The Society of Lloyd's v Clementson [QBD (Comm)]
| Jurisdiction | England & Wales |
| Judge | Saville J |
| Judgment Date | 16 December 1993 |
| Court | Queen's Bench Division (Commercial Court) |
| Date | 16 December 1993 |
Queen's Bench Division (Commercial Court)
Saville J.
V V Veeder QC and Peter Duffy (instructed by John Mallinson) for Lloyd's.
Michael Burton QC, Paul Griffin and Nicholas Green (instructed by S J Berwin & Co) for Mr Clementson.
Anthony Hooper QC, Craig Orr and Nicholas Green (instructed by Michael Freeman & Co) for Mr Mason.
The following cases were referred to in the judgment:
Ashmore & Ors v Corpn of Lloyd's (No. 2)WLR [1992] 1 WLR 446; [1992] 2 Ll Rep 620.
Liverpool City Council v Irwin & AnorELR [1977] AC 239.
R v Lloyd's of London, ex parte Briggs & OrsUNK [1993] 1 Ll Rep 176.
Lloyd's insurance market — Underwriting conducted on behalf of members by underwriting agent through syndicates — Each new member entering into “general undertaking” with Lloyd's — Central fund to discharge members” obligations as last resort — Annual contribution made by each member to central fund — Members” liabilities discharged by Lloyd's through payments from central fund — Central fund governed by byelaws enacted pursuant to statutory powers—Whether byelaw valid — Whether terms to be implied into general undertaking between individual members and Lloyd's — Whether Lloyd's practices anti-competitive contrary to Community law — Lloyd's Act 1982, s. 14 — EC Treaty, art. 3(g) (formerly 3(f)), 5, 85(1)(2), 90.
This was a hearing on preliminary issues of law arising out of actions pending before the Commercial Court concerning claims by Lloyd's for reimbursement from members of sums paid out of Lloyd's central fund to meet the members' underwriting liabilities.
An individual who was not a professional underwriter but wished to underwrite insurance at Lloyd's was required to enter into an agreement with Lloyd's known as the general undertaking, and to join one or more syndicates, taking a specified share in the underwriting business of such syndicates. Each syndicate had a professional underwriter who transacted business on behalf of syndicate members. Each member, known as a name, was a sole trader liable only for the specified share of any risk underwritten. A member was required to appoint an agent responsible for the actual underwriting and administering the business. To ensure adequate cover for liabilities only individuals with sufficient personal wealth were admitted as members by Lloyd's. Members provided and maintained security at Lloyd's to meet underwriting liabilities, and contributed annually to the central fund. If a member was unable to discharge obligations by meeting cash calls and realising assets held as security at Lloyd's, as a last resort his liabilities could be met out of the central fund. Following heavy losses by certain members Lloyd's discharged their liabilities from the central fund, and sought reimbursement from those members. A considerable number of members brought actions against Lloyd's.
The following issues were heard as preliminary issues of law: (1) the validity of a byelaw concerning the application of the central fund; (2) whether certain terms should be implied into the general undertaking between individual members and Lloyd's; and (3) whether Lloyd's had been guilty of anti-competitive practices contrary to the EC Treaty.
Held, ruling accordingly:
1 Clause 7(d) of the Central Fund Byelaw, which provided for the application of moneys from the central fund for the purpose of extinguishing or reducing the liability of any member “to any person whatsoever whether or not arising under a contract of insurance” was not unnecessarily and unreasonably wide since it was qualified by the closing words of the clause. Consequently the clause referred to the liabilities of a member as a member.
2 The object of the general undertaking was to bind those who wished to become or to continue to be Lloyd's members to comply with the rules, regulations and agreements of Lloyd's by a contractual undertaking. Since the agreement wholly carried through that object, it was unnecessary to imply any of the suggested terms.
3 In discharging from the central fund the underwriting obligations of members who had failed to honour their commitments and in seeking reimbursement of such payments from those members Lloyd's was acting in a regulatory capacity outside the provisions on ant-icompetitive practices of art. 85 of the EC Treaty.
