0 Jan 85

Rand Institute of Civil Justice Study: Asbestos in the Courts

(vii) Period of study late 1983 - early 1985.

(12) Asbestos suits characteristics quite unlike those of other product liability cases.

(21) Since 1982 new filings have declined in some jurisdictions remained high in others.

(24) by the mid-80s, the surge in filings begun in 1978 had ended ... yet the number of dispositions continues to fall behind the number of new filings.

(32) The asbestos crisis is far from ending: new filings projected to continue into the next century. In addition new types of asbestos personal injury and property damage cases will continue to be filed in uncertain numbers into the future. In addition to the traditional plaintiffs, new types of plaintiff and new types of injury (property damage).

(41) Cites 1983 Philadelphia Court which notes that litigating with these claimants is like gambling at a casino.

(114) Seriously injured litigants will be under-compensated, less seriously injured parties


0 Jan 85

Ernst & Whinney INSIGHT No. 26. Environmental considerations.

When carrying out work on the environmental considerations input of the SRA work papers, members of staff may like to know that the Insurance Technical Section does maintain specific environmental files, relating to all areas of the industry. Accordingly, if you wish to avail yourself of this facility, please speak to a member of the section.... A paper, entitled Insurance Industry Scan 1984, has been prepared to summarise many of the more significant developments recorded on these files and will be circulated in early February.


The Committee of Management of Toplis & Harding Inc., a wholly owned principal subsidiary company of the Corporation of Lloyd's, which managed the asbestos computer database in the USA:-



M H Cockell (Chmn)

Willis Faber

R Ballantyne

Sedgwick Forbes

R D Hazell

Three Quays (Sedgwick Forbes)

G W Hutton


J A W Moir


T O Pitron


H A R Rokeby-Johnson


C W Welch

Chairman of Lloyd's of London Press Inc. USA, Lloyd's of London Press Ltd, Lutine Publications; Member of the Agency Committee, the Advisory Panel on Public Affairs, the Systems and Communications Policy Board.

G C King FCA (Secretary)

General Manager, Lloyd's Membership Dept

Jan 85

Mr Ian Winchester has resigned as Managing Director of Winchester Bowring Ltd. Mr Hugh Prior is appointed Managing Director of the company. Mr Winchester will remain a director of Winchester Bowring Ltd until he takes up his new appointment with Toplis & Harding Inc. in the United States early in 1985.

4 Jan 85

Pulbrook Underwriting Management Ltd acquired by Merrett Holdings Plc.

4 Jan 85

Meeting of Ernst & Whinney held at the City Office.

Present Holland, Bolger, Standish, Hill, Harris....

Nigel Holland stated that historically the reinsurance to close had been on a net basis. True and fair forces the syndicate to gross up their reinsurance to close between the premium element and the claims element. He cited Merretts as an example as having no pattern in their fourth and subsequent year run-off position, although the figures were not particularly large when compared to the reinsurance to close itself.

Michael Bolger stated that Lloyd's has a very low expense ratios and many syndicates will not go to the extra expense of having full risk written records in order to arrive at a "technical" premium accrual....

Stephen Hill was quite categoric when he said that if there were no records, then, the auditors should qualify their report.

Nigel Holland stated that Davison had felt that a mass of qualified opinions is harmful to Lloyds as a community. He believed that pocket books are being kept at the box, but that they are not related to the accounting records maintained....

Peter Standish and Michael Bolger discussed the problems relating to treaty and binding authority business....

Nigel Holland stated that historically by ignoring the premium accrual, an extra loading was given to the reinsurance to close.

7 Jan 85


7 Jan 85

A M Farrar, solicitor and Lloyd's Council Member, writes to a BPR Name stating, inter alia, "

Is not the likely chain of events that Sir Edward Singleton will report shortly to Lloyd's and that if, as you allege, the matters disclosed by that Report are on all fours with Fidentia, that Lloyd's will then consider disciplinary charges? If this happens, then there are really two possibilities; it is I suppose possible for Lloyd's to say that any charges will lie on the file whilst matters disclosed by Sir Edward Singleton's Report are fully disclosed to Names and an appropriate offer of compensation made, or, alternatively, the matters will proceed in the manner in which the Brooks and Dooley affair did

11 Jan 85

Keene Corp. -v- I.N.A. Judgement redefined.

The US Court of Appeals amended its judgment of the 19 November 1984 which upheld the decision reached by the District of Columbia.

Jan 85

Mr. Ayliffe of Merretts received a letter enclosing a recent article which stated that in the last three or four years, the number of claims filed by railroad workers alleging asbestos disease has far exceeded the total of such actions in the entire history of the American railroad industry.

Jan 85

The Government publishes its proposals contained in the White Paper, "Financial Services in the United Kingdom: A New Framework for Investor Protection".

22 Jan 85

Letter to C. J. Ayliffe enclosing recent articles from the Brief including (133B) Asbestos Litigation by R Motley:-

In the last three or four years, the number of claims filed by railroad workers alleging asbestos disease has far exceeded the total of such actions in the entire history of the American railroad industry. These claims reflect a growing awareness of the enormous toll exacted by the railroads' use of asbestos, particularly in the Steam Era.... Railroad have long been among the heaviest users of asbestos containing products in American industry.

24 Jan 85


Recent filings by a variety of plaintiffs, including the State of Maryland, the City of Baltimore, the City of New York, several school districts, and various associations, highlight the potential for far-reaching and protracted litigation in the proper damage area.

The State of Maryland has filed suit against 40 manufacturers and distributors of asbestos, including PCC, seeking $500 million in compensatory damages to clean up asbestos in more than 3,000 public buildings in the state, including schools, prisons, dormitories, hospitals and offices. The State's complaint alleges that it has had to spend millions of dollars to inspect, identify, test, analyse, remove encapsulate, decontaminate or enclose asbestos or asbestos-containing products in public buildings and facilities. The State also requests an injunction requiring the companies to perform all "necessary asbestos abatement remedial actions" and to pay for the cost of the suit.

A similar suit has been filed by the City of Baltimore seeking some S225 million from 55 defendants for asbestos abatement costs in public buildings ranging from schools and office buildings to prisons. The City has also charged the companies with fraud for allegedly making false statements about the safety of asbestos and with conspiracy "to deprive the public, and particularly the users, of medical and scientific data" linking asbestos to lung disease and cancer. This action is in the early stages of litigation.

In November 1984, the City of New York and The Board of Education through the office of the Corporation Counsel and the firm of Kriendler & Kriendler, filed an action against more than 60 manufacturers seeking S250 million in order to recover the cost of asbestos removal and containment. The action was filed in the Supreme Court, New York County, and alleges causes of action based upon restitution, nuisance, negligence, fraud and misrepresentation, strict liability, implied and express warranties, and conspiracy. In addition the complaint seeks punitive damages in an unspecified amount

The number of filings by school districts continues to increase, with more than 70 property damage actions now having been commenced nation-wide. PCC has been named as a defendant in 20 school district actions to date, including the national class action pending in Philadelphia. Developments in the Philadelphia national class action are set forth separately hereinafter.

In Michigan, a class action has been filed in Ingham County Circuit Court by eight public school districts against 65 defendants requesting class certification for all Michigan school districts to recover the costs of asbestos abatement and removal therein. The complaint also requests the establishment of an indemnity fund of at least $1 million per school district for any personal injury claims that may be brought against the school districts and punitive damages of S1 million per district.

A similar class action was filed in October in Wayne County Court, Michigan, by the Detroit and Flint School Districts on behalf of all other school districts in the State. That action also remains pending.

In Ohio, a motion is pending before the Cuyahoga County Common Pleas Court requesting certification of a state-wide class action for school property damage suits. That class complaint is on behalf of 54 private and parochial school districts against some 60 defendants.

Other recent school district filings include actions by The University System of New Hampshire in the Federal Court, New Hampshire, wherein plaintiff seeks $5 million in compensatory damages in addition to unspecified punitive damages, and the Selah School District in Yakima, Washington, wherein plaintiff demands $200,000 compensatory damages and unspecified punitive damages involving the installation of asbestos acoustical plaster.

Various associations are also now starting to take action to protect their members allegedly affected by exposure to asbestos products in public buildings. The New Jersey Education Association has filed a class action suit in Mercer County Superior Court, New Jersey, against 157 school-boards and 125 unnamed asbestos manufacturers, suppliers and contractors seeking to recover the cost of medical check-ups for teachers and other school employees exposed to asbestos, alleging that the defendants have permitted the continued presence of asbestos in school buildings even though they knew this presented a substantial risk of harm to them. Meanwhile, in Washington, D.C., the Service employees International Union representing 100,000 school workers, filed a suit in Federal Court against the Environmental Protection Agency for its failure to promulgate effective rules to deal with the problem of asbestos in public and private schools.

PCC continues to view its property damage exposure as not significant due to the fact that its only asbestos product, Unibestos, was a high temperature product principally used in oil refineries and nuclear submarines rather than schools and public buildings. Notwithstanding this fact, the assured is being named in a greater percentage of the more recent property damage filings as plaintiffs' attorneys attempt to include large corporate defendants perceived as having a "deep pocket." These defendants must then participate in costly litigation until evidence produced through discovery confirms that their product was not involved, at which time dismissals are negotiated with plaintiffs' attorneys or sought bad motion. PCC has attempted to obtain voluntary dismissals prior to discovery on the proviso that it could be brought back into the suit if discovery shows that Unibestos was involved, however, thus far plaintiffs' attorneys have not been receptive.

31 Jan 85

Mr. Floyd Knowlton of the Travelers Insurance Company, Inc. is recorded as stating in Mrs. Rowe's (claims manager at the R J Kiln Agency) contemporary record of a conversation with Mr. Knowlton on 31 January 1985:-

"Knowlton said the asbestos B.I. problem may be more or less under control, but he feels the P.D. will be at least as large - and may in turn spark more B.I. claims..."

Feb 85

The Johns-Manville settlement was reached by Manville Corporation, the parent Company of Johns-Manville, for $111.8m with three excess insurers, which increased the insurance cover of Manville Corp. to $426m, with a consequence increase in the quantum of asbestos-related claims falling upon insurers.


In early 1985, The Investigations Committee of Lloyd's appointed Mr D R P Baker FCA, a partner in Touche Ross & Co, to act jointly with Sir Edward Singleton on the Committee of Enquiry into Bellew, Parry & Raven.

18 Feb 85

Letter from Toplis and Harding (Asbestos Services) Limited to insurers at interest, signed inter alia, by C. J. Ayliffe of Merrett Syndicates Limited.

(The steady increase in the number of advices being received in the Market from insureds who have potential problems relating to environmental pollution emphasises the need to establish inter market co-ordination... Bearing in mind that the Market is presently involved in excess of 300 sites which constitute problem areas, it is essential that a system be put into place which can provide an index open to all London participants which records the name of Insured, site designation and the name of the Counsel acting on that account. At the present time the Environmental Protection Agency of the U.S. Government have designated some 783 dump sites as locations subject to special investigation. Quite apart from the damage to persons and property that may arise beyond the area of the site, it has been estimated that the average cost of clean up at any one site will amount to $6.5M... Legislation, such as the Compensation Environmental Response, Compensation & Liability Act has provided that liability for the cost of clean up will be imposed on a joint and several basis with the dump site owner and major dumpers being the initial target of the Government. In a number of instances there can be in excess of one hundred dumpers and transporters of industrial waste involved at one dump site. Control will need to be exercised to ensure that the legal profession does not precipitate mass litigation under contribution theories. Recent budgetary increases granted by the Federal authorities to the Environmental Protection Agency will permit them steadily to increase the site designations in which they are actively involved. This general background leads the Claims Group to conclude that it is essential that the Market addresses the implications without delay).

The steady increase in the number of advices being received in the Market from Insureds who have potential problems relating to environmental pollution emphasises the need establish inter-market co-ordination... Unfortunately, as has been experienced in claims arising from asbestos related injuries, matters involving alleged pollution often extend over many decades, with London placings for individual insureds being handled by various brokers and being subscribed by different markets... It is inevitable that environmental pollution will produce many coverage issues for insurers, and if the present indications from the United States can be taken as a guide the London market is likely to become involved in coverage litigation ... The co-ordinated effort that is required in order to address the issues that arise can and must start within the Market. In an effort to explore how this can be achieved, an inter Market group of Claims Managers, whose names we detailed below have been meeting to exchange views.... The purpose of this letter is to give you some insight into the problems that exist and the future developments that are foreseeable, more importantly the manner in which the problems should be addressed within the Market. It must be emphasised that it is not proposed that the active handling and decision making process be removed from the participating Market, but more towards liaison with the Group whose prime task will be to monitor all matters in the general interests of the entire Market. To succeed in this endeavour it is essential that general support is demonstrated, and to determine if this is forthcoming it would be helpful if you could complete the attached letter and return without delay to ..., Toplis & Harding (Asbestos Services) Ltd., Greenly House, 40 Dukes Place, London. EC3.

Feb 85

An address was delivered to the Chartered Insurance Institute entitled, Insolvencies: A fear or a favour.

22 Feb 85

Ernst & Whinney note from N F Holland to C Watt.

We maintain that a syndicate is a joint venture of one year's duration. Assuming the account is then reinsured, that year ceases. Reinsurance to close, therefore, is not just a matter of what is known at the time but takes into account what is likely to creep out of the woodwork at a later date in order to preserve equity between the closing year and the reinsuring year. A company is an on-going entity and, therefore, any shortfall in the funds one year can be made good in a later year without in any way affecting the entity as such. I accept that an unduly good or bad result may affect the price of shares which , of course, is pertinent for those buying and selling, but I do not believe that it follows that what is good for the companies is necessarily good for Lloyd's.

25 Feb 85

R A G Jackson attended a meeting with Senior Executive Officers of the Aetna, Hartford, Liberty Mutual, I.N.A. and Continental, which was held in New York on Monday, 25th February to discuss the latest developments of the formation of the Asbestos Claims Facility and consider the next stage to be addressed at an executive level .

25 Feb 85

The Chairman of Lloyd's, Peter Miller, writes to a working Name and syndicate Underwriter stating inter alia

"Thank you for your two letters. As to the first one concerning the number of FCII's in Lloyd's, I can only reflect that Lloyd's underwriters, by the large, appear to make much better profits than their company colleagues! Frivolity apart, the lack of technical qualification is deplorable and the numbers I agree, are surprisingly low".

26 Feb 85

Letter from Peter Miller addressed to Dear Senior Partner/Chairman

I refer to the letter of 12th October last, in which deputy chairman, Mr. Murray Lawrence, advised you of the membership requirements which would apply for new members who commenced underwriting from 1st January 1986 and to existing members who changed their underwriting arrangements after 1st January 1985.

27 Feb 85

The Wellington Resolution Group gives the ‘Green Light' to the Asbestos Claims Facility. This was an Insurance Market initiative to resolve the asbestos problem without Government interference, legislation and an imposed solution..

28 Feb 85

The Chancellor of the Exchequer has decided to take action to counter the practice known as "Bond Washing". The new rules will apply on and after 28 February 1986 when the scheme comes into effect.

0 Mar 85

Cornell University researchers have concluded in a recent study on the adequacy of workers compensation payments to the survivors of men who died from workplace exposure to asbestos, that "the compensation is neither adequate nor equitably distributed."

The study, one of the first on compensation for occupational-related illnesses and diseases, focused on benefits payments in 1979 to 249 widows, whose husbands would have been living that year had they not died from asbestos exposure. It was found that workers compensation payments replaced only 36.2% of the losses of widows for whom it was the only source of income. The figures are far below the normal standard that workers compensation benefits should equal, approximately 66% of the workers wages before his death.

Additionally, the study showed that widows who succeeded in common law actions received the most adequate compensation, but it also showed that tort awards were inadequate for some widows and that, furthermore, some of these awards would be exhausted within one year.

0 Mar 85


A recent survey released by the EPA indicates that 20% of commercial, federal and residential apartment buildings in the United States may contain friable asbestos. The survey was conducted on 231 buildings to determine how much friable asbestos-containing material might be in buildings other than schools. The 20% figure translates into approximately 733,000 commercial, federal and residential apartment buildings with friable asbestos.

The report noted that only 38 of the surveyed buildings had asbestos-containing ceiling tiles. The report also noted, however, that buildings constructed in the 1960's were found to be 15% more likely to have asbestos-containing sprayed or troweled-on friable material than other buildings.

The report went on to say, "It appears that the extensive use of asbestos-containing sprayed-on friable material would have continued and perhaps increased in the 1970's had not the EPA banned the use of those materials for all but decorative purposes in 1973." The EPA banned all other uses of these materials in 1978.

0 Mar 85

In March, the Chairman, Peter Miller, visited Brussels accompanied by the Deputy Chairman, Mr David Coleridge. Meetings were held with Lord Cockfield, Vice President of the EEC and other senior officials of the Community.

1 Mar 85

Mendes & Mount letter to R A G Jackson, Chairman, Asbestos Working Party, C/- Merrett Syndicates Ltd. Re: Report on the Asbestos Working Party activities during the past twelve months:

As attorneys servicing the interests of the London Market in various asbestos related matters, we submit the following report to Underwriters and Companies, highlighting the events of significance which have received the attention of the Working Party during the past twelve months.

1. Asbestos Claims Facility:

As the market is aware, negotiations aimed at the establishment of the Asbestos Claims Facility have become somewhat protracted. We understand that the Chairman of the Asbestos Working Party has at frequent intervals provided advice to the Market on how matters had been developing, and bearing in mind the importance which is attached to the success of this venture, we feel that it would be beneficial to provide the Market with a broader review of the background to the discussions that have taken place; the problem that presently exist in establishing the Facility; and finally the consequences to the London Market that could arise in the event that the Facility fails to get underway.

  1. Past Developments:

The concept of the Asbestos Claims Facility was two-fold: Firstly, it was recognised by industry leaders that there was a pressing need to arrive at a negotiated solution with Producers of various coverage issues which continue to persist under numerous declaratory judgment actions.

Secondly, which is much more material in addressing the problems which exist domestically was the need to establish a claim handling capability to provide asbestos claimants fair and equitable compensation as an alternative to resorting to the civil tort system.

The backlog of suits in the various jurisdictions, Federal and State, were a source of increasing concern, because it was unreasonably delaying the time before which the claimants could have their suits addressed by the court. It was the unacceptable delay in the ability of the tort system to provide compensation to meritorious claimants which was progressively attracting more attention from the Federal Government.

The negotiations to bring about agreement in regard to both coverage issues and claims handling commenced in October, 1982, by a small representative group of Insurers and Producers. As the Market is aware, two London Market representatives have served on that Resolution Group, which over the past two years, met on no less than 32 occasions, involving 58 days of intense and difficult negotiations.

It is interesting to record that the role of the leading negotiator on behalf of the insurance group was assumed by Ray Stahl of the Travelers Insurance Company, who diligently pursued solutions to various problems using innovative ideas in order to bring about agreement. Although the proposals that evolved recognised the Keene interpretation of coverage, their effect was nevertheless to bring about a controlled application of Keene by applying indemnity over a block of coverage. In addition, it was through Ray Stahl's persistence that ultimately agreement was reached in regard to the establishment of a defence funding mechanism! in connection with policies issued on the pre l966 C.G.L. wordings.

By May 1984, agreement had been reached on all issues within the Resolution Group and the "Agreement Concerning Asbestos Related Claims" was released throughout the Insurance Industry and to all the commercial concerns who had any involvement in the asbestos problem in the U.S. Thereafter, both groups undertook to educate their individual constituencies with a view to obtaining provisional commitments to the Facility concept. Unfortunately development of the necessary support has proven to be a slow process, for with respect to the Insurance Industry a number of issues continue to be raised by direct writers who, among other matters, were concerned at the negative attitude being indicated by the reinsurance market. A further difficulty arose in June 1984, when the Travelers announced that certain aspects of the Agreement relating to the resolution of coverage matters were not in keeping with that company's approach, and, therefore, indicated that it was unlikely that the Travelers would become a provisional subscriber. By December 1984, provisional commitment had been received from the following insurers:-


Direct Insurers


Aetna Life & Casualty Co.;


American Universal;


Argonaut Insurance Co.;


Bituminous Casualty Corp.;


Continental Insurance Co.;


Crum & Forster;


Employers of Wausau;


Fireman's Fund


First State Insurance Co.;


Harbor Insurance Co.;


Hartford Insurance Group;


Highlands Insurance Group;




Liberty Mutual Insurance Co.;


Underwriters for Lloyds of London;


Reliance Insurance Co.;


Royal Insurance Co.;


The St. Paul Cos., Inc.;


U.S. Fidelity & Guarantee Co.;


Zurich Insurance Co.;

However, in order for the Facility to be truly viable, it remains the view of the Resolution Group that subscription from the following companies was highly desirable:-




American Mutual






Commercial Union











Although negotiations aimed at this objective have been underway for some time, to date provisional commitments have not been obtained. The immediate problem that this poses for the Facility Agreement is that within the provisions relating to the broad band of coverage, gaps could be created by the non-participation of certain carriers. This factor was recognised within the Agreement, which essentially provides that provided the gaps are small, the participating Insurers will on a temporary basis assume those additional obligations, subject to the Assured pursuing the non- subscribing Insurer through the courts.

Regrettably, as matters stand at present, the absence of participation by the majority of the companies listed above could create gaps of considerable size so as to make the position unacceptable in regard to certain accounts. Indeed, it may ultimately develop that non-subscribing carriers would feel compelled to make some payment to their Insured in such a situation, which could have the effect of reducing the gap to a more manageable proportion for participating Insurers to assume on a temporary basis.

The delays that have arisen have proven counter-productive to the interests of both Insurers and Producers, to the extent that certain coverage issues for which the Facility proposed solutions are with the passage of time now being addressed by the courts. While in most cases these are at a lower court level, it is inevitable that any decision rendered after the terms of the Agreement were concluded will detract support from either the Producer or Insurer element. Despite this fact, it must be recorded that Producers have been highly successful in obtaining support from their industry, and to date have received provisional commitments from no less than 31 companies involved in mining, producing or in some way handling asbestos products. The only major Producer yet to make a commitment is GAF. However, negotiations continue, and it is hoped that their support will ultimately be forthcoming.

B. Future Implications:

With the Co-ordinated Action in California due to start in March, 1985, .it has been decided that in the short time available one final effort should be made to enlist support of at least some of those major Insurers who have yet to make a commitment to the Facility. Negotiations along these lines are now being conducted at a Chief Executive officer level through the Aetna, Hartford, Continental, INA, Liberty Mutual and London interests. It has generally been accepted ; by its supporters that the Asbestos Claims Facility is the only viable way in which to control the developing asbestos problems which rage in the States, and there is Federal Government support for that conclusion. It is equally apparent that in the event through lack of support the Insurance Industry fails to achieve success in resolving the issues, the pressure that will be brought to bear upon the Federal authorities from uncompensated claimants will be such that ultimately there will be a Government imposed solution.

There is no question that in the event this were to happen, the effect on the Insurance Industry would be dramatic, and far less palatable than the regulated handling provided for within the Facility Agreement. In the event that the Facility concept were ultimately to collapse, it is important that Underwriters do appreciate the serious problems that would arise in the London Market in endeavouring to handle some 30,000 outstanding claims which, from past experience, will increase by some 5,000 new suits each year.

The conflict issues that would face your various Counsel would no longer be capable of being kept low key, and this fact, coupled with the dramatic increase that would arise in expense incurred on handling accounts, would undoubtedly be far in excess of anything the Market has currently experienced. This fact, coupled with the inevitable increase in coverage litigations would prove extremely burdensome to the Market.

During the course of the past year there have developed new issues in regard to damage to property allegedly caused by asbestos containing materials, which create unique coverage issues which have yet to be addressed. If the solution proposed in respect of bodily injury claims under the Facility Agreement receive the support they deserve, the Facility must be the best forum through which to address resolutions of coverage in regard to Property Damage. This would undoubtedly be a more satisfactory way in which to deal with this particular problem than permitting the courts to adjudicate on the matter, which would only serve to create additional dilemmas by reason of the conflicting rulings that could arise.

II. Johns-Manville

As the Market is aware, following the collection of the estimated then present value of the Settlement agreed with the Insured the funds were invested with Citibank through Lord, Day & Lord. The return being achieved, together with the capital gain which will arise, will be adequate to meet the sum specified in the Settlement Agreement at 31st December 1985, or thereafter. We understand that participants have recently received tax advice from U.S. and UK advisors, which sets out the tax implications that arise for Lloyd's and companies.

The terms of settlement arrived at between Travelers, Home & London continue to attract the criticism of the Plaintiff and Creditors Committee, who argue that the liabilities of settling Insurers was in excess of the $315M accepted by Johns-Manville. As a result of the opposition that developed, Judge Lifland has ordered a Fairness Hearing at which the issues can be adjudicated. Originally the Hearing was set for early December 1984, but due to continued discussions between Johns-Manville and other excess insurers, the court continued the hearing to 22 February 1985, although further extension are a distinct likelihood. Irrespective of the ruling handed down by Judge Lifland, the matter will be appealed.

Johns-Manville has expended considerable effort over the past three months to reach agreement with other carriers for either a cash buy out of coverage limits or an understanding on the manner coverage will be applied. It is clearly their hope that by the time the Fairness Hearing takes place they will have substantially increased the amount of the settlement fund, which could have the effect of deflating the plaintiffs' objections.

Considerable court activity is anticipated before the Insured's Plan of Reorganisation has final judicial approval, and there is little doubt that, with the authority of the Bankruptcy Court still subject to question, appeals will be filed, perhaps all the way to the U S. Supreme Court. Some sources have expressed the view that if the Settlement Fund is approved there is a possibility that Judge Lifland will make a partial order to permit Johns-Manville to address the substantial number of claims that have remained pending since the Chapter 11 petition was filed on August 26, 1982.

As was indicated in our Year End reserve recommendation report, it is necessary that participants recognise that on certain layers of London coverage liabilities will continue to accrue, and this situation will persist until there is a binding decision from the Court.

In accordance with the terms of the Settlement Agreement, Johns-Manville has dismissed London participants from the California Co-ordinated Action on a without-prejudice basis. Effectively, the Insured is at liberty to refile coverage litigation, should the settlement ultimately be rejected by the Court. However, participants should be aware that as a result of the filing of cross-complaints in the Co-ordinated Action by certain company defendants, declaratory judgment counsel continue to be involved in matters relating to Johns-Manville, albeit on a more restricted role than was formerly the case. Whilst this will inevitably involve participants in additional defence costs, the terms of the Settlement Agreement require Johns-Manville to indemnify Insurers in respect of any compensatory award that may arise.


During the last year the anticipated increase in re- insurance involvement has developed, as is demonstrated the volume of reports now monitored by the Re-insurance Claims Committee [see Toplis and Harding (Asbestos Services) Limited]. It is reasonable to expect this trend to continue as the overall cost of the asbestos problem increases and more cedants' potential exposure exceeds underlying retentions. In addition, it is inevitable that the Market will develop a further up-surge in retrocessional involvements.

All year end reserve reports are reviewed by the Reinsurance Claims Committee to ensure that the reserve recommendations are in keeping with factual information emanating from the original account. Due to the increased volume of reports being processed, the membership of the Reinsurance Claims Committee has been broadened to include Peter Dodds, John Heath and Jim Teff. The prime objective of the Committee is to ensure that reports which contain year end reserve recommendations are circulated with a minimum of delay. Narrative reports on each account will thereafter be prepared by reporting Counsel setting out in more detail the present posture of each matter and outlining the manner in which the reserve recommendations were established. Due to pressures involved it was not possible to produce a narrative report on every account during 1984, but Counsel have been asked to correct this situation for the current year.

One problem which is tending to recur at more frequent intervals is the difficulty of tracing Market participants on early years of involvement. The Reinsurance Committee is depending upon information held by the broker, which can be incomplete at times. In such instances the Market has been asked to review their records to assist in identifying participants.

During the ensuing year, 1985, it is intended to develop subscriber information on layers of reinsurance over those levels presently impacted by reserves. Once this information is available, the Claims Committee will circulate advice to upper levels of coverage once reserves attain 80% of underlying limits.

L.U.N.C.O. will shortly be advising that, with the exception of LMX business, there will be no change in the manner in which reserves are recorded for this year end. The most up-to-date figures available for year end closing are those provided by Toplis Harding (Asbestos Services) Ltd., and that office should be given full credit for the service that they have afforded to the market.

Asbestos declaratory judgement actions:

During 1984, deposition testimony of a number of London Market Underwriters and claim staff was taken in connection with the California Co-ordinated Declaratory Judgment Action. Although the possibility still exists that this litigation could be concluded by settlement prior to the 5th March 1985 trial date, especially if the Asbestos Claims Facility secures the critical mass necessary to a viable organisation, the closer that date comes the more certain it is that the first phase of the litigation relating to the existence of policies will commence.

While the litigation instituted by Celotex Corporation against its insurers in Tampa, Florida, has not proceeded through pre-trial discovery, an interpleader action was filed on behalf of the London Market seeking a declaration as to whether the benefits of the London policies belong to Celotex Corporation or Rapid American. Significant developments are anticipated in the interpleader action, although the Declaratory Judgment Action has not proceeded to any extent, partially due to the insured having settled with some of its other Insurers.

Decisions of significance in coverage actions during 1984 include: Keene Corporation -v- I.N.A., where Keene's motion for punitive damages against the I.N.A. for refusal to defend was dismissed on a Summary Judgment Motion by the trial Judge, June Green. Judge Green determined that Pennsylvania law controlled since I.N.A.'s decision with respect to defence was made at its home office in Philadelphia, Pa. Under Pennsylvania law it is against public policy to allow recovery of Punitive Damages against an Insurance carrier. Keene had also sought punitive damages against its other primary insurers, Aetna and Liberty Mutual, but since the respective laws of the states of incorporation, Connecticut and Massachusetts had not been brief and argued, the judge reserved decision.

In a later decision in the same case, Judge Green denied Keene's motion for partial Summary Judgment seeking a determination that I.N.A. was required to continue defending Keene subsequent to the exhaustion of I.N.A.'s Aggregate Limits for products bodily injury. The judge found the I.N.A. policy wording to be unambiguous and that under the plain meaning of that wording I.N.A.'s defence obligations ceased with the exhaustion of the policies' Aggregate Limits.

In a more recent decision in the case of Owens Illinois -v- Aetna Casualty and Surety, Judge Hogan endorsed the Keene "triple trigger" finding and also held that the decision by Owens Illinois to manufacture and sell the asbestos product, "Kaylo" should be regarded as a single occurrence with the result of only one deductible would apply.

Asbestos Property Damage Actions:

As anticipated, in 1984 there was a continuing increase in the number of property damage actions filed against the producers of asbestos products. The most significant of which were those filed on behalf of various Districts. These include the actions instituted in Ohio, Alabama, New York, Michigan and Maryland. As an illustration. in the Maryland action brought on behalf of the Mayor and City Council of Baltimore the Plaintiffs seek actual damages of $225,000,000 and in addition seek an unspecified amount of punitive damages and costs.

When the new school year commenced in September, much adverse publicity was generated by the fact that a number of School Districts had failed to comply with the requirements of the Environmental Protection Agency, regarding testing and removal of friable asbestos.

Following public debate, the U.S. Congress was persuaded to pass the Asbestos School Hazard Abatement Act of 1984 whereby the Environmental Protection Agency was granted a total of $600,000,000 to be used for loans and grants to schools for the abatement of the asbestos problem. Significantly The Act preserves claims for damages against manufacturers and producers.

Letters of Credit/Funding

In the year end 1983 Market report strong emphasis was placed upon the need for timely collection of funds from the Market, in order to satisfy both servicing and data bank commitments, and more importantly to provide indemnity to direct Insureds. At that time it was hoped that through the gradual adoption of Letters of Credit the situation would effectively be improved, which would enable us to satisfy the loan account that we were compelled to establish in order to meet data bank and servicing requirements. Unfortunately, the improvement took far longer than had been expected consequently it was not until December, 1984, that sufficient funds were in hand to enable us to reduce the loan to a manageable level.

The reasons that have contributed to these delays are two-fold:

Firstly, the refusal by certain company participants to grant Letters of Credit has imposed an administrative burden on brokers who have been forced to process collections in the traditional manner to satisfy each cash call made during the period. To a great extent this problem has been alleviated as more companies have become participants in the Letters of Credit Scheme. However, we must again emphasise that the efficiency of a Market funding mechanism based on Letters of Credit is geared to total acceptance by participants, and we, therefore, again implore these companies who have yet to give a commitment to reassess their position so as to avoid any criticism that could well develop if funding delays continue. More importantly we are fearful that some producers might not be quite so indulgent which conceivably could precipitate actions for bad faith and/or extra contractual damages against the entire Market.

Secondly, the period of time which has elapsed between dispatch of a draw down request and the receipt of the requisite authority to proceed. We shall shortly be again contacting all brokers involved in Letter of Credit funding to re-emphasise the need for prompt handling. It is our understanding that only the agreement of the Leading Underwriter is required for a draw down, and we would ask that those involved leads provide priority handling to these matters. It is essential that the Market recognise that its performance is going to come under increasing scrutiny as more Insureds become dependent upon this Market for indemnity. In addressing this need, we are firmly of the view that it is essential that the Market develop the ability to respond to funding requests in a maximum time frame of 30 days. Performance at that level will enable us to eliminate the present line of Credit which we had to establish in order to respond to contractual obligations of the C.I.S. and other servicing needs. Of greater importance will be the Market's ability to address the cash problems confronting its Insureds whose financial viability could well be dependent on prompt indemnification.

These factors have been under constant consideration by the Claims Committee, who now recommend that we modify the basis of the projections on which Letters of Credit are currently predicated from a one-year projection to two years. Significantly, this will ensure that credit is always available on which to make drawings, and reduce to an extent the administrative effort for the Market. It is intended that future needs will be based upon a two-year projection which will be adjusted at one year intervals to respond to changing circumstances. One such changed circumstance could be the establishment of the Asbestos Claim Facility. The Facility would require funding promptly and at frequent intervals from the entire Insurance Industry. New Letters of Credit reflecting the new two-year projection are currently in preparation, and will be circulated shortly.

As indicated elsewhere in this report, C.I.S. expenses are subject to constant review, and we are pleased to advise that the projections for 1985 will again show a reduction from the preceding year. Now that the Reinsurance Market is deriving greater benefits from the C.I.S., the Reinsurance Claims Committee have agreed to recommend that an annual charge of $2,000 per original account be made. This is, we consider, an equitable way in which to allocate expenses throughout the Market in keeping with benefits being received.


The Market should be aware that per Claimant reserves on each account continue to be reviewed annually by the Claims Committee together with reporting counsel. Indemnity reserves are adjusted to reflect the historical level of settlements for each account to which is then added a percentage loading - normally 20% - to provide for future inflationary trends. In addition, a defence expense allowance is calculated on each account in order to recognise that upon exhaustion of the primary aggregates, the obligation to indemnify for these defence costs will pass to the excess carrier.

It must again be re-affirmed that reserves recommended by your servicing counsel are based on filed claims outstanding for each assured, and no attempt has been made to project an IBNR factor in respect of claims yet to be filed.

This year end there was some recognition of the potential for Property Damage Liability in cognisance of the increasing number of School District claims filed although the issues of liability and date of loss remain unresolved.

Any increase in property damage reserves in the future will depend upon the results of court cases pending in various jurisdictions during the ensuring year, and/or attempts to resolve disputes by negotiation.


As has been reported previously, the London Claims Information System (C.I.S.) has proven to be the most flexible system yet devised to monitor Asbestos claims. For some time work has been proceeding on the Claims Facility database with input from Alexander Grant as representative of London's interests. It has now been recognised by both Insurers and Producers that London's system is the only one possible for creating the foundation for the Facility database and, therefore, London will have a much greater say as to the ultimate design of the system. Members of the Claims Committee continue to meet with Alexander Grant to evaluate current requirements and methods in a constant endeavour to reduce costs. Towards this end London now owns the software relating to the Asbestos Databank which, including the Purchase, will result in a reduction of costs for 1985 and produce even greater benefits in the long term. This software package also gives Underwriters the ability to create a database for other requirements as will no doubt arise in the future at a greatly reduced cost and with an improved efficiency.

Toplis & Harding (Asbestos Services) Ltd

This office has now been in operation for just over a year, and the volume of work, for both Direct Accounts and Reinsurance, has increased dramatically.

The number of Direct reports containing reserve recommendation remains in line with the previous year; however, some 145 Reinsurance reports were circulated, compared with 66 last year end.

In view of increasing litigation, this office has proven invaluable to the Market. During the course of 1984, the operation broadened its responsibilities to embrace the D.E.S. litigation and reporting. It is envisaged that during 1985 it will encompass other areas which cannot be fully serviced by the Broker. All such costs incurred are debited specifically to the accounts in question.

Working Party Authority

Last year in our Market Report dated 19th January 1984, reference was made to the need to create a company limited by guarantee, so that a proper asbestos General Authority could be obtained from the Market. Unfortunately, after a long delay, we are advised that the Companies Registry reports that exception had been taken to the proposed name of the company, "Asbestos Working Party Ltd.", since there is a Government body called the "Asbestos Working Party." The incorporation of the company is therefore proceeding under the name "Market Claims Services Limited." As soon as the company is incorporated, the Working Party will circulate a revised General Authority, and request that the Market assist by signing and returning the document as soon as possible after it is received.

Mendes & Mount and the Working Party

The past twelve months have again served to confirm the comments we expressed in our year end 1983 report, that the guidance, perception and efforts of members of the Working Party have not only immeasurably aided us, as well as other servicing counsel, in properly representing the diverse interests involved in the asbestos litigation, but more importantly have served the interests of the entire Market.

The clearest illustration of this is the extent to which a concept totally unheard of in the insurance industry - co-operation between insurers - in the form of an Asbestos Claims Facility has progressed to the degree it has. It cannot be gainsaid that had not the London Market, through its representatives, exhibited the support it did, the Facility concept would be languishing on a drawing board and not on the threshold of emergence as a viable Organization. It is only through imagination, foresight and old fashioned hard work that such creative thinking becomes reality.

We unquestionably look forward to continuing our efforts on behalf of the Market, as well as the continuing assistance, guidance and active participation of the Asbestos Working Party until these matters are completely resolved.


In America, by universal acclaim, insurance seems to have been constituted the general money tree. Just to take one example the New York Superintendent of Insurance, James P Corcoran, introduced an amendment which would prohibit insurance companies licensed in New York from requiring tests for AIDS, on the grounds that the proposed amendment would result in the denial of essential health insurance coverage to individuals. Insurance is looked on as a substitute for social welfare. The many obvious advantages this must have where politicians are concerned hardly needs to be emphasised.

4 Mar 85

Asbestos Working Party letter to Insurers at interest enclosing a copy of a draft press release that will be made to all trade journals and newspapers, including "Lloyds List". The Facility currently boasts 33 producers and 22 insurance companies that have conditionally signed the Agreement.

I enclose for your information Mendes & Mounts year end report reviewing matters involving the Asbestos Working Party during the course of 1984.

As you will observe, our main concern during the past year has been in relation to the Asbestos Claim Facility, and we have continued to work closely with certain U.S. Domestic Insurers in an effort to develop the support necessary to ensure that the Facility becomes operational.

As recounted in the attached report, negotiations have been somewhat protracted, but I wish to report that a sufficient measure of success has been achieved during the past months that it now appears that the Facility will go ahead.

I attended a meeting with Senior Executive Officers of the Aetna, Hartford, Liberty Mutual, I.N.A. and Continental, which was held in New York on Monday, 25th February to discuss the latest developments and consider the next stage to be addressed at an executive level.

The most significant development which has taken place in the past few days has been the provisional commitment of both the Home and C.N.A. to become Facility members. Both companies are significantly involved in the asbestos problem, and their participation is of considerable importance to the effectiveness of the Facility. Discussions will continue with other companies who have yet to make a decision, but indications are that the present Insurer commitments received are now adequate for the Facility to move forward. Obviously, for total effectiveness it would require support from the entire Insurance Industry, but we have now achieved enough support to enable U8 to proceed, whilst efforts continue to attract others to join.

You will appreciate that all Insurer commitments are subject to approval being obtained from their Reinsurers. To date certain professional Reinsurers in the U.S. Market have not been particularly positive in their reaction to the Facility, but plans are now in hand for a meeting of Senior Executives to take place within the next month to develop a more positive approach. My personal view is that it is unlikely that any direct writer will obtain the total support of all his Reinsurers, particularly in view of the extended periods affected by the asbestos problem. However, it will be up to each participant to determine whether they have sufficient indications of support to enable them to make the necessary binding commitment.

As an indication of where matters now stand, I am enclosing a copy of a draft press release that will be made to all trade journals and newspapers, including "Lloyd's List". As you will observe from the future activities outlined in the press statement, there remains much to be done to achieve a final closing date of 29th May. Several sub-committees are in existence, which are addressing such varied issues as staffing and terms of employment, transitional arrangements for claim files from each Insurer participant, funding and financial integrity of the Facility, office site selection, incorporation and computer design.

The two London representatives will continue to be actively involved in future meetings, and I have agreed to participate with Pete Thomas, Chief Executive of the Hartford; John Baldwin, Chief Executive of Pittsburgh Corning; and Harry Wellington, Dean of the Yale Law School in making a presentation before Senator Nicholls at the hearing set up by the Senate Labour Sub-Committee to consider the Facility agreement.

The proposed meeting with producers in April is of major importance, for it has as its objective agreement between Producers and Insurers of any specific coverage problems that have not been addressed within the terms of the Agreement, in order that matters remaining for the attention of the Alternative Dispute Resolution Procedures can be kept to the minimum. It is important that you appreciate that at this negotiating session London representatives will be required to make certain decisions on your behalf on the manner coverages will apply within the Facility. Whilst it is not possible to foresee all the issues that could be raised, I trust that you will accept that our representatives are authorised to participate in the manner indicated and can assure you that wherever possible, there will be no departure from the basic principles on which the Facility Agreement was based.

Now that we have the Facility momentum underway, I would like to address the procedure I would advocate for the London Market sign-up. Directly the final minor amendments to the Facility Agreement have been agreed, the document will be reprinted. Once the final agreement is received in London I propose to distribute one copy to each Lloyd's syndicate, and two copies to each London company. As detailed in my letter dated 30th August, 1984, Lloyd's participants will be requested to return to me an authority to sign the final document on their behalf. If for any reason a Lloyd's participant wishes to sign a separate Agreement, the necessary arrangements can be made, provided I am given prior notice to this effect. So far as London companies are concerned, I will require one signed Agreement from each company, which on the present timetable must be returned to me no later than Wednesday, 15 May.

The operation of the Facility will raise two issues for the Market. Firstly, in addressing future year end reserve recommendations, it will be necessary for our U.S. Counsels only to consider an exposure concept in line with the Facility Rules. The liability share allocated to each Producer member will simplify calculations of reserves, which will in any event be affected by the reductions in defence costs that will arise.

Obviously, it will be necessary to continue to operate the London Databank for some time to come, but eventually it should be possible to scale down that operation, once we are satisfied that the Facility Databank will cater for our needs in London.

The second issue that needs early attention is a new authority for the Asbestos Working Party, which will enable prompt commitments to be made on behalf of the Market to the many administrative issues that have to be addressed in the Facility formation, and in the processing of claims. I expect to be writing to you shortly on this subject.

In conclusion, let me say that I am now more satisfied with the progress that has been achieved for my colleagues, and I on the Asbestos Working Party remain convinced that the Facility is the only answer to the problems which confront the Insurance Industry.


WASHINGTON, D.C., 27 February 1985 - The Wellington Resolution Group announced today that the proposed Asbestos Claims Facility, a private sector solution to the massive number of asbestos-related injury suits clogging the nation's court system, has been given a "green light" and is expected to be established in May of this year.

The Facility is the result of over two years of highly complex and intense negotiations between producers and insurers involved in asbestos-related lawsuits and insurance coverage disputes.

A unanimous decision was made by the chief executive officers of the Wellington Resolution Group to proceed with a concrete schedule designed to achieve finalisation of the Facility.

"We are going forward with the Facility and we will proceed swiftly," said John Baldwin, president of Pittsburgh Corning and chairman of the Wellington Producers Group. "There is no question that this alternative to our court system will satisfy the interests of the parties involved, especially the injured workers," he added.

The Facility is designed to provide a faster, less costly, and equitable alternative to asbestos claims litigation. It will be available to those claimants involved in the more than 23,000 cases currently pending in state and federal courts, as well as the new suits that are being filed at the rate of about 500 per month.

John F. Shea, Jr., vice president and claim counsel of Aetna Life & Casualty and chairman of the Wellington Insurers Group, stated that "although we will actively continue to seek additional subscribers, the recent conditional sign-ups of Fireman's Fund, C.N.A. and Home Insurance companies has greatly enhanced our effort to move the proposal forward."

"We applaud the decisions of the CEOs of these companies to join us and hope that other insurers will soon follow," said Shea. The Facility currently boasts 33 producers and 22 insurance companies that have conditionally signed the Agreement.

Robin Jackson, chairman of the London Asbestos Working Party stated that he was very encouraged by the progress that is being made, and pledged the continuing support of the London insurance market to the objectives of the Wellington Group.

The Rand Corporation has estimated that producers and their insurers have spent approximately $1 billion in compensation and legal expenses in the last ten years. Injured workers, however, have received only 37 cents of every dollar.

"Providing fair and equitable compensation to injured workers does not require that hundreds of millions of dollars be wasted in legal expenses," said Dean Harry Wellington, Dean of Yale Law School and Chairman of the negotiations.

"The proposed Facility serves the national interest. It will ease the judicial morass that the suits have created in the tort system. It will allow the companies involved to manage their liability and pursue financial planning for the future, thereby making greater contributions to the nation's economy," Wellington continued.

Wellington praised the companies involved for their persistence and strong commitment to finding a fair solution to one of the nation's greatest occupational disease problems and noted that the Facility provides a precedent for settling massive numbers of suits in other segments of our society.

The Facility has received the support of many Members of Congress and Administration officials in recent months. Secretary of Commerce Malcolm Baldridge said the efforts of the Wellington Resolution Group "are clear testimony to the ability of the private sector to resolve major problems that widely affect our society. It is significant that you have done so without requiring the intervention of Government."

The next few months will be marked by a number of significant dates leading to the proposed May culmination of the Agreement. They include:

March 12

Mandatory meeting of subscribing producers to assure completion of insurance coverage information essential for final closing of Agreement.

