Case No: 2000 Folio 249
 [2003] EWHC 1636 (COMM)

IN THE HIGH COURT OF JUSTICE
QUEENS BENCH DIVISION
COMMERCIAL COURT

Royal Courts of Justice
Strand, London, WC2A 2LL

Date: 8 July 2003

Before : 

THE HONOURABLE MR JUSTICE THOMAS

- - - - - - - - - - - - - - - - - - - - -
Between :

	SPHERE DRAKE INSURANCE LIMITED
(FORMERLY (1) SPHERE DRAKE INSURANCE PLC
(2) ODYSSEY RE (LONDON) LIMITED	

Claimant	
	- and -		
	(1) EURO INTERNATIONAL UNDERWRITING LIMITED
(2) JOHN HUBERT WHITCOMBE
(3) CHRISTOPHER REGINALD COLIN HENTON
(4) STIRLING COOKE BROWN REINSURANCE BROKERS LIMITED
(5) STIRLING COOKE BROWN INSURANCE BROKERS LIMITED
(6) NICHOLAS BROWN
(7) JEFFREY RONALD BUTLER	

Defendants	
- - - - - - - - - - - - - - - - - - - - -
Jonathan Hirst QC, Andrew Lydiard QC and Colin West (instructed by Clyde & Co) for the Claimants
David Railton QC, Raymond Cox QC and Marcus Smith (instructed by Richards Butler) for the Fourth to Seventh Defendants
The Second and Third Defendants appeared in person and represented the First Defendant
- - - - - - - - - - - - - - - - - - - - -
Approved Judgment: Part II

I direct that pursuant to CPR PD 39A para 6.1 no official shorthand note shall be taken of this Judgment and that copies of this version as handed down may be treated as authentic.
.............................
Mr Justice Thomas

INDEX TO PART II
Paragraph No.

1.          THE INITIAL PROGRAMMES	2
Programme 1:  John Hancock (per JEH Re) LMX account	2
(a)	The placement prior to 27 January 1997	4
(b)	The placing information provided to Mr Henton	8
(c)	The basis on which the programme was accepted	13
(d)	The position of SCB on the basis of acceptance	16
(e)	The role of Mr Whitcombe	17
(f)	The confirmation	20
(g)	The losses	21
(h)	Conclusion	22
Programme 4: Lincoln National in respect of the Big Ben lineslip	24
    (a)    The business written under the Big Ben lineslip	25
(b)	The relationship between the generals and the specifics	30
(c)	The information provided in relation to the generals	35
(d)	The premium	36
(e)	The basis on which the generals were accepted	39
(f)	The specific reinsurance	46
(g)	The position of SCB on the basis of acceptance	50
(h)	Confirmation by Mr Whitcombe	51
(i)	The losses	52
(j)	Conclusion	53
Programme 5: John Hancock (per Hackett)	55
(a)	The information provided	58
(b)	The basis of acceptance	60
(c)	The confirmation by Mr Whitcombe	62
(d)	The losses	63
(e)	Conclusion	64
Programme 3: American Reliable	66
(a)	The difficulties in placing the programme	68
(b)	The approach to Mr Henton on 27 January 1997	71
(c)	The placing information	75
(d)	The “as if figures”	76
(e)	Other information	81
(f)	The basis on which Mr Henton accepted the programme	83
(g)	The WFD placements	85
(h)	The position of SCB and WFD on the basis of acceptance	86
(i)	The confirmation by Mr Whitcombe	88
(j)	The losses	89
(k)	Conclusion	90
Programme 2: Phoenix	93
(a)	The placing information	97
(b)	The basis on which the programme was accepted	100
(c)	The position of SCB on the basis of acceptance	104
(d)	Discussions with HHI	105
(e)	The confirmation	107
(f)	The losses	108
(g)	Conclusion	109
2.  	OCTOBER 1997	111
Programme 6:  All American per WEB	111
(a)	The difficulties in placing	114
(b)	The placing information	118
(c)	The decision to accept	121
(d)	Loss position	124
(e)	Conclusion	125
3. 	THE CHRISTMAS EVE PROGRAMMES	128
Programme 7: Clarendon (per Raydon) – the IMC Truckers scheme	128
(a)	IMC and the lack of cover	129
(b)	The information provided	133
(c)	The basis on which the programme was accepted	136
(d)	The loss position	141
(e)	Conclusion	142
Programme 8:  Retrocession of JEH Re’s participation in Bridgefield	144
(a)	Bridgefield	145
(b)	Mr Billyard’s request	148
(c)	The terms of the retrocession	149
(d)	The information provided to Mr Henton	151
(e)	The basis on which the retrocession was accepted	156
(f)	SCB’s position on the basis of acceptance	160
(g)	The losses	161
(h)	Conclusion	162
Programme 9:  Reinsurance of Realm National and of JEH Re’s participation in 
the B&S scheme	165
(a)	The B&S scheme for the Georgia assigned risk pool	167
(b)	The reinsurances of the scheme	173
(c)	The contracts written by Mr Henton	176
(d)	The placing history of the reinsurance of Realm National	177
(e)	The information provided to Mr Henton on placing	180
(f)	A three year contract and premium?	185
(g)	Was this business gross loss making in Realm National’s hands?	194
(h)	The basis of acceptance	196
(i)	The position of SCB on the basis of acceptance	201
(j)	The proposed “renewal” in July 1998	202
(k)	The losses	208
(l)	Conclusion	209
Programme 10: All American per WEB	214
(a)	The placing history	216
(b)	The information provided	220
(c)	The basis of acceptance	224
(d)	SCB’s position on the basis of acceptance	227
(e)	The losses	228
(f)	Conclusion	229
Programme 11: CIGNA in respect of the Aviary lineslip	232
(a)	The Aviary lineslip	234
(b)	The promise to reduce Mr Billyard’s line	235
(c)	The written information provided to Mr Henton	239
(d)	No information about losses or the underlying business	241
(e)	The basis of acceptance	245
(f)	SCB’s position on the basis of acceptance	253
(g)	The premium to be paid	254
(h)	The role of Mr Bird	256
(i)	The amendment in August/September 1998	262
(j)	The losses	263
(k)	Conclusion	265
Programme 12:  John Hancock (per JEH Re) “direct” account	268
(a)    The relationship to Programme 1……………………..………………….271
(b)	The specific occupational accident protection	276
(c)	The placing history	278
(d)	The information provided	279
(e)	The basis of acceptance	280
(f)	The position of SCB on the basis of acceptance	285
(g)	The losses	286
(h)	Conclusion	287
Programme 13: Gerber (B&S)	290
(a)	Sleep easy cover	292
(b)	Brokerage of 50%	295
(c)	Conclusion	300
Programme 14: Clarendon (per Raydon) – participation in the MELEX scheme	303
(a)	The MELEX scheme	304
(b)	The placing with Mr Billyard	305
(c)	The profitability of the business in the hands of Clarendon	307
(d)	The information provided	311
(e)	The basis of acceptance	316
(f)	The position of SCB on the basis of acceptance	321
(g)	The losses	322
(h)	Conclusion	323
Programme 15: Clarendon (per Raydon) – EEII book	327
(a)	The predominantly EEII book	329
(b)	The history of the placement	330
(c)	The information provided	332
(d)	The basis of acceptance	336
(e)	The position of SCB on the basis of acceptance	339
(f)	The losses	340
(g)	Conclusion	341
Programme 16: Unum	343
(a)	The origins of the dispute between D&H and SCB	345
(b)	The investigation into the projected losses: the Wakely Report	353
(c)	The attempt to find quotes	358
(d)	D&H’s pressure on SCB	362
(e)	Mr Henton’s acceptance of this stop loss: 17-24 December 1997	366
(f)	Entry onto the Christmas Eve bordereau	376
(g)	The new slips signed by Mr Henton on 29 December 1997	377
(h)	Mr Whitcombe’s involvement	380
(i)	A new period clause	387
(j)	The unease of D&H	392
(k)	D&H’s request for SD to countersign the slips put to Mr Henton	399
(l)	Obtaining a letter from EIU/SD	403
(m)	Further efforts in March	417
(n)	New losses and further attempts	426
(o)	Conclusion	436
Programme 17: Clarendon Temps scheme	442
(a)	The scheme for temporary employees	443
(b)	Information provided: the slip	447
(c)	Information provided about the scheme	451
(d)	Information provided: loss runs and analysis	456
(e)	The deductions	459
(f)	The basis of acceptance	462
(g)	The position of SCB on the basis of acceptance	468
(h)	The losses	469
(i)	Conclusion	470
Programme 26: Mr Cackett’s specifics	473
4.  	THE NEW YEAR’S EVE PROGRAMMES	474
Programme 18: Clarendon (per Raydon) – “direct” generals programme	474
(a)	The nature of the business reinsured	475
(b)	The structure of the reinsurance	476
(c)	The information provided	479
(d)	The basis of acceptance	486
(e)	SCB’s position on the basis of acceptance	489
(f)	The losses	490
(g)	Conclusion	491
Programme 19:  The Hallmark scheme	494
(a)	The origins of the underlying scheme	496
(b)	The refusal by Mr Crane	499
(c)	The role of Mr Henton and Mr Bird	504
(d)	The mechanism for passing the losses	512
(e)	The writing of the risk by Mr Henton on New Year’s Eve 1997	517
(f)    The structure in place for 1998	523
(g)	The way the information provided was considered	524
(h)	The information about losses under the scheme	527
(i)	Information about the scheme and the underwriting	532
(j)	The change in the management of the scheme in January 1998	537
(k)	The premium paid to SD; deductions and commissions	541
(l)	The basis of acceptance	551
(m)	The position of SCB on the basis of acceptance	555
(n)	The actual underlying premium income and the losses	556
(o)	Conclusion	557
Programme 22: Syndicate 53’s PA account	562
(a)	Syndicate 53	563
(b)	The placing history	566
(c)	The information provided	571
(d)	The basis of acceptance	579
(e)	The position of SCB on the basis of acceptance	584
(f)	The losses	585
(g)	Conclusion	586
Programme 27: CIGNA PA account written by Mr Minter and Mr Branch	588
(a)	The placing history	589
(b)	The information provided	593
(c)	The basis of acceptance	599
(d)	SCB’s position on the basis of acceptance	602
(e)	The losses	603
(f)	Conclusion	604
Programme 28: John Hancock (per Hackett/JEH Re) 95% QS	606
(a)	The placing history until New Year’s Eve 1997	607
(b)	The placement by SCB with Mr Henton and others	616
(c)	The information provided	622
(d)	The terms of the reinsurance	633
(e)	Was LMX included or excluded?	636
(f)	The level of deductions	641
(g)	An analysis of the information	644
(h)	The basis of acceptance	648
(i)	Losses	652
(j)	Conclusion	653
5.	THE PROGRAMMES BETWEEN 5 JANUARY AND 4 FEBRUARY 1998	656
Programme 20: Chiyoda	657
(a)	The placing	658
(b)	The information provided	663
(c)	Conclusion	668
Programme 21: Venton Syndicates 376 & 2376 and the run-off of Fenn 
Syndicate 1038	670
(a)	The placing history	671
(b)	The information provided	679
(c)	The basis of acceptance	685
(d)	The position of SCB on the basis of acceptance	687
(e)	The effect of successive tiers of reinsurance	688
(f)	The commutation	690
(g)	Conclusion	691
Programme 23:  CIGNA Aviary aggregate cessions	694
(a)	The nature of the business protected	695
(b)	Placing history	696
(c)	The information provided	702
(d)	The basis of acceptance	708
(e)	The amendment on 10 August 1998	713
(f)	The losses	716
(g)	Conclusion	717
Programme 24: Retrocession of JEH Re’s reinsurance of Centaur (Mr Cackett)	720
(a)	The placing history of the “generals”	722
(b)	The information provided	730
(c)	The basis of acceptance	737
(d)	SCB’s position on the basis of acceptance	743
(e)	The losses	744
(f)	Conclusion	745
Programme 25: Republic Western	747
(a)	The placing and the information	749
(b)	Losses and conclusion	755
6.	PROGRAMMES BETWEEN MARCH AND JULY 1998	758
Programme 29:  CIGNA per Aviary lineslip – US Longshoremen and Harbour 
Workers’ WC business	759
(a)	The role of SCB and Mr Bird	760
(b)	The approach to Mr Henton	763
(c)	The information provided to Mr Henton	766
(d)	The basis of acceptance	769
(e)	SCB’s position on the basis of acceptance	775
(f)	The review by Mr Coppinger…………………………………………….776
(g)	The loss position	777
(h)	Conclusion	778
Programme 30: Retrocession of JEH Re’s reinsurance of Mr Cackett’s 
participation in WEB’s variable QS	780
(a)	The other business that had been written for WEB	782
(b)	The placing history of the variable QS	784
(c)	Mr Billyard’s reinsurance of Mr Cackett	788
(d)	The placement with Mr Henton	790
(e)	The information provided to Mr Henton	792
(f)	The information provided to SCB for the renewal	795
(g)	The basis of acceptance	798
(h)	The loss position	805
(i)	Conclusion	806
Programme 31: Realm National Monoline	808
(a)	The structure of the reinsurance	809
(b)	The placing history	811
(c)	The Monoline scheme	814
(d)	The information on the excess of loss	816
(e)	The information on the aggregate stop loss	820
(f) 	The basis of acceptance	823
(g)	The losses	828
(h)	Conclusion	829
Programme 32: New Cap Re (Australia)	831
(a)	The origins of the programme	833
(b)	The indication given by Mr Henton on a reciprocal basis	839
(c)	The negotiations for the deal	842
(d)	The confirmation	851
(e)	The information provided	853
(f)	The terms…………………………………………………………………856
(g)	A spiral?	858
(h)	The basis of acceptance	862
(i)	SCB’s position on the basis of acceptance	868
(j)	The loss position	869
(k)	Conclusion	870
Programme 33: JEH Re – 66.6666% QS of the non-proportional account	872
Programme 34: WEB’s participation in the Unicare scheme	873
(a)	The Unicare scheme	875
(b)	The placing history	878
(c)	The placing information: the two year contract	884
(d)	The information about the business	889
(e)	The brokerage and fees earned by SCB and EIU	895
(f)	The basis of acceptance	896
(g)	SCB’s position on the basis of acceptance	901
(h)	Enquiries by SD in July 1998 and thereafter	902
(i)	The losses	905
(j)	Conclusion	906
Programme 35: Raydon for Clarendon – EEII and CSLI business	908
(a)	The business covered	909
(b)	The placing history	913
(c)	The placing information	920
(d)	The scope of the cover	926
(e)	The basis of acceptance	927
(f)	The position of SCB on the basis of acceptance	934
(g)	Calculation of the loss ratios by Mr Henton	935
(h)	The losses	939
(i)	Conclusion	940

Mr Justice Thomas: 
1.	There are two matters that need to be explained in relation to this Part. 
i)	The references to paragraph numbers in the text of this Part refer to the paragraphs of this Part, unless otherwise indicated.
ii)	In respect to each programme, there are references to diagrams. These were produced by SD and were substantially agreed. They are largely self-explanatory but it is necessary to point out that on many of the diagrams, there are lines from the boxes representing the acceptances. These lines show, in general, the possible programmes to which lines accepted by reinsurers other than SD could be ceded. On some of the diagrams, there are against the box at the top of the diagram, lines identifying programmes from which cessions could have been made. There is no information before the Court save in a very few instances as to whether cessions had in fact been made. These diagrams are therefore illustrative of the potential further complexity for accumulation of loss.  
1.   	THE INITIAL PROGRAMMES
Programme 1:  John Hancock (per JEH Re) LMX account
2.	This programme accepted by Mr Henton on 27 January 1997 for SD consisted of nine XL contracts written in layers (up to $4m) protecting on an LOD basis, from 1 January 1997, the LMX business written by Mr Billyard for John Hancock. Mr Henton wrote a line on all the layers except the bottom layer ($90,000 xs $10,000) which he declined. The programme is summarised in Diagram 1.
3.	As set out at paragraph 409 of Part I, Mr Billyard had two programmes to cover the business – one for his “direct” business and one for his LMX business. Programme 1 covered LMX business.
(a)	The placement prior to 27 January 1997
4.	As set out at paragraph 745.ii) of Part I, Phoenix and American Reliable had subscribed to the entire programme for 100% before Mr Henton was approached on 27 January 1997.
5.	Phoenix had subscribed with limited information being provided to them:
i)	Mr Huey of Phoenix was asked by fax to renew Phoenix’s line on 27 December 1996; the fax stated that the account had a drastically reduced premium income due to the underwriter’s decision to consolidate his LMX account somewhat. Mr Billyard was said to be very unsure what premium income he would achieve and wanted to base his M&Ds on $2m. The upside was that SCB thought that they could achieve higher rates. The fax set out a new structure for the layers with the rates. 
ii)	On 31 December 1996, Mr Huey sent a fax back offering to write 5% on the basis as offered, and then a correcting fax to take 50% on each layer. 
iii)	The only document sent to Phoenix was the SCB questionnaire. No loss information was given and Mr Huey accepted without seeing any. Mr Brown’s evidence was that Mr Huey might have been prepared to write the programme on the basis of the claims statistics for prior years; Mr Butler’s evidence was that Mr Huey would have been aware of the history of the account as he (Mr Huey) had written it in previous years. Mr Butler accepted that one of the reasons for acceptance without loss statistics might be that it did not matter how loss making it was, as Mr Huey was arbitraging.
6.	The placement with American Reliable followed; again very little information was provided:
i)	The placement was made by WFD as sub-brokers for SCB; Mr Johnson’s evidence was that the account had very bad loss figures, but that the past was no guide to future performance, and that the account had changed so much that there was good reason to think that the figures were not relevant.
ii)	Mr Johnson’s evidence was that Mr Billyard had said that he was not writing LMX retro for 1997:
a)	Mr Billyard had told him that when Mr Billyard had declined to write the reinsurance of American Reliable – see paragraph 68.
b)	Mr Billyard had sent WFD a fax dated 30 December 1996 which stated, in connection with the reinsurance of SRRF:
“In addition I made it quite clear to you that I am unable to write retrocessional business. Having considered this further and bearing in mind Barbara’s account is a reinsurance orientated book of business, I require the following exclusion as part of the slips to ensure my position is clear in this matter:– “excluding [LMX] and/or retrocessional business howsoever assumed”.” 
iii)	Mr Johnson therefore did not regard Mr Billyard’s account as an LMX account on the basis that LMX meant XL on XL possibly with a spiral element. He had told Mr Durling that Mr Billyard would not be writing LMX business. He understood that Mr Billyard might write non-spiral LMX, i.e. London market direct writers. Mr Butler did not agree with this evidence, as he believed that Mr Billyard could still write LMX retro and cede it to his reinsurance – Programme 1.
iv)	American Reliable wrote a 50% line on each layer including the lowest layer of $90,000 xs $10,000. Mr Durling scratched the slip on 10 January 1997 and the lines were confirmed on 15 January 1997. As set out at paragraph 585.iii)d) of Part I, at the time American Reliable wrote this, they knew that Mr Billyard had refused to write their reinsurance.
7.	The programme was therefore fully placed before Mr Henton was approached on 27 January 1997.
(b)	The placing information provided to Mr Henton	
8.	The written placing information for Mr Henton was:
i)	The slip.
ii)	The SCB questionnaire dated 27 December 1996 which stated that the gross premium income in 1996 was $5m and that it was to be $2m in 1997; it was to be 100% LMX.
iii)	Loss statistics provided separately for each layer. 
a)	The losses on the layer $400,000 xs $100,000 were catastrophic in 1994 and 1995. In those years, the business had been written by Mr Hackett and Mr Cody; the business would have comprised the reinsurance of Mr Billyard, the reinsurance of other spiral participants who had reinsured Mr Billyard, and risks which Mr Billyard had led (Mr Hackett followed Mr Billyard, according to Mr Butler, on about 95% of the business written). 
b)	The loss information showed that the total losses across all the layers accepted by Mr Henton were:
1994  	$78m, a loss ratio of 8,330%; 
1995  	$25m, a loss ratio of 2,930%; and
1996  	$1.4m for a total premium of $803,000.  
iv)	A quote sheet which gave the rates which had been agreed by the leader; on the eight layers accepted by Mr Henton, this produced a net premium to SD for the line written of $90,000. 
9.	Mr Henton’s evidence was that this was the information usually provided for a risk like this. 
10.	Mr Henton’s evidence was that he was also given oral information: 
i)	His evidence in his statement was that he had no recollection of being told who the leader was at the time that the statement was prepared; he thought that the leader was American Reliable. His statement reflected this fact. His oral evidence was that he might have been told the leader’s name and recognised it as being a recognised market leader; that the leader was in fact Phoenix which had participated since 1994 and had written lines of 50%; Mr Huey had set the rates. 
ii)	Although the account was described as 100% LMX in the questionnaire, Mr Henton’s evidence was that he was told by Mr Butler that Mr Billyard (who had joined JEH Re as President in late 1995 to write the 1996 account) was changing the account for 1997 and was going to be concentrating on the reinsurance of direct underwriters.
iii)	Mr Butler accepted that he had said that but he had not told Mr Henton there would be no retro business in the account. Mr Henton accepted that to be correct.
iv)	Mr Henton’s evidence was that as he was told the business was LMX, the direct writers would be London domiciled insurers, but he did not know their identity; these would be first tier reinsurers of those writing in the US. This was not retro business. The difference, as he understood it, was that in the previous year Mr Billyard would have been writing second tier reinsurance of those reinsurers – XL on XL; the movement down one tier made a difference because the premium would be greater; there were other factors as well – retentions were rising; they had been $5,000 in 1994. 
v)	Mr Henton accepted that he could not recall being told that retrocessional business would not be written by Mr Billyard; he could not recall any discussion about the retro content of the business; he would not be able to complain he was misled if the retro content had been 20%.
vi)	Mr Henton’s evidence was that the loss figures were poor and that was why the information on the concentration on the reinsurance of direct writers was so important; such concentration would improve the figures and would mean that one would not get a spiral; he would not have written the account if he had known that the business to be written in 1997 was broadly the same as the business that was written in previous years.
vii)	Mr Butler’s evidence was that the account Mr Billyard wrote was all retrocessional – a reinsurance of someone else; he was actively trying to reduce his spiral account, but not excluding it completely; he would not have told Mr Henton that there was no spiral content.
viii)	Mr Butler did not know the way in which Mr Billyard classified business as LMX. He believed that Mr Billyard would have classified the SD outwards reinsurances which were written by him at the end of 1997 as LMX retro.
11.	Some support for Mr Henton’s evidence that he was told it was an account for direct writers was provided by: 
i)	The note of the telephone conversation he had with Mr Butler on 17 June 1997 – see paragraph 976 of Part I.
ii)	The document he handed to Mr Johnson on 14 May 1997 to which I have referred at paragraph 961 of Part I. On this document he had noted against “direct writers only” Programme 1 and had given the exposure to retro as blank for Programme 1.
iii)	The summary of business written, prepared at about the same time and referred to at paragraph 962 of Part I. Programme 1 was not shown as having any retro involvement, though Programmes 2 and 3 were.
iv)	However, in considering the reliability of these documents, it is necessary to refer to the accumulation calculations Mr Henton did, of which only the version current in November 1998 had survived. In this he had classified Programme 1 as having a retro spiral content; he said that this was because he knew by then that the outwards reinsurance of SD had been ceded to it. It was also Mr Henton’s evidence that as he only had $5m of vertical cover under his reinsurance programme by November 1998, he may have made the figures fit in with the reinsurance programme; an example of this was the fact that he had not counted Programme 3 as having any retro content and therefore discounted the aggregates by 40%, despite the fact that he knew it had retro content and knew that if the account had any retro content, it was necessary to reinsure to 100% of the aggregates and not discount it.
v)	The written information as to Mr Billyard’s intentions, dated 24 November 1995, which Mr Billyard had produced for the 1996 placement; this stated that for 1996 the estimated premium income was going to be $5m and 100% LMX and continued:
“My basic intention is to underwrite as last year i.e. direct underwriters only. However, in order to obtain a more meaningful underwriting vehicle, I will need to be involved in a certain amount of retro reinsurance. This will be kept to the minimum possible and will definitely not be a sought after element of the account. It is difficult to put an estimate on this participation, however I would anticipate between 10% to 20% of my premium income. Areas involved will be primary with small limits, therefore restricting any spiral.” 
Mr Butler’s evidence was that Mr Billyard had written spiral business in 1994 and 1995; he assumed that Mr Billyard was referring to 1995; in 1995, Mr Billyard had moved away from spiral-writing at D&H. The position for 1997 was that he was cutting his income from $5m to $2m and Mr Butler believed that he had also intended to reduce the spiral writings from the heavy spiral account which Mr Hackett had written.
12.	Mr Henton scratched the quote sheet to indicate his commitment to underwrite the programme.
(c)	The basis on which the programme was accepted
13.	Mr Henton did not dispute that, if the programme was looked at on a conventional basis and putting aside his evidence as to what he was told about the change to the account, losses of $9m could be expected; the premium of $90,000 would be absurd on that basis.
14.	Mr Hines’ initial evidence was that the lower layers would very probably make a loss; he accepted during cross-examination that that loss was going to run into many millions of dollars. Indeed if he had been writing this on a conventional basis, he would have sought to limit the reinstatements, or have sought a premium of $30m for a 100% line on the basis that the account might improve.
15.	Mr Henton’s evidence was that the programme was written on a net basis on the back of reinsurance:
i)	He considered the first layer he was writing would be most exposed as he was told that the average line size was $225,000 any one contract, though he did not know at what layers Mr Billyard was writing. He thought that some of the higher layers might make a gross profit. He took into account the fact that accumulations might occur from other accounts he might write.
ii)	He accepted that he did not know the loss ratio on the underlying business or ask for “as if” figures; he agreed that it was standard market practice to ask for them, if they could be produced.  
iii)	Mr Henton could not recall why he had declined the bottom layer. On the face of it, the loss figures for the bottom layer were quite catastrophic and were of the same magnitude as the next layer.
iv)	As the contract was written on an LOD basis, he would pick up a few risks written on the 1996 account that occurred in 1997; it would not be significant in Mr Henton’s view as most LMX contracts were placed on an LOD basis and had an inception date of 1 January.
v)	He did not think that the programme would be hugely loss making – a loss ratio of 200%, or up to 300%.
vi)	He did not carry out any calculations, but believed that it would make a profit with reinsurance as he was accepting it only on the basis that he had reinsurance.
vii)	He did not, however, have details of the outwards reinsurance in place, though he knew it had a retention, which he believed was $60,000 but was in fact $50,000; he expected, by the time the programme was confirmed, that the reinsurance would be placed shortly. As set out at paragraph 783 of Part I, he only approached Mr Davis of WFD on 3 February 1997 for reinsurance to reduce the retention to $10,000.
viii)	Mr Henton accepted that if SD had had a retention of $60,000, then SD could only take two losses on the first layer. 
(d)	The position of SCB on the basis of acceptance
16.	It was accepted by SCB in their letter of 4 December 2001 that this programme was writeable only with reinsurance; Mr Butler’s evidence was that there were indications that the losses might be less in 1997 as Mr Billyard was reducing his retro writing. Mr Billyard was a known arbitrageur and the business at the lower layers could only be written on an arbitrage basis.
(e)	The role of Mr Whitcombe
17.	Mr Whitcombe’s evidence was that he would have been shown the papers by Mr Henton and told of what had been said during the broking. 
18.	In cross-examination, he accepted that the loss figures were “awful, appalling, dreadful”, and that the programme looked on the face of the documents like a dump for really dreadful business; there must have been a good broking story, but he could not recall it. He did not know of Mr Billyard other than the fact that he was an ex-Lloyd’s underwriter. He was not aware of any underwriting criteria being applied; the programme was written on its merits. The risk review would have been done by Mr Henton. 
19.	Mr Henton’s evidence was that he would have discussed the risk with Mr Whitcombe, with the placing information in front of them, at a place such as The Mail Coach; he might have mentioned it on 28 January 1997 or shortly thereafter, when he had had lunch with Mr Whitcombe and Mr Smith. Mr Whitcombe would have “flicked” though the papers and Mr Henton would have said what he was told by the broker.
(f)	The confirmation
20.	Mr Whitcombe confirmed the acceptance on 12 February 1997; as set out at paragraph 783 of Part I, this was before any quote had been obtained by WFD for reinsurance to reduce the retention to $10,000, let alone that reinsurance being in place.
(g)	The losses
21.	There were very significant losses; figures showed the following losses incurred by SD on this programme, as at the first quarter of 2001:
Layer					Incurred Amount	
		$400,000 xs $100,000			$5.152m
		$500,000 xs $500,000			$1.387m
		$500,000 xs $1m			$477,000
		$500,000 xs $1.5m			$294,500
		$500,000 xs $2m			$125,000
		$500,000 xs $2.5m			$31,750
TOTAL				$7.467m
Mr Butler did not know how they were caused; Mr Johnson believed that they were caused by the reinsurance of SD that was subsequently placed at the end of 1997. EIU submitted that the loss might have resulted from the acceptance of contracts reinsuring CIGNA and SD in 1998. It was not possible to draw any conclusion as the information available was limited.
(h)	Conclusion
22.	I am sure that EIU and in particular Mr Henton acted dishonestly in the acceptance of this programme:
i)	As set out at paragraph 875 of  Part I, there was an arrangement under which EIU would write SCB’s business; I am also sure that SCB saw in Mr Henton, an underwriter who had a facility from SD which they could ruthlessly exploit and Mr Henton was prepared to acquiesce in that exploitation.
ii)	The programme could only be written on the back of reinsurance; the  figures showed loss ratios of more than 1,000%; his evidence was that he wrote the programme on the basis that there was reinsurance, but at that time he knew that SD had a retention of $60,000 and that the programme could not be written on a net basis without reinsurance to reduce the retention. Nonetheless the business was confirmed without any such reinsurance being in place. That was dishonest; it was plainly not in the interests of SD and was only done to further the interests of SCB.
iii)	In any event Mr Henton had no information from which he could calculate the number of retained losses and did not ask for this.
iv)	Mr Henton had no proper basis to assume that the loss record would be better; I accept Mr Jackson’s evidence that no such assumption could be made without proper information. Mr Henton asked no questions as to the nature of the account to be written by Mr Billyard, nor did Mr Henton ask for “as if statistics” to show what the account would be going forward.
v)	I am sure he was not told by Mr Butler that there would be no retrocessional business; as the account was described as 100% LMX, he knew that there was likely to be some spiral or retrocessional content; I attach no weight to the documents in which Mr Henton recorded that there was no retro content. It was obvious that there was, but he made no enquiry as to the extent of retrocessional business. Any person trying to assess the risk honestly would have been bound to make that enquiry.
vi)	Mr Henton made no assessment of this programme either on a gross or net basis before acceptance.
vii)	Mr Whitcombe’s confirmation was given by him without any understanding of the business.
23.	My conclusion on the position of SCB is set out at paragraphs 883 and following of Part I.
Programme 4: Lincoln National in respect of the Big Ben lineslip
24.	This programme which was also accepted by Mr Henton on 27 January 1997, consisted of XL contracts reinsuring Lincoln National in respect of business written under the Big Ben lineslip (described at paragraphs 438 to 441 of Part I). It did not protect any other business written by Lincoln National. There were two parts to the programme accepted:
i)	The generals programme, written on an RAD basis, provided cover of up to $5m; it is summarised in Diagram 4a. 
a)	There was a bottom layer, $90,000 xs $10,000, on which SD did not participate; there were then three low level layers (covering $900,000 xs $100,000) on which SD participated for lines of 20%, 10% and 10% respectively. They also participated on the layer $3m xs $2m for a line of 7.5%. This programme protected the combined PA account (which contained occupational accident business) on an RAD basis for 1997 and on an LOD basis for risks written prior to 1 January 1996 that occurred on or after 1 January 1997. 
b)	Mr Billyard had been asked to quote on 7 November 1996. He signed slips thereafter. Other reinsurers were Clarendon per Raydon, American Phoenix and Sun Life per Cackett, Syndicate 957 and Phoenix; New Hampshire, Chiyoda, American Reliable and RGA per GRRM also participated.
ii)	The specifics programme written on an LOD basis is summarised in Diagram 4b.
a)	The specifics programme has already been referred to at paragraph 845 of Part I as it provided SCB with the idea for a similar contract to protect Mr Billyard’s direct account. 
b)	The programme protected solely Lincoln National’s occupational accident account. It comprised two layers of XL reinsurance; the bottom layer was written by Gan for $45,000 xs $25,000 with 29 reinstatements which was backed up, on the exhaustion of those reinstatements, by an XL contract with unlimited free reinstatements written by American Reliable 100%. The second layer was for $180,000 xs $70,000 with unlimited free reinstatements; SD wrote 50% of this. Its co-insurer was JEH Re.
(a)	The business written under the Big Ben lineslip
25.	In the previous years, the Big Ben lineslip (as set out at paragraph 440 of Part I) had been split into three sections: (a) direct reinsurance of WC carveout, (b) LMX (including spiral and retro), and (c) EEII. There was a reinsurance programme for each of the three sections, though the primary million of EEII was covered under the reinsurance of section (a); the reinsurance of section (a) had been on an LOD basis for the period of 15 months commencing 1 October 1994, but had then been on an RAD basis for 1996.
26.	 From 1 January 1997: 
i)	The account was, according to the evidence given by Mr Bird, predominantly direct. This was because Lincoln National would not write retro business under the Big Ben lineslip. Mr Bird gave two explanations as to how this had come about:
a)	Lincoln National had pulled out of the retro market worldwide.
b)	Lincoln National had decided that Mr Dumenil at their own London office (referred to at paragraph 741.i) of Part I) would write LMX business; during 1996 there had been a clash between the writings by Mr Dumenil and the writings under the Big Ben lineslip. For 1997, Lincoln National decided that London market business would be written by Mr Dumenil and that LMX would not be written under the Big Ben lineslip, which would concentrate on WC carveout-related business instead.
ii)	Lincoln National had, however, agreed that they would “grandfather” certain accounts of SCB’s which had been written under Section B of the Big Ben lineslip in previous years, where it was XL or LMX of direct writers or international XL, because Mr Dumenil would only do business with certain brokers which did not include SCB.
iii)	According to Mr Bird, Lincoln National understood the “direct account” to be an account with less than a 20% LMX content; they had two other categories – anyone who wrote between 20% and 50%, and anyone who wrote between 50% and 100%. For 1997, they only went forward with those they termed “direct” – those that wrote less than 20% LMX.
27.	Mr Bird described the account written under the Big Ben lineslip for 1997 as the old direct account plus a few direct writer LMX accounts; it was not spiral business.
28.	Mr Butler’s evidence was that a high proportion of business under the Big Ben lineslip was SCB-placed business though other brokers also used it. Mr Butler accepted that gross loss making business was accepted under the Big Ben lineslip.
29.	As set out at paragraph 1035 of Part I, the Big Ben lineslip was suspended about 14 July 1997.
(b)	The relationship between the generals and the specifics
30.	Before setting out the circumstances in which the programme was accepted, it is necessary to explain the inter-relationship between the two parts of the programmes.
31.	The generals programme protected the whole account which included some international PA business that was not WC carveout or related business; the specifics covered only WC carveout or related business, but it inured to the benefit of the generals.
32.	When there was a loss in respect of WC carveout or related business, the loss would first form a claim under the generals programme of up to $25,000 as $15,000 xs $10,000 would be collected under the generals; then any loss xs $25,000 would be claimed under the specifics ($45,000 being collected from the first layer and $180,000 from the second layer). Any loss xs $250,000 would then come back as a claim under the generals for a loss at $25,001. 
33.	Mr Bird’s evidence was that the purpose of the specifics was to reduce the volume of claims that fell on the generals as Lincoln National wanted to protect their generals programme, which was on an RAD basis, from losses of up to $250,000.
34.	Lincoln National paid the full premium on the generals and made no deduction for the premium that they paid on the specifics. It was Mr Bird’s evidence that they hoped to be able to retain the generals on an RAD basis when they expanded their book of carveout business. There was therefore no warranty or condition requiring Lincoln National to maintain the specifics programme.
(c)	The information provided in relation to the generals
35.	The information provided was prepared by Mr Bird and, according to Mr Bird’s evidence, approved by Lincoln National:
i)	The slip for the generals was on an RAD basis. Cover was provided in addition, as has been mentioned, for what was described as the “run-in”, that is, losses on risks that had been written prior to 1 January 1996 but that had occurred on or after 1 January 1997. No extra information was provided in respect of that, other than the standard information. The slip contained an exclusion of retrocessional XL reinsurance of Lloyd’s syndicates and London market companies; that exclusion by its terms did not exclude other LMX or exclude international XL. This was an important provision which needs some explanation:
a)	Mr Bird’s evidence was that the exclusion was drafted in this way so that Lincoln National could reinsure accounts that had been written under Section B of the Big Ben lineslip in earlier years (LMX of direct writers) which Lincoln National had permitted under the Big Ben lineslip for the reasons explained; there was no blanket LMX exclusion as in prior years.
b)	Mr Butler’s evidence was that the slip had been worded so that LMX retro was excluded but LMX of “direct” writers was included; Lincoln National had written reinsurances of Lloyd’s syndicates on their original writings and did not want those excluded; Lincoln National was to write, in 1997, facultative retrocession of London market business that was tied back to an original account, and not whole account reinsurances of “direct writers”.
c)	It was Mr Henton’s evidence that it was not the intention to write international XL. However, the next programme he wrote that day was a reinsurance of John Hancock (per Hackett) (Programme 5) where the leader was Lincoln National as he knew; Lincoln National’s reinsurance of John Hancock (per Hackett) would have been covered under Programme 4 as this was international XL; when asked about this, Mr Henton’s evidence was that he may therefore have been mistaken when he had said that it was not his intention to write international XL. His evidence was that he had been told that Mr Bird was not writing a retrocessional account through the Big Ben lineslip. 
ii)	An information sheet for the generals dated 24 October 1996 was provided; it gave the estimated net premium income to the generals programme as $50m but stated that the income base for the M&D premiums would be $30m. It stated that the account would include facultative, QS and international XL; it gave details of the lines and noted under “Facultative and Quota Share” that the account would include occupational accident and other scheme type business. Under the heading “Anticipated split of income” it stated: 
“Proportional 		70%
 	XOL 			10% 
Carve Out XOL 	 3%
International XL 	 7% 
E.E.I.I. 		 5%
Other 			 5%” 
It stated that EEII written by the reinsured would be included, but only for the primary $1m. However, it is clear on the evidence that the breakdown was not accurately presented:
a)	Mr Bird’s evidence was that the sheet should have made clear what the position was; in fact, 83% was occupational accident (the proportional, XL on XL and carveout XL) and the balance was not occupational accident (7% international XL, 5% EEII and 5% other). The international XL included the reinsurance of the direct, non-occupational accident writings of international companies such as Tokyo Fire and Marine; “other” was the business carried over Section B of the previous year’s Big Ben lineslip.
b)	Mr Johnson had annotated his copy of this document to show which part of this split was in fact occupational accident and this showed that only 80% was (only the proportional and XL).
c)	It was Mr Henton’s evidence that he would have been told this, but his evidence was that other than this, he did not know anything more about the type of business that Mr Bird was going to write; he did not know Lincoln National’s cedants but that was not the information which was given for such business. He did not consider that the international XL which was to be written was to include retro business. Mr Henton accepted that a majority of the account was occupational accident but he did not know what the rest was.
d)	Mr Butler’s evidence was that all of the business was WC or occupational accident derived business.
iii)	Loss statistics as at 13 June 1996, dated 25 October 1996, were also provided together with claims bordereaux for both the 1994/5 and 1996 years; these were headed “direct account” and were only for Section A of the earlier slips. The figures were for the 15 month period at 1 October 1994 (1994-5) and for the 12 month period at 1 January 1996. They showed for 1994/5, paid and outstanding claims of $627,000 on a premium of $715,000 and for 1996, outstanding losses of $150,000 on a premium of $800,000. 
a)	Mr Henton accepted that the figures were seven months out of date but said that there was nothing unusual about out of date figures; a telephone call to Mr Bird would not have produced up to date figures as they were figures that were approved by Lincoln National. It was normal market practice to underwrite on such figures. Mr Butler and Mr Bird agreed with this. As the loss statistics for the specifics were as at 14 January 1997, Mr Henton could not explain why the figures for the generals could not have been updated as well. He accepted that there would have been development in the figures. 
b)	Mr Henton accepted that there was information available in this class of business on which the loss development could have been predicted. His evidence was that it was something Lincoln National may have been looking at on the underlying business but that that was not the sort of information provided to him.
c)	Mr Bird described the accounts in his witness statement as relatively new accounts with hardly any developed exposure; his oral evidence was that there was hardly any developed exposure at that stage as it would not be expected then; as he had put it, “the account had hardly started”. He had expected more losses to come in on the 1994/5 and 1996 years. 
iv)	“As if” statistics were provided for the 1994/5 year with the losses removed on a reinsurance of Guarantee Mutual (a large life company based in Nebraska), which Lincoln National had reinsured in 1994/5 and which had had very bad losses. Mr Henton did not know much about the Guarantee Mutual reinsurance.
v)	No information was given for the contracts written under Section B of the Big Ben lineslip for previous years and which were to be written for the 1997 year under the “grandfather” arrangement; there were no loss statistics or any other information, and no “as if” figures. Mr Bird’s evidence was that no presentation of these contracts had been made to Lincoln National and it was therefore uncertain as to which contracts they would be writing; there was no commitment by Lincoln National to accept the contracts, only a commitment that they would be considered under the Big Ben lineslip. Mr Bird said that the change in the exclusion should have indicated a change in the account and he had assumed that this was part of the oral broke to the reinsurers.
vi)	No information was provided about the underlying business or about the account philosophy; it was Mr Butler’s evidence that that was not provided for such business; if Lincoln National were writing an international XL book, they would not have had that information themselves. According to Mr Butler, the underwriter only had to ask if he had wanted more information; what was provided for was all that was wanted and it was standard of this market. 
vii)	Mr Henton’s evidence was that he would have been told who the leader was – he believed it was JEH Re.
(d)	The premium
36.	The premium income under the Big Ben lineslip had been $15m in 1994/5 ($12m on an annual basis), $24m in 1996 and $50m in 1997. The account had quadrupled by 1997 over a short period.
37.	The total premium income under the generals was $4.04m for a 100% line based on $50m of business being written under the Big Ben lineslip; the premium income to SD was $362,700 on that basis. Mr Henton had not understood the way in which the premium was paid; he thought that the rate under the specifics was applied to $18m and that the rate on the generals was applied to the remainder of $50m. This was incorrect as the premium for the specifics was additional to the premium for the generals – Lincoln National paid twice; the premium of $18m was taken as the applicable premium for the specifics as the specifics were on an LOD basis and that was the relevant applicable estimated premium income.
38.	The estimated net premium income figures for the account written in previous years (15 months at 1 October 1994 – $13m, 12 months at 1 January 1996 – $40m) were not given, but Mr Butler had that information and could have made it available to Mr Henton as it would have been with him as part of his broking pack. No information was given as to the premium to the programme for the direct account for previous years, or for that part of the LMX account which was to be written under the 1997 account, though Mr Bird could have provided it if asked. Mr Bird accepted that this was information needed to assess the loss statistics. The income for the direct account (Section A of the lineslip) had been shown on the information sheet for 1996. For 1994 it had been originally estimated at $12m (revised in the information sheet for 1996 to $13m) and $52.25m for 1996. Mr Bird’s evidence was that his calculation was that the income under Section A of the lineslip was $30m for 1994/5 and $40m for 1996, in contrast to the $50m for 1997 for Section A and some of Section B).
(e)	The basis on which the generals were accepted
39.	It was SD’s case that Mr Bird had provided the information used by SCB on the basis that it was clear that no serious consideration would be given to it; Mr Bird’s evidence that it was up to the underwriter to evaluate it and he would do so on the basis he thought fit; it was the kind of information normally provided for such business and he thought that it would be evaluated. According to Mr Bird, New Hampshire (one of the reinsurers on Programme 4) had participated in the programme on the basis of the information that had been provided. If more information were required, it would have been up to the underwriter or broker to ask for it.
40.	Mr Henton’s evidence was that he was not aware by 27 January 1997 of the serious losses coming in on Syndicate 103’s account; although Mr Bird had written a spiral account at Syndicate 103, the account here was not the same as that at Syndicate 103. 
41.	Mr Henton did not know the size of the lines being written by Lincoln National, though this was necessary to estimate the number of losses. However, he had a feeling that they were mainly larger lines; he did not think about asking Mr Bird. The number of losses written for 1994/5 was 13, as was apparent from the claims bordereaux with which he was provided, but this did not show the full loss picture for that year; using his experience, he considered that there would be more, but he did not work it out.
42.	However, if the programme was to be written on a net basis, the reinsurer would generally wish to have information about the number of losses; Mr Bird accepted that the only information about the number of losses was the loss run for 1994/5; the 1996 year (which had only one loss) was still to develop and there was no information about what was to be written under the “grandfather” arrangement, of the risks that had been written under Section B of the Big Ben lineslip; nor was there information about the types of industries that were insured under the underlying business; Mr Bird said that it was up to Mr Henton to decide what to do; he was in the position of any underwriter looking at a new account as it was a fairly new account early in its development.  
43.	Mr Henton thought initially, looking at the programme as a whole, that there would be gross profits. The account was different as the “as if” figures took out the losses on an account reinsuring Guarantee Mutual, though he accepted that he could not tell how that had affected the number of losses or the loss frequency. He accepted that it might have been viewed as gross loss making on an overall basis to SD; the premium on the upper layers might have been insufficient to make a difference, but on a net basis the premium on the upper layers was pure profit. He rejected the suggestion that, as the premium to the lowest layer being written was only $216,000 and as there were 13 losses on the account and the 1997 account was to have four times the premium income, the aggregate of retentions of $10,000 on the losses would greatly exceed the premium. Mr Bird’s evidence was that he did not really consider whether it would be unprofitable on a gross basis, but it was possible that it might be.  
44.	It was Mr Henton’s evidence that JEH Re’s participation in this programme would not have come back to SD under Programme 1 because this was not LMX business as the risks were accepted and insured in Fort Wayne, Indiana.
45.	Mr Hines’ evidence was that he thought that this might make money overall but he accepted that more information would be needed about the “grandfathered” accounts.
(f)	The specific reinsurance
46.	The circumstances in which Mr Henton wrote a line without a leader have been considered and my conclusion in respect of this has been set out at paragraphs 845 and following of Part I. 
47.	The information provided to Mr Henton when he wrote the specifics was:
i)	The slip on the specific part of the programme was on an LOD, not an RAD, basis; it excluded all LMX and EEII business and therefore had a wider exclusion than that on the generals. The EEII exclusion was put in by Gan (the leader on the lowest layer) to prevent any argument that EEII could be ceded to that treaty. The slip referred to an information sheet dated 6 February 1997. 
ii)	The information sheet for the specifics was dated 6 February 1997. Mr Henton did not have the information sheet when he quoted on 27 January 1997, but his evidence was that he was told what was in it. Mr Butler’s evidence was that Mr Henton would probably have had the prior year’s information sheet.
iii)	The loss statistics were as of 14 January 1997, dated 15 January 1997; they were for 1996 only when the contract had been written 100% by Mr Billyard. They showed nil paid and nil outstanding. There were no statistics for the year prior to 1996 as no contract had been placed for that year. Mr Henton was asked why he did not ask for “as if” statistics; his evidence was that it was possible for these to have been produced. A loss was shown on the loss run for the generals for 1996 (Matrix Inc.) which appeared to be an occupational accident risk that was not reflected in the loss statistics. He believed, from his experience, that the average loss on occupational accident was below $100,000.
48.	The rate for the specifics was lower than that for the generals even though the specifics cut in lower for 80% of the account; Mr Henton’s evidence was that that was because the specifics was written on an LOD basis.
49.	Mr Bird’s evidence was that he made no assumption as to whether the business would be loss making on a gross basis; that was for the person writing the risk to decide.
(g)	The position of SCB on the basis of acceptance
50.	Mr Butler’s evidence was that it was a programme to be written on an arbitrage basis at the lower layers and would need to be written on that basis overall. He added, when asked again on another day, that at the time of broking, it was not part of their remit to consider on what basis it should be written. As set out at paragraph 882 of Part I, I do not accept the evidence that that was not something which was thought of at the time.
(h)	Confirmation by Mr Whitcombe
51.	The contracts were confirmed by Mr Whitcombe on 12 February 1997; he did not understand the difference between the two accounts.
(i)	The losses
52.	The losses on the programme were, in March/June 1998, $1.17m on a net premium to SD of $190,000; there were no up to date figures because there were so many avoidances and disputes on the underlying contracts, as well as underlying contracts being investigated by Lincoln National; these included disputes on the spiral contracts. Mr Bird had produced some figures for Lincoln National on the basis of the underlying contracts which were not in dispute or being investigated by Lincoln National; he had given Lincoln National a schedule of the claims on the contracts being disputed or investigated, but these claims had not been processed or allocated to layers. The loss to SD as at the fourth quarter of 2001 on this basis was about $2.38m; there were no new premium figures. Mr Brown accepted that the gross losses on the programme would be big but he could not provide any further information.
(j)	Conclusion
53.	I am sure that EIU and in particular Mr Henton acted dishonestly in the acceptance of this programme:
i)	As set out at paragraph 875 of  Part I, there was an arrangement under which EIU would write SCB’s business; I am also sure that SCB saw in Mr Henton, an underwriter who had a facility from SD which they could ruthlessly exploit and Mr Henton was prepared to acquiesce in that exploitation.
ii)	Mr Henton had no information about the run-in part of the generals programme and had no information about the risks that could be written under the modified LMX exclusion which enabled risks formerly written under Section B to be included; this should (as Mr Hines accepted) have been provided; if not, Mr Henton should have asked. The information on the losses on the generals was seriously out of date and Mr Henton made no attempt to obtain up to date information, even though up to date information had been provided for the specifics. He proceeded to write the risk as he did not care what loss was inflicted on SD.
iii)	If, as Mr Henton seemed to accept in his cross-examination (and which was accepted in EIU’s closing submissions), the programme was written on a net basis, he did not have the information to calculate the likely number of losses and in any event did not make any such calculation on the information he had. He could not have formed any view as to whether the programme would be profitable on a net basis. But at that time he knew that SD had a retention of $60,000 and that the programme could not be written on a net basis without reinsurance to reduce the retention. Nonetheless the business was confirmed without any such reinsurance being in place. That was dishonest; it was plainly not in the interests of SD and was only done to further the interests of SCB.
iv)	I have already set out in Part I my conclusion in respect of the specifics being written without there being any leader.
v)	There was no information on which he could have properly assessed the specifics.
vi)	Mr Whitcombe’s confirmation was given by him without any understanding of the business.
54.	My general conclusion on the position of SCB in respect of Programmes 1, 4 and 5 is set out at paragraphs 883 and following of Part I:
i)	My conclusion in respect of SCB’s and Mr Butler’s dishonesty in relation to the specifics is set out at paragraph 845 of Part I.
ii)	I accept SD’s criticism of Mr Bird (set out at paragraph 39); the clearest example was the failure to provide any information about the contracts that had been written under Section B of the lineslip and which might be renewed under the “grandfather” arrangement and permitted by the modified LMX exclusion. Although it is clear that other reinsurers participated in the programme, there was no evidence before me as to what enquiries they had made, or as to their state of knowledge, or as to what they were told; I could therefore draw no inference one way or another from the acceptances by them.
Programme 5: John Hancock (per Hackett)
55.	This programme consisted of five XL contracts (for $4.99m xs $10,000) written in layers protecting, on an RAD basis from 1 January 1997, the business underwritten for John Hancock by Mr Cody at Hackett’s office at Milford, Connecticut and by Mr Carey at their office at Philadelphia (see paragraph 424.ii) of Part I); it did not cover the account written by Mr Billyard at JEH Re. EIU wrote a line of 33.33% on four of the layers; they did not participate on the bottom layer which was placed entirely with Lincoln National under the Big Ben lineslip. The programme is summarised in Diagram 5.  
56.	SD’s co-reinsurers on each layer were Clarendon (per Raydon) and Lincoln National. Lincoln National’s line could have been ceded under Programme 4. If there was a large loss then, although the losses would aggregate, there would be only one retention and the net loss would not be increased.
57.	The gross premium for the four layers on which SD participated was (on the assumption that the estimated premium was achieved) $577,500; the net to SD for its layers was $125,000.  
(a)	The information provided
58.	The information provided was:
i)	The slip. As set out above, the reinsurances were on an RAD basis from 1 January 1997; however, cover was also given for losses occurring on or after 1 January 1997 for earlier years – a run-in element. It was Mr Henton’s evidence that this was usual when a reinsured was converted from an LOD basis to an RAD basis. There was an express exclusion of the business written by Mr Billyard at JEH Re but Mr Henton accepted that that would not exclude a reinsurance of Mr Billyard’s business by other reinsurers. LMX was excluded but not international XL.
ii)	The information sheet dated 12 December 1996. It comprised four pages and gave a description of the account in narrative form over the period 1994-6. Mr Henton’s evidence was that his attention would have been drawn by SCB to the salient points. The sheet noted that there had been no known claims in excess of $25,000 for recovery under the retrocession to date, but this was inconsistent with the loss statistics that had been presented to Mr Henton. It could be read consistently if the statement was taken as referable to 1996.
iii)	Loss and premium statistics as at 4 December 1996. It showed that almost all the premium was WC. Hackett had been following Mr Billyard’s lead and had been reinsuring him since 1994. For the 1994 year it showed the premium coming in over three years; the losses in the 1994 year were $184,800 in 1994, $313,300 in 1995 and $664,500 in 1996. Mr Henton’s evidence was that the losses peaked in 1996 but this evidence was not consistent with the information that was published by the Reinsurance Association of America on WC business; Mr Henton’s evidence was that he did not have any such literature in his office though he was intending to build up a library of information over time. The statistical information also set out the losses xs $10,000 and the losses xs $25,000. There was one loss of $471,000 in 1994. If there had been one total loss to the lowest layer written by EIU, that would have made the programme loss making on a gross basis as the total premium for the programme was only $125,000; Mr Henton did not think that one large loss would necessarily occur again in 1997. Mr Henton did not know and did not ask about the attachment dates of prior year business which would have enabled him to assess the scale of the exposure, given that the programme also covered losses occurring on or after 1 January 1997 in respect of risks attaching before 1997.
59.	Mr Henton’s evidence was that he thought that he was told by SCB that the leader was Lincoln National. Lincoln National had given a quote on 20 December 1996; Clarendon (per Raydon) was invited on 31 December 1996 to participate on the basis of the quote from Lincoln National. 
(b)	The basis of acceptance
60.	Mr Henton’s evidence was that he had expected a gross profit on the programme. Mr Butler’s evidence was that he did not know whether Hackett wrote arbitrage accounts except as regards Hackett’s LMX account. He was unclear as to whether this was an account written by Mr Henton on an arbitrage basis and seemed to accept that the account might be gross loss making, but that was not something he had considered at the time as they presented the information and what the reinsurer did with it was up to him. Mr Bird thought that this account would make a gross profit. It was SCB’s submission that this programme was not one that was likely to be gross loss making.
61.	Mr Jackson’s evidence in his report was that this was written on inadequate information; in his cross-examination by Mr Henton, his evidence was that this was not one he felt strongly about and that the programme might make a gross profit. Mr Hines’ evidence was that it was possible that there might be a profit on the first layer Mr Henton wrote and more likely on the other layers; however, Mr Henton did not have the necessary information to see how the losses would develop.
(c)	The confirmation by Mr Whitcombe
62.	The programme was confirmed by Mr Whitcombe on 19 February 1997; he did not know anything about Hackett or recall anything about this programme.
(d)	The losses 
63.	The losses as at the third quarter of 2001 were $637,500 on a net premium income to SD of $71,700; this was a loss ratio of 900%. Further losses advised by the second quarter of 2002 have taken the incurred loss position to $1.1m.
(e)	Conclusion
64.	I am sure that EIU and in particular Mr Henton acted recklessly in the acceptance of this programme:
i)	As set out at paragraph 875 of  Part I, there was an arrangement under which EIU would write SCB’s business; I am also sure that SCB saw in Mr Henton, an underwriter who had a facility from SD which they could ruthlessly exploit and Mr Henton was prepared to acquiesce in that exploitation. 
ii)	The information presented was not easy to reconcile, but on the basis on which it could be reconciled, it pointed to the need for further questioning and for further information. When the background of Hackett’s writing and the nature of the business written was taken into account, this pointed to the need for further information and for a much closer enquiry than was in fact made by Mr Henton.
iii)	Mr Whitcombe’s confirmation was given by him without any understanding of the business.
65.	My conclusion on the position of SCB in respect of Programmes 1, 4 and 5 is set out at paragraphs 883 and following of Part I.
Programme 3: American Reliable
66.	Programme 3 was also considered on 27 January 1997. I have set out at paragraphs 818 to 833 of Part I, the events that led to the deal which enabled this programme to be written by Mr Henton. Those paragraphs did not consider the placing information or the underwriting basis on which the programme was said to have been accepted; this section deals with those aspects.
67.	The programme had two relevant parts:
i)	An XL programme. There were four layers of XL reinsurance excess of $10,000 up to $2.5m on an LOD basis on which SD participated in the first and second layers through SCB; they wrote 90% on the first layer and 55% on the second layer. The third layer was placed by WFD and SCB with three reinstatements at an additional premium. The fourth layer was placed by WFD and SD participated on that for 30%. The XL programme is set out in Diagram 3.
There were layers of $2.5m xs $2.5m and $5m xs $5m above this, placed for WFD by JP Woods.
ii)	A reinstatement premium protection. The third layer of the XL programme had three reinstatements at an additional premium. An insurance of that additional premium was placed by WFD on which SD and RGA per GRRM wrote 50% each. This protected the reinstatement premium on the third layer; as RGA per GRRM participated on the third layer, RGA was protecting its own reinstatement premium. The reinstatement premium protection part of the programme is set out in Diagram 3a.
