1.HEADNOTE

This action forms part of the Lloyd's Litigation. The Lloyd's Litigation is the largest and most complex piece of civil litigation this jurisdiction has ever seen. The Commercial Court's approach to the case management of the Lloyd's Litigation is referred to in chapter 5. The Court decided a number of preliminary issues which (subject to appeal) were designed to assist in resolving issues of principle common to one or more of six categories of cases (LMX Cases, Long-Tail Cases, Personal Stop Loss Cases, Portfolio Selection Cases, Central Fund Litigation and Other Cases). The Court in addition selected from cases in a particular category lead or pilot cases for trial as to liability (and principles relating to quantum) in the hope that decisions in these cases would provide broad guidance in relation to other cases in the same category.

At the time of the R&R settlement offer of July 1996 there were about 90 syndicate based Action Groups with relevant litigating syndicate years of account.

In September 1996 a market settlement was arrived at. About 95% of Names accepted the market settlement. 1,752 Names did not accept. About 180 Names have since reached individual settlements with Lloyd's. Of the remaining Names, 216 Names are parties to this action.

Appendix 1 hereto contains a list of cases forming part of the Lloyd's Litigation (and related litigation) both before and after the market settlement in September 1996.

There are (or have been) proceedings against Lloyd's in the United States of America, Canada, Australia, Belgium, and before the European Commission.

This trial is concerned with the Threshold Fraud Point being the issue whether Lloyd's made misrepresentations which it knew to be untrue and/or as to which it was reckless whether they were true or false, and whether such misrepresentations were communicated to the Names and if so, when? The trial is confined to allegations of fraud during the Relevant Period 1978 to 1988. The Names' case is in tort for fraudulent misrepresentation. The Names say that certain alleged representations derived (i) from the Brochures and (ii) from the Lloyd's Aggregate Results/Global Reports and Accounts as at 31 12.81 to 31.12.87 made by Lloyd's to external Names when they were applying to join Lloyd's or considering whether to continue as underwriting members of Lloyd's, were false and fraudulent to the knowledge of Lloyd's. The Names say that Lloyd's knew or was reckless as to the fact that: (i) the Lloyd's market's exposure to asbestos-related claims required reserves and RITC to be set at figures far in excess of those which were set out in the Lloyd's Aggregate Results/Global Reports and Accounts as at 31.12.81 to 31.12.87; and (ii) to the extent that there was under-reserving, the burden would be borne by Names underwriting in future years.

Lloyd's deny that they made the alleged representations in the Brochures and the Aggregate Results/Global Reports and Accounts as at 31.12.81 to 31.12.87. Further Lloyd's say that none of the elements of the tort of deceit are made out and in particular all allegations of fraud are emphatically denied.

The relevant legal principles as to the tort of deceit are set out in chapter 9. In order to sustain an action in deceit, there must be proof of fraud. Nothing short of fraud will suffice. Fraud is proved where it is shown that a false representation has been made (i) knowingly, or (ii) without belief in its truth, or (iii) recklessly, careless whether it be true or false. To prevent a false statement from being fraudulent, there must be an honest belief in its truth.

The Names' case must be judged against the relevant structure and background. It is necessary to have regard to and understand the way the Lloyd's market worked in the Relevant Period. Thus it is necessary to consider the administrative structure and governance of the Lloyd's market (chapter 10); the regulatory background for the auditing and accounting regime at Lloyd's (chapter 11); the rules and procedures governing the admission to underwriting membership of Lloyd's and related matters (chapter 12); RITC - the role of the managing agents/underwriter (chapter 13) and the role of the auditors (chapter 14).

I set out in chapter 15 a broad description of the evidence of the witnesses and my assessment of that evidence.

An overview of the nature and development of asbestos-related claims in the United States is set out in chapter 16. Between 1973 and the beginning of 1981 there were 8,000 to 10,000 asbestos-related claims. In the period between 1981 and the Wellington Agreement (June 1985) the filing pattern was remarkably steady at 500 new claims per month. The opening inventory of the ACF in mid-1985 was about 25,000 claims. In the 18 month period after the Wellington Agreement the rate of claims rose initially to 700 per month and then to around 1,000 per month. In 1987, the claims rose to 2,000 per month (a fourfold increase in the level of claims pre the Wellington Agreement), and then went up to 3,000 per month, before settling at 1,500 per month for a while. By 1990, this had risen again, so that in the early 1990s the rate was about 24,000 a year; an annual total which was broadly comparable to the entirety of claims between 1973 and 1983. The current rate of claims is around 60,000 a year. The current total volume of claims (including those that have been settled) is approximately 450,000. There were a number of interlinked reasons why things looked so different at the end of the 1980s and in the early 1990s, from the way in which they had looked in the early 1980s.

Differing views were held as to the likely outcome of asbestos-related claims in the Lloyd's market (and elsewhere) in the late 1970s and early 1980s. One illustration of this is the fact that Outhwaite, Merrett, Meacock and other syndicates wrote a number of run-off contracts.

The Brochures and the Aggregate Results/Global Reports and Accounts as at 31.12.81 to 31.12.87 did not contain the alleged representations. Further the other ingredients of the tort of deceit were not made out. In particular the Names have not proved fraud in the relevant sense.

The Names' case is confined to asbestos-related losses. The losses suffered by the market in and after the Relevant Period were caused by a number of factors in addition to asbestos-related claims including (i) pollution and other long-tail claims; (ii) the North European storms in 1987; Piper Alpha and Hurricane Gilbert in 1988; Hurricane Hugo, the San Francisco Earthquake, Exxon Valdez, and Phillips Petroleum in 1989 and the North European storms in 1990; and (iii) the LMX Spiral.

As the Names' case is confined to asbestos-related losses, it is necessary to single out the impact of these losses.

Significant protections should have been afforded to Names on long-tail syndicates by the role and duties of the managing agents/underwriter and of the auditors. Further it was for the members' agent (not Lloyd's centrally) to advise prospective Names/ Names as to the risks inherent in long-tail syndicates, along with all other material risks.

If there were factors which affected or might affect the adequacy of the reserves, the syndicate auditor was required, under Clause 3 of the Audit Instructions, to report to the Committee and obtain their instructions before issuing the Audit Certificate/Syndicate Solvency Report. The letter from Neville Russell dated 24 February 1982 as to asbestos-related claims, was written pursuant to Clause 3. I find that the Murray Lawrence letter was sent to all underwriting agents (including members' agents) and all active underwriters, as stated in the final paragraph of the letter. Further, I find that the Murray Lawrence letter and the Randall letter (both dated 18 March 1982) were an honest response to the issues raised by the Neville Russell letter.

The allegation that Lloyd's knew or was reckless as to the fact that the Lloyd's market's exposure to asbestos-related claims required reserves and RITC to be set at figures far in excess of those which were set out in the Aggregate Results/Global Reports and Accounts as at 31.12.81 to 31.12.87, is rejected. The Committee/Council of Lloyd's were generally entitled to assume that auditors were performing their duties competently. The allegation that the 1979 year of account should have been left open by syndicates affected by asbestos-related claims is also rejected.

For the reasons set out in the judgment I find for Lloyd's, and against the Names, on the Threshold Fraud Point. The costs of these proceedings will be subject to rigorous taxation.

I make a number of further observations (see chapter 25). It is high time that the Lloyd's Litigation and related litigation here and overseas came to an end.

Despite all the reforms described in the judgment, the catalogue of failings and incompetence in the 1980s by underwriters, managing agents, members' agents, and others (established by judgments of the court, by disciplinary hearings and other means referred to in chapter 24) is staggering (and brought disgrace on one of the City's great markets). External Names (whether they accepted R&R or not) were the innocent victims of the failings and incompetence. Many Names have suffered enormously in financial and personal terms. A fair overall solution (as between Lloyd's and those who did not accept R&R and have not settled since R&R) is unlikely to be achieved without independent assistance. Such an overall solution is in the interests of Lloyd's and the Names. An independent review by an independent panel set up by Lloyd's should consider the individual cases of those Names who did not accept R&R (and who have not settled since R&R).

2.THE IMPACT IN PERSONAL TERMS

I wish at the outset of this judgment to refer to the impact in personal terms, on Names and others, of the events at Lloyd's in and about the 1980s.

On the one hand (i) membership of Lloyd's involved considerable risks; and (ii) asbestos and pollution claims, the exceptional number of catastrophes in the late 1980s and other factors would have caused widescale losses if managing and members' agents had acted competently throughout.

On the other hand there was widespread incompetence on the part of some underwriters/managing agents (and some members' agents). I recognise that no words can adequately describe the devastation that has been caused to many individuals in financial and personal terms.

I asked the parties to attempt to agree a short statement as to the impact on Names and others but they were unable to do so. I accordingly set out their respective positions.

The Names

The Names say that the difficulties that Lloyd's faced during and after the Relevant Period caused (a) average losses per person of approximately £120,505 for working Names: (b) average losses per person of approximately £263,400 for external Names: (c) average losses per person of approximately £469,051 for Jaffray litigants. The resulting hardship varied on an individual basis.

Many UNO members suffered financial ruin.

The UNO membership has paid to Lloyd's, through drawdowns on bank guarantees, loss of funds deposited at Lloyd's and by direct payments approximately £66,000,000 (an average of £308,000 each). The same people, together, have judgments against them amounting to approximately (a further) £50 million in respect of Equitas premia. This does not include the Central Fund writs which Lloyd's have reinstated.

Currently, 14 UNO members qualify for Legal Aid. As the result of drawdowns of bank guarantees, or other bank borrowing to pay Lloyd's, 62 UNO members have been evicted from or forced to sell their homes and/or businesses and are living with relatives or in cheap rented accommodation.

Many non-UNO Names (accepting and non-accepting) have been made bankrupt by Lloyd's and by banks and institutions.

About 60 UNO members are currently in receipt of statutory demands/bankruptcy petitions from Lloyd's and fear they will be made bankrupt.

Fear of bankruptcy and homelessness continues to take its toll on UNO members, litigants in person and other Names. Names say that Lloyd's difficulties were the cause of, or probable explanation for, 15 suicides - also of marriage breakdowns, divorce and the break-up of families. Two non-UNO Names have attributed the suicides of their children to Lloyd's.

Many Names, of all categories, have suffered. Doctors have attributed a range of serious illnesses to Lloyd's problems.

Lloyd's Comments on the Names' Submissions as to the Hardship Caused as a Result of the Difficulties Faced by the Lloyd's Market

Lloyd's regrets the undoubted financial hardship and distress caused to many Names and their families from the massive losses incurred in the very late 1980s and 1990s. Similar statements of regret were made by Mr. Murray Lawrence and Sir David Rowland, both former Chairmen of Lloyd's, during the course of their evidence in this case. Indeed throughout the 1990s (starting with his appointment as chairman of the Task Force in 1991) the principal focus of Sir David's work at Lloyd's was to find a way of assisting Names to meet their liabilities at Lloyd's, permitting them to trade through where appropriate and achieve finality where they so wished.

The culmination was, of course, the R&R Settlement Offer worth £3.2 billion to Names. R&R provided very substantial assistance to many Names, being accepted by an overwhelming majority of membership. Lloyd's never sought to argue that the settlement could undo the hardship many had already suffered, but it was the best alternative that could be provided and was the result of an enormous amount of work over a period of years. Sir David summed up the position when introducing the detailed terms of the offer in the Settlement Information Document:

"I deeply regret the events that have made the reconstruction plan necessary. They must never be allowed to recur. I am reminded daily of the damage membership of Lloyd's has caused to thousands of people. We in the Lloyd's market have a clear responsibility to develop a solution that offers the best prospect of alleviating this damage.

I believe we have such a solution in the reconstruction plan. It is not perfect: we do not command unlimited resources and time is no longer on our side. But it offers better prospects than continued litigation. It offers assistance not otherwise available for those Names who have borne the heaviest losses. And it offers Names the chance to carry on with their lives, relieved of the uncertainty caused by their membership of Lloyd's.

I have said many times that no compromise settlement can eradicate our recent history; the losses and their consequences were real. We have sought - and I believe achieved - the best result possible in the interests of the whole Society".

Lloyd's questions the reliability of the figures put forward by the Names as to the personal effect of the losses at Lloyd's. Lloyd's does not believe that these figures can or should be relied upon as representing an accurate statement of the position.

Based on their finality statements, Lloyd's has provided the court with the aggregate total gross and net liabilities as at the same time of R&R of the 216 Names who are parties to this action. On average, each of these Names faced a gross liability of £364,000; the average amount they would have had to pay under R&R was £64,000. Only one of the 216 Names had to pay in excess of £100,000. Others would have qualified for additional assistance had they accepted the offer, reducing their net liabilities even further. Post R&R means based settlement offers were made to 63 Jaffray Names. Lloyd's does not accept that there is any justification for any Jaffray Name who is unable to pay his/her Lloyd's debt not seeking a settlement with Lloyd's.

Only 7 of the 216 Names who are parties to this action have been put into bankruptcy on the petition of Lloyd's. Following the Garrow decision, any statutory demands against Jaffray Names were set aside and any outstanding bankruptcy petitions were dismissed.

The Names say that they have identified 15 individuals who were Lloyd's members and who, they say, committed suicide for reasons that were or may have been associated with losses they suffered through underwriting at Lloyd's. Of these individuals three were formerly working members of Lloyd's. In correspondence with More Fisher Brown, Lloyd's has questioned the reliability of the figures produced by the Names for Lloyd's related suicides. Lloyd's further questions the ability to ascribe reasons for the circumstances surrounding the suicide of an individual without examining the detailed facts in each case.

3.GLOSSARY OF TERMS AND ABBREVIATIONS/ACRONYMS

GLOSSARY OF TERMS

Active Underwriter

In relation to a syndicate, the person at the underwriting box with principal authority to accept risks on behalf of the members of a syndicate. The active underwriter is usually a director or employee of the managing agency for the syndicate.

Accumulation

Concentration of risk, for example where an insurer has written many policies on liabilities that could result in losses occurring at one and the same time.

Agent Orange

A chemical defoliant used by the US army in Vietnam which caused serious bodily injury to US personnel who happened to be exposed to it, because it contained a suspected carcinogenic substance known as dioxin.

Aggregation

(1)see "Accumulation" above.

(2)a provision in an excess of loss reinsurance contract whereby the cost of successive claims may be added together for the purpose of establishing the sum recoverable.

Aggregate limit

A provision in a (re)insurance contract which caps the (re)insurer's maximum liability at a ceiling beyond which the (re)insurer ceases to be liable. The ceiling is reached when all the (re)insurer's liabilities under the contract added together equal the level at which the ceiling is set.

Asbestos

A fibrous silicate material which achieved wide usage by reason of its physical properties such as the ability to withstand fierce heat, corrosion and decay under almost every condition of temperature and moisture. Its uses included roofing, plasterboard and fireproof wallboard, floor tiles, an ingredient in paints and sealants, car brake linings and clutch facings.

Asbestos Working Party
("the AWP")

A body set up by the non-marine market in about August 1980 with a view, inter alia, to providing a forum for discussing problems relating to asbestos-related claims, to collecting and making available information relating to the asbestos problem.

Asbestosis and other diseases associated with asbestos exposure

Asbestosis, emphysema, lung cancer and mesothelioma.

Attorneys' reports

Reports obtained from firms of US attorneys in relation, inter alia, to pending litigation in the United States and in relation to the level at which notified claims against particular assureds were expected to settle. These reports were collated by AWP and made available to all interested underwriters. Particular attorneys' reports were commonly to be found on the claims files of syndicates exposed to claims the subject of those reports.

Binding authority

An authority given by an insurer (or reinsurer) to a broker or other agent authorising that agent to accept risks on the (re)insurer's behalf.

Casualty business

Liability or third party business. Particularly used for those classes of US business where liability arises for accidents or events causing bodily injury or property damage.

Cedant

An insurer which cedes business under a reinsurance agreement.

Closed year

In relation to Lloyd's syndicates which adopt a three-year basis of accounting, a year of account for which a result (profit or loss) has been declared following the reinsurance of all remaining liabilities attaching to the account, both known and unknown.

DES

Diethylstilboestrol – a drug which had been given to pregnant women in the United States and which had been blamed for causing cancer in, amongst others, their female offspring.

Direct insurance

Insurance as opposed to reinsurance.

Discounting

The reduction in amount of a loss reserve to take credit for an anticipated future growth through investment of the sum reserved, before the claims fall to be paid.

Exposure

(1)The state of being subject to the possibility of loss.
(2)The measurable extent of risk.
(3)A basis for determining the scope of coverage under an occurrence based policy which requires the claimant against the assured under the policy to have been exposed to the cause of the injury during the policy period (cf. manifestation and triple trigger).

Incidental non-marine

Insurance business written by a marine underwriter as an adjunct to his marine insurance account.

Incidental non-marine syndicate

A mirror syndicate to a marine syndicate (with identical composition of stamp) into which a marine underwriter could write incidental non-marine business.

Incurred but not reported (IBNR)

A term used for claims arising from insured events which have occurred but of which the insurer has not yet been advised. At the end of a period of account (usually 36 months in the case of Lloyd's syndicates) a reserve is established to cover the expected cost of such losses ("the IBNR reserve").

Incurred losses

The aggregate of paid and known outstanding claims.

Leading Underwriter

An underwriter who is regarded in the market as being an expert in a particular class of business and who therefore "leads" risks by taking the first (often relatively substantial) line on terms which are then adopted by the following market as well.

Line slip

An authority (or facility) given in writing by a number of underwriters which enables the leading underwriter(s) to agree to proposals for insurance of risks within a prescribed class on behalf of all underwriters subscribing to the line slip provided that the proposed insurance is within the scope of the terms of the authority.

Loading

An additional factor or amount taken into account in loss reserving (e.g. to increase notified outstanding claims to take account of IBNR).

Long-tail

A term used to describe classes of insurance business (e.g. US casualty, including asbestos, pollution, medical malpractice) where it is known from experience that notification or settlement of claims may not take place until many years after the writing of the business.

Managing Agent

The underwriting agent (normally a limited company or partnership) which has the day-to-day conduct of a syndicate or group of syndicates on behalf of all names who are members of the managed syndicate or syndicates.

