The Court Service-Commercial

17. DIFFERING VIEWS AS TO THE LIKELY OUTCOME OF ASBESTOS-RELATED CLAIMS. THE WRITING OF RUN-OFF CONTRACTS

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

The first known run-off policy is believed to have been written in 1963, when the Committee of Lloyd's sponsored what was in effect a salvage operation to protect a failed syndicate, the Roylance syndicate. More commonly, but still rarely, in later years, run-off policies were placed in respect of syndicates which continued, but where the underwriter had retired or died. Run-off policies were also sometimes purchased for occasional housekeeping and general management reasons (see the Freshields' Report of June 1988). According to a Winchester Bowring note dated November 1979, Winchester Bowring placed about 25 run-off reinsurances during the mid-1970's.

I refer to Mr. Kellett's evidence about (i) the reinsurance he purchased from Mr. Posgate in respect of computer leasing risks and (ii) the overdue market.

The run-off contracts written by the Outhwaite syndicates 317/661 are set out in Table 3 below. According to the Freshfields' Report, of some 1600 Names on the Outhwaite 1982 year, about 345 were working Names.

TABLE 3

OUTHWAITE RUN-OFFS (1974-1982 YEAR OF ACCOUNT)

Reinsured (Syndicate/ Insurance Company

Signing Year

Percentage reinsured by Outhwaite & Ors

Excess and Limits

Premium

Years of Account Reinsured

Inception Date

Date
Accepted

Broker

Marine/Non-Marine/
Incidental Non-Marine Account Being Ceded

Whether or not Whole Account

Whether or
Not Arbitrated

Whether or
Not Commuted

Other Information

Hobbs (737)

1982

Outhwaite: 64.52% Cassidy Syn.No.582: 19.35%

Hardcastle Syn. No.704: 16:13%

£100,000 (unlimited)

£85,000 + US$185,000 +CAN$5,000

1958 + prior

1/1/77

Jun 78

Winchester Bowring

Non-Marine

No: 33.98% of Syn.964's 1958 apr years of account reinsured by the cedant

No

No

Bishopsgate

1982

Outhwaite 32%

Kellett Syn.No.994: 32%

Vernon Syn.No.947:
4.8%

Miles Syn.No.391: 2.4%

Drysdale Syn.No.43: 28.8%

£1,129,200 (unlimited)

£875,000

(i) 1972-1977 (H.S. Weavers)

(ii) 1966-1975 (C.R. Drivers)

1/1/80

Feb 80

Fielding & Partners/Bain Dawes

Mainly Non-Marine

No: the cedant was reinsured i.r.o. their share of (i) Weaver Agencies 1972-1977.

(ii) C.R.Driver 1966-1975

No

Yes

Kellett reinsured his line with Outhwaite in April 1982, retaining £500,000 exposure

Cockell (347)

1982

Outhwaite: 100%

US$12m (unlimited)

US$1.35m

1970 + prior

1/1/81

Aug 81

Winchester Bowring

Non-Marine

Yes

Yes: held for cedant

No

Award of Lord Wilberforce as Umpire and MT Evennett and MS Freeman as party-appointed arbitrators

Birrell (27)

1982

Outhwaite: 100%

US$330,000 (unlimited)

US$55,000

1970 + prior

1/1/81

Aug 81

Winchester Bowring

Incidental Non-Marine

Yes

Arbitration commenced

Yes

Thomson (484)

1982

Outhwaite: 100%

US$9.25m (unlimited)

US$1.1m

1975 + prior

1/1/81

Sept 81

Winchester Bowring

Non-Marine

Yes

Arbitration commenced

Renegotiated

Reinsured (Syndicate/ Insurance Company

Signing Year

Percentage reinsured by Outhwaite & Ors

Excess and Limits

Premium

Years of Account Reinsured

Inception Date

Date
Accepted

Broker

Marine/Non-Marine/
Incidental Non-Marine Account Being Ceded

Whether or not Whole Account

Whether or
Not Arbitrated

Whether or
Not Commuted

Other Information

Fireman's Fund

1982

Outhwaite: 50%

Merrett Syn.No.417/421:
50%

US$35m (unlimited)

US$6,359,552

1969 + prior

1/1/74

Nov 81

C.T.Bowring & Co.

Non-Marine

No: reinsurance i.r.o. cedant's share of complete portfolio run-off for the Sturge syndicate for the 1969 and prior years (cedant's share being 50% i.r.o. 1966 apr and i.r.o. 1967, 1968 and 1969 50% of total paid amount of $27m and 80% of settlements over that amount)

Arbitration commenced

Renegotiated

Smith (660)

1982

Outhwaite: 100%

US$4m (unlimited)

US$300,000

1978 + prior

1/1/81

Dec 81

Winchester Bowring

Non-Marine

Yes

No

Renegotiated

Stewart (15)

1982

Outhwaite: 100%

US$6.45m (unlimited)

US$550,000

1976 + prior

1/1/81

Dec 81

Winchester Bowring

Non-Marine

Yes

Arbitration commenced

Renegotiated

Cowdy (763)

1982

Outhwaite: 50%

Posgate Syn.No.126: 30%

Posgate Syn.No.701: 20%

US$800,000

(unlimited)

(US$5m limit)

US$420,000

1979 + prior

12/1/82

Jan 82

Hoveringham Howard/T. Clowes (Insurance Brokers) Ltd.

Incidental Non-Marine

No: "asbestosis only"

Litigation commenced

Renegotiated

Wrightson (90)

1982

Outhwaite: 50%

S.A. Meacock: 20%

Retained: 30%

US$26,969,321 (unlimited)

US$1.54m

1974 + prior

1/1/81

Jan 82

Winchester Bowring

Non-Marine

Yes

Arbitration commenced

Renegotiated

Arbitration in respect of Meacock's 20% held in favour of cedant

Reinsured (Syndicate/ Insurance Company

Signing Year

Percentage reinsured by Outhwaite & Ors

Excess and Limits

Premium

Years of Account Reinsured

Inception Date

Date
Accepted

Broker

Marine/Non-Marine/
Incidental Non-Marine Account Being Ceded

Whether or not Whole Account

Whether or
Not Arbitrated

Whether or
Not Commuted

Other Information

Harris (947)

1982

Outhwaite: 50%

Posgate Syn.No.126: 30%

Posgate Syn.No.701: 20%

US$20m (unlimited)

US$2.25m

1976 + prior

01/1/82

Apr 82

Morgan Read & Coleman Ltd.

Non-Marine

Yes

No

No

MacKinnon (60)

1982

Outhwaite: 50%

Kellett Syn.No.994: 50%

US$1,870,662
(US$625,000 limit)

US$150,000

1976 + prior

1/1/82

Apr 82

Wigham Poland Reinsurance Brokers

Incidental Non-Marine

Yes

No

No

Kellett (iro Bracey) (993)

1982

Outhwaite: 100%

£500,000 (unlimited)
(combined)

£110,000
(combined)

1968 to 1976

1/1/81

Apr 82

Morgan Read & Coleman Ltd.

Non-Marine

No: the Cedant was reinsured i.r.o. their 33.33% share in a run-off of the 1968-1976 years of account of Bracey Syndicate 917

No

No

Harris (947)

1982

Outhwaite: 33.33%

Posgate Syn.No.126: 40%

Posgate Syn.No.701: 26.67%

US$2m (i.r.o items processed in 1982, 1983 & 1984)
(unlimited)

US$750,000

1976 + prior

1/1/82

Apr 82

Morgan Read & Coleman Ltd.

Non-Marine

Yes

No

No

Between June 1978 and June 1982 eleven run-off contracts were written in whole or in part by Merrett syndicate 418/417 (and in some cases in part by Merrett syndicate 421). Particulars of the eleven run-off contracts are set out in table 2 at page 416 of the Merrett judgment, to which I refer.

Table 3 above includes references to run-off contracts written in part by the Meacock syndicate and other syndicates.

There was litigation/arbitration relating to a number of the run-off contracts referred to above. The column headed final outcome in Table 3 above (and the column headed final outcome in table 2 in the Merrett judgment) show the result of such litigation/arbitration and also the result of settlements arrived at between the parties.

It is to be noted that a significant number of the 33 individuals accused of fraud and their families were Names on the open years of the Outhwaite and/or Merrett syndicates.

The fact that Outhwaite, Merrett and Meacock (and others) wrote run-off contracts which were exposed to asbestos-related risks shows that differing views as to the likely outcome of asbestos-related claims were held in a Lloyd's market in the late 1970s and early 1980s. The Merrett syndicates had access to the extensive knowledge of Mr. Jackson and Mr. Ayliffe.

18. OPEN YEARS

As reported in the Chairman's statement in the 1987 Globals, at the end of December 1987 there were 76 syndicates with a total of 120 years of account left open. Problems associated with asbestos and pollution risks, together with other US liability business, appear to account for the vast majority of the run-off years.

According to the Report of the Rowland Task Force 'Lloyd's: a route forward' January 1992:-

"In 1980 there were 32 syndicate years which had not been able to close at the end of the normal three-year accounting period. By the end of 1990, 97 syndicate years had been left 'open' in this way. These 97 years relate to 53 syndicates, some having up to 5 years of account in run-off. Approximately 17,500 Names have at least one open year of account; amongst these 17,500 Names, the average Name has three to four open years of account."

Exhibit 16 to the Rowland Task Force Report (Trends in Run-Off Accounts (Open Years)) contains a table showing the number of syndicates and of years in run-off for the even years from 1974-1990 inclusive.

Exhibit 1 to the Open Years Panel Report shows the numbers of years in run-off for all the years from 1970-1991 inclusive. It does not show the number of syndicates in run-off. Exhibit 6 to the Open Years Panel Report gives a breakdown by principal cause of the years of account in run-off as at December 1991. According to Exhibit 6 the stamp capacity of run-off years by principal cause at December 1991 was:-

Asbestos/Pollution 60%
LMX Spiral 19%
PSL/EPP 7%
Catastrophe 5%
Professional Indemnity 4%
No Stamp Capacity 3%
Other 2%.

