment was a reasonable
one is to look with hindsight at the claims which have in fact been made on the
Syndicate as a result of the unprecedented series of catastrophes which
occurred in the years 1987 to 1990 from which they say it is apparent that not
only will Syndicate 475 not suffer losses of anything like the same order as
other Syndicates or companies who are well known to have been devastated by
them but also such vertical [*316]
losses as have occurred or may occur are well within the bounds of what could
or should reasonably have been expected in the case of such a Syndicate. That,
they submit, provides the best evidence that, whatever the details of how Mr
Bromley approached it, his judgment as to the appropriate PML for the Syndicate
cannot be criticised at all let alone as a negligent one. F. The Evidence Perhaps not surprisingly in
the absence of Mr Bromley the oral factual evidence was of a limited nature.
Two witnesses were called by Mr Flaux, Mr Wills who was deputy underwriter of
the Syndicate at the material times and Mr Hough who was assistant underwriter
to Mr Bromley for the XL business of the Syndicate. I found both Mr Wills and
Mr Hough straightforward and patently honest witnesses albeit their evidence
was inevitably of limited relevance in view of the character and conduct of Mr
Bromley which I refer to below and which each of them frankly acknowledged. The
Members Agents called no factual evidence of their own. Expert opinion evidence
was given by Mr David Neil on behalf of the Names and by Mr Richard Outhwaite
on behalf of the Defendants. Mr Neil had been a non-marine
underwriter at Lloyd’s until 1993. His knowledge of marine business
was therefore limited. On the other hand, there is nothing to suggest that the
principles of underwriting marine LMX business were any different from
non-marine LMX business in which Mr Neil had considerable experience. I found
Mr Neil an impressive witness who was ready to concede points even where they
might be thought to be against the interests of the Names, knew what he was
talking about and gave objective professional evidence which was intended to
and did assist the Court. Mr Outhwaite had been a marine
underwriter at Lloyd’s for many years. In the 1970s he had written a
marine account which had involved him in the calculation of PMLs but he had not
done so in the l980s when he avoided LMX business save for back-up policies and
some low layer covers. He therefore had no experience of writing an LMX book
such as that of Syndicate 475 in the relevant period when the LMX market
expanded considerably. That said, however, Mr Outhwaite gave evidence with
considerable authority and emphasis. His basic thesis was that it was really
impossible for anyone on the information available to second guess what Mr
Bromley had in fact done in assessing the level of vertical protection to
acquire for the Syndicate and that the assessment of a PML and of the extent of
unreinsured exposure it was appropriate to run were matters uniquely for the
underwriter concerned whose knowledge of his account no one else could hope to
be able to duplicate. This thesis made his evidence particularly difficult to
penetrate. For example he offered no opinion on what would have been an
appropriate PML for Syndicate 475. Thanks to the good sense of
the parties a considerable quantity of documentary evidence was placed before
the court on the basis that it should be treated as evidence admitted under the
Civil Evidence Act 1968 leaving questions of the weight to be attached to it to
me. By way of summary, that documentary evidence consisted of: (l) Records of XL risks
written by the Syndicate in the years 1988 to 1991 which were produced from the
Syndicate’s computer records in June 1995 and which recorded the
reference number of the risk, the introducing broker, the name of the Assured,
the layer of cover concerned and the size of the line written; (2) Copies of slips and the
underwriting information provided with them; (3) Reinsurance cover notes
from 1988 to 1991; (4) Claims records; (5) The Syndicate’s
Reports and Accounts; (6) Minutes of the Board
Meetings of the Bromley Agency; (7) Notes of meetings and
correspondence with Managing and Members Agents which purport to record
statements and explanations about the Syndicate’s business given by Mr
Bromley to Agents; (8) Transcripts of evidence
given to the “Casson” review. In December 1993 Lloyd’s
appointed Mr Jeremy Casson, a partner of Touche Ross & Co, to review and
report on the circumstances giving rise to the run-off account losses sustained
by the Syndicate on its 1989 and 1990 years of account; (9) The report made by Mr
Casson, following his review, to the Council of Lloyd’s dated 14
February 1995. As to that the parties were happy for me to read the report but
the extent of its admissibility as evidence was limited; (10) So called “monthly”
aggregate reports which were contemporaneous computer-generated reports
intended to record the total “anticipated” in-force exposures
of the Syndicate at a given date. These reports were in sterling and showed the
overall aggregates for the Whole Account and XL of XL writings of the Syndicate
separately as well as the aggregates for the Rig, Hull, Cargo and War accounts.
Each account was also split into “London” and “London
and USA” business. In addition under the heading “Major
Accumulations in respect of foreseeable losses” the reports showed
three further totals, namely for a “Rig Loss” the total [*317] aggregates of the whole account,
XL of XL account and the Rig and Hull accounts, for a “Marine
Catastrophe” the total aggregates of the whole account, XL of XL
account and the Hull and Cargo accounts, and for a war loss” the total
aggregates of the whole account, XL of XL account and the Cargo and War
accounts. Although described as “Monthly” these reports, so
far as they are available today, were produced at the following dates: 1986: 1 November 1988: 1 March, 1 April, 1 May
and 3 July 1989: 7 January, 4 March and 5
December 1990: 1 January, 2nd and 16
February, 3 March, 5 April, 3 June and 8 August 1991: Substantially at the
beginning of each of the first six months of the year. The evidence is uncertain as
to whether or not the reports I have listed were the only ones which were in
fact available during the period from 1988 to June 1991. Both parties have
asked me to make a finding whether that was so or not. The evidence of Mr Wills
was that once the records were computerised whilst they were not available
“on line” they were produced at least twice a year and he
suspected more frequently. Mr Hough said the reports had to be requested from a
computer bureau and paid for, he thought they were produced monthly but, when
told of Mr Wills’ evidence, he said that was so “at the very
end.” He could not say if there had been others but they were prepared
regularly either monthly or quarterly as well as being available on an ad hoc
basis. On balance this evidence suggests to me that until 1991 there was in
fact no regular system for obtaining such reports but that they were asked for
as and when it seemed relevant to do so. Moreover, whilst recognising the risk
that such documents may have become lost, it seems to me that as the ones
produced have survived the probability is that no others were in fact obtained
and I so find. (11) Weekly premium and
written liability reports which showed the aggregates and written premium
income of the business written in a given underwriting year (ie not on an
in-force basis save at the end of the calendar year). The same headings for
categories of business were used as for the “Monthly Reports”
but in addition the other categories of the Syndicate’s business were
also shown (such as yachts and legal liabilities). It was Mr Outhwaite’s
evidence, which was not challenged, that these reports could also have been
used to obtain the in-force aggregates at any given date by comparing the
figures at that date with the figures at the same date in the previous year to
calculate the additional business written which could then be added to the
total aggregates at the end of the previous year. (12) Equitas forms, being the
forms completed on behalf of the Syndicate in 1995 to record the exposure on
certain major catastrophe events, including payments made and the reinsurance
protections applicable. Where relevant I shall
indicate and seek to resolve in this judgment any disputes about the accuracy
of what is recorded in these documents but for present purposes it suffices to
say that in general I see no reason not to accept their contents as accurate
and I, like the parties, have therefore derived much of the factual material
referred to below from them. I am quite satisfied that their contents are
probative of those facts and figures at least to an extent sufficient to
justify the conclusions I reach. G. The Basic Facts I now intend to set out what
in my judgment can to a large extent fairly be described as substantially
undisputed matters of fact or matters which I am satisfied are established in
evidence about the history of Syndicate 475, the personalities involved, the
nature of the Syndicate’s business and the principles to be applied in
underwriting it, and the relevant figures which give rise to the Names’
allegations and claim. G.1 Mr Bromley and the
Bromley Agency In opening the case for the
Names Mr Rokison described Mr Bromley as a successful and respected marine
underwriter. Mr Bromley’s career was in the Company market until May
1982, when he retired from Sphere Drake Underwriting Ltd. at the age of 60. He
had been the marine underwriter at Sphere Drake since 1968. He had been elected
to the Committee of the Institute of London Underwriters and chaired the Excess
Loss Liaison Committee. Mr Outhwaite, who knew Mr Bromley, said that from his
own knowledge of him Mr Bromley had a knowledge and perception of LMX business
of a high order. It was Mr Bromley’s plan and ambition on his
retirement to turn his skills to forming a Syndicate at Lloyd’s to
write all classes of Marine Business. With that in mind he formed the Bromley
Agency to manage the proposed syndicate, but was not at first successful in his
application for the Agency to be admitted as a Lloyd’s underwriting
agency. As a result the original plan changed and in May 1983 the Chester
Agency, which was an established and well respected agency at Lloyd’s,
applied to form a new syndicate with Mr Bromley as the active underwriter and
the [*318] Chester Agency as
Managing Agents. The new syndicate was approved in about July 1983 and given
the number 475. The Chester Agency continued as Managing Agents of the
Syndicate until February 1987, when the Bromley Agency obtained approval as a
combined Managing and Members Agent to manage Syndicate 475, and the Bromley
Agency thereafter assumed the responsibility of managing the Syndicate. That
approval was, however, given subject to compliance with a number of
requirements, one of which was that the Chester Agency should, as it did, give
the undertaking to Lloyd’s to which I have referred above: Cl (4). So far as material the
Directors and employees of the Bromley Agency were as follows: Mr Bromley. Mr Bromley was
Chairman and Managing Director as well as active underwriter of the Syndicate
until he was dismissed by the Board from those posts in May 1991. Mr Bromley
committed suicide in January 1993. Mr Welch. Mr Welch was one of
the two employees of the Chester Agency who was referred to in the undertaking given
by that Agency to Lloyd’s. He was a very experienced Marine
underwriter including writing Excess of Loss Business and was the active
underwriter of Syndicates 65/69 Until he retired in August 1989. The Defendants
served a short statement from Mr Welch under the Civil Evidence Act 1968
stating that he could not attend the trial because of ill health. He had known
Mr Bromley for many years. Although it is clear that Mr Welch did not attend
any Board Meetings of the Bromley Agency after May 1988 (when he was first
taken ill) he said he was kept informed by the Minutes of Board Meetings and
regular telephone conversations with Mr Bromley. Mr Martin was the other
employee of the Chester Agency referred to in the Lloyd’s undertaking.
