[1997] 265 L. R. L. R. Queen's bench division



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[1997] 265 L.R.L.R.
QUEEN'S BENCH DIVISION (COMMERCIAL COURT)
Apr. 3, 4, 5, 6, 7, 12, 24, 26, 27, May 1, 2, 3, 4, 9, 10, 11, 15, 16, 17, 18, 22, 23, 24, 25, 26, June 6, 7, 8, 9, 12, 13, 14, 15, 19, 20, 21, 22, 26, 27, 28, 29, 30, July 3, 4, 5, 6, 10, 11, 12, 13, 25, 26, 27, 28; Oct. 31, 1995
HENDERSON v. MERRETT SYNDICATES LTD. AND OTHERS AND ERNST & WHINNEY
HALLAM-EAMES v. SAME
HUGHES AND OTHERS v. MERRETT SYNDICATES LTD. AND OTHERS
MERRETT AND ERNST & WHINNEY
Before Mr. Justice Cresswell
Reinsurance - Lloyd's litigation - Negligent underwriting - Duty of care - Run-off contracts and reinsurance to close contracts - Claims against managing agents, members' agents and auditors in contract and tort - Auditors alleged contributory negligence - Issues as to limitation - Limitation Act, 1980 s. 32.
Each of the plaintiffs in these actions was an underwriting member of Lloyd's participating in Syndicates 418/417 for one or more underwriting years between 1980 and 1985 (inclusive).
Up to Jan. 1, 1986 Merrett Syndicates Ltd. (MSL) was a combined agent - a managing agent of 418/417 and also a members' agent. From Jan. 1, 1986 MSL operated solely as a members' agent and Merrett Underwriting Agency Ltd. (MUAM) became the managing agent of 418/417. At all material times Mr. Stephen Merrett was the active underwriter of 418/417.
The claims in these actions against Merretts and the members' agents related to the writing of 11 run-off contracts, and the plaintiffs alleged that each of the contracts was negligently written. The plaintiffs also claimed against Ernst & Whinney (E&W) the syndicate auditors to 418/417 alleging that the members' agents, Merretts and E & W negligently closed each of the six years of account 1979-1984 by way of a reinsurance to close (RITC) into the following year.
MSL and/or MUAM had sole control and management of 418/417 and sole conduct of its underwriting and the defendant members' agents merely performed the duties of members' agents in relation to the participation of their Names on 418/417.
Each of the plaintiffs entered into an underwriting agency agreement in relation to his or her participation
[1997] 266 L.R.L.R. Henderson v. Merrett Syndicate (Q.B. (Com. Ct.))
in 418/417. Prior to the coming into effect of the Agency Agreements Byelaw (No. 1 of 1985) on Jan. 1, 1987 the form of agreement was prescribed by MSL/MUAM. After the coming into effect of the byelaw the agreement was as prescribed by the byelaw.
To the extent that the defendant members' agents were members' agents in relation to the participation of any of the plaintiffs in 418/417 that participation was pursuant to a sub-agency agreement which prior to the coming into effect of the byelaw was as prescribed by MSL/MUAM and after the coming into effect of the byelaw was as required by the byelaw.
Between June, 1978 and December, 1982 11 run-off contracts were written by 418/417. A run-off contract was a policy of reinsurance by which a syndicate or company was reinsured against outstanding and future liabilities claims and expenses in respect of business written into past underwriting years of account.
Between 1982 and 1987, 418/417's 1979 year of account, and each subsequent year of account until its 1984 year of account, was closed by way of a RITC into the following year of account. The effect of the succession of RITCs was that the underwriting members of 418/417's 1980, 1981, 1982, 1983, 1984 and 1985 years of account successively agreed to indemnify the Names on the immediately preceding year of account against all known and unknown liabilities of the reinsured members arising out of the insurance business written or reinsured into the reinsured year of account.
As against E&W the plaintiffs contended that as syndicate auditors E&W had the responsibility to ensure that accounting policies were applied consistently from one year of account to the next; that the amount of any item to be included in an indemnity account for a closed year was determined on a prudent basis; that all charges and income relating to a closed year of account were taken into account without regard to the state of receipt or payment and that accounting policies were adopted in respect of items affecting more than one year of account so as to ensure a treatment which was equitable as between the members of the syndicate effected. The plaintiffs contended that there was an implied term of reasonable skill and care and/or a duty of care in tort to like effect and in particular a duty of care and skill in assessing whether the RITC premium was equitable.
E&W argued that the Names had no contract with and had no contractual claim against E&W. As to tort E&W contended that the only duty owed by E&W to the Names on the succeeding year (when there was a RITC) was to act with such care and skill as was to be expected of a Lloyd's panel auditor in carrying out the work necessary to give, and in giving the form of opinion or report in fact given.
The defendants raised issues of limitation contending that claims by direct Names against combined agents in contract and tort by the pre-1984 joiners in the Hallam-Eames action were barred; that the claims by the indirect Names against managing agents in tort by the pre-1984 and the 1984 joiners in the Hallam-Eames actions (but not the 1984 joiners in the Henderson actions) were statute barred and that claims by indirect Names against members' agents in contract by the pre-1984 and the 1984 joiners in the Hallam-Eames actions but not the 1984 joiners in the Henderson actions) were statute barred. E&W alleged that the claims by the pre-1984 and the 1984 joiners in the Hallam-Eames action (but not the 1984 joiners in the Henderson actions) were statute barred.
The plaintiffs relied on s. 32 of the Limitation Act 1980 which provided inter alia:
(1). . .where in the case of any action for which a period of limitation is prescribed by this act, either (a) the action is based on fraud of the defendant; or (b) any fact relevant to the plaintiff's right of action has been deliberately concealed from him by the defendant. . .the period of limitation shall not begin to run until the plaintiff has discovered the fraud, concealment. . .or could with reasonable diligence have discovered it.
The plaintiffs alleged deliberate concealment.
E&W alleged that they were entitled to claim that the damages the plaintiffs suffered were as a result partly of their own fault and they sought to rely on s. 1 of the Law Reform (Contributory Negligence) Act, 1945.
-Held, by Q.B. (Com. Ct.) (Cresswell, J.), that (1) the writing of the run-off contracts (Ballantyne, Verrall, Fireman's Fund, Dolling Baker, Toomey, Gooda Walker, Humm, Burdett and Judd) were negligent; there was a failure to adhere to the standard of skill and care reasonably to be expected of Merretts at the time and with the knowledge that Merretts had or should have had; the contract exposed the plaintiffs to potentially huge liabilities, unlimited in time or amount, which were not capable of reasonable quantifications on the material before the deputy underwriter Mr. Emney; there was insufficient placing or other information available at the time the note was considered to enable a reliable assessment to be made with a reasonable degree of confidence of 417's ultimate net retained potential liability under the contract; and Merrett failed to obtain all the information including in particular INBR (incurred but not reported) loss reserves for both asbestos and non-asbestos claims and the methodology behind the IBNR factors (see p. 324, cols. 1 and 2; p. 326, cols. 1 and 2; p. 332, cols. 1 and 2; p. 333, cols. 1 and 2; p. 334, cols. 1 and 2; p. 336, col. 2);
(2) there was no or no adequate system for detecting or monitoring the aggregation in 418/417 of particular risks included in the business ceded under the contract and there was inadequate reinsurance cover against the liabilities assumed (see p. 324, cols. 1 and 2; p. 326, col. 2; p. 332, col. 1; p. 333, cols. 1 and 2; p. 334, col. 1; p. 335, col. 1; p. 336, col. 2);
(3) in all the circumstances Merretts decisions to close years 1, 2 and 3 was not a decision that no reasonably well-informed and competent underwriter/managing agents could have made; and the criticisms that could be made of Merretts in years 1, 2 and 3 did not lead to the conclusion that year 1 should have been left open (see p. 330, col. 2; p. 341, cols. 1 and 2; p. 342, col. 1; p. 347, col. 2; p. 348, col. 1);
(4) the plaintiffs' claims against E&W in respect of years 1, 2 and 3 also failed; and the plaintiffs had not
[1997] 267 L.R.L.R. Henderson v. Merrett Syndicate (Q.B. (Com. Ct.))
established that E&W should have disclaimed an opinion on the grounds of fundamental uncertainty in years 1, 2 and 3 (see p. 331, cols. 1 and 2; p. 342, col. 1; p. 349, col. 1);
(5) as to years 4, 5 and 6, given Merretts knowledge of the fundamental uncertainties, Merretts and in particular Mr. Merrett knew that a reinsurance to close figure could not be arrived at with a reasonable degree of accuracy/within a zone of reasonableness and Merretts should accordingly have left the years open (see p. 361, col. 1; p. 381, col. 1; p. 393, col. 2);
(6) E&W should have realized that a reinsurance to close figure could not be arrived at within a zone of reasonableness; E&W should have disclaimed an opinion on the grounds of fundamental uncertainty and if they had done so Merretts would have had no alternative but to leave the years open (see p. 361, cols. 1 and 2; p. 381, col. 2; p. 393, col. 2);
(7) in all the circumstances a reasonably competent Lloyd's managing agent specializing in the writing of longtail risks would have recognized in years 4, 5 and 6 that a reinsurance to close within a zone of reasonableness could not be ensured or even contemplated without evidence as to the run-off contracts similar in form to that relating to 418/417's book of business; the relevant circumstances included, inter alia, the fact that 11 run-off contracts formed a constituent part of the 1982/1983/1984 accounts, the extent of the exposures (including asbestos and pollution risks) and the amount of net outstandings referable to the run-off account (see p. 366, col. 1; p. 384, col. 2; p. 385, col. 1; p. 395, col. 2);
(8) Merretts had inadequate information in relation to the run-off contracts to justify the closure of years 4, 5 and 6; had they obtained the necessary further information this would have served to underline the uncertainties and to confirm that it was not possible to arrive at a RITC within a zone of reasonableness (see p. 366, col. 2; p. 384, col. 1; p. 396, col. 1 );
(9) Merretts carried out no or no adequate margin of error calculations in relation to the reserves in respect of 418/417's own book and the books of each of the 11 cedents to reflect the fundamental uncertainties as to the future development of (i) asbestos bodily injury claims, (ii) asbestos property damage claims and (iii) pollution claims; had they carried out adequate margin of error calculations these would have served to confirm that it was not possible to arrive at a RITC figure with a reasonable degree of accuracy (see p. 370, col. 1; p. 384, col. 1; p. 397, col. 2; p. 398, col. 1);
(10) it was incumbent on E&W to review a sample of the attorneys' reports to test the representations made by Merretts; had E&W reviewed a sample of the attorneys' reports for this purpose in years 4, 5 and 6 this would have served to confirm the extent of the fundamental uncertainties as to the future developments of asbestos bodily injury claims, asbestos, property damage claims and pollution claims (see p. 370, col. 2; p. 384, col. 2; p. 397, col. 1);
(11) E & W carried out no or no adequate margin of error tests in relation to the reserves in respect of 418/417's own books and the books of each of the 11 cedents to reflect the fundamental uncertainties as to the future developments of asbestos bodily injury claims, asbestos property damage claims and pollution claims; had they done so these would have served to confirm that E&W should have disclaimed an opinion on the grounds of fundamental uncertainty (see p. 372, col. 1; p. 385, col. 1; p. 398, col. 1);
(12) a reasonably competent Lloyd's panel/recognized auditor in years 4, 5 and 6 would have disclaimed an opinion on the grounds of fundamental uncertainty (see p. 372, col. 1; p. 385, col. 1; p. 398, col. 2);
(13) if year 4 had been left open the overwhelming probability was that the 1982 account would not have been closed at Dec. 31, 1985 and Dec. 31, 1986; had year 4 been left open this would have revealed to the Names the nature and extent of the fundamental uncertainties to which 418/417 was subject; Merretts would have faced enormous pressure from members' agents representing Names on subsequent years not to close the 1982 year and the probability was that Merretts would have been compelled to accede to such pressure (see p. 385, col. 2; p. 398, col. 2; p. 399, col. 1);
(14) as to contributory negligence, having regard to the relevant agency/sub-agency agreements, the audit engagement, the regulatory regime and in particular to the role of the managing agents/underwriter on the one hand and the role of the auditors on the other hand in relation to a RITC it could not be considered that the plaintiffs, on a time construction of s. 1 of the 1945 Act suffered damage as a result partly of their own fault; and having regard to the complex structure of Lloyd's and in particular the duties of the managing agent the underwriters and the syndicate auditors in relation to a RITC E & W's submission that the plaintiffs were contributorily negligent would be rejected; if that was wrong then in all the circumstances it was not just or equitable that the damages should be reduced having regard to the plaintiffs' share in the responsibility for the damage (see p. 402, col. 1);
(15) as to limitations, for MSL to state in their letter of Apr. 14, 1985 to all their direct Names that the late notification of the size of the losses resulting from the run-off contracts was due to two main reasons i.e. that virtually every contract had seen an unprecedented deterioration in the later months of 1994 and that the full impact of this deterioration could not be fully assessed until the insurers had completed their own assessment, was to conceal from the plaintiffs Merretts many serious failures in years 1, 2 and 3 and the fact that year 3 accounts were materially inaccurate (see p. 404, col. 2; p. 405, col. 1);
(16) there was a deliberate concealment of the position in relation to the run-off contracts by Merretts up to about early April, 1985 (see p. 40, col. 1; p. 406, col. 2);
(17) with regard to seven of the run-off contracts i.e. Ballantyne, Verrall, Fireman's Fund, Dolling-Baker, Toomey, Gooda and Humm) the plaintiffs did not discover the concealment until after the commencement of these proceedings, nor could they with reasonable diligence have discovered it earlier; Merretts deliberately concealed from the plaintiffs inter alia the fact that the run-off contracts exposed the plaintiffs to potentially huge liabilities which were not capable of reasonable quantification on the material before Mr. Emney; in case of these seven contracts the limitation period
[1997] 268 L.R.L.R. Henderson v. Merrett Syndicate (Q.B. (Com. Ct.))
was postponed and the defence of limitation failed (see p. 406, col. 2);
(18) Merretts deliberately concealed from the plaintiffs the central fact that the years 4 and 5 as at June 4, 1985 and June 2, 1986 exposed the plaintiffs to potentially huge liabilities which were not capable of reasonable quantification on the information available to Merretts at that date; at those dates Merretts and in particular Mr. Merrett knew the central fact that a RITC figure could not be arrived at with a reasonable degree of accuracy; and the information as to the run-off contracts was wholly inadequate; the plaintiffs did not discover the central fact until at the earliest May 15, 1992 nor could they with reasonable diligence have discovered it earlier; the relevant limitation period was postponed and Merretts' defence of limitation failed (see p. 411, cols. 1 and 2);
(19) in the particular circumstances of the case the plaintiffs could not rely on s. 32(1) of the 1980 Act as against the members' agents; the members' agents played no part in managing or controlling 418/417 or in the conduct of the underwriting on behalf of the plaintiffs; and the plaintiffs' submission that Merretts could only have committed the acts of deliberate concealment, so far as indirect Names were concerned, qua agent of the defendant members' agents would be rejected; s. 32 did not serve to postpone the limitation period as against the members' agents (see p. 413, cols. 1 and 2);
(20) as to the claims against Mr. Merrett personally, although the probability was that Mr. Merrett knew more about the run-off contracts than he accepted in his statement or in his evidence there was no justification in making a finding against Mr. Merrett personally in respect of the writing of the run-off contracts; it was not possible to determine Mr. Merrett's precise involvement in the writing of each contract and there had not been any or any adequate expert assistance as to the practice at Lloyd's at the material time as to the extent to which the active underwriter was subject to a duty to supervise his deputy (see p. 414, col. 1);
(21) as to the years 4, 5 and 6 RITCs, Mr. Merrett as active underwriter owed a duty of care in tort to the reinsuring Names (whether direct or indirect) to exercise reasonable care and skill in the exercise of his functions as active underwriter; Mr. Merrett was in breach of that duty of care; and the relevant limitation period was postponed in respect of years 4 and 5 and Mr. Merrett's defence of limitation failed (see p. 414, col. 2).
The following cases were referred to in the judgment:
AWA Ltd. v. Daniels trading as Deloitte Haskins & Sells & Others, (1992) 7 A.C.S.R. 579; (1992) 10 A.C.L.C. 1643;
Aitken (P.J.) v. Stewart Wrightson Members Agency Ltd., [1995] 2 Lloyd's Rep. 618;

Applegate v. Moss, [1971] 1 Q.B. 406;

Bolam v. Friern Hospital Management Committee, [1957] 1 W.L.R. 582;

Caudle (B.F.) v. Sharp, [1995] L.R.L.R. 80;

Deeny v. Gooda Walker Ltd., [1996] L.R.L.R. 183;

De Meza v. Apple, [1974] 1 Lloyd's Rep. 508;

Eckersley v. Binnie, (C.A.) [1988] 18 Con.L.R. 1;

Fletcher v. National Mutual Life Nominees Ltd., [1990] 1 N.Z.L.R. 97;

Hedley Byrne & Co. Ltd. v. Heller & Partners Ltd., (H.L.) [1963] 1 Lloyd's Rep. 485;

Henderson v. Merrett Syndicates Ltd. (Sub nom The Lloyd's Litigation The Merrett Gooda Walker and Feltrim cases), (H.L.) [1994] 2 Lloyd's Rep. 468; [1995] 2 A.C. 145; (C.A.) [1994] 2 Lloyd's Rep. 468;

Kane (H.E.) Agencies Ltd. v. Coopers & Lybrand, (1983) 23 C.C.L.T. 233;

Maynard v. West Midland Regional Health Authority, (H.L.) [1984] 1 W.L.R. 634;

Moonacre, The [1992] 2 Lloyd's Rep. 501;

Nelson Guarantee v. Hodgson, [1958] N.Z.L.R. 609;

Pacific Acceptance Corporation v. Forsythe, (1970) 92 W.N. (N.S.W.) 29;

Revelstoke Credit Union v. Miller, (1984) 28 C.C.L.T. 17;

Saif Ali v. Sydney Mitchell & Co., (H.L.) [1980] A.C. 198;

Sheldon v. Outhwaite, (H.L.) [1995] 2 Lloyd's Rep. 197; [1995] 2 W.L.R. 570;

Simonius Vischer & Co. v. Holt & Thompson, [1979] 2 N.S.W.L.R. 322;

Superhulls Cover Case, [1990] 2 Lloyd's Rep. 431;

Walker v. Hungerfords, (1987) 44 S.A.S.R. 532;

West Coast Finance Ltd. v. Gunderson Stokes

Walton & Co., (1975) 56 D.L.R. 461; 44 D.L.R. (3d.) 232;

Wilsher v. Essex A.H.A., (C.A.) [1987] 1 Q.B. 730.