"Your Committee is concerned that two recent catastrophe losses, the October storm and Piper Alpha seem to have been off-loaded onto the reinsurance market and then to be disappearing. As we are dealing with the largest non-marine and marine physical damage losses the insurance world has ever seen, we would expect Lloyd's underwriters to be paying rather more than what appears to be a few fairly modest retentions. Your Committee feels that we need to go beyond the rather comforting letters which managing agents have sent out on Piper Alpha. The attached questionnaire is designed, after considerable market consultation, to find out where these two losses, and Alicia, are finally going to rest so that our members' agents get information which they need for themselves and their Names. Please therefore complete the questionnaire for each of your managed syndicates, adding explanatory notes where necessary, and send it as soon as possible...to your members' agents. ..."

Extensive work was carried out in reserving for the reinsurance by Equitas, which involved a large number of the leading external actuaries and accountants. The results of this work were considered by, amongst others, the DTI advised by the Government Actuary's Department. The Council of Lloyd's was advised by Lazard Brothers & Co Ltd and by Tillinghast-Towers Perrin. The board of Equitas was separately advised by N.M. Rothschild. Approval of the New York Insurance Department was also required, given the assets held in trust in the US in relation to the market's US dollar denominated business.

22. ANALYSIS OF AND CONCLUSIONS AS TO THE THRESHOLD FRAUD POINT

The Threshold Fraud Point. The Names' Case. Lloyd's Case. The Relevant Legal Principles.

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 Names' case is set out in chapter 7.

Lloyd's case is set out in chapter 8.

The relevant legal principles are set out in chapter 9.

Representations Alleged to be Derived from the Brochures. Representations Alleged to be 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 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.

The Brochures

I find that the Brochures did not contain the alleged representations, inter alia for the following reasons.

(i) The whole of each Brochure must be considered.

(ii) The starting point is the actual words used in the Brochures.

(iii) A useful question is as follows: What would a reasonable applicant for membership of Lloyd's/Name understand when reading the Brochure as a whole?

(iv) The alleged representations are not contained in any of the express words used in the Brochures.

(v) The alleged representations (a) are not necessary to give business efficacy; (b) do not represent the obvious, but unexpressed, intention of the parties; and (c) are inconsistent with the express words used in the Brochures.

(vi) In Society of Lloyd's v Clementson [1994] CLC 71 (Saville J), [1995] CLC 117 (CA), the Names argued that their contract with Lloyd's was subject to implied terms, such as:

"(1) That Lloyd's would regulate and direct the business of insurance at Lloyd's with care and diligence and/or lawfully.

(2) That Lloyd's would manage and superintend the affairs of the Society with care and diligence.

(3) That Lloyd's would advance and protect the interests of members of Lloyd's in connection with the business carried on by them with care and diligence and/or lawfully."

The alleged (derived) representations are re-workings of the implied terms rejected in Clementson. In Clementson, Saville J. said (76):

"... it seems to me that whatever test is applied, there is no need for the implication of any of the suggested terms. The undertaking is wholly efficacious as it is expressed and wholly carries through its object, namely contractually to bind the individual to the rules etc of the Society. Since this is the bargain that the parties were making, they could not on any sensible view have regarded the suggested implied terms as a necessary part of the individual's promise to comply with the rules. The contract is not incomplete; its nature does not require that further unexpressed rights and obligations should be implied into it. ...

Since in my judgment the defendants fail on this first essential requirement for implied terms it is not necessary to deal with the other arguments addressed to me on this topic. Suffice to say that I saw great force in many of the other submissions made by [Counsel] on behalf of the Society, for example as to the lack of precision of the alleged terms, and as to the tacit but unfounded assumption of the defendants that the Society was not only concerned with regulating the market but was also responsible in some way for the actual underwriting transacted by the agents of the members. In this latter connection it is noteworthy that Mr. Mason .... signed a "verification form" as a candidate for membership in which he expressly acknowledged that he understood that this was not the case and that the agents bore sole responsibility for the underwriting."

In the Court of Appeal, Sir Thomas Bingham MR said (at 122):

"... I would be content to accept the judge's reasoning as my own. The clear and simple purpose of this agreement, aptly called an undertaking, was to ensure that on his becoming a name Mr. Mason became subject to the regulatory regime of Lloyd's. The clauses governing choice of law and venue were ancillary to that object. No other obligation was assumed by Lloyd's because no other obligation was needed to achieve that object. No contractual obligation was needed to restrain Lloyd's from acting unlawfully, ultra vires or in bad faith because it had no power to do so and could be restrained from doing so without the need to rely on any contract. It was in no way necessary to the efficacy of the contract that Lloyd's should regulate and direct the business in its market with reasonable care … Mr. Mason was subjecting himself to the regulatory jurisdiction of a body of which he was becoming a member and consisting of his fellow members. For the management of his underwriting business he would look to his own agents and not to Lloyd's. In contractual terms there was no more to it than that..."

Steyn LJ said (at 132–133):

"... I take the view that there are four reasons which cumulatively make it impossible to imply any of the suggested implied terms …Thirdly, the Lloyd's system operates on the fundamental premise that a name entrusts his affairs, and in the process his fortune, to his managing agents. The name has remedies both in contract and in tort against the managing agent: Henderson v Merrett Syndicates Ltd. . Names assume substantial risks but at all material times names have done so in return for the advantage of their money, by way of underwriting and investment, "working twice", added to which there have been the prospects of substantial taxation advantages. Historically becoming a name at Lloyd's proved very profitable business. But the negative side of the bargain has always been that the name relies on, and assumes the risk of, the honesty and skill of his managing agent. Manifestly in the Lloyd's system there is no assumption of responsibility by Lloyd's to supervise the investment or underwriting decisions of managing agents. That does not mean that Lloyd's has a licence to act in bad faith, for improper purposes or otherwise in an unlawful manner. But that merely means that such action would be ultra vires …

… I would reject the argument that any of the terms put forward in this case are capable of being implied. I am driven to this conclusion by three distinctive features of the relationship between a name and Lloyd's: namely (1) that the sole purpose of the general undertaking is to commit a name to the regulatory system of Lloyd's; (2) that it is prima facie inappropriate to imply such terms in a relationship between names inter se; and (3) that the Lloyd's system operates on the basis that names look for protection of their interests solely to their managing agents and not to Lloyd's. While the Council and Committee of Lloyd's are empowered to regulate the market Lloyd's does not assume any responsibility to protect names from the breaches of duty of their agents. The suggested implied terms are not needed. On the contrary, the Lloyd's system, as underpinned by the Lloyd's Act, would be rendered unworkable if such terms were to be implied."

(vii) As to the first alleged representation ("Could have confidence in Lloyd's as an institution to safeguard his/her interests") it is (a) unclear in its terminology; (b) does not accord with the administrative structure and governance of the Lloyd's market and the regulatory background for the auditing and accounting regime at Lloyd's; and (c) is inconsistent for example with the following express statements in the Brochures.

The 1980 Brochure for Applicants stated:

"2.7 The functions of the Underwriting Agent are of vital concern to Members because the Agent is in complete control of the underwriting affairs of his Names, and has to deal with the complications of taxation, reserves, investments and the running of the Agency in addition to maintaining accounting procedures and statistical data on the current trends of underwriting. The Underwriting Agent is responsible for advising the Member as to which syndicates to join and conducting his Lloyd's business on his behalf, which involves, among other things, keeping him fully informed of the progress of his underwriting activities, as well as keeping regularly in touch with the syndicates to which the Member belongs. The Agent will also be responsible for the investment of premium income received from the Member's account... The Agent may however make arrangements for some of his duties to be carried out by another agent. The Underwriting Agent has a duty to his Names on the one hand to conduct the underwriting affairs in as efficient a manner as possible, and the Committee of Lloyd's on the other to see that its requirements are complied with on behalf of the Names for whom he acts."

See further for example 'Membership - The Issues' December 1986 under the heading 'Key Membership Issues'.

See also Gatehouse J in Ashmore v Lloyd's (No.2) [1992] 2 Lloyd's Rep. 620.

(viii) Similarly the second alleged representation ("Could trust those who were chosen by Lloyd's to regulate the Lloyd's market and manage its affairs") and the third alleged representation ("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") are (a) unclear in their terminology; (b) do not accord with the administrative structure and governance of the Lloyd's market and the regulatory background for the auditing and accounting regime at Lloyd's; and (c) are inconsistent for example with the following express statements in the Brochures.

The Brochure for Applicants in 1979, in 1980 and in 1981 described the RITC process in the following way:

"11. CLOSING REINSURANCE

When the estimated outstanding liability on a year of account is determined at the end of the third year pursuant to the provisions of the Lloyd's audit, a syndicate will usually close the account by reinsuring such liability into a later year of the syndicate. This is accomplished by members of the old syndicate paying a reinsurance premium to the new syndicate. The new syndicate then assumes any future liability which may be incurred as a result of claims on the policies written by the old syndicate. Being an estimate of future liability, the reinsurance premium may or may not eventually be proven accurate. In certain cases it has been inadequate and the new syndicate has suffered losses in excess of the reinsurance premium received; in such cases Members in the new syndicate would suffer a loss on the reinsurance to close."

The December 1983 version of the Brochure for Applicants described the RITC process in the following way:

11. CLOSING REINSURANCE

Whilst paid claims will, of course, be known and information available on known (but unpaid) claims, it will also be necessary to estimate the value of any unknown claims which may arise in the future and be attributable to that year of account. The computation of the overall figure of outstanding claims is a major exercise for the managing agent and his underwriter and will be a crucial element in determining whether that year of account shows a profit or a loss. Once this liability has been estimated it must be reinsured by a policy of reinsurance in order that the account can be closed. The reinsurance will normally be accepted by the syndicate's next year of account, but provision can be made for the reinsurance to be placed with other syndicates or for the account to remain open for a further year or years. The latter course will be adopted where the agent and his underwriter feel that it is not practicable, at that time, to predict with any reasonable degree of certainty the future claims which will arise on that year of account... The quantification of the reinsurance to close is an estimate of future liability and the reinsurance premium may or may not eventually be proven accurate. In certain cases it has been found to have been inadequate and Members participating on the account which has accepted the reinsurance have suffered a loss on the reinsurance to close."

The December 1986 publication 'Membership - The Issues' contained the following explanation of the RITC process and closure of syndicate accounts:

In the "Key Membership Issues" summary section at the beginning of the Brochure:

"Members inherit both assets and liabilities in respect of business underwritten before they joined a syndicate. There can be no certainty that the assets will be sufficient to cover the liabilities."

