Axa Reinsurance (UK) Plc v Field

JurisdictionUK Non-devolved
JudgeLord Mackay of Clashfern L.C.,Lord Goff of Chieveley,Lord Mustill,Lord Slynn of Hadley,Lord Hoffmann
Judgment Date20 June 1996
Judgment citation (vLex)[1996] UKHL J0620-1
Date20 June 1996
CourtHouse of Lords
AXA Reinsurance (U.K.) Plc
(Appellants)
and
Field (Sued on his Own Behalf and on Behalf of All Other Members of Lloyd's Syndicate No. 204 for 1991)
(Respondent)

[1996] UKHL J0620-1

Lord Chancellor

Lord Goff of Chieveley

Lord Mustill

Lord Slynn of Hadley

Lord Hoffmann

House of Lords

1

OPINIONS OF THE LORDS OF APPEAL FOR JUDGMENT IN THE CAUSE

Lord Mackay of Clashfern L.C.

My Lords,

2

I have had the advantage of reading in draft the speech or my noble and learned friend, Lord Mustill and for the reasons he gives I too would allow this appeal.

Lord Goff of Chieveley

My Lords,

3

I have had the advantage of reading in draft the speech of my noble and learned friend. Lord Mustill and for the reasons he gives I would allow this appeal.

Lord Mustill

My Lords,

4

The heavy losses suffered in recent years by individuals subscribing policies of insurance in the London market have generated wide-ranging complex and voluminous litigation, of which this appeal is a fragment. Its origins lie in the involvement of numerous members of syndicates at Lloyds in what has come to be known as "the LMX spiral." This phenomenon has already been described in judgments of outstanding lucidity and mastery of detail. Since, as will appear, the narrow issue before the House does not call for any investigation of the facts, it need only be said that the spiral was the pathological outcome of writing whole account excess of loss in a narrow market, the essence being that the same loss might in certain events circulate through a chain or chains of reinsurances, repeatedly impacting on and ultimately exhausting successive layers of cover, leaving the reinsured without the intended protection or none at all. Complaining that those who managed their syndicates had failed either to recognise the risks of the spiral, or to take proper precautions against its adverse effects, numerous members who suffered heavy losses brought proceedings against the managers for negligence and breach of contract. These proceedings are the origin, but not the subject, of this appeal which is concerned with the aggregation of losses for the purpose of reinsurance policies some distance away from the policies out of which the losses originally arose.

5

It is convenient to begin with a brief description of the route by which the matter has come before the House, before giving a more detailed account of the issue. The root case was Deeny v. Gooda Walker Ltd. (In voluntary liquidation) [1994] C.L.C. 1224. in which members of syndicates recovered damages against certain members' agents. One of the agents was Bankside Members Agency Limited which brought proceedings under an errors and omissions policy, underwritten by, amongst others, Lloyd's Syndicate 204. An issue in that case, which was resolved in Cox v. Bankside Members Agency Ltd. [1995] 2 Lloyd's Rep. 437, was how in the light of the various acts and omissions which founded the liability of the members' agents in Deeny v. Gooda Walker Ltd. losses should be aggregated for the purpose of a provision limiting the insurers' total liability. Syndicate 204 is now looking for a recovery under an excess of loss treaty issued by, amongst others, Axa Reinsurance (U.K.) Plc, providing one layer of cover in respect of the whole of the syndicate's "casualty" account. Once again, a question of aggregation has arisen, and proceedings have been brought to determine whether the answer is the same as that which was given in Cox v. Bankside Members Agency Ltd. Thus far, both Phillips J. and the Court of Appeal have held that it is, and Axa sets out to persuade the House that it is not.

6

I return to the history in more detail, beginning with the decision of Phillips J. in Deeny v. Gooda Walker Ltd., supra. Two companies in the Gooda Walker group acted as the managing agents of four syndicates, and also as members' agents for more than two hundred Names. A decision of this House, Henderson v. Merrett Syndicates Ltd. [1995] 2 A.C. 145, elaborated by later authorities, established that the agents owed duties of care to (amongst others) those Names who were members of the managed syndicates. These syndicates wrote substantial excess of loss (hereafter, in the terminology of the market "LMX") business, and were participants in the spiral. In the event the Names suffered enormous losses. Complaining that these flowed from breaches by the companies of their duty of care, the Names sued Gooda Walker for damages. After a long trial Phillips J. analysed the spiral and its consequences in a most valuable judgment, holding in the upshot that the three professionals who conducted the underwriting for Gooda Walker tailed to measure up to the necessary standards in respects summarised (at p. 1277F) as follows:

"There are common features in the approach to the conduct of excess of loss business by Mr. Andrews. Mr. Willard and Mr. Walker. Each of these underwriters had immense experience of the business of underwriting… . The approach of each of them to excess of loss underwriting was one that may well be appropriate in other fields of business — the reliance on past experience when estimating risk.

