Court of Appeal (Civil Division)
HEARING-DATES: 28 May 1993
28 May 1993
E Gloster QC and M Havelock-Allan QC for the Appellants; T Seymour for the Respondents
PANEL: Sir Thomas Bingham MR, Steyn LJ, Sir Christopher Slade
JUDGMENTBY-1: SIR THOMAS BINGHAM MR
SIR THOMAS BINGHAM MR:
This is the judgment of the court. This appeal concerns a dispute between the Society of Lloyds and two Names at Lloyds who have incurred substantial underwriting losses. The extent of the liability of the Names in respect of risks written on their behalf is not in issue. The case concerns the security which Names must provide for the due fulfilment of their obligations to policyholders. In other words, if every issue arising on this appeal is decided against Lloyds, the personal liability of the Names will remain exactly as it was. And the same personal remedies will be available to enforce the liabilities of the Names.
The central question is whether recoveries made by the Names under their stop loss policies, which were taken out by those Names on a voluntary basis for their own protection, are subject to the trusts created by the Lloyds Premiums Trust Deed which each Name signed. While the case is directly concerned with only two Names, the appeal gives rise to issues of far wider importance. The potential scale of the problem is demonstrated by the fact that for the 1991 solvency test more than 4,000 Names asked for personal stop loss recoveries, totalling £232 million, to be taken into account as at 31 December 1991. If the submissions made on behalf of the Names in this case are right, they and many other Names will be entitled to use such recoveries for the payment of debts to banks and other institutions or indeed to use those recoveries as they wish.
The contextual scene:
We are conscious that what we say about the contextual scene will be elementary material for those who are engaged in the Lloyds market. The operation of Lloyds insurance market is, however a matter of public interest and we must therefore try to explain the context of the problem in readily intelligible terms.
The London insurance market comprises a companies market and the Lloyds market. The capital of insurance companies is provided by shareholders whose liability is limited for each shareholder to the amount of capital that he has subscribed. For the protection of the interests of the policyholders the Insurance Companies Act 1982 contains detailed provisions about the authorisation of insurance companies to carry on insurance business, the regulation of authorised insurance companies, and the conduct of insurance business. Lloyds, on the other hand, is a society of individual underwriting members or Names. Lloyds does not effect any insurance. Insurance is effected by Names who are grouped in syndicates. The Names are obliged to act through underwriting agents who have full authority to act on their behalf in dealing with brokers, the agents of the assured. A members agent acts on behalf of a Name in all respects except the managing of the syndicate which the Name joins. A managing agent is an underwriting agent who manages one or more Lloyds syndicates. An active underwriter employed by a managing agent effects insurance business on behalf of Names on a syndicate. The managing agent is also responsible for the investment of syndicate funds. A Name accepts unlimited liability for his share of any insurance written on his behalf: he is liable to sacrifice his entire personal fortune in payment of valid claims. And Names underwrite risks on the basis of liability "each for his own part and not one for another": section 8(1) of the Lloyds Act 1982. The affairs of Lloyds, and the carrying on of insurance business at Lloyds, is governed by the Lloyds Act 1982 and Byelaws made by the Council of Lloyds. Section 15(4) of the Insurance Companies Act 1982 exempts Names at Lloyds from complying with the solvency provisions in Part II of the Act provided that they comply with section 83. For present purposes the following subsections of section 83 are material:
"(2) Every underwriter shall, in accordance with the provisions of a trust deed approved by the Secretary of State, carry to a trust fund all premiums received by him or on his behalf in respect of any insurance business.
(4) The accounts of every underwriter shall be audited annually by an accountant approved by the Committee of Lloyds and the auditor shall furnish a certificate in the prescribed form to the Committee and the Secretary of State.
(5) The said certificate shall in particular state whether in the opinion of the auditor the value of the assets available to meet the underwriters liabilities in respect of insurance business is correctly shown in the accounts, and whether or not that value is sufficient to meet the liabilities "
The trust fund constituted under section 83(2) of the Act was plainly a critical factor which persuaded the legislature that, consistent with a policy of self-regulation at Lloyds, it was possible to exempt Names from the solvency requirements of the Act. Consistent with the legislative policy of self-regulation adopted in respect of the Lloyds insurance market, section 42 of the Financial Services Act 1986 also provides that the Society of Lloyds and persons permitted by the Council of Lloyds to act as underwriting agents at Lloyds are exempted persons as respects investment business carried on in connection with or for the purpose of insurance business at Lloyds.
In accordance with section 83(2) each Name at Lloyds is obliged to execute a Lloyds Premiums Trust Deed. The parties to the deed are in each case a Name, his members agent and Lloyds. The critical provision in the Premiums Trust Deed is clause 2(a) which provides as follows:
"Subject as hereinafter provided the Trust Fund shall consist of:-
(i) all premiums and other monies whatsoever (except as provided in sub-clause (b) of this Clause) now belonging or payable or hereafter at any time belonging or becoming payable to the Name in connection with the Underwriting and "
Two observations are pertinent. First, in practice it is to the individual Names Premium Trust Fund that the managing agent will first resort if he requires funds to meet the Names underwriting liabilities. Secondly, it will immediately be obvious that, whereas section 83(2) only required "premiums" to be carried to the trust fund, the trust deed approved by the Secretary of State also required Names to carry to the trust fund "all other monies whatsoever now belonging or payable or hereafter at any time belonging or becoming payable to the Name in connection with the Underwriting". The meaning of "other monies" in the context of clause 2(a)(i) is one of the principal issues in the case. As we have indicated it arises in connection with personal stop loss recoveries by Names.
