cox.txt [1995] 2 Lloyd's Rep. 437 COURT OF APPEAL Apr. 26 and 27, 1995 COX v. BANKSIDE MEMBERS AGENCY LTD. Before Sir Thomas Bingham M.R., Lord Justice Peter Gibson and Lord Justice Saville Practice - Procedure - Lloyd's litigation - Management - Errors and omissions insurance - Allocation of funds payable by E & O underwriters - Whether claimants should all be entitled to a share of funds available from E & O underwriters or whether those who first succeeded in establishing claims to have first call on funds - Application of Third Parties (Rights Against Insurers) Act, 1930 - Whether E & O policies or their proceeds subject to trust or other fiduciary obligation requiring rateable distribution of proceeds - Effect of management plan adopted in relation to Lloyd's litigation. Insurance (Errors and Omissions) - Implied indemnity - Lloyd's litigation - Whether agent entitled to be indemnified by E & O underwriter against interest and costs incurred as a result of underwriters' decision to contest case. The plaintiffs were in effect a number of underwriters who had provided errors and omissions insurance cover to managing and members' agents at Lloyd's. Those agents had been or were likely to be sued for negligence by their respective Names. The Commercial Court had adopted a management plan in July, 1993 in order to deal with the mass of litigations that had arisen from the catastrophic losses sustained by Lloyd's over the last few years. The management plan involved the selection of individual cases from the various groups, into which the litigation had been divided, for the determination of preliminary issues of importance to all and the trying of various allegations of negligence in the hope that the resolution of those matters in the selected cases would assist the parties in the large number of cases either to resolve their disputes or at least to narrow the issues between them. The agents so sued had the benefit of E & O insurance cover the extent of which was not known but it was generally accepted that it would not be adequate to indemnify all the agents against claims which had been and might yet be established. But because the E & O cover was accepted to be inadequate to meet all such claims it was of acute practical importance to the Names to establish the basis on which the funds payable by the E & O underwriters should be allocated. The main issue was whether the claimants should all be entitled to a share of the funds available from the E & O underwriters or whether those who first succeeded in establishing their claims should have first call on those funds. In order to seek an authoritative ruling on this issue E & O underwriters had issued an originating summons joining as defendants all those agents and Names whom they wished to bind by the decision of the Court. The E & O underwriters contended for chronological priority. -Held, by Q.B. (Com. Ct.) (Phillips, J.) that the schemes for rateable allocation would be rejected; if any scheme was to be upheld there had to be a judicial basis for it and the scheme had to be shown to be workable in practice. Certain plaintiff Names appealed submitting that: (1) Where all the agents had contributed to the premium for the cover, but the cover was insufficient to provide for an indemnity for all the claims made, the agents were between themselves bound as a matter of contract, or by a rule of law, to share out the available fund in proportion to the claims made on all the agents. (2) Where a number of assured contributed to the premium for a group policy they impliedly agreed between themselves that, if the policy proceeds in total were less than the aggregate claims covered by the policy, then any of the group members who received more than the policy proceeds than his proportion of claims made should contribute the excess to the other members of the group, so that the policy moneys were shared proportionately to the group's liabilities. (3) The application of the Third Parties (Rights against Insurers) Act, 1930 in the circumstances of Lloyd's litigation led to the conclusion that all third parties (i.e. the claimant Names) to whom the insured's rights under any given insurance were transferred under the Act shared on a pro rata basis all the recoveries under that insurance. (4) Since Lloyd's agents were at the material time obliged under the rules of the Society of Lloyd's to insure against third party liabilities and since this obligation was clearly imposed for the benefit of their Names, the insurance recoveries were to be held by the agents in a fiduciary capacity, for distribution on a pro rata basis between those Names who had valid claims, if the insurance was not sufficient to satisfy in full the claims of all. (5) The unforeseen or inequitable results of the management plan were such that the Court should now impose a solution which would achieve the same result i.e. the Court should order that all relevant judgments on quantum in the Lloyd's litigation should be dated with the same date as that on which the Gooda Walker group of Names obtained an order for an interim payment of their claims. Certain defendant agents cross-appealed contending that where an E & O underwriter had exercised its right to take control of an agent's defence to a claim made against the agent by a third party and had caused the claim to be contested at trial unsuccessfully thus causing there to be a judgment against the agent not only for the principal sum claimed but also for pre-judgment interest under s. 35A of the Supreme Court Act, 1981 and costs the agent was entitled to be indemnified by the underwriter against the interests and costs incurred as a result of the underwriter's decision. -Held, by C.A. (Sir Thomas Bingham, M.R., Peter Gibson and Saville, L.JJ.), that (1) there was no valid basis on which it could be suggested that by their conduct or otherwise the agents impliedly agreed that the available policy moneys should be shared proportionately and there was no business efficacy reason for implying such an arrangement; once the available cover was exhausted established claims would have to be met from the agent's own resources or the agent concerned would have to go into liquidation (see p. 457, col. 1; p. 463, col. 2; p. 466, col. 2); (2) the insurances did not create joint rights between the various insured but provided cover to each of the insured severally; there was no factual basis for imputing an intention that any shortfall in cover should be rateably borne nor was there any factual basis for imputing an intention that any excess applicable to the group should be rateably borne (see p. 457, col. 2; p. 464, col. 1; p. 466, col. 2; p. 467, col. 1); (3) nothing in the 1930 Act or in any case decided under it supported a scheme of rateable allocation; the object of the Act was to avoid third party liability insurance money going into the general pool available for all the creditors; its intention was to preserve the funds for the third parties concerned but it in no way sought to stipulate what was to happen if there was insufficient insurance money for all the third party claimants (see p. 457, col. 2; p. 458, col. 1; p. 464, col. 2, p. 467, col. 2); (4) a trust was unnecessary while the insured agent remained solvent and if the agent was insolvent the 1930 Act applied; there was nothing in the regulations or the policy or in any document governing the relationship between the agent and his principal that was suggestive of a trust of the policy or of its proceeds; the requisite certainties for the establishment of a trust were not satisfied (see p. 458, col. 2; p. 464, cols. 1 and 2; p. 465, col. 1; p. 468, col. 1); (5) the Court had power to ensure that its procedures did not work injustice; the management plan was not designed so as to lay out in advance the time table for the selected cases up to and including final judgment or judgment for interim payment; the Court was not persuaded that the plan itself had led to unforeseen results or to inequities in the sense of producing unequal treatment that would not otherwise have existed; and the Court would be slow to act unless reasonably confident both that the objective of fair treatment would be achieved and that any directions designed to correct one injustice would not produce other and perhaps even greater injustices; and the Court was not persuaded that greater fairness would be achieved by the scheme of rateable allocations proposed (see p. 459, col. 2; p. 460, col. 1; p. 469, cols. 1 and 2; p. 470, col. 2; p. 471, cols. 1 and 2); (6) on a straightforward reading of the policy the insurers were bound to indemnify the assured, on a claim being made against the assured during the policy period arising from one of the specified risks subject to the excess and up to the policy limits; on the presumption that "damages" included pre-judgment interest it (*439) was clear that the policy limit was to be inclusive of damages and pre- judgment interest; there was no room for implication of a term to the effect contended for; the appeals would be dismissed (see p. 461, col. 2; p. 462, col. 1; p. 463, col. 1; p. 471, col. 2; p. 472, col. 1). The following cases were referred to in these judgments: Allen v. London Guarantee and Accident Co. Ltd., [1912] 28 T.L.R. 254; Banque Financière de la Cité v. Parc (Battersea) Ltd., (C.A.) Apr. 20, 1993 unreported; Barlow Clowes International Ltd. v. Vaughan, [1992] 4 All E.R. 22; Boulting v. Association of Cinematograph Television and Allied Technicians, [1963] 2 Q.B. 606; Bradley v. Eagle Star Insurance Co. Ltd., (H.L.) [1989] 1 Lloyd's Rep. 465; [1989] A.C. 957; Groom v. Crocker, [1939] 1 K.B. 194; Harrington Motor Co. Ltd., ex parte Chaplin, In re [1928] Ch. 105; Hood's Trustees v. Southern Union General Insurance Co. of Australasia Ltd., [1928] Ch. 793; Insurance Co. of Africa v. Scor (U.K.) Reinsurance Co. Ltd., [1985] 1 Lloyd's Rep. 312; Island Archon, The [1994] 2 Lloyd's Rep. 227; Netherlands Insurance Co. Est. (1845) Ltd. v. Karl Ljungberg & Co. AB, [1986] 2 Lloyd's Rep. 19; Normid Housing Association Ltd. v. Ralphs, [1989] 1 Lloyd's Rep. 265; Post Office v. Norwich Union Fire Insurance Society Ltd., [1967] 1 Lloyd's Rep. 216; [1967] 2 Q.B. 363; Sheffield Corporation v. Barclays, (H.L.) [1905] A.C. 392. This was an appeal by certain plaintiffs' Names from the decision of Mr. Justice Phillips who had determined that claims made against agents including the Bankside Members Agency Ltd. and against errors and omissions underwriters under the Third Parties (Rights Against Insurers) Act, 1930 were to be settled on a first past the post basis and not by application of a principle of rateable allocation. There was also a cross-appeal by certain defendant agents from the decision of Mr. Justice Phillips rejecting their claim to an implied indemnity by E & O underwriters in respect of costs and interests incurred as a result of the underwriters' decision to defend a claim made against the agent. Mr. Justice PHILLIPS delivered the following judgment on Jan. 16, 1995: The disastrous losses experienced by Names at Lloyd's since 1987 have led members of many syndicates to issue proceedings against their members and managing agents, claiming damages for negligence in exposing them to the risk of the losses in question. The agents so sued have the benefit of errors and omissions ("E & O") insurance cover, although in some cases E & O underwriters have purported to avoid the cover. In some cases agents have individual cover, in others they share group cover. The overall amount of the