(a)	The difficulties in placing the programme 
68.	As set out at paragraph 745.iii)a) of Part I, Mr Billyard would not write the reinsurance of American Reliable. Information was sent to him on 10 December 1996 by WFD; it comprised WFD’s standard information sheet but no loss history. His response was that it was his intention to withdraw from LMX retro business, but that he was considering writing other LMX business which covered direct writers. Mr Cackett had then been tried and declined – see paragraph 76 below. Others were then approached, but most declined.
69.	Mr Johnson asked SCB to help on 31 December 1996, though SCB were not given some of the information (the “as if” figures) until 24 January 1997 – see paragraph 77. As set out at paragraph 745.iii)e) of Part I, SCB wrote to Mr Huey of Phoenix on 13 January 1997, attaching the information sheet and asking him to renew the second and third layers. He was also offered a line on the bottom layer $490,000 xs $10,000 at a rate of 17%; the letter observed that the client wanted to know as soon as possible as it was quite late in the season; the information sheet sent to Phoenix was not available to the Court, but the letter stated:
“I have attached the 1997 information questionnaire which you will note now details that they do not write any retro-cessional LMX business.”
This must be compared with the information sheet shown to Mr Henton that stated that there was – see paragraph 75.ii). Mr Huey replied that day, declining the bottom layer. Phoenix had no reinsurance itself at the time (as set out at paragraph 745.iv)) of Part I.
70.	Mr Butler’s evidence was that they could not go to Mr Billyard as he was actively reducing his retro account and they could not find anyone else to write the bottom layer.
(b)	The approach to Mr Henton on 27 January 1997
71.	As set out at paragraph 800 of Part I, Mr Butler offered Mr Henton the lowest layer and the second layer on 27 January 1997. The lowest layer had no leader as SCB had been unable to place it at that point, but the rates offered were typed onto the slip. 
72.	The second layer had a leader; Mr Henton’s evidence in his statement was that he could not recall when he became aware that the leader was Phoenix, but he might have simply been told at the time that there was a recognised market leader. The second layer was in fact led by RGA per GRRM; there was some initial uncertainty over this as one document stated that the leader was Lincoln National. Phoenix wrote 25%. 
73.	Mr Henton wrote a line of 55% on the second layer. The participation on the second layer was confirmed on 12 February 1997.
74.	The 90% line on the bottom layer was written on 7 March 1997 after the deal involving Phoenix had been done.
(c)	The placing information
75.	The placing information was:
i)	The slips. The rate of 17% was typed onto the slip for the lowest layer; that was the rate on the offer made to Phoenix (see paragraph 69). Mr Henton’s evidence was that he understood that it was what American Reliable were prepared to offer. The layers $2.5m xs $2.5m and $5m xs $5m included travel insurance though the other layers did not.
ii)	The information sheet dated 14 October 1996:
a)	It showed the breakdown of the account as travel (28.5%), direct writers (48.25%), PA retro (excluding XL on XL) (17.25%), PA whole account (including retro) (5.25%); Mr Johnson’s evidence was that “direct writers” included those who wrote a direct account and an international XL account – XL reinsurances of direct insurers; this could contain some retro, as if an XL was written of a US company it could include some retro, but the identity of the reinsured would have to be specifically declared.
b)	It showed that the PA account had increased from $2.77m in 1995 to an estimated $5m in 1996 and was estimated as $7.5m for 1997. Mr Butler’s evidence was that he was not surprised that Mr Durling had doubled his income in a year as he had been in the market for a long time.
c)	The figure for PA whole account including retro was, according to Mr Johnson, the potential spiral content – 5.25%. His evidence was that American Reliable had not renewed or written any spiral contracts as of December 1996. The position changed and spiral contracts were written when SD agreed to write the reinsurance of American Reliable; SD would have been aware of that; as travel was excluded from the first layer, the adjusted retro or spiral content was in fact about 7%; this was reduced from the 14% for 1996. However, as the account was larger, the spiral content had only decreased from $700,000 to $550,000.
d)	It showed the largest loss – the Val Reef loss of £574,633. 
iii)	Loss information. The loss figures were on an “as if” basis for the first layer but not for the second layer. The “as if” figures need separate explanation because of the removal of the spiral losses from the figures and the error in the totals due to the omission of the sterling claims.
(d)	The “as if figures”
76.	The figures were “as if” figures because the spiral losses had been removed. The removal took place in the following circumstances:
i)	On 16 December 1996, Mr Johnson tried to place the lowest layer with Mr Cackett; Mr Cackett replied, wanting figures for each layer. Mr Johnson then asked Ms Tina Kersey, Mr Durling’s assistant, to obtain up to date figures. The figures were supplied by the High Wycombe office of American Reliable.
ii)	The information on incurred claims as at the end of November 1996 was sent to Ms Kersey by the High Wycombe office on 17 December 1996; there were four pages for 1995 and one for 1996. The letter made it clear that there were a large number of claims which would be processed in December which were not included in the lists.
iii)	It was Mr Johnson’s evidence that the spiral losses were taken out from the figures because there was no spiral market at the end of 1996, thereby accurately reflecting the account as going forward. It was his evidence that although there was an intention to write spiral business when the information sheet was prepared in October 1996, there was no such intention in December 1996 when the “as if figures” were prepared. This was the explanation for the inconsistency with the information sheet which showed a retro or spiral content to the account. The removal reduced the frequency and severity of the losses. As far as Mr Johnson was aware, there was no spiral content from earlier years that would affect the 1997 account. 
iv)	The result of the removal of the spiral losses was to reduce the losses from $9m for 1995 to the $2.2m shown on the “as if” figures; thus the spiral losses removed were in the order of $6.8m.
v)	The “as if” figures were then forwarded to Mr Cackett on 19 December 1996 under cover of a letter from Mr Johnson which explained that the figures were “as if” and excluded spiral business which was no longer written. Mr Johnson’s evidence was that he had learnt from Mr Durling that spiral business would not be written; that position only changed in February 1997 with the reinsurances of Phoenix and SD. Mr Cackett nonetheless declined to write the account.
vi)	On 27 December 1996, Mr Johnson wrote to GRRM seeking to place the second layer of the programme, attaching only the information sheet; the “as if” figures were not sent and there was also no information about the impact of the spiral. No further information was requested by GRRM. Mr Johnson said that Mr Sutcliffe of GRRM had been happy to write the second layer of the programme; he had led the layer $1.25m xs $1.25m and had been happy to write the layer $750,000 xs $500,000 on this information.
77.	The “as if” figures were supplied to Mr Butler on 24 January 1997. Mr Johnson’s evidence was that he was sure that he had explained the basis of the preparation of the “as if” statistics to Mr Butler; in any event it would have been madness not to have asked “as if what”. Mr Butler could not recall what he knew as to their “as if” basis.
78.	Mr Henton’s evidence was that he was told that the account had changed – the spiral part; TLA were concentrating on direct writers but there would be an element of retro; he thought that the figures supported that change; he could not recall knowing that the figures excluded spiral losses; if they did, they were misleading. Mr Butler’s evidence was that he could not recall whether at the time he knew the spiral losses had been removed; he thought he probably would have done and, if so, he would have told Mr Henton. The inclusion of retro would have made the figures worse as they would have included the reinsurance of Mr Billyard.
79.	The second aspect of the “as if figures” that requires an explanation was the fact that the figures themselves were missing a total column for £ claims, though there was such a column for $ claims. The total claims for 1995 excess of $10,000 were in fact $2.2m for 1995 on a premium of $2.77m and not $1m. Mr Butler’s evidence was that he did not notice the mistake then. Mr Johnson’s evidence was that he was not aware of this at the time; the version sent to Mr Cackett did not have a column for excess of $10,000.
80.	Mr Henton accepted that there would be more development of the losses, but his evidence was that although there was no IBNR figure he would allow for that in his underwriting. 
(e)	Other information
81.	It was Mr Henton’s evidence that other than the information sheet, there was no other detailed information about the account written by American Reliable; that was normal for this market.
82.	Mr Henton was told that the underwriter was Mr Durling who had been the deputy underwriter at the Darling Syndicate; Mr Henton’s evidence was that apart from this, his only knowledge of Mr Durling, whose bottom layer he had wanted to lead 100%, was that he had not heard anything against Mr Durling.
(f)	The basis on which Mr Henton accepted the programme
83.	Mr Henton’s evidence as to his decision to accept the programme was:
i)	It was not a risk that could have been accepted on a gross basis as “the loss record suggested that it was going to be marginal at best”. He accepted that if the conventional approach to underwriting was taken, then as the premium was increasing, he would have to allow for that; that would mean that using the 1995 information, the losses on the first layer would be grossed up to $5.92m. On a conventional basis, it was to be anticipated that the layer would have losses of $5m on a premium of just under $1m. He would not have written the layer on a gross basis. 
ii)	He therefore looked at the figures on a net underwriting basis and accepted it on that basis, on the back of reinsurance. 
iii)	He was therefore not interested in triangulations which were not provided for this business; nor did he need to know the nature of the business nor where the risks were situated geographically nor what the nature of the policies were.
iv)	He considered that the important factor was the number of losses; the frequency of losses and their number (not their size) and the attritional effect on the retention mattered if one was looking to make a profit on a net basis.
v)	On the “as if figures”, there were 27 losses in 1995. He would have carried out a calculation in which he grossed up the number of losses to allow for the increase in premium; that would have given about 100 losses.
vi)	He worked on the basis not of the actual retention of $60,000 under the SD programme, but on the basis of $10,000 on a reinsurance he expected to obtain. If the losses were 100, then the attritional loss to the retention would be $1m. However, that figure did not take into account the fact that there would be only one retention on losses that accumulated across the whole book, particularly with American Reliable and Phoenix. On its own this one contract might be loss making on a net basis, but that would not be the case if one looked at the account as a whole.
vii)	If there were retro losses which had been left out of the “as if” figures, he would have had to allow for more losses and the size of the gross loss would have had to be bigger because of the spiral effect.
viii)	He wanted to write 100% on this layer but did not explain why, save to say that he was interested in a net profit and that it was the kind of business which Syndicate 103 wrote.
ix)	As to the second layer, it was common ground that it had to be looked at in conjunction with the first layer accepted. The loss figures showed paid and outstanding losses for 1995 of $1.1m on which the gross premium had been $205,000 – a loss ratio of 500%. However, that did not matter on a net underwriting basis; nor did the frequency of the number of losses. That would have been taken into account in the first layer and the retention taken on that. Provided that each loss was within the vertical limits of the outwards reinsurance programme, for net underwriting purposes it did not matter what the losses were on the higher layers; it was beneficial to write up to the limits of the outwards reinsurance programme without any net loss; the more that was offered and written the better as the premium on the layers above the bottom layers helped to pay for the reinsurance and contributed to the net profit without contributing to the net loss that was capped by the retention. The only matter that was to be taken into account was the effect on the premium for the outwards reinsurance programme.
84.	This reasoning applied to Mr Henton’s acceptance of a line from WFD on the backup for the third layer as the net loss would be absorbed within the retention.
(g)	The WFD placements
85.	The WFD contracts were written on or shortly after 27 January 1997. They were confirmed by Mr Whitcombe on 6 February 1997.
(h)	The position of SCB and WFD on the basis of acceptance
86.	It was accepted by SCB in their letter of 4 December 2001 that this programme was writeable only with reinsurance. Mr Butler agreed that it was only writeable on an arbitrage basis. Mr Hines’ evidence was that it was very probably going to make a very large gross loss.
87.	Mr Johnson accepted that a gross loss ratio of 700% was one that might have been anticipated on the “as if” figures; if the spiral losses were added it would have increased the percentage, but it was his evidence that he would not have liked to put a figure on it. This could only have been accepted on the basis that the loss was passed on to reinsurers.
(i)	The confirmation by Mr Whitcombe
88.	Mr Whitcombe’s evidence was that he could not recall what placing information he had seen, but he confirmed the acceptance on the second layer on 12 February 1997; Mr Henton’s evidence was that he would have taken Mr Whitcombe through the papers and would have told him of the broking; he would have told Mr Whitcombe that he was writing it on the basis of net underwriting.
(j)	The losses
89.	The losses on the programme are in excess of $71.35m; the net premium obtained by SD on the programme was $977,000, a loss ratio of 7,300%. Mr Butler did not know why they are as bad as they are. Mr Johnson was shocked at the loss. A large part of the loss was in fact attributable to the occupational accident specific reinsurances of Mr Billyard’s account – see paragraph 844 of Part I.
(k)	Conclusion
90.	I am sure that Mr Johnson acted dishonestly in relation to the figures provided:
i)	It was dishonest not to prepare new figures in place of the “as if” figures which excluded the spiral losses, when it was obvious that the objective of the deal involving Phoenix and American Reliable was to enable spiral business to be written.
ii)	It was dishonest to have used the figures prepared between 17 and 19 December 1996 in January 1997 without thereafter providing revised figures to take into account the losses that were about to be processed or making it clear that there were further losses that were about to be processed.
91.	I am sure that EIU and in particular Mr Henton acted dishonestly in the acceptance of this programme:
i)	As set out at paragraph 875 of  Part I, there was an arrangement under which EIU would write SCB’s business; I am also sure that SCB saw in Mr Henton, an underwriter who had a facility from SD which they could ruthlessly exploit and Mr Henton was prepared to acquiesce in that exploitation when he agreed to write the second layer and wished to lead the bottom layer on 27 January 1997.
ii)	The circumstances of the deal subsequently entered into involving Phoenix and my conclusion on the dishonesty of the deal have been  set out at paragraph 857 of Part I.
iii)	Mr Henton accepted the programme at the rate of 17% that was typed onto the slip; he made no attempt to negotiate a higher rate or otherwise improve the terms to the advantage of his principals despite the market position he knew American Reliable was in. This was an example of the subservience to the interests of SCB, as set out paragraph 875.iv) of Part I.
iv)	The programme could only be written on the back of reinsurance but the programme was only confirmed when 20% of the bottom layer of the reinsurance was in place. 
v)	Mr Whitcombe confirmed the programme without having any understanding of the business accepted.
92.	SCB acted dishonestly in relation to the deal that was done which enabled Mr Henton to accept this programme; they also acted dishonestly in the respects set out at paragraphs 884 and 885.
Programme 2: Phoenix
93.	This programme was written on 7 March 1997 as part of the deal that has been described at paragraphs 828 to 831 of Part I.
94.	It consisted of XL contracts written in four layers (xs $20,000) protecting Phoenix up to $2m in respect of their XL account on an LOD basis with unlimited reinstatements; the lowest layer was $480,000 xs $20,000. On top of this programme there were three further layers providing $1.5m of cover excess of $2m, though this was with limited reinstatements; these higher layers were placed by WFD with American Reliable. The M&D premiums on the upper layers were higher than those on some of the lower layers.
95.	EIU participated on behalf of SD on the bottom four layers (up to $2m) which had unlimited free reinstatements for a line of 90% on each layer; the estimated gross premium income was just under $2m for 100% and the net to SD would have been 90% of $1.29m ($1.163m). The programme is summarised in Diagram 2.
96.	Apart from a reinsurance on Phoenix’s life account, this was the only programme placed for Phoenix by SCB. 
(a)	The placing information
97.	The placing information for each layer on which EIU participated comprised:
i)	The slip. Retro and LMX were not excluded.
ii)	An information sheet dated 6 March 1997. This showed an estimated net premium income of $7.5m; it also set out the normal underwriting limits.
iii)	Loss statistics. The loss statistics which were also dated 6 March 1997 were on an “as if” basis as the layer structure had been changed. 
a)	On the lowest layer, the losses were $58.64m for 1994, $28.5m for 1995 and $5.36m for 1996.
b)	There were no IBNR figures. Mr Henton’s evidence was that such figures were not provided for this business.
c)	No premium income was given. Mr Butler’s evidence was that there was a new layer structure from the previous year (where the layers had been $95,000 xs $5,000 and $400,000 xs $100,000); there was therefore no premium figure to put alongside the losses, though he would have had the information about the previous years’ premiums with him and would have given it as part of the broke. Although it was not possible to calculate the performance on the account from the figures set out in the sheets provided, it could be calculated from information on SCB’s file as the premium income in 1994 was $5m, it was $6.5m-$7m in 1995 and it was $7.3m in 1996. The loss ratios were in fact terrible.
d)	The other layers also had poor loss records. Over three years on the second layer, the losses were $9.298m paid and $13.483m outstanding, on the third layer, the losses were $4.476m paid and $6.659m outstanding.
Without knowing the nature of the accounts written, it was not possible to tell how developed those losses were. It was Mr Brown’s evidence that the losses were not viewed as suicidal as the programme written by American Reliable.
98.	Mr Henton was also provided with oral information:
i)	Mr Henton had annotated the figures with a note stating that the loss statistics were “not representative of account written in 97”. His evidence was that the figures shown were not going to be repeated because of changes in the market and in the underwriting stance; he was told that there was a change in the underwriter at Phoenix; he could not recall if he was told that Mr Huey was the new underwriter but it would not have stuck in his mind if he was told. He believed that the previous underwriter was Mr Ekwall who had moved to WEB and whose reinsurances he subsequently wrote (Programmes 6 and 10) – see paragraph 112; Mr Henton believed that Mr Ekwall had written a very heavy LMX retro account at Phoenix which had caused the losses, similar to the losses seen on the JEH Re account in Programme 1.
ii)	Mr Butler’s evidence was that he did not believe he had used the words “the figures were not representative”, but that he would have said that Phoenix intended to cut down on their spiral or retro writings. This would have reduced the amount of claims. Mr Butler considered that the programme covered Phoenix’s LMX account and could have included their international retro writings as well. All the lines that Phoenix wrote were retro lines, but Phoenix were trying to move away from spiral business by not underwriting those who would be reinsuring Phoenix. He understood that Phoenix were going to write the Crawley Warren account as well as direct accounts in the LMX market. He understood that there were changes for 1997 as Mr Ekwall and Mr Wright had left Phoenix to set up WEB. Mr Huey had picked up the account until Mr Swanick arrived. Mr Butler believed that he would have told Mr Henton about the change in personnel.
iii)	Mr Henton’s evidence was that the written information was of no use; the only useful information was the verbal information the broker had given and that that was merely that they would write more reinsurance of direct writers. The account for 1997 was going to be different, but there were no figures to support it. It was to concentrate on reinsurance of direct writers with a small amount of retro business estimated at 5%; the retention level was increased to $20,000. Mr Henton was also told that a considerable part of the underlying business was placed by Crawley Warren and not by SCB; this reduced the possibility for spiral. 
iv)	His evidence was also that he did not know if Phoenix (who were the leaders on Programme 1) were going to cede their writings under their participation in Programme 1 to this programme, but he thought that it was probable; that could be PA XL retro as it was not LMX.
99.	Later in the summer he had to ascertain, in order to answer a query from Lloyd Thompson in respect of the placing of the reinsurance (see paragraph 973 of Part I), that the LMX figures in the account were 8.4%; by this was meant the XL reinsurances of London market companies – they might or might not have been retro or spiral.
(b)	The basis on which the programme was accepted
100.	Mr Henton expected that the account might make a gross loss. He did not calculate a figure, but was of the opinion that it was not going to be catastrophic. He did not expect the actual results to be a gross loss of $26m or a loss ratio of over 2,000%. He accepted the programme on a net basis on the back of reinsurance.
101.	He accepted Mr Jackson’s view that the nature of the underlying business was obscure; he did not know anything about the account written but that was not a question that PA underwriters asked as it was not necessary to know about it. The programme covered Phoenix’s non-proportional account which could include occupational accident and their London market account concentrating on direct underwriters. He did not ask for an “as if” presentation of the new account to be written, because he believed he would not have received one if he asked; he had written the account on the basis of what he had been told. He did not know the average line size of the accounts written by Phoenix and so could not tell whether there were going to be lots of small losses or a few large losses. In fact the book of business written by Phoenix appeared from the loss runs before the Court to have contained a huge variety of PA business, but I accept that WC carveout losses would come in later and that the loss runs might therefore not be representative. 
102.	No information was given as to the number of losses (which had been the basis of the way in which Programme 3 had been written – see paragraph 83.iv)) and there was no information on which this could be calculated. Mr Henton’s evidence was that he thought that there would be enough premium in the account to cover the retentions and that the business in this account and in Programme 3 would be similar, so that the losses on both programmes would aggregate and there would be only one retention; the number could not be calculated as the account was changing.
103.	It was Mr Henton’s evidence that he believed that he had proper reinsurance.
(c)	The position of SCB on the basis of acceptance
104.	It was accepted by SCB in their letter of 4 December 2001 that this programme was writeable only with reinsurance. Mr Butler’s evidence was to the same effect; he accepted that the losses that occurred on this programme were on a scale that was not surprising.
(d)	Discussions with HHI
105.	Mr Henton accepted the layers for a line of 90% each on 7 March 1997, endorsing the slip “Following lead line from American Reliable”. American Reliable wrote the 10% line in the circumstances described at paragraph 93. Mr Henton’s evidence was that he was told by Mr Butler that EIU’s lines would be signed down to 60%, but he subsequently learnt on 3 April 1997 that it had not.
106.	Mr Henton’s evidence was that he recalled discussing the risk with Mr McCarthy, explaining the 90% line that EIU had written, and discussing the Crawley Warren business that had been placed with Phoenix (which Mr Henton understood gave a spread of business across the PA market). Neither Mr Smith nor Mr McCarthy had said that the 90% line was inappropriate.
(e)	The confirmation
107.	Mr Whitcombe confirmed the risk on 7 March 1997; he could not recall what he had been shown. The figures for the first layer showed that huge losses had been sustained over the previous three years and there was no figure for the premium income over that period (which Mr Whitcombe accepted was extraordinary). Mr Whitcombe did not know what the representative figures were. He accepted that the losses on the other layers were “lousy, huge, ghastly”.
(f)	The losses
108.	The losses at the end of the third quarter of 2001 were $26.5m on a net premium income to SD of $1.5m.
(g)	Conclusion
109.	I am sure that EIU and in particular Mr Henton acted dishonestly in the acceptance of this programme:
i)	I have set out at paragraph 857 of Part I, my conclusion on the dishonesty of the deal involving American Reliable.
ii)	Mr Henton accepted that the written information provided was of no use if the account was changing, but no information was provided about the changed account save that Phoenix would write more reinsurance of direct writers. I accept the evidence of Mr Jackson that no honest underwriter could write a 90% line on account of this size on the basis of such a comment; Mr Henton did so because he was putting the interests of SCB over those of SD. 
iii)	He had no information (as Mr Butler clearly knew) as to the likely number of losses and made no enquiry for further information.
110.	SCB acted dishonestly in relation to the deal that was done which enabled Mr Henton to accept this programme; they also acted dishonestly in the respects set out at paragraphs 884 and 885.
2.  	OCTOBER 1997
Programme 6:  All American per WEB
111.	On 3 October 1997, Mr Henton provisionally accepted a 10% line on this programme comprising two layers ($4m xs $1m and $5m xs $5m) for 12 months from 1 June 1997 on an RAD basis, reinsuring All American and United States Life (per WEB). The programme is summarised in Diagram 6.
112.	WEB (see paragraph 1026 of Part I) had commenced business in late 1996 or 1997; one of the principals, Mr Ekwall, had been the underwriter at Phoenix when they had made disastrous losses (see paragraph 98). They were acting as MGAs for All American and United States Life. The principals had all been part of  the market, according to Mr Brown, involved in spiral, WC and other business.
113.	The programme was led by John Hancock (per Hackett’s Philadelphia office) with a 50% and 55% line on each layer respectively; Clarendon (per Raydon) took 15% on both layers and Mr Billyard (JEH Re for John Hancock) took lines of 25% and 20% respectively. The acceptance by EIU was confirmed the same day. 
(a)	The difficulties in placing
114.	Mr Butler’s evidence was that it was not a very easy programme to place because of the time of year. Mr Carey of Hackett had quoted on 5 June 1997; Mr Carey had rated this programme on the basis of his experience and his knowledge of the market. Mr Carey had wanted to be signed to 34% but agreed to write 100%. He agreed to do so on the basis of an assurance which was given on 16 July 1997 that he would be signed down; Mr Butler was meeting All American and WEB the following week. 
115.	In October 1997, Chiyoda and New Hampshire also subscribed to the slip through their London offices, but later came off as their premium warranty had not been met. On 3 October 1997, Mr Kelly of SCB approached Beach; the fax stated that the leader had written 100% on each layer and “later requested assistance to sign him down”. This was untrue as Mr Carey had only written on the assurance of signing down. Beach declined. 
116.	The programme was also declined by RGA on the basis that they had seen a number of risks that WEB thought were good, but which they did not agree were. SCB also asked Mr Billyard for help on 15 October 1997, telling him that Mr Carey was over-lined; Mr Billyard subscribed. Mr Murray at Raydon was asked on 16 October 1997; he also agreed on behalf of Raydon.
117.	Mr Butler accepted in his evidence that it was a struggle to get the line signed down; his evidence was that this was because WEB was a new agency and was a rival to the existing agencies.
(b)	The placing information
118.	The information provided was:
i)	The slip. This contained a warranty imposed by Chiyoda (who then came off), when it subscribed on 1 October 1997, of no known or reported losses. The estimated premium income to the programme shown on the slip was $10m for risks attaching for 12 months from 1 June 1997. The slip referred to information about WEB.
ii)	A ten page document entitled “Executive Summary”. Mr Henton considered that this document provided a lot of information about WEB’s intentions. It described, in very general terms, the aims of WEB and the business it would write; an example of the phraseology was:
“Our external philosophy is to only reinsure organizations that are committed to producing profitable business instead of volume, and who aggressively manage their expenses and claims.”
119.	Mr Henton’s evidence was that he considered that WEB were trying to go after good business; he read what he was shown and formed his opinion from that and the feel that he got from it and the slip. The document referred to Mr Ekwall; Mr Henton’s evidence was that he thought that WEB would not be writing the LMX account that had caused the losses at Phoenix. 
120.	There were no loss statistics for the first four months of the programme. Mr Henton accepted that there was no information about the accounts that WEB had actually written since they started up; he did not think that they had written very much; in his experience no one would ask for the accounts that the reinsured had written.
(c)	The decision to accept
121.	Although EIU had decided to cease writing business until they had obtained reinsurance, Mr Henton’s evidence was that he wrote this programme because they had had some reinsurance in place and thought that it was enough to cover this programme; he thought that the programme would be profitable on a gross basis as there was a two life warranty – two or more had to be involved in a loss; he also did not think that there would be claims on the two layers. Unlike other contracts, the reinstatements were limited to four and were all at 100% additional premium.
122.	Mr Henton accepted that a total loss to his line would wipe out the profitability, but he did not think that that was a possibility. His evidence was that he would also accumulate a loss from the reinsurance of John Hancock (per Hackett) under Programme 5.
123.	As set out at paragraph 780, Mr Henton wrote, on 5 May 1998, another programme (Programme 30) which was a retrocession of WEB’s business in respect of the same period. That programme was a variable QS.
(d)	Loss position
124.	There were no reported losses for SD on this programme.
(e)	Conclusion
125.	This was a small programme; the estimated gross premium for 100% was $550,000; the estimated net premium to SD was $35,750 and was in fact $34,500.
126.	SD accepted that this was different to the other programmes – it had the two life warranty; Mr Butler also pointed out that the programme was excess of $1m and had limited reinstatements.
127.	This programme was not written on a net basis; it was common ground that this was a contract that might be profitable (as it in fact is likely to be). The specific acceptance of this programme was not dishonest.
3. 	THE CHRISTMAS EVE PROGRAMMES
Programme 7: Clarendon (per Raydon) – the IMC Truckers scheme
128.	The first of the Christmas Eve programmes was a backdated cover which provided two layers of aggregate stop loss reinsurances of Clarendon and their QS reinsurers for $2m xs $2.7m in the aggregate (or 90% of gross premium income). The programme was on an RAD basis for 12 months at 1 April 1997, protecting business that was written under a binding authority given by Clarendon (per Raydon) to Insurance Management Corporation (IMC) of Kansas. The programme is summarised in Diagram 7. This was first tier aggregate reinsurance, but it was backdated by eight months.
(a)	IMC and the lack of cover
129.	IMC held an SCB-placed binder from Clarendon (per Raydon) which entitled them to write WC and similar business in relation to independent contractor trucking companies for 12 months at 1 April 1997. Mr Murray at Raydon was responsible for overseeing the operation of the binder; Clarendon filed the rates and set out the underwriting guidelines.  
130.	Lincoln National had written this reinsurance programme in 1995 and 1996. Lincoln National had agreed to write a line in February 1997 under Section A of the Big Ben lineslip; after the termination of the Big Ben facility, Lincoln National had treated it as “not taken up” on 16 December 1997 over a dispute on the amount of business that was to be written and hence the M&D premiums payable; the terms sought by Lincoln National had not been acceptable to Raydon. Mr Brown’s evidence was that the delay had arisen because Raydon did not know how much business would be written and did not want to pay the M&D premium based on an underlying premium that might not be achieved. 
131.	Mr Brown’s evidence was that he believed that this was the only reinsurance of the programme; it was a monetary stop loss policy that cut the losses on the programme at a given figure of 90% of gross premium income or $2.7m.
132.	The estimated premium income on both layers was $170,000 gross or $110,500 net.
(b)	The information provided
133.	The written information provided was:
i)	The slips for each layer. As reinsurance was provided on an RAD basis and the underlying policies could be for an 18 month period, a long period of protection was given. There were none of the usual exceptions; Mr Henton’s evidence was that he believed that what he was reinsuring was WC carveout, but it was difficult to see from the available documents what precisely was carved out of the standard WC policy.
ii)	The information sheet dated 14 March 1997 to which the binder granted to IMC was attached. This was clearly prepared during the time at which Lincoln National was quoting and showed the estimated premium income as $6m. Mr Henton had been prepared to write the programme on the basis of the same information sheet many months later; he had no information as to what had been written in the period from April 1997. The evidence was that Mr Brown had told him that it was clean; that meant that there were no losses to the layer; that meant that the aggregate had not been exceeded; it did not tell him anything about how many losses had been incurred under the retention and therefore how near the aggregate was to being reached. It could have reached “$2.6m or 89%” and what the broker had said would still have been true. Mr Brown’s evidence was that he knew that the layer was clean as Mr Murray had advised him that the premium income was miniscule or tiny (as it turned out to be, according to Mr Brown, in the order of $900,000); the attachment point was a long way off.  
iii)	The information sheet also showed that the estimated gross earned premium income had reduced from $6m to $3m and that the commission would be 26% plus tax; Mr Brown’s evidence was that about 30% was usual in this business – about 26% in agency and fronting fees and the rest in tax which varied from State to State. 
iv)	The loss figures were as at 26 February 1997; on the 1993 year (which covered 1994 as well), the losses for a contract $995,000 xs $5,000 were $2.65m (just below the attachment point under the aggregate stop loss that Mr Henton was considering). There was no information about the premium income. Mr Henton’s evidence was that he would probably have been told it as it would, according to Mr Brown, have been in the file; he would therefore have been able to draw some conclusions. Mr Henton accepted that there would be more development of losses on that year. The figures for 1995 (where an aggregate stop loss was placed) were $2.9m with the excess point at $6.7m. No premium was given but according to Mr Henton it was $7.5m; that year was in a very early stage of development. On the 1996 year (where an aggregate stop loss was placed), the losses were $1.34m; the excess point was $5.4m. Mr Brown’s evidence was that he did not agree that 1995 and 1996 were pretty immature as at the end of 1996 – on an account like this, losses tended to be promptly advised within two to three years.
134.	Mr Henton’s evidence was that he thought he had been told that the risk had been placed with Lincoln National, but that Lincoln National’s terms had been considered too expensive so the Lincoln National offer had not been taken up; he was not sure if he had been told that at the time or he had learnt about it later, but he believed that he had been told something at the time. He thought that other reinsurances protecting Clarendon in respect of this scheme would have been placed earlier in the year and that it was not unusual to buy aggregate stop loss later; there was no pressure to place the aggregate stop loss before the inception of the underlying scheme. 
135.	Mr Henton’s evidence was that he was not told, and did not know, that Raydon were part of the SCB group. Mr Brown’s evidence was that if Mr Henton had wanted more information, all he had to do was to ask for it.
(c)	The basis on which the programme was accepted 
136.	Mr Henton’s evidence was that he considered that the loss figures showed that this was a profitable account as there was a long way to go on the earlier years before the aggregate was breached.
137.	The expert evidence of Mr Jackson was that the reinsurances written by Mr Henton provided Clarendon with a stop loss with a floor of 90% of gross premium income and a ceiling of 157% of gross premium income for a net rate to SD of 3.7% of gross premium income for both layers. I accept that evidence and the calculations on which it was based;  his evidence was that he could not say whether it would be profitable or not without more information. On the figures provided, Mr Hines expected the lower layer to make a gross loss of up to $1m, and although the upper layer might be profitable, the gross premium on the upper layer was only $42,500; the programme was therefore a loss making one on the whole.
138.	Mr Hines’ evidence was that it was probable that the programme would make a loss overall. Although his evidence was that the aggregate part of the programme could be placed late, he would never have dreamt of underwriting without his XL programme in place. In his experience the normal range for XL programmes to be placed would be up to two months after the inception date. He would normally expect up to date information if it was placed later – in this case, figures at September 1997. Mr Greig’s evidence was that it was fair to say that up to date figures should have been available, but Mr Henton should have asked. 
139.	However, if the premium income to the scheme was to be small, then the contract was likely to be marginal or not clearly loss making, as SD and SCB agreed.
140.	Mr Whitcombe’s evidence was that he did not know that SCB had a connection with Raydon. He knew that SD’s outwards reinsurance was on an LOD basis; it was EIU’s intention therefore, in accepting inwards business on an RAD basis, to get by as best as they could, but they should have accepted the inwards business on an LOD basis.
(d)	The loss position
141.	The net premium income to SD was $86,250.  No losses had been advised.
(e)	Conclusion
142.	I am sure that EIU and in particular Mr Henton acted dishonestly in accepting this programme: 
i)	This was one of the risks that Mr Henton accepted for the reasons set out at paragraph 1246 of Part I, though this programme was, Programme 13 apart, the one programme that might not have made a gross loss for the reasons given; there was simply insufficient information to make a judgment.
ii)	He made no attempt to obtain proper information about the programme, particularly about the underlying premium and the losses; he knew that it was wrong to write the programme without making any attempt to obtain up to date figures in circumstances where Lincoln National had refused to go through with their writing of the programme. 
iii)	He provided cover on an RAD basis whereas the outwards reinsurance he was obtaining was on an LOD basis for 1997 and 1998; for the reasons given paragraph 1246.xii) of Part I, he knew that it was wrong to expose SD to the mismatch in terms for the reasons set out. 
iv)	Although he had no authority to write a line of 100%, as set out at paragraph 1191 of Part I, I am satisfied that Mr Broad accepted the 100% line by initialling the Christmas Eve bordereau. 
v)	Mr Whitcombe acquiesced in what was done without any real enquiry into this programme.
143.	Mr Brown knew that Mr Henton was acting in dishonest breach of duty and dishonestly assisted him in this:
i)	This programme was put before Mr Henton in the circumstances set out at paragraphs 1246 and 1247 of Part I. This programme was included because Lincoln National had refused to go through with it and backdated cover was needed. 
ii)	He made no attempt to obtain up to date figures as he knew that Mr Henton would write the business as Mr Henton had no alternative; there was therefore no need to do what any honest broker would have done by obtaining up to date information. 
iii)	As set out at paragraph 1246.xiii) of Part I, Mr Brown fully appreciated that no honest agent would expose his principal to the obvious risks in the then market arising from the mismatch between granting cover on an RAD basis but only obtaining reinsurance on an LOD basis.
Programme 8:  Retrocession of JEH Re’s participation in Bridgefield
144.	Under this programme Mr Henton agreed to write 100% of a retrocession of JEH Re’s reinsurance of Bridgefield, under which Mr Billyard had agreed to reinsure Bridgefield for $450,000 xs $50,000 for a period of 12 months at 1 April 1997 on an RAD basis with 19 free reinstatements. The retrocession assumed the liability subject to an excess of $50,000 each loss and excess of an aggregate deductible of $3.5m. The programme is summarised in Diagram 8. This was a second tier reinsurance protecting an account written by Mr Billyard and placed at his request; it was again backdated by eight months.
 (a)	Bridgefield 
145.	Bridgefield was a company originating from an Employers’ Self Insurers Fund which had insured WC coverage since 1979 and had issued policies to employers; it was managed by Summit Consulting Inc. of Florida and was principally based in Florida. Mr Brown’s evidence was that the fund had been formed by a group of specified employers; this had grown as they had a good reputation for handling self-insured business; he did not know what industries were covered (it in fact covered 6,000 Florida employees in different occupations). By 1997/8, the estimated earned normal premium income on the underlying scheme was $107m and the estimated payroll was $2.24bn.
146.	Much detailed information was available about Bridgefield as a very detailed 187 page presentation dated 13 January 1997 was provided to Mr Billyard by SCB for the renewal for the period 1 April 1997 to 1 April 1998. This showed that it had been a large programme for many years ($2bn-$3bn of payroll) and it covered a large number of different industries; triangulations were set out and there were statements of open claims and statements of losses on the various layers. This presentation was in the file for the placement of the underlying reinsurance of Bridgefield with Mr Billyard. Although it had been sent to Mr Brown, it was not in the file for the placement of the retrocession with EIU. It had probably been sent to Mr Brown some time in February 1997.
147.	At some time earlier in 1997, Mr Cooke or Mr Hugo Morris or Mr Lord of SCB had placed a reinsurance of Bridgefield with Mr Billyard for $450,000 xs $50,000 on an RAD basis for a maximum of 19 free reinstatements. The reinsurance was for 12 months from 1 April 1997. The maximum liability was $9m. 
(b)	Mr Billyard’s request
148.	Mr Billyard had, in a fax sent from him in Bermuda on 19 November 1997 to Mr Brown, requested that a retrocession of his reinsurance of Bridgefield be obtained. It referred to “our recent get together”. It stated:
“Attached are schedules detailing the claims incurred under the above policies as at 30th September 1997. During our recent get together we discussed the possibilities of a stop loss covering both accounts. Would you investigate and let me know the possibilities. Your own files contain full placing information with previous loss information.”
Mr Butler’s evidence was that Mr Billyard had ceded the Bridgefield risk to his direct whole account programme and may have then decided to carve it out.
(c)	The terms of the retrocession
149.	Under the terms of the retrocession, Mr Billyard had to retain the first $50,000 of any loss and the aggregate deductible had to be exhausted before any payment was due under the retrocession. The premium was $1m. The maximum liability of SD was, because of the limited reinstatements, $4.5m.
150.	SCB were paid 20% brokerage, as that was what they wanted. Mr Henton agreed to it as he thought that it was “okay”; it was, in his view, a little more than normal, but not exceptional. The consequence of this was that EIU had less for themselves. 
(d)	The information provided to Mr Henton
151.	The written information provided to Mr Henton was:
i)	The slip. The retrocession covered WC carveout business and had the standard exclusions; as the reinsurance and retrocession were both on an RAD basis, they would cover losses on policies issued up to 31 March 1998.
ii)	Loss information. The only information given was for the period of 12 months at 1 April 1997 (covered by the retrocession); one sheet (dated 18 November 1997) showed the claims and one (dated 17 December 1997) provided “as if” statistics. The paid and outstanding losses were already, by that time, $1.7m and halfway to the aggregate of $3.5m. 
iii)	The slip underwritten by Mr Billyard. This gave the information on the estimated payroll ($2.24bn), the estimated size of the underlying premium ($107m) and the intention to convert the fund into a company.
152.	Mr Henton was given no loss information on previous years though it was obvious from the size of the business that there were previous years; Mr Henton’s evidence was that this was because the account was new to SCB; he accepted that there was a previous loss history and that he would have needed to see it if he had been underwriting on a conventional basis. Mr Brown’s evidence was that he did not know what the previous loss history was, even though he had been sent the 187 page presentation containing that information.
153.	Mr Henton’s evidence was that during the course of the oral presentation he would have been told something more than that which appeared on the papers. However, he could not recall what he was told.
154.	The 187 page presentation provided to Mr Billyard was not provided to Mr Henton; Mr Brown who was cross-examined extensively as to the information in it, said that it was not requested; he could not explain why the information about the prior years was not produced for Mr Henton. SD’s experts produced, from the 187 page presentation, an analysis which showed the losses excess of $100,000; on the basis of those it could be expected that the retrocession would be a total loss.
155.	Mr Henton did not know who the insured were or what their businesses were. From the loss record which he saw, he could have seen that they included a variety of companies which were mainly based in Florida – from roofers to car dealers. Mr Henton thought that the way in which the original insurance operated was that there were agents in Florida to whom employers went and obtained cover.
(e)	The basis on which the retrocession was accepted
156.	The retrocession was likely to be loss making on a conventional basis, but Mr Henton did not accept that it would be a total loss. Mr Henton’s evidence was that he had written the retrocession on a net underwriting basis and that he expected the retrocession to make a profit on this basis; it was a good net write.
157.	Mr Henton said that he did not know much about the various insureds; but he calculated that as there were a maximum of 20 reinstatements, he was looking at 20 total losses on which there would be a retention of $10,000 on SD’s outwards reinsurance on each loss. That would mean a maximum net liability to SD of $200,000 on a premium of about $400,000, ignoring the cost of outwards reinsurance. 
158.	There was an alternative interpretation. Although the slip did not specify the order of losses, in Mr Brown’s view this did not matter as you could have any number of small occurrences and add them up until the cover was exhausted. This meant that each individual loss excess of $100,000 from ground up would count as a loss to SD for the purposes of its outwards reinsurance, up to a maximum of $4.5m. On this basis Mr Henton had inadequate information on which he could conclude that the risk would be profitable on a net basis; further information on loss frequency was required. The information which was available on this programme, but which was not provided to Mr Henton, indicated a very high loss frequency.
159.	Mr Hines accepted that an underwriter looking at the retrocession on a net basis would need the detailed information on loss frequency shown in the presentation, and that the number of losses under the retrocession would overwhelm it and the retrocession was likely to be a total loss. Mr Greig’s evidence in his report was that the key information available to SCB had been provided; that was not in fact the case as it only emerged during the trial that Mr Brown had much more information. 
(f)	SCB’s position on the basis of acceptance
160.	SCB accepted, in their letter of 4 December 2001, that the programme was writeable only on a net basis. Mr Brown’s evidence was to the same effect – reinsurance was needed.
(g)	The losses
161.	The net premium income to SD was $575,000 and the total losses to the programme were $680,000; the losses have since deteriorated to $735,136.
(h)	Conclusion
162.	This retrocession was placed at the request of Mr Billyard because Mr Billyard wanted to remove some of those losses from his whole account reinsurance programme and transfer them to the reinsurer writing the retrocession. 
163.	I am sure that EIU and in particular Mr Henton acted dishonestly in accepting this programme: 
i)	This was one of the risks that Mr Henton accepted for the reasons set out at paragraph 1246 of Part I.
ii)	He made no attempt to obtain proper information about the underlying business or the previous years’ losses; his explanation to the Court for his failure was untruthful. If he had been acting honestly he would have asked for information about the underlying business and about the losses on the previous years so that he could have made a proper assessment of loss frequency. If he had obtained the information in the 187 page presentation that was in the possession of SCB, it would have been clear to him, from the analysis referred to at paragraph 154, that it was likely that the retrocession would be heavily gross loss making and that the claims frequency was high. 
iii)	He provided cover on an RAD basis whereas the outwards reinsurance he was obtaining was on an LOD basis for 1997 and 1998; for the reasons given at paragraph 1246.xii) of Part I, he knew that it was wrong to expose SD to the mismatch in terms for the reasons set out. 
iv)	There was no justification for allowing brokerage of 20% to SCB.
v)	Although he had no authority to write a line of 100%, as set out at paragraph 1191 of Part I, I am satisfied that Mr Broad accepted the 100% line by initialling the Christmas Eve bordereau. 
vi)	Mr Whitcombe acquiesced in what was done without any real enquiry into this programme.
164.	Mr Brown knew that Mr Henton was acting in dishonest breach of duty and dishonestly assisted him in this:
i)	This programme was put before Mr Henton in the circumstances set out at paragraph 1246 and 1247 of Part I. This programme was included because Mr Billyard wanted reinsurance and backdated cover was needed. 
ii)	Mr Brown made no attempt to supply proper loss information to Mr Henton in respect of the earlier years as he knew that Mr Henton would write the business as Mr Henton had no alternative; there was therefore no need to do what any honest broker would have done, by having available the information about the underlying business and the loss information on previous years; he had 187 pages of that information in his file but he did not bother to go through it with Mr Henton as he knew that it was unnecessary.
iii)	As set out at paragraph 1246.xiii) of Part I, Mr Brown fully appreciated that no honest agent would expose his principal to the obvious risks in the then market arising from the mismatch between  granting cover on an RAD basis but only obtaining reinsurance on an LOD basis. 
iv)	The demand for 20% brokerage (some $200,000) to which Mr Henton acceded was not justified; SCB did virtually nothing for that payment and although this was taken out of the fees allowed to EIU, the acquiescence by Mr Henton in this demand confirmed the subservience of EIU to SCB’s interests.
Programme 9:  Reinsurance of Realm National and of JEH Re’s participation in the B&S scheme 
165.	This programme protected the primary $1m of WC and alternative WC business that was written by an MGA which was acting under a binder from Realm National, an insurance company that SCB had acquired, as set out at paragraph 359 of Part I. Mr Henton participated in 12 contracts in this programme, all relating to the primary $1m of Realm National’s reinsurance of WCA Section A business. Each contract was on an RAD basis for 12 months at 1 July 1997. The contracts comprising the programme are complex and are summarised in Diagram 9. The reinsurance written by Mr Henton was backdated by more than five months. 
166.	Before explaining the programme it is necessary to explain the underlying scheme of the insurance and reinsurance. 
(a)	The B&S scheme for the Georgia assigned risk pool
167.	B&S Underwriters Inc. (B&S) were an MGA that were based in Louisiana. B&S met SCB in late 1994 and they did business through the broker that acted for them, Mr Standing of Delta Intermediaries (see paragraph 1447 of Part I); Mr Cooke had met Delta in the summer of 1994. Guarantee Mutual were the issuing carriers for B&S. Mr Bird’s evidence was that B&S wrote for other companies; B&S were audited by Lincoln National and by CIGNA on other business. B&S also had a binder for Homestead Insurance Company (Homestead) who were a policy-issuing company for WC business; Homestead were reinsured by JEH Re for a 100% QS and by Republic Western (per Realm UM) for the excess of $1m.
168.	In 1997 B&S devised a new scheme under which Realm National issued the policies which were the subject of reinsurance protection under Programme 9; B&S operated the scheme and wrote the policies under a binder from Ream National which entitled them to write WC and alternative WC business. Mr Brown’s evidence about the scheme was that he was very familiar with it as he had met and discussed it with Mr John Oxendine, the Georgia Insurance Commissioner, for the purpose of having Realm National approved to underwrite the policies which were issued under the scheme. Under the scheme, B&S were to underwrite insurance policies which were issued by Realm National in respect of the proportion of the assigned risk pool that was allocated to B&S. SCB were told that 75% of the assigned risk pool comprised five year loss-free business which emanated from small businesses popularly known as “mom and pop shops”; it was not cost effective for larger insurance companies to underwrite this business but B&S had systems in place to handle them. The other 25% of the pool comprised potentially high risk business but once the initial allocation had been made to Realm/B&S, re-underwriting could then take place on renewal.
169.	The scheme commenced on 1 July 1997. Three year policies were issued by Realm National to the insured but a separate premium was identified for each year and was fixed at the start of the policy.
170.	It was Mr Brown’s evidence that he was not aware of any business plan or other written information about the scheme; his evidence was that the difficulty was that B&S and Realm National did not know, and were not told, what was going to be allocated to them out of the assigned risk pool; they were simply told that the risks could not be selected; instead, there would be a random selection of a block of income out of the pool (which was $700m at the time). No one put any plan or anything else on paper about the scheme. 
171.	There was, however, attached to the excess of $1m reinsurance which was written by Republic Western and referred to in the contract for that reinsurance (see paragraph 175 below), a document entitled “Georgia Plan” for WC and employers’ liability insurance which had been sent by B&S to Realm National on 13 May 1997. It set out the rates filed for various occupations, the permitted modifiers (discounts) and deductions that could be allowed; it made clear that policies were to be for three years. It was not a business plan but an explanation of what policies would be written and of the rates and discounts. Mr Brown’s evidence was that he could not recall seeing this document at all; he said that this document might have been requested by Republic Western, but that he had never ever been asked to provide a rate filing to a reinsurer to whom he was broking business.
172.	It was Mr Brown’s evidence that the underwriting by B&S was audited by Reliastar, one of Realm National’s QS reinsurers on the scheme; Mr Jonathan Bowers from London and several others from Reliastar’s head office in Minnesota conducted the audit. If this evidence is true, the audits by Reliastar must be viewed in the context of their actual exposure; it was limited because of yet further reinsurance provided by Mr Billyard (see paragraph 178).
(b)	The reinsurances of the scheme
173.	Realm National underwrote the entirety of the risk under the policies which were accepted on their behalf by B&S; they had separate reinsurances for WCA Section A and Section B liabilities.
174.	Realm National’s primary $1m for its WCA Section A business was protected by a reinsurance programme:
i)	A 75% QS treaty; this was a three year contract. There was an anniversary date at which reinsurers could terminate the contract.
ii)	XL reinsurances protecting Realm National’s QS reinsurers. 
iii)	XL reinsurances and aggregate stop loss reinsurances protecting Realm National’s retention of 25% under the QS.
175.	The liability for WCA Section A business that was above the primary $1m was protected under a “Workers’ Compensation Excess of Loss Reinsurance” for an unlimited amount for 12 months from 1 July 1997. This was accepted by either Mr Billyard in his capacity as underwriter at Realm UM or by Realm UM’s Mr Christensen on behalf of Republic Western which, according to Mr Brown, wrote a lot of policies of that type. The reinsurance was expressed to be of the business written by B&S and “classified as Workers’ Compensation”; it provided that Realm National should have a net retention in respect of the primary $1m. Mr Brown’s evidence was that Realm National did indeed have a net retention in respect of the primary $1m, despite the existence of the reinsurance programme for the primary $1m. The slip gave an estimated gross written premium income of $122.2m in respect of risks attaching for 12 months at 1 July 1997 – $130m less the premium for the WCA Section B coverage. Mr Brown’s evidence was that although this was not clearly expressed on the slip, the estimated gross underlying premium of $130m was for a three year period.
 (c)	The contracts written by Mr Henton 
176.	The contracts comprising Programme 9 can be conveniently divided into two parts:
i)	The protection of Realm National’s retention. One part of the programme written by Mr Henton related to Realm’s retention of 25% on the primary $1m (see the left hand side of Diagram 9). This comprised seven contracts: 
a)	There were two layers of XL reinsurance; the retention on this was $2,500 and cover was provided for $247,500. This therefore covered Realm National for the entirety of a loss under their share of the primary $1m excess of their retention of $2,500. 
JEH Re had written 100% on each of the two contracts as explained at paragraph 177.iii)a) below; Mr Henton wrote a line of 100% on each which therefore signed at 50%.
b)	Realm National’s retention of $2,500 each loss (under the XL contracts described above) was in turn protected by five layers of aggregate stop loss reinsurance; the entry point was 70% of net premium income and cover was provided for $5m.
JEH Re wrote 50% on the first, third and fifth layers and Mr Henton agreed to write the balance of those three layers and 100% on the other two. 
ii)	The protection of JEH Re’s participation in the QS. As I have set out at paragraph 174 above, Realm National had a 75% QS treaty of the primary $1m; by December 1997, Realm National’s QS reinsurers were John Hancock (per JEH Re) (57% of 75%), Phoenix/Sun Life (through Mr Cackett) (28% of 75%) and Reliastar (15% of 75%). The other part of the reinsurance programme that was written by Mr Henton protected JEH Re’s participation in the QS:
a)	There were two layers of XL reinsurance; above a retention of $10,000 there was cover for a further $417,500, that is, for the whole of JEH Re’s participation in the QS excess of the $10,000 retention; and
b)	the retention of $10,000 was protected by an aggregate stop loss in three layers; the entry point was 70% of net premium income and this gave cover for $3m above the entry point. 
	Mr Henton wrote a line of 100% on each of these contracts.
(d)	The placing history of the reinsurance of Realm National
177.	Mr Brown’s evidence was that:
i)	Mr Billyard had initially participated on the QS for 28%; Lincoln National had participated for 29%, Reliastar for 15% and Phoenix/Sun Life for 28%; it seems clear from the documents that SCB considered that Lincoln National were bound, as there was a sheet showing how much of the premium was to be paid to them.
ii)	Lincoln National then came off, increasing the participation of JEH Re to 57%. This was because on 14 July 1997, Lincoln National’s head office stated that they were not going to proceed with their participation in the QS as they were not prepared to conduct any underwriting pending their review of the Big Ben facility (see paragraph 1035 of Part I). It was Mr Brown’s evidence that Lincoln National had indicated an acceptance but had then changed their minds. Mr Billyard subsequently agreed to increase his line to 57%, taking up Lincoln National’s previous share.
iii)	On 23 June 1997:
a)	Mr Billyard wrote 100% of the XL reinsurance of Realm National’s 25% retention of the primary $1m; he had annotated the slip “Signing T.B.A” and “R/I Direct 96” which meant that it was to be ceded to his 1996 direct reinsurance programme. 
b)	He wrote lines of 50% on the first, third and fifth layers of the aggregate stop loss reinsurance of Realm National’s 25% retention of the primary $1m. Each was annotated “Signing T.B.A.”. He did not subscribe to the other two layers of this aggregate stop loss.
iv)	Mr Brown could not recall whether he had discussed this programme with Mr Billyard when they were in Florida. Mr Brown’s evidence was that without the protection provided by Mr Henton, Mr Billyard would have been reinsured under his direct programme that had incepted in October 1996.
v)	On 15 December 1997, SCB North America asked SCRIB by fax who the reinsurers of Realm National’s XL and aggregate stop loss reinsurances in respect of the 25% retention were; the purpose of this was to enable Realm National to evaluate their letter of credit requirements; Mr Mortley replied on 17 December 1997 that the layers were covered 100% by John Hancock per JEH Re; he continued:
“However, Jeff [Butler] is still marketing these layers and anticipates further lines from [SD] and from [Keyport] per [WEB]. However, this is very much still TBA.”
vi)	However, it was clear from SCB’s file that the aggregate stop loss reinsurance of Realm National’s 25% retention had yet to be covered in full; Mr Brown’s evidence was that he did not know if anything had taken place between 23 June 1997 and 17 December 1997; his evidence was that Mr Mortley might well have spoken to Mr Billyard and had the missing layers covered, though there was no note of this.
vii)	Mr Brown’s evidence was that he had spoken to Mr Henton about EIU writing this aggregate stop loss reinsurance of Realm National’s retention – see paragraph 1147 of Part I for the context of this; Mr Henton’s evidence was that he could not recall discussing the reinsurance of Realm National’s B&S scheme on 17 December 1997; Mr Henton’s recollection was that this was first discussed on 23 December 1997.
178.	The protection of the reinsurers was in fact even more complex. An SCB internal document dated 16 June 1998 (which referred to the programme as “Georgia Block Roll Deal and Spins”) set out the entire programme. This document was only found on 27 July 2002 through the search of SCB’s old system; this further complexity is shown on Diagram 9.
i)	Reliastar’s QS participation was reinsured by JEH Re above a retention of $10,000 by an XL contract for a further $102,500 and by what appears to be two layers of aggregate stop loss reinsurance xs 85% of net premium income; all of these were written 100% by Mr Billyard at some unknown date.  
ii)	It also appeared from this document that JEH Re’s participation in the QS was itself subject to a 75% QS which was written 100% by All American per WEB. 
179.	By December 1997, it was clear that there was an urgent need on the part of SCB to complete the placing of the reinsurances for Realm National’s 25% retention; it was also clear that Mr Billyard wanted reinsurance to reduce the exposure of his considerable involvement under both the protection of Realm National’s 25% retention and under the QS and, if he covered the missing layers on the aggregate stop loss reinsurance of Realm National’s 25% retention, that he did so in the expectation that his lines would be eventually replaced.
(e)	The information provided to Mr Henton on placing
180.	The information provided to Mr Henton on Christmas Eve 1997 was:
i)	The slips. The slips set out the information that was provided but the only information given was (1) the fact that the reinsurance provided an indemnity in respect of the primary $1m of Realm National’s participation in the WC programme, and (2) the applicable estimated net premium income.
ii)	Sheets were provided which showed the calculation of the applicable net premium income. Out of the gross underlying premium of $130m, 6% of that was required for the premium to cover WCA Section B business ($7.8m), 4% of the net premium income was required for statutory reinsurances ($3.324m) and 32% of the premium for the QS was required for ceding commissions ($28.53m). 5% brokerage was then charged on the premium for the QS ($4.458m).
iii)	There was no other written information. 
181.	Mr Brown’s evidence was that the business was new to B&S and there were therefore no statistics; the presentations to Reliastar and Mr Cackett were done orally and they were provided with nothing more than the breakdown of premiums; the only document Realm National had was the management agreement with B&S. 
182.	Mr Henton’s evidence was that he was told that this was a new account which B&S had identified. The underwriter at B&S was Mr Black and the agency was based in Louisiana, but Mr Henton did not know anything about him or about the agency’s track record. He had a recollection that CIGNA had carried out an audit of B&S and had identified them as one of the better agencies that CIGNA had looked at. B&S had identified a niche area in the market where a large number of accounts had had no losses for five years; these were from small and medium sized businesses that were part of an assigned risk pool, as no one wanted to write them; Mr Brown probably identified this to Mr Henton as the “Georgia Block Roll”. The explanation given by Mr Henton as to why there were no loss statistics was that the account was new to SCB and Realm National. If there had been any losses known to those he was reinsuring, those losses would have been reported to him; in the absence of any such reports, he therefore proceeded on the assumption that there were no losses known to those he was reinsuring.
