COURT OF APPEAL (CIVIL DIVISION)
ON APPEAL FROM THE HIGH COURT OF JUSTICE
The Hon Mr Justice Morison
Strand, London, WC2A 2LL
B e f o r e :
LORD JUSTICE CLARKE
SIR CHRISTOPHER STAUGHTON
| ASSICURAZIONI GENERALI SpA||Claimant/|
|- and -|
ARAB INSURANCE GROUP (B.S.C.)
(instructed by Holman, Fenwick and Willan) for the Appellant
Mr Stewart Boyd QC and Mr Richard Millett
(instructed by LeBoeuf, Lamb, Greene and MacRae) for the Respondent
Hearing dates : 18th to 24th June 2002
Crown Copyright ©
Lord Justice Clarke:
Approach of the Court of Appeal
"(1) Every appeal will be limited to a review of the decision of the lower court unless –
(a) a practice direction makes different provision for a particular category of appeal; or
(b) the court considers that in the circumstances of an individual appeal it would be in the interests of justice to hold a re-hearing.
(3) The appeal court will allow an appeal where the decision of the lower court was
(a) wrong; …
(4) The appeal court may draw any inference of fact which it considers justified on the evidence."
"The appellate approach: the general rule
30. As a general rule, every appeal will be limited to a review of the decision of the lower court. This general rule will be applied unless a practice direction makes different provision for a particular category of appeal, or the court considers that in the circumstance of an individual appeal it would be in the interests of justice to hold a rehearing: CPR r 52.11(1). The appeal court will only allow an appeal where the decision of the lower court was wrong, or where it was unjust because of a serious procedural or other irregularity in the proceedings in the lower court: CPR r 52.11(3).
31. This marks a significant change in practice, in relation to what used to be called "interlocutory appeals" from district judges or masters. Under the old practice, the appeal to a judge was a rehearing in the fullest sense of the word, and the judge exercised his/her discretion afresh, while giving appropriate weight to the way the lower court had exercised its discretion in the matter. Under the new practice, the decision of the lower court will attract much greater significance. The appeal court’s duty is now limited to a review of that decision, and it may only interfere in the quite limited circumstances set out in CPR r 52.11(3).
32. The first ground for interference speaks for itself. The epithet "wrong" is to be applied to the substance of the decision made by the lower court. If the appeal is against the exercise of a discretion by the lower court, the decision of the House of Lords in G v G (Minors: Custody Appeal)  1 WLR 647 warrants attention. In that case Lord Fraser of Tullybelton said, at p 652:
"Certainly it would not be useful to inquire whether different shades of meaning are intended to be conveyed by words such as ‘blatant error’ used by the President in the present case, and words such as ‘clearly wrong’, ‘plainly wrong’, or simply ‘wrong’ used by other judges in other cases. All these various expressions were used in order to emphasise the point that the appellate court should only interfere when they consider that the judge of first instance has not merely preferred an imperfect solution which is different from an alternative imperfect solution which the Court of Appeal might or would have adopted, but has exceeded the generous ambit within which a reasonable disagreement is possible".
"(1) The burden of showing that the trial Judge was wrong lies on the appellant. …
(2) When questions of the credibility of witnesses who have given oral evidence arise the appellant must establish that the trial Judge was plainly wrong. Once again there is a long line of authority emphasizing the restricted nature of the Court of Appeal’s power to interfere with a Judge’s decision in these circumstances though in describing that power different expressions have been used. In SS Hontestroom v SS Sagaporak …  AC 37 at p 47 Lord Sumner said:
"None the less not to have seen the witnesses puts appellate Judges in a permanent position of disadvantage as against the trial Judge and unless it can be shown that he has failed to use or has palpably misused his advantage, the higher Court ought not to take the responsibility of reversing conclusions so arrived at merely on the results of their own comparisons and criticisms of the witnesses and of their own view of the probabilities of the case."
Finally in Mersey Docks and Harbour Board v Proctor  AC 253 at p 258, Viscount Cave LC said:
"In such a case … it is the duty of the Court of Appeal to make up its own mind not disregarding the judgment appealed from and giving special weight to that judgment in cases where the credibility of witnesses comes into question, but with full liability to draw its own inferences from the facts proved or admitted and to decide accordingly.
(3) When a party has been acquitted of fraud the decision in his favour should not be displaced except on the clearest grounds. This proposition is not in contest and is supported by the House of Lords in Akerhielm v De Mare  AC 789 at p 806, where the earlier authority of Glasier v Rolb (1889) 42 Ch D 436 is cited."
"With regard to an appeal to this court (which would never have involved a complete rehearing in that sense), the language of ‘review’ may be said to fit most easily into the context of an appeal against the exercise of a discretion, or an appeal where the court of appeal is essentially concerned with the correctness of an exercise of evaluation or judgment – such as a decision by a lower court whether, weighing all relevant factors, a contract of service existed. However, the references in r 52 11 (3) and (4) to the power of an appellant court to allow an appeal where the decision below was ‘wrong’ and to ‘draw any inference of fact which it considers justified on the evidence’ indicate that there are other contexts in which the court of appeal must, as previously, make up its own mind as to the correctness or otherwise of a decision, even on matters of fact, by a lower court. Where the correctness of a finding of primary fact or of inference is in issue, it cannot be a matter of simple discretion how an appellant court approaches the matter. Once the appellant has shown a real prospect (justifying permission to appeal) that a finding or inference is wrong, the role of an appellate court is to determine whether or not this is so, giving full weight of course to the advantages enjoyed by any judge of first instance who has heard oral evidence. In the present case, therefore, I consider that (a) it is for us if necessary to make up our own mind about the correctness or otherwise of any findings of primary fact or inferences from primary fact that the judge made or drew and the claimants challenge, while (b) reminding ourselves that, so far as the appeal raises issues of judgment on unchallenged primary findings and inferences, this court ought not to interfere unless it is satisfied that the judge’s conclusion lay outside the bounds within which reasonable disagreement is possible. In relation to (a) we must, as stated, bear in mind the important and well-recognised reluctance of this court to interfere with a trail judge on any finding of primary fact based on the credibility or reliability of oral evidence. In the present case, however, while there was oral evidence, its content was largely uncontentious."
In the same case Neuberger J stressed (at paragraphs 61 to 64) that the question whether there was a contract of service on the facts involved the weighing up of a series of factors. Thorpe LJ agreed with both judgments.
"On the other hand, the standards applied by the law in different contexts vary a great deal in precision and generally speaking, the vaguer the standard and the greater the number of factors which the court has to weigh up in deciding whether the standards have been met, the more reluctant an appellate court will be to interfere with the trial judge’s decision"
"The question of whether an invention was obvious had been called "a kind of jury question" (see Jenkins LJ in Allmanna Svenska Elektriska A/B v The Burntisland Shipbuilding Co Ltd (1952) 69 RPC 63, 70) and should be treated with appropriate respect by an appellate court. It is true that in Benmax v Austin Motor Co Ltd  AC 370 (1955) 72 RPC 39, 42, this House decided that, while the judge’s findings of primary fact, particularly if founded upon an assessment of the credibility of witnesses, were virtually unassailable, an appellate court would be more ready to differ from the judge’s evaluation of those facts by reference to some legal standard such as negligence or obviousness. In drawing this distinction, however, Viscount Simonds went on to observe, at page 374, that it was "subject only to the weight which should, as a matter of course, be given to the opinion of the learned judge". The need for appellate caution in reversing the judge’s evaluation of the facts is based upon much more solid grounds than professional courtesy. It is because specific findings of fact, even by the most meticulous judge, are inherently an incomplete statement of the impression which was made upon him by the primary evidence. His expressed findings are always surrounded by a penumbra of imprecision as to emphasis, relative weight, minor qualification and nuance (as Renan said, la vérité est dans une nuance), of which time and language do not permit exact expression, but which may play an important part in the judge's overall evaluation. It would in my view be wrong to treat Benmax as authorising or requiring an appellate court to undertake a de novo evaluation of the facts in all cases in which no question of the credibility of witnesses is involved. Where the application of a legal standard such as negligence or obviousness involves no question of principle but is simply a matter of degree, an appellate court should be very cautious in differing from the judge’s evaluation."
"It is worth reflecting on what judges mean when they speak of ‘inferences’ in this context. An inference from a number of primary facts may itself be a simple matter of fact. That is an inference from circumstantial evidence, or what might be called the ‘smoking gun’ kind of inference. (Inferences from a litigant’s failure to call a particular witness may be in this category.) In the present context, however, the inference is not a simple matter of fact because it involves a process of evaluation. It was put very clearly by Viscount Simonds in Benmax v Austin Motor Co Ltd  AC 370, 373 (a patent case on obviousness):
"I cannot help thinking that some confusion may have arisen from a failure to distinguish between a finding of a specific fact and a finding of fact which is really an inference from facts specifically found or, as it has sometimes been said, between the perception and evaluation of facts."
"How reluctant should an appellate court be to interfere with the trial judge’s evaluation of, and conclusion on, the primary facts? As Hoffmann LJ made clear in Grayan there is no single standard which is appropriate to every case. The most important variables include the nature of the evaluation required, the standing and experience of the fact-finding judge or tribunal, and the extent to which the judge or tribunal had to assess the oral evidence."
i) failure by Generali to disclose that the reserving policy adopted by G&T was imprudent or unusual;
ii) presentation by Generali of materially inaccurate loss statistics; and
iii) misleading ARIG as to the participation of Munich Re by stating or implying that it was participating in the whole package and not (as was the case) in only one section.