cover is not known, but it is generally accepted that it is unlikely to prove adequate to provide a full indemnity in respect of the claims made. Some agents are already in liquidation. Others will be placed in liquidation if the claims asserted against them are made out. There are thus likely to be competing for limited E & O recoveries groups of Names asserting rights under the Third Parties (Rights Against Insurers) Act, 1930. In some cases of group cover, they may also be in competition with agents who remain solvent. By this originating summons the E & O underwriters seek to determine the principle whereby the competing claims will fall to be resolved. They also seek the resolution of a number of issues of construction of the E & O policies. The defendants to the summons are firstly the agents and secondly the various groups of Names involved in the Lloyd's litigation, which comprises approximately 50 actions. A few actions have already proceeded to judgment. On Apr. 13, 1994 Mr. Justice Gatehouse gave judgment on liability in favour of two individual Names: Brown v. KMR Services, Sword-Daniels v. Patel, [1994] 4 All E.R. 385. On Oct. 4, 1994 I gave judgment on liability in favour of Names on a number of syndicates managed by the Gooda Walker agents Deeny v. Gooda Walker Ltd., [1994] C.L.C. 1244. An application for an interim payment order will be made by these Names later this term. Last term I heard actions by Names on syndicates managed by the Feltrim Agency and will be hearing closing speeches and giving judgment later this term. Other substantial actions are at varying stages of preparation for trial. The order in which these actions have been or will be tried has been or will be determined in part by the speed with which they are made ready for trial and in part by the Commercial Court's requirements for efficient case management of this huge volume of litigation. In these circumstances many of the defendants to the originating summons are uncertain as to which answers to a number of the questions raised are likely to be more advantageous to their interests. Some have taken no part in the hearing and those (*440) who have been represented have not sought to make submissions in respect of all the questions raised. The E & O cover The plaintiffs have provided me in their skeleton argument with a helpful and uncontroversial summary of the nature of the cover: The relevant E & O cover of Members and Managing Agents at Lloyd's was typically organised in layers. In some cases there was a single assured. In other cases, the insurance was a group insurance covering a number of assured companies. In the case of group insurance: (a) the limits operated on an aggregate basis. (b) Sometimes the excess operated on an aggregate basis. Sometimes there was a separate excess for each group company. (c) One premium was payable under the group policy. The first layer First layer insurance was conferred upon declarations being made under lineslip facilities operated by Sedgwicks or Frizzell. In respect of each declaration, there would be a slip (and/or a policy as the case may be), which: (1) Identified the type of insurance as "Professional Indemnity Insurance". (2) Incorporated standard wording in one of the following forms: (a) The FB1986 Form (used from 1987 to 1991). (b) The FB1991A Form (introduced during 1991). (c) The FB1992A Form (introduced in 1992). (3) Identified the assured(s). (4) Stated the period of the cover. (5) Identified the interest insured as the "Assured"'s business as Lloyd's Underwriting Agents". (6) Set out the limits of cover in one of 2 ways: (i) In the Sedgwick slips: SUM INSURED: £A any one occurrence or series of occurrences arising from one originating cause but £B in the aggregate after application of Automatic Reinstatement Clause. EXCESS: £C (ii) In the Frizzell Slips: SUM INSURED: £A in all (subject to one automatic reinstatement as per policy wording) Excess of: £C in the aggregate The forms FB1986, FB1991A and FB1992A are substantially similar. In each case the form anticipated a schedule with particular details e.g. term, premium, excess and limits drawn from the slip. Where a proper policy was drawn up, the Schedule was completed. Otherwise, the details to be included in the Schedule have to be derived from the slip. The most significant difference between the general wordings is that cover incorporating Form FB1992A did not provide for reinstatement, because, from 1992, reinstatement was no longer offered. The second and subsequent layer First and higher layer excess cover was conferred upon declarations being made under lineslip facilities. In due course, the slip in respect of such declaration or the policy (as the case may be) would incorporate one of the general wordings for the upper layers, being: (1) Form BRS 1983 (used from 1987 to 1990 and for some lineslip facilities in 1991); (2) Form BRS 1991 (used for some lineslip facilities in 1991 and those in 1992). The slip or policy would also state the identity of the assured(s), the period of cover, and the limits and excess applicable to the relevant layer. The forms BRS 1983 and BRS 1991 are virtually identical. Each included a Schedule to summarise in the policy the details of premium, term, excess and limits on the slip. The terms of the second and higher layers follow the terms of the first such that resolution of the issues of principle in relation to the first layer will govern them also. I shall set out the relevant provisions of the cover in their contexts when I deal with the particular issues that I am asked to resolve. Reinstatement and the limits of cover Forms FB1986 and FB1991 had a clause headed "Automatic Reinstatement" in almost identical terms. The only difference was the addition in the latter form of the three words I have underlined: It is agreed that the amount of any Claim hereunder (which amount shall include costs and expenses incurred with the written consent of the Underwriters in the investigation defence or settlement of such claim), shall be automatically reinstated from the date of notice of claim but it is agreed that Underwriters total liability under this Policy in respect of all Claims made during the period specified (including costs and expenses incurred with the written consent of the Underwriters in the investigation defence or settlement of such Claim) in the Schedule shall in (*441) no event exceed the sum stated in Item 3(b) of the Schedule. Notwithstanding anything contained in the foregoing paragraph it is agreed that the Insurers' total liability under this Policy in respect of any Claim or Claims arising from one originating cause, or series of events or occurrences attributable to one originating cause or related causes, shall in no event exceed the sum stated in Item 3(a) of the Schedule. It is further agreed that such reinstatement of cover shall only apply when the Underwriters of any Policy or Policies of insurance providing cover in excess of this policy have paid, or have agreed to pay or been held liable to pay to the extent of the indemnity provided by such Policy or Policies. The relevant question raised by the originating summons is as follows: Whether, in the event of any claim against Underwriters in respect of the liability of the Assureds established in Deeny v. Gooda Walker Limited, 1993 Folio No. 335, there would be reinstatement of the Policy such that, to the extent such claim exceeded the limit of cover without reinstatement, it could be made against the reinstated cover. "Claim" in this question, is intended to embrace any claim or claims arising from a single originating cause. In the event it was common ground that this question falls to be answered in the negative. Ms. Healy, for Mr. Sword-Daniels, produced a complex schedule setting out a number of examples of the manner in which she submitted that the cover would respond to claims. This was neither agreed nor disputed by those of the parties who made submissions in relation to this question. They appeared to be satisfied that there was no issue between them. Certainly the following simple proposition was common ground: The cover afforded by the layered policies is subject to two limits: (1) a limit applying to a claim or claims arising from one originating clause; (2) a larger overall limit. For the purposes of the more fundamental issue to which I am about to turn, it suffices to note that, whether in the case of single or of group cover, claims under the cover, whether arising from a single originating cause or from more than one originating cause, can exceed the relevant limit of cover. The ranking of competing claims on limited E & O cover The originating summons poses the following question: Whether claims must be met by the Underwriters up to the limit of cover under the Policy: (a) in the order that each Claimant: (i) established (aa) liability; and/or (bb) quantum in relation to the relevant Assured or Assureds by judgment in an action, an award in arbitration or settlement; and/or (ii) presents his claim to the Underwriters; and/or (iii) establishes the Underwriters' liability and/or the quantum of the Underwriters' liability under the Policy in respect of his claim by action, arbitration or settlement; or (b) in such other order as the Court shall determine. In relation to this question the parties who have made submissions on this issue fall into two camps. The E & O underwriters, supported by Mr. Sword-Daniels, the Gooda Walker Names and the Feltrim Names contend that claimants on the E & O cover are entitled to recover on what has been described as a "first past the post" basis. Those action groups represented by Mr. Nugee, Q.C., and Mr. Bompas, Q.C., have contended that the proceeds of the various E & O covers must be shared between those who have claims upon them on a rateable basis. The merits If claims against E & O cover are to be settled on a first past the post basis, those who first establish their claims may make a full recovery whereas those who lag behind may recover nothing. If this result were to reflect the relative degree of diligence demonstrated by Names in pursuing their claims, there might be some justification for this result, albeit that the reward for expedition might appear disproportionate. In the event, however, the order in which the various stages of the Lloyd's actions will be progressed will not necessarily reflect the diligence of those responsible for their conduct. To a degree the order of passing the post will be fortuitous. It does not seem to me fair that the timetabling of cases by the Commercial Court with the object of efficient case management should have a decisive effect on the extent to which litigants obtain compensation for wrongs done to them. I have approached this issue in the hope that the ingenuity of Counsel would demonstrate an approach respectable in law and viable in practice that would effect an equitable distribution of the E & O recoveries. The ingenuity has not been lacking, but I fear that it has failed to persuade me that either in law or in practice it is possible to reach the end that I would wish to achieve. I propose first to set out my conclusions as to the approach that the law requires in respect of the unprecedented problems posed by the Lloyd's litigation and then (*442) to explain why I have felt constrained to reject the solutions proposed by Mr. Nugee and Mr. Bompas. The 1930 Act The relevant provisions of the Act are as follows: (1) Where under any contract of insurance a person (hereinafter referred to as the insured) is insured