Under "Major Financial Aspects":

"At the end of the third year, the account is normally closed by a payment of a reinsurance premium, normally to the following underwriting year of account of the same syndicate ... The acceptance by a syndicate of the premium for the reinsurance to close an earlier year of account means that a Name becomes liable for risks written before he became a member of the syndicate ... Occasionally, an account is left open at the end of the third year and is not closed by reinsurance. This may happen for a number of reasons, but will primarily result from major uncertainty as to future levels of liability. Full liability remains with the members participating in such accounts even if they resign from Lloyd's or die, until the accounts are closed by reinsurance: this may take years."

Under "Accounting and Information to Names":

"The reinsurance to close represents a premium payable under contract by Names in one year of account to a succeeding, usually the next, year of account ... The contract transfers by reinsurance all outstanding risks and benefits relating to the closing year and all previous years of account to the succeeding year, in consideration for which an equitable premium is paid ... The calculation of the premium for reinsurance to close involves the exercise of significant professional judgment and draws on the full experience of the active underwriter in assessing the outstanding known claims, claims incurred but not reported to the syndicate and any further claims which are likely to arise ... The syndicate auditor is required to pay particular attention to the calculation of the reinsurance to close in drawing up his report."

The Globals

I find that the Aggregate Results/Global Reports and Accounts as at 31.12.81 to 31.12.87 did not contain the alleged representations, inter alia for the following reasons:

(i) The whole of each of the Aggregate Results/Global Reports and Accounts as at 31.12.81 to 31.12.87 must be considered.

(ii) The starting point is the actual words used.

(iii) A useful question is as follows: What would a reasonable applicant for membership of Lloyd's/Name understand when reading the document as a whole?

(iv) The alleged representations are not contained in any of the express words used.

(v) The alleged representations (a) are not necessary to give business efficacy; (b) do not represent the obvious, but unexpressed, intention of the parties; and (c) are inconsistent with the express words used.

(vi) The alleged representations are (a) unclear in their terminology; (b) do not accord with the administrative structure and governance of the Lloyd's market and the regulatory background for the auditing and accounting regime at Lloyd's; and (c) are inconsistent with express statements in the documents. By way of example I refer to the passages quoted in chapter 19 from the Aggregate Results/Global Reports and Accounts as at 31.12.81 to 31.12.87.

(vii) As to the second alleged representation, Lloyd's accepts that a representation was made that such figures represented an accurate aggregate of the audited trading results of all syndicates in the market. The Notes to the Accounts in the Globals made it quite clear that the figures were no more than an aggregation of such syndicate results.

Other Ingredients of the Tort of Deceit Not Made Out

In case I am wrong as to the alleged representations or any of them, for the reasons set out below I find that other ingredients of the tort of deceit were not made out. In particular I find, for the reasons set out below, that the Names have not proved fraud in the sense set out in chapter 9 above, under the heading 'The Tort of Deceit'.

The Names' Case is Confined to Asbestos-Related Losses

The Names say that 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.

It is important to remember that 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 without limitation:-

(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 described in chapter 10.

The impact of these factors varied as between individual syndicates. Long-tail syndicates facing asbestos-related claims also faced environmental pollution claims. It is unrealistic in any year in the Relevant Period to ignore the problems created by environmental pollution and other latent liability claims. The position of course varied from year to year. The report of the Rowland Task Force published in January 1992 said that the greatest uncertainties surrounded environmental pollution claims. The Open Years Panel Report of March 1993 stated that the least well-developed, and therefore the most uncertain, of latent liability problems was environmental pollution.

As the Names' case is confined to asbestos-related losses, it is necessary to single out the impact of these losses, bearing in mind at all times the wider picture referred to above.

The Names' Case Must be Judged Against the Relevant Structure and Background

The Names' case must be judged against the relevant structure and background. For this reason I have set out the Administrative Structure and Governance of the Lloyd's Market in chapter 10, the Regulatory Background for the Auditing and Accounting Regime at Lloyd's in chapter 11, and the Rules and Procedures Governing the Admission to Underwriting Membership of Lloyd's and Related Matters in chapter 12.

As to RITC, I have set out in chapter 13 the Role of the Managing Agents/Underwriter and in chapter 14 the Role of the Auditors.

I refer to the detailed analysis in chapters 10 to 14.

I set out below some general points under the headings (a) to (i) below, without prejudice to the general account in chapters 10 to 14 which is central to a proper understanding of how the Lloyd's market worked.

There is considerable force in Lloyd's submission that 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.

(a) Market Associations

A separate association exists for each underwriting market. They are independent of the Society and Corporation of Lloyd's. The statements made by the Chairman of LUNMA in the Aggregate Results/Global Reports and Accounts as at 31.12.81 to 31.12.87 were independent of the Society and Corporation of Lloyd's.

(b) The Role of The Department of Trade and Industry

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 Lloyd's Aggregate Results/Global Reports and Accounts as at 31.12.81 to 31.12.87, must be judged having regard, among other matters, to the role of the DTI as explained in chapter 10. I have set out in chapter 19 some examples of the attitude and position taken by the DTI as to reserving for long-tail claims during the Relevant Period.

(c) Minimum Percentage Reserves

Lloyd's made it clear to the DTI, and in the Audit Instructions, that the MPRs were absolute minima. Thus by way of example the Solvency Letter for the 1984 year end expressly stated, at note (i)(a) to clause 6, that: "The scales of minimum percentage reserves represent the absolute minimum requirement for any syndicate."

(d) Developments in the Lloyd's Regulatory Environment for Auditing and Accounting

I refer to the developments in the Lloyd's Regulatory Environment for Auditing and Accounting as described in chapter 11C under the headings the Fisher Report and Lloyd's Act 1982, Changes in Lloyd's Departmental Structure, 1986 Audit Brief, the Neill Report, and Involvement of Professionals in the Task Groups, Working Parties and the AASC and MSSC. These developments were responsible developments with a view to improving the auditing and accounting regime at Lloyd's.

(e) Managing Agents

Significant protections should have been afforded to Names by the role and duties of managing agents. The role and duties of a managing agent are described in chapter 10. The role of the managing agents/underwriter in relation to RITC is described in chapter 13.

The Names' case 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/Globals as at 31.12. 81 to 87, pre-supposes that all or a significant number of managing agents concerned with syndicates subject to asbestos-related risks were negligent during the Relevant Period. It is necessary to distinguish between syndicates that wrote run-off contracts, and those which were simply concerned with their own book of business. As to syndicates that wrote run-off contracts I refer to the Outhwaite settlement and the Merrett judgment. As to syndicates which were simply concerned with their own book of business, no two syndicates had the same book or the same protections. By way of example some syndicates had unlimited run-off cover. An independent assessment is found in the Kerr Report (October 1993).

Paragraphs 14.8 and 14.9 under the heading "Long-Tail Cases" dealt with claims against syndicates which had not written any unlimited run-off contracts for other Lloyd's syndicates:

"14.8 We have carefully considered all the events in 1980 to 1982 on which the Names rely in support of their contentions that 1979 should have been kept open, culminating in the Neville Russell letter in February and the Murray Lawrence letter in March of 1982. But we are not persuaded that these arguments fairly or adequately reflect the overall market perception (or lack of perception) of the likely future dimension of the asbestosis claims experienced at the time... The choice appears to us therefore to lie between the conclusion that the entire market with long-tail US liabilities was negligent in closing 1979 or that the allegation of negligence in this regard is based on hindsight. In our view the latter conclusion is more likely to be correct.

14.9 Looking at the matter broadly, we have therefore concluded that Names...are unlikely to establish that the 1979 year of account ought not to have been closed into 1980 in the calendar year 1982, and we have reached the same conclusion in relation to the closure in 1983 and 1984 of the years 1980 and 1981. From the calendar year 1985 onwards the closure of earlier years for syndicates with accrued long-tail liabilities arising out of US casualty business gradually became more questionable, although the circumstances varied as between different syndicates, and the case against closure was not necessarily progressively uniform. In this connection it must be remembered that the full impact of asbestosis and pollution liabilities for the market was only felt in the late 1980s..."

Further I refer to the detailed assessments in the Kerr Report of the 14 sets of long-tail cases.

(f) Panel or Registered Auditors

Significant protections should have been afforded to Names by the role and duties of panel or registered auditors. There were two separate (although related) aspects of the annual audit work carried out by the panel or registered auditors:

(i) the audit of syndicate accounts prepared by the managing agents. In this context the auditors' report was addressed to the members of the syndicates themselves; and

(ii) the annual solvency audit whereby auditors were obliged to report annually to Lloyd's and the DTI on the solvency of the Names.

The role and duties of panel or registered auditors are described in chapter 11. The role of the auditors in relation to RITC is described in chapter 14.

The Names' case 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 relevant Aggregate Results/Globals, pre-supposes that all or a significant number of auditors concerned with syndicates subject to asbestos-related risks were negligent during the Relevant Period. Again it is necessary to distinguish between syndicates that wrote run-off contracts, and those which were simply concerned with their own book of business. As to syndicates that wrote run-off contracts, I refer to the Merrett judgment. As to syndicates which were simply concerned with their own book of business, no two syndicates had the same book or the same protections.

The Committee/Council of Lloyd's were generally entitled to assume that auditors were performing their duties competently. The review of the AU 38s and the steps taken where a syndicate's reserves for the year prior to the year of account being closed were found to have an apparent inadequacy greater than 15% of the reserves, are described in chapter 11.

(g) Meetings of Panel Auditors

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. A number of these occasions are referred to in chapter 19. I find that those persons who provided information to panel auditors in this way from time to time, did so (in the case of Mr. Nelson probably did so) honestly and responsibly.

(h) Members' Agents

The role and duties of a members' agent are described in chapters 10 and 12.

It was the duty of a members' agent to give a prospective Name/a Name comprehensive and objective advice among other matters as to:-

(i) whether membership of Lloyd's was appropriate to his/her circumstances;

(ii) the consequences of membership in the light of a thorough understanding of his/her circumstances;

(iii) which syndicates to join and in what amounts, on an annual basis, when decisions had to be made for the following underwriting year;

(iv) the different classes of business;

(v) factors which had materially affected past results of syndicates, or which might materially affect future results of syndicates e.g. asbestos and pollution claims, the impact of catastrophes etc;

(vi) risks associated with LMX syndicates, long-tail syndicates, PSL syndicates etc;

(vii) the quality of individual syndicates;

(viii) where a particular syndicate involved some special, additional or unusual risk, an appropriate warning coupled with appropriate information;

(ix) other information as was necessary to enable the Name to make reasonably informed decisions about portfolio selection;

(x) the risks of membership and the concept of unlimited liability;

(xi) the fact that he/she or his/her estate would remain liable until all the syndicates on which he/she participated had been closed by reinsurance to close.