March 19

Senate Labor Subcommittee holds oversight hearings on Facility; Wellington subscribers testify.

March 29

Insurance coverage information provided by subscribing producers to subscribing insurers.

April 24 - 26

All subscribing insurers and producers meet to reconcile insurance coverage information agreeing on items for alternative dispute resolution.

May 10

Reconciled insurance schedules provided by subscribing producers to subscribing insurers.

May 22

Pre-closing meeting of all conditional subscribers.

May 29

Final closing, final signing, Washington, D.C.

During this time period the Facility will be incorporated and the Wellington Resolution Group will also complete its search for a chief executive officer as well as other personnel. The Facility will be headquartered in Boston with a claims office in San Francisco.

The Wellington Resolution Group is comprised of six major producer companies and six major insurance companies that have negotiated the Agreement to establish the Asbestos Claims Facility. (Kathryn Broderick refers to only 34 Producers and 16 insurers that formerly signed the Asbestos Claims Facility Agreement on 19 June 1985)

Mar 85

The Chairman of Lloyd's, Peter Miller, accompanied by the Deputy Chairman, David Coleridge, visited Brussels. Meetings were held with Lord Cockfield, Vice President of the EEC and other senior officials of the Community.

Mar 85

Victor B Levit, a partner in the San Francisco law firm, Barger & Wolen, and the legal editor of Underwriters' Reports, delivers a paper entitled "Toxic Perils and Products Liability: Current Insurance and Legal Developments" to the Under 30's Lloyd's Non-Marine Claims Committee.

Mar 85

The US Attorneys reports addressed to Underwriters at Interest advise that "there was some recognition of the potential for property damage liability in cognisance of the increasing number of school District claims filed although the issues of the liability and date of loss remain unresolved".

6 Mar 85

Letter from Wilson, Elser, Endelman & Dicker to

Asbestos Claims Facility


Page 1 missing

directors chosen from among the subscribing insurers and asbestos producers. The Facility would operate from two offices, one on the east coast and another on the west coast. Additional regional offices could be opened when and if the need arises.

The Asbestos Claims Council invited interested insurers and asbestos producers to conditionally subscribe to the Facility by 15 July 1984. Final subscription was originally scheduled for 13 September 1984, but was extended indefinitely to allow insurers additional time to consult with their reinsurers.

As proposed, the Facility has two major objectives. First, it will operate as a claims processing center to administer, evaluate, pay, settle and/or defend all asbestos-related bodily injury and disease claims brought against subscribing asbestos producers and their insurers. For the present, property damage claims would not be processed under the Facility.

Each asbestos claimant would be required to support his claim by submitting valid evidence, such as job, medical and compensation histories. Claimants would also be required to demonstrate that they suffer from a recognised asbestos-related condition and that they were exposed to a subscribing producer's asbestos products. The Facility would be empowered to settle on behalf of all subscribing asbestos producers. Punitive damages claims would, however, be disallowed. The Facility would also be empowered to toll the statute of limitations for claimants whose claims have not yet matured, thereby allowing such claimants to resubmit their claims when additional medical evidence becomes available.

One last point should be emphasise. Participation in the Asbestos Claims Facility is purely voluntary. Present and future asbestos claimants may choose to forego the Facility's alternative dispute mechanism, and sue the asbestos producers in court, thereby preserving their right to a jury trial.

The Facility's second major objective is to resolve coverage disputes between asbestos producers and their insurers by providing asbestos producers and their insurers with a cheaper, faster and more efficient way of disposing of those claims. Under the proposed Facility, asbestos producers would be afforded "comprehensive coverage". Each producer would be permitted to select a "coverage block" consisting of some or all of its insurance policies issued before 1 January 1973. 1 January 1973 is the pivotal date, since after that date, insurance policies written for asbestos producers either contained high per-claim deductibles and self-insured retentions or excluded coverage for asbestos-related disease liability altogether.

As claims come into the Facility, each producer would be assigned a predetermined percentage of liability for each claim and its liability would be allocated among all the insurers in its "coverage block". An asbestos producer's percentage of liability would be determined by a complicated formula which takes into consideration the number of claims that have been filed against the producer as well as any amounts that the producer may have paid out on those claims.

For example, if a subscribing asbestos producer's percentage of liability is found to be 10% and the claim is settled for $50,000, the producer's $5,000 liability would be distributed among all of the insurance policies in effect during its coverage block. Thus, if a company had a twenty-five year coverage block, which included twenty-five insurers, each insurer would pay 1/25 of $5,000, or $200.

Under this coverage approach, an asbestos producer does not have to pay any of its own money until all of the insurance in its coverage block is exhausted. Thus, even if the primary and excess policies in a particular year are exhausted, the producer would not have to participate in affording coverage; rather, coverage for the exhausted policy year would be divided among the remaining insurers in the coverage block.

An asbestos producer may still include post-1973 policies in its coverage block, assuming, of course, that such policies do not exclude liability for asbestos-related diseases, but in that case, the asbestos producer would be required to pay its proportionate share of any per-claim deductible or self-insured retention. For example, if a subscribing asbestos producer is found liable for 1/25 of a claims payment, the subscribing asbestos producer would pay 1/25 of the deductible obligation toward it.

Unlike the "triple trigger" theory of coverage first enunciated in the Keene case, which would allow an insured to select a particular policy that would apply, and then force the selected insurer to seek contribution from the other insurers, the Facility's comprehensive coverage approach eliminates the need for contribution actions because all years of coverage in the coverage block are triggered, and thus each insurer is required to pay its proportionate share.

The proposed agreement would also prohibit subscribing asbestos producers from cross-claiming against each other, and would require all subscribing producers to terminate their declaratory judgment actions against their insurers and waive their bad faith and punitive damages claims as well. This last aspect of the agreement is particularly unappealing to many asbestos producers, such as GAF, Nicolet and Manville, who strongly believe in the merits and substances of their bad faith cases against their carriers.

On the question of the duty to defend under pre-1966 policies, the proposed Facility would provide that the duty to defend would cease on exhaustion of the policy limits. However, if a subscribing producer exhausted all of its other pre-1966 coverage, including its excess coverage, then defence coverage would be revived. The revived coverage would come from a defence fund established by all the subscribing insurers and would guarantee lifetime payments of defence coverage under pre-1966 policy forms.

Not all potential subscribing producers are pleased with the proposed defence coverage provisions. Some producers argue that at least two decisions, AC & S -v- Aetna Casualty & Surety Company, and Raymark -v- Zurich International, hold that insurers under pre-1966 policies have an unlimited duty to defend even after their policy limits are exhausted. In addition, many asbestos producers argue that the Facility's proposed defence coverage plan could mean less excess coverage for some asbestos producers, since excess policies, unlike primary policies, frequently include defence costs within the policy limits and therefore, if excess insurers are tapped for defence costs (instead of primary insurers providing unlimited defence), excess coverage that would normally be used to pay claims would be spent on defence.

The proposed Facility also attempts to resolve the question of putting "caps" on policies and deductibles that have no aggregate limits. This is frequently seen in early Lloyd's policies, many of which were written without aggregate limits. Under the agreement, the coverage cap would be calculated by multiplying the per-occurrence limits by numbers ranging from one to ten. High per-occurrence limits would be multiplied by a lower number, and lower per-occurrence limits would be multiplied by a higher number. Thus, policies with high per-occurrence limits would have a low aggregate limit and policies with low per-occurrence limits have a high aggregate limit. A similar formula would be used to calculate caps on policyholder's deductible obligations.

Most members of the Asbestos Claims Council agree that without widespread industry participation, the Facility cannot succeed. To attract additional subscribers, the Asbestos Claims Council has taken two steps. First, as noted above, it has indefinitely extended the final subscription deadline to allow insurers additional time to consult with their reinsurers. Second, it has extended the cut-off date for individual "coverage buyout" agreements to 24 October 1984. Before this change, any agreement executed between producers and insurers after 1 January 1984 that involved insurers "buying back" the policies they had issued to a producer to end the insurers' liabilities would have been set aside if the producer or insurer joined the facility. As a result of this, many producers and insurers balked at giving up all coverage agreements made after 1 January 1984 in order to join the claims facility.

The extension of the cut-off date for buy-out agreements is believed to be what motivated Manville to conditionally subscribe to the claims facility in mid-October. Manville reached a $315 million settlement with its three primary carriers, Travelers, the Home and Underwriters at Lloyds in July 1984. Were it not for the extension of the cut-off deadline, Manville would have had to set this agreement aside if it joined the claims facility. The topic of Manville's insurance settlement will be discussed further in the next subsection the Manville Bankruptcy Proceeding.

The following are reported to have conditionally subscribed:


Asbestos Producers




AC&S, Inc.




Amatex Corp.




Armstrong World Industries, Inc.




Brinco Mining Co.




Celotex Corp.




CertainTeed Corp.




Dana Corp.




Eagle-Picher Industries, Inc.




Eastern Refractories Co.




Fibreboard Corp.




Flintkote Corp.




Forty-Eight Insulations, Inc.




Lake Asbestos Corp. of Quebec




Manville Corp.


Chapter 11


Maremount Corp.




National Gypsum Co.




National Services Industries




Owens-Corning Fiberglas Corp.




Owens Illinois, Inc.




Pacor, Inc.




Pittsburgh Corning Corp.




Porter Hayden Co.




Shook & Fletcher Co




Turner & Newall



Direct Insurers




Aetna Life & Casualty Co.




American Universal




Argonaut Insurance Co.




Bituminous Casualty Corp.








Continental Insurance Co.




Crum & Foster




Employers of Wausau




First State Insurance Co.




Hanover Insurance Co.




Hartford Insurance Group




Harbor Insurance Co.




Highlands Insurance Group




Liberty Mutual Insurance Co.




Underwriters for Lloyds of London




Reliance Insurance Co.




Royal Insurance Co.




The St. Paul Cos., Inc.




U.S. Fidelity & Guaranty Co.




Zurich Insurance Co.




Since our last report three significant developments have occurred in the Manville Bankruptcy proceeding.

First, as noted above, in early June Manville announced that it had settled with three of its large insurers -- the Home Insurance Company, The Travelers Insurance Company, and a group of Lloyd's syndicates - for $315 million dollars. Manville originally sued its 27 insurers in 1980 in a dispute over how much insurance the carriers should provide the company for its asbestos claims. A wrinkle emerged in the settlement in early August, however, when it was learned that as part of the settlement package, Manville had agreed to indemnify the three insurers if they were named in any future Manville-related actions.

Manville's co-defendants and the representatives of Committee, expressed concern that could reduce the amount of funds and cause the co-defendants to pay the Asbestos Claimants' payment to the insurers available for claimants more. It remains to be seen whether the U.S. Bankruptcy Court presiding over Manville's bankruptcy reorganisation will approve this provision in the settlement agreement.

The second development, also noted above, was Manville's recent decision to subscribe to the Asbestos Claims Facility. Manville's support for the facility has boosted the hopes of the facility's proponents and brought new pressure to bear on more insurers and producers to join.

Nevertheless, it remains to be seen whether New York Bankruptcy Judge Burton R. Lifland, the Bankruptcy Judge presiding over Manville's reorganisation, will permit Manville to participate in the facility before its reorganisation plan is approved. No forthcoming ruling on this point is expected from Judge Lifland.

The third noteworthy development, which could jeopardise Manville's entire reorganisation plan, occurred in late June when congressional draftsmen, hurriedly putting together a new bankruptcy bill, slipped up in the bill's final wording.

As we noted in our earlier report, the United States Supreme Court struck down a sizeable portion of the 1978 Bankruptcy Reform Act in the 1982 case of Northern Pipeline Construction Co. -v- Marathon Pipeline. In July, Congress passed a bill that overhauled the U.S. Bankruptcy Court System in accordance with the Supreme Court's Northern Pipeline guidelines. Under the bill, the Bankruptcy Courts were supposed to continue handling the asbestos-related bodily injury claims against Manville that they were currently handling, and all future asbestos-related bodily injury claims against Manville were supposed to be filed in Federal District Courts. In other words, the revised Bankruptcy bill was supposed to apply only to future and not current cases. This is not, however, what happened.

Instead, legislative draftsmen incorrectly applied the new Bankruptcy bill to current cases, which means that all of the 16,500 asbestos-related lawsuits against Manville may have to be transferred to United States District Courts for handling.

The significance of this mistake is debatable. On the one hand, asbestos-related claimants' chances of recovering large judgments are significantly improved in District Courts and thus, Manville's reorganisation plan could be placed in jeopardy. On the other hand, Manville contends that the bill also provides that the District Courts could still transfer bankruptcy cases back to Bankruptcy Courts for handling.

Although there has not yet been any definitive court ruling on this question, two federal district court judges, one from New York and the other from Illinois, have ruled that the new bankruptcy law requires both pending and future asbestos cases to be tried in a federal district court at some point.

Congress could amend the bankruptcy law in its next session so that it conforms to its original intent, although, many legislators concede that such an attempt may run into a bureaucratic blockade that could become insurmountable.



A California jury recently awarded a 63 year old welder with lung cancer who had smoked 1 1/2 packs of cigarettes a day for 50 years $200,000 with a 40% reduction for comparative fault for smoking, for a net award of $120,000.

When asked after the trial why they returned a verdict in the plaintiff's favour, the jurors said that they were impressed with the plaintiff's expert's testimony about the "synergistic effect" of asbestos exposure when combined with cigarette smoking.


A Hawaii Federal District Court Judge recently dismissed a $500,000 punitive damages award against Raymark Industries on the ground that the award was barred by the State's two year statute of limitations.

The jury had originally awarded that sum to the Estate of Manuel S. Carvalho, a Pearl Harbor rigger, who died of bronchogenic carcinoma in 1980. In assessing punitive damages, the jury concluded that Raymark had distributed its products "wantonly, oppressively and with such malice as implies a spirit of mischief or criminal indifference."

However the jury also found that Carvalho should have known of the cause of his illness on 5 July 1978. This meant that his suit, filed on 28 July 1980, was brought 23 days to late to comply with the State's two year statute of limitations and was dismissed accordingly.


A Detroit Michigan jury has awarded $400,000 in damages to a former insulator who claimed to be suffering from asbestosis. The claimant, who worked as an insulator in the Michigan area for 26 years, also suffered from severe rheumatoid arthritis, and severe heart disease.

The jury had originally awarded the plaintiff $800,000, but that award was reduced by 50% under Michigan's comparative negligence law because the plaintiff had not worn a respirator and had continued to smoke for many years even after he was warned to stop.


The first ten cases processed under the Ohio Court's "Asbestos Case Management Plan" were recently settled for $1.1 million dollars. In December 1983, the Ohio Courts, both state and federal, implemented the Asbestos Case Management Plan to streamline asbestos litigation and facilitate the preparation of asbestos cases for trial. In processing asbestos cases, the plan makes use of such devices as case consolidation, expedited discovery and summary jury trials.

These first ten cases are among the more than 100 asbestos cases filed in Ohio State and Federal Courts between 1979 and 1981. Each of the settling plaintiffs is expected to receive approximately $100,000.


In what is believed to be one of the largest damage awards ever made to a non-cancer claimant, a Philadelphia Court of Common Pleas jury has awarded $875,000 to an asbestosis sufferer and his wife. The defendants in the case included GAF, Pittsburgh Corning and Keene Corp. The trial court did not permit the plaintiff to offer any evidence of lost present and future earnings, lost past overtime or medical bills for future suffering of cancer and mesothelioma.

Interestingly enough, both plaintiff's and defendants' medical experts agreed that plaintiff was neither presently disabled nor suffering from cancer or mesothelioma. Plaintiff's medical expert diagnosed the plaintiff as having both pleural thickening and asbestosis, while defendants' medical expert diagnosed only pleural thickening.


A jury in Marshall, Texas recently awarded $7.9 million in damages to 3 insulators and the widow of a fourth. All four insulators suffered from asbestosis and the total award included $1,000,000 in punitive damages for each claimant.


The families of five former shipyard workers, who died from mesothelioma after working more than 50 years at the Norfolk Naval Shipyard, recently reached a settlement totalling more than $12 million dollars with nine national asbestos producers. While neither side would disclose the precise amount of the settlement, court sources indicated that they range from a high of $3 million dollars to a low of $2 million dollars.


A jury in King County, Washington has returned the first defence verdict in an asbestos-related disease case in the State of Washington. The case, Kinsman -v- Fibreboard, involved an action brought by a widow of a man who died at the age of 54 allegedly from mesothelioma caused by 37 years exposure to asbestos. The decedent, a vice president with the Brown Company, who was earning $51,000 at the time of his death, was allegedly first exposed to asbestos while employed as an insulator for the Brown Company.

The plaintiffs sought to recover $500,000 from Fibreboard, and $50,000 from its co-defendant, Pittsburgh Corning. The jury, however, returned an 11 to 1 defence verdict following extensive medical testimony from the defendants' expert witnesses that it was impossible to tell with a "reasonable degree of medical certainty", whether the tumour present in plaintiff's decedent was mesothelioma or abdominal adenocarcinoma.




In a recent study on the adequacy of workers compensation payments to the survivors of men who died from workplace exposure to asbestos, Cornell University researchers have concluded that "the compensation is neither adequate nor equitably distributed."

The study, one of the first on compensation for occupational-related illnesses and diseases, focused on benefits payments in 1979 to 249 widows, whose husbands would have been living that year had they not died from asbestos exposure. It was found that workers compensation payments replaced only 36.28 of the losses of widows for whom it was the only source of income. The figures are far below the normal standard that workers compensation benefits should equal, approximately 66% of the workers wages before his death.

Additionally, the study showed that widows who succeeded in common law actions received the most adequate compensation, but it also showed that tort awards were inadequate for some widows and that, furthermore, some of these awards would be exhausted within one year.


In another study, researchers for the Rand Corporation Institute for Civil Justice concluded that neither the legal jurisdiction (federal or state) nor the region of the country, made any significant difference in the outcome of an asbestos-related disease case. While noting that the more severely injured plaintiffs generally received higher awards, the Rand Corporation's researchers found that other factors besides the plaintiff's injury, influenced the plaintiff's award. Those factors include:

(1) Claims with more defendants than the average of 15 - resulted in a maximum estimated increase in compensation of about 15%;

(2) The largest multiple plaintiff lawsuits resulted in an estimated average compensation per claimant that was about 70% of the compensation for single-plaintiff lawsuits;

(3) The cases that went to trial resulted in verdicts 2.28 times greater than the amounts received in comparable cases settled before trial.


A recent survey conducted by the American Society Home Inspectors of 670 homes in the eastern United States indicated that 181 homes, or 27%, contain asbestos products. The results of the survey were published in a report which was presented to the Consumer Products Safety Commission in mid-October.

Of the 181 homes where asbestos was found, the most frequent location of the material was the heating system; 123 homes, 18% of those surveyed, had asbestos material in the heating systems. In 56 of the homes. the asbestos was visibly damaged.

The report cautions against predicting a national average based on the survey and notes that other regions of the country, such as California, may have widely different patterns of the use of asbestos-containing products.

The report concludes, "Asbestos was commonly found in homes more that 20-40 years old and is particularly common in components of home heating systems. The asbestos products in inspected homes were often damaged or worn; these are the conditions under which the Consumer Product Safety Commission staff is most concerned about the possibility of asbestos exposure to home residents. "


A recent survey released by the EPA indicates that 20% of commercial, federal and residential apartment buildings in the United States may contain friable asbestos. The survey was conducted on 231 buildings to determine how much friable asbestos-containing material might be in buildings other than schools. The 208 figure translates into approximately 733,000 commercial, federal and residential apartment buildings with friable asbestos.

The report noted that only 3% of the surveyed buildings had asbestos-containing ceiling tiles. The report also noted, however, that buildings constructed in the 1960's were found to be 15% more likely to have asbestos-containing sprayed or troweled-on friable material than other buildings.

The report went on to say, "It appears that the extensive use of asbestos-containing sprayed-on friable material would have continued and perhaps increased in the 1970's had not the EPA banned the use of those materials for all but decorative purposes in 1973." The EPA banned all other uses of these materials in 1978.


Recently, in In re: Asbestos Litigation, the Second United States Circuit Court of Appeals sitting in New York dismissed four consolidated asbestos cases brought by workers


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Claims brought by school districts against asbestos producers are becoming ever more frequent as the public's awareness of the asbestos hazard continues to grow. No one is exactly sure how widespread the problem may be, but anxieties are growing about the threat posed to the nation's 36 million students by asbestos flaking from classroom and hallway ceilings and walls.

The average cost of cleaning up a single medium sized school building is $100,000. Educational officials project that the total cleanup cost for the nation's 122,000 public and private schools may run as high as $1.4 billion.

In April 1984, a bill, known as the Asbestos School Hazard Abatement Act, was introduced in the Senate. Under this bill $500,000,000 would be spent over the next six years to remove asbestos from schools across the country. The bill would require states to submit priority lists, indicating which schools are in the most need of federal assistance.



In the case of Austin -v- Raybestos Manhattan, the Maine Supreme Court ruled that comparative negligence can only be used as a defence in a strict liability action in Maine if a plaintiff's conduct rises to the level of "assumption of the risk."

The ruling came after the plaintiff appealed a 1981 jury verdict to the United States Court of Appeals for the First Circuit. The First Circuit certified the following question of state law to the Maine Supreme Court: Whether the failure of plaintiff's deceased husband to wear a respirator constituted a comparative negligence defence for the asbestos manufacturers?

The Maine Supreme Court concluded that this failure to wear a respirator was not "fault" as fault is defined in Maine's comparative negligence statute, and that any contributory negligence on the decedent's part in failing discover asbestos dangers and guard against them is not a defence to a Maine products liability action.


The United States District Court for the Western District of Virginia recently held that the husband of a woman who died as a result of her exposure to asbestos both at work and when she washed her husband's clothes at home could sue her employer for injuries resulting from the exposure in her home.

In the case, Joyce -v- AC & S, the claimant had contended that his wife contracted mesothelioma as a result of her continuous and repeated exposure to asbestos both in her home and on the job with DuPont. In reaching its decision, the Court said, "Although DuPont is immunised from suit in its capacity as an employer, with respect to the claim to the decedent's exposure as a housewife, DuPont occupied a position no different from any other joint tortfeasor and should be treated accordingly."


Manville has filed another third-party action in the U.S. Court of Claims against the United States Government, this time seeking $36,000,000 in damages and legal costs that the Company claims it paid in connection with claims brought by nearly 1,200 shipyard workers. Manville charges that the U.S. Government failed to fulfil its contractual obligation regarding asbestos containing products in shipyards, thereby resulting in unobserved safety and health regulations. Manville claims that the government was aware that it was delinquent in meeting Navy safety and health standards for asbestos exposure and it has offered documents into evidence that will allegedly prove it.

This is Manville's third third-party action against the Government. The first action, filed in July 1983, sought contribution for damages Manville paid to asbestos victims who suffered shipyard exposure during World War II. In the second action, filed in November 1983, Manville sought contribution for damages it paid to government shipyard workers exposed to asbestos after 1964.



A District of Columbia Federal District Court Judge recently ruled that the Insurance Company of North America's (INA) obligation to pay defence costs for Keene Corporation terminates with the exhaustion of the aggregate policy limits.

This action, part of the ongoing Keene litigation, involved pre-1966 coverage that INA sold to Keene between 31 December 1956 and 1 June 1968. INA told Keene that the indemnity limits of the pre-1966 policies were exhausted and that the defence obligation would be transferred to Keene's excess liability insurance carriers.

Relying on the cases of A C & S -v- Aetna Casualty & Surety and Commercial Union -v- Pittsburgh Corning corporation, Keene argued that the standard pre-1966 policy language created an "open ended " duty for INA to continue paying defence costs in all present and future asbestos-related suits brought against Keene.

In reaching its decision, the Court specifically rejected the holdings in A C & S and Commercial Union and held that the policy language is susceptible to only one reasonable interpretation, namely, that the policies limit the duty to defend as to both the nature and the amount of insurance provided. As the Court said, "without offering any objective evidence of a contrary intent, Keene suggests that it reasonably could have expected the defence duty to continue long past INA's payment of the policy limits. This construction would remove any connection between the duty to defend and the payment of insurance premiums."

This decision marks the first time that any court has limited a primary insurer's defence obligation under pre-1966 policies. Many insurance company lawyers are already saying that this decision will be useful in appealing previous opinions in such cases as A C & S and Commercial Union where courts have held that the primary carriers have an unlimited defence obligation under pre-1966 policys.

If the District Court's opinion is affirmed on appeal, it may well prompt additional asbestos producers and their insurers to subscribe to the Asbestos Claims Facility, since the rule of the facility is that the duty to defend under pre-1966 policies ends with the exhaustion of the policy limits.

In early October, this same District Court dismissed a punitive damages claim that Keene had brought against INA. Keene had based its punitive damages claim on INA's alleged "malicious breach of conduct and bad faith in blatantly switching to a manifestation interpretation of its comprehensive general liability insurance policies on a national scale to enable it to escape its recognised enormous financial liability for asbestos law suits."

The Court ruled that the law of the state where an insurer's corporate headquarters is located governs punitive damages claims. Since INA's corporate headquarters is located in Pennsylvania, the Court found that Pennsylvania law was controlling.

In reviewing Pennsylvania law, the District Court found that the Pennsylvania Supreme Court had dismissed punitive damages claims for an insurer's alleged "bad faith" on the ground that the Pennsylvania Unfair Insurance Practices Act constitutes the sole remedy for such conduct in Pennsylvania. In conclusion, the District Court said, "This Court must respect Pennsylvania's policy of not imposing punitive damages against insurance companies, which reflects the State's judgment to protect the financial security of resident corporations rather than impose punitive damages to regulate conduct."

Second Circuit Adopts "Injury In Fact" Theory of Coverage

On November 13, 1984 the United States Court of Appeals for the Second Circuit affirmed Federal District Court Judge Abraham Sofaer's decision in the case of American Home Products -v- Liberty Mutual that "injury in fact" is the trigger for coverage in progressive or delayed manifestation disease cases.

The American Home Products case was concerned with determining the nature and extent of Liberty Mutual's liability for defence and indemnification in fifty-four suits filed against American Home Products by plaintiffs alleging injuries from a variety of pharmaceutical products, including DES. In each of these suits, the alleged injuries did not manifest themselves until after the termination of Liberty Mutual's insurance coverage on 1 November 1976.

Article 1 of Liberty Mutual's CGL policy provided liability coverage for occurrences that result in "personal injury, sickness or disease, including death at any time resulting therefrom, sustained by any person."

Article IV of Liberty Mutual's policy provided that "this policy applies to (1) personal injury, sickness or disease including death resulting therefrom...which occurs during the policy period."

Liberty Mutual argued that the Court should resolve the coverage question by applying the manifestation theory while American Home Products urged the Court to adopt the exposure theory.

In reaching his decision, Judge Sofaer carefully considered the other coverage theories enunciated by the various Federal Circuit Courts and adopted an "injury in fact" test for determining when insurance coverage is triggered in progressive or delayed manifestation disease cases.

Judge Sofaer held that the key determination should be whether a compensable and diagnosable injury occurs within the policy period, regardless of whether injury corresponds with exposure or manifestation.

In his decision, the Judge was guided by the well-established policy of New York courts that when construing an insurance policy, a court must enforce the plain meaning of the policy and not attempt to vary its meaning to accomplish desirable social objectives.

Judge Sofaer rejected the exposure theory on the ground that Liberty Mutual's policy required injury and not exposure to occur within the policy period. As he said in his opinion, "The result is keyed to the policy period, not the exposure period."

He also rejected the manifestation theory for failing to take into consideration latent but real illnesses. The Judge noted the policy covered all injuries occurring during the policy period, not just those manifesting themselves.

In adopting his "injury in fact" theory, Judge Sofaer relied on several sources. First, he referred to the draftspersons of the 1966 CGL form who expressly rejected the manifestation and exposure theories and said that coverage would be extended only to injuries resulting during the policy period. Second, he pointed to the course of dealings and past practices between the parties, noting that the parties treated injury as the trigger for coverage, not manifestation or exposure. Finally, he relied on implications drawn from rate computations for insurance premiums. He pointed out that premiums were computed on the basis of loss records that used the "injury in fact" approach for assigning claims to various policies.

The United States Circuit Court of Appeals ruled that the "District Court's reading of the trigger-of-coverage clause as plainly providing for coverage upon the occurrence of an injury in fact, an injury that has occurred, is the only interpretation of the clause that neither departs from the policy's language nor imports expansions of or limitations on the words that do not ordinarily exist." The Court did, however, modify Judge Sofaer's decision by eliminating the terms "diagnosable" and "compensable" from the coverage trigger. The Court noted that no clause in the Liberty Mutual policies uses either of these terms and that compensability is a legal concept that is not material to the determination of whether an injury has "in fact" occurred.

With the Second Circuit Court of Appeals' decision in American Home Products, six Federal Appeals Courts have attempted to resolve the question of when insurance coverage attaches in progressive or delayed manifestation disease cases. The following is a brief survey of the Federal Appellate Court decisions concerning the attachment date for insurance coverage in such cases:


Case Name

Coverage Theory


First (Maine, New Hampshire, and Massachusetts)

Eagle-Picher -v- Liberty Mutual




(Texas, Louisiana and


Porter -v- American Optical Corp.




(Ohio, Kentucky

Tennessee & Michigan)

INA -v- Forty- Eight Insulations




District of Columbia

Keene -v- INA

Triple trigger




Delaware, & New Jersey)

AC & S -v- Aetna

Casualty & Surety

Triple trigger



(New York, Connecticut

& Vermont)

American Home Products -v- Liberty Mutual

Injury in fact


In other developments, it was recently announced that Keene Corporation had settled its suits against INA, Aetna, the Hartford and Liberty Mutual. The settlement came after Keene Corporation instituted a declaratory judgment action against those carriers in the United States District Court for the District of Columbia to determine the nature and extent of the insurance coverage they provided it. As you will recall, it was in the Keene case that the "triple trigger or continuous trigger" theory of coverage was first enunciated. Trial of the case was scheduled to begin on 26 November. This would have been the first trial to determine whether an asbestos producer's insurers are liable for bad-faith conduct in their handling of asbestos claims.

In announcing the settlement, a spokesman for Keene Corporation indicated that it will try to resolve any coverage disputes with its insurers before the proposed Asbestos Claims Facility. Although Keene Corporation has not formally subscribed to the Claims Facility, the memorandum of points and authorities accompanying its settlement provides that "Keene and its insurers will attempt to compromise their differences on this issue through the proposed Asbestos Claims Facility, which is viewed by Keene and its insurers as providing a framework for a possible global solution to the asbestos litigation crisis."


In one of the broadest decisions on the allocation of defence costs in asbestos coverage disputes, an Illinois County Circuit Court has ruled that primary insurers on pre-1967 policies have an unlimited duty to defend asbestos producers, even after their policy limits are exhausted. In the case of Raymark -v- Zurich Insurance Co., the Court reasoned that since none of Raymark's pre-1967 primary carriers had any language in their policies limiting their defence obligations and since Illinois case law clearly indicates that the duty to defend is independent of and broader than the duty to indemnify, the duty to defend is unlimited.

With respect to post-1967 policies, the Illinois Circuit Court ruled that while the primary insurers of asbestos defendants generally do not have an unlimited duty to defend the assured after their policy limits are exhausted, the primary insurers must continue to provide a defence for cases they are currently defending, even after their policy limits are exhausted. Here the Court reasoned, based on the well-settled principles of insurance law and on the ideals of American Jurisprudence, that an insurer cannot abandon a case in progress once it has assumed a defence.

Barring a successful appeal, this decision means that Raymark's primary insurers will pay virtually all the defence costs and that its excess liability insurance (approximately $370 million) can be used solely to indemnify asbestos injury damages assessed against the assured.



In the landmark decision of Copeland -v- Celotex, a Florida appeals court became the first court in the United States to adopt a market share theory of liability in an asbestos-related disease case. In Copeland, the Court ruled that defendants in asbestos-related disease suit are required to apportion their liability and damages according to their total market share, even when plaintiffs cannot identify which company's product caused their injuries. The Copeland decision is a technical variation of the landmark California decision in Sindell -v- Abbott Laboratories, in which the California Supreme Court first used the market share theory of liability in a suit involving the anti-miscarriage drug DES.

The plaintiffs in Copeland claimed that they were unable to identify the asbestos product's brand names after they were removed from their original containers. They sued virtually all the manufacturers and distributors of the asbestos products to which they were exposed. Celotex argued that the plaintiffs' complaint should be dismissed, since they failed to show a causal connection between the injuries they sustained and their exposure to Celotex's asbestos-containing products.

While agreeing with Celotex that a plaintiff ordinarily has the burden of proving that a particular defendant has caused him harm, the appeals court declined take this position in asbestos-related disease cases. In view of the scientific and technological advances which allow harmful products to be created which cannot be traced to a specific producer, the Court noted that the traditional theories of causation no longer apply.

The Florida appeals court's adoption of the market share theory of liability in Copeland was somewhat unexpected, since neither side urged the appeals court to apply the market share theory; indeed, plaintiffs and defendants had agreed at the outset that Sindell should not apply.


On 19 June 1984, the Occupational Safety and Health Administration (OSHA) held a hearing on a proposed permanent standard to reduce the permissible exposure level for asbestos, thereby reducing workers' exposure to the carcinogen. The proposed permanent reduction follows an emergency temporary standard, which was issued in November 1983, but which was struck down as invalid by the United States Court of Appeals for the Fifth Circuit in March 1984. The proposed standard would reduce the permissible exposure level from two fibres per cubic centimetre of air to either .5 or .2 cubic centimetres of air, depending upon which level would be most protective and most feasible.



In the case of Jackson -v- Johns-Manville, the Fifth Circuit ruled that punitive damages should not be imposed on asbestos manufacturers because the companies are struggling to pay compensatory damages. This case arose out of an action brought by a former Mississippi sheet metal worker who received compensatory damages of $390,000 against Manville and Raybestos and punitive damages of $500,000 against Manville and $125,000 against Raybestos. In vacating the damage award and in remanding the case for retrial on the damages question, the Fifth Circuit said "[o]ur holding today is limited to the extraordinary circumstances of this litigation, where the allowance of punitive damages carries the manifest portent of undoing the strict liability remedy for present and prospective claimants and where the purposes of punitive damages are otherwise served."

In another asbestos case, Hansen -v- Johns-Manville, the Fifth Circuit ruled that punitive damages awards were appropriate. In Hansen, a Texas Federal Jury awarded punitive damages for the death of a 65 year old pipefitter who died in 1978 of asbestosis, after working 35 years in the Todd Shipyard in Texas. In appealing the award, Manville urged the Fifth Circuit to follow its Jackson decision and set aside the punitive damages award. The Court, however, disagreed, noting that its Jackson holding was based in Mississippi law and that it could " [f] ind no basis on which to hold that Texas courts would disallow punitive damages award in a situation such as this."

Notwithstanding the Court's attempt to explain the different results reached in Jackson and Hansen on choice of law grounds, plaintiff's attorneys believe that the Fifth Circuit may be preparing to overturn its earlier decision in Jackson. In its most recent punitive damages case, Foster -v- Pittsburgh Corning, the Court affirmed a trial court decision awarding an lnsulator $300,000 in punitive damages against Pittsburgh Corning. Moreover, the Fifth Circuit, sitting en banc, reheard oral arguments in Jackson in mid-September, although no early ruling is expected.



In the case of Kline -v- Johns Manville, et al., the Ninth Circuit recently held that Pittsburgh Corning Corp. was not a successor in interest to Unarco Industries. This case involved actions brought by nine plaintiffs who allegedly contracted asbestos-related diseases from their continuous and repeated inhalation of asbestos fibres from pipe insulation materials manufactured by Unarco. Unarco manufactured the asbestos-containing product line known as Unibestos from 1936 to 1962, when it sold the Unibestos line to Pittsburgh Corning.

The Ninth Circuit pointed out that the case presented the question of whether, under California law, a successor corporation could be held liable for its predecessor's defective products when it buys only a part of its predecessor's business.

The Court held that California generally did not impose liability "[o]n a successor corporation that purchases the assets of a predecessor in an arm's length transaction." The Court did note, however, that in the case of Ray -v- Aldad Corporation, an exception was created. In Ray, the California Supreme Court held that a successor corporation could be held liable for the torts of its predecessor if the predecessor liquidates itself after the sale of its assets. The Ray holding is based on the following factors:

1) the virtual destruction of the plaintiff's remedy;

2) the successor's ability to assume the original manufacturers risk-spreading capacity; and

3) the fairness of having the successor assume the predecessor's liabilities together with the good will enjoyed by the continuing operation of the predecessor's business.

The Ninth Circuit concluded that Ray was not controlling in the Kline case since Unarco did not liquidate; rather Unarco continued to do business with other product lines even after it sold its Unibestos line to Pittsburgh Corning and thus, the plaintiff's remedy against Unarco was still preserved.



The United States Gypsum Company has instituted a declaratory judgment action in the Circuit Court for Cook County, Illinois, against its 23 insurers, seeking a declaration that its insurers are obligated to indemnify it for all of its costs and any punitive damages it is ordered to pay in the more than 2,900 asbestos-related bodily injury and property damage actions that are pending against it. Gypsum is also seeking damages for breach of contract, claiming that its insurers failed to fulfil their contractual obligations.

Gypsum is asking the Court to apply the "triple trigger" theory of coverage to its action, a theory which was first enunciated in the landmark decision of Keene -v- Insurance Corporation of North America.


H. K. Porter has instituted a declaratory judgment action in Federal District Court for the Western District of Pennsylvania against its 32 insurers seeking a ruling that its 32 insurers breached their contract and acted in bad faith by refusing to defend and indemnify Porter in the more than 18,800 asbestos-related bodily injury and disease suits that have been brought against it to date.

Porter urged the Court to adopt the "triple trigger" theory of coverage, which holds that all insurers on risk from the time of exposure through the time of manifestation are obligated to defend and indemnify the assured.

Porter charged that its carriers had taken a position that would deprive it of coverage or a defence for any asbestos-related injury or disease claims manifesting themselves after 1 May 1979. Porter claims to have spent $8.3 million thus far defending asbestos-related claims, paying out verdicts and satisfying judgments. Porter's declaratory judgment action is still in its preliminary stages and no trial date has yet been set.

The foregoing represents a distillation of significant developments in the field of asbestos litigation in the United States, and is not an exhaustive study of the subject. We hope that it has helped your understanding of this subject. If you have any questions, please do not hesitate to contact us.

6 Mar 85

Most members of the Asbestos Claims Council agree that without widespread industry participation, the Facility cannot succeed. To attract additional subscribers, the Asbestos Claims Council has taken two steps. First, as noted above, it has indefinitely extended the final subscription deadline to allow insurers additional time to consult with their reinsurers. Second, it has extended the cut-off date for individual Coverage buyouts agreements to 24 October 1984. Before this change, any agreement executed between producers and insurers after 1 January 1984 that involved insurers buying back the policies they had issued to a producer to end the insurers' liabilities would have been set aside if the producer or insurer joined the facility. As a result of this, many producers and insurers balked at giving up all coverage agreements made after 1 January 1984 in order to join the claims facility.

The extension of the cut-off date for buy-out agreements is believed to be what motivated Manville to conditionally subscribe to the claims facility in mid-October. Manville reached a $315 million settlement with its three primary carriers, Travelers, the Home and Underwriters at Lloyds in July 1984. Were it not for the extension of the cut-off deadline, Manville would have had to set this agreement aside if it joined the claims facility.

11 Mar 85

The Agency Agreements Byelaw (No. 1 of 1985, 11 March 1985). Standard Agency Agreements etc.

11 Mar 85

Lloyd's publishes the Findings of Disciplinary Proceedings, case No. 8401/7, into Dashwood, Brewer & Phipps Ltd.

12 Mar 85

Mandatory meeting of subscribing producers to the Asbestos Claims Facility to assure completion of insurance coverage information essential for final closing of Agreement.

12 Mar 85

Meeting of Ernst & Whinney chaired by M. Bolger. Stephen Hill spoke about:

(a) the question of Johns-Manville asbestosis settlements was raised ...

  1. the Rocky Mountain claim (Shell chemical waste 194344) is still around this year. As this claim involves the US Government there are various bases on which settlement can be made. Paul McNamara is to circulate a confidential memo to partners only regarding this problem.... It was also felt important that clients are sent copies of all recent Lloyd's publications prepared by E & W..

Alan Deeves felt (and Stephen Hill agreed) that syndicates were becoming "little companies." In this respect it was considered that underwriters need educating as to the procedures they should be adopting, and it is our job to educate them.

14 Mar 85

The Times: Lloyd's underwriter ‘made scapegoat for dubious practices'

Mr. Peter Coucher, a former Lloyd's underwriter who made a series of false insurance claims to pay for the running of his yacht, L'Obsession, claimed in an interview with The Times yesterday that he had been made a scapegoat for dubious business practice

Speaking on the telephone from St. Thomas, in the United States Virgin Islands, where he works, Mr. Coucher said: "I was singled out as the culprit for practices which everyone knew about, and I was paid off to resign Lloyd's and leave quietly".

He said that he had been available in London until July last year to answer any investigation into the £11,000 in false claims, but had never been approached by Lloyd's. "There is no question whatever of my fleeing the country.

On Tuesday the Lloyd's council published its ruling into the affairs of Syndicate 689, the group formed by Mr. Coucher to underwrite yacht insurance. Mr. Coucher was employed by Bellew, Parry and Raven as agent to run a similar syndicate owned by them, Syndicate 691.

At the end of 1982 it was revealed that L'Obsession owned by Syndicate 689 and berthed at Lymington, Hampshire, was having its expenses paid by false insurance claims.

According to Mr. Coucher., who is now working as a consultant to Insurance Unlimited (Caribbean), on St Thomas, the claims were used to pay £600 a year mooring fees for L'Obsession, which was used for business entertaining. From 1977 to 1982 a total of, £6,500 in false claims was paid out to run the yacht.

The case is certain to bring increased political pressure on Sir Michael Havers, the Attorney-General, to explain why there have been no prosecutions for alleged fraud in this and a series of similar cases that have been disclosed by Lloyd's investigations during the past two years.

Mr. Coucher said yesterday: "The purpose of those claims was known openly. I do not regard them as in any way fraudulent."

"I was then offered by Bellew, Parry and Raven £25,000 in cash, free of tax, and £89,000 for my half share in my company, Coucher Underwriting Agency, to leave quietly. I decided that I didn't want to face the hassle, and agreed to resign from Lloyd's after 35 years as a member because I was fed up with the whole business, and felt I was being victimised because the club did not like me."

Mr. Donald Mott, a director of Bellew and Raven underwriting agencies, agreed yesterday that Mr. Coucher had been paid to buy out his syndicate. "There is no question, however that we were buying him off. That is totally untrue."

Mr. Mott added: "At that time the bye-laws contained in the Lloyd's Act, which introduced the disciplinary procedures for such situations, was not in force. They came in at the beginning of 1983."

According to Lloyd's it was felt by all the insurers involved that, by paying £7.000 to Bellew and Raven in early 1983 to clear the false claims, Mr. Coucher had indeed acquitted his responsibility.

19 Mar 85

Robin A G Jackson had agreed to participate with Pete Thomas, Chief Executive of the Hartford; John Baldwin, Chief Executive of Pittsburgh Corning; and Harry Wellington, Dean of the Yale Law School in making a presentation before Senator Nicholls at the hearing set up by the Senate Labour and Human Relations Sub-Committee to consider the Facility agreement.

Testimony given by Robin A G Jackson, Chairman, London Asbestos Working Party to Senator Nickolls

(Mr. Robin Jackson in testimony stated that "the number of present and expected asbestos-related claims is enormous, and the problems they are creating for the producers and insurers are unprecedented, both in terms of the total dollars involved and of the human resources needed to handle these claims. ... Against this background of judicial uncertainty, already catastrophic losses, and the reality of massive property damage claims yet to come, the task of fixing meaningful reserves and managing cash-flow to pay claims will continue to demand virtual clairvoyance and a near reckless courage from the executives involved at primary level, as well from their re-insurer counterparts." (emphasis added). Mr. Jackson then added "You might well ask if we are getting it right. I will show you how we propose to do just that" and referred to the proposed Asbestos Claims Facility. While appropriate allowance must be made for the occasion on which these remarks were made their significance is obvious).

1. The number of present and expected asbestos related claims is enormous, and the problems they are creating for the producers and insurers are unprecedented, both in terms of the total dollars involved and of the human resources needed to handle these claims....

4. Against this background of judicial uncertainty, already catastrophic losses, and the reality of massive property damage claims yet to come, the task of fixing meaningful reserves and managing cash-flow to pay claims will continue to demand virtual clairvoyance and a near reckless courage from the executives involved at primary level, as well as from their re- insurer counterparts. You might well ask if we are getting it right. I will show you how we propose to do just that:... Since Domestic USA insurance companies rely heavily upon the availability of proper reinsurance facilities both in the USA and those provided in and through the London Market, the importance of securing all reinsurers' support and co-operation on the Asbestos Claims Facility is therefore paramount.... The Asbestos Claims Facility promises to bring order to an otherwise chaotic legal situation while controlling distribution of losses to insurers and ensuring efficient use of the insurance dollars available, not as legal costs but in proper timely compensation for the victims.... The Facility is a good deal for producers, claimants and insurers alike because it will:

a) set guidelines for handling the fundamental insurance issues of allocating liability and expenses over various policy years; regulating application of deductibles and self-insured retentions; allocating liability for "aggregate" and "any one loss" policy limits; apportioning disputed liabilities between primary, excess, and ultimately, reinsurance carriers;

b) provide an internal and informal arbitration mechanism for coverage disputes such as continuing defence obligations and applicability of exclusions, as an alternative to costly and protracted litigation,

c) introduce, by combining the first two benefits, a degree of certainty where none existed before, not only for insurers (and their reinsurers) wishing to determine their eventual asbestos commitment, but also for producers who would for example gain from the release of key personnel committed to claims processing;

d) offer centralised evaluation, settlement and defence of the numerous future claims arising on a scale which will otherwise swamp existing individual insurer and producer facilities. The opportunity is there for avoiding inefficiency caused by wasteful duplication or duplication of what are, contrary to public belief finite market resources, and for sharing the initial investment and overheads of a single system with other participants;

e) provide centralised data capture and storage, giving the broadest base for future management exercises on aggregating losses and deductibles, reserving and the like;

f) achieve consolidation of negotiations, settlements and defences on numerous claims, and thereby reduce overall legal costs, improve the payment of damages to legitimate claimants, and present a "single" defence where literally dozens would have been pleaded before,

g) eliminate, as one of the Facility's preconditions, punitive damage suits against insurers, and avoid similar actions against producers, by reducing the delays giving rise to such actions and by the Facility itself being evidence of defendants' willingness to resolve claims promptly;

h) offer to producers an existing mechanism for continued claims handling on their behalf if, and this is a very real possibility for many, their total policy limits available are eventually exhausted by claims.