This was an action by the plaintiff Names, Mr. Ian McIntosh Henderson, Mr. William Hallam-Eames and Ms Elise Heckman Hughes and other Names listed in the schedule to the writ of summons claiming damages against the defendants Merrett Syndicates Ltd. and other agencies listed in the schedule to the writ of summons, Ernst & Whinney and Mr. Stephen Roy Merrett in respect of 11 run-off contracts which the plaintiffs alleged had been negligently written and in respect of six years'
[1997] 269 L.R.L.R. Henderson v. Merrett Syndicate (Q.B. (Com. Ct.)) Cresswell, J.
of account 1979-1984 which the plaintiffs alleged had been negligently closed by way of a reinsurance to close into the following year.
Mr. A. Boswood, Q.C., Mr. B. Doctor, Mr. A. Wales and Mr. T. Macey-Dare (instructed by Messrs. More Fisher Brown) for the Names; Mr. A. Temple, Q.C., Mr. J. Rowland and Mr. A. Christie (instructed by Messrs. Reynolds Porter Chamberlain) for Merretts; Mr. Roger Toulson, Q.C. and Mr. C. Edelman, Q.C. (instructed by Messrs. Oswald Hickson Collier) for the Members' agents; Mr. C. Clarke, Q.C., Mr. M. Howard and Mr. H. Davies (instructed by Messrs. McKenna & Co.) for the auditors Ernst & Whinney.
The further facts are stated in the judgment of Mr. Justice Cresswell.
Judgment was reserved.
Tuesday, Oct 31, 1995
JUDGMENT
Mr. Justice CRESSWELL:
CONTENTS
1. THE PARTIES AND THE CLAIMS

2. THE SCHEME OF THE JUDGMENT

3. THE ROLE OF MEMBERS' AGENTS AND MANAGING AGENTS AT LLOYD'S

4. THE RUN-OFF CONTRACTS

5. THE CLOSING OF THE YEARS OF ACCOUNT

6. THE CAUSES OF ACTION

7. THE SPEECHES OF THE HOUSE OF LORDS IN HENDERSON V. MERRETT SYNDICATES LTD

8. THE 1985 NAMES

9. DIRECT NAMES/COMBINED AGENTS: CONTRACT AND TORT

10. INDIRECT NAMES/MANAGING AGENTS: TORT

11. INDIRECT NAMES/MEMBERS AGENTS: CONTRACT

12. INDIRECT NAMES/MEMBERS AGENTS: TORT

13. E&W'S DUTIES

14. STANDARD OF CARE

15. LIMITATION

16. THE WITNESSES

17. THE REGULATORY REGIME FOR THE YEARS ENDED 31.12.80-1986

18. THE NEVILLE RUSSELL LETTER AND THE RESPONSE

19. RITC - SOME GENERAL PRINCIPLES

20. IDENTIFICATION OF 418/417'S EXPOSURE IN RESPECT OF DEFENDANTS IN THE ASBESTOSIS LITIGATION

21. NOTIFICATION OF ASBESTOS-RELATED LOSSES

22. PERCEPTION AND THE MATERIALS AVAILABLE TO MERRETTS AND E&W

23. THE WRITING OF THE RUN-OFF CONTRACTS

24. THE WRITING OF THE PROVINCIAL RUN-OFF CONTRACT

25. THE WRITING OF THE UNIVERSAL RUN-OFF CONTRACT

26. THE WRITING OF THE BALLANTYNE RUN-OFF CONTRACT

27. THE WRITING OF THE VERRALL RUN-OFF CONTRACT

28. THE WRITING OF THE FIREMAN'S FUND RUN-OFF CONTRACT

29. YEAR 1: THE CLOSURE OF 1979 INTO 1980 AS AT 31.12.81 (MERRETTS' AND E&W'S REPORTS DATED 4.5.82)

30. THE WRITING OF THE DOLLING-BAKER, TOOMEY, GOODA AND HUMM RUN-OFF

CONTRACTS

31. THE WRITING OF THE BURDETT RUN-OFF CONTRACT

32. THE WRITING OF THE JUDD RUN-OFF CONTRACT

33. YEAR 2: THE CLOSURE OF 1980 INTO 1981 AS AT 31.12.82 (MERRETTS' AND E&W'S REPORTS DATED 4.5.83)

34. YEAR 3: THE CLOSURE OF 1981 INTO 1982 AS AT 31.12.83 (MERRETTS' AND E&W'S REPORTS DATED 15.5.84)

35. YEAR 4: THE CLOSURE OF 1982 INTO 1983 AS AT 31.12.84 (MERRETTS' AND E&W'S REPORTS DATED 4.6.85)

36. YEAR 5: THE CLOSURE OF 1983 INTO 1984 AS AT 31.12.85 (MERRETS' AND E&W'S REPORTS DATED 2.6.86)

37. YEAR 6: THE CLOSURE OF 1984 INTO 1985 AS AT 31.12.86 (MERRETTS' AND E&W'S REPORTS DATED 21.5.87)

38. CONTRIBUTORY NEGLIGENCE

39. LIMITATION

40. THE CLAIMS AGAINST MR. MERRETT PERSONALLY

41. THE RESULT

APPENDICES

1. CHRONOLOGY


[1997] 270 L.R.L.R. Henderson v. Merrett Syndicate (Q.B. (Com. Ct.)) Cresswell, J.
2. AGREED LIST OF UNITED STATES AUTHORITIES

3. SPECIMEN FORMS OF AGREEMENT


1. THE PARTIES AND THE CLAIMS
Each of the plaintiffs in these actions was an underwriting member of the Society of Lloyd's ("Lloyd's"), participating in Lloyd's Syndicate 418/417 ("418/417") for one or more underwriting years between 1980 and 1985 (inclusive), or sues as an administrator or executor of a deceased name who so participated in 418/417. The number of plaintiffs in the actions and the years of account in which each of them participated in 418/417, are broadly as set out in Table 1 below (at p. 415 post) which was helpfully prepared by Merretts' solicitors.
Up to Jan. 1, 1986, Merrett Syndicates Ltd. ("MSL") was a combined agent - it was the managing agent of 418/417 and was also a members' agent. From Jan. 1, 1986, Merrett Underwriting Agency Management Ltd. ("MUAM") became the managing agent of 418/417, and MSL operated solely as a members' agent. At all material times the active underwriter of 418/417 was Mr. Stephen Merrett ("Mr. Merrett"). Until about June, 1985 Mr. John Emney ("Mr. Emney") acted as deputy underwriter and excess of loss underwriter for the syndicate. Mr. Emney was dismissed by Merretts in 1985. (Throughout the judgment the term "Merretts" is used to refer to one or more of MSL, MUAM, Mr. Merrett or Mr. Emney and should be read as the context requires).
The defendant underwriting agencies who acted as the members' agents for the plaintiffs during the period 1979-1987 and/or who have assumed the liabilities of members' agents who so acted, are identified in the schedules to the writs in the actions.
The defendants Ernst & Whinney ("E&W") were a firm of chartered accountants who were engaged to act, and acted, as syndicate auditors to 418/417.
The claims in these actions against Merretts and the members' agents relate to the writing of 11 run-off contracts listed in Table 2 below (at p. 416 post). The claims against Merretts, the members' agents and E&W relate to six reinsurances to close ("RITCs") listed in Table 3 below (at p. 417 post). The relevant plaintiffs contend that each of the 11 run-off contracts was negligently written and that each of the six years of account 1979-1984 was negligently closed by way of a RITC into the following year. The 1985 year of account was left open. The defendants deny liability on a number of grounds. The limitation issues that arise are summarized in Table 4 below (at p. 418 post).
I was told when this case was opened:
. . .the amounts involved are frightening. The declared loss in the 1993 syndicate accounts for the 1985 open year is £163,739,000. Chatset currently estimate a further deterioration of 400% of stamp. If that were correct, the total loss for the 1985 year would be £723,199,000, a loss of between £50,000 and £55,000 for each £10,000 of line on the syndicate.
2. THE SCHEME OF THE JUDGMENT
The scheme of the judgment is as follows.
Sections 1-22 deal with introductory matters and sections 23-37 address the 11 run-off contracts and the six RITCs.
Section 3 considers the manner in which underwriting business at Lloyd's was carried on at the

material times, the role of members' agents and managing agents and the contractual structure.


Section 4 identifies the 11 run-off contracts and section 5 of the 6 RITCs the subject of claims in these actions.
Section 6 refers to the causes of action relied on.
Section 7 refers to the decision of the House of Lords in Henderson v. Merrett Syndicates Ltd.

Sections 8 to 13 consider the position of and the duties of various parties as follows:


8 - The 1985 Names.
9 - Direct Names/combined agents: contract and tort.
10 - Indirect Names/managing agents: tort.
11 - Indirect Names/members' agents: contract.
12 - Indirect Names/members' agents: tort.
13 - E&W's duties.
Section 14 deals with the standard of care.
Section 15 summarizes the limitation issues.
Section 16 considers the evidence of the witnesses.
Section 17 considers the regulatory regime for the years ended Dec. 31, 1980-1986.
Section 18 sets out the Neville Russell letter and the response thereto.
Section 19 considers some general principles as to RITC.
Section 20 considers the question of the identification of 418/417's exposure in respect of defendants in the asbestosis litigation in the United States and section 21 considers notification of asbestos-related losses.
[1997] 271 L.R.L.R. Henderson v. Merrett Syndicate (Q.B. (Com. Ct.)) Cresswell, J.
Section 22 considers perception of asbestos and pollution claims and the materials available to Merretts and E&W.
Section 23 contains some general comments on the writing of the run-off contracts.
From this point the judgment follows a strict chronological sequence. The 11 run-off contracts and the six RITCs are considered in turn in the chronological order in which the 11 run-off contracts were written and the six years were closed. Thus section 24 (Provincial), 25 (Universal), 26 (Ballantyne), 27 (Verrall) and 28 (Fireman's Fund) consider the writing of the first 5 run-off contracts.
Section 29 considers the year 1 RITC.
Sections 30 (Dolling-Baker, Toomey, Gooda and Humm), 31 (Burdett) and 32 (Judd) consider the writing of the remaining 6 run-off contracts.
Sections 33 (year 2 RITC), 34 (year 3 RITC), 35 (year 4 RITC), 36 (year 5 RITC) and 37 (year 6 RITC) consider the remaining 5 RITCs.
Sections 38 considers contributory negligence and 39 limitation. Section 40 considers the personal liability of Mr. Merrett.
Section 41 summarizes the result.
3. THE ROLE OF MEMBERS' AGENTS AND MANAGING AGENTS AT LLOYD'S
This section of the judgment is drawn from an agreed statement of facts.
General role
At all material times, the manner in which underwriting business at Lloyd's was carried on was as follows.
There were two types of underwriting agents, namely members' agents and managing agents. Combined agents perform both the role of members' agents and the role of managing agents.
The main duties of managing agents were to manage the syndicate or syndicates of which they were managing agents and to conduct the underwriting on behalf of those Names who were members of the syndicates. The management of the syndicate and the conduct of the underwriting on behalf of the Names was controlled and carried on exclusively by the managing agents of the syndicate. The managing agents employed the "active underwriter" being the person with principal authority to accept risks on behalf of the syndicate or syndicates managed by the managing agents of which he or she was designated as the active underwriter.
The main duties of members' agents were to assist candidates for membership of Lloyd's in the making of their application for membership, to discuss and agree with each of the Names for whom they acted the syndicates on which the Name should be placed and the allocation of the Name's premium limit as between syndicates, to seek to arrange the participation of their Names in syndicates as so discussed and agreed and generally to look after the interests of their Names and act as a channel between managing agents and their Names. Save when acting as managing agents, members' agents played no part in managing or controlling syndicates or in the conduct of the underwriting on behalf of names.
At all material times underwriting agents were only entitled to carry on business as such at Lloyd's if they were approved by Lloyd's to act as underwriting agents at Lloyd's and in order to be so approved, each underwriting agent would be required to undertake, inter alia, to conform to any requirements which might from time to time be introduced by Lloyd's. Such requirements were set out, inter alia, in the Lloyd's Manual for Underwriting Agents which provided as follows:
Section A.
CONDUCT OF UNDERWRITING AGENTS.
1.GENERAL
1.The Corporation of Lloyd's requires Underwriting Members to conduct insurance business at Lloyd's through syndicates and through the medium of Underwriting Agents approved by the Committee of Lloyd's. The names of approved Agents are contained in a list of approved Lloyd's Underwriting Agents kept by the Committee.. . .
4.There are two types of Agents - a Members' Agent who acts in all respects for the Name except the managing of the syndicate, and a Managing Agent (who may also be a Members' Agent) who manages the syndicate and conducts the underwriting. A Managing Agent writing for his own Names and for Names provided under a Sub-Agency Agreement is commonly said to be writing for "a Group". A Members' Agent who provides Names in this way delegates the underwriting duties for the Names to the Managing Agent, who for this purpose is a Sub-Agent.. . .

3.DUTIES OF AN AGENT.


1.The main duties of an Agent may be summarised as follows:
(i) Management of the Syndicate
(a) to appoint, control and manage the underwriting staff;
(b) to endeavour to ensure that the amount of business written for the syndicate is within the permitted Premium Limits of its Members;
[1997] 272 L.R.L.R. Henderson v. Merrett Syndicate (Q.B. (Com. Ct.)) Cresswell, J.
(c) to manage the Premiums Trust Fund;
(d) to effect the Reinsurance to Close. (With discretion to keep an account open);
(e) to comply with the Audit and other regulations;
(f) to accept responsibility for the underwriting and the records.
(ii) Service to Names
(a) to advise and discuss with prospective Names the prospects and past results (shown in the form approved by the Committee of Lloyd's) of various syndicates in which he can place Names;
(b) to co-operate with the sponsor in submitting applications for Membership to the Committee;
(c) to agree with the Names the allocation of Premium Limits as between syndicates;
(d) to keep Names informed of the progress of the underwriting, and to arrange to provide annual audited accounts to them;
(e) to manage the Special Reserve Fund and Personal Reserves and, if the Name and the Agent so desire, to assist in the investment of these Funds and the Lloyd's Deposit;
(f) to arrange reserves for Names;
(g) to handle requests by Names for advice on taxation matters;
(h) to take all reasonable steps to ensure that Names comply with their undertakings to the Committee;
(i) to pass on to the names any relevant information or instructions contained in correspondence from the Committee of Lloyd's.. . .
2. A Managing Agent performs all the duties in A3.1(i) and A3.1(ii) for his direct Names, and he may perform the underwriting duties in A3.1(i) for Names provided through a Members' Agent.. . .
3. A Members' Agent will be approved by the Committee only if he is prepared to perform the duties listed in A3.1(ii) which fall to an Agent who is not necessarily managing a syndicate but is looking after the interests of Names and acting as a channel between the Managing Agent and the Name.. . .
Further by Lloyd's Byelaw No. 4 of 1984 "Underwriting Agents" made on May 14, 1984, provision was made for a system of registration specifying those underwriting agents at Lloyd's permitted to act solely as members' agents, those underwriting agents at Lloyd's permitted to act solely as managing agents and those underwriting agents at Lloyd's permitted to act as both members' agents and managing agents. The byelaw defined a members' agent as being an underwriting agent which acted on behalf of a Name but did not perform any of the functions of a managing agent and defined a managing agent as being an underwriting agent which performed for the name one or more of the following functions: (i) underwriting contracts of insurance at Lloyd's; (ii) reinsuring such contracts in whole or in part; (iii) paying claims on such contracts.
Accounting functions
At all material times the respective roles of members' agents and managing agents with regard

to syndicate accounts were as follows.