(i) The Rota Committee

Paragraph 4.36 of the Neill Report referred to two central elements in Lloyd's assessment of the effectiveness of the briefing given by agents to prospective Names, the Verification Form and Rota interview. As to the latter the Neill Report stated;-

"4.38...There can be no fault with the theory that prospective Names should be interviewed by experienced market practitioners to test whether they understand all the implications of membership. It is an unusual and valuable procedure. We have, however, received two general criticisms of the practice. One is that it comes too late in the day in that by the time a candidate is interviewed he is already committed in a psychological sense to membership. We have also had some evidence from both external and working members that points to a degree of superficiality in the questioning that takes place. There is a related anxiety that a Name may be inhibited by the presence of his agent from raising queries or giving candid answers to questions.

4.39 If the other changes in the recruitment procedure designed to improve the introductory information given to prospective Names and to raise the standards of agents in advising Names who approach them are introduced, we do not think it necessary to change the timing of the Rota. As to the nature of the interview, there must be limits to what can be accomplished in the space of what may be as little as 15 minutes. We are, however, anxious that Lloyd's should do all they can to ensure that it is not a mere formality. Apart from continuing to emphasise the point with Rota Chairmen, one way of furthering this objective would be to arrange the interview in such a way that for some part of it the agent would leave the room so that the candidate could be questioned on his or her own. We recommend that the Council adopt this procedure."

The conclusion of the Neill Report was that if the detailed recommendations in chapter 4 were followed up (including those set out above), Lloyd's would have a properly regulated recruitment process containing safeguards at least comparable with those envisaged elsewhere in the financial services sector.

I find that the Neill Report in the passage quoted above accurately reflected the different roles of members' agents and Lloyd's procedures. The duties of a members' agent included those set out above. The function of the Rota Committee was to test whether prospective Names understood all the implications of membership. There were limits to what could be accomplished in about 15 minutes. The Neill Report did not require any alteration to the nature of the questions asked by the Rota Committee Chairmen.

The Witnesses

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

The Chronology of Certain Information Relevant to Asbestos-Related Claims for the Period 1978-1988

Appendix 3 contains a Chronology of certain information relevant to asbestos-related claims for the Relevant Period. The keys (SI = syndicates at interest or interested insurers; SS = syndicate specific; PA = Panel Auditors; AWP = Asbestos Working Party) represent an attempt to identify recipients of a document, but do not constitute a finding that any particular individual or syndicate received or was aware of the document or its content. Although Appendix 3 contains extracts from documents, I have of course had regard to the whole of each of the documents referred to (and all other material before the court).

List of US Cases Concerning Coverage for Asbestos Losses for the Period 1978-1988

Appendix 2 contains a list of US cases concerning coverage etc for asbestos losses for the Relevant Period.

An Overview of the Nature and Development of Asbestos-Related Claims

I have set out in chapter 16 an overview of the nature and development of asbestos-related claims.

Mr. Rayment in his witness statement identified the principal 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, when the problem had been appreciated as significant, but nothing like as serious as it eventually became. The reasons are of course interlinked and there may be others which should be identified. The starting point is the sheer volume of claims which eventually came to be made. Table 2 in chapter 16 illustrates the growth of the problem.

Between the Borel decision in 1973 and the beginning of 1981, there were probably something in the region of 8,000 to 10,000 claims in an eight year period. In the period between 1981 and the Wellington Agreement, the filing pattern was (according to an AR dated 1 August 1988) "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 1000 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 1990's the rate was about 24,000 a year; an annual total which was broadly comparable to the entirety of claims in the 10 year period after Borel (1973 to 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.

These figures show that despite Borel and despite what is on any view a considerable volume of claims over the lengthy period between Borel and the Wellington Agreement, it was only after the Wellington Agreement that the filings of claims increased dramatically. The fact that the ACF dissolved within just three years after the Wellington Agreement demonstrates that asbestos-related claims did not proceed in the way that producers and insurers thought they would proceed.

The sheer volume of claims defied expectations and has made the problem much more serious and expensive than was anticipated. It was not, for example, an increase in the cost of settling individual claims which caused the problems; the recommended reserving for known claims has in fact stood up very well. Mr. Rayment said in his witness statement - "What caught us, and the rest of the insurance industry, out, was quite simply the unforeseen increases in the number of claims".

I considered in chapter 16 some of the 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 as to the Likely Outcome of Asbestos-Related Claims. The Writing of Run-Off Contracts

I have referred in chapter 17 to the fact that differing views as to the likely outcome of asbestos-related claims were held in the Lloyd's market (and elsewhere) in the late 1970s and early 1980s. One illustration of this is found in the fact that Outhwaite, Merrett, Meacock and other syndicates wrote a number of run-off contracts.

It is to be noted that according to the Freshfields' Report, of some 1600 Names on the Outhwaite 1982 year, about 345 were working Names.

Open Years

I have referred in chapter 18 to the extent to which the number of open years increased during the Relevant Period.

Examples of Estimates of Asbestos-Related Claims Proving to be Incorrect

I refer to a number of examples of estimates of asbestos-related claims proving to be incorrect.

Mr. Rayment cited Johns Manville Corporation as an example of estimates of potential claims proving to be incorrect. In August 1986 the United States Bankruptcy Court for the Southern District of New York signed an order pursuant to which Johns-Manville undertook an extensive campaign designed to provide the maximum amount of publicity, with respect to the confirmation process of the Plan before the court. The campaign provided for national television and radio advertisements, newspaper advertisements in the six leading US and Canadian newspapers and in the largest circulation daily newspaper in each State, the District of Columbia and each Canadian Province. This publicity campaign was designed to inform as many future asbestos claimants as possible of the impact of the Manville reorganisation, upon whatever rights they might have against Manville as Debtor. I refer to the decision of Judge Lifland dated 18 December 1986 and the subsequent appeals. In his judgment dated 19 January 1995 Senior District Judge Weinstein of the United States District Court E and SD New York said:-

"When the distribution plan was confirmed in 1986, it was established that the Trust would receive approximately 83,000 to 100,000 claims over the course of its life into the middle of the next century. To date, the Trust has received approximately 240,000 claims and it is expected to receive hundreds of thousands more."

Manville has continued to receive claims which are now paid from the Manville Personal Injury Settlement Trust. This trust was set up as a result of the Manville bankruptcy proceedings. The number of claims against Manville, including claims administered by the trust, now exceeds 400,000.

As to PCW Mr. Lord said "For eight months we dealt with this matter with the greatest possible care" (with the assistance of Mr. Nigel Holland and Mr. Charles Skey) "and two years later it became quite clear that we got it wrong."

Mr. Louw (who was called by the Names) was cross-examined by reference to the accounts of Mercantile & General Reinsurance Co Ltd. He agreed that the reserves in the 1980s were inadequate to meet the weight of asbestos-related claims. He accepted that the Mercantile added to its reserves year by year in order to meet asbestos claims, but those reserves proved inadequate. The size of the reserves for asbestos and pollution claims in 1995 was greater than the entire reserves for the whole of the non-proportional account in some of the 1980s.

The first Names' action to go to trial (Stockwell v Outhwaite) settled in about January 1992, without judgment being delivered. The Names recovered £116 million. Mr. Stockwell pointed out that this proved insufficient - "It went within two years".

There are a number of examples of underwriters refusing offers of run-off protection in the early 1980s which, with the benefit of hindsight, they would have been wise to accept.

As to certain reports relied on by the Names as to the possible impact of asbestos-related claims, Mr. Keeling said:-

"Six months ago we had some very learned Government experts saying Y2K was going to cost between $600 billion and $1.5 trillion...it actually came out at very little, if anything. ...As an underwriter, you see an awful lot of Governmental and scientific reports and you've got to value them."

There is, of course, a marked distinction between a RITC arrived at by the underwriter/managing agents (i) erroneously and (ii) negligently; the same applies to an unqualified audit report.

The Relevant Period

In chapter 19 I have set out a chronology of certain important events in 1978 to 1988 (the years in question).

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 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 were an honest response to the issues raised by the Neville Russell letter.

At a meeting of the Audit Committee on 6 April 1982 Mr. Randall reported that there had been little or no reaction from the market following the circulation of the Murray Lawrence letter. It is important to note that the panel auditors appeared to have been content with the guidance in the Murray Lawrence and Randall letters. They did not seek further instructions as to asbestos-related claims from the Committee/Council at any time during the Relevant Period.

A telling comment is found in a document entitled "Narrative Which Could Be Adapted To Become A Draft Affidavit" where Mrs. Mackenzie-Smith wrote - "In the summer of 1994, I first saw the now famous Murray Lawrence letter... The letter came as a shock to me as it seemed to demonstrate that Lloyd's were not after all fraudulent but had in fact disseminated the information concerning impending losses to "all underwriting agents". I immediately made enquiries in all directions and learnt that no agent could be found who admitted having received the letter and that there was a possibility that it had never been sent". Thus Mrs. Mackenzie-Smith appears to have accepted that if the letter was sent to all underwriting agents, "Lloyd's were not after all fraudulent". I have found 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.

The new Council which met for the first time on 5.1.83 comprised three constituent groups, working Names, external Names and persons nominated by the Council and confirmed by the Governor of the Bank of England. Chapter 19 contains a number of references to efforts made, particularly by nominated members, to improve among other matters syndicate accounting and disclosure of information to prospective Names. I regret that I did not hear evidence from Mr. Ian Hay Davison who plainly made a major contribution towards improved disclosure. He wrote in a memorandum dated 9 February 1984 to Mr. P. A. R. Brown:-

"As to syndicate accounting, I believe in all honesty it can be said that we have made great progress in arranging for the publication of syndicate accounts and by incorporating by byelaw certain basic essentials which will go to Council on 13 February...disclosure is the name of the game and disclosure is what we are achieving. There is an inevitability about the work of accountants in this field which even the high Tories on the Committee know they cannot reverse."

The hand of Mr. Davison at work can be seen, for example, in the review procedure for syndicate accounts approved by the Council of Lloyd's on 11 June 1984.