He was the Managing Director of the Chester Agency until he resigned in
December 1991. He was appointed Chairman of the Bromley Agency on Mr Bromley’s
dismissal in May 1991 and resigned as a Director of the Bromley Agency in
February 1992. Mr Boardman was the Agency
Manager of the Syndicate from July 1983 to November 1987. Mr Wills (who gave evidence)
joined the Syndicate as Deputy underwriter on 1 September 1986 when he was aged
40. He was appointed a Director of the Bromley Agency in late 1986 or early
1987 and following Mr Bromley’s dismissal in May 1991 was appointed
active underwriter of the Syndicate. Mr Wills had acquired experience of
writing Marine risks in the Company market particularly since about 1979 but he
readily acknowledged that he was not in any way a specialist Excess of Loss
underwriter. In fact during Mr Bromley’s period as active underwriter
Mr Wills’ primary responsibility was for the direct Hull and Rig
accounts with only a minor involvement in the Excess of Loss account which Mr
Bromley dealt with. After the Piper Alpha catastrophe in 1988 Mr Wills said
only Mr Bromley dealt with the Excess of Loss account and even his minor
involvement with it ceased. Mrs Clouting was appointed a
Director in August 1988. She had been with Mr Bromley at Sphere Drake and acted
as his personal assistant. As a Director her responsibility was administration
and she was the compliance officer of the Agency. Mr Lister was appointed a
Director in October 1988. He joined the Agency to be active underwriter of
Syndicate 1148 which was a non-Marine syndicate formed in September 1988. Mr
Lister had been engaged in underwriting overseas since September 1972. Mr Weatherby was appointed a
Director in October 1990. Prior to that he had acted as Company Secretary. He
was also Company Secretary and accountant to the Chester Agency and Syndicates. Mr Hough was never appointed a
Director of the Bromley Agency. He was the senior assistant underwriter on
Syndicate 475 and assistant to Mr Bromley on underwriting. He was also in charge
of data processing. He joined the Bromley Agency in September 1982 and apart
from spending about six months in 1983 observing the operation of another
marine syndicate had no underwriting experience when he joined the Agency. In 1987 and thereafter the
share capital of the Bromley Agency was divided into 100 A shares and 99,900 C
shares (increased to 149,900 in 1989). Whilst the holders of the C shares were
entitled to all dividends declared, save for limited purposes, only the holders
of the A shares had voting rights. Mr Bromley held a majority of the A shares
until 6 June 1989 when his holding was reduced to 44 shares. Mr Bromley always
held a majority of the C shares. The consequence was that
throughout the period with which the Court is concerned Mr Bromley was not only
the active underwriter of the Syndicate but the Chairman, Managing Director and
majority or largest shareholder in the Bromley Agency as well. In November 1991, after Mr
Bromley had been dismissed, the management of the Syndicate and the members
agency business of the Bromley Agency were transferred to Spratt and White
Limited. However the Syndicate failed to achieve sufficient capacity to
underwrite for 1992, wrote virtually no new business after 1 September 1991,
and ceased to trade and was placed in run off on 31 December 1991. In April
1993 a resolution was passed that the Bromley [*319]
Agency be placed in voluntary liquidation. Spratt and White conducted the run
off until December 1993 when they were succeeded by Quay Run Off Services
Limited who in June 1994 were themselves succeeded by P & B Run-off
Limited. I do not find it necessary to
record in any detail the circumstances of Mr Bromley’s dismissal by
the Board of the Bromley Agency. There is ample evidence that Mr Bromley was
both autocratic and arrogant. He appears to have believed, with some
justification if one leaves Mr Welch out of account, that no one else at the
Agency had any real understanding of XL marine underwriting and in any event he
was not the sort of man to take kindly to questions about his underwriting or
to answer them if anyone did have the temerity to ask them. Really for the
first time, in 1991 the Board became seriously concerned about his underwriting
and sought to question him about it in a meaningful way and in particular to
limit the acceptances of XL business by him. Mr Bromley’s attitude was
that he was not going to provide the Board with information about the level of
the Syndicate’s reinsurance protections relative to its aggregate
exposures, he knew and they did not, and they must trust him. The Board,
however, was no longer prepared to tolerate that. Although the Defendants
submitted that it would be wrong to conclude from what Mr Bromley said and did
in 1991 that the same applied to his conduct in earlier years I am quite
satisfied that it did even if his conduct in 1991 could be said to be an
extreme example of it. The legal obligations of the
Managing Agents of a syndicate, such as the Bromley Agency, to the Names on the
syndicate are now well established. They employ the underwriter. In this case
as a result of the management and shareholding structure of the Bromley Agency
and Mr Bromley’s personality the underwriter and the Managing Agents
were effectively the same. Indeed the evidence is really overwhelming that
until a few months into 1991 the Board of the Bromley Agency did not have the
expertise to question Mr Bromley’s underwriting nor did it have the
inclination. The one man who did have the expertise at least to ask the right questions
was Mr Welch but after April 1988 he was not present at Board Meetings to do
so. Moreover Mr Outhwaite said Mr Welch like Mr Bromley was himself an
underwriter of the old school by which is meant, to put it colloquially, his
word was law. As regards XL underwriting I am quite satisfied that Mr Bromley
was effectively a law unto himself. In any event, as a matter of
law, if Mr Bromley’s underwriting was negligent then the Bromley
Agency is liable to the Names for that negligence. If he was not then the fact,
as I find, that the Agency failed to discharge its duty to monitor his
underwriting would not be causative of any loss to the Names and so adds
nothing to the basic issue of whether Mr Bromley’s underwriting was
negligent or not. G.2 LMX Underwriting Although there is an issue as
to how those in the market and Members Agents in particular perceived or should
have perceived the nature of the business written by Syndicate 475 and in
particular the extent of its writing of LMX business there is very little real
dispute about the characteristics of that business. It is also acknowledged
that Mr Bromley was or at least should have been aware of those characteristics
and of the principles to be applied in underwriting it at the time. I propose therefore
to set out those characteristics and principles so far as relevant in summary
form. In doing so I readily and gratefully acknowledge the assistance of the
judgments of Phillips J in Deeny v Gooda Walker Ltd. [1995] 4 All ER 289,
[1995] 1 WLR 1206 and Arbuthnott v Feltrim Underwriting Agencies Ltd.
(Unreported 10 March 1995). (1) LMX business was
reinsurance on an excess of loss basis underwritten in the London market. It
could be the XL reinsurance of a direct underwriter (primary or first tier reinsurance)
or of an XL reinsurer of the direct underwriter (second tier) or of such a
second tier reinsurer (third tier). (2) At the second and third
tiers the insurance could be written either as XL of XL or as a whole account
cover. Whilst the former would protect only the XL writings of the cedant, the
latter (whole account covers) would protect the whole account of the cedant
including but not limited to his own XL writings. Where, of course, the cedant’s
writings did include XL business the whole account cover was to that extent no
different in principle or effect from XL of XL. Thus Mr Bromley himself bought
protection for Syndicate 475 on a whole account basis (not XL of XL) the major
purpose of which was to protect the XL account he had himself written. No doubt
he appreciated that others in the market including his own cedants acted in the
same way. (3) The purpose of acquiring
such reinsurance was to protect the cedant from aggregate accumulations in his
account in the event of a catastrophe loss whether from the loss of a high
value risk such as an oil rig or an accumulation of losses from a single event
such as a hurricane. It would take the form of a series of layers of protection
up to the vertical limit which the underwriter considered it prudent to
acquire. Whilst the lower or working layers could be expected to be impacted
with some frequency the higher layers could be expected to be impacted only by
major catastrophe losses. It was this perception that led to the higher layers
(where [*320] there would be no or
limited claims experience to rely on) being rated by way of a percentage of the
exposure (rate on line) and to that rate itself being a percentage of the rate
for the layer which underlay it. Thus the higher the layer in general the lower
it would be rated. (4) There were a limited
number of Lloyd’s and Company reinsurers which underwrote LX business.
In consequence, and as the market grew in the 1980s, many reinsurers were
reinsured by those they were themselves reinsuring. Underlying retentions
tended to be small and, at least in the marine market, co-insurance was
uncommon. (5) The further away the
reinsurer was from the original business the less he knew or could know about
the nature of or risk of accumulations on his cedant’s business. It
was not the custom for cedants or brokers to provide aggregate information or
the level of their own protection on their accounts when placing their
reinsurance. (6) The features in (4) and
(5) in particular gave rise to what was called “the spiral” or
“the spiral effect” which became greatly exacerbated by the
late l980s and had the effect of concentrating a catastrophe loss on the few
and not spreading it among the many albeit the latter was the major rationale
of reinsurance., (7) For the purposes of these
proceedings two features of the spiral should be stated. First the consequence
of claims arising from a particular catastrophe accumulating in the accounts of
those who wrote LMX business and being repeatedly passed on as claims to their
reinsurers was that the amount of the original insured loss was magnified as it
passed within those accounts albeit of course actual payments to the original
assureds could never exceed the total insured loss. By way of illustration Mr
Outhwaite said that the insured loss to the London market of the Piper Alpha
catastrophe in July 1988 was some BN to .2BN but as the claims passed through
LMX accounts it reached a total in Lloyd’s alone well in excess of
$10BN. The effect was not only that the higher layers of protection were
impacted in the case of a catastrophe far more easily but also that the
protection they were thought to provide was to a great extent rendered illusory
as once a loss was in the spiral it would progress through the layers almost automatically
subject only to the second feature of the spiral described in (8) below. It was
also a consequence that the practice of rating the higher layers as a
percentage of the underlying layer did not reflect the real risk undertaken. (8) The second relevant
feature of the spiral was that the only significant way in which catastrophe
losses would cease to spiral was as one or more LMX reinsurer exhausted the
vertical level of their protections and so ceased to contribute to the spiral.
Moreover, as Mr Outhwaite really acknowledged and Mr Flaux accepted, there was
no way an individual underwriter could tell whether he would exhaust his
protections before others did and so assess whether a substantial part of the
loss would fall on them rather than on his Syndicate. The information was not
available to do so and whilst Mr Outhwaite said an underwriter such as Mr
Bromley would have some understanding as to which underwriters ran an exposure
and which did not the fact is (as is now apparent) that many who thought they
were running no or no substantial exposure were wrong and sadly disillusioned
by events. No other underwriter could, as it seems to me, have known as much
let alone more about other underwriters’ accounts than those
underwriters thought they knew about them nor could an underwriter properly
have conducted his own account on the basis that others would exhaust their
covers before he did and so cease to contribute to the spiral causing it to
slow or stop. To have done so would be to rely on luck not judgment. (9) It follows, and on the
evidence was or should have been understood at the relevant time by those
writing LMX business such as Mr Bromley, that it was essential for an
underwriter to protect and the only way in which he could protect the Syndicate
against serious losses arising from accumulations on his account to take a
number of steps. First he had to know the aggregate exposures which he had
written (or was proposing to write) on his XL account and to keep them under
review as might be necessary. That was or should have been a reasonably
straightforward exercise in the sense that the cover would typically be on the
basis of lines of a fixed percentage of the exposure on a given layer of cover.
Whilst the signed line might be written down later if the cover was
over-subscribed, that was not usual in the late l980s on LMX business and in
any event systems should have been in place to anticipate it or at least record
it when notified. (10) The second step required
of the LMX underwriter was to assess the probable maximum loss (PML) to the
Syndicate in the event that the worst practical catastrophe occurred to which
his account might be exposed. That was an exercise of judgment in two respects.
The relevant type of catastrophe had to be identified and then the probable
maximum exposure to such a catastrophe assessed. However the range of judgment
required seems to me on the evidence and as I find to have been a limited one.
For a marine underwriter the relevant catastrophe might well be a disaster
affecting one or more rigs in the North Sea or a US hurricane such as Hurricane
Hugo (as there is no dispute in this case that a marine underwriter such [*321] as Mr Bromley should have
anticipated a potentially severe impact on his account of such an apparently
non-marine catastrophe). To assess the PML would, for any catastrophe chosen,
require that the XL of XL account be assessed to be effectively a total loss
involving 100% of the aggregates on the account and that the same would apply
to whole account covers which were in reality equivalent to XL of XL covers.
The reasons for that were the effect of the spiral and the lack of knowledge
of, or opacity of, the underlying business which I have described above. The
extent to which a PML lower than 100% might reasonably be applied to the
balance of the whole account is one of the major issues which I have to
determine. It is also in issue whether Mr Bromley in fact ever did take the
step of assessing the PML on the Syndicate’s XL account. (11) The third and final step
required of the LMX underwriter was to acquire reinsurance protection to a
vertical level sufficient to protect the Syndicate against the PML to the
extent that he considered it reasonable to do so. That also involved judgment
but again on the evidence and as I find a judgment with limited parameters in
which a prudent underwriter could reasonably operate. Whilst it seemed on
occasions that the Defendants were contending that a prudent underwriter could
take into account the likelihood of the relevant catastrophe event in fact
occurring I do not accept that. The purpose of a PML calculation is to assess
the probable maximum loss which could arise from an event which could in a
practical sense be envisaged. Whilst an underwriter could decide that it was
reasonable to expose the Names to part or even all of a loss from such an
event, in agreement with Phillips J, I do not think he could do so to any
greater extent than should reasonably have been anticipated from the known
features of the business of the Syndicate without expressly warning the Names
and their Agents both of what the loss could be and of his decision to expose
them to the risk of it without protection. If it was the underwriter’s
judgment that the cost of protection was too high he could of course limit the
exposure by writing less XL business. In this case the second major issue is
the extent to which Mr Bromley could without negligence or express warning
expose the Names to loss from a properly assessed PML. There is agreement that
this issue is to be considered in the context of the Stamp Capacity of the
Syndicate in each year. Mr Neil’s opinion is that the maximum proper
exposure would have been 50% of the stamp. Mr Outhwaite offered no opinion as
to a maximum but concluded that to run a net vertical exposure of the order of
60-75% of the stamp in 1989 and 1990 was “entirely reasonable”.
