ANTHONY FEASEY (A REPRESENTATIVE LLOYD’S UNDERWRITER SUING ON HIS OWN BEHALF AND ON BEHALF OF ALL THE MEMBERS OF SYNDICATE 957) v (1) SUN LIFE ASSURANCE COMPANY OF CANADA (2) PHOENIX HOME LIFE MUTUAL INSURANCE COMPANY [2002] EWHC 868 (Comm)

IN THE HIGH COURT OF JUSTICE
QUEENS BENCH DIVISION
COMMERCIAL COURT
[2002] EWHC 868 (Comm)Case No Case No 2000 Folio 1333Venue Royal Courts of Justice, Strand, London, WC2A 2LL
Between
ANTHONY FEASEY (A REPRESENTATIVE LLOYD’S UNDERWRITER SUING ON HIS OWN BEHALF AND ON BEHALF OF ALL THE MEMBERS OF SYNDICATE 957)Claimant(1) SUN LIFE ASSURANCE COMPANY OF CANADA (2) PHOENIX HOME LIFE MUTUAL INSURANCE COMPANYDefendantsCase No: 2001 Folio 908 STEAMSHIP MUTUAL UNDERWRITING ASSOCIATION (BERMUDA) LIMITEDClaimantANTHONY FEASEY(A REPRESENTATIVE LLOYD’S UNDERWRITER SUING ON HIS OWN BEHALF AND ON BEHALF OF ALL THE MEMBERS OF SYNDICATE 957)Defendants
Before
Mr Justice LangleyCase No 2000 Folio 1333Mr J. Flaux QC and Mr D. Lord and Miss C. Laband (instructed by Messrs Lovells) for the ClaimantMr D. Kendrick QC and Mr S. Kerr (instructed by Messrs Clifford Chance) for the first DefendantsMr D. Kendrick QC and Mr S. Kerr and Mr A. Fenton (instructed by Messrs Barlow Lyde & Gilbert) for the second DefendantsDate 17 May 2002
[1]Hearing dates : 18 th February 2002 to12th March 2002 INDEX Paragraphs INTRODUCTION 1 – 7 THE ISSUES 8 –11 THE EVIDENCE 12-22 THE FACTS (See below) 23-131 THE FIGURES 132-144 THE EXPERTS 145-151 THE 1774 ACT ISSUES 152-189 THE MISREPRESENTATION ISSUE 190-207 THE AUTHORITY ISSUE 208-209 RELIEF 210 SCHEDULE THE FACTS THE 1994 REINSURANCE 24 LLOYD’S AUDIT CODES and THE PA CONCEPT 25 THE FIRST MASTER LINESLIP 26-34 LEGAL EXPENSES 35 THE ORIGINAL BENEFIT FIGURES 36-38 THE 1995 MASTER LINESLIP 39-41 THE FIRST DECLARATION 42-44 THE WORDING 45-57 THE FIRST CLAIMS 58-62 ALTERATION OF THE TTD BENEFIT FIGURE 63-69 THE 1996/7 MASTER LINESLIP RENEWAL 70 STEAMSHIP’S EXCESS OF LOSS REINSURANCE 1-72 THE BORDEREAUX 73 MR CACKETT AND CENTAUR 74 MR FEASEY AND 1996/7 75 CENTAUR AND SUN LIFE AND PHOENIX 76 THE 1997/8 MASTER LINESLIP RENEWAL AND THE FALCON FIGURES 77-79 THE FIRST SUN LIFE AND PHOENIX REINSURANCE 80-85 MR COOPER’S 1997 REPORTS 86-88 MR JOHNSTON’S 25 NOVEMBER LETTER 89-92 FURTHER LEGAL ADVICE 93-96 THE THREE YEAR MASTER LINESLIP 97-106 THE SUNLIFE AND PHOENIX REINSURANCE 1998/00 107-114 THE RELIANCE TOP-UP 115-120 CENTAUR AND PHOENIX 121-126 THE OCTOBER 1998 PRESENTATION AND 1998/01 COVERS 127-130 THE CLAIMS ON THE RELIANCE TOP-UP 131 Mr Justice Langley: INTRODUCTION Steamship Mutual Underwriting Association (Bermuda) Limited (“Steamship”) is a Protection and Indemnity Club which provides cover to its members in accordance with the Club’s Rules for, amongst other things, the liabilities of members for personal injury or death of persons occurring on or in relation to vessels entered with Steamship. Syndicate 957 entered into various contracts of insurance with Steamship between 1994 and 1998. In particular, in about June 1995, rather than entering into a conventional reinsurance, Steamship and Syndicate 957 entered into a Personal Accident and Illness Master Lineslip Policy. By the Master Lineslip Syndicate 957 agreed to insure Steamship for losses occurring during the period 20 February 1995 to 20 February 1996 in respect of bodily injury and/or illness sustained by a person (“an Original Person”) who was engaged in any capacity on board a vessel or offshore rig entered by a member with Steamship. The Syndicate agreed to pay Steamship fixed benefits in respect of death and permanent and temporary total disability (PTD or TTD) of an Original Person calculated in accordance with a Schedule of Compensation contained in the Master Lineslip. The Master Lineslip was arranged by Monument Insurance Brokers Limited (formerly David Gyngell & Company) (“Monument”) by one of its directors, Philip James, on behalf of Syndicate 957 and by Lloyd Thompson Ltd (Carrie Greenaway) on behalf of Steamship. The Master Lineslip was renewed from time to time and in particular in about May 1998 in respect of losses occurring on declarations attaching during three consecutive periods of 12 months from 20 February 1997 and, later, in respect of losses occurring on declarations attaching during the period 20 February 2000 to 20 February 2001. The fixed benefits were revised from time to time. These renewals and certain reinsurances of Syndicate 957 in respect of them are the subject of the proceedings. Sun Life Assurance Company of Canada (“Sun Life”) is incorporated in Canada. Phoenix Home Life Mutual Insurance Company (“Phoenix”) is incorporated in the United States of America. From October 1996 Centaur Underwriting Management Limited (“Centaur”) wrote a reinsurance account on behalf of both Sun Life and Phoenix. The chief underwriter and President of Centaur was John Cackett. Mr Cackett had been the active underwriter of Syndicate 957 since the mid-1980s and was so at the time the Master Lineslip was placed with the Syndicate in 1995. Mr Cackett left Syndicate 957 in June 1996 to establish Centaur and was succeeded by his deputy, Anthony Feasey. Mr Feasey was himself succeeded by Gareth Absalom in April 1998. Mr Absalom had previously been the Claims Manager at Syndicate 957 and then deputy underwriter to Mr Feasey. Mr Shelton replaced Mr Absalom as Claims Manager. In 1997 Centaur underwrote (on behalf of American Phoenix as fronting reinsurer for Phoenix and Sun Life ) four reinsurance contracts protecting Syndicate 957 in respect of various liabilities under the Master Lineslip for the 1997/1998 year. In about May 1998 Centaur (acting on behalf of Sun Life and Phoenix in equal shares) agreed to renewals of the four contracts of reinsurance. The renewals covered the period from 20 February 1998 to 20 February 2000 and (subject to their terms) also reinsured Syndicate 957 in respect of its liabilities to Steamship under the Master Lineslip. The contracts were extended by endorsement signed by Centaur on 29 October 1998 to cover the period from 20 February 1998 to 20 February 2001. There is an issue as to Centaur’s authority to act for and so to bind Phoenix and Sun Life at the time of this extension. It is these contracts of reinsurance which are also the subject of the proceedings. In about January 2000 Sun Life and Phoenix ceased to pay claims submitted to them by Syndicate 957. The Syndicate issued a Claim Form (No 2000 Folio 1333) on 7 December 2000 seeking to recover unpaid amounts allegedly due under the reinsurances. Syndicate 957 also refused to pay Steamship amounts due under the Master Lineslip from the second quarter of 2000 onwards save under reservation. On 10 August 2001 Steamship issued a claim form (No 2001 Folio 908) against Syndicate 957 seeking declaratory relief that the Master Lineslip was valid. In November 2001 the Court ordered that the Claims should be heard at the same time. THE ISSUES SYNDICATE 957 and SUN LIFE/PHOENIX Sun Life and Phoenix allege that the reinsurance contracts are voidable and have been avoided for various non-disclosures and/or misrepresentations and/or breaches of the duty of utmost good faith by or on behalf of Syndicate 957 and/or because the underlying Master Lineslip agreed between Steamship and Syndicate 957 is in breach of Sections 1 and/or 3 of the Life Assurance Act 1774. Sun Life and Phoenix claim damages and/or repayment of sums paid on the basis of a mistake of fact or law. The principal underlying basis of these allegations is that the fixed benefits payable under the Master Lineslip were represented to be but were not a realistic estimate of the average sums likely to be paid by Steamship to members of the Club in respect of the same deaths and disablements and that Steamship in fact made a substantial “over-recovery” as a result of the levels at which the benefits were set and other reinsurances available to Steamship for the same business. I shall refer to these issues as The Misrepresentation Issue and The 1774 Act Issue. The terms of the representations finally relied upon by Sun Life and Phoenix are stated in paragraphs 190 and 191 of this judgment. Phoenix alleges that to the knowledge of Syndicate 957 Centaur’s authority to underwrite for Phoenix was terminated with effect from 1 October 1998 and so Centaur had no authority to extend the reinsurance contracts for the year February 2000 to 2001. Whilst Syndicate 957 alleges that Centaur had actual or ostensible authority to act for Phoenix in the alternative it alleges and Sun Life disputes that Sun Life is bound as to 100% for that year. I shall refer to this as The Authority Issue. STEAMSHIP and SYNDICATE 957 Syndicate 957’s primary case is that the Master Lineslip was not in breach of the 1774 Act but it relies against Steamship on the Sun Life allegations to the contrary should they succeed. In summary the allegations are that Steamship had no insurable interest to protect by the Master Lineslip (Section 1 of the Act) or if it did it should recover no more than what is said to be the true value of that interest (Section 3) so as to preclude a claim for any over-recovery and to require repayment of any over-recovery already paid (The 1774 Act Issues). Quantum issues (including possible disputes as to the existence of a cause of action for any over-payment) are to be addressed later in the light of this judgment. The liability issues nonetheless have required consideration of a great deal of claims information. THE EVIDENCE Sensibly it was agreed between counsel for Steamship and Syndicate 957 that the 1774 Act Issues and the evidence concerning and the calculations of Steamship’s inwards and outwards claims should primarily be addressed in submissions and evidence by Steamship whereas the Misrepresentation and Authority Issues (which do not concern Steamship) would form the major part of Syndicate 957’s submissions and evidence. Mr Feasey, Mr Absalom, Mr Shelton and Mr James gave evidence on behalf of Syndicate 957. Robert Johnston was the head of underwriting at Steamship at all material times. Steamship’s claims partner for the relevant business at the material times was Stephen Martin. Michael McAleer had day to day responsibility at Steamship for handling both inwards claims from members and outwards claims on insurers and reinsurers of Steamship. Mr Martin, Mr McAleer, Mr Johnston and Ms Greenaway gave evidence on behalf of Steamship. Mr Cackett and a Mr Cooper gave evidence on behalf of Sun Life and Phoenix. Mr Cooper is an auditor and a director of Cranmore Adjusters Limited. Prior to that Mr Cooper had been a senior auditor for Peter Blem Adjustors Limited. Mr Cooper was involved in two inspections of Steamship’s claims during the relevant periods. In addition Ms. Susan Benson, formerly a vice president at Sun Life and the person at Sun Life who had the primary responsibility for dealings with Centaur and Mr Cackett, gave evidence for Sun Life and Mr Fred Sawyer, formerly a senior vice president of Phoenix and concerned for Phoenix at the time when Centaur’s underwriting agency agreement with Phoenix was terminated, gave evidence for Phoenix. Expert underwriting evidence was provided by Mr Hunt (for Syndicate 957) and Mr Berry (for Sun Life and Phoenix). Mr Smart (for both Syndicate 957 and Steamship) gave expert evidence on fixed benefit schemes and their commercial purpose. Ms. Camp (for Sun Life and Phoenix) provided an expert actuarial report on the valuation of benefits under insurance policies. In the event neither Syndicate 957 nor Steamship required her to attend for cross-examination and accepted the content of her report albeit on the basis that they submitted it was not material to the issues. There were few direct conflicts of evidence or material conflicts of recollection, but I should express briefly my general views of the witnesses, including the experts. Each witness, I am satisfied, gave evidence truthfully to the best of their recollection. Mr James gave his evidence carefully. His recollection of events was understandably very much dependent on the documents. He began his broking career in 1983. Mr James and Mr Cackett were the moving spirits in the promotion of the Master Lineslip. Mr James’ original role of promoting the business for Syndicate 957 together with Mr Cackett and his subsequent role of placing Syndicate 957’s reinsurance with Mr Cackett and Centaur on behalf of Sun Life and Phoenix had an obvious potential for misunderstanding. Mr Feasey was an experienced underwriter but all that experience had been as a deputy until he succeeded Mr Cackett. He first joined Syndicate 957 as deputy to Mr Cackett in 1985. Mr Absalom joined Syndicate 957 in 1984. His experience was mainly in claims adjustment and he was claims manager at the time when the first claims by Steamship were made on the Syndicate. Both Mr Feasey and Mr Absalom gave their evidence in a straightforward manner. Mr Shelton has worked in claims adjustment since 1983. He joined the managing agents of Syndicate 957 in 1994. Mr Martin was an obviously intelligent and impressive witness. He first joined Steamship in 1982 and became a claims partner in 1987. Mr Johnston has worked with Steamship since leaving university in 1975. He was appointed head of underwriting in 1987. He, too, was an intelligent and impressive witness. Mr McAleer joined Steamship as a claims adjuster in 1993. He was also an impressive witness and one who obviously was good at his job. Ms Greenaway has worked in insurance since 1986. She joined Lloyd Thompson in 1992. Whilst understandably her recollection of events was also often dependent on the documents she was a straightforward and patently truthful witness. Mr Sawyer and Ms Benson were both very experienced underwriters. Mr Cackett’s evidence was affected by a lack of recollection and a risk of reconstruction which, albeit understandable, caused a lack of clarity and certainty in some significant respects. Like Mr James, the change in his role from insurer to reinsurer when he left Syndicate 957 and established Centaur carried with it an obvious potential for misunderstanding. Although Mr Cooper was the subject of direct criticism from counsel for Steamship arising from opinions he had expressed in some areas about Steamship’s motivation he was (rightly) prepared to withdraw those opinions and I do not doubt that the evidence he gave was both competently and professionally given. The experts were each well qualified and knowledgeable and gave evidence in full compliance with their duty to the court. THE FACTS The issues and submissions are both complex and, to my mind, difficult to resolve. I propose to set out the material evidence and documents so that the issues can be addressed in the context of the background and facts as I find them to be. It is the contracts for the years 1998 onwards which are the subject of the proceedings but it is also necessary to examine the events of earlier years which gave rise to the concept of a Personal Accident (PA) cover and led to the original Master Lineslip. THE 1994 REINSURANCE In 1994 Syndicate 957 had reinsured Steamship (and other Clubs) on a bodily injury “carve out” and mixed indemnity and fixed benefit basis. That is to say, the Syndicate reinsured that part of Steamship’s exposure to its members which concerned the members’ liabilities for personal injury or death of persons occurring on or in relation to vessels entered with Steamship with fixed levels of compensation, with a maximum limit of $1m per person, payable once Steamship’s liability to members exceeded given threshold amounts. In 1994 Steamship did not write an oil rig account. LLOYD’S AUDIT CODES and THE PA CONCEPT Whilst there is some doubt as to the details of the development of the concept of the PA cover, the context which gave rise to it is indisputable. In September 1994, Lloyd’s announced changes to its Risk Codes for the 1995 year of account. The effect of these changes was that the carve out from liability policies, for the purposes of reinsurance, of the bodily injury and illness related elements in the liability policies could not be classified for audit purposes as personal accident insurance. From January 1995 accident and health policies could only be so classified if payments were on a fixed benefit basis, the amount payable was dependent only upon the degree of injury or illness sustained, and the amount could be assessed within a reasonable time and was not subject to a court award or negotiated by way of settlement. Liability dependent cover was treated as long-tail business for reserving purposes. PA cover was treated as short-tail and so did not require provision of substantial reserves to be held for long periods. NEGOTIATION OF THE FIRST (1995) MASTER LINESLIP Mr Cackett wanted to preserve the substantial 1994 premium income received by the Syndicate from Steamship if he properly could but also to maintain the PA classification. Together with Mr James he sought to develop the PA concept which, Mr Cackett agreed, was his creation. The basic idea was to provide a fixed level of benefit payable on proof of the fact of death, PTD or TTD of an Original Person with medical expenses payable in addition. As will be seen, it came to be appreciated by all those involved that the level of benefits could not and would not track the amount of the actual liability of the member of Steamship or Steamship in respect of that death, PTD or TTD. Also, and inevitably, benefits payable under a PA cover would be paid before and often long before the liability crystallised and was paid by Steamship. PA cover was indeed short-tail and liability cover long-tail. But the Audit Codes were no concern of Steamship. Indeed Mr Johnston knew nothing about the changes to them or their consequences at the time. A “conceptual proposal” codenamed “Nelson” was submitted to Steamship by Lloyd Thompson in January 1995. It proposed that Steamship might enter the oil rig market providing cover to operators on a fixed premium basis and should be protected by “a product” reflecting Mr Cackett’s PA concept protecting Steamship’s whole account. The proposed wording for the cover was debated between Lloyd Thompson, Mr James and Mr Cackett. The solicitors, Ince & Co, were also involved. It is apparent that the tension between Steamship’s desire to match the benefits to the Club’s liabilities, the difficulties of doing so and staying on the right side of the Audit Codes and the need for an insurable interest were appreciated and addressed. Ironically, in view of Sun Life’s allegations of “over-payment”, if the concept was to be sold to Steamship, Steamship’s reluctance to depart from conventional reinsurance had to be overcome. But it was this tension which colours many of the subsequent material events. Indeed it is the case of Sun Life and Phoenix that in law it could not successfully be resolved. Ince & Co wrote a letter of advice addressed to Mr Cackett at Syndicate 957 dated 27 February 1995. The letter described a number of “hurdles” in relation to the PA concept, including the need for Steamship to have an insurable interest capable of being the subject of the cover. The letter did not refer in terms to the 1774 Act but it did express the view “on balance” that Steamship had sufficient interest in the injury, sickness or death of a crew member of a vessel entered with it “to enable it to effect a personal accident insurance in effect protecting its potential liabilities”. The letter also suggested “given the unusual nature of this cover and its significance to the Syndicate” and “the consequences should the Syndicate’s Reinsurers contest the existence of an insurable interest” that the opinion of suitable commercial Counsel should be sought. That suggestion was not taken up. Mr James informed Ms Greenaway on 3 March that the lawyers had given the “green light”. In sending Mr Cackett revised drafts of the wording on 7 March, Ince & Co mentioned a few references to Steamship’s “liability” in respect of claims which had appeared in earlier drafts adding “obviously we have spent some effort trying to get away from any impression that this is an indemnity or reinsurance cover and it seemed to us that it might be better if possible to avoid words like liability. Instead we have used obligation.” For the same reason Ince & Co did not care for the “adjustment” provisions in the draft which provided for Steamship to make repayments where it transpired that the fixed benefits exceeded the Club’s liability to a member. The target of this advice was clearly the Audit Codes not insurable interest. On 10 March 1995 both Lloyd Thompson and Steamship (Mr Martin) commented on a draft wording proposed by Ince & Co. These comments, (which were sent or passed on to Mr Cackett) demonstrate the tension to which I have referred. They include: i) “Steamship …remain a potential interested buyer …. However, whilst accepting that the PA form has to be subject to its own terms and conditions, it must track the majority of their personal injury type exposures. The less it does so, the less tempting it becomes ….” ii) “[Steamship] would much prefer to have the benefits track their outgoings as they are paid and incurred and we (Lloyd Thompson) are continuing the task of explaining and educating them to the fact this may not be possible. They made it quite clear yesterday that they do not wish to profit from their misfortune in any respect ….” iii) The “adjustment feature is most helpful, particularly given Steamship’s intention that they only want to draw down on the policy in a fair and equitable manner”. iv) “We (Steamship) are happy with a proviso that the Club should first have paid its member;” “Why is it necessary that the Club affirms … that it has an obligation to the Member for a claim? So far as we are concerned, there is no question of the Club making any claim otherwise;” “In many cases of death, the Club would not expect to pay anything approaching $1m. Our objective is to recover what the Club has paid up to the maximum benefit set down in the Schedule.” Mr Cackett’s reaction to these comments was that Steamship had not understood the PA concept of a “stand alone” product. A meeting was held on 22 March. By that time the death and PTD benefit of $1m, and a weekly TTD benefit of $4000 had both been the subject of an indication (dated 22 February) from Mr Cackett. It is recorded that at the meeting Mr Martin expressed dislike of the $4000 figure and Mr Cackett explained how a TTD loss could turn into a PTD loss and that “establishment of insurable interest was paramount.” Ince & Co were to review the “adjustment feature”. Ince & Co did review the exchanges between the parties and wrote to Mr Cackett about them on 22 March. Their comments included the following: i) “It is presumably not controversial for Lloyd Thompson to say that the Club’s intention is that the wording should track as closely as possible the Club’s exposure. Whether you can fully share that intention may be another question.” ii) “In general terms the Club’s wish to recover no more than their own exposure is understandable but it is not, I think, achievable within a PA policy. So long as the Club sometimes win and sometimes loses there should not be a problem provided things even out over time. If the Club think they will always (or nearly always) win, maybe the amount of the benefits should be adjusted to protect Underwriters!” iii) The adjustment clause, whilst popular with the Club, was the part of the wording which “still troubles us the most because it is already sailing closer to the wind on reinsurance/indemnity”. On 11 April 1995 Lloyd Thompson (Ms Greenaway) sent Mr Johnston a quotation for the PA cover. Ms Greenaway said she had received details from Falcon Drilling Inc (a candidate for the oil rig accounts at Steamship) of incidents to date which would be submitted to underwriters for disclosure purposes. She also wrote:
“You are aware that the policy is a Personal Accident form, providing for the payment of clearly designed fixed benefits, the payment of which are related to the type of injury or illness sustained by a crew member and with a specific time period during which a claim can be presented to the policy. In other words, this policy is not a liability reinsurance …. The indemnity and compensation benefits are not linked to the establishment of liability imposed by a court but triggered by the injury sustained by any person that falls within the ambit of the “Original Person” clause. We provide you with a copy of the wording that has been developed …. It is intended to respond within the ambit of its own terms and conditions and (we) ask you in particular to note the following: a) The definitions of bodily injury and illness …. b) The exclusions …. c) Lapse of benefits …. d) No legal expenses cover.”
LEGAL EXPENSES. There is a dispute (which affects the extent of any over-recovery by Steamship) as to the effect of the undoubted fact that, in contrast to medical expenses, the wording which came finally to be agreed did not, as Ms Greenaway’s letter stated, provide for legal expenses cover. Mr Martin said, however, that it was his understanding that whilst Steamship would be paid nothing additional to the fixed benefits for legal costs and would have to absorb those costs it was to be compensated for them from the amounts of the fixed benefits payable. I accept Mr Martin’s evidence about this. Mr Feasey said Syndicate 957’s expectation was the same: the benefits themselves were to cover the sums that Steamship were ultimately going to pay out in relation to personal accident claims and this included legal costs. Mr Cackett differed, but I did not find his evidence on this either clear or convincing. It was not a question of providing extra cover for legal expenses, plainly that was not the case. It was a case of setting the benefit levels so as to contribute to Steamship’s exposures including legal costs. THE ORIGINAL BENEFIT FIGURES. The draft wording provided with the 11 April letter included a Schedule of Compensation with the figures in it which were subsequently also included in the agreed wording and in particular, for what may loosely be called North American claims, the figures for death and PTD of $1m and for TTD the weekly figure of $4000 (for a maximum of 152 weeks in all) which had been the subject of Mr Cackett’s earlier indication. The origin of these figures is both of some importance and some uncertainty. Steamship’s evidence is that the figures were put forward by Syndicate 957 as what was in effect on offer for the premium quoted. The $1m figure probably reflected the maximum limit in the 1994 cover. Overall on the evidence (and despite some documents suggesting the contrary) I am quite satisfied that both figures originated with Mr Cackett. Steamship had no historic information for assessing a PTD or TTD figure as claims by members were for damages for death or personal injury without distinguishing the type of injury or length of time the person injured was unable to work. Mr Martin said (and I accept) that he had, and expressed, considerable reservations about the $4000 TTD figure. Mr Cackett (and Mr James) were experienced in PA underwriting which Steamship and Lloyd Thompson were not. The basis on which Mr Cackett put these (rather than other) figures forward is particularly obscure if (which I doubt) it involved any particular calculations. That it was not and could not be “scientific” is borne out by the exchanges in December 1995 (see paragraph 63 below). Mr Cackett said the benefit levels would have been discussed with Mr James and based on the information provided albeit he could not recall what that was. He said the figures were not simply plucked out of the air but would have been arrived at by a professional underwriting process. He also said that “over a period of time” he expected that through renegotiation of the benefit levels there would be “no material aggregate over or under payment” and indeed that such was necessary on Ince & Co’s advice. Mr Cackett referred to this as “the equalisation process”. Mr James also said that the basis on which Steamship and Syndicate 957 went into the transaction was that the benefits had to be fixed at a level which approximated overall the anticipated liability payments of Steamship and agreed that this would have to be monitored quite carefully. But it is, I think, apparent from the exchanges to which I have referred that it was Steamship which had to be persuaded out of the benefits tracking the Club’s liabilities to members and Mr Cackett and the Syndicate’s requirement, derived from the Audit Codes, that the policy be a PA insurance and not a liability reinsurance which made that unacceptable. Moreover the question of how any “equalisation process” was to be dealt with over time and what it was to include does not seem to have been considered or addressed. THE 1995 MASTER LINESLIP On 18 April 1995 Ms Greenaway informed Syndicate 957 that it had an order from Steamship for the PA cover for 12 months from 20 February 1995. The order was on the current terms of the draft wording subject to a final review by Ince & Co. By 12 May 1995 two oil rig accounts (“Falcon” and Marine Drilling Inc) had been bound with Steamship. In June 1995 the terms and wording were finally agreed between Syndicate 957 and Steamship effective for the period 20 February 1995 to 20 February 1996. The Master Lineslip itself (LH9510547) had been signed earlier for 100% by Mr Cackett on behalf of Syndicate 957 naming Lloyd Thompson as the Line Slip holder. It was to accept declarations during the period but no individual declaration was to run for a period greater than 12 months plus odd time not exceeding 18 months in all. The maximum sum insured was not to exceed $1m any one person. THE FIRST DECLARATION The first Declaration (LH 9510548) under the Master Lineslip was accepted on 16 June. It named Steamship as the insured. It was to pay Steamship benefits “calculated in accordance with the Schedule of Compensation” contained in the wording for death, PTD or TTD and medical expenses in relation to TTD only as defined in the wording. The policy limits were as specified in the Schedule of Compensation but also subject to a maximum of $1m for any one event and “a maximum amount recoverable in all equivalent to 250% of the finally adjusted gross premium payable”. There was an aggregate deductible of 6.6% of Steamship’s net premium income or $1.5m whichever was the greater. A deposit premium of $5.5m was payable in six equal quarterly instalments starting on 20 May 1995 and was adjustable quarterly at 32.5% of Steamship’s net premium income received in respect of member entries during the policy period. The “information” referred to in the Declaration was:
“Underwriting submission – “Nelson” – 16 th January, 1995, Annual Report & Accounts of Steamship … P&I Club Analysis of claims 1993. Summary of Anticipated Accounts, etc based on available historic data seen, noted and agreed by Insurers hereon.”
THE WORDING The Policy Wording was scratched in June 1995 by Syndicate 957 and Steamship. The same wording was used in all years save where I have indicated to the contrary. The insuring clause was expressed in terms that “if an Original Person sustains Bodily Injury and/or Illness we will pay to the Insured in accordance with the terms and conditions of this Insurance and according to the Schedule of Compensation after the claim has been substantiated under this Insurance”. Clause 1 contained a number of relevant definitions. “The Insured” was Steamship. “Entered Vessel” was defined as:
“… a vessel, offshore rig and/or similar interest to be agreed which has been entered by a Member … for any of the risks enumerated herein ….” “Member” was defined as: “an owner and/or … other person interested in any Entered Vessel to whom the Insured has obligations under its Rules and/or terms of entry in respect of the Bodily Injury and/or illness suffered by an Original Person.” “Original Person” was defined as: “(i) any person … while engaged during the Policy Period in any capacity on board or in relation to an Entered Vessel as part of her complement, but shall include any person who is engaged by a Member during the Policy Period at the time of the Accident … and is seconded to another vessel … pursuant to a contract entered into by a Member and/or (ii) other persons while engaged during the Policy Period in any capacity on board or in relation to any Entered Vessel.”
PTD was defined as “Bodily Injury and/or Illness which actually prevents the Original Person from attending to his or her usual business or occupation and/or assuming the same work activities as those which he or she was employed to perform immediately prior to the Accident or the manifestation of the Illness and which lasts twelve months and at the expiry of that period appears to be such that the Original Person will not thereafter be able to resume attending to such usual business or occupation and/or assume such same work activities”. TTD was defined as “Bodily Injury or Illness which actually prevents the Original Person from attending to his or her usual business or occupation and/or assuming the same work activities as those which he or she was employed to perform immediately prior to the Accident or manifestation of the Illness”. The Wording contained (Clause 2) a limited number of exclusions such as death or disablement arising out of war (and the like) and mental or psychiatric illness. Clause 3 provided for claims notification and settlement of benefits. Notification of claims by Steamship had to be accompanied by “reasonable documentary proof” of the death or disablement of the Original Person, the date of the accident and inward claim, details of the circumstances of the accident and injury and, if the claim was for TTD, an estimate of the period during which the disablement appeared likely to continue and details of any medical expenses paid by Steamship, or, if the claim was for PTD, confirmation that disablement appeared likely to continue for not less than 12 months. In the event of death or PTD Syndicate 957 agreed on receipt of such notification to pay Steamship the Capital Sum specified in the Schedule of Compensation. In the case of TTD, also on receipt of such notification, Syndicate 957 agreed to “pay the weekly benefit as specified in the Schedule of Compensation for the period of Disablement together with any Medical Expenses. Should the period of Temporary Total Disablement (either as estimated by the Insured or as actually suffered by the Original Person) exceed 152 weeks and should the Insured confirm to Underwriters that it appears that the Original Person will not thereafter be able to resume attending to his or her usual business or occupation and/or to assume the same work activities …. Underwriters … will pay to the Insured the Capital Sum Insured as if the Original Person had suffered Permanent Total Disablement less any benefit (including Medical Expenses) already paid ….” Payment of the benefits was to be made no later than 30 days after submission of bordereaux (Clause 4); claims notified 24 months after expiry of the Policy Period were not covered (Clause 5). The “adjustment” clause debated in the exchanges to which I have referred became a clause (Clause 6) entitled “Alteration in Circumstances” reading:
“Should the Insured at any time become aware that any confirmation or information provided to Underwriters in connection with a claim hereunder is not, or is no longer, accurate or applicable, the Insured shall immediately inform Underwriters and at the same time return to Underwriters any amount by which all payments made by Underwriters hereunder exceed the amount (if any) which would actually be payable hereunder in accordance with the accurate or applicable confirmation or information.”
