Arbuthnott v Feltrim Underwriting Agencies Ltd (No 3) [QBD (Comm)]
| Jurisdiction | England & Wales |
| Judge | Longmore J. |
| Judgment Date | 15 January 1996 |
| Date | 15 January 1996 |
| Court | Queen's Bench Division (Commercial Court) |
Queen's Bench Division (Commercial Court).
Longmore J.
Andrew Smith QC and Marcus Smith (instructed by Richards Butler) for the plaintiff names.
Peregrine Simon QC and Simon Bryan (instructed by Elborne Mitchell & Co) for the defendant members' agents.
The managing agents did not appear and were not represented.
The following cases were referred to in the judgment:
Deeny v Gooda Walker Ltd[1994] CLC 1224; [1995] 1 WLR 1206.
Deeny v Gooda Walker Ltd (interim payment application, unreported, 14 February 1995, Phillips J).
Negligence Damages Lloyd's insurance market Action for negligence by Lloyd's names against underwriting agents following heavy losses Underwriting agents held liable Assessment of damages.
This was the calculation of damages to be awarded to Lloyd's names following the decision of Phillips J on liability ([1995] CLC 437) and a further judgment by Phillips J on issues of principle concerning the assessment of damages ([1995] CLC 1550).
The plaintiff names were members of three Lloyd's syndicates, 540, 542 and 847, which wrote primarily excess of loss business; 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 and because the claims outstripped the reinsurance cover put in place. The names brought an action alleging 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.
Phillips J gave judgment ([1995] CLC 437) for the names and held that damages were to be assessed by putting in place a notional reinsurance cover which was sufficient to reduce the net exposure to a probable maximum loss (PML) event to 100 per cent of stamp. In a further judgment ([1995] CLC 1550) Phillips J determined that the notional reinsurance cover was to be calculated at levels immediately above the actual reinsurance cover placed by the syndicates, and was to be of the same type as that provided by the existing upper layers of exposure and have the same retention or co-insurance. Additionally, the retained premiums were to be left out of account, and the reinsurance cover should be on a first loss basis. The names sought an award of substantial damages.
Held, ruling accordingly:
1. In the exceptional circumstances of the Lloyd's litigation damages were to be awarded not as a single award but in respect of underwriting losses when they were sustained, not in anticipation of them, whether notified or not. No interim payment ought to be made for outstanding but unpaid claims. (Deeny v Gooda Walker Ltd[1994] CLC 1224; [1995] 1 WLR 1206followed.)
2. The names were entitled to calculate their damages from the time their outward reinsurances were in fact exhausted despite the fact that the outward treaties contained a fixed exchange rate (of US$2.80 to 1), which in the circumstances was artificially high.
3. The notional additional reinsurance was to be introduced immediately above the existing layers at an ever decreasing cost on the basis that the higher the layer, the cheaper it would be. The appropriate minimum rate on line for the notional reinsurance of syndicates 540/542 in 1989 was 6.5 per cent. The deemed notional reinsurance could be obtained only on the basis of a top and drop premium. For the deemed additional reinsurance to be available to meet each catastrophe on a first loss basis it was necessary to discount the drop element by 15 per cent.
4. It was not necessary to include exposure to the risk of loss or damage to oil rigs in calculating the PML.
5. The names were not required to reformulate their calculations of the aggregate exposure elements in the PML by reference to the quarterly accumulation ledgers.
6. No account was to be taken of the possibility that reinstatement premiums might be paid under the notional reinsurance.
Longmore J: On 10 March 1994 judgment in this Lloyd's action was given by Phillips J in favour of the names ([1995] CLC 437). He held that the managing agents had been negligent in exposing the names on syndicates 540/542 and 847 to losses far in excess of 100 per cent of stamp in the underwriting years 1987, 1988 and 1989. He further held that the members' agents were responsible for that negligence. In that judgment he also stated the basic principle to be applied in the assessment of damages, viz. (at p. 490E):
that the damages awarded should 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 PML (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.
It was, I think, common ground at that stage and it was certainly common ground before me that reinsurance protection of such extent was not available on the market. To calculate damages on this basis is, therefore, recognised as being a wholly notional exercise but an exercise which is best fitted to compensate the names for their substantial losses.
The concept of probable maximum loss (PML) is fully explained by Phillips J at p. 445G and I need not say more than that that the defendants were held at fault in failing to assess adequately the exposure of the syndicate to various PML events and,
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(a) that the relevant events by reference to which losses of the names are to be assessed are:
(1) the 1987 storm in Europe (CAT 87J)
(2) the Piper Alpha disaster in 1988,
(3) Hurricane Hugo in 1989,
(4) the storm of 1990 (CAT 90A), and
(b) that the relevant PML event for the purpose of assessing damages is major US windstorm.
The judge indicated that the method of assessing damages was to be relatively simple; it is necessary to calculate (1) the loss actually sustained as a result of the relevant catastrophes by reason of there being inadequate vertical reinsurance...
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