Poole & Ors v Her Majesty's Treasury [2006] EWHC 2731 (Comm)

“The Claimants’ case in outline is that: 2.1 Each Claimant participated in the writing of insurance business by Lloyd’s syndicates, which are annual ventures acting as insurance undertakings, and in so doing subscribed capital to the venture and placed at risk his entire net personal wealth to meet, if necessary, syndicate liabilities; 2.2 The liabilities of each syndicate included liabilities incurred but not reported (“IBNR”) in respect of insurance business written in previous years, acquired on supposedly commercial terms under a system known as reinsurance to close (“RITC”) which involved, among other things, fixing reserves at a level sufficient to meet all liabilities including IBNR; 2.3 Contrary to the requirements of the Insurance Directive, the Defendant failed to implement in the domestic law of the UK, or to achieve the result prescribed by, the provisions of the Insurance Directive relating to (among other things) the conditions to which the authorisation of insurance undertakings at Lloyd’s was to be subject, and the monitoring of same; the classes of insurance business such undertakings are permitted to write; requirements as to technical reserves and solvency margin of such undertakings; and the verification of such requirements. 2.3A The Defendant failed to ensure, as at the date of each annual RITC exercise after the Insurance Directive came into force, that there was in place at Lloyd’s any adequate system of accounting reasonably capable of ensuring that syndicate assets (including reserves) were sufficient to meet known and IBNR liabilities, including those inherited through successive RITC exercises. 2.4 The Claimants, in various years of account: 2.4.1 joined Lloyd’s; 2.4.2 continued in membership of Lloyd’s; and/or 2.4.3 increased their underwriting capacity at Lloyd’s, when the IBNR liabilities inherited by many syndicates were, unbeknown to them, far greater than was revealed by the information available to them and than the assets available to meet those liabilities. Each Claimant has, in consequence, suffered the other loss and damage pleaded in paragraphs 99 to 103, including, in many cases, personal liability incurred on or about 3 September 1996 to pay a substantial sum as part of Lloyd’s “Reconstruction and Renewal” (“R&R”) exercise (which related to the 1992 and earlier years of account), and additionally facing the prospect of future demands as a result of the proportionate insolvency of Equitas. 2.5 Had the Defendant, as at the date of each material RITC exercise, ensured compliance with the requirements of the Insurance Directive, the existence of very substantial but unquantifiable IBNR liabilities, and an ineffective accounting and auditing system, would have been revealed and the Claimants would not, variously, have joined Lloyd’s, continued in membership or increased their underwriting, and to that extent would not have suffered the loss and damage pleaded in paragraphs 99 to 103. 2.6 The Claimants have accordingly suffered loss as a result of the Defendant’s breaches of the Insurance Directive.” 2.4.1 joined Lloyd’s; 2.4.2 continued in membership of Lloyd’s; and/or 2.4.3 increased their underwriting capacity at Lloyd’s, when the IBNR liabilities inherited by many syndicates were, unbeknown to them, far greater than was revealed by the information available to them and than the assets available to meet those liabilities. Each Claimant has, in consequence, suffered the other loss and damage pleaded in paragraphs 99 to 103, including, in many cases, personal liability incurred on or about 3 September 1996 to pay a substantial sum as part of Lloyd’s “Reconstruction and Renewal” (“R&R”) exercise (which related to the 1992 and earlier years of account), and additionally facing the prospect of future demands as a result of the proportionate insolvency of Equitas. 2.5 Had the Defendant, as at the date of each material RITC exercise, ensured compliance with the requirements of the Insurance Directive, the existence of very substantial but unquantifiable IBNR liabilities, and an ineffective accounting and auditing system, would have been revealed and the Claimants would not, variously, have joined Lloyd’s, continued in membership or increased their underwriting, and to that extent would not have suffered the loss and damage pleaded in paragraphs 99 to 103. 2.6 The Claimants have accordingly suffered loss as a result of the Defendant’s breaches of the Insurance Directive.”

“5. unanimously recognizes that the determining criterion for setting these rates should be the intention to protect insured parties, that is, the own capital endowment of an insurance firm should allow it, permanently and in every case, to execute the insurance contracts that it has concluded.”

“i) Whereas by virtue of the General Programme the removal of restrictions on the establishment of agencies and branches is, in the case of the direct insurance business, dependent on the coordination of the conditions for the taking-up and pursuit of this business; whereas such coordination should be effected in the first place in respect of direct insurance other than life assurance. ii) Whereas in order to facilitate the taking-up and pursuit of the business of insurance, it is essential to eliminate certain divergencies which exist between national supervisory legislation; whereas in order to achieve this objective, and at the same time ensure adequate protection for insured and third parties in all the Member States, it is desirable to coordinate, in particular, the provisions relating to the financial guarantees required of insurance undertakings. iii) Whereas a classification of risks in the different classes of insurance is necessary in order to determine, in particular, the activities subject to a compulsory authorization and the amount of the minimum guarantee fund fixed for the class of insurance concerned. iv) …. v) Whereas the various laws contain different rules as to the simultaneous undertaking of health insurance, credit and suretyship insurance and insurance in respect of recourse against third parties and legal defence, whether with one another or with other classes of insurance; whereas continuance of this divergence after the abolition of restrictions on the right of establishment in classes other than life assurance would mean that obstacles to establishment would continue to exist ; whereas a solution to this problem must be provided in subsequent coordination to be effected within a relatively short period of time. vi) Whereas it is necessary to extend supervision in each Member State to all the classes of insurance to which this Directive applies; whereas such supervision is not possible unless the undertaking of such classes of insurance is subject to an official authorization; whereas it is therefore necessary to define the conditions for the granting or withdrawal of such authorization; whereas provision must be made for a right to apply to the courts should an authorization be refused or withdrawn.” vii)…. viii ix x) The Eighth, Ninth and Tenth Recitals deal respectively with technical reserves, the solvency margin and the minimum guarantee fund. The eighth recital demonstrates that some aspects of coordination were to be reserved for later Directives. It provided:- “Whereas the search for a common method of calculating technical reserves is at present the subject of studies at Community level ; whereas it therefore appears to be desirable to reserve the attainment of coordination in this matter, as well as questions relating to the determination of categories of investments and the valuation of assets, for subsequent Directives … xi) …. xii) Whereas the coordinated rules concerning the taking-up and pursuit of the business of direct insurance within the Community should, in principle, apply to all undertakings entering the market and, consequently, also to agencies and branches where the head office of the undertaking is situated outside the Community ; whereas it is, nevertheless, desirable as regards the methods of supervision to make special provision with respect to such agencies or branches in view of the fact that the assets of the undertakings to which they belong are situated outside the Community. xiii) …. xiv) …. xv) Whereas it is important to guarantee the uniform application of coordinated rules and to provide, in this respect, for close collaboration between the Commission and the Member States in this field.”

“This Directive concerns the taking-up and pursuit of the self-employed activity of direct insurance carried on by insurance undertakings which are established in a Member State or which wish to become established there in the classes of insurance defined in the Annex to this Directive.”

“83 Moreover the Insurance Directive must be read with the 1991 Accounts Directive on the annual accounts and consolidated accounts of insurance undertakings, which amended the Insurance Directive and assists in its interpretation. Article 4 of the 1991 Accounts Directive provides that it shall apply to Lloyd’s subject to the adaptations set out in the Annex to that Directive, the said Annex requiring Lloyd’s accounts to show, inter alia, inter-syndicate business and provision for IBNR. 84 The purpose of the 1991 Accounts Directive is set out in the recitals thereto, which include:- “Whereas Article 54 (3) (g) of the Treaty requires coordination to the necessary extent of the safeguards which, for the protection of the interests of members and others, are required by Member States of companies and firms within the meaning of the second paragraph of Article 58 of the Treaty, with a view to making such safeguards equivalent throughout the Community; … Whereas such coordination is also urgently required because insurance undertakings operate across borders; whereas for creditors, debtors, members, policyholders and their advisers and for the general public, improved comparability of the annual accounts and consolidated accounts of such undertakings is of crucial importance.”

“84 Lloyd’s underwriters – financial resources (1) Subject to such modifications as may be prescribed and to any determination made by the [Treasury] in accordance with regulations, sections 32, 33 and 35 above shall apply to the members of Lloyd’s taken together as they apply to an insurance company to which Part II of this Act applies and whose head office is in the United Kingdom. (2) The powers conferred on [the Treasury or] the Secretary of State by sections 38 to 41, 44 and 45 above shall be exercisable in relation to the members of Lloyd’s if there is a breach of an obligation imposed by virtue of subsection (1) above.”

“(1) The Committee of Lloyd’s shall deposit every year with the [Treasury] a statement in the prescribed form summarising the extent and character of the insurance business done by the members of Lloyd’s in the twelve months to which the statement relates. (2) Regulations made for the purposes of this section may require the statement to deal separately with such classes or descriptions of business as may be specified in the regulations.”