Personal Stop Loss Insurance
A stop loss policy is a reinsurance contract. The distinctive features of this type of reinsurance are described by Butler and Merkin, reinsurance Law, as follows:
"Stop loss treaties reinsure not individual losses or aggregations caused by an event or occurrence, but aggregate losses arising in respect of a specified class or classes of insurance. Here the reinsurers liability comes into play when the reinsureds ratio of losses to premium income for any year of business exceeds a stipulated percentage, or if claims exceed a specified sum; often these possibilities are framed as alternatives, the reinsurer becoming liable when the lesser of them is fulfilled. The primary objective of stop loss reinsurance is to facilitate the reinsureds ability to carry on a particular class of business, by guaranteeing his solvency either overall or in relation to that class of business."
It is now necessary to attempt to describe the role of personal stop loss insurances by Names at Lloyds.
The evidence before us is less than exhaustive but the subject of personal stop loss insurances was considered by the Fisher Working Party in their report "Self Regulation at Lloyds", which was published in May 1980. The report set out that it was estimated that in 1980 the number of policies of this kind then in force was not less than 3,500. The report stated that at that time the vast majority of such policies were underwritten by Lloyds Underwriters but some were issued by outside companies. It was clearly regarded as a matter of some importance. The report stated (paragraphs 24.05-24.07):
We have considered two questions in relation to these policies: first, whether Names should be allowed to buy such protection and, secondly, whether Lloyds Underwriters should be free to assume the risks
Some of our witnesses have expressed misgivings about Personal Stop-Loss Insurance because they believe that such policies tend to erode the principle of unlimited liability, reduce the confidence that a Name should have in his Agent and result in an undesirable variation in the fortunes of individual Names on the same Syndicate. However, we do not think that these objections are sufficient to warrant the Committee prohibiting them.
We find it more difficult to decide whether Personal Stop-Loss Insurances should be underwritten by Lloyds Underwriters. Quite clearly it is wrong in principle for a Name to be covered by any Syndicate on which he participates. We recommend that this be strictly forbidden, irrespective of how small the participation is. Obviously, if only a few Syndicates are prepared to write these risks, there is a real danger that the losses of many will come home to roost on the few, with a consequent serious impact on the Central Fund. Furthermore, by the very nature of the business all the losses paid by insurers will be after the close of the underwriting year of account involved, thereby producing potentially serious reserving problems. For these reasons we recommend:-
(a) that the Council should continue to allow the writing of Personal Stop-Loss Insurance business in the Lloyds Market but should introduce stringent audit regulations in respect of this class of business;
(b) that the Council of Lloyds, or the Committee by delegation, should monitor the way in which Stop- Loss Insurance or Reinsurance is spread through the Market and should have power to make such regulations as may be necessary;
(c) that the Council or Committee of Lloyds should have power to obtain evidence from Syndicates of the amount of Stop-Loss Insurance written, and to limit the amount written by individual Syndicates.
The Council or Committee might also investigate the possibility of introducing a four year account for Stop- Loss business."
Subsequently, a Committee of Inquiry of which Sir Patrick Neill, QC was the Chairman, reported on regulatory arrangements at Lloyds: A report presented to Parliament by the Secretary of State for Trade and Industry in January 1987: Cm 59. Comprehensive as this report is in other respects, we do not believe that the Committee of Inquiry directly reported on the role of personal stop loss insurances at Lloyds.
There is, however, a helpful affidavit sworn by Mr Richard Prior, the Deputy Solicitor of Lloyds, which described the current position in regard to the use of personal stop loss insurances. Mr Prior states that about 8,000 Names or 36% of the total membership of Lloyds had personal stop loss insurances covering the 1992 year of account. Such insurances are very often, but not always, arranged for the Name by the Members Agent. Mr Prior states that the stop loss policy wordings in current use fall into 6 main categories. While we have noted these different wordings, they do not appear to us to be material to the specific issues which we have to decide.
Our attention has been directed to two instruments which affect stop loss reinsurance at Lloyds. The first is Personal Stop Loss Reinsurance Regulation, No 2 of 1990, 20 June 1990. The objective of the instrument is apparently the observance of proper limits on the writing of this kind of business at Lloyds. It does not touch on the problems before us. The second is High Level Stop Loss Fund Byelaw No 12 of 1992, 7th October 1992. Regulation 11 of this byelaw does affect a Names rights to bring into account in the estimation of losses an indemnity available to him under a personal stop loss contract. On the other hand, it post dates the events with which we are concerned and we must ignore it.
The forensic shape of the case:
The case came before Mr Justice Tuckey in the form of an Originating Summons issued by Lloyds. The first defendant (Mr Morris) and the third defendant (Mr Kimpton) were Names at Lloyds. The second and fourth defendants were joined for technical reasons and played no role in the proceedings at first instance or on appeal to this court. Both Mr Morris and Mr Kimpton are Names who face calls for the payment of substantial underwriting losses. Both had taken out personal stop loss insurances. They would like to use the proceeds of their stop loss insurances to pay off other debts which they have incurred. Mr Morris and Mr Kimpton are part of a large group of Names who have had the benefit of advice from Mr Michael Freeman, of Michael Freeman & Co, Solicitors. Those Names have been advised that recoveries on their personal stop loss insurances do not fall within the trust fund created by the Premiums Trust Deeds which they executed. On behalf of the Names for whom he acts Mr Michael Freeman put this contention to Lloyds. Lloyds disputed the contention of the Names on a number of grounds and issued the Originating Summons or appropriate declaratory relief. By agreement between Mr Michael Freeman and Lloyds the proceedings were instituted against Mr Morris and Mr Kimpton in the expectation that a ruling on the disputes between these two Names and Lloyds will provide guidance to the Lloyds market generally. It is right, however, to point out that the proceedings are not formally representative proceedings binding on all Names.