against liabilities to third parties which he may incur, then - (a) in the event of the insured becoming bankrupt or making a composition or arrangement with his creditors; or (b) in the case of the insured being a company, in the event of a winding-up order or an administration order being made, or a resolution for a voluntary winding-up being passed, with respect to the company, or of a receiver or manager of the company's business or undertaking being duly appointed, or of possession being taken, by or on behalf of the holders of any debentures secured by a floating charge, or any property comprised in or subject to the charge or of a voluntary arrangement proposed for the purposes of Part I of the Insolvency Act 1986 being approved under that Part; if, either before or after that event, any such liability as aforesaid is incurred by the insured, his rights against the insurer under the contract in respect of the liability shall, notwithstanding anything in any Act or rule of law to the contrary, be transferred to and vest in the third party to whom the liability was so incurred. (4) Upon a transfer under subsection (1) or subsection (2) of this section, the insurer shall, subject to the provisions of section 3 of this Act, be under the same liability to the third party as he would have been under to the insured, but - (a) if the liability of the insurer to the insured exceeds the liability of the insured to the third party, nothing in this Act shall affect the rights of the insured against the insurer in respect of the excess; and (b) if the liability of the insurer to the insured is less than the liability of the insured to the third party, nothing in this Act shall affect the rights of the third party against the insured in respect of the balance. These provisions effect a statutory transfer of the rights of an insolvent assured against his insurer to the third party to whom the assured is under liability covered by insurance. It is clearly established that where these provisions apply, the third party stands in the shoes of the assured: Under that section the injured person steps into the shoes of the wrongdoer. . .it is clear to me that the injured person cannot sue the insurance company except in such circumstances as the insured himself could have sued the insurance company [per Lord Denning M.R. in Post Office v. Norwich Union Fire Insurance Society Ltd., [1967] 1 Lloyd's Rep. 216 at p. 219, col. 1; [1967] 2 Q.B. 363 at pp. 373-374; approved by Lord Brandon in Bradley v. Eagle Star Insurance Co. Ltd., [1989] 1 Lloyd's Rep. 465; [1989] A.C. 957. See also The Fanti, [1990] 2 Lloyd's Rep. 191; [1991] 2 A.C. 1]. The logical starting point when considering the present question must be to consider the relationship between an insurer who grants limited E & O cover and a solvent assured who experiences a series of third party claims. The nature of the insurer's obligations The contractual duty undertaken by a liability insurer is to hold harmless the assured against third party liability. No obligation on the part of the insurer arises until the liability of the assured to a third party is established and quantified by judgment, arbitration award or settlement. At that moment the assured acquires a cause of action against the insurer for damages for breach of duty in failing to provide the indemnity. Lord Denning, M.R. and Lord Justice Salmon so held in Post Office v. Norwich Union and, in Bradley v. Eagle Star at p. 469, col. 1; p. 966, Lord Brandon, after referring to the relevant passages of those judgments, said: In my opinion the reasoning of Lord Denning M.R. and Lord Justice Salmon contained in the passages from their respective judgments in the Post Office case set out above, on the basis of which they concluded that, under a policy of insurance against liability to third parties, the insured person cannot sue for an indemnity from the insurers unless and until the existence and amount of his liability to a third party has been established by action, arbitration or agreement, is unassailably correct. If an assured agent is covered by an E & O policy on terms of the forms with which I am concerned, and subject to an overall limit of liability, the insurer will be in cumulative breach of duty to the agent each time a quantified claim is established until the sum of the claims overtops the amount of the cover. Thereafter if further third party claims are established it does not seem to me that these can result in further liability on the part of the insurer. The position is the same where an insurer grants E & O cover subject to an overall limit not to a single assured agent, but to a group of assured agents. Each time a quantified third party liability is established against one of the agents, that agent will acquire a cause of action against the insurer in respect of the liability in question, until the sum of (*443) the liabilities overtops the overall policy limit. Thereafter the establishment of further third party liabilities cannot give rise to further liability on the part of the insurer. Mr. Bompas argued that where co-assured take out cover for a single joint premium subject to a single limit of cover, they are obliged to share recoveries made between themselves in proportion to the third party liabilities that they incur. Those co-assureds who first establish claims, and thereby exhaust the cover, have to share their recoveries rateably with any other co-assureds who are subjected to third party liabilities after the cover has been exhausted. In advancing this submission, Mr. Bompas argued that precisely the same equitable principle applied as governed the right of one co- insurer to seek contribution from another co-insurer: . . .there being no contract between the two insurers, the right of contribution depends, and can only depend, on an equity which requires someone who has taken the benefit of a premium to share the burden of meeting the claim. [Per Lord Justice Nourse in Legal & General Assurance Society Ltd. v. Drake Insurance Co. Ltd., [1991] 2 Lloyd's Rep. 36 at p. 42, col. 1; [1992] 1 Q.B. at p. 898]. Equally, urged Mr. Bompas, co-assured who have joined in paying a single premium for limited cover must have an equitable right to share in the fruits of the cover. This fundamental proposition was put as simply and shortly as I have set it out. Mr. Bompas conceded that there was no authority which supported it but pointed out that equally there was no authority which proved it wrong. There are a number of respects in which the relationship between co-insurers differs from that between co-assured. The first is that co- insurers, in the situation covered by Legal & General v. Drake, are not party to the same contract; co-assured are. Where the rights between co-assured fall to be considered it seems to me that one must look first, not to principles of the law of equity but to the terms expressly or impliedly agreed between them. Mr. Bompas did not shrink from this. His alternative proposition was that where, as in the present context, co-assured are party to a policy of insurance which does not expressly cover the point, they must implicitly agree that they will share equitably the benefit of the cover. This contention was based on the premise that the rights of agents co-insured under a group policy are joint rights. He put the matter thus: . . .there is one assured and therefore several different persons, I submit, are co-insureds jointly. It is composite policy in this sense: that it will respond to events which have occurred in relation to each of the insureds severally, but nonetheless, it is a composite policy with each of them joining with the others to insure together. A group cover against E & O liability of the kind I have to consider is not a joint policy. It is a policy which provides cover to each of the assured severally. In contradistinction to the position of co-insurers, the co-assured are not exposed in relation to the same interest and the same perils. Rights to claim under the cover will almost inevitably arise sequentially. I can see no basis for implying agreement between the co-assured that if E & O liabilities are established one by one which result in the limit of cover being exceeded, those who have recovered under the policy will be obliged to share their recoveries pro rata with those whose liability is established only after the cover has been exhausted. When co-assured enter into a contract of insurance that gives them several rights, subject to an overall limit, it seems to me that each simply takes the risk that cover may become exhausted, leaving all thereafter exposed to third party claims. The effect of insolvency Under the 1930 Act, the effect of insolvency is simply to effect a transfer of rights from the assured agents to the third party Names who have established, or proceed to establish, quantified liability against the assured. The ranking of claims and the amounts recoverable are unaffected by the transfer. In a situation of solvency, the ranking of claims against the E & O underwriter depends upon the order in which the third party Names establish liability against the assured by judgment, arbitration award or settlement, thereby giving rise to a vested right on the part of the assured to indemnity in accordance with the terms of the cover. The same is true in a situation of insolvency. If the insolvency occurs after third party Names have established quantified liability, the right or rights to indemnity that were thereby established in the assured agent will be transferred to the Names upon the assured becoming formally insolvent. If quantified liability has not been established at the date of insolvency, a third party Name asserting a claim will have transferred under the Act merely an inchoate or contingent right. If before that Name establishes a quantified claim, other quantified claims are established which exhaust the cover, his contingent right will be rendered nugatory. It follows that, subject to one reservation, the answer to the relevant question is: Claims must be met by the Underwriters up to the limit of cover under the Policy in the order (*444) that each Claimant establishes liability and quantum in relation to the relevant Assured or Assureds by judgment in an action, an award in arbitration or settlement. The reservation relates to the effect of an order for interim payment, which is dealt with later in this judgment. I turn now to explain why I have been unable to accept the schemes of rateable distribution proposed by Mr. Nugee and Mr. Bompas. Mr. Nugee's scheme Mr. Nugee's scheme has the following features: (1) Recoveries from E & O underwriters under a single policy, whether by solvent assured agents or by third party Names claiming under the 1930 Act, would have to be paid into a trust account, to be administered in accordance with directions given by the Court. (2) This would be achieved by other potential claimants under the policy obtaining injunctions restraining recovery from the E & O underwriters, save on terms that the insurance proceeds be paid into the trust account. (3) The Court would direct that the trust fund be administered in accordance with a procedure akin to that laid down by the Insolvency Act, 1986, with provision for proof of debts within a limited time, payment of dividends as and when money was available and claims were established or dismissed, etc. The end result would be that the insurance recoveries would be distributed rateably between all who established claims under the policy, whether as solvent assured or third party Names. In order to establish the validity of his scheme, Mr. Nugee had two hurdles to surmount. First he had to demonstrate a juridical basis for pro rata distribution. Secondly he had to demonstrate that his scheme was practically viable. Juridical basis for pro rata distribution Mr. Nugee advanced a number of alternative bases. 