The insurance, reinsurance and retrocession
"As you will see these placings are for Contractors involved principally in Residential, Commercial and associated trades coverage is provided on an all jobs basis with no single project being more than $10,000,000 in Contract.
The estimated premium income over both placings in the next twelve months is estimated at approximately US$20,000,000.
As respects the Liability coverage, please note that any account with a known products exposure is automatically disqualified and not even submitted to the Underwriters for an indication of terms.
Each account is subject to a vigorous pre-qualification procedure in the USA and in London before it is even submitted to Underwriter.
This process has contributed to the success of the placing which is demonstrated by the enclosed figures and the premium volume.
The leading Insurers in London are the Assicurazioni Generali Spa with support from the Commercial Union and the Munich Re.
We believe you will find our submissions self explanatory but if you have any questions pleas contact the undersigned.
We now await details of your proposed participation which can be on a reinsurance basis if you wish."
This placing has a proven record in attracting contracting risks.
…. one of the reasons for its success has been the low handling costs for both Producers and Underwriters.
In order that risks may be handled swiftly and economically by both Leading Underwriters and Brokers, business will be handled in the following manner:
1) Summary sheets will be completed by the Agent, providing details of risk.
2) The Leading Reinsurer will indicate terms for the risk and these will be submitted by Alexander Howden to their Agent.
3) If a firm order is obtained, the Underwriter and their Leading Reinsurer will simultaneously bind the risk.
4) The Agent of Alexander Howden will then issue a Certificate of Insurance to the Assured. ….
5) From renewal 1992, premium payment and claims settlement to be by monthly bordereaux."
The introduction concluded by saying that no major changes were planned for 1992-3, that steps would be taken to simplify policy issuance and that the placing would be strengthened by improving its geographic base into the Pacific North-west, the South-west and the North-east.
AHL CONTRACTORS PREMIUM AND LOSS EXHIBIT SECT A & B
|FACILITY NO||GROSS PREMIUM||INCURRED LOSSES||LOSS RATIO|
|0919089||$ 157,653||$ 52,275||33.15%|
|0956090||$ 1,649,525||$ 19,347||1.17%|
|0956091||$ 3,869,003||$ 140,034||3.62%|
|0956090||$ 8,581,632||$ 3,385,943||39.45%|
|0956091||$ 636,516||$ 12,084||1.90%|
"He recalls discussing the capacity which was on offer at that time and the split of the forecast premium of US$20 millions for the next year between sections A and B, and between the AH package and the WK Cooper package. He discussed the ‘pre-qualification procedures’ and was led to believe, accurately, that AH would initially assess the suitability of the proposal and weed out those which they believed would be unacceptable to underwriters and that the Lead Reinsurance underwriters at Generali would carry out their own assessment and quote terms, where the risk was acceptable. He also says that he was led to believe that Munich Re was taking 35%, Generali was taking 40% and Commercial Union 20%. He says he ‘understood’, from the fax and the telephone call that these percentages applied to both sections A and B. He says that he formed a very favourable impression of the potential business as the brokers had been able to answer all their questions and ‘give the necessary comfort we were looking for’. He recalls a further telephone conversation with AH on 9 July 1992, when he chased them up for the ‘wordings’ for which he has asked in the earlier call."
On his copy of the fax of 18 June Mr Rehman noted 40% against Generali, 20% against Commercial Union and 35% against Munich Re.
"Derek, thanks for your patience and input on this placement in view of which, based on your offer 18-6-92 and faxes 9-7-92, we are prepared to accept a 7.5% line of whole to be signed in full subject the CGL R/I available and total deductions to ARIG 30% in all.
Please forward final slip(s) for our signature after finalising all points such as fronting, protection, etc.
Pls note that our liability only incepts from inception of this facility for projects to be declared from now; no run off liability is accepted from previous periods or contracts already having incepted and/or completed. Pls confirm. Best rgds."
"… we confirm that we will be using your line of 7.5% on each sections with respect to declarations attaching on or after the 2nd of July 1992.
… we confirm that we have arranged excess of loss re-insurance in respect of your 7.5 % line on the CGL section – section B. Your re-insurance cover note will be sent shortly.
… we anticipate that you will be writing as a retrocession of the Generali United Kingdom Branch. Will advise again if this is not the case. Will send copy of our slip in next day or so. … we confirm total deductions to ARIG are 30%.
Lastly, we confirm that this placing only apples to occurrences under declarations bound during the twelve months @ July 2nd 1992. Liability from back years is not transferred …
Trusting all in order and many thanks."
"We believe that you will find these to be in order and would ask you to authorize your line, where shown on each retrocession slip and fax them back to us immediately.
We believe you will find everything in order but if you have any questions please contact the undersigned immediately."
If, which is by no means certain, I have understood the position, the direct slips evidenced the contract between the insured and United, the reinsurance slips fronting the insurance evidenced the contract between United and Generali and the retrocessions slips evidenced the contracts of retrocession between Generali and the retrocessionaires including ARIG.
"The leading Insurers in London are [Generali] with support from the Commercial Union and the Munich Re."
It will also be recalled that Mr Rehman was told on the telephone that their relative percentages were 40%, 20% and 35% respectively.
"Claims Handling Procedure:- as per the attached agreement. Claims settlement authority is US$25,000 per claim"
No agreement was attached, but on 26 August Alexander Howden sent Mr Rehman a fax to which were attached "the Claims Handling Procedures which have been agreed on the direct placings" and which were stated to be given to ARIG to complete their file because they were "participating on a reinsurance basis". The document attached gave details of various procedures agreed with G&T but did not make any express reference to any reserving policy or methodology.
"(1) The fax of 18 June 1992 was an invitation by AH to ARIG to treat. It did not amount to an offer since, amongst other things, it did not specify the respect in which ARIG could participate – whether a co-reinsurer of United or as a retrocessionaire of Generali.
(2) ARIG’s fax of 10 July 1992 was not an acceptance of an offer, because no offer had been made and in any case the acceptance of a 7.5% line could have been on the basis of a co-insurance [where the contracting party would include United] or a retrocession [where the contracting party would be Generali].
(3) The reference by ARIG in that fax to the need for AH to send final slips for signature after finalising points on matters such as fronting, protection etc is significant for two reasons: first, it shows that as at that date ARIG did not regard the contract as concluded because there were terms and conditions still to be sorted out and agreed; and second, it shows that ARIG regarded the formal act of scratching the slip as the last step in the contractual chain.
(4) The fax from AH saying that ‘we will be using your line of 7.5% still left open the question whether ARIG was contracting as retrocessionaire or as co-insurer. That issue remained to be resolved and, until it was, there could not have been a concluded contract. When AH had decided in which capacity ARIG was to contract they did so at the same time as sending ARIG the final slips to scratch which they asked to be returned signed and stamped as a matter of urgency. It was only when these slips were sent that ARIG’s contractual position had been clarified.
(5) From an objective analysis of the contractual documents, it seems to me clear that both parties intended the contract to be concluded when the slips were scratched and returned by ARIG to AH. That would be the usual method by which insurance, reinsurance or retrocession was concluded. Thus, in my judgment, the contract was only concluded in September when that step was taken by ARIG. "
"(2) Every circumstance is material which would influence the judgment of a prudent insurer in fixing the premium, or determining whether he will take the risk."
"For these reasons I conclude that there is to be implied in the Act of 1906 a qualification that a material representation will not entitle the underwriter to avoid the policy unless the misrepresentation induced the making of the contract, using "induced" in the sense in which it is used in the general law of contract."
"Under the general law, a misrepresentation need not be the sole inducement, but must have been a real and substantial cause affecting the decision of the representee to enter into the contract, or to do so on the terms agreed."
They cite as examples JEB Fasteners Ltd v Marks, Bloom & Co  1 All ER 583 and Edgington v Fitzmaurice (1885) 29 ChD 459. In paragraph 22-3C of Clarke it is said that what is usually required is what is identified as a type B representation, which is defined as follows:
"Type B is a representation such that, if the recipient had known the truth, he would still have been willing to make the contract, but only on different terms, notably, but not only as to premium."
"The existence of such a presumption is recognised in the authorities; see Halsbury’s Laws vol 31 par 1067 where the law is stated as follows:
Inducement cannot be inferred in law from proved materiality, although there may be cases where the materiality is so obvious as to justify an inference of fact that the representee was actually induced, but, even in such exceptional cases, the inference is only a prima facie one and may be rebutted by counter evidence.
The authorities cited include Smith v Chadwick (1884) 9 App Cas 187 and in my judgment they justify the above statement of the law. This provides a reminder of the need to distinguish "materiality" from "inducement", although inevitably the two overlap.
Here, the evidence of the three underwriters who did give evidence and of the expert witnesses was clear. If the underwriters had been told the true state of the ground conditions, as revealed by the 1982 report, and of the conflicting views expressed by the authors of that report and by Worleys, then they would have called for further information and in all probability either refused the risk or accepted it on different terms. In fact, all four underwriters including Mr Earnshaw accepted it without any relevant enquiries. There is no evidence to displace a presumption that Mr Earnshaw like the other three was induced by the non-disclosure or misrepresentation to give cover on the terms on which he did. In my judgment, these insurers also have discharged their burden of proof."