19 Mar 85

Meeting of the Directors of Merrett Syndicates Limited.

Present: S R Merrett, K E Randall, C J Ayliffe and others.

Current Estimates on 1982 Account Results. Syndicate 418/417. The Chairman reported that syndicate 418 appeared to have produced a reasonably good result. However the early indications on syndicate 417 were showing a serious deterioration. A great deal of work was still to be done on syndicate 417 figures but a combined 418/417 bottom line loss could not be ruled out... Syndicate 421. John Emney reported that the claims experience on 1982 was exceptionally good and felt that an underwriting profit was likely. However the size of this profit could not be ascertained until more detailed work had been carried out particularly with regard to a number of special risks.

25 Mar 85

Ernst & Whinney meeting chaired by Peter Standish.

Standish stated that it was his belief that the existence of a time and distance policy should be disclosed as this was, in effect, a discounting of reserves. He then explained how a time and distance policy worked. John briefly touched on 3 other points:

(b) the likelihood that any factor preventing a true and fair report being given may also indicate non-compliance with a specific requirement of the bye-law and hence necessitate qualification in any event.

(c) Run-off accounts. It would be noted that if a qualified report is to be given, a full PSP must be convened.... Whatever happens, it was felt that as the reinsurance to close brought forward was an agreed figure, the treatment must be considered by the audit partner, and if necessary a PSP.

28 Mar 85

Market Claims Services Ltd incorporated, as a company limited by guarantee and not having a share capital. The principal activity being to process, litigate or settle insurance claims, particularly those relating to asbestosis. The original 13 Subscribers and Directors being main player Lloyd's Agency Underwriters and Claims Directors:-



H R Rokeby-Johnson


J W Pryke


C H A Skey


R A G Jackson


C J Ayliffe


W W Maitland

Janson Green

K R Rayment


J Teff

Janson Green

J R Heath

Weavers, Walbrook, London United Investments

J W Webb

Andrew Weir

H A Taylor


P D Downs

Home & Overseas

A J P King


R J R Keeling,

Murray Lawrence Underwriter, was appointed a director on 31 December 1988.





Touche Ross & Co.


The company was dissolved on 27 October 1992.

0 Apr 85

In April, Mr Miller addressed the American-Swiss Chamber of Commerce in Geneva.

4 Apr 85

State of New York -v- Shore Realty Corp., 759 F.2d 1032, 1044, 2d Circuit, 4 April 1985. Court of Appeals for the Second Circuit found retroactive strict liability "without regard to causation" under CERCLA, and under the law of the State of New York, for the cleanup costs of an environmental claim.

Apr 85

The Chairman of Lloyd's, Peter Miller, visited Switzerland and addressed the American-Swiss Chamber of Commerce in Geneva.

10 Apr 85

A revised draft was presented by the ACC on 10 April 1985 with additional rules to take account of the special concerns of those producers, especially Johns-Manville Corp., who had sought the protection of Chapter 11 of the Bankruptcy Act and to make it possible for them to participate in the Asbestos claims Facility.

12 Apr 85

Ernst & Whinney meeting to discuss problems on Lloyd's syndicates.

Present inter alia Holland, Bolger, McNamara, Abbott, Peter Standish

Peter Standish opened the meeting by stating that the purpose was to discuss where we were on true and fair reporting in terms of bye-law number 7 in general and premium accruals in particular..

2. Time and distance policies: It was generally considered that such policies amount to a discounting of the reinsurance to close, and such must be disclosed....

5. Qualification of reports. Peter Standish raised the question of whether we can give clean solvency opinion if we give a qualified audit report. It was felt that

(a) where there is a specific transgression of the bye-law, we must qualify the syndicate accounts;

(b) a non true and fair report amounts to a qualification;

(c) if there is a qualification, a PSP must be convened, and

(d) a standard qualified report... is to be issued covering various circumstances. Michael Bolger spoke at some length on the Neville Russell paper on syndicate audit reports. John Philpott spoke about the problems of run-off accounts.... There are attached examples of audit report qualifications.

Apr 85

HMSO publication "Asbestos: Effects on Health of Exposure to Asbestos" issued by the Health and Safety Executive.

15 Apr 85

Recovery of monies Paid Out of Lloyd's Central Fund or the Funds and Property of the Society Byelaw (No. 2 of 1985, 15 April 1985).

15 Apr 85

Mr Randall's memorandum to Mr Merrett refers to "the shattering news of the last ten days".

15 Apr 85

Ernst & Whinney meeting

... Solvency test problems may arise where we are unable to express an unqualified true and fair opinion on the syndicate accounts...

In cases of non- fundamental uncertainty arising from inadequate premium records, the premium credit which is omitted is likely to outweigh the additional reserve which would be created thus giving rise to a worse view being taken for solvency purposes which is probably acceptable in the context of the test, although questions arise as to whether names should be advised by their members' agents that they are being penalised.

15 Apr 85

Corporation of Lloyd's Annual Report at 31 December 1984

Statement by Mr. Peter Miller, Chairman of Lloyd's

By the end of 1984, the Council of Lloyd's, the principal policy making body of the Society, completed its second full year of activity since its formation under the provisions of Lloyd's Act 1982.

During 1984 the Council continued at its monthly meetings, to promulgate rules for the effective supervision and administration of the Lloyd's market within a self-regulatory environment. Byelaws were enacted covering the re-registration of underwriting agencies following divestment, the accounts and audit of syndicates, rules for members, and the monitoring of premium income. In legislating for these and other topics, the Council continued to ensure that opportunities were offered for full consultation with the market, the membership and other interested parties.

This vital task has benefited greatly from the contributions made by the working, external and nominated members of the Council and from the quality of support received from the staff of Corporation departments.

Against the background of the significant progress made over the past two years in the discharge of its regulatory function, the Council decided in November 1984 that greater emphasis should henceforth he laid on formulating policies that are directed towards enhancing the level and quality of support to the Lloyd's market to enhance its commercial success.

Some of the policy decisions have already been implemented and are referred to elsewhere in this report. Within the Corporation, a small unit has been established to act as a focal point for co-ordination of changes in market practices and procedures. This and other developments in the market services area allied to the introduction of enhanced systems and communications facilities, are directed to securing the provision of highly efficient yet cost effective services to the market in general and underwriters in particular.

The Council and Corporation will implement this programme on a carefully phased basis since we are concerned to maintain a flexible approach and avoid unrealistic deadlines. We are equally concerned to preserve the independence and individuality of our underwriters, who must be enabled to take advantage of the welcome current upturn in the market with complete faith in the regulatory and administrative services provided by the Corporation. We are all determined to earn and thereafter to continue to justify that faith.

Review of the Corporation's Activities

Council Elections

Postal ballots were held for eight seats on the Council of Lloyd's for 1985 in respect of both working and external members. This election was the first occasion on which external members of the Council were elected under the full provisions of Lloyd's Act 1982. Previous elections for external membership of the Council were conducted under the transitional arrangements of the Act. Under these arrangements, the four retiring external members of the Council were able to stand for immediate re-election on this occasion only.

There were eight candidates for the four working members' seats vacated by the retirement (by rotation) from the Council of Mr B J Brennan, Mr G W Hutton, Mr S R Merrett and Mr I R Posgate. Those elected were Mr R Ballantyne, Mr P T Daniels, Mr. H R Dobinson and Mr. A Parry.

Of the seventeen candidates who contested the election of four external members of the Council Mr J M G Andrews was elected and Mr C C Baillieu, Mr C V G Davidge and Mr R E M Elborne were re-elected to serve a further term.

Mr E I Walker-Arnott, one of the four nominated members of the Council who retired, by rotation, was re-appointed, with the approval of the Governor of the Bank of England, to serve for a further period.

Staff Organisation

The fundamental changes in the constitutional framework for the governance of Lloyd's recorded in the 1983 report led to further refinement and re-organisation of the Corporation's departments and of its senior management structure during the year.

A new organisation structure for the senior staff of the Corporation has been introduced recognising the three principal functions performed for the Lloyd's community by the Corporation: the regulation of the market; the provision of commercial services to support the operations of the market; and the management of the Society's facilities and staff. This new tighter structure has improved co-ordination between Corporation departments and with the Council and its Committees which lay down policy for Lloyd's.

During the year, Mr P J Rawlins, first secretary to the Rules Committee and personal assistant to the Deputy Chairman and Chief Executive, following the end of his period of secondment to the Corporation took up an appointment as managing director of R W Sturge & Co; Mr K E Randall resigned as Head of Regulatory Services upon his appointment as managing director of a Lloyd's underwriting agency; and Mr C T G Blackmore, Director, Redevelopment Project retired. All played a significant role in the work of the Corporation.

Pending the appointment of a new Head of Regulatory Services, Mr P A R Brown, Head of External Relations was appointed Acting Head of Regulatory Services. Mr P M R Hermon was appointed as Head of Systems and Communications Group and Mr W C Beckett, formerly Solicitor to the Department of Trade and Industry, was appointed to the new position of Solicitor to the Corporation at the beginning of 1985.


Membership of the Society continued to expand vigorously. The number of underwriting members of Lloyd's at the beginning of 1985 was 26,050, representing an increase of more than 11 per cent on the previous year. While the number of UK members increased by almost 10 per cent, the number of American citizens in membership rose by 18. 7 per cent. Overall, the increase in the number of foreign nationals compared with a year earlier amounted to eleven per cent. More than one fifth of the Society is now accounted for by female members.

There is every indication that this year will see further substantial increase in the number of individuals applying for membership of Lloyd's. The Society is indebted to members of the Committee and Council of Lloyd's who serve on the Rota Committees and to the Membership Department for the smooth processing of applications.

Regulatory Matters

Much of the Council's work, with the close involvement of appropriate Committees of the Council and Corporation departments, was concerned with the formulation and promulgation of byelaws relating to establishing improved standards for the preparation of syndicate accounts and for the auditing of those accounts. These standards are contained in the Syndicate Accounting Byelaw (No 7 of 1984) and the Syndicate Audit Arrangements Byelaw (No 10 of 1984).

Important progress was also made in the promulgation of rules concerning .membership. This was reflected in the implementation of the Membership Byelaw (No 9 of 1984) and publication of a manual for members which contained detailed requirements and conditions for membership of the Society. The Long Term Review Working Party, under the chairmanship of Mr. P G Bird, completed its deliberations and, since the end of the year, its report has been published as a consultative document on which submissions and comment have been invited.

In May 1984, the Council promulgated the Underwriting Agents Byelaw (No 4 of 1984) which deals, inter alia, with the subject of divestment. It is a statutory provision of Lloyd's Act 1982, that Lloyd's insurance brokers must divest themselves of their managing agencies by 22 July 1987, five years from the date of enactment.

This process will inevitably have fundamental repercussions for the structure and shape of the Lloyd's market. The divestment programme has already gathered pace and by the end of the first quarter of 1985, almost half of the 114 managing agencies affected had announced plans to comply with the Byelaws.

In January 1985, the Council approved publication of the new Standard Underwriting Agency Agreement following consideration of responses to a consultative document published in July 1984.

Investigations have now been largely completed into those cases of alleged misconduct which came to light towards the end of 1982. In consequence, a number of cases have been heard by Lloyd's Disciplinary Committees. The verdicts and penalties have, in some cases, been considered at special meetings of the Council and the findings of the Disciplinary Committee and the Council's decisions made public.

External Relations

After prolonged discussions, in which Lloyd's law Reform Committee was actively involved, the Government decided not to proceed with a Michael Cockell, the Chairman participated in the annual meeting of the American Association of Managing General Agents. Finally, after a brief visit to Los Angeles, Mr Miller addressed a plenary session of the National Association of Insurance Commissioners in Kansas.

8 May 85

K P. McNamara paper on Outhwaite's Syndicate 317/661 run-offs. Policies for discussion.

During 1984 there has been a very substantial deterioration in outstanding claims which relate to many years ago. The deterioration is related to three major factors; significant further increase in the number of claims for asbestosis; a larger than expected settlement of claims for sufferers from the defoliant used in Vietnam, Agent Orange, and a massive claim from Shell Oil in the USA relating to seepage of chemical warfare products in Colorado which they have been ordered to clean up by the US Environmental Protection Agency. These additional claims have added in the year approximately $70 million to the claims that may have to be paid eventually by Syndicate 317. However, insofar as our client never underwrote the business directly he is not well placed to assess whether the current estimate of outstanding tosses is excessively prudent or not. He has made enquiries in respect of one of these contracts which, so far, indicates that the position may be prudent. We are nevertheless left with a major difficulty in determining what the ultimate liability on these contracts is likely to be. Many of the long established syndicates at Lloyd's are having difficulties in assessing the reserves to make in respect of business written many years ago but insofar as the syndicates have expanded greatly in the intervening period the adverse effect of under provision is spread over a greatly increased number of names. However for Syndicate 317 we are effectively [sic] taking in the adverse run-off for more names than are currently on the syndicate and thus there is uniquely not the dilution that helps the others....

The Client's Position:

... Although it is a standard Lloyd's procedure to close an underwriting account by reinsurance into the following year it is possible to leave an account "open" and thus the 1982 Names stay on risk until such time as it is decided to close the account. It is widely known in the Lloyd's market that Mr Outhwaite has written these run-off contracts, not least by the many people he has insured who believe that he will end up paying out more than he expected. Mr Outhwaite is aware of the controversy surrounding these contracts and also the increased attention created by the substantial losses recently declared by our client, Merrett syndicates. Part of which has arisen from a dozen run-off contracts that they have underwritten some jointly with Mr Outhwaite. Whilst we do not doubt his sincerity in the proposed result for the year we appreciate that he would not wish Names to defect from his syndicate, rather the reverse, which could arise if he declared a significant loss. He has already had Merrett syndicates, who as a sub-agent had placed names on the syndicates, defect following an investigation and he would not wish others to follow.... the principal argument put forward by him [Mr Outhwaite] is that the insureds are pessimistic in the notification of the claims outstanding and that it is typical for outstanding claims to reach a peak and then fall out as they are compromised or not pursued. He considers the latter to be particularly relevant in connection with property claims arising on buildings, like schools, built with asbestos linings. However confident he may be it is still necessary for him to consider the adequacy of the IBNR. The client has not produced any documentation or calculations to support the IBNR. Indeed he did not until recently accept the principle of providing the future cost of financing losses provision which he has now effectively made by reducing the IBNR by a corresponding amount. Whilst it is recognised that determining the IBNR is not susceptible to actuarial projection we are in the position of relying on his opinion as to excessive nature of the claims already notified and the £34.1 million of IBNR.

Our position:

Apart from acting as auditors to this syndicate we also act for at least 17 sub-agents who have placed Names on the syndicate ... the new Lloyd's Regulations effectively stipulate that if we issue a qualified report that the 1982 account will have to be left "open". This course would be highly unpopular with the agent and also the sub-agents for the administrative chaos it would be likely to cause. It has to be recognised that if the account is left open there is every probability that it will remain so until at least 2010 which creates the difficulties for Names who die, resign etc. However the 1983 Names are already committed and they must receive an equitable premium for the risks they are assuming, particularly those who joined in 1983. There are a series of fundamental issues to address.

Firstly whether we are satisfied that the client has done enough to demonstrate that the reserve for IBNR has been calculated after due and careful consideration.

Secondly we have to consider disclosure. At the present level of reserve we are assuming an ultimate level of claim payments including IBNR that might be considered by many as being low although the judgement could only be made on the basis of even more limited knowledge than the Underwriter. If however the syndicates were to adopt the level of provision that Merretts were projecting for their run-off contracts then we would need to add approximately £40 million to the IBNR or £25,000 per name.

9 May 85

Meeting of Ernst & Whinney partners including Holland and McNamara re Outhwaite Syndicate 317.

EOME opened the discussion and enquired whether the numbers had been properly computed by the client particularly in respect of the IBNR. It was admitted that the client had originally been planning to pay out a profit of £7 million to the names and the revised figures were showing a distribution of only £400,000 and the difference represented adjustments made in respect of points which had been raised in the course of our audit which required the specific adjustment. Nevertheless, it was recognised that the element of IBNR had in one sense remained unaltered and had been initially derived backwards, the figure having first determined what profit the Underwriter wished to pay out.

N C L McDonald stated that despite making the adjustments there was still a very large degree of uncertainty because of the sensitivities of the projections to minor changes in the assumptions. He felt that as the initial starting number for the IBNR reserve was unsupportable no matter what changes we had made, the final concluding number still suffered from the inherent defects of the original estimate, as the adjustments we asked to be made represented only specific items and that the original Reinsurance to Close put forward by the client represented an element of the specific and the general and that whilst we had adjusted the specific little change had been made, if any to the general provision despite the client's acceptance of the fact that some interest factor adjustment would have to be made for the payment of claims running ahead of the recovery under the special reinsurance policies.

NCLM stressed that he appreciated that we were in an industry dealing with uncertainty and that we naturally expected, but it was nevertheless still possible, to come to a point whereby the uncertainty was so significant that we would be unable to express a view. He went on to say that insofar as he believed that the Underwriter was not necessarily putting forward a well constructed best estimate of what the outstanding losses are likely to be, that we should in no sense in our audit report, endorse the position taken by the client even in the knowledge that it might well be wrong...

N F Holland expressed the view strongly that what we did not want to do in our audit opinion was to say that the matter was such that we thought the Reinsurance to Close was understated but that we wished in fact to take a neutral position.

KPM supported this view and he appreciated the point that was being made by NFH. If we said it was under-reserved it will be very difficult for us to sign a solvency certificate with an opinion which would have a compounding effect on the overall solvency certificate for the whole of the Lloyd's Market....

KPM expressed the view that the professional reader of the accounts would be very much able to form his own view about the adequacy of the Reinsurance to Close if he was able to see that the ratio of the specific element to the IBNR element. It was also agreed that in view of the uncertainties we had, it would be inevitable that we would have to give a form of opinion that was tantamount to a disclaimer and that as a consequence, the account would be likely to be left open probably for many years to come. Note signed by McNamara on 15 May 1985.

May 85

The Chairman of Lloyd's Peter Miller, accompanied by Mr Colin Murray and senior members of the Lloyd's broking community paid an official visit to the Peoples republic of China. In Beijing, the Lloyd's party met the Chairman of The People's Insurance Company of China, Mr Shang Ming and other leading officials of the PICC, before being received by Vice Premier, Tian Jiyun and Madame Chen Muhua, State Councillor and President of the People's Bank of China.

13 May 85

Evening Standard: The Name Game – and why, today, there are some famous faces among the losers

EROS had his work cut out today. The God of love currently resting in the Royal Festival Hall while his Piccadilly site is renovated can rarely have felt so out of place. For the South Bank site was playing host this after-noon to a meeting of names - or members - of Lloyd's.

A few weeks ago they were brusquely informed that they had, each and every one, lost a fortune on insurance under-writing deals which had gone horribly wrong.

As they gathered this afternoon to get further possibly better, but more likely worse, news of the debacle. love would have been the last thing on their minds.

The few hundred people concerned include some of the best known names in the country, many of whom will scarcely be down to their last million, no matter how heavy the losses they have to bear.

These are folk from the fashion pages and the gossip columns - like Adnam Kashoggi, Lord Portman and the Duchess of Kent.

Their life savings

But for most of the other 400 names it is a deep personal tragedy and one made all the worse for the waiting, for they still do not know just how bad it will be, and just how much they will have to pay up.

"The vast majority of the 400 affected are normal, middle - class moderately wealthy people," says Christopher Crosthwaite, a partner in Ashurst Morris, a leading firm of solicitors.

He is involved because he acts for a steering committee of names formed under the chairmanship of Lord Goodman, which is even now seeing what can be done to limit the damage.

And he is extremely concerned at the toll the potential losses could have on these people.

"Many are professional people – barristers, solicitors and farmers, and the bulk of them are retired." says Crosthwaite. "In a lot of these cases a substantial portion of the security they have pledged is their holiday home or their life savings or both, and they it is who stand to lose all. Quite a number say they face personal bankruptcy."

The early estimates of the losses were bad enough. At the beginning of May, following a spate of rumours in the Press, Richard Beckett, the Lloyd's professional who runs the troubled syndicates, wrote to the names - the outsiders who put up the money and bear the risk-to tell them the bad news.

They stood to lose about £60 million for the insurance policies they had written in the years up to 1982 - a wallet-numbing average of £150,000 each.

But there is worse - possibly much worse - to come. That letter detailed the problems up to the end

of 1982 but they are still working out what has happened since then.

How, bad that will be is still anyone's guess but it could be as much again, or more. So the average

Liability immediately doubles to £300,000.

Losses on this scale raise a fundamental question. What is it that makes people invest in Lloyd's, and what return do they expect on their money which can possibly make worthwhile the risk of losing absolutely everything you have worked for all your life?

The key point about investing in Lloyd's or becoming a name is that you can lose much more than the money you put in. It is not like buying a share or betting on a horse, where all you can lose is your stake money

In fact it is quite the opposite. The investor in Lloyd's is the bookie, not the gambler - and if the favourite comes in he has to pay out no matter how painful the loss.

But it is worse than that. For what the names in these affected syndicates have found is that the horse which keeps winning is one they did not even know was in the race.

They are being asked to pay out claims which could one day reach $5 billion for compensation to workers for diseases like asbestosis which did not exist, or had not been diagnosed, when they agreed years ago to insure the employers against the possibility of their people being inured at work.

Passport to profits

Ignorance, of course, is no excuse. They agreed to write the insurance and they cannot in fairness, or in law, change their minds when it does not work out as expected.

Nor can they say they did not know they would be personally liable to their last penny - the committee of Lloyd's goes to great pains to make it clear that the shirt on your back is at risk, although. one member told me with a grim smile, they do try to leave the bankrupt with a clean pair of sheets.

But it is a bitter shock nevertheless, and one which is ironically the harder to bear because being a Lloyd's name is so often a passport to substantial profits.

To become a name, you have first to be able to show personal wealth of £100,000, excluding your house, but you do not actually have to deposit the money. So it can be left in shares or earning interest in a bank account, while at the same time it is technically working for you at Lloyd's. In other words, it earns for you twice over.

On top of that, writing insurance can be very profitable. If, for example, a syndicate has £1 million of capital, it would be allowed to collect insurance premiums under Lloyd's rules for two, three or perhaps four times that amount, depending on what was being insured.

So it might have £4 million in cash from premiums which it can invest, and the interest on that at today's bank rates of 12-5 per cent would be £500,000 a year.

So even if all the premium money ultimately has to be paid back in claims on the policy, the syndicate will still have made £500,000 on the £1 million pledged - a rate of return of 50 per cent.

The problem is that the prospect of that kind of return tends to blind people to the risks involved - until something on the lines of the present disaster happens.

Then the names find to their cost that they are alone. The rest of tile Lloyd's market will not bale them out, nor will the Lloyd's firm which run the business for them. The pounding is solely on their pockets.

It is at this time that they are all probably in mind of a homily told by a particularly austere Scots minister. He would tell his flock that sinners, as they saw the fires of hell, were wont to look up to heaven and cry "Lord. we did not know it would be like this." And the Lord would look down on them in his infinite mercy and say "Well you know now."

14 May 85

Meeting held at Lloyd's to inform them about the qualification in the audit report of Outhwaite Syndicate 317/661 in their 31 December 1984 accounts.

Present, inter alia, K P McNamara and N B Tyler of Ernst & Whinney.

Paul McNamara then explained to Cathy Shorthouse( Manager, Lloyd's Auditing Department) enough of the background for her to understand how we had come to the present position of an audit report with a disclaimer of opinion. He emphasised that the report on the Syndicate's accounts and the report on the Syndicate's solvency position for the 1982 year of account were two entirely separate issues. He agreed that for solvency purposes as the provisions to close 1982 were the Syndicate's best estimate and also that Ernst & Whinney were not saying that this estimate was too low we could sign off the solvency return for the Syndicate.

Paul McNamara pointed out that our audit qualification on the accounts was carefully worded to take a middle or neutral view, i.e. the disclaimer of opinion was purely on the grounds of uncertainty, Ernst & Whinney are not saying they consider the reserves to be either understated or overstated, ...

Maurice Hussey stated that he had discussed the Syndicate's audit report qualification with a number of sub-agents for the Syndicate and they did not disagree with this qualification. Robin Gilkes then strongly expressed his opinion that the 1982 accounts should be closed. He stated that to keep it open was not the best solution as it would not be possible to close it for say 10 years.

Cathy Shorthouse then stated that the final decision as to whether a year of account is closed rests entirely with the Managing Agent. She pointed out that discussion on this matter with a Syndicate's auditors would be beneficial but emphasised that the final decision on whether a year of account is closed is the Managing Agent's and not the auditors'....

It was thus agreed that the Syndicate could close its 1982 year of account and that the audit report would be qualified with what amounted to a disclaimer of opinion. It was also agreed that the solvency return for the 1982, 1983 and 1984 accounts at 31 December 1984 would be submitted with a clean audit opinion. Note by N B Tyler.

14 May 85

Cover Note issued by E W Payne Limited (a Sedgwick subsidiary) to Merretts summarising Time and Distance policy purchased from Mendip Insurance & Reinsurance Company Ltd ("Mendip") (a Sedgwick subsidiary), a company incorporated in Bermuda. The contract cost $3,275,000 and would generate potential recoveries of $7,250,000. The contract had the effect of reducing losses attributed to the Names on the 1982 year of account of Syndicate 421 by $3,975,000 (£3,426,724 at 31 December 1984 rates of exchange) which represented approximately 120% of the 1982 stamp.

15 May 85

In a file note dated 15 May 1985, in relation to the audit of the accounts of Syndicates 418/417 and 421 for the year ended 31 December 1984, Ernst & Whinney recorded inter alia:

"It was the initial intention of Merretts that having computed the necessary reinsurance to close for each of the above syndicates they would be closed out on the basis of a full reserve at this time, although it was recognised that there would not necessarily be settlement on many of the claims provided for many years to come.

After further consideration and discussions with the Chairman of Lloyd's and the Deputy Chairman by Stephen Merrett it was decided that they would take out an element of time and distance policy ... in order to mitigate the impact of the losses on the Names participating in the 1982 year of account ...

We stipulated to them that if they chose to purchase such policies we consider it essential that the timing of recoveries under those policies should be such that at no time were the funds carried forward left in the syndicate in respect of the 1982 accounts and prior being inadequate to meet the claims as and when they fell due. If in fact there was a position whereby subsequent underwriting years of account had to fund the difference then it will be necessary at this time to make an interest provision for that funding to be provided by future years of account.

After this discussion Merretts produced various cash flow forecasts in order to determine the pattern of time and distance policies that they would wish to purchase in order to ensure that there would be adequate cash in the syndicate to meet claims as and when they fell due out of funds provided in respect of the 1982 year of account. Full cash flow forecasts were produced for each syndicate by Peter McCann on the basis of spending various sums of money in respect of time and distance policies for each syndicate and with different periods of recovery as needed.

In preparing the cash flow forecasts account was taken of the various elements of the reinsurance to close in determining the claims settlement patterns. Particular attention was paid to the run-off contracts by reference to the excess point on each contract. Points beneath the excess points which are currently being reached and the current rate of settlement of claims by the individual syndicates or insurance companies. Arbitrary assessments were made of the pattern of settlements in respect of Shell claims and other Environmental Protection Act claims between now and 1999.

Cash flow forecasts have been prepared on a reasonably conservative basis and it is quite possible that there will be a slower rate of settlement than forecast."

Taking credit for time and distance contracts at their monetary value, rather than at their net

present value, in the RITC for the 1982 account was thought to be a radical concept at that time by Chatset; the 1982 Lloyd's League Tables, produced by Chatset and published in 1985, stated in a discussion on outstanding claims:

"At least on the face of it, Merrett Syndicates have adopted a brand new convention. This involves assessing today's value of the outstanding obligations, but taking into account reinsurance recoveries from a Time and Distance policy ... as if all the next ten year's interest had already been received..."

The Syndicate 421 Loss Review Committee accepts that the use of time and distance contracts was a common practice at Lloyd's at that time and that they were generally accounted for as "normal" reinsurance contracts, usually with no, or inadequate, disclosure. In contrast, Syndicate 421 made comprehensive disclosures of these contracts; in response to a question as to whether he regarded taking credit for time and distance contracts at their monetary value as a new convention, Ken Randall told the Committee:

"Not at all; I think that as it now appears maybe we were ahead of most in our disclosures."

and went on to say:

"I cannot see what point there would have been in purchasing time and distance in the context of the exercise we were undertaking at that time if we had taken the present value."

15 May 85

Financial Times: Accountancy muddle adds problems at Lloyd's

Accountants Price Waterhouse are uncovering a major accounting muddle which has contributed to the worsening problems of the Lloyd's underwriting members whose affairs are managed by interests of Minet Holdings, the insurance broker.

More details emerged yesterday about the events which led up to the £130m losses falling on the Lloyd's underwriting members.

So far the official reason for the losses, given by Minet's Richard Beckett underwriting agency, is that huge insurance claims arose from product liability, pollution, medical malpractice, personal injury business and asbestosis claims all largely from U.S. clients, which have led to a "dramatic deterioration" in the underwriting results.

However, independent accountants, Price Waterhouse, acting for a group of concerned underwriting members who have formed a steering committee to protect the interests have started to unearth an accounting muddle within the agency which has had a dramatic effect on the results.

The problems being discovered are linked to the troubles which surfaced in late 1982 when its was discovered by Minet executives that money had been misappropriated from the underwriting funds of the Lloyd's members by other senior executives.

By last year Minet had established that nearly £40m had disappeared from the underwriting members' funds to interests of Mr Peter Dixon and Mr Peter Cameron-Webb, managers of the group's PCW agency, and their associates. The money was used for the two men's personal benefit.

A part of the underwriting members' business was reinsured via a company in Bermuda called Chiltern. The business was then channelled to companies in Gibraltar, which it has since transpired were controlled by interests of Mr Cameron-Webb and Mr Dixon. Blanket reinsurance arrangements were made for underwriting members whose affairs were managed by the Minet's underwriting agency.

When Minet identified the full extent of the seriousness of the troubles it sought to regularise the position and cancelled reinsurance programmes arranged by Mr Peter Cameron-Webb and Mr Dixon. Minet managed to recover £25m of the missing money and with Alexander and Alexander, another insurance broker whose Howden interests had been used to siphon off the money, put up a further £12.7m to make good the loss to the underwriting members. In all a near £40m compensation offer was made to the underwriting members for their missing funds.

Price Waterhouse is probing the extent to which the reinsurance programme arranged by Mr Dixon and Mr Cameron-Webb was involved in reinsuring real liabilities of the syndicate. At the moment it is feared that the underwriting members reinsurance support may have been knocked away in Minet's attempts to unscramble the mess.

There are other matters which Price Waterhouse are examining. Last year when Minet discovered the full amount of the funds missing it also indicated that trading losses of roughly the same amount, nearly £40m, had also arisen. Minet's compensation proved timely and the underwriting members used the money to pay for their trading losses. In return for accepting the money the underwriting members had to agree to assign away their legal rights to sue Minet, or anybody else, in connection with the recovery of further funds and the scandal to a joint company owned by Minet and Alexander and Alexander.

The underwriting members are upset that they took up the offer in the expectation that there were no further losses of significance in the pipeline. Since then Minet's agency, now called the Richard Beckett Underwriting Agency, has changed the basis of accounting for future losses, taking a more prudent view of future insurance claims. As a result, a further £60m of provisions are felt to be necessary and other claims of £17m are in the pipeline. Price Waterhouse wants to know why the basis of accounting was changed.

Moreover, the reinsurance programme as a whole, admitted Mr Graham White, managing director of the agency, has been inadequate.

Price Waterhouse is wondering why the reinsurance programme had limits on the amount which could be paid out to the underwriting members when the type of business reinsured called for the most extensive laying off of risks which could be arranged.

Some members of the Minet syndicates took out personal stop loss, but some found their personal stop losses were arranged with a tiny syndicate formed of Mr Cameron-Webb and his associates. The wording of their policies was so tightly drawn that they may be unlikely to recover any money

in the form of claims, while the small syndicate has been virtually guaranteed a sure-fire profit.

At the Moment a Steering Committee of underwriting members, whose honorary chairman is Lord Goodman, is trying to raise a fighting fund of £1.5m to pursue legal action against various parties.

Underwriting members are putting up the cash and are prepared to inject as much as £3.8m into the fund.

Mr Ian Hay Davison, Lloyd's chief executive, said yesterday that the results of the syndicates in which the Beckett underwriting members are grouped " are absolutely dreadful," but Lloyd's is not intending to provide financial support to the troubled members.

18 May 85

Financial Times: The story of a £130m loss

THE audience was nervous before the performance on Monday at the Royal Festival Hall. Port and brandies were ordered at the bar by some of the elegantly turned-out ladies and gentlemen to calm churning stomachs.

It was no ordinary occasion, for this audience was formed of around 500 or so members of the Lloyd's insurance market, and their professional advisers, who had come to listen to the managers of their affairs give them details of their investment in Lloyd's. The members had not expected good news and they did not get it. They were told that they had to be prepared to fund £130m of insurance losses which were expected to fall on them as underwriting members of Lloyd's.

"Come clean. you devil," one angry underwriting member shouted at she stage where the managers of his affairs at Lloyd s, Richard Beckett Underwriting Agencies were seated. It was a mark of the confusion and anger felt by him and his fellow underwriting members who want to know why the problems happened and whether they will happen again. Some face personal bankruptcy if they have to pay out for the insurance claims.

The underwriting members of Lloyd's are a very unusual class of investor. They are drawn from the wealthiest end of society and usually have to show that they have £100,000 of personal wealth before they become members. It is their wealth, which they pledge to Lloyd's, which allows the market to function. In return for their commitment they receive a share of the profits - but they also have to meet insurance losses even if those losses swallow up their entire personal fortunes.

Losses arise frequently for the 26,000 underwriting members at Lloyds. But the huge losses in this case have been compounded by the alleged misappropriation of funds. Members whose insurance business has been affected by the troubles include: the Duchess of Kent, the Duchess of Marlborough, Viscount Portman, Jeffrey Archer, the novelist, Adnan Kashoggi, the businessman and Charles Longbottom, a former Conservative MP.

Most of the 1,525 affected however, are not well-off celebrities. Rather they are farmers, successful businessmen, lawyers, accountants and insurance professionals of the Lloyd's market itself.

Those members who work in Lloyd's are known as "vocational" members.

One farmer faces losses of more than £500,000. A secretary put into Lloyd's by a former boss at the Beckett underwriting agency faces losses of around £250,000. But whole families - including members, their wives, sons and daughters - face combined losses running to millions.

The underwriting members affected are arguing that the situation has called into question Lloyd's regulatory structure. They are highly critical of the management of the Richard Beckett Underwriting Agency and its parent company, Minet Holdings, the large insurance broker. "I would not recommend anyone to become a member of Lloyd's until this is sorted out," said Mr Keith Whitten, a 39-year-old City head-hunter who stands to lose £105,000 from his involvement as a member of Lloyd's.

The anger of the members, meanwhile, has been fired by other troubles which have surfaced at the agency in the last three years. In 1982 Lloyd's launched an emergency inquiry into an insurance contract arranged by former underwriting executives of Minet's underwriting agency interests. The Lloyd's inquiry had been prompted by accountants Deloitte Haskins and Sells who were examining the books of Alexander Howden, another large insurance broker.

Deloitte Haskins & Sells had already established that $55m had gone missing at Howden allegedly misappropriated by former Howden executives. But they had discovered a new problem. Highly unorthodox insurance contracts had been arranged by executives of underwriting interests of Minet.

The Department of Trade and Industry decided to appoint inspectors to investigate the matter and asked the City of London Police Fraud Squad to assist it in its inquiries. Shortly after, Mr John Wallrock, chairman of Minet, resigned when he admitted that he had secretly gained benefit from insurance transactions for the Lloyd's underwriting members within the group.

Minet later discovered that £40m of funds had gone missing which it alleged had been misappropriated by its two leading underwriting executives, Mr Peter Cameron-Webb and Mr Peter Dixon. They had spent the money on buying yachts, executive jets, production costs of two films "Let's do it" and ‘ The last Horror Show," oil and gas wells in the U.S., a French orange juice company and other private investments.

How then did it happen and what has brought hundreds of comfortably off individuals to the brink of financial ruin?

A key figure in the story is Mr Cameron-Webb, a highly respected underwriter within Lloyd's who had established a considerable reputation in the 1960s and 1970s. He was, according to one broker, "one of the ‘brains' of the market." His early business life was spent working with Sir Peter Green, the former chairman of Lloyd's.

Later Mr Cameron-Webb set up his own underwriting agency, called PCW, that was to be renamed "Richard Beckett Underwriting Agencies" by Minet once the troubles surfaced in later Years. The agency supervised the affairs of Lloyd's underwriting members and Mr Cameron-Webb took on insurance business on behalf of the members. It was a successful agency and in 1973 he decided to sell it on to Minet.

He received around £2m in the deal but drove a hard bargain with Mr Wallrock, the then chairman of Minet, in the way the agency was to be run. Under the arrangement, Mr Cameron-Webb and his partner Mr Dixon, were to be left with full autonomy in the running of the agency; they were to own the voting shares in the agency, while Minet would hold non-voting shares which received a dividend; and only one member of the Minet board was to be allowed to sit on the agency's own board - with the agency nominating the individual. It chose Mr Wallrock.

It was further stipulated that there was to be no involvement by Minet in the conduct of the agency unless the value of the asset became substantially impaired. By the end of 1982 action was needed. So for nine years, the entrepreneurial Mr Cameron-Webb, together with his partner Mr Dixon, was running his own show in the high risk business of insurance.

In arranging business for the members, Mr Cameron-Webb made extensive use of the world's arcane reinsurance markets. These are used to lay off the risks of the syndicates with other insurance concerns which are expected to pay claims to the syndicates in the event of large losses. To secure reinsurance the syndicates pay money in the form of a premium to gain the necessary protection.

But once Lloyd's started its inquiries and Minet launched its own investigation it was found that PCW was using reinsurance in a way that was not originally intended. The money, flowed out of the syndicates, ostensibly as a reinsurance premium, and was eventually channelled to companies in Gibraltar that were owned by interests of Mr Cameron Webb and Mr Dixon.

Minet found, among the contracts, that Mr Cameron-Webb had arranged hat around 5 per cent of the syndicates' premium income was passed across to companies which they owned. The contracts were drawn up so that in the event of losses the companies would pay 5 per cent of any claims falling on the syndicates.

Minet's Beckett agency has since sought to unscramble the mess. It located £25m of the missing funds in Gibraltar. But it faced a problem. If the money was to be returned to the members it had to be channelled back through a number of other companies. To channel the funds to their interests in Gibraltar, Mr Cameron-Webb and Mr Dixon had utilised independent companies outside the Minet group, which wanted the policies cancelled if the funds were to be returned. Minet's Beckett agency did that. The result of doing so was to remove a part of the syndicates' reinsurance programme.

Last summer, Minet arranged for a return of funds of £25m to the underwriting members which had allegedly been misappropriated by Mr Cameron-Webb and Mr Dixon. This was topped up by a £13.14m contribution by Minet and Alexander & Alexander, the parent company of Alexander Howden through which much of the missing money had been routed.

The offer was timely. Insurance claims were pouring into the syndicates arising from court cases against U.S. industrial companies by families of former employees who had contracted asbestosis. Other liability claims were coming through to the syndicates arising from the use of Agent Orange, the defoliant used during the Vietnam war. These claims were now arising on business which had been accepted in earlier years by the agency management. The losses from this and other business totalled £37.9m. So the £38.14m offer by Minet's interests helped wipe out individual losses of syndicate members who stood to lose up to £233,000 each.

Mr Ralph Bailey, a newly appointed underwriter, who had taken over the running of Beckett's 400-strong syndicate 918, decided that the possibility of other liability claims was so great that funds would be needed from the members in order to take account of future losses. Together with its sister syndicates, the members are to be asked to find £60m to fund future losses though the agency hopes that if the funds are provided the interest earned on the money over a possible 20 year period will be sufficient to meet the expected £130m of insurance claims which will arise.

Because of the mounting problems at the agency Minet has had to take urgent action. Richard Beckett is to be closed at the end of the year and the underwriting members will have to find other managers in the Lloyd's market to run their affairs.

The underwriting members are shocked that the possible claims were not anticipated last year by the current management of the agency, and are furious that Minet appears to be "walking away" from the agency's management. They are also arguing that they have not received up to £40m of interest on the money which went missing over the years.

For Lloyd's, the problems of the Minet agency have created their own regulatory nightmare. Much of what happened took place before Lloyd's legislation improving its regulatory powers was passed in the 1982 Lloyds Act. The powers of the Lloyd's authorities were limited in the extent to which they could intervene. Any intervention by the market authorities in underwriting affairs of the business was, and still is, resented by those working in a market where freedom of action is jealously guarded.

So Lloyd's has reacted to rather than prevented the problems. It is taking disciplinary action against Mr Wallrock, who is hoping to clear his name. Other disciplinary proceedings have been taken against Mr Dixon, who has been fined £1m, and expelled from the market subject to final ratification by Lloyd's council and completion of the disciplinary process. Both Mr Cameron-Webb and Mr Dixon are livings abroad and Mr Cameron-Webb is working on the Lloyd's style insurance market in Florida, the Insurance Exchanges of the Americas. Mr Cameron-Webb resigned from Lloyd's at the end of 1981 and is therefore now beyond the reach of Lloyd's disciplinary procedures.

Underwriting members hope that the troubles at the Minet agency will give impetus to further reforms at Lloyd's. A range of accounting reforms has already been pushed through and others are on the way. Better monitoring of what is happening in the market is also likely to be introduced. Unfortunately for the members of the Beckett agency the reforms have come too late to save them from their own financial agony.

May 85

The Cologne Re reported that only a small proportion of asbestosis cases were actually taken to trial up to 1982.

21 May 85

Letter from Merrett Syndicates Ltd (MSL) (J. Robson) to members.

21 May 85

Note of telephone conversation held on 17 May 1985 between Robin Gilkes of Outhwaite Syndicates and N B Tyler of Ernst & Whinney.

Tyler said he understood Lloyd's might be reconsidering the ruling they had given E&W and Outhwaite on Tuesday 14 May. At this point Gilkes put the phone down on him.

21 May 85

Letter from S R Merrett to N C Haydon.

We have .. given serious consideration as to whether the accounts should be kept open. After that consideration, and on the basis of all the information we have concluded that we can quantify an appropriate sum to close the account by reinsurance, and we are therefore proceeding to do so.

30 May 85

Financial Times: Agency chief sounds out Lloyd's on rescue

Mr Graham White, managing director of the stricken Richard Beckett Underwriting Agencies company in the Lloyd's insurance market, has been taking soundings in quest of a possible market rescue of the 1,525 underwriting members who face £130m of losses.

A top level meeting took place last Thursday at Hambros Bank with various members of Lloyd's to discuss a course of action for the agency and its underwriting members, who face one of the worst series of trading and management problems to emerge in the market for years.

Present at the meeting were Mr Stephen Merrett, a leading Lloyd's underwriter; Mr Michael Wade of Horace Holman & Co. and a stop loss insurance specialist; Mr Bill Goodier of Willis Faber & Dumas (Agencies); Ms Heather Thomas of Willis Faber; Mr John Donner of Donner Underwriting Agencies, and Mr John Gordon of Bland Welch Underwriting.

The public attitude expressed so far by the Lloyd's authorities is that the underwriting members, nearly 300 of whom face losses of more than £100,000 each, will not receive financial assistance to help them meet those losses.

But last week's meeting is understood to have explored what the market itself might initiate or recommend to help underwriting members through their financial crisis.

Those who went to the meeting are understood to have felt there should be a rescue of some kind. But there was agreement that nothing should be done until the agency was provided with new management by Lloyd's and separated from its parent company, Minet Holdings, the large insurance broker.

Lloyd's has said it plans to form a new management company for the underwriting members following Minet's decision to close the agency by the end of the year.

The meeting explored the idea of arranging a letter of credit provided by a bank to help the underwriting members pass the Lloyd's solvency test by the July 31 deadline.


The Companies Act of 1985 receives Royal Assent. Section 310 of the 1985 Companies Act, forbids accountants from being able to contractually limit their liability.

0 Jun 85

Lloyd's of London Newsletter: United States next

Between May 28 and June 11 the Chairman will be touring the United States visiting Sea Island, Georgia, Frankfort, Kentucky, San Francisco, Los Angeles, Houston and Kansas City.

During the visit the Chairman will address the National Association of Insurance Brokers, the American Association of Managing General Agents, and the National Association of Insurance Commissioners. He will also be giving a series of press conferences and will appear on the Johnny Carson television show.

The Chairman will be accompanied by Lord Kimball for the visits to Georgia and Kentucky and by Mr. Michael Cockell elsewhere.

0 Jun 85

the Department of Trade and Industry issued a consultative document on Accounting and Audit Requirements for Small Firms. This stirred up a notable controversy.

0 Jun 85

Lloyd's of London Newsletter: Brokers code

The Council of Lloyd's has approved the preparation of a consultative document on the regulation of Lloyd's brokers. Four working groups have been set up which will deal with

(a) the financial requirements,

  1. an appropriate code of conduct, and
  2. the structure and operations of Lloyd's brokers.

The fourth group will co-ordinate activities and be responsible for producing the consultative document.

It is hoped that preliminary work, involving representatives of Lloyd's Insurance Brokers' Committee, will be completed in sufficient time to allow the consultative document to be issued in October, and that rules will be enacted in about twelve months time.

Current regulations predate the Lloyd's Act 1982 and details on the granting of permissions and undertakings vary according to the date of each broker's admission. The question of umbrella arrangements, at present under examination by a separate body, will not be dealt with in isolation but will be incorporated in any rules set up.

