B E T W E E N:

IAN McINTOSH HENDERSON

(and other Names listed in

the Schedule to the Writ of Summons)

- and -

MERRETT SYNDICATES LIMITED

(and the other Agencies listed in

the Schedule to the Writ of Summons)

ERNST & WHINNEY

(a firm)

Defendants

AND BETWEEN Names and similar parties in Actions 1992

Folios 1652 and 1834

B E T W E E N:

WILLIAM HALLAM-EAMES

(and other Names listed in

the Schedule to the Writ of Summons

- and -

MERRETT SYNDICATES LIMITED

(and the other Agencies listed in

the Schedule to the Writ of Summons)

ERNST & WHINNEY

(a firm)

AND BETWEEN Names and similar parties in Actions 1993

Folios 137, 144, 163, 164, 175, 203, 247,

290, 320, 511, 724 and 817

AND BETWEEN 1993 Folio 545

ELISE HECKMAN HUGHES

(and other Names listed in

the Schedule to the Writ of Summons)

- and -

MERRETT SYNDICATES LIMITED

(and the other Agencies listed in

the Schedule to the Writ of Summons)

STEPHEN ROY MERRETT

ERNST & WHINNEY

(a firm)

AND BETWEEN Names and similar parties in Actions 1993

Folios 546 and 592

Appearances

MR. A. BOSWOOD QC, MR. B. DOCTOR, MR. A. WALES, and MR. T. MACEY-DARE appeared on behalf of the Names, instructed by More Fisher Brown.

MR. A. TEMPLE, QC, MR. J. ROWLAND and MR. A. CHRISTIE appeared on behalf of Merretts, instructed by Reynolds Porter Chamberlain.

MR. ROGER TOULSON, QC and MR. C. EDELMAN QC appeared on behalf of the Members' Agents instructed by Oswald Hickson Collier.

MR. C. CLARKE, QC, MR. M. HOWARD and MS. H. DAVIES appeared on behalf of Ernst & Whinney instructed by McKenna & Co.

CONTENTS

2. THE SCHEME OF THE JUDGMENT

3. THE ROLE OF MEMBERS' AGENTS AND MANAGING AGENTS AT LLOYD'S

This section of the judgment is drawn from an agreed statement of facts.

At all material times, the manner in which underwriting business at Lloyd's was carried on was as follows.

There were 2 types of underwriting agents, namely members' agents and managing agents. Combined agents perform both the role of members' agents and the role of managing agents.

The main duties of managing agents were to manage the syndicate or syndicates of which they were managing agents and to conduct the underwriting on behalf of those names who were members of the syndicates. The management of the syndicate and the conduct of the underwriting on behalf of the names was controlled and carried on exclusively by the managing agents of the syndicate. The managing agents employed the "active underwriter" being the person with principal authority to accept risks on behalf of the syndicate or syndicates managed by the managing agents of which he or she was designated as the active underwriter.

The main duties of members' agents were to assist candidates for membership of Lloyd's in the making of their application for membership, to discuss and agree with each of the names for whom they acted the syndicates on which the name should be placed and the allocation of the name's premium limit as between syndicates, to seek to arrange the participation of their names in syndicates as so discussed and agreed and generally to look after the interests of their names and act as a channel between managing agents and their names. Save when acting as managing agents, members' agents played no part in managing or controlling syndicates or in the conduct of the underwriting on behalf of names.

At all material times underwriting agents were only entitled to carry on business as such at Lloyd's if they were approved by Lloyd's to act as underwriting agents at Lloyd's and in order to be so approved, each underwriting agent would be required to undertake, inter alia, to conform to any requirements which might from time to time be introduced by Lloyd's. Such requirements were set out, inter alia, in the Lloyd's Manual for Underwriting Agents which provided as follows :

CONDUCT OF UNDERWRITING AGENCIES.

1. GENERAL

3. DUTIES OF AN AGENT.

(ii) Service to Names

Further by Lloyd's Byelaw No. 4 of 1984 "Underwriting Agents" made on 14th May 1984, provision was made for a system of registration specifying those underwriting agents at Lloyd's permitted to act solely as members' agents, those underwriting agents at Lloyd's permitted to act solely as managing agents and those underwriting agents at Lloyd's permitted to act as both members' agents and managing agents. The Byelaw defined a members' agent as being an underwriting agent which acted on behalf of a name but did not perform any of the functions of a managing agent and defined a managing agent as being an underwriting agent which performed for the name one or more of the following functions :

(iii) paying claims on such contracts.

At all material times the respective roles of members' agents and managing agents with regard to syndicate accounts were as follows.

The managing agent was responsible for keeping accounting records and for the production of annual audited accounts for the syndicates which it managed and the members' agent played no part in the preparation of such accounts or any of the work required therefor.

On the basis of the annual audited syndicate accounts and solvency reports provided by managing agents, auditors appointed by the members' agents prepared and submitted solvency reports to Lloyd's in respect of each of their names.

The respective functions of members' agents and managing agents were set out, inter alia, in the Lloyd's Manual for Underwriting Agents which provided, inter alia, as follows:

"10. ACCOUNTS.

The respective functions of members' agents and managing agents were further set out in Byelaws made under the Lloyd's Act 1982.

(2) The Syndicate Accounting Byelaw (No. 7 of 1984)

MSL and/or MUAM had sole control and management of 418/417 and sole conduct of its underwriting and the defendant members' agents did not take any part in the management or control of 418/417 or the conduct of its underwriting and were not authorised by Lloyd's so to do but merely were authorised to perform and performed the duties of members' agents in relation to the participation of their names on 418/417.

Lord Goff in Henderson v Merrett Syndicates Ltd [1995] 2 AC 145

summarized the contractual structure as follows:-

As regards the indirect names the position was as follows.

Each of the plaintiffs entered into an Underwriting Agency Agreement in relation to his or her participation in 418/417. Prior to the coming into effect of the Agency Agreements Byelaw (No. 1 of 1985) on 1.1.87, the form of Underwriting Agency Agreement between the defendant members' agents and those of the plaintiffs for whom they acted as members' agents in relation to participation in 418/417 was prescribed by MSL and/or MUAM. A specimen agreement is at Appendix 3 to this judgment. After the coming into effect of the Byelaw, the form of Underwriting Agency Agreement between the defendant members' agents and those of the plaintiffs for whom they acted as members' agents in relation to participation 418/417 was as required by the Byelaw.

To the extent that the defendant members' agents were the members' agents in relation to the participation of any of the plaintiffs in 418/417, that participation was pursuant to a Sub-Agency Agreement made between the plaintiffs' respective members' agent and MSL and/or MUAM. Prior to the coming into effect of the Byelaw, each such Sub-Agency Agreement was in the form prescribed by MSL and/or MUAM. A specimen agreement is at Appendix 3. After the coming into effect of the Byelaw, each such Sub-Agency Agreement was in the form required by the Byelaw.

By the form of Underwriting Agency Agreement prescribed by MSL and/or MUAM, it was provided, inter alia, as follows :

By the form of Sub-Agency Agreement prescribed by MSL and/or MUAM it was provided, inter alia, as follows :

The form of Underwriting Agency Agreement required by the Byelaw, provided, inter alia, as follows :

The form of Sub-Agency Agreement required by the Byelaw provided, inter alia, as follows :

TABLE 2

Policies written to Syndicates 418 and 417

U/L = unlimited

xs = excess

apr = and prior years

Footnotes -

1. Outhwaite 317 50%

2. 317 50%

3. Merrett 421 20%

5. 421 12.5%; 317 50%

6. 421 10%; 317 50%

7. 421 15%

8. 421 25%

10. 421 20%

11. 421 16.7% 317 33.3%

"Reinsurance to close" ("RITC") means an agreement under which underwriting members who are members of a syndicate for a year of account agree with underwriting members who comprise that or another syndicate for a later year of account that the reinsuring members will indemnify the reinsured members against all known and unknown liabilities of the reinsured members arising out of the insurance business underwritten through that syndicate and allocated to the closed year, in consideration of a premium and the assignment to the reinsuring members of all the rights of the reinsured members arising out of or in connection with that insurance business. In computing a reinsurance to close the premium arrived at will take account of two elements : known outstanding claims and claims incurred but not reported ("IBNR"). The amount charged by way of premium in respect of reinsurance to close should, where the reinsuring members and the reinsured members were members of the same syndicate for different years of account, be equitable between them, having regard to the nature and amount of the liabilities reinsured.

Between 1982 and 1987, 418/417's 1979 year of account, and each subsequent year until its 1984 year of account, was closed by way of an RITC into the following year of account. The effect of the succession of RITCs is that the underwriting members of 418/417's 1980, 1981, 1982, 1983, 1984 and 1985 years of account have successively agreed to indemnify the names on the immediately preceding year of account against all known and unknown liabilities of the reinsured members arising out of the insurance business written or reinsured into the reinsured year of account.

The succession of RITCs is shown in Table 3 below.

TABLE 3

THE CLOSURE OF YEARS - RITC

The direct names claim against the combined agents in contract and tort (and against Mr. Merrett in tort only).

The indirect names claim against the managing agents in tort (and certain of the indirect names claim against Mr. Merrett in tort). The indirect names claim against the members' agents in contract and tort.

The plaintiffs claim against the auditors in contract and tort.

Before considering these causes of action it is convenient to refer to a further cause of action in misrepresentation/failure to report or disclose.

The plaintiffs allege that in its conduct and management of the underwriting as managing agents of 418/417, and/or as the active underwriter of 418/417, Merretts and/or Mr. Merrett respectively misrepresented, or at least failed adequately to report or disclose to the plaintiffs, information in their possession which was evidently material to the plaintiffs' assessment of their underwriting as members of 418/417 for years of account between 1980 and 1985 (inclusive), and/or to the conduct of that underwriting.

Paragraph 11 (3) of the Amended Points of Claim in the Hallam-Eames actions states that "if and insofar as any defendant seeks to rely upon a defence of limitation... and succeeds in establishing that defence, each affected name will claim damages against Merretts, Mr. Merrett and his or her relevant members' agent, for the loss arising by reason of (the alleged misrepresentation/failure to report or disclose)".

This alternative plea calls for further evidence beyond that adduced to date. I will if necessary give further directions in this connection after delivery of this judgment.

7. THE SPEECHES OF THE HOUSE OF LORDS IN HENDERSON V MERRETT SYNDICATES LTD.

I refer to the full report of the speeches of the House of Lords in Henderson v Merrett Syndicates Ltd. [1995] 2 AC 145. This decision determined a number of preliminary issues in these actions. The effect of the decision of the House of Lords is summarised in sections 8 to 11 to below. This summary is not however a substitute for reference to the full report.

8. THE 1985 NAMES

When names on the 1985 underwriting year reinsured names on the 1984 year, although the 1984 names were running off their business, the 1985 names were writing new insurance business which could only be done pursuant to the 1985 Byelaw form of agreement in force as from 1.1.87.

9. DIRECT NAMES/COMBINED AGENTS : CONTRACT AND TORT

MSL ceased to be a combined agent on 1.1.86. There is a contract between the direct names and the combined agent, in the terms of the pre-1985 Byelaw form of agency agreement, in which a term is to be implied that the agents will exercise reasonable skill and care in the exercise of their functions as managing agents under the agreement. That duty of care is no different from the duty of care owed by the combined agents to the direct names in tort on the Hedley Byrne principle.

10. INDIRECT NAMES/MANAGING AGENTS : TORT

The claims of the indirect names arise in the context of the pre and post 1985 Byelaw forms of agency agreements. There is to be implied into the sub-agency agreements a duty upon the managing agents to exercise reasonable skill and care. There is no material difference between the relevant contractual duty and the duty of care owed by the managing agents to the indirect names in tort on the Hedley Byrne principle.

11. INDIRECT NAMES/MEMBERS' AGENTS : CONTRACT

Under an implied term in the pre-1985 Byelaw forms of agency agreements and under the form prescribed by the 1985 Byelaw, members' agents are responsible to indirect names for any failure to exercise reasonable skill and care on the part of the managing agents to whom underwriting was delegated by the members' agents. For these purposes underwriting includes the assessment and effecting of any RITC and the fixing of the premium therefor.

12. INDIRECT NAMES/MEMBERS' AGENTS : TORT

In P.J. Aitken v Stewart Wrightson Members Agency Limited (Pulbrook 334) Potter J. held on agreed facts that the members' agents did not owe a non-delegable duty of care to the indirect names in tort. Pending appeal the plaintiffs reserve their position on this. The point was not argued before me.

13. E & W's DUTIES

The plaintiffs contend that E&W were engaged by them contractually and that, as syndicate auditors, had the responsibility to ensure:

The plaintiffs contend that there was an implied term of reasonable skill and care and/or a duty of care in tort to like effect, and in particular a duty of care and skill in assessing whether the RITC premium was equitable in the terms set out above. This duty was owed to all names on the year into which the previous year was closed.

The plaintiffs further contend that at all material times such implied term and/or duty imposed at least the following specific obligations on the syndicate auditors:

The names contend that the assessment and/or effecting of the RITC and the decision to close the year was made by Mr. Merrett and/or Merretts and participated in and/or approved by E&W.

E&W submit that the names had no contract with and have no contractual claim against E&W. As to tort E&W's submissions are as follows. The only duty in tort owed by E&W to the names on the succeeding year (when there is a RITC) was to act with such reasonable care and skill as was to be expected of a Lloyd's Panel Auditor in carrying out the work necessary to give, and in giving, the form of opinion or report in fact given. In respect of the years 1981, 1982 and 1983 E&W did not provide (and were not engaged to provide) a qualitative opinion on the syndicate accounts. In respect of the years 1984, 1985 and 1986 E&W did express a qualitative opinion that the Annual Report gave a true and fair view of the closed year of account profit.

In respect of all of the years 1981-1986 E&W compiled a Syndicate Solvency Report.

Accordingly E&W's duty (so far as presently relevant) was to take reasonable care in taking the steps necessary to give and in giving:

In respect of (a), the duty was, in essence, to take care to see that the agent had discharged his responsibilities for establishing reserves in a reasonable manner, so as to be in a position to give the opinion in the Syndicate Solvency Report. This did not involve the auditor in approving or expressing an opinion on the RITC. It required the auditor to ensure that the managing agent had used the highest of the two or three alternative tests. In the case of a non-marine syndicate the first (Lloyd's percentages) and third (RITC) tests were "given" figures. By virtue of the second test (total of estimated outstanding liabilities including an element to take care of unnoted and unknown liabilities) the auditor had to ensure that the agent had discharged his responsibility in a reasonable manner consistent with available information.

In respect of (b) no serious question arises. Merretts' books were properly kept and the accounts were in agreement with them.

In respect of (c) the critical feature for present purposes is the reinsurance to close. The duty is not accurately expressed, whether in relation to the period before or after "true and fair view" reporting, as a duty to make, participate in, or approve the decision to close or leave open the year of account. It was a duty to form (and express) an opinion, or decline to do so, on a decision made by the underwriter.

In view of my findings as to years 1,2 and 3 below it is unnecessary to express an opinion as to the extent of E&W's duties in years 1 to 3, save to say (a) that having regard to E&W's functions in respect of the syndicate accounts and syndicate solvency report the duties were wider than those contended for by E&W but (b) weight has to be given to the fact that the opinion required was not a true and fair view opinion. Even if the plaintiffs' submissions were accepted in full, I do not consider that E&W were negligent in years 1, 2 and 3.

As to years 4, 5 and 6 E&W accept that they owed a duty of care in tort to the reinsuring names to act with such reasonable care and skill as was to be expected of a Lloyd's panel/recognised auditor in carrying out the work necessary to give, and in giving, the true and fair opinion. It was, as E&W point out, a duty to form and express an opinion, or decline to do so, on a decision made by the managing agent/underwriter.

In view of the fact that E&W accept that they owed a duty of care in tort as set out above, the question whether the contract of engagement was with the managing agents (as E&W contend) or with the names (as the plaintiffs contend) is academic and it is unnecessary to express an opinion on this point.

14. STANDARD OF CARE

I turn to consider the standard of care required of Merretts and

E&W.

In Bolam v Friern Hospital Management Committee [1957]1 WLR 582 at p 587 McNair J. said that a professional:-

In Saif Ali v Sydney Mitchell & Co [1980] AC 198 at 220D Lord Diplock said:-

In Maynard v West Midlands Regional Health Authority [1984] 1 WLR 634, Lord Scarman at page 638 H said:-

In Wilsher v Essex AHA [1987] 1 QB 730 at 747 A-C Mustill LJ said:-

In Eckersley v Binnie [1988] 18 Con.LR 1 at p.79 Bingham LJ said:-

Bingham LJ then quoted the passage from Saif Ali set out above and continued:-

In The Lloyd's Litigation : The Merrett, Gooda Walker and Feltrim Cases [1994] 2 Lloyd's Rep 468 at 474 Bingham MR said:-

I set out below propositions relevant to the present case derived from the above authorities:-

As to MSL (to the extent that they acted as managing agents), MUAM and E&W:-

15. LIMITATION

Save in all cases for the plea in paragraph 11 (3) of the Amended Points of Claim (misrepresentation/non-disclosure):-

Subject to S14A (tort) and S32 (contract and tort) of the Limitation Act 1980 claims by direct names against combined agents in contract and tort by the pre-1984 joiners in the Hallam-Eames actions are statute-barred.

Subject to S14A and S32 claims by indirect names against managing agents in tort by the pre-1984 and the 1984 joiners in the Hallam-Eames actions (but not the 1984 joiners in the Henderson actions) are statute-barred.

Subject to S32 claims by indirect names against members' agents in contract by the pre-1984 and the 1984 joiners in the Hallam-Eames actions (but not the 1984 joiners in the Henderson actions) are statute-barred.

The Names assert claims in contract and tort against E&W. E&W assert that the only duty arises in tort. Subject to S14A (tort) claims by names against E&W by the pre-1984 and the 1984 joiners in the Hallam-Eames actions (but not the 1984 joiners in the Henderson actions) are statute-barred.

The limitation position and issues are set out in Table 4 below.

I return to the subject of limitation in section 39 below.

TABLE 4

Footnote ² Subject to the plea in para 11(3) of the Amended Points of Claim of misrepresentation, non- disclosure.

16. THE WITNESSES

I turn to consider the witnesses in the order in which they gave

evidence.

Mr. Ayliffe joined MSL as Non-Marine Claims Manager in 1977. He was appointed a director of MSL in 1978 and was a director of MUAM from January 1986. He became a name on Syndicate 418/417 in 1978.

Mr. Ayliffe served on a number of Lloyd's Market Committees including the Management Board of LUNCO and the Non-Marine Association Claims Committee of which he was Chairman from 1965 to 1978.

Mr. Ayliffe was a founder member of the Asbestos Working Party ("AWP") (which was set up in 1980). He was one of the two London Market representatives instructed to work with the US insurance industry and asbestos producers on the Asbestos Claims Council. In 1985 he was appointed as the London Director to the Board of the Asbestos Claims Facility ("ACF") which was established that year. He retired from that post in May 1988. Mr. Ayliffe served on the AWP Claims Committee for the years 1983 to 1988 and the AWP Reinsurance Claims Committee from 1983 to 1988. He was also a member of the Special LMX Committee dealing with problems associated with delayed response of certain outward reinsurers to asbestos-related claims.

Mr. Ayliffe was also a founder member and the initial chairman of the London Market Environmental Claims Group set up in 1984 and served on the Environmental Claims Reinsurance Group for the years 1985 to 1988.