183.	Mr Henton did not know why he was being asked to write the programme in December 1997. He was given no information as to the business which was written between July and December 1997, but his view was that there would not have been very much information flowing through as it was a new startup; he was not expecting to get information regarding details of matters such as the premium rates at the level at which he was underwriting. He would not have expected a report from B&S on the business that had been written since 1 July 1997 or of the current loss position as B&S knew it; those were not the kinds of questions that an XL underwriter would ask.
184.	Both Mr Whitcombe and Mr Henton knew that Realm National was owned by SCB.
(f)	A three year contract and premium?
185.	The QS treaty was, as set out at paragraph 174.i) above, a three year contract; thus the reinsurance written by Mr Henton protecting JEH Re’s participation in the QS attached for three years as he had written it on an RAD basis. It was Mr Henton’ evidence that he did not know this at the time, as he had no authority to write a three year contract. If he had known it was for three years, he would have gone to Mr Broad for specific approval. Mr Brown’s evidence was that he believed he had explained to Mr Henton that the underlying policies were for three years with an annual re-signing; although Mr Brown knew that the underlying policies were for three years, it was his evidence that the reinsurers were not bound for more than one year. However, the contract for the QS provided that a QS reinsurer could not terminate his participation in the QS before the expiry of the three year period, unless “a Reinsurer of equal standing has been contracted as a replacement”. As I have mentioned, the estimated premium income under the underlying scheme was $130m. 
186.	It was the evidence of Mr Brown that the underlying premium figure of $130m was for three years and that he had explained this to Mr Henton. As the premiums under the policies issued to the insured employers were broken down into annual periods, there was an annual premium that could be calculated and this was used for the reinsurance which was effectively organised on an annual basis.  
187.	I reject as untruthful, the evidence that the reinsurers were only bound for a year. Quite apart from the fact that the reinsurances were plainly three year contracts,  SCB knew that and knew that a reinsurer could only escape liability under the three year contract if he had found another reinsurer to take his place. A letter dated 26 October 1998 that was written by Mr de Melo of SCB to Mr Ekwall of WEB in respect of the QS stated:
“I can inform you that the original Georgia Quota Share provides for Realm three years cover with Reinsurers of a certain standing. Reinsurers therefore do have the option to cancel their participation at annual anniversary dates within the three year period if another reinsurer can be found to assume their line.”
I am sure that Mr Brown (whose evidence was that he was familiar with the scheme) fully understood that; it was inconceivable that he would have permitted Realm National, the SCB group insurance company it had been his ambition to establish, to be exposed under such a large scheme without reinsurance to protect it for the period for which it was committed. Indeed, his evidence was, as set out at paragraph 195, that they were not going to do anything to damage it.
188.	On the slips for the XL reinsurances protecting JEH Re’s participation in the QS, the estimated net premium income to John Hancock was stated as $32.016m “in respect of risks attaching during the period 12 months commencing 1st July 1997 (see attached breakdown)”. A sheet detailing the premium breakdown showed how the applicable estimated net premium income was derived from the gross underlying premium income of $130m. The slips for the aggregate stop loss reinsurances protecting JEH Re’s participation in the QS showed the estimated net premium income to John Hancock as $24.0122m.
189.	Similarly, on the reinsurances protecting Realm National’s 25% retention, the applicable estimated net premium income:
i)	for the XL reinsurances “in respect of risks attaching during the period 12 months commencing 1st July 1997” was $19.7125m; and
ii)	for the aggregate stop loss reinsurances “in respect of risks attaching during the period 12 months @ 1st July 1997” was  $13.799m.
The applicable estimated net premiums for the aggregate stop loss reinsurances were lower because the XL reinsurances inured to the benefit of the aggregate stop loss reinsurances, and the premiums for the aggregate stop loss reinsurances were therefore reduced to take into account the cost of the XL reinsurances.
190.	Mr Henton’s evidence at first was that he did not know that the policies were for three years; he seemed to accept that the underlying premium of $130m and the applicable estimated net premium income figures shown on the slips (calculated from $130m) was the annual applicable premium. 
191.	However, when asked again about this in connection with the estimated premium income on the Christmas Eve bordereau presented to Mr Broad (see paragraphs 1205 to 1212 of Part I, Mr Henton’s evidence was that the underlying premium of $130m was for three years. Mr Henton had written on one of the slips (the slip for $40,000 xs $10,000) for the part of the programme protecting JEH Re’s participation on the QS, a figure of $1.5m for gross premium income. His evidence was that that was either the total premium income for the layer $40,000 xs $10,000 or it was the total premium income for that part of the programme for the first year, which would have meant a gross premium income of about $20m-$25m for the first year of the QS. He was told that the premium income for the lines he was taking on the part of the programme relating to Realm National’s retention was $1m, though he could now find no note of this. He had referred to this in his statement and it was not an invention at the time of the trial in order to meet the point on the under-declaration of the estimated premium income on the Christmas Eve bordereau. Mr Brown agreed with Mr Henton’s evidence that Mr Brown had given Mr Henton a premium figure for the annual period. Mr Henton’s evidence was also that his commitment was for one year only and that there would have to be annual re-signings.
192.	The statements on the slips that the applicable estimated net premium incomes were $32.016m (for the XL protection of JEH Re), $19.7125m (for the XL protection of Realm National’s retention), $24.012m (for the aggregate stop loss protection of JEH Re), and $13.799m (for the aggregate stop loss protection of Realm National’s retention) respectively were inconsistent with Mr Henton’s explanation of the manuscript note he had made. Mr Henton believed that the information on the slips were wrong and that his manuscript note was correct, though he was not told that the information on the slips were wrong.
193.	Some support for the view that the premium was for three years is provided by the letter written to Mr Ekwall on 26 October 1998, to which reference has been made at paragraph 187. In that letter SCB were providing information about the substitution of CIGNA for JEH Re, with effect from 1 July 1998, on JEH Re’s participation on the QS, in respect of which WEB had, in turn, provided a 75% QS. The letter stated that the estimated original written premium for the second annual period was $30m.
(g)	Was this business gross loss making in Realm National’s hands?
194.	Figures for the results on the QS of Realm National were produced by SCB. These showed that, on the basis of a comparison between the gross ceded premium and claims, the paid loss ratio was 75% and the incurred loss ratio was 83%. The effect of ceding commission, tax, brokerage and the contribution to compulsory reinsurance was to increase the loss ratio to 146% (on an incurred basis) in the hands of the first tier reinsurers. As the ceding commission included the commission payable to the MGA and an overrider, it was not clear what had to be taken into account to calculate the loss ratio in the hands of Realm National, but the business was, in their hands, loss making on a gross basis, depending on what fees and commissions were taken into account. The programme was not loss making after reinsurance.
195.	Mr Brown’s evidence was that SCB had worked very hard to establish Realm National and were not going to do anything which would damage it; they would not going to risk any default in their reinsurance.
(h)	The basis of acceptance
196.	Mr Henton’s evidence as to the basis on which he accepted the programme was not entirely clear; he considered, on the basis of what he had been told about the intention of B&S to write five year loss-free business, that the aggregate stop loss protections of JEH RE would be profitable on a gross basis, but the fact that he had reinsurance did come into the equation; he believed that the premium rate was fair.
197.	It was Mr Jackson’s evidence that Mr Henton should have requested for further information about Realm National and B&S (especially since the effect of the programme would be to make SD the principal risk-bearer for the contracts that were to be written by B&S); such information was especially important in light of the fact that anyone underwriting a WC account would understand that an assigned risk pool took on accounts that could not be insured in the ordinary way due to their loss record or the occupations insured. It was Mr Jackson’s conclusion that there was insufficient information to allow any genuine underwriting assessment of the programme and that such information as was available indicated that the programme was virtually certain to expose SD to substantial losses and that there was no reason to expect it to be profitable. Mr Greig considered that from a broker’s point of view there was no reason why a reinsurer should not have considered that a gross profit was possible though speculative – “in other words a punt”; he thought that a reasonably competent broker would have considered the information sufficient for an underwriter to accept it on a net or a gross basis; Mr Greig did not, however, deal with the fact that up to date information would have been available from the SCB group, though he thought that a broker would not have been surprised that an underwriter did not take more than a passing or minimal interest in such figures. Sir Alan Traill considered that up to date information should have been provided. I prefer the evidence of Sir Alan; Mr Greig did not say that such information should not have been obtained. It is obvious it should have been and it was easy to have obtained it.
198.	The expert evidence was that a number of sideways losses could be anticipated from the structure of the reinsurance sought by Realm National and Mr Billyard; Mr Hines, on the limited information available, accepted in the course of cross-examination that the programme would be loss making on a gross basis; Mr Jackson thought that it was almost certain to be loss making on a gross basis and that it would make substantial losses for SD.
199.	As this programme provided in part, aggregate protection in respect of small losses, then, subject to accumulation, reinsurance would not have been as great a factor as in other programmes in making a gross loss making programme profitable on a net basis.
200.	Mr Henton accepted that under the programme he had written, Realm National were guaranteed a 30% profit unless the losses on their retentions exceeded $5m and JEH Re were similarly guaranteed a 30% profit if the losses on their retentions did not exceed $3m. He had not looked at it in this way at that time. He also accepted that the entry points for the aggregate stop loss protections of both Realm National and JEH Re (70% of net premium income) were low, but his evidence was that insurers would buy as low as they could get and that those were the terms on which he was asked to write. Mr Brown accepted that both Realm National and JEH Re were guaranteed profits; he also accepted that, as in calculating the premiums under the aggregate stop loss reinsurances of Realm National and JEH Re, the XL premiums were to be deducted, this meant that the profits guaranteed by the aggregate stop loss reinsurances were in fact greater than appeared and might be in the order of 25%.
 (i)	The position of SCB on the basis of acceptance
201.	Mr Brown’s evidence was that he did not agree that this was an obviously loss making programme for EIU.
(j)	The proposed “renewal” in July 1998
202.	Mr Henton contemplated renewal of the part of the programme relating to JEH Re’s QS participation in July 1998 and signed a slip on 8 July 1998:  “Agree renew as before all layers”; this was strictly unnecessary as it was a three year contract. No written information was provided for the renewal except for what had been available on the initial writing. 
203.	Mr Henton’s evidence was that he renewed on the basis that there were no losses reported to him by JEH Re; if Mr Billyard had had losses reported to him, those should have been reported to EIU. According to Mr Henton, SCB would have told him if there were any losses; he would not go down the chain to get a report on losses from B&S. It did not surprise him that there were no losses on the business, as B&S had said that they would write mainly loss-free business. In his experience as an XL underwriter, one did not ask questions about the loss experience, the business written in the year, or how business was rated. 
204.	Mr Brown could not recall the renewal or whether he had been the broker involved in it, though he said that he might well have been; he accepted Mr Henton’s evidence on this. Mr Henton’s evidence was that as he had the benefit of outwards reinsurance and as losses had not been reported to him, he thus did not need more information. 
205.	The renewal was subsequently not taken up as the moratorium (referred to at paragraph 1474 of Part I) was imposed; in any event, Mr Henton did not believe himself to be committed until the slip was stamped. Mr Brown did not view this as a renewal as it was his opinion that there was no commitment to renew until there had been a firm order and the slip had been stamped.
206.	SD submitted that the “renewal” was a pure formality as EIU were bound for three years; if it was not and this was meant to be a renewal, then the fact that there was a renewal here was an example of the collusive relationship between EIU and SCB. 
207.	The line was not confirmed because of the moratorium. 
(k)	The losses
208.	The losses as at the third quarter of 2001 were $1.78m on a net premium to SD of $1.083m. Further losses advised by the second quarter of 2002 have taken the incurred loss position to $5.222m. 
(l)	Conclusion
209.	I am sure that the part of the programme protecting JEH Re’s participation in the QS was placed because Mr Billyard had wanted to reduce his exposure and replace it with the expectation of a net profit; the part of the programme protecting Realm National’s retention had been devised to ensure that Realm National would, as part of the SCB group, make a net profit; that part was placed with Mr Henton as it had either not been completed, or Mr Billyard had covered it on the understanding that his participation would be replaced in part. 
210.	Although the terms of the documents pointed to the underlying premium of $130m being a three year premium and much more information could have been provided by the SCB group, on the evidence before me, I cannot conclude on the necessary high standard of proof that this was so, nor can I conclude that Mr Henton was not given the figures he says he was given by Mr Brown. 
211.	I am sure that EIU and in particular Mr Henton acted dishonestly in accepting this programme. 
i)	This was one of the risks that Mr Henton accepted for the reasons set out at paragraph 1246 of Part I.
ii)	I am sure that no honest underwriter acting in the interests of his principal would have written a programme with an anticipated gross underlying premium of $130m (even assuming that the premium would come in over a three year period) without a clear understanding of the business to be written and a much more detailed information about the loss history of the account than the mere assurance that 75% of it was clean; he would certainly want to see information on the other 25%.
iii)	Mr Henton made no attempt to obtain proper information. He did not even know why the programme was being placed so late. Although the account was new as at 1 July 1997, there must have been information about what had been written since 1 July 1997 and about any losses that had occurred since then. If he had been acting honestly he would have asked for that information so that he could have made a proper assessment of the business being written and of the loss frequency. Mr Henton’s evidence that in writing this very substantial programme he relied on an oral assurance that 75% of the business in the assigned risk pool was loss-free was incredible; that told him nothing. Any honest underwriter would have sought information that must have existed as to the pool’s performance in the past, and without proper information would not have committed his principals to the risk and certainly not on the scale he did.
iv)	Although he accepted in his evidence that the entry points on the aggregate excess were low, he made no attempt to increase, but simply did as Mr Brown wanted; he had little alternative for the reasons set out at paragraph 1246 of Part I and simply acquiesced in his subservience to the interests of SCB.
v)	He provided cover on an RAD basis whereas the outwards reinsurance he was obtaining was on an LOD basis for 1997 and 1998; for the reasons given at paragraph 1246.xii) of Part I, he knew that it was wrong to expose SD to the mismatch in terms for the reasons set out.
vi)	Although he had no authority to write a line of 100%, as set out at paragraph 1191 of Part I, I am satisfied that Mr Broad accepted the 100% line by initialling the Christmas Eve bordereau. 
vii)	Mr Whitcombe acquiesced in what was done without any real enquiry into this programme.
viii)	If, as Mr Henton and Mr Brown asserted, there was a need to renew in July 1998 and that there was a commitment to that effect, then to do so without any information at all was clearly a dishonest breach of duty to SD (as I have found at paragraph 1538.iii)c) of Part I) and a further example of the subservience of EIU to the interests of SCB
212.	Mr Brown knew that Mr Henton was acting in dishonest breach of duty and dishonestly assisted him in this:
i)	This programme was put before Mr Henton in the circumstances set out at paragraphs 1246 and 1247 of Part I. This programme was included because Mr Billyard wanted reinsurance (or if he had held the unplaced parts of the programme covered, he wanted to be relieved of that); backdated cover was needed; the interests of the SCB group needed to be protected.
ii)	Apart from the document referred to at paragraph 171, there was no document produced to the Court that amounted to an underwriting plan or an assessment of the scheme, even though the scheme was written through an SCB group company. Mr Brown’s evidence was that there was no such document. The clear inference must be that such a plan was unnecessary as the risks were being transferred away from the SCB group and their position entirely protected. 
iii)	Mr Brown made no attempt to supply up to date information to Mr Henton as he knew that Mr Henton would write the business as Mr Henton had no alternative; there was therefore no need to do what any honest broker would have done, by having available the information about what had happened since 1 July 1997, particularly as such information was information available within the SCB group.
iv)	As set out at paragraph 1246.xiii) of Part I, Mr Brown fully appreciated that no honest agent would expose his principal to the obvious risks in the then market arising from the mismatch between granting cover on an RAD basis but only obtaining reinsurance on an LOD basis. 
v)	If, as Mr Brown asserted, a renewal was needed, the fact that the broker who dealt with the renewal could persuade Mr Henton to do so without providing him with any information, demonstrated that the broker knew that Mr Henton was prepared to act dishonestly towards his principals, as set out at paragraphs 1535 to 1538 of Part I.
213.	The scheme and the reinsurance programme was a good example of how SCB used reinsurance to further their competitive position in WC business in the US and how they did this with such ruthlessness and dishonesty. They ensured that they could write the business and that their own company which they had worked so hard to establish would not be harmed.
Programme 10: All American per WEB
214.	This programme provided XL protection for the PA and occupational accident account written for All American/Trustmark and US Life per WEB; it was placed in four layers for $1.975m xs $25,000 for 12 months at 1 October 1997 on an RAD basis. Mr Henton wrote lines on each of the layers, as is shown in Diagram 10. SD had reinsured WEB’s underwriting under Programme 6 (see paragraph 111). It was backdated by nearly 3 months.
215.	The layers had unlimited reinstatements; they were free except for the top layer where WEB had to pay for the first reinstatement. The gross premium income for all the layers was $1.36m and the net premium to SD for its line was $221,000.
(a)	The placing history 
216.	Mr Murray of Raydon (acting for Clarendon) had quoted on 10 November 1997. On 17 November 1997, Mr Brown told Mr Murray that SCB had other quotes, but there was no note of any on the file. Mr Brown’s evidence was that Mr Bird had spoken to Mr Minter. Mr Murray had then written a 50% line “to stand” on each layer; Mr Billyard had written the balance on each layer but not “to stand”.
217.	The programme was already fully subscribed when Mr Henton was approached.
218.	Mr Henton wrote a line on each layer to sign not less than 25%; this therefore reduced Mr Billyard’s line to 25% on each layer. Mr Brown did not accept that the purpose of Mr Henton’s writings was to reduce Mr Billyard’s exposure.
219.	A 20% line (to stand) was written under the Aviary lineslip on the second and fourth layers after 5 January 1997, reducing Mr Billyard’s line to 5% on those layers. WEB also obtained a fifth layer for $3m xs $2m from CIGNA.
(b)	The information provided
220.	The information provided was:
i)	The slip. It excluded LMX but not international XL.
ii)	A one page information sheet dated 20 November 1997. This gave the estimated net premium income as $4m; it stated that the account would include XL but not LMX; line guides were also given. 
iii)	The business plan provided for Programme 6 (referred to at paragraph 118.ii)) was also available; Mr Henton did not ask to see it and Mr Brown did not know if Mr Henton had looked at it.
iv)	There was no written loss information.
221.	Mr Henton’s evidence was that he was told that the risk was clean, which he understood to mean that so far as SCB knew, there were no known or reported losses. He was also reminded by Mr Brown that he had reinsured WEB under Programme 6. Mr Henton did not know how this programme related to Programme 6. Mr Brown’s evidence was that Programme 6 provided WEB’s catastrophe protection.
222.	Although this was a new account, Mr Henton’s evidence was that he had no idea about the persons or accounts that WEB were going to be insuring; he received the normal information for this market; he would not have expected to see a business plan which contained information about the sort of business that would be attractive to WEB and the sort of rates that WEB would write, as that was WEB’s business and that sort of information was not provided on this type of XL business. He would not have expected to be told the difference between the published rates for WC in the States in which WEB wrote, and what WEB intended to charge.
223.	No information was provided on what had been written since WEB had begun underwriting in June 1997 (see paragraph 784). Mr Brown said that SCB would not have produced up to date information; they had placed the business on the information that they had and did not go back to have it updated.
(c)	The basis of acceptance
224.	Mr Henton’s evidence was that he followed the leader, which was Clarendon per Raydon. He relied on WEB’s statements that said that they were going after profitable business; he was also looking at the net basis of the programme. 
225.	Mr Jackson’s evidence was that there was not enough information to form any view about the programme; that would have been obvious to anyone. As Mr Hines put it, one would expect to get horrendous losses at low levels. Mr Greig considered that there was adequate information for a start up, but categorised this also as a “punt”. He considered that loss information for the period up to Christmas Eve 1997 was likely to have been of very limited value. Sir Alan Traill agreed with the views of Mr Jackson. I prefer the views of Sir Alan and Mr Jackson to those of Mr Greig’s as it was obvious that there was virtually no information about the account.
226.	The protection was given at a premium of 34% of WEB’s applicable net premium income; this covered WEB’s lines. Mr Henton’s evidence was that this was the market rate. It was Mr Jackson’s evidence that the premium was heavily loaded against SD.
(d)	SCB’s position on the basis of acceptance
227.	Mr Brown’s evidence was that the underlying business was marginal; the retention of WEB was larger than others. He did not agree that it was obviously loss making to SD; this was a startup and one could not say.
(e)	The losses
228.	The losses to the programme as at 7 March 2002 were $1.2m, on a net premium to SD of $583,000; further losses advised by December 2002 have taken the incurred loss position to $5.7m.
(f)	Conclusion
229.	I am sure that the purpose of getting Mr Henton to write the programme was to reduce Mr Billyard’s lines; they were halved on the first and third layers, and reduced to a mere 5% on the second and fourth layers. I reject Mr Brown’s evidence to the contrary as untruthful.
230.	I am sure that EIU and in particular Mr Henton acted dishonestly in accepting this programme: 
i)	This was one of the risks that Mr Henton accepted for the reasons set out at paragraph 1246 of Part I.
ii)	Mr Henton made no attempt to obtain proper information. Although the account was new as at either 1 July 1997 or at 1 October 1997, there must have been information about what had been written since those dates and about any losses that had occurred. If he had been acting honestly, he would have asked for that information so that he could have made a proper assessment of the business being written, particularly bearing in mind that one of the principals of WEB was Mr Ekwall who had written the disastrously loss making account at Phoenix. I reject as untruthful, his evidence that he had relied on the statement in the business plan he had seen in October 1997 to the effect that WEB were going after profitable business. This was obviously gross loss making business.
iii)	He provided cover on an RAD basis whereas the outwards reinsurance he was obtaining was on an LOD basis for 1997 and 1998; for the reasons given at paragraph 1246.xii) of Part I, he knew that it was wrong to expose SD to the mismatch in terms for the reasons set out.
iv)	Mr Whitcombe acquiesced in what was done without any real enquiry into this programme.
231.	Mr Brown knew that Mr Henton was acting in dishonest breach of duty and dishonestly assisted him in this:
i)	This programme was put before Mr Henton in the circumstances set out at paragraphs 1246 and 1247 of Part I. This programme was included in those that Mr Henton was required to write in order to obtain the outwards reinsurance, because Mr Billyard wanted his lines reduced.
ii)	Mr Brown made no attempt to obtain information in respect of the business which had been written since 1 July or 1 October 1997 as he knew that Mr Henton would write the business as Mr Henton had no alternative; there was therefore no need to do what any honest broker would have done, by having available the information about what had happened since 1 July or 1 October 1997.
iii)	As set out at paragraph 1246.xiii) of Part I, Mr Brown fully appreciated that no honest agent would expose his principal to the obvious risks in the then market arising from the mismatch between  granting cover on an RAD basis but only obtaining reinsurance on an LOD basis.
Programme 11: CIGNA in respect of the Aviary lineslip 
232.	This programme provided XL reinsurance on an RAD basis from 1 October 1997 for occupational accident business written under the Aviary lineslip (which was granted to Mr Bird by CIGNA). The programme was in six layers up to $5m with further layers above that. Mr Henton wrote four layers; he wrote a 100% line (to sign 50%) on the bottom layer $90,000 xs $10,000; the other layers on which he participated were $250,000 xs $250,000 (the third layer for 33.33%), $1m xs $1m (the fifth layer for 33.33%) and $3m xs $2m (the sixth layer for 25%). The programme is summarised on the left hand side of Diagram 11. It was backdated by three months.
233.	As appears from the right hand side of Diagram 11, Mr Henton also wrote a reinsurance of business that was written under the lineslip on an aggregate basis; this programme (Programme 23) was written on 30 January 1998 (see paragraph 694). Mr Henton’s evidence was that though Programme 23 may have been planned at the time that Programme 11 was written, it was not placed then. Programme 23 was not as significant as it was only for a premium income of  $1.5m-$2m.
(a)	The Aviary lineslip
234.	The circumstances in which Mr Bird was granted an authority under the lineslip are as set out at paragraphs 1039 and following of Part I.
(b)	The promise to reduce Mr Billyard’s line
235.	The six layers of the programme were led by Mr Billyard who had quoted in August 1997 and had written 100% on 8 October 1997, endorsing the slips “to sign no less than 50%”. A fax sent by Mr Billyard to Mr Brown on 21 October 1997 stated:
“The above has been written 100% subject no less than 50% signing. Please advise signed lines as soon as possible.”
Mr Bird’s evidence was that a cover note had not been sent to CIGNA so that the programme could be offered to EIU.
236.	A memorandum to Mr Brown from Mr Mortley dated 10 December 1997 (found as a result of a search of electronic records and made available on 27 July 2002 – referred to at paragraph 1554.i) of Part I) noted that Mr Billyard had written the layers 100% subject to being signed down to no less than 50%, and that Mr Butler was still marketing them. Mr Butler was not recalled to give evidence about this document but it is clear from it that Mr Billyard had been promised that his line would be signed down to 50%.
237.	It is also clear that a cover note had not been sent to CIGNA as the promise to Mr Billyard had not been honoured. The effect therefore of Mr Henton’s subscription on Christmas Eve 1997 was to honour that promise and to reduce Mr Billyard’s line.
238.	On 30 December 1997, acting under its agency agreement, WEB agreed to write lines on the second to sixth layers; Trustmark was the policy-issuing company. WEB had quoted for much higher layers in November 1997 and had been invited to write lines on the six layers on 2 December 1997. WEB tried to cancel for non-payment of premium in August 1998 but that was rejected and their participation remained. They were unhappy that nine of the underlying risks that were ceded under the treaty had been written with lines that were larger than 50%. WEB had information about the underlying risks.
(c)	The written information provided to Mr Henton 
239.	The information provided was:
i)	The slip. This excluded retrocessional XL reinsurance of Lloyd’s syndicates and London market companies, but not LMX or international XL retro. Mr Brown’s evidence was that this was done at the request of CIGNA as there were a number of original risks that went into Lloyd’s which CIGNA could not write directly and Lloyd’s acted as a front for them; CIGNA had their own syndicate at Lloyd’s which had the necessary licences. In order to deal with these arrangements, the exclusion had to be drafted in this way as such reinsurance of Lloyd’s was technically LMX.
ii)	A one page information sheet dated 3 October 1997. This gave the estimated written premium income for 1997/8 as $50m with $10m to be accounted for in that year. It also showed the line size and the account distribution: 80% QS, 10% XL, 5% carveout XL, 3% international XL and 2% other. The evidence of Mr Bird and Mr Brown was that 95% was WC carveout  – that is, all the QS, XL and carveout XL. Mr Brown’s evidence was that he would have told EIU that the programme was designed to cover WCA Section A business; Mr Henton said that he was told that the business was occupational accident. It was also his opinion that the QS would be mostly that of direct writers.
240.	No other written information was provided. Mr Henton knew that Mr Billyard was the leader and that it had been fully placed but not closed at the time.
(d)	No information about losses or the underlying business
241.	No loss figures were shown. Mr Henton’s evidence was that Mr Brown told him that the account was clean.
242.	It was Mr Henton’s evidence that the account had been described by Mr Brown as “Birdy’s account”, but Mr Henton took the view that it was a new account to CIGNA as they might not renew the entirety of the account that was previously written under the Big Ben lineslip. It was broked to Mr Henton as a new account, though he accepted that Mr Bird would have a huge influence as it would have been Mr Bird who recommended business to CIGNA. It was not to be spiral business. Mr Henton’s evidence was also that he did not know of Mr Bird’s experience at Lincoln National and that he did not know about what had happened at Syndicate 103. 
243.	It was Mr Bird’s evidence that no loss figures were provided as it was a new account – “a totally different programme”. His explanation as to why it was a totally different programme has been set out at paragraph 1041 of Part I. In summary, the account for CIGNA was to be purely WC carveout or WC related business, whereas the business written under the Big Ben facility by Lincoln National had other classes. Mr Bird maintained that CIGNA wrote the book for a gross profit. 
244.	Mr Brown’s evidence was to the same effect; the business to be written by CIGNA was “a start-up operation”. It was difficult to give more information in the oral broke. Although SCB had placed some business with CIGNA, information about it would not tell Mr Henton much about the account that was to be written. No loss figures for Lincoln National were provided as they did not know if Mr Minter and Ms Stoltz would have followed the same policy as Lincoln National. 
(e)	The basis of acceptance
245.	Mr Henton’s evidence was that the information provided to him was standard information and that he could accept the programme without anymore information:
i)	The information sheet told him about the account distribution and that 80% was QS. As he viewed it as being mostly direct business, he was therefore as close as he could get to writing the direct business itself. 
ii)	From such business he would get quite a good share of the spread of risks and of the original premium; more premium would be flowing through on a QS account. 
iii)	No information was given as to the underlying accounts of which Mr Bird was proposing to accept (or put forward for acceptance) QS treaties; it was not usual for such information to be required. 
iv)	As the contract had incepted on 1 October 1997, some business would have been written but he did not think that Mr Bird had written much; he would not, in any event, ask as this was not information that he needed to know. 
v)	In this type of business (unlike conventional reinsurance), he did not need to know if Mr Bird had retained anything; it was not a question he asked.
246.	As set out above, the reinsurance was provided on an RAD basis; Mr Brown’s evidence was that in general, the inwards reinsurances on accounts like CIGNA’s (a direct writer) were on an RAD basis; in LMX business the lines were always written LOD and that is why SD’s outwards reinsurance was written on an LOD basis.
247.	Mr Henton said that he accepted the programme on a net basis and that he looked on it as a reasonable prospect on that basis:
i)	On a gross basis (before paying out the reinsurance premium), it was his evidence that SD would have enough to pay 200 losses within their retention. 
ii)	Mr Henton accepted that the effect of deductions on the business could be to make business that was profitable to the primary insurer, loss making to the reinsurer or retrocessionaire. 
iii)	He accepted that the programme would be loss making on a gross basis, with a 400% or 500% loss ratio on the bottom layers. 
248.	Mr Henton thought that the rates were fair as they were the rates being charged in the market at the time. The effect of the programme was that on the first $5m, Mr Bird was obtaining reinsurance for $4.99m xs $10,000 for 18.43% of net premium income; above $5m, he would need to have the accumulations protected but the cost of that was very low. On the basis of this programme, CIGNA could pay 4,000 losses with their $10,000 retention. 
249.	Mr Bird said that he made no assumptions as to the way his reinsurance would be written; he did not assume that those reinsuring him would be doing so on a net basis.
250.	It was Mr Jackson’s evidence that there was insufficient information to make any judgment on rates or on profitability, save that it was stacked against reinsurers. Mr Hines’ evidence that he was not surprised at the level of losses actually sustained as he anticipated that that the losses at the lower levels would be large.
251.	It was SD’s submission that writing this programme on such a paucity of information was a total dereliction of Mr Henton’s duty; it was “a piece of calculated and callous dishonesty”.
252.	This programme was one of those examined by Mr Coppinger during the review at EIU in July 1998; examination of the papers led him to conclude that it looked like a standard XL programme which was mostly QS; his view changed when Mr Henton told him that Mr Bird was an employee of SCB.
(f)	SCB’s position on the basis of acceptance
253.	In his evidence Mr Brown would not accept that the business was going to make a gross loss on a large scale; his evidence on this was not easy to follow as he was evading answering the questions put to him.
 (g)	The premium to be paid
254.	It was agreed by the underwriting experts for SD and SCB that the net premium figure to SD was $2m, based on the estimated applicable premium income of $50m. This figure was based on SD’s written and signed line on the first layer, on the written lines on the third and fifth layers (which then signed down), and on a line of 50% on the sixth layer (there was an error here, as the written line was actually 33.33%). Taking the written lines, the figure for the net premium to SD should have been $1.9m. On the basis of the signed lines, the estimated total net premium to SD should therefore have been $1.64m. 
255.	The M&D premiums were only 16% of the gross premium income on the programme as opposed to the usual 80-90%. I have considered the evidence on this at paragraph 1210.iii) of Part I and have set out, at paragraph 1211 of Part I, my conclusion on the information given on the Christmas Eve bordereau where the lines were given as the written lines.
(h)	The role of Mr Bird
256.	As set out at paragraph 1045 of Part I,  it was Mr Bird’s evidence that he did not make the underwriting decisions; the risks written under the Aviary lineslip were all considered by Mr Minter; SD did not accept that evidence and contended that Mr Bird had in effect done the underwriting.
257.	On 6 January 2003, after the conclusion of the oral final submissions, Ince & Co wrote on behalf of CIGNA to the solicitors to the parties and asked to ensure that a copy of that letter be brought to my attention. The letter stated that CIGNA had not been asked by the parties about this and if they had been, SD would have been advised that they were mistaken. Ince & Co asserted, on the basis of their own discussions with the underwriter at CIGNA (without waiving any privilege in relation to those discussions) and on documents that they had seen, that the underwriting decisions were made by CIGNA and that the book was not Lincoln National’s book; it was in fact CIGNA’s selection of what it was offered, within the far narrower parameters set by its lineslip than those in Lincoln National’s Big Ben lineslip.
258.	I enquired of the parties as to how this letter should be treated and whether it constituted evidence on which I could rely. It was submitted on behalf of SCB that the letter should be treated as independent corroboration of the evidence of Mr Bird that the underwriting was carried out by Mr Minter and not by Mr Bird. SD submitted that no weight should be attached to its contents:
i)	The letter was mere assertion. It did not address obvious questions such as the respective roles of Mr Bird and the CIGNA underwriter, and the identity of the CIGNA underwriter referred to by Ince & Co (not identified in Ince’s letter).
ii)	No documents accompanied the letter and privilege was not waived.
iii)	Mr Minter had not given evidence and he had not been called by SCB to give evidence.
iv)	CIGNA had been following the trial and had received the transcripts. Had they written during the course of the trial or after the cross-examination of Mr Bird (which occurred in July 2002), it would have then been possible for the parties to have applied to call Mr Minter to give evidence and for him to be cross-examined.
259.	I consider the submissions made on behalf of SD to be well-founded; as I have made clear in this judgment, I have not made any findings of fact in relation to disputes between other parties. I have also endeavoured to make no findings where I have not heard from the relevant witnesses, unless there were reasons for me to do so. For example, at paragraphs 1740 and following of Part I, I have dealt extensively with the circumstances in which CIGNA agreed to front on Programme 26 at the request of SCB. As I stated at paragraph 1740.iv) of Part I, I did not make any findings as to what happened between Mr Butler and Mr Minter as it was not necessary for me to do so. Obviously if Mr Minter had given evidence, I would have done so.
260.	It seems to me that I cannot possibly rely on Mr Minter’s evidence as corroborating Mr Bird’s evidence in relation to the underwriting or the content of the book. The assertions made by Ince & Co in the circumstances set out are simply assertions and are entitled to no weight. Quite apart from that decisive consideration, if Mr Minter had given evidence I would have been able to make findings in relation to what had occurred between Mr Minter and Mr Butler in circumstances where SCB would have been clearly asserting that Mr Minter was not a truthful witness. I do not think it would be fair in the circumstances to receive Ince & Co’s assertions of what he might say on another topic unless proper evidence was made available.
261.	On the evidence before me, the account was clearly regarded as an account over which Mr Bird had the decisive influence; it is not necessary for me to decide whether Mr Minter technically approved what was done so it could be said to be underwritten by CIGNA. Furthermore, the question as to whether the book intended to be written was essentially the book written under the Big Ben facility with the change described was a question that was necessary to decide and I do so without regard to what was stated by Ince & Co in their letter of 6 January 2003. I have decided that issue, as set out at paragraph 265 below, on the evidence properly adduced before me.
(i)	The amendment in August/September 1998
262.	On 5 August 1998, Ms Barnes asked Mr Billyard if he would agree to change the exclusion in respect of retrocessional business to enable CIGNA to write a small amount of facultative reinsurance, or a reinsurance of a specific section of an account for a Lloyd’s syndicate or London market company; CIGNA still wanted to exclude whole account retro XL. An endorsement was provided in those terms. Mr Billyard had been prepared to agree to the proposed endorsement subject to various points, including that any claims from those reinsurances were covered by his own outwards reinsurance. On 25 September 1998, Mr Billyard sent the agreed endorsement to SCB on the understanding that it was for specific retro XL and that the programme was allocated to his 1998 London reinsurance programme, plus a stop loss protecting his retained line. Mr Brown’s evidence was that this was a reference to Programme 33, but that it could not be placed under that programme as the CIGNA reinsurance had a 1 October 1997 attachment date and not a 1 January 1998 attachment date. Mr Brown did not know if Mr Riding had corrected Mr Billyard. Mr Brown did not know what the stop loss was to which Mr Billyard had referred.
 (j)	The losses
263.	The losses sustained totalled $29.898m at the end of the first quarter of 2001, (as has been set out at paragraph 1048 of Part I) on a gross premium to SD of $912,500 (net premium to SD of $525,000), with an underlying premium of $18m. This was a loss ratio of 5,700% on the basis of the net premium to SD. By the second quarter 2002, the losses had further deteriorated to over $35m.
264.	Mr Bird’s evidence was that the losses were higher than he would have expected, had he done the exercise at the time. There was no information available on the losses on the Big Ben lineslip as there had been so many avoidances – see paragraph 52. Mr Brown could not explain the losses and CIGNA had given no explanation either. A loss bordereau for the bottom layer showed that there were a very large number of small losses; the number of losses reported to SD was about 2,000. The bordereau did not set out the contracts under which the loss had come. It was not therefore possible, on the evidence before the Court, to determine what had caused the massive loss.
 (k)	Conclusion
265.	I am sure that: 
i)	The account intended to be written under the Aviary lineslip was, in essence, intended to be the account which had been written under the Big Ben facility, with certain categories of risk excluded and some of the renewals declined. The projected income under the Aviary lineslip was $50m which was of the same order as had been projected under the Big Ben facility. It is inconceivable that an account of this size could have been projected unless there was a clear assumption as to what was to be written; the only suggestion was the account written under the Big Ben facility. Furthermore, as set out at paragraph 1046 of Part I, most of the QS business was SCB-produced; that was also Mr Brown’s evidence, though the lineslip was open to all brokers. Mr Bird was, as I have set out, a man who had deceived the DTI and his Names and who had given dishonest evidence on a number of matters to the Court; I do not accept his evidence on any matter unless there was independent evidence to support it. In this case there was none and the clear weight of the evidence pointed to the contrary. The account was, as succinctly described to Mr Henton, “Birdy’s account” and as set out at paragraph 697, was referred to by Mr Murray of Raydon as “Alan Bird’s account (Cigna)” (see also the contemporary remark in Mr Billyard’s hand, referred to at paragraph 698).
ii)	There was no reason why “as if” figures could not have been provided. 
iii)	Mr Bird’s evidence (to which I have referred at paragraph 1044 of Part I) that the account written under the Aviary lineslip was being written for a gross profit and that he did not assume that those providing the reinsurance would be writing on a net basis was untruthful. It was obvious on the evidence, and as a very experienced underwriter in this business he knew, that the business to be written would make a gross loss and that there would be a significant gross loss to the reinsurers; the business was only being written under the Aviary lineslip and under the reinsurance programme on a net basis. I am also sure that Mr Brown knew that the business would be gross loss making to a significant degree and his evidence to the contrary was untruthful.
266.	I am sure that EIU and in particular Mr Henton acted dishonestly in accepting this programme: 
i)	This was one of the risks that Mr Henton accepted for the reasons set out at paragraph 1246 of Part I.
ii)	He was writing a 50% line on the bottom layer of a WC account with an estimated premium income of $50m; it was inevitable that the losses would be huge. Despite this, he made no attempt to obtain proper information; as he was told it was “Birdy’s account”, he knew perfectly well that the account that was going to be offered to CIGNA was the account that had been written under the Big Ben lineslip without the LMX or international XL business. He should have asked for proper loss figures and proper information as to the nature of the underlying business. If he had been acting honestly he would have asked for that information so that he could have made a proper assessment of the business that was intended to be written. There was no evidence as to loss frequency but it was obvious that there would be very substantial loss frequency on the lowest layer, on which he wrote a line of 50%; he had no way of knowing what that was and thus whether it might be profitable or loss making on a net basis.
iii)	The premium charged to CIGNA could not be justified; given the state of the market, there was no honest basis for writing the programme at such a low premium that was loaded so heavily in favour of CIGNA. The reinsurance that he obtained at the same time from Mr Brown had M&Ds that were going to be in the order of 80-90% of the estimated premium income as was usual in the market, whereas he was prepared to reinsure Mr Bird on terms where the M&D were only 16% of the estimated premium income.
iv)	He provided cover on an RAD basis whereas the outwards reinsurance he was obtaining was on an LOD basis for 1997 and 1998; for the reasons given at paragraph 1246.xii) of Part I, he knew that it was wrong to expose SD to the mismatch in terms for the reasons set out.
v)	Mr Whitcombe acquiesced in what was done without any real enquiry into this programme.
267.	Mr Brown knew that Mr Henton was acting in dishonest breach of duty and dishonestly assisted him in this:
i)	This programme was put before Mr Henton in the circumstances set out at paragraphs 1246 and 1247 of Part I. This programme was included in those that Mr Henton was required to write in order to obtain the outwards reinsurance, because Mr Billyard wanted his lines reduced. It would benefit SCB as much of the business to be placed under the QS with CIGNA was SCB business which was obviously grossly loss making in CIGNA’s hands and therefore could only be written by them on the back of reinsurance. 
ii)	Mr Brown knew that the account to be written was in essence the account which had been written under the Big Ben Facility with certain categories removed (as set out at paragraph 265.i)). He made no attempt to do what any honest broker would have done, by having available the proper loss statistics on an “as if basis”. He did not bother as he knew that Mr Henton would write the business as Mr Henton had no alternative but to write the programme.
iii)	As set out at paragraph 1246.xiii) of Part I, Mr Brown fully appreciated that no honest agent would expose his principal to the obvious risks in the then market arising from the mismatch between granting cover on an RAD basis but only obtaining reinsurance on an LOD basis.
Programme 12:  John Hancock (per JEH Re) “direct” account
268.	This reinsurance programme protected Mr Billyard’s direct account written by him through JEH Re on behalf of John Hancock for 12 months at 1 October 1997 on an RAD basis; it excluded London market retrocessional business howsoever assumed (except on the top layer, where LMX business howsoever assumed was excluded), but not international retrocessional business:
i)	The lowest layer was $15,000 xs $10,000. 
ii)	There were then four layers up to $5m xs $25,000; each of these had unlimited reinstatements; they were free on the first three layers and six reinstatements were free on the fourth layer, but the rest were at 100% additional premium.
iii)	There were then three further layers on top, providing cover up to $70m.
269.	EIU subscribed to each of the four layers covering $4.975m xs $25,000. Mr Henton participated on each layer for lines from 15% to 30%, as summarised in Diagram 12. The co-reinsurers on the layer $75,000 xs $25,000 were Clarendon per Raydon (25%), Trustmark per WEB (10%), American Phoenix per Cackett (25%) and Sun Life per Cackett (25%). Clarendon per Raydon and Trustmark per WEB participated on the next three layers as well; on the top layer, New Hampshire per AIG (15%) and Chiyoda (20%) also participated.
270.	Before referring to the placing history and information, it is necessary to explain the relationship between this programme and two other programmes that protected Mr Billyard’s account.
(a)	The relationship to Programme 1
271.	As set out at paragraph 3 above and at paragraph 409 of Part I, Mr Billyard had two main reinsurance programmes – one for his direct account and one for his LMX account. His LMX account had been reinsured under Programme 1. As set out at paragraph 10.ii), it was Mr Henton’s evidence that he had been told by Mr Butler when offered Programme 1, that Mr Billyard would be concentrating on his direct account for 1997. As Programme 12 covered Mr Billyard’s direct account, Mr Henton was asked to explain the relationship between the two accounts. 
272.	It was Mr Henton’s evidence that he understood that Programme 1 protected underwriters in London who reinsured direct accounts (such reinsurers being called “direct writers” by some who wrote this business); the bulk of the account under Programme 1 would therefore be those who wrote in the London market, such as Lloyd’s syndicates and any company that was domiciled in London (including the London office of CIGNA). It was his understanding that Programme 12 covered the direct business that Mr Billyard wrote under QS, aggregate and catastrophe XL reinsurance – international XL (that is, companies not domiciled in London such as Lincoln National). Mr Henton accepted that Mr Billyard’s participation in some of the programmes which EIU had written might be ceded by Mr Billyard under Programme 12. Those that could be ceded to Programme 12 are identified in Diagram 12 as are the lines of the co-reinsurers under Programme 12 which could be ceded to other programmes which were written by Mr Henton. SD’s outwards reinsurance that was written by Mr Billyard could not be ceded under Programme 12 because of the exclusion in Programme 12 of London market retrocessional business howsoever assumed. 
273.	Mr Brown’s evidence was that Programme 12 was a renewal of John Hancock’s whole account reinsurance; it covered business excluding London retrocessional business, as distinct from the non-proportional account which was covered under Programme 1. 
274.	It seems clear that Programme 12 was intended to take international XL. On 10 February 1998, WEB sought an assurance that there was no retro business written into Mr Billyard’s direct account and wanted a profile of the account. On 11 February 1998, Mr Billyard said in answer to the query on retro business:
“I can confirm we do not knowingly write Excess of Loss on Excess of Loss for London based insurance/ reinsurance entities. It is not our intention now or in the future to write this class of business.”
In answer to the request for a profile of the account, he stated:
“Regret this is not possible to provide in any meaningful detail. The type of account we write does not lend itself to analysis of this nature…”
275.	In response, WEB said that their concern was not necessarily related to London retro business and that they had an assurance that this direct account would not contain their own retrocession placements which were supported by Mr Billyard. Mr Brown did not know if such an assurance had been given. WEB wanted confirmation of the position in writing. However, it is clear from a note dated 27 March 1998 that was found through the search of electronic records and disclosed on 27 July 2002, that this issue continued to trouble SCB; the note stated that there was a need to give to WEB the confirmation which they sought and that Mr Billyard needed specific reinsurance. There was also another note dated 31 July 1998 that stated:
“Letter needed from Reg stating the WEB non-proportional layers he writes do not go back to WEB, but are reinsured to another facility – agreed with Reg 30/7.” 
(b)	The specific occupational accident protection
276.	It was Mr Henton’s evidence that he was told by Mr Brown that a specific reinsurance that was placed by WFD protected the bottom and at least part of the second layer of Programme 12. Mr Henton had been asked by WFD to subscribe to this specific reinsurance but had declined to do so; he did not keep a copy of the slip that had been shown to him by WFD. Mr Henton’s evidence was that he was told that Mr Billyard had bought this specific reinsurance for 1997 and was going to renew it for 1998, but that Mr Billyard did not obtain any warranty that such reinsurance would be maintained.
277.	Mr Brown’s evidence (given in connection with this programme) was that he had been told by Mr Billyard that he (Mr Billyard) was buying or had bought a specific occupational accident reinsurance via WFD with Gan and perhaps others as well. In fact, SCB had suggested such a programme to Mr Billyard in February 1997 and Ms Barnes had given him advice on it; as set out at paragraph 846 of Part I and in Diagram A, specific occupational accident protection had been obtained by Mr Billyard. This had been written by Gan, American Reliable and CNA per IGI, and American Reliable’s exposure had in turn been ceded under Programme 3. Unknown therefore to Mr Henton, he was already in fact reinsuring a significant part of Mr Billyard’s occupational accident account.
 (c)	The placing history
278.	Mr Brown’s evidence was that the rates on Programme 12 had been set by Raydon on behalf Clarendon and that the layers on which EIU participated had been fully placed before Mr Henton had written his lines; they were placed in October/November1997; Mr Cackett wrote his lines on the lowest layer on 31 October 1997, and WEB indicated their lines on 3 November 1997 and confirmed them on 26 November 1997. Mr Brown’s evidence was that the partcipations were available to be signed down. On 10 November 1997,  Mr Murray was asked to increase his line on the lowest layer from 25% to 50%. The effect of Mr Henton’s subscription was that WEB’s lines were signed down.
(d)	The information provided 
279.	The information provided was:
i)	The slip. This referred to the information sheet and the claims statistics.
ii)	The information sheet dated 20 August 1997. This gave the estimated net premium income on the underlying risks as $40m; Mr Brown told the Court that this was not large in the context of a direct account. The sheet stated that only $15m of the estimated net premium income would be accounted for during the 12 month period of the programme. A breakdown of the account was given – 54% of the business was proportional and QS treaty business, 20% was catastrophe XL, 17% was occupational accident or WCA alternative workers’ compensation and 9% were aggregate covers. Mr Brown’s evidence was that this was mainly an occupational accident account and Mr Henton’s evidence was that he was told this by Mr Brown. 
iii)	Claims statistics dated 1 September 1997. These were provided for each layer as at 30 June 1997 – the end of the second quarter of 1997. Mr Henton’s evidence was that he did not get or ask for later figures as the claims statistics were the figures on which the business had been placed with other reinsurers and he was happy with what he had been provided. Mr Brown’s evidence was that Mr Henton could have asked for updated statistics, but that it was not the practice to get figures other than those that had been presented to the leading underwriter. On the layer $75,000 xs $25,000, the losses in 1995/6 were $1.68m on a premium of $348,000. The figures showed that only 27.6% of the 1995 premium had come in after two years and that only 7.4% of the 1996 premium had come in after one year; this was slow, but according to Mr Henton, it told one nothing about the speed at which claims would come in. Mr Brown accepted that the figures for 1996 were too raw to form a view about what the loss position would be. The figures for the next layer were comparable. It was clear from an examination of the statistics that it was difficult to understand the premium position and thus to work out the loss ratios on previous years. Mr Henton did not seek any explanation of the position on premium.
iv)	Mr Henton was told by Mr Brown that the programme was clean, which he understood to mean that there were no losses known to SCB.
 (e)	The basis of acceptance
280.	The rate on the lowest layer written by Mr Henton ($75,000 xs $25,000) had increased from 3% in 1995/6 to 9.4% in 1997/8. The rates on the four layers on which Mr Henton participated was, in total, 22.15% and the rate on the lowest layer ($15,000 xs $10,000) was 5% (as appears from an SCB document provided in connection with Programme 28); the total premium for cover up to $5m was therefore obtained for 27.15% of the applicable net premium income, though the contract had the benefit of the occupational accident specifics.
281.	Mr Henton’s evidence was that he did not view that as obviously loss making because of the increase in the rate at which it was adjustable.
282.	The estimated gross premium income on the four layers on which SD was a participant was $8.86m and the estimated net premium to SD was $1.3m. The deposit premiums were low, but the minimum premiums were much higher; on the lowest layer written by Mr Henton, the deposit premium was $1.41m but the minimum premium was $3.38m (the deposit premium to SD was $350,000 whilst the minimum premium to SD was $940,000).
283.	It was Mr Jackson’s evidence that there was not enough information to form a judgment, but such as there was indicated losses on a substantial scale on the lower layers. It was Mr Hines’ evidence that he expected that there would be more claims than premium over the whole programme and that it would be a loser on a gross basis.
284.	There was no information from which the loss frequency could have been calculated.
(f)	The position of SCB on the basis of acceptance
285.	SCB accepted, in their letter of 4 December 2001, that the lower layers of the programme were writeable only on a net basis. Mr Brown accepted that the programme was only writeable on a net basis at the lower layers, but not if looked at as a whole. His evidence was that he could not remember if he had offered Mr Henton the higher layers, though he said that Mr Henton could have written any layer he wanted. 
(g)	The losses
286.	The losses as at the third quarter of 2001 were $8.26m. Further losses that were advised at the second quarter of 2002 have taken the incurred loss position to $9.31m on a gross premium to SD of $750,000 or a net of $431,000 – a loss ratio on the net premium in the order of 2,000%; it is clear that a far greater proportion of the loss on Mr Billyard’s direct account was taken by the specific occupational accident reinsurance and passed to SD under Programme 3 – see paragraph 89 for the losses.
(h)	Conclusion
287.	As Mr Brown accepted, the account written by Mr Billyard for the 12 months at 1 October 1997 was largely SCB-produced.
288.	I am sure that EIU and in particular Mr Henton acted dishonestly in accepting this programme: 
i)	This was one of the risks that Mr Henton accepted for the reasons set out at paragraph 1246 of Part I.
ii)	He made no attempt to obtain proper or up to date information; it was an obviously loss making programme on a gross basis; I reject Mr Henton’s evidence to the contrary. He did not have information on loss frequency to write it net. He did not understand how the programme related to the specific occupational accident protection and made no attempt to understand that. If he had been acting honestly, he would have asked for that information so that he could have made a proper assessment of the losses to be anticipated and of the loss frequency.
iii)	The premium declared under the Christmas Eve bordereau was not the minimum premium but only the far lower deposit premium; I have set out my conclusion in respect of this at paragraph 1211.i) of Part I.
iv)	He provided cover on an RAD basis whereas the outwards reinsurance he was obtaining was on an LOD basis for 1997 and 1998; for the reasons given at paragraph 1246.xii) of Part I, he knew that it was wrong to expose SD to the mismatch in terms for the reasons set out.
v)	Mr Whitcombe acquiesced in what was done without any real enquiry into this programme.
289.	Mr Brown knew that Mr Henton was acting in dishonest breach of duty and dishonestly assisted him in this:
i)	This programme was put before Mr Henton in the circumstances set out at paragraphs 1246 and 1247 of Part I. It is not clear on the evidence why this  programme was included.
ii)	Mr Brown made no attempt to obtain proper up to date loss information in respect of the business as he knew that Mr Henton would write the business as Mr Henton had no alternative; there was therefore no need to do what any honest broker would have done, by having proper up to date loss statistics available. Mr Brown did not supply any meaningful information about the specific occupational accident reinsurance.
iii)	As set out at paragraph 1246.xiii) of Part I, Mr Brown fully appreciated that no honest agent would expose his principal to the obvious risks in the then market arising from the mismatch between granting cover on an RAD basis but only obtaining reinsurance on a LOD basis.
Programme 13: Gerber (B&S)
290.	B&S (who had acted as an MGA for Realm National in Programme 9) also wrote alternative workmen’s compensation business for Gerber Life Insurance Company (Gerber) (for whom they were also an MGA). It was a programme on which the premium income was $18.7m and the applicable net premium income (after a ceding commission of 30% had been deducted) was $13.1m. The programme is summarised in Diagram 13.
291.	Mr Henton accepted a 100% line on a reinsurance for 12 months at 1 November 1997 and, in respect of some of the classes of business protected, for a further 12 months at 31 October 1998. This programme protected Gerber’s account in respect of the difference in conditions between their QS and their specific XL protections. Mr Brown did not know why this programme had not been placed prior to Christmas Eve 1997.
(a)	Sleep easy cover
292.	The reinsurance was a “sleep easy” cover, picking up matters not otherwise reinsured, including occupational diseases, punitive damages and war risks; Mr Brown thought that the chance of a loss incurred by this programme was infinitesimal and that Gerber were being ultra-cautious. Mr Brown’s evidence was that he had told Gerber’s lawyers, Skadden Arps, that the programme was a waste of money.
293.	The gross M&D premium was $250,000. There were no claims to the programme.
294.	The retrocession of this cover had been written directly by SD in the previous year. No criticism could be made of Mr Henton’s decision to accept this programme and SD did not pursue the criticisms that they had made.
(b)	Brokerage of 50%
295.	However, the important issue on this programme was the brokerage which Mr Henton agreed to pay to SCB. It was 50% of the gross premium income or $125,000. 
296.	Mr Henton’s evidence was that SCB asked for 50% and he accepted that as it was a very good risk. As 50% was more than could be paid for under the EIU binder (as the maximum deduction was then 37.5% plus the commission to which HHI were entitled), the difference was funded by EIU and closed within EIU’s monthly accounts.
297.	Mr Brown strongly defended the request for 50% brokerage and SCB’s entitlement to it.
i)	His evidence was that SCB had done a lot of work on this contract with Skadden Arps in the previous year and had wanted to recoup their outlay. They had not been able to do that in the preceding year as they had only got 1.5% brokerage because they had been “nailed” back to that by Mr Richard Asprey.
ii)	The draft slip produced in connection with a retrocession of Homestead for this cover in 1997 showed a brokerage of 1.5%. Mr Brown’s evidence was that there was not a typical brokerage for difference in conditions (DIC) business; SCB wanted to get as much brokerage as was possible.
298.	The evidence of Mr Greig was that a broker would view the contract as an attractive proposition to an underwriter; in his view, it would not be surprising that an underwriter gave a broker 50% deductions to secure an order; “as a broker one would always seek to obtain as much brokerage on a slip as possible”. He added that he did not know why it was said that the level of brokerage was high for a sleep easy cover. Sir Alan Traill’s evidence was that the brokerage was excessive and that it was not a market level.
299.	The evidence of Mr Hines was that there were instances where high brokerages were paid and although such a brokerage might be “extravagant beyond belief” and unusual in isolation, one had to look at it across the whole book of business. 
(c)	Conclusion
300.	SD submitted that payment of brokerage of this size showed that Mr Henton would do SCB’s bidding. 
301.	Although I accept Mr Hines’ evidence that there might well be circumstances where a high brokerage was justified and that one should look at the book of business as a whole, it is difficult to conceive of any justification for Mr Henton agreeing to pay the 50% brokerage to SCB. If the book as a whole is looked at, SCB were earning a huge brokerage; on the Christmas Eve programmes, they were earning brokerage not only on the substantial inwards programmes placed but also on the outwards reinsurance as well. The only reason Mr Henton paid was because Mr Brown asked him to. As I have concluded, Mr Brown put Mr Henton in a position where he had to write all the Christmas Eve risks and when one was given that might make a profit, Mr Brown demanded half of the premium of that for SCB. He appreciated that no agent acting honestly in the interests of his principal would have agreed to pay this amount by way of commission. I prefer the evidence of Sir Alan Traill to that of Mr Greig’s; the brokerage was obviously excessive and the fact that Mr Greig was not able to accept that in response to the written question asked must cast some doubt on his general reliability as a witness in comparison to Sir Alan. 
