A key round to the names: Diane Coyle takes a detailed look at the 146-page Lloyd's judgment

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The Independent Online
THE VICTORY won yesterday by the names in the Gooda Walker case against 71 Lloyd's of London agencies is a more sweeping victory than many of them can have dared to hope. The judge, Mr Justice Phillips, has in effect accepted the names' arguments that the agents who put them into Gooda Walker acted negligently.

Mr Justice Phillips' 146-page judgment sets out his reasons for finding that the names' affairs had been handled negligently by the agents who placed them on the spectacularly loss-making Gooda Walker syndicates 299, 298, 290 and 164. His assessment of the underwriting carried out by these particular syndicates in the group chaired by Anthony Gooda is damning.

His analysis goes further, however. In laying down some principles by which Lloyd's underwriting should be governed, his comments will encourage names on other syndicates whose cases have yet to come to court - particularly those involved in the same kind of business as the Gooda Walker group.

This was excess of loss on excess of loss insurance, otherwise known as XL on XL or 'spiral' business. It was reinsurance for other reinsurers' cover for big losses. In practice, most spiral losses arose from big catastrophes.

In his judgment, the first definitive legal victory for a group of Lloyd's names, Mr Justice Phillips did not award a specific amount of damages. The names' lawyers estimate the amount at pounds 504m, but a final figure will have to be agreed by both sides.

The judge did lay down the principles that should govern any award. He ruled that the names should receive damages that would put them in the same position as if their syndicates had bought enough reinsurance cover to protect them against losses from five central catastrophes. These were the Piper Alpha and Exxon Valdez disasters, Hurricane Hugo, Phillips Petroleum and a windstorm in 1990.

As the four syndicates had bought some cover against catastrophes, the names will be entitled to the amount by which the total loss exceeded it, with some adjustments. Most importantly, as the syndicates still have open years, they are indemnified against potential future losses.

The judgment concludes that the senior underwriters - Derek Walker, Anthony Willard and Stanley Andrews - had not met reasonable standards of competence. They were at fault because their names faced exposure to losses that were 'unintended, unplanned and unjustified by any proper analysis of risk'.

Mr Andrews was the underwriter for syndicate 298, whose cumulative losses by the end of 1993 were pounds 332.5m. Mr Justice Phillips said: 'Mr Andrews' performance fell far short of reasonable competence.' He said that Mr Andrews had failed to assess properly the possibility of catastrophes hitting his specialist catastrophe insurance business, and that he did not believe Mr Andrews had monitored his total exposure to risk.

Mr Willard was in charge of underwriting for syndicate 299, with losses of pounds 66.1m by the end of last year. Mr Justice Phillips said: 'It was plain he keenly felt his responsibility for the losses that had been suffered by his names.' But he added that in parts of his business, such as rating risks, Mr Willard displayed a lack of competence.

Mr Walker, the Gooda Walker group's senior underwriter, breached his duty to names by not monitoring his syndicates' net exposure to risk. He also used creative accounting to increase the syndicates' reported profits. Mr Walker faces separate Lloyd's disciplinary charges over his habit of buying 'time and distance' policies, which added significantly to his profits between 1981 and 1987.

The judgment concluded: 'Most of the criticisms made by the plaintiffs in relation to the manner in which Mr Walker conducted his underwriting business are made out. He was deliberately running a net exposure to risk without monitoring the precise level of that exposure or correctly informing his names of this.'

Mr Justice Phillips said all three underwriters relied on past experience when estimating risk, an approach that might be appropriate in other business fields, but which ignored the fact that excess of loss insurance raises 'special problems in relation to risk, exposure and rating that called for special consideration. Some gave it that consideration. The Gooda Walker underwriters did not.'

In a section that will particularly interest parties in the long line of cases awaiting a hearing, Mr Justice Phillips set out criteria for assessing an underwriter's competence. Underwriters should achieve a balance of risks, he said, and although losses in some years could legitimately be offset by profits in others, 'if an underwriter is deliberately to expose his names to suffering losses from time to time, he must make sure that the names are aware of this and of the scale of losses to which they will from time to time be exposed'.

He said an underwriter specialising, as the Gooda Walker ones did, in catastrophe reinsurance should, as a fundamental principle, 'formulate and follow a plan as to the amount of exposure that his syndicate would run'. He should monitor his business properly. A competent underwriter would know his exposure to losses and have a proper policy of buying reinsurance.

The clear statement of principles of good underwriting in yesterday's judgment will help other litigating groups of names. A further conclusion that other names' groups were swift to welcome was that generally low standards of underwriting were no excuse as far as the courts were concerned.

Mr Justice Phillips cited the legal precedent on professional negligence: 'Suppose a profession collectively adopts extremely lax standards in some aspect of its work. The court does not regard itself as bound by those standards and will not acquit practitioners of negligence simply because they complied with those standards.' For bad underwriters, in other words, there is no safety in numbers.

The judge also dismissed the 'casino' defence put forward by the members' agents. They claimed that it was well known that the business carried out by the Gooda Walker syndicates was high-risk. Mr Justice Phillips said it was clear that not even the defendants generally held this perception of spiral business.

He described the spiral as 'rather like a multiple game of pass the parcel'. The losses for the syndicate holding the parcel at the end would be many times bigger than the loss that triggered the spiral.

He went on to say that if all those writing spiral business had adopted a competent approach to underwriting, the XL on XL market in London would not have existed in the form it took. It was 'an aberration'. Parties in forthcoming spiral cases - starting with the Feltrim case on 17 October - will be taking careful note.