Manifestation

A basis for determining the scope of coverage under an occurrence based policy which requires the injury sustained by the claimant against the assured, to have manifested itself during the policy period.

Members' Agent

The underwriting agent (normally a limited company or partnership) which advises names on their choice of syndicates, places names on the chosen syndicates and provides general advice to names in relation to their underwriting affairs.

Name

An underwriting member of the Society of Lloyd's, who subscribes to policies of insurance through membership of one or more syndicates for particular years of account. When an insurance is subscribed by the active underwriter on behalf of the syndicate, each name is liable for his stated fraction only of the insurance but not for the fractions of other members ("each for his own part and not one for another … and in respect of his due proportion only"). The personal liability of each name is unlimited.

Occurrence basis

A policy is said to be written on an occurrence basis if it covers the consequences of events occurring during a period of insurance even though claims may not arise or be made until after expiry of the period of insurance (compare claims made policies which confine the liability of the insurer to claims made during the currency of the policy).

Open year

A year of account in respect of which the ultimate financial outcome remains to be determined. Each year of account of a Lloyd's syndicate must remain open for 36 months and may remain open beyond 36 months.

Outstanding claims

A claim which has been notified to the insurer but has not yet been settled.

Outstanding claims reserve

A reserve held by an insurer to meet claims notified but not yet paid.

Reinsurance to close ("RITC")

The method by which the underwriting account of a Lloyd's syndicate is closed (usually after 36 months). The reinsurance to close is effected by means of a reinsurance to close contract - an agreement under which underwriting members (the reinsured Names) who are members of a syndicate for the closed year of account agree with the underwriting members who comprise that or another syndicate for a later year of account (the reinsuring Names) that the reinsuring names will indemnify the reinsured Names against all known and unknown liabilities of the reinsured names arising out of insurance business underwritten through that syndicate and allocated to the closed year, in consideration of:
(a)payment of a premium; and
(b)the assignment to the reinsuring Names of all rights of the reinsured Names arising out of or in connection with that insurance business.

Retrocession

Reinsurance of reinsurance.

Roll over policy

Such policies can take various forms and an all-embracing definition cannot be given

Run-off contract

A run-off contract is a policy of reinsurance by which a syndicate or insurance company is reinsured, subject to the terms of the policy, against outstanding and potential future liabilities, claims and expenses in respect of business written into past underwriting years or into such past years of account as are specified in the policy. Such an excess of loss reinsurance contract may provide the reassured with protection which is unlimited both in aggregate amount and in time and which covers the reassured's whole account or a defined part of it.

Short tail

A term used to describe classes of business where it is known that for the most part claims will be notified and settled within a short period after the insurance was written.

Stamp capacity

In relation to a syndicate, the aggregate of the syndicate premium limits of all the members for a given year of account of the syndicate.

Stop loss reinsurance

A form of reinsurance under which the reinsurer pays the cedant's losses in any year to the extent that they exceed a specified loss ratio or amount. The reinsurance is usually (though need not be) subject to a specified monetary limit.

Syndicate

A group of underwriting members underwriting insurance business through the common agency of a managing agent, each underwriter taking a proportion of the insurance for himself/herself, without assuming liability for the proportions taken by the other members of the syndicate.

Syndicate auditor

In relation to a syndicate, the auditor responsible for (i) auditing the syndicate's annual financial statements and (ii) carrying out the work required for the purposes of the annual solvency test.

Time and Distance policy

Such policies can take various forms and an all-embracing definition cannot be given. They could include policies of reinsurance where recovery under the policy is not made until a period of time after the policy is taken out and where the amount of available indemnity is determined by the investment income on the original premium over that period of time.

Triple-trigger

A basis for determining the scope of coverage under an occurrence based policy whereby the policy is triggered if any part of the injury process from first exposure to manifestation of injury occurs during the policy period including so-called "exposure in residence" (i.e. progressive injury occurring after exposure to asbestos has ceased). The triple-trigger theory was first adopted in Keene Corporation v Insurance Company of North America 667 F 2d 1034 US Circuit Court of Appeals, District of Columbia Circuit. Pursuant to that decision the insured could choose the policy year from which to pursue recovery and the chosen insurer was required to meet the total liability of the insured even though part of the injury process may have occurred at times when the policyholder was uninsured or had no proof of insurance coverage.

Year of account

Each syndicate operates with a given membership for one calendar year only. The calendar year of a syndicate is called the syndicate year of account (e.g. the 1985 year of account of a particular syndicate ).

ABBREVIATIONS/ACRONYMS

AARD Accounting and Auditing Review Department

AASC Accounting and Auditing Standards Committee

ACF Asbestos Claims Facility

AGGREGATE RESULTS Financial information, produced by Lloyd's prior to the Global Accounts as at 31 December 1982, relating to the underwriting results of the Lloyd's Market and released to underwriting agents and the public.

ALM Association of Lloyd's Members

ANNAN Association of Non-North American Names

APCAuditing Practices Committee of the Consultative Committee of Accounting Bodies

AR Attorneys' Report

AWP Asbestos Working Party

BIBA British Insurance Brokers' Association

CCAB The Consultative Committee of Accounting Bodies

CCR Center for Claims Resolution

CEG Chief Executive's Group

CIS Claims Information System

DES Diethylstilbestrol

DTI Department of Trade and Industry

ECG Environmental Claims Group

EPA US Environmental Protection Agency

GAD Government Actuary's Department

IBNR Incurred but not reported

ICA 1982 Insurance Companies Act 1982

ICA 1974 Insurance Companies Act 1974

LATF Lloyd's American Trust Fund

LAUA Lloyd's Aviation Underwriters' Association

LIBC Lloyd's Insurance Brokers' Committee

LMCS London Market Claims Services

LMUA Lloyd's Motor Underwriters' Association

LMX London Market Excess of Loss

LNAWP Lloyd's Names Association Working Party

LPSO Lloyd's Policy Signing Office

LUA Lloyd's Underwriters' Association

LUAA Lloyd's Underwriting Agents' Association

LUCRO The Marine Market Claims Office

LUNCO Lloyd's Underwriters' Non-Marine Claims Office

LUNMA Lloyd's Underwriters' Non-Marine Association

MAIR Members' Agent's Information Report

Merrett Judgment The judgment of Cresswell J in Henderson v Merrett Syndicates Ltd [1997] LRLR 265

MSSC Members' Solvency and Security Committee

MSSD Members' Solvency and Security Department

MPRs Minimum PercentageReserves

Murray Lawrence letter The letter of 18.3.82 set out in full in chapter 19

NDA Names Defence Association

OPL Overall Premium Limit

PI Premium Income

PSL Personal Stop Loss

PTF Premiums Trust Fund

RBUA Richard Beckett Underwriting Agencies Ltd

Relevant Period 1.1.78 to 31.12.88

RITC Reinsurance to close

SRF Special Reserve Fund

SSC Solvency and Security Committee

SSOB Statutory Statement of Business being the annual return required by statute to be furnished by Lloyd's to the Board of Trade or the DTI (known as Annual Statements prior to 1982 year end).

UAAD Underwriting Agents and Audit Department

UNO United Names Organisation

XL Excess of Loss

4.THE SCHEME OF THE JUDGMENT

This action forms part of the Lloyd's Litigation. An account of the Lloyd's Litigation is set out in chapter 5, followed by a summary of proceedings against Lloyd's in other jurisdictions (chapter 6).

In view of the significance of this case domestically and internationally, I set out below in some detail the way the Lloyd's market worked in the Relevant Period, so that the essential background to the issues in this case is identified.

This trial is concerned with the Threshold Fraud Point (chapter 7) being the issue whether Lloyd's made misrepresentations which it knew to be untrue and/or as to which it was reckless whether they were true or false, and whether such misrepresentations were communicated to the Names and if so, when? The Names' Pleaded Case and the Names' Case as Summarised in Closing Submissions are set out in chapter 7. Lloyd's Case is set out in chapter 8.

The Relevant Legal Principles are set out in chapter 9.

The way the Lloyd's market worked in the Relevant Period is described in chapters 10 to 14:-

- The Administrative Structure and Governance of the Lloyd's Market (chapter 10);

- The Regulatory Background for the Auditing and Accounting Regime at Lloyd's (chapter 11);

- The Rules and Procedures Governing the Admission to Underwriting Membership of Lloyd's and Related Matters (chapter 12);

- RITC - Some General Principles - The Role of the Managing Agents/Underwriter (chapter 13); and

- RITC - The Role of the Auditors (chapter 14).

I set out in chapter 15 a broad description of the evidence of the witnesses and my assessment of that evidence.

There follows:- an Overview of the Nature and Development of Asbestos-related Claims (chapter 16), an account of the Differing Views as to the Likely Outcome of Asbestos-Related Claims and The Writing of Run-Off Contracts (chapter 17), and reference to the extent to which the number of Open Years increased during the Relevant Period (chapter 18).

In chapter 19 I set out a chronology of certain important events in 1978 to 1988 being The Years in Question. 1989 and Subsequent Years are considered in chapter 20 and Developments in Relation to Capital Structure in chapter 21.

My analysis of and conclusions as to the Threshold Fraud Point are set out in chapter 22.

In chapter 23 I consider E&O Cover at Lloyd's and in chapter 24 The Market Scandals and The Failings revealed by the Lloyd's Litigation.

My conclusions are set out in chapter 25.

The Tables and Appendices are listed at the beginning of this judgment.

5. THE LLOYD'S LITIGATION

The Lloyd's Litigation is the largest and most complex piece of civil litigation this jurisdiction has ever seen.

The Commercial Court's approach to the case management of the Lloyd's Litigation has been described in earlier judgments. The Lloyd's Litigation was divided into the following categories:-

(a) LMX Cases.

(b) Long-Tail Cases:-

(i) Run-Off Contract Cases

(ii) Reinsurance to Close Cases.

(c) Personal Stop Loss Cases.

(d) Portfolio Selection Cases.

(e) Central Fund Litigation.

(f) Other Cases.

The Court identified and decided a number of preliminary issues which (subject to appeals) were designed to assist in resolving issues of principle common to one or more categories of case.

The Court in addition selected from cases in a particular category, lead or pilot cases for trial as to liability (and principles relating to quantum), in the hope that decisions in these cases would provide broad guidance in relation to other cases in the same category. A variety of case management techniques (e.g. use of sample Names and limitations on formal discovery) were employed in group cases.

I refer to the statements issued by the court from time to time reporting on progress in the six categories of cases listed above.

The R&R settlement offer of July 1996 listed 85 syndicate based Action Groups with relevant litigating syndicate years of account. A letter from More Fisher Brown dated 24 July suggested that there were at least five additional Action Groups.

In September 1996 a market settlement was arrived at. About 95 % of Names accepted the market settlement. 1,752 Names did not accept. About 180 Names have since reached individual settlements with Lloyd's. Of the remaining Names, as at 1 November 1999 about 148 were claimants in this action and about 1,420 were not. A number of the remaining Names have joined this action since 1 November 1999. Thus there are 216 Names who are parties to this action.

I refer to the three statements I made in relation to the management of this case on 1 November 1999 and 21 January and 3 February 2000.

Appendix 1 hereto contains a list of cases forming part of the Lloyd's Litigation (and related litigation) both before and after the market settlement in September 1996.

6. PROCEEDINGS AGAINST LLOYD'S IN OTHER JURISDICTIONS

A. United States of America - California

An action by David, Deborah and Susan West was until recently proceeding against Lloyd's in the Superior Court in the State of California (the State Court). I was informed by letter dated 2.11.00 from Freshfields that this action had been settled on terms which are confidential.

B. Canada

(I) New Brunswick

There are a number of actions ongoing against Lloyd's. None of the plaintiff Names are parties to the Jaffray action.

Ten Names have commenced proceedings directly against Lloyd's. These proceedings were commenced in 1997/8. The Names claim that they were victims of fraud and fraudulent misrepresentation by Lloyd's inducing them to apply for membership of Lloyd's and that the information provided to them was a violation of the New Brunswick Securities Act. The factual allegations underlying the Names' claims of fraud cover similar ground to the allegations being made by the Names in the Jaffray action. (The New Brunswick Names also allege inter alia that Lloyd's acted fraudulently in respect of the "LMX spiral activity".)

In respect of these proceedings Lloyd's has brought motions permanently to stay the actions on applications based primarily on the Names' execution of the General Undertaking which provided that any disputes relating to their membership of or underwriting at Lloyd's would be subject to the jurisdiction of the English Courts and subject to English Law and in the alternative on forum non conveniens grounds.

In three cases Lloyd's motion has been heard and in each case the decision of the Judge has been to order a permanent stay (one was by consent). In the two contested cases the orders (both made in January 1999) were subject to certain conditions should the Names bring action against Lloyd's in England (which they have not done), namely that:

(i) Lloyd's would not require security for costs;

(ii) Lloyd's would waive any precondition that any judgment it obtains against the Names would be satisfied before they could proceed; and

(iii) they would waive any contractual provision that required the Names to pay any contractual obligations arising between the Names and Lloyd's before any action might lie against Lloyd's by the Names.

In these two cases the New Brunswick Court of Appeal in January 2000 dismissed the Names' appeals. Leave was sought by both Names to appeal to the Supreme Court of Canada, but this was refused on 5 October 2000.

No hearing date has been fixed for any of Lloyd's other motions. There is an agreement amongst Counsel that the motions will be bound by the result in the matter in which leave is currently sought.

Eight Names have joined Lloyd's as a third party to proceedings brought by the Royal Bank of Canada against them for indemnity for monies paid by the bank to Lloyd's following calls made on letters of credit/bank guarantees held by Lloyd's as security for the Names' underwriting. Lloyd's was joined to the proceedings in April 1998 and brought motions permanently to stay the third party proceedings (on the same basis as set out above). The claims made by the Names in these third party proceedings are the same as in the direct actions referred to above. No hearing date has been fixed for any of these motions and Counsel have agreed again to accept the determination of the two contested matters.

(ii) Prince Edward Island

Eight Names commenced actions against Lloyd's in Prince Edward Island in January 1999. In this action the Names allege that Lloyd's, directly and through agents, subjected them to fraudulent misrepresentations and fraudulent, deceitful and reckless practices, but for which they would have neither become members of Lloyd's nor have undertaken particular underwriting obligations. The Names also allege that Lloyd's failed to comply with the licensing, prospectus and other disclosure and filing requirements of the Prince Edwards Island Securities Act.

The factual allegations underlying the Names claims of fraud cover similar ground to those allegation being made by the Names in the Jaffray action, to which these Names are not a party. (These Names also allege, inter alia, that Lloyd's acted fraudulently in respect of the "LMX Spiral" and made misrepresentations in connection with the use of time and distance policies).

Lloyd's brought motions permanently to stay these proceedings primarily on the basis of the forum selection and choice of law clauses in the General Undertaking executed by the Names, and in the alternative on the basis of forum non conveniens. On 7 April 2000 the Judge granted a stay subject to the same conditions imposed by the New Brunswick Court but with one further condition namely that:

"Should the plaintiffs proceed expeditiously to bring an action for fraud against the defendant [Lloyd's] in England and be denied access to English Courts for hearing the action, the plaintiffs can apply to this Court to end this stay of proceedings".

No appeal has been made though time for doing so has not yet expired.

C. Australia

Proceedings have been commenced against Lloyd's in Australia by 8 Names, all of whom are counterclaimants in the Jaffray proceedings. The most advanced of the 8 cases is White v Lloyd's. Proceedings were commenced by the Commonwealth Bank of Australia against Mr White in the Victorian State Court concerning letters of credit issued by the bank to support Mr White's underwriting at Lloyd's. Subsequently, in December 1998/February 1999 Mr White served Lloyd's with a Third Party Notice. As regards the other proceedings, a Mr Luxton issued proceedings against Lloyd's in the Victorian State Court on 2 September 1999, and 6 other Australian Names issued proceedings against Lloyd's in the New South Wales State Court on 3 September 1999. Apart from the White proceedings, none of the other Writs has been served on Lloyd's.

Lloyd's is not permitted to view the Writs issued (but not served) in the New South Wales jurisdiction, but has been able to view the Writ issued, but not served, by Mr Luxton, due to the different procedural rules in Victoria. That Writ sets out substantially the same causes of action and a similar factual basis as the Third Party Notice served by Mr White and, whilst it is not known, it is suspected that the same is the case with the Writs issued in New South Wales.

As regards the legal basis for his claims against Lloyd's, Mr White has pleaded several statutory causes of action arising under the Australian Trade Practices Act and the Corporations legislation, including:

· Section 51A and Section 52 of the Trade Practices Act 1974 (Mr White pleads that Lloyd's conduct was misleading and deceptive and relies on Section 51A of the Trade Practices Act, which deem a representation as to a future matter to be misleading unless the corporation has reasonable grounds for valuing the representation); and

· s.83 of the Companies Act 1961 and ss.169-171 of the Companies (Victoria) Code: Mr White pleads that Lloyd's made an offer or invitation to the public to subscribe for or purchase membership at Lloyd's and failed to perform its statutory obligations of disclosure.

In addition, Mr White has pleaded negligent misstatement against Lloyd's, and relies upon the doctrines of "public policy" and "unconscionable" bargain in seeking to impugn or avoid, amongst other provisions, the exclusive jurisdiction clause contained in the 1986 General Undertaking which Mr White signed. Whilst the legal basis for the claim is somewhat different to the fraudulent misrepresentations relied upon by the Names in the Jaffray proceedings, the factual basis for Mr White's claim is very similar to the factual basis of the claims being made by the Names in the Jaffray action and, indeed, the original White pleading appears to draw heavily on the original pleading in the English action.

Lloyd's challenged the jurisdiction of the Victorian Court to hear the claims made by Mr White on several grounds, including the fact that Mr White (like the other 7 Australian Names) had signed the General Undertaking 1986 (which contains an exclusive jurisdiction clause in favour of the English Court). On 29 July 1999, his Honour Justice Byrne decided that, notwithstanding the exclusive jurisdiction clause, the Victorian Court could hear the claims made by Mr White. Lloyd's applied to the Court of Appeal of the Supreme Court of Victoria for leave to appeal, but Lloyd's application was refused on procedural grounds. Subsequently, Lloyd's applied to the High Court of Australia for special leave to appeal, but special leave to appeal was again refused on procedural grounds by the High Court on 11 February 2000.