It appears to me that a presumption of this kind really amounts to no more than this. It simply operates where the evidence before the court is enough to lead to the inference that the insurer or reinsurer was, as a matter of fact, induced to enter into the contract.
i) In order to be entitled to avoid a contract of insurance or reinsurance, an insurer or reinsurer must prove on the balance of probabilities that he was induced to enter into the contract by a material non-disclosure or by a material misrepresentation.
ii) There is no presumption of law that an insurer or reinsurer is induced to enter in the contract by a material non-disclosure or misrepresentation.
iii) The facts may, however, be such that it is to be inferred that the particular insurer or reinsurer was so induced even in the absence from evidence from him.
iv) In order to prove inducement the insurer or reinsurer must show that the non-disclosure or misrepresentation was an effective cause of his entering into the contract on the terms on which he did. He must therefore show at least that, but for the relevant non-disclosure or misrepresentation, he would not have entered into the contract on those terms. On the other hand, he does not have to show that it was the sole effective cause of his doing so.
Correcting a misrepresentation
i) The fax of 18 June did not contain any representation that Munich Re participated in the whole package. The words "with support from the Commercial Union and the Munich Re" in the fax of 18 June could not mean more than that Munich Re were participating in the packages and did not necessarily mean that they were participating in both sections A and B. Mr Rehman misunderstood the position because he wrongly thought that it was not possible to participate in only one of the packages, although (as I read his judgment) the judge expressed considerable scepticism as to whether Mr Rehman was really of that view.
ii) As to the telephone conversation on 3 July, the judge said this in paragraph 31:
"I am not prepared to place any great weight on the oral conversation between Mr Wardlaw and Mr Rehman at the beginning of July 1992. Mr Wardlaw had no recollection of the conversation; the witnesses were dealing with something that occurred 9 years ago and for which there are no notes relevant to this issue. Mr Wardlaw says he thinks he would have explained the full position about Munich Re’s participation. I doubt he did so because Mr Rehman had obviously talked himself into believing that participation could only be across the board. The most obvious explanation for how this issue came to the fore is simply that Mr Rehman has misled himself and thought, through his own ignorance, that support from Munich Re must have involved their participation in both Sections of both packages. The truth was staring at him in the face. It is most improbable that the brokers would have negligently or deliberately misrepresented the position when the true position was there for all to see."
iii) In any event the judge did not consider that what was said about Munich Re played any part in the decision taken ARIG to participate in the programme. In reaching that conclusion he placed particular reliance upon the oral evidence of Mr Anderberg to which I refer below.
Materiality and inducement
"But in any event I do not consider that what was said about Munich Re played any part in the decision taken by ARIG to participate in the programme. Although Mr Anderberg suggested in his witness statement that but for Munich Re’s participation ARIG would not have participated, his position modified when he gave evidence. Quite rightly, I think, he said that the decision taken by ARIG whether or not to participate was taken on the merits of their appraisal of the risk but that the fact Munich Re was also a participant was a comfort factor after the decision had been taken."
"A. Am I right in thinking that you are asking me a question -- because it is quite a long question -- that the Munich Re decision did not have any impact on our own decision?
Q. On your underwriting judgment, on deciding whether or not to accept this risk, that is what I am asking.
A. You know, we are making an independent underwriting.
Q. I am sure you are.
A. On all risks. All the other factors involved here -- the excellent figures, et cetera -- indicated that this was a very profitable account and I am sure we would have written it without the participation of Munich Re, I am sure. It was a comfort factor but Munich Re is not guiding our underwriter, we are guiding our underwriting ourselves.
MR JUSTICE MORISON: The position is that you take an independent underwriting decision, having made the decision to participate, you are feeling comfortable with that decision having regard to the participation of Munich Re in the programme.
"Q If you had been told that Munich Re was on section A and section B at the time you assessed the risk, and then just before you accepted the line you were told that Munich Re was not, in fact, on section B, what view would you have taken?
A I would have been very puzzled, asking "why", because this was a profitable account and I would have gone back to the producer and asked them for a clarification and why Munich Re did not participate in section B, which was actually, as far as I remember, when we were asking for the premium split it generated, on the advice premium volume of 20 million, it actually generated 75 per cent. Why should Munich Re not participate on this 75 per cent of the 20 million if it was a profitable account with good prospects? That would have been my immediate reaction.
If I would not have got any clarification which I could buy, I would have declined participation."
"CONTRACTORS PREMIUM AND LOSS UPDATE SECTIONS A & B
|FAC NO||GROSS PREMIUM||PAID||OUT-STANDING||INCURRED
Paid & O/S
||$ 233,991||$ 31,772||$ NIL||$ 31,772||13.57%|
||$ 1,666,516||$ 21,833||$ 456,732||$ 478,565||28.70%|
||$ 4,596,397||$ 223,529||$ 249,454||$ 472,983||10.29%|
||$ 3,245,289||$ NIL||$ 10,500||$ 10,500||00.32%|
||$ 10,237,000||$ 2,661,930||$ 1,783,384||$ 4,445,314||43.42%|
||$ 13,334,976||$ 330,181||$ 1,162,273||$ 1,492,454||11.20%|
||$ 11,986,078||$ 4,027||$ 160,223||$ 164,250||01.37%|
|TOTAL||$ 45,300,347||$ 3,273,272||$ 3,822,566||$ 7,095,838||15.66%|
Those figures excluded a particular loss in respect of which coverage was not renewed and were stated to be provided by the third party claims administrator ("TPA"), which was of course G&T, as being in excess of deductibles and self insured retentions ("SIRs").
|"FAC NO||GROSS PREMIUM||PAID||OUT-STANDING||INCURRED
Paid & O/S
||$ 749,418||$ 96,264||$ 76,633||$ 172,897||23.07%|
||$ 394,640||$ NIL||$ 6,000||$ 6,000||01.52%|
||$ 2,332,347||$ 148,970||$ 366,789||$ 515,7594||22.11%|
||$ 2,217,193||$ 4,027||$ 78,223||$ 82,250||03.71%
|TOTAL||$ 5,693,598||$ 249,261||$ 527,645||$ 776,906||13.65%|
"… [Generali] failed to disclose to [ARIG] that the claims administrator at all material times … [G&T] operated an unusual and/or imprudent reserving policy."
It was further alleged that that failure was a failure to disclose a material fact and that, as a result, Generali presented materially inaccurate loss statistics in the two sets of figures set out above. Finally it was said that ARIG was thereby induced to enter into the contracts.
"What is complained of is [the figures’] misleading character. ARIG say that the figures would have looked quite different had the TPA [ie G&T] not operated an unusual and imprudent reserving policy.
Through Mr Simon QC, ARIG put their case on the need to disclose the reserving policy in two separate ways. He submitted that the reserving policy was imprudent and unusual and, ipso facto, should have been disclosed as a material fact as a part of the fair presentation of the risk. Second, he submitted that without disclosure of it, the figures presented in the fax of June 1992 and in March 1993 were materially misleading. I agree with Mr Collins QC on behalf of Generali that there is effectively only one point. The reserving policy is not itself a material fact which requires to be disclosed. The evidence was clear on this point. An underwriter would only be expected to be informed of such a policy if it were unusual and imprudent so that it rendered the figures showing the ratio of losses to premiums unreliable. Was the policy unusual and imprudent so that the figures disclosed were misleading? Mr Simon’s two points merged into just one."
The expert witnesses
"It seemed to me that Appendix A did not provide the particulars which it purported to provide. As he said, "my reserve of $40,000 cannot be compared to the reserve needs on any individual file." He also explained that his Appendices omitted any deductions for deductibles and … SIRs. … But, crucially, the claims population upon which Mr Kiverstein prepared his work, namely some 5,452 claims, was different from the claims which were known about in June 1992 and March 1993, namely 512 claims and 954 claims respectively.
It became apparent to ARIG’s advisers that valuable as Mr Kiverstein’s work may have been to ARIG he was not the witness who could talk about the Gay & Taylor reserving policy in response to Generali's expert, Mr Palange."
"In my judgment, even when dealing with expert witnesses, a trial judge has an advantage over an appellate court in assessing the value, the reliability and the impressiveness of the evidence of the experts called on either side. There are various aspects of such evidence in respect of which the trial judge can get the ‘feeling’ of a case in a way in which an appellate court, reading the transcript, cannot. Sometimes expert witnesses display signs of partisanship in the witness box or lack of objectivity. This may or may not be obvious from the transcript, yet it may be quite plain to the trial judge. Sometimes an expert witness may refuse to make what a more wise witness would make, namely, proper concessions to the viewpoint of the other side. Here again this may or may not be apparent from the transcript, although plain to the trial judge. I mention only two aspects of the matter, but there are others."
Brandon LJ was there considering the evidence of medical experts, but in my view the same principles apply to all experts including experts on reserving.