At a meeting of the MSSC on 17 December 1984 Mr. Murray Lawrence expressed the view that Lloyd's should not pass judgment on syndicates' reinsurance to close. This should, he said, be left to managing agents and auditors. This point of view was representative of the then current thinking of the Committee/Council, and in my judgment reflected the distinction between the role of the Committee/Council and the duties and responsibilities of managing agents/underwriters and auditors of individual syndicates. A similar point was made by Mr. Fredjohn (who was called by the Names). Mr. Fredjohn said that in his opinion it was not the Council's job to try and second guess the work carried out by managing agents and auditors. The Council set the regulatory framework in which others operated. Further Mr. Murray said when giving evidence that in his opinion it was no part of Lloyd's function to usurp the role of the agents, working in conjunction with their auditors, in relation to the closure of syndicates' years of account, nor did the Committee/Council of Lloyd's have the information, time or resources to interfere in this area of the agents' businesses.

I refer again to the passages quoted in chapter 19 from the Aggregate Results/Global Reports and Accounts as at 31.12.81 to 31.12.87. I also refer to the comments made by the Chairman of Lloyd's from time to time at meetings of members, quoted in chapter 19. There were repeated references to the problems presented by asbestos-related claims and other long-tail risks, including in particular pollution.

Further the reports of individual syndicates during the Relevant Period contained numerous references to the problems presented by asbestos-related claims (and other long-tail risks, including in particular pollution). Some examples of such references are set out in Appendix 3.

In the Chatset Lloyd's Syndicates Results 1978 (published in 1981) Mr. Sturge wrote "Asbestosis has been described as the largest ever insurance loss and will not only affect the non-marine market." Despite this in March 1985 Mr. Sturge (as an experienced market commentator) wrote that Names could look forward with confidence to the latter half of the 80s in the knowledge that it should be a profitable period and one in which self-regulation would be seen to be working for the community as a whole.

The Allegation that 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).

The Names say 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 Lloyd's Aggregate Results/Global Reports and Accounts as at 31.12.81 to 31.12.87. (The Aggregate Results/Globals simply aggregated the audited trading results of all syndicates in the market). The Names further say that 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 (say the Names) 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.

The Names rely in this connection on the evidence of Mr. K. V. Louw who was not called as an expert witness but as a "technical" witness. I repeat the comments I made on Mr. Louw's evidence in chapter 15.

The basic approach to the calculation of a reserve figure for outstanding asbestos claims started with the attorneys recommending a reserve figure in relation to each policy on which they were instructed. The claims manager of the particular syndicate then identified the extent to which his/her syndicate had subscribed to that policy, and determined a reserve in the light of the advice given by the attorneys. The position of each syndicate would vary, depending upon , for example, which producers it had insured, the years it had covered, the levels at which it had written, the deductibles contained in the policies, and the limits of those policies. Consideration would then need to be given to the impact of the syndicate's own reinsurance programme. Mr. Rayment did not believe that it was possible or appropriate for any single syndicate to short-circuit this approach (for example by simply applying some overall percentage to a notional cost per claimant).

I refer to Mr. Rayment's detailed comments on the Names' calculations. I accept Mr. Rayment's evidence that the only way in which a reserve requirement could, and indeed should, have been worked out, was by each syndicate looking at its own inwards book of business, looking at its own reinsurance protections, working out its own outstandings figures, and forming its own view in the light of all the information available to it, as to what its IBNR estimate should be, and hence arriving at its own decision as to what its reinsurance to close should be. Mr. Rayment said that without knowing what business had been written by any particular syndicate, and without knowing its reinsurance protections (including time and distance policies and run-off policies), he would have been in no position to second-guess the decisions taken by other syndicates as to their RITC calculation. Lloyd's was in no better position. Further the Lloyd's market was a very competitive market place: each syndicate would keep its own business to itself.

Mr. Rayment's views as to the extreme difficulties that would have been encountered in the Relevant Period, had Lloyd's sought to make an independent investigation and assessment of the global exposure of the Lloyd's market to asbestos-related claims (including IBNR), are confirmed by the experience of the early 1990s.

The Rowland Task Force appointed McKinsey & Co to work with Task Force. They provided analytical support. The Task Force attempted to scale the potential size of the market's ultimate liability for asbestos and pollution claims. However, the Task Force concluded that to do this at a market level would be extremely complicated, and the uncertainties were too great to come out with reliable estimates based simply on an overview.

The Open Years Panel (with analytical support provided by Mercer Management Consulting) spent a lot of time trying to put a figure on what the cost would be to close all the open years. It did not succeed because of the very great uncertainties attaching to US long-tail liabilities, especially pollution.

The proposals of the Business Plan in relation to the management of the old years became known as the "NewCo Project". An essential feature of the proposals was the proper capitalisation of NewCo, on the basis of appropriate and equitable reserving standards. The reserving project commenced in the autumn of 1993, with the appointment of Heidi Hutter, a US actuary with extensive experience of non-life reinsurance, to lead the project. The project expanded in May 1995, as part of the R&R proposals, to cover all 1992 and prior years liabilities. It was not completed until May 1996, almost three years after it commenced. It was probably the largest reserving project ever undertaken in the insurance industry. It involved many of the leading actuarial and accounting firms in the insurance industry, including Tillinghast, Ernst & Young, Coopers & Lybrand Actuarial Insurance Services, Neville Russell and Mercer Management Consulting.

Mr. Lord answered the Names' allegation in practical terms. He said that there was no doubt that information could have been assembled in an aggregate form. "One would then have had... the ability to say to the underwriters, 'Are you aware of this? Are you clear that in your reserving you have taken full account of the situation which this reflects?'. My problem is this: that if the underwriter had said, 'Yes I am, and I have done my triangulations with this in mind, and to the best of my ability my reinsurance to close reflects all this and my auditors have taken no exception to anything that I have done', then I think that in the Lloyd's system at that point one comes to an end." Mr. Lord added that the General Review Department would not have had the technical insurance expertise to re-work an underwriter's reinsurance to close. "One could only have done that by putting in a team of competing underwriters... to go through the numbers. That actually is what qualified Lloyd's auditors are supposed to do."

Recruit to Dilute

As to "recruit to dilute" Mr. Sturge (who was called by the Names) said that up to 1985 he did not believe there was any "recruit to dilute". He was less happy about what happened in 1986 and 1987. He thought the Council of Lloyd's should have put some check on the growth of capacity - "The wrong people were becoming members of Lloyd's, those who did not really have any real wealth". It is again necessary to distinguish between the role and duties of members agents and the functions of the Committee/Council.

It was the duty of a members' agent to give a prospective Name comprehensive objective advice as to whether membership of Lloyd's was appropriate to his/her circumstances. Thus in Sword-Daniels v Pitel and Others [1994] LRLR 10 Gatehouse J said at 14:-

"More than one expert witness expressed the view, with which I agree, that in the light of Mr. Sword-Daniels' disclosed circumstances he should have been discouraged from joining Lloyd's. His only substantial asset was a half-share in the equity of his house, which had to be charged to the bank in order to obtain the guarantees totalling £100,000 which were necessary to establish the required minimum of readily realisable assets. Beyond this, his assets were minimal. Although he was a higher-rate tax payer his professional income at the time was modest... so there was an insubstantial tax cushion to absorb any serious loss.

No complaint is made, of course, that Mr. Sword-Daniels should not have been put forward as a suitable member, but I think he was at least close to the bottom end of any suitability scale, and it was clearly the duty of John Poland & Co, acting through Mr. Pitel, to make sure that they followed the safety-first approach which had been promised and on which he relied.

How, then, did it come about that in 1987, Mr. Sword-Daniels' first year for underwriting, no less than £80,000 out of his allocated premium income of £190,000 was placed with seven syndicates (out of a total of fourteen) which, on any view, were "high-risk"?..."

Further, as I pointed out in the Merrett judgment at page 314, if the amount to be charged by way of premium in respect of the RITC could not be arrived at with a reasonable degree of accuracy, it would be fundamentally wrong if the managing agents/underwriter, instead of leaving the account open, closed the account and sought to expand the syndicate in the hope that by doing so the (expanded) syndicate would be able to weather the difficulties. To the extent that this happened it would form the basis of a claim against the managing agents/underwriter and not the Committee/Council of Lloyd's.

The Allegation that the 1979 Year of Account should have been left Open by Syndicates Affected by Asbestos-Related Claims

I reject the contention made by a least one witness called by the Names, that the 1979 year of account should have been left open by syndicates affected by asbestos-related claims. I refer to the analysis in the Merrett judgment in relation to the closure of 1979 into 1980 in May 1982 (year 1 in that case). The Kerr Report's assessment of the claims against managing agents and members' agents in respect of syndicates 418/417's 1979 closed year was "hopeless". I did not of course have the Kerr Report before me when I wrote the Merrett judgment.

Further, there was so many variables among syndicates affected by asbestos-related claims - for example, what had the syndicate written; at what levels; what were the policy limits; what was its reinsurance protection; had it bought a run-off; had it got rollovers or time and distance policies; did it have surplus in its short-tail or other reserves etc?

Further, it is worth repeating again paragraph 14.8 of the Kerr Report:-

The Case in Fraud Fails

In case I am wrong as to the alleged representations or any of them, for the reasons set out above I find that other ingredients of the tort of deceit were not made out. In particular I find, for the reasons set out above, that the Names have not proved fraud in the sense set out in chapter 9 above, under the heading 'The Tort of Deceit'.

23. E&O COVER AT LLOYD'S

In the course of his evidence, Sir David Rowland said that E & O cover covered 12 months at a time and was on a "claims made basis". It was possible that external Names were underwriting the E & O insurance of their own agent. "One of the very big problems (was) the recycling of the risk around the very people (the Names) who were involved in seeking to recover (in the Lloyd's Litigation) from their agents." Thus E & O cover was provided within the very market it was intended to protect. The same was true for personal stop-loss. "It was this whole element of recycling and double-counting which caused a great deal of (the) problems".

By letter dated 30 June 2000 Freshfields helpfully provided a schedule which sets out the E & O Indemnity Insurance requirements from 1981-1993.

From 10 April 1991 the Council decided that members' agents would not be required to arrange E & O insurance in 1991. On 11 April 1991 the Chairman (Mr David Coleridge) wrote to all underwriting agents advising them of the removal of the mandatory errors and omissions insurance requirements for members' agents that year. This decision was later reaffirmed for 1992. On 12 June 1992, the Junior Deputy Chairman wrote to all agents and Names, advising them of the removal of the mandatory errors and omissions requirements for all agents for 1993.

