Bonner & Ors v Cox Dedicated Corporate Member Ltd & Ors

This is a complicated case involving Insurers and Reinsurers. It started as a debt collection exercise by the Insurers/Reinsureds. The Reinsurers responded with detailed defences and cross claims, including allegations against AON, the brokers. Words such as “torrential” have been used to describe the wide-ranging defences and reference made to a “scatter gun” approach to litigation. I see nothing wrong with the pleadings as such; they are voluminous and complex; but that is the nature of the way the case has developed since it started; although the word ‘torrential’ seems fair. Part of the case settled during the Christmas vacation and the issues have narrowed somewhat, although the remaining defendants have relied upon defences which were maintained by other, settling, defendants. I attach as Appendix I to this Judgment a list of the outstanding issues.

I start with the background to this case and a description of the various parties. The Claimants are all Lloyd’s Syndicates [Nos. 535, 62, 187 & 228] whose business included writing risks in the energy market. The 1^st Defendant is a Lloyd’s Syndicate, [the Cox Syndicate, or Cox, as appropriate] a Reinsurer. The 2^nd – 7^th Defendants are both Insurers and Reinsurers [Syndicate 1243], whom I shall call Euclidian. The 8^th Defendant is another Lloyd’s Syndicate No. 1688 [1688], a Reinsurer, and the 9^th Defendant is AON, insurance brokers. An Insurer/Reinsurer referred to as Tryg was joined as a part 20 Defendant.

The Claimants and Euclidian jointly participated on an Open Cover which was devised and operated by AON. The Cover, known as the Energy ’77 Cover, was the brainchild of Roger Backhouse, a Lloyd’s broker who was, for most of the relevant time, employed by AON. In the late 1980s Mr Backhouse, whilst employed by Sedgwicks [brokers], together with Syndicate 535, operated what was then known as the Sedgwick/535 Cover. The Cover was a convenient tool which enabled Sedgwicks as producing brokers to place their considerable book of energy business without having to broke each risk in the market. This Cover continued until 535 went into run-off in 2001. Roger Backhouse, and a colleague who was also instrumental in arranging the 535/Sedgwicks Cover, left Sedwicks and moved to Alexander Howden in the early 1990s. They created a similar Cover for their new employer and this was originally called the Noddy Cover. At the end of 1994, this Cover was re-named and called the ‘77 Cover for no better reason than the Cotesworth Group, to which 535 belonged, had its offices at 77 Gracechurch Street. The Cover was re-issued and revised again at the end of November 1995. It became an AON facility from January 1997 following AON’s acquisition of Alexander Howden. And in its revised form it became the 1999 year of the ’77 Cover to which the Claimants [and Euclidian to the extent of 10%] subscribed. The terms of the Cover, in its revised form, are set out in Appendix II to this Judgment.

The Cover is not itself a contract of insurance but rather a standing offer by the subscribing Cover Underwriters to be bound to risks accepted by the leader, 535, within the terms of the Cover. In fact, Syndicate 62 reserved to itself the right to be presented with each potential declaration and make their own judgment as to whether they would accept it, but the other Syndicates were true followers, relying on the skill and judgment of the leading Underwriter, Mr Davies, and his deputy, Mr Seymour, of 535.

Each year of the Cover was a new insurance venture in the sense that the Cover underwriters might or might not subscribe to the Cover for the following year. An example of this is that Cox were on the Cover but then came off it at the end of 1997. Over its lifespan, the Cover Underwriters comprised “consistently” Syndicates 535 and 62, and the supporting underwriters were “fairly consistent” in their continuing participations. However, in 1998 the Spalding Syndicate (which had a 10% line) indicated that it did not wish to renew and Euclidian was chosen to be, and became, their replacement.

The proportions of the risks under the 1999 year of the Cover finally accepted by the Cover Underwriters are set out in the following table together with the date when each Underwriter put down his line.

The case centres on the reinsurance arrangements made for the benefit of the Claimants, which were broked by AON on their behalf. In due course I shall have to examine with some care the precise sequence of events but for present purposes it is sufficient to set the scene in this way.

Prior to the 1999 year of the ’77 Cover, the Cover Underwriters arranged their own reinsurance on a facultative basis. The energy market essentially provided insurance and reinsurance to the oil production industry. Declarations to the Cover provided insurance and reinsurance for risks relating to the oil, gas, sulphur, mineral, mining, exploration, development and production industries anywhere in the world, both onshore and offshore. Thus, for example, oil wells and oil rigs and platforms were the typical sort of property that would be covered by property insurance and then there was, typically, insurance against loss of business through ‘business interruption’ cover. The sums insured were large and the insurance was normally structured in layers on an excess basis. The top layers were, obviously, less risky than the lower layers and the primary layer was most likely to respond to attritional losses. The premiums reflected the risks undertaken. For about two years prior to the 1999 year of account both the insurance and reinsurance markets in the energy field were softening. That meant that pure excess of loss insurance/reinsurance in this market was increasingly hard to come by. It can be seen from the list of declarations to the Cover in the years 1997 and 1998 that some low level risks had been declared to the Cover, such risks being likely to sustain attritional losses. The ’77 Cover was well regarded in the Market and it produced a lot of premium income, which was welcome in a soft market.

In order to facilitate their broking task, AON decided that they would seek reinsurance for the Cover which could then be offered to those insurers who were prepared to subscribe to the ’77 Cover for the 1999 year. They approached Mr Woodgate of Syndicate 1688 and he scratched a document on November 23 1998. AON say that this document is an offer of reinsurance which remained open for acceptance by the Cover Underwriters, whoever they might be. The reinsurance slip scratched by Mr Woodgate [without his scratch and the words he added in pencil] is appended to this Judgment at Appendix III.

There are a number of issues relating to this document with which I shall have to deal. 1688 deny that this slip was an offer capable of acceptance and at most was an offer by a company, HIH Casualty and General, and was not and could not have been an offer on behalf of HIH’s prospective involvement in the market through a corporate Lloyd’s Syndicate, 1688. The line which was ‘offered’ was for 50%.

On 7 December 1998, Tryg scratched the other half [50%] of the line. 1688 was part of the Cotesworth Group to which 535 also belonged and could not be a reinsurer of 535’s 50% participation on the Cover. But Tryg were not an acceptable security for 535: Tryg were not on their approved security list. It was proposed by AON that Euclidian should front for Tryg: being a Lloyd’s Syndicate it was satisfactory security. As part of a package deal, Euclidian were to be given a 10% share on the Cover [initially 5% but increased to 10%] as a direct Underwriter and fulfil, at the same time, its fronting arrangement for a fee. Thus, by way of a back to back arrangement, [a 100% quota share retrocession] with a tight simultaneous settlements clause, Euclidian fronted Tryg’s half of the reinsurance and became 535’s reinsurer. But just as 1688 could not reinsure 535, nor could it reinsure 228, for the same reason. This point was picked up late in the day, and in early January 1999, when the problem was noticed, Euclidian increased its reinsurance line to 56.66% and, similarly its retrocession arrangement with Tryg. Subsequently, 1688 scratched an 11.75% line on the quota share retrocession of Euclidian which had previously been written 100% by Tryg and thus, 11.75% of Euclidian’s 56.66% participation on the Cover reinsurance was retroceded to 1688. The balance, namely 88.25% of 56.66% remained retroceded to Tryg. The picture at the end of these transactions looks like this.

The Reinsurance Cover was amended to include scheduled risks written in 1998 and which had not yet been re-signed into the 1999 Cover. The amendment has been an issue in these proceedings. The final version of the reinsurance slip was accompanied by a security schedule which divided up the reinsurance limits between the different 1999 Cover Underwriters’ participations and allocated the two reinsurers on the slip. The final version of the slip completed in March 1999 is appended as Appendix IV.

At the beginning of the trial, Mr. Gruder QC, on behalf of 1688 and Cox, told me that he had noticed, shortly before the trial was due to begin, that there was a potential defence to the claim which had not so far been pleaded relating to non disclosure of a substantial loss to the 1998 year of the ’77 Cover, which occurred towards the end of 1998 and which he contended should have been disclosed before the reinsurance was accepted by Mr Woodgate of 1688. Since the Elk Point loss had not been pleaded there had been no disclosure relating to it. It became clear that what Mr Gruder QC was proposing would require a considerable amount of work to be done in terms of finding the relevant documentation and re-proofing the witnesses. The temptation to refuse this application for an adjournment was considerable. The application was being made late in the day; the court’s schedule would need to be adjusted to accommodate the adjournment; a postponement of the case was an unattractive option having regard to the number of parties and the state of their preparation. However, despite the opposition to the application by both AON and the Claimants, I was persuaded to accede to it, largely because it seemed to me that it would be unfortunate if the court were to embark on a heavy trial with some of the parties believing that justice was only half done, whatever the result. Although the adjournment did require substantial additional work, I am sure that it was right that the Elk Point issues have been ventilated. Indeed, I think it fair to say that the Elk Point points became the predominant feature of Mr Gruder QC’s closing presentation. In order that it may be considered I shall set out the relevant facts relating to AON’s knowledge of the loss, in some detail.

One of the declarations to the Cover for the 1998 year was itself an energy open cover, known as the Petropac facility. This was accepted as a declaration to the Cover by the 1998 Underwriters on 22 January 1998. The Petropac Facility was an open cover commencing on 1^st January 1998 to run until 31 December 1998. In fact, this facility was renewed by the 1999 Cover Underwriters as the second declaration to the 1999 year of the ’77 Cover. Declarations to the Petropac facility had to be approved by Mr Seymour as lead underwriter in the normal way. The facility was divided into 3 sections: section 1 covered physical damage risks, both onshore and offshore, including Business Interruption claims; section 2 covered Operators Extra Expense [OEE] such as the control of a well in the event of a blow-out and the cost of re-drilling and making the well safe; section 3 covered what were described as “Umbrella Liabilities and Third Party Liabilities” in respect of properties, or from the Insured’s operations. The limits were expressed in Canadian Dollars and were CAD 100 million, each section, any one accident or occurrence, with an excess to be advised to the Leading Underwriter in respect of each declaration to the facility. On the figures presented to them, the 1998 Cover Underwriters were entitled to take the view that this was profitable business. There was some CAD $10.4 million premium over the preceding three years with a gross profit of at least CAD $ 2 million.

At the end of April 1998, Mr Seymour, on behalf of 535 and in his capacity as lead Underwriter for the ’77 Cover, accepted as a declaration [No 4] to the Petropac Facility an OEE risk in respect of the interest of a group of companies [Elk Point Resources] in an oil well being drilled in Kern County California. It was a deep well [an estimated depth of 18,700 feet]. The insurance cover was limited to US$20 million any one accident or occurrence in excess of US$5 million and the premium was US$32,500.

AON Reed Stenhouse Inc, a broking company affiliated to AON London and which operated out of Alberta in Canada, sent an urgent fax to AON London which was received by them on 1 December 1998, together with 2 enclosures. The first enclosure was an extract from the Daily Oil Bulletin, which is presumably some kind of trade paper published in California, dated 26 November 1998. The paper was reporting the blow-out of the oil well in respect of which Elk Point was insured. The report indicated that the well was burning sweet natural gas and concentrate; most of the equipment to clear the well head was being transported and was likely to arrive on 27 November 1998. The paper reported that the well-known firm of fire control operators, Boots and Coots, had been engaged. As a contingency, engineering designs for a relief well were underway. Elk Point personnel are reported as saying that they had more than sufficient insurance to cover the damage. The second enclosure was a clipping from the Calgary Herald. This report included a statement from Boots and Coots that the blow-out “is in the higher-end calibre” [sic] and the fire could potentially take months to put out. On Monday 7 December 1998, a claims broker from AON Reid Stenhouse, faxed London with a preliminary fax report from loss adjusters retained on behalf of the Insurers. The fax was received the following day. The report is dated 2 December 1998. It identifies the date and time of the blow-out [23 November 1998 at approximately 8:30 pm] and states:

“The Excess Policy reserve of $5.0 M (US) must be considered tentative pending the development of additional information which can only be procured once the well control experts have developed a control/kill procedure based on their findings when the rig debris is removed from the well-head area and they have access to the casing.

This office will undertake to provide underwriters with a proper reserve assessment as soon as possible.”

Also on 7 December 1998, received the following day, there was another fax asking whether London Underwriters could give a quote for insuring up to $60 million liability cover for the re-drilling operation, with a suggested policy period of 6 December 1998 to the end of February 1999. On 8 December 1998, AON went to 535’s box and presented them with a copy of the incident summary prepared by Elk Point. The fax enclosing this was also shown to the Underwriter. It reads:

“Elk Point are expected to spud a relief well today/tomorrow and in accordance with the terms and conditions of the policy Underwriters are entitled to review rates/premiums for any relief wells. For their information, the well will be drilled 15,500 feet and will be set 1500 feet NE of the original well. It will take a minimum of 30 days to drill and set casing and an additional 2 – 3 weeks for the balance of the procedure.”

Mr. Seymour scratched the document, noting its contents and wrote “AP [additional premium] to be agreed”. It was also scratched on behalf of Syndicate 62. The document contained Elk Point’s request for the extra cover in respect of liabilities arising from the re-drill, but this was marked by Mr Seymour “No thank you”. There was some doubt whether the relief well expenses were in fact covered by the insurance and 535 indicated that it wished to take advice from the London Claims Office “to establish their moral obligation to their reinsurers etc.” Those expenses were covered; accordingly, an OEE cover in relation solely to the relief well was accepted by the 1998 Cover Underwriters for US$25 million any one accident or occurrence in excess of Underlying placements for a premium of US$ 275,000. This additional insurance, with effect from 12 December 1998, was finally scratched by Mr Seymour on 22 December 1998. He had previously [11 December 1998] quoted a premium of US$350,000. By a fax dated Tuesday, 10 December, but received the next day, AON London were told that the loss adjusters who had indicated a current reserve of US$10 million had expressed the view that that estimate “will be exceeded and is expected to potentially reach US$20 million” [that is, US$15 million to the cover, after deduction of the US$5 million excess]. This was shown to 535 on 11 December 1998 before Mr Seymour quoted for the OEE cover for the relief well. As at the end of the year, the Lloyd’s Claims Office were saying that the best case estimate for the blow out was US$18.5 million. In fact, at the end of the day the ’77 Cover Underwriters for the 1998 year paid the full amount of the cover, namely US$20 million.

There is no doubt that the loss, occurring as it did around the time that AON were broking the Cover for the 1999 year and the Cover Reinsurance was, to say the least, tiresome. It is common ground, at the end of the day, between the parties that

But these ‘concessions’ conceal a number of difficult questions. First, when was the contract of reinsurance concluded? Second, when did the brokers become aware of the Elk Point loss so that they were under a duty to disclose the facts about it to the prospective reinsurers [was it as from 1 December or 8 December]? Third, even had the Elk Point loss been disclosed to Mr Woodgate would it have made any difference to his willingness to write the business on the terms he had put forward; in other words, have 1688 proved ‘inducement’?

I find the following facts. AON had recently acquired another brokerage company, Greig, and took over the employment of a number of Greig’s staff, including Mr Amies, an experienced broker who had placed reinsurance cover for a [different] energy Cover. Greig’s acquisition by AON had only recently taken place and there had been no physical integration of the office space so that Mr Amies was working from a different building to the indigenous AON brokers. The person primarily responsible for the broke to Mr Woodgate was Mr Amies of AON. He was a specialist reinsurance broker and, whilst with Greig, had successfully placed a reinsurance contract in the market for an Energy Open Cover. He was asked to see if he could obtain an offer of reinsurance in relation to the ’77 Energy Cover, and met with Mr Woodgate of Syndicate 1688. Mr Woodgate was employed as an underwriter for HIH Casualty and General which was in the process of setting up a corporate Lloyd’s Syndicate [1688] by whom Mr Woodgate became employed. There were various meetings. Initially Mr Amies knew nothing about the Cover, what declarations had previously been made to it or what was proposed for the future. He accompanied his immediate boss, Mr Alan Smith, the MD of Greigs, to a meeting with Mr Woodgate, at the London Underwriting Centre. Mr Amies had not previously met Mr Woodgate but knew him to be an underwriter who specialized in the energy market, writing both insurance and reinsurance. Mr Amies also knew that Mr Woodgate had participated in the Noddy cover when he was working at Royal & Sun Alliance. Mr Woodgate’s recollection that he had “known Mr Amies for some years and .. had had extensive and generally very successful dealings with him” was not correct, as Mr Woodgate accepted in evidence. Mr Woodgate attempted to justify this mistake by saying that when he met Mr Amies, for what was the first time, he was ‘left … with the feeling that I did actually know him for perhaps longer than I had’. If this was an attempt, as I think it was, to justify the error in his evidence it was unconvincing and somewhat puzzling. At their first meeting shortly before 21 October 1998, Mr Woodgate knew more of the business than did Mr Amies, who effectively knew nothing about it. The conclusion of the first meeting, which must have been more of a courtesy call than a broking exercise, was that Mr Woodgate raised a number of questions which he wanted answering before he could contemplate giving a quote. Mr Smith then delegated the task of getting the information to Mr Amies, and, consequently, he asked AON for certain detailed information, including a copy of the Original Cover Slip and declarations to the 1998 Cover year and, importantly, “any information regarding the parameters of the Cover”. I set out below the full terms of his request. It is to be noted that Mr Amies obviously contemplated that the Reinsurer(s) might impose some limit on losses occurring during the 1999 year in respect of business which had been written prior to that date.

77/1998 ENERGY COVER.

Information required for the placement of a dedicated Excess of Loss

Protection for the above captioned Energy Cover :

• Copy of the Original Cover slip, including full market and total discounts.

• Any information regarding the parameters of the cover.

• Sight of all declarations to the 1998 cover year, so that we can

ascertain the levels of the in-built excess points, if any .

• Information regarding the loss dates and to which underwriting year they would have attached. (Are they as presented?).

• Estimates of final earned premium for 1998 as well as that anticipated for 1999.

• As we would intend show statistics on an "Account Going Forward" basis, we would need to isolate those claims on accounts no longer write. Any information on this would be extremely helpful .

• Obviously we anticipate placing the protection on a "Risks Attaching Basis" for the ensuing period, but would like to explore the possibility of including a sub limit for losses occurring during the period Twelve Months at 1st January, 1999 on business written prior to that date, so would need to look at the declarations for years prior to 1998.

Once we have the information requested , we can start to target markets with fully supporting data.

NEIL AMIES / PAUL JEFFREY.

21st OCTOBER, 1998.”

On this document, Mr Amies made two handwritten notes. Against the fourth bullet point, he wrote “RAB” meaning ‘Risk Attaching Basis’; and against the fifth bullet point he wrote ‘US$ 15 million gross US$10 million net’. He told me, and I accept, that after he had seen the draft Cover Concept document and the other material provided to him, he thought that an estimate of premium income for the 1999 year of the Cover was more realistically US$15 million rather than the figure of US$10 million, which he regarded as at the lower end of the bracket. Mr Amies was provided with the lists of declarations to the Cover for the preceding two years and a copy of the ’77 Cover slip and these documents were taken by Mr Amies to Mr Woodgate at one or more meetings between 3 and 6 November 1998. On 6 November there was an internal AON meeting attended by Mr Smith and Mr Amies, the ex Greig people, and two of AON’s technicians, Mr Paul Finlay and a Mr Hession. Mr Amies outlined the basis on which he wanted to offer the risk. He said that they might try and broke a reinsurance cover with a US$10 million limit, EEL [each and every loss] with an aggregate excess of US$5 million and a premium of 35% ONP [original net premium], then estimated to be $10 million, excluding onshore liabilities absolutely. Mr Hession noted the proposal and sent an e-mail to Roger Backhouse, the broker in charge of the Energy Department, asking whether the proposal was “likely to fly”. On 9 November, Mr Amies met with Mr Woodgate again and Mr Woodgate asked if he could be provided with a document ‘to show his senior management’ which would explain the history of the Cover and the nature of the business to be written to it. After the meeting, Mr Amies spoke with Mr Finlay and was provided within a few hours with a document called “Cover Concept/Evolution” which Mr Finlay had drafted, following conversations with Mr Backhouse of AON. He and Mr Amies discussed the draft and the latter made some suggestions as to the wording. In my view, nothing significant turns on this. After this conversation Mr Finlay made a re-draft incorporating some but not all of Mr Amies’ suggestions. I accept that Mr Amies was particularly concerned to ensure that the document made it clear that it was setting out an estimate of the premium for the 1999 year of the Cover only, and that the estimate did not take into account premium earned in later years from long-term business written in 1999 or re-signed into that year from previous years and which were to extend beyond the 1999 year. The document was re-named Memorandum of Understanding and has been a significant feature in this case.

On the basis of information provided to him by AON, Mr Amies prepared a document relating to losses on an account going forward basis for the previous four years. The following day, 10 November 1998, Mr Amies took with him to see Mr Woodgate a copy of the 1996 declaration list, which Mr Woodgate had asked for, together with the Cover Concept evolution document. At that time Mr Woodgate was prepared to give a ‘pure indication’ of potential terms which Mr Amies noted on the reverse of a draft slip which Mr Amies had drafted, using as a template the slip which he had broked in relation to the other Energy Cover. The only note of relevance are the words “HIH “Lloyd’s”. This note reflects, I think, the fact that it was the intention that Mr Woodgate would be accepting the risk, if he did, on behalf of the prospective HIH Syndicate. On this slip the assureds are described as “various Lloyd’s Syndicates but only in respect of their participation in Energy Insurance and reinsurance policies as may be declared to AON Group Limited 77/ 1999 Energy Cover”. At this date it was not known which of the 1998 Cover Underwriters would renew for the 1999 Cover year and which would have to be replaced and if so by whom.

Mr Amies sent his draft slip to Mr Finlay who made a number of alterations which eventually became incorporated into the final version which was presented to Mr Woodgate by Mr Amies on 23 November 1998, the date of the blow out at Elk Point’s well [California time]. During that meeting, Mr Woodgate went through Mr Amies’ Claims Breakdown sheet which showed losses relating to the 1995 through to 1998 years of the Cover. The amount of the claims were shown in various currencies [Norwegian Kroner, Canadian and US Dollars and one entry in Pounds Sterling]. Mr Woodgate’s notes show that he went through the document with some care. In relation to the 1995 year of the Cover, there were eight claims recorded which arose out of the Contractor’s All Risk section [CAR] and he bracketed these claims and wrote “nett” against them. For the 1996 year, there were 4 claims, two of them arose from CAR risks and the other two were totalled by Mr Woodgate [roughly]. For the 1998 year there were listed four claims and, using a conversion rate for Canadian into US dollars of one half, Mr Woodgate noted the total for that year of US$ 13,500,000. There is no doubt that these calculations were made before he scratched the slip in pencil on 23 November 1998. Mr Woodgate in evidence suggested that as at 23 November 1998, there was still outstanding claims information. He based this evidence on the fact that on 24 November 1998 Mr Finlay of Aon sent to Mr Amies a fax attaching a copy of the claims breakdown figures. But Mr Woodgate faced a conundrum: if he had not been provided with claims information he must have put his scratch down before knowing a critical piece of information which he would need in order to be able to make a quote. On the other hand, Mr Amies’ evidence, during cross-examination, was clear: [Day 18 128 line 22 to 129 line 24].

Mr Amies, you say in your statement at paragraph 16 that

23 you received this fax from Mr Finlay which attached

24 a breakdown of claims incurred on the previous four

25

years of the cover. You then prepared a second document

1 which converted certain figures into Norwegian krone and

2 Canadian dollars into US dollars and also showed the

3 amounts ceded to the reinsurers.

4 Is that document the document at page 125? Is the

5 document which you refer to as having prepared, the

6 document at 125?

7 A. It would seem so, my Lord, yes.

8 Q. Can I ask you, why did you prepare this claims breakdown

9 in this way?

10 A. I think this document was prepared for Mr Paul Jeffrey,

11 who was seeking to place further lines on the

12 reinsurance.

13 Q. I would suggest to you that the reason why you asked for

14 the claims breakdown was so that you could (1) submit it

15 to Mr Woodgate and (2) so that you could prepare C1/125

16 for you to continue with your broke to Mr Woodgate.

17 A. My broke to Mr Woodgate had finished, my Lord. He had

18 written his line of 50 per cent on the 23rd.

19 Q. I would suggest to you that in fact what he did was gave

20 you an indication that he wanted to see further figures.

21 A. That is totally incorrect, my Lord. There was no

22 indication -- it was a firm line. His 50 per cent

23 pencilled line was subject to no further information

24 requested, it was a full promised line.

Further, Mr Woodgate’s own evidence is that when he signed the tidied up slip on 16 December 1998 there was effectively no further broke to him. Putting this evidence together, it seems to me clear that Mr Woodgate was provided with claims figures before he put his scratch down on 23 November 1998 and he was ‘musing about’, rather than recollecting, the events based on a reconstruction founded on the fax to Mr Amies. I agree with Mr Leggatt QC that the most likely explanation for the fax is that Mr Amies had left his only copy with Mr Woodgate on 23 November and needed another copy for his files. Mr Gruder QC says that the fact that, subsequent to 23 November 1998, Mr Amies dropped off at Mr Woodgate’s work station what might be called a tidied up version of the claims breakdown which Mr Woodgate had annotated, shows that the broke was not completed at that date. I disagree. This tidied up version of the claims breakdown was provided as a courtesy, and does not suggest to me that Mr Woodgate was not regarded by AON as ‘on the hook’ as from that date. Had Mr Woodgate been prepared to scratch the slip without any, or any sufficient, claims information he would have indicated as much on the slip itself by making his acceptance ‘subject’ to whatever he required. Such subjectivities are a commonplace in Lloyd’s and other insurance markets.

On 23 November 1998, Mr Woodgate made a number of alterations to the slip before he scratched it. First, he excluded CAR policies re-signed into the 1999 year of account. Second, in pen, he wrote in the blank space US$3,500,000 both as the Minimum Premium and the Deposit Premium. The premium was stated to be adjustable at a percentage of the ONP in respect of business covered by the reinsurance and Mr Woodgate filled in the percentage figure of 35%. At the bottom of the slip he wrote “50% HIH Cas & Gen” and scratched the slip and dated it 23 November 1998. Immediately below that, he wrote “subject re referencing wef [with effect from] 1/1/99”. All these additions at the end of the slip, including his scratch, were made in pencil.

The context in which these additions were made is that the slip defined the period as

“Risks attaching to the 77 Energy Cover during the period 1^st December 1998 to 31 December 1999 both days inclusive and 1999 (and subsequent if and as applicable) year of account attachments to antecedents of the 77 (1999) Energy Cover (ie Resignings) as original and all as original. Excluding CAR policies resigned into 1999 year of account” [Mr Woodgate’s addition].

The owners of HIH Cas & Gen were intending to do business in England through their own Lloyd’s Syndicate, which was, at the time [to use a neutral expression] in the process of being set up but for which the necessary stamps were not available. The Syndicate was scheduled to write business only from 1 January 1999. It could not write a risk for the period of one month prior to that date. The understanding of the brokers was that when he scratched this slip Mr Woodgate had taken a 50% line on the reinsurance from HIH Casualty and General Ltd “whose security will change to HIH Lloyd’s effective 1 January 1999”.

Mr Woodgate said that he did not consider that he was bound at this date, for a number of reasons, which must be examined later.

Mr Amies was not involved in the broking of the 1999 year of the ’77 Cover to the Cover Underwriters. But he believed that before 10 December 1998 he was told by AON that the reinsurance had been accepted because on that day he proceeded to communicate with Mr Woodgate about reinsurance possibilities. Because of the problems with the stamp and the need for re-referencing there were a number of visits paid by Mr Amies to Mr Woodgate. Although he did not refer to these in his witness statements, I am prepared to believe Mr Amies on this point. He struck me as a steady and reliable witness who knew the energy reinsurance business. It was suggested to him that he did not fully understand the nature of the slip and how it fitted into the business written to the 1999 Cover and that as a result he misled Mr Woodgate into thinking that the liability he was writing was for one year only. Not only did Mr Amies understand what he was doing but, also, I regarded the suggestion that Mr Woodgate thought that the business was for only one year as specious, for reasons which I shall develop in due course. If Mr Woodgate did not understand what he was doing, that was not the fault of Mr Amies.

On 16 December 1998, it is common ground that Mr Woodgate stamped the reinsurance slip. He wrote on the slip “for decs [declarations] attaching up to and including 31/12/98” followed by the HIH Casualty and General stamp which he then scratched and dated 16/12/98. Below that he had written “for decs attaching after 1/1/99” and used a stamp for HIH 1688 which he also scratched and dated 16/12/98. In each case he indicated that he was accepting a 50% line. Either on the same day or later, Mr Woodgate inserted referencing numbers in each case. It is common ground between the parties that Mr Woodgate was bound as at 16 December 1998, in relation to those Cover Underwriters, if any, who had by then accepted his offer of reinsurance. But there is an issue between the parties as to when acceptance took place. It is also common ground that the Elk Point Loss was not reported to Mr Woodgate at any material time. I should make it clear that Mr Amies was unaware of the Elk Point Loss even though Mr Finlay, Mr Matson and Mr Backhouse were aware of it.

Mr Woodgate had accepted a 50% line on the reinsurance. The other 50% was placed with Mr Tobin of Tryg-Baltica. The circumstances in which this came about are as follows. It had been contemplated that Mr Woodgate would take a 100% line; but because of the Cotesworth connection with 535 that was not possible. Therefore the brokers looked for participation from another reinsurer. Mr Hopper had recently joined the underwriting team at Tryg Baltica. He had previously been employed as a technician by Syndicate 535 and had expressed interest to AON [Mr Matson] in participating in the ’77 Energy Cover. Mr Matson regarded him as an obvious choice for the remaining 50% although he knew that Tryg Baltica would not be acceptable security for 535. On 7 December 1998 Mr Tobin, Mr Hopper’s superior, scratched Mr Woodgate’s slip immediately below where Mr Woodgate had written his additional words in pencil. Mr Tobin wrote “50% Colonia/Baltica” [Tryg Baltica’s former name] and scratched and dated it. There is an issue as to whether Mr Matson misled Tryg Baltica as to the availability of reinsurance for them in respect of their participation. There was no ‘subjectivity’ on the slip.

Because Tryg Baltica were not acceptable security to 535 [which had a 50% line on the Cover] and because Mr Woodgate could not reinsure 535, it was necessary for AON to find a front for Tryg’s participation. It appears to be common ground that Mr Matson procured Euclidian’s agreement to front the reinsurance for Tryg on about 18 December 1998. Mr Hegarty of Euclidian, who was “delighted” to have the opportunity to participate in the ’77 Energy Cover, agreed to take a 5% line on the Cover as partial replacement for Spalding. He was also prepared to act as a front for Tryg [as an “assist” for AON] but only if the retrocession cover was for 100% of the assumed risk and was on back to back terms, with a tight simultaneous settlements clause. Mr Hegarty scratched the reinsurance slip, previously scratched by Mr Woodgate and Mr Tobin, and a copy of the Memorandum of Understanding. On the same date, Mr Tobin annotated the reinsurance slip “Agree as R/I of Euclidian”. Subsequently, Mr Hopper added the words “less 10% in all” indicating, as was the case, that AON had agreed to absorb Euclidian’s fronting fee out of its own brokerage. The fronting arrangement was perfected on 30 December 1998 when Mr Hopper of Tryg stamped and scratched a slip which recorded Tryg’s 100% quota share reinsurance of Euclidian.