"I have to say at once that I did not regard Mr Beckerman’s evidence as particularly helpful or reliable. In the most general terms he tended to advocate ARIG’s case, no doubt through considerable experience of advocating claims in the US courts, often, I suspect, before a jury. He did not quite have the presence, authority and balance to be expected of an independent expert. But he was labouring, I think, under the disadvantage of being instructed late. … He was adamant that a claims handler MUST post a reserve within 30 days of a claim being made. He went on to say that he did not regard a 90 day delay as acceptable. 30 days was a US industry standard. There was no mention of this standard in his report, nor in the joint memorandum prepared by the experts nor in a book on the subject to which he helpfully drew our attention. He was of the view that there were really no exceptions to this standard. He felt able to make judgments about the adequacy of the reserves in relation to files for which he had only one piece of paper extracted. I consider that he exaggerated the need for a reserve in 30 days and was not prepared to look at the matter from the perspective of a claims handler in 1992/1993. Broadly speaking, I felt unable to rely upon Mr Beckerman’s evidence unless it was consonant with the evidence of Mr Palange."
"Mr Palange gave me confidence about the reliability of his evidence. He is well qualified to give his opinion in this case. He has conducted "literally hundreds" of reserve and technical audits of US Insurers’ claims departments and TPAs. What he did was to carry out a sampling of 144 original files which he selected from Appendix A. He said, and I accept, that he selected samples of large and small incurred losses, large and small paid losses and a sampling of all sizes of loss where Appendix A had used the figure of US$40,000 (repetitively). He reached a number of conclusions, based on his own analysis of complete files chosen at random within the parameters set out, which I accept and find as follows."
The judge then made a series of findings of fact to which I shall return below. For present purposes it is important to note that the judge’s conclusions were influenced to a considerable degree by the adverse view which he formed of Mr Beckerman as compared with the favourable view which he formed of Mr Palange. In considering the arguments advanced in this appeal, that is to my mind an important factor which we should keep in mind.
G&T’s reserving policy
"(1) In almost every case, a claim under the programme would be in the form of a law suit. Claims were attended to immediately on receipt. He would look at the claim, as he looked at all of them in the early years. It would be allocated to a claims examiner, of whom there were 33 and entered in the system.
(2) A nil reserve was set until Gay & Taylor were in a position "to set a loss reserve that properly represented underwriters’ most likely financial exposure in the context of coverage provided by the insurance policy". This was rarely possible before extensive investigation had been carried out in the circumstances surrounding the event which had given rise to a claim." The court papers served on the insured would not usually contain sufficient information to set a reserve; for example, the formal claim might or might not contain a date of loss.
(3) Every claim made in the form of legal proceedings would be reviewed with coverage and defence counsel. In almost every such case, the files in the Court Depository would have to be looked at by coverage counsel whom Mr Reynaud often accompanied. The purpose of the search was to establish dates of ‘loss’ and ‘occurrence’ [this was prior to the decision in the Montrose case]; an indication of the damages being sought; a listing of all the insurance carriers and a listing of all sub-contractors. Once the sub-contractors had been identified it was usually possible to say from whom indemnities might be sought and whether the loss fell outside the insurance year. If the claim was large, then the amount of documentation would increase in size. However, completion of this process would not usually provide Mr Reynaud with sufficient information to set a reserve. It might take anything up to three years from first notification before sufficient information was available to set appropriate loss reserves.
(4) In summary, it was not possible to set a loss reserve which properly represented underwriters’ most likely financial exposure "until I had all of the information regarding the circumstances surrounding events that gave rise to the claim".
(5) As regards expense reserves it was not unusual to set a nil reserve because the insured had a minimum deductible/SIR of $2,500 (up to $50,000).
(6) As and when necessary, a reserve (and the file) would be reviewed."
"Gay & Taylor adopted a form of case reserving. That is, the reserves were applied on a case by case basis. Initially a nil reserve was set when a new file was opened and the claim would be investigated both as to ‘coverage’ and liability, often through outside attorneys or independent adjusters. Once the likely outcome was capable of being assessed, Gay & Taylor did not adopt a policy of stair step reserving, but pursued a policy of ‘one-time’ reserving "that is to say, to establish a reasonably accurate reserve for the first time it was set once adequate and accurate investigation information was received."
"make every effort to establish the full circumstances surrounding an event that has given rise to a claim. Having done so, it is incumbent on the claimant to set a reserve that properly represents its most likely financial exposure in the context of coverage provided by the policy(ies) and for that reserve to be fixed as soon as is reasonably practicable, including reserving for legal and associated expenses. The reserves should be reviewed on a regular basis (including liaison with and obtaining regular updates from external advisers, such as loss adjusters and/or lawyers involved in actual or potential claims)".
"Matters of Market Practice
It is the custom, practice and procedure in the United States insurance industry to post reasonably accurate loss and expense reserves for primary construction, liability and construction defect liability claims, in as timely a fashion as the facts and circumstances of each individual claim reasonably allow.
One of the duties of a TPA is the posting (establishment and maintenance) of reserves. Reserves are used to help an insurance carrier predict the amount of money it will have to spend on paying claims and lawsuits.
Case reserving is the most common form of reserving practice within the insurance industry in the United States. "Case" reserving means, simply, that each claim is reserved individually, on its own facts, circumstances, coverage and merits, i.e., case-by-case. Substantive changes in the facts surrounding a claim will justify increases or decreases in the case reserves set.
Reserving done on a case by case basis, involves the claims handler (or TPA) managing the file and making their best educated appraisal of what each claim will ultimately cost.
It is desirable to avoid "stair stepping" reserves and increasing reserves merely to cover individual partial payments (as made). However, this does not mean that reserves should not be adjusted. It merely means that reserves should be posted based on the most accurate information available at the time, acknowledging the fact that all claims and lawsuits evolve."
"Expense reserving should be based upon the reasonable likely cost of the investigation and of the defense of the claim. …
When a new claim is received, there may be times when information is so limited that a determination of the indemnity or expense reserve amount cannot immediately be made.
Normally, defence counsel will provide the claims handler with the information obtained from the discovery process. Defense counsel may also suggest a future course of discovery. However, defence counsel will not normally recommend a specific reserve amount, although he or she may be invited to do so by the claims handler.
The retention of defence counsel, and the initiation of the discovery process, should result in the prompt receipt of at least some liability and damages information. Information discovered should be transmitted promptly by the defence attorney to the claims handler in writing.
No insurer (or TPA) relative to large construction defect claims could establish reserves that would "properly represent[s] its most likely financial exposure in the context of coverage provide by the policy(ies)" until such time as they received adequate investigative data concerning coverage, liability and damages as the facts and circumstances of each individual claim reasonably allowed.
Large losses are more likely to involve complex coverage issues and consideration. Once a coverage position is adopted by an insurer that is "adverse" to an insured, and the larger the potential damages exposure, the more likely it is that the insured will contest such a coverage position(s).
It is generally accepted within the US Insurance Market that a large loss is so designated when the incurred value of such loss reaches or exceeds a "significant amount". Some insurers may select some other value, but US$100,000 is a somewhat common level utilised for a "large loss" designation.
Large losses are more likely than smaller losses to involve or require the engagement of professional outside experts (e.g. engineers, contractors or laboratory testing) in the evaluation of coverage, liability and damages."
"(1) Gay & Taylor were reputable and well known TPAs and it was quite reasonable for Generali to have used them.
(2) The terms of the agreement between Generali and Gay & Taylor were "reasonable". Mr Beckerman was asserting that any such agreement should specify the time for making reserves and that this agreement was unusual in that it did not do so. I reject this advice. It is significant I think that when other TPAs were tendering for the job in 1995 none of them included within their bids any time constraints. Thus, contrary to the pleaded case, the tender documents do not support ARIG’s position; if anything, they are inconsistent with it.
(3) Gay & Taylor reported losses via a monthly bordereaux system, which was in accordance with market practice.
(4) Gay & Taylor adopted a form of case reserving. That is, the reserves were applied on a case by case basis. Initially a nil reserve was set when a new file was opened and the claim would be investigated both as to ‘coverage’ and liability, often through outside attorneys or independent adjusters. Once the likely outcome was capable of being assessed, Gay & Taylor did not adopt a policy of stair step reserving, but pursued a policy of ‘one-time’ reserving "that is to say, to establish a reasonably accurate reserve for the first time it was set once adequate and accurate investigation information was received".
(5) On the basis of his investigation, stair stepping was successfully avoided with regard to about 90% of the reported claims, although increases in reserves were inevitable in relation to large losses. Large losses in this sort of business, as a rule of thumb, will represent 20% or less of the number of claims but will account for 80% or more of the incurred losses. The figures in Appendix A showed that in relation to claims over $100,000 they represented just under 10% of all the claims there recorded and accounted for just under 80% of the losses and some 14 claims made before March 1993 gave rise to a pay-out of just under $6 millions or just 20% of the total losses.
(6) He indicated that the decision of the Californian Supreme Court in the case of Montrose v Admiral made a radical change in the law, with retrospective effect. Although the case was concerned with pollution it resolved the question of whether a carrier was liable for vices which existed during the period of coverage but which commenced before the carrier came on risk. Prior to this decision carriers had been able to avoid coverage on the basis that the "occurrence" insured against was an "occurrence" which occurred during the policy year and not before. But the Supreme Court held that there was a "continuous trigger" of coverage. The danger of Mr Kiverstein’s approach was to ignore the ‘change’ in the law."
"Adopting Mr Beckerman’s policy would involve some guess work and would put a premium on regular reviews of such reserves thereafter. Delaying setting a reserve until after an investigation of the full circumstances would be likely to lead to more realistic reserves which were less likely to require review but which were less timely. To adopt a policy whereby reserves were only set when the last ‘t’ had been crossed and the last ‘i’ dotted would defeat the object of the exercise which was substantially to inform participants in the programme what the relationship was between premium income and losses (actual and anticipated). If Mr Reynaud had adopted this policy then it would have been both unusual and imprudent".
