Berriman v Rose Thomson Young (Underwriting) Ltd [QBD (Comm)]
| Jurisdiction | England & Wales |
| Judge | Morison J. |
| Judgment Date | 19 March 1996 |
| Court | Queen's Bench Division (Commercial Court) |
| Date | 19 March 1996 |
Queen's Bench Division (Commercial Court).
Morison J.
Michael Crane QC, Stephen Moriarty and Matthew Reeve (instructed by Richards Butler) for the plaintiffs.
Jonathan Hirst QC, Andrew Popplewell and Harold Matovu (instructed by Reynolds Porter Chamberlain) for the managing agents.
Richard Slade (instructed by Cameron Markby Hewitt) for the members'agents.
The following cases were referred to in the judgment:
Arbuthnott v Feltrim Underwriting Agencies Ltd[1995] CLC 437.
Arbuthnott v Feltrim Underwriting Agencies Ltd (in liq.) (No. 2)[1995] CLC 1,550.
Arbuthnott v Feltrim Underwriting Agencies Ltd (in liq.) (No. 3)[1996] CLC 714.
Banque Bruxelles Lambert SA v Eagle Star Insurance Co Ltd[1995] CLC 410.
Brown v KMR Services Ltd (formerly HG Poland (Agencies) Ltd)[1995] CLC 1,418.
Deeny v Gooda Walker Ltd (in voluntary liq.)[1994] CLC 1,224.
Eckersley v BinnieUNK(18) Con LR 1.
Henderson v Merrett Syndicates Ltd[1994] CLC 918; [1995] 2 AC 145.
Jebsen v East and West India Dock CoELR(1875) LR 10 CP 300.
Yorkshire Dale Steamship Co Ltd v Minister of War TransportELR[1942] AC 691.
Insurance Lloyd's insurance market Duty of underwriting agents to underwriting names Breach of duty in contract and tort Syndicate underwriting excess of loss and personal stop loss business Series of catastrophes Reinsurance cover inadequate Substantial losses incurred by names Whether active underwriter failed adequately to assess risk Whether underwriter failed to secure suficient vertical reinsurance Whether underwriter accepted inadequate security Whether underwriter failed to recognise impact of aggregation of personal stop loss insurance with excess of loss business Assessment of damages Level of risk accepted by name on syndicate.
This was an action by 1,092 Lloyd's names against their managing and members' agents for damages for negligent underwriting of excess of loss reinsurance.
The plaintiff Lloyd's names were members of marine syndicate 255/258 in the 1988 and 1989 years of account. The first defendants, who went into liquidation in December 1994, were the managing agents of the syndicate and the members' agents of the direct names. 42 members' agents of the indirect names were also defendants. The syndicate specialised in excess of loss reinsurance written mainly in the London market (LMX). The names incurred substantial losses on the 1988 and 1989 years of account as a result of a series of catastrophes. They brought an action in contract and tort in respect of negligent underwriting, alleging failure to act with reasonable care and skill in the conduct and management of the underwriting for the two relevant years of account.
It was conceded that, if the names established negligence on the part of the active underwriter, the first defendant would be liable in contract and tort to the direct names, and in tort to the indirect names. Their members' agents similarly would be liable in tort to the indirect names.
The primary allegation for the names was that they were negligently over-exposed to risk because the active underwriter took on excessive exposure without adequate vertical reinsurance. It was the names' case that the underwriter failed adequately to calculate his probable maximum loss (PML) which led to his failure to appreciate the full extent of the exposure of his names. Other allegations concerned the negligent acceptance of security for the special priority treaty entered into as a result of the impact of the Piper Alpha disaster on the syndicate's book of business, the negligent writing of personal stop loss (PSL) reinsurance and the failure to match reinstatements. It was the underwriting agents' case that the names' losses were caused by the extraordinary and unprecedented number and nature of major catastrophes impacting on both years of account.
Held, giving judgment for the names:
1. An underwriter was under a duty to plan his book of business, to calculate his probable maximum loss (PML) to determine the amount of vertical reinsurance protection, and to make an informed judgment as to the net exposure to which he could properly expose his names. By failing to meet those obligations the syndicate's underwriting fell short of the standard required of a specialist in the excess of loss market. The first defendants as managing agents of the syndicate were accordingly in breach of their duty to the names to conduct the underwriting with reasonable care and skill.