The managing agent was responsible for keeping accounting records and for the production of annual audited accounts for the syndicates which it managed and the members' agent played no part in the preparation of such accounts or any of the work required therefor.
On the basis of the annual audited syndicate accounts and solvency reports provided by managing agents, auditors appointed by the members' agents prepared and submitted solvency reports to Lloyd's in respect of each of their Names.
The respective functions of members' agents and managing agents were set out, inter alia, in the

Lloyd's Manual for Underwriting Agents which provided, inter alia, as follows:


10. ACCOUNTS.
1. Duties of Managing Agent with regard to the

Accounts.


(i) The basic accounting procedures to be carried

out are:


(a) the processing of all advices received from Lloyd's Policy Signing Office and other sources

relevant to the underwriting affairs of the Syndicates, into:


(i) accounting media - Books of Account, Control Ledgers.
(ii) statistical data.
(b) the receipt of premiums and the payment of claims
(c) the recording of outstanding claims
(d) the assessment of the reinsurance premium to close an account
(e) the preparation of final and audited underwriting figures at the 31st
[1997] 273 L.R.L.R. Henderson v. Merrett Syndicate (Q.B. (Com. Ct.)) Cresswell, J.
December of each year for the closing and the then

open underwriting years of account


(f) compliance with the audit requirements of the Committee of Lloyd's and the filing by the Syndicate Auditors of the necessary certificates to the Committee of Lloyd's.
2. Responsibilities of the "Group" Managing Agent to the Members' Agent.. . .
(iii) Since the Members' Agent has delegated full powers of underwriting to the Managing Agent, he is entirely dependent upon the Managing Agent for the essential accounting and statistical data to enable him to produce the Accounts to his name.
The respective functions of members' agents and managing agents were further set out in byelaws made under the Lloyd's Act, 1982.
(1) The 1983 Annual Reports of Syndicate's Byelaw (No. 2 of 1984)
2. Every Managing Agent which managed a Syndicate at 31st December 1983 shall produce in

respect of such Syndicate -


(a) an annual report signed by at least one director or partner as the case may be, of the underwriting agent and the active underwriter of the Syndicate prepared in accordance with paragraph 3 below;
(b) a report by the active underwriter and the Managing Agent (or separate reports by each of them) on the business transactions for the account of the underwriting members who underwrote through that Syndicate during any relevant year of account and other matters of specific interest including comments on the progress of open years. . .
3. (a) Subject to sub-paragraph (c) below, an annual report shall be prepared in respect of any relevant year of account for each underwriting member who underwrote any insurance business through the Syndicate during any relevant year of account.
(b) The annual report shall be made up to 31st December 1983 and shall comprise:
(i) In respect of each year of account being closed at 31st December 1983, an underwriting account showing the net result arising therefrom and how that net result has been arrived at;
(ii) In respect of each open year of account, an underwriting account showing the balance

carried forward at 31st December 1983 and how that balance has been arrived at;


(iii) A balance sheet;
(iv) Such notes as are necessary for a proper understanding of the underwriting accounts and balance sheet specified in (i) (ii) and (iii) above; and
(v) Any additional commentary which the Managing Agent considers appropriate.
(c) The annual report may, instead of being prepared separately for each underwriting member who underwrote through the Syndicate, show the combined figures for all or some of such underwriting members;. . .
5. (a) The Managing Agent shall procure that all annual reports. . .prepared under paragraphs 3. .

.above shall be audited and reported upon by an accountant approved for the purposes of Section 83(4) of the Insurance Companies Act 1982.. . .


6. Not later than 15th June 1984 the Managing Agent shall -
(a) Send to each underwriting member who underwrote through the Syndicate during any year of account to which the annual report relates and for whom the Managing Agent acts as Members' Agent a copy of the documents prepared under paragraph 2 above in respect of that underwriting member;
(b) Send to every other underwriting agent who acts as Members' Agent for any underwriting member who underwrote through the Syndicate during any relevant year of account -
(i) Two copies of the documents prepared under paragraphs 2(a) and 2(b) for each such underwriting member for whom the Members' Agent so acts . . .
A copy of the audit report shall be attached to every copy of an annual report sent in pursuance of sub-paragraph (a), (b). . .
7. (a) Subject to sub-paragraph (b) below, every Members' Agent which receives copies of any

documents from a Managing Agent pursuant to paragraph 6(b) above shall within one month

thereafter send one copy of those documents to the underwriting member for whom they have been prepared.
(b) A Members' Agent which is entitled to receive copies of documents pursuant to paragraph 6(b) above in respect of two or more Syndicates through which an underwriting member underwrites may comply with this paragraph by sending one copy of all such documents to
[1997] 274 L.R.L.R. Henderson v. Merrett Syndicate (Q.B. (Com. Ct.)) Cresswell, J.
that underwriting member within one month after the Members' Agent receives the last of such copies.
(2) The Syndicate Accounting Byelaw (No. 7 of 1984)
2. Accounting Records
(a) Every Managing Agent shall cause accounting records to be kept in accordance with this paragraph in respect of each Syndicate for the time being managed by it.
(b) The accounting records shall be sufficient to show and explain the transactions entered into on behalf of the members of the Syndicate.
(c) The accounting records shall be such as to -
(i) be capable of disclosing with reasonable accuracy at any time the financial position at that

time of each member of the Syndicate; and


(ii) enable the Managing Agent to ensure that every annual report, personal account, Managing Agent's report and other documents prepared by it complies with all applicable requirements of the Lloyd's Syndicate accounting rules.
4. Duties of Managing Agents with respect to Reports and Accounts
(a) Every Managing Agent shall in each year, in respect of each Syndicate managed by it at 31st

December of the preceding year -


(i) prepare an annual report or reports complying with paragraphs 5 and 7 below. . .
(iii) prepare a Managing Agent's report complying with paragraph 10(a) below; and
(iv) procure that the active underwriter of the Syndicate prepare an underwriter's report complying with paragraph 10(b) below. . .
(c) Every Managing Agent shall procure that every annual report. . .prepared under the Lloyd's

Syndicate Accounting Rules shall be audited and reported upon by the Syndicate Auditor of the

Syndicate to which it relates. . .
5. Annual Reports
(a) Subject to sub-paragraph (c) below, an annual report shall be prepared for each underwriting member who was a member of the Syndicate during any year of account other than a year of account which has beenclosed before 1st January of the year which ended on the reference date.
(b) The annual report shall comprise -
(i) an underwriting account in respect of each year of account closed at the reference date or at any time during the year ended on the reference date;
(ii) an underwriting account in respect of each year of account left open at the reference date;
(iii) a balance sheet as at the reference date;. . .
(v) such other information as is necessary for a proper understanding of the annual report;
and may include any such further information (not being misleading or inconsistent with the remainder of the annual report) as the Managing Agent may consider appropriate.. . .
7. Form and Content of Annual Reports and Personal Accounts
(a) (i) Every underwriting account prepared in respect of a closed year of account under paragraph 5(b)(i) above shall give a true and fair view of the profit or loss for that year of account of the underwriting member or members for whom it is prepared. . .
(b) Sub-paragraph (a) overrides all other requirements of the Lloyd's Syndicate Accounting Rules as to the matters to be included in an annual report or a personal account; and accordingly -
(i) If an underwriting account. . .drawn up in accordance with those requirements would not

provide sufficient information to comply with sub-paragraph (a) above, any necessary additional

information must be provided in that underwriting account. . .or in a note thereto. . .
13. Distribution of Annual Reports. . .
(a) Every Managing Agent shall send copies of the documents required under paragraph 4 above to each underwriting member to whom they relate, or to his Members' Agent, in accordance with sub-paragraphs (b) and (c) below.
(b) Two copies of each annual report and of each personal account prepared in respect of an underwriting member who is a member of a Syndicate through the agency of a Members' Agent. . . shall be sent to that
[1997] 275 L.R.L.R. Henderson v. Merrett Syndicate (Q.B. (Com. Ct.)) Cresswell, J.
Members' Agent not later than the prescribed date.
(c) A copy of each annual report. . .prepared in respect of any other underwriting member shall be sent to the member not later than the prescribed date.
(d) Every Members' Agent which receives copies of any document under sub-paragraph (b) above shall not later than the prescribed date send one copy of the document to the underwriting member for whom it has been prepared.. . .
The role of the defendant members' agents
MSL and/or MUAM had sole control and management of 418/417 and sole conduct of its underwriting and the defendant members' agents did not take any part in the management or control of 418/417 or the conduct of its underwriting and were not authorized by Lloyd's so to do but merely were authorized to perform and performed the duties of members' agents in relation to the participation of their Names on 418/417.
The contractual structure
Lord Goff in Henderson v. Merrett Syndicates Ltd., [1994] 2 Lloyd's Rep. 468; [1995] 2 A.C. 145

summarized the contractual structure as follows:


Each Name entered into one or more underwriting agency agreements with an underwriting agent, which was either a members' agent or a combined agent. Each underwriting agency agreement governed the relationship between the Name and the members' agent, or between the Name and the combined agent in so far as it acted as a members' agent. If however the Name became a member of a syndicate which was managed by the combined agent, the agreement also governed the relationship between the Name and the combined agent acting in its capacity of managing agent. In such a case the Name was known as a direct Name. If however the Name became a member of a syndicate which was managed by some other managing agent, the Name's underwriting agent (whether or not it was a combined agent) entered into a sub-agency agreement under which it appointed the managing agent its sub-agent to act as such in relation to the Name. In such a case the Name was known as an indirect Name.
As regards the indirect Names the position was as follows. Each of the plaintiffs entered into an underwriting agency agreement in relation to his or her participation in 418/417. Prior to the coming into effect of the Agency Agreements Byelaw (No. 1 of 1985) on Jan. 1, 1987, the form of underwriting agency agreement between the defendant members' agents and those of the plaintiffs for whom they acted as members' agents in relation to participation in 418/417 was prescribed by MSL and/or MUAM. A specimen agreement is at Appendix 3 to this judgment. After the coming into effect of the byelaw, the form of underwriting agency agreement between the defendant members' agents and those of the plaintiffs for whom they acted as members' agents in relation to participation 418/417 was as required by the byelaw.
To the extent that the defendant members' agents were the members' agents in relation to the participation of any of the plaintiffs in 418/417, that participation was pursuant to a sub-agency agreement made between the plaintiffs' respective members' agent and MSL and/or MUAM. Prior to the coming into effect of the byelaw, each such sub-agency agreement was in the form prescribed by MSL and/or MUAM. A specimen agreement is at Appendix 3. After the coming into effect of the byelaw, each such sub-agency agreement was in the form required by the byelaw.
By the form of underwriting agency agreement prescribed by MSL and/or MUAM, it was provided, inter alia, as follows:
1. The Agent shall act as the Underwriting Agent for the Name for the purposes of underwriting at Lloyd's through the sub-agency of Merrett Syndicates Limited (hereinafter called "the Sub-Agent") for the account of the Name policies and contracts of insurance reinsurance and guarantee relating to all classes of insurance business which with the sanction of the Committee of Lloyd's may be transacted at Lloyd's by the Syndicate.. . .
4. The Agent shall have full power and authority to appoint and employ the Sub-Agent to carry on and manage the underwriting and to delegate to or confer upon the Sub-Agent all or any of the powers authorities discretions and rights given to the Agent by this Agreement including the powers contained in this Clause.. . .
6. (a) The Agent shall have sole control and management of the underwriting and absolute

discretion as to the acceptance of risks and settlement of claims. . .


7. The following provisions shall apply concerning the Accounts of the Underwriting:
(a) The Agent shall keep such usual and proper underwriting books accounts and memoranda as are kept by Underwriting Agents at Lloyd's and the Agent shall from time to time arrange for the accounts to be audited on the Name's behalf and furnish to the Committee of Lloyd's the figures
[1997] 276 L.R.L.R. Henderson v. Merrett Syndicate (Q.B. (Com. Ct.)) Cresswell, J.
and Audit Certificate required by the Committee of Lloyd's according to their regulations regarding annual audit. The Agent shall send to the Name a copy of the accounts as soon as reasonably practicable after the end of each calendar year.. . .
(e) The Syndicate Account of any calendar year shall not be closed before the expiration of the two calendar years next following the calendar year in question and in order to close the Syndicate Account of any year the Agent may:
(i) reinsure all or any outstanding liabilities in such manner and by debiting such Account with such sum as the Agent shall in the absolute discretion of the Agent think fit as a premium for reinsurance and crediting the reinsurance premium to the Syndicate Account of the next succeeding year or
(ii) reinsure all or any outstanding liabilities of such account into the Account of any other year then remaining open or in any other manner which the Agent thinks fit or
(iii) allow the whole or part of a Syndicate Account of any year to remain open until its outstanding liabilities shall have run off. . .
By the form of sub-agency agreement prescribed by MSL and/or MUAM it was provided, inter alia, as follows:
. . .The Agent delegates to the Sub-Agent the exercise of all such powers authorities discretions and rights conferred upon the Agent by the Underwriting Agency Agreement as it may be in any way necessary for the Sub-Agent to have to enable the Sub-Agent or any underwriter or agent appointed by the Sub-Agent to carry on the underwriting for the Name and to close the accounts of the Names.. . .
6. Subject to the provisions of Clause 7 hereof, the underwriting shall be conducted and the accounts thereof shall be kept and made up and the profits ascertained in such a manner as the Sub-Agent may for the time being think fit and the Sub-Agent shall have the sole control and management of the Underwriting and sole discretion as to the acceptance of risks and the compromise or settlement of claims.
7. The Sub-Agent shall conduct and manage the Underwriting in accordance with and observe the

provisions of the Underwriting Agency Agreement. . .


13. (a) The Sub-Agent shall keep such books of account as are usual and proper for Underwriting

Agents at Lloyd's. . .Such books shall be the propertyof the Sub-Agent.. . .


(c) As soon as practicable after the end of each year the Sub-Agent shall provide the Agent with an audited statement of account applicable to the accounts of the Names in respect of each year's

underwriting and the Sub-Agent shall be responsible for furnishing to the Committee of Lloyd's all the figures and Audit Certificates required in respect of each of the Names by the Committee of Lloyd's according to their regulations regarding annual Audits.


The form of underwriting agency agreement required by the byelaw, provided, inter alia, as follows:
2. . . .(a) The Agent shall act as the underwriting agent for the Name for the purpose of underwriting at Lloyd's for the account of the Name such classes and descriptions of insurance business,. . . as may be transacted by the Syndicate. . .
4. . . .(b) . . .the Agent shall have the following customary and/or special powers in connection with

the conduct. . .of the underwriting business:. . .


(g) Delegation of Agent's powers:
Power, subject to any requirements of the Council, to appoint (or) employ any person, firm or body corporate to carry on or manage the underwriting business or any part thereof, and to delegate or to confer upon any person, firm or body corporate all or any of the powers, authorities and discretions given to the Agent by the Agreement including this power of delegation and the other powers contained in this paragraph.. . .
5. Control of underwriting business:
(a) The Agent shall have the sole control and management of the underwriting business. . .
6. Provisions relating to accounts and accounting records:
The following provisions shall apply concerning the accounts and accounting records of the

underwriting business:


(a) The Agent shall comply with, or procure compliance with, the byelaws, regulations, or requirements of the Council from time to time dealing with accounting to underwriting members of Lloyd's... .
The form of sub-agency agreement required by the byelaw provided, inter alia, as follows:
2. The Sub-Agent shall act as sub-agent for the Agent for the purpose of conducting in the names

and for the account of each of the Agent's Names that part of the underwriting business as


[1997] 277 L.R.L.R. Henderson v. Merrett Syndicate (Q.B. (Com. Ct.)) Cresswell, J.
defined in Clause 2(a) of the Agency Agreement which is to be transacted by such Name as a member of the Syndicate. . .
5. (a) The Agent delegates to the Sub-Agent the performance of all such duties and the exercise of all such powers, authorities and discretions imposed or conferred upon the Agent by the Agency Agreement. . .as it may be appropriate or necessary for the Sub-Agent to perform or exercise for the purpose of carrying on the Syndicate underwriting business.. . .
7. (a) The Sub-Agent shall conduct the Syndicate business in such manner as to comply with the provisions of the Agency Agreement and Lloyd's byelaws and regulations and as to have regard for Lloyd's Codes of Conduct or similar forms of guidance for the Lloyd's market.. . .
4. THE RUN-OFF CONTRACTS
Between June, 1978 and December, 1982 11 run-off contracts were written by 418/417. A run-off contract is a policy of reinsurance by which a syndicate or insurance company is reinsured, subject to the terms of the policy, against outstanding and potential future liabilities, claims and expenses in respect of business written into past underwriting years or into such past years of account as are specified in the policy.
Particulars of the 11 run-off contracts are set out in Table 2 below (at p. 416 post). In the late 1980s there was litigation/arbitration relating to a number of the run-off contracts. The column headed final outcome shows the result.
5. THE CLOSING OF THE YEARS OF ACCOUNT
"Reinsurance to close" ("RITC") means an agreement under which underwriting members who

are members of a syndicate for a year of account agree with underwriting members who comprise that or another syndicate for a later year of account that the reinsuring members will indemnify the reinsured members against all known and unknown liabilities of the reinsured members arising out of the insurance business underwritten through that syndicate and allocated to the closed year, in consideration of a premium and the assignment to the reinsuring members of all the rights of the reinsured members arising out of or in connection with that insurance business. In computing a reinsurance to close the premium arrived at will take account of two elements: known outstanding claims and claims incurred but not reported ("IBNR"). The amount charged by way of premium in respect of reinsurance to close should, where the reinsuring members and the reinsured members were members of the same syndicate for different years of account, be equitable between them, having regard to the nature and amount of the liabilities reinsured.


