Mr Justice Rix:
- The subject matter of the two actions before me is a claim in damages under section 2(1) of the Misrepresentation Act 1967 (the "Act"). Section 2(1) provides as follows:
"Where a person has entered into a contract after a misrepresentation has been made to him by another party thereto and as a result thereof he has suffered loss, then, if the person making the representation would be liable to damages in respect thereof had the misrepresentation been made fraudulently, that person shall be so liable notwithstanding that the misrepresentation was not made fraudulently, unless he proves that he had reasonable ground to believe and did believe up to the time the contract was made that the facts represented were true."
- The claimants are stop loss insurers of a large number of Lloyd's names for the 1990 and 1991 years of account and the defendants are insurance brokers who were the coverholders authorised by the claimants to bind and issue stop loss policies on their behalf in respect of those years.
- Prior to entering into the binding authorities for each of the years the claimants were shown and taken through a presentation document which had been prepared by the brokers and which described how the underwriting of the stop loss policies would be undertaken. The misrepresentations relied upon are certain of the statements contained in those presentations. To some extent oral representations outside those documents are also relied on, but in essence they add nothing to the claimants' case on the written material.
- The core of the claimants' complaint is that the presentation documents represented that each risk, that is to say each of the names who proposed to take out stop loss insurance from the claimants, would be individually assessed by the leading underwriter, Mr Victor Broad of syndicate 370, in accordance with stated underwriting criteria, but that Mr Broad did not do so, and that the brokers were negligent (but not dishonest) in representing that he would. In the words of section 2(1) of the Act, the complaint is that the claimants have suffered loss as a result of entering into the binding authorities and that the brokers are unable to prove that they had reasonable ground to believe that the facts represented were true.
- The loss claimed is all the loss suffered by the claimants by reason of having been required to indemnify the Lloyd's names in accordance with the terms of the stop loss policies against their losses at Lloyd's in the 1990 and 1991 years of account respectively, less a credit for premiums paid and for interest on those premiums up to the time when they were exhausted by payment of losses. In other words, the damages claimed are on the basis that but for the alleged misrepresentations the claimants would not have entered into the binding authorities with the brokers and thus would neither have received the premiums which they did receive nor have suffered the losses which they have paid out to the names. Such damages are on a "no transaction" basis and represent the measure of damages available in fraud. Subject to the assessment of the credit to be given in respect of interest on the premiums received, the parties have agreed the quantum of the loss claimed.
- The parties are at issue, however, as to the correct measure of loss. The defendants accept that in this court they are bound by the court of appeal decision in Royscot Trust Ltd v. Rogerson [1991] 2 QB 297 to the effect that damages for innocent (ie non-fraudulent) misrepresentation under section 2(1) of the Act are exigible under the tortious measure for fraud rather than the tortious measure for negligence. However, they reserve the right to argue in a higher court that that decision is wrong and that the measure of loss for innocent misrepresentation is the same as that available at large for the tort of negligent misrepresentation.
- The decision in Royscot Trust v. Rogerson has become of all the greater moment for any claim under section 2(1) of the Act in the light of recent developments in the law of damages to be found in particular in two House of Lords decisions, those of Banque Bruxelles Lambert SA v. Eagle Star Insurance Co sub nom South Australia Asset Management Corporation v. York Montague Ltd [1997] AC 191 and Smith New Court Securities Ltd v. Citibank NA [1997] AC 254. In the former it was held that damages for negligent misrepresentation even in a "no transaction" situation may not be of all the foreseeable loss caused by entering into the transaction but only of the foreseeable consequences of the information being wrong. This is because where the duty is to take reasonable care to provide information on which someone else will decide on a course of action, a defendant is liable for breach of that duty only for the consequences of that information being wrong (as distinct from the position where the duty is to advise someone as to what course of action should be taken, in which case negligence will render a defendant responsible for all the foreseeable loss which is a consequence of that course of action having been taken): at 214G/F. Despite a bald submission on behalf of the claimants that the present case falls into the latter category of a duty to advise, I find that the defendants owed no such duty to the claimants.
- In Smith New Court v. Citibank, however, the House of Lords confirmed that fraud is different and that damages are at large, both foreseeable and unforeseeable, provided only that they are directly caused by entering into the transaction induced by the fraud. Lord Browne-Wilkinson (at 267F) reserved the question, expressing no view, whether Royscot Trust v. Rogerson was correct to apply the same measure of loss (in accordance with the then existing rule in Doyle v. Olby (Ironmongers) Ltd [1969] 2 QB 158) to damages for innocent misrepresentation under the Act. And Lord Steyn (at 282H/283C) said this:
"In Royscot Trust Ltd. v. Rogerson [1991] 2 QB 297 the Court of Appeal held that under section 2(1) of the Misrepresentation Act 1967 damages in respect of an honest but careless misrepresentation are to be calculated as if the representation had been made fraudulently. The question is whether the rather loose wording of the statute compels the court to treat a person who was morally innocent as if he was guilty of fraud when it comes to the measure of damages. There has been trenchant academic criticism of the Royscot case: see Richard Hooley, "Damages and the Misrepresentation Act 1967" (1991) 107 L.Q.R. 547. Since this point does not directly arise in the present case, I express no concluded view on the correctness of the decision in the Royscot case, I express no concluded view on the correctness of the decision in the Royscot case. The second case is the decision of the Court of Appeal in Downs v. Chappell [1997] 1 WLR 426. The context is the rule that in an action for deceit the plaintiff is entitled to recover all his loss directly flowing from the fraudulently induced transaction. In the case of a negligent misrepresentation the rule is narrower: the recoverable loss does not extend beyond the consequences flowing from the negligent misrepresentation: see Banque Bruxelles Lambert S.A. v. Eagle Star Insurance Co. Ltd. [1997] AC 191."
Lord Keith of Kinkel and Lord Slynn of Hadley agreed with the speech of Lord Steyn as well as that of Lord Browne-Wilkinson. In the article referred to in Lord Steyn's speech, Mr Hooley points out that it is arguable that the words in section 2(1) "that person shall be so liable" etc mean merely that "that person shall be liable in damages notwithstanding that at common law damages were only available for misrepresentations proved to be fraudulent".
- The narrower measure of damages in negligence would be important in this case, were the rule in Royscot Trust v. Rogerson ever to change, because Mr John Rowland QC accepts on behalf of the claimants that they are unable to prove any loss flowing from the alleged misrepresentations other than has been caused from the acts of entering into the binding authorities themselves. Thus there has been no attempt to prove that the underwriting undertaken by Mr Broad, even if not carried out in accordance with the brokers' presentations, was negligently or imprudently carried out, or that Mr Broad did not write as good a book of stop loss risks as if he had followed the underwriting criteria mentioned in the presentations to the letter. It is perhaps for this reason that, although the claimants had pleaded an alternative cause of action in tort, outside the Act, for negligent misrepresentation, indeed it may be said to have been pleaded as a primary cause of action, that claim was not pursued at trial at all, but was formally abandoned.
- In the circumstances, were the measure of damages for innocent misrepresentation under the Act to consist not in the consequences, unforeseeable as well as foreseeable, of entering into the binding authorities, but in proving what foreseeable loss was caused by the inaccuracy of the information, the claimants would have been unable to prove any loss. That is because the claimants are unable to prove or even to allege that they would not have suffered as great a loss even if the representations complained of had been true. As Lord Hoffmann said in Banque Bruxelles v. Eagle Star (at 216E):
"One therefore compares the loss he has actually suffered with what his position would have been if he had not entered into the transaction and asks what element of this loss is attributable to the inaccuracy of the information."
- The claimants are unable to say that any of the quantum agreed was attributable to any inaccuracy in the brokers' representations as to the manner in which Mr Broad would underwrite the business. On the contrary, Mr Broad gave evidence, which was uncontradicted as far as it went, that the losses incurred were a consequence of the general difficulties of the market, and in particular in 1990, when the losses were particularly severe, were the result of the unforeseeable decision of Lloyd's to permit syndicates to leave their year open.
- The measure of damages in fraud or negligence is also to be contrasted with the measure of damages for breach of contract. It is well recognised that the tortious measure differs from the contractual in that under the former the claimant recovers the relevant part of his loss due to his change in position in reliance on the representation concerned, whereas in contract he is entitled to be put in the same position as he ought to have been in if the warranty had been performed. As Lord Hoffmann put it (ibid at 216F):
"Both measures are concerned with the consequences of the inaccuracy of the information but the tort measure is the extent to which the plaintiff is worse off because the information was wrong whereas the warranty measure is the extent to which he would have been better off if the information had been right."
- A particular feature of the present case is that the representations of which complaint is made were by and large, and were ultimately accepted as being, representations as to the future, as to the way in which Mr Broad would undertake the underwriting in the coming year. They might perhaps have been pleaded as collateral warranties, but were not. Some of them were in fact pleaded as contractual terms, on the mistaken impression, I was told, that the presentation documents were incorporated into the binding authorities subsequently entered into. These contractual claims were, however, all withdrawn, for the most part before trial, or at any rate to the extent that any of them survived to trial the claimants had already stated in correspondence that no damages were claimed for breach, and at trial the allegation of breach was itself not persisted in. Being representations as to the future, the question arose as to how they could be relied on for the purposes of section 2(1) as representations of fact: the answer given by the claimants was that they involved implicit representations as to Mr Broad's and/or the brokers' intentions, negligently made without reasonable grounds for believing them to be correct. Nevertheless, it will be readily appreciated how such representations as to the future might perhaps be said to be more appropriately a matter for complaint in contract, either as collateral warranties or as part of the contracts themselves. If they had been, the damages would have been nil.
- The intriguing nature of the claim, therefore, is that representations as to the future, which in contract would have produced no damages in the event of breach, and which in tort would have produced no damages in a cause of action for Hedley Byrne negligent misrepresentation, nevertheless when presented as statements of existing intention for the purposes of a claim in innocent misrepresentation under the Act may, if they are found to be incorrect, produce damages, as per Royscot Trust v. Rogerson, on a scale commensurate with fraud. When, moreover, it is considered that the test of causation is inducement, that the misrepresentation need not be the sole or decisive inducement as long as it materially contributed to the decision of the representee to enter into the contract (Edgington v. Fitzmaurice (1885) 29 Ch D 459, Pan Atlantic Insurance Co Ltd v. Pine Top Insurance Co [1995] 1 AC 501), and that a material misrepresentation, ie one likely to influence a reasonable man, sets up a presumption or inference (of fact, not law) that the claimant has been induced, subject to rebuttal the burden of which is on the defendant (Redgrave v. Hurd (1881) 20 Ch D 1 at 21, as explained by Lord Blackburn in Smith v. Chadwick (1884) 9 App Cas 187 at 196), it can be appreciated what a mighty weapon lies in section 2(1) of the Act.
- What, however, is the test of truth or falsity, and how difficult is it to rebut the inference of inducement? Is a representation true if in substance it is true, even if to some extent, let us assume some real and more than trivial extent, it is false? Moreover, where the transaction is complex and the representations are manifold, much may depend on how they are categorised. If the representations are chopped into small slices, and the microscope is turned up to investigate each slice, it may be easier to establish the inaccuracy of a representation than if the matter is looked at more broadly. On the other hand it may be that the smaller the slice, even on the assumption of materiality, the weaker is the inference of inducement. So these questions are interlinked.
- I do not know of any statement of principle as to the test of truth or falsity outside section 20 of the Marine Insurance Act, 1906. That provides in part as follows:
"(3) A representation may be either as to a matter of fact, or as to a matter of expectation or belief.
"(4) A representation as to a matter of fact is true, if it be substantially correct, that is to say, if the difference between what is represented and what is actually correct would not be considered material by a prudent insurer.
"(5) A representation as to a matter of expectation or belief is true if it be made in good faith."
- It is now recognised that such sections of the Marine Insurance Act apply outside the scope of marine insurance itself to other insurance contracts. However the binding authorities, although entered into for the purpose of underwriting, may not in themselves have been contracts of insurance and in any event were not presented to me as such, nor was any reference made to section 20. Nevertheless, it seems to me that I could well adopt the test of truth set out in section 20(4), bearing in mind that materiality in the context of insurance contracts is somewhat different to the way in which the term is used in general. Thus a representation may be true without being entirely correct, provided it is substantially correct and the difference between what is represented and what is actually correct would not have been likely to induce a reasonable person in the position of the claimants to enter into the contracts.
- As for the inducement, JEB Fasteners Ltd v. Marks Bloom & Co [1983] 1 All ER 583 illustrates the limitations of the doctrine of partial inducement (albeit that was a case in Hedley Byrne misrepresentation in which context it has been said that the term denoting causation is properly speaking reliance and not inducement: Downs v. Chappel [1997] 1 WLR 426 at 433, Bristol and West Building Society v. Mothew [1998] Ch 1 at 11). At first instance the judge had found that although the plaintiffs had relied on the accounts prepared by the defendant accountants they had not been caused any loss by the defendants' negligence. Sir Sebag Shaw said (at 587e):
"What the judge is really stating as his underlying meaning is that, while the content of the accounts was observed and considered by Messrs John and Eric Bufton, it did not in any material degree affect their judgment in deciding whether or not to take over BG Fasteners Ltd" (emphasis added).
Donaldson LJ put the matter thus (at 588c/d):
"In real life decisions are made on the basis of a complex of assumptions of fact. Some of these may be fundamental to the validity of the decision. 'But for' that assumption, the decision would not be made. Others may be important factors in reaching the decision and collectively, but not individually, fundamental to its validity. Yet others may be subsidiary factors which support or encourage the taking of the decision. If these latter assumptions are falsified in the event, whether individually or collectively, this will be a cause for disappointment to the decision-taker, but will not affect the essential validity of his decision in the sense that if the truth had been known or suspected before the decision had been taken, the same decision would still have been made" (emphasis added).
Stephenson LJ said this (at 589b and 589h):
"But, as long as a misrepresentation plays a real and substantial part, although not by itself a decisive part, in inducing a plaintiff to act, it is a cause of his loss and he relies on it, no matter how strong or how many other matters which play their part in inducing him to act...
"And it is only because the judge complicated the matter by introducing what would have encouraged for what did induce, and so finding reliance where no true reliance was, that he has given counsel for the plaintiffs any real ground for appealing his judgment that the defendants did not cause the plaintiffs' loss" (emphasis added).
I derive from that case the distinction between a factor which is observed or considered by a plaintiff, or even supports or encourages his decision, and a factor which is sufficiently important to be called a real and substantial part of what induced him to enter into a transaction.
- The law of misrepresentation has developed in fits and starts. At one time a misrepresentation (outside contractual or fiduciary relationships) only granted a remedy in two situations: a pre-contractual misrepresentation could be a ground for avoiding a contract; and a remedy in damages was available in the tort of deceit but only of course if there was fraud. No damages were available for an innocent misrepresentation, not even if it was a negligent one. Then in 1963 in Hedley Byrne & Co Ltd v. Heller and Partners Ltd [1964] AC 465 the House of Lords made it plain that a duty of care to avoid negligent misstatements could arise between persons in a special relationship and breach of that duty could found recovery in damages. Only a few years later in 1967 the Misrepresentation Act extended a right to damages under section 2(1) in the case of any misrepresentation inducing a contract made by one party to another party to it where the representor is unable to prove absence of negligence or bad faith. In the meantime, the law of contract had developed the collateral warranty, albeit in Heilbut Symons & Co v. Buckleton [1913] AC 30 at 47 Lord Moulton was able to say that it was viewed with suspicion by the law. In time that suspicion decreased, while the passing of the Act in 1967 with its alternative remedy under section 2(1) made the inference of a collateral contract less necessary. Not, however, entirely unnecessary: for promissory representations or representations as to the future are harder to fit within the scope of the Act, which has been interpreted as applying to the classic representation of present or past fact, as distinct from representations as to the future and statements of opinion, expectation, intention or law.
- One result of this piece-meal historical development is that tests developed for one situation may not operate adequately or fairly in another situation. Another result is that the inadequacy of existing remedies at any one time to deal with the pressure of facts in one case may have led to the development of doctrine which may not operate as well in different circumstances and against the background of a wider range of remedies. To take one example: it is the pressure of dishonesty which led to the doctrine that statements of opinion or as to the future can be read as containing an implied statement of present fact as to a person's beliefs or intentions: see eg Edgington v. Fitzmaurice ("the state of a man's mind is as much a fact as the state of his digestion" per Bowen LJ at 483, a case of fraud). That doctrine has led in turn to the implication that a representor has reasonable grounds for his statement of belief or intention: see eg Brown v. Raphael [1958] Ch 636, where the court of appeal stressed that the representor was in a far better position to ascertain the facts than the representee. In other situations, however, where fraud is not in issue, the courts have sometimes preferred to say that statements of belief or as to the future, or promissory representations, should take effect as terms of the contract (or it might be said as collateral warranties) or not at all: see eg Economides v. Commercial Union Assurance Co plc [1998] QB 587, applying to a contract of household contents insurance section 20(5) of the Marine Assurance Act. In general, the authorities indicate the concern of the courts to do justice in the particular case: see the discussion in CHITTY on Contracts, 1999, 28th Edition, Vol. I, at para 6-010.
- With that introduction, I will turn to the facts.
The parties
- The claimants comprised some but not all of the subscribers to the 1990 and 1991 binding authorities ("binders"). There was one binder for the 1990 year, and two binders, a primary binder and an excess binder, for the 1991 year. In the action concerning the 1990 binder (the "1990 action") the claimants subscribed to 32.22% of the total of all subscribing lines, and in the action concerning the 1991 binders the claimants subscribed to 52.37% of the primary binder and 50% of the excess binder (16.27% of the 1990 binder, 7.67% of the 1991 primary binder and 5% of the 1991 excess binder) and naturally was not a claimant: but why the other subscribers amounting to 51.5% of the 1990 binder, 40% of the 1991 primary binder and 45% of the 1991 excess binder, did not join in the claims I do not know.
- The defendants are (1) Swire Fraser Limited, a Lloyd's broker formerly known as Robert Fraser Insurance Brokers Limited, and (2) its wholly owned subsidiary Fraser Special Risks Limited, formerly known as Robert Fraser Special Risks Limited. Both companies held themselves out as being experts in broking and placing personal stop loss insurance for names at Lloyd's. No distinction was drawn between the two defendants for the purposes of the trial before me. I shall therefore simply call them "the brokers", for the most part without distinguishing between them.
- In fact, however, the binders were entered into by the first defendants, whom I shall call "Robert Fraser", while the presentations made to prospective subscribers were made by the second defendants, whom I shall call "Special Risks". The pleaded allegation was that the presentations were made by Special Risks on behalf of Robert Fraser, alternatively on its own behalf: at trial the defendants did not deny that Special Risks was acting on behalf of Robert Fraser in making such presentations. Although the claims were originally pleaded on a wider basis against both defendants, ultimately the only basis which was carried through to the end of trial was a claim under section 2(1) of the Act: therefore it should I think follow that this claim can only be made against Robert Fraser, since the remedy under section 2(1) lies only against the misrepresentor who is "another party thereto" ie to the contract induced by the misrepresentation.
- The claimants in each action had been a combination of company underwriters and Lloyd's syndicates. As a result of the settlement of the so-called Lloyd's litigation concluding in the Reinsurance and Run-off Contract made on 3 September 1996 ("R&R"), these claims brought by names on Lloyd's syndicates against the brokers were assigned to Equitas Reinsurance Ltd ("ERL") and thence under the Retrocession Agreement also made on 3 September 1996 by ERL to Equitas Limited ("Equitas"). Equitas thus became by amendment a claimant in these actions. A further claimant, Mr S R Woodland, was also joined to represent the interests of non-accepting names, ie those names who had not accepted the settlement offer under R&R: it was their case that their claims had not been so assigned. The brokers pleaded that the claims of both accepting and non-accepting names had been assigned ultimately to Equitas, and that Equitas had waived such claims under clause 6.1 of the Brokers' Agreement of 15 August 1996. There was an issue whether the claims before me nevertheless fell outside such waiver by reason of the exception contained in clause 6.4(c) of the Brokers' Agreement. Ultimately these issues never fell to be debated at trial (other than in opening skeleton arguments) because the claimants putting forward the claims of reinsuring names settled with the brokers in the course of trial on the terms that they would make no recovery and would make a contribution to the brokers' costs.
- As a result of that partial settlement of the claims before me, the only claimants left in these two actions were the company underwriters. These were as follows: in the 1990 action, Avon Insurance plc ("Avon") and Trygg-Hansa Forsakrings AB ("Trygg-Hansa"), and in the 1991 action those two companies again and in addition Iron Trades Insurance Company Limited ("Iron Trades"), UAP Provincial Insurance plc formerly Provincial Insurance plc ("Provincial"), and Vesta Reinsurance Company AS ("Vesta").
Personal stop loss insurance
- Personal stop loss (or PSL) policies are a type of stop loss policy specifically designed for Lloyd's names under which they can protect themselves against their net underwriting losses for a given underwriting year (or in respect of their aggregate losses over a three year period). They are generally written on an excess of loss basis. In Society of Lloyd's v. Robinson [1999] 1 WLR 756 Lord Steyn at 763G described them as -
"...a form of reinsurance which reinsures aggregate losses of a [name's] underwriting in a given year and indemnifies [the name] in respect of a certain limit..."