I find the facts relating to the broke of the 1999 ’77 Cover to the Cover Underwriters are these. At some stage in November 1998, Mr Backhouse of AON approached Mr Seymour of 535 to discuss the renewal of the Cover for the 1999 year. On 3 December 1998, both Mr Watters [of Syndicate 62] and Mr Seymour on behalf of their respective syndicates scratched a document headed “Attaching to and Forming Part of ’77 Energy Cover”. The document contained reference to “common account reinsurance details as per policy number t.b.a. (l/u)”. The document reflected the new limits [up from US$ 75 million any one accident or occurrence to US$ 150 million]. On the evidence it seems to me unlikely that Mr Woodgate’s slip, scratched in pencil on 23 November 1998, was presented to these Underwriters. I say that because of the evidence of both Mr Seymour and Mr Davies, which I considered to be reliable on this point. Neither of them was aware of Mr Woodgate’s involvement until the New Year. Syndicate 1688 was managed by Cotesworth of which Mr Davies was a director. Bernard Devereese of Syndicate 228 was also a director of Cotesworth, as was Gordon McCall, the nominated underwriter of Syndicate 1688 could not reinsure syndicate 535, because of the common management. Whilst Mr Backhouse says he recalls taking the reinsurance slip round to Mr Seymour or Mr Davies, I cannot accept that evidence. Nor do I accept that he showed the slip to Mr Hart or to Mr Watters. Mr Hart was not called to give evidence. There undoubtedly had been discussions about a reinsurance contract and its scope. It is probable that Mr Backhouse was told by Mr Hart that, owing to previous experience of reinsurers reneging on a deal because they said they had not been given full disclosure, it was important that AON should obtain from all the Cover Underwriters and the reinsurers a signature to a document which made full disclosure of the understanding on which the Cover and reinsurance were being placed. It was in response to this request that the Cover Concept Evolution document was renamed the Memorandum of Understanding. The difficulty with Mr Backhouse’s recollection of showing the slip to the lead Underwriters is well illustrated by the following citation from Mr Gruder QC’s effective cross examination of Mr Backhouse on this issue Day 20 page 88 line 22 to page 97 line 18] and I annex the transcript at Appendix V.

I regarded Mr Backhouse as a generally satisfactory witness but I believe that his recollection of events on this issue was faulty. In my view it is probable that the Cover Underwriters understood that the reinsurance was to be provided by a Lloyd’s syndicate although Syndicate 62 may not have known their identity until later. At some stage between 3 and 7 December Syndicates 187 [Kevin Regan] and 228 [Mr Devereese] probably scratched copies of the renewal endorsement for the 1999 year. There is no documentary material showing such an acceptance but the probability is that such has been lost. There is no issue about the followers’ participation in the Cover. They had certainly accepted by 23 and 30 December 1998. It is entirely probable that AON would have gone to the followers after achieving the acceptances of the two lead syndicates. Mr Matson and Mr Backhouse both told me that they did and I do not disbelieve them, despite the absence of any written documentation. AON would need to know whether the followers were still ‘on side’ for renewal, otherwise replacements would need to be found. It would have been most incautious of AON to have simply assumed that the followers would indeed follow on and a brief meeting to ascertain their intentions was sensible and likely. At such a meeting the availability of reinsurance would surely have been discussed and there was no reason why they should be told any less than the two lead syndicates.

The Spalding syndicate, which had had a 10% line for the 1998 year did not wish to renew their participation and therefore, there was a shortfall of 10% in the participation in the Cover.

On 30 December 1998, Mr Matson invited Euclidian to take the remaining 5% of the Cover, which Mr Hegarty agreed to do, provided that Mr Matson first obtained for him high level excess reinsurance protection for his syndicate. This Mr Matson did, and on the following day Mr Hegarty scratched the package of Cover documentation.

The parties had not appreciated that 1688 could not be a reinsurer for Syndicate 228 because of the same common management problem which affected 535. Therefore, in early January 1999, Mr Matson approached Mr Hegarty again to ask him to extend the fronting arrangement to include Syndicate 228’s line of 6.66%. The way this was achieved was to maintain Mr Woodgate’s 50% line but to change the reassureds allocated to the reinsurers so that Mr Woodgate was reinsuring Syndicate 62 [25% line] Syndicate 187 [8.34% line] and Euclidian [10% its own line and 6.66% as a front for 228], leaving Euclidian as the reinsurer [as a front for Tryg] for 535’s 50% line. The arrangements were formalized with Mr Woodgate on 11 February 1999 when he scratched an attachment to the Reinsurance policy. 1688’s participation in the Reinsurance remained the same but their 50% line covered

On 19 March 1999 Mr Woodgate scratched a further endorsement attaching an amended slip. The risks were separated into two categories: Category A described those risks which were covered by the original slip and Category B [the additional category] consisted of losses incurred after 1 January 1999 on risks which were declared to the 1998 year of the Cover but which were to be resigned, at some stage during 1999, into the 1999 Cover year [after re-signing they would be covered under the 1999 year of the Cover in any event]. At the same time, Mr Seymour had noticed that the reinsurance dated from 1 December 1998 yet the risks in relation to the 1999 year of the Cover [which was the subject of the reinsurance] could only be declared to that Cover year from 1 January 1999. Therefore, the reinsurance period was brought into line with the period of the Cover so that both ran for a calendar year.

When this case was opened by AON it was their submission that Mr Woodgate had committed his syndicate as at 23 November 1998 because he had made an irrevocable binding offer of reinsurance which could not be withdrawn before it had been tendered for acceptance to the Cover Underwriters, whoever they were. This submission was later withdrawn in the light of the expert evidence.

It seems to me that this issue may be potentially important in other cases and perhaps it is best left to be dealt with then. However, I consider that there is force in the submission. In Lloyd’s it is frequently the case that a broker will try and get a promise of reinsurance ‘in the bag’ before attempting to place the underlying insurance. The fact that reinsurance is available is likely to make a material difference to insurers’ decision whether to undertake the risks. From a practical point of view, the broker would be able to carry around with him the offer and induce underwriters to make binding commitments. In legal theory there would be no objection in principle to a contract whereby the reinsurer promises to enter into a contract of reinsurance on terms agreed with the broker with any Lloyd’s Syndicate who might write the underlying risk in question. The consideration for the promise is that the broker would broke the risk to the prospective insurer on the basis of the available reinsurance and no other. Such a bargain would properly reflect what actually happens in practice. The weight of the expert evidence in this case was that a reinsurer who had given such an offer could withdraw it at any time thereafter, whether or not for good reason. The attitude of the market towards someone who withdrew would depend upon the reason for the withdrawal. Strictly, it is for the Judge rather than the experts to determine questions of this sort; but in this case Mr Leggatt QC did not invite me to reject the expert evidence and made the concession to which I have already referred. It follows, therefore, that Syndicate 1688 were not committed to the reinsurance of the ’77 Cover by what happened on 23 November 1998. So far as the duty of disclosure is concerned the clock was still ticking.

But in the minds of Mr Amies and AON it was thought that HIH corporate and Syndicate were now committed [see for example the letter from Mr Jeffrey to Hannover Re dated 26 Novmber 1998: “Our slip has been led off with a 50% line from Messrs HIH Casualty & General Ltd whose security, incidentally, will change to HIH Lloyd’s effective 1 January 1999”]. That was not an unreasonable view. Mr Amies thought that this was a good moment to try and sell some reinsurance to Mr Woodgate to protect his 50% commitment, and he would not have done this unless he thought that Mr Woodgate was ‘on the hook’.

On or about 3 December 1998 Mr Seymour was told of the reinsurance, although, as I have found, he probably was not told of Mr Woodgate’s identity. His note at that time showed that a reinsurance was on offer $10 million each and every loss excess $5 million Aggregate. He scratched an Attachment to “and forming part of ’77 Energy Cover’ which contained the words “common account reinsurance details as per policy.” This attachment was also scratched by Mr Watters on behalf of Syndicate 62 on the same date. So far as Syndicate 535 were concerned, they would have been prepared to renew their participation for the 1999 year whether or not the reinsurance was on offer. Mr Seymour regarded the business as profitable and enhanced his Syndicate’s position in the market. The problem the Reinsurance in question presented to the lead Cover Underwriters was that 35% of all premium would be ceded to the reinsurers and, in relation to claims recoveries, AON had a poor reputation for efficiency. The latter point prompted Mr Backhouse of AON to write to his colleagues on 22 December 1998 saying

“Now my biggest battle has been for the underwriters to buy this reinsurance, not because of price or security but because they do not believe (based on the abysmal service they have so far received on reinsurance recoveries) that AON will be able to police this.”

And he proposed that AON should recruit an additional employee at a junior level whose sole responsibility would be to monitor and look after all premium and claims transactions for the ’77 Cover.

On 22 December 1998 Mr Seymour scratched a tidied up copy of the Attachment, together with an unsigned copy of the reinsurance Slip, which referred in the Information Section to “Memorandum of Understanding seen and agreed by Reinsurers and held on file in the offices of AON ...”, together with the MOU itself. He also scratched a claims breakdown, expressed to be as at 23 November 1998. This breakdown omitted from it any numbers in respect of “Onshore PDI/BI – Smith Enron” which had previously featured but had been objected to by Mr Seymour. Mr Hart also scratched the same documents on the same date. The two following syndicates put down their lines on 23 December 1998 and finally, on 31 December, Euclidian put down their 10% line.

Mr Gruder QC submitted that Mr Woodgate was in no position to bind the Syndicate as at 23 November 1998 because of a letter dated 6 November 1998 from Lloyd’s which gave approval in principle to Cotesworth to manage the new Syndicate and the appointment of Mr McCall as the active underwriter of the new syndicate. But these approvals in principle “have been given subject to [a number of matters including] “as a condition precedent the resolution of the agency law issues to the satisfaction of Lloyd’s” and the “provision of the appropriate level of funds at Lloyd’s by Cotesworth …” This issue arises purely as a result of the Elk Point amendment. Until that amendment was made none of the parties were concerned to direct their evidence to the question when the disclosure clock stopped running. In his first witness statement Mr Woodgate said that he believed he had suggested, at the meeting of 23 November 1998 that HIH Casualty and General could write this for one month until 31 December 1998 with a new policy for 12 months at 1 January 1999 underwritten through Syndicate 1688. Yet in his third witness statement, made after the amendment, he was saying that before the new Syndicate could write business there were still discussions to take place with the Lloyd’s Authorities.

The position after the settlement is as follows: The Claimants together with Syndicate 1243 are united. Syndicate 535 was reinsured by Euclidian fronting for Tryg and by Cox. Having settled with Euclidian and Tryg, it pursues its remaining reinsurance claim against Cox. Syndicates 62, 187 and 1243 [with lines of 25%, 8.34% and 10% respectively] were all reinsured 100% by Syndicate 1688. Syndicate 228 was reinsured by Euclidian fronting for 1688. Having settled its claim with Euclidian it now pursues its claim against Syndicate 1688 under the 1688 Retrocession Contract. All the Cover Underwriters make contingent claims against AON.

I turn to the parties’ submissions on the Elk Point loss in relation to Mr Woodgate’s claim that there was material non-disclosure without which he would either not have written the risk at all or on the terms which he in fact agreed.

In a nutshell, 1688 is entitled to avoid the Cover reinsurances of Euclidian, Syndicates 62 and 187 and the retrocession of Euclidian’s fronting reinsurance of 228 all of which contracts were concluded after AON and the Claimants had knowledge of material information concerning the Elk Point loss which was not disclosed to 1688.

The Elk Point loss was known to personnel in the broking arm of AON and not just to the claims department – in particular the loss was known to Mr Matson, Mr Finlay and Mr Backhouse who were all involved in securing the renewal of the Cover for the 1999 year. Curiously, certain key AON personnel (in particular Mr Amies and Mr Jeffrey) were kept in the dark about the loss until sometime in the New Year. “It is 1688’s case on the facts that AON (by at least Matson and Finlay) chose to suppress disclosure of the Elk Point loss for fear that its wider dissemination would prejudice AON’s prospects of getting the Cover Reinsurance fully placed and the Cover renewed in full for 1999.” On the evidence, there was no reason why some personnel should know and others kept in the dark.

Mr Matson concocted a story about how he came to learn of the loss “in the market” after 7 December 1998 when it is plain that he was told of the loss by Mr Finlay very shortly after Finlay knew of it and that he did so in order to excuse the fact that he did not disclose the loss to Tryg on 7 December 1998, when Tryg scratched their 50%. Mr Matson also lied in his evidence to the effect that “he must have” disclosed the Elk Point loss to Euclidian and to Tryg later in December 1998; a piece of evidence so feeble that it was not put by Mr Leggatt QC to either of those parties’ witnesses.

Furthermore, the Elk Point loss files were plainly relevant to the allegation that AON had failed to make a fair presentation of the risk to Mr Woodgate. In Mr Walters’ witness statement [of AON] dated 29 July 2003 [that is, before the Elk Point loss point had been raised] he said that around February 1999 the Elk Point loss was advised to the Cover for the 1998 year. “We realized that this loss severely limited our chance of successfully obtaining quotes for reinsurance. In conjunction with [Tryg] it was decided to exclude from the reinsurance [of Tryg] any declarations from Petropac, which is the facility from where Elk Point and a number of other smaller losses emanated.” In other words, AON were seeking to say at this time that the Elk Point loss became an issue only from second month of the 1999 year, after the presentations had been made and after the duty of disclosure had come to an end. This was untrue. AON resisted the application for permission to amend and amongst other things indicated that the claims file would have to be examined to determine who in the claims department was first told about the loss and what exactly they were told. Since Mr Finlay and Mr Seymour had been engaged in writing cover in relation to the relief well they had personal knowledge of the Elk Point Loss and would have been well aware of the fact that they knew about it in early December 1998.

AON’s initial case that Mr Woodgate had bound his Syndicate as at 23 November 1998 was without foundation, both as a matter of law and market practice. In law a resinsurer who makes an offer may withdraw it at any time before it has been accepted. Market practice is no different, as the evidence showed. The duty of disclosure persisted until the contract had been concluded: see section 18(1) of the Marine Insurance Act 1906 and MacGillivray on Insurance Law at paragraphs 17 – 22. There is no difference in this respect between a contract of insurance or reinsurance. The Zephyr [1984] 1 Lloyd’s Law Reports 529 did not go so far as to say that the duty of disclosure ceased after a ‘binding’ offer of insurance had been made. This case was not concerned with the duty of disclosure.

In relation to the Cover Underwriters there is a separate contract of reinsurance between 1688 and each of Underwriters who accepted the reinsurance. The effect of the various arrangements made is that 1688 reinsured Syndicates 62 and 187 [respectively 25% and 8.34%] participation in the Cover as well as Eunclidian’s participation as to 10%. Euclidian’s retroceded their liability as a front for Syndicate 228 to Syndicate 1688. Each of these contracts has been validly avoided for non-disclosure of the Elk Point loss. Further, 1688 also contend that even if they are not entitled to avoid the retrocession from Euclidian, Euclidian is unable to advance a claim under the retrocession because of the non-disclosure to them of the Loss. Even if Euclidian, in their settlement with the Claimants, have given up that part of their case it does not follow that 1688 are precluded from taking the point.

The various contracts were concluded on the following dates:

In relation to the retrocession, Euclidian agreed to write the front for 228 no earlier than 11 February 1999 when Mr Hegarty scratched a note recording his agreement in principle “subject to QS R/I [Quota share reinsurance] – as per Colonia Terms”.

1688 would wish to argue, further, that the dates given above were the earliest arguable dates for the cessation of the duty of disclosure. What was on offer as at 16 December was reinsurance for a period which the Cover Underwriters did not want [that is, commencing 1 December 1998]; it was really only when the revised slip with the amended date and the two categories of risk identified that Mr Woodgate was finally bound, whatever his own state of mind might have been.

The 23 November 1998 slip did not contain any offer capable of acceptance for a number of reasons: first Mr Woodgate did not have by then any loss statistics. The meeting between Mr Amies and Mr Woodgate took place in the morning of 23 November. Mr Amies faxed a copy of the slip to Mr Finlay at 13.13 hours on that day. It is improbable that the loss statistics were typed up and supplied in time for the morning meeting and the evidence suggests that the figures were not sent until the next day. That would explain also why Mr Woodgate scratched the slip in pencil to indicate that he was not yet binding himself to the risk. It is improbable that after the risk was bound, Mr Amies would have been bringing round loss statistics. If the broke was over, why were AON still providing broking services? In any event, the slip was made subject to re-referencing and a new stamp with effect from 1 January 1999 and could only have been an offer on behalf of HIH Cas & Gen. At this stage, the Society of Lloyd’s had not given the new syndicate unqualified approval to commence business. The lack of a stamp was not just a question of lacking a necessary piece of stationary equipment. The existence of a stamp was a crucial item for Mr Woodgate’s ability to bind his Syndicate. He could have, but did not, write in the slip, ‘on behalf of Syndicate 1688 with effect from 1 January 1999’. Mr Amies appreciated the position to be that Mr Woodgate was at that time unable ‘physically’ to put his line down on behalf of the Syndicate. I should prefer Mr Youell’s view on the effect of the Lloyd’s letter to the Syndicate. Mr Youell had sat on Lloyd’s Regulatory Board and was in a good position to say whether the condition precedent had to be fulfilled before underwriting could commence.

In any event, any offer of reinsurance constituted by the 23 November 1998 slip lapsed before it was accepted. The inception date on the slip was 1 December 1998. The reason why there was a change from 13 months to 12 months from 1 January 1999 was because Euclidian became a front for Tryg: see the note dated 18 December 1998 when Mr Hegarty indicated a willingness to take a 5% line [subsequently increased to 10%] and to front for Tryg. In relation to each promise the date was with effect from 1 January 1999. If the offer was in respect of risks attaching from 1 December then if that offer remained unaccepted, as it did, at that date the offer lapsed. In any event, an offer of reinsurance is only open for acceptance so long as the material facts on which it was based remained the same. Once the Elk Point loss was discovered then when it was disclosed, as it should have been, Mr Woodgate would have been entitled to withdraw it or it would be treated as being withdrawn without further intervention from him.

In fact, the offer, if such it was, on 23 November 1998 was never accepted according to its terms by any of the Cover Underwriters. Indeed, it appears from the contemporary documents that the Cover Underwriters were invited to renew for the 1999 year on the basis of reinsurance with effect from 1 January 1999. If that were to be regarded as an occasion for an acceptance of the reinsurance it was an acceptance of an offer which had not been made. The slip did not contain two different offers, one on behalf of the Company and one on behalf of Syndicate 1688. It was at best one offer and not a collection of offers which could be accepted independently.

When did Syndicate 62 accept the Cover Reinsurance?

There is some evidence that Mr Watters and Mr Hart of Syndicate 62 accepted a renewal of the Cover on 3 December 1998 [when Mr Hart scratched an endorsement]. But it was improbable that Syndicate 62 would commit themselves to a reinsurance before Syndicate 535 committed itself and Mr Hart and Mr Watters had had a previous bad experience with a reinsurer who disputed the basis on which the reinsurance contract had been placed and as a necessary precondition Syndicate 62 wanted any reinsurer of the Cover Underwriters to have in writing disclosure as to the nature of the Cover and what would or might be written to it. The document in question was not provided to Mr Woodgate until 16 December and Syndicate 62 never scratched it until 22 December 1998. On the facts it is unlikely that the MOU was seen by the Cover Underwriters until very shortly before 22 December 1998. In fact the document was still called Cover Concept/ Evolution as late as 18 December 1998.

Syndicate 62 would not have committed to buying the reinsurance until they were aware of its terms. There was no evidence on the Syndicate’s files to indicate that they were ever shown a copy of the 23 November slip and the probabilities are that they were not. The handwritten note made on the Endorsement scratched on 3 December by Syndicate 535 and Hart on behalf of 62 [by Paul Welden] would have been more detailed had the slip been available and a copy of the slip would have been made and attached to the note. The note only refers to reinsurance on offer but no indication of acceptance. Mr Watters did not know the identity of the Reinsurer until 1999. Syndicate 62’s own underwriting notes show that they regarded the renewal date of the Cover as 22 December 1998, and no earlier.

Although there was some confusion in the documents, it does appear that prior to late December 1998 there were no declarations written to the 99 year of the Cover. Mr Gruder QC submitted that this was not surprising because until 18 December 1998 the Cover was not fully placed.

When did Syndicate 187 accept the Cover reinsurance?

The only evidence before the court in relation to this question is a statement made by Mr Regan of 187. 1688 chose to put his statement into evidence and neither the Claimants nor AON sought to exercise their right to cross-examine him. From the witness statement it is clear that Mr Regan needed some persuading before he agree to the reinsurance. It is inherently unlikely that Syndicate 187 would have agreed as at 3 December to accept the reinsurance. The most probable date is 23 December 1998; the date of an Underwriting Note which is the same date as the scratches on the attachment, the MOU, the Claims Breakdown as at 23 November 1998 and the reinsurance slip.

AON’s case that there was a meeting in early December soon after the meeting with 535 and 62 on 3 December 1998 is “unconvincing”. Mr Matson suggested in evidence that 187 and 228 would have scratched an Attachment shortly after it was scratched by 535 and 62 and that the document has been misplaced. But no record of such a document has been disclosed by the two Syndicates. The probabilities are that they would have retained a copy of such a document in their own files, just as Syndicates 62 and 535 did. And why were the scratches of 187 and 228 not to be found alongside the scratches of 62 and 535? Mr Matson was untruthful when he suggested that 187 would have scratched a copy of the MOU when it was still called the Cover Concept/Evolution document when neither Mr Seymour nor Mr Watters [of Syndicates 535 and 62 respectively] had seen them. Further, Mr Regan’s unchallenged evidence is clear: Mr Regan scratched the MOU on 23 December 1998 and recalls asking Mr Matson why it had been prepared and Mr Matson told him why.

When did Syndicate 228 accept the Cover Reinsurance?

There was no direct oral evidence from the Syndicate as to the circumstances in which they came to renew their participation on the Cover and accept the reinsurance from Euclidian. There is no evidence to suggest that 228 agreed to renew the Cover until they scratched the slip, the reinsurance slip and the MOU on 30 December 1998. There is room to doubt whether there could be a valid acceptance of reinsurance from 1688 since 228 could not, under Lloyd’s regulations, be reinsured by 1688, as they came from the same stable. Ultimately, the reinsurance arrangements were only finalized after Euclidian had got the reinsurance they required by 11 February 1999. This was the date when 228 was reinsured in respect of its participation.

In any event, the information which AON received about the Elk Point well disaster as at 1 December was sufficient to place on AON a duty of disclosure. As at that date AON knew that there had been a well blow out which was, according to Boots and Coots “in the higher end calibre”. Mr Gruder QC argues that it did not matter that as at 1 December 1998 no figure could be put on the value of the loss. The information disclosed a serious risk of a substantial claim to the 1998 year of the Cover, even if the quantum of the loss was as yet unknown. A fair presentation of the loss history required an inclusion of the latest knowledge of the extent of the disaster. Therefore if there had been a commitment by 535, 62, 187 and 228 as at 3 December or very shortly thereafter then any contract of reinsurance is voidable for non-disclosure and has been validly avoided.

Mr Woodgate was unaware of the Elk Point loss until 1999. The Court should readily conclude that Mr Woodgate was induced to write the reinsurance by reason of the non-disclosure. “The obviousness of the materiality of the Elk Point loss, certainly as at 8 December 1998 … makes a finding of inducement inevitable.” The documents show that Mr Woodgate was particularly concerned with the loss history. The importance of the aggregate deductible was obvious. The effect on the claims history of a further loss to the 1998 year, whether of $5 or $15 million is obvious. The experts are agreed that what AON knew on 8 December 1998 was material for disclosure. “The notion that [Mr] Woodgate would have written the Cover reinsurance on precisely the same terms if there had been a disclosure of the Elk Point loss of $5 or $15 million to the Cover for 1998 is ridiculous.” Even disclosure of a well blow out itself would have been sufficient to induce Mr Woodgate to write the risk on different terms or to refuse to write it at all. On the hypothesis that some of the Cover Underwriters had accepted the reinsurance before AON had material knowledge of the Elk Point loss and others had not, Mr Woodgate would nonetheless have been entitled to withdraw his offer from those Cover Underwriters who had not accepted. It would have been quite normal for a reinsurer to whom material had recently been disclosed to say that he was not prepared to sell any more insurance on those terms, and there was no reason in principle why some of the Cover Underwriters should have reinsurance and others not.

In relation to Euclidian as a fronting reinsurer of 228’s participation in the Cover, if 1688 are not entitled to avoid the retrocession of Euclidian, then they can say that Euclidian had no liability to 228 by reason of the misrepresentation or non disclosure of the Elk Point loss and therefore Euclidian has nothing to pass on to 1688 under the retrocession. Prior to settlement it had been Euclidian’s case against 228 that it was under no liability to 228 under the fronting reinsurance. Following the settlement Euclidian withdrew that part of its case and affirmed its liability to 228 which it seeks to pass on to 1688. The loss information provided to 228 was prepared by Mr Finlay of AON and the claims details are as at 23 November 1998; yet Mr Finlay was well aware of the Elk Point loss; the claims figures were not adjusted and no disclosure was made to 228 of the loss. Mr Matson, who also knew of the Elk Point loss went to see Mr Hegarty on 18 December 1998 and he said that he did not have the claims information with him at the time. That evidence was “frankly ridiculous” as the notion that a broker would approach a new underwriter without claims history makes no sense. Without such information no prudent underwriter would have written the risk. Mr Hegarty said that he wrote the front as a favour to AON and did so on the basis that he could participate on the Cover as a Cover Underwriter. The Court should readily conclude that Mr Hegarty was misled into believing that the loss information as at 23 November 1998 was accurate and up to date and that if he had been told the true position he would have refused to write the line on the Cover and the front. By the time Mr Hegarty was approached AON [including Mr Matson] knew that there was an unofficial reserve on the Elk Point loss of some $15 million. The Court should accept Mr Hegarty’s claims in evidence that the size of the claims made a difference on his decision to front. He had said more than once that the likelihood and severity of claims were paramount considerations because he would be paying claims before he recovered from the fronted for reinsurer. The claims history was material to the decision to be taken by Mr Hegarty in relation to the front and was not, as Mr Holmes suggested in his expert testimony, just a matter of good housekeeping. “The court should conclude that the accurate claims position was material to a fronting reinsurer in Euclidian’s position.” In any event, proof of materiality is unnecessary; Euclidian was entitled to rescind the fronting reinsurance by reason of the misrepresentation of the claims history: it was put forward untruthfully as accurate and up to date.

Mr Leggatt QC submitted that the fact of the Elk Point loss has been exaggerated. It was a loss which was never going to impact on the Reinsurers for the 1999 year of account; it was of historical interest only. The most important factor for someone in Mr Woodgate’s position would be to understand the business being written to the Cover by examining the declarations made to the Cover for the preceding years. Second, Mr Woodgate’s decision would be affected by the capability and reputation in the market of the lead underwriter who would be binding the risks to the Cover. The claims statistics would be one factor and would not outweigh or affect the decision of an underwriter who thought the general quality of the book was satisfactory. Nonetheless, a factor is “material” within the meaning of section 18(2) of the 1906 Act if it is a circumstance that would influence the judgment of a prudent underwriter in fixing the premium or determining whether he will take the risk. “For these purposes, it is not necessary to show that the circumstance is one that would, if known, have made any difference to the decision reached; it is sufficient if a prudent underwriter would have wanted to know of the circumstance”: see Pan Atlantic Ins. Co v Pine Top Ins Co [1995] 1AC 501. AON accept that the Elk Point loss was a material circumstance within the meaning of the Act, as interpreted by authority. However, the duty of disclosure only exists during the period up to the conclusion of a binding contract of insurance or reinsurance. Once concluded there is no such further duty.

The analysis of Hobhouse J in The Zephyr [1984] 1 Lloyd’s Law Reports page 58 is applicable here. There, the broker obtained reinsurance cover before the underlying insurance had been placed. With the assistance of the reinsurance slip signed by the reinsurer, the broker obtained insurance cover [the details do not matter]. The Court held, amongst other things, that the broker was acting throughout on behalf of the assured; that a binding contract between insurer and reinsurer was concluded even though the insurers’ acceptance of the reinsurance was not communicated to the reinsurer; the fact that at the time when the reinsurer signed the slip the identity of the reassureds was not known did not affect the position. The signing of the slip by the reassured was a unilateral offer to such Cover Underwriters as might subscribe to the 1999 year of the ’77 Cover and was akin to the offer in Carlill – v - Carbolic Smoke Ball [1893] 1 QB 256; A can bind B to C even though C’s identity was not known or capable of being known at the time of the contract between A and B: New Zealand Shipping Co v Sattherthwaite [1975] AC 154.

Thus, the slip signed by Mr Woodgate on 23 November 1998 was an offer addressed to Cover Underwriters. I interpolate at this stage. It seems to me that there are good and compelling commercial reasons why such an offer should be regarded as binding for so long as the broking to the Cover Underwriters is in progress. The Reinsurers have the benefit of the brokers’ promise that they will offer the reinsurance, and no other, to the Cover Underwriters as part of the broke, in return for the Reinsurers’ promise to reinsure whomever becomes the Cover Underwriter for the relevant year. The late Lord Hobhouse considered [The Zephyr at page 80] whether there might be a binding contract between the Reinsurer and the broker at this stage and reserved this point for further consideration. The weight of the expert evidence in this case suggests that the market considers that the Reinsurer has made an offer which can be withdrawn at any time before acceptance. Had I felt free to do so, I would have been inclined to hold that the offer was not capable of being withdrawn before the broke to the Cover Underwriters had been completed, as a matter of binding contract between the broker, as agent of the Assured rather than himself, and the Reinsurer. But Mr Leggatt QC, rightly perhaps, in the light of the evidence did not feel able to maintain that position and he conceded for the purposes of these proceedings only that on 23 November Mr Woodgate made an offer of reinsurance which was capable of being withdrawn before acceptance. As a matter of law, each acceptance by a Cover Underwriter created a separate contract of reinsurance with Syndicate 1688. The offer was, at least in theory, capable of being withdrawn from just one of the Cover Underwriters.

On the evidence the offer of reinsurance had been accepted by Syndicates 62, 187 and 228 before AON became aware of the Elk Point loss on 8 December 1998. Because Euclidian did not agree to participate in the Cover until after 8 December there was a duty of disclosure to them before the contract was concluded. “However it is inconceivable that if the Elk Point claim had been disclosed to Mr Woodgate he would have sought to impose different terms on Euclidian from those which had already been accepted by the Cover Underwriters.” “It is one thing to say, however, that such an offer is not irrevocable as a matter of law; it is quite another thing to say that as a matter of commercial reality an underwriter would, save in the most exceptional circumstances seek to resile from a firm offer that he has given because of an event that occurs after the offer has been made.”

