Lloyd's names win legal victory

JOHN EISENHAMMER

Financial Editor

Loss-making Lloyd's names were celebrating a landmark High Court victory against auditors yesterday which could produce massive damages awards.

The judgment also boosted the prospects of an overall solution to the troubles at Lloyd's of London by dramatically increasing the pressure on auditors to make a substantial contribution to the global settlement to the names in exchange for them dropping all litigation against the market.

John Mays, chairman of Merrett syndicate 418 names' action group, said he expected the damages to total pounds 300m. "This is a stunning victory. If we had written the judgment ourselves we could not have done it better," he said. Syndicate members include such well-known personalities as Rocco Forte, Major Ronald Ferguson, father of the Duchess of York, Adam Faith, the former pop star, Sir Nicholas Lyell, the Attorney-General, and Ted Dexter, the cricketer.

Ernst & Whinney, now part of Ernst & Young, was found to have been negligent in auditing the Merrett syndicate 418 during three years in the early Eighties. Merrett is the first big Lloyd's case to involve auditors as well as the controversial asbestos and pollution policies in the US, which, because of retrospective legislation, began in the late Seventies to land names with ruinous losses.

Mr Justice Creswell found all four defendants, Stephen Merrett himself, the Merrett company, the managing agents and the auditors, guilty of negligence in failing to take proper account of the risks inherent in these US pollution and asbestos liabilities. Mr Merrett, a former deputy chairman of Lloyd's and long-serving member of the society's council, was also found to have deliberately concealed significant information from names.

The judge said he had "serious reservations about many aspects of Mr Merrett's evidence and serious reservations about his approach as underwriter", adding that Merrett accounts for 1982 contained "a mixture of truth, half- truths and falsehood".

Mr Mays said: "This is devastating criticism of Merrett, and in criticising him the judge is criticising the entire old guard at Lloyd's of which Merrett was an integral part."

The judge's findings of deceit and cover-ups by such a formerly eminent member of Lloyd's are expected to fuel efforts by US lawyers, in particular, to seek damages from the insurance market.

Rejecting names' claims for the three preceding years, Mr Justice Creswell found that there had been negligence in the underwriting and auditing of the insurance years 1982, 1983 and 1984. He found the Merrett syndicate to have been negligent on 11 counts when it took on the re-insurance of other syndicates' US pollution and asbestos liabilities.

These were big policies and Mr Merrett was in effect taking a bet against the market that the liabilities would turn out to be less than supposed. In the event, with inadequate cover of its own, they brought ruin to names.

The auditors were criticised for not getting the additional information that should have persuaded them to withhold their unconditional approval for these years' accounts. Instead, the Merrett syndicate was allowed to "close" these years, implying that it was certain it had sufficient coverage for all potential losses, and allowing it to recruit unsuspecting new names who suddenly found themselves liable for huge losses.

Ernst & Young yesterday said it would probably appeal, and stressed that the Merrett judgment, because of its particular circumstances, had no implications for other Lloyd's cases the auditor faces. Nick Land, senior partner at Ernst, said names' estimates of their potential damages were exaggerated, should an appeal fail. "Any reasonable assessment is likely to put our contribution below pounds 20m," he said.