“5 REGULATION. 5.1 Underwriters at Lloyd’s are subject to regulation in the United Kingdom and in certain other countries …. Whilst the Secretary of State has responsibility for overseeing and monitoring insurance business within the United Kingdom, the Lloyd’s Acts, together with the Insurance Companies Act, specifically give the Council and Committee of Lloyd’s full powers of self-regulation of the Lloyd’s market. The Council is, however, accountable to the Secretary of State for Industry (and hence to the United Kingdom government) and is required to lodge various statutory returns and other information with the Secretary of State for Industry. 5.2…. 13. LLOYD’S SOLVENCY TEST 13.1 Pursuant to the United Kingdom Insurance Companies Act (under which Lloyd’s operates) each Member’s underwriting accounts must be submitted annually, as at each 31st December, to a rigorous solvency test conducted by a firm of chartered accountants approved by the Council of Lloyd’s. This test is carried out in accordance with the “Instructions for the Guidance of Lloyd’s Auditors” (referred to as the “Instructions”) issued annually by the Council of Lloyd’s and approved by the Secretary of State. If, after taking into account all assets, … a Member’s accounts do not conform to the standard of solvency required, he will be obliged to provide sufficient additional funds or to cease underwriting. In conducting the annual solvency test, the managing agent and active underwriter of the syndicate must determine the reserves necessary to be created on the syndicates accounts including the amount required to close the account at the end of its third year…. 13.2 The Instructions which are reviewed annually by the Council of Lloyd’s set out the responsibilities placed upon auditors in connection with the annual solvency test of members of Lloyd’s, including in particular, the method to be adopted in calculating the value of the assets and the estimation of the outstanding liabilities as at the year end. 13.3 The Instructions require that the assets taken into account for the solvency test are valued at the year end. In the case of the Premiums Trust Fund, these may include cash with approved banks and discount houses, certain types of investments specified in the British Trustee Investments Act and their equivalent where the funds are invested in non UK obligations. Premiums Trust Fund Monies may also be invested in other securities which are readily realisable. These latter securities may not, however, exceed 40% of the Trust Fund plus net amounts due from Lloyd’s Brokers. Other assets which may be taken into account include balances due from Lloyd’s Brokers and the Members’ personal funds, e.g. Special Reserve Fund, Personal Reserves and Lloyd’s Deposits, but, in the case of the Lloyd’s Deposit, subject to the restrictions referred to under “description of securities”, 8.3. 13.4 Minimum requirements are prescribed in the Instructions for calculating the estimated future liability. In carrying out this exercise the managing agent must ensure that all factors are taken into account and, in many cases, the required figure will be higher than the prescribed minimum. For the purpose of estimating liabilities, underwriting accounts are divided into categories representing sub-divisions of the business underwritten in the four main markets, i.e. Marine, Non-Marine, Motor and Aviation, and scales of reserves, expressed as percentages of premium income, are set out in the Instructions for each of these categories. These percentage reserves, which are based on the general claims experience of the markets, are an absolute minimum requirement and if the claims experience for a syndicate demonstrates that a higher provision is needed, then it must reserve that higher figure. In addition, an alternative test based on the syndicate’s estimate of the outstanding liabilities as at the previous 31st December (which must include a provision for unknown and unnoted losses) is prescribed in respect of the third and subsequent years of account should this prove to be higher than the percentage reserves. 13.5….”

“2.01 In this chapter we seek to demonstrate the extent to which Lloyd’s is subject to statutory regulation, and how its freedom to regulate itself is thereby limited. We do not consider it to be the duty of this Working Party to consider the sufficiency or otherwise of the measures of statutory regulation which exist, or to suggest changes to them. The area with which we are concerned is that in which, by definition, there is no statutory regulation and Lloyd’s is left free to regulate itself. We are not, for instance, concerned with the adequacy of the regulations governing the Audit, in so far as these are regularly approved by the Secretary of State. We are however concerned with the effectiveness, or otherwise, of the steps taken by the Committee to ensure that statutory requirements are carried out by Members. 2.02 The Insurance Industry, both in the United Kingdom and in the many countries and states in or with which Members of Lloyd’s do business, is governed by legislation. In the United Kingdom the principal statute governing the Insurance Industry is the Insurance Companies Act 1974 but, in addition, by virtue of the European Communities Act 1972, the Insurance Industry in the United Kingdom is subject to the Treaty of Rome and to Regulations and Directives made under the Treaty…. Both in the United Kingdom legislation, the EEC legislation and in the legislation of many other countries special provision is made for members of Lloyd’s by virtue of the fact that Lloyd’s is recognised to be a unique institution. The exemptions from control which are accorded to Members of Lloyd’s are dependent on the proper exercise by the Corporation of Lloyd’s of its responsibility to regulate the Market, to maintain standards and to ensure compliance by the Members with the requirements of the various regulatory bodies. This fact alone provides a powerful argument for a constitutional system which will enable this responsibility to be carried out effectively. 2.08 As a result of an EEC Directive, a statutory instrument (S.I.1979 No. 956) was brought into operation in 1979 which applies to Lloyd’s as a whole the same solvency requirements as apply to insurance companies. Further, it empowers the Secretary of State to intervene in Lloyd’s affairs if it is unable at any time to meet these requirements. It enables the Secretary of State to exercise in relation to Lloyd’s certain of those powers of intervention he is granted in respect of insurance companies in the Insurance Companies Act 1974. 2.11 There are a number of EEC Directives which affect Members of Lloyd’s in so far as they are operative as part of the law of England and Scotland, or of any other EEC country in which Members of Lloyd’s transact business- Reinsurance Directive 25/2/64 64/225/EEC Co-ordination of Laws Directive 24.7.73 73/239/EEC Freedom of Establishment Directive 24/7/73 73/240/EEC Co-insurance Directive 30/5/78 78/473/EEC Directive re Freedom of Establishment and Freedom of Services for Insurance Intermediaries 13/12/86 77/92/EEC The European Commission has also made proposals for further Directives which, if and when adopted, may affect the conditions under which Members of Lloyd’s are free to provide insurance services throughout the community. We shall not find it necessary in this report to refer further to these Directives and draft Directives. However it is important for Lloyd’s to bear in mind that any rules and regulations which the Society may impose on its members, any requirements which Lloyd’s imposes as a condition for admission in any capacity, and any disciplinary rules and procedures must comply with European Community law and in particular with the Rules on Competition (articles 85-90 of the Treaty) which are administered by the European Commission (Directorate-General IV). We have had this in mind in the recommendations which we make in this report.”

“A substantial proportion of our Syndicate clients have losses, or potential losses, arising from asbestosis and related diseases. It appears that although, in respect of direct insurance of the main carriers and reinsurance of American insurers, Syndicates have received some notification of outstanding claims, they are unable to quantify their final liability with a reasonable degree of accuracy for the following reasons: (i) You have informed us that there have been approximately 15,000 individual claimants. Total exposure to the problem appears to be considerably in excess of this figure. (ii) The Courts have not yet finally decided on whether the exposure or manifestation basis is applicable. (iii) The losses are being apportioned over carriers on an “industry” basis. If one of the carriers has losses in excess of its insurance cover (as seems likely) then it could go bankrupt. It appears that its share of the industry loss could be apportioned over the remaining companies. (iv) Most Syndicates are not very certain of their reinsurance recoveries. (v) Most Syndicates will incur losses on their own writings of re-insurance business. Very little of this has been advised so far. The Audit Instructions (Clause 3) require that if there are any factors which may affect the adequacy of the reserves, then the auditor must report to the Committee and obtain their instructions before issuing his Syndicate Solvency Report. We consider that the impossibility of determining the liability in respect of asbestosis falls into this category and we accordingly ask for your instructions in this respect.”

“Potential claims arising in connection with Asbestosis represent a major problem for insurers and reinsurers. It is therefore all the more important that the reserves created in the Lloyd’s Audit at 31 December, 1981, fairly reflect the current and foreseeable liabilities of all syndicates. I should stress that the responsibility for the creation of adequate reserves rests with Managing Agents who will need to liaise closely with their Auditors. Clearly, individual circumstances will vary, but it is felt that the following broad guidelines may be helpful to Underwriters, Managing Agents and Auditors in agreeing equitable reserves as at 31st December, 1981, and ensuring, so far as possible, a reasonably consistent approach to this problem. 1. Reserves for Asbestosis liabilities should be separately identified and disclosed to Auditors. This applies for both the closing and open years. 2. Substantial information has been built up in the LUNCO Office regarding direct business …. 3. It is in the area of reinsurance writings that the information available may be least complete. Nevertheless, the Committee believes that some information is now available within the Market and Underwriters and Managing Agents should discuss with their Auditors the steps they have taken to quantify and reserve for losses which may arise on an Excess of Loss or Pro Rata basis as a reinsurance of American or other insurers. In this connection, Underwriters should attempt to identify reinsureds on whom Asbestosis claims are likely to fall and to seek their opinion as to the basis on which contracts together with the reserves which they are carrying at the present time and an estimate of possible future liabilities. 4. The Committee is aware of the legal argument whether liability arises on the basis of “exposure” or “manifestation”

“12.3 In chapter three we outlined the arrangements implemented under the 1982 Act for governing the Society. If the comparison is made between this structure and the regime envisaged under the Financial Services Act (outlined in chapter two), there can be little doubt that Lloyd’s will be less subject to external monitoring than the SROs which will be supervised by the SIB. This contrast is not as extreme, however, as some observers have suggested. Both the Department of Trade and Industry and the Bank of England have statutory functions in relation to Lloyd’s which give rise to a certain degree of external accountability. Moreover, the composition of the Council was specially designed so as to provide a check on the power of the working members. 12.4. The Department of Trade and Industry’s role arises from its responsibility for the authorisation and subsequent prudential supervision of insurers. One important element of this is the monitoring of their compliance with statutory solvency requirements. With regard to Lloyd’s the Department’s role is much more limited than it is in relation to insurance companies since the Society has statutory powers to regulate its own affairs. The Department has to approve the deed governing the premiums trust fund and the guidance provided by Lloyd’s to auditors as to the basis on which members’ non-life insurance liabilities are calculated. It also receives auditors’ certificates in relation to the accounts of all underwriting members and a statement of business covering the market as a whole submitted annually by the Council of Lloyd’s. The purpose of these documents, which are reviewed by the Department, is to confirm the solvency of individual members of Lloyd’s and to show that collectively they satisfy each year the solvency margin requirements laid down in legislation. The Department’s memorandum, produced at Appendix 14, explains its role in more detail and describes the residual powers available in the event of non-compliance with the statutory conditions. These important functions, which have their most recent basis in the Insurance Companies Act 1982, are, however, limited in scope and directed towards the protection of the interests of policyholders rather than Names, though the latter may derive some incidental benefit from them. It needs to be stressed that the Department’s statutory responsibility is concerned exclusively with the protection of policyholders; it has no duty to protect the interests of Names. Thus, although officials have commented on various aspects of the consultative documents issued by Lloyd’s in the process of regulatory reform, the Department has not attempted to develop any special role in that connection. For the future, section 59(1)(a) of the Financial Services Act will confer on the Secretary of State a power (which can be transferred to the SIB) to prohibit any individual whom he judges to be not fit and proper from being employed in connection with investment business by ‘authorised persons or exempted persons’. The Society of Lloyd’s and those permitted by the Council to act as underwriting agents are within the definition of exempted persons (section 42). 12.5 The Governor of the Bank of England has a statutory responsibility to confirm the appointment of the nominated members of the Council under section 3(2)(c) of the Lloyd’s Act. This responsibility carries with it no right to intervene in the regulation of the Society, but, in the difficult circumstances that existed in the latter part of 1982, the then Governor took the initiative in persuading Lloyd’s to create the new post of Chief Executive to which Mr Ian Hay Davison was appointed (see paragraph 3.14)”

“Syndicates were dealt a further blow as environmental pollution claims threatened to dwarf the asbestosis losses. At the end of 1988, 76 syndicates had, between them, a total of 120 open years as a result of these claims and other market problems. Inability to compute the RITC’s for those years has resulted in a marketwide problem affecting most of the members of Lloyd’s. None of the syndicates with these problems is in a position to close its open years of account. Indeed, the situation has deteriorated further this year with more syndicates reporting that they have had to keep open their 1986 Accounts.”