On an analysis of the 23 November slip, all the relevant terms of the reinsurance were identified, including the premium and size of line. The slip had been scratched by Mr Woodgate “thereby signifying his agreement to provide reinsurance in accordance with its terms and the slip was unqualified in the sense that there were no subjectivities.” The stamping and referencing for the new syndicate as from 1 January 1999 were purely administrative acts which do not need to be completed before the risks attached. This was the uncontradicted expert evidence of Mr Holmes and Mr Outhwaite. There is nothing in the slip which suggests that it was not to be used by the broker for his broke to the Cover Underwriters and accordingly the slip was a binding offer of reinsurance to the Cover Underwriters for the 1999 year.

The three arguments put forward by 1688 as to why the slip was not a binding offer should be rejected. First, reliance is placed on the fact that the slip was scratched in pensil. The weight of the evidence was that the use of a pensil in such a situation where there was a promised line did not establish that an indication rather than a promise was being given. This was the evidence of Mr Seymour of 535, Mr Watters of 62 and Mr Amies, the broker and all three experts. The use of a pencil was entirely consistent with a slip being committed to before the stamp and referencing process had been completed, when a tidied up slip would be scratched in pen. Second, Mr Woodgate suggested that as at 23 November negotiations were still in train and, therefore, the slip could not have been regarded as a binding offer. On the evidence, this appears unlikely and inconsistent with other parts of Mr Woodgate’s evidence and was contradicted by the evidence of Mr Amies. It is also to be noted that the slip does not say that the line was ‘subject to further loss information’. Third, it is said that the status of 1688 was such that Mr Woodgate was not promising a line from them and could not have done so because there were certain formalities that had to be completed before the Syndicate was allowed to trade. This point was a late invention after Mr Woodgate had clearly indicated in his earlier evidence that he had suggested to Mr Amies that HIH Casualty and General could write the risk for one month with a new policy for 12 months underwritten through the Syndicate. Apart from the one letter, there is no further disclosure on this issue and no evidence as to when Cotesworth began underwriting on behalf of the Syndicate or was authorized to do so. Whilst there was a disagreement between the experts as to the effect of the letter, I should prefer the evidence of Mr Holmes and Mr Outhwaite to that of Mr Youell. If the 23 November slip was a firm offer on behalf of both HIH Cas & Gen and the Syndicate, the position is the same whether Mr Woodgate was acting properly or improperly at that time.

The offer of reinsurance contained in the 23 November slip was capable of acceptance by communication to the broker of an order for the reinsurance. In the case of Syndicate 62, the offer was accepted when Mr Hart agreed to renew the syndicate’s participation in the Cover at the end of November and was confirmed when Mr Watters scratched the renewal endorsement on 3 December 1998. In the case of Syndicates 187 and 228, their agreement to renew the Cover and buy the reinsurance was given at meetings very shortly after the cover renewal by Syndicates 535 and 62 given on 3 December and before 7 December 1998. The acceptance is proven even if Mr Backhouse and Mr Matson of AON are wrong in their recollection that these two syndicates scratched a copy of the renewal endorsement. Euclidian agreed to buy the reinsurance in two stages [as Euclidian agreed to take a 5% line which was increased by another 5% to make a 10% participation]: on 18 and 30 December 1998 respectively. The signature by Mr Woodgate to the tidied up slip on 16 December 1998 was a confirmation of the contracts already made with Syndicates 62, 187 and 228 and a renewed offer of reinsurance to Euclidian concluded by 30 December 1998. In relation to 228, the contract between 228 and 1688 was replaced by a later contract between 1688 and Euclidian when Euclidian agreed to front the reinsurance for Syndicate 228. Euclidian at the same time offered to 1688 to add a further 6.66% which Mr Woodgate agreed to on 11 February 1999 when at the same time he cancelled the direct contract with 228.

AON first knew about a potential claim under the Elk Point policy on 8 December 1998. The suggestion that they acquired knowledge of material facts before that date should be rejected. Copies of newspaper bulletins which were received on 1 December 1998 did not give rise to a duty to disclose and 1688’s attempts to make use of this date were misplaced and not supported by any expert evidence. Accordingly there was no failure to make disclosure in relation to syndicates 62, 187 or 228 because those contracts had been concluded before 8 December. The Elk Point loss should have been disclosed to Mr Woodgate between 18 and 30 December 1998. As to the substitution of 228’s 6.66% for Euclidian’s 6.66% on 11 February there was no duty to disclose since the only effect of the change was to change one reassured for another.

It is inconceivable that Mr Woodgate was induced to enter into the agreement by reason of any non-disclosure and that he would have acted any differently had he been told of the Elk Point position as at 8 December 1998. Mr Woodgate regarded the business as attractive to write. The energy market was soft and underwriters were hungry for premium income. He regarded the Cover as “prestigious”; others spoke of the Cover being a good piece of business to write; Mr Hegarty regarded the offer to participate on the Cover as an excellent offer. Mr Tobin and Mr Hopper shared this view: the Cover was well known in the market as an important part of AON’s book of energy business and was known to be very profitable for 535. By subscribing to the Cover, underwriters could anticipate exploiting their connection with AON for future other business. It is unrealistic to suppose that an underwriter would have been led to reconsider his decision by the advice of a single claim which he was not going to have to pay. Historical claims information was not the most important factor to a competent underwriter in Mr Woodgate’s position. The evidence showed that where a claim was notified at a late stage after a line had been agreed, the common practice was to take this fact into account on renewal, presumably by adjusting the premium in some way. Once the commitment was given the expectation in the market is that it will be honoured, even if, technically, the offer could be withdrawn. The attitude of the market would depend upon the reason why the offeror was pulling out. At best for Mr Woodgate, Mr Youell said:

“In practice the market would apply a proportionality test, in that the loss must be of sufficient size and significance to make a real difference to the underlying facts on which the underwriter based his opinion.”

There is no reason to think that Mr Woodgate would have considered the Elk Point claim to be an event of sufficiently large size and significance to justify the exceptional step of seeking to resile from a firm offer that he had already given. That possibility becomes even more fanciful when the offer had been accepted by 40% of the 50%. Therefore, 1688 has wholly failed to prove that if the claim in relation to Elk Point had been disclosed to Mr Woodgate on or after 8 December Syndicate 1688 would not have entered into the contracts it in fact made.

Are Syndicate 1688 entitled to rely on defences which are not pursued by Euclidian? The case with Euclidian was settled and by it Euclidian agreed to withdraw all disputed allegations set out in the statements of case, experts’ reports and witness statements and “accept and acknowledge that the 535 and 228 Reinsurance Contracts are valid, subsisting and effective” and Euclidian acknowledged its liability to pay to Syndicates 535 and 228 the full amount of all past, present and future claims which fall within the terms of the 535 and 228 reinsurance contracts.” By an open letter Euclidian confirmed that

“As a result of the settlement we hereby withdraw our claim to avoid the Contracts and affirm that each of the Contracts is a valid and subsisting contract of reinsurance.”

Syndicate 1688 amended their defence to allege that Euclidian is “obliged to take” its previous defences in defence of claims made by Syndicate 228 and that if it does not do so then Syndicate 1688 “will not be liable … for payments made by [Euclidian] to Syndicate 228 which would not have been payable if such defences had been taken”. Whilst it is accepted that a reinsurer may [subject to express terms to the contrary] legitimately refuse to indemnify a reinsured who has compromised a claim with the assured on the grounds that the reinsured was under no liability to the assured, there is no dispute that losses have occurred which impact on Euclidian’s fronting reinsurance contract and which fall within the back-to-back arrangement with 1688. The effect of non-disclosure is not to cause the contract to be discharged automatically, it merely gives the insurer the right to avoid the contract which is an option capable of being exercised or not. Here, Euclidian have expressly withdrawn their claim to avoid the contract and has affirmed the contracts as valid and subsisting. In the absence of an express or implied term to the contrary effect [and none is pleaded] it is not a defence in law for Euclidian to prove that Euclidian could have succeeded on their avoidance case. But in any event, such a claim by Syndicate 1688have been bound to fail because the Elk Point loss was not a claim material to be disclosed to Euclidian and in any event, Euclidian was not induced to enter into the fronting arrangement by reason of any such non-disclosure. As a fronting insurer with a follow the settlements clause, the only material risk to Euclidian was a security risk, ie the risk that Tryg Baltica would become insolvent. Two of the three experts expressed the opinion that claims information is immaterial in these circumstances and the third expert, Mr Youell, expressed no opinion on the point. The evidence shows that Mr Hegarty did not see or ask to see any claims information before Euclidian agreed to provide fronting reinsurance; his evidence that he did or must have seen some details of the claims should be rejected as it is contrary to the objective evidence. The only claims breakdown in Euclidian’s file came into existence after 18 December, the date when Mr Hegarty said he would or must have seen them. The document reference number shows that that document was first created by Alex Dicks of AON on 21 December 1998. Mr Hegarty’s note of the key points of the broke made no reference to claims. Mr Hegarty did not scratch any claims breakdown on 30 December 1998; the only breakdown he scratched was a day later when the document was presented to him as part of the package of the Cover documents. Mr Hegarty’s only concern was to secure a tight simultaneous settlements clause, as one might expect. It was not suggested by Euclidian that Mr Hegarty should have been given any claims breakdown when he increased the front to add 6.66%. Given the small change involved it would not have been Mr Hegarty’s case that disclosure of the Elk Point loss would have been of any interest to him. As to whether Euclidian were entitled to avoid the fronting arrangement, the court should conclude in the absence of any case to that effect by Euclidian that the answer to that question is no.

As a result of the settlement, the Claimants and Euclidian are united. Following the settlement the position is that Syndicate 535 pursues its remaining reinsurance claim against 2591 [Cox]. During the hearing, what had previously been a torrential downpour of pleaded allegations by the reinsurers, turned into a mere trickle. There were 104 declarations to the Cover and complaints in the pleadings were made about 87 of them. As a result of a process of refinement, the end result is that effectively only 6 declarations are pursued in detail although the claims in relation to the others are not formally abandoned. The nature of the complaints about the declarations is that they were either written [accepted to the Cover] negligently or were accepted to the Cover because Mr Seymour, effectively, was prepared to write against his reinsurance.

Mr Woodgate was an unsatisfactory witness who suffered from both an over and under recollection of events and revealed himself to be a “thoroughly incompetent” underwriter. Having committed his syndicate to a reinsurance on a risk attaching basis he said that he thought he was only committing his syndicate to reinsure these risks for a period of 12 months. That showed his incompetence and the fact that he did not really know what he was doing.

In relation to 1688’s claim based on non-disclosure of the Elk Point loss, the Claimants had nothing to add to AON’s submissions. So far as the Claimants are concerned it was accepted on behalf of AON that if 1688 were entitled to avoid the reinsurance for non-disclosure then AON would be liable to the Cover Underwriters. However, since Euclidian was one of the Claimants it had an interest in the question whether Euclidian had to prove that the fronting reinsurance was valid and binding in order to pursue a claim under the retrocession contract and to answer the question whether it would be a defence available to Syndicate 1688 to prove that Euclidian was entitled to avoid the fronting reinsurance?

Euclidian has produced evidence of the existence of the fronting insurance which is prima facie valid and binding. In their latest amended defence, Euclidian have acknowledged the validity of the fronting reinsurance contract and its liability to pay claims; thus, it is for Syndicate 1688 to allege and prove that this fronting arrangement was not valid and binding. The Claimants support AON’s case on this issue, namely that the Elk Point loss was not a material fact to be disclosed. The weight of the expert evidence was to that effect. In any event, it was probable that Mr Hegarty would have agreed to write the front even if the Elk Point loss had been disclosed to him. Therefore, the Elk Point loss was neither material nor would Mr Hegarty have been induced to write the business if the loss had been disclosed.

In my judgment, as at 8 December AON were aware of a loss which was material to be disclosed to any prospective Cover Underwriter or Reinsurer. I reject the submission that AON had that knowledge as from 1 December 1998. At that date there were simply two newspaper cuttings and although there may have been telephone calls there was nothing sufficiently concrete to ‘go on’ to require disclosure in the context of a broke. Until there was some hard factual material, such as a loss adjuster’s report and estimate, whether the insurance written to the Cover for the 1998 year was going to be hit was unknown. The un-contradicted evidence of Mr Outhwaite and Mr Holmes was clear on this point and I unhesitatingly accept it.

Mr Holmes put the position succinctly and convincingly this way: Day 31 page 27:

As at 8 December 1998 what was the contractual position as between Mr Woodgate’s Syndicate and the Cover Underwriters? In my view the slip which Mr Woodgate scratched on 23 November 1998 was intended by him to convey an offer to all qualifying Cover Underwriters for the 1999 year to provide reinsurance in the terms of the slip and that that offer was made on behalf of both HIH Casualty & General for the period 1 December to 31 December 1998 and the new HIH Syndicate 1688 as from 1 January to 31 December 1999. I use the word “qualifying” to indicate that it was known to everyone at the time that 535 could not be reinsured by another Cotesworth venture: see Mr Amies’ memo of 18 November 1998 making this point. I reject all the arguments raised for suggesting that the slip was not a firm offer.

In the first place, the argument that as the scratch was in pencil it was only an indication and not an offer has no support from the experts and indeed is contrary to market practice. Had Mr Woodgate intended that the slip was only an indication he would have said so on the slip itself. I am satisfied that he knew the importance and legal significance of a slip and what was written on it. He was anxious to participate in what was regarded as a good piece of business and the premium income from the Energy Cover was an important start for the new Syndicate. The Cover was generally highly valued in the market as being a well written book likely to produce a profit at the end of the day.

Second, I reject the suggestion that Mr Woodgate was not in a position to make an offer on behalf of 1688, the new HIH Syndicate. His first witness statement made it clear that he raised the question with Mr Amies and that he suggested the idea of writing the slip initially for the company which was going to go into run-off at the end of the year and then for the benefit of the new HIH vehicle, their Lloyd’s Syndicate.

“I believe I suggested to Amies that HIH Casualty and General could write this for one month until 31 December 1998, with a new policy for 12 months at 1 January 1999 underwritten through Syndicate 1688.”

The case that Mr Woodgate cannot have been acting on behalf of the Syndicate at that time seems to me to be somewhat artificial. Such a new Syndicate must write business for its first year of trading [that is, from 1 January] prior to that date, if only because of the way the market works, namely a calendar year basis with the renewal season in full swing in December of any year. It is true that no risks were written to the Cover which impacted on the reinsurance before 31 December 1998 but that was because, I think, the reinsurance was never required to be effective before 1 January. Prior to that date the 1998 Cover Underwriters had made their own reinsurance arrangements on a facultative basis. To this extent, the slip was contradictory: it was reinsurance for the Cover Underwriters but only in respect of the policies declared to the 77/1999 Energy Cover. For this reason, on a proper construction of the slip, risks under those policies could not attach prior to 1 January 1999 and there could be no risks attaching to that Cover during the period 1 December 1998 to 31 December 1998. But this error does not vitiate the offer made by Mr Woodgate. As for the words “subject re-referencing and new stamp with effect from 1 January 1999”, he intended them to mean, and they did mean, that there was to be a process whereby references were to be put onto the slip and a stamp applied. As a matter of practice, and law, the insertion of references and the putting down of the stamp were administrative formalities to be completed when, as AON put it, the slip was tidied up.

In my view the probable explanation for Mr Woodgate’s use of pencil was nothing more than a reflection of the fact that another document would, for purely administrative reasons, have to be drawn up and signed. The stamp was not yet physically available. I consider that there is not enough in the letter from Lloyd’s to justify the view that the Syndicate was not able to operate until something further had happened. Like Mr Leggatt QC I regard it as unsatisfactory that the Court has simply been provided with one letter from Lloyd’s without any proper explanation as to what the further approval process involved, if anything, and when it was completed and how. Although as a Judge one might perhaps be instinctively more cautious than others when formalities have to be completed, the majority of the evidence supported AON’s case on this issue. It is said that Mr Woodgate “could not make” an offer on behalf of the Syndicate, but he did; whether in doing so Mr Woodgate exposed himself to sanctions from Lloyd’s is another matter. Mr Amies who broked the reinsurance to him was firmly of the view that as at 23 November 1998 he had had a firm offer both on behalf of the company and the Syndicate. Mr Woodgate’s initial testimony showed a practical view from on the ground and this was supported by two of the three experts. Mr Holmes and Mr Outhwaite took the view that agreement by Lloyd’s in principle was sufficient; Mr Youell disagreed. I am inclined to the view that on this issue, Mr Woodgate was in a position to make the offer he did; but that in any event he made an offer on behalf of the newly formed Syndicate.

Third, I reject the suggestion that the offer was contingent upon further negotiations with the broker. This part of the case was based entirely on a reconstruction of the documents and not upon actual recollection. Mr Woodgate has convinced himself that as he was given claims information after 23 November and as he was a prudent underwriter, he could not have intended the slip which he scratched to be binding. In fact, the evidence is clear and I accept what Mr Amies told me. The loss figures had been presented to Mr Woodgate and he went through them before he scratched the slip. He made handwritten annotations; subsequently, Mr Amies provided him with a typed up copy of the calculations that Mr Woodgate had done. The reason why Mr Finlay sent a copy of the claims breakdown to Mr Amies on 24 November was probably because the copy of the claims breakdown on which Mr Woodgate had made his annotations was kept by him and Mr Amies wanted another copy for his own records. In his first witness statement, Mr Woodgate was clear that all relevant discussions had taken place with Mr Amies on or before the day he scratched the slip and that there was no further broke to him as such when he scratched the tidied up version on 16 December 1998. That evidence was correct and accords with the impression which Mr Amies had at the end of 23 November 1998, namely that he had in his pocket a binding offer of reinsurance which could be used by the brokers when seeking renewals by the Cover Underwriters for the following year.

Therefore, in my judgment, by November 24 1998, Mr Woodgate had committed the new HIH Syndicate to offering the reinsurance set out in the slip. The slip contained all the relevant terms of the reinsurance, including the premium and the size of Mr Woodgate’s line. Mr Woodgate had carefully amended the draft to accord with his requirements and there is no suspensory clause [or subjectivity] included within the slip to postpone its legal effect. The slip is an important document in the Lloyd’s Market. What Mr Woodgate must have intended by scratching the slip was that the brokers were free to put forward his offer of reinsurance to any qualified renewing or new Cover Underwriter for the 1999 year of the ’77 Energy Cover. As a matter of law, the offer contained in the slip was capable of being accepted by a communication to that effect to the broker and was capable of being accepted by a qualified Cover Underwriter, even though their identity was unknown at the date of the offer and incapable at that time of being ascertained: see Hobhouse J in The Zyphyr at pages 71 and 72; and see also the judgment of Mustill LJ on appeal in The Zyphur [1985] 2Lloyd’s Reports 529 at 532:

“…a practice has developed whereby a broker instructed to obtain a primary cover will on his own initiative approach potential reinsurers to obtain from them in advance a binding promise to provide reinsurance for whatever person may subsequently write a line on the primary cover and desire to reinsure the whole or part of that line. The reinsurer conveys this promise by initialling a percentage line on a slip, which identifies the subject-matter, the nature of the risk and the value. The slip does not, however, identify the reassured and could not do so: for at the stage when the potential reinsurer is approached, it is not known whether the primary insurance will ever be written at all, and if so by whom; or whether any of the primary insurers will desire to effect reinsurance; or whether any insurer who does desire to reinsure will be willing to do so with the reinsurer whom the broker has approached, and on the terms which he has offered. With this promise “at large” in his pocket, the broker can offer to an underwriter a package consisting of the opportunity to take a line on the primary cover, and at the same time to place an order for reinsurance.”

When was there a binding contract between Syndicate 1688 and any or all of Syndicates 62, 187 and 228? It is common ground that the duty to disclose ceases when the contract of insurance or reinsurance has been concluded. In my view there is little doubt about the acceptance of the reinsurance by Syndicate 62 by 3 December 1998. I accept the evidence of Mr Backhouse that he had discussed the reinsurance with Mr Hart. I also accept that Mr Backhouse was told of the need for reinsurers expressly to accept the basis on which the reinsurance was being written. I have already indicated that I do not think it likely that the slip itself was shown to Syndicate 62 at this time. But Mr Watters scratched an Attachment to the Cover Note indicating his acceptance of a renewed line of 25% subject to common account reinsurance. Therefore, if acceptance of an offer of reinsurance given to the broker by the reinsured requires knowledge of the identity of the reinsurer then acceptance by Syndicate 62 cannot have occurred as at 3 December 1998. But the commercial reality is that provided the security was a Lloyd’s Syndicate, the precise identity of the reinsurer was not an issue. Mr Watters knew the principal terms of the reinsurance on offer and plainly, I think, was intending to make an acceptance of that reinsurance a part of his acceptance of the renewal. In my judgment there was a binding contract between Syndicate 62 and Syndicate 1688 constituted by Mr Woodgate’s offer and Mr Watters’ acceptance communicated to the brokers on 3 December 1998, even though Mr Watters did not then know the identity of the reinsurer, other than that it was a Lloyd’s Syndicate. The fact that Mr Hart had asked that a document should be prepared to ensure that the reinsurer had no grounds for challenging the validity of the reinsurance on the basis that what was declared to the Cover was not what he expected, and that that document had not by then been given to Syndicate 62 for their approval does not make any difference to the analysis, in my view. The stipulation was not so much a pre-condition which had to be fulfilled before the contract became effective in law; rather it was a condition which was to be fulfilled at some stage: the acceptance of the reinsurance was on condition that [at some stage] the reinsurers signed a document acknowledging the basis upon which the reinsurance had been tendered. In fact, Mr Watters rejected the suggestion that his acceptance of the reinsurance was ‘conditional’ upon approval of the MOU at all and I would be inclined to accept his evidence on this point. There was no subjectivity to the contract entered into between Syndicate 62 and the Lloyd’s syndicate [1688] offering the reinsurance.

As to Syndicate 187, the essential issue is whether I believe Mr Matson and Mr Backhouse that they visited the last year’s two following Syndicates between 3 December and 7 December 1998; specifically Friday 4 December or Monday 7 December. The first point to make is that there is no documentary evidence in existence to prove that this happened and, secondly there has been no evidence from either of the two Syndicates. In general, I found Mr Backhouse to be a witness of truth. Throughout his evidence he resisted with grace the proper and penetrating challenges to his recollection. As best as I could judge he invented nothing and, at worst, was capable of having an incorrect recollection. I cannot go so far as this with Mr Matson’s evidence. I have to say that I thought that on occasions he gilded the lily by saying things which were not correct. This was for understandable reasons. His reputation in the market place was seriously challenged. He was accused of downright dishonesty and over-reacted to that basically unfounded allegation. In such circumstances, his reaction during the evidence was entirely understandable, if not always admirable. My judgment of him was that he was a fundamentally honest witness who tried to do his best to help the court. I am sure that he never mentioned the Elk Point loss at any stage during the broke to the Cover Underwriters or at any time before January 1999. There is no doubt that he knew of the loss, as did Mr Backhouse and Mr Finlay.

It is 1688’s case that AON “chose to suppress disclosure of the Elk Point loss for fear that its wider dissemination would prejudice AON’s prospects of getting the Cover Reinsurance fully placed and the Cover renewed in full for 1999.” In my view this allegation goes much too far. So far as the Cover Underwriters were concerned the two principal leaders [535 and 62] were aware of the loss yet were willing to renew their participation; in the case of 535 their decision to renew was not, on Mr Seymour’s evidence, contingent on there being any reinsurance on offer. Deliberately failing to mention a material fact to procure a commercial advantage is a serious allegation to make against a broker and needs to be looked at with some care. I reject at once the suggestion that AON ought not to have resisted the application for permission to amend and that by doing so they were pretending that the relevant personnel who were to be called to give evidence were unable to deal with the Elk Point loss without sight of a claims file when they must have had it in their minds all along. It seems to me more likely that the reason why the Elk Point loss was not mentioned was due to error rather than misdeed. AON had no incentive to conceal the loss. The renewing underwriters all renewed, save for a 10% line, the loss of which had nothing to do with Elk Point, so far as the evidence went. The Cover was a good news story and there is no evidence to suggest it was hard to sell. The renewing syndicates all knew about the loss shortly after it occurred.

In this case both parts of the reinsurances were ‘in place’ before AON were aware of facts requiring disclosure. The reason why Mr Matson told the Court he believed he would have informed Euclidian of the Elk Point loss before securing their replacement line on the Cover was precisely because, I think, he could not understand in his own mind how he failed to disclose it. Had there been some kind of conspiracy of silence, his evidence would have been different, I think. Nor do I accept that there was a decision taken not to inform Mr Amies of the Loss. That was an accident probably, and I speculate, caused by the physical separation of their offices. Everything points to oversight; not least the impression which the AON witnesses gave me. Mr Gruder QC put his case too high in suggesting a deliberate act of non-disclosure. That is not how the evidence came across to me. If AON thought, as they did, that the reinsurances were ‘in the bag’ as at 23 November and 7 December [before Elk Point had become an issue] it is, perhaps not surprising [save in relation to Euclidian] that they said nothing further about it; and the oversight in relation to Euclidian was entirely understandable since all the other Cover Underwriters were aware of the Elk Point loss.

Although I take the view that the duty of disclosure to Mr Woodgate probably came to an end in relation to Syndicates 62 and 187 before AON were aware of material facts, the position with Syndicate 228 and Euclidian is different. It seems to me that Syndicate 228 were not entitled to accept Mr Woodgate’s offer since they were under the same management. As I understand the position, even if Syndicate 228 had purported to accept the reinsurance it was probably not an enforceable contract. So far as Euclidian is concerned there was no excuse for them not being informed of the Elk Point loss, which, ex concessis, was a material fact which ought to have been disclosed in relation to their own 10% line.

I recognize that the issue as to whether there was any concluded contract before 22 December 1998 is nicely balanced and it would not be satisfactory if I were to consider the effect of non-disclosure solely on the hypothesis that that is the right conclusion in law.

At this stage the question is whether the non-disclosure induced the contracts. This issue involves asking a hypothetical question, namely what, probably, would have happened had disclosure of the Elk Point loss been made to Mr Woodgate on or soon after 8 December 1998. This question is not truly a question of fact in the normal sense since the Court is looking at something which in fact did not happen. The Court’s judgment must be based upon all the relevant circumstances, including taking account of what Mr Woodgate said he would have done. On the one hand, Mr Woodgate had paid attention to the loss figures when he made his offer and had made appropriate annotations against them. The Elk Point loss was material since its existence might have caused Mr Woodgate to reflect on, and adjust, the terms which he offered. On the other hand, Mr Woodgate was running a new Syndicate which needed a good start. The Energy Cover was regarded as good business and underwriters welcomed the chance to be a part of it. But the most important consideration, I think, is that the knowledge of the loss occurred after Mr Woodgate had scratched the slip and after, at the very least, the substance of the offer had been used to broke to two of the Cover Underwriters who were in a position to accept it. I am satisfied that at Lloyd’s it is not unusual for events to occur during a broke and that it was common for the new event to be reflected in the following year’s arrangements, rather than undoing or trying to undo the work that had already been done. As at 8 December 1998 Mr Amies was of the view that he had had a firm and binding offer from Mr Woodgate and on the basis of what he had been told, he believed that the offer had been accepted in principle by the two lead Underwriters. Just as the question whether there was in fact and in law a binding acceptance of the reinsurance by two or three of the renewing Cover Underwriters at this time has occupied the Court’s time for many days, so the parties would have been debating the question had the Elk Point loss been disclosed as at 8 December, had Mr Woodgate been minded to withdraw his offer altogether. It would plainly not have been a commercial or sensible position for Mr Woodgate’s offer to be accepted by some but not all of the Cover Underwriters, since they demanded and had agreed common account reinsurance arrangements. I agree with Mr Leggatt QC that it is inconceivable that Mr Woodgate would have felt able to withdraw his offer just from Euclidian or to have sought different terms just for them and 228. In my judgment the process of the broke had proceeded too far by 8 December to make it commercially sensible for the firm offer to be altered significantly, and that is so, whether or not as a matter of fact and law the offer had already been accepted by Syndicate 62 and 187. Mr Woodgate was never going to have to bear the loss himself; it affected only the Cover Underwriters for the 1998 year of the Cover and their facultative reinsurers. It was thought at the time that the Cover would be renewed for the 2000 year and that the reinsurance could be renewed also for that year. As a matter of probability I take the view that had the Elk Point loss been disclosed to Syndicate 1688 on or after 8 December 1998 Mr Woodgate would have not withdrawn his offer, even were it open to him to do so; although the experts say he could have done so before acceptance, the fact is that Mr Woodgate had never done so before. Withdrawing an offer is rarely done [and, I may add, pace the experts in this case, may arguably not be lawfully done] and the last thing the underwriter of a new Syndicate would want would be to have a row with an established broker and underwriting team in the market in the energy sector where Syndicate 1688 wanted to place part of their book of business. I agree with Mr Outhwaite that no sensible underwriter would ever dream of resiling from a firm offer which had been accepted in part. And I am not sure that Mr Woodgate was inclined to disagree with this. His answers in cross-examination were tentative at best and I think he appreciated the effect that withdrawal of his offer might have had on the market, and the ensuing chaos.

Of course, with the benefit of hindsight, the contract which Mr Woodgate wrote was imprudent and became loss making. But looking at the position in December 1998, the picture was different and the prospects were good. What made the reinsurance imprudent was nothing to do with the past loss position; it had everything to do with Mr Woodgate’s misunderstanding of what he had bound his Syndicate to. At the end of the day, therefore, I am of the view that whilst there may have been material non-disclosure to Mr Woodgate and he could theoretically have withdrawn his offer to reinsure 228 and Euclidian [and possibly also Syndicates 62 and 187] the disclosure of a recent loss which occurred after the offer was made did not have a causative effect. Had disclosure been made the position for the 1999 year would have been no different.

