Daly v Lime Street Underwriting Agencies Ltd and Others

Queen's Bench Division (Commercial Court)

The Times 8 June 1987, The FT 17 June 1987, (Transcript:Hemingway)

HEARING-DATES: 4 June 1987

4 June 1987

Anthony Boswood QC and Philip Brook Smith for the Plaintiff, AD Colman QC and J Gilman for the Defendants

PANEL: Staughton J


STAUGHTON J: There are some 31,000 underwriting members of Lloyd's. The plaintiff, Mr Daly, was until recently and still is to some extent one of them. By "underwriting members" I mean those who as members make themselves liable on policies of insurance. In general they do not take any active part in the business; it is all done for them by agents. But at about this time of year they receive accounts from those who act on their behalf, together with a cheque or a demand for payment. They are frequently referred to as names.

The underwriting members are grouped together in syndicates, and may participate in more than one syndicate. An internal arrangement of the syndicate decides the percentage of its business which each underwriting member takes upon himself. The business of a syndicate is run by somebody who has been called in this case the active underwriter. He sits in his box at Lloyd's, initials slips that are brought to him by brokers so as to conclude contracts of insurance, authorizes the payment of claims, and gives directions for the effecting of recoveries. For example, I have seen a slip which gave notice of a loss initialled by the active underwriter of a syndicate with the laconic and even minatory observation:

"Instruct Ince."

When, as frequently happens, a slip designed to effect a contract of insurance is initialled by the active underwriters of several syndicates, each states the percentage or proportion of the risk which is accepted by his syndicate. One of them can be recognised as the leading underwriter of that particular insurance. That does not necessarily give him authority to act on behalf of the members of other syndicates on the risk. But the slip may expressly confer such authority -- for example by the words "declarations to be approved by leading underwriter only". Otherwise the initials of each active underwriter bind only the underwriting members of his syndicate. But the status or standing of the leading underwriter frequently has the result that other active underwriters follow his decisions.

It is as plain as can be that each underwriting member participates in a contract of insurance for his share only -- that is for his proportion of the syndicate's business applied to the syndicate's proportion of the risk as a whole. See, for example, the standard form of marine policy in the First Schedule to the Marine Insurance Act 1906, which has the words:

"do hereby promise and bind ourselves, each one for his own part."

The members of a syndicate are not partners. Each is liable for his own obligations and not for those of other members.

The administration of these arrangements is somewhat complex. The underwriting member concludes an agreement with a members' agent, conferring certain powers on the agent. He in turn concludes, on behalf of one or more underwriting members who are his clients, an agreement with the managing agents of the syndicate. They appoint an active underwriter, at a salary it is said, to manage the affairs of the syndicate. In doing so he acts both for himself and, by delegated authority, for all the other members of the syndicate. In this case Mr Daly appointed the first defendants, Lime Street Underwriting Agencies Limited, as his Members' Agent. They on behalf of Mr Daly and others concluded an agreement with CJW (Underwriting Agencies) Ltd, the second defendants, as managing agents of syndicate 553. Mr Warrilow, the third defendant, is the active underwriter of that syndicate.

When Mr Lloyd ran his coffee-house at the start of the 18th century such elaborate arrangements may not have been necessary. For all I know each underwriter then used to attend daily, to subscribe personally to contracts of insurance, receive premiums and pay claims. But with over 30,000 members it is plain that agency is an essential feature of the operation in modern times. If only 10,000 of them were involved in one contract of insurance, as might well be the case, for individual amounts that were quite small, it would be manifestly impracticable and uneconomic that each should be required, or permitted, to attend to his own share of the business personally.

Before turning to the issues in this case I must say something about the accounting system at Lloyd's. The accounts of a syndicate for business undertaken in a calendar year remain open for the two years next ensuing. Then they are closed, and each underwriting member receives his share of the profit (unless it is transferred to a reserve) or pays his share of the loss. But long-tail business may result in liability many years later, and recoveries may be achieved after the third year has expired. To allow for such events the outstanding business of the syndicate is, at the end of the third year, reinsured. This is called reinsurance to close. As I understand the practice it is generally placed with those who are members of the same syndicate in the next year, ie, the business of 1984 is on 31st December 1986 reinsured, often for a substantial premium, as part of the business of the syndicate for 1985. That allows the members to calculate their profit or loss for 1984 (subject to the views of the Inland Revenue and Parliament); and if any have died or resigned from membership, they or their executors can sleep easily at night, in the knowledge that any outstanding liabilities are reinsured with their successors.