The Schedule of Compensation (Clause 9) in the original wording provided for different levels of compensation for three geographical areas: the highest level where the Entered Vessel or Member was registered or had a place of business or conducted operations in North America, half those levels for Europe, Japan or the Asean group of trading nations, and half again for anywhere else. The North American levels were US $1m for death and PTD and $4000 a week for a maximum of 152 weeks for TTD. The maximum limits (also set out in Clause 9) were $1m in respect of any one Original Person and $1m in all for any claim or claims caused by the same occurrence or series of occurrences arising out of the same event. In subsequent wordings (where appropriate) the Schedule of Compensation referred to “as declared” or was otherwise changed to reflect the terms agreed for the relevant period of cover. It is convenient to comment here on various issues or matters arising on this wording:- i) As I have already said, I find that Mr Cackett was responsible for setting the benefit levels. ii) Although Ince & Co (and Mr Cackett) were concerned (because of the Audit Codes) to avoid references to Steamship’s own liability to the Club’s Members and specifically removed the adjustment provisions which would have resulted in re-payment of “over-recoveries” it is I think clear that both Steamship and Syndicate 957 intended that claims would only be sustainable under the cover in cases in which Steamship was itself liable to indemnify the Member concerned in respect of the accident and injury to the Original Person in question. Mr Boswood submits that on analysis the wording in any event requires as much; Mr Kendrick submits it does not. On any view Mr Kendrick is right in submitting that such a requirement (if any) can only be found in the depths of the definitions: see (iii). iii) Mr Boswood’s submission is as follows. Syndicate 957 agreed to make the fixed benefit payments if an “Original Person” suffered injury. Original Persons are persons engaged on an “Entered Vessel”. An Entered Vessel is one entered by a “Member” of the Club with Steamship during the relevant period in respect of any of the risks “enumerated” in the wording itself. A Member has to be a person interested in any Entered Vessel and a person to whom Steamship “has obligations under its Rules … in respect of the Bodily Injury …suffered by an Original Person.” That, submits Mr Boswood, has the effect that unless there is a liability on Steamship to the Member for the injury (which there would not be if, for example, any damages payable to the Original Person was less than the member’s deductible) no recovery could be made or, if made, retained under the Policy Wording. Mr Kendrick submits that Mr Boswood’s submission places more weight on the word “obligations” than it can bear. He submits that Steamship owed “obligations” under the Club’s Rules to investigate claims. But I agree with Mr Boswood that the relevant Rule (Rule 28) does not in ordinary language impose an obligation on Steamship to investigate claims on Members but bestows a right on Steamship to do so. In my judgment Mr Boswood’s submission on the construction of the Wording is also right and, however obscurely, reflects what both Mr Cackett and Mr Martin said and I find was intended. iv) The definition of “PTD” was one of some width. It did not, for example depend on earning capacity. In the case of rig workers there might be a particular risk that an otherwise not very serious injury would prevent an Original Person from resuming arduous duties leading to a PTD payment within the definition. Mr Cackett was alive to the possibility of a “TTD” becoming a “PTD” and indeed the wording expressly addressed it in Clause 3 (see paragraph 53). The possibility, however, might well not be manifest for a considerable time as the Clause itself contemplates the elapse of 152 weeks before a determination might be made. That is of significance because on the evidence in the event the major if not the only source of alleged “overpayments” to Steamship is the number of claims which started as TTDs but came later to be classified as PTDs. v) Mr Cackett had a close involvement in drafting the wording yet nothing in it or otherwise required Steamship to include or provide figures for paid or incurred claims by Members on Steamship. The trigger for payment of the benefit was simply proof of the death or disablement of an Original Person: Clause 3. vi) “Original Persons” were not necessarily identifiable at inception. They included those who came to work on an Entered Vessel at any time during the period of the cover. vii) There was an aggregate excess and limit (in the event $1.5m and 17.25m respectively). THE FIRST CLAIMS. In late June 1995 Mr Cackett, Mr Feasey and Mr Absalom (then underwriter, deputy and claims manager of Syndicate 957) visited Steamship to meet those at Steamship, including Mr McAleer, who were to be involved in the submission of claims. By October 1995 three rig accounts had been written by Steamship, shortly described as Falcon, Marine Drilling and Global Industries. On 23 October Steamship (by Mr McAleer) sent Lloyd Thompson, for formal notification to Syndicate 957, details of the claims that had already arisen on those accounts. It is apparent from the terms of the letter that the contents of claims bordereaux had not by then been finally agreed between Steamship and Syndicate 957, but the details provided contained nothing about the values of inwards claims by Members on Steamship. They did contain estimates of the sums due under the Master Lineslip (described disarmingly as “Reinsurance” estimates) in accordance with Clause 3 of the wording. The claims caused great concern on the part of Mr Cackett. Ms Greenaway said, and I accept, that the major concern was the speed at which the claims had arisen and eroded the aggregate deductible and so would have to be paid under the PA cover. Indeed payment was sought of a sum in excess of $2.5m after full allocation of the $1.5m deductible. The Syndicate did not pay and a debate started. In the course of the debate information which enabled a comparison to be made between the inwards claims estimated reserves made by Steamship and the outward claims on the Syndicate on the fixed benefit basis was provided to Syndicate 957 (probably, as I find, by Lloyd Thompson). This led Mr Cackett to express concern to Ms Greenaway about “potential overpayment” to Steamship because the figures showed Steamship’s estimated reserves for the claims were some $2m less than the incurred claims on the Syndicate. All the claims (save two) were TTDs. Syndicate 957 and Lloyd Thompson did some “as if” computer runs to see what the figures would be if the fixed benefit levels were reduced by various combinations and amounts. Mr Martin was not pleased with this development. As he told Ms Greenaway (her note of 14 December) and said in evidence Steamship had wanted the PA concept cover to track the claims on Steamship but the Syndicate “had closed that door”. Mr Martin is recorded (in the same note) as expressing concern at how Mr Cackett knew about Steamship’s estimates (“This is no concern of theirs”). The note also records that Ms Greenaway explained the “mutual interest in ensuring equity of payments” in the context of a potential long-term relationship with the Syndicate. Mr Kendrick sought to make much of Mr Martin’s recorded concern about the provision of inwards claims estimates to Syndicate 957. But I accept Mr Martin’s evidence that he was irritated by what he saw as an attempt to re-negotiate a recently made agreement at a time when it was far too early to tell whether Steamship’s overall exposure would result in an “overpayment” or not. Indeed in a telephone conversation with Ms Greenaway on 20 December and at a meeting in early January, Mr Martin is on record as expressing the view that “with legal fees and I.B.N.R.” he felt that the TTD figure of $4000 “may well be right”. In the course of the hearing there was some considerable confusion and dispute about whether or not the information about the inwards claims estimates of Steamship were or were not provided or to be provided as part of the standard or at least proposed standard terms of claims bordereaux from Steamship to Syndicate 957. The matter has also been the subject of written submissions following the hearing. Understandably, not least because of the location of some documents in the trial bundles, Mr Martin’s “concern”, and a comment in Ms Greenaway’s statement about her “understanding” Mr Kendrick asked a number of questions and made some submissions of a more or less sinister nature on the basis that the information was agreed to be provided and then ceased to be so. In fact I am satisfied on analysis of all the evidence that was not the case. The Wording did not require it (paragraph 53). That was consistent with the Syndicate’s need to keep on the right side of the Audit Codes. Many of the documents in the bundles are plainly computer runs of “as if” figures not claims bordereaux. Mr McAleer’s evidence was that the information was never and never agreed to be part of the bordereaux. He was not challenged on that and he was party to the meeting in June as was Mr Absalom. I accept Mr McAleer’s evidence without hesitation. Mr Absalom’s evidence was consistent with it. The fact that the information was provided when Mr Cackett became concerned at the timing and amount of the first claims is readily explained by the debate to which that gave rise. Further Mr Martin’s irritation and comment about the fact that the Syndicate had the figures is, as Mr Flaux submitted, quite inconsistent with any suggestion that they were to be provided in the bordereaux in any event. Finally it is an undoubted fact that the information was not provided subsequently in any bordereaux and no complaint was ever made about that. None of Mr Cackett, Mr Feasey and Mr Absalom ever raised the question nor did they ever set up or ask to be set up any system for the regular exchange of information concerning inwards claims on Steamship. ALTERATION OF THE TTD BENEFIT FIGURE Ms Greenaway wrote to Mr Cackett and Mr Feasey on 22 December 1995. The letter had been discussed with Mr Martin. It is a good summary of the position at that date. Mr Cackett’s concerns are said to be that the benefit payments exceed Steamship’s estimated liabilities and that the level of benefits is set too high “and/or that the TTD benefit is not tracking the paid and incurred claims of Steamship in the way contemplated”. It is acknowledged that Steamship had made it quite clear that they did not expect to “profit from their misfortune”, and that the phrase swings and roundabouts was used during negotiations and that “an element of potential overpayment was contemplated” by the Syndicate “but the risk of underpayment was also taken onboard” by Steamship so that “the risk cuts both ways”. The point was also made that it was too early to know with certainty whether Steamship would be disadvantaged by a change to the levels of compensation. The letter also states (entirely rightly on the evidence) that:
“None of us were able to bring any science to bear on the translation, for want of a better word, of potential liability claims into benefit payments”
. The letter concluded by stating that Steamship was prepared to contemplate amendment to the Schedule of Compensation “should the level of benefit payments be found to be too generous … in order to ensure a more equitable formulae as part of a continuing long term relationship”. Mr Cackett responded on 2 January 1996. Mr Feasey had produced a computer run based upon a retrospective reduced weekly TTD benefit of $2250 (instead of $4000) but maintaining the $1m benefit for death and PTD. The computer run showed the reduction in benefit resulted in a negative difference of only $83,730 in Steamship’s overall recoveries from Syndicate 957 against the estimated reserve of Steamship for the 7 months of claims then being addressed. Mr Cackett pointed out in his letter that such an amount should easily be offset by interest earned by Steamship on the recoveries. Mr Cackett suggested that the TTD benefit level should be revised to $2250 from inception. In February 1996 Lloyd Thompson carried out an analysis of the latest figures. The analysis showed that the numbers of claims on Steamship was such that the Master Lineslip aggregate limit would be exhausted whether the benefit levels for death and PTD/TTD were $1m and $4000, or $1m and $2250 or indeed $500k and $1750. The number and level of claims was in effect such that the only effect of altering the benefit levels was that the cover would be burnt through later if the level was reduced. This analysis took some of the heat out of the debate and negotiation, at least on the part of Steamship. Mr Cackett indicated that he was prepared to renew for the period 20 February 1996 to 20 February 1997 but only on the basis of the retrospective reduction in the TTD benefit to $2250 for 1995/6 and a separate review of and rating for each member entry rather than a whole account protection for 1996/7. Indeed Mr Cackett had given a non-binding indication for Falcon for 1996/7 on 2 February based on benefits of $500K for death and PTD and $1750 for TTD with a maximum recovery of $4m in all and an aggregate retention of $345K. Mr Cackett’s evidence was that both the $2250 and $1750 figures came from him and that he believed the $2250 figure was less than Steamship appeared to be paying. He could not remember why the $1750 level was set but he was happy with it “because it was beneath the $2250 figure”. The outcome, reflected in Lloyd Thompson’s letter to Mr Cackett dated 16 February 1996, and scratched by him on 23 February, was agreement that the benefit levels should be $1m and $2250 from the inception of the 1995/6 cover, and that Mr Cackett would give further non-binding indications to cover other accounts for the 1996/7 year. It is a further indication of the tension created by the Syndicate’s need to comply with the Audit Codes and so to avoid “tracking” that when Ms Greenaway visited Mr Cackett and Mr Feasey (with Mr James) on 23 February to seek his scratch on the 16 February letter Mr Cackett is recorded as expressing concern about the reference in the last sentence of the letter that it represented the final settlement of the issue concerning the 1995/6 benefits level. Ms Greenaway’s note records:
“At this stage Tony Feasey interrupted the conversation and made it very plain to John (Cackett) that the Syndicate should sign as continual amendment to the benefit scale could open them up to being accused of attempting to track liability and they apparently have specific legal advice on this matter. John considered this for a few moments and signed the letter.”
THE 1996/7 MASTER LINESLIP RENEWAL On 4 March 1996 the Lineslip was renewed for 1996/7 but for individual declarations. Thereafter various declarations were attached to the Lineslip on terms which varied as to benefit limits and aggregates as appears from the schedule annexed to this judgment. Thus Falcon was “renewed” on the terms of Mr Cackett’s indication (paragraph 67) with the limits of $500K for death and PTD and $1750 for TTD. Marine Drilling was renewed with limits of $400K and $1750. Limits for Marine Drilling of $500K and $1750 had been the subject of a non-binding indication given by Mr Cackett on 24 April 1996 and the renewed limits were the subject of a further indication also given by Mr Cackett on 16 May. There were also individual aggregate excesses and limits as shown on the schedule. Mr Cackett could not recall, even with the benefit of contemporary notes, how these indications and limits were arrived at. I do think, however, that Mr Flaux is right in his submission that the notes show that Mr Cackett and Mr Feasey both worked on the figures and that the figures they were assessing were the 1995 year claims on the Syndicate and re-calculating them on different “as if” limits to assess a premium. STEAMSHIP’S EXCESS OF LOSS REINSURANCE . Mr Johnston was concerned by the reduction in the maximum death and PTD benefit level from $1m to $500K (and below). Mr Martin believed the level was not enough. For the 1996/7 year, therefore, Steamship also bought excess of loss insurance for losses on members’ claims which exceeded the relevant limit. The excess of loss contracts protected all Steamship’s liability arising from the rig accounts (not merely personal accident liability) and the contracts remained in place for subsequent years effective above the applicable death and PTD limits of the Master Lineslip from time to time. The effect, as Mr Kendrick put to Mr Johnston, was that if the relevant limit in the Master Lineslip was $500K, Steamship would recover that sum from Syndicate 957 even where the claim by the member was less than $500K, but where a claim exceeded $500K Steamship obtained 100% recovery from the combination of the Master Lineslip and the excess of loss cover. Mr Kendrick put it to Mr Johnston that on that basis Steamship could not make a loss but only a “profit” on any such claims. Mr Johnston’s surprise at the question was obviously genuine and I accept that he had not seen the matter in those terms at the time. He also expressed amazement at the thought that having lowered the limit Syndicate 957 had thought that Steamship would just choose to take the excess risk itself. Nonetheless and despite some evidence to the contrary I accept the evidence of both Mr Feasey and Mr Absalom that they were not aware that Steamship had taken out reinsurance either for losses in excess of the death/PTD limit or (as happened later: paragraph 115) by way of the top-up or sideways cover with Reliance. Indeed it was not suggested by Mr Kendrick that Mr Feasey either did know or should have known of the excess of loss or top-up covers. Mr Absalom said he would not have expected to be informed one way or the other although he would not have been surprised to find that Steamship had other insurance or reinsurance, higher layer or stop loss. THE BORDEREAUX Once the dispute about the TTD benefit level for 1995/6 had been resolved the bordereaux contained only the information required by the Policy Wording: Clause 3 (paragraph 53). But, as I have said and find, that was not a “change” in what had gone before, more a confirmation of it. I should add that I am also satisfied that Steamship was always prepared to provide whatever information was asked of it. MR CACKETT and CENTAUR It was in March 1996 that Mr Cackett gave notice of his intention to leave Syndicate 957 and he said that Mr Feasey would have been taking over the reins from then onward. In June Mr Cackett left Syndicate 957 and was succeeded by Mr Feasey. Mr Cackett established Centaur in Bermuda shortly thereafter. MR FEASEY AND 1996/7 . Mr Feasey dealt with the renewal of the remaining declarations for the 1996/7 year shown on the schedule to this judgment after Mr Cackett’s departure. Mr Feasey said that by that time he was comfortable that Syndicate 957 was not paying out more to Steamship than Steamship was paying its members. That belief was based on the exercise carried out with Mr Cackett in January and February 1996 which had resulted in the agreed reductions (paragraph 68). He also said he, as Mr Cackett had done, wanted to continue to reduce the benefits over time which, together with the effect of inflation on payments by Steamship to members, would help to ensure that the Syndicate was not over-compensating Steamship. CENTAUR and SUN LIFE and PHOENIX On 26 August 1996 Centaur and Sun Life entered into an Underwriting Management Agreement. Mr Cackett’s underwriting authority was limited to reinsurance business. The agreement commenced on 1 October 1996 and could be terminated at each anniversary by not less than 6 months notice. It contained gross assumed and retained maximum limits. On 12 September Centaur and Phoenix entered into an Underwriting Management Agreement on substantially the same terms save that Mr Cackett’s authority was not limited to writing reinsurance business. Centaur’s “compensation” under each agreement was 7½% of gross premium paid plus a profit commission. The business plan envisaged a gross premium income of $100m in the first year. In February 1997 Centaur sent Monument a “standard agency questionnaire” signed by Sun Life and Phoenix and letters of authority which contained the essence of the terms of the Underwriting Management Agreements. THE 1997/8 MASTER LINESLIP RENEWAL AND THE FALCON FIGURES In January 1997 Mr Feasey asked Lloyd Thompson for Steamship’s figures on the Falcon account, which was the biggest of the accounts declared to the Lineslip. He did so, he said, because whilst he was comfortable that the Syndicate was not over-compensating Steamship, he wanted to check how the Syndicate’s payments compared with Steamship’s payments to a member. The figures he received showed that for the 1995/6 year Steamship’s liabilities (paid and outstanding) were some $7.1m and Syndicate 957 had paid to the limit of the cover created by the overall aggregate cap (some $4.9m) with outstandings of some $1.42m uncollectable. For 1996/7 Steamship’s liabilities were shown as some $2.7m and the Syndicate’s paid and outstanding (excess of the aggregate deductible of $345k) were some $750k. Mr Feasey said that he regarded the figures as likely to be representative of the underlying claims as a whole and considered that they showed that Steamship was recovering less from Syndicate 957 than it was paying its members. He used individual spreadsheets to analyse the effects of various benefit levels, deductibles and franchises on claims under the Master Lineslip to generate a quotation in the same way as he and Mr Cackett had done in the previous year (paragraph 70). Mr Feasey believed that the Falcon figures were comparing “like with like” meaning a comparison of the exposures of Steamship on the same claims as the claims paid by or claimed upon Syndicate 957. Further, at this date on the 1995/6 year, only one of the Falcon claims was in respect of a death and none were for PTDs. Mr Feasey said that by this time he would have expected Steamship to have had a pretty good idea of whether or not a claim was a PTD. He did not feel there was any need to investigate individual claims because Steamship had confirmed that “in the round” they were not being over compensated. Mr Feasey’s reliance on the Falcon figures has been the subject of particular criticism by Mr Kendrick. There is no document which evidences the renewal of the Master Lineslip for 1997/8 but the various individual declarations were renewed as shown on the schedule to this judgment. As the schedule shows some limits were changed, further aggregate excesses were introduced but individual aggregate limits were substantially increased with an overall limit of $33.56m which was less than the total of the individual limits. The “qualifying period” for a TTD (see paragraphs 53 and 57(iv)) was reduced from 152 to 104 weeks. Mr Feasey also introduced “franchises” the effect of which was both to exclude from the cover losses which did not exceed the franchise figure until the exhaustion of the franchise retention figure and to delay presentation of claims which did exceed the figure. For example, in the case of a TTD loss, the loss had to exceed the franchise level before it could be claimed so that if the weekly benefit level was $1000 and the franchise $25,000 a claim could only be made if the TTD lasted for 25 weeks or more. THE FIRST SUN LIFE AND PHOENIX REINSURANCE FOR 1997/8 Syndicate 957 had itself been reinsured in respect of its liabilities to Steamship under the Master Lineslip (and for other covers) by a reinsurance programme underwritten by a number of other syndicates at Lloyd’s. Mr James wrote to Mr Cackett (who was in England at the time) on 6 February 1997 enclosing an information pack on the reinsurance for the 1997/8 year and seeking quotes from Centaur for elements of the Syndicate’s reinsurance programme for that year. Mr James wrote:
“You are obviously familiar with the entire rating structure and product relative to the underlying declarations from your days at Syndicate 957 and in due course I will provide (you) with copies of sample declarations for 1997 attachments. You may recall that from 1996 the maximum any one person limits were reduced to $500,000 and in many cases declarations were bound for significantly less. This is an underwriting stance which Tony (Feasey) intends to continue with.”
The information pack itself included: i) Under the heading “Rating, Deductibles and Premium Income” the statement that “individual vessels, units, fleets and whole portfolios are rated by the Leading Lineslip Underwriter on the basis of historical loss information where such is available and by taking account of overall historical burning costs . Individual excesses, aggregate deductibles and franchises are considered on each declaration depending on the nature of the operator and previous loss experience.” ii) The claims statistics for claims reported by Steamship to Syndicate 957 at 30 January 1997 for risks attaching for 1994/5, 1995/6 and 1996/7. These showed, for 1995/6, that incurred claims from Steamship were a total loss to the limits of the PA cover and for 1996/7 that incurred claims totalled some $1.643m. iii) An undated file note of a meeting on an unknown date between Mr Feasey, Mr James and the underwriter (“RDL” being Mr Littlemore) of one of the reinsuring syndicates (Syndicate 1096) which addressed the “quite disastrous experience” on the layers of the reinsurance written by that Syndicate. The note was made by Mr Littlemore and records that the account was a very important one for Syndicate 957 “which is underwritten to produce a gross profit” and not written on the back of reinsurance something for which Mr Feasey is noted as being aware that Syndicate 957 had a reputation. It continues:
“TF (Mr Feasey) made the point that with any new product and limited historical data there is always the danger of getting it wrong. By the results it is clear mistakes were made. The benefit levels particularly were set too high. It has meant that every part of the underwriting has been addressed.”
Reference was then made to four specific matters: reduction in weekly TTD benefits, reduction in the death and PTD benefit, the increase in aggregate deductibles and the use of franchises. Mr Littlemore’s “Summary” of the meeting reads:
“Good informative meeting allowing me to become far more comfortable with product. TF is much happier with how 1996 is developing and is confident all parties will make money. Still very difficult to make any true predictions for at least another 12 months particularly as a number of the risks are running aggregate deductibles ….”
Mr Cackett’s immediate response to the information pack was that he would like to see “some triangular projections on an as if basis with relative (original) premium income levels i.e. to the P&I clubs so as to correctly evaluate the loss experience”. That information was, it seems, duly provided and Mr James and Mr Cackett met in February to discuss the matter. Mr James had little clear recollection of this meeting. He said that he and Mr Cackett would not have spent any great deal of time talking about the benefit levels because he would just have explained that Mr Feasey was continuing to assess the levels he was happy to provide based upon historical performance “and the broad parameters of the legal advice he had had”. Mr James did not know what Mr Cackett wanted the triangular projections for “other than to perhaps assess the benefit levels or assess the premium … relative to the underlying premium.” Whatever the case there is no evidence at all of what if anything Mr Cackett did with the information. On 10 March 1997 Mr Cackett for Centaur wrote to Mr James enclosing quotations for various reinsurances of Syndicate 957. In May 1997 Mr Cackett, using American Phoenix as a front for Sun Life and Phoenix for 50% each, entered into a number of reinsurances of Syndicate 957 in respect of the Syndicate’s liabilities under the Master Lineslip in respect of losses occurring between 20 February 1997 and 20 February 1998. The first reinsurance was to pay $95,000 excess of $5000 on each and every claim. The other three reinsurances were to protect Syndicate 957 in respect of claims related premium adjustments payable by the Syndicate on various layers of its excess of loss reinsurances protecting the account (described as “burning cost” reinsurances). Mr Cackett said in evidence in relation to Mr Littlemore’s note that whilst he was aware of the Syndicate’s reputation when he was at the Syndicate he had also intended to write the Master Lineslip for a profit and not on the back of reinsurance. He also agreed that the four specific matters referred to in the note were accurate. MR COOPER’S 1997 REPORTS In August 1997 another of Syndicate 957’s reinsurers sought an audit of Steamship’s claims “given the highly unfavourable results”. The inspiration for the audit appears to have been the speed at which payments were being made (and reimbursement sought) in 1995 in comparison to 1994. That, of course, was no surprise to Steamship or Syndicate 957 because of the change in the nature of the cover between those two years. This audit was Mr Cooper’s first introduction to the business. Mr Cooper produced a draft report dated 26 September 1997. He was complimentary about Steamship’s control over and handling of claims. However he also stated that on the files he had reviewed the terms of the cover had led to Steamship recovering more than it ultimately paid. Mr Cooper’s final report dated 5 December was enclosed with a letter to Mr Sharp of Syndicate 957’s managing agents which also noted that “Steamship appear to have profited from the arrangement”. It was Mr Cooper’s evidence that he could not recall whether he was commenting on paid claims or paid and incurred but he believed he would have carried out an analysis on both bases. Both Mr Feasey and Mr Absalom were aware of these comments. Mr Cooper’s reports and comments seem to have been the catalyst for a further round of legal opinions and information being sought from Steamship by Mr Sharp on behalf of Syndicate 957. MR JOHNSTON’S 25 NOVEMBER 1997 LETTER On 25 November 1997 Mr Johnston wrote to Mr Sharp, following a meeting. He said:
“As we explained to you, the decision to arrange PA cover was seen as complementary to the original risk underwritten by the Club. Unfortunately despite the purchase of the PA programme the Club has suffered an underwriting deficit in the 1995/6 year. For your guidance, the net premium charged by the Club to the five rig members concerned was $15.1m. Claims paid in the year currently stand at $10.29m and claims outstanding at $19.1m. The overall claims figure as at today therefore stands at $29.39m. The PA insurance programme that the Club purchased was at a price of $6.89m and the full amount of recoveries made were $17.22m. As you will appreciate therefore the Club is in underwriting deficit, notwithstanding the PA programme.”
On the evidence, there is no doubt that this letter led to a misunderstanding. Again, I am satisfied, that insofar as the contrary may have been suggested, there was nothing sinister about it. The aggregate limit of the Master Lineslip in 1995/6 was $17.25m. The cover had therefore burnt through. Hence the figure of $17.22m. Mr Feasey, however, thought, as with the Falcon figures (paragraph 78), the letter was comparing like with like, namely the cost to Steamship of those same claims which had cost Syndicate 957 $17.22m. That, Mr Feasey said, would have been the same comparative exercise as was carried out in late 1995 and early 1996 which had resulted in the retrospective reduction in the TTD benefit level. Mr Feasey said that had he known Steamship’s claims paid and outstanding figures included property claims, the deductible, and in particular claims other than those paid by Syndicate 957 (as they did) he would at least have wanted to know “the real position” and “potentially” would have wanted to revise the benefit levels downwards. He also expressed considerable surprise that Steamship had bought other protections because he believed that it had been intended that the Master Lineslip should be a stand alone product and Steamship had not wanted to be over-compensated. Again, Mr Feasey’s reliance on this letter has been specifically criticised by Mr Kendrick. Mr Martin, for the purpose of his second witness statement, had produced schedules showing the updated Steamship claims position as at 8 January 2002. Inwards claims from members for 1995/6 were then estimated at $28.132m. (thus some $1.26m less than Mr Johnston’s figure in November 1997) but both figures related to all claims by Members on Steamship whether or not the subject of claims on and payments by Syndicate 957 and were net only of the deductibles borne by Members. In particular, they included claims by Members after the Syndicate’s cover had burnt through. Mr Martin said Steamship’s approach to the cover had been to protect the Club’s whole exposure but without any expectation of excess recovery. He also said that even on the basis to which Mr Feasey referred his schedule showed that the Club’s liabilities were $22.447m and so in any event in excess of recoveries from Syndicate 957. Mr Johnston’s evidence was that Mr Sharp had expressed concern that Steamship was profiting from the PA cover and he had told Mr Sharp that was “completely incorrect” and had written the letter to set out the figures. He also said that he had never done an exercise to match like claims with like recoveries nor had he ever sought to work out the average cost of a death or PTD claim. The $29.39m figure was “the overall claims figure” being the liability reserve of the Club on all claims. FURTHER LEGAL ADVICE Whilst the evidence remains vague as to the precise circumstances in which further legal advice was sought there is no doubt that Mr James was a prime mover in seeking it and that Mr Feasey was aware of it. It led to the solicitors, Reynolds Porter Chamberlain (RPC), writing to Mr James with “provisional advice” on 7 January 1998. The letter records (wrongly in the light of my findings and Mr James’ own evidence) RPC’s understanding that “the level of fixed benefits was originally set on the basis of an assessment by the Clubs of their average exposure in relation to a spectrum of liability” and (rightly) that payment was made without a prior requirement that the Club’s legal liability to pay the underlying claim be first established. The concern attributed to Mr James or Syndicate 957 was whether the validity of the insurance could be the subject of a successful challenge by reinsurers. The letter asked “the fundamental question” whether the Club had an insurable interest at the time of inception of the policies and specifically referred to the 1774 Act. The thrust of the advice was that a sufficient insurable interest should be demonstrated on the basis that it was probable that the death or injury of an Original Person would produce a claim by a Member against the Club but there was a need to have an insurable interest in the specific lives at inception and because the class of Original Person was so wide and transient “it would seem impossible to show an insurable interest in the lives of Original Persons who had only a theoretical existence at the time of inception”. The general comment was also made that the Courts had tended to uphold life insurance if it was bona fide. Section 3 of the 1774 Act was also addressed and the view expressed that:
“where, as in the case of the Facility, there has been a genuine attempt, prior to inception, to estimate and agree on the likely exposures of the Clubs to their Members, the level of benefits agreed would be conclusive. The only exception to this rule (saving the obvious one of fraud) is where the sum agreed is so grossly excessive that it amounts to a wager. The sums payable under the Facility do not appear to be grossly excessive. Looking at the overall position it may well be the case that the Club have not in fact recovered more from Underwriters than they have paid their Members. In summary and on balance RPC considered the cover would be upheld but was potentially vulnerable for lack of an insurable interest in the lives of some of the Original Persons. The question was also referred to Leading Counsel, Andrew Popplewell QC. Mr Popplewell prepared a “Note of Advice” which was sent by RPC to Mr James on 13 February. Mr Popplewell’s advice was very similar to the advice of RPC. He suggested the way to overcome the need (as he saw it) for an identifiable interest in the life of each person at the time the insurance was written was to create a new contract of insurance each day of the year so that anyone becoming an Original Person on any day would be the subject of a policy incepting that day. Mr Martin understandably considered this to be impracticable and an extraordinary basis on which the determination of legality could depend. Mr Feasey read the opinion as a positive one with a few suggested refinements. He too considered it was not necessary to alter the wording. The Opinion was supplied to Steamship on 28 May. THE THREE YEAR MASTER LINESLIP 1997/00 On 14 April 1998 Mr Absalom scratched, by way of a Declaration off the 1997/8 Master Lineslip, insurance for Steamship for the three 12 month periods 20 February 1997/8, 1998/9 and 1999/00. By April 1998 the 1997/8 cover had of course expired but the member declarations off the 1997/8 Master Lineslip were cancelled and rewritten to become member entries to this three-year Declaration. Also on 14 April 1998 a further Master Lineslip was agreed to accept Declarations from 20 February 1998 to 20 February 2000. It is this three-year Declaration which is the subject of the proceedings (Folio 908) between Steamship and Syndicate 957. The circumstances in which it came to be agreed are somewhat obscure. They also overlap the departure from Syndicate 957 of Mr Feasey in April 1998. The Declaration described the Type of Insurance as “Personal Accident and/or Illness” and the Insured as Steamship. A Wording was attached in the same terms as the original Policy Wording (paragraphs 45-57) save that the Schedule of Compensation was “as declared” each declaration. The maximum amount recoverable was limited in respect of each individual member to 150% of original gross annual premium and an overall limit was applicable. In the event the figures for these limits were as set out in the schedule to this judgment. The “Information” was described as “as presented and noted by the Underwriter at the inception of the Original Member Entries.”
The weekly TTD benefit was limited to a maximum of 104 weeks in all. The list of Member Entries for each year recorded for 1997/8 in the case of Falcon alone that the cover was in respect of “losses occurring or first notified” to Steamship in that period. In all other Member entries it was in respect only of “losses occurring”. The effect was that the original 1997/8 cover for Falcon was enlarged to cover claims notified in 1997/8 but arising in earlier years. Those claims were of course, already known at April 1998. The figures (at August 1998) in fact show estimates for such claims of some $4.5m. As appears from the schedule to this judgment for the years 1998/00 the weekly TTD benefit was reduced from $1750 to $1000 for all Member Entries and the death/PTD benefit was “equalised” at $400,000 for all Member Entries which involved an increase in the limits in 1997/8 in two cases and a decrease (from $500,000) in three cases. Mr Feasey assessed the benefit levels on the basis of “as if” figures between Steamship and the Syndicate. He had no figures to assess the comparative position between Steamship and its members. Mr Feasey said that after the dispute which had led to the retrospective reduction in the TTD figure in 1996 the business had gone forward largely on the basis of an assumption that the level of benefits was such that Steamship would not be over-compensated “in the round” and the issue was what was the Syndicate prepared to offer and whether Steamship thought it worthwhile to buy what was offered at the price proposed. Mr Feasey also agreed that because Steamship should not be over-compensated it was prudent to “continue monitoring and adjusting” to minimise any mismatch. By that however he did not, I think, and despite Mr Kendrick’s submissions, mean the sort of monitoring to which Mr Kendrick refers in his submissions which would have involved a detailed exercise on Steamship’s estimated reserves. Mr Feasey did not undertake and never suggested he had undertaken such an exercise. He said he relied on the 1996 exercise, the Falcon figures, Mr Johnston’s letter, his knowledge and experience of PA business and the size of awards to justify his confidence that Steamship was not being over-compensated and would not be over-compensated by the benefit levels he was offering. He had of course reduced the levels further, particularly the TTD figure. As regards PTDs it was not put to Mr Feasey how he could or should have “monitored” them. Nor, as stated, was he aware of any other protections available to Steamship. Mr James had no recollection why the 1997/8 declarations were re-written into the three-year Declaration. He suggested that Syndicate 957 may have been sensitive to the business being under competition from Centaur and so concerned to extend the term of the cover. Mr Feasey also could not recall why the covers had been written for three years. There is no doubt that the Master Lineslip provided a significant part of the Syndicate’s premium income. Mr Absalom said he believed the terms were now such that there was no question of over-compensating Steamship and (substantially in agreement with Mr James) that it was valuable to secure the income for a period of time when the Syndicate was under pressure from outside competition. I think Mr James’ suggestion is likely to be accurate and that it would have coincided with Steamship’s wish to have a long-term agreement which was how the Club (and the Syndicate) had always seen the arrangement. Mr Feasey said he was aware of the enlargement of the cover for Falcon, although not aware of the figure of $4.5m. Mr Kendrick asked Mr Feasey if it was not elementary when extending a contract in this way to have the broker identify claims known and notified. Mr Feasey’s response was:
“It is difficult for me to remember now what debate went on around about that time when that was agreed. I am sure I would have had good reason for doing that, it would not be my style to just be cavalier with it, but I cannot give you precise recollections of what was actually debated at that time, what I knew and what I did not.”