302.	It was clear on the evidence that Mr Brown intended that SCB should retain the brokerage and not pay any to their client. Whether this was permissible in respect of an unusually high commission, in the light of authorities such as Great Western Insurance Co of New York v Cunliffe (1874) LR 9 Ch App 525, is not an issue that is necessary for me to determine.
Programme 14: Clarendon (per Raydon) – participation in the MELEX scheme
303.	This programme comprised four layers of XL reinsurance for 12 months at 1 December 1997 on an LOD basis, up to $1m xs $5,000 of the underlying excess in the policies issued by Clarendon under the MELEX scheme; Mr Henton accepted a line on each layer (three layers for 33.33% and 25% on the third layer). The programme is summarised in Diagram 14.
(a)	The MELEX scheme
304.	WFT Insurance Services Ltd. (WFT) (which had offices in London and in the US and in which Mr Cooke had a shareholding) developed a programme for maritime employers’ liability for oil well drilling, support and service companies. They produced the business and were given guidelines under which they underwrote policies, within limited parameters, on behalf of Clarendon and their associated companies. Mr Murray of Raydon acted for Clarendon and the evidence was that he supervised the underwriting closely. The limit in the scheme policies was $1m.
(b)	The placing with Mr Billyard 
305.	Mr Billyard had written a line of 100% on 12 November 1997 (the date of the Florida meeting with Mr Brown) on each of the four layers; in previous years it had been written at Lloyd’s and then by Lincoln National under the Big Ben lineslip. The effect of Mr Henton’s participation was to reduce Mr Billyard’s line.
306.	The only other participation, apart from SD and JEH Re, was on the third layer ($400,000 xs $100,000), where a line of 33.33% was written under the Aviary lineslip. It was accepted by Mr Henton that claims under the Aviary lineslip would come back (in part) to SD under Programme 11 and that claims under the participation of Mr Billyard would come back (in part) to SD under Programme 12. 
(c)	The profitability of the business in the hands of Clarendon
307.	Prior to the placement with Mr Henton, Mr Brown calculated the profit that Clarendon was likely to make on the basis of Mr Billyard’s participation in the programme.
308.	Mr Brown performed a number of calculations on or after 20 November 1997 to show how profitable this business would be for Clarendon. He sent a nine page fax to Mr Murray sometime after 20 November 1997, setting out his calculations of the profitability as Clarendon thought that the reinsurance programme was too expensive. A comparison between claims and premiums for 1993, 1994 and 1995 produced a pure burn rate of 55.65%; the cost of the reinsurance quoted by Mr Billyard was 58.5% and as the retention was only $5,000, he conservatively estimated the cost of paying for the retained loss at 12% of the premium. The profitability to Clarendon was therefore likely to be in the order of 30%, on top of which they would get their issuance fees of 6%-7.5%. This showed that Mr Brown could easily calculate the likely effect of any programme.
309.	SD contended that this showed, on a programme which was a first tier reinsurance (that is, a reinsurance of a direct insurer in the ordinary sense), that a profit could not be made because so much of the premium was stripped out by the reinsured and went in commissions and brokerage. It converted profitable or break-even business into substantially loss making business at first tier level; the other first tier reinsurance programme was Programme 17 (Clarendon Temps).
310.	Mr Brown’s evidence was that Clarendon were able to get reinsurance at such a good rate because that was a function of the market; that was what enabled them to make the profits they did on this business.
(d)	The information provided
311.	The information provided to Mr Henton was:
i)	The slip. This set out the estimated gross net premium income for the underlying programme at $6.25m. There was no information on the level of deductions charged by WFT – commissions and expenses, but it was Mr Brown’s evidence that they would be in the order of 30%.
ii)	An information sheet dated 20 November 1997 showed that the underlying programme had a fairly stable estimated premium income for previous years, within the range of $5.4m-$7.1m.
iii)	Loss statistics. For the lowest layer, they were on an “as if” basis as at the third quarter of 1997. Statistics for the lowest layer gave loss figures for 1993/4, 1994/5 and 1995/6, but as the layer had not been placed for the earlier years, no premium figures were given save for 1996/7; Mr Brown’s evidence was that this was because any premium figures for earlier years would just have been a guess. On the third layer (which had been placed in the previous years), there were losses of $5.6m on a premium of $3.2m. Details of the number of open claims on the previous years of account were given.  
312.	In addition, there was a bundle comprising 89 pages of detailed information provided by WFT. There was included in this bundle, an account bound register, loss statistics, loss runs, a loss summary, a description of the underwriting procedures and a specimen contract; the account bound register gave information such as the identity of the assured, premiums and excess points. The detailed information showed that the account had varied over the years as to the types of offshore employers insured. WFT commented:
“The excellent claims records for each year continue to reflect prior trends experienced, and point towards a secured underwriting profit.”
313.	Mr Henton’s evidence was that he was taken through this bundle by Mr Brown, who drew the applicable or important parts of it to his attention; Mr Brown’s evidence on this was similar to Mr Henton’s;  Mr Brown’s evidence was that Mr Henton flicked through the bundle. Mr Henton thought that the bundle was produced for Raydon, but he did not study it, as he was writing XL contracts on the basis of net underwriting. He could not recall what he had seen but he identified the parts which would have been material for the broker to show to him as the account bound register identifying the excess points for the assureds, what the policy covered and the loss runs; the rest was not relevant. He added that the description of the underwriting stated that the business was relatively short tail.
314.	Mr Henton said that he would have never asked for triangulations as they were not normally provided for in this business.
315.	SD suggested that the coverage provided was employers’ liability with only occupational disease being carved out; Mr Henton said it was similar to EEII for those in maritime or offshore work. He did not, upon looking at the policy, know what it covered, save to say that it was classified as PA.
(e)	The basis of acceptance
316.	Mr Henton’s evidence at first was that the programme might be profitable on a gross basis and produced calculations to show this; these were contrasted with an analysis carried out by Mr Jackson. It is not necessary to lengthen this judgment by setting out the respective analyses because if the premium was taken at the new rate of 58.5% (the deductions including EIU’s fee made before it reached SD) and compared to the claims, then the overall programme would have been loss making with a loss ratio of about 150%, leaving out of account a factor for inflation of claims of about 7% per annum. Thus the new rate adjusted to a net was insufficient to make a gross profit. Mr Hines agreed that it would be gross loss making.
317.	Mr Henton’s evidence was that he was writing on a net basis. 
318.	In his witness statement, Mr Henton stated that he could not recall precisely what he did, but that he expected that he would have carried out calculations to see what the results would have been in prior years, applying the proposed premium rates; looking at the figures at the time he prepared the statement, he said that the effect of the proposed rates of premium would have been to turn substantial losses in earlier years into either a gross profit or a small gross loss.  Mr Henton’s oral evidence was that he would have counted up the number of losses – 27 in 1993, 28 in 1994 and 16 in 1995; he would have gleaned this from the loss runs. Mr Hines’s evidence was that although considerable study would have been undertaken before embarking on net underwriting of WC business, it would be necessary to see how this contract fitted in to that understanding; that was not the same as starting from scratch. An underwriter looking at this would need to see if the programme was properly administered in order to see whether it could be rated in the light of the loss experience, and if so, at what rate.
319.	The total rate offered on all four layers was 58.5% of the gross net premium income; from this there had to be deducted brokerage and the fee to EIU; that meant that SD had 39% of the gross net premium income to pay the losses from $5,000 to $1m; in contrast, Clarendon retained 41.5% of the gross net premium income to pay the retention and make a profit.
320.	The estimated gross premium for the reinsurance was $3.6m; SD would have received a net premium of $690,000 for their participation on this basis; brokerage was 10% and EIU retained 25% or about $266,000.
(f)	The position of SCB on the basis of acceptance
321.	Mr Brown agreed that the programme was only writeable net. SCB accepted, in their letter of 4 December 2001, that the lower layers of the programme were only writeable on a net basis.
(g)	The losses
322.	The losses as at the fourth quarter of 2001 were $4.482m on a gross premium to SD of $750,000 and a net premium to SD of $488,750.
(h)	Conclusion
323.	This was one of the few examples of first tier reinsurances accepted by EIU. The business was probably profitable on a gross basis (as WFT suggested) in the hands of the original underwriter. The profit in this case had been magnified, as Mr Brown’s calculations showed, in the hands of that original underwriter through the reinsurance rate quoted by Mr Billyard.
324.	In the hands of the first tier reinsurers, the business was loss making on a gross basis. If this account was typical of the rates charged, then it was clear that on each successive tier of reinsurance, the loss ratios on a gross basis would increase as each reinsurer passed on the losses for much less premium than they received.
325.	I am sure that EIU and in particular Mr Henton acted dishonestly in accepting this programme: 
i)	This was one of the risks that Mr Henton accepted for the reasons set out at paragraph 1246 of Part I.
ii)	Although there was much more information available, given the very short period of time in which the programme must have been considered, Mr Henton cannot have had the time to analyse the programme properly.
iii)	The premium charged to Clarendon (per Raydon) was inexplicable; this was profitable business in their hands (as the information available showed) and there was no justification for writing the business on terms that magnified their profit and that assumed gross losses for SD. As the market was (as was obvious to Mr Henton) tight, and if he had properly analysed the information, he should only have participated at much higher rates. However, he made no attempt to act faithfully in the interests of SD.
iv)	Mr Whitcombe acquiesced in what was done without any real enquiry into this programme.
326.	Mr Brown knew that Mr Henton was acting in dishonest breach of duty and dishonestly assisted him in this:
i)	This programme was put before Mr Henton in the circumstances set out at paragraphs 1246 and 1247 of Part I. This programme was included in those that Mr Henton was required to write in order to obtain the outwards reinsurance because Mr Billyard wanted his lines reduced; I am sure that that was the position as Mr Billyard’s subscription was agreed on 12 November 1997 and the effect of the placement with Mr Henton was to reduce Mr Billyard’s lines.
ii)	Mr Brown knew that there was a great deal of information available to Mr Henton. He knew that if Mr Henton had analysed the information properly, Mr Henton would have reached the same conclusion on profitability as he had reached and that no honest underwriter would have agreed to write the reinsurance at a rate that gave such a large profit to Clarendon and the certainty of gross loss to SD in the market then prevailing. Mr Brown knew that Mr Henton had not, in the time available, carried out the calculation of profit to Clarendon. Mr Brown in disingenuous and dishonest answers in cross-examination, sought to attribute the readiness of Mr Billyard and Mr Henton to write at a rate that gave such a large profit to Clarendon on market conditions in which reinsurers would write at such low rates. However, as Mr Brown well knew, that was not the state of the market even for a first tier risk such as this. He placed the risk with EIU as he knew that Mr Henton would do his bidding in the circumstances and, far from being in a position to take advantage of the state of the market, would write a programme which Mr Brown knew would provide considerable profits to Clarendon.
Programme 15: Clarendon (per Raydon) – EEII book
327.	This programme was a reinsurance of the predominantly EEII book written by Raydon on behalf of Clarendon; the programme was written on an RAD basis for 12 months at 1 May 1997. The programme comprised: 
i)	five layers of XL reinsurance providing cover for $5m xs $10,000; and 
ii)	two layers of aggregate stop loss to protect the $10,000 retention; the entry point was $2.45m or 50% of the gross net premium income; cover was provided for $2m.
328.	Mr Henton wrote 50% on six of the contracts; the effect was to reduce the lines written by JEH Re (subject to a point on the fourth layer considered below). He wrote 33.33% on the fifth layer of the XL part of the programme and Hackett’s Philadelphia office wrote 50% on 31 December 1997; as Mr Billyard had only written a line of 33.3333%, all these lines signed down. The programme is summarised in Diagram 15. EIU’s acceptance was for cover that had been in place for eight months and this was another backdated programme.
(a)	The predominantly EEII book
329.	Raydon underwrote a book of business for Clarendon that was predominantly EEII business; EEII had been developed by SCB as described at paragraph 123 of Part I. Due to fierce competition the account was in decline and the premium volume was falling. Mr Brown’s evidence was that one of the competitors was SD; the largest producer of EEII to SCB was Mr Al Harding and he had taken his account to SD.
(b)	The history of the placement	
330.	The programme of reinsurance had been fully placed with Mr Billyard on 2 June 1997. On 21 October 1997, SCB sent a fax to Mr Billyard, asking him to sign the quote sheet. Mr Billyard signed the sheet, but with a note telling SCB that he wanted Raydon to make up their minds and that he would be obliged to make a warranty for “no known or reported claims”; the request for a warranty was withdrawn on 2 December 1997 but Mr Brown did not know why. Mr Brown’s evidence was that he thought that the problem in finalising the reinsurance programme related to establishing what the premium income was likely to be, just as it had been under the IMC Truckers scheme (Programme 7). Mr Billyard only signed the slips on 10 December 1997; he wrote lines of 100% on all the layers except the fourth layer where he only wrote 50%. There was no evidence as to why he had only written this amount.
331.	Mr Brown’s evidence was that as the underlying premium income was not large, the reinsurance programme would not have been offered to others; however, the programme was offered to Mr Whitcombe and Mr Henton as they were looking to write for premium at that point of the year.
(c)	The information provided
332.	The information provided was:
i)	The slip. It contained a provision for a deposit premium and an adjustable rate; there was no provision for a minimum premium. The slip did not make it clear that the reinsurance was protecting EEII business, but Mr Henton was told by Mr Brown that it would protect mainly, though not only, EEII business. 
ii)	An information sheet dated 6 August 1997. This stated that the estimated applicable premium income was $1m; Mr Brown’s evidence was that Clarendon were not very interested in EEII as the rates were low and premium was decreasing; that was why the estimated applicable premium income for 1997/8 was low; he would have explained all this to Mr Henton. The figures for premium were on a gross net basis – that is, after an issuing fee to Clarendon and commissions (which would have been in the order of 30%) were deducted.
iii)	The slips all referred to claims statistics dated 31 July 1997, but the statistics for four of the layers on the XL part of the programme were as at 31 December 1996 and dated either 11 December 1995 or 12 May 1997, even though the reinsurance incepted on 1 May 1997; the statistics for the lowest layer were on an “as if” basis as at 19 May 1997. Mr Henton’s evidence was that he looked at the claims statistics on 24 December 1997, but that he did not notice the difference in the dates. There was no such discrepancy on the claims statistics for the aggregate stop loss contracts. Mr Brown’s evidence was that nothing up to date had been provided as Mr Billyard, the leader, had been prepared to quote on that basis, even though the statistics on all but one layer were almost a year old by the time Mr Henton was being asked to take a line in December 1997. On the lowest layer, the statistics were “as if” and gave only the claims figures but not the premium figures; Mr Brown’s evidence was that that there was no such layer previously and they did not have a premium figure and as brokers, they would not guess. It was up to the underwriter to ask for prior year information and SCB would have provided the details. Mr Henton’s evidence was that he could not recall whether he calculated the premiums for the previous years and therefore did not know the loss ratios. On the other layers, the premiums and claims figures were given.
iv)	Claims bordereaux for the second to fourth layers of the XL part of the programme.
333.	Mr Henton’s evidence was that he was told that the book was reducing and that the book was going to consist of those accounts which Clarendon per Raydon wanted to keep hold of and where they were achieving the rates they wanted. He did not know what the underlying accounts were. He thought that as the size of the book was being reduced, the figures would improve, in that there would be a reduction in losses and an improvement on the returns (as business would be written on a more selective basis, with the better business retained and the worse rejected). He was told by Mr Brown that the programme was clean.
334.	Mr Henton’s evidence was that what he knew of Raydon was that the underwriter was Mr Murray who had been at Lloyd’s, and that Raydon were writing on behalf of Clarendon; he knew nothing against Mr Murray; the figures looked okay; Mr Henton accepted that EEII was employers’ liability insurance but his evidence was that it was classified as PA in the market.
335.	The estimated gross premium income on the XL contracts was $390,000, with SD receiving $125,000 net for their share; on the aggregate stop loss contracts, the estimated gross premium income was $30,000, of which SD received $10,000 net for their share.
(d)	The basis of acceptance
336.	Mr Henton was asked how the fact that the cover was mainly EEII affected the rating; Mr Henton said that for the purposes of rating it did not matter what form of occupational accident cover it was (his evidence in relation to Programme 22 was different – see paragraph 577). It was rated by JEH Re; what mattered was the loss record.
337.	There was no summary of the premiums and claims for the combined layers of the XL part of the programme but this calculation was done by Mr Jackson; in 1993 the combined loss ratio was 293% gross (or 450% net), in 1994 it was 287% gross (or 441% net). Mr Henton said that this did not take into account the new gross rate of 39% and he would want to see what effect that had on the old loss figures; he had done this, working out the gross position and then the net position. On that basis, 1993 was still loss making on a gross premium and on the net premium, the loss ratio was about 200%; 1994 also still showed a loss. Mr Jackson’s burning cost calculations (that is, the percentage of the underlying premium needed to meet the claims) showed that the premium needed was much higher than the 39% (even ignoring inflation). Mr Henton did not dispute the fact that the premium rate of 39% was far too low if the business was to be reinsured on a conventional basis for a gross profit. It was Mr Hines’ evidence that overall this was likely to be gross loss making, though not to the same degree as some of the other programmes. Although it appeared to be Mr Greig’s view that the information was adequate, he relied in part on the fact that other underwriters had subscribed to the programme; as the only other underwriter who had subscribed (apart from Hackett on the top layer) was Mr Billyard, in view of the findings I have made about Mr Billyard, Mr Greig’s opinion must be viewed in that light.
338.	Mr Henton’s evidence was that he underwrote for a net profit. Mr Henton rejected the suggestion that the programme was loaded in favour of Clarendon and against SD. It was put to him that the programme would not have made a net profit as he had to pay for his reinsurance (at a rate of about 60%) and for the retentions; he thought that he had done the calculations but was unable to recall if he had.
(e)	The position of SCB on the basis of acceptance
339.	Mr Brown agreed that the programme was loss making on a gross basis.
(f)	The losses
340.	The losses as at the fourth quarter of 2001 (according to updated information) were $955,000; the net premium to SD was $106,950.
(g)	Conclusion
341.	I am sure that EIU and in particular Mr Henton acted dishonestly in accepting this programme: 
i)	This was one of the risks that Mr Henton accepted for the reasons set out at paragraph 1246 of Part I.
ii)	Some of the information was out of date and an analysis was needed to assess the information properly; given the very short period of time in which the programme must have been considered, Mr Henton cannot have had the time to analyse the information properly which he had to do as he had no underwriting plan.
iii)	He provided cover on an RAD basis whereas the outwards reinsurance he was obtaining was on an LOD basis for 1997 and 1998; for the reasons given at paragraph 1246.xii) of Part I, he knew that it was wrong to expose SD to the mismatch in terms for the reasons set out.
iv)	Mr Whitcombe acquiesced in what was done without any real enquiry into this programme.
342.	Mr Brown knew that Mr Henton was acting in dishonest breach of duty and dishonestly assisted him in this:
i)	This programme was put before Mr Henton in the circumstances set out at paragraphs 1246 and 1247 of Part I. The obvious inference as to the reason for the inclusion of this programme in those that Mr Henton was required to write in order to obtain the outwards reinsurance was that Mr Billyard had wanted his lines reduced.
ii)	Mr Brown knew that the claims figures were out of date but made no effort to obtain up to date figures, even though the business was being underwritten through Raydon, a company within the SCB group. 
iii)	As set out at paragraph 1246.xiii) of Part I, Mr Brown fully appreciated that no honest agent would expose his principal to the obvious risks in the then market arising from the mismatch between granting cover on an RAD basis but only obtaining reinsurance on an LOD basis.
Programme 16: Unum 
343.	Mr Henton agreed, under this programme, to indemnify against losses under six reinsurance contracts which were placed by SCB and written by Mr Billyard in 1995 when he worked for D&H. The programme was not taken up because D&H were not satisfied by the evidence (that SCB produced) of EIU’s authority to write the retrocession and because there was no agreement on the period clause. The programme is summarised in Diagram 16; however, in respect of this diagram it must be pointed out that the description of the scope of the cover written by EIU is very general in its terms as there was a dispute as to what, if anything, was agreed. The circumstances relating to this programme were heavily relied upon by SD as proof of the nature of the dishonest relationship between SCB and Mr Henton.
344.	The purpose of the retrocession was to enable SCB to try and settle a dispute that had arisen over the reinsurance contracts that had been placed by SCB with Mr Billyard. It is therefore first necessary to explain the dispute.
(a)	The origins of the dispute between D&H and SCB
345.	As set out at paragraph 410 of Part I, D&H operated the LARG II pool which included Unum, Federal and Chubb. Mr Billyard had started to write for the pool in 1993; much of the business was on an arbitrage basis. The reinsurances had low retentions; in 1993 and 1994 they were $5,000 on LMX and $25,000 on his direct programme.
346.	Among the reinsurances written by Mr Billyard on behalf of the pool in 1995 were three layers protecting Clarendon per Raydon on an RAD basis for $490,000 xs $10,000 for 12 months at 1 January 1995 and one which protected CIRCL on an RAD basis for 12 months at 1 January 1995 for $240,000 xs $10,000; his participation was between 33.33% and 50%. Each was placed with him by SCB; CIRCL and Raydon were SCB companies. There were two other contracts protecting CIRCL, but it was unclear the extent to which these were relevant. The business protected was WC carveout business. This was classified as “direct” by Mr Billyard and was reinsured by Mr Billyard under his direct reinsurance programme for 1995 which provided protection in layers up to $48m xs $25,000 on an LOD basis.
347.	In 1996 after Mr Billyard had left D&H, reinsurance was bought by D&H for 1996 on an LOD basis, but with a retention of $50,000; that increased their net losses. It was Mr Butler’s evidence (given in connection with a similar issue in Programme 24 – see paragraph 722) that Chubb and Federal had raised the retentions in 1995/6 against Mr Billyard’s wishes.
348.	In 1996 D&H became concerned about the losses on these contracts and started an investigation; the loss runs showed that significant losses were still coming through in 1996 as the inwards reinsurance was on an RAD basis and the outwards reinsurance was on an LOD basis.
349.	A meeting of pool members was held in New York on 17 October 1996; the participants included Phoenix, Mr Elgie for Manulife, Mr Denis Loring for Equitable Life, and Mr Ramussen for Allianz. They were told that the problems arose from contracts which covered WC carveout (not LMX) and which were broked by SCB; a large number of attritional losses were perceived to be the problem; it was estimated that the premium was $1.1m on the contracts that were causing problems and that the loss ratio was 1,000%.
350.	SCB were told of the concerns by Mr Hoare, a director of D&H, who provided a detailed statement which was not challenged in cross-examination. D&H retained Mr Kevin MacDonald of American Speciality Claims Services to assist. 
351.	D&H contended that there had been a misrepresentation in the placement of the inwards reinsurances in that Mr Billyard had not been given the up to date figures; they had made this clear to SCB by June 1997 at the latest; they had also ceased paying on the reinsurance of CIRCL. It is not necessary to set out details as the merits of that dispute are not ones on which I will express any view, but it is right that I should make it clear that Mr Brown denied that there was any misrepresentation. He maintained that he had told Mr Billyard of the figures, but they did not examine them as they considered themselves bound (see the explanation in Mr Brown’s letter of 16 April 1998 to Mr Cooke at paragraph 427). The position was exacerbated, in Mr Brown’s view, because the reinsurances were renewed with a greater retention after Mr Billyard had left; they would simply have passed the losses on if they had been renewed with the same retention. In fact, it was also exacerbated because the reinsurances were only on an LOD basis. 
352.	SCB prepared a tough response, not only because of the potential liability to SCB as broker, but also because CIRCL had assumed an underwriting liability; It was Mr Brown’s evidence that as CIRCL had assumed underwriting risks, this showed that the SCB group were concerned as to the quality of the business ceded under the six contracts accepted by Mr Billyard.
(b)	The investigation into the projected losses: the Wakely Report
353.	The likely loss outcome was investigated as D&H wanted a one-off payment to fund a commutation or a stop loss of their liabilities under the reinsurances of Clarendon and CIRCL. American Specialty Claims Services’ assessment of the final incurred losses was $8m on a net basis.
354.	On 25 July 1997, Mr Duncan Hopegood of SCB consulted Mr Brian Hynes of Insurance Market Solutions about the IBNR for the account. SD adduced materials about the background of Mr Brian Hynes; from those materials, it was clear that Mr Brian Hynes had been involved with Mr Carlos Miro and had had a criminal conviction in the US in 1993 as a result of assisting Mr Miro in commiting an insurance fraud; it appeared from the sentencing remarks of the Judge in that case that he had provided considerable assistance to the authorities and was the least culpable of the defendants in those criminal proceedings. Mr Brown was aware of this by 1997 as he had been told of it by Mr Cooke. 
355.	Mr Brian Hynes worked with SCB (including Mr Cooke and Mr Jones) in producing their estimate of IBNR. A strategy was worked out by Mr Cooke (as set out in his letter to Mr Brown dated 28 July 1997): Clarendon were “on side” at that stage and were going to give SCB considerable time to sort it out in-house:
“I have suggested that Paul [Pearson, the Claims Director of SCB]  goes in and acts as “Mr Nice Guy” with Keith Schofield [D&H’s claims manager] in respect of obtaining numbers and Brian [Hynes] can act as an independent consultant through Intermarket Solutions and be a bit firmer with Keith in trying to obtain some hard IBNR numbers from them. I think this stick and carrot approach should shake D&H up a bit…”
Mr Cooke hoped that D&H would be realistic and that the problem could be solved by either a stop loss or a portfolio transfer into CIRCL, but at a realistic price so that the SCB group would not have to take a statutory hit on CIRCL’s balance sheet. He was also examining bringing a claim against D&H and one of the pool members, Chubb, in Texas so that they would be at risk of punitive damages.
356.	SCB then engaged, through Mr Brian Hynes, Mr Mark Crawshaw and Mr John Gleba of Wakely & Associates (Wakely), actuaries, to do a similar task; a draft report referred to as the “Wakely report” was provided to SCB on 30 August 1997:
i)	It set out the net position in respect of Clarendon, showing that the losses went on developing until 2015, but with little development after 2004; Wakely estimated payments of $12.045m gross and $7.124m net; of that $7.124m, $1.888m had been paid by the year ending 30 June 1997 with $5.236m remaining to be paid. The reported losses as at the year ending 30 June 1997 were $4.794m with $2.33m left to develop on those projections, to give the net figure of $7.124m. 
ii)	It also set out the position in respect of CIRCL – gross losses were $4.809m and net losses were $3.341m; of that $3.341m, $1.246m had been paid at 30 June 1997 with $2.095m remaining to be paid; the reported losses were $2.114m with $1.227m to be reported later.
There was therefore on these projections, $7.331m to be paid in the future out of final net incurred losses of $10.465m, with $3.134m having been paid already.
There was no final report and the draft report remained the one in use.
357.	These were net figures. Attachments to a letter written by Mr Brian Hynes on 4 November 1997 showed that the overall account written by Mr Billyard at D&H in the years 1993 to 1995 (originating from SCB) had been written on the backs of reinsurers. The gross losses were huge. The premiums payable to reinsurers were $44.6m, the reinsurance recoveries were $621.5m and the net amount to be paid by reinsurers was therefore $576.9m.
(c)	The attempt to find quotes
358.	On 18 September 1997, the draft report from Wakely was sent to D&H with a summary which showed that Wakely estimated that the net loss on the Clarendon and CIRCL contracts was $10.4m; as $3.134m had been paid at 30 June 1997, there was an outstanding net loss of $7.33m.
359.	SCB, with the assent of D&H given in 17 September 1997, sought outside quotes. Mr Kelly approached Mr Tom Bolt of Berkshire Hathaway (who wanted further information including triangulations); this information was sent on 2 October 1997. Mr Kelly did not give evidence; it was explained on behalf of SCB on 1 August 2002 that Mr Kelly was not employed by them at the time of the trial; they had planned to call him before he went on holiday and he had been present in Court, but evidence had overrun and it had not been possible to call Mr Kelly before he went on holiday. He had not contacted his office and as the next date on which he could be fitted in was 23 September 2002, a decision had been made to press on and not to call him. 
360.	Mr Butler also became involved as he had known Mr Hoare since 1982. D&H took the view that they were prepared to absorb $5.5m themselves, but they wanted SCB to structure a solution to remove further loss exposure from them. 
361.	On 8 October 1997, SCB provided D&H with indications from two reinsurers:
i)	Mr Bolt indicated a premium of 92.9% for an indemnity of $7.3m-$6.5m; in a letter to SCB on 3 October 1997, Mr Bolt observed that the account was “green” and that there were uncertainties. Mr Butler thought that Mr Bolt had worked out the payout pattern, the losses and the reinsurance programme he would assume. Mr Brown’s evidence was that Berkshire Hathaway had quoted on the basis that they would take over the entire liability from D&H and it was a “financial reinsurance”. Under such an arrangement, the reinsurers needed to calculate how much interest the block of premium would earn and then calculate the loss corridor above that to a given limit which they hoped would be covered by the investment income. They were not assuming risk in relation to the losses, merely to the pattern of payment. It was, according to Mr Brown, completely different to PA reinsurance.
ii)	Inter-Ocean Reinsurance Company (Inter-Ocean) indicated a premium of $7.7m on the basis that the reserves for losses was $8.068m; $8.35m for $10m aggregate and $11m for $15m. They qualified this and stated that they wanted to have a better understanding of the volatility of the account. Mr Brown’s evidence was that this was “financial reinsurance”.
iii)	Mr Butler’s evidence was that the quotes were for financial reinsurance and would have been full novations, but a stop loss would have had to be provided to sit on top; they were not proper comparisons with contracts that were effected within the PA market. 
 (d)	D&H’s pressure on SCB
362.	At their meeting on 23 October 1997, the pool members did not consider these acceptable; it was reported that Goldman Sachs had been spoken to (as part-owners of SCB and as sponsors of the IPO of SCB – referred to at paragraph 1118 of Part I) to ask them to address the concerns of the pool. 
363.	On 4 November 1997, Mr Brian Hynes submitted a further report to SCB (on the assumption that D&H would accept a 500% net loss ratio on the reinsurances) with various proposals for contributions by the SCB group and others. It appeared that D&H were prepared to accept this level of net loss ratio.
364.	On 27 November 1997, Mr Butler and Mr Kelly had a meeting with Mr Hoare and Mr Tantony (who had been Mr Billyard’s deputy when he was at D&H).  At the meeting, D&H set out the proposal for the stop loss reinsurance they wanted – a stop loss for $7.5m xs $6.12m. D&H also had an idea of the premium that would have to be paid for this – an M&D of $2.2m and a maximum of $2.7m, though they might not have told SCB this. They provided to SCB, a sheet that the stop loss they wanted was for $7.5m xs $6.1m. The figure of $6.1m was a transcription error for $6.6m as the stop loss was premised on D&H taking a net loss ratio of 500% – $5m, and then receiving the benefit of the additional premium which would be payable under the inwards reinsurances of $1.6m. Mr Butler agreed to get quotes; Mr Brown also understood what was wanted.
365.	D&H pressed SCB for the quotes during the remainder of November and December 1997; amongst companies that were tried by Mr Butler and Mr Kelly were Berkshire Hathaway, St Paul and Copenhagen Re; Mr Cooke may have approached insurers in Bermuda. Nothing came of this. Mr Brown then approached Mr Henton – he was the only person which Mr Brown saw.
(e)	Mr Henton’s acceptance of this stop loss: 17-24 December 1997
366.	It is clear that on Christmas Eve 1997 Mr Henton initialled a slip providing a stop loss; there was, however, a very substantial dispute as to the effect of this. It is first convenient to set out what SCB reported at the time to D&H.
367.	Contemporary notes made by D&H recorded that it was reported to them on 17 and 18 December 1997 that Mr Brown was working on the placement of the stop loss; that he had a “very good” indication; that he hoped to have news by Friday 19 December or Monday 22 December 1997. Mr Brown’s evidence was that he would have outlined to Mr Henton what was wanted at that time to Mr Henton; Mr Henton’s evidence was that there could have been a discussion on 17 December 1997.
368.	On 23 December 1997, according to D&H’s notes, it was reported to them that Mr Brown was meeting on his deal at ten; on 24 December 1997, D&H were told that Mr Brown had written confirmation of a deal in tranches of $1m at a price that they believed that Mr Jones would probably pay with security D&H should accept. 
369.	It is clear that what this referred to was the presentation of risk to Mr Henton as Mr Brown was not discussing the reinsurance with anyone else; Mr Brown’s evidence was that it was not a firm agreement as he had no order.
370.	It is next convenient to refer to the terms of the slip presented to Mr Henton which he scratched on Christmas Eve 1997. It was prepared by Mr Mortley of the technical department of SCB (who did not give evidence); the instructions to draft it would have been given by either Mr Butler, Mr Brown or Mr Kelly.
i)	The slip provided for a stop loss reinsurance of Unum and/or Federal and/or Chubb’s PA account written by D&H on an RAD basis for 36 months at 1 January 1995. What D&H had wanted was cover on an RAD basis for 12 months at 1 January 1995, as that was the period during which Mr Billyard had written the risks. It was SD’s case that the slip presented to Mr Henton was crafted in this way to enable Mr Henton to write it under the binding authority. Mr Butler did not know why it was drafted in this way, but he did not think it made any difference; Mr Brown’s evidence was that it was done this way on the basis that they were starting at 1 January 1995 and covering the loss through that period of time; it was important to go back to 1 January 1995.
ii)	The limits were $7.5m xs $6.6m; this was what D&H in fact wanted and was derived from the proposal given to Mr Butler on 27 November, except that as a result of a transcription error (to which I have referred) the excess point was wrongly set out.
iii)	The slip contained a warranty to the effect that only losses within the net retention were to be taken into account in computing the excess point; the warranty was expressed to be in respect of risks attaching not only in 1995 but also in 1996 and 1997, with different retentions being set out for each year. Mr Brown said that was done to deal with the different retentions, even though there were no risks that attached in 1996 or 1997.
iv)	Under the heading “Information”, it was stated that the report of Wakely & Associates and Insurance Market Solutions had been noted and seen by reinsurers.
371.	The slip so drafted was scratched by Mr Henton for 100%, but with manuscript amendments which:
i)	reduced the cover from $7.5m to $7m; 
ii)	split the cover into seven layers of $1m each; and
iii)	recorded the premium as $600,000.
372.	The terms of the slip were clear as to the period clause, in that it covered losses on risks attaching at 1 January 1995; although the slip as scratched was amended in the respects to which I have referred, the period clause was not amended. Nonetheless, both Mr Brown and Mr Henton maintained in their evidence that the period clause did not represent what was agreed on Christmas Eve 1997 and that Mr Henton had not agreed to cover losses in respect of risks attaching at 1 January 1995:
i)	Mr Brown’s evidence was that they had had a discussion earlier; he had explained the position to Mr Henton, and Mr Henton had said that a position based on three years at 1 January 1995 was unacceptable; he could do something after 1 January 1997; the calculations of premium and the deal were based on 1 January 1997 going forward. Mr Henton had not agreed to the period clause; if Mr Henton had, Mr Brown would have issued a cover note for the reinsurance at once.
ii)	Mr Henton had denied in his first statement that the Unum programme had ever been accepted under the binder; his evidence in that statement was that he had told Mr Brown that he could only accept risks in relation to losses occurring after 1 January 1997 and had agreed in principle to write it subject to proper information, Mr Whitcombe’s confirmation and Mr Broad’s approval. His evidence was that he had prepared this statement in a rush when EIU had few documents; it had been corrected in his second statement.
iii)	Mr Henton agreed in his oral evidence with Mr Brown’s recollection that he had made it clear to Mr Brown on 24 December 1997 that he could only cover the risk in respect of losses after 1 January 1997 because EIU was only in existence from that date. He clearly recalled saying that. 
373.	It was Mr Henton’s evidence that his memory as to whether he had seen the two reports referred to in the slip was not good; he recalled sitting and talking to Mr Brown who had files with him and did refer to them, but although the references on the slip suggested that he had seen them, he could not recall during his oral evidence of having seen them; he said in his statement that he had not seen them. He neither took copies of the reports nor studied them.
374.	It was clear on the terms of the slip that, if, as anticipated, the actual losses were $10.4m, then after D&H’s payment of losses up to the excess point of $6.6m, SD would pay $3.4m. Mr Brown accepted, on the basis of the terms set out on the slip, that the programme would have made a very large loss for a premium of $600,000.
375.	Mr Brown considered that it was material for Mr Henton to know of the dispute with D&H and he believed he had told him; Mr Henton’s evidence was that he did not know anything about the dispute.
(f)	Entry onto the Christmas Eve bordereau
376.	The contract was entered onto the bordereau submitted to Mr Broad on 29 December 1997 (as set out at paragraph 1188 of Part I); the period was described as “TBA 1997”; Mr Henton denied that he had inserted that in order to make what he had agreed fit in with the binding authority.
(g)	The new slips signed by Mr Henton on 29 December 1997
377.	On 29 December 1997, a quote sheet was prepared as well as a new slip; on these, the risk was split into seven layers but the period clause remained the same as that set out on the slip scratched on Christmas Eve 1997 (as set out at paragraph 372); the quote sheet described the reinsurance as “risks attaching during the period 36 months at 1 January 1995”. Mr Henton signed each of the slips and provided seven confirmations of acceptance, each in the form of a photocopy of Mr Whitcombe’s signature with Mr Henton’s initial alongside it. Each acceptance stated that the inception date was “36m at 1.1.95”. Mr Brown and Mr Butler were present. 
378.	Again the period clause in the slip was clear and each of the slips containing that clause were scratched by Mr Henton. On this occasion confirmations of acceptance were given. On the documents it was therefore clear that EIU had committed SD to providing reinsurance on these terms. However, the evidence of Mr Henton and Mr Brown was to the effect that the agreement was not properly reflected in the slips and the confirmations: 
i)	Mr Henton’s evidence was that he told Mr Brown when he signed the new slips that they could only cover losses occurring during 1997; he discussed with him how that should be dealt with and that the period clause would be changed. He had an oral agreement with Mr Brown that he was covering “losses after sometime in 1997” or losses that occurred after a date in 1997. He was covering development in 1997. He accepted that if this had been the agreement, this could very simply  have been expressed on the slips as LOD  from 1 January 1997.
ii)	Mr Brown’s evidence was that he understood that cover was not from 1 January 1995 as that was not Mr Henton’s intention; SCB were to come up with something that would accommodate what they were prepared to do from 1 January 1997; he left the meeting knowing that they had to redraft the clause.
379.	It is obvious that the period of cover would affect the premium charged; Mr Henton could not recall how he came up with the premium; he denied that he had set it to help SCB out.
i)	Mr Brown’s evidence was that Mr Henton looked at a couple of pages of the Wakely report, probably the pages that set out the figures and which I have summarised at paragraph 356.
ii)	Mr Henton’s evidence, given after he had had time to consider the point, was that he discussed the premium with Mr Brown; the Wakely report predicted few claims for 1997 and they decided to charge $600,000. There would have been an expectation of a gross profit. The Wakely report showed, in respect of losses under the CIRCL contracts, $15,000 of reported losses for CIRCL and $11,000 of IBNR. The comparable figures for Clarendon were $146,000 and $114,000, but it appears that these were not in the copy in Mr Brown’s file and there was no evidence that Mr Henton saw them. As a matter of fact, if the reinsurances had been on the terms which Mr Henton claimed in his oral evidence and these figures had been looked at, then the premium of $600,000 would, even after brokerage and commission, have given an expectation of a small gross underwriting profit. 
iii)	Mr Henton’s evidence was that the figure expressed to be the excess point under the reinsurance reflected the paid and outstandings in the Wakely report; he thought that it was $2.1m for CIRCL and $4.5m for Clarendon for which reserves had already been made. He was covering only losses in 1997. He found it difficult to explain how the excess point set by reference to all the paid and outstandings already reserved related to an excess in respect of the payment of losses in 1997, save to say that the wording needed to be sorted out; the agreement he made with Mr Brown was to pay all losses occurring after 1 January 1997 and notified after the Wakely report without an excess point at all.
iv)	He was asked to consider a comparison between the quotes that had been given by Berkshire Hathaway and Inter-Ocean; Mr Henton’s evidence was that he considered that the Berkshire Hathaway and Inter-Ocean quotes were for loss portfolio transfers; they covered all the losses notified and reserved and all the IBNR up to a defined limit. When he quoted, he was only covering losses notified after the Wakely report and excess of all notified claims paid and outstanding; the excess point was different; Berkshire Hathaway was to pay what was on the books. He was only to pay the excess of that.
(h)	Mr Whitcombe’s involvement
380.	The treaty was recorded in SCB’s renewal list as for a period for 36 months at 1 January 1995; this was in Mr Mortley’s hand. Mr Brown thought that this had been taken from the slips.
381.	Mr Whitcombe’s evidence was that he was not present when the seven slips were signed and when the seven confirmations were given as there would have been no need to use photocopies and for Mr Henton to add his initials; at that stage, as Mr Henton had not been given underwriting authority, Mr Whitcombe had not authorised that this be done.
382.	However, sometime in January 1998, Mr Whitcombe’s evidence was that when he saw the contracts and the period clause, he told Mr Henton that they could not write the contracts as EIU had only started in January 1997; he was quite firm and said, sorry, they could not do it; he pulled EIU out of it as soon as he saw it and put a stop to it.  
383.	It was Mr Whitcombe’s evidence that Mr Henton said that he had made a mistake but did not explain that mistake, even though it was a fundamental one. Mr Henton had said to him that he would get back in touch with the brokers; he did not think at the time that he had raised this with the brokers, but he certainly pushed Mr Henton to getting words agreed with the brokers.
384.	Mr Henton’s evidence in his third witness statement was that he recalled vaguely discussing the programme with Mr Whitcombe, but could not be precise about when this occurred; he recalled that Mr Whitcombe pointed out that the slip period was outside the terms of the binder. In his oral evidence, Mr Henton said that he recalled discussing the matter with Mr Whitcombe either at the end of December 1997 or at the beginning of January 1998; he explained to him that the period clause was going to change.
385.	Mr Brown did not agree with Mr Whitcombe’s evidence. Mr Henton had always been clear that he could not write the slip as presented as they had only started in business in January 1997. There had been no second thoughts.
386.	There is an undated note written by Mr Kelly of SCB which states:
“CH was under the impression that he was only picking up the losses advised after the Wakely report. The main reason being that they were only in existence after 1 1 97.”
Mr Henton vaguely recalled a conversation to this effect; the note reflected his understanding at the time.
(i)	A new period clause
387.	On 6 January 1998, Mr Hoare met Mr Jones of SCB in London and was told of the quote obtained from SD; Mr Jones provided a statement, but for good reason did not attend the trial. His evidence was that he understood that quotes had been provided by SD per EIU and was later provided with a draft slip; he was not aware of any concern on the part of EIU about the period clause. 
388.	On about 7 January 1998 SCB drafted a new period clause:
“Losses first notified after date of actuarial report, 1995/1996/1997 years of account.”
389.	By 8 January 1998 there was a further draft: 
“This reinsurance to apply to losses first notified by the Reinsured to this reinsurance subsequent to the Actuarial Report from Wakely & Associates Inc (as attached) relating to the 1995, 1996 and 1997 years of account.”
i)	Mr Henton’s evidence was that he had not agreed that. His evidence was that at first he was only going to cover losses occurring after the Wakely report, not those notified after the date of the report. After he had had time to consider the matter further, he said that he was only prepared to cover losses occurring after 1 January 1997 and which were first notified after the Wakely report. He did not know that that was unacceptable to D&H as Mr Brown had never explained to him the requirements of D&H; he accepted that there would have been very few losses under the 1995 reinsurance that occurred after the Wakely report or that occurred after 1 January 1997 and were notified after the date of the Wakely report, but he and Mr Brown may have been at cross-purposes and for that reason the period clause was never agreed.
ii)	Mr Brown was not sure if Mr Henton had agreed the draft; they were in a process of negotiating on what D&H and Mr Henton might agree. His interpretation of the clause was that the losses that had occurred prior to the Wakely report would go to the aggregate deductible and that the reinsurance would pick up losses which actually occurred after that date, but although it was difficult to see what losses there could be given the original insurance, D&H thought that there might be. Although the loss bordereau in February 1998 showed that there were no 1997 losses, a subsequent loss bordereau showed that there were losses with a 1997 date of loss. D&H were correct as losses could occur in 1997 or later on an RAD policy for 12 months at 1 January 1995.
390.	Mr Henton included this programme in the bordereau that was submitted in late January 1998 (referred to at paragraphs 1280 and following of Part I), with it being shown as 12 months at 1 August 1997. It was Mr Henton’s evidence that from his computer records, he could tell that 12 months at 1 August 1997 had been put in between 12 and 20 January 1998; this therefore reflected the new period clause – cover for losses occurring from after the Wakely report (which he had thought was dated in August 1997). The entry in the bordereau was meant to reflect the period clause agreed. 
391.	On 8 January 1998, Mr Jones sent to Mr Hoare, the quotes from SD which were for the period for 36 months at 1 January 1997 and copies of the draft slip that had been prepared, but not the one signed by Mr Henton; the letter stated that the provision of this was conditional upon D&H agreeing immediately to recommence paying claims, but offering to make a contribution of $300,000. The draft slip (which was enclosed) contained the period clause with the words “to losses first notified by the reinsured to this reinsurance subsequent to the Actuarial Report …” set out at paragraph 389 above, but it also contained the excess point of $6.6m.
(j)	The unease of D&H
392.	That same day, D&H discussed the quote at an internal meeting and decided that they wanted to know if the quote was direct from SD or through a broker’s binder; a quote through a broker’s binder would not be acceptable as their security committee considered these unacceptable.
393.	The quotation was also reviewed internally by Mr Stratton of D&H; he raised a number of queries, particularly relating to the period clause and to the underwriting of the reinsurance. He read the clause drafted by SCB as meaning “first notified”. He wanted to be sure that the slip had been properly placed and had been written with authority. Payments under the reinsurance would be needed for three to five years. The premium was not sufficient.
394.	On 13 January 1998, Mr Tantony wrote to SCB, asking for confirmation that the acceptance by SD was direct and not through an intermediary; he also asked for full details of the price paid. D&H also redrafted the slip to accord with what they had made clear they wanted; that draft set out the period clause as one on an RAD basis for 12 months at 1 January 1995 and it made specific reference to the inwards reinsurance contracts covered.
395.	On 13 January 1998, Mr Kelly visited D&H. In his report to Mr Brown (who was overseas) Mr Kelly stated that he was asked if the reinsurer was an agency or a direct insurer. He reported that he claimed ignorance of this, but went on to state in his report to Mr Brown that that issue would have to be addressed and asked for instructions on that question and on the terms of D&H’s redraft of the slip. Mr Brown responded to Mr Kelly that the period clause was not acceptable and that D&H had to accept what was on SCB’s draft or the deal was off. 
396.	On 15 January 1998, Mr Kelly visited D&H: 
i)	They discussed the period clause; he told them that SD were happy with the slip but still wanted mention of the Wakely report; Mr Kelly was told that this confused the issue and that it was not acceptable.
ii)	Mr Kelly told D&H that SD’s acceptance was through a binding authority and he showed them the cover note. D&H noted that the period of the cover note for the binding authority was from 1 January 1997 and that they were discussing a 1995 contract. They decided that this was not acceptable security and told Mr Kelly so. Mr Kelly reported to Mr Brown that D&H would not accept the binder and he suggested that they do a deal with someone else.
397.	On 30 January 1998, there was a meeting between Mr Brown and D&H, during which Mr Tantony emphasised to Mr Brown that they wanted the stop loss reinsurance placed, as discussed, for $7m xs $6.6m in a manner that would not allow for debate if claims became payable; they wanted a copy of the actual slip for the reinsurance signed by SD to ensure that they had SD’s full endorsement of the cover given. This was emphasised by Mr Hoare in his fax to Mr Jones on 3 February 1998; the fax made clear that they were concerned about the period clause and wanted it absolutely clear that the stop loss paid for all the losses. They also wanted a sign off by SD on the slip. There were also comments on the contribution that SCB were to make to the premium payable. 
398.	Mr Brown’s evidence was that that D&H understood the basis of the quote given by Mr Henton; SCB had provided a quote based on what Mr Henton said he would do, but that was not what D&H wanted as SCB could not get a quote for that. 
(k)	D&H’s request for SD to countersign the slips put to Mr Henton 
399.	On about 12 February 1998, Mr Brown spoke to Mr Henton and as a result reported to Mr Jones:
“I have spoken with the underwriter and he can provide signed bordereaux showing agreement of slips written for D& H. He is unable to provide signed slips direct from [SD], the reason being obviously the MGU is contracted to underwrite this class of business for [SD] and they do not wish to set a precedence by asking Sphere to sign off individual slips. As the underwriting manager they are responsible for the account and as such [SD], whilst they will agree all business submitted on a bordereau, if they signed the individual slips it would negate the underwriting authority and responsibility that the MGU has. In essence this is no different from the authority D&H have for their carriers. D&H would not expect to have their carrier sign off on each individual risk as by doing this they are transferring their responsibility as the underwriters directly to the carrier…”
400.	Mr Brown’s evidence was that Mr Henton had told him this and he understood that EIU did not consider it appropriate or necessary for SD to sign off directly on the slips; he accepted that the slips could have been presented to Mr Broad for a special acceptance and that he would have been happy for the proposed reinsurances to be put to Mr Broad, but Mr Henton had told him that he would not do that. He asked Mr Henton why and was told that he (Mr Henton) was not prepared to do that. He could not take the matter any further and did not know what the reasoning was, whether it was political or otherwise. 
401.	Mr Henton’s evidence was as follows:
i)	In cross-examination on behalf of SCB, Mr Henton said that he might have said that there was no agreed slip so there was nothing to sign off on; it was quite possible that he would have said that in the way they operated that, there was no requirement for agreeing slips; he might have told Mr Brown the thrust of what was in the letter to Mr Jones. He had no objection to getting an initial on a slip, but the slip would have to be agreed first.
ii)	In cross-examination on behalf of SD, Mr Henton said that he did not recall saying what was in the letter to Mr Jones, but there was no period clause agreed and so he had nothing to put to Mr Broad; it would not have been a problem to put it to Mr Broad once it was agreed; they could have taken a contract to Mr Broad to get him to confirm it, if someone wanted that assurance for the purposes of being satisfied as to EIU’s authority. 
402.	Mr Whitcombe’s evidence was that he would have had no objection to walking the slip round and showing it to Mr Broad.
(l)	Obtaining a letter from EIU/SD
403.	In January 1997, as set out at paragraph 759 of Part I, Mr Butler had provided Mr Wells of SCB (who dealt with the security of reinsurers), a copy of the cover note granted to EIU by HHI.
404.	At the beginning of 1998, Mr Mortley saw Mr Wells and asked him if they could revisit the issue of EIU’s authority as they were placing a lot of business through the agency and they wanted to be sure that things were satisfactory. As set out at paragraph 760 of Part I, Mr Wells did not know that the business being written was likely to have significant gross losses; he only knew that the business was WC or carveout.
405.	Mr Wells wrote a memorandum on about 20 January 1998. Paragraph 2 of the memorandum asked for the underwriting structure to be clarified; paragraph 6 stated that it appeared that the confirmations were signed without SD’s involvement; and paragraph 8 stated that SCB were probably being overcautious, but experience told them that they would sleep more easily at night if they had some sort of documentary evidence that SD were aware of what EIU were writing.
406.	Mr Wells’ memorandum was passed to Mr Henton on 18 February 1998. Mr Butler reported by an e-mail dated 23 February 1998 to Mr Brown who was skiing at Aspen: 
“…Chris Henton is doing a letter to us explaining the way the business flows through to Sphere including the fact that Sphere sign off every risk bound on a Bordereaux. Chris will get Sphere to sign the letter as well and when I told Alan Tanthony this was the route being taken he seemed OK, but asked us to get reply as soon as possible. We will probably get an answer from Chris this week.”
This document was one of those disclosed on 27 July 2002 as a result of the search of electronic records and so was not put to any witness.
407.	The letter requested was sent by Mr Henton on 25 February 1998: 
i)	In relation to paragraph 2, what was written by Mr Henton included the following passage:
“EIU is an underwriting management company that administers the day-to-day affairs of the Horace Holman contract underwritten for by John Whitcombe. John accepts business under the contract by stamping the slip and completing the confirmation of acceptance document.”
Mr Henton accepted in his evidence that this was not correct, but he did not intend to mislead. Mr Butler’s evidence was that the description fitted what had been done and was no different to the situation at a syndicate at Lloyd’s where the deputies acted for the underwriter.
ii)	In relation to paragraph 6, Mr Henton stated that each confirmation note was signed by Mr Whitcombe. This was not true as photocopies were signed by Mr Henton; Mr Butler accepted that he knew this.
iii)	In relation to paragraph 8, Mr Henton said: 
“[SD] have agreed and initialled John's business plan for 1997, the inception year of the facility as well as holding an underwriter's report commenting on the actual account written during 1997 and the proposed size and content of the 1998 account. These documents are between the underwriter and the carrier and as such you are welcome to view them but do not feel it appropriate to give you copies for your file. Is there something extraordinary that Sphere Drake need to be ‘aware’ of? If so please let us know! All business accepted under this contract has the benefit of the reinsurance protections that have been purchased and placed by SCB who have advised that they are adequate. You will therefore understand that full disclosure is made.”
408.	On 26 February 1998, Mr Butler reported to Mr Brown at Aspen:
“Please see the attached letter from Chris. Obviously this isn’t exactly what we need and I have asked him to “doctor it” for the D&H boys. Chris has unfortunately taken 2 days unplanned holiday so we are trying to get Whitcombe to do it.”
This document was one of those disclosed on 27 July 2002 as a result of the search of electronic records and so was not put to any witness.
409.	The following day, 27 February 1998, Mr Butler and Mr Kelly met Mr Whitcombe. Their purpose was to come up with a letter which would, as Mr Butler put it, “appease” D&H and convince them that EIU had authority to do what they were doing, short of getting Mr Broad to sign the slip (which was what D&H wanted, as set out in their fax of 3 February 1998 to Mr Jones – referred to at paragraph 397). Mr Butler said that he could not recall discussing going to Mr Broad, but they may have done so. It was agreed that a shorter and more factual letter would be prepared. Mr Whitcombe had no specific recollection of the meeting. 
410.	Slight changes were made to paragraphs 1, 3 and 4, and paragraphs 7 and 8 were taken out from the letter of 25 February 1997 that was signed by Mr Henton. Mr Whitcombe then signed the letter of that date “pp Chris Henton”; his evidence was that he knew that it was for D&H, but said that he did not know that what D&H were looking for was a sign off on the actual slip. He would have been happy to go to Mr Broad, but they were never asked. He added that from what he had learnt subsequently, “he would not have touched this frankly with a very long barge pole”. He did not discuss the matter with Mr Smith save in connection with getting the letter signed by Mr Broad. 
411.	On the same day Mr Broad initialled the letter written by Mr Whitcombe setting out their authority.
412.	Mr Henton’s evidence was that that they did not go to Mr Broad as they had the agreement on the bordereau and the period clause was not agreed; the letter was not a device to avoid this.
413.	On 4 March 1998, Mr Butler sent to D&H, a copy of the letter of 27 February and other documentation, including a copy of the bordereau scratched by Mr Broad. Although details of the other contracts had been blanked out, the part remaining showed Mr Broad’s initial, the headings and the details of the seven  contracts which protected the pool. However, the period of the contracts (which had read 12 months at 1 August 1997) and the heading for the column heading “period” under which this had appeared had also been blanked out. Mr Butler’s evidence was that this redaction was probably done by his secretary at his direction; although he could not recall why it was done, he thought it had been done because the inception date had not been agreed, or it was a mistake by him or the person who had carried out the deletion, or he had given an imprecise instruction to take out all the periods. Mr Henton’s evidence was to the same effect.
414.	The documents were considered by D&H; an internal memorandum recorded the views of those involved at D&H in typescript and manuscript; those views included the following: that they could not understand how business written under 1 January 1995 could be bound under the binder; that they believed that SCB wanted the period clause as drafted so that they could somehow hide the fact from SD; that it was unusual that the bordereau did not show the period; and that they considered it essential that SD countersign the actual slip. “If there is nothing to hide, what is the problem?” 
415.	On 12 March 1998, Mr Tantony replied to SCB, stating that they required that the slip or cover note be countersigned by SD; there were parts of the slip that were ambiguous and needed discussion if the countersignature problem was to be resolved. Mr Butler sent a fax that to Mr Jones that said “I have just received the attached from Mr Tantony Aaa….rgh!”. Mr Butler accepted that he was frustrated. 
416.	Mr Brown’s evidence was that he was never told by D&H that they were suspicious; he knew them well (as he had placed their business for years) and the members of the pool; they also knew Mr Broad and could have contacted him.
(m)	Further efforts in March
417.	On 19 March 1998, Mr Brown telephoned Mr Tantony; according to Mr Tantony’s note of 23 March 1998, Mr Brown had told him again that SD would not countersign the slip or the cover note as they did not wish to set a precedent; the slip would have to stay in the form originally drafted. Mr Brown accepted that he had said this, though the reference to SD was indeed a reference to EIU.
418.	Mr Henton’s evidence was:
i)	When cross-examined on behalf of SCB, he agreed that what was said in Mr Tantony’s note might have been the message he was giving Mr Brown at the time.
ii)	When cross-examined on behalf of SD, he said that he could not recall a conversation, but that it might be referring to the one he had in February 1998 as he could not recall a later conversation, though there were meetings during which the period clause was discussed.
419.	On 26 March 1998, Mr Brown wrote to D&H; he first dealt with the period clause:
“As I have previously stated, EIU did not exist in 1995 and therefore it would not be appropriate for them to underwrite a risk that had an inception date prior to the establishment of the company. The clause that we provided does however give them the ability to underwrite a risk where loss developments may occur after a given point in time once the company was established. Our view on this was to provide you with the coverage and at the same time accommodate EIU to enable them to participate.”
He then dealt with the authority issue:
“Secondly, we had provided you with confirmation that [SD] had agreed that EIU could accept these reinsurances on their behalf but EIU or [SD] are unwilling at this point to have [SD] sign off on these slips directly. As with your own MGU, there has to be a chain of responsibility for what business is underwritten and as such the responsibility for this lies with EIU. It would negate the underwriting agreement EIU have with [SD] if [SD] then began to underwrite any risks directly.”
