England and Wales High Court (Commercial Court) Decisions

IN THE HIGH COURT OF JUSTICE
QUEENS BENCH DIVISION
COMMERCIAL COURT

		Royal Courts of Justice Strand, London, WC2A 2LL
		25/05/2004

The Hon. Mr Justice Langley:

The Application.

1. This is an application for pre-action disclosure pursuant to CPR Part 31.16. In the alternative application is made under CPR Part 31.18 for disclosure pursuant to the principle enunciated in Norwich Pharmacal Co v Customs & Excise Commissioners [1974] AC 133. Inspection of a few of the same documents is also sought pursuant to CPR 31.14 on the basis that they are mentioned in a witness statement of Mr Dowlen, the Managing Director of the First Respondent ("ZSML").

Background.

2. The Applicant companies, to which I shall refer as XL London and Brockbank, are the managing agents of two Lloyd's syndicates 861/1209 and 253/2253 respectively and make the applications in that capacity. I shall refer to the two syndicates as the Brockbank syndicates.
3. The second respondent company, "Acott & Tilley", is the sole member of syndicate 2002. ZSML is the managing agent of syndicate 2002.
4. For the 1993 to 1999 years of account the Brockbank syndicates wrote a book of broker based motor business. In 1999 the syndicates decided to cease writing motor business. In September 1999 they agreed to sell the goodwill of the business to Acott & Tilley the vehicle of the management who had conducted the business for the Brockbank syndicates. For the 2000 year of account the business was renewed into syndicate 2002, a new syndicate formed by Acott & Tilley for that purpose.
5. In addition a Run Off Agreement was entered into on 4 January 2000 whereby XL London (in its previous name of Brockbank Syndicate Management Limited) and Brockbank effectively delegated their powers as managing agents of the Brockbank syndicates to Acott & Tilley which agreed to run off the 1993 –1999 business to extinction. By Clause 7 of the Run-Off Agreement XL London and Brockbank expressly retained the right to inspect the books and records of the run-off.
6. Acott & Tilley sub-contracted responsibility for the run-off to Zenith Insurance Management Ltd ("ZIML") a then wholly-owned subsidiary. When, with effect from 1 January 2001, ZSML began to act as managing agent for syndicate 2002, ZIML became a wholly-owned subsidiary of ZSML. The ultimate holding company of both Acott & Tilley and ZSML is Zenith UK Holdings Ltd.
7. During the period of the run-off Acott & Tilley provided quarterly reports to XL London and Brockbank on the run-off, including reserving levels, which were reviewed regularly by KPMG on behalf of XL London and Brockbank.
8. In about June 2000 ZIML appointed a new claims management team. The new team informed KPMG that some of the larger personal injury claims had been settled for well over their reserved value and that the reserve for all personal injury claims would therefore be reviewed. After this review the reserves were substantially increased in the third quarter of 2000 and thereafter.
9. The increase in reserves was also investigated on behalf of the Brockbank syndicates by KPMG and by Eversheds. Nothing untoward or objectionable was discovered or recorded in their reports completed in June and August 2001. It is the uncontradicted evidence of XL London and Brockbank, however, that these investigations, like the regular reserve reviews, were necessarily conducted on the basis of information provided by Acott & Tilley.
10. In June 2001 XL London and Brockbank sought quotations for the reinsurance to close (RITC) the 1993 to 1999 years of account. Quotations were received from ZSML, as managing agent of Syndicate 2002, and two others (albeit one of the two was late). The ZSML quotation was the lowest and was accepted. As a result two RITCs were entered into on 11 March 2002 (one for each Brockbank syndicate) at a total premium of about £44.1m. That premium was based on estimates made by ZSML of net outstanding claims of £24.8m and of IBNR of £17.4m. The premium was of course intended to represent an estimate of the ultimate liability to be incurred in running off the business to extinction.
11. Lloyd's syndicates make quarterly returns to Lloyd's itself which include a forecast of results. Syndicate 2002 submitted a forecast for the second quarter of 2002 showing a forecast profit of some £18.2m. The forecast would have been made in about September 2002 only some 6 months after the RITCs. It is the uncontradicted evidence of XL London and Brockbank that this profit forecast was almost entirely the result of a reduction in the reserves for the 1993 to 1999 motor business. Indeed for the year end Syndicate 2002 reported a release by way of profit to Acott & Tilley of £23.5m of the RITC premium paid by the Brockbank syndicates.
12. At the time of the quotation by ZSML for the RITC there were only 95 claims in excess of £100k of which 10 had closed; at the end of March 2002 there were a total of 2,241 claims files (1,241 bodily injury cases) outstanding; and by early July 2003 only 627 claims files (367 bodily injury cases) were still outstanding. The RITC premium calculation was based on gross outstanding claims of some £28.8m (£282.6m less paid claims of £234.8m) and gross IBNR of some £19m.
13. It is also the evidence of XL London and Brockbank, unsurprisingly, and again without contradiction, that it is most unusual for over reserving of this magnitude to become apparent in such a short time scale let alone with a book of motor business which was, as the figures show, high volume low value business. As it is modestly put "something must have gone badly wrong with the reserves" and an explanation is called for. It is also understandable that there is evidence that Lloyd's itself and the regulators have taken an interest in these events.
14. The possible explanations for the release of reserves suggested by XL London and Brockbank are negligence of Acott & Tilley in setting the reserves during the run off; negligence of KPMG and Eversheds in addressing the reserves, (albeit I agree that it seems improbable that such negligence could exist without negligence by Acott & Tilley also); some singular event or events which changed the picture or, as has been hinted at in some of Acott & Tilley's evidence, that the release itself may yet prove optimistic or wrong; or any combination of these possibilities. At present it is not known to anyone, apart from Acott & Tilley, how the £23.5m is made up. It could be over reserving on some outstanding claims or IBNR or, of course, both.
15. XL London and Brockbank have sought an explanation as well as the production of the documents the subject of the present applications. But it is, I think, of some significance that no explanation has been offered for the release to profit itself nor of how it was made up. Acott & Tilley and ZSML say the release was "a commercial decision" made by them and "as such was a matter for them only" and whether or not it was justified "is no business" of XL London or Brockbank.