Mr Flaux submitted that that was indeed the policy adopted by Mr Reynaud and that it followed from the judge’s own conclusion that it was both unusual and imprudent.
"Mr Palange prepared his first report having had a copy of Mr Reynaud’s witness statement. His conclusion, based upon that and a study which he had carried out on the sample files led to this conclusion, namely that this form of reserving "was not one uncommon among American Insurers and TPAs in the late 1980s and early 1990s". That accords with Mr Reynaud’s own testimony. Provided that Mr Reynaud did not take the need to investigate all the circumstances to an extreme so that reserves were never set, there was nothing imprudent or unusual about Gay & Taylor’s policy."
Pausing there, subject to one passage in Mr Palange’s evidence upon which Mr Flaux relied and to which I shall return, I entirely agree with those conclusions.
"No insurer or TPA relative to large construction defect claims could establish reserves that would "properly represent its most likely financial exposure in the context of coverage provided by the policy(ies)" until such time as they received adequate investigative data concerning coverage, liability and damages as the facts and circumstances of each individual claim reasonably allowed."
It appears to me to be self-evident that in a complex case it would often take some considerable period before that time came. That is, I think, especially so if it is recalled that, as stated in paragraph 100 above, it was common ground that (as alleged by ARIG) the general principle governing reserving policy was to make every effort to establish "the full circumstances" and, having done so, to reserve at a figure which represented the underwriters’ "most likely financial exposure".
"There was a certain amount of debate as to what Mr Reynaud meant in his testimony. Mr Simon would say that "all of the circumstances" meant down to the last detail and that explained delays in making reserves. If "by all the circumstances" one means no more than all of the circumstances relevant to setting a reserve then Mr Reynaud was not describing an unusual reserving policy."
There follows what is to my mind an important point because it shows that the judge was relying upon the fact that the conclusions reached by Mr Palange were informed by his own work in considering 144 claim files which he regarded as representative. The judge said:
"Based upon Mr Palange’s own work, it is clear that the policy described by Mr Reynaud in his witness statement was, in fact, carried out and that Mr Reynaud did not indulge in the unacceptable practice of taking the investigations too far before setting the reserve. Indeed, in many cases a reserve was made very soon after a file was opened. That did not contradict Mr Reynaud’s evidence since it was not inconsistent with the reserving policy outlined in his witness statement. The line of questioning pursued of Mr Palange was to try and establish that he was denying the policy of Gay & Taylor. Taking his evidence as a whole, I do not see a difference between the evidence of Mr Reynaud (which added little to what he said in his witness statement) and what Mr Palange discovered on a review of the files."
1) The immediate investigation will be sufficient to include the information needed to make a preliminary investigation. We stress good judgment on a case-by-case basis. …
1) Evaluation based upon sound claims handling practices and investigation is the key to any successful program. Our rudimentary investigation is completed within 21 days from the date of the assignment, provides information required to reasonably evaluate any coverage question, negligence issue, merits of the particular case based on local precedence, and a reasonable estimate of injuries/damages. This permits the claims representative to offer sound recommendations for the ultimate resolution. …
1) Risk Management cannot effectively operate and obtain its proper goals if our reserves are unrealistically established. The setting of proper reserves on files is most important and sometimes the most difficult task to accomplish. We are diligent in our efforts to obtain the necessary information by which a claim can be properly evaluated. Our reserves are an estimate of the probable ultimate total dollar exposure on a claim.
2) Reserve worksheets will be completed within 14 days on all initial and revised reserves.
3) Reserves are continually reviewed for the life of a file and are submitted in all reports except the final. …
Reporting and Correspondence
2) Our first report will be submitted within thirty (30) days of assignment, unless otherwise specified by the Client, and will include details on any coverage questions.
3) Subsequent reports shall follow 30-day intervals, unless otherwise specified by the Client …"
"Q. …. There must be a finite period, must there not, Mr Palange?
A. Most insurers would require, for example, a – for example, monthly bordereau reporting and prompt handling and reserve establishment. They would not necessarily put a specific time limit on reserving. Some do and some do not.
Q. I suggest to you that very few, if any, do not insist on some period within which reserves must be posted; do you disagree with that?
A. I would say that the majority would put a timeframe on that subject."
1) The immediate investigation shall be sufficient to include the essential information to make our preliminary evaluation. We stress good judgment on a case-by-case basis. …
1) Evaluation based upon sound practices and investigation is the key to any successful program. Thus, our rudimentary investigation will be completed within 30 days from date of assignment and will provide the data required to reasonably evaluate any coverage question, negligence issue, merits of the particular case based on local precedence, and a reasonable estimate of damages. This will permit the claims representative to offer sound recommendations for the ultimate resolution.
2) Basis for acceptance or denial of coverage or liability will be documented in the file.
1) CCI’s philosophy is to set and stabilize realistic reserves on all cases at the earliest time considering the issues of injury/damage, mitigating circumstances, liability, etc. In no event will we "step ladder" reserves.
2) Reserves will be continually reviewed for the life of a file, and will be submitted in all reports except the final. Changes will be adequately explained and promptly reported
REPORTING AND CORRESPONDENCE
2) A first report on claims in excess of our TPA Authority will be submitted within forty-five (45) days of the assignment, and will include details on any coverage questions.
… CONTROL IN HANDLING THE CLAIM
5) The Unit Supervisor will review all files at least every 30 days …."
"This paragraph or a paragraph similar to it is one goal set by some insurers and claims handlers as a type of goal."
This exchange followed:
A. Well, we disagree on that, whether it is most.
Q. [Reference was made to paragraph 2), under Reporting and Correspondence quoted above.] You see, I suggest to you that a reserving philosophy or policy in which no time limit is set on the preliminary evaluation is going to get into trouble because there is no discipline; there is nothing to ensure that the claims handlers are doing their job. Do you disagree with that?
A. I believe that putting time limits in proposals and agreements of this sort evolved over time and they became quite common. So earlier versions of the same subject might say "prompt" or might say "regular" or "frequent" or might say "periodic". Time limits can and do exist.
Q. I am not talking about contracts, Mr Palange. I am talking about what is sensible, prudent reserving. Unless you have some discipline on the evaluation of the claim, a time limit within which a claim must be reserved, you are going to get sloppy reserving?
A. I do not agree with you.
Q. You are certainly going to get sloppy reserving unless there is a system for reviewing the files on a regular basis. Do you disagree with that?
A. I do not know what you mean by sloppy. You might get delays in reserving if you do not review the files regularly.
Q. You will get delays in reserving and that is not what you want. You should try and avoid delays in reserving, should you not?
"The reserving policy adopted by me for the US Contractors Program meant that I believed it was not possible to set a loss reserve which properly represented underwriters’ most likely financial exposure in the context of coverage until I had all of the information regarding the circumstances surrounding events that gave rise to the claim."
It was put to Mr Palange that, if that was the reserving policy adopted by him, it was absurd and he said no. The exchange continued:
"Q. That he deferred setting a loss reserve until he had all of the information regarding the circumstances surrounding the events which gave rise to the claim?
A. That is also a standard approach to investigation.
Q. It is not prudent reserving policy to wait until you know all the circumstances because you are never going to know all the circumstances and you should not be put off setting a reserve until you think you do, should you?
A. As the next sentence says, he did not.
Q. "On a number of occasions, for the reasons I have stated, this could take a significant amount of time". What is the point you are making, Mr Palange?
A. I think on a small number of occasions it took a significant amount of time and on the rest of the occasions it did not.
Q. The policy is that he defers setting a loss reserve until he has all the information regarding the circumstances surrounding the events which gave rise to the claim. If that was his policy -- if that was his philosophy -- it was an absurd claims handling policy, was it not?
A. If that was the philosophy of him and Gay & Taylor for all claims reported, up until March 1993, I would not call it absurd, I would call it unacceptable.
"A. Upon receipt of notice of claim, we set a zero reserve. Upon receipt of the adjuster’s first report, if sufficient information has been developed, we will set the indemnity reserve and expense reserve.
B. If suit is our first notice of loss, we will maintain a zero reserve until sufficient discovery reveals our exposure.
C. In general, we do not utilize the step reserve theory, and prefer to set a one-time reserve."
"We have resisted setting reserves on first notice claims, as this method evolves into what we classify as step reserving or stair-step reserving. We prefer to set a zero reserve until we have enough information to set a "one-time" indemnity reserve, sometimes referred to as the loss reserve. The reason(s) for this method, prevents frequent upgrades/downgrades of reserves and presents Underwriters with reasonably sound financial figures.
Expense reserves we occasionally will set an immediate estimate. This of course is dependant upon the type(s) of loss(s). Property losses we know from experience as to how much the adjusting fees will be on various types of losses. If the loss is large, we will delay the expense reserve setting. Normally, property loss, indemnity and expense reserves, we will try to post within the first month or thirty (30) days after receipt of the claim.
Liability reserving is the most difficult to set. On these we usually wait until some discovery has been completed in order to determine the amount of exposure to the Insured. Serious debilitating injuries reserves, we will evaluate and set a one-time reserve, once we have evaluated the injuries, negligence, venue, policy and case law cases.