The stop loss policies involved in these actions were issued on behalf of the claimants by the brokers, as coverholders under binding authorities. The claimant underwriters agreed to indemnify the names in respect of the amount by which their overall net underwriting loss, after taking account of any profits earned, exceeded in the relevant year of account the excess agreed in the policy up to the amount of the limit of indemnity agreed. The net underwriting loss was generally determined as at the end of the third year from the beginning of the relevant year of account. That reflected the normal Lloyd's cycle of using a reinsurance to close so as to close a relevant year of account's underwriting performance after 36 months. The stop loss underwriters would therefore have the premium income for at least three or so years before there could be any question of paying losses.
- In the late 1980s, after very many years of profits, the Lloyd's insurance market suffered unprecedentedly large losses. The losses, at any rate in their severity, were not anticipated. To some extent these losses were concentrated in a relatively few syndicates: the litigation concerning certain syndicates that specialised in London excess of loss underwriting has become well known, see for instance Deeny v. Gooda Walker [1996] LRLR 183. Even so, some excess of loss syndicates managed to avoid the huge losses suffered by others. The opening of Phillips J's judgment in that case is worth citing:
"1988, 1989 and 1990 were bad years for Lloyd's. In each of those years the market as a whole made a loss. The loss for 1988 was calculated by Chatset Ltd., who publish a Lloyd's "League Table", at £510m., or 13.7 per cent of the net premium income. In 1989 these figures were £2063 m. or 52 per cent of net premium income and in 1990 they were £2915 m. or 55.2 per cent of net premium income. These losses were not borne evenly by the Names at Lloyd's. [The names on four Gooda Walker syndicates] ... claim to have lost sums totalling some £630 m."
- was also a bad year, but not to the extent of the two earlier years.
- The cause of the losses may be to some extent controversial, but was not explored in detail before me. One aspect of it was the falling together of a number of catastrophes generating huge claims. To some extent it arose from the impact of escalating long tail losses arising from asbestosis and also from environmental claims, particularly in the US. There was, however, some evidence before me from Mr Broad, the major witness appearing for the brokers, that the most important factor accounting for the 1990 losses was the unexpected decision by Lloyd's to go back on its word given in the autumn of 1989 that in 1990 syndicates would not be allowed to keep their accounts open. In the event, very many syndicates did keep their 1990 year of account open as at the end of 1992, and that occurred in respect of the 1991 year of account as well. Mr Broad's evidence to this effect and the importance of this decision in concentrating losses in those years of account was not contradicted by the claimants' evidence. The consequence of these factors was to concentrate losses within the 1990 and to a lesser extent the 1991 years of account, as the open years had to go into run off.
The Robert Fraser scheme
- The brokers were one of a small number of units which marketed a stop loss scheme. Competitive schemes were run by Holman Wade, Carritt and Fenchurch. The selling point of the Robert Fraser scheme, as the brokers' scheme was known, was that it did not operate on a tariff basis, but was personally assessed and underwritten by Mr Victor Broad of syndicate 370, an acknowledged expert in the field. A tariff based scheme entails automatic acceptance for names who meet minimal conditions (viz participation in at least 5 syndicates, see Fenchurch's 1989 tariff) at tariff rates, loadings and discounts. It does not involve any assessment of the spread or quality of the name's portfolio of syndicates, other than is reflected in automatic discounts for participation in larger numbers of syndicates or automatic loadings in the case of larger lines.
- The marketing of the Robert Fraser scheme was in the hands of Mr Peter Roxburgh and Mr David Seel. They had been working together as a team, in association with Mr Broad, in developing personal stop loss business since about 1983, when they were with Hogg Robinson. They joined Robert Fraser in 1987. Until the 1989 year the facility was underwritten entirely at Lloyd's, but in that year companies began to participate.
- The policies would be bound in the following way. Names would indicate their interest in taking out a stop loss policy to their agents, who would then apply to those operating the various competing schemes for quotes. The agents would supply details of the names' syndicate portfolios to the operators and the latter would then develop quotations, which would provide the names with alternatives from which to choose: for instance, different levels of indemnity at various levels of excess. The name would then decide which quotation, if any, to accept and where there was an acceptance a policy would be bound.
- In the early 1980s the numbers of names taking out stop loss policies increased significantly. The brokers estimated that in 1988 approximately half of all names purchased such policies. During this period and particularly in the years with which this action is principally concerned, 1989[1]/1991, the Robert Fraser scheme itself underwent a significant expansion, as the following figures will illustrate. These figures are not agreed, but I accept them as sufficiently accurate. In 1989, 1,570 proposals were assessed, resulting in 586 policies but also 948 quotations which were not taken up; there were 36 proposals for which no quote was given. In 1990, the total number of proposals assessed had tripled to 4,724, in response to which 1,524 quotations resulted in policies and some 3,200 quotations were not taken up. A separate figure for "no quotes" is not available. In 1991, the number of proposals again soared, this time to 8,128, in response to which 1,735 quotations resulted in policies. 6,080 quotations were not taken up, and 313 proposals were offered no quote.
- The very great expansion in the number of names seeking quotations from the Robert Fraser scheme in these years necessitated certain changes in the procedure of assessment on the part of the brokers and Mr Broad. In 1990, out of the total of 4,724 proposals, some 75% or 3,534 still came forward individually, in the sense that suggested quotations were written on the individual proposal (or portfolio) sheet by the brokers and individually agreed or amended and scratched by Mr Broad or one of his deputies. The remaining 25% or 1,190, however, were dealt with as it were in batches, or in some sense collectively, in that there was an attempt both to treat like cases in a more efficient way, and also to cut down on the amount of separate writing or at least scratching that would have to be performed.
- Two different forms of collectivisation occurred. Under one form, the names from a single agency sharing similar portfolios were all rated by reference to the quotation provided for a single name within that agency's list of proposing members. A "summary sheet" restating the relevant quotation would be drawn up, also containing, beneath the quotation, the names of all the other members within the agency to whom the same quotation would apply. Attached to that summary sheet would be the individual portfolio details of each name, setting out the syndicate number, its class (eg marine, non-marine, motor, aviation etc), its underwriter, and the participation on each syndicate, together with the total API. These portfolio details would appear on individual documents (ie the proposal or portfolio sheets) relating to each name. The quotation would also appear on the portfolio sheet relating to the, as it were, lead name, and every other name's portfolio sheet would be marked, for example, "as Mrs Woodley" or "as Wiltshire". In such cases, there was no need to scratch the portfolio sheet of each name, nor was the same quotation written out on the portfolio sheet of each name. A single scratch by Mr Broad or one of his deputies on the summary sheet sufficed - although there are also occasional scratches on individual "as Mrs Woodley" portfolio sheets. This system was devised by the brokers and Mr Broad working together in order to cut down, in what was regarded as appropriate cases, on the amount of writing and scratching which were needed. I shall refer to this form of collectivisation as the "batch" procedure.
- The other system of collectivisation was adopted where a number of names, all members of a particular agency, were brought together on a summary sheet under the name of that agency but in circumstances where they did not share similar portfolios. In this case, it was not of course possible to provide one quote for all the names so grouped together, and the portfolio sheets for each name which accompanied such summary sheets were separately marked with individualised quotations. The summary sheets stated: "Noted, seen and agreed the attached quotations"; and were scratched by Mr Broad or one of his deputies. Sometimes, as in the case of the batch procedure, the individual portfolio sheets were scratched as well, but on the whole they were not, since the whole purpose of this second type of procedure was to save Mr Broad the trouble of individually scratching each portfolio sheet. But although he[2] did not scratch each such portfolio sheet, he did² look through them, and there are numerous instances where he has altered the quotation which the brokers have, by way of suggestion, written on the portfolio sheets. I shall refer to this form of collectivisation as the "summary sheet" procedure. In truth, it was not really a type of collectivisation, but was spoken of as such during the trial, as a matter of convenience, to distinguish it from those proposals which were dealt with from beginning to end as individual proposals, individually scratched. However, I regard the proposals dealt with under the summary sheet procedure as in every way processed with as much individuality as any of such individual proposals.
- The statistics for such collectivisation are as follows. In 1990, 1,190 out of the total number of 4,724 proposals were dealt with in this way, and of that 1,190, 616 proposals were processed under the batch ("as Mrs Woodley") procedure and 574 under the summary sheet procedure. In 1991, out of 8,128 proposals, only 860 were dealt with outside the collective procedure, but of the remaining 7,268 the great majority, 6,518, received the essentially individual treatment of the summary sheet procedure and only 750 (some 9% of the year's total) were dealt with under the batch procedure.
- These statistics were generated because of the claimants' complaint that proposals had not been individually assessed by Mr Broad, in conflict with the representations that they would be. That complaint went through a number of forms: viz that the proposals had not been looked at individually at all, as reflected by the absence of any scratch on individual portfolio sheets, alternatively that the assessment had been done by one of Mr Broad's deputies rather than by Mr Broad himself; while the ultimate form of complaint was that any assessment had not been carried out in accordance with the underwriting criteria which had been referred to in the brokers' presentations. To understand the claimants' case in misrepresentation, it is necessary to deal in detail with those presentations. Just before I do so, however, I will set out information as to the binders themselves.
The binders
- The binders for the company market were contained in slips which were in essentially the following form. The coverholder was designated as Robert Fraser. The interest was to indemnify the individual assureds, ie the names, in respect of their underwriting loss for the relevant year of account subject to an excess of "minimum 10% of Total Allocated Premium Income or as agreed by the Leading Underwriter" and subject also to a limit of indemnity of £100,000 (in the case of the 1991 excess binder, the limit of indemnity was again £100,000 but this indemnity only came in above the layer of indemnity under the primary binder). The Conditions included the following:
"1. Agreed follow all terms and conditions of Lloyd's Leading Underwriter, V W Broad, Syndicate 370 [or as agreed[3]].
"2. Agreed Robert Fraser Insurance Brokers Ltd to accept business on behalf of Underwriters subject to monthly bordereau of orders [to Underwriters3] [and all subject to prior agreement by V W Broad at terms and conditions or as agreed[4]].
"3. The rates and excesses specified in the Schedule of rates are minimum only and may be increased at the discretion of the Leading Underwriter only and/or Robert Fraser Insurance Brokers Ltd and/or as agreed by Leading Underwriter only."
- The "Schedule of rates" was not attached to the slips, but was attached to the more formal "Binding Authority Agreement" subsequently scratched by the syndicate subscribers. The Schedule of rates for the 1990 year was contained in two documents entitled "Rating Schedule Addendum No 1 Personal Stop Loss Reinsurance" and "VWB Rating Schedule Addendum No 2" (the "rating schedules 1 and 2" respectively). They were scratched by Mr Broad on 12 December 1989. For the 1991 year the "Schedule of rates" was contained in the same two documents[5], rescratched by Mr Broad on 25 February 1991, these relating to the primary binder, and in a third document entitled "Appendix 2 Excess Layer Facility" scratched by Mr Broad on 30 November 1990.
- Rating schedule 1 provided a means for calculating premium in the following way. "Basic coverage" was assumed to amount to a limit of indemnity of 20% of total allocated premium income (API) on an excess of 10% of the same figure. Thus, if for example a name's portfolio of syndicate participations amounted to an API of £500,000, then basic coverage was assumed to be a limit of £100,000 (20%) excess of £50,000 (10%). The premium rate was 2.5% of the cover, but 3% on APIs of under £300,000. It could thus be calculated that the premium for such "basic coverage" on an API of £500,000 was £2,500. This basic coverage was allocated a "factor" of 100. The document then set out other factor numbers (ie percentages of 100) against alternative arrangements, eg "10 x 71/2" ie cover of 10% of API on an excess of 71/2%. There were alternatives at excesses of 71/2%, 10%, 15%, 20%, 30% and 40%. Thus, you could discover, for instance, that the factor for "40 x 15" was 100: this would mean that a limit of indemnity of £100,000 on an API of £250,000 (40%) with an excess of £37,500 (15%) would cost £3000 (the rate being 3% in this case). The factor for "50 x 15" was 105: ie a limit of indemnity of £100,000 on an API of £200,000 with an excess of £30,000 would cost 105% of £3000, or £3,150. These calculations provided a gross premium figure.
- Rating schedule 2 contained other rating provisions, eg special terms for joint quotations for husband and wife, escalating discounts for "large individual names" depending on the number of syndicates on which they participated (so that at 15 syndicates there was already a discount of 25%), and other specific terms such as one restricting the maximum participation on any one syndicate to 25% of API or "£100,000 whichever is the lesser"; or another term stating that minimum excess for APIs of over £500,000 for £50,000; and a catch-all term stating that "All quotations outside above guidelines to be agreed by Leading Underwriter only". The application of the discounts contained within such terms would provide a net premium figure.
- The 1991 excess binder schedule gave "indicative rates" of premium levels which varied between £500 and £725 for various examples of cover, dependent on whether the limit of liability was £100,000 or £50,000 and on the size of the name's API.
- The two rating schedules were said at trial to be of largely historical significance; and premiums obtained were by and large in excess of the indications there given especially when account is taken of discount terms and so on. But they were nevertheless contractual documents, albeit stated to be expressive of only "minimum" rates, and it is to be noted that ultimately no claims were pressed for breach of them.
- In addition to the "Schedule of rates" specified in the binders, Mr Broad also scratched, on 11 January 1990, another document for the purpose of the 1990 binder, headed "Indicative Personal Stop Loss Premiums". This showed indicative gross premiums for various types of situations, albeit all based on an indemnity of £100,000. Thus, apart from the level of indemnity, the nature of a name's portfolio would depend inter alia on his total API, the number of syndicates within his portfolio, and the largest line held on any syndicate: and in addition, the premium to be quoted for any personal stop loss insurance contract would depend to an important degree on the excess quoted. So it was that this document gave 14 examples of such situations, ranging from an API of £200,000 over 6 syndicates with a maximum allocation of £60,000, an excess of £50,000 and an indicated premium of £3,300, to an API of £2,000,000 over 50 syndicates, a maximum allocation of £50,000, an excess of £200,000 and an indicated premium of £2,250. It will be observed that the premium for the latter is substantially lower than the premium for the former, even though the name under the latter portfolio would be writing up to ten times as much business as the name under the former. This is because, at any rate in theory, the larger the number of syndicates, the more likely it is that losses under some will be cancelled out by profits under others, especially where the participations in each syndicate are even, and where in any event there is a healthy total excess - in the latter case £200,000 amounting to 10% of the API. In other words the latter name would have to suffer an across the board loss in excess of 10% before the stop loss policy would begin to cut in with its indemnity.
- This document also stated that the indicated premiums were "approximate indications only" and that underwriters and coverholders were not to be held to them. Moreover, "where poor spread and/or high allocation one syndicate, indemnity reduced or no quote". I shall call this document the "1990 indicative guidelines".
- There is one other document, relevant only to the 1991 year, which, although not scratched by Mr Broad, appears to have been put into practice by the brokers in preparing proposals for Mr Broad to assess and agree, and that is headed "Personal Stop Loss - 1991 Criteria. I shall call this document the "1991 indicative guidelines". It reads as follows:
"1) Minimum Premium - £2,500
2) Increase all premiums by 7.5% (pencil)
3) Under £250,000 Allocated Premium Income - Minimum excess 15% or largest syndicate share.
4) Excess always to be minimum 10% or largest syndicate share (unless Allocated Premium Income £250,000 or less).
5) Consider renewals at same terms or same premium - but higher excess.
6) Allocated Premium Income £200,000 plus - offer £200,000 limit wherever possible.[6]
7) Quote £100,000 limit only.
8) Check quotes against Holman Wade[7] at al times but guide as follows..."
and there followed six examples ranging from an API of £250,000 on an excess of £37,500 for a premium of £2,500, to an API of £1m on an excess of £100,000 for a premium of £2,800 (against which someone has written in manuscript the figure of 3,100). It may be noted that the former example corresponds to an example in rating schedule 1 where the gross premium generated is, however, £3,000; whereas the latter example would under rating schedule 1 have generated only £1,625. In practice, 1991 rates appear to have been given a general increase of 10% rather than 7.5%. The figure of 7.5% seems to have been derived from the 1990 practice of a general uplift of that percentage.
The brokers' presentations
- For the purpose of soliciting support for their scheme, the brokers drew up written presentations for the 1990 and 1991 years respectively. There are only a small number of relevant changes between the presentations of the two years, and for convenience the claimants founded themselves on the presentation for 1990, or what I shall call the "1990 presentation". A copy of this or of the 1991 presentation was provided to each of the claimants.
- The 1990 presentation was a booklet of 15 pages which dealt inter alia with the history of the Robert Fraser group and its personal stop loss scheme and provided underwriting statistics. It was pointed out that throughout the 1980s Lloyd's had been profitable (the last year for which results would have been declared was 1986), and that personal stop loss premiums had increased some eightfold in the last five years. The critical sections upon which the claimants base themselves are to be found on pages 3 and 4 of the document, under the section headings of "Risk to Underwriters" and "Underwriting Criteria". I shall have to set them out in full:
"RISK TO UNDERWRITERS
The risk of sustaining a loss on an account of Names with a good spread is remote because:-
a. Each proposal is individually assessed by the Leading Underwriter.
b. Each individual syndicate has it own protections and in some cases an overall Stop Loss on its whole account.
c. Each Name accepted will normally belong to a well balanced number of syndicates covering a spread of classes including Marine, Non-Marine, Aviation, Motor etc. It is most unusual for a major loss in the market to affect all classes of insurance. Invariably, either one syndicate or one particular class of insurance is involved.
d. The average spread of syndicates on our portfolio of business supported by each Name is approximately fifteen.
e. The Personal Stop Loss Policy itself is normally in excess of a minimum of 10% of a Name's Gross Underwriting Limit. The Average Excess is more than 15%.
f. The Underwriting Criteria adopted are intended to produce a well spread book of business.
UNDERWRITING CRITERIA
The main criteria adopted for underwriting the book of personal Stop Loss business are as follows:
a) Assessment of syndicates
b) Spread
c) Premium Limit any one syndicate
d) Historical results of each syndicate
e) Excess
f) Subsequent changes in Underwriting philosophy relating to syndicates.
g) Rating
A) Assessments of Syndicates [This marks the beginning of page 4]
Market knowledge of syndicates is an important factor so that changes in Underwriters, Underwriting philosophy etc are recorded. This is obtained through discussions with other specialist Stop Loss syndicates and brokers. The type, class, geographical and currency split, shortail/longtail element etc. are key factors which are considered when quoting.
B) Spread
Our book of business will emanate from a significant number of different introducing underwriting agents, brokers and producers. The majority is likely to be from Members' agents rather than Managing Agents, thereby providing a greater degree of spread. Certain restrictions to the number of quotations issued to any one agent will be maintained in order to avoid undue aggregation problems. The current trend of Names wishing to increase their premium income allocations also has the effect of greatly improving the spread. It is not Underwriters' intention to encourage policies for Working Names and in any such cases, the excess and premium will be significantly increased.
C) Premium Limit on any one Syndicate
It will be our policy[8] to relate the excess of an individual policy to the largest share of any one syndicate. In normal circumstances the excess will be increased if the share on a particular syndicate [exceeds £40,000-£50,000 or][9] forms a significant percentage in relation to the total premium limit. This principally affects Names through Managing Agents which, as already mentioned, will not constitute a large percentage of our portfolio of business.
D) Historical Results
The results of all syndicates are available from the A.L.M. league tables and Managing Agencies. In addition, copies of the syndicates' report and accounts are available to Robert Fraser. The results of each syndicate on which a Name participates will be analysed and graded, dependant upon the overall historical results.
E) Excess
Each submission is individually assessed and rated accordingly. However, in respect of a non-standard submission it will be our policy8 to increase the excess rather than load the premium. We believe that this is a more relevant and effective form of underwriting.
F) Underwriting Changes to Syndicates
All subsequent changes which might affect the assessment of a particular syndicate are carefully monitored. This could include, changes in Underwriter, Underwriting Philosophy, Managing Agents etc., which might result in changes of classes of business which are underwritten.
G) Rating
Personal Stop Loss has kept in line with market conditions and in consequence there have been significant rate increases within the last three years which coupled with certain restrictions in cover, has meant that the premiums have effectively trebled within that period."
- The 1991 presentation was in very similar form, save for the following changes. The average number of syndicates supported by each name within the scheme was now reported as being approximately 20 (in 1990: approximately 15 - see paragraph (d) under risk to Underwriters). The average excess, which in 1990 had been reported as being "more than 15%" (paragraph (e) under Risk to Underwriters) was now described in monetary terms as being "approximately £52,000" as against an average API of £373,000. That would calculate to an average excess of nearly 14%. Criteria (A) and (B) under Underwriting Criteria were reversed in 1991, so that "Spread" came under (A) and "Assessment of Syndicates" under (B). The words "exceeds £40,000-£50,000 or" were omitted from paragraph (C) under Underwriting Criteria. The words "our policy" in paragraphs (C) and (E) became "our Underwriter's policy".
- The final page of both presentations, headed "Conclusion", mentioned eight "bullet" points, the seventh of which was "Proposals individually assessed and underwritten".