Between 1982 and 1987, 418/417's 1979 year of account, and each subsequent year until its 1984 year of account, was closed by way of an RITC into the following year of account. The effect of the

succession of RITCs is that the underwriting members of 418/417's 1980, 1981, 1982, 1983, 1984 and 1985 years of account have successively agreed to indemnify the Names on the immediately preceding year of account against all known and unknown liabilities of the reinsured members arising out of the insurance business written or reinsured into the reinsured year of account.


The succession of RITCs is shown in Table 3 below (at p. 417 post).
6. THE CAUSES OF ACTION
The direct Names claim against the combined agents in contract and tort (and against Mr. Merrett in tort only).
The indirect Names claim against the managing agents in tort (and certain of the indirect Names claim against Mr. Merrett in tort). The indirect Names claim against the members' agents in contract and tort.
The plaintiffs claim against the auditors in contract and tort. Before considering these causes of action it is convenient to refer to a further cause of action in misrepresentation/failure to report or disclose.
The plaintiffs allege that in its conduct and management of the underwriting as managing agents

of 418/417, and/or as the active underwriter of 418/417, Merretts and/or Mr. Merrett respectively

misrepresented, or at least failed adequately to report or disclose to the plaintiffs, information in their possession which was evidently material to the plaintiffs' assessment of their underwriting as members of 418/417 for years of account between 1980 and 1985 (inclusive), and/or to the conduct of that underwriting.
Paragraph 11(3) of the amended points of claim in the Hallam-Eames actions states that -
. . .if and insofar as any defendant seeks to rely upon a defence of limitation. . .and succeeds in establishing that defence, each affected name will claim damages against Merretts, Mr. Merrett and his or her relevant members' agent, for the loss arising by reason of (the alleged misrepresentation/failure to report or disclose).
This alternative plea calls for further evidence beyond that adduced to date. I will if necessary give further directions in this connection after delivery of this judgment.
[1997] 278 L.R.L.R. Henderson v. Merrett Syndicate (Q.B. (Com. Ct.)) Cresswell, J.
7. THE SPEECHES OF THE HOUSE OF LORDS IN HENDERSON V. MERRETT SYNDICATES LTD.
I refer to the full report of the speeches of the House of Lords in Henderson v. Merrett Syndicates Ltd., [1994] 2 Lloyd's Rep. 468; [1995] 2 A.C. 145. This decision determined a number of preliminary issues in these actions. The effect of the decision of the House of Lords is summarized in sections 8 to 11 to below. This summary is not however a substitute for reference to the full report.
8. THE 1985 NAMES
When Names on the 1985 underwriting year reinsured Names on the 1984 year, although the 1984 names were running off their business, the 1985 Names were writing new insurance business which could only be done pursuant to the 1985 byelaw form of agreement in force as from Jan. 1, 1987.
9. DIRECT NAMES/COMBINED AGENTS: CONTRACT AND TORT
MSL ceased to be a combined agent on Jan. 1, 1986. There is a contract between the direct names and the combined agent, in the terms of the pre-1985 byelaw form of agency agreement, in which a term is to be implied that the agents will exercise reasonable skill and care in the exercise of their functions as managing agents under the agreement. That duty of care is no different from the duty of care owed by the combined agents to the direct Names in tort on the Hedley Byrne (Hedley Byrne & Co. v. Heller & Partners Ltd., [1963] 1 Lloyd's Rep. 485) principle.
10. INDIRECT NAMES/MANAGING AGENTS: TORT
The claims of the indirect Names arise in the context of the pre and post 1985 byelaw forms of

agency agreements. There is to be implied into the sub-agency agreements a duty upon the managing agents to exercise reasonable skill and care. There is no material difference between the relevant contractual duty and the duty of care owed by the managing agents to the indirect Names in tort on the Hedley Byrne principle.


11. INDIRECT NAMES/MEMBERS' AGENTS: CONTRACT
Under an implied term in the pre-1985 byelaw forms of agency agreements and under the form

prescribed by the 1985 byelaw, members' agents are responsible to indirect Names for any failure to exercise reasonable skill and care on the part of the managing agents to whom underwriting was delegated by the members' agents. For these purposes underwriting includes the assessment and effecting of any RITC and the fixing of the premium therefore.


12. INDIRECT NAMES/MEMBERS' AGENTS: TORT
In P.J. Aitken v. Stewart Wrightson Members Agency Ltd., [1995] 2 Lloyd's Rep. 618, (Pulbrook 334) Mr. Justice Potter held on agreed facts that the members' agents did not owe a non-delegable duty of care to the indirect Names in tort. Pending appeal the plaintiffs reserve their position on this. The point was not argued before me.
13. E&W's DUTIES
The plaintiffs' submissions
The plaintiffs contend that E&W were engaged by them contractually and that, as syndicate auditors, had the responsibility to ensure:
(1) that accounting policies were applied consistently from one year of account to the next, so as to ensure the consistent treatment of like items in each year of account;
(2) that the amount of any item to be included in an underwriting account for a closed year of account was determined on a prudent basis;
(3) that all income and charges relating to a closed year of account were taken into account without regard to the date of receipt or payment;
(4) that accounting policies were adopted in respect of items affecting more than one year of

account so as to ensure a treatment which was equitable as between the members of the syndicate affected. In particular, the amount charged by way of premium in respect of RITC had, where the reinsuring members and the reinsured members were members of the same syndicate for different years of account, to be equitable as between them having regard to the nature and amount of the liabilities reinsured.


The plaintiffs contend that there was an implied term of reasonable skill and care and/or a duty of care in tort to like effect, and in particular a duty of care and skill in assessing whether the RITC premium was equitable in the terms set out above. This duty was owed to all Names on the year into which the previous year was closed.
The plaintiffs further contend that at all material times such implied term and/or duty imposed at least the following specific obligations on the syndicate auditors:
(i) an obligation to consider the appropriateness of the method adopted by the managing agents

to assess the IBNR element of the RITC premium


[1997] 279 L.R.L.R. Henderson v. Merrett Syndicate (Q.B. (Com. Ct.)) Cresswell, J.
having regard to the concept of equity between the Names on the different years of account; and/or
(ii) an obligation to ensure that the underlying assumptions and the method of computation used were appropriate and consistent with previous years so as to produce a premium which was equitable between years of account; and/or
(iii) an obligation to identify the assumptions made and the evidence available to support the

validity of those assumptions and/or to identify the factors taken into account by the managing agents; and/or


(iv) an obligation to test the validity of the assumptions made by the managing agents by reference to the criteria of equity and/or prudence and/or consistency.
The Names contend that the assessment and/or effecting of the RITC and the decision to close the year was made by Mr. Merrett and/or Merretts and participated in and/or approved by E&W.
E&W's submissions
E&W submit that the Names had no contract with and have no contractual claim against E&W. As to tort E&W's submissions are as follows. The only duty in tort owed by E&W to the Names on the succeeding year (when there is a RITC) was to act with such reasonable care and skill as was to be expected of a Lloyd's panel auditor in carrying out the work necessary to give, and in giving, the form of opinion or report in fact given. In respect of the years 1981, 1982 and 1983 E&W did not provide (and were not engaged to provide) a qualitative opinion on the syndicate accounts. In respect of the years 1984, 1985 and 1986 E&W did express a qualitative opinion that the annual report gave a true and fair view of the closed year of account profit.
In respect of all of the years 1981-1986 E&W compiled a syndicate solvency report.
Accordingly E&W's duty (so far as presently relevant) was to take reasonable care in taking the

steps necessary to give and in giving:


(a) In respect of all years, the opinion in the syndicate solvency report-
. . .that the profit or loss of the closed underwriting account. . .and the estimated surplus or deficiency of the open underwriting accounts has/have been arrived at after valuing all assets and calculating all liabilities in accordance with the current Instructions. . .;
(b) in respect of 1981, 1982, 1983, the compliance opinion in fact given;
(c) in respect of 1984, 1985 and 1986 the opinion that the accounts gave a true and fair view of the closed year of account loss. In respect of (a), the duty was, in essence, to take care to see that the agent had discharged his responsibilities for establishing reserves in a reasonable manner, so as to be in a position to give the opinion in the syndicate solvency report. This did not involve the auditor in approving or expressing an opinion on the RITC. It required the auditor to ensure that the managing agent had used the highest of the two or three alternative tests. In the case of a non-marine syndicate the first (Lloyd's percentages) and third (RITC) tests were "given" figures. By virtue of the second test (total of estimated outstanding liabilities including an element to take care of unnoted and unknown liabilities) the auditor had to ensure that the agent had discharged his responsibility in a reasonable manner consistent with available information.

In respect of (b) no serious question arises. Merretts' books were properly kept and the accounts



were in agreement with them.
In respect of (c) the critical feature for present purposes is the reinsurance to close. The duty is not accurately expressed, whether in relation to the period before or after "true and fair view" reporting, as a duty to make, participate in, or approve the decision to close or leave open the year of account. It was a duty to form (and express) an opinion, or decline to do so, on a decision made by the underwriter.
Conclusion
In view of my findings as to years 1, 2 and 3 below it is unnecessary to express an opinion as to the extent of E&W's duties in years 1 to 3, save to say (a) that having regard to E&W's functions in respect of the syndicate accounts and syndicate solvency report the duties were wider than those contended for by E&W but (b) weight has to be given to the fact that the opinion required was not a true and fair view opinion. Even if the plaintiffs' submissions were accepted in full, I do not consider that E&W were negligent in years 1, 2 and 3.
As to years 4, 5 and 6 E&W accept that they owed a duty of care in tort to the reinsuring Names to act with such reasonable care and skill as was to be expected of a Lloyd's panel/recognized auditor in carrying out the work necessary to give, and in giving, the true and fair opinion. It was, as E&W point out, a duty to form and express an opinion, or decline to do so, on a decision made by the managing agent/underwriter.
In view of the fact that E&W accept that they owed a duty of care in tort as set out above, the question whether the contract of engagement was with the managing agents (as E&W contend) or with the names (as the plaintiffs contend) is academic and it is unnecessary to express an opinion on this point.
[1997] 280 L.R.L.R. Henderson v. Merrett Syndicate (Q.B. (Com. Ct.)) Cresswell, J.
14. STANDARD OF CARE
I turn to consider the standard of care required of Merretts and E&W.
In Bolam v. Friern Hospital Management Committee, [1957] 1 W.L.R. 582 at p. 587 Mr. Justice McNair said that a professional:
. . .is not guilty of negligence if he has acted in accordance with a practice accepted as proper by a responsible body of medical men skilled in that particular art. . .Putting it the other way round, a man is not negligent, if he is acting in accordance with such a practice, merely because there is a body of opinion who would take a contrary view. . .Finally, bear this in mind, that you are now considering whether it was negligent for certain action to be taken in August 1954, not in February 1957; and in one of the well-known cases on this topic it has been said you must not look with 1957 spectacles at what happened in 1954.
In Saif Ali v. Sydney Mitchell & Co., [1980] A.C. 198 at p. 220D Lord Diplock said:
No matter what profession it may be, the common law does not impose on those who practise it any liability for damage resulting from what in the result turns out to have been errors of judgment, unless the error was such as no reasonably well-informed and competent member of that profession could have made. So too the common law makes allowances for the difficulties in the circumstances in which professional judgments have to be made and acted upon.
In Maynard v. West Midlands Regional Health Authority, [1984] 1 W.L.R. 634, Lord Scarman at p.

638H said:


There is seldom any one answer exclusive of all others to problems of professional judgments. A Court may prefer one body of opinion to the other; but that is no basis for a conclusion of negligence.
In Wilsher v. Essex AHA, [1987] 1 Q.B. 730 at p. 747A-C Lord Justice Mustill said:
The risks which actions for professional negligence bring to the public as a whole, in the shape of an instinct on the part of the professional man to play for safety, are serious and are now well recognised. Nevertheless, the proper response cannot be to temper the wind to the professional man. If he assumes to perform a task, he must bring to it the appropriate care and skill. What the courts can do, however, is to bear constantly in mind that, in those situations which call for the exercise of judgment, the fact that in retrospect the choice actually made can be shown to have turned out badly is not in itself a proof of negligence; and to remember that the duty of care is

not a warranty of a perfect result.


In Eckersley v. Binnie, [1988] 18 Con.L.R. 1 at p. 79Lord Justice Bingham said:
In defining the duty of the first defendants the judge correctly ruled that the standard of care required was that of reasonably competent engineers specialising in the design of water transfer systems, including tunnels, applying the standards appropriate at the time of design, construction and operation. The law requires of a professional man that he live up in practice to the standard of the ordinary skilled man exercising and professing to have his special professional skill. He need not possess the highest expert skill; it is enough if he exercises the ordinary skill of an ordinary competent man exercising his particular art. So much is established by Bolam v Friern Hospital Management Committee which has been applied and approved time without number.
Lord Justice Bingham then quoted the passage from Saif Ali set out above and continued:
. . .From these general statements it follows that a professional man should command the corpus of knowledge which forms part of the professional equipment of the ordinary member of his profession. He should not lag behind other ordinary assiduous and intelligent members of his profession in knowledge of new advances, discoveries and developments in his field. He should have such awareness as an ordinarily competent practitioner would have of the deficiencies in his knowledge and the limitations on his skill. He should be alert to the hazards and risks inherent in any professional task he undertakes to the extent that other ordinarily competent members of the profession would be alert. He must bring to any professional task he undertakes no less expertise, skill and care than other ordinarily competent members of his profession would bring, but need bring no more. The standard is that of the reasonable average. The law does not require of a professional man that he be a paragon, combining the qualities of polymath and prophet.
In deciding whether a professional man has fallen short of the standards observed by ordinarily skilled and competent members of his profession, it is the standards prevailing at the time of his acts or omissions which provide the relevant yardstick. He is not, as the judge in this case correctly observed, to be judged by the wisdom of hindsight. This of course means that knowledge of an event which happened later should not be applied when judging acts and omissions which took place before that event, a
[1997] 281 L.R.L.R. Henderson v. Merrett Syndicate (Q.B. (Com. Ct.)) Cresswell, J.
very relevant consideration here because knowledge of the Abbeystead catastrophe has (as the evidence shows) had a profound educational effect. It is proper and necessary to investigate very

carefully the events leading up to this methane explosion to ascertain what assessment was made of the methane explosion risk, and why; but it is necessary if the defendants' conduct is to be fairly judged, that the making of this detailed retrospective assessment should not of itself have the effect of magnifying the significance of the methane risk as it appeared or should reasonably have appeared to ordinarily competent practical men with a job to do at the time.