“This is a sombre reflection of the fact that long tail asbestosis and pollution claims are hitting reinsurance to close brought forward from 1985 and earlier closed years of account nearly as hard as they are hitting the syndicates with open run-off years of account. The deterioration, during calendar year 1988, of syndicates with open run-off years amounted to £179 million.”

“Over recent years money has been flooding out of Lloyd’s in order to pay claims relating to policies written decades ago. These claims which relate to asbestosis and pollution losses were, until recently, completely unanticipated and therefore Lloyd’s syndicates were caught without adequate reserves. This is causing a strain on the current membership and is resulting in many Names paying for losses arising on policies written before they were born. This has occurred at the same time as Lloyd’s Syndicates find their reserves coming under heavy fire from the Inland Revenue resulting in Names being attacked on two fronts.”

“At present, if it is to be allowed for tax purposes in toto, a managing agent is required by the Inland Revenue to set the syndicate RITC on a ‘no profit/no loss’ basis. The agent also has a duty to set the RITC at a level which is equitable to both the reinsuring Names and the Names on the closing year. This approach presupposes that the RITC can be set with a certain degree of precision. In some cases it can, for instance for short-tail business, but in many cases it cannot. The RITC can often only reflect a subjective judgment arrived at after considering a wide variety of factors. Consequently, an RITC can, with hindsight, often be seen to have been wrong. It will have been set in good faith, drawing on all relevant information and using appropriate reserving techniques, but it can still prove insufficient. Thus the receiving Names must carry a risk that the RITC will prove inadequate (likewise they have a potential upside should the RITC prove more than adequate). The reality of this risk is emphasised in the 1988 Global Accounts which show a deterioration of £365 million in respect of prior closed years, following a deterioration of £1295 million in 1987. At present the tax regime encourages many underwriters and their advisers to set and agree an RITC premium which is likely to be allowed by the Revenue as not containing a profit element or risk premium.”

“The size of the old years problem first became apparent in the first half of the 1980s, and its impact on Names has steadily increased since then. Over the past 4 years, the cumulative prior year underwriting result has been a loss of £1.6 billion; each year has seen a steady rise (Exhibit 52). The impact of these prior year losses, coupled with the cyclical downturn in current underwriting profits, lies at the heart of the market’s current difficulties.”

“14.22 The regulatory change effected by the Council following the Lloyd’s Act 1982 has been substantial. The Neill Committee commented, “the Council have acted with energy and determination in using their powers. They have transformed self-regulation at Lloyd’s. We know of no profession or equivalent organisation which has accomplished such a major programme of reform in such a short timescale”

“1. fraudulently and or negligently inducing my initial and continuing membership by wilful non-disclosure of material matters. 2. failure, wilful and continuing, to disclose a wide variety of material matters to me at the appropriate time or at all, including the following failures. 3. failure to regulate members agencies, and ensure that they at all times observe their fiduciary duties to Names in preference to their duties to managing agencies, Lloyd’s and the Council. 4. failure to regulate managing agencies, and ensure that they at all times observe their fiduciary duties to Names in preference to their duties to Lloyd’s and the Council. 5. failure to regulate the LMX market, and in particular the LMX spiral. 6. failure to regulate the cash call process. 7. failure to regulate syndicate accounting for reserves, profits, surpluses, losses and deficiencies. 8. failure to regulate the composition of syndicate years of account. 9. failure to regulate brokerage commissions. 10. failure fraudulently and or negligently to disclose the above and other material matters. 11. making fraudulent demand under my guarantee.”

“For reasons which will appear, we entirely fail to understand how Mr Emney, Mr Merrett, or any other underwriter at the relevant times could possibly have reached the conclusion that he was better able than the cedant syndicate or company to predict the outcome of such claims on their accounts – or to make any such prediction at all with any degree of confidence that it would turn out to be right. The material which we have seen, and which was deployed in open court during the Outhwaite trial, fully supports the conclusion that, well before any of the run-off contracts was written, and therefore long before any question of closing the 1982 year of Syndicate 418/417 arose, the asbestos problem was perceived to be of the utmost severity, and to constitute the gravest crisis ever to confront the insurance industry. Moreover, the impact of asbestosis claims on the industry generally, and on the accounts of particular insurers and reinsurers was perceived to be completely incalculable. This perception was not confined to US insurers: on the contrary, it was, or should have been, shared by anyone working in the London market having anything to do with the insurance or reinsurance of non-Marine risks emanating from the United States.”

“Please understand that on all general matters Christopher Stockwell speaks for all Action Group Chairmen and thus represents some 16,000 Names.”

“It seems to me to be clear beyond argument that the UK has a continuing obligation to comply with the directive. How it does so is a matter for the national government. In the case of Lloyd’s this country has chosen to permit the Society a large degree of self-regulation. If this self-regulation fulfils the requirements of the directive (and no one suggested before me that it did not) then the UK has performed its Community obligations in this regard. Thus on any view there is a close connection between the directive and the Lloyd’s Act 1982. It is true that only member states are bound by the directive, but that seems to me to be neither here nor there, for the question is whether the section in question is capable of being in breach of Community law, not whether the society itself is bound by the directive.”

“All Lloyd’s officials, at all relevant times, were well aware that the whole basis on which the Lloyd’s market operated was as set out in paragraph 4 of the Re-Amended Points of Defence and Counterclaim. Such officials knew, at all material times, that it was difficult or impossible to determine with any, or any reasonable, certainty, the degree of risk assumed by syndicates, or the extent of the potential liabilities of syndicates, because of the particular features of the Lloyd’s market referred to in paragraph 4 of the Re-Amended Points of Defence and Counterclaim….”

“3. Insofar as the Defendant intends at trial to make any positive case as to what Lloyd’s should do, whether in its regulatory function or otherwise, in order to seek to assess or control the exposures assumed by Lloyd’s syndicates, then give full and precise particulars of the Defendant’s case. ANSWER 3. Lloyd’s should have taken the following steps: (1) Lloyd’s should have devised, and introduced, an effective premium income monitoring scheme which: (a) gave an early warning of overwriting by syndicates; (b) took account of the adequacy of insurance rates; (c) differentiated between the riskiness of different classes of business being written; And/or (2) Lloyd’s should have developed a categorisation of the riskiness of different types of business for the purposes of its solvency requirements, with higher risk business requiring higher solvency margins; and/or (3) Lloyd’s should not have permitted 100% credit to be taken for reinsurance ceded to other Lloyd’s syndicates, for the purposes of its solvency requirements; and/or (4) Lloyd’s should have set limits to the proportion of high risk business (including, in particular, LMX business) that Names were permitted to write; and/or (5) Lloyd’s should have introduced requirements for managing agents of each syndicate to: (i) maintain reliable and up-to-date records of aggregate exposures (on both gross and net bases), as part of the syndicate’s accounting records; and/or (ii) prepare, and obtain board approval of, proper and accurate underwriting plans for each year; and/or (iii) disclose to Names the level of aggregate exposure assumed,….”

“My attention has been brought to two matters fundamental to Lloyd’s solvency this year and I would appreciate your comments. I am aware that David Rowland says solvency is settled and in the bag but I still have questions! Firstly you will doubtless have seen Mr Grossman’s letter to The Times concerning directive 91/674/EEC and the Francovich decision. My attention was drawn to these some months ago in a “learned dissertation” (!) but they have only acquired a new relevance in the light of my second point. I would be grateful to know if you agree that the Government will be liable for the losses of Names and Policyholders arising from passing Lloyd’s for solvency if that proves to be subsequently incorrect. If you do not accept the government will become liable, what are your reasons?”

“If the DTI certifies Lloyd’s solvency this year and Lloyd’s is later shown to have been insolvent, then based on the EC Insurance Accounts Directive (91/674/EEC) in force from January 1, 1994, and the 1991 Francovich decision of the European Court of Justice, the British Government might well be liable for any ensuing losses suffered by both names and policyholders.”

“Lloyd’s was capable of being regarded as an association of undertakings within the meaning of art. 85 of the EC Treaty. Certain decisions taken by Lloyd’s … had the potential to affect trade between member states and to distort competition in the common market. It followed that the issue of whether Lloyd’s had infringed art. 85 could not be determined as a preliminary point of law but should proceed to trial to be decided on the evidence.”

“On solvency the position remains as I described it in my previous letter, ie that subject to the completion of the detailed checking, Lloyd’s has met the statutory requirements. We do not anticipate any problem completing the scrutiny, but I am sure you will understand that the checking of the certificates for over 33,000 Names does take some time. I share your hope that the Equitas (alias NewCo) project will indeed be successful, but decisions on the authorisation of the company will naturally depend on the outcome of work still to be completed, and I would not wish in any way to prejudge the outcome. With regard to the Neville Russell letter, it seems to us that there is a great danger that in looking back on the events of 1981/92 with the benefit of twelve years hindsight, one will impute much more sinister motives than are reasonable. As we see it, Lloyd’s acted within a month of receiving the letter to alert the market to the problems. Lloyd’s also advised agents to inform the Names concerned of the potential problems. That does not seem to be an unreasonable way of proceeding. In this connection you enquired about the DTI’s actions at the time. I should perhaps remind you that the Department’s duties relating towards Lloyd’s are laid down specifically in what is now the Insurance Companies Act 1982. These duties are aimed mainly at policyholder protection and monitoring the solvency of Lloyd’s. In particular the Department is responsible for (i) the receipt of certificates relating to the accounts of every underwriter and the approval of the basis for calculating certain liabilities (s 83(4) & (5)); (ii) the receipt of the Statutory Statement of Business (s86), with which is associated the prescription of the application of sections 32, 33, and 35 of the Act (s84), and (should the situation arise) the exercise of any appropriate powers referred to in s84(2) in the event of a breach of s84(1); (iii) the approval of the deed governing the premiums trust funds (s83(2)); (iv) the exercise of powers relating to the transfer of business (s85). On the other hand, Lloyd’s is charged (under the Lloyd’s Act 1982) with the “management and superintendence of the affairs of the Society and the power to regulate and direct the business of insurance at Lloyd’s.”

