Brown v K.M.R Services Ltd
| Jurisdiction | England & Wales |
| Judge | Gatehouse J |
| Judgment Date | 26 May 1994 |
| Date | 26 May 1994 |
| Court | Queen's Bench Division (Commercial Court) |
Queen's Bench Division (Commercial Court)
Gatehouse J.
Adrian Hamilton QC and Stephen Hofmeyr (instructed by D J Freeman & Co).
Michael Crane QC and Hannah Brown (instructed by Hextall Erskine & Co) for the names.
Peregrine Simon QC and Simon Bryan (instructed by Elborne Mitchell) for the members' agents.
The following cases were referred to in the judgment:
Alexander & Ors v Cambridge Credit Corporation Ltd & Anor (1987) 5 ACLC 587.
Banque Bruxelles Lambert SA v Eagle Star Insurance Co Ltd (unreported, 21 December 1993, Phillips J).
Banque Financière de la Cité SA v Westgate Insurance Co Ltd (on appeal from Banque Keyser Ullmann SA v Skandia (UK) Insurance Co Ltd & Ors)ELR[1991] 2 AC 249.
Bradburn v Great Western Railway CoELR (1874) LR 10 Ex 1.
Deeny & Ors v Gooda Walker Ltd & Ors [1994] CLC 55.
Eley v King & Anor (unreported, 11 April 1989, CA).
Galoo Ltd & Ors v Bright Grahame MurrayUNK [1994] BCC 319.
Parry v CleaverELR [1970] AC 1.
Parsons (H) (Livestock) Ltd v Uttley Ingham & Co LtdELR [1978] QB 791.
Quinn v Burch Bros (Builders) Ltd [l966] 2 QB 370.
Saif Ali & Anor v Sidney Mitchell & Co & OrsELR [1980] AC 198.
Sykes & Ors v Midland Bank Executor and Trustee Co Ltd & OrsELR [1971] 1 QB 113.
Tort — Negligence — Breach of contract — Lloyd's insurance market — Underwriting by members' agent on behalf of name — Failure of underwriting members' agents to warn names of high-risk nature of certain syndicates — Heavy losses incurred by names — Whether members' agents liable to names in negligence and for breach of contract — Damages — Assessment of damages — Indemnity for losses in open years — Whether profits to be offset against losses.
These were two actions, heard together, brought by Lloyd's “names” claiming damages and declarations for an indemnity against underwriting members” agents on whose advice they had joined high-risk syndicates without warning of the nature of the risk.
“SD”, a dental surgeon almost entirely dependent upon his professional income and with very slender assets, sought to become a name at Lloyd's to pay for the private education of his daughters. He was a cautious investor who could not contemplate the possibility of suffering serious losses. The members” agent to whom he was introduced in 1986 explained to him the nature of the Lloyd's insurance market, but assured him of a safety-first approach. A name was prohibited from underwriting on his own account, total control being vested in the members” agent with whom the name entered into a contract. The members” agent delegated the actual underwriting to a managing agent. The members” agent assured SD that the underwriting strategy to be pursued on his behalf would be a policy of low-risk insurance, any losses being small and easily contained. Nevertheless the members” agent placed a substantial proportion of SD's allocated premium income with high-risk syndicates, in particular catastrophic excess of loss (“CAT XOL”) and London Market Excess (“LMX”) reinsurance, without warning SD of the nature of the risk involved.
“B”, a successful businessman, became a name in 1976 while still a student at the London Business School. He began underwriting with a small premium income level in 1977, and gradually increased his premium income level over the years in line with consistently successful results. In 1976 his knowledge of underwriting was minimal and his underwriting policy cautious and conservative, which his members” agent knew. By 1985 he had become more sophisticated and independent, choosing his own syndicates and allocations primarily by reference to profitability as disclosed in the annual reports and accounts of each syndicate. He received advice and information from his members” agent, but rejected his recommendations when he thought fit. Although B increased his premium income level significantly and adopted a less cautious investment strategy, he was not sufficiently warned of the dangers of high-risk syndicates by the members” agent.
Between 1987 and 1990 SD and B suffered very heavy losses as a result of catastrophic losses on high-risk syndicates, and further losses were expected in respect of open years. Each brought an action against his members' agent alleging that they had made known to their agents their desire to follow a conservative underwriting policy but in breach of the agent's duty of care and in breach of contract they had been recommended to join and were not warned of the nature of high-risk syndicates. B later abandoned his claim in respect of 1986 and 1987.
Held, giving judgment for the names:
1. The name's contract for underwriting was with the members' agent, who was responsible for the name's affairs and for acting as a reasonably competent agent in fulfilling his duties of care.
2. A name was entitled to receive advice from his members' agent about the syndicates which it was recommended that he join, in particular the nature of the higher reward/risk syndicates.