1. The management plan Mr. Nugee submitted that all the defendants were party to a management plan for the Lloyd's litigation, an implicit if not explicit feature of which was that the order in which actions came to trial and judgments were obtained would not determine priorities in recovering from E & O underwriters as between solvent agents and/or third party Names. It followed from this that the defendants implicitly agreed that insurance proceeds should be distributed pro rata, or at least were estopped from challenging rateable apportionment. The parties have agreed that I answer the questions raised by their originating summons on the basis of an agreed statement of facts and chronology. These fall far short of establishing any agreement as to the effect on substantive rights of the Commercial Court's management of the Lloyd's litigation. Nor do the agreed facts support a plea of estoppel. In any event I cannot see how Mr. Nugee's scheme could be founded on an estoppel. Mr. Nugee failed to persuade me that either agreement or estoppel provided a juridical basis for his scheme of pro rata distribution. 2. The Lloyd's market This juridical basis for Mr. Nugee's scheme was said to turn on the construction of the policy, having regard to the influence on that construction of particular features of the Lloyd's market. These were: (a) Potential third party claimants were confined to Names underwriting at Lloyd's. (As Mr. Sumption pointed out, this was not in fact correct). (b) The relationship between the Names and their agents was unusual if not unique. (c) All the Names were members of Lloyd's. (d) Lloyd's compulsorily required agents to take out E & O cover - this requirement was imposed for the benefit of the Names - the only potential E & O claimants. Mr. Nugee submitted that these unique features had the effect that, and I quote from his skeleton argument: . . .as a matter of construction, the proceeds of the policy, in circumstances in which the claims notified to E & O insurers exceed the total sum insured (and assuming those claims as established do so exceed it) fall to be distributed rateably, rather than on a first come first served basis. Mr. Nugee went on to submit that an agent owed a fiduciary duty to all Names with claims against him to share any insurance recoveries rateably between them. I was unable to accept these submissions. In the first place I do not see any scope in a contract of insurance between an agent and an E & O insurer for implying a term governing the manner in which the agent will use any insurance recoveries. In the second place, a contractual obligation to effect a rateable distribution of insurance recoveries makes sense neither when the agent is solvent and able to discharge his liabilities in full nor when he is insolvent and no longer able to control the manner in which insurance recoveries are distributed. (*445) Mr. Nugee's submissions in relation to this head of argument crystallized into a contention that each E & O policy was impressed with a trust in favour of all the Names with claims against the assured, whichtrust survived the liquidation of the assured and entitled all such Names to share pro rata in the insurance recoveries. This submission ran directly counter to the decisions in Re Harrington Motor Co. Ltd., [1928] Ch. 105 and Normid Housing Association Ltd. v. Ralphs, [1989] 1 Lloyd's Rep. 265. Mr. Nugee recognized this, but argued that the special features of the Lloyd's market enabled him to distinguish these cases. In my judgment they did not, and this juridical basis for Mr. Nugee's scheme was not established. 3. Banque Financière de la Cité v. Parc (Battersea) Ltd., (Transcripts Apr. 7 and 13 and June 5, 1992; C.A. Apr. 20, 1993) In this case two rival creditors were seeking charging orders over the property of the debtor - a company which was not yet in liquidation, but whose assets would not be adequate to satisfy both creditors. Mr. Justice Ferris deliberately synchronized the making of the charging orders in favour of the two creditors with the intention that this would ensure that they ranked pari passu. He took this unusual step because in earlier proceedings the Court had unintentionally placed one of the two creditors at a procedural disadvantage which prevented it from seeking to obtain its charging order ahead of the other. In the Court of Appeal it was held that this special factor justified Mr. Justice Ferris's approach - otherwise the two creditors should have been permitted to compete to be first past the post. Mr. Nugee submitted that this decision provided the precedent that he needed to demonstrate that, when special circumstances so demand, the Court can take steps to ensure that an inadequate fund is rateably distributed between those with claims upon it. Here the special factor which justified this course was the unintended effect that the Commercial Court's management plan would otherwise have upon the ranking of claims. It seemed to me that there was a quantum leap between the action that Mr. Justice Ferris took in making two charging orders simultaneously and the complex scheme that Mr. Nugee suggests that the Court should impose in the present case. I suggested to him that if there was validity in his analogy, the appropriate course in the circumstances of the Lloyd's litigation would be for the Commercial Court to defer giving or perfecting judgments quantifying damages in the various actions until this could be done simultaneously. Mr. Nugee was, I think, inclined to grasp this somewhat slender straw. Those seeking a first past the post solution raised a number of objections to this suggested stratagem, not least that it would leave E & O underwriters with the use of funds for many years that should properly be paid to Names. This summons does not raise the question of whether the Commercial Court can, or should, deliberately take procedural steps which will affect the time at which substantive rights accrue in the Lloyd's litigation. Such a course would have to result from a decision of the Commercial Judges to take a concerted course of procedural action. It would become apparent either by a practice statement or when first a Commercial Judge acted in accordance with such decision. All that I need say is that such a decision has not to date been taken. Practicality Mr. Nugee assured me that the Chancery Court would be able to adopt existing procedures to give practical effect to the right of all third party claimants against an agent to share rateably in recoveries under an E & O cover. The mechanism which would initiate the intervention of the Court would be an application by claimants who had yet to establish their claim for an injunction against the disposal of insurance recoveries by claimants who had established a claim under the 1930 Act. Thereafter the Court would appoint a receiver who would receive the insurance recoveries and take charge of their proper distribution. He would apply, by analogy, insolvency procedures or the Judge-made procedures adopted when distributing an estate inadequate to meet all legacies, or subject to contingent claims. Mr. Sumption submitted that a viable scheme for rateable apportionment would have to include the following features: (1) the creation of a fund; (2) a requirement for claims to be made against the fund rather than pursued independently against the insolvent agent; (3) provision for valuing all claims at a single conventional date. Mr. Nugee did not accept this. The receiver could make a provisional distribution and if Names subsequently established that they should have received a share of the fund, it would be open to them to seek recovery from the Names who had received a distribution of more than their proper share. Having regard to the number of Names who would be involved this is not a realistic proposition. I do not propose to analyse at length the practical problems that would be posed by a system of rateable distribution of insurance recoveries between Names, operated in parallel with the administration of the other assets of an insolvent agent under the Insolvency Act, 1986. Suffice it to (*446) say that I consider that this would be an impossibility without statutory machinery. In contrast, as Mr. Nugee himself accepted, first past the post provides a relatively simple and practicable basis for distributing reinsurance recoveries. Mr. Bompas' scheme Mr. Bompas supported Mr. Nugee's submissions as to rateable apportionment, but advanced an alternative juridical basis for this. I have already referred to his submission that, under a group policy, the assured agents are bound to share rateably E & O recoveries under the policy, and explained why I do not consider this submission to be correct. His submission in relation to the rights afforded to competing Names by the 1930 Act followed a similar theme. The starting point of Mr. Bompas' argument was the contention that, upon an event of insolvency of an agent, the rights transferred by s. 1(1) were the rights of all third parties to whom the agent had incurred liabilities which fell within the cover of the E & O policy, whether or not these liabilities had reached the stage of being established and quantified by judgment, award or settlement. This submission was based upon the natural meaning of s. 1(1) and s. 3 of the 1930 Act. I accept that it is correct. It does not, however, lead to any conclusion as to the nature of the rights transferred. In particular it does not bear upon the question of whether individual rights are contingent and subject to the risk of being defeated should the cover become exhausted by prior establishment of quantified claims. The next stage of Mr. Bompas' argument was the contention that what was transferred was not a series of individual rights to individual claimants, but a single right transferred to all the claimants "as a group". In consequence the group became, at a single moment in time, the joint transferees of a single right, the benefits of which, according to equitable principle, fell to be shared between them pro rata. I accept that there are circumstances in which, following the maxim "equality is equity", the Court may direct a rateable distribution of a limited fund between those who rank equally in claiming on it. An example of such a situation is, by common accord, the approach to be adopted to the rights of Names, who as members of an action group, may simultaneously establish a claim on E & O underwriters. I do not, however, accept that claimants against an assured agent who becomes insolvent fall into this category. The fallacy in Mr. Bompas' argument can best be demonstrated by reference to a passage in his skeleton argument: . . .the right of indemnity which the insured has against the insurer, where there are several losses which enable the insured to claim indemnity, is asingle right: it cannot be divided up into several rights each attributable to (or "in respect of ", the expression used in the 1930 Act) a separate loss. If, following the time when an insured has a right toclaim indemnity and has claimed, a fortiori where he has not claimed, a further loss occurs within thescope of the indemnity, he does not obtain a new