Following that judgment, Lloyd's applied for an anti-suit injunction from the English Court to restrain the 8 Australian Names from progressing their claims against Lloyd's in Australia, pending the outcome of the Jaffray trial. The application was made on notice, but Mr White and the other Australian Names chose not to be represented at that hearing, although they did lodge written submissions prepared by their Australian lawyers. Mr Justice Cresswell granted a temporary anti-suit injunction against the 8 Australian Names on 3 March 2000.

Since 3 March 2000, and in reliance upon the anti-suit injunction granted by the English Court, Lloyd's has sought a stay in the Victorian Court of the White proceedings pending the outcome of the Jaffray trial. In order to be able to apply for a stay, Lloyd's entered a Notice of Appearance in the White proceedings on 6 March 2000 and attended a hearing for directions on 10 March 2000. Lloyd's application for a stay was postponed and was later heard before her Honour Justice Warren on 18 and 19 April 2000. The decision of the Victorian Court was handed down on 21 June 2000. Her Honour Justice Warren granted Lloyd's application to stay the White proceedings pending delivery of judgment in the Jaffray proceedings or until further order.

As regards the other 7 Australian Names, they were also subject to the temporary anti-suit injunction and, to date, have not served their Writs on Lloyd's.

D. Belgium: André Milhoux

Mr Milhoux is a Belgian Name who, in the summer of 1996, obtained an order from a court in Brussels which purports to have the effect of freezing his deposit at Lloyd's. His deposit is made up of a Bank Guarantee issued by the Banque Bruxelles Lambert. A demand has been made by Lloyd's on the guarantee but the Banque has not met this because of the court order. £55,449.24 remains of that Guarantee. Lloyd's has intervened in the proceedings, in the Tribunal de Première Instance, Brussels, seeking to have the court's order set aside.

Pleadings have not closed and a hearing date has not been set.

Mr Milhoux is a litigant in the Jaffray proceedings. In his Belgian pleadings, he claims that Lloyd's demand on the guarantee is a consequence of the fraud to which he claims the Names were victim and therefore fraudulent itself.

He alleges intentional fraudulent presentation of the yearly accounts, deliberate complicity by Lloyd's in the syndicates' failure to constitute sufficient reserves to cover asbestos claims, intentional fraudulent presentation of profits by Lloyd's in the annual accounts, tolerance of a false representations by the syndicates of their financial situation and he says that Lloyd's aggregate accounts encouraged 20,000 new Names to join, who would not have done so if they had realised the true state of affairs.

E. European Commission

(a) A short petition has been sent to the European Parliament with supporting documents.

(b) A complaint has been made to the European Commission alleging a failure by the UK government to comply with the First European Non-Life Insurance Directive (EC73/239).

7. THE THRESHOLD FRAUD POINT. THE NAMES' CASE.

This trial is concerned with the Threshold Fraud Point being the issue whether Lloyd's made misrepresentations which it knew to be untrue and/or as to which it was reckless whether they were true or false, and whether such misrepresentations were communicated to the Names and if so, when?

The trial is limited to and by reference to three selected or sample Names namely Captain Hindle who joined Lloyd's in 1979, Sir William Jaffray who joined Lloyd's in 1982 and Mrs. Dona Evans who joined Lloyd's in 1988. The trial is confined to allegations of fraud during the period 1978 to 1988.

Table 1 below sets out certain information which explains the background to the Threshold Fraud Point.

TABLE 1

AS AT 31ST DEC.

YEAR OF ACCOUNT

CLOSED INTO

BY SYNDICATES IN ABOUT

WITH MANAGING AGENTS' + AUDITORS' REPORTS IN ABOUT

LLOYD'S AGGREGATE RESULTS/GLOBAL A/C's AS AT 31ST DECEMBER

PUBLISHED IN OR ABOUT AUGUST OR SEPTEMBER

REPORT LLOYD'S AGGREGATE/GLOBAL RESULTS FOR LATEST CLOSED YEAR (and two subsequent open years)

WOULD BE AVAILABLE TO BE SEEN BY JOINERS (and continuing Names) FOR YEAR

YEAR

1977

1975

1976

Mid 1978

1977
Aggregate Results

1978

1975

1979

1

1978

1976

1977

Mid 1979

1978 " "

1979

1976

1980

2

1979

1977

1978

Mid 1980

1979 " "

1980

1977

1981

3

1980

1978

1979

Mid 1981

1980 " "

1981

1978

1982

4

1981

1979

1980

Mid 1982

1981 " "

1982

1979

1983

5

1982

1980

1981

Mid 1983

1982
Global Accounts

1983

1980

1984

6

1983

1981

1982

Mid 1984

1983 " "

1984

1981

1985

7

1984

1982

1983

Mid 1985

1984
Global Report/Accounts

1985

1982

1986

8

1985

1983

1984

Mid 1986

1985 " "

1986

1983

1987

9

1986

1984

1985

Mid 1987

1986 " "

1987

1984

1988

10

1987

1985

1986

Mid 1988

1987 " "

1988

1985

1989

11

(1) The Names' Pleaded Case

The Names' pleaded case is as follows.

Knowledge or awareness on the part of Lloyd's are alleged to be references to the knowledge or awareness of the persons listed below during the period 1978 - 1988:

(i) Certain members of the Council and/or Committee of Lloyd's: Sir Peter Green, F. Barber, Richard Ballantyne, D.J. Barham, J.R.K. Beckett, I.R. Binney, P.G. Bird, B.J. Brennan, A.H. Chester, M.H. Cockell, D.E. Coleridge, P. T. Daniels, R.D. Hazell, C.O. Gibb, C.D.D.Gilmour, A.W. Higgins, V.V. Hudson, R.J. Kiln, W.N.M. Lawrence, S.R. Merrett, Sir Peter Miller, C.K. Murray, E.E. Nelson, A. Parry, I.R. Posgate, Sir David Rowland, C.H.A. Skey (including, where relevant, their membership of Audit and Membership Committees and their statements in the Global Reports and Accounts as LUNMA Chairmen respectively during the Relevant Period). The Names say that where any one or more of these persons acted during any year between 1978 and 1988 as Chairman or a Deputy Chairman of the Committee/Council of Lloyd's they carried special responsibilities in the oversight and administration of the Lloyd's market and had particular influence which was likely to be decisive in matters relevant to the problem of asbestos-related claims.

(ii) K.E. Randall.

(iii) H.R. Rokeby-Johnson, Robin Jackson, Bryan Kellett and Michael Williams (the other LUNMA Chairmen who contributed to the Global Reports and Accounts in the Relevant Period).

(iv) Certain members of the Asbestos Working Party during the Relevant Period (E.E. Nelson, H.R. Rokeby-Johnson, R.A.G. Jackson, D. Tayler, C.H.A. Skey).

The Names say that the persons listed at (i) to (iv) above were the principal sources of Lloyd's knowledge of the asbestos problem during the Relevant Period and constituted the directing minds of Lloyd's.

The Names say that by express decision of Lloyd's no mention of problems related to asbestos was made at Rota Committee interviews to persons joining as external Names for the years 1981 to 1989.

The Names say that by virtue of the Lloyd's Acts 1871 - 1982 Lloyd's had a continuing duty and responsibility to act at all times in good faith in accordance with its objects.

As to the Names' case in fraud, the Names say that certain representations made by Lloyd's to external Names when they were applying to join Lloyd's or considering whether to continue as underwriting members of Lloyd's, were false and fraudulent to the knowledge of Lloyd's.

The Names say that from at least 1975 until 1988 it was the established policy of Lloyd's to encourage the recruitment of new members and the expansion of the market's underwriting capacity.

Lloyd's Representations - Representations Derived from the Brochures - Representations Derived from the Aggregate Results/Global Reports and Accounts as at 31.12.81 to 31.12.87

The Names say that the Lloyd's Brochures from time to time contained statements which constituted representations to the effect that a Name joining Lloyd's:

(i) Could have confidence in Lloyd's as an institution to safeguard his/her interests;

(ii) Could trust those who were chosen by Lloyd's to regulate the Lloyd's market and manage its affairs;

(iii) Because of the way in which Lloyd's regulated and monitored underwriting accounts year by year:

(a) could rely on syndicate accounts;

(b) could in underwriting and/or deciding whether to remain a member of Lloyd's have confidence in the audited syndicate results, for results of past years;

(c) could be sure that Lloyd's as part of its regulatory duties would ensure that when prospective liabilities were reinsured by one syndicate year into another, such liabilities were being fairly assessed and quantified as between the two syndicate years.

The statements in the Brochures relied upon by the Names as supporting these alleged (derived) representations are set out in Appendix 3 to Sir William Jaffray's Re-Amended Points of Defence and Counter-claim. The statements relied upon include statements in:-

(a) Notes for Applicants for Underwriting Membership 1975/1977 version;

(b) Brochure for Applicants for Underwriting Membership: issued by Lloyd's January 1980;

(c) Brochure for Applicants for Underwriting Membership: issued by Lloyd's December 1981;

d) Brochure for Applicants for Underwriting Membership: issued by Lloyd's December 1983;

(e) Brochure for Applicants for Underwriting Membership: issued by Lloyd's December 1984;

(f) Membership: The Issues: December 1986;

(g) Membership: The Issues: December 1987.

The relevant documents allegedly seen by Captain Hindle prior to joining Lloyd's in 1979 were the 1975/1977 version of Notes for Applicants for Underwriting Membership.

The relevant documents allegedly seen by Sir William Jaffray prior to joining Lloyd's in 1982 were the 1980 edition of Lloyd's Brochure for Applicants for Underwriting Membership and a schedule of the previous 7 closed years of account of his proposed syndicates.

The relevant documents allegedly seen by Mrs. Evans prior to joining Lloyd's in 1988 were the 1986 edition of Membership: the Issues and the Global Reports and Accounts as at 31.12.84 and 85.

The Names say that Lloyd's knew and intended that prospective Names would read and rely upon the Brochures and where applicable Aggregate Results/Global Reports and Accounts as at 31.12.81 to 87 and the statements and representations contained therein, for the purposes of considering whether or not to become a Name.

It is alleged that induced by, and in reliance upon, the representations derived from the Brochures, Captain Hindle joined Lloyd's in 1979, Sir William Jaffray joined Lloyd's in 1982, following Rota Committee interviews. It is alleged that induced by, and in reliance upon, the representations derived from the Brochures and/or from the Global reports and Accounts as at 31.12.84 and 85 (see below) Mrs. Evans joined Lloyd's in 1988, following a Rota Committee interview. The Names say that Rota Committee interviews gave Lloyd's an opportunity, which it did not on any occasion take, to correct misrepresentations made by it as to the sound financial position of the Lloyd's market by giving due warning to prospective Names as to the impact of asbestos-related liabilities on the Lloyd's market. By its continuing failure to give that warning Lloyd's invited Names joining Lloyd's during the Relevant Period to place continuing faith and reliance upon the image of Lloyd's contained in the Brochures including the above representations.

Captain Hindle underwrote business at Lloyd's for the years of account 1979 to 1994, Sir William Jaffray for the years of account 1982 to 1989 and Mrs. Evans for the years of account 1988 to 1993 (all inclusive).

It is alleged that in deciding to remain a member of Lloyd's for each of the further underwriting years beyond the first, Captain Hindle/Sir William Jaffray/Mrs. Evans continued to rely upon the above representations derived from the Brochures. Further it is alleged that (where applicable) in deciding to remain a member of Lloyd's for each of the underwriting years beyond the first, Captain Hindle/Sir William Jaffray/Mrs. Evans relied upon representations derived from the Aggregate Results/Global Reports and Accounts as at 31.12.81 to 87.

The alleged representations derived from the Aggregate Results/Global Reports and Accounts as at 31.12.81 to 31.12.87 were as follows:-

(a) that the Lloyd's market was in a sound financial condition;

(b) that Names could safely join Lloyd's and/or continue their membership of Lloyd's and/or increase their Premium Income Limit with confidence that known and projected claims had been prudently and adequately reserved to ultimate.

The Names rely on specific statements in the said Appendix 3 as supporting these representations. They say that Lloyd's knew and intended that Names and prospective Names would read and rely upon the said Aggregate Results/Global Reports and Accounts and the statements and representations contained therein for the purposes of considering whether to continue membership of Lloyd's and/or increase Premium Income Limits or to join.

It is alleged that induced by, and in reliance upon, the representations derived from the Brochures and the Aggregate Results/Global Reports and Accounts as at 31.12.81 to 87 Captain Hindle, Sir William Jaffray/Mrs. Evans continued his/her membership of Lloyd's and/or increased his/her Premium Income Limit.

Falsity of Lloyd's Representations

The Names say that the representations derived from the Brochures were false at the time Captain Hindle/Sir William Jaffray/Mrs. Evans joined Lloyd's in that:

(i) The minimum audit reserves were manifestly inadequate in the light of Lloyd's knowledge of the Lloyd's market's exposure to asbestos-related liabilities such that:

(a) Lloyd's regulation of Lloyd's annual audit and solvency test was not stringent and could not be reasonably regarded as such;

(b) The annual solvency test was not a "searching" one in practice and could not reasonably be regarded as such; and/or

(c) Lloyd's annual audit procedures did not give "ample" margins of security, but in fact gave no margin of security at all.

(It is alleged that the MPRs as determined by the Committee for each of the relevant years were set to Lloyd's knowledge or recklessly below Lloyd's own estimate of what was required to maintain the solvency of Lloyd's).

(ii) Lloyd's failed to make proper and full disclosure, or ensure such disclosure was made, of material information relating to the exposure of the Lloyd's market to potentially huge and escalating asbestos-related claims and failed to regulate properly or at all the manner in which syndicates or their auditors reserved for and accounted for such potential liabilities;

(iii) Lloyd's had not strictly regulated the activities of agents operating in the Lloyd's market;

(iv) Lloyd's had in relation to the closing years of syndicates exposed to asbestos-related claims failed to implement or apply appropriate audit regulations with the result that an equitable premium for RITC as between the reinsuring members and reinsured members was not assessed and charged having regard to the nature or amount of the liabilities to be reinsured;

(v) The insurance market at Lloyd's was not and had not been properly regulated by Lloyd's;

(vi) Those chosen to regulate and manage the affairs of Lloyd's and to protect Names' interests and disseminate information, prior to and from the date of Captain Hindle/Sir William Jaffray/Mrs. Evans becoming a member of Lloyd's, withheld from him/her and/or misrepresented information concerning asbestos-related liabilities to which he/she was likely to become exposed as a member.

The Names say that the Aggregate Results/Global Reports and Accounts for the period 31.12.82 to 87 were (insofar as a Name joined Lloyd's in reliance on the said Aggregate Results/Global Reports and Accounts) false at the time when the Names joined and false at the time when Captain Hindle/Sir William Jaffray/Mrs. Evans increased his/her Premium Income Limit and/or continued as a Lloyd's member and/or to underwrite from year to year in that as Lloyd's were well aware at all material times:

(i) Lloyd's syndicates were exposed to huge and escalating asbestos-related claims which had not been adequately reserved and/or reserved to ultimate;

(ii) the RITC represented in the Aggregate Results/Global Reports and Accounts as at 31.12.81 and subsequent years did not reflect the true exposure of the Lloyd's market for known and projected claims for asbestos-related losses relating to the closed year and to all previous closed years.

Further or in the alternative it is alleged that the representations derived from the Brochures and the Aggregate Results/Global Reports and Accounts as at 31.12.81 to 87 became false.

The Names say that the representations derived from the Brochures and the Aggregate Results/Global Reports and Accounts as at 31.12.81 to 87 were made by Lloyd's knowingly or recklessly without any honest belief in their truth and that Lloyd's omitted information known to it about the affairs of the Lloyd's market, with the result that the Brochures and Aggregate Results/Global Reports and Accounts, taken as a whole, deliberately gave a false impression of the profitability of the Lloyd's market and the financial risks posed to Names by becoming and/or remaining a member of Lloyd's.

Particulars of Lloyd's Knowledge/Falsity/Recklessness

The Names set out particulars of Lloyd's knowledge/falsity/recklessness by reference to each of the eleven periods/years in question.

The Names' Case Against Lloyd's as Summarised in the Pleadings

In summary the Names' case against Lloyd's is as follows.

The Names say that Lloyd's knew or was reckless as to the fact that:

(i) The Lloyd's market's exposure to asbestos-related claims (even to the extent that those liabilities could be quantified) required reserves and RITC to be set at figures far in excess of those which were set out in the Lloyd's Aggregate Results/Global Reports and Accounts as at 31.12.81 to 87; and

(ii) To the extent that there was under-reserving, the burden would be borne by Names underwriting in future years.

It is alleged that Lloyd's knew or was reckless as to the fact that the implications of asbestos-related liabilities were such that Lloyd's ought:

(A) To have made full and proper disclosure to Names, when publishing the Aggregate Results/Global Reports and Accounts as at 31.12.81 to 87, of the estimates of the likely extent and growth of future asbestos-related claims;

(B) To have given, and repeated as appropriate, directions as to the minimum levels of reserves necessary for syndicates with any material exposure to asbestos-related claims to cater for their potential liabilities;

(C) To have given clear and appropriate directions to syndicates with any material exposure to asbestos-related claims, in relation to keeping open the 1979 and subsequent years of account, wherever such syndicates were unable to assess and quantify fairly such claims for the purposes of fixing the RITC;

(D) To have given clear and appropriate directions to underwriting agents or otherwise have ensured that full and proper disclosure was made to all Names of their syndicates' exposure to asbestos-related liabilities and the treatment by those syndicates in their accounts of their liability to such claims;

(E) To have given clear and appropriate directions to Lloyd's auditors in relation to the treatment of asbestos-related liabilities in syndicate accounts so as to ensure that inequitable or inadequate figures for RITC were not incorporated into syndicate accounts.

The Names say that Lloyd's knowingly or recklessly failed at any material time to take the above steps or any of them.