It is this issue which raises the question of how in terms of risk the
Syndicate was or should have been perceived by Names and Member Agents. (12) I would add that, whilst
established at the time, the practice of presenting the accounts of LMX
Syndicated or information about them in terms of the level of premium income to
be derived or in fact derived from the various parts of its business and of
writing business against expected or hoped for levels of premium income could
lead to misunderstanding. The key feature of LMX business which the underwriter
had to consider was the exposures he wrote and the level of protection he
acquired to limit that exposure. Whilst premium income levels may be an
indication of exposure they are not necessarily so let alone a substitute for
the procedures described above. If premium rates rise less exposure can be
written for the same income. If more higher layers and so lower rated covers
are written more exposure may accrue for the same or less premium. It is also
the case that estimates of premium income can themselves be significantly
affected by subsequent and unpredictable events. It was common for covers to be
provided on the basis of one or in the marine market usually two reinstatements
(in the event of a layer being the subject of a claim) at the same or some
other agreed premium as the original layer. Those premiums would be payable
only when the claim on the layer was paid which could be some considerable time
after the loss. It was also possible for the original premium to be fixed by
reference to the level of his anticipated premium income represented by the
cedant on placement. If that level were subsequently exceeded further premiums
would be due. H. The Figures I now propose to set out the
evidence on the material aspects of the Syndicate’s accounts. H.1 Stamp Capacity These figures are derived from
the Casson Report and the evidence of Mr Hough. In 1984 (the first year) the
capacity was £3.05M Thereafter on an annual basis it rose to
£5.48M, £9.51M, £14.88M, £23.0lM
(1988), £25.5M (1989), £35.86M (1990) and £39.19M
(1991). H.2 Premium Income The gross premium income after
12 months and the proportion of it attributable to XL income are also set out
in the Casson Report and can be derived from the Syndicates Reports and
Accounts and the documents annexed to the Plaintiffs’ document denoted
“P2”. The figures in £000s were: [*322]
lainly these figures show a
generally rising level of XL premium income and a rising percentage of that
income as part of the total premium income. The figures for net premium
income after 36 months are also set out in the Casson Report and can be derived
(with one minor exception) from the same sources as the gross premium income
figures. They were in £000s:
These figures show that whilst
the amount of net XL premium income was rising XL was reasonably static as a
percentage of the total net premium income between 1987 and 1991. H.3 Aggregates There are a number of sources
for the aggregate figures on the XL account: the Casson Report, the so-called
“monthly” aggregate reports, the weekly reports and the
record of all XL risks written in the years 1988 to 1991 produced from the
Syndicate’s computer records in June 1995. In some instances the
figures derived from these sources may differ but not in amounts which could
not reasonably be explained by timing differences in the writing of business or
the recording of information or, no doubt, by errors of in-putting the
information which were subsequently corrected. By way of illustration the
figure to be derived from the “monthly” report at 3 January
1990 was some £114M whereas that derived from the June 1995 print-out
at 2 January 1990 was, I was informed, in excess of £129M However it
is notable that the “monthly” report for 2 February 1990 also
showed aggregates in excess of £129M Whilst the Defendants suggested
that Mr Bromley was entitled to make his judgments on the basis of the figures
that were produced to him (ie. the monthly” reports) I do not think
that is right for two reasons. First, I think it probable that the June 1995
figures were in fact the accurate ones reflecting for example business written
in the month of January but incepting at the beginning of the year and
subsequent corrections of errors. Second, I think it is not in dispute that Mr
Bromley should have been aware not only of the business he had written but the
business he intended or expected to write and particularly so in the context of
deciding what level of protection he should acquire for the Syndicate. Indeed
it is the Defendants’ case that Mr Bromley would have had and he alone
could have had an intimate knowledge of his account. For those reasons, and
insofar as it may become relevant hereafter, the figures which are set out
below and which are derived from the “monthly” aggregate
reports may very well understate the true aggregates at the dates shown and in
my judgment it is the true figures by which the level of protection in fact
acquired and which ought to have been acquired should be judged. The figures derived from the
“monthly” aggregate reports are as follows in pounds
sterling:
Whilst the above figures
are those for the aggregate’s of the Syndicate’s XL of XL and
Whole accounts the XL business written included amounts of US XL of XL and
Whole account as well as Bermudan and other overseas business. I mention that
because it may be that different PMLs could properly be applied to those parts
of the account as considered later in this judgment. One thing which is very
striking from these figures is the increase in aggregates over the years and in
particular from mid-1988 through 1989 and in to 1990. H.4 The Limit of Vertical
Protection The level of vertical
protection acquired by Mr Bromley for the Syndicate was increased from time to
time and did not always incept from the beginning of the year. Further there
were occasions on which the covers were not fully placed giving rise to what
was I think inaccurately termed “co-insurance”. A better
description would be an involuntary retention. In particular in the first half
of 1988 Mr Bromley purchased further layers of protection on 1 March
(£10M excess £33.5M) on 1 April (£5M excess
£43.5M) and on 1 June (£2.5M excess £48.5M) and
in 1989 the top layer (£2.5M excess £51.5M) was 39%
unplaced and in 1990 several layers were not fully placed and the top layer
(£2.5M excess £52.250M) was unplaced as to 30.05% With those factors in mind and
derived from the reinsurance cover notes and allowing for the underlying
retention the top limit of vertical cover was:
Thus, from
mid-1988 to 1990 the top limit of cover hardly increased at all. H.5 Summary To summarise some of the
information on the figures which I have set out above:
Hurricane Hugo occurred
in mid-September 1989, and the UK windstorm 90A on 25 January 1990. There is
evidence that in September 1989 the XL aggregates were of the order of
£107.007M The cover was 52.875M The aggregates at the time of 90A
were, for the reasons to which I have referred above (H3), probably of the
order of the figure shown at 2 February rather than 3 January. These figures starkly
illustrate the very considerable growth in aggregates and the lack of any
concomitant growth in the level of vertical protection. There is nothing in the
evidence which remotely suggests that there was any change in the nature of the
XL business written by Mr Bromley in this period which could explain these
figures nor was it submitted that there was or could be. Indeed, as the
evidence is that premium rates for XL business rose considerably following the
Piper Alpha catastrophe in July 1988 the increase in aggregates is the more
remarkable. As Mr Outhwaite accepted any increase in aggregate exposures
between 1988 and 1990 had to be the result of Mr Bromley writing new risks or
increased lines on renewal business and not the result of increased premium
rates. Mr Hough did suggest that Mr Bromley may have thought that the increase
in rates meant that the risk of loss if he wrote more business was thereby
reduced. I do not find that at all convincing and if Mr Bromley did have it in
mind he should not have done. Relative to the increase in unprotected aggregates
any increase in premium was always likely to be insignificant and of course the
cost of protection was equally affected by the increase in rates. Whilst on the findings which I
make below as to a reasonable PML which should have been applied to these accounts
it is not appropriate to use the 100% aggregate figures for the purpose it is
nonetheless relevant to express these figures in terms of the total unprotected
exposure the syndicate in fact had as a percentage of stamp capacity at various
dates.
I shall have to return to
these figures in considering the issue of negligence but even granted the
application of a PML they are startling and demonstrate both how the level of
protection acquired appears to bear no resemblance to the aggregates written
and how, expressed as a percentage of stamp capacity, the level of exposure to
which Mr Bromley committed the Names appears to have no consistent pattern or
rationale. H6. THE LOSSES SUFFERED BY THE
SYNDICATE It is the incidence of losses
in fact suffered by the Syndicate which the Defendants rely on not only to
demonstrate how different was the actual outcome of Mr Bromley’s
underwriting to that of others who wrote LMX business (and indeed have been
held to have been negligent) but also as evidence which they submit and Mr
Outhwaite says can fairly be used to demonstrate that his underwriting was not
in any way negligent. I will therefore summarise the
evidence here. The overall results of the
Syndicate derived from the annual reports and accounts were as follows in
£000s:
The results for 1989, 1990 and
1991 are stated after 5, 4 and 3 years respectively of the run off of the
accounts. The evidence as to the extent
to which these losses arose from exposures in excess of the vertical limit of
the Syndicate’s protection programme comes from a number of sources.
First, there are the paid and incurred claims figures for the catastrophe
losses. Second, various estimates of the ultimate loss figures have been made
by those (P & B Run-off Limited) conducting the run-off of the Syndicate’s
accounts for the years 1989 to 1991. Third, the Defendants have produced a
statement of certain actuverdana calculations made by Mr English on a paid
claims basis which the Plaintiffs agreed should be before the court as showing
some estimate of the ultimate gross losses from Hurricane Hugo and 90A, both
parties recognising that they were only estimates and could prove to be wrong.