andfurther right to indemnity; his existing right is modified and becomes a right to obtain a larger indemnity. Where the 1930 Act applies, this right is shared amongst those whose claims on the insuredamounted to the losses by which the right was given its substance. This proposition is advanced as if it is axiomatic. In my judgment it is incorrect. Each contractual right of indemnity is in theory a separate right. When it accrues it gives rise to a new cause of action in its own right. It does not merge with the right previously accrued, so as to create a new cause of action for the joint amount of the two indemnities. Furthermore, I do not see how Mr. Bompas' proposition accommodates, as according to his case it should, any liabilities established by third parties after the limit of cover has been exhausted. The true position is that individual third party liabilities give rise to no more than inchoate or contingent rights, whether on the part of the solvent assured, or the third party claimants in the event of insolvency. They are several, not joint rights. Each right will prove of value only if quantified liability is established before the limit of cover is reached. Mr. Bompas was unable to provide a solution to the practical problems which I have considered when dealing with Mr. Nugee's scheme. Priority of liabilities to pay third party costs The originating summons poses this question: (a) Whether Claims ranked according to whatever system of priority is established include any legal costs payable under the judgment, award or agreement upon which the claims are based, notwithstanding the fact that the amount of such legal costs may not have been determined by agreement or taxation; alternatively (b) Whether such legal costs from independent Claims which shall not fall to be ranked in the system of priority established until the amount thereof has been determined by agreement or taxation. No argument was specifically directed to this point. The governing principle is that E & O underwriters come under no liability, whether to solvent assured or to Names in the event of insolvency, until a quantified liability on the part of the assured is established. Thus the answer to this question is "alternative (b)". (*447) Last tier pro-rating The question raised by the originating summons under this head is lengthy and convoluted. In essence it poses the question of the basis for apportioning a limited recovery under an E & O policy between individual members of an action group which establishes simultaneously a quantified liability in favour of all the members of the group. This question will almost certainly be answered by the terms of the agreement under which the Names in question have joined the action group. In the absence of such agreement, the limited recovery would fall to be apportioned rateably, according to the amounts of the established claims of the individual Names. As I have already stated there was common accord that the maxim "equality is equity" would apply in this situation. The excess The originating summons poses the following question: Whether claims are subject to the excess under the relevant policy such that (subject to any other defences) early claimants have no entitlement to payment until the excess has been applied and exhausted. By common accord the answer to this question is yes. Interest The originating summons poses the following question in relation to interest: Whether (subject to any other defences) the Underwriters would be liable in respect of pre-judgment interest claimed against the Assureds pursuant to Section 35A of the Supreme Court Act 1981 and/or post judgment interest claimed against the Assureds pursuant to the Judgment Act 1938. Pre-judgment interest Whether E & O underwriters are liable in respect of interest awarded to Names under s. 35A of the Supreme Court Act, 1981 depends upon the true construction of the policies. Under each of them the underwriters agreed: . . .to indemnify the Assured against their legal liability for compensatory damages and/or costs and/or legal expenses. . . The issue is simply whether the phrase "compensatory damages" extends to cover interest awarded under s. 35A. That section provides: Subject to the rules of court, in proceedings (wherever instituted) before the High Court for the recovery of a debt or damages there may be included in any sum for which judgment is given simple interest, at such rate as the court thinks fit or as rules of court may provide, on all or any part of the debt or damages in respect of which judgment is given. . . Mr. Sumption submitted that "damages" in the policies could not properly be construed as including interest awarded under statute. Damages was a term of art. The common law clearly established that interest for delay in meeting an obligation could not be recovered as general damages. It was for this reason that the legislation intervened, first by the Civil Procedure Act, 1833, then by the Law Reform (Miscellaneous Provisions) Act, 1934 and finally by the Supreme Court Act, 1981 to grant to the Court a discretionary power to award interest to compensate for delay in receiving payment of debt or damages. In support of this submission Mr. Sumption referred me to The London, Chatham & Dover Railway Case, [1893] A.C. 429, the President of India v. La Pintada Compania Navegacion S.A., [1984] 2 Lloyd's Rep. 9; [1985] A.C. 104 and the President of India v. Lips Maritime Corporation, [1987] 2 Lloyd's Rep. 311; [1988] A.C. 395. These cases do indeed clearly establish that interest for delay in paying a debt or damages cannot be recovered as general damages at common law. To this submission, a number of Counsel acting for the Names joined in making a common riposte, as follows: (1) In common parlance, the word "damages" is wide enough to comprehend an award of interest under statute. (2) There are overwhelming practical reasons for giving the word "damages" in the policies the wider meaning it enjoys in common parlance, rather than treating it as a term of art. So far as common parlance is concerned, the best guide to this is perhaps the Pocket Oxford Dictionary. That defines damages as "sum claimed or adjudged as compensation for damage". It seems to me that interest claimed and awarded under statute can naturally be so described. The statutory power to award interest on damages was introduced in order to remedy a shortcoming in the common law which prevented a plaintiff from recovering full compensation for a wrong done. In Riches v. Westminster Bank Ltd., [1947] A.C. 390 the House of Lords had to decide whether an award of interest under s. 3(1) of the Law Reform (Miscellaneous Provisions) Act, 1934 constituted "interest of money" in the context of the Income Tax Act, 1918. It was argued that such an award was not "interest" but "damages". The House of Lords held that there was not necessarily any inconsistency between the two. Lord Wright at p. 401 recognized that an award of interest under (*448) the statute could properly be described as "interest by way of damages". Lord Simonds at p. 406 said that such interest might be called "damages in the nature of interest, or even damages". In La Pintada at p. 22, col. 2; p. 129 Lord Brandon spoke of the "history of interventions by the legislature" in relation to the common law rule that interest could not be recovered by way of general damages. In Marshall v. Southampton Health Authority, [1991] I.C.R. 136 the issue arose as to whether "damages" in the context of the Sex Discrimination Act, 1975 included interest awarded under s. 35A(1) of the Supreme Court Act, 1981. Lord Justice Staughton at p. 153 said: It is argued that self-evidently section 35A(1) of the Supreme Court Act 1981 distinguishes damages on the one hand and interest on the other. However, it seems to me arguable that what the statute permits is an award of interest by way of damages. In President of India v La Pintada Compania Navegacion S.A. [1985] A.C. 104 there are at least four references in the speech of Lord Brandon of Oakbrook to interest by way of damages (pp. 115, 124, 127, 131) albeit in the context of the common law rule which did not allow such an award. It seems to me arguable that this is what the statute permits, although the common law did not. Should one then construe "damages" in section 65(1)(b) of the Act of 1975 as including interest by way of damages?. . . In my judgment it is arguable that "damages" in section 65(1)(b) include interest by way of damages, whether on a purely English construction of the statute or because that result may (I do not say must) achieve consistency with Community law. But in the end it is unnecessary to decide the point, for the reason to which I now turn. These judicial dicta support the view which I would in any event have formed that, in the appropriate context, "damages" can naturally extend to include interest awarded under the 1981 Act. Are the policies with which I am concerned such a context? Mr. Bathurst, Q.C., for the Feltrim Action Group, submitted that Lloyd's underwriters who granted third party cover against liability in damages customarily recognized that the cover extended to liability to pay interest on damages awarded under statute. Mr. Sumption accepted that this was often the case, if not universally so, but argued that it was not open at this late stage for Mr. Bathurst to seek to rely on custom as an aid to construction of the policies. This must be right, but in my judgment the practice of Lloyd's underwriters accords with the true construction to be given to the word"damages" in the context of the policies. The general conditions of the policies includes thefollowing relevant provisions: 4. No admission of liability shall be made or implied and no payment shall be made or costs incurred or steps taken to resist any claims and no correspondence or negotiations of any kind shall be entered into without the consent of Underwriters who shall be entitled at their own choice, to take control of the defence of any Claim or to prosecute in the name of the Assured for their own benefit any Claim for indemnity or damage or otherwise against any third party and shall have full discretion in the conduct of any negotiations or proceedings or the settlement of any Claim. 