The Documents Sought.

16. The documents which XL London and Brockbank seek to inspect relating to the book of motor business subject to the RITCs are:

i) All Claims files (open and closed) for the period 2000 to 2003.

ii) All procedure manuals, instructions, e-mails and memoranda regarding claims reserving philosophies and practices for the period 2000-2003.

iii) All board and staff meeting minutes, relating to the planning or implementation of changes to working/reserving practices.

iv) All printouts of reserve histories and large movement reports.

v) Any documentation evidencing how the bid for the RITC was put together and its prices, including working papers/actuarial assessments, board minutes, memoranda.

vi) All documentation relating to the calculation of the amount of prior year reserves to be released to Syndicate 2002 after the RITCs had been effected and relating to the decision to reduce the reserves by that amount.

17. These documents can also conveniently be divided into two categories to reflect the issues as they have developed between the parties. The first category are documents which pre-date the RITCs and fit descriptions (i) to (iv). The second category are those which fit the descriptions (i) to (vi) but post-date the RITCs.
18. The parties reached an agreement for the disclosure of the first category of documents shortly before this hearing when the outstanding issue about the terms of a confidentiality agreement to control such disclosure was resolved. Although there was some debate about which party was responsible for delay in resolving this I see no purpose in addressing it. What is of some materiality is that Acott & Tilley and ZSML contend that until XL London and Brockbank have inspected the first category documents it is premature to consider the second category documents.
19. Ms Dias, who appeared for Acott & Tilley and ZSML, did not seek to question the breadth or terms of the description of the documents albeit she did submit that if the court was at all minded to order any disclosure of second category documents the claims files alone would meet any legitimate interest of XL London and Brockbank in further disclosure. Ms Dias also acknowledged that whilst she submitted that no claim could lie against ZSML all the documentation sought was in fact held by or available to Acott & Tilley and so nothing of substance turns on any distinction between the roles of the two companies. There is also no distinction between the documents sought under CPR 31.16 and 31.18 and those few documents sought under CPR 31.14 are also included in the wider applications. If, therefore, disclosure is to be ordered under 31.16 both of the other applications are otiose.