3. In view of SD's personal circumstances, his slender assets, comparatively modest income, limited underwriting ambitions, and known unwillingness to face the possibility of serious losses, a cautious or even pedestrian underwriting strategy was required. Since he was not alerted by his members' agent to the high-risk nature of CAT XOL syndicates, nor to the fact that it was proposed to allocate a substantial part of his premium income to such syndicates, his agreement to the allocations in each year complained of was uninformed.
4. It followed that the members' agent was in breach of his duty of care to SD, for which SD was entitled to damages in respect of his ascertained losses to date and an indemnity against future losses on those syndicates with open years.
5. The members” agent was similarly in breach of contract by failing to warn of the dangers inherent in SD's portfolio, which no competent members” agent would have failed to do at the relevant time. That breach of contract was causative of SD's loss, and although losses of the magnitude that occurred in the middle to late 1980s were unforeseen, losses of the type that occurred were foreseeable. Accordingly SD's losses were the natural and obvious result of his being a member of the “disaster” syndicates.
6. A plaintiffs damages were not generally reduced by the proceeds of insurance he had procured. The failure of the members' agent to warn SD of the dangers inherent in high-risk syndicates was a breach of duty unaffected by his advice to insure. Consequently stop-loss cover was not relevant to liability.
7. In relation to quantum, SD was entitled to recover his actual losses as pleaded, and an indemnity against future losses on the open years of the syndicates in question.
8. Since B was not advised by his members' agent of the dangers inherent in high-risk syndicates, his claim for breach of contract was made out. That breach was similarly causative of B's losses, which were reasonably foreseeable.
9. With regard to quantum of damages, in view of B's less cautious approach to underwriting in later years, both his quantified damages and the indemnity to which he was entitled in respect of future losses on open years would be reduced by 30 per cent, with the profits made in the profitable years 1986 and 1987 being offset against the subsequent losses on the same syndicates.
(Delivered 13 April 1994)
Gatehouse J: The plaintiffs in these two actions, heard together, suffered very serious financial losses as names at Lloyd's in the years of account 1987-1990. In addition to accrued losses, they are both likely to suffer further losses in respect of open years.
In these actions they claim against their former members' agents damages, and declarations for an indemnity, on the ground that the agents acted negligently and in breach of contract in advising them which syndicates to join and/or to continue with, and with what premium allocations.
Both plaintiffs allege that they made known to the agents their desire to follow a conservative underwriting policy but, in breach of the agent's duty of care they were recommended to join, and were not warned about the nature of, syndicates which were unsuitable as being high reward/high-risk, namely those which wrote a substantial book of Catastrophe Excess of Loss (“CAT XOL”) and London Market Excess (“LMX”) reinsurance. In good years, i.e. those which were wholly or largely catastrophe-free, such syndicates generally made substantial profits for their names. But the insurance market is traditionally cyclical and there will inevitably come a time when one or more major catastrophes will occur: when this happens, such syndicates are likely to suffer disastrous results because of the funnelling effect of reinsuring “excess of loss on excess of loss”, and the spiral effect of a small number of syndicates reinsuring each other in successive layers. Put shortly, whereas the basic principle of direct insurance is to spread the risk among the many, this kind of reinsurance has the opposite effect: excess of loss reinsurance tends to concentrate the risk among ever fewer syndicates, with the result that by far the greater proportion of the loss involved in the original catastrophe, hurricane, earthquake, oil-rig etc. has to be borne by a comparatively few syndicates.
Before turning to the details of these claims some preliminary points can be made.
1. Every individual who wishes to become an underwriting member of Lloyd's is made unequivocally aware of certain fundamental matters, the most important of which for present purposes are these:
-
(a) All insurance is a high-risk business and a name can make losses as well as profits.
-
(b) The name has unlimited liability. If his/her reserves and deposits are insufficient to meet the name's share of insurance claims written on his or her behalf, the individual...
To continue reading
Request your trial
- Deeny and Others v Gooda Walker Ltd and Others
-
Rubenstein v HSBC Bank Plc
...on its own illegality was so unethical, ie against the ethos of the market, as to amount in effect to an extraneous cause. 107 In Brown v. KMR Services Ltd [1995] 2 Lloyd's Rep 513 the court of appeal considered a claim by a Lloyd's name against his members' agents for exposing him to membe......
-
Cox v Bankside Members Agency Ltd
...[1985] 1 Ll Rep 437 Bradley v Eagle Star Insurance Co LtdELR [1989] AC 957. Brown v KMR Services Ltd; Sword-Daniels v Pitel & OrsUNK[1994] 4 All ER 385; [1994] CLC 492 Caudle (B F) & Ors v Sharp; Grove Sharp [1994] CLC 216. Coleman's Depositories Ltd and Life & Health Assurance Association,......
- Kpohraror v Woolwich Building Society