Ontario Court of Justice, General Division, Commercial Court, Toronto, Canada September 27, 1994

Between: Hongkong Bank of Canada, et al, Plaintiffs and Anne Hendrie et al, Defendants

Excerpts from the proceedings:

Evidence of Ian Richard Posgate

Examination-in-chief by Mr. Lenczner

Pages 6-12; 18-20; 22-30; 32-39; 40-41.


Mr. Posgate was one of the most successful underwriters in the 300-year history of Lloyd's. Posgate dealt almost exclusively in "marine" or maritime insurance, whereas almost all asbestos claims were levied against "non-maritime" syndicates at Lloyd's. Posgate was elected to Lloyd's ruling Committee in 1982, and subsequently also served on the Council of Lloyd's. He thus became more knowledgeable about the asbestos crisis at Lloyd's than he might ever have intended himself to be. The defense put forth great effort—more than is quoted below—to limit Mr. Posgate's testimony to what went on to his own syndicates and his personal knowledge. The intent in limiting the scope of Posgate's statements was to avoid admission into the record of any description by Posgate of how widespread the same or similar fraudulent practices were at Lloyd's, and how they were known to exist, allowed, and even encouraged by the Committee and then (after 1982) the Council of Lloyd's.

("Q"): Mr. Lenczner, Queen's Council for Defendants

("A"): Mr. Posgate

  1. Did you become aware of an asbestos problem facing Lloyd's in the early 1980's?
  1. In 1980, yes, sir.
  1. All right, and what was your knowledge of the magnitude of the problem?
  1. The possibility was that it may become vast.
  1. And how did Lloyd's deal with that problem?
  1. They formed a working party called the asbestosis working party. I think the letter went to all Names in 1980—or all agents rather.
  1. All agents?
  1. All agents.

[The external Names did not know of the Asbestos Working Party until 1990-91, when they learned that the working party had sent a letter, dated August 5, 1980, to the Committee recommending that the syndicates with asbestos liability should set aside reserves of $75,000 per anticipated claimant.]

  1. And was the formation of a working party a usual or unusual event over your career at Lloyd's?
  1. It was an unusual event. I can only recall myself being connected with one other which was the computer leasing working party, only one of them.
  1. Were you on the computer leasing working party?
  1. I was, sir.

. . . . . .

  1. And this is a letter of February 24, 1982 from the chartered accountants Neville Russell to Lloyd's. Have you read this letter, sir?
  1. Yes, I have, sir.
  1. Were you aware of this letter in 1982?
  1. I was aware of the letter although I did not see the letter, sir.
  1. All right. And by February 24, 1982, I understand you were on the Committee of Lloyd's.
  1. Yes, sir.
  1. Now this letter, which we've all seen many times before, says in the second paragraph, the panel auditors say to Lloyd's that the syndicates are unable to quantify their final liability with a reasonable degree of accuracy and then sets out the reasons. Then in the last paragraph it says:

"The audit instructions require that if there are any factors which may affect the adequacy of the reserves, then the auditor must report to the Committee and obtain their instructions. . ."

Was this letter brought before the Committee of Lloyd's?

  1. No, it was not, sir. It would have been dealt with by the "O" group of Lloyd's.
  1. And who is on the "O" group at Lloyd's?
  1. "O" group at Lloyd's is the chairman, which at that time was Sir Peter Green, the senior deputy and junior deputy, and that was Mr. Murray Lawrence and Mr. Tim Brennan, and the chief executive officer, Mr. Hodges (phonetic), and other members of the permanent staff such as the manager of the audit department.
  1. And that was Mr. Randall in those days?
  1. In those days, it was Mr. Randall, yes, sir.
  1. Now, sir, the letter ends off this way on February 24:

"We consider that the impossibility of determining the liability in respect of asbestosis falls into this category and we accordingly ask for your instructions in this respect."

[The auditors' specific instructions were to report to the Committee. However, the "O" sub-group did not let copies of Neville Russell's letter go beyond themselves and they, not the auditors, "reported" what they wished of its contents to the Committee. This was in strict terms a violation of Lloyd's byelaws, by an insider "committee within" the Committee composed of the Lloyd's highest-rank executives—and clear evidence that the fraud was perpetrated "from the top down". The Committee knew less than the O-group, the agents and underwriters knew less than the Committee, and the Names were told nothing at all—except those with inside connections, who either quietly resigned, or shifted to known "safe" syndicates.]