0 Jun 85

Lloyd's of London Newsletter: Richard Beckett losses

Losses estimated at £62 million have been announced by Richard Beckett Underwriting Agencies (RBUA) for 1979-82 inclusive, affecting syndicates managed by the company. The losses resulted mainly from a deterioration in long term US liability business, notably asbestosis.

Announcing the losses to a meeting of some 400 Names held in the Royal Festival Hall on May 13, Mr. Graham White, managing director of RBUA, told members that it was a black day and that bad underwriting in the years before the Richard Beckett Agency assumed responsibility was, in part, to blame. The syndicates were formerly managed by the discredited PCW agency. Following the meeting, members of the syndicates affected formed a steering committee under the honorary chairmanship of Lord Goodman to consider plans for a legal campaign against the agency.

Speaking on BBC2's Newsnight programme the Chairman of Lloyd's, Mr. Peter Miller, did not think the RBUA affair would cause any loss of confidence in Lloyd's. He said: "In the year when the losses were made there were some 431 syndicates trading at Lloyd's. This is one syndicate. There are at the moment 26,050 members of Lloyd's. This syndicate involved 350 Names or thereabouts, so we must put that in context. Another thing I have to say is that the Council of Lloyd's has a regulatory function and its primary duty is towards the policyholder to see that the Lloyd's policy and its backing, its Names, are solvent at all times."

8 Jun 85

Daily Telegraph: ‘False accounting' at PCW claim members

AN INVESTIGATION of the books of the PCW syndicates at Lloyd's, which are facing £130 million of losses, has produced a picture "entirely consistent with a long-term and all-embracing fraud and with false accounting going back to the early 1970s," says the committee of members

"This has cast doubt over all underwriting accounts and results published during that period," it adds.

A report for members front accountants Price Waterhouse shows the figures were "manipulated to conceal serious overwriting" and the reinsurance programme was "wrongly implemented in a manner which is prejudicial to the interests of the non-marine syndicate," says the committee.

On top of that information has been withheld from members and "a large number of possible reinsurance recoveries on non-marine syndicates have not been claimed or credited to the syndicates accounts."

Members will discuss the report next week with Robert Alexander QC, reputedly Britain's highest paid barrister, to see if it gives grounds for litigation.

Keith Whitten, a member of the PCW 1985 Committee said the effect was that the accounts were "totally meaningless." If members had known last year that the syndicates were under-reserved by £36 million they might have wanted greater contributions from Minet Holdings and Alexander Howden Group before agreeing to the suggested rescue package.

The Price Waterhouse report suggests that money transferred in and out of the 1975-76 accounts concealed overwriting which might have been three times the permitted limit. It also looks as if non-marine syndicate was left uncovered because its catastrophe fund was used to help the marine syndicate.

The committee now questions "the right to demand any funds at all" from members to make good the losses, and the enforceability of last year's offer from Minet and Howden. It is also to see Sir Ian Morrow, who has just been nominated by Lloyd's to take over as independent manager of the syndicates.

17 Jun 85

The Syndicate Audit Arrangements (Amendment) Byelaw (No. 3 of 1985, 17 June 1985).

17 Jun 85

AC and S -v- Aetna, 764 F.29 968, 3rd Circuit. Court held exposure, exposure in residence and manifestation all trigger coverage (following Keene, 667 F.2d 1034) (triple-trigger).

19 Jun 85


It is all the more interesting to record that the role of the leading negotiator on behalf of the insurance companies involved in the Wellington negotiations was assumed by Ray Stahl of the Travelers Insurance Company, whose reinsurance broker was Marsh MacLennan.

Stahl stated that the Travelers would not become a party to the Wellington agreement and, therefore, would not be paying claims under the compromised formula.

(Insurers never sought the approval of their reinsurers prior to accepting the conditions of the Wellington asbestos-related method of paying claims. The London market, specifically Lloyd's, has assumed responsibility for approximately 40% of the asbestos-related problem through its involvement in direct and reinsurance business. Investor Names are being required to pay claims, many of which would have been improperly paid under the original policy wordings and have assumed extra-contractual obligations and retrospective liability, specifically the gaps caused by insolvent insurers and reinsurers as well as the insurance coverage gaps, for which no agreement was sought from the reinsurers and no premium was paid. Names were never told.)

The following producers are reported to have conditionally subscribed:-






AC&S, Inc:


Aetna Life & Casualty Co.;


Amatex Corp.


American Universal;


Armstrong World Industries, Inc.;


Argonaut Insurance Co.;


Brinco Mining Co.


Bituminous Casualty Corp.;


Celotex Corp.;


CIGNA Corp.;


CertainTeed Corp.;




Dana Corp.;


Continental Insurance Co.;


Eagle -Picher Industries, Inc.;


Crum & Forster;


Eastern Refractories Co.;


Employers of Wausau;


Fibreboard Corp.;


Fireman's Fund


Forty-Eight Insulations, Inc.;


First State Insurance Co.;


Lake Asbestos Corp. of Quebec;


Hanover Insurance Co.;


Manville Corp.;


Harbor Insurance Co.;


Maremount Corp.;


Hartford Insurance Group;


National Gypsum Co.;


Highlands Insurance Group;


National Services Industries;


Home Insurance Co.;


Owens -Corning Fiberglass Corp.;




Owens-Illinois, Inc.;


Mutual Insurance Co.;


Pittsburgh Corning Corp.;


Liberty Mutual Insurance Co.;


Porter Hayden Co.;


Underwriters for Lloyds of London;


Pacor, Inc.;


Reliance Insurance Co.;


Shock & Fletcher Co.;


Royal Insurance Co.;


Turner & Newall


The St. Paul Cos., Inc.;




U.S. Fidelity & Guarantee Co.;



Zurich Insurance Co.;









Late Joiners













Non Joiners




American Mutual




Commercial Union










(The "Agreement Concerning Asbestos-Related Claims" (Wellington Agreement), executed by Producers and Insurers as the Asbestos Claims Facility had been signed by 34 asbestos producers and 16 of their insurers. The gist of the facility was as follows :


The Keene Exposure basis of coverage was to be adopted;


The 34 producers participating in the ACF were to participate in all outstanding claims against all Facility Producers in a fixed share: (N.B. Not all producers joined);


The assured could exhaust all earlier policy years before applying the less favourable coverage in later years;


There was a cap on the liability of those policies which had no aggregate limit;


There was to be a Central Claims Facility which would handle claims against the participating producers and establish liability and insurance shares

It was agreed that occurrence is triggered in the continuous exposure periods so that any policy concluded in the time span from first exposure to the asbestos containing product until the manifestation of the disease is liable for the loss. As Professor Wellington stated at a conference in 1986:

"A claim triggers all insurance policies within the block ... each policy that is triggered will respond to a claim in a pro rata fashion and when primary insurance for a particular year is exhausted excess insurance for that year will drop down for indemnity purposes."


"Moreover when coverage from any year is exhausted, insurance from other years within the block will, in most cases, fill the gap, but the total limit of each insurance policy, of course, will not thereby be increased."

( Some 516 Lloyd's Syndicate bureau stamp signing numbers, not included as London Third-Party Defendants, confirmed acceptance to the Wellington Agreement, but only 384 Syndicates active in 1985. This re-affirms the notes of an auditor at the Lloyd's Panel Auditors' meeting held on 15 January 1982 which state inter alia "Asbestosis is a latent risk, but has spilled over into both the Marine and Aviation market. Some 33 Asbestos Producers and 22 Insurance Companies were party to the Wellington Agreement and the subsequent Asbestos Claims Facility, established to settle asbestos-related claims).

The Wellington Agreement was signed by approximately 50 companies being 33 asbestos producers , involving some 30 firms in the US asbestos industry and 22 insurance companies, comprising some 16 US insurers, Lloyd's (approximately 516 Lloyd's syndicate Bureau Signing Numbers) and London Market insurance companies. The Asbestos Claims Facility will start working as soon as the data of member firms which determine liability share and insurance coverage have been fed into the Facility's databank. When the Facility commenced operations , its opening inventory consisted of approximately 25,000 outstanding claims which were pending against the Producer membership. Only some 6,000 claims had been settled and paid. The Facility will handle claims at a headquarters to be set up in Boston and two regional locations, one in the East Coast and one on the West Coast staffed by trained professionals.

Jun 85

Toplis & Harding (Asbestos Services) Ltd sets up the Environmental Claims Group (ECG) as a separate department to monitor D.E.S. and Pollution, then estimated at between $100m - $100bn.

21 Jun 85

PCW 1985 Steering Committee letter to Members of Syndicates 918, 940 and 157 ("the Syndicates") managed by Richard Beckett Underwriting Agencies Limited - formerly PCW Underwriting Agencies Limited - ("RBUA") for years of account 1979 onwards who have contributed to the funds of this Committee.

Dear Member,

This letter is the further letter which I promised in my letter to you of 11th June. It should be read in conjunction with that letter. My letter of 11th June should be treated as giving Names the more detailed analysis of the problems which we face and the areas which are being addressed by this Committee. This letter is intended to concentrate rather more upon drawing conclusions and upon ensuring that, so far as possible, Names act as a body in order to meet the common problems which we face.

1. Price Waterhouse Preliminary Report

This Committee has now received from Price Waterhouse their Preliminary Report and I enclose a copy for your use. The Report is clear and to the point and I strongly advise you to study it with your professional advisers. Without an understanding of the contents of the Report nobody is, in my view, in a proper position to understand, or make decisions concerning, the PCW affair. I also draw your attention to the warning which is set out at the top of the first page of the Report.

2. Legal Advice

Ashurst, Morris, Crisp & Co. and Counsel have now confirmed to us as follows:-

  1. Names have a good arguable case to refuse to meet the cash call made by RBUA in their letter of 6th June 1985.
  2. Names have a number of causes of action against RBUA (and others) arising from the manner in which their affairs have been managed between since 1968.
  3. The Price Waterhouse Report contains information in a number of areas, which was not made available to Names at the time of the 1984 Offer but which would have been material to any decision to accept that Offer. Much of that information was available to RBUA at the time that it made the Offer. In these circumstances, there is prima facie evidence on the basis of which Names who accepted the offer may be able to set their acceptance aside. Names who accepted the Offer on the basis of particular assurances or statements of RBUA, which have proved to be wrong, are in an even stronger position to set aside their acceptance of the offer.

(iv) Depending upon the form of the Underwriting Agency Agreement, Names, who have claims against RBUA and who have either not accepted the 1984 Offer or who succeed in setting aside their acceptance, may well be able to set off the amount of their claims against the cash call now being made by RBUA and any future claim for interest.

(v) As explained below and subject to any points arising from the Statutes of Limitation, there is no tactical advantage to Names in issuing proceedings immediately in respect of any of the above matters.

Ashurst, Morris regret that, without seeing each individual Names' Underwriting Agency Agreement and without hearing from each individual Name the special circumstances which apply to his or her case, they cannot give more specific advice. They are confident, however, that were RBUA to sue Names to recover the cash call, the issues involved would prevent RBUA obtaining a quick summary judgment and would require long and protracted proceedings in which Names would be able fully to put their case against RBUA.

3. Lloyd's Solvency Test and Names' Funds and Guarantees

In my last letter, I discussed in some detail what the passing of the Lloyd's Solvency Test entails and what would be the consequences of an inability or refusal to pass the Test. The following further points, however, may help clarify the position for Names:

( i ) Names who pass the Solvency Test by 31st July 1985 are likely, of course, to receive, in the future, further requests to deposit funds or guarantees to meet Lloyd's means or solvency tests. The Solvency Test has normally to be passed by Underwriting Names each May; the premium test each September/October; and a Name can at any time be demonstrate means.

(ii) Any assets placed with Lloyd's to meet solvency pass from the Name's control and increase the Name's funds to which Lloyd's may have recourse as outlined below.

(iii) A Name who does not wish to continue to underwrite and does not meet Solvency will face administrative suspension from further underwriting. Failure by a Name to meet the Solvency Test does not entitle Lloyd's immediately to seize or apply that Name's assets held at Lloyd's. His reserves and deposits with Lloyd's may be "earmarked" to meet future losses but they will not be applied other than to meet policy claims as they fall due and until this happens should continue to earn interest for the Name. We do not know at what rate policy claims will have to be met but RBUA estimate the current annual cash requirement of Syndicates 918, 940 and 157 to be between £7 and £8 million.

(iv) There are two forms of guarantee which some Names have given to Lloyd's: one as an alternative to having to deposit realisable assets to show means and one as security to meet Solvency. The exact wording of both forms of guarantee varies between different Names but the practice at Lloyd's is that such guarantees, whatever their wording, are only called to meet policy claims as they fall due and to the extent that they are not met out of the Name's reserves and deposits at Lloyd's. Defaulting of a Name and use of the Lloyd's Central Guarantee Trust Fund are the final remedies available to Lloyd's followed by a claim by Lloyd's against the Name for reimbursement of the Central Guarantee Trust Fund.

4. Underwriting Losses

The cash call currently being made by RBUA against Names in the open years of account 1979 to 1982 inclusive of some £60 million does not represent the underwriting losses which will have eventually to be met by those Names. It represents RBUA's current estimate of the cash which would be necessary, were it to be invested now, to meet underwriting losses as they fall due over the next 15 or 20 years. No exact figure for those eventual underwriting losses is available but a figure of some £130 million has been referred to by RBUA. Names should appreciate that, however carefully the current estimate of £60 million has been made, it is only an estimate and future calls may be necessary, in the event, to permit actual underwriting losses to be met. Nobody is guaranteeing that if Names meet the current cash call of some £60 million future cash calls will not be necessary in respect of the underwriting losses on the open years 1979 to 1982 of these three Syndicates. Equally, Names should appreciate that if the cash call is not met now underwriting losses will have to be met, at least, when they fall due. Whether they have to be met by those Names who are on the 1979 to 1982 open years of account is no doubt one of the issues which would be the subject of litigation.

5. Immediate Objective of this Committee

The first objective of this Committee was to obtain, for Names, as much information as possible in the time available for them to reach their individual decisions as to whether to meet the RBUA cash call by the end of June and whether to pass the Lloyd's Solvency Test by the end of July. The Price Waterhouse Report was commissioned to establish the facts. Ashurst, Morris and Counsel were consulted to advise on the major legal questions that arose. Between us, this Committee and our professional advisers hope that we have prepared the ground for Names to make their decisions. As Price Waterhouse make clear in their Report there is still much to be done.

We have also been aware of the need for Names' underwriting affairs, as members of the RBUA Syndicates, to be managed after the demise of RBUA. Whilst we have made no definitive progress in this respect, there may be grounds for some hope in the involvement of Sir Ian Morrow.

Our final and principal objective has been to seek an overall solution to the current problems satisfactory to Names. It seems to us that Lloyd's and Minet must be involved in any such solution. Lloyd's continue to maintain that they cannot become involved in the matter which they regard as a personal problem for Names. Equally, Minet continue to state publicly that they do not consider that they are involved in the problem which is one between their subsidiary RBUA and the Names. However, armed with the preliminary findings of Price Waterhouse and Ashurst, Morris we intend to pursue an overall solution.

This Committee does not regard, as one of its immediate objectives, the launching of litigation to bring claims against RBUA and third parties. If an overall solution cannot be reached by agreement then litigation will be necessary to obtain justice for the Names and this Committee would be happy to act as a leader and co-ordinating body in such litigation. At this stage, we believe that litigation to pursue such claims is a distraction from the more immediate problems of Names. It will be apparent to you all that litigation against all potential defendants properly co-ordinated between all affected Names, involving all the individual circumstances of those Names, will be a complex and lengthy operation.

6. Recommendations of the Committee

This Committee cannot guarantee that a united stance by all affected Names in refusing to meet the cash call and to pass solvency will produce a solution to our problems. It may still be necessary for Names to resort to long term litigation to obtain justice. This would be unfortunate but we fear that it may be the only solution to the problem. Names who do not meet the cash call, risk proceedings by RBUA and Names who do not pass solvency will almost certainly be suspended from underwriting.

However, notwithstanding all of the uncertainties and risks, this Committee believes that its own strength and the collective strength of the affected Names to produce a satisfactory solution to the current problem will be considerably greater were all Names:-

(i) to refuse to meet the cash call now made by RBUA; and

(ii) to refuse to pass the Lloyd's Solvency Test at the end of July.

If you intend not to meet the cash call and/or not to pass solvency, may I suggest that you write briefly to RBUA and/or Lloyd's, as soon as possible, telling them of your intentions and sending a copy of your letter to this Committee. RBUA and Lloyd's will thereby be made aware of the strength of feeling among Names in time for us to pursue possible solutions.

If you are considering not passing the Lloyd's Solvency Test you should discuss the matter with your Members Agent or with the Managing Agent of any other syndicates with which you are involved at Lloyd's since a suspension from underwriting would relate not only to the RBUA syndicates but to all syndicates at Lloyd's. If you intend to pass solvency then we suggest that you write to Lloyd's making clear that any steps which you may take to pass solvency are taken "without admission" and "without prejudice" to any claim which you may wish to make in the future relating to the validity of any statements of account on which the figures of solvency are based and generally to your underwriting affairs on the RBUA syndicates.

7. Funds of this Committee

As you will appreciate, the extent and complexity of the problems with which this Committee has been dealing and the speed with which we have had to ask our professional advisers to operate, have involved us in considerable expenditure. Our funds stand at some £90,000 and our liabilities are slightly in excess of that. If we are to continue our work, therefore, we must seek further funds from you. We believe that the next six weeks are likely to be a period of intense activity for ourselves and we must involve all our professional advisers activity. Also, we would wish Price Waterhouse to continue their work. To enable us to do so, we would be grateful if you would each send us a further contribution of £250 to add to the £250 which you have already contributed to our funds. We will use this further sum in the same manner and subject to the same restrictions that we used the first £250 and we will, of course, return any unused funds to you. We will also produce our accounts to any of you who request a copy. For those of you who have signed the undertaking which we distributed at the meeting at the Royal Festival Hall, this further contribution would count towards the undertaking which you have given us.

8. Meeting

Finally, we confirm that we have arranged a meeting of all affected Names to be held at the Captain's Room at Lloyd's, 52 Lime Street, London, EC3 at 4.30 p.m. on Friday, 28th June. This will enable us to discuss the position with affected Names and to give you a final report of any progress which we have made by then ahead of the 30th June deadline for meeting the cash call made by RBUA. We very much encourage Names to attend at that meeting.

We thank you all for your support and encourage you to continue with it. We have had a large number of letters from Names and we hope that those who have had no reply will understand that that is not from lack of interest but merely from lack of time and resources. We have taken account of your comments and suggestions and we hope that our letters and the Price Waterhouse Report answer your questions.

21 Jun 85

Daily Telegraph: Minet drops support for PCW Syndicates

Minet Holdings is withdrawing any further assistance from the PC W syndicates at Lloyd's rather than leave itself with a continuing commitment which could prejudice its own finances, Raymond Pettitt, Minet chairman, has told shareholders in a letter.

He had already decided to close down Richard Beckett Underwriting Agencies, the subsidiary which run the syndicates at the end of this year but the troubles have continued to grow. "It is now apparent that the problems of a minority of RBUA's names have become so great that the protection of Minet's shareholders' funds is paramount ".

Mr Pettitt says Minet has no legal obligation to support or finance the syndicates yet it has set up £8.3 million provision to allow for the run down of the business.

"The board does not consider that the further provision of shareholder funds is justified beyond what is required to protect the company's interest".

As it is Minet has now made £16 million total provisions including legal costs, for its involvement with RBUA, Mr Pettitt tells shareholders. Now the prospect of new litigation "has been resurrected " despite Minet being advised it need not pay more.

The letter emphasises that Minet promised to leave the syndicate management undisturbed and so could not have known what fraud had been committed nor what deficiencies had occurred in the underwriting.

24 Jun 85

Lloyd's List. Asbestos pact will help cure litigation "epidemic".

Soaring legal fees in asbestos cases - already well past the $600,000,000 mark - at last look set to be reined in.. The London insurance market is expected to give formal backing to the establishment of the new Asbestos Claims Facility next month....

Support by 50 companies and affected interests, including all the Lloyd's syndicates involved, has nonetheless been greater a giant step forward in dealing with what must be the U.S.'s - and the world's - greatest occupational disease compensation problem. Mr. James Ayliffe of Merrett Syndicates, has been nominated London representative, with Mr. Keith Rayment of Sturge an alternate. The two men have been leading proponents of the Facility. Mr. Robin Jackson, chairman of the Asbestos Working Party set by the London market said it was clear that London representatives have committed greatly to the success of negotiations.

Jun 85

A Committee of Inquiry has been established by the Council of Lloyd's to investigate the administration of certain syndicates managed by Richard Beckett Underwriting Agencies Ltd between December 1982 and June 1985. The Committee will report to the Council within six months and a copy of their report will be sent to the Secretary of State for Trade & Industry.

The Davis Committee of Inquiry:-

John Davis (Chmn)

Vice Chairman of Lloyd's Bank Plc and President of the Institute of Bankers.

Henry Chester

Chairman of underwriting agency H G Chester & Co Ltd

Alan Brookland

Partner with Accountants Coopers & Lybrand.

In the event of any matter arising outside the terms of reference of the Committee of Inquiry but which, in their view, warrants further investigation, the Committee have been specifically charged to bring this to the attention of the Council of Lloyd's so it can decide whether further investigation is appropriate. The report was submitted to the Council of Lloyd's in July 1986.

26 Jun 85

The members of the board of Additional Underwriting Agencies (No 3) were announced by the Chairman of Lloyd's. They are:-

Sir Ian Morrow FCA

Deputy Chairman of Hambro Plc. Chairman of UKO International Plc and the Laird Group Plc.

Jeremy Hardie FCA

Chairman of the National Provident Institution.

Charles Skey

Chairman of Edwards & Payne (Underwriting Agencies) Ltd. Director of Sturge Holdings Plc.

John Heynes

Partner of John Heynes & Co.; Pepper (Underwriting Agencies) Ltd.; KPH Underwriting Agencies Ltd; and C W Rome (Underwriting Agency) Ltd.

Eric Bruce

Chairman of Cunliffe-Fraser; Bruce & Co Ltd.; Peter F Wright & Co Ltd.; and Additional Underwriting Agencies Ltd

William Goodier

Director of Willis Faber

The Council of Lloyd's established AUA3 under the provisions of the Substitute Agents Byelaw on 6 June 1985. This followed the announcement by Minet Holdings Plc, the parent company of Richard Beckett Underwriting Agencies Ltd (RBUA), of its intention to close down RBUA by the end of 1985. RBUA assumed the agency function of all syndicates previously managed by PCW Underwriting Agencies Ltd in December 1982.

26 Jun 85

Annual General Meeting of Members of Lloyd's: Statement by Mr Peter Miller, Chairman

I had hoped to be able to devote this speech to a glowing description of the progress of the new building, the esoteric mysteries of the latest byelaws and a detailed explanation of the new electronic wizardry involved in the business processing system. Events have led me to conclude that I should rather talk about less domestic matters and about the well publicised problems which face the world insurance industry in general and Lloyd's in particular.

Many leading underwriters and successive Chairmen of Lloyd's have spoken over the last few years forecasting depressing underwriting results. What is the reality with which we are now faced? The international insurance market has been, and to a great extent still is, going through a very severe crisis indeed. It is, I believe, not too dramatic to say that we face a storm rising to a whirlwind, which has destroyed, particularly in America, more than a few insurance institutions and which threatens to destroy, or at least severely to cripple, many more. The problem lies in the utterly disastrous results of large sections of the American casualty book. To many of you the scale of the losses is already well known. To others the figures may not be so familiar. For example, I note that the American property and casualty companies are estimated to have suffered an overall loss of $4 billion in 1984. In the same year, the ten top British composites made, on their non-life account and for the first time in many years, an overall loss. In Germany the Munich Reinsurance Company recorded losses of DM431 million on its reinsurance book in this class, while the Swiss Reinsurance Company of Zurich was reported as declaring that it would withdraw from US casualty business until not only rates improved but policy forms improved likewise. Wherever one goes in the world of insurance one hears, to a greater or lesser extent, the same tale of woe. Lloyd's is, of course, heavily involved in United States casualty business and our results in this class are therefore very relevant.

It is true that a handful of Lloyd's syndicates, out of the 431 trading in 1982, have reported heavy losses and some, very severe losses indeed. From this, some of the omniscient seers in our Society are reported as deducing that the market will make an overall loss for 1982 lying between £70 and £100 million. Further, it is alleged that somehow Lloyd's standing in the eyes of its clients and policyholders has been reduced. The effectiveness of our regulation of the underwriting agency system is called into question. The Council of Lloyd's is accused of sitting on its hands and failing to help the Names on the troubled syndicates.

These are the allegations. The facts are somewhat otherwise. Let me start by breaking with all precedent and anticipate, at least in outline, what would normally be said at the time of the publication of our detailed Global market results. Today I anticipate a market profit overall for 1982 in the region of £50 million. In the context of the world-wide results I have already referred to, I regard this as satisfactory. Moreover, the anticipated result accords with the cautious optimism which I expressed in September 1984 that we would, as a market, escape the worst results of our competitors. In passing, let us not forget that the contribution of Lloyd's and its brokers to the balance of payments today runs at approximately £1 billion per annum and that Lloyd's as a market has traded at an overall profit in every year since 1948 save for three. Not a bad track record!

May I now try to answer the three questions which arise from the allegations I have referred to. They are serious questions and they deserve a straight answer. Arguing from the particular to the general, they relate firstly to the Council's treatment of what I will call the troubled syndicates and I will take the Peter Cameron-Webb (PCW) syndicates as the example; secondly, to the general effectiveness of our regulatory system in relation to our underwriting agents and thirdly to the standing of Lloyd's in the world of insurance.

Before the autumn of 1982 the authorities at Lloyd's had no information which would have led them to suspect that anything was amiss in the PCW syndicates. They were regarded as a group of the most innovative and leading syndicates in the market with a dynamic underwriting team. Their audited accounts showed reasonable profits and the underwriters were widely used by many brokers for clients on a world-wide basis. My predecessor as Chairman carried out an investigation into a contract placed by PCW - the so-called Unimar investigation -and concluded that there had been no dishonesty. His findings have since been confirmed by the independent inquiry into PCW carried out by Mr Simon Tuckey QC in the following terms:

"I do not think that there was any attempt by the Chairman of Lloyd's to cover up anything either before or during the course of his informal enquiry. During the enquiry he asked all the right questions and concluded, rightly in my view, that there had been no dishonesty."

Mr Cameron-Webb himself retired in January 1982 and resigned as a member of the Society in 1983, at which time we had no byelaw to prevent him doing so. It is highly regrettable that we are therefore unable to take any action under our own disciplinary procedures. However, we have made the relevant authorities in this country fully aware of the results of our investigations into this matter. We are totally confident that the Director of Public Prosecutions will take the necessary action.

The events of the autumn of 1982 are a matter of record. Thereafter, the Lloyd's brokers Minets, the owners of PCW, introduced a successor agency and underwriting team, known as the Richard Beckett Underwriting Agency (RBUA). Under their aegis, an offer of restitution of the whole of the principal of the monies stolen from the Names was made by various parties, to the Names in June last year. Minets state that the Names on the non-marine syndicates were advantaged in the allocation of the monies and therefore received in addition to the principal a sum in excess of any reasonable calculation of interest. The Council neither promoted nor opposed the offer. The offer was, in fact, accepted by Names on commercial grounds, with the benefit of detailed professional advice from accountants and lawyers. I would emphasise that the offer did not involve any surrender of rights in respect of the years from 1982 inclusive onwards, wherein more than 60 per cent. of the current underwriting losses have actually occurred.

It was not until April of this year that, for the first time, the Council learned that there were further underwriting problems which had not been identified in 1984 and we were informed of a possible heavy loss. We made it clear that the determination of the appropriate reserve was the responsibility of the Richard Beckett Underwriting Agencies board and insisted that they must inform the Names in detail as soon as possible. By the time that RBUA convened the meeting of Names at the Royal Festival Hall, it was becoming clear to us that the board of RBUA was losing the confidence of the Names and indeed, losing confidence in its own ability to sort out the affairs of the Names for which it is responsible. The Council therefore determined that we would organise the appointment of a substitute agency, free from the conflict of interest that troubled RBUA, to look after the run off of the Names' affairs. We were also concerned that the marine and aviation syndicates should be in a position to continue to trade. The marine syndicates have now been sold. This must be in the best interests of the many Names on those syndicates who wished to continue to support their underwriting team and who, unless they saw a continuation of trading, might have been left in a position of uncertainty with their syndicates being left open and subject to yet another run off situation.

Additional Underwriting Agencies (No. 3) Limited (AUA3) is now in a position of being able to look after the Names' interest for the run off of the syndicates. It is a free-standing company and will act independently of the Council of Lloyd's although the Society owns the shares. We shall not seek to influence its conduct one way or another. Sir Ian Morrow has agreed to act as chairman of the new agency and I have no doubt will show himself to be a vigorous and effective agent for the Names. I would remind you that Sir Ian was the person entrusted by the Government with the reconstruction of Rolls-Royce Limited. He is already considering how and in what form and in co-operation with whom, any legal remedies which are in the best interest of the Names should be pursued.

The provisional board of the company consists of Sir Ian Morrow as Chairman, aided by a very strong team consisting of:

Mr Jeremy Hardie

Mr Eric Bruce

Mr Charles Skey

Mr William Goodier

Mr John Heynes


Mr Graham White will make himself available in whatever capacity the board asks him to serve. This team will take over from about 1st August 1985.

We have the utmost confidence in AUA3 as currently constituted and we believe that this arrangement fulfils our duty of seeing that a competent agent should be in charge of the Names' affairs. Beyond this, the Council has decided upon certain further steps, as follows.

Firstly, that it would be appropriate for them, under their powers under Byelaw 3 of 1983 to appoint an independent committee of inquiry, with terms of reference requiring them to investigate the conduct of the management of the troubled syndicates whilst in the hands of the Richard Beckett Underwriting Agencies. This team of inquiry has been established with the approval of Sir Ian Morrow. Since there is no evidence of malfeasance on the part of the directors, it is not of a "disciplinary" nature but is rather designed to assist AUA3 and the Names (to whom, together with the Secretary of State, the report will be published) to establish facts. It will be headed by Mr John Davis President of the Institute of Bankers, who will be assisted by Mr Henry Chester and Mr Alan Brookland, a senior accountant versed in Lloyd's matters.

Secondly, your Council is examining the position of various Names who purchased stop/loss policies. The facts are not yet clear and the position far from satisfactory. It appears that some forty-three Names purchased stop/loss policies through the PCW Underwriting Agency. Claims on these policies have not yet been presented to underwriters for payment; as soon as the underwriters' reply has been ascertained I shall use every endeavour to ensure that the brokers, agents and underwriters involved respond properly to the situation.

Finally, we shall ensure that any costs of the run off beyond normal syndicate expenses will not fall upon the Names. I am anticipating that Minets will meet their obligations in this respect. In addition to this, I have an undertaking from Minets that no decision as to the liquidation of RBUA will be taken without further consultation with Lloyd's.

In the whole of this matter I believe that the Council has pursued a course entirely consistent with what I said to the Society at the General Meeting in June 1984, when I outlined the action which any Council should take if a syndicate experienced difficulties with its managing underwriting agent. At the same time, I made it clear then that the hard fact remains that the incompetent or even wrong-doing agent is still the agent of the Name.

In addition to the fundamental duty of seeing that a competent agent should be in charge of the Names' affairs, the Council can and does give help in a variety of ways. Through the Corporation staff we give advice to Names on their position under the solvency requirements; through our investigation and disciplinary committees we deal firmly, if laboriously, with those who have transgressed the rules of our Society. We established a Names' Advisory Committee, which is performing a valuable service as a further body to which Names can bring their troubles. Any member is, of course, welcome to discuss problems with the Chairman of Lloyd's and I have invited representatives from the 1985 PCW Names Committee to discuss with me the letter which they have recently sent to the Names on the afflicted syndicates, a draft of which I have now seen. Generally, the Council is constantly engaged in discussions with parties to the problems, in an effort to seek reasonable solutions advantageous to the Names' interest. The one thing the Council cannot do is to provide some sort of so-called financial lifeboat and thus depart from the principle that we each individually have to respond for our share of losses if, unhappily, they occur.

At the end of the day the Council has an inescapable duty placed upon it under the Insurance Companies Act of 1982. This is to ensure that every member of Lloyd's obtains a solvency certificate, valid as at the previous 31st December. This statutory certificate does not distinguish between open and closed years; they are of equal importance in terms of solvency; nor does it distinguish between actual underwriting losses which need immediately to be met, and outstanding claims which must be met at a later time. It is a report in a form laid down by statute, signed by an approved accountant that the Name has sufficient assets to meet all his underwriting liabilities. In the absence of such a certificate, we cannot allow the Name to continue trading as a member of Lloyd's and we must see that any deficiency in solvency is covered. Any person who wishes to continue to trade as an underwriter must arrange their affairs so as to ‘pass the Lloyd's solvency test. Money, or other securities, may be deposited for this purpose with either the members' agent or with Lloyd's itself, as an alternative to the managing agent.

We have extended the deadline for some syndicates as far as we are logistically able to do. If any Name fails to pass the solvency test we have, and I stress this, no option but to suspend that Name from further underwriting at Lloyd's until the position is rectified and to earmark Central Fund monies to cover any deficiency. Lloyd's as a whole will continue to trade and valid claims on its policies will continue to be met. The question as to what we do thereafter with regard to the recovery of those monies from the individual Name will be one for the Council. We shall use all legal remedies to ensure proper discharge of responsibilities. However, I repeat what I have said before, that it would be no part of the Council's policy to drive any person finally into bankruptcy who makes a genuine attempt to meet his full obligations.

It is very important to keep these current problems in context. They relate to events prior to the coming into force of the 1982 Act with its new and extensive powers and only a relatively small number of Names is affected - somewhat less than 400. The Council has had the hard and unenviable task of balancing its duties to the assured and to the Society as a whole, against its responsibility to these individual Names.

I have described the actions of the Council in relation to the PCW syndicates in some detail. There is one other agency matter which, although presenting a lesser problem, I should mention. It appears likely that the Council may have to appoint another substitute agency to look after the affairs of Syndicate 895 if it becomes apparent that Spicer and White can no longer competently handle the affairs of the members of that syndicate.

Before I finally leave the affairs of the PCW syndicates, may I repeat on behalf of us all, that we share the outrage of the members upon whom a theft of £40m was perpetrated - an outrage not only of personal loss, but also of the abuse of the trust which so many of us placed in certain persons running those syndicates. But it is not correct to argue from the particular to the general and to stigmatise Lloyd's as an institution that cannot be trusted. That would be totally to ignore the dedicated hard work of the thousands of people who work in our Society to the great benefit of our country and the members of our Society.

I now return to the general question which I have posed as to whether a member or prospective member of Lloyd's can trust the system which now regulates the market in which they participate - or, to put it more bluntly: "Could it happen to me?"

At once I must start by saying that, trading as we do on the basis of individual and unlimited liability, there will always be, as there always has been, a possibility of financial disaster from underwriting losses. But surely at Lloyd's we deal in the risk of probabilities, rather than the risk of possibilities. Everyday life is not so different. It may be that the next cross-channel ferry upon which anyone of us travels is in collision with another ship, killing some aboard. Yes, it is possible. But given the fact that there are very strict rules concerning not only the seaworthiness of the vessel itself, but also the competence of the captain and pilot and further detailed rules for the prevention of collisions at sea, it is most improbable that we shall receive a fatal injury in this way.

I believe that the Council of Lloyd's has now evolved a regulatory system which is both appropriate to the modern day world and is also one in which the current members of Lloyd's and those seeking membership can fully place their trust. I do not suggest that it is there to remove all possibility of financial disaster - no system could do that -but rather to reduce the possibility so far as is practicable.

The 1982 Act gives us new and sufficient powers, so what is it that we have achieved by passing all these byelaws in relation to the underwriting agency system?

Firstly, we are insisting upon improvements in the auditing of syndicate accounts and in the reporting thereof. This will ensure that any improper behaviour or other problems are identified and therefore dealt with much more rapidly.

Secondly, by insisting upon very full disclosure, we have highlighted the accountability enshrined in the law of agency, which requires the agent to respond to his principal for his care over the principal's interest. A central file of syndicate results is now available for inspection.

Thirdly, we have introduced a new standard agency agreement which must be used throughout the market from 1st January 1987. Logistically it was not possible to bring it in with effect from 1st January 1986, much as I would personally have liked that.

Fourthly, we have codified and immensely strengthened our processes for the approval of underwriting agents. I believe that the impact and importance of the "fit and proper" test for directors and underwriters cannot be over-estimated.

Next, we are insisting that each managing agent has a system to monitor his premium income and we review the results produced.

In all these matters, I consider it is important to realise the essential difference between regulators like the Council of Lloyd's, or the Department of Trade and Industry for that matter, and a monitor. There is and must be a limit to what regulators can do. Neither the Department of Trade nor Lloyd's monitors the day-to-day activities of the market. A regulator generally works on a post-facto basis. The objective of good regulation must surely be to try to ensure that the right controls are in place and functioning correctly and to see that, as far as possible, the individual syndicates and their managing agents are run by fit and proper people who are fully accountable to the members for whom they are underwriting.

These measures I have listed and many other reforms add up, in my view, to a modern and efficient system of regulation in which Names may readily put their trust. The events of the past few months will have affected some people's decision to become members of Lloyd's. The current turn in the market and , however, will be seen by many as compelling reasons for participating in this market. Indeed, it seems that this is how many perceive the matter. The latest figures show that new applications for membership for 1986 continue to run at 120 per cent of the numbers for 1985. At the same time, about 9,000 existing members are asking to increase their premium income limits for next year. It is almost impossible to speak of the "right" time to join the market; that said, I believe that this is one of those times.

Before I turn back to the point I started with, namely the position of Lloyd's in the world insurance market, there is one matter which must be mentioned.

The relationship of Lloyd's with our own Inland Revenue continues on a number of points to give cause for concern. However, we are in active discussion on these points with the Revenue, both as they affect the past and will affect the future. I hope for a positive response from them to any suggestions which we may put forward to end the present difficulties. I would have liked to have been able to go into these matters fully today, but the time is not yet ripe.

But to return to the state of the market. It is true that there has been, and still is, a severe crisis in the world insurance market. This has led, at long last, to a very sharp upturn in market conditions, particularly in the most difficult areas. It is now spreading out from those areas. I do not, however, wish to overstate the improved position of the market. There is at the moment only an impression of hardening in the marine market, where - as elsewhere - the risks that are difficult to place are the liability risks and not so much the physical damage risks. In the aviation market the hardening rates in 1984 have been maintained into 1985, but there are possible signs that further advances may be difficult. The area of greatest immediate potential profit is probably the non-marine market, particularly in the liability section; however, it is not only a matter of rates. Two other essentials have to be mentioned, namely that underwriters can no longer afford, in some critical areas of liability business, to underwrite on an "occurrence" form but rather on a "claims made" form and at the same time a measure of tort reform is needed and indeed is long overdue in the American legal system. Without improvements in both these areas, it is likely that some classes of insurance will become literally uninsurable.

The collapse of the world insurance market as a provider of insurance in these areas is leading to a great strain upon the capacity at Lloyd's. Demand is so great that sometimes Lloyd's is accused of losing capacity. This suggestion is quite unjustified. Lloyd's in 1985 compared to 1984, attracted an increase in its capital base, partly from existing members and partly from new, of 29 per cent expressed in sterling terms, or perhaps 15 per cent when account is taken of the strengthening of the dollar against the pound. The membership figures I have referred to show that a further substantial increase in our capacity will take place in 1986. On the sparse figures available in relation to world non-life insurance premiums, it seems that Lloyd's is increasing its overall market share and at the right time. Again, I am certain that the Council was right when, in the early months of the year, it decided not to interfere in some artificial way in an effort immediately to develop more capacity. The market in this, as so many things, should be left to deal with the matter itself and it does so with remarkable efficiency.

I have been very privileged to have travelled widely on Lloyd's behalf in the last nine months. I have visited South Korea, Japan, China, including Hong Kong, Canada, the United States on two occasions, and Brussels. Nobody who has done so can possibly be pessimistic about the future for Lloyd's in the world insurance market. As an insurance institution, Lloyd's continues to command respect and admiration and to be a place where the potential clients of Lloyd's are happy to place their business. This is because three things are, I believe, perceived. Firstly, Lloyd's continues to offer one of the strongest policies of insurance in the world, at a time when financial institutions in the insurance world are being shaken to the foundations by terrible losses. The maintenance of a sound policy is of fundamental importance to our continued trading success. Secondly, the concentration of underwriting talent at Lloyd's enables us to be innovative, flexible and quick in our response to the insurance needs of our clients. Thirdly, we continue, due to the size of our market and to our continuing ability to attract capital, to provide the continuity that people are looking for at a realistic price.

In each of the countries I have visited on behalf of the Society I have been made aware of the esteem in which Lloyd's is held and the fact that our customers continue to look to Lloyd's, as they have always done, to provide a lead in insurance matters. That reputation for leadership is, I believe, intact and I have every confidence that this important quality will continue to be provided by our underwriters, our brokers, our agents and by your Council. This and the great and evident successes of our Society are what must be set against the much publicised problems with which we have had to deal.

It is my firm opinion that Lloyd's has an unparalleled opportunity to prosper and I believe that it will do so.

27 Jun 85

Financial Times: John Moor reports on yesterday's meeting of underwriters - Lloyd's members find little comfort

In the Lloyd's insurance market yesterday trading was halted in the underwriting room for 70 minutes. It was no ordinary occasion. Lloyd's was holding a general meeting of members and near the top of the agenda was the controversial PCW affair, one of London's business community's worst financial scandals.

Underwriting members all listened as Mr Miller, the market's chairman, addressed them in front of the famous Lutine Bell. During the tense meeting Mr Miller outlined Lloyd's policy on the PCW case.

His message did not offer much comfort to the 1,525 underwriting members whose affairs are managed by the PCW agency, which is now known as Richard Beckett Underwriting Association.

The underwriting members are facing £130m of underwriting losses in addition to £40m of their funds which have been misappropriated by two of the agency's former managers.

"May I repeat on behalf of us all, that we share the outrage of the members upon whom a theft of £40m was perpetrated - an outrage not only of trust which so many of us placed in certain persons running those syndicates (into which the 1,525 members were grouped)." Mr Miller said.

"But it is not correct to argue from the particular to the general and to stigmatise Lloyd's as an institution that cannot be trusted. That would be totally to ignore the dedicated hard work of thousands of people who work in our Society to the great benefit of our country and the members of our Society."

But he stressed that " the hard fact remains that the incompetent or even wrong-doing agent is still the agent of the name (the underwriting member)."

Would Lloyd's mount a rescue for the stricken underwriting members? That was the question uppermost in the minds of those present. Already in the rule-making council chamber of Lloyd's the question of a rescue is causing anxiety.

In Lloyd's recent history there are several instances of underwriting members being helped by the market after the discovery of irregularities in their affairs.

No rescue deal was forthcoming. "The one thing the council cannot do is to provide some sort of so-called financial life-boat and depart from the principle that we each individually have to respond for our share of losses if, unhappily, they occur," Mr Miller said.

He sought to support the principle of unlimited liability in the market, in which underwriting members were responsible to the full extent of their wealth for any losses.

He mapped out Lloyd's further course of action over the PCW affair. A fact-finding inquiry team would be appointed to examine how the members' affairs have been looked after by the Richard Beckett agency since the scandal broke in 1982. The affairs of the members are to be looked after by an independent underwriting agency headed by Sir Ian Morrow. Other directors of the new agency, Additional Underwriting Agencies (Number 3), are Mr Jeremy Hardie of the discount house Alexanders, and four other working members of the Lloyd's market.

Announcing the inquiry into the affairs of Richard Beckett Mr Miller said that there was "no evidence of malfeasance on the part of the directors." The inquiry was designed to establish facts and would report within six months.

Lloyd's is also softening its line on the solvency test for the underwriting members. Each year they have to show that they have enough personal wealth to meet their insurance liabilities. The deadline for the solvency test requirements is July 31. Mr Miller said that unless the underwriting members met its requirements Lloyd's would have no option but to suspend them from underwriting. Funds would be earmarked from the central fund, designed to protect policyholders in the event of defaults by underwriting members. But Lloyd's would not "drive any person finally into bankruptcy," if they made a genuine attempt to meet their obligations. Lloyd's may give the members time to protect their interests and take further action before they are finally asked to pay up.

"Any person who wishes to continue to trade as an underwriter must arrange their affairs so as to pass the Lloyd's solvency test," Mr Miller said.

Underwriting members leaving the meeting were puzzled about its significance. The Department of Trade and Industry has been investigating the PCW affair for nearly three years. The City of London Police Fraud Squad has also been investigating it, Lloyd's has held two inquiries, the Inland Revenue was looking at the matter, there has been at least five firms of leading accountants which had examined the issue. "Will this new inquiry do any good?" one member wondered.

27 Jun 85

Times: Underwriting losses will cut 1982 Lloyd's profit to £50m

Lloyd's insurance market will make a sharply-reduced overall profit of at least £50 million for the 1982 year of underwriting, Mr. Peter Miller, chairman of Lloyd's, announced at yesterday's annual meeting of members.

The figure compares with a profit of £154 million for 1981 and record profits of £263.8 million in 1980.

Although no breakdown was given, the overall profit will contain a large underwriting loss, which will be more than covered by investment income. Last year an underwriting loss of £43.5 million was announced for 1981, the first such loss for 14 years.

Mr. Miller said that the anticipated result indicated that Lloyd's would escape the worst results of its competitors.

Speaking on the losses at the Richard Beckett Underwriting Agencies, Mr. Miller reiterated Lloyd's ruling council's position that there would be no financial lifeboat for names, who face losses of £130 million.

He did not regard the Sasse case, in which there was a market rescue for stricken names in the late 1970s as a precedent.

Mr. Miller defended the record of Lloyd's ruling body, saying that before the autumn of 1982 the authorities had no information which would have led them to suspect anything was amiss at the PCW syndicates, since renamed Richard Beckett.

Mr. Miller made public for the first time, the findings of an inquiry into PCW carried out by Mr. Simon Tuckey QC, which cleared Sir Peter Green, former chairman of Lloyd's of a cover-up in his personal investigation into PCW.

"Sir Peter asked the right questions and concluded, rightly in my view, that there had been no dishonesty," Mr. Tuckey wrote. It was later discovered that former managers of the agency had misappropriated £40 million.