Liability expense reserves, we will set depending on the cause of action stated in the summons & complaint.
All reserves set reflect reserves above Deductibles and/or SIR amounts."
"Our reserving policy is not unique in the states or in the Insurance Industry."
"The statistics do not assist either, since a case by case assessment is required. Mr Simon says that as at June 1992 there were 249 open claims files of which just over 40% had had no indemnity reserve for more than 90 days and 32% had had no expense reserve for more than 60 days. But these figures say little without some indication of the nature of the claim, what inquiries were underway, what the issues were and how much was the deductible. Those figures are not inconsistent with Mr Reynaud’s stated policy. The same is true of the data relating to March 1993. I can well understand arguments in favour of early reserving with a large slice of ‘judgment’ or guesswork involved. But over-reserving had its own disadvantages. Late but accurate reserving avoided stair stepping and a risk of over-reserving, but was less prompt. There is no reliable evidence before me to say that the one method was unusual or imprudent and the other not."
"The question was whether [the methodology] was unusual or imprudent as at 1992 and March 1993. Mr Beckerman says it was; Mr Palange says it was not. I have had no difficulty in preferring the latter’s opinion to that of the former. I suspect that over the passage of time, reserving has become more sophisticated and the needs for guesstimates more compelling. I suspected, though he denied it, that Mr Beckerman was reflecting more modern practice when he expressed his opinions. Ultimately, Mr Reynaud’s own evidence that his style of reserving was by no means unique or unusual, coupled with an endorsement from Mr Palange resolved this issue in favour of Generali."
"If ARIG had, as they did, the burden of proving that the claims handling procedure, including the reserving was imprudent and unusual, they have failed to discharge it. Had an exercise been carried out to ‘second guess’ reserving in relation to each of the claims files open as at June 1992 and March 1993 and it had transpired that on a case by case basis there was a pattern which showed imprudent reserving then the result of the case might have been different. But here ARIG had to prove that the reserving policy which it asserts should have been adopted [namely a prompt reserve after the full circumstances had been established] was not adopted. They have not proved this by their evidence since there has been no attempt to carry out the necessary exercise to show what should have happened had the claims been ‘properly’ handled, in their opinion. Reserving with hindsight is not a helpful exercise."
"I do not find the letters referred to by Mr Simon of any assistance to my decision. Gay & Taylor’s policy is clear and the letter from a third party carries no weight with me, since I do not know the basis for the writer’s views. I should make clear that whatever Mr Wardlaw’s misgivings might have been, the reason why Gay & Taylor were replaced in 1995/96 had nothing to do with their reserving policy, but related to some other, irrelevant dispute."
ARIG does not challenge that last conclusion in this appeal, but it does rely upon the correspondence as evidence that G&T did not operate a usual or prudent reserving policy.
"We have always acknowledged that your past short term experience with this program is inconsistent with the anticipated long term exposure we believe you face. However, what I personally do not understand is your virtual blind loyalty to Gay & Taylor in view of: (1) its acknowledged inability to keep accurate and current financial records; (2) its obvious input and management of the claims files; (3) its unrealistic (or non-existent) reserving practices; and (4) its total abdication of its proper role in favour of two "coverage" attorneys, who, in my opinion, author simplistic, and to some extent, incomplete analysis of problems."
For present purposes, the problem with the allegations in the letter is that they do not identify what was said to be wrong with G&T’s reserving policy apart from G&T’s acceptance of the opinions of Mr Hamrick.
"Firstly 1991/2 and 1992/3 up to September. The various issues of California coverage and Lawyers utilised were discussed at length but it was finally accepted that for better or worse we have taken the route we have taken and we may get away with it – only time will tell as to whether some of these cases backfire. In any case whilst United National accept that we are responsible for all issues on those years and they will not intervene further but that they need to be kept informed immediately of any bad faith accusations or litigation which may arise in order that we may deal appropriately with that. In the final analysis on these years it is up to us to indemnify United National.
With regard to post-September 1993 we acknowledge that United National wish to be responsible for all claims issues, defence coverage etc. However the reality is that they could not physically take over all these matters now and would have to appoint a TPA. In the circumstances it seems preferably that we continue to use Gay & Taylor but that Gay & Taylor should follow their instructions on these claims. Meanwhile United National will start gearing up to take over all of the post-September 1993 claims themselves within say a period of 12 months. What needs to be clearly agreed are the lines of communications, financial arrangements and controls during this period."
The note ended with a suggestion that Alexander Howden should be more involved since there had been a decided lack of input from them in the past.
"The last area that we were advised of some concerned happened to be reservings. To fully understand this, I have asked Mr Mark Jones, present manager of the unit, to give me his understanding of the reserving philosophies and practices as instructed by Generali. Mr Jones admittedly cannot completely clarify the reasoning behind the reserving practices since Mr JG Reynaud was managing the unit at its inception. Mark Jones has advised that he had received several inquiries from London requesting detailed explanation for large initial reserves. Mr Reynaud said that his instructions from Generali was not to "stair step" reserves and Generali preferred no indemnity reserves being placed until we had adequate information to set up a final reserve. This reserving policy is as a result of the majority of our cases are involving construction defect matters, which involve questionable coverages, liability and damages throughout their life cycle. Certainly, it is extremely difficult to establish correct reserves on these type of claims, however, most of our clients and certainly the insurance industry does expect reserving to be posted as soon as practical. The instructions by Generali to Mr Reynaud were followed and reserving was not posted until later in the claim file.
Again, I must advise that this is contradictory to what we at Thomas Howell/Gay & Taylor feel are proper reserving philosophies within the industry, however, since we were taking instructions from Generali, Mr Reynaud was utilizing Generali’s reserving philosophies as instructed to him."
"But the fact that the losses developed more quickly and thus, the reserves did not correspond to the ‘norms’, is neither here nor there unless it can be shown by ARIG what the reasons are for the large loss development. The Montrose decision may have played a part, but there will have been other factors as well, such as an increase in awards by the courts and so on."
The judge added at the end of his judgment:
"The reason why there have been such heavy losses on this programme is nothing to do with the reserving policy but is to do with the quality of the underwriting decisions. This was business that were better not written save with much larger premiums. But that is not a matter with which the court is concerned."
For my part, I agree with those conclusions. I do not think that the ISO figures assist ARIG to show that G&T’s reserving policy was unusual or imprudent. Even if they provide some assistance, they do not to my mind provide sufficient assistance to displace the conclusions reached by the judge.
Conclusion on non-disclosure
"Q. Mr Anderberg, do you accept that what is material to the risk in this context is not the reserving methodology itself but the accuracy of the figures that it produces?
A. Well, one thing depends on the other. If you have a wrong-serving philosophy or guideline or whatever it could be, it would filter through the figures and distort the figures because that is the connection between these two, you know. That is my opinion.
Q. The premium and loss figures are what matter to you as an underwriter?
A. It is very important, yes.
Q. The use of an unusual reserving philosophy or methodology would only be material to an underwriter to know if it resulted in figures that were materially inaccurate?
"Q. …. if you had been told that the reserving policy was unusual and/or imprudent, how would that have affected your underwriting judgment?
A. First of all, I would not have believed in the figures we were given initially and if it would have been a very great deviation from normal standards, I am sure we would have declined participation. Because then we did not know what we were doing."
However, that answer has to be considered in the light of Mr Anderberg’s evidence as a whole and assessed in the light of the probabilities.
"Q. If the 1990 loss ratio had been over, what, 50 per cent/60 per cent, at what point of time would it have raised a question in your mind as to why the losses were so high in such a short period of time?
A. I might have queried about it if we would have touched maybe 50/60 per cent but I cannot tell you now how I would have reacted. I might have reacted and sought clarification and the clarification might have changed my decision or at least this would have had an impact on the overall programme."
A little later he said that he might have queried the figures if they showed a loss ratio for, say 1990, "where we have a break-even point, 60 per cent".
Sir Christopher Staughton:
"Q: The policy is that he defers setting a loss reserve until he has all of the information regarding the circumstances surrounding the events that gave rise to the claim. If that was his policy... if that was his philosophy... it was an absurd claims handling philosophy, was it not?
A: If that was the philosophy of him and Gay & Taylor for all claims reported, up until March 1993, I would not call it absurd, I would call it unacceptable."
"Q: Unless there is something materially wrong with the figures which needs to be explained, the methodology of which they are arrived at and calculated is not of interest to you; is that correct?
A: Correct, yes."
"The leading insurers in London are the Assicurazioni Generali SpA with support from the Commercial Union and the Munich Re."
I do not, for my part, consider that there is any need to ponder on the meaning of the word "support", as the judge was asked to do, and still less to find a meaning for the word in the evidence of expert witnesses. I would be inclined to think that the information thus conveyed was material - otherwise there would be no point in providing it.
"I can categorically state that I would not have authorised Arig’s participation if I had known Munich Re only participated in Section A."
"All the other factors involved here - the excellent figures, et cetera ..... indicated that this was a very profitable account and I am sure we would have written it without the participation of Munich Re, I am sure. It was a comfort factor [but] Munich Re is not guiding our underwriter, we are guiding our underwriting ourselves."
However, on the next day in re-examination he added that he would have asked why Munich Re were not participating in the whole package, and said:
"If I would not have got any clarification which I could buy, I would have declined participation."