It should also be noted that incurred figures should be viewed with some
caution as they may not ultimately turn into paid claims for various reasons
including wrong notifications and the insolvency of cedants or other underlying
insurers which may for example lead to commutations. In addition the ultimate
loss from the Exxon Valdez catastrophe in March 1989 may prove to be an
over-estimate as a result of recent developments in proceedings in the USA With those caveats, the
figures are as follows:
Thus, granted the real
uncertainty about the estimate for Exxon Valdez (the incurred figure at 30
September 1995 was $70.780) the only catastrophe losses which are projected to
exceed the level of protection are Hugo (where the incurred figure of $126,620
already exceeds the cover) and 90A (where the incurred figure at 30 September 1995
was £56.240). Moreover the extent of any unprotected exposure is not
enormous. If one takes the estimates for Hugo and 90A as a percentage of the
stamp capacity of the Syndicate at the time they occurred using an exchange
rate of £1 : $1.67 the figures are: Hugo (1) P
& B $22M or £13.17M or 54% of Stamp (2) English
$13.4M or £8M or 31% of Stamp 90A (1) P
& B £8.725 or 24% of Stamp (2) English
£0.825 or 2.3% of Stamp These figures are plainly in marked
contrast to those I have set out above relative to the total XL exposures of
the Syndicate at the time. They also demonstrate that the proportion of the
overall losses suffered by the Syndicate in 1989 and 1990 attributable to the
level of vertical protection being exceeded is not large. It is not material
for me to consider the reasons for the other losses. Moreover it is well known
that other Syndicates suffered enormous losses on these and indeed other
catastrophes in the years 1987 to 1990 and of a quite different order of
magnitude to those which Syndicate 475 seems likely to suffer. I should, however, also record
that the estimates of ultimate losses have fallen as time has passed. Thus, in
the case of Hugo, the Syndicate’s accounts for the year ended 31
December 1993 included an estimated ultimate reserve for Hugo of $37.5M or
£24.4M or some 96% of Stamp capacity. That serves to demonstrate not
only the uncertainty in estimates but also the difficulty in judging the true
exposure of the Syndicate even some years after a catastrophe caused at least
partly, as I think, because of the underlying problem of making a judgment
about the effect of the spiral on others in the market. Finally, under this heading,
the Defendants submit that Mr Bromley did and was entitled to derive comfort
from the fact that Piper Alpha was contained within the Syndicate’s
protections. The figures for Piper Alpha at 30 September 1995 show incurred
losses of $88.860M Those figures have not altered significantly for some three
years. The limit of the vertical protection at the time was $102M I. Mr Bromley’s
XL Underwriting I now turn to consider the
evidence as to how in fact Mr Bromley did conduct the underwriting of the
Syndicate’s XL account and in particular how he assessed the level of
reinsurance protection which it was appropriate to acquire to protect the
Syndicate against catastrophe losses. There are a number of issues which have
arisen in this context. The Plaintiffs say that the system of coding aggregates
followed by the Syndicate was inadequate and such as to make any proper PML
assessment impossible or inadequate. They contend Mr Bromley in fact made no
PML assessment at all or none worth the name. They also contend that the
picture presented of the Syndicate and the way it would and should have been
perceived by the Names was one of a well-balanced general marine syndicate
which would not be expected to be of the high risk/high reward nature of other
Syndicates known to write almost exclusively or at least very substantially LMX
business. All these matters are in dispute and whilst the ultimate questions
for me to determine are how a prudent and careful underwriter should have acted
(even if I find Mr Bromley did not act as such) and how the Syndicate ought to
have been perceived given proper advice to the Names from their Member Agents,
it is necessary for me to reach conclusions on them in order to address those
questions. In the absence of Mr Bromley,
and granted the admittedly limited nature of the knowledge of both Mr Wills and
Mr Hough as to what Mr Bromley’s practices actually were, the only way
in which this can be done is to seek to draw reasonable inferences from the
documents and the overall picture of Mr Bromley’s conduct of the
Syndicate’s business. My reasoning and conclusions on the proper PML
which should have been assessed are set out in s J of this judgment. I.1 The Coding of
Aggregates The system of coding of
aggregates followed by the Syndicate was that XL of XL risks were coded XX and
whole account risks were coded XY. I am satisfied on the evidence that the
codes were applied by reference to the description of the business on the
heading of the slip. I am also satisfied that Mr Neil is right in saying that
of the whole account risks so coded some 35% in each of the years 1989, 1990
and 1991 were whole account covers for cedants who were acknowledged to be
writers of LMX business and whose whole accounts had an XL content greater than
20-25%. Indeed Mr Neil’s evidence about this was not challenged. It
was Mr Neil’s opinion that such risks should have been coded as XL of
XL because the risk of aggregation was no different from XL of XL risks. Mr
Outhwaite did not seriously challenge that the risk of aggregation was or at
least could well be the same but said (as did Mr Hough) that how risks were
coded was immaterial so long as the underwriter took account of the XL of XL
content in his whole account writings when considering the appropriate PML for
that account. Bearing in mind the ultimate issues I have to determine Mr
Outhwaite and Mr Hough must, I think, be right about this. However the
Plaintiffs point to what they call the miscoding of risks as some evidence to
support their case that Mr Bromley did not in fact assess a PML at all. It is agreed that the purpose
of coding risks is to enable the underwriter to assess the PML. It is also
agreed that at least in principle the PML for XL of XL risks is 100% whereas
the PML for whole account risks may be a lower percentage. Whilst I accept that
there was no standard system for checking or coding aggregates and Mr Bromley
had available to him full information on the risks he wrote, in my judgment if
it was his practice to assess a PML and to do so with proper care it is
surprising that he adopted a coding system which did not readily fulfil its
purpose of enabling him to make the necessary assessment. Whilst I can accept
that the underwriter should know in general terms what is in his whole account
I cannot accept that he could expect to have or keep in his mind figures for
the total aggregates written to cedants whose business included a substantial
XL content, so as to be able to monitor the aggregates and PML in order to
assess the adequacy of the protection available to the Syndicate. It follows that I think the
way Mr Bromley coded the risks is some indication that he may not have carried
out a PML assessment at all or at least that his approach to it was flawed. It is material to note that,
albeit at a date which is uncertain, a risk (CR Hill) coded XY was in fact
re-coded XX where it appears the LMX content of the account was some 23% to
27%. That, as it seems to me, adds force to Mr Neil’s criticisms of
the coding system and to his opinion that in such a case a whole account cover
was in reality no different from an XL of XL cover in terms of the risk of
aggregation. Moreover Mr Neil quoted examples of whole account covers where 40%
to 50% of the cedant’s premium income was derived from XL business and
in one case approaching 80%. I.2 Did Mr Bromley Assess a
PML? Mr Outhwaite could not believe
that Mr Bromley, with his background and experience, would not have made a PML
assessment on his XL account. He pointed out that, whatever the coding system
adopted, all the necessary information was available to Mr Bromley to do so
both in writing and, as Mr Outhwaite would have it, in Mr Bromley’
head as the underwriter of the business. He also said that the “monthly”
aggregate reports in giving total aggregate figures for a Rig loss, a marine
catastrophe and a War loss themselves indicated that Mr Bromley must have had a
PML approach in mind. Both Mr Outhwaite and Mr Neil did not find it surprising
that no record had survived of any PML calculations that might have been made
by Mr Bromley, as it could have been done on a piece of paper which there would
be no need to retain or which might not have been retained. Further the Defendants point
to two (and only two) documents which they suggest establish that Mr Bromley
did make an assessment of the PML. They are notes of two meetings with Members
Agents held on 29 August and 11 September 1990. The first note records Mr
Bromley’s response to an enquiry as to how he calculated the amount of
reinsurance to buy. The response was that he took his aggregates in any
particularly defined area and added the XL (of XL) account aggregate and
“a percentage of the whole account that he believed would be exposed”.
The second note is to the same effect. Whilst these statements
unquestionably show the sort of approach to assessing a PML which it is agreed
should have been carried out and amount to an acknowledgment that the XL of XL
account should have a 100% PML they also suggest that Mr Bromley saw the
entirety of the whole account as appropriate for some lower percentage PML but
give no indication of what that percentage was or how it was derived. There is evidence that on 18
January 1989 some 6 months after Piper Alpha Mr Bromley reported to Members
Agents on what he believed to be the exposure of the Syndicate to that
catastrophe. Although described in the Casson Report as an “estimate
of PML”, and the Report suggests that Mr Bromley’s estimate
for the loss was based on a PML of 100% of specific Rig accounts and XL of XL
accounts and 30% of the whole account I cannot myself deduce the latter figure
(30%) from the documents and it is probable that the exercise was the result of
what I would term an after-the-event exposure analysis (examining those
contracts in fact impacted and likely to be impacted by claims made) which is
in some ways the antithesis of a PML assessment which is designed to asses the
impact of the worst practical catastrophe which could occur in the future in
order to assess the extent of protection required. I note that the Points of
Defence originally pleaded that Mr Bromley adopted a PML in 1989 for “a
Piper Alpha scale loss in the region of 30% for his whole account business”
but that allegation was deleted by amendment. Nonetheless the document is
undoubtedly further evidence for the fact that in the context of Piper Alpha Mr
Bromley considered it appropriate to take “as a total loss the 100%
aggregate of all lines written protecting XL of XL”. It is also of
some significance that Mr Bromley is on record as saying in May 1989 that the
Syndicate’s gross loss for Piper Alpha would not exceed $70M In fact
it is now known, as I have stated, that the actual loss is of the order of $88M
That at least suggests that even with the benefit of 6 months claims
information he got the answer wrong and if he was applying any form of PML he
got that wrong too. Mr Wills did an exposure analysis of the Piper Alpha loss
in 1991. That analysis produced a gross loss in excess of $99M which included
97% of XL of XL and 64% of whole account aggregates. He also was therefore
proved to be wrong. Mr Wills’ evidence
was that he did not know how Mr Bromley assessed the level of protection to
acquire, it was never explained to him or the Board of the Bromley Agency and
there was no discussion of PMLs to which he was a party. He said he assumed Mr
Bromley looked at the aggregates and the cover available to satisfy himself
that the protection was adequate. He said he never had any meaningful
discussion with Mr Bromley on the subject and indeed that such discussions as
they did have were meaningless, although, in agreement with Mr Hough and the
documents, he added that Mr Bromley would often stress that the XL of XL
aggregates were fully protected. Mr Hough’s evidence
was that insofar as Mr Bromley did discuss underwriting philosophy with him it
was not in terms of PML and he could not remember what it was save that Mr
Bromley used historic records (including records of the business he had written
at Sphere Drake) to make projections to assess the vertical cover needed. Some clues to Mr Bromley’s
approach (as well as evidence of Mr Hough’s concerns about the level
of protection available to the Syndicate) are to be found in a note Mr Hough
prepared for Mr Bromley dated “15/9” but plainly written in
1989. The note was written because Mr Hough was about to go on holiday and it
set out his “thoughts” on the renewal reason for the 1990
account in the context of a review of the 1989 account and the “latest
monthly accumulation report”. The note recorded that: the aggregate
exposures for a vertical loss were “now twice the amount of protection
in place”; “we have never looked to buy 100% of the
accumulation shown” in the report; the “accumulations are
only likely to grow”; there was an “increasing content of XL
as a percentage of our accounted income” which “now seems to
have reached 50%; and that the perception in the market was that the Syndicate’s
whole account protection programme certainly at the top end was “one
of the cheapest around”. Mr Hough said in evidence that it was his
view that the level of vertical protection was inadequate but he could not
recall any real reaction from Mr Bromley to the note. However Mr Bromley did
write some comments on the note. One of those comments, written against the
reference to the aggregate exposures being now twice the amount of protection,
was “reinstatement premiums in event major catastrophe loss”;
another, written against the cheapness of the protection programme, was
“great”. Had Mr Bromley assessed a PML
for the whole account on any logical basis it would, I think, have been natural
for him to have said so in response to this note. The reference to
reinstatement premiums was hardly an adequate answer, but it was the only one
given. Further the cheapness of the protection programme was, as Mr Hough’s
note itself implied, two-edged. If the premium for the upper layers had been
pared to the bone no further layers were likely to be available at the same
price. There is other evidence that
Mr Bromley’s approach to the purchase of reinsurance protection was
principally focused on cost rather than a PML assessment and that on occasions
when I think it would have been reasonable to expect him to say that he had
made such an assessment if he had he did not. Mr Wills was not aware of Mr
Bromley planning the amount of exposure he would write as opposed to the amount
of premium income. The Minutes of the Board meeting of the Bromley Agency held
on 13 June 1989 record that Mr Bromley informed the Board that a further layer
of whole account protection of £2.5M excess £5l.5M was half
placed but that “rates for new business have increased from 3% to 6%
on line which is considered to be too expensive”. At the Board meeting
held on 19 April 1991, when Mr Bromley’s back was to the wall and he
was being pressed about the level of protection relative to aggregates, Mr
Bromley said it was unnecessary for the Board to know the slip exposure’,
they must accept his judgment as underwriter, and “it was not
necessary for him to conform to what the rest of the market did (my emphasis)
since it was conspicuously less successful than he was”. Even allowing
for Mr Bromley’s character, this strongly suggests to me that he had
no consistent or logical explanation to give or he would have done so and that
he was not one to follow the standard approach to assessing aggregates and the
level of protection to be acquired. Further, as I have already
said, I think the way in which risks were coded is some indication that no or
no meaningful PML assessment was carried out as the system did not fulfil the
purpose of enabling that readily to be done and kept under review. The major factor which
impresses me on this issue is, however, the impossibility, as I find, of making
any sense of the actual figures of the Syndicate’s aggregates and
level of reinsurance protection if a consistent and meaningful assessment of
PML had been made. I have set the figures out earlier in this judgment (see H3,
H4 and H5) and the inescapable fact is that the level of aggregates increased
substantially but the level of protection did not, and no sensible explanation
has been offered for why that might properly be so. Mr Outhwaite did suggest,
albeit somewhat tentatively, that the outcome of Piper Alpha might lead an
underwriter to change his view of the PML but there could be no certainty as to
that outcome for some time and it would hardly be a safe analogy in
circumstances where much greater exposure was subsequently undertaken and a
more serious catastrophe such as the loss of two rigs or a more expensive rig
could practically have been envisaged. Mr Outhwaite also suggested, supported
by Mr Wills, that there was nothing unreasonable in buying more cover when it
was cheap and so Mr Bromley could have done so in the first half of 1988 (when
such cover was cheap) even though it was not then strictly needed on his PML
assessment but could have been done with an eye to writing more exposure in the
future and on the basis that it was easier to renew such covers than acquire
them for the first time. However I do not think Mr Bromley was the sort of
underwriter who would buy cover he thought was unnecessary, especially when
there could be no guarantee that it would be renewed let alone at the same
price, and I think this points much more to the acquisition of cover being
dependant on price and not any PML assessment. Moreover had he intended to
write more exposure I think he should have said so. In fact he said the
opposite as appears below (see K2.1 and K2.2) which, whatever the merits of the
theory, belies it as a matter of fact. In these circumstances it does
not surprise me at all that the Defendants have been unable to offer any
suggested PML factors which Mr Bromley could consistently have applied and
which could even remotely explain the figures. When Mr Outhwaite agreed that
what PML Mr Bromley had in fact assessed was a matter of pure speculation he
could and perhaps should have said that no amount of speculation could produce
an answer that made sense. In my judgment the true
position was that, provided the XL of XL aggregates coded XX were covered, Mr
Bromley bought such further protection as he considered was available at a
reasonable price and without reference to any or any meaningful assessment of
PML. He may have thought there would not be a catastrophe loss which could
impact the whole account aggregates to any serious extent, but I find that as a
matter of fact Mr Bromley made no or no meaningful assessment of the PML of the
Syndicate in any of the years 1989, 1990 and 1991 J. What PML Should Have
Been Assessed for Syndicate 475 J.1 The Views of The
Experts Granted my finding that Mr
Bromley in fact made no or no meaningful PML assessment (and even if he did, no
one knows what it was) I have to deduce the minimum PML which a reasonable
underwriter should have assessed for the XL account from the expert evidence
and such assistance as I get from the evidence which I have set out and
referred to in considering the issue whether or not Mr Bromley in fact did assess
a PML. The views of the experts may
be summarised as follows. Mr Neil’s opinion was
that the London XL of XL aggregates should be given a 100% PML, the 35% of the
London whole account aggregates which reinsured business which itself included
20 to 25% of XL business should also be given a 100% PML and the same applied
to the balance of 65% of the whole account because the coding system adopted by
Mr Bromley was such that he could not know and did not understand what part of
the account was XL of XL or how it might accumulate. As regards the non-London
business Mr Neil’s opinion was that US XL of XL should be given a 100%
PML, US whole account a 25% PML, Bermuda business a 100% PML and foreign XL a
75% PML. The 75% for foreign XL was calculated on the basis that it would be
split equally between XL of XL and whole account covers which would have PMLs
of 100% and 50% respectively. Apart from the work he had done in reaching the
35% figure for 20 to 25% XL business protected by the whole account Mr Neil had
done no further analysis of the underlying business in the whole account. Mr Outhwaite did not offer any
PML figures but confined himself to comment and criticism of Mr Neil’s
figures. That was because his basic theme, as I have said, was that no one could
second guess the underwriter who alone would have the relevant knowledge to
assess his account and make the subjective judgments required. He did not
seriously challenge that risks coded XX should be given a 100% PML. He said the
35% of the whole account which protected business which itself was 20% to 25%
XL business should not necessarily be given a 100% PML because the risk of
aggregation depended on the layers written and reinsured for example where the
cedant was known to reinsure in excess of his own PML so the risk of exposure
at the higher layers was minimal, albeit he agreed that if the account was
heavily exposed to XL risks “something nearer 100% would be assessed”.