The relevant background is described in Sir David Rowland's third witness statement. I also refer in this connection to correspondence between Mr Coleridge and Dr and Mrs Munn between September 1991 and May 1992.

24. THE MARKET SCANDALS. THE FAILINGS REVEALED BY THE LLOYD'S LITIGATION

THE MARKET SCANDALS

The Revelations of Late 1982 and the Subsequent Disciplinary Hearings

The Neill Report described the revelations of late 1982 in the following terms:-

"3.12 In the same month that the Lloyd's Act received Royal Assent, the first signs of the major scandals that have subsequently damaged Lloyd's reputation began to surface. Press reports revealed that … Deloitte Haskins & Sells were conducting a special review of the Alexander Howden Group following the latter's takeover by Alexander & Alexander Services Inc. Towards the end of July 1982 it was announced that Mr Kenneth Grob, chairman of Howden, was resigning from the board of Alexander & Alexander, and, together with the finance director of Howden, Mr Allan Page, was to retire from Howden in December. On 1 September 1982 Alexander & Alexander filed a statement with the Securities and Exchange Commission … in Washington which said that they had discovered that 'Howden had entered into some reinsurance transactions with companies which were owned and controlled on an undisclosed basis by four persons who have now ceased to be officers or directors of Howden and are no longer employed by Howden'. It was estimated at the time that there was a deficiency in the tangible net assets of Howden up to $25m. There followed a period of intense press speculation, and on 8 September, Lloyd's announced that they had asked another firm of accountants, Ernst & Whinney, to 'enquire into the various matters referred to in the recent public statements concerning certain companies within the Alexander Howden Group'. On 20 September 1982, Alexander & Alexander made a further statement to the SEC announcing that suits had been filed in the United Kingdom against Messrs Grob, Page, Comery, Carpenter and Posgate seeking remedies for breach of fiduciary duty and misrepresentation. On the same date, the Secretary of State for Trade announced that he proposed, under Section 165(1)(b) of the Companies Act 1948, to appoint investigators into the Alexander Howden Group, and Lloyd's ordered both Alexander Howden Underwriting Limited and Posgate & Denby (Agencies) Limited to suspend Mr Posgate from his posts of underwriter and company director.

3.13 The second, and perhaps most notorious disclosure occurred on 2 November 1982, when Lloyd's announced that Mr Peter Dixon, chairman of PCW Underwriting Agencies Limited (a subsidiary of Minet Holdings plc) and WMD Underwriting Agencies, had voluntarily suspended himself from all duties with the agencies. The decision was taken pending an investigation by Lloyd's arising out of information supplied by Alexander Howden concerning quota share reinsurance placed by PCW and WMD. … on 4 November, there was an announcement of the appointment of inspectors by the Secretary of State for Trade to investigate the affairs of Minet Holdings. On 16 November Lloyd's appointed Mr Peter Millett QC and Mr Nigel Holland FCA to investigate the Howden and PCW affairs. In March 1983 they were joined by Mr Simon Tuckey QC who was given special responsibility for PCW matters. In the event two separate investigations were conducted into Howden and PCW, carried out by Messrs Millett and Holland, and Messrs Tuckey and Holland respectively. A third investigation, to be carried out by Mr Anthony Colman QC and Mr Stephen Hailey FCA, was established by Lloyd's on 15 December 1982 into matters relating to Fidentia Marine Insurance Company Limited (a Bermudan company) and syndicates for which Mr T.R. Brooks and Mr T.J. Dooley were underwriters. The investigators were asked, among other things, to look into reinsurance placed with Fidentia and the extent to which the managing agents of the Brooks and Dooley syndicates, or the brokers placing the business, had any interest in Fidentia or its related companies."

The Neill Report summarised the subsequent disciplinary hearings as follows:-

"3.18 In December 1984, following the release of the investigation report into Fidentia to affected Names on 16 November 1983, the expulsion of Mr Brooks and the 21 months suspension of Mr Dooley were announced. The charges before the Disciplinary Committee concerned the making of secret profits through the placing of reinsurance with Fidentia. It was estimated that a benefit of approximately £6.2m was derived by Fidentia.

3.19 In July 1985 it was announced that a number of those involved in the Howden affair, including Messrs Grob, Comery, Carpenter and Page, had been expelled from the Society. The main charges before the Disciplinary Committee included the capitalisation of a Panamanian corporation, Southern International Re Company SA ('SIR'), with misappropriated funds: the use of SIR, which was not authorised as a reinsurance business, to reinsure Lloyd's syndicates; the acquisition of the Banque du Rhone … with funds derived from Lloyd's syndicates; and the falsification of the accounts of the Alexander Howden Group. It was estimated that some US$30m had been misappropriated. A finding of guilt leading to the expulsion of Mr Posgate was overturned on appeal, although he was suspended for 6 months on lesser charges.

3.20 In November 1985, the expulsion of Mr Dixon and Mr A.A. Sampson … and lesser penalties against other members of Lloyd's were announced following the disciplinary hearing into the PCW matter. (Lloyd's had not been able to bring charges against Mr Cameron-Webb because of his resignation from the Society). The charges before the Disciplinary Committee concerned the misappropriation of funds via insurance contracts to companies which were not genuinely in the business of reinsurance, which never paid any claims on the contracts and which were owned by the directors of PCW, WMD and their friends and associates; further charges related to the misappropriation of funds via two small (or 'baby') syndicates whose members were Mr Dixon, Mr Cameron-Webb and their associates and relatives. The report of the disciplinary proceedings suggested that a sum of at least £29m was lost through the reinsurance schemes, together with further undetermined amounts lost through the baby syndicates.

3.21 The findings of the investigations into these three cases revealed a number of facts about the inadequacy of the pre-1982 regulatory framework and the standards of conduct that had prevailed in the market, evidence of which had not been before the Fisher working party. Two specific vehicles of abuse were identified. One was the use of baby syndicates whereby agency directors and those closely associated with them were favoured either by receiving more profitable business than that directed to other syndicates under the control of the same underwriter, or by the manipulation of funds between the syndicates. The other was the placing of reinsurance premiums on behalf of syndicates with companies (mostly off-shore) in which the agency or holding company director had a financial interest. Some of these related organisations were not reinsurance companies at all, but simply a means by which premiums due to Names could be diverted. Others offered genuine reinsurance, but under favourable terms to the company and allowing those involved to make secret profits at the expense of the Names.

3.22 Apart from these particular matters, however, the investigations drew attention to an absence of understanding on the part of many working members of the principles of the law of agency. The Lloyd's investigators into PCW told the Corporation (in a letter dated 20 January 1984) that it was apparent to them that many of the Lloyd's community in senior positions 'were not even vaguely aware' of the legal obligations on agents to act at all times in the best interests of their principals, not to make secret profits at their principals' expense and not to disclose fully all matters affecting their relationship with their principals."

The report then referred to the resignation of Mr. Hay Davison and the PCW affairs. The report then described the development of the new regulatory framework as follows:-

"3.28 The events described in the preceding paragraphs have led a number of observers to conclude that the framework within which the Society is now regulated is inadequate. This judgment appears to be based largely on the assumption that since the Lloyd's Act of 1982 was passed before the scandals came to light, it could not by definition have provided a regulatory framework capable of ensuring that similar problems did not recur. We have not made that initial assumption. Our objective, as stated in paragraph 2.21, has been to assess the effectiveness of what the Council of Lloyd's have done in implementing the new regime. So, the succeeding chapters of the report review the impressive volume of legislative activity undertaken since 1982. This is exemplified by the establishment of an elaborate structure of committees and sub-committees (which we discuss further in Chapter 12 and list in Appendix 15) and by the volume of legislation which has been passed (some 46 byelaws and three regulations as well as two codes of practice)."

Memorandum prepared by Lloyd's in Response to the Neill Committee of Inquiry

I refer to a memorandum prepared by Lloyd's in response to a letter from the Secretary to the Neill Committee of Inquiry dated 12 March 1986. The letter sought to establish the extent to which conclusions reached in the conduct of various Lloyd's investigations since 1982 had been reflected in byelaws. The memorandum contained a summary of five major investigations together with a description of those regulatory measures that should reduce the risk of fraud, dishonesty or negligence and facilitate their earlier detection. The following summary of the investigations into Brooks and Dooley, Alexander Howden, Multi Guarantee, and Bellew, Parry and Raven are drawn from the memorandum.

Brooks and Dooley

In 1967 Mr T.R. Brooks and Mr T.J. Dooley founded Brooks and Dooley Underwriting Limited, a Lloyd's managing agent in which they had a 75% and 25% interest respectively. Along with three other related Lloyd's agencies, Brooks and Dooley jointly managed a total of eight Lloyd's marine and incidental non-marine syndicates.

In late 1969 or early 1970 Mr Brooks conceived the idea of forming a group of companies with various functions in the insurance industry, which would include an insurance company and a Lloyd's managing agency. Mr Brooks decided upon Bermuda as the appropriate venue for incorporation of the insurance company, which was to be called Fidentia. Fidentia was wholly owned by Mr Brooks and Mr Dooley and from the date of its incorporation in 1970 it underwrote reinsurances of the Brooks and Dooley syndicates in London, either by way of direct reinsurance or by way of retrocession from other insurance captives owned by various Lloyd's interests. At all material times Mr Brooks not only controlled the underwriting of the Lloyd's syndicates, but also the underwriting conducted by Fidentia. In this way he was able to place the syndicates' reinsurances with Fidentia on terms clearly beneficial to Fidentia.

The Lloyd's Committee of Inquiry made the following findings:-

(i) The reinsurance transactions concluded between the Brooks and Dooley syndicates and Fidentia were genuine risk contracts, and Fidentia from time to time paid substantial claims on these contracts. In fact these reinsurance contracts often proved to be of considerable benefit to the syndicates concerned.

(ii) However, by means of these transactions Mr Brooks and Mr Dooley also obtained considerable benefit in breach of their fiduciary duties to Names on those syndicates. Whilst secret profits were made by Mr Brooks and Mr Dooley it could not be said that the transactions, taken as a whole, caused substantial prejudice to the interests of the Names.

(iii) The fact that the syndicates in question were subject to joint management and de facto control by Mr Brooks, rather than the management of independent agents, contributed to the unsatisfactory events mentioned above.