"You can then derive as a reinsurer some - to a great or lesser degree - additional satisfaction and comfort from the knowledge that Munich Re now have a large vested interest in this business and they will be monitoring in their incomparable way, and if things start to go awry, they will gently make an approach to the leader... Now, I think that, therefore, the existence and the potential of Munich Re to do that is something that brings a little added comfort to an underwriter."
Lord Justice Ward :
Review or rehearing? Does it make a difference?
"(1) Every appeal will be limited to a review of the decision of the lower court unless –
(a) a practice direction makes different provision for a particular category of appeal; or
(b) the court considers that in the circumstances of an individual appeal it would be in the interests of justice to hold a rehearing.
(2) Unless it orders otherwise, the Court of Appeal will not receive
(a) oral evidence; or
(b) evidence which was not before the lower court.
(3) The Appeal Court will allow an appeal where the decision of the lower court was –
(a) wrong; or
(b) unjust because of a serious procedural or other irregularity in the proceedings in the lower court.
(4) The Appeal Court may draw any inference of fact which it considers justified on the evidence. …"
That is in contrast to the old RSC Order 59 Rule 3 which provided that an appeal to the Court of Appeal shall be by way of rehearing.
"Now we feel, as strongly as did the Lords of the Privy Council in the cases just referred to [The Julia 14 Moo P.C. 210 and The Alice L.R. 2 P.C. 245], the great weight that is due to the decision of a judge of first instance whenever, in a conflict of testimony, the demeanour and manner of the witnesses who have been seen and heard by him are, as they were in the cases referred to, material elements in the consideration of the truthfulness of their statements. But the parties to a cause are nevertheless entitled, as well on question of fact as on questions of law, to demand the decision of the Court of Appeal, and that court cannot excuse itself from the task of weighing conflicting evidence and drawing its own inferences and conclusions, even though it should always bear in mind that it has neither seen nor heard the witnesses, and should make due allowance in this respect."
The first big issue: misrepresentation and Munich Re.
"The leading insurers in London are the Assicurazioni Generali Spa with support from the Commercial Union and the Munich Re."
In a subsequent conference telephone call on 3rd July Arig say they sought clarification and that Mr Wardlaw stated that the respective percentage participations were Generali 40%, Commercial Union 20% and Munich Re 35%.
The first question: were any of these representations?
"I am not prepared to place any great weight on the oral conversation between Mr Wardlaw and Mr Rehman at the beginning of July 1992. Mr Wardlaw had no recollection of the conversation; the witnesses were dealing with something that occurred nine years ago and for which there are no notes relevant to this issue. Mr Wardlaw says he thinks he would have explained the full position about Munich Re’s participation. I doubt he did so because Mr Rehman had obviously talked himself into believing that participation could only be across the board."
Were those misrepresentations false?
Were the representations material?
"influence the judgment of a prudent insurer in fixing the premium, or determining whether he would take the risk."
"… this expression clearly denotes an effect on the thought processes of an insurer in weighing up the risk, quite different from words which might have been used but were not, such as "influencing the insurer to take the risk.""
"The sub-section does not require that the circumstance in question should have a decisive influence on the judgment of the insurer; and I, for my part, can see no basis for reading this requirement into the subsection."
I agree with Clarke L.J.’s analysis in paragraph 55 of his judgment.
When was the contract made?
The effect of later disclosure of the non-participation by Munich Re in section B business.
"No-one is entitled to make a statement which on the face of it conveys a false impression and then excuse himself on the ground that the person to whom he made it had available the means of correction."
That was a case of fraudulent misrepresentation, but the principle is equally applicable to a case of rescission based on innocent misrepresentation as in Redgrave v Hurd (1881) 20 Ch D 1, where Sir George Jessel M.R. said at p. 13/4:-
"Nothing can be plainer, I take it, on the authorities in equity than that the effect of false representation is not got rid of on the ground that the person to whom it was made has been guilty of negligence. One of the most familiar instances in modern times is where men issue a prospectus in which they make false statements of the contract made before the formation of a company, and then say that the contracts themselves may be inspected at the offices of the solicitor. It has always been held that those who accepted those false statements as true were not deprived of their remedy merely because they neglected to go and look at the contract. Another instance with which we are familiar is where a vendor makes a false statement as to the contents of a lease, as, for instance, that it contains no covenant preventing the carrying on of the trade which the purchaser is know by the vendor to be desirous of carrying on upon the property. Although the lease itself might be produced at the sale, or might have been open to the inspection of the purchaser long previously to the sale, it has been repeatedly held that the vendor cannot be allowed to say, "You were not entitled to give credit to my statement". It is not sufficient, therefore, to say that the purchaser had the opportunity of investigating the real state of the case, but did not avail himself of that opportunity."
There the purchaser of the solicitor’s practice had possession of accounts which upon examination would have revealed the falsity of the representation as to the level of profit it was said that the practice was achieving. Absent proof that he had in fact become aware of the falsity, he was entitled to relief.
"Mr Rehman had the information before the contract was made and his failure to read the enclosures is no excuse. If, which I doubt, Mr Rehman was under any misapprehension it was due to his own preconceived ideas and a failure to study the paperwork properly."
"In fact, I formed a favourable view of Mr Rehman as a careful man and witness. I have to say I find it incredible that he would not have read the fax in July as carefully as he did the retrocession slips which were a part of it. All the other signs are that he approached the underwriting decisions with meticulous care, as did Mr Anderberg."
I have to say I find this another elliptical part of the judgment. The judge hinted at but did not expressly say that he disbelieved the witnesses. The evidence was clear enough. Mr Rehman said when asked in cross-examination why he did not look at a document which plainly evidenced Munich Re’s participation:-
"The information that the broker supplied at the beginning, that they were participating, led us to go through the analysis of the risk and move on from there. At this point I do not know why I would have to look for that. If there was a material change I think the broker should be able to bring it out to my notice or on the front page saying: "Look, there is a change here, the reinsurers you know, are participating in this or that or they are not participating on this"".
"… It would be prudent to tell us they are not supporting part of the package … You cannot expect us to be suspicious. We are getting information from a producer which we are relying on."
The crucial question: did the fact of Munich Re’s represented participation in both parts of the package induce the contract?
"It is not necessary to show that the misstatement was the sole cause of his acting as he did. If he acted on that misstatement, though he was also influenced by an erroneous supposition, the defendants will still be liable."
Bowen L.J. said at p. 483:-
"The real question is, what was the state of the plaintiff’s mind, and if his mind was disturbed by the misstatement of the defendants, and such disturbance was in part the cause of what he did, the mere fact of his also making a mistake himself could make no difference. It resolves itself into a mere question of fact."
"But in my opinion if the false statement of fact actually influenced the plaintiff, the defendants are liable, even though the plaintiff may have been also influenced by other motives."
That that still represents the law was affirmed in St. Paul Fire & Marine Insurance Co. (U.K.) Ltd. v McConnell Dowell Constructors Ltd. & Others  2 Lloyds Rep. 18, 124/125 per Evans L.J.
"But in any event I do not consider that what was said about Munich Re played any part in the decision taken by Arig to participate in the programme. Although Mr Anderberg suggested in his witness statement that but for Munich Re’s participation Arig would not have participated, his position modified when he gave evidence. Quite rightly, I think, he said that the decision taken by Arig whether or not to participate was taken on the merits of their appraisal of the risk but that the fact that Munich Re was also a participant was a comfort factor after the decision had been taken."
"I can categorically state that I would not have authorised Arig’s participation if I had known Munich Re only participated in section A."
"I am sure we would have written it without the participation of Munich Re, I am sure."
But that was not all the evidence.
"I am sorry you have had a rather long day and fairly uncomfortable."
"Q: … Now, you describe the support of Munich Re or, for that matter, the Commercial Union as a comfort factor?
Q: That is your description of it?
Q: By that you mean what, precisely: a broker’s selling point, or something of that kind?
A: Part of it, yes. I would say we are seeing this nearly on a daily basis. We have, maybe, five flag carriers in the world. Munich is one of these. You have Swiss Re, you have Alliance, you have a couple of others which have major resources. If you are seeing them in a programme, whatever, you are doing your underwriting and you are seeing them on the programme, it is a comfort factor and it is used by the broking community to comfort you, to tell you this is a quality business we are giving you.
Q: Yes. In this instance Munich Re was not the lead underwriter, nor was Commercial Union. Generali was the lead underwriter?
Q: So it indicates that Munich Re was confident in Generali as lead underwriter?
Q: And encourages you, similarly to have confidence in Generali as lead underwriter?
A: That was only part of it, you know.
A: The major part was actually the figures we have discussed previously. We had an excellent record and then you expected, Munich Re, to support and Commercial Union, such an excellent record is attracting not the small underwriters, as we are, but even the big ones, so it is an important factor. The figures combined with those names being on this risk.
Q: So it tells you both that Munich Re has confidence in Generali and it tells you that it has exercised its underwriting judgment in a certain way?
Q: It does not, as I think my Lord put to you at the beginning of this series of question, affect your underwriting judgment and your decision as to whether or not to write this risk, does it?