The issues before Tuckey J
Mr Justice Tuckey was asked to decide a number of issues of which three remain issues on this appeal. These issues are as follows:
(1) whether (as Lloyds contended) all personal stop loss recoveries by Names fall within the trust fund created by the Premiums Trust Deed;
(2) if not, whether Mr Morris is estopped from denying that the recoveries from his personal stop loss insurances have been assigned to his Premiums Trust Fund;
(3) if the answer to (1) is No, whether Mr Morris and Mr Kimpton validly and effectively assigned their contractual right to receive personal stop loss recoveries to the trustees under their Premiums Trust Deeds.
Mr Justice Tuckey decided issues (1) and (2) against Lloyds and in favour of the Names. He decided issue (3) in favour of Lloyds and against the Names.
For the sake of completeness we record that at first instance Lloyds attempted to sustain its contention on two further grounds which have now been abandoned. One was based on an asserted construction of an Assignment of Premium Deed which until 1985, was executed by Names joining Lloyds. The other was based on a direction given by the Chairman of Lloyds on 21 February 1992 pursuant to the powers of the Council of Lloyds under section 6 of the Lloyds Act 1982. It is sufficient for us to say that these concessions came as no surprise to us.
The Construction of the Premiums Trust Deed:
It is now necessary to set out the relevant provisions of the Premiums Trust Deed more fully. Clause 2(a) reads as follows:
"Subject as hereinafter provided the Trust Fund shall consist of
(i) all premiums and other monies whatsoever (except as provided in sub-clause (b) of this Clause) now belonging or payable or hereafter at any time belonging or becoming payable to the Name in connection with the Underwriting and
(ii) if the Members Agent is for the time being a Co- ordinating Agent all such monies or other assets vested in or under the control of the Members Agent (or any of the Members Agents Trustees) as represent
(1) profits from any current or past underwriting business of the Name at Lloyds carried on through the agency of or under arrangements made by or through a members agent other than the Members Agent or
(2) payments on account or in respect of United Kingdom income tax (and any interest thereon) on such profits and
(iii) so much of any deposits funds income and assets as is excepted in paragraphs (i) and (ii) of sub-clause (b) of this Clause and
(iv) all investments and other assets now or hereafter for the time being representing any such premiums or other monies (except as aforesaid) or representing any such monies or other assets referred to in paragraph (ii) of this sub-clause or representing so much of any deposits funds income and assets as aforesaid or representing the income next mentioned and
(v) all income from time to time arising from any such investments deposits funds or other assets comprised in the Trust Fund" (Our emphasis)
The words "the Underwriting" in Clause 2(a)(i) are defined in clause 1 as follows:
"The underwriting business (whether current or past or future) of the Name at Lloyds carried on through the agency of the Members Agent or under arrangements made by or through the Members Agent but excluding any long term business of the Name"
Clause 3 provides:
"The Trust Fund and the income thereof shall be held (by whomsoever and in whatever names the monies and assets comprised therein are respectively now held or stand or shall hereafter at any time be held or stand) upon the following trusts subject as hereinafter provided
(a) In trust for the payment or discharge as provided in Clause 7(a) hereof
(i) of any losses claims returns of premiums reinsurance premiums and other outgoings now payable or at any time hereafter to become payable in connection with the Underwriting (hereinafter collectively referred to as "Underwriting payments") and "
Clause 6 provides:
"(a) All premiums monies and other assets whatsoever constituting or becoming part of the Trust Fund and received by the Name or on behalf of the Name by the Members Agent or any Managing Agent or any other person shall (subject as provided in sub-clauses (b) (c) and (d) of this Clause) forthwith after receipt (if not already vested as hereinafter provided) be paid or transferred to or otherwise vested in
(i) Lloyds (if Lloyds is then the sole Members Agents Trustee) or at least two of the Members Agents Trustees one of whom shall be qualified as provided in Clause 5(i) hereof (unless for the time being none of the Members Agents Trustees other than Lloyds is so qualified) or
(ii) an Approved bank company or an Approved nominee company so as to be held (in either case) by that company as a nominee and under the direct control of the Members Agents Trustees or (as the case may be) the sole Members Agents Trustee "
The question of construction is whether the language of clause 2(a)(i) is apt to cover the proceeds of personal stop loss policies taken out by Names on a voluntary basis for their own protection.
In concluding that clause 2(a)(i) does not embrace the proceeds of personal stop loss policies, Tuckey J relied on an earlier decision of Saville J in Napier v Kershaw (unreported, 14/5/1992). Saville J decided that damages payable to Names by their members agents and managing agents in respect of negligent underwriting is not caught by clause 2(a)(i) of a Premiums Trust Deed in identical form to the Premiums Trust Deed in the present case. That issue was decided by Saville J in a dispute between Lloyds and Names. The consequence of this decision was that the Names did not have to pay damages into the trust fund created by the Premiums Trust Deed. He stated:
"The money in question is clearly not a receipt of the underwriting business, for the business is one of underwriting at Lloyds and not one of compensating Names for mistakes allegedly made by their agents in conducting the Names business of underwriting at Lloyds. The money can hardly be described as an expense of the Names business of underwriting for it is a receipt and not an expense of the Name. As an expense, it is incurred by the Agents and not the Name, and it is the Names business with which we are concerned. The money is not a loss of the underwriting business since it represents compensation for losses and is not the losses themselves. It is not a profit of the underwriting business for the same reason, nor would it feature in the accounts of the Names Syndicate: and it should be remembered that a Name is only allowed to conduct underwriting business at Lloyds through Syndicates. Thus, the money is neither a receipt, nor an expense, nor a loss, nor a profit, nor even an item in the accounts, of the underwriting business of the Name carried on at Lloyds.
