Arbuthnott v Feltrim Underwriting Agencies Ltd [QBD (Comm)]
| Jurisdiction | England & Wales |
| Judge | Phillips J |
| Judgment Date | 10 March 1995 |
| Court | Queen's Bench Division (Commercial Court) |
| Date | 10 March 1995 |
Queen's Bench Division (Commercial Court)
Phillips J.
Jeremy Cooke QC, Stephen Moriarty and M Smith (instructed by Richards Butler) for the plaintiff names.
David Johnson QC, John Rowland and Kirsten Houghton (instructed by Clifford Chance) for Feltrim.
Bernard Eder QC, Christopher Butcher and Nigel Eaton (instructed by Elborne Mitchell) for the members' agents.
The following cases were referred to in the judgment:
Aiken & Ors v Stewart Wrightson Members Agency Ltd & Ors[1995] CLC 318; [1995] 1 WLR 1281.
Deeny & Ors v Gooda Walker Ltd (involuntary liquidation) & Ors[1994] CLC 1,224.
Breach of duty in contract and tort Damages Lloyd's insurance market Syndicates underwriting excess of loss business Series of catastrophes Reinsurance cover inadequate Substantial losses incurred by names Whether active underwriters failed to secure sufficient reinsurance Whether managing agents and members' agents liable in damages for losses incurred
This was an action brought by 1,594 Lloyd's names in syndicates 540, 542 and 847 against their members' agents and managing agents for negligent underwriting of excess of loss business on behalf of the names for the underwriting years 1987, 1988 and 1989.
The plaintiff Lloyd's names were members of three Lloyd's syndicates 540/42 and 847 which wrote primarily excess of loss business. Syndicate 540 was a marine syndicate whereas 542 and 847 were non-marine syndicates. The defendants were the syndicates managing agents (Feltrim) and the names members? agents. From 1983 the Feltrim syndicates grew considerably, and the marine market wrote an increasing amount of non-marine business.
During the underwriting years 1987, 1988 and 1989 the names on those syndicates suffered very heavy losses as a result of a series of catastrophes. Claims outstripped the reinsurance cover put in place. The names alleged that their exposure to such losses was attributable to a failure on the part of the active underwriters competently to apply established principles of excess of loss underwriting in relation to assessing and making provision for exposure to a single loss event. Feltrim and the members' agents contended the underwriters adopted a competent approach to vertical exposure. They maintained that the losses were attributable to two factors which could not reasonably be foreseen, namely the impact on marine cover of non-marine losses and an unprecedented series of catastrophes. The members' agents claimed an indemnity from Feltrim in respect of any liability the members' agents might be under to the names.
Held, giving judgment for the names:
1. The active underwriters failed to put in place adequate vertical reinsurance protection which constituted breaches of duty owed to the names.
2. In assessing damages the basic principle to be applied was to place the names on each syndicate year in the same position as if the underwriters had purchased reinsurance protection sufficient to restrict the names' net exposure to the probable maximum loss to 100 per cent of stamp. In calculating net exposure regard should be had not merely to the gap above the top layer of reinsurance cover but to retentions and co-insurance.
3. Each of the series of catastrophes which occurred during 1987-1989 was of a type which the underwriters intended to guard against by reinsurance. In so far as the inadequacy of reinsurance cover had increased the losses resulting from those catastrophes, those losses were not too remote to be recoverable.
4. The members' agents were entitled to an indemnity from Feltrim in respect of 100 per cent of their liability to the names.
Phillips J: In October last year I gave judgment in favour of some 3,000 names at Lloyd's who had sued their managing agents the Gooda Walker agencies and their members' agents for breaches of duty owed in contract and in tort (see [1994] CLC 1,224). The breaches alleged and proved related to the negligent conduct of the business of writing excess of loss reinsurance on behalf of the names.
In these actions 1,594 names bring similar claims against their members' agents and their managing agents Feltrim Underwriting Agencies Ltd (Feltrim). Once again the gravamen of the names complaint is that their underwriters negligently left them exposed to the risk of huge losses in the event of one or more catastrophes occurring.
The claims relate to losses sustained by three syndicates managed by Feltrim for the underwriting years 1987,1988 and 1989.
Syndicate 540 was a marine syndicate. In the three years with which I am concerned approximately 90 per cent of its premium income was earned from excess of loss (XL) business. The balance was marine direct and facultative business, including hull, cargo, marine liability and P & I club reinsurances. The syndicate also wrote an aviation excess of loss account. The marine excess of loss business comprised whole account and specific protection. A significant proportion of this business was XL on XL.