CPR Part 31.16

20. The primary basis on which disclosure is sought is CPR Part 31.16. The rule relates to applications for "disclosure before proceedings have started". So far as material, the rule provides that:

"(3) The court may make an order under this rule only where-

(a) the respondent is likely to be a party to subsequent proceedings;

(b) the applicant is also likely to be a party to those subsequent proceedings;

(c) if proceedings had started, the respondent's duty by way of standard disclosure, set out in rule 31.6, would extend to those documents or classes of documents of which the applicant seeks disclosure; and

(d) disclosure before proceedings have started is desirable in order to-

(i) dispose fairly of the anticipated proceedings;

(ii) assist the dispute to be resolved without proceedings; or

(iii) save costs."

21. The requirements of the rule have received detailed analysis in the decision of the Court of Appeal in Black v Sumitomo Corporation [2001] EWCA Civ 1919. That decision emphasises the need to address each individual part of the rule separately and the distinction between matters of jurisdiction and discretion.
22. To establish jurisdiction to make an order the applicant must show that:

i) Both applicant and respondent are likely to be parties to subsequent proceedings in the sense that if proceedings are subsequently brought they may or may well be parties to those proceedings.

ii) The documents in question must be such as would be subject to standard disclosure in such proceedings and so must be documents on which the respondent would rely or which would support the applicant's case or which would adversely affect the case of either party. It follows that the issues in any subsequent proceedings must be sufficiently clear to enable this requirement to be addressed. There is a particular need for caution and focus when an allegation or possibility of fraud is involved. Whilst some of the evidence might be said to hint at the possibility of such an allegation in this case it is not suggested that a cause of action in fraud is or might be available and I propose to address the issues without regard to that possibility.

iii) There is a real prospect of an order being fair to the parties if proceedings are started, or that it will assist them to avoid proceedings or will save costs.

23. If the jurisdiction tests are satisfied it remains a matter for the court's discretion whether an order should be made which will depend on "all the facts of the case" but "important considerations" will be "the nature of the injury or loss complained of; the clarity and identification of the issues raised…; the nature of the documents requested; ….; and the opportunity which the complainant has to make his case without pre-action disclosure".
24. It has, of course, to be kept in mind, as Ms Blanchard submitted, that, by definition, this is a jurisdiction which typically will involve some element of speculation and may not lend itself to precision. It is a powerful argument against an order that the applicant can well make a case without disclosure. It follows that an applicant will often, if not usually, be unsure of the specific nature of any case he may have and indeed one of the salutary objectives of the rule is to resolve claims without proceedings. In this case, Ms Blanchard was entirely straightforward in saying that XL London and Brockbank did not know what had gone wrong, were not able to make specific allegations of negligence, and had not determined to sue come what may. But I agree with her that such a picture far from being necessarily fatal or even damaging to the applicant will often be a proper context for addressing the provisions of the rule. In this case, the substance of the application (which is not factually in issue) can be put shortly: the reserves turned out in a very short timespan to be far too high; there is a close correlation between the reserves and the premium for the RITC so the premium was also far too high; and those short facts call for an explanation which has not been forthcoming.
25. I will address the individual parts of the rule under the headings of the words which I have underlined in paragraphs 22 and 23.

Likely to be Parties.