Further, it is alleged that Lloyd's knowingly or recklessly failed to respond at any material time adequately or at all to the questions and issues raised in the letter sent to it by Neville Russell on 24 February 1982. The two letters both dated 18 March 1982, one addressed to Lloyd's Panel of Auditors from Mr. Randall, the other addressed to Lloyd's underwriters from Mr. Lawrence, were recklessly and/or deliberately concealed by Lloyd's from the members' agents and thereby the Names in that they were not sent to or received by the vast majority of members' agents. Further, it is alleged that Lloyd's knowingly or recklessly took no or no adequate steps to secure that appropriate measures were taken by syndicates and/or syndicate auditors in response to the letters from Mr. Lawrence and/or Mr. Randall.

The Names say that recklessly and/or deliberately, Lloyd's failed to advise or warn Names of the nature and extent of the asbestos problem facing Lloyd's at the material times.

It is alleged that the representations derived from the Brochures and the Aggregate Results/Global Reports and Accounts as at 31.12.81 to 87 were made fraudulently in that Lloyd's published the Brochures and Aggregate Results/Global Reports and Accounts knowing or not caring that the representations contained therein were false or not caring or being reckless as to whether the representations were true or not and without any honest belief in their truth.

Alternatively it is alleged that Lloyd's fraudulently failed to correct the said representations knowing that they had become false and/or not caring or being reckless as to whether they were true or false. In so far as the Aggregate Results/Global Reports and Accounts as at 31.12.81 to 87 published by Lloyd's were aggregations of syndicate results, Lloyd's knew or were reckless as to the fact that the aggregated reserves under-reserved for the asbestos liabilities overhanging the market and failed to deal equitably with RITC.

Further or alternatively the Names say that throughout the Relevant Period the accounts which Lloyd's published as Aggregate Results/Global Reports and Accounts were a mere aggregation of syndicate results. Lloyd's deliberately chose not to make an independent investigation and assessment of the global exposure of the Lloyd's market to asbestos-related claims (including IBNR). Instead, Lloyd's put forward as safe and reliable, year by year, figures which could not be reconciled with current claims information and closed their eyes throughout the Relevant Period to the implications for external Names.

Reliance

It is alleged that but for Lloyd's representations (derived from the Brochures and/or where appropraite the Aggregate Results/Global Reports and Accounts for the period 31.12.81 to 87) Captain Hindle/Sir William Jaffray/Mrs. Evans:

(i) Would not have proceeded to join Lloyd's as a Name and/or join any syndicates exposed to asbestos-related liabilities and/or would have resigned from underwriting business at Lloyd's; and/or

(ii) Would not have increased his/her underwriting premium limit in the years in which he/she underwrote business at Lloyd's; and/or

(iii) Would not have signed the General Undertaking effective from 1 January 1987.

In the event and in reliance on the representations derived from the Brochures and/or where appropriate the Aggregate Results/Global Reports and Accounts for the period 31.12.81 to 87 Captain Hindle/Sir William Jaffray/Mrs. Evans took (and in the case of resignation, failed to take) all the above steps.

It is alleged that by reason of the foregoing Captain Hindle/Sir William Jaffray/Mrs. Evans suffered loss and damage.

The issues to be determined at this trial include whether each of the sample Names relied upon any of the pleaded (fraudulent) misrepresentations during the period 1978 to 1988.

Alternative Claim

The alternative claim is outside the ambit of this trial.

Allegations not made by the Names

The Names' case is confined as follows:-

(i) No allegations of fraud are made against any of the Chief Executives of Lloyd's;

(ii) No allegations of fraud are made against any non-working (i.e. nominated or external) members of the Council of Lloyd's;

(iii) No allegations of fraud are made against any employees of Lloyd's, except Mr. Randall;

(iv) Except as above, no allegations of fraud are made against any underwriters on any Lloyd's syndicate, nor against any other persons concerned in the management of such syndicate or in its year-end audit;

(v) The Names do not seek to investigate at trial the position of any particular Lloyd's syndicates or seek to show that any such syndicates wrongly closed any years of account;

(vi) The Names do not make any allegations of fraud against any panel auditors, nor do the Names seek to investigate at trial the manner in which any particular firm or firms of auditors, or individual audit partners, conducted the audit of any Lloyd's syndicate for any particular syndicate year of account;

(vii) No allegations are made that any material information was withheld from underwriters or auditors by or with the connivance of Lloyd's, save that it is alleged that Lloyd's failed to distribute the Murray Lawrence letter of 18 March 1982 to members' agents, adequately or at all.

(2) The Names' Case as Summarised in Closing Submissions

Mr. Goldblatt QC summarised the Names' case in his closing submissions as follows.

The Names' case is one in tort for fraudulent misrepresentation. They contend that Lloyd's intended to make and did make representations in its Brochures and annual Global Reports and Accounts; that those representations were not true; that it did not honestly believe them to be true; and that external Names were intended to and did rely upon them in deciding whether or not to join Lloyd's or to continue their membership of Lloyd's.

The Representations - The Brochures

Lloyd's Brochures from time to time contained statements which constituted representations to the effect pleaded, see (1) above.

The Global Reports and Accounts

The representations to be derived from the Aggregate Results/Global Reports and Accounts as at 31.12.81 to 31.12.87 were as pleaded, see (1) above.

The Falsity of the Representations

The Names say that these representations, made by Lloyd's, were untrue, for two principal reasons:

(i) that the market was under-reserved for asbestos-related losses; and/or,

(ii) that there were systemic problems affecting the market's ability to quantify accurately future losses for asbestosis such that the ultimate cost of the asbestos losses which would affect the Lloyd's market was not capable of quantification.

The Names say that the evidence before the Court which proves both under-reserving and radical uncertainty comes in the following forms:

Under-Reserving

(i) The document provided to the Court by Equitas under the terms of the Court's confidentiality orders.

(ii) The numerous contemporary comments and documents of individuals both within and outside Lloyd's to that effect.

(iii) The information contained in the AU38 forms. These documents also provide clear evidence of the impact of asbestos liabilities on the Lloyd's market and demonstrate that it was very considerably under-reserved for asbestos liabilities even on the syndicates' own market projections.

(iv) The charts prepared by Mr Louw on the basis of Mr Rayment's figures.

Uncertainty

(v) The numerous contemporary comments and documents of individuals both within and outside Lloyd's to that effect.

(vi) The attorneys' reports coming into Lloyd's from US attorneys were a critical source of information to all within the market. Analysis of the reports demonstrates how consistently and powerfully these attorneys' reports detailed the massive scale of the asbestos liabilities and the indeterminacy of their ultimate cost both globally and to Lloyd's. One key feature of the attorneys' reports to be borne in mind is that, as Attorney H reported on 20/1/83:

'The Working Party wish to draw the Market's attention to the fact that no allowance is made for IBNR, due to the many uncertainties that exist'.

This remained the position throughout the Relevant Period, Attorney H reporting on 24/8/87 that:

'It is extremely difficult for us to provide any reliable advice as to how the asbestos problem is likely to develop over the ensuing years except to the extent that it now appears that the total insurance limits of most insureds could be consumed by this enormous problem'.

Knowledge

The Names say that the knowledge of relevant individuals of this under-reserving and uncertainty is proved by a variety of forms of evidence before the court:

(1) The attorneys' reports coming into Lloyd's from US attorneys, were a critical source of information to all within the market.

(2) Contemporary comments during the course of the Relevant Period by individuals amongst the 33 and other documentary evidence indicating their knowledge. The evidence of the key witnesses called by Lloyd's from amongst the 33, (Mr. Murray, Mr. Murray Lawrence, Sir Peter Miller, Mr. Kellett, Mr. Jackson and Sir David Rowland) was partial. Their purported lack of memory of key events and documents was unconvincing as were their attempts to explain away damaging documents.

(3) The inferences to be drawn in respect of those witnesses Lloyd's chose not to call.

(4) The critical period during the Relevant Period when the documentary evidence most clearly demonstrates such knowledge is from the latter half of 1981 to the first half of 1982. A key event within this period was the discussion of and issue of the Murray Lawrence letter by the Committee of Lloyd's. A further significant aspect of the Names' case relates to the restricted circulation of this letter. The Names say that the evidence points to a restricted circulation of the letter; to members' agents as a general body not receiving it as they ought to have done; and to Mr. Lawrence and/or Mr. Randall as being those most likely to be responsible for that restricted circulation.

(5) The charts prepared by Mr. Louw and the evidence of Mr. Sturge on the 'feel' which a simple set of calculations would have given the market are also relevant. A 'back of the envelope' exercise was a straight-forward means of gaining a 'feel' for what order of exposure to asbestos Lloyd's had. Whilst it may be crude, it would certainly give such a feel and it is inconceivable that many of those at the heart of Lloyd's with knowledge of the market and of asbestos did not gain such a 'feel' themselves. The documentary evidence makes it plain that Mr. Nelson for one did precisely that.

The Names say that Lloyd's is fixed with the knowledge of these relevant individuals and hence liability for the misrepresentations because:

(i) In the course of the formal decision to publish the representations complained of there were people at Lloyd's who failed to speak out. These people were, or were amongst, the 33 against whom the Names allege fraud. Those with guilty knowledge who withheld it were the primary representatives of Lloyd's in relation to the critical omission (in failing to include a 'health warning' or qualification to the Brochure/ Global Reports and Accounts).

(ii) Those responsible for the content of the statements from the Chairmen of the Society and of the Market Associations of Lloyd's were amongst those identified above. (a) Such individuals acted as, or were held out as, agents for Lloyd's in making these statements. (b) These individuals were the primary representatives of Lloyd's in relation to the making of these statements. Either (a) or (b) is sufficient to fix their knowledge upon Lloyd's.

8. LLOYD'S CASE

Mr. Aldous QC for Lloyd's summarised Lloyd's case in his closing submissions as follows.

Many of the original allegations which may have encouraged some Names to reject the R&R proposals and to sue Lloyd's have been shown to be unreliable or are now abandoned.

The Names have adopted an inconsistent position concerning the Lloyd's market's reserving for asbestos and pollution. Further, in instituting these proceedings, the Names seem to have been unaware of:

(i) the extent of information about asbestos which was available to all syndicates and the role of the AWP in distributing up to date information across the market;

(ii) the extensive information about asbestos which was provided to panel auditors annually;

(iii) quite how the asbestos problems increased in ways which were not predicted within Lloyd's and the insurance market generally; and

(iv) the underwriting activities of many of the 33, including their personal underwriting, which were inconsistent with their alleged dishonesty.

It is essential to have regard to the context in which the allegations are said to have occurred:

(a) In considering the Names' allegations, it is of assistance to look at other events in the Relevant Period and see the attitude and approach of those accused of fraud, the atmosphere of the times and the views of external bodies who looked at the structure and governance of the Lloyd's market. During the Relevant Period there was a process of vigorous regulatory reform, the aim or purpose of which (better disclosure, new accounting standards etc) was the very antithesis of the allegations of concealment of and a connivance in under-reserving. There were also two independent inquiries into the regulation of the Lloyd's market, which did not disclose any of the failings in the Lloyd's system which it is now alleged were known to the 33 at the time, and whose recommendations were implemented with efficiency and zeal. There were crises which demanded urgent attention and response - such as the "scandals" of 1982 and the PCW affair - which were responded to by Lloyd's in a serious and open manner.

(b) The Relevant Period (11 years) cannot be approached as though it is a single or unified event. Perceptions, concerns and preoccupations altered as opinions were changed by developing events and the different perspective which they gave. In addition new issues emerged which demanded urgent attention. Market conditions and outlook also changed: there were periods when market conditions engendered real optimism for the future (in particular the period 1985 to 1987).

The Names' case is founded upon allegations of fraudulent misrepresentation contained in the various Brochures issued by Lloyd's during the Relevant Period and Global Reports and Accounts of market results.

(i) The Brochures and Globals were prepared and reviewed with considerable care to ensure their accuracy and published with the approval of the Committee or Council. The LUNMA Chairmen's statements were not produced or prepared by Lloyd's, but by the LUNMA Chairmen without interference.

(ii) The implied representations which the Names allege cannot be found in the Brochures. The contrived implications relied upon are a disguised attempt to impose regulatory obligations on Lloyd's which the Courts (in the Ashmore and Clementson decisions) have previously held do not arise. The contrived nature and content of these representations reflects the real heart of the Names' complaint, a claim of alleged regulatory failure by Lloyd's. To circumvent section 14(3) of the Lloyd's Act, the Names have sought to force this claim into a case of fraudulent misrepresentation for alleged breaches of obligations which the Court (having read the Brochures) had previously held Lloyd's had not agreed to undertake. Moreover the Names have no justifiable complaint against Lloyd's for alleged regulatory failure.

(iii) The collegiate nature of the decisions of the Committee and Council to publish the Brochures and the Globals is important when considering the test for attributing a particular state of mind to Lloyd's in relation to those documents. In order to establish that that state of mind was dishonest, it is necessary for the Names to show that the majority of the body who approved and made the decision to publish the Brochure or Globals had such a state of mind. In relation to the Chairman of Lloyd's statement, the Chairman had no authority to include a statement in the Globals without consideration and approval of the Committee (for the 1981 to 1984 years of account) and the Council (for the 1985 to 1987 years of account). His statement was a commentary on the results in the form in which the Committee/Council had approved them and cannot sensibly be separated out from those Global results when considering the issue of attribution. Again, therefore, it is necessary for the Names to establish that a majority of the Committee/Council were aware that the Chairman's statement was untrue or were reckless as to the same. In those areas where the Chairman's statement expressed his own view, it is necessary to show that the majority of the Committee/Council (as appropriate) were aware that the Chairman did not hold such an opinion.

(iv) The LUNMA Chairmen's statements were not statements made by or on behalf of Lloyd's, but individual statements by the Chairmen of one of the market associations. In order to establish that Lloyd's acted dishonestly in relation to the publication of such a statement, the Names would have to show both that the relevant individual had a dishonest state of mind in relation to the contents of his statement, and that a majority of the body approving publication were likewise acting dishonestly in publishing it.

There are a number of features of the Names' case which make an analysis of the structure of the Lloyd's market, and of the respective roles of Lloyd's, the managing agents, the members' agents and the auditors within that market, of crucial importance:

(a) The Names are forced to look for contrived representations in two types of document only, the Brochure and the Globals, because of the very limited interaction between Lloyd's and applicants or Names (the Name's principal relationship and channel of communication being with his/her underwriting agents, members' and managing).

(b) The representations alleged seek to fix Lloyd's with obligations (such as the obligation to advise Names) which are properly the members' agents responsibilities. The allegation that Lloyd's "turned a blind eye" by not conducting some form of macro-reserving project or second-guessing syndicates' audited results, is an attempt to impose on Lloyd's an obligation to perform the functions of managing agents and auditors.

(c) The allegations of fraud against Lloyd's are not premised upon any suggestion that Lloyd's had access to special information or insight not available to the participants in the market, be they managing agents, their auditors or members' agents (indeed the Council and Committee consistently had less knowledge than the market about asbestos).

(d) If the Names' allegations are factually correct, then it would follow that each managing agent of a syndicate exposed to asbestos-related claims, each firm of panel auditors concerned with such a syndicate, each members' agent advising Names on syndicate selection, and the DTI as the overall regulator of the insurance industry, should have drawn similar conclusions to those which the Names allege Lloyd's should have drawn. It would equally follow that each of these bodies, in their own conduct throughout the Relevant Period, also acted dishonestly, and "turned their back" on the obvious. The Names' case requires an acceptance of extensive dishonesty throughout the market and of all the bodies operating in that market; an entirely improbable state of affairs which the Names have not sought to assert, still less to prove. It entails the suggestion either that there was the (improbable) coincidence of a series of unconnected and individually dishonest acts which ensured that no single group revealed the dishonesty of any other group, or that the dishonest acts were somehow connected and inter-dependent (the grand conspiracy theory).

(e) This is also true of members of the Council and Committee who are not accused of dishonesty (including the two Chief Executives, the many working members of the Council against whom no allegations of fraud are made, and external and nominated members of the Council) and the many members of the Corporation staff against whom allegations of fraud have not been made, such as Mr Tony Parkington, Mr Simon Tovey, Mrs Catherine Stynes and Mr Alan Pollard.

(f) The evidence establishes that the solvency and audit system was perceived by Lloyd's to be operating properly during the Relevant Period. At no stage during the Relevant Period did the regulatory system signal that the process by which managing agents and auditors participated in establishing reserves was one which could no longer safely be relied on. On the contrary, through the increases in reserves seen in response to a deteriorating claims situation and the increasing number of open years, the system worked. The accounting reforms and developments implemented during the Relevant Period included the introduction of a requirement of true and fair accounting, the production of the Audit Manual, the publication of the Audit Brief and the on-going introduction of new firms onto the auditors' panel.

The argument that Lloyd's turned its back on under-reserving is premised on an allegation that Lloyd's perceived during the Relevant Period that the scale of asbestos claims was so great and their final number so uncertain that either reserves could not equitably be set, or the total of reserves established by the Lloyd's market was perceived to be manifestly insufficient based on some form of "back of the envelope" calculation. To support their allegations, whilst eschewing an allegation of fraud against the AWP in the order of 1 July 1999, the Names have alleged that the AWP decided that attorneys should not make reserve recommendations which reflected future projections and claims. Various quotations have been culled from reports and periodicals to support the allegation that asbestos was perceived as a claim which was too uncertain to permit reserves to be equitably set; and crude "macro" calculations have been put forward of the Lloyd's market's share of outstanding and future asbestos claims.

Lloyd's submits:

(i) The AWP was a market body whose members did their best to ensure that asbestos claims received the serious attention which they deserved, and that syndicates had access to the most accurate and up-to-date information available. Issues relating to IBNR were left to individual syndicates to determine, utilising that information in the context of their individual books of business and protections. The Committee of Lloyd's did not attempt to influence the form in which reserve advices were produced.

(ii) The insurance industry did not foresee the scale of asbestos claims which were eventually to come. Insurance companies throughout the world and Lloyd's syndicates believed that exposure to asbestos claims could be fairly reserved for. These reserves were later shown to be inadequate because of the unforeseeable manner in which asbestos claims continued to develop, with new classes of claims and new categories of assureds emerging. This deterioration did not present itself as a continuing and inevitable event, but as a series of developments which, as they occurred were factored into reserving calculations, but which did not themselves presage the further deterioration to come.