5. The Underwriters shall not settle any Claim without the consent of the Assured. If, however, the Assured should refuse to consent to any settlement recommended by the Underwriters and shall elect to contest or continue any legal proceedings in connection with such Claim, then the Insurers' liability for the Claim shall not exceed the amount for which the Claim could have been so settled, plus costs and expenses incurred with their consent up to the date of such refusal, and then only up to the amount stated in Item 3 of the Schedule. The effect of these provisions is to give the E & O underwriters the contractual right to decide whether or not a claim shall be contested. The consequence of contesting a third party claim unsuccessfully will inevitably be the ultimate award of a substantial sum of interest under the 1981 Act. I am told that in the Gooda Walker litigation interest may amount to as much as £80 m. If Mr. Sumption's submissions are correct, the consequence of a requirement by underwriters that a claim be contested may be that underwriters enjoy the use of the money ultimately awarded in damages for a lengthy period that elapses prior to judgment while the assured has to compensate the third party for being deprived of the use of the same sum. Such a result would be commercially unattractive in the extreme. In these circumstances I am in no doubt that the correct construction of the policies requires the phrase compensatory damages" to extend to cover interest awarded under the 1981 Act. Implied indemnity in relation to interest Mr. Berry, who appeared for a substantial number of agents, pointed out that, where a third party claim exceeded or approached the limit of cover, a requirement by underwriters that a claim be contested would expose the assured to a liability to pay (*449) interest that did not fall within the limit of cover provided by the policy. In these circumstances he submitted that the underwriters would be under an implied obligation to indemnify the assured against the liability to pay interest that was not subject to the limit of cover. Counsel for the Names supported this submission. The basis of Mr. Berry's submission was the general principle established by the House of Lords in Sheffield Corporation v. Barclays, [1905] A.C. 392 and stated in Chitty on Contracts, 26th ed. at p. 1470 as follows: When an act. . .is done by one person at the request of another, and the act turns out to be injurious to the rights of a third person, the person doing the act is entitled to an indemnity (against his liability towards the third person) from the person who requested the act to be done. Mr. Berry submitted that while a claim to such an indemnity could be brought under the law of restitution, where the parties concerned were in contractual relationship with each other the preferable basis for the indemnity was an implied term of the contract. He instanced as an example of the general principle the implied indemnity that arises under a time charter in respect of the consequences of complying with charterers' orders as to employment of a vessel. Mr. Berry drew my attention to what he submitted was another example of the general principle, which is more pertinent in the present context - the decision of Mr. Justice Phillimore in Allen v. London Guarantee and Accident Co. Ltd., (1912) 28 T.L.R. 254. In that case the plaintiff was insured against third party liability arising out of the use of horsedrawn vehicles, subject to a limit of £300. The defendant insurers were entitled to take over the conduct of the defence of any proceedings. The plaintiff was sued for the consequences of an accident and the defendants took over the conduct of the proceedings. They culminated in judgment against the plaintiff for a sum which exceeded the £300 limit, and in addition for £218 costs. The plaintiff claimed that the defendants were liable to indemnify him for the costs that they had caused him to incur - relying, the report suggests, not upon the indemnity provisions of the policy but upon common law principles. This claim was accepted by Mr. Justice Phillimore. The report records shortly at p. 255: On the question of who was liable to pay the costs of the two actions, the insurance company contended that so long as they fought in good faith they could involve the assured in unlimited liability for costs; but all that they could be called upon to pay was £300. This was not, in his judgment, a reasonable construction of the clauses inthe policy. If the insurance company defended an action in the name of the assured without the consent of the assured they incurred a common law liability for the costs. It might or might not be for the benefit of the company to defend the action, but they accepted the risk. Mr. Sumption accepted the general principle in Sheffield Corporation v. Barclays, but submitted that it did not apply to a situation such as the present where the act giving rise to the claim to an indemnity was one which the party requesting it had an express contractual right to require. Lawful orders given under a charter-party did not carry with them an automatic right to an indemnity against their consequences. A right to an indemnity only arose in respect of abnormal consequences of complying with such orders - see the judgment of Lord Justice Nicholls in The Island Archon, [1994] 2 Lloyd's Rep. 227 at pp. 237-239. In my judgment the implied right to an indemnity will not normally arise in respect of the consequence of an order or request if the party claiming the indemnity has contractually agreed to accept the risk of that consequence. Where a variety of consequences may flow from an order, as in the case of a time charter, it may be a nice question as to whether the risk of a particular consequence is or is not one which the party obeying the order has agreed to accept. In the present case, the risk of incurring liability to pay interest under the 1981 Act is an automatic consequence of the exercise of E & O insurers' contractual right to require a claim to be defended. Furthermore, on my construction of the ambit of the word "damages", the contract expressly confers a right, albeit a limited right, to an indemnity in respect of the liability to pay such interest. I do not consider that these express contractual provisions leave scope for the implication of a wider right to an indemnity. See the observations of Lord Justice Robert Goff in The Insurance Co. of Africa v. Scor (U.K.) Reinsurance Co. Ltd. , [1985] 1 Lloyd's Rep. 312 at p. 332 and of Lord Justice Fox at pp. 334-335. While Allen v. London Guarantee and Accident Co. Ltd., (1912) 28 T.L.R. 254 appears to support Mr. Berry's submissions, that was a decision upon a differently worded policy and the report is unclear both as to the material terms and as to the precise reasoning of Mr. Justice Phillimore. The decision in that case does not persuade me that the implied right to an indemnity for which Mr. Berry contends arises on the wording of the policies with which I am concerned, and I rule against him on this point. Post judgment interest Mr. Sumption suggested that the remedy of the assured, or of third parties in the shoes of an (*450) insolvent assured, for delay in receipt of an indemnity after the third parties have established a quantified claim is an award of interest under s.35A of the 1981 Act. No defendant seemed inclined to challenge this, perhaps not surprisingly, for it leaves it open to the Court to award interest which will match any Judgment Act interest to which the third parties are entitled without regard to the limit of cover. In these circumstances I need not answer the question posed in relation to post judgment interest. Costs The originating summons, as amended, poses the following question in relation to costs: Whether each claim is subject to set off of costs paid by the Underwriters or incurred and/or accruing and/or for which the Underwriters are liable in respect of the defence of claims: (a) against the particular Assured or Assureds in respect of whom such claim is brought; or (b) against all Assureds under the Policy under which such claim is brought; and in any case (c) costs up to what date; save in so far as such set off ("the Set-Off") has already been applied and exhausted. The purport of this question was clarified by Mr. Sumption in opening. E & O underwriters are concerned to establish the manner of operation of the insuring clause, when read with general condition 1, in circumstances where the underwriters have themselves funded defence costs. The insuring clause provides that E & O underwriters: . . .agree to the extent and in the manner hereinafter provided to indemnify the Assured against all sums which the Assured shall become legally liable to pay as damages and/or costs and/or legal expenses but not exceeding the sum stated in Item 3 of the Schedule (such sum to include costs and expenses incurred with the written consent of the Insurers in defence or settlement of any claim) in respect of claims which are first made against the Assured during the period specified in the Schedule arising from. . . General condition 1 provides: In respect of all losses notified by the Assured or claims first made against the Assured during the period of Insurance, the aggregate amount specified in Item 4 of the Schedule [which is the excess] which amount shall be inclusive of damages and claimants costs and expenses, and costs and expenses incurred with the written consent of the Insurers in the defence or settlement of any claim,shall be borne by the Assured at their own risk and the Insurers shall only be liable to indemnify the Assured in excess of such amount. In his opening Mr. Sumption reformulated the question as follows: . . .the effect of general condition 1 is that until the excess is exhausted the assured must bear the costs himself having regard to the fact that the costs are part of what he has cover for. Thereafter until the limit is exhausted the underwriters are liable for defence costs incurred with their consent and the question which is posed is what happens if the underwriters have in fact funded the whole of the defence costs including that part of it which lies within the excess. That is what has happened here because the underwriters have funded the defence costs in cases where the agent is insolvent and the alternative would have been a default. In the course of argument it became apparent that the following issues fall to be resolved: (i) In what circumstances, if any, can E & O underwriters treat payments that they have made in defending claims brought against the assured as discharging their liabilities to the assured under the policies? (ii) What consequences follow if underwriters fund defence costs before the assured have borne the excess that they are required to bear by general condition 1? As the hearing progressed it became apparent that there was a fundamental dispute between E & O underwriters and the defendants, as to the circumstances in which costs were deemed to be "incurred by" the assured under the insuring clause and general condition 1. Mr. Sumption's submissions can be summarised as follows: 1. All defence costs are "incurred by" the assured, whether defence solicitors are instructed and/or paid by underwriters or by the assured. 2. If underwriters fund defence costs which should properly be borne by the assured under general condition 1, the assured is liable to reimburse underwriters in respect of this expenditure. Underwriters can set off this liability against their indemnity obligations under the policy. 3. Subject to 2, underwriters are liable to indemnify the assured for defence costs incurred with their written consent, up to the limit of cover. 4. The requirement for written consent can be waived by underwriters. 5. Subject to 2, when underwriters fund defence costs they thereby discharge their liability to indemnify the assured against those costs, so that the payments made encroach upon the limit of cover. On behalf of the defendants Mr. Bathurst, supported by Mr. Bompas, joined issue with this (*451) analysis. They submitted that the only defence costs incurred by the assured, within the meaning of the policy, were the costs of solicitors voluntarily instructed by the assured. If the assured did not wish to defend a claim and underwriters exercised their right to take over the conduct of the defence, the resultant defence costs were, on a true construction of the policy, incurred by underwriters and not by the assured. Underwriters had no right to claim reimbursement of such costs, or to treat them as, pro tanto, a discharge of their indemnity obligations. Mr. Bathurst submitted that, if Mr. Sumption was correct, underwriters would always have a motive for defending any claim for a sum in excess of their limit of cover, for they would not be at risk of the costs of so doing. A construction which produced this result was not a reasonable one. My conclusions in relation to this issue are as follows: 1. A contract of insurance is uberrimae fidei. One must approach any question of construction of the policy on the premise that the parties will act in good faith. In particular one must assume that the decision whether or not to defend a claim will be taken on its merits: . . .the insurers are. . .clearly not entitled to allow their judgment as to the best tactics to pursue to be influenced by the desire to obtain for themselves some advantage altogether outside the litigation. . .