- The presentations, in my judgment rightly, emphasised the importance of the excess as a means of controlling claims and limiting losses. In this connection, the presentations elsewhere explained that where (as often occurs) a syndicate is unable to write 100% of its stamp capacity, an excess agreed in relation to the size of a name's APIL, eg 10% of API("normally in excess of a minimum of 10%"), effectively provides greater protection. For example a 10% excess where only 80% of stamp capacity is written amounts to an effective 12.5% excess, and use of only 50% of stamp capacity means an effective excess of 20%.
- The written presentations formed an important part of the broker's marketing of the scheme to potential underwriters of it, but Mr Roxburgh and Mr Seel also held meetings with representations of each of the claimants, and encouraged them to meet Mr Broad.
- Thus, Mr Roxburgh and Mr Seel met Mr Ronald Thomas, Avon's underwriting manager, in August 1989, at which time the 1990 presentation booklet was handed over. Mr Thomas also met Mr Broad at lunch sometime that summer, but does not recall talking about the scheme. Mr Thomas handed the booklet over to Mr Sidney Gibson, Avon's commercial assistant manager, who tested the proposal from a technical point of view working on the claims' figures provided and making projections about maximum losses. For the purpose of his review Mr Gibson made some notes, none of which are directly relevant to this litigation other than his observations that the minimum excess would be 10% and that average spread would be 15 syndicates. The two of them considered the proposal together, and ultimately a decision to participate was taken by Mr John Murray, Avon's general manager, on Mr Thomas's recommendation. It would seem that the participation by Avon was continued into 1991 without seeing the 1991 presentation and without further meetings.
- In the case of Trygg-Hansa, a short meeting in Monte Carlo at the end of September 1989, at which the 1990 presentation was handed over, was followed up by a longer meeting in London on 18 October between Mrs Gudrun Stenfors, then a regional manager within Trygg-Hansa's reinsurance division, and Messrs Roxburgh and Seel. A detailed agenda of that meeting survives, from which it seems reasonably clear that Mrs Stenfors was (inter alia) taken through the quotation stage of a typical proposal. On her return to Stockholm, she recommended participation to Mr Ull Berenholt, to whom she reported and who alone had authority for the decision, and he accepted her recommendation. Later, on 24 April 1990, her assistant Mr Thomas Clarstedt, who had come with her to London in October 1989 and to whom she was about to hand over responsibility for this business, went to visit Mr Broad in London, to see how the underwriting was done. By that time Mr Broad had completed the underwriting for that year, but no doubt he was able to discuss the matter with Mr Clarstedt and answer any of his questions. The decision to continue the participation into 1991 was taken by Mrs Stenfors on Mr Clarstedt's recommendation, as it would seem without consideration of the 1991 presentation.
- Iron Trades participated for the first time in 1991. The 1991 presentation was handed over to Mr Peter O'Neill, group property manager, at a meeting n November 1990. A report on that meeting by Mr O'Neill's colleague, Mr Peter Dawkins, said that Mr Broad "vets every application personally". The matter was discussed internally, and Mr O'Neill sought information about Mr Broad's reputation and learned that he was considered a cautious underwriter and "very much the market leader in PSL". Two of Mr O'Neill's colleagues were sent to meet Mr Broad and to discuss with him the way he was going to underwrite the business. On 3 December 1990 Mr O'Neill wrote a note to Mr Brian Connell, the assistant general manager, recommending a participation in the Robert Fraser scheme (and in two other PSL schemes). Mr Connell in turn passed on the 1991 presentation to Mr David Pinnell, with his and Mr O'Neill's joint recommendation. Mr Pinnell concurred. In his witness statement, Mr O'Neill said this (at para 14):
"We would not have underwritten this scheme but for the fact that each proposal was to be individually assessed by the leading underwriter, Mr Broad. I did not believe that Mr Broad would undertake this individual assessment unassisted by the brokers but I thought that he would devise a method of sorting the risks which the brokers would undertake which would cut down the amount of time which he would have to give to each risk. At the end of the day it would be for the leading underwriter to achieve the right balance between delegating the task of sorting and sifting the various proposals and the actual level of assessment that each risk would call for from the leading underwriter. In some cases where there were numerous difficult features about a proposal the underwriter would have to give more attention to the underwriting of the risk and its assessment whereas in other cases where the risk presented attractive features it might be a matter of a short assessment of the proposal."
It is not clear to me whether this was purely Mr O'Neill's subjective understanding of the matter, or whether it also reflected what was discussed at the meetings with the brokers or with Mr Broad: but I would infer the latter. In any event, this passage, in accepting the concept of a balance between delegation and personal assessment did in fact represent the actual position, as will appear below. In this connection I also regard the use in Mr Dawkins' note of the word "vets" as reflecting the same concept.
- Provincial was another of the companies who participated for the first time in 1991. Mr Roxburgh and Mr Seel first sought to interest Provincial in the Robert Fraser scheme in 1989, when they went to see Mr Colin Dearlove, who had responsibility for "special risks", and gave him their 1990 presentation. During the course of their meeting, Mr Dearlove made a manuscript note, one line of which read -
"u/w done by Rt Fraser - insist u/w shown to lead u/w."
The emphasis of this note is not that everything was done by Mr Broad personally, but that the brokers ("Rt Fraser") shared fully in the underwriting process, albeit everything would end up being shown to the leading underwriter. This is redolent of the language of "vetting" found in Mr Dawkins' note, and would support the inference that Mr O'Neill's understanding was derived at least in part from what Iron Trades was told. In his written statement (para 5.1) Mr Dearlove commented on his written note as follows:
"The brokers made a great play of the quality of the underwriting and emphasised the role of the leading underwriter. What I wrote reflected my understanding which is that some initial underwriting was done by Robert Fraser - by this I understood there to be some initial categorisation of the proposals, breaking down the syndicate participation, and making some analysis of individual syndicates in accordance with what the presentation held out as the underwriting criteria. Although I don't recall rating being discussed, it would not have surprised me if some initial rating was done by the brokers. However, what I do recall very clearly is the emphasis placed by the brokers on the lead underwriter's input. I was left with the clear understanding that the lead underwriter would look at each individual proposal and would bring his underwriting judgment and Lloyd's knowledge and experience to bear. Indeed, to some extent this was the central theme of the presentation."
- After an opportunity for further study of the presentation booklet, Mr Dearlove transferred his thoughts to a more formal typed memorandum of the meeting, which attached the booklet and emphasised among "main points from the discussion" the following:
"4. Underwriting is initially carried out by the Broker but always vetted by the lead Underwriters -
"5. Underwriters main concerns would be -
a good spread of the members premium limit, both in terms of number of syndicates and type
the chosen syndicates underwriting record
the maximum premium limit per syndicate.
If underwriters are not satisfied on these points they are likely to decline."
This report, in fuller amplification of Mr Dearlove's manuscript notes made at the meeting itself, is useful for it is contemporaneous evidence of how Mr Roxburgh and Mr Seel would present their business case. It is intriguing to note that the word "vetted" is used by Mr Dearlove in the context of paragraph 4 of his report.
- As it was, Provincial turned down the approach for the 1990 year. In September 1990, however, Mr Dearlove had another meeting to discuss possible participation in the 1991 year of account. Mr Dearlove reviewed his file from the previous autumn. He was given the 1991 presentation. The brokers emphasised that the leading underwriter would continue to be at the heart of the scheme. Mr Dearlove marked certain passages in the presentation under the heading "Underwriting Risk", viz that each proposal was individually assessed by the leading underwriter, that the minimum excess would normally be 10% and that the average excess was approximately £52,000, and that underwriting agents are remunerated by profits. In addition, Mr Tony Browne, Mr Dearlove's superior who ultimately took the underwriting decision, wrote on page 3 of the booklet the words "mix - across the board" against paragraph (c) (which dealt with the prospect that each name would normally belong to a well balanced number of syndicates covering a spread of classes) and "good spread" against paragraph (d) (which said that average spread of syndicates were approximately twenty). On this occasion Provincial took a line on both the primary and excess layers.
- Vesta was the third new participant in the 1991 year. The initial contact was between Mr Christian Hesselmann, Vesta's general manager, and Mr Seel in Monte Carlo in September 1990: Mr Seel gave Mr Hesselmann a copy of the 1991 presentation. Mr Hesselmann sent on the booklet to Mr Per Flaaten, Vesta's senior underwriter with a note observing inter alia that the minimum deductible was 10%. Mr Flaaten marked up the presentation by highlighting the statement (under "Underwriting Risks") that each proposal was individually assessed by the leading underwriter and by sidelining paragraph (E) (under "Underwriting Criteria") dealing with Excess. Mr Flaaten met Mr Roxburgh and Mr Seel in London in October 1990. It seems likely that he received the same presentation as that given to Mrs Stenfors the previous year, for like her he was given a demonstration of the brokers' computer system: but Mr Flaaten could not remember the details of the meeting.
- I shall have to return at a later stage of this judgment to consider in further detail the issues which arise on the question of inducement.
The alleged misrepresentations
- Although ultimately the broad scope of the claimants' case in misrepresentation became clear or at any rate clearer at trial, viz that Mr Broad (and/or the brokers) did not intend to assess each risk individually in accordance with the stated underwriting criteria (or perhaps at all), the path to that conclusion was wayward. At the end of the day, and despite last minute amendment (made by consent on the last day of trial and affecting alleged inaccuracies in respect of the surviving pleaded representations), I do not think that the critical representation(s) relied on were ever properly pleaded.
- Nevertheless I need to set out the final and surviving form of the pleaded case, which was as follows.
- In both actions[10] the claimants pleaded the following representations derived from the wording of the presentation booklets:
"i. that each proposal for stop-loss insurance by a Name was individually assessed by Mr Broad;
iii.[11] that the underwriting criteria adopted were intended to produce a well spread book of business;
iv.[12] that the main criteria adopted for underwriting the personal stop loss business were:
(1) assessment of syndicates;
(2) spread
(3) the premium limit for any one syndicate;
(4) the historical results of each syndicate;
(5) the excess;
(6) subsequent changes in underwriting philosophy relating to syndicates;
(7) rating;"
In addition the claimants pleaded the following representation in the 1990, but not in the 1991, action:
"(8) the geographical spread and the nature of the syndicates' commitments were individually considered as set out on page 4 of the proposal."
- At the commencement of the hearing I was told by Mr Rowland that the reference to page 4 of the proposal was a reference to the last sentence of paragraph (A) ("Assessment of syndicates"), viz "The type, class, geographical and currency split, shortail/longtail element etc. are key factors which are considered when quoting." At the conclusion of the hearing, however, Mr Rowland submitted that the reference to page 4 was a reference to the whole of it (viz paragraphs (A) to (G) as a whole). I do not think that he was right to say that as a matter of construction, and in any event he had clarified the pleading at the outset and would and should in all fairness prima facie be bound by that.
- As for the 1991 action, the surviving pleaded representations continued as follows:
"viii. it would be the underwriter's policy to relate the excess of an individual policy to the largest share of any one syndicate...
ix. all changes which might affect the assessment of a particular syndicate were carefully monitored including changes in Underwriter, Underwriting Philosophy or Managing Agent..."
These two representations (taken from paragraphs (C) and (F) on page 4) pleaded in the 1991 action were not pleaded in the 1990 action.
- In addition to these representations derived from the wording of the presentation booklets themselves, the claimants also relied on the following oral representations: (a) in the 1990 action, in the case of Trygg-Hansa, that "each proposal was individually assessed by reference to the syndicates upon which a Name was placed and agreed by Mr Broad"; and (b) in the 1991 action, in the case of Iron Trades, that "Mr Broad was a man noted for his careful approach to the underwriting business and that Mr Broad personally vetted each application for stop loss insurance." However, Mr Rowland accepted that these oral representations went no further than those derived from the presentation booklets and made no separate submissions with respect to them: therefore I need not comment further upon them, save to say that the evidence was that Mr Broad was a man noted for his careful approach to the underwriting business, and to point to the use again of the word "vetted". It is therefore Iron Trades' own case that the oral presentation used that word.
- Apart from these surviving representations, the claimants had also pleaded and formally abandoned albeit only on the penultimate day of trial an equal or greater number of additional misrepresentations. I set out the abandoned allegations of representation and of corresponding inaccuracy in Annex 1 to this judgment.
- In relation to the surviving representations relied upon the claimants pleaded the following inaccuracies (and that such representations had been made negligently and/or without reasonable grounds to believe that they were true):
- First, in relation to the 1990 action[13]:
"a. Each proposal for stop-loss insurance in respect of the stop-loss authority for 1989 ("the 1989") was not assessed individually by Mr Broad at the time of the written proposal sufficiently to satisfy himself that it had been assessed in accordance with the seven underwriting criteria:[14]
d. no assessment was carried out of the syndicates to which individual Names belonged with the result that it could not be said that there was a well-spread book of business. In particular, no assessment was carried out of individual syndicates, an individual Names's spread, an Individual Name's premium limit for any syndicate, the historical results of a syndicate or its Underwriting philosophy;...
Further the Claimants will rely upon the fact that each proposal for stop-loss insurance in respect of the stop-loss binding authority for 1990 ("the 1990 binder") was not assessed individually by Mr Broad at the time of the written proposal sufficiently to satisfy himself that it had been assessed in accordance with the seven underwriting criteria."14
- It will be observed that the complaint in the 1990 action had originally been related solely to the 1989 year of account, and it was only by amendment that the complaint was extended to the 1990 year. This reflected Mr Rowland's concession during the course of trial that the presentation booklets' representations should be regarded (as the claimants' witnesses gave evidence that they did regard them) as looking forward to the following year's underwriting. Thus the 1990 presentation looked forward to the 1990 year's underwriting, and the 1991 presentation looked forward to the 1991 year's underwriting. Originally the pleading in the 1990 action had sought to rely on the circumstances of the historical underwriting in 1989, on the basis that the 1990 presentation was making representations as to the underwriting in 1989. In the course of trial, however, Mr Rowland made it clear that he accepted that the 1989 underwriting was looked to only as evidence from which to test and prove the brokers' negligence in stating that the 1990 underwriting would be carried on in the way represented in the 1990 booklet, and not as verification in itself that representations in the 1990 booklet as to how the underwriting had been carried out in 1989 had been misstated.
- So it was with the 1991 action as well, save that in the case of the 1991 presentation and the 1991 year of account reliance was placed on all three years' underwriting, 1989, 1990 and 1991 and the reference to 1991 came in only by amendment. Otherwise the pleaded case was in in pari materia with the 1990 action[15].
- The amendments were made by consent. In other circumstances there might of course have been strong opposition to such substantial and late amendments. But the 1990 situation had always required to have been investigated for the purpose of the 1991 action, and the 1991 situation had already been investigated in the course of trial because of a document which the claimants had introduced on the fourth day of the trial entitled "Inferences that the Claimants will invite the Court to draw" (the "Inferences document"). This document sought to restate the claimants' case on inaccuracy as follows:
"The claimants' case is that as a general practice neither Mr Broad, nor anyone else at the syndicate, made any individual assessment of the risks shown to him (or them) in any of the years 1989, 1990 and 1991, having regard to each of the seven underwriting criteria set out in the presentations for those years. In support of this case the Claimants will invite the Court to infer that:
(a) Mr Broad did not assess any syndicates by reference to their type, geographical and currency split, short tail/ long tail element: nor did these characteristics form a key or any significant part of the quoting process;
(b) Mr Broad did not record changes in Underwriters, Underwriting philosophy or any other changes, whether obtained through discussions with other specialist Stop Loss syndicates and brokers or otherwise;
(c) Mr Broad did not relate the excess of individual policies to the largest share of any one syndicate;
(d) Mr Broad did not analyse and grade the results of each syndicate on which a Name participated dependant upon the overall historical results;
(e) Mr Broad did not individually assess and rate each risk accordingly or at all, nor did he as a matter of policy increase the excess rather than load the premium in respect of non-standard submissions;
(f) Mr Broad did not monitor all subsequent changes that might affect the assessment of particular syndicates;
(g) No one else performed these functions to any significant degree such as to enable Mr Broad to assess each risk individually in accordance with the seven underwriting criteria."
- I would regard this case as being in amplification of the claimants' pleaded case of inaccuracy. It was reproduced in almost identical terms in paragraph 3 of the claimants' closing (written) submissions. It represents a longhand version of what the claimants formally and subsequently introduced into their pleadings when they amended, as recited above, to say that Mr Broad had not assessed each proposal "sufficiently to satisfy himself that it had been assessed in accordance with the seven underwriting criteria"[16]. Thus it brings the 1991 underwriting position into the 1991 action - but not of course into the 1990 action. However, I do not regard it as amplifying the representations relied upon by the claimants. The scope of the representations relied upon or abandoned was specifically discussed by Mr Rowland and myself on the penultimate day of trial, and the result was as stated above (and in Annex 1). Thus I do not think that I can infer from the extent of the alleged failures of Mr Broad (or anyone else) that the representation case relied upon was more extensive than it had been pleaded to be.
- Am I however to infer that the mere listing in each action of the "underwriting criteria" (ex page 3 of the presentations) must be regarded as an implied reliance on the whole of what is said in amplification of those criteria at page 4 of the booklets? I do not think that is possible. Not only is there the specific reference to the "type class, geographical and currency split" etc sentence in the 1990 action (ex paragraph (A) of the 1990 presentation) but not in the 1991 action, and conversely to the representations that "It will be our underwriter's policy to relate the excess of an individual policy to the largest share of any one syndicate" (ex paragraph (C) on page 4 of the 1991 presentation) and that "all changes which might affect the assessment of a particular syndicate are carefully monitored" (ex paragraph (F) on page 4) in the 1991 action but not in the 1990 action, but the pleaded representations in both actions then go on to pick and choose elsewhere from certain of the passages from page 4 of the presentations but not from other such passages; and not only that, but several of those specially selected passages have then been abandoned during trial - see representations (vi) and (vii) in the 1990 action and representations (vi), (vii), and the second sentence of (viii) in the 1991 action.
- There was a further and different problem for the claimants in giving clear expression to their case, and that revolved around the fact already mentioned that ultimately Mr Rowland accepted that all the representations relied upon were understood to operate and were properly to be understood to operate as relating to the future year. It followed that what was in issue was whether the brokers had misstated the position by implying that Mr Broad (or the brokers?) intended to operate the underwriting in the way indicated. However, that implied representation was nowhere pleaded and had as it were to be filled in. This was a point taken by the brokers from the beginning and never formally dealt with on the part of the claimants. Thus already in the brokers' points of defence the following was to be found:
"statements contained in the proposal documents concerning intended future conduct do not amount to actionable representations, unless it is alleged that such an intention did not exist at the time when the proposal documents were provided..."
The same point was made in the opening skeleton argument put in on behalf of the brokers by Mr Jeremy Stuart-Smith QC.
- The absence of a plain pleading of the implied representation was both unhelpful and important. It entitled Mr Stuart-Smith to query whether it was possible to reply on a misrepresentation as to intention, especially where Mr Broad had approved the brokers' presentations, while at the same time expressly eschewing (as Mr Rowland did) a claim of fraud. In the end, in his final speech Mr Rowland sought to explain his case as follows (Day 15.4/6):
"We say that they intended to underwrite the business as they in fact did. When I say "they", Mr Broad. In other words, as they repeatedly said in evidence, there was no basic change in the method of underwriting between 1989, 1990 and 1991...
"Where we say that they made their mistake, if one can put it that way, is in believing that they description set out in the presentation matched the method of underwriting which they in fact were using. That, we say, is the basis upon which we say they had no reasonable grounds for describing the underwriting in the way in which they did in the presentation...
"I do not say they were dishonest...in that they knew that the description that they were giving was untrue, and then sought, dishonestly, to persuade our clients to participate by giving a false description. But the description was untrue and inaccurate, and their intentions were to underwrite as they did. The mistake was in believing that the description they were giving matched that...
"In fact it really comes to one broad misrepresentation, and that is that the risks would be individually assessed and underwritten by Mr Broad in accordance with the underwriting criteria" (emphasis added).
- I suppose that Mr Rowland meant to say that the "one broad misrepresentation" was really a representation that "they" (Mr Broad? The brokers? Mr Broad and the brokers?) intended that the risks would be individually assessed and underwritten by Mr Broad in accordance with the underwriting criteria. But he never said it, never pleaded it, and I am left in uncertainty as to the exact nature of the critical representation. Unless the representations relied upon are related to intentions, they must in my judgment and by Mr Rowland's concession fail, for they do not relate to statements of fact. If, on the other hand, they relate to intentions, as I am willing to allow, then I am uncertain as to whose intentions I am considering.
- Another possible formulation of the implied representation might be to the effect that the brokers had reasonable grounds for the belief that the risk would be underwritten in the manner set out in the presentation booklet. That alternative was not, however, proposed by Mr Rowland, even though it was formulated by Mr Stuart-Smith in his written closing submissions (at para 6.1.3, where he said that he took no point that this case was unpleaded, save to reserve his position as to costs).
- Mr Stuart-Smith had indeed at an early stage of the trial made known his discomfort with the uncertain nature of the case which he faced. It was a concern he voiced a number of times, but he was at all times practical and realistic in seeking to prepare himself to meet whatever was brought up against his clients. The fact remains that the critical implication was never expressly elaborated by the claimants, and the trial really proceeded to examine the nature of the underwriting in the 1990 and 1991 years as if (a) the pleaded representations were alleged breaches of contract; and (b) any representation relied upon in the 1990 action was equally relied upon in the 1991 action (and vice versa).