Mr Daly, who is an American citizen, submitted an application for membership in 1978. He was required to sign a form which stated, inter alia:

"I understand the following matters, which have been explained to me by my Underwriting Agent . . .

(g) the control of my underwriting must remain solely in the hands of my Underwriting Agent, and I may take no active role in the conduct of the insurance business on my behalf".

Clearly the managing agents of a syndicate, and the active underwriter, would find it difficult to carry on business if they were liable to receive hundreds of anguished telephone calls every time that news of a major casualty appeared in the press.

On 1st January 1980 Mr Daly became a member of syndicate 553. The number of members of the syndicate no doubt varied from year to year. In 1984 it was 1463.

The present dispute arises out of two binding authorities (or "binders") granted to Atlas Underwriters Ltd of Richmond, Virginia. The first, numbered T 10350 was granted by syndicate 553 and 12 other syndicates at Lloyd's for one year from 1st October 1980 and was subsequently extended. The second, number T 10404, was granted by syndicate 553 only, for one year from 1st January 1982 and was also subsequently extended. Both were terminated on 31st December 1984.

Mr Warrilow, and no doubt the active underwriters of the other syndicates involved, were dissatisfied with the conduct of Atlas. On 24th March 1986 a complaint was filed in the United States Court for the Eastern District of Virginia by Mr Warrilow, on his own behalf and on behalf of other Lloyd's underwriters subscribing to Binding Authority agreements T 10350 and T 10404. According to the affidavit of Mr Boxer, in summary the claims against Atlas were as follows:

"(a) Recovery of original insurance files from Atlas's possession and damages for alleged wrongful detention,

(b) Equitable accounting to prevent Atlas's unjust enrichment from profits of its breach of its duty of loyalty as a fiduciary,

(c) Damages for alleged breach of the cover holder agreements, the binders, and for breach of fiduciary duty in negligence.

The plaintiffs sought punitive and exemplary damages for the defendants' breach of fiduciary duty and breach of contract. At the same time the plaintiffs sought a detinue order, a temporary restraining order and preliminary injunction".

The process of discovery commenced, and then on 11th July 1986 Mr Warrilow applied for and was granted leave to amend his complaint. Additional defendants were added -- Chesapeake Underwriters Ltd, one other corporation and five individuals. Amongst the new claims was one for triple damages against Atlas and three of the individual defendants for violations of the Racketeer Influenced and Corrupt Organisations Act ("RICO"). An order was also sought to override a conveyance by Atlas of its assets to Chesapeake, which was said to be a fraud on the creditors of Atlas.

Meanwhile Mr Daly had, on 15th May 1985, resigned as a member of syndicate 553 and a member of Lloyd's, with effect from 1st January 1986. The last three years of his underwriting were thus 1983, 1984 and 1985. Of those years the accounts for the first have now been closed; although Mr Daly formally remains a party to contracts made on his behalf in that year, he no longer has any financial interest in them since his liability is covered by the reinsurance to close. I am told that, contrary to what I believe is the usual practice, 1984 has not yet been closed entirely. For the present Mr Daly still has a financial interest in the business of 1984 and 1985; but that may be expected to disappear in due course by means of reinsurance to close.

Nevertheless Mr Daly is, along with 4951 others, one of those on whose behalf Mr Warrilow commenced the action in the United States District Court. In this court he now seeks a declaration that he has conferred no authority on the defendants or any of them to commence or continue the United States action on his behalf, and an injunction restraining the second and third defendants from continuing the US proceedings on his behalf. Various alternative forms of that relief are sought in the originating summons. But Mr Boswood on Mr Daly's behalf has made it clear that he is most concerned to restrain that part of the US action in which punitive and exemplary damages, exceeding any loss actually suffered, are claimed.