“This submission was started several months ago when the Treasury Select Committee announced its intention to investigate self-regulation at Lloyd’s. During the last few months, the Names have won some important legal victories and it has become clearer to the General Public and the Press that they are the victims of one of the worst regulatory failures the City has ever seen. The Appeal Court has ruled there must be a trial of the Names allegations that Lloyd’s has been in breach of European Law since 1982 and that some of its fundamental arrangements are illegal. If the Names win their case then they will be eligible to pursue substantial claims for damages against the Society, which would have no immunity from suit in that eventuality, and against the government which had approved the arrangements complained of. …. US regulators have expressed concern at the “hands off” attitude of the DTI regulators, and damning criticism of the methods of regulators in general, in the report of the House of Representatives Sub-Committee on Oversight and Investigations entitled “Wishful Thinking”. (Extracts are appended to this report). The New York Insurance Commissioners have also announced they are investigating the solvency of the Society and the management of Lloyd’s American Premium Trust Fund. Rarely can so many people have suffered so much damage as the regulatory failure at Lloyd’s has caused….”

“Names perceive the present structure of regulation at Lloyd’s has tended to view the protection of policy holders as being more important than the protection of Names and question the close relationship between the DTI and the Corporation of Lloyd’s.” “The Government has had a role in permitting the under-reserving of the Society and in failing to maintain protection for Names. The DTI in pursuit of its objective of protecting policy holders has colluded in a systematic misrepresentation of the adequacy of the Society’s reserves to the Names.” “The Names losses in the last few years are the result of a systematic failure of self-regulation at Lloyd’s over the last decade.” “The protection of policy holders has been interpreted as complying with the statutory solvency requirements of the DTI under the Insurance Companies Act of 1982. The experience of the last 4 years would suggest that this was inadequate to ensure proper protection for policy holders, since we stand on the brink of a significant default. The lack of any apportionment of capital in relation to risks has meant that the market has taken on a disproportionately large amount of long tail high risk business for which it is totally unsuited. The poor standards of underwriting, management and professionalism that have been evidenced in a succession of Loss Review Committee reports, have also demonstrated the vulnerability of policy holders as the solvency of the market progressively collapses as a consequence of past regulatory failures. It is worth mentioning who the Policy Holders are in Lloyd’s. Half the policy holders are other Lloyd’s syndicates due to the excessive re-cycling within the market. Most of the remainder are large Multi-national corporations. Very little of Lloyd’s business is small personal lines for UK subjects. It follows that a default by some Names has the effect of causing bad debt write-offs for other Names and therefore mutualises a substantial part of any resulting loss before the balance falls principally on large American companies. It must also be questioned whether the close relationship between the DTI and the Corporation of Lloyd’s is in the interest of anybody. The willingness of the DTI to defend the apparently indefensible in Lloyd’s in the last year has been remarkable, with many letters from Ministers giving the appearance of having been drafted by the staff of the Corporation. Action Group Investigations There are now over 40 action groups at Lloyd’s all set up to investigate the circumstances of particularly large losses that have now arisen for Names. Without exception these investigations have uncovered appallingly low underwriting standards and most of them have found a great many other malpractices. Several have found evidence of fraud. These investigations are usually leading to litigation though the absence of any resources to pay compensation is causing some of the more recent groups to simply assemble information which is unlikely to lead to recovery litigation. The losses arising on syndicates covered by the action groups are over £5 billion. This is less than half the losses that the market will have made. This does not mean that the remaining losses are considered to be “acceptable” trading losses. In many cases they result from the same failures to reserve adequately in the past, or to rate properly, or to make adequate reinsurance arrangements which are the main problems bedevilling syndicates where litigation is in progress. One of the proofs of the failure of self-regulation is that these other situations are not being investigated and are being treated as “acceptable” market losses. Our evidence is that the causes of almost all the losses investigated are the same. Low underwriting standards, poor reinsurance programmes, failure to maintain adequate records, failure to monitor aggregate exposures, unwillingness to withdraw from uneconomic business because of the loss of commission and brokerage that would result for the working members, and all these reflect poor and unacceptable standards across the market as a result of the lack of proper regulation. The Responsibility of Her Majesty’s Government The Government’s attitude has been that Lloyd’s is a self regulatory body under its own Act and therefore the Government has no responsibility for the way in which it has conducted its affairs or for the losses which Names have suffered. The Government has sought to argue that its sole responsibility has been to ensure that policy holders are protected. In two important ways however the Government has been directly involved in creating the present debacle. Firstly throughout the mid and late 1980s the Inland Revenue took a great interest in the RITC and sought to challenge it on the basis of being a tax avoidance scheme. The poor standard of record keeping and the inadequate methods of calculation employed by underwriters in setting the RITC meant that in many cases underwriters were not able to justify their RITC calculations adequately with the result that substantial amounts of RITC were disallowed by the Revenue for tax purposes. In many instances underwriters were probably not unhappy about this since like the Revenue they had the same vested interest of wishing to maximise short term profitability. The long term damage is all too clear now to everybody, and particularly to those Names who have been ruined in the last three years. The second Government department involved has been the DTI. The DTI is responsible for the protection of policyholders. It has no responsibility for the protection of Names which is exclusively the responsibility of the Lloyd’s Council. In pursuit of its primary objective of protecting policy holders, the DTI has been concerned to increase the level of reserves at Lloyd’s. Since 1983 it has involved the Government Actuary’s Department in the setting of reserves and has agreed a programme of “stair stepping” the minimum reserve percentages which it sets for Lloyd’s in order systematically to increase the reserves. The process agreed between Lloyd’s Council and the DTI has been effective in increasing the reserves many more times than the annual turnover originating from outside the market. There is real danger of creating the best reserved insolvent institution in the world. At no time do the DTI or Lloyd’s appear to have given consideration to their obligations to Names where these have conflicted with their obligations to policy holders. At no time have the 20,000 Names who joined since 1982 been told that a policy of increasing reserves was being pursued, which would inevitably have the effect of reducing the profits payable to Names. In a company it is a reasonable policy to pursue to pay historic losses out of present or future profits, and provided this is disclosed to the market in the annual profit forecasts the effect on the capital base is fully taken account of in the variations on the share price. The capital base at Lloyd’s renews itself annually and at no time are Names obliged to carry on. By being kept in ignorance of the agreement between the DTI and Lloyd’s to increase reserves names were misled and believed that their underwriting would be more profitable than it was in fact going to be.”

“Would Names also give up their right to litigate against Lloyd’s and the DTI for further compensation or the recovery of their deposits?”

“The evidence now exists that the cover-up of asbestos liability goes beyond negligence and incompetence. Members of the Council were involved with syndicates where the reserves were not being set to provide for ultimate liability. They knew that attorney’s reports were coming in to the Society advising of huge future asbestos liabilities.” “Inside Eye”

“I attended the hearing of the above on 15th February at which three men from the DTI gave oral evidence. Their spokesman was a Mr Spencer. My prime motivation for attending was to discover whether any guide might be given as to whether the DTI could be sued successfully by Names/Names action groups for failure to carry out their duties as regulators…. Regulation of Lloyd’s by DTI Mr Spencer made it very clear that he interpreted his responsibilities under the Insurance Regulation Act as concern for the policyholder only. He was pressed on this at some length, one line taken being that Names were also policyholders. An astute lawyer would be required to argue that they have a retrospective responsibility which they have failed to discharge. After the meeting I asked Mr Spencer and his colleagues whether they were aware of the attempts to involve the DTI on this issue. They said they were, although they had not seen any letters and that of course they would oppose it. They ventured the opinion that it might prove difficult to persuade the courts that the DTI should be joined in any action taken. One of them suggested that the lawyers involved were acting like ambulance chasers. Solvency of Lloyd’s Considerable time was spent on this issue and Mr Spencer explained the two step procedure: 1/ Solvency for Lloyd’s overall. There seems little doubt that Lloyd’s will be able to pass this. The margin last year was three times the minimum required. 2/ Solvency for individual Names, including Names no longer underwriting, depends heavily on the Central Fund at the moment. This is where problems might arise although not unnaturally Mr Spencer did not wish to speculate on what might happen in 1995 or 1996. Conclusion 1/ Any Name who is thinking of joining an action group that claims it will be successful in joining the DTI to its litigation against Lloyd’s or the Council of Lloyd’s would do well to insist on seeing a fully briefed Counsel’s opinion on the matter. My view until proved otherwise by such an opinion is that any attempt will fail….”