Mr. Ayliffe was appointed a director of Toplis & Harding (Asbestos Services) Limited in 1984 and continued to serve as a director of its successor company, Toplis & Harding (Market Services) Limited until early 1989. He retired from Merretts in 1988. On his retirement he was awarded the Freedom of the City of London for services to the Lloyd's Insurance Market.

Mr. Ayliffe said that he had no involvement in the assessment of strict IBNR as that was the responsibility of the underwriter Mr. Merrett, though he said that with his fellow directors he approved the relevant accounts.

He said that it never crossed his mind that the nature of the problems of asbestos and pollution were such as to make it impossible for the underwriter to reach a responsible and fair IBNR or to make it unfair to close any of the relevant years of account.

Mr. Ayliffe plainly had very considerable specialist knowledge as to the problems of asbestos and pollution. His witness statement contained a number of passages dealing with the perception of the market as to the problems of asbestos and pollution claims at different periods in time. While in no way doubting Mr. Ayliffe's considerable experience and expertise I consider that it is far safer to base my analysis of the perception of these problems at the material times on the contemporary documents. By way of example what Mr. Ayliffe said in October 1985 (see section 36 below) should be compared with the relevant passages in his witness statement.

Mr. Ayliffe was not concerned with the claims handling of the run-off contracts and said that he first heard about these in about 1984. A striking feature of Mr. Ayliffe's evidence was that he was very reluctant even to comment on the run-off contracts.

Mr. Hart has been a Fellow of the Institute of Actuaries since 1970 and a member of the Institute's General Insurance Study Group from 1974. He was a founder member of the London Market Actuaries Group in 1982 and was Chairman in 1990/91. He was a member of the Institute's General Insurance Joint Committee from 1989 to 1992.

Mr. Hart joined MSL in August 1982. He was responsible to the underwriter of Syndicate 799, Mr. Jackson. His role at 799 was to assist Mr. Jackson on the RITC and to deal with whatever statistical or actuarial tasks were allocated to him. Mr. Hart regarded himself as working full time for Mr. Jackson and was only seconded to special projects for 418/417.

Mr. Hart was the first actuary to be employed by a Lloyd's underwriting agency.

Mr. Hart edited a monograph entitled "Lloyd's and the London Market" by London Market Actuaries Group (two editions in 1989). Chapter 6 is entitled Claims and Estimating Reserves. Paragraph 6.18 et.seq deals with Asbestos and Latent Disease Claims.

In paragraphs 4 to 6 of his witness statement Mr. Hart explains why traditional actuarial or statistical approaches were not applicable to reserving for asbestos and other latent disease claims. In the result Mr. Hart acknowledged that his actuarial qualification was of marginal relevance to the assessment of an IBNR. It was not Mr. Hart's function to form a view as to the likely future development of asbestos and pollution claims. As he said "I was not in a position to suggest that asbestos would run-off over another 3,5 or 7 years. I did not know." In this connection he was dependent on what he was told by other personnel at Merretts.

Mr. Hart said that the decision whether or not to close a year or to leave it open was not one in which he would be involved, save to the extent that he would provide some figures to the underwriter, whose decision it was.

Mr. Hart did not know that 417/418 had written any of the run-off contracts until about late March 1985. When shortly thereafter he conducted a review with Mr. Randall, they found it was a struggle to get even the most basic data.

Mr. Merrett started work in the London Insurance Market in 1962 as a marine broker. In 1964 he joined the marine box of Merretts as a trainee underwriter, covering all classes of business handled by the marine syndicate at that time. In 1971 he became joint active underwriter of 418/417 with Mr. Richard Outhwaite. He became sole active underwriter in 1974 on Mr. Outhwaite's departure. During the course of more than 20 years underwriting experience Mr. Merrett has been involved in the underwriting and leading of risks across many classes of business. Most of these classes have included both direct insurance and reinsurance or retrocession business. Mr. Merrett has been a name on 418/417 since 1968.

During the course of his underwriting career Mr. Merrett has been involved with Lloyd's governance and with market issues, technical, regulatory and structural. He was elected to the Committee of Lloyd's to serve from 1981 to 1984 inclusive, and therefore became a member of the Council of Lloyd's after the passage of the 1982 Lloyd's Act. He was re-elected for a second term on the Council from 1987 to 1991, and a third in 1993. He served as a Deputy Chairman in 1993. Mr. Merrett has served on many of the committees and sub-committees of the Council and Committee of Lloyd's, including Finance and General Purposes, Membership, Audit (subsequently Members Solvency), Accounting and Auditing Standards and Financial Guarantee. Mr. Merrett was a member of the Higgins Working Party which reviewed the relationship between names, managing agents and members' agents after the passage of the 1982 Act, and the Rowland Task Force, whose report encompassed the radical change in the structure of the Market since 1990. Mr. Merrett served on the Committee of the Lloyd's Marine Underwriters Association from 1974 to 1993 and for two years he was Chairman. In 1978 at the request of Lloyd's he undertook the management of the Sasse Agency and Syndicates after the Agency had been suspended from trading following substantial losses.

Mr. Merrett has provided expert evidence for Lloyd's in a number of contexts including testimony at the Committee Stages in both Houses on the Lloyd's Bill in 1981. Mr. Merrett is currently Chairman of the Lloyd's "Superfund" Working Party.

Mr. Merrett had a distinguished father who provided very valuable services to the market.

Mr. Merrett is a highly intelligent man who has extremely wide experience of the market as appears from the above. Mr. Holland of E&W described him as having a forceful personality.

I regret to say that I have serious reservations about many aspects of Mr. Merrett's evidence and serious reservations about his approach as underwriter to 418/417.

Mr Merrett said that Mr. Emney was at the outset responsible for the management of the run-off contracts including the underwriting, the recording and the handling and management of claims. In 1985 it was the Board's view that Mr. Emney had not fulfilled his duties properly and that was why, when he withdrew his resignation, he was dismissed.

As to the writing of the run-off contracts the minutes of the meeting of the Audit Committee held on 2.3.82 (H1/471A) attended by Mr. Merrett recorded:-

I do not accept Mr. Merrett's explanation of this passage in the minutes (Day 15/141-144). It is in my view plain that the reference to "telling its own Names" is in the context of a syndicate which had written run-off contracts. The point of concern was that such liabilities could fall on comparatively few syndicates. In fact Merretts did not tell E&W about the writing of the run-off contracts until year 3 (when reference was made to only 6 out of 11). I reject Mr. Merrett's evidence that E&W were told about the writing of the run-off contracts prior to year 3. The first the plaintiffs heard about the writing of the run-off contracts was on 18.4.85.

On 4.5.82 Mr. Merrett signed a letter in response to E&W's Latent Disease Questionnaire for year 1 (D1/146) which failed to mention the run-off contracts. When asked about this letter Mr. Merrett said that it was wholly consistent with his having informed E&W of the existence of the run-off contracts. The letter of 4.5.82 was seriously misleading and I reject Mr. Merrett's explanation (Day 15/138-9). Mr. Merrett was in no doubt as to the importance of informing E&W about the run-off contracts (see the meeting on 2.3.82 above). The Latent Disease Questionnaire in year 2 (D2/174) asked a specific question about "OTHER EXPOSURE TO LATENT DISEASES. Evidence that syndicates have taken steps to identify, quantify and record as above any other known or potential liabilities in respect of writing of ... (c) Run-off Account containing latent disease liability". Mr. Merrett replied in a letter dated 28.4.83 (D2/170) "Other exposures to latent Disease. This syndicate (417) does not as a matter of policy write these classes of business, other than on a very incidental basis, very seldom". On the same date Mr. Merrett wrote in respect of 418 "Latent Diseases. The reports have been obtained, and records retained in accordance with the reinsurance to close claims analysis exercise: we have no knowledge of any other reinsurance contract which might become involved. We have no other known or known potential liabilities and no material recoveries". Neither of these letter referred to the fact that by 28.4.83 all 11 run-off contracts had been written. When asked about the letters dated 28.4.83 Mr. Merrett said "Had I been in any doubt as to (E&W's) knowledge of those contracts and had I wished to make certain that they had a record in writing of our having written them then I suppose I would have written in those terms; but given that, to my belief, they were already aware of the contracts then the necessity to make specific reference fell away." (Day 17/12-13). Again I reject Mr. Merrett's attempted explanation of these very serious failures.

In his witness statement Mr. Merrett said:-

Mr. Merrett's oral evidence was to very different effect (Day 16/9/9-/14/11) and his explanation for the inconsistency unconvincing (Day 15/118/9-122/17).

Merretts did not call Mr. Emney to give evidence. As a result I consider that I have been inhibited in getting to the truth about the writing of the run-off contracts. The probability is that Mr. Merrett knew more about the writing of the run-off contracts than he accepted in his statement or in his evidence.

As to the 6 RITCs Mr. Merrett correctly accepted that his duties in this connection were the most important function that he fulfilled each year as underwriter of 418/417. The amount charged by way of premium in respect of reinsurance to close had to be equitable as between the reinsuring members and the reinsured members, having regard to the nature and amount of the liabilities reinsured. Compliance with "equity between Names" had to be demonstrated by the underwriter and the managing agent in determining the RITC. I find that Mr. Merrett gave inadequate time and attention to the RITCs particularly in years 4, 5 and 6, and this must have been apparent to E&W. It was not enough to rely on Mr. Ayliffe, Mr. Hart and Mr. Randall. Mr. Ayliffe had no involvement in the assessment of strict IBNR as that was the responsibility of Mr. Merrett. It was not Mr. Hart's function to form a view as to the likely future development of asbestos and pollution claims. Further the decision whether or not to close a year was not one in which Mr. Hart would be involved, save to the extent that he would provide figures to Mr. Merrett, whose decision it was. Mr. Randall said that in 1985 and subsequent years he was in no position to form an opinion as to the likely development of asbestos-related claims or pollution claims and was totally dependent on the advice received from others.

Mr. Merrett's evidence in relation to Mr. Rokeby-Johnson's letter of 16.7.82 (D6/444, quoted below) was unconvincing (see Day 16/63/23-67/5).

In relation to the RITCs particularly in years 4, 5 and 6 Mr. Merrett was subject to conflicts of interest inherent in the system. Significant commercial disadvantages would flow from leaving the year open. The letter dated 18.4.85 and the reports in the year 4 accounts contain a mixture of truth, half-truth and falsehood. But the letter dated 18.4.85 stated "in the current underwriting climate, it is our intention significantly to expand... 418...".

Mr. Merrett knew from his very considerable experience that 418/417 in year 4 was subject to deep-rooted problems and 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 ten cedants. Further the information as to the run-off contracts was wholly inadequate. I find that Mr. Merrett knew that a reinsurance to close figure could not be arrived at in year 4 with a reasonable degree of accuracy and yet he was determined to close the account. Similar considerations applied in years 5 and 6.

Mr. Randall first became involved in the insurance industry in 1974 when he joined the Corporation of Lloyd's as Deputy Corporation Accountant. He had previously qualified as a certified accountant. In 1979 he became responsible for the Lloyd's Audit Department which dealt, inter alia, with the review of the solvency of Lloyd's Members and security behind the Lloyd's Policy of Insurance. In 1982 he additionally became head of the Special Investigation Department at Lloyd's looking into various Market problems such as Alexander Howden, PCW and Brooks & Dooley amongst others. In 1983 he became the Head of Regulatory Services and as such was the principal point of contact between the Lloyd's Market and the Corporation of Lloyd's and between the Corporation of Lloyd's and the Department of Trade and Industry in respect of, inter alia, solvency. He was also the principal point of contact between the Corporation of Lloyd's and the panel auditors. He was a member of the Lloyd's Audit Committee and Chairman and/or a member of several of the Fisher Task Groups set up in 1980 to follow up the various suggestions made in the Fisher Report.

Mr. Randall joined Merretts at the beginning of 1985. His initial appointment was as Managing Director of MSL. He was also appointed a director of Merrett Holdings PLC. He was subsequently appointed Managing Director of MUAM when that company assumed the managing agency function from MSL as at 1.1.86. In 1987 Mr. Randall was appointed Group Chief Executive and Managing Director of the Merrett Group. He left the Merrett Group in August 1991 and set up an independent insurance consultancy, Randall Insurance Services Ltd, of which he is Chief Executive.

Mr. Randall said that after he left Merretts his office was cleared "and no-one seems to be sure what happened to all the papers in it - there was an entire series of cupboards and filing cabinets stacked full of files and reports of various sorts and they have all disappeared".

In fairness to Mr. Randall he had only been with Merretts a very short time when the problems in relation to the run-off contracts came to light. Mr. Randall said that in 1985 and subsequent years he was in no position to form an opinion as to the likely development of asbestos-related claims or pollution claims and was in this connection totally dependent on the advice received from others.

After making full allowance for the difficulties that Mr. Randall faced including those referred to above, I have a number of reservations about his evidence. In particular I consider that Mr. Randall was at times inclined to go further than was justified in seeking to defend the approach of the Merrett defendants.

Two United States Attorneys were called to give evidence. Mr. Newman gave evidence on behalf of the plaintiffs and Mr. Ringer gave evidence on behalf of the Merrett defendants. Mr. Ringer's evidence was also relied upon by E&W. Mr. Newman and Mr. Ringer prepared and agreed Appendix 2 to this judgment and I am grateful to them for this assistance.

Mr. Newman's and Mr. Ringer's experience and qualifications are set out in their statements.

Mr. Ringer's witness statement extended to 134 pages (his statement in reply to 29 pages). Mr. Ringer frankly accepted that the opinions set out in his statements were largely based upon the research he had conducted. He said he did have some anecdotal evidence learnt contemporaneously but would not consider that to have been sufficient to base an opinion on. He relied upon the documents and various other materials that his research had located. I have marked reservations about Mr. Ringer's witness statement, save where the statement contains matters that are agreed between the parties. The statement contains numerous assertions which should have been qualified so as to make it clear that the opinions expressed were based upon research and not on any contemporary experience. Mr. Ringer confirmed that the two attorneys between them had collected a good representative sample of the material available in the United States at the material times. In my view the most accurate reflection of perception in the United States in the 1980s is found in the contemporary materials and particularly the attorneys' reports.

In paragraph 53 of his statement Mr. Ringer said that based on the 10-k and Annual Reports of the 9 US insurers he had reviewed all 9 believed that their reserves were adequate to cover current and future asbestos bodily injury (and environmental liability) claims up to and including 1988 and that only at the 1989 year end did the first qualifications appear. I refer below in connection with Mr. Knowlton's evidence to the fundamental distinctions between the considerations applicable to and circumstances of a US insurance company and a Lloyd's syndicate such as 418/417. For the purposes of any comparison between a US insurance company and 418/417 it is necessary to compare net assets, exposure to asbestos-related claims (direct, reinsurance and retrocession), the extent of any reinsurance protections, the proportion of the reserves for asbestos-related claims to the total reserves and the fact that a US insurance company is not concerned with equity between names. Further 418/417 wrote 11 run-off contracts with a resultant funnelling of asbestos and pollution risks into the syndicate.

In paragraph 105 of his statement Mr. Ringer said "the unanticipated surge of claims by workers in trades other than shipbuilding and insulation goes a long way to explain why the Conning & Co. 1982 predictions became obsolete by the late 1980s". The extent to which at any moment in time there were claims by workers in trades other than shipbuilding and insulation is shown by the contemporary documents and particularly the attorneys' reports. I have to consider the perception of asbestos-related claims (and pollution claims) at 17 different points in time (11 run-off contracts and 6 RITCs). The best guide is found in the contemporary documents and particularly the attorneys' reports. It is possible to point to "surges" but what matters for present purposes is the state of perception at the 17 different points in time.

Mr. Knowlton was called to give evidence on behalf of Merretts. He commenced employment with Travelers Insurance Company Inc in 1960. He remained with Travelers until 1989 when he moved to ITT Hartford Insurance Group. In 1979 Mr. Knowlton transferred to the strategic claims operations of Travelers. In April 1979 he was asked to oversee Travelers' recently established department set up to deal exclusively with asbestos claims. In 1981 he was appointed Vice-President. In late 1984 he was placed in charge of the Strategic Claim Division which included large liability claims as well as the Environmental Unit. He remained in that position with Travelers until 1989 when he transferred to ITT Hartford to take up the position of Director of Environmental Claims and Litigation. He is presently a Vice-President with ITT Hartford. Mr. Knowlton, in preparing his statement, did not have access to contemporary materials at Travelers.

In my view the most reliable indications of Mr. Knowlton's perception in the 1980's are to be found in the contemporary documents. As at April 1983 (H4/294C) Mr. Knowlton is reported as saying "Asbestos is the single biggest problem we find in the industry. But the numbers aren't anywhere near the numbers that the Chicken Littles are saying."

In an article in 'The Brief' in August 1983 (H4/296C) Mr. Knowlton wrote:-

Mr. Knowlton's perception as at January 1985 is referred to below.

As at May 1987 (Mr. Ringer's file 4/27) Mr. Knowlton is recorded as saying:-

The fact that it is far safer to rely on Mr. Knowlton's perception as reflected in contemporary documents as opposed to some passages in his witness statement is illustrated by the following example.

Paragraph 32 of Mr. Knowlton's witness statement ("I recollect that in the early 1980's there were some pessimists who predicted that property damage claims would present a bigger problem for insurers than bodily injury claims. However, neither I nor others at Travelers nor, to my knowledge, my associates at other insurance companies, shared that view at the time.") should be contrasted with Mrs. Rowe's contemporary record of a conversation with Mr. Knowlton on 31.1.85 "Knowlton said the asbestos BI problem may be more or less under control, but he feels the P.D. will be at least as large - and may in turn spark more B.I. claims..." (I2/478).

Mr. Knowlton refers in his witness statement to changes in the type of claimant (paragraph 23 (2)), changes in the number of defendants (paragraph 27) and the development of class actions (paragraph 26). The nature and extent of these changes and developments are most accurately reflected in the attorneys' reports from time to time. Mr. Knowlton says in paragraph 30 of his statement "In my own case, and I believe that to be reasonable and typical in the industry, the perception that reserving "to ultimate" was no longer possible developed during 1989 and 1990. By that time I had taken the view that reserving for these types of claims would have to be done on a simple projection of future payment streams covering a limited period of time."

There are fundamental distinctions between the considerations applicable to and the circumstances of a US insurance company such as Travelers (not concerned with equity between two sets of names, able to adjust reserves from year to year, net assets amounting to billions of dollars, primary layers/excess layers with extensive reinsurance protections, very little reinsurance exposure) and a Lloyd's syndicate such as 418/417. When asked whether he was able to provide any indication as to the proportion that asbestos reserves bore to total reserves at Travelers, Mr. Knowlton said that at the Hartford asbestos is probably 1% or 2% of the total reserves of some $9 billion and that Travelers and Hartford are about the same size.

Mr. Knowlton provided a valuable description of the extremely detailed approach adopted by Travelers in relation to reserving asbestos-related claims.

Mrs. Rowe was called, as an expert witness on claims handling and managing, by the plaintiffs. After graduating in 1974 in Economics from Cambridge she spent 15 years in Lloyd's employed by R.J. Kiln. In 1981 she qualified as a Fellow of the Chartered Insurance Institute by examination. She is a Chartered Insurance Practitioner. Her time at R.J. Kiln was spent almost entirely in the Claims Department where for most of her career she was Claims Manager. She was responsible to the extent shown by the contemprorary documents for the calculation of the RITC figures, including estimates for IBNR. Since 1989 she has been practising independently as senior partner in her own firm. Mrs. Rowe was expert in claims handling and managing but made no claim to have any expertise in underwriting decisions.