I venture to state these familiar propositions because, against the background of a calamity such as this, it is easy and tempting to impose too high a standard in order to see that the innocent victims of the disaster are compensated by the defendants' insurers. Many would wish that the right to recovery in such cases did not depend on proof of negligence. But so long as it does, defendants are not be held negligent unless they are in truth shown to have fallen short of the standards I have mentioned.
In The Lloyd's Litigation: The Merrett, Gooda Walker and Feltrim Cases, [1994] 2 Lloyd's Rep. 468

at p. 474 Sir Thomas Bingham, M.R. said:


I would, however, observe that any successful claim against the agent in negligence would, as in any other case, have to show a failure to show the standard of skill and care reasonably to be expected of such an agent at the time and with the knowledge that he had or should have had. His judgment could not be impugned simply because events showed it to be wrong. A decision taken under cl. 7(e)(i) could not easily be challenged.
In Deeny v. Gooda Walker Ltd., [1996] L.R.L.R. 183 Mr. Justice Phillips said:
The first proposition [The standard of skill and care to be exercised by a member of a professional calling is the degree of skill and care ordinarily exercised by reasonably competent members of that profession or calling] does not remove from the Judge the determination of the standard of skill and care that ought properly to be demonstrated. As the authors of the third edition of Jackson and Powell on Professional Negligence point out at p.39:
It is for the court to decide what is meant by "reasonably competent" members of the profession. They may or may not be equated with practitioners of average competence. . . Suppose a profession collectively adopts extremely lax standards in some aspects of its work. The court does not regard itself as bound by those standards and will not acquit practitioners of negligence simply because they have complied with those standards. . .
As to the second proposition [The existence of a common practice over an extended period of time by persons habitually engaged in a particular business is strong evidence of what constitutes the exercise of reasonable skill and care] the particular business with which this action is concerned is the business of underwriting. More particularly, this action is concerned with one area of underwriting, excess of loss reinsurance. At the heart of the action lies one aspect of excess of loss underwriting, the writing of spiral business. That was a business that developed rapidly in the period of eight years or so that led up to the events with which this action is concerned. Only a relatively small proportion of Lloyd's underwriters specialised in writing spiral business. The London market no longer writes spiral business - at least on the scale and in the manner which developed in the last decade. In those circumstances I do not consider that one can automatically regard the practices of those who wrote spiral business as constituting strong evidence of what constituted the exercise of reasonable skill and care. It is necessary to approach this case with the possibility in mind that, for many involved, a significant involvement in spiral business may not have been compatible with competent underwriting.
I set out below propositions relevant to the present case derived from the above authorities:
1. As to MSL (to the extent that they acted as managing agents) and MUAM the standard of care required was that of reasonably competent Lloyd's managing agents specialising in the writing inter alia of long tail risks.
2. As to E&W the standard of care required was that of reasonably competent Lloyd's panel/recognised auditors.
As to MSL (to the extent that they acted as managing agents), MUAM and E&W:
3. The standards prevailing at the time of the alleged acts or omissions provide the relevant yardstick. The defendants are not to be judged by the wisdom of hindsight. Knowledge of an event which happened later should not be applied when judging alleged acts or omissions which took place before that event. In judging the case in relation to the writing of 11 run-off contracts and the 6 RITCs it is vitally important to have regard only to the relevant knowledge at the material times.
4. Further, it is necessary to bear constantly in mind that in those situations which call for the exercise of judgment, the fact that in retrospect the
[1997] 282 L.R.L.R. Henderson v. Merrett Syndicate (Q.B. (Com. Ct.)) Cresswell, J.
choice actually made can be shown to have turned out badly is not in itself proof of negligence. The duty of care is not a warranty of a perfect result. The law does not impose liability for damage resulting from what in the result turn out to have been errors of judgment unless the error was such as no reasonably well-informed and competent member of the relevant profession could have made.
5. Any successful claim against the managing agents/auditors in negligence would have to show a failure to adhere to the standard of skill and care reasonably to be expected of such agents/auditors at the time and with the knowledge that they had or should have had. Their judgment could not be impugned simply because events showed it to be wrong.
6. A professional person should command the corpus of knowledge which forms part of the professional equipment of the ordinary member of his profession. He should keep abreast of other ordinary assiduous and intelligent members of his profession in knowledge of developments in his field. He should have such awareness as an ordinarily competent practitioner would have of the deficiencies in his knowledge and the limitations on his skill. He should be alert to the hazards and risks in any professional task that he undertakes to the extent that other ordinarily competent members of the profession would be alert.
7. The defendants are not to be held to have been negligent if they acted in accordance with a practice accepted as proper by a responsible body of managing agents/auditors skilled in the relevant field. There is seldom any one answer exclusive of all others to problems of professional judgments. A Court may prefer one body of opinion to another; but that is no basis for a finding of negligence.
8. The defendants were required in practice to live up to the standard of the ordinary skilled persons exercising and professing to have the relevant special professional skills. The standard is that of the reasonable average. This does not remove from the Judge the determination of the standard of skill and care that ought properly to be demonstrated.
15. LIMITATION
Names/Agents
Save in all cases for the plea in par. 11(3) of the amended points of claim

(misrepresentation/non-disclosure):


Subject to s. 14A (tort) and s. 32 (contract and tort) of the Limitation Act, 1980 claims by direct Names against combined agents in contract and tort by the pre-1984 joiners in the Hallam-Eames actions are statute-barred.
Subject to s. 14A and s. 32 claims by indirect Names against managing agents in tort by the pre-1984 and the 1984 joiners in the Hallam-Eames actions (but not the 1984 joiners in the Henderson actions) are statute-barred.
Subject to s. 32 claims by indirect Names against members' agents in contract by the pre-1984 and the 1984 joiners in the Hallam-Eames actions (but not the 1984 joiners in the Henderson actions) are statute-barred.
Names/Auditors
The Names assert claims in contract and tort against E&W. E&W assert that the only duty arises in tort. Subject to s. 14A (tort) claims by names against E&W by the pre-1984 and the 1984 joiners in the Hallam-Eames actions (but not the 1984 joiners in the Henderson actions) are statute-barred.
The limitation position and issues are set out in Table 4 below (at p. 418 post). I return to the subject of limitation in section 39 below.
16. THE WITNESSES
I turn to consider the witnesses in the order in which they gave evidence.
Mr. James Ayliffe
Mr. Ayliffe joined MSL as non-marine claims manager in 1977. He was appointed a director of MSL in 1978 and was a director of MUAM from January, 1986. He became a name on Syndicate 418/417 in 1978.
Mr. Ayliffe served on a number of Lloyd's market committees including the management board of LUNCO and the non-marine association claims committee of which he was chairman from 1965 to 1978.
Mr. Ayliffe was a founder member of the asbestos working party ("AWP") (which was set up in 1980). He was one of the two London market representatives instructed to work with the U.S. insurance industry and asbestos producers on the asbestos claims council. In 1985 he was appointed as the London director to the board of the asbestos claims facility ("ACF") which was established that year. He retired from that post in May 1988. Mr. Ayliffe served on the AWP claims committee for the years 1983 to 1988 and the AWP reinsurance claims committee from 1983 to 1988. He was also a member of the special LMX committee dealing with problems associated with delayed response of certain outward reinsurers to asbestos-related claims.
Mr. Ayliffe was also a founder member and the initial chairman of the London market environmental claims group set up in 1984 and served on

[1997]


283

L.R.L.R.



Henderson v. Merrett Syndicate (Q.B. (Com. Ct.)) Cresswell, J.
the environmental claims reinsurance group for the years 1985 to 1988.
Mr. Ayliffe was appointed a director of Toplis & Harding (Asbestos Services) Ltd. in 1984 and continued to serve as a director of its successor company, Toplis & Harding (Market Services) Ltd. until early 1989. He retired from Merretts in 1988. On his retirement he was awarded the Freedom of the City of London for services to the Lloyd's insurance market.
Mr. Ayliffe said that he had no involvement in the assessment of strict IBNR as that was the responsibility of the underwriter Mr. Merrett, though he said that with his fellow directors he approved the relevant accounts.
He said that it never crossed his mind that the nature of the problems of asbestos and pollution were such as to make it impossible for the underwriter to reach a responsible and fair IBNR or to make it unfair to close any of the relevant years of account.
Mr. Ayliffe plainly had very considerable specialist knowledge as to the problems of asbestos and pollution. His witness statement contained a number of passages dealing with the perception of the market as to the problems of asbestos and pollution claims at different periods in time. While in no way doubting Mr. Ayliffe's considerable experience and expertise I consider that it is far safer to base my analysis of the perception of these problems at the material times on the contemporary documents. By way of example what Mr. Ayliffe said in October, 1985 (see section 36 below) should be compared with the relevant passages in his witness statement.
Mr. Ayliffe was not concerned with the claims handling of the run-off contracts and said that he first heard about these in about 1984. A striking feature of Mr. Ayliffe's evidence was that he was very reluctant even to comment on the run-off contracts.
Mr. David Hart
Mr. Hart has been a Fellow of the Institute of Actuaries since 1970 and a member of the Institute's general insurance study group from 1974. He was a founder member of the London market actuaries group in 1982 and was chairman in 1990/91. He was a member of the Institute's general insurance joint committee from 1989 to 1992.
Mr. Hart joined MSL in August, 1982. He was responsible to the underwriter of Syndicate 799, Mr. Jackson. His role at 799 was to assist Mr. Jackson on the RITC and to deal with whatever statistical or actuarial tasks were allocated to him. Mr. Hart regarded himself as working full time for Mr. Jackson and was only seconded to special projects for 418/417.
Mr. Hart was the first actuary to be employed by a Lloyd's underwriting agency.
Mr. Hart edited a monograph entitled "Lloyd's and the London Market" by London market actuaries group (two editions in 1989). Chapter 6 is entitled Claims and Estimating Reserves. Paragraph 6.18 et seq. deals with asbestos and latent disease claims.
In par. 4 to 6 of his witness statement Mr. Hart explains why traditional actuarial or statistical

approaches were not applicable to reserving for asbestos and other latent disease claims. In the result Mr. Hart acknowledged that his actuarial qualification was of marginal relevance to the assessment of an IBNR. It was not Mr. Hart's function to form a view as to the likely future development of asbestos and pollution claims. As he said:


. . .I was not in a position to suggest that asbestos would run-off over another 3, 5 or 7 years. I did not know.
In this connection he was dependent on what he was told by other personnel at Merretts.
Mr. Hart said that the decision whether or not to close a year or to leave it open was not one in which he would be involved, save to the extent that he would provide some figures to the underwriter, whose decision it was.
Mr. Hart did not know that 417/418 had written any of the run-off contracts until about late March, 1985. When shortly thereafter he conducted a review with Mr. Randall, they found it was a struggle to get even the most basic data.
Mr. Stephen Merrett
Mr. Merrett started work in the London insurance market in 1962 as a marine broker. In 1964 he joined the marine box of Merretts as a trainee underwriter, covering all classes of business handled by the marine syndicate at that time. In 1971 he became joint active underwriter of 418/417 with Mr. Richard Outhwaite. He became sole active underwriter in 1974 on Mr. Outhwaite's departure. During the course of more than 20 years underwriting experience Mr. Merrett has been involved in the underwriting and leading of risks across many classes of business. Most of these classes have included both direct insurance and reinsurance or retrocession business. Mr. Merrett has been a Name on 418/417 since 1968.
During the course of his underwriting career Mr. Merrett has been involved with Lloyd's governance and with market issues, technical, regulatory and structural. He was elected to the committee of Lloyd's to serve from 1981 to 1984 inclusive, and
[1997] 284 L.R.L.R. Henderson v. Merrett Syndicate (Q.B. (Com. Ct.)) Cresswell, J.
therefore became a member of the Council of Lloyd's after the passage of the 1982 Lloyd's Act. He was re-elected for a second term on the Council from 1987 to 1991, and a third in 1993. He served as a deputy chairman in 1993. Mr. Merrett has served on many of the committees and subcommittees of the council and committee of Lloyd's, including finance and general purposes, membership, audit (subsequently members solvency), accounting and auditing standards and financial guarantee. Mr. Merrett was a member of the Higgins working party which reviewed the relationship between Names, managing agents and members' agents after the passage of the 1982 Act, and the Rowland task force, whose report encompassed the radical change in the structure of the market since 1990. Mr. Merrett served on the committee of the Lloyd's marine underwriters association from 1974 to 1993 and for two years he was chairman. In 1978 at the request of Lloyd's he undertook the management of the Sasse Agency and Syndicates after the agency had been suspended from trading following substantial losses.
Mr. Merrett has provided expert evidence for Lloyd's in a number of contexts including testimony at the committee stages in both Houses on the Lloyd's Bill in 1981. Mr. Merrett is currently chairman of the Lloyd's "Superfund" working party.
Mr. Merrett had a distinguished father who provided very valuable services to the market.
Mr. Merrett is a highly intelligent man who has extremely wide experience of the market as appears from the above. Mr. Holland of E&W described him as having a forceful personality.
I regret to say that I have serious reservations about many aspects of Mr. Merrett's evidence and serious reservations about his approach as underwriter to 418/417.
Mr. Merrett said that Mr. Emney was at the outset responsible for the management of the run-off contracts including the underwriting, the recording and the handling and management of claims. In 1985 it was the board's view that Mr. Emney had not fulfilled his duties properly and that was why, when he withdrew his resignation, he was dismissed. As to the writing of the run-off contracts the minutes of the meeting of the audit committee held on Mar. 2, 1982 (H1/471A) attended by Mr. Merrett recorded:
Mr. Chester then raised the question of the reinsurance of underwriters' asbestosis liability in

the Lloyd's Market (i.e. effectively amounting to reinsurance of the Asbestosis "tail") and expressed concern that such liabilities could fall on comparatively few syndicates. Mr. Merrett

considered that it would be inappropriate for such reinsurances to go unnoted and unreserved by

Panel Auditors and that it would be improper for a syndicate taking such reinsurances without telling its own Names. . .


I do not accept Mr. Merrett's explanation of this passage in the minutes (Day 15/141-144). It is in my view plain that the reference to "telling its own Names" is in the context of a syndicate which had written run-off contracts. The point of concern was that such liabilities could fall on comparatively few syndicates. In fact Merretts did not tell E&W about the writing of the run-off contracts until year 3 (when reference was made to only six out of 11). I reject Mr. Merrett's evidence that E&W were told about the writing of the run-off contracts prior to year 3. The first the plaintiffs heard about the writing of the run-off contracts was on Apr. 18, 1985.
On May 4, 1982 Mr. Merrett signed a letter in response to E&W's latent disease questionnaire for year 1 (D1/146) which failed to mention the run-off contracts. When asked about this letter Mr. Merrett said that it was wholly consistent with his having informed E&W of the existence of the run-off contracts. The letter of May 4, 1982 was seriously misleading and I reject Mr. Merrett's explanation (Day 15/138-9). Mr. Merrett was in no doubt as to the importance of informing E&W about the run-off contracts (see the meeting on Mar. 2, 1982 above). The latent disease questionnaire in year 2 (D2/174) asked a specific question about:
. . .OTHER EXPOSURE TO LATENT DISEASES. Evidence that syndicates have taken steps to

identify, quantify and record as above any other known or potential liabilities in respect of writing of. . . (c) Run-off Account containing latent disease liability.


Mr. Merrett replied in a letter dated Apr. 28, 1983 (D2/170):
. . .Other exposures to latent Disease. This syndicate (417) does not as a matter of policy write these classes of business, other than on a very incidental basis, very seldom.
On the same date Mr. Merrett wrote in respect of 418:
Latent Diseases. The reports have been obtained, and records retained in accordance with the

reinsurance to close claims analysis exercise: we have no knowledge of any other reinsurance contract which might become involved. We have no other known or known potential liabilities and no material recoveries.


Neither of these letters referred to the fact that by Apr. 28, 1983 all 11 run-off contracts had been written. When asked about the letters dated Apr. 28, 1983 Mr. Merrett said:
[1997] 285 L.R.L.R. Henderson v. Merrett Syndicate (Q.B. (Com. Ct.)) Cresswell, J.
. . .Had I been in any doubt as to (E&W's) knowledge of those contracts and had I wished to make certain that they had a record in writing of our having written them then I suppose I would have written in those terms; but given that, to my belief, they were already aware of the contracts then the necessity to make specific reference fell away. (Day 17/12-13.)
Again I reject Mr. Merrett's attempted explanation of these very serious failures.
In his witness statement Mr. Merrett said:
(paragraph 59). . .With one exception, none of the contracts written was perceived as having a substantial exposure to asbestos claims at the date that they were written. The exception was the

Fireman's Fund contract. . .


(paragraph 60)In November 1981 it was already more than 10 years since any of the original business had been written. Furthermore, Fireman's Fund was an insurer of greater sophistication than other cedants, and from their own direct exposures well able to evaluate the Sturge reserving levels. I believed that the retrocession could be safely written with a very substantial probability of profit.
Mr. Merrett's oral evidence was to very different effect (Day 16/9/9-/14/11) and his explanation for the inconsistency unconvincing (Day 15/118/9-122/17).
Merretts did not call Mr. Emney to give evidence. As a result I consider that I have been inhibited in getting to the truth about the writing of the run-off contracts. The probability is that Mr. Merrett knew more about the writing of the run-off contracts than he accepted in his statement or in his evidence.
As to the six RITCs Mr. Merrett correctly accepted that his duties in this connection were the most important function that he fulfilled each year as underwriter of 418/417. The amount charged by way of premium in respect of reinsurance to close had to be equitable as between the reinsuring members and the reinsured members, having regard to the nature and amount of the liabilities reinsured. Compliance with "equity between Names" had to be demonstrated by the underwriter and the managing agent in determining the RITC. I find that Mr. Merrett gave inadequate time and attention to the RITCs particularly in years 4, 5 and 6, and this must have been apparent to E&W. It was not enough to rely on Mr. Ayliffe, Mr. Hart and Mr. Randall. Mr. Ayliffe had no involvement in the assessment of strict IBNR as that was the responsibility of Mr. Merrett. It was not Mr. Hart's function to form a view as to the likely future development of asbestos and pollution claims. Further the decision whether or not to close a year was not one in which Mr. Hart would be involved, save to the extent that he would provide figures to Mr. Merrett, whose decision it was. Mr. Randall said that in 1985 and subsequent years he was in no position to form an opinion as to the likely development of asbestos-related claims or pollution claims and was totally dependent on the advice received from others.
Mr. Merrett's evidence in relation to Mr. Rokeby-Johnson's letter of July 16, 1982 (D6/444, quoted below) was unconvincing (see Day 16/63/23-67/5).
In relation to the RITCs particularly in years 4, 5 and 6 Mr. Merrett was subject to conflicts of interest inherent in the system. Significant commercial disadvantages would flow from leaving the year open. The letter dated Apr. 14, 1985 and the reports in the year 4 accounts contain a mixture of truth, half-truth and falsehood. But the letter dated Apr. 18, 1985 stated:
. . .in the current underwriting climate, it is our intention significantly to expand. . .418. . .