Mr Absalom also said that he would have been aware of the enlargement of the Falcon cover, but he too could remember no more about it and would have relied on Mr Feasey. Mr Johnston’s evidence was that the enlargement came about because Steamship asked for it. He said Syndicate 957 had requested a 3-year contract:
“It became very obvious to us that they were extremely anxious to place this contract. We therefore took the position that we might as well see what we can negotiate out of this to our advantage, and one of the things that occurred to me was that we might as well ask them whether they would be prepared to consider losses that were going to arise during the course of the year that had not as yet arisen.”
Mr Johnston added that the Falcon cover had not burnt through by that time. He also said that he did not think it was for Steamship to calculate any appropriate benefit level and the Club did not do so. They were offered a cover and had to decide if it was worth buying. Mr Martin said the same. Steamship did not expect the protection to be the equivalent of a full reinsurance of Steamship’s first retained layer and the question was would it provide a substantial protection. Mr Martin said his evaluation in 1998 would have been that a death claim would certainly cost more than $500K, a PTD would cost more than $500K and a TTD more than $1000 a week. It should be noted that there were no pleaded allegations in respect of the enlargement of the Falcon cover and so Mr Feasey had not addressed it in his statement nor did it appear that he was prepared for questions on the subject. THE SUN LIFE AND PHOENIX REINSURANCE 1998/00 In about April 1998 Mr James produced a Renewal Presentation for the reinsurance of Syndicate 957 for losses occurring during the period 20 February 1998 to 2000. It is this presentation together with the meeting between Mr James and Mr Cackett at which it was discussed which is substantially relied upon for the misrepresentations alleged by Sun Life and Phoenix. The oral presentation took place between Mr James and Mr Cackett in Bermuda on 5 May when Mr Cackett agreed to write the covers. There are no notes of the meeting. The figures stated in the Presentation were in respect of losses notified to the Syndicate at 20 February 1998. The contents were an up-dated version of the earlier presentation (paragraphs 80-81). The heading “Policy Coverage, Specific Wordings and Declarations” now included the words “supporting underwriters have directly and via the placing brokers sought extensive advice from solicitors and leading counsel regarding the formats and legality of the policy wording. Copies of opinion … are enclosed …. For 1998 and based on most recent opinion some minor alterations may be incorporated if underwriters deem these prudent and commercially acceptable”. The enclosures referred to were the Ince & Co letters dated 27 February and 7 March 1995, (paragraphs 29 and 30), RPC’s letter of advice dated 7 January 1998, RPC’s instructions to Mr Popplewell and Mr Popplewell’s Note of Advice (paragraphs 93 to 96). Mr James agreed that in fact it had already been decided that no alterations would be made to the wording to meet Mr Popplewell’s expressed concern but said that he might have said so at his meeting with Mr Cackett. The claims statistics for 1996/7 now showed that both the Falcon and Marine Drilling accounts had burnt through their individual limits of the PA cover. The levels of cover, benefits, deductibles and franchises were all accurately set out. Details of the “Member Entries” in each year were provided. As regards Falcon it was clearly stated that for the year 1997/8 the cover was for losses occurring or first notified in that period. There was no other reference to this provision but Mr James said he believed he may have drawn it to the attention of reinsurers. Mr Cackett did not contradict this. He could not remember one way or the other whether it was drawn to his attention. The note of the meeting with Mr Littlemore (paragraph 81(iii)) was included in the Presentation again. Mr Cackett said he would have assumed that the note would not have been included if what it recorded was no longer the case. “It was confirmation that the underwriting stance had not changed” and, he said, confirmed his understanding that the accuracy of the benefit levels had been thoroughly revised . Mr James said in his Witness Statement that, as in the previous year, there were no significant discussions nor queries relating to the benefit schedules and, contrary to Mr Cackett’s evidence, he had not made any representation that the benefit levels constituted a realistic assessment of the likely exposures of Steamship to members under the Club’s Rules. In cross-examination Mr James said that he did not have to tell Mr Cackett too much because Mr Cackett was familiar with the underwriting from his days at Syndicate 957 and probably knew Mr Feasey better than Mr James did. Mr James agreed that he had told Mr Cackett that it had become difficult to persuade Steamship to buy the product because Mr Feasey had always been reducing the benefit levels (as he had) and that the reductions would hopefully mean an improvement in the underwriting results. Mr James said that the gist of his presentation was that Mr Feasey was taking the same underwriting approach as Mr Cackett had done and the Syndicate was continuing to do a professional job in terms of the legalities, the appraisal of the risk and matching the benefits. In his First Witness Statement (dated 14 December 2001) Mr Cackett’s evidence was that had he been informed at the time that Steamship was expecting to make a significant over-recovery under the Master Lineslip that would have defeated the equalisation process and he would not have written the reinsurances. Indeed this part of his statement appeared to be predicated on the basis that at the time of the placing Steamship had anticipated making an “over-recovery” in the region of 48.6% more than it was to pay to its members. The Statement does, however, also say that had he been informed that Syndicate 957 “had not been making a professional and good faith effort to monitor the levels of the fixed benefits so that overall they approximately matched the payments by Steamship to its members or had not performed a thorough analysis of the benefit levels” he would have been “very concerned”, and if he had not understood “that the benefits had been thoroughly reviewed” Mr Cackett would not have written the business. The way he put it in cross-examination was that he was content with the benefit levels set by Mr Feasey because he believed Mr Feasey had “used his best endeavours” and “continued to remain vigilant” about them. Mr Cackett said in evidence that the figures in the presentation which he would have been particularly interested in were the summaries of the losses to the various excess layers in the years 1994/7 showing their development over that period. That was, of course, the cover he was being invited to write. He also said, in re-examination, that “the gist of the broke” in relation to the reduced benefit figures of $400,000 and $1000 per week was that “Mr Feasey had continued to underwrite the risk in such a fashion that it was now going to make an underwriting profit, and that those benefit levels were far closer to those that were appropriate”. Asked by Mr Kendrick in terms “what about the monitoring?” (meaning monitoring of inwards against outwards claims) Mr Cackett said he thought “it was taken as a given that it must have been monitored, otherwise there was no reason for him to reduce those benefit levels”. It is, I think, significant that even in such a context Mr Cackett did not say that “monitoring” had been expressly discussed or even referred to. It is also the case that Mr Cackett himself had further reduced the benefits in the case of Falcon and Marine Drilling in the spring of 1996 to $500,000 and $1750 without reference to any “monitoring” save to the extent that the retrospective reduction from $4000 to $2250 could be said to have been so derived (paragraphs 68 and 70). He proposed limits and premium on the basis of “as if” calculations of the claims on the Syndicate just as Mr Feasey had done. In May 1998 Mr Cackett agreed on behalf of Phoenix and Sun Life 50:50 to renew the four reinsurances of Syndicate 957 which are the subject of the Syndicate’s claims in Folio 1333. The contracts covered losses on declarations attaching in the period 20 February 1998 to 20 February 2000. One was to pay $90,000 excess $10,000 each and every person, accident or occurrence. The other three were burning cost covers (as in 1997: see paragraph 84) in respect of premium adjustments payable by the Syndicate on other excess layer covers placed with other reinsurers. Mr Cackett said that in writing this business he relied upon Mr James’ presentation and in particular the representation which Mr James disputes. THE RELIANCE”TOP-UP” On 29 June 1998 Mr Cackett provided Mr James with a non-binding indication for what has been referred to as the “top-up” or “sideways” cover of Steamship. The cover was to protect Steamship for the 3 years at 20 February 1997 in the event that the Master Lineslip total limits (overall or for individual members) were exhausted. The benefit levels and terms were to be the same. The maximum cover was to be $10m a year. Mr Cackett indicated that a fronting company was to be agreed and a premium of $12m. Mr Cackett said that in discussions with Mr James, Mr James had indicated that this cover would be a way of utilising “the spend of Steamship”, meaning the amount allocated by Steamship to but not used for the purchase of reinsurance, and that there was very little likelihood of a loss to such a policy. Mr Cackett said it was put to him by Mr James “very much that it was more of a gift than a risk”. Mr Cackett could, however, offer no sensible explanation for Steamship paying such a sum as a gift. Mr James’ evidence about the origins of the Reliance top-up was that it arose out of a joint discussion with Mr Cackett which concluded that “it would be beneficial to all parties” to offer Steamship such a policy as it would give Steamship total comfort but would hopefully be less likely to be affected by losses. On 17 July 1998 Lloyd Thompson wrote to Mr Johnston with an indication for the top-up cover with a maximum limit of $40m. The indication came from Reliance National but as a front for Centaur and Mr Cackett. The premium quoted was $15m. On 12 August 1998 Mr James informed Mr Cackett that Reliance National had agreed “to front for Sun Life/Centaur” for a three year limit of $40m “excess” of the cover provided by Syndicate 957. On 12 September Mr James and Mr Cackett met in Bermuda and on 14 September Centaur accepted the reinsurance of Reliance on behalf of both Sun Life and Phoenix equally. Mr James and Mr Cackett met again in San Francisco on 25 September. On 27 September Mr James wrote to Mr Cackett saying:
“… I have pleasure (!?!) in enclosing the final information and records pack in respect of the (top-up) contract for your files. A copy is also lodged with Reliance, Steamship, Lloyd Thompson and Monument. I thought it a little too much to ask you to carry this back to Bermuda with you!”
The “information and records pack” was indeed an enormous amount of material filling over 5 lever-arch files. Mr Cackett said the contract had already been written and he doubted if the information had been shown to him or Centaur before. He had no recollection of looking at it, and he thought the information was unnecessary because of the terms in which the risk was “broked” to him. The information in fact contained schedules of inwards claims to Steamship together with Steamship’s estimates of their value albeit not distinguished between PTDs and TTDs because that distinction was only material to the Master Lineslip. Reliance signed the Slip on 30 September 1998. CENTAUR AND PHOENIX . In March 1998 Mr Cackett gave 6 months notice to Phoenix to terminate the Underwriting Management Agreement between Centaur and Phoenix. Mr Sawyer and Mr Cackett met in Toronto in April and Mr Sawyer made it clear then that “going forward” Mr Cackett and Centaur were not to do anything which would increase or extend the exposure of Phoenix but it was agreed that they could reduce the exposure if that was possible. On 17 August 1998 Centaur sent Mr Absalom a letter concerning the termination of the underwriting agreement with Phoenix. The letter enclosed a “Newsletter” which itself stated that:
“Centaur … have given notice to Phoenix … to terminate their Underwriting Agreement to take effect from 1 st October 1998. From the 1 st October 1998 Centaur are pleased to offer 100% Sun Life … as our sole Principal ….”
Mr Absalom accepted that he probably read this letter on his return from holiday in early September 1998. Ms Benson accepted that she probably saw it and that it was cleared with Sun Life. Mr Sawyer accepted that Phoenix would probably have approved it. Mr James accepted that Monument would have received it and he was aware of its contents. Phoenix sent out standard letters itself. Mr Absalom and Mr James were on the relevant computerised mailing list. The letter, dated 26 August, stated that the underwriting agreement would be terminated “effective” 1 October 1998 and added:
“We confirm that we shall continue to honour all obligations in respect of business accepted prior to October 1, 1998 by Centaur on our behalf.”
Mr James did not recollect receiving the letter; I think and find that he probably did. Mr Absalom accepted that he probably also read this letter. In fact, after 1 October, Centaur was allowed by Phoenix to run off the business written pursuant to the Underwriting Management Agreement. THE OCTOBER 1998 PRESENTATION and 1998/01 COVERS On 19 October 1998 Mr Johnston reported to his partners on the “Rig Portfolio”. The report had a schedule attached to it with estimates of Steamship’s overall liabilities and reinsurance recoveries as well as premiums received and paid. For the years 1995-1997 taken together the figures show the Club was estimating an overall net loss on the account of $3.180m. On 20 October 1998 Monument prepared a further reinsurance presentation on behalf of Syndicate 957 in respect of the three-year period 20 February 1998/01, in effect involving a further one-year extension to the existing cover. Apart from minor changes to up-date the information the presentation was the same as the previous one and is relied upon by Sun Life and Phoenix in the same way. Centaur agreed to extend the four reinsurances. That was done in each case by an endorsement and (later) cover note addendum. The endorsements (button-stamped and initialled by Mr Cackett on 29 October) recorded that it was “noted and agreed that with effect from inception” the period of cover was to read 1998/01 and that “all other terms and conditions remain unaltered”. It is this extension which is the subject of The Authority Issue. Mr Cackett agreed with Mr James and Mr Absalom that he would not have written the endorsements unless he believed he had full authority to do so. But he said that when he wrote them he “did not know … that I actually addressed my mind to exactly who I was underwriting for … I was underwriting on behalf of Centaur. I do not know that I actually would have considered whether it was Sun or Phoenix at the time”. By 29 October Centaur’s agreement with Phoenix had terminated to the knowledge of both Mr James and Mr Absalom. The cover to February 2000 had been written prior to termination on behalf of Phoenix and Sun Life equally. The extension to 2001 was written after termination. Mr Cackett thought he might have had it in mind to re-sign the cover in February 1999 as 100% Sun Life. Despite, perhaps tentative, submissions and evidence to the contrary the extension was plainly a new contract and cannot be described as “a variation” or a run-off of an existing contract even if that was a material distinction. The only sensible construction that I think can be put on these events is that, as Mr Fenton submitted, Mr Cackett had no authority to write any new business on behalf of Phoenix and so could not bind Phoenix to the 2000/1 extension for 50% or at all, but equally that, as Mr Kendrick submitted, he was not in fact writing the extension so as to bind Sun Life 100% even if arguably he would have had authority to do so. The endorsement purported to extend an existing cover written for both companies and as Mr James said, and is plainly right, had Mr Cackett been writing 100% for Sun Life that would have been clear in the documentation when in fact the opposite is the case THE CLAIMS ON THE RELIANCE TOP-UP In February and March 1999 Steamship notified substantial claims on the top-up policy essentially arising from the deterioration of the Falcon declaration under the Master Lineslip. Mr Cackett instructed that an audit be carried out. It was this which led to Mr Cooper’s second inspection of Steamship’s records and indirectly to the present proceedings. THE FIGURES Schedules of figures continued to be produced in the course of closing speeches. Submissions about the figures continued to be made (at my invitation) in writing after the conclusion of the speeches. There remain matters of doubt and debate. In part Sun Life and Phoenix blame that on allegedly inadequate disclosure on the part of Steamship whereas Steamship maintains the detail at least is of no relevance. Nonetheless I think I must do my best to make some sense of the position. First, however, I should note a number of more general points. The fact that Sun Life and Steamship are in radical dispute as to what exposures of Steamship should be compared to what recoveries made under the Master Lineslip and other protections to assess any “over-payment” is, I think, a consequence of the potential for misunderstandings inherent in the PA concept itself. Of course it may also be that any relevant comparison for the purpose of the misrepresentation case differs from that required, if it is required, for the purposes of Section 3 of the 1774 Act. But Sun Life and Phoenix submit that any true comparison should be only between inwards claims by members and outward claims recoveries on the Master Lineslip (and other protections) in respect of the very same claims. Sun Life also submits that the deductible agreed between Steamship and Syndicate 957 should be excluded from inwards claims (because in effect Steamship agreed to be self-insured to that extent), and that legal expenses should also be deducted (but see paragraph 35). Steamship contends that all inwards claims, save to the admittedly very small extent they were not for death or injury, should be included even if they could not be claimed for under the Master Lineslip (because, say, the limits had been exhausted) and that the existence of and recoveries made from other protections (the excess of loss and Reliance Top-up covers) are of no relevance in any comparison. Mr Martin produced a schedule which showed that even at 8 January 2002 inwards claims were still open for outstanding sums of some significance: 1996 ($3m) 1997 (6.5m) 1998 (15m) and 1999 (14.3m). Steamship was anxious to stress that claims which were still open were unpredictable as to their final outcome. I am, however, quite satisfied that Steamship’s reserving procedures were of a high standard and likely to give reliably realistic estimates across the whole account. The one area of significance which does materially affect the estimates relates to the possible “translation” of a TTD into a PTD. On the evidence, Steamship applied a rigorous approach requiring evidence approaching a certainty or at least clarity of inability to return to pre-accident employment before classifying a claim as PTD rather than TTD. It is that approach which largely if not entirely explains why the figures deteriorated after some years. It is agreed that at least the years subsequent to 1999/00 are not sufficiently developed to provide a meaningful analysis. There is no evidence before the court which shows, even as a matter of probability, that for the relevant periods of cover either the death or the TTD benefit levels set were such as to lead to any “over payment” to Steamship however that calculation is approached. For the last 3 years, February 1998 to 2001, the levels were standardised at $400,000 and $1000 a week. The cause of any over recovery is the PTD benefit level coupled with the fact (if it be material) that in any cases where the claim exceeded $400,000 the excess reinsurance protected Steamship and in any case where the aggregate limit had been exhausted the Reliance top-up cover would respond. It is also Steamship’s evidence (which I accept) that in the year 1995, once the aggregate limit of the Master Lineslip had been exhausted, separate figures for PTDs and TTDs were no longer necessary nor kept and so that, at least without detailed examination of individual claims files, such figures would not have been available had they been asked for at any time. Mr Martin’s schedule at 8 January 2002 set out for each policy year the estimated claims position and the insurance and reinsurance recoveries position of Steamship. In general terms the figures showed for all years and all bodily injury claims Steamship’s exposure was some $213m (of which 1997 accounted for some $43m) but if the exposure was capped at the maximum amount insured under the Master Lineslip and limited only to claims where some recovery from Syndicate 957 was estimated (i.e. where annual policy limits were not exceeded) the figure for all years was some $153m and for 1997 some $29m. Recoveries (estimated, paid and outstanding) from Syndicate 957 for all years totalled some $158.7m and some $29m for 1997. Those figures of themselves therefore are comparable to Steamship’s exposures. Steamship also had recoveries from the Reliance top-up of some $19.8m, of which $13.8m was in respect of 1997, and from excess of loss contracts protecting the account in a total of some $36.5m, of which an amount of $8.2m is attributable to 1997. The Reliance top-up cover was first agreed in September 1998 effective from February 1997. It would, from its very nature, as Mr Martin said, not have been the subject of any estimated recoveries for some substantial period after it incepted. The figures include legal costs. Mr Cooper estimated that legal costs formed about 13% of the value of claims by members. Using the same figures as Mr Martin, Mr Cooper set out figures for what he described as “the correct analysis” which compared all the assumed claims that could generate recoveries under the Master Lineslip and the Reliance top-up with recoveries made under the Master Lineslip, the top-up policy and the general excess of loss programme. The results of that analysis for the years 1997-1999 were set out in paragraph 10 of his second witness statement and showed a “profit” over the 3 years of $19.7m on claims of $118.8m (16.66%) and for 1997 alone of $8.1m on claims of $43m (18.96%). That profit would be increased by $1.5m (if the aggregate deductible was taken out) and by some $500K a year for liabilities not involving death or injury. Legal expenses were also not included but rightly so in my judgment. In the course of his oral evidence Mr Martin produced a further schedule based on the latest review of the statistics for the years 1997-2000. In general terms this schedule showed that: i) For the more developed years, 1997-1999, the numbers of death and PTD claims were approximately the same as the number of TTD claims. Mr Martin said the probability was that as the year 2000 developed so the result would be similar as some TTDs translated to PTDs. He also said that in 1998 Steamship would have predicted that rather than an equal split there would be 3 or 4 times as many TTDs as death and PTD claims. He pointed out (rightly) that the “qualifying period” (see paragraph 53) for a TTD in the years 1995 and 1996 was 152 weeks and only reduced to 104 weeks in 1997 and thus at renewal in 1998 it would not have expired for any of the years. Although Mr Johnston said he was not surprised at the ratio shown by the schedule, I accept Mr Martin’s evidence. He was the “claims man” and both Mr Martin and Mr Johnston said that equal numbers of PTDs and TTDs was not what they foresaw in 1998 and that the historic information then available would not have revealed otherwise. ii) The average net of deductible estimate of Steamship’s exposure for death and PTD claims was of the same order as the average recovery under the Master Lineslip, and the average for TTD claims on Steamship was to a significant extent greater than the average recovery under the Master Lineslip. This comparison, however, was comparing all the incoming claims to Steamship regardless of whether they were ones which gave rise to a liability under the Master Lineslip. Mr Kendrick and Mr Kerr had done some homework on those Falcon PTD claims at April 1998 where it was possible from the disclosed documents to identify the sums reserved by Steamship for the Club’s exposure to Falcon. Of the 4 claims concerned the average figure reserved by Steamship was some $148K. The PTD benefit was $400K. Mr Martin, I think understandably, described this as a small sample which he doubted was representative. The next 7 PTD claims (appearing in the August 1998 bordereau) researched by counsel had an average reserve of some $200K. In his closing submissions, Mr Kendrick (in the context of the application of Section 3 of the 1774 Act), and considering the value of inwards claims which were or came to be claimed on Syndicate 957 as PTDs but capping the claims at a figure of $400,000 (to reflect Sun Life’s case that the Excess Reinsurance should also be accounted for) produced a schedule showing the average value of the inwards “PTD” claims on Steamship to have been of the order of $275,000 in 1997 and $270,000 in 1998 and 1999. Granted the $400,000 cap the ‘actual’ figures would have been higher and I think on the figures probably significantly so. Finally, at least as regards the trial, in the course of his Closing Submissions, in reply to Mr Kendrick, Mr Boswood produced a further schedule of figures albeit one requested earlier by Mr Kendrick. This schedule sought to identify and derive a value for inwards claims which were PTDs in the years 1995/6 and 1996/7. The debate to which it gave rise demonstrates the difficulty of the exercise. That is because once the Syndicate’s cover was known to have burnt through Steamship did not categorise claims as TTD or PTD (because there was no need for it to do so) and so only claims presented and paid as PTDs before then were readily identifiable as such. The schedule showed an average value of the claims Steamship identified as PTDs (based on the high reserve) for the two years of $472,000. It also showed that in each year the average estimated value of all inwards claims on Steamship exceeded by a substantial margin the average estimated recovery from Syndicate 957. But, as Mr Kendrick submitted, these latter figures ignored the aggregate deductible, recoveries under the excess of loss reinsurance for the 1996/7 year, and included inwards claims which had not been claimed on Syndicate 957 because the cover had burnt through. Because of the limit on the cover and the fact that there was no excess of loss cover until 1996 there is no doubt on the figures that Steamship suffered an overall loss in the years 1995/6 and 1996/7. Mr Kendrick also criticised the selection of those claims identified as PTDs and in particular the omission of inwards claims which would have been of a low value but nonetheless claimed as PTDs had the cover not burnt through. All these criticisms I think have some validity. In fact the claims identified by Steamship as PTDs in 1995/6 only numbered 16 and in 1996/7 only 11 and the recent figures would strongly suggest that had the cover not burnt through many more claims would have been so classified. The figures do however support Steamship’s case that it was only later on expiry of the TTD “qualifying period” that the number of PTDs became apparent. As I have said, the figures and the evidence and submissions about them leave considerable uncertainties but I will summarise the conclusions which I have drawn about them as a matter of probability:- i) Insofar as it is suggested that at any material time Steamship deliberately set out to make or appreciated it was making “a profit” I am entirely satisfied the suggestion would be wrong. Steamship saw the covers as providing a worthwhile contribution towards its overall exposures to members and did not expect to profit or to be “over-compensated”, rather the opposite. ii) There is no evidence to suggest that the TTD figure of $1000 a week was greater than the cost of the same claims by members. The probability is that it was less. iii) The only basis on which the figures now show that Steamship has made a profit or been over-compensated is the inclusion of the recoveries from the excess of loss and Reliance top-up covers. iv) The death benefit figure has generally been ignored in evidence, possibly because there were only about 5 death claims in each year. v) The numbers of PTD claims which have arisen was unexpected and unforeseen by Steamship in 1998 when the relevant covers were agreed and for some time thereafter. It is the numbers of PTD claims (and the existence of the excess of loss and top-up reinsurances which covered them) which has led to any over-compensation. vi) Both Steamship and Syndicate 957 honestly believed when the relevant covers were agreed in 1998 that the level of benefits had been set so as to eliminate any possibility of over-compensation for Steamship. Neither had any information to suggest the contrary and each could justify its belief on the information available and the history of reducing levels of benefit. In the case of Steamship that is so even with the knowledge of the excess of loss and Reliance top-up insurance it acquired. As stated I accept Syndicate 957 was unaware of those contracts. vii) Even allowing for recoveries under the excess of loss and top-up contracts the estimated level of “over-recovery” in 1997 and 1998 and 1999 whilst substantial (paragraph 139) cannot, I think, be characterised as of a size such as to change the character of the transaction from insurance to gaming or a wager. Moreover there is probably some unknown balancing factor resulting from under-recovery on TTD claims. THE EXPERTS UNDERWRITING Mr Berry said that in all his experience he had never before come across a situation where what he described as a “reinsured’s liabilities” were dealt with by a policy of insurance rather than reinsurance. Mr Hunt agreed. Mr Berry also said that whilst it is not unusual to write a three-year contract with fixed rates at the outset and no ability to adjust them he would describe doing so as “bad or foolish underwriting”, but provided reinsurers were informed (as Mr Cackett plainly was informed) that there was no scope to adjust rates annually they would have no cause for complaint. On Materiality Mr Berry’s evidence was that “ordinarily” he would say that representations that an estimate had been undertaken of Steamship’s realistic likely exposure to its members and that the fixed benefits were realistic estimates of that exposure would not be material to a prudent underwriter when deciding whether and on what terms to write the four reinsurance contracts which Mr Cackett wrote. That was because the reinsurer’s risk is based upon the benefit levels which are agreed and not the actual claims incurred by Steamship. But, he said, in this case, because it was intended that on balance over the year Steamship’s exposure would approximate to its recoveries from Syndicate 957 and that was fundamental to the Master Lineslip such representations would be material to the prudent underwriter. Mr Berry’s reason for this opinion was two-fold. First that because the Master Lineslip was not providing indemnity cover it could lead to circumstances where Steamship was being guaranteed a healthy profit lowering Steamship’s own underwriting standards, which “would normally discourage a reinsurer from providing protection”, and second because the legality of the Master Lineslip depended upon recoveries approximating to exposures. It was also Mr Berry’s opinion that a representation that a professional appraisal had been made of the benefit levels would be material to a prudent reinsurer of Syndicate 957. That, also, was because “the Syndicate’s tracking of fixed benefits goes to the moral hazard aspect of the risk in that if Steamship were to make a gross profit from the concept then it may lead to Steamship accepting business without proper underwriting considerations”. Mr Hunt did not consider that representations about the benefit levels being realistic estimates of Steamship’s exposure to members would be material to the reinsurance contracts written by Centaur and Mr Cackett. His reason was the same as Mr Berry’s reason for his opinion that this would “ordinarily” be so: what Steamship paid members did not affect the amount Syndicate 957 was to pay Steamship and it was only the Syndicate’s exposure to those amounts which Mr Cackett was being asked to reinsure. Mr Hunt added that as to the excess reinsurance layer written by Mr Cackett $90,000 excess $10,000 would in any event be exposed by every death and PTD to a total loss and as the exposure of the burning cost covers depended on further premium becoming payable by the Syndicate to other excess of loss reinsurers they were also unaffected by the amounts paid by Steamship to members. The key was the number of claims not the level of benefits. Centaur and Mr Cackett could set their own terms for any cover they were prepared to offer focusing on the loss experience in the reinsurance statistics. That was where their profit was to be found, if it was. Mr Hunt thought that any risk of Steamship dropping its underwriting standards was dependent upon Steamship being aware that it was sure to profit from the business and in any event impacted the relationship of Steamship and Syndicate 957 not the position of the Syndicate’s reinsurers. But he agreed that at the time of renewal a comparison or monitoring of the benefits paid against the exposures of Steamship should have been undertaken by a prudent underwriter of the Syndicate in order to make an overall comparison between the total amount of the benefits provided and Steamship’s total exposures. The target of the comparison would be the lawfulness of the cover and so to check as well as could be done that the overall balance was within acceptable limits and the benefit levels need not be adjusted on renewal. Mr Berry’s opinion was that monitoring should be done, certainly on renewal, and by reference separately to the three categories of benefit, death, PTD and TTD. Ms CAMP’s EXPERT REPORT Ms Camp is an experienced actuary. It was her opinion that if, in 1998, she had been in the position of Syndicate 957 and wanting to ensure that the benefits would in the aggregate equate with Steamship’s underlying exposures she would normally have required details of Steamship’s loss experience in paying equivalent liability claims for ideally 10 but at least 5 years. She would use industry and rig owners loss history if that information was not available. Her conclusion was that as the data she would have required was not available to her she could not provide an estimate of the “appropriate levels for the fixed benefits” and so could not confirm by any actuarial technique whether the levels in fact were realistic estimates. MR SMART’s EXPERT OPINION Mr Smart described a number of types of personal accident policies which pay fixed benefits upon the death or disablement of the insured. Key man (or key men) insurance has been marketed for over 20 years. The fixed payment will not usually be dependent upon demonstration of any particular loss or damage. So, too, with sports and entertainment insurance such as a football club insuring a star player for a fixed payment to be made to the club in the event of injury. Mr Smart said that the fixing of the benefit levels in such policies was “necessarily an inexact science” because the value of the insured’s interest in the key man or star player cannot be established with precision nor is it likely to remain the same throughout the term of a policy. Multiples of salary or revenue generated are typically used. Mr Smart agreed that in the cases he was describing the insured and the key man or star would (at least usually) be in a pre-existing contractual relationship albeit, for example, in the case of a “group” policy an employer might insure all his employees from time to time. THE 1774 ACT ISSUES The 1774 Act is entitled:
“An Act for regulating Insurances upon Lives, and for prohibiting all such Insurances except in cases where the Persons insuring shall have an Interest in the Life or Death of the Persons insured.”
The Preamble states:
“Whereas it hath been found by experience that the making insurances on lives or other events wherein the assured shall have no interest hath introduced a mischievous kind of gaming.”
Section 1 provides:
“From and after the passing of this Act no insurance shall be made by any person or persons, bodies politick or corporate, on the life or lives of any person or persons, or on any other events whatsoever, wherein the person or persons for whose use, benefit, or on whose account such policy or policies shall be made, shall have no interest, or by way of gaming or wagering; and that every assurance made contrary to the true intent and meaning hereof shall be null and void to all intents and purposes whatsoever.”
Section 3 provides:
“And … in all cases where the insured hath interest in such life or lives, event or events, no greater sum shall be recovered or received from the insurer or insurers than the amount of value of the interest of the assured in such life or lives, or other event or events.”