4 There was no infringement of art. 85 of the treaty in s. 14 of the Lloyd's Act 1982 which provided some immunity from liability in damages to Lloyd's in regulating the insurance market, nor in Membership Byelaw No. 9 of 1984 which restricted members from underwriting in any other insurance market or from broking at Lloyd's without the consent of the Council of Lloyd's, nor in the mandatory standard agency and sub-agency agreements, which did not impose restrictions over and above what the very nature of the Lloyd's market itself required.
Saville J: In these cases the Society of Lloyd's makes claims against the defendant names under s. 10 of the Central Fund Byelaw for reimbursement of sums paid from the central fund. The defendants resist these claims on a number of grounds. In October this year and as part of the management of the Lloyd's litigation as a whole, I ordered the hearing of certain preliminary issues. I now give judgment on these issues.
An individual who is not a professional Lloyd's underwriter but who wishes to underwrite insurance at Lloyd's must (among other things) first become a member of the Society of Lloyd's and then join one or more syndicates, in effect taking a specified share in the underwriting business of such syndicates. Each syndicate has a professional underwriter who transacts business on behalf of syndicate members. It has always been a fundamental principle of underwriting at Lloyd's that each member is a sole trader and thus only liable for the specified share of any risk underwritten. In other words, the member is only liable to policyholders to the extent of that share. This fundamental principle is now enshrined in s. 8 of the Lloyd's Act 1982 in the following terms:
“An underwriting member shall be a party to a contract of insurance underwritten at Lloyd's only if it is underwritten with several liability, each underwriting member for his own part and not for one another, and if the liability of each underwriting member is accepted solely for his own account.”
In view of the number of members involved, it would be wholly impracticable for each member personally and separately to negotiate his or her part of any underwriting transaction, to collect his or her share of the premium or to negotiate and pay his or her share of any claims. Thus under the rules of the Society a name must appoint agents who, among other things, are responsible for the actual underwriting, keeping the accounts of each member, arranging for the collection of premiums and the negotiation and payment of claims and other expenses of the business, and attributing the resulting debits and credits of the business to the members according to their respective shares.
There is another factor of the greatest importance, namely the need to protect policyholders so as to ensure, so far as is possible, that their legitimate claims are duly met. In general terms most insurance is a business where in return for a payment in advance (the premium) the insurer undertakes a risk of loss which would otherwise fall on the insured. There would be no point in the business unless there was a real chance that a loss could, in money terms, exceed the premium. There would also be no point in the business unless there was confidence that the insurer would be able to pay when a loss occurred. Thus it is of paramount importance that insurers so conduct their affairs that their assets are and remain sufficient to meet their known and estimated liabilities under insurances that they have written. Experience of failures of insurance companies in the last century showed the need for state intervention and regulation in this respect and this now exists in the form of the Insurance Companies Act 1982 and regulations made thereunder.
The Society of Lloyd's has many rules and regulations designed to ensure, so far as is possible, that those insuring or reinsuring at Lloyd's are adequately protected in this regard. The individual must show a level of personal wealth before being admitted to membership of the Society. All premiums have to be paid into a trust fund and remain unavailable for distribution to the member while the accounts of the underwriting year to which they are attributable remain open and until proper provision is made for outstanding liabilities. The member must provide and maintain security at Lloyd's in the form of readily realisable assets to meet underwriting liabilities including the costs of running the business. The member agrees with the agents to provide funds upon demand to enable the agents to meet these liabilities. Under the Insurance Companies Act the accounts of every member must be audited each year and a certificate supplied by the auditors to the Secretary of State for Trade and Industry to the effect that the member has sufficient acceptable assets to meet known and estimated underwriting liabilities.
There is also, as an integral part of these arrangements, the central fund. Each member contributes annually to this fund. If a member fails to provide the agents with sufficient money and the deposits and security are not in themselves enough to satisfy solvency requirements, the fund can be “earmarked” by the amount of the shortfall so as to enable that part of the central fund to be taken into account for the purposes of the solvency requirements of the member concerned. The Central Fund Byelaw stipulates that the Society has the right to demand payment from the member of any amount so earmarked. If the member persists in a failure to meet cash calls from...
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