[per Sir Wilfred Greene M.R. in Groom v. Crocker, [1939] 1 K.B. 194 at p. 203]. 2. By general conditions 4 and 5 the parties have agreed: (i) that the decision whether or not a claim shall be defended shall lie with underwriters; (ii) that underwriters shall be entitled to take over the conduct of the defence on behalf of the assured. 3. Where underwriters instruct a solicitor to conduct the defence, they thereby create the relationship of solicitor and client between the solicitor and the assured - Groom v. Crocker at pp. 202-203. 4. The normal consequence of this is that the assured becomes liable to pay the solicitor's costs, even if underwriters were also liable for those costs: Adams v. London Improved Motor Coach Builders Ltd., [1921] 1 K.B. 495 at pp. 501 and 504. 5. Those costs are properly deemed to be incurred by the assured, even if they are funded by underwriters: Davies v. Taylor (No. 2), [1974] A.C. 225 at p. 230; Lewis v. Avery (No. 2), [1973] 1 W.L.R. 510 at p. 513. 6. If underwriters fund defence costs of an assured which fall within the excess, the assured will be under an obligation to reimburse underwriters. This obligation arises under the terms of general condition 1, or alternatively under principlesof restitution. Conclusions 5 and 6 are necessarily premised, as Mr. Sumption accepted that they must be, on the assumption that the assured is legally liable to pay the solicitors who are instructed to conduct the defence. This will depend upon the terms upon which those solicitors are instructed. Where a number of E & O underwriters join together to instruct a firm of solicitors to defend claims brought by an action group against a large number of agents, some solvent, some insolvent, the terms and circumstances under which the solicitors are instructed may require careful consideration in order to determine whether and to what extent individual assured are liable for defence costs. Set-off The obligation of an assured to reimburse defence costs funded by underwriters within the excess gives rise, in my judgment, to a right of set-off on the part of underwriters against a claim for indemnity from that particular assured, applying established principles governing set-off. Mr. Sumption submitted that, in the case of a group policy, payment of defence costs of one assured in the group could be set-off against a claim for an indemnity advanced by another assured in the group. I do not propose to rule on this difficult point as it was not canvassed in argument and I consider that the answer could well turn on the details of the particular cover. It can more satisfactorily be resolved if and when it arises in its appropriate context. Can the insurers invoke a right of set-off that was available against an assured as against the Names who step into the shoes of the assured pursuant to the provisions of the 1930 Act? In my judgment they can. It seems to me that the rights transferred under the Act must be subject to any defences that would have been available had those rights been asserted by the assured from whom they are transferred. Insofar as the decision in Murray v. Legal and General Assurance Society Ltd., [1969] 2 Lloyd's Rep. 405; [1970] 2 Q.B. 495 is inconsistent with this conclusion, I decline to follow it. Interim payment The originating summons poses the following question: Whether (subject to any other defences) Underwriters would be liable in respect of any interim payment order against any of the Assureds in relation to a particular claim or claims: (1) Prior to judgment on such Assured's liability in respect of such claim or claims. (2) After judgment on such Assured's liability in respect of such claim or claims? (*452) In particular whether: (a) an order for an interim payment triggers the policy, in particular by reference to the words "all sums which the Assured shall become legally liable to pay as damages" in the insuring clause; (b) an order for an interim payment satisfied section 1(1) of the 1930 Act, and especially, the words "any such liability as aforesaid is incurred by the assured". Order 29, R.S.C. provides as follows: 10. (1) The plaintiff may, at any time after the writ has been served on a defendant and the time limited for him to acknowledge service has expired, apply to the Court for an order requiring that defendant to make an interim payment. 11. (1) If, on the hearing of an application under rule 10 in an action for damages, the Court is satisfied - (a) that the defendant against whom the order is sought (in this paragraph referred to as "the respondent") has admitted liability for the plaintiff's damages, or (b) that the plaintiff has obtained judgment against the respondent for damages to be assessed; or (c) that, if the action proceeded to trial, the plaintiff would obtain judgment for substantial damages against the respondent or, where there are two or more defendants, against any of them, the Court may, if it thinks fit and subject to paragraph (2), order the respondent to make an interim payment of such amount as it thinks just, not exceeding a reasonable proportion of the damages which in the opinion of the Court are likely to be recovered by the plaintiff after taking into account any relevant contributory negligence and any set- off, cross-claim or counterclaim on which the respondent may be entitled to rely. Is an order for an interim payment a sum which the assured has "become legally liable to pay as damages"? If this question falls to be answered in the affirmative, then an order for interim payment will give rise to a right in the assured to claim an indemnity under the policy. Mr. Sumption submitted that the answer to the question was "No". He accepted that an order for interim payment was a sum which the assured had become legally liable to pay, but contended that the payment was not "as damages". He relied upon this passage in the judgment of Mr. Justice Chadwick in Maxwell v. Bishopsgate Investment Management (in liquidation), (Transcript Jan. 28, 1993) at p. 10: In my view, the true analysis is that the interim payment order does create a debt which is distinct from, but not independent of, the underlying liability to pay damages. The inter-dependence is this: in computing the final amount to be paid in respect of the underlying liability credit must be given for anything paid or to be paid under the interim payment order. Once judgment is given in respect of a claim for damages, subsequent enforcement is of the judgment debt. The sum that the judgment orders the defendant to pay is nonetheless properly and naturally described as "damages". In Maxwell v. Bishopsgate Mr. Justice Chadwick had to decide whether an interim payment order gave rise to a debt within the meaning of s. 267(b) of the Insolvency Act, 1986. I do not find that the passage relied upon by Mr. Sumption provides any assistance in determining whether the subject matter of an interim payment order falls within the meaning of "damages" in the context of the policies with which I am concerned. Mr. Sumption described the payment as "in effect, a loan on account of a liability". It was not, he said, an order that damages should be paid but an order that a sum should be paid which would fall to be taken into account when eventually damages were assessed and awarded. I was not impressed by these semantics. An interim payment ordered under O. 29, r. 11 is ordered on account of and in anticipation of an eventual award of damages. Where judgment for damages is subsequently entered, it will be for a sum that gives credit for the interim payment already made. In my judgment the subject matter of an interim payment ordered under O. 29, r. 11 can properly and naturally be described as damages and falls within the meaning of "damages" in the insuring clause of the policy. Ascertainment Does an interim payment order satisfy the requirement laid down by Post Office v. Norwich Union that no claim can be brought under a policy of insurance against third party liability until the existence and amount of that liability has been established by action, arbitration or agreement? Mr. Sumption argued that, because an interim payment order was provisional, it did not establish the amount of the assured's liability. Furthermore, the possibility that the order might be varied raised practical problems as to the operation of the cover. So far as these practical problems are concerned, it does not seem to me that they differ in principle from those inherent in the fact that a first instance judgment in favour of a claimant against the assured may be reversed or varied on appeal. So far as ascertainment is concerned, an interim payment (*453) order ascertains a quantified sum which is due and payable by way of damages - albeit on a provisional basis. Interim payment orders did not exist when Post Office v. Norwich Union was decided, but in my judgment an interim payment order satisfies the requirements there laid down. Had I any doubts on this question, they would be dispelled by the consequences that would flow were Mr. Sumption's submissions correct. An agent adequately protected by E & O insurance, would nonetheless be liable to be rendered insolvent by his inability to call upon his E & O underwriters to indemnify him against his liability to comply with an interim payment order. A liability policy which exposed the assured to such a possibility would provide an unsatisfactory cover and it is appropriate, where the wording permits, to adopt a construction that avoids this result. The terms of O. 29, r. 11(2)(a) indicate that those who drafted this order anticipated that liability insurers would be bound to respond to an interim payment order. In my judgment they were justified in so doing. Review of priorities Under the terms of the policies, subject to the excess, vested rights to indemnity on the part of an assured may arise in a number of circumstances, each of which requires the establishment of a quantified loss on the part of the assured. These are: (1) The incurring of defence costs with the consent of the underwriters. (2) The establishment of a quantified liability to third parties to pay damages or costs as a result of: (i) settlement; (ii) arbitration award; (iii) interim payment order; (iv) judgment; (v) taxation. Until the excess is exhausted, such losses must be borne by the assured, so the initial effect of such losses, as they occur, is to reduce the outstanding excess, until this has been fully borne by the assured. Thereafter the quantified losses give rise to successive liabilities in the order in which they are established, until the limit of cover is reached. Notice General condition 3 provides: The Assured shall give to the Underwriters immediate written notice of: (i) any Claim made against the Assured, (ii) any loss discovered by the Assured, (iii) the discovery by the Assured of reasonable cause for suspicion of dishonesty or fraud or negligence