As to the balance of 65% he said that would include direct or primary XL business
or no XL business at all and if so a much reduced PML could be applied to it.
He described Mr Neil’s figures for the non-London accounts as wholly
arbitrary: the appropriate PML would depend on the underwriter’s
knowledge of the extent they might aggregate with other areas if a PML event
occurred. Mr Neil accepted that if the
underlying business in the 65% of the whole account he had not analysed could
be broken down into categories of XL business of more than 10% but less than
20% to 25% and less than 10% then those categories could properly have a PML
less than 100% applied to them. His figure, on that basis, was 80%, noting the
real risk of accumulation from business written within Lloyd’s. But he
also accepted that insofar as the whole account included business with less
than 10% XL content a 50% PML would have been reasonable. As to Mr Outhwaite’s
evidence, if it was intended to suggest that absent the underwriter the court
was not in a position to make its own assessment of a proper PML I reject that.
I am satisfied on the evidence before me not only that a prudent underwriter
would have applied percentages to the various sections of his account but also
that there is sufficient evidence as to the parameters which such an
underwriter should have used in doing so to enable me to reach a conclusion on
the question. That said, and despite Mr Rokison’s protests, I bear in
mind that the burden of proof is on the Plaintiffs, that the test requires me
to consider the lowest reasonable PML which should have been applied by a
prudent underwriter, and therefore where the evidence is uncertain as to what
proportion of the account falls into one or other category which I consider to
be material it is right that in reaching my conclusions I should adopt an approach
which gives to the Defendants the benefit of that uncertainty. With that in mind, I cannot
accept that it is appropriate simply to apply a 100% PML to the totality of the
whole account because Mr Bromley’s coding system was inadequate or he
could not have known what was in the account or the extent of the risk of
accumulation. The prudent underwriter would have had the requisite coding
system or knowledge to make a proper assessment. Indeed the Defendants forcibly
make the point that the result of applying a 100% PML is that the overall PML
would be some 95% of the total aggregates of the XL business written by the
Syndicate. Whilst Mr Rokison says that is not surprising when what is being
addressed is only XL business I do not accept that and nor did Mr Neil who
readily accepted that the l00% approach was an over-cautious one. I think it is
clear on the evidence that for primary business or business where the cedant
did not write XL business a reduced PML was appropriate and I see no reason and
have heard no evidence to suggest that the whole account would not have
included such business and I would expect it to do so. Further, although (see
J2 below), I have major reservations as to the extent to which the actual
losses likely to be suffered by the Syndicate are material to this issue I do
think they provide some support for concluding that it would be wrong simply to
apply a 100% PML to the entirety of the whole account. I would add that although it
was Mr Neil who put forward the 100% figure he readily accepted, as I have
said, that a prudent underwriter who did know his book of business could
reasonably have adopted a lower PML figure. Despite the considerable debate as
to the amount of detailed work which would have been required in order to split
the whole account into relevant categories to enable a PML to be properly
assessed, in this context that is not material. The prudent underwriter should
have known and had systems in place to inform him. J.2 The Relevance of The
Losses Suffered by The Syndicate It was a, if not the, major
plank of the Defendants’ case on the appropriate PML that the losses,
or lack of them, likely to be suffered by the Syndicate demonstrated that the
level of cover in fact obtained was appropriate for the exposures which the
Syndicate had. It was said that Mr Bromley was entitled to be pleased and
comforted by the fact that it appeared that Piper Alpha would be contained
within the protections, as in fact it has been, and the likely losses on Hugo
and 90A (and the likely lack of any losses from other catastrophes) also
demonstrated for “near PML events” and events which fully
engaged the spiral that the level of cover was appropriate which was the best
evidence now available of what the Syndicate’s PML in fact was at the
time. Mr Outhwaite, whilst not
suggesting that they represented the PMLs in fact adopted by Mr Bromley, said
it was appropriate to work backwards from the results in order to assess the
reasonableness of the judgments Mr Bromley made at the time as to the
appropriate level of protection. He said that the losses in question were
spiral losses and “therefore ... are a true reflection of (the
Syndicate’s) PML from spiral business”. In doing this
exercise Mr Outhwaite acknowledged that larger original losses could have been
envisaged which would have caused “some additional claims to circulate
from underwriters who have not run out of cover” or claims arising
from other direct or primary covers and made allowances for that. On this basis
he said that as the estimated loss on Piper Alpha was $89M and if that figure
was increased by an allowance of 20% a reasonable PML would have been $107M
whereas the cover was $102M; and for Hugo, if the incurred loss of $126.5M was
increased by an allowance of 10% to $139M, that would be a reasonable PML
estimate whereas the cover was 08M leaving a net exposure of $3lM or, depending
on the exchange rate, of between 61% and 75% of the stamp capacity. In my judgment and, as I think
Mr Outhwaite himself really recognised to a substantial extent in a paper
delivered to a reinsurance conference in April 1988, there are several flaws in
this reasoning and approach: (1) The underlying premise is
that the actual outcome could have been predicted by the prudent underwriter in
advance of the catastrophe. In fact the outcome of any spiral loss to any
reinsurer who does not protect his aggregates to 100% depends on the outcome to
other reinsurers. As I have said (see G2(8) above), any substantial leakage
from the spiral came only from other reinsurers exhausting their covers, and
neither that nor its extent was predictable by another reinsurer. A major
reason why a PML exercise was required was the unpredictable nature of spiral
losses. Mr Bromley may have been lucky, but he could not reasonably have relied
on luck. (2) As Mr Neil said and Mr
Outhwaite acknowledged larger loss events could practically have been
envisaged. Mr Outhwaite’s thesis was that because of the spiral, apart
from the sort of allowances he made, that would not give rise to a greater loss
because other reinsurers would still have exhausted their covers as they did.
However that is really no more than the same point as (l) above and suffers
from the same flaw. (3) If Mr Outhwaite were right
there is no explanation for why the reasonable “PML” should
produce such a different outcome for Piper Alpha than for Hugo. In fact, of
course, no underwriter could assume that the exposures, covers, and PML
assessments of others would remain the same, indeed after Piper Alpha the
reasonable assumption would be that those who did suffer losses might well take
steps to avoid a repetition whereas Mr Bromley himself substantially increased
the exposures of the Syndicate but not the cover. I, like Mr Neil, can see no
justification in the outcome to the Syndicate of Piper Alpha for changing the
PML albeit I, also like Mr Neil, accept that Mr Bromley would have been
entitled to take some comfort from that outcome. Nonetheless, I do not think it
right wholly to ignore the outcome or estimated outcome to the Syndicate in
considering the PML which a prudent underwriter should have assessed. It does,
I think, provide some limited evidence that the business written by Mr Bromley
was not as exposed to aggregation as that of the major players in the LMX
market. Limited because whilst I think, as Mr Outhwaite said, the prudent
underwriter could have had it in mind I do not think he could have made any
real assessment of it in advance and of course the fact in any event remains
that in all probability both Hugo and 90A will result in significant losses,
contrary, as appears below (see K2.1), to Mr Bromley’s views about
those losses at the time. J.3 Findings on PML Factors In my judgment the appropriate
PML factors were as follows: (l) On business coded XX (XL
of XL) a PML of 100%. There is, as I say, no real dispute about this and there
is evidence that Mr Bromley himself recognised that these aggregates should be
fully protected. (2) On business coded XY
(whole account) where the XL content identified in evidence by Mr Neil was 20
to 25% or more (effectively 35% of the aggregates in the years 1989, 1990 and
1991) also a PML of 100%. I accept Mr Neil’s evidence on this and I
reject Mr Outhwaite’s suggestion that a lower percentage was or might
be appropriate because some of the layers of some cedants might reasonably be
thought to be less exposed than others. That suggestion was not put to Mr Neil
in cross-examination nor did it appear in either of Mr Outhwaite’s
Reports. In any event I do not think an underwriter could prudently assume that
another underwriter who sought and paid for cover would not or might not
require it for the protection of his account. Indeed where a whole account
contained a significant amount of XL business it would be likely that the
cedant would consider that part of his account to be most at risk and therefore
the major reason for his seeking to protect it conscious of the risk of
aggregation. The effect of the spiral in magnifying the amount of the claim as
it spiralled upwards was such that any contrary assumption would in my judgment
have been unjustified and wrong. A PML is of course the probable maximum loss.