Mrs. Rowe based her report on a reading of limited materials. In paragraph 4 of her report she said she had studied the various copy RITC files, in particular the "pruned" RITC files. Thus by way of example Mrs. Rowe did not read the E&W audit files (D1-13).

Mrs. Rowe was cross-examined at length as to the approach adopted by the Kiln Syndicate 510/511. The defendants rely on a number of points derived from this cross-examination. I will consider the position of the Kiln Syndicate below.

Mrs. Rowe said she became aware that 418/417 had written some of the same run-off contracts as the Outhwaite syndicate, once the Outhwaite run-off contracts became a subject of general discussion. She was asked whether it occurred to her at that stage that 418/417 would have an insoluble reserving and closing problem. She said that she believed it did and that at some of the reserving discussion meetings between the underwriter of Kiln 510/511 the conversation went along the following lines - "If our figures are this big, and still developing, how on earth do people with bigger portfolios, let alone run-off contracts, manage?".

The essence of Mrs. Rowe's criticism of Merretts was as follows. She said that in her opinion they did not do as much analysis of their account as was possible. She said that the principal heads of analysis that she conducted, but Merretts did not conduct, comprised statistical triangulations of all sections of the account (including eventually separate triangulations for asbestos-related claims), graphical projections of those triangulations and close analysis of the direct casualty account from virtually complete records. Mrs. Rowe said that Merretts did not do as much analysis of their accounts as possible; had they done that analysis, coupled with the much greater knowledge that people like Mr. Ayliffe had of the underlying nature of the asbestos problems in the market, they would have come to the conclusion earlier that they should not close. Mrs. Rowe added that the larger the impact of asbestos-related claims (including in particular asbestos-related claims deriving from the run-off contracts which were even harder to estimate) the more any uncertainty was likely to damage the syndicate. Kiln was in the fortunate position that it could close in the years in question. She did not believe that 418/417 was in the same position. She was asked what approach she would have adopted if Kiln had written run-off contracts. She said that for each run-off contract she would want to be able to do the same exercise as she did for Kiln's own book of business, if she were to have any comfort at all in closing a syndicate with a run-off contract in it.

Although Mrs. Rowe's evidence must be approached with care having regard in particular to the extent of her expertise and her limited consideration of the materials in the case, I formed the impression that she was a sincere and generally a reliable witness. For the reasons set out below I consider that there are marked distinctions between the position of the Kiln syndicate and 418/417.

I should record that the materials before the court in relation to the Kiln syndicate were not complete. I accept Mrs. Rowe's evidence that there are a number of relevant materials missing from the files relating to the Kiln Syndicate. I was left with the impression that Mrs. Rowe was thorough in her statistical analysis of Kiln's own book of business. It should not be assumed that she would have reached the same conclusions as those arrived at in relation to Kiln if she had been concerned with 418/417's own book of business plus the eleven run-off contracts.

There were marked differences between 418/417's own book of business and the book of business written by Kiln 510/511. Further Kiln did not write any run-off contracts.

From 1963 to approximately 1968 the Kiln Syndicate wrote a small book of direct US casualty insurance. Nearly all of this was written under market line slips and in particular the Price Forbes line slip. Nearly all of it was high level excess umbrella business and none of it was primary business. That book ceased in 1968 or 1969. The Kiln Syndicate was mostly a reinsurance syndicate, and had always written some reinsurance of US casualty business. In the 1970's that was predominantly either the casualty element of global or package reinsurances or the reinsurance of claims made and medical malpractice business. From the 1980's onwards, the element of global business disappeared, and from then on virtually all of the syndicate's US casualty business was on a claims made or a high level clash basis. There was a specific programme of outward insurance to protect the direct book, which consisted of an excess cession treaty protecting each year of account, covering each line written. It varied from between 75 and 80% of the syndicate's line, in excess of 25 or 20% of the line, with unlimited reinstatements as to the original business and that in turn enured to the benefit of an excess of loss protection, with a very low deductible, about $10,000 each and every loss, also with unlimited reinstatements. Thus the per loss retention of the syndicate was approximately $5,000 or $10,000 any one casualty loss. The syndicate's total casualty book was never more than about 10% of the book at its maximum.

Mrs. Rowe said "we did not have the sort of book that would inevitably respond to every casualty problem that surfaced" (Day 26/123) and "we were known in the market as almost entirely a short tail syndicate" (Day 27/93). For other points of distinction between 418/417 and 510/511 see the plaintiffs' closing submissions 21/15.

A chart prepared on behalf of the plaintiffs contrasted the stamp capacity and RITC gross of credit for T&D in the case of 418/417 and Kiln 510/511.

In the Chairman's report dated 3.5.95 Mr. C.K. Murray, Chairman of R.J. Kiln & Co Ltd wrote:-

Mrs. Rowe described 510/511's general approach to reserves as follows. "We started with noted outstandings received from professionals, lawyers, adjusters, and the like... We made no attempt... to interfere with those figures... Before applying any projections to our total figures, we then put in our own specific IBNR, or supplementary reserves, which was the syndicate's own judgment of where those specific claims should be reserved... We then did a statistical projection on the total figures..." (Day 26/22).

The defendants rely on a number of contemporary documents from Kiln's files including inter alia the following which relate to the years ended 31.12.84-6:-

(i) The 510/511 RITC as at 31.12.84 Supplementary Reserves

(a) Asbestos - bodily injury claims

N1/358 ("Last year we loaded our noted asbestos figures by 100%... This year ...I... suggest a 50% IBNR. In addition I am not removing our old 'expense' reserves...");

(b) Asbestos - property damage

N1/359 ("To date, one reinsured ... and one insured ... have advised potential P.D. claims. We have no reserves ... We know that several other reinsurers ... anticipate P.D. claims... At the moment we have no way of predicting what our involvement will be and I therefore am making no suggestions for supplementary reserves ...")

(c) Pollution/Toxic Waste/Clean-Up Costs

N1/361 ("American insurers forecast that this class of claims will be the "next asbestosis" - and possibly bigger ... Some claims have already been made on the Lloyd's market ... Shell ... reserving this in (our attorneys) most pessimistic assumptions ... produces NIL to ... 510/511 ... For neither of these claims do I think we need any extra reserves added to our noted outstandings... Nor, at this stage, am I suggesting any other supplementary reserves - we have far too little information to make a sensible suggestion").

A chart prepared on behalf of the Merrett defendants compares the position as at 31.12.84 and 31.12.89 in relation to asbestos, pollution and property damage.

(ii) The 510/511 RITC as at 31.12.85 Supplementary/Specific IBNRs

(a) Asbestos - bodily injury claims

N2/41 ("Claims are also being made against insurers from some new sources ... Claims from various American railroad companies ... last year's 50% load on noted outstandings as an asbestosis IBNR is still reasonable and should be continued but now applied to all years...")

but see N2/100 ("Moreover our history of asbestos "specific IBNRs" has been a load of 100% for 1983 when reserve information was rudimentary and a load of 50% for (1984) when we thought nearly all exposures were reserved. A load of 50% again when reserves have increased again and the "Facility" has taken effect is not therefore justifiable");

(b) Asbestos - property damage

N2/44 ("We have received new advices this year on account of US Gypsum ... These reserves are precautionary only ... We know that several other reinsureds ... anticipate P.D. claims ... though few have formally been made ... We should begin establishing IBNRs for expenses, but we are still not in a position to forecast our loss IBNR which is still 'unknowable'").

(c) Pollution/Toxic Waste/Clean-up Costs

N2/45 ("We have several more advices since last year end, both directly and by way of reinsurance ... I therefore think it appropriate ... to begin setting up 'expense' IBNRs although it is still impossible to predict the outcome of the claims themselves").

See further the document at page 102 of bundle N3 which summarises the syndicate's RITC as at 31.12.85.

(iii) The 510/511 RITC as at 31.12.86

(a) Asbestos - bodily injury claims

N2/147 ("... plaintiffs' attorneys are actively seeking both new claimants and new target defendants ... The IBNR for claims is now included in our graphs and estimated ultimate losses for all long tail business ... It would ... be illogical to include a further specific amount");

(b) Asbestos-propery damage

N2/149 ("We continue to receive new advices ... I think we should begin establishing IBNRs for expenses, but we are still not in a position to forecast our loss IBNR which is still 'unknowable'");

(c) Pollution/Toxic Waste/Clean-up Costs

N2/149 ("We continue to receive new advices, but largely without reserves - at least for our years of involvement ... I think it is appropriate to continue setting up 'expense' IBNRs").

According to the figures at N2 pages 282 to 284 as at 31.12.87 the cumulative total of asbestos bodily injury claims amounted to 471 (a claim being defined as the total claim for one insured for one policy year or for one reinsured in respect of one insured for one policy year). As to asbestos property damage the total number was 41 and as to pollution - EPA the total number was 182.

I have carefully considered the contemporary documents relating to 510/511 and with these in mind I have given appropriate weight to Mrs. Rowe's evidence in relation to each of the six 418/417 RITCs. As Mr. Ayliffe said attempts to compare one syndicate with another in terms of the impact of asbestos etc. are liable to be a trap for the unwary because no syndicate is the same as another. Every syndicate has a different historical background.

There are numerous points of distinction between 418/417 and 510/511 including the fact that 418/417's own book of US casualty business was far greater than 510/511's own book and the fact that 510/511 did not write any run-off contracts. I should not be taken to accept that the approach adopted by 510/511 in respect of its own particular book of business was necessarily appropriate in every respect. Nor do I accept without reservation the totality of Mrs. Rowe's evidence. However it should not be assumed that Mrs. Rowe would have reached the same conclusions as those arrived at in relation to Kiln if she had been concerned with 418/417's own book plus the 11 run-off contracts.

Mr. Neil was called, as an expert witness on underwriting practice, by the plaintiffs.

In 1980 Mr. Neil was employed as active underwriter of Non-Marine syndicate 939 (Octavian). The business underwritten by Mr. Neil at syndicate 939 included North American casualty which was all written on a treaty excess of loss basis and included general liability amongst other categories of business. He was also a director of Octavian Underwriting Ltd, a joint members' and managing agency and Octavian Syndicate Management Ltd, an underwriting managing agency. Syndicate 939 in 1981 was relatively small, under £2m stamp capacity. In 1986 the capacity was approximately £13m and grew to £35m by 1991.

Mr. Neil said that the figures relating to asbestos and pollution "would have been no reason to keep the 1990 year of account open". Mr. Neil thought that paids as at 31.12.93 amounted to $300,000. As at 31.12.93 the total reserve for estimated future liabilities in respect of the 1990 year amounted to £39,468,055 of which the net outstanding claims in respect of asbestosis and pollution amounted to £691,746 and the IBNR amounted to £1,383,492.

For other points of distinction between 418/417 and 939 see the plaintiffs' closing submissions 21/22.

Mr. Rome was called as an expert witness on underwriting practice by Merretts.

Mr. Rome was the underwriter of syndicate 662 and a director of C.W. Rome (Underwriting Agency) Ltd, L.G. Cox & Co Ltd and Gammell Kershaw & Co Ltd. These companies are all managing agents of marine syndicates at Lloyd's. Mr. Rome joined Lloyd's on leaving school in 1955. He was appointed the active underwriter of syndicate 926 in 1972. In 1979 he founded C.W. Rome (Underwriting Agency) Ltd and syndicate 662 was formed. He continued as underwriter of both syndicates and they were merged in 1989 as 662. The syndicate ceased trading at the end of 1993. Mr. Rome was a director until 1988 of Bolton Ingham (Agency) Ltd which was a managing and members' agency acting for 2 marine and 1 non-marine syndicates. The non-marine syndicate 231 had written a long tail book of business and remained open for 2 or 3 years as a result of uncertainty on computer leasing. This syndicate had a significant number of asbestos claims. Mr. Rome has been actively involved in writing a wide range of business for over 30 years. He has been a leader, inter alia, of energy, hull, cargo, war and contingency business.

Mr. Rome has served on a number of Lloyd's and industry committees.

In 1988 Mr. Rome was asked by the then chairman of the Lloyd's Underwriting Agents' Association to join a working party under the leadership of Mr. Martin Hunter of Freshfields, who had been appointed to consider the underwriting by Mr. Outhwaite of a number of reinsurance contracts. Mr. Rome provided an expert report in the case of Stockwell v Outhwaite although he was not in the event called to give evidence as the case was settled out of court (see B.F. Caudle v Sharp [1994] CLC 216 at 223 - the report records that a sum of £116m was accepted by the names in full and final settlement of their claims against the agents).

Mr. Rome as underwriter of syndicate 662 was one of the underwriters on the errors and omissions line slips. A line on some of the layers of the lines slip would inevitably be exposed to successful claims in the Lloyd's litigation. As a name on syndicate 662 Mr. Rome is potentially at risk personally in relation to the result of this case. In subsequent years he wrote a substantial line on a stop loss contract which would be a substantial beneficiary if the plaintiffs in this action succeed. Further in the event of the litigation succeeding he would be able to make recoveries against the excess of loss programme. Thus he said he had a financial interest in the matter which he could not assess. In fairness to Mr. Rome he disclosed in paragraph 13 of his witness statement that he was one of the underwriters on the errors and omissions line slips. It is of course most unusual for an expert witness to have a financial interest in the result of the case. I do not suggest that this consciously affected Mr. Rome's evidence.

I have, however, a number of reservations about his evidence for other reasons. In my view Mr. Rome's evidence about the writing of the run-off contracts was unrealistic and unreasonably defensive. He said that if there were criticisms to be made of the writing of the run-off contracts they were not such as to lead him to believe that the writing of any of the run-off contracts was professionally incompetent. On the basis of such evidence as has survived he concluded that he could properly have written those contracts individually and in the aggregate. Paragraph 153 of his statement in relation to Sturge was materially inaccurate (see Day 34/91 et seq). The sentence in paragraph 138 of his statement "it is hard to see what other enquiries Mr. Merrett or Mr. Emney could have made to improve their knowledge of the risks under consideration" is not supportable.

Mr. Rome's statement did not contain any detailed critical analysis of the RITCs in years 1 to 6. Again I found his evidence at times in this connection unreasonably defensive. By way of example he said that if the underwriter and the auditors had known that the Ballantyne contract had deteriorated within 3 years of writing, to the extent that the incurred position had reached a deficit of $2.5m, he would not have expected them to be unduly concerned. I do not consider it was realistic to describe this contract as "one contract of many thousands of contracts, which form part of the accounts of that syndicate".

As to a comparison between the business of 418/417 and syndicate 662, Mr. Rome said that 418/417 was substantially larger than 662. 418/417 had written more business and had probably written larger lines. He added that it was impossible for the court to form more than a general impression of the relative sizes and exposures of these syndicates to each other.

Reports from Mr. B. Thomas Florence (on behalf of Merretts but also relied on by E&W) and Mr. John Ryan (on behalf of Merretts) were subject to Civil Evidence Act notices.

Mr. McNamara is a partner with the firm of Ernst & Young. In the period from 1980 to 1987 he was the Audit Partner responsible for the audit of Merretts' accounts and solvency reports, together with Mr. Nigel Holland.

Mr. McNamara qualified as a chartered accountant in 1973. In 1979 he was admitted as a partner in E&W. In September 1979 E&W merged with Baker Sutton & Co. and Mr. McNamara became involved with some of the insurance clients of the former Baker Sutton firm, and in particular the audit of the syndicates managed by Merretts. In addition he became involved with the audit of syndicates 401 (Cuthbert Heath), 317/661 (R.H.M. Outhwaite), 518 (Salter & Outhwaite) and 552 (Mander Thomas & Cooper). In 1983 Mr. McNamara led a team which made a successful proposal in a competitive tender for the audits of syndicates managed by Norman Frizzell Underwriting Ltd (Syndicates 979, 975 and 850). In 1983 Mr. McNamara became responsible for the audits of two further syndicates which had commenced underwriting in 1983 : 672 (I.C.A. Agnew Underwriting) and 321 (Outhwaite & Green). Mr. McNamara also became the audit partner for a syndicate formed by Mr. David Mann, formerly of Merretts, for the 1984 year of account.

In 1982 Mr. McNamara assisted with the Lloyd's enquiry into PCW and WMD Underwriting Agencies.

From 1987 until 1992 Mr. McNamara was the partner in charge of the UK Insurance Industry Group of E&W and subsequently Ernst & Young. Mr. McNamara has served on the Lloyd's Accounting and Auditing Standards Committee.

I was very impressed with the candid manner in which Mr. McNamara gave his evidence. He responded frankly to detailed questioning.

E&W were placed in a difficult position by the "shattering news" of early April 1985. They did however become aware that 417 was party to a portfolio of 6 run-off contracts in the course of the year 3 audit. The 6 run-off contracts were not given adequate attention by E&W in year 3. The breakdown in communication and organisation in the course of the year 3 audit was exacerbated by Merretts' failure to disclose the run-off contracts written by 418 and the Judd run-off contract.

It is never pleasant to have to make a finding of negligence against a professional man and it is with particular regret that I feel compelled to make a finding of negligence against E&W in years 4, 5 and 6 for the reasons set out below. I make the finding after appropriate allowance for all the difficulties that Mr. McNamara faced, particularly in year 4. I am bound to say that given the deadlines that apply to all Lloyd's syndicates and the particular problems that emerged in relation to 418/417 and Outhwaite 317/661, Mr. McNamara appears to me to have been subject to an unduly heavy burden of work, particularly in year 4.

Mr. Hill's statement was put in evidence on the basis identified at Day 43/61.

Mr. Holland is now retired. He qualified as a chartered accountant in 1951 and became a partner of Baker Sutton & Co. in 1960. When Baker Sutton & Co. merged with E&W in 1979 he became a partner in E&W. He retired in August 1988.

By the mid-1970s the major part of Mr. Holland's workload was insurance related. His curriculum vitae summarises his Lloyd's and insurance related experience.

Mr. Holland first became involved with the audit of the Merrett Syndicates in about 1957. As Mr. Holland was becoming increasingly involved with Lloyd's Committees and enquiries in the early 1980s, culminating in his appointment in January 1983 as one of two inspectors with respect to the Alexander Howden affair, Mr. McNamara took over principal responsibility for the audit of the Merrett Syndicates from the year end 31.12.82. From that year end onwards Mr. Holland's role was limited to that of "client partner". His involvement with the audit itself post-1981 was limited. He did not become involved with the detailed auditing, nor did he review the work that was conducted.

Mr. Attwood was called as an expert witness on behalf of the plaintiffs.

In 1974 Mr. Attwood became a partner in Robson Rhodes. Since 1989 he has been the Chief Executive Officer of R.S.M. International, the worldwide accounting group of which Robson Rhodes is the U.K. member. He is a representative of the I.C.A.E.W. on the Joint International Committee of Chartered Accounts. From about 1979 to 1983 he was his firm's representative on the International Professional Standards Committee, which was the committee responsible for setting standards for international auditing work throughout the world (being appointed Chairman during his later years of involvement). In 1976 he became the author of the fifteenth edition of the standard text "de Paula's Principles of Auditing" (Pitman) and has also been the author of the sixteenth and seventeenth editions. In 1978 he was asked by the I.C.A.E.W. to write an introductory text to the Discussion Drafts of the proposed Auditing Standards.