Mr. Miller also announced the appointment of a committee of inquiry into the handling of the troubled syndicates by RBUA since new management was put in at the end of 1982.

The steering committee of names representing 350 of the worst hit names on RBUA syndicates was not impressed with Mr. Miller's statement.

It said the measures announced were unsatisfactory and provided no solution to the affair. The evidence showed a history of misconduct and mismanagement at the agency between 1968 and 1982 and an inquiry into events from 1982 would not satisfy those names who are not prepared to pay their losses until they see that the money is properly due.

Mr. Miller said yesterday he saw very little substance and a great deal of confusion in some of the things the steering committee was saying.

The names are claiming on the basis of a report by Price Waterhouse, the accountants, commissioned by them that not only was there misappropriation, but serious overwriting of business and manipulation of accounts in the mid 1970s.

Mr. Miller yesterday denied there was evidence of overwriting on the basis of Lloyd's rules at the time. (Paragraph 4 a whopper. At any point of time Lloyd's published global figures are three years in arrears.)

27 Jun 85

Times: Hogg rise

Hogg Robinson, the insurance broking and transport group, reported pre-tax profits for the year to March 31 of £14.2 million, up from £11.0 million.

27 Jun 85

Financial Times: Lloyd's rules out help with losses

A SERIOUS row is developing between the authorities of the Lloyd's insurance market and 1,525 underwriting members faced with up to £130m of losses.

Relations have deteriorated between a steering committee representing 360 of the underwriting members and Lloyd's after Mr. Peter Miller, chairman of Lloyd's told a meeting yesterday that no "so-called financial lifeboat" could be provided to help the underwriting members meet their losses.

Mr. Miller, at a morning meeting of underwriting members, revealed that Lloyd's is to launch a new inquiry into how the underwriting members' affairs have been managed since 1982.

The inquiry is to be led by Mr. John Davis, president of the Institute of Bankers. He will be assisted by Mr. Henry Chester, a leading Lloyd's underwriter, and Mr. Alan Brookland, an accountant who has specialised in Lloyd's affairs.

The steering committee of underwriting members said last night that Lloyd's moves were unsatisfactory and provides no prospect of a solution to the affair.

The committee led by Lord Goodman, said all the available evidence pointed to misconduct and mismanagement of the underwriting members affairs during the period 1968 to 1982 and particularly in the mid-1970s. "The proposed inquiry into events since 1982, when new management took over, will not satisfy those members who intend not to pay money without first being satisfied that the deficits are properly due and are not related to fraud and malpractice of earlier years."

Underwriting members are angry that they are faced with up to £130m of losses after £40m of their funds was misappropriated by two former managers of the agency now living abroad. Mr. Miller said yesterday: "We share the outrage of the members upon whom a theft of £40m was perpetrated."

The underwriting members had been looking to Lloyd's to mount a rescue operation but Mr. Miller ruled that out yesterday. The one thing the ruling council could not do, he said, was to provide some sort of "so-called financial lifeboat" and thus depart from the principle for his share of the losses if, unhappily, they occur.

During the course of the meeting Mr. Miller revealed that Lloyd's investigators had confirmed the decision by Sir Peter Green, former chairman of Lloyd's, to close his personal inquiry into the PCW underwriting agency just six months before the scandal erupted in 1982.

Investigators said there was no attempt by the chairman of Lloyd's to cover up anything either before or during the course of his informal inquiry. "During the inquiry he asked all the right questions."

Mr. Simon Tuckey, QC, heading the investigation into the affair said Sir Peter concluded, rightly in his view, that there had been no dishonesty. Sir Peter had been studying the way in which an insurance contract had been arranged with Unimar Company in Monte Carlo.

Mr. Miller indicated yesterday that profits at Lloyd's for the last completed underwriting account will be "in the region of £50m," a sharp fall on the previous underwriting profits of £153m.

29 Jun 85

The Economist: Lloyd's, Sedgwick and the Chiltern millions

The role of two companies at the centre of the infamous PCW affair warrants fuller investigation by Lloyd's of London. One is Chiltern Reinsurance, a Bermudan-registered company which was used as a conduit for cash allegedly misappropriated from Lloyd's syndicates run by the PCW managing agency. The other company is Sedgwick, Chiltern's owner between 1975 and 1981. Sedgwick is the biggest Lloyd's broker. Transamerica Corporation, an American conglomerate, now has 39% of Sedgwick's equity and a 29% share of its votes.

Over a 10-year period, roughly £40m was allegedly plundered from the 1,500 or so names on the PCW syndicates by their two underwriters, Mr Peter Cameron-Webb, Mr Peter Dixon and a handful of co-conspirators. Last year. the Lloyd's broker Minet, which owned the PCW managing agency, repaid £40m to the names: £26m of it came from various bolt-holes found in Gibraltar.

The money was returned to the names provided they gave up their rights to sue anybody involved in the fraud. They complain they were also led to believe that future losses for their syndicates would be small. Earlier this year. they were told that another £60m of losses had been clocked up on various claims in America. The bulk of the losses fell on non-marine syndicates 918 and 940. In theory, these syndicates should have had reinsurance cover through Chiltern. In fact they had virtually none at all.

Chiltern was incorporated in Bermuda in December, 1975. Under Bermudan law, locals must outnumber foreign directors. Between 1975 and 1981, there were eight nominal local directors, including representatives of Conyers, Dill and Pearman, a law firm. Six Sedgwick men served on Chiltern's board between 1976 and 1981, including Mr Brian John Brennan, now a non-executive director of Sedgwick. Between 1981 and 1983, Mr Brennan was a deputy chairman of Lloyd's .

Sedgwick says that Chiltern only became "active" in 1978. From that moment, Chiltern was run as a giant rollover ("roller") fund for syndicates managed by PCW and its 40% affiliate, the WMD agency. Rollover funds. which are common in the Lloyd's market, work like this: in a good year, when syndicates are minting money, cash is moved to an offshore reinsurer via a reinsurance contract. When the lean years come, the cash is then repatriated to the syndicates. In the case of PCW, Chiltern was one of many such offshore companies. Between 1978 and 1981, Sedgwick was the sole broker for the two-way flow to Chiltern of premiums and claims. During that period, Chiltern's gross premium income was over $80m. ‘The PCW syndicates, however, could never take out more money than they had put in. Chiltern, like many other rollover funds, did not have the resources to meet any catastrophe presented to it.

Dealings between PCW and Chiltern had the appearance of arm's-length transactions, but that was a sham. Chiltern had no clients other than PCW and its affiliate WMD. While it was owned by Sedgwick, Chiltern's day-to-day management (accepting premiums and paying claims) was conducted by Sedgwick, while the cash in Chiltern was managed by an investment company owned by PCW. Chiltern's sole source of premium income was money from the PCW syndicates. Although legally owned by Sedgwick, Chiltern had the appearance of a PCW animal.

How did Sedgwick see its role in the rollover? According to the report commissioned from Price Waterhouse, an accountancy firm, by 300 or so disaffected names, Sedgwick said "the main duty of the broker is considered to be to see that the claims and premiums appear to be in accordance with the terms of the policy". Price Waterhouse "wonders whether such a view is valid".

But Chiltern was something more than a straightforward rollover fund. It was used to siphon £6.7m into the Gibraltar piggy banks of Mr Cameron-Webb and Mr Dixon. This was achieved through a retrocession (i.e., Chiltern reinsured some of its reinsurance) with Marine Excess of Gibraltar and Marine Guernsey, both set up in 1980. The retrocession covered the years 1977 to 1982 and the original broker to the retrocession was Sedgwick.

Sedgwick says that it had no idea of these financial doings of Mr Cameron-Webb and Mr Dixon. Sedgwick had been instructed by Mr Dixon to arrange the retrocession with Marine Excess and Marine Guernsey, and was assured by him that the companies were owned by a trust whose beneficial owners were the PCW names. Sedgwick says that "the arrangement was unusual but the substance of the transaction was not". However unusual, Sedgwick took the word of Mr Dixon and went ahead with the retrocession.

Chiltern was finally sold in l981, says Sedgwick, on the instruction of its client (PCW) to the Hong Kong-registered Citadel Insurance for $350,000. Citadel, a reinsurance company which is 49'% owned by Hongkong & Shanghai Banking Corporation, was also used by Mr Cameron-Webb and Mr Dixon as a conduit for money flowing into Gibraltar.

The Chiltern affair raises two issues which Lloyd's should address. First, it should be illegal for any Lloyd's management agency to place its outward reinsurance with any company in which it has a beneficial interest. In this case PCW managed Chiltern's investments. Second, Lloyd's should ban the operation of such captive rollovers as Chiltern, where the legal owners appear to be owners in name only. It was only because Chiltern was the creature of PCW that the two underwriters were able to siphon cash from syndicates through the company to Gibraltar. The affair should also he a salutary lesson to brokers who operate captive insurance companies on behalf of syndicates and simply see their role as broadly complying with the instructions of their clients and, apparently, accepting them without question.

29 Jun 85

Daily Telegraph: Call to probe Sedgwick group

SEDGWICK GROUP, Britain's largest insurance broker, closed 17p down yesterday at 353p following a call that it too should be investigated for its connection with the PCW syndicates, at Lloyd's from which some £40 million is alleged to have been stolen by former directors of the syndicate management.

Sedgwick had operated the Bermuda-based c o m p a n y through which the money was channelled into companies and private directors' accounts. But as Frank Hitchman, Sedgwick secretary explained, it had been told the companies into which the money went were owned by the whole of the syndicate, and since PCW manager at the time were thought reputable there was no reason to question that.

29 Jun 85

The Economist: More suits than Liberance

Accountants are feeling persecuted. The Bank of England's decision to sue Arthur Young, auditor to Johnson Matthey Bankers (JMB), is the latest in a long string of suits against accountancy firms (see table). The suits are already hurting. Indemnity insurance premiums for accounting firms have increased by two to three times in the past year, and many firms are finding it impossible to get full cover.

In America, suits against accountants are running at around one a day. Arthur Andersen, the biggest accounting firm, made 16 payouts worth $137m between September 1980, and February, 1985. Litigious America's lead is being followed elsewhere in the English-speaking world. In Australia, A $145m ($97m) -way above the firm's insurance cover - was awarded earlier this year for negligent auditing against Fell and Starkey, a firm with 29 partners. Suits against British accountants have tripled in the past 10 years, but no case has gone to court in recent times. Accountants are half hoping for a big landmark case (as long as it does not involve their firm) that would set down clear rules.

Many of the suits involve the auditors of financial service companies that have got into trouble (e.g. Continental Illinois, ESM, and Drysdale as well as JMB). Not only are more financial firms going bust than for half a century, but auditors seem uncertain how to judge the risks and the speed of change in new-fangled financial businesses.

The crux of most of the cases lies in defining the accountant's responsibility. Accountants claim that there is a big gap between what is expected of them and how comprehensive their audits can be. Critics say that firms are now too interested in diversifying into management consultancy and other activities. Basic auditing has become a second-class business. In America, Mr John Dingell, chairman of the house of representatives' energy and commerce committee, is holding hearings on regulating auditors. Britain's Institute of Chartered Accountants has undertaken its own study.

Accountants want to find a way to limit the unlimited liability of partners in firms. One suggestion is for legislation to set a multiple of the fees paid as a limit for claims. Several American states have passed laws based on this principle to protect doctors. However, most accountants say it is "moonbeam" thinking - it would give them protection that far exceeds that granted to other businesses. A more realistic lobby wants accountancy firms (most of them partnerships) to be allowed to become limited companies. This would not make the auditors' responsibilities any clearer, but it would protect the partners from personal bankruptcy.

Big suits pending



Country of suit


Alexander Howden

Arthur Young



Baldwin United

Peat Marwick



Continental Illinois

Ernst & Whinney


At least $220m

De Lorean

Arthur Andersen

USA and UK

$260m and £100m


Arthur Andersen



ESM Govt Securities

Alexander Grant


$1 billion

Finance Corp. of America

Arthur Andersen



Home State S&L

Arthur Andersen



Insurance Corp. of Ireland

Ernst & Whinney


I. £90m

Johnson Matthey Bankers

Arthur Young



Media General

Touche Ross



Penn Square

Peat Marwick



Republic Finance Corp.

Peat Marwick



Saxon Industries

Fox & Co.




Coopers & Lybrand

New Zealand

NZ $6m

Winnipeg Mortgage

Deloitte Haskins & Sells


C $5.8m

29 Jun 85

The Economist: No stop to losses

At this week's annual gathering of Lloyd's names - wealthy folk who back this insurance market with their fortunes - Lloyd's chairman, Mr Peter Miller, told members that it is the fundamental duty of Lloyd's to see that "a competent agent should he in charge of the names' affairs". And an honest one? That question was uppermost in the minds of the 1,500 or so names on the PCW syndicates (now called the RBUA syndicates) who had £40m allegedly stolen from them by their underwriters, and who now stand to suffer losses of £130m from bad underwriting and worse. Many have refused to pay and are contemplating legal action against Minet, the broker which owns PCW/RBUA, as well as Lloyd's (possibly) and others.

Mr Miller has offered a couple of sops to the 350 PCW names on whom most of the losses will fall. Lloyd's has plumped for the classic delaying tactic: it has appointed a committee of inquiry to look into the running of RBUA since 1982. By the time it reports, many PCW names could be in Carey Street. A few might be lucky. The stop-loss policies purchased by 30 of them through the PCW agency, which turned out to be duff, might now (it seems) be honoured.

But these. at most, will cover a meagre £2m. Mr Miller is adamant that there will be no ‘‘financial lifeboat" for PCW names.

How those names must wish they were in the same boat as the members of the Sasse syndicate, which almost went bankrupt in 1979 when an American crook, Mr Jack Goepfert, skimmed money rightfully belonging to names. The names threatened to sue Lloyd's, which promptly bailed them out. So what s different now? In 1979, Lloyd's did not have legal immunity from damages for breach of trust or negligence. That vas conferred on it by the 1982 Lloyd's Act.

30 Jun 85

Sunday Telegraph: Lloyd's names go to court

AS a new Lloyd's row threatens to erupt over losses at syndicates run by the Oakeley Vaughan group (see page 28), hard-pressed members of the former PCW syndicates are this weekend planning to extend their legal action far beyond the Corporation of Lloyd's itself. They face total losses of £130 million.

At a meeting on Friday night members of syndicates. 918, 940 and 157 unanimously resolved to start proceedings both in Britain and America to "reclaim losses caused by fraud and mismanagement."

The PCW members are considering legal action against the Richard Beckett Underwriting Agencies (which took over from the PCW Agencies), Minet (parent company of PCW and Richard Beckett), other members' agents, the Corporation of Lloyd's and the dynamic duo of Peter Cameron-Webb and Peter Dixon, who originally managed the syndicates.

The m e m b e r s ‘ solicitor Ashurst, Morris, Crisp, hopes to co-ordinate action in Britain with legal moves in America, where many of the names have social security numbers and so believe they are entitled to sue from there. With its contingency fees and mega - settlements, America is attractive suing territory (as Lloyd's underwriters already know to their costs).

0 Jul 85

Best's Review: Back to Saner Paths. (The remarks below are excerpted from an address by Sir Peter Miller, chairman of Lloyd's of London, to the summer meeting of the National Association of Insurance Commissioners in Kansas City)

There is a crisis in the world insurance industry, and the dimensions of the problem in monetary terms are well known. The area of concern is pre-eminently the casualty market in the United States. In 1984, U.S. property/casualty companies had a loss overall of $4 billion. The top 10 UK composites lost money overall for the first time in many years. In Germany, the Munich Re had a loss on its U.S. reinsurance portfolio of DM 431 million. The Swiss Re is said to have withdrawn from the casualty market until there is a revision of policy form. At Lloyd's some syndicates particularly engaged in that market also have had heavy losses, although only about 1% of our Names have been seriously affected.

The effect on the world insurance industry of these continuing losses is very severe indeed and is leading to a lack of capacity which should cause great concern to all legislators, state and federal, as well as to regulators, because consumers will shortly be deprived of insurance coverage which they need.

There are, in fact, three components to the crisis of capacity, none of which can be taken alone if w e are to find a solution. First, the crisis is one of inadequate rating. The long honeymoon of the soft market has enabled policyholders to enjoy, and led them to expect, a rating structure wholly inadequate in relation to the risks the insurer is asked to bear. The losses brought about by inadequate rates have so enfeebled the underwriting industry that they cannot absorb the risks at the right rate without a new influx of capital. That won't come overnight, nor will it come at all unless the providers of the capital can look for a long-term stable return.

Second, it is no longer possible for large sections of the liability book to be written on the occurrence form. The claims-made form is no panacea by itself and can easily be abused (or may even, through use of an extended discovery clause, not improve the insurers' position at all). Nevertheless, I believe that it is the only policy form upon which large parts of the casualty book can in the future be written, and then only if there is an overall limit, including legal costs.

Third, the present legal system in the United States makes it impossible for the liability or casualty insurer to operate, certainly to the extent necessary to satisfy the insuring needs of the public. The reason for this is the total uncertainty facing an insurer as to how the US courts w ill interpret various policy wordings.

We need reform in so many areas: in limiting the abuse of discovery procedures; in a reform of the contingency fee system; in a limit upon pain and suffering damages; in the elimination of punitive damages - to name but a few of the reforms which are necessary. These w ill be incredibly difficult to achieve, but the problem of capacity will not go away until they are. I believe that we can no longer live with the uncertainty engendered by the vagaries of the American legal system as it stands today.

All of this is said, not in any spirit of hostile criticism, but from and on behalf of a Society - Lloyd's - which is most deeply committed to a healthy insurance market in the United States. The members of the NAIC have a great responsibility in this matter to lead us back to saner paths where the insurance industry can give to the public the services it needs, while ourselves making a proper financial return for the risks which we run. I do not think that you will shirk that responsibility.

1 Jul 85

Letter from Outhwaite to Names. Following the publication of our accounts we have discussed with many agents the implications of the qualified audit report. We have reconsidered the matter and have decided to leave the 1982 year open.

2 Jul 85

A seminar give by Jim Ayliffe and Keith Rayment in Cologne on "asbestos related claims". [This document has a covering memo from JM Dowlen submitting it as a first draft to CJ Ayliffe and K Rayment for them to change as they wished. The first five out of sixty-seven pages have been corrected (by CJ Ayliffe)]

(Asbestos was seen as giving rise to the US's and the world's greatest occupational disease compensation problem. In July, August and October 1985 Mr. Ayliffe, the Merrett Agency claims director, said in the course of the seminars held in Europe (addressed by Mr. Ayliffe and Mr. Rayment of Sturge):-

"Exposure to asbestos and consequent litigation involve potentially enormous personal and economic stakes. Approximately 24,000 people have filed products liability law suits claiming asbestos-related injury as of March 1983. Many times that number have been exposed to asbestos. The severity of the asbestos problem is such that the Chairman of the Asbestos Working Party in London has identified it as the most serious problem ever to be encountered by the insurance industry... It did not take long for the Unions to recognise that there was now a way of getting compensation for their members which did not require them to go through the workman's compensation route and get minimum compensation even if they qualified... They started in a small way... For the past 3 or 4 years we have seen those actions running at a level of approximately 500 new law suits per month. Over the past year, that rate has increased to approximately 750 new law suits per month. We have at the present time no real feeling how long it will be before we have seen a peaking of the legal activity that has been gradually developing, but we now have had filed approximately 45,000 separate actions by individuals. The problem that asbestos produced from the injury aspect, was obviously the latency period. The time from the first exposure of the individual to an environment that has asbestos dust in the air, to the point when the individual can show a physical disability arising from the accumulation of that dust or fibre, can range between 20 and 40 years... If we therefore assume say a 30 year exposure, it is likely to be the end of the century before we see a major fall off in claims being filed in regard to asbestos exposure. Not all claims arise from individuals exposed in their work place... Family members who have been exposed... we have claims from persons who live near existing plants that use asbestos... The decisions on coverage interpretation coming from the US Courts have been, from the insurers' point of view, ever increasing and broad in their findings and in the context of the asbestos problem, I think you have to recognise that nearly every decision that has come down has, to an extent, been insured orientated. ...so the present situation is that we are now forced to accept that the Keene situation is not an aberration, it is a fact of life with which we have to live.... There are not a few insurers who have equal concerns about their ability to remain financially solvent due to problems that have been gradually developing in the asbestos matter... The Facility as it is now becoming a much stronger voice (it's one voice speaking for 55% of all defendants in the asbestos scene), can now produce much more meaningful statistics that all of us badly need, to get a handle as to where we stand in regard to our potential exposure, whether we are direct writers, reinsurers or involved on retrocessions. ... We have in formation the ability to contain the extreme wastage of money on legal costs that we had in the past... The big difficulty is none of us know how long it will be before evidence comes through that the asbestos issue appears to be fully under control..."

Mr. Rayment, the Sturge Agency claims director, who accompanied Mr. Ayliffe to the seminars referred to above, described "asbestos property damage claims . ... perhaps a greater liability, certainly more difficult to evaluate at this stage, is asbestos property damage. Reports say that it could be much larger than the bodily injury claims that we are seeing to date. We fear that ultimately there may be claims from utility companies, even house owners which have got insulation in their roofs or wherever. Certain examinations have been done just of small areas of private house owners and over 60% have got asbestos contained within their houses. The claims alone against Johns-Manville (who currently still reside in chapter 11 of the bankruptcy laws) exceed $50 billion... The unique thing about the Johns-Manville bankruptcy was that there was another creditor group, the future plaintiffs group. This body represented those out there who have a cause of action in the future but at the moment do not know this. So there is a committee set up to protect those claimants as well ..."

The state of the US authorities is set out in the many Attorneys reports and paralleled in the court judgements. Mr. Ayliffe referred in Europe to the experience of insurers before the US courts in the context of the asbestos problem. The attitude of the US courts to the proposed defences to pollution claims was at best uncertain).

Jim Ayliffe:

Keith Rayment and I have been intimately involved with the subject of our discussion this morning. ... We have been

involved in dealing with problems relating to asbestos claims since the end of the 1970's ... Keith and I have participated in the London Asbestos Working Party . . .

(171 ) Before I deal with the development of the products law in the USA, I would like to quote to you the opening paragraph in a publication which was put out in 1983, and an additional publication in 1984, by the Institute of Civil Justice in the USA. The reasons why that body, a totally independent organisation became involved in the asbestos problem was the recognition at that time that vast sums of money were being expended in paying lawyers but... The Institute did an analysis. ... I think the opening statement in that study puts the whole matter into some sort of perspective: "Exposure to asbestos and consequent litigation involve potentially enormous personal and economic stakes. Approximately 24,000 people have filed products liability law suits Painting asbestos-related injury as of March 1983 . Many times that number have been exposed to asbestos." ... The severity of the asbestos problem is such that the Chairman of the Asbestos Working Party in London has identified it as the most serious problem ever to be encountered by the insurance industry. From a financial impact point of view there is no question that that overview is perfectly correct. To address this problem we have worked diligently over the past few years to find a way of containing the problem, a way in which we can handle the tort litigation and more particularly, a way in which we can use the available funds in a manner which addresses claims and does not enrich lawyers...

(175) In the 1970's, there was a case brought by ... a man called Borel, who had suffered work place exposures from the asbestos products supplied to his firm by a number of asbestos suppliers ... Now that was really the start of our asbestos problem that we know today ... It did not take long for the Unions to recognise that there was now a way of getting compensation for their members which did not require them to go through the workman's compensation route and get minimum compensation even if they qualified.... They started in a small way ... For the past three or four years we have seen those actions running at a level of approximately 500 new law suits per month. Over the past year, that rate has increased to approximately 750 new law suits per month. We have at the present time no real feeling how long it will be before we have seen a peeking of the legal activity that has been gradually developing, but we now have had filed approximately 45,000 separate actions by individuals. The problem that asbestos produced from the injury aspects was obviously the latency period. The time from the first exposure of the individual to an environment that has asbestos dust in the air, to the point when the individual can show a physical disability arising from the accumulation of that dust or fibre, can range between 20 and 40 years.... If we therefore assume say a thirty year exposure, it is likely to be the end of the century before we see a major fall off in claims being filed in regard to asbestos exposure. Not all claims arise from individuals exposed in their work place ... Family members who have been exposed ... We have claims from persons who live near existing plants that use asbestos ...

(180) A review of the USA Court decisions on insurance policy coverage ...

(183) The decisions on coverage interpretation coming from the US Courts have been, from the insurers' point of view, ever increasing and broad in their findings and in the context of the asbestos problem, I think you have to recognise that nearly every decision that has come down has, to an extent, been insured orientated ...

( 184) What we were seeking was equity in the way of our contracts were interpreted. Unfortunately as is typical in the USA, we have not received equity. We have received punitive treatment and our contracts have been expanded far beyond anything that was ever intended when they were written so the present situation is that we are now forced to accept that the Keene situation is not an aberration, it is a fact of life with which we have to live ...

(186) The concerns facing producers, Plaintiffs, insurers and judiciary, regarding the asbestos problem ...

(187) Asbestos litigation is slowly clogging up the whole operation of justice within the USA ...

(188) From the insurers' point of view ... the coverage litigation has occupied a tremendous amount of time, effort and expense on the part of the insurance industry. Dare I say, that not only are the producers concerned about their financial ability to respond to asbestos claims. There are not a few insurers who have equal concerns about their ability to remain financially solvent due to problems that have been gradually developing in the asbestos matter.... Many insurers can address Asbestos providing it is phased out in the manner in which it has its impact on us. None of us could pay the total cost of asbestos today because we would all be bankrupt. That was the big fear that we had, that unless as an industry we could find a solution, we had be threat of a solution being imposed upon us.

(189) That is the background of the problems that all the different parties involved in asbestos claims were facing ... Let me give you some figures. These come again from the Rand study. The Rand people are an independently financed prestigious body in the USA. They operate under the name of the Institute of Civil Justice... Dealing with the total expenditure, the amount expended overall in a similar time-frame in addressing asbestos-related matters, was just in excess of $1 billion...

Keith Rayment:

(190) The formation of the Asbestos Claims Facility. I would like to take up from about half way through Jim Ayliffe's talk this morning. The Keene decision came down in about October 1981. I think from London's standpoint, we saw the writing on the wall in that the Court's main objective was to maximise insurance coverage for the insured and that whatever we did, the Judge would be looking at what was best for the asbestos producer. ... We felt that we should probably try and make contact with the American domestic insurance companies and the Asbestos producers themselves to see if there was a way we could try and resolve our differences without relying upon the American judiciary. In May 1982, there was a Defence Research Institute seminar on asbestos in Florida which a number of people from London attended including Jim Ayliffe and myself... We left that meeting in May 1982, somewhat despondent ... But in October 1982, Jim Ayliffe and myself were invited by the major direct insurers in America to join a committee of insurers at that stage, to endeavour to find alternative solutions to the asbestos problems.

(195) How the facility intends to resolve the problem issues ...

(201) Asbestos property damage claims. Unfortunately, this is only half the story. Perhaps a greater liability, certainly more difficult to evaluate at this stage, is asbestos property damage. Reports say that it could be much larger than the bodily injury claims that we are seeing to date. ... We fear that ultimately there may be claims from utility companies, even house owners which have got insulation in their roofs or wherever. Certain examinations have been done just of small areas of private house owners and over 60% have got asbestos contained within their houses. The claims alone against Johns-Manville (who currently still reside in chapter 11 of the bankruptcy laws) exceed $50 billion....

(203) The Johns-Manville bankruptcy ... The unique thing about the Johns-Manville bankruptcy was that there was another creditor group, the future Plaintiffs group. This body represented those out there who have a cause of action in the future but at the moment do not know this. So there is a committee set up to protect those claimants as well and the Court employed Leon Silvermann to act as their representative...

(208) Jim Ayliffe: Asbestos related claims: reinsurance issues.

(213) Reserving for asbestos insurance and reinsurance claims.... That was the professional reinsurers' approach so far as the USA is concerned. It has, I think, produced a degree of comfort to direct writers, it has brought out of the discussion a meaningful relationship on all the parties knowing exactly where they stand. There are a number of spin-off benefits that actually evolve out of this which, if anything, benefit the reinsurance industry more than most. One is the area of reserving. The Facility as it is now becoming a much stronger voice (it's one voice speaking for 55% of all defendants in the Asbestos scene), can now produce much more meaningful statistics that all of us badly need, to get a handle as to where we stand in regard to our potential exposures, whether we are direct writers, reinsurers or involved on retrocessions...

(220) ... All the problems are capable of discussion, but they need to be aired, to be considered, on a commercially sensible basis so that we all know exactly where we stand. We think the Facility has contributed to this because we now have developing a solution to the handling of the original problem. We have in formation the ability to contain the extreme wastage of money on legal costs that we had in the past, the money can now go towards directly settling claims, which is where it should be going. There is a clear line coming through of where the liability of original insurers will attach under their policies. We are able to give a clearer indication as reinsurers how we will respond to that liability and people can now get on with their business of dealing with the Asbestos problem and trying to chart what we do in the future as the problem develops. The big difficulty is none of us know how long it will be before evidence comes through that the asbestos issue appears to be fully under control.... The uncertainty is how long it will be with us, in the hope that many of us can continue to withstand its impact over the years to come.

[Also given at Hamburg (4/7/85), Stockholm (19/8/85) and Vienna (28/10/85)].

4 Jul 85

A seminar give by Jim Ayliffe and Keith Rayment in Hamburg on "asbestos related claims".

(Asbestos was seen as giving rise to the US's and the world's greatest occupational disease compensation problem. In July, August and October 1985 Mr. Ayliffe, the Merrett Agency claims director, said in the course of the seminars held in Europe (addressed by Mr. Ayliffe and Mr. Rayment of Sturge) [See 2 July entry] ).

5 Jul 85

Daily Telegraph: Lloyd's members sue syndicate agency

A writ was issued yesterday by 172 members of the disastrous syndicate 895 at Lloyd's against the agency running the syndicate, Spicer and White, a subsidiary of broker Willis Faber. They allege wilful breach of the premium limits, failure to keep proper books, and hence an absence of accurate reports and .

Even when it was clear the rules were being breached no action was taken to remedy the problem and this shows the management company failed "to exercise due care and skill in the conduct of the syndicate business" says the writ.

But for this, members' losses would have been substantially less than the current estimate or something more than four times their underwriting limit, the with adds. They are therefore claiming damages and interest on the money lost.

Among the members involved in the law suit are tennis players Mark Cox and Virginia Wade, two senior barristers, Julian Jeffs QC and Leonard Kitz QC, and Lords Crawshaw, Grantley, Mexborough, and Ronaldshay.

Spicer and White are arranged for a bank loan to tide members over the payments period when they had to fund claims but before income on other underwriting was to hand. But the members over-whelmingly rejected it because they disliked the repayment terms and the ban on litigation.

Willis Faber has hinted that unless some means of sorting out the syndicate can be found it might follow Minet Holdings which decided to wind up the management of the stricken PCW syndicates.

Members have said would back such a move.

Damon de Laszlo, spokesman for members, said they would like the syndicate's underwriter Peter Pepper to be up in his own company or for Lloyd's to be set up around him an independent business did for PCW.

8 Jul 85

Penalties of exclusion from membership of Lloyd's have been confirmed on Mr Kenneth Grob, Mr Ronald Comery, Mr Mario Benbassat and Mr Jack Carpenter by a special meeting of the Council of Lloyd's held on 8 July 1985. The penalty of suspension for six months imposed on Mr Ian Posgate by a Lloyd's Disciplinary Committee was also confirmed although a further penalty of exclusion was reduced, following an appeal by Mr Posgate to six months. Both terms will run concurrently. The charges brought against the defendants alleged dishonourable trading and discreditable conduct under the Misconduct, Penalties and Sanctions Byelaw.

The proceedings also originally involved Mr Allan Page FCA who was Finance Director of Alexander Howden Group at the time of the alleged offences but the case against him was severed on the submission of medical evidence. Mr Page has resigned as a member of Lloyd's and his underwriting accounts will be run off by 31 December 1986. Until Mr Allan Page joined Alexander Howden in 1973, becoming the Financial Director in 1976, he was a partner in Angus Campbell & Co responsible for the PCW audit 1968 to 1973.

12 Jul 85

Ian Hay Davison letter to the Governor of the Bank of England

Ian Hay Davison set out his concerns in a lengthy letter to the Bank of England concerning the difficulties caused by the defective constitution. This was the key issue to be tackled and he decided that he could not resolve it himself, having neither the time in office nor the necessary powers; he should use his resignation to force the issue into the open in the hope that it would thereby be resolved and concluded.

First, that the system of having unwritten terms of reference for the Chairman could only work in a climate of self-restraint which we now know cannot always be guaranteed. The experiment of yoking a full-time Chairman to a full-time Chief Executive cannot work without detailed written responsibilities for both, and this must be done for my successor.

Second, there is a profound misunderstanding between the Committee of Lloyd's and the outside world about the meaning of the phrase "Self-regulation". most informed observers, and no doubt to most Names at Lloyd's, It means that the rules are made by those to whom they are to be applied. The application of rules, on a case by case basis, would be the duty of the staff [vide Fisher]. The traditional Lloyd's man sees it differently. He has never known a written rule book, but has relied upon the precepts of the Chairs. To him self-regulation is consonant with self-government. The Chairs decide, case by case, what shall be done. This approach suffers from the lack of clear policy direction, or, at the least, from the lack of proper segregation of policy from execution. Further, those deciding are frequently parti-pris, often concerned themselves, may have a conflict of interest, and usually suffer from knowing the individuals socially. The correct answer must be to relieve the elected Chairs from any responsibility for the day to day regulation of the Market, which should be handled by the professionals, expert in the topic, dispassionate and experienced. Rule-making itself, however, should remain in the hands of the elected Council. This would produce a much more effective regime which would still be properly described as self-regulation.

Third, given the experiences of the last two and a half years. it is necessary for me to be succeeded by a forceful public figure capable of dealing with a climate of Committee opinion that is still largely unaltered despite the experiences of the last three years. He must be a Deputy Chairman because of the status that brings here, and should be appointed for a five-year term, renewable once. He must be independent and must, therefore, come from outside the Society. His appointment must be publicly endorsed by the Bank. And, if self-regulation is to work, he must be supported by a powerful staff of senior colleagues who apply the rules.

Jul 85

The remarks below are excerpted from an address entitled "Back to Saner Paths" by Sir Peter Miller, Chairman of Lloyd's, to the Summer Meeting of the National Association of Insurance Commissioners in Kansas City:-

1. There is a crisis in the world insurance industry, and the dimensions of the problem in monetary terms are well known. The area of concern is pre-eminently the casualty market in the United States. In 1984, U.S. Property/Casualty Companies had a loss overall of U.S. $4bn. The top UK Composites lost money overall for the first time in many years. In Germany, the Munich Re had a loss of DM431 million. The Swiss Re is said to have withdrawn from the casualty market until there is a revision of policy form. At Lloyd's some syndicates particularly engaged in that market also have had heavy losses. Although only about 1% of our Names have been seriously affected.

2. The effect on the world insurance industry of these continuing losses is very severe indeed and is leading to a lack of capacity which should cause great concern to all legislators, State and Federal, as well as to regulators, because consumers will be deprived of insurance coverage which they need..

3. There are, in fact, three components to the crisis of capacity, none of which can be taken alone if we are to find a solution. First, the crisis is one of inadequate rating. The long honeymoon of the soft market has enabled policyholders to enjoy, and led them to expect, a rating structure wholly inadequate in relation to the risks the insurer is asked to bear. The losses brought about by inadequate rates have so enfeebled the underwriting industry that they cannot absorb the risks at the right rate without a new influx of capital. That won't come overnight, nor will it come at all unless the providers of the capital can look for a long-term stable return.

4. Second, it is no longer possible for large sections of the liability book to be written on the occurrence form. The claims-made form is no panacea by itself and can easily be abused (or may even, through use of an extended discovery clause, not improve the insurers' position at all). Nevertheless, I believe that it is the only policy form upon which large parts of the casualty book can in the future be written, and then only if there is an overall limit, including legal costs.

5. Third, the present legal system in the United States makes it impossible for the liability or casualty insurer to operate, certainty to the extent necessary to satisfy the insuring needs of the public. The reason for this is the total uncertainty facing an insurer as to how the U.S. courts will interpret various policy wording.

6. We need reform in so many areas: in limiting the abuse of discovery procedures; in a reform of the contingency fee system; in a limit upon pain and suffering damages; in the elimination of punitive damages - to name but a few of the reforms which are necessary. These will be incredibly difficult to achieve, but the problem of capacity will not go away until they are. I believe that we can no longer live with the uncertainty engendered by the vagaries of the American legal system as it stands today.

Jul 85

A draft Code of Practice for agents and underwriters on the subject of preferred underwriting and the management of multiple syndicates has been approved by the Council of Lloyd's. The Lloyd's market, which has been issued with the document will have three months to comment on the code, prior to its final approval by the Council.

The Code, the second to be promulgated by the Council (the first being the Binding Authority Exposure Document) it is hoped, will provide a guide to the appropriate practices for managing agents to follow when faced with a possible conflict of interest.

While the Codes are not mandatory in themselves, the Council see the Code as establishing a standard of professional conduct for the Lloyd's market. As with the previous Code promulgated, on binding authorities, the Code on preferred underwriting would be supported by a number of existing Byelaws including those on disclosure of interests, underwriting agents, which requires registration, and syndicate accounting.

The draft Code is in three parts. A foreword to Lloyd's Codes of Practice outlining the status of codes of practice within the regulatory framework. An Introduction to the Codes of Practice established for underwriting agents and active underwriters setting out the general law of agency as it affects underwriting agents.

The third part of the draft is the Code itself which sets out the situations where a conflict of interest may arise and the ways in which such situations may be best avoided. To minimise the problem, the Code suggests that the managing agent should be satisfied that each managed syndicate has a valid reason for its existence. It states categorically that a syndicate could not be regarded as having a valid reason for its existence if its prime or major function was to provide incentive or remuneration to agency or box staff.

Speaking at a press conference at Lloyd's, Mr Ian Hay Davison, a Deputy Chairman and Chief Executive of Lloyd's said "The Code indicates that the most desirable way of avoiding the problem of preferred underwriting is for managing agents to manage only one syndicate in each class of business but, where that is not possible, it suggests that the managing agent must seek to modify and minimise any conflicts which may arise and gives some indication of how this can be done. In particular it say that, where a managing agent chooses to adopt the approach of minimising conflicts, he should as a preliminary step be satisfied that each managed syndicate has a valid reason for its existence."

The DTI Commissioned Neill Report, published in January 1987, highlights this problem which is summarised within Appendix 11 and 12:-

The Neill Report

Appendix 11

Summary of Underwriters and Syndicates showing those operating in parallel situations.

1978 - 1986 Years of Account






Year of


With Parallel



In Parallel


















































































Source: submitted by Lloyd's at the request of the Neill Committee of Inquiry; see paragraph 8.34 of the Neill Report.

(This indicates that certain underwriters were underwriting for more than two syndicates).

Appendix 12

Analysis of Syndicates by numbers of Members

Number of Syndicates by Year

Member Range










0 - 49










50 - 99










100 - 149










150 - 299










300 - 499










500 - 999










1,000 - 1,499










1,500 - 1,999










2,000 - 2,499










2,500 - 2,999










3,000 - 3,499










3,500 - 3,999




















The capacity of the top ten managing agents remaining constant at 41 per cent. The capacity of the top ten members' agents has shown little fluctuation increasing to 33 per cent from 32.1 per cent in 1984. This stability in the larger agencies and the disappearance of many smaller agencies is seen as an indication of a healthy growth in the middle of the market.

16 Jul 85

Lloyd's had moved vigorously and effectively to improve its procedures under the new powers made available under Lloyd's Act 1982, declared Mr Alex Fletcher, Parliamentary Under Secretary of State for Trade & Industry, replying for the Government in an adjournment debate on Lloyd's on 16 July 1985.

Replying to comments made earlier by Mr Bryan Gould MP (Lab. Dagenham), Opposition Spokesman for Trade, Mr Fletcher said that he could not agree with the suggestion that Lloyd's was burying its head in the sand.

Dealing with questions posed by Mr Gould arising from the losses sustained by members of certain syndicates managed by Richard Beckett Underwriting Agencies and previously by the PCW Agency, Mr Fletcher referred to the DTI's own inquiries and those of the police. He expected that of the DTI inquiry into alleged irregularities in the conduct of companies within the Alexander Howden Group Plc and Minet Holdings Plc would be completed earlier next year.

"I emphasise, therefore, that both Lloyd's and the Government took action when it became apparent that there were problems. Lloyd's has taken action where appropriate and has launched its own inquiry into the latest difficulties of the affected syndicates, as well as taking various other measures to help the Names involved," said Mr Alex Fletcher.

He continued: "We are keeping in close touch with Lloyd's and we promptly sent in Companies Act Inspectors to the PCW syndicates when it was clear that there might be fraud or malpractice. I repeat that we can extend the investigations should other matters come to light which make it necessary to do so."

Mr Alex Fletcher added: "While we regret the fact that some Names are facing substantial losses, there is nothing to imply that a Government inquiry into Lloyd's generally is either necessary or desirable at this stage."

Earlier, Mr Gould was critical of what he described as the "dilatoriness of the Director of Public Prosecutions" which, he said, left a real question mark over the Government's determination to deal with City fraud

He recounted the chronology of events that had followed the discovery of malpractice within PCW managed syndicates in 1982 and the disclosure earlier this year by RBUA of substantial losses affecting certain syndicates.

Mr Gould argued that these losses could not be construed as ordinary trading losses. "It is not possible to draw a line under the £40 million loss, which is attributed to fraud, and then to say that any further losses were unrelated and that the ordinary principles of unlimited liability should apply," he added.

Warning that a future Labour Government would be obliged to look again at how Lloyd's was regulated - just as it would wish to see self-regulation in the City looked at again - Mr Gould argued that the future operation and the good name of the City was at stake.

"No-one suggests that Lloyd's should take the full financial burden of what is happening. Lloyd's must at the least take the responsibility of negotiating an agreement that is seen to be fair and acceptable to all the parties," he declared.

Hours before the debate, Mr Ian Hay Davison, Deputy Chairman and Chief Executive of Lloyd's, presented a paper on self-regulation to the American Bar Association at its convention in London. He referred to the far reaching reforms which had fundamentally altered the market's regulatory framework over the last two and a half years.

Two factors have been paramount in achieving so much in a comparatively short time. Most important was the Market's recognition of the need for change and an unequivocal commitment to implement radical measures. Secondly, Parliament in passing the Lloyd's Act, recognised that commitment and the market's ability to make the desired changes itself." he said.

Lloyd's believed that the right form of regulation was self-regulation. There was no doubt, he said, that Lloyd's had done more in less time than Government regulations could have achieved. (Bullshit)

Defending the need for a balanced approach against the criticism that market regulations did not make profits for members nor pay claims to customers, Mr Davison cited the view of Sir Henry Fisher the architect of Lloyd's regulatory machinery. He had said: "The existence of a code of rules, and the enforcement of them, so far from being inconsistent with freedom and competition is the necessary condition of their continuance."

Mr Davison concluded: "Lloyd's is the most secure and most flexible insurance market. That must be safeguarded. Its rules must be equally secure and flexible: we believe that can best be achieved by effective self-regulation."

19 Jul 85

Letter from Ernst & Whinney to K E Randall, Merretts. Nigel Holland, Ernst & Whinney. Management letter for the audit of the syndicates for the year ended 31 December 1984.

3. Reinsurance to Close:

3.1. We are concerned at the lack of specific designated responsibility for the claims management for syndicate 417. Such management should include responsibility for the completeness and accuracy of outstanding claims records (both gross and net) and the establishment of adequate statistics from which IBNR loadings can be determined. We consider that the establishment of adequate management responsibility for this syndicate is now imperative given the nature of certain of the business it has written and the difficulties that have been encountered.

3.2. At the present time, certain of the outstanding claims and related reinsurance recoveries of syndicate 417 are dealt with by syndicate 799 personnel. However, we have found the quality and completeness of the data concerned for syndicate 417 to be of an inadequate standard. It has been necessary for our audit staff to allocate a considerable amount of time to establishing the outstanding claims and potential reinsurance recoveries to be reflected in determining the reinsurance to close. Our work has indicated a number of errors and inaccuracies in the records maintained and the assumptions made, and in our view this is primarily due to this lack of appropriate management responsibility. We also consider that you should review the current staffing arrangements for controlling the outstanding claims records to ensure that adequate resources at the right level of seniority are allocated.

19 Jul 85

Financial Times The quality of limited liability is strained in the Minet Holding affair

The last few days at the Lloyd's insurance market has seen intense behind-the-scenes lobbying for a rescue of the stricken underwriting members who are facing £130m of losses.

The talks have taken place as Mr Bryan Gould, Opposition spokesman for trade, has argued in Parliament that Lloyd's should negotiate a settlement which was seen to be fair to all parties.

Lawyers acting for about 360 of the 1,525 underwriting members have been in discussions with Mr Peter Miller, Lloyd's chairman, in an effort to find a solution for the problems of the underwriting members.

The discussions are taking place against a deadline. By July 31, the stricken underwriting members will have to demonstrate that they have enough assets to meet their liabilities. If they cannot, they will be suspended from underwriting.

So far Lloyd's has taken a tough line. Mr Miller has argued that there can be no financial assistance for the members, but if they could not meet the solvency requirements on July 31, they would not be driven into bankruptcy.

Lawyers for the underwriting members are urging Lloyd's to intervene. They argue that the members worsening trading position is directly linked to the management problems in the running of their affairs which were unearthed in the last few years.

Minet Holdings, the insurance broker which owns the underwriting agency which manages the underwriting members' affairs, found that £40m of the members' funds were missing. The broker alleged that former executives of the agency, once known as PCW, had diverted the money for their personal benefit.

Lloyd's is worried that any intervention in the affair might compromise the market's underlying principle of unlimited liability. Mr Miller said: "Underwriting members of Lloyd's underwrite with unlimited liability and are responsible for all their underwriting liabilities." Lawyers for the underwriting members are arguing that there should be a contribution from all the brokers and auditors involved in the PCW affair to meet immediate funding requirements of £60m for the members' insurance business. They argue that the remaining liabilities should be met by the rest of the Lloyd's market.