I am satisfied that there was no sensible distinction to be drawn in terms of
the risk of accumulation and PML between this category of business and XL of
XL. It was known that many in the LMX market protected their accounts by whole
account covers. Mr Bromley himself did just that. (3) On business coded XY
(whole account) other than the 35% of aggregates referred to in (2) the
appropriate PML is not capable, on the evidence, of an assessment with any real
degree of certainty. The evidence and factors which I have taken into account
in reaching my conclusion expressed below (in addition to the burden of proof
and the need to assess a minimum prudent figure referred to above) are the
following: (i) It was my impression that
in giving his evidence Mr Neil was accepting that the 65% balance of the whole
account aggregates was in respect of business which contained less than 20% of
XL business. Mr Rokison said I was wrong about that and both the Plaintiffs and
the Defendants at my invitation have provided me with references to the
transcript so I can review the position. Having done so I accept that what Mr
Neil said was that he did not go through every slip but had identified those
cedants who wrote 20% to 25% or more of XL business by selecting those he
believed to be substantial XL of XL writers. On the other hand he was plainly
not in a position to say that there were any others in the 65% who wrote that
level of XL business. His view was that granted there were none included who
were writing “anything like” 20% of XL of XL business an
appropriate PML for the 65% would be not less than 80%. A PML of 25% to 50% would
in his opinion be wholly inappropriate because the original business, whatever
its nature, would be written in the Lloyd’s marine market and the risk
of accumulation from the same insurers being on the direct insured loss was
therefore considerable. In my judgment, bearing in mind the burden of proof,
whilst it would not be right to conclude that the 65% of aggregates may not
have included cedants who wrote as much as 20% of XL of XL business, it would
be wrong to follow Mr Rokison’s suggestion that I should treat that
65% as split one-third between cedants who wrote 20% or more of such business,
one-third who wrote l0% or more and one-third who wrote none or less than 10%.
Had the Plaintiffs wished to advance such a case then in my view they should have
adduced evidence much more persuasive than they did. (ii) In the Feltrim case
(unreported), to which the Plaintiffs and Defendants both referred me, Phillps
J, acting of course on the evidence before him, considered the minimum
appropriate PML for whole account aggregates where less than 10% of the
business ceded was XL was 50%, and 80% if it was more than 10%. In the present
case I do think it reasonable to conclude that the 65% of aggregates included
business which was both more than 10% XL and less that 10% XL in content.
Equally it needs to be remembered that in Feltrim the more than 10% category
would also have included the more than 20% to 25% category to which I have
indicated a 100% PML should have been applied and which for the reasons I have
given is at least in large part to be excluded from the 65% of the account. (iii) Although Mr Rokison
submitted that in Feltrim, where there was no evidence that a split of the
account between more or less than 10% XL business was available to the underwriter,
Phillips J had in fact applied an 80% PML across the board (that is giving no
lower percentage or discount from that figure for such part as might be less
than 10%), I do not find it at all easy to deduce that from the judgment itself
and the business of the Feltrim Syndicates was more weighted to XL business
than the business of the Bromley Syndicate. In any event, as I have said, my
task is to consider the prudent underwriter and such an underwriter should have
known the facts or at least had a good feeling for them. (iv) Mr Neil accepted that
where there was less than 10% XL, Phillips J’s figure of a 50% PML was
a reasonable one. His figure of a PML of 80% for the 65% balance of the account
was on the basis that it was not possible to say which cedants fell into this
category and the considerable risk of accumulation on business written at Lloyd’s.
But, as I say, the prudent underwriter should have known. (v) Although, for the reasons
I have given (see J2), I do not think the actual losses suffered by the
Syndicate are of any relevance to the assessment of the PML I have to make I do
think they can fairly be said to be at least some indication that the Syndicate’s
whole account was not providing protection for XL business on the same scale as
others in the market and a prudent underwriter could reasonably have had that
in mind in assessing the PML on the balance of the whole account. In the event
the evidence was that the gross loss on Piper Alpha absorbed some 50% of the
total whole account aggregates at the time; Mr Wills’ estimate of the
loss made in 1991 would have amounted to some 60% of those aggregates. It is,
of course, the maximum practical loss which has to be assessed. In my judgment and doing the
best I can in the circumstances the minimum prudent PML factor for the
aggregates forming the balance of 65% of the whole account was 60%. I have
arrived at this figure substantially on the basis that the account should
reasonably have been considered as split approximately equally between accounts
with more and accounts with less than 10% of XL business in them and that the
appropriate PML figures for such accounts would be 80% and 50% respectively,
but also taking into consideration the possibility that some accounts could
have had an XL content as high as 20% or more but the Plaintiffs have failed to
prove that, and that whilst looking for a maximum practical loss I am also
looking for the minimum PML figurea prudent underwriter could reasonably have
assessed. I have also kept in mind as a reasonableness check the actual or
estimated results of the catastrophe losses actually suffered. In the hope of removing any
possible confusion in this figure of 60% I should make clear that the
consequence of my findings looking at the total whole account is that 35% of it
should have had a PML of 100% and 65% a PML of 60%. Thus viewed as a single
account the PML would have been about 75% (ie. 35% plus 39%). Again, as an
overall reasonableness test, in my judgment this figure passes the test. (4) As regards the non-London
XL business I see no basis in the evidence to doubt and Mr Outhwaite (despite
describing them as arbitrary) really accepted and Mr Flaux did not challenge Mr
Neil’s figure of a 100% PML for US XL of XL and a 25% PML for US whole
account business (because it would be likely at least in part to have LMX
exclusion clauses). The same applies to Mr Neil’s figure of 100% for
Bermudan business. Mr Neil said (without challenge) that at least 2 of the
Bermudan cedant companies wrote substantial XL accounts including a substantial
LMX content. However Mr Neil’s figure of a 75% PML for foreign XL
business assumed, as I have said, an equal split of that business between XL of
XL (100%) and whole account (50%). The Defendants have pointed out that in fact
in 1990 the part of this business which was XL of XL was very small, and I
therefore accept Mr Outhwaite’s figure of 50% PML for the whole of
these aggregates for 1990. The Defendants did not provide figures for 1989 or
1991 but if the same applies my answer is the same. J.4 Conclusion on PML I therefore reach the
conclusion that the minimum PML factors which a prudent underwriter should have
applied to the various sections of the Syndicate’s XL account were: (A) LONDON ACCOUNTS (i) XL of XL coded XX:100% of
aggregates (ii) Whole account coded XY (a)as to 35%:100% of aggregates (b)as to
65%:60% of aggregates (B) NON-LONDON ACCOUNTS (i)US XL of XL:100% of aggregates
(ii)US Whole account:25% of aggregates (iii)Bermuda:100% of aggregates
(iv)Foreign XL:[50% of aggregates] J.5 The Application of the
PML Factors to the Aggregates The Defendants submitted that
a prudent underwriter would and should review the aggregates and the extent of
the reinsurance protection only or at least mainly at the major inception dates
of the business he wrote, that is at 1 January, 1 April, 1 July and possibly 1
September in each year. They also point to the fact that in 1988 the “monthly”
aggregate reports at about these dates showing increased aggregates were
followed by purchases of further levels of protection. However that was not the
case in 1989 nor is it consistent with the suggestion that the 1988 purchases
were made with an eye to the future. I am quite satisfied on the
evidence that a prudent underwriter should have kept under regular review the
aggregates he was writing or being asked to write relative to the level of
protection he had acquired. By regular review I mean that he should have had in
mind at all times what his protections and aggregates were and ensured that
there was sufficient level of cover to match his PML less only the risk of loss
to which it was appropriate to expose his Names. Whether that would involve
refusing business offered or obtaining more cover or both is not something I
can consider in this judgment. But the result should have been as I have stated
it. It follows that, for example, at the time of Hurricane Hugo and 90A,
Syndicate 475 ought, had Mr Bromley been conducting the underwriting prudently
in the sense I have defined, to have had an exposure to loss no greater than
would have arisen from having protection to the extent of the PML factors I
have assessed applied to the aggregates exposures as they in fact were at the
time, save only to the extent of the percentage of stamp capacity referred to
in K6 below. K. The Level of Loss to
Which the Names Could Properly Be Exposed K.1 The Competing
Submissions As I have already stated it is
the Names’ case that the Syndicate was presented as a general marine
Syndicate writing a balanced book of business both in terms of the proportion
of XL business written and as regards the proportion of foreign (ie. non-LMX
business) written within the XL account. They say, supported by Mr Neil’s
opinion, that properly advised by their Agents, the Names could and should not
have expected an exposure to loss on any one catastrophe of an amount greater
than 50% of stamp capacity and that is the maximum loss to which Mr Bromley as
a prudent underwriter should have exposed them. The Defendants’ case,
supported by Mr Outhwaite’s opinion, is that the Syndicate was or
ought to have been perceived by Names and their Agents as one which wrote a
substantial amount of XL business which was acknowledged to be of a high risk
nature and which could therefore in a bad year give rise to substantial losses,
and certainly losses of as much as 75% of stamp capacity. Beyond that, Mr
Outhwaite expressed no opinion as to what would be a maximum level of exposure
which would have been proper. In their closing submissions, however, the
Defendants invited the Court to adopt a figure of 100% which was the figure
decided upon by Phillips J in Feltrim (unreported). The question to be addressed
is not in issue. It is what maximum level of unprotected exposure the Names,
properly advised by their Agents, should have perceived or expected would be
run by Syndicate 475. There is no evidence which directly establishes whether
Mr Bromley intended to run any unprotected exposure at a11or if he did to what
level or on what basis. The answer to the question therefore has to be found
substantially in the documents and in particular the picture of the Syndicate
presented by Mr Bromley as it is recorded in them, and in the expert and other
evidence to which I will now refer. K.2 The Picture of the
Syndicate Presented by Mr Bromley K.2.1 The Reports and
Accounts and Board Meetings In his Underwriter’s
Report dated 25 May 1988 for the year ended 31 December 1987 Mr Bromley set
out, by reference to premium income, the percentage contribution to the total
business of the Syndicate of each category of business written by it. The XL
account was shown as the largest single component of the total account
contributing a virtually constant 33% of premium income in the years 1984 to
1987 inclusive and an estimated contribution of 33% for 1988. The “general
conclusion” of this Report was that: “the composition of
the account has been maintained in the split between the different categories.