420.	Mr Henton’s evidence was:
i)	He agreed in cross-examination on behalf of SCB that the comments recorded might have come from him – it might have been a repeat of what he had told Mr Brown in February. 
ii)	In cross-examination on behalf of SD, Mr Henton accepted that they could have gone to Mr Broad and that what was said in the letter was not their position. To say what Mr Brown said would not be true, but the matter was dragging on a bit and he might have said something to get rid of him.
421.	On 1 April 1998, Mr Tantony replied, reiterating the points that he had made earlier in relation to the period clause and the requirement that SD countersign, not underwrite, the slip. 
422.	On 3 April 1998, Mr Brown responded that they would try and come up with another period clause. He then continued: 
“Sign off by [SD]. As I stated previously, this is the one area where we are not certain we can achieve your request. To repeat my previous comments, [SD] have stated by signing the bordereau that this is sufficient to confirm their agreement to the risk.”
423.	Mr Henton’s evidence was that it looked as if they were having the same conversations and he was saying the same thing to Mr Brown; he might have said something like that to get rid of Mr Brown as the period clause had not been agreed. He could not recall saying that the bordereau was sufficient to confirm SD’s agreement, but the bordereau was signed and that was SD’s agreement.
424.	On 14 April 1998, Mr Brown wrote to D&H to say that he might have come up with a period clause which they could agree but that SD would not sign off the individual slips. 
425.	Mr Henton’s evidence was as follows:
i)	He accepted in cross-examination on behalf of SCB that he may have said what was set out in the letter.
ii)	In cross-examination on behalf of SD, he said that there had been discussions at that stage; he had not told Mr Brown to “get lost”; there were discussions about the period clause; he was worried that there might have been a misunderstanding as to what he was prepared to offer and what D&H wanted.
 (n)	New losses and further attempts
426.	On 15 April 1998, Mr Henton was, for the first time, sent a schedule of the reinsurances written by Mr Billyard at D&H; these showed that the reinsurances were all for 12 months at 1 January 1995.
427.	On 16 April 1998, Mr Brown wrote to Mr Cooke to say that he had spoken to Mr Tantony (who was prepared to accept a letter from SD saying that they understood the risks had been written); he was going to be in contact with EIU and SD that day. He also set out the history of the dispute with D&H and stated in one passage:
“To try and assist in these problems, we had provided D&H with stop loss quotes which they felt were too expensive. We then provided alternative quotations at a lesser price from an MGU which they now appear to be having problems with based on their requirement for the original carrier to sign off on the original slips. I have made this request of both the MGU and the original carrier but they cannot accommodate this as it will negate the underwriting management contract between the two parties.”
Mr Brown’s evidence was that he had been told by Mr Henton that SD were not prepared to do this; that Mr Henton was insistent that they went no further and that he was therefore unable to go and see Mr Broad. The reference in the letter to “the carrier” was the carrier via the MGA. Mr Henton’s evidence was that he might have said things to get rid of Mr Brown. 
428.	A draft period clause was prepared at about this time by Mr Brown which provided that the reinsurance would pay for losses that arose, increased or were reported subsequent to the Wakely report, but that all losses would count to the erosion of the excess point of $6.6m; Mr Brown accepted that this would have enabled D&H to make a large recovery, but his evidence was that Mr Henton would not agree to it. Mr Henton’s evidence was that the clause was not acceptable to him; he was not prepared to cover losses occurring before 1997.
429.	On 23 April 1998, SCB produced a draft of a letter which Mr Henton was to write to Mr Smith at HHI; this stated: 
“We have been asked by Unum to confirm that the risks detailed below have been accepted under Binding Authority number 50413 100% underwritten by [SD]…”
The draft then set out the seven contracts without any mention of the period covered and continued:
“As you are aware these items have previously been seen and noted under the normal channels, but we have been requested to provide individual notation of these specific risks.”
The draft continued by stating that they had not been given any firm order for the risks, but that the premium was to be increased by $400,000. The draft was provided to D&H; Mr Tantony proposed some changes which he sent under cover of a letter dated 28 April 1998; the important addition was a reference to the fact that the original risks incepted prior to 1 January 1997. 
430.	Mr Henton’s evidence was that he could only recall the draft vaguely; there was a discussion, he put the price up and was getting fed up. He may have well given Mr Brown that impression. There was in fact a new bordereau which showed more losses, though none at that stage were in 1997. Mr Brown’s evidence was that he would have been quite happy for the draft as amended by D&H to go to Mr Broad, but Mr Henton was not.
431.	Mr Henton’s evidence was that he increased the premium because of the loss figures received for the first quarter of 1998. His evidence was that counting up the losses for 1997, they came to $485,000 which was more than the Wakely report had suggested. As the agreement he had made was to pay all claims where the loss incurred after 1 January 1997 and notified after the date of the Wakely Report without any deductible, he had to put the premium up in order to make a gross profit. The figures that he counted were in fact in the loss runs attached to a memorandum of 5 May 1998, but his evidence was that it was possible that he had had them earlier. No document showing an increase in the premium was scratched.
432.	On 30 April 1998, there was a meeting of the LARG pool at which Mr Hoare reported on the negotiations and on their contacts with Clarendon; they had been considering the best time to avoid the reinsurances with their lawyers.
433.	On 7 May 1998, Mr Brown wrote to D&H; the letter referred to Mr Tantony’s letter and stated:
“Unfortunately there were a number of special requirements surrounding this deal and following a review of the letter provided EIU/[SD] have indicated that our proposed letter would not be acceptable to them…
I have attached the original letter which was acceptable to [SD]. If the attached letter is not sufficient, then it appears that we have reached an impasse.”
The letter also stated that EIU had increased the premium to $1m when they were presented with the up to date loss run.
434.	The only significant difference between the two drafts was that D&H had insisted on a reference (as set out at paragraph 429) to the fact that the original risks incepted prior to the date of the binder. Mr Brown’s evidence was that he was told by Mr Henton or Mr Henton and Mr Smith that they were not prepared to go any further.
435.	On 8 May 1998, D&H wrote to Mr Cooke to give notice of the avoidance of the reinsurances on the basis of the non-disclosure of loss figures, failure to reserve adequately, and other matters.
(o)	Conclusion
436.	SD had relied on the fact that SCB had employed Mr Bryan Hynes, in spite of his conviction for insurance fraud, to assist them in their dispute with D&H However, I attach no weight whatsoever to that fact. There was no evidence before me to suggest that he did not act other than with propriety towards D&H and I draw no adverse inference against SCB in any way for using him. They were entitled to treat him as someone who had paid the penalty for what he had done and be allowed to re-establish himself in the market.
437.	SD had also relied on the fact that Mr Kelly had not been called to give evidence and had asked me to draw an adverse inference from this; in the circumstances which I have set out I do not consider that it would be just to do so; he was in Court and was prepared to give evidence and I cannot infer that the decision not to call him was because he would give evidence adverse to SCB’s case in relation to Unum. Although it is clear that Mr Cooke was closely involved in many aspects of this matter, it is not necessary for me to make any findings in relation to his conduct. Although it was surprising that Mr Cooke was not called to give evidence, given his involvement in this and in other matters, I draw no adverse inference against SCB in relation to this matter.
438.	I am sure that Mr Henton had agreed on Christmas Eve 1997 to reinsure Unum in respect of all losses in excess of $6.6m on risks attaching for the period 36 months at 1 January 1995:
i)	This was what D&H had wanted, save that they did not want cover for 36 months from 1 January 1995, only for 12 months from 1 January 1997. The longer period was inserted for the reason set out in the next sub-paragraph.
ii)	The slip presented on Christmas Eve 1997 to Mr Henton was obviously crafted to try and fit in with the authority under EIU’s binder; as no risks had been written other than in the period for 12 months at 1 January 1995, the only point of extending the period to 36 months was to give the slip the appearance of covering a risk that at least in part coincided with the period of the binder.
iii)	As set out at paragraph 368, D&H recorded that they were told by Mr Brown that he had written confirmation of a deal at a price he believed that SCB could meet; that was entirely consistent with Mr Henton having agreed to the terms expressed in the slip as that reflected the deal which D&H had wanted.
iv)	If, as Mr Brown and Mr Henton said, the intention was only to cover the losses occurring after 1 January 1997, it would have been very easy to amend the slip to express this intention on Christmas Eve 1997.
v)	An amendment to split the reinsurance into seven layers was noted on the slip on Christmas Eve 1997 as signed; new slips were presented for signature on 29 December 1997 to reflect that notation. However, no change was made to the period clause. Mr Henton signed the seven slips without amending the period clause, even though it would have been easy to do so.
vi)	Mr Henton issued confirmations, each with the inception expressed in manuscript to be 36 months at 1 January 1995. It is incredible that this would have been written in if this was not what had been agreed.
vii)	The slip contained an excess point of $6.6m; this fitted in entirely with the reinsurance sought by D&H; it was nonsensical on the basis that what was being covered was losses after 1 January 1997 notified after the date of the Wakely Report. If, as Mr Henton maintained in his oral evidence, the excess point was not part of the agreement, then it would have been simple to delete it.
viii)	If all that was covered was losses after 1 January 1997 notified after the date of the Wakely Report, this did not provide the pool with what they had wanted (as must have been obvious to Mr Brown). Such reinsurance would not have assisted SCB resolve the dispute with D&H in any way and may have even made the pool’s position worse as they were paying $600,000 and not getting the protection that they wanted.
ix)	When, as set out at paragraph 427 below, Mr Brown wrote to Mr Cooke in April 1998, setting out the history of the dispute, he referred to the quotes from EIU as alternatives to the quotes from Berkshire Hathaway which had been too expensive, without suggesting that the quotes from EIU provided very little protection.
x)	I accept Mr Whitcombe’s evidence that it was his action taken sometime in very early January 1998 which acted as the impediment to Mr Henton and Mr Brown proceeding in the way that they had originally intended, and that Mr Henton had told Mr Whitcombe that he had made a mistake in agreeing to it. Although that was a lie, he had made no suggestion to Mr Whitcombe that the deal was other than that set out in the slips in respect of which confirmations had been issued. 
xi)	The documents were entirely consistent with the change coming about in early January 1998 and Mr Whitcombe’s evidence readily explains how that happened.
xii)	I do not accept Mr Brown’s evidence (referred to at paragraph 352). Clearly the business was gross loss making, but as no detailed information was provided by either CIRCL or Mr Cooke, I cannot assess the quality of the business. The true position was, however, that Mr Brown took the view that it did not matter; the real problem, from his viewpoint, had only arisen because D&H had increased the retention. If they had not done so, then, as he said in his evidence (referred to at paragraph 351), the losses would have been passed on to someone else and the problem would not have arisen at D&H. 
439.	I reject Mr Henton’s and Mr Brown’s evidence as a concocted fabrication that was designed to cover up the obvious dishonesty and collusion between them in procuring the writing of the reinsurance which was intended by SCB to assist them in resolving their dispute with D&H – this was to be done by transferring the losses to SD by means of a carefully crafted document that was intended to give the semblance of falling within the scope of the binder. Mr Brown knew that Mr Henton was acting in dishonest breach of his duties.
i)	It was clear that D&H were pressing SCB to procure reinsurance to protect them for losses in excess of $6.6m for a further $7.5m.
ii)	No one could be found to write it on terms which SCB and/or the pool members were prepared to fund.
iii)	“Financial reinsurance” is a complex subject and it is not necessary for me to lengthen this judgment still further by describing it in any detail. It is different to other reinsurances in that the risk borne by the “reinsurer” is often directly related to the expectation of investment income and the rate of claims payment; nonetheless the process of evaluating what the claims are likely to be is a procedure that any honest and prudent underwriter must carry out, not only for the purpose of “financial reinsurance”, but also for the purpose of ordinary reinsurance. The reinsurers who indicated that they would be prepared to offer “financial reinsurance” wanted more information before they would agree to write a contract. Although I accept that the premium under the “financial reinsurances” cannot be properly compared to the premium being sought by Mr Henton as the terms were so different, this does not in any way affect the fact that Mr Henton could not properly consider the reinsurance that he was offering on the information before him (as must have been obvious to Mr Brown from the position taken by the other reinsurers).
iv)	Mr Henton agreed to write the reinsurance without any meaningful information; he could only vaguely recall seeing the Wakely Report. Assuming in his favour that he had seen it, he did not study it or call for further information. No person acting honestly or in the best interests of his principal would have agreed to write the reinsurance without a careful study of both reports (as must have been obvious to Mr Brown).
v)	Mr Henton’s evidence in relation to the way he considered the premium was an invention. There was no time to study the Wakely report in the detail needed to find the figures for 1997; had he done so, he would have appreciated that he did not have the figure for Clarendon (where the overall losses were greater) which he would have needed, if he was to carry out any meaningful assessment.
vi)	There was no rational basis for charging a premium for the contract as expressed in the slip (which I have found expressed the terms agreed) that was so low, save that it was a sum which gave SCB what they wanted, at the least cost to them.
vii)	This was one of the risks that Mr Henton accepted for the reasons set out at paragraphs 1246 and 1247 of Part I.
viii)	Mr Henton clearly appreciated when he wrote the risk, that he had no authority to write it; his entry of the inception date “TBA 1997” for the programme into the bordereau submitted to Mr Broad on 29 December 1997 was on the same day as when he signed confirmations of acceptance giving the inception date as 1 January 1995. I  am sure that the entry onto the bordereau was a date that was designed to deceive by giving the impression that this was a 1997 risk.
440.	When Mr Brown and Mr Henton were unable to proceed with the original scheme in early January 1998, I am sure that they dishonestly colluded in an attempt to find a formulation of the period clause that would satisfy D&H and also to find a way of meeting D&H’s requirement that SD gave their own confirmation of the programme:
i)	The reason put forward by Mr Henton for not going to Mr Broad was that the period clause was not agreed; the explanations which he gave for the statements in the letters sent by Mr Brown to Mr Jones and to D&H were various and included his desire to get rid of Mr Brown because he was getting tired of the matter. I reject that evidence as an untruthful invention. If the period clause had not been agreed, that cannot have been the reason for not going to Mr Broad. In the bordereau submitted on 29 December 1997, he had sought Mr Broad’s agreement on the basis of a period “TBA”; in the bordereau submitted to Mr Broad at the end of January 1998, he had put the period in as 12 months at 1 August 1997; he had therefore reported an agreed period.
ii)	The true reason why he did not go was that EIU might have had to explain the risk that they were covering – a stop loss of Mr Billyard’s gross loss making business written in 1995 which was intended to be used to settle a dispute arising out of alleged misrepresentation by SCB. Whereas I am sure that Mr Broad did not ask questions about matters which he regarded as being of a routine nature, it is clear from the two risks that were taken to him for specific approval, that he did consider those. Mr Henton was therefore not prepared to take the risk of asking Mr Broad to approve the contract specifically in case Mr Broad had asked questions which would have led to the uncovering of the dishonest use of the binding authority. It was for the same reason that SCB did not seek to resolve the question raised by one of Mr Cackett’s principals in relation to the approval of a contract written by SD per EIU – see paragraph 1708 of Part I.
iii)	I am sure that Mr Brown knew that was the reason; given the importance of the matter to SCB, if he had thought that Mr Broad would approve the risk, I am sure he would have pressed Mr Henton to take the risk to him or would have even taken it himself. I am sure that he would not have accepted an answer from Mr Henton in which Mr Henton refused to give the reasons. The letters drafted by him and sent to Mr Jones, Mr Cooke and D&H gave an explanation that was untrue to his knowledge; Mr Henton’s evidence that purported to support this was a dishonest attempt to cover up their collusion.
iv)	I am also sure that Mr Henton was trying to accommodate Mr Brown’s request to provide cover within the constraint of what he thought he could accept under the binder.
v)	Mr Brown’s letters stated that the refusal was that of SD as well as EIU; his letter to Mr Cooke on 16 April 1998 is a clear example of this. In his evidence, Mr Brown stated that he had meant SD through EIU. I am sure that he had intended to convey the impression that SD had also refused. If the letter had merely stated that EIU had refused to obtain the confirmation, it would have been obvious that they had a good reason not to go to their principal. The letters were so drafted by Mr Brown in order to tell this further and deliberate lie; he knew that SD had not been approached and had never given the explanations set out in the letters. As Mr Whitcombe rightly accepted, these were lies.
vi)	SCB also resorted to fraudulent alteration of a document in furtherance of their attempts to deceive D&H. The bordereau presented to Mr Broad in early February 1998 had the period shown as “12m at 1 8.97”. As set out at paragraph 413, a copy of this was provided by Mr Butler to D&H, but before submitting it to D&H, SCB deleted the period and also the heading. It was submitted that this may have been unintended, but even if intended, there was sufficient reason to redact the period from the bordereau as the period had not been agreed with D&H. 
vii)	I am sure that the deletion was deliberate and that it had been done with the fraudulent intention of deceiving D&H. It was clear that D&H were particularly interested in the period as all the evidence showed; that must have been obvious to SCB; they knew that a period of 12 months from 1 August 1997 would be wholly unacceptable to D&H. If they had been told that the reinsurance had been approved by SD on the basis of that, they would have immediately appreciated that either SD were being misled (in that they had not been told the truth about the period) or that SCB had misled D&H as to the cover they could obtain for them; there was nothing in the period clauses put to D&H that suggested an inception date of 1 August 1997. SCB decided therefore to conceal the true position by making the fraudulent alteration to the document.
viii)	Although I have taken into account the fact that Mr Butler’s comment in his report to Mr Brown that he had asked Mr Henton to “doctor” a document for D&H was not put to any witness because of its late production, it is clearly indicative of the collusive relationship between Mr Henton and SCB. 
ix)	When towards the end of April 1998, D&H were prepared to agree to a letter from SD, SCB would not accept the one major change that they wanted – to make it clear that the original risks were 1995 risks. Mr Brown’s response of 7 May 1998 (referred to at paragraph 433) was dishonest when he stated that the redraft was not acceptable to SD whereas the original draft was. He knew that SD had said nothing of the kind. 
441.	Credit is due to Mr Whitcombe in preventing the execution of the obvious fraud that Mr Brown and Mr Henton had intended on Christmas Eve 1997 and on 29 December 1997 to perpetrate on SD by writing a reinsurance that would transfer up to $7m of the losses of the LARG II excess of $6.6m pool to SD for a premium of $600,000. However, he was prepared to collude with Mr Henton and SCB in providing a document on 27 February 1998 which he appreciated was intended to show that SD had approved the reinsurance; Mr Whitcombe was only asked to do this by SCB as Mr Henton was away and Mr Whitcombe did not know the full facts; I accept his evidence that had he known the full facts he would not have touched it with a “very long barge pole”.
Programme 17: Clarendon Temps scheme
442.	This programme was a 100% QS of $250,000 per occurrence of policies written by Clarendon in respect of a temporary employees scheme for the period 1 October 1997 to 31 December 1998; Mr Henton wrote a line of 100%. The programme is summarised in Diagram 17.
(a)	The scheme for temporary employees
443.	SCB devised a WC scheme for temporary staff and contract staff risks covering all industries in the US, with some classes (such as explosives manufacturing) the subject of special acceptances. The scheme incepted on 1 October 1997 and the QS written by Mr Henton covered the risk from inception; the book of business was derived from a book that had previously been written under the South Carolina Association of Personnel Services (SCAPS).
444.	The actual underwriting of the scheme was done by Stirling Cooke Risk Management Services Inc., an underwriting agency based in Maitland, Florida. The underwriter was its President, Mr O. Ray McCartha, who was based in Florida. It also had offices in Texas and New Jersey. The scheme was marketed by 262 retail agents throughout the USA and 47 wholesale agents.
445.	Policies were issued under the scheme by Clarendon (per Raydon), Legion and Realm National as fronting companies; the choice of carrier in each State depended on the scope of the carrier’s licence in that State.
446.	Mr Brown could not explain why SCB had not placed the programme earlier.
(b)	Information provided: the slip
447.	The information provided was:
i)	The slip.
ii)	A document entitled “Stirling Cook Alternative  Employment Staffing Workers’ Compensation Program”.
iii)	Loss runs.
It is convenient to consider each in turn.
448.	The slip stated that the estimated net written premium income was $1.5m and the brokerage was 5% of the gross written premium.
449.	The terms of the slip provided that the cover was to indemnify the reinsured for its liability under the scheme; Mr Henton’s evidence was that it was his understanding that there was reinsurance above the limit of the QS for an unlimited amount, and that the premium for that was deducted from the gross premium (see paragraph 459.vii) below). Mr Brown explained that the QS covered Section A of the WC scheme; Section B was covered by CIRCL; he suggested that reinsurance above $250,000 was provided by another carrier (not identified) at a rate of 3% (see paragraph 459.vii)) as part of a block policy placed by Clarendon for such cover. Clarendon  and the other front companies acted as a pure front; they took no retention, only a fee.
450.	The period of cover under the QS was 15 months; as policies could be issued up to the end of that period and although they were ordinarily for 12 months, they could be longer, the exposure could be to the end of 1999 or possibly even beyond that.
(c)	Information provided about the scheme
451.	The scheme was described in a detailed presentation provided to Mr Henton, which had been prepared for the insurers by Stirling Cooke Risk Management Services; it was entitled “Stirling Cook Alternative Employment Staffing Workers’ Compensation Program”. It was 15 pages long. Mr Henton’s evidence was that Mr Brown had pointed to several sections of the document and Mr Henton thought that he had read the first four pages. Mr Brown’s evidence was that it would have been his job to précis the document for Mr Henton. 
452.	The document set out the underwriting guidelines; these stated that Stirling Cooke Risk Management Services had conducted a survey of the “Workers’ Compensation situation faced in the personnel service providers business”. The survey showed that most personnel service providers were insured via the assigned risk facilities in various States; some were insured by companies such as Reliance and AIG. Not all personnel service providers were equal and some of Stirling Cooke Risk Management Services’ clients (not identified) had certain characteristics that made them better risks; they had taken a leadership role within their industry and had grouped their buying power together to establish a WC scheme alternative to the assigned risk plan; the alternative provided various features such as a claims service and incentives for loss prevention and loss reduction. The survey estimated that the market had $90m of premium for this scheme, of which less than 35% would qualify under the scheme. Each account would be written individually. The underwriting information required of the insureds were provided, as were the underwriting guidelines.
453.	The document set out the underwriting criteria (which Stirling Cooke Risk Management Services could change); the insurance was to be rated according to the rates established by the National Council on Compensation Insurance or another such organisation recognised in the relevant State. There were underwriting restrictions and provision was made for underwriting inspections. For certain types of employees, prior approval was required by Stirling Cooke Risk Management Services.
454.	The State-by-State concentrations, a list of target States, and the projected premiums were also provided. For the first year, $6m of premium was projected, rising to $15m in the second year, and then to $22m in the third year.
455.	Mr Henton could not recall whether he was told the industries that would be covered; he understood that the underwriting would be undertaken by Mr McCartha and his team. It was Mr Henton’s evidence that he had never heard of Mr McCartha before.  
(d)	Information provided: loss runs and analysis
456.	Mr Henton recalled being shown the summary of the SCAPS loss runs for 1995 and 1996. Mr Brown’s evidence was that the Stirling Cooke Risk Management Services scheme was the amalgamation of an earlier scheme or some other book, including the SCAPS scheme.
457.	Mr Henton said he vaguely recalled seeing a SCAPS analysis which showed that the gross loss ratio for 1995 (before an XL reinsurance) was 179.6% and for 1996 (before an XL reinsurance) was 122.6%; Mr Brown accepted that the 1996 figures were very undeveloped.
458.	Mr Henton’s evidence was that he was told that the book of business was changing and that they were looking to cut out some of the bad business and attract in new business that was better.
(e)	The deductions
459.	The deductions from the original gross rate for the purpose of calculating the net rate payable to SD were described as “typical program deductions” in an endorsement dated 25 February 1998 and set out in that endorsement as:
i)	Brokering and producing agent				12%
ii)	Policy issuance						3.5%
iii)	Loss control							2%
iv)	Issuing fee							7.5%
v)	Programme administration fee				3%
“Other deductions” were also set out:
vi)	Claims administration						6.5%
vii)	Statutory reinsurance covering losses above $250,000	3%
viii)	Taxes/RMLs etc.						TBA
This came to 37.5% plus tax.
460.	Mr Brown’s evidence was that he would have told Mr Henton of the deductions when the risk was presented. 
461.	In addition, the slip gave SCB 5% brokerage on the gross written premium.
(f)	The basis of acceptance 
462.	Mr Henton considered that he could write the QS because those underwriting the scheme were going to go after employment agencies which fell into the criteria set out in the 15 page document. He said that this differed from what had happened in previous years (which had not worked, although he did not know what had not worked) as they were re-writing the book. His evidence was the programme might make a gross profit.
463.	Mr Henton accepted that he had no control over the underwriting by Stirling Cooke Risk Management Services. Although the slip provided for underwriting inspections to be carried out by North American Risk Ltd., Mr Henton did not know anything about this entity. His evidence was that he intended to go and visit the insureds.
464.	Mr Jackson’s evidence was that an underwriter genuinely trying to protect SD’s interests would not have been content to accept the programme on the basis of the information provided, which included Mr Brown’s assertions about the proposed re-writing of the book of business; the QS would be loss making on a gross basis; the existence of SD’s outwards reinsurance programme did not provide any possible justification for the writing of this risk.
465.	Mr Hines agreed that the programme would be obviously loss making in light of the large deductions (though not to the same degree as in previous years); he had never written a 100% QS as it was prudent to make the reinsured bear a proportion of the risk he was writing, particularly where the reinsurer had no control over the primary underwriting. Although he was not an expert in WC business, temporary workers were a worse risk than ordinary employees; the losses that had occurred were no surprise to him.
466.	Mr Henton’s evidence was that for the purposes of calculating EIU’s fee, he treated the deductions as 34.5% (as the 3% for statutory reinsurance was not an acquisition cost) and then brokerage of 5% which took the total to 39.5%. EIU then took a fee of 2%-3%. The effect of this (as the statutory reinsurance was an additional cost) was that SD received only 50% of the premium. It was Mr Henton’s evidence that this was normal on this type of business. 
467.	It was Mr Brown’s evidence that the market at the time was soft and that reinsurers were prepared to write reinsurance with this size of deduction and with the policy-issuing company taking no retention and receiving a fee.
(g)	The position of SCB on the basis of acceptance
468.	Mr Brown accepted that this was gross loss making business. 
(h)	The losses
469.	The losses on the programme were $4.78m at November 2001 on a premium income to SD of $1.8m gross or $1.27m net. Further losses advised at the second quarter of 2002 have taken the incurred loss position to $5.09m. Mr Brown did not know what the cause of the losses was.
(i)	Conclusion
470.	This programme, like Programme 14, was one of the few programmes where Mr Henton accepted a first tier reinsurance; I have referred (at paragraph 323) to the fact that Programme 14 was unprofitable on a gross basis; similarly, the level of commissions and other deductions on this programme were very high such that less than 50% of the premium reached SD, who nevertheless took virtually all of the risk. 
471.	I am sure that EIU and in particular Mr Henton acted dishonestly in accepting this programme: 
i)	This was one of the risks that Mr Henton accepted for the reasons set out at paragraph 1246 of Part I.
ii)	Mr Henton took 100% of the risk under this QS in respect of a new programme where the figures on the old programme showed bad loss ratios. Although he had assurances that the book was being re-underwritten; Mr Henton knew nothing of the underwriter and had no control over him. He took no steps to substantiate the assurances or to find out what had happened since 1 October 1997 when the new underwriting had started. There were substantial deductions. He permitted SCB to take their brokerage on the gross premium before the deductions; the bulk of the risk was effectively borne by SD for half of the original premium. It was obviously loss making in such circumstances and Mr Henton’s evidence that he believed that it might be profitable on a gross basis was dishonest. The QS was backdated by three months. 
iii)	If Mr Henton had been acting honestly, he would not have accepted the QS; he would not have written 100% and left those doing the underwriting and supervising it with no retention.
iv)	He provided cover on an RAD basis whereas the outwards reinsurance he was obtaining was on an LOD basis for 1997 and 1998; for the reasons given at paragraph 1246.xii) of Part I, he knew that it was wrong to expose SD to the mismatch in terms for the reasons set out.
v)	Although he had no authority to write a line of 100%, as set out at paragraph 1191 of Part I, I am satisfied that Mr Broad accepted the 100% line by initialling the Christmas Eve bordereau.
vi)	Mr Whitcombe acquiesced in what was done without any real enquiry into this programme.
472.	Mr Brown knew that Mr Henton was acting in dishonest breach of duty and dishonestly assisted him in this:
i)	This programme was put before Mr Henton in the circumstances set out at paragraphs 1246 and 1247 of Part I. This programme was included in those that Mr Henton was required to write in order to obtain the outwards reinsurance, because SCB had been unable to find anyone else to write the QS on the terms offered. 
ii)	I reject as dishonest, Mr Brown’s evidence that this was the kind of contract without a retention that would be written in a soft market. His suggestion that he did not know why it was placed late was dishonest; It was clear that he could not place it which given the business he was seeking to place on the terms of a 100% QS without a retention was to be expected. It was nothing to do with soft market conditions as he knew. His evidence was dishonest.
iii)	Mr Brown knew that no honest agent acting in the interests of his principal would write a 100% QS with the policy-issuing company taking no retention, particularly where that agent had no control over the underwriting of the scheme, knew nothing about the underwriter, and was allowing or taking deductions on loss making business where his principal would get only 50% of the original premium.
iv)	As set out at paragraph 1246.xiii), Mr Brown fully appreciated that no honest agent would expose his principal to the obvious risks in the then market arising from the mismatch between granting cover on an RAD basis but only obtaining reinsurance on an LOD basis.
Programme 26: Mr Cackett’s specifics 
473.	I have set out an account of the acceptance of this programme at paragraphs  1685 and following of Part I. My conclusions on the underwriting of this programme are set out at paragraphs 1704 and 1705 of Part I.
4.  	THE NEW YEAR’S EVE PROGRAMMES
Programme 18: Clarendon (per Raydon) – “direct” generals programme 
474.	SCB placed for Clarendon, a generals or whole account reinsurance of their PA account in four layers for $4.99m xs $10,000 on an RAD basis of business for 12 months at 1 January 1998:
i)	the first two layers were reinsured by John Hancock (per JEH Re); 
ii)	on the third layer, 50% was underwritten by John Hancock (per JEH Re) and 50% by Mr Henton; and
iii)	on the fourth layer, 33.33% each was written by John Hancock (per JEH Re), CIGNA (through their in-house underwriter, Mr Minter) and Mr Henton.
The programme is summarised in Diagram 18.
(a)	The nature of the business reinsured
475.	This was the generals programme that protected Clarendon’s reinsurance business written under a facility granted to Raydon by Mr Murray. According to Mr Butler, the reinsurance business written by Mr Murray under the facility was low level, high deductible, occupational accident and treaty business; even though the wording of the slip did not exclude LMX business, the programme was intended to cover the whole account non-LMX writings of Raydon; Mr Butler did not believe that Raydon knowingly wrote LMX at the time. Mr Murray wrote a varied account; a spread of that business was for SCB brokers in London and throughout the US, but he also wrote business to other brokers. Mr Butler did not know what proportion of that account was SCB business.
(b)	The structure of the reinsurance
476.	The programme was led by Mr Billyard who had quoted on the same rates as those in 1997.
477.	Mr Henton knew the structure of this programme as he was shown the quote sheet for 1998; he also knew that JEH Re was the leader; he appreciated that the line taken by JEH Re might come to SD under Programme 12. Mr Butler agreed that it could be ceded under that programme, but he did not know if it was, as Mr Billyard ran his own operation. Mr Henton was not sure if he knew that JEH Re were writing the lower layers of Programme 18 or that CIGNA was writing alongside him; he accepted that the CIGNA line on the higher might be picked up under Programme 27 which was written on the same day as Programme 18; Mr Butler agreed it could be. However, that layer had had no reported losses.
478.	The estimated gross premium income for the two layers was $380,000; SD’s net share was $123,000.
(c)	The information provided
479.	The information provided, apart from the quote sheet for 1998, was:
i)	the slip;
ii)	an information sheet; and
iii)	loss statistics for the layers that he wrote.
480.	The slip described the business as that which was assigned to Clarendon’s PA account; it was stated to include all assumed reinsurance and “First Party Bodily Injury claims in respect of policies written on NCCI/1996 ISO policy forms”; Mr Henton did not know what “first party bodily injury claims” were. The slip did not exclude retro (but the information sheet could be said to have shown that LMX retro was excluded, as the line structure showed the PA treaty line as “ex. LMX”). 
481.	The information sheet showed that the account was PA treaty 15%, high deductible WC (the deductible being borne by the insured) 30%, occupational accident 30% and AD&D/primary occupational accident (business with little or no retention) 25%. The sheet showed that these percentages had been the same since 1995 and that the same was intended for 1998. Mr Henton did not know what underlying business this covered, other than that indicated by the sheet; he also did not know the rating being applied by the underwriter at the original level, or whether those underwriters were writing below the published rates. It was his evidence and that of Mr Butler’s that he had the information normally supplied in the market. 
482.	The loss statistics were dated 22 December 1997 and were as at the third quarter of 1997. The statistics showed that the premium to the layers had fluctuated heavily. The layer $3m xs $2m was clean; the statistics for the layer $1.5m xs $500,000 showed:
i)	Though the rates had at first been 5% and then 4.705%, a simple calculation showed that the gross premium income to the programme had been $15.26m in 1993 and that the loss ratio for that year was 167% (gross) or 200% (net of the SD deductions on the assumption that they were applied to that layer that year).
ii)	In 1994 the gross premium income to the programme had been $6.76m, with no losses.
iii)	In 1995 the gross premium income to the programme had been $18.02m, with the loss ratio being 70% gross and 80% net at that stage with development to come; Mr Henton’s evidence was that he did not think that there would be much development; the reserves were set by Clarendon.
iv)	In 1996 the gross premium income to the programme had been $8.77m, but that might grow as more premium income came through; the loss ratio on the then current figures was 172% gross or over 200% net. 
v)	Only the gross premium income figure was shown for 1997.
vi)	Looking at all the years as a whole on this layer, the gross premium income under the reinsurance was $2.73m and the losses were $2.58m – a loss ratio of 95% gross and about 135% net.
483.	Mr Henton’s evidence was that he could not recall if he had spotted the fluctuations in the premium figures, but that the broker would probably have pointed that out during the broke; he might not know what had caused the figures to fluctuate and did not enquire into the programme’s history. There were three possibilities – the same account and lower premium, weeding out of loss making business and charging higher premiums, or changes in the specifics programme.
484.	Mr Butler’s evidence was that the information provided was standard; it was the way he had placed business in the market since he had started in it; it had been accepted by the other participants in the risks such as CIGNA.  There was nothing to show that the programme would be profitable and nothing to explain the fluctuations though the reinsured might have varied its cessions to the generals programme as it had specific reinsurance.
485.	There was no information in Mr Henton’s file or in SCB’s file which gave the details of the losses, though there were loss runs for previous years; the one for the layer $1.5m xs $500,000 was as at October 1995. 
i)	If the loss runs for previous years had been shown to Mr Henton, Mr Henton said that he would have been interested to see them to understand the loss frequency of the account, but that he would not have been interested in the details of the losses. His evidence was that the broker might sometimes show him information about loss frequency and he might sometimes ask for it. 
ii)	Although Mr Billyard was the leader and SD might be picking up losses from Mr Billyard under Programme 12, Mr Henton’s evidence was that he would not have expected Mr Billyard to examine the details of the losses or the details of the business or the risk control systems in place; Mr Billyard would look at the overall loss record and loss frequency and base his rating on that. 
(d)	The basis of acceptance
486.	Mr Henton thought that there was the prospect of a gross profit, but if it was not, he had his reinsurance to cater for it.
487.	Mr Jackson’s evidence was that the programme could not have been properly written on a gross basis without more information; he did not have enough information to know whether it would make a gross loss, but this was not as bad a programme as some others. Mr Hines considered that it could have been written on that information, provided that the underwriter had carried out a lot of investigative work ahead of time, as this was not a low working layer reinsurance; it was not possible to tell whether the layers written by Mr Henton would have made a gross loss. Mr Hines considered that the case was the same in respect of a net underwriting approach. 
488.	This programme was one of those examined by Mr Coppinger during the review at EIU in July 1998. He commented in his note that the arrangement would appear to be break even without taking into account loss development or the deductions.
(e)	SCB’s position on the basis of acceptance
489.	SCB accepted, in their letter of 4 December 2001, that the lower layers of the programme were writeable only on a net basis. Mr Butler’s evidence was that he was not too sure that this would have been looked at as an arbitrage write. 
 (f)	The losses
490.	There were losses of $1.72m at the end of the third quarter of 2001. Further losses advised by the end of the second quarter of 2002 have taken the incurred loss position to $1.92m, on a net premium income to SD of $81,600 – a loss ratio of 2,350%, though there may have been more premium to come. Mr Butler could not explain why the account written by Mr Murray had been so disastrously loss making – he did not know what made up the underlying portfolio of the programme, even though the portfolio included SCB business.
 (g)	Conclusion
491.	This programme was not at a low working layer, and if the underwriter had studied WC business properly, had devised a proper underwriting plan and had the assent of his principal to engage in this business with appropriate reinsurance, it is possible that the programme might have been written on terms that would not have involved  any improper breach of duty. 
492.	I am sure that EIU and in particular Mr Henton acted dishonestly in accepting this programme: 
i)	This was one of the risks that Mr Henton accepted for the reasons set out at paragraph 1246 of Part I.
ii)	Mr Henton knew virtually nothing about WC business and had no underwriting plan; there was no information that would have been needed to assess the risk on a gross basis and no information about loss frequency that would have been needed to assess the risk on a net basis. 
iii)	I am sure that in these circumstances Mr Henton did not act honestly in the interests of SD in writing this programme. 
iv)	He provided cover on an RAD basis whereas the outwards reinsurance he was obtaining was on an LOD basis for 1998; for the reasons given at paragraph 1246.xii) of Part I, he knew that it was wrong to expose SD to the mismatch in terms for the reasons set out.
v)	Mr Whitcombe acquiesced in what was done without any real enquiry into this programme.
493.	Mr Butler knew that Mr Henton was acting in dishonest breach of duty and dishonestly assisted him in this:
i)	This programme was put one of those before Mr Henton in the circumstances set out at paragraphs 1246 and 1247 of Part I.
ii)	As set out at paragraph 1246.xiii) of Part I, Mr Butler fully appreciated that no honest agent would expose his principal to the obvious risks in the then market arising from the mismatch between granting cover on an RAD basis but only obtaining reinsurance on an LOD basis.
Programme 19:  The Hallmark scheme  
494.	This programme, which Mr Henton wrote 100%, provided XL reinsurance to a group of underwriters led by Mr Crane of Syndicate 53. The programme was written on an RAD basis for 12 months from 1 January 1998 in respect of losses the reinsureds sustained as XL reinsurers of a book of business underwritten in the US and known as the Hallmark scheme. An aggregate stop loss protection of Mr Crane and his co-reinsurers was provided as part of the arrangement; this was written 100% under the Aviary lineslip. This programme is complex and is summarised in Diagram 19.
495.	Before explaining how the programme was put together, it is necessary to describe the underlying scheme as appeared from the evidence before the Court. The evidence was not at all satisfactory, but it was characteristic of much of the business in that these large contracts were written without a clear understanding of the underlying arrangements.
(a)	The origins of the underlying scheme
496.	In about 1989, a programme to provide WCA coverage was begun under the name of Security Self Insurance Association. It was based in Oklahoma City and became associated with Hallmark Reinsurance Company Ltd. (Hallmark), a Bermuda-based captive; the evidence before me as to the ownership of Hallmark was unclear, but Mr Butler thought that it was owned by those who bought insurance through it. Hallmark was sold to PCA Solutions Inc. and the Hallmark team operated as PCA Solutions for some time. In the summer of 1997, PCA Solutions sold the business to Humana Workers’ Compensation Services Inc. (Humana).
497.	Clarendon and its QS reinsurers provided a facility to Hallmark; the New York head office of Clarendon allowed its paper to be issued and the reinsurances were arranged by Raydon. The US brokers responsible for the whole scheme were Midland Management Corporation of Oklahoma (Midland Management), the principal being Mr Charles Caldwell. A binder was provided through SCB to Mr Caldwell by Mr Crane of Syndicate 53, a syndicate managed by Crowe Syndicate Management Ltd. (Crowe). Mr Crane (whose experience at his syndicate is referred to at paragraph 563) gave evidence as I have mentioned at paragraph 208 in Part I. 
498.	The scheme had been underwritten on the basis of a binder with a QS; the common account XL reinsurance for Clarendon and its QS reinsurers that was eventually written by Mr Crane and others had been underwritten by Mr Murray of Raydon in earlier years for $275,000 xs $25,000. It was Mr Crane’s evidence that the binder had been profitable on a gross basis on all years but one. 
(b)	The refusal by Mr Crane
499.	The placing for 1998 began in mid-November 1997 when SCB (probably Mr Morris) approached Mr Crane in mid to late November 1997 to write the XL reinsurance of the account for a layer of $475,000 xs $25,000. 
500.	Mr Butler calculated the burn rate (total premium against total claims) at 23.84% of gross premium income; he also worked out the deductions on the binder. Mr Crane could not recall if he had seen the calculation of the burn rate, but his evidence was that that was the kind of calculation he would have made and he confirmed its accuracy. It was based on the loss statistics (referred to at paragraph 527) which Mr Crane might have been shown, and on the landscape table showing the premiums (referred to at paragraph 533) which Mr Crane was shown.
501.	Mr Crane declined to write the reinsurance. He explained that he declined it because of the claims history and because he thought it would be unprofitable. On the information provided to him, he thought it would be difficult to predict the profitability of the business with the premium varying so much; however, he considered that the reinsurance would make a gross loss on a considerable scale. The calculation of the burning cost made by the broker did not take into account factors such as brokerage, inflation, loss development and other factors; although Mr Crane did not do a calculation, he could see at once that the offered rate of 18.5% gross (or 13.69% net) was not going to work. It was clearly going to lose money at that rate and he sent the broker away. He said that if he was going to write it on a conventional basis, then the rate would probably have been more than double what it was, but that he would only have reached that conclusion after considerable study and enquiry.
502.	He was also not prepared to write the reinsurance because he was reluctant to expose his syndicate’s outwards reinsurance programme to the level of loss which would likely emanate from writing the risk; he did not want to jeopardise the future renewal of that outwards programme by ceding too much loss to it. Moreover, he was unprepared to write 100% of the $475,000 xs $25,000 layer because he could not accept that much premium income. However, he agreed to write the programme when he was offered in-built reinsurance.
503.	That in-built reinsurance was provided by Mr Henton and by CIGNA under the Aviary lineslip.
(c)	The role of Mr Henton and Mr Bird
504.	Mr Butler’s evidence was that he had had a meeting with Mr Henton on about 17 December 1997; Mr Butler thought that he had spoken to Mr Henton then about providing an XL reinsurance of the entire exposure which SCB had wished to place with Mr Crane, subject to a retention of $10,000. 
505.	Mr Henton’s evidence was that he thought that the risk was mentioned to him just before Christmas 1997 and that he recalled it being talked about on either 23 or 24 December 1997; he could not recall if he was told about it on 17 December 1997. All that he could recall was that there was a discussion on 17 December 1997 about the writing of new business.
506.	It is clear, however, that Mr Butler must have been fairly sure on 17 December 1997 that Mr Henton would write the XL reinsurance, as it was used on the same day to persuade Mr Crane to change his mind.
507.	Mr Bird was approached at the same time to see if there could be provided under the Aviary lines slip an aggregate stop loss to protect the $10,000 which Mr Crane and his co-subscribers would have to retain under the XL Mr Henton was to provide to them.
508.	The terms of these two reinsurance arrangements were carefully worked out by SCB in a premium flow chart, prepared, according to Mr Butler, by Mr Morris or a member of Mr Morris’ team. Mr Crane’s evidence was that this was prepared for the benefit of the following market after he had agreed to write his XL, but that it was the sort of calculation he would have done before agreeing to write his XL. 
509.	The calculation showed that, on an estimated gross premium income of $57.1m under the underlying scheme, Mr Crane (and his following market) would be left with $4.3m of premium after deducting the cost of the XL reinsurance (that was to be written by Mr Henton) and the aggregate stop loss reinsurance (that was to be written under the Aviary lineslip) which totalled 45% of the net premium income to Mr Crane. The aggregate stop loss would take effect at 85% of net premium income or at $4.15m (or after 415 retentions). The aggregate stop loss would protect Mr Crane (and his following market) for a further 500 retentions before exhaustion. Over the four previous years of the programme taken together, there had only been 630 losses excess of $25,000. As the aggregate stop loss cut in at 85% of net premium income  and provided protection until the 915th loss, the reinsurances provided by Mr Henton and by CIGNA under the Aviary lineslip would guarantee a small profit to Mr Crane and his following market, save in the unlikely event of the losses exceeding, by a considerable margin, the combined total losses of the four previous years of the programme. 
510.	It is hardly surprising therefore, when Mr Crane was approached again to write the XL reinsurance of the underlying scheme with the benefit of the in-built reinsurance, that he was prepared to write the XL reinsurance that he had declined because it was likely to be so loss making. On 17 or 19 December 1997, Mr Crane scratched a slip to provide a reinsurance to Clarendon and its QS reinsurers for $475,000 xs $25,000. This was subject to the in-built protection for $465,000 xs $10,000 with an aggregate cover for the $10,000 retention for $5m excess of 85% at a total premium of 45% of what was received, less brokerage; the slip for the underlying XL reinsurance noted “Security: CIGNA/Sphere”. Mr Butler’s evidence was that he thought that Mr Crane put the line down on 17 December 1997, as he had recorded a meeting with Mr Crane that day in his diary.
511.	Mr Crane’s evidence was that he was content with the security, and that having done the calculations, thought that the reinsurance he was writing would “turn a small profit for the syndicate”. He agreed to write the risk because the in-built reinsurance made the acceptance nearly risk-free and it provided the syndicate with premium income which it needed at the time, as it was short of income for its PA account. It enabled him to bring the premium income up for his syndicate’s PA account, with very little downside as it appeared then.
(d)	The mechanism for passing the losses 
512.	Mr Crane’s evidence was that his syndicate’s traditional aim was that all business accepted should make a gross profit and a net profit; however, due to the way in which the market moved, it was no longer possible to always do this and maintain the same income levels, though the philosophy generally remained the same. The acceptance of this underlying XL reinsurance of Clarendon and its QS reinsurers on a gross loss making basis was therefore most unusual, very much an exception and a one-off arrangement. Although he considered that Names generally did not worry as to whether the profit was gross as long as they received a net profit, if they had thought about the matter, they would have appreciated that writing an account of gross loss making business entailed greater risks for them. 
513.	Mr Crane accepted that he knew that SD would make a gross loss, but that he did not know what their reinsurance arrangements were, as that was not his concern. He rejected SD’s contention that what he did was dishonest as it was a common market practice for losses to be shunted from one place to another and to go round and round in circles until it disappeared into some unlucky person’s hands; it was a long standing market practice.
514.	Mr Crane was shown a loss flow chart produced by SD for the purposes of the trial which demonstrated that the loss ratio, on a conservative basis to Mr Crane’s reinsurers (ignoring loss development, inflation and other adverse factors), would be at least 260% and that the only way he would make a profit was on the back of those reinsurers. He accepted that he was only going to make a profit, as a result of his reinsurers paying him a lot of money, but such a notion was too simplistic as it ignored what his reinsurers would be doing – there was an arbitrage market and a retro market and “losses were passed from pillar to post, round and round, and where they stopped nobody knows”. Although there was a constant diminution of premium, the losses were being passed on.
515.	Mr Butler’s evidence was that, as brokers, they gave no thought to how the losses would come through to individual reinsurers. However, a note drafted by Mr Butler on 17 December 1997 (the contents of which were reproduced in a letter that was sent to Mr Caldwell by Mr Morris) stated: 
“We have managed to secure pricing for the specific layer at 18.5% of gross premium income for a layer of $475,000 xs $25,000. This is well within the burn and it is an extremely cheap price based upon historic claims information. Taking into account the revitalised underwriting criteria it is still going to be extremely close. In order to protect the Lloyds facility which may write this layer there must be reinsurance available for the participants. This reinsurance obviously is going to cost and at present it would seem to be pricing in the region of 40-50% of the net premium income accounted for into the Lloyd’s facility.
Once again this reinsurance is very very cheap based upon losses, and the only way we maybe able to attract reinsurers into participating upon this layer is to offer reduced deductions allowing more premium to flow to the risk carriers….”
	The letter then set out suggestions for altering the commission structure.
516.	Although Mr Butler’s evidence was that he did not know what the gross position for SD was, it was his evidence that the position on the net was in any event different. He pointed out that Mr Caldwell did not object to the contents of the letter (referred to at paragraph 515) which was sent to him.
(e)	The writing of the risk by Mr Henton on New Year’s Eve 1997 
517.	This programme was accepted by Mr Henton on New Year’ Eve 1997.
518.	Thereafter the underlying XL reinsurance $475,000 excess of  $25,000 led by Mr Crane was completed. His co-reinsurers were Syndicate 1101 (Theakston), Syndicate 957 (Feasey) (the three syndicates taking 58.83% in all), Reliastar (9.8%) and Trustmark (per WEB) (31.37%).
519.	As Diagram 19 shows, Clarendon’s QS reinsurers on the underlying scheme were CIGNA and Trustmark per WEB. Losses under that part of the retention of $25,000 written by CIGNA under their QS were liable to pass under Programme 11.
520.	The retention of $10,000 under the XL reinsurance which was written by Mr Henton, was, as planned in the circumstances described above, reinsured 100% on the Aviary lineslip by an aggregate stop loss policy excess of 85% of the net premium income, up to $5m. 
521.	As set out in Diagram 19, losses under the aggregate stop loss were liable to pass under Programme 23 (the CIGNA cession treaties). As set out at paragraphs 713 and following, an amendment was made to the slip for Programme 23 as Mr Minter wanted it made clear that the Hallmark account was covered under Programme 23. 
522.	 When Mr Henton accepted the programme, he was provided with:
i)	The slip. He wrote 100% to sign 50%, but it did not sign down and SD carried 100%. Mr Henton queried this, but could not recall what he was told. In any event, as his basis of acceptance was net underwriting, he considered that he would be getting for his 100% line twice the premium for the same retained losses.
ii)	The slip for the underlying XL reinsurance that was led by Mr Crane.
iii)	The loss record.
iv)	An overview and historical narrative, the QS slip, the landscape table referred to at paragraph 533, information about the QS, the loss runs for losses excess of $25,000, an internal memorandum to Clarendon from those underwriting the scheme, premium projections by State, and a table showing deductions for 1 July 1996/7.
It is necessary to describe the more important of these documents.
(e)	The structure in place for 1998
523.	When the underlying scheme was placed, it was intended that PCA Solutions should write the underlying scheme for 1998, with Clarendon as the policy-issuing company. The policy-issuing company had a 100% QS with Trustmark (per WEB) (45%) and with CIGNA (55%) which was supported by an extensive XL reinsurance. Raydon managed the reinsurance recoveries, but not the original underwriting.
(f)	The way the information provided was considered
524.	A considerable amount of information about the underlying scheme was provided, though on examination, it was incomplete as several important documents were missing from both the EIU file and the SCB file. 
525.	In his witness statement, Mr Henton said that during the broke, Mr Butler spoke to him about the programme at some length, whilst he “flicked through the package of information”. Mr Henton’s oral evidence was that “flicked through” was perhaps not correct, as he did read through a number of the documents; Mr Butler would have referred him to particular sections of the documents and would have then summarised the position on the programme. He would have listened to Mr Butler’s presentation as he read through the documents. Mr Henton’s evidence was that, although EIU’s fee would be over $300,000 on a premium income to the underlying scheme of $57m, he did not think that he needed to spend more time on the documents as the account was changing and he was underwriting the programme on a net basis. He did not appreciate at the time that the information provided was not complete.
526.	Mr Butler’s evidence was that it was not obvious to him that Mr Henton had not considered the information provided properly. His evidence was that Mr Henton had done nothing different to what other underwriters had done at that point in time.
(g)	The information about losses under the scheme
527.	Undated loss statistics were provided for the years 1994-7; they showed the losses incurred excess of $25,000, excess of $50,000, excess of $75,000 and excess of $100,000 and in layers above; there was no column for the losses incurred excess of $35,000 at which Mr Henton would be taking the risk ($10,000 xs $25,000). Mr Butler accepted that they were a little bit lazy in not providing the figures, but that if Mr Henton had really wanted them, they would have been provided. Mr Henton did not know why SCB had not provided the figures, despite the fact that SCB were earning a large commission. Mr Henton’s evidence was that he did not ask for the figures because there was to be a re-underwriting which was going to affect the numbers going forward. He accepted Mr Jackson’s calculations of the percentage of losses that fell into the band excess of $35,000; these showed an increasing trend from which it could be estimated that in 1998, 32% of the total losses (by value) would fall into that band. Mr Henton’s evidence was that he did not expect the trend to be repeated in 1998 because of the proposed changes to the account. 
528.	Mr Henton also accepted Mr Jackson’s calculations that in order to break even on the premium he had charged, the loss ratio would have to be between 10% and 20%. 
529.	Mr Crane saw the loss statistics; he considered that the figures for his layer excess of $25,000 were particularly poor for 1996 and 1997. It was his evidence that the loss figures were only a rough guide to the future; this was because the income had varied so much. As set out at paragraph 501, he had originally declined to write the XL reinsurance.
530.	Mr Henton looked at the loss runs for losses excess of $25,000 which were also provided, from which it was possible to count up the number of losses for a layer $465,000 xs $35,000; Mr Henton said that he went through these and counted up the number of losses, as there was no summary of the number of losses. He had worked out that in 1994, 81% of the losses were below $35,000, 78% in 1995 and 73.5% in 1996. He based his decision to write the programme on the loss runs that he had seen and on the expectation that the underwriting would improve. In counting up the number of losses, he had carried out an exercise which was similar to that which SCB had done in their calculation for Mr Crane’s following market (as set out at paragraphs 508 and 509).
531.	There were triangulations dated 31 March 1996 for part or the whole of the previous account under its former style of “Security Self Insurance Association”; these showed that the account developed for about four years and then stabilised (in 1990 the incurred loss ratio stabilised at 85% with 88% in the sixth year; the incurred loss ratio for 1991 showed a similar pattern). Mr Henton’s evidence was that he attached more importance to the passage in the memorandum referred to at paragraph 535 which described the reserving practice in place. 
(h)	Information about the scheme and the underwriting
532.	An overview and historical narrative was provided; this explained that the market was competitive and that, save in Mississippi where they had identified a number of bad accounts, the deterioration in the results had been due to uncompetitive pricing, a matter which they had intended to address.
533.	Attached to this was a schedule in a landscape layout (the landscape table). This set out for the years 1994-7, the premium income (by reference to the manual premium, the normal premium and the earned premium), the total incurred loss and the loss ratios at the front end:
i)	Mr Crane’s evidence was that the normal premium was the premium without loaders and discounts (as filed in each State) and that the manual premium was the premium with the loaders and discounts applied to it, depending on the nature of the risk and the nature of its record (as permitted by the filings).
ii)	The table showed that the normal premium under the scheme had grown between 1994 and 1997 from a premium income of $6.4m in 1994 to $23.1m in 1996 and to $101.3m in 1997; the projected premium for 1998 was $58m.  
iii)	Mr Crane’s evidence was that it was his conclusion that this was a difficult account to predict because of the variation in the premium income; he thought that the loss ratio for 1997, which was already 74.53% (and was going to get much worse), was indicative of the fact that the extra premium put on the books between 1996 and 1997 was not good business. 
iv)	The 1997 figure of $101.3m was in fact wrong. Mr Butler’s evidence was that he did not appreciate this at the time; it should have been $49m. The important point, Mr Henton agreed, was that the proposed figure for 1998 was roughly 2.5 times the figures for 1995 and 1996, but he added that the proposed figure for 1998 was less than the figure for 1997, which suggested a confirmation that the business had been re-underwritten. The loss ratios had been declining from 68.91% in 1994 to 73.77% in 1996; the figure for 1997 was given as 74.53%, but it should have been 77.69%; the figures for 1997 were, in any event, not useful as there was more development in the figures to come. 
534.	In addition to these documents there was a memorandum from Mr Marshall Snipes of Humana to Mr Chris Foy, a Vice-President of Clarendon, dated 4 November 1997 with attachments. This was in response to letters from Clarendon and addressed the problem described as: 
“Loss development on the existing Clarendon program has become unacceptable.”
The memorandum summarised a review of what had happened and gave the reasons for the adverse loss development as well as the plans to improve it. It concluded that the major cause of deteriorating loss ratios was inadequate pricing:
“While our emphasis was on growth and following the underwriting guidelines, too many exceptions were made because of competitive pressures.”