. . . . . . . . . .

  1. Mr. Posgate, go back then please, if you wouldn't mind, to page 32. This is the letter of March 18, 1982 from Murray Lawrence to the deputy chairman headed "Asbestosis, Lloyd's Audit at 31st December, 1981". Did you get a copy of this letter at the time, sir?
  1. I received all directives of agencies, and I was the director of two agencies, and received copies of this letter, sir.
  1. All right. Is this the instruction that Murray Lawrence was giving in response to the auditor's letter?
  1. It is the follow-up instruction from Mr. Neville Russell's—or Mr. Alan Dyer's letter from Neville Russell to the audit committee.
  1. All right. In the instruction—well, can you in your own words tell us what the instruction accomplishes?
  1. What the instruction says is that you either have to quantify the asbestosis claims and collect them or if you can't quantify the asbestosis claims, you have to leave the syndicate open.
  1. All right. You mentioned quantifying the asbestosis claims and collect them. If the claims don't fall in for a period of years but you can quantify them today, do you have to collect the monies today according to Lloyd's rules?
  1. This is the problem of Lloyd's rules which operate on a sole trader basis for one year at a time. If a claim is announced and is not payable for ten years, it has to be collected then.

[That is, collected at the time the claim is announced. Known ("incurred but not reported") claims were not announced, nor were they reserved for (reserving would "announce" their existence, obviously), nor were the syndicates left open (this also obviously would reveal their existence). As emerges in the following testimony, Lloyd's Committee/Council not only abdicated all exercise of their mandated regulatory obligations to control or prevent this practice; they let that abdication be known such as to encourage fraudulent practices by their members' agents and managing agents.]

. . . . . . . . .

Pages 18-20

  1. What is the function of the Committee and Council of Lloyd's?
  1. To regulate Lloyd's and—well to regulate and to govern Lloyd's.
  1. And you've mentioned to us the two rules about accounts, that either you take the reserves or you leave your years open. Are those rules of Lloyd's covered by the byelaws of Lloyd's?
  1. Yes, they are, sir. When—if you don't leave your syndicate open, if you take the reserve, that reserve has to be called for and paid by the Names.
  1. All right. Were either of those two rules followed in 1982 for asbestosis?
  1. For asbestosis, no, sir.

[The ‘Asbestos Working Party' had reported to the Committee on the coming asbestos claim losses, and Neville Russell had notified them the losses could not be quantified. The Committee as knowledgeable regulating body should have ordered the managing agents to either reserve adequately, or leave the (1979) year open. Since, however, as Neville Russell had told them, claims could not be quantified, and hence adequate reserves could not be determined, the agents would have had to leave the year open on all the syndicates exposed to asbestos claims. This would have:

(a) announced the coming losses; and

(b) announced that no one knew just how bad the losses were going to get; and

(c) committed the fortunes of every Name in those syndicates—a "who's who" list of the English upper class and nobility—to paying those claims for the next thirty years and more; and besides (d) discouraged any future investment by Lloyd's present or potential members.

In other words, Lloyd's would have been bankrupted. The Committee chose moral bankruptcy instead, and sent the managing agents a general letter (discussed in testimony below) "instructing" them they should reserve adequately or leave their syndicates open, but leaving it up to the agents to do as they saw fit. Meanwhile the Committee let it be known that they were going to look the other way. Lloyd's Committee did not fully inform even their own agents how bad the situation really was, let alone the external Names.]

. . . . . . . . . .

  1. With respect to asbestosis, you've already told us, because you were also a Names' agent and you put Names on a lot of syndicates, that reserves were not called for for asbestosis, is that correct?
  1. Yes, sir.
  1. All right. Do you know whether the asbestosis syndicates left their 1979 year of account open?

[Mr. Glezos objects, and there is brief discussion, ending with the Court saying: "The question was, does he know, and he can answer that. Either he knows or does not know."]