I believe the account continues to be well balanced both in respect of the
individual categories and the line structure within those categories.” In his Report for the
following year end (1988) which was dated 22 May 1989 Mr Bromley presented the
premium income figures in a different manner. The “target” figures
for 1986, 1987 and 1988 XL (in each case 33%) were shown as “achieved”
to the extent of 127%, 105% and 111% respectively. The 1989 “target”
was expressed to be 45%. The Report stated that: “the target
percentage of 45% in respect of the 1989 Excess of Loss Account is greater than
previous years due to the very considerable increase in rating (my emphasis) of
individual contracts - rate on line - this percentage will be brought back in
following years”. Similar statements had been
and were made by Mr Bromley to the Board of the Bromley Agency on 21 February
and 13 June 1989 when presenting and commenting on the underwriting plan for
1989. The 1988 Report also stated
that: “The account was
written to give a broad spread of market business both LMX and Foreign with a
10% - 12% content of XL/XL with small signed lines, for the first three years
signing less than 2%”; and “The excess of loss
account will continue to be written to the same policy and principles as in
previous years, but ... it will increase as a proportion of the whole account,
although the exposure liability will reduce proportionately by the substantial
increase in overall rating” (my emphasis); and “I believe that the
account continues to be well balanced, both in respect of individual categories
and the line structure within those categories”. At a Board Meeting on 10
October 1989, when Mr Bromley presented the 1990 underwriting plan which then
showed a target premium income for the XL account of 42.86%, that also was said
to be the result of rate increases albeit the percentage was somewhat more than
Mr Bromley would like to see. The Report for the 1989 year,
dated 17 May 1990, recorded that the 1989 XL “target” (45%)
had been 87% “achieved” (but in a context where the targets
in all categories were not achieved) and a “target” for 1990
of 43% was stated. This Report included the
following statements: “The Excess
Loss/Excess Loss contracts amount to 24% of the Excess Loss premium and 16.56%
of the Excess Loss account exposure”. “1990 has a lower
target for Excess Loss account and similar caution will be exercised in view of
substantial increase in rates on individual contracts and the effect of
possible further major catastrophe claims during the year” (my
emphasis). “The account
continues to be balanced both in respect of spread of account and maximum loss
any one event”. At Board Meetings on 21
January 1990 and 11 October 1990 Mr Bromley said that all known claims were
contained within the Syndicates protection programme. At least by the later of
those dates both Hurricane Hugo and 90A had not only occurred but were known in
the market to be major catastrophes. The underwriter’s
Report for the 1990 year was dated 28 May 1991 and was written by Mr Wills
following Mr Bromley’s dismissal. The XL content of the account as a
percentage of net premium income was shown for 1988 at 36 months as 51%, for
1989 at 24 months as 47% and for 1990 at 12 months as 61%. I would make the following
comments on these statements. First, I think they support the Plaintiffs’
case that the Syndicate was presented as one in which the XL account played a
significant part but a part which was balanced not only by the other accounts
but also within itself. Second, the “target” increase in XL
premium percentage in 1989 and 1990 was attributed to rate increases, not
increases in exposure. Third, there is no suggestion that any unprotected
exposure is being run let alone any exceptional exposure. Fourth, I have
difficulty in seeing how Mr Bromley could say with apparent confidence that
claims for Hugo and 90A would be within the protection programme if he knew or
thought he was in fact running an unprotected exposure. K.2.2 Mr Bromley’s
Statements to Agents In August 1989, at meetings with
a number of Agents, Mr Bromley also explained the increase in the percentage
content of the XL account. He said he was aiming to revert to a 33% content for
1991 but the increase was the consequence of increased premiums and inability
to meet the targets in other areas of the account. He is, for example, recorded
as informing Brian Clarkson Members Underwriting Agency Ltd on 17 August 1989
that the XL account was: “out of balance with
the original plans but this was a reflection of increased premiums in this area
and not an increase in the Syndicate’s controlled exposure” (my
emphasis). In general, when questions
were asked of Mr Bromley about the exposure of the Syndicate, his answers were
reassuring in the sense that he would say he knew what he was doing and there
was no need for concern. Whilst it might be said that a prudent Agent should
have pressed further, in the absence of any evidence (factual or expert) from a
Members’ Agent, I do not find it either surprising or a matter to he
held against the Names that the picture Mr Bromley presented was accepted as
such. The Defendants have not really sought to submit otherwise. K.2.3 Foreign and LMX Risks A further aspect of the
“balanced” XL account which Mr Bromley presented was the
split between foreign and LMX risks written. That is apparent from the second
passage quoted in Section K.2.1 above from the 1988 year report. On 15th August
1990 Mr Bromley told a Members Agent that “he aimed for a 50/50 split
in the excess of loss account between foreign and London market but felt at
present the foreign content was 35% of premium”. He said much the same
thing to another agent in September 1990. No one has produced premium
income figures reflecting the split which was in fact achieved. There is, however,
evidence, that in terms of aggregates at March in each of the years 1988, 1989
and 1990, LMX aggregates were respectively 72%, 75% and 72% of the total XL
aggregates. There is also evidence that within the aggregates of the XL of XL
and whole accounts the percentages of LMX business were of the order of 95% and
over 80% respectively. As it seems to me, the
relevance of this split and what Mr Bromley said about it is really as a
further illustration of how the Syndicate was presented as one with a balanced
book of business in the sense that the exposures were widely spread and not
concentrated on LMX business with its recognised greater risk of accumulation. K.3 The Results of the
Syndicate Expressed in terms of a Name
with a share of £10,000 the profits/(losses) of the Syndicate, as
reported in the 1990 year accounts, were: 1984 : (10.6%) 1985 : 3.36% 1986 : 10.6% 1987 : 7.29% 1988 : 1.07% Allowing for the fact that the
Syndicate was only established in 1983 there is nothing in these results which
suggests that it was or should have been perceived to be a Syndicate achieving
or capable of achieving an exceptional return. The results were better than the
average for marine Syndicates but not remarkably so. Whilst it was the Defendants’
submission that a Name and his Agent would be more concerned with future
results than past results in assessing the risk/reward ratio of a Syndicate I
do not see the logic of that. I think both past results and anticipated future
returns would and would inevitably play a part in such an assessment. Indeed,
unless a clear indication was given that the business of the Syndicate and the
risks it ran had changed significantly, the past results could reasonably be
taken as a guide to the future. As I have already said, Mr Bromley presented
the increase in “target” XL premium for 1989 and 1990 as the
result of rate not exposure increases and also made clear that the intention in
the future was to revert to the one-third target. The key to risk of course lay
in the amount of unprotected exposure and the increase in that exposure (which
in fact occurred) was never notified to Names or Agents. As is also now known
(see H.2. above) in fact the XL premium income of the Syndicate constantly
exceeded Mr Bromley’s “targets” but the only
information made available to Names and Agents was as I have set out at K.2.l.
above. It is true, as the Defendants
submitted, that the increase in the “target” for XL premium
income in 1989 and 1990 seems to have caused no surprise or concern on the part
of Names or Agents. However, that is itself not surprising in view of the way
in which the increase was presented by Mr Bromley. I therefore see nothing in the
evidence to justify a suggestion that the perception of the Syndicate and the
results it was likely to achieve would or should have changed in 1989 or 1990. K.4 The Views of the
Experts It was Mr Neil’s
evidence that the level of unprotected exposure should properly be viewed in
the context of seeking to achieve a reasonable return to the Names over a
period of years so that the good years could be off-set against the bad years
when, as he accepted, substantial losses could be expected for a Syndicate such
as Syndicate 475. Granted that LMX business was perceived to be high risk/high
reward business Mr Neil said the perception of the Syndicate would depend on
the perception of the content of LMX business in its account. In general terms the evidence
of both Mr Neil and Mr Outhwaite was that a return of 20% on LMX business could
be expected in good years and a loss of about 100% of stamp capacity in bad
years. On that basis, and looking at the results over a period of 5 to 10 years
Mr Neil’s evidence was that for a Syndicate writing only LMX business
an unprotected exposure of 100% of stamp could only be justified if at least a
20% return could be expected over a minimum of 5 years. But for a Syndicate
writing only 50% LMX business a return of only 10% could be expected in the
good years and so an unprotected exposure of 50% was the most that could be
justified. As I have stated, Mr Bromley presented the Syndicate as one writing
less than 50% XL business. Mr Outhwaite’s
evidence was that marine Syndicates could in general terms and granted that the
lines between the categories were not finite, be categorised as (A) those which
wrote no LMX business; (B) those which wrote some LMX business as an adjunct to
their main book of business and (C) specialist LMX Syndicates where LMX
business was the major part of their book. He placed Syndicate 475 in category
“B” and Feltrim in Category “C”. Mr Outhwaite considered that
for a Category C Syndicate a 20% profit could be expected in the good years and
if, over a 10 year period, such a profit was earned in 9 of the years but a
loss of 100% of stamp occurred in one year, the overall return would be
acceptable against a general expectation of a 10% profit from membership of
Lloyd’s. His opinion was that a Category C Syndicate could not be
criticised for running an unprotected exposure of 120% of stamp. Syndicate 475
would, or at least should, have been regarded as a high risk Syndicate because
LMX business formed a significant part of its account but he accepted that it
was not comparable to Feltrim or other Category C Syndicates but one where a
profit of between 10% and 20% could have been expected in the good years and he
agreed that if the figure was 10% it followed logically that an unprotected
exposure of about 50% of stamp was appropriate. Indeed, if it were right, as
the Defendants submitted, that Syndicate 475 could properly run an exposure of
100% of stamp it would have been a high risk/medium reward Syndicate which does
not seem to me to be a rational conclusion. In view of the evidence of Mr
Outhwaite it was somewhat surprising that the Defendants submitted that a
risk/reward ratio approach to this issue should not be followed at all and the
more so as they suggested no alternative approach. It was less surprising that
as an alternative submission they put forward a figure of 75% of stamp derived
from the mid-point of Mr Outhwaite’s 10% to 20% profit figure. However
that range itself was not founded on any particular evidence, other than Mr
Outhwaite’s opinion, and it does not derive any support from the
actual results of the Syndicate which I have set out above at K3. In my judgment, the picture of
the Syndicate’s account presented by Mr Bromley as one aiming for 33%
XL business by premium income rising to 45% and 43% in 1989 and 1990 by reason
of rate increases, and even leaving out of consideration the statements about
the split between LMX and foreign business, would fully justify Mr Neil’s
figure of a 50% maximum on a risk/reward approach to the issue. K.5 Other Evidence/Factors (1) Mr Wills agreed that the
Syndicate would have been perceived to be a general marine Syndicate but one
which wrote XL business. (2) The thrust of the evidence
given to the Casson Inquiry by Mr Martin, Mr Lister, Mr Boardman and Mrs
Clouting was also that the Syndicate was perceived to be a general marine
Syndicate with a balanced account and of medium risk. (3) The figure of 100% which
Phillips J decided was the maximum proper figure for Feltrim was on the basis
that the Syndicate was a specialist XL Syndicate and despite the fact that such
a level of loss would have been considered almost unthinkable. Mr Outhwaite, as
I have recorded, accepted that in the context of marine Syndicates Syndicate
475 was probably medium risk and not comparable to Feltrim. Whilst Mr Neil
accepted that Syndicate 475 would have been perceived as writing an “awful
lot” of XL business that has to be read in the context of his opinion
that a maximum unprotected exposure of 50% was proper. (4) As Phillips J noted in
Feltrim a loss of 100% of stamp capacity was considered to be a sufficient
reason for Lloyd’s to establish a loss review committee to enquire
into its causes. A loss of 50% of capacity would of itself be, as it seems to
me, a very substantial and serious loss and one which it would not be
unreasonable to suppose could have led to a flight of Names if it occurred or
had been thought more than a very remote possibility. (5) The very fact that Piper
Alpha was not a problem for the Syndicate and Mr Bromley’s
understandable emphasis on it and his apparent belief that none of the other
major catastrophes would be a problem either would inevitably suggest that the
Syndicate was of a different risk nature to those Syndicates who were and were
known to have been severely exposed to and caught out by those catastrophes. K.6 Conclusion In my judgment the conclusion
to be drawn from the evidence which I have summarised is that: (1) Whilst the XL content of
the Syndicate’s account was the largest single category it was
“balanced” by the other accounts and the policy was to ensure
that that remained the case. (2) The increase in the
“target” percentages of the XL account for 1989 and 1990 were
the result of rate increases and not an increase in exposure and so risk. (3) The XL of XL content of
the account was itself not a substantial proportion of the XL business written. (4) There was no indication
that Mr Bromley had chosen to expose or had exposed the Syndicate to any
unusual risk of loss beyond that to be expected from a Syndicate described as
in (1) to (3). (5) The results of the
Syndicate and the other evidence and factors to which I have referred establish
that it would have been perceived and rightly have been perceived to be a
medium risk/medium reward marine Syndicate, not comparable to the specialist XL
Syndicates such as Feltrim, but a Syndicate which could be exposed to
significant loss in a bad year. In those circumstances, I find
Mr Neil’s opinion as to the proper maximum level of unprotected
exposure wholly compelling and I accept it. Indeed I think that it could have
been reasonably argued that his figure of 50% of stamp capacity was generous to
the Defendants but I am satisfied that his figure is one which any prudent
underwriter should have ensured was not exceeded. I should also record that
after the conclusion of the hearing but before I had completed the writing of
this judgment Morrison J delivered his judgment in the case of Sir David
Berriman v Rose Thomson Young (Underwriting) Limited (unreported). I have read
that judgment and written submissions from both parties upon it. However,
unlike the judgments of Phillips J in Gooda Walker and Feltrim the judgment and
its reasoning were not of course put to the witnesses in this case and the
competing submissions of the parties about it do not encourage me to embark on
a comparison between that case and this where the evidence inevitably was
different. All I would say, therefore, is that I see nothing in the judgment of
Morrison J which is inconsistent with the conclusion I have reached and expressed
above. Again in the hope of avoiding
any future argument about the effect of my conclusion, I should make clear that
I find that the minimum required of Mr Bromley, acting as a prudent
underwriter, would have been: (1) to assess the PML of the
Syndicate at any date which may be material in accordance with my findings in
J4 and J5 above. (2) to have ensured that
either the business was not written or reinsurance protection was acquired to
the extent necessary to ensure that at any material time the Syndicate was not
exposed to an unprotected risk on that PML greater than 50% of stamp capacity;
and (3) to have done so by
ensuring that the risk of such exposure (the 50%) arose only at the top of and
not at some intermediate stage in the protection programme which should have
been acquired to achieve that outcome. To the extent that it may
hereafter be proved (or agreed) that Mr Bromley did not achieve that outcome in
my judgment he fell below the standard of care to be expected of a prudent underwriter
and was in breach of the duty which he owed to the Plaintiff Names and the
Bromley Agency as Managing Agents would also be liable to the Names accordingly
as would the Members Agents for the 1989 year, save only to the extent (if any)
to which a limitation defence is available to the Defendants which I consider
in the ensuing section of this judgment. L. Limitation The question whether or not
the Plaintiffs’ claims are statute-barred arises only in respect of
the claims for the 1989 year. The claims against the estate
of Mr Bromley and the Bromley Agency for the 1989 year are claims in tort. The
cause of action therefore accrues when damage is suffered. As I am not in a
position to determine on this hearing (even if my findings establish that Mr
Bromley was negligent) whether or not the Plaintiff Names have suffered any
loss by reason of that negligence or if they did when they did I also cannot
determine when any cause of action in negligence first accrued to the
Plaintiffs and, as Mr Flaux submitted and Mr Rokison accepted, this issue must
therefore await a further hearing if there is to be one. That includes any
issues as to the application of s 14(A) of the Limitation Act 1980 which does
apply to claims in tort (see D above). The claim against the Members
Agents for the 1989 year is and is only in contract. The cause of action is
therefore complete when the breach or breaches, if such there were, occurred.
