XL London Market Ltd and Another v Zenith Syndicate Management Ltd and Another
| Jurisdiction | England & Wales |
| Judge | The Hon. Mr Justice Langley |
| Judgment Date | 25 May 2004 |
| Neutral Citation | [2004] EWHC 1182 (Comm) |
| Date | 25 May 2004 |
| Court | Queen's Bench Division (Commercial Court) |
| Docket Number | Case No:Double-click to add case number |
[2004] EWHC 1182 (Comm)
IN THE HIGH COURT OF JUSTICE
COMMERCIAL COURT
QUEENS BENCH DIVISION
The Honourable the Hon. Mr Justice Langley
Case No:Double-click to add case number
Ms C. Blanchard (instructed by Messrs Elborne Mitchell) for the Claimants
Ms. J. Dias (instructed by Messrs Eversheds) for the Defendants
Hearing date: 17 th May 2004
Approved Judgment
I direct that pursuant to CPR PD 39A para 6.1 no official shorthand note shall be taken of this Judgment and that copies of this version as handed down may be treated as authentic.
The Hon. Mr Justice Langley:
The Application.
This is an application for pre-action disclosure pursuant to CPR Part 31.16. In the alternative application is made under CPR Part 31.18 for disclosure pursuant to the principle enunciated in Norwich Pharmacal Co v Customs & Excise Commissioners [1974] AC 133. Inspection of a few of the same documents is also sought pursuant to CPR 31.14 on the basis that they are mentioned in a witness statement of Mr Dowlen, the Managing Director of the First Respondent ("ZSML").
Background.
The Applicant companies, to which I shall refer as XL London and Brockbank, are the managing agents of two Lloyd's syndicates 861/1209 and 253/2253 respectively and make the applications in that capacity. I shall refer to the two syndicates as the Brockbank syndicates.
The second respondent company, "Acott & Tilley", is the sole member of syndicate 2002. ZSML is the managing agent of syndicate 2002.
For the 1993 to 1999 years of account the Brockbank syndicates wrote a book of broker based motor business. In 1999 the syndicates decided to cease writing motor business. In September 1999 they agreed to sell the goodwill of the business to Acott & Tilley the vehicle of the management who had conducted the business for the Brockbank syndicates. For the 2000 year of account the business was renewed into syndicate 2002, a new syndicate formed by Acott & Tilley for that purpose.
In addition a Run Off Agreement was entered into on 4 January 2000 whereby XL London (in its previous name of Brockbank Syndicate Management Limited) and Brockbank effectively delegated their powers as managing agents of the Brockbank syndicates to Acott & Tilley which agreed to run off the 1993 –1999 business to extinction. By Clause 7 of the Run-Off Agreement XL London and Brockbank expressly retained the right to inspect the books and records of the run-off.
Acott & Tilley sub-contracted responsibility for the run-off to Zenith Insurance Management Ltd ("ZIML") a then wholly-owned subsidiary. When, with effect from 1 January 2001, ZSML began to act as managing agent for syndicate 2002, ZIML became a wholly-owned subsidiary of ZSML. The ultimate holding company of both Acott & Tilley and ZSML is Zenith UK Holdings Ltd.
During the period of the run-off Acott & Tilley provided quarterly reports to XL London and Brockbank on the run-off, including reserving levels, which were reviewed regularly by KPMG on behalf of XL London and Brockbank.
In about June 2000 ZIML appointed a new claims management team. The new team informed KPMG that some of the larger personal injury claims had been settled for well over their reserved value and that the reserve for all personal injury claims would therefore be reviewed. After this review the reserves were substantially increased in the third quarter of 2000 and thereafter.
The increase in reserves was also investigated on behalf of the Brockbank syndicates by KPMG and by Eversheds. Nothing untoward or objectionable was discovered or recorded in their reports completed in June and August 2001. It is the uncontradicted evidence of XL London and Brockbank, however, that these investigations, like the regular reserve reviews, were necessarily conducted on the basis of information provided by Acott & Tilley.
In June 2001 XL London and Brockbank sought quotations for the reinsurance to close (RITC) the 1993 to 1999 years of account. Quotations were received from ZSML, as managing agent of Syndicate 2002, and two others (albeit one of the two was late). The ZSML quotation was the lowest and was accepted. As a result two RITCs were entered into on 11 March 2002 (one for each Brockbank syndicate) at a total premium of about £44.1m. That premium was based on estimates made by ZSML of net outstanding claims of £24.8m and of IBNR of £17.4m. The premium was of course intended to represent an estimate of the ultimate liability to be incurred in running off the business to extinction.
Lloyd's syndicates make quarterly returns to Lloyd's itself which include a forecast of results. Syndicate 2002 submitted a forecast for the second quarter of 2002 showing a forecast profit of some £18.2m. The forecast would have been made in about September 2002 only some 6 months after the RITCs. It is the uncontradicted evidence of XL London and Brockbank that this profit forecast was almost entirely the result of a reduction in the reserves for the 1993 to 1999 motor business. Indeed for the year end Syndicate 2002 reported a release by way of profit to Acott & Tilley of £23.5m of the RITC premium paid by the Brockbank syndicates.
At the time of the quotation by ZSML for the RITC there were only 95 claims in excess of £100k of which 10 had closed; at the end of March 2002 there were a total of 2,241 claims files (1,241 bodily injury cases) outstanding; and by early July 2003 only 627 claims files (367 bodily injury cases) were still outstanding. The RITC premium calculation was based on gross outstanding claims of some £28.8m (£282.6m less paid claims of £234.8m) and gross IBNR of some £19m.
It is also the evidence of XL London and Brockbank, unsurprisingly, and again without contradiction, that it is most unusual for over reserving of this magnitude to become apparent in such a short time scale let alone with a book of motor business which was, as the figures show, high volume low value business. As it is modestly put "something must have gone badly wrong with the reserves" and an explanation is called for. It is also understandable that there is evidence that Lloyd's itself and the regulators have taken an interest in these events.
The possible explanations for the release of reserves suggested by XL London and Brockbank are negligence of Acott & Tilley in setting the reserves during the run off; negligence of KPMG and Eversheds in addressing the reserves, (albeit I agree that it seems improbable that such negligence could exist without negligence by Acott & Tilley also); some singular event or events which changed the picture or, as has been hinted at in some of Acott & Tilley's evidence, that the release itself may yet prove optimistic or wrong; or any combination of these possibilities. At present it is not known to anyone, apart from Acott & Tilley, how the £23.5m is made up. It could be over reserving on some outstanding claims or IBNR or, of course, both.
XL London and Brockbank have sought an explanation as well as the production of the documents the subject of the present applications. But it is, I think, of some significance that no explanation has been offered for the release to profit itself nor of how it was made up. Acott & Tilley and ZSML say the release was "a commercial decision" made by them and "as such was a matter for them only" and whether or not it was justified "is no business" of XL London or Brockbank.
The Documents Sought.
The documents which XL London and Brockbank seek to inspect relating to the book of motor business subject to the RITCs are:
i) All Claims files (open and closed) for the period 2000 to 2003.
ii) All procedure manuals, instructions, e-mails and memoranda regarding claims reserving philosophies and practices for the period 2000–2003.
iii) All board and staff meeting minutes, relating to the planning or implementation of changes to working/reserving practices.
iv) All printouts of reserve histories and large movement reports.
v) Any documentation evidencing how the bid for the RITC was put together and its prices, including working papers/actuarial assessments, board minutes,...
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