There is a separate question as to the right of Syndicate 1688 to assert Euclidian’s alleged right to avoid the fronting reinsurance of Syndicate 228. In principle a reinsured who settles, or agrees to pay, a claim can only recover from the reinsurer if he can establish that he was liable in the first place [subject to any special contractual provisions such as a follow the settlements clause]. However as Mr Leggatt QC rightly submitted, the legal effect of a non-disclosure of itself gives rise to no defence as such; the effect of a non-disclosure is to give the insurer or reinsurer the right to avoid the relevant policy. It is a right which may be exercised. Euclidian has expressly withdrawn its claim to avoid its fronting arrangement with 228 and, in the settlement has affirmed the contract. It is not correct, therefore, for 1688 to argue that Euclidian is obliged to take its previous defences or else Syndicate 1688 will not be liable for payments made by Euclidian to 228 which would not have been payable had the points been taken. As a matter of law this is simply not right. However, Euclidian would not probably have been entitled to avoid the fronting arrangement for non-disclosure of the Elk Point loss as that loss was not material to be disclosed to them in relation to that contract. What Euclidian as a front having the benefit of a simultaneous settlements clause are concerned with is the solvency of Tryg. Claims information is not a material factor in relation to that security risk. The evidence of both Mr Outhwaite and Mr Holmes was quite clear on this issue and Mr Youell expressed no contrary opinion. Therefore, the Elk Point loss was not a material fact and therefore its non-disclosure gave Euclidian no right to avoid the fronting contract. In any event, the allegation borders on the absurd, having regard to Mr Hegarty’s evidence. It seems to me clear on the facts that Mr Hegarty did not in fact see or ask to see any claims information before agreeing to provide the fronting reinsurance. The only document on Mr Hegarty’s file which amounted to a claims breakdown and which Mr Hegarty said he saw on 18 December was in fact created on 21 December 1998 and scratched by Mr Hegarty on 31 December 1998, after the fronting arrangement had been bound on 30 December; Mr Hegarty’s key points for the broke make no reference to claims nor do his underwriting notes refer to the claims position. In other words, Mr Hegarty only directed his mind to material factors which did not include material relating to claims experience. That was entirely consistent with the expert evidence. This part of the claim is, on the evidence, hopeless and the position is not affected by what happened on 7 January when the fronting arrangement was extended by a further 6.66%.

I turn therefore to the next head: Misrepresentations and Non-Disclosure other than Elk Point. This was, until the late amendment, the principal ground upon which the reinsurers sought to resist the claims made against them. It was their case that they were misled as to the nature of the business that had been and was intended to be accepted to the Cover.

In essence these allegations [made both by 1688 and Cox] may be catalogued as follows:

I shall consider each of these issues in turn.

The MOU

“MEMORANDUM OF UNDERSTANDING

Historically, the 77 Energy Cover was an Alexander Howden Limited market facility pitched to accept business on an excess basis. However, acknowledging prevailing market conditions in recent years, the facility has increasingly entertained business on a “ground-up” basis, and it is with this trend in mind that the estimated net premium income figure for 1999 of US $10,000,000 has been set.

This figure represents annual estimated premium income, and contemplates only 1999 income deriving from the following categories of business to be covered under the reinsurance:

-Construction risks attaching during the twelve months at 1st January, 1999;

-Twelve month period operating risks attaching during twelve months at 1st January, 1999;

-Greater than twelve month period operating risks attaching during twelve months at 1st January, 1999;

-1999 (and subsequent) year of account signings in respect of greater than twelve month period operating risks attaching to antecedents of the 77 (1999) Energy Cover.

It should also be noted that this estimate is still very much predicated upon the AHL portfolio.

Whilst, since the “Aon-isation” of Alexander Howden Limited, the Cover has been opened up to accept business from previously established Aon owned London intermediaries (Bain Hogg International; Jenner Fenton Slade; Nicholson Leslie), it has to be recognized that the marketing strategy of the merged enitity has not yet homogenized to the extent that ALL Aon Group Limited Brokers consistently access the Cover when appropriate.

It could be inferred that the facts of:

-subsequent years of greater than twelve month period operating risks not being included;

-the increasing trend toward a “ground-up” underwriting philosophy;

-increasing utilization for ex-JFS/BH/NL business;

-access to the Cover for Grieg (U.K.) Ltd. following their “Aon-isation”;

will render the estimated net premium income US $10,000,000 conservative, and perhaps a more realistic figure taking these factors into account would be circa US $15,000,000.”

Mr Gruder QC on behalf of the 1688 and Cox made his submissions on this aspect under two heads: first a failure to disclose a “significant change” in the Cover; and secondly a failure to disclose the intention to write first loss risks to the Cover.

The Cover’s reputation in the market was as an excess Cover and the MOU acknowledges that fact. 535’s “underwriting philosophy” [as with Syndicate 62] for the last ten years had been to write energy risks on an excess basis and this was recorded in 535’s business plan for the 1999 year published in August 1998

“our strategy continues to avoid attritional losses that erode the premium base, emphasizing … high excess policies ... [and] avoiding … attritional losses emanating from Primary placements”.

There was a change in the business to be written to the Cover for the 1999 year which was variously described by the leading Cover Underwriters as either “a significant change” or a “change in emphasis”. The change was regarded as sufficiently significant by both Syndicates for them, independently, to obtain the reinsurers specific agreement to the change. Without reinsurance cover Syndicate 62 would not have renewed the Cover for the 1999 year. Because of the softening market pure excess loss business was not so readily available and it was going to be necessary for risks to be declared to the Cover from the ground up so as to have access to the excess layers. Less premium income had been generated in the 1998 year than had been forecast and unless there was a significant change in emphasis the Cover was becoming and going to continue to be moribund.

The purpose and intention of the reinsurance cover was to give the Cover Underwriters a buffer at the working end of the risk and leave them effectively as insuring or reinsuring excess layers. They were therefore in the same position as they had been when writing excess layer business: that is, keeping the excess for themselves and leaving the primary layer to the reinsurers.

The reinsurers were never told that their participation in what they understood to be a predominantly excess book of business was

“in truth to be used to “take out” the primary exposure from ground up risks so as to allow the Cover underwriters to retain the excess part of the risks. The Cover reinsurers would not be sharing in a predominantly excess book of business. They would not be participating in the excess business. On the contrary they would be writing the take out of the primary risk so as to enable the Cover Underwriters to keep excess business for themselves. They would be providing the means by which Cover Underwriters could write excess business, but they would not be participating in such business.”

The MOU did not disclose a significant change or a change in emphasis; falsely it gave the impression of continuity and evolving trends [eg “prevailing market conditions in recent years”; ”with this trend in mind”; “the increasing trend towards a ground-up underwriting philosophy]. Furthermore such was the proposed change that Syndicate 62 were not to renew the Cover for 1999 without reinsurance: “where is this disclosed in the MOU?”

Nor did the MOU truthfully or fairly disclose the issue of accepting to the Cover “ground-up” business. In the past when such business had been written the Cover Underwriters had obtained facultative reinsurance to remove the primary exposure. Fewer ground up risks had been written in 1998 than in 1997 and no CAR business had been written in 1998 because facultative reinsurance was not available.

The MOU gave the impression of a gradual change rather than a sudden step change planned for the 1999 year to accept more ground up business not as a response to gradual market trends but as a “determined individual underwriting initiative”. Mr Gruder QC relied upon Mr Youell’s report, which said that an underwriter considering the reinsurance contract would need to have disclosed to him the philosophy of his cedant’s underwriting and any anticipated change in it as well as the intended function of the proposed contract, as such facts would be material.

First loss or primary business means the first layer of insurance or reinsurance which sits above the Assured’s retention or above the basic deductible. By definition, first loss and excess business were mutually exclusive. In the energy market, as Mr Holmes accepted, first loss business had a potential for serious losses. Therefore, a first loss reinsurance [such as the present reinsurances after exhaustion of the aggregate deductible] of first loss business was similarly exposed. For example, the Cover Underwriters could take 100% of a first loss reinsurance of US$10 million or 10% of a ground up risk of US$100 million; if a US$10 million loss occurred then there would be exposure to the full US$10 million in the first instance and only to US$1 million in the second instance. In these circumstances it was essential that if Cover Underwriters intended to accept first loss business to the Cover this fact should have been disclosed to the prospective Cover Reinsurers.

The ground-up business being referred to in the MOU must be interpreted in accordance with the context. In a softening market it was increasingly difficult for the brokers to split risks into multiple layers and therefore there was a tendency for business to be offered and written from the ground up as there was a limited amount of business at higher layers available. Therefore, ground-up business meant business with the full stretch from the ground to the top, thus giving the Insurer/Reinsurer an opportunity to achieve premium income for what had previously been the higher excess layers whilst exposing himself to what had been low level business. The Court was asked to accept the definition of “ground-up” business put forward by Mr Youell:

“A “ground-up” policy is one that attaches immediately above a deductible or retention, if any, and provides coverage up to the total value of the item or schedule. In the case of very highly valued items, such as a refinery, a ground-up policy may not cover the entire value, but the expression would only be used to describe a placing where a significant stretch of cover is provided…”

Had AON intended to disclose that first loss or primary business was being written then these were words which would have conveyed that intention. The words that were used were, at best, ambiguous and did not fairly disclose the position. Ground up business is something very different from first loss or primary business.

On the evidence, the declaration lists would not have revealed that first loss reinsurances were being accepted to the Cover. The experts agreed that taken on their own and in the absence of additional information the declaration lists were not adequate for the Underwriters’ proper digestion. Nor was there any obligation on the reinsurers to ask. A fair presentation of the risk requires disclosure of any unusual circumstance and if the reinsurer does not know about it he cannot be criticized for not asking about it: Marc Rich v Portman [1997] 1 Lloyd’s Reports 225 at page 234, per Leggatt LJ.

Mr Leggatt QC accepted on AON’s behalf that a number of risks that were declared to the Cover can be described as “first loss”. Although that phrase has no fixed market meaning it can be taken to mean the first layer of insurance above the assured’s retention. Of the 104 risks declared to the Cover for the 1999 year, 15 of them, according to Mr Holmes’ analysis, fall wholly or partly into this category; of those 15, 9 were resignings or renewals of risks written in previous years and are, therefore, cases of first loss risks that had already been written before the reinsurance was placed; the remaining 6 were new to the Cover in 1999.

There is no evidence to suggest that Syndicate 535 set out in November or December 1998 with the active intention to write first loss business to the Cover in 1999; simply that such risks were not excluded from consideration and might be written if the terms were right. The “Interests Covered” in the reinsurance slip embraced energy business in all its forms and at every level and contained no exclusion of first loss business or any other particular sub-category of energy risks. The case that first loss risks were excluded by the MOU depends upon a blinkered and unreasonable reading of it which seeks to extract from it a meaning almost the exact opposite of the message it actually conveyed.

The reinsurers’ argument is that the MOU only predicates two types of business: excess of loss and “ground up”. “Ground up”, by a curious alleged definition, excludes first loss. Therefore the MOU contemplates that no first loss business would be written. But this analysis leaves out of account the fact that the expression “on a ground up basis” [the words actually used] does not have an established market meaning only capable of being read as the reinsurers contended. Mr Youell, when cross examined by Mr Boswood QC for the Claimants said this:

All the experts were agreed that the words did not have a fixed and settled meaning and that they were capable of being understood in different ways depending upon the context. Mr Holmes was of the view that “ground up” would include first loss insurance in the sense of a policy above the basic deductibles which would include first loss but that the words were also appropriate to be understood in the sense defined by Mr Youell.

Therefore, it was common ground that the meaning of the expression must be taken from the context. The relevant context consists of the wording of the MOU itself, the background information available to an underwriter in the position of Syndicate 1688 who were considering whether to write the reinsurance. In the context of the MOU as a whole the phrase is being used by way of a contrast with business written on an excess basis. It is not prescriptive of what business other than excess business is included; rather it is capable of including business written on any other basis, including first loss business. A reasonable reader in Mr Woodgate’s position would appreciate that the risks might include first loss business.

Furthermore, the nature and size of the risks in the energy market made it inherently unlikely that a policy which attached immediately above basic deductibles would in all cases provide cover all the way up to the full limit of the risk: Mr Holmes’ evidence. The list of declarations to the Cover in 1996, 1997 and 1998 which were provided to Mr Woodgate and Cox as part of the placing information was a complete mixture and included first loss and other low level risks. Finally, the very nature of the reinsurance cover itself, which was on a first loss basis, indicated that Cover Underwriters required protection in respect of low level risks.

If, contrary to the above submissions, any representation was made in the MOU or otherwise that there was no intention to accept first loss business to the Cover, AON will say that after the reinsurers acquired knowledge that first loss business had been written to the Cover they either affirmed their reinsurance contracts or waived any entitlement to avoid them. Throughout 1999 and 2000 AON prepared declaration lists and periodically took them round to the Reinsurers to inform them of risks which were running on their reinsurance. This was usually done by Alex Dicks. It was her evidence that in addition to the declaration list she took with her the underlying declaration slips themselves so that any underwriter who chose to do so could inspect them and take copies if they wished. On her visits she went through the declaration lists and she said that all underwriters who she visited were interested in them. It was the evidence of Mr Jenks of Cox and Mr Holmes that to any underwriter who chose to read the lists it would have been apparent that the business ceded to the 1999 year of the Cover included first loss risks. Mr Woodgate reviewed the declaration lists that were brought round to him and scratched them to indicate that he had read them and understood them; yet he expressed no concern and continued to accept premium thereafter. Whether, as AON primarily contends, Mr Woodgate saw and appreciated that some first loss business was being written, in accordance with his expectations, or he concluded that he would proceed with the reinsurance cover anyway, this head of the defence fails.

In relation to Euclidian’s fronting arrangements, the nature of the business to the Cover was not a material fact; alternatively, AON relies on its other submissions above.

As for the alleged failure to disclose the “significant change” the short answer is that what is or is not such a change is a matter of opinion and not of fact. No-one could predict with any confidence or precision what business AON would win and offer to the Cover Underwriters and/or what the Cover Underwriters would choose to accept.

Mr Boswood QC submitted that it is not alleged by 1688 or by Cox that the MOU contained any express representation; rather, an implied representation is relied upon: either that it impliedly represented that the Cover had not accepted fist loss business “and there was no intention to accept first loss business” or simply that “there was no intention to accept first loss business”.

So far as Cox is concerned, its case on the MOU is wholly unsustainable in the light of evidence given by Mr Jenks, the Underwriter for that Syndicate:

It is apparent from this evidence that Mr Jenks did not read the MOU before the reinsurance was concluded and in these circumstances the MOU cannot have contained any implied representation which induced him to enter into the contract.

In relation to 1688, the test for whether there was any implied representation excluding first loss or primary business is to ask objectively what the MOU would have conveyed to a prudent insurer in the position of Mr Woodgate: see Sumitomo Bank v BBL [1997] 1 Lloyd’s Reports 487 at 515, per Langley J.

Applying this principle, the MOU does not purport to set any limits at all as to what business has been and will be declared to the Cover. The MOU was provided to Mr Woodgate together with the Cover slip itself which showed that as a matter of contract first loss business could be declared to the Cover. The business described in the MOU was of a general trend and was not by definition exhaustive. Any prudent underwriter would realize that “business on a ground up basis” was a general reference to “non excess business” and therefore would include any risk in excess of basic deductibles.

1688’s construction involves some special meaning to be given to the words “business on a ground up basis”. There was a difference in understanding between Mr Youell the expert and Mr Woodgate, the underwriter, as to the meaning of the words on a ground up basis and first loss. If first loss meant, as Mr Woodgate suggested, “the first stretch of cover” then it was apt to include Mr Youell’s understanding of the words on a ground up basis.

For the reasons given by Mr Boswood QC, as summarized above, I regard the Cox claim based upon an implied representation in the MOU as unsustainable. It is apparent that the Underwriter was not induced to enter into any reinsurance contract on the basis of the MOU, which he did not read until after the broke had been concluded and contract competed.

In relation to 1688, I must deal with a number of background facts. It is correct that the ’77 Cover was known principally for being an excess loss book of business. That did not mean that all risks accepted to the Cover were excess loss, but the overwhelming majority of them were. And that remained the position for the 1999 year. Mr Holmes’ figures suggested that a total of 16 out of 104 declarations could be described as first loss. Mr Seymour’s figure was lower: something like 6, of which 3 were re-signings. Whichever figure is correct, the overwhelming proportion of the declarations were, as they had been in the past, insurance business which could be described as excess loss business. There was no conscious decision taken by the Cover Underwriters to ‘go for’ first loss business; they appreciated that in a softening market it was likely that there would be more of it than had hitherto been the case. There was no change in the emphasis of the underwriting; merely a change in the market which the Cover Underwriters were willing to go with. In fact, the composition of the book of business in the future was not a matter which could be known to the Cover Underwriters or to the brokers. As AON submit, it all depended upon what business AON could win in the market and what declarations to the Cover Mr Seymour [in particular] was prepared to accept. It is inherently improbable, therefore, that, regardless of the wording of the MOU, Mr Woodgate could legitimately have concluded that the MOU amounted to an implied representation as to future business.

In any event, on a proper construction of the MOU it seems to me clear that when taken with the slip itself [which is widely drawn and excludes no particular category of risk other than CAR] the MOU includes every type of risk whether it is excess business or other business, whether written from bottom to top, or somewhere in-between or simply first loss. “On a ground up basis” means, in the context, business other than excess and would include both full stretch, half stretch [my words] and first loss. I prefer the evidence of both Mr Outhwaite and Mr Holmes on this issue. Mr Youell was taking a very narrow view of the words as though they had some special meaning. If it were suggested by Mr Woodgate, and I think it was not, that he thought about whether first loss business was included or not, it would defy belief to accept that he construed the MOU in such a way as to make it unnecessary for him to ensure that the slip excluded first loss business. He was writing first loss reinsurance, after exhaustion of the aggregate deductibles, and if he thought about it and understood what he was doing he would have realized that by writing such reinsurance the reinsureds might or would write some first loss business.

I accept that the question as to the meaning of the MOU must be answered from the perspective of a reasonably competent underwriter in Mr Woodgate’s shoes. The answer seems to me to be clear. The MOU is a perfectly proper description of the history of the Cover against the background of the market as it had operated. Over the years there was a trend towards business on a ground up basis, when properly understood, there had even been more first loss business written to the Cover in 1997 than 1998. Mr Woodgate could see from the declaration lists which were provided to him as part of the broke that what had been accepted to the Cover was a mixed bag of risks which might well have included first loss business and he would have needed to ask to find out. He did not ask; not because he was misled into thinking that by virtue of the MOU first loss risks were excluded, but simply because he could not have given the matter any thought. In my judgment the notion that Mr Woodgate was misled by the MOU is fanciful.

The three specific oral representations allegedly made by Mr Amies. I shall deal with them together as they all concern Mr Amies and Mr Woodgate.

There were two closely related questions namely whether on a proper construction of the reinsurance slip, reinsurers agreed to cover only the 1999 year of long term risks declared to the Cover and whether Mr Amies represented to Mr Woodgate that only the 1999 year of long term risks would be covered under the reinsurance. In relation to the first question it is submitted that there are numerous indications in the reinsurance slip, the MOU and the Cover that the reinsurance is not intended to cover all the years of long term risks declared to the 1999 year Cover until extinction. Since I deal with these issues later in the judgment I will refrain from setting out the arguments on this question, until then. As to the second question Mr Gruder QC referred to two notes made in July 2000 in which Mr Amies and Mr Jeffrey both said that it was their understanding when the risk was broked that the intention was that the ’77 Cover would continue to be annually renewed and a new reinsurance programme placed each year. This is confirmed by Mr Amies’ first witness statement where he said:

“Mr Woodgate asked me [during the broke] what would happen if the reinsurance for the 2000 year was renewed upon the same terms as that of the 1999 year. I explained to Mr Woodgate that in this scenario the 1999 reinsurers would not have any liability for antecedent long term contracts that were resigned in to the 2000 year Cover.”

Mr Amies also explained that had the reinsurance been renewed then a mirror policy would have been put in place which “would cut the liability for 1999 into that 12 month period and transfer it by resigning into the year 2000”. Thus the broke was on the basis of continuity; it was the intention to continue and that is what the reinsurers were told. When, at the end of 1999 for the following year there was a new Cover called the GTX Cover it was considered to be a renewal by Mr Seymour although it was not treated as such with regard to the re-signings. Mr Amies was surprised about this and regarded what happened as close to the knuckle.

The first oral representation relied on in the pleadings was that Mr Amies told Mr Woodgate words to the effect that the reinsurance “only covered risks of a duration of up to 12 months incepting in the period 12 months at 1 January 1999.” The allegation was that Mr Woodgate was only prepared to write the reinsurance on that basis and that this was accepted and confirmed by Mr Amies. Yet the case for 1688 did not support this representation; rather he believed that the reinsurance was only offering 12 months of cover. Had the pleaded representation been persisted in it would have meant that Mr Woodgate believed that the reinsurance would not have covered any multi-year risk. On the second version, risks of over 12 months would be covered but only for 12 months from their 1999 attachment (or anniversary) date. Quite apart from the radical change of case, to a new and unpleaded allegation, the new case was hopeless as it is evident from the reinsurance slip itself that there was reinsurance cover for all risks attaching, without limitation in time. Accordingly it is simply not credible that Mr Amies would have said something self-evidently contrary to the words of the slip; nor that Mr Woodgate would have believed him had he done so. I should reject Mr Woodgate’s evidence to a contrary effect. The only charitable explanation for Mr Woodgate’s case is that it was based on a misunderstanding of a conversation he and Mr Amies would have had about the future. Mr Amies was of the view that the Cover was likely to continue after the 1999 year and it was likely that Mr Woodgate would be given a chance to write another policy for risks attaching in future years. He denied that he had given any assurance or promise of renewal. The less charitable explanation for the allegation is that it was based on Mr Woodgate’s misunderstanding of the MOU – supported by his expert – and their misunderstanding of the process of re-signing. It is doubtful if those arguments were in his mind at the time, and even if they were it is doubtful if they were planted in his mind by anything said by Mr Amies.

The second oral representation was as to the nature of the business. The pleaded allegation is that Mr Amies told Mr Woodgate that the 1999 year of the Cover “would re-focus on writing mainly excess physical damage business.” This allegation was added late, and very shortly before the beginning of the trial, as a part of the sixth round of amendments. This alone casts doubt on its veracity. But further, it is highly improbable that Mr Amies said anything of the kind. The MOU had been prepared to perform that function. Mr Amies understood it to mean what AON have submitted it meant, and which I have held it did mean. It would be remarkably foolish for a broker to say something which was self-evidently not correct. Furthermore, Mr Amies knew less about the Cover than did Mr Woodgate and it is highly unlikely that, had Mr Amies said anything of the sort, Mr Woodgate would have accepted it in the face of the MOU without making a note about it in his files or adding an appropriate clause to the slip.

The third specific representation is said to have been made by Mr Amies to Mr Woodgate on 19 March 1999 when Mr Amies presented an endorsement to him attaching an amended slip. The amended slip divided the risks into two. The allegation is that Mr Amies said that “this slip did not change the nature of the reinsurance that Syndicate 1688 had written”. Mr Woodgate has no recollection of this meeting and his case is based on supposition: “I must have been told by the broker that this slip did not change the nature of the reinsurance … because otherwise I would not have signed it.” The fact that the slip is amending the previous terms is self evident from the slip itself and the changes are obvious from a most casual perusal of the amendment. Mr Woodgate’s supposition should be rejected as there is no reason to believe that he was misled by anyone except himself.

Mr Boswood QC invited the court to take a robust view of Mr Woodgate’s lack of credibility, as also with Mr Hegarty.

Unlike Mr Gruder QC I prefer to take the case based on express oral representations first, although I consider them in the context of the matters to which he has directed the court’s attention. For reasons which will emerge, I regard the case based on re-signings, the cancellation clause and the MOU as unsustainable. Nevertheless, the question remains did Mr Amies or Mr Matson make any oral representations which were false? As it seems to me there was a radical change in the case for 1688 as described by Mr Leggatt QC. Mr Woodgate’s original case was founded on a mistaken view, supported by his expert, that long term risks were not covered by the reinsurance which was for one year only. Having convinced himself that that was the position he then sought to blame Mr Amies for giving him that impression. Mr Amies knew exactly what he was doing and how the reinsurance worked. It was intended that the Cover and the reinsurance would be renewed each year and he discussed that with Mr Woodgate. Mr Woodgate must have appreciated, if he understood what he was doing, that if the contracts were not renewed, the reinsurers might be carrying the can for longer than 12 months. The reinsurance was a risks attaching policy without limitation in time on the policies written. The fact that long term risks were written in the Energy Market must have been apparent to him as a result of his perusal of the declaration lists which he asked for and saw during the broke.

If, as I find, Mr Amies understood how the policies worked why should he misrepresent the position? Mr Amies struck me as an honest man. Had he made the representation alleged he would have known it was false and it would have been a gross act of dishonesty and quite out of character for him. Mr Woodgate was not a reliable witness, in my judgment; not because I thought him to be dishonest but rather I felt that he was maintaining a case, at this point, without merit. When being cross-examined he admitted:

In my judgment the overwhelming probability is that Mr Amies did not misrepresent the duration of the contract. On the evidence, both he and Mr Woodgate understood that what was written on the slip would have belied what Mr Amies is alleged to have said. That would suggest that no such representation was made by an honest broker and no underwriter would have scratched the slip without a qualification to the wording.

As to the oral representation as to the nature of the business, I find it incredible that Mr Amies said anything which was directly contradicted by the MOU. The suggestion is that he told Mr Woodgate that the emphasis would be on writing mainly “excess physical damage business”. Mr Amies’ understanding of the MOU was that it was telling the reinsurers that the Cover Underwriters would be writing less excess business than they had before and more business on a ground up basis. Mr Amies was a reinsurance broker who had recently come on the scene so far as the ’77 Cover was concerned. He was not in a position to say what business would be written for the 1999 year. In any event, Mr Woodgate would not, as an experienced underwriter, place any store on what a broker thought might happen in the future when he would not be engaged in obtaining the business himself and knew less about the energy underwriting business than Mr Woodgate. This was a very late and unconvincing allegation which I reject as being wholly improbable.

The third matter related to the March slip: “this slip did not change the nature of the reinsurance that Syndicate 1688 had written”. This allegation is based purely on supposition: “I must have been told by the broker that this slip did not change the nature of the reinsurance because otherwise I would not have signed it”. That, in my judgment is not a sufficient foundation for a serious allegation that Mr Woodgate was misled into scratching the March Slip. Mr Woodgate cannot say that these words were spoken by Mr Amies since he has no recollection of any discussions at the time and there is no underwriting note made. Mr Amies denied making this statement and I believe him. That being so the allegation must fail.

In their defence, Euclidian made a number of specific allegations which they have expressly withdrawn as part of the settlement. These are allegations that Mr Matson misled Euclidian by making three representations to Mr Hegarty: first that the Cover Reinsurance would not be written against; second that “claims activity would be very low” and third that “the quality of the business [to the Cover] would be very high”. He is also alleged to have made a representation that Euclidian would benefit from 100% back-to-back reinsurance cover for its fronting reinsurance and its direct participation on the Cover [the 10% line]. Finally, he is alleged to have failed to disclose that declarations had been and would be accepted to the Cover with an “inequitable premium split”.

As to the first set of oral representations, it is improbable that things were said to Mr Hegarty back in 1998 which the latter can recall without there being any mention of them in his underwriting notes. He says he noted the key points of the broke yet there is nothing about the representations. Mr Hegarty had no reason to think that the Reinsurance would be written against; that was not mentioned in his notes and was most unlikely to have been on his mind. This allegation has all the hallmarks of a construction based upon hindsight. The claims activity was of no concern to him as a front and he took no interest in claims before he committed the Syndicate to the 10% line. In any event all these representations were of a future nature as to how the business would be written and how successful and profitable the business would be [profit being a function of claims activity].

As to “back-to-back warranties”, it is accepted that Mr Matson expressly or impliedly represented to Mr Hegarty that Euclidian’s retrocession cover with Tryg was on terms which were back to back with the reinsurance. Euclidian’s claim (now abandoned) was that the alleged warranty made its liabilities to Syndicates 535 and 228 under its fronting reinsurance contingent on the existence of a valid retrocession cover. This allegation was designed to ensure that if 1688 were not liable under the retrocession then Euclidian were not liable under the reinsurance and adds nothing to the case since Euclidian’s case for breach of warranty pre-supposed that Syndicate 1688 was entitled to avoid its own contract.

As to the alleged inequitable split in premium, this is not a point taken by Mr Woodgate or his Syndicate – perhaps because he himself fixed the rate at 35%. What is an inequitable split in the premium is a pure matter of opinion and cannot give rise to an arguable claim for non-disclosure to Mr Hegarty.

I can simply say that all these allegations are also unproven. Mr Hegarty was not a reliable witness; and his suggestion that there was a discussion of the reinsurance being written against is so improbable as to be rejected. The ‘writing against’ allegation arose during the litigation and it is fanciful to think that Mr Hegarty was omniscient and anticipated the arguments on this point which have developed during the litigation. I am not sure that any of these points are now relied upon by 1688 or Cox.

For the next set of issues it is necessary to revert to the facts. The claim made by Cox starts with an allegation that, when broking the reinsurance to Tryg, Mr Matson falsely represented to them that he would obtain stop loss reinsurance for them, which never materialized. In essence what is then said is that to get themselves off the hook for having promised something which could not be delivered, AON embarked on a serious piece of dishonesty to procure Cox to take over Tryg’s line.

Because it was apparent that 1688 could not reinsure 535’s 50% line on the Cover, Mr Backhouse asked Mr Matson to find an alternative reinsurer for them. Mr Matson knew Mr Hopper, who had just joined Tryg from Syndicate 535. At an initial meeting in November 1998 Mr Hopper indicated that Tryg would be interested in writing the reinsurance for 535, and at another meeting on 7 December 1998 Mr Tobin, Mr Hopper’s immediate boss, scratched a 50% line below Mr Woodgate’s scratch and Mr Tobin regarded this as a promised line. Mr Tobin alleged that on or before this date, he told Mr Matson that Tryg were only willing to write the reinsurance if Tryg was itself protected by reinsurance and Mr Matson told them that AON had obtained a quotation from Transatlantic e for a stop loss reinsurance. This allegation is denied. When Mr Tobin put down Tryg’s line on 7 December 1998 he knew that Tryg were not acceptable security to 535 but indicated that he would accept a suitable fronting arrangement. On 18 December 1998 Mr Matson obtained a suitable fronting arrangement with Euclidian and, probably on the same date Mr Matson returned to Tryg and Mr Tobin wrote on the slip “agree as R/I of Euclidian”. At a later date Mr Hopper wrote on the slip “less 10% in all” to reflect the fact that AON had agreed to absorb Euclidian’s fronting fee out of its own brokerage. On 30 December 1998Mr Matson visited Tryg and spoke to Mr Hopper, who scratched the tidied up version of the slip together with a further slip recording the terms of Tryg’s quota share reinsurance of Euclidian. There is an issue between the parties as to what was said on this occasion. Mr Hopper did not give evidence, even though Cox had issued a witness summons against him and he was, presumably, available to give evidence.

On or shortly after 30 December 1998 Mr Hopper completed a standard Tryg underwriting form headed “Marine Underwriting Facing Sheet” On that Sheet, under the heading “Facultative Reinsurance Details”, written by neither Mr Hopper nor Mr Tobin but by someone unidentified, are the initials TBA which, in this context might mean “to be advised” “to be arranged” or “to be agreed”. It is not known when that was written on the sheet; but probably on a different occasion to Mr Hopper’s contribution to it.

At Mr Matson’s suggestion Mr Amies and Mr Jeffrey contacted Tryg to discuss arranging reinsurance for them. They met Mr Hopper and Mr Tobin in the ILU Underwriting Room.