(iii) This perception of asbestos claims was not limited to the insurance industry, but extended to other bodies which made judgments as to the future number of claims. The views that assureds such as Johns Manville formed when settling coverage disputes, and which the US Bankruptcy Court formed when approving the Johns Manville reorganisation, were shown by hindsight to be equally inadequate, but were arrived at in good faith and were regarded as a proper foundation on which to take important decisions at the time.

(iv) The Names rely on figures from the Califano statement, Dr Selikoff's research and the Commercial Union and MacAvoy reports, but have chosen not to rely on reports such as Conning and Munich Re. The figures which the Names rely on were regarded as at the outer fringes of contemporary statements of view, and remain so even with hindsight. The development of claims numbers during the Relevant Period was not consistent with the problem being one of the scale suggested by these figures. Many sources in the world insurance industry and amongst producers believed in the early 1980's that the likely total of claimants would be of the order of 40-50,000. Even towards the end of the Relevant Period, when matters had deteriorated considerably, the likely total was viewed as one in the 80,000-100,000 range.

(v) The Names' allegation that Lloyd's could and should have performed a "back of the envelope" calculation which would have revealed that the Lloyd's market was under-reserved for asbestos claims is misconceived. No witness with relevant expertise agreed that such an exercise could be performed, nor is there any evidence that anyone either made such a calculation, or believed that it could be made, at the time. Where it has been possible to test the figures for Lloyd's share of known outstanding claims put forward by Mr Louw, it is clear Mr Louw's figures wildly over-state the position.

The Names' allegations as to the various steps which Lloyd's should have taken during the Relevant Period are premised on a fundamental misconception of the nature of the Lloyd's regulatory role, and the fundamental distinction between that role and the executive, managerial, advisory and auditing role performed by agents and auditors.

The allegation that Lloyd's engaged in a strategy of recruiting Names or encouraging existing Names to increase their capacity in order to meet asbestos losses (the recruit to dilute allegation) was misconceived. The evidence establishes that the Lloyd's market capacity grew in response to external market factors, that growth was spread across different sectors of the Lloyd's market, and that Lloyd's competitors also grew to a similar or greater degree at this time.

The Names' allegation that MPRs were deliberately set at too low a level in order to encourage under-reserving should be rejected. The allegation misunderstands the purpose of MPRs and the alternative reserving tests almost universally applied to long-tail business. The proposed MPRs, and the market settlement statistics which were collected to assist in establishing the MPRs, were widely distributed to the DTI, the auditors and the market associations for comment and review and were initially suggested by Corporation staff. Again the allegation that MPRs were set deliberately too low entails allegations of dishonesty against many other persons and bodies.

The events of the pivotal period demonstrate an honest and entirely proper regulatory response to the issue of reserving for asbestos claims. Important and useful information was provided by Lloyd's to underwriting agents and to auditors to assist them in the audit. The auditors' concerns in the Neville Russell letter were treated with due seriousness, and received a proper response in the form of the Murray Lawrence letter. The evidence establishes that the Committee intended that that letter should be sent to all underwriting agents (members' and managing agents) and panel auditors; that it was so sent; and that thereafter asbestos was dealt with through the terms of the Audit Instructions and the annual meeting with panel auditors at which Lloyd's arranged for a member of the market body concerned with asbestos claims (the AWP), to give an up-date on the development of these claims. After the Murray Lawrence letter was sent, there was no occasion on which the auditors repeated the concerns they had expressed in the Neville Russell letter about the manner in which some syndicates were reserving for asbestos claims.

As to the Outhwaite syndicate, the existence of the run-off market in which this highly regarded syndicate was so heavily engaged, and the way in which different syndicates responded to that market, confirms that the perception of the future development of asbestos claims in the early 1980s was very different to that for which the Names contend. The series of events by which the Outhwaite 1982 year came to be left open in early 1985 reveal the proper working of the Lloyd's audit and agency system. Lloyd's did not acquire any information or insight from its involvement with the Outhwaite syndicate, whether in 1985 or thereafter, which suggested that there were any widespread problems in the audit system.

The PCW settlement of 1986/1987 confirms that even in the most difficult of circumstances, it was believed that equitable reserves could be established for syndicates with significant asbestos exposures. The subsequent deterioration of the syndicates' run-off reflects the unforeseen developments in asbestos and pollution claims. Nominated members of the Council and senior members of Corporation staff such as Mr Lord were intimately involved in the Council's consideration of the affairs of the PCW syndicates and did not themselves draw the conclusion that there was any problem with the audit regime.

As to the Names' allegation that Lloyd's should have warned Names in Rota of the risks posed by syndicates touched by asbestos, the Rota interview was the culmination of an extended admission process. Its limited purpose was to verify that the Name's agent had explained the fundamental features of membership to Names. It was not the context in which advice could be given, nor did this form part of the Rota Committee's role.

As to the Inland Revenue investigation into rollover policies and rollover policies themselves, the investigation was premised on the allegation that the Lloyd's market was over-reserved and seeking to defer the payment of taxable profit. Rollover policies (which in the vast majority of cases did not involve any impropriety on the part of the underwriters who took them out) evidenced the desire of syndicates to protect their Names against any risk of catastrophe claims or claims from the old years which had not been foreseen and for which no specific reserve had been allocated.

As to certain conspiracy theories which the Names have advanced during different stages of this trial (the allegation that the Bank of England sent Lloyd's a copy of a letter warning of "asbestos Armageddon" and the exposure of clearing banks to the Lloyd's market in 1982; the allegation that a secret Lloyd's department or committee, FOLDRUG, was monitoring the market's exposure to asbestos claims; and the allegation that Lloyd's had destroyed copies of Ian Hay Davison's book), each of these allegations is misconceived.

As to the allegations of reliance by the three sample witnesses, the claim that these Names either perceived or relied upon the representations alleged to be contained in the relevant Brochure or Global Reports and Accounts has not been substantiated. These Names have not even established that they received and considered the documents in question, still less that they understood them to make the representations pleaded, and relied on such representations. The evidence suggests that the Names relied on the advice of their members' agents.

9. THE RELEVANT LEGAL PRINCIPLES

The Tort of Deceit

The relevant legal principles as to the tort of deceit are as follows:-

(1) In order to sustain an action in deceit, there must be proof of fraud. Nothing short of fraud will suffice. Fraud is proved where it is shown that a false representation has been made

(i) knowingly, or

(ii) without belief in its truth, or

(iii) recklessly, careless whether it be true or false.

To prevent a false statement from being fraudulent, there must be an honest belief in its truth. (Lord Herschell in Derry v Peek (1889) 14 App. Cas. 337 at 374).

(2) It is not necessary that the maker of the statement was "dishonest" as that word is used in the criminal law. The relevant intention is that the false statement shall be acted upon by a person to whom it is addressed. If the false statement was made knowingly and that intention is proved, then the basis for liability for the tort of deceit is established. That conduct and state of mind was described as "dishonest" in Derry v Peek and may also be called "fraudulent"; but that is not necessarily using those words in their criminal sense. (Standard Chartered Bank v Pakistan National Shipping Corporation (No.2) [2000] 1 Lloyd's Rep. 218 at 224, Evans LJ).

(3) The misrepresentation which is necessary to found an action in deceit must be a representation as to a past or existing fact (Clerk & Lindsell on Torts, 17th Edition para 14-05).

(4) In order to give a cause of action in deceit, not only must the statement complained of be untrue to the defendant's knowledge, it must be made with intent to deceive the plaintiff, with intent that it shall be acted upon by him/her (Clerk & Lindsell supra 14-29 and the cases there cited). Thus to establish liability in deceit it is incumbent on the representee to show that the representor intended his statement to be understood by the representee in the sense in which it was false (Goose v Wilson Sandford, CA 14.3.2000).

(5) For a plaintiff to succeed in the tort of deceit it is necessary for him/her to prove that (i) the representation was fraudulent, (ii) it was material and (iii) it induced the plaintiff to act (to his/her detriment). A representation is material when its tendency, or its natural and probable result, is to induce the representee to act on the faith of it in the kind of way in which he/she is proved to have in fact acted. The test is objective. Inducement is a question of fact. (Downs v Chappell [1997] 1 WLR 426 at 433, Hobhouse LJ).

(6) In considering whether the elements of the tort of deceit have been established the relevant standard of proof is as follows:- the more serious the allegation the less likely it is that the event occurred and, hence, the stronger should be the evidence before the court concludes that the allegation is established on the balance of probability. Fraud is usually less likely than negligence (Goose v Sandford supra citing the statement of Lord Nicholls of Birkenhead in Re H and Others (Minors) (Sexual Abuse: Standard of Proof) [1996] AC 563).

In What Circumstances Could Lloyd's be Held Liable in Deceit?

1. The preamble to the Lloyd's Act 1982 stated as follows. By the Lloyd's Act 1871 certain persons were united into a society or corporation for the purposes of that Act and were incorporated by the name of Lloyd's and various powers were conferred upon the Society by the 1871 Act. The 1871 Act established the Committee of Lloyd's to have the management and superintendence of the affairs of the Society and to exercise all the powers of the Society (except as otherwise provided), subject to control and regulation by a general meeting of the members of the Society. By the 1871 Act the members of the Society in general meeting were empowered to make byelaws for the purposes provided in the Act and generally for the better execution of the Act and the furtherance of the objects of the Society. Further powers were conferred on the Society and on the members of the Society in general meeting by Lloyd's Acts 1911, 1925 and 1951. It was no longer practical or expedient for the members of the Society to exercise in general meeting the powers reserved to them by the 1871, 1911, 1925 and 1951 Acts. It was expedient in order to enable the Society to regulate the management of its affairs that (a) there should be established a Council of Lloyd's to have control over the management and regulation of the affairs of the Society; (b) the Council should have power to make byelaws for the purposes of such management and regulation, including byelaws making provision for and regulating the admission, suspension and disciplining of members of the Society, Lloyd's brokers, underwriting agents and others; and (c) certain provisions in the Lloyd's Acts 1871 to 1951 should be amended or repealed.

The 1982 Act provided for the Council (section 3),the Chairman and Deputy Chairmen (section 4), the Committee (section 5) and the powers of the Council and of the Committee (section 6).

Section 14(1) of the 1982 Act exempted the Society from liability in damages at the suit of a member of the Lloyd's community (as defined in section 14(2)).

Section 14(3) provided that:-

"Subject to subsections (1), (4) and (5) of this section, the Society shall not be liable for damages whether for negligence or other tort, breach of duty or otherwise, in respect of any exercise of or omission to exercise any power, duty or function conferred or imposed by the Lloyd's Acts 1871 to 1982 or any byelaw or regulation made thereunder -

(a) insofar as the underwriting business of any member of the Society or the costs of his membership or the business of any person as a Lloyd's broker or underwriting agent may be affected; or

(b) insofar as relates to the admission or non-admission to, or the continuance of, or the suspension or exclusion from, membership of the Society; or

(c) insofar as relates to the grant, continuance, suspension, withdrawal or refusal of permission to carry on business at Lloyd's as a Lloyd's broker or an underwriting agent or in any capacity connected therewith; or

(d) insofar as relates to the exercise of, or omission to exercise, disciplinary functions, powers and duties; or

(e) insofar as relates to the exercise of, or omission to exercise, any powers, functions or duties under byelaws made pursuant to paragraphs (21), (22), (23), (24) and (25) of Schedule 2 to this Act;

Unless the act or omission complained of -

(i) was done or omitted to be done in bad faith; or

(ii) was that of an employee of the Society and occurred in the course of the employee carrying out routine or clerical duties, that is to say duties which do not involve the exercise of any discretion."

Section 14(6) provided that for the purposes of section 14 "the Society" means the Society itself and also any of its officers and employees and any person or persons in or to whom (whether individually or collectively) any powers or functions are vested or delegated by or pursuant to Lloyd's Acts 1871 to 1982.

2. The rules of attribution.

Who were the persons so centrally concerned with the relevant parts of Lloyd's operations (the Brochures and the Globals) that (for the purposes of the tort of deceit) their acts etc are to be deemed to be those of Lloyd's?

In Meridian Global Funds Management Asia Ltd v Securities Commission [1995] 2 AC 500 at 506 Lord Hoffman having referred to the phrase "directing mind and will" said:-

"Any proposition about a company necessarily involves a reference to a set of rules. A company exists because there is a rule (usually in a statute) which says that a persona ficta shall be deemed to exist and to have certain of the powers, rights and duties of a natural person. But there would be little sense in deeming such a persona ficta to exist unless there were also rules to tell one what acts were to count as acts of the company. It is therefore a necessary part of corporate personality that there should be rules by which acts are attributed to the company. These may be called "the rules of attribution."

The company's primary rules of attribution will generally be found in its constitution, typically the articles of association... There are also primary rules of attribution which are not expressly stated in the articles but implied by company law...

These primary rules of attribution are obviously not enough to enable the company to go out into the world and do business. Not every act on behalf of a company could be expected to be the subject of a resolution of the board or a unanimous decision of the shareholders. The company therefore builds upon the primary rules of attribution by using general rules of attribution which are equally available to natural persons, namely, the principles of agency. It will appoint servants and agents whose acts, by a combination of the general principles of agency and the company's primary rules of attribution, count as the acts of the company. And having done so, it will also make itself subject to the general rules by which liability for the acts of others can be attributed to natural persons, such as estoppel or ostensible authority in contract and by vicarious liability in tort. ...

The company's primary rules of attribution together with the general principles of agency, vicarious liability and so forth are usually sufficient to enable one to determine its rights and obligations. In exceptional cases, however, they will not provide an answer. This will be the case when a rule of law, either expressly or by implication, excludes attribution on the basis of the general principles of agency or vicarious liability. For example, a rule may be stated in language primarily applicable to a natural person and require some act or state of mind on the part of that person "himself", as opposed to his servants or agents. This is generally true of rules of the criminal law, which ordinarily impose liability only for the actus reus and mens rea of the defendant himself. How is such a rule to be applied to a company?

One possibility is that the court may come to the conclusion that the rule was not intended to apply to companies at all... Another possibility is that the court might interpret the law as meaning that it could apply to a company only on the basis of its primary rules of attribution, i.e. if the act giving rise to liability was specifically authorised by resolution of the board or an unanimous agreement of the shareholders. But there will be many cases in which neither of these solutions is satisfactory; in which the court considers that the law was intended to apply to companies and that, although it excludes ordinary vicarious liability, insistence on the primary rules of attribution would in practice defeat that intention. In such a case, the court must fashion a special rule of attribution for the particular substantive rule. This is always a matter of interpretation: given that it was intended to apply to a company, how was it intended to apply? Whose act (or knowledge, or state of mind) was for this purpose intended to count as the act etc of the company? One finds the answer to this question by applying the usual canons of interpretation, taking into account the language of the rule (if it is a statute) and its content and policy."

3. The general approach to the rules of attribution set out in 2 above applies to Lloyd's, when considering whether anything was "done or omitted to be done in bad faith".

4. The principles of agency. Liability for a tort committed by an agent.

A company is liable to be sued for a tort committed by its agent if an action in tort would lie against an individual and the agent is acting in the course of his employment or within the actual or ostensible scope of his authority, and the act complained of is one which the company might possibly be authorised by its constitution to commit. (Halsbury's Laws of England, 4th edition, volume 7(2), Companies, paragraph 1120 and the cases there cited. See further Bowstead & Reynolds on Agency, 16th edn. 8-177 and Armagas Ltd v Mundogas S.A. (The Ocean Frost) [1986] AC 717).

5. The Names' case is summarised in chapter 7 above. Lloyd's deny that the alleged representations are to be derived from the Brochures and from the Aggregate Results/Global Reports and Accounts as at 31.12.81 to 87. Further, Lloyd's deny that anything was done or omitted to be done in bad faith.

6. The Brochures up to and including the Brochure dated December 1981 were issued by the Committee. The Brochure dated December 1983 and subsequent Brochures were issued by the Council. The approval of the Brochures was a collective or collegiate act of the Committee/Council (although other persons and bodies contributed to the drafting).

7. If (contrary to my findings in this judgment) all other ingredients of the tort of deceit were made out, in the case of the Brochures whose act, knowledge and state of mind would count as the act etc of Lloyd's?

Lloyd's submits that the rule of attribution to be applied is the majority test accepted by the House of Lords in Jones v Swansea [1990] 3 All ER 737, i.e. the majority of the Committee/Council.

The Names submit that if any one member of the Committee/Council with expertise in the non-marine market had the requisite knowledge and intention, that would be sufficient. Further, the Names submit that any of the 33 persons who approved the particular Brochure would have had the necessary knowledge and intention.

8. The Aggregate Results for the year ended 31.12.81 and the Globals for the years ended 31.12.82 to 31.12.84 were approved by the Committee. The Globals for the years ended 31.12.85 to 31.12.87 were approved in draft by the Council, although approval of the final version was delegated to the Committee. Other persons and bodies contributed to the preparation of the Aggregate Results/Globals.

9. If (contrary to my findings in this judgment) all other ingredients of the tort of deceit were made out, in the case of the Aggregate Results/Globals whose act, knowledge and state of mind would count as the act etc of Lloyd's? If (contrary to my findings) the Chairman's statement contained a fraudulent misrepresentation to the knowledge of the Chairman, would Lloyd's be liable in respect thereof?

A distinction must be drawn between (i) the Chairman's statement (ii) the Chairman of LUNMA's statement and (iii) the figures/results.

Lloyd's submits that in relation to (i) it would be necessary to show that the relevant Chairman and a majority of the Committee to y/e 31.12.84/of the Council from y/e 31.12.85 lacked an honest belief in the truth of what was said (it would not be sufficient if the Chairman's statement contained a fraudulent misrepresentation to the knowledge of the Chairman, because what he said had to be approved by the Committee/Council); in relation to (ii) any dishonesty by any LUNMA Chairman would not be attributable to Lloyd's; in relation to (iii) it would be necessary to show that a majority of the Committee to y/e 31.12.84 and of the Council from y/e 31.12.85 lacked an honest belief in the truth of what was said.

