TESTIMONY OF IAN RICHARD POSGATE
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
[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.]
. . . . . .
"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?
"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.]
. . . . . . . . . .
[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.]
. . . . . . . . .
[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.]
. . . . . . . . . .
[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."]
[Another question's phrasing is objected to, proper phrasing decided, and then the questions go on.]
[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.]
[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.]
. . . . . . . . . .
THE COURT: Or what?
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.]
[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.]
[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.]
"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?
[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.]
[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.]
[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.)
"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?
[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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