- For myself, I am inclined in the context of a plea of misrepresentation to take a strict view of the matter. However, seeing how the trial unfolded, I would not wish to fault the claimants by applying an overly formal approach, if that can be avoided without causing injustice to the brokers. I will therefore proceed on the working basis that any surviving representation pleaded in either action applies in both actions and that such representations must be understood as involving the implication that Mr Broad and/or the brokers intended (or, if that makes a difference, believed) that the underwriting would be carried out in the way pleaded.
- The Inferences document also described how the claimants would seek to ask the court to draw a conclusion of misrepresentation: from the absence of markings on the documents showing any input by Mr Broad or his deputies as distinct from the brokers; the absence (since 1989) of any recording of syndicate type etc; the absence of any recording of syndicate grades; the absence (since 1989) of any historic analysis; the absence of any rating or other guidelines; the arbitrary nature of the setting of premium and excess levels; the absence of any relationship between largest syndicate share and excess levels; the use of summary sheets to introduce thousands of risks; the absence of any list for 1990 of any syndicates to avoid and the absence of any apparent influence of a 1991 document entitled "Hit List - 1991 Account"; the scratching of many risks by deputies with nothing to indicate any supervision from Mr Broad; the impossibility of underwriting so many risks without written guidelines or recorded analysis.
The background to the actions
- These actions have a bit of a history which it is important to understand. Some of the subscribers to the 1990 binders including some of the claimants to these actions were reinsured by Dai Ichi Kyoto Reinsurance company SA, a company which has gone into liquidation ("DIK"). In 1994 these reinsureds commenced proceedings against DIK in respect of their losses. They issued an application for summary judgment. DIK opposed the application and sought a stay for arbitration based on an arbitration clause in the reinsurance contract. In an affidavit sworn on behalf of DIK a case was made that, contrary to the brokers' presentations, Mr Broad "did not in fact write business on the basis of assessing each risk by reference to the 7 criteria" and that therefore the reinsureds were entitled to avoid liability "for misrepresentation and/or failure to make full and frank disclosure". It was submitted that it followed that no liability attached to DIK. The point was put very broadly: it was said that the great number of names insured and the sheer size of the losses "strongly suggests that individual risks were not carefully assessed and selected". It was said that the batch procedure meant that "some risks which were hidden behind others were never in fact signed" by Mr Broad, and that "the reality was that Mr Broad simply did not have the information available to enable him to make any meaningful assessment of individual risks".
- The reinsureds asked Mr Broad to swear an affidavit in answer. In it he said that he was well aware of the underwriting criteria set out in the presentations, since they had been drawn up by him personally in conjunction with the brokers. He explained that when proposals were brought to him by the brokers, he would look at each one individually to see if the name's portfolio programme was "average" and accordingly acceptable: but that after some weeks of initialling large numbers of risks, he considered that it would be simpler simply to initial the summary sheet. He had therefore assessed each name individually in accordance with the underwriting criteria, deleting those which were not acceptable to him. In a subsequent affidavit, he added:
"It was generally the case that the brokers submitted risk in two separate bundles, comprising firstly (i) those which fell unarguably within the agreed underwriting criteria and secondly (ii) a smaller bundle which although within the agreed underwriting criteria nevertheless for one reason or another required more specific consideration from an underwriting viewpoint. It was from this second category that negotiation between the broker and myself as to terms and rates frequently occurred. Risks which fell within the first group would occasionally be shown with my approval to my deputy who, knowing the basis of the underwriting criteria applicable to the scheme, would check the mathematics and then scratch the Syndicate List or Summary Sheet, if it was in order. If for any reason he had any concerns or reservations he would refer the risk back to me."
- This last affidavit was sworn in response to a further affidavit put in on behalf of DIK which made the point, in the light of the very considerable discovery which had already been afforded by the reinsureds, that proper assessment of each risk n accordance with the criteria was shown to be unlikely given: the absence of any relevant documentation from Mr Broad's files; the fact that allowing only 10/12 minutes per policy written (the number then adopted was 1508) would still have taken almost three months of work non-stop; and the submission that there was little homogeneity between the portfolios of names dealt with by the batch process.
- As it was the proceedings were stayed for arbitration and an experienced tribunal of underwriters was appointed. However, DIK gave no instructions to its solicitors and filed no defence. Hearing dates were set for 20/21 July 1995, but, as was expected, DIK did not appear. Nevertheless, the reinsureds had to prove their case and Mr Broad was called to give evidence. He confirmed the content of the affidavits he had sworn for the purpose of the action and was then questioned by the arbitrators themselves.
- Mr Broad was asked about risks declined. He said that he had declined about 200 himself, and that in addition the brokers had refused to put forward others on the basis of a sifting process which he and they had developed together over the years: only those risks which the brokers thought would meet his underwriting criteria would be submitted.
- The arbitrators then turned their attention to the 1990 presentation and in particular page 4. The tribunal pointed out that some of the paragraphs, viz (B) (spread) and (C) (premium limit any one syndicate) read as if those functions were going to be carried out by the brokers: Mr Broad was asked how the work was shared in practice. His answer was to the effect that at the beginning of each year he and the brokers would hold a discussion in which a strategy would be developed. Syndicates or types of syndicate of possible concern were identified and test runs were carried out on portfolio programmes to see whether such syndicates would produce adverse loss positions or not. (Of course such test runs were done on a historical basis: the most recent results available at the beginning of 1990 were the results for the 1986 year, published in 1989.) Then, as the underwriting season got underway it was his job "to bring in other factors...trying to put an underwriter's view of it", but there was "nothing particularly scientific" about it. Nevertheless, what he and the brokers were trying to do was to introduce an element of judgment into the process which had never existed before. (That was a reference to the fact that other personal stop loss schemes worked on a pure tariff rating basis.) The development of a strategy was important, because the large number of proposals meant that it would be impossible to deal with the scheme in any other way.
- Mr Broad was then asked about the usefulness of historical results in circumstances where these would go back to 1986. It was pointed out that probably every single syndicate at Lloyd's would show a history of profits of some sort over the last five years (ie 1982/1986). Mr Broad agreed that you could not use history to project the future: what he was looking for, however, was to identify the types of syndicates that were operating in fields were profits could be of an erratic nature, such as heavy involvement in US catastrophe business: in such a field five good years' profits could end in a nasty loss. Mr Broad then gave an example of change, where there were signs that a new underwriter was attracting massive queues. "All these factors you would sort of bring into your general assessment..."
- Mr Broad emphasised that his assessment was not concerned with getting out the league tables on every single syndicate, but rather in trying to identify the "negative syndicates". In what was to become a significant passage, he added:
"So, these are the hit list, these are the ones we won't go anywhere near. If you have a programme without those suspect or what we felt were dangerous syndicates on there, you could then possibly make your judgment...The sifting process in Fraser's office they would know what we were concerned about..."
I shall have to refer below to the subject of a "hit list" of negative, suspect or dangerous syndicates.
- The tribunal then asked Mr Broad about the evidence he had given in his affidavits concerning the division by the brokers of proposals into two separate bundles, one of standard, the other of non-standard risks. He explained that in the former case, the brokers would apply as it were scale or benchmark rates. These had themselves been developed, in accordance with the underwriting criteria, to deal with standard or average risks. Even so, he still checked each proposal for any error. In the latter case, however, he had to exercise a judgment to deal with something out of the ordinary, such as a heavy participation on a single syndicate: was that a plus factor (because the name was on an excellent syndicate) or a minus factor (because the name was on a syndicate which was disliked - and Mr Broad gave an example)? If the latter, then either the premium or, preferably, the excess would be raised, or the proposal would even be declined.
- The tribunal next turned their attention to a particular proposal as an example: that of Mrs Fieldhouse, at what is now bundle E.119. The proposal had been scratched by Mr Broad. Premiums for different levels of cover had been written onto the sheet, and two of the three had been crossed through and a higher premium written in. Mr Broad explained that the original premiums had been proposed by the brokers and represented scale rates, and that he had altered them himself. Other similar examples were referred to, and Mr Broad gave the same evidence. At trial, however, Mr Broad accepted that these and many other examples, and as I find the great majority if not very nearly all of such proposals where premiums were crossed through and higher premiums written in, were wholly prepared by the brokers, so that only the scratch was his.
- Mr Broad was asked how many of the 1,500 or so risks accepted in 1990 had been looked at individually by Mr Broad in this way, ie as non-standard risks: the figure of a third was suggested to him. He replied that that would be a "very, very good ball park figure". He emphasised how long the underwriting process had taken: several hours each day from January until late March, sometimes as many as three and a half hours on a day. (This may not have been a bad guess. The tribunal were only asking about the 1500 or so risks which had resulted in policies in 1990, and were overlooking or unaware of the fact that there were twice as many proposals which had been underwritten but were never taken up by the names. In fact, as the statistics I have given above indicate, in 1990 (but the figures change in 1991) 3,534 out of 4,724 proposals were dealt with in a purely individual manner, even though many of these may have been signed off by deputies as standard risks.
- Finally, so far as this account goes, Mr Broad was questioned on DIK's point made by way of affidavit in the earlier court proceedings that there was no homogeneity between the portfolios of names dealt with by the batch process. Mr Broad said that even though these portfolios did not display identical syndicates, they were homogeneous in terms of spread, API, premium allocation, and the general type or category of syndicate or general type of programme, also in that they did not contain a "hit list" syndicate or anything of a "hazardous long tail nature": so that the same premium was appropriate.
- On 16 August 1995 the arbitrators published their interim award in favour of the reinsureds. It was a fully reasoned award. They pointed out that they had felt it essential for Mr Broad to be available at the hearing, so that he could be questioned. They defined the primary issue before them to be "whether or not Mr Broad did in fact assess each risk individually, in accordance with... the criteria set out in the [presentation]". They reviewed Mr Broad's evidence in detail and set out their own understanding of it. This makes interesting reading because it reflects the application by market experts of their own considerable experience to the interpretation of that evidence. They concluded that each of the paragraphs at page 4 of the presentation booklets had been fulfilled. They pointed out that the "horrors which were to be inflicted upon the later years as a result of the "LMX Spiral" were not at that time appreciated". It is quite plain that they understood Mr Broad to have been saying, with respect to non-standard risks, that the alteration of the premiums was in Mr Broad's hand "and was the result of his underwriting assessment of the particular risk" (para 8.9). the essence of their conclusions are contained in the following paragraphs:
"9.2 So far as the time element is concerned, we consider that it would have been a relatively quick and simple task to deal with the bulk of business declared under the Facility, i.e. those risks falling under the first category. For an underwriter with Mr Broad's depth of knowledge and experience, it would, in our view, have taken perhaps only a minute or two (as opposed to the ten - twelve minutes per risk suggested by Mr Mackie) to run an eye over the list of syndicates in which a Name participated, in order to ascertain whether or not that list included either a syndicate or syndicates over which Mr Broad had a particular concern or where the Name's participation in any one syndicate represented an unduly large proportion of the whole. It was Mr Broad's evidence, which we accept, that the greater part of his time was spent on the lesser number of risks which required individual rating.
"9.3 We accept that, for those risks falling within the "above average" category, it was entirely reasonable, and indeed predicated, that such risks would be accepted at the standard terms contained in the Rating Schedule; that, as Mr Broad himself pointed out, was the reason for the very existence of that Schedule. We also accept Mr Broad's explanations as to how the practice of initialling only summary sheets arose; we are satisfied that in each instance, Mr Broad assessed the individual risks attached to those summary sheets. On the question of the retention of "working papers", we accept that Mr Broad's evidence that it was not the general practice of Lloyd's underwriters to retain such papers at their boxes. We know from our own experience that the very limited working area provided by the typical Lloyds box precludes to a very large degree the retention of anything other than the barest details of the risks accepted, e.g. a copy of the placing slip...
"9.4 After careful consideration of the evidence, we conclude that Mr Broad did in fact undertake the individual assessment and rating of risks, as required by both the general conditions of the Facility and the criteria laid down in the "Package". That requirement was fulfilled in two ways; firstly by the assessment of those risks which fell to be bound under the standard terms stipulated int he Rating Schedule (in our view it matters not that the original assessment was performed by the brokers in accordance with a strategy established with Mr Broad - what is important is that Mr Broad (or his deputy) checked the correctness of that initial assessment). Secondly; in respect of risks falling outside of that first category, by the individual assessment and rating of the risks concerned. In reaching that conclusion, we have taken into account, to the extent that it might be relevant, our own personal knowledge and experience of the underwriting methods employed in the market at large."
- I have referred to the award, not because it constitutes in any way evidence in this trial, but because it was put before me by consent together with Mr Broad's evidence in the arbitration as part of the background to this case, upon which Mr Broad was cross-examined at length, and indeed as part of the core documentation which fell for my consideration. I am clear in my mind that the evidence upon which I have to decide this trial is the evidence given before me, as tested by reference to Mr Broad's previous evidence, and that I have to make up my own mind as to the value of Mr Broad's testimony. Although Mr Broad was questioned by the arbitrators, he was not subject to the much more detailed cross-examination, on much richer materials, which he was taken through before me, nor was his questioning by the arbitrators subject to the adversary process which has taken place only in this trial.
The 1991 hit list.
- It will have been observed that a "hit list" of syndicates to be avoided was first mentioned by Mr Broad in his evidence at the arbitration hearing. At that time it was not spoken of as a document, and no such document was disclosed in the arbitration, but it was I suppose consistent with that evidence that such a list might have been recorded on paper.
- It was only in the discovery given by the brokers for the purpose of this action that a document headed "Hit List - 1991 Account" (the "1991 hit list") came to light. There is no similar document for 1990 or any other year of account. The 1991 hit list was disclosed among a number of documents generically described as "various documents re 1991 PSL insurance". It lists 29 syndicates by their number and name. What is it?
- The claimants submit that it is a hit list of syndicates to avoid for the 1991 year, and that as such it provides proof that Mr Broad did not carry out an individual assessment of each proposal, because it can be shown that a significant number of names were accepted in 1990 and in 1991 despite the fact that they had participations in listed syndicates (not infrequently as many as three or four and occasionally six or seven such syndicates in any one portfolio).
- Mr Broad, however, said that although he discussed with the brokers at the beginning of each year syndicates that he did not like in the sense that they should be watched, he never reduced such a list to writing. He also pointed out that the 1991 hit list: contained syndicates that he recalls having liked, such as Devereese (228), Dodson (660), Caudle (760) and Coffey (902); and did not contain syndicates that he recalls having disliked, such as Sturge, Forrest, Lissenden and Merrett. It did however contain the Gooda Walker syndicate 290 which he disliked. In any event the presence of one or even more such syndicates on a portfolio did not, he said, mean that no quote would be given: it was merely one factor in the assessment along with spread, premium allocation, long-tail or catastrophe exposure, and so on. As for what the 1991 hit list was, he could not say. It was not his document, but in so far as there was any common denominator to the list, the syndicates on it all appeared to him to have been fairly heavily involved in excess of loss business: as such, that would again be merely another factor in the assessment, and might have meant that they were a slightly higher risk than other syndicates. Finally, he sought to qualify the remark he made to the arbitrators about a hit list of syndicates "we won't go anywhere near". That was in effect a figure of speech. He was referring to syndicates which, other things being equal, he preferred to avoid, or what he would call a "watch list".
- The hit list was the brokers' document, not Mr Broad's. So what did the brokers say about it? Mr Roxburgh confirmed that Mr Broad never delivered any list in writing to them, and that they never drew up a list of syndicates which Mr Broad preferred to avoid. He had no recollection of it. It appears to have been drawn up by his colleague, David Close, whose initials are on it. Mr Roxburgh speculated that it was either a list of potential participants in the binder, or a list of syndicates which Mr Close was watching from the point of view of aggregation, an exercise carried out with the help of the brokers' computer system with which Mr Close was involved. Mr Close was not called to give evidence, although a witness statement from him was exchanged, in which he said that he had no recollection of the document and also speculated as to its function. I pay no regard to that statement, for it is not in evidence, but I have checked it to ensure that it says nothing essentially inconsistent with Mr Roxburgh's evidence.
- I do not think that it is appropriate to test the 1990 proposals and quotations by reference to the 1991 hit list, but it is relevant to ask what light the 1991 underwriting throws on the matter. There has been no analysis of the underwriting in the case of the quotations which were not taken up, but the risks which resulted in policies being written have been analysed (see bundle K2). These show that the hit list syndicates are frequently to be found included within the names' portfolios. By no means every name has at least one such syndicate on his or her portfolio, but I would guess that at least half such names do. Many names have more than one hit list syndicate on their portfolios, and in a very few cases the number can rise as high as six, seven or even (in one case) eight. However the number of syndicates is not the only guide, for often the larger numbers of hit list syndicates appearing on a single portfolio occur in the case of a name who wrote a high total API, so that the percentage that the hit list syndicate API bears to the total API need not be that great: see, for example, J S Marks whose 5 hit list syndicates amounted to only 8.46% of total API. Correspondingly, sometimes a smaller number of hit list syndicates absorbed a higher percentage of total API: see, for example, M G Clerk with 2 such syndicates amounting to 20% of his API. The fact is that 91 names had a hit list syndicate API of more than 20% of total API (see appendix 2 to Mr Broad's supplemental statement) and it could rise in rare cases to over 30%, in the case of D J Lawson to 37.14%. It seems impossible to conclude, therefore, that the 1991 hit list was a list of syndicates which would disqualify a name from cover.
- There is some evidence that a substantial percentage of hit list syndicate API would tend to push up the excess: thus appendix 2 to Mr Broad's supplementary statement shows that names with more than 20% of their API on his list syndicates suffered an average excess of 15.23% as against an average in the case of all other names of only 14.06%.
- In my judgment, therefore, the 1991 hit list was not a list of unfavoured syndicates, although it may incidentally have contained some, such as syndicate 290. If neither Mr Broad nor Mr Roxburgh knew about it, it could not be a list of unfavoured syndicates, and I do not consider that they were misleading the court. I would for myself adopt the explanation put forward speculatively by Mr Roxburgh that its primary function was to keep an eye on the excess of loss market for the purpose of aggregation (I do not accept his alternative speculation). Additionally, it or rather a general feeling of concern about syndicates which wrote a substantial amount of excess of loss business may have affected the assessment to a minor degree (see the appendix 2 analysis above) in that it was felt that excess of loss syndicates added marginally, or as one factor among others, to the overall risk. In this connection I note that back in 1989, when some historical analysis was done on a number of portfolios' outturns for the 1986 year (what Mr Broad in the arbitration called test runs), the fact that a syndicate wrote excess of loss business was frequently noted on the proposal form. Mr Broad was asked about this and his attitude to excess of loss generally. He accepted that by 1989 there were some opinions in the market (eg Chatset's) which speculated on difficult times ahead for excess of loss; but there were other opinions too and the dramatic results of subsequent years were not generally foreseen. Nevertheless, he had a non-specific concern ("always a factor to be taken into consideration") about excess of loss, and in particular disliked syndicate 290. As a result, he sought to ensure that the XL content of a portfolio was not going to unbalance it: a few syndicates within a portfolio was one thing, two out of three quite another. If the preponderance of a portfolio programme was wrong, it would be rejected or the excess raised. In this respect, XL was no different from other potentially problem areas of the market, such as syndicates substantially involved in longtail business, or US catastrophe business, or syndicates which had purchased large time and distance policies. The important thing was to look at the balance of the portfolio, and where necessary take the protection of raising the excess or refusing to quote. And in the case of syndicate 290, there was a specific concern to limit its involvement in the scheme.
- It would be known by the brokers that Mr Broad had such general concerns about excess of loss business. In these circumstances I can well imagine that Mr Close decided to monitor the position of XL syndicates and constructed a list of them, including as it happened, since it was his list rather than Mr Broad's, both the favoured and the unfavoured on it. In the meantime, the general assessment of portfolios would be going on, in which the presence of XL syndicates would be only one factor among others.
- Against that background, I could understand that the presence of names which had larger percentages of XL syndicates on their portfolios might have been a subject-matter of complaint: such cases might have been specifically investigated, in an attempt to show that the premiums and excesses set in their cases showed no sign of any regard being paid to the high proportion of XL content; and, dependent upon what such an analysis might show, an argument might have been advanced that such cases indicated that no regard was paid at all to XL content and that this was evidence against there having been any genuine assessment of names' portfolios. Such an attempt would probably have had to involve an ex post facto qualitative analysis of the result of the underwriting: did such cases show a worse underwriting loss for the stop loss insurers than the general run of things? Were such losses evidence of a failure to carry out a proper or any genuine assessment of the names' portfolios? However, although as a result of the discovery of the 1991 hit list there has been some analysis of part of the underwriting to show that the hit list syndicates were not avoided and the extent to which they were not avoided, and there has also been some attempt to analyse (a mere) 7 examples of the 1990 names with 20%+ participation in the 1991 hit list syndicates (see Mr Lawrence's appendix 11 discussed below), no further use has been made of the point. This feature of the structure of the argument deployed before me can be generalised across other areas of concern, such as longtail business and so on.