Mr. Attwood became a member of the Auditing Practice Committee in 1980. He was asked by the A.P.C. to become its representative on the C.C.A.B. Lloyd's Sub-Committee in 1982. At about that time Robson Rhodes was in the process of obtaining "recognition" by Lloyd's for the purposes of undertaking syndicate audits.

In 1984, Mr. Attwood became the Chairman of the newly formed A.P.C. Lloyd's Working Party, charged with the development of auditing guidance in relation to Lloyd's syndicates, following the recent Byelaw changes at Lloyd's and the publication by the A.P.C. in 1980 of the Auditing Standards and Guidelines. That role continued until the publication in 1992 of Practice Note No.2, "The Lloyd's Market", by the then Auditing Practices Board. Previously the Working Party had produced the Audit Brief "Lloyd's Syndicates" in 1986, and several additional Practice Notes providing guidance on specific topics, all of which then became combined in "The Lloyd's Market" publication.

In 1985 Mr. Attwood became a member of the I.C.A.E.W. Insurance Sub-Committee.

In 1982 Mr. Attwood was partner-in-charge of Robson Rhodes London office. Initially his role was as "second" or "support" partner to the audit partner responsible for work for the John Townsend group of companies, then comprising a Lloyd's broker, a members' agent, a managing agent and two marine syndicates with incidental non-marine syndicates (275/6 and 575/645). In about 1985 he took over lead responsibility for that client and remained involved with its syndicate audits for two years until the group's divestment of its managing agency activities.

Mr. Attwood was an extremely impressive witness. He has very considerable professional standing and knowledge. He was prepared to withdraw a criticism if it was not justified or supportable.

It is necessary in considering Mr. Attwood's evidence to bear in mind (a) that he had limited experience as a panel/recognised auditor (b) that his own standards in years 1 to 3 may to some extent be above the reasonable average (c) that at times his approach tended to be slightly over-purist/over-technical and (d) the approach adopted in relation to 275/6 as to which see below.

As to the appropriate materiality level or maximum level of tolerance of error in 418/417's RITC premium, whereas on the one hand I consider that the level adopted by Mr. Attwood was somewhat strict for a long tail syndicate, on the other hand I do not accept the very much higher percentages contended for by E&W and their experts.

While it is important to make appropriate allowance for the above I was left with the firm impression that Mr. Attwood's evidence was soundly based by reference to appropriate professional standards (by way of example only I refer to his evidence in relation to the need for audit evidence and the appropriate approach to management representations). I was particularly struck by an important point made by Mr. Attwood in the course of his evidence (Day 48/132/4):-

E&W rely on a number of points derived from an examination of the audit of syndicate 275/6. I have made appropriate allowance for these in my findings as set out below. It is however most important to remember that the 1981 year of account was left open as at 31.12.83 The 275/6 accounts at 31.12.83 stated:-

Mr. Whiter was called as an expert witness on behalf of E&W. His evidence was relied on by Merretts. Mr. Whiter's evidence addressed years 4 to 6.

Mr. Whiter has since February 1994 been the Finance Director of The Benfield Group Limited, a company whose principal subsidiaries consist of a Lloyd's broker, specialising in reinsurance, and a reinsurance company. For over 18 years until January 1994 Mr. Whiter was a partner in the accountancy firm Neville Russell.

In the latter part of 1982, Mr. Whiter led the team which investigated the "P.C.W. affair" on behalf of Minet Holdings PLC. Whilst a partner in the London office of Neville Russell, Mr. Whiter's clients included a number of Lloyd's syndicates, Lloyd's underwriting agencies and Lloyd's brokers. Among the Lloyd's syndicate clients for whom he was responsible as audit partner were twelve syndicates managed by R.W. Sturge & Co. (in respect of the audits as at 31.12.86 and subsequent years) and three syndicates (marine and non-marine) managed by Roberts & Hiscox Limited (in respect of the audits as at 31.12.83 and subsequent years) and, on a joint audit basis, three syndicates managed by F.L.P. Secretan & Co. (in respect of the audit as at 31.12.83 only). These audits included non-marine and incidental non-marine syndicates which had a material exposure to latent diseases and pollution. Certain of the Sturge and Hiscox syndicates had the benefit of run-off contracts. From about 1983 Mr. Whiter became responsible for the management of Neville Russell's Syndicate Book-Keeping Department. This department was responsible, on a sub-contract basis, for the book-keeping of a number of Lloyd's syndicates. At that time, the department dealt with approximately 80 syndicates including Outhwaite 317/661 and Secretan 367.

Mr. Whiter became Managing Partner of the London office in 1988 and Senior Partner of the London office in 1992, which role he retained until he left in January 1994.

Mr. Whiter is a defendant in the Secretan case which forms part of the Lloyd's Litigation (Long Tail category). It is of course most unusual to find that an expert witness has a direct financial interest in the result of another case in which similar issues arise, but I recognise that there are a limited number of auditors with the requisite experience to give expert evidence in the Lloyd's Litigation. I do not suggest that Mr. Whiter's interest in the Secretan case consciously affected his evidence.

I regret however that I have serious reservations about Mr. Whiter's evidence. It seemed to me that he was concerned to defend without reservation everything that E&W did in the years 4 to 6. I consider that at times Mr. Whiter's answers were evasive. Some of his evidence was unrealistic. By way of example I refer to Mr. Whiter's evidence (Day 49/page 169/line 2):-

By way of further example Mr. Whiter said in relation to the run-off contracts in year 4 that he would have been prepared to express an opinion provided he had the outstandings and the paids - he would not have needed anything else. It is to be noted that the reserves in respect of 10 of the run-off contracts in year 4 amounted to £55m. Mr. Whiter added that information as to the reinsurance cover available to the cedants would be helpful but not necessary.

I consider that at times Mr. Whiter's approach was not logical. I refer by way of example to paragraph 123 of his witness statement where he said:-

Mr. Sharp was called as an expert witness on behalf of E&W. His evidence was also relied on by Merretts. Mr. Sharp's evidence addressed years 1 to 3.

Mr. Sharp is the Managing Director of Archer Holdings Plc, a position he has held since August 1983. In 1976 he was admitted to partnership with Futcher Head & Gilberts a firm of chartered accountants who had the fourth or fifth largest market share of work done for Lloyd's syndicates for the late 1970's until he left in December 1983. After resigning from Futcher Head & Gilbert's in December 1983 Mr. Sharp was admitted to partnership in Spicer & Oppenheim London in January 1984. Spicer & Oppenheim were also Chartered Accountants and panel auditors. Mr. Sharp took a substantial part of the insurance practice of Futcher Head & Gilberts (including a number of their staff) with him to Spicer and Oppenheim. He was the head of the insurance group of Spicer & Oppenheim and Touche Ross & Company from approximately 1986 until he resigned from the merged partnership in December 1990. In his practice as an accountant Mr. Sharp was responsible for the audit of a number of syndicates with exposure to US casualty business including the Murray Lawrence syndicates, the Dolling-Baker syndicate 544 and the Frizzell syndicates. A number of the syndicates that Mr. Sharp audited which closed their years as at 31.12.82 and 31.12.83 had the benefit of run-off contracts.

On 1.1.91 Mr. Sharp became the Managing Director of Castle Underwriting Agents Limited who are Lloyd's managing agents, who were responsible for a number of non-marine syndicates. He held that position until he was appointed as Managing Director of Archer Holdings Plc in August 1993, which is one of the two publicly quoted Lloyd's underwriting agents.

Mr. Sharp was the Chairman of G.W.Run-Off Limited from its creation in October 1991 until April 1993. G.W.Run-Off Limited was a run-off company established to manage the run-off of the Gooda Walker syndicates.

Mr. Sharp was a member of the working party established by the A.P.C. of the C.C.A.B. in approximately 1984 which produced the Audit Brief entitled "Lloyd's Syndicates". Mr. Sharp became a member of the Institute of Chartered Accountants Insurance Industry Sub-Committee from 1991.

Mr. Sharp became a member of Lloyd's on 1.1.92.

In October 1993 Mr. Sharp was appointed as the Chairman of the Micro Reserving Group, which is part of the Lloyd's Equitas Project. On 1.1.95 the Micro Reserving Group and the Macro Reserving Group were merged and are now called the "Inwards Group". Mr. Sharp is Chairman of the combined group.

Of the syndicates under the management of Archer the Alec Sharp syndicate 839 leads a number of the higher layers on the members' agents E&O slip. Syndicate 741 (and possibly other syndicates) under the management of Archer has a line on an auditors' E&O line slip. I do not suggest that these matters influenced Mr. Sharp's evidence.

I do however have certain reservations about Mr. Sharp's evidence. By way of example I refer to paragraph 53 of his supplementary report where in dealing with the Ballantyne run-off contract he said:-

Further I consider, again by way of example, that some of Mr. Sharp's answers in respect of paragraph 3 of Mr. Murray Lawrence's letter were unsatisfactory.

Merretts did not call either Mr. Emney who scratched the 11 run-off contracts or Mr. Jackson who was the underwriter of 799. Both Mr. Emney and Mr. Jackson could have given me considerable assistance on important issues in this case for reasons explained elsewhere in this judgment.

I give one example as to Mr. Emney. In relation to the most significant of the 11 run-off contracts (Sturge/Fireman's Fund) written by 417 (37.5%) and Merrett syndicate 421 (12.5%) Mr. Emney said in the 421 Loss Review:-

This evidence to the 421 Loss Review was wholly inconsistent with Mr. Merrett's account in evidence before me. In reaching my conclusions as to the writing of run-off contracts I have disregarded Mr. Emney's evidence on all prior occasions (including the evidence referred to above), but I am left with a considerable sense of disquiet having only heard from Mr. Merrett.

Further I regret having to make findings against Mr. Emney without having heard from him.

17. THE REGULATORY REGIME FOR THE YEARS ENDED 31ST DECEMBER 1980-1986

The following Standards and Guidelines are relevant for the purposes of this case.

Auditing Standards and Guidelines - explanatory foreword (issued April 1980) provided:-

The Glossary of Terms in the Appendix stated:-

The Auditor's Operational Standard (issued April 1980) provided:-

The Auditing Standard: Qualifications in Audit Reports (issued 1980) provided:-

The Auditing Guideline: Planning, controlling and recording (issued April 1980) provided:-

The Auditing Guideline - Audit Evidence (issued April 1980) provided:-

The Auditing Guideline - Representations by Management (issued July 1983) provided:-

(See also in this connection I.C.A.E.W. Statements on Auditing No. 18 Audit problems of the smaller company (issued November 1972) paragraphs 5 and 6 and Auditing Guideline-Exposure Draft Management Representations (issued February 1982)).

As to the Audit Brief, published by the A.P.C. of the C.C.A.B. based on the Lloyd's Byelaws and the law as at 1.1.86, see below.

Auditing Standards: Explanatory foreword (issued April 1980 but revised January 1989) stated:-

(Practice Note No.2 - The Lloyd's Market was issued in July 1992).

In 1978 the Fisher Working Party, chaired by Sir Henry Fisher, was established to report on "Self-regulation at Lloyd's". The report was published in May 1980 and Chapter 23 dealt with the audit regime.

The regulatory regime for the solvency audit and the audit of the syndicate accounts was as follows:-

A. Section 73 Insurance Companies Act 1974

B. Rule 16 Assurance Companies Rules 1950 (1950 No.533)

D. Solvency Letter for 31.12.1980 Audit

Of these only the documents at A and E are relevant for succeeding years.

Ernst & Whinney contend that the document at E above was, as its name suggests, directed to Underwriting Agents, not to auditors, and was not binding on either Underwriting Agents or auditors. Nor, in that sense, did it constitute part of the regulatory regime for any audit.

The plaintiffs contend that the Manual constituted and/or reflected good practice within the market for both underwriting agents and auditors prior to the adoption of the true and fair view form of audit report. In that sense it formed part of the regulatory regime. The Plaintiffs further contend that Ernst & Whinney regarded it as setting out the proper practice within the market - see Mr Holland's evidence at Day 43/115-116 esp. /115/10-11: "The requirements for the first three years were the requirements indicated in the agents' manual". Mr Attwood also gave evidence that the Manual was one source of Ernst & Whinney's professional responsibility, being one of the documents they would have had regard to in accepting instructions to undertake audit work - Day 45/63.

The Members' Agents contend that auditors were aware that Lloyd's were telling agents that they should see that everything was done to enable their auditors to sign the audit certificate by the prescribed date and that this involved ensuring (inter alia) that the information required by auditors to enable them to satisfy themselves as to the proposed reinsurance to close an account was available by early April (para 1.4 J5/32). Panel auditors must have known that this reflected the expectation and understanding of the market, viz. that it was part of the auditors' job to satisfy themselves as to the proposed RITC.

The document at B above was revoked in 1982 by the Lloyd's (Audit Certificate) Regulations 1982 and the documents at C & D were revised annually.

The regulatory regime for the solvency audit and the audit of the syndicate accounts was as follows:-

A. Section 73 Insurance Companies Act 1974

B. The Lloyd's (Audit Certificate) Regulations 1982 (1982 No. 136)

D. Solvency Letter for 31.12.1981 Audit

E. Manual for Underwriting Agents

A. Section 73 of the Insurance Companies Act 1974 (which came into force on 31st August 1974) provided:-

The Auditor referred to in sub-section (4) is the Auditor

appointed by the Members' Agent and not the syndicate Auditor.

B. The Lloyd's (Audit Certificate) Regulations 1982 (which came into force on 8th March 1982) set out the required form of the certificate mentioned in section 73(4) ICA 1974 to be provided by the Auditor appointed by the Members' Agent in respect of each Name.

C/D. Document D was issued on a covering letter to Document C and the two should be read together.

C. The instructions for the Guidance of Lloyd's Auditors (The "Blues") provided, inter alia, as follows:-

The notes to Clause 6 included the following:-

D. The Solvency Letter for 31st December 1981 (the "Whites")

contained explanatory notes to document C above. In particular,

as regards Clause 3 of the Audit Instructions it provided, inter

alia, as follows:-

As to Matters to be Reported the Solvency Letter provided:-

E. Sections A.10 and Section F of the Manual for Underwriting

Agents provided inter alia as follows:-

Section F

(a) The Regulatory Regime

The regulatory regime for the solvency audit and the audit of the syndicate accounts was as follows:-

A. Sections 83-86 Insurance Companies Act 1982

B. Insurance (Lloyd's) Regulations 1983 (1983 No.224)

C. Instructions for Guidance of Lloyd's Auditors at 31.12.1982

D. Solvency Letter for 31.12.1982 Audit

E. Manual for Underwriting Agents

(b) Other Materials

Following the report of the Fisher Working Party, Lloyd's established Task Groups to consider the recommendations which had been made. In December 1982 Task Group 4 produced a consultative document on "The Annual Financial Report for Underwriting Members of Lloyd's" which included a Draft Lloyd's Accounting Manual. Neither document was binding on the Managing Agents or Auditors or, in that sense, constituted part of the regulatory regime as at 31.12.1982 Audit. The Plaintiffs contend that the Draft Lloyd's Accounting Manual represented or reflected the professional practice to be observed by Lloyd's panel auditors. The members of the Task Group included Mr. K.E. Randall and Mr. N.F. Holland.

A. Section 83 of the Insurance Companies Act 1982 (which came into force on 28.3.83) replaced section 73 ICA 1974, though the relevant provisions are in similar terms. In particular, sub-sections (4) and (5) provided that:-

Again, the reference to "auditor" in sub-section (4) is a reference to the Auditor appointed by the Members' Agent.

B. The Insurance (Lloyd's) Regulations 1983 (1983 No.224) (which came into force on 22.3.83) revoked the Lloyd's (Audit Certificate) Regulations 1982. Regulation 4/Schedule 2 of the 1983 Regulations set out the new required form of Audit Certificate to be provided by the Auditor appointed by the Members' Agent under Section 83 ICA 1982. The new certificate was identical to the previous certificate save that "underwriters" became "underwriting members" and "the Committee of Lloyd's" became "the Council of Lloyd's".

C and D. Document D was issued as a covering letter to Document C and the two should be read together.

C. The Instructions for Guidance of Lloyd's Auditors at 31.12.82 were broadly similar to those issued for the previous year save inter alia for the following alterations.

Clause 2 now provided as follows:-

Clause 6 now began:-

D. The Solvency Letter was broadly similar to that issued for

the previous year.

E. Manual for Underwriting Agents (see year 1 above).

(a) The Regulatory Regime

The regulatory regime for the solvency audit and the audit of the syndicate accounts was as follows:-

A. Sections 83-86 Insurance Companies Act 1982

B. Insurance (Lloyd's) Regulations 1983 (1983 No.224)

C. Instructions for Guidance of Lloyd's Auditors at 31.12.1983

D. Solvency Letter for 31.12.1983 Audit

E. Byelaw No 2 of 1984

F. Byelaw No 3 of 1984.

G. Manual for Underwriting Agents

(b) Other Materials

On 2.12.83 Lloyd's published a Provisional Lloyd's Accounting Manual. It was produced by the Accounting and Auditing Standards Committee of the Council of Lloyd's and relied heavily upon the Draft Accounting Manual produced by Task Group 4 a year earlier.

As with the Draft Accounting Manual, the Provisional Accounting Manual was not binding. But in a letter dated 1.2.84 the Chairman of Lloyd's invited Panel Auditors to encourage their clients to comply with its spirit in preparing the 1983 Reports and suggested a proposed form of report. The Plaintiffs contend that the Provisional Accounting Manual represented or reflected good practice to be observed by Lloyd's panel auditors.

E&W did this and their report this year tracked the proposed wording suggested by the Chairman in his letter.

A. Sections 83-86 ICA 1982 (see above).

B. Insurance (Lloyd's) Regulations 1983 (see above).

C. and D. Document D was issued as a covering letter to Document C and the two should be read together.

C The Instructions for Guidance of Lloyd's Auditors at 31.12.83 were broadly similar to those issued for the previous year save inter alia for the following alterations.

Clause 2 now provided:-

D. The Solvency Letter was broadly similar to that of the year before.

E. Byelaw No.2 of 1984. The 1983 Annual Reports of Syndicates Byelaw came into force on 13.2.84.

F. Byelaw No.3 of 1984. Disclosure of Interests came into force on 9.4.84.

The regulatory regime for the solvency audit and the audit of the syndicate accounts was as follows:-

A. Sections 83-86 Insurance Companies Act 1982

B. Insurance (Lloyd's) Regulations 1983 (1983 No.224)

C. Instructions for Guidance of Lloyd's Auditors at 31.12.1984

D. Solvency Letter for 31.12.1984 Audit

E. Byelaw No. 2 of 1984

F. Byelaw No. 3 of 1984

G. Byelaw No. 6 of 1984

H. Byelaw No. 7 of 1984 and explanatory notes dated 8.10.1984

I. Byelaw No. 10 of 1984 and explanatory notes dated 10.12.1984

J. Manual for Underwriting Agents.

A. Sections 83 - 86 ICA 1982 (see above)

B. Insurance (Lloyd's) Regulations 1983 (see above).

C. and D. Document D was issued as a covering letter to Document C and the two should be read together.

C. The Instructions for Guidance of Lloyd's Auditors at 31.12.84 were broadly similar to those issued for the previous year save inter alia for the following alterations.