“The present Conservative Government risks being embarrassed before Lloyd’s problems are resolved. The Department of Trade and Industry is seriously implicated”. “Research findings indicate that neither the DTI nor Lloyd’s regulators adequately monitored the spread and magnitude of underwriting risks in individual syndicates on any regular or systematic basis. Nor did they properly monitor the spread and diversification of the financial assets of individual syndicates. Financial reporting procedures which cover such obvious matters are fundamental in the regulation of financial institutions throughout the developed world. They are particularly applied to insurance companies and money market funds, the types of organisations most akin to Lloyd’s syndicates.” “The DTI has the ultimate responsibility for regulating the solvency and wellbeing of Lloyd’s. It has clearly failed.” “The DTI also has a statutory responsibility to protect the interests of insurance policyholders, whether of Lloyd’s policies or of other British insurers. Names at Lloyd’s, because of their status as RITC, excess of loss re-insurance, E&O insurance, or personal stop-loss policyholders, must represent numerically the largest group of policyholders at Lloyd’s. As was evident at recent hearings of the Treasury Select Committee, the DTI has so far not considered the interests of Names as policyholders.” “Indeed, a number of them [Names] now believe that they will be forced in due course to look to the Laws of the European Community and the United States of America. Already the Writs Response Group is sponsoring the defence of Mr John Clementson against a solvency writ from Lloyd’s, his defence being based on alleged irregularities and infringements of European law by Lloyd’s concerning inter alia its operation of the Central Fund.” “Inside Eye”

“Since – under European law – the DTI bears the ultimate responsibility for ensuring that Lloyd’s is solvent, the DTI may risk liability if the Central Fund runs out. There is a precedent. In the leading European case of Francovich, the Italian government was compelled to compensate employees because it had failed to implement a directive concerning the compensation of workers in cases of employer insolvency. In the same way, the UK government could be made to pay out to policy holders because it failed to reconcile the legal relationship between Names and Lloyd’s with the provisions of the Insurance Companies Act 1982 which was enacted in order to comply with the EC First Non-Life Directive of 1973. To comply with EC law, the DTI assesses Lloyd’s solvency to continue trading on the basis that all Names are liable for the debts of others. But if Lloyd’s were to collapse, that would not be the position: each Name would only be obliged to cover his own responsibilities. So if Lloyd’s ever did crash policy holders could well be looking to the DTI to make up their losses. Even if the litigation never came to such a pass, the implication of DTI responsibility could trigger a change away from its current Pontius Pilate-like stance. Lloyd’s and its Names could therefore have a strong political card to play against the DTI. The DTI and Lloyd’s Lloyd’s has operated as a de facto self-regulating organisation since its incorporation in 1871. The Lloyd’s Acts of 1871 and 1982 define the framework in which Lloyd’s regulates itself: the government’s regulatory function is – broadly – limited to ensuring that Lloyd’s passes an annual solvency test. Under European law, the DTI must ensure that all insurance entities in the UK are adequately secured. In Lloyd’s case, this is done by a test which is split into two parts: global and individual. The DTI are now arguing that the implied consequences of lumping all Names together for the global part of the test means that losses are mutualised via the Central Fund if any Names defaults. However, under the Lloyd’s Acts, there is no mutualisation. Indeed, every insurance contract underwritten by Lloyd’s states that Names are severally and not jointly liable.”

“DTI powers I start from the statement made by John Redwood, when Minister of State at the DTI, on the 26th January 1992 to Jonathan Mantle and me, and again on the 13th Feb. to 5 MPs, that Parliament had denied to the DTI the power to regulate Lloyd’s unless Lloyd’s was found to be insolvent. The Insurance Companies Act 1982 and the Lloyd’s Act appear to grant power to the DTI to regulate UK insurance companies (including Lloyds’ members as individuals as well as collectively as Lloyd’s) to maintain solvency levels of insurance entities which are “carrying on insurance business”.”

“DTI’s role in the regulatory regime 1.5 The Government notes that the Committee has reported (paragraph 17) that some evidence questioned the DTI's role in performing the regulatory functions laid on it by the Insurance Companies Act 1982 (as summarised in paragraphs 14 to 19 of the Report and described in the DTI's memorandum of February 1995-pages 127 to 129 of Volume II of the Report). However the Government also notes that the Report distinguished the DTI's responsibilities for solvency regulation and policyholder protection from any regulatory protection of Names, which is left to Lloyd's itself under the Lloyd's Acts 1871 to 1982. 1.6 The DTI's monitoring of the solvency regime applied to Lloyd’s as a whole is performed on a basis comparable with that applied to other insurers in the United Kingdom. This is essential to ensure that neither Lloyd's nor the insurance companies have any unfair competitive advantage as a result of differences in the regulatory regime. The DTI is not, however, involved in the supervision of the relationship between Names and the organs of the Lloyd's insurance market, any more than it is involved in the supervision of the relationship between capital providers and insurance companies, (other than through the operation of the general provisions of non-insurance legislation, like company law, and (where appropriate) insolvency law). 1.7 The Government notes that some evidence questioned the way in which the DTI (with the advice of the Government Actuary's Department) set the minimum percentage reserve figures (MPRs) which form part of the process of setting the solvency reserves required by Names and the market. The evidence submitted demonstrates that those who have complained about the system have not fully understood the purpose of the MPR's and, particularly, do not properly recognise that MPRs are not the sole means, nor even the principal means, by which Names' liabilities for solvency purposes are determined. The main method for determining Names' liabilities for solvency purposes is based on annual syndicate accounts, as agreed by syndicate auditors, on essentially the same basis as in the insurance company market. The MPRs are used to provide a supplementary safety-net test to provide additional protection for policyholders against the Names' liabilities being assessed too low. For most of the business about which complaints are made, the liabilities are determined by the main method, which produces a higher liability figure based on audited syndicate accounts…: a figure of 300 per cent would only be appropriate if the MPRs were not minima, but were averages to be used as the standard for all relevant syndicates. A fuller description of the way in which the liabilities are determined for solvency purposes was given in response to a written parliamentary question on 14 February 1995 (Official Report cols 557 & 558). The Government considers that reserving for solvency purposes was carried out properly having regard to the accounting standards of the day and the information available at the time.”

“… whilst I do understand that your department’s statutory duties are concerned primarily with solvency supervision, your department’s responsibilities do indeed also incorporate areas apart from solvency responsibilities, as has become clear from my careful reading of both the content and the implications of the Act to which you refer.”

“1. It is the DTI that have ultimate responsibility for the supervision of Lloyd’s. Furthermore and more importantly, whilst the DTI’s responsibilities are concerned primarily with solvency requirements, this is certainly not their only responsibility. 2. The DTI have now conceded, at least by implication, that they failed in one of their statutory obligations with regard to solvency. The DTI in 1980 and 1981 agreed to, and have been condoning since, a policy of “stair-stepping”, identifiable as such now, Evans states, with the benefit of “hindsight”

“The prospect of obtaining compensation from the D.T.I. for their failure to regulate has for some time been a possibility. A government department can now be sued under English as well as European law. A paper is enclosed which may be of interest.”

“I believe that Lloyd’s is acting outside the powers of its constitution in doing this and that the D.T.I. may be answerable for its actions in approving it under European law. Counsel’s opinion is being sought now on those and other related points.”

“We believe there is a good chance the Clementson Case based on European law issues will eventually succeed in the European Courts. If it does not, or possibly in parallel, we will proceed to defend Names against writs from Lloyd’s or Agents with the Fraud defence”. “As you know the fraud evidence has been reviewed a number of times in the United States in open court… Many thousands of hours of work has gone into accumulating the vast quantity of evidence now available in the United States…. That evidence has all been made available to the English Defence Groups.” “A substantial quantity of the evidence … have been reviewed by (leading counsel). They have said: It is clear that the Key Working Members knew from their involvement with the AWP and/or as members of the Audit Committee that, in 1982 and later years, appropriate reserves for asbestos related liabilities were unquantifiable and probably unfundable and an equitable IBNR impossible to calculate.”

“I urge you to read this document very carefully and to take advice from your lawyer, financial or other appropriate adviser on the terms of the settlement offer and your finality statement as soon as possible but, in any event, so that you are able to meet the deadlines for acceptance and payment. Financial background The Lloyd's market has returned to profitability. As announced on 12 July 1996, the 1993 pure year of account reported profits of £1,084 million after personal expenses, including the members' special Central Fund contribution. The1994 and 1995 years of account have not yet been closed but it is already apparent that both will prove to have been very profitable trading periods. Atthis stage, managing agents' projections show profits to members after personal expenses, including the members' special Central Fund contribution, of approximately £ l billion for 1994 and nearly £900 million for 1995. Without these profits, the settlement offer could not be made. Alongside this return to profitability, the Society must face the magnitude of the losses which many Names have incurred on the 1992 and prior years of account. In comparison with the Equitas premium (calculated asat 31 December 1995) of £14.7 billion, syndicate assets (excluding Names' debt) available to meet these liabilities as at 31 December 1995 were £9.9 billion. A significant part of the balance is believed to be irrecoverable from the many Names who have incurred significant losses. To date, the Society has been able to deal with the non-payment of members' obligations through the application of the Central Fund. As at 30 June 1996, the Central Fund's net assets (excluding amounts owed by members) stood at approximately £505 million. In the absence of the successful implementation of the reconstruction plan, the Central Fund might not be able to meet the anticipated cash requirements arising out of members' shortfalls and the Society would be unlikely to meet the DTI’s members' level solvency test. If the reconstruction plan were to fail, the Council would be required to reconsider whether the Society were still a going concern. If the going concern assumption were no longer valid, the Council would be obliged to put the Society into run-off with consequent damage to members.”