- Instead the claimants have adopted a different strategy, which is to stress the absence of any documents in which Mr Broad set out his concerns or thinking or gave any guidance to the brokers, or by reference to which they in turn assisted him in his task by bringing to his consideration aspects of the underwriting process other than their suggested quotations. It is to this strategy, essentially a case of no individual assessment by Mr Broad in accordance with the presentations' underwriting criteria, that I will turn, after saying something about the two major witnesses that I have heard on behalf of the brokers.
Mr Broad and Mr Roxburgh
- Mr Broad was examined for a day and a half and cross-examined for over three days. There was no general attack on his credit, but there were specific attacks to the effect that he had misled the arbitrators (i) by suggesting that he had himself altered the brokers' initial premium quotes in the generality of cases, (ii) that the brokers' initial quotes were benchmark quotes taken from rating scales, and (iii) in saying that he had a hit list of syndicates to avoid. No submission, however, was made to me by Mr Rowland as to how in general I should regard his evidence.
- I do not accept the second and third points of complaint. As for benchmark quotations, the evidence was very confused. There were two kinds of rating scales which could have been in Mr Broad's mind, first the rating schedules attached to the binders, and secondly the indicative guidelines scratched for 1990 (and further indicative guidelines drawn up but not scratched for 1991). It was never clearly established for the purpose of Mr Broad's cross-examination exactly which of these types of documents he had in mind in any answers he gave. In any event, neither of these forms of rating scales would necessarily or even very often provide a premium rate for any particular situation, so that in any event the initial rate would have to be a calculated rate into which elements of judgment might begin to introduce. I am not conscious of any exercise of analysis conducted and relied on by the claimants which seeks to prove that the initial quote on any proposal sheet could not be related to some rating scale. It seems to me that Mr Broad's evidence on this point adds nothing to the first point - other than that Mr Broad may himself have been confused as to what the brokers were doing.
- The third point, relating to the hit list, I have already investigated. Mr Rowland wanted to argue in the first place that the 1991 hit list was a list of syndicates to avoid and may be representative of lists for other years which have not survived; and in the alternative that Mr Broad was lying about hit lists altogether. I have already rejected the primary submission. It seems to me that the alternative submission fails as well. Mr Broad did have lists, perhaps more accurately described as watch lists however they may have been referred to at the time, of syndicates which he preferred to avoid. But such lists would have been short ones and easily borne in mind: both Mr Broad and Mr Roxburgh said that as such they were not formally drawn up, in part out of concern for confidentiality, although Mr Broad may have made personal notes for himself. There would otherwise have been areas of general concern (not I think lists of syndicates save as Mr Close may have generated in the 1991 hit list) such as excess of loss, longtail and US catastrophe business, where any undue weighting on a portfolio would have been a factor for taking into account. I do not think Mr Broad lied to me about these matters, even if he did overstate the point in the arbitration by talking of syndicates "we won't go anywhere near".
- As to the first point, it is true that Mr Broad did tell the arbitrators that the premium alterations had been made by him, when, as he was ready to accept before me, this was not the case, since they had been made by the brokers. Mr Broad nevertheless denied that he had deliberately sought to mislead the arbitrators. It is hard for me to know what to make of this. Ultimately I have to judge Mr Broad's value as a witness on the basis of his evidence before me, and I had ample opportunity over his lengthy and detailed cross-examination to do so. In my judgment, then, Mr Broad was a fundamentally honest witness, even if, for reasons to which I will refer again below, his evidence had to be treated with care. I think that on this point of the brokers' role in altering the suggested premiums Mr Broad's evidence before the arbitrators was incautious and inexact, rather than deceitful. He would have had in mind that the rating schedule or indicative guidelines would have been discussed and agreed with him; that such standard changes as the 71/2% uplift in 1990 - a source of very many of the changes made - were agreed with him; that he did intervene personally on a regular basis, even if, as a detailed analysis now shows, this was to alter excess points rather than premium rates; and that he agreed and scratched the individual risks. He was also at the disadvantage of giving evidence in undefended proceedings. The difficulty of that is the loss of adversarial discipline. I think that in these circumstances he incautiously assented to the arbitrators' assumption that the alterations were his, and there was nothing to correct that false step. But I do not think he lied or intended to deceive.
- There was a parallel of a kind in the evidence given before me regarding the deletion of names from summary sheets which collected together names from particular agents. In his written statement Mr Broad said (at para 37) that "If I was not satisfied in any particular case I would cross the name off the list before initialling it." When cross-examined as to this, Mr Broad said that whereas he might have crossed off a name, he would accept that by and large the deletions were made by the brokers. I asked Mr Roxburgh about this and he said that generally the deletion was made by the brokers, but that this covered situations both where the deletion was made in advance of seeing Mr Broad but pursuant to underwriting principles agreed with him, and where the deletion was made in the presence of Mr Broad following discussion with him.
- However, even if I were wrong about my views on Mr Broad's evidence on this point in the arbitration, it is his evidence in these proceedings that I have to evaluate. It is evidence which the claimants have sought to rely on as much as to criticise. In my findings I have sought to bear in mind the difficulties of evaluating that evidence, and I hope I have been successful in doing so.
- There was again no general attack on Mr Roxburgh's credit, but his evidence regarding the question of the grading of syndicates was criticised. I deal with that specific topic below under the heading "Paragraph (D): Historical results". Nevertheless, in general I found Mr Roxburgh's evidence to be helpful and reliable. As in Mr Broad's case, however, much depended on my assessment of what that evidence amounted to when contrasted with the case which the claimants were seeking to make.
The case on inaccuracy (1): no individual assessment; no assessment by Mr Broad personally.
- For the moment I shall put aside the concern I have expressed above as to the scope of the alleged representations relied upon and will concentrate instead on the claimants' case on inaccuracy, both as repleaded in the points of defence and as expanded in the Inferences document. For these purposes I shall begin, as indeed the matter was argued before me, as though I was investigating the whole history of events ex post facto, as it were for the purposes of a case of misrepresentation of past facts or even a case of breach of warranty, rather than a case of misrepresented intentions. Only subsequently will I go on to ask how the matter is affected by the fact that ultimately the case is not of that kind but one of misrepresented intentions.
- It will in due course be convenient to address the claimants' case on inaccuracy by reference to the synopsis contained in their Inferences document (as set out above) and restated in almost identical language early in their closing written submissions. Before doing so, however, I shall address a more fundamental question which is whether there had been any assessment at all of individual proposals by Mr Broad worthy of its name, or whether anything done by way of assessment had been done only by the brokers, and not in a way which constituted assessment of each individual risk. It is not clear to me to what extent elements of this complaint remained to the end of the trial, by which time there had been a measure of qualified acceptance that the presentations did not in terms require Mr Broad to do everything himself, but entitled him to deputise his personal role to his deputies and a fair measure of the overall preparation to the brokers. Nevertheless, the leading representation relied upon in the pleadings remained the representation (i) that "each proposal...was individually assessed by Mr Broad"; and the synopsis of the claimants' case on inaccuracy is drafted in terms of "Mr Broad did not..." do this or that. Moreover, an alleged failure to carry out individual assessment remained at the heart of the claimants' case.
- It is therefore necessary to state my findings as to how Mr Broad and the brokers did in general set about the process of underwriting the scheme.
- By 1990 the scheme[17] had been operating for seven years. Over that period Mr Broad and Messrs Roxburgh and Seel had formed a close working relationship. It would be fair to say that neither brokers nor underwriter could have performed their respective functions without the intimacy and mutual understanding which the operation of the scheme over those years had engendered. For example, it was the brokers and not Mr Broad who had control over the brokers' computer system. Yet that was the system which enabled problems of aggregation to be identified, and Mr Broad had to rely on the brokers to bring any such problems to his attention. Indeed in general the scheme worked in accordance with the typical Lloyd's operation in those years, whereby documentation remained with the brokers, and the Lloyd's underwriters at their box kept for themselves practically nothing other than the basic underwriting materials such as slips. It was Mr Broad, however, who was the specialist Lloyd's underwriting "insider", and his particular role and his importance to the scheme as a whole was his insider's knowledge of the market (comprising its 400 or so syndicates) as it varied from time to time. That knowledge was discussed and pooled with the brokers.
- At the beginning of each year, before the quoting season got under way, the brokers and Mr Broad would meet to hold long discussions about the broad strategy and detailed tactics of the underwriting of the scheme. They would pool their knowledge: and less favoured areas of the market and particular syndicates which would need watching would be identified and discussed. It was not so much a matter of detailed grading of syndicates, as seeking to identify potential problem areas of increased risk. Some agencies would be favoured above other agencies, on commercial grounds which would reflect a mixture of business goodwill for past support and trust in those agencies' own selection of portfolios for their members. To some extent, particularly with agencies which had provided repeat business in the past, the profile of risks presented by the members' portfolios was not unfamiliar business. If necessary, published material such as Chatset could be and was consulted, but on the whole such information was some years old.
- Rating and excess levels were also discussed. This lead to the drawing up of indicative rating documents such as those indicative guidelines to which I have referred earlier in this judgment. Such documents were in general presented to Mr Broad for scratching. The document relating to the 1991 primary layer does not appear to have been scratched, but I regard it nonetheless as reflecting pre-season discussions between brokers and Mr Broad.
- Early in the 1989 quoting season a number of portfolios were checked for the results which that portfolio would have produced in the most recent year for which there were published figures. That would have been the 1985 year (which closed in 1987 and reported in 1988). The results of individual syndicates were written onto the portfolio (proposal) sheet and the total net profit (it always was a profit) was calculated. The portfolio would then be graded A, B, C and so on in accordance with a formula which is contained in the 1989 presentation booklet, but not thereafter. I shall refer below to that formula in greater detail, but for present purposes it is enough to note that the grading system was not reproduced after 1989 and therefore is not of direct relevance to the years with which I am principally concerned. It was discovered that in general such historical analyses produced a grade A, so much so that the practice fell into comparative disuse and, as I have just said, the reference to it was dropped from subsequent years' presentations. Although Mr Broad and Mr Roxburgh said in evidence that there were some cases of B or even C, every example which has been identified in the trial documents produced an A. The fact was that at the period for which such checks were made Lloyd's profitability was still such that an A grade could, on the basis of such tests, had been predicted. In 1989 the 426 quotations which resulted in policies have shown up 43 such analyses, or roughly 1 in 10. It is not known what the position is among quotations not taken up. The 43 analyses alone covered 140 syndicates or more than one-third of all syndicates. In 1990 only 10 such analyses have been found (there may well be more among quotations not taken up) covering 97 syndicates. In 1991 only one analysis has been found.
- These analyses graded the historical quality of the portfolio, not of individual syndicates, but of course the results of individual syndicates were incidentally brought to the attention of the brokers and Mr Broad. Only a small minority of syndicates showed a loss. There was, however, no analysis or grading of the historical results over the years of individual syndicates. This might have been interesting, for it would have indicated the extent to which certain syndicates might have produced erratic profits and losses over the years. Mr Broad accepted that the risk involved in such syndicates might be grater than in the case of syndicates which showed a stream of steady profits over the years: but he also acknowledged that there could be categories of syndicate, such as those involved in catastrophe risk, where the nature of the underwriting was such that even years of profits could one day be followed by a significant loss. That insight, however, would not seem to me to depend on historical analysis.
- As the quoting season got under way, the brokers would prepare the portfolio proposal sheets for underwriting by Mr Broad and his deputies. They would frequently indicate the largest line, or large lines, since this would or could have a bearing on the excess. Sometimes, particularly in 1989, they would indicate excess of loss syndicates by writing XL against the syndicate name or number. Sometimes matters of this kind might be drawn to Mr Broad's attention during discussions, but it is hard to evaluate this in the absence of markings. Chatset and other reference books were available, and were referred to as necessary.
- The brokers prepared the proposal sheets for Mr Broad by writing on them suggested terms relating to cover, excess and premium. Typical examples of such suggestions might take the following forms:
An example from 1989: [Core, tab2 9, p37, Bannatyne]
"50,000 x/s 25,000 - 1850 1950
100,000 x/s 25,000 - 2500 2850
100,000 x/s 37,500 - 1875 2075"
An example from 1990: [Core, tab 10, p182, Buchanan]
"50,000 x/s 50,000 - 1950 2096
100,000 x/s 50,000 - 2750 2956
100,000 x/s 75,000 - 1825 1962"
An example from 1991: [Core, tab 14, p2, Davis]
"100/69,500 - 3000 3300
200/69,500 - 3700 4085
100/104,250 - 2250 2650
200/104,250 - 2900 3395"
- Thus in 1990 and 1991 three[18] quotations would be provided, of which typically two would be for £100,000 cover at different excess points, and a third would be for some lower level of cover. In the case of 1991 quotes would of course be given for both primary (£100,000) and primary and excess (£200,000) cover. There would often be two or sometimes even three different suggested rates for each line: the succeeded rates would be crossed through. Generally the later suggestion would be higher, but sometimes there was a reduction. The higher rates would in 1990 typically be an uplift of 7.5% and in 1991 an uplift of 10%: but the figures could vary and where they did they generally exceeded those typical uplifts. The 1991 example given above, shows on cover of £100,000 an uplift of 10% at an excess of £69,500, but of more than 10% at an excess of £104,250. There were many variations on these examples.
- This system was of course adopted by the brokers with the approval of Mr Broad. It would have been impossible for Mr Broad to have started each quotation from scratch. The writing in of suggested premiums and then deleting them with a light oblique stroke was, on my understanding of the matter, to give transparency to the process. Mr Broad would be able to see at a glance, and the broker would be at hand to explain in case of need, the thinking behind the broker's suggestions. When Mrs Stenfors was taken through the quotation of a typical proposal, it seems likely that she would have been given an accurate explanation of the way in which this system worked.
- I have already described the systems of collectivisation that were generated in the 1990 and 1991 years to deal with the growth of the scheme, and need not repeat them here.
- The brokers, by agreement with Mr Broad, also sifted proposals into two broad categories: one comprised those which were thought to constitute standard risks well within the guidelines and criteria of the scheme, and the other comprised risks which were thought to require more detailed attention. If Mr Broad was busy or unavailable, the former category could be dealt with by Mr Broad's deputies. The claimants have identified 96 (out of 586) risks bound in 1989 scratched by Mr Tunstall, and 224 (out of 1,524) risks bound in 1990 scratched by Mr Bunn. The claimants provided no figure for 1991. The risks scratched by Mr Bunn in 1990 were as far as I can determine, typically of the "as Mrs Woodley" variety, a form of collectivisation of similar risks with identical APIs within a single agency which I have described above and called the "batch" procedure. Even so, many of such batches were scratched by Mr Broad himself.
- Various expressions have been used to describe this process of categorisation between the standard and the non-standard. Thus in his evidence at the DIK arbitration Mr Broad distinguished between risks which "fell unarguably within the agreed underwriting criteria" and those "which required more specific consideration". In his written evidence in these proceedings he expressed the difference in these terms:
"First, those which fell unarguably within my criteria and current guidelines (that is to say Names with a good spread who were not unduly exposed to any particular syndicate and who did not have any participation on syndicates with which I did not want to be involved). Second, those which were not so straightforward, perhaps because of a narrow spread, a comparatively large concentration of risk or the presence within the portfolio of a syndicate which I preferred to avoid."
Mr Broad also referred to risks in the first category as "acceptable, or standard" and to risks in the second category as "non-standard" (paras 36 and 39/40 of his first statement).
- In his oral evidence Mr Broad was cross-examined on the logical basis and practical consequences of such categorisation. Not surprisingly, among such rich material as was available for this purpose, there were examples where he found it difficult now to say where a particular risk lay between such categories: or was pressed as to why a risk dealt with as a standard risk, perhaps even by a deputy, should not be said to raise a question-mark even according to the principles which he had himself advanced. Although such cross-examination could be made to seem embarrassing to Mr Broad, I was not much impressed by it. There would always be cases of line-drawing, or even errors and oversights. What in the full flow of quoting on a daily basis would have seemed an easy and simple matter then, now getting on for a decade later might well be a cause for uncertainty or perplexity. In any event, as Mr Broad explained, his deputies, who were well versed in his underwriting principles and philosophy, were instructed to check any problem with him and were subject to his supervision.
- At the end of the day the claimants' attitude to this issue was somewhat typical of their approach in general. They did not question the ultimate merits of the underwriting (see, for instance, Mr Rowland in the course of cross-examining Mr Broad at Day 9.115), but they did seek to submit (para 98 of their closing written submissions) that "there was no adequate or coherent system for distinguishing between standard and non-standard risks". However, to my mind the proof of that pudding must be in the eating. If the merits of the underwriting were not to be questioned, I do not see why the adequacy of the system should not pass muster.
- I would for my part accept the basic concept of this division of risks, and the evidence which Mr Broad (and Mr Roxburgh) gave about it. However it is expressed, I would myself regard the division as being essentially between standard and non-standard risks, or what at any rate were regarded by the brokers and Mr Broad as such. Such a division is inherent in the presentation booklets themselves, since paragraph (E) on page 4 ("Excess") speaks of non-standard risks ("in respect of a non-standard submission") and states that in such cases "it will be our policy to increase the excess rather than load the premium". The implicit distinction drawn in that paragraph appears to be between standard risks, in which case, no doubt subject to what is also said about the use of excess in paragraph (C), the risk would be reflected in the premium, and non-standard risks where the policy would be to increase the excess rather than the premium. It seems to me to be also inherent in the division between standard and non-standard risks and in the case of standard risks of the "as Mrs Woodley" variety that the concept of individual assessment and rating would entitle the brokers to propose and Mr Broad to accept a standard premium for a standard risk. One of the matters discussed between Mr Broad and the brokers at the beginning of a season was a standard rate for standard risks all belonging to a particular agency. After all, the concept of treating like cases alike is not inconsistent with a policy of individual discrimination: on the contrary.
- In the light of the evidence given by Mr Broad which I have reviewed above in the passage regarding the 1991 hit list, viz about syndicates which he preferred to avoid or to watch and areas of business about which he had some non-specific concern, I would accept that the mere presence on a name's portfolio of one or two less favoured syndicates would not, if a decent spread was otherwise achieved, turn what was otherwise a standard risk into a non-standard one. Although the distinction between standard and non-standard risks was recognised in the presentation booklets themselves, it was not defined and these were not terms of art.
- There are passages in the evidence of the claimants' witnesses which suggest that they had been led to believe that Mr Broad did nothing or little more than agree the brokers' suggestions. This evidence reflected Mr Rowland's most fundamental submission to the effect that Mr Broad "did not individually assess and rate each case accordingly or at all", a conclusion which in his Inferences document he asked me to draw from the documents before the court, and in particular from the first and fifth alleged features of that material, viz
"(a) the absence of markings on the documents showing any input by Mr Broad or his deputies";
(e) that the quotations (and almost all the alterations thereto) written on the syndicate lists or summary sheets are those of the brokers not Mr Broad."
Thus Mr Thomas of Avon said (at para 9 of his written statement):
"It would not have been acceptable that the lead underwriter should simply look at the total premium income, the number of syndicates by major class and the allocated premium income on each syndicate."
- Similar sentiments were expressed by other witnesses (see for instance Mr Gibson of Avon at para 6.2 of his statement and Mr Flaaten of Vesta at para 6 of his). Mrs Stenfors seems to have thought that Mr Broad had "just appl[ied] some sort of tariff". Mr O'Neill of Iron Trades and Mr Dearlove of Provincial were more cautious about how they regarded Mr Broad's assessment of non-standard risks, but seem to have assumed that at any rate standard risks were "rated entirely mechanically by applying some formula" (Mr O'Neill) or were "merely initial[led] without detailed scrutiny".
- The position was in fact different. Not only were standard risks the subject of assessment by the brokers in accordance with Mr Broad's criteria and the detailed discussions shared between them, and again the subject of consideration by Mr Broad or one of his deputies on an individual basis before the underwriting assent was given, but there were regular, if relatively uncommon, interventions by Mr Broad in the case of non-standard risks. Examples of such interventions in 1990 and 1991 have been assembled within bundles Q and R and summarised in appendices 1 and 2 to the brokers' closing submissions. Normally Mr Broad's intervention was by way of increasing the excess, which he did by deleting the excess suggested by the brokers and writing in a higher one: but there are also examples, if very rare, of him changing a premium or writing in "no quote". Although the number of such interventions, compared to the number of scratches without alteration to the brokers' suggestions, are infrequent, the fact that they occur shows that each proposal was individually considered and assessed. Against that background, the fact that the majority of proposals did not require any amendment to the brokers' suggestions merely shows the extent to which the close collaboration between the brokers and Mr Broad over the years and their detailed consultations together at the start of each quoting season enabled the brokers to reflect Mr Broad's thinking in their preparations for his final assessment. In truth, the assessment was a continuous process, which only ended, rather than began, with the presentation of the individual portfolio sheets to Mr Broad. If Mr Broad agreed the brokers' suggestion, this was not a case of assessment by the brokers and mere acquiescence by Mr Broad: It was a continuous assessment by the brokers and Mr Broad in partnership, with the brokers' work being led and guided by Mr Broad from beginning to end.