Note (1) to Clause 6 contained the following additional provision:-

D. The Solvency Letter was broadly similar to that issued for

the previous year save inter alia for the following alteration:-

E. Byelaw No.2 of 1984 (see above).

F. Byelaw No.3 of 1984 (see above).

G. Byelaw No.6 of 1984 Syndicate Premium Income came into force

on 6.8.84.

H. Byelaw No.7 of 1984 and Explanatory Notes dated 8.10.84.

The Byelaw was published on 8.10.84 and came into force on 1.1.85

subject to the following transitional provision.

The Byelaw provided inter alia as follows:-

Schedule 1 Interpretation provided:-

Schedule 3 contained "Fundamental Principles and Statements

of Accounting Policies". In particular it provided that:-

The Explanatory Notes dated 8.10.84 stated inter alia:-

As to paragraph 11 of the Byelaw (Report of the Syndicate

Auditor) the Explanatory Notes stated:-

As to the provisions and requirements of paragraph 2 of and

Schedule 2 to the Byelaw the Explanatory Notes provided, inter

alia, that:-

As to Schedule 3 paragraph 4 - items to be determined on an

equitable basis where transactions affect members participating

in more than one year account - the Explanatory Notes provided:-

I. Byelaw No. 10 of 1984 Syndicate Audit Arrangements came into

force on 10.12.84

The regulatory regime for the solvency audit and the audit of the syndicate accounts was as follows:-

A. Sections 83-86 Insurance Companies Act 1982

B. Insurance (Lloyd's) Regulations 1983 (1983 No.224)

D. Solvency Letter for 31.12.1985 Audit

E. Byelaw No. 2 of 1984

F. Byelaw No. 3 of 1984

G. Byelaw No. 6 of 1984

H. Byelaw No. 7 of 1984

I. Further Explanatory Notes to Byelaw No. 7 of 1984

J. Byelaw No. 10 of 1984

K. Byelaw No. 6 of 1985

A. Sections 83-86 ICA 1982 (see above).

B. Insurance (Lloyd's) Regulations 1983 (see above).

C. and D. Document D was issued as a covering letter to Document C and the two should be read together.

C. Instructions for Guidance of Lloyd's Auditors at 31.12.85 were broadly similar to those issued for the previous year save inter alia for the following alteration. A new second sentence was added to Clause 6 so that Clause 6 read:-

D. The Solvency Letter was broadly similar to that issued for

the previous year save inter alia for the following alterations.

The Notes to Clause 6 were amended to read:-

E. Byelaw No.2 of 1984 (see above).

F. Byelaw No.3 of 1984 (see above).

G. Byelaw No.6 of 1984 (see above).

H. Byelaw No.7 of 1984 (see above).

I. Further Explanatory Notes to Byelaw No.7 of 1984 were

published on 9.12.85. The Notes were entitled "Explanatory

Notes - Reinsurance To Close". The introduction stated that the

Explanatory Notes were a guide only and did not override the

requirements of the Byelaw. The Explanatory Notes stated:-

J. Byelaw No.10 of 1984 (see above).

K. Byelaw No. 6 of 1985 The Reinsurance To Close Byelaw. This

byelaw commenced on 9.12.85.

(a) The Regulatory Regime

The regulatory regime for the solvency audit and the audit of the syndicate accounts was as follows:-

A. Sections 83-86 Insurance Companies Act 1982

B. Insurance (Lloyd's) Regulations 1983 (1983 No.224)

D. Byelaw No. 2 of 1984

E. Byelaw No. 3 of 1984

F. Byelaw No. 6 of 1984

G. Byelaw No. 7 of 1984

H. Byelaw No. 10 of 1984

I. Byelaw No. 6 of 1985.

A. Sections 83-86 ICA 1982 (see above).

B. Insurance (Lloyd's) Regulations 1983 (see above).

C. Instructions for the Annual Solvency Test of Underwriting Members of Lloyd's - 31.12.86. Whereas in previous years the Instructions and the Solvency Letter were separate documents, these were combined for the first time this year in a single document. The contents were reformulated but were broadly similar to those of the Instructions and the Solvency Letter.

D. Byelaw No.2 of 1984 (see above).

E. Byelaw No.3 of 1984 (see above).

F. Byelaw No.6 of 1984 (see above).

G. Byelaw No.7 of 1984 (see above).

H. Byelaw No.10 of 1984 (see above).

I. Byelaw No.6 of 1985 (see above).

(b) Other Material.

The Audit Brief was published by the Auditing Practices Committee ("APC") of the Consultative Committee of Accounting Bodies ("CCAB") in 1986 and was specifically addressed to the auditing of Lloyd's Syndicates. The status of this document was described in the revised Explanatory forward to the Auditing Standards and Auditing Guidelines issued in January 1989 in the following terms:

The Plaintiffs contend that the Audit Brief represented or reflected good practice for the conduct of the audits in years 3 to 6. Mr. McNamara accepted that the Audit Brief "broadly accorded with best practice that had emerged, certainly in my firm" (Day 43/42). See also E&W Insight No.32 June 1986.

The Audit Brief provided inter alia:-

TABLE 5

FLOWCHART

¯

Syndicate

Auditor

¯

Auditor appointed by

Members' Agent ("AMA")

¯

¯

Committee/Council of Lloyd's (¹)

¯

¯

Secretary of State

(¹) from 1982

18. THE NEVILLE RUSSELL LETTER AND THE RESPONSE

In response to the Neville Russell letter, Mr. Ken Randall, in his capacity as manager of the Underwriting Agents and Audit Department at Lloyd's, wrote a letter dated 18.3.82 inter alia to E & W as follows:-

The attached letter dated 18.3.82 from the Deputy Chairman Mr. Murray Lawrence stated:

19. RITC - SOME GENERAL PRINCIPLES

I turn to consider some general principles in relation to RITC and the role of the managing agents/underwriter and of the auditors.

"Reinsurance to Close" means an agreement under which underwriting members who are members of a syndicate for a year of account agree with underwriting members who comprise that or another syndicate for a later year of account that the reinsuring members will indemnify the reinsured members against all known and unknown liabilities of the reinsured members arising out of the insurance business underwritten through that syndicate and allocated to the closed year, in consideration of a premium and the assignment to the reinsuring members of all the rights of the reinsured members arising out of or in connection with that insurance business.

In computing a reinsurance to close the premium arrived at will take account of two elements: known outstanding claims and claims incurred but not reported (IBNR).

If a year is closed into a succeeding year the RITC is final. There is no mechanism for correcting past inaccuracies or inequities.

The following propositions are largely derived from the regulatory materials referred to in section 17 above.

1. The amount charged by way of premium in respect of reinsurance to close should, where the reinsuring members and the reinsured members were members of the same syndicate for different years of account, be equitable as between them, having regard to the nature and amount of the liabilities reinsured.

Compliance with "equity between Names" had to be demonstrated by the underwriter and managing agent in determining the reinsurance to close.

2. By year 4 it was strongly recommended that whilst the decision whether to close a year of account of a syndicate was the responsibility of the managing agent in consultation with the underwriter, no year of account should be closed before the managing agent determined whether the syndicate auditor intended to give a qualified audit opinion in respect of that year of account.

3. The determination of the IBNR element required the exercise by the underwriter of judgment as to the level of IBNR which was appropriate, having regard to all relevant materials and after appropriate enquiries. The Further Explanatory Notes to Byelaw No.7 of 1984 published on 9.12.85 set out in paragraphs 18 to 24 a number of matters which might fall to be considered in computing the IBNR. These include the nature of the business written by the syndicate as one of the main factors affecting the size and relative importance of the IBNR element of the reinsurance to close. Different classes of business gave rise to different considerations. The Further Explanatory Notes also stated that the reinsurance to close must be supported by records setting out the manner and bases upon which the final figure was determined in sufficient detail to "show and explain" the nature of the transaction. The Further Explanatory Notes also provided that it was important that the process of determining the IBNR, the more judgmental aspect of the reinsurance to close exercise, was documented to the same standard as was adopted in relation to outstanding claims. Documentation should include a record of the overall factors taken into account by the underwriter in arriving at his approach to the reinsurance to close. This should cover those factors which the underwriter considered had a significant impact on the year of account and might refer to those which did not and the reasons why such conclusions were drawn. Although the Further Explanatory Notes were published on 9.12.85, the matters referred to derived from the Notes probably reflected the approach that ought properly to have been followed in earlier years and in particular from year 4.

4. 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 having regard to the nature and amount of the liabilities reinsured, the account should be left open.

5. Where at its normal date of closure a year of account is left open an amount to meet known and unknown outstanding liabilities must nevertheless be included. The same considerations as apply to a reinsurance to close (with the exception of equity between names) will be relevant notwithstanding the fact that the objective is not to determine the final profit or loss for the year of account.

I wish to add one footnote which follows from the above propositions. 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, instead of leaving the account open, to close the account and seek to expand the syndicate in the hope that by doing so the (expanded) syndicate would be able to weather the difficulties.

The following propositions are derived from the regulatory materials referred to in section 17 above.

1. The auditors should obtain relevant and reliable audit evidence sufficient to enable them to draw reasonable conclusions therefrom (Operational Standard (issued April 1980)).

2. As to the nature of audit evidence, the sources and amount of evidence needed to achieve the required level of assurance were questions for the auditors to determine by exercising their judgment in the light of the opinion called for under the terms of their engagement. They would be influenced by the materiality of the matter being examined, the relevance and reliability of evidence available from each source and the cost and time involved in obtaining it (The Auditing Guideline - Audit Evidence (issued April 1980)).

3. As to representations by management, in certain cases, such as where knowledge of the facts was confined to management or where the matter was principally one of judgment and opinion, the auditors might not be able to obtain independent corroborative evidence and could not reasonably expect it to be available. In such cases, the auditors should ensure that there was no other evidence which conflicted with the representations by management and should obtain written confirmation of the representations. (The Auditing Guideline - Representations by Management (issued July 1983)).

4. For the purposes of the present case, from year 4 the report should state whether a true and fair view was given in the accounts.

5. As from year 4 the syndicate auditors should qualify their report if they were unable to obtain all the necessary information and explanations required. In the absence of a reference to these matters the syndicate auditors' confirmation thereof was implicit in an unqualified audit report.

(The following propositions are derived from the Audit Brief. Although the Brief is based on the Lloyd's Byelaws and the law as at 1.1.86 I find that it reflected the approach that ought properly to have been followed from year 4 (see in this connection Mr. Attwood's evidence, E&W Insight No.32 June 1986 and Mr. McNamara (Day 43/42/20 et seq)).

6. In selecting materiality levels, the auditor should have regard to the impact of syndicate transactions on the personal account of each syndicate member; he should look behind the syndicate to its constitution, as well as to the syndicate as a whole, in making judgments relating to materiality.

7. The auditor would need to be satisfied that the premium for the reinsurance to close a year of account was equitable as between the names on that account and those on the accepting year of account. The determination of the premium for the reinsurance to close involved the exercise of significant professional judgment and drew on the full experience of the underwriter.

8. The Auditor's Operational Standard stated that "the auditor should obtain relevant and reliable audit evidence sufficient to enable him to draw reasonable conclusions therefrom". Since the audit report on syndicate financial statements was expressed in true and fair terms, the auditor would need to ensure that he had gathered evidence of sufficient quality to support such an opinion.

9. The reinsurance to close a year of account was normally the area of greatest audit difficulty, because it was derived with the benefit of a substantial degree of underwriting judgment. In common with all accounting estimates, it was one of a range of possible outcomes and the audit approach should recognise that the objective was to ensure that the reinsurance to close was within a zone of reasonableness rather than an arithmetically accurate figure. (See also paragraph 5 of Mr. Randall's letter of 18.3.82).

10. The auditor would need to consider such matters as the nature of the syndicate's business, the overall size of the syndicate, the impact of the reinsurance protection programme, and the accuracy of previous estimates as a part of his assessment of the appropriate range within which he would expect the premium for the reinsurance to close to fall.

11. The results derived from statistical techniques should be treated with a degree of caution, since historically derived data might not be an accurate guide as to uncertain future events. The auditor should, therefore, ascertain from the underwriter the underlying basis for his estimate of claims incurred but not reported, so that appropriate additional evidence could be collected to support the computation.

12. Other matters the auditor might consider as a part of the audit of the reinsurance to close included the following. The syndicate might have reinsured the run-off of other syndicates or companies and the auditor must satisfy himself that due account had been taken of the liabilities which were likely to arise under such contracts. This evidence would usually take a similar form to that relating to the syndicate's own business.

Mr. Attwood's evidence provides material support for the above propositions, particularly insofar as they apply to auditors. Further support for the above propositions is found in Mr. Holland's lecture of 21.1.86 entitled "Setting the scene" as part of an E&W seminar for clients, "The RITC process" (D12/253 et seq):-

The materials referred to above, while distinguishing between the respective functions of the managing agents/underwriter and the auditors, show the interplay between those functions.

The defendants rely on certain passages in Mr. Neil's evidence eg. Day 29/137-8 as to whether or not objective justifiability is needed in setting an IBNR. I have already said that in my view Mr. Neil was at times confused by terminology in some of the answers that he gave. If and to the extent that any of his evidence was inconsistent with the above propositions I reject it. Although the determination of the IBNR element required the exercise by the underwriter of judgment that judgment plainly had to be exercised having regard to all relevant materials and after appropriate enquiries. I accept the plaintiffs' submission that the judgment must not be uninformed or exercised in an information vacuum or exercised without reference to the range of potential outcomes.

The Audit Brief referred to "a zone of reasonableness rather than an arithmetically accurate figure". Mr. Randall's letter of 18.3.82 stated "auditors will no doubt give special attention to the question of whether or not the Agent has decided to leave an account open in cases where the reserve for Asbestosis represents a material proportion of the total reserves of the syndicate or where there is a wide margin of error in the calculation". Considerable evidence was devoted to the appropriate materiality level or maximum level of tolerance of error in 418/417's RITC premium. Whereas on the one hand I consider that the level adopted by Mr. Attwood was somewhat strict for a long tail syndicate, on the other hand I do not accept the very much higher percentages contended for by E&W and their experts. I do not consider that it is necessary or appropriate to make a precise finding (in terms of a particular percentage) as to the appropriate materiality level in 418/417's RITC premium. It is plain than an assessment had to be made by the managing agents/underwriter and the auditors as to the width of the margin of error in the RITC calculations.

20. IDENTIFICATION OF 418/417's EXPOSURE IN RESPECT OF DEFENDANTS IN THE ASBESTOSIS LITIGATION.

Could Merretts discover at each year end from their own records or other sources whether in respect of any known/actual defendant in the asbestosis litigation they had insured that defendant direct or by facultative reinsurance, treaty reinsurance or retrocession?

As to the above question the plaintiffs' case was as follows.

It is not possible to say whether Merretts could have discovered at each year end from their own records whether or not they had any potential liability to a known/actual defendant to the asbestosis litigation. The E&W note in year 4 at D6/589 shows that they had some documents but not others. That is not to say that they ought not to have kept appropriate records, nor does it touch on the topic of whether they could have obtained such information from brokers or other sources. If they could have, they did not do so. If they could not have, because no such information was available anywhere and Merretts simply had to wait until an assured made a claim, then it follows that they knew that they would face liabilities which they were unable to identify until a claim was received.

As to the above question Merretts' case was as follows.

It would have been possible to identify nearly all policies to which 417 subscribed during the period 1953 to 1979 from the syndicate's underwriting records (shared with syndicate 799 for US casualty business). Two possible qualifications are (i) that the occasional record may have gone missing but this would be exceptional and (ii) that some binding authorities/line slips were written for which full declarations might not exist. This was not a particular problem in relation to the major asbestos defendants since, with the notable exception of US Gypsum, these defendants were not placed in the market through such facilities (and in any event major involvements were researched and notified to the market through Toplis & Harding).

Thus it would have been possible to identify from their own records (or from brokers if there was some difficulty) whether syndicate 417 had participated on a known defendants' programme of direct insurance. So far as the major defendants were concerned this was not necessary because these involvements were researched by the brokers and advised to the market at a very early stage. Other defendants' positions would be researched by the brokers as and when they advised involvement to the market.

On reinsurances Merretts could determine whether they had written a line on the reinsurance programme of an American domestic insurer or reinsurer, but that information did not tell them what exposures that insurer or reinsurer had to known defendants to the asbestos litigiation. The major domestic insurers all had some involvement. Again their involvements were reported upon to the market at a very early stage (that is not to say that the perception as to their ultimate losses was foreseen - it clearly was not). Mr. McNamara's schedule at year 2 lists many reinsurance policies (although many have a NIL reserve). Syndicate 417 had some retrocession policies for US reinsurers but otherwise retrocessions were not significant. Facultative reinsurance was not significant to syndicate 417 in asbestos-related claims.

As to Merretts' knowledge of the policy terms, in later years (from the late 1960s onwards) the majority of policy forms were standardised so that the market could identify relevant policy terms by knowing the form used. In earlier years this was less so. Identification of policy terms in the early years could not be done by Merretts, but had to be researched by the broker.

For the purposes of this judgment I am, save where otherwise stated, content to accept Merretts' case as set out above. There was a limit to the extent to which these matters were explored in evidence.

21. NOTIFICATION OF ASBESTOS-RELATED LOSSES

Merretts say the procedure was as follows.

At the very early stages of asbestos-related claims (i.e. in the mid to late 70s) an insured (who claimed to be covered by the London market) facing asbestos bodily injury claims by plaintiffs in the U.S. would first notify their U.S. broker of its exposure to these types of claims. The U.S. broker would then notify the London broker in writing of the exposure to such claims. Initially such notifications were extremely generalised. The response of the London broker would be to identify the Lead Underwriter (or one of the Lead Underwriters) providing coverage to the particular insured. The broker would then take the loss notification to the Lead Underwriter (or the Claims Manager of that syndicate) to obtain instructions. Almost without exception the first step would be for the Lead Underwriter to direct the claim be referred to a U.S. attorney to advise. The nominated attorney would then investigate the insured to establish the years of insurance coverage, the layers of such insurance protection, the extent of London market involvement, the number of claims made to date against the insured, the details of settlements and outstanding case reserves, the nature of the products giving rise to the losses and obtain general background information on the assured and its products. Having ascertained this information the attorney would make a first report to the market including giving advice on coverage issues and allocation of reserves (e.g. manifestation or exposure). That advice would list the years of coverage, the layers of coverage, how the claims reserve should be allocated between years and the number of claims paid and outstanding.

The report was received by the market via the broker. Upon receipt of the report the broker would identify from slips who were the participating syndicates on the years of coverage identified by the attorneys and disseminate the report and policy information to all involved syndicates. After the AWP had assumed responsibility for the handling of asbestos claims on behalf of the market, Toplis & Harding, were appointed to co-ordinate the distribution of the reports, so that it was Toplis & Harding who disseminated the information to all involved syndicates, having obtained the information on syndicate participation from the brokers.

As the system developed in the early 1980s identification of participants and dissemination of the information became more efficient. However, by 1980-81 certain major defendants had been identified. Nearly all of their direct coverage in London had been identified and the underwriters participting on layers exposed to claims had been notified of their participation. Attorneys' reports were available for all such defendants and reserve recommendations were circulated to the market at year end 1981 and at subsequent year ends.