On 19 January the content of Mr Hopper’s written underwriting note [on the Sheet] was entered on Tryg’s computer and at the end of the entry appears these words: “R/I AON to revert re Stop Loss 200% XS 100% Rate TBA”. Following the meeting on 12 January 1999, Mr Amies and Mr Jeffrey asked Transatlantic Re to quote for stop loss reinsurance for Tryg. Transatlantic Re refused to do so and confirmed its decision by an e-mail dated 2 February. Mr Jeffrey communicated this to Tryg and sought reinsurance from another source, GIO, which was not taken up as it was not acceptable to Mr Tobin. Sometime in February or early March Mr Tobin’s boss, Mr Potter, came on the scene and he asked Mr Walters and Mr Blake of AON, whom he knew, to see what they could do to get reinsurance. By the end of March Tryg were concerned that they had been unable to obtain suitable reinsurance and Mr Tobin sought to enlist Mr Fillingham from AON, who was at that time a managing director of AON’s Energy Division and inquired whether Syndicate 535 would allow Tryg to cancel or replace its line on the Cover Reinsurance. Accordingly, Mr Fillingham and Mr Matson went to 535 and saw Mr Davies, who refused Tryg’s request. Mr Matson saw Mr Seymour of 535 about this issue and Mr Backhouse also spoke to Mr Davies. At the same time Tryg were coming under pressure in relation to their general reinsurance protections which were being handled by AON. They needed to inform their reinsurers of the contract which they had made with Euclidian and they were advised to try and cover that position with suitable reinsurance. At some stage before the end of March, probably, Mr Potter of Tryg had advised Tryg’s managing director, a Mr Seest, that it had not purchased facultative reinsurance to protect their exposure to the Cover.

At this stage it is likely that Mr Tobin, as the underwriter responsible for committing Tryg to the Cover reinsurance, must have felt vulnerable to criticism. On 6 April 1999 Mr Tobin was asked by Mr Potter to prepare a document for Mr Seest giving an account of the circumstances in which Tryg came to write the risk, and of the attempts to find reinsurance for it. He did not respond immediately and had to be pressed to do so by Mr Potter on 6 June 1999. Mr Tobin was also slow to notify Tryg’s main programme reinsurers; he delayed for about 4 months [writing a letter dated 28 July 1999]. Meanwhile on 6 June 1999 Mr Tobin finally produced a memorandum giving an account of the relevant events.

As the memo is important I set it out:

“Background to the placing of the Risk:

Initial discussions took place in late November 1998. From the outset we discussed protecting our exposure with specific reinsurance. We were advised that a stop loss had been indicated by Transatlantic Re at approximately 35/37.5% of ONP [Original Net Premium] and we advised we would require this cover. It transpired that this was a verbal indication and Transatlantic Re subsequently withdrew their terms. We also discussed additional sideways protection on a risks attaching basis.

AON tried on a number of occasions to get Transatlantic Re to reconsider but were advised on 1 February 1999 that Transatlantic Re were formally declining to quote.

We advised AON from the outset that we did not wish to run this Cover against our core programme and required specific protection.

Initially we dealt with Neil Amies and Paul Jeffrey who we feel did not provide an adequate service.

Following a number of unacceptable offers principally from GIO in Australia we asked the X/L people at AON to get involved. However, we were now into the third month of 1999 and energy capacity was virtually non-existent.

Following the meeting with NES [Mr Seest] I contacted Tim Fillingham at AON and we are now in a position where the brokers advised me that they have tried to replace our line but without success. RogerBbackhouse who was joint MD with Tim Fillingham resigned during my recent discussions with AON and as he controlled the facility this has further complicated matters.

We are now at an impasse with AON on this matter.”

On 6 July 1999, Mr Fillingham met Mr Hopper and Mr Tobin. According to a handwritten note of this meeting prepared by Mr Tobin:

“I advised him [Mr Fillingham] both John Hopper and myself recall discussing the stop loss with Simon Matson before the line went down and were told a quote had been obtained…”

It is common ground that this is the first occasion that the allegation had been made to AON that reinsurance and a quote had been mentioned by Mr Matson during the broke. Mr Fillingham had thought that the first occasion when the allegation had been raised was at a meeting on 19 July but in the light of the note he, rightly, corrected his first witness statement. On 15 July there was a further meeting between Mr Fillingham, Mr Hopper, Mr Tobin and Mr Potter. At this meeting Mr Potter gave Mr Fillingham instructions to reduce Tryg’s exposure to the Cover. Mr Fillingham believes that he was instructed to do whatever he could to reduce Tryg’s exposure. But the scope of the instructions is in dispute. Following this meeting Mr Matson was instructed to go out and look for reinsurance for Tryg as a matter of urgency. On the same day, Mr Matson visited Mr Jenks of Cox at the Syndicate’s box at Lloyd’s. Cox had participated on the Cover for the 1996 and 1997 years but had not renewed their participation, as to do so was thought to conflict with their exposure on two other Covers operated by AON. Mr Wilmot, Mr Jenks’ assistant, was also present and made some notes on a sticky Post-it note. Whilst what was said at this meeting is greatly in dispute the outcome is not. Mr Jenks indicated that he was prepared in principle to write a quota share reinsurance of Tryg up to US$2.5 million, subject to claims details and seeing the declarations. To this end Mr Jenks scratched a slip with appropriate subjectivities.

Four days later, on 19 July 1999, Mr Matson returned to see Mr Jenks with the information that had been requested. Mr Jenks scratched out the two subjectivities he had put on the slip on 15 July. Mr Matson suggested that as Cox were averse to the Petropac facility it should be excluded from the reinsurance and at the end of the meeting Mr Jenks indicated that he was agreeable to writing the reinsurance, subject to that exclusion and also excluding known or reported losses as at 19 July 1999. Later on 19 July, Mr Fillingham and Mr Matson attended a meeting with Mr Potter, Mr Tobin and Mr Hopper of Tryg. Again there is a major dispute about this meeting. AON say that Tryg were told of the offer of quota share reinsurance; Cox denied that Tryg were offered any form of reinsurance.

On 21 July 1999 there was what turns out to be an important Email from Mr Fillingham to the various AON personnel who had been involved in trying to get reinsurance for Tryg, namely Mr Matson, Mr Finlay, Mr Jeffrey, Mr Amies, Mr Blake and Mr Walters. The e-mail is from Mr Fillingham’s desk although it was sent by his secretary. The subject of the e-mail is “Colonia Baltica – ’77 Cover” and reads:

“Gentlemen

Following our meeting on the 19^th July with Keith Potter, William Tobin and John Hopper, they have agreed to buy Simon’s [Matson’s] Quota Share indication from Cox (Simon, please bind this as soon as possible and confirm with William Tobin/John Hopper). As for any other reinsurance requirements, they will respond to us by the end of the week. I have suggested that the remainder of their exposure can be retained within their overall reinsurance programme, however, they might ask us to reapproach the CLM [another Lloyd’s Syndicate] deal. I have warned them that this will be very difficult and will definitely [not] be “risk attaching”,

As soon as I have a response I will revert.”

Mr Matson returned to Cox on 30 July 1999 when Mr Wilmot scratched a quota share reinsurance slip “100% of order”. The slip identified Tryg as the retrocessionaire reinsuring the retrocedent, Euclidian, reinsuring the reassured, 535. Mr Wilmot also scratched the two underlying slips and the MOU. The quota share reinsurance slip was stamped and referenced by Cox on 3 August 1999. Shortly before the beginning of October, Mr Hession [of AON] told Mr Matson that Euclidian wished to reduce their fronting income on the Cover reinsurance because the front was proving to be an inefficient use of Euclidian’s premium capacity. Therefore, on 1 October 1999 Mr Matson went back to Cox and spoke to an assistant political risks underwriter, Mr Roberts, who alone was available at the box; neither Mr Jenks nor Mr Wilmot were there. Mr Roberts also assisted on the marine and energy account when his seniors were not there. According to Mr Matson, he explained to Mr Roberts that Tryg and Euclidian were to be taken out of the loop, or chain of reinsurance, so that Cox would reinsure Syndicate directly. He pointed out that the result would be that Cox would pay less brokerage and would be about 10% better off in terms of premium. He told Mr Roberts that this possibility had previously been discussed with Mr Jenks, as Mr Matson says it had been, and Mr Roberts noted this fact on his copy of the retrocession slip. Mr Roberts deleted the reference to Euclidian [the retrocedent] but failed to delete the reference to Tryg [the retrocessionaire]. Cox rely on this error to say that no contract was made with Syndicate 535.

Subsequently Mr Matson went to see Mr Hegarty of Euclidian. They agreed to vary their cover so that their line would be reduced from 50% to 25% from inception but would remain at 50% for Petropac and known and reported losses as at 19 July 1999 (which were not insured by Cox) and Mr Hegarty annotated his slip to reflect this change accordingly. At some stage around this time, Mr Matson visited Mr Seymour of Syndicate 535 to explain the developments and obtain 535’s approval, which was given. On 26 October 1999, Mr Matson again visited Mr Roberts and they went through the relevant documents, which Mr Roberts scratched. Mr Roberts left the documents with a note for Mr Wilmot to check. His note, which was made on the same day [26 October 1999] reads:

“simple tidy up QS [therefore] slip no longer a retrocession 10% RI brokerage removed No change in our exposure still part of Cotesworth security 50/50 with Euclidian on Decs [declarations] ex Petropac now on original RI as seen by PHJ” [Mr Jenks].

Also on 26 October 1999, 535 scratched an endorsement and a revised signed line security schedule reflecting the change to its security. The next day, 27 October, Mr Hegarty scratched a revised line security schedule reflecting Euclidian’s reduction in participation. Instead of being 100% reinsurers of 535, Euclidian were now co- reinsurers with Cox with regard to non Petropac declarations and declarations without known or reported losses. Tryg scratched an endorsement reflecting its agreement to the changes. Thus Cox’s quota share reinsurance was replaced by a direct reinsurance contract with 535.

Cox claims to have been deceived by AON into writing both the July and October contracts, with the unwitting assistance of Mr Jenks.

First, there is no substance in the allegation that Tryg wrote their line at the end of 1998 because they had been led to believe by Mr Matson that AON had obtained a stop loss reinsurance from Transatlantic Re and there is no motive for Mr Matson to have behaved in this way. It is inconceivable that had Mr Matson made any such promise or statement that it would not have been recorded by Tryg in Mr Hopper’s underwriting notes on 30 December 1998 or those entered on the computer system on 19 January 1999. Had Mr Matson said there was a quote Tryg would surely have asked to see it and accept it. Reinsurance was mentioned during the broke and for that reason Mr Jeffrey and Mr Amies visited Tryg to find out what their requirements were and were given an outline of Tryg’s requirements. At that meeting, on the evidence, neither of the Tryg personnel present [Mr Tobin and Mr Hopper] made any complaint or allegation of the sort now made. Mr Tobin said he was considerably shocked to hear that there was no quote from Transatlantic Re but that evidence as with much of what Mr Tobin told the court was incredible. Had Mr Matson made the statement, by 12 January, on Mr Tobin’s evidence, he knew there was no quote and that Mr Matson had misled him. He surely would have made a record of the statement then and there or made a note on the computer record. It was not until July that AON were first told that one of their brokers was alleged to have behaved dishonestly.

Further, Mr Tobin would have been keen to inform his boss, Mr Potter, that he had been lied to because that would have been a satisfactory explanation for why there was no reinsurance. The lack of reinsurance was first raised internally within Tryg in February 1999. This delay is more consistent with Mr Tobin being embarrassed at having written the line without proper outwards protection than being angry at having been deceived about the reinsurance availability. And the note made by Mr Tobin in June makes the position clear. It does not say that Mr Tobin and Mr Hopper were lied to by Mr Matson; indeed, it makes no reference to Mr Matson at all, let alone makes any complaint against him. The note identifies and criticized two AON reinsurance brokers, Mr Amies and Mr Jeffrey. Nor is there any reference to a stop loss reinsurance quotation. The advice about stop loss was, according to the memo, an ‘indication’ not a quotation. Mr Tobin, the author of the note, understands the distinction between the two. An indication, by definition is not a quotation. Further, the note refers to a “verbal [sic] indication” which was subsequently withdrawn. Had the case against Mr Matson on this issue been credible, this note would have been written in a completely different manner.

What Tryg were doing was trying to embarrass AON into assisting them to get out of a mess which was entirely of their own making and in the process have concocted an entirely false picture, which involves the unfair destruction of the reputation of Mr Matson. The allegation must have come as a surprise to Mr Matson who had done business with Tryg throughout 1999 and continued to do so in July 1999 and on 23 July 1999 was a guest at Tryg’s annual golf day; on 19 August 1999 lunch with Mr Hopper, as his guest.

As to the contract in July, Mr Leggatt QC contended that Cox allege that their agreement to subscribe to a quota share reinsurance of Tryg procured by fraudulent misrepresentations made by Mr Matson:

As it was put in Cox’s opening: “Jenks was seriously misled in July 1999. AON had no instructions from Tryg to place a quota share with Cox. Jenks was essentially duped into helping AON to find a solution to a difficulty they had got themselves into with the size of Tryg’s line .”.

On the evidence, Mr Fillingham was given instructions by Mr Potter of Tryg to reduce if not eliminate Tryg’s exposure on the Cover reinsurance and this was a broad mandate. Pursuant to that mandate Mr Matson went the same day into the market and approached Cox. At the further meeting on 19 July Tryg were told about Cox’s indication for a quota share reinsurance. Tryg instructed AON to buy it and Mr Matson duly caused the risk to be bound when he attended Mr Wilmot on 30 July 1999. The allegation is that AON knew that Tryg only wanted a reduction in its line, rather than a laying off of a part of its risk, and were not content with a quota share reinsurance and that AON lied to Tryg by saying that their line had been halved, when it had not been. This was all part of a plan to persuade Cox on a later occasion to cancel the quota share reinsurance and instead become a direct reinsurer of 535 as was done in October. Such a plan would involve a huge risk. The quota share reinsurance had to be concealed from Tryg until the reinsurance they had been told they were getting could be put in place; and the quota share reinsurer would have not to notice that his reassured was changing identity. If the plan failed AON were in serious trouble, legally and financially. The assumption that Tryg would not accept a quota share reinsurance which reduced their liability and which had the same practical net effect as a reduction in their inwards line, is absurd. Only if the quota share reinsurer was of doubtful security would there be any difference and as the quota share reinsurer was in Lloyd’s the adequacy of the security was not an issue. There was never a good reason for Tryg only being prepared to accept a reduction rather than a quota share reinsurance. An instruction to do whatever they could to reduce Tryg’s exposure was a mandate wide enough to encompass either a reduction in the line or a quota share reinsurance. In fact, had Tryg had some compelling reason to take this position then there was no reason why the October arrangements with Cox could not have been implemented in July/August. There was, therefore, no motive for any deceit.

Furthermore, on the evidence, and especially having regard to the e-mail from Mr Fillingham, the court should conclude that Tryg were informed of the quota share reinsurance indicated by Cox and AON were instructed to buy it. That e-mail is objective and clear contemporary evidence which completely destroys the conspiracy theory. Although some attempt was made to suggest that the e-mail might have been concocted such a suggestion was made in desperation rather than based on anything solid.

The case for Tryg rests on three planks: first the recollection of Mr Tobin and Mr Potter that sometime before the end of July they were told by Mr Matson that their line had been halved [and no mention was made of quota share reinsurance]; second that Tryg never gave AON a written order for the reinsurance and third the absence of any cover note or demand for premium from AON to Tryg between July and October 1999.

As to the first, Mr Leggatt QC submitted that Mr Tobin and Mr Potter were trying to remember what they were told some four years before they made their witness statements [without sight of the e-mail]. They must have realized at the time that had their inwards line been halved that could only be done by amending their contract and any alteration to the slip would require not only their own scratch but that of Euclidian and Syndicate 535 and before being content with what they were told they would have needed to have been satisfied that the consent of other parties had been obtained; especially since on their own case they had been misled once before by Mr Matson.

As to the allegation that there was no written order, that is true; but nothing of significance turns on this, save to emphasise that, if their case be true that they would have needed to complete paperwork that would apply with even more force if they had thought their inwards line had been reduced. The absence of a written order does not help the court to determine the truth.

As for the absence of a cover note or demand for premium, the reason is not hard to find. AON’s administration work at this time was notoriously slack. Hence, for example the note written by Mr Backhouse on 22 December 1998, and the fact that a Cover Note was not sent to the Cover Underwriters until the end of April 1999, four months after the contracts had been concluded. In that context a delay of some two months from the date when Cox’s quota share reinsurance was stamped and referenced to the new arrangements was ‘normal’ and nothing can be read into it.

The reason why matters changed in October was not because of some kind of conspiracy but because Euclidian have what Mr Seymour referred to as ‘income problems’ [see his note made around this time]. These income problems motivated Euclidian to wonder whether their exposure could be reduced. On 27 October 1999 Tryg [Mr Hopper] scratched an attachment recording the changes. It is surprising that, on the evidence, Mr Hopper raised no queries about this process being conducted so late in the day if he had genuinely thought that he was simply concluding a transaction which had already been agreed back in July.

As to the allegation of fraud relating to a statement made to Cox that Tryg were “overlined”, AON submits that it is common ground that Mr Matson told Mr Jenks on 15 July 1999 that Tryg had a problem with their line size and needed to reinsure it. Mr Youell does not deal with this alleged statement in his report on materiality. In re-examination, Mr Jenks was asked:

During the evidence Mr Jenks used various expressions such as “assisting Tryg with a problem concerning their line size” or “Tryg had a problem with their line” or “I was asked to assist him with a problem with his line size”. The only time the word ‘overlined’ was used in the oral evidence was when it was used by Mr Gruder QC in the re-examination referred to. Far from being fraudulent, Mr Matson was being accurate. Tryg did have a problem with the size of the line they had taken on the reinsurance for the Cover and had been attempting to obtain reinsurance cover to reduce their exposure and it was this problem that AON advised should be reported to their general insurers. Underlying the allegation that a fraudulent misrepresentation was made about Tryg being overlined, is an unarticulated case that Tryg’s problem with its line size was caused by AON falsely representing that there was a stop loss policy available when there was none, so as to cause Tryg to be over-exposed. But as already submitted, that allegation has no substance.

Finally, there is not the slightest reason to doubt Mr Matson’s integrity. All the underwriters in relation to the ’77 Energy Cover appear to have dealt with him before, during and for a long time after their involvement on this reinsurance.

In relation to the October contract, there are further contentions made on behalf of Cox. They say first that no contract with Syndicate 535 was concluded and, secondly, Cox is entitled to avoid the contract for material misrepresentation or non-disclosure. As to the first point, Cox argue that the documents produced to Mr Roberts did not purport to create a contract between Cox and 535, and in any event Mr Roberts did not have authority to make any contract on behalf of Cox. The first point is an attempt to take advantage of what was an obvious mistake made by Mr Roberts [and not spotted by Mr Matson] when Mr Roberts crossed out Euclidian but left in Tryg instead of removing them both. There is no real dispute on the facts that this was an error and that both parties intended the slip to achieve the result that Cox became a direct reinsurer of 535. Although it is possible that Mr Matson inadvertently led Mr Roberts to cross out Euclidian alone, that would have made no sense since Tryg were not an acceptable security for 535; once Euclidian were out of the loop, Tryg had to follow. The mistake was corrected when the documents were signed on 26 October. As to Mr Robert’s alleged lack of authority, his job title is “Underwriting Assistant and this includes such duties as may reasonably be associated with this position”. There is nothing in Mr Roberts’ employment documents to limit his authority in the way suggested, namely “straightforward renewals, the entry of promised lines and the tidying up of existing commitments”. By October 1999, Mr Roberts had 14 years experience in the market and was well able to decide whether what he was being asked to do was within his own competence or not and he decided that he could deal with it. When it was suggested to him that he had to leave the decision to Mr Wilmot, Mr Roberts said that leaving the documents for Mr Wilmot was simply a matter of courtesy so that the energy team should be aware of all things that happen on the slip. Mr Roberts certainly thought he had authority to do what he did; he was held out as an assistant underwriter and it was for him to decide whether he could or could not scratch a slip on behalf of his Syndicate. Mr Roberts had apparent authority to bind his Syndicate.

As to the alleged misrepresentation and non-disclosure, the case which AON has to meet can be summarized in this way. There were five acts of misrepresentation or non-disclosure:

Mr Leggatt QC submitted that Mr Matson did represent to Mr Roberts that the documents he presented to him on 26 October 1999 reflected what had already been agreed by Cox and was a tidy up. That representation was true. The documents formalized the arrangement agreed on 1 October 1999 as reflected in the slip which Mr Roberts scratched. On that occasion he had correctly told Mr Roberts that the removal of Euclidian and Tryg from the reinsurance had been contemplated as a possibility in July and that is why Mr Roberts noted the words “possibility of this known previously” on the slip and not “previously agreed” as it had not been. Had Mr Jenks agreed to the idea in July then it would have been implemented at that time. Not only had the change to the reinsurance been agreed by Mr Roberts it had also been approved by Mr Jenks shortly afterwards and that explained why Mr Roberts had written on the slip “PHJ OK”. Mr Roberts clearly understood what was happening and reliance was placed on this extract from the evidence of Mr Roberts, when cross examined by Mr Leggatt QC:

Given his understanding of the details it would have been obvious to Mr Roberts that AON were acting on behalf of 535. It was true that the exercise was essentially a tidy up. In the latest amendments to the defence it was pleaded that the statement that it was a tidy up was false because prior to 26 October 1999 there had been no distinction between Category A and Category B risks, whereas the slip on 26 October referred to both categories. But in scratching the slip on 26 October, Cox was not committed to any greater risk than it was committed to on 1 October 1999 or than it had accepted in July for reasons which are developed separately. It is accepted that AON did not tell Mr Roberts that AON had not received a written reinsurance order from Tryg nor issued any cover note nor collected any premium in relation to Cox’s reinsurance of Tryg. “There is no conceivable reason why AON should have done so;” none of these facts were material to Mr Roberts in any way. It is also common ground that no updated loss figures were given to Cox post 19 July. Since Cox was on risk from that date for their share of 535’s participation in the Cover the later figures were immaterial in October when the chain of reinsurers was simplified and this was the view of Mr Holmes whose evidence on materiality should be accepted.

Mr Gruder QC submitted that it is immaterial to Cox’s case whether the Tryg witnesses are correct in the evidence they gave as to the statements made to them by Mr Matson in December 1998, as it is clear that by June and July 1999 Tryg were strongly contending that Mr Matson had told Mr Hopper and Mr Tobin that a quote for a stop loss policy had been obtained. Mr Matson’s denial of ever having done business with Transatlantic Re is belied by Mr Seymour’s note of 3 December 1998 which clearly records Mr Matson as naming Transatlantic Re as a potential front. Further, the internal AON report prepared by Mr Walters and Mr Blake, based on information which could only have come from Mr Matson, contains this paragraph:

“... Unfortunately for the Colonia Baltica they had not written this reinsurance with the proviso of AON Energy Direct Department obtaining Reinsurance for their own line but had been promised that suitable reinsurance would follow shortly after attachment.”

Mr Fillingham’s letter to Mr Tobin of 16 June 1999 contains this paragraph:

“In December 1998 William Tobin and John Hopper said that they would like to look at some reinsurance options particularly a stop loss. It was at this point that I discussed it with Paul Jeffrey and Neil Amies.”

The “I” could only have been Mr Matson, since Mr Fillingham was not himself involved at that time and the letter suggests that there must have been a written account of the broke from Mr Matson from which this was a quotation. The rest of the letter is a direct copy of what Mr Amies and Mr Jeffrey had written to Mr Fillingham on 9 June 1999. It was AON’s failure to provide the reinsurance that led Tryg to say that they wanted to come off the reinsurance and have their line replaced. The letter from Mr Fillingham was prepared as a result of a direct request for AON’s chronology of events involving AON personnel from Mr Tobin [see Mr Potter’s handwritten note on Mr Tobin’s undated memo but scratched as seen on 1 June 1999]. Mr Fillingham must have called for accounts from Mr Matson, Mr Jeffrey and Mr Amies, yet the version from Mr Matson has not been disclosed. Mr Fillingham’s explanation that his letter of 16 June was not drafted by him and he signed it without reading it first should be rejected as should his initial denial that he had not at that time had any discussion with Mr Matson concerning Tryg.

In relation to the meeting between Mr Fillingham and Tryg on 6 July 1999 there is no dispute that what took place is accurately recorded in Mr Tobin’s handwritten note:

“I advised TF [Mr Fillingham] I was disappointed with the content of the letter of 16 June 1999 [AON’s chronology letter]

I advised him both John and myself recall discussing the stop loss with Simon Matson before the line went down and were told a quote had been obtained.

I also advised him I wanted Simon Matson at the meeting to discuss his recollection of events in November & December ’97.

TF asked if discussions went something like “we will try to get R/I stop loss at? would you like this deal”?

I advised TF our discussions were more definite as far as R/I requirements.

TF will speak to SM [Simon Matson] either 7^th or 8^th regarding this matter and revert ASAP.”

Mr Matson says in evidence that the first time he had heard of the allegation that he had promised reinsurance was at the meeting with Tryg which he says he attended on 19 July 1999. In the light of the Memo this evidence was clearly untrue. As Mr Fillingham explained, as soon as he was confronted with the allegation he appreciated that it raised a serious ethical issue and he would certainly have wished to contact Mr Matson “as soon as I could”.

As for the meeting on 15 July 1999 between Mr Fillingham and Tryg, Mr Fillingham was given no authority to buy reinsurance protection for Tryg, who wanted “out” or to reduce their line to 5% or 10%. Tryg would not have given AON carte blanche in advance to place reinsurance on their behalf “in the light of the numerous unacceptable reinsurance options AON had come up with since January 1999”. Mr Fillingham’s e-mail of the same day to relevant AON personnel summarises the position:

“This afternoon I spent half an hour in the company of Keith Potter, William Tobin and John Hopper discussing the ’77 reinsurance. Without dealing with all the issues in this Email I have told Keith [Potter] that the issue must be resolved by the end of next week [23 July] of which he concurs so please will you all be available for a meeting at 2.30 pm on Monday 19 July in my office on the 3^rd floor so that we can bring this to a conclusion.

Please can you make every effort to be there.”

I should prefer Mr Hegarty’s evidence to that of Mr Matson in relation to Euclidian’s desire to reduce their line. Mr Hegarty says that he communicated this desire to Mr Matson from the middle of the year onwards; whereas Mr Matson says that he only learned of this from Mr Hession shortly before the beginning of October. “The position is that by mid July 1999, Matson and AON knew that both Tryg and its front Euclidian wanted to reduce their lines on their respective reinsurances. It is against this background that the conduct of Mr Matson and AON has to be judged”.

On 15 July 1999, Mr Matson went to the Cox box and broked a reinsurance of 50% of Tryg’s line subject to claims details and sight of declarations. The broke to Mr Jenks concentrated on the fact that Jenks was familiar with the Cover since he had been on it in previous years: 1996 and 1997. Mr Matson told Mr Jenks that Tryg had overlined itself but did not mention that Tryg had wanted to reduce their line and had been pressing for a long time to do so on the basis that they had not been provided with the reinsurance they had been promised. Mr Matson’s explanation was that he was unaware there was a dispute, which was obviously untrue. I should reject Mr Matson’s evidence that he explained to Mr Jenks that he was not sure how the line reduction would take place and that Tryg and Euclidian might ultimately be taken out of the loop leaving Cox to reinsure 535 directly. This evidence is untrue and should be rejected because it conflicts with Mr Jenks’ evidence; it is denied by Mr Wilmot who was also present; nothing to that effect is to be found in Mr Wilmot’s note; if Mr Matson was unaware of Mr Hegarty’s desire to reduce his line then Mr Matson had no basis for making this statement; the reinsurance was written by Jenks as a favour to Tryg and a statement that Tryg might be removed would have been inconsistent with that.

The documents presented by Mr Matson to Mr Jenks on 15 July 1999 were copied by Mr Wilmot and they made no reference to the slip which had been scratched in March 1999, with the two categories of risk. Mr Matson’s explanation for this, that the copy was an incomplete copy and must have been part of a larger copy was to be rejected as untruthful, as also should his evidence that he explained the Category B risks to Mr Jenks.

It appears from Mr Fillingham’s diary entries that the meeting with Tryg on 19 July 1999, which AON say Mr Matson attended, took place at 3.30 pm. Would Mr Matson have had time to attend the meeting and do all the other things he said he did that day? The internal meeting with AON took place at 2.30 pm; he returned to see Mr Jenks with a claims breakdown [possibly just up to 23 November 1998] and Mr Jenks deleted the “subjects” which he had added on 15 July 1999. Mr Matson would not have had time to go to the AON meeting, then revisit the Cox box and thereafter to attend the meeting with Tryg. Both Mr Fillingham and Mr Matson are wrong when they say that Mr Matson attended the meeting on 19 July. The Tryg witnesses say he was not there. They have no recollection of approving a Quota share reinsurance; merely that they were told that AON had halved their line. Tryg rely on a letter sent to the general account reinsurers which contains this passage, as showing their understanding of the position:

“The maximum exposure to us is $2,500,000 but $5,000,000 for Canadian business any one loss and we will have the benefit of any common account reinsurance purchased by original underwriters.”

Slowness with paperwork is not a satisfactory explanation for the lack of a Cover Note or a demand for premium. The evidence shows that AON managed to produce the documentation in relation to the October events by 27 October 1999, some four weeks after the new arrangements were first canvassed. Abrogating the quota share reinsurance could not be done unilaterally, Tryg’s consent was required and yet AON failed to procure Tryg’s consent to the new arrangements and that is consistent only with AON not having told Tryg that they had obtained reinsurance, merely that their line had been reduced.

As for the e-mail sent by Mr Fillingham on 19 July with the instructions to Mr Matson “please bind this as soon as possible”, it is curious that by the time this e-mail was sent Mr Matson had already bound the reinsurance, as Mr Fillingham must have known had Mr Matson been with him at the meeting on 19 July.

The visit to Mr Roberts on 1 October 1999 resulted in the deletion only of Euclidian from the slip. Mr Roberts said he would have deleted Tryg as well had he been asked to do so but he was not so asked. What Mr Matson was after was a reduction in Euclidian’s exposure. It was no mistake that Mr Matson only asked for the deletion of Euclidian and not Tryg and it is significant that Mr Matson did not correct the mistake when he visited Mr Hegarty of Euclidian the same day to show him the documents. Had Mr Matson intended that Tryg’s name be removed he would also have gone round to Tryg. Mr Jenks “OK” was understandable since the substance of the risk had not changed and it appeared that Tryg remained Cox’s reassured since Tryg’s name had not been deleted.

