Law Report: Underwriters were negligent: Deeny and others v Gooda Walker Ltd and others - Queen's Bench Division (Commercial Court)(Mr Justice Phillips), 4 October 1994.

Although a Lloyd's name knowingly accepts unlimited liability for losses, he will expect the active underwriter who acts on his behalf to exercise due skill and care to prevent the risk of such liability.

Mr Justice Phillips decided that the plaintiffs, 3,095 Lloyd's names, are entitled to recover from the defendants, Lloyd's syndicates 164, 290, 298 and 299 and members' agents, damages caused by excess of loss underwriting flowing from five central catastrophes.

The plaintiffs claimed pounds 630m, alleging that the defendants negligently disregarded certain principles of underwriting, with the result that the plaintiffs were subjected to excessive exposure to risk in 1988 to 1990. A large measure of the plaintiffs' exposure was attributed to excess of loss insurance resulting from five catastrophes - Piper Alpha, Exxon Valdez, Hurricane Hugo, Phillips Petroleum and Windstorm Daria 90A.

The defendants alleged that Lloyd's names knowingly accepted unlimited liability, that underwriting was a risk business, excess of loss business involved a higher degree of risk and of reward so that by joining the Gooda Walker syndicates they rendered themselves liable to suffer significant losses, and that the plaintiffs' losses were the consequence not of bad judgement or negligence or incompetence in underwriting, but of the unprecedented and unforeseeable sequence of catastrophes.

Geoffrey Vos QC, Jonathan Gaisman and David Lord (Wilde Sapte) for the plaintiffs; Bernard Eder QC, Mark Templeman, Simon Bryan and Sara Cockerill (Elborne Mitchell) for the defendants.

MR JUSTICE PHILLIPS said the fact that a Lloyd's name deliberately agreed to expose himself to unlimited liability did not mean that he anticipated or accepted that when he joined a syndicate the active underwriter would deliberately expose him to the risk of such liability. On the contrary, the name would reasonably expect the underwriter to exercise due skill and care to prevent him from suffering losses.

If an underwriter was deliberately exposing his names to suffering losses from time to time, he must make sure that the names were aware of that and of the scale of loss to which they would be exposed. A name would want to structure his underwriting business in a manner that accorded with his means and with his attitude to risk.

It was a fundamental principle of excess of loss underwriting that the underwriter should formulate and follow a plan as to the amount of exposure his syndicate should run. Such a plan would normally involve restricting the syndicate's gross exposure by reinsurance in order to attain the planned level of net exposure. The underwriter must be monitoring his business properly so that he knew what he was doing and he should not make so radical a departure from his policy on exposure as to betray the reasonable expectation of his names.

Any professional who engaged in a particular speciality could be expected to demonstrate the level of skill and care appropriate to that speciality. Successful excess of loss underwriting called for an approach to underwriting which differed from that of conventional direct insurance and called for a high degree of skill.

The defendants' approach to excess of loss underwriting was one that might be appropriate in other fields - the reliance on past experience when estimating risk. Past experience had to be treated with particular caution in the field of catastrophe excess of loss insurance, for the size and incidence of catastrophes did not conform to a pattern.

The growth of the London Market Excess of Loss business in the 1980s raised special problems in relation to the assessment of risk, exposure and rating, that called for special consideration. Some gave it that consideration. The Gooda Walker underwriters did not.

The exposure to which the names were subjected was not negligent per se. The exposure in respect of which the underwriters were at fault was culpable because it was unintended, unplanned and unjustified by any proper analysis of risk. Even had the names been aware of the exposure, such knowledge would not have constituted acceptance of the circumstances that made it blameworthy or given rise to any defence. The plaintiffs were restricted to recovering damages flowing from incompetence in relation to the writing of excess of loss business. Their claim for all losses they had sustained could not succeed. Significant causes of loss could not be attributed to the negligence that the plaintiffs had established.

The plaintiffs were entitled to damages which would place them in the same position as if the underwriting had been competently performed. The exposure to claims arising out of the five catastrophes was neither unforeseeable nor a consequence of deliberately calculated risk. The plaintiffs should recover damages as would put them in the same position as if the exposure had been protected by reinsurance.

Some plaintiffs had taken out stop-loss policies which would have indemnified them, in whole or in part, for the losses which they sought to recover. The well established principle was that where a plaintiff took out an insurance policy against the risk of injury or loss, the monies paid under that policy were not to be taken into acocunt when assessing the damages payable for causing such injury or loss. Stop-loss recoveries had no relevance to the measure of the plaintiffs' damages and did not reduce the measure of damage. No decision to take out such insurance or to refrain from taking out such insurance could amount to a voluntary assumption of the risk of negligence.