Mr Henton attached importance to the memorandum and its exhibits; Mr Jackson accepted that most of the steps outlined in the memorandum were positive; Mr Hines’ evidence was that it was positive that the underwriters were identifying the problems and trying to do something about them.
i)	The improvements included a reduction of the overall premium income, a reduction of the agency network and the tightening of underwriting guidelines. 
ii)	In respect of re-underwriting, it stated:
“Re-underwriting of the current book of business through the on-going underwriting process which includes:
1. Identification of targeted accounts with adverse cumulative       loss ratios. (See Exhibit 3).
2. Underwriting of the remaining book of business to a 125% loss ratio. (See Exhibit 4 – Results of Ongoing Underwriting).” 
iii)	Exhibit 3 set out the loss making part of the book of business that was taken on by Clarendon from the Mississippi United Business Self Insurers’ Fund; the exhibit listed 54 accounts on which the total incurred losses were merely $6.24m and might not therefore in themselves make a material difference to the loss ratio of the re-underwritten account. 
iv)	Exhibit 4 might have explained what was meant by underwriting to a 125% loss ratio, but it was not provided to Mr Henton, though it was made available to the court from documents held by SD.
a)	Mr Henton’s evidence was that this did not mean that the book would be written to a 125% loss ratio, but to a maximum loss ratio of 125%. He said on the next trial day that that might not be right and that he had worked out that the figure of 125% might have been the 20% discount that the MGA was giving off of the manual premium; he had worked out that the figures that were given for normal premium was 80% of figures that were given for manual premium; expressing it the other way round, the figures for manual premium was 125% of the figures for normal premium. He considered that this must have been the case as the average loss ratio was below 125%. He thought that what the MGA had been trying to do was to write the account so as to give Clarendon a profit; in 1995 and 1996, if the deductions detailed on the QS slip were deducted from the earned premium figures shown in the landscape table, the loss ratio to Clarendon would have been 105% in both years.
b)	Mr Butler’s evidence was that it meant that no individual account would be written at more than a 125% loss ratio. 
c)	Mr Crane’s evidence was that he thought that it meant that any business with a loss ratio of over 125% would be discarded and any business with a loss ratio up to that would be reassessed; although the MGA did write for income to a certain extent, they nevertheless did not want to kill all of their reinsurers as they would otherwise eventually run out of reinsurers.
The exhibit showed the overall loss ratio was reduced quite substantially on each year if accounts with loss ratio of over 125% were eliminated, but it was not clear when this was looked at with Exhibit 3 what accounts were to be eliminated if the premium volume was to be maintained. This did not matter, as the important point was that Mr Henton did not call for the document.
v)	Mr Henton’s evidence was that he knew nothing of the past history of Mr Snipes and whether Mr Snipes could implement the proposed changes and bring about a re-underwriting of the account. Mr Henton knew nothing of the businesses that Humana insured.	
535.	The memorandum also referred to the reserving policy that was set out in Exhibit 1; this described the reserving policy under which the client representative was to reserve to the ultimate within 180 days of filing a case with Humana; Humana produced figures which showed that this worked in all States except for Mississippi, and that at the 180 day point, the figures did not need additional development factors applied to them in order to predict the ultimate loss position. The exhibit concluded: 
“Therefore, the development factors suggested in your letters appear to be substantially too high. The fact, however, does not mitigate the existence of the problem that loss development is adverse and unacceptable.”
In any event, Mr Butler’s evidence was that it was standard market practice for client representatives to reserve on the basis that they expected the loss to be at its ultimate conclusion. It was also his evidence that he did not expect the loss figures shown in Exhibit 1 to move much as claims had to be reported quickly anyway.  Mr Jackson accepted that there was nothing wrong with the reserving process as such and they appeared to be fairly accurate.
536.	A breakdown of premium projections by State was also provided. Mr Crane’s evidence was that it was a positive factor that much of the business ($24m) was written in Oklahoma as his experience was that Oklahoma was a good State which produced high quality business of this kind; Texas, by way of contrast, was not such a good State because it had a more litigious environment and the premium projection for Texas was consequently much smaller ($5m).
(i)	The change in the management of the scheme in January 1998
537.	On 16 January 1998, Humana had announced that they were moving some of the business from their Oklahoma office to their Florida office and that two of those who had run the business in the Oklahoma office would be resigning; there was also to be a change in the underwriting of the business. 
538.	On 27 January 1998, Clarendon cancelled the facility granted to PCA (which had been sold to Humana as set out at paragraph 496) and appointed American Agency System Inc., a wholly owned subsidiary of Midland Management, as its new MGA with effect from 28 January 1998. American Agency System subsequently hired the leading employees who had run the PCA book. As was pointed out in a fax dated 30 January 1998 from Mr Caldwell to Mr Morris (that was scratched by Mr Henton), PCA’s book of business (along with its team) became that of the new agent’s. The underlying XL reinsurance programme and Programme 19 were amended to reflect this change by way of a new slip and an endorsement respectively. The underlying scheme was the same in all relevant respects, save that Harbor Speciality Insurance Company (which Mr Butler believed was a subsidiary of Midland Management) became a policy-issuing company in addition to Clarendon.
539.	Mr Crane’s evidence was that the change was significant; Hallmark was closed down by Clarendon and American Agency System had taken over the business because Hallmark had not implemented the promised changes (see below) and had carried on as if nothing had happened. Hallmark had been writing as much business as they physically could – they had written about $12m worth of business in the first 27 days; Mr Crane had been shown figures sometime in January and/or May 1998 which reflected that fact. He had learnt from discussions and meetings that he had had with American Agency System and with Mr Caldwell that a stricter regime was to be implemented; that between 27 January 1998 and 31 December 1998, only $8m of premium had been written. Mr Crane was of the opinion that a stricter regime had indeed been implemented in order to reduce the writing of loss making accounts; following the discussions with Mr Caldwell, it was the hope that the account would be profitable on a gross basis. 
540.	It did not appear that Mr Henton was involved in these decisions, save that he had approved the transfer of the binder to American Agency System. 
(j)	The premium paid to SD; deductions and commissions
541.	The premium payable to SD was based on the net premium received by Mr Crane and his following market.
542.	Under the underlying XL reinsurance led by Mr Crane, the M&Ds were $2.5m, payable quarterly in advance, adjustable annually at 18.5% of the gross premium income (that is, the underlying premium of $57.1m). On a premium income of $57.1m, this was $10.56m or $7.8m net after brokerage.
543.	Mr Crane allowed brokerage of 26% to SCB ($2.75m). Mr Crane’s evidence was that the brokerage of 26% was standard for SCB business that was produced to him which, for the most part, was profitable; some of the SCB business that was produced to him had a very small premium income base, and the 26% brokerage probably paid for SCB’s production costs. It was “perfectly normal” to pay 26% brokerage in the context of the business that he had written to Midland Management and to SCB on this class of business; the 26% brokerage included all of the acquisition costs incurred by the brokers, even though there was also brokerage on the QS (as set out at paragraph 548 below); SCB shared the 26% brokerage with Midland Management – 20% went to Midland Management and 6% to SCB.
544.	Mr Henton’s evidence was that the brokerage was a bit high, but that he knew of the 18.5% rate and the 26% brokerage as he had the slip for the underlying XL reinsurance. As Mr Butler pointed out, the actual brokerage received was much less; the brokerage was booked on the basis of the M&Ds, and the actual brokerage received was based on the premium that was actually earned – the full premium anticipated did not materialise.
545.	Under the slip for Programme 19, the M&D premium was $684,315, adjustable annually at 36.99% of the applicable net premium income; the estimated applicable net premium income for the programme was $7.8m (that is, the premium that was received by Mr Crane and his following market less brokerage, as explained at paragraph 542 above). The M&D premium was based only on the estimated applicable net premium income for the first year of the programme ($1.85m). The estimated gross premium to be received by EIU was $2.892m, on which there was brokerage of 15% ($433,726). This left SD with approximately $2m after EIU’s fees had been deducted.
546.	Taking into account the premium on the aggregate stop loss written by CIGNA (8%), Mr Crane and his co-reinsurers were, as set out at paragraph 509 above, guaranteed a profit. They also obtained a cash flow benefit because of the difference in the M&Ds received by them and the M&Ds received by SD. In terms of figures, Mr Crane was allowing Midland Management and SCB just a shade under what he was to pay in premium to SD.
547.	Although the deductions and commissions paid under the QS were not relevant to the calculation of the sums to be received by SD for bearing a very high proportion of the actual risk, it is nonetheless important to see how much by way of the original premium went to those who bore no proportion of the risk.
548.	Under the QS, substantial deductions were made, totalling 29.5%; this was made up of the issuance fee of 6.5% (probably to Clarendon), Hallmark administration of 15% and agent’s commission of 8%. In addition, there was a 5% brokerage. Thus at this stage, 34.5% of the premium had been deducted (about $19.7m of the $57.1m). Mr Henton knew about these deductions as he had a copy of the QS slip; his evidence was that they were standard deductions in that market.
549.	The total take for brokerage, assuming that the estimated premium was achieved in full, was over $5m, whereas SD merely received $2m for taking the bulk of the risk.
550.	The deductions for the QS, the underlying XL reinsurance, the reinsurance written by SD, and the aggregate stop loss written by CIGNA (under the Aviary lineslip) are summarised in Diagram 19a. The deductions could have been worked out on the documents available to Mr Henton; it was not suggested that he could have appreciated this in the time which he devoted to the acceptance of the programme, but it was suggested that he should have done so.
(k)	The basis of acceptance
551.	Mr Henton accepted that the programme would be gross loss making. His evidence was that the gross loss ratio on the programme was 300%-400% (amounting to $6m-$8m of gross losses), though he did not work that out at the time. He wrote the programme on a net basis. However, he could not be sure that he would make a profit on a net basis as there might have not been enough premium to pay the retentions and the outwards premium, but he was encouraged by the proposed changes to the account to think that a net profit was realistic. He did care about the gross position of the programme as the gross losses had to be paid, but it was the net position on which he concentrated. He was making a turn on a net basis and did not need to know a lot of detail about the account to achieve this. The skill was making sure that he had the requisite outwards reinsurance.
552.	Mr Henton accepted that the outwards reinsurance premium that SD had to pay would have been about 40% and thus, on a net premium of $2m to SD, they would have paid JEH Re $800,000, out of which brokerage would have had to be paid by JEH Re, leaving JEH Re with about $700,000. On the assumption that the gross losses were $7m, Mr Henton would have had to transfer losses of $5.8m to JEH Re in order to make a net profit for SD. JEH Re would have had to meet their retention on those losses out of the premium of just over $700,000, as well as paying premium to their own reinsurers. Mr Henton was not concerned as to whether JEH Re had the funds to pay their own outwards premium after meeting their retention as Mr Billyard was a knowledgeable party. When it was put to him that the scheme broke down at the next tier, Mr Henton said that he had not analysed it that way, but that he thought that the losses were reducing each time; it was in the nature of reinsurance for those at the highest tiers to take increasingly unprofitable business. 
553.	Mr Crane considered that the information provided would have indicated to an underwriter that the retrocession written by Mr Henton would make a loss on a gross basis. Mr Hines’ evidence was that this programme would make a very large gross loss and that that was obvious; it would be necessary to do some calculations (or get the broker to do the calculations) in order to rate the business; he did not disagree with Mr Jackson’s view that a loss ratio of 1,400% was predictable. Mr Greig’s view was that the prospects for profit or loss were speculative, but the fact that it might be loss making would not have deterred an underwriter in the PA market. What would have been important to that underwriter was that his outwards reinsurance matched the inwards business, he had sufficient vertical, and horizontal cover and the premiums exceeded the costs of the outwards cover; none of this was usually within the knowledge of the placing broker. However, in fact, SCB knew there was a mismatch. Mr Jackson, in his report, with which Sir Alan Traill agreed, pointed to the fact that it was clear that the primary carriers retained little interest in the risk. I accept their evidence that this was obvious.
554.	This programme was one of those examined by Mr Coppinger during the review at EIU in July 1998. His note commented on the fact that there had been no analysis by EIU.
(l)	The position of SCB on the basis of acceptance
555.	SCB accepted, in their letter of 4 December 2001, that the programme was writeable only on a net basis. Mr Butler accepted that the programme was probably written by Mr Henton on a net basis; the scale of the actual loss did not surprise Mr Butler.
(m)	The actual underlying premium income and the losses
556.	The actual underlying premium income on the account was in fact much less than the estimate; Mr Crane’s evidence was that it was about $22m. The incurred losses on the account at November 2001 for SD were $10.474m on a net premium income to SD of $470,500, though Mr Henton thought that the premium should have been $1.1m; Mr Crane also thought that the premium should have been higher. Further losses advised at August 2002 have taken the incurred loss position up to $10.602m. On the basis of a net premium income to SD of $470,500 and an incurred loss position of $10.602m, the loss ratio was 2,250%.
(n)	Conclusion
557.	It was a feature of the underlying scheme and of this programme that SCB stood to earn more by way of brokerage (5% on the QS, 6% on Mr Crane’s underlying XL reinsurance, 15% on the retrocession written by Mr Henton and probably 10% or 15% under the aggregate stop loss) than was to be paid to SD by way of premium for assuming the entirety of the risk between $35,000 and $500,000. I am sure that the underlying scheme was designed by SCB, partly to strip as much as possible out of the premium and to pay that amount to entities that were not bearing any risk, and partly to enable Mr Caldwell and those associated with him to continue to write loss making business whilst dumping the losses on capital providers who were ignorant of what was being done. Mr Henton was used by SCB as the means of dumping the losses on SD.
558.	On the evidence it is unclear when Mr Henton was first approached to write the reinsurance of Mr Crane; it is clear that there was discussion about writing new business to pay for SD’s outwards reinsurance and that there may have been mention of this programme on either 17 December 1997 or on 23 or 24 December 1997.  It was of considerable importance to SCB, as without it, they could not place the underlying XL reinsurance with Mr Crane. The terms on which Mr Henton was to write this programme had been worked out by SCB by 17 December 1997; I am sure that this was done without any consultation with Mr Henton and that it was done on the basis of finding terms that would guarantee Mr Crane a profit and so persuade him to write the underlying XL reinsurance. It was done in the confident expectation that Mr Henton would sign up to those terms when required to do so. I am also sure that it was made clear to Mr Henton that he had to write the reinsurance 100% on those terms as part of the arrangements under which he was provided with the outwards reinsurances by SCB from Mr Billyard, though the hope was held out to him that it would sign down. It is striking that even though SCB were earning considerable brokerage on the placement of the programme with Mr Henton, they did not bother to provide him with statistics that were relevant to his programme; Mr Butler said it was laziness. I reject that evidence as dishonest; Mr Butler was not a lazy man; he did not provide them as he knew that Mr Henton would write the reinsurance on the terms that were presented as he had had no alternative. Nor I am surprised that the line did not sign down; given the state of the market and the terms on which Mr Henton accepted the programme, there was never any real prospect of finding anyone else to write a line, as SCB well knew.
559.	I am sure that EIU and in particular Mr Henton acted dishonestly in accepting this programme: 
i)	This was one of the risks that Mr Henton accepted for the reasons set out at paragraph 1246 of Part I.
ii)	Mr Henton took 100% of the risk without conducting any proper analysis although he must have clearly appreciated that the programme was bound to generate significant gross losses for SD. He had no proper understanding of the business being written under the underlying scheme, or how the scheme operated, or the role of the various entities which participated in it. Furthermore, despite his evidence that he had accepted this programme on the basis that the account was to be re-underwritten, he did not know anything about the person who had put forward that assurance, or whether the proposed changes could be implemented (see paragraph 534.v) above). 
iii)	I reject his evidence that he had counted up the number of losses; he had said nothing about this in his statement and it is wholly inconsistent with his approach to the other documents on this programme which he clearly did not examine and did not even think of taking the time to examine.
iv)	If this had been a proper commercial transaction, Mr Henton would have carefully evaluated the materials presented to him and would have charged a premium that was commensurate with the risk; the market conditions were such that there was no one other than Mr Henton prepared to consider the risk. 
v)	He provided cover on an RAD basis whereas the outwards reinsurance he was obtaining was on an LOD basis for 1998 and he had no cover for losses in 1999; for the reasons given paragraph 1246.xii) of Part I, he knew that it was wrong to expose SD to the mismatch in terms for the reasons set out.
vi)	Mr Whitcombe acquiesced in what was done without any real enquiry into this programme.
560.	SCB and in particular Mr Butler knew that Mr Henton was acting in dishonest breach of duty and dishonestly assisted him in this:
i)	This programme was put one of those before Mr Henton in the circumstances set out at paragraphs 1246 and 1247 of Part I. This programme was included in those that Mr Henton was required to write in order to obtain the outwards reinsurance, because SCB had to have the programme to enable them to place the underlying XL reinsurance with Mr Crane; the particular circumstances of the gross dishonesty of SCB have been summarised in paragraphs 557 and 558.
ii)	Mr Butler knew that very large gross losses would be sustained; that no honest agent acting in the interests of his principal would write a 100% retrocession on such business that effectively took a very great part of the risk for so little premium where the primary underwriters had little interest, the loss record had deteriorated, and the agent knew nothing about the person doing the underwriting and was relying on unspecified assurances that the underwriting would improve.
iii)	As set out at paragraph 1246.xiii) of Part I, Mr Butler fully appreciated that no honest agent would expose his principal to the obvious risks in the then market arising from the mismatch between granting cover on an RAD basis but only obtaining reinsurance on an LOD basis.
561.	I accept Mr Crane’s evidence that this was very much a one-off transaction for him and that he had entered into it in the belief that Mr Henton had been provided with all the information from which Mr Henton could see that SD would suffer gross losses and that substantial sums would be paid by way of commission and fees. On the evidence before me, full disclosure of the gross position and of the fact that Mr Crane was writing on a net basis had been clearly made to Mr Henton; Mr Crane did not know of the relationship of Mr Henton to SD and to SCB. It was submitted by SD that Mr Crane had acted dishonestly by underwriting the underlying XL reinsurance as it was making a contract that was certain to be hugely loss making profitable on the back of reinsurance and was in the end passing losses to an unlucky person. I have set out my views on the nature of the business when dealing with the general issues. Mr Crane’s evidence was that it was not his duty to act in the interests of his reinsurers, but in the interests of his Names; his reinsurers could look after themselves. In relation to the specific facts concerning the Hallmark scheme, although I a sure that Mr Crane did not act dishonestly, I am sure that he acted in a manner that was well below the standards to be expected of a Lloyd’s underwriter in relation to this programme.
Programme 22: Syndicate 53’s PA account
562.	Under this programme, Mr Henton subscribed to a line of 33.3333% on a layer of an XL reinsurance of Syndicate 53’s PA book. The programme was placed on an LOD basis for 12 months at 1 January 1998 for $210,000 xs $15,000 excess of an overall aggregate of $210,000. The programme is summarised in Diagram 22.
(a)	Syndicate 53
563.	Syndicate 53 was known as the Eliot Syndicate; it was originally an aviation syndicate that was underwritten for by Mr Robin Eliot who fell ill in 1996 and retired that same year. It was managed by Crowe. Its active underwriter from October 1996 was Mr Crane to whom I have referred to in Part I and extensively in connection with Programme 19. Mr Crane had begun his career in insurance in 1965, had joined the Eliot Syndicate in 1976 and had become the underwriter of the syndicate’s PA account in 1978. By the time Mr Eliot retired, Mr Crane was the deputy underwriter of the syndicate. He became involved in occupational accident business, probably in the late 1980s or early 1990s, when he was approached by Mr Cooke to write that business. At its height, the syndicate wrote 33% PA and of that, 33% (or 10% of the whole stamp) was carveout business – about $8m.
564.	Mr Crane’s evidence was that his PA account made a gross profit most years, though in some years the gross profit was marginal; carveout business made a good gross profit in most years. In the early years, his outwards reinsurance programme was profitable for his reinsurers, but he then bought some low working layers that perennially lost money for the reinsurers – this was something which he knew would happen when the outwards reinsurance was placed. This gross loss making reinsurance had been placed by Mr Brown and Mr Butler for many years from the time they were at Bain Dawes and Mr Billyard had always participated in this reinsurance in every year that it was placed.
565.	Mr Crane thought that there was a high probability that his outwards reinsurance programme for the 1998 year would be gross loss making for his reinsurers. He had used several brokers to place his outwards reinsurance, with Sedgwick being the primary broker; the layers placed by Rattner Mackenzie were fairly marginal in terms of profitability, but were usually profitable; the layer placed by SCB was almost guaranteed to be loss making. He did not regard the brokers’ practice in placing gross loss making business as dishonest as every PA underwriter bought low down working “so-called reinsurance” because it was available; any underwriter who did not do so was failing in his duty to his Names. The layer that was reinsured by Mr Henton was bought as a means of making the syndicate a profit and this had been done by the syndicate for several years. Mr Crane accepted that it was exactly as if the reinsurers had agreed to write him a cheque or he had given them £1 but had received £5 in return. It was Mr Crane’s evidence that it was in the interests of his Names to purchase such reinsurance; it was common market practice.
(b)	The placing history
566.	Sometime well before the end of 1997 and probably in late September or early October 1997, Mr Billyard wrote a 100% line of the XL reinsurance of Syndicate 53’s PA book on an LOD basis for $210,000 xs $15,000 excess of an overall aggregate of $210,000. 
567.	On New Year’s Eve 1997, Mr Henton wrote a line of 50% to sign 33.3333%. 
568.	The slip did not exclude LMX or international XL business.
569.	Mr Henton accepted in his evidence that when, between April and June 1998, he had agreed to reinsure Mr Billyard’s LMX account under Programme 33, Mr Billyard’s line under Programme 22 could be ceded to Programme 33 as Programme 22 was LMX business for Mr Billyard.
570.	The estimated gross premium income for the reinsurance was $700,000 – 7% of the applicable net premium income, with SD’s net receipt being  $180,800.
(c)	The information provided
571.	Mr Henton was provided with:
i)	An information sheet; 
ii)	a questionnaire; and
iii)	claims statistics.
Mr Henton observed that there was more information in SCB’s file and said that he might have been shown more information. He could not recall whether he had seen the “as if” statistics that were in SCB’s file.
572.	The information sheet gave the estimated applicable net premium income for the underlying PA account as $10m.
573.	The questionnaire was dated 25 September 1997; this had fuller information than the questionnaires or information sheets that had been provided by either WFD or SCB. The questionnaire showed a small growth in the gross premium income and showed that the largest class of business written was WCA carveout (38.968% in 1997); the other significant categories were treaty business excluding catastrophe and sports (25.331%), and sports business (22.823%). The questionnaire also stated that EEII business had not been written since 1993. It also referred to record cards providing information about five year loss records; however, there were no record cards, only loss runs and a general claims report in the SCB file. The questionnaire also referred to details of the three largest losses being supplied in an attachment, but this was not in anyone’s file. Mr Crane said that the syndicate did not write LMX or retro business and that there was no retro business in the treaty account.  
574.	Mr Crane’s evidence was that this was standard information and that this was much more than had been supplied in some previous years. The information was as at the end of the second quarter of 1997; updated statistics were not supplied as the programme was renewed each year on the basis of second quarter statistics.
575.	The claims statistics were dated 19 December 1997 and were as at the second quarter of 1997 for the years 1993-1997; the figures for 1993, 1994 and 1995 were for different limits from the figures for 1996 and 1997. 
576.	There was an “as if” loss record in the SCB file (also dated 19 December 1997) for the layer to be written by EIU, showing the “as if” losses for 1993, 1994 and 1995; this was a summary taken from the SCB loss bordereaux which SCB had, in turn, prepared from information that had been provided by the syndicate. These did not show the premiums. Mr Henton could not recall if he had seen the “as if” loss record and it was not on his file, but Mr Butler’s evidence was that he (Mr Butler) would have had it with him during the broke. 
577.	The non-“as if” figures showed that the loss record for 1993 was very poor; the “as if” figures made it very much worse. Applying the 1998 premium rate of 7%, the “as if” premium for 1993 would have been $770,000 for “as if” losses of $5.14m. It was Mr Henton’s evidence that EEII business had not been written under the underlying account since 1993, and that the account was going to contain a large volume of WC carveout business from the US instead. Mr Henton though that the EEII rates of loss were different from the WC carveout rates of loss, but his evidence on Programme 15 at paragraph 336 was the opposite.
578.	The actual loss ratios in the 1993-1995 years had varied between 387% and 460%.
(d)	The basis of acceptance
579.	Mr Henton said that this was a working layer protection and that he expected it to be unprofitable on a gross basis; he wrote the programme on a net basis. He thought that the gross loss ratio for the programme would be about 200% (ignoring the 1993 figures), but not 400%-500%. He did not work out the gross loss ratio at the time that the programme was written. 
580.	Mr Henton’s evidence was there was enough information from the loss runs to calculate the loss frequency and to show that he could pay his retentions, but although he could have looked at the loss runs in the time available, he could not recall if he had seen them. He thought that the premium rate was a fair rate in the then market.
581.	Mr Hines accepted that this was a programme that this would be a programme where a loss on a significant scale would be inevitable; Mr Crane was a good example of an arbitrage underwriter.
582.	The programme was confirmed on 28 January 1998 – Mr Whitcombe could not explain the delay in the confirmation.
583.	This programme was one of those examined by Mr Coppinger during the review at EIU in July 1998. He commented in his note that there was a reasonable breakdown of the portfolio, but no analysis had been performed.
(e)	The position of SCB on the basis of acceptance
584.	SCB accepted, in their letter of 4 December 2001, that the programme was writeable only on a net basis. Mr Butler accepted that it was loss making and he accepted that there would have had to be a dramatic improvement if it was not going to be. His evidence was they did not think who received those losses; that when considering the materials, Mr Henton had acted no differently to any other underwriter who wrote PA business.
(f)	The losses
585.	The losses at the end of the second quarter of 2001 were $1.284m on a net premium to SD of $155,000. Further losses advised by the end of the second quarter of 2002 have taken the incurred loss position to $1.47m.
(g)	Conclusion
586.	I am sure that EIU and in particular Mr Henton acted dishonestly in accepting this programme: 
i)	This was one of the risks that Mr Henton accepted for the reasons set out at paragraph 1246 of Part I.
ii)	Mr Henton accepted a line of 33.3333% on the risk without conducting any proper analysis, although he must have clearly appreciated that the programme was bound to make significant gross losses for SD.  
iii)	I reject his evidence that he had counted up the losses; he had said nothing about this in his statement and it is wholly inconsistent with his approach to the other documents on this programme which he clearly did not examine and did not even think of taking the time to examine.
iv)	Mr Whitcombe acquiesced in what was done without any real enquiry into this programme.
587.	Mr Butler knew that Mr Henton was acting in dishonest breach of duty and dishonestly assisted him in this:
i)	This programme was put one of those before Mr Henton in the circumstances set out at paragraph 1246 and 1247 of Part I.
ii)	Mr Butler knew that this was gross loss making business to which no one but Mr Billyard had subscribed; he could not think of anyone else who would write at that level other than Mr Henton, though he said there might be. I am sure there was no one who would write at that level with unlimited reinstatements. That was why Mr Henton was required to write it as one of the inwards programmes to be accepted in return for the outwards reinsurance.
Programme 27: CIGNA PA account written by Mr Minter and Mr Branch
588.	This reinsurance programme protected CIGNA’s London office’s PA account on an LOD basis for 12 months at 1 January 1998 in seven layers from $10,000 to $5m; it did not exclude LMX business. Mr Henton wrote lines on the third ($250,000 xs $250,000), fourth ($500,000 xs $500,000), sixth ($1.25m xs $1.75m) and seventh ($2m xs $3m) layers. The programme is summarised in Diagram 27. CIGNA also had layers above $5m.
(a)	The placing history
589.	Mr Billyard gave a signed quotation on 12 November 1997 for all the seven layers – the same date as that when he quoted for SD’s outwards reinsurance, though the document on which Mr Billyard quoted for Programme 27 was dated 25 November 1997. Mr Billyard had written lines on each layer; it was not clear whether these had been 100% on each layer, but he had written 100% on the first, second and fifth layers. His subscription to the third layer was on 10 December 1997.
590.	On New Year’s Eve 1997, Mr Henton was offered and wrote four layers of the programme; Mr Henton had written 100% on the third and fourth layers (both of which were subsequently signed down) as Mr Butler had wanted them confirmed by the end of the year; Mr Henton had put these lines down on the quote sheet together with lines of 33.3333% and of 25% on the sixth and seventh layers respectively. He had also written 100% on the slips for the third and fourth layers, but they were eventually signed down to 75.0002% on each layer.
591.	As can be seen from Diagram 27, SD’s co-reinsurers were JEH Re on all the layers and WEB for All American on the top two layers. JEH Re’s participation was ceded to Programme 33 when Mr Henton wrote it later in 1998 (see paragraph 1557.iv) of Part I. The M&Ds on the lowest two layers were huge – some $6.84m. 
592.	It appeared from the documents that WEB must have been offered a participation in various layers, including the first and second layers, in January/February 1998; on 25 February 1998, they declined to write the bottom two layers, but agreed on 26 February 1998 to write lines on the sixth and seventh layers, subject to receipt of signed slips on an LMX retro programme that they had wanted to be placed. Mr Henton was not sure if WEB’s participation was reinsured by SD under Programme 10, but thought that it might not be, as WEB had an LMX specific programme to which losses under Programme 27 would go. Further it was Mr Butler’s evidence that Programme 10 contained an LMX exclusion clause in any event.
(b)	The information provided
593.	The information provided to Mr Henton was:
i)	The slips;
ii)	loss statistics; and
iii)	a questionnaire.
Mr Henton’s evidence was that he might also have been provided with other information – see paragraph 597 below.
594.	The slips gave a general description of the business covered, but the evidence was that this covered the PA account of the London office of CIGNA (already referred to at paragraph 1040 of Part I; the underlying account was a mixed PA account with man on the street and sportsmen covers; it was written by Mr Minter and Mr Branch. The programme did not cover business which was written under the Aviary lineslip.
595.	There were loss statistics for the third and fourth layers as at September 1997; they were prepared on 25 November 1997 and covered the years 1994-7. There were no loss statistics for the sixth and seventh layers in EIU’s file; Mr Henton’s evidence was that this was because these layers had no losses. The losses for the third layer far exceeded the premiums, even if the 1998 rate of premium was applied; the position was worse on the fourth layer with average actual loss ratios of 200%-400%.
596.	The questionnaire was dated 29 September 1997. This showed that the underlying account had started in 1993 with a premium of $13.67m and had grown to $35m by 1997, with an estimated premium of $39m for 1998. A breakdown of the account was given – 48% direct PA, 40% PA treaty XL (excluding LMX), 3% PA LMX, 6% PA proportional/QS treaties, and some other small items. 33% of the account was sports-related. The largest exposures included London, USA, Italy and Japan. Sheets setting out five year loss records and the three largest losses in the past ten years were not attached.
597.	Mr Henton was fairly sure that he had also received some individual loss breakdowns from which he noted the number of losses.
598.	It was Mr Butler’s evidence that the fact that a very a large insurer such as CIGNA could buy reinsurance on this type of information was indicative of what was acceptable in the market.
(c)	The basis of acceptance
599.	Mr Henton’s evidence was that he wrote the programme on a net basis; his evidence was that at first, he did not consider that the programme would be necessarily loss making on a gross basis, but after being reminded of the information in the documents, he accepted that it was. He had counted the losses and had considered the third layer profitable on a net basis; the fourth layer had only three losses and these would all be covered by the retention on the third layer – the fact that he was writing the programme on a net basis meant that the losses on the fourth layer did not cost him anything more as his retention had already been taken out. He considered that the programme would be very profitable on a net basis.
600.	Mr Hines anticipated that the loss ratio on the programme would be several hundred percent.
601.	The risk was confirmed on 25 February 1998; Mr Whitcombe could not explain the delay in the confirmation. 
(d)	SCB’s position on the basis of acceptance
602.	SCB accepted, in their letter of 4 December 2001, that the programme was writeable only on a net basis. Mr Butler agreed that it was gross loss making business on the lower layers. Mr Butler’s evidence was that CIGNA were quite happy to be buying down to $10,000 on the basis that the business was gross loss making; Mr Jackson did not criticise them for doing it.
(e)	The losses
603.	As at December 2001, the losses were $2.687m on a net premium to SD of $1.051m. Further losses advised as at the second quarter of 2002 have taken the incurred loss position to $2.739m.
(f)	Conclusion
604.	I am sure that EIU and in particular Mr Henton acted dishonestly in accepting this programme: 
i)	This was one of the risks that Mr Henton accepted for the reasons set out at paragraph 1246 of Part I.
ii)	Mr Whitcombe acquiesced in what was done without any real enquiry into this programme.
605.	Mr Butler knew that Mr Henton was acting in dishonest breach of duty and dishonestly assisted him in this:
i)	This programme was put one of those before Mr Henton in the circumstances set out at paragraphs 1246 and 1247 of Part I.
ii)	It was obviously loss making business which no one but Mr Billyard had been prepared to write; WEB were only prepared to write the sixth and seventh layers and even then only on certain terms. Mr Henton was therefore required to write it in return for the outwards reinsurance.
Programme 28: John Hancock (per Hackett/JEH Re) 95% QS 
606.	Under this programme, Mr Henton agreed to write a 13.4% line on a 95% QS of the accident and health and WC carveout account of John Hancock that was written by Hackett and JEH Re. The programme was continuous from 1 January 1998 for $3m any one person, $7.5m any one occurrence any one policy. 
(a)	The placing history until New Year’s Eve 1997
607.	As set out at paragraph 1553 of Part I, Hackett had had a QS for several years; the flag broker on the QS was Van Dyke, who had been the brokers to Hackett since it was started up in 1991.
608.	A renewal package for 1998 was put together by Hackett and Van Dyke in October 1997, and there were discussions between Van Dyke, Hackett and Mr Billyard about its placing. 
609.	On 12 November 1997, Ms Kimberly Kulesh of Van Dyke (Mr James Hackett Senior’s wife) prepared a slip which excluded LMX howsoever written and XL on XL howsoever written. She wrote to Hackett stating:
“You will see that LMX is mentioned as an exclusion. Reinsurers are requiring this now on facilities and, since JEH Re no longer write this class of business, it should not be a problem.”
A letter enclosing the renewal package was prepared in order to be sent to existing reinsurers; the letter included a passage which stated that LMX would be excluded from the renewal as Hackett/JEH Re had discontinued writing this class of business with effect from 1 January 1997.
610.	Mr Butler thought that Van Dyke had misunderstood the position as Mr Billyard was writing LMX and XL on XL, and Mr Hackett Jr had mentioned writing XL on XL in a fax to Van Dyke dated 30 October 1997.
611.	At about this point in time, SCB had become involved at the instigation of Mr Billyard as Van Dyke had received some cancellation notices from existing reinsurers, although Skandia, Union Re, Gerber, Fidelity Security, RAS and Reliance National had not given any notice of cancellation. In a fax from Mr Billyard to SCB on 19 November 1997, he informed SCB that it was Mr Hackett Jr’s consideration that “the Van Dyke situation is now a non-starter”. Mr Brown’s evidence was that he was sure that he had been consulted on this. It is not clear why some had cancelled, but, for example, GRRM had in a fax to Van Dyke on 11 October 1997 pointed out their concern about the business being written in Bermuda; they wished to do an audit.
612.	There was a meeting sometime thereafter at which SCB agreed that they would try and cover LMX and XL on XL in their marketing by removing those exclusions from the slip, but would nonetheless provide historical figures which excluded LMX. A contemporary note in Mr Butler’s hand read:
“Transfer JEH slip to [Stirling Cooke Re] paper. No LMX or XL on XL exclusion. List common A/C RI + Historical net losses excluding LMX.”
613.	It was Mr Butler’s evidence that they were excluding LMX from the historical figures as the information indicated that LMX was not being written. However, LMX was included in the cover as SCB had wanted to offer as much coverage as they could. Mr Brown’s evidence was that SCB had set about placing the coverage on as broad a basis as they could.
614.	The SCB slip was therefore one to which XL on XL as well as LMX could be ceded on the terms of the slip, but the right to do so may have been curtailed by the figures provided and what might have been said at the presentation in relation to LMX not being cede to that account. The way in which this related to Mr Billyard’s LMX writings is considered at paragraphs 1553 and following of Part I; the position in relation to the ability to cede LMX business to this programme is considered in more detail at paragraphs 636 and following.
615.	Van Dyke placed their part of the reinsurance with a number of reinsurers – Swiss Re, Gerber, Reliance National, Skandia, Fidelity Security and RAS, as set out in Diagram 28.   
(b)	The placement by SCB with Mr Henton and others
616.	Mr Henton’s evidence was that the programme might have been mentioned to him before New Year’s Eve 1997, but he could not recall when. On New Year’s Eve, he indicated a line of 10% on the programme.
617.	SCB clearly had difficulty in completing the placement, though they eventually achieved a placing of 65.5% of the programme; this was achieved through placements with Overseas Partners Re and New Cap Re (Bermuda) in addition to SD.
618.	Sometime during late February 1998, SCB asked Mr Henton to increase his line; he agreed to increase it to 15% after he had had more information; Mr Butler reported to Mr Brown on 23 February 1998 that he would get Mr Henton’s line signed over the next couple of days. Mr Henton’s line was put down as a line of 20.46% of 65.5% of the QS (13.4% of the whole QS). 
619.	A line of 34.1% of 65.5% of the QS (22.3% of the whole QS) was placed with Overseas Partners Re, a Bermudan company; their underwriter, Ms Jo Hare, met Mr Billyard on 23 February 1998 to discuss the risk and expressed an interest in writing it. On 26 February 1998, Mr Butler reported to Mr Brown: “Jo Hare has a meeting with her underwriters tomorrow morning and we expect to hear back after that”. There is a note on 27 March 1998: “Jo Hare: Reg Billyard, need overseas partner”. Her line was not committed until either March or April 1998 and then only after SCB had placed an aggregate stop loss with Dorinco Re per Beach Associates (Mr Traxler) for $4.125m excess of 125% of net premium income – that  is, a stop loss which cut in when the loss ratio was larger than 125%. As set out at paragraphs 143 and 144 of Part III, this stop loss was offered to Mr Henton but he declined it.
620.	New Cap Re (Bermuda) (through WFD) took 45.44% of 65.5% of the QS (29.8% of the whole QS). This was placed late, probably in March 1998. In a fax from Mr Butler to Mr Brown on 26 February 1998, Mr Butler stated: “New Cap Re have asked questions on the quota share as well, which I am answering”. In a fax to Mr Hackett Jr on 18 March 1998, Mr Butler confirmed that he had received an indicated line from New Cap Re of 33.333% and that SCB had had a 15% line from SD. The two documents to which I have referred were produced as a result of the electronic search and disclosed only on 27 July 2002; they were not put to any witness.
621.	Mr Henton’s evidence is that he would have picked up some of the losses that were accepted by New Cap Re under this programme when he reinsured them under Programme 32, but he may have been mistaken as Programme 32 was appears to have been a reinsurance of New Cap Re (Australia) and the line on this programme was written by New Cap Re (Bermuda).
(c)	The information provided
622.	Mr Henton’s evidence was that the written information which he had was confined to what was in his file – these were copies that Mr Henton had taken of the key documents that were in SCB’s placing file which contained a considerable amount of information; there may have been other things, but he was unable to recall. Mr Butler could not recall the broke.
623.	There was a description of Hackett/JEH Re, prepared by Hackett and made available to Mr Henton on SCB paper, setting out its history and organisation. It referred to Mr Billyard:
“Reg Billyard, as President of JEH Bermuda, leads our Bermuda office and has a unique and far-ranging reinsurance background as Underwriter for a pool of life companies, plus ten years of profitable and successful underwriting experience for a prominent Lloyd’s syndicate.”
It set out the estimated premium income figures for the offices at Bermuda (JEH Re), Connecticut (Hackett) and Philadelphia (Hackett); Bermuda (JEH Re) had the lion’s share:
			1997			1998
Bermuda		$50 million		$55-60 million
Connecticut		$10 million		$10 million
Philadelphia		$7 million		$7 million
These totalled $72m-$77m for 1998. 
It concluded:
“At [Hackett] were remain committed to underwriting profitable business for John Hancock and our facility participants, and will continue to actively take steps to ensure this objective continues to be achieved.”
624.	Mr Billyard was writing business that was not profitable in the sense in which the passage would be understood by ordinary insurers. Unless those who received this (such as Mr Henton and others who participated in the business of accepting insurance and reinsurance they knew to be gross loss making on the backs of their reinsurers) knew exactly what was meant, the statement was obviously misleading. 
625.	Attached to this document was a list of the classes of business which were written by Hackett/JEH Re; these included international portfolio XL. However, there was no percentage breakdown of each class of business; LMX was not listed.
626.	There was no information sheet for the business; an information sheet dated 20 August 1997 which was provided was not for this programme, but was for an excess of loss and had probably been misfiled during Mr Mather’s and Mr Coppinger’s visit to EIU.
627.	There was also a letter dated 30 January 1998 from Hackett to Mr Butler, enclosing illustrations of the underwriting results. The letter stated these were:
“…after removing the medical business from each year and the LMX class for ‘94, ‘95 and ‘96. These are two discontinued lines and would not be included in our ‘98 facility.”
Mr Henton’s evidence was that he did not see these on New Year’s Eve, but that he might have seen something similar. However, he saw these illustrations of the underwriting results by late February 1998 before he increased his line on the programme.
628.	In addition, there were profit and loss statements dated 19 November 1997 which set out the premiums and loss experience as at the end of the third quarter of 1997. The statistics divided the account into four categories – catastrophe XL, accidental death & dismemberment (AD&D), occupational accident and WCA, and SR other (a tiny category comprising miscellaneous business). The  two largest categories were AD&D, and occupational accident and WCA.
629.	The profit and loss statements were supported by a letter from Mr Frank W Klinzman dated 20 November 1997, stating that he enclosed a statement of actuarial opinion (which was not on file). One paragraph of the letter stated:
“Also, you will note that due to the complexity and uncertainty of the type and degree of risks being assumed and retroceded I was unable to provide an opinion on the LMX portion of the business.”
Against that paragraph Mr Henton had made a notation – “not covered here”. Mr Butler believed that he had told Mr Henton that no LMX was covered under this programme. 
Mr Henton believed that the reference to ‘LMX’ in this letter meant LMX in the strict technical sense (that is, not including international XL). He accepted that there was no logical difference between LMX and international XL as regards the complexity of the programme, and said that he thought that the reference to ‘LMX’ was, to a certain extent, a reference to spiral business, even though that was not stated. Mr Butler did not accept that Mr Klinzman would have necessarily found international XL too difficult as it depended on what type of account was being considered, but he accepted that the same considerations that Mr Klinzman found too difficult for LMX could well apply to international XL.
630.	Also provided were sheets showing the loss experience from inception through to 31 December 1996 and 30 September 1997, along with details of the underlying contracts written by Hackett/JEH Re; Mr Jackson produced a spreadsheet that analysed these; the figures in these experience exhibits showed a very considerable divergence for the years 1994, 1995, 1996 and 1997 from those provided in the profit and loss statements. Mr Jackson’s report made clear that the figures in the experience exhibits did not match the figures in the profit and loss statements; Mr Henton could not recall what he was told and could not recall studying the figures in any detail.
631.	Lists of the common account reinsurances that inured to the benefit of the QS were in SCB’s file; it was Mr Henton’s evidence that he recalled discussing these. Mr Butler’s evidence was that he would have explained the common account reinsurances to Mr Henton as it was one of the big ‘sells’, that the participants in the QS were effectively writing on a net bottom layer. Amongst the contracts which formed a part of the common account reinsurances were:
i)	Programme 1 (12 months from 1 January 1997); this was not renewed for 1998 and Programme 33 effectively took its place.
ii)	Programme 5 (12 months from 1 January 1997); a sheet indicated that quotations had been obtained for renewal for 1998.
iii)	Programme 12 (12 months from 1 October 1997), which, as a specific protection of the direct account, would inure to the benefit of this QS.
iv)	The specific occupational accident protections of JEH Re which were stated to be in the process of renewal for 1998, and which John Hancock’s solicitors said were renewed (in the information provided on 4 October 2002); these were placed for 1998 with Gan, American Reliable and CNA for layers up to $500,000.
632.	This meant that SD were themselves a reinsurer of part of the common account protections through their participation in Programme 12. 
(d)	The terms of the reinsurance
633.	The QS reinsurance was a continuous contract, subject to 180 days’ notice of cancellation to be given on 1 January. Mr Henton’s evidence was that SCB would have automatically given notice on 1 January 1998, but that the QS nevertheless came to an end as the arrangement with John Hancock was cancelled (as set out at paragraph 1540 of Part I). 
634.	There was a warranty that there was to be a 5% retention, subject to reinsurance.
635.	The accounts for all of Hackett’s offices were covered, including that written by Mr Billyard in Bermuda.
(e)	Was LMX included or excluded?
636.	The position on the term of the agreement was as follows on the limited evidence available to the Court:
i)	The slip to which Mr Henton subscribed did not exclude LMX or international XL on XL. 
ii)	The slip to the other part of the reinsurance which Van Dyke had placed was not available to the Court. It was clearly not within the possession or control of SCB. 
iii)	Van Dyke made it clear that they would not produce their slip or their file without an application to the courts of the United States. 
iv)	The solicitors to John Hancock stated, in a letter dated 30 October 2002, that John Hancock did not wish to produce their file as they were concerned that that might be providing an opportunity for a fishing expedition against non-parties to the proceedings; they did not produce the slip either. The solicitors, in another letter dated 31 October 2002, stated that they:
“had been advised by John Hancock’s US lawyers that there was no LMX exclusion on the 1998 Van Dyke placement.” 
They had also been advised that there was no change in this respect from the prior years’ placements. 
v)	These documents were obviously important to the issues relating to this significant programme and, as I have made clear on a number of occasions, to the case being made by Mr Whitcombe and Mr Henton whom John Hancock knew to be unrepresented. It is a matter of regret that they declined to produce the documents voluntarily and insisted on the formal route of a letter of request being pursued when they ought to have appreciated that this would have been impractical. It is impossible to understand why they did not produce the slip; I cannot accept the explanation given that they were concerned that this was a “fishing expedition”; the documents were highly material. The position taken by John Hancock was not one I would have expected a reputable life insurance company to take.
637.	Mr Henton’s evidence was that he was told that LMX was not included in this programme;  that the SD outwards reinsurances by JEH Re could not be ceded under Programme 28 as they were not part of the account that was covered; he had not confused this with the assurance that he said had been given by Mr Brown on 23 December 1997 in relation to Programme 1. Mr Butler thought that he did tell Mr Henton that LMX would not be included in this programme, and that it was possible that he had told Mr Henton that SD’s outwards reinsurances by JEH Re would not form part of the account to be covered under this programme; the outwards reinsurances of SD by JEH Re would have been coded ‘LMX’ and would not therefore have been covered under Programme 28.
638.	It was SCB’s case (as put in the cross-examination of Mr Henton on day 32 of the trial) that LMX could not be ceded under this programme because of the information that had been provided in the letter of 30 January 1998 from Hackett to Mr Butler (see paragraph 627) and in Mr Klinzman’s letter of 20 November 1997 (see paragraph 629), even though there was no exclusion of LMX on the slip. 
639.	What was the position in fact?
i)	Mr Butler’s and Mr Brown’s evidence was that they did not know what had been ceded to this programme; Mr Brown did not believe that any LMX had been ceded to this programme.
ii)	Mr Billyard stated in his letter of 25 June 1998 to Mr Brown which is set out at paragraph 1599 of Part I that he retained the LMX business net. 
iii)	A document which SD had obtained from John Hancock but which was only made known to the other parties on day 75 of the trial, showed that all the LMX business written by Mr Billyard had been ceded to the programme (as I have mentioned at paragraph 1571 of Part I); John Hancock’s solicitors, in their letter of 4 October 2002, made it clear that they considered that all business that had been written by Hackett and JEH Re was covered by the 95% QS.
640.	In view of the fact that no original documents were provided by John Hancock and I did not hear any evidence from Van Dyke:
i)	I cannot determine what the position is in respect of LMX business as regards the Van Dyke placement.
ii)	On the evidence before me of the documents produced, and of what SCB said to those, including Mr Henton, with whom the programme was placed by SCB, LMX business could not be ceded under that part of Programme 28 which they placed.
iii)	In the light of Mr Billyard’s letter of 25 June 1998 and the absence of documents in relation as to the timing of the cessions, it is not possible for me to make any finding as to the way in which the cessions to Programme 28 were actually made.
(f)	The level of deductions
641.	The programme allowed Hackett/JEH Re to make deductions on the gross net reinsurance premium equivalent to the sum of (a) brokerage, commissions and fees on the inwards business, (b) a 6% management fee, and (c) a 2.5% issuance fee. Brokerage to SCB, payable by the reinsurers, was between 1.5% and 3%, depending on the loss ratio under the QS.
642.	EIU took a fee of 1.5% of the gross premium income – that is, the premium income before any of the commissions on the QS had come off; EIU initially made no deductions for commission pending a discussion with Mr Broad, but the level of commission was eventually agreed, according to Mr Henton, in June 1998 (see paragraph 1407 of Part I.
643.	The level of deductions in respect of brokerage, commissions and fees on the inwards business under the programme was very high, as could be seen from the information provided:
i)	On the AD&D category totals, the ceding commissions were 40.1% of either the gross or the gross net premium income, and brokerage was 12.6%, before the 6% management fee and the 2.5% issuance fee were deducted. Mr Henton’s evidence was that these were standard market deductions, although he later agreed that these levels of deductions were quite astonishing. Taking into account reinsurance costs, 68.8% of the premium income had been taken out before it came to SD and the other reinsurers. In 1997, the deductions were greater – the brokerage and ceding commissions were 63.2% of either the gross or the gross net premium income, making the total premium income received by the QS reinsurers, after specific reinsurance had been deducted, 11.4%. 
ii)	On the occupational accident and WCA category totals, the deductions were not as large; the overall deductions for ceding commissions, brokerage, management fee and issuance fee were 42.8%. 
Mr Henton thought that the overall level of deductions were relatively normal, but Mr Jackson’s evidence was that they were extremely high. Mr Henton also pointed to the fact that other reinsurers had accepted the same level of deductions.
(g)	An analysis of the information
644.	Mr Jackson’s evidence was that it was necessary to produce a spreadsheet analysing the information, as no summary was provided at all. Mr Butler’s evidence was that it was not necessary for the brokers to provide a spreadsheet and that other reinsurers on the programme had not asked for one. Mr Henton did not think it necessary to produce a spreadsheet setting out what was provided as each part of the account had been broken down; his evidence was that, for example, the profit and loss statement summarising the occupational accident and WCA category showed everything, including the IBNR agreed by the actuary, and it showed an outcome – a profit margin of 2.1%. 
645.	However, Ms Hare of Overseas Partners Re did reconstruct “as if” statistics from the information she had been provided with, and had sent the “as if” statistics to SCB, asking for statistics which showed year-by-year information, broken down into premium items, expense items and claims items; Ms Hare had also asked about the allowance that was to be provided for reinsurers’ expenses.
646.	Moreover the spreadsheets prepared by Mr Jackson showed that:
i)	There were very large swings in the premium income (which Mr Henton had not observed, save the large swing that had occurred when Mr Billyard joined JEH Re).
ii)	The overall deductions were growing year on year, from 37.3% in 1992 to 54.9% in 1997.
iii)	The overall IBNR for 1992 was 44.8% but was 21.3% for 1997; for the occupational accident and WCA category, the IBNR in 1992 was 73.9% and was 43.6% in 1997. Normally, the IBNR would be highest in the most recent year and smaller in the earlier years; Mr Henton’s explanation was that the unusual position shown in the spreadsheets was due to changes in the account, and to reflect the fact that there was a more extensive reinsurance in place when Mr Billyard started underwriting the account and the IBNR was set against the net position of the account; Mr Henton relied on the fact that the IBNR figures had been set by an actuary.
647.	Although Mr Butler accepted that deductions could turn an account into a loss making one, all the reinsurers would have seen the information provided, which was self-explanatory.
(h)	The basis of acceptance
648.	This was a substantial programme; the estimated applicable net premium income was $40m and the estimated gross premium income on SD’s 15% share was $6m. As set out at paragraph 1665 of Part I, the actual premium income was well below the estimate.
649.	Mr Henton’s evidence was that he underwrote this programme in the expectation of a gross profit. However, he accepted that Mr Billyard did write business that was unprofitable on a gross basis, as he could see from those contracts on which Mr Billyard was SD’s co-reinsurer and therefore a part of the account was written on a net basis; Mr Henton’s evidence was that he also expected a net profit on this programme.
650.	Mr Jackson did not criticise the level of information supplied and accepted that the actuarial report would give comfort, but as I have set out, he considered that the information required careful analysis and that analysis gave rise to questions and the need for triangulations. The QS was not going to make a large loss, but he could not say that it would make a profit. Mr Hines’ evidence was that a 95% QS was not common as this left little by way of retention; this was not generally desirable for reinsurers particularly where these was a high overrider. He thought it was probable that this would be gross loss making in the light of the WC content. 
651.	This programme was one of those examined by Mr Coppinger during the review at EIU in July 1998. Mr Coppinger’s note recorded that he had observed a discrepancy in n the figures which Mr Henton was unable to explain; nor did Mr Henton have any knowledge of the portfolio.
(i)	Losses
652.	As at the first quarter of 2001, the total losses to the programme were $4.29m against a net premium to SD of $885,500; by the second quarter of 2002, the losses had increased to $10.756m. In the light of the information provided by John Hancock, I assume that these figures include LMX losses that on the evidence before me would not in fact be covered under the placement with SD.
(j)	Conclusion
653.	I have set out my conclusions on the relationship of this programme to Programme 33 at paragraph 614.
654.	I am sure that EIU and in particular Mr Henton acted dishonestly in accepting this programme: 
i)	This was one of the risks that Mr Henton accepted for the reasons set out at paragraph 1246 of Part I.
ii)	Mr Henton knew that Mr Billyard wrote on an extensive scale, business that was gross loss making on the backs of reinsurers; he knew this from the reinsurances he had written of Mr Billyard’s writings and from the contracts on which Mr Billyard was a co-reinsurer of SD’s. He also knew that the deductions were very high; I accept Mr Jackson’s evidence that they were about 55% for the 1997 underwriting year; and that, as both Mr Jackson and Mr Hines agreed, questions needed to be asked about these. Although Mr Henton was entitled to rely on the statements made to him that LMX would not be covered, he clearly needed to examine and analyse the information provided with great care, in view of the very substantial gross losses that Mr Billyard was inevitably going to write. Although Mr Henton’s evidence was that he had looked at the figures that had been provided, any honest underwriter would not have committed SD to a line of 10% and then 15% of such a programme in such circumstances without having undertaken a proper analysis of the information, which I am sure he did not do. I accept the evidence of Mr Jackson that the presentation of the materials was such that it needed analysis. The information presented, as Mr Hines agreed, was in a very user-unfriendly format; it was not in a format where the underwriter could analyse and assimilate it in the usual way. I am sure that the reason that Mr Henton carried out no analysis of the information that had been presented was not due to negligence and incompetence; it was due to the fact that he did not care what loss was caused to SD.
iii)	Mr Henton relied heavily on the fact that other reinsurers, including a reinsurer of such eminence as Swiss Re, had subscribed to the QS. However, I did not see the materials on which they subscribed and I do not know if they knew that Mr Billyard was deliberately writing gross loss making business on the backs of reinsurers, a matter of the highest materiality to any reinsurer, as I have already explained. Certainly the document which provided a narrative about Hackett/JEH Re (see paragraph 623) did not explain what Mr Billyard was doing; as a matter of fact, it gave precisely the opposite impression. Though I take into account the fact that Mr Henton and Mr Whitcombe wanted to see the presentation to the other reinsurers and, despite efforts made by SCB, SD and the Court, they could not be obtained, I cannot, on the evidence before me, conclude that the other reinsurers on the QS had the same information as Mr Henton did in relation to the kind of business which Mr Billyard in fact wrote. 
iv)	On the evidence before me, I consider it probable that the programme would be gross loss making, but not on an extensive scale; at one stage, it appeared that SD and SCB might have reached agreement about the position, but it appears that this was not the case.
v)	Mr Whitcombe acquiesced in what was done without any real enquiry into this programme.
655.	Mr Butler knew that Mr Henton was acting in dishonest breach of duty and dishonestly assisted him in this as this programme was one of those put before Mr Henton in the circumstances set out at paragraphs 1246 and 1247 of Part I. This programme was included in those that Mr Henton was required to write in order to obtain the outwards reinsurance, as it was essential for the protection of Mr Billyard and SCB were having the greatest difficulty in placing it.
5.	THE PROGRAMMES BETWEEN 5 JANUARY AND 4 FEBRUARY 1998
656.	This group of programmes has been referred to at paragraph 1273 of Part I.
Programme 20: Chiyoda
657.	On 5 January 1998, Mr Henton wrote lines on five of the seven layers of Chiyoda’s PA and sickness account on an LOD basis for 12 months from 1 January 1998; the programme is summarised in Diagram 20. There was another layer above this programme for $5m xs $5m.
(a)	The placing
658.	Mr Billyard had originally quoted. He was asked by fax on Friday 2 January 1998 to agree to a new split of the layers in order to get the risk placed, as Mr Butler was unable to get the part of the risk between $1m and $10m placed in one layer; Mr Billyard was asked to cover the 4 layers between $1m and $3m for 100%: “these will sign no more than 50% once I have spoken with [SD] on Monday (unfortunately they are off today)”. Mr Butler also asked Mr Billyard to write 66.233% on the layer between $2m and $5m: “again this will sign you to a line of no more than 33.333% once [SD] return”.
659.	Mr Butler’s evidence was that he thought that Mr Henton would write those lines, either because he had discussed them with him on New Year’s Eve 1997, or because he had thought that it was the kind of risk and line that Mr Henton would write. Mr Henton said that he had no recollection of discussing this risk with Mr Butler before 5 January 1998 and thought that SCB were being a bit presumptuous; he rejected SD’s suggestion that he would have done what SCB had wanted. 
660.	Mr Henton in fact did as Mr Butler had promised he would do on the 4 layers between $1m and $3m – Mr Henton wrote a line of 50% and the other 50% was written by JEH Re; Mr Henton also wrote 25% on the layer between $2m and $5m, though this eventually signed down to 23.6967%. Mr Henton initialled Mr Butler’s fax to that effect.
661.	The first two layers ($400,000 xs $100,000 and $500,000 xs $500,000) were written 100% by JEH Re.
662.	The balance of the layer $2m xs $3m was, apart from JEH Re and SD, written by CIGNA, New Hampshire (per AIG), Reliastar, All American (per WEB) and Phoenix. 
(b)	The information provided
663.	The information provided to Mr Henton was the slip, a questionnaire and  loss statistics.
664.	The slip did not exclude LMX business.
665.	The questionnaire showed that the premium income had grown steadily from 1993, was estimated at $10m in 1997 and was estimated at $12.5m in 1998. 50% of the business was direct PA, 31% was PA proportional/QS treaties and 10% of the business comprised travel schemes; there were other items which each comprised 1% of the business, including PA LMX. Mr Henton thought that the 50% direct PA was a standard traditional PA account.