It is common ground between the parties that the broke on 26 October was represented as a tidy-up and that there was no change in Cox’s exposure. This was not a simple tidy up and the exposure was different since it covered Category B losses. A losses occurring basis is different from a risks attaching basis. Mr Jenks said that depending upon what information he was given “I might well not have agreed to provide Category B coverage for all or some of the declarations.” Mr Youell said that this change was “fundamental” and would be considered “material” by an underwriter. As to the suggestion that category B risks had to be accepted by Cox before they were bound to them they were known and could be identified from the wish list provided by the Cover Underwriters. The fact that there were no losses under the Category B declarations is not relevant. Materiality is to be looked at as at the date of the placing by reference to the circumstances within an Assured’s knowledge at that date: Brotherton v Aseguradora Colseguros SA (No 2) [2003] Lloyd’s Law Reports 746. Secondly, there is a big difference in being at the end of a chain of reinsurers and reinsuring the Cover Underwriter directly. If the reinsurance between 535 and Euclidian or the retrocession between Euclidian and Tryg was voidable on grounds of non-disclosure to Euclidian or Tryg then Cox would also have not been liable because the chain would have been broken. Without the chain, Cox were deprived of that possibility. Cox had a reinsurance contract with Tryg and had a right to enter into a contract with a new party and Mr Jenks said he would not necessarily have agreed to the change without investigation.

The following day, Mr Matson went to Tryg to get Mr Hopper to scratch the formal endorsement which confirmed the reduction in Tryg’s line and Mr Matson accepted that it was the first contact which he or anyone else at AON had had with Tryg in respect of the Tryg reinsurance or the reduction of their line since the end of July 1999.

It seems to me that the first and important question is whether I accept the case advanced that Tryg were misled into accepting the reinsurance because Mr Matson deceived them about the availability of reinsurance. In my judgment Mr Matson did not mislead Tryg. I regarded Mr Tobin as an untruthful witness upon whose evidence no reliance could be placed, unless it was independently confirmed. He completely failed to explain why, if he had been misled, he made no record of the assurance or promise as to reinsurance or made his slip conditional on such reinsurance being provided. Instead he suggested that there was a missing file containing documents which would have assisted Tryg’s case. I refer in particular to these passages in Mr Tobin’s cross-examination:

And I asked a number of questions a little later from which it emerged that the file was said to have gone missing from a very early date and was not available to him when he made his witness statements; but he said the missing file would have been available in July 1999. I do not believe that there was any such file. If it had existed Mr Fillingham would surely have been told that the alleged conversations with Mr Matson were noted and that their contemporary notes showed that he had promised reinsurance and mentioned Transatlantic Re. In his witness statement, he misrepresented what his computer records showed. I also disbelieve Mr Tobin because the note to Mr Potter which he made on 6 June 1999 was flatly contradictory of the case which he sought to advance in court. There was no complaint about Mr Matson’s conduct or any allegation that he had been misled. Nor does it say that Mr Matson represented that he had had a quote from Transatlantic Re but merely a verbal indication which had been withdrawn. He was unable to explain why his case against Mr Matson suddenly developed between this date and a month later. If there had been a contemporaneous file he would have referred to it when making his note, as it was allegedly still in existence then. If so, the missing file cannot have contained anything which supported Mr Tobin’s case otherwise it would have been revealed to Mr Potter at that time. Mr Hopper was not called to give evidence. Significantly, in Mr Hopper’s witness statement, which is not part of the evidence in the case, there was an assertion that the reason why there was no subjectivity on the slip was because Mr Matson had persuaded him that this would prevent him from closing the reinsurance arrangements before the year end. There was no mention of this conversation in any of the four witness statements which Mr Tobin made, yet he tried to suggest in cross-examination, for the first time, that Mr Hopper had told him this. Such evidence was simply not credible. Had such a conversation taken place then it would have featured in one of Mr Tobin’s witness statements and had it been true he would have wanted a fully detailed account of the conversation between Mr Hopper and Mr Matson on 30 November 1998; yet he told the court that he could not vouch for the conversation between Mr Hopper and Mr Matson.

Had there been a firm offer or quotation for reinsurance at the time of the broke, it is inconceivable that Tryg would not have asked to see it with a view to closing the deal then and there. Yet there is nothing to suggest that this happened and nothing was shown on the computer record which supports Tryg’s case. The facultative reinsurance details on the Tryg sheet completed by Mr Hopper are simply left blank “TBA”.

What seems to me to have happened is this. On a balance of probabilities, Mr Matson did speak about reinsurance but certainly never promised any nor said that he had a quote from Transatlantic Re; whether that name was mentioned as a potential reinsurer I am not so sure. I accept that Mr Matson had not done business with them before even though he mentioned the company as a potential front for 535. Knowing that Tryg were looking for reinsurance, Mr Jeffrey and Mr Amies were ‘put on the case’. When they visited Tryg they mentioned the possibility of obtaining a quote from Transatlantic Re from whom they had previously obtained a stop loss policy. At no stage was there any suggestion that Mr Matson had given some kind of assurance or promise about reinsurance from this company. As I have said, Mr Amies was a reliable witness and I believed what he told me. The entry on the computer, made after the visit from Mr Amies contains the entry “R/I AON to revert re: stop loss 200% XS 100% rate TBA”. It also contains details taken from Mr Hopper’s note which has been lost. I reject Mr Gruder QC’s submission that this information must have come from Mr Matson; on the contrary the probabilities are that this entry was made as a result of the discussions with Mr Amies and Mr Jeffrey on 12 January 1999 and was an addition not recorded in Mr Hopper’s note. It is not possible to be sure about this, as Mr Hopper was not called to give evidence.

Transatlantic Re declined to give a quote. Of course, had Tryg’s case on this point been correct, Mr Matson must have been taking a huge risk in promising a reinsurance which was not available. Had Mr Matson made the promise as alleged, then immediately on hearing that Transatlantic Re had refused reinsurance, I would have expected Mr Tobin and Mr Hopper to ‘hit the roof’: what they had been told was now known to be untrue. They had been duped and misled. But their reaction was quite different, and consistent only with them not having been misled at all. They had simply failed in their duty to protect themselves with suitable reinsurance and without it should perhaps have never undertaken the Cover reinsurance, through a front.

As time went on Tryg’s position became more of a problem and in April there was pressure from AON, who were handling Tryg’s general reinsurance, to own up to the position and acquire reinsurance if at all possible. Mr Tobin must have felt himself under pressure and I reject his denial that that was so. He had blundered and was about to be found out. Mr Tobin took two months to provide the report he had been asked to provide for Mr Seest. Mr Tobin also delayed for four months in notifying Tryg’s general reinsurers; hoping no doubt that the problem would be solved before it became necessary to explain that they were exposed on their Cover reinsurance. When he did write to them he pretended that the notification was due to a thorough review following the announcement of the change in shareholders in June 1999; whereas, in truth, he had been asked to notify them in April by AON.

As at 6 June Mr Tobin was blaming Mr Jeffrey and Mr Amies for the problems facing Tryg; without mentioning or criticising Mr Matson. By this date, more senior personnel in AON were trying to help. Mr Walters and Mr Blake were both asked to see if they could help: Mr Potter using his connections to get them to do this. And Mr Tobin himself asked Mr Fillingham to assist at a meeting on 29 March 1999. Needless to say, at this time there was no suggestion that Mr Matson had done anything wrong or that Tryg had been misled into accepting the reinsurance to the Cover. Despite what I accept were real attempts, Mr Fillingham was unable to persuade 535 to drop the Tryg reinsurance and Mr Walters and Mr Blake did not manage to obtain a satisfactory quote to cover part of Tryg’s position. Those efforts having failed it was then for the first time, I think in order to put pressure on AON to help them out of a mess of their own making, that Mr Tobin started to say that Mr Matson had misled him at the broke. That was first mentioned to Mr Fillingham at the meeting on 6 July 1999. The fact that he changed his mind about the dates is of no significance. Contrary to Mr Gruder QC’s submissions, I found Mr Fillingham to be an entirely credible witness. He was a senior man and was being called on to help Tryg out of a mess for which AON were not responsible either legally or morally. Further, also contrary to Mr Gruder QC’s submission, I regard it as important that as a matter of fact there is no truth in the allegations made against Mr Matson. He suggests that even if I did not believe the Tryg witnesses on this point, AON had some motive for behaving as he alleged they did in July and October. But that is not so. From AON’s perspective Tryg were making a false allegation and they knew it to be false as a result of Mr Fillingham getting input from his team. There was no motive for AON to behave as they were accused of behaving in relation to the July and October events.

As for the AON letter to Mr Tobin dated 16 June 1999, sent in the name of Mr Fillingham, it would appear to me that Mr Matson must have made an input into that letter, hence the use of the first person singular in the first main paragraph. That “I” must be Mr Matson. I am not prepared to infer that there was a document from Mr Matson on which this letter was based nor that if there had been it was still in existence and was being concealed by AON. This was a letter dashed off by someone on behalf of Mr Fillingham. I think he does not know who actually wrote it; he simply signed it and did not pay much attention to it at the time. It may well be that Mr Matson gave information directly to Mr Fillingham’s secretary and she simply typed as he spoke; but I simply do not know. Mr Matson said that he had not been consulted on the letter before it was sent. What I am sure about is that the letter accurately reflects what had happened at the end of December 1998: there was no promise of a stop loss policy for which there was already a quote.

When the allegation was made to Mr Fillingham he treated it with the seriousness which it deserved. I think he would have spoken very soon afterwards with Mr Matson and, therefore, I reject Mr Matson’s evidence which was to the effect that he first heard of the allegation at the meeting on 19 July 1999. On a balance of probabilities he would have been made aware of the allegation very soon after Mr Fillingham returned from the meeting on 6 July. It follows that I also reject Mr Matson’s evidence that at the time of his broke to Mr Jenks on 15 July he was unaware of a dispute about his broke to Tryg.

Mr Matson was due to attend the meeting on 15 July but did not for reasons which are now unknown. As to what was said, I prefer Mr Fillingham’s evidence. At the end of the day there was not much between what he considered his instructions to be and what Tryg were prepared to accept. In my judgment Mr Filingham was given an instruction that AON should do whatever it could to reduce Tryg’s exposure. That was what Mr Tobin and Mr Potter wanted. AON were to use whatever machinery available and Mr Fillingham’s good offices to reduce the exposure. Following this meeting, Mr Fillingham asked Mr Matson to go out and look for reinsurance as soon as possible.

I accept that when Mr Matson went to Mr Jenks on 15 July he essentially broked the reinsurance on the basis that Mr Jenks was already familiar with the business as Cox had been a Cover Underwriter in 1996 and 1997. There is an issue as to whether there was any discussion about how the line reduction would work, and the possibility that in due course Tryg and Euclidian might be taken out of the loop. I can see no reason for doubting that something along these lines was said. It is not surprising that Mr Jenks and Mr Wilmot cannot remember, as such a change would have been of no significance save for a saving in brokerage. I do not regard Mr Matson as such an unreliable witness that his evidence should be rejected in full. On the contrary, whilst I think he went too far on occasions when under pressure in the witness box, the overall impression which he gave me during his testimony was of a sensible pleasant person who did his best to help the court. He shone as a witness by comparison with, for example, Mr Tobin. Mr Jenks, on the other hand, gave some evidence which was nothing short of extraordinary. He said that he did not see the front page of the slip which he scratched; thus he did not know the identity of Tryg’s retrocedent; he was not shown any claims figures by Mr Matson; he wrote the risk without seeing either the declaration lists or the declarations themselves and that he did not read the MOU or spot that there was a reference to it in the slip before he scratched it; he signed the slip with subjectivities which he cancelled even though the subjectivities had not been complied with. None of these startling statements were foreshadowed in his witness statement. As between Mr Matson and Mr Jenks I prefer the evidence of the former even though I approach his evidence with care. Mr Jenks was a negligent underwriter and I reject the suggestion that Mr Matson broked the contract to him by representing that the business was the same as what it had been in the past; the MOU was the basis of the broke although, of course, the Cover was familiar territory to Mr Jenks. I also accept that Mr Matson explained that Tryg were overlined; that was true. A fair presentation did not require him to go further and explain why they were overlined or to refer to the allegation which had been made and of which I am satisfied Mr Matson was aware.

The slip was not the one which contained the two categories; in other words Mr Matson had used the December slip and not the March slip. I reject Mr Matson’s explanation that the documents in the bundles were incomplete and what was available must have been part of a larger copy. This is unlikely; he had simply overlooked the fact that there had been a new slip in March and he could not, therefore, have gone through the Category B risks at the time. On this Mr Matson was confused. But as to the broke, Mr Jenks was not misled by Mr Matson; Mr Jenks appeared not to understand what he was doing.

I find as a fact that when Mr Matson returned to see Mr Jenks on 19 July he took with him the further information which Mr Jenks had required. I also reject Mr Jenks’ evidence that this information was not shown to him. It was on the basis of the information that he cancelled the subjectivities. It was Mr Matson’s suggestion that he exclude the Petropac facility which Mr Jenks apparently did not like and he agreed to write the reinsurance at the end of the day subject to excluding Petropac and any known and reported losses as at 19 July 1999. Mr Matson did not mislead Mr Jenks into writing this line.

I find that Mr Matson was at the meeting with Tryg on 19 July which was also attended by Mr Fillingham. At this stage he had ‘in his pocket’ Mr Jenks’ offer or indication. He was able both to reject angrily the allegation that was repeated to him face to face that he had misled them back in December, and to tell them of the indication he had received from Mr Jenks which would have the effect of reducing their exposure by half. I am sure that Tryg were told of the reinsurance. The reason why I am sure is the e-mail which Mr Fillingham sent on 19 July 1999 stating in terms that Tryg had agreed to buy the quota share indication from Cox. If that e-mail is genuine it completely destroys Tryg’s denials that any mention was made of the quota share reinsurance. There is nothing to support the idea that the e-mail is not genuine as a document. It would have been a most devious thing for Mr Fillingham to have written what he did, knowing that Tryg had not agreed to buy the reinsurance; and fanciful to have suggested that he would have acted like this. That e-mail destroys, in my judgment, any suggestion that there was no order for a quota share reinsurance policy discussed at that meeting. Tryg’s case on the July contract seems to me to fail on the facts. As to the absence of a written order for the reinsurance; none was necessary and its absence does not suggest one way or the other what the true position was. The lack of any written confirmation of the position or demand for premium cuts both ways. If Tryg had thought that their inwards line had been reduced then they would have expected to be shown consents from Euclidian and Syndicate 535 and an amendment to their contract. None of this was provided. The absence of documentation says nothing about whether Tryg were told their line had been reduced or whether they were told that their exposure was reduced by quota share reinsurance. The absence of documentation says more about AON’s administration than it does about what happened at the meeting. Silence reigned from 3 August 1999 until the end of September 1999.

As to the October contracts, I regard the arguments of Mr Gruder QC as ‘opportunistic’ rather than of substance. I start with the allegation that Mr Matson knew in July that Euclidian had a problem with their premium capacity. Whether Euclidian had been experiencing the problem in the summer, the important question is whether Mr Matson was aware of it at that time. He says he first knew of the problem, and that Euclidian wanted to reduce their fronting income, as a result of being told so by Mr Hession towards the end of September 1999. I have no reason to doubt this evidence since it makes no sense that AON should have delayed in removing Euclidian and Tryg from the loop until October. There was no problem in Cox agreeing to become the direct reinsurer of 535 and none has been suggested. In argument Mr Gruder QC suggested that there might be some advantage in a reinsurer being down the line to take advantage of defences that other reinsurers might have further up the line, but this is a lawyer’s perception. Cox knew what it was doing in October and Mr Jenks approved what was done by Mr Roberts. The suggestion that Mr Matson knew of Euclidian’s wishes earlier is a necessary part of the conspiracy theory but it has, I think, no substance in fact. I find as a fact that Mr Matson’s evidence as to when he was told about Euclidian’s position was credible and should be accepted; there is no other reliable evidence on this point. I find that Mr Matson had anticipated, rightly, that in due course the chain could be reduced, when he broked the risk to Cox in July; had it been possible to achieve that objective then and there he would have done so and Cox would have been willing to write the business on the terms which they did in October 1999.

Nothing that Mr Matson said during the broke to Mr Roberts was untrue or misleading. In the first place it is true that the possibility of Tryg and Euclidian being removed from the loop had been discussed in July; it was true that the effect of the reduction in the chain would be to increase Cox’s income without increasing their exposure (as Mr Robert’s note recorded: “QS [therefore] no extra liability”) and the exercise was something of a tidying up; no category B risks were ever accepted to the Cover so the failure to take the right slip on the first visit was of no significance and there was no extra exposure undertaken by the second slip scratched on 26 October 1999. It is common ground that no up to date loss figures were given to Cox, that is loss figures post 19 July 1999. But these figures were immaterial in circumstances where Cox was already bound for its share of 535’s participation in the Cover; Mr Holmes’ opinion on materiality is plainly correct and I accept it. Following Mr Hegarty’s approval of Euclidian’s position and 535’s consent on 26 October 1999 Mr Matson returned to see Mr Roberts. I am satisfied on the evidence that Mr Roberts was both competent and authorized to write the slip; he understood the documents brought to him and he had them approved by Mr Wilmot, who also understood the effect of the changes. There is no doubt on the evidence that the failure to remove Tryg’s name on 1 October 1999 was a pure oversight which was corrected later. There could have been no commercial purpose in leaving Tryg’s name there, without Euclidian, since it was known that Tryg were not acceptable security for 535. It was precisely that fact which had brought Tryg into the picture in the first place. Mr Roberts did not intend to leave the name on: he was prepared to do what Mr Matson told him, because he was satisfied with the objective outlined to him, although he thinks he was only told to remove Euclidian’s name (as indeed he may have been). Mr Matson was trying to complete the formalities in a hurry; there cannot have been any good, or nefarious, reason why he wanted to leave Tryg’s name on the slip This mistake was not spotted by Mr Matson or by Mr Hegarty but that is understandable, if regrettable. The proposal was that both should fall out of the loop and therefore I am satisfied that a simple mistake was made. The fact that this was the proposal is confirmed by what Mr Seymour said in relation to Mr Matson’s visit to him in October. As a matter of probability it is unlikely that the proposal as reported to Mr Seymour should change from the proposal as presented to Mr Roberts. In any event, the mistake was corrected on 26 October 1999.

In conclusion, Cox have no grounds for avoiding liability under the placement.

Mr Boswood QC on behalf of the Cover Underwriters submits as follows. The pleaded case on ‘writing against’ the reinsurance is that there was breach of an implied term in the reinsurance contract to accept risks

“on the same or substantially the same terms and conditions … as would otherwise have been accepted … if underwriting without the benefit of the reinsurance cover.”

In other words it would be wrongful for the Cover Underwriters to accept as a declaration to the Cover a risk because they had reinsurance which they would not have accepted a risk had there been no such reinsurance. This would provide a remarkable result, namely that the existence of the reinsurance inhibited rather than enabled the Cover Underwriters to accept a risk. The latest re-formulation of the case under this head is that

“Syndicate 535 as Cover leader underwrote certain risks (a) without believing or being reckless as to whether it would make a gross underwriting profit and (b) because of the existence of the Cover reinsurance.”

The real question is what duty, if any, a reinsured owes to the reinsurer when deciding what business to accept and on what terms.

The Cover Underwriters’ submissions are summarized this way. First, an insurer is entitled to take full account of the existence and terms of his reinsurance contracts (whether proportional or not) when deciding what business to accept and on what terms. No underwriter or expert who gave evidence suggested otherwise. One of the reasons for taking reinsurance is to allow the insurer to write business he might otherwise have been unable or unwilling to do. Thus, the insurer may be able to write larger risks or a larger number of smaller risks.

Second, an excess of loss reinsurance is a commercial arm’s length contract; there is no basis for implying or imposing fiduciary or quasi fiduciary duties. In a contract of reinsurance as here the interests of the reinsured and reinsurer will involve conflicting interests, such as the reinsured’s interest in getting the maximum potential cover at the lowest price. They may share some common interest such as minimizing claims and so on. Unlike, possibly, proportional reinsurance there is no sense in which an excess of loss reinsurer is engaged in a joint venture with the reinsured: see Charter Re v Fagan [1997] AC 313 at 341-342

“Proportional and non-proportional reinsurances are different forms of reinsurance. Under the former the reinsurer shares pro rata in both premiums and losses on risks ceded whether from ground up or on a surplus basis. Under the latter, the premium may be fixed but is commonly (as under the present reinsurances) a minimum and deposit premium adjustable by reference to a percentage of the reinsured’s net premium income: claims on the risk(s) within the scope of the reinsurance are payable in excess of a specified figure, whether the cover relates to individual losses or to an accumulation of losses on the whole or a particular part of the reinsured’s account. …”

and Kingscroft v Nissan (No 2) [1999] Lloyd’s IR 603 per Moore Bick J at 622:

“Because quota share reinsurance effectively involves transferring a share of the business, both premiums and claims, to the reinsurer, it reduces to a corresponding extent the reinsured’s liability for each loss that occurs and so reduces his interest in each risk written. Non-proportional reinsurance, typically in the form of excess of loss reinsurance, is different in that the reinsured remains liable for all losses up to a certain amount and to that extent retains a direct economic interest in each risk underwritten. The evidence of Dr Lührsen, Mr Williams and Mr Outhwaite suggested that the way in which the market perceives these different types of contract reflects these fundamental differences: quota share reinsurance is seen by reinsureds as a means of increasing capacity and by reinsurers as a means of acquiring a share of the business written by another underwriter who has access to a particular market; excess of loss reinsurance is seen primarily as a way of managing an underwriting account. …”

and Kiln on Reinsurance in Practice (4^th edition page 48) (dealing with quota share reinsurance):

“Firstly, it is the only method of reinsurance when the Reinsured and the Reinsurer are true partners in a portfolio of business. … As a true partnership it is often used on new accounts or a new class of business where the two parties want to share in the deal for better or for worse. … The same argument may apply to unusual classes of business. The confidence given to the Reinsurer when he knows he is a partner and cannot be selected against, can be very necessary.”

Mr Boswood QC further submitted: “As a matter of legal principle it is inappropriate to imply fiduciary or quasi fiduciary duties into contracts which are commercial arm’s length contracts, where each party acts for its own interest. Fiduciary duties only arise in case where a party agrees not to act in his own interests but in the interests of another: see Bristol & West Building Society v Mothew [1998] Ch 1, at page 18, per Millett LJ:

“A fiduciary is someone who has undertaken to act for or on behalf of another in a particular matter in circumstances which give rise to a relationship of trust and confidence. The distinguishing obligation of a fiduciary is the obligation of loyalty. The principal is entitled to the single-minded loyalty of his fiduciary.” (Emphasis added)

The reinsurers are seeking to impose a quasi fiduciary relationship onto the reassured so as to turn a self interest arrangement into some kind of joint venture.

Third, the reinsurers do not and cannot rely on the post contractual duty of good faith. Given that a reinsured is not a fiduciary there are only two possible legal sources for a reinsured’s legal duties to his reinsurer:

As Lord Hobhouse has explained, post contract the source of the obligations must be found in the contract; there is no concept of a free standing duty of good faith after a contract has been concluded: see The Star Sea [2001] 1 Lloyd’s Reports 389 at paragraph 52:

“A coherent scheme can be achieved by distinguishing a lack of good faith which is material to the making of the contract itself (or some variation of it) and a lack of good faith during the performance of the contract which may prejudice the other party or cause him loss or destroy the continuing contractual relationship. The former derives from requirements of the law which pre-exist the contract and are not created by it although they only become material because a contract has been entered into. The remedy is the right to elect to avoid the contract. The latter can derive from express or implied terms of the contract; it would be a contractual obligation arising from the contract and the remedies are the contractual remedies provided by the law of contract.”

Post contract, in insurance cases there is a recognized series of circumstances which may give rise to fraudulent conduct which is unlawful, such as making false claims, where nothing short of fraud will suffice. There is no general duty of “fair dealing” or disclosure. “Writing against” is not a recognized act of fraud and nor is it in the same category as making false claims.

Fourth, the source of any duty not to write against the reinsurer must, therefore, be a bespoke implied term and the test is necessity: either to give a contract business efficacy or to include an obligation which the parties are presumed to have intended but which was too obvious to spell out expressly: Liverpool City Council v Irwin [1977] AC 239 at 253, per Lord Wilberforce.

The test is an exacting one: see Comptoir v Power Son [1920] 1KB 868 at 899 per Scrutton LJ:

“The Court … ought not to imply a term merely because it would be a reasonable term to include if the parties has thought about the matter, or because one party, if he has thought about the matter, would not have made the contract unless the term was included, it must be such a necessary term that both parties must have intended that it should be a term of the contract, and have only not expressed it because its necessity was so obvious that it was taken for granted.”

Fifth, the bespoke implied term proposed should be rejected. The formulation proposed goes far beyond a duty not to engage in some form of fraudulent or dishonest conduct; instead they seek to impose a duty to refrain from being reckless or indifferent to the merits of the risk and the interests of the reinsurers. And at the end of the day what they are really saying is that the reinsureds owed a duty to take care of the interests of their reinsurers. It is wrong to adjust the bargain which the parties have written. It might well be in the interests of the Cover Underwriters to accept declarations to the Cover which will impact most heavily on their reinsurers.

The implication of any such term contended for would be contrary to authority. A more extreme case than this, where there is a fac/oblig reinsurance under which the reinsured can retain the plums and pass the duff onto the reinsurers does not give rise to obligations that the reinsured must have regard to the reinsurers interests when deciding what risks to cede: see the speech of Lord Millett in Aneco v Johnson & Higgins [2002] 1 Lloyd’s Reports 157 at paragraph 71:

“Fac/oblig treaties are naturally less attractive to reinsurers than quota share treaties. They are subject to the obvious risk that the insurer will retain good business for his own account and cede poor business to the treaty. There is, or at least there is assumed to be, no obligation of good faith on the part of the ceding party when exercising his discretion whether to cede or retain a risk. The only constraint upon him is that he must exercise some restraint if he wishes to maintain a good reputation in the market and any hope of doing future business with existing and prospective reinsurers.” (emphasis added)

Thomas J proceeded on the same basis in the recent case of Sphere Drake v EIU [2003] Lloyd’s Law Reports 525. The case was concerned with a unique section of the insurance market where reinsurances were written which would inevitably involve losses but which the reinsurers retroceded to a retrocessionaire in circumstances where the reinsurer would make a profit.

“An underwriter would often take on the risk of a catastrophe in the expectation that it might not happen and that he would therein make a profit, but if it did happen, he had so arranged his outwards reinsurance that he would not have to bear any of the loss. There have been a number of distinguished underwriters who have written with the expectation of making an underwriting profit but who, through skilful use of outwards reinsurance, have ensured a profit even if there was no underwriting profit.”

If there was a certainty that the risk would be loss making and the reinsurer failed to disclose his intention to write such business because he would make an arbitrage profit then that was objectionable. It was a matter which should have been disclosed before the contract was written.

“The spiral in the catastrophe market involved risks where there was a real chance that there would be no major catastrophe that would give rise to a loss; there was a genuine fortuity and a chance of profit in good years for all participants. In the spiral that operated in respect of WC [Workers’ Compensation] carveout and related business, losses were inevitable year in, year out. As the reinsurances in the spiral merely operated to pass on those losses at an ever reducing premium, huge losses would have to be paid each year out of premium that was also diminished on every tier and every layer of reinsurance through the payment of brokerage (para 174(ii)).

…

It seems to me, as I am concerned with reinsurance, that the ordinary principles of disclosure suffice. If the nature of the business was properly disclosed, then in my judgment no complaint could be made about the writing of gross loss making business on the back of reinsurance (para 329).

…

Furthermore, it must be recognised that markets must be free to function within the existing law and regulatory structure. In my judgment, the existing principles of the law in relation to fiduciaries, misrepresentation, conspiracy, deceit and disclosure already provide a sufficient legal framework to determine the issues in this action in relation to this market as between these parties … (para 331).

…

Deliberately writing business which is known will produce losses far in excess of the premium on the basis that reinsurers will be expected to pay for losses for even less premium, is so alien to the ordinary practices of conventional insurance that it must be specifically disclosed. …(para 336(i)).

…

It was not inherently dishonest to place or cede such business if there was full disclosure (para 336(v)).”

Accordingly the following propositions were to be derived from this case:

On the question whether there is any duty of care owed by the Cover Underwriters to the reinsurers, no such duty should be implied because each party was looking after its own interests and those interests were not necessarily mutual. A duty of care is only on the cards in relation to a contract in which one party agrees to apply that skill for the benefit of another: see Henderson v Merrett Syndicates Limited [1995] 2 AC 145 at 179-181 per Lord Goff

“It should now be regarded as settled if someone possessed of a special skill undertakes to apply it for the benefit of another person who relies on such skill, a duty of care will arise …in a context concerned with a liability which may arise under a contract or in a situation “equivalent to contract,” it must be expected that an objective test will be applied when asking the question whether, in a particular case, responsibility should be held to have been assumed by the defendant to the plaintiff.

…

there is in my opinion plainly an assumption of responsibility in the relevant sense by the managing agents towards the Names in their syndicates. The managing agents have accepted the Names as members of a syndicate under their management. They obviously hold themselves out as possessing a special expertise to advise the Names on the suitability of risks to be underwritten; and on the circumstances in which, and the extent to which, reinsurance should be taken out and the claims should be settled. The Names, as the managing agents well knew, placed implicit reliance on that expertise, in that they gave authority to the managing agents to bind them to contracts of insurance and reinsurance as to the settlement of claims.”

In relation to direct insurance, there is no implied duty of care between insured and insurer otherwise a coach and horses would be driven through the law of insurance. This applies not just to liability insurance but also all risks insurance on goods and marine insurance. The same principle applies in relation to contracts of reinsurance between two insurance companies. An excess of Loss reinsurance is not a contract for the provision of services by the reassured since the reassured must have regard only to their own commercial interests. He is not providing any service for the benefit of his reinsurer. The contract is complete and workable on the basis that the reinsurer should assume the risk of negligent underwriting by the reinsured. Excess ofloss reinsurance would be unworkable if the reinsured had to show that each risk had been written with appropriate skill and care. It would make the practice of reinsuring to close unworkable. The position might be different with some kinds of proportional reinsurance but that is not this case. The conclusion that there is no duty of care is supported by authority so far as excess of loss reinsurance is concerned.

There are four cases on proportional reinsurance where the duty of care has been discussed.

In Glasgow v Symondson [1911] 16 Com. Cas 109 it was argued by reinsurers that coverholders were in effect the reinsurers’ agents for selecting risks and so owed an implied duty of reasonable care and skill to them.

In Phoenix v Halvanon [1985] 2 Lloyd’s Reports 599, Hobhouse J accepted that there should be an implied term that the reinsureds should conduct their business prudently and in the ordinary course of business; but the duty seems to have been agreed by the parties and he heard no argument on the point; his decision was later reversed (although not on this point which again was not argued in the Court of Appeal) and, in any event, the court was construing a fac/oblig treaty.

In Simner v New India [1995] LRLR 240, HHJ Diamond QC considered a stop loss policy of insurance and rejected an argument that a potential reassured had a duty of care to make inquiries of facts outside his knowledge during placement on the basis that “An assured is under no duty of care not to cause financial loss to the insurer”.