such as might give rise to a Claim under this Policy. If during the period of Insurance, the Assured shall first become aware of any circumstance which may subsequently give rise to a loss or a Claim against the Assured, they shall during the period of Insurance give written notice to the Underwriters of such circumstance and then any loss or Claim arising therefrom shall be deemed to be a loss first discovered, or Claim first made against the Assured during the period of Insurance. Although the question is not clearly raised by the originating summons, the parties agreed that I should decide whether or not compliance with this clause is a condition precedent to the right to make a claim under the policy on the basis of written submissions to be provided after the hearing. Mr. Sumption submitted that, in the context of a "claims made" policy, such as those with which I am concerned, a notice requirement is necessarily a condition precedent to the right of recovery. He also submitted that the relevant authorities held consistently that compliance with notification provisions such as condition 3 is a precondition of the insurer's liability under liability policies, or at least a condition breach of which entitles the insurer to repudiate liability for the relevant claim. In two of the four cases upon which he relied for this proposition, the policy expressly provided that the clauses in question should impose conditions precedent to liability. The other two provided no basis for concluding that any general rule applied. Counsel for the defendants challenged Mr. Sumption's submission and referred me to a number of decisions where notice provisions were not held to be conditions precedent to liability: Stoneham v. The Ocean Railway and General Insurance Company, (1887) 19 Q.B.D. 237; In Re Coleman's Depositories Ltd., [1907] 2 K.B. 798 and The Litsion Pride, [1985] 1 Lloyd's Rep. 437. I have concluded that the position is accurately summarized by MacGillivray and Parkington, 8th ed. at par. 1585: It is not always easy to decide whether clauses requiring notice of a claim are conditions precedent to the liability of the insurer under the policy, or merely terms of the policy for breach of which the insurer's only remedy is to claim damages for the extra expense flowing from the insured's failure to give notice within the proper time. Little more can be said than that it is a matter of construing the policy as a whole. In my judgment the requirements of condition 3 do not constitute conditions precedent to the right to claim under the policy. They are not described as conditions precedent, as one would naturally expect if they were intended to have this effect - see MacGillivray at par. 1585. Nor, when one considers the interests of both contracting parties, do I consider that commercial efficacy would be served by (*454) treating the requirements of condition 3 as conditions precedent. While I can appreciate why underwriters would wish to receive immediate notice of claims, it does not seem to me that this is an essential requirement from their viewpoint. Indeed in the majority of cases I would not expect that a limited delay in notifying underwriters of a claim would have any adverse effect on underwriters. If failure to give immediate notice under condition 3 is, however, to deprive the assured of cover under the policy, the condition will be liable to operate unreasonably harshly on the assured - particularly in the case of a failure to give immediate notice of the discovery of reasonable cause for suspicion of negligence such as might give rise to a claim - a requirement that it may be difficult to satisfy in practice. Mr. Sumption beguilingly urged me not to concern myself with how quickly notification must be received in order to qualify as immediate, but it is the draconian requirement for immediacy, which on the natural meaning of that word gives minimal scope for delay, that is the most cogent consideration in persuading me that condition 3 does not lay down conditions precedent to the right to make a claim. Originating cause The final question posed by the originating summons is: If the liability established in Deeny v. Gooda Walker Ltd. [1994] C.L.C. 1224 arises from more than one originating cause, how many? This question falls to be answered on the basis of the facts I have found in the Gooda Walker judgment. The protagonists on this issue were Mr. Sumption and Mr. Vos, Q.C., although all who are party to the originating summons will, in my judgment, and despite Mr. Bathurst's submission to the contrary, be bound - insofar as affected - by my finding on the point. Mr. Sumption founded his submissions on the judgment of Mr. Justice Clarke in Caudle v. Sharpe, [1995] L.R.L.R. 80. That was an appeal against an award of London arbitrators. The issue related to the scope of cover of reinsurance policies under which the reinsured had to bear an excess in relation to losses "arising out of one event". The losses in question arose out of liability to Names incurred by Mr. Richard Outhwaite in concluding on their behalf 32 run-off contracts in circumstances where he had negligently failed to have regard to the potential consequences of asbestosis. The arbitrators held that those losses were the consequence of one event, and not, as the reinsurers contended, of 32 events. In approving the approach of the arbitrators, Mr. Justice Clarke said: For those reasons I hold that the arbitrators were right on the first issue. I do so on the basis that there was a continuing state of affairs amounting to an event out of which the losses arose rather than on the basis that the writing of the 32 contracts taken together was an event. It is more natural to say that the writing of that series of contracts arose out of one event, namely the continuing failure of Mr. Outhwaite to "conduct the necessary research and investigation into the basic underlying problems of asbestosis". On the facts found in the award it was that event from which arose the writing of all the 32 run- off contracts which in turn led to the losses incurred by the names. . . Mr. Sumption argued that, similarly, in the case of Gooda Walker a single originating cause was responsible for all the losses in respect of which the Names recovered judgment. His submissions, as set out in his skeleton argument, were as follows: Applying the Caudle v. Sharp approach to the situation in Gooda Walker: (1) Loss deriving from successive failures by a particular underwriter to pay due regard to proper principles of underwriting stem from one originating cause. (2) Loss deriving from disregard of proper principles by different underwriters writing the same book stem from the same originating cause. (3) Loss deriving from disregard of proper principles by different underwriters writing different books but employed by the same assured stem from the same originating cause. (4) Loss deriving from disregard of proper principles by different underwriters writing different books and employed by different assureds within the Gooda Walker organisation stem from the same originating cause. In each of (1) to (4) above, the originating cause was: (1) disregard of proper principles of underwriting; or (2) promulgation of the wrong principles by those responsible within any particular assured or within the Gooda Walker group of companies for underwriting policy, or (at the least) failure by such persons to promulgate the correct principles. Mr. Vos submitted that four separate originating causes applied in Gooda Walker, each giving rise to its independent third party liability: (1) The negligence of Derek Walker in underwriting for 290 (and on a split stamp basis for 164) without rating the business properly, appreciating (*455) the risks to his Names, or informing his Names of it. (2) The negligence of Stan Andrews in underwriting for 298 without monitoring aggregates, competently estimating his exposure, or having a proper appreciation of the excess of loss business (and in particular his class 01 whole account exposure) that he was writing. (3) The negligence of Mr. Willard in underwriting for 299 for 1988 without calculating PMLs or placing adequate reinsurance. (4) The negligence of Mr. Willard in underwriting for 1989 on a basis that was bound to result in a loss to his Names. So far as Mr. Sumption's submissions were concerned, I identified two overlapping themes. The simplest was that the one originating cause was lack of any proper formulation and implementation of underwriting policy at board level, treating the two Gooda Walker agency companies as a single organisation or unit for this purpose. At p. 1233 of my judgment I observed: . . .the only issue that I have to resolve in relation to liability is whether or not the active underwriters exercised the skill and care to be expected of reasonably competent underwriters. The plaintiffs have pleaded that Gooda Walker were not merely vicariously liable for the faults of the active underwriters, but in breach of their own duties to manage the underwriting. In the event, however, there is no shortcoming alleged against the companies themselves that will not, if well founded, also involve a finding of fault on the part of the active underwriters. In fact, the plaintiffs did not devote any significant attention to allegations of deficiency in central management and I made no findings in relation to such allegations. The essence of the plaintiffs' case, and of my judgment in their favour, was that there were shortcomings in the conduct of the underwriting by the individual underwriters. Mr. Sumption's alternative submission accommodated this basis of liability. He submitted that the negligence displayed by each of the Gooda Walker underwriters was essentially identical - a failure to appreciate the gearing effect of the spiral and the nature of the problems to which any steps that they took to protect their Names had to be directed. Just as Mr. Outhwaite's lack of appreciation of the consequences of asbestosis was the single event which was the cause of the losses that flowed from the 32 disastrous run-off contracts, so the lack of appreciation of the effect of the spiral was the single originating cause responsible for all the Gooda Walker losses. In my judgment this reasoning is fallacious. A culpable misappreciation in an individual which leads him to commit a number of negligent acts can arguably be said to constitute the single event ororiginating cause responsible for all the negligent acts and their consequences. The same is not true when a number of individuals each act under an individual misappreciation, even if the nature of that misappreciation is the same. Each of the Gooda Walker underwriters formed his own policy, insofar as he had one, and took his own underwriting decisions for his Names, independently and from his own viewpoint. While their actions suffered from similar shortcomings, the individual approaches which resulted in these shortcomings were by no means identical. In my judgment, if one applies the approach of Mr. Justice Clarke in Caudle v. Sharpe, the result is that the approach to underwriting of each underwriter was a separate originating cause, resulting in the losses suffered by the Names on whose behalf that underwriter was writing business. I do not, however, accept Mr. Vos' submission that Mr. Willard's underwriting for the 1989 year constituted an additional originating cause to his underwriting for the 1988 year. This submission was based on the assertion that Mr. Willard's acts of negligence in 1989 were