A: Of course it has an impact on all underwriters, I would say, not only me. It has an impact on all underwriters because it is a comfort factor. Determining that Munich Re is comfortable with the product as such and that they are participating with a substantial line. So I mean it is an important part of the information and it is widely used by all producers. Maybe not specifically if you are looking at the Hong Kong producers or Singapore producers but specifically in the London market where they are marketing the risk, this is the line written by so and so, this is the line written by so and so –
Mr Justice Morison: How did you know that Munich Re were writing or participating with a substantial line? What was the information that you rely on for that proposition?
A: Because we queried. We always queried who is supporting this type of – not specifically this type of policy but who is supporting major type of risks.
"Q: So far as your underwriting decision was concerned – "yours", I mean Arig’s, Mr Anderberg – you would agree, I am sure, that the participation of Munich Re in the programme does not affect the matters which we ran through earlier today, the question of limits, premium, excellent loss ratios, whether the business fits the Arig profile, whether it is within the Arig capacity to write, whether it falls within Arig’s reinsurance limits and reinsurance protection; anything of that kind. It has no bearing on any of those factors which go into Arig’s own decision as to whether or not to write this business. That is right, is it not?
A: Am I right in thinking you are asking me a question – because it is quite a long question – that the Munich Re decision did not have any impact on our own decision.
Q: On your underwriting judgment, on deciding whether or not to accept this risk that is what I am asking.
A: You know, we are making an independent underwriting.
Q: I am sure you are.
A: On all risks. All the other factors involved here – the excellent figures etc. – indicated this was a very profitable account and I am sure we would have written it without the participation of Munich Re, I am sure. It was a comfort factor [but] Munich Re is not guiding our underwriter, we are guiding our underwriting ourselves.
Mr Justice Morison: The position is that you take an independent underwriting decision, having made the decision to participate, you are feeling comfortable with that decision having regard to the participation by Munich Re in the programme.
Mr Justice Morison: That is the way it works?
A: That is the correct way, your Lordship."
"Q: If you had been told that Munich Re was on section A and section B at the time you assessed the risk, and then just before you accepted the line you were told that Munich Re was not, in fact, on section B, what view would you have taken?
A: I would have been very puzzled, asking "why", because this was a profitable account and I would have gone back to the producer and asked them for clarification of why Munich Re did not participate in section B, which was actually, as far as I remember, when we were asking for the premium split it generated, on the advice premium volume of twenty million, it actually generated 75%. Why should Munich Re not participate on the 75% of the twenty million if it was a profitable account with good prospects? That would have been my immediate reaction. If I would not have got any clarification which I could buy, I would have declined participation."
i) The judge referred to the evidence in the witness statement and then said that Mr Anderberg’s position "modified when he gave evidence". He seized upon the answer in cross-examination. But that is not the whole picture. There was ample evidence in the other passages under cross-examination which I have highlighted, as well as the answer in re-examination which indicated the continuing influence of Munich Re’s participation on the eventual decision.
ii) For the judge to consider that Munich Re paid no part in the decision seems to me to be quite clearly against the weight of the evidence. In my judgment it was a material fact which was followed up by specific enquiry to confirm their involvement and good reason was given why it made the deal more attractive. Reserves may well butter no parsnips but Munich Re was icing on the cake.
iii) That metaphor goes to the heart of my concern. The law on inducement is, as I have set out, that the court does not embark upon the exercise of finding the decisive cause or the dominant cause or the main reason: any reason is sufficient if it has actual influence upon the decision taken. Mr Anderberg made plain enough that he was convinced by his own analysis of the information that the deal was a profitable one. That was why he agreed to participate. But he also drew comfort from the fact and therefore relied upon Munich Re’s involvement as a fact which supported his judgment. One tests the position by asking the question in the negative: can it be said he entirely disregarded the misrepresentation about Munich Re’s participation? To that question there is, in my judgment, only one answer. It is, "no".
iv) This is borne out by an analysis of what he was saying in the context in which he was saying it. He had explained what he meant by "a comfort factor", namely that it was a factor "to tell you this is a quality business". Munich Re gave him confidence but "that was only part of it", "the major part" (and those words do need to be emphasised) "was actually the figures we have discussed previously". "We had an excellent record" (which I take to mean his analysis showed this new business he was being invited to join had an excellent record) and then Munich Re’s support "is an important factor". It is all summed up in the next phrase: "The figures combined with these names being on this risk". Again "It is an important part of the information".
v) Let me then analyse the passage which so attracted the judge. It began by Mr Collins reminding him of the various factors which went into Arig’s own decision and Mr Anderberg anticipates the question to be that the Munich Re decision did not have any impact on their own decision. He confirms that they made an independent underwriting on all the risks. They concluded it was a very profitable account and the real meaning of his evidence, in my judgment, is that he was saying he was sure they would have written the business "without the participation of Munich Re" meaning if Munich Re had not taken its percentage, in other words, if there had been no mention of Munich Re at all in the information given to them. He makes it plain, however, that its participation did not "guide" their underwriting decision, in other words they did not act blindly on the fact of that participation, because they made their own independent assessment of profitability. Having done that, Munich Re was a comfort factor in that it bolstered their decision. Translate that into the language in which we reach our decisions: "I am satisfied having regard to all the evidence that this, that or the next thing is the right result and I am fortified in that conclusion by the fact that X, Y and Z". That is what Mr Anderberg was saying upon a true reading of the totality of his evidence.
vi) The question using Lord Mustill’s words is whether Munich Re’s participation was affecting his thought processes, or, more colourfully, in Bowen L.J.’s words, whether it was disturbing his mind? If we ask another question, but just as important a question, "Was he ignoring Munich Re?", then we get an easy answer. "No, of course not". Of course they assessed the proposal on its merits, and would not have signed up if not convinced of its merits, but a second and even if a secondary reason is the confirmation (comfort) they get from knowing Munich Re must have similar confidence in the deal.
So was the judge wrong?
The next big issue: reserving policy and materially misleading statistics.
i) there was a failure to disclose the material fact that the reserving policy adopted by Gay & Taylor was imprudent and/or unusual, and,
ii) the loss statistics misrepresented the profitability of the packages or, putting the same point another way, there was a failure to disclose the material fact that the loss statistics were materially misleading.
The complaint is that the judge wrongly treated these two discrete defences as substantially the same.
"[Arig’s counsel] submitted that the reserving policy was imprudent and unusual and, ipso facto, should have been disclosed as a material fact as a part of the fair presentation of the risk. Second, he submitted that without disclosure of it, the figures represented in the facts of June 1992 and in March 1993 were materially misleading. I agree with [Generali’s counsel] that there is effectively only one point. The reserving policy of itself is not a material fact which requires to be disclosed. The evidence was clear on this point. An underwriter would only expect to be informed of such a policy if it were unusual and imprudent so that it rendered the figures showing the ratio of losses to premiums unreliable. Was the policy unusual and imprudent so that the figures disclosed were misleading? Mr Simon’s two points merged into just one."
Was an unusual and/or imprudent reserving policy adopted?
"Make every effort to establish at the earliest possible opportunity the full circumstances surrounding an event that has given rise to a claim. Having done so, it is incumbent on the claimant to set a reserve that properly represents its most likely financial exposure in the context of coverage provided by the policy[ies] and for that reserve to be fixed as soon as it is reasonably practicable, including reserving for legal and associated expenses. The reserve should be reviewed on a regular basis (including liaison with and obtaining regular updates from external advisors, such as loss adjusters and/or lawyers involved in actual or potential claims."
That was the standard which had to be met.
235. The experts agreed that:-
"No insurer (or TPA) relative to large construction defect claims could establish reserves that would "properly represent[s] its most likely financial exposure in the context of coverage provided by the policy[ies]" until such time as they received adequate investigative data concerning coverage, liability and damages as the facts and circumstances of each individual claim reasonably allowed."
Much would thus depend on how far adequate investigation had to go.
"To adopt a policy whereby reserves were only set when the last "t" had been crossed and the last "i" dotted would defeat the object of the exercise which was substantially to inform participants in the programme what the relationship was between premium income and losses (actually and anticipated). If Mr Reynaud had adopted this policy then it would have been both unusual and imprudent."
"Q: The policy is that he [Mr Reynaud] defers setting a loss reserve until he has all of the information regarding the circumstances surrounding the events that gave rise to the claim. If that was his policy – if that was his philosophy – it was an absurd claims handling philosophy, was it not?
A: If that was the policy of him and Gay & Taylor for all claims reported, up to March 1993, I would not call it absurd, I would call it unacceptable."
"Provided that Mr Reynaud did not take the need to investigate all the circumstances to an extreme so that the reserves were never set, there was nothing imprudent or unusual about Gay & Taylor’s policy."
"Taking his evidence as a whole, I do not see a difference between the evidence of Mr Reynaud (which added little to what he had said in his witness statement) and what Mr Palange discovered on a review of the files."
It is important to stress the fact that in this instance the judge did take the evidence as a whole into account. That can be compared with my complaint of his treatment of the evidence of Mr Anderberg when he did not take the whole of his evidence into account.
Was the judge wrong?
"The need for appellate caution in reversing the trial judge’s evaluation of the facts is based upon much more solid grounds than professional courtesy. It is because specific findings of fact, even by the most meticulous judge, are inherently an incomplete statement of the impression which was made upon him by the primary evidence. His express findings are always surrounded by a penumbra of imprecision as to emphasis, relative weight, minor qualifications and nuance … of which time and language do not permit exact expression, but which may play an important part in the judge’s overall evaluation."
Were the statistics of loss materially misleading?