Mr. Merrett knew from his very considerable experience that 418/417 in year 4 was subject to deep-rooted problems and uncertainties as to the future development of (i) asbestos bodily injury claims (ii) asbestos property damage claims and (iii) pollution claims not only in respect of 418/417's own book going back to 1953, but also in respect of the books of the 10 cedants. Further the information as to the run-off contracts was wholly inadequate. I find that Mr. Merrett knew that a reinsurance to close figure could not be arrived at in year 4 with a reasonable degree of accuracy and yet he was determined to close the account. Similar considerations applied in years 5 and 6.


Mr. Kenneth Randall
Mr. Randall first became involved in the insurance industry in 1974 when he joined the Corporation of Lloyd's as deputy corporation accountant. He had previously qualified as a certified accountant. In 1979 he became responsible for the Lloyd's audit department which dealt, inter alia, with the review of the solvency of Lloyd's members and security behind the Lloyd's policy of insurance. In 1982 he additionally became head of the special investigation department at Lloyd's looking into various market problems such as Alexander Howden, PCW and Brooks & Dooley among others. In 1983 he became the head of regulatory services and as such was the principal point of contact between the Lloyd's market and the Corporation of Lloyd's and between the Corporation of Lloyd's and the Department of Trade and Industry in respect of, inter alia, solvency. He was also the principal point of contact between the Corporation of Lloyd's and the panel auditors. He was a
[1997] 286 L.R.L.R. Henderson v. Merrett Syndicate (Q.B. (Com. Ct.)) Cresswell, J.
member of the Lloyd's audit committee and chairman and/or a member of several of the Fisher task groups set up in 1980 to follow up the various suggestions made in the Fisher report.
Mr. Randall joined Merretts at the beginning of 1985. His initial appointment was as managing director of MSL. He was also appointed a director of Merrett Holdings Plc. He was subsequently appointed managing director of MUAM when that company assumed the managing agency function from MSL as at Jan. 1, 1986. In 1987 Mr. Randall was appointed group chief executive and managing director of the Merrett Group. He left the Merrett Group in August, 1991 and set up an independent insurance consultancy, Randall Insurance Services Ltd., of which he is chief executive.
Mr. Randall said that after he left Merretts his office was cleared:
. . .and no-one seems to be sure what happened to all the papers in it - there was an entire series of cupboards and filing cabinets stacked full of files and reports of various sorts and they have all disappeared.
In fairness to Mr. Randall he had only been with Merretts a very short time when the problems in relation to the run-off contracts came to light. Mr. Randall said that in 1985 and subsequent years he was in no position to form an opinion as to the likely development of asbestos-related claims or pollution claims and was in this connection totally dependent on the advice received from others.
After making full allowance for the difficulties that Mr. Randall faced including those referred to above, I have a number of reservations about his evidence. In particular I consider that Mr. Randall was at times included to go further than was justified in seeking to defend the approach of the Merrett defendants.
Mr. Newman and Mr. Ringer
Two United States attorneys were called to give evidence. Mr. Newman gave evidence on behalf of the plaintiffs and Mr. Ringer gave evidence on behalf of the Merrett defendants. Mr. Ringer's evidence was also relied upon by E&W. Mr. Newman and Mr. Ringer prepared and agreed Appendix 2 to this judgment and I am grateful to them for this assistance.
Mr. Newman's and Mr. Ringer's experience and qualifications are set out in their statements.
Mr. Ringer's witness statement extended to 134 pages (his statement in reply to 29 pages). Mr. Ringer frankly accepted that the opinions set out in his statements were largely based upon the research he had conducted. He said he did have some anecdotal evidence learnt contemporaneously but would not consider that to have been sufficient to base an opinion on. He relied upon the documents and various other materials that his research had located. I have marked reservations about Mr. Ringer's witness statement, save where the statement contains matters that are agreed between the parties. The statement contains numerous assertions which should have been qualified so as to make it clear that the opinions expressed were based upon research and not on any contemporary experience. Mr. Ringer confirmed that the two attorneys between them had collected a good representative sample of the material available in the United States at the material times. In my view the most accurate reflection of perception in the United States in the 1980s is found in the contemporary materials and particularly the attorneys' reports.
In par. 53 of his statement Mr. Ringer said that based on the 10-k and annual reports of the nine

U.S. insurers he had reviewed all nine believed that their reserves were adequate to cover current and future asbestos bodily injury (and environmental liability) claims up to and including 1988 and that only at the 1989 year end did the first qualifications appear. I refer below in connection with Mr. Knowlton's evidence to the fundamental distinctions between the considerations applicable to and circumstances of a U.S. insurance company and a Lloyd's syndicate such as 418/417. For the purposes of any comparison between a U.S. insurance company and 418/417 it is necessary to compare net assets, exposure to asbestos-related claims (direct, reinsurance and retrocession), the extent of any reinsurance protections, the proportion of the reserves for asbestos-related claims to the total reserves and the fact that a U.S. insurance company is not concerned with equity between Names. Further 418/417 wrote 11 run-off contracts with a resultant funnelling of asbestos and pollution risks into the syndicate.


In par. 105 of his statement Mr. Ringer said:
. . .the unanticipated surge of claims by workers in trades other than shipbuilding and insulation goes a long way to explain why the Conning & Co. 1982 predictions became obsolete by the late 1980s.
The extent to which at any moment in time there were claims by workers in trades other than shipbuilding and insulation is shown by the contemporary documents and particularly the attorneys' reports. I have to consider the perception of asbestos-related claims (and pollution claims) at 17 different points in time (11 run-off contracts and six RITCs). The best guide is found in the contemporary documents and particularly the attorneys' reports. It is possible to point to "surges" but what
[1997] 287 L.R.L.R. Henderson v. Merrett Syndicate (Q.B. (Com. Ct.)) Cresswell, J.
matters for present purposes is the state of perception at the 17 different points in time.
Mr. Floyd Knowlton
Mr. Knowlton was called to give evidence on behalf of Merretts. He commenced employment with Travelers Insurance Co. Inc. in 1960. He remained with Travelers until 1989 when he moved to ITT Hartford Insurance Group. In 1979 Mr. Knowlton transferred to the strategic claims operations of Travelers. In April, 1979 he was asked to oversee Travelers' recently established department set up to deal exclusively with asbestos claims. In 1981 he was appointed vice-president. In late 1984 he was placed in charge of the strategic claim division which included large liability claims as well as the environmental unit. He remained in that position with Travelers until 1989 when he transferred to ITT Hartford to take up the position of director of environmental claims and litigation. He is presently a vice-president with ITT Hartford. Mr. Knowlton, in preparing his statement, did not have access to contemporary materials at Travelers.
In my view the most reliable indications of Mr. Knowlton's perception in the 1980's are to be found in the contemporary documents. As at April, 1983 (H4/294C) Mr. Knowlton is reported as saying:
. . .Asbestos is the single biggest problem we find in the industry. But the numbers aren't anywhere near the numbers that the Chicken Littles are saying.
In an article in "The Brief" in August, 1983 (H4/296C) Mr. Knowlton wrote:
The growth in asbestos claims that began in the late 1970s has become an explosion. The 1,100 claims that the Travelers Companies had in 1977 has grown to more than 60,000, which represent some 20,000 persons claiming some kind of injury due to exposure to asbestos fiber or an asbestos product. And 500 new claimants are being added monthly, a rate that is expected to continue through the end of the twentieth century, and perhaps longer. . .What makes asbestos different? There are several reasons: First, there is generally a long latent period between exposure to asbestos and any discernible injury; with related substances such as Agent Orange and DES, second generation claimants are even involved. It isn't like an automobile accident involving an instant, identifiable injury clearly involving individuals. . .Second, there is no experience pattern with asbestos claims. We know only that hundreds of thousands of people have been exposed to asbestos and some will manifest a disease. Third, many of these claims arise out of an occupational exposure. Thus, both the tort system and the workers' compensation system are involved. Neither wants to shoulder the burden of the other. Fourth, if insurance policies are involved, it isn't clear which apply or what role the policy holder plays if he was uninsured or his coverage exhausted. . .There is one common denominator in these decisions: coverage has been applied liberally and broadly and in favor of policy holders. This is not unusual in this type of case, but it can hardly be viewed as the guiding principle of law in these cases. . .Various reports have sought to quantify future claims. Among the diverse ones are a report done by Epidemiology Resources, Inc., . . .August 1982. . .; "Disability Compensation for Asbestos-Associated Diseases in the U.S.,". . .by Dr. . . Selikoff. . .under a contract with the Department of Labor and released on June 18, 1982; and "The Potential Impact of Asbestos on the Insurance Industry," published by Conning & Co., a Hartford brokerage firm, in September 1982.
Mr. Knowlton's perception as at January, 1985 is referred to below.
As at May, 1987 (Mr. Ringer's file 4/27) Mr. Knowlton is recorded as saying:
It causes me to think that this is going to go on forever. . .because the workers now suing have been in industries where they have been exposed to many products in addition to asbestos, insurers will have to conduct more investigations to determine whether there is an asbestos-related injury and whether it was caused by a policy-holder's product, notes Mr. Knowlton. . .As a result, legal and administrative costs could be very significant, he says. However, the indemnity payments in these cases may not be as large as for shipyard workers, Mr. Knowlton added.
The fact that it is far safer to rely on Mr. Knowlton's perception as reflected in contemporary documents as opposed to some passages in his witness statement is illustrated by the following example.
Paragraph 32 of Mr. Knowlton's witness statement:
I recollect that in the early 1980's there were some pessimists who predicted that property damage claims would present a bigger problem for insurers than bodily injury claims. However, neither I nor others at Travelers nor, to my knowledge, my associates at other insurance companies. shared that view at the time.
should be contrasted with Mrs. Rowe's contemporary record of a conversation with Mr. Knowlton on Jan. 31, 1985:
. . .Knowlton said the asbestos BI problem may be more or less under control, but he feels the P.D. will be at least as large - and may in turn spark more B.I. claims. . .(12/478).
[1997] 288 L.R.L.R. Henderson v. Merrett Syndicate (Q.B. (Com. Ct.)) Cresswell, J.
Mr. Knowlton refers in his witness statement to changes in the type of claimant (par. 23(2)), changes in the number of defendants (par. 27) and the development of class actions (par. 26).
The nature and extent of these changes and developments are most accurately reflected in the attorneys' reports from time to time. Mr. Knowlton says in par. 30 of his statement:
. . .In my own case, and I believe that to be reasonable and typical in the industry, the perception that reserving "to ultimate" was no longer possible developed during 1989 and 1990. By that time I had taken the view that reserving for these types of claims would have to be done on a simple projection of future payment streams covering a limited period of time.
There are fundamental distinctions between the considerations applicable to and the circumstances of a U.S. insurance company such as Travelers (not concerned with equity between two sets of Names, able to adjust reserves from year to year, net assets amounting to billions of dollars, primary layers/excess layers with extensive reinsurance protections, very little reinsurance exposure) and a Lloyd's syndicate such as 418/417. When asked whether he was able to provide any indication as to the proportion that asbestos reserves bore to total reserves at Travelers, Mr. Knowlton said that at the Hartford asbestos is probably 1 per cent. or 2 per cent. of the total reserves of some U.S. $9 billion and that Travelers and Hartford are about the same size.
Mr. Knowlton provided a valuable description of the extremely detailed approach adopted by Travelers in relation to reserving asbestos-related

claims.


Mrs. Phillippa Rowe
Mrs. Rowe was called, as an expert witness on claims handling and managing, by the plaintiffs. After graduating in 1974 in Economics from Cambridge she spent 15 years in Lloyd's employed by R.J. Kiln. In 1981 she qualified as a Fellow of the Chartered Insurance Institute by examination. She is a Chartered Insurance practitioner. Her time at R.J. Kiln was spent almost entirely in the claims department where for most of her career she was claims manager. She was responsible to the extent shown by the contemporary documents for the calculation of the RITC figures, including estimates for IBNR. Since 1989 she has been practising independently as senior partner in her own firm. Mrs. Rowe was expert in claims handling and managing but made no claim to have any expertise in underwriting decisions.
Mrs. Rowe based her report on a reading of limited materials. In par. 4 of her report she said she had studied the various copy RITC files, in particular the "pruned" RITC files. Thus by way of example Mrs. Rowe did not read the E&W audit files (D1-13).
Mrs. Rowe was cross-examined at length as to the approach adopted by the Kiln Syndicate 510/511. The defendants rely on a number of points derived from this cross-examination. I will consider the position of the Kiln Syndicate below.
Mrs. Rowe said she became aware that 418/417 had written some of the same run-off contracts as the Outhwaite syndicate, once the Outhwaite run-off contracts became a subject of general discussion. She was asked whether it occurred to her at that stage that 418/417 would have an insoluble reserving and closing problem. She said that she believed it did and that at some of the reserving discussion meetings between the underwriter of Kiln 510/511 the conversation went along the following lines:
. . .If our figures are this big, and still developing, how on earth do people with bigger portfolios, let alone run-off contracts, manage?
The essence of Mrs. Rowe's criticism of Merretts was as follows. She said that in her opinion they did not do as much analysis of their account as was possible. She said that the principal heads of analysis that she conducted, but Merretts did not conduct, comprised statistical triangulations of all sections of the account (including eventually separate triangulations for asbestos-related claims), graphical projections of those triangulations and close analysis of the direct casualty account from virtually complete records. Mrs. Rowe said that Merretts did not do as much analysis of their accounts as possible; had they done that analysis, coupled with the much greater knowledge that people like Mr. Ayliffe had of the underlying nature of the asbestos problems in the market, they would have come to the conclusion earlier that they should not close. Mrs. Rowe added that the larger the impact of asbestos-related claims (including in particular asbestos-related claims deriving from the run-off contracts which were even harder to estimate) the more any uncertainty was likely to damage the syndicate. Kiln was in the fortunate position that it could close in the years in question. She did not believe that 418/417 was in the same position. She was asked what approach she would have adopted if Kiln had written run-off contracts. She said that for each run-off contract she would want to be able to do the same exercise as she did for Kiln's own book of business, if she were to have any comfort at all in closing a syndicate with a run-off contract in it.
Although Mrs. Rowe's evidence must be approached with care having regard in particular to
[1997] 289 L.R.L.R. Henderson v. Merrett Syndicate (Q.B. (Com. Ct.)) Cresswell, J.
the extent of her expertise and her limited consideration of the materials in the case, I formed the impression that she was a sincere and generally a reliable witness. For the reasons set out below I consider that there are marked distinctions between the position of the Kiln syndicate and 418/417.
I should record that the materials before the Court in relation to the Kiln syndicate were not complete. I accept Mrs. Rowe's evidence that there are a number of relevant materials missing from the files relating to the Kiln Syndicate. I was left with the impression that Mrs. Rowe was thorough in her statistical analysis of Kiln's own book of business. It should not be assumed that she would have reached the same conclusions as those arrived at in relation to Kiln if she had been concerned with 418/417's own book of business plus the 11 run-off contracts.
Kiln 510/511
There were marked differences between 418/417's own book of business and the book of business written by Kiln 510/511. Further Kiln did not write any run-off contracts.
From 1963 to approximately 1968 the Kiln Syndicate wrote a small book of direct U.S. casualty insurance. Nearly all of this was written under market line slips and in particular the Price Forbes line slip. Nearly all of it was high level excess umbrella business and none of it was primary business. That book ceased in 1968 or 1969. The Kiln Syndicate was mostly a reinsurance syndicate, and had always written some reinsurance of U.S. casualty business. In the 1970's that was predominantly either the casualty element of global or package reinsurances or the reinsurance of claims made and medical malpractice business. From the 1980's onwards, the element of global business disappeared, and from then on virtually all of the syndicate's U.S. casualty business was on a claims made or a high level clash basis. There was a specific programme of outward insurance to protect the direct book, which consisted of an excess cession treaty protecting each year of account, covering each line written. It varied from between 75 and 80 per cent. of the syndicate's line, in excess of 25 or 20 per cent. of the line, with unlimited reinstatements as to the original business and that in turn enured to the benefit of an excess of loss protection, with a very low deductible, about U.S.$10,000 each and every loss, also with unlimited reinstatements. Thus the per loss retention of the syndicate was approximately U.S.$5000 or U.S.$10,000 any one casualty loss. The syndicate's total casualty book was never more than about 10 per cent. of the book at its maximum.
Mrs. Rowe said:
. . .we did not have the sort of book that would inevitably respond to every casualty problem that

surfaced [(Day 26/123) and] we were known in the market as almost entirely a short tail syndicate (Day 27/93).