The Names submit that in relation to (i) it would be sufficient to show that the relevant Chairman lacked an honest belief in the truth of what was said or (if the Chairman believed in the truth of what was said) that any one member of the Committee with the expertise in the non-marine market had the requisite knowledge (of falsity) and intention, and was in a position to cause the Chairman to correct his statement, and failed to do so; in relation to (ii) and (iii) if any one member of the Committee with expertise in the non-marine market had the requisite knowledge and intention, that would be sufficient. Further, the Names submit that any one of the 33 persons who approved the relevant Aggregate Results/Globals would have had the necessary knowledge and intention.

10. In the light of my findings in this judgment, the questions set out in paragraphs 7 and 9 above do not arise. If they had arisen in my opinion:-

(a) it would first be necessary to identify the false statement and where it was made;

(b) in the particular circumstances of this case identified in paragraphs 6 and 8 above, it would probably be necessary for the Names to establish the requisite knowledge and intention on the part of a majority of the members of the Committee/Council. Further in practical commercial terms it is most unlikely that the requisite knowledge and intention could be made out unless a majority of the members of the Committee/Council had such knowledge; and

(c) any dishonesty by any LUNMA Chairman in the Aggregate Results/Globals would not be attributable to Lloyd's.

10. THE ADMINISTRATIVE STRUCTURE AND GOVERNANCE OF THE LLOYD'S MARKET

The following account of the Administrative Structure and Governance of the Lloyd's market is drawn from a statement of agreed facts. Where I have decided a matter in dispute between the parties this is shown in square brackets.

A. INTRODUCTION

I set out below the governance and administrative structure of the Lloyd's market and identify the functions of particular committees, sub-committees, departments and personnel over the Relevant Period and of the various participants in the Lloyd's market.

B. THE OPERATION OF THE LLOYD'S MARKET GENERALLY

Structure of the Lloyd's Market

The Society and Corporation of Lloyd's regulates and provides services to an insurance market (the Lloyd's market) comprising individual underwriting members known as Names. All underwriting members appoint underwriting agents, registered and regulated by Lloyd's to conduct insurance business on their behalf. Names underwrite insurance through their agents on a several basis for their own profit or loss.

By the Lloyd's Act of 1982 the constitution of the Society was refashioned and a new Council was created, equipped with wide powers to regulate the conduct of the practitioners in the market and to provide protection for the policyholders whose risks are insured and for the Names who underwrite those risks.

[Prior to the Lloyd's Act 1982 more restricted functions were carried out by the Committee of Lloyd's as reflected in the Fisher Report.]

The Nature of the Lloyd's Market

Lloyd's is an insurance market in which underwriting members (the Names) provide insurance cover for policyholders (the assured). The Names operate through underwriting agents who have complete authority to act on their behalf in dealing with brokers, the agents of the assured. Underwriting members at Lloyd's can be categorised according to whether they are, or have been substantially involved in the market as agents or brokers or their employees (the working Names), or whether they have no professional involvement (the external Names).

The way in which a Name puts his or her wealth at risk at Lloyd's in providing insurance cover is as follows. He/she has to demonstrate that he/she possesses sufficient capital appropriately invested. These investments and the returns on them constitute reserve capital which is called upon only if, as a result of the underwriting carried out on his/her behalf, the premiums received from the assured (and any amounts derived from the reinsurance of the risks underwritten) do not cover claims from policyholders. In the event that his/her capital is called, the Name's liability is unlimited; he/she is liable, if necessary, to sacrifice his/her entire personal fortune to pay valid claims, even if in total they go far beyond the amount originally declared. This is one of the two fundamental principles of membership of Lloyd's. The other is that Names underwrite on the basis of 'each… for his/her own part and not for another'… If a Name suffers a loss he/she cannot call on other members to share it, nor can they call on him/her to share theirs. Likewise he/she is not called upon to share his/her profits.

Although Names are sole traders, the effective operation of the market demands that they underwrite in groups, or syndicates, of varying sizes. Syndicates are grouped principally into four main markets (marine, non-marine, aviation and motor). Syndicates enable members to co-operate in underwriting risks, or proportions of risks, which would be too large for an individual to cover and they permit most of the participants to leave the actual business of underwriting to one or more working members acting on behalf of the whole syndicate. But syndicates themselves have no separate corporate status. Each member contracts directly or indirectly with his/her underwriting agent that he/she will be responsible for only a percentage of the syndicate's underwriting business, known as his/her 'line' which may vary from year to year.

There have evolved two distinct types of underwriting agent. The organiser and manager of one or more syndicates is known as a managing agent. The day to day management of each syndicate is carried out by a main (or 'active') underwriter who is an employee (and often a director or partner) of the agency. It is the active underwriter and his team who accept risks on behalf of syndicate members, receive premium income and settle claims.

The managing agent does not recruit syndicate members directly save in the case of a combined agency. That is the task of another type of agent, the members' agent, who introduces prospective Names to Lloyd's, advises them on syndicate membership and acts as an intermediary between Names and managing agents. The latter agree with members' agent that they will make available specified amounts of syndicate capacity which those members' agents can then allocate to individual Names.

The Society of Lloyd's was formed in 1811 and incorporated by an Act of Parliament as the Society and Corporation of Lloyd's. The objects of the Society are as follows:

(i) The carrying on by members of the Society of the business of insurance of every description including guarantee business;

(ii) The advancement and protection of the interests of members of the Society in connection with the business carried on by them as members of the Society and in respect of shipping and cargoes and freight and other insurable property or insurable interests or otherwise;

(iii) The collection, publication and diffusion of intelligence and information;

(iv) The doing of all things incidental or conducive to the fulfilment of the objects of the Society. (Section 4, Lloyd's Act 1911).

The Society does not itself underwrite insurance.

Active underwriters at Lloyd's must be members of the Society and, with certain limited exceptions, brokers must be approved by the Society in order to place business with Lloyd's underwriting agents on behalf of their clients.

Underwriting Members or Names

A Name is the 'insuring entity' that underwrites risk in the market through participation in syndicates and that earns the underwriting profit or sustains the loss. Each Name trades individually for his or her own account. In order to be eligible to underwrite insurance at Lloyd's, an individual must apply and be accepted as a member.

The amount of business a Name is permitted to underwrite is circumscribed by the level of resources placed at Lloyd's and is referred to as an Overall Premium Limit. (The premium limit is based on a multiple of the membership means requirement). This does not, however, apply to premiums received for reinsurance to close earlier years of a syndicate on which the Name is placed, where the placing and receiving syndicate are substantially similar.

During the Relevant Period:

(i) changes were made in relation to deposits and assets to be shown by Names; and

(ii) there were distinctions, in relation to means and deposit requirements, between working members and external members.

As a result of recommendations by the Bird Working Party in 1984, Names were required to "come into line" with any new deposit and means requirements introduced since they joined.

Syndicates

Names underwrite in groups called syndicates. A syndicate aggregates the underwriting capacities allocated to it by individual Names. It has no legal status or personality independent of the Names. Most Names allocate capacity to a number of different syndicates. Each Name underwrites risk though a managing agent aggregating the underwriting capacities of the various Names who appoint him/her, so that larger risks may be accepted. Names trade on the basis of several liability and so are not responsible for the liabilities of other Names within the syndicate.

Names underwrite through syndicates which write business allocated to a single calendar year (known as the year of account). Syndicates are reconstituted at the beginning of each year with a membership which may well differ, at least to some degree, from the previous year. The syndicates are therefore sometimes described as annual ventures. The outstanding liabilities of a particular year of account of a syndicate are reinsured at least 2 years after the end of the year of account, usually by the next succeeding year of account of the same syndicate. This reinsurance is known as reinsurance to close. Accordingly, the management of a syndicate's business is effectively an ongoing venture, carried out by a managing agent.

According to the practice at Lloyd's, every year of account of a syndicate is kept open for not less than three years from the beginning of that year of account. A year of account begins on 1 January of each year. At the end of three years, a year of account may (but need not) be closed into a later (usually the next oldest open) year of account, by means of a contract known as a Reinsurance to Close.

The management and underwriting of Names' insurance business is carried out on their behalf by the managing agents of the syndicates in which they participate. A managing agent employs underwriting and administrative staff (including the active underwriter) who run the syndicate's business from year to year. The services provided by the underwriter can include general management, accounting, business development, computer services and other shared services. The cost of the services so provided is charged to the members of the syndicate as part of the costs of underwriting. In addition, the managing agent charges a fee, based on the capacity allocated to the syndicate by each Name, and receives a profit commission on the syndicates' profits.

The following were among the principal features of a syndicate:

(i) Working members were entitled to be, and often were, Names on the syndicates for which they worked;

(ii) Clause 5 of the Standard Agency Agreement scheduled to the Agency Agreements Byelaw No 1 of 1985 provided that: "The Agent shall have the sole control and management of the underwriting business and the Name shall not in any way interfere with the exercise of such control or management." This provision reflected the contractual provision that prevailed prior to Byelaw No. 1 of 1985;

(iii) The active underwriter was a key figure in a syndicate.

Most managing agents are now limited companies (one or two are partnerships), which are privately owned or, in a few cases, publicly quoted. Prior to the divestment process required by Lloyd's Act 1982, some of the managing agencies were owned by Lloyd's brokers but, as result of the divestment requirements, the brokers were required to dispose of their interests in the managing agents (and vice versa). See further paragraphs 12.03 to 12.07 of the Fisher Report. A period of five years was allowed for the process of divestment.

Active underwriters were required by paragraph 21 of the Underwriting Agents Byelaw (No. 4 of 1984) to be directors of the managing agency.

There were three types of agent. Originally, the managing agent fulfilled the role of introducing new Names to the market and managing their affairs as underwriting members. Over the past 30 years, a second category of agent has evolved within the Lloyd's market: the members' agent, whose function was to introduce new Names and advise them on syndicate selection and other issues.

Some members' agents operate, so far as Lloyd's agency functions are concerned, exclusively as members' agents. Some of these agents are part of broking groups, who were able to retain ownership of members' agencies when they were required to sell off their managing agencies by the divestment provisions of Lloyd's Act 1982. Other members' agents are owned by, or are members of a group that includes, a managing agent in which case they and the managing agent are referred to as combined agents.

Divorce of managing and membership functions was voted on prior to the promotion of the Lloyd's Bill and was rejected by a very large majority.

Members' agents are remunerated on a similar basis to managing agents, receiving both a fee based on allocated capacity and a profit commission.

Categories of Business Conducted at Lloyd's

The business of Lloyd's was traditionally divided into four principal categories: marine, non-marine, aviation and motor. Managing agents often describe the syndicates they manage by reference to the main category in which they have traditionally operated. However, these descriptions are not comprehensive and do not define syndicates which frequently write a broader range of business than those titles might suggest.

Marine syndicates wrote, in some cases, an incidental non-marine account. Some of these incidental non-marine accounts carried an exposure to long-tail asbestos-related liabilities. Asbestos-related claims were made on some aviation syndicates.

Each syndicate writes a different mix of business, with each category of business carrying different risks. There is an important distinction between "short-tail" and "long-tail" risks. The term "short-tail" is applied to business on which claims generally arise and are settled relatively soon after the risk is accepted and the premium paid; "long-tail" denotes business for which the notification or the settlement of claims, or both, may take many years.

The US $ "All Other" class of business included both longer long-tail risks and shorter long-tail risks.

Lloyd's syndicates underwrite both "direct business" (where the policyholder has a direct interest in the underlying risk insured) and "reinsurance" (where the policyholder is an insurance company or another Lloyd's syndicate). Reinsurance can be of an individual risk (a facultative reinsurance) or a portfolio or specified part of risks previously written or yet to be written (treaty reinsurance).

Facultative-obligative (or fac/oblig) is one of a number of categories of reinsurance treaties. Some syndicates wrote retrocession as well as reinsurance business.

XL and LMX business are dealt with below.

The insurance industry is international and, in many areas, highly competitive. In many countries, insurance can only be provided by locally-based licensed insurers. However, Lloyd's underwriters have been authorised to provide insurance under local insurance legislation in a number of countries including Australia, Canada, New Zealand and South Africa. In many of the countries where Lloyd's underwriters are so authorised, they are required to fulfil a number of local requirements, which may include the appointment of a general representative, the maintenance of local deposits and the filing of statistical reports. In other countries, Lloyd's underwriters are able to accept business without having to be licensed insurers. For example, in the USA, although licensed to write direct insurance only in Illinois, Kentucky and the US Virgin Islands, Lloyd's underwriters are eligible (except in Kentucky and the US Virgin Islands) to accept excess or surplus lines business (i.e. business which locally licensed insurers are unable or unwilling to underwrite) in all states. Lloyd's underwriters are also able to write reinsurance of insurance companies, even in countries where they are unable to write on a direct basis.

The Production and Placement of Business

Business is brought to Lloyd's by the world-wide networks of the Lloyd's brokers. Managing agents and active underwriters depend primarily upon Lloyd's brokers bringing insureds and cedant insurers to them. Business is also underwritten on behalf of syndicates through binding authorities. Binding authorities are arrangements whereby third parties (often brokers) are authorised to accept risks on behalf of the members of the syndicate subject to certain conditions and limits.

A Lloyd's broker is a partnership or corporate body permitted by the Council to broke insurance business at Lloyd's on behalf of its clients. Most of the largest broking firms in the world own a Lloyd's broking subsidiary. Lloyd's brokers do not place all of their business through the Lloyd's market. They also deal with UK insurance companies and overseas insurance markets.

The Lloyd's broker is the final link in a chain from the policyholder to the Lloyd's underwriters which may include a number of other intermediaries. The remuneration payable to the Lloyd's broker (usually expressed as a percentage of the premium payable by the insured) may be shared amongst all the intermediaries. The Lloyd's broker is normally responsible for preparing the documentation which is used for presenting the risk to underwriters (the "slip"). A typical risk will be placed with a number of syndicates, with one particular underwriter (the "leader") setting the premium rate, approving the policy wording and, frequently, underwriting the largest "line" - or percentage - of the risk. In most cases, once the risk has been placed, the broker issues a cover note setting out the basic terms and conditions of the insurance, and the proportion of the risk accepted by each insurer. There may be some participants in the cover from outside the Lloyd's market. However, there will only be one policy document for the participating Lloyd's syndicates. That document is usually prepared by the broker, and checked by the Lloyd's Policy Signing Office, which issues it on behalf of the subscribing underwriters.

Lioncover

As a result of large losses suffered by the Names on those syndicates managed by PCW Underwriting Agencies Limited (caused mainly by the fraud of its active underwriter), Lioncover was formed in 1987 by the Society (as a wholly-owned subsidiary under its control) as a vehicle to reinsure the liabilities of syndicates formerly managed by PCW (later Richard Beckett Underwriting Agencies Limited). It subsequently also reinsured WMD Underwriting Agencies Limited, an associated agency. 73 syndicates were managed by these agencies. They were broad-based marine, non-marine and aviation accounts, including a large exposure to non-marine long-tail casualty business.

All PCW syndicates and Names were reinsured to close into Syndicate 9001. This was a syndicate formed specifically to enable Names on PCW syndicates to obtain reinsurance to close, thereby ending their involvement in the PCW syndicates for regulatory and tax purposes and enabling them to be released from membership of Lloyd's. Syndicate 9001 conducts no other business. Lioncover (as retrocessionaire) entered into a whole account retrocession agreement with Syndicate 9001 (as retrocedant).

The Society gave indemnities to each of the members of Syndicate 9001 who were Mr. Murray Lawrence, Mr. Alan Parry and Sir Peter Miller.

Centrewrite

Centrewrite Limited, a wholly owned subsidiary of the Society, and under its control, was formed in 1991 to provide reinsurance, on an arms-length, unlimited basis, for syndicates in run-off and for individual members of such syndicates. From1993, it underwrote Lloyd's members' Estate Protection Plans.

XL and LMX Business

Under an excess of loss reinsurance contract, the reinsurer agrees to indemnify the reinsured in the event of the latter sustaining a loss in excess of a pre-determined figure, (the deductible). The reinsurer is liable for the amount of the loss in excess of the deductible up to an agreed amount, the deductible being the amount retained, (or retention), for the reinsured's own account. The purpose of excess of loss reinsurance is thus to limit the exposure of the reinsured on any loss, whether this arises from a large individual risk or through an aggregation of losses from a number of risks affected by a single event or loss occurrence.

XL protection may be obtained through whole account or general reinsurance, which provides cover for all or a proportion of losses, net of recoveries, on underlying policies. In practice, cover will normally be purchased in layers, rather than through one single policy. Specific XL treaties provide protection in respect of specific portfolios of business accepted by the reinsured (e.g. hull, cargo, oil rigs). The term XL can be used to describe all these types of excess of loss business.

In providing cover to primary insurers, accepting reinsurers may themselves accumulate exposures higher than they wish to retain. To meet their requirements for protection, the retrocession of excess of loss reinsurance developed as a mechanism that was intended to spread exposures more widely.

LMX is not a term which is uniformly used. It is excess of loss reinsurance written by London market entities. It is written by both corporate reinsurers and Lloyd's syndicates. The nature of LMX business is the same as that of other excess of loss treaty reinsurance. LMX business is distinguished from other excess of loss business in that it is, depending on usage, (i) reinsurance underwritten by underwriters operating in the London market of risks originating in this same market, as opposed to general excess of loss business that is reinsured on a worldwide basis, or (ii) is an excess of loss reinsurance written in London of an excess of loss contract. The "London" distinction is thus almost entirely a geographical and cultural phenomenon, encouraged by certain brokers who specialised in this business and reflecting their knowledge of and trading relationships with the parties involved.