What, to my mind, the money has to with is not the Names business of underwriting at all, but the rights and obligations existing between the Name and his Members and Managing Agents: and those rights and obligations are not part of the Names business of underwriting at Lloyds either, but part of the internal arrangements made between these parties as a means of enabling the Names business of underwriting at Lloyds to be conducted. That business is business with third parties and not business between the Name and his Agents. In my judgment, the money is payable in connection with the latter and not the former business within the meaning of the Deeds.
I should add that I am not persuaded by the fact that under the revenue laws the money is, or may have to be, taken into account in assessing a Names liability for tax, for this depends on the meaning and effect of tax statutes and regulations with which the present case is not concerned and which (to adopt the words of Viscount Dunedin in Gliksten & Son v Green  AC 381, 385) represent a quagmire into which one should avoid treading unless absolutely necessary. I see no such necessity in the present case.
Lloyds did not appeal against this decision.
Tuckey J accepted the reasoning of Saville J in Napier v Kershaw. Tuckey J stated:
"Looking at the statutory and contractual background to the deed it is clear that its primary purpose is to provide a fund for the payment of policy holders and to this end the premium which a name receives from his underwriting, which he can only do as a member of a syndicate, becomes subject to the trust. I think that the words "other monies whatsoever payable in connection with the underwriting" are directed to other receipts of this underwriting such as reinsurance recoveries, salvage and the like. In other words they refer to all monies received by or on behalf of the name as an underwriter on a syndicate. PSL recoveries do not fall into this category. Such recoveries are not receipts of the names underwriting business but the product of a personal voluntary arrangement which the name has affected in order to soften the blow in the event that his underwriting business goes badly. I think this case is a fortiori Napier v Kershaw where the damages at least represented the proceeds of the underwriting business which, but for the negligence, the name would have received or been credited with."
Miss Gloster challenged the reasoning of Tuckey J. She argued that the Premiums Trust Deed covers all recoveries under personal stop loss policies however such policies might be worded. She said that the inclusion of the word "whatsoever" after "other monies" excludes the application of the ejusdem generis rule of construction and enlarges the scope of the word "monies" mentioned earlier. "Other monies" must therefore be given its full meaning. She argued that the words "in connection with" mean "substantially related in a practical business sense" or "having something to do with". She submitted that Saville J and Tuckey J fell into error in approaching the matter of construction as a single enquiry. She said that the correct approach is to ask first whether the taking out of the personal stop loss policies is part of the underwriting business. If it is, then Lloyds construction prevails. If it is not, then the next question is whether such policies are taken out "in connection with" the underwriting business. And she emphasised the width of the words "in connection with". Miss Gloster pointed to the differences between Napier v Kershaw and the present case. She said that the decision of Saville J was in any event wrong.
It seems to us that the argument advanced on behalf of Lloyds stretches the language of clause 2(a)(i) beyond the limits which the context will allow. It must be remembered that a Name is a passive participant in the business of a syndicate. The managing agents and active underwriter take all underwriting and investment decisions. They are not obliged to take into account the individual wishes and circumstances of a Name but they must be guided by the best interests of the syndicate as a whole. All moneys derived from the business transacted by the managing agents and active underwriter in and about the affairs of the syndicate fall within the trust fund unless expressly excepted by the deed. In contradistinction the taking out of a personal stop loss policy by a Name is not syndicate business. The Name is not obliged to take out a stop loss policy. The managing agent or active underwriter cannot require him to do so. And he is entitled to reject advice to do so. It is an essentially personal decision by the Name for his own protection, judged in the light of his assessment of his personal circumstances. Moreover, he is entitled to arrange such personal stop loss insurance outside Lloyds.
All moneys derived directly or indirectly from the underwriting business clearly fall within clause 2(a)(i). It follows that the proceeds of syndicate reinsurances, reinsurances to close, salvage, and the like, form part of the trust fund. But the proceeds of the personal stop loss insurances are not money derived directly or indirectly from "the Underwriting". Such moneys can only be said to be payable "in connection with the Underwriting" if one gives to that phrase the very wide meaning "having something to do with". Taken in isolation the words are capable of bearing such a meaning but the context suggests otherwise. Postulate, for example, the case where a Name recovers damages from a financial adviser outside Lloyds who negligently advised him to join a particular syndicate. It is rightly conceded that such a recovery could not be caught by clause 2(a)(i). Yet such a recovery may in a sense be said to "have something to do with" the underwriting. That would, however, be too wide a construction of those words in the context. Properly construed it seems to us that the words "in connection with the Underwriting" import the idea that the underwriting business must be the source of the funds. And plainly the underwriting business was not the source of the stop loss recoveries.
Miss Gloster sought to gain support for her wide construction of the words "in connection with the Underwriting" from other parts of the trust deed. Since the trust deed must be read as a whole this is in principle a perfectly legitimate exercise. She invoked clause 3(a)(i) which provides for the payment out of the trust fund and its income of "losses claims returns of premiums reinsurance premiums". In our view, however, this provision must be read in the same sense as clause 2(a)(i), and on this basis it yields no support to Lloyds argument. Miss Gloster also relied on clause 6(a) which imposes a duty to transfer moneys "constituting or becoming part of the trust fund" for the benefit of the fund. In our view clause 6(a) merely represents the contractual machinery to implement the due constitution of the trust fund. In our view it does not militate against the construction which we have suggested.
We would respectfully accept the reasoning of Saville J in Napier v Kershaw. There are, of course, differences between that case and the present case. But we believe that the interpretation of Saville J, and the distinction between business transacted at syndicate level and at a personal level, is valid and applicable to the present case. In agreement with Saville J we also do not consider that the fact that the Inland Revenue allow tax relief on stop loss insurance premiums is significant. It follows that we also respectfully endorse the reasoning of Tuckey J in his judgment in the present case.