“My researches of the European Treaty and the 73/239 First Council Directive have shown that the solvency requirements for Lloyd's of London must have been unreasonably modified for it to have been possible to produce accounts without the disclosure of formidable known losses…. The Neville Russell letter to the Lloyd's Audit Department on 24th February 1982 signed by six panel auditors … makes it clear that the losses were unquantifiable. The Names were never advised of this vital piece of information to which they were entitled. Names have been given to understand that Lloyd's provided the panel auditors with an indemnity so that the accounts could be signed off although this fact does not appear in the accounts themselves. This dubious tactic was then followed by the necessity to devise a way to present the relevant accounts with the losses remaining hidden. This was achieved by the latitude apparently allowed by the provisions of the new Lloyd's Act of 1982 and any adjustments to the Insurance Companies Act 1982 (which replaced the repealed Insurance Companies Act of 1981) that may have been made to enhance the effectiveness of the Lloyd's Act 1982. The Names are told that the provisions of the Insurance Companies Act 1982 enabled the competent authority (the Department of Trade and Industry) to alter the solvency requirements and that the Lloyd's Act of 1982 entitled Lloyd's to pass whatever byelaws, with the full force of the law, were considered necessary to ensure its own survival…. These extra powers have intensified the vulnerability of the deceived Names and seem to be totally incompatible with the declared aims of the European Treaty concerning the protection of the fundamental rights of the citizen. They, also, appear to infringe Articles 5, 8(2), 90(1), 100a(3), 100b(l), 129a(l) and 189. Furthermore, there seem to be numerous breaches of the Articles of the First Council Directive 73/239/EEC which specifies the solvency requirements and the regulatory requirements of Lloyd's as follows: First Council Directive 73/239/EEC (1) In the preamble of this directive it is stated…. (2) Also, in the preamble of this directive, there are repeated references to the requirements of the solvency margins and the emphasis that "it is important to guarantee the uniform application of coordinated rules and to provide, in this respect, for close collaboration between the Commission and the Member State in this field". To operate solvency margins which do not comply with the requirements of the directive appears to be a flagrant defiance of these legally binding instructions. For example, the DTI claims that the Insurance Companies Act 1982 lays down no requirement for the audit of global accounts or statutory statement of business. However, Article II states "with regard to Lloyd's, the publication of the balance sheet and the profit and loss account shall be replaced by the compulsory presentation of annual trading accounts covering the insurance operations, and accompanied by an affidavit certifying that auditors certificates have been supplied in respect of each insurer and showing that the responsibilities incurred as a result of these operations are wholly covered by the assets. These documents must allow authorities to form a view of the s t a t e of solvency of the Association". In addition, Article 14 clearly states "the supervisory authority of the Member State in whose territory the head office of the undertaking is situated must verify the state of solvency of the undertaking with respect to its entire business". (3) Article 8(1) states "Each Member State shall require that any undertaking set up in its territory for which an authorisation is sought shall ... in the case of the United Kingdom ..... Lloyd's underwriters ... submit a scheme of operations in accordance with the provisions of Article 9." Although this directive became operative on 27th J u l y 1973, the Names understand that it was not until 28th February 1995 (twenty-two years later and well after massive losses had been inflicted on the deceived Names) that, in spite of repeated reminders from the Commission, Lloyd's made any attempt to comply with this requirement. Had Lloyd's done so when first asked or had the Commission been more assiduous in its insistence that the providing of this essential information within the specified time limit was mandatory and not subject to exemption, the true state of Lloyd's affairs would have been in the public domain much sooner. The wording of this article implies that authorisation is conditional upon this requirement being met. The Commission appears to have allowed Lloyd's to continue to trade without proper authorisation. This lack of supervision put in jeopardy the quality of consumer/investor protection that Names could have expected to receive under the terms of the Treaty. (4) Article 16 states that the solvency margin shall be "free of all foreseeable liabilities". The Neville Russell letter makes clear that the foreseeable liabilities are unquantifiable. Unquantifiable liabilities do not suddenly become quantifiable because it is not convenient for them to remain unquantifiable. The solvency requirements specified in this article have either not been met by Lloyd’s or were not sufficiently stringent or tightly enough defined to ensure an orderly insurance market at Lloyd's which is the prime purpose of this directive. (5) Article 35 requires Member States to amend their national provisions to comply with this directive within eighteen months and applied within thirty months from the date of notification. The United Kingdom competent authority does not appear to have ensured that Lloyd's fulfilled this requirement. (6) Article 36 states "Upon notification of this directive. Member States shall ensure that the texts of the main provisions of a legislative, or regulatory administrative nature which they adopt in the field covered by this directive are communicated to the Commission", but, also, does not seem to have been obeyed within the set time limits. Had the competent authority done as directed, the inherent anomalies would have become apparent and subject to any required revision which is the point of this article and which may be the very reason why it appears to have been deliberately ignored. The DTI …. The United Kingdom, as a Member State, and its competent authority are believed to be in breach of the European Treaty as itemised above. The European Commission is believed to have failed in its statutory duty to ensure an orderly insurance market at Lloyd's by not checking that the wording of the directive was appropriate, as required in Article 90(3), and properly applied in the Member State (the U.K.), as required in Article 87(2)b of the European Treaty. Unless the articles of the Treaties and Directives are constantly monitored and rigorously enforced the desired results have no hope of being attained. The lax supervision of these legally binding requirements have made it too easy for them to be treated with contempt and openly flouted. The result has been a catastrophic outcome of what seems to be a flawed system. If I am entitled to do so, I would like to request, under the provisions of Article 177, that a preliminary ruling on the legality of the present position be given by the European Court of Justice without delay before any further damage is done or more anguish caused and also, that a moratorium be imposed on any further harassment or fiscal deprivation of Names, as provided for in Articles 185 and/or 186, until this matter is properly addressed and resolved. I have no doubt that the European Parliament has the authority and the means to establish a firm discipline on a situation where the abuse of power is currently out of control and to ensure that those citizens who have been illegally damaged have access to justice and compensation. The Names can only hope and pray that it has the will and the determination to do so. This Petition is submitted under the provisions of Articles 8d and 138d of the European Treaty.”

“I am concerned that we get the issue of duties and powers aligned. I am sure you recall that Directive 73/239 imposes a duty on member governments to regulate the insurance market. It follows that if the duties are not correctly delegated along with the powers, then presumably the duties stay with the national government making the national government liable for the failure of the delegated body to exercise its powers.”

“… it is, I think, straining the statutory language to say that the Council [of Lloyd’s] has a “duty” to protect Members. In this context you referred to the Directive 73/239. The obligation to implement the Directive in the UK properly and on time does, indeed, fall on the Government. That obligation has been discharged and we do not consider, therefore, that any liability falls on the Government.”

“I refer to all the reforms etc described in this judgment implemented as the result of the Fisher Report, the Neill Report and the very considerable efforts of men and women of undoubted integrity, independence and standing. Despite all the reforms etc the catalogue of failings and incompetence in the 1980s by underwriters, managing agents, members’ agents, and others (established by judgments of the court, by disciplinary hearings and other means referred to in chapter 24) is staggering (and brought disgrace on one of the City’s great markets).”

“The English courts have commented on “the staggering catalogue of failings and incompetence” that represents the Lloyd’s saga in the last twenty years. It is our belief that the catalogue has only been possible because of the complete failure of the British Government to regulate Lloyd’s in accordance with European law. Following on from complaints and petitions by various Names to the European Commission and European Parliament, the Commission has launched an investigation into whether or not infringement proceedings are appropriate. A decision by the Commission is imminent. The European Parliament has accepted the petitions of Names and is taking a close interest in the Commission’s investigations. If the Commission takes infringement proceedings and succeeds in showing that the British Government infringed European law in its supervision of Lloyd’s, the British Government will be liable to compensate Lloyd’s Names who suffered loss in consequence. We consider it is in the interests of all Names to encourage the Commission to take proceedings. Equitas faces proportionate insolvency as a consequence of the rising tide of asbestos claims in the US. The consequences of that will be serious for Lloyd’s and for reinsured Names. If Equitas ceases to be able to pay claims in full, we believe it will be in your interests to be seeking not only compensation for past losses from the British Government but also an indemnity in respect of future losses. We hope you will make the time to write along the lines of the enclosed letter to as many Members of the European Parliament representing your country as possible.”

“I have suffered substantial loss as a consequence of my membership of Lloyd’s. Along with over 30,000 other Names who joined Lloyd’s, I have been made liable for a share of the losses that Lloyd’s has incurred in business written in the United States. I believe there is strong evidence that Lloyd’s syndicates had not properly reserved for that business as required by Directive 73/239 and that I was improperly made liable for a share in those losses. …. It is my view that the European Commission should take infringement proceedings against the British Government for its failure to comply with Directive 73/239….”

“i) There was a representation in the 1981 brochure that there was in place a rigorous system of auditing which involved the making of a reasonable estimate of outstanding liabilities including unknown and unnoted losses. (Paragraph 321) ii) Subsequent brochures contained essentially the same representation, even though the word 'rigorous' no longer appeared. (Paragraph 323) iii) The 1981 brochure also contained a representation that Lloyd's believed that such a system was in place. So did subsequent brochures. (Paragraphs 321 and 323) iv)…. v) The representations in i) and ii) were, during the relevant period, untrue. (Paragraphs 375 and 376) vi) The names have however failed to prove that Lloyd's did not believe the representations to be true or that they either knew that they were or became untrue or were reckless as to whether they were true or untrue…. vii) It follows that the judge was right to determine the threshold fraud issue in favour of Lloyd's and to hold that Lloyd's is not liable to the names in the tort of deceit. It further follows that the appeal on the merits, which the names had permission to bring, fails and must be dismissed.”

“The names' case is that the brochures … issued from time to time by Lloyd's contain fraudulent representations upon which they relied when deciding whether to become names. In chapter 22, the judge correctly identified the alleged representations in the brochures as representations to the effect that a name joining Lloyd's: "(i) could have confidence in Lloyd's as an institution to safeguard his/her interests; (ii) could trust those who were chosen by Lloyd's to regulate the Lloyd's market and manage its affairs; (iii) because of the way in which Lloyd's regulated and monitored underwriting accounts year by year: (a) could rely on syndicate accounts; (b) could in underwriting and/or in deciding whether to remain a member of Lloyd's have confidence in the audited syndicate results, for results of past years; (c) could be sure that Lloyd's as part of its regulatory duties would ensure that when prospective liabilities were reinsured by one syndicate year into another, such liabilities were being fairly assessed and quantified as between two syndicate years.”