For other points of distinction between 418/417 and 510/511 see the plaintiffs' closing submissions 21/15.
A chart prepared on behalf of the plaintiffs contrasted the stamp capacity and RITC gross of credit for T&D in the case of 418/417 and Kiln 510/511.
In the chairman's report dated May 3, 1995 Mr. C. K. Murrey, Chairman of R. J. Kiln & Co. Ltd. wrote:
Syndicate 510 is certainly one of the few if not the only syndicate that wrote a general Non-Marine account in the 1960's and that does not owe its survival to a reinsurance policy purchased from the Outhwaite Syndicate or from one of the very few markets that offered this cover. Our survival is due to the fact that we have always attempted to keep our acceptance of liability business in the United States to a low percentage of our overall account and because our total group capacity has grown from approximately £1 m in 1963 to approximately £500 m today.
Mrs. Rowe described 510/511's general approach to reserves as follows:
We started with noted outstandings received from professionals, lawyers, adjusters, and the like. . .We made no attempt. . .to interfere with those figures. . .Before applying any projections to our total figures, we then put in our own specific IBNR, or supplementary reserves, which was the syndicate's own judgment of where those specific claims should be reserved. . .We then did a statistical projection on the total figures. . .(Day 26/22).
The defendants rely on a number of contemporary documents from Kiln's files including inter alia the following which relate to the years ended Dec. 31, 1984-1986:
(i) The 510/511 RITC as at Dec. 31, 1984 Supplementary Reserves
(a) Asbestos - bodily injury claims
N1/358
Last year we loaded our noted asbestos figures by 100%. . .This year. . .I. . .suggest a 50% IBNR. In addition I am not removing our old "expense" reserves. . .
(b) Asbestos - property damage
N1/359:
To date, one reinsured. . .and one insured. . .have advised potential P.D. claims. We have no
[1997] 290 L.R.L.R. Henderson v. Merrett Syndicate (Q.B. (Com. Ct.)) Cresswell, J.
reserves. . .We know that several other reinsurers. . .anticipate P.D. claims. . .At the moment we have no way of predicting what our involvement will be and I therefore am making no suggestions for supplementary reserves. . .
(c) Pollution/Toxic Waste/Clean-up Costs
N1/361:
American insurers forecast that this class of claims will be the "next asbestosis" - and possibly bigger . . . Some claims have already been made on the Lloyd's market . . . Shell . . . reserving this in (our attorneys) most pessimistic assumptions . . . produces NIL to . . . 510/511 . . . For neither of these claims do I think we need any extra reserves added to our noted outstandings . . . Nor, at this stage, am I suggesting any other supplementary reserves - we have far too little information to make a sensible suggestion.
A chart prepared on behalf of the Merrett defendants compares the position as at Dec. 31, 1984 and Dec. 31, 1989 in relation to asbestos, pollution and property damage.
(ii) The 510/511 RITC as at Dec. 31, 1985 Supplementary/Specific IBNRs
(a) Asbestos - bodily injury claims
N2/41:
Claims are also being made against insurers from some new sources. . .Claims from various American railroad companies. . .last year's 50% load on noted outstandings as an asbestosis IBNR is still reasonable and should be continued but now applied to all years. . .
but see N2/100:
Moreover our history of asbestos "specific IBNRs" has been a load of 100% for 1983 when reserve information was rudimentary and a load of 50% for (1984) when we thought nearly all exposures were reserved. A load of 50% again when reserves have increased again and the "Facility" has taken effect is not therefore justifiable;
(b) Asbestos - property damage
N2/44
We have received new advices this year on account of US Gypsum. . .These reserves are precautionary only. . .We know that several other reinsureds. . .anticipate P.D. claims . . . though few have formally been made. . .We should begin establishing IBNRs for expenses, but we are still not in a position to forecast our loss IBNR which is still "unknowable".
(c) Pollution/Toxic Waste/Clean-up Costs
N2/45:
We have several more advices since last year end, both directly and by way of reinsurance. . .I therefore think it appropriate . . .to begin setting up "expense" IBNRs although it is still impossible to predict the outcome of the claims themselves.
See further the document at p. 102 of bundle N3 which summarizes the syndicate's RITC as at Dec. 31, 1985.
(iii) The 510/511 RITC as at Dec. 31, 1986
(a) Asbestos - bodily injury claims
N2/147:
. . .plaintiffs' attorneys are actively seeking both new claimants and new target defendants . . . The IBNR for claims is now included in our graphs and estimated ultimate losses for all long tail business. . .It would. . . be illogical to include a further specific amount. . .
(b) Asbestos - property damage
N2/149:
We continue to receive new advices. . .I think we should begin establishing IBNRs for expenses, but we are still not in a position to forecast our loss IBNR which is still "unknowable". . .
(c) Pollution/Toxic Waste/Clean-up Costs
N2/149:
We continue to receive new advices, but largely without reserves - at least for our years of

involvement . . . I think it is appropriate to continue setting up "expense" IBNRs.


According to the figures at N2 pp. 282 to 284 as at Dec. 31, 1987 the cumulative total of asbestos bodily injury claims amounted to 471 (a claim being defined as the total claim for one insured for one policy year or for one reinsured in respect of one insured for one policy year). As to asbestos property damage the total number was 41 and as to pollution - EPA the total number was 182.
I have carefully considered the contemporary documents relating to 510/511 and with these in mind I have given appropriate weight to Mrs. Rowe's evidence in relation to each of the six 418/417 RITCs. As Mr. Ayliffe said attempts to compare one syndicate with another in terms of the impact of asbestos etc. are liable to be a trap for the unwary because no syndicate is the same as another. Every syndicate has a different historical background.
There are numerous points of distinction between 418/417 and 510/511 including the fact that 418/417's own book of U.S. casualty business was far greater than 510/511's own book and the fact that 510/511 did not write any run-off contracts. I should not be taken to accept that the approach adopted by 510/511 in respect of its own particular
[1997] 291 L.R.L.R. Henderson v. Merrett Syndicate (Q.B. (Com. Ct.)) Cresswell, J.
book of business was necessarily appropriate in every respect. Nor do I accept without reservation the totality of Mrs. Rowe's evidence. However it should not be assumed that Mrs. Rowe would have reached the same conclusions as those arrived at in relation to Kiln if she had been concerned with 418/417's own book plus the 11 run-off contracts.
Mr. David Neil
Mr. Neil was called, as an expert witness on underwriting practice, by the plaintiffs.
In 1980 Mr. Neil was employed as active underwriter of non-marine Syndicate 939 (Octavian). The business underwritten by Mr. Neil at Syndicate 939 included North American casualty which was all written on a treaty excess of loss basis and included general liability among other categories of business. He was also a director of Octavian Underwriting Ltd., a joint members' and managing agency and Octavian Syndicate Management Ltd., an underwriting managing agency. Syndicate 939 in 1981 was relatively small, under £2 m. stamp capacity. In 1986 the capacity was approximately £13 m. and grew to £35 m. by 1991. A number of paragraphs in Mr. Neil's witness statement are open to criticism. I give some examples as follows. Paragraph 83 did not make express reference to Mr. McNamara's schedules. Mr. Neil's research as to par. 114 (comparison with Outhwaite) was inadequate. Mr. Neil withdrew the criticism in the first sentence of par. 122 in the light of the McNamara schedule for year 4. Despite the terms of par. 130 et seq., Mr. Neil stated in evidence that he had no criticism to make of Merretts' use of time and distance policies. Paragraph 138 should be read in the light of his supplementary statement. Mr. Neil accepted that the second sentence of par. 143 was not justified. Paragraphs 189 and 190 did not refer to Mr. Merrett's witness statement in these proceedings. To his credit Mr. Neil was ready to withdraw criticisms if they could not be justified and to acknowledge errors.
As to the six RITCs Mr. Neil advanced a fundamental criticism of Merretts as follows. It was, he maintained, impossible to establish an IBNR within a reasonable degree of accuracy for those syndicates with substantial exposure to asbestos-related claims over a large number of years. This fundamental criticism applied particularly to 418/417 because it was one of the heaviest U.S. casualty syndicates in Lloyd's. In making this criticism Mr. Neil drew attention to the size and scale of 418/417's account, the number of years over which the business was written (1953 onwards), the type of business written, the number of claims, the source of those claims and the difficulty of identifying how many claimants there would be in the future, the number of years which would see claims in the future, and the amount that each claimant might recover.
Mr. Neil advanced a number of general and detailed criticisms in relation to the writing of the 11 run-off contracts.
The defendants rely on certain passages in Mr. Neil's cross-examination e.g. Day 29/137-138 as to whether or not objective justifiability is needed in setting an IBNR. In my view Mr. Neil was at times confused by terminology in some of the answers he gave in particular in the passage referred to above. I consider this subject further under the heading "RITC - Some General Principles" section 19 below.
I found Mr. Neil's evidence in relation to the run-off contracts far more compelling than Mr. Rome's evidence on that subject for the reasons set out below. Although I have a number of reservations about Mr. Neil's evidence in relation to the six 418/417 RITCs, in my view his fundamental criticism in respect of years 4, 5 and 6 was sound.
Octavian 939
The defendants relied on a number of matters drawn from an analysis of the approach adopted by Mr. Neil as underwriter of Syndicate 939. In my view there are very marked differences between 418/417 and Syndicate 939 and because of these differences any comparison of the approach adopted in respect of 418/417 on the one hand and 939 on the other is of limited value. Some of 939's business was workmens' compensation business, subject to restrictive clauses. The majority of the rest of the business was clash cover business (for a description see Day 33/118/25 et seq.). Syndicate 417 was an underwriter of direct insurance business. Syndicate 939 did not write any direct insurance business. 417 started writing business in 1953, 939 in 1981. Syndicate 939 had extensive reinsurance protections (a low level reinsurance programme - within the first $20,000 there were limited reinstatements, after that 939 had unlimited reinstatements). The principal source of asbestos losses so far as 939 was concerned was LMX business. Syndicate 939's 1990 year of account was left open at Dec. 31, 1993 due to:
. . .the material uncertainty surrounding the syndicate's exposure to a large North American reinsurance company's Non-proportional Marine Treaty and Personal Stop Loss Business. . . .Whilst Syndicate 939 did not commence underwriting until 1981 significant amounts of asbestosis and environmental pollution claims are being received through casualty business written in the early 1980's. This area was previously reserved as part of the core account, however due to the size and frequency of new claims advice(s) a separate IBNR reserve was set up at the end of
[1997] 292 L.R.L.R. Henderson v. Merrett Syndicate (Q.B. (Com. Ct.)) Cresswell, J.
1992. An amount of £1,383K has been reserved with respect to 1990 and prior as at 31 December 1993. The IBNR reserve is set at 200% of outstanding claims. (see N3/392, 398).
Mr. Neil said that the figures relating to asbestos and pollution "would have been no reason to keep the 1990 year of account open". Mr. Neil thought that paids as at Dec. 31, 1993 amounted to U.S.$300,000. As at Dec. 31, 1993 the total reserve for estimated future liabilities in respect of the 1990 year amounted to £39,468,055 of which the net outstanding claims in respect of asbestosis and pollution amounted to £691,746 and the IBNR amounted to £1,383,492.
For other points of distinction between 418/417 and 939 see the plaintiffs' closing submissions 21/22.
Mr. Christopher Rome
Mr. Rome was called as an expert witness on underwriting practice by Merretts.
Mr. Rome was the underwriter of Syndicate 662 and a director of C. W. Rome (Underwriting Agency) Ltd., L. G. Cox & Co. Ltd. and Gammell Kershaw & Co. Ltd. These companies are all managing agents of marine syndicates at Lloyd's. Mr. Rome joined Lloyd's on leaving school in 1955. He was appointed the active underwriter of Syndicate 926 in 1972. In 1979 he founded C. W. Rome (Underwriting Agency) Ltd. and Syndicate 662 was formed. He continued as underwriter of both syndicates and they were merged in 1989 as 662. The syndicate ceased trading at the end of 1993. Mr. Rome was a director until 1988 of Bolton Ingham (Agency) Ltd. which was a managing and members' agency acting for two marine and one non-marine syndicates. The non-marine Syndicate 231 had written a long tail book of business and remained open for two or three years as a result of uncertainty on computer leasing. This syndicate had a significant number of asbestos claims. Mr. Rome has been actively involved in writing a wide range of business for over 30 years. He has been a leader, inter alia, of energy, hull, cargo, war and contingency business.
Mr. Rome has served on a number of Lloyd's and industry committees. In 1988 Mr. Rome was asked by the then chairman of the Lloyd's underwriting agents' association to join a working party under the leadership of Mr. Martin Hunter of Freshfields, who had been appointed to consider the underwriting by Mr. Outhwaite of a number of reinsurance contracts. Mr. Rome provided an expert report in the case of Stockwell v. Outhwaite although he was not in the event called to give evidence as the case was settled out of Court (see B. F. Caudle v. Sharp, [1995] L.R.L.R. 80 at p. 86 - the report records that a sum of £116 m. was accepted by the names in full and final settlement of their claims against the agents).
Mr. Rome as underwriter of Syndicate 662 was one of the underwriters on the errors and omissions line slips. A line on some of the layers of the lines slip would inevitably be exposed to successful claims in the Lloyd's litigation. As a Name on Syndicate 662 Mr. Rome is potentially at risk personally in relation to the result of this case. In subsequent years he wrote a substantial line on a stop loss contract which would be a substantial beneficiary if the plaintiffs in this action succeed. Further in the event of the litigation succeeding he would be able to make

recoveries against the excess of loss programme. Thus he said he had a financial interest in the matter which he could not assess. In fairness to Mr. Rome he disclosed in par. 13 of his witness statement that he was one of the underwriters on the errors and omissions line slips. It is of course most unusual for an expert witness to have a financial interest in the result of the case. I do not suggest that this consciously affected Mr. Rome's evidence.


I have, however, a number of reservations about his evidence for other reasons. In my view Mr. Rome's evidence about the writing of the run-off contracts was unrealistic and unreasonably defensive. He said that if there were criticisms to be made of the writing of the run-off contracts they were not such as to lead him to believe that the writing of any of the run-off contracts was professionally incompetent. On the basis of such evidence as has survived he concluded that he could properly have written those contracts individually and in the aggregate. Paragraph 153 of his statement in relation to Sturge was materially inaccurate (see Day 34/91 et seq.). The sentence in par. 138 of his statement:
. . .it is hard to see what other enquiries Mr. Merrett or Mr. Emney could have made to improve their knowledge of the risks under consideration. . .
is not supportable.
Mr. Rome's statement did not contain any detailed critical analysis of the RITCs in years 1 to 6. Again I found his evidence at times in this connection unreasonably defensive. By way of example he said that if the underwriter and the auditors had known that the Ballantyne contract had deteriorated within three years of writing, to the extent that the incurred position had reached a deficit of U.S.$2.5 m., he would not have expected them to be unduly concerned. I do not consider it was realistic to describe this contract as "one contract of many thousands of contracts, which form part of the accounts of that syndicate".
[1997] 293 L.R.L.R. Henderson v. Merrett Syndicate (Q.B. (Com. Ct.)) Cresswell, J.
As to a comparison between the business of 418/417 and Syndicate 662, Mr. Rome said that 418/417 was substantially larger than 662. Syndicates 418/417 had written more business and had probably written larger lines. He added that it was impossible for the Court to form more than a general impression of the relative sizes and exposures of these syndicates to each other.
Mr. B. Thomas Florence and Mr. John Ryan
Reports from Mr. B. Thomas Florence (on behalf of Merretts but also relied on by E&W) and Mr. John Ryan (on behalf of Merretts) were subject to Civil Evidence Act notices.
Mr. Paul McNamara
Mr. McNamara is a partner with the firm of Ernst & Young. In the period from 1980 to 1987 he was the audit partner responsible for the audit of Merretts' accounts and solvency reports, together with Mr. Nigel Holland.
Mr. McNamara qualified as a chartered accountant in 1973. In 1979 he was admitted as a partner in E&W. In September, 1979 E&W merged with Baker Sutton & Co. and Mr. McNamara became involved with some of the insurance clients of the former Baker Sutton firm, and in particular the audit of the syndicates managed by Merretts. In addition he became involved with the audit of Syndicates 401 (Cuthbert Heath), 317/661 (R. H. M. Outhwaite), 518 (Salter and Outhwaite) and 552 (Mander Thomas and Cooper). In 1983 Mr. McNamara led a team which made a successful proposal in a competitive tender for the audits of syndicates managed by Norman Frizzell Underwriting Ltd (Syndicates 979, 975 and 850). In 1983 Mr. McNamara became responsible for the audits of two further syndicates which had commenced underwriting in 1983: 672 (I. C. A. Agnew Underwriting) and 321 (Outhwaite and Green). Mr. McNamara also became the audit partner for a syndicate formed by Mr. David Mann, formerly of Merretts, for the 1984 year of account.
In 1982 Mr. McNamara assisted with the Lloyd's enquiry into PCW and WMD Underwriting

Agencies.