- In this connection I would refer back to Mr O'Neill's evidence for Iron Trades which I quoted above under the heading "The brokers' presentations". He understood the scheme presented to him by the brokers as imposing on Mr Broad the need to "devise a method of sorting the risks which the brokers would undertake which would cut down the amount of time which he would have to give to each risk". It would, as he said, be for Mr Broad "to achieve the right balance between delegating the task of sorting and sifting the various proposals and the actual level of assessment that each risk would call for from the leading underwriter". Mr Dearlove's evidence for Provincial together with his contemporaneous notes to the effect that underwriting was initially done by the brokers but vetted by Mr Broad support my view that it was a standard part of the brokers' oral presentation to explain accurately how the assessment process was shared between brokers and Mr Broad. If this was Mr O'Neill's and Mr Dearlove's understanding of the scheme as presented to them, it seems to me that there is no good reason why each of the claimants ought not to have regarded the scheme in the same way.
- Mr Rowland sought to suggest that the sheer number of quotations dealt with on a daily basis meant that individual assessment was impossible (or at any rate that assessment in accordance with the underwriting criteria was impossible, a subject that I shall be dealing with below). Thus in 1990 on days when underwriting was carried out, an average of well over 100 risks were scratched each day; in 1991, this figures rose to well over 200. The heaviest of all days were 12 and 13 December 1990 (part of the 1991 season) when 601 and 404 risks were scratched respectively. However, even on those days there are many interventions by Mr Broad, showing that his agreement was not a mere form. Mr Broad gave evidence that throughout the quoting season he was regularly putting in hours each day in dealing with quotations. No doubt the number of individual proposals put pressure on the scheme and Mr Broad in particular: but his scratches and his interventions, even on the busiest of days, show that he managed to consider each one. There is no complaint about the ultimate merits of his underwriting.
- Mr Rowland did, however, seek to submit, by reference to some detailed work performed by the claimants' expert witness Mr Richard Lawrence, that the rating of the risks was simply arbitrary. Therefore, it was said, should infer (from that among other matters) the absence of assessment. The whole of this exercise was a mechanical or rather numerical one, in that Mr Lawrence admitted in cross-examination that he possessed no expertise in the writing of personal stop loss insurance and thus no expertise which enabled him to assess the risk profile of any portfolio of syndicates or to quantify a premium or to perform a qualitative assessment of Mr Broad's underwriting. Indeed, he claimed not to have even attempted to do that, but simply to present figures without seeking to draw conclusions from them.
- I confess to finding this submission of arbitrariness to be unhelpful. It would be surprising, whatever the validity of the claimants' case in general, if the underwriting of this scheme, after so many years of experience of it in the past, was simply arbitrary. The submission also had to fight with the opposing argument that individual assessment had lost out to a mechanical tariff based underwriting. An entirely arithmetic exposition of the numbers involved, without any relevant expertise to evaluate them, could not begin to explain differences or samenesses or incompatibilities or even downright incoherencies relied on as proving arbitrariness: were such allegedly apparent oddities due to diverse risk profiles, or changing evaluation of risk profiles, whether diverse or not, or to commercial considerations, whether of goodwill or competition, or to an attempt to price up (or down) one layer of excess or cover in preference to another, or to misjudgment, or to simple error? On the evidence, all of these were possibilities, indeed they would be likely to occur in a regime of individual assessment. Only in a pure tariff based scheme should it be possible to explain every single rating against a published tariff. The fact that Mr Broad and Mr Roxburgh were now, so many years later, unable to state by reference to any particular explanation why any compared or contrasted set of ratings took the form they did, did not surprise or assist me.
- Ultimately Mr Rowland made little use of Mr Lawrence's workings in his final submissions. He maintained a submission (para 85 of his written closing submissions) that "there was in fact no rating scale in operation for any of the years 1989, 1990 and 1991" and that the rates applied "represented a purely arbitrary assessment by the brokers of the premium which they could obtain for an individual risk": and there was a general passage (in para 111) on Mr Lawrence to the effect that he, Mr Lawrence, having analysed a significant quantity of the risks was justified to conclude that he was "unable to discern any consistent underwriting pattern much less any pattern of underwriting which is remotely consistent with the representations made in the presentations". But there was no sustained attempt, hardly any attempt at all, to develop those broad themes by reference to the detail of Mr Lawrence's appendices.
- In the circumstances I do not propose myself to go much into the details of Mr Lawrence's workings: but I will seek to give the flavour of them, and to do so by reference to the inferences which Mr Rowland asked me to draw in his Inferences document. Thus he asked me to conclude that the indicative guidelines prepared for the 1990 and 1991 years were not used. I am not sure that Mr Lawrence himself even sought to support that submission, but, if he did, he did not succeed. For these purposes I have in mind the particular appendices 9 and 11 of Mr Lawrence's first report and schedules A, B and C of his third report, and in general the points made in the body of his reports in relation to these and other appendices. Mr Lawrence (or Mr Rowland) had, for present purposes, perhaps three major points to make based on these workings: one, that the excess quoted did not always equal the largest participation on any single syndicate ("largest line"): two, that premium quoted varied from the indicative guidelines and varied inconsistently between one quote and another; and three, that participation on the 1991 hit list did not appear to affect quotations, whether in 1990 or 1991.
- As for the first point, this does not seem to me to bear at all on the broad submission presently under examination, but rather on the narrower question, to which I will have to return below, as to whether the policy of relating the excess to the largest line was pursued (see the first sentence of paragraph (C) of page 4 of the presentations). Mr Lawrence stated in his first report (at para 5.20(b)) that he took this policy to mean that "the excess will be equal" to the highest line. In cross-examination he disavowed that interpretation (at Day 13.124), while accepting that on looking through the documents in the case -
"it became immediately apparent that this [ie that the excess was equal to the highest line] was the normal course of events, certainly in respect of a lot of quotations" (at Day 13.125).
The fact is that the 1990 indicative guidelines show that 8 out of the 14 examples there given have an excess lower than the largest line (but pulled above 10% in the direction of the largest line). It was only in 1991 that the 1991 indicative guidelines stipulated that excess was always to be minimum 10% or largest line (save where the total API was £250,000 or less). Therefore a 1990 excess of between 10% and the highest line would not be inconsistent with the application of the 1990 indicative guidelines; and I am not conscious of a 1991 excess which is inconsistent with the 1991 indicative guidelines (although perchance there may be some): see for instance Mr Lawrence's appendices 13, 14 and 15.
- In this connection I could mention Mr Lawrence' s appendix 11 based on 1990 quotations. 20 examples are there taken of portfolios which contain a high percentage of 1991 hit list syndicates, 7 of those 20 examples are then extracted for the purpose of comparing the excesses quoted in those cases with the 1990 indicative guidelines. The reason why those 7 were chosen was because only these in Mr Lawrence's opinion displayed close parallels with the examples contained in the guidelines. Mr Lawrence thereby implicitly recognised, correctly in my judgment, that within the interstices between the examples provided by the guidelines there is room for and indeed the necessity of interpretation and assessment. Mr Lawrence's comment at para 5.40 of his first report is that 5 of the 7[19] examples "show an excess that was actually below the indicated scale minimum". But his appendix shows no such thing. At most it purports to show 3 below the guideline excesses, 1 above, and 3 absolutely in line. But even the 3 purportedly below the guidelines are not really so. In one case (#14. Doughty) the guideline example taken is of an API of £500,000, largest line £110,000, number of syndicates 15, excess of £90,000 and premium of £3,700 (gross). Mr Lawrence seeks to say that Mr Doughty's portfolio of an API of £500,000, largest line of (only) £40,000, and number of syndicates 20 is a close parallel. He therefore criticises the quote of £2230 on an excess of £75,000. But Mr Doughty's largest line of £40,000 (8% of API) bears absolutely no relation with the guideline example's largest line of £110,000 (22% of API). The comparison is grotesque. Moreover Mr Doughty's 20 syndicates give a better spread than the guideline example's 15. Therefore the excess of 15% on a premium of £2300 (net) is wholly understandable, even if the guidelines do not help very much. Perhaps a closer parallel is the guideline example of an API of £400,000, largest line £40,000, number of syndicates 20, on an excess of £45,000 and a premium of £3,000 (gross). Compared to that the alternative quote of £2,903 (net) on an excess of £50,000 may not be all that different: I have to confess, however, that the relationship between gross and net premium rates was never explored before me.
- Similar comments could be made about Mr Lawrence's other 2 cases where the excess quoted purportedly lies below the guidelines' indication.
- The reference to 5 of the 7 examples having a lower excess makes me wonder whether Mr Lawrence actually intended to say that it was the premium quoted rather than the excess which was lower than the guidelines' indication. It is at any rate true of Mr Lawrence's appendix that 5 of the cited examples are tabulated with premiums quoted purportedly lower than the guidelines' rates. The trouble remains, however, that Mr Lawrence is not comparing like with like, as the above example of Mr Doughty's portfolio indicates. The matter is not assisted either by Mr Lawrence simply tabulating the wrong rates! Thus the sixth example (#19, Pilkington) should read a quoted rate of £2,849 (net) compared with a guideline rate of £2,600 (gross), and the seventh example (~20, Owen) should read a quoted rate of £2,825 (net) as against a guideline rate of £2,750 (gross). There is no help for Mr Lawrence there.
- There is nothing in Mr Lawrence's figures to suggest that Mr Broad was wrong to say, as I understood him to intend to say in his evidence, that the initial quote written in by the brokers was meant to reflect the guidelines or so-called "benchmark" worked out for the appropriate year; nor anything to show that the rating was done on a purely arbitrary basis.
- The second point concerns premium rates which it was suggested could not be related to the guidelines nor to any coherent pattern as between one quote and another. Again, I find that the allegation is not made good. There is a general difficulty in comparing quoted rates with indicative guideline rates in that the latter are given gross and the former are quoted net. Even if I assume, however, that both sets of rates are in pari materia, Mr Lawrence's figures, when adjusted for errors of fact or assumption, do not prove his (or Mr Rowland's) point. By errors of assumption I mean to refer to mistakenly taking a particular example in the indicative guidelines as a close parallel for a quoted rate (as in the case of Mr Doughty above). For instance, Mr Lawrence sometimes seeks to compare a rate quoted for cover of less than £100,000, typically £50,000, with the indicative guidelines: but such a comparison is impermissible, for the latter all assume cover of £100,000. Certainly there is nothing in Mr Lawrence's appendices 1 to 6 to suggest that rates were not related to (and better than) the indicative guidelines' rates.
- In his third report Mr Lawrence sought to show that a comparison of the rating of similar sized portfolios showed inconsistency and therefore arbitrariness. But the maximum differences highlighted amounted to only a few hundred pounds on cover of £10,000: with the exception of one 1991 quote which was unusually low, but had "special agreed" on it - a case of the exception which proves the rule - in percentage terms the largest rating difference shown was 0.45% (£450 on £100,000 cover). What was often put forward as showing divergency could be seen as consistency.
- The closest Mr Lawrence or Mr Rowland came to showing any incoherency or arbitrariness in rating was in a small number of examples of so-called "inversions" where two separate risks with a similar API show divergent rates at different excess levels. I do not think I can explain this complaint save by setting out an example. Thus in 1990 three risks, each of which had a total API of £250,000, carried suggested ratings (of which the final suggestions were scratched as quotes) as follows:
| Broome: |
50/25 |
- 2200 |
- 2365 |
| |
100/25 |
- 2800 |
- 3010 |
| |
100/37.5 |
- 1600 |
- 1720 |
| |
|
|
|
| Caplan: |
5/25 |
- 2010 |
- 2160 |
| |
100/25 |
- 2600 |
- 2795 |
| |
100/37.5 |
- 1850 |
- 1980 |
| |
|
|
|
| Johnston: |
50/25 |
- 2000 |
- 2150 |
| |
100/25 |
- 2600 |
- 2795 |
| |
100/37.5 |
- 2100 |
- 2258 |
Thus, at £50,000 or £100,000 cover excess of £25,000 Mr Broome was quoted a higher rate than Mr Caplan or Mr Johnston, whereas at £100,000 cover excess of £37,500 Mr Broome was quoted a lower rate. That is the so-called inversion. Moreover, the rates quoted at the £37,500 excess were in each of the three cases different from one another.
- There was no very satisfactory explanation for these apparent anomalies other than some error, or differing views at different times as to the desirability of attracting acceptance of the quote at an excess of £37,500 rather than at the more standard 10% excess of £25,000. I do not, however, consider a handful of such examples per year as proving arbitrary underwriting, let alone the necessary second stage of the argument - an absence of individual assessment. On the contrary, I would rather think that such inconsistencies or errors, if such is their true explanation, are likely to be symptomatic of individual assessment, rather than of the lack of it. Of course, if such oddities are viewed as inconsistencies or errors, the fact that they were accepted without alteration by the underwriters concerned (I believe the scratch on Mr Broome's quotation sheet is different from the scratches on the other two sheets) is an indication of the importance of the pre-underwriting work done by the brokers. However, despite that consideration I think that these relatively few examples[20] are a poor basis upon which to throw over or doubt the rest of the evidence which has persuaded me that the proper way to regard the material before me is that there was individual assessment which can properly be ascribed to Mr Broad.
- The third point made by Mr Lawrence referred to above concerned the 1991 hit list: but I have already dealt with that in an earlier section of this judgment and concluded that in the ordinary case the syndicates mentioned on that list, reflecting a collection of XL syndicates, would only affected the rating (excess or premium) to a marginal extent.
- I have said above that there had been no attempt by the claimants to investigate on a qualitative basis the underwriting of 1991 names with a high proportion of hit list XL content in their portfolios. In appendix 11 to his first report (to which I have referred above, an appendix concerned with names with a high content of 1991 hit list syndicates) Mr Lawrence compared 7 examples of 1990 (not 1991) quotes against the indicative guidelines for that year. I do not accept the relevance of the 1991 hit list to the 1990 year, but even so proceed to examine again what Mr Lawrence's 7 examples show. Those 7 names had an average of 23% of their portfolio API on the 1991 hit list. Their average excess was 11.7%. Their rates are not directly comparable with the indicative guideline rates save perhaps in one case (#15, Flynn) where the excess is 10% (as in the guideline)[21] but the premium is £3,845 (net) as against a guideline £2,750 (gross). (No doubt other points could be made about others of those 7 examples.) I do not say that that shows anything relevant, but it certainly does not help the claimants' case.
- I have to conclude in the first place whether or not each risk was individually assessed and rated. I do not have to decide whether such assessment and rating was careful or cautious, or even whether it was logical and coherent. A case has been made that it was arbitrary and incoherent, and paid no regard to indicative guidelines. But no case has been made that it was not careful or cautious; nor that any lack of care, or logic, or coherency, has led to the losses which have been suffered and in respect of which the claimants seek to recover. The complaint of arbitrariness and incoherency is therefore only a staging post on the road to the more fundamental thesis that there was no assessment at all or none that was worthy to be called its name. I have considered that thesis in its broad outlines and also in its detail, a detail which I cannot reproduce here, and I reject it. In my judgment each risk was assessed and rated individually. The fact that some risks were assessed to be standard risks and rated accordingly is not inconsistent with individual assessment. The process of assessment was continuous. It began in advance of the submission of the proposals and continued until the quotation sheet was finally produced by the brokers. Sometimes this assessment went even beyond the underwriting scratch, because the brokers subsequently felt that a higher premium could be competitively requested. Such late alterations (always in favour of the underwriters) were sometimes scratched again by Mr Broad, but perhaps more frequently they were not: this was something authorised both by Mr Broad and the terms of the slips and binders themselves. The overall process of assessment was designed, as it had to be, to accommodate large and increasing numbers of proposals and to make as much use of the brokers as was possible. But in its philosophy and in its control it always went back to Mr Broad himself.
- At the opening of the trial it appeared that the claimants had three main complaints: (i) that each proposal had not been individually assessed; (ii) that each proposal had not been individually assessed by Mr Broad personally ; and (iii) that each proposal had not been individually assessed by Mr Broad in accordance with the seven underwriting criteria. I have been considering the first two of these complaints under this section of my judgment, and will be considering the third complaint below.
- By the end of the trial there had been a tendency for Mr Rowland to run all three complaints together, so that he was able to say, in a passage that I have quoted above, that there was "one broad misrepresentation" that "the risks would be individually assessed and underwritten by Mr Broad in accordance with the underwriting criteria". It seems to me, however, that it is necessary to bear in mind the separate elements of that broad case, both for the sake of clarity but also because of the way in which the representations had been pleaded and the evidence of inducement presented.
- In this connection it was not, however, clear to me that by the end of the trial there remained much commitment on Mr Rowland's part to the second complaint, in relation to the personal role of Mr Broad. On the contrary, it seemed to me that there was a large measure of acceptance that if the more fundamental points in (i) and (iii) above were not made good, then the claimants' case would not be rescued by complaint (ii). The effect of that complaint had been to seek to deny any validity to any role played in the assessment or underwriting process by the brokers or Mr Broad's deputies.
- If it matters, however, I should state my conclusions specifically in relation to those aspects. In my judgment the participation of the brokers and the deputies in the process did not falsify any representation in relation to the role of the leading underwriter in the individual assessment of each proposal. The presentation booklets did not say that the leading underwriter would do everything himself. They did not limit the means by which Mr Broad could involve the brokers in the overall process. On the contrary, there was much in the language of page 4 of the booklets to suggest that the brokers would play an important role in the assessment of the risks. Thus there would be "discussions" with (inter alios) "brokers" (paragraph (A)); there was frequent reference to "Our book of business" (paragraph (B)) or to "our policy" or "our portfolio" (paragraph (C)); copies of syndicates' reports and accounts were said to be available to "Robert Fraser" (paragraph (D)); and the important paragraph (E) which opened with the repetition of the concept of individual assessment in its opening sentence then went on to speak of "our policy" of increasing the excess rather than the premium, and stated that "We" believe that this was a more relevant and effective form of underwriting (emphasis added).
- I have taken the wording above from the 1990 booklet. It maybe observed that the wording of paragraphs (C) and (E) in the 1991 booklet differs slightly in that "our policy" each time becomes "our Underwriter's policy". Nevertheless the parties were content to argue the case on the basis of the 1990 wording and the change was not investigated. It was correct to say that the policy was that of Mr Broad: which is not to say that it was not also that of the brokers.
- The part played by the brokers in the overall process was also, in my view, emphasised or at any rate spoken to in the oral presentations made by Messrs Roxburgh and Seel. Where a contemporaneous note survives of such presentations, as in the case of Mr Dawkins of Iron Trades (who reported that Mr Broad "vets every application personally") or Mr Dearlove of Provincial[22] (who noted "u/w done by Rt Fraser - insist u/w shown to lead u/w", and later reported "Underwriting is initially carried out by the Broker but always vetted by the lead Underwriters"), it is clear that the explanation given of the underwriting process was not that everything was done by Mr Broad, or by the leading underwriter, but that the basic work was done by the brokers and then shown to and vetted by the underwriter. Mr O'Neill (of Iron Trades) and Mr Dearlove (of Provincial) gave evidence consistent with that view. There is also support fore that view in the agenda handed over to Mrs Stenfors (of Trygg-Hansa). It is therefore interesting to observe that where contemporaneous notes of the meetings with the brokers have survived to guide the witnesses' recollection, their evidence, as in the case of Mr O'Neill and Mr Dearlove, reflected the more complex, shaded and sophisticated position which existed in actual events, and consequently, in my judgment, undermined the starker evidence of some other witnesses.
- Therefore the brokers' role in the overall process was inconsistent neither with the controlling and supervising role of Mr Broad, nor with the representations made in the booklets and at the meetings between claimants and brokers.
- As for the matter of Mr Broad's use of his deputies I see no vice in that. The leading representation was that each proposal would be individually assessed "by the Leading Underwriter". There was evidence before me that reference to a lead underwriter would be understood as a reference to the syndicate as a whole and would embrace the use of deputies: Mr Lawrence among others agreed on that. I would acknowledge that Mr Broad's high reputation in the field of personal stop loss insurance was a selling point of the scheme: but I do not consider that the controlled use of deputies, under his supervision, was incompatible with anything said about Mr Broad's personal role in the assessment of the risks.
- I therefore conclude that the claimants have failed to prove any misrepresentation to the effect that each proposal was not or would not be individually assessed (or rated or underwritten), or that each proposal was not or would not be assessed by Mr Broad personally.
- I must next consider the claimants' third main complaint, which is that each proposal was not assessed in accordance with the seven underwriting criteria.
The case on inaccuracy (2): no assessment in accordance with the seven underwriting criteria.
- For these purposes I must return to the synopsis of the claimants' case as reformulated in the Inferences document and restated at the beginning of their written closing submissions. I will repeat it for convenience, in its final form, reordering and renumbering some of the paragraphs:
"(1) Mr Broad did not assess syndicates by reference to their type, geographical and currency split, short tail/long tail element; not did these characteristics form a key or any significant part of the quoting process;
"(2) Mr Broad did not record changes in Underwriters, Underwriting philosophy or any other changes, whether obtained through discussions with other specialist stop loss syndicates or otherwise;
"(3) Mr Broad did not monitor all subsequent changes that might affect the assessment of particular syndicates;
"(4) Mr Broad did not generally relate the excess of individual policies to the largest share of anyone syndicate;
"(5) Mr Broad did not individually assess and rate each risk accordingly or at all, nor did he as a matter of policy increase the excess rather than load the premium in respect of non-standard submissions;
"(6) Mr Broad did not analyse and grade the results of each syndicate on which a name participated dependent upon the overall historical results;
"(7) no one performed these functions to any significant degree such as would enable Mr Broad to assess each risk in accordance with the seven underwriting criteria set forth in the presentations..."
