Lloyds Reinsurance Law Reports
 L.R.L.R. 310
[note discrepancy between this citation for the print version and the LexisUK version, which starts below]
Queens 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 Lloyds 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 Lloyds 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 Lloyds 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 Lloyds 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. Bromleys 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 Lloyds 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 Lloyds considered necessary from time to time; and there was no evidence that either the Bromley Agency or Lloyds 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 syndicates 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.)  2 Q.B. 495;
Berriman (Sir David) v. Rose Thomson Young (Underwriting) Ltd.  L.R.L.R. 426;
Deeny v. Gooda Walker Ltd.,  L.R.L.R. 183;  1 W.L.R. 1206;
Iron Trade Mutual Insurance Co. Ltd. v. J. K. Buckenham Ltd.,  2 Lloyds Rep. 85; [*312]
Lee (Paula) Ltd. v. Robert Zehil & Co. Ltd.,  2 All E.R. 390;
Merrett Gooda Walker and Feltrim decisions, The (H.L.)  2 Lloyds Rep. 468;
Saif Ali v. Syndney Mitchell & Co., (H.L.)  A.C. 198;
Société Commerciale de Réassurance v. Eras (International) Ltd. (C.A.)  1 Lloyds Rep. 570;
World Navigator, The  2 Lloyds 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
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 Bromleys 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 Lloyds 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 Lloyds 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 Lloyds 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 Lloyds 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 Lloyds.
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 Lloyds 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  3 All ER 506,  2 Lloyds 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 Bromleys 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.  AC 198,  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  2 All ER 390 at 394d and of Parker LJ in the World Navigator  2 Lloyds 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.
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.
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 Syndicates 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 Bromleys 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  2 Lloyds Rep 85 and Scor v Eras  2 All ER 82,  l Lloyds 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 Bromleys 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 Lloyds 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 Lloyds 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 Syndicates 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 Syndicates 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 Syndicates business given by Mr Bromley to Agents;
(8) Transcripts of evidence given to the Casson review. In December 1993 Lloyds 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 Lloyds 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 Syndicates business were also shown (such as yachts and legal liabilities). It was Mr Outhwaites 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 Syndicates 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 Bromleys 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 Bromleys plan and ambition on his retirement to turn his skills to forming a Syndicate at Lloyds 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 Lloyds 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 Lloyds, 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 Lloyds 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 Lloyds. 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 Lloyds 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 Bromleys 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 Bromleys 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 Bromleys 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
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 Bromleys 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 Bromleys attitude was that he was not going to provide the Board with information about the level of the Syndicates 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 Bromleys 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 Bromleys 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 Bromleys 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 Bromleys 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.  4 All ER 289,  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 cedants 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 Lloyds 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 cedants 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 Lloyds 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 Syndicates 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 underwriters 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 Neils 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 Syndicates 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.
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 Syndicates 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 aggregates of the Syndicates 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.
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 Bromleys 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 Syndicates 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 Syndicates 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 Syndicates 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 Syndicates 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 Bromleys XL Underwriting
I now turn to consider the evidence as to how in fact Mr Bromley did conduct the underwriting of the Syndicates 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 Bromleys 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 Bromleys conduct of the Syndicates 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 Neils evidence about this was not challenged. It was Mr Neils 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 Neils 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 cedants 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 Bromleys 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 Bromleys 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 Syndicates 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 Houghs 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 Bromleys approach (as well as evidence of Mr Houghs 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 Syndicates 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 Houghs 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 Bromleys 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 Bromleys 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 Bromleys 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 Syndicates 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 Neils 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 Neils 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 Neils 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 Neils figures for the non-London accounts as wholly arbitrary: the appropriate PML would depend on the underwriters 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 Lloyds. 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 Outhwaites 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 Rokisons 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 Bromleys 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 Syndicates 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 Syndicates) 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 Outhwaites 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 Bromleys 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 Neils evidence on this and I reject Mr Outhwaites 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 Outhwaites 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 Lloyds 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 Rokisons 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 Js 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 Lloyds. 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 Syndicates 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 Neils 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 Neils 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 Neils 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 Outhwaites 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 Syndicates 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 Neils 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 Outhwaites 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 Underwriters 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 underwriters Report for the 1990 year was dated 28 May 1991 and was written by Mr Wills following Mr Bromleys 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 Bromleys 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 Syndicates 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 Bromleys 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 Neils 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 Neils 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 Outhwaites 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 Lloyds. 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 Outhwaites 10% to 20% profit figure. However that range itself was not founded on any particular evidence, other than Mr Outhwaites 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 Syndicates 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 Neils 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 Lloyds 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 Bromleys 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.
In my judgment the conclusion to be drawn from the evidence which I have summarised is that:
(1) Whilst the XL content of the Syndicates 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 Neils 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.
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 Bryans 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 Syndicates 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 Syndicates XL account were non-existent.
In support of these submissions Mr Bryan relies on Bell v Peter Browne & Co  2 QB 495,  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 Plaintiffs 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 Plaintiffs cause of action both in contract and tort arose in September 1978 when the Defendants failed to protect his interest.
The basis of the Courts 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 Plaintiffs 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 partys 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 Bryans 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 Syndicates 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 Bryans 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 Bryans 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 Bromleys 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 Lloyds 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 Lloyds itself considered necessary from time to time and there is also no evidence that either the Bromley Agency or Lloyds 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 Syndicates 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.