The Spiral

Writing high level XL on XL business on a catastrophe account is high risk. The working of the spiral which developed in the 1980s was complex, and it is convenient to describe it only in a simplified form. The phenomenon of what is described as the spiral was not new or peculiar to the operation of the market in the 1980s. Before Hurricane Betsy in 1965, a similar spiral had developed in the London market, and the losses that followed that catastrophe demonstrated the effect of the spiral. The lesson had been forgotten by the 1980s. Many syndicates which wrote XL cover took out XL cover themselves. Those who reinsured them were thus writing XL on XL. They, in their turn, frequently took out their own XL cover. There thus developed among the syndicates and companies which wrote XL business a smaller group that was responsible for creating, in relation to some risks, a complex intertwining network of mutual reinsurance, a spiral. When a catastrophe led to claims being made by primary insurers on their excess of loss covers, this started a process whereby syndicates passed on their liabilities, in excess of their own retentions, under their own excess of loss covers from one to the next, rather like a multiple game of "pass the parcel". Those left holding the liability parcels were those who first exhausted their layers of excess of loss reinsurance protection. Following Hurricane Alicia in 1983, the non-marine market introduced higher retentions, co-insurance and the exclusion of XL of XL business from whole account or general programmes written. The marine market did not take similar measures.

So far as the individual syndicates were concerned, the effect of the spiral was to magnify many times the number of claims flowing from a particular loss. This is because claims were repeatedly made in respect of the same loss as it circulated in the spiral. For example, claims in respect of the Piper Alpha loss exceeded by a multiple of about 10 the net loss that was covered on the London market.

This gearing effect did not result in an ultimate payment of a greater indemnity than the initial loss. As the loss passed through the spiral, however, it impacted repeatedly on successive layers of reinsurance cover (which it progressively absorbed), and once the total underlying retention was breached, ultimately concentrated on those reinsurers who found their cover exhausted.

The spiral effect of claims was, however, diminished or extinguished by individual retentions, whether before reinsurance protection commenced or after it had been exhausted, by co-insurance and by 'leakage' to reinsurers who did not reinsure with the same insurers. The effect of the spiral, however, significantly reduced the comfort that could properly be derived from being exposed only to what appeared to be a very high layer of loss.

Lloyd's Underwriting Claims and Recovery Office saw 43,000 claims on 11,500 excess of loss policies in respect of the Piper Alpha loss. In the case of Piper Alpha, gross claims transactions totalled about $15 billion for the whole of the London market, whereas the actual loss was $1.4 billion.

There was a claims turnover of ten times the actual loss in relation to the Exxon Valdez claim.

Growth of the LMX market during the 1980s

Certain underwriters identified commercial opportunities in writing substantial LMX business in the 1980s. It was perceived that there was an opportunity to write profitable LMX business in circumstances in which underwriting capacity was increasing rapidly and other underwriting business (eg marine) was sluggish or in decline. However, the business involved exposures and a need for judgments different from those with which many of these underwriters were familiar. In the event, a number of Lloyd's syndicates and others in the London market suffered very heavily from their decision to write such business. Further details of the nature of the XL spiral, and the reasons for the heavy losses suffered, are contained in the decisions of Phillips J in the Gooda Walker and Feltrim litigation. The parties have agreed the facts set out in those judgments relating to the manner in which the business was written on those syndicates, and the findings of Phillips J as to the negligence of the underwriters concerned.

There was also an increase in the number of companies in the so-called "fringe" market in London at this time. Many of the companies that then went into reinsurance were highly inexperienced in reinsurance and were used by the brokers to drive prices down or to get unacceptable clauses accepted. One reason that brought people into the market was the opportunity for so-called "cash flow" underwriting. The 1980s were a time when returns on investment were high. A high cash flow would produce high investment returns. This led to some reinsurers pricing reinsurance at rates that would in normal circumstances have been considered too low in terms of pure underwriting rates of return. The big continental reinsurance groups in many cases also made pure underwriting and overall losses on specific catastrophe accounts but were able to spread the losses across other segments of business. There were only a very few years when they lost large amounts overall. The worst hit were those who did not have a spread of business; this also applied to the worst hit syndicates in Lloyd's. Continental reinsurers generally had the benefit of equalisation and other reserves which enabled them to weather the bad years by spreading their losses over more than 12 months.

Gross premiums for business written in the 1988 account showed a 61% increase by comparison with premiums for business written in the 1983 account, with a growth of 201% in premium income of the LMX syndicates over the same period. Gross premium income of the LMX syndicates as a proportion of Lloyd's total gross premium income rose from 13.1% for the 1983 account to 24.6% in 1988 and 26.4% in 1990. Premium rates for LMX business fell substantially in the 1980s.

In the period 1987 to 1990, insurance and reinsurance markets were impacted by an unprecedented number of major catastrophe losses, viz 1987, North European storms; 1988, Piper Alpha and Hurricane Gilbert; 1989, Hurricane Hugo, the San Francisco Earthquake, Exxon Valdez, and Phillips Petroleum; 1990, North European storms. The cumulative impact of these losses was severe on both companies and syndicates. For the 1987 North European storms, Piper Alpha, Hurricane Hugo and the 1990 North European storms, companies (including direct insurers and major reinsurers) carried 69%, 45%, 64% and 64% of the liability respectively, but still leaving substantial losses for Lloyd's syndicates. On the basis of the syndicates analysed in the Walker Report, losses were concentrated on a relatively small number of syndicates: although 87 syndicates were writing significant LMX business in 1988 or 1989 – in one case 93% of that syndicate's stamp capacity – 95% of the losses attributable to those syndicates for the 1988 account were encountered on 12 of those syndicates and 79% of the losses of the LMX syndicates for the 1989 account were attributable to 14 of them.

In the 1980s premium rates for LMX business fell substantially. In circumstances of apparently reasonable profit levels (in the years between 1965 and 1987, the worldwide reinsurance market was relatively undisturbed by major catastrophes, thus generally leaving reinsurers with a 22 year span of profitable results) and increasing capacity, premium rates in 1987 and 1988 had fallen to only 10% of those being charged ten years earlier and were reduced in higher layers as a consequence of the perceived diminution in exposure.

Catastrophe reinsurance rates have risen since 1989. The expectation of the world-wide reinsurance industry in April 1995 was that substantial withdrawals of capacity from the industry as a whole that had taken place would keep reinsurance rates hard over the medium term.

The Risks

The high risk nature of the spiral exposures accepted by the syndicates and the level of reinsurance accepted by the syndicates and the level of reinsurance purchased to protect them was not appreciated by many Names. Had the Names been better aware of the risks involved they might have ceased or reduced their participation.

C. GOVERNANCE AND ADMINISTRATIVE STRUCTURE

Prior to the 1982 Lloyd's Act, powers were conferred upon the Society of Lloyd's by four earlier Acts of Parliament: the Lloyd's Acts of 1871, 1911, 1925 and 1951. The Committee of Lloyd's was charged with the management and superintendence of the affairs of the Society, but was subject to control and regulation by general meeting of the members (Section 29 Lloyd's Act 1871).

In summary, the powers of the Society were:

(i) to make, revoke or amend byelaws (by general meeting, re-confirmed by a further general meeting within 28 days and subsequently approved by the Recorder of the City of London) in respect of a number of defined purposes (Section 24 Lloyd's Act 1871);

(ii) to suspend members for a period not exceeding 2 years for any "act or default discreditable to him ... in connection with the insurance business" (Section 12 Lloyd's Act 1911);

(iii) to expel a member for a breach of the rules of the Society or for committing a discreditable act following a determination of guilt by 2 arbitrators and on the vote of four fifths of the members attending at a general meeting convened for that purpose (on at least 6 days notice) (Section 20 Lloyd's Act 1871);

(iv) to investigate and punish any frauds or felonies which relate to the insurance business carried out by members (Section 11 Lloyd's Act 1911);

(v) to raise or borrow money (Section 3 Lloyd's Act 1951);

(vi) to guarantee payment of claims (Section 9 Lloyd's Act 1911); and

(vii) to act as trustee (Section 8 Lloyd's Act 1911).

The Committee was originally established under the 1871 Act and comprised 12 individuals appointed under that Act (Section 11 Lloyd's Act 1871). Prior to the start of the Relevant Period the number of Committee members was increased to 16 (See Byelaw 44 of the 1973 edition of Lloyd's Byelaws). One quarter of the Committee retired by rotation each year and new members were elected by a vote of all the members at general meeting. Individuals who had retired from the Committee were eligible for re-election one year after they had stood down. Newly elected Committee members would be invited to attend the Committee meeting at the end of the year.

The Council of Lloyd's

The Council of Lloyd's was established by the Lloyd's Act 1982 and was formed on 1 January 1983. The first meeting of the Council took place on 5 January 1983. Under the Act the Council became the body charged 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 (Section 6(1) Lloyd's Act 1982). To that end, the Council was empowered (by special resolution of separate majorities of the working members and of the external and nominated members together) to:

(i) make such byelaws as from time to time seem requisite or expedient for the proper and better execution of Lloyd's Acts 1871 to 1982 and for the furtherance of the objects of the Society, including such byelaws as it thinks fit for any or all of the purposes specified in Schedule 2 of the Act; and

(ii) amend or revoke any byelaw made or deemed to have been made thereunder (Section 6(2) Lloyd's Act 1982).

Under Section 6(4) of the Lloyd's Act 1982, any byelaw passed by the Council may, within 60 days, be challenged at a general meeting by a majority of those voting, such majority being at least a third of the total membership, on the petition of not less than 500 Names.

The composition of the Council was established by the Lloyd's Act 1982 as comprising 16 working Names, 8 external Names and 3 Names nominated by the Council and confirmed by the Governor of the Bank of England (Section 3 Lloyd's Act 1982). In July 1987, following the Neill Report, the composition was altered to 12 working Names, 8 external and 8 nominated Names.

The composition of the Council was (after the Relevant Period) subsequently further altered and the number of working Names reduced to 6.

Working members of the Council are elected by the working members of the Society and external members of the Council are elected by external members of the Society (Section 3(2) Lloyd's Act 1982). The conduct of elections of members of the Council is regulated by byelaws passed by the Council. During most of the Relevant Period elections for both working and external Council members were held by postal ballot on the same day as the general meeting in November each year (Byelaw 13 of 1983, paragraph 2). Council members were elected for 4 years (save for nominated members of Council who served for 3 years at a time). Council members were required to take a sabbatical year after serving on the Council before standing for re-election. The date on which the elections were held was changed in 1987 (Byelaw 1 of 1987).

The Chairman and Deputy Chairmen of Lloyd's are elected on an annual basis by the Council (Section 4 Lloyd's Act 1982).

The Committee of Lloyd's

From January 1983 the Committee of Lloyd's was comprised of the 16 working members of the Council (Section 5(1) Lloyd's Act 1982). This was reduced to 12 in July 1987. By means of special resolution, the Council was able to delegate certain functions to the Committee, namely:

(i) the making of regulations regarding the business of insurance at Lloyd's; and

(ii) the carrying out or exercise of any duties, responsibilities, rights, powers or discretions imposed or conferred upon the Council by any enactment (other than an enactment in the Act) or regulation made in pursuance thereof or by any other instrument having the effect of law or by any other document or arrangement whatsoever, whether or not such enactment, regulation, instrument, document or arrangement was in force or in existence on the day when the Act came into force, insofar as such delegation was not prohibited by any enactment, regulation, instrument, document or arrangements (Section 6(6) Lloyd's Act 1982).

Other powers and functions under the 1982 Act and the power to make directions regarding the business of insurance at Lloyd's may be delegated to the Committee or to the Chairs of Lloyd's or to the Chairs of the Committee (Section 6(5) Lloyd's Act 1982).

The Chairs

The Chairman was the ambassador and principal spokesman of Lloyd's to the outside world, including external Names. [He was the team leader of a team that was the fountainhead of authority and policy. He liaised regularly with Market Association Chairmen. For the proper performance of his functions it was necessary for him to inform himself of important market activities and problems.]

[The two elected deputy Chairmen deputised for the Chairman when he was not available. Where appropriate, any member would be allowed direct access to the Chairs.]

Committee Structure

In turn, the Council and the Committee have delegated functions to certain committees. The roles of certain committees relevant to the present dispute (both before and after the 1982 Act) are set out below.

(a) Audit Committee

The Audit Committee was a policy and advisory committee reporting to the Committee of Lloyd's on matters affecting the solvency of members of Lloyd's and the security underlying Lloyd's policies. The Audit Department of the Corporation provided administrative support to the Audit Committee and was directly responsible to it.

The Audit Committee existed from 1960 until 1983 when it was replaced by the Members' Solvency and Security Committee. (The name was changed to Solvency and Security Committee in 1986.)

The MSSC was responsible for making recommendations to the Committee of Lloyd's on all aspects relating to the annual solvency test and the protection of Lloyd's policyholders. The MSSC liaised with the AASC (see below) in relation to accounting and audit considerations relevant to the conduct of the annual solvency test.

(b) Accounting and Auditing Standards Committee

The AASC was set up in 1983 (effectively taking over the work of two Fisher Task groups: 4 & 15) to define the accounting and related auditing requirements applicable to Lloyd's brokers, underwriting agents and syndicates, the reporting of information to Names and the introduction of manuals to reflect the Council's requirements as to accounting and audit.

(c) Membership Committee

The Membership Committee existed from January 1977 to December 1985. It was a policy and advisory committee which reported and made recommendations to the Committee of Lloyd's on matters relating to membership requirements.

The Membership Committee considered the terms of the rota brief, and consulted the LUAA and others, from time to time. In March 1982 the question whether the subject of latent disease should be "introduced" into Rota Committee was addressed by Mr. Murray Lawrence to the Membership Committee.

Functions and Structure of the Corporation of Lloyd's

The executive and administrative functions of Lloyd's are fulfilled by the Society's employees (known colloquially in the market as 'the Corporation').

Prior to the introduction of the 1982 Act, the Corporation staff were divided into a large number of departments which were grouped into the following areas:

(i) the Corporation services group including the catering, office services, personnel, premises, redevelopment, the superintendent of the Room's department and training departments;

(ii) the Management services group which was divided into data processing (called computer services in 1982), system development, technical and, also from 1982, planning;

(iii) the Publicity, Information and Press department whose responsibilities included the many Lloyd's publications including co-ordinating the production of the annual report and distribution of information to Names;

(iv) the Advisory, Brokers and Legal departments;

(v) the Finance group which encompassed the finance department, and accounts, investment, tax and internal audit departments;

(vi) LUCRO, the marine market claims office;

(vii) the Aviation department which included sections dealing with surveys (including accident investigation) and intelligence;

(viii) the Agency department which dealt with settlement of claims abroad, salvage arbitration, cargo certificates and also included an administration section dealing with more general matters;

(ix) LPSO which issued all policies written in the Lloyd's market on behalf of underwriters; and

(x) the Membership Services group incorporating the Membership, Underwriting Agents and Audit, and Deposit departments.

While the Secretary-General was responsible for the Corporation staff, the head of each department reported to the Chairman of Lloyd's. The Chairman was assisted in this task by the Deputy Chairs who acted as a point of contact for some of the departments.

Secretary-General

From 1975 the senior member of the Corporation staff was the Secretary-General. The Secretariat ensured that departmental papers and representatives were available at Committee discussions. Following the introduction of the office of Chief Executive in 1983, the Secretary-General's main role was as advisor to the Chairs and secretary to the Council. From 1984 the Secretary-General became known as the Secretary to the Council. When Mr. Ian Hay Davison became Chief Executive a subsidiary role was created for the incumbent Secretary-General and, upon his retirement, he was not replaced.

The Secretary-General was responsible for co-ordinating the work of the different departments including the supervision of the agenda for the weekly Committee meeting.

"O" Group

The "O" Group existed from the 1970s to the early 1990s. It had no terms of reference as such but was effectively a small informal group set up to co-ordinate the presentation of papers to Council and Committee. It included the Chairman and Deputy Chairmen, the Secretary-General, the Chief Executive and typically the group heads. Its role included the review of papers to be submitted at Council/Committee meetings and consideration of general policy issues. Given the informal nature, the precise role played by the 'O' Group was dependent on the Chairs and Chief Executive at the relevant time.

Chief Executive

The creation of this post was instigated by the Bank of England, who nominated Mr. Ian Hay Davison as a suitable candidate.

Terms of reference for the Chief Executive were laid down in 1983. The Chief Executive is also a Deputy Chairman of Lloyd's and a nominated member of the Council.

In May 1983 the Chief Executive put forward proposals for a new organisational structure comprising 6 group heads reporting directly to him. Departmental managers would in return report to the group heads. Mr Davison's organisational proposals were accepted and implemented by the Council.

The new structure comprised the following groups:

(i) Finance. This group was responsible for the Corporation's financial affairs including internal audit, treasury, financial information and market financial services. From 1984 the Finance group was combined with the Market Services group.

(ii) Market Services. This group was responsible for co-ordinating organisations which provided direct services to the market including LPSO, LUCRO and the Aviation department.

(iii) Regulatory. This group was responsible for the self-regulation of the Society. The departments falling within its control included membership, underwriting agents and audit, deposits, advisory and brokers.

(iv) Systems and Communications. This group provided computer and telecommunications services to the market and was responsible for developing systems to aid both the market and the Corporation in their work.

(v) External Relations. This group included departments dealing with information, legislation and taxation but by 1984 responsibility for taxation and legislation had been transferred to the Regulatory group and for information to the Finance and Market Services Group.

(vi) Corporation Services. This group was responsible for the catering, personnel, training and premises departments within the Corporation. Departments within this group became part of a new Administration group in 1988.

The Secretary-General initially retained control over the legal, secretarial, research and disciplinary functions but these subsequently fell under the umbrella of group heads.

Chief Executive's Group

The CEG was established in 1983 and consisted of the group heads together with the Secretary- General and the Chief Executive. The CEG was a management group which discussed co-ordination of the activities of the Corporation. Towards the end of the Relevant Period the group also adopted an administrative role in co-ordinating the production of papers for Council.

Role of the Department of Trade and Industry

The basic regulatory arrangements governing carrying on insurance business in the UK are now provided for by the Insurance Companies Act 1982. (Prior to the introduction of the ICA 1982, similar regulatory arrangements were provided for by the Insurance Companies Act 1974). Insurance may normally be carried on only by bodies authorised to do so by the Secretary of State. It is the Secretary of State for Trade and Industry who is responsible for this sector, and the powers of the ICA 1982 were generally exercised on his behalf by the DTI. The ICA 1982 provides that individuals may only underwrite insurance business in the United Kingdom if they are accepted as members of Lloyd's.