THE SUBMISSIONS It is important to state at the outset that Sun Life and Phoenix do not make any case that the Master Lineslip was “gaming or wagering”. Nor do they make any case that the Master Lineslip was not “a genuine commercial relationship”. The case on Section 1 (as pleaded and advanced in submissions) is that: i) As liability insurers Steamship’s only insurable interest was the risk of liability of a Member to third parties. The type of interest and the type of policy must coincide. ii) When the Master Lineslip was agreed Steamship “stood in no legal or equitable relation to the lives” of the third parties (“Original Persons”) concerned who included anyone who might come on board an Entered Vessel during the policy period. iii) At most Steamship had “an expectancy” that claims made against Members by Original Persons as a result of injuries arising in the course of the policy period could lead to liability on Steamship under the Club’s Rules. “Such an expectancy is not an insurable interest at all still less an insurable interest sufficient for an insurance on the lives themselves.” The case on Section 3 is that assuming (as must be assumed if the Section is to apply at all) Steamship did have an insurable interest at inception then the true value of that interest must be judged at that time and assessed by an honest estimate on reasonable grounds of its true monetary value. That, it is submitted, did not occur and using the knowledge then available and comparing only Steamship’s exposure on those claims in fact claimed on Syndicate 957 an average figure for death, PTD and TTD should now be assessed and any greater amount paid should be re-paid or any such amount claimed should not be paid. Steamship’s submission is that once it is accepted that the Master Lineslip was neither gaming nor wagering but a genuine commercial arrangement then Section 1 of the Act has no part to play. A contingent interest in the lives and well being of Original Persons arising from the liability to indemnify members for their death or injury is a sufficient insurable interest. If that requires a robust purposive approach to the Act then it is submitted there is good reason and authority to justify it. The submission on Section 3 is that provided the relevant interest is valued in good faith at the inception of the cover then that is sufficient to satisfy the Section. Both approaches, I think, derive support from authority. THE PURPOSE OF THE ACT Despite the wording of the preamble it is not at all clear from the reference works to which my attention has been drawn what was the nature of the “mischievous kind of gaming” at which the Act was aimed nor why it needed to do so; nor, indeed, is it clear to me what purpose the Act serves today insofar at least as it extends beyond “gaming” which, as a matter of language, Section 1 purports to do by the use of the words “no interest or by way of gaming or wagering”. At common law wagering contracts were not illegal; nor were contracts expressly agreed to be “interest or no interest”. Indeed that language may explain the use of the words “no interest” in the Act. The Marine Insurance Act 1746 prohibited wagering policies on risks connected with British shipping. The preamble to that Act shows that the major purpose was prevention of the fraudulent loss or destruction of ships and their cargoes. Park’s treatise on “A System on the Law of Marine Insurances” 7 th Ed 1812 suggests that the target was to outlaw the insuring of “ideal” risks (used in contrast to an indemnity against loss from “real” risks) meaning risks with “no reference whatever to actual trade or commerce”. The target of the 1774 Act, according to Park, was the insurance of lives with which the assured had no connection as a “mode of gambling” possibly because it was undermining the security of insurance companies. No doubt, as Mr Boswood submitted, in the early 19 th century the law of disclosure had not been developed to provide the protection to insurers which it does today. What, however, I think is undoubted is that the purpose of the legislation was indeed to prevent “gaming” in the disguise of insurance and in the sense of gambling on the outcome of an uncertain event in which the “assured” had no interest save for the interest created by the very gamble or agreement itself: see Tindal C.J. in Paterson v Powell (1832) 9 Bing 329 at 327. In that context a purpose can also be divined for section 3. Section 1 outlaws insurance in which there is no interest at all. Section 3 bites where there is an interest but prevents recovery of more than the value of the interest. Otherwise it would be possible to insure a genuine interest in an amount many times the value of any loss which could possibly be occasioned which would in principle be no different from gaming on the excess: see Dalby (below). THE AUTHORITIES The authorities on which Mr Boswood principally relied were the following. In Dalby v The India and London Life Assurance Company [1854] 15 CB 364, a decision of the Court of Exchequer Chamber, an insurance company (Anchor) had taken out a policy of insurance with the defendant company on the life of the Duke of Cambridge in the sum of £1000 for which it had agreed to pay and did pay a yearly premium during the life of the Duke. Anchor had itself granted policies of insurance to a Reverend Wright on the Duke’s life in a total amount of £3000. Anchor’s policy with the Defendant was “a cross or counter-assurance” or, in today’s terms, a reinsurance. The significance of the decision derives from the fact that before the Duke died Anchor agreed with the Reverend Wright to the surrender and cancellation of his policies in return for an annuity. The issue was whether or not it sufficed that Anchor had an interest in the Duke’s life when the policy with the Defendant was effected or whether such an interest had to subsist at the time of the Duke’s death. No one seems to have bothered with questions whether or not the Reverend Wright had an interest in the Duke’s life. The court decided unanimously that it was sufficient for the interest to exist at the time the insurance was effected and that its value at that time was recoverable under Section 3. The obligation at that time to pay the Reverend Wright was “unquestionably an interest in the continuance of the life of the Duke” under Section 3. Parke B, delivering the judgment of the court, said at page 389:
“Now, what is the meaning of this provision? On the part of the plaintiff, it is said it means only, that, in all cases in which the party insuring has an interest when he effects the policy, his right to recover and receive is to be limited to that amount; otherwise, under colour of a small interest, a wagering policy might be made to a large amount, - as it might if the first clause stood alone. The right to recover, therefore, is limited to the amount of the interest at the time of effecting the policy. Upon that value, the assured must have the amount of premium calculated: if he states it truly, no difficulty can occur: he pays in the annuity for life the fair value of the sum payable at death. If he misrepresents, by over-rating the value of the interest, it is his own fault, in paying more in the way of annuity than he ought; and he can recover only the true value of the interest in respect of which he effected the policy: but that value he can recover. Thus, the liability of the insurer becomes constant and uniform, to pay an unvarying sum on the death of the cestui que vie, in consideration of an unvarying and uniform premium paid by the assured. The bargain is fixed as to the amount on both sides. This construction is effected by reading the word “hath” as referring to the time of effecting the policy. By the 1 st section, the assured is prohibited from effecting an insurance on a life or on an event wherein he “shall have” no interest, - that is, at the time of assuring: and then the 3 rd section requires that he shall recover only the interest that he “hath”
. If he has an interest when the policy is made, he is not wagering or gaming, and the prohibition of the statute does not apply to his case. Had the 3 rd section provided that no more than the amount or value of the interest should be insured, a question might have been raised, whether, if the insurance had been for a larger amount, the whole would not have been void: but the prohibition to recover or receive more than that amount, obviates any difficulty on that head.” In Stock v Inglis [1884] 12 QBD 564 the Court of Appeal held that buyers of sugar to whom the risk of loss of the sugar but not the property in it had passed had an insurable interest. Brett M.R., at page 571, began his judgment as follows:
“Nobody can deny that this is a case of extreme difficulty and of great nicety. In my opinion it is the duty of a Court always to lean in favour of an insurable interest, if possible, for it seems to me that after underwriters have received the premium, the objection that there was no insurable interest is often, as nearly as possible, a technical objection, and one which has no real merit, certainly not as between the assured and the insurer. Of course we must not assume facts which do not exist, nor stretch the law beyond its proper limits, but we ought, I think, to consider the question with a mind, if the facts and the law will allow it, to find in favour of an insurable interest.”
In Mark Rowlands v Berni Inns [1986] 1QB 211, the issue was whether a basement tenant had an interest in the landlord’s fire insurance policy and an insurable interest in the premises which were destroyed by fire. The Court of Appeal decided that “this ancient statute” and in particular Section 2 of the 1774 Act (which makes it unlawful not to name, as the tenant was not named, “the person interested” in a policy to which the Act applies) had no application to indemnity insurance but only to insurances which provide for the payment of a specified sum upon the happening of an insured event. The court also adopted and applied (Kerr LJ at page 228) “the classic definition of insurable interest” given by Lawrence J in Lucena v Craufurd (1806) 2 B&P 269 at 303:
“A man is interested in a thing to whom advantage may arise or prejudice happen from the circumstance which may attend it; … and whom it importeth, that its condition as to safety or other quality should continue: … to be interested in the preservation of a thing, is to be circumstanced with respect to it as to have benefit from its existence, prejudice from its destruction.”
The authority is, I think, fairly described as an example of a robust approach to the 1774 Act in order to achieve a plainly just result. A similar question in relation to Section 2 of the Act arose in Siu Yin Kwan v Eastern Insurance Co [1994] 2 AC 199 (PC) with the same result, the Privy Council expressly following the decision in Mark Rowlands in holding that the Act did not apply to indemnity insurance. The claim arose out of the death of two seamen on their employers’ vessel but the employers were not named in the relevant policy. At page 211F Lord Lloyd said:
“There are two reasons why their Lordships prefer the decision in Mark Rowlands …. In the first place the words “event or events” in section 2, while apt to describe the loss of the vessel are hardly apt to describe … liability arising under the common law, as a consequence of the loss of the vessel. Secondly, section 2 must take colour from the short title and preamble to Section 1. By no stretch of the imagination could indemnity insurance be described as a “mischievous kind of gaming”
. Their Lordships are entitled to give section 2 a meaning which corresponds with the obvious legislative intent.” In The Moonacre [1992] 2 Lloyd’s Rep. 501 Mr A. D. Colman QC (as he then was) had to consider circumstances in which the plaintiff, S, had bought a vessel, insured it in his name, but registered it in the name of company, R. The boat was destroyed by a fire. The insurers argued that S had no insurable interest in the vessel, albeit by agreement with R he was entitled to exclusive use and control of the vessel. It was this agreement which enabled the Judge to distinguish the case of Macaura (see below) because (see page 512) S had an insurable interest in the vessel as he would benefit from its preservation and suffer loss of a valuable benefit if it were lost or destroyed. At page 510 the Judge also expressed the view that there was no third category of contracts of insurance which were not wagering contracts but were unenforceable for want of an insurable interest. That view was however in the context of, albeit not limited to, the Marine Insurance Act 1906 which is in different terms to the 1774 Act. Indeed and perhaps to add to the illogicalities and want of principle in this area of the law, the 1906 Act expressly provides that an interest at the time of loss is necessary but not at the time the insurance is effected (section 6) and so contrasts with the decision in Dalby where that Act applies. It is well established by authority (see MacGillivray on Insurance Law , 9 th Edition, paragraphs 1-83 and 1-88) that a creditor or surety has an insurable interest in the life of the debtor to the extent of the debt, and a debtor has an insurable interest in the life of his creditor provided the latter has made a binding promise not to enforce the debt during his lifetime. That is an example where the type of interest and type of policy do not “coincide”. So, too, is keyman insurance. Credit risk insurance or loss of profits cover would be more coincident. In Clarke “The Law of Insurance Contracts ” 3 rd Ed (1997) at paragraph 3-6D in discussing the value of an insurable interest, the author expressed the opinion that “the view in the United States” was realistic that if such an interest exists the amount of the policy may exceed its actual value “unless so grossly disproportionate as to change the predominant character of the transaction from insurance to wager”. The authorities on which Mr Kendrick principally placed reliance were the following. There is a considerable body of high authority which determines that for an assured to have an insurable interest in property he must have a legal or equitable relation to it at the time the insurance incepts. One of the leading cases in this context is Macaura v Northern Assurance Company Limited [1925] AC 619. The House of Lords there decided that neither a shareholder nor a simple creditor of a company had any insurable interest in any particular asset of the company because as such he had no legal or equitable interest in it. The question arose in a case where the owner of a timber estate sold it to a company in exchange for shares in the company but the timber was insured against fire in his own name. The timber was destroyed by fire. Although the assured was the sole shareholder in and a substantial creditor of the company it was held that he had no insurable interest in the timber. The 1774 Act was not itself in issue. Clarke notes that Macaura has not been followed in Canada; is not the law in the USA and the law has been changed by Statute in Australia. The only requirement in those jurisdictions is that the assured has “a relation in fact to the subject matter of the insurance giving rise to an economic interest”. By no stretch of the imagination, however, could the unsuccessful plaintiff in Macaura be thought to have been indulging in gaming or wagering. In Deepak Fertilisers v ICI Chemicals [1991] 1Lloyd’s Rep 387 P’s methanol plant had been constructed with the use of know-how and services supplied by D. Following completion the plant exploded. The plaintiff sued D for negligence and breach of contract. The plaintiff had undertaken to indemnify D against loss to the plant and to cause D to be named as co-insured in all insurances effected in respect of the plant. D contended that it had a complete defence to the claim because it was entitled to be insured against it. In that context the question arose whether or not, following completion of the plant, D had an insurable interest in the plant itself. The Court of Appeal held that it did not. The relevant reasoning is to be found at pages 399-400 in the judgment of the court delivered by Stuart-Smith LJ. The Court held that whilst D had an insurable interest in the plant under construction, because it might lose the opportunity to work on it and earn remuneration if it were destroyed, after completion its only interest was in damage or destruction to the plant caused by D’s own breach of contract or duty of care and that could be insured only by liability insurance not insurance on the property or structure itself. So here, Mr Kendrick submits, Steamship had no interest in the lives or well-being of Original Persons but only in the Club’s possible exposure to indemnifying members against the member’s liability to those Persons. An earlier example of the same principle is Anderson v Morice (1875) LR 10 CP 609 (Exch. Ch) and (1876) 1 App, Cas. 713 (HL) in which a purchaser of a cargo was held to have no insurable interest in the cargo itself until the risk had passed to him on completion of loading. The only possible insurable interest was on the profits from sale of the cargo but not on the cargo itself which alone was the subject matter of the relevant insurance: per Blackburn J (Exch. Ch) at page 621. To much the same effect is Glengate v Norwich Union [1996] 1 Lloyd’s Rep 614 in which Auld LJ at page 623 said that “the nature of the insurable interest in each case must depend on the type of cover in issue”. However, both Niell LJ (at page 622) and Auld LJ (at page 624) referred to The Moonacre with approval (albeit more so in the case of Neill LJ than Auld LJ) and both Lords Justices appear to have considered that questions such as the degree of certainty of exposure and commercial considerations were material to the existence or otherwise of an insurable interest in property. Finally the decision in Hebdon v West (1863) 3 B&S 379 was understandably very much at the forefront of Mr Kendrick’s submissions on Section 3 of the 1774 Act. As Mr Boswood submits that the decision cannot stand with Dalby (decided only a few years earlier) it is important to note that Dalby is a decision of a higher court. Hebdon was a decision of the Court of King’s Bench (Wightman, Crompton and Mellor JJ). Both, however, are binding on me. Hebdon claimed against (in effect) an insurance company (“ILA”) under a policy by which he insured in the sum of £2500 the life of X. Hebdon was employed in a bank of which X was the senior and managing partner. In 1855 Hebdon was employed on a seven-year contract at £600 a year. He also owed the bank £4700 on loans it had made to him. X had assured Hebdon that during X’s life Hebdon would not be called upon to repay the loan. Hebdon, with X’s permission, in 1856, insured X’s life with another company (CGLI) for £5000 so as to provide against the loan. 12 months later, the debt having increased to £6000, Hebdon took out the policy with ILA which was the subject of the proceedings. X died in 1861. CGLI paid £5000 which Hebdon paid to the bank. ILA contended that Hebdon had no interest in X’s life within the meaning of the 1774 Act or that his interest was less than the £2500 so that he should recover less pursuant to section 3 of the Act. The court decided that there was no insurable interest at all in X’s assurance that the loan would not be called because there was no consideration for the assurance and it was not therefore a binding agreement such as could be “considered as a pecuniary or indeed any appreciable interest in the life of X”. The court did hold that there was an insurable interest in Hebdon’s salary (for 5 more years at £600 a year) at the time the policy was effected, and so in a sum in excess of the value of the ILA policy, but nonetheless that because the value of that interest had been paid by CGLI Hebdon could recover nothing by virtue of section 3 of the Act. The judgment of the court was delivered by Wightman J. The “question” which arose, as described by Wightman J at page 222, was whether the payment of £5000 by CGLI “is a bar to the plaintiff’s claim by virtue of [Section 3] it being taken as a fact that the £5000 included all the insurable interest that the plaintiff had at the time of making both policies; in fact that the interest of the plaintiff at the time of making the insurance with the defendant was the same as that which he had when he made the insurance with [CGLI] …. …. It was said that … the object of the statute would be defeated, as a small amount of insurable interest might be made the foundation for a great number of insurances, each to the amount of the whole interest of the insured ….” Wightman J referred to the use of the words “insurer or insurers” in section 3 as an indication that recovery could only be made once (rejecting, to my mind, a compelling submission that the use of the plural contemplated several insurers on one policy) and continued:
“Looking to the declared object of the legislature, we are of the opinion that though, upon a life policy, the insurable interest at the time of the making the policy, and not the interest at the time of death, is to be considered, it was intended by the 3 rd section of the Act that the insured should in no case recover or receive from the insurers (whether upon one policy or many) more than the insurable interest which the person making the insurance had at the time he insured the life. If for greater security he thinks fit to insure with many persons and by different contracts of insurance, and to pay the premiums upon each policy, he is at liberty to do so, but he can only recover or receive upon the whole the amount of his insurable interest, and if he has received the whole amount from one insurer he is precluded by the terms of the 3 rd section of the statute from recovering or receiving any more from the others. Any argument arising from the supposed hardship of allowing the insurers in such a case to receive and retain the premiums without being obliged to pay the consideration for which such premiums were paid, would be equally applicable to the case of marine assurances, upon which, however many policies there may be, the underwriters are only liable to the extent of the value insured.”
For my part, I have some difficulty in following this analysis. The judgment proceeds on the basis that there was a sufficient insurable interest under Section 1 at inception. A decision to the contrary, in a case of “double insurance” might be sustainable as “gaming” or otherwise but the consequence was that Section 1 was satisfied. Dalby indeed then requires that Section 3 be applied to the interest valued at inception. That, as held, exceeded the sum of £2500. I cannot then read Section 3 as Wightman J appears to do. Although Hebdon has been long referred to in text books as the leading authority on section 3 of the 1774 Act with genuine deference I do not think it is consistent with Dalby in the reasoning. If I had an option, which I do not, as to which case to follow I would follow the reasoning in Dalby . CONCLUSIONS There are to my mind powerful and compelling arguments to be made and which have been very well made in favour of the opposing submissions. The issue is also one of general importance. This is not the only case in these courts in which it arises. I have, however, reached the conclusion that Mr Boswood’s arguments are to be preferred and that I am not precluded by authority from preferring them. My reasons are: SECTION 1 i) There can be no real dispute that Steamship had as a matter of the usual use of language a real and significant contingent economic interest in the lives and well being of persons on vessels entered by members with it. The extent of that interest (whether or not an over-recovery was made) is reflected in the Club’s paid and estimates of its incurred liabilities to its members arising from injury to those persons. I do not see why the fact that some of those persons are not identifiable at inception of the cover and they may change over the period of cover should affect the substance of the position. ii) In principle, as it seems to me, insurers who quote for and so price and are paid premiums to undertake risks should meet the liabilities agreed to be undertaken unless of course there are matters of law or fact which compel another conclusion. This was indeed a commercial agreement freely entered into by established and experienced professionals. iii) It is obvious in this case that the tension between the need for an insurable interest and Mr Cackett’s target of writing a cover which would be classified as PA for Lloyd’s Audit codes has resulted in a hybrid cover which is on my findings part PA and part liability. It does not readily fit into any category. But in principle I do not see any compelling reason why a liability exposure should only be insured as such. The decisions to the contrary are in the context of property insurance and often relate to insurance against the loss of a benefit and I see no reason to import them into other types of insurance where the existence of a “legal or equitable right” is not a normally appropriate concept and the context is a contingent liability not the loss of a benefit. Further, Steamship’s contingent obligation to indemnify members for the death or disablement of Original Persons can properly be characterised as a legal relationship. Mr Kendrick accepted that no objection could be taken pursuant to the Act to an indemnity reinsurance against liability which paid in pre-arranged amounts. As he put it “a valued policy is still an indemnity policy”. In principle I can see no substantive difference between such a policy and the present contracts. iv) I accept Mr Kendrick’s submission that the Master Lineslip is unusual, if not unique, and to decide that it was unlawful would not involve any serious consequences beyond those to the present parties because hopes that it could be marketed widely proved unfounded as, again ironically, it proved unattractive to insureds. But I can detect no discernible or rational policy or other principle or reason why the law should strike it down as unlawful when it is accepted rightly and inevitably that in no sense did it amount to gaming or wagering, is not suggested to be contrary to any other policy consideration and is not commercially objectionable. SECTION 3 Applying Dalby , I think the question which Section 3 asks is what was “the amount of value of ” Steamship’s interest in the lives and well being of persons on vessels entered by members with it at the time when the insurance contracts incepted. The question is, as the case itself demonstrates, easier to state than to answer. These proceedings have focused attention on several matters of apparent principle in assessing the “value” of the interest. First, what, if any, is the relevance of a deductible or franchises agreed between insured and insurer or a limit on the overall level of recovery, and, second, what if any is the relevance of the insurer acquiring other insurance for or related to the relevant interest? The “interest” exists but if the contract of insurance itself limits the extent to which it can be recovered or other insurance responds when the limit is reached does Section 3 look to the value of the interest before or after the contractual limits are applied or with or without regard to other insurances? The sophistication of modern insurance practices is not readily addressed by application of the language of Section 3, and particularly so when the ‘value’ has to be assessed at inception. The answer to these questions ought not to depend on matters of timing of agreements or payments, which may be affected by the length of the cover and a host of uncertainties. A further irony is that it is Mr Kendrick’s submission that Section 3 has now to be applied in effect to provide an indemnity to Steamship against the liability of members which, as Mr Boswood submitted, was the very thing which Steamship wanted but Mr Cackett and Syndicate 957 were concerned and determined to avoid in order to comply with the Lloyd’s audit codes in their own commercial interests as they saw them. I have found that both Syndicate 957 and Steamship in proposing and agreeing to the relevant benefit levels acted in good faith. Both believed that the insurance provided only for recovery of the value (or less than the value) of the insurable interest which I have held Steamship had and so was entitled to insure. The insurance was of course priced and paid for on the basis of the benefits provided. Syndicate 957 does not complain of any misrepresentation or non-disclosure at the time of placement. In my judgment there is no requirement to be found in Section 3 to enter into any detailed examination of the values of insurable interests with or without the benefit of hindsight. Nor is it required that a court should examine and assess whether a given value was arrived at without negligence or reasonably. The underlying purpose of Section 3 is derived from Section 1: to outlaw recovery of the proceeds of what is properly to be described as gaming or wagering. As I have found and indeed is accepted, and whether or not account be taken of limits and other insurances, no one was gaming or wagering at the time. I would also repeat that even with the benefit of the latest figures and hindsight a case to the contrary cannot in my judgment be justified: paragraph 144(vii). In these circumstances I do not think Section 3 has any application. In my judgment in approaching that Section the court should confine itself to a consideration of whether the insurable interest it finds to exist under Section 1 has in fact been insured in a manner or at a value which can be seen to be such that it either is or is not fairly to be characterised as gaming or wagering at the time of the contract. The basis for any valuation, the care with which it is arrived at, the existence of other insurances, limits and the like may be, and in this case I think are, all potentially material to that question but they are not and in my judgment in this case are not conclusive. I would add that in Hebdon v West it was not the existence of the two policies which resulted in non-recovery, nor was it criticised, but payment of what the court found to be full value under the first policy. Even if I am wrong in my view of Hebdon v West , that is not the case here. THE MISREPRESENTATION ISSUE The first representation alleged is that in 1998 Mr James represented to Mr Cackett that the fixed benefits in the Master Lineslip constituted “a realistic estimate” made by Syndicate 957 “of the average sums likely to be properly paid out by Steamship in respect of death, PTD or TTD” under the Club’s Rules for the 1998 and following years. In support of this allegation reliance is placed on the statements and information in the Renewal Presentation to which I have referred in paragraphs 107 to 114. I shall refer to this as “the realistic estimate” representation. In his closing submissions Mr Kendrick described it as “the bottom line” of the case on misrepresentation and non-disclosure. The second representation alleged is that at Mr James’s presentations in 1998 “the gist” of the presentation was that Steamship’s risk “had been carefully and professionally appraised by Mr Feasey, who had carefully adjusted benefit figures and other terms of the account in the light of past loss experience with the aim of making a gross underwriting profit which he was confident, on reasonable grounds, would be made”. The basis for this alleged representation is the same but in particular the note of the meeting with Mr Littlemore: paragraph 81(iii). I shall refer to this as “the professional appraisal” representation. The allegation that the realistic estimate representation was a misrepresentation is to be found in a “Further Pleading” served pursuant to an Order made by Thomas J in November 2001. Essentially reliance is placed on what is said to be the actual outcome and the substantial “over-recoveries” made by Steamship and the failures to “monitor” inwards claims on Steamship against the benefit levels to see if the one “tracked” the other. The basis of the allegation that the professional appraisal representation was a misrepresentation is that Mr Feasey did not know or ask for the underlying loss statistics of Steamship and did not have any “as if” figures showing the effect of the adjustments to the benefit levels on the profitability of the account and should not have placed the reliance he did on the Falcon figures and Mr Johnston’s letter (paragraphs 77-78 and 89-90). It was also alleged that Syndicate 957 or Monument failed to disclose the existence of the excess of loss contracts taken out by Steamship. But that allegation was (rightly) not pursued once Mr Feasey and Mr Absalom had given evidence that they were not aware of the contracts. Both Mr Berry and Mr Kendrick accept that no criticism could be made of them in that regard. The pleaded allegations of breach of contract were also not pursued at the hearing or in Closing Submissions on behalf of Sun Life and Phoenix and need not be addressed. THE REPRESENTATIONS It is of course for Sun Life and Phoenix to establish the representations on which they rely. There are, I think, serious difficulties facing them in doing so. Both the realistic estimate and professional appraisal representations are expressed in general terms and, as the evidence and submissions unfolded, are not based on any specific words but have to be distilled if possible from the substance of the written information provided and the oral exchanges between Mr James and Mr Cackett at the time of placement. Their lack of real recollection, the potential for misunderstanding arising from their previous roles and the tensions to which I have referred make for an unpromising context in which to find representations of sufficient clarity to justify avoidance of the contracts. As Mr Flaux submitted, in every reinsurance placing there is likely to be an understanding that the relevant reinsured underwriter has acted carefully and professionally in writing the original insurance but that would not normally become a binding representation that there has been no want of care on his part. Normally it is for the reinsurer to exercise his own skills in assessing and pricing the risk and providing he is not misled and proper disclosure is made he can have no complaint if it turns out that he has made a bad bargain. Much of the Sun Life and Phoenix case sought to provide a measure of precision by asserting that the substance of a realistic estimate and a professional appraisal was the need to “monitor” estimates of inwards claims on Steamship so as to compare the estimates with the benefits provided by the Master Lineslip. Yet it is not suggested that Mr Feasey or Mr James ever made an express representation to the effect that the Syndicate had done any monitoring or done so in any particular manner. Nor did Mr Cackett say otherwise (paragraph 113). The development of the realistic estimate and professional appraisal submissions into a complaint of a failure to monitor also depended in large part on the submission that the placing in 1998 had to be seen in the context that Mr Cackett had carried out such a monitoring exercise himself in early 1996 and that the bordereaux were originally designed to enable monitoring to be carried out. But on my findings that simply was not the case. The relevant figures were made available in late 1995 as part of the debate caused by the unexpected timing and size of the first claims. It is true that the figures were used as a lever to obtain a retrospective reduction in the TTD figure but they did not and could not have informed Mr Cackett’s reduction of 50% in the death and PTD benefit figure to $500k for the 1996/7 year in the case of Falcon and Marine Drilling. Mr Cackett was happy with the figures (including a lower TTD figure of $1750) and that they had been professionally established. Mr Cackett did not take any steps either in the wording or at inception or at any time before his departure to set up a system to enable the sort of monitoring now referred to to be carried out (paragraphs 57(v) and 62). Nor is it suggested that he ever inquired about the inwards claims figures again. Indeed on the evidence there are real doubts that any or any adequate PTD figures were available in 1998 had anyone sought to ask about them. It also follows that Mr Kendrick’s submission that there was an implied mis-representation/non-disclosure because Mr Cackett was not told that Mr Feasey and Mr Absalom were no longer engaged in the “proper monitoring” which Mr Cackett had undertaken must fail. The reliance on Mr Littlemore’s note looks to a general statement when the specific comments contained in it, as Mr Cackett acknowledged, were correct. No doubt, as he said, Mr Cackett had been confident an underwriting profit would be made when he wrote the Master Lineslip and when he set the level of some of the benefits for 1996/7. As the note itself records, and Mr Cackett, Mr James and Mr Feasey would all have understood, predictions of profitability would be difficult to make. Trying to stand back from all the evidence and to distill “the essence of the broke” in my judgment it was really, as indeed Mr Kendrick’s submissions suggested, and I think was the thrust of Mr James’s evidence (paragraphs 80 & 111) that Mr Feasey and Syndicate 957 were carrying on and doing as Mr Cackett had done. But, as Mr Flaux submitted, I do not think Mr Cackett had done anything materially different. Both priced on the Syndicate’s claims figures. Both sought to reduce the benefit figures. Indeed Mr Feasey had reduced them substantially below figures Mr Cackett had been content to provide. Mr Feasey was indeed right on the evidence to believe that the TTD figure of $1000 per week provided less than Steamship’s exposure and indeed probably right that the death and PTD figure of $400K provided less or at least not significantly more than Steamship’s exposure to such claims provided the excess of loss and Reliance top-up covers (of which he was not aware) were not accounted for. Nor was there anything to suggest in 1998 that anyone did or should have anticipated that Steamship would make a profit. Whilst I think Mr Flaux sought to give more importance to the top-up cover in this context than justifiable, Mr Cackett was of course aware of it and so at least that Steamship was prepared to pay a very substantial sum for extra protection. In my judgment, therefore, Sun Life and Phoenix have failed to establish the representations on which they rely and the claims on that basis fail at the first hurdle. I propose therefore to address the other issues which arise on these claims only briefly. MISREPRESENTATIONS? If I had found that the misrepresentations relied on had been made it is right to record that I do think some of the criticisms of Mr Feasey’s underwriting are justified. The reliance he appears to have placed