The affair has caused considerable argument in Lloyd's. Those that argue against a rescue say the principle of unlimited liability, under which individual underwriters are liable to the full extent of their wealth for their losses, would be irreparable damaged. There have been several rescues in the past, the most recent involving the Sasse syndicate in 1980. Any more rescues, say the market would erode possibly forever the principle of unlimited liability.

Others are doubtful about the need to preserve unlimited liability. When Lord Cromer was asked by Lloyd's in the late 1960s to review the membership structure of Lloyd's and make recommendations about how the growth of the market could be maintained, he considered whether unlimited liability should or should not be preserved.

In an internal report, he wrote that those who favoured limited liability, had argued that unlimited liability in a commercial undertaking such as Lloyd's was out of date. They had said that "unlimited liability deterred prospective names (underwriting members) from coming forward."

Lord Cromer observed: "The insurance brokers as a whole favoured limited liability as a means of attracting fresh capital, and did not attach much importance to limited liability as a selling point for Lloyd's policies."

Those who favoured the retention of unlimited liability "considered that the esteem in which Lloyd's policy was held rested, to some extent, on the fact that names were liable to the last penny of their possessions."

In the last year, a Lloyd's working party has considered the issue again and concluded that if unlimited liability were abandoned, Lloyd's would face "enormous problems, particularly overseas, where Lloyd's has been given different treatment on the grounds of unlimited liability."

Lord Cromer, however, had recommended a possible compromise. "The right course is for members to build up substantial reserves so that unlimited liability can become again a legal obligation which was of no practical importance."

"If after substantial reserves have been created, unlimited liability is still a stumbling block, Lloyd's might be able with safety to undertake an obligation to ensure that members were not called upon for funds beyond some specific figure." Lloyd's did not act on that recommendation

Lloyd's is worried that if it requires more "up front" money from the members, it will deter new members from coming forward. The key attraction of Lloyd's is that members can join through pledging their wealth, rather than providing it for the market.

A bank guarantee secured on a would-be member's house goes a long way in securing a membership of Lloyd's, where individual wealth of £100,000 has to be shown. If unlimited liability were to be abandoned Lloyd's would have to embark on a massive cash-raising operation among the members to demonstrate to the outside world that the security of its insurance policies was being maintained.

However, the PCW affair is likely to lead to a wide-ranging reassessment of the principles of unlimited liability at Lloyd's in the next few months.

19 Jul 85

Financial Times: U.S. claims system attacked

U.S. legal procedures for dealing with compensation claims by chemical pollution victims were compared unfavourably with the English system by a speaker at the American Bar Association conference.

Mr David Higgins, a partner in Herbert Smith & Co, the City solicitor, said the English system struck a not unreasonable balance between justice for the few - in the shape of compensation - and justice for the many, in the shape of uninhibited economic activity.

Such a balance, Mr Higgins suggested, was struck in the U.S., where there seemed to be such a plethora of claims - many stupefyingly unmeritorious - that the system was unable to cope.

The problem appeared to be procedural defects. He cited the use of the contingency fee system rather than a properly constituted legal aid system, and the failure to allow attorneys' fees and disbursements to be awarded against losing sides.

Mr Michael Harvey, QC,, said UK legislation had concentrated more on the anticipation and prevention of pollution problems, than on the compensation of victims.

19 Jul 85

Financial Times: Coal board's accounts qualified by auditor

The external auditors of the National Coal Board has qualified the board's accounts for the financial year 1984-5, because of uncertainty about the board's subsidence compensation procedures.

This is the second year running that Thomson McLintock, the auditor has qualified the section of the accounts dealing with compensation for surface damage caused by mining.

As a result, the House of Commons Select Committee for Energy is to hold an inquiry into the subsidence issue in the autumn. Mr Ian McGregor, NCB chairman, is understood to have agreed to give evidence.

The qualification has been made even though the board's accounts 1984-85 are understood to show that there has been a decline in the compensation claim since it suddenly rocketed the previous year to a peak of some £230m.

The Commons committee was told about the qualification of the accounts during a two-day visit to Mansfield this week to investigate the abnormally high level of subsidence claims in the North Nottinghamshire area.

During the visit evidence was taken from property owners and from municipal and local NCB officials. The committee later decided to launch an urgent inquiry into mining compensation claims throughout the country.

This will be a prelude to a separate inquiry into the NCB as a whole, which is expected to dominate next year's activities of the committee, under its chairman., Mr Ian Lloyd, conservative MP for Havant.

Mr Lloyd said yesterday that the NCB was the only energy activity which his committee had not yet investigated in depth. It would review the aftermath of the miners' strike and examine the future supply and demand for coal and its relationship with the nuclear option.

It was also possible that the scope for privatisation of coal would be examined.

19 Jul 85

Financial Times: Subsidence claims charge

Two more men appeared yesterday in Mansfield Nottinghamshire, magistrates court on charges connected with compensation claims for subsidence due to coal mining.

Mr Dennis Rye, 51, a managing director, of Tibshelf, Derbyshire, was accused of false accounting and remanded in police custody until Monday.

Mr Alan Parker, 29, a National Coal Board Official, of Knowle, near Newark, was charged with obtaining a valuable security for £11,809 and remanded until today.

This brings to six the number of people accused of offences connected with mining subsidence compensation claims.

19 Jul 85

Financial Times: Call for tighter financial rules

The Government should introduce a statutory securities and exchange body to take over responsibility for the financial markets if its proposed system of self-regulation is abused.

This is the conclusion of a paper published today by the Conservative Bow Group.

The paper also recommends the formation of a single investment board rather than the two separate boards - covering investment markets and the marketing of life assurance - which were suggested in the recent White Paper.

It goes further in recommending that the investment industry should be subject to legal control.

The paper says the Take-over Panel should be given statutory backing and it makes a number of controversial proposals on financial conglomerates.

  • Written investment research should disclose whether the firm acts for or makes a market in the security under review, and show the approximate size of its position at the time of publication.
  • Investment managers should not be allowed to vote shares held by their nominee companies without (formal reference to the beneficial owner in cases where their firm is also acting in take-over bids or other corporate activity concerning the company.
  • Contract notes should be time-stamped.

The author of the paper is Mr Alaster Ross Goobey, joint proprietor of Geoffrey Morley and Partners, an independent fund management company, and a non-executive director of the Scottish Life Assurance Company.

He says the ideal solution would be to forbid discretionary investment managers from being associated with investment banking or market making.

"But this cannot be achieved now after the ground rules have already been established," he adds.

"The City Revolution - Gentlemen versus players." Bow Group Publications, 240 High Holborn, London WC1V 7 DT £4

23 Jul 85

Commercial Union Insurance Co. -v- Sepco, 765 F.2d 1543, 11th Circuit. Court held exposure triggers coverage (silicosis case).

31 Jul 85

Declaratory Judgment Decisions: Lac D'Amiante du Quebec Ltee -v- American Home Assurance Co

The first Declaratory Judgement decision of record involving Lac D'Amiante du Quebec Ltee -v- American Home Assurance Co decision from the District Court for the District of New Jersey, decided by Judge Barry on July 31, 1985. This case involved coverage for both asbestos bodily injury and property damage claims, with the involved insurers being, American Home Assurance Co, Midland and Highlands. The parties had stipulated that the underlying claims alleged property damage, and the Judge reached her decision in the context of summary judgement motions.

Judge Barry decided that the ‘triple trigger' would apply to bodily injury claims, and, as she considered it would be inconsistent to have a different trigger apply to property damage, she applied the ‘triple trigger rule' to the property damage claims as well. Judge Barry found that the asbestos in the buildings deteriorated over the passage of time, resulting in continuous and progressive damage. Judge Barry also decided that the assured was entitled to select the policy which was obligated to make payment, in that liability on the part of the insurers was joint and several.

The case is currently on appeal to the U.S. Court of Appeals for the Third Circuit. However, it is not known whether the appellate court will reach all coverage issues in its decision. American Home and Highlands have settled with the assured and Midland, which is in liquidation, has based its appeal primarily on jurisdictional grounds. (presumably, coverage was under a CGL policy).

Asbestos-related Property Damage Claims was the Lac D'Amiante du Quebec Ltee -v- American Home Assurance Co., 613 F. Supp. 1549, United States District Court of New Jersey., 31 July 1985. Vacated on other grounds, 864 F.2d 1033, 3rd Circuit, 28 December 1988. Judge Barry pointed out that "[i]ndeed, the ["[t]housands upon thousands" of] claims currently pending represent only a small percentage of the total number of potential claimants." Court predicted that New Jersey Courts would construe these ambiguous policies in favour of the insured and, following Keene, adopt the triple trigger theory. Once coverage is triggered, the insurer is jointly and severally liable for the total amount without pro-ration of losses, the possible effect of "other insurance" clauses..

The Court of Appeals for the Third Circuit reversed District Court with instructions to dismiss this action, and ruled that the District Court should have abstained from exercising jurisdiction. The lower court decision was questioned in the Third Circuit Court of Appeals' decision, but no conclusion was reached.

31 July 85

Mr Philip Brown, Head of Regulatory Services, left the Corporation of Lloyd's staff on 31 July 1985.

He was one of three advisers, appointed in April 1983 for a three year term on a half-time basis. Mr Brown will continue to advise the Chief Executive over the coming months. He was replaced by Mr David McWilliam who will resume responsibility for the Regulatory Services Group with the exception of Publicity and Information, which will report in future to the Chief Executive.

0 Aug 85

Preferred underwriting code

5 Aug 85

The Binding Authorities Byelaw (No. 4 of 1985, 5 August 1985).

This byelaw and its accompanying Code of Practice has been designed to reflect recommended practice for the operation of binding authorities which should, ideally, be incorporated in all binding authority agreements.

5 Aug 85

The Appeal Tribunal (Amendment) Byelaw (No. 5 of 1985, 5 August 1985).

5 Aug 85

The Council of Lloyd s appointed Additional Underwriting Agencies (No. 3) Ltd (AUA (3)), established previously by Lloyd s, to act as the managing agent of the PCW syndicates in place of Richard Beckett Underwriting Agencies Ltd (previously PCW (Underwriting Agencies) Ltd. On transfer to AUA (3) , the agency assumed the role of servicing the run-off of these syndicates.

7 Aug 85

Financial Times: Record failures in Lloyd's test

A RECORD 517 members of the Lloyd's insurance market have failed to pass the latest annual test of their solvency. The total shortfall in their wealth came to about £65.5m.

The main factor an failures was the problems of certain syndicates managed by Richard Beckett Underwriting Agencies.

Each year Lloyd's members have to show they have sufficient wealth to cover the insurance liabilities of the syndicates to which they have given their names in order to continue as underwriting members

Mr Ian Hay Davison, Lloyd's chief executive said yesterday that 517 members had failed to submit properly audited solvency certificates.

The deadline for compliance with the solvency test is May 31. However, because of the problems with RBUA, the Council of Lloyd's extended the deadline for members involved to July 31.

A total of 325 members with RBUA failed to meet the requirements, showing an overall shortfall of £58.6m.

Lloyd's will write today to the 517 members giving them 28 days' notice to provide reasons why they should depot be suspended from underwriting.

Mr Davison said that on past experience a large proportion of members failing the initial solvency test subsequently provided the necessary resources. Last year 120 members contacted after failing to provide the certificate, but subsequently only 39 were suspended.

However, given that a number of RBUA members face insurance losses of £130m, conditions this year appear different from normal.

Failure to produce a certificate, does not mean a member cannot meet the necessary requirements - some may be withheld for protest or other reasons. Many members connected with RBUA have been vocal in demanding full disclosure of the affairs of the agency and the likely losses.

Management of the affairs of the syndicates which have stopped trading has passed to an independent agency - Additional Underwriting Agencies No. 3 - financed by Lloyd's and headed by Sir Ian Morrow. He has said he intends to operate a conservative accounting policy in calculating losses.

The PCW 1985 Committee which looks after the RBUA members' interests, has therefore advised its supporters to consider carefully before meeting the requirements of the solvency test. Names who decide to comply this year may be faced next year with having to show twice the value of assets if they are to comply with Sir Ian's new policy.

The Lloyd's authorities have to satisfy the requirements of the Department of Trade and Industry annually that all underwriting debts are covered - which gives rise to the need for an annual solvency test. Any shortfall is made up from the Lloyd's Central Fund, which was set up to protect policy holders.

The Committee of Lloyd's has so far earmarked £65.5m of this fund to cover the deficit. The ultimate call will depend on how many members finally fail to comply and their aggregate liabilities.

The central fund amounted to £167.2m as at the end of l984. It is financed by levies on names at the rate of 0.45 per cent of premium income.

Details of the number of members failing to comply with the solvency requirements and the number of suspensions is expected to he announced on September 5 by Mr Peter Miller, Lloyd's chairman, when he presents Lloyd's global figures.

9 Aug 85

Letter from Merretts (P McCann) to K P McNamara, Ernst & Whinney.

I detail below our understanding of the major areas of investigation on the run-off contracts for inclusion in your draft letter to reinsureds. ... if you have any doubts or queries could you speak to Ken (Randall) or David Hart.

Aug 85

Lloyd's Newsletter to Names - Council and Committee Update:

Wellington Agreement will cut law costs: ... according to one recent survey, an average worked liability case produced payments of $95,000 of which $60,000 were legal fees and the balance the damage award.

Lloyd's has taken the initiative in the negotiations, and has co-ordinated its own response by means of the London Asbestos Working Party. Mr. Robin Jackson of Merrett Syndicates, who signed the agreement on behalf of more than 100 Lloyd's syndicates involved in asbestosis claims, said: ‘The role played by the London representatives contributed greatly to the success that has been achieved. The Asbestos Claims Facility promises to bring order to an otherwise chaotic legal situation while controlling distribution of losses to reinsurers and ensuring efficient use of the insurance dollars available, not as legal costs, but in proper and timely compensation for the claimants. ...

19 Aug 85

Telex from Karen Ruby of Merretts to Mendes & Mount. Re. Year-end reserve report.

Jim [Ayliffe ?] has reviewed draft report and has made the following amendments which he would like incorporated in a second draft report to be in London in time for Asbestos working Party Meeting on 22 August....

Page 4 para 2 amended to read as follows:

However we must point out that there has been a noticeable increase in the rate at which new suits are being filed which raises the annual rate to 8,500 new cases per year. It is therefore inevitable that an increase in reserves will result but we are hopeful that the facility concept will enable our recommended reserve to be contained at lower level than would otherwise been required for the reasons already stated. For the reasons already stated there are likely to be noticeable variations between different producer insureds. Finally we wish to again emphasise that our recommendations do not make any allowance for IBNR and the market should not lose sight of the fact that new filings are being reported at a rate of 700 cases per month.

19 Aug 85

A seminar give by Jim Ayliffe and Keith Rayment in Stockholm on "asbestos related claims".

(Asbestos was seen as giving rise to the US's and the world's greatest occupational disease compensation problem. In July, August and October 1985 Mr. Ayliffe, the Merrett Agency claims director, said in the course of the seminars held in Europe (addressed by Mr. Ayliffe and Mr. Rayment of Sturge) [See 2 July entry] ).

Aug 85

Letter from Attorneys to Underwriters at interest. Re year-end reserves various asbestos accounts. [This report was drafted by Mr Ayliffe.]

(The draft AWP report stated the following. An attorney's report stated the following. Many factors complicate the setting of year end reserves at this time. In addition to the imponderables which have arisen, it has yet to be demonstrated that the necessary co-operation will be afforded by the plaintiff Bar to enable the ACF to achieve its objective of providing a viable cost-effective alternative to the tort system. Due to these uncertainties it is your counsel's recommendation that the market maintains a conservative approach in establishing reserves for the coming closing. There has been a noticeable increase in the rate at which new suits are being filed which raises the annual rate to 8,500 new cases per year. ... There are likely to be noticeable variations between different producer insureds.... Our recommendations do not make any allowance for IBNR. New filings are being reported at a rate of 700 cases per month... The market is aware that the ACF does not address property damage. The property damage issue of loss attachment date continues to be difficult because there are no appellate court coverage decisions which can be looked to for guidance).

On June 19 1985, RAG Jackson executed on behalf of the Market the historic "Agreement Concerning Asbestos-related Claims", which inter alia established the asbestos claims facility....

In early 1982 the Claims Committee and Counsel considered that in order to control the ever increasing number of case which were being filed at an alarming rate it would be essential that a data bank be established before the asbestos problem became unmanageable. As a result of a concentrated effort the databank was in operation in sufficient time to address the Market's reserve needs for year end 1982... The above points are outlined to demonstrate the many factors which complicate the setting of year end reserves at this time. In addition to the imponderables which have arisen, it has yet to be demonstrated that the necessary co-operation will be afforded by the Plaintiffs' bar to enable the Facility to achieve its objective of providing a viable cost effective alternative to the tort system. Due to these uncertainties it is your counsels recommendation that the Market maintain a conservative approach in establishing reserves for the coming closing, and to achieve this we have decided, with the agreement of the Asbestos Working Party, to adopt an average per claim base of $85,000 for our calculation.... However we must point out that there has been a noticeable increase in the rate at which new suits are being filed which raises the annual rate to 8,500 new cases per year......... our recommendations do not make any allowance for IBNR....... new filings are being reported at a rate of 700 cases per month.......... The market is aware that the Facility does not address property damage. The property damage issue of loss attachment date continues to be difficult because there are no appellate court coverage decisions which can be looked to for guidance.... The only case thus far involving coverage issues for property damage was decided July 31, 1985 by the United States District Court, District of New Jersey. The trial Judge adopted a Keene type coverage trigger observing that nowhere in the policies at issue could be found language which limited coverage only for the damage which may have occurred during the policy period.

27 Aug 85

Letter from K P McNamara Ernst & Whinney, to K E Randall, Merretts enclosing a revised draft letter to be sent to each of the insureds for whom Merretts have written the run-off contracts, together with the supporting schedules. The draft letter is attached and there is an appendix stating the standing data required from all reinsureds. Appendix B shows regular information regarding development of the account which is required to be provided on a 6 monthly basis.

0 Sep 85

In September, Mr Miller spoke at the Thirteenth Annual Marine Insurance Seminar in Houston.

Sep 85

letter to Mr. Jackson from Attorneys enclosed an updated booklet (165 pages) containing a list of companies that had been identified by the EPA as being potentially responsible parties at hazardous waste disposal sites in the US. An earlier booklet had been sent to Mr. Jackson the previous year. The letter stated:- "OVERVIEW OF EPA PROGRAM"

The booklet contains an introductory overview of the EPA clean-up program. The overview sets forth in summarised form the year-end statistical information provided by the EPA. This information underscores the broad scope and the magnitude of the EPA hazardous waste disposal site clean-up program...

"As of late 1984, the EPA had identified 18,884 potential hazardous waste disposal sites. Of these sites, EPA personnel completed preliminary assessments of 10,767 sites and 8,117 sites were awaiting preliminary assessments. Of the 10,767 sites for which preliminary assessments had been completed, 7,016 required site inspections and 3,751 required no site inspections. Of the 7,016 sites that required inspections, 3,601 were actually inspected by the end of September, 1984 and 3,415 were awaiting inspection at that time. Of the 3,601 sites that were actually inspected, 1,732 had been assigned a hazardous rank score and 1,869 were awaiting assignment of a hazardous rank score. Of the 1,732 inspected sites assigned a hazardous rank score, some 815 sites were included or were proposed for inclusion on the National Priority List. All of these latter sites are contained in the booklet.

Obviously, the mills of the EPA grind slowly but exceedingly fine, and I note that our sources at the EPA believe that the total number of identified sites will eventually increase to 22,000 under the EPA's present identification program. Furthermore, as if the EPA did not have enough on its plate, we have confirmed that it is seeking to expand its jurisdiction to other types of sites, such as leaking underground storage tanks, mine tailings, and sites located on federal lands. This latter area of potential interest would eventually include Department of Defence sites such as the Rocky Mountain Arsenal.

If the efforts of the EPA continue at their current pace, with or without expanded jurisdiction, it is clear that the number of EPA claims that will be pursued against companies in the United States will increase markedly during the foreseeable future. Thus far, the EPA's efforts have been hindered somewhat by political and budgetary considerations, and most of the claims that are being processed through the EPA system have not yet reached the enforcement or cost recovery stage in substantial numbers. Accordingly, we anticipate that an increasing number of new claim notices are likely to be received by Underwriters as the governmental process inexorably moves toward the enforcement phase of its program."

5 Sep 85

Letter from N F Holland to D Evers of David Evers Limited.

Thank you for your letter of 16th August regarding the audit Opinion issued in respect of syndicate 317... My firm has received a number of enquiries from various agents regarding the issues raised by the audit opinion given in respect of syndicate 317 and although we have heard of several agents wondering why there is a discrepancy in opinion between 317 and syndicate 418/417, your letter is the first occasion in which we have actually been asked to give a formal explanation. As you can imagine, at the time of the audits, this was a matter which concerned us considerably and, indeed, it was a matter that was considered by a group of partners within this firm on account of the significance of the issue for the syndicates themselves and also for Ernst & Whinney. I believe the best explanation can be given by drawing your attention to note 2 to the accounts of syndicate 317 which sets out the 3 key points to which the reinsurance to close is sensitive... As between syndicate 418/417 and syndicate 317, there is no difference in the question of the problems surrounding the ultimate amount of claims except for one major factor. Syndicate 317 has, in total, almost 60 run-off reinsurance policies whereas syndicate 418/417 is involved in only 12. Inevitably, therefore, the impact of the run-off policies is substantially less as a proportion of the total reinsurance to close in respect of 418/417 than in the case of syndicate 317. You must remember that 1982 was the first account on which we were expressing an opinion as to the truth and fairness of its result. Both underwriters wished to close the account and therefore all the relevant factors that could affect that result needed to be considered and depending on the materiality of the variations to the result so would depend whether or not we could conclude that the result was true and fair. As well as the matters described in note 2, there are uncertainties that attach to the run-off of a long-tail account. In the one extreme are the many lines that will increase for all sorts of reasons over time; in the other extreme are the recoveries, savings or withdrawals of claims. As a consequence the result and the potential extremes of the variations to that result needed to be carefully weighed up and a decision reached as to whether or not those variations were within an acceptable range in relation to the result. In summary, we consider that because of these highly subjective and potentially material variations that it was right to issue a different opinion in respect of 317 compared to syndicate 418/417. You may also care to consider the further position in respect of syndicate 421 where we also did not give an unqualified opinion. The circumstances there, albeit on a smaller scale were between the position of syndicate 317 and syndicate 418/417.... Could I suggest you join me for lunch one day? ....

9 Sep 85

Council of Lloyd's meeting

At the end of the Council meeting, Sir Kenneth Berrill intervened with criticisms about the administration of the Society's affairs. The meeting had started with a discussion of the reason for an error in the global accounts which had emerged at the last moment. Mr Peter Miller seized eagerly upon Sir Kenneth's intervention to propose a committee of inquiry into the administration. Mr Ian Hay Davison took it as a reflection upon his position that such an inquiry should have been launched without any advance notice.

9 Sep 85

Minutes of Merrett's Marine Box Management Meeting.

(27) Seepage, pollution. The overall picture looks a little healthier. Reserves in Shell may be over-pessimistic.

11 Sep 85

R Hazell, Chairman of Lloyd's Underwriters' Non-Marine Association, states, inter alia, in relation to the 1982 year of account:-

The figures produced for the close of the 1982 Account do not make happy reading from the non-marine market's point of view, producing an overall loss of £219m after taking into account substantial investment earnings. It must be remembered when reviewing these figures that they relate to the experience of the insurance market of three years ago when the insurance industry generally was at its lowest ebb for very many years, if not in its entire history. Undoubtedly, much of the blame for these poor results can be attributed to the need for underwriters' to increase reserves for outstanding losses in the light of the more liberal attitudes adopted by American courts, very often in pursuit of the deep pocket theory. This is particularly apparent, but is not unique, in relation to those claims affecting asbestosis and pharmaceutical products. New laws regarding liability following pollution and other forms of environmental impairment could also produce problems for underwriters as these new laws appear to apply retroactively, thus making it very difficult to underwrite against such circumstances. It is to be hoped that the newly formed asbestosis facility, which after many years of being discussed has now been established, will enable settlement of claims to be made at a faster rate with a consequent saving of legal expenses.

Following these results, much of the capacity in the market which was previously available for this type of coverage no longer exists, generating the position where some insureds are finding extreme difficulty in obtaining renewal of the cover they previously have had and, in some extreme circumstances, ant cover at all. This is true not only of relative American business but also of our non-dollar writings and it applies particularly in this area at the moment to certain policies of errors and omissions coverage for some of the more exposed professional classes.

I now believe that London underwriters are being presented with opportunities to write business at higher rates of premium. Additionally, a reduction in the scope of cover provided is also occurring, which I believe is of at least equal importance".

11 Sep 85

Letter from Merretts to all cedants as per draft letter suggested by McNamara. Dear , As you will be aware, the above Syndicates 417/421 (the Merrett syndicates) have entered into the above-mentioned contract, providing in effect whole account stop loss protection for this Syndicate.

11 Sep 85

Lloyd's Global Accounts 1984: 1982 Year of Account

Statement by Mr Peter Miller, Chairman of Lloyd's

This report covers Lloyd's global results for 1982, the last closed year, together with the figures for the two open years 1983 and 1984, as at 31st December 1984. The report is in a format which will be familiar to you and includes the relevant figures from our statutory returns, statements from the chairmen of the market associations, a five year business summary, and an analysis of the security behind a Lloyd's policy.


That there is a profit at all in the 1982 account, given the general state of the world insurance market, in that year, must be cause for some satisfaction, even if muted and restrained. Indeed, the results are somewhat like the curate's egg - parts of which you will recall were excellent. Of the seven major classes of business, three show a substantial improvement as compared with last year, three show a substantial deterioration and one a modest deterioration. While the marine account is the best for some years and four of the other six major accounts show reasonable profits, the general (non-marine) liability account shows an enormous loss. One wonders what Mr Micawber, with his nose for which side of the financial line happiness lay, would have made of that particular result. Certainly his recipe for putting things to rights by waiting "in case anything turned up" cannot commend itself to the underwriters whose duty it is to correct this disastrous state of affairs. Figures such as these make it obvious that underwriters must take stringent remedial action as indeed they are. It is worth repeating that a combination of three things is needed, particularly in the all important American casualty business; first, a realistic rating level; second. a reformed policy wording embracing, where needed, a claims made basis for claims and an overall limit, including legal costs; and third, a measure of tort law reform. Without real progress in all three areas, it is hardly to be wondered at if underwriters increasingly withdraw from this class of business, with the result that certain industries will be left without the insurance coverage which they need to continue in business, to the detriment of society in general.

If we may now look at the overall results, the global profit of £57m for 1982 represents a 2. 0% profit on income (compared to 6. 7% for 1981). This profit, though in line with the troughs of the 1982 and 1983 accounts of which I spoke last year, is clearly not a satisfactory return; indeed, it masks a deterioration in overall underwriting loss from 1. 9% in 1981 to 6. 5% in 1982. At the same time our total year of account income has increased from £4. 9bn in 1981 to £6. 6bn in 1982 (premiums have increased from £2. 3bn to £2. 9bn) and the reinsurance premium paid to close the account has increased from £2. 7bn to £3. 8bn. It should be recorded with some satisfaction that the expense ratio in 1982 continued to fall as a percentage of income. from 7% in 1981 to 6.40/0 in 1982.


The level of activity during 1984, measured by calendar year premium income, increased by £1. 1bn to £4. 4bn, while the number of members increased by 11% in 1985 (compared to 8% in 1984). We expect a further substantial increase in capacity, both from the addition of new members and by way of increased participation from existing members, in 1986.

In September 1984 I expressed a cautious optimism for the future, with rate increases being obtained in all sectors. With regard to the outcome of the 1983 and 1984 years of account, I have nothing to add to the statements of the market chairmen contained in this report; but I believe that the development of market conditions in 1985 bears out the optimism which I expressed last year. I am struck by the determination of underwriters in all the major markets including Lloyd's, to put an end to the series of disastrous results which have afflicted non-life insurance business in many areas of the world and notably in the pre-eminent United States market.

I note that the strength of the Lloyd's policy continues to attract clients to the Lloyd's market. There is every indication that Lloyd's underwriters are successfully tackling the problems in the different classes of their business. I believe that we will see a continuing return to proper levels of profitability which will attract the future capital required to support their endeavours.


Statement by R Outhwaite, Chairman, Lloyd's Underwriters' Marine Association

The development of Lloyd's as a reinsurance market has been phenomenal over the last 20 years. In part this reflects the impact of understandable nationalistic tendencies throughout the world which inevitably affects or business. The difficulties of control and the slow transmission of cash balances which follow, work invariably to Lloyd's disadvantage.

The growth of excess of loss reinsurance emanating from overseas, and within the London market, is equally marked over this period and there are now few large marine syndicates that do not underwrite a substantial volume of this business. While this has produced a considerable proportion of Lloyd's marine profits in recent years, it has also resulted in a significant loss of control over the rating levels on the original business. Indeed, in certain areas such as the oil exploration business, many of Lloyd's competitors can only operate because of the reinsurance facilities granted to them by Lloyd's underwriters. In the long run this will be resolved but it adds to our short term problems.

The Notes of the Financial Facts on "Security - Financial Facts" as at 31 December 1984

1. The average deduction for brokerage and commission across all markets has been estimated at ?% per cent

The Global results as announced by Lloyd's to the General Public

Year of Account


Year of Account




£ 57,013,000

Declared post-tax profits

£ 151,880,000

The undisclosed additional expenses, being agents' profit commission

£ 61,100,000

Agents Profit Commission

£ 66,500,000

£ ( 4,087,000)

Received by Names

£ 85,380,000

£ 60,000,000

Discounting of PCW Losses



True and Fair Result


£ ?

Central Fund Earmarking

£ ?

(This excludes additional earmarkings of members unencumbered ‘Funds at Lloyd's' for Solvency Purposes.)

13 Sep 85

Letter from AWP to insurers at interest re: subscriptions for the Asbestos Claims Facility. At this stage difficult to predict impact on reserve movements. ... Too soon to measure impact of the Facility; there has been acceleration of new claims filed currently running at 8,500 per year.

17 Sep 85

Meeting of the Directors of MSL. Asbestos - related claims. ...

(New claims were arising at the rate of approximately 700 cases per month. After the exhaustion of insurance protection in any year, the tendency of the US courts to move claims to immediately preceding years where protection had not been exhausted, created potential hazards in reserving. While recent claims are of a ‘less serious' nature and the claims Facility is now available, much of these advantages could be eroded by inflation. It was extremely dangerous to make positive statements at the Names' meeting).

New claims were arising at the rate of approximately 700 cases per month.... After the exhaustion of insurance protection in any year, the tendency of the US courts to move claims to immediately preceding years where protection had not been exhausted created potential hazards in reserving.

v). While recent claims are of a ‘less serious' nature and the claims facility is now available, much of these advantages could be eroded by inflation. Concern was expressed that the full asbestos report would not be available until mid-October at the earliest since the interim review of the 1983 Underwriting Account was largely invalidated if asbestos-related claims could not be included making it extremely dangerous to make positive statements at the Names' meetings. It was agreed that the potential impact of deterioration of asbestos-related claims on syndicate results made investigation into the possibility of updating of the position twice a year, rather than once a year, very urgent.

... The pollution and seepage claims problem was potentially serious but much would depend on the attitude and interpretation of the US Courts to cases put before them.

20 Sep 85

United States Fidelity & Guaranty Co. -v- Armstrong, 479 So. 2d 1164, Alabama, 20 September 1985. Supreme Court of Alabama held the pollution exclusion did not apply when raw sewage overflowed on property owner's land during course of insureds' construction of sanitary sewage system. The event constituted an "occurrence" within the meaning of the general liability policy, since there was no evidence that insureds intended discharge of sewage onto land.

20 Sep 85

Financial Times: Agency tells Lloyd's members to raise cash

THE INDEPENDENT Lloyd's underwriting agency looking after the affairs of 1,525 members of the Lloyd's insurance market who face £130m in losses has warned them they will need to find more money next year it they are to satisfy the market that they can meet their liabilities.

A letter to this effect has been circulated by the agency, which is headed by Sir Ian Morrow and largely financed by Lloyd's.

The agency company was set up this summer when Minet Holdings, the insurance broker, announced it was to close its subsidiary company, Richard Beckett Underwriting Agencies, which was looking after the members' affairs, by the end of the year. The Richard Beckett agency, once known as PCW, and its parent company have alleged there were many irregularities in the conduct of the members' affairs by former agency executives,

A change in accounting procedure by the agency - Additional Underwriting Agencies No. 3 - has meant that future insurance losses are being calculated on a more conservative basis.

However, the individual losses of members have risen sharply. The share of losses of nearly 400 members, who are suffering the bulk of the stream of insurance claims has nearly doubled with the change in accounting procedure.

At present a group of more than 300 underwriting members affected by the troubles are making representations to Lloyd's that they should not be suspended from underwriting. Each year Lloyd's insists that all members must pass a solvency test in which individual members have to show that they can meet their insurance liabilities.

Those members resisting the solvency test procedures believe that with the troubles surrounding the conduct of their affairs Lloyd's should not take action until it discovers the full extent of the problems and the irregularities.

Lawyers Ashurst, Morris, Crisp, acting for a steering committee which represents more than 300 members, said last night there was " absolutely no reason why underwriting members should pass the solvency test in the light of the details of this letter. Even if they pass solvency this year the members are likely to be required to put up two-thirds as much money again next year."

24 Sep 85

Meeting of the Directors of Merrett Syndicates Ltd (MSL).

Present: Merrett, Jackson Hulme, Jackson and Randall and others. ...

The delay in receiving the up-dated report on asbestos claims and their potentially significant impact on syndicates 799, 418/417 and 421 now made statements very difficult. However, it was agreed that although a reasonable indication of the likely result was not possible at the meetings, it was essential to give Names confidence that a clear indication would be available reasonably early in the New Year and that there would not be "late surprises" as for the 1982 account. Mr Randall reported that all the reinsureds on the "special" run-off contracts affecting syndicates 418/417 and 421 have now been circulated with a detailed questionnaire about business written, reinsurance arrangements, required reporting procedures etc. It was envisaged that reserving strategy would be greatly assisted with a better flow of information on these contracts.

0 Oct 85

Ernst & Whinney Audit Planning memorandum for year ended 31 December 1985.

(The memorandum recorded that it is rapidly becoming apparent that the potential claims arising from asbestosis will dwarf any claim in the history of the Non-Marine market.

that new laws regarding liability following pollution and other forms of environmental impairment could also produce problems for underwriters as these new laws appear to apply retroactively. Such subjects require constant reappraisal of the reserves set up in the past to deal with future claims).

The main reason for the large loss in 1982 is the Syndicate's exposure to asbestosis in back years for which there is vastly inadequate reinsurance protection. At the same time, problems have arisen in relation to other "specials" and "run-offs" requiring the creation of additional reserves. ...

General Non-Marine Market.

However, it is rapidly becoming apparent that the potential claims arising from asbestosis will dwarf any claim in the history of the Non-Marine Market. It is a fact, however, that in the United States, to date under half of the money paid out by the industry has ended up in the hands of the injured party; the balance has ended up in the pockets of the lawyers involved. It is to be hoped that the newly formed Asbestosis Facility, which after many years of being discussed has now been established. will enable settlement of claims to be made at a faster rate with a consequent saving of legal expenses. In addition to this considerable problem, the market is also currently dealing with other products-related claims dating back to the Vietnam War and unexpected side effects of certain medicaments. New laws regarding liability following pollution and other forms of environmental impairment could also produce problems for Underwriters as these new laws appear to apply retroactively, thus making it difficult to underwrite against such circumstances. Such subjects require constant reappraisal of the reserves set up in the past to deal with future claims.

2 Oct 85

Financial Times: Government promises to curb fraud

THE GOVERNMENT last night reaffirmed its determination to deal with commercial fraud.

Mr. Michael Howard. Minister for Corporate and Consumer Affairs, told the Institute of Chartered Secretaries and Administrators that the Government realised commercial fraud could destroy confidence at home and abroad.

Mr. Howard said the Government would introduce a Financial Services Bill which would be important in dealing with fraud.

But, he said it was " only another link in the chain "

The Government had taken a number of steps to deal with fraud since it came to power in 1979.

"The Companies Act of 1980 contained important provisions designed to curb abuses by directors in their business dealings with companies.

"The Companies Act of 198I strengthened the powers of inspectors to interview witnesses and obtain disclosure of documents. The same 1981 Act enabled the higher court to disqualify directors and others from managing companies for up to 15 years."

Mr. Howard said the present Insolvency Bill contained important provisions related to the disqualification of directors and gave a statutory basis for the concept of wrongful trading.

A permanent fraud investigation group had been set up in the office of the Director of Public Prosecutions.

A report by Lord Roskill on the possibility of improving the conduct of fraud trials " which were well known for their complexity and length " was awaited. he said.

Mr. Howard said that earlier this year the Government had issued a Green Paper on extradition.

"This, of course, is wider than fraud alone, but without it other measures are likely to be much less effective

"I hope the Government's determination will be backed up by industry and commerce by insisting on sound internal controls in business organisations and common business prudence in dealing with third parties."

2 Oct 85

Financial Times: Lloyd's postpones suspension plans

LLOYD'S INSURANCE market authorities yesterday postponed plans to suspend a record number of members from underwriting. The last-minute delay came because a committee led by Sir Kenneth Berrill which considers whether members should be suspended, had no quorum.

More than 300 members of stricken syndicates once managed by the Richard Beckett Underwriting Agency company are among those hit by £130m of losses in the market. They face suspension.

Each year Lloyd's insists all members demonstrate sufficient personal wealth to meet liabilities. The 300 hit by the £130m losses, however, are resisting the Lloyd's solvency test requirement. They say their affairs were mismanaged. They are preparing legal action against several Lloyd's companies.

If the 300 hold out against Lloyd's the authorities must set aside a record sum from the central fund-of-last-resort designed to protect policyholders' interests. Up to £58m from the £167m fund may be needed.

Lloyd's, however, is trying to move so as to ease the financial burden of the stricken underwriting members. Unlike earlier suspensions, the authorities do not intend to name defaulters or take immediate legal action against the members to recover the money which has to be allocated to pay their liabilities from the central fund.

They do intend to ensure any suspension does not lead to members' forced expulsion from the market.

Lloyd's is reluctant to launch any legal action against underwriting members affected by the troubles because it could lead to one o£ the biggest court cases in modern times involving the market.

So far Lloyd's hopes members' own legal action will focus on individual companies in the market rather than on the Lloyd's community as a corporate body.

A steering committee of underwriting members whose affairs were managed by Beckett has been making representations to Sir Kenneth on why they should not be suspended.

The committee, through its lawyers, has said the figures which Sir Kenneth has been studying in considering the members' suspension are wrongly based. It said there are numerous doubts over the assets and liabilities figures and that these should make it difficult for him to decide what action should be taken.

3 Oct 85

Financial Times: Suspension dilemma at Lloyd's

OFFICIALS of the Lloyd's insurance market yesterday were attempting to deal with a serious procedural crisis within the community which could lead. to the suspension of a record number of members from underwriting.

Sir Kenneth Berrill, a member of the Lloyd's ruling council, and a five man Lloyd's internal committee which is responsible for the suspension met yesterday, but could not agree on how many members should be suspended. The six plan to meet again today.

Sir Kenneth and the committee were studying submissions from 193 underwriting members and their representatives explaining why they should not be suspended.

In all more than 300 members face possible suspension, most of whom were hit by £130m of losses in the market through their involvement with the Richard Beckett Underwriting Agency.

Each year Lloyd's insists all members demonstrate that they have sufficient personal wealth to meet their liabilities.

The 300 hit by the £130m losses have balked, saying their affairs were mismanaged, and are preparing legal action against several Lloyd's companies.

Moreover, a steering committee of the underwriting members whose affairs were managed by the Richard Beckett agency, through legal representatives, has argued that the figures stating their assets and liabilities are wrongly based.

This committee has said there are numerous doubts over the figures, and that these should make it difficult for Sir Kenneth to decide on a course of action.

The issue has posed numerous constitutional and procedural problems for Lloyd's as members who do not show that they have enough wealth to cover their liabilities are usually suspended. If the 300 or so are suspended the authorities would be forced to set aside a record sum of up to £58m from a £167m central fund to cover the members' liabilities and ensure that policyholders' insurance claims are paid.

Lloyd's has already decided that the affected members of the Beckett agency should not be hounded into bankruptcy. Officials are not planning to take legal action against the members to recover the sums at issue.

4 Oct 85

Financial Times: Lloyd's suspends 199 members

THE AUTHORITIES of Lloyd's insurance market yesterday suspended a record number of 199 underwriting members from trading and set aside £56m from internal funds to meet their potential liabilities.

The suspensions came after a six-man Lloyd's committee headed by Sir Kenneth Berrill, a member of Lloyd's ruling council, studied submissions from 179 of the members and their representatives, arguing against suspension.

All the 199 were grouped into insurance syndicates which were managed by the troubled Richard Beckett Underwriting Agency. They are among 300 or so members bearing the bulk of £130m of losses which have arisen during their trading at Lloyd's.

Each year Lloyd's insists that all members demonstrate sufficient personal wealth to meet their insurance liabilities. Those hit by the £130m losses have been resisting this solvency test requirement on the grounds that their affairs were mismanaged. and are preparing legal action against several Lloyd's companies.

Lloyd's said yesterday that six members could not meet the solvency requirements; 38 members were unwilling to submit to the test; 45 members could pass the test but were unwilling to do so because they had inadequate accounting information; and 26 members argued that there were special circumstances.

Joint representations were made through solicitors for 64 members. No representations were received from a further 57 members.

After Lloyd's considered the affairs of the total of 236 underwriting members, it decided to suspend 199. Suspensions usually amount to no more than a dozen individuals. Last year there were 18 suspensions and Lloyd's was forced to set aside £6m from its central fund to pay policy holders' claims.

Lloyd's has delayed taking action against the remaining 37 members this year for several reasons. About 27 of them had formed part of the Beckett insurance syndicates.

They discovered that insurance policies arranged for them by former members of the agency to protect them against onerous losses are virtually worthless because of the wordings. Lloyd's is insisting that the policies are honoured, which may mean that the members will not have to be suspended.

The other 10 members, believed to be unaffected by the problems surrounding the Beckett agency, intend to comply with Lloyd's solvency rules and are completing the formalities.

Because of the suspensions Lloyd's has been forced to set aside a record £56m from its £167m central fund to protect insurance policyholders. Of that, £54.6m relates to the syndicates once managed by the Beckett agency.

Sir Kenneth Berrill's committee expressed "great sympathy with all members who have sustained losses and the position in which they find themselves."

Lloyd's is understood to be hoping that a future settlement can be reached between the members of the troubled Beckett syndicates and those involved with their trading at Lloyd's so that their losses are largely met by a number of groups within the community.

In the event of a settlement the underwriting members could resume trading within the market.

4 Oct 85

Daily Telegraph: Lloyd's bars 199 members

A RECORD NUMBER of 199 people were yesterday suspended from underwriting at Lloyd's for being unwilling or unable to put up the funds needed to back the policies already written on their behalf. Most of them were members of the stricken PCW syndicates which face losses of at least £130 million.

Lloyd's was forced to earmark £56 million from its central fund to pay claims made against the suspended members' policies. The PCW members have repeatedly said their losses are uncertain. If they put up cash this year they will need to raise more next year, and they want to sue the people responsible for the syndicates.

The Administrative Suspension Committee said it had "great sympathy" with the losses and the daunting prospect of further demands. But it feels bound to uphold the rules of the society, not least out of consideration for the majority of members who complied with the solvency requirements.

At the end of July there were 517 members who failed to meet the Lloyd's audit rules but by Sept 5 the number had fallen to 403. In recent weeks more complied and the committee, which started its sitting on Wednesday, had 236 cases to examine.

Of these, 179 put forward representations arguing against suspension. Some had their. own insurance cover to limit their losses, and where these had "contentious wording" they have been given a month to resolve arguments. Another ten are in the process of finding the necessary money end have been given a fortnight to hand it over.

There were 57 members who made no submissions and 83 of those who did said they were "unwilling to meet solvency." The committee said the 27 PCW members with "stop loss policies" should consider a letter being sent out today by the new company set up by Lloyd's to run down the affairs of the syndicates.

Lloyd's yesterday said that of the money earmarked to pay suspended members' claims, £54. 6 million relates to the PCW syndicates "and covers ear-markings made in respect of all Names associated with these syndicates whether suspended this time or not." This seems to indicate Lloyd's is prepared to support the members as it has long been urged to do.

In theory the Lloyd's central fund can recover money it pays out by demanding it from the member responsible, even to the point of suing him for the debt. Lloyd's members have a theoretical unlimited liability though they have not been pursued to the point of losing their homes.

4 Oct 85

Daily Telegraph: Accountants put anti-fraud views

A FORMULA aimed at beating company fraud was yesterday handed to the Government by the Institute of Chartered Accountants.

Companies should be forced to install financial controls and keep proper accounting records like building societies, the Institute told Mr. Howard, Consumer Affairs Minister, as part of a series of measures for reducing the fast-growing menace of corporate fraud.

The Institute endorsing most of the recommendations of an internal working party, has told the Government that auditors should be obliged to report that records and controls are being properly used.

But there should be no legal obligation to report any fraud they discover.

The Institute however, is prepared to wrestle with a recommendation of the Davison working party that its internal ethical rules ought to be changed. At the moment auditors are discouraged from coming forward with their suspicions.

Even this is likely to cause conflict within the profession as traditionalists want to preserve auditors' detachment. Brian Jenkins, president of the Institute, said discussion would start to ensure that the ethical wording was at least neutral.

Forcing auditors to report suspected fraud would change "the relations between a professional man and his client."

Accountants do not want to "go striking out on a limb beyond the generality of the law" applying to other professions, Mr. Jenkins added.

In addition, "it would not he either realistic or cost-effective to expand the existing requirements for auditors to detect fraud" says the letter to Mr. Howard.

A major problem will continue to be managers colluding to defraud a company.

But making "fiduciary" companies with outside shareholders install proper checks on the lines required of building societies should drastically reduce employee fraud, the accountants believe.

Mr. Jenkins warned that all these efforts can succeed only "if the Government show determination in the investigation and prosecution of fraud."

Ian Hay Davison, who chaired the original working party, is now chief executive of Lloyd's.