Past experience has to be treated with particular caution in the field of catastrophe excess of loss insurance, for the size and the incidence of loss do not conform to a pattern. The growth of the LMX market in the 1980s and, in particular, the growth of spiral business, raised special problems in relation to the assessment of risk, exposure and drafting, that called for special consideration. Some gave it that consideration. The Gooda Walker underwriters did not."

7

This conclusion by Phillips J. was sufficient to hold Gooda Walker liable for the failures of their three active underwriters. At that stage, no question of the measure of liability arose for decision, and hence the questions which now fall to be considered do not feature in his Lordship's judgment.

8

Meanwhile, there had taken place in February 1994 the decision at first instance in Caudle v. Sharp [1995] L.R.L.R. 80. Various original insurers arranged 32 run-off contracts of reinsurance with syndicates for whom Mr. Outhwaite was the underwriter, and of whom his company, R.H.M. Outhwaite Ltd. was the managing agent. The contracts led to large losses for the members of the syndicates, who sued the company. The action was settled for a large sum, and the company amongst others claimed under its errors and omissions policies, written by a syndicate of which Mr. Sharp was the representative. This syndicate was in turn reinsured by another syndicate of which Mr. Caudle was the representative. Mr. Sharp's syndicate paid claims under the errors and omissions policy, and claimed against Mr. Caudle's syndicate under its reinsurance. Two issues arose in the resulting arbitration, of which only one is material. This was whether the losses under all 32 contracts could be aggregated for the purpose of a claim under the reinsurance. The relevant clause read as follows:

"… each and every loss and/or occurrence and/or catastrophe and/or disaster and/or calamity and/or series of losses and/or occurrences and/or catastrophes and/or disasters and/or calamities arising out of one event."

9

The critical words were "arising out of one event." The arbitrators held that there was only a single loss arising out of one event, namely the negligence of Mr. Outhwaite in writing the contracts without conducting the necessary research and investigation into the problems of asbestosis: and that this failure was the occurrence which gave rise to the series of losses. On appeal to the High Court Clarke J. upheld the award, "on the basis that there was a continuing state of affairs amounting to an event out of which the losses arose rather than on the basis that the writing of the 32 contracts taken together was an event:" See p. 87.

10

A similar question then arose before Phillips J. in Cox v. Bankside Members Agency Ltd. [1995] C.L.C. 180. as one of several preliminary issues grouped together for the purpose of managing the large volume of litigation. under different contracts and between different parties, then pending before the Commercial Court. One of the issues debated was whether the liability which the learned judge had found to exist in Deeny v. Gooda Walker Ltd. [1994] C.L.C. 1224 resulted from claims arising "from … one originating cause." In reliance on Caudle v. Sharp [1994] C.L.C. 216 it was argued that loss deriving from successive failures by a particular underwriter to pay sufficient regard to proper principles of underwriting stemmed from one originating cause. Just as Mr. Outhwaite's lack of appreciation of the consequences of asbestosis was the single event which was the cause of the losses that flowed from the 32 disastrous run-off contracts, so also the lack of appreciation of the effect of the spiral was the single originating cause responsible for all the Gooda Walker losses.

11

The learned judge disagreed, because even if a culpable misappreciation in an individual which led him to commit a number of negligent acts could arguably be said to constitute the single event or originating cause responsible for all the negligent acts and their consequences, this was not true when a number of individuals each acted under an individual misappreciation, even if the nature of this misappreciation was the same: [1994] C.L.C. 180, 205. Even applying Caudle v. Sharp the result was that the approach to underwriting of each individual underwriter was a separate originating cause. Since there were three underwriters, the result was that there were three originating causes.

12

Next in time was the appeal in Caudle v. Sharp [1995] L.R.L.R. 433, where Evans L.J. delivered the leading judgment. It will be recalled that the clause in question embodied a number of words linked by "and/or" and culminating in the expression...

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