on the Falcon figures in 1997 was, I think, more than the figures could justify. So, too, he misunderstood the figures in Mr Johnston’s 25 November 1997 letter. The enlargement of the Falcon cover (paragraphs 103-106) even allowing for the lack of opportunity for Mr Feasey to consider it, is difficult to understand when no figures were requested. On the other hand, I also think that Mr Feasey was entitled to act on the basis of his belief that Steamship was not making an overall profit. In the early months of 1998 no figures would have revealed what is now known to have been the cause of the losses and of any profit namely the numbers of late developing PTDs. Nor, as stated, can Mr Feasey be criticised for not being aware of the excess of loss and Reliance top-up covers which alone account for any significant profit to Steamship. In that context the benefit levels Mr Feasey in fact set are not open to criticism and no amount of “monitoring” would have shown otherwise. MATERIALITY I prefer the views of Mr Berry to those of Mr Hunt only to the extent that I think it would be material to a prudent underwriter that Steamship was not being generally over-compensated by the benefit levels set. Whilst it is true that Steamship’s underwriting standards would or could only be affected if the Club was aware of or anticipated a profit I think Mr Kendrick and Mr Berry are right that a prudent reinsurer would consider it material that his insured was at least satisfying itself that Steamship was not being over-compensated in a manner or to an extent which could lead to a lowering of standards or indeed to the unlawfulness of the business. But I do not think it goes further than that. I also readily accept that in given contexts express representations as to the professionalism or competence of an underwriter could be material. But I do not think they are likely to amount to guarantees that business has been written without negligence and I do think materiality will depend on the context having sufficient specific reference to provide the necessary certainty for the question to be tested. INDUCEMENT Mr Cackett’s evidence is set out in paragraphs 112 to 114. Expressed largely in negative terms as it is I find it hard to characterise. Nor can the issue readily be addressed in the light of my findings on the “essence of the broke”. Mr Flaux submitted that it was “fanciful in the extreme” to suggest that Mr Cackett was induced to write the reinsurances by either the reliable estimate or the professional appraisal representation (if made). That submission was not, I think, well reflected in the cross-examination of Mr Cackett on the issue. Had it been specifically discussed with and represented to Mr Cackett that inwards claims on Steamship were being monitored by Syndicate 957 in some specific way to calculate appropriate benefit levels I would have held that such a representation was material and had Mr Cackett said he would not otherwise have written the business I think such a statement could credibly have been supported. But, although I would not go nearly so far as the language used by Mr Flaux, I am left in real doubt as to whether either alleged representation if made would have acted on Mr Cackett’s mind. He priced the contracts on the Syndicate’s statistics. I think he thought the lawfulness of the Master Lineslip no longer a concern. I am sure he was confident from his own knowledge that the benefit levels (especially as reduced further by Mr Feasey) were not a problem. He had been content with much higher ones. He knew Steamship and he knew Mr Feasey and Mr Absalom. He had created and understood the business. In the final analysis I am also not satisfied as a matter of probability that even if either representation relied upon was made it or they did induce Mr Cackett to write the business. THE AUTHORITY ISSUE I have already recorded (paragraph 130) that: i) The extension of the Sun Life/Phoenix reinsurance of Syndicate 957 for the year 2000 to 2001 was written by Centaur after termination of Centaur’s authority to write business on behalf of Phoenix. ii) the termination of Centaur’s authority from Phoenix was known to both Syndicate 957 and Mr James. iii) the extension was nonetheless in fact written by Centaur on behalf of both Sun Life and Phoenix equally and in any event was not written only on behalf of or 100% for Sun Life. It follows that Centaur/Mr Cackett had neither express nor apparent authority to write the extension on behalf of Phoenix and Phoenix has no liability in respect of the extension. Sun Life, subject to the other issues, accepts that it was on risk for 50% of the extension but no more. It is right to do so. It does not in any way follow that because Centaur and Mr Cackett had no authority to write the extension for Phoenix it and he must have written the extension 100% for Sun Life. On analysis, however, that was the only way in which Mr Flaux could and did put the Syndicate’s case. The fact is that Centaur and Mr Cackett purported to write an extension of the existing contract written by both Phoenix and Sun Life. He did not and did not purport to do so only for or 100% for Sun Life and no one understood that he had. RELIEF I will hear the parties when this judgment is handed down on the details of the relief to which they submit they are entitled and any other applications arising out of what I have decided. Essentially, Steamship is entitled to the Declarations it seeks and Syndicate 957 is entitled to be paid sums due from Sun Life and Phoenix under the reinsurance contracts on a 50% basis, save in respect of the year 2000/1 when Sun Life alone is liable on a 50% basis. Steamship Mutual Underwriting Association (Bermuda) Limited (“Steamship”) is a Protection and Indemnity Club which provides cover to its members in accordance with the Club’s Rules for, amongst other things, the liabilities of members for personal injury or death of persons occurring on or in relation to vessels entered with Steamship.[2]Syndicate 957 entered into various contracts of insurance with Steamship between 1994 and 1998. In particular, in about June 1995, rather than entering into a conventional reinsurance, Steamship and Syndicate 957 entered into a Personal Accident and Illness Master Lineslip Policy. By the Master Lineslip Syndicate 957 agreed to insure Steamship for losses occurring during the period 20 February 1995 to 20 February 1996 in respect of bodily injury and/or illness sustained by a person (“an Original Person”) who was engaged in any capacity on board a vessel or offshore rig entered by a member with Steamship. The Syndicate agreed to pay Steamship fixed benefits in respect of death and permanent and temporary total disability (PTD or TTD) of an Original Person calculated in accordance with a Schedule of Compensation contained in the Master Lineslip.[3]The Master Lineslip was arranged by Monument Insurance Brokers Limited (formerly David Gyngell & Company) (“Monument”) by one of its directors, Philip James, on behalf of Syndicate 957 and by Lloyd Thompson Ltd (Carrie Greenaway) on behalf of Steamship.[4]The Master Lineslip was renewed from time to time and in particular in about May 1998 in respect of losses occurring on declarations attaching during three consecutive periods of 12 months from 20 February 1997 and, later, in respect of losses occurring on declarations attaching during the period 20 February 2000 to 20 February 2001. The fixed benefits were revised from time to time. These renewals and certain reinsurances of Syndicate 957 in respect of them are the subject of the proceedings.[5]Sun Life Assurance Company of Canada (“Sun Life”) is incorporated in Canada. Phoenix Home Life Mutual Insurance Company (“Phoenix”) is incorporated in the United States of America. From October 1996 Centaur Underwriting Management Limited (“Centaur”) wrote a reinsurance account on behalf of both Sun Life and Phoenix. The chief underwriter and President of Centaur was John Cackett. Mr Cackett had been the active underwriter of Syndicate 957 since the mid-1980s and was so at the time the Master Lineslip was placed with the Syndicate in 1995. Mr Cackett left Syndicate 957 in June 1996 to establish Centaur and was succeeded by his deputy, Anthony Feasey. Mr Feasey was himself succeeded by Gareth Absalom in April 1998. Mr Absalom had previously been the Claims Manager at Syndicate 957 and then deputy underwriter to Mr Feasey. Mr Shelton replaced Mr Absalom as Claims Manager.[6]In 1997 Centaur underwrote (on behalf of American Phoenix as fronting reinsurer for Phoenix and Sun Life ) four reinsurance contracts protecting Syndicate 957 in respect of various liabilities under the Master Lineslip for the 1997/1998 year. In about May 1998 Centaur (acting on behalf of Sun Life and Phoenix in equal shares) agreed to renewals of the four contracts of reinsurance. The renewals covered the period from 20 February 1998 to 20 February 2000 and (subject to their terms) also reinsured Syndicate 957 in respect of its liabilities to Steamship under the Master Lineslip. The contracts were extended by endorsement signed by Centaur on 29 October 1998 to cover the period from 20 February 1998 to 20 February 2001. There is an issue as to Centaur’s authority to act for and so to bind Phoenix and Sun Life at the time of this extension. It is these contracts of reinsurance which are also the subject of the proceedings.[7]In about January 2000 Sun Life and Phoenix ceased to pay claims submitted to them by Syndicate 957. The Syndicate issued a Claim Form (No 2000 Folio 1333) on 7 December 2000 seeking to recover unpaid amounts allegedly due under the reinsurances. Syndicate 957 also refused to pay Steamship amounts due under the Master Lineslip from the second quarter of 2000 onwards save under reservation. On 10 August 2001 Steamship issued a claim form (No 2001 Folio 908) against Syndicate 957 seeking declaratory relief that the Master Lineslip was valid. In November 2001 the Court ordered that the Claims should be heard at the same time. THE ISSUES SYNDICATE 957 and SUN LIFE/PHOENIX[8]Sun Life and Phoenix allege that the reinsurance contracts are voidable and have been avoided for various non-disclosures and/or misrepresentations and/or breaches of the duty of utmost good faith by or on behalf of Syndicate 957 and/or because the underlying Master Lineslip agreed between Steamship and Syndicate 957 is in breach of Sections 1 and/or 3 of the Life Assurance Act 1774. Sun Life and Phoenix claim damages and/or repayment of sums paid on the basis of a mistake of fact or law. The principal underlying basis of these allegations is that the fixed benefits payable under the Master Lineslip were represented to be but were not a realistic estimate of the average sums likely to be paid by Steamship to members of the Club in respect of the same deaths and disablements and that Steamship in fact made a substantial “over-recovery” as a result of the levels at which the benefits were set and other reinsurances available to Steamship for the same business. I shall refer to these issues as The Misrepresentation Issue and The 1774 Act Issue. The terms of the representations finally relied upon by Sun Life and Phoenix are stated in paragraphs 190 and 191 of this judgment.[9]Phoenix alleges that to the knowledge of Syndicate 957 Centaur’s authority to underwrite for Phoenix was terminated with effect from 1 October 1998 and so Centaur had no authority to extend the reinsurance contracts for the year February 2000 to 2001. Whilst Syndicate 957 alleges that Centaur had actual or ostensible authority to act for Phoenix in the alternative it alleges and Sun Life disputes that Sun Life is bound as to 100% for that year. I shall refer to this as The Authority Issue. STEAMSHIP and SYNDICATE 957[10]Syndicate 957’s primary case is that the Master Lineslip was not in breach of the 1774 Act but it relies against Steamship on the Sun Life allegations to the contrary should they succeed. In summary the allegations are that Steamship had no insurable interest to protect by the Master Lineslip (Section 1 of the Act) or if it did it should recover no more than what is said to be the true value of that interest (Section 3) so as to preclude a claim for any over-recovery and to require repayment of any over-recovery already paid (The 1774 Act Issues).[11]Quantum issues (including possible disputes as to the existence of a cause of action for any over-payment) are to be addressed later in the light of this judgment. The liability issues nonetheless have required consideration of a great deal of claims information. THE EVIDENCE[12]Sensibly it was agreed between counsel for Steamship and Syndicate 957 that the 1774 Act Issues and the evidence concerning and the calculations of Steamship’s inwards and outwards claims should primarily be addressed in submissions and evidence by Steamship whereas the Misrepresentation and Authority Issues (which do not concern Steamship) would form the major part of Syndicate 957’s submissions and evidence.[13]Mr Feasey, Mr Absalom, Mr Shelton and Mr James gave evidence on behalf of Syndicate 957.[14]Robert Johnston was the head of underwriting at Steamship at all material times. Steamship’s claims partner for the relevant business at the material times was Stephen Martin. Michael McAleer had day to day responsibility at Steamship for handling both inwards claims from members and outwards claims on insurers and reinsurers of Steamship. Mr Martin, Mr McAleer, Mr Johnston and Ms Greenaway gave evidence on behalf of Steamship.[15]Mr Cackett and a Mr Cooper gave evidence on behalf of Sun Life and Phoenix. Mr Cooper is an auditor and a director of Cranmore Adjusters Limited. Prior to that Mr Cooper had been a senior auditor for Peter Blem Adjustors Limited. Mr Cooper was involved in two inspections of Steamship’s claims during the relevant periods. In addition Ms. Susan Benson, formerly a vice president at Sun Life and the person at Sun Life who had the primary responsibility for dealings with Centaur and Mr Cackett, gave evidence for Sun Life and Mr Fred Sawyer, formerly a senior vice president of Phoenix and concerned for Phoenix at the time when Centaur’s underwriting agency agreement with Phoenix was terminated, gave evidence for Phoenix.[16]Expert underwriting evidence was provided by Mr Hunt (for Syndicate 957) and Mr Berry (for Sun Life and Phoenix). Mr Smart (for both Syndicate 957 and Steamship) gave expert evidence on fixed benefit schemes and their commercial purpose. Ms. Camp (for Sun Life and Phoenix) provided an expert actuarial report on the valuation of benefits under insurance policies. In the event neither Syndicate 957 nor Steamship required her to attend for cross-examination and accepted the content of her report albeit on the basis that they submitted it was not material to the issues.[17]There were few direct conflicts of evidence or material conflicts of recollection, but I should express briefly my general views of the witnesses, including the experts. Each witness, I am satisfied, gave evidence truthfully to the best of their recollection.[18]Mr James gave his evidence carefully. His recollection of events was understandably very much dependent on the documents. He began his broking career in 1983. Mr James and Mr Cackett were the moving spirits in the promotion of the Master Lineslip. Mr James’ original role of promoting the business for Syndicate 957 together with Mr Cackett and his subsequent role of placing Syndicate 957’s reinsurance with Mr Cackett and Centaur on behalf of Sun Life and Phoenix had an obvious potential for misunderstanding. Mr Feasey was an experienced underwriter but all that experience had been as a deputy until he succeeded Mr Cackett. He first joined Syndicate 957 as deputy to Mr Cackett in 1985. Mr Absalom joined Syndicate 957 in 1984. His experience was mainly in claims adjustment and he was claims manager at the time when the first claims by Steamship were made on the Syndicate. Both Mr Feasey and Mr Absalom gave their evidence in a straightforward manner. Mr Shelton has worked in claims adjustment since 1983. He joined the managing agents of Syndicate 957 in 1994.[19]Mr Martin was an obviously intelligent and impressive witness. He first joined Steamship in 1982 and became a claims partner in 1987. Mr Johnston has worked with Steamship since leaving university in 1975. He was appointed head of underwriting in 1987. He, too, was an intelligent and impressive witness. Mr McAleer joined Steamship as a claims adjuster in 1993. He was also an impressive witness and one who obviously was good at his job. Ms Greenaway has worked in insurance since 1986. She joined Lloyd Thompson in 1992. Whilst understandably her recollection of events was also often dependent on the documents she was a straightforward and patently truthful witness.[20]Mr Sawyer and Ms Benson were both very experienced underwriters. Mr Cackett’s evidence was affected by a lack of recollection and a risk of reconstruction which, albeit understandable, caused a lack of clarity and certainty in some significant respects. Like Mr James, the change in his role from insurer to reinsurer when he left Syndicate 957 and established Centaur carried with it an obvious potential for misunderstanding.[21]Although Mr Cooper was the subject of direct criticism from counsel for Steamship arising from opinions he had expressed in some areas about Steamship’s motivation he was (rightly) prepared to withdraw those opinions and I do not doubt that the evidence he gave was both competently and professionally given.[22]The experts were each well qualified and knowledgeable and gave evidence in full compliance with their duty to the court. THE FACTS[23]The issues and submissions are both complex and, to my mind, difficult to resolve. I propose to set out the material evidence and documents so that the issues can be addressed in the context of the background and facts as I find them to be. It is the contracts for the years 1998 onwards which are the subject of the proceedings but it is also necessary to examine the events of earlier years which gave rise to the concept of a Personal Accident (PA) cover and led to the original Master Lineslip. THE 1994 REINSURANCE[24]In 1994 Syndicate 957 had reinsured Steamship (and other Clubs) on a bodily injury “carve out” and mixed indemnity and fixed benefit basis. That is to say, the Syndicate reinsured that part of Steamship’s exposure to its members which concerned the members’ liabilities for personal injury or death of persons occurring on or in relation to vessels entered with Steamship with fixed levels of compensation, with a maximum limit of $1m per person, payable once Steamship’s liability to members exceeded given threshold amounts. In 1994 Steamship did not write an oil rig account. LLOYD’S AUDIT CODES and THE PA CONCEPT[25]Whilst there is some doubt as to the details of the development of the concept of the PA cover, the context which gave rise to it is indisputable. In September 1994, Lloyd’s announced changes to its Risk Codes for the 1995 year of account. The effect of these changes was that the carve out from liability policies, for the purposes of reinsurance, of the bodily injury and illness related elements in the liability policies could not be classified for audit purposes as personal accident insurance. From January 1995 accident and health policies could only be so classified if payments were on a fixed benefit basis, the amount payable was dependent only upon the degree of injury or illness sustained, and the amount could be assessed within a reasonable time and was not subject to a court award or negotiated by way of settlement. Liability dependent cover was treated as long-tail business for reserving purposes. PA cover was treated as short-tail and so did not require provision of substantial reserves to be held for long periods. NEGOTIATION OF THE FIRST (1995) MASTER LINESLIP[26]Mr Cackett wanted to preserve the substantial 1994 premium income received by the Syndicate from Steamship if he properly could but also to maintain the PA classification. Together with Mr James he sought to develop the PA concept which, Mr Cackett agreed, was his creation. The basic idea was to provide a fixed level of benefit payable on proof of the fact of death, PTD or TTD of an Original Person with medical expenses payable in addition. As will be seen, it came to be appreciated by all those involved that the level of benefits could not and would not track the amount of the actual liability of the member of Steamship or Steamship in respect of that death, PTD or TTD. Also, and inevitably, benefits payable under a PA cover would be paid before and often long before the liability crystallised and was paid by Steamship. PA cover was indeed short-tail and liability cover long-tail. But the Audit Codes were no concern of Steamship. Indeed Mr Johnston knew nothing about the changes to them or their consequences at the time.[27]A “conceptual proposal” codenamed “Nelson” was submitted to Steamship by Lloyd Thompson in January 1995. It proposed that Steamship might enter the oil rig market providing cover to operators on a fixed premium basis and should be protected by “a product” reflecting Mr Cackett’s PA concept protecting Steamship’s whole account.[28]The proposed wording for the cover was debated between Lloyd Thompson, Mr James and Mr Cackett. The solicitors, Ince & Co, were also involved. It is apparent that the tension between Steamship’s desire to match the benefits to the Club’s liabilities, the difficulties of doing so and staying on the right side of the Audit Codes and the need for an insurable interest were appreciated and addressed. Ironically, in view of Sun Life’s allegations of “over-payment”, if the concept was to be sold to Steamship, Steamship’s reluctance to depart from conventional reinsurance had to be overcome. But it was this tension which colours many of the subsequent material events. Indeed it is the case of Sun Life and Phoenix that in law it could not successfully be resolved.[29]Ince & Co wrote a letter of advice addressed to Mr Cackett at Syndicate 957 dated 27 February 1995. The letter described a number of “hurdles” in relation to the PA concept, including the need for Steamship to have an insurable interest capable of being the subject of the cover. The letter did not refer in terms to the 1774 Act but it did express the view “on balance” that Steamship had sufficient interest in the injury, sickness or death of a crew member of a vessel entered with it “to enable it to effect a personal accident insurance in effect protecting its potential liabilities”. The letter also suggested “given the unusual nature of this cover and its significance to the Syndicate” and “the consequences should the Syndicate’s Reinsurers contest the existence of an insurable interest” that the opinion of suitable commercial Counsel should be sought. That suggestion was not taken up.[30]Mr James informed Ms Greenaway on 3 March that the lawyers had given the “green light”. In sending Mr Cackett revised drafts of the wording on 7 March, Ince & Co mentioned a few references to Steamship’s “liability” in respect of claims which had appeared in earlier drafts adding “obviously we have spent some effort trying to get away from any impression that this is an indemnity or reinsurance cover and it seemed to us that it might be better if possible to avoid words like liability. Instead we have used obligation.” For the same reason Ince & Co did not care for the “adjustment” provisions in the draft which provided for Steamship to make repayments where it transpired that the fixed benefits exceeded the Club’s liability to a member. The target of this advice was clearly the Audit Codes not insurable interest.[31]On 10 March 1995 both Lloyd Thompson and Steamship (Mr Martin) commented on a draft wording proposed by Ince & Co. These comments, (which were sent or passed on to Mr Cackett) demonstrate the tension to which I have referred. They include: i) “Steamship …remain a potential interested buyer …. However, whilst accepting that the PA form has to be subject to its own terms and conditions, it must track the majority of their personal injury type exposures. The less it does so, the less tempting it becomes ….” ii) “[Steamship] would much prefer to have the benefits track their outgoings as they are paid and incurred and we (Lloyd Thompson) are continuing the task of explaining and educating them to the fact this may not be possible. They made it quite clear yesterday that they do not wish to profit from their misfortune in any respect ….” iii) The “adjustment feature is most helpful, particularly given Steamship’s intention that they only want to draw down on the policy in a fair and equitable manner”. iv) “We (Steamship) are happy with a proviso that the Club should first have paid its member;” “Why is it necessary that the Club affirms … that it has an obligation to the Member for a claim? So far as we are concerned, there is no question of the Club making any claim otherwise;” “In many cases of death, the Club would not expect to pay anything approaching $1m. Our objective is to recover what the Club has paid up to the maximum benefit set down in the Schedule.”[32]Mr Cackett’s reaction to these comments was that Steamship had not understood the PA concept of a “stand alone” product. A meeting was held on 22 March. By that time the death and PTD benefit of $1m, and a weekly TTD benefit of $4000 had both been the subject of an indication (dated 22 February) from Mr Cackett. It is recorded that at the meeting Mr Martin expressed dislike of the $4000 figure and Mr Cackett explained how a TTD loss could turn into a PTD loss and that “establishment of insurable interest was paramount.” Ince & Co were to review the “adjustment feature”.[33]Ince & Co did review the exchanges between the parties and wrote to Mr Cackett about them on 22 March. Their comments included the following: i) “It is presumably not controversial for Lloyd Thompson to say that the Club’s intention is that the wording should track as closely as possible the Club’s exposure. Whether you can fully share that intention may be another question.” ii) “In general terms the Club’s wish to recover no more than their own exposure is understandable but it is not, I think, achievable within a PA policy. So long as the Club sometimes win and sometimes loses there should not be a problem provided things even out over time. If the Club think they will always (or nearly always) win, maybe the amount of the benefits should be adjusted to protect Underwriters!” iii) The adjustment clause, whilst popular with the Club, was the part of the wording which “still troubles us the most because it is already sailing closer to the wind on reinsurance/indemnity”.[34]On 11 April 1995 Lloyd Thompson (Ms Greenaway) sent Mr Johnston a quotation for the PA cover. Ms Greenaway said she had received details from Falcon Drilling Inc (a candidate for the oil rig accounts at Steamship) of incidents to date which would be submitted to underwriters for disclosure purposes. She also wrote:
“You are aware that the policy is a Personal Accident form, providing for the payment of clearly designed fixed benefits, the payment of which are related to the type of injury or illness sustained by a crew member and with a specific time period during which a claim can be presented to the policy. In other words, this policy is not a liability reinsurance …. The indemnity and compensation benefits are not linked to the establishment of liability imposed by a court but triggered by the injury sustained by any person that falls within the ambit of the “Original Person” clause. We provide you with a copy of the wording that has been developed …. It is intended to respond within the ambit of its own terms and conditions and (we) ask you in particular to note the following: a) The definitions of bodily injury and illness …. b) The exclusions …. c) Lapse of benefits …. d) No legal expenses cover.”
[35]LEGAL EXPENSES. There is a dispute (which affects the extent of any over-recovery by Steamship) as to the effect of the undoubted fact that, in contrast to medical expenses, the wording which came finally to be agreed did not, as Ms Greenaway’s letter stated, provide for legal expenses cover. Mr Martin said, however, that it was his understanding that whilst Steamship would be paid nothing additional to the fixed benefits for legal costs and would have to absorb those costs it was to be compensated for them from the amounts of the fixed benefits payable. I accept Mr Martin’s evidence about this. Mr Feasey said Syndicate 957’s expectation was the same: the benefits themselves were to cover the sums that Steamship were ultimately going to pay out in relation to personal accident claims and this included legal costs. Mr Cackett differed, but I did not find his evidence on this either clear or convincing. It was not a question of providing extra cover for legal expenses, plainly that was not the case. It was a case of setting the benefit levels so as to contribute to Steamship’s exposures including legal costs.[36]THE ORIGINAL BENEFIT FIGURES. The draft wording provided with the 11 April letter included a Schedule of Compensation with the figures in it which were subsequently also included in the agreed wording and in particular, for what may loosely be called North American claims, the figures for death and PTD of $1m and for TTD the weekly figure of $4000 (for a maximum of 152 weeks in all) which had been the subject of Mr Cackett’s earlier indication.[37]The origin of these figures is both of some importance and some uncertainty. Steamship’s evidence is that the figures were put forward by Syndicate 957 as what was in effect on offer for the premium quoted. The $1m figure probably reflected the maximum limit in the 1994 cover. Overall on the evidence (and despite some documents suggesting the contrary) I am quite satisfied that both figures originated with Mr Cackett. Steamship had no historic information for assessing a PTD or TTD figure as claims by members were for damages for death or personal injury without distinguishing the type of injury or length of time the person injured was unable to work. Mr Martin said (and I accept) that he had, and expressed, considerable reservations about the $4000 TTD figure. Mr Cackett (and Mr James) were experienced in PA underwriting which Steamship and Lloyd Thompson were not.[38]The basis on which Mr Cackett put these (rather than other) figures forward is particularly obscure if (which I doubt) it involved any particular calculations. That it was not and could not be “scientific” is borne out by the exchanges in December 1995 (see paragraph 63 below). Mr Cackett said the benefit levels would have been discussed with Mr James and based on the information provided albeit he could not recall what that was. He said the figures were not simply plucked out of the air but would have been arrived at by a professional underwriting process. He also said that “over a period of time” he expected that through renegotiation of the benefit levels there would be “no material aggregate over or under payment” and indeed that such was necessary on Ince & Co’s advice. Mr Cackett referred to this as “the equalisation process”. Mr James also said that the basis on which Steamship and Syndicate 957 went into the transaction was that the benefits had to be fixed at a level which approximated overall the anticipated liability payments of Steamship and agreed that this would have to be monitored quite carefully. But it is, I think, apparent from the exchanges to which I have referred that it was Steamship which had to be persuaded out of the benefits tracking the Club’s liabilities to members and Mr Cackett and the Syndicate’s requirement, derived from the Audit Codes, that the policy be a PA insurance and not a liability reinsurance which made that unacceptable. Moreover the question of how any “equalisation process” was to be dealt with over time and what it was to include does not seem to have been considered or addressed. THE 1995 MASTER LINESLIP[39]On 18 April 1995 Ms Greenaway informed Syndicate 957 that it had an order from Steamship for the PA cover for 12 months from 20 February 1995. The order was on the current terms of the draft wording subject to a final review by Ince & Co.[40]By 12 May 1995 two oil rig accounts (“Falcon” and Marine Drilling Inc) had been bound with Steamship.[41]In June 1995 the terms and wording were finally agreed between Syndicate 957 and Steamship effective for the period 20 February 1995 to 20 February 1996. The Master Lineslip itself (LH9510547) had been signed earlier for 100% by Mr Cackett on behalf of Syndicate 957 naming Lloyd Thompson as the Line Slip holder. It was to accept declarations during the period but no individual declaration was to run for a period greater than 12 months plus odd time not exceeding 18 months in all. The maximum sum insured was not to exceed $1m any one person. THE FIRST DECLARATION[42]The first Declaration (LH 9510548) under the Master Lineslip was accepted on 16 June. It named Steamship as the insured. It was to pay Steamship benefits “calculated in accordance with the Schedule of Compensation” contained in the wording for death, PTD or TTD and medical expenses in relation to TTD only as defined in the wording.[43]The policy limits were as specified in the Schedule of Compensation but also subject to a maximum of $1m for any one event and “a maximum amount recoverable in all equivalent to 250% of the finally adjusted gross premium payable”. There was an aggregate deductible of 6.6% of Steamship’s net premium income or $1.5m whichever was the greater. A deposit premium of $5.5m was payable in six equal quarterly instalments starting on 20 May 1995 and was adjustable quarterly at 32.5% of Steamship’s net premium income received in respect of member entries during the policy period.[44]The “information” referred to in the Declaration was:
“Underwriting submission – “Nelson” – 16 th January, 1995, Annual Report & Accounts of Steamship … P&I Club Analysis of claims 1993. Summary of Anticipated Accounts, etc based on available historic data seen, noted and agreed by Insurers hereon.”
THE WORDING[45]The Policy Wording was scratched in June 1995 by Syndicate 957 and Steamship. The same wording was used in all years save where I have indicated to the contrary. The insuring clause was expressed in terms that “if an Original Person sustains Bodily Injury and/or Illness we will pay to the Insured in accordance with the terms and conditions of this Insurance and according to the Schedule of Compensation after the claim has been substantiated under this Insurance”.[46]Clause 1 contained a number of relevant definitions. “The Insured” was Steamship.[47]“Entered Vessel” was defined as:
“… a vessel, offshore rig and/or similar interest to be agreed which has been entered by a Member … for any of the risks enumerated herein ….”
[48]“Member” was defined as:
“an owner and/or … other person interested in any Entered Vessel to whom the Insured has obligations under its Rules and/or terms of entry in respect of the Bodily Injury and/or illness suffered by an Original Person.”
[49]“Original Person” was defined as:
“(i) any person … while engaged during the Policy Period in any capacity on board or in relation to an Entered Vessel as part of her complement, but shall include any person who is engaged by a Member during the Policy Period at the time of the Accident … and is seconded to another vessel … pursuant to a contract entered into by a Member and/or (ii) other persons while engaged during the Policy Period in any capacity on board or in relation to any Entered Vessel.”
[50]PTD was defined as “Bodily Injury and/or Illness which actually prevents the Original Person from attending to his or her usual business or occupation and/or assuming the same work activities as those which he or she was employed to perform immediately prior to the Accident or the manifestation of the Illness and which lasts twelve months and at the expiry of that period appears to be such that the Original Person will not thereafter be able to resume attending to such usual business or occupation and/or assume such same work activities”.[51]TTD was defined as “Bodily Injury or Illness which actually prevents the Original Person from attending to his or her usual business or occupation and/or assuming the same work activities as those which he or she was employed to perform immediately prior to the Accident or manifestation of the Illness”.[52]The Wording contained (Clause 2) a limited number of exclusions such as death or disablement arising out of war (and the like) and mental or psychiatric illness.[53]Clause 3 provided for claims notification and settlement of benefits. Notification of claims by Steamship had to be accompanied by “reasonable documentary proof” of the death or disablement of the Original Person, the date of the accident and inward claim, details of the circumstances of the accident and injury and, if the claim was for TTD, an estimate of the period during which the disablement appeared likely to continue and details of any medical expenses paid by Steamship, or, if the claim was for PTD, confirmation that disablement appeared likely to continue for not less than 12 months. In the event of death or PTD Syndicate 957 agreed on receipt of such notification to pay Steamship the Capital Sum specified in the Schedule of Compensation. In the case of TTD, also on receipt of such notification, Syndicate 957 agreed to “pay the weekly benefit as specified in the Schedule of Compensation for the period of Disablement together with any Medical Expenses. Should the period of Temporary Total Disablement (either as estimated by the Insured or as actually suffered by the Original Person) exceed 152 weeks and should the Insured confirm to Underwriters that it appears that the Original Person will not thereafter be able to resume attending to his or her usual business or occupation and/or to assume the same work activities …. Underwriters … will pay to the Insured the Capital Sum Insured as if the Original Person had suffered Permanent Total Disablement less any benefit (including Medical Expenses) already paid ….”[54]Payment of the benefits was to be made no later than 30 days after submission of bordereaux (Clause 4); claims notified 24 months after expiry of the Policy Period were not covered (Clause 5).[55]The “adjustment” clause debated in the exchanges to which I have referred became a clause (Clause 6) entitled “Alteration in Circumstances” reading:
“Should the Insured at any time become aware that any confirmation or information provided to Underwriters in connection with a claim hereunder is not, or is no longer, accurate or applicable, the Insured shall immediately inform Underwriters and at the same time return to Underwriters any amount by which all payments made by Underwriters hereunder exceed the amount (if any) which would actually be payable hereunder in accordance with the accurate or applicable confirmation or information.”