From 1987 until 1992 Mr. McNamara was the partner in charge of the U.K. insurance industry group of E&W and subsequently Ernst & Young. Mr. McNamara has served on the Lloyd's accounting and auditing standards committee.
I was very impressed with the candid manner in which Mr. McNamara gave his evidence. He responded frankly to detailed questioning. E&W were placed in a difficult position by the "shattering news" of early April, 1985. They did however become aware that 417 was party to a portfolio of six run-off contracts in the course of the year 3 audit. The six run-off contracts were not given adequate attention by E&W in year 3. The breakdown in communication and organization in the course of the year 3 audit was exacerbated by Merretts' failure to disclose the run-off contracts written by 418 and the Judd run-off contract. It is never pleasant to have to make a finding of negligence against a professional man and it is with particular regret that I feel compelled to make a finding of negligence against E&W in years 4, 5 and 6 for the reasons set out below. I make the finding after appropriate allowance for all the difficulties that Mr. McNamara faced, particularly in year 4. I am bound to say that given the deadlines that apply to all Lloyd's syndicates and the particular problems that emerged in relation to 418/417 and Outhwaite 317/661, Mr. McNamara appears to me to have been subject to an unduly heavy burden of work, particularly in year 4.
Mr. Hill
Mr. Hill's statement was put in evidence on the basis identified at Day 43/61.
Mr. Nigel Holland
Mr. Holland is now retired. He qualified as a chartered accountant in 1951 and became a partner of Baker Sutton & Co. in 1960. When Baker Sutton & Co. merged with E&W in 1979 he became a partner in E&W. He retired in August, 1988.
By the mid-1970s the major part of Mr. Holland's workload was insurance related. His curriculum vitae summarizes his Lloyd's and insurance related experience.
Mr. Holland first became involved with the audit of the Merrett Syndicates in about 1957. As Mr. Holland was becoming increasingly involved with Lloyd's committees and enquiries in the early 1980s, culminating in his appointment in January, 1983 as one of two inspectors with respect to the Alexander Howden affair, Mr. McNamara took over principal responsibility for the audit of the Merrett Syndicates from the year end Dec. 31, 1982. From that year end onwards Mr. Holland's role was limited to that of "client partner". His involvement with the audit itself post-1981 was limited. He did not become involved with the detailed auditing, nor did he review the work that was conducted.
The expert evidence on auditing standards and practice
Mr. Frank Attwood
Mr. Attwood was called as an expert witness on behalf of the plaintiffs.
In 1974 Mr. Attwood became a partner in Robson Rhodes. Since 1989 he has been the chief executive officer of R. S. M. International, the
[1997] 294 L.R.L.R. Henderson v. Merrett Syndicate (Q.B. (Com. Ct.)) Cresswell, J.
worldwide accounting group of which Robson Rhodes is the U.K. member. He is a representative of the I.C.A.E.W. on the joint international committee of chartered accountants. From about 1979 to 1983 he was his firm's representative on the international professional standards committee, which was the committee responsible for setting standards for international auditing work throughout the world (being appointed chairman during his later years of involvement). In 1976 he became the author of the 15th edition of the standard text "de Paula's Principles of Auditing" (Pitman) and has also been the author of the 16th and 17th editions. In 1978 he was asked by the I.C.A.E.W. to write an introductory text to the discussion drafts of the proposed auditing standards.
Mr. Attwood became a member of the auditing practice committee in 1980. He was asked by the A.P.C. to become its representative on the C.C.A.B. Lloyd's sub-committee in 1982. At about that time Robson Rhodes was in the process of obtaining "recognition" by Lloyd's for the purposes of undertaking syndicate audits.
In 1984, Mr. Attwood became the chairman of the newly formed A.P.C. Lloyd's working party, charged with the development of auditing guidance in relation to Lloyd's syndicates, following the recent byelaw changes at Lloyd's and the publication by the A.P.C. in 1980 of the auditing standards and guidelines. That role continued until the publication in 1992 of Practice Note No. 2, "The Lloyd's Market", by the then auditing practices board. Previously the working party had produced the audit brief "Lloyd's Syndicates" in 1986, and several additional practice notes providing guidance on specific topics, all of which then became combined in "The Lloyd's Market" publication. In 1985 Mr. Attwood became a member of the I.C.A.E.W. insurance sub-committee.

In 1982 Mr. Attwood was partner-in-charge of Robson Rhodes London office. Initially his role was as "second" or "support" partner to the audit partner responsible for work for the John Townsend group of companies, then comprising a Lloyd's broker, a members' agent, a managing agent and two marine syndicates with incidental non-marine syndicates (275/276 and 575/645). In about 1985 he took over lead responsibility for that client and remained involved with its syndicate audits for two years until the group's divestment of its managing agency activities.


Mr. Attwood was an extremely impressive witness. He has very considerable professional standing and knowledge. He was prepared to withdraw a criticism if it was not justified or supportable.

It is necessary in considering Mr. Attwood's evidence to bear in mind (a) that he had limited experience as a panel/recognized auditor (b) that his own standards in years 1 to 3 may to some extent be above the reasonable average (c) that at times his approach tended to be slightly over-purist/over-technical and (d) the approach adopted in relation to 275/276 as to which see below.


As to the appropriate materiality level or maximum level of tolerance of error in 418/417's RITC premium, whereas on the one hand I consider that the level adopted by Mr. Attwood was somewhat strict for a long tail syndicate, on the other hand I do not accept the very much higher percentages contended for by E&W and their experts.
While it is important to make appropriate allowance for the above I was left with the firm impression that Mr. Attwood's evidence was soundly based by reference to appropriate professional standards (by way of example only I refer to his evidence in relation to the need for audit evidence and the appropriate approach to management representations). I was particularly struck by an important point made by Mr. Attwood in the course of his evidence (Day 48/132/4):
Asbestosis and environmental pollution. . .were on a continuum where at one point one approach to reserving was appropriate, and at (a later) point in time matter(s) changed such that a different approach was what appeared to me to be appropriate.
Syndicate 275/276
E&W rely on a number of points derived from an examination of the audit of Syndicate 275/276. I have made appropriate allowance for these in my findings as set out below. It is however most important to remember that the 1981 year of account was left open as at Dec. 31, 1983. The 275/276 accounts at Dec. 31, 1983 stated:
. . .During 1983 the number of latent disease advices notified to the syndicates has risen to such a level that we have had to increase substantially our reserves. Moreover, because of the uncertainty surrounding the size and timing of any latent disease claim settlements we have decided that the fairest course of action as far as the Members of syndicate 275/6 are concerned is to leave open the 1981 account for at least a further 12 months. It is currently impossible to fix an accurate reinsurance premium to enable us to close it. Notwithstanding the above we have had to make our best estimate of the requirement to cover these potential losses and as a result the figures for 1981 will show a loss of 10.05% of the allocated premium income after taking credit for capital appreciation, investment income and after deducting all syndicate and Names' expenses. However, if outstanding claims are
[1997] 295 L.R.L.R. Henderson v. Merrett Syndicate (Q.B. (Com. Ct.)) Cresswell, J.
settled for less than the reserve plus its attributable investment earnings there will be a balance to be remitted to the Names. Conversely, of course, if our estimate is too low then the loss will be greater. (Emphasis added (R3/64-2)).
Mr. John Whiter
Mr. Whiter was called as an expert witness on behalf of E&W. His evidence was relied on by Merretts. Mr. Whiter's evidence addressed years 4 to 6.
Mr. Whiter has since February, 1994 been the finance director of the Benfield Group Ltd., a company whose principal subsidiaries consist of a Lloyd's broker, specializing in reinsurance, and a reinsurance company. For over 18 years until January, 1994 Mr. Whiter was a partner in the accountancy firm Neville Russell.
In the latter part of 1982, Mr. Whiter led the team which investigated the "P.C.W. affair" on behalf of Minet Holdings Plc. While a partner in the London office of Neville Russell, Mr. Whiter's clients included a number of Lloyd's syndicates, Lloyd's underwriting agencies and Lloyd's brokers. Among the Lloyd's syndicate clients for whom he was responsible as audit partner were 12 syndicates managed by R. W. Sturge & Co. (in respect of the audits as at Dec. 31, 1986 and subsequent years) and three syndicates (marine and non-marine) managed by Roberts & Hiscox Ltd. (in respect of the audits as at Dec. 31, 1983 and subsequent years) and, on a joint audit basis, three syndicates managed by F. L. P. Secretan & Co. (in respect of the audit as at Dec. 31, 1983 only). These audits included non-marine and incidental non-marine syndicates which had a material exposure to latent diseases and pollution. Certain of the Sturge and Hiscox syndicates had the benefit of run-off contracts. From about 1983 Mr. Whiter became responsible for the management of Neville Russell's syndicate book-keeping department. This department was responsible, on a sub-contract basis, for the book-keeping of a number of Lloyd's syndicates. At that time, the department dealt with approximately 80 syndicates including Outhwaite 317/661 and Secretan 367.
Mr. Whiter became managing partner of the

London office in 1988 and senior partner of the

London office in 1992, which role he retained until

he left in January, 1994.


Mr. Whiter is a defendant in the Secretan case which forms part of the Lloyd's litigation (long tail category). It is of course most unusual to find that an expert witness has a direct financial interest in the result of another case in which similar issues arise, but I recognize that there are a limited number of auditors with the requisite experience to give expert evidence in the Lloyd's litigation. I do not suggest that Mr. Whiter's interest in the Secretan case consciously affected his evidence. I regret however that I have serious reservations about Mr. Whiter's evidence. It seemed to me that he was concerned to defend without reservation everything that E&W did in the years 4 to 6. I consider that at times Mr. Whiter's answers were evasive. Some of his evidence was unrealistic. By way of example I refer to Mr. Whiter's evidence (Day 49/p. 169/line 2):
[Q.] Would you say that the systems operated by Merretts for the "recording and control of. . .claims" had been adequate in relation to claims under the run-off contracts as at 31st December 1983 when I remind you 4.65 m. worth of claims were not recognised at all? [A.] In the context of the total claims for the syndicate, probably that would not qualify as a breakdown in the system of recording. . .
By way of further example Mr. Whiter said in relation to the run-off contracts in year 4 that he would have been prepared to express an opinion provided he had the outstandings and the paids - he would not have needed anything else. It is to be noted that the reserves in respect of 10 of the run-off contracts in year 4 amounted to £55 m. Mr. Whiter added that information as to the reinsurance cover available to the cedants would be helpful but not necessary.
I consider that at times Mr. Whiter's approach was not logical. I refer by way of example to par. 123 of his witness statement where he said:
The nature and extent of the uncertainty and its impact on the syndicate may be such that leaving the year open is the only reasonable course. However, this is more likely to be the case where the uncertainty is expected to be resolved or substantially reduced within a certain period . . .
Mr. Ralph Sharp
Mr. Sharp was called as an expert witness on behalf of E&W. His evidence was also relied on by Merretts. Mr. Sharp's evidence addressed years 1 to 3.
Mr. Sharp is the managing director of Archer Holdings Plc, a position he has held since August, 1983. In 1976 he was admitted to partnership with Futcher Head & Gilberts a firm of chartered accountants who had the fourth or fifth largest market share of work done for Lloyd's syndicates for the later 1970s until he left in December, 1983. After resigning from Futcher Head & Gilberts in December, 1983 Mr. Sharp was admitted to partnership in Spicer & Oppenheim London in January, 1984. Spicer & Oppenheim were also chartered accountants and panel auditors. Mr. Sharp took a
[1997] 296 L.R.L.R. Henderson v. Merrett Syndicate (Q.B. (Com. Ct.)) Cresswell, J.
substantial part of the insurance practice of Futcher Head & Gilberts (including a number of their staff) with him to Spicer and Oppenheim. He was the head of the insurance group of Spicer & Oppenheim and Touche Ross & Co. from approximately 1986 until he resigned from the merged partnership in December, 1990. In his practice as an accountant Mr. Sharp was responsible for the audit of a number of syndicates with exposure to U.S. casualty business including the Murray Lawrence syndicates, the Dolling-Baker syndicate 544 and the Frizzell syndicates. A number of the syndicates that Mr. Sharp audited which closed their years as at Dec. 31, 1982 and Dec. 31, 1983 had the benefit of run-off contracts.
On Jan. 1, 1991 Mr. Sharp became the managing director of Castle Underwriting Agents Ltd. who are Lloyd's managing agents, who were responsible for a number of non-marine syndicates. He held that position until he was appointed as managing director of Archer Holdings Plc in August, 1993, which is one of the two publicly quoted Lloyd's underwriting agents.
Mr. Sharp was the chairman of G. W. Run-Off Ltd. from its creation in October, 1991 until April, 1993. G. W. Run-Off Ltd. was a run-off company established to manage the run-off of the Gooda Walker syndicates.
Mr. Sharp was a member of the working party established by the A.P.C. of the C.C.A.B. in approximately 1984 which produced the audit brief entitled "Lloyd's Syndicates". Mr. Sharp became a member of the Institute of Chartered Accountants insurance industry sub-committee from 1991.
Mr. Sharp became a member of Lloyd's on Jan. 1, 1992.
In October, 1993 Mr. Sharp was appointed as the chairman of the Micro Reserving group, which is part of the Lloyd's Equitas project. On Jan. 1, 1995 the Micro Reserving group and the Macro Reserving group were merged and are now called the "Inwards Group". Mr. Sharp is chairman of the combined group.
Of the syndicates under the management of Archer the Alec Sharp syndicate 839 leads a number of the higher layers on the members' agents' E&O slip. Syndicate 741 (and possibly other syndicates) under the management of Archer has a line on an auditors' E&O line slip. I do not suggest that these matters influenced Mr. Sharp's evidence. I do however have certain reservations about Mr. Sharp's evidence. By way of example I refer to par. 53 of his supplementary report where in dealing with the Ballantyne run-off contract he said:
. . .418/417, on the other hand, being much bigger and carrying reserves of some US$141.5m (£90.7m) was entitled at that stage to treat this as a contract which did not require a specific reserve and such an approach was one which a reasonably competent auditor would have been entitled to accept.
Further I consider, again by way of example, that some of Mr. Sharp's answers in respect of par. 3 of Mr. Murray Lawrence's letter were unsafisfactory.
The witnesses Merretts did not call
Merretts did not call either Mr. Emney who scratched the 11 run-off contracts or Mr. Jackson who was the underwriter of 799. Both Mr. Emney and Mr. Jackson could have given me considerable assistance on important issues in this case for reasons explained elsewhere in this judgment.
I give one example as to Mr. Emney. In relation to the most significant of the 11 run-off contracts (Sturge/Fireman's Fund) written by 417 (37.5 per cent.) and Merrett Syndicate 421 (12.5 per cent.) Mr. Emney said in the 421 loss review:
[A]. It had become a highly political issue, in a sense, I suppose. It was more of an exercise to get Bowrings out of the shit than to place a risk - if you will pardon my French.

[Q]. Did you feel that you were being pressurized to write that contract against your better judgment? [A]. Mr. Merrett wrote the contract, I did not write it, I may have put the stamp on the slip and wrote the line, but it was Mr. Merrett's decision to write it and undoubtedly Bowrings were looking for a bit of a help out on something which was, for them, a very hot potato, as I think they were being threatened with all sorts of suits by the Fireman's Fund etc.. . .


This evidence to the 421 loss review was wholly inconsistent with Mr. Merrett's account in evidence before me. In reaching my conclusions as to the writing of run-off contracts I have disregarded Mr. Emney's evidence on all prior occasions (including the evidence referred to above), but I am left with a considerable sense of disquiet having only heard from Mr. Merrett. Further I regret having to make findings against Mr. Emney without having heard from him.
17. THE REGULATORY REGIME FOR THE YEARS ENDED 31ST DECEMBER 1980-1986
Auditing Standards, Auditing Guidelines, etc.
The following Standards and Guidelines are relevant for the purposes of this case.
Auditing Standards and Guidelines - explanatory foreword (issued April, 1980) provided:
Scope of Auditing Standards and Auditing Guidelines - Auditing Standards prescribe the basic principles and practices which members are expected to follow in the conduct of an audit.
[1997] 297 L.R.L.R. Henderson v. Merrett Syndicate (Q.B. (Com. Ct.)) Cresswell, J.
Unless otherwise indicated in the text. Auditing Standards apply whenever an audit is carried out. Each Auditing Standard will consist of a text to which there may be added an explanatory note. Explanatory notes have the same status and purpose as Auditing Guidelines (see paragraph 5 below).
It would be impracticable to establish a code of rules sufficiently elaborate to cater for all situations and circumstances which an auditor might encounter. Such a code could not provide for innovations in business and financial practice and might hinder necessary development and experiment in auditing practice. In the observance of Auditing Standards, therefore, the auditor must exercise his judgment in determining both the auditing procedures necessary in the circumstances to afford a reasonable basis for his opinion and the wording of his report.
The glossary of terms in the appendix stated:
The following terms in the Explanatory Foreword to Auditing Standards and Guidelines, in the Auditing Standards or in the Auditing Guidelines are used with the following meanings:
Audit - the independent examination of, and expression of opinion on, the financial statements of an enterprise by an appointed auditor in pursuance of that appointment and in compliance with any relevant statutory obligation.
The Auditor's Operational Standard (issued April, 1980) provided:
Planning, controlling and recording
2. The auditor should adequately plan, control and record his work. . .
Audit Evidence
4. The auditor should obtain relevant and reliable audit evidence sufficient to enable him to draw reasonable conclusions therefrom. . .
The Auditing Standard: Qualifications in Audit Reports (issued 1980) provided:


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