In Economic v Le Assicurazioni d’Italia [unreported, 27 November 1996] Tuckey J concluded that a coverholder who wrote business on behalf of Economic which in turn had a quota share reinsurance for all risks accepted with a pool of reinsurers, had an implied duty of care owed to the reinsurers. The reinsurances were quota share and Tuckey J’s attention was not drawn to Glasgow or Simner. And now, Aneco and Sphere Drake are both authorities against the proposition that a duty of care could be implied. It is possible to argue that the cases can sit together because it should be said, in a way which could not be said here, that in Phoenix and Economic the transactions were arguably in the nature of a joint venture and where there could be said to be a common intention that the reinsured would underwrite for the common good.

If there were such a duty, presumably it would be upon the lead underwriter alone in relation to the following market on standard security terms since they would be obliged to follow. The following market could not be vicariously liable to the reinsurers for risks they would be bound to accept. The principle at Lloyd’s is that each underwriting member accepts liability for his own part and not for another, and any vicarious liability would subvert this principle [specified in section 8 of the Lloyd’s Act 1982]. It would also offend the principle that the rights of one insured or reinsured are not to be prejudiced by the acts or omissions of another insured or reinsured unless the policy in question is a joint policy; that is joint risk, joint interest and joint loss; State of Netherlands v Youell [1997] 2 Lloyd’s Reports 440 at 460.

These issues do not directly affect AON but they wish to make submissions based upon the Sphere Drake case. That case was concerned with a sector of the insurance market which, as the Judge put it, “traded in losses” generated by US Workers’ Compensation business. The Judge was concerned to answer the question whether and to what extent it was legitimate for an insurer to engage in “arbitrage” or “net underwriting” and secondly to accept “gross loss making business”. By ‘arbitrage’ or ‘net underwriting’ is meant accepting risks where the insurer has arranged reinsurance on terms which enable him to make a certain profit whatever the outcome of the risk. The conclusion was that this business was permissible where there was a significant uncertainty as to whether a gross loss will occur. There is no suggestion in the judgment that an intention to engage in net underwriting would be material to disclose. The Judge defined gross loss making business as:

“By gross loss making business I mean business where it is a virtual certainty that there will be losses which will far exceed the premium, and by referring to those who wrote gross loss-making business I mean those who deliberately decided to write gross loss making business in the knowledge that the losses would exceed the premium by a significant amount.”

On the other hand it was accepted by the Judge, or was common ground, that there was nothing wrong with an underwriter writing business on occasions that is bound to make a loss for example, in order to maintain market share, to maintain good relations with a producer or broker in the expectation of receiving profitable business or carrying on business in a soft market so as to take advantage of a hard market when the underwriting cycle changed. However, an intention to write business on this basis may be a matter which is material to be disclosed. But it was the peculiar nature of the section of the market and the writing of business certain to be loss making on the basis that reinsurers will be expected to pay for it that “is so alien to the ordinary practices of conventional insurance that it must be specifically disclosed.”

AON’s submissions may be summarized thus:

For the reinsurers, Mr Gruder QC submitted that the reinsurance contracts contained two implied terms:

The first implied term prohibits what has been referred to as ‘writing against’ and the second is the duty of reasonable care which the reinsurers contend is owed to them by the Cover Underwriters when accepting risks to the Cover. Both terms pass the ‘obviousness test’: it is so obviously a stipulation in their agreement that the parties must have intended it to form part of their contract.” It also passes the “oh of course” test applied by the officious bystander.

It is common ground that when the Cover was broked it was not disclosed to reinsurers that the Cover Underwriters would be underwriting with a view to producing anything other than a gross underwriting profit. As Thomas J said in the Sphere Drake case if the underwriters intended to write gross loss making business then if it is disclosed the reinsurers can hardly complain; but if it is not, then the underwriters would have to bear the consequences. In the absence of disclosure the reinsurers were plainly entitled to assume that only risks which were anticipated to produce a gross underwriting profit would be accepted to the Cover. If they were only accepting business because they were in an arbitrage position then in the absence of disclosure that business should not be accepted to the Cover.

The evidence showed that Cover Underwriters understood what writing against involved: Mr Seymour said that he meant by the expression not writing against that

“On no occasion did I decide to accept a declaration simply because of the existence of the reinsurance; either not caring whether a loss might or might not occur or in the certain knowledge that I would make a profit on that risk even if losses were sustained (because those losses would be met by reinsurers).”

In evidence Mr Watters said:

Mr Holmes’ evidence was that writing against the reinsurer

“reflects the situation where an underwriter has decided to write a risk because he had the benefit of a reinsurance that would allow him to make a loss, irrespective of what loss was sustained on that risk.”

The Claimants have sought to make the position rather over complicated; when in truth the market knows the practice when it sees it and frowns upon it when it happens.

As to the implied term of reasonable care and skill, such a term should be uncontroversial since Hobhouse J implied such a term in relation to a fac/oblig contract. This Cover was essentially the same as a fac/oblig treaty. The Cover Underwriters had absolute freedom whether or not to write a risk to the Cover. In other words they had a choice whether to write the risk with reinsurance cover or without. If they chose to write it to the Cover, the reinsurers were bound and the case for a Phoenix v Halvanon implied term is unanswerable. Phoenix v Halvanon was cited with approval by Hobhouse LJ in Toomey v Eagle Star [1994] 1 Lloyd’s Reports 516 at 523.

It seems to me that a number of principles may be derived from the cases:

I shall now apply the principles to the six cases upon which Mr Gruder QC particularly relies.

As a preliminary observation, I should say that Mr Seymour struck me as a reliable sound and sensible underwriter. Overall I was impressed by the care which he appeared to have taken when writing all the risks declared to the Cover. His underwriting abilities and his careful approach were readily and favourably contrasted with Mr Woodgate’s underwriting of the reinsurance slip; Mr Jenks’ writing generally and that of Mr Tobin. The underwriting notes were for the most part more extensive than one might have expected. As a witness Mr Seymour was impressive. He obviously knew what he was talking about and spoke with modest authority. I felt able to rely on what he told me, without exception.

I shall only deal with the six declarations. Although Mr Gruder QC’s closing submissions were confined to them he appeared also to be saying that his position with regard to the many other declarations in respect of which complaint was made was not closed. In my view other than the six with which I shall deal there is nothing in any of the other declarations to persuade me that a case on carelessness could be advanced or that these declarations were so odd that they required prior express notice and approval, or that there was any sign that the Cover Underwriters were writing business with a view to ‘stuffing’ the reinsurers.

Mr Boswood QC has accurately and helpfully summarized the factual position in relation to each of the relevant declarations in his written closing submission and I take the facts from there.

This was a new declaration to the Cover for the 1999 year of account. The declaration slip was scratched by Mr Seymour on 2 February 1999. The risk was of 24 months’ duration but it was cancelled with effect from 2 April 1999; the Cover Underwriters and reinsurers were on risk for only three months. The security was standard security. Pluspetrol is a leading independent Argentinian oil and gas company. The declaration is a reinsurance of a local Argentinian front insurance company which retained no part of the risk. The original policy is an OEE policy. The limits of the risk were US$25 million excess of basic deductibles. It was, therefore, a ‘ground-up risk’. It could not be described as a ‘first loss’ or ‘primary’ risk since there were no layers above it. It was a full stretch risk from the ground up. The Cover Underwriters took a 42.5% line [although they wanted more]. Taking the aggregate deductible under the reinsurance contract into account, the percentage of the risk run by the reinsurers was 50%. The annual premium was of the order of US$230,000. Mr Woodgate’s Syndicate was a co-insurer with Cover Underwriters having taken a 100% line on another AON Cover. Details of this risk appeared on the first (and subsequent) declaration list on 11 April 1999. In his underwriting notes Mr Seymour noted that there were no losses recorded since 1993:“clean at least 6 years” was his note.

Mr Youell’s sole criticism of this declaration is that

“it is not clear whether the original assured purchased substantial higher layers of indemnity although it is reasonable to assume that he did so in light of the possible size of losses, and this would render this placement a first loss policy” but that “if this is all that was purchased, this ground up declaration appears to be unobjectionable”

Since the evidence shows that this was a full stretch policy there can be no grounds for any criticism. However, Mr Gruder QC maintains that the reinsurers should not be liable. The declaration has produced a loss of about US$10 million. His only point appears to be that South American well coverage is generally known to be hazardous and “the inenitable conclusion is that Mr Seymour accepted the risk because he knew that the overwhelming likelihood was that any loss would be borne by the reinsurers.” But with respect, that may be his case; it is not supported by his own expert. Even had this declaration been written because Mr Seymour knew he had reinsurance protection that would not be wrongful. The Cover Underwriters were exposed on this risk if 42.5% of a loss exceeded USS$15 million, assuming the aggregate deductible was fully in place. I do not think the complaint relating to this declaration has any merit. The evidence showed that, to use Mr Youell’s phrase “this is all that was purchased”.

These were new declarations to the 1999 year of the Cover. The slip for Declaration 26 was scratched by Syndicate 535 on 15 May 1999 and on 28 May 1999 in relation to Declaration 13. The security for Declaration 13 was standard, that for Declaration 26 non-standard. In relation to the latter, the Cover Underwriters allocated the risk between them as follows:

Declaration 26 was a participation in a direct package of insurance of Alberta Energy. The package comprised three sections: (1) Physical loss & damage/business interruption; (2) OEE; (3) Excess liabilities. Declaration 13 was a reinsurance of section 1; in other words it was a reinsurance of some of the Cover Underwriters’ co-insurers.

Declaration 26 was, in combination, a large risk and it was split in the following way:

The limits on Declaration 13 were US$/CAN$25 million xs basic deductibles. It can properly be described as first loss business and was from the ground upwards. The Cover Underwriters took a 32.36% line on this declaration for a premium of CAN$325,000 plus US$62,250. There was a premium adjustment clause in the underlying policy which provided for upwards premium adjustment in the event of adverse losses and additional premium would accrue under this declaration if such an increase occurred. Although Cover Underwriters’ exposure on this declaration alone was US/CAN$ 8.092 million this declaration was aggregated with Declaration 26 and there could not be a claim under this declaration unless there had also been a claim under Declaration 26. At the time when this declaration was written the aggregate deductible in the Cover had not been exhausted. At the time it was written, the Cover Underwriters, therefore had a potential exposure of $5 million. And the Cover Underwriters’ share of the aggregate risk (ignoring the deductible) was 16% [$14 million out of $84.67 million].

After inception the original assured required an increase of CAN$100 million in its excess liabilities protection and this was agreed to by way of an endorsement, with enhanced premium. The Cover Underwriters had a line roughly equivalent to 25.5% of the whole package [40.219% of 100% of 63.5%] which gave them, with the benefit of the reinsurance (but ignoring the basic deductibles), an exposure of about 18.3% of the risk. By accepting the increased limit, this represented about an increased exposure of CAN$12.5 million. The effect of this increase did not impact on the reinsurers as this level of loss would only be reached after the reinsurance had been exhausted.

Cox participated as a co-insurer with the Cover Underwriters on the original package policy through the Tower Energy Cover [another AON facility].

The uncontradicted evidence of Mr Seymour in relation to the underwriting of these two declarations was to this effect. The account was well known to Mr Seymour. He had previously participated in the insurance arrangements for Alberta Energy through other brokers [JLT]. AON won the account from JLT for the 1999 year. Mr Seymour had visited the Syndcrude site [a joint venture to which Alberta Energy were a party] a significant part of which was covered by the insurance package. Syndicate 535 maintained extensive records relating to this assured. JLT had tried to broke the risk for the 1999 year and therefore Mr Seymour had the benefit of two presentations from different brokers. The allegations made by Cox and 1688 in relation to this risk are as follows:

It goes without saying that these are serious allegations against Mr Seymour. And I find that none of them is justified by the evidence.

I start with Declaration 13. Mr Gruder QC says that the evidence shows that there was no reliable market for primary facultative business. “It must have struck AON as very fortunate that the Cover, backed by the Cover reinsurance, provided a means of accepting first loss business which enabled them to get the main package policies fully placed. Declaration 13 is a prime example of the Cover – but ultimately the Cover reinsurance – being used to satisfy AON’s needs.”

That may be so; but there can be no complaint, in my judgment, about first loss business being written to the Cover. There was not an excessive amount of this business, which formed a relatively small proportion of the overall book. As for the suggestion that Mr Seymour did not rate the risk at all, he said he did rate it and I should accept this evidence. He admitted he did not do a formal burn cost analysis as he had done for Declaration 26. Mr Seymour said that he considered the calculation of the premium on the basis of “how much premium did I think I could get out of the original underwriters to satisfy me … but at the same time making it a realistic proposition that people may actually wish to buy.” Whether one might agree with this approach or not, it is going too far to suggest that the risk was not rated by Mr Seymour. On his evidence, which I accept, he did rate the business but perhaps not as Mr Youell would have done.

The second complaint that the rating was inadequate is based entirely on the proposition that the premium charged was below the mean average loss level over the past four years. Mr Seymour rejected the suggestion that he should have carried out a burning costs analysis for this risk because there was no sufficient claims experience to justify that approach [over the last four years that had been 6 losses spread 0, 3, 2 and 1]. Mr Youell effectively conceded that there was no significant claims frequency here and I prefer the evidence of Mr Holmes and Mr Outhwaite that there was nothing wrong with the rating approach of Mr Seymour. At the end of the day I am sure that Mr Youell’s overall complaint about this declaration was unsupportable. I quote just one passage from his evidence:

The complaint about the particular clauses which were said to be unacceptable is unfair, I think. This was a soft market; underwriters were not well placed to insist on more favourable terms: they could push their point so far but no further. Mr Youell says that no reasonable underwriter would have accepted these clauses; yet the evidence from Mr Seymour was that in relation to the record clause “there is nothing at all unusual in it and indeed it is part of the client’s basis of accepting the long-term policy”. In relation to the review clause, he told the court there was nothing unusual in that:

“obviously if you have a client with a portfolio of property that can be changing over the course of the year, it is not at all unusual to have some form of allowance in there plus or minus 10 per cent of fluctuations you effectively allow without any amendments. So that clause is a very very common sort of clause.”

It seems to me that the dispute over these two clauses exemplifies the dangers of second guessing an underwriter’s judgment with the benefit of hindsight. And, incidentally, of opening up to a review by the court under the guise of a duty of care, the performance of an underwriter vis-a-vis his reinsurer. If Mr Seymour is right about these two clauses then that is an end of any point that can be made. I reject Mr Youell’s criticism on the basis that he is seeking to impose his own approach to underwriting on others who may be writing their business differently but just as competently as him.

Mr Youell was mistaken as to the history of claims frequency and the fifth criticism amounts to nothing.

As to the assertion that the account was traditionally loss making, that was denied by Mr Seymour and I think that the force of Mr Youell’s criticism under this head was extinguished in the following exchange with the Court:

It would not be fair to describe the declaration as traditionally loss making.

Finally was the Cover written on its merits? The answer is yes, if, as I do, I accept Mr Seymour’s evidence. He explained his underwriting thinking and told me that he would probably have written this declaration without the comfort of the reinsurance. In other words, although no doubt he had regard to his reinsurances as he was entitled (and, I think, obliged) to do, he did not write this business because and only because he had the Cover reinsurance.

In relation to Declaration 26 and the split into two layers A and B allegedly done to disadvantage the reinsurers. On the evidence the split was introduced solely in order to ensure that what might appear to be the most lucrative parts of the business could be brought within the Cover limits. If Layer B had been declared to the Cover there would have been no more than a few thousand dollars of premium to be split between the Cover Underwriters and the Cover reinsurers.

I regard as absurd Mr Youell’s suggestion that the rating of Declaration 26 was inadequate. Declaration 26, discounts and all, was so popular in the market that the Cover Underwriters’ original order had to be reduced. One of the many underwriters who were apparently happy with the rating of the risk and the discounts which Mr Youell criticizes was Cox.

The case that Declaration 26 was not written on its merits is simply not established by any credible evidence. It was regarded at the time as a good and profitable piece of business and Mr Seymour was not alone in so thinking. He knew the risk well and was able to make a judgment about it in the normal course of his underwriting.

Mr Gruder QC nonetheless maintains that the Cover reinsurers were not treated “fairly” by the Cover Underwriters. The principal criticism under this head is the way the layers were split and Layer B was not declared to the Cover. I have already dealt with this. The insurance was split because the Cover did not have the capacity to write it all; when the line was reduced (because of the popularity of the insurance) the split was unnecessary. I cannot see how in these circumstances it could be said that 535 acted negligently unless there is an underlying proposition that Cover Underwriters were bound to treat their reinsurers fairly [whatever that might involve]. I can see no foundation for any such obligation; they were not in a fiduciary relationship one with another. We are dealing with the world of commerce.

The facts are these. Pemex is the Mexican State-owned oil and gas company. The declaration is a reinsurance of a captive insurer KOT. The policy covered off-shore property and business interruption, OEE, on-shore property and business interruption and third party liabilities. Mr Seymour underwrote this risk and scratched the declaration slip on behalf of the Cover Underwriters on 4 August 1999. It was a 36 month risk from 30 June 1999 and had been the subject of negotiation from about May onwards. The Cover had participated on a predecessor policy since April 1996. However, the line then was different. In 1996 there was a line on a risk of $75 million xs $25 million. In 1999 the limits were $75 million for onshore/off shore property and business interruption and $25 million in respect of third party liabilities. Both limits were excess a schedule of underlying excess points ranging from $5 million to $20 million and $120 million in the aggregate for the 36 month term. Cover Underwriters’ took a 15% line (increased to 20% in relation to third party liabilities). Therefore the Cover Underwriters’ maximum exposure was $16.25 million but that figure could increase with aggregation with two other declarations: numbers 45 and 46, giving a total exposure of $38.8 million. Cover Reinsurers’ total exposure was $10 million (ignoring the aggregate deductible). Thus in the event of a catastrophe, such as a hurricane in the Bay of Mexico the reinsurers’ share of the maximum exposure was 25.8% for 35% of the premium. The annual premium was $3,499,749 (section 1), $2,805,750 (section 2) and $219,501 (section 3) for 100% interest. Cox participated in the reinsurance of the captive and was a co-insurer with the Cover Underwriters. Syndicate 535 took part in other parts of the reinsurance programme for their own account as did Cox and 1688.

The reinsurance was presented to 535 after it had already been rated by the international energy leaders SCOR France and the All American Marine Slip. By the time it was presented to Mr Seymour it had also been accepted by various international markets such as AXA and Hannover Re. Mr Seymour carried out a detailed analysis of the considerable aggregation with other exposures to Pemex. He reviewed the loss history since 1993 and retained a copy of this on 535’s files. It had a claims history which showed a number of losses but the figures showed only two losses since 1993 that would have impacted on the reinsurance about to be written: one was an explosion the other a hurricane. Mr Seymour concluded that the rating done by the leaders was satisfactory and there was a good likelihood of a profit on a gross basis.

No criticisms are being advanced in relation to declarations 45 or 46. The criticisms that are made in relation to Declaration 35 are as follows:

15% was the extent of the order on offer. The suggestion that a larger order should have been taken must be an error in the light of the other criticisms. The allegation that there was no examination of the loss record was not sound on the facts. The loss record was in 535’s file and Mr Youell accepted that he had no basis for disputing Mr Seymour’s evidence that he had reviewed it. Indeed, it was never put to Mr Seymour that he had not done so. As to rating, Mr Youell accepted that 535 was not responsible for the rating of this risk because it had been led by others; he accepted that the leaders on this risk were recognized energy leaders and that it would be usual for the leaders to rate the risk and he had no grounds for supposing that it had been rated otherwise than properly on its merits. Cox also took a line on this risk. As to whether Mr Seymour wrote the risk on its merits, Mr Boswood QC submits that there is no basis for any challenge to Mr Seymour’s evidence that he carried out an appraisal of the risk before he signed the acceptance slip. There was an interesting passage in Mr Youell’s evidence during cross examination which shows, in my view, why Mr Youell’s position in relation to this declaration is unsustainable:

It is Mr Youell’s thesis that so far from enabling an insurer to write more business which he might not have written without reinsurance, the existence of reinsurance was a disabling factor. I cannot accept that analysis: it turns reinsurance on its head.

However, Mr Gruder QC maintains that I should find that the writing of this reinsurance contract was “inexplicable” even though other reputable insurers wrote the business too. Mr Seymour’s notes calculate that 535’s gross exposure of $5.625 millions was netted off against the aggregate deductible ($5 million) in the reinsurance contract leaving a net exposure of $0.625 million. The real explanation for writing this declaration was that for $167,050 of premium to cover an exposure of $0.625 million was to be compared with the reinsurers’ position who took a big risk for 35% of the premium. I should infer that Mr Seymour only wrote the risk because of the reinsurance despite his denial. I have to decide whether to accept Mr Seymour’s evidence on this issue. Whilst I have no doubt that he would have taken comfort from the existence of the reinsurance I do not consider that the reinsurance was the only factor which motivated him to write this risk. It was a reasonable risk to write; other distinguished underwriters had rated and accepted the business. Mr Seymour was entitled to think that this was going to make a gross profit. Again, I have to say that Mr Youell’s own standards appear to be in conflict with the standards adopted generally throughout the market. Cox wrote a part of the business to his own account and I am mystified by the suggestion that 535 should not have written it because they had the benefit of the Cover reinsurance. In my view this was a piece of business properly written and accepted as a declaration to the Cover.

This was a new declaration to the over for 1999. The declaration slip was scratched on 29 July 1999 and Mr Seymour underwrote it. This was a 36 month risk incepting as from 1 July 1999 and there was standard security for this declaration.

Kerr McGee is a large US oil and gas company. The declaration was a reinsurance of an original “Oil Wraparound” package policy. Oil is Oil Insurance Limited, an energy mutual based in Bermuda which provides its members with various insurance coverages. Kerr McGee was a member of Oil. At the relevant time Oil provided US$225 million of potential recovery for its members’ interests in assets but this protection did not cover business interruption or loss of production and it was subject to deductibles and limits. Against that background the concept of a wraparound policy was conceived which would provide energy companies with additional cover to that provided by Oil.

The wraparound cover was in five sections of which only three are relevant. Section 1 provided protection to Kerr McGee in respect of their deductible and additional coverage in respect of perils already covered; and section 2 related to Loss of Production Income relating to certain locations; section 4 provided coverage xs Oil in relation to Kerr McGee’s non oil and gas exploration and production activities. In relation to sections 2 and 4 there was a deductible of $10 million and the coverage across all three sections was subject to a limit of $25 million any one accident/occurrence.

The Cover Underwriters’ line for 1999 was essentially 54%.

It is accepted that this declaration could be described as a first loss reinsurance of the original package policy but the basic deductibles under the wraparound policy were substantial: as much as $225 million. It is the Claimants’ case that this was a ‘good write’ and has been profitable. The Cover Underwriters maximum potential exposure was $13.5 million and, therefore, the potential risk borne by the Cover reinsurers was 73.9%, although because the assets often had other interests involved, because of joint venture agreements, the reality was that the overall exposure was less than 73.9%. The premium was 32.5% of ONP which was $2,308,307 per annum. This declaration was disclosed on the declaration lists taken round the boxes dated 2 November 1999 and was there described as “1^st loss Package R/I”.

The risk was well known to Mr Seymour as he had written a line on the underlying policy since 1995. He had also written a 10% line on a reinsurance of the underlying policy xs of US$200 million. This had always been profitable. It was Mr Seymour’s evidence that when he was brought the risk to review he was also being asked to renew Syndicate 535’s participation on the underlying policy and its existing excess policy and would have been shown and reviewed the loss figures at that time in that connection. The loss figures were good as 535’s records show: no claims in 1998, a loss ratio of 0.09% for 1997, a loss ratio of 21.33% for 1996 and a loss ratio of 0.4% for 1995.

The criticisms of this declaration are these:

The suggestion that the Cover Underwriters deprived the reinsurers of a fair spread of the risk is based on a misapprehension of the legal obligations between Cover Underwriter and reinsurer. The criticism that 535 should have declared their higher participations to the Cover was withdrawn by Mr Youell when he realized that these higher layer risks had been written outside the Cover since 1995.

It seems to me that the following extract from the transcript demonstrates the lack of merit in the ‘fair spread’ point and the point that it was unfair that Mr Seymour did not declare the higher layer to the Cover.

In conclusion I see nothing wrong with the underwriting of this risk and declaring it to the Cover.

This a new declaration to the Cover in 1999 and the declaration slip was scratched on 14 December 1999. The duration of the risk was 28 months expiring on 1 April 2002. However, the declaration contained a cancellation clause which allowed cancellation as at 1 April 2001 after 17 months. The only part of the declaration which came on risk in 1999 was Marine 7 which related to a jack-up drilling rig to a production platform. Thereafter the vast bulk of the cover incepted on 1 January 2000 but with a line of 14.599%. The 100% line came into effect on 1 April 2000 [therefore for 12 months]. The security was standard.

Oceaneering is an off-shore oil and gas contractor. The underlying policy is an 11 section policy covering a variety of perils including a CAR section, although the package as a whole could not be described as CAR. The limit of the risk was $15 million xs basic deductibles and it was therefore a ground up risk and a first loss risk. Syndicates 228, 187 Cox and Tryg also participated directly in the underlying package policy through another AON facility. Cox subsequently was replaced by London & Edinburgh.

Before the risk was bound to the Cover, it was shown to Syndicate 62 who were concerned as to whether this was a risk which could be declared to the Cover and Mr Watters asked AON to seek to ensure that the reinsurers were informed about the risk before it was written, rather than simply telling them after the risk had been written. For this reason details of the risk were included in the declaration list for 24 November 1999. None of the reinsurers who would have seen the declaration list raised any queries; AON informed Watters that the reinsurers had seen the risk on the declaration list and had not objected to it so the risk was bound.

The risk was declared to the Cover by a Mr Brown at 535. He was not called to give evidence but his underwriting notes are to be found in the file. From the notes it is apparent that he carried out an appraisal of the information presented to him by AON including the loss history. The loss records had been given to him on two different bases: one which included the loss of a vessel called the Stephanitum and one which excluded this vessel. Mr Brown appears to have focused on the loss record which excluded this vessel and the mean annual historical loss of US$,381,945 was calculated. Mr Brown also noted that the liabilities section of the policy were clean. He calculated that on the figures provided by AON the ’77 Cover Underwriters’ share of premium would be US$1,865,000, that is, slightly above the burn figure.

Mr Youell makes the following allegations:

As to the first criticism, there is no dispute that what was written is a first loss reinsurance.

As to the second criticism, the experts disagree as to whether the premium should have been fixed in advance. Mr Outhwaite said it was a commonplace that in such a case as this the premium would be agreed from the start. Although Mr Youell disagreed I would not be prepared to find that every careful underwriter would have done one thing or the other. It would not be negligent for the underwriter to agree the premium in advance. It may be that Mr Youell’s opinion was based on a misapprehension that the part of the risk which incepted in December was inconsequential. In fact, the vessel was by far the largest item of property covered by the policy and generated the largest element of premium. As to whether it was appropriate to have regard to the burning costs, it seems to me that that is a matter of underwriting judgment and that it is not negligent to base a premium on it. As Mr Boswood QC observes, if Mr Brown had not done it Mr Youell might well have criticized him for that. As to the assertion that the premium was wholly inadequate, it must be assumed that he must be criticizing the figure of 70% rather than the ONP itself which was fixed by Catlin. The criticism is quite unjustified and was never put to Mr Outhwaite. In any event, Mr Youell accepted in cross-examination that the burn figure calculated by Mr rown was a legitimate number; that it was up to the individual underwriter to decide whether to look at the losses ex or cum Stephanitum and that if Mr Brown had made any mistake in calculating the pro rata premium figure from the burn figure that could have been a mistake in the mathematics “which can happen”. In fact, Mr Outhwaite was of the view that the calculations were correct.

As to the allegation that when it was written Mr Brown must have realized that the reinsurers would bear any losses, the true picture is that if there had been a total loss the reinsurers would have been liable for $10 million and the Cover Underwriters for $5 million; this was not a case of taking premium for no risk. Because some risk was retained by the Cover Underwriters, Mr Holmes withdrew his suggestion that there may have been writing against in relation to this declaration. On any view the Oceaneering was a genuine fortuity and not a guaranteed loss. The reinsurers got 35% of the premium and the advantage of a first loss excess of $2.5 million in respect of the CAR element of the policy. There was every prospect of a profit.

Mr Gruder QC points out, correctly, that AON perceived this declaration to be difficult to place. Both Mr Amies and Mr Jeffrey were concerned at what would appear to be an arbitrage price for 535. Mr Amies felt that acceptance of this risk was something of an abuse. The Court did not hear from Mr Brown who underwrote the declaration or from Mr Lyne who broked the declaration to 535. No satisfactory reasons for their absences have been proffered. Both would have been available to give evidence. The Court should draw adverse inferences from their absence from the trial. The background to the risk being written is important. In the first place, the declaration was written at a time when 535 knew that the aggregate deductible in the reinsurances had been exhausted. It appears from the documents that 535 inquired as to the position of the aggregate deductible on 23 November 1999 and the very next day agreed to write the Oceaneering risk: “verbally quoted”. The Court should infer that this was not mere coincidence and that Mr Brown agreed to quote after he had checked and confirmed that the reinsurance would be picking up the first $10 million loss for 35% of the premium. Further it is clear from Mr Watters’ evidence that AON were putting pressure on Syndicate 62 to write the risk as it was a new piece of business they had won. Catlin’s line went down after the verbal quotation and the inference the court should draw is that AON would have had difficulty in placing the package policy without the reinsurance by 535, backed by the reinsurance from 1688 and Cox. The net premium was actually less than the burning cost due to an error in the calculation and was, therefore, probably going to be loss making, based on the mean average. Therefore, on what legitimate basis was this risk written The retained exposure of $5 million was more theoretical than real as there were very few vessels which could expose the reinsurance to the Cover for more than $10 million. “Indeed, it is probable that the declaration was given an artificial limit of $15 million as window dressing”. Mr Holmes sought to withdraw his acceptance that the reinsurance may well have been written against in relation to this declaration on the basis that the Cover Underwriters retained a $5 million exposure, but he refused to acknowledge that if the net exposure was theoretical and not real there could still be a writing against.

It is difficult to avoid the conclusion that the reason why the Marine 7 risk was written in December was to ensure that the declaration was a 1999 Cover declaration which would attach to that year so as to obtain the reinsurance cover that was available. Alternatively, the writing of this risk was negligent.

As to the suggestion that AON obtained the approval of the Cover Underwriters to this risk by including it, in advance of the risk being written, on a declaration list and that thereby some kind of waiver or estoppel is created it is fanciful and unsustainable.

I have to say that I think that many of Mr Gruder QC’s points are valid, but crucially, I reject his suggested inference that a partial retention of risk by the Cover Underwriters was theoretical rather than real. In the other respects I draw the adverse inferences which I am invited to draw. It seems to me quite plausible that this risk was written substantially in advance because it was desired that the risk should have the benefit of the reinsurance. I also infer that it was no coincidence that inquiries were made, as they appear to have been, as to whether the aggregate deductible had been exhausted, so that Mr Brown would be able to assess the potential liabilities to the Cover Underwriters if the risk were accepted to the Cover.