4 Oct 85

Daily Telegraph: New external membership of the Exchange

THE Stock Exchange Council is to create a new class of "external membership" as part of a package of new measures designed both to open up the Exchange after the "Big Bang" changes next year and to make sure that the Council's regulatory powers can be extended to other businesses such as banks if they own member firms.

The Council said yesterday it will lift the existing 29. 9 p.c. restriction on ownership of a member firm by an outside body with effect from next March, enabling 100 p.c. ownership.

But any company holding more than 29. 9 p.c. will have to become an external member and will be subject to disclosure requirements and, if thought necessary, sanctions from the Council.

The major missing element from these changes is the entrance fee for external members and new firms.

Expectations are that the Council will agree a fee scale shortly, with a one-off initial payment followed by a phased two tier arrangement for annual payments.

New entrants are expected to pay more than existing firms towards the annual expenses of the Exchange for the first few years.

New member firms will be allowed to trade in single capacity as either jobbers or brokers, from next March and firms which intend to trade in dual capacity will be able to apply for corporate member-ship but not to trade until after the Big Bang towards the end of the year.

Where member firms have any degree of common ownership with others, they will have to give specific undertaking of total segregation of all broking and jobbing functions.

The rule requiring Council prior permission for any outside acquisition of more than 10 p.c. in a <member firm is being retained.

The concept of individual limited liability is also under-going major changes, largely due to the entrance of outside financial institutions to the market.

Directors of limited liability corporate firms will no longer be personally responsible for the debts of their firm.

Directors of failed limited corporate member firms will cease to he members upon a Council resolution and will not be able to reapply for membership for three years.

Before any such application is considered, the former member will have to undertake to pay such subs as the Council considers appropriate to the Exchange in respect of the default.

Non-member directors of a failed firm will not be able to serve in that capacity on other firms unless cleared to do so by the Council. The new rules do not affect the unlimited liability of partners in a firm which does not opt for corporate status.

The Council is to permit a defined and limited category of specialist and professional non-members who can become executive directors of firms.

8 Oct 85

Financial Times: Managers' pay rises by 8.7%, survey shows

THE basic average pay of managers below board level in industry and commerce rose by 8.7 per cent during the 12 months to August.

After adding increased bonus and other incentive payments, the total was 9.1 per cent higher than in the previous 12 months, according to a twice-yearly salary and living cost report by Reward Regional Surveys.

This average increase in managers' total income was above the 6.9 per cent rise in the cost-of-living retail price index over the same period. It compares closely with the Government's average earnings index, which rose by 9.2 per cent in the 12 months to June.

Last week Charterhouse. the banking and investment group, published a survey showing the median basic pay rise of top managers rose by 10.5 per cent over six months to August.

A survey of executive salaries published by Inbucon. the management consultant showed a rise of nearly l0 per cent in basic salaries in the 12 months to July.

The Reward survey, based on a sample of more than 600 companies, forecasts that most pay awards during the next 12 months will be between 6 per cent and 8 per cent.

The average is likely to be 6.4 per cent but may range from 3+ per cent to 20 per cent.

There are considerable differences in average pay for the same managerial job between regions.

The median basic pay in London, for example, is nearly 14 per cent higher than the UK median of £11,320 per year. At the other end of the scale the median pay' in the West Midlands is 10.4 per cent below the UK median.

The survey covers the pay spectrum in six ranks, from senior manager to supervisor level.

It shows the more senior the job the bigger the pay rise. As a result differentials between grades of staff continue to widen.

The survey indicates computer programmers are receiving smaller percentage inn eases than other Computer staff.

Reward Salary and Living Cost Report, September 1985 Reward Regional Surveys, 1 Mill St, Stone, Staffordshire, £80.

8 Oct 85

Financial Times: Why the accountants are split over small company audits. More on the debate over DTI proposals to reduce statutory burdens on business

A NOTABLE controversy has been stirred up by the consultative document on Accounting and Audit Requirements for small Firms, issued by the Department of Trade and Industry in June.

Its suggestion that the compulsory audit for small companies might be abolished formed part of the Government's proposals to reduce the burdens on small businesses imposed by a wide variety of regulations.

Many responses have been submitted to the department, and the arguments are often surprising.

Last week, for instance, the UK's biggest accountancy body, the Institute of Chartered Accountants in England and Wales said it considered that the audit should be voluntary subject to safeguards.

According to Mr Brian Jenkins, the institute's president: "The audit has never been more important as a protection to shareholders. But when all shareholders so agree, it should not be legally required for small business.

"Our members provide a range of vital services to small companies and play a key role in promoting the growth of the small business sector. They do not need to rely on the law for this work."

However, many other interested bodies disagree, including several accountancy institutes.

These all speak with individual voices, since the scrapping of the Consultative Committee of Accountancy Bodies which was designed to produce a consensus from its six member institutes.

The Chartered Association of Certified Accountants has described the proposal to abolish the statutory audit as "misguided." It argues that the cost of an audit for a small company is not a significant burden and that the value of the benefits outweighs the cost.

The Irish Institute of Chartered Accountants also wants the statutory audit to be retained.

However, the Scottish institute agrees that the audit should be voluntary, certainly for small companies which are at least 75 per cent owned by their proprietors.

The Institute of Cost and Management Accountants recommends optional audits for small and medium-sized companies unless required by at least 35 per cent of shareholders.

Touche Ross, the firm of accountants, wants the legal requirement for an audit to be scrapped subject to the right of any ordinary shareholders to require one. Some other films, like Stoy Hayward, take a similar line.

Some non-accountancy bodies have staunchly defended the statutory audit.

Investors in Industry, the Venture capital group, calls the audit a fair price to pay "in return for the limited liability conferred by incorporation."

The TUC accuses the plan for abolition as "being guided more by the Government's obsession with deregulation than by the public interest."

Credit rating organisations with a vested interest in the availability of credible financial information on small companies have been particularly vociferous. Proposals for abolishing compulsory small company audits are "unbelievable nonsense." said Mr Larry Lewis of the Glasgow-based Lewis Group.

Many responses have been submitted: the arguments are often surprising

Some organisations believe the audit could he replaced by an independent review or compliance certificate. However it is not clear whether this would regarded by the courts as imposing any less responsibility on the signer than an audit.

To clarify who would beat responsibility for unaudited accounts the ICAEW suggests that directors should be reminded of the responsibilities they already bear under company law.

If they dispense with an auditor, they should be required to sign a statement containing specific assurances about the accounts.

The emergence of a majority opinion within the English institute favouring voluntary audits, at least in certain cases, appears to reflect a more commercial attitude among members.

Some argue that a compulsory audit actually reduces the scope for selling other Services. In dealings with proprietorial companies many accountancy firms focus on an integrated approach to personal and corporate taxation, and the audit function has become secondary.

The audit itself is regarded as the basis for accounting and management services, which can be much more lucrative than a bare statutory audit.

The auditor's legal responsibility may also be a factor, at a time when the cost of professional indemnity insurance is rising. Some firms of accountants may feel the extra fee gained from the audit is insufficient to compensate for the risk.

At the same lime, however, more traditionally - minded accountants in public practise are concerned that abolishing the statutory audit would mean companies would no longer have to seek accountants, who would have to go out and sell their services.

Some accountants are apprehensive, but many more look forward to the opportunity to sell services in a less regulated climate.

Even those bodies, like the ICAEW, which favour a degree of regulation, appear to have little idea of exactly how many of Britain's million-odd private companies would be able to scrap their audits.

The ICAEW also puts considerable emphasis on the scope for reducing costs by simplifying the accounting requirements for smaller companies.

At presence shareholders' accounts have to be prepared more comprehensively than the simplified accounts filed at Companies House. It is suggested that a single modified form of the accounts, intermediate in scope between the two versions, would serve both purposes and save money.

However the ICMA will have nothing to do with any reduction in reporting requirements for small companies. "Businesses seeking less onerous responsibilities should be run as partnerships, not limited liability companies," it says.

The Chartered Association, meanwhile, floats the possibility of the reintroduction of a form of "exempt " private company, entitled to relief from some of the more onerous accounting requirements.

8 Oct 85

Financial Times: Lloyd's publishes suspended members' list

THE LLOYD'S insurance market authorities have published the names of the 199 members of the community who were last week suspended from underwriting.

Lloyd's move follows its decision to suspend a record number of underwriting members from the market. All of those suspended are members whose affairs were once managed by the troubled Richard Beckett underwriting agency company.

Together with other underwriting members they face losses amounting to £130m.

Each year Lloyd's insists that all members show they have enough wealth to meet their liabilities. If they do not Lloyd's suspends them from trading in the market.

Most of those suspended have argued that their affairs were mismanaged by former executives of the Beckett agency. Those who have been suspended can meet Lloyd's solvency requirements, but are resisting the procedures while their affairs are being untangled.

Among those suspended were: the Duchess of Marlborough, Lady Elizabeth Melville, Viscount Portman and Lord Ramsay.

Also suspended were several members of individual families of Lloyd's - investors. Three members of the Shohet family at Lloyd's have been suspended, as have three members of the Verhaeghe de Naeyer family.

According to records prepared by accountants Neville Russell for the Richard Beckett agency, members of the Shohet family are showing losses of £475,450 each, while Viscount Portman is showing losses of £471,403.

The Verhaeghe de Naeyer family are showing losses of £185,714 each. Lady Melville is showing losses of £185,714, while the Duchess of Marlborough is showing losses of nearly £140,000.

Lloyd's said those named are suspended from underwriting for six months from October 3.

Inside the market the authorities hope a settlement can be reached between the groups which looked after the members' affairs and the units with which they traded in Lloyd's .

Lloyd's hopes a wide variety of companies connected with the members trading in the market w ill meet the bulk of the members losses.

14 Oct 85

Lloyd's: Circular letter from Peter Miller to all Members of Lloyd's - Settlement with Inland Revenue -

At each of the three General Meetings held since I became Chairman, I have spoken to you of the difficulties which Lloyd's has faced in its relationship with the Inland Revenue.

In June of 1984 I indicated that we had had discussions with the Inland Revenue on certain reinsurances, known as roll-over policies. In November 1984 I had to say that matters remained unresolved on a variety of reinsurance policies, including the so-called time and distance, as well as the roll-over policies and mentioned the possible problem with the reinsurance to close. In June of this year, I told you that Lloyd's relationship with the Inland Revenue continued, on a wider range of issues, to give cause for concern and indicated that we were actively discussing these issues with the Revenue.

The speeches to which I have referred, in November last year and June this year, reflected our growing concern at the continuing effect of the Revenue's attitude in tax matters. The broadening of their enquiries from the so-called roll-over policies to time and distance policies and eventually to the reinsurance to close, has developed over the last 18 months to a point where the interests of the Society as a whole and the Membership as a whole are now seriously affected.

The Council of Lloyd's, at its meeting this morning, finally agreed to a central settlement with the Inland Revenue and I am therefore writing to you to explain why we arrived at such a settlement and to indicate its main terms. The settlement is all embracing and does not relate to particular Members within the Society, nor to particular transactions, but to the Revenue problem in its entirety.

The disadvantages to the Membership as a whole if we had not settled would have fallen into three categories:

  1. The problem of protracted litigation between Names and the Revenue which, in the absence of a settlement, would inevitably have ensued;
  2. The expense of further protective assessments, which already affect the majority of the Membership and which would shortly have affected the whole Membership;
  3. A further deterioration in the relationship between the Society and the Revenue.

Taking these three disadvantages in order, the problems of litigation would be enormous; it would be costly, lengthy and wholly disruptive of the Market and of the tax affairs of the individual Names. Likewise, further protective assessments would not only be disruptive, but extremely costly to all Members both by way of continuing restrictions on loss relief and by additional accountants' fees. It was clear to the Council in examining these adverse consequences, where a monetary quantification can be made, that to make a settlement on the terms referred to below was advantageous to the Members and completely justifiable in monetary terms alone.

However, the absence of a settlement would lead to further consequences, in my opinion as adverse as those upon which one can put a purely monetary quantification. The deterioration of relations between Lloyd's and the Revenue is causing damage to our Society. It is clear to me that, had the present dispute with the Revenue subsisted, the possibility of fruitful discussions on a number of important topics would remain limited.

Before I turn to the details of the settlement itself, I would like to deal with two points. Firstly, the Council of Lloyd's has always been satisfied that as a general rule the reinsurance policies which have been the subject of our discussions with the Revenue, were effected as valid reinsurance for proper commercial reasons in the best interests of the Members of the various Syndicates. Our belief in the commerciality of these transactions is, and always has been, founded upon very clear legal advice and the Revenue acknowledges our consistent approach in this matter. We have never sought to discuss, nor does this settlement deal with, allegations of personal self-enrichment made against a few Managing agents.

The second matter with which I wish to deal is the concept of the settlement being made on a central basis, without contributions being sought from individual sections or members of the Society. The Council of Lloyd's examined the possibility of apportioning the cost of the settlement over the constituent parts of the Society. However, we were strongly advised by Counsel that quantification of the relative merits of individual cases was impossible; that contribution from Agents would have been wrong and that quantification of differential benefit to individual Names wholly impracticable. Counsel advised and Council concluded that there was no viable alternative to a payment out of general funds of the Society (other than the Central Fund).

I now turn to the details of the settlement itself.

  1. The settlement, in monetary terms, is for the sum of £42-5m, together with interest from 1st August, 1985.
  2. This amount will be paid out of the general funds of the Society and contributions will not be sought from individual Members of the Society.
  3. The settlement covers every Member of the Society, with the exception of certain Names, approximately 25 in number, who will be notified by the Inland Revenue in the next few days that they are outside the scope of the settlement.
  4. With regard to roll-over policies, these will be terminated as quickly as contractually possible. At the same time, a satisfactory regime is being established for the accounting for time and distance policies.
  5. The settlement will resolve the tax treatment for 1982 and prior years of account regarding roll-over policies, time and distance policies and reinsurance to close.
  6. Restrictions on repayment to Names on 1980 and 1981 Lloyd's losses relating to these matters will be lifted. Likewise, transfers to and from the Special Reserve Fund in respect of 1980 and 1981 will be agreed.
  7. All related protective assessments for 1976/77 and other years will be discharged.
  8. At the same time, a joint working party with the Revenue will be established further to consider guidelines on reinsurance to close, time and distance policies and other matters.

In broad terms, this means that the tax problems for all Names in respect of the 1982 year of account and prior are settled in relation to these matters. At the same time, we have started to establish a more satisfactory regime for the future.

The implementation of this settlement will be a considerable administrative task. Appropriate procedures and a timetable are being worked out to deal with those problems, together with an extension of time limits for Special Reserve Fund transfers for the 1980, 1981 and 1982 accounts. The details will be communicated in a letter from Lloyd's within the next few days.

It was against a background of damage to the Society as a whole on the one hand and benefit to the Society as a whole on the other, that the question of concluding a central settlement was approached by the Council of Lloyd's. Having taken detailed professional advice, the Council decided that it was in the best interests of the Society as a whole that such a settlement should be concluded. I trust that the Council's reasons for arriving at this decision are clear to you. I am sure that it will be of relief to the whole Society to learn that matters have been settled in this way. We are all determined that today's settlement will be the harbinger of a better relationship between Lloyd's and the Inland Revenue, which is essential to the future health of the Society.

18 Oct 85

Memorandum from Randall to Jackson, Merrett, Robson.

Relatively few of the asbestos claims reports have been received and analysed. However, the trends indicated by the early reports (approximately 20% to date) look encouraging and it is to be hoped that the 1985 reserves will be within the IBNR provisions raised last year. However, there is potential for further deterioration on the large numbers of reports not yet seen and the impact could vary quite significantly from syndicate to syndicate.

23 Oct 85

Ashurst, Morris, Crisp & Co: Memorandum to Bill Goodier of AUA(3) re PCW (No. 886188)

"I suspect that there will be fury amongst the 400 or so Non Marine affected Names that despite the assurances in the Chairman S letter of 14th October last their tax problems are excluded from the Lloyd's settlement and that I shall be instructed to take the cudgels up with Lloyd's.

In the meantime however and as always without any admission as to AUA(3)'s role, I urge that AUA(3) do not lose their initiative with Lloyd's on this one. As I understand it the Revenue say the quota shares are different from "normal" roll overs, time and distance and R/I to close because thefts by the names agent do not constitute a tax deduction. I also believe that Lloyd's have left out PCW Syndicates because their problems are not market wide. If you put the two together it looks shabby in the extreme, i.e. we shall not help these Names because not enough agents stole enough money from innocent names through the market. If the Lloyd's rescue has any commercial or moral justification then PCW Names should be first in line for the rescue.

Could we have an urgent word to see what AUA(3) is doing vis à vis Lloyd's."


Christopher Crosthwaite, Ashurst, Morris, Crisp & Co.

24 Oct 85

Financial Times: Lloyd's members face new battle with Revenue over tax liabilities

HUNDREDS of members of the Lloyd's insurance community face a new battle with the Inland Revenue over disputed tax liabilities.

The surprise development emerged this week following a settlement last week by Lloyd's with the Revenue which appeared to, resolve the market's long-running dispute.

Last week's Lloyd's agreed to pay to the Revenue £42.5m from its general funds to cover past tax liabilities which underwriters did not disclose to the Revenue.

Lloyd's said that the settlement "covers every member of the society," with the exception of about 25 members. In all more than 26,000 Lloyd's members were affected by the settlement as the payment is to be met from funds contributed by their annual subscriptions to Lloyd s.

The tax liability had been incurred by the operation of a number of controversial insurance arrangements within the Lloyd's market called "roll-over" policies, which are to be terminated by Lloyd's.

But in the past few days it has become clear that a range of other insurance contracts, which carry huge past tax liabilities, are now outside the scope of the settlement.

These are called "quota share" insurances. They are a form of insurance in which underwriters lay off large parts of their risks with other insurers

However, the revenue is concerned that in several cases the operation of these polities may have been operated to benefit individual working underwriters in the Lloyd's market.

Underwriting members whose affairs were formerly managed by the troubled Richard Beckett Underwriting Agency, where it has been alleged that more than £40m of funds belonging to 1,525 underwriting members have been misappropriated by former agency executives, could be excluded from the latest settlement with the Inland Revenue.

The Revenue is concerned about the extent to which former managers of the Beckett agency may have diverted the funds to companies which they owned offshore in secret and which were not declared for tax purposes.

The Revenue is thought to be taking the view that if funds have been improperly diverted in the course of insurance business then those funds cannot be offset against tax.

Other members of Lloyd's whose affairs have been managed by agencies where similar allegations have been made, may also be outside the scope of the settlement with the Inland Revenue.

28 Oct 85

A seminar give by Jim Ayliffe and Keith Rayment in Vienna on "asbestos related claims".

(Asbestos was seen as giving rise to the US's and the world's greatest occupational disease compensation problem. In July, August and October 1985 Mr. Ayliffe, the Merrett Agency claims director, said in the course of the seminars held in Europe (addressed by Mr. Ayliffe and Mr. Rayment of Sturge) [See 2 July entry] ).

Oct 85

The following is an extract from the summarised notes of the meeting with Names which took place during October and November 1985, at which the principal speaker was Stephen Merrett, relating to the Run-Off Contracts:

"We had no adequate awareness of the run-off book of policies that had been written or of the way in which the accounts that those policies were protecting were rapidly deteriorating.

We admit that our controls were at fault in this case ... we have no intention of going back into the writing of Run-Off Contracts as a book of business because we believe that that was a mistake."

Oct 85

Letter from Attorneys to the Underwriters at Interest. Assured: ...

(The report stated that the property damage issues are no closer to a solution now than they were at year end 1984. Further, property damage is not yet addressed by the Facility Agreement. Producers are arguing for a Keene type of spread going from first installation through discovery, whereas insurers are maintaining that the date of occurrence should be tied into discovery. Since there is still uncertainty with respect to the property damage issues, the assessment of reserves continues to be most difficult).

With further reference to the afore-captioned account, we submit herewith for your consideration our year end reserve report.

Bodily Injury:

In our general market report of 22 August 1985 [see above] the Market was advised of the signing of the historical Wellington Agreement on 19 June 1985. In that report the Market was provided with a brief history of the past methods employed in reserving for bodily injury and how the methods would be codified under the Facility concept. Without belabouring the Market with a repetition of those comments, we at this time simply allude to the principle points on reserves. The average per claim base has been established at $85,000. Of this sum it is estimated that Facility members will be obliged for 55%. Facility members hereafter will share in all cases filed against a Facility member whether named therein or not, but only to the extent of the producers' indemnity/Expense generic shares....

Property Damage:

The property damage issues are no closer to a solution now than they were at year-end 1984. Further, property damage is not yet addressed by the Facility Agreement. As Underwriters are aware, producers are arguing for a Keene type of spread going from first installation through discovery, whereas insurers are maintaining that the date of occurrence should be tied into discovery. Keene has in fact recently filed litigation against its excess insurers in the District of Columbia seeking to have the court apply the Keene bodily injury coverage spread to property damage cases. As at this date, only one case has addressed the trigger of coverage for property damage issues. In Lac D'Amiante du Quebec -v- American Home Insurance Company, decided in the let's District Court of the District of New Jersey, the trial judge held that the "triple trigger" coverage spread applied to both personal injury and property damage claims. This case is presently on appeal , and it is therefore of no precedential value at the present time... Since there is still uncertainty with respect to the property damage issues, the assessment of reserves continues to be most difficult.

For our 1984 year-end report, we provisionally estimated that this exposure was approximately $200,000 per policy year, and we continue to view this estimate as appropriate. We hasten to add that this is not a reserve recommendation, but is precautionary only, and Underwriters thus may establish those reserves which in their considered judgement are most appropriate under the circumstances....

0 Nov 85

In November, Mr Miller addressed the Insurance Brokers' Association of Ontario in Toronto.

6 Nov 85

General Meeting of Members of Lloyd's: Statement by Mr Peter Miller, Chairman

About two weeks ago I was a guest at the Annual Bankers and Merchants Dinner at the Mansion House. Not for the first time, listening to speeches made by the Chancellor and City leaders, I was struck by the immense diversity of the City of London in practice as opposed to the almost corporatist identity often ascribed to it in theory. The Chancellor's recognition of the importance of the invisibles sector was welcome and the Government's support for a stable exchange rate was of direct relevance to Lloyd's; however, lengthy sections of an important address related to City interests quite apart from our own.

It was also quite apparent from the other speeches, both on that and indeed other occasions, that many parts of the City are approaching the problem of creating new trading structures and, to a lesser extent new regulatory structures in a different way from that we have adopted at Lloyd's. In this part of the City it is accepted that the way forward is a separation of the functions of broking and underwriting, to avoid conflicts of interest-or, more accurately, conflicts of duty. The possible solution of ‘divestment' put forward by Lloyd's in the Bill of 1980, became the mandatory solution by Parliament's command in the Act of 1982-and that was an end of the matter. Elsewhere in the City, the accepted wisdom is that functions should be unified and I have no comment to offer on this quite contrary solution, which may be correct for institutions other than Lloyd's. However, what is certain is that the rest of the City is today, as Lloyd's has been for the last five years, unusually concerned with establishing proper regulatory structures. I am sometimes asked whether Lloyd's is likely to be affected by the pending Financial Services Bill. My answer is "no", because Professor Gower's report and the Government's White Paper in response did not concern themselves with Lloyd's, its Names and assureds, but rather with investor protection. However, it is clear that heavy reliance is to be placed on the various S.R.O.'s - the self regulating organisations - to achieve the desired degree of protection. Names at Lloyd's are not investors, but rather people who individually carry on the business of insurance through an agent of their choice at Lloyd's. Nevertheless, there are parallels between the degree of protection which the Financial Services Bill will seek to give investors, largely, I suspect, through self-regulatory bodies, and the degree of protection which Sir Henry Fisher in 1980 said that Lloyd's should provide to its Names through its own system of self-regulation. I believe, therefore, that this is an appropriate moment to review our progress.

It has never been in dispute that before July 1982, successive Committees of Lloyd's had insufficient power to carry out their duty of self-regulation. The fact that power resided in the assembly of members at General Meetings meant that, with a rapidly growing membership, any attempt at self-regulation was impossibly cumbersome. The Act of 1871 was out of date; the disciplinary procedures were virtually impossible to operate and the penalties available for wrong-doers quite inflexible.

Following receipt of the Fisher Working Party report we presented a Bill to Parliament at the end of 1980. It received very careful scrutiny. It occupied twenty-one hours of debate on the floor of both Houses and was discussed for thirty-three days in front of the two Select Committees-indeed, it had more Parliamentary time spent upon it than any other Private Bill since the war. The Act, as it emerged, gave us wide powers to regulate ourselves, those powers to be exercised by a Council upon which fo>

External Members


John de Courcy Ling, MEP


Elias George ‘Eddie' Kulukundis

Sir Kenneth Berrill, KCB, one of the four nominated members of the Council who retired, by rotation, was re-appointed to serve for a further period. His appointment was confirmed by the Governor of the Bank of England.

The Council elected Mr Peter Miller as Chairman for 1986 and Mr Murray Lawrence and Mr Michael Cockell as Deputy Chairmen for the same period.

6 Nov 85

Letter to Insurers at Interest. Re Environmental Claims Group - Pollution Crisis.

Further progress report from the ECG following letter circulated in July...

There are more than 15 declaratory judgement actions involving London insurers already proceeding in various US courts..... There are a substantial number of other declaratory actions against US insurers and the 6 lawyers have been asked by the ECG to file amicus briefs in those cases where US insurers are taking positions which are incompatible with those that London insurers would wish to adopt.

Nov 85

The Government published the Financial Services Bill.

In November, the Government published the Financial Services Bill which gave effect to its proposals which were contained in the White Paper, "Financial Services in the United Kingdom: A New Framework for Investor Protection," published in January 1985.

11 Nov 85

Lloyd's: Letter from Peter Miller, the Chairman of Lloyd's, to a PCW Name in relation to the Settlement with the Inland Revenue

Thank you for your letter of 28th October.

I appreciate your difficulties but I would suggest that the settlement does represent a diminution in the forces which you see ranged against you. The settlement covers roll-overs, time and distance and reinsurance to close and applies to all syndicates and all Names, other than the 25 or so excluded. It applies to PCW syndicates and Names as it applies to other syndicates and Names and is of immediate and considerable benefit.

Insofar as there are other tax matters which have yet to be resolved the process of resolution is much simplified by the removal of all dispute on roll-overs, time and distance and reinsurance to close. Even if those matters cannot be speedily resolved the Revenue has undertaken to apply less restrictive criteria to repayment in respect of loss relief.

11 Nov 85

Council of Lloyd's meeting

The new office holders for 1986 were confirmed. The recently developing pattern of governing the society were thus set for the near term. At the end of the meeting, having told the chairman beforehand of his decision, Ian Hay Davison read out his letter of resignation, which formally took effect on 28 February 1986. The appointment was one with a term of three to five years. Two matters made him choose the Council meeting on 11 November to submit his resignation: the Berrill enquiry and the Financial Services Bill.

11 Nov 85

Lloyd's: PCW

The findings of Lloyd's Disciplinary Case No 8401/5 "PCW", in respect of Messrs Hardman, Oldworth, Davies, Hill, Sampson and Dixon, published.

12 Nov 85

Lloyd's: PCW

At a Special Meeting of the Council of Lloyd's on 11 November, the Council of Lloyd's confirmed penalties imposed by a Lloyd's Disciplinary Committee upon Messrs J A W I Hardman, A G P Oldworth, C E Davies, D B Hill, A A Sampson and P S Dixon. The Council resolved, inter alia, that the Decision of the Disciplinary Committee (together with the decision of the Appeal Tribunal relating to A A Sampson) should be published to the Members of the relevant Syndicates managed at the material times by PCW, Gardner Mountain and WMD. On 12 November, the Secretary to the Council forwards copies of the Disciplinary Proceedings Case No 8401/5 to the respective Syndicate Names.

12 Nov 85

Financial Times: Ian Hay Davison's letter of resignation

As Chief Executive of Lloyd's, I report to the Council of Lloyd's and I am, therefore, addressing this, my notice of resignation, to you.

When I came to Lloyd's in February 1983, it was with these Terms of Reference which I required as a condition of accepting the appointment and which were confirmed by the Council at the time.

As Deputy Chairman to be concerned with external relations, notably with regulatory and tax authorities and the Press.

As Chief Executive to be responsible to the Council for:

  • Overseeing the establishment of the new self-regulatory regime envisaged by the Lloyd's Act 1982.
  • Exercising general supervision over disciplinary arrangements.
  • Managing the resources of the Society.
  • Appointing and directing staff.
  • Overseeing the implementation of policy decisions.
  • Maintaining proper channels of communication and responsibility
  • Laying the foundations for the future management of the Society.

With the approval of the Chairman and the Council, I set myself three principal objectives: to bring to book those in the Lloyd's community who had misbehaved themselves; to establish a new regulatory framework for Lloyd's, based upon higher standards of disclosure, accounting and auditing; and to improve the staffing organisation and management of the Corporation. I undertook this assignment for a term of three to five years. I saw, and see, myself as an agent of change and had no intention of continuing permanently in post.

Thanks to the readiness of the Council to embrace the major changes called for and the energy of the Chairman in pressing them forward, those principal objectives are now largely achieved. We expect, today, to complete the last of the major disciplinary cases; the new rule book called for by Sir Henry Fisher is mostly in place; and the re-staffing of the Corporation is evident by the substantial influx of new people and the major reorganisation that has occurred since I joined Lloyd's.

My conclusion that now is the time to resign is prompted by the Council's recent initiation of an internal inquiry into the structure of Lloyd's, which has started discussions about changing the Terms of Reference and status of the post of Chief Executive. The preparation of the Corporation's evidence for this inquiry has revealed divergent opinions about the continuing need for the Chief Executive to be independent and responsible directly to the Council.

My own views on the paramount necessity of an independent Chief Executive, with appropriate terms of reference, responsible directly to the Council have not changed and, therefore, I would find it impossible to continue in office were those terms to be significantly altered. At the same time, the argument is a perfectly proper one for a self-regulatory body and, by resigning at this time, I remove an obstacle to the Council's freedom of discussion and to my freedom to argue for the retention of the position of the Chief Executive with independent powers without any suggestion of self-interest.

My contract requires me to give six months notice of resignation. This I now do and propose to leave the Corporation's employment on 11th May 1986. In view of the circumstances of my appointment, I am sending copies of this letter to the Secretary of State for trade and Industry and the Governor of the Bank of England. In order to obviate any speculation about the reasons for my decision, I am also sending a copy to the Press.

13 Nov 85

Financial Times: Lloyd's unravels schemes to siphon off millions - John Moore reports on disciplinary actions against six members of the insurance market -

A tangled web of irregular financial transactions involving six members of the Lloyd's insurance market has been discovered by the authorities of Lloyd's. Six members of the market have been disciplined and the largest fine ever has been imposed on a member of London's financial community.

The Lloyd's authorities have unravelled a complex series of deals within the market by six of its working members who have been involved in schemes which have siphoned off millions of pounds belonging to the underwriting members.

Mr. Peter Stephen Dixon, once the main director and later chairman of an underwriting agency called PCW, which looked after the affairs of 1,525 underwriting members of Lloyd's, has been fined £1m and expelled from the market.

A Lloyd's disciplinary committee found that Mr. Dixon, together with Mr. Peter Cameron-Webb, another underwriter who has not bee n charged with offences by the Lloyd's authorities, were the "brains" behind most, if not all of the schemes which led to the disciplinary action.

Mr. Cameron-Webb resigned his membership before the troubles emerged.

Lloyd s found that Mr. Dixon, in his capacity as a leading executive of PCW, part of the Minet Holdings insurance broking group, devised schemes which led to the diversion of underwriting members' money and to him gaining the following benefits in secret.

He received interest free loans of £1.8m; funds of £5.89m were used to purchase, renovate, decorate and maintain the Villa La Doma in the south of France; investments of £480,597 were made in Florida land development; cash withdrawals totalling £1.59m were made in Geneva and London; and an investment of £123,457 was carried out in a diamond syndicate.

Lloyd's found that Mr. Dixon had used funds of £1-69m belonging to the underwriting members to invest in films and musical productions; to pay expenses for a boat amounting to £270,387; further expenses for an aircraft amounting to £122,206; investment in a Swiss bank, the Banque du Rhone et de la Tamise of £330,287 and loans to related companies of £248,642.

Other charges were laid by Lloyd's against Mr. James Adrian William Innes Hardman, a confederate of Mr. Dixon. Mr. Hardman, a former underwriter with PCW, has been suspended for 12 months and two years from the market, both sentences to run concurrently.

Lloyd's has found that from about 1976 Mr. Hardman received from Mr. Dixon more than £70,000 in cash " in envelopes " which, said Lloyd's, "he knew was derived from the personal benefits scheme."

Lloyd's said that he received other benefits which he assumed came from the scheme, "although he did not know the route."

Mr. Hardman, according to Lloyd's, received the following benefits: about £21,000 cash in French and Swiss francs in 1979, 1980 and 1982 for skiing holidays; another £1,250 for his daughter's school fees in France; a £6,126 loan; an interest-free loan of £8,255 which was later increased to £17,827; an increased loan of £47,603, and a further increase to £47,900 from a range of offshore schemes; the discharge of a loan of £47,900 from a settlement and another loan.

A total of 46 charges were brought against the defendants covering, in general terms, allegations that funds were transferred from Lloyd's syndicates formed of underwriting members, set up or managed by Mr. Dixon or Mr. Cameron-Webb.

In its findings Lloyd's disciplinary committee observed: "We are absolutely sure that Mr. Dixon is a clever, dishonest, greedy and unscrupulous individual."

It observed that Mr. Dixon had conducted the affairs of PCW and an associate agency WMD "in a manner which represents a complete negation of those standards of professional honesty, good faith and rectitude upon which the world-wide reputation of Lloyd's, and through Lloyd's of the whole London insurance market has been founded.

"No other dealings at Lloyd's of which we are aware including those which have come to light since late 1982 - equal in magnitude the sums misappropriated by the depredations of Mr. Dixon and Mr. Cameron-Webb. Their conduct represents a disgrace to the London market.

Also caught up in the affair is Mr. Arthur Alan Sampson. Mr. Sampson has been expelled from the market, sentenced to a three month suspension and a reprimand.

Mr. Sampson was alleged to have aided and abetted Mr. Dixon and Mr. Cameron-Webb in implementing and operating the schemes and "in the dishonest misappropriation of very substantial sums."

The disciplinary committee found that he took no steps to prevent what was going on and "thereby acted in complete disregard of his duties" to members of the syndicates.

Following the various charges laid against Mr. Sampson and the findings of the disciplinary committee, Mr. Sampson appealed. The appeal was dismissed.

Charges were levelled against Mr. David Babington Hill, a former director and underwriter of PCW. Among the irregularities Lloyd's found that he received travellers cheques of $10,000 for personal expenditure on a combined business and holiday trip to the US. He was aware, said the disciplinary committee, that the money had been derived from premiums from the PCW syndicates paid out in the form of reinsurance business. He has received a reprimand and notice of censure.

Mr. Anthony Gilbert Frederick Oldworth, a former director of PCW and underwriter, received from Mr. Dixon from 1976 monthly payments totalling £50,000 to £60,000 in cash, the payments continuing until six months after he retired in July 1981. He received other benefits over the years including licence fees paid for the use of farm land next to his house. Mr. Oldworth was suspended for three months and 12 months, both sentences to run concurrently.

Lloyd's has suspended Mr. Colin Edward Davies, a former director of the WMD underwriting agency, for three and 12 months, both sentences running concurrently. He has been found guilty of dishonestly misappropriating syndicate funds through reinsurance schemes between 1976 and 1977. "Because of his unquestioning acceptance of what they (Mr. Cameron-Webb and Mr. Dixon) decided, he had little detailed information about any of the schemes or the origins of the benefits," said the disciplinary committee.

The disciplinary committee has ordered that Mr. Dixon should pay £215,430 towards costs; Mr. Hardman £56,200; Mr. Davies £40,172; Mr. Oldworth £37,466; Mr. Sampson £18,733 and Mr. Hill £9,366.

Verdicts of guilty were recorded by the disciplinary committee on six of the eight charges against Mr. Hardman, Mr. Davies, Mr. Sampson and Mr. Peter Dixon. Four of the seven charges were proved against Mr. Anthony Oldworth and five of the seven against Mr. Hill. Mr. Sampson was found not guilty of two of the eight charges levelled against him.

13 Nov 85

Financial Times: Life groups warned on commission

Life companies and Intermediaries could be forced to reveal to policyholders the commission paid on the sale of a life policy unless the life assurance industry came to an agreement on disclosure.

The warning was given by Mr Bill Proudfoot, chief executive of Scottish Amicable and a member of the Marketing of Investments Board Organising Committee (MIBOC), while speaking recently to the Hertfordshire and Middlesex Life and Pensions Society.

He pointed out that the Government had chosen self-regulation to raise the standards of financial services and protect investors. Miboc had been set up to handle the supervisory system for the marketing of investments such as life assurance contracts and unit trusts.

Miboc had asked the life assurance industry for its views on commission ahead of the publication of its proposals on the subject, which is due shortly.

Two sets of proposals had been submitted. showing the divergence of views in the industry.

Meanwhile, certain life companies continued to pay up to 50 per cent more commission than standard in order to attract business.

He warned that if the industry did not reach agreement on commission payment and disclosure, the Government would be forced to step in. This would mean disclosure of the amount of commission paid on each sale.

He said that Miboc's proposals for licensing life assurance salesmen would get rid of the "cowboys" of the profession.

18 Nov 85

Inland Revenue: HM Inspector of Taxes Leeds (Underwriters Unit - Letter to a PCW Name on Syndicate 918

You will be aware from the letter dated 14 October 1985 from the Chairman of Lloyd's that the disputes between the Revenue and Lloyd's syndicates concerning roll-over policies, time and distance policies and reinsurance to close have been settled up to 31 December 1982. You may also be aware that there are other matters still in dispute in respect of certain syndicates. I have to inform you that Syndicate 918 is one of these syndicates and it is unlikely that it will be possible in the immediate future to agree your losses for 1982 or to repay any tax that may be due to you.

The Revenue are aware of the magnitude of the losses arising on Syndicate 918 and have agreed with Lloyd's that steps can be taken to alleviate any hardship that the continued inability to settle your underwriting losses has caused. It is proposed, therefore, to make provisional repayments to all Names who were members of Syndicate 918 in Lloyd's underwriting year 1982 provided the following conditions are satisfied:-

  1. The Case I underwriting loss for 1982 (for all the syndicates in which you are involved, as advised by syndicate managers) is at least twice your income from all sources for 1982/83.
  2. Either you or your agents can provide a statement of the amounts of tax you have paid in respect of income outside Lloyd's for 1982/83.

The amount of any repayment will be the tax paid and not already repaid in respect of 1982/83 plus any repayment supplement calculated on normal lines.

If you wish to receive repayment under the terms of this letter, please arrange for details of your underwriting losses, income for 1982/83 and any receipts for tax paid, dividend vouchers etc to be forwarded to me. Further repayment on normal lines will be available when your underwriting losses are agreed for 1980/81 and 1982 if due.

Yours faithfully,

R A Rowan

HM Inspector of Taxes

BT A copy of this letter has been sent to your agent.


30 Nov 85

Financial Times: Lloyd's fines member £1m

A RECORD £1m fine was imposed yesterday by the authorities of the Lloyd's insurance market on one of its members, at the centre of a £40m scandal within the Lloyd's community.

Mr. Ian Hay Davison, Lloyd's chief executive, who announced his resignation earlier this week, disclosed that Mr. Peter Dixon, once the head of one of the largest underwriting agencies in the market, was to be fined and expelled from Lloyd's.

Mr. Davison said Lloyd's papers relating to its investigation were with the office of the Director of Public Prosecutions. Lloyd's said it was prepared to take legal action to collect the money.

Mr. Dixon has been living in Marbella, Spain, since Lloyd's began its investigations in l982 into a complex series of transactions which led to the diversion of millions of pounds of funds belonging to 1,525 underwriting members.

Another man at the centre of the affair, Mr. Peter Cameron-Webb, has avoided disciplinary action by the Lloyd's authorities as he resigned his membership of Lloyd's before the troubles emerged. Mr. Cameron-Webb works on the Insurance Exchange of the Americas, the Lloyd's-style market in Florida.

Mr. Dixon and Mr. Cameron-Webb have been described by a Lloyd's disciplinary committee as the "brains" behind a scheme to divert millions of pounds of funds belonging to the underwriting members to reinsurance companies they secretly controlled in offshore centres such as Gibraltar, the Isle of Man and Guernsey.

In the report at the disciplinary proceedings Mr. Dixon is described as "a clever, dishonest greedy and unscrupulous individual" who during a period of more than 10 years conducted his agency company at Lloyd's, PCW, "in a manner which represents a complete negation of those standards of professional honesty, good faith and rectitude" on which the reputation of Lloyd's rests

The report describes how Mr. Dixon used millions of pounds belonging to underwriting members for his personal benefit. He used the members' cash for interest-free loans, to buy a villa in the south of France; to invest in land deals in Florida; invest in a Spanish orange juice company and for films and musical productions. He made regular cash payments " in envelopes " to key members of staff.

Money was spent by his associates on skiing holidays, school fees, foreign travel and loans. In one instance Mr. Dixon, with Mr. Cameron-Webb and an associate invested in a bloodstock syndicate in the US using underwriting members' funds.


New York City enacted a law requiring asbestos certified Inspectors to approve any commercial building modification, renovation or demolition. Under the New York law only accredited and asbestos trained contractors can handle the asbestos repair or removal. Substantial fines are levied against property owners who do not comply with this law. 6 other States have similar laws; by 1988, some 39 States now certify and regulate asbestos abatement work.

0 Dec 85

Ernst & Whinney report to the assignment partner.

As at December 1985 A report to the assignment partner of Ernst & Whinney recorded the following:

(Last year saw a marked deterioration in the number of asbestos claims; the number of sufferers making claims having risen from 500 to 700 per month. This year the number of claims per month has risen to 1000 per month. It is hoped that the claims Facility will eventually result in a reduction in costs per claim, although these effects will not be seen for the first year.

Environmental protection claims are causing some concern at the present time in view of the large number and settlement amounts).


These provisions are difficult to assess. because there are known uncertainties with respect to the Fireman's Fund (manifestation or exposure), and also with regard to potential new advices for property damage claims. Last year saw a marked deterioration in the number of asbestos claims; the number of sufferers making claims having risen from 500 to 700 per month. This year the number of claims per month has risen to 1,000 per month. The claims facility which was being promoted last year has now become effective and it is hoped that it will eventually result in a reduction in costs per claim, although these effects will not be seen for the first year.

Agent Orange:

Any inadequacy of this reserve is likely to be immaterial.

DES. DDT. Environmental Protection Act:

This covers the Shell-Rocky Mountain clean-up. The 1984 Reinsurance to close included a reserve of $5 million to which a 50% loading was added. The reserve is based on lawyers' estimates and the eventual claim could be higher, so that the above reserve would be inadequate. Environmental protection claims are causing some concern at the present time in view of the large number and settlement amounts. Merretts have taken the view that their syndicate, which has written general liability risks over many years, with very little reinsurance protection in the early years, is particularly exposed in this area - particular if they are to be settled on an exposure basis. Thus Merretts have decided to provide for two further losses as IBNR, on the same basis as the Shell claim: i.e. $5 million in respect of each loss. (This spreads a claim of $250 million over all the years of Syndicate 417, up to 1975.) While some reserves may appear ultra-conservative, it must be considered against potential under-reserving in the case of asbestos losses.

Run-off contracts:

Last year, the run-off contracts written into the 1981 and 82 years of account saw marked deterioration. Additional information was sought from reinsureds, to provide the latest information, particularly in respect of various latent disease claims, including asbestos, and also in respect of Shell and the actuary then projected what he felt the IBNR factor should be, based on the factors used for 799 . The IBNR provision determined by him was 75% of the then outstanding losses. However, in view of the poor reinsurance protection enjoyed by Syndicate 417, by comparison with 799, together with the experience of 417 itself and knowledge of some of the underlying insureds, such an IBNR provision appeared inadequate. Thus the IBNR provision became 100% of the outstandings.

Syndicate 418:

.. .In respect of the run-off contracts the policy adopted has followed Syndicate 417, which is written in greater detail below. A special loading of $4 million was provided at 31 December 1984, which brought the overall loading on noted outstanding claims to £15.3 million or 90% of noted Outstanding. As with Syndicate 417, this is considered prudent in view of the possible inadequacy of the reinsurance programme of the underlying insureds. The run-off contracts, written by Syndicate 418 have proved to be particularly exposed to latent disease losses and it has been recognised that the reserves provided to date may prove to be inadequate in the long term.

3 Dec 85

Financial Times: An abiding controversy at Lloyd's - John Moore examines the Unimar underwriting affair

SINCE THE end of 1981, insurance underwriters and brokers at Lloyd's have been speculating about the events surrounding the Unimar affair.

This is the one controversy in Lloyd's which refuses to abate, near]y four years after an internal investigation. It threatens to become a political issue as Labour MPs raise the question of the effectiveness of regulation at Lloyd's.

For nearly three years, inspectors appointed by the Department of Trade and Industry have been investigating the Unimar affair as part of a much wider inquiry into the events which preceded allegations that more than £40m had been misappropriated from the Lloyd's insurance market by Mr. Peter Cameron-Webb and Mr. Peter Dixon. two former leading Lloyd's professionals.

An interim report has been passed to the office of the Director of Public Prosecution by the inspectors.

The story of the Unimar affair began in the late 1970s. Mr. Cameron-Webb then a leading Lloyd's underwriter, channelled business of about 1,000 underwriting members of Lloyd's to an insurance specialist company in Monte Carlo, called Unimar S.A.M., from 1978.

The business was channelled to Unimar by Mr. Cameron-Webb in the form of reinsurance, via a Lloyd's insurance broker called Seascope.

Reinsurance is used by insurance groups to lay off insurance risks when they feel they do not have the financial strength to carry them on their own books. So, in effect, reinsurance is an insurance policy arranged by insurance groups to protect themselves against onerous losses.

In the Unimar link, reinsurance was used with rather different aims.

Under the arrangement with Unimar, Mr. Cameron-Webb said it was planned that Unimar would receive fees and commissions from his underwriting members, in return for generating reinsurance business for his two Lloyd's syndicates - number 810 and 869. The syndicates were formed of about 2,000 members of Lloyd's.