Reinsurance claims were dealt with in a similar fashion. Once a reinsured notified its brokers of potential involvements with asbestos claims, that notification would be directed through the London broker to a Leading Underwriter on that reinsurance programme. Attorneys would then be instructed to report and advise. The attorneys' report would list years of cover, layers of reinsurance and principal involvements (e.g. Johns Manville, GAF etc). Such reports would advise on the likelihood of claims invading the reinsurance programme and, if appropriate, make reserve recommendations. The AWP did not immediately involve itself in reinsurance claims but by 1983 it had taken over responsibility for these as well. The Wellington Agreement and the ACF set up under it enabled a good data base of reinsureds' involvements to be established, and improved the ability of the market to set reserves on reinsurances.

In the early period 1980-81 LUNCO would advise the market of reinsurance claims on 1971 and post policies; pre-1971 policies would be advised through the broker and then by Toplis & Harding. In about 1982 LUNCO was requested by the AWP to stop advising reserves so that all asbestos-related claims, both direct and reinsurances, would be advised in the same way through Toplis & Harding. Thereafter LUNCO's only role was to send out cards on reinsurances covered by their system with no reserves advised but with instructions for the establishment of letters of credit where required under the terms of the reinsurances.

As with direct insurances, by year end 1981 certain major domestic insurers who had reinsurances placed in the London Market had been identified (Travelers, Home, CNA, Aetna and others), their reinsurers identified and notified, attorneys instructed and the reinsured's perceived exposure to underlying insureds reported upon with reserve recommendations if any. Underwriters in London were dependent upon the quality of the reinsured's information for reserving purposes and in particular to identify those underlying insureds which the reinsured expected to give rise to claims on the reinsurance.

There was essentially no difference between the way in which reinsurance and retrocession claims were dealt with. Retrocession claims were advised later than reinsurance claims.

According to Merretts the procedure was as follows. Every risk underwritten by Merretts which was the subject of an attorney's report giving reserve recommendations (even where the recommendation may have been nil) was notified to Merretts, initially by the brokers and subsequently by Toplis and Harding. No syndicate in Lloyd's would receive a copy of the attorney's report unless they had participated on the risk. With the attorney's report they would receive a schedule setting out each year that they had participated in the risk which was the subject of the attorney's report together with their percentage participation.

The system did not require Merretts to recognise that they had incurred any loss; that information would accompany the attorney's report. What Merretts had to do was to take the reserve recommended by the attorneys and apply the syndicate's share as set out in the accompanying schedule.

On the receipt of an attorney's report containing a reserve recommendation (including a nil recommendation) Merretts would write up a manual claims card recording that claim.

If the attorney's report showed a policy burning then Merretts would receive notification of that policy by receiving both the attorney's report and the schedule showing their participation on those policies which were burning. Secondly, it was not possible for intervening years in which Merretts participated to be missed since the schedule accompanying the attorney's report identified all years of coverage and all the syndicate's participation. If a policy could not be located by the broker but there was reason to believe one existed (e.g. years 1950-55 and 1957-1963 had been identified and traced but nothing for 1956) then Merretts could consult with underwriting records to locate it.

22. PERCEPTION AND THE MATERIALS AVAILABLE TO MERRETTS AND E&W

I turn to consider perception and the materials available to Merretts and E&W. It is vitally important to consider perception (separately) at the time of the writing of each of the 11 run-off contracts and at the time of each of the 6 RITCs and to distinguish between the perception of and the materials available to Merretts and the perception of and the materials available to E&W. Where materials are drawn on which would probably have been available only to Merretts or E&W this is indicated in brackets. Where witnesses gave evidence as to perception which was inconsistent with the contemporary documents, my findings as to perception are based on the contemporary documents. The contemporary documents are a far surer guide.

Mr. Merrett accepted that the best source of up-to-date information about the asbestosis problem was to be found in attorneys' reports (Day 16/98).

Further Mr. Jackson and Mr. Ayliffe were particularly well placed to receive information as to the development of asbestos and pollution claims. Mr. Jackson was a member of the market AWP from the outset and was Chairman from 1984. Mr. Ayliffe was a founder member of the AWP, subsequently a director of the ACF and the founder and initial Chairman of the Lloyd's Environmental Claims Group.

Mr. Merrett said that he was a regular reader of insurance periodicals such as Lloyd's List and Business Insurance, and of the Financial Times, the Economist and the Wall Street Journal. As such he was aware of those developments which were receiving press attention and evaluated the significance of what he read. As to attorneys' reports, there were numerous attorneys' reports in Merretts' possession. Many of these repeated comments made in previous reports. The chronology, Appendix 1 to this judgment, refers to examples of some attorneys' reports. The chronology is drawn from a document prepared by the plaintiffs which purported to identify "documents or information... actually in the possession of the respective defendant shown against the entry". I have made a number of revisions to the chronology in the light, inter alia, of a revised chronology provided on behalf of Merretts. If I have inadvertently referred to an attorney's report which was not in the possession of Merretts, the probability is that there were other reports in their possession to similar effect.

The availabity and system for circulation of attorneys' reports from time to time is reflected in the Chronology and in particular in the following entries:- the letter from the AWP dated 10.2. 81; the meeting of the AWP 10.8.81; the letter from the AWP dated 1.12.81; the letter from the AWP dated 16.2.82; Mr. Murray Lawrence's letter of 18.3.82 see above, paragraph 2; the attorney's report dated 20.1.83 and the letter from the AWP dated 27.4.83.

E&W accept that the knowledge which a reasonably competent syndicate auditor should have acquired includes knowledge from the following sources of information:

(iii)Any information given to the auditor by his client;

As to attorneys' reports, copies of attorneys' reports in Merretts' possession were generally available to E&W (see T13/125). (As to a particular point made by E&W with reference to J11/26/462, there appear to be very few examples of attorneys' reports marked "this report is not to be made available to brokers, reinsurers, auditors or any other parties.")

Mr. Attwood in his reports and evidence as to audit evidence and reliance on specialists and management representations said that, in his view, because of the uncertain nature of the asbestos liabilities and the materiality of amounts involved, the representations by Merretts as to the future development of these liabilities had to be corroborated by independent evidence before the representations could be accepted. Mr. Attwood singled out attorneys' reports as a source of such corroboration. The same point applies to pollution liabilities albeit from a later point in time. I refer in this connection to The Auditing Guidelines - Representations by Management (issued July 1983) supra.

E&W submit that it was not incumbent upon, nor would it have been a realistic exercise for, a reasonably competent auditor at any time to review the entirety of all attorneys' reports in Merretts' possession. E&W did refer to a sample of reports to see that the figures which Merretts were carrying for outstandings tallied with the figures recommended by the attorneys.

I accept that it was not incumbent upon E&W to review the entirety of all such reports in Merretts' possession, but the attorneys' reports provided important independent evidence as to the nature, extent and development of asbestos and pollution claims from time to time.

Having regard, inter alia, to the extent of the asbestos and (subsequently) pollution problems, the extent of the exposure of 418/417's own book (and subsequently the cedants') to these problems, the materiality of the reserves in connection with asbestos (and subsequently pollution), the critical importance of any assessment as to the future nature extent and development of these claims, and in the case of later years the inaccuracy of previous estimates, I accept Mr. Attwood's evidence that it was incumbent upon E&W to review a sample of the attorneys' reports to test the representations made by Merretts. I recognise that the attorneys' reports emphasized that they made no attempt to project an IBNR factor in respect of claims which had yet to be filed, but they contained extremely important independent information as illustrated below.

In my analysis of perception in relation to each of the six years I have distinguished between documents available to Merretts and documents available to E&W. In the case of the attorneys' reports I have referred to samples from the numerous reports in Merretts' possession. E&W were on my finding only obliged to review a sample and in doing so might well have reviewed reports other than those to which I have referred. However many of these reports repeated comments made in previous reports and, if E&W did not review the reports to which I refer below, the probability is that they would have read other reports in Merretts' possession to similar effect.

E&W were entitled to have regard to Mr. Ayliffe's and Mr. Jackson's knowledge and expertise in relation to asbestos and pollution problems, but the contemporary documents provide the best guide as to the limited extent to which these matters were in fact discussed with Mr. Ayliffe and Mr. Jackson in the context of 418/417. Further for the reasons set out above any such representations needed to be tested.

As to AWP minutes, reports and communications, at a panel auditors meeting on 15.1.82 panel auditors were informed that Lloyd's had set up a database in respect of asbestos claims and were told that the information was available to auditors with written authority from syndicate clients. (See also in this connection the letter from the AWP dated 16.2.82). However in the light of the evidence that AWP minutes, reports and communications were not shown to E&W I have disregarded these materials in examining E&W's knowledge in years 1 to 6. In addition I have taken a similar approach in respect of certain miscellaneous publications and reports.

23. THE WRITING OF THE RUN-OFF CONTRACTS

I set out below some general comments on the writing of the run- off contracts. The 11 individual contracts are considered in turn below.

1. The plaintiffs' pleaded case includes inter alia the following allegations.

(i) No limitations were placed either on the amount or on the duration of 418/417's liability to pay claims within the terms of the policies. If (which the plaintiffs deny) an ordinarily competent underwriter would ever have written such policies, he would have done so only if the placing or other information available at the time each risk was considered was such as to enable him reliably to assess with a reasonable degree of competence the reinsurer's ultimate net retained potential liability under each of the policies. Neither Mr. Merrett, nor Mr. Emney, nor anyone else at Merretts could or did have in relation to any of the run-off policies written, such information as would enable such a reliable assessment to be made.

(ii) Mr. Merrett, Mr. Emney and/or Merretts had no, or no adequate, system for detecting or monitoring the possible aggregation in 418/417 of particular risks included in the business ceded under the run-off policies. In failing to implement any such system, Merretts paid inadequate regard to the risk of potentially disastrous aggregation in 418/417.

(iii) By reason of the uncertainty over the volume, quantum and timing of asbestos-related claims, the potential for substantial further claims arising from other types of latent disease or complaints, and the yet further uncertainty generated by the spectre of pollution-related claims, Mr. Merrett, Mr. Emney and/or Merretts ought to have appreciated that there was no material on the basis of which a reliable or proper assessment of the ultimate outcome of accounts with a significant US casualty exposure could be made and that those cedants who were looking to obtain the benefit of run-off cover were doing so, in large measure, precisely because of the uncertainty and the consequent inability to make a reliable assessment of the ultimate outcome of their accounts. It was, in the circumstances, unsafe to reinsure the run-off liabilities of cedants.

(iv) Mr. Merrett, Mr. Emney and/or Merretts failed to obtain adequate reinsurance cover or other security against the liabilities assumed under the run-off policies.

(v) Before writing any of the run-off policies, Mr. Merrett and/or Mr. Emney failed to make any, or any adequate, enquiries or investigation as to the extent of the asbestosis problem for insurers and the implications thereof.

2. It is not in dispute that it was Mr. Emney's scratch which formally bound 418/417 on all 11 run-off contracts; nor is it in dispute that he played a substantial role in the decision to write the contracts. Despite this, Merretts did not call Mr. Emney to give evidence. The fact that Mr. Emney was not called by Merretts for tactical reasons has not made the task of doing justice between the parties any easier. Mr. Emney could have assisted the court on a number of issues including, by way of example only, the question of which materials constituted the placing information and the role of Mr. Merrett in the writing of the policies.

3. The plaintiffs contend that Mr. Merrett took part in the decision to write each run-off, or the run-offs as a whole, to the extent that he should be held personally liable for such conduct. The plaintiffs submit that there are three extraordinary aspects of this part of the case, which bear on this question:

(a) The writing of the run-offs by 418/417 was withheld from E&W (as to 6 until late in the audit of year 3 in 1984 and as to the remaining 5 until April 1985) and was not within the knowledge of the directors of MSL (apart from Mr. Emney and Mr. Merrett and possibly Mr. Smaje) until 1985. (I reject Mr. Merrett's evidence that the auditors had knowledge of the run-off contracts prior to the dates accepted by E&W).

(b) When the "shattering news" as to the deterioration on the run-off contracts broke in April 1985, no inquiry of any sort was instituted by the agency to determine who was responsible and how it had come about that the contracts had been written.

(c) After they were written the claims made under them were not handled by the Claims Manager, Mr. Ayliffe, or his department. Before the news broke in April 1985, they were apparently handled by Mr. Emney who thus added claims handling to his underwriting duties, both being in a field (US casualty business) which was not his primary area of expertise.

As regards the liability of Merretts (and the members' agents) the question of whether it was Mr. Emney alone or in conjunction with Mr. Merrett who wrote the run-off contracts is immaterial. The plaintiffs submit that in order to make good the claim against Mr. Merrett, it is not necessary to go so far as showing that Mr. Merrett scratched the slip, or even that he personally made the decision to write every policy. They accept that it is not possible to determine his precise involvement in the writing of each contract, but say that it is clear that he was aware that they were being written, that he had given the go-ahead in a general way, that he was certainly involved in the details of at least some individual contracts, that they could not have been written without his consent, and that he has been less than frank over the precise extent of his involvement. The plaintiffs accept that as the active underwriter on 418/417 Mr. Merrett was not required to assess every risk himself and make the decision to accept or not, but he was in overall control. They submit that it is quite unbelievable that a man of Mr. Merrett's personality and presence would have simply allowed Mr. Emney to enter this field and write this sort of business without keeping a close eye on what was going on.

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

When giving evidence Mr. Merrett did not accept that the writing of the run-off contracts was a "colossal gamble" but referred to "an attempt, which in hindsight was severely misplaced, to provide a service to other syndicates on a basis that would be distinctly profitable to our Names." Mr. Randall said that in 1985 Mr. Merrett described the writing of the run-off contracts as "an underwriting blunder".

5. Mr. Merrett accepted that in order to write a run-off contract a view had to be taken as to the ultimate outcome of the cedant's account. He said that broadly speaking he assumed that such a view was formed by Mr. Emney simply because it would have been imprudent and inconsistent with due care and skill to have written the contracts without forming such a view. He added that with the exception of Verrall he was unable, save in the general terms referred to, to explain the methodology which was used in relation to the run-off contracts.

Mr. Merrett further accepted (as I find correctly) that it was of vital importance that either the cedant's IBNR should be known or the basis on which the IBNR was created should be known. Mr. Merrett explained that by this he meant that it was necessary to know the material on which the cedants had reached their IBNR, the individual constituent parts, how they addressed it, the information that they would have put into their calculcations (triangulations, statistical projections) and the basis on which outstandings were established. This information was necessary so that an assessment could be formed as to where the claims might end up. Without such adequate information to form a view as to where the account was likely to end up, or its equivalent in another form, a run-off contract would not be competently or prudently written. Mr. Merrett added that the underwriter should satisfy himself that the cover became purely notional at a level which was going to impact catastrophically on an individual name.

Mr. Rome accepted that the data and evidence which he had seen did not tell him what view Mr. Emney formed as to the outcome or ultimate outcome of the accounts being ceded.

6. The information which Mr. Neil considered was essential to assess the run-off contracts before writing them is set out in paragraph 187 of his report. The information included "IBNR loss reserves for both asbestos claims and non asbestos claims and the methodology behind the IBNR factors". (Mr. Neil's paragraph 187(g) should be read as referring only to direct business). He comments in paragraph 184 that :-

I prefer Mr. Neil's evidence in relation to the run-off contracts to that of Mr. Rome. In my view Mr. Rome's evidence about the writing of the run-off contracts was unrealistic and unreasonably defensive (see above).

7. When asked whether he considered it was consistent with skill, prudence and competence not to keep copies of the placing information in relation to the run-off contracts, Mr. Merrett accepted that prudence would have dictated a more extensive retention philosophy with reference to the contracts. Merretts' failure to keep full and careful records of the placing information in relation to the run-off contracts has caused difficulty not only in this litigation but in earlier litigation and arbitration. (See further in this connection the affidavit of Mr. Randall sworn in the Dolling-Baker litigation 1988 Folio 3514: C53/3 196).

8. The plaintiffs accept that there could have been few if any syndicates or persons whose knowledge of the asbestos problem, as it impinged on the London market, exceeded or even approached that of Mr. Ayliffe and Mr. Jackson. When asked whether Mr. Jackson would have written the 11 run-off contracts Mr. Merrett said "I do not think so, no. He may have written some of them, but he was not writing a London market reinsurance book at all..." When asked whether he thought Mr. Jackson would have taken on these risks had he been writing a London market reinsurance book Mr. Merrett added "there is no reason to suppose he would not have taken on Judd, for example. I would not want to go much further up the list". Mr. Merrett also said that the to the best of his knowledge Mr. Jackson was not consulted in respect of any of the 11 run-off contracts (and this is what the Names were told on 25.5.90 F6/337). Nor was Mr. Ayliffe consulted.

9. Six of the run-off contracts were written after Mr. Murray Lawrence's letter dated 18.3.82 quoted in section 18 supra (and see also clause 3(iii) of the Audit Instructions in year 1). Five of the run-off contracts were written within 3 months of the year 1 audit.

10. In an article in Lloyd's List dated 8.12.82 Mr. David Mann, a Director of MSL wrote:-

11. Mr. Chester at a meeting of the Audit Committee of Lloyd's on 2.3.82 (H1/471A) commented on the particular dangers of a concentration of exposure to asbestos-related claims in a small number of syndicates. Mr. Merrett was present at this meeting.

Further Mr. Chester at a panel auditors meeting on 9.3.82 (J7/92(3)) said that the writing of run-off contracts could lead to the funnelling of a large amount of liability into a small number of names and added that consideration was being given to asking the market to stop writing such reinsurances in the open years. Merretts were not represented on 9.3.82 but the point about funnelling should have been obvious to them.

12. The run-off contracts were not protected by adequate reinsurance. When asked whether he discussed with Mr. Emney what reinsurance would be necessary for the 11 run-off contracts Mr. Merrett said that "at that time it was agreed between us that it was not a matter of arbitraging, that we should either accept that the risks were risks that we could write and run or we should not write them; but after some time he discussed with me the advantages of taking out some reinsurance."

13. Mr. Merrett said that the view in 1985 was that Mr. Emney had not fulfilled his duties properly and that essentially was why, when he withdrew his resignation, he was dismissed. When asked in what respects Mr. Emney did not fulfill his duties properly Mr. Merrett said that "we had reservations at that stage, and substantial reservations as to the underwriting of the individual contracts, as to whether that had been done with the necessary care and attention and conservatism". Although Mr. Merrett referred to Mr. Emney drinking too much he said he was never aware of Mr. Emney doing any underwriting when he was the worse for drink.

14. According to Mr. Merrett if no run-off contracts had been written "it is a reasonable expectation that the syndicate would be trading and that there would be losses arising out of the 417 domestic account, but the subsequent position of the syndicate would have been very different".

24. THE WRITING OF THE PROVINCIAL RUN-OFF CONTRACT

The plaintiffs do not persist with their contention that the writing of the Provincial contract was per se negligent for the following reasons and on the following basis. The plaintiffs

accept that it is not possible to know with reasonable certainty what Merretts knew about the asbestos problem prior to the writing of the Provincial contract. They say there are indications that Merretts must have known of the looming problem and the uncertainties surrounding it. The plaintiffs also say that it is clear that by the time of the writing of the endorsements to this contract, much more was known, but no separate case of negligence was pleaded in this respect. The plaintiffs add that the abandonment of the allegations of negligence in relation to Provincial does not mean that, once written, it could be ignored as a factor when each of the later contracts came to be written because the nature of the asbestos problem in relation to the Provincial contract would have put Merretts on notice of the problem generally, because of the way the account progressed. Nor does the abandonment detract from the plaintiffs' submissions regarding the closing of the years.