It is clear that paragraph (1) above relates to the second sentence of paragraph (A) on page 4 of the 1990 presentation booklet; paragraphs (2) and (3) concern changes and relate to the first two sentences of paragraph (A) and to paragraph (F); paragraphs (4) and (5) concern the fixing of the excess and relate to the first sentence of paragraph (C) and to paragraph (E); paragraph (6) relates to the last sentence of paragraph (D); and paragraph (7) relates to the general issue whether and to what extent the work could be delegated to the brokers or deputies so as still to permit it to be said that Mr Broad fulfilled his general obligation to assess each proposal personally. It will be observed therefore that no complaint is made with reference to paragraphs (B) (Spread) and (G) (Rating), or indeed to the second and third sentences of paragraph (C) (Premium Limit any one Syndicate), or the first two sentences of paragraph (D) (Historical Results).
- In essence, the focus of the claimants' case has become more specific and less general. The complaint now is not so much the general case that there was no individual assessment or no personal assessment by Mr Broad, but rather that such assessment, if any, as was performed, whether by Mr Broad or by the brokers, was not carried out in the specific way in which page 4 of the presentation booklets represented that it would be. For these purposes I will assume, irrespective of my concerns as to the way in which the claimants' case has been pleaded, that the facts are to be tested against the detail of page 4 of the presentations; and I will again begin by investigating the matter as it were for a case of misrepresentation of past facts or even a case of breach of warranty, rather then a case of misrepresented intentions.
Paragraphs (A) and (F): assessment of syndicates.
- The complaint is that neither Mr Broad nor the brokers made an assessment of syndicates by reference to their type and geographical, currency, short or long tail elements and so on, or recorded or monitored changes which might affect such assessment: contrary to the representations contained in paragraphs (A) and (F) on page 4 of the presentation booklets. For these purposes Mr Rowland emphasised again the absence of documentary evidence of such assessment, either by way of analysis or by way of markings on portfolio sheets and so on. In particular Mr Rowland relied on certain passages in Mr Broad's cross-examination to the effect that such assessment was not done on a "quote by quote basis".
- Thus at Day 8.69/70 there occurred this passage:
"Q. When the broker looked at an application or proposal for stop loss, is it your understanding that he would look at the type of syndicates, the class: Marine, Non-marine, aviation, that he would look at their geographical and currency split and the longtail elements and take those into consideration in a quote by quote basis?
"A. I do not think he would on a quote by quote basis.
"Q. Did you do that on a quote by quote basis?
"A. No, I did not."
- Similarly at Day 9.99/100, where Mr Rowland was questioning Mr Broad on passages in his affidavits produced for the action against DIK, Mr Broad answered as follows:
"Q...Again, that is suggesting that you went through each risk and brought the seven underwriting criteria there to bear on each risk?
"A. It probably is suggesting it, but the fact of the matter was, and I have said before, that these exercises were done at the very beginning of the programme and that they could not quite clearly be carried through to every risk because of the sheer size. We never made any secret of that fact and I would not imagine the brokers did either. It is a question - it is impossible for anyone that they can follow a scheme and everything is going to be done exactly on an individual basis by the underwriter in the room within a two hour period. We had to have a system that catered for all these and the system was, in fact, in place."
With reference to monitoring changes to syndicates, Mr Rowland relied on this passage at Day 8.97/98:
"Q. All I am asking you is whose responsibility was it to keep check of that?
"A. It just does not work the way you are suggesting.
"Q. Not in the way you put it, because it was impossible."
- Mr Stuart-Smith on the other hand emphasised other passages in evidence, where the application to the individual quoting process of general principles, worked out between Mr Broad and the brokers both over the years and in relation to specific years of account, was spoken to. The following seeks to give the flavour of them. Thus at Day 8.68 Mr Broad answered Mr Rowland as follows:
"Q. Who was it who was responsible for ensuring that each risk, when it was quoted, took account of these key factors, was it you, or was it the brokers?
"A. It was a process that started off with the broker checking the situation according to our original thoughts, then drawing it to my attention and when I looked at a particular risk I then brought to bear additional knowledge that I might have acquired or further knowledge that the broker might have acquired. It was a joint process that started with one person and concluded with the other involvement."
- Similarly at Day 11.70/1, where Mr Broad is again being questioned on his DIK action affidavits, he said this:
"A...I say it is true because we set in motion a system that allowed this underwriting process to take place under my control...I really do believe we assessed those risks. We put into effect a programme of risk assessment. We agreed them with the brokers and we worked professionally with those brokers over many many years. They were experts. They had systems and they were first class people to deal with. I feel very comfortable with that statement [ex his affidavit - "I assessed each risk by reference to the criteria set out in the Information Pack"] because I know that those risks were assessed under my control and I was responsible for them."
- In re-examination, Mr Broad gave this evidence regarding a typical hypothetical case of a proposal coming before him (at Day 11.112/3):
"A. I would ask the broker what he knew about it and he would invariably bring out Chatset...I would have looked at the syndicates; I would have looked at the allocations. Certain syndicates would have triggered a response in my mind and I would have reacted to it.
"Q. But if a portfolio did not satisfy your underwriting criteria what would do about it?
"A. Talk to the broker about it. Sometimes the broker would - often the broker would give me his knowledge of a particular syndicate. Sometimes I might say, "I have heard things about this. What do you know?" We would talk about it."
Mr Broad accepted that he would not expect to notice an error in respect of premium, but he regarded the excess as being more important.
- Mr Roxburgh confirmed the use of Chatset on such occasions as these (Day 12.9). He explained the assessment of syndicates as follows (at Day 12.38/39):
"We called on our extensive knowledge at the time that we had and Vic Broad had of the syndicates. We were talking constantly to underwriting agents. We had many meetings with underwriting agents to gauge their thoughts on their portfolios and the syndicates they were supporting. General market knowledge. Obviously, we used historical results, Chatset and ALM. A whole range of things that enabled us to assess the syndicates..."
He said (at Day 12.127):
"Yes. Every one, as I have said, was - every submission was looked at and reviewed within the criteria. So even though it had not been marked does not necessarily mean it was not discussed."
Mr Rowland put to Mr Roxburgh that that may have been true in early years but that by 1989 the growth of the scheme had been such that detailed assessment was no longer practical. Mr Roxburgh disagreed. He identified the additions to the brokers' team over the years and added (at Day 13.37/38) -
"we lived and breathed it for five, six, seven months of each year. These were all things that we brought in to improve and make the whole underwriting more selective...we did everything in our power to make sure it was done properly and it was done in the manner in which we said it was going to be done."
- The issue before me was essentially between a more specific and a more general approach to the question of the assessment of syndicates. The resolution of the issue was not made easier by the fact that Mr Broad's evidence was difficult to evaluate. He was not always consistent, and sometimes he gave answers which did not do himself justice. I think this was partly because he had genuine difficulties in answering very detailed questions nearly the best part of a decade after the events, and partly because much of that detail lay more closely with the brokers than with himself. Moreover, he was not a direct party to the dispute, and so may have approached the preparation of his evidence with less care than might otherwise have been the case. In any event, he found that he was having to deal with a detailed complaint which in many respects was different from or additional to that which had been pleaded. I have dealt with his evidence as a whole in a separate section of my judgment above. In my view he was an honest witness, and part of his difficulty lay in a concern that in his evidence at the arbitration he had dealt with matters more cavalierly than would I think have occurred if that arbitration had been fought out on an adversarial basis.
- As for the particular issue with which I am here concerned, I think that his evidence was driven by his anxiety to speak truthfully to two separate points between which there was a natural tension. In emphasising one, he ran the risk of failing to do justice to the other, and vice versa. On the one hand he wanted to explain how the process of assessment was divided between himself and the brokers, but in such a way that he was still able, as he believed, and I have found him justified in doing so, to claim that the assessment was carried out under his personal control and ultimately by himself. On the other hand, when pressed for details of how he applied the underwriting criteria to individual cases, he was concerned not to claim more than he felt entitled to as at the point of underwriting each individual risk. He did not want to give the impression that everything was done at the last moment on a quote by quote basis. So it was that his answers at Day 8.69/70 (see above) were straightaway qualified in response to the immediately ensuing question from Mr Rowland -
"Q. How was it that the broker or you took those factors into account when you quoted?"
- by the following:
"A. Well, you have to perhaps appreciate that this was a process that went on over many years. We were developing a strategy towards this. At the beginning of the year, we would have long discussions concerning what strategies should be for the next year for the kind of syndicates which we felt we wanted to avoid and it was well known in the market what certain syndicates underwrote. It was just common market practice.
"Do not ask me now, but certainly ten years ago we were very much aware what they were doing in general and we knew what were the loss syndicates and the liabilities and we knew which had a predominance of American business and so on, so we devised a strategy of weeding out the syndicates which we felt were ones which we should - should deserve special treatment and it was more a question of identifying the areas which we disliked or were concerned about or which we regarded were more of a high risk and that is what we targeted, so from the discussions we had at the beginning of the year, the strategy, the understanding came about. But it would not have been good enough to leave it at that, because in a marketplace things change, so having established the basis on which we were going to underwrite, this was tempered by the day to day relationship and knowledge that we had in the marketplace and certain things would occur at one point, part of a year. They might be concerns about a syndicate that might be market rumour or gossip and we might take it on board and be alert to it and we might change attitudes.
"It was a moving target situation based on the set of criteria that we laid down at the beginning of the underwriting period."
- In my judgment there was assessment of syndicates and their type and class were considered when quoting. Each of the portfolio sheets divided syndicates between their main categories ("class") of marine, non-marine, motor, aviation etc. As for type, there was at any rate in general terms consideration when quoting of what types, such as longtail, US catastrophe, XL, and so on raised a concern as to risk: see the section above concerning the 1991 hit list. Furthermore there was an attempt to identify particular syndicates of concern. Market knowledge was made use of constantly, so that current trends, thinking and changes were taken into account. Changes were therefore "monitored", and they were also "recorded" at any rate mentally, but not in writing. The danger of too much risk building up in particular syndicates was monitored through the computer system: if there was a problem of aggregation it was addressed, for instance at first by limiting the period for acceptance of a quote to below the normal month and if necessary by declining to quote. I would accept that, in a general way at any rate, such considerations affected the assessment of each risk.
- The process of assessment was, however, less scientific and analytical than the claimants sought to say in submission and cross-examination that it should have been. It was not as though written checklists were brought into existence, or position papers were developed. There was no system by which every proposal sheet was marked up with notations of relevant considerations (although sometimes particular syndicates might be marked, and largest lines were often indicated). The process did not work by examining each risk anew from the bottom up, syndicate by syndicate, against such analytical material. Probably only a computerised system which had a data-base which somehow weighted each portfolio, syndicate line by syndicate line, to arrive at some overall scores for excess, premium rate, or rejection, could have done justice to the claimants' demands. And indeed, at one time some of the claimants had sought to make a case that they had been told that the computer system would be used as part and parcel of the assessment process; but that was not pursued.
- Assessment was rather of a different kind. Perhaps in the last decade we have already so much experienced the advance of computers in our lives that we have forgotten how recent the past is. Be that as it may, Mr Broad's and the brokers' assessment of syndicates in the overall quoting process was rather, if I may be permitted to put it this way, picking up an expression used by Mr Roxburgh, of the "live it, breathe it" school. It may have been none the worse for that. They were spending their working lives in the scheme. Mr Broad was a Lloyd's "insider" constantly using his insider's knowledge and experience in the assessment of syndicates.
- I would accept that the primary meaning of "to record" is to make an enduring account of something, especially in written form: but in its context ("Market knowledge...This is obtained through discussions..."), I do not think it would be right to press the language of "changes...are recorded" in that way. This is the only place in pages 3 or 4 of the presentations where the word "record" or "recorded" is found.
- In such circumstances it is particularly difficult to give effect to those words in the paragraphs under consideration which reflect qualitative considerations. Was the assessment of syndicates by their type treated as a "key factor" in quoting? Were changes "carefully" monitored? Or to put the matter generally, when I compare paragraphs (A) and (F) to the facts: do these conclusions amount to the basis of a finding that what was said would be done was not done?
- In my judgment, they do not. When I bear in mind the fact that the claimants have chosen not to make any qualitative case of careless underwriting, I conclude that these paragraphs of the presentation booklets fairly and substantially correctly state the manner in which syndicates and the changes to syndicates were assessed and monitored throughout 1989, 1990 and 1991.
Paragraphs (C) and (E): the fixing of the excess.
- The complaint is that Mr Broad and the brokers failed to relate the excess to the largest line on any one syndicate, and failed as a matter of policy to increase the excess rather than load the premium in respect of non-standard submissions, contrary to statements contained int he first sentence of paragraph (C) and the second sentence of paragraph (E) of the presentations. The complaints by reference to the second sentence of paragraph (C) were abandoned.
- In my judgment this complaint fell wide of the mark. It was premised on an initial theory that the excess ought as a matter of policy to equal the largest line: but that is not what the presentations say, as I have already found. Ultimately it became the submission (see paragraph 106 of the claimants' closing submissions) that -
"although the minimum 10% excess level was observed no obvious relationship existed between the excess level and the largest share of any one syndicate where that exceeded the minimum and without any obvious relationship between the excess level and the nature of the portfolio".
To my mind the question rather is whether the claimants can show that there was no policy or tendency to raise the excess above the minimum 10% level by reference to largest lines which exceeded 10% of total API. In my judgment they failed totally to show that, and the evidence of Mr Broad and Mr Roxburgh was to the contrary and was supported by the documentary material. To some extent I have already covered this subject above, when dealing with Mr Lawrence's evidence. Of course, it was always possible to tease Mr Broad with questions as to why he raised the excess in one case to the level of the largest line and in another case did not do so; or why a particular excess was adopted in one case but not another: but without being able to rethink the whole underwriting process from scratch so many years after the event, that line of questioning took matters nowhere. In any event, the production of exceptions and anomalies does not prove the absence of a policy, and it is in terms of a policy that the presentations speak.
- In this context it is also to my mind instructive that the pleaded and particularised case made under the second sentence of paragraph (C) had to be abandoned. For I would regard the first sentence of that paragraph as being in large measure an introduction to what follows. The fact is that every quantified case which had been pleaded, including for present purposes the plea in the 1990 action in relation to the second sentence of paragraph (C), failed.
Paragraph (D): Historical results.
- The complaint is that neither Mr Broad nor the brokers analysed and graded the results of each syndicate, dependent upon overall historical results. The focus is on the second sentence of paragraph (D) -
"The results of each syndicate on which a Name participates will be analysed and graded, dependant upon the overall historical results."
This paragraph has something of a history which it is necessary to explain.
- In the 1989 presentation paragraph (D), there paragraph (4), stated (emphasis added) -
"The results of each syndicate on which a Name participates will be analysed and graded from A-F, dependant upon the overall historical results.
"See Underwriting Philosophy."
Under "Underwriting Philosophy" the following appeared:
"Each proposal is independently assessed to establish whether it is acceptable. The Underwriting results for each Syndicate are analysed over at least three years (where appropriate), and the aggregate Underwriting Results, including the Syndicate investment income and Capital Appreciation, are then grouped by category as follows:
"Underwriting Results (including Syndicate Investment Income and Capital Appreciation) as percentage point.
0 - 20% - A
20 - 40% - B
40 - 50% - C
50 - 60% - D
60 - 80% - E
Over 80% - F
"In light of this information, the following procedure is adopted:-
1. No quotation supplied
2. Impose higher Excess."
The emphasised additional material in paragraph (4) and the whole of the Underwriting Philosophy paragraph were removed from the 1990 and 1991 presentations.
- How this matter was dealt with before 1989 was not investigated. However, in 1989, as I have mentioned above, there were 43 examples out of 426 accepted quotes where the proposal sheets had been analysed (for the most recent results, in 1985, alone, and therefore not over three years) syndicate by syndicate and the portfolio as a whole had been graded - in every case A.
- It was common ground that the intention and effect of the 1989 presentation was that the grading A-F was of whole portfolios (the "aggregate Underwriting Results"), not of individual syndicates. Thus if the portfolio as a whole made a loss of 20% or less than 20% of the excess, it would receive an A grade. This may be right: the alternative that an individual syndicate could make a loss of up to 20% of the excess and still receive a top grade A seems to be wrong in principle. On that basis, it might only take the presence of five first class syndicates on a portfolio to threaten an underwriting loss to the PSL insurers! But it also follows that if the grading is that of the portfolio as a whole, then there is no grading of individual syndicates (despite the language of paragraph (4) itself), and the grading of a portfolio depends not so much or rather not merely on the quality of its constituent syndicates' results but also on the excess assigned to it. The riskier a portfolio and the higher the excess level, the greater the countervailing tendency to raise its grading. Still, such a system would enable the operators of the scheme to check their own previous assessments. A riskier portfolio which still achieved an A grade might seem to be a portfolio worth backing.
- At any rate it was by grading the portfolio as a whole that the scheme proceeded in 1989. The result of such analyses and grades was to show that the scheme was in good order: every example received an A grade. That may not have been surprising, given that in the mid-1980s Lloyd's was still profitable. Mr Broad said that as a result the system fell into disuse. Hence, the 1990 and 1991 presentations were amended to delete the paragraph on Underwriting Philosophy and all reference to grades A-F. Paragraph (D) remained, however, and, left to itself, rightly or wrongly so far as Mr Broad's and the brokers' intentions are concerned, must be read as dealing with the analysis and grading of syndicates. Moreover the concluding words "dependant upon the overall historical results" which originally must have referred to the grading of portfolios, since they had followed the words "from A-F", must in 1990 and 1991 be given a meaning relating only to syndicates. However, paragraph (D) does not in terms require any particular kind of grading, or the keeping of records, or the grading of syndicates portfolio by portfolio.
- It is perhaps because of the change of system and even some confusion about how the 1989 system was intended to operate, and also perhaps because of a simple case of overlooking what the drafting changes in 1990 had achieved, that Mr Broad's and Mr Roxburgh's evidence about the grading of syndicates was really rather unsatisfactory. In their written statements both of them said that Mr Broad had graded syndicates from A to D: Mr Broad said that a grading of D indicated syndicates which gave rise to particular concern and which he wanted to avoid. In their oral evidence, however they were both confused as to whether the grading was done by the brokers or Mr Broad, or jointly. It may be that the brokers and Mr Broad did speak to one another about A syndicates, which would be the majority, and D syndicates, namely those which they wanted to avoid; but there is no documentary material to support this. Certainly, however, the portfolio analyses performed in 1989 were done - and 1990 has produced 12 examples covering 97 syndicates, and a single example has come to light from 1991. Those analyses would incidentally throw a great deal of light on the syndicates involved (140 in 1989 and 97 in 1990): by far the great majority of them showed profits and thus could be regarded as A syndicates. It may be that it was in that context that, without separately marking the grading of syndicates, Mr Broad and the brokers developed their own way of referring to A, B, C and D syndicates. D syndicates would in any event reflect a watch list of syndicates or syndicates to avoid, which I have already accepted were not formally committed to paper. Be that as it may, however, there was never any written analysis of syndicates' results over several years such as the example contained in the presentations (but not referred to in their text at pages 3 or 4): see bundle F.100 - "Sample Individual Name's Underwriting Results".
- The upshot of all this is in my judgment as follows. I accept that the brokers and Mr Broad followed to a greater or lesser degree the results of syndicates as published in Chatset, ALM league tables and syndicate reports and accounts. There may have been some rather jejune analysis and grading of syndicates based on their historical results: but I am left in real doubt as to whether it amounted to much more than an appreciation that, whereas most of Lloyd's had been consistently profitable for many years, some syndicates had been more erratic or were in types of underwriting business, such as catastrophe, which in their nature were likely to be erratic, certain syndicates were necessary to watch, and a small number of syndicates were ones to avoid. I do not think that that does amount to the analysis and grading of the results of each syndicate, although it may well have been all that experience taught was required. I would accept, however, that Mr Broad (and the brokers) carried with them in their heads a vast amount of knowledge and experience regarding the historical results of syndicates, rather as lawyers or doctors carry their experience with them and know when it is necessary to consult their books or records.
- Thus there was in 1990 and 1991 to a certain degree a lack of fulfilment of the last sentence of paragraph (D).
Misrepresentation
- I return, in the light of these findings, to ask whether the claimants have proved their case of misrepresentation by reference to the representations relied upon.
- The first main representation relied on was
"i. that each proposal for stop-loss insurance by a Name was individually assessed by Mr Broad."
- It follows from the discussion above that there would have been no misrepresentation in this respect even if I had had to consider the matter as though I was regarding the 1989/1991 underwriting years as a pure matter of history. As it is, I must consider the matter as though the true representation relied upon was that Mr Broad and the brokers intended that each of the proposals underwritten in the 1990 and 1991 years would be individually assessed by Mr Broad. It seems to me that the conclusion that there was no misrepresentation in this respect then becomes, if anything, more cogent. The brokers' or Mr Broad's intentions would not be faulted by the possibilities that through error or misunderstanding or even incompetence (although none is alleged), or even because of the pressure of events (such as the increase in the number of proposals), things did not work out quite as they were supposed to do.
- The second main representation was
"iii. that the underwriting criteria adopted were intended to produce a well spread book of business."