666.	The loss statistics were for losses excess of $75,000. These showed that there were no losses on the layers excess of $1m, which were the layers which Mr Henton accepted.
667.	The underwriter at Chiyoda was Mr Brian Cauldwell who had been a Lloyd’s underwriter for Syndicate 464 (EP Hall) and was referred to at paragraph 441.iv) of Part I as the PA underwriter for the ESG pool; the syndicate is referred to at paragraph 507 of Part I. Mr Butler had been placing business with Mr Cauldwell since 1987/8. Mr Henton thought that Mr Cauldwell had been a very successful underwriter.
 (c)	Conclusion
668.	Mr Henton wrote this programme in the expectation of a gross profit; the net premium income to SD was only $43,700 and there were in fact no losses on the programme.
669.	No real criticism of Mr Henton’s acceptance of this programme was made at the end of the trial. This was a risk that looked as if it would be profitable and no criticism can be made of Mr Henton for writing it. It is, however, striking that it was only Mr Billyard and Mr Henton who participated in the layers under $2.5m. However, the fact that Mr Butler was prepared to be confident about Mr Henton’s participation is illustrative of the collusive relationship between them as was the fact that Mr Henton was prepared to endorse the very fax which showed Mr Butler’s readiness to commit SD without consulting Mr Henton.
Programme 21: Venton Syndicates 376 & 2376 and the run-off of Fenn Syndicate 1038 
670.	Under this programme, Mr Henton agreed in January 1998 to reinsure Venton Syndicates 376 and 2376 and the run-off of Fenn Syndicate 1038 for a line of 50%. The programme was for a period of five months at 1 January 1998 on an LOD basis for $990,000 xs $10,000. The programme is summarised in Diagram 21.
(a)	The placing history
671.	By 10 December 1997, Venton Syndicate 376 had instructed SCB that the syndicate did not want to renew its expiring cover, but instead wished to extend its cover for a further five months until 31 May 1998; this was recorded by Mr Mortley in his memorandum of 10 December 1997 which has already been referred to at paragraph 1554.i) of Part I.
672.	Mr Billyard was asked to subscribe to the risk on 13 January 1998; he did so and signed a quote sheet and the slip.
673.	Sometime before 19 January 1998, Mr Henton was asked by Mr Kelly of SCB to write a reinsurance of Venton Syndicates 376 and 2376 and of the run-off of Fenn Syndicate 1038; he agreed to do so by setting down a provisional line of 25% on the slip.
674.	He was then asked to write an increased line and agreed on 19 January 1998 to write a 50% line.  
675.	Subsequently he was told that the syndicate was unhappy with SD as security and the line was cancelled.
676.	However, he was then on 27 January 1998 asked to reinstate SD’s line and he agreed to do so; Mr Henton had a vague recollection that he was told by Mr Kelly that the syndicate had changed its mind as they had decided that SD was in fact acceptable security after all.
677.	SD’s other co-reinsurer for 50% was Mr Billyard, who could have ceded his line under this programme to Programme 28 and Programme 33.
678.	The estimated gross premium to the reinsurance was $239,100 and SD obtained for their 50% share, a net premium of $92,600. The premium rate was 12.75% of the applicable net premium income.
(b)	The information provided	
679.	Mr Kelly broked the risk to Mr Henton. The information that was provided to Mr Henton was:
i)	the slip;
ii)	an information pack; and
iii)	loss statistics.
680.	The slip showed:
i)	The reinsurance covered J.H. Venton and others, Syndicates 376 and 2376, and the run-off of J.D. Fenn, Syndicate 1038. The Venton Syndicates were managed by Venton Underwriting Agencies Ltd. (established in 1988); the Fenn Syndicate (which had been managed by Merrett) had been closed into one of the two Venton Syndicates.  
ii)	There was no exclusion of LMX or retro business; Mr Butler did not think that the syndicate wrote any LMX business, although he was unsure whether the syndicate wrote any retro business. 
iii)	The period of cover was five months. This was in fact to fit in with the other reinsurances of the Venton Syndicates; Mr Henton’s evidence in his statement was that he recalled being told that the Venton Syndicates had ceased underwriting for the first five months of 1998, but in his oral evidence, he said that this was not the case and that his recollection was probably wrong; Mr Butler confirmed that the Venton Syndicates wrote business during that five month period.
iv)	The PA class underwriter of the Fenn Syndicate from 1993-4 and of Venton Syndicate 376 from 1994 until June 1997 was Mr Martin Bond (who gave evidence); he had nothing to do with the preparation of the information for the placement with EIU; he was not in a position to give factual evidence about this programme. He gave evidence about his general practice as a PA underwriter, but I attach no weight to this as he was not an expert, though at one stage he was contemplated as one.
681.	An information pack dated 30 December 1997 was also provided. This showed that the estimated gross premium income of Venton Syndicates 376 and 2376 had risen from £38m in 1992 to £130m in 1998; the estimated premium income for the 1998 PA and K&R (kidnap and ransom) account (written by Mr Bond) was £1.5m and $2m. This was a mixed account with sports, travel and K&R business.
682.	Loss statistics dated 17 December 1997 were also provided. The figures were, apart from those for 1996 and 1997, for limits different to that which Mr Henton was being asked to underwrite; his evidence was that he did not ask for statistics for the earlier years broken into the new layers as he was happy with the statistics that had been provided for the short period of 1996 and 1997. The figures for 1996 already showed a gross loss ratio of 140%. 
683.	His evidence was that he was able to count up the number of losses from the information supplied and that this was sufficient for him as he was writing the programme on a net basis.
684.	Mr Jackson extracted the figures and applied the premium rate for 1998 to them; this showed that the net loss ratios were between 132% and 315%. Mr Henton did not disagree with those loss ratios. 
(c)	The basis of acceptance
685.	Mr Henton’s evidence was that he underwrote this programme on a net basis, counting up the number of losses and assessing the premium rate charged (which he considered to be quite good). He said that it was quite common amongst reinsurers in the market to write reinsurances on the basis of figures below the burn (that is to say figures which indicated an expectation of a gross loss) by writing against reinsurers. This was not a case where he thought (in contrast to Programme 19 (Hallmark)) that things might improve. He expected the underwriters on the Venton Syndicates to continue to underwrite in the same way such that SD would suffer gross losses.
686.	Mr Hines accepted that the programme was very likely to make a large gross loss.
(d)	The position of SCB on the basis of acceptance
687.	SCB accepted in their letter of 4 December 2001 that this was only writeable on a net basis. Mr Butler agreed that this programme would result in significant gross losses being borne by SD.
(e)	The effect of successive tiers of reinsurance
688.	SD produced a chart that showed what happened in such a case where losses were passed down the line to successive reinsurers. They took the actual losses on this programme in 1998 as at the third quarter of 1999. The losses to the layer were $215,081 as against a gross premium for the layer that was assumed to be $189,888. On the layer at 100% figures, taking into account a brokerage of 10%, a fee to EIU of 12.5%, a reinsurance premium cost of 25% and (a retention rate of 1%), the loss ratio before reinsurance was 146.15% and the loss ratio after reinsurance was 84.67%. Mr Henton’s evidence was that a lot of people would have been quite happy with a net profit of 15%.
689.	What happened on the reinsurances assumed to be successively in place was as follows, assuming a deduction of brokerage of 10%, reinsurance costs of 25% and a retention of $10,000:
i)	On the next layer, the net premium for the layer would be $33,111.72 against losses to the layer of $121,634. This was a gross loss ratio of 367.34% and a net loss ratio of 185.51%.
ii)	On the next layer, the net premium for the layer would be $8,277.93 against losses to the layer of $75,564. This was a gross loss ratio of 1,014.26% and a net loss ratio of 576.42%.
iii)	On the next layer, the net premium for the layer would be $1,862.53 against losses to the layer of $43,356. This was a gross loss ratio of 2,586.44% and a net loss ratio of 1,129.01%.
iv)	On the next layer, the net premium for the layer would be $419.07 against losses to the layer of $29,162. This was a gross loss ratio of 7,731.93% and a net loss ratio of 3,535.16%.
v)	On the next layer, the net premium for the layer would be $94.29 against losses to the layer of $19,162. This was a gross loss ratio of 22,580.26% and a net loss ratio of 15,711.84%.
vi)	On the next layer, the net premium for the layer would be $21.22 against losses to the layer of $9,162. This was a gross loss ratio of 47,983.95% and a net loss ratio of 63,978.59%.
Me Henton’s evidence was that such a contract would have been a part of an overall account and was not considered on a single basis; the retention diminished the loss. Those who participated in such a reinsurance were knowledgeable parties who were quite familiar with this type of business.
(f)	The commutation
690.	SD commuted this programme at an equivalent loss ratio of 290%.
(g)	Conclusion
691.	The illustration (the chart referred to at paragraphs 688 and 689) put to Mr Henton was striking:
i)	The gross loss ratio at the first layer was only 146%. 
ii)	Although I accept that one would have to take accumulations into account, the illustration showed that in a very short time, the business was unprofitable on a net basis and that catastrophic levels of loss ratios were being passed to reinsurers further up the chain. 
iii)	Where the figures were much larger, then applying these type of loss ratios, the actual losses to those further up the chain would be enormous, for instance, in the case of the specific occupational accident protections of Mr Billyard’s account (which was, in turn, protected under Programme 3 in part – see paragraphs 846 and 847 of Part I.
692.	I am sure that Mr Henton acted dishonestly in accepting this programme. Mr Henton knew that this programme was going to make a gross loss and that it was only being underwritten by him and Mr Billyard as SCB had been unable to complete the placement. He was relying solely on his outwards reinsurance to make a net profit by writing against his reinsurers and was doing this without the authority of SD.
693.	In considering the position of SCB, I have had to take into account the fact that Mr Butler was only cross-examined briefly on this as it was anticipated by everyone at the time that Mr Kelly would give evidence on this programme on behalf of SCB. However, as SCB accepted, this was gross loss making business; the programme was written in the circumstances set out at paragraph 1538 of Part I; I have found (as set out in Part I) that SCB knew Mr Henton had no authority to accept such business.
Programme 23: CIGNA Aviary aggregate cessions
694.	Under this programme, Mr Henton wrote, on 30 January 1998, two layers of reinsurance of the aggregate business accepted by CIGNA under the Aviary lineslip:
i)	A layer $240,000 any one cession xs $10,000 any one cession xs $1m of qualifying losses. He took a line of 50% on this layer. The other 50% was written by JEH Re.
ii)	A layer $750,000 any one cession excess of the first layer. He took a line of 25% on this layer with JEH Re also writing 25% and Raydon for Clarendon writing 50%.
This programme ran for 12 months from 1 October 1997 on an RAD basis, as did Programme 11. The programme is summarised in Diagram 23.
(a)	The nature of the business protected
695.	The purpose of this reinsurance was to protect business which was written under the Aviary lineslip on an aggregate basis; it had nothing to do with CIGNA’s retentions on other business. This programme was a reinsurance of CIGNA’s aggregate underwritings of programmes such as Programme 19 (Hallmark). Aggregate cover was also required of self-insured funds in the US; protection was provided by reinsurance that paid out when claims reached a certain level and generally known as specific and aggregate reinsurance. This type of cover was also provided to insurers. A specific reinsurance of this and of similar programmes which were written by EIU was considered by EIU in August 1998 (see paragraph 1639 of Part I).
(b)	Placing history
696.	Mr Bird’s evidence was that this was an account that was new to CIGNA, and that CIGNA were not prepared to write this account without SCB finding them reinsurance.
697.	A quotation was given by Mr Murray of Raydon on 23 September 1997, referring to the account as “Alan Bird’s Account (Cigna)”, for a layer $750,000 xs $250,000; the quote was on the basis (to be confirmed) that the account had never incurred a loss when written for a different carrier; Mr Bird’s evidence was that this was merely seeking confirmation that the aggregate account written by Lincoln National had never incurred a loss; Mr Murray was fully aware of Mr Bird’s position as administrator, and not underwriter, of the Aviary lineslip.
698.	Subsequently “the quote was taken over” by Mr Billyard who quoted on 8 October 1997 for a lower layer $240,000 xs $10,000 any one cession and for the layer for which Mr Murray had quoted; it was Mr Henton’s evidence that Mr Billyard had probably covered the programme 100%. The quote sheet stated (in Mr Billyard’s hand):
“Limited to Business written by Alan Bird under SCRIB Line slip.”
Mr Bird’s evidence was that there was no significance in this wording as Mr Billyard was fully aware of Mr Bird’s position as merely an administrator of the Aviary lineslip; Mr Bird would have corrected Mr Billyard if he had seen this manuscript note at the time.
699.	On 30 January 1998, Mr Henton was approached jointly by Mr Brown and Mr Butler to write the programme, backdated to 1 October 1997.
700.	Mr Henton did not ask why he was being approached to write the programme four months after it had incepted. Mr Bird’s evidence was that he did not know of the reason for the delay in Mr Henton being approached, but that as far as he was concerned, CIGNA had already been 100% covered. There was no explanation as to why this programme was placed with Mr Henton on 30 January 1998 as he had accepted the generals programme (Programme 11) on Christmas Eve 1997 (as set out at paragraphs 232 and following) and Programme 23 was already in existence at that time. 
701.	The estimated gross premium for the programme was $600,000 and SD were to receive a net premium of $130,000 for their lines. 10% of the premium was payable on 31 December 1997 and therefore, according to Mr Henton, was accounted for under the 1997 account. No entry could be found on the EIU bordereau for business written in 1997.
(c)	The information provided
702.	The only document provided to Mr Henton were the slips; the slips excluded “Retrocessional Excess of Loss Reinsurance of Lloyd’s Syndicates and London Market Companies”; an amendment was made on 10 August 1998 (as set out at paragraph 713) to alter the scope of that exclusion. The slips were amended in March 1998 to correct a mistake and to deal with the order of losses. There was a dispute whether the provision as to qualifying losses was a franchise or an aggregate; I will assume in Mr Henton’s and SCB’s favour that it was an aggregate.
703.	The slips set out the estimated applicable net premium income as $1.5m-$2m and that the maximum line on any one layer was $1m.
704.	The slip for the first layer referred to an information sheet dated 3 October 1997; it was not on any file. Mr Henton thought that the reference on the slip to an information sheet was an error, as the final copy of the slip had no such reference.
705.	Mr Henton was provided with an oral presentation by Mr Butler and Mr Brown; it was Mr Henton’s evidence that there was no additional information other than the slips as this was a new account for CIGNA, despite the fact that the programme had already been running for four months when he was asked to subscribe. He thought he was told then or at Christmas Eve 1997 that SCB’s overall aggregate account was running quite well as it had an overall loss ratio of 23%; he might also have been told that aggregate business had previously been written under the Big Ben lineslip and that the business accepted under the Big Ben lineslip was clean at that point. He was told nothing about what was being written under the account as this was not information he would have expected to receive. 
706.	Mr Butler’s evidence was that he had told Mr Henton that there were no losses and that this was true as there were indeed none.
707.	Mr Bird’s evidence was that this was a new account to CIGNA and it was not known at the time what the account would be; Lincoln National had written some aggregate business but did not protect it separately as they had not written much. Mr Bird thought that a lot more aggregate business went into the Aviary lineslip than had gone into the Big Ben lineslip. There was consequently no history of the account that could be provided on the basis of the aggregate business that had been written under the Big Ben lineslip.
 (d)	The basis of acceptance
708.	Mr Henton’s evidence was that he expected a gross profit on this programme; he could not recall if he had any outwards aggregate reinsurance at the time that this programme was written. He thought that Mr Bird wrote this part of his account for a gross profit and that Mr Bird had a large retention of $1m which Mr Bird did not reinsure, even though there was no warranty to this effect.
709.	Mr Henton did not think that he would be reinsuring either JEH Re or Clarendon on this programme as it was likely that the losses were going to be small losses. However, he would have picked up the Hallmark losses if they had exceeded the aggregate retention of $10,000 any one cession, though he did not think that likely as it was unlikely that the aggregate stop loss reinsurance which CIGNA (per Aviary) had written on Hallmark would be “hit”.
710.	Mr Butler’s evidence was that he thought that this programme could be underwritten without any specific information; he thought that aggregate business was more difficult to write than vertical business and that Mr Billyard rated this programme on the basis of his experience in the market. Further this type of cover had been previously placed for the Big Ben lineslip. He thought it would be profitable.
711.	Although the losses on this programme would have been generally small and below the level of the retention, JEH Re’s participations in this programme could have been ceded to the 95% QS (Programme 28).
712.	Mr Jackson’s evidence was that there was simply not enough information to make any assessment. Mr Hines’ evidence was that the information that was provided was totally inadequate. Mr Greig’s evidence as to the adequacy of the information was that it had been supplemented orally; in fact little was said on the oral presentation. Sir Alan Traill considered the information totally inadequate; he pointed out that as Mr Bird worked in the offices of SCB, the information must have been available. I accept the evidence of Sir Alan Traill as it was obvious there was no information and information could easily have been supplied. On the evidence, I have no doubt that the information was totally inadequate, information was available within the offices of SCB and that any honest or competent broker would have known that.
(e)	The amendment on 10 August 1998
713.	Mr Henton made a significant amendment to the slip on 10 August 1998 (after the moratorium, which was referred to at paragraph 1474 of Part I, had been imposed); under the amendment, the exclusion referred to at paragraph 702 above was amended to include within the programme, “facultative and specific” retrocessional XL reinsurances of Lloyd’s syndicates and London market companies”. This was done around the same time as the approach was made in respect of the “all sources” endorsement (see paragraph 1725 of Part I).
714.	Mr Henton’s evidence was that this amendment was made to cover a cession of a reinsurance such as that of Hallmark as it had been intended that such covers should have been included and that the exclusion as originally drafted was therefore too wide. He could not recall what he was told when he was asked to agree to this, but it was his evidence that he did not receive a list of the contracts that were to be covered as a result of this endorsement.
715.	Mr Bird’s evidence was that this endorsement was not an extension of cover; he considered that it was never intended that the Hallmark programme was not to be covered. However, Mr Minter wanted it completely clear on the slip that the Hallmark programme was specifically covered and he wanted the wording clarified as there could otherwise be a debate as to whether the Hallmark programme fell within the scope of the original exclusion; it was the Hallmark programme that caused CIGNA to look at this exclusion. Mr Butler’s evidence was that it was never the intention to exclude facultative and specific XL retrocessions of Lloyd’s syndicates and London market companies and that this was merely a “tidying up” endorsement.
(f)	The losses
716.	The incurred losses, on 100% figures provided by Mr Bird, on the first layer was $30,000 and on the second layer was $300,000. The applicable premium income had been approximately $3.5m (in contrast to the $1.5m-$2m indicated on the slips); the premium income to the first layer was therefore $350,000 and to the second layer was $700,000. As at 7 March 2002, the net premium income that was received by SD for this programme was $44,100.
(g)	Conclusion
717.	I am sure that Mr Henton acted dishonestly in accepting this programme; he made no enquiry as to why he was being asked to write it four months after inception; he asked for no written information about the account despite the fact that it had already been in existence for four months. He received no meaningful information about the risk and sought none. 
718.	I am sure that Mr Brown and Mr Butler knew that Mr Henton was acting in dishonest breach of his duty to his principals when he wrote this programme and that they dishonestly assisted him; this was one of the programmes written in the circumstances set out at paragraph 1538 of Part I; they knew that he had no meaningful or up to date information about the risk, despite the fact they could obtain it easily from Mr Bird;  they had acted on the basis that Mr Henton would write it in the same way that he had written the other contracts on Christmas Eve and New Year’s Eve by acquiescing in writing a participation on the reinsurance which was to protect the account being underwritten under the Aviary lineslip on which Mr Bird had the decisive underwriting influence (as I have found at paragraph 261 above).
719.	Mr Henton acted dishonestly in agreeing the amendment on 10 August 1998 without referring the matter to SD; he knew that this amendment would have the effect of altering the written contract such that the part of the Hallmark programme which was written under the Aviary lineslip would be covered; he should have referred the matter to SD, even if he believed that it had always been the intention to include the Hallmark programme. He did not do so because he knew that to give the necessary explanation would have immediately brought the nature of the relationship he had with SCB to the attention of Mr Mather.
Programme 24: Retrocession of JEH Re’s reinsurance of Centaur (Mr Cackett)
720.	This programme was accepted on 30 January 1998 by Mr Henton as retrocession of Mr Billyard’s participation in the reinsurance of business that had been accepted by Mr Cackett (through Centaur) for Sun Life and Phoenix. Mr Henton wrote a 50% line on a layer $90,000 xs $10,000. The reinsurance written by Mr Billyard was written as a separate reinsurance of Sun Life for $45,000 xs $5,000 and as a separate reinsurance of Phoenix for $45,000 xs $5,000, giving a combined layer of $90,000 xs $10,000; for ease of explanation and as the split into two contracts makes no material difference, these and the figures in respect of them, have been treated as one. This programme is summarised in Diagram 24. In effect, Mr Henton was taking 50% of the low level XL reinsurance that had been written by Mr Billyard, but allowing Mr Billyard an overrider of 5% and SCB a further brokerage of 5%.
721.	Mr Cackett’s career  and style of business has been described at paragraph 1687 of Part I. The XL reinsurance that had been written by Mr Billyard was a “generals” contract covering the whole of Mr Cackett’s account from 1 January 1998, as opposed to Programme 26 (accepted on Christmas Eve 1997) which was specific to his occupational accident and WC account and which ran from 1 October 1997.  This has been described at paragraphs 1691 and following of  Part I. 
(a)	The placing history of the “generals”
722.	As has been set out at paragraph 1687.iii) of Part I, Mr Cackett began writing for Sun Life and Phoenix in October 1996; SCB had previously placed a low level XL reinsurance for 15 months for $90,000 xs $10,000 for Mr Cackett. In November 1997, Mr Cackett asked SCB to obtain a renewal of this layer. Mr Butler’s evidence was that Ms Sue Benson of Sun Life was putting pressure on Mr Cackett to raise his outwards retention and that he therefore wanted the XL reinsurance renewed quickly in order to forestall this. Mr Butler said others had done this; Federal/Chubb had raised their retentions in 1995/6 against Mr Billyard’s wishes.
723.	It is obvious, as was put on behalf of SD to Mr Butler, that had Mr Cackett not forestalled Ms Benson in this way, Mr Cackett’s scope for acting as an arbitrageur would have been curtailed and he would have had to write business with an eye to its profitability rather than deliberately writing gross loss making business on the backs of reinsurers to whom the huge losses were passed.
724.	Mr Billyard quoted in mid-December 1997. He agreed to reinsure the PA and health accounts underwritten by Mr Cackett for Sun Life and Phoenix on an RAD basis for $90,000 xs $10,000 with free unlimited reinstatements. This reinsurance was written at a rate of 10% of the applicable net premium income, with an M&D premium of $1.35m, and a brokerage of 15%. According to Mr Butler, Mr Cackett signed off this reinsurance and returned it to SCB on 21 January 1998.
725.	It is clear that Mr Billyard had to have his line reduced; Mr Butler could not recall whether this was because SCB had promised him that his line would be signed down or whether it was Mr Billyard who had asked for his line to be reduced.
726.	On 30 January 1998, SCB (probably Mr Butler) approached Mr Henton to that end. Mr Henton agreed to write a retrocession of 50% of that reinsurance on the same basis of $90,000 xs $10,000, at the premium paid to JEH Re less a 5% overrider and a further 5% brokerage.
727.	Mr Butler’s evidence was that he thought that the reason Mr Henton had come in as a retrocessionaire and not as a co-reinsurer with Mr Billyard was because Mr Cackett had wanted the reinsurance cover noted as quickly as was possible (for the reasons explained at paragraphs 722 and 723) and Mr Cackett did not want to alter the cover notes. 
728.	No specific retrocession of the other 50% was placed by Mr Billyard; it was retained by him but was reinsured under the specific occupational accident reinsurance for 1998 and by the 95% QS (Programme 28).
729.	There were other layers that had been placed above the layer that Mr Billyard had written for Mr Cackett.
(b)	The information provided
730.	Mr Henton was provided with a slip, an SCB information sheet and some other sheets showing the lines and the statistics. The information provided to Mr Henton was therefore within a small compass, but his evidence was that this was normal information which would have been provided in the market.
731.	The slip set out the terms of the reinsurance written by Mr Billyard; that was expressed to cover the risks allocated to Sun Life’s and Phoenix’s PA and health account, but as far as Mr Henton was aware, Mr Cackett wrote only that type of business. The slip also referred to an information sheet dated 7 November 1997 and gave the estimated accounted for premium during 1998 as $7.5m. 
732.	The SCB information sheet was dated 7 November 1997; it gave details of the estimated premium income for 1996/7 ($25m-$30m net written and $5m-$6m accounted for) and of the estimated premium income for 1998 ($30m-$35m net written and $7.5m-$10m accounted for). The sheet also gave the line structure and risk profile of the underlying account.
733.	A single sheet set out the breakdown of the portfolio; this showed that 19.85% of the portfolio was whole account (which Mr Henton interpreted to be whole account XL reinsurances of direct writers and containing no retro business), 39.58% was occupational accident and WCA carveout, 15.14% was marine carveout (which Mr Henton understood to be the equivalent of WCA carveout for mariners), 8.22% was LMX (which Mr Henton understood could include retro business), 6.88% was travel business, 5.1% was medical business, and there was less than 1% each of international XL excluding retro and of international XL that might include retro. The marine carveout business in this account was the subject of the dispute in Feasey v Sun Life [2002] EWHC 868 (Comm).
734.	The sheet also gave average line sizes; Mr Henton did not accept that he was picking up a large proportion of those average lines as the average was calculated across all layers and did not necessarily fall on the bottom layer which Mr Henton was reinsuring. 
735.	Mr Butler’s evidence was that he did not know much about the underlying account as SCB did not place much business with Mr Cackett.
736.	Mr Henton was also provided with loss statistics for the layer for 14 months at 1 October 1996. The statistics were as at August 1997 and were prepared in November 1997; they showed a gross premium of $800,000 with incurred losses of $194,800. 
(c)	The basis of acceptance
737.	Mr Henton was taking (on 100% figures) 6.6% of the premium (after deductions) for the risk exposure of  $90,000 xs $10,000; on this premium, and as it was a working layer reinsurance, Mr Henton accepted that the programme was likely to be loss making on a gross basis. Mr Henton’s evidence was that he had written the programme on a net basis; he had appreciated this fact as Mr Cackett was a net underwriter for part of his business and would be living off the backs of his reinsurers – in this case, Mr Henton himself.  
738.	Mr Henton accepted that no one would be prepared to write this programme on a gross basis.
739.	Mr Henton did not know how many losses there had been or there would be and there was no information from which this could be calculated. His evidence was that this was a new account and was not sufficiently developed for this information to be provided. According to Mr Henton, he was not provided with information on the accounts that Mr Cackett had written, as it was not usually provided to a PA underwriter. He thought that the rate set was reasonable and that he would make a net profit on the programme, even though he did not know how many losses were likely to occur on it.
740.	Mr Henton’s evidence was that there was an additional factor – the fact that he considered that the JEH Re line on this programme would have been ceded to the JEH Re direct programme (Programme 12). This would have benefited SD as there would have been a single retention for both programmes on SD’s outwards reinsurance whilst additional premium would have been received as a result of this programme being written, even though there would have been an accumulation of gross losses between both programmes. 
741.	Mr Henton suggested to Mr Jackson that the rate was high in the market at the time; Mr Jackson’s evidence was that there was insufficient information; he stated in his report that the rate offered was “hopelessly light” and in his oral evidence that it looked “remarkably low”. Mr Hines’ evidence was that he would not have dreamt of reinsuring Mr Cackett at this level as he knew Mr Cackett’s philosophy; Mr Hines would have expected a very large gross loss. Mr Greig’s evidence was that for a new account, there was “plenty of information” and it would have appeared to the broker that there was a reasonable amount of information on which to make an underwriting judgment; he also referred to the fact that the underlying account was written by Mr Cackett and that the risk itself was written by Mr Billyard. Sir Alan Traill’s evidence was that there was insufficient information and that he would have provided more information as a broker.
742.	This programme was one of those examined by Mr Coppinger during the review at EIU in July 1998 – see paragraphs 1726 and 1756 of Part I. Apart from raising the question referred to in Part I, Mr Coppinger recorded in his note that there was no analysis of the risk whatsoever.
(d)	SCB’s position on the basis of acceptance
743.	SCB accepted, in their letter of 4 December 2001, that the programme was writeable only on a net basis. Mr Butler accepted that this programme could probably only be written on a net basis.
(e)	The losses
744.	As at the third quarter of 2001, the incurred losses were $2.316m against a net premium to SD of $211,600 – a loss ratio of 1,094%; by the second quarter of 2002, the incurred losses had risen to $9.994m.
(f)	Conclusion
745.	I am sure that Mr Henton acted dishonestly in accepting this programme:
i)	Mr Henton knew that Mr Cackett wrote on the backs of his reinsurers, that the retrocession would produce gross losses and that he had no information about the number of losses on the account. He could have had no idea whether he would have retained enough premium to pay the losses. As he had not prepared any underwriting plan, he could not honestly have written the risk on the available information.
ii)	There was no justification for participating as a retrocessionaire at this low level and allowing Mr Billyard to make a commission of 5% and SCB a further brokerage of 5%. The XL reinsurance had been placed 100% with Mr Billyard and if he had wanted his line reduced there was no reason to pay him and SCB for the privilege. It was obviously contrary to the interests of SD to do so.
iii)	He provided cover on an RAD basis whereas the outwards reinsurance he had obtained was on an LOD basis for 1998; for the reasons given at paragraph 1246.xii) of Part I, he knew that it was wrong to expose SD to the mismatch in terms for the reasons set out.
746.	I am sure that SCB knew that Mr Henton was acting in dishonest breach of duty and dishonestly assisted him in this:
i)	This was known by Mr Butler to be gross loss making business which he knew Mr Henton had no authority to accept. 
ii)	This was one of the programmes written in the circumstances set out at paragraph 1538 of Part I.
iii)	Mr Butler knew that the cover had originally been placed 100% with Mr Billyard in order to enable Mr Cackett to pre-empt the wishes of his principal. Mr Butler knew that Mr Billyard wanted to reduce his line, but that Mr Cackett would not agree to change the cover note. In these circumstances, Mr Butler knew that Mr Henton was obviously acting contrary to the interests of SD when he agreed to pay Mr Billyard a 5% overrider and SCB a 5% brokerage, when if the business was to be written at all, it should have been written without any deduction in favour of either SCB or Mr Billyard.
iv)	As set out at paragraph 1246.xiii) of Part I, Mr Butler fully appreciated that no honest agent would expose his principal to the obvious risks in the then market arising from the mismatch between granting cover on an RAD basis but only having reinsurance on an LOD basis.
Programme 25: Republic Western
747.	This programme, written on 4 February 1998, provided high level XL reinsurance of Republic Western’s and John Hancock’s (Republic Western’s QS reinsurers) occupational accident and related account with effect from 23 December 1997. It is summarised in Diagram 25. 
748.	Republic Western was a company from which Mr Billyard held an underwriting authority through Realm UM; the underlying business was “full form comp business” – unlimited full WC cover (and not carveout) for the full statutory limits. Republic Western issued policies with a high excess point to employers and also issued reinsurances to writers of such covers.
(a)	The placing and the information
749.	This programme was placed by Mr Morris of SCB.
750.	Mr Henton participated on a layer $5m xs $5m and on a layer $5m xs $10m; the lines were small (3.75% on each layer). His co-reinsurers on both layers were Syndicate 1101 (Theakston) (1.875%), Syndicate 1185 (Wills) (1.875%), Reliastar (50%), Clarendon (per Raydon) (20%), First All America (per SRRF) (12.5%) and John Hancock (per JEH Re) (10%). There were three free reinstatements on the first layer and two free reinstatements on the second layer; there was a specified maximum aggregate recoverable under each layer.
751.	The estimated gross premium for the layers was $320,000 and the estimated net premium income to SD was $9,500. Mr Henton classified this as a 1997 programme.
752.	The only information that was provided to Mr Henton were the slips and a list of the underlying accounts which were protected, though there was no information about those insured; some of these were companies which featured in other programmes (such as Clarendon) and others which did not (such as Florida Preferred). Mr Henton did not know if the insureds whose names were featured elsewhere were being covered under this programme for business that he himself had written elsewhere. 
753.	Mr Henton’s evidence was that he had discussed with Mr Morris, the any one person limits and losses which had been experienced in the past and had been told that the largest any one person loss at the time was about $1m; he therefore thought that they were well away from any realistic prospect of loss. 
754.	Mr Butler accepted that the participations of Clarendon (per Raydon) and of JEH Re in this programme could be ceded to other programmes which SD had written and that losses could therefore aggregate.
(b)	Losses and conclusion
755.	There have been no losses; the net premium to SD was $6,256.
756.	SD accepted that this was a perfectly placeable programme; they accepted that it was much nearer to true carveout business, being intended to pick up catastrophes.
757.	There was no dishonesty in the writing of this programme; it was a programme that was properly accepted, as it was a high level catastrophe reinsurance for a small line with little prospect of loss. It was not significant as the premium to SD was only $6,256 and, as Mr Hines accepted, when taken with others, did little to alter the overall impact of the business accepted by Mr Henton from SCB.
6.	PROGRAMMES BETWEEN MARCH AND JULY 1998
758.	This final group of programmes has been referred to at paragraphs 1338 and following of Part I.
Programme 29:  CIGNA per Aviary lineslip – US Longshoremen and Harbour Workers’ WC business
759.	Sometime between 1 and 10 March 1998, Mr Henton accepted a 100% line of a low level retrocession of an XL treaty that was written under the Aviary lineslip in respect of US longshoremen and harbour workers’ WC business. The retrocession was for a period of 12 months from 1 January 1998 on an RAD basis. The date in March 1998 on which Mr Henton wrote the risk was unclear, but it was confirmed by Mr Whitcombe on 30 March 1998. The programme is summarised in Diagram 29, pages 1 and 2.
(a)	The role of SCB and Mr Bird
760.	The SCB group had a considerable involvement in a book of business insuring employers for their liability under the US Longshoremen and Harbor Workers’ (USL&HW) Compensation Act; this was the equivalent of WCA for maritime workers. The SCB group, through companies in the US, acted as the MGA; it is also clear that Mr Cooke played a role in this book of business and that CIRCL had been a reinsurer on this business in earlier years. 
761.	The structure of the business was such that Clarendon and Legion were used as policy-issuing companies, with 100% QS reinsurance being provided (as set out in Diagram 29 page 1) for the business where Clarendon was the policy-issuing company, and (as set out in Diagram 29 page 2) for the business where Legion was the policy-issuing company.
762.	Under the Aviary lineslip:
i)	There were provided a 40% QS reinsurance of Clarendon and a 50% QS reinsurance of  Legion; the fact these QS treaties and that these were written under the Aviary lineslip was only made known to SD and the Court when Mr Bird gave his evidence; and
ii)	Offers were made to provide XL reinsurance up to $1m for the two policy-issuing companies and their other QS reinsurers (Trustmark per WEB and American Reinsurance Company) for 12 months from 1 January 1998 on an RAD basis.
However, according to Mr Bird’s evidence, Mr Minter of CIGNA was not initially prepared to write lower than excess of $30,000 but American Reinsurance wanted cover down to $10,000. Mr Minter then agreed to provide cover down to $10,000 with the first $20,000 carved out. That low level  carveout was the liability that Mr Henton reinsured.
(b)	The approach to Mr Henton
763.	Prior to 23 January 1998, SCB had tried to place some part of the reinsurance with Reliastar, D&H and the Theakston Syndicate (Syndicate 1101). The Theakston Syndicate had asked questions to which answers had been received; they took the view that the commission structure was far too high. It was not clear why the Theakston Syndicate took that view as they had participated in the Hallmark scheme (Programme 19) where the commissions were high.
764.	It was Mr Bird’s evidence that sometime in December 1997 or January 1998, because Mr Brown and Mr Butler were away, he had approached Mr Henton to write the carveout of $20,000 xs $10,000 from the underlying XL that was to be written under the Aviary lineslip. Mr Bird did not show Mr Henton any figures; he merely wanted to know if Mr Henton was interested in writing the carveout. 
765.	Sometime between 1 and 10 March 1998, Mr Henton agreed to write a retrocession protecting the first $20,000 of CIGNA’s exposure under the underlying XL, that is, the layer $20,000 xs $10,000; the spread of the layer was proportionately reduced to reflect the 60% and 50% orders (to $12,000 in the case of Clarendon and $10,000 in the case of Legion). Mr Henton had not dated the slip but recalled that he had been approached in early March 1998; it must have been prior to 10 March because on 11 March 1998, he had agreed an amendment to the provision which dealt with the payment of the M&D premium.
(c)	The information provided to Mr Henton
766.	The slips set out the estimated applicable net premium income as $4.5m for the Clarendon policies and $5.5m for the Legion policies. The premium payable to SD was fixed at a rate of 37.5% of the net premium income to CIGNA under the underlying XL (which was 45% of the estimated applicable net premium income). 15% brokerage was paid by SD to SCB, on top of another 15% that was paid by CIGNA to SCB under the underlying XL. The estimated gross premium for the programme was $743,000 with SD to receive on that basis a net premium of $538,000. EIU’s fee for this would be about $80,000.
767.	There was a fax from Stirling Cooke Texas dated 16 August 1996; information about the terms of the underlying policy was set out. 
768.	Claims statistics:
i)	For Legion for 1996; these were undated but included losses at 30 September 1997 and were therefore third quarter figures. These showed a breakdown of the claims, providing, for each claim, a name of the employer, the inception date of the policy (some of which were in 1997), the State, the details of the loss and the figures for the losses paid and incurred. There were noted losses xs $10,000 and losses which fell into the layer $20,000 xs $10,000. The total for losses xs $10,000 was $2.458m; for $20,000 xs $10,000 (the layer Mr Henton was to write) was $842,300. Mr Henton’s evidence was that the reserves set in the incurred figures would cater for the ultimate position. 
ii)	For Legion 1997 as at 30 September 1997; these had policies incepting from March 1997. There were noted losses xs $50,000, but not for the layer which Mr Henton was to write. The total incurred losses were $513,000, but there was no computation of the total losses for the layer which Mr Henton was to write; Mr Butler said that they would have been prepared if they had been sought. The statistics were very immature and had only one loss excess of $50,000.
iii)	An examination of the 1996 loss statistics showed many small figures, which suggested that these were merely interim figures which were to develop further. Mr Henton’s evidence was that that was not the way in which he looked at the figures at the time; Mr Butler’s evidence was that the claims reserve figures had been settled by adjusters and were expected to be reasonably accurate. 
iv)	Mr Bird’s evidence was that he paid attention to the 1996 figures but not to the 1997 figures as they were too immature; he considered that the 1996 figures would not deteriorate significantly as SD were reinsuring at a level that was so low down that claims were reported as they happened – it was a requirement that claims were reported by the injured employee to his employer within a stipulated period. There were, however, no premium income figures in relation to the claims.
v)	A two page document was provided, setting out the 1996 and 1997 figures for the previous placement with CIRCL, with Mr Cooke’s name on the top of the page. Mr Butler’s evidence was that CIRCL were the reinsurers in previous years and that these were the statistics for them; the underlying business was the same, but the structure of the reinsurance was different with the XL having a retention of only $3,000. This was the only document that gave the premium income figures for 1996 and 1997; however, these figures related to different layers and different contracts and it was therefore difficult to work out how these figures related to those shown on the slips. The figures for CIRCL showed very high loss ratios (the incurred loss ratio on the layer $97,000 xs $3,000 on the basis of earned premiums was 499%). Mr Bird’s evidence was that he could not recall seeing these figures but he believed they were in his file; he was aware that CIRCL had had a participation in earlier years as a QS reinsurer of the underlying business and that these figures were for the XL reinsurance of their retained portion of the QS. Mr Cooke, who could have explained this document, was not called to give evidence, but I draw no inference adverse to SCB from the fact he did not give evidence on this.
(d)	The basis of acceptance
769.	Mr Henton’s evidence was that he believed that the underlying insurance was the equivalent of Section A of WC insurance for those working in harbours and in the inland waters of the US. He did not know how compensation was assessed under the underlying scheme, or what the guidelines for compensation were. Mr Henton did not know the details of the ways in which the US Longshoremen’s Act and the underlying insurance worked; he did not know which persons were doing the underwriting, nor did he know anything about the sort of business that was being underwritten, although he thought that that would have been drawn to his attention. His evidence was that that was not a matter for him, but was a matter for CIGNA and the policy-issuing companies instead. Mr Butler agreed, as that was the way that this market worked. His evidence was also that he could not recall looking at the claims statistics in detail – he mainly looked at the number of losses in the layer which he wrote. 
770.	Mr Bird’s evidence was that the QS reinsurers took a keen interest in the underlying business; they had to be comfortable with the fronting companies as these companies filed the rates and provided the underwriting guidelines to the MGA; Clarendon had in-house and external actuaries on this account. It was not possible, in his view, to see whether the MGA was doing a good job from London and so both CIGNA and Lincoln National sent out audit teams to audit the MGA and to meet Clarendon. His understanding was that the QS reinsurers relied on the ceding company to do all the legal work, but the QS reinsurers then managed the account by auditing the people who were underwriting it. He also understood that the fronting companies were constantly checking that all was being done properly, as the payment of WC claims was very political and there could be no delays.
771.	Mr Henton’s evidence was that he did not expect this programme to be gross loss making at the time; in his statement he had said that there was a reasonable prospect of it being profitable; his oral evidence was that he might have made a mistake in his statement and in his calculations at the time. Looking at the claims statistics when he gave his evidence, it was Mr Henton’s evidence that he was wrong and that the programme would be expected to make a gross loss; however, he could not recall thinking that the programme would be gross loss making when he wrote it. Although he was reinsuring the Aviary lineslip under Programme 11 and would therefore be reinsuring CIGNA for any losses xs $20,000 xs $10,000 which CIGNA picked up under this programme, he would not have to pay an additional amount by way of claim, as there would be only one retention on his outwards reinsurance programme; a proportion of the premium received by CIGNA for this programme would be ceded under Programme 11; overall, there would therefore be a benefit to SD for no additional net loss.
772.	Mr Bird’s evidence was that the premium rate charged by EIU was in line with the market rate at the time.
773.	Mr Jackson’s evidence was that there was insufficient information to make an underwriting assessment on a conventional basis, but such as there was would have told the underwriter that he was exposing his capacity to the risk of significant loss. Mr Jackson also produced, for the Court, the US National Council on Compensation Insurance figures for 1997; these included figures for the number of claims per 100,000 workers in each State for WCA and for the US Longshoremen and Harbor Workers’ Compensation Act; the USL&HW figure was over 26,000 and very much higher than that for any State. SCB’s computation of the anticipated number of losses showed that this number was far greater than the number that could have been covered by the premium available under this programme.
774.	Mr Hines’ evidence was that he thought that it would make a large gross loss, though there were programmes where larger gross losses would be anticipated; it was difficult to find one’s way around the information provided.
(e)	SCB’s position on the basis of acceptance
775.	SCB accepted, by their solicitors’ letter of 4 December 2001, that this programme could only be written on a net basis; Mr Butler’s evidence was to the same effect. 
(f)	The review by Mr Coppinger
776.	This programme was examined by Mr Coppinger during his visit to EIU in July 1998; he thought that the information in the file was very confusing and that Mr Henton was unable to explain the inter-relationship between the Clarendon portfolio and the Legion portfolio; he noted that there was a lot of information on file in respect of Legion. Mr Henton’s evidence was that he was nervous and that Mr Coppinger was tired during their meeting (referred to at paragraphs 1469 and following of Part I) – that was why Mr Henton was unable to explain the programme clearly to Mr Coppinger. 
(g)	The loss position
777.	The net premium to SD was $586,327. No losses had been advised.
(h)	Conclusion
778.	I am sure that Mr Henton acted dishonestly in accepting this programme:
i)	He had no understanding of how the underlying insurance operated; he should not have agreed to write the programme on either a gross or net basis when he did not understand the underlying business, particularly at the low level at which CIGNA were not prepared to write. He had made no attempt to obtain the figures for the Clarendon portfolio, or to obtain meaningful information about the way in which the reinsurance had operated when CIRCL were the reinsurers.
ii)	I reject as untruthful, his evidence that he thought that this programme might make a gross profit and his explanation that he might have made an error; the evidence clearly pointed to it being gross loss making. He could not have carried out a calculation to see if he could cover the number of retained losses within the premium he had after paying for reinsurance, for even allowing for a generous accumulation, the anticipated number of losses could not have been covered.
iii)	I am sure that Mr Henton knew that SCB were the underwriters of the underlying scheme; he wrote this line to enable SCB to continue with their insurance scheme for this business, as this layer of retrocessional cover was essential if CIGNA were to provide the necessary XL reinsurance. That was why he did not seek out meaningful information or bother to calculate properly whether it would be profitable on a net basis.
iv)	He provided cover on an RAD basis whereas the outwards reinsurance he had was on an LOD basis; for the reasons given at paragraph 1246.xii) of Part I, he knew that it was wrong to expose SD to the mismatch in terms for the reasons set out.
779.	I am sure that SCB knew that Mr Henton was acting in dishonest breach of duty and they dishonestly assisted him in this:
i)	SCB knew that this was gross loss making business which Mr Henton had no authority to accept.
ii)	SCB used him as a source of cover for a low working layer reinsurance with a very high loss frequency which they needed in order to be able to provide cover which one of the participating QS reinsurers demanded, but which two took. Their motivation was clearly to enable them to provide competitive pricing on their insurance scheme in the US.
iii)	As set out at paragraph 1246.xiii) of Part I, Mr Butler fully appreciated that no honest agent would expose his principal to the obvious risks in the then market arising from the mismatch between  granting cover on an RAD basis, when he only had reinsurance on an LOD basis.
Programme 30: Retrocession of JEH Re’s reinsurance of Mr Cackett’s participation in WEB’s variable QS
780.	On 5 May 1998, Mr Henton wrote a retrocession of Mr Billyard’s reinsurance of Mr Cackett’s participation (for Sun Life/Phoenix) in a variable QS of PA and WC carveout business that was underwritten by WEB. The structure of the programme is set out at Diagram 30.
781.	Under the variable QS, WEB could cede, with effect from 1 June 1997, up to 67% of $3m any one person; it had the characteristics of a facultative obligatory contract, except that WEB had to retain, subject to reinsurance, one-third of the business ceded. Mr Butler accepted that under this kind of contract, WEB could cherry pick their cessions. In Aneco Reinsurance Underwriting Ltd v Johnson & Higgins Ltd [2001] UKHL 51, Lord Steyn observed in relation to facultative obligatory treaties at paragraph 26:
“By contrast fac/oblig treaties are plainly open to abuse. The reassured is able to put onto his reinsurer the least attractive pieces of qualifying business in his book, while keeping what he considers to be the best business for himself. A reinsurer will tend only to reinsure another underwriter on fac/oblig terms if he has considerable trust in the way that his reassured will use it.”
(a)	The other business that had been written for WEB
782.	As set out at paragraph 111 above, in October 1997, Mr Henton had underwritten part of an XL reinsurance programme of WEB (Programme 6); WEB had begun underwriting WCA and other similar business for All American in June 1997. The principal basis on which Programme 6 was written was on the business plan where WEB had stated that they would write profitable business (see paragraph 118.ii)). 
783.	Mr Henton had written part of a further programme for WEB on Christmas Eve 1997 – Programme 10 (see paragraph 214).
(b)	The placing history of the variable QS
784.	WEB had sought in about June 1997 to place a variable QS of the business it had underwritten for All American and used Aon and Crawley Warren as their brokers. Mr Cackett wrote a 15% line on behalf of Sun Life and Phoenix through Aon, but that was all that Aon were able to place. Crawley Warren were unable to place any lines.
785.	WEB then instructed SCB. In about June 1997, Mr Crane of the Eliot Syndicate had led a consortium of Lloyd’s syndicates which had subscribed to a 10% lead line on SCB’s slip for the variable QS. The consortium led by Mr Crane coded this risk ‘KA’. Mr Crane’s evidence was that he suspected that the account would be expected to make a gross profit, but that he did not know the account in any detail.
786.	Other participants who subscribed through SCB in August 1997 were Mr Billyard (for 23.81% on 5 August 1997), Clarendon (per Raydon) (for 23.81% on 5 August 1997), Chiyoda (for 9.52% on 6 August 1997), and Mr Keith Smith of New Hampshire (for 2.86% on 6 August 1997). These were the line sizes after signing down had taken place.  
787.	Mr Cackett also subscribed to a further 15% on 11 August 1997. Mr Butler’s evidence was that he had told Mr Cackett that this line was too small as Mr Cackett wrote large lines; if others saw a small line they would not follow. Mr Cackett agreed to write the further line, subject to reinsurance being obtained for the further line and for the original 15% line that was written for Aon. 
(c)	Mr Billyard’s reinsurance of Mr Cackett
788.	Sometime after 11 August 1997, Mr Billyard agreed to write two reinsurances of Mr Cackett’s participation in the variable QS, even though he had subscribed to the variable QS himself – there was a separate contract for each of Sun Life and Phoenix, but as in other contracts protecting Mr Cackett’s writings, the two contracts here have been treated as one:
i)	An aggregate stop loss (for all claims up to $10,000) up to $1m in the aggregate excess of 80% of the net premium income on an RAD basis for 12 months from 1 June 1997; there was an exclusion of LMX but not of international XL. The premium rate was 8% of the applicable net premium income (net of all acquisition costs and specific reinsurance costs), which was estimated to be $945,000.
ii)	An XL reinsurance for $2.312m xs $100,000, again on an RAD basis for 12 months from 1 June 1997; this contained a warranty which provided that no recovery could be made until the reinsured had incurred an original loss of $2.5m. The premium rate was 3.5% of the applicable net premium income.
789.	Mr Billyard provided the reinsurances on the basis that Mr Butler would obtain reinsurances for 50% of his lines. Mr Butler indicated that he hoped to be able to place such cover, possibly with SD; Mr Billyard would then ultimately retain 50% of the reinsurances he had written.
(d)	The placement with Mr Henton
790.	On 5 May 1998, some 11 months after the variable QS had incepted, and ten months after Mr Crane had subscribed to it, and some months after Mr Billyard had provided the reinsurances of Mr Cackett, Mr Brown approached Mr Henton to write a retrocession of the reinsurances of Mr Cackett that had been provided by Mr Billyard. Mr Brown could not recall why Mr Billyard wanted the retrocession then, but explained that it might have had something to do with Mr Billyard’s line; there were no documents made available to the Court that helped to resolve this.
791.	Mr Henton agreed to do so and Mr Whitcombe confirmed the programme on the same day.
i)	On the retrocession of the aggregate stop loss, Mr Henton took a 50% line, receiving 50% of the total premium that was paid to Mr Billyard for the underlying reinsurance, less an overrider to Mr Billyard of 2.5% and a further brokerage to SCB of 2.5%.
ii)	On the retrocession of the XL, Mr Henton also took a 50% line on the basis of the same deductions.
(e)	The information provided to Mr Henton
792.	The slip referred to the applicable estimated net premium income under the underlying reinsurance, and to the copy of the variable QS and information for WEB having been seen and noted.
793.	There was no information on the underlying business, or on the basis on which cessions would be made, or of the cessions that had been made. Mr Henton’s evidence was that he was told that there were no losses to the aggregate stop loss that were reported to SCB; he would expected to have been told if there were losses that had used up some of the aggregate. He could not recall being told (although he might have been) of the business that had been bound or of the way that the variable QS had been operated, even though the variable QS had already been running for ten months. That was not something he would normally be told. Mr Brown’s evidence was that it was sufficient that Mr Henton had seen the document produced by WEB (which was shown to Mr Henton at the time Programme 6 was placed); Mr Brown believed that that document was used again in the placement of this programme, and that it was the document which was referred to in the slip for the underlying reinsurance.
794.	Mr Henton’s evidence was that he thought he had been told that the programme was being placed late because WEB had had problems with its outward reinsurance and had requested increased cover from Mr Cackett. Mr Henton accepted that an underwriter would want to know more about the problems that had been faced and why such problems had arisen. He thought he was probably told, but could not recall what he was told. 
(f)	The information provided to SCB for the renewal
795.	However, on 4 May 1998, the day before Mr Henton was approached, WEB sent to SCB, information relating to the renewal of the variable QS for June 1998; Mr Brown believed that he might have shown Mr Henton that information. Mr Henton’s evidence was that he might have been shown some of it but he could not remember. That information comprised:
i)	A letter to Mr Butler from Mr Ekwall dated 1 April 1998 about profit commission; this stated:
“To review the situation, the [profit commission] we have with our two lead companies, Trustmark and All American, includes investment income on cash distributions held by them. This is an important component in our [profit commission] calculation and specifically impacts WCA type business where reserves are held for a substantial period (emphasis added).
Unfortunately, this component is not included in the [profit commission] calculation for our [variable] QS and thus we are faced with the potential of losing significant [profit commission] revenue when we cede to the [variable] QS. This should be very profitable business for the [variable] QS and we do not want to be penalized for ceding profitable business to the [variable] QS.” 
Mr Henton’s evidence was that there would be commutation clauses and that the investment income would remain until the loss had actually been paid out, which would probably be before the commutation clause took effect, otherwise the loss would be commuted at that point.
ii)	A document of 4 May 1998 which stated that WEB had written $16.6478m of business to the treaty; the vast majority of it was QS or low level excess WCA business. WEB were confident that the business ceded would produce profits to their reinsurers in excess of their 15% target after expenses. They had not written much in the mid or high layers as rates were generally too thin.
iii)	Exhibits to the document set out the following proportions of business that had been written: WCA QS (74%), WCA excess (25%) and PA excess (1%). WEB expected 37% of the written premium to be paid in 1998, 38% to be paid in 1999, 15% to be paid in 2000 and 10% to be paid in 2001.
iv)	A schedule of the risks written under the variable QS was also enclosed. Included in it was the contract that Mr Henton was to write later – WEB’s participation in Unicare (Programme 35 – see paragraph   908), and contracts ceded by a number of reinsurers that Mr Henton might be reinsuring elsewhere – Realm National, Clarendon, New Cap Re, and Clarendon/Legion USL&HW (Programme 29). These risks might also be ceded to other programmes he had written. Mr Henton’s evidence was that none of that information made any difference at the layers he was writing. 
796.	A summary dated 14 May 1998 showed that of those contracts that were ceded to the variable QS, the percentage ceded varied between 40% and 66.6667%. The total number of contracts ceded was 35.
797.	Mr Crane led the renewal on 15 May 1998 on the basis of the information that was provided to SCB on 4 May 1998; he however then declined, but the slip was supported by others. Mr Henton declined the opportunity to participate on the variable QS when it was renewed for 1998. His evidence was that he did so because he thought that there was, on the wording, a risk of E&O claims from WEB under the contract; his evidence was that he read into the contract that it also covered E&O and he was not authorised to cover that and it was not covered by the reinsurance.  Mr Henton therefore declined the renewal because on his view of the programme it also covered E&O which was not within the authority granted to EIU.
(g)	The basis of acceptance
798.	It was Mr Henton’s evidence that he had approached the programme on a gross basis, and had expected a gross profit. Notwithstanding this, if the programme was looked at on a net basis, the losses arising under those risks written under the variable QS which might also have been ceded to the other programmes written by Mr Henton and would aggregate with the losses that SD were covering under this programme; there would be only one retention on SD’s outwards reinsurance programme. 
799.	On the aggregate stop loss contract, Mr Henton’s evidence was that he would probably have carried out calculations to see how many losses there would be before he had to pay; he agreed that, on the basis of the estimated applicable net premium income to the underlying reinsurance of Mr Cackett, the excess point at 80% was $756,000; he also agreed with Mr Jackson’s calculation that the aggregate stop loss was for 186% xs 80% of net premium income (a band of coverage of 106% of net premium income). Mr Jackson calculated that JEH Re received premium income at the rate of 8% gross or 6.8% net and that SD received premium income at a net rate of 5.44%; on the face of it, this rate looked loaded against SD for the band of coverage involved. He also calculated that it would take 76 losses for the excess point of 80% to be breached and a further six losses for the premium received by SD to be used up; SD would then be exposed to a further 94 losses. Mr Jackson thought that there was a very real risk that the excess point would be breached as this was a substantial account at working layers.
800.	Mr Henton’s evidence was nonetheless that he expected a gross profit on the aggregate stop loss as WEB were going to write profitable business and that this would follow through to the retrocession he had written; although there would be some claims, the underlying business would be profitable. 
801.	When queried about the lack of statistics that had been received on the premium and level of claims on the underlying business, it was Mr Henton’s evidence that at the time that this programme was written, the premium flow to WEB had been slow, even though 11 months had passed since the inception of the variable QS; however, Mr Henton accepted that WEB must have known the amount of premium that they had written and that there must have been losses known to them. He said that he nevertheless did not need to see any such statistics because of the layering of the contracts he was writing. 
802.	SD submitted that the loss ratio on a well written WCA account would be near 100% before investment income, and that there would inevitably be claims on an aggregate stop loss at WEB’s level; Mr Henton said that that was not his thinking at the time. SD suggested that in order to determine the appropriate amount of premium that was to be sought, Mr Henton would have needed to form a view about the likely losses that would be received on the underlying business; it was Mr Henton’s response that he had relied on Mr Billyard’s quote on the underlying reinsurance, even though Mr Billyard admittedly wrote on the backs of his reinsurers on occasion.
803.	Mr Brown’s evidence was that a variable QS was in the interests of the SD to accept as EIU had accepted it.
804.	On the XL contract, Mr Jackson considered that the likelihood of the cover being impacted was low, but that he could not form a view on the rating of the premium without further information about the underlying book. The net premium to SD under the contract was $11,245, compared with a total loss of $1.156m to SD. Mr Hines’ evidence was that he had never written a variable QS as he did not like being selected against or people being given the potential to select against him. He did not consider it possible to make a realistic underwriting assessment. It was not suggested to him that it was bound to make a loss.