[56]The Schedule of Compensation (Clause 9) in the original wording provided for different levels of compensation for three geographical areas: the highest level where the Entered Vessel or Member was registered or had a place of business or conducted operations in North America, half those levels for Europe, Japan or the Asean group of trading nations, and half again for anywhere else. The North American levels were US $1m for death and PTD and $4000 a week for a maximum of 152 weeks for TTD. The maximum limits (also set out in Clause 9) were $1m in respect of any one Original Person and $1m in all for any claim or claims caused by the same occurrence or series of occurrences arising out of the same event. In subsequent wordings (where appropriate) the Schedule of Compensation referred to “as declared” or was otherwise changed to reflect the terms agreed for the relevant period of cover.[57]It is convenient to comment here on various issues or matters arising on this wording:- i) As I have already said, I find that Mr Cackett was responsible for setting the benefit levels. ii) Although Ince & Co (and Mr Cackett) were concerned (because of the Audit Codes) to avoid references to Steamship’s own liability to the Club’s Members and specifically removed the adjustment provisions which would have resulted in re-payment of “over-recoveries” it is I think clear that both Steamship and Syndicate 957 intended that claims would only be sustainable under the cover in cases in which Steamship was itself liable to indemnify the Member concerned in respect of the accident and injury to the Original Person in question. Mr Boswood submits that on analysis the wording in any event requires as much; Mr Kendrick submits it does not. On any view Mr Kendrick is right in submitting that such a requirement (if any) can only be found in the depths of the definitions: see (iii). iii) Mr Boswood’s submission is as follows. Syndicate 957 agreed to make the fixed benefit payments if an “Original Person” suffered injury. Original Persons are persons engaged on an “Entered Vessel”. An Entered Vessel is one entered by a “Member” of the Club with Steamship during the relevant period in respect of any of the risks “enumerated” in the wording itself. A Member has to be a person interested in any Entered Vessel and a person to whom Steamship “has obligations under its Rules … in respect of the Bodily Injury …suffered by an Original Person.” That, submits Mr Boswood, has the effect that unless there is a liability on Steamship to the Member for the injury (which there would not be if, for example, any damages payable to the Original Person was less than the member’s deductible) no recovery could be made or, if made, retained under the Policy Wording. Mr Kendrick submits that Mr Boswood’s submission places more weight on the word “obligations” than it can bear. He submits that Steamship owed “obligations” under the Club’s Rules to investigate claims. But I agree with Mr Boswood that the relevant Rule (Rule 28) does not in ordinary language impose an obligation on Steamship to investigate claims on Members but bestows a right on Steamship to do so. In my judgment Mr Boswood’s submission on the construction of the Wording is also right and, however obscurely, reflects what both Mr Cackett and Mr Martin said and I find was intended. iv) The definition of “PTD” was one of some width. It did not, for example depend on earning capacity. In the case of rig workers there might be a particular risk that an otherwise not very serious injury would prevent an Original Person from resuming arduous duties leading to a PTD payment within the definition. Mr Cackett was alive to the possibility of a “TTD” becoming a “PTD” and indeed the wording expressly addressed it in Clause 3 (see paragraph 53). The possibility, however, might well not be manifest for a considerable time as the Clause itself contemplates the elapse of 152 weeks before a determination might be made. That is of significance because on the evidence in the event the major if not the only source of alleged “overpayments” to Steamship is the number of claims which started as TTDs but came later to be classified as PTDs. v) Mr Cackett had a close involvement in drafting the wording yet nothing in it or otherwise required Steamship to include or provide figures for paid or incurred claims by Members on Steamship. The trigger for payment of the benefit was simply proof of the death or disablement of an Original Person: Clause 3. vi) “Original Persons” were not necessarily identifiable at inception. They included those who came to work on an Entered Vessel at any time during the period of the cover. vii) There was an aggregate excess and limit (in the event $1.5m and 17.25m respectively).[58]THE FIRST CLAIMS. In late June 1995 Mr Cackett, Mr Feasey and Mr Absalom (then underwriter, deputy and claims manager of Syndicate 957) visited Steamship to meet those at Steamship, including Mr McAleer, who were to be involved in the submission of claims.[59]By October 1995 three rig accounts had been written by Steamship, shortly described as Falcon, Marine Drilling and Global Industries. On 23 October Steamship (by Mr McAleer) sent Lloyd Thompson, for formal notification to Syndicate 957, details of the claims that had already arisen on those accounts. It is apparent from the terms of the letter that the contents of claims bordereaux had not by then been finally agreed between Steamship and Syndicate 957, but the details provided contained nothing about the values of inwards claims by Members on Steamship. They did contain estimates of the sums due under the Master Lineslip (described disarmingly as “Reinsurance” estimates) in accordance with Clause 3 of the wording.[60]The claims caused great concern on the part of Mr Cackett. Ms Greenaway said, and I accept, that the major concern was the speed at which the claims had arisen and eroded the aggregate deductible and so would have to be paid under the PA cover. Indeed payment was sought of a sum in excess of $2.5m after full allocation of the $1.5m deductible. The Syndicate did not pay and a debate started. In the course of the debate information which enabled a comparison to be made between the inwards claims estimated reserves made by Steamship and the outward claims on the Syndicate on the fixed benefit basis was provided to Syndicate 957 (probably, as I find, by Lloyd Thompson). This led Mr Cackett to express concern to Ms Greenaway about “potential overpayment” to Steamship because the figures showed Steamship’s estimated reserves for the claims were some $2m less than the incurred claims on the Syndicate. All the claims (save two) were TTDs. Syndicate 957 and Lloyd Thompson did some “as if” computer runs to see what the figures would be if the fixed benefit levels were reduced by various combinations and amounts.[61]Mr Martin was not pleased with this development. As he told Ms Greenaway (her note of 14 December) and said in evidence Steamship had wanted the PA concept cover to track the claims on Steamship but the Syndicate “had closed that door”. Mr Martin is recorded (in the same note) as expressing concern at how Mr Cackett knew about Steamship’s estimates (“This is no concern of theirs”). The note also records that Ms Greenaway explained the “mutual interest in ensuring equity of payments” in the context of a potential long-term relationship with the Syndicate. Mr Kendrick sought to make much of Mr Martin’s recorded concern about the provision of inwards claims estimates to Syndicate 957. But I accept Mr Martin’s evidence that he was irritated by what he saw as an attempt to re-negotiate a recently made agreement at a time when it was far too early to tell whether Steamship’s overall exposure would result in an “overpayment” or not. Indeed in a telephone conversation with Ms Greenaway on 20 December and at a meeting in early January, Mr Martin is on record as expressing the view that “with legal fees and I.B.N.R.” he felt that the TTD figure of $4000 “may well be right”.[62]In the course of the hearing there was some considerable confusion and dispute about whether or not the information about the inwards claims estimates of Steamship were or were not provided or to be provided as part of the standard or at least proposed standard terms of claims bordereaux from Steamship to Syndicate 957. The matter has also been the subject of written submissions following the hearing. Understandably, not least because of the location of some documents in the trial bundles, Mr Martin’s “concern”, and a comment in Ms Greenaway’s statement about her “understanding” Mr Kendrick asked a number of questions and made some submissions of a more or less sinister nature on the basis that the information was agreed to be provided and then ceased to be so. In fact I am satisfied on analysis of all the evidence that was not the case. The Wording did not require it (paragraph 53). That was consistent with the Syndicate’s need to keep on the right side of the Audit Codes. Many of the documents in the bundles are plainly computer runs of “as if” figures not claims bordereaux. Mr McAleer’s evidence was that the information was never and never agreed to be part of the bordereaux. He was not challenged on that and he was party to the meeting in June as was Mr Absalom. I accept Mr McAleer’s evidence without hesitation. Mr Absalom’s evidence was consistent with it. The fact that the information was provided when Mr Cackett became concerned at the timing and amount of the first claims is readily explained by the debate to which that gave rise. Further Mr Martin’s irritation and comment about the fact that the Syndicate had the figures is, as Mr Flaux submitted, quite inconsistent with any suggestion that they were to be provided in the bordereaux in any event. Finally it is an undoubted fact that the information was not provided subsequently in any bordereaux and no complaint was ever made about that. None of Mr Cackett, Mr Feasey and Mr Absalom ever raised the question nor did they ever set up or ask to be set up any system for the regular exchange of information concerning inwards claims on Steamship. ALTERATION OF THE TTD BENEFIT FIGURE[63]Ms Greenaway wrote to Mr Cackett and Mr Feasey on 22 December 1995. The letter had been discussed with Mr Martin. It is a good summary of the position at that date. Mr Cackett’s concerns are said to be that the benefit payments exceed Steamship’s estimated liabilities and that the level of benefits is set too high “and/or that the TTD benefit is not tracking the paid and incurred claims of Steamship in the way contemplated”. It is acknowledged that Steamship had made it quite clear that they did not expect to “profit from their misfortune”, and that the phrase swings and roundabouts was used during negotiations and that “an element of potential overpayment was contemplated” by the Syndicate “but the risk of underpayment was also taken onboard” by Steamship so that “the risk cuts both ways”. The point was also made that it was too early to know with certainty whether Steamship would be disadvantaged by a change to the levels of compensation. The letter also states (entirely rightly on the evidence) that: “None of us were able to bring any science to bear on the translation, for want of a better word, of potential liability claims into benefit payments”.[64]The letter concluded by stating that Steamship was prepared to contemplate amendment to the Schedule of Compensation “should the level of benefit payments be found to be too generous … in order to ensure a more equitable formulae as part of a continuing long term relationship”.[65]Mr Cackett responded on 2 January 1996. Mr Feasey had produced a computer run based upon a retrospective reduced weekly TTD benefit of $2250 (instead of $4000) but maintaining the $1m benefit for death and PTD. The computer run showed the reduction in benefit resulted in a negative difference of only $83,730 in Steamship’s overall recoveries from Syndicate 957 against the estimated reserve of Steamship for the 7 months of claims then being addressed. Mr Cackett pointed out in his letter that such an amount should easily be offset by interest earned by Steamship on the recoveries. Mr Cackett suggested that the TTD benefit level should be revised to $2250 from inception.[66]In February 1996 Lloyd Thompson carried out an analysis of the latest figures. The analysis showed that the numbers of claims on Steamship was such that the Master Lineslip aggregate limit would be exhausted whether the benefit levels for death and PTD/TTD were $1m and $4000, or $1m and $2250 or indeed $500k and $1750. The number and level of claims was in effect such that the only effect of altering the benefit levels was that the cover would be burnt through later if the level was reduced.[67]This analysis took some of the heat out of the debate and negotiation, at least on the part of Steamship. Mr Cackett indicated that he was prepared to renew for the period 20 February 1996 to 20 February 1997 but only on the basis of the retrospective reduction in the TTD benefit to $2250 for 1995/6 and a separate review of and rating for each member entry rather than a whole account protection for 1996/7. Indeed Mr Cackett had given a non-binding indication for Falcon for 1996/7 on 2 February based on benefits of $500K for death and PTD and $1750 for TTD with a maximum recovery of $4m in all and an aggregate retention of $345K. Mr Cackett’s evidence was that both the $2250 and $1750 figures came from him and that he believed the $2250 figure was less than Steamship appeared to be paying. He could not remember why the $1750 level was set but he was happy with it “because it was beneath the $2250 figure”.[68]The outcome, reflected in Lloyd Thompson’s letter to Mr Cackett dated 16 February 1996, and scratched by him on 23 February, was agreement that the benefit levels should be $1m and $2250 from the inception of the 1995/6 cover, and that Mr Cackett would give further non-binding indications to cover other accounts for the 1996/7 year.[69]It is a further indication of the tension created by the Syndicate’s need to comply with the Audit Codes and so to avoid “tracking” that when Ms Greenaway visited Mr Cackett and Mr Feasey (with Mr James) on 23 February to seek his scratch on the 16 February letter Mr Cackett is recorded as expressing concern about the reference in the last sentence of the letter that it represented the final settlement of the issue concerning the 1995/6 benefits level. Ms Greenaway’s note records:
“At this stage Tony Feasey interrupted the conversation and made it very plain to John (Cackett) that the Syndicate should sign as continual amendment to the benefit scale could open them up to being accused of attempting to track liability and they apparently have specific legal advice on this matter. John considered this for a few moments and signed the letter.”
THE 1996/7 MASTER LINESLIP RENEWAL[70]On 4 March 1996 the Lineslip was renewed for 1996/7 but for individual declarations. Thereafter various declarations were attached to the Lineslip on terms which varied as to benefit limits and aggregates as appears from the schedule annexed to this judgment. Thus Falcon was “renewed” on the terms of Mr Cackett’s indication (paragraph 67) with the limits of $500K for death and PTD and $1750 for TTD. Marine Drilling was renewed with limits of $400K and $1750. Limits for Marine Drilling of $500K and $1750 had been the subject of a non-binding indication given by Mr Cackett on 24 April 1996 and the renewed limits were the subject of a further indication also given by Mr Cackett on 16 May. There were also individual aggregate excesses and limits as shown on the schedule. Mr Cackett could not recall, even with the benefit of contemporary notes, how these indications and limits were arrived at. I do think, however, that Mr Flaux is right in his submission that the notes show that Mr Cackett and Mr Feasey both worked on the figures and that the figures they were assessing were the 1995 year claims on the Syndicate and re-calculating them on different “as if” limits to assess a premium. STEAMSHIP’S EXCESS OF LOSS REINSURANCE .[71]Mr Johnston was concerned by the reduction in the maximum death and PTD benefit level from $1m to $500K (and below). Mr Martin believed the level was not enough. For the 1996/7 year, therefore, Steamship also bought excess of loss insurance for losses on members’ claims which exceeded the relevant limit. The excess of loss contracts protected all Steamship’s liability arising from the rig accounts (not merely personal accident liability) and the contracts remained in place for subsequent years effective above the applicable death and PTD limits of the Master Lineslip from time to time. The effect, as Mr Kendrick put to Mr Johnston, was that if the relevant limit in the Master Lineslip was $500K, Steamship would recover that sum from Syndicate 957 even where the claim by the member was less than $500K, but where a claim exceeded $500K Steamship obtained 100% recovery from the combination of the Master Lineslip and the excess of loss cover. Mr Kendrick put it to Mr Johnston that on that basis Steamship could not make a loss but only a “profit” on any such claims. Mr Johnston’s surprise at the question was obviously genuine and I accept that he had not seen the matter in those terms at the time. He also expressed amazement at the thought that having lowered the limit Syndicate 957 had thought that Steamship would just choose to take the excess risk itself.[72]Nonetheless and despite some evidence to the contrary I accept the evidence of both Mr Feasey and Mr Absalom that they were not aware that Steamship had taken out reinsurance either for losses in excess of the death/PTD limit or (as happened later: paragraph 115) by way of the top-up or sideways cover with Reliance. Indeed it was not suggested by Mr Kendrick that Mr Feasey either did know or should have known of the excess of loss or top-up covers. Mr Absalom said he would not have expected to be informed one way or the other although he would not have been surprised to find that Steamship had other insurance or reinsurance, higher layer or stop loss.[73]THE BORDEREAUX Once the dispute about the TTD benefit level for 1995/6 had been resolved the bordereaux contained only the information required by the Policy Wording: Clause 3 (paragraph 53). But, as I have said and find, that was not a “change” in what had gone before, more a confirmation of it. I should add that I am also satisfied that Steamship was always prepared to provide whatever information was asked of it.[74]MR CACKETT and CENTAUR It was in March 1996 that Mr Cackett gave notice of his intention to leave Syndicate 957 and he said that Mr Feasey would have been taking over the reins from then onward. In June Mr Cackett left Syndicate 957 and was succeeded by Mr Feasey. Mr Cackett established Centaur in Bermuda shortly thereafter.[75]MR FEASEY AND 1996/7 . Mr Feasey dealt with the renewal of the remaining declarations for the 1996/7 year shown on the schedule to this judgment after Mr Cackett’s departure. Mr Feasey said that by that time he was comfortable that Syndicate 957 was not paying out more to Steamship than Steamship was paying its members. That belief was based on the exercise carried out with Mr Cackett in January and February 1996 which had resulted in the agreed reductions (paragraph 68). He also said he, as Mr Cackett had done, wanted to continue to reduce the benefits over time which, together with the effect of inflation on payments by Steamship to members, would help to ensure that the Syndicate was not over-compensating Steamship.[76]CENTAUR and SUN LIFE and PHOENIX On 26 August 1996 Centaur and Sun Life entered into an Underwriting Management Agreement. Mr Cackett’s underwriting authority was limited to reinsurance business. The agreement commenced on 1 October 1996 and could be terminated at each anniversary by not less than 6 months notice. It contained gross assumed and retained maximum limits. On 12 September Centaur and Phoenix entered into an Underwriting Management Agreement on substantially the same terms save that Mr Cackett’s authority was not limited to writing reinsurance business. Centaur’s “compensation” under each agreement was 7½% of gross premium paid plus a profit commission. The business plan envisaged a gross premium income of $100m in the first year. In February 1997 Centaur sent Monument a “standard agency questionnaire” signed by Sun Life and Phoenix and letters of authority which contained the essence of the terms of the Underwriting Management Agreements.[77]THE 1997/8 MASTER LINESLIP RENEWAL AND THE FALCON FIGURES In January 1997 Mr Feasey asked Lloyd Thompson for Steamship’s figures on the Falcon account, which was the biggest of the accounts declared to the Lineslip. He did so, he said, because whilst he was comfortable that the Syndicate was not over-compensating Steamship, he wanted to check how the Syndicate’s payments compared with Steamship’s payments to a member. The figures he received showed that for the 1995/6 year Steamship’s liabilities (paid and outstanding) were some $7.1m and Syndicate 957 had paid to the limit of the cover created by the overall aggregate cap (some $4.9m) with outstandings of some $1.42m uncollectable. For 1996/7 Steamship’s liabilities were shown as some $2.7m and the Syndicate’s paid and outstanding (excess of the aggregate deductible of $345k) were some $750k. Mr Feasey said that he regarded the figures as likely to be representative of the underlying claims as a whole and considered that they showed that Steamship was recovering less from Syndicate 957 than it was paying its members. He used individual spreadsheets to analyse the effects of various benefit levels, deductibles and franchises on claims under the Master Lineslip to generate a quotation in the same way as he and Mr Cackett had done in the previous year (paragraph 70).[78]Mr Feasey believed that the Falcon figures were comparing “like with like” meaning a comparison of the exposures of Steamship on the same claims as the claims paid by or claimed upon Syndicate 957. Further, at this date on the 1995/6 year, only one of the Falcon claims was in respect of a death and none were for PTDs. Mr Feasey said that by this time he would have expected Steamship to have had a pretty good idea of whether or not a claim was a PTD. He did not feel there was any need to investigate individual claims because Steamship had confirmed that “in the round” they were not being over compensated. Mr Feasey’s reliance on the Falcon figures has been the subject of particular criticism by Mr Kendrick.[79]There is no document which evidences the renewal of the Master Lineslip for 1997/8 but the various individual declarations were renewed as shown on the schedule to this judgment. As the schedule shows some limits were changed, further aggregate excesses were introduced but individual aggregate limits were substantially increased with an overall limit of $33.56m which was less than the total of the individual limits. The “qualifying period” for a TTD (see paragraphs 53 and 57(iv)) was reduced from 152 to 104 weeks. Mr Feasey also introduced “franchises” the effect of which was both to exclude from the cover losses which did not exceed the franchise figure until the exhaustion of the franchise retention figure and to delay presentation of claims which did exceed the figure. For example, in the case of a TTD loss, the loss had to exceed the franchise level before it could be claimed so that if the weekly benefit level was $1000 and the franchise $25,000 a claim could only be made if the TTD lasted for 25 weeks or more. THE FIRST SUN LIFE AND PHOENIX REINSURANCE FOR 1997/8[80]Syndicate 957 had itself been reinsured in respect of its liabilities to Steamship under the Master Lineslip (and for other covers) by a reinsurance programme underwritten by a number of other syndicates at Lloyd’s. Mr James wrote to Mr Cackett (who was in England at the time) on 6 February 1997 enclosing an information pack on the reinsurance for the 1997/8 year and seeking quotes from Centaur for elements of the Syndicate’s reinsurance programme for that year. Mr James wrote:
“You are obviously familiar with the entire rating structure and product relative to the underlying declarations from your days at Syndicate 957 and in due course I will provide (you) with copies of sample declarations for 1997 attachments. You may recall that from 1996 the maximum any one person limits were reduced to $500,000 and in many cases declarations were bound for significantly less. This is an underwriting stance which Tony (Feasey) intends to continue with.”
[81]The information pack itself included: i) Under the heading “Rating, Deductibles and Premium Income” the statement that “individual vessels, units, fleets and whole portfolios are rated by the Leading Lineslip Underwriter on the basis of historical loss information where such is available and by taking account of overall historical burning costs . Individual excesses, aggregate deductibles and franchises are considered on each declaration depending on the nature of the operator and previous loss experience.” ii) The claims statistics for claims reported by Steamship to Syndicate 957 at 30 January 1997 for risks attaching for 1994/5, 1995/6 and 1996/7. These showed, for 1995/6, that incurred claims from Steamship were a total loss to the limits of the PA cover and for 1996/7 that incurred claims totalled some $1.643m. iii) An undated file note of a meeting on an unknown date between Mr Feasey, Mr James and the underwriter (“RDL” being Mr Littlemore) of one of the reinsuring syndicates (Syndicate 1096) which addressed the “quite disastrous experience” on the layers of the reinsurance written by that Syndicate. The note was made by Mr Littlemore and records that the account was a very important one for Syndicate 957 “which is underwritten to produce a gross profit” and not written on the back of reinsurance something for which Mr Feasey is noted as being aware that Syndicate 957 had a reputation. It continues:
“TF (Mr Feasey) made the point that with any new product and limited historical data there is always the danger of getting it wrong. By the results it is clear mistakes were made. The benefit levels particularly were set too high. It has meant that every part of the underwriting has been addressed.”
Reference was then made to four specific matters: reduction in weekly TTD benefits, reduction in the death and PTD benefit, the increase in aggregate deductibles and the use of franchises. Mr Littlemore’s “Summary” of the meeting reads:
“Good informative meeting allowing me to become far more comfortable with product. TF is much happier with how 1996 is developing and is confident all parties will make money. Still very difficult to make any true predictions for at least another 12 months particularly as a number of the risks are running aggregate deductibles ….”
[82]Mr Cackett’s immediate response to the information pack was that he would like to see “some triangular projections on an as if basis with relative (original) premium income levels i.e. to the P&I clubs so as to correctly evaluate the loss experience”. That information was, it seems, duly provided and Mr James and Mr Cackett met in February to discuss the matter.[83]Mr James had little clear recollection of this meeting. He said that he and Mr Cackett would not have spent any great deal of time talking about the benefit levels because he would just have explained that Mr Feasey was continuing to assess the levels he was happy to provide based upon historical performance “and the broad parameters of the legal advice he had had”. Mr James did not know what Mr Cackett wanted the triangular projections for “other than to perhaps assess the benefit levels or assess the premium … relative to the underlying premium.” Whatever the case there is no evidence at all of what if anything Mr Cackett did with the information.[84]On 10 March 1997 Mr Cackett for Centaur wrote to Mr James enclosing quotations for various reinsurances of Syndicate 957. In May 1997 Mr Cackett, using American Phoenix as a front for Sun Life and Phoenix for 50% each, entered into a number of reinsurances of Syndicate 957 in respect of the Syndicate’s liabilities under the Master Lineslip in respect of losses occurring between 20 February 1997 and 20 February 1998. The first reinsurance was to pay $95,000 excess of $5000 on each and every claim. The other three reinsurances were to protect Syndicate 957 in respect of claims related premium adjustments payable by the Syndicate on various layers of its excess of loss reinsurances protecting the account (described as “burning cost” reinsurances).[85]Mr Cackett said in evidence in relation to Mr Littlemore’s note that whilst he was aware of the Syndicate’s reputation when he was at the Syndicate he had also intended to write the Master Lineslip for a profit and not on the back of reinsurance. He also agreed that the four specific matters referred to in the note were accurate.[86]MR COOPER’S 1997 REPORTS In August 1997 another of Syndicate 957’s reinsurers sought an audit of Steamship’s claims “given the highly unfavourable results”. The inspiration for the audit appears to have been the speed at which payments were being made (and reimbursement sought) in 1995 in comparison to 1994. That, of course, was no surprise to Steamship or Syndicate 957 because of the change in the nature of the cover between those two years. This audit was Mr Cooper’s first introduction to the business.[87]Mr Cooper produced a draft report dated 26 September 1997. He was complimentary about Steamship’s control over and handling of claims. However he also stated that on the files he had reviewed the terms of the cover had led to Steamship recovering more than it ultimately paid. Mr Cooper’s final report dated 5 December was enclosed with a letter to Mr Sharp of Syndicate 957’s managing agents which also noted that “Steamship appear to have profited from the arrangement”. It was Mr Cooper’s evidence that he could not recall whether he was commenting on paid claims or paid and incurred but he believed he would have carried out an analysis on both bases. Both Mr Feasey and Mr Absalom were aware of these comments.[88]Mr Cooper’s reports and comments seem to have been the catalyst for a further round of legal opinions and information being sought from Steamship by Mr Sharp on behalf of Syndicate 957. MR JOHNSTON’S 25 NOVEMBER 1997 LETTER[89]On 25 November 1997 Mr Johnston wrote to Mr Sharp, following a meeting. He said:
“As we explained to you, the decision to arrange PA cover was seen as complementary to the original risk underwritten by the Club. Unfortunately despite the purchase of the PA programme the Club has suffered an underwriting deficit in the 1995/6 year. For your guidance, the net premium charged by the Club to the five rig members concerned was $15.1m. Claims paid in the year currently stand at $10.29m and claims outstanding at $19.1m. The overall claims figure as at today therefore stands at $29.39m. The PA insurance programme that the Club purchased was at a price of $6.89m and the full amount of recoveries made were $17.22m. As you will appreciate therefore the Club is in underwriting deficit, notwithstanding the PA programme.”
[90]On the evidence, there is no doubt that this letter led to a misunderstanding. Again, I am satisfied, that insofar as the contrary may have been suggested, there was nothing sinister about it. The aggregate limit of the Master Lineslip in 1995/6 was $17.25m. The cover had therefore burnt through. Hence the figure of $17.22m. Mr Feasey, however, thought, as with the Falcon figures (paragraph 78), the letter was comparing like with like, namely the cost to Steamship of those same claims which had cost Syndicate 957 $17.22m. That, Mr Feasey said, would have been the same comparative exercise as was carried out in late 1995 and early 1996 which had resulted in the retrospective reduction in the TTD benefit level. Mr Feasey said that had he known Steamship’s claims paid and outstanding figures included property claims, the deductible, and in particular claims other than those paid by Syndicate 957 (as they did) he would at least have wanted to know “the real position” and “potentially” would have wanted to revise the benefit levels downwards. He also expressed considerable surprise that Steamship had bought other protections because he believed that it had been intended that the Master Lineslip should be a stand alone product and Steamship had not wanted to be over-compensated. Again, Mr Feasey’s reliance on this letter has been specifically criticised by Mr Kendrick.[91]Mr Martin, for the purpose of his second witness statement, had produced schedules showing the updated Steamship claims position as at 8 January 2002. Inwards claims from members for 1995/6 were then estimated at $28.132m. (thus some $1.26m less than Mr Johnston’s figure in November 1997) but both figures related to all claims by Members on Steamship whether or not the subject of claims on and payments by Syndicate 957 and were net only of the deductibles borne by Members. In particular, they included claims by Members after the Syndicate’s cover had burnt through. Mr Martin said Steamship’s approach to the cover had been to protect the Club’s whole exposure but without any expectation of excess recovery. He also said that even on the basis to which Mr Feasey referred his schedule showed that the Club’s liabilities were $22.447m and so in any event in excess of recoveries from Syndicate 957.[92]Mr Johnston’s evidence was that Mr Sharp had expressed concern that Steamship was profiting from the PA cover and he had told Mr Sharp that was “completely incorrect” and had written the letter to set out the figures. He also said that he had never done an exercise to match like claims with like recoveries nor had he ever sought to work out the average cost of a death or PTD claim. The $29.39m figure was “the overall claims figure” being the liability reserve of the Club on all claims.[93]FURTHER LEGAL ADVICE Whilst the evidence remains vague as to the precise circumstances in which further legal advice was sought there is no doubt that Mr James was a prime mover in seeking it and that Mr Feasey was aware of it. It led to the solicitors, Reynolds Porter Chamberlain (RPC), writing to Mr James with “provisional advice” on 7 January 1998.[94]The letter records (wrongly in the light of my findings and Mr James’ own evidence) RPC’s understanding that “the level of fixed benefits was originally set on the basis of an assessment by the Clubs of their average exposure in relation to a spectrum of liability” and (rightly) that payment was made without a prior requirement that the Club’s legal liability to pay the underlying claim be first established. The concern attributed to Mr James or Syndicate 957 was whether the validity of the insurance could be the subject of a successful challenge by reinsurers. The letter asked “the fundamental question” whether the Club had an insurable interest at the time of inception of the policies and specifically referred to the 1774 Act. The thrust of the advice was that a sufficient insurable interest should be demonstrated on the basis that it was probable that the death or injury of an Original Person would produce a claim by a Member against the Club but there was a need to have an insurable interest in the specific lives at inception and because the class of Original Person was so wide and transient “it would seem impossible to show an insurable interest in the lives of Original Persons who had only a theoretical existence at the time of inception”. The general comment was also made that the Courts had tended to uphold life insurance if it was bona fide. Section 3 of the 1774 Act was also addressed and the view expressed that: “where, as in the case of the Facility, there has been a genuine attempt, prior to inception, to estimate and agree on the likely exposures of the Clubs to their Members, the level of benefits agreed would be conclusive. The only exception to this rule (saving the obvious one of fraud) is where the sum agreed is so grossly excessive that it amounts to a wager. The sums payable under the Facility do not appear to be grossly excessive. Looking at the overall position it may well be the case that the Club have not in fact recovered more from Underwriters than they have paid their Members.[95]In summary and on balance RPC considered the cover would be upheld but was potentially vulnerable for lack of an insurable interest in the lives of some of the Original Persons.[96]The question was also referred to Leading Counsel, Andrew Popplewell QC. Mr Popplewell prepared a “Note of Advice” which was sent by RPC to Mr James on 13 February. Mr Popplewell’s advice was very similar to the advice of RPC. He suggested the way to overcome the need (as he saw it) for an identifiable interest in the life of each person at the time the insurance was written was to create a new contract of insurance each day of the year so that anyone becoming an Original Person on any day would be the subject of a policy incepting that day. Mr Martin understandably considered this to be impracticable and an extraordinary basis on which the determination of legality could depend. Mr Feasey read the opinion as a positive one with a few suggested refinements. He too considered it was not necessary to alter the wording. The Opinion was supplied to Steamship on 28 May.[97]THE THREE YEAR MASTER LINESLIP 1997/00 On 14 April 1998 Mr Absalom scratched, by way of a Declaration off the 1997/8 Master Lineslip, insurance for Steamship for the three 12 month periods 20 February 1997/8, 1998/9 and 1999/00. By April 1998 the 1997/8 cover had of course expired but the member declarations off the 1997/8 Master Lineslip were cancelled and rewritten to become member entries to this three-year Declaration. Also on 14 April 1998 a further Master Lineslip was agreed to accept Declarations from 20 February 1998 to 20 February 2000.[98]It is this three-year Declaration which is the subject of the proceedings (Folio 908) between Steamship and Syndicate 957. The circumstances in which it came to be agreed are somewhat obscure. They also overlap the departure from Syndicate 957 of Mr Feasey in April 1998.[99]The Declaration described the Type of Insurance as “Personal Accident and/or Illness” and the Insured as Steamship. A Wording was attached in the same terms as the original Policy Wording (paragraphs 45-57) save that the Schedule of Compensation was “as declared” each declaration. The maximum amount recoverable was limited in respect of each individual member to 150% of original gross annual premium and an overall limit was applicable. In the event the figures for these limits were as set out in the schedule to this judgment. The “Information” was described as “as presented and noted by the Underwriter at the inception of the Original Member Entries.” The weekly TTD benefit was limited to a maximum of 104 weeks in all. The list of Member Entries for each year recorded for 1997/8 in the case of Falcon alone that the cover was in respect of “losses occurring or first notified” to Steamship in that period. In all other Member entries it was in respect only of “losses occurring”. The effect was that the original 1997/8 cover for Falcon was enlarged to cover claims notified in 1997/8 but arising in earlier years. Those claims were of course, already known at April 1998. The figures (at August 1998) in fact show estimates for such claims of some $4.5m.[100]As appears from the schedule to this judgment for the years 1998/00 the weekly TTD benefit was reduced from $1750 to $1000 for all Member Entries and the death/PTD benefit was “equalised” at $400,000 for all Member Entries which involved an increase in the limits in 1997/8 in two cases and a decrease (from $500,000) in three cases. Mr Feasey assessed the benefit levels on the basis of “as if” figures between Steamship and the Syndicate. He had no figures to assess the comparative position between Steamship and its members.[101]Mr Feasey said that after the dispute which had led to the retrospective reduction in the TTD figure in 1996 the business had gone forward largely on the basis of an assumption that the level of benefits was such that Steamship would not be over-compensated “in the round” and the issue was what was the Syndicate prepared to offer and whether Steamship thought it worthwhile to buy what was offered at the price proposed. Mr Feasey also agreed that because Steamship should not be over-compensated it was prudent to “continue monitoring and adjusting” to minimise any mismatch. By that however he did not, I think, and despite Mr Kendrick’s submissions, mean the sort of monitoring to which Mr Kendrick refers in his submissions which would have involved a detailed exercise on Steamship’s estimated reserves. Mr Feasey did not undertake and never suggested he had undertaken such an exercise. He said he relied on the 1996 exercise, the Falcon figures, Mr Johnston’s letter, his knowledge and experience of PA business and the size of awards to justify his confidence that Steamship was not being over-compensated and would not be over-compensated by the benefit levels he was offering. He had of course reduced the levels further, particularly the TTD figure. As regards PTDs it was not put to Mr Feasey how he could or should have “monitored” them. Nor, as stated, was he aware of any other protections available to Steamship.[102]Mr James had no recollection why the 1997/8 declarations were re-written into the three-year Declaration. He suggested that Syndicate 957 may have been sensitive to the business being under competition from Centaur and so concerned to extend the term of the cover. Mr Feasey also could not recall why the covers had been written for three years. There is no doubt that the Master Lineslip provided a significant part of the Syndicate’s premium income. Mr Absalom said he believed the terms were now such that there was no question of over-compensating Steamship and (substantially in agreement with Mr James) that it was valuable to secure the income for a period of time when the Syndicate was under pressure from outside competition. I think Mr James’ suggestion is likely to be accurate and that it would have coincided with Steamship’s wish to have a long-term agreement which was how the Club (and the Syndicate) had always seen the arrangement.[103]Mr Feasey said he was aware of the enlargement of the cover for Falcon, although not aware of the figure of $4.5m. Mr Kendrick asked Mr Feasey if it was not elementary when extending a contract in this way to have the broker identify claims known and notified. Mr Feasey’s response was:
“It is difficult for me to remember now what debate went on around about that time when that was agreed. I am sure I would have had good reason for doing that, it would not be my style to just be cavalier with it, but I cannot give you precise recollections of what was actually debated at that time, what I knew and what I did not.”
[104]Mr Absalom also said that he would have been aware of the enlargement of the Falcon cover, but he too could remember no more about it and would have relied on Mr Feasey. Mr Johnston’s evidence was that the enlargement came about because Steamship asked for it. He said Syndicate 957 had requested a 3-year contract:
“It became very obvious to us that they were extremely anxious to place this contract. We therefore took the position that we might as well see what we can negotiate out of this to our advantage, and one of the things that occurred to me was that we might as well ask them whether they would be prepared to consider losses that were going to arise during the course of the year that had not as yet arisen.”