“315. In short a central representation in the brochure is that there was in existence a rigorous system of auditing which involved the making of a reasonable estimate of outstanding liabilities including unknown and unnoted losses.… In these circumstances the judge should have held that that the brochure contained representations by Lloyd's to that effect. 316 …. 317 It will be observed that the case which we have summarised above is not quite that pleaded and considered by the judge. The representations considered by the judge are set out in paragraph 285 above. As to the first two, we entirely agree with the judge that they are not contained in any of the brochures…. 318 If the names are to succeed in establishing the tort of deceit based on the brochures they must identify specific representations of fact in the brochures. In our view the third alleged representation, or more accurately set of representations, set out in paragraph 285 above comes nearer to satisfying the relevant test. However, they also are in our view much too widely drawn. Moreover, they also are expressed in terms of what names "could" do, ie in the future. There is nowhere a statement that names could rely upon their syndicate accounts if, by that, is meant that names could rely upon the accuracy of syndicate accounts. The brochures make it clear that the syndicate accounts are prepared by the syndicate and that it is the managing agent and the active underwriter together with the panel auditor who conduct the annual audit. We do not think that the brochures can fairly be read as containing the kind of promise alleged in each of the pleaded representations set out in paragraph 285 and considered by the judge. 319 It appears to us, on the other hand, that the brochures do contain a number of statements of fact including statements as to the system of accounting in operation at Lloyd's. Indeed, the purpose of the brochure was to describe the system in operation and an important part of that system was the accounting system. The system of accounting included three year accounting and the closing of one year into the next. It follows that the RITC premium and the way it was calculated were central to the system and, since the premium depended upon a fair assessment of future liabilities, the system required a workable method of calculating not only liabilities in respect of claims which had been notified, but also the IBNR liabilities or, in the words of paragraph 12.3 of the brochure "unknown and unnoted losses". 320 In all these circumstances we have reached the conclusion that the case set out in paragraphs 309 to 315 above should be accepted. In our view the 1981 brochure does contain the representation set out in paragraph 315, namely that there was in existence a rigorous system which involved the making of a reasonable estimate of outstanding liabilities including unknown and unnoted losses. It seems to us that an ordinary person applying to become a name would reasonably reach that conclusion by reading the 1981 brochure. The language of the brochure would lead the prospective member to conclude that Lloyd's, who (as Bowen LJ put it) knew the facts when the prospective member did not, knew facts which justified the statement that the accounts were submitted annually to a rigorous audit in accordance with appropriate instructions approved by Lloyd's which included proper provision for unknown and unnoted losses. To answer the question posed by Lord Evershed, that is the effect that the language of the 1981 brochure would have had upon the mind of a potential name. 321 We stress that we are not saying that the 1981 brochure contained representations that syndicates accounts were, as a matter of fact, all prepared in accordance with the Audit Instructions. Our conclusion is simply that the brochure contained a representation that there was in place a rigorous system which involved the making of a reasonable estimate of outstanding liabilities which, as it was put in paragraph 10.4 of the 1981 brochure, "must provide for liabilities in respect of claims reported but not settled, and claims, which may have not yet been reported with respect to policies attaching to the year of account". Thus we would express the representation as being that there was in existence a rigorous system of auditing which involved the making of a reasonable estimate of outstanding liabilities including unknown and unnoted losses…. 325 It is true that, so stated, those representations are much more limited than the representations considered by the judge, even representation (iii). Nevertheless, they are representations which in our judgment were espoused in the various ways in which the names' argument was advanced in this court and was in effect addressed in argument by both sides.”

“374 It is clear that detailed consideration was given each year by the audit department at Lloyd's, the Audit Committee, and the Committee as to the instructions to be given to underwriters and auditors. All this was intended to produce a system that enabled proper RITCs to be produced and proper certification of solvency. But was the system actually producing a result where audit reserves were being calculated in a way that involved the making of a reasonable estimate of outstanding liabilities including IBNRs? 375 We have felt obliged to consider the system in detail but we can answer these questions quite shortly because the facts simply speak for themselves. The mere fact that ultimately, when the R&R was carried out, so many syndicates were shown to be massively under-reserved demonstrates that the system simply had not been producing reasonable estimates of outstanding liabilities over the years. The liabilities which ultimately had to be paid had in fact been incurred before the period with which this litigation is concerned. With the benefit of hindsight it is clear that IBNRs were grossly underestimated throughout the relevant period. This is not an indictment of particular underwriters or particular auditors. We have not explored the way in which estimates were made by individual syndicates or individual auditors. The simple fact is that as it turned out most syndicates were under-reserved. Mr Murray in his evidence said there was no doubt he was under-reserved, and all those involved in the writing of business which included asbestos would, unless they were covered by reinsurance, have to accept the same. 376 In short, through the relevant period the system did not involve the making of a reasonable estimate of outstanding liabilities including unknown and unnoted losses. It follows that the answer to the question posed in paragraph 344 above, namely whether there was in existence a rigorous system of auditing which involved the making of a reasonable estimate of outstanding liabilities, including unknown and unnoted losses, is no. Moreover, the answer would be no even if the word 'rigorous' were removed. The first representation which we found to exist in paragraph 321 above is therefore untrue.”

“ACTION REQUIRED BY AUGUST 30TH TO PROTECT YOUR INTERESTS. This letter is relevant to you whether you accepted R&R or not. Acceptance of R&R did not involve waiving your rights in relation to the UK Government. In a judgment handed down on 26th July 2002 … the Court of Appeal has said that a continuing misrepresentation was made to Names by Lloyd's in the brochures seen by Names during the period 1978-88. The Court of Appeal has said Lloyd's did not from 1978-88 have in place an adequate "system of auditing which involved the making of a reasonable estimate of outstanding liabilities including unknown and unnoted losses". The requirement for Lloyd's to have a proper accounting system is laid down in European Community law and in English law. It is the responsibility of the UK Government to make sure that there is a proper system. European Community law says that where there has been a serious breach of a fundamental law by a national government, that government should pay compensation to citizens who have suffered loss as a consequence of the breach. Time-bar rules may stop you claiming past losses if your position is not protected by August 30th. Time-bar is not an issue in recovering losses yet to be incurred as a result of Equitas triggering proportionate insolvency. We are advised you need to ACT NOW to protect your position. PLEASE READ THE ATTACHED EXPLANATION AND THEN SEND BACK THE RESPONSE FORM…. Explanation The judgment of the Court of Appeal in July 2002 means that all Names who joined Lloyd's between 1978 and 1988 or who expanded or continued their underwriting in that period, were the victims of mis-representations by Lloyd's. Specifically, the Court of Appeal said that Lloyd's represented to Names, future Names, and others, that it had "a rigorous system of auditing which involved the making of a reasonable estimate of outstanding liabilities including unknown and unnoted losses”

“is it possible to identify a right which should necessarily have been granted to the claimant to achieve the results required by the Directive.”

“Dismissing the appeal in so far as it related to European Community law, that whether the Directive of 1977 gave rights to individual depositors and potential depositors had to be determined by examining the terms of the Directive itself; that the recitals showed that it was intended to be the first step in a continuing process to co-ordinate the supervision of credit institutions; that the protection of savings was merely a matter to which regard had to be had, along with the creation of equal conditions of competition, in the process of co-ordination; … that, although articles 6 and 7 were concerned with supervision, their purpose was to ensure co-ordination between the supervisory authorities of the member states and the only duty which they imposed was a duty to co-operate; that article 8(1) allowed the withdrawal of authorisation in limited circumstances but its terms were restrictive rather than obligatory; that, read as a whole, the Directive placed duties of co-operation on the supervisory authorities of member states but stopped short of prescribing any duties of supervision; that, consequently, it was not possible to discover provisions entailing the granting of rights to individuals as such rights were not necessary to achieve the results which were intended to be achieved by the Directive; and that, accordingly, the interpretation of the Directive was acte clair and it would not be appropriate to make a reference to the European Court of Justice ….”

“The plaintiffs say, under reference to these and other passages in the opinion that the committee recognised that the main purpose of legislation concerning banking regulation was to provide security for depositors and to protect savings. I am willing to accept that this is so. No doubt the committee recognised that the protection of savings is a necessary part of every system at national level for the regulation of credit institutions whose business it is to receive from the public deposits and other forms of repayable funds. But the point to which it was drawing attention in its opinion was the need for the harmonisation of authorisation requirements, without which there would be likely to be serious disparities between the member states. The Community law purpose which was indicated in its observations was that of the harmonisation of regulatory measures affecting the right of establishment with a view to eliminating these disparities. I do not find any indication here that the committee saw the purpose of the Directive as being to confer Community law rights on individual depositors.”

“The purpose of the Directive of 1977 was to begin the process of harmonisation of national laws so as to remove barriers to the provision of banking services throughout the single market, but without weakening or impairing the protection of depositors. The protection of depositors was seen therefore not as a purpose of the Directive but as a constraint on the provision of banking services to the public which had to be recognised.”

“Looking back at the Directive as a whole, the key to a proper understanding of its purpose and effect seems to me to lie in the fact that it was the first step in a process of harmonisation of provisions for the regulation of credit institutions carrying on business within the Community. It was about the removal of barriers to the right of establishment under article 52 of the EEC Treaty (now article 43EC). It confined itself to imposing a number of minimum conditions and prohibitions on member states as to the authorisation and supervision of credit institutions having their head offices in another member state or having their head offices outside the Community. It was based upon an appreciation of the fact that credit institutions require regulation in order to protect savings. So any measures of harmonisation had to meet the twin requirements of protecting savings on the one hand and creating conditions of equal competition between credit institutions operating in more than one member state on the other. It placed duties of co-operation on the competent authorities where a credit institution was operating in one or more member state other than that in which its head office was situated. But it stopped short of prescribing any duties of supervision to be performed by the competent authority within each member state. It is not possible to discover provisions which entail the granting of rights to individuals, as the granting of rights to individuals was not necessary to achieve the results which were intended to be achieved by the Directive.”