There is also a broader consideration which appear to us to militate against the construction put forward by Lloyds. Given the fact that personal stop loss insurance is taken out in the discretion of a member and for his own personal benefit, it seems to us that more explicit language than the words of clause 2(a)(i) would be needed to bring proceeds of such insurances within the scope of clause 2(a)(i). Taking into account the widespread use of such policies since at least 1980, the increase in the use of such insurance over the last decade, and the fact that the use of such policies at Lloyds has been a matter of some controversy, one would have expected an explicit reference in clause 2(a)(i) to the proceeds of personal stop loss insurance if it was intended that such recoveries should form part of the trust fund created by the Premiums Trust Deed.
Finally, we would emphasise the vagueness of the words "in connection with" in clause 2(a)(i) upon which Lloyds must found their construction. Fowler (A Dictionary of Modern English Usage, 2nd edn, 105) comments on this phrase in the following trenchant terms:
"In the prevalent modern use, however, it is worn down into a mere compound preposition, with vagueness and pliability as its only merits".
Given the contextual scene in which those words appear in the Premiums Trust Deed, it cannot possibly be said that they unambiguously embrace the proceeds of stop loss insurances. If, contrary to our view, the relevant words in clause 2(a)(i) are ambiguous, it follows that the Names obligation to provide security must be given the narrower of the two possible interpretations. In that event Lloyds submission also fails. Having pointed to this further difficulty in the way of the submission made on behalf of Lloyds, we make clear, however, that we hold that the proper contextual interpretation of clause 2(a)(i) is plain, and that it is one which does not embrace the proceeds of personal stop loss insurances.
For all these reasons we reject Lloyds submission on the construction of clause 2(a)(i)
Lloyds plea of estoppel assumes, as we have ruled, that recoveries under personal stop loss reinsurances are not caught by Clause 2(a)(i) of the Premiums Trust Deed. The estoppel issue arises in these proceedings only between Lloyds and Mr Morris, and only in respect of matters said and done on his behalf in respect of the 1991 solvency test. On the other hand, we have been told on behalf of Lloyds that our judgment on this issue may provide guidance in respect of other Names who are in a similar position to Mr Morris.
The Solvency and Reporting Byelaw, No 13 of 1990, dated 5 December 1990, contains comprehensive provisions for the conduct of the annual solvency test which a Name must pass. Since there is no controversy about this aspect we need not set out the terms of the byelaw. In his affidavit Mr Prior helpfully summarised the procedure adopted in respect of the annual solvency test. Lloyds Solvency and Reporting Department ("SRD") publishes a Market Bulletin in January or February each year prescribing inter alia the Solvency and Reporting Forms ("SR Forms") and the criteria for ascertaining assets eligible for the solvency test at the previous year end. It is an important document and we must quote from it at some length. The relevant bulletin provided:
"5. PERSONAL STOP LOSS CONTRACTS AND ESTATE REINSURANCE CONTRACTS
Contracts underwritten at Lloyds
5.1 In relation to reinsurance contracts underwritten at Lloyds the conditions set out in paragraph 5.2 below must be met if anticipated recoveries are to be brought into account for the purposes of the solvency test under:
(a) a members personal stop loss contract (including a stop loss contract taken out by an underwriting or non-underwriting member, or on behalf of a deceased member); and/or
5.2. The following are the conditions referred to in paragraph 5.1 above:
(a) in relation to the contract:
(1) the contract must contain an assignment of any recovery to the trustees of the members premiums trust fund;
(2) the contract must provide for the payment of cash on account before determination of the final outcome of an underwriting account where it can be demonstrated that such payment is required to meet the members underwriting liabilities (eg to pay claims and expenses or to fund a currency shortfall where there is an overall estimated loss which would give rise to a claim under the contract);
(3) the terms of the contract must be such that the amount of any recovery (or anticipated recovery can be ascertained with reasonable certainty at any stage of the underwriting account; and
(4) the contract must be non-cancellable; and
(b) in relation to the members agent, the contract must be held on the members behalf by his members agent before the amount of any anticipated recovery may be taken into account.
5.3 (a) where a personal stop loss contract does not meet the conditions set out in paragraph 5.2(a) above, the amount of any anticipated recovery may nonetheless be taken into account if it can be established to the satisfaction of the recognised auditor appointed by the members agent that:
i) a recovery is due under a personal stop loss contract;
ii) the amount of such recovery can be ascertained with reasonable certainty;
iii) the recovery will be collected; and iv) the rights to the recovery have been assigned to the trustees of the members premiums trust fund
provided that in such cases the amount to be taken into account in respect of anticipated recoveries shall be limited to a maximum of 50% of the amount of the anticipated recovery unless the reinsurers provide to the trustees of the members premiums trust fund a letter of credit for a greater amount in which case that greater amount may be taken into account."
For present purposes paragraph 5.3 above, and in particular the need for satisfying the auditor that "the rights to the recovery have been assigned to the trustees of the members premiums trust fund", is the important provision. The SRD procedure requires that by 28 February members agents must file a list of eligible assets held for each Name as at 31st December the previous year. Once the syndicate results are known, and that happens in about June, members agents must complement the information already given in the light of syndicate results, by filing appropriate SR forms. If any Name has a shortfall at this stage, the members agent may, again on appropriate SR forms, report supplementary assets received since 31 December. At this stage the members agent may declare anticipated stop loss recoveries, which satisfy the SRD criteria. Where a Name has an asset shortfall by the earmarking date (a date between July and September fixed by Lloyds) the Committee earmarks a proportion of Lloyds Central Fund to make good the deficiency. The SRD then notifies the members agent of any earmarking in respect of a Name. The Name is then required to report further assets to clear his solvency shortfall by the solvency clearance date (that being a date in September or October as determined by Lloyds), failing which he will receive a notice of demand and an administrative suspension may follow if the Name is actively underwriting. Any further assets declared to clear a solvency must be reported by filing SR forms. Names served with a notice of earmarking demand face legal action by Lloyds to recover the amount of the earmarking as a civil debt if the solvency shortfall is not cleared by the date specified in the notice.