  1. It is my personal knowledge that no asbestosis syndicate was left open, my personal knowledge.
  1. All right. Now, you were involved with discussion amongst other Council and Committee members as to how to deal with this problem?
  1. Yes, sir. . .

[Another question's phrasing is objected to, proper phrasing decided, and then the questions go on.]

  1. Was disclosure made by the Committee of Lloyd's that the syndicates had not left their 1979 year open? Was disclosure made to the Names?
  1. No disclosure was made, sir, in '82 or '83.
  1. Was disclosure made to the Names that no reserves had been taken for asbestos liabilities for the 1979 or 1980 years?
  1. That is not quite correct, sir, for some reserves had been taken.
  1. All right.
  1. If I'm to speak of my own syndicates, some reserves were taken each year.
  1. And for the—I think you told us that for the asbestos syndicates, no reserves were taken.
  1. I can't speak of the other syndicates. I can only tell you that my decision was to do it gently over ten years.
  1. All right. Did you have a discussion with any other member of the Committee or Council as to a recommendation that you were making or a view that you were taking as to how to solve this problem?
  1. Yes, sir.
  1. And what did you say?
  1. That it would be dealt with gently over a period of ten years when we would have greater knowledge of the amount of the claim.
  1. All right.
  1. And it could be dealt with quietly rather than the collection of a very large sum at the end of 1981.
  1. If you had collected in a very large sum at the end of 1981, from which Names would you have had to collect that large sum from?
  1. It would have been the 1979 Names.
  1. Now, by dealing with the problem gently over ten years, on whom would the liabilities as they fell in fall upon?
  1. '79, '80, '81, '82, '83, '84, '85, '86, '87, '88.





  1. Did other members of the Council agree or disagree with the view that you have just put forward?

[Objection was raised and sustained, again avoiding any actual statement of what the Council and/or other syndicates said and did. Quite a few of the other syndicates did not even take Posgate's supposedly "gentle" approach, opting to neither reserve for the asbestos liabilities nor leave open years. Some did so deliberately. Some did so by ignoring the obvious. This latter sort of ignorance (accent on the second syllable) is as inexcusable as any deliberate wrongdoing.]

  1. In the result, what was done by the Committee? Did they take any action, the Committee or Council of Lloyd's in 1982?
  1. They took no action, sir.

[It should be remembered that each Name's unlimited liability was "several" (based on the verb "to sever" meaning to cut, or separate from)—i.e. each Name was only liable for their share in the total risk and no one else's. Besides that, each syndicate year was a discrete business entity with separate books, such that each one of an individual Name's participations in Lloyd's insurance was distinct from the others, be it in various syndicates in a given year, or in different years of account on the same syndicate. Suppose a Name participated in two different syndicates, "A" and "B", and that A lost money whereas B showed a profit. Syndicate "A" could not call on syndicate "B" for the money to cover the Name's share of A's losses; it could only "call" on the Name.

Consequently, Lloyd's syndicates could not legally "stair-step" (build up) reserves against coming losses over a period of years. According to Lloyd's own byelaws, the stair-stepping took money and/or liabilities that rightfully pertained to one business and its Names (the closing year) and gave it to another (the next year). Posgate's method of "reserving gently" built up better—though still grossly inadequate— reserves. It also, however, spread the liabilities belonging to one year of account and its Names over nine other years (which the other nine hardly saw as "gentle"); and it took money (which, in the absence of disclosure of the coming losses, "rightfully" belonged to the Names of the closing year) and gave it to a separate business. Lloyd's as a regulating body directly participated in this practice, by gradually increasing their minimum reserve recommendations for the syndicates over that same ten-year period. The Names, as Posgate has made plain, were told nothing, neither by the Committee nor by their agents.]

. . . . . . . . . .

  1. Are you knowledgeable about the LMX spiral?
  1. Yes, sir.
  1. And can you tell us what it is and how it operates? . . .
  1. Can you tell us your understanding of how the spiral operated?
  1. The spiral is not reinsurance but retrocessional business. A retrocession is reinsurance of a reinsurance. Everyone in the market—or originally everyone in the market wrote direct business and reinsured. The spiral is developed when a reinsurer reinsures, that becomes retrocessional business because no details are given of a retrocession. So it forms part, then, of a pyramid which circles around Lloyd's and becomes akin to arbitraging or churning.