The motive for this action is plain enough. Mr Daly has for some time been the president of James P Daly Inc, a wholesale insurance agency in New Jersey. He has also now become a director of Chesapeake, one of the added defendants in the United States action; this is said to have occurred on 9th January 1986. So he may have an interest in the welfare of that company. In his capacity as a former member of syndicate 553 he is suing Chesapeake; and although the claim for triple damages is not made directly against that company, the effect of it may be felt by reason of the claim that the transfer of assets by Atlas to Chesapeake should be set aside. Furthermore, there is a counterclaim by Atlas in the United States action, also based on RICO and for triple damages. One way or another, it seems unlikely that Mr Daly will derive any net benefit from that action; and he may find it merely an expensive method of providing employment for lawyers, so far as he is concerned.

Judge Merhige in the United States District Court was invited to stay the action before him until the proceedings here were concluded. He declined to do so, with great courtesy and for good reason. I trust that this judgment, coming from a court which has, if I may say so, a close acquaintance with the methods of work at Lloyd's, will be of some assistance. In passing, I would mention that when, on 27th February 1987 I ordered that a date be fixed for trial, I also ordered by consent that the plaintiffs' opening was to be concluded in two hours. I suspect that this period was rather longer than would be consumed in any event in an American court -- but not with some of the prolix advocates we have in this country. Mr Boswood faithfully complied with that obligation. Others who seek an expedited hearing and priority over the business of other litigants may find that a similar undertaking is exacted from them.

The RICO statute was enacted by the Congress of the United States in 1970. It is said to have been the reaction

"to a problem of organised crime and drug trafficking on a very large scale."

(see The Profits of Crime and Their Recovery by Mr Justice Hodgson and others p 36). Until 1980 the powers of criminal forfeiture in the statute were used relatively rarely (ibid p 40). But it would seem that the civil remedies which the statute provides have been popular and widely used. They carry the advantages of mandatory damages equal to three times the loss suffered, a prospect of recovery of costs and attorneys' fees, and Federal jurisdiction. Although by no means welcomed by the United States judiciary, RICO actions are frequently brought even in cases which at first sight one would say had little to do with racketeer influenced and corrupt organisations. Mr Kiln in paragraph 37 of his affidavit says this:

"Mr Crosthwaite in his affidavit sworn on 18th December 1986, paragraph 12, suggests that the only proceedings that can be brought of right are normal and customary claims in proceedings for amounts owing to the relevant names on insurance or reinsurance transactions, including in this case for premiums owing to relevant names under the binder agreements. He further claims that RICO claims are not ordinary or customary claims in connection with the recovery of premiums or other monies due to the relevant names. This is not so. They have been part of normal and customary claims in the United States since the early 1970s at least".

I accept that evidence, although I have some caution about accepting the date of "early 1970s".

RICO has been described in an American article as one of the legal phenomena of our age, just as the Mareva injunction might be described in this country.

Mr Boswood does not complain that it was improper for Mr Warrilow to bring a RICO action in this particular case. What he does say is that Mr Warrilow had and has no authority to bring it on behalf of Mr Daly. So the question is whether such authority was in fact conferred on Mr Warrilow irrevocably by the agreement which Mr Daly signed when he became a member of Lloyd's. If it was, Mr Boswood does not argue that it was terminated when Mr Daly's membership expired. It would be difficult to argue that, since former members remain, as I have explained, in point of form parties to contracts of insurance once concluded on their behalf, even though their financial interest in such contracts gradually disappears though the reinsurance-to-close procedure. It is indeed possible that I am myself in point of form a party to the United States action, since I was an underwriting member in 1980. I do not know and have not asked. I certainly have no financial interest in it, since my membership expired more than three years ago.

Mr Daly says that he was never asked if the United Stations action could be commenced on his behalf. That is not surprising, in view of the evidence and the practice that I have described. What would have surprised me is if the 4952 underwriting members had all been asked, though I suppose that the active underwriters of the other 12 syndicates involved may well have been consulted. There have been occasions in the past when the underwriting members of a syndicate have emerged from their backwoods and taken an active interest in its affairs. One example is the PCW affair. But they are rare, and justified by some special reason.