The considerations which apply to the claims in tort do not therefore
necessarily apply, Whilst Mr Bryan accepted that
it was difficult for him to maintain that a cause of action in contract was
statute-barred prior to the commencement of the 1989 underwriting year itself
he nonetheless did submit that the claims first made in the third to sixth (and
especially the sixth) writs issued were statute-barred. The relevant dates,
(see D above), allowing for the six-year limitation period, are that the claim
would be barred if the breach of contract occurred before 14 June 1988 (3
Writ), 28 October 1988 (4 Writ), 19 December 1988 (5 Writ) and 15 May 1989 (6
Writ). The foundation of Mr Bryan’s
submissions on limitation was that the burden of proving that their causes of
action accrued within the six-year period was on the Plaintiffs and the central
claim made in the Points of Claim was that the level of protection properly
required for the Syndicate’s XL account should have been planned and
placed in advance of writing the business so as to protect the PML. That
process, he submitted, relying on the evidence of Mr Wills and Mr Hough, should
have begun in the Autumn of 1988 for the 1989 year and at least should have led
to the protection being in place by about mid-October 1988. On the assumption,
which has to be made to address this issue, that the proper level of protection
was not then in place, that, so the submission continues, establishes that the
relevant breach of contract occurred at that time and therefore at least the
claims made in the 4th to 6 Writs are barred. Moreover, even if it were right
to conclude that there was no breach prior to 1 January 1989 or a further
breach in failing to obtain proper protection at that date, Mr Bryan submits
that the claims made in 6 Writ are plainly barred and particularly so because
by May 1989 the chances of obtaining any further and higher layers of
protection for the Syndicate’s XL account were non-existent. In support of these
submissions Mr Bryan relies on Bell v Peter Browne & Co [1990] 2 QB 495,
[1990] 3 All ER 124 (CA). In that case the solicitor defendants were instructed
in 1978 by the Plaintiff husband, as part of a proposed divorce settlement, to
protect his interest in an agreed one-sixth share in the proceeds of sale of
the matrimonial home if and when it was sold by his then wife to whom he had
agreed to transfer his half-share and who was to live in the house until she
sold it. The transfer of the Plaintiffs’ half share was duly executed
in September 1978 but the defendants did not then or thereafter take any steps
to protect the Plaintiff’s interest in the proceeds of sale. In
December 1986 the Plaintiff learnt that his former wife had sold the house and
spent all the proceeds. The Plaintiff issued a Writ against the Defendants in
August 1987 claiming damages for negligence both in contract and tort and was
met by a plea of limitation which the Court of Appeal upheld. The Court held
that the Plaintiff’s cause of action both in contract and tort arose
in September 1978 when the Defendants failed to protect his interest. The basis of the Court’s
decision can I think be found in the judgment of Nicholls LJ. At page 500,
Nicholls LJ said that the question when the cause of action arose in contract
involved identifying the relevant terms of the contract and the date when the
breach relied upon occurred. As to the terms of the contract he held they were
that the Defendants should take all those steps which a reasonably competent
solicitor would take to transfer the home and to retain the Plaintiff’s
beneficial share in it adding that: “clearly all those
steps needed to be taken at the time of the transfer or, in the case of lodging
a caution, as soon as reasonably practical thereafter.” The breach occurred in 1978
when those steps were not taken. And that was so even though the breach remained
remediable at least as regards lodging a caution for many years. A remediable
breach was still a breach. At page 501, Nicholls LJ said: “for completeness I
add that the above observations are directed at the normal case where a
contract provides for something to be done and the defaulting party fails to
fulfil his contractual obligation in that regard when performance is due under
the contact. In such a case there is a single breach of contract. By way of
contrast are the exceptional cases where, on the true construction of the
contract, the defaulting party’s obligation is a continuing
contractual obligation. In such cases the obligation is not breached once and
for all, but is a contractual obligation which arises anew for performance day
after day, so that on each successive day there is a fresh breach.” The same distinction between a
“one-off” obligation and a continuing obligation can be found
in the judgments of the other members (Beldam and Mustill LJJ) of the Court. Mr Bryan says the obligation
on Mr Bromley to plan and procure proper reinsurance protection for the
Syndicate was (if it was) broken by about October 1988 and certainly by 1
January 1989 and the fact that it could thereafter he remedied is therefore
nothing to the point. In my judgment the fatal flaw
in Mr Bryan’s submissions is their starting point, namely that the
terms of the contract were merely to plan and procure protection prior to
writing the business and that the breach alleged is in substance a failure to
do so. I agree with Mr Rokison that this submission is a distortion of the
claims pleaded by the Plaintiffs and of the obligations of Mr Bromley and so of
the Managing Agents. The Amended Points of Claim in my view clearly and
unequivocally allege a continuing obligation on Mr Bromley to monitor and
control the Syndicate’s aggregates, PML and protection on a continuing
basis, and a breach of that obligation. Moreover that was the basis on which
the proceedings were conducted and for the reasons I have given was an obligation
which I find has been established. If the consequence of my judgment is that it
is shown that the obligation was broken at, for example, the time when
Hurricane Hugo or 90A occurred then Mr Bromley was in breach of duty and the
Members Agents in breach of contract at that date and effective at that date.
In my judgment Mr Bromley should at all times have taken steps to secure the
level of protection for the Syndicate which I have found he should have done or
should have declined to write business which if written would have increased
the unprotected exposure of the Syndicate above that level. If he failed to do
so that was itself a breach of duty at each date it applied. That is sufficient to dispose
of Mr Bryan’s submissions in principle but I would add the following
points: (1) As a matter of fact Mr
Bromley acquired the higher layers of the protection at dates after 1 January
in each relevant year and they incepted at various dates the last tranche for
1989 incepting in May 1989. (2) Also as a matter of fact
the weekly reports show that Mr Bromley continued to write business throughout
the year. The total 1989 underwriting year XL aggregates at 13 May 1989 were
$107,683,935 of which XL of XL was $19,598,901 and whole account $57,281,900
whereas at 16 September 1989 (the date of Hugo) the total XL aggregates were
$144,279,756 of which XL of XL was $24,764,928 and whole account $81,171,669.
Although these figures do not represent the in-force aggregates, which would
include any business written in the 1988 year to incept after May and September
in that year, it is reasonable to suppose that if Mr Bromley had not written
the further aggregates these figures establish that he did write between May
and September in 1989 the in-force aggregates would have been considerably
reduced. (3) The real cause of the
loss, if loss there is, to the Plaintiffs is the inadequate level of cover at
the time the relevant catastrophes which caused such losses occurred. Mr Bryan’s
submissions were predicated on Mr Bromley taking a decision in October 1988 to
expose the syndicate to the risk of loss for the 1989 underwriting year which
it in fact ran. I do not think Mr Bromley took any such decision in any
meaningful sense and even if he did his obligation to the Names on a continuing
basis was to review it and act properly in accordance with that review. If he
had done so that would in a sense be remedying an existing breach of duty but
it would also have been to avoid committing a further breach of duty actionable
as such if he did not do so. (4) Mr Bromley’s
obligations were not of a “one-off” nature but at all times
to act as a prudent underwriter in the best interest of the Plaintiff Names. The practical consequences of
my conclusions on this issue are that the only claims which may yet give rise
to a limitation defence by the Members Agents are those the subject of 6 Writ.
Whether or not they do so must, as it seems to me, also await a further hearing
if there is to be one but on the basis of my conclusions. Thus, should the
Exxon Valdez disaster, which occurred on 24 March 1989, give rise to losses for
which the Plaintiffs in 6 Writ would otherwise be entitled to claim the Members
Agents’ limitation defence may well be effective. M THE DISCRETE CLAIM
AGAINST THE CHESTER AGENCY The basis of this claim is set
out at C1.(4) above. In my judgment this claim must
fail as the Plaintiffs have failed to establish the duty of care on which they
rely. There is no evidence that the Names or their Agents were at any time
aware of or in any way relied upon the terms of the undertaking given to Lloyd’s
by the Chester Agency. Further the undertaking does
not create an obligation on the Chester Agency to supervise the Bromley Agency
but only to provide such administrative or management support as the Bromley
Agency or Lloyd’s itself considered necessary from time to time and
there is also no evidence that either the Bromley Agency or Lloyd’s
did consider such support to be necessary. The services of Mr Martin and Mr
Welch were provided to the Bromley Agency in accordance with the undertaking
albeit only to a limited extent in the case of Mr Welch. Mr Rokison told me that in
some of the actions default judgments have been obtained against the Chester
Agency. He suggested in his closing address that it might not be necessary to
determine the validity of the claim, but as I indicated at the time I do not
think I should be deterred from doing so as the claim was opened and not
formally withdrawn and I have reached a firm conclusion on it. N. Contribution Between
Defendants In the event that they are
found liable to the Plaintiffs the Members Agents seek an indemnity against or
a contribution of 100% to that liability, including their costs, from the
Bromley Agency as Managing Agents of the Syndicate and from the estate of Mr
Bromley. Whilst it will require a further trial or agreement to determine
whether the consequence of this judgment is that the Members Agents and the
Bromley Agency are liable to the Plaintiffs and if so in what sum the liability
of the Members Agents will arise from the breach by the Bromley Agency of their
duty to control and manage the underwriting of the Syndicate. That duty was
also owed to the Members Agents under the terms of the Sub-Agency Agreements
between them and the Bromley Agency. In those circumstances Mr
Bromley and the Bromley Agency were responsible to the Members Agents for the
proper conduct of the Syndicate’s underwriting and Mr Flaux concedes
that it follows that the Members Agents are entitled to the indemnity they
claim and that it is right that I should so find and order at this stage of the
proceedings, which I do. DISPOSITION: Judgment accordingly. |