(iv) The establishment of a preferred syndicate by Brooks and Dooley in 1970 was objectionable.

(v) The standards and practices employed by the auditors were inadequate.

(vi) Many of those involved in the management of Lloyd's syndicates were remarkably ignorant of the duties and obligations imposed upon them by the law of agency. Similarly, the Lloyd's brokers who placed the reinsurance policies in question only had the faintest concept of their general responsibilities as regards the placing of reinsurance and their particular responsibilities with regard to related party transactions.

Alexander Howden

(1) Wigham Poland

The investigation revealed the existence of a funding policy under which the contributors were two groups of syndicates. However, whereas one group of syndicates had contributed 98% of the funds accumulated under the policy, the underwriter and deputy underwriter for the one group of syndicates, who were also joint active underwriters for the other group of syndicates which had contributed only 2% of the funds, caused the entire fund to be paid out to the latter group. The latter group received and retained the entire sum for some 14 months and then repaid approximately 90% of it.

The Disciplinary Committee found that the underwriters owed a duty of care to the Names and also a fiduciary duty to safeguard the Names' monies and to keep proper accounts. It found that there had been gross negligence rather than dishonesty.

(2) Southern International Re/Banque du Rhone (SIR/BdR)

The investigation unearthed the following matters that lead to disciplinary proceedings:-

(i) The capitalisation of SIR (a Panamanian Corporation) with misappropriated funds.

(ii) Use of SIR as a reinsurer of Lloyd's syndicates (SIR was incorporated as a real estate corporation under Panamanian law and was not authorised to write insurance or reinsurance business).

(iii) Acquisition of the Banque du Rhone by means of a conspiracy between seven participants to purchase the BdR from Alexander Howden Group secretly, without cost to the conspirators, with funds derived from Lloyd's syndicates.

(iv) Personal benefits from SIR. It was alleged that the four persons who formed SIR caused SIR to enter into transactions for their personal benefit and that for this purpose funds were used which were dishonestly misappropriated by the use of reinsurance policies.

(v) Provision of favours to an underwriter with the intention of influencing his judgment.

(vi) Falsification of accounts of AHG by switching funds from one company to another in order to deceive the US regulatory authorities, the board of AHG, its shareholders, directors and auditors. Further the true state of affairs in Sphere and Drake, the flagship insurance company in the Howden group, was concealed.

The inquiry and subsequent disciplinary proceedings revealed abuse of trust and dishonesty.

Multi Guarantee

This inquiry arose from the activities of Multi Guarantee Company Ltd, a non-Lloyd's insurance broker specialising in extended warranty schemes for consumer electrical goods. Certain of these insurances were placed in the Lloyd's market by a non-Lloyd's broker operating under an umbrella arrangement with a Lloyd's broker. Policy holders were misled both as to the existence and the extent of the cover placed at Lloyd's, with consequent detriment to the name and reputation of Lloyd's. Whilst there was dishonesty on the part of the principal of Multi Guarantee, a Lloyd's Disciplinary Committee found, inter alia, that the Lloyd's broker had failed adequately to supervise the activities of the non-Lloyd's broker under the umbrella arrangement.

PCW

In 1967 Mr Cameron-Webb and Mr Dixon founded PCW, a Lloyd's managing agency. Despite the fact that it was taken over in 1973 by JH Minet and Company Limited, it remained at all material times under the effective management and control of these two persons. Along with WMD (another Lloyd's managing agency, in which PCW had a 40% shareholding) it managed a number of Lloyd's syndicates, principally in the marine and non-marine markets. Throughout the period covered by the investigations Mr Cameron-Webb was the active underwriter for some 30 syndicates managed by PCW Agencies. This enabled the PCW principals to manipulate the underwriting policy of all the syndicates they managed at their will.

For the accounting years 1970 to 1981 inclusive, Mr Cameron-Webb and Mr Dixon caused the PCW and WMD syndicates to effect a large number of quota share reinsurance contracts with (or which were retroceded to) a succession of "reinsurance companies" in Guernsey, the Isle of Man, Gibraltar and Geneva. All these companies were controlled and beneficially owned by the directors of PCW, WMD or their friends and associates. These companies were not genuinely in the business of reinsurance at all and no monies were ever paid by way of claims to the syndicates on those reinsurances. Their sole reason for existence was to benefit Mr Cameron-Webb, Mr Dixon and six other directors of PCW Agencies. For the underwriting years 1968 to 1982 inclusive Mr Cameron-Webb operated what he called the "Intermediate Programme". This involved the placing of a number of excess of loss reinsurance policies with off-shore insurance companies (nearly all of which were beneficially owned by Mr Dixon and Mr Cameron-Webb). The Intermediate Programme was essentially a funding policy ostensibly for the benefit of the PCW Names. However, some of the monies involved were improperly used for the benefit of Mr Dixon and Mr Cameron-Webb.

For the accounting years 1970 to 1981 inclusive, PCW managed syndicates 954 (marine) and 986 (non-marine) on which the only Names were Mr Cameron-Webb, Mr Dixon and five close business associates. The syndicate accounts for the underwriting years 1970 to 1979 showed that profits of £1.96m were distributed to the seven Names on the syndicates. However, in addition to these profits, further sums were paid to Guernsey for the benefit of these Names under "Tonner policies" in the sum of approximately £1.3m and to Geneva, purportedly under a quota share policy, in the sum of approximately £550,000.

Between the years 1978 and 1981 PCW managed syndicate 893, whose members were the wives of Mr Cameron-Webb and Mr Dixon, a director and a number of senior employees of PCW.

The accounting systems of PCW and its service company PCW (S) were not satisfactory. This facilitated the improper use of syndicate funds for paying directly or indirectly Mr Cameron-Webb's and Mr Dixon's private employees, for paying the tax liabilities of various PCW employees and for paying the expenses of three companies beneficially owned by Mr Cameron-Webb and Mr Dixon.

The Inspectors appointed by Lloyd's to investigate the affairs of PCW and WMD, at an early stage in their enquiries, summarised their preliminary findings in a letter to Lloyd's dated 20 January 1984 which is referred to in Chapter 19.

Bellew, Parry and Raven

The following summary should be read subject to the detailed findings of the Disciplinary Committee and the Appeal Tribunal.

In essence secret profits were made at the expense of the syndicates managed by the BPR companies, because BPR reinsurance business with related companies was not conducted on an arm's length basis, with the result that larger monetary benefits accrued to the BPR principals and/or their families.

Disciplinary Verdicts

Serious failings were revealed by a number of Lloyd's disciplinary verdicts set out below. (The numbers 5 and 6 refer to the following offences included in paragraph 1 of the Misconduct, Penalties and Sanctions Byelaw (5 of 1983): 5 = conduct of any insurance business in a discreditable manner or with a lack of good faith; 6 = conduct which is dishonourable or disgraceful or improper).

(1) I refer to the Summary of Lloyd's disciplinary verdicts as set out in Appendix 13 to the Neill Report between about 1984 and about 1986:-

FIDENTIA

(Mr T.R. Brooks 5 (on six separate charges); Mr T.J. Dooley 5 (on four separate charges)).

ALEXANDER HOWDEN

Wigham Poland Policy (Mr I.R. Posgate 5 (on one charge); Mr M.E. Denby 5 (on one charge)).

SIR/BdR (Mr K.V. Grob 6 (on six charges) 5 (on one charge); Mr R.C. Comery (guilty of the same charges as Mr Grob); Mr M. Benbassat 6 (on two charges); 5 (on one charge); Mr I.R. Posgate 6 (on two charges - after appeal)).

J.H. Carpenter (Mr J.H. Carpenter 5 (on two charges)).

C.L.R. Hart (Mr C.L.R. Hart 6 (on eight charges)).

M.J.A. Glover (Mr M.J.A. Glover 6 (on one charge)).

G.R. Pope (Mr G.R. Pope 5 (on one charge)).

MULTI GUARANTEE

(Mr R.L. Meddes 5 (on one charge) and 6 (on one charge); Mr S. Campbell-Ritchie 6 (on one charge)).

PCW

(Mr P.S. Dixon 5 (on five charges); Mr A.A. Sampson 5 (on five charges); Mr J.A.W.I. Hardman 5 (on five charges); Mr A.G.F. Oldworth 5 (on three charges); Mr C.E. Davies 5 (on five charges); Mr D.B. Hill 5 (on three charges); Mr J. Wallrock 5 (on four charges)).

D.G.T. McADAMS

(Mr D.G.T. McAdams 5 and 6 (on one charge) and 6 (on one charge)).

(2) The Notice of Censure in respect of Sir Peter Green published in about May 1987 said:-

"Sir Peter Green … has been found guilty in proceedings before a Lloyd's Disciplinary Committee on a charge alleging the commission between 1977 and 1983 of acts or defaults discreditable to him as an underwriter contrary to Section 20 Lloyd's Act 1871 and which, if committed on 25^th June 1986 when the charge was brought, would have constituted misconduct, namely the conduct of insurance business by him in a discreditable manner, within the meaning of paragraphs 1 (e) and 1A of the Lloyd's Byelaw entitled "Misconduct Penalties and Sanctions" as amended.

The Disciplinary Committee and The Rt. Hon. The Lord Wilberforce PC, CMG, OBE, on appeal both stressed that no question of deliberate or dishonest conduct or pursuit of personal gain was raised against Sir Peter Green and that the charge against him was founded solely on seriously negligent acts of omission.

The charge concerned a funding policy known as the Oil Rig Policy which Sir Peter Green, as the active underwriter for the Names on the syndicates concerned, arranged to be placed with the Imperial Insurance Company (Cayman Islands) Limited ("Imperial") of which he was a director and in which he had a financial interest as a shareholder (although his shareholding at no time exceeded 7.6% of the share capital). The Oil Rig Policy was renewed over a number of years. No criticism has been made of the terms of the policies between 1971 and 1977 but between 1978 and 1982 (save for a retroactive adjustment effective from 1^st October 1981) the return to the Names from the funds accumulated under the Oil Rig Policy was manifestly inadequate and inequitable. This resulted from the failure of Sir Peter Green to review the return credited under the Oil Rig Policy at least once a year from 1978 to 1982. This failure was a breach of the duty owed by Sir Peter Green to the Names to ensure that the return arranged under the Oil Rig Policy was adequate and equitable in the Names' best interests and was not unduly beneficial to Imperial at the Names' expense.