Mr Boswood also does not argue that the existence of a potential conflict of interest takes away any authority which the active underwriter otherwise has. Such conflicts are inevitable. To take a simple example, a syndicate may have a reinsurance claim against another syndicate and there may be some underwriting members who are common to both. I accept the argument of Mr Colman that the duty of the active underwriter is to conduct the affairs of the syndicate in good faith and in the manner which is beneficial to the syndicate as a whole; if that involves disadvantage to some members, it must be ignored; otherwise the interests of those members who would benefit and not be disadvantaged will suffer.

Theoretically it is possible for the active underwriter to pursue a claim, or take some other action, on behalf of some but not all his members. The US action could be pursued by Mr Warrilow on behalf of himself and 4950 others, omitting Mr Daly, at any rate if the United States procedural law has no objection. But I am satisfied that this would give rise to great inconvenience. The accounting process at Lloyd's is complicated enough already. It would, of course, be possible, with the help of a computer, to produce one set of accounts at the end of three years for all the other members of the syndicate, and another for Mr Daly alone which omitted the transactions in which he was not concerned, although this might puzzle those who prepare league tables of the results of Lloyd's syndicates. It would also be possible for the reinsurance-to-close to cover the outstanding liabilities of all other members at one premium, and the different liabilities of Mr Daly at another. But I do not think that such a process would commend itself to the members or the Corporation at Lloyd's; and if not one but quite a number of members of a syndicate chose to be excluded from different aspects of its activities, it would become intolerable.

Against that background I turn at last to the underwriting agency agreement which Mr Daly concluded with the first defendants, Lime Street Underwriting Agencies Ltd. It was dated 31st December 1979 and provided as follows, so far as is material:

"Appointment of the name's Agent at Lloyd's

1. THE Agent shall act as the sole Non-Marine Underwriting Agent for the Name from the First day of January One Thousand nine hundred and eighty for the purpose of underwriting at Lloyd's policies and contracts of insurance re-insurance and guarantee business relating to all classes of non-marine insurance business transacted, through the Syndicate at present known as CJ Warrilow & Others Syndicate 553, at Lloyd's, as may from time to time receive the sanction of the committee of Lloyd's to be so transacted and of carrying on for him the business of a Non-Marine Underwriter at Lloyd's.

Power to Delegate

2. THE Agent may appoint or employ any person to carry on or manage the underwriting and may delegate to any person all or any of the powers authorities and discretions given to the Agent by this Agreement and, without prejudice to the generality of the foregoing, the Agent is irrevocably authorised so long as the Agent shall continue to Act as Underwriting Agent for the Name and during the winding-up of the underwriting if the Agent shall wind up the underwriting in accordance with the power given in Clause 12 hereof:-

Power to Appoint Sub-Agents abroad

(a) to appoint or employ sub-agents in any part of the world for the purpose of complying with foreign, dominion and colonial local laws, ordinances and regulations and for the purpose of accepting service of writs, notices and processes.

Power to Accept service of proceedings

(b) to accept service of all writs, notices, processes and other communications from time to time requiring to be served on the Name in connection with or arising out of the underwriting.

Power to enter into agreements on behalf of the Name

(c) to accede to and sign on behalf of the Name the agreements constituting Lloyd's Central Fund and Lloyd's Insurance Brokers' Scheme and the Agreement dated the Twenty-eighth day of April One thousand nine hundred and thirty-seven and made between Lloyd's of the first part certain Underwriters of the second part and Additional Securities Limited of the third part and all other agreements in connection with the underwriting business which the Agent may consider it desirable to enter into and accede to on the Name's behalf with the Corporation of Lloyd's and/or any other or others and to contribute on the Name/s behalf from time to time the monies payable by the Name under all such agreements which monies shall be treated as an outgoing of the business.

Power to collect money and to make payments

(d) to collect all premiums and other monies due to the Name in connection with the underwriting and to pay on his behalf all claims and expenses properly incurred and all monies due from the name in connection with the underwriting.

Power to comply with statutory provisions and with the requirements of Lloyds

(e) to comply at all times on behalf of the Name with the requirements prescribed by the Insurance Companies Act 1958 and/or all other statutory provisions for the time being in force affecting Underwriting Members of Lloyd's and with all requirements and regulations prescribed by Lloyd's.

Control of Underwriting

3(a) THE Agent shall have the sole control and management of the underwriting and absolute discretion as to the acceptance of risks and settlement of claims whether such claims shall be legally enforceable or not.