2. It was the duty of a Lloyd's broker to satisfy himself that the security put before an underwriter was reasonably appropriate to the type of business written, for example, excess of loss or long tail. Further, the underwriter was under a duty to satisfy himself that the security offered by the broker was appropriate for the purpose for which he intended to use it. In accepting as security an unsuitable reinsurer for the purpose of proportional reinsurance, and in ceding to another more aggregate than he should have done, the syndicate's active underwriter was negligent.
3. Although a perceptive underwriter would have appreciated the potential for aggregation between the syndicate's LMX and PSL exposures, the risk was unquantifiable. By failing to recognise that risk the active underwriter therefore did not fall below the standard expected of a reasonably competent underwriter.
4. An active underwriter was under a duty to match his reinstatements wherever possible. A competent underwriter, knowing that his syndicate was unintentionally exposed horizontally, would take that fact into account when assessing the amount of vertical exposure he was entitled to run net for his names. On the facts the failure of the underwriter to match reinstatements did not amount to negligence.
5. The correct approach to damages was to put the names in the position they would have been in if a competent underwriter had competently chosen a PML event, competently calculated the PML exposure, competently decided how much of that exposure to retain net for the names' account and then purchased vertical reinsurance for the balance of the exposure in relation to the book of business actually written by the underwriter. (Arbuthnott v Feltrim Underwriting Agencies Ltd (in liq.) (No. 2)[1995] CLC 1,550followed).
6. On the evidence, in relation to the PML amount or the measurement of the syndicate's exposure to the PML event, no competent underwriter could have concluded that his whole account covers were other than exposed 80 per cent.
7. An underwriter was only entitled deliberately to expose his names to risk on the basis of their consent. The risk a name consented to on joining or remaining on a syndicate depended on the way it was presented by the syndicate. It was not the case that a name on an LMX syndicate ought always to expect the underwriter to retain a net exposure of 100 per cent of stamp, regardless of what the syndicate actually did or said about itself. On the evidence, an underwriter acting competently could not have assumed, in relation to the syndicate in question, that a name had accepted that he would be deliberately exposed to a loss greater than 40 per cent of stamp.
Morison J: This is yet another Lloyd's case in which names seek to recover damages from their managing agents and members' agents in respect of substantial losses which they have incurred as underwriting members of the Society of Lloyd's in the 1988 and 1989 years of account.
To be admitted to membership of Lloyd's at the relevant time and become a name, a person was required to demonstrate a certain minimum amount of wealth. The amount of premium income which a name was permitted to write in and year was calculated by multiplying his proven wealth by 2.5. A name could only become a member of a syndicate through the agency of a members agent or a combined agent. In consultation with, and usually upon the advice of such agent, a name's permitted premium income would be allocated between a number of syndicates [a portfolio].
At the relevant time, the first defendants, Rose Thompson Young (Underwriting) Ltd [RTY] were the managing agents of marine syndicate 255/258 [the syndicate] and employed Mr Bullen as the syndicate's active underwriter, and Mr Green as his deputy. RTY were also a members' agency. There are 1092 plaintiffs. Each of them is a name, or the personal representative of a name, who either participated in the syndicate directly through RTY or, indirectly, through a members' agency other than RTY which, in turn, appointed RTY as its sub-agent. There are 42 such members' agencies which have been joined as defendants by the indirect names.
It is the plaintiffs' case that RTY failed to act with reasonable care and skill in the conduct and management of the underwriting for the two relevant years of account, and that the defendants are, thereby, in breach of duty and liable for the resulting losses.
The duties owed to direct and indirect names by a combined agency such as RTY, and by a members' agency, in relation to the manner in which a syndicate's underwriting is carried out and managed, have been fully analysed by the House of Lords in Henderson v Merrett Syndicates Ltd[1994] CLC 918; [1995] 2 AC 145. In these proceedings it is common ground that, if the plaintiffs have made good their contentions, RTY are liable in both contract and tort to the direct names, and the members' agents named as defendants are liable in contract to the indirect names, to whom RTY are also liable in tort.
On 4 July 1995, this court ordered that the issues for determination at the trial were to be limited to:
(1) Issues of liability
(2) Such issues of principle relating to quantum as may hereafter be agreed or ordered.
Apart from an order which I made on 1 November 1995, there has been no agreement or other order made in relation to quantum. The ambit of para. (2) has caused some minor controversy, to which it will be necessary to revert in...
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