Against this background it is now possible to examine what was done by or on behalf of Mr Morris in regard to the 1991 solvency test. In August 1992 Mr Morris anticipated recoveries totalling £208,980 under two personal stop loss policies. On 12 August 1992 Laurence Philipps (Agencies) Ltd (Mr Morriss members agent) filed on behalf of (among others) Mr Morris a supplementary asset return. This return included as a discrete item in respect of Mr Morris his anticipated personal stop loss recoveries in the sum of £208,980. The members agents stated in the return that it had been prepared "in accordance with the provisions of the Solvency and Reporting Byelaw (No 13 of 1990) and the conditions and requirements prescribed thereunder". That meant that the recoveries were represented to be "eligible assets" within the meaning of paragraph 5.3 of the Market Bulletin, ie that the rights of recovery had been assigned to the trustees of Mr Morris Premiums Trust Fund. On the 13th August 1992 Ernst & Young (the auditors) gave a certificate to the same effect. The earmarking date for the 1991 solvency test was 2 September 1992. By that date Lloyds had earmarked a sum or £55,078 in the Central Fund in respect of Mr Morris. On 2 September 1992 Lloyds submitted a certificate of solvency as at 31.12.1991 to the Department of Trade and Industry pursuant to section 83(4) of the Insurance Companies Act 1982. On 9 September 1991 Lloyds submitted the statement of business to the DTI as at 31.12.1991 pursuant to section 86(1) of the Insurance Companies Act 1982. On 16 September 1992 Mr Morriss members agent tried to withdraw Mr Morriss personal stop loss recoveries from the insolvency process by filing a negative return for Mr Morris.
At first instance Lloyds argued that these facts and circumstances gave rise to an estoppel by representation precluding Mr Morris from denying that his personal stop loss recoveries had been assigned to his premiums trust fund trustees in order to satisfy the solvency test for 1991. The judge found that the alleged representation on behalf of Mr Morris, and reliance by Lloyds thereon, had been established. He held, however, that Lloyds had failed to establish any prejudice, and the plea of estoppel accordingly failed. Lloyds attempted at the hearing before Tuckey J also to rely on a promissory estoppel. Tuckey J held that this was a change of case, which came too late, and he accordingly found against Lloyds on this point.
Before us Miss Gloster principally relied on estoppel by representation and estoppel by convention. The requirements of estoppel by representation are too well known to require citation of authority. The requirements of estoppel by convention are explained in Norwegian American Cruises AS v Paul Mundy Ltd (The Vistafjord)  2 Lloyds Rep, 343 at 351-352. Miss Gloster added that, if necessary, she would rely on promissory estoppel. The argument advanced by Miss Gloster on the estoppel issue before us was considerably more detailed and refined than the argument placed before Tuckey J. Miss Gloster explained her case as follows: By virtue of the asset return submitted on behalf of Mr Morris to Lloyds on 12 August 1992, Mr Morris represented or, alternatively, Lloyds and Mr Morris thereafter proceeded at least until 16 September 1992 (when Mr Morris attempted to withdraw the assets) on the common assumption:
(1) that Mr Morris had £208,980 of anticipated personal stop loss recoveries as at 31 December 1991;
(2) that those recoveries were "eligible" assets under the Lloyds SRD Requirements for the purpose of Mr Morris 1991 solvency test, because the right to the recovery declared in the asset return had been assigned to his premiums trust fund trustees;
(3) that Mr Morris required such PSL recoveries to be taken into account in the sum of £208,980 as "eligible" assets
(a) for the purposes of the solvency statement which Lloyds had to prepare to enable him to pass that test;
(b) for the purposes of the earmarking by Lloyds to enable him to pass that test;
(c) for the purpose of the auditors solvency certificate pursuant to section 83(4) and (5) of the Insurance Companies Act 1982.
(4) that accordingly, such assets were eligible assets, the legal title to which was vested in his premiums trust fund trustees, and available to discharge his liabilities as at 31 December 1991 as shown in his solvency statement as certified and audited.
It will be obvious that the asset return of 12 August 1992, and the auditors certificate of 13 August 1992, are the foundation of Lloyds case on estoppel. Mr Seymour said on a number of occasions that the filing of the asset return was a "mistake" by Mr Morris members agent. There is no evidence to that effect before us. But, in any event, if the members agent had no express authority to submit the asset return, he most certainly had either implied authority or apparent authority to do so. This part of Mr Seymours argument cannot avail Mr Morris.
Turning now to the merits of the plea of estoppel we accept Miss Glosters interpretation of the contemporary documents. We have no difficulty in finding that the necessary representation by Mr Morris and reliance by Lloyds has been established. The major focus of Mr Seymours argument was, however, in support of the judges conclusion that no prejudice to Lloyds was established. Miss Gloster submitted that in reliance on the representation Lloyds underestimated the amount to be earmarked out of the Central Fund to enable Mr Morris to pass the 1991 solvency test. It is probable that, if the representation had not been made, a further sum of the order of £181,000 would have been earmarked in the Central Fund in respect of Mr Morris. Moreover, the statement of business made by the Council of Lloyds pursuant to section 86(1) of the Insurance Companies Act 1982, which is dated 9 September 1992 contains a certificate to the following effect by, among others, the Chairman of Lloyds:
"A certificate complying with subsection (5) of section 83 of the Insurance Companies Act 1982 has been furnished to the Council of Lloyds and the Secretary of State pursuant to subsection (4) of that section in respect of every underwriting member of Lloyds."