(h)	The loss position
805.	The net premium to SD was $135,843. No losses had been advised. However, as set out at paragraph 898, 50% of WEB’s retention under the underlying XL contract in Programme 34 (Unicare) had been ceded to this programme and the losses on that programme are very large.
(i)	Conclusion
806.	I am sure that Mr Henton acted dishonestly in accepting this programme:
i)	It is clear the delay in the placement of this programme  due to the fact that SCB was unable to find anyone else to write this programme, other than EIU
ii)	There was no justification for participating as a retrocessionaire and allowing Mr Billyard to make a commission of 2.5% and SCB a further brokerage of 2.5%. If Mr Billyard had wanted his participation reduced, then he should not have been paid for doing so. Mr Henton was simply acquiescing in SCB’s demands.
iii)	There was no information on which a proper underwriting assessment either on a net or gross basis could have been made; Mr Henton simply did not bother to ask. I am sure that the information provided to SCB in relation to the renewal for 1998 was not provided to Mr Henton when he wrote this programme; it was information that had it been provided would have been copied by EIU. Mr Henton did not attempt to determine the basis on which cessions would be made, or of the cessions that had been made, notwithstanding the fact that 11 months had passed since the inception of the variable QS and that there must have been some information about the underlying writings up until then.
iv)	He provided cover on an RAD basis whereas the outwards reinsurance he had was on an LOD basis; for the reasons given at paragraph 1246.xii) of Part I, he knew it was wrong to expose SD to the mismatch in terms for the reasons set out.
807.	I am sure that SCB knew that Mr Henton was acting in dishonest breach of duty and dishonestly assisted him in this as:
i)	It was placed with Mr Henton as no one else could be found to effect the reduction of Mr Billyard’s lines on his reinsurances of Mr Cackett that had been promised.
ii)	This was one of the programmes written in the circumstances set out at paragraph 1538 of Part I.
iii)	It was obvious, in the light of the finding I have made in paragraph 806.iii), that there was insufficient information to accept the risk on any basis; up to date information was not provide because it was known that Mr Henton would write the risk without bothering to ask for it.
iv)	SCB knew that Mr Billyard wanted to reduce his line; in these circumstances months after the contract had incepted, it was obvious to Mr Butler that Mr Henton was obviously acting contrary to the interests of SD when he agreed to pay Mr Billyard a 2.5% overrider and SCB a 2.5% brokerage, when if the business was to be written at all, it should have been written without any deduction in favour of either SCB or Mr Billyard.
v)	As set out at paragraph 1246.xiii) of Part I, Mr Butler fully appreciated that no honest agent would expose his principal to the obvious risks in the then market arising from the mismatch between granting cover on an RAD basis, when he only had reinsurance on an LOD basis
Programme 31: Realm National Monoline
808.	This programme was accepted by Mr Henton on 13 May 1998, providing an XL contract and an aggregate stop loss contract, both on an RAD basis for 12 months from 1 January 1998 in respect of Realm National’s Monoline scheme for occupational accident business. The programme is summarised in Diagram 31, but requires further explanation.
 (a)	The structure of the reinsurance
809.	For the year beginning January 1998:
i)	Realm National retained 25% of the risk under its Monoline scheme on the primary $1m of the scheme. 
ii)	The balance of the primary $1m was subject to a QS reinsurance with:
a)	American Re-Insurance Company (18.75%), Theakston Syndicate 1101 (5.58%), Reliastar (4.46%), Trustmark (per WEB) (17.85%); and 
b)	Mr Crane’s Syndicate 53 (3.3525%) and CIGNA through the Aviary lineslip (25.005%).
810.	Mr Henton wrote:
i)	An aggregate stop loss protection of Realm National’s retention for an aggregate of $3m xs 60% of the applicable net premium income or an aggregate of $982,500. The contract was written on an RAD basis for 12 months from 1 January 1998. Mr Henton wrote a 20% line, JEH Re 40 % and Clarendon (per Raydon) 40%.
ii)	The second layer of an XL protection of Realm National and the QS reinsurers listed at paragraph 809.ii)a) for $750,000 xs $250,000. Mr Henton wrote a line of 20% to stand, following a lead line of 100% by JEH Re which eventually signed to 51.64% down as it was necessary only to cover those who wanted the XL reinsurance. This XL contract was offered to all the QS reinsurers and was taken up by Realm National and those QS reinsurers listed at paragraph 809.ii)a) above, but not by those listed at paragraph 809.ii)b). The reinsurers listed in b), Mr Crane and CIGNA, had probably declined because they had had their own outwards reinsurance programmes, including programmes which had been written by Mr Henton, as shown in Diagram 31.
(b)	The placing history
811.	Mr Butler could not recall why the programme was placed late with Mr Henton.
812.	Mr Billyard had written the XL contract 100% and the effect of Mr Henton’s participation was to sign Mr Billyard’s down; Clarendon (per Raydon) was also on the XL for 50% of the order (which signed down to 13.6191%), but Clarendon had subsequently requested their removal from this contract. It was Mr Butler’s evidence that he believed that this was because Clarendon did not want Mr Murray of Raydon to be reinsuring an SCB company. This removal was evidenced by an endorsement dated 8 September 1998 and Clarendon’s line was then picked up by Mr Billyard on or about 10 September 1998, taking his line on the contract to 51.64%.
813.	The bottom layer of the XL protection ($240,000 xs $10,000) was written by JEH Re and CIGNA (per Aviary lineslip); these lines could be ceded under other programmes which were written by EIU, as shown in Diagram 31.
(c)	The Monoline scheme
814.	The Monoline scheme was an alternative WC insurance scheme. This scheme had been begun within Realm National in 1997 after the company had been acquired by SCB. Mr Butler’s evidence was that the insurance policies issued by Realm National to employers were full WC compensation covering WCA Sections A & B, but under the reinsurances covered by Programme 9, they only reinsured Section A and Section B was reinsured by others; they insured all sizes of employers from small to large. Mr Butler’s evidence was that they also provided reinsurance to captives and self-insured funds on the same basis. The underwriting was done by agents within the SCB group, but Mr Butler did not know whether these agency relationships were exclusive. Mr Butler believed that the whole scheme was probably managed by SCB. 
815.	Mr Butler said that Realm National probably had business plans which described the underlying business, but that he could not recall seeing them.
(d)	The information on the excess of loss
816.	The information provided to Mr Henton was:
i)	The slip; this excluded WCA Section B business; the estimated gross net premium income was given as $6.55m and a maximum any one person limit of $15m was set. The premium rate was 3% of the applicable gross net premium income.
ii)	A statistical record as at 8 December 1997; this showed that there were no paid or outstanding losses on this layer for the 12 months as at 1 January 1997 (Mr Butler believed that 1997 was Realm National’s first year of writing business). No up to date figures were provided. 
817.	Mr Henton could not recall if any other written information was provided.
818.	Mr Henton had no written information about the businesses that were insured by Realm National under this scheme; he believed that they were small to medium sized businesses; Realm National concentrated on low to medium risk businesses in southern US. He did not know if the rates filed were the manual premium. He did not receive information about the assureds under the scheme or information about their loss experience (which Realm National had used to rate the new account) – that was a matter for Realm National. Mr Butler’s evidence was to the same effect; there was no need to provide any information about the underlying business as that was not the way the market worked.
819.	Mr Henton believed that the underwriter of the scheme was Mr Patrick Whelan, but when he was told that Mr Whelan was the President of Realm in New York, Mr Henton said that he did not know if Mr Whelan was responsible for the underwriting of this account. This showed how little Mr Henton knew about the business.
(e)	The information on the aggregate stop loss
820.	The information given to Mr Henton was:
i)	The slip.
ii)	A statistical record as at 8 December 1997 for the 12 months at 1 January 1997. This showed that there were no paid or outstanding losses under the stop loss; it did not show how many losses there were before the excess or entry point. Mr Butler’s evidence was that he did not tell Mr Henton of the extent to which claims had approached the excess point for the stop loss for either 1997 or 1998, although SCB could have obtained that information. The other participants on the stop loss (Mr Billyard and Mr Murray) wrote without this information.
821.	The effect of the aggregate stop loss was to provide Realm with cover between 60% and 180% of the applicable net premium income for a premium of 2.5%. It guaranteed Realm an underwriting profit of 40% less the costs of the outwards reinsurances and the operational costs of the company, provided that the premium income on the contract was equivalent to 166.6667% of the minimum premium of $982,500 (60% of the estimated gross net premium income of  $1.6375m). The contract therefore paid after Realm had paid 98 retentions of $10,000. The estimated gross premium income for the contract was $40,940, of which SD received a net premium of $5,940 for their 20% line. 
822.	Mr Butler’s evidence was that this aggregate stop loss did not mean that Realm would write unprofitable business as this was business where there were filed rates.
(f) 	The basis of acceptance
823.	Mr Henton’s evidence was that he thought that as the account was small, there would be greater selectivity in allowing Realm to pick and choose which accounts to write.
824.	Mr Henton thought that the XL contract would be profitable on a gross basis.
825.	Neither Mr Henton nor Mr Butler accepted that SD was bound to lose money on the aggregate stop loss. On the contrary, Mr Henton thought that it would be profitable on a gross basis.
826.	Mr Jackson’s evidence was that this was not a “clear and obvious loser”, but that there was insufficient information to reach an underwriting assessment. Mr Hines’ evidence was that as this was new business, there was little information and the underwriter would be dependent on his experience of the class of business; he considered that the programme was unwriteable on the basis of the information in the papers, but he did not know what had been said orally by the broker to Mr Henton. On the basis of what was said in the papers, the programme was likely to make a large loss overall on a gross basis. Mr Greig’s evidence was that although he agreed with Mr Jackson’s evidence that triangulations might have been of use, triangulations were not used in the PA market and the information was sufficient for an underwriter in this market to accept it on a speculative basis – a “punt”. Sir Alan Traill’s evidence was that there was no meaningful information. Sir Alan was obviously correct – there was no meaningful information on this programme.
827.	This programme was one of those examined by Mr Coppinger during the review at EIU in July 1998. He commented that there was too little information.
(g)	The losses
828.	The losses under the XL contract as at the second quarter of 2001 were $506,034 on a net premium to SD of $65,932. 
(h)	Conclusion
829.	I am sure that Mr Henton acted dishonestly in accepting this programme:
i)	It was backdated by about four months without any explanation; the probability was that Mr Henton’s subscription was needed in order to reduce Mr Billyard’s lines on the programme. Mr Henton knew that SCB owned Realm National and I am sure that Mr Henton knew that SCB were the underwriters of this scheme; he wrote this line in order to assist SCB with their insurance scheme for this business. Mr Henton was not acting in the interests of SD.
ii)	He had no understanding of how the underlying insurance operated. He had made no attempt to obtain up to date figures or to find out how much business had been written in the first four months of 1998. He had made no attempt to find out how close the excess point under the aggregate stop loss was to being breached in either 1997 or 1998. He wrote both contracts with no meaningful information about either the business or its record. There was no material on which he could have rated the contracts. The programme was unwriteable on the written information that was provided and nothing material was provided orally.
iii)	He was providing cover to Realm National on terms of reinsurance which were more favourable than the terms of the outwards aggregate stop loss reinsurance he had obtained from Dorinco Re for 1998 on an RAD basis (see paragraph 1234 of Part I).
830.	I am sure that SCB knew that Mr Henton was acting in dishonest breach of duty and dishonestly assisted him in this as:
i)	This was one of the programmes written in the circumstances set out at paragraph 1538 of Part I.
ii)	This was essentially SCB business placed with Mr Henton four months after inception with the object of reducing Mr Billyard’s lines; they knew that Mr Henton was writing it for the benefit of the SCB group.
iii)	SCB made no effort to obtain any meaningful information such as information about the underlying scheme from Realm National, even though Realm National were an SCB-owned company.
Programme 32: New Cap Re (Australia)
831.	On 30 April 1998, Mr Henton gave an indication that he would write a low layer XL reinsurance of New Cap Re (Australia). This was given at the same time as when he agreed in principle to write a 66.6667% QS of JEH Re (Programme 33) – see paragraphs 1236 and 1572. He agreed on 25 or 28 May 1998 to write 100% of an XL protection for $20,000 xs $5,000 for 12 months from 1 May 1998 on an LOD basis. This programme is summarised in Diagram 32.
832.	This was written as part of an arrangement under which Mr Henton would reinsure New Cap Re (Australia) and New Cap Re (Australia) would reinsure SD, as referred to at paragraph 1236.i) of Part I. The origins of the programme are as follows.
(a)	The origins of the programme
833.	As set out at paragraph 1129 of Part I, New Cap Re (Australia) recruited Mr Sparkes (who had underwritten for Gan in London) to write a PA account. Mr Sparkes had bought a reinsurance programme for New Cap Re (Australia)’s PA account through WFD on the basis of a questionnaire dated 1 January 1998. It recorded that he was going to write a PA account which was similar to that which he had written at Gan for the previous eight years. The reinsurance programme was placed with Mr Billyard for $5m xs $25,000.
834.	Mr Sparkes commenced his employment with New Cap Re (Australia) on 30 March 1998, but had advised them earlier about the account which he intended to write and about the reinsurance which was needed so that this was put in place before he had commenced his employment.
835.	On 26 March 1998, Mr Murray of Raydon agreed to provide a quote to Mr Butler which covered New Cap Re (Australia) for a layer $40,000 xs $10,000 for their occupational accident account (which had an estimated premium income of $15m); the M&D premium was $1.2m. This quote was passed on by SCB to Mr Johnson of WFD. Sometime before or on 15 June 1998, Mr Henton reinsured New Cap Re (Australia) and New Cap Re (Bermuda) at a layer $3m xs $2m for a line of 30% in respect of occupational accident business; this was placed by WFD and was referred to at paragraph 1272 of Part I. The information sheet for this was also headed “Occupational Accident Account”.
836.	On 7 April 1998, Mr Hedley of MBR (brokers in Australia that were referred to at paragraph 1561.vi) of Part I) contacted Mr Brown by fax; he told Mr Brown that he had been asked by Mr Sparkes to provide a quote for a new low layer in respect of Mr Sparkes’ PA account at New Cap Re (Australia) (not the specific occupational accident account); the account was to be similar to that which Mr Sparkes had underwritten at Gan; this new low layer was to be a layer below the existing retention of $25,000 on the programme which was written by Mr Billyard. Mr Sparkes wanted to go as low as possible and wanted cover on an RAD basis for 12 months from 1 April 1998, as well as on an LOD basis in order to cover the risks that had already been written. Mr Sparkes had written $3.9m worth of premium on contracts incepting on 1 January 1998, along with some incepting on 1 October 1997 as well. Mr Sparkes was hoping to write $9m-$9.5m worth of premium in the year from 1 April 1998. A questionnaire and a draft slip (based on the programme written by Mr Billyard) were attached, with the limits and the deductibles on the draft slip left blank; the draft slip contained an exclusion of XL on XL business with a known spiral content.
837.	Mr Brown and Mr Kelly (who dealt with MBR) corresponded with MBR. Mr Kelly told Mr Butler, as recorded in an undated note, that Mr Sparkes wanted a layer $22,500 xs $2,500 on an LOD basis for 20 months from 1 May 1998, with unlimited reinstatements if possible; the estimated premium income was $5m.
838.	Mr Butler’s evidence was that the reciprocal deal referred to at paragraph 832 was envisaged from the outset. Mr Kelly’s note recorded that if SCB wanted Mr Sparkes to quote for EIU’s outwards reinsurance for a layer $40,000 xs $10,000, Mr Sparkes would only do so subject to New Cap Re (Australia)’s reinsurance being written. Mr Butler’s evidence was that he knew that Mr Henton was looking to write low level business and SCB consequently approached him; the others he could have approached were CIGNA and Clarendon (through Mr Murray); Mr Butler could not recall if he had spoken to them.
(b)	The indication given by Mr Henton on a reciprocal basis
839.	On 30 April 1998, Mr Brown approached Mr Henton to write this programme and Programme 33.
840.	Mr Henton’s evidence was that he and Mr Brown had discussed a deal, though he could not recall who had come up with it first. As he had wanted reinsurance from New Cap Re (Australia), he had merely given an indication as he would not have been prepared to write a reinsurance of New Cap Re (Australia) unless he had received outwards reinsurance in return. He had made it clear that the indication he had given was conditional; it was not unusual for there to be this type of activity in order to get the bottom end of a programme moving. Mr Henton had wanted a quid pro quo as he had wanted to bring down the excess point on his outwards reinsurance programme – he had wanted to take the excess point down from $20,000 to $10,000.
841.	The indication given was that he would write a layer $15,000 xs $10,000 at a rate of 5%; he recorded this indication on the questionnaire which was referred to at paragraph 833.
(c)	The negotiations for the deal 
842.	This indication was then passed on to MBR by Mr Brown on 1 May 1998 (with some details added, including an M&D premium of 80%, an inception date of 1 January 1998, and an RAD basis) on the basis that New Cap Re (Australia) would quote for the layer reinsuring SD at $40,000 xs $10,000 at a rate of 10%-12%. In his fax, Mr Brown described EIU as a full MGU for SD.
843.	Discussions then continued between SCB and MBR; on 13 May 1998, MBR pressed SCB for action, as a team from WFD had arrived in Australia and MBR did not want to lose the opportunity to place the reinsurance. On 21 May 1998, MBR told SCB that unless a quote for New Cap Re (Australia) for the layer $22,500 xs $2,500 was found, MBR and SCB would have their instructions withdrawn; Mr Sparkes had been prepared to offer the reciprocal quotation, but that was as far as he was prepared to go pending receipt of a quote for New Cap Re (Australia)’s reinsurance.
844.	On 22 May 1998, further terms for the inwards and outwards reinsurances were discussed; Mr Sparkes made it clear that he was not authorised to provide unlimited cover, but he made an offer to reinsure SD on an LOD basis for 12 months from 1 June 1998 with 49 free reinstatements. This was based on a premium of $6.5m written by EIU – this was the premium estimate that EIU had put forward at the start of the year and which Mr Henton said was still justified as this was an LOD policy.
845.	Further negotiations followed until, on 25 or 28 May 1998, Mr Henton scratched a fax to assent to his agreement and dated it 25 May 1998. The premium rate remained at 5%.
846.	On 28 May 1998, New Cap Re (Australia) quoted for the outwards reinsurance of SD at a layer $50,000 xs $10,000, limited to 99 free reinstatements. 
847.	On 2 June 1998, Mr Smith gave an order for the outwards reinsurance. Mr Henton’s evidence was that he had had a discussion with Mr Smith about the reciprocal arrangement; Mr Henton did not consider telling SD in writing about the inwards reinsurance that he was writing in order to get this outwards reinsurance. As set out at paragraph 1238 of Part I, Mr Broad’s evidence was that he did not know anything about the outwards reinsurance with New Cap Re (Australia) being placed.
848.	By 3 June 1998, Mr Billyard had agreed to change the bottom layer of reinsurance he had written for SD for 1998 to a backup with unlimited reinstatements of the proposed New Cap Re (Australia) reinsurance which had the lower excess point of $10,000.
849.	On 4 June 1998, SCB provided a formal quote sheet for the reinsurance that was to be written by EIU; it was accepted by New Cap Re (Australia). It contained a warranty: “Warranted that no business to be ceded to the above with an attachment point below $10,000”.
850.	During the negotiations, Mr Henton had said that he would have had to get SD’s approval if New Cap Re (Australia) had wanted the programme to start on 1 January 1998, a statement he admitted was untrue. His evidence was that he had told this lie because he was fed up with all the “to-ing and fro-ing” that had happened on this programme. Mr Butler’s evidence was that he had been advised by EIU that a backdating of the cover would require approval from SD; he did not know what SD and EIU had discussed. However, Mr Butler knew that there were other programmes which had previously been backdated, including, for example, Programme 31; Mr Broad had only approved backdated programmes that were on the Christmas Eve bordereau for the reasons and in the circumstances set out in Part I.
(d)	The confirmation
851.	The confirmation of the programme was issued on 10 June 1998, after the meeting between Mr Watson and Mr Whitcombe on 3 June 1998 at which an increase in the premium income was discussed (referred to at paragraph 1372 of Part I). This was the same day as that when Mr Henton was asked to write Programme 33 – paragraphs 1588 and following of Part I.
852.	The outwards reinsurance of SD by New Cap Re (Australia) was documented on 22 June 1998. It was written 100% by New Cap Re (Australia) and covered SD’s PA account (including LMX) on an LOD basis for 12 months from 1 January 1998; it was for $50,000 xs $10,000 at a rate of 7.75% of the applicable net premium income and an M&D premium of $450,000. It was, however, limited to 99 free reinstatements, but the reinsurance provided by Mr Billyard cut in after the 99 reinstatements and was, as I have set out, for an unlimited amount.
(e)	The information provided
853.	The information provided to Mr Henton was the questionnaire dated 1 January 1998 to which I have referred at paragraph 833:
i)	Although this gave the estimated gross premium income as $9m-$9.5m, it was annotated “$3.5[m]”; Mr Henton’s evidence was that he recalled that there had been a re-estimate of the premium income. However, as set out at paragraph 836, the figure of $3.9m had been given in the letter of 7 April 1998 as the premium that had been written so far that year. The premium position was clarified in the slip, which made it clear that notwithstanding what was set out in the questionnaire, the estimated premium income was $5m for 12 months at 1 January 1998.
ii)	The estimated breakdown of the account was 80% PA treaty XL, 10% proportional treaty, 9% kidnap and ransom XL and 1% travel schemes and credit cards. 
iii)	A note stated that New Cap Re (Australia) would not knowingly write business with an XL on XL spiral content, and that if an account had even a small percentage of income described as LMX, it would either be declined or they would seek assurances as to the intent of the underwriter in order to ensure that they did not write spiral business. The SD account written by EIU contained XL on XL with a spiral content and LMX including retro.
iv)	The questionnaire also noted that occupational accident, EEII and WCA carveout were not going to be written. Mr Butler’s evidence was that that this meant that Mr Sparkes was not going to write such business as original products, but that they could be included in a treaty which New Cap Re (Australia) reinsured. SD had written a very large proportion of occupational accident business.
v)	There was a separate occupational accident programme to which Mr Henton had subscribed, as set out at paragraph 835. Mr Henton’s evidence was that when New Cap Re (Australia) quoted for SD’s 1999 outwards reinsurance (as set out in paragraph 1791 of Part I), they wanted to know how much occupational accident EIU had written because the occupational accident programme that New Cap Re (Australia) had had allowed them to cede whole accounts to it where more than 50% of the whole account comprised occupational accident business; as SD’s account contained more than 50% occupational accident business, New Cap Re (Australia) reinsured their outwards protection of SD under their own occupational accident protections. 
854.	It was Mr Henton’s evidence that he did not know what business had been written by Mr Sparkes. No loss experience was provided as Mr Sparkes had only been at New Cap Re (Australia) since 30 March 1998. The information supplied was the normal sort of information that would be provided in the market for this sort of business. No information was provided to SCB about the business that had been written. It was Mr Butler’s evidence that this was not part of the information provided for a treaty account like this.
855.	Mr Henton did not know Mr Sparkes save that he had been supported a lot in the market by Mr Johnson of WFD and that he was a PA XL underwriter whose account in London would have probably included retro.
(f)	The terms
856.	The programme as set out in the slip protected New Cap Re (Australia)’s PA account for a period of 12 months from 1 May 1998 on an LOD basis with unlimited reinstatements for a layer $20,000 xs $5,000. There was a franchise of $15,000, the effect of which was that New Cap Re (Australia) could not recover under the programme unless the loss was at least $15,000, though if this was the case they would then be able to recover for the whole of any such loss less the retention of $5,000. New Cap Re (Australia) had an option to cancel and replace at 31 December 1998; this was to enable New Cap Re (Australia) to bring the programme into a structure which started at 1 January 1999.
857.	The warranty set out at paragraph 849 was not carried into the slip.
(g)	A spiral?
858.	There was an exclusion of XL on XL with a known spiral content.
859.	In his main statement, Mr Henton said that he was aware that losses could spiral or “ping pong” between Programme 32 and New Cap Re (Australia)’s reinsurance of SD; this was not a problem as New Cap Re (Australia) were providing SD with cover to a higher level than SD was providing to New Cap Re (Australia). That meant that any loss would end up with New Cap Re (Australia). When cross-examined on behalf of SCB, he said that he was aware of the risk of a spiral when the reinsurance of New Cap Re (Australia) was proposed to him. 
860.	However, in his cross-examination on behalf of SD, he said that when he made the statement he had not noticed the exclusion put onto the draft slip sent on 7 April 1998 (and onto the slip he eventually signed) excluding XL on XL business with a known spiral content; nor did he recall it when he was cross-examined on behalf of SCB. His evidence was that he did not intend a spiral when he entered into the arrangement with Mr Sparkes as the exclusion prevented the business passed by EIU to New Cap Re (Australia) being passed back. Mr Butler agreed that the exclusion stopped SD’s outwards reinsurance by New Cap Re (Australia) coming back.
861.	Mr Henton’s evidence was that he thought that New Cap Re (Australia)’s other outwards reinsurances would probably have the same exclusion of known spiral business and so New Cap Re (Australia) would end up with all the losses from SD. On the assumption that losses did spiral, Mr Henton accepted Mr Jackson’s illustration of a $60,000 loss, where some of the loss would go off to the higher layers of SD’s and New Cap Re (Australia)’s outwards reinsurance programmes; thus those outwards reinsurers would be deprived of the protection of their excess point as a result of the spiral – the outwards reinsurer in both cases appears to have been Mr Billyard.
 (h)	The basis of acceptance
862.	The estimated gross premium income for the programme was $250,000; the brokerage was 15% and the fee to EIU was 12.5%, leaving SD with an estimated net premium of $181,250. 
863.	In his statement and in cross-examination, Mr Henton accepted that the inwards reinsurance was likely to be unprofitable on a gross basis. As set out at paragraph 840, his evidence was that he had looked at the reinsurance of SD by New Cap Re (Australia) and the reinsurance of New Cap Re (Australia) by SD together; he had thought that the reciprocal deal would be profitable to SD on a net basis because the losses would end up with New Cap Re (Australia). His evidence was, when cross-examined, that he might have written the inwards reinsurance even without the outwards reinsurance.
864.	He accepted that the inwards reinsurance under this programme was at a very low level; he had set the premium rate at 5% in order to make a net profit; he would not have written the programme on a gross basis. He had set the premium rate after he had had a conversation with Mr Brown and had taken into account the rate that the market would pay for such a programme, the cost of outwards reinsurance and the number of retentions he would have to pay under the programme. He did not know the likely number of retentions on this programme as it was a new account; however, the rate in the market and the fact that New Cap Re (Australia) were going to write SD’s outwards reinsurance were factors that Mr Henton had taken into account. The premium rate was a fair rate at that time for that sort of level.
865.	Mr Jackson’s evidence was that there was insufficient information for a meaningful underwriting assessment to be made. Mr Hines’ evidence was, although part of the information were confusing, they could have been clarified by asking questions of the broker; that the programme was likely to make a gross loss on a large scale; he did not find the amount of losses that had occurred surprising as it was the sort of amount that could have been predicted at this low level.
866.	SD’s case was that the vice of this programme was the fact that intrinsically loss making business was being written on a reciprocal basis; SD, as the principal, were being kept in ignorance of the true nature of what had happened.
867.	This programme was one of those examined by Mr Coppinger during the review at EIU in July 1998; he thought that it was the protection of a genuine PA book and not a WC carveout book.
(i)	SCB’s position on the basis of acceptance
868.	SCB accepted, in their letter of 4 December 2001, that the programme was writeable only on a net basis.
(j)	The loss position
869.	The losses under the contract as at 24 July 2000 were $2.7814m, on a net premium to SD of $171,900. Revised figures as at 24 July 2002 have taken the incurred loss position down to $2.7614m.
(k)	Conclusion
870.	I am sure that Mr Henton acted dishonestly in accepting this programme:
i)	It is clear that he wrote this business in order to obtain outwards reinsurance from New Cap Re (Australia); no assessment was carried out to see if the reciprocal deal was beneficial to SD. Assuming that it was proper in the circumstances to make a reciprocal arrangement and that the effect of the terms in the policies was that there was to be no spiral, the arrangement was disadvantageous to SD:
a)	The reinsurance he wrote was bound to produce a large gross loss to SD, given the low level at which it was written.
b)	He provided cover in respect of losses that would occur in 1999 as the cover he had granted covered the inevitable losses that would occur on such business in the first four months of 1999. However, the outwards reinsurance he had obtained in return was on an LOD basis for 1998. There was therefore a serious mismatch in cover. Although it was Mr Henton’s evidence that he had expected to obtain outwards reinsurance for 1999 in due course, it was dishonest of him to have exposed SD to certain loss in 1999 when he had had no reinsurance for the losses and had known how difficult it had been to obtain reinsurance for 1998.
c)	The reinsurance he provided was on an unlimited reinstatement basis; the reinsurance provided by New Cap Re (Australia) was limited to 99 free reinstatements.
ii)	His evidence in relation to the existence of a spiral demonstrated that he was prepared to invent an account of matters when he felt that that suited him.
iii)	I reject as an invention, his evidence that he had discussed the reciprocal arrangement with Mr Smith. Mr Smith and Mr Broad were kept ignorant of that fact when Mr Smith gave an order for SD’s outwards reinsurance by New Cap Re (Australia). They thought that SD were obtaining outwards reinsurance on the basis of the offer from New Cap Re (Australia), without realising that the price paid for that outwards reinsurance included the inwards reinsurance of New Cap Re (Australia).
871.	I am sure that SCB knew that Mr Henton was acting in dishonest breach of duty and dishonestly assisted him in this. They knew that he had no authority from SD to write gross loss making business on the backs of reinsurers and this was one of the programmes written in the circumstances set out at paragraph 1538 of Part I. They also knew that the conduct of Mr Henton in accepting this programme would be to expose SD to certain loss in 1999 (particularly as the programme covered business which was to be written in the first four months of 1999) for which SD had no outwards reinsurance; SCB also knew that it was very unlikely that they would be able to find any reinsurer who would be prepared to provide outwards cover for the business that had been written by SD.
Programme 33: JEH Re – 66.6666% QS of the non-proportional account
872.	This programme has already been dealt with in at paragraphs 1552 and following of Part I
Programme 34: WEB’s participation in the Unicare scheme
873.	With effect from 1 January 1998, Trustmark and All American per WEB wrote a working layer XL for $475,000 xs $25,000 of WC carveout business for UniCARE Insurance Company (Unicare) on an RAD basis. On 10 June 1998, Mr Henton reinsured WEB’s entire participation above a retention by WEB of  $10,000 per loss. The programme is summarised in Diagram 34.
874.	This was a large programme in terms of the premium to SD as the M&D premium was $4.9665m. It was a specific contract unlike Programmes 6, 10 and 30 which were generals; this programme therefore inured to the benefit of those generals that covered this period. 
(a)	The Unicare scheme
875.	Unicare were a direct writer of WCA business based in California; their gross net premium income over the period 1993 to 1997 was in excess of $100m each year. 
876.	Mr Butler’s evidence was that he did not know any more about Unicare than what was set out in the preceding paragraph. WEB had originally approached SCB on the basis that they had wanted a front to write full WC business, with WEB reinsuring the business on a carveout basis with their principals; it was WEB’s original intention to reinsure WCA Section A business, but to leave Section B business with the fronting company; Clarendon was approached, but nothing had materialised. 
877.	WEB therefore reinsured Unicare at a layer $475,000 xs $25,000 for Unicare’s WC business (excluding employers’ liability – WCA Section B business). This underlying contract was placed by EW Blanche with WEB at a rate that was below the burn. The contract was to remain in force until 1 January 2000 with a run-off provision taking effect if it was not renewed.
(b)	The placing history	
878.	Mr Butler’s evidence was that he thought that this programme had been placed late as WEB had not received an order until April 1998; Mr Bastan of WEB had first approached SCB to place the XL on 14 April 1998.
879.	Mr Butler’s evidence was that he first raised this programme with Mr Henton in May 1998 when they were in Monte Carlo for the Grand Prix; Mr Henton’s evidence was that it might have been mentioned then.
880.	On 10 June 1998, Mr Henton initialled the statistics referred to at paragraph 889 to indicate that he would reinsure WEB for a 50% line for $465,000 xs $10,000 (xs $25,000) on an RAD basis; this was subsequently increased to 100% as set out at paragraph 882 below. This left WEB with a retention of $10,000 for its reinsurance. Mr Henton’s evidence was that this was his provisional acceptance. He had understood and had noted that it was being offered to Clarendon. He had also put down a line on an aggregate stop loss which WEB had sought for $2m xs 80% of the net premium income. He had quoted a premium rate of 50% for both the XL and the aggregate stop loss.
881.	An attempt was made to find a following market for the XL; SCB tried Reliastar, Chiyoda, AIG, IGI and some Lloyd’s syndicates including Mr Crane’s, Mr Theakston’s and Mr Panter’s. Mr Butler’s evidence was that he did not know why they did not subscribe, but underwriters would decline a risk one day only to change their minds when approached a second time. On 24 June 1998, the risk was offered to Mr Murray of Raydon (a second time) and to Mr Cackett, but not to Mr Billyard; both declined.  
882.	On 29 June 1998, Mr Butler saw Mr Henton again. Mr Butler told him that the aggregate stop loss had been placed with another reinsurer and asked him if he would write 100% of the XL at a rate of 43%, which Mr Henton believed was derived by subtracting the rate charged by the other reinsurer from the 50% which he had originally quoted. Mr Henton agreed and wrote 100% of the XL; Mr Whitcombe confirmed the programme that same day.
883.	The reinsurer with which the aggregate stop loss had been placed was CIGNA (under the Aviary lineslip); as set out in Diagram 34, CIGNA’s participation on this programme could be ceded under Programme 23.
(c)	The placing information: the two year contract
884.	Mr Henton was provided with a slip, the copy of the underlying reinsurance and two sheets of claims statistics for 1993-1997.
885.	The slip set out the estimated net premium income for the underlying XL as $14.4375m “accounted for during the period hereon”; this was 27.5% of the estimated premium income of $52.5m on the underlying Unicare scheme as WEB had written the underlying XL at the rate of 27.5%; it was Mr Butler’s evidence that the premium was for a two year period.  
886.	The copy of the underlying XL which WEB had written of Unicare showed that it was a two year contract and that it ran until 1 January 2000, covering losses occurring during that period; there was a run-off provision in the event that the contract was not renewed or other replacement cover not obtained, such that WEB had to pay the losses on the business that had been written before the contract expired.
887.	Mr Henton’s evidence was that he vaguely recalled a discussion about the underlying XL being a two year contract; he had regarded this programme as being a 12 month programme, and had perceived that there would be a renewal of the programme for 1999; Mr Butler’s evidence was that he would have told Mr Henton that the underlying XL was a two year contract with a possible run-off; Mr Henton did not have a sufficient recollection to say if this was right. 
888.	Mr Henton maintained that he had the authority to write the XL as it was a 12 month RAD contract; he accepted that under the binder he could only protect original contracts in excess of 12 months plus odd time if he had reinsurance – see paragraph 705 of Part I. His evidence was that they had reinsurance for 1998 and that they would get it for 1999; he did not consider that acceptance of this programme was a breach of the terms of the binder. Mr Butler said that he could not recall knowing that Mr Henton was restricted to writing contracts over one year only with reinsurance; he did not check the file provided to SCB which contained a copy of the binder. As set out at paragraph 1468 of Part I, on 16 July 1998, Mr Henton told Mr Bentley he had not written any programmes with original policies of up to 36 months as permitted by the endorsement made on 26 February 1998.
(d)	The information about the business	
889.	He was provided with two sheets of claims statistics for 1993 to 1997; one sheet comprised the figures sent by Mr Bastan to Mr Butler on 6 May 1998 and the other comprised the figures for Mr Henton’s layer as calculated by SCB from the figures on the first sheet. 
i)	Mr Butler’s evidence was that the figures for WEB’s layer (the first sheet of statistics) showed that the average burning cost over the years was 22.5% and Mr Butler had found out that WEB were charging a rate of 27.5% for their layer. Mr Butler considered that the figures for the incurred losses were reasonably well developed, though there might be new losses.
ii)	The figures prepared by SCB (the second sheet of statistics) showed loss ratios on an incurred and paid basis; this showed an incurred loss ratio of 15.65% in 1993, 18.22% in 1994, 23.75% in 1995, 20.6% in 1996 and 7.84% in 1997. 
iii)	However, as was evident from the ratios on both sheets and as Mr Henton appreciated, the loss ratios on the second sheet were calculated by reference to the estimated gross net premium income under the scheme as a whole. They were not calculated by reference to the premium charged to the XL layer that Mr Henton was writing.
iv)	Mr Henton thought that he had calculated the loss ratios by reference to the premium he would be charging; calculations by Mr Jackson of the actual loss ratio on EIU’s layer on the basis of the premium to be charged showed that the incurred loss ratio was between 183% and 277%, save in 1997 where it was already 91% on an immature year. Mr Henton accepted that Mr Jackson’s figures were correct.
890.	Mr Henton’s evidence was that the figures did not take into account what he was also told:
i)	There would be changes to the Unicare scheme and the estimated gross net premium income for the scheme was reducing from $113m in 1997 to $52.5m in 1998 as the account would be re-underwritten in order to achieve better loss ratios. Mr Butler’s evidence was that he was told that Unicare had been forced to cut the scheme back because of competition.
ii)	Unicare were going to include a book of small account business, which Mr Henton understood to be referring to small businesses; this was going to improve the loss ratio by around 20%.
The information about the previous years’ premium incomes and about sub-paragraphs ii) and iii) was sent by Mr Bastan to Mr Brown on 15 April 1998; however, the fax of 14 April 1998 from Mr Bastan to Mr Brown made it clear that the small accounts book would increase the premium under the underlying scheme to $77m. The information about the re-underwriting was set out in a note that was to be used to market to an anticipated following market the XL which Mr Henton had written. 
891.	Mr Henton accepted that the improvement of the loss ratio by 20% would only make a modest difference (as calculations done by Mr Jackson showed that the range for the incurred loss ratios would change to 145%-220% only), and that the programme would still make a gross loss, which would be significant given the size of the premium income on the programme. Mr Butler did not know if the improvement had taken place; he accepted that the losses were still fairly huge even if the 20% improvement occurred.
892.	Mr Henton’s evidence was that he was not given any figures as to the performance of the account in the first half of 1998; the figures would in any event be too immature and he would not get any information about the underlying accounts as such information would not normally be provided. Mr Butler agreed that this would not normally be provided.
893.	The documents to which I have referred were the totality of the information provided to Mr Henton about this very large programme. That apart:
i)	Mr Henton understood that Unicare were a large Californian company which wrote WC business.
ii)	He knew nothing more about them and had no information even about whether they were charging manual rates or not. His lack of knowledge was in spite of the fact that he was reinsuring almost the whole of this working layer as WEB only had a small retention. He had asked no pertinent questions about Unicare.
iii)	His evidence was that he was reinsuring WEB whom he believed from earlier programmes had said that they had intended to write profitable business.
894.	Mr Henton’s evidence was that he did not know of SCB’s interest in WEB at the time.
(e)	The brokerage and fees earned by SCB and EIU	
895.	At a rate of 43%, the gross premium income to SD would be $6.2081m and the net premium income would be $4.5009m; the M&D premium was $4.9665m. EIU’s fee was about $776,000 if the full premium was earned; SCB’s brokerage was about $931,000 if the full premium was earned.
(f)	The basis of acceptance
896.	Mr Henton’s evidence was that this programme was likely to make a gross loss and that he had looked at it on a net basis; he did not have a figure for the number of losses that were likely to be incurred. He said that he used the difference between the figures relating to the layer $465,000 xs $35,000 and the figures relating to the layer $460,000 xs $40,000 (set out in a fax from Mr Bastan to Mr Butler dated 8 May 1998) to calculate a net loss ratio of 50% (account having been taken of the proposed improvement in the loss ratio).
897.	WEB were to retain 57% of the estimated gross net premium ($8.2294m) to pay the losses up to their retention of $10,000, whilst SD received only $6.2081m ($4.5009m net) to pay the balance.
898.	Mr Henton’s evidence was that 50% of WEB’s retention was ceded under Programme 30.
899.	Mr Hines accepted that this programme was likely to make a very large loss on a gross basis. His evidence was that if this was accepted on a net basis, then Mr Henton would have to be certain of getting cover for the two year period for which he was exposed under the underlying contracts by virtue of the RAD nature of the cover. 
900.	Mr Greig and Mr Hines used the information in SCB’s file to calculate that over the years 1993-5, Mr Henton would, on average, retain losses of $7.73m and would receive an average gross premium (applying the rate of 43%) of $13.62m. Mr Jackson rightly pointed out that this did not take into account the effect of inflation in pushing claims up into the layers which EIU were reinsuring; there were no figures to do the calculation but Mr Jackson estimated that the retained losses would exceed $10m; furthermore, the figure quoted by Mr Hines and Mr Greig as the average premium was a gross figure; as a deduction of 69% (including the cost of the outwards reinsurance) had to be made, the contract would have been unprofitable on a net basis even on Mr Hines’ and Mr Greig’s average retained loss figure, and even more unprofitable on a net basis on Mr Jackson’s average retained loss figure. There is no evidence that Mr Henton saw the documents which set out these calculations and conclusions.
(g)	SCB’s position on the basis of acceptance
901.	In their letter of 4 December 2001, SCB accepted that this programme could only be written on a net basis. In his cross-examination on behalf of SD, it was suggested to him that the programme could not be written on a net basis. His answer was that it could as part of overall account protections and as part of an overall portfolio of business.
(h)	Enquiries by SD in July 1998 and thereafter
902.	Mr Coppinger reviewed this programme during his visit to EIU in July 1998. He calculated that WEB kept $8m of the premium for their retentions of $10,000; it would therefore follow that SD received $4.5m for their exposure of $465,000 xs $35,000. His note recorded that when he questioned Mr Henton about the risk, Mr Henton had told him that the rate was inadequate but that the outwards aggregate stop loss provided rendered the risk writeable at those terms. Mr Coppinger’s conclusion was that this deal fell into the “egregious” category.
903.	Letters of credit were required at the end of the year; no allowance was made for the cost of this.
904.	As set out at paragraph 1801 of Part I, this programme was discussed at the meeting on 4 January 1999. After the meeting, Mr Brown wrote on 6 January 1999 (see paragraph 1823 of Part I) to say that SD had got their figures wrong and that the information presented to Mr Henton had showed that the business would be profitable. Mr Henton did his own calculations which showed that the loss ratio on the gross premium income to EIU was 132% and he so informed Mr Brown. If the loss ratio was calculated on the basis of the premium income received by SD, then the loss ratio was 182%. Mr Butler accepted that Mr Brown’s calculations were wrong.
(i)	The losses
905.	As at February 2000, the losses on the contract were $16.8675m on a net premium income to SD of $3.4145m.
(i)	Conclusion
906.	I am sure that Mr Henton acted with gross dishonesty in accepting this programme:
i)	He had made no attempt to underwrite the risk, or to obtain any meaningful information about the book that had been written or the proposed changes, despite the fact that this was a very large contract on which he had written a 100% line. There was obviously a great deal of available information about Unicare and the business it was writing.
ii)	The estimated gross premium income to SD was $6.2081m; by that time, EIU had already written $12m worth of premium and EIU knew that they were not authorised to write any more (as set out at paragraph 1341.vi) of Part I). It was suggested by Mr Henton that by this time they could increase their premium income because of the QS with ESG; however, that had not been agreed.
iii)	It was backdated by about five months.
iv)	The programme reinsured WEB on an RAD basis for its participation in the Unicare scheme; it therefore covered losses that WEB had to pay under the underlying contract. This covered at least a two year period and the potential for a run-off. Mr Henton was not authorised to subscribe to a programme such as this as he had inadequate outwards reinsurance in place to cover it.
v)	The rate he charged left WEB with a very large part of the premium.
vi)	Mr Henton did no net underwriting calculations; his evidence that he had was an invention. If he had carried out the kind of calculation suggested by the experts, it would have shown that the business was unprofitable on a net basis.
vii)	He provided cover on an RAD basis whereas the outwards reinsurance he had obtained was on an LOD basis for 1998; for the reasons given at paragraph 1246.xii) of Part I, he knew that it was wrong to expose SD to the mismatch in terms for the reasons set out. On this particular programme, the mismatch was severe because of the length of the exposure under the underlying contracts. 
907.	I am sure that SCB knew that Mr Henton was acting in dishonest breach of duty and dishonestly assisted him in this: 
i)	They knew that he was not authorised to write  gross loss making business; this was one of the programmes written in the circumstances set out at paragraph 1538 of Part I; this was a very large programme that they had been unable to place with anyone else; they knew that no person acting honestly in the interests of his principal would write this very large risk 100% in the circumstances set out. 
ii)	As set out at paragraph 1246.xiii) of Part I, Mr Butler fully appreciated that no honest agent would expose his principal to the obvious risks in the then market arising from the mismatch between granting cover on an RAD basis but only obtaining reinsurance on an LOD basis. In this particular case, the mismatch was severe because of the length of time of the exposure under the underlying contracts.
Programme 35: Raydon for Clarendon – EEII and CSLI business
908.	On 8 July 1998, Mr Whitcombe confirmed the acceptance of 100% lines on four layers of an XL reinsurance of Clarendon (per Raydon)’s book of occupational accident business. This programme was, in part, a renewal of Programme 15 (EEII business) (see paragraph 327) (though with a different inception date), but with the addition of a CSLI book to it. The layers covered $2m xs $10,000 and the reinsurance was on an RAD basis for 12 months from 30 April 1998. Mr Henton could not recall when he had written the programme – it was either the same day that it was confirmed, or a day or so before. The programme is summarised in Diagram 35.
(a)	The business covered
909.	Mr Henton’s and Mr Butler’s evidence was that the EEII book and the CSLI book were being combined for the purposes of reinsurance. The reinsurance was intended to cover the two books; there was a provision for other occupational accident business to be included, but EEII and CSLI were to be the predominant if not the only types of risks covered. Mr Butler’s evidence was that EEII and CSLI were combined as the two products were very similar; furthermore, in previous years CSLI had been ceded to Raydon’s general programme and as the premium income under EEII had reduced, it was beneficial for these two products to be combined in this specific reinsurance.
910.	The scope of EEII coverage has been considered at paragraphs 123 and 124 of Part I. 
911.	CSLI was also a predominantly Texas policy and an alternative to WC insurance, nevertheless it was also sold in a few other States. It differed to EEII in that the employer had a large self-insured retention under EEII – about $100,000 (much more in the early 1990s – about $250,000 and much less in the late 1990s), whereas the employer did not have a significant self-insured retention under CSLI – typically only $1,000 or a few thousand dollars. The essential difference between the two products was in the level of the self-insured retention; CSLI was therefore more suitable for smaller employers.
912.	Both these products were sold through agents, some of whom were within the SCB group and some of whom were not; Stirling Cook Texas were underwriting the business as well as providing a funnel for the business to be processed and administered for Clarendon.
(b)	The placing history
913.	On 10 March 1998, Mr Murray of Raydon thanked Mr Bill Roche of Clarendon for a recent meeting in New York to discuss the “Seamless Program”; one of the issues discussed was the falling away of premium over the previous two years; according to Mr Butler, this was because EEII was under competitive attack from those who were providing full WC insurance. Renewal of the reinsurance was discussed. Mr Butler was sent a diagram of the reinsurance on 5 March 1998.
914.	On 29 April 1998, Mr Billyard agreed to hold cover the reinsurance for 100% for 14 days from 1 May 1998; he eventually did not want to write it for a reason of which Mr Butler was unaware.
915.	WEB would only write the reinsurance on certain terms; their fax of 8 May 1998 stated:
“We have reviewed the opportunity to quote the $490k xs $10k and $500k xs $500k layers. We would be willing to quote and support if our cover is limited to pure medical, indemnity & death benefits and excludes any non-economic awards. If that is feasible, we will need historical claims & premium to price this. Additionally, we need clarification on whether this cover attaches excess the employer SIR.”
916.	Mr Henton did not know why this programme was written retrospectively – he assumed that the reinsured had not made up their mind as to how to protect the account.
917.	The risk was broked to Mr Henton by Mr Butler and possibly by Mr Brown as well.
918.	Mr Henton did not at the time appreciate that this programme was a renewal of Programme 15 – he did not make the connection in his mind and did not refer to the information which had been provided at the time he wrote Programme 15 on Christmas Eve 1997. He could not recall being told by Mr Butler that this was a renewal. Mr Butler could not recall telling Mr Henton that this programme was a renewal of Programme 15, but he believed that he would have done so.
919.	Mr Butler’s evidence was that Clarendon had purchased reinsurance of up to $20m through Jardine Sayers in Princeton USA using the same information that had been presented to Mr Henton.
(c)	The placing information
920.	The information provided to Mr Henton was:
i)	The slip. There was no M&D premium. It was Mr Butler’s evidence that this was because of uncertainty over the premium.
ii)	“As if” claims statistics as at 28 May 1998 dated 8 July 1998 for EEII business; these showed the net written premium income and the incurred losses for the 1994 to 1998 years of account for the layer $490,000 xs $10,000 and for the layers up to $2m. On the bottom layer, the net written premium income was falling consistently, but not the gross loss ratios calculated by Mr Henton – see paragraphs 935 to 938 below. A note made it clear that the net written premium figures on the statistics were the premium figures to the programme and not to the layer. Mr Butler’s evidence was that he would have made it clear to Mr Henton that the net written premium figures were for the whole account and were not the premiums that were to be paid to the reinsurers. The statistics did not include the figures for CSLI business.
iii)	“As if” claims statistics dated 8 July 1998 for CSLI business; this showed the incurred losses but not the net written premium for the 1994 to 1998 years of account for the layers $490,000 xs $10,000 and $500,000 xs $500,000. A note stated that information about the premium was not available then. Mr Henton’s evidence was that there were no losses above that layer. Mr Butler’s evidence as to the absence of premium figures was that it was his belief that they could not be supplied as there might have been a recording or accounting problem that prevented Stirling Cooke Texas from breaking down the CSLI figures from the EEII figures. 
iv)	Loss runs and information about the legal trends in Texas for alternative WC business.
921.	Mr Henton’s evidence was that he recalled being told by Mr Butler and Mr Brown that the proposed account was the remainder of an account that had been much larger; they told him that the remainder of the account consisted of the better risks and that the underwriters had refused to reduce their rates which had led to the account reducing in size. Mr Henton’s evidence was that he was also told that the cover was clean.
922.	Mr Henton’s evidence was that he expected the split between EEII and CSLI for 1998 to be the same as that for 1997; he referred to a pie chart for 1997 which gave a breakdown of the levels of retention of the policies that had been written that year; those policies with a retention below $50,000 were CSLI policies; thus about 45% of the policies written were CSLI and the balance were EEII. Mr Jackson’s evidence (which I accept) was that the figures showed that in fact the CSLI book was dominating the account by 1998.
923.	Mr Jackson’s evidence (which I accept) was that a comparison of the information provided on this programme and that provided on Programme 15 showed discrepancies that made the information provided to Mr Henton on this programme misleading. When cross-examined, Mr Henton had not checked through Mr Jackson’s report and was consequently unable to comment on whether he agreed with Mr Jackson’s observations.
924.	No estimate of the applicable gross net premium income was given on either the slip or the statistics; it was Mr Henton’s evidence that he was told that the applicable gross premium income would be $6m and he had recorded in a note that the gross net premium income would be $2m. This was reflected in the figures that were given to SD in the bordereau for business written as at 31 July 1998. The net premium to SD was to be $1.59m.
925.	Mr Henton was told that the total premium on offer was 36.5% and that he could split that across the layers as he wished.
(d)	The scope of the cover
926.	Mr Henton’s evidence was that at the time the risk was broked to him, he understood (as his manuscript note recorded) that the reinsurance he was providing covered economic loss only and accident only. The note recorded that economic loss consisted of lost income and medical expenses; non-economic loss consisted of pain and suffering, mental anguish and disfigurement. He therefore considered that although there was nothing in the slip to exclude coverage of punitive damages, he did not believe that it was covered under the reinsurance he had written. It was clear from the underlying policy that punitive damages were covered.
(e)	The basis of acceptance
927.	Mr Henton’s evidence in his statement was that he thought that the programme was likely to be profitable on a gross basis if the slimming down of the account was successful, the loss making accounts were eliminated and the profitable accounts were retained. Mr Henton’s oral evidence was that he thought that the higher layers would make a gross profit and that the lower layers might either make a gross profit or a gross loss; he accepted that he had not carried out a loss ratio calculation at the time of the broke but had done so after Mr Coppinger’s visit – see paragraphs 935 to 938 below. He claimed that he did not underwrite this programme on a net basis. However, this was challenged by SD and must be examined by reference to the figures provided.
928.	As to the EEII figures (referred to at paragraph 920.ii) above):
i)	On the basis (as was made clear) that the net written premium figures shown were those received by Clarendon for the scheme and were not the premiums payable to the reinsurers for the layers, the net loss ratios were 383% for 1994, 267% for 1995, 510% for 1996 and 90% for 1997.
ii)	If, as Mr Henton claimed, the net written premium figures shown on the statistics were the premiums paid to the reinsurers, Mr Jackson’s calculations of the net loss ratios for the four layers on this basis produced ratios of 140% for 1994, 98% for 1995, 186% for 1996 and already 33% for 1997; he considered that these figures would deteriorate further still.
iii)	Mr Jackson had also calculated the number of losses xs $10,000 from 1994-1997; the number of losses xs $10,000 had not dropped as much as the reduction in the net written premium income.
iv)	Mr Henton did not accept that Mr Jackson’s approach to the number of losses xs $10,000 was correct, as Mr Henton was told that Clarendon were only going to be keeping the accounts where they were achieving the rate they wanted and were going to be shedding loss making accounts.
v)	Mr Butler’s evidence in relation to the loss ratios on the EEII figures was that the level of retentions under EEII were much higher in the early 1990s and had subsequently reduced.
929.	As to the CSLI figures (referred to at paragraph 920.iii) above):
i)	No loss ratios could be calculated.
ii)	Mr Henton accepted that if the net written premium figures for CSLI were included in the net written premium figures set out in the claims statistics for EEII (as he had assumed in the calculation done after Mr Coppinger’s visit – see paragraphs 935 to 938 below), then the loss ratios for EEII would be even worse.
iii)	Mr Henton accepted that Raydon and SCB should have been able to provide the net written premium figures for CSLI, but that he was content to go ahead without such figures as the account was changing anyway. Mr Butler accepted that the loss ratios could not be worked out without such figures. 
930.	Mr Jackson drew a comparison between the EEII and the CSLI figures, concluding that the CSLI account had not shrunk as fast as the EEII account and that the number of CSLI losses had not dropped as fast as the number of EEII losses.
931.	Mr Jackson considered that the combined rate of 36.5% was substantially too low given the loss ratios for the EEII book alone, even on the basis of Mr Henton’s interpretation of “net written premium”, but Mr Henton’s evidence was that he considered that the account had changed.
932.	Mr Hines’s evidence was that the information was very confusing; the programme would lose money on a substantial scale on a gross basis.
933.	Mr Greig’s evidence was that what was important was that the outwards reinsurance and inwards reinsurance matched; he pointed out that it was common in the PA market for reinsurers to write on an RAD basis with only LOD cover on an outwards basis. His evidence appeared to be that the information was adequate, but he did not appear to address the issue in relation to the missing premium figures. Sir Alan Traill’s evidence was that the broker should have sorted out the information and confusion in relation to premium. I prefer the evidence of Sir Alan; it was an elementary part of a broker’s duty to see that the information in relation to the premium was clear and that figures were provided to make the statistics on the CSLI part of the programme meaningful. Furthermore, although there might be circumstances in which it might be acceptable to write inwards business on an RAD basis whilst only having outwards reinsurance on an LOD basis, there could be no conceivable justification for writing gross loss making business on this scale on an RAD basis, particularly given the conditions in the then market; in so far as Mr Greig’s evidence extended to writing RAD business with only LOD insurance in the market as it was in 1998, I reject that evidence, given the market conditions as I have found them to be.  
(f )	The position of SCB on the basis of acceptance
934.	In their letter of 4 December 2001, SCB accepted that this programme could only be written on a net basis. Mr Butler accepted that the EEII part of the programme was gross loss making business and  that the CSLI part of the programme was going to produce a lot of losses at the lowest layer.
(g)	Calculation of the loss ratios by Mr Henton 
935.	Mr Henton accepted that he had calculated the loss ratios on this programme after Mr Coppinger’s visit, probably in August 1998. These calculations were made on two important bases:
i)	He took the net written premium figures shown on the EEII claims statistics to be the premiums payable to the reinsurers for the layers and not as the premiums received by Clarendon for the scheme.
ii)	He took the net written premium figures shown on the EEII claims statistics to include the premiums for the CSLI book as well, having deduced this from the list of risks that had been supplied.
These were false bases.
936.	Mr Henton calculated that the gross loss ratios were 101.22% for 1994, 70.7% for 1995, 134.94% for 1996 and 23.9% for 1997.
937.	Mr Henton also added the CSLI losses to the EEII losses and premiums; the results were set out in a computer printout which Mr Henton said was prepared in early August 1998. This showed gross loss ratios in excess of 100% (277% in 1996) and net loss ratios of no more than 26.03% (though he had failed to take into account the cost of outwards reinsurance). He maintained that notwithstanding this he thought that the programme could be written on a gross basis as the account was changing.
938.	Mr Henton had, however, miscalculated the gross premium to SD as $730,000 as he had applied the adjustable rate to the wrong figure – he accepted that the net written premium figures shown on the EEII claims statistics were the premiums that were received by Clarendon for the scheme and were not the premiums that were payable to the reinsurers; the adjustable rate should therefore have been applied to the net written premium figures set out in the EEII statistics.
(h)	The losses
939.	The losses as at the fourth quarter of 2001 were $8.5238m on a net premium income to SD of $1.5056m