Although this representation was not formally abandoned, it was never pursued. The claimants made no attempts to show that the book of business underwritten was not well spread. I regard this as a most significant point. It is the closest that the pleadings come to alleging that Mr Broad produced a book of business that was not carefully underwritten. The function of the underwriting criteria was to produce a carefully selected and therefore well spread book of business. The representation just cited is taken specifically from the presentations at paragraph (f) on page 3, but the concept of spread was pervasive. It was the concept which preferred a greater number of syndicates per portfolio to a smaller number; which preferred a more even participation on syndicates to an uneven one; which looked to achieve a balance across the classes of syndicates; which accommodated a smaller number of participations in types of syndicates and areas of business which raised general concern but looked with more suspicion on a larger number of such participations; and which sought to avoid syndicates which were disliked. Such an approach is to be contrasted with a purely tariff based system. Of course, if the presence in a portfolio of something less desirable than the most favoured was made the cause in every case of declinature, the writing of PSL business would become impossible. The shrewdness lay in exercising the option of declining in case of necessity, but otherwise in so quoting excess and premium rates as by and large to encourage acceptance by proposing names who were adjudged to participate in better structured portfolios and to discourage the others.
- There was therefore no misrepresentation in this respect.
- The third main representation relied upon was
"iv. that the main criteria adopted for underwriting the personal stop loss business were..."
and then I think I can say, compendiously, the seven criteria headlined on page 3 of the presentations. I remain unsatisfied as to the implication into the case of reliance upon what is said on page 4 of the presentations in amplification of the headlines on page 3. I will assume, however, for the moment that the claimants must be treated as having properly incorporated reliance on page 4 (or parts of it) to an extent that went beyond what had been specifically pleaded in either action. It follows then from the discussion above that there was a measure of non-fulfilment in achieving what the brokers said would be done under one sentence of paragraph (D) in respect of the analysing and grading of the historical results of each syndicate. No case was ultimately sought to be made by reference to paragraphs (B) relating to spread or (G) relating to rating. The complaints made by reference to paragraphs (A) relating to assessment of syndicates, (C) and (E) relating to excess, and (F) relating to subsequent change, have all failed. In terms of the implied representation as to Mr Broad's or the broker's intentions to adopt those criteria, the failure of those complaints is again a fortiori.
- How then should I consider the non-fulfilment under paragraph (D) in respect of historical results? What is the representation against which I should measure that failure? Is it Mr Rowland's "one broad misrepresentation" that "the risks would be individually assessed and underwritten by Mr Broad in accordance with the underwriting criteria", ie that Mr Broad and the brokers intended to assess and underwrite each risk individually in accordance with those criteria? Or is it that Mr Broad and the brokers intended that the results of each syndicate would be analysed and graded, dependent upon the overall historical results? If it was the former, I would say that the representation was true in as much as it was substantially correct, and that the limited extent to which there was a failure under the last sentence of paragraph (D) was, in the overall context, unlikely to influence a reasonable person int he position of the claimants to enter into the binders (hereafter "substantially correct"). If, on the other hand it was the latter, I would say that the representation was not true and I would also have to say that the brokers could not reasonably have believed that it was.
- I should say something further in respect of these alternatives. The claimants may be said to have put their case both broadly and more particularly. However, in three critical places it was put more broadly. First, the case was put broadly in their pleadings, where the representation under discussion is put by reference to page 3 rather than page 4 - indeed, only in the 1990 action and not in the 1991 action is express reference made in this context to page 4 and that was only to a single sentence in paragraph (A): other sentences on page 4 were also pleaded in both actions, but only in other contexts where the respective complaints have either failed or been abandoned. Secondly, the case was put broadly in their closing submissions, paragraph 1 of which restates the essence of the claimants' case as being that they subscribed in reliance upon the representations that "each proposal was individually assessed in accordance with the seven detailed underwriting criteria". And thirdly, the case was put broadly in Mr Rowland's final speech, when he referred to his "one broad misrepresentation". Therefore, and also for two other reasons, I think that it would be preferable to look upon the matter in terms of the broad case. The first of those two other reasons is that it is always possible to find a substantial inaccuracy if the focus is adjusted more and more microscopically so as to concentrate on each sentence, phrase or word of a presentation. The other is the present state of the law, whereby any misrepresentation which induces a contract provides damages upon the fraud basis. Since that is the law which binds me, it ought in my view to follow that, where there is room for an exercise of judgment, a misrepresentation should not be too easily found. On the basis, therefore, that the representation with which I am concerned is the broad one, I am I think entitled, in considering whether that representation is substantially correct, to bear in mind not only all those respects in which no complaint has been made, or pursued, or succeeded, but also the importance of the fact that the ultimate significance of all these criteria is that they are adopted, as an exercise in prudent underwriting, in order to achieve a well spread book of business: and there is no complaint that that was not achieved.
- If, on the other hand, the rule in Royscot Trust v. Rogerson were one day to be found to be a misunderstanding of the Act, and the way were to become open to treat an innocent misrepresentation under section 2(1) as though it was a case of negligence in Hedley Byrne, so that in the typical case of the provision of negligent information it would be possible to tailor the damages to the risk undertaken by the negligent representor, as in Banque Bruxelles v. Eagle Star, then there would be nothing to be said against adopting a more closely focused approach to the proof of misrepresentation.
- In case, however, I am wrong to limit the claimants' case to their pleadings, amended as they were on the final day of trial, or wrong to say that I should test the claimants' case on the broader rather than narrower representation, or wrong to find that the former was substantially correct, I must go on to consider the issue of inducement.
Inducement.
- For these purposes I will assume that the relevant sentence dealing with historical results was material, and that there is therefore a presumption of inducement. Nevertheless, the claimants each gave evidence and were cross-examined on the issue of inducement, and I am entitled to conclude whether, on the evidence as a whole, they were induced by this misrepresentation, ie whether it materially contributed to their decision to contract.
- Avon was represented by Mr Thomas and Mr Gibson. Each of them in both their written and oral evidence stressed individual assessment by Mr Broad as the matter of "key importance", the factor that was "absolutely crucial", "the single most important issue". Mr Thomas put the point by reference to the fact that Mr Broad was an insider (at para 7 of his statement);
"What was important to me was that an acceptable leading underwriter would assess risks individually, and that the lead should be someone inside the Lloyd's market who knew more than the Avon underwriters about individual syndicates and the risks they presented."
That was the reason given by Mr Thomas for the fact that, when he was introduced to Mr Broad by the brokers, he did not seek to make that an opportunity to question him about how he did his assessments. Mr Gibson's contemporaneous notes mention inter alia spread and excess, but not historical results. In cross-examination he accepted that the actual mechanics of assessment ("however he does it") were of less importance than that Mr Broad made a proper assessment of the risk presented by the portfolio as a whole (Day 5.37). Mr Thomas stated somewhat similarly (Day 6.108):
"He was obliged to underwrite each individual risk. Exactly how he did that, I do not know."
It was only in re-examination that, in answer to leading questions from Mr Rowland regarding the underwriting criteria at page 4 of the booklets, Mr Thomas said that he relied on that description of the underwriting process, and Mr Gibson said that it was critical to his decision. Although each of them went through the underwriting criteria in their written statements. Mr Gibson did not there mention historical results (as distinct from assessment of syndicates and excess), and only Mr Thomas mentioned the importance of the analysis and grading of historical results. In my judgment, Avon was not induced to enter into its contracts by the reference to historical results in paragraph (D). I would regard Mr Thomas's statement's careful progress through page 4 of the booklets as an ex post facto reconstruction. The matter of historical results may have encouraged him to think that Mr Broad's assessment would be carried out properly; but it was the representation regarding individual assessment by a respected Lloyd's insider that was the important thing. In terms of the distinction drawn by JEB Fasteners v. Mark Bloom the matter of historical results supported or encouraged but did not induce the decision.
- Mrs Stenfors spoke for Trygg-Hansa. She dealt with the reasons which had led to her decision to recommend participation in paragraphs 20/21 of her written statement. She said:-
"20. Individual assessment of proposals, spread and the underwriting criteria are all related. When Trygg Hansa accepted a line, I assumed that Vic Broad would assess each proposal individually as set out in the presentation, assisted by Fraser's computer system. I believed that he would properly underwrite each risk and would not just apply some sort of tariff. I did not expect the brokers to be involved in underwriting...In particular, I believed that as part of the individual assessment, the underwriting criteria set out in the presentation would be followed. By looking carefully at each individual proposal and by applying the underwriting guidelines, I believed a good spread could be achieved. I expected Mr Broad to assess each syndicate on a proposal, and consider the nature of the business it carried out and the areas in which it did business to ensure that each individual name had a good spread over the various syndicates on which they participated; I expected that Vic Broad would consider the historical results of each syndicates [emphasis added] and see if there had been a change in underwriter or change in the underwriting policy of that syndicate. I expected him to use this information to rate each risk individually, and to ensure that an appropriate excess was set, with greater risks carrying larger excesses rather than larger premiums. I would expect him to reject some proposals altogether.
"21. If I had believed that PSL business had not been written in this manner in the past, and would not be in the future, I would not have agreed to accept the business. In particular, I would not have accepted the business if I had believed that each proposal had not been individually assessed in the past and would not be in the future. I would not have written the business if I had believed that a number of Names in the past had not belonged to a well balanced spread of syndicates, or did not have their excess increased where they had a significant share of their premium on one syndicate. If I had believed that no computer system existed which could assist in the underwriting process, I would have been concerned to know how Mr Broad could have carried out the individual assessment and rating of the proposals. I would not have "given our pen" if I had thought that lead insurer was not retaining a significant part of the risk."
- It will be observed that in these paragraphs Mrs Stenfors mentions a large number of factors, as to many of which she had significant misunderstandings; that the only mention of historical results is in a passage which I have emphasised above and which is expressed in terms of considering the historical results of each syndicate rather than of analysing and grading them - on such a basis I would not have found any misrepresentation; and that finally in paragraph 21 she turns to four reasons in particular which induced her to accept the business. These are given as: individual assessment, well balanced spread and proper use of the excess, computer assistance, and Mr Broad's retention of risk. None of these four are relevant to my present consideration, save in this sense: by singling out spread and excess, Mrs Stenfors is concentrating on particular aspects of the underwriting criteria which do not include historical results.
- Mrs Stenfors was asked in cross-examination about the four reasons she had given in paragraph 21 for participation in the scheme and asked to agree that spread was the key factor. She said no. She twice said (at Day 4.37 and 4.59) that the key factor was individual assessment by Mr Broad. She added also a reference to following the underwriting criteria, among which she agreed that spread was "very important".
- In my judgment, the second sentence of paragraph (D) of the presentation booklets did not make a material contribution to the inducement of Trygg-Hansa to enter into the contracts. The matter of historical results, mentioned by Mrs Stenfors in passing in a manner which does not even emphasise what to my mind was the vice in the representation, is something which, by representation, is something which, by reference to the terms discussed by the court of appeal in JEB Fasteners v. Mark Bloom, Mrs Stenfors observed or considered or by which she was supported or encouraged, but it did not induce her.
- Mr O'Neill of Iron Trades in his statement also identified individual assessment by Mr Broad as a key feature without which Iron Trades would not have participated in the scheme. On the other hand, he identified just about everything as "key", including (at para 20) the analysing and grading of historical results. Oddly in these circumstances, he had a separate section of his statement (at paras 10/12) which was explicitly headed "Reasons for taking the business". These reasons were (i) the underwriting statistics of he scheme, (ii) the excess achieved or to be achieved, and (iii) spread and the representation that each name would normally belong to a well balanced number of syndicates covering a spread of classes. In cross-examination Mr O'Neill confirmed that these were the reasons which were critical to the decision to participate. None of these reasons were relevant to the complaints pursued to the end of trial, and certainly the factor of historical results was not among them. In my judgment, if it is legitimate for me to go outside those reasons at all, I would conclude that what Mr O'Neill was concerned about was that "the underwriting on this business would be carefully and rigorously undertaken" (to quote from para 22 of his written statement). As Mr O'Neill's colleague at the brokers' presentation had noted in his report, Mr Broad "is a man apparently noted for his careful approach to this business and vets every application personally". So it was that Mr O'Neill sought confirmation in the market concerning Mr Broad's reputation as a cautious underwriter and market leader in PSL business; and two senior colleagues were sent to meet Mr Broad and discuss his underwriting with him. But, as has previously been said the essence of the complaint in these actions is not that the underwriting has been done carelessly, but rather that, so far as the third limb of Mr Rowland's case is concerned, the procedure laid down in the underwriting criteria had not been followed in all respects to the letter. That procedure, however, was something that gave Mr O'Neill "considerable comfort" that the underwriting would be carefully and rigorously undertaken (para 22), as distinct from constituting his real concern. In my view, even if I stray beyond Mr O'Neill's own reasons, I would conclude again that the matter of historical results was something which supported or encouraged rather than induced Iron Trades to participate.
- Mr Dearlove spoke for Provincial. In his written statement there appeared a passage headed "Reasons for Taking the Business in 1991". First came individual assessment, then spread, then minimum excess, then underwriting criteria (without specific mention of historical results), then managing agents and working names, then syndicate share (largest line considerations), then historical results and changes to syndicate (together but by reference to para 8A a ix of the points of claim which was only concerned with the careful monitoring of changes), and then the computer system. In effect, Mr Dearlove went down the list of pleaded representations, and mentioned historical results only in a misplaced setting. He said he "relied on the above representations" and then went on (at para 20):
"If I might summarise the position, it would be that the scheme was presented to me on both occasions as being almost a bespoke scheme in which every risk would be given individual scrutiny by the leading underwriter and that there would be detailed analysis of each Name's portfolio so that the rating and excess point could be used to achieve a high quality of underwriting."
- In my judgment, for the reasons which I have set out above, that is essentially what Provincial got; and, as I have also remarked above, there is in any event no complaint that there was a failure to underwrite carefully. Moreover, the markings on Mr Dearlove's copy of the 1991 presentation booklet emphasised such matters as individual assessment, excess, agents' profit commission, and spread but did not include a reference to historical results. I would again regard the almost casual reference to historical results as a matter that went to support or encourage rather than to induce entry into the 1991 binder.
- Finally, Vesta was represented by Mr Flaaten. In his written statement he adopted the same format as Mr O'Neill in that he went through the pleaded representations making comments as he went. He described individual assessment as "particularly important": he had originally highlighted this in his copy of the 1991 presentation, as he pointed out himself, and he went on to say that if he had known that proposals had not been individually assessed, he would not have agreed to write the business. He next described spread as "very important", but in this connection was more concerned with spread over classes and types of business rather than over absolute numbers of syndicates. His comments on excess are equivocal. In dealing next with the underwriting criteria, he understood them as being adopted in order to produce a good spread (something about which there has ultimately been no complaint in these actions). As for paragraph (D) on historical results, he merely said that he would expect the lead underwriter "to consider" them, but immediately continued by commenting that
"it is not enough just to look at the results without considering the type of business, the changes in underwriter and the prospects for that business. An excess of loss or catastrophe syndicate might have 5 good years, but still represent a big risk from a reinsurer's point of view. Individual assessment would be necessary to see that such a syndicate was a risky syndicate."
I could hear Mr Broad speaking there. Mr Flaaten also went on subsequently to stress the importance of the Lloyd's insider "who was aware of [changes] and did not just look at the historical results..." Mr Flaaten finally dealt with the matter of the brokers' computer system. There then followed a separate passage in his statement headed "Reasons for subscribing to the Scheme", which began as follows:
"I believed from reading the presentation that the presentation described the way in which the scheme had operated in the past, and the way in which it would operate in the future. I was impressed by the careful underwriting that was to take place as I thought that we only insured Names with a well-balanced spread of well-managed syndicates."
- In my judgment, the comments I have made above apply to Mr Flaaten and Vesta as well. Historical results were all very well, but it was up to date insider knowledge, individual assessment and spread that were the matters of real importance. Again there was the bottom line comment that the point of it all was careful, well-balanced, underwriting, the very matters which are not in dispute.
- The various witnesses each had their own way of expressing their opinions as to the reasons which had lead them and their companies to subscribe to the scheme. I would be loathe however to think that too much turned on particular wording or expression. In general, they made the same points, that individual assessment by a Lloyd's insider with intimate and up to date knowledge of Lloyd's syndicates, and with a careful eye on obtaining, through the concept of spread, a well-balanced book of business, was what had attracted them to the scheme. In this context, the analysing and grading of historical results, if mentioned at all, fell into a lesser category, as something which supported or encouraged their decision, but in my judgment did not induce it. When faced with litigation, there was a certain anxiety on their part to leave no part of the pleaded case unaddressed, but I have to try to make sense of the whole of the evidence, which I have to sought to do in my comments above. I therefore conclude that even if I ought to have treated the second sentence of paragraph (D) as a material misrepresentation giving rise to a presumption of inducement, I would find on the evidence that the presumption had not been justified, but should be considered to be rebutted.
Damages
- It follows that no question of any damages arises. If it had, damages had been agreed, subject to challenge to Royscot Trust v. Rogerson, and subject to assessment of the credit to be given in respect of interest on the premiums received, in the following amounts, reflecting the net balance of losses and premiums:
| Avon: |
1990
1991 |
£7,303,187.73
394,402.44
|
| Trygg-Hansa: |
1990
1991 |
7,064,708.90
648,154.70
|
| Iron Trades: |
1991 |
362,941.00
|
| Provincial: |
1991 |
787,159.74
|
| Vesta: |
1991 |
786,972.26 |
Conclusion
- In conclusion, the claims of each of the surviving claimants in these two actions fail. No misrepresentation has been proved. To the extent that, contrary to my primary view, the failure to fulfil the second sentence of paragraph (D) should be treated as the basis of a potentially actionable misrepresentation in terms of Mr Broad's and the brokers' intentions, the claimants have failed to sustain the presumption that it would have materially contributed towards their decision to participate in the scheme.
ANNEX 1
Allegations of misrepresentation formally abandoned on the penultimate day of trial.
The following were the additional allegations of misrepresentation made in the 1990 action and based on the 1990 presentation. The representations pleaded were:
"ii. that each name would normally belong to a well balanced number of syndicates covering a spread of classes with the average spread of syndicates supported by each Name being approximately fifteen:
"v. that the Personal Stop Loss policies provided were in excess of a minimum of 10% of a Name's Gross Underwriting Limit with the average excess being more than 15%;
"vi. that it would be the policy to increase the excess on a policy if an individual premium share exceeded £40,000 to £50,000 or formed a significant percentage of overall premium limit;
"vii. that it was not the intention to encourage policies from working Names and that, in any such cases the excess and premium would be significantly increased;
"viii. that the Plaintiffs operated a specially designed computer system so as to enable documents to be progressed speedily to clients and provide underwriters with required statistics."
The claimants pleaded the following inaccuracies in relation to this abandoned case:
"b. a significant number of Names for the 1989 binder did not belong to a well-balanced number of syndicates covering a spread of classes in that 44 exceeded the levels agreed for the 1989 binder as set out in the rating schedule in that they either had more than 25% of their allocated premium income with a single syndicate or had more than a £100,000 line with a single syndicate;
"c. the average number of syndicates to which Names belonged in 1989 was 13;
"e. the Defendants, on occasions, charged Names less than a 10% excess of Allocated Premium Income in that in 1989, 3 Names had an excess below that figure and the average excess was 13.26% rather than more than 15%;
f. a significant number of Names (37 for the 1989 binder) had a syndicate share of more than £50,000 but had not had their excess increased and 2 Names had a single syndicate share more than or equal to twice their average allocation but did not have their excess increased;
g. 8 of 10 identified working Names had not had their excess of premium loaded;
h. no specially designed computer system existed in order to provide underwriters with required statistics."
As for the 1991 action, the additional pleaded representations based on the 1991 presentation were as follows:
"ii. each name would normally belong to a well balanced number of syndicates covering a spread of classes with the average spread of syndicates supported by each Name being approximately twenty;
iii. the personal stop loss policy would normally be in excess of a minimum of 10% of a Name's Allocated Premium Income;
vi. risks from Managing Agents would not be encouraged;
vii. it was not the underwriter's intention to encourage policies for Working Names and in such cases, the excess and premium will be significantly increased;
viii...In normal circumstances the excess would be increased if the share on a particular syndicate forms a significant percentage in relation to the total premium limit;
x. the Defendants operated a specifically designed computer system which met fully the Corporation of Lloyd's guidelines and which enabled the defendants to provide Underwriters with the required statistics, such as premium income, aggregation per syndicate and orders per agency."
In relation to the abandoned case in the 1991 action, the claimants pleaded the following inaccuracies:
"c. a significant number of Names for the 1989 and 1990 binders did not belong to a well-balanced number of syndicates covering a spread of classes in that:
(i) in the 1989 binder, 44 Names exceeded the levels agreed for the 1989 binder in that they had more than 25% of their allocated premium income with a syndicate or had more than a £100,000 line with a single syndicate;
(ii) in the 1990 binder, 46 Names had an allocated premium income to a single syndicate of more than 25% of their total of £100,000;
(e) no specially designed computer system existed in order to provide underwriters with the required statistics;
(g) Policies were accepted from at least 23 Working Names, of those 23, 18 did not have their excess or premium increased; and
(h) 261 Names were introduced through managing agents rather than members' agents."