25. THE WRITING OF THE UNIVERSAL RUN-OFF CONTRACT

When asked in cross-examination "Is it your position that no competent underwriter would have written the Universal contract or are you simply saying 'one can see where it went wrong, but I do not say it was incompetent by standards at the time'?", Mr. Neil replied "I am not sure it was incompetent by the standards of the time. I am saying that I believe further information should have been sought regarding potential asbestos exposures, and, had that information been sought, it may have made the underwriter think twice about writing it".

The writing of the Universal contract was an error of judgment, but given the date at which it was written and Mr. Neil's evidence, the error was not such as no reasonably well-informed and competent underwriter could have made.

26. THE WRITING OF THE BALLANTYNE RUN-OFF CONTRACT

As at 30.7.81 the future development and extent of asbestos-related claims were subject to considerable uncertainty.

I refer to the chronology, Appendix 1 to this judgment (which in the case of attorney's reports lists some examples of reports in Merretts' possession). As to the US cases at the above date see Appendix 2 to this judgment.

The nature and extent of the uncertainties as at 30.7.81 were known to Merretts. The broad nature and extent of the uncertainties as at 30.7.81 included the following.

(a) As to uncertainties disclosed by materials dated prior to 1.1.81 in Merretts' possession see the chronology. The AWP was established in 1980 - see the letter dated 5.8.80.

(b) As at 10.2.81 (Merretts only) a letter from the AWP to active underwriters stated that during the past year the number of cases in suit has increased from about 5,500 to in excess of 8,000 and at this stage it is not possible to project how many more claims will be filed.

(c) As at April 1981 an attorney's report referred to asbestos in public schools and added that this creates an additional potential plaintiff pool of many millions. Possibly more important are the potential property damage claims by school districts in order to make school buildings once again "safe". The same report stated that an Illinois jury has recently awarded $500,000, $375,000 of that punitive, to the spouse of an asbestos worker in a law suit based on loss of consortium. This appears to be the first award of punitive damages in an asbestos suit and, if indicative of a trend, greatly increases the potential liabilities of companies and their insurers.

(d) The Commercial Union position paper dated 12.5.81 and Dr. Selikoff's 1981 report (both Merretts only) are referred to in Mr. Ayliffe's witness statement (paragraph 59). According to Mr. Ayliffe these reports were viewed with scepticism (paragraph 60). But as the contemporary documents show there were (quite apart from the paper and the report) widely differing views.

The plaintiffs' case in respect of Ballantyne is set out in their closing submissions. Merretts accept that the writing of Ballantyne is open to criticism but they do not accept that it was negligently written for the reasons set out in their submissions.

1. I refer to the general comments on the writing of the run-off contracts set out above.

2. As to perception of asbestos-related claims at the date of this contract see above.

3. As to the US cases as at the date of this contract see Appendix 2 to this judgment.

4. As to the dispute as to the information provided at the date of placing, in the absence of evidence from Mr. Emney I am not satisfied on a balance of probabilities that any further information was provided beyond that agreed to have been provided. The true position is particularly difficult to assess in the absence of proper record keeping by Merretts and evidence from the person who scratched the risk.

5. I prefer the evidence of Mr. Neil to that of Mr. Rome in relation to this contract.

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 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 417'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 in particular IBNR loss reserves for both asbestos claims and non-asbestos claims and the methodology behind the IBNR factors.

I also refer to the detailed points made by Mr. Neil in relation to the material before Mr. Emney. The finding of negligence is made for the central reason set out above . In addition it is to be noted that there was no or no adequate system for detecting or monitoring the aggregation in 418/417 of particular risks included in the business ceded under the contract and there was inadequate reinsurance cover against the liabilities assumed.

27. THE WRITING OF THE VERRALL RUN-OFF CONTRACT

See above for perception as at 30.7.81.

The plaintiffs' case in respect of Verrall is set out in their closing submissions.

Merretts' submit that it is obvious from Mr. Emney's working paper that a view was taken as to the ultimate outturn of this contract.

It is to be noted that this contract was avoided for material non-disclosure.

1. I refer to the general comments on the writing of the run-off contracts set out above.

2. As to perception of asbestos-related claims at the date of this contract see above.

3. As to the US cases as at the date of this contract see Appendix 2 to this judgment.

4. As to the dispute as to the information provided at the date of placing, in the absence of evidence from Mr. Emney I am not satisfied on a balance of probabilities that any further information was provided beyond that agreed to have been provided. The true position is particularly difficult to assess in the absence of proper record keeping by Merretts and evidence from the person who scratched the risk.

5. I prefer the evidence of Mr. Neil to that of Mr. Rome in relation to this contract.

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 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 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 in particular IBNR loss reserves for both asbestos claims and non-asbestos claims and the methodology behind the IBNR factors.

I also refer to the detailed points made by Mr. Neil in relation to the material before Mr. Emney. The finding of negligence is made for the central reason set out above. In addition it is to be noted that there was no or no adequate system for detecting or monitoring the aggregation in 418/417 of particular risks included in the business ceded under the contract and there was inadequate reinsurance cover against the liabilities assumed.

For the avoidance of doubt I have arrived at the above finding without having any regard whatsoever to the conclusions of the arbitrators as to the writing of this contract.

28. THE WRITING OF THE FIREMAN'S FUND RUN-OFF CONTRACT

As at 13.11.81 the future development and extent of asbestos-related claims were subject to considerable uncertainty. I refer to the chronology, Appendix 1 to this judgment (which in the case of attorney's reports lists some examples of reports in Merretts' possession). As to the US cases at the above date see Appendix 2 to this judgment.

The nature and extent of the uncertainties as at 13.11.81 were known to Merretts.

The broad nature and extent of the uncertainties as at 13.11.81 included the following.

(a) As to perception at 30.7.81 see above.

(As to the Advisory Panel of Auditors meeting 10.11.81 (E&W only) see the chronology).

(b) As at November 1981 an attorney's report referred to a huge increase in the number of claims brought against one assured. As at 1.11.81, notices of a total of 4,656 claims against the assured in 28 American jurisdictions had been received. At 30.6.81 a total of 6,210 law suits involving 7,877 individual claimants had been filed against the assured. Since 30.6.81 the assured experienced an additional 300 new claims each month for a current total of approximately 9,000 claims. The report added that there are numerous well informed people who believe that the claims filed to date represent only the beginning of a potential flood of asbestos litigation.

The plaintiffs' case in respect of Fireman's Fund is set out in their closing submissions.

Merretts submit that Mr. Neil plainly thought that the Fireman's Fund broking memorandum (C9/25) was a reasonably comprehensive document. There were bound to have been discussions.

Merretts referred to the following passage in Mr. Neil's cross-examination (Day 33/43):-

Merretts accept that the writing of Fireman's Fund is open to criticism but they do not accept that it was negligently written.

Mr. Merrett accepted that the Fireman's Fund contract was the largest and most risky contract of the 11 run-off contracts (Day 18/27/16). It was suggested in cross-examination of Mr. Rome that the subsequent settlement cost the Names approximately $159m (Day 34/106/3).

Mr. Merrett said that in the 1950's and 1960's the non-marine market for casualty business was dominiated by two or three syndicates which included Sturge (Day 16/64/23).

In his witness statement Mr. Merrett said (paragraph 60 J1/1/38):-

This statement is to be contrasted with Mr. Merrett's evidence

when cross-examined (Day 16/9/10-14/11). At page 14/5 Mr.

Merrett said:-

When asked whether Mr. Rokeby-Johnson was wrong when he said in his letter dated 16.7.82 that "the content of a Lloyd's underwriter's book of business... makes it impossible to quantify the final outcome of these huge and complex claims with any degree of accuracy" Mr. Merrett said "I think, if one is addressing the Sturge syndicate uniquely, then it is a reasonable statement. I think it is an accurate statement with reference to Sturge."

It is to be noted that Mr. Mann the deputy underwriter on 799 in about September 1981 "declined to quote on the coverage (re: Sturge run-off account). He cited the asbestosis exposure and their already heavy involvement as the main reason. He pointed out that the known identified exposures to Sturge on asbestosis could easily run to excess of $40,000,000 (v. $10,000,000 currently reserved) and felt that Merretts' current exposure prevented him from exposing the syndicate to additional exposure from that source." (See the inter office memorandum dated 21.9.81 from Mr. Brown to Mr. Isom H1/367).

Thus 799 was not prepared to write this risk in about September 1981 but 417 wrote it in November 1981.

My conclusions are as follows:-

1. I refer to the general comments on the writing of the run-off contracts set out above.

2. As to perception of asbestos-related claims at the date of this contract see above.

3. As to the US cases as at the date of this contract see Appendix 2 to this judgment.

4. As to the dispute as to the information provided at the date of placing, in the absence of evidence from Mr. Emney I am not satisfied on a balance of probabilities as to the content of any further information provided beyond that agreed to have been provided. The true position is particularly difficult to assess in the absence of proper record keeping by Merretts and evidence from the person who scratched the risk.

5. I prefer the evidence of Mr. Neil to that of Mr. Rome in relation to this contract.

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 Mr. Emney. There is 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 417'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 in particular IBNR loss reserves for both asbestos claims and non-asbestos claims and the methodology behind the IBNR factors.

I also refer to the detailed points made by Mr. Neil in relation to the material before Mr. Emney. The finding of negligence is made for the central reason set out above. In addition it is to be noted that there was no or no adequate system for detecting or monitoring the aggregation in 418/417 of particular risks included in the business ceded under the contract and

there was inadequate reinsurance cover against the liabilities assumed.

In May 1982, 418/417's 1979 year of account was closed by way of an RITC into the 1980 year of account; and it was reported on by Merretts on 4th May 1982.

In the 1981 Annual Report and Accounts for 418/417 was a Note by E&W to the Accounts to the effect that the reinsurance had been calculated by the underwriter and complied with the requirements of the Council of Lloyd's.

As to the regulatory regime for the year ended 31.12.81 see above.

As at 4.5.82 the future development and extent of asbestos related claims was subject to considerable uncertainty. I refer to the chronology, Appendix 1 to this judgment (which in the case of attorneys' reports lists some examples of reports in Merretts' possession). As to the US cases at the above date see Appendix 2 to this judgment.

The nature and extent of the uncertainties as at 4.5.82 were known to Merretts and E&W, 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.

(a) As to perception/uncertainties as at 13.11.81 see above.

(b) As at November 1981 an attorney's report stated that an assured reported that it had 11,315 open 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 able to make out a prima facie cause of action, juries do find liability.

(c) 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.

(d) As at December 1981 (Merretts only) a letter from the AWP 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. 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.

(e) As at January 1982 (Merretts only) the notes of comments made at a meeting of the AWP recorded that no one knows what the real reserve situation is.

(f) As at January 1982 (E&W only) a note of a Panel Auditors Meeting recorded that policies giving rise to claims were issued between 1945 and 1975 with a certain number going back prior to 1945. The note also included the following information. There have been some 15,000 claims notified but they are increasing at the rate of 400 per month. It is difficult to guess what the final number of claims will amount to, but it was suggested that by the mid to end 1980's we should expect some 25,000 in total. (An aside by someone stated that the Prudential were guessing at a figure of 2 million claims. Mr. Nelson (a member of the AWP) said he considered this figure to be well wide of the mark). At the moment the loss reserves have been set up on a basis of an average cost per claim, based on the statistics available, of $125,000 plus expenses of $10,000 per claimant. Currently this means a total claim of $2,025,000,000. On an exposure basis 40% is with London companies and Lloyd's whereas on a manifestation basis it is 10%. As far as the IBNR factor is concerned, it is suggested that a view should be taken as to what can come forward within the next 5 to 6 years.

(g) As at February 1982 (Merretts only) a letter from the AWP to all interested underwriters stated that in view of the uncertainties of the future, it is difficult to provide any meaningful projection of the developments that are likely to take place over the coming years in regard to this problem and added that the number of claims is likely to escalate and future deterioration is inevitable.

(h) The Neville Russell letter (E&W only) dated 20.2.82 is quoted in full supra.

(i) As at March 1982 (E&W only) Mr. Nelson told a meeting of Panel Auditors that at present 400 new claims per month were being advised and that if this were projected over a 10 year basis would lead to approximately 50,000 claims. Mr. Nelson added that in his view a figure of 50,000 new claims over the next 10 years would seem to be realistic and that reports of up to 2 million new claims could well be an exaggeration. (see also Mr. Chester's remarks about run-off contracts - "funnelling of a large amount of liability into a small number of names" and "consideration was being given to asking the market to stop writing such reinsurances").

(j) As at March 1982 (E&W only) an internal letter from Mr. Bolger referred to the fact that in the White Letter accompanying this year's Lloyd's audit instructions the attention of auditors is drawn to risks which include liability for latent diseases and products liability when assessing the adequacy of reserves. Major losses under these categories have been known in the Lloyd's market for some time. The letter also stated the following. It is understood that there are 40 insureds of which 19 are direct in the London market. In respect of 15 of these, all the slips placed in the London market have been found. The total number of cases in litigation is in the region of 15,000 and this number is growing by approximately 400 per month. The product was readily available between 1945 and 1975. The pattern in Lloyd's is that up to 1962 syndicates have insured American carriers direct, and thereafter they have covered American companies by reinsurance in the London market. The size of the asbestosis problem became apparant some two years ago when it was agreed that normal assessments of settlements were not suitable. Estimates have been made on the basis of an average cost per claim together with an estimate of expenses. The average was said to be $125,000 plus $10,000 for expenses.

(k) The letter dated 18.3.82 from Mr. Randall of Lloyd's to E&W and the enclosure (a copy of Mr. Murray Lawrence's letter of 18.3.82 to all underwriting agents and active underwriters) are quoted in full in section 18 above.

The RITC for 1981 (prior to credit for the roll over policy) broke down as follows (rounded):-

The make-up of this figure is in J10/Schedule A and see Pie Chart 1.

Outstandings.

The Agency had prepared for it by Dataloyd a print out of outstanding claims (IO4). Reserves were based on recommendations from attorneys. 417 used a parallel recording system to that used by Syndicate 799. Of the reinsurance recoveries, some were automatically calculated by the computer because identification of the relevant reinsurance cover was included in the underwriting reference. Some were "manual specific" i.e. had to be based on a review by the Agency of relevant claims data and the result manually input. Recoveries in respect of aggregate losses were manually input.

From this material Mr. de Silva of Merretts prepared a summary of net outstandings by currency, classification of business (short or long tail) and year of account: D1, p.188-190. Mr. Wheatley of Merretts identified policies upon which claims or potential claims had been notified in respect of asbestosis risks, recording where applicable outstandings on a gross and net basis. Merretts also checked their records with the AWP computer records [D2/202]. Additional manual input was provided by the marine box staff in respect of those sections of the account written at the marine box. Mr. Wheatley took the syndicate's share of 100% of outstandings as reported by US attorneys (hence the reference at the RITC meeting to 417's share of the "market report figures"): p178(i). He made the necessary amendments to the IO4: page 229 and p148-174. This showed gross outstandings of $8.858m and net outstandings of $5.276m (derived from 162 policies and calculated on the higher of the exposure and manifestation bases). The details of the relevant policies are attached to the workings: D1, p.152-174. The policies were both direct policies and reinsurance policies.

For a comparison of 417 and 799's asbestosis outstandings gross and net see D1 p.178(1).

E&W reviewed outstandings: Schedule BA1(b) (J10/2) and Hill, para. 24 and p.203-4: see the Audit Programme for O.C.R. at p.203. In particular they reviewed and performed cross-checks on Mr. Wheatley's figures which produced $5.276m: see D1, p.204 and 229-233.

IBNR.

A loading of 50% was applied to total net outstandings in respect of all business as the loading for 417 as a whole: see the figures for "asbestos" and "others" under "loading" in Schedule A (J10/1): and Mr. Hulme's Schedule at D1, p.184. (The figure of £100,000 "additional" on Schedule A (J10/1) was added to cover a late discovered understatement of an outstanding on the 1973 account: D1, page 179(1)).

Pages 177-179 contain notes of the RITC meeting of 30.3.82 at which the 50% loading was agreed.

At 31.12.80 (the previous year end) the Agency had taken a 50% figure and had also added, by way of IBNR, a lump sum figure of £1m for asbestosis in respect of which there were then no outstandings, no claims in respect of asbestosis having been recorded at that date: p.177(1).

Mr. Wheatley's exercise had identified net outstandings in respect of asbestosis of $5.276m, which applying the 50% load to net outstandings, produced a load of $2,638,000 (£1.381m). What had previously been a loading unrelated to any specific asbestosis claim (none having been recorded) was now, therefore, directly related to such claims. 10 of the 12 assureds on Mr. Wheatley's list were on the list of 19 asbestos producers or manufacturers subsequently identified at D2/277 (insured either directly or by way of reinsurance of the main US carriers such as CNA, Home and Travelers). The list at D2/277 (Databank Reserves) in its heading refers to a meeting in a US attorneys' office on 8.9.92. Reference was made to "19 risks insured in the London market" at the Panel Auditors' Meeting on 15.1.82 (J7 p.87). The evidence does not establish whether the 19 risks referred to at this meeting were the same as the 19 assureds identified at D2/277.

The minutes of the RITC meeting record (D1/178(1)):

Mr. Hulme's schedule (D1, p. 184) shows that the result of using 50% as at 31.12.81. was that a deficiency of £1.97m arose on the back years. Although asbestosis reserves ($5.2 m + $2.6 m = $7.9m) were circa £4m, an increase of £3m on the previous year, the back year deficiency on reserves was only £1.97m. The AU38 showed a figure of £1.84m for the deficiency in the back year reserves.

The loadings adopted exceeded the Lloyd's percentage reserves: p.181-2.

The total reserves in respect of asbestos for 417 amounted to £4.14m of a total RITC for 418/417 of £46.93m: see J10/Schedule A. Thus asbestos reserves constituted approximately 9% of the total RITC.

The RITC is recorded in several places: e.g. p133 and 181-2. The AU 17 dated 23.4.82 signed by Merretts is at D1 p.118.

SYNDICATE 418

There is no equivalent of LUNCO in the Marine Market. Merretts kept manual records at the Box recording claims above a noting level. Information in these records was derived from (1) brokers' notifications, (2) market information, (3) settlements from LPSO and (4) reinsurance collection notes. At the end of the year the Box claims' staff prepared a summary of the claims (net of recoveries) based on these records. This summary was submitted to Mr. Merrett and the auditors. Mr. Merrett reviewed it and amended it if necessary. He had maintained over many years his own record ("the Red Book") which was multi-columned to show the development from year to year. The Red Book for 1981 is at D1, p.66-94 and a summary of it at D1, p.65. The steps taken by E&W to review outstandings are set out in Schedule BA2(b) (J10/2). The Hulme Schedule is at D1, p.29.

The Agency used the Lloyd's percentage reserves as an IBNR figure. (E&W did the relevant calculations for them). This was added to the sum of (i) outstanding claims (above a noting level) net of facultative and class X/L reinsurances (but no other); and (ii) 25% of specific reinsurance recoveries (a figure determined by the Agency which had been used in previous years) to allow for the potential irrecoverability of reinsurance. In other words they allowed for only 75% recovery under the reinsurances.

The precise make up of the RITC is shown at D1, p.28. D1, page 63 has a summary of the gross claims and the claims net of facultative reinsurance. D1, page 62 calculates the 25% add-back. In addition there was a specific loading for asbestos, which at the RITC meetings is referred to as $500,000, but was in the event $250,000: D1, p.57: item 3(a).