[105]Mr Johnston added that the Falcon cover had not burnt through by that time. He also said that he did not think it was for Steamship to calculate any appropriate benefit level and the Club did not do so. They were offered a cover and had to decide if it was worth buying. Mr Martin said the same. Steamship did not expect the protection to be the equivalent of a full reinsurance of Steamship’s first retained layer and the question was would it provide a substantial protection. Mr Martin said his evaluation in 1998 would have been that a death claim would certainly cost more than $500K, a PTD would cost more than $500K and a TTD more than $1000 a week.[106]It should be noted that there were no pleaded allegations in respect of the enlargement of the Falcon cover and so Mr Feasey had not addressed it in his statement nor did it appear that he was prepared for questions on the subject. THE SUN LIFE AND PHOENIX REINSURANCE 1998/00[107]In about April 1998 Mr James produced a Renewal Presentation for the reinsurance of Syndicate 957 for losses occurring during the period 20 February 1998 to 2000. It is this presentation together with the meeting between Mr James and Mr Cackett at which it was discussed which is substantially relied upon for the misrepresentations alleged by Sun Life and Phoenix. The oral presentation took place between Mr James and Mr Cackett in Bermuda on 5 May when Mr Cackett agreed to write the covers. There are no notes of the meeting. The figures stated in the Presentation were in respect of losses notified to the Syndicate at 20 February 1998. The contents were an up-dated version of the earlier presentation (paragraphs 80-81). The heading “Policy Coverage, Specific Wordings and Declarations” now included the words “supporting underwriters have directly and via the placing brokers sought extensive advice from solicitors and leading counsel regarding the formats and legality of the policy wording. Copies of opinion … are enclosed …. For 1998 and based on most recent opinion some minor alterations may be incorporated if underwriters deem these prudent and commercially acceptable”. The enclosures referred to were the Ince & Co letters dated 27 February and 7 March 1995, (paragraphs 29 and 30), RPC’s letter of advice dated 7 January 1998, RPC’s instructions to Mr Popplewell and Mr Popplewell’s Note of Advice (paragraphs 93 to 96).[108]Mr James agreed that in fact it had already been decided that no alterations would be made to the wording to meet Mr Popplewell’s expressed concern but said that he might have said so at his meeting with Mr Cackett.[109]The claims statistics for 1996/7 now showed that both the Falcon and Marine Drilling accounts had burnt through their individual limits of the PA cover. The levels of cover, benefits, deductibles and franchises were all accurately set out. Details of the “Member Entries” in each year were provided. As regards Falcon it was clearly stated that for the year 1997/8 the cover was for losses occurring or first notified in that period. There was no other reference to this provision but Mr James said he believed he may have drawn it to the attention of reinsurers. Mr Cackett did not contradict this. He could not remember one way or the other whether it was drawn to his attention.[110]The note of the meeting with Mr Littlemore (paragraph 81(iii)) was included in the Presentation again. Mr Cackett said he would have assumed that the note would not have been included if what it recorded was no longer the case. “It was confirmation that the underwriting stance had not changed” and, he said, confirmed his understanding that the accuracy of the benefit levels had been thoroughly revised .[111]Mr James said in his Witness Statement that, as in the previous year, there were no significant discussions nor queries relating to the benefit schedules and, contrary to Mr Cackett’s evidence, he had not made any representation that the benefit levels constituted a realistic assessment of the likely exposures of Steamship to members under the Club’s Rules. In cross-examination Mr James said that he did not have to tell Mr Cackett too much because Mr Cackett was familiar with the underwriting from his days at Syndicate 957 and probably knew Mr Feasey better than Mr James did. Mr James agreed that he had told Mr Cackett that it had become difficult to persuade Steamship to buy the product because Mr Feasey had always been reducing the benefit levels (as he had) and that the reductions would hopefully mean an improvement in the underwriting results. Mr James said that the gist of his presentation was that Mr Feasey was taking the same underwriting approach as Mr Cackett had done and the Syndicate was continuing to do a professional job in terms of the legalities, the appraisal of the risk and matching the benefits.[112]In his First Witness Statement (dated 14 December 2001) Mr Cackett’s evidence was that had he been informed at the time that Steamship was expecting to make a significant over-recovery under the Master Lineslip that would have defeated the equalisation process and he would not have written the reinsurances. Indeed this part of his statement appeared to be predicated on the basis that at the time of the placing Steamship had anticipated making an “over-recovery” in the region of 48.6% more than it was to pay to its members. The Statement does, however, also say that had he been informed that Syndicate 957 “had not been making a professional and good faith effort to monitor the levels of the fixed benefits so that overall they approximately matched the payments by Steamship to its members or had not performed a thorough analysis of the benefit levels” he would have been “very concerned”, and if he had not understood “that the benefits had been thoroughly reviewed” Mr Cackett would not have written the business. The way he put it in cross-examination was that he was content with the benefit levels set by Mr Feasey because he believed Mr Feasey had “used his best endeavours” and “continued to remain vigilant” about them.[113]Mr Cackett said in evidence that the figures in the presentation which he would have been particularly interested in were the summaries of the losses to the various excess layers in the years 1994/7 showing their development over that period. That was, of course, the cover he was being invited to write. He also said, in re-examination, that “the gist of the broke” in relation to the reduced benefit figures of $400,000 and $1000 per week was that “Mr Feasey had continued to underwrite the risk in such a fashion that it was now going to make an underwriting profit, and that those benefit levels were far closer to those that were appropriate”. Asked by Mr Kendrick in terms “what about the monitoring?” (meaning monitoring of inwards against outwards claims) Mr Cackett said he thought “it was taken as a given that it must have been monitored, otherwise there was no reason for him to reduce those benefit levels”. It is, I think, significant that even in such a context Mr Cackett did not say that “monitoring” had been expressly discussed or even referred to. It is also the case that Mr Cackett himself had further reduced the benefits in the case of Falcon and Marine Drilling in the spring of 1996 to $500,000 and $1750 without reference to any “monitoring” save to the extent that the retrospective reduction from $4000 to $2250 could be said to have been so derived (paragraphs 68 and 70). He proposed limits and premium on the basis of “as if” calculations of the claims on the Syndicate just as Mr Feasey had done.[114]In May 1998 Mr Cackett agreed on behalf of Phoenix and Sun Life 50:50 to renew the four reinsurances of Syndicate 957 which are the subject of the Syndicate’s claims in Folio 1333. The contracts covered losses on declarations attaching in the period 20 February 1998 to 20 February 2000. One was to pay $90,000 excess $10,000 each and every person, accident or occurrence. The other three were burning cost covers (as in 1997: see paragraph 84) in respect of premium adjustments payable by the Syndicate on other excess layer covers placed with other reinsurers. Mr Cackett said that in writing this business he relied upon Mr James’ presentation and in particular the representation which Mr James disputes. THE RELIANCE”TOP-UP”[115]On 29 June 1998 Mr Cackett provided Mr James with a non-binding indication for what has been referred to as the “top-up” or “sideways” cover of Steamship. The cover was to protect Steamship for the 3 years at 20 February 1997 in the event that the Master Lineslip total limits (overall or for individual members) were exhausted. The benefit levels and terms were to be the same. The maximum cover was to be $10m a year. Mr Cackett indicated that a fronting company was to be agreed and a premium of $12m. Mr Cackett said that in discussions with Mr James, Mr James had indicated that this cover would be a way of utilising “the spend of Steamship”, meaning the amount allocated by Steamship to but not used for the purchase of reinsurance, and that there was very little likelihood of a loss to such a policy. Mr Cackett said it was put to him by Mr James “very much that it was more of a gift than a risk”. Mr Cackett could, however, offer no sensible explanation for Steamship paying such a sum as a gift.[116]Mr James’ evidence about the origins of the Reliance top-up was that it arose out of a joint discussion with Mr Cackett which concluded that “it would be beneficial to all parties” to offer Steamship such a policy as it would give Steamship total comfort but would hopefully be less likely to be affected by losses.[117]On 17 July 1998 Lloyd Thompson wrote to Mr Johnston with an indication for the top-up cover with a maximum limit of $40m. The indication came from Reliance National but as a front for Centaur and Mr Cackett. The premium quoted was $15m.[118]On 12 August 1998 Mr James informed Mr Cackett that Reliance National had agreed “to front for Sun Life/Centaur” for a three year limit of $40m “excess” of the cover provided by Syndicate 957. On 12 September Mr James and Mr Cackett met in Bermuda and on 14 September Centaur accepted the reinsurance of Reliance on behalf of both Sun Life and Phoenix equally. Mr James and Mr Cackett met again in San Francisco on 25 September. On 27 September Mr James wrote to Mr Cackett saying:
“… I have pleasure (!?!) in enclosing the final information and records pack in respect of the (top-up) contract for your files. A copy is also lodged with Reliance, Steamship, Lloyd Thompson and Monument. I thought it a little too much to ask you to carry this back to Bermuda with you!”
[119]The “information and records pack” was indeed an enormous amount of material filling over 5 lever-arch files. Mr Cackett said the contract had already been written and he doubted if the information had been shown to him or Centaur before. He had no recollection of looking at it, and he thought the information was unnecessary because of the terms in which the risk was “broked” to him. The information in fact contained schedules of inwards claims to Steamship together with Steamship’s estimates of their value albeit not distinguished between PTDs and TTDs because that distinction was only material to the Master Lineslip.[120]Reliance signed the Slip on 30 September 1998.[121]CENTAUR AND PHOENIX . In March 1998 Mr Cackett gave 6 months notice to Phoenix to terminate the Underwriting Management Agreement between Centaur and Phoenix. Mr Sawyer and Mr Cackett met in Toronto in April and Mr Sawyer made it clear then that “going forward” Mr Cackett and Centaur were not to do anything which would increase or extend the exposure of Phoenix but it was agreed that they could reduce the exposure if that was possible.[122]On 17 August 1998 Centaur sent Mr Absalom a letter concerning the termination of the underwriting agreement with Phoenix. The letter enclosed a “Newsletter” which itself stated that:
“Centaur … have given notice to Phoenix … to terminate their Underwriting Agreement to take effect from 1 st October 1998. From the 1 st October 1998 Centaur are pleased to offer 100% Sun Life … as our sole Principal ….”
[123]Mr Absalom accepted that he probably read this letter on his return from holiday in early September 1998. Ms Benson accepted that she probably saw it and that it was cleared with Sun Life. Mr Sawyer accepted that Phoenix would probably have approved it. Mr James accepted that Monument would have received it and he was aware of its contents.[124]Phoenix sent out standard letters itself. Mr Absalom and Mr James were on the relevant computerised mailing list. The letter, dated 26 August, stated that the underwriting agreement would be terminated “effective” 1 October 1998 and added:
“We confirm that we shall continue to honour all obligations in respect of business accepted prior to October 1, 1998 by Centaur on our behalf.”
[125]Mr James did not recollect receiving the letter; I think and find that he probably did. Mr Absalom accepted that he probably also read this letter.[126]In fact, after 1 October, Centaur was allowed by Phoenix to run off the business written pursuant to the Underwriting Management Agreement. THE OCTOBER 1998 PRESENTATION and 1998/01 COVERS[127]On 19 October 1998 Mr Johnston reported to his partners on the “Rig Portfolio”. The report had a schedule attached to it with estimates of Steamship’s overall liabilities and reinsurance recoveries as well as premiums received and paid. For the years 1995-1997 taken together the figures show the Club was estimating an overall net loss on the account of $3.180m.[128]On 20 October 1998 Monument prepared a further reinsurance presentation on behalf of Syndicate 957 in respect of the three-year period 20 February 1998/01, in effect involving a further one-year extension to the existing cover. Apart from minor changes to up-date the information the presentation was the same as the previous one and is relied upon by Sun Life and Phoenix in the same way.[129]Centaur agreed to extend the four reinsurances. That was done in each case by an endorsement and (later) cover note addendum. The endorsements (button-stamped and initialled by Mr Cackett on 29 October) recorded that it was “noted and agreed that with effect from inception” the period of cover was to read 1998/01 and that “all other terms and conditions remain unaltered”. It is this extension which is the subject of The Authority Issue.[130]Mr Cackett agreed with Mr James and Mr Absalom that he would not have written the endorsements unless he believed he had full authority to do so. But he said that when he wrote them he “did not know … that I actually addressed my mind to exactly who I was underwriting for … I was underwriting on behalf of Centaur. I do not know that I actually would have considered whether it was Sun or Phoenix at the time”. By 29 October Centaur’s agreement with Phoenix had terminated to the knowledge of both Mr James and Mr Absalom. The cover to February 2000 had been written prior to termination on behalf of Phoenix and Sun Life equally. The extension to 2001 was written after termination. Mr Cackett thought he might have had it in mind to re-sign the cover in February 1999 as 100% Sun Life. Despite, perhaps tentative, submissions and evidence to the contrary the extension was plainly a new contract and cannot be described as “a variation” or a run-off of an existing contract even if that was a material distinction. The only sensible construction that I think can be put on these events is that, as Mr Fenton submitted, Mr Cackett had no authority to write any new business on behalf of Phoenix and so could not bind Phoenix to the 2000/1 extension for 50% or at all, but equally that, as Mr Kendrick submitted, he was not in fact writing the extension so as to bind Sun Life 100% even if arguably he would have had authority to do so. The endorsement purported to extend an existing cover written for both companies and as Mr James said, and is plainly right, had Mr Cackett been writing 100% for Sun Life that would have been clear in the documentation when in fact the opposite is the case THE CLAIMS ON THE RELIANCE TOP-UP[131]In February and March 1999 Steamship notified substantial claims on the top-up policy essentially arising from the deterioration of the Falcon declaration under the Master Lineslip. Mr Cackett instructed that an audit be carried out. It was this which led to Mr Cooper’s second inspection of Steamship’s records and indirectly to the present proceedings. THE FIGURES[132]Schedules of figures continued to be produced in the course of closing speeches. Submissions about the figures continued to be made (at my invitation) in writing after the conclusion of the speeches. There remain matters of doubt and debate. In part Sun Life and Phoenix blame that on allegedly inadequate disclosure on the part of Steamship whereas Steamship maintains the detail at least is of no relevance. Nonetheless I think I must do my best to make some sense of the position. First, however, I should note a number of more general points.[133]The fact that Sun Life and Steamship are in radical dispute as to what exposures of Steamship should be compared to what recoveries made under the Master Lineslip and other protections to assess any “over-payment” is, I think, a consequence of the potential for misunderstandings inherent in the PA concept itself. Of course it may also be that any relevant comparison for the purpose of the misrepresentation case differs from that required, if it is required, for the purposes of Section 3 of the 1774 Act. But Sun Life and Phoenix submit that any true comparison should be only between inwards claims by members and outward claims recoveries on the Master Lineslip (and other protections) in respect of the very same claims. Sun Life also submits that the deductible agreed between Steamship and Syndicate 957 should be excluded from inwards claims (because in effect Steamship agreed to be self-insured to that extent), and that legal expenses should also be deducted (but see paragraph 35). Steamship contends that all inwards claims, save to the admittedly very small extent they were not for death or injury, should be included even if they could not be claimed for under the Master Lineslip (because, say, the limits had been exhausted) and that the existence of and recoveries made from other protections (the excess of loss and Reliance Top-up covers) are of no relevance in any comparison.[134]Mr Martin produced a schedule which showed that even at 8 January 2002 inwards claims were still open for outstanding sums of some significance: 1996 ($3m) 1997 (6.5m) 1998 (15m) and 1999 (14.3m). Steamship was anxious to stress that claims which were still open were unpredictable as to their final outcome. I am, however, quite satisfied that Steamship’s reserving procedures were of a high standard and likely to give reliably realistic estimates across the whole account. The one area of significance which does materially affect the estimates relates to the possible “translation” of a TTD into a PTD. On the evidence, Steamship applied a rigorous approach requiring evidence approaching a certainty or at least clarity of inability to return to pre-accident employment before classifying a claim as PTD rather than TTD. It is that approach which largely if not entirely explains why the figures deteriorated after some years. It is agreed that at least the years subsequent to 1999/00 are not sufficiently developed to provide a meaningful analysis.[135]There is no evidence before the court which shows, even as a matter of probability, that for the relevant periods of cover either the death or the TTD benefit levels set were such as to lead to any “over payment” to Steamship however that calculation is approached. For the last 3 years, February 1998 to 2001, the levels were standardised at $400,000 and $1000 a week. The cause of any over recovery is the PTD benefit level coupled with the fact (if it be material) that in any cases where the claim exceeded $400,000 the excess reinsurance protected Steamship and in any case where the aggregate limit had been exhausted the Reliance top-up cover would respond. It is also Steamship’s evidence (which I accept) that in the year 1995, once the aggregate limit of the Master Lineslip had been exhausted, separate figures for PTDs and TTDs were no longer necessary nor kept and so that, at least without detailed examination of individual claims files, such figures would not have been available had they been asked for at any time.[136]Mr Martin’s schedule at 8 January 2002 set out for each policy year the estimated claims position and the insurance and reinsurance recoveries position of Steamship. In general terms the figures showed for all years and all bodily injury claims Steamship’s exposure was some $213m (of which 1997 accounted for some $43m) but if the exposure was capped at the maximum amount insured under the Master Lineslip and limited only to claims where some recovery from Syndicate 957 was estimated (i.e. where annual policy limits were not exceeded) the figure for all years was some $153m and for 1997 some $29m.[137]Recoveries (estimated, paid and outstanding) from Syndicate 957 for all years totalled some $158.7m and some $29m for 1997. Those figures of themselves therefore are comparable to Steamship’s exposures.[138]Steamship also had recoveries from the Reliance top-up of some $19.8m, of which $13.8m was in respect of 1997, and from excess of loss contracts protecting the account in a total of some $36.5m, of which an amount of $8.2m is attributable to 1997. The Reliance top-up cover was first agreed in September 1998 effective from February 1997. It would, from its very nature, as Mr Martin said, not have been the subject of any estimated recoveries for some substantial period after it incepted. The figures include legal costs. Mr Cooper estimated that legal costs formed about 13% of the value of claims by members.[139]Using the same figures as Mr Martin, Mr Cooper set out figures for what he described as “the correct analysis” which compared all the assumed claims that could generate recoveries under the Master Lineslip and the Reliance top-up with recoveries made under the Master Lineslip, the top-up policy and the general excess of loss programme. The results of that analysis for the years 1997-1999 were set out in paragraph 10 of his second witness statement and showed a “profit” over the 3 years of $19.7m on claims of $118.8m (16.66%) and for 1997 alone of $8.1m on claims of $43m (18.96%). That profit would be increased by $1.5m (if the aggregate deductible was taken out) and by some $500K a year for liabilities not involving death or injury. Legal expenses were also not included but rightly so in my judgment.[140]In the course of his oral evidence Mr Martin produced a further schedule based on the latest review of the statistics for the years 1997-2000. In general terms this schedule showed that: i) For the more developed years, 1997-1999, the numbers of death and PTD claims were approximately the same as the number of TTD claims. Mr Martin said the probability was that as the year 2000 developed so the result would be similar as some TTDs translated to PTDs. He also said that in 1998 Steamship would have predicted that rather than an equal split there would be 3 or 4 times as many TTDs as death and PTD claims. He pointed out (rightly) that the “qualifying period” (see paragraph 53) for a TTD in the years 1995 and 1996 was 152 weeks and only reduced to 104 weeks in 1997 and thus at renewal in 1998 it would not have expired for any of the years. Although Mr Johnston said he was not surprised at the ratio shown by the schedule, I accept Mr Martin’s evidence. He was the “claims man” and both Mr Martin and Mr Johnston said that equal numbers of PTDs and TTDs was not what they foresaw in 1998 and that the historic information then available would not have revealed otherwise. ii) The average net of deductible estimate of Steamship’s exposure for death and PTD claims was of the same order as the average recovery under the Master Lineslip, and the average for TTD claims on Steamship was to a significant extent greater than the average recovery under the Master Lineslip. This comparison, however, was comparing all the incoming claims to Steamship regardless of whether they were ones which gave rise to a liability under the Master Lineslip.[141]Mr Kendrick and Mr Kerr had done some homework on those Falcon PTD claims at April 1998 where it was possible from the disclosed documents to identify the sums reserved by Steamship for the Club’s exposure to Falcon. Of the 4 claims concerned the average figure reserved by Steamship was some $148K. The PTD benefit was $400K. Mr Martin, I think understandably, described this as a small sample which he doubted was representative. The next 7 PTD claims (appearing in the August 1998 bordereau) researched by counsel had an average reserve of some $200K.[142]In his closing submissions, Mr Kendrick (in the context of the application of Section 3 of the 1774 Act), and considering the value of inwards claims which were or came to be claimed on Syndicate 957 as PTDs but capping the claims at a figure of $400,000 (to reflect Sun Life’s case that the Excess Reinsurance should also be accounted for) produced a schedule showing the average value of the inwards “PTD” claims on Steamship to have been of the order of $275,000 in 1997 and $270,000 in 1998 and 1999. Granted the $400,000 cap the ‘actual’ figures would have been higher and I think on the figures probably significantly so.[143]Finally, at least as regards the trial, in the course of his Closing Submissions, in reply to Mr Kendrick, Mr Boswood produced a further schedule of figures albeit one requested earlier by Mr Kendrick. This schedule sought to identify and derive a value for inwards claims which were PTDs in the years 1995/6 and 1996/7. The debate to which it gave rise demonstrates the difficulty of the exercise. That is because once the Syndicate’s cover was known to have burnt through Steamship did not categorise claims as TTD or PTD (because there was no need for it to do so) and so only claims presented and paid as PTDs before then were readily identifiable as such. The schedule showed an average value of the claims Steamship identified as PTDs (based on the high reserve) for the two years of $472,000. It also showed that in each year the average estimated value of all inwards claims on Steamship exceeded by a substantial margin the average estimated recovery from Syndicate 957. But, as Mr Kendrick submitted, these latter figures ignored the aggregate deductible, recoveries under the excess of loss reinsurance for the 1996/7 year, and included inwards claims which had not been claimed on Syndicate 957 because the cover had burnt through. Because of the limit on the cover and the fact that there was no excess of loss cover until 1996 there is no doubt on the figures that Steamship suffered an overall loss in the years 1995/6 and 1996/7. Mr Kendrick also criticised the selection of those claims identified as PTDs and in particular the omission of inwards claims which would have been of a low value but nonetheless claimed as PTDs had the cover not burnt through. All these criticisms I think have some validity. In fact the claims identified by Steamship as PTDs in 1995/6 only numbered 16 and in 1996/7 only 11 and the recent figures would strongly suggest that had the cover not burnt through many more claims would have been so classified. The figures do however support Steamship’s case that it was only later on expiry of the TTD “qualifying period” that the number of PTDs became apparent.[144]As I have said, the figures and the evidence and submissions about them leave considerable uncertainties but I will summarise the conclusions which I have drawn about them as a matter of probability:- i) Insofar as it is suggested that at any material time Steamship deliberately set out to make or appreciated it was making “a profit” I am entirely satisfied the suggestion would be wrong. Steamship saw the covers as providing a worthwhile contribution towards its overall exposures to members and did not expect to profit or to be “over-compensated”, rather the opposite. ii) There is no evidence to suggest that the TTD figure of $1000 a week was greater than the cost of the same claims by members. The probability is that it was less. iii) The only basis on which the figures now show that Steamship has made a profit or been over-compensated is the inclusion of the recoveries from the excess of loss and Reliance top-up covers. iv) The death benefit figure has generally been ignored in evidence, possibly because there were only about 5 death claims in each year. v) The numbers of PTD claims which have arisen was unexpected and unforeseen by Steamship in 1998 when the relevant covers were agreed and for some time thereafter. It is the numbers of PTD claims (and the existence of the excess of loss and top-up reinsurances which covered them) which has led to any over-compensation. vi) Both Steamship and Syndicate 957 honestly believed when the relevant covers were agreed in 1998 that the level of benefits had been set so as to eliminate any possibility of over-compensation for Steamship. Neither had any information to suggest the contrary and each could justify its belief on the information available and the history of reducing levels of benefit. In the case of Steamship that is so even with the knowledge of the excess of loss and Reliance top-up insurance it acquired. As stated I accept Syndicate 957 was unaware of those contracts. vii) Even allowing for recoveries under the excess of loss and top-up contracts the estimated level of “over-recovery” in 1997 and 1998 and 1999 whilst substantial (paragraph 139) cannot, I think, be characterised as of a size such as to change the character of the transaction from insurance to gaming or a wager. Moreover there is probably some unknown balancing factor resulting from under-recovery on TTD claims. THE EXPERTS UNDERWRITING[145]Mr Berry said that in all his experience he had never before come across a situation where what he described as a “reinsured’s liabilities” were dealt with by a policy of insurance rather than reinsurance. Mr Hunt agreed. Mr Berry also said that whilst it is not unusual to write a three-year contract with fixed rates at the outset and no ability to adjust them he would describe doing so as “bad or foolish underwriting”, but provided reinsurers were informed (as Mr Cackett plainly was informed) that there was no scope to adjust rates annually they would have no cause for complaint.[146]On Materiality Mr Berry’s evidence was that “ordinarily” he would say that representations that an estimate had been undertaken of Steamship’s realistic likely exposure to its members and that the fixed benefits were realistic estimates of that exposure would not be material to a prudent underwriter when deciding whether and on what terms to write the four reinsurance contracts which Mr Cackett wrote. That was because the reinsurer’s risk is based upon the benefit levels which are agreed and not the actual claims incurred by Steamship. But, he said, in this case, because it was intended that on balance over the year Steamship’s exposure would approximate to its recoveries from Syndicate 957 and that was fundamental to the Master Lineslip such representations would be material to the prudent underwriter. Mr Berry’s reason for this opinion was two-fold. First that because the Master Lineslip was not providing indemnity cover it could lead to circumstances where Steamship was being guaranteed a healthy profit lowering Steamship’s own underwriting standards, which “would normally discourage a reinsurer from providing protection”, and second because the legality of the Master Lineslip depended upon recoveries approximating to exposures.[147]It was also Mr Berry’s opinion that a representation that a professional appraisal had been made of the benefit levels would be material to a prudent reinsurer of Syndicate 957. That, also, was because “the Syndicate’s tracking of fixed benefits goes to the moral hazard aspect of the risk in that if Steamship were to make a gross profit from the concept then it may lead to Steamship accepting business without proper underwriting considerations”.[148]Mr Hunt did not consider that representations about the benefit levels being realistic estimates of Steamship’s exposure to members would be material to the reinsurance contracts written by Centaur and Mr Cackett. His reason was the same as Mr Berry’s reason for his opinion that this would “ordinarily” be so: what Steamship paid members did not affect the amount Syndicate 957 was to pay Steamship and it was only the Syndicate’s exposure to those amounts which Mr Cackett was being asked to reinsure. Mr Hunt added that as to the excess reinsurance layer written by Mr Cackett $90,000 excess $10,000 would in any event be exposed by every death and PTD to a total loss and as the exposure of the burning cost covers depended on further premium becoming payable by the Syndicate to other excess of loss reinsurers they were also unaffected by the amounts paid by Steamship to members. The key was the number of claims not the level of benefits. Centaur and Mr Cackett could set their own terms for any cover they were prepared to offer focusing on the loss experience in the reinsurance statistics. That was where their profit was to be found, if it was.[149]Mr Hunt thought that any risk of Steamship dropping its underwriting standards was dependent upon Steamship being aware that it was sure to profit from the business and in any event impacted the relationship of Steamship and Syndicate 957 not the position of the Syndicate’s reinsurers. But he agreed that at the time of renewal a comparison or monitoring of the benefits paid against the exposures of Steamship should have been undertaken by a prudent underwriter of the Syndicate in order to make an overall comparison between the total amount of the benefits provided and Steamship’s total exposures. The target of the comparison would be the lawfulness of the cover and so to check as well as could be done that the overall balance was within acceptable limits and the benefit levels need not be adjusted on renewal. Mr Berry’s opinion was that monitoring should be done, certainly on renewal, and by reference separately to the three categories of benefit, death, PTD and TTD. Ms CAMP’s EXPERT REPORT[150]Ms Camp is an experienced actuary. It was her opinion that if, in 1998, she had been in the position of Syndicate 957 and wanting to ensure that the benefits would in the aggregate equate with Steamship’s underlying exposures she would normally have required details of Steamship’s loss experience in paying equivalent liability claims for ideally 10 but at least 5 years. She would use industry and rig owners loss history if that information was not available. Her conclusion was that as the data she would have required was not available to her she could not provide an estimate of the “appropriate levels for the fixed benefits” and so could not confirm by any actuarial technique whether the levels in fact were realistic estimates. MR SMART’s EXPERT OPINION[151]Mr Smart described a number of types of personal accident policies which pay fixed benefits upon the death or disablement of the insured. Key man (or key men) insurance has been marketed for over 20 years. The fixed payment will not usually be dependent upon demonstration of any particular loss or damage. So, too, with sports and entertainment insurance such as a football club insuring a star player for a fixed payment to be made to the club in the event of injury. Mr Smart said that the fixing of the benefit levels in such policies was “necessarily an inexact science” because the value of the insured’s interest in the key man or star player cannot be established with precision nor is it likely to remain the same throughout the term of a policy. Multiples of salary or revenue generated are typically used. Mr Smart agreed that in the cases he was describing the insured and the key man or star would (at least usually) be in a pre-existing contractual relationship albeit, for example, in the case of a “group” policy an employer might insure all his employees from time to time. THE 1774 ACT ISSUES[152]The 1774 Act is entitled:
“An Act for regulating Insurances upon Lives, and for prohibiting all such Insurances except in cases where the Persons insuring shall have an Interest in the Life or Death of the Persons insured.”
[153]The Preamble states:
“Whereas it hath been found by experience that the making insurances on lives or other events wherein the assured shall have no interest hath introduced a mischievous kind of gaming.”
[154]Section 1 provides:
“From and after the passing of this Act no insurance shall be made by any person or persons, bodies politick or corporate, on the life or lives of any person or persons, or on any other events whatsoever, wherein the person or persons for whose use, benefit, or on whose account such policy or policies shall be made, shall have no interest, or by way of gaming or wagering; and that every assurance made contrary to the true intent and meaning hereof shall be null and void to all intents and purposes whatsoever.”
[155]Section 3 provides:
“And … in all cases where the insured hath interest in such life or lives, event or events, no greater sum shall be recovered or received from the insurer or insurers than the amount of value of the interest of the assured in such life or lives, or other event or events.”