Moreover, Unimar would also participate in reinsuring the two syndicates at Lloyd's. The money that found its way to Unimar was to be used at Mr. Cameron-Webb's instructions to make payments in the form of "commissions" to attract other business to the syndicates.

In Lloyd's, it was described as a "slush fund."

The money, however, flowed one way - from the Lloyd's syndicates to Unimar. No business flowed to syndicates from Unimar.

"Unimar were, in fact, unable to generate the business in the way that had been contemplated," Mr. Dixon, chairman of the PCW Underwriting agency which Mr. Cameron-Webb had founded, later told the underwriting members after a Lloyd's investigation.

During the commercial relationship that Mr. Cameron-Webb had with Unimar, two employers at Seascope - a broker and an executive responsible for processing the documents who was also a member of the PCW syndicates - expressed concern about the operation of the contract and the commission payments to Unimar.

The broker who left Seascope complained to Sir Peter Green, then chairman of Lloyd's, about the operation of the contract with Unimar and questioned why business was being placed with such a little-known entity as Unimar.

Sir Peter held a personal inquiry into the Unimar affair at the end of 1981. He later came under criticism from brokers and underwriters in the market for not having established a fully independent inquiry into the affair.

Mr. Cameron-Webb had been a former business associate of Sir Peter, working with the latter's Janson Green agency at Lloyd's in the 1960s.

Sir Peter concluded his inquiries when more than £400,000 of funds belonging to the underwriting members was returned to the syndicates. Mr. Cameron-Webb, by then, had retired from Lloyd's to work abroad. He later resigned his membership of the market, in 1983.

The affair was reopened subsequently, it having been discovered that more than £40m of money belonging to the underwriting members was missing. Mr. Simon Tuckey, QC, has carried out an internal investigation at Lloyd's into the relationship of Mr. Cameron-Webb with Unimar.

Mr. Peter Miller, the Lloyd's chairman, told Lloyd's members this year that Mr. Tuckey had confirmed Sir Peter's findings "that there had been no dishonesty" in the Unimar affair.

Mr. Miller stated that Mr. Tuckey had said in his report: "I do not think that there was any attempt by the chairman of Lloyd's (Sir Peter Green) to cover up anything, either before or during the course of his informal enquiry. During the enquiry, he asked all the right questions and concluded, rightly in my view, that there had been no dishonesty."

What has worried underwriters at Lloyd's is that the ultimate beneficial ownership of the Unimar company has never been disclosed, and that there has been no disclosure of the extent, if any, of any indirect shareholding links with business interests of Mr. Cameron-Webb.

So far, Lloyd's has not published an account of its findings of two inquiries into the Unimar affair. Until it does so, the controversy will continue.

3 Dec 85

Financial Times: DPP fraud section needs more resources Solicitor General says

The Fraud Investigation Group, the main agency for dealing with serious cases of theft and deception in Britain's business community, needs more resources to pursue cases of alleged fraud, the Government indicated yesterday.

Sir Patrick Mayhew, Solicitor General, yesterday defended the record of the Director of Public Prosecutions in fraud cases in response to cross party pressure for more vigorous pursuit of offenders. He conceded in the Commons that the resources of the investigation group, part of the DPP's office, "were now seriously stretched and they are now under review." But he refused to go further because of discussions that were taking place with the Treasury.

His comments were in response to calls from Mr Nick Brown one of Labour's legal affairs spokesmen, and from a number of senior Conservative MPs for an increase in the resources of fraud investigators. Sir Patrick noted that there was sufficient indication of the Director's determination to prosecute fraud wherever sufficient admissible evidence was available and that with the present resources available he had been getting on with the job.

In relation to the alleged £40m fraud of Lloyd's insurance syndicates once managed b Mr Peter Cameron-Webb, he noted the problems and delays in obtaining evidence because certain evidence was located overseas. He stressed that successful prosecution depended upon available admissible evidence from people prepared to come forward.

Sir Patrick admitted certain problems at Lloyd's. He noted that Lloyd's was governed by its own legislation and that the Director of Public Prosecutions was in renewed discussions about ways in which Lloyd's could make available transcripts of its disciplinary proceedings without infringing operations under this legislation.

Lloyd's yesterday denied suggestions made at the weekend that it had withheld evidence concerning fraud allegations. Lloyd's officials said that the Director of Public Prosecutions had been provided with numerous documents and transcripts relating to its two biggest scandals surrounding the affairs of Alexander Howden and Minet Holdings, two large insurance brokers.

Lloyd's officials said: "The Director of Public Prosecutions has been provided with the same evidence and documents on which to base any criminal proceedings as that which Lloyd's itself had in order to commence its own disciplinary proceedings against individuals involved. Lloyd's proceedings require the criminal burden of proof to be established."

Sir Patrick added that the difficulties at Lloyd's applied to making available transcripts when criminal proceedings were not afoot. "The Director may very well wish to see these transcripts as an aid to his investigation but he cannot as yet say that proceedings are afoot."

Mr Brian Sedgemore, the Labour MP for Hackney South and Shoreditch, last night renewed his pressure on Lloyd's by putting down a series of Commons motions. One called for the resignation of Mr Peter Miller, Lloyd's chairman as a

5 Dec 85

Peter Miller, Chairman of Lloyd's, forwards letter to all Names in relation to

(1) the resignation of Ian H Davison;

(2) Lloyd's Self-Regulation - the impetus for the reform of Lloyd's regulatory structure came from within Lloyd's and not from outside. Since the implementation of the Lloyd's Act 1982, the Council of Lloyd's has passed thirty-seven Byelaws with thirteen amendments, three regulations and one amendment and one Code of Practice. We are about to deal with the abuses of the past in relation to the so-called "Baby" or "preferred" syndicates;

(3) PCW Syndicates - Having cleared up the disciplinary aspects of this problem from the past, we are now actively pursuing with the parties concerned, various possibilities with a view to resolving the financial problems faced by the PCW Names as speedily and as justly as possible;

(4) I conclude that any argument for bringing Lloyd's within the scope of the new Financial Services Bill is refuted by the action we have taken under the new Lloyd's Act. The protection to be conferred upon the investor by the proposed Bill is of no relevance to the Lloyd's policy-holder who is protected by the chain of security behind the Lloyd's policy. The Member of Lloyd's is protected by the range of Byelaws passed under the new Lloyd's Act. (Miller omitted to inform the Members that Lloyd's considered that the Byelaws gave Lloyd's powers as opposed to duties and obligations. Lloyd's rarely policed the Byelaws and left it to the agents and underwriters to comply if they so chose).

5 Dec 85

Financial Times: Lloyd's reviews ex-chief's offshore ties

AN INFORMAL review of the relationship of Sir Peter Green, the former chairman of the Lloyd's insurance market, with an offshore company in the Cayman Islands is in progress at Lloyd's.

The review, which has been in progress since the beginning of last year, has been headed by a senior accountant at Arthur Andersen and has centred on deals carried out by Sir Peter on behalf of members of Lloyd's whose affairs he looks after with the Imperial Insurance Company (Grand Cayman) .

The study was started by Lloyd's after Sir Peter stepped down as chairman at the end of 1983 to concentrate on running his successful underwriting agency. He left the ruling council of Lloyd's at the same time.

Mr Ian Hay Davison, chief executive of Lloyd's, said last night: "It is not our policy to comment on matters which may or may not be the subject of investigation at Lloyd's. Only if and when disciplinary proceedings are brought are matters disclosed." Sir Peter Green was unavailable for comment.

During 1983, in accordance with new disclosure proposals introduced at Lloyd's, Sir Peter revealed that substantial sums of the funds of nearly 1,000 underwriting members, whose affairs his Janson Green underwriting agency looks after, had been passed to the Imperial in the course of business.

Sir Peter had a small interest in the Imperial of up to 10 per cent which was held by a discretionary charitable trust. Under the terms of the trust a single partnership farm company owned by Sir Peter could benefit from the shareholding interest.

Sir Peter revealed for the first time in 1983 that up to £34m of the underwriting members' money had been placed with the Imperial, which was first set up in the Bahamas in the 1960s. The money said Sir Peter had been placed with the Imperial as a "special funding" policy to provide for large insurance losses.

He explained that the funding arrangements with the Imperial were part of the underwriting members' reserves which would protect them against large insurance losses. "A large part of the investment earnings," he said on the funds with Imperial "were credited to the policy thus increasing its value further."

He told the underwriting members that "a more constructive approach" by the British Inland Revenue "would remove the necessity for these somewhat esoteric policies." He argued that underwriting agents at Lloyd's had difficulty convincing the Inland Revenue that conventional on-shore reserves of the members "are proper reserves and not tax avoidance." The money with Imperial was brought back on-shore in 1983 and used to bolster the underwriting members' reserves to offset their underwriting losses.

However, Lloyd's decided to hold an informal review of their relationship of Sir Peter with the Imperial following the disclosures. The Inland Revenue also entered into discussions with him on possible tax liabilities under the arrangement.

Peter Ridden adds: The affairs of Lloyd's will not be examined by a Commons committee. The cross-party trade and industry committee announced last night that it had no plans to look into the subject. The possibility of an inquiry, which had apparently been suggested by some MPs, has not been discussed by the committee and would involve a very large amount of work. However, the committees had a private meeting in the summer to be briefed by members of the Lloyd's Council.

5 Dec 85

City Forum Club: Trial by One's Peers - Speech by the Chairman of Lloyd's, Mr Peter Miller

Whilst I am delighted to have been afforded the opportunity of addressing you today I must at the outset, and in accordance with the principle of uberrima fidei, declare a material fact. The fact is that, whereas I understand the age limit for membership of this august body to be 45, I attained that figure some years ago. Whilst it would be presumptuous of me to relate age to wisdom, I think age can fairly be related to experience and it is my experience of, in particular, trial by one's peers in the context of self-regulation of Lloyd's that I wish to speak about today.

Discussion about self versus statutory regulation is undoubtedly a growth industry and I am afraid that my overall conclusion is that much of this discussion whether at Westminster, in the City or in the press, tends to generate more heat than light. Facts are lost in a welter of rumour, rhetoric and good old-fashioned rubbish. This creates an atmosphere fit for nothing but political opportunism. In such circumstances it is helpful in clarifying the issues to begin, as the King in Alice gravely said, at the beginning . . .

‘No free man shall be taken or imprisoned or deseised or outlawed or exiled or in any way molested nor will we set forth against him nor will we send against him except by the lawful judgment of his peers or by the law of the land'. This is what Magna Carta says and this principle is enshrined in English law. It is the basis of the recognition in English law that self-regulation is a legitimate instrument of government. Incidentally I think that the word self-regulation is a misnomer. What we are really talking about is practitioner regulation under direct authority from Parliament. There is an intrinsic appeal to persons who join together for some common lawful purpose in themselves regulating the admission to membership of that group, the conduct of that group's activities and the procedures to be followed when a member transgresses the self-imposed rules. This appeal has long been recognised by the general law of England and, indeed, by many other legal systems.

The feature common to all schemes of practitioner regulation is that the people whose conduct is to be governed themselves decide what the rules are to be and what penalties are to be imposed for breach of those rules. In many cases no-one but the members themselves will be interested in how the group or society regulates itself. The fact that pink trousers may be banned on the golf course may be of vital relevance to members of the golf club but it is hardly of cosmic significance. The public, as such, are not concerned. However, there are societies or groups whose activities impinge not only upon their members but upon society as a whole. These include most if not all the professional bodies such as doctors, accountants and solicitors. To this extent, practitioner regulation must be tempered by a recognition of and a regard for the wider interests of society. Once central government is satisfied that this public interest has been adequately safeguarded it is generally content to leave the task of regulation to the societies or groups concerned.

Whereas the advantages of practitioner regulation have gained wide acceptance and are, accordingly, well known, I think it important that they should be kept very firmly in mind. They certainly bear repetition. In brief, the advantages are that the process of making rules is quicker, more flexible and more responsive to change. Moreover, self-made rules are likely to attract greater respect from those to whom they apply because they are rules made by one's peers. The Government White Paper on Financial Services in the United Kingdom expressly outlines the objectives of its new framework for investor protection as being efficiency, competitiveness, confidence and flexibility. We would agree with these objectives and, as I hope to show later, we at Lloyd's maintain that regulation as practised by the Council of Lloyd's has realised all these objectives. Indeed, the Government recognises in the White Paper the importance of self regulation and I quote "Self-regulation has a continuing and crucial contribution to make".

Having briefly described the general features and advantages of practitioner regulation I would invite you to consider how practitioner regulation operates at Lloyd's.

The basis of regulation as practised at Lloyd's today is the Lloyd's Act of 1982. The Act created the Council of Lloyd's as the governing body of the Society and charged the Council with "the management and superintendence of the affairs of the Society and the power to regulate and direct the business of insurance at Lloyd's". The Council may, and in some cases must, make byelaws in exercise of its powers and in fulfilment of its duties under the Act.

At this point I should state for the benefit of Mr Brian Sedgemore and other critics of Lloyd's that the impetus for the fundamental reforms of Lloyd's as provided for in the new Act came from within the Society not from external forces, be they agencies or individuals. I say this because a perusal of recent media coverage might well lead one to the erroneous conclusion that Lloyd's has been dragged kicking and screaming into the 1980s like an unwilling and recalcitrant child being taken to school . Far from it - in 1978 Lloyd's itself recognised the weaknesses in the old system and did not hesitate to introduce new and radical change.

Insurers outside Lloyd's are subject to the provisions of the Insurance Companies Act 1982 which rightly provides for the Secretary of State for Trade to ensure that all insurers are "fit and proper" persons to conduct insurance business. Byelaws made under the new Lloyd's Act have equally provided that persons wishing to conduct the business of insurance at Lloyd's shall be fit and proper. Our tests are stricter and the categories of person to which they apply are wider than those contained in the Insurance Act. Because of this, Lloyd's underwriters are exempt from the ‘fit and proper' provisions of that Act. This is a classic example of governmental regulation and practitioner regulation running in parallel. In whatever system of regulation of insurance the paramount concern must be the protection of the assured . This is a principle of cardinal importance at Lloyd's. Its implementation by Lloyd's has never been questioned and whatever problems we currently face, imagined or real, they do not affect the holder of a Lloyd's policy.

Since the formation of the Council of Lloyd's a great many byelaws have been passed covering virtually every area of Lloyd's operation. Major areas covered include those relating to discipline, disclosure of interests premium income, syndicate accounting, membership, syndicate audit arrangements and agency agreements. Many other byelaws have been passed which I will not trouble to detail as they are already matters of public record. However, for the statistical record, I will state that a total of thirty-seven byelaws and thirteen amendments have been passed, three regulations and one amendment to regulations have been made and one code of practice has been issued. Importantly, I confidently anticipate that, at our next meeting, we shall promulgate the appropriate rules to bring to an end abuses of the past in relation to underwriters acting for more than one syndicate—the so-called ‘baby' or ‘preferred' syndicate. Next year's rule-making programme is already crowded. This record I submit completely refutes any charge that Lloyd's as an organisation is only too willing to return to what has been described as the clubbish atmosphere of a small village in EC3. We are neither complacent; nor in the business of self-destruction . We are engaged in the steady, deliberate and considered construction of a framework of regulation that is capable of not only meeting all requirements of the modern Lloyd's but which is nothing less than Parliament expected the Council of Lloyd's to deliver when it voted on the Lloyd's Act in 1982. Indeed, I venture to suggest that Lloyd's has put more on its statute book in the last two and a half years than probably could and would have been achieved by any outside body in ten years. Our work is surely an example of what the Prime Minister is reported as saying on Tuesday:—

"It is important to harness to the new enforcement system the knowledge and commitment of the leading financial organisations in the City."

Our legislative record is one of which Lloyd's can justifiably be proud and is capable of withstanding the most stringent scrutiny.

So much for what we have done as regards the making of rules - let us now consider how these rules have operated. I will choose just one important area, that of discipline.

The new Lloyd's Act, as I will call it, required the establishment of disciplinary committees and an appeal tribunal and provided for the introduction of new disciplinary practices and procedures for Lloyd's, the whole edifice based upon the principle of natural justice. The requisite byelaws were passed by the Council at its very first meeting on 5th January, 1983. The first members of the disciplinary committees were appointed at the second meeting on the 7th February 1983 together with the appeal tribunal whose president is Lord Wilberforce, the ex-Law Lord. Since that time eighteen cases have been referred to the disciplinary committees and charges against some twenty six defendants have been determined. Penalties ranging from expulsions to reprimands have been imposed. The disciplinary committees also have the power to fine defendants and in a recent and well-publicised case have done so to the tune of £1.000,000. Once disciplinary proceedings have been concluded, the report of the disciplinary committee is published not only to the Lloyd's community but also to the press and hence to the world at large. We do this both in the interest of the Society and in the public interest. We also have the power to, and do, pass all information we acquire in the course of our enquiries to the DPP whatever you may read in the newspapers!

All of the ‘scandals' which have affected Lloyd's predated the new self-regulatory regime set up under the new Lloyd's Act. Accordingly, whilst we have provided in the new disciplinary proceedings an effective cure for old diseases, we maintain that the new regulatory regime will go further and prevent outbreak of disease in the first place.

I should mention that the standard of proof required by the disciplinary committees is the criminal standard, i.e. proof beyond all reasonable doubt. Accordingly, you might well conclude that if Lloyd's disciplinary committees can be satisfied upon the application of this standard of proof to the evidence before them, then the DPP would be justified in bringing charges against certain Lloyd's miscreants. There is, of course, a difference between criminal trials and Lloyd's disciplinary hearings. In the former the prosecution has to prove the facts to juries composed of persons who may have no knowledge of the often complex and technical issues involved. In the latter, the disciplinary committee consists of people with deep knowledge and experience of the subject matter before them - a true trial by one's peers and a lesson, perhaps, for the Roskill Inquiry into the possible reform of criminal fraud trials. At the same time the necessary independent outside influence is preserved in our disciplinary proceedings in that a chairman of disciplinary committees in serious cases is an outside QC or other senior lawyer and in all cases, we have appeal tribunals under totally independent lawyers.

Against the background of the legislative programme that I have outlined you will, I am sure, be aware that criticism has been voiced in the press and in Parliament as to Lloyd's continuing commitment to the principles which are embodied in the new Act and the byelaws. In essence the suggestion is that there has been some sort of ‘backsliding' on the part of the Council of Lloyd's from the original reformist zeal. The litany of reforms achieved and our crowded work programme for further reforms give the lie to that. At the same time these criticisms have been fuelled by a number of factors including the recent announcement by the Deputy Chairman and Chief Executive of his resignation, which generated a veritable plethora of newspaper articles. The general implication is that a quality of independence and objectivity has somehow been irretrievably lost. Let me say this. Effective regulation does not and cannot hinge upon one individual, be he chairman, chief executive or Corporation employee. Valuable though the work of the present Chief Executive has been, it is only part of a continuing process started by many people at Lloyd's long before his appointment and will continue long after his departure.

If it is independence and objectivity which it is alleged we will henceforth lack, let us briefly examine the current composition of the Council of Lloyd's. Apart from those members of the Council who are members of the Society, there are, in addition to the Deputy Chairman and Chief Executive, three other nominated members of the Council. These are persons wholly independent of Lloyd's whose appointment to the Council is required to be confirmed by the Governor of the Bank of England. These persons are eminent in fields outside Lloyd's and bring their specialist knowledge to bear upon very many and varied issues which come before the Council. The value the Council places upon their independence and expertise should not be underestimated and is demonstrated by the fact that each of them chairs important sub-committees of the Council. Sir Kenneth Berrill, chairman - designate of the Securities and Investment Board, is chairman of, amongst others, the Administrative Suspension Committee and the Structure Working Party. Mr Brandon Gough, senior partner of a firm of chartered accountants, is chairman of the Accounting and Auditing Standards Committee and Mr Edward Walker-Arnott senior partner of a major firm of City solicitors, is chairman of the Investigations Committee. Each of these committees is at the very core of self-regulation of the modern Lloyd's. Further proof of independence, if proof be needed, is underlined by the appointment of Lord Wilberforce, the ex-Law Lord, and David Calcutt QC, the former Chairman of the Bar, as president and deputy president of Lloyd's Appeal Tribunal respectively. How much more independent can you get?

None of this is, of course, to imply that qualities of independence and objectivity are not to be found in the elected members of the Council. It is the Council as an entity that passes all byelaws and I must emphasise that we could scarcely have maintained our legislative momentum if the Council as a whole had not been so firmly committed to reform. To my certain knowledge no member of Council has attempted in any way to stifle the byelaw making function or the disciplinary process. I am, therefore, genuinely bemused when we are accused of backsliding.

I have mentioned the Structure Working Party chaired by Sir Kenneth Berrill . I should explain what this is and how the Council came to commission Sir Kenneth's inquiry. It is important that I should do this because there has been some suggestion that it may have been intended in some way to subvert the independence and effectiveness of the office of Chief Executive. Nothing could be further from the truth. The circumstances which led to the establishment of the working party are that the Council became anxious that in management terms, the Corporation was not running as smoothly as they wished. They noted with alarm at their meeting in September the embarrassing error surrounding the publication of the 1982 Global Report and Accounts; as an example of their anxieties. They, therefore, commissioned the Berrill Structure Working Party to examine the working of the Corporation with a view to remedying whatever problems existed.

Following the resignation of the Chief Executive the Council has immediately put in hand the selection of a successor to the present Chief Executive. That successor will be offered the same terms of reference as the present Chief Executive; although these terms may need to be expanded to make it clear that the job offered is a long term one and also expanded to emphasise the Chief Executive's responsibility for managing the support services for the market. The terms of reference make it clear amongst other things that the Chief Executive:-

  • "reports to the Chairman and to the Council of which he is a member",
  • " forms part of a team with the Chairman and the other two Deputies who together preside over the affairs of the Society",
  • "as Deputy Chairman he is particularly concerned with supporting the Chairman in connection with the external relations of the Society."

We have identified three immediate and key tasks for the Chief Executive:-

1. To maintain the pace of regulatory reform.

2. To provide a smooth running Corporation to serve the market.

3. To assist the market in taking full advantage of information technology in their business.

I repeat what I have said many times. We are committed to the concept of a Chief Executive whose "independence" is assured by the fact that he will be a nominated member of Council.

Let me now turn in greater detail to the Financial Services White Paper which has been the focus of much public debate. From what we know, the Government in the cause of investor protection is committed of a chief executive, whose independence is assured by the fact that he will be a nominated member of the council," he said.

Mr Ian Hay Davison was brought into Lloyd's by the Bank of England to help reform the market following a series of scandals. He resigned when attempts were made by Lloyd's to curb his status in the market.

The resignation caused concern in Parliament, where some politicians have been arguing that Lloyd's should be brought within the more formal regulatory framework proposed for the City.

Bank of England officials were also worried that the reform programme might lose momentum at Lloyd's with the departure of Mr Davison and the possibility that the status of chief executive might be downgraded.

Mr Miller said he was "genuinely bemused" when Lloyd's was accused of backsliding in its reform programme. No member of the ruling council had attempted to stop Lloyd's framing rules or to interfere with the disciplinary process.

Further rules were planned "to bring to an end abuses of the past" in which Lloyd's professionals had gained financial benefit at the expense of other members of the market, he said.

6 Dec 85

Letter from Murray Lawrence, Deputy Chairman of Lloyd's, to all agents, active underwriters and panel auditors: Tax: 1983 Year of Account

The Settlement with the Inland Revenue resolved the position on roll-overs, time and distances and reinsurance to close for 1982 and previous years of account. It did not, however, by any means mark the end of the Revenue's interest in these matters and I am writing now to comment on how they fall to be dealt with, under the settlement, for later years, with particular reference to 1983 year of account.

These arrangements which are generally described as "roll-overs" are perhaps the most straightforward to deal with. They are not regarded as effective arrangements and they should be terminated as quickly as is contractually possible. More to the point, all roll-over funds which have not already been brought into the account must be brought into the 1983 Account, if necessary by an adjustment to the reinsurance to close for that year.

The arrangements for time and distance policies are somewhat less straightforward. It has been agreed in principle that depending on the facts of the particular case either:-

(i) the whole of the ultimate indemnity provided for by the policy will be brought into account in calculating the reinsurance to close premium or

(ii) to the extent that the ultimate indemnity is not so brought into account it will instead be accounted for on an accruals basis, the amount so accrued to be treated as a noted reinsurance recovery and set-off against outstanding claims. [For this purpose the accrued value of the policy at the relevant date will be a sum equal to the premium plus compound interest at that percentage rate which, when applied to the premium, would, over the period from the date that premium was paid to the first date upon which 100% of the ultimate indemnity would become available, produce the amount of the ultimate indemnity.]

These principles will apply to all such policies protecting 1983 and/or previous years of account. It is not material that the principles may not have been applied in previous accounts. They must now be applied for 1983 Account, and if, having regard to the particular circumstances and policies with which you are concerned, you feel that their application is likely to give rise to difficulty you may wish to consider whether some such step as reducing the indemnity or reducing or eliminating the profit commission might not be appropriate.

In these matters the calculation of the reinsurance to close, and its acceptability to the Revenue, is clearly going to be crucial and you may reasonably expect the Revenue to undertake some very close and critical enquiries on the 1983 accounts.

As to the reinsurance to close there is very little in the way of specific guidance that I can offer. Each case is peculiar to its facts and will fall to be dealt with for tax, in discussion with Inland Revenue, by reference to those facts. You may, however, care to note that accounting guidelines for the calculation of reinsurance to close are to be considered by Council on 9th December and should be promulgated shortly thereafter.

I would like to reinforce the message given by Frank Barber when he wrote to you a year ago. The measurement of the reinsurance to close is, above all else, a commercial matter which is of crucial importance both to the ceding and to the accepting Names. You must in this be guided by commercial principles.

As to tax I cannot anticipate what line the Revenue will take in any one case but what is self-evidently crucial, in any discussion with the Revenue, and I cannot over-stress its importance, is that your measurement be shown to be soundly based on reasonable evidence. This, perhaps an easier task for known outstandings and for short-tail business but it is a principle which applies with equal force to all elements of the reinsurance to close and to all classes of business.

It is essential that the calculation be made by reference to the best evidence available and that the records show that the figure in the accounts is derived directly and justifiably from the evidence, on a consistent basis.

These are, of course, complex matters. They will continue to be the subject of discussion both internally and with the Revenue and further information and guidance will be issued in due course.

If in the meantime you have any queries please contact D R Culliford of the Taxation Department on extension 3228.

I have sent this letter to all Agents, active underwriters and panel auditors.

9 Dec 85

Financial Times: Break through in Manville asbestos claim wrangle.

Although Mr. Silverman has not released details of the settlement plan, it is believed to incorporate elements of previous proposals aimed at providing $2.5 billion for present and future asbestos victims. A further $125,000,000 or more is likely to be allocated for property damage caused to organisations - particularly schools - which have had to remove asbestos insulation from their buildings.

9 Dec 85

Financial Times: Lloyd's council to study underwriting code

RULES TO end abuse within the Lloyd's insurance community are to be studied today by the market's ruling council.

The council is to discuss "preferred underwriting" one of the most controversial practices in the Lloyd's market. So far there has been resistance within Lloyd's to reform the practice.

Lloyd's was forced to consider the practice more than two years ago after complaints from among its 26,050 underwriting members. They were concerned that certain of the market's professionals may be providing themselves, their families and friends with hidden financial benefits through the syndicate system at the expense of the wider membership.

Members of Lloyd's are grouped for operational purposes into syndicates. There are 21,000 members who do not work at Lloyd's but who pledge their capital to allow the market to function. The remainder is formed of Lloyd's professional insurance brokers and underwriters.

Underwriting members discovered that among the 430 or so syndicates operating in the market there were at least 30 with a small number of members. Places on these " baby syndicates" were usually reserved for the market's professionals, their relations, friends and business associates. In one instance, a syndicate consisted of only one Lloyd's professional.

The baby syndicates were regarded as an ideal way to provide additional remuneration and incentive to the market. such as to the brokers for providing business for the largest syndicates.

The practice led to abuse. More selective, and usually highly profitable business was passed to the small syndicates at the expense of the larger. It also became usual for one professional underwriter to underwrite for both a large syndicate and a baby syndicate. Some underwriters "preferred'' the smaller syndicate over the large syndicate when business was accepted at Lloyd's.

In 1983, a working party led by Mr Alec Higgins, a former deputy chairman of Lloyd's said: "We recommend that preferred underwriting should be banned. The duty in law of an agent to his principal is so clear and so Strict as to be incompatible with preferred underwriting."

Following representations from the market, Lloyd's decided not to ban preferred

underwriting. In July this year it indicated that it would curb abuses through the operation of a code of practice.

9 Dec 85

Council of Lloyd's meeting

It was decided that changes to the 1987 Financial Requirements for Membership should be kept to a minimum, pending a debate on the findings of the Working Party report on membership requirements. The following changes were introduced to assist in the administration of membership for 1987.

Firstly. it was agreed that directors of Lloyd's brokers may be eligible as vocational Names, regardless of their precise duties providing they have completed the qualifying five years' period of employment at Lloyd's. This does not include directors of subsidiary or parent companies of Lloyd's brokers. The overall limit for vocational Names on nominal means has been increased from £50,000 to £60,000. Deposit remains at 50 per cent.

Secondly, payment of the entrance fee is now a prerequisite for election.

Finally, overseas members will be permitted to provide acceptable UK Stock Exchange securities and sterling in their deposits, subject to powers of attorney in the UK

9 Dec 85

The Reinsurance to Close Byelaw (No. 6 of 1985, 9 December 1985).

The determination of the IBNR element required the exercise by the underwriter of judgement as to the level of IBNR which was appropriate, having regard to all relevant materials and after appropriate enquiries. The Further Explanatory Notes to Byelaw No. 7 of 1984 published on 9.12.85 set out in paragraphs 18 to 24 a number of matters which might fall to be considered in computing the IBNR. These include the nature of the business written by the syndicate as one of the main factors affecting the size and relative importance of the IBNR element of the reinsurance to close. Different classes of business gave rise to different considerations. The Further Explanatory Notes also stated that the reinsurance to close must be supported by records setting out the manner and bases upon which the final figure was determined in sufficient detail to "show and explain" the nature of the transaction. The Further Explanatory Notes also provided that it was important that the process of determining the IBNR, the more judgmental aspect of the reinsurance to close exercise, was documented to the same standard as was adopted in relation to outstanding claims.

Documentation should include a record of the overall factors taken into account by the underwriter in arriving at his approach to the reinsurance to close. This should cover those factors which the underwriter considered had a significant impact on the year of account and might refer to those which did not and the reasons why such conclusions were drawn.

Rules as to who may place reinsurance to close and a requirement for it to be signed at Lloyd's Policy Signing Office were defined in the Reinsurance to Close Byelaw (No. 6 of 1985). In addition the Council took the opportunity to issue practical guidance dealing with reinsurance to close, and in particular the documentation to be prepared to evidence this important aspect of a syndicate's operation.

9 Dec 85

The Multiple Syndicates Byelaw (No. 7 of 1985, 9 December 1985).

2. Restriction of Multiple Syndicates

No managing agent shall, without the consent of the Council, manage any syndicate which consists of less than fifty members unless at least seventy-five percent of the capacity of that syndicate is provided by members who are not shareholders, directors, partners or employees of the managing agent or individuals who are connected with any of those persons.

  1. The prohibition in paragraph 2 hereof shall not apply if the managing agent manages no other syndicate transacting business principally in the same market as the syndicate concerned.
  2. Council Satisfaction

"The Council shall not grant any consent under paragraph 2 hereof unless it is satisfied:-

  1. That participation in the syndicate has been offered to the members of every other syndicate managed by the managing agent transacting business principally in the same market;
  2. That the purpose of the syndicate will not be to favour any of the participating members over members participating in such other syndicates."
  1. Commencement

This byelaw shall come into operation on 1 January 1986.

The Council introduced "Codes of Practice" for underwriting agents and active underwriters. The Codes of Practice are intended to guide Members of the Lloyd's community as to matters of best practice. Managing agents should adopt one of the following courses of action to minimise any conflicts and problems which may arise from any syndicate or group of Names receiving or appearing to receive selective treatment to any other:-

  1. have different Active Underwriters for each managed syndicate; or
  2. ensure that syndicates participation on risks whether separately or together in accordance with a policy which is consistent with the purpose for which each syndicate was established and which is disclosed.

Underwriting Agents are reminded that they may owe duties to Names as agents and as trustees simultaneously where they hold monies or other property on behalf of the Name.

The Neill Report

This Byelaw had a limited target, namely, "Baby Syndicates". From 1 January 1987, a managing agent is not permitted, without the consent of the Council, to continue to manage any syndicate which consists of less than 50 members, unless at least 75% of the capacity of that syndicate is provided by people unconnected with the agent (paragraphs 2, 5 and 6). In fact the number of syndicates with less than 50 members has fallen dramatically in recent years - from 99 in 1978 to 10 in 1986: only 5 of those 10 have managing agents which manage other syndicates transacting business principally in the same market; only 3 of the 5 have less than 75% of their capacity provided by members who are unconnected with the agent. A similar effect is visible in relation to larger small syndicates with up to 150 members. In other words the potential problem of preference being shown by means of "Baby " syndicates was very largely dealt with before the Council legislated, simply by reason of their disappearance. Why this reduction in numbers took place is a matter for speculation. It seems likely, however, that it reflected a number of factors: a changing climate in relation to acceptable standards of behaviour; the progress being made towards much improved levels of disclosure on the part of managing agents and the ability to compare syndicate results.

Nevertheless, the Multiple Syndicate Byelaw deals only with the possibility of preference being shown to a very small syndicate. The larger area of concern is that even in 1986 there are 111 syndicates operating in parallel, some 30% of the total. Thus the real question and one on which the submissions to us are divided, is whether the Code of Practice for Underwriting Agents and Active Underwriters (Multiple Syndicates) is sufficient as a regulatory control.

The Code of Practice does not outlaw parallel syndicates. The potential problem is identified and the suggestion made to managing agents that there are two ways of seeking to ensure fair treatment between Names - by avoiding the problem or by minimising its effect. Avoidance means ensuring that the circumstances where preference might occur (that is, two syndicates being run in parallel) do not exist. Minimisation of the problem means , full , fair and prior disclosure to Names and members' agents; establishing that each managed syndicate has a valid reason for existence; ensuring that each managed syndicate has a separate active underwriter or participates in risks according to a consistent policy which is disclosed in advance; and taking steps to ensure the separation of each syndicate's reinsurance programme (paragraph 2 and 3). Additions to the Code of Practice came into effect in May 1986 dealing with the protection of Names where reinsurance arrangements are made between syndicates under the control of a single managing agent or group of managing agents and with the development and disclosure of a written policy by managing agents regarding the allocation of expenses across syndicates.

Returning to the matter of the time taken to introduce Byelaw No. 7 of 1985 and the accompanying Code of Practice, we have had no satisfactory explanation of the delay in dealing with such an obvious abuse. The need for further work to refine the recommendations in the Higgins Report does not explain why it took two years to produce an alternative proposal, the effect of which, Lloyd's argue, is very similar. The argument that disclosure was a proper first step does not seem to us to be a relevant factor. Disclosure is correctly, at the centre of the new regulatory arrangements, but in this area it has not materially added to the understanding of the problems provided by the Higgins report.

(It is material to note that many of the syndicates engaged in preferred underwriting were able to quietly disappear as at 31 December 1985 as the additions to the Code of Practice did not become effective until May 1986, until after completion of the 1985 year of account audit and closing by reinsurance or otherwise).

A further consideration, in deciding whether a byelaw or code of practice is the appropriate mode of regulation, is the effect on a Name seeking to take action against his agent for breach of contract. The Neill Report referred in paragraph 6.25 to the contractual remedy in the standard agency agreement (The Agency Agreements Byelaw No 1 of 1985, 11 March 1985) equivalent in principle to the statutory provision in Section 62(2) of the Financial Services Acct which enables an investor to take action for damages if he suffers loss or is otherwise adversely affected because of a contravention of rules laid down by the SIB or an SRO. The drafting of paragraph 2(b) of the standard agency agreement refers to compliance with the byelaws, regulations and requirements for the time being of the Council affecting the Name as an underwriting member of Lloyd's. This might be thought to have a wider application than the reference to "rules" in the statutory provision, although the fact that the Foreword to Lloyd's Codes of Practice indicates that such codes are not mandatory in themselves (see paragraph 8.1) casts some doubt on whether their provisions would be considered to be "requirements" . Whether or not failure to comply with the provision of a code would give grounds enabling a Name to mount an action for breach of contract, it is beyond doubt that a clear and specific byelaw dealing with the same matter would enhance his prospects of success. Non-compliance with a loosely written code of practice would be more difficult to establish. We recommend that the Council keep its consideration in mind as to the programme of regulatory reform proceeds.

Regulation of multiple syndicates has been addressed under the provisions of the multiple Syndicates Byelaw (No. 7 of 1985) and its accompanying Code of Practice. This byelaw prohibits the operation of relatively small syndicates unless specific consent thereto is given by the Council.

9 Dec 85

The Lloyd's Introductory Test Byelaw (No. 8 of 1985, 9 December 1985).

Furthermore, the Council's concern to improve the standards of competence of new entrants to the Lloyd's market was reflected in its promulgation of the Lloyd's Introductory Test Byelaw (No. 8 of 1985). The byelaw requires that everyone conducting business in the underwriting Room for the first time from the beginning of 1986 should pass the Test within a 15 month period in order that they may continue trading or working at Lloyd's - unless the Council is satisfied that they have sufficient experience in the conduct of insurance business.

Dec 85

The Environmental Considerations Document recorded that there were known uncertainties with regard to potential new advices for property damage claims.

10 Dec 85

Financial Times: Brittan rejects inclusion of Lloyd's in City Bill

MR LEON BRITTAN, the Trade and Industry Secretary, has said that regulations on the Lloyd's insurance market can not be included within the scope of the Financial Services Bill, which is expected to be published later this week.

Mr Brittan said in London yesterday that the insurance activities of Lloyd's "could not possibly be covered in this bill, because it covers only investment activities. Much of what Lloyd's does is not investment."

However, Mr Brittan stressed that he was open minded on changes likely to be proposed in the bill during its progress through Parliament. He said the basic principle of self regulation would remain in place but that "we shall have to take account of everything said and we shall be responsive to the concerns expressed."

The alleged fraud in the Lloyds insurance market and at Johnson Matthey Bank have spurred backbenchers on both sides of the House to put pressure on Ministers to tighten up on the bill.

Mr Brittan said: "I think it is extremely important for the City that we get the right regulatory regime. Fraud must be pursued vigorously and effectively. No regulatory regime will prevent fraud, but I believe that our requirements will make it more difficult.

"Anyone who has any detailed proposition to make will have them considered on their merits. I'm certainly not saying that the bill is the last word and that we will not change any dot or comma."

Mr Brittan said his decision to refer the bid by the Australian company Elders IXL for Allied Lyons to the Monopolies and Mergers Commission last week had been taken because of the " unusual financing " for the deal - which involved a " highly leveraged " bid involving eight banks, of a type unusual in the UK.

11 Dec 85

Guardian: Tory group chief quits

The brief and controversial reign of Mr. Bill Walker as chairman of the backbench group of Scottish Tory MPs ended last night when he announced that he would not contest the re-run of his election.

After a meeting with Mr. John Wakeham, the government chief whip, Mr. Walker announced that he would stand down..

The row broke out after Mr. Walker unseated Sir Hector Mumro with the help of a number of English MPs. The coup split the Scottish group and caused the executive of the 1922 Committee of backbenchers to change the rules for election.

11 Dec 85

Guardian: Sedgemore extends net in Lloyd's scandal claim

Mr Brian Sedgemore. the Labour MP for Hackney and Shoreditch, last night broadened his allegations about the Lloyds' insurance market by naming seven syndicates which he claimed have been or may be touched by scandal.

He called in a series of detailed Commons early day motions, for an investigation into a claim that a former deputy chairman of Lloyd's led a banking business through one syndicate while he was employed at another and had half the commissions paid direct into a Swiss bank account.

Mr Sedgemore, who has been at the forefront of revelations about City scandals in recent months also called for an investigation into the role of Sir Peter Green, the former Lloyd's chairman in the operation of the reinsurance scheme, the Imperial Insurance Company (Cayman Islands) Ltd.

He said it had been alleged that Mr Leslie Dew, a former Lloyd's committee member and deputy chairman in 1975 and part of 1977, led a substantial banking business through Alexander Howdens while he was employed at Merretts Syndicate Ltd., and had the commission from the brokerage arising from the business paid direct into a Swiss bank account.

The motion also says that Mr Dew's role as president of the Gulf oil company's Bermudian captive insurance company Insco Ltd should he examined.

The motions call for an investigation into the way the Lloyds' syndicate Janson, Green operated its own dealing company, Cresvale Securities Ltd - shares were held 49 per cent by Janson, Green and 51 per cent by GRPN Valentine - rather than deal through independent stockbrokers.

Mr Sedgemore wants to know if the commissions earned by this company should have gone to the names. The motion notes that in the year to March 31 1983 on a turnover of £1,568,271 the pre-tax profit was £1,138,498.

He calls for investigation into the role of Sir Peter Green in the reinsurance, scheme of Imperial Insurance Company which provided reinsurance for Janson, Green. Mr Sedgemore said the question of the links between syndicates and agencies on the one hand and inter-linked companies involved in offshore reinsurance schemes on the other hand needed further investigation.

"This House is deeply concerned about Lloyds syndicates which have already been touched by scandal or may be touched by scandal, particularly those managed by PCW Underwriting Agencies Ltd, Alexander Howden Underwriting Ltd, R. W. Sturge and Co, H. G. Chester and Co Ltd, Sedgwick Forbes, WMD Underwriting Agencies Ltd and Janson, Green Ltd" said the motion.

Mr Sedgemore said last night that MPs who were associated with the syndicates or agencies concerned before the Lloyd's Act 1982 should use their expertise to help amend the forthcoming Financial Services Bill.

This would restore the good name of Lloyd's and bring hope to the victims of the scandals, he said.

11 Dec 85

Guardian: Rein in the City cowboys - Steel

The Liberal leader, Mr David Steel, said yesterday that he was convinced that a statutory supervisory body will be needed to prevent the City of London becoming "a saloon for the gunslingers and a cowboys of the financial world."

Mr Steel, who was speaking to the American Chamber of Commerce in London, said that a mish-mash of different self-regulating bodies and codes barely seemed adequate for the new City, where there was now the potential for serious conflicts of interest within the new financial conglomerates. He believed that an overall supervisory body, along the lines of the US Securities and Exchange Commission, was now appropriate.

"The City of London must not become a saloon for the gunslingers and cowboys of the financial world to make a killing at the expense of the small investor and insurer," Mr Steel said. He added that the City's great international reputation must not be allowed to be tarnished by trickery and fraud which go unpunished.

Mr Steel said the public would see over the next few weeks whether the Government was prepared to recognise just how much damage had been done by the apparent failure of the authorities to bring prosecution proceedings against those alleged to have been involved in fraud at Johnson Matthey Bankers and Lloyd's insurance. Next week the Government is due to publish its Financial Services Bill, which will create a regulatory body run by City practitioners.

Pressure is mounting within and outside the City for the Government to establish a full statutory body in the light of the scandal surrounding JMB and Lloyd's.

On Monday the Labour Party's spokesman on Treasury affairs, Dr Omagh McDonald, set out its plan for tougher regulation of the banks in the wake of the JMB affair. Labour would set up a statutory audit commission to detect fraud and to examine the quality as well as quantity of a bank's loans. Banks would have to inform the Bank of England of the relationship between companies and individuals to whom loans are made and may also have to contribute to a national fund to deal with any financial collapses.

  • Mr Abdul Shamji, whose Gomba companies owed JMB more than £21 million, opened his action in the High Court to claim damages against the Bank of England for appointing receivers to Gomba. He claims the Bank refused an offer to repay £14.5 million of Gomba's debt.

11 Dec 85

Financial Times: Labour calls for Lloyd's legislation

THE Labour Party formally asked the Government to include regulation of Lloyd's insurance market within the scope of the Financial Services Bill to be published next week.

John Smith, on behalf of Labour, said in a letter to Trade and Industry Secretary Leon Brittan that the public had lost confidence in Lloyd's capacity for self-regulation.

11 Dec 85

Financial Times: Labour steps up Lloyd's campaign

THE Labour Party yesterday stepped up its campaign over the regulation of the Lloyd's insurance market with a formal request to the Government that Lloyd's be included in the scope of the Financial Services Bill due to be published next week.

The call was made by Mr. John Smith, Labour's principal Trade and industry spokesman and a former trade secretary, in a letter to Mr. Leon Brittan, the Trade and Industry Secretary. "Any public confidence there was in the capacity of Lloyd's to regulate itself has decreased to vanishing point" he says.

It was the intention of the Labour Party to move amendments to the bill to include Lloyd's so that parliament could decide the question. " but the situation has now deteriorated to the extent that I believe the Government must take the initiative." He hopes the bill will be accompanied by an announcement about the inclusion of Lloyd's.

Mr. Smith's intervention is significant since he is a senior member of the Shadow Cabinet, and his concern over Lloyd's is shared by a number or senior Tory MPs who also wanted it to be included in the bill.

However. Mr. Brittan has argued that Lloyd's cannot possibly be covered in the bill, which only covers investment activities. There may be wide-ranging support for any Labour amendment to the bill.

Fresh allegations about the official handling of Lloyd's problems came yesterday in a Commons motion from Mr. Brian Sedgemore the Labour MP for Hackney South and Shoreditch.

It say; that Lord Richardson, the former governor of the Bank of England, convened a meeting with Sir Peter Green the then chairman of Lloyd's in March 1983 in the presence of the governor's specialist adviser on tax matters to discuss the personal tax affairs of Sir Peter..

The motion notes this followed a request from the Inland Revenue to Sir Peter for details of his own and his family's offshore interests and expresses shock that. such a meeting should be convened at the request of the governor as he has no standing in law as regards an individual's tax affairs. The motion calls for a full explanation.

In a lunch-time speech yesterday, Mr. David Steel,. the Liberal leader, said in relation to Lloyd's that there had "clearly been disgraceful misappropriation of funds on a massive scale."

He argued. in respect of the City as a whole, that "not only the amateurish and voluntary basis of Lloyd s and the Stock Exchange supervision be tightened up but competition law and the takeover panel should be made more consistent in their aims and applications."

Mr. Steel said he was increasingly convinced that "an overall supervisory