Syndicate 542 was, in 1987 and 1988, the incidental non-marine syndicate for syndicate 540, and consisted of the same membership. In 1989 it became a full non-marine syndicate. It wrote almost exclusively excess of loss business. In 1987 and 1988 underwriting was carried on jointly on behalf of syndicates 542 and 847 and shared on a split stamp basis.
Syndicate 847 was a non-marine syndicate writing in 1987 and 1988 almost exclusively excess of loss business. In 1989 it wrote a small direct and facultative property account and also wrote some marine business. Its membership was smaller than that of syndicates 540 and 542, but nearly all its members were also on the other two syndicates. Between 1983 and 1988 syndicates 540/542 grew from a membership of 782 with a stamp capacity of approximately 15m to a membership of 1,457 with a stamp capacity of approximately 37m. During the same period syndicate 847 grew from a membership of 150 with a stamp capacity of approximately 2m to a membership of 1,174 with a stamp capacity of approximately 20m. In the years with which these actions are concerned, the stamp capacities of the syndicates were as follows:
Syndicate |
1987 |
1988 |
1989 |
540/2 net gross |
20.95m 27.24m |
37.1m |
41.4m |
847 net gross |
8.9m 11.6m |
18.51m |
24.5m |
Mr Thompson, the plaintiffs' expert witness, has extracted from the syndicates' reports and accounts the following sterling estimates of premium income for 1987, 1988 and 1989:
1987 |
1988 |
1989 |
|
Syndicate 540 Total estimated premiums |
24,558,300 |
21,515,957 |
25,651,455 |
XL proporation |
22,102,470 |
20,009,840 |
23,176,608 |
Percentage of XL: total est prems |
90% |
93% |
90.35% |
Syndicate 542 Total estimated premiums |
2,778,700 |
2,399,605 |
6,300,000 |
XL proportion |
2,646,839 |
2,327,617 |
6,191,845 |
Percentage of XL: total est prems |
97% |
97% |
98.28% |
Syndicate 847 Total estimated premiums |
11,648,000 |
10,298,088 |
21,428,571 |
XL proportion |
11,648,000 |
10,298,088 |
21,428,571 |
Percentage of XL: total est prems |
100% |
100% |
100% |
This gives some idea of the scale and composition of the business written by the syndicates although in the event these estimates were significantly exceeded, due in part to the effect of reinstatement premiums.
In 1974 WMD Underwriting Agencies Ltd CWMD) began managing two syndicates marine syndicate 174 and its incidental non-marine syndicate 175. The underwriter of both syndicates was Mr Colin Davies. In 1982 a new non-marine syndicate number 847 was formed. At the end of that year the propriety of certain reinsurance arrangements involving WMD and an associated agency, PCW Underwriting Agencies Ltd (PCW), was called in question. WMD was suspended by Lloyd's and only reinstated after Mr Davies had resigned, to be replaced as underwriter by his deputy Mr Fagan. In order to distinguish the new regime from the old, syndicates 174 and 175 were re-numbered syndicates 540 and 542.
In early 1986 it was decided that a new agency should be formed to take over from WMD the management of the syndicates. Mr Fagan and a number of his colleagues would continue to perform their existing functions in respect of the business of the syndicates, but as employees of the new agency. The new agency was Feltrim and Lloyd's approved that it should be registered to act as managing agent for syndicates 540, 542 and 847 in December 1986.
The board of directors of Feltrim consisted of Mr Eric Andrew, the chairman, who had previously been the managing director of Holmwoods Back & Manson (Underwriting Agencies) Ltd, and the underwriter of its syndicate 144; Mr Jan Manning, the finance director, who had previously, been finance director of Brown Shipley Insurance Services Ltd; Mr Andrew Drysdale, a non-executive director, who had previously been the non-marine underwriter for Terra Nova Insurance Co before becoming the chairman of Andrew Drysdale Ltd and the underwriter of its non-marine syndicate 43; Mr James Bazell, another non-executive director who was also the chairman of Stewart Wrightson Members Agency Ltd and the two underwriters, whom I shall now introduce.
Mr Patrick Fagan's insurance career began in 1953 when he joined Home & Overseas Insurance Co Ltd, a small company which wrote some excess of loss business. In 1956 he moved to English & American Insurance Co Ltd and spent the next 17 years in their marine underwriting room. English & American was a member of the Institute of London Underwriters. It wrote a general marine insurance account and a book of foreign excess of loss business. In 1973 Mr Fagan left English & American to join WMD as deputy underwriter to Mr Davies. The business that Mr Davies wrote for syndicates 174 and 175 was almost exclusively excess of loss. Mr Fagan became the active underwriter of these syndicates, under their new numbering, and also of syndicate 847, when he superseded Mr Davies in 1982. At that time he was appointed a director of...
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