Right Honourable Francis Nigel Baron Napier & Ettrick & Anor v R F Kershaw Ltd & Ors

Damages recovered for negligent or reckless underwriting by Lloyd’s managing agents fall within a premiums trust deed covering money payable in connection with the underwriting. They replace the financial receipts or results which competent underwriting would have produced and have a real and substantial causal connection with the business. A power to vary the deed remains confined to its contractual purpose and contemplated scope. It cannot be used to bring personal assets outside the underwriting business into the trust fund.

The appeals concerned pre-1995 Lloyd’s Premiums Trust Deeds. Saville J held in Napier v Kershaw that recoveries for negligent underwriting fell outside clause 2(a)(i). The Vice-Chancellor reached the same conclusion in Lloyd’s v Woodard and also held that amendments made under clause 22, intended to capture wider litigation recoveries, were invalid.

Lloyd’s appealed. The central questions were whether negligent-underwriting recoveries were payable in connection with the underwriting, and whether clause 22 authorised amendments requiring other litigation recoveries to be paid into the trust fund.

Disposition

1. The appeal in Napier v Kershaw was allowed unanimously. In Lloyd’s v Woodard, the appeal was allowed as to recoveries for negligent underwriting. The challenge to the clause 22 amendments was dismissed by a majority comprising Nourse LJ and Pill LJ; Hobhouse LJ dissented. Consequential matters were deferred.
2. Clause 2(a)(i), covering premiums and other money payable in connection with the underwriting, was expressed broadly. Recoveries for negligent or reckless underwriting by managing agents replaced lost underwriting receipts or the proper financial result of syndicate participation. They therefore had a real and substantial causal connection with the underwriting and formed part of the trust fund.
3. The Court distinguished Society of Lloyd’s v Morris [1993] 2 Re LR 217, whose ratio concerned personal stop-loss recoveries and did not decide the negligent-underwriting question. The reasoning in Deeny v Gooda Walker Ltd (No 2) [1996] 1 WLR 426, including the treatment of damages for an agent’s bad performance as trade receipts, supported the conclusion reached. The wider categories were not resolved on an entirely common basis: Hobhouse LJ treated the stop-loss and syndicate-selection questions as concluded by Morris and Deeny, Nourse LJ expressed only a provisional view, and Pill LJ reserved his position.
4. Under clause 22, an amendment power had to be exercised for the purpose for which it was conferred and within the scope reasonably contemplated when the deed was made, having regard to the nature and circumstances of the arrangement. The recitals and section 83(2) of the Insurance Companies Act 1982 showed that the deed’s purpose was to provide a trust fund from underwriting-business receipts. The majority held that clause 22 could not extend the fund to personal assets outside that business, so the amendments were invalid. The principle stated in Hole v Garnsey [1930] AC 472 was applied.
5. Hobhouse LJ would have upheld the amendments. In his view, the deed created executory obligations arising when recoveries were made, and the amendments were consistent with the wider purpose of facilitating payment of Names’ underwriting liabilities. That reasoning was not adopted by the majority.

• Court of Appeal (Civil Division): allowed the Napier v Kershaw appeal and gave judgment on the related Lloyd’s v Woodard appeal: [1996] EWCA Civ 796.
• High Court, Queen’s Bench Division, Commercial Court: Saville J held that negligent-underwriting recoveries fell outside clause 2(a)(i).
• High Court, Chancery Division: the Vice-Chancellor reached the same conclusion and held that the clause 22 amendments were invalid.