The following quotations are from the Draft Judgement of the Honorable Mr. Justice Cresswell, in the High Court of Justice, Queen's Bench Division, Commercial Court, in the matter of Henderson v. Merrett Syndicates Limited. Merrett Syndicates Limited ("Merretts") was ultimately only found liable to its Names for "negligence" in its conduct of business in the 1980's, even though the Justice found that Merretts had deliberately misrepresented and/or concealed facts and circumstances from the Names, and thereby caused them enormous financial harm. In U.S. courts, the same actions are likely to have resulted in a finding of fraud. There is, however, no civil cause of action for fraud under English law, and an action for criminal fraud is subject to many onerous strictures under English law, including:

(a) that one must have prima facie evidence amounting to proof in hand to file a case;

(b) having to post a bond covering the defendant's and the plaintiff's attorney's fees; and

(c) the solicitor who files such a case is under threat of being disbarred if the case is dismissed for not having established sufficient cause.

The standards for establishing criminal fraud, the size of such bonds, and the threat of disbarment if the case is dismissed, very effectively discourage the filing of such cases.

All through the 1980's, Merretts "reinsured to close" successive syndicate years of account that they knew should have been left open because those syndicates had known incurred but not reported ("IBNR") claims due to asbestos-related exposures. In addition, Merretts reinsured other Lloyd's syndicates, that turned out to have huge exposures to asbestos claims, without properly assessing the risks that were being assumed for their Names. These exposures were found by Justice Cresswell to have been concealed from the Names, on successive years of account from 1985 to 1992.

The latent asbestosis claims exposures were concealed by not disclosing the extent of IBNR claims to auditors and managers of successor-year syndicates that issued (disastrously inadequate) reinsurances to close the 1985 to 1992 years of account. In 1992, the IBNR asbestos claims, that had been wending their way through the courts and prior layers of reinsurance, came ruinously home to roost at Merretts.

As Merretts syndicate years were closed and profits reported throughout the 1980's, it appeared to the Names that they were making good returns on their investments. Then, in 1991 and subsequent years, Merretts' Names were suddenly and then repeatedly faced with having to pay claims on the order of 1000% or more of their premium capacity (level of investment). These losses accrued to enormous levels due to the unlimited personal liability for losses that they had agreed to when they became members of Lloyd's. Many Names were financially ruined; nearly all were seriously damaged. Despite Justice Cresswell's finding Merretts "negligent" in their underwriting practices, Lloyd's went after those Names for every nickel it could collect.


From the Draft judgement of Justice Cresswell, 31.10.95

Henderson v. Merrett Syndicates Limited

Draft judgement of Justice Cresswell, p. 143 and on:

"Mr. Merrett said in his witness statement (paragraph 77):-

"It is my current view, formed with hindsight, that a more critical eye should have been brought to bear on the contracts as they were written, and that we should have decided at an earlier stage that the risk that the exposures of the cedants [syndicates/companies Merretts reinsured] were understated was sufficient to decide that the aggregate exposure to this book of business was enough before all 11 contracts had been written."

Judgement, p. 163 and on:

"The nature and extent of the uncertainties as at 4.5.82 were known to Merretts and E&W [Ernst & Whinney, Merretts' auditors], [or] alternatively in the case of E&W would have been known to E&W had necessary and appropriate audit tests and enquiries been carried out and conducted.

The broad nature and extent of the uncertainties as at 4.5.82 were reflected in the following materials. Where materials are drawn on which would probably have been available only to Merretts or E&W this is indicated in brackets.

  1. As to perception/uncertainties as at 13.11.81 see above.
  2. As at November 1981 an attorney's report stated that an assured [policyholder] reported that it had 11,315 open [asbestos health hazard] cases and that new cases were being filed at the rate of approximately 100 per week. The report added that it is our observation that in cases where the plaintiffs is (sic) able to make out a prima facie cause of action, juries do find liability.
  3. As at November 1981 an attorney's report in respect of assureds stated that the asbestos cases manifestly represent grave potential exposure to the asbestos manufacturers and producers of the past 40 to 50 years. The situation must be viewed as one of certain liability. A major problem concerns the fact that it is impossible to predict with certainty the number of products liability claims that would be made against the assured. The number of potential claims would appear to be staggering (emphases added).
  4. As at December 1981 (Merretts only) a letter from the AWP [Lloyd's ‘Asbestos Working Party'] to all interested underwriters stated that Johns-Manville have exhausted their primary cover. Owens-Corning has recently been reported as having exhausted its primary domestic insurance with a result that claims will shortly be presented to interested underwriters in London [emphasis added]. The database currently shows 14, 526 individual claimants but on the basis of various projections which the working party is not in a position to verify, the total claimants will, in the end significantly exceed this number. During the period since the setting up of the working party there has been a substantial increase in the number of suits filed. New suits currently reported now average 300-400 per month, which is indicative of the increasing severity of this problem to the asbestos industry and its insurers. It is not possible at this stage to perceive any clear indication of the likely development in the future (emphases added)."

Judgement, p. 188 and on:

"6. I find that in all the circumstances the writing of this contract was negligent. There was a failure to adhere to the standard of skill and care reasonably to be expected of Merretts at the time and with the knowledge that Merretts had or should have had. The central reason for the finding of negligence is that this contract exposed the plaintiffs to potentially huge liabilities, unlimited in time or amount, which were not capable of reasonable quantification on the material before [Merretts underwriter] Mr. Emney. There was insufficient placing or other information available at the time the risk was considered to enable a reliable assessment to be made with a reasonable degree of confidence of [syndicate #] 418's ultimate net retained potential liability under the contract. Merretts failed to obtain all the information referred to in paragraph 187 of Mr. Neil's report including the particular IBNR loss reserves for both asbestos claims and non-asbestos claims and the methodology behind the IBNR factors."