THE SUBMISSIONS[156]It is important to state at the outset that Sun Life and Phoenix do not make any case that the Master Lineslip was “gaming or wagering”. Nor do they make any case that the Master Lineslip was not “a genuine commercial relationship”.[157]The case on Section 1 (as pleaded and advanced in submissions) is that: i) As liability insurers Steamship’s only insurable interest was the risk of liability of a Member to third parties. The type of interest and the type of policy must coincide. ii) When the Master Lineslip was agreed Steamship “stood in no legal or equitable relation to the lives” of the third parties (“Original Persons”) concerned who included anyone who might come on board an Entered Vessel during the policy period. iii) At most Steamship had “an expectancy” that claims made against Members by Original Persons as a result of injuries arising in the course of the policy period could lead to liability on Steamship under the Club’s Rules. “Such an expectancy is not an insurable interest at all still less an insurable interest sufficient for an insurance on the lives themselves.”[158]The case on Section 3 is that assuming (as must be assumed if the Section is to apply at all) Steamship did have an insurable interest at inception then the true value of that interest must be judged at that time and assessed by an honest estimate on reasonable grounds of its true monetary value. That, it is submitted, did not occur and using the knowledge then available and comparing only Steamship’s exposure on those claims in fact claimed on Syndicate 957 an average figure for death, PTD and TTD should now be assessed and any greater amount paid should be re-paid or any such amount claimed should not be paid.[159]Steamship’s submission is that once it is accepted that the Master Lineslip was neither gaming nor wagering but a genuine commercial arrangement then Section 1 of the Act has no part to play. A contingent interest in the lives and well being of Original Persons arising from the liability to indemnify members for their death or injury is a sufficient insurable interest. If that requires a robust purposive approach to the Act then it is submitted there is good reason and authority to justify it. The submission on Section 3 is that provided the relevant interest is valued in good faith at the inception of the cover then that is sufficient to satisfy the Section.[160]Both approaches, I think, derive support from authority. THE PURPOSE OF THE ACT[161]Despite the wording of the preamble it is not at all clear from the reference works to which my attention has been drawn what was the nature of the “mischievous kind of gaming” at which the Act was aimed nor why it needed to do so; nor, indeed, is it clear to me what purpose the Act serves today insofar at least as it extends beyond “gaming” which, as a matter of language, Section 1 purports to do by the use of the words “no interest or by way of gaming or wagering”.[162]At common law wagering contracts were not illegal; nor were contracts expressly agreed to be “interest or no interest”. Indeed that language may explain the use of the words “no interest” in the Act. The Marine Insurance Act 1746 prohibited wagering policies on risks connected with British shipping. The preamble to that Act shows that the major purpose was prevention of the fraudulent loss or destruction of ships and their cargoes. Park’s treatise on “A System on the Law of Marine Insurances” 7 th Ed 1812 suggests that the target was to outlaw the insuring of “ideal” risks (used in contrast to an indemnity against loss from “real” risks) meaning risks with “no reference whatever to actual trade or commerce”. The target of the 1774 Act, according to Park, was the insurance of lives with which the assured had no connection as a “mode of gambling” possibly because it was undermining the security of insurance companies. No doubt, as Mr Boswood submitted, in the early 19 th century the law of disclosure had not been developed to provide the protection to insurers which it does today.[163]What, however, I think is undoubted is that the purpose of the legislation was indeed to prevent “gaming” in the disguise of insurance and in the sense of gambling on the outcome of an uncertain event in which the “assured” had no interest save for the interest created by the very gamble or agreement itself: see Tindal C.J. in Paterson v Powell (1832) 9 Bing 329 at 327. In that context a purpose can also be divined for section 3. Section 1 outlaws insurance in which there is no interest at all. Section 3 bites where there is an interest but prevents recovery of more than the value of the interest. Otherwise it would be possible to insure a genuine interest in an amount many times the value of any loss which could possibly be occasioned which would in principle be no different from gaming on the excess: see Dalby (below). THE AUTHORITIES[164]The authorities on which Mr Boswood principally relied were the following.[165]In Dalby v The India and London Life Assurance Company [1854] 15 CB 364, a decision of the Court of Exchequer Chamber, an insurance company (Anchor) had taken out a policy of insurance with the defendant company on the life of the Duke of Cambridge in the sum of £1000 for which it had agreed to pay and did pay a yearly premium during the life of the Duke. Anchor had itself granted policies of insurance to a Reverend Wright on the Duke’s life in a total amount of £3000. Anchor’s policy with the Defendant was “a cross or counter-assurance” or, in today’s terms, a reinsurance. The significance of the decision derives from the fact that before the Duke died Anchor agreed with the Reverend Wright to the surrender and cancellation of his policies in return for an annuity. The issue was whether or not it sufficed that Anchor had an interest in the Duke’s life when the policy with the Defendant was effected or whether such an interest had to subsist at the time of the Duke’s death. No one seems to have bothered with questions whether or not the Reverend Wright had an interest in the Duke’s life.[166]The court decided unanimously that it was sufficient for the interest to exist at the time the insurance was effected and that its value at that time was recoverable under Section 3. The obligation at that time to pay the Reverend Wright was “unquestionably an interest in the continuance of the life of the Duke” under Section 3. Parke B, delivering the judgment of the court, said at page 389:
“Now, what is the meaning of this provision? On the part of the plaintiff, it is said it means only, that, in all cases in which the party insuring has an interest when he effects the policy, his right to recover and receive is to be limited to that amount; otherwise, under colour of a small interest, a wagering policy might be made to a large amount, - as it might if the first clause stood alone. The right to recover, therefore, is limited to the amount of the interest at the time of effecting the policy. Upon that value, the assured must have the amount of premium calculated: if he states it truly, no difficulty can occur: he pays in the annuity for life the fair value of the sum payable at death. If he misrepresents, by over-rating the value of the interest, it is his own fault, in paying more in the way of annuity than he ought; and he can recover only the true value of the interest in respect of which he effected the policy: but that value he can recover. Thus, the liability of the insurer becomes constant and uniform, to pay an unvarying sum on the death of the cestui que vie, in consideration of an unvarying and uniform premium paid by the assured. The bargain is fixed as to the amount on both sides. This construction is effected by reading the word “hath” as referring to the time of effecting the policy. By the 1 st section, the assured is prohibited from effecting an insurance on a life or on an event wherein he “shall have” no interest, - that is, at the time of assuring: and then the 3 rd section requires that he shall recover only the interest that he “hath”
. If he has an interest when the policy is made, he is not wagering or gaming, and the prohibition of the statute does not apply to his case. Had the 3 rd section provided that no more than the amount or value of the interest should be insured, a question might have been raised, whether, if the insurance had been for a larger amount, the whole would not have been void: but the prohibition to recover or receive more than that amount, obviates any difficulty on that head.”[167]In Stock v Inglis [1884] 12 QBD 564 the Court of Appeal held that buyers of sugar to whom the risk of loss of the sugar but not the property in it had passed had an insurable interest. Brett M.R., at page 571, began his judgment as follows:
“Nobody can deny that this is a case of extreme difficulty and of great nicety. In my opinion it is the duty of a Court always to lean in favour of an insurable interest, if possible, for it seems to me that after underwriters have received the premium, the objection that there was no insurable interest is often, as nearly as possible, a technical objection, and one which has no real merit, certainly not as between the assured and the insurer. Of course we must not assume facts which do not exist, nor stretch the law beyond its proper limits, but we ought, I think, to consider the question with a mind, if the facts and the law will allow it, to find in favour of an insurable interest.”
[168]In Mark Rowlands v Berni Inns [1986] 1QB 211, the issue was whether a basement tenant had an interest in the landlord’s fire insurance policy and an insurable interest in the premises which were destroyed by fire. The Court of Appeal decided that “this ancient statute” and in particular Section 2 of the 1774 Act (which makes it unlawful not to name, as the tenant was not named, “the person interested” in a policy to which the Act applies) had no application to indemnity insurance but only to insurances which provide for the payment of a specified sum upon the happening of an insured event. The court also adopted and applied (Kerr LJ at page 228) “the classic definition of insurable interest” given by Lawrence J in Lucena v Craufurd (1806) 2 B&P 269 at 303:
“A man is interested in a thing to whom advantage may arise or prejudice happen from the circumstance which may attend it; … and whom it importeth, that its condition as to safety or other quality should continue: … to be interested in the preservation of a thing, is to be circumstanced with respect to it as to have benefit from its existence, prejudice from its destruction.”
[169]The authority is, I think, fairly described as an example of a robust approach to the 1774 Act in order to achieve a plainly just result. A similar question in relation to Section 2 of the Act arose in Siu Yin Kwan v Eastern Insurance Co [1994] 2 AC 199 (PC) with the same result, the Privy Council expressly following the decision in Mark Rowlands in holding that the Act did not apply to indemnity insurance. The claim arose out of the death of two seamen on their employers’ vessel but the employers were not named in the relevant policy. At page 211F Lord Lloyd said:
“There are two reasons why their Lordships prefer the decision in Mark Rowlands …. In the first place the words “event or events” in section 2, while apt to describe the loss of the vessel are hardly apt to describe … liability arising under the common law, as a consequence of the loss of the vessel. Secondly, section 2 must take colour from the short title and preamble to Section 1. By no stretch of the imagination could indemnity insurance be described as a “mischievous kind of gaming”
. Their Lordships are entitled to give section 2 a meaning which corresponds with the obvious legislative intent.”[170]In The Moonacre [1992] 2 Lloyd’s Rep. 501 Mr A. D. Colman QC (as he then was) had to consider circumstances in which the plaintiff, S, had bought a vessel, insured it in his name, but registered it in the name of company, R. The boat was destroyed by a fire. The insurers argued that S had no insurable interest in the vessel, albeit by agreement with R he was entitled to exclusive use and control of the vessel. It was this agreement which enabled the Judge to distinguish the case of Macaura (see below) because (see page 512) S had an insurable interest in the vessel as he would benefit from its preservation and suffer loss of a valuable benefit if it were lost or destroyed. At page 510 the Judge also expressed the view that there was no third category of contracts of insurance which were not wagering contracts but were unenforceable for want of an insurable interest. That view was however in the context of, albeit not limited to, the Marine Insurance Act 1906 which is in different terms to the 1774 Act. Indeed and perhaps to add to the illogicalities and want of principle in this area of the law, the 1906 Act expressly provides that an interest at the time of loss is necessary but not at the time the insurance is effected (section 6) and so contrasts with the decision in Dalby where that Act applies.[171]It is well established by authority (see MacGillivray on Insurance Law , 9 th Edition, paragraphs 1-83 and 1-88) that a creditor or surety has an insurable interest in the life of the debtor to the extent of the debt, and a debtor has an insurable interest in the life of his creditor provided the latter has made a binding promise not to enforce the debt during his lifetime. That is an example where the type of interest and type of policy do not “coincide”. So, too, is keyman insurance. Credit risk insurance or loss of profits cover would be more coincident.[172]In Clarke “The Law of Insurance Contracts ” 3 rd Ed (1997) at paragraph 3-6D in discussing the value of an insurable interest, the author expressed the opinion that “the view in the United States” was realistic that if such an interest exists the amount of the policy may exceed its actual value “unless so grossly disproportionate as to change the predominant character of the transaction from insurance to wager”.[173]The authorities on which Mr Kendrick principally placed reliance were the following.[174]There is a considerable body of high authority which determines that for an assured to have an insurable interest in property he must have a legal or equitable relation to it at the time the insurance incepts. One of the leading cases in this context is Macaura v Northern Assurance Company Limited [1925] AC 619. The House of Lords there decided that neither a shareholder nor a simple creditor of a company had any insurable interest in any particular asset of the company because as such he had no legal or equitable interest in it. The question arose in a case where the owner of a timber estate sold it to a company in exchange for shares in the company but the timber was insured against fire in his own name. The timber was destroyed by fire. Although the assured was the sole shareholder in and a substantial creditor of the company it was held that he had no insurable interest in the timber. The 1774 Act was not itself in issue. Clarke notes that Macaura has not been followed in Canada; is not the law in the USA and the law has been changed by Statute in Australia. The only requirement in those jurisdictions is that the assured has “a relation in fact to the subject matter of the insurance giving rise to an economic interest”. By no stretch of the imagination, however, could the unsuccessful plaintiff in Macaura be thought to have been indulging in gaming or wagering.[175]In Deepak Fertilisers v ICI Chemicals [1991] 1Lloyd’s Rep 387 P’s methanol plant had been constructed with the use of know-how and services supplied by D. Following completion the plant exploded. The plaintiff sued D for negligence and breach of contract. The plaintiff had undertaken to indemnify D against loss to the plant and to cause D to be named as co-insured in all insurances effected in respect of the plant. D contended that it had a complete defence to the claim because it was entitled to be insured against it. In that context the question arose whether or not, following completion of the plant, D had an insurable interest in the plant itself. The Court of Appeal held that it did not. The relevant reasoning is to be found at pages 399-400 in the judgment of the court delivered by Stuart-Smith LJ. The Court held that whilst D had an insurable interest in the plant under construction, because it might lose the opportunity to work on it and earn remuneration if it were destroyed, after completion its only interest was in damage or destruction to the plant caused by D’s own breach of contract or duty of care and that could be insured only by liability insurance not insurance on the property or structure itself. So here, Mr Kendrick submits, Steamship had no interest in the lives or well-being of Original Persons but only in the Club’s possible exposure to indemnifying members against the member’s liability to those Persons.[176]An earlier example of the same principle is Anderson v Morice (1875) LR 10 CP 609 (Exch. Ch) and (1876) 1 App, Cas. 713 (HL) in which a purchaser of a cargo was held to have no insurable interest in the cargo itself until the risk had passed to him on completion of loading. The only possible insurable interest was on the profits from sale of the cargo but not on the cargo itself which alone was the subject matter of the relevant insurance: per Blackburn J (Exch. Ch) at page 621. To much the same effect is Glengate v Norwich Union [1996] 1 Lloyd’s Rep 614 in which Auld LJ at page 623 said that “the nature of the insurable interest in each case must depend on the type of cover in issue”. However, both Niell LJ (at page 622) and Auld LJ (at page 624) referred to The Moonacre with approval (albeit more so in the case of Neill LJ than Auld LJ) and both Lords Justices appear to have considered that questions such as the degree of certainty of exposure and commercial considerations were material to the existence or otherwise of an insurable interest in property.[177]Finally the decision in Hebdon v West (1863) 3 B&S 379 was understandably very much at the forefront of Mr Kendrick’s submissions on Section 3 of the 1774 Act. As Mr Boswood submits that the decision cannot stand with Dalby (decided only a few years earlier) it is important to note that Dalby is a decision of a higher court. Hebdon was a decision of the Court of King’s Bench (Wightman, Crompton and Mellor JJ). Both, however, are binding on me.[178]Hebdon claimed against (in effect) an insurance company (“ILA”) under a policy by which he insured in the sum of £2500 the life of X. Hebdon was employed in a bank of which X was the senior and managing partner. In 1855 Hebdon was employed on a seven-year contract at £600 a year. He also owed the bank £4700 on loans it had made to him. X had assured Hebdon that during X’s life Hebdon would not be called upon to repay the loan. Hebdon, with X’s permission, in 1856, insured X’s life with another company (CGLI) for £5000 so as to provide against the loan. 12 months later, the debt having increased to £6000, Hebdon took out the policy with ILA which was the subject of the proceedings. X died in 1861. CGLI paid £5000 which Hebdon paid to the bank. ILA contended that Hebdon had no interest in X’s life within the meaning of the 1774 Act or that his interest was less than the £2500 so that he should recover less pursuant to section 3 of the Act. The court decided that there was no insurable interest at all in X’s assurance that the loan would not be called because there was no consideration for the assurance and it was not therefore a binding agreement such as could be “considered as a pecuniary or indeed any appreciable interest in the life of X”. The court did hold that there was an insurable interest in Hebdon’s salary (for 5 more years at £600 a year) at the time the policy was effected, and so in a sum in excess of the value of the ILA policy, but nonetheless that because the value of that interest had been paid by CGLI Hebdon could recover nothing by virtue of section 3 of the Act. The judgment of the court was delivered by Wightman J.[179]The “question” which arose, as described by Wightman J at page 222, was whether the payment of £5000 by CGLI “is a bar to the plaintiff’s claim by virtue of [Section 3] it being taken as a fact that the £5000 included all the insurable interest that the plaintiff had at the time of making both policies; in fact that the interest of the plaintiff at the time of making the insurance with the defendant was the same as that which he had when he made the insurance with [CGLI] …. …. It was said that … the object of the statute would be defeated, as a small amount of insurable interest might be made the foundation for a great number of insurances, each to the amount of the whole interest of the insured ….”[180]Wightman J referred to the use of the words “insurer or insurers” in section 3 as an indication that recovery could only be made once (rejecting, to my mind, a compelling submission that the use of the plural contemplated several insurers on one policy) and continued:
“Looking to the declared object of the legislature, we are of the opinion that though, upon a life policy, the insurable interest at the time of the making the policy, and not the interest at the time of death, is to be considered, it was intended by the 3 rd section of the Act that the insured should in no case recover or receive from the insurers (whether upon one policy or many) more than the insurable interest which the person making the insurance had at the time he insured the life. If for greater security he thinks fit to insure with many persons and by different contracts of insurance, and to pay the premiums upon each policy, he is at liberty to do so, but he can only recover or receive upon the whole the amount of his insurable interest, and if he has received the whole amount from one insurer he is precluded by the terms of the 3 rd section of the statute from recovering or receiving any more from the others. Any argument arising from the supposed hardship of allowing the insurers in such a case to receive and retain the premiums without being obliged to pay the consideration for which such premiums were paid, would be equally applicable to the case of marine assurances, upon which, however many policies there may be, the underwriters are only liable to the extent of the value insured.”
[181]For my part, I have some difficulty in following this analysis. The judgment proceeds on the basis that there was a sufficient insurable interest under Section 1 at inception. A decision to the contrary, in a case of “double insurance” might be sustainable as “gaming” or otherwise but the consequence was that Section 1 was satisfied. Dalby indeed then requires that Section 3 be applied to the interest valued at inception. That, as held, exceeded the sum of £2500. I cannot then read Section 3 as Wightman J appears to do. Although Hebdon has been long referred to in text books as the leading authority on section 3 of the 1774 Act with genuine deference I do not think it is consistent with Dalby in the reasoning. If I had an option, which I do not, as to which case to follow I would follow the reasoning in Dalby . CONCLUSIONS[182]There are to my mind powerful and compelling arguments to be made and which have been very well made in favour of the opposing submissions. The issue is also one of general importance. This is not the only case in these courts in which it arises. I have, however, reached the conclusion that Mr Boswood’s arguments are to be preferred and that I am not precluded by authority from preferring them. My reasons are: SECTION 1 i) There can be no real dispute that Steamship had as a matter of the usual use of language a real and significant contingent economic interest in the lives and well being of persons on vessels entered by members with it. The extent of that interest (whether or not an over-recovery was made) is reflected in the Club’s paid and estimates of its incurred liabilities to its members arising from injury to those persons. I do not see why the fact that some of those persons are not identifiable at inception of the cover and they may change over the period of cover should affect the substance of the position. ii) In principle, as it seems to me, insurers who quote for and so price and are paid premiums to undertake risks should meet the liabilities agreed to be undertaken unless of course there are matters of law or fact which compel another conclusion. This was indeed a commercial agreement freely entered into by established and experienced professionals. iii) It is obvious in this case that the tension between the need for an insurable interest and Mr Cackett’s target of writing a cover which would be classified as PA for Lloyd’s Audit codes has resulted in a hybrid cover which is on my findings part PA and part liability. It does not readily fit into any category. But in principle I do not see any compelling reason why a liability exposure should only be insured as such. The decisions to the contrary are in the context of property insurance and often relate to insurance against the loss of a benefit and I see no reason to import them into other types of insurance where the existence of a “legal or equitable right” is not a normally appropriate concept and the context is a contingent liability not the loss of a benefit. Further, Steamship’s contingent obligation to indemnify members for the death or disablement of Original Persons can properly be characterised as a legal relationship. Mr Kendrick accepted that no objection could be taken pursuant to the Act to an indemnity reinsurance against liability which paid in pre-arranged amounts. As he put it “a valued policy is still an indemnity policy”. In principle I can see no substantive difference between such a policy and the present contracts. iv) I accept Mr Kendrick’s submission that the Master Lineslip is unusual, if not unique, and to decide that it was unlawful would not involve any serious consequences beyond those to the present parties because hopes that it could be marketed widely proved unfounded as, again ironically, it proved unattractive to insureds. But I can detect no discernible or rational policy or other principle or reason why the law should strike it down as unlawful when it is accepted rightly and inevitably that in no sense did it amount to gaming or wagering, is not suggested to be contrary to any other policy consideration and is not commercially objectionable. SECTION 3[183]Applying Dalby , I think the question which Section 3 asks is what was “the amount of value of ” Steamship’s interest in the lives and well being of persons on vessels entered by members with it at the time when the insurance contracts incepted.[184]The question is, as the case itself demonstrates, easier to state than to answer. These proceedings have focused attention on several matters of apparent principle in assessing the “value” of the interest. First, what, if any, is the relevance of a deductible or franchises agreed between insured and insurer or a limit on the overall level of recovery, and, second, what if any is the relevance of the insurer acquiring other insurance for or related to the relevant interest? The “interest” exists but if the contract of insurance itself limits the extent to which it can be recovered or other insurance responds when the limit is reached does Section 3 look to the value of the interest before or after the contractual limits are applied or with or without regard to other insurances?[185]The sophistication of modern insurance practices is not readily addressed by application of the language of Section 3, and particularly so when the ‘value’ has to be assessed at inception. The answer to these questions ought not to depend on matters of timing of agreements or payments, which may be affected by the length of the cover and a host of uncertainties. A further irony is that it is Mr Kendrick’s submission that Section 3 has now to be applied in effect to provide an indemnity to Steamship against the liability of members which, as Mr Boswood submitted, was the very thing which Steamship wanted but Mr Cackett and Syndicate 957 were concerned and determined to avoid in order to comply with the Lloyd’s audit codes in their own commercial interests as they saw them.[186]I have found that both Syndicate 957 and Steamship in proposing and agreeing to the relevant benefit levels acted in good faith. Both believed that the insurance provided only for recovery of the value (or less than the value) of the insurable interest which I have held Steamship had and so was entitled to insure. The insurance was of course priced and paid for on the basis of the benefits provided. Syndicate 957 does not complain of any misrepresentation or non-disclosure at the time of placement.[187]In my judgment there is no requirement to be found in Section 3 to enter into any detailed examination of the values of insurable interests with or without the benefit of hindsight. Nor is it required that a court should examine and assess whether a given value was arrived at without negligence or reasonably. The underlying purpose of Section 3 is derived from Section 1: to outlaw recovery of the proceeds of what is properly to be described as gaming or wagering. As I have found and indeed is accepted, and whether or not account be taken of limits and other insurances, no one was gaming or wagering at the time. I would also repeat that even with the benefit of the latest figures and hindsight a case to the contrary cannot in my judgment be justified: paragraph 144(vii).[188]In these circumstances I do not think Section 3 has any application. In my judgment in approaching that Section the court should confine itself to a consideration of whether the insurable interest it finds to exist under Section 1 has in fact been insured in a manner or at a value which can be seen to be such that it either is or is not fairly to be characterised as gaming or wagering at the time of the contract. The basis for any valuation, the care with which it is arrived at, the existence of other insurances, limits and the like may be, and in this case I think are, all potentially material to that question but they are not and in my judgment in this case are not conclusive.[189]I would add that in Hebdon v West it was not the existence of the two policies which resulted in non-recovery, nor was it criticised, but payment of what the court found to be full value under the first policy. Even if I am wrong in my view of Hebdon v West , that is not the case here. THE MISREPRESENTATION ISSUE[190]The first representation alleged is that in 1998 Mr James represented to Mr Cackett that the fixed benefits in the Master Lineslip constituted “a realistic estimate” made by Syndicate 957 “of the average sums likely to be properly paid out by Steamship in respect of death, PTD or TTD” under the Club’s Rules for the 1998 and following years. In support of this allegation reliance is placed on the statements and information in the Renewal Presentation to which I have referred in paragraphs 107 to 114. I shall refer to this as “the realistic estimate” representation. In his closing submissions Mr Kendrick described it as “the bottom line” of the case on misrepresentation and non-disclosure.[191]The second representation alleged is that at Mr James’s presentations in 1998 “the gist” of the presentation was that Steamship’s risk “had been carefully and professionally appraised by Mr Feasey, who had carefully adjusted benefit figures and other terms of the account in the light of past loss experience with the aim of making a gross underwriting profit which he was confident, on reasonable grounds, would be made”. The basis for this alleged representation is the same but in particular the note of the meeting with Mr Littlemore: paragraph 81(iii). I shall refer to this as “the professional appraisal” representation.[192]The allegation that the realistic estimate representation was a misrepresentation is to be found in a “Further Pleading” served pursuant to an Order made by Thomas J in November 2001. Essentially reliance is placed on what is said to be the actual outcome and the substantial “over-recoveries” made by Steamship and the failures to “monitor” inwards claims on Steamship against the benefit levels to see if the one “tracked” the other.[193]The basis of the allegation that the professional appraisal representation was a misrepresentation is that Mr Feasey did not know or ask for the underlying loss statistics of Steamship and did not have any “as if” figures showing the effect of the adjustments to the benefit levels on the profitability of the account and should not have placed the reliance he did on the Falcon figures and Mr Johnston’s letter (paragraphs 77-78 and 89-90).[194]It was also alleged that Syndicate 957 or Monument failed to disclose the existence of the excess of loss contracts taken out by Steamship. But that allegation was (rightly) not pursued once Mr Feasey and Mr Absalom had given evidence that they were not aware of the contracts. Both Mr Berry and Mr Kendrick accept that no criticism could be made of them in that regard.[195]The pleaded allegations of breach of contract were also not pursued at the hearing or in Closing Submissions on behalf of Sun Life and Phoenix and need not be addressed. THE REPRESENTATIONS[196]It is of course for Sun Life and Phoenix to establish the representations on which they rely. There are, I think, serious difficulties facing them in doing so. Both the realistic estimate and professional appraisal representations are expressed in general terms and, as the evidence and submissions unfolded, are not based on any specific words but have to be distilled if possible from the substance of the written information provided and the oral exchanges between Mr James and Mr Cackett at the time of placement. Their lack of real recollection, the potential for misunderstanding arising from their previous roles and the tensions to which I have referred make for an unpromising context in which to find representations of sufficient clarity to justify avoidance of the contracts. As Mr Flaux submitted, in every reinsurance placing there is likely to be an understanding that the relevant reinsured underwriter has acted carefully and professionally in writing the original insurance but that would not normally become a binding representation that there has been no want of care on his part. Normally it is for the reinsurer to exercise his own skills in assessing and pricing the risk and providing he is not misled and proper disclosure is made he can have no complaint if it turns out that he has made a bad bargain.[197]Much of the Sun Life and Phoenix case sought to provide a measure of precision by asserting that the substance of a realistic estimate and a professional appraisal was the need to “monitor” estimates of inwards claims on Steamship so as to compare the estimates with the benefits provided by the Master Lineslip. Yet it is not suggested that Mr Feasey or Mr James ever made an express representation to the effect that the Syndicate had done any monitoring or done so in any particular manner. Nor did Mr Cackett say otherwise (paragraph 113).[198]The development of the realistic estimate and professional appraisal submissions into a complaint of a failure to monitor also depended in large part on the submission that the placing in 1998 had to be seen in the context that Mr Cackett had carried out such a monitoring exercise himself in early 1996 and that the bordereaux were originally designed to enable monitoring to be carried out. But on my findings that simply was not the case. The relevant figures were made available in late 1995 as part of the debate caused by the unexpected timing and size of the first claims. It is true that the figures were used as a lever to obtain a retrospective reduction in the TTD figure but they did not and could not have informed Mr Cackett’s reduction of 50% in the death and PTD benefit figure to $500k for the 1996/7 year in the case of Falcon and Marine Drilling. Mr Cackett was happy with the figures (including a lower TTD figure of $1750) and that they had been professionally established. Mr Cackett did not take any steps either in the wording or at inception or at any time before his departure to set up a system to enable the sort of monitoring now referred to to be carried out (paragraphs 57(v) and 62). Nor is it suggested that he ever inquired about the inwards claims figures again. Indeed on the evidence there are real doubts that any or any adequate PTD figures were available in 1998 had anyone sought to ask about them. It also follows that Mr Kendrick’s submission that there was an implied mis-representation/non-disclosure because Mr Cackett was not told that Mr Feasey and Mr Absalom were no longer engaged in the “proper monitoring” which Mr Cackett had undertaken must fail.[199]The reliance on Mr Littlemore’s note looks to a general statement when the specific comments contained in it, as Mr Cackett acknowledged, were correct. No doubt, as he said, Mr Cackett had been confident an underwriting profit would be made when he wrote the Master Lineslip and when he set the level of some of the benefits for 1996/7. As the note itself records, and Mr Cackett, Mr James and Mr Feasey would all have understood, predictions of profitability would be difficult to make.[200]Trying to stand back from all the evidence and to distill “the essence of the broke” in my judgment it was really, as indeed Mr Kendrick’s submissions suggested, and I think was the thrust of Mr James’s evidence (paragraphs 80 & 111) that Mr Feasey and Syndicate 957 were carrying on and doing as Mr Cackett had done. But, as Mr Flaux submitted, I do not think Mr Cackett had done anything materially different. Both priced on the Syndicate’s claims figures. Both sought to reduce the benefit figures. Indeed Mr Feasey had reduced them substantially below figures Mr Cackett had been content to provide. Mr Feasey was indeed right on the evidence to believe that the TTD figure of $1000 per week provided less than Steamship’s exposure and indeed probably right that the death and PTD figure of $400K provided less or at least not significantly more than Steamship’s exposure to such claims provided the excess of loss and Reliance top-up covers (of which he was not aware) were not accounted for. Nor was there anything to suggest in 1998 that anyone did or should have anticipated that Steamship would make a profit. Whilst I think Mr Flaux sought to give more importance to the top-up cover in this context than justifiable, Mr Cackett was of course aware of it and so at least that Steamship was prepared to pay a very substantial sum for extra protection.[201]In my judgment, therefore, Sun Life and Phoenix have failed to establish the representations on which they rely and the claims on that basis fail at the first hurdle. I propose therefore to address the other issues which arise on these claims only briefly. MISREPRESENTATIONS?[202]If I had found that the misrepresentations relied on had been made it is right to record that I do think some of the criticisms of Mr Feasey’s underwriting are justified. The reliance he appears to have placed on the Falcon figures in 1997 was, I think, more than the figures could justify. So, too, he misunderstood the figures in Mr Johnston’s 25 November 1997 letter. The enlargement of the Falcon cover (paragraphs 103-106) even allowing for the lack of opportunity for Mr Feasey to consider it, is difficult to understand when no figures were requested.[203]On the other hand, I also think that Mr Feasey was entitled to act on the basis of his belief that Steamship was not making an overall profit. In the early months of 1998 no figures would have revealed what is now known to have been the cause of the losses and of any profit namely the numbers of late developing PTDs. Nor, as stated, can Mr Feasey be criticised for not being aware of the excess of loss and Reliance top-up covers which alone account for any significant profit to Steamship. In that context the benefit levels Mr Feasey in fact set are not open to criticism and no amount of “monitoring” would have shown otherwise. MATERIALITY[204]I prefer the views of Mr Berry to those of Mr Hunt only to the extent that I think it would be material to a prudent underwriter that Steamship was not being generally over-compensated by the benefit levels set. Whilst it is true that Steamship’s underwriting standards would or could only be affected if the Club was aware of or anticipated a profit I think Mr Kendrick and Mr Berry are right that a prudent reinsurer would consider it material that his insured was at least satisfying itself that Steamship was not being over-compensated in a manner or to an extent which could lead to a lowering of standards or indeed to the unlawfulness of the business. But I do not think it goes further than that.[205]I also readily accept that in given contexts express representations as to the professionalism or competence of an underwriter could be material. But I do not think they are likely to amount to guarantees that business has been written without negligence and I do think materiality will depend on the context having sufficient specific reference to provide the necessary certainty for the question to be tested. INDUCEMENT[206]Mr Cackett’s evidence is set out in paragraphs 112 to 114. Expressed largely in negative terms as it is I find it hard to characterise. Nor can the issue readily be addressed in the light of my findings on the “essence of the broke”. Mr Flaux submitted that it was “fanciful in the extreme” to suggest that Mr Cackett was induced to write the reinsurances by either the reliable estimate or the professional appraisal representation (if made). That submission was not, I think, well reflected in the cross-examination of Mr Cackett on the issue. Had it been specifically discussed with and represented to Mr Cackett that inwards claims on Steamship were being monitored by Syndicate 957 in some specific way to calculate appropriate benefit levels I would have held that such a representation was material and had Mr Cackett said he would not otherwise have written the business I think such a statement could credibly have been supported. But, although I would not go nearly so far as the language used by Mr Flaux, I am left in real doubt as to whether either alleged representation if made would have acted on Mr Cackett’s mind. He priced the contracts on the Syndicate’s statistics. I think he thought the lawfulness of the Master Lineslip no longer a concern. I am sure he was confident from his own knowledge that the benefit levels (especially as reduced further by Mr Feasey) were not a problem. He had been content with much higher ones. He knew Steamship and he knew Mr Feasey and Mr Absalom. He had created and understood the business.[207]In the final analysis I am also not satisfied as a matter of probability that even if either representation relied upon was made it or they did induce Mr Cackett to write the business. THE AUTHORITY ISSUE[208]I have already recorded (paragraph 130) that: i) The extension of the Sun Life/Phoenix reinsurance of Syndicate 957 for the year 2000 to 2001 was written by Centaur after termination of Centaur’s authority to write business on behalf of Phoenix. ii) the termination of Centaur’s authority from Phoenix was known to both Syndicate 957 and Mr James. iii) the extension was nonetheless in fact written by Centaur on behalf of both Sun Life and Phoenix equally and in any event was not written only on behalf of or 100% for Sun Life.[209]It follows that Centaur/Mr Cackett had neither express nor apparent authority to write the extension on behalf of Phoenix and Phoenix has no liability in respect of the extension. Sun Life, subject to the other issues, accepts that it was on risk for 50% of the extension but no more. It is right to do so. It does not in any way follow that because Centaur and Mr Cackett had no authority to write the extension for Phoenix it and he must have written the extension 100% for Sun Life. On analysis, however, that was the only way in which Mr Flaux could and did put the Syndicate’s case. The fact is that Centaur and Mr Cackett purported to write an extension of the existing contract written by both Phoenix and Sun Life. He did not and did not purport to do so only for or 100% for Sun Life and no one understood that he had. RELIEF[210]I will hear the parties when this judgment is handed down on the details of the relief to which they submit they are entitled and any other applications arising out of what I have decided. Essentially, Steamship is entitled to the Declarations it seeks and Syndicate 957 is entitled to be paid sums due from Sun Life and Phoenix under the reinsurance contracts on a 50% basis, save in respect of the year 2000/1 when Sun Life alone is liable on a 50% basis.

Cited in 1 later judgment