It follows, therefore, that I must approach the issue relating to this declaration on the basis that the Cover Underwriters accepted the risk to the Cover because it would have the benefit of the reinsurance and because they knew that the reinsurance would cover the first $10 million in the event of a loss; and I infer that without this reinsurance the contract would never have been written. But even on that basis it does not seem to me that this was a policy not written in the ordinary course of the Cover Underwriter’s business and nor was it written negligently. Nor was there any dishonesty involved. This was commercial opportunism. The deciding factor in favour of this view is that the Cover Underwriters accepted part of the risk: this was not an arbitrage situation. Had they not retained any part of the risk I would have decided this point differently because I would have taken the view that the risk should not have been accepted to the Cover without express approval. It seems to me that there was no such express approval. I agree entirely with Mr Gruder QC that putting the name on a declaration list [which was supposed to show what risks had been written] was quite insufficient. I am not prepared to accept that the reinsurers accepted or agreed to the risk or have somehow become estopped from complaining about its acceptance.

In short, I take the same position as Mr Holmes. The crucial point which makes all the difference is that the Cover Underwriters retained an exposure. It seems to me that one cannot say that the retained exposure was theoretical; there is no evidence to show that that is so. It may well be that the chances of the Cover Underwriters having to foot any claim was small, but one cannot reassess the chances after the event. This was a declaration which was near the knuckle and the premium split between Cover Underwriters and reinsurers did not fairly reflect their exposure to risk. The premium split was a feature of the commercial contract and the parties cannot now complain about the way it worked. Mr Woodgate chose to write the reinsurance for 35% of the premium in relation to such risks as were declared to the Cover; he will, so to speak, win some and lose some. He was a loser in this instance. If a reinsured treated his reinsurer in this way on a regular basis I doubt whether his shelf life at Lloyd’s would be a long one. It is one thing to act lawfully; quite another to act decently.

The ‘P’ stands for Petropac and is a declaration accepted to that facility which had itself been accepted to the Cover. This was a re-declaration of a risk to the 1999 Cover of a 36 month risk which had originally been declared in 1996 and which was then re-declared in 1998. What happened in 1999 was an extension of 12 months of a risk which still had 24 months to run. Mr Seymour scratched the relevant endorsement for Syndicate 535 on 15 June 1999. The security for the risk was standard.

Westcoast Energy is a Canadian oil and gas company operating pipelines and other facilities. Declaration 18 is a retrocession covering Zurich Insurance Company’s reinsurance of West Coast’s captive insurance company. The retrocession covered three sections: property, boiler and machinery; OEE; and Excess Liabilities. The limits of the risks were, essentially, the difference between CAN$10 million each section less a CAN$2 million deductible for each section. The Cover Underwriters had originally accepted a line of 93.6275% but this was increased to 100% in 1999. The maximum exposure to the Cover was CAN$24 million, however the declaration had the potential to aggregate with Declaration P8 which meant that the true total exposure of the Cover Underwriters to West Coast was CAN$54.2 million of which the Cover reinsurers were exposed to only 25.8%. The annual premium was CAN$1,250,000.

The Cover Underwriters also participated in the same underlying risk through Declaration P8 and also participated in risks outside the Cover, including a swing protection policy and reinsurance of US$240 million xs of $10 million for section 1; $40 million xs of $10 million for section 2 [OEE] and $190 million xs of $10 million for section 3 and a further layer of excess cover in relation to section 1 of $150 million xs of $100 million; and in relation to section 3 [excess liabilities] a layer of $100 million xs of $100 million.

The evidence showed that Mr Seymour was very familiar with West Coast having visited them in Vancouver on several occasions. Whilst some losses had been experienced in earlier years in some years they were ‘clean’. There had been one large loss leading to a claim in January 1999 but at the time of the scratch in June, Mr Seymour was of the view that there was a good prospect that in a subrogated action the losses would be recovered from the owners of the adjoining plant whose destruction had caused damage to West Coast.

Mr Youell accepted in evidence that Mr Seymour had performed a genuine underwriting exercise on the merits of the risk and in the expectation of profit on a long term basis. The thrust of the criticism relates to the risks ceded to the Cover by comparison with the risks accepted outside the Cover. But the reinsurances outside the Cover had been in place since 1996 and there could be no obligation on 535 to change the existing structure so as to enable the reinsurers to participate in, for example the higher excess layers. Mr Youell said he had some sympathy with the continuity argument.

Mr Gruder QC invites me to find as a fact that the only reason for writing this risk to the Cover was because of the Cover reinsurance and this is based upon a note dated 11 June 1999 which reads “subject 77 Cover Risk”. Mr Youell was of the view that the loss record did not justify the rating of the risk and the underwriting judgment appeared difficult to justify. He went as far as to say that most underwriters would not have considered this risk to be prudent with the loss record and the rating and therefore it had been negligently written.

I do not accept that there can be any legitimate criticism of the way the risk was written. There is no doubt that Mr Seymour applied his mind to the question and was familiar with the risk; much more familiar than Mr Youell was. The rating of a risk is very much a matter of feel, having regard to the loss record and other relevant factors. Mr Seymour expressly took account of the loss record and was able to make a judgment about it based upon his personal knowledge of the circumstances of the big claim arising from a disaster at a neighbouring site. That information was not known to Mr Youell. It appears that Mr Youell accepted Mr Seymour’s modus operandi even if he disagreed with the outcome. But the real complaint he was making, I think, was not what was put to the Cover but what could and, he would say, should have been put to the Cover so that the reinsurers got more of the plums and less of the duff.

I see no grounds in law for complaining about the way this risk was written. It seems to me that Mr Seymour had acted prudently and competently and his rating cannot legitimately be criticized. As for the way he decided that the risks should be structured as between “in the Cover” and “outside the Cover”, it seems to me that Mr Youell has gone too far. He appears to believe that 535 owed some duty to their reinsurers to put more favourable business their way even if it meant restructuring the old basis. I see no justification for such an approach. I repeat: the reinsurance arrangement was agreed to by commercial men. There was nothing negligent or out of the ordinary about this declaration and I reject the complaints about it.

It follows, therefore, that I reject all the complaints about the six individual declarations on which reliance is placed and hold that there was no breach of any duty by 535 in relation to them.

These issues are specified in Parts D & E of the List of Issues. Essentially, the reinsurers seek to limit their exposure by contending that the reinsurances, as a matter of construction were limited in scope and the main group of such arguments relate to the duration of the Cover. It seems to me sensible to deal with the issues under this head together and I start with the parties’ arguments.

Mr Gruder QC submitted that there are two distinct ways in which long term risks are reconciled with the traditional position that a Syndicate is an annual venture. The first is by way of premium transfer and the second is by re-signing. The former applies where there is one premium paid at the outset for the whole long-term risk and a due proportion of the premium is then transferred to the next years’ names. Re-signings are different. It is submitted that the procedures laid down in the LPSO Manual provide for a novation where the right to receive the premium and the liability to meet any claim is transferred with the consent of the assured through his broker from the syndicate which originally wrote the risk to the following year of that syndicate. It is intended that the Assured receive the addendum which is intended to inform him that

“… the underwriters subscribing to the policy are now those signed on the addendum…”

If there is no following year, or the following year cannot accept the re-signing the liability remains in the syndicate year which originally wrote the risk. It is not suggested that the process of re-signing itself would release reinsurers who had subscribed to a risks attaching policy in 1999 . However, on the facts of this case it is necessary to consider how the parties considered the transfer of long term risks was effected within the context of the Cover.

Under the terms of the Cover, only declarations to the Cover were included, not re-signings. Yet, the reinsurance covered re-signings and the underlying assumption is that these are re-signings to the Cover and are effected by way of declaration to the Cover. Income received from re-signings was invariably included as income for the relevant year of the Cover and AON’s declaration lists have listed re-signings as declarations to the Cover. The treatment of re-signings is relevant to the proper construction of the provision in the reinsurance “Agree resign in 2000 etc, as original and/or all as original”. Mr Holmes’ evidence in relation to this, until he sought to modify it, was to this effect:

“This means that long term business attaching to the Cover for the 1999 year of account would be re-signed into the subsequent years of the Cover as applicable until normal expiry. Accordingly this would notify a prudent reinsurer that the reinsurance would cover such re-signings in the event that the Cover was not renewed.”

If there were a Cover in 2000 then the risks would be resigned into that Cover and the 1999 Cover reinsurers would be under no further liability.

There are a number of features which are consistent with the reinsurance only covering the 1999 year of long term risks declared or resigned to the ’77 Energy Cover. First, the premium figures in the slip suggest that the figure was calculated on a pure year basis for 1999. If it had been intended to reinsure long term risks to their expiry then much more premium would have been anticipated and one would have expected higher minimum and deposit figures to have been agreed. The deposit premium would not only have been larger but the instalments would have been over a longer period. The slip provides for “Final adjustment 36 months after expiry”. This clause could not work if a risk was a three year risk written to the Cover in 1999 because the final position with regard to premium would only be known until some years after the risk had ceased. Further if long term risks were covered the amount of premium owing to reinsurers would be of the order of $14 million which would make an adjustment premium of US$11 million some three or four times the amount of the deposit premium. Mr Jeffrey wrote on the slip scratched by Mr Woodgate on 23 November 1998 some calculations which proceeded on the basis that the income to the slip would be US$4.725 million which is 35% of estimated premium income for the 1999 year of $15 million, less 10% AON brokerage. Had Mr Woodgate believed that he was to receive premium income in respect of coverage after 1999 he would not have rated it just on the 1999 income.

The Cover contained a cancellation clause which Mr Jenks said he relied upon during the broke to his Syndicate.

In summary, there are three separate arguments which lead to the same conclusion:

In relation to the first point Mr Gruder QC relies upon the amounts of the minimum and deposit premiums, the terms of the adjustment clause, and the terms of the MOU. Taken together these words were sufficient to override what would otherwise have been the effect of a ‘risks attaching’ basis. The effect of the agree re-sign clause meant that the 1999 reinsurance would only cover such resignings in the event that the Cover was not renewed in 2000. On the facts the GTX Cover was a renewal of the ’77 Cover and the long term risks should have been re-signed into it. The cancellation clause meant that all long term risks were cancelled after one year.

As to estoppel, Mr Amies broked the risk to Mr Woodgate on the basis that the 1999 reinsurance slip would only cover the 1999 year of long term risks and the dealings between them were on that basis. Therefore the parties proceeded on the basis of a common understanding and neither of them should be allowed to go back on it. The agreed assumption must cross the line but a concluded agreement is not a requirement for an estoppel by convention.

In any event there is no coverage for resignings since the reinsurance slip only covers “Assured’s participation in various Energy risks policies as may be declared as original and/or all as original”.

The principal coverage issue raised by 1688 and Cox is as to the duration of the cover provided by the reinsurance slip. The period of cover provided in the slip is:

“Risks attaching to the 77 Energy Cover during the period 1 January 1999 to 31 December 1999 both days inclusive and 1999 (and subsequent if and as applicable) year of account attachments to antecedents of the ’77 (1999) Energy Cover (i.e. Resignings) as original and/or all as original.”

This clause has two components: first, it covers all risks attaching in the 1999 year, and, second, risks which were long term and were written in a prior year but were re-signed into the 1999 year. Where there is a ‘risks attaching’ policy then the reinsurer is on risk if the risk in question attaches (incepts) during the 1999 year regardless of when the risk expires or when a loss occurs. In the absence of another term which expressly limits the duration of the reinsurance cover, the reinsurance is co-extensive in time with the original insurances. Not only is there no clause limiting the duration of the reinsurance cover, the cover is expressly stated to be “as original”, that is, the same as the period of the original policies declared to the Cover. The position is even clearer when looking at re-signings of the words in the period clause in the first brackets (“subsequent if and as applicable”) year of account. The conditions in the slip provide that the reinsurance is “subject to all terms, clauses and conditions as original” and those terms would include terms as to the duration of the underlying insurances.

The fact that the business covered by the reinsurances included risks of greater duration than 12 months was manifest because such policies are commonplace within the market so that risks accepted to the Cover could be expected to include such policies; the declaration lists provided to the reinsurers consisted of a large number of such declarations; the very fact that risks were to be resigned into the 1999 and subsequent years of account showed that long term risks had been written in the past. In any event, the terms of the MOU listed categories of business to be covered and expressly included greater than 12 month period operating risks attaching during 1999 and “1999 (and subsequent) year of account signings in respect of greater than 12 month period operating risks attaching to antecedents of the ’77 (1999) Energy Cover.” This makes the position clear. When the MOU said that “subsequent years of greater than 12 month operating risks not being included” in the context it was clear that this was referring to the basis on which the premium income estimate had been calculated. In other words, it was clear that risks for longer than 12 months would be declared to the Cover and attached to the reinsurance, but for the purpose of estimating premium income subsequent years of premium were not included in the estimate. This is clear from the location of this expression in the MOU where the document is concerned with EPI and is one of the factors which tend to make the EPI conservative and refers back to the part of the MOU which states that the EPI estimate includes only the 1999 premium income. The fact that the first of the four factors said to make the estimate conservative is illogical has no bearing on this issue.

It is submitted that no reasonable underwriter who read the reinsurance slip and MOU could be in any possible doubt that the risks covered included multi year risks and that such risks are covered by the reinsurance for their full duration.

The contrary is argued and reliance is placed on the provision in the Cover slip relating to cancellation and the established Lloyd’s practice of re-signing. As to the cancellation provision

“Noted and agreed that … the following shall be deemed to apply to all declarations hereon since inception:

Noted and agreed notice of cancellation as at annual anniversary date to have been given by underwriters hereon whether or not the declaration slip provides for such cancellation. If the foregoing slip provides for such cancellation Underwriters are deemed to have complied with the terms within which notice of such cancellation must be given and/or as agreed Leading Underwriter.”

When the reinsurers first took the point that the reinsurance slip does not cover the second or any subsequent year of long term declarations this cancellation clause was the sole point relied upon.

As a matter of law the provision had no effect unless there was a cancellation clause at anniversary date in the underlying policy. Mr Davies for 535 said that this cancellation clause was put in as a negotiating tool only. Mr Leggatt QC submits that the attempt by Mr Gruder QC and his team to make use of this answer to provide another ground for their non-disclosure case was opportunistic but misguided. The Lead Underwriter’s understanding of the legal effect of a clause cannot be a material fact. There is no evidence that this clause was in fact ever invoked and since the power was never exercised the reinsurer’s liability remains unaffected.

As to annual re-signings, the case advanced for 1688 and Cox through their expert Mr Youell is that the effect of a re-signing was to cancel the policy and create a new one. The Lloyd’s Policy Signing and Central Accounting Manual describes the practice of annual re-signing as follows:

“When a long term insurance is written and the Assured contracts to pay premium in periodic or annual instalments it is customary for the participating underwriters to require the premium for each 12 months period to be allocated to the correct year of account. Annual re-signing ensures that this is achieved.”

A Lloyd’s syndicate is an annual venture; year 1999 of the Syndicate will likely be made up of different names from year 2000. Each year is a new venture but the Syndicate, qua Syndicate, retains its identity. The effect of a re-signing is that the successor syndicate becomes entitled to receive the premium and take on the remaining exposure of the predecessor. In this way, instalments of premium and any claims are allocated to the appropriate year of account.

Provision was made for the annual re-signing of long term risks declared to the Cover by the express provision:

“Agree allocate premium to separate years of account for each 12 month period based IDA at inception and anniversary dates of Declaration.”

IDA stands for Inception Date Allocation and refers to the accounting practice now mandatory at Lloyd’s whereby premium is allocated to years of account by reference to the inception date of the risk and, where the risk exceeds twelve months, the anniversary date.

Mr Youell apparently believed, when he wrote his first report, that the effect of providing for annual re-signing was to require any long term declaration to the Cover to be cancelled at the anniversary date and replaced with a new policy for the remaining period of the risk. This meant that all risks of over 12 months declared to the Cover would be cancelled at the end of the year and re-declared to the 2000 year of the Cover with the result that the reinsurance would not cover them thereafter. He was mistaken: see Baker v Black Sea [1996] Lloyd’s RLR 353 at pages 358-9 per Staughton LJ; and 360-361 per Millett LJ. Thus, long term risks written by the Cover Underwriters for the 1998 year were resigned by their successor syndicates in 1999 and were covered by the reinsurance as the reinsurance expressly covered re-signed risks.

Mr Youell relied upon the term in the reinsurance slip which said:

“Agree re-sign in 2000 etc. As original and/or all as original”

The suggestion appears to be that this clause meant that the Cover Underwriters agreed that all long term declarations would be re-declared into the 2000 year of the ’77 Cover. But this cannot be so: first the words are re-sign and not re-declare; second there could be no guarantee that the ’77 Cover would be continued into the next year although it was anticipated that it would be; andhis interpretation gives no meaning to the words “as original and/or all as original”. This clause means something quite different, namely that in cases where the original policy declared to the Cover provides for annual re-signing then there will also be resigning of the premium under the reinsurance. In other words, if any long term risks were to be re-signed into the Cover in 2000 the successor syndicates of Cox and 1688 for the 2000 year of account will receive their share of the annual premium and will reinsure the continuing exposure of the 1999 Syndicates who wrote the Cover reinsurance. In other words, this clause destroys rather than supports the argument that subsequent years of long term declarations are not covered under the reinsurance.

When confronted with the difference between a re-signing and a re-declaration Mr Youell appeared to change his tune. He then came up with an idea, not previously espoused, that the reinsurance only covered risks which attached to the Cover in 1999 and did not cover re-signings at all. This theory is contradicted by the terms of the MOU itself and the terms of the reinsurance slip.

The second coverage issue is whether Cox and 1688 are liable in relation to declarations to the Cover where the Cover Underwriters did not participate in their standard shares. This point was first raised in July 2002. The point is taken despite the fact that Cox and 1688 knew that non-standard security sometimes applied as they would have seen from the declaration lists provided to them from time to time. The argument is hopeless in any event. The reinsurance covered risks which were declared to the Cover. Provided that a risk was accepted as a declaration to the Cover by the lead underwriter [Syndicate 535] the internal arrangements between the Cover Underwriters as to their shares does not bear on the question whether the risk was accepted as a declaration. The express terms of the Cover permitted non-standard participations. The alternative argument was that even if covered, where there is a declaration with non-standard security the reinsurance only responds to each Cover Underwriter’s standard percentage line. There was no line restriction in the reinsurance contract which did not operate by reference to percentage participation of the reassureds. Rather the reinsurances were expressed in dollar amounts which were recorded in a signed line security schedule which was shown to and agreed by each of the reinsurers on 19 March and 11 April and [in the case of Cox] 26 October 1999. This provision limited the amount that could be recovered to the dollar amount by reference to the standard participations of the Cover Underwriters. The reinsurance is limited to the dollar amount which those percentages produced rather than by reference to a percentage line. No claim is made which exceeds those limits.

The third coverage issue relates to Category B risks. There is no claim in the action in relation to these risks since on a proper interpretation of the slip no Category B risk was covered unless and until any such risk had been ‘scheduled’ and no risk could be schedule without the reinsurers consent, AON contends that four risks were expressly accepted; 1688 contend that even these four risks were not properly scheduled so that they were never covered. Whether or not they were covered is of no materiality since in relation to the four there is no claim being made as no losses occurred on any of them.

The final coverage issue relates to the question whether any of the risks declared to the policy were CAR risks which Mr Woodgate had excluded from the ambit of the reinsurance. There are five such risks. This is not an issue of concern to AON.

At the stage when the case was opened for 1688 and Cox on long term declarations the following arguments were in play:

The case is now in complete disarray as a result of the evidence given by Mr Youell in the course of his cross-examination. During this process Mr Youell appeared to abandon completely his automatic cancellation argument:

“Q. What is it you say, if anything, the cover underwriters

7 should have done to limit the exposure of their cover

8 reinsurers to 12 months?

9 A. I think you have to take it in two stages, if I may.

10 The reinsurance is for risks attaching to the 1999

11 cover. Those risks may be more than 12 months, those

12 risks may come into the cover from previous years by

13 being re-signed into the 1999 cover.

14 Q. Yes.

15 A. The question of what happens to the second or even the

16 third year of something that is signed into the 1999

17 cover is a matter of what the cover provides for.

18 Undoubtedly, if something is declared, let us say for

19 the last 24 months of a period into the 1999 cover, the

20 1999 cover and the 1999 reinsurers are prima facie

21 liable for that.

22 MR JUSTICE MORISON: For the 24 months.

23 A. For the 24 months because it will be their number on the

24 document.

25 MR BOSWOOD: But what your thesis is and always has been, as

1 I understand it still is, is that in some way the

2 liability of the cover reinsurers is limited to

3 12 months. What I am failing to understand is how you

4 say that limitation to a period of 12 months could or

5 should have been achieved.

6 A. This goes back to the terms of the cover itself and

7 raises the issue of "agree re-signing" and whether the

8 understanding was that there would be a successor cover

9 into which, let us say, year 3 would be put.

10 Q. Yes, so are you saying that there was in some way an

11 undertaking given to the cover reinsurers that there

12 would be a successor cover?

13 A. I think the cover seems to have presupposed there was.

14 I cannot say whether an undertaking was given. Clearly

15 this matter is very much a matter of evidence, which

16 I am not sure what comes out of it. There is some

17 dispute clearly as to who said what to whom.

18 Q. Perhaps. But how could anyone give an undertaking in

19 late 1998 to Mr Woodgate, or anyone else, that the Aon

20 77 cover would be renewed at the end of 1999 or for any

21 subsequent year?

22 A. A firm undertaking, I agree is extremely difficult. It

23 is a legal matter as to whether an undertaking was given

24 or not given. There is language that hints at it. It

25 is not 100 per cent clear but I think the proper and

1 normal interpretation of that would indicate that there

2 was going to be a successor cover but I am not being

3 inconsistent in saying if there was no successor cover

4 the 1999 cover reinsurers remain liable for the period

5 of the cover, of the cover that was declared to the 1999

6 cover absent any other provision.

Mr Youell appeared to argue that there were re-signings in the conventional sense which were not covered by the reinsurance and re-signings to the Cover or re-declarations which were covered. This appears to be a different case from any advanced before.

The cancellation clause in the Cover could not possibly have any legal effect where there was no cancellation clause in the declared policy. Apart from Mr Youell no one thought otherwise. There was no automatic cancellation by reason of the process of re-signing.

As to the construction argument which asserts that the reinsurance does not cover resignings because such were not declared to the Cover, the argument only runs if one takes the “assured” clause only and ignores the “period” clause. Looked at together, there can be no doubt that re-signings are covered by the reinsurance. As for the rectification argument, that depends on the court accepting Mr Woodgate’s evidence in preference to that of Mr Amies. Are Syndicates 1688 and Cox prevented from contending that long term risks are not covered for their full duration by reason of waiver or estoppel. Both Mr Woodgate and Mr Jenks accepted in evidence that by scratching the declaration lists they were recording that they had read them and on that basis it is an inevitable inference that both Syndicate 1688 and Cox were fully aware throughout the time they participated in the cover reinsurance that long-term declarations were being accepted to the cover and that AON and the Cover Underwriters regarded them as covered by the reinsurance. With that knowledge they accepted premium and paid claims and in so doing represented that long term declarations were covered by reinsurance.

In the light of the signed line security schedule which makes the position clear, the argument that the reinsurance does not cover non-standard security risks is hopeless.

Are so-called category B risks covered by the reinsurance. The allegation that Mr Woodgate relied on a statement from Mr Amies that the March slip was no different from the December slip is unsubstantiated on the evidence, since Mr Woodgate has no recollection of the broke in March.

I start, first, with the construction of the reinsurance slip. It seems to me clear that the slip must be construed as a whole. When construed as a whole, the reinsurance offered was in respect of the Cover Underwriters’ participation in insurance and reinsurances declared to the 1999 year of the Cover on a risks attaching basis AND 1999 year attachments to antecedent years of the Cover re-signed into that year. It is not correct in principle to look at the Coverage only by looking at the “Original Assured” Clause, ignoring what is stated in the Period Clause. Read together the coverage is clear. If there were any doubt about it, the MOU makes the position on this issue crystal clear. The categories of business to be covered under the reinsurance included 1999 year of account signings in respect of greater than 12 month period operating risks attaching to antecedents of the 1999 year of account of the Energy Cover.

Further, it must have been clear to the prospective reinsurers that there would be long term risks written to the Cover for the 1999 year on a risks attaching basis. Such knowledge derives from a knowledge of the energy market generally, where long term risks were regularly written. Mr Woodgate does not say that he did not realise that long term risks would be written. In addition the MOU made it clear that the 1999 business would include “greater than 12 month period operating risks attaching during 12 months at 1 January 1999”. The reference in the MOU to “subsequent years of greater than 12 month operating risks not being included” was in the context of an assessment of the EPI. This statement alone would tell any sensible reader that longer than 12 month risks were being written to the Cover and, therefore to the reinsurance. Further, The declaration lists with which he had been provided before he scratched the slip in November showed long term risks being written.

The reinsurance contains no time limit in relation to the risks attaching cover. It does not say, for example, losses in respect of risks attaching and occurring in 1999.

None of the points made by Mr Gruder QC about the amount of the premium or the size of the deposit premium alters the position. All those points demonstrate that when the reinsurance was broked it was the anticipation that the Cover would be renewed for the next year with a corresponding renewal of the reinsurance policy. On that basis none of the figures is surprising or suggestive that the policy does not mean what it manifestly says. Mr Gruder QC is not right to say that effectively the Cover was renewed. The evidence shows that it was not. The GTX Cover was not the same animal as the ’77 Cover and the declarations to the ’77 Cover were not re-signed into it. Whether this was a fair way of dealing with the situation is not for the court to decide; the market will decide and react accordingly.

The cancellation provision does not assist Mr Gruder QC’s clients. Mr Davies of 535 described the clause as a feeble attempt to give the Cover Underwriters some kind of bargaining advantage but he recognised that it was not a weapon with any force since it fired blanks. The right to cancel in the Cover was not a right in law at all since it could only be exercised if the assured had agreed to such a cancellation by, for example, agreeing to a similar provision in their underlying policy. It was a weapon which was never fired and the reinsurers have no defence based on this.

Mr Youell initially thought, somewhat surprisingly I thought, that the annual re-signing process effected a cancellation of the policy after the first 12 months and a re-declaration for the next 12 months. My surprise was based on what I thought was common knowledge in the market as to what is involved in a re-signing. Re-signing is done for purely administrative reasons, based upon the annual cycle of a Syndicate. It addresses the fact that the Syndicate is not a corporation but a new annual venture. How does a syndicate write long term business? The answer is that the syndicate remains liable on such a contract throughout and the counterparty looks to the syndicate for recovery. The counterparty is not concerned to know the identity of the Names [until court proceedings] or the annual arrangements as between the Names. The process of re-signing enables the Names on the syndicate to adjust receipts and outgoings as between themselves. The legal position is clear: see for example Baker v Black Sea [1996] 1 Lloyd’s RLR 353, Court of Appeal. When a risk is resigned, vis a vis the assured, it has no legal significance and certainly does not amount to a re-declaration of the risk; once declared always declared. The effect of the re-signing so far as involves this case only relates to the reinsurance. The position is that those 1998 Cover Underwriters who remained on the Cover in 1999 obtained the benefit of the reinsurance from the date upon which a risk was re-signed into their 1999 year of account. The reason why they were protected by the reinsurance is simply because that is what the reinsurance expressly covered.

I think, also, that Mr Youell may have misunderstood the provision in thee reinsurance slip “agree re-sign in 2000 etc. As original and/or all as original”. What this clause is dealing with is the prospect that the reinsurance slip will be renewed for the next year [2000]. This clause ensures that if the Cover and the reinsurances are renewed for 2000 then the 2000 year names for Cox and 1688 will both receive the premium for that year and take on responsibility for the losses for that year. This clause does not constitute a promise by the Cover Underwriters that there will be a renewal and nor does it suggest that declarations will be re-declared as from 1 January 2000. Because the clause is dealing with the re-signing of long term risks it is another reason why Mr Woodgate must have known that long term risks were being written and that he was reinsuring them. Presumably also he must have understood what would have happened had there been no 2000 year of the Cover or reinsurance.

The conclusion I have reached is that 1688 and Cox are committed to reinsuring long term risks, whether those risks had been declared to an earlier year of the Cover and re-signed into the 1999 year or were declared to the 1999 year and have continued after the ending of the Cover. A risks attaching basis unlimited in time is what the reinsurance provides.

In relation to non-standard security, the position is covered by the signed line security schedules. It seems to me to be clear that the amounts recoverable are limited by the dollar amounts and not the percentage lines and that this is the basis upon which claims have been made. The purpose of the schedules was to produce this consequence. There is nothing in the reinsurance contract which exempts the reinsurer from liability in respect of contract written in non-standard proportions.

Finally I deal with Category B risks. The position, as it seems to me is that Mr Gruder QC is right when he says that identifying the four declarations in the declaration lists taken to Mr Woodgate in April 1999 and to Cox in November 1999 was insufficient to make them scheduled declarations. The risks had to be identified and agreed with the reinsurers and express agreement was, I think required. These risks are not covered by the reinsurance. But the effect is irrelevant since none of the four risks has been loss making.

I would add for the sake of completeness that none of the policies declared to the Cover for the 1999 year of account were CAR policies.

In my judgment none of the defences raised in this case have, on analysis, any substance. Questions such as the rights and obligations of the Claimants vis a vis the brokers, AON and vice versa are moot, as are questions of waiver and affirmation when they have been raised. This is a long judgment and I do not consider that it would be right to add to its length points of academic interest.

I will leave it to the parties to draw up the order to give effect to this judgment.

It follows the basic structure used in the Claimant’s Opening i.e. identifying main heads of issues (e.g. (A) Avoidance, (B) Writing against etc) and then sub-issues under those heads.

Issue heading F (Syndicate 1243’s implied term issues) is however no longer live, following the settlement and Syndicate 1243’s subsequent amendment.

It is also clear that many of the sub-issues previously identified no longer remain live in light of the settlement or other developments. Accordingly the sub-issues have been re-ordered.

Finally, this List of Issues seeks to articulate under a new head the Elk Point issues which arose after the case was opened.

Other Avoidance Issues

“Writing Against” Issues

Negligent Underwriting Issues

Long term Declaration Issues

Coverage issues

(CONTINUED) Noted and agreed that, except in respect of Builders Risks and Voyage Risks, whether direct or reinsurance, the following shall be deemed to apply to all declarations hereon since inception:

“Noted and agreed notice of cancellation as at annual anniversary date to be have given by underwriters hereon whether or not the declaration slip provides for such cancellation. If the forgoing slip provides for such cancellation Underwriters hereon are deemed to have complied with the terms within which notice of such cancellation must be given and/or agreed Leading Underwriter.”

Authority granted by leading underwriter for claims in respect of this contract to be handled by L.C.O.

Agree separate 5% Coverholders discount to Alexander Howden Energy Inc, Houston.

LSW 1001 or LSW 1001 (R)

Institute Radioactive Contamination Exclusion Clause CL356 Brokers Cancellation Clause (B Reg 834055) to apply to declarations herein as may be applicable.