The Notes of the RITC Meeting are at D1, p.27.

Syndicate 418's 1979 account made an underwriting profit of £4.86m including a surplus from the years reinsured into that account (as appears from D1, p.29: see the figure of £3.5m under the first "Total").

The AU17 Certificate for 418 is at A(A)(1) Tab 28.

By 31.12.81 the following 4 run-off contracts had been written into the following years of account: 

Of these only Provincial fell to be considered as a constituent of the RITC as at 31.12.81. No claim on that appeared in the claims box summary or in the Red Book. The outstandings in relation to Provincial as at 31.12.81 were $802,852. The application of Lloyd's audit minima percentages applied to the Provincial premium produced a loading of $254,758 which was included in the overall IBNR for 418.

E&W requested Merretts to complete what was referred to as the Latent Disease Questionnaire in respect of both 417 and 418: D1, page 22 (- enclosure to E&W letter of 17.2.82 D1, page 20 which drew attention to clause 3(iii) of the Lloyd's white letter dated 1.2.83). Mr. Merrett's response for 417 stated inter alia, that:

Mr. Merrett's response for 418 stated:

E&W's stop loss reinsurance questionnaire (D1, p.252-3) asked whether Syndicate 418/417 (inter alia) had written whole account stop loss insurance in excess of 1% of the NPI of the Syndicate. Mr. Merrett's response was no - D1, p.145; and E&W reported accordingly with form AU.38: p135.

1. Merretts failed to comply with the guideline in paragraph 6 of Mr. Lawrence's letter -

Merretts failed to advise E&W of the Universal, Ballantyne and Verrall contracts (as to Provincial see below) and also failed to consider whether the open year reserves should be increased.

2. Merretts failed to comply in relation to the Provincial, Universal, Ballantyne and Verrall run-off contracts with clause 3 (iii) (c) and (d) of the Solvency/White Letter dated 1.2.82 (J5/55)-

3. Merretts' replies to the Latent Diseases Questionnaire were seriously misleading. In the case of 418 (D1/254) Merretts failed to inform E&W that a loss had been notified in the sum of $802,852 in respect of Provincial and failed to identify 418's exposure pursuant to the Universal and Verrall contracts. Merretts' answer in relation to 417 (D1/146) failed to identify 417's exposure pursuant to the Ballantyne contract.

(See also Merretts' answer on the Form Au17).

4. 418 subscribed to 50% of the Provincial contract. Its share of outstandings for the Provincial contract at 31.12.81 was $802,852. The contract was reserved at Lloyd's Audit minima - $254,758. There was no amount for Provincial included in the outstandings. Had the Provincial contract been reserved on the basis adopted for 417 (ie an uplift of 50%) this would have produced $1,204,278. The difference between the Lloyd's Audit minima reserve and the amount which would have been reserved on the basis adopted for 417 is $949,520.

5. It is unclear on the evidence as to the extent to which

Merretts complied with the guideline in paragraph 3 of Mr. Murray Lawrence's letter -

(a) Merretts

It is important to remember that the plaintiffs' case is that year 1 should have been left open (and no alternative case is advanced that if year 1 was to be closed it should only have been closed at a higher premium than that in fact adopted).

I do not consider that in all the circumstances Merretts' decision to close year 1 was a decision that no reasonably well-informed and competent underwriter/managing agent could have made. I so find inter alia for the following reasons and having regard to the following circumstances:-

1. Asbestos-related claims

The perception of asbestos personal injury and property damage claims is considered separately at each of years 1 to 6. These 6 sections of the judgment show the developing problem. The position as at year 1 should be contrasted with the position in subsequent years. As to perception as at 4.5.82 see above. The approximate number of personal injury claims/claimants as at 4.5.82 is there stated. Property damage claims were at a relatively early stage.

418/417's incurreds in respect of asbestos claims (main account) in year 1 were $5.276m.

2. Pollution claims

Merretts carried reserves in respect of Love Canal from 1979. As to the relevant legislation see the chronology, Appendix 1 to this judgment. CERCLA was passed in 1980. The Shell claim (see below) was first notified in October 1983. By year 4 pollution claims were recognised to be the next major problem for the market. The perception of pollution claims in year 4 is to be contrasted with perception in prior years. In year 1 the only substantive pollution claim in existence was Love Canal.

3. The Run-Off Contracts

In year 1 only the Provincial run-off contract fell to be considered as a constituent of the RITC as at 31.12.81. The figure of $1,204,278 (£630,512) see above, should be contrasted with the RITC premium in fact set for 418/417 of £47m.

4. The Plaintiffs' criticisms

As to the plaintiffs' criticisms of Merretts as at year 1, I have already held that some of these are well-founded (see above). The list of criticisms set out above does not purport to be exhaustive. However I do not consider that the criticisms that can be made of Merretts in year 1 lead to the conclusion that year 1 should have been left open.

The plaintiffs advance 7 principal criticisms of Merretts.

As to the first, I do not consider that no attempt whatsoever was made to calculate an IBNR loading to infinity for asbestosis claims. While there are criticisms which can be made of Merretts' approach and while I should not be taken to accept that the RITC as at year 1 received the attention that it should have received from Merretts, it does not follow that year 1 could not have been competently closed.

As to the second principal criticism (there was no justification for the use of the 50% loading in respect of asbestosis claims), Mr. Murray Lawrence's letter in referring to an "IBNR loading" and "the appropriate IBNR percentage" (paragraph 5) reflected the then practice of the market as to percentage loadings for IBNR. I should not be taken to accept that 50% was in all the circumstances the appropriate load for year 1 in respect of asbestosis claims, but the plaintiffs have tied their case to the question whether or not the year could properly have been closed, as opposed to the quantum of the load.

As to the third principal criticism (no consideration was given to leaving the 1979 account open) I consider that the decision to close the year involved implicit consideration of the alternative.

As to the fourth principal criticism (whole account stop loss) in view of the conflicting evidence as to the true meaning of this expression, I disregard this point.

As to the fifth principal criticism (see the response to the first and second principal criticisms above).

I have dealt with the sixth principal criticism above.

(b) E&W

As to E&W in year 1 it is important to remember that E&W were seriously misled by Merretts as to the run-off contracts (see criticisms 1-4 under the heading 'Some Criticisms of Merretts in Year 1' above). Further the case against E&W in year 1 must be judged in the light of their perception of asbestos-related claims as at 4.5.82 (see above).

It follows from my conclusions in relation to Merretts, that the plaintiffs' claim against E&W in respect of year 1 must also fail. It is accordingly unneccesary to consider the plaintiffs' detailed criticisms of E&W in year 1. Although I have noted that Mr. Attwood's standards in years 1 to 3 may to some extent be above the reasonable average, I accept Mr. Attwood's central contentions as to the need for appropriate audit evidence. I should not be taken to accept that E&W's audit approach and work in year 1 is not open to criticism. The plaintiffs have however tied their case to the question whether or not the year could properly have been closed, as opposed to the quantum of the premium. I do not consider that the plaintiffs have established that E&W should have disclaimed an opinion on the grounds of fundamental uncertainty in year 1.

30. THE WRITING OF THE DOLLING-BAKER, TOOMEY, GOODA AND HUMM RUN-OFF CONTRACTS

As at the above dates the future development and extent of asbestos-related claims were subject to considerable uncertainty. I refer to the chronology, Appendix 1 to this judgment (which in the case of attorneys' reports lists some examples of reports in Merretts' possession). As to the US cases at the above date see Appendix 2 to this judgment.

The nature and extent of the uncertainties as at the above dates were known to Merretts. As to perception as at 4.5.82 see above.

The plaintiffs' case in respect of Dolling-Baker is set out in their closing submissions.

Merretts' submit that it is obvious that there was significant non-disclosure in respect of the Dolling-Baker contract. When cross-examined Mr. Neil said (Day 33/50) that he would criticise the Dolling-Baker syndicate for the removal of paragraph 4 from C/13/50.

Further Merretts accept that the writing of Dolling-Baker is open to criticism but they do not accept that it was negligently written.

1. I refer to the general comments on the writing of the run-off contracts set out above.

2. As to perception of asbestos-related claims at the date of this contract see above.

3. As to the US cases as at the date of this contract see Appendix 2 to this judgment.

4. As to the dispute as to the information provided at the date of placing, in the absence of evidence from Mr. Emney I am not satisfied on a balance of probabilities that any further information was provided beyond that agreed to have been provided. The true position is particularly difficult to assess in the absence of proper record keeping by Merretts and evidence from the person who scratched the risk.

5. I prefer the evidence of Mr. Neil to that of Mr. Rome in relation to this contract.

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 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 417'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 in particular IBNR loss reserves for both asbestos claims and non-asbestos claims and the methodology behind the IBNR factors.

I also refer to the detailed points made by Mr. Neil in relation to the material before Mr. Emney. The finding of negligence is made for the central reason set out above. In addition it is to be noted that there was no or no adequate system for detecting or monitoring the aggregation in 418/417 of particular risks included in the business ceded under the contract and there was inadequate reinsurance cover against the liabilities assumed.

The plaintiffs' case in respect of Toomey is set out in their closing submissions.

Merretts point to Mr. Neil's answers in cross-examination (Day 33/56/66) but these are to be contrasted with his evidence in re-examination (Day 34/22). Merretts submit that Toomey was on the border (and should not be regarded as being negligent).

In a letter dated 31.1.89 (C15/241 at 243) Mr. Toomey wrote:-

My conclusions are as follows:-

1. I refer to the general comments on the writing of the run-off contracts set out above.

2. As to perception of asbestos-related claims at the date of this contract see above.

3. As to the US cases as at the date of this contract see Appendix 2 to this judgment.

4. As to the dispute as to the information provided at the date of placing, in the absence of evidence from Mr. Emney I am not satisfied on a balance of probabilities that any further information was provided beyond that agreed to have been provided. The true position is particularly difficult to assess in the absence of proper record keeping by Merretts and evidence from the person who scratched the risk.

5. I prefer the evidence of Mr. Neil to that of Mr. Rome in relation to this contract. I have paid careful regard to Mr. Neil's evidence in cross-examination and re-examination referred to above.

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 Mr. Emney. There was a manuscript schedule C/15/4/43 giving "loadings for IBNR" on 1966-1970 accounts as at 31.12.77-80 inclusive but not as at 31.12.81 - see in this connection C15/241 at 243. 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 417'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 in particular up-to-date IBNR loss reserves for both asbestos claims and non-asbestos claims and the methodology behind the IBNR factors.

I also refer to the detailed points made by Mr. Neil in re-examination as to the material before Mr. Emney. The finding of negligence is made for the central reason set out above. In addition it is to be noted that there was no or no adequate system for detecting or monitoring the aggregation in 418/417 of particular risks included in the business ceded under the contract and there was inadequate reinsurance cover against the liabilities assumed.

The plaintiffs' case in respect of Gooda is set out in their closing submissions.

Merretts accept that the writing of Gooda is open to criticism but they do not accept that it was negligently written for the reasons set out in their submissions.

1. I refer to the general comments on the writing of the run-off contracts set out above.

2. As to perception of asbestos-related claims at the date of this contract see above.

3. As to the US cases as at the date of this contract see Appendix 2 to this judgment.

4. As to the dispute as to the information provided at the date of placing, in the absence of evidence from Mr. Emney I am not satisfied on a balance of probabilities that any further information was provided beyond that agreed to have been provided. The true position is particularly difficult to assess in the absence of proper record keeping by Merretts and evidence from the person who scratched the risk.

5. I prefer the evidence of Mr. Neil to that of Mr. Rome in relation to this contract.

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 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 417'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 in particular IBNR loss reserves for both asbestos claims and non-asbestos claims and the methodology behind the IBNR factors.

I also refer to the detailed points made by Mr. Neil in relation to the material before Mr. Emney. The finding of negligence is made for the central reason set out above. In addition it is to be noted that there was no or no adequate system for detecting or monitoring the aggregation in 418/417 of particular risks included in the business ceded under the contract and there was inadequate reinsurance cover against the liabilities assumed.

The plaintiffs' case in respect of Humm is set out in their closing submissions.

Merretts accept that the writing of Humm is open to criticism but they do not accept that it was negligently written for the reasons set out in their submissions.

1. I refer to the general comments on the writing of the run-off contracts set out above.

2. As to perception of asbestos-related claims at the date of this contract see above.

3. As to the US cases as at the date of this contract see Appendix 2 to this judgment.

4. As to the dispute as to the information provided at the date of placing, in the absence of evidence from Mr. Emney I am not satisfied on a balance of probabilities that any further information was provided beyond that agreed to have been provided. The true position is particularly difficult to assess in the absence of proper record keeping by Merretts and evidence from the person who scratched the risk.

5. I prefer the evidence of Mr.Neil to that of Mr. Rome in relation to this contract.

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 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 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 in particular IBNR loss reserves for both asbestos claims and non-asbestos claims and the methodology behind the IBNR factors.

I also refer to the detailed points made by Mr. Neil in relation to the material before Mr. Emney. The finding of negligence is made for the central reason set out above. In addition it is to be noted that there was no or no adequate system for detecting or monitoring the aggregation in 418/417 of particular risks included in the business ceded under the contract and there was inadequate reinsurance cover against the liabilities assumed.

31. THE WRITING OF THE BURDETT RUN-OFF CONTRACT

As at 28.7.82 the future development and extent of asbestos-related claims were subject to considerable uncertainty. I refer to the chonology, Appendix 1 to this judgment (which in the case of attorneys' reports lists some examples of reports in Merretts' possession). As to the US cases at the above date see Appendix 2 to this judgment.

The nature and extent of the uncertainties as at 28.7.82 were known to Merretts. As to perception at 29.6.82 see above. Further as at July 1982 a letter from Mr. Rokeby-Johnson of Sturge to Winchester Bowring (not seen by E&W until later see below) stated:-

The plaintiffs' case in respect of Burdett is set out in their closing submissions.

The plaintiffs' accept that in the case of Burdett Mr. Emney did have the cedant's/its auditors' assessment of the IBNR.

Merretts accept that the writing of Burdett is open to criticism but they do not accept that it was negligently written.

1. I refer to the general comments on the writing of the run-off contracts set out above.

2. As to perception of asbestos-related claims at the date of this contract see above.

3. As to the US cases as at the date of this contract see Appendix 2 to this judgment.

4. As to the dispute as to the information provided at the date of placing, in the absence of evidence from Mr. Emney I am not satisfied on a balance of probabilities that any further information was provided beyond that agreed to have been provided. The true position is particularly difficult to assess in the absence of proper record keeping by Merretts and evidence from the person who scratched the risk.

5. I prefer the evidence of Mr. Neil to that of Mr. Rome in relation to this contract.

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 Mr. Emney. Despite the fact that Mr. Emney did have the cedant's/its auditor's assessment of the IBNR 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 417's ultimate net retained potential liability under the contract. Mr. Emney failed to obtain all the information referred to in paragraph 187 of Mr. Neil's report including in particular the methodology behind the IBNR factors. I refer to the detailed points made by Mr. Neil in relation to the material before Mr. Emney (see J2 and J3 of his report). The finding of negligence is made for the central reason set out above. In addition it is to be noted that there was no or no adequate system for detecting or monitoring the aggregation in 418/417 of particular risks included in the business ceded under the contract and there was inadequate reinsurance cover against the liabilities assumed.

32. THE WRITING OF THE JUDD RUN-OFF CONTRACT

As at 29.12.82 the future development and extent of asbestos-related claims were subject to considerable uncertainty. I refer to the chronology, Appendix 1 to this judgment (which in the case of attorneys' reports lists some examples of reports in Merretts' possession). As to the US cases at the above date see Appendix 2 to this judgment.

The nature and extent of the uncertainties as at 29.12.82 were known to Merretts. As to perception at 28.7.82 see above. Further:-

(a) As at September 1982 a report by Conning & Co. (Merretts only) which is referred to in Mr. Ayliffe's statement stated:-

(b) As at December (Merretts only) 1982 an article by Mr. David

Mann Director MSL in Lloyd's List stated:-

(c) As at December 1982 an attorney's report stated the following in respect of two class action suits pending against GAF and numerous other defendants filed in Pennsylvania. The actions allege property damage caused by the presence of asbestos materials in schools and other public buildings. The class actions are in the very early preliminary stages and we are at this time unable to evaluate the overall merits of the actions, the potential damages, or the assured's possible exposure. The property damage claims cannot be reflected in the Claims Information System which is established for bodily injury claims, and separate reserve provisions for the property damage claims will be established.

The plaintiffs' case in respect of Judd is set out in their closing submissions.

The plaintiffs accept that in the case of Judd Mr. Emney did have the cedant's/its auditors' assessment of the IBNR.

Merretts submit that Mr. Neil's criticism of the Judd contract is particularly misplaced. Mr. Emney had the following protection:-

(a) The assessment of the cedant's RITC;

(b) A buffer of 50% excess the RITC;

(c) The time value of money from the time when the payment was made until the excess point was reached, if at all; and

(d) The benefit of an underlying run-off protection in respect of asbestos losses underwritten by Mr. Outhwaite for 33_%.

1. I refer to the general comments on the writing of the run-off contracts set out above.

2. As to asbestos-related claims at the date of this contract see above.

3. As to the US cases as at the date of this contract see Appendix 2 to this judgment.

4. As to the dispute as to the information provided at the date of placing, in the absence of evidence from Mr. Emney I am not satisfied on a balance of probabilities that any further information was provided beyond that agreed to have been provided. The true position is particularly difficult to assess in the absence of proper record keeping by Merretts and evidence from the person who scratched the risk.

5. I prefer the evidence of Mr. Neil to that of Mr. Rome in relation to this contract.

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 Mr. Emney. Despite the fact that Mr. Emney did have the cedant's/its auditor's assessment of the IBNR 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 417's ultimate net retained potential liability under the contract. Mr. Emney failed to obtain all the information referred to in paragraph 187 of Mr. Neil's report including in particular the methodology behind the IBNR factors. I refer to the detailed points made by Mr. Neil in relation to the material before Mr. Emney (see K4, K5 and K6 of his report). The finding of negligence is made for the central reason set out above. In addition it is to be noted that there was no or no adequate system for detecting or monitoring the aggregation in 418/417 of particular risks included in the business ceded under the contract and there was inadequate reinsurance cover against the liabilities assumed.

33. YEAR 2 : THE CLOSURE OF 1980 INTO 1981 AS AT 31.12.82 (MERRETTS' AND E&W'S REPORTS DATED 4.5.83).

In May 1983, 418/417's 1980 year of account was closed by way of an RITC into the 1981 year of account; and it was reported on by Merretts on 4th May 1983.

In the 1982 Annual Report and Accounts for 418/417 was a Note by E&W to the Accounts to the effect that the reinsurance had been calculated by the underwriter and complied with the requirements of the Council of Lloyd's.

As to the regulatory regime for the year ended 31.12.82 see above.

As to developments and changes in perception in previous years see above.

As at 4.5.83 the future development and extent of asbestos-related claims were subject to considerable uncertainty.

I refer to the chronology, Appendix 1 to this judgment (which in the case of attorneys' reports lists some examples of reports in Merretts' possession). As to the US cases at the above date see Appendix 2 to this judgment.

The nature and extent of the uncertainties as at 4.5.83 were known to Merretts and E&W, 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 4.5.83 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.

(a) As at January 1983 (Merretts only) a press release agreed at a meeting of the Asbestos Claims Council referred to 20,000 claims pending and tens of thousands mor