The certificate referred to was given by Ernst & Young, the registered Auditors of Lloyds, on 2 September 1992. The certificate states:
"In our opinion, the value of the assets . . . available to meet each underwriting members liabilities, calculated in accordance with the said Instructions, in respect of his insurance business is correctly shown in the accounts and is sufficient to meet his liabilities in respect of that business."
The Auditors certificate in turn relied inter alia on a report in respect of underwriting accounts which in the case of Mr Morris is the certificate of 13 August 1992. It follows that Lloyds submitted an incorrect certificate to the Secretary of State. In our judgment these facts on their own establish sufficient detrimental reliance on the part of Lloyds to found an estoppel by representation.
Miss Gloster has, however, also persuaded us that the prejudice to Lloyds is more fundamental. She directed our attention to paragraph 10A(1) of the Central Fund Byelaw, No 4 of 1986, 14 July 1986. It reads as follows:
"Where the Council directs or has directed that, in order that a members solvency report may be issued in respect of any member of the Society, there be put in trust, charged, appropriated or set apart, conditionally or otherwise, (whether separately or as part of assets so dealt with in respect of more than one member of the purposes mentioned in paragraph 7(a) to (d), assets of the Central Fund sufficient in value to enable that member of the Society to pass an annual solvency test to which that members solvency report relates, the Council may take action against such member in accordance with the provisions of this paragraph notwithstanding that such assets of the Central Fund have not yet been applied for any of the purposes mentioned in paragraph 7(a) to (d)"
This provision must be read with the definition of "members solvency report" in the Schedule Interpretation. It is to the following effect:
"members solvency report" means the certificate issued by an auditor in the form prescribed by the Insurance (Lloyds) Regulations 1983 (SI 1983 No 224) evidencing that a member of the Society has passed an annual solvency test and furnished to the Council and the Secretary of State"
Miss Gloster said that, so far as earmarking is concerned, once the Central Fund has been earmarked in a particular amount to enable a name to pass his annual solvency test, then, if the earmarking has not been cleared by the solvency clearance date, Lloyds can serve a notice under paragraph 10A requiring payment of the earmarked amount, and can subsequently sue for it as a civil debt. But it would not be possible for Lloyds under the terms of paragraph 10A to increase the amount of the earmarking and then serve a 10A notice, and sue, in respect of the increased amount. This is because the 10A procedure is limited to amounts earmarked "to enable [the name] to pass an annual solvency test to which that [names] solvency report relates". Any additional earmarking would not be for that purpose. We accept this submission. For this further reason we hold that prejudice, and therefore all the ingredients of estoppel by representation, are established.
We are further persuaded that as a result of the submission of the asset return of 12 August 1991 on behalf of Mr Morris both Mr Morris and Lloyds acted upon the common assumption of fact that the stop loss insurance recoveries had been assigned to the trust under the premiums trust deed. It is necessary to show that it would be unconscionable to allow Mr Morris to revert without further ado to his strict legal rights. In our judgment it would indeed be unconscionable to allow Mr Morris to assert that he did not assign recoveries under the stop loss insurance policies to the trustees under the premiums trust deed. Thus the requirements of estoppel by convention, as explained in the Vistafjord case, are satisfied.
Mr Seymour argued, however, that Lloyds are seeking to use estoppel as a sword and not a shield. He referred us to the decision of this Court in Amalgamated Investment & Property Co Ltd v Texas Commerce International Bank Ltd  1 QB 84,  3 All ER 577. In that case, however Lord Justice Brandon pointed out (at 131H) that while a party cannot in terms found a cause of action on an estoppel, he may, as a result of being able to rely on an estoppel, succeed on a cause of action on which, but for the estoppel, he would necessarily have failed. In our judgment Mr Seymours objection is not well founded. Lloyds would be fully entitled to plead a cause of action asserting that Mr Morris had assigned recoveries under the stop loss policies to the trustees under the premiums trust deed. If asked for further and better particulars, Lloyds could quite properly rely on the asset return, read with paragraph 5.3 of the Market Bulletin, as an admission against interest made by Mr Morris that he had effected such an assignment. If the fact of the assignment was denied by Mr Morris, Lloyds would be entitled to reply that Mr Morris is estopped from denying the fact of the assignment. In our judgment Lloyds are not seeking to use estoppel as a weapon of offence.
It follows that Lloyds have established both an estoppel by representation and an estoppel by convention. In view of these conclusions it is unnecessary to discuss promissory estoppel in detail. We do not, however, see any difficulty in spelling out the necessary promise not to withdraw the assets from the 1991 solvency test. Lloyds clearly relied on that promissory statement, and Lloyds did so to its detriment. The elements of a promissory estoppel are also established.
That brings us to the effect of the estoppel.
Miss Gloster concedes that the estoppel only applies to the extent required by the equity which the estoppel has raised. That must be right. It follows that Mr Morris will not be estopped from withdrawing the recoveries under the stop loss insurances when all his obligations to policyholders as at 31 December 1991 have been discharged. It is, however, still necessary to consider whether Mr Morris has disposed of his rights to such recoveries by assignment.