(b) THE Underwriting shall be conducted for the Name in the same manner, as may for the time being, be adopted or approved of by the Agent for the Agent's other Names in the Syndicate.

(c) THE Name shall have such share in the risks underwritten on behalf of the syndicate as the Agent may determine at the beginning of each underwriting year, and the Name's share shall not be substantially altered during an underwriting year, other than with his agreement or by operation of Clause 15 hereof.

(d) THE Name shall not in any way interfere with the exercise of the aforesaid control or management or discretion."

Whatever authority that agreement conferred was delegated by the first defendants to the second defendants, albeit a year earlier under an agreement dated 1st January 1979; and by the second defendants to Mr Warrilow. There has been no argument about that. So the question is what authority was conferred by the agreement with the first defendants.

A meticulous draftsman would find much to criticize in that agreement. In particular clause 2 begins by conferring power on the agent to delegate and then,

"without prejudice to the generality of the foregoing", confers express authority on five specific topics at (a) to (e). But those are not examples of what had been conferred by the first part of clause 2; they are additions to it. Furthermore, there are a great many topics not expressly dealt with in clause 2 -- one example is the power to affect reinsurance -- which one would not expect a draftsman to be content with covering by "the generality of the foregoing", whatever the foregoing may be.

Mr Colman disclaims reliance on clause 2(2) -- collection of monies due to the syndicate. I consider that authority is, on the true construction of the agreement, conferred on the agent by clause 1 -- authority to carry on.

"the business of a non-marine underwriter at Lloyd's"

on behalf of Mr Daly. The "underwriting", of which by clause 3(a) the agent is to have the sole control and management, is in my view not simply the task of subscribing contracts of insurance; it includes all aspects of the business of being a non-marine underwriter.

Is the commencement of a RICO action in the United States District Court part of that business? I see no reason why it should not be. The evidence is that such an action has never been commenced before by Lloyd's underwriters. But if it was otherwise properly done -- and the contrary is not suggested -- I do not consider that it was outside the business for which authority was conferred. There are many other types of action which are habitually commenced by underwriters. Some may be for premiums, or reinsurance claims, or return of reinsurance premiums, or by way of subrogation for damages against those who have injured the property of their assured. I would not draw a line so as to exclude claims for damages against agents or brokers for misfeasance. Nor would I draw it so as to exclude such claims when based on the RICO statute and seeking triple damages.

Mr Boswood sought to rely on the Protection of Trading Interests Act 1980, as showing that the United Kingdom Parliament disliked claims for triple damages. But the statute was manifestly a measure for the protection of UK traders. I cannot hold that it says anything about what UK citizens may claim in the United States. Accordingly, I hold that Mr Warrilow did and does have the irrevocable authority of Mr Daly to commence and continue the action in the United States. Mr Colman acknowledges that there must be some limitation on the powers of the active underwriter, but there is none that need concern us here.

Two other points were argued. First it was said that a customary meaning of the contract emerged, because, in paragraph 26 of his affidavit, Mr Klin said:

"In my opinion wording such as 'the underwriting' or 'the business of the non-marine underwriter' means in the market the whole business that a syndicate transacts on behalf of the name. This does not just include the binding of risks and collecting of premiums, but includes the sole control over, inter alia, the investment of syndicate funds, control of suits and claims, questions of reinsurance and exercising any subrogated rights as an insurer".

I have seen too many such affidavits to give much credence to this one. If Mr Kiln had told me the grounds for his belief as to how much contracts would be understood in the market, I might have accepted his evidence. As it is, although I have certainly paid regard to the evidence of the practice at Lloyd's and of inconvenience that would otherwise result, in reaching my decision on the construction of the agreement I decline to attribute a meaning to the contract on the basis of custom alone.

Likewise both parties, for different purposes, have put before me the revised form of contract that was introduced after the events with which this action is concerned. Their arguments remind me of Factory Acts cases, where the defendant is always cross-examined as to why he required a guard to be placed on the machinery after the accident had occurred. I do not find the later form of agreement of any assistance.

There will be judgment for the defendants.

Judgment for the defendants

Ashurst Morris & Crisp; Fishburn Boxer & Co