“In a number of the recitals in the preambles to the directives referred to in the second question … it is stated in a general manner that one of the objectives of the planned harmonisation is to protect depositors. Furthermore, Directives 77/780, 89/299 and 89/646 impose on the national authorities a number of supervisory obligations vis-à-vis credit institutions. However, contrary to the claims of Paul and others, it does not necessarily follow either from the existence of such obligations or from the fact that the objectives pursued by those directives also include the protection of depositors that those directives seek to confer rights on depositors in the event that their deposits are unavailable as a result of defective supervision on the part of the competent national authorities. In that regard, it should first be observed that Directives 77/780, 89/299 and 89/646 do not contain any express rule granting such rights to depositors. Next, the harmonisation under Directives 77/780, 89/299 and 89/646, since it is based on Article 57(2) of the Treaty, is restricted to that which is essential, necessary and sufficient to secure the mutual recognition of authorisations and of prudential supervision systems, making possible the granting of a single licence recognised throughout the Community and the application of the principle of home Member State prudential supervision. However, the coordination of the national rules on the liability of national authorities in respect of depositors in the event of defective supervision does not appear to be necessary to secure the results described in the preceding paragraph. Moreover, as under German law, it is not possible in a number of Member States for the national authorities responsible for supervising credit institutions to be liable in respect of individuals in the event of defective supervision. It has been submitted in particular that those rules are based on considerations related to the complexity of banking supervision, in the context of which the authorities are under an obligation to protect plurality of interests, including more specifically the stability of the financial system. Finally, in adopting Directive 94/19 the Community legislature introduced minimal protection of depositors in the event that their deposits are unavailable, which is also guaranteed where the unavailability of the deposits might be the result of defective supervision on the part of competent authorities. Under those conditions, as pointed out by the Commission and the Member States which submitted observations to the Court, Directives 77/780, 89/299 and 89/646 cannot be interpreted as meaning that they confer rights on depositors in the event that their deposits are unavailable as a result of defective supervision on the part of competent national authorities. In the light of the foregoing, the answer to the second question must be that Directives 77/780, 89/299 and 89/646 do not preclude a national rule to the effect that the functions of the national authority responsible for supervising credit institutions are to be fulfilled only in the public interest, which under national law precludes individuals from claiming compensation for damage resulting from defective supervision on the part of that authority. On the third question …. It follows from the case-law that a State incurs liability for breach of a rule of Community law only where, in particular, the rule of law infringed is intended to confer rights on individuals (see … Factortame…. Dillenkofer ….). However, it is clear from the answers given to the first two questions that Directives 99/19, 77/780, 89/299 and 89/646 do not confer rights on depositors in the event that their deposits are unavailable as a result of defective supervision on the part of competent authorities, if the compensation of depositors prescribed by Directive 94/19 is ensured. Under those conditions, and for the same reasons as those underlying the answers given above, the directives cannot be regarded as conferring on individuals, in the event that their deposits are unavailable as a result of defective supervision on the part of competent authorities, rights capable of giving rise to liability on the part of the State on the basis of Community law.”

“So long as a directive has not been properly transposed into national law, individuals are unable to ascertain the full extent of their rights. That state of uncertainty for individuals subsists even after the Court has delivered a judgment finding that the Member State in question has not fulfilled its obligations under the directive and even if the Court has held that a particular provision or provisions of the directive are sufficiently precise and unconditional to be relied upon before a national court. Only the proper transposition of the directive will bring that state of uncertainty to an end and it is only upon that transposition that the legal certainty which must exist if individuals are to be required to assert their rights is created.”

“The existence of a wholly independent claim for damages, subject to longer time-limits than the comparatively short ones prescribed for restitutionary and entitlement claims in many Member States, is consistent with the different nature of the claim. Its basis is not merely the unjust enrichment of the State resulting from simple error in the routine application of technical legislation but a serious violation of individual rights, calling for a re-appraisal of the balance between such rights and the collective interest in a measure of legal certainty for the State.”

“The Danish, French and United Kingdom Governments consider that a Member State is entitled to rely on a limitation period under national law such as the period at issue, since it complies with the two conditions, of equivalence and of effectiveness, laid down by the Court’s case-law …. In their view, the judgment in Emmott must be confined to the quite particular circumstances of that case, as the Court has, moreover, confirmed in its subsequent case-law. As the Court has pointed out in paragraph 39 of this judgment, it is settled case-law that, in the absence of Community rules governing the matter, it is for the domestic legal system of each Member State to lay down the detailed procedural rules for actions seeking the recovery of sums wrongly paid, provided that those rules are not less favourable than those governing similar domestic actions and do not render virtually impossible or excessively difficult the exercise of rights conferred by Community law. The Court has thus acknowledged, in the interests of legal certainty which protects both the taxpayer and the authority concerned, that the setting of reasonable limitation periods for bringing proceedings is compatible with Community law. Such periods cannot be regarded as rendering virtually impossible or excessively difficult the exercise of rights conferred by Community law, even if the expiry of those periods necessarily entails the dismissal, in whole or in part, of the action brought …. The five-year limitation period under Danish law must be considered to be reasonable …. Furthermore, it is apparent that the period applies without distinction to actions based on Community law and those based on national law. It is true that the Court held in Emmott, at paragraph 23, that until such time as a directive has been properly transposed, a defaulting Member State may not rely on an individual’s delay in initiating proceedings against it in order to protect rights conferred upon him by the provisions of the directive and that a period laid down by national law within which proceedings must be initiated cannot begin to run before that time. However as was confirmed by the judgment in … Johnson … it is clear from … Steenhorst-Neerings …that the solution adopted in Emmott was justified by the particular circumstances of that case, in which the time-bar had the result of depriving the applicant of any opportunity whatever to rely on her right to equal treatment under a Community directive….”

“20. Shorn of detail the legal question is whether principles of law enunciated by the Court of Justice in Emmott v Minister for Social Welfare retain their authority or whether they have been gradually so whittled away that the case is now to be seen as based narrowly upon its own facts. 47. What in reality stood in the way of a person in another EEA country making a claim in time in the years 2001 and 2002 was the fact that on reading the 2000 Regulations and accepting them to be the letter of the law, he would see no point in applying at all because he did not meet the clear residential qualification in regulation 2(1)(a). A potential claimant is, however, presumed to know the law (a fiction which is increasingly more of a joke in a real world inundated by legislation, primary and secondary, flooding in on us from Westminster, Whitehall and Brussels). However unreal and therefore unfair it may appear to many, I have to conclude that, in the light of that presumption, he must be taken to know the law contained in Regulation 1408/71 better than the Secretary of State seemed to have understood it at the time. He is deemed to know that a winter fuel payment is a form of old age benefit which is exportable. If Advocate-General Jacobs is correct, as I respectfully think he is, to say that an individual cannot be considered not to have notice of a Directive merely because it has not been transposed into law, then the individual's position is all the weaker when his rights flow from a Regulation which is directly applicable and needs no transposition. 48. Now I can easily accept that in the real world in which life is lived, it could be said to have been virtually impossible or excessively difficult to make a claim in circumstances where the individual is understandably ignorant in fact of his rights and where his government, whose duty it is to comply with EC Regulations, is steadfastly denying their application. In the legal world it is different. With knowledge of the law the arguments in favour of the exportation of the benefit were not excessively difficult to see or to understand and the making of the claim was thus perfectly possible. For that reason I conclude that the Deputy Commissioner erred in posing the question to be answered to be whether the position for which the government had been arguing, which was not resolved until July 2002, rendered the possibility of a claim in time being virtually impossible or excessively difficult. The proper question is whether a claimant with knowledge of the law (which he is presumed to know) could have applied in time. To that question the answer is sadly "Yes". The Deputy Commissioner erred in finding that it was virtually impossible or excessively difficult for Mr Walker-Fox to make his claim in time and for that reason the appeal should be allowed. 49. Although, therefore, it is not strictly necessary to consider what is left of Emmott in the light of the subsequent rulings of the ECJ, I have come to the clear conclusion, if I am permitted to utter it, that, again in agreement with Advocate-General Jacobs, it should be confined to very exceptional circumstances. They are that in some unconscionable way the state has obstructed the exercise of the individual's judicial remedy or contributed to his failure to exercise it. Such unjust conduct would make it a breach of the principle of effectiveness which underpins this jurisprudence…. 50. The question then arises whether the Government has behaved in an inequitable way here which makes it unjust for it to rely on the time bar. This is the matter to which I have said in para. 18 I would return. For the Government genuinely to advance a view of the law and subsequently to acknowledge that the argument cannot prevail, cannot, in my judgment, come close to being the kind of unconscionable conduct which the court should not countenance. This case is on its facts miles away from Emmott. The Secretary of State may have taken a bad point in Brussels but he was in no way actively misleading the applicant or lulling him into a false sense of security. The narrow reading of Emmott to which it has been confined by the subsequent ECJ judgments does not apply in this case ….”

“So far as it is material to determine when, as a matter of domestic law, each Claimant’s cause of action first accrued, the Claimants contend that this occurred, at the earliest, when the Claimant first became liable to pay a contribution to syndicate underwriting liabilities, or received reduced profits by reason of syndicate underwriting liabilities, as a result of the Defendant’s failure to implement the Directive.”

“… a contingent liability, such as the possibility of an obligation to pay money in the future, was not in itself damage until the contingency occurred; that, consequently, until a claim was actually made, no loss or damage had been sustained….”

“The relevant date was not when (the first claimant) Mr Haward first knew he might have a claim for damages. The relevant date was an earlier date, namely, when Mr Haward first knew enough to justify setting about investigating the possibility that (the defendants’) advice was defective.”

“it must always be remembered that all that Section 14A requires is knowledge that loss is “capable” of being attributed in whole or “in part” to the act or omission alleged to constitute a particular defendant’s negligence.”

“(3) A claimant did not have to know that he had a cause of action or that the defendant’s acts could be characterised in law as negligent or as falling short of some standard of professional or other behaviour, but he must have known the facts which could fairly be described as constituting the negligence of which he complained …. (4) Applying those principles, in this case it was not enough that the Names knew that run-off and RITC policies were being written or that the syndicate accounts were being certified. It was necessary in addition to add the knowledge that those policies exposed the Names to potentially huge and unquantifiable liabilities ….”

“Directives also have to be interpreted in the light of the general principles of Community law: see Kolpinghuis, Case no 80/86 [1987] ECR 3969. One of those principles is that a person is taken to know the content of Community law as soon as it is published in the Official Journal of the European Communities: see for example Friedrich Binder GmbH & Co KG v Hauptzollamt Bad Reichenstall, Case 161/88 [1988] ECR 2415 at para. 19. Here the Community instrument was a directive and accordingly (article 16 not having created directly applicable rights) a person was not bound by article 16 until it was implemented in UK law. This has now happened by the enactment of primary legislation. Thereupon, the further presumption in English law that a person is presumed to know the law is brought into operation: for this presumption, see generally Halsbury’s Laws of England para 1324. Advocate General Darmon expressed the view at para 34 of his opinion in the Binder case that this presumption would arise in national proceedings in most member states. Accordingly, in my judgment the right approach to the interpretation of article 16 is to proceed on the basis that, when implemented, the general presumption that ignorance of the law is no defence will apply unless on a true interpretation of the directive it is excluded.”