In argument we were referred to three letters. The first was in what was described as "Old Form 1". The effect of this letter is not an issue in the present proceedings. It was not signed by either Mr Morris or Mr Kimpton. The evidence about it is also incomplete. Whatever we say about it would be obiter. We do not intend to examine the effect of this letter. But we are called on to consider the effect of two letters in "Old Form 2" which were respectively signed not only by Mr Morris and Mr Kimpton but also by many other Names. The letter signed by Mr Morris is dated 20 July 1991. The letter signed by Mr Kimpton is undated but that does not matter. The letter signed by Mr Morris is addressed to Carritt & Partners, Lloyds brokers. The letter signed by Mr Kimpton does not contain the name of an addressee. It seems probable that it was addressed to brokers. Mr Seymour invited us to proceed on that assumption and we will do so. The two letters are in identical form. It will therefore be sufficient to refer to the letter signed by Mr Morris. It reads as follows:
PERSONAL STOP LOSS INSURANCE POLICY NO 8716330
We, the undersigned, give our irrevocable agreement that any recoveries made under the above mentioned Stop Loss Insurance Policy shall be paid to the Trustees of the Premiums Trust Fund and held on this Account until all the Assureds obligations following the Annual Solvency Audit at the 31st December 1990 and subsequent Annual Solvency Audits have been satisfied.
Furthermore, if Stop Loss Insurers advance any monies as an 'on account' payment under the Policy, we give our irrevocable agreement that such amounts subsequently shown to be an over-payment by
either: the production of a subsequent Personal Account statement showing a loss less than the amount previously notified
or: the production of a tax form LL9 showing a loss less than the amount previously notified
shall be refunded to the Underwriters of the above Policy within 30 days of written notice being given by Carritt and Partners Limited that such refund is due. Subject always to the Terms and Conditions of the Policy."
The letter was signed by Mr Morris. It was also countersigned on behalf of the "Trustees Of The Assureds Premium Trust Fund".
The submission on behalf of Lloyds is that the Old Form 2 letters constitute a legal assignment of existing contractual rights which satisfies the well known requirements of section 136 of the Law of Property Act 1925. That submission was accepted by the judge. Mr Seymour mounted a sustained attack on this ruling of the judge.
The judge understood Mr Seymour to contend that the operative words of Old Form 2 merely conferred a revocable authority on the brokers to pay personal stop loss recoveries to the trustees of the premiums trust deeds of the Names. Initially, it seemed to us that this was also a contention before us. But in due course Mr Seymour expressly disclaimed this particular submission. Taking into account the use of the word "irrevocable", the word "agreement" instead of the word "authority" and the counter signature of the letter by the trustees of the premiums trust deed, we regard Mr Seymours concession as inevitable.
Mr Seymour concedes that Old Form 2 letter evidences an intention to assign contractual rights. The question is: what rights? We understood him to argue that the assignment evidenced by Old Form 2 letters merely extended to the rights of Names to receive sums already paid or due and owing under stop loss insurances. He submitted that the assignment does not extend to sums becoming due after the brokers authority had been revoked. This is a difficult submission to sustain. The letter does not draw the distinction suggested. It makes no reference to the withdrawal of the brokers authority. The words "any recoveries" are very wide. They must be read in the context of paragraph 5.3 of the Market Bulletin. That paragraph refers to "anticipated recovery", and stipulates that one of the relevant criteria is that "the rights to the recovery have been assigned to the trustees to the members premiums trust fund". There is no hint of the distinction drawn by Mr Seymour in the language of paragraph 5.3 or in the language of the letter itself.
There is, however, another factor to be taken into account. Mr Seymour argues that Old Form 2 letters were addressed to the brokers, who would in due course be receiving moneys under the stop loss insurance policies for onward transmission to the Names, solely in their capacity as agents for the Names. The judge dealt with this issue in the following terms:
"Were the letters notice to underwriters? Lloyds submit that the brokers were the agents of underwriters for this purpose. A Lloyds broker is generally the agent of the insured. whether PSLs were written by brokers holding a binding authority or under a line slip from underwriters does not emerge from the evidence before me, although I would not be surprised if that were the case in which event for some purposes obviously the brokers would be the underwriters agents. Nevertheless, there are clearly other circumstances (eg notification of claims) in which the broker may act as agent of underwriters in this market. It was clearly intended that the letters to brokers were to serve as notice to underwriters and I can see no reason why such intention should not be given effect. The second part of Old Form 2 which contains the obligations assumed by trustees in the event of overpayment must have been received by brokers in their capacity as agent for underwriters and it would therefore be wholly artificial to say that the first part was only received by them in their capacity as agent for the insured"
We agree. Indeed before us it was common ground that the brokers acted pursuant to binding authorities given by stop loss underwriters to the brokers. That in our judgment decisively shows that the Old Form 2 letters were received by the brokers partly as agents for the stop loss underwriters. But we make clear immediately that, even if the brokers had not acted pursuant to binding authorities, we would still have taken the view that in the circumstances the brokers were the agents of the stop loss underwriters for the limited purpose of receiving notice of the assignment. This view is supported by the fact that the Old Form 2 letters were countersigned by the trustees and incorporated an undertaking in favour of the stop loss underwriter to return overpayments.
In our judgment the Old Form 2 letters constitute an absolute assignment of existing contractual rights, viz the right of the Names to future recoveries under the stop loss insurances irrespective of when they become due and owing. The Old Form 2 letters were signed by the assignors. Express notice of the assignment was given to the stop loss underwriters by delivery of the letters to the brokers, who for that purpose were the agents of the underwriters. In agreement with the judge we are satisfied that there has been a valid and effective legal assignment as submitted by Lloyds.
It follows that in our judgment the appeal of Lloyds should be dismissed on the construction point and allowed on the estoppel issue. The cross-appeal by the Names on the assignment issue, is dismissed. The precise form of order to be made is a matter on which we invite counsels submissions.
Lloyds Legal Department; Michael Freeman & Co