THE COURT: Or what?

  1. Churning.
  1. And do you know the reasons why the LMX spiral came into being at Lloyd's?
  1. Lloyd's, to combat the asbestosis claims, needed to take more Names and write more business. But the direct business coming into Lloyd's between 1980 and 1990 remained at approximately 4 billion each year, a slight decrease in the marine business and a slight increase in the motor business. As it took more Names, it needed to write more business. Pyramid selling or arbitrage had the effect of creating an illusion of more premium income. It did, of course, one other thing where Lloyd's was getting into a problem.

When I started underwriting at Lloyd's, the expenses at Lloyd's were approximately 15 per cent whereas the expenses of a company would be 30 per cent. In the 80's the expenses of Lloyd's had gone between the assured and the Name to 34 per cent, in that Lloyd's was then more expensive than companies. So by taking more Names, more business, even if it were arbitrage business, you reduced the level of expenses.

[That is, reduced the percentage it cost the Name to do business. Over the years, Lloyd's agents, underwriters, and their brokers, besides hiding the coming losses, had more than doubled their bite of the apple, maximizing their own profits in the interim before the losses hit—and of course minimizing the profits of the very Names who would be cash-called to pay up when the losses eventually arrived at Lloyd's. The sheer scale of the greed and the callousness, including the number (thousands!) of people involved, sometimes lends a sense of unreality to the cold, hard facts. Were it not documented, it would be seriously hard to believe that that many people, of that social stature (we are talking about the English "nobility", after all) could stoop so low at the same time.]

  1. And, sir, if any of the banks involved in this action had approached you for an explanation or clarification of the LMX spiral, would you have agreed to provide such explanation?
  1. Of course I would, sir.
Thank you. Those are my questions. [The following are questions by Mr. Casey, after his asking Mr. Posgate if he thought reserving over ten years, as described above, was the prudent thing to do, which Mr. Posgate answered in the affirmative. The questions concern Mr. Murray Lawrence's letter to the deputy chairman, headed "Asbestosis, Lloyd's Audit at 31st December, 1981", which was copied to the syndicate managing agents, instructing them to either quantify the (incurred but not reported) asbestosis claims and collect them or leave the syndicate open for that year (1979). The Committee at the same time let it be known through the "insider" grapevine that it wished the 1979 years of account to be closed.]
  1. Would you agree with me that as of March of 1982 this was also a prudent approach to take, what is set out in this letter?
  1. It was a letter that had to be written.
  1. And it had to be written because Lloyd's has overall responsibility to manage Lloyd's.
  1. It was a protective letter that had to be written even if no one was going to honour it.
  1. It was Mr. Lawrence's obligation to say these things.
  1. Mr. Lawrence was the deputy chairman in charge of this and he was also of course a senior underwriter, his being one of the largest asbestosis syndicates.
  1. And there's nothing in this letter, sir, that you disagree with?
  1. It is according to the rules and there is nothing I could disagree with.

[Lloyd's thus had it on record that they had told the managing agents exactly the opposite of what Lloyd's was allowing, and in fact encouraging, the agents to do, as discussed above. Mr. Casey then takes the questioning to Lloyd's in-house inquiry into the LMX spiral in 1992, headed by Sir David Walker, with Sir William Clarke, John Lock, Peter Mynors, and Leslie Lucas.]

  1. And as far as you're concerned, those are knowledgeable, honourable men?
  1. Well the chief executive of the Mercantile & General, that company no longer writes business; the Norwich Winterthur has gone, I think, into run-off. I wouldn't agree, sir; that's why I didn't give evidence.
  1. You don't consider these people to be honest, honourable men?
  1. Oh, they are totally honest, sir, totally honest. I think they have no experience, which is why they were chosen with regards to the Lloyd's LMX spiral.

[Perhaps only an Englishman could find such a roundabout way to say "ignorant", "incompetent" and "used" about these men—who then, their usefulness at an end, were allowed to go under.]