26. The Run-Off Agreement contains what the law would in any event otherwise have implied, an express obligation upon Acott & Tilley to exercise reasonable care in running off the motor business. That obligation was owed to XL London and Brockbank. The reserves were set in that context. It is not in issue that if there were a want of care in setting them then XL London and Brockbank would have a cause of action for damages against Acott & Tilley. Nor is it in issue that such a claim could properly encompass any provable loss arising from the fixing of the premium for the RITC.
27. Ms Blanchard put forward a number of other possible causes of action directly referable to the RITC. Each faced a number of difficulties but I do not think it necessary to address them. In my judgment it suffices to satisfy this requirement that if proceedings are issued for negligent setting of the reserves prior to the RITC then XL London, Brockbank and Acott & Tilley can be expected to be parties to those proceedings.

Standard Disclosure.

28. This requirement gave rise to the major debate. Ms Dias submitted that standard disclosure on a claim for negligence in setting the reserves would not extend to documents created after the conclusion of the RITCs when the Run-Off Agreements ceased to have any effect. The only disclosable documents would be those addressing the calculation of the reserves which were in question. Moreover, as she pointed out, those documents had been looked at and the level of reserving investigated by KPMG, Eversheds and the other bidders for the RITC who had put forward a premium higher than Acott & Tilley. There was no certainty in reserving and none of these parties had picked up on anything amiss. In the alternative Ms Dias submitted that at least until the first category documents had been inspected it would be premature to extend the scope of disclosure beyond them or that no more than the up-to-date claims files should be disclosed which would or should reveal how the claims had developed.
29. I am wholly unpersuaded by these submissions. The complaint is that within months of the reserves being set a decision was taken to reduce them by about half. It is not known whether or to what extent that was the consequence of claims settling below or within the reserve or an adjustment to IBNR or some other reason. What requires an explanation is the reduction in the reserves and that explanation will provide the focus for addressing the appropriateness of the reserves set at the time of the RITCs. By way of illustration, if there are, as one would expect, documents which record how the sum released from reserves was calculated and made up I think it inevitable that they would support the case of one side or the other about the care with which the earlier reserves were assessed. Whilst the level and quality of reserving, like the results and quality of an audit, fall to be judged at the time they were made that judgment will ordinarily and materially be informed by knowledge of how and why in the event the outcome was different.
30. In my judgment the second category of documents pass the test of standard disclosure.

Fair?

31. In general, where the relevant information is held by the respondent and not otherwise available to the applicant, I think it is likely that if the first two tests are passed so will be the test of fairness. To determine if they have a claim and to formulate it XL London and Brockbank need access to the second category of documents. I also think that disclosure will save costs. It will enable further investigation of the reserves to be focused rather than random. If a claim is made it can be expected to be presented with particularity.
32. Discretion.
33. The context is a serious one involving a substantial sum. Explanation has been sought but not provided. There is no suggestion that disclosure would be oppressive or unmanageable. No question of commercial confidentiality has been raised. For the reasons I have sought to express, I see nothing but extra cost if the first category of documents are to be looked at alone without the advantage of the second category also being available. In my judgment these considerations all point to the exercise of discretion in favour of making the order sought by XL London and Brockbank.

Norwich Pharmacal

34. In view of my conclusions on the application under CPR Part 31.16 there is no need to consider the issues which arose on this alternative application. Suffice to say that had the application failed under CPR Part 31.16, in agreement with Ms Dias' submission, I find it unlikely that it could have succeeded on this basis. In contrast to Part 31.16 the Norwich Pharmacal jurisdiction remains, I think, one targeted upon disclosure to reveal the identity or nature of wrongdoing by a third party not by the respondent.

CPR 31.14.

35. There is also no need to address the limited application made on this basis and I will not do so.

Conclusion.

36. As I informed the parties at the conclusion of the hearing in my judgment XL London and Brockbank are entitled to the order they seek against Acott & Tilley. Because it has been accepted that the documents are all available to Acott & Tilley I see no need for the order to extend to ZSML and no point in addressing whether or not it could properly do so.
37. I will hear the parties on any ancillary matters which cannot be agreed when this judgment is handed down.