Judgement, p. 298 and on:

"(iii) Uncertainties evidenced by what the cedants were saying.

Concerns expressed by. . . the cedants underlined the fundamental uncertainties.

  1. Mr. Merrett accepted that the Fireman's Fund/Sturge contract was the largest and most risky contract of all. In a letter dated 16.7.82 . . . Mr. Rokeby-Johnson of R. W. Sturge & Co wrote:-

"Secondly I would like to remind you of the content of a Lloyd's Underwriter's book of business which makes it impossible to quantify the final outcome of these huge and complex claims with any degree of accuracy. Not only were we involved in the direct writing of casualty business from the United States and, indeed, worldwide, but we also had very considerable commitments in the writing of casualty treaties not only to original and excess writers but also to professional re-insurers like the General Re-insurance Corpn., finally we have an involvement in the reinsurance arrangements of a few Lloyd's Syndicates and London Companies.


The claims arising from the ingestion of asbestos fibres by all those involved in handling this material seem likely to be the biggest claim ever to confront the insurance industry not only in the United States but also throughout the world. Various attempts have been made to quantify the potential final sum of all payments and some very large figures have emerged. Over 7,000 people actually die each year in the United States from asbestosis and it is expected that this figure will soon increase to 9,000 or 10,000 – these deaths and disablements will continue to be reported for the next decade or more and if it is reasonable to suggest that the average settlement of each claim is of the order of $100,000 including costs and expenses and that the number of serious claimants may reach 100,000 or more the final claim would be $10 billion at least. On these figures it is not impossible to forecast the Sturge gross involvement at $40,000,000 - $50,000,000 (emphasis by the court)."

Judgement, p. 439 and on:

"Conclusion – year 4 RITC

I find that Merretts deliberately concealed from the plaintiffs the central fact that the year 4 RITC [reinsurance to close 1982] as at 4.6.85 exposed the plaintiffs to potentially huge liabilities which were not capable of reasonable quantification on the information available to Merretts as at that date. I refer to the detailed analysis of the uncertainties as at 4.6.85 – see year 4 above. I find that as at that date Merretts and in particular Mr. Merrett knew the central fact that a reinsurance to close figure could not be arrived at with a reasonable degree of accuracy. The information before Merretts and Mr. Merrett as at 4.6.85 showed the extent of the fundamental uncertainties as to the future development of (i) asbestos bodily injury claims (ii) asbestos property damage claims and (iii) pollution claims not only in respect of 418/417's own book going back to 1953 but also in respect of the books of the 10 cedants. Further the information as to the run-off contracts was wholly inadequate.

Instead of telling the names the true position (and leaving the account open) Merretts and in particular Mr. Merrett deliberately concealed the true position and deliberately kept the names in the dark [emph. added] in the letter of 18.4.85 and in the managing agent's and underwriter's reports. The plaintiffs did not discover the central fact until at the earliest 15.5.92 (the date of the accounts as at 31.12.91) nor could they with reasonable diligence have discovered it earlier. When the 1985 year was left open the series of documents referred to above gave the misleading impression that Merretts intended to close the 1985 year as soon as the outcome of the disputes as to the runoff contracts was clearer. Merretts said that uncertainty over asbestos and pollution was not expected to delay closure once the outcome of the run-off disputes was known. It was not until the accounts as at 31.12.91 that the names were told "we are faced with such uncertainties as to the future claims development of a significant part of this account that we are unable to assess an equitable reinsurance to close premium". [italics in original] In truth Merretts and in particular Mr. Merrett knew in year 4 that the liabilities were not capable of reasonable quantification and the fundamental uncertainties were no less in subsequent years."

[Note: The Court reached a similar conclusion concerning year 5, in substantially the same language (Judgement, p. 440).]

Judgement, p. 451:

"I find that Mr. Merrett as active underwriter owed a duty of care in tort to the reinsuring names (whether direct or indirect) to exercise reasonable skill and care in the exercise of his functions as underwriter. For the reasons set out in sections 35, 36 and 37 above Mr. Merrett was in breach of that duty of care."

Final Note:

Lloyd's potential liability was not at issue in this case, only Merretts'. However, as is clear in the above excerpt of a letter by Lloyd's ‘Asbestos Working Party'. Lloyd's knew:

(a) the magnitude of the loss problems facing dozens of Lloyd's syndicates, and

(b) thus inevitably knew the pressure and temptation those problems exerted on the Merretts syndicate, and others, to conceal and/or misrepresent their true situation from the Names, other syndicates, and policyholders alike.

Lloyd's Council nonetheless did nothing to exercise their power and duty to oversee and regulate the syndicates' conduct of business. Lloyd's Council and senior syndicate directors and managers moreover:

(1) concealed and/or misrepresented their own knowledge of the situation; and

(2) thereby aided and abetted the syndicates in the swindling of tens of thousands of Names; and

(3) thereby put many of their policyholders at risk of non-payment besides.

(Perhaps the ultimate irony in this entire debacle is that, in direct contradiction of Lloyd's self-proclaimed reliability on payment of claims, not once has Lloyd's even offered to pay, much less paid, their own Names or syndicates a dime out of the Central Fund on what Lloyd's still insists is their "reinsurance to close", on a failed syndicate.)

No English court before or since the Merrett case has ever allowed a case to proceed against Lloyd's even for its regulatory failure, much less for Lloyd's active participation in what those same courts have acknowledged was ongoing fraud.

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