The Disciplinary Committee by a majority concluded that the repeated failure to perform this duty to the Names was sufficiently serious negligence as to constitute "discreditable" conduct for the purposes of Section 20 Lloyd's Act 1871 and the Misconduct Penalties and Sanctions Byelaw.

In respect of this charge the Disciplinary Committee ordered that a Notice of Censure be posted in the Room and that Sir Peter Green pay a fine of £20,000."

(3) Penalties were confirmed by the Council in November 1987 in respect of:- A.W. Knott Becker Scott Ltd/Spicer & White (Underwriting Agents) Limited (Mr P.R. Marsh 5 (on five separate charges); Mr B.R. Spencer 5 (on five separate charges); Mr G.R.L.K. Becker 5 (on two separate charges); Mr J.S. Scott 5 (on two separate charges); Mr J.R. Cantouris 5 (on one charge)).

(4) Penalties were confirmed by the Council in December 1988 in respect of:- Bellew, Parry & Raven (Holdings) Limited (Mr A.H.B. Grattan-Bellew 5 (on three charges) and 6 (on three charges); Mr J.R. Parry 5 (on four charges) and 6 (on three charges); Mr F.C. Raven 5 (on four charges) and 6 (on three charges); Mr E.E. Nelson 5 (on three charges)).

In the Decision and Reasons Relating to Penalties and Sanctions dated 5 August 1988 Mr David Calcutt QC President of the Appeal Tribunal wrote in relation to Mr Nelson:-

"Mr Nelson's misconduct was, in my view, not merely discreditable, but seriously so. In respect of the conduct which was the subject-matter of charge 10A, Mr Nelson was party to the arrangement whereby part of the interest earned on the relevant rollovers was paid to Surplus, so providing substantial benefit for Mr Nelson's family trust. No less than 35% of the monies received by Surplus enured to the benefit of his family trust: the balance of 65% was to be shared between the three BPR principals."

THE FAILINGS REVEALED BY THE LLOYD'S LITIGATION

Judgments in the Lloyd's Litigation - LMX Cases

The following judgments in the Lloyd's Litigation in LMX cases established that there were very serious failures on the part of underwriters/managing agents of a number of LMX syndicates:-

(1) 04.10.94 Deeny v. Gooda Walker Limited [1996] LRLR 183, Philips J. - case 32 in Appendix 1.

(2) 10.03.95 Arbuthnott and Others v. Feltrim Underwriting Agencies Ltd and Others, Philips J - case 42 in Appendix 1.

(3) 19.03.96 Berriman and Others v. Rose Thomson Young (Underwriting) Ltd [1996] LRLR 426, Morison J. - case 66 in Appendix 1.

(4) 16.04.96 Wynniatt-Hussey and Others v. R.J. Bromley (Underwriting Agencies) PLC and Others, Langley J. - case 67 in Appendix 1.

Settlement/Judgment in the Lloyd's Litigation - Long-Tail Cases

The following settlement/judgment in the Lloyd's Litigation in long-tail cases involving syndicates that had had written run-off contracts, indicated/established that there were very serious failures at certain dates on the part of underwriters/managing agents of two long-tail syndicates:-

(1) January 1992. Stockwell v. Outhwaite, Saville J. (Actions settled, the defendants agreeing to pay £116m without an admissions of liability) - case 3 in Appendix 1.

(2) 31.10.95 Henderson and Others v. Merrett Syndicates Ltd and Others [1997] LRLR 265, Cresswell J. - case 58 in Appendix 1.

Judgments in the Lloyd's Litigation - Portfolio Selection Cases

The following judgments in the Lloyd's Litigation in two portfolio selection cases established that there were very serious failures in the two instances on the part of the members' agents concerned.

(1) 12.04.94 Sword-Daniels v. Pitel and Others, Brown v. KMR Services Ltd, Gatehouse J. - case 25 in Appendix 1 (the decision of the Court of Appeal in Brown v. KMR Services Limited is reported at [1995] LRLR 241 - case 51 in Appendix 1).

Claims Not Considered by the Court

Numerous claims were outstanding at the time of the market settlement in September 1996. Although by the time of the market settlement the Court had heard the above lead or pilot cases in the LMX, long-tail and portfolio selection categories, no case involving a PSL syndicate had been heard.

I refer to the Kerr Report for an independent assessment of the cases which the court had not heard at the time of the market settlement. In particular:-

(i) I draw attention to the assessments in the outstanding LMX cases, long-tail cases, and PSL/Miscellaneous cases.

(ii) It is striking how few of the long-tail cases, involving syndicates other than those which wrote run-off contracts, received an assessment of medium or above and how many of the cases concerning the writing of PSL and EPP business received assessments above medium (i.e. upper medium or strong).

(iii) Claims by Names for negligent syndicate advice or selection fell outside the remit of the Kerr Panel, since such claims necessarily related to the particular circumstances of individual Names. Further the report mentioned the difficulties caused by claims founded on alleged misrepresentations to Names by members' agents or managing agents, often on a collective basis by accounts or reports sent to all Names.

Some Faultlines

The Lloyd's Litigation and the evidence in this case have revealed a number of faultlines, some of which I refer to below.

Long-Tail Syndicates

Mr Murray said when giving evidence that (with the benefit of hindsight) the "asbestos and pollution experience … has … communicated to me that the annual venture with the reinsurance to close is almost impossible to apply to long-tail business … this is why I really believe the future of the market is for corporate capital".

Personal Stop Loss and EPP Business

I refer to the evidence of Sir David Rowland on this subject (see chapter 15) and to the views of the Kerr Panel as to claims in this connection.

Competence in the Lloyd's Market

Sir David Rowland accepted that competence in areas of the Lloyd's market was seriously lacking in the 1980's. "The level of ability of Lloyd's (was not, during the Relevant Period) at the level I would wish, looking backwards." Sir David added that there was a great deal of variability in the quality of members' agents.

The Recruitment of Persons who should never have become Members of Lloyd's

In his evidence to the Treasury and Civil Service Committee on 13 February 1995 Sir David (then Mr) Rowland was asked "do you agree that people were encouraged to become Names in the 1980s who did not actually have the resources to be Names?" Mr Rowland answered "Yes. They had to pass the relevant tests, they had to show the minimum necessary, but if you are asking me a general question, I think that many people came into membership, either stretching themselves being encouraged by their banks and other advisors to do so, and indeed by agents who brought them in - everybody has a responsibility in this - who never should have been members of the market". When asked "So basically people were brought in under false pretences?" Mr Rowland replied "No. I answered exactly as I believe, false pretences may have occurred but I am talking about an atmosphere which existed that many people were encouraged into membership who in hindsight should never have become members."

25. CONCLUSIONS

For the reasons set out above 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.

Before parting with this judgment, I wish to make a number of further observations. I emphasise that what follows is subject to, (and not intended to detract from), all relevant decisions in the Lloyd's Litigation set out in Appendix 1 hereto.

It is, however, high time that the Lloyd's Litigation and related litigation here and overseas came to an end. The hostility between the Names and Lloyd's was evident throughout the trial. Following the management of the Lloyd's Litigation described in chapter 5, about 95 per cent of Names accepted the market settlement in September 1996. The subsequent litigation between some of the remaining 5 per cent and Lloyd's is referred to in Appendix 1.

I make the following general observations:-

(i) I refer to all the reforms etc described in this judgment implemented as the result of the Fisher Report, the Neill Report and the very considerable efforts of men and women of undoubted integrity, independence and standing. Despite all the reforms etc 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).

(ii) 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.

(iii) Many Names were/are unable to pursue perfectly valid claims against managing and members' agents because of deficiencies in relation to E&O cover. In some cases E&O cover was not obtained. In other cases E&O cover was insufficient. In other cases external Names were underwriting the E&O insurance of their own agent.

(iv) By way of example only, many Names had/have (subject to limitation) claims against their members' agents for negligent advice/portfolio selection advice (which they were not able to pursue by way of action groups because such claims were not susceptible to group actions), and yet there was/is no E&O cover to meet such claims.

(v) Individual portfolio selection claims were not assessed by the Kerr Panel. Lloyd's 'Comments on the Names' Response to Section U' paragraphs 12 and 13 explain the steps taken by Lloyd's to assist portfolio selection claimants through R&R. But these claims were by their nature particularly difficult to address.

(vi) Lloyd's answer to the allegations in this case (which I have accepted to the extent set out above) is that 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.

(vii) There are examples among the litigants in person (and I have no doubt there are similar examples among other Names) of individuals who were recruited (sometimes through intermediaries) in the mid to late 1980s, where it would appear strongly arguable that the advice/the portfolio selection advice was at best grossly negligent. (I refer in this context to the quotation from the judgment of Gatehouse J in Sword-Daniels in chapter 22 above, which I suspect would apply in broad terms to a significant number of other cases).

(viii) There is a distinction between those who can't afford to pay and those who can pay but refuse to do so.

(ix) Acceptors of R&R would no doubt complain if the non-acceptors were not treated equally (after making appropriate allowance for subsequent events e.g. costs orders in favour of Lloyd's). Further (although appropriate allowance must be made for post R&R developments), the non-acceptors would no doubt point to the way Lloyd's treated those who did accept R&R (or who have subsequently settled).

(x) In my opinion 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.

With these considerations in mind and having regard to the overriding objective, I suggest that there should be an independent review by an independent panel set up by Lloyd's (to be drawn from the legal profession with, if necessary, independent technical advice). I suggest that such independent Panel should (while respecting and applying all relevant decisions of the court to date) be asked to consider the individual cases of those Names who did not accept R&R (and who have not settled since R&R) and in particular:-

(a) whether the R&R offer to the individual Name was fair when compared with offers made to other Names in a similar position, i.e. was there equal treatment between Names in a similar position?

(b) whether any settlement offer made to the individual Name after the deadline for acceptance of R&R was fair, when compared with settlement offers made to other Names post R&R, i.e. was there equal treatment between Names in a similar position?

(c) what would be a fair settlement now as between Lloyd's and the individual Name, having regard to all the circumstances (including without limitation the need to ensure equal treatment between all Names and the result of this and other actions)?

I acknowledge that there are intractable problems where homes were charged to support letters of credit or other security provided by banks and other financial institutions. These should, I suggest, also be addressed so far as practicable by the independent Panel.

I conclude by expressing my gratitude to the respective teams of solicitors and counsel and to the litigants in person for the way in which this enormously difficult and complicated case has been conducted.