  1. So would you agree with me, Mr. Posgate, that there are differing opinions as to the causes and the results of the LMX spiral?
  1. Why would there be—I don't think there would be any differences on the causes.
  1. Let's just explore that, shall we? Can you go to paragraph 1.2 [of the committee's report]. It says:

"The committee did not in its own investigations form a view that there was any fraud or conspiracy to disadvantage particular groups of Names or to advantage others. The committee was mindful that the losses sustained on LMX business were not confined to Lloyd's syndicates; as a result of underwriting judgments similar to those made by loss-making syndicates, a number of corporate reinsurers also lost substantial sums on their LMX exposure."

Let's start there. Do you agree or disagree?

  1. I absolutely disagree with the first sentence of that.
  1. So you're of the view that there was some fraud or conspiracy?
  1. There were very clearly—I don't know whether I'm allowed to say this so—

[How he can answer is discussed among the attorneys and the judge. The rules of evidence were (again) used to prevent more blatant statements than the following.]

  1. None of the Committee were on spiral syndicates.

[Throughout the 1980's, the largest, and apparently most desirable and profitable syndicates on which one could be placed were those in the spiral—unless one knew the dangers of the spiral itself, and of the coming asbestos claims. It was also true, although it is not apparent from this testimony, that not only none of the Committee, but none of the Committee members' close friends and associates were placed in the spiral by their agents either. The people placed on those syndicates were almost entirely the new members, recruited in the 70's and especially the 80's, to a degree far beyond what could result by statistical chance.]

  1. Yes?
  1. We used them to our advantage. I have campaigned over ten years that retrocessional business—and I've asked the Council—all retrocessional business should be banned at Lloyd's. I would have liked to have seen Sir David Walker, who is an honourable man from the Bank of England, to have banned retrocessional business. It's very easy. It wasn't written thirty years ago and could easily be banned and then Lloyd's would be honest again.
  1. That hasn't occurred?
  1. That has not occurred.
  1. And you—
  1. Retrocessional business is still going on in Lloyd's, pyramid selling, if you like, arbitraging, is still going on in Lloyd's at this moment.

[Posgate said it very simply: "We used them to our advantage." In the context of this testimony, by a member of Lloyd's Committee and Council, that sums up the fraud—except for giving a sense of the sheer magnitude of the abuse. Lloyd's inflicted what is now over $20 billion in losses on the Names.)

  1. Let's take it a step further. Paragraph l.6:

"In the view of the [inquiry] committee, the growth of LMX business through the 1980's, with the catastrophic losses sustained in '88 and '89, is wholly explicable in terms of commercial factors and judgments, and we do not find the development of the LMX spiral to have been improper or to have been distorted by conspiracy or misfeasance."

Now, I take it you disagree with that statement as well?

  1. I totally disagree with that statement. I do not see how on earth—in 1988 mention was made of Piper Alpha, a loss to Lloyd's of 700 million. Sir David Walker has given evidence that 16 billion of claims from the 700 million of actual insurance on which premium was paid—16 billion of claims went through Lloyd's claims-settlement office as Piper Alpha went round and round Lloyd's with 10 per cent being deducted each time it passed go.

[Assuming a simplified scenario—that Piper Alpha was insured for $700 million, and reinsured enough times for the repeated passages of that figure through the claims office to add up to $16 billion—then Piper Alpha had been reinsured the equivalent of 23 times over (16b = (16,000m), -:- 700m = 22.857. . .). As a result, only about 35% of the original premium remained to apply to the loss when the North Sea oil platform Piper Alpha self-destructed. And, since ("Titanic" revisited) no one thought a North Sea oil platform could possibly end up a total loss, syndicate reserves against losses were consistently and grossly underestimated. The rest would have to come out of the pockets of the Names on the syndicates left holding the bag. Now, in actuality, the reinsurance risk was spread over multiple syndicates as it went up the spiral, which meant that even more Names ("x" syndicates times "y" Names) had a hold on the bag (or, more accurately, the bag had a hold on them) to the tune of ten or twenty times their premium share. In addition, since the spiral wound back on itself, many Names found that their members' agents and syndicate managing agents had put them in the ridiculous position of "reinsuring themselves" against their losses.]

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