In view of the regulatory regime provided by the Lloyd's Acts, Lloyd's is exempted from some of the requirements of the ICA 1982. However, pursuant to the ICA 1982 and regulations made under it (i) the requirements to pay all premiums into Premiums Trust Funds were imposed; (ii) accounts of every underwriting member had to be prepared and audited annually and a certificate of solvency of each underwriting member delivered to the DTI; and (iii) the Council had to file an annual return summarising the extent and character of the insurance business done by the members of Lloyd's.

Under the terms of the ICA 1982 and the Insurance (Lloyd's) Regulations 1983, the members of Lloyd's taken together are required to maintain a minimum margin of solvency. A failure to comply with this requirement is one of the grounds on which the DTI is entitled to exercise extensive powers of intervention for the protection of policyholders.

The powers of the DTI if it intervenes include:

(i) the power to require maintenance of assets in the European Union or the United Kingdom of value equal to the whole or a specified proportion of Names' liabilities;

(ii) the power to stipulate who should hold the assets as trustee;

(iii) the power to obtain information; and

(iv) a residual power to require a Name to take such action as appears to the Secretary of State to be appropriate for the purposes of protecting policyholders against the risk that the Name may be unable to meet his/her liabilities.

D. MARKET ASSOCIATIONS

In addition to the committee and departmental structure, there are a series of market associations which represent the interests of the various market constituencies but do not involve themselves in underwriting decisions. A separate association exists for each underwriting market. They are independent of the Society and Corporation of Lloyd's and do not act under its control. They are: the LUNMA (non-marine), the LUA (marine), the LMUA (motor) and the LAUA (aviation). Details of these and other market bodies are dealt with below.

LUNMA

In 1910 what is now Lloyd's Underwriters' Non-Marine Association Ltd was formed with the object of meeting periodically to consider matters relating to fire and non-marine business at Lloyd's. One of the chief functions of that association was then, and still is, to gather and circulate to its members information relating to non-marine business throughout the world. Within the purview of LUNMA was the wording and effect of standard policy forms for use by the non-marine market. LUNMA was incorporated as a company limited by guarantee on 3 January 1991.

Membership of the association comprises all the active underwriters at Lloyd's underwriting non-marine business and they elect a committee.

LUA

Lloyd's Underwriters' Association was formed in 1909 and represents the interests of the marine market at Lloyd's. The committee of the association meets regularly to discuss the underwriting and general administrative problems which affect marine insurance. It frequently makes recommendations to all members of the association with a view to improving the efficiency and profitability of marine insurance. Also, the association keeps its members supplied with pertinent information that is likely to have some bearing upon the underwriting of marine insurance at Lloyd's.

LMUA

The introduction of compulsory third party insurance in 1930 led directly to the formation of the Lloyd's Motor Underwriters' Association in June 1931.

LAUA

Lloyd's Aviation Underwriters' Association was formed in 1935 to represent the interests of the Lloyd's aviation market. Membership comprises active underwriters of any Lloyd's syndicate writing aviation business. The committee acts on behalf of the members as a whole, keeping them informed (particularly in relation to foreign legislation and international conventions governing the liability of air carriers) and sometimes making recommendations designed to improve the efficiency of the market.

Throughout the Relevant Period:

(i) the Chairs were ex officio members of the four market associations (LUNMA, LUA, LAUA and LMUA);

(ii) there were individuals who were members of both the Committee of Lloyd's and the market associations.

LUAA

Lloyd's Underwriting Agents' Association was formed in 1960 to look after the interests of underwriting agents and to examine and report on matters which might be referred to it by the Chairman or Council of Lloyd's. The association has no regulatory power. The association acts as a forum for its members and, when necessary, speaks collectively on their behalf. The association is represented on a number of standing and ad hoc committees at Lloyd's and it liaises with the various departments of the Corporation of Lloyd's on matters affecting agents and the Names for whom they are responsible.

Underwriting agents are a single category within Lloyd's regardless of whether managing, members' or combined.

BIBA

The British Insurance Brokers' Association was a single national body representing the interests of insurance brokers in the United Kingdom. The purpose was to ensure that, for the future, united action was taken on measures to protect and promote the interests of the British insurance broking industry and that a single representative body existed which was able to react to or express opinion on matters affecting the industry. BIBA is not a body within Lloyd's regulatory ambit.

LIBC

The Lloyd's Insurance Brokers' Committee was an autonomous committee of BIBA. It was the direct successor of Lloyd's Insurance Brokers' Association, which was formed in 1910 but merged into BIBA in 1978. While the LIBC was one of the regional committees of BIBA, in so far as matters affecting the interests of Lloyd's brokers were concerned, it was autonomous and the interests of Lloyd's brokers remained in the hands of a committee of 16, elected by Lloyd's brokers themselves. It therefore continued to represent Lloyd's brokers on, inter alia, all matters peculiar to their relationships in the Lloyd's community.

Asbestos Working Party

The AWP was formed on the initiative of leading non-marine underwriting agents in August 1980. Interested underwriters were advised of the AWP's formation.

The functions of the AWP, as set out in a letter from Elborne Mitchell to all interested underwriters dated 1 December 1981, included the following:

(i) to provide a forum for discussing problems relating to asbestosis claims and to seek market agreements to assist underwriters in their handling of claims;

(ii) to advise on coverage matters when requested to do so by the leading underwriters;

(iii) to consider facultative re-insurance as well as direct insurance;

(iv) to explore solutions to the asbestosis problem otherwise than by litigation or traditional claims handling; and

(v) to assist in the establishment and development of a database to provide claims information for reserve purposes.

The AWP did not undertake any executive function; it acted in an advisory capacity and to facilitate and co-ordinate the dissemination of information to the insurance market as a whole. It considered that it was not its place to usurp the functions of underwriters and others to whom it communicated in the market with regard to information that came to hand.

The AWP, which was not a Lloyd's initiative but rather a market initiative, had no agency or other legal relationship with Lloyd's, and Lloyd's is not, and never has been, responsible for the acts or omissions of the AWP.

The AWP was created after consultation between the signatories to the letter of 5 August 1980. Its work was intended to embrace a matter of importance to some Lloyd's syndicates and London companies. In December 1982, Mr EE Nelson was asked by Mr. Peter Green to give a brief summary regarding the position of asbestos-related claims when the MPRs for the US$ All Other Business category were discussed at the Committee meeting. Panel auditors during the Relevant Period were addressed by Mr. Murray Lawrence, Mr. Ted Nelson, Mr. Ralph Rokeby-Johnson and Mr. Robin Jackson on the question of (amongst other things) asbestos-related claims. The AWP sought authority from Lloyd's syndicates and companies in the London market for the handling of claims. Individuals (including Mr. R.A.G. Jackson) who were members of the AWP, or its claims committees, were amongst those involved in negotiating the Wellington Agreement and assisting in the establishment of the Asbestos Claims Facility. US attorneys reports were sent to the AWP and distributed to insurers at interest in the London market. The AWP was responsible for the decision to establish Toplis and Harding Asbestos Services Ltd. (later Toplis and Harding Market Services Ltd.) to which attorneys' reports were subsequently addressed. Toplis and Harding Inc. (a US company) was purchased by Lloyd's in 1984. Alexander Grant, a firm of US chartered accountants, was retained by the AWP in 1981 to establish a database containing claims information. Toplis and Harding Inc. assisted in inputting information into the database.

Other Working Parties

In addition to the AWP, a number of other working parties were formed by underwriting agents to study particular claims related issues of interest to the market, for example, the Computer Leasing Working Party and the Environmental Claims Group.

Mr. Murray Lawrence was chairman of the Computer Leasing Working Party.

Mr. Ian Posgate was a member of the working party. The Computer Leasing Working Party retained Elborne Mitchell as its solicitors. For a short period, computer leasing formed part of the brief to Rota Committee Chairmen.

Market Representation of Names

Names are represented through the external members of the Council elected by them. A number of associations have also been created to represent their interests including the Association of Lloyd's Members. Prior to the formation of the Council, external Names were entitled to vote alongside working Names for the Committee candidates. Upon formation of the Council, external Names were entitled to vote only for external members of the Council. The responsibilities of members of the Council, to have regard to the interests of Lloyd's as a whole, did not vary from Council member to Council member. Names' action groups have existed since at least 1979 (when the Sasse action was in existence).

E. DEVELOPMENT OF SELF-REGULATION AT LLOYD'S

Lloyd's was established as a society of underwriters in 1811 when a Deed of Association was executed by the members at that time. By 1871, the business of Lloyd's had increased in size to the extent that it was considered necessary to promote an Act of Parliament to establish the Society of Lloyd's in a more permanent fashion. The Lloyd's Act 1871 incorporated the then members and all persons subsequently admitted as members into the Society and Corporation of Lloyd's. That Act, with a few basic amendments, established the Committee of Lloyd's as responsible for managing the affairs of Lloyd's and set out the framework upon which Lloyd's affairs were conducted during the ensuing 110 years. It laid down (inter alia) and confirmed two fundamental rules for Names, that underwriting must be conducted only in the Underwriting Room and a Name shall be a party to a contract of insurance underwritten at Lloyd's only if it is underwritten with several liability, each underwriting member for his/her own part and not for another, and if the liability of each underwriting member is accepted solely for his/her own account.

During the late 19th and early 20th Century, the market saw the development of new forms of underwriting and the Lloyd's Act 1911 extended the objects of Lloyd's to include the carrying on by Names of insurance business of every description (previously it had been limited to marine business). The Act also introduced the power of the Society to suspend temporarily any Name if the Committee considered him/her to have been guilty of any act or default discreditable to him/her as an underwriter.

The Lloyd's Act 1925 gave enabling powers in respect of the making of byelaws by the Society and modified some of the rules governing the operation of the Committee. A further Lloyd's Act in 1951 was promoted to give the Society full powers to borrow money. Several parts of the Acts referred to above were repealed by the Lloyd's Act 1982, the purpose and provisions of which are considered further below.

The Cromer Report

In November 1968, Lord Cromer was asked to head a Working Party to investigate and recommend "what should be done to encourage and maintain an efficient and profitable Lloyd's underwriting market of independent competing syndicates, which would be of a size to command world attention". The Cromer Report was delivered to the Committee of Lloyd's at the end of December 1969. The Cromer Report was made available by Lloyd's to Names in 1986. The Cromer Report pointed out that in order to maintain its share of the world market in insurance, which was expanding at 7 to 10 per cent. per annum, Lloyd's would need an increasing amount of capital.

The Fisher Report

In 1979, the Committee of Lloyd's established a working party, chaired by Sir Henry Fisher, its terms of reference being:

"To enquire into self-regulation at Lloyd's and for the purpose of such enquiry to review:

(i) the constitution of Lloyd's (as provided for in Lloyd's Acts and Byelaws);

(ii) the powers of the Committee and the exercise thereof; and

(iii) such other matters which, in the opinion of the Working Party, are relevant to the enquiry.

Arising from the review, to make recommendations".

The principal recommendation of the Working Party in May 1980 was that:

"... the constitution is no longer appropriate and the Committee's powers are inadequate for self-regulation in modern conditions. We have, therefore, recommended that the Committee of Lloyd's should promote a new private Act of Parliament so that the constitution of Lloyd's can be brought up to date and the powers of self-regulation enlarged."

The report of the Working Party contained a draft bill to amend Lloyd's Acts 1871-1951. That draft was the basis of the bill approved by the Lloyd's membership at a meeting on 4 November 1980. On 27 November 1980, the Committee presented the draft bill to Parliament for passage as a private Act of Parliament. The Bill received Royal Assent on 23 July 1982.

The Neill Report

In January 1986 the Financial Services Bill was published and did not include Lloyd's within its scope. However, during the second reading of the Bill, the Secretary of State for Trade and Industry announced that the Sir Patrick Neill would head an inquiry into the administrative and disciplinary framework of Lloyd's and the operation of Lloyd's Act 1982. The terms of reference of the Neill Committee were:

"to consider whether the regulatory arrangements which are being established at Lloyd's under the 1982 Lloyd's Act provide protection for the interests of members of Lloyd's comparable to that proposed for investors under the Financial Services Bill".

The Neill Committee reviewed the byelaws and codes of conduct made since 1983.

The Neill Committee did not recommend that the regulation of membership of Lloyd's should be brought under the auspices of the Securities and Investments Board. Nor did it recommend any amendments to Lloyd's Act 1982; it stated that its recommendations could be effected by byelaws and resolutions of the Council.

The Committee expressed a number of views on the relationship between external and working members of Lloyd's and made a total of 70 recommendations. These related to the following areas:

(i) the constitution of the Council of Lloyd's: in particular, it recommended increasing by four the number of members nominated and approved by the Governor of the Bank of England and reducing by four the number elected from working Names;

(ii) admission to membership;

(iii) the relationship between Names, members' agents and managing agents: in particular, the structure and terms of the standard agency agreement;

(iv) syndicate accounting and disclosure;

(v) registration of underwriting agents, Lloyd's brokers and syndicate auditors;

(vi) conflicts of interest: especially in relation to common ownership of managing and members' agents;

(vii) enforcement of the system of regulation;

(viii) compensation of and complaints by Names.

Implementation

A chart listing all the byelaws passed by the Council of Lloyd's since the introduction of the 1982 Act and as a consequence of the development in self-regulation is at Appendix II to the statement of agreed facts.

Central Fund Byelaw (No 4 of 1986)

The Lloyd's Central Fund is held and administered by the Society of Lloyd's in accordance with the Central Fund Byelaw (No. 4 of 1986). Members contribute to the Fund each year based on a percentage of their gross allocated capacity.

As part of Lloyd's solvency procedure, certain assets of the Fund may be used to cover underwriting deficiencies of Names at the preceding 31 December, to enable them to pass the solvency test and meet the requirements of the DTI.

Evolution of the Central Fund Byelaw

The 1986 Central Fund Byelaw (No. 4 of 1986) replaced the Central Fund Agreement of 1927. This embodied the provisions of the guarantee scheme (the immediate predecessor of the 1927 Agreement). The Fund was set up to meet the liabilities of members who had been declared in default of their obligations, and was also available for the "advancement and protection of members", at the Council's discretion. It was funded through contributions from members based on premium income of the previous year. The catalysts that provoked the making of the 1927 Agreement were the Burnand (1903) and Harrison (c.1923) cases. Both involved deliberate fraud on the part of the underwriters and caused considerable losses for Names. As a direct result, the Chairman in the mid 1920s, Mr Arthur Sturge, suggested that £200,000 be subscribed by all underwriters in proportion to their premium incomes.

Clause 3 of the 1927 Agreement stated as follows:

"The Central Fund shall consist of (a) £49,988-8s-0d now in the hands of the Society and arising from earlier guarantee schemes which have now been discontinued (b) the contributions of the Subscribing Members hereinafter mentioned (c) the investments for the time being representing such fund and contributions and (d) any other monies which may be at any time added to the Central Fund".

The Central Fund was held and administered by the Committee of Lloyd's (and, following the recommendation of the Fisher Working Party, the Council), on behalf of all members in accordance with the 1927 Agreement and subsequent amendments.

The 1927 Deed was replaced by the Central Fund Byelaw (No. 4 of 1986) as a result of the findings of the Fisher Working Party in 1980. The Fisher Working Party recommended that the Council of Lloyd's should be given express power by an amendment to Lloyd's Acts to maintain the Central Fund, to decide (and to alter from time to time) the purposes to which money in the Fund may be applied, to require members of Lloyd's to contribute to it, and to fix the rate of contribution and to alter it from time to time. Whether or not this was done, they considered that the 1927 Agreement required consideration by the Council with a view to possible revision. In particular the Council should review:

"(a) the purpose for which money in the Fund may be used;

(b) the investment of the Fund in the light of the purposes for which the money in the Fund may be required;

(c) the provision that money in the Fund may not be applied in payment of claims on policies underwritten by a Member until he has been declared to be in default;

(d) the rates of contribution fixed by the 1927 Agreement, and the procedure for increasing contributions in case of need;

(e) the practice in relation to the formalities required for adhesion to the 1927 Agreement." (Fisher Report, para 24.16).

Fisher Task Group 19 was given the task of considering these recommendations. It recommended that:

(i) Names should be required as a condition of membership of Lloyd's to consent to variation of the Central Fund 1927 Agreement

(a) removing the maximum contribution limit of 0.45% of premium income and empowering the Committee by regulation to levy contributions at rates to be determined;

(b) removing the proviso against increasing the financial liability of Names;

(c) enabling future modifications or variations to the Central Fund 1927 Agreement to be effected by Byelaw rather than by Deed;

(ii) the 1927 Agreement should be amended to allow payment of claims without a declaration of default where Names subscribing a risk cannot be identified;

(iii) the default declaration proviso in Clause 10 ("no part of the Central Fund shall be applied in paying or making good or purchasing claims or returns on Policies...(a) unless and until he shall be been declared by a Resolution of the Committee to have made such default as aforesaid...") should not be immediately removed but by amendment to Clause 15 (to be agreed to by Names in a supplemental deed) the Council should be empowered subsequently to remove it by Byelaw;

(iv) a Byelaw should require all Names to subscribe to the Central Fund.

All the Task Group recommendations were agreed by the Committee with two modifications: first, they proposed a maximum rate of contribution of 2½% of premium income to the Central Fund, and secondly, they proposed that it remain necessary for a member to be declared in default before his claims could be met by the Central Fund.

The recommendations were considered by the Council on 21 March 1983. The Council approved the recommendations made by the Task Group save that it agreed with the Committee that the default declaration provisos should not be removed. The Council did not, however, agree to the suggested maximum rate of contribution, but deferred a decision until a final decision had been taken as to the future form of the Fund.

The Council also approved the Committee's proposal that, as from 1984, the basis for calculating the levy should be gross premium income (i.e. without deduction of reinsurance premiums paid) instead of net premium income. It was calculated that the change was equivalent to increasing the levy on net premium income from 0.45% to 0.60% and that this increase was an amount which was not less than the premium which Names would have been required to pay for the guarantee policies which ceased to be required in respect of years of account later than 1981 (and the premiums on which ceased to be paid in the 1984 year of account).