Queen's Bench Division
Deeny and Others v Gooda Walker Ltd (in voluntary liquidation) and Others
Before Mr Justice Phillips
(Judgment October 4)
Insurance - reinsurance - damages - Lloyd's names
Lloyd's names entitled to damages
Lloyd's names who belonged to syndicates which had fared particularly badly as a result of the manner in which the underwriting was conducted by the active underwriters were entitled to recover damages limited to the loss which flowed from incompetence in relation to the writing of excess of loss business.
Mr Justice Phillips so held in a reserved judgment in allowing an action brought by 3,095 names in Syndicates 164, 290, 298 and 299 against 71 defendants who managed the syndicates and the individual members' agents.
Mr Geoffrey Vos QC, Mr Jonathan Gaisman and Mr David Lord for the plaintiffs; Mr Bernard Eder, QC, Mr Mark Templeman, Miss Sara Cockerill and Mr Simon Bryan for the defendants.
MR JUSTICE PHILLIPS said that 1988, 1989 and 1990 were bad years for Lloyd's. In each of those years the market as a whole made a loss but those losses were not borne evenly by the names.
The first and second defendants, to whom his Lordship would refer collectively as Gooda Walker, managed between them four syndicates which fared particularly badly: 164 and 290, managed by the first defendant and 298 and 299 managed by the second defendant.
The plaintiffs in the action were the majority of the names on those syndicates, numbering 3,095. Between them they claimed to have lost some £630 million.
They contended that those losses had been inflicted upon them because the manner in which the underwriting was conducted by the active underwriters for those syndicates was incompetent.
Whether that contention was well founded was the principal issue in the action. If it was, the plaintiffs would have established breach of a duty of care owed to them not only by the first and second defendants but also by the plaintiffs' individual members' agents, who made up the other 69 defendants.
It was common ground that the losses made by the plaintiffs were attributable in large measure to their exposure to a series of catastrophes.
It was the plaintiffs' case that the underwriters were negligent in leaving their syndicates exposed to those catastrophes.
It was the defendants' case that the sequence of catastrophes was unprecedented and unforeseeable and that no blame was to be attached to the defendants for the fact that the plaintiffs were not protected from their consequences.
In the action the plaintiffs had focused on seven catastrophes. They contended that the first two (Hurricane Alicia and UK windstorms in October 1987) were significant in that their impact should have alerted the underwriters to the risk to which they were exposing their names.
The subsequent five (the loss of the Piper Alpha, Exxon Valdez, Hurricane Hugo, Phillips Petroleum and Windstorm Daria) were relied upon by the plaintiffs as evidencing the consequences of the defendants' breaches of
duty for which they were liable in damages.
In his Lordship's judgment, the fact that a name who joined Lloyd's deliberately agreed to expose himself to unlimited liability did not mean that he anticipated or accepted that when he joined a syndicate the active underwriter would deliberately expose him to the risk of such liability.
On the contrary the name would reasonably expect the underwriter to exercise due skill and care to prevent him from suffering losses.
There was no reason in principle why an underwriter should not write business on the basis that net losses would be made in some years that were balanced by generous profits made in other years.
If, however, an underwriter was deliberately to expose his names to suffering losses from time to time, he must make sure that the names were aware of that and of the scale of loss to which they would from time to time be exposed.
A name, with the assistance of his members' agent, would want to structure his underwriting business in a manner that accorded with his means and with his attitude to risk.
Syndicates at Lloyd's tended to specialise in different categories of business, some of which involving less risk of loss, and commensurately less prospect of reward. A name needed to know the nature of the exposure that he was likely to run by joining a particular syndicate if he was to be able to structure his underwriting business in an appropriate manner.
It was the plaintiffs' case that, in the absence of a specific warning, a name would not anticipate that a particular excess of loss syndicate would write in such a way that loss making years would be a natural consequence from time to time. A loss making year would only result from some untoward event or sequence of events for which the underwriter could not reasonably have been expected to provide.
The plaintiffs pleaded, as an allegation of breach of duty, that Syndicates 190, 298 and 299 entered into contracts of reinsurance between themselves. That was alleged to be objectionable because of the proportion of names who were on more than one Gooda Walker syndicate.
Where reinsurance took place between two syndicates on which there were common names, the consequence was to dilute the transfer of risk which the reinsurance was intended to achieve. The extent of the dilution depended upon the degree to which the syndicates were made up of common names.
Where syndicates had a large proportion of common names, so that the dilution of the transfer of risk became significant, it would usually make sense to avoid inter-syndicate reinsurance.
It did not seem to his Lordship that it was possible to condemn inter-syndicate reinsurance as constituting, per se, a practice which breached the duty to exercise reasonable skill and care in conducting the
business of underwriting.
It had to be considered having regard to all the relevant individual circumstances, not least its potential consequences for the names involved. Those consequences were particularly difficult to assess where the inter-syndicate reinsurance formed part of the complex web of reinsurance transactions that created the spiral (by which the underwriter agreed to cover others against excessive losses from catastrophes).
All that one could say was that the inter-syndicate reinsurance that took place in the present case accentuated the incestuous nature of the spiral
transactions and diminished the comfort that the active underwriters could take from the apparent protection afforded by the reinsurance cover that they bought.
His Lordship reached a similar conclusion in relation to the pleaded allegation that the underwriters were negligent in doing "a substantial volume of reinsurance business with other syndicates and/or companies who were at one and the same time placing reinsurances with them and accepting reinsurances from them, with the effect that reinsurances were written and placed which effectively cancelled each other out and/or contributed to the LMX spiral". (LMX is underwriting excess of loss cover)
There were common features in the approach to the conduct of excess of loss business by Mr Andrews (Syndicate 298), Mr Willard (299) and Mr Walker (164 and 290). Each of those underwriters had immense experience of the business of underwriting. The approach of each of them to excess of loss underwriting was one that might well be appropriated in other fields of business, the reliance of past experience when estimating risk.
Past experience had to be treated with particular caution in the field of catastrophe excess of loss insurance, for the size and the incidence of catastrophes did not conform to a pattern. The growth of the LMX market in the 1980s and, in particular, the growth of spiral business, raised special problems in relation to the assessment of risk, exposure and rating, that called for special consideration. Some gave it that consideration. The Gooda Walker underwriters did not.
In his Lordship's judgment the plaintiffs were restricted to recovering damages flowing from incompetence in relation to the writing of excess of loss business but that was not restricted to claiming the losses flowing from the five central catastrophes.
The plaintiffs were entitled to that award of damages which would place them in the same position as if the underwriting carried out on their behalf by each syndicate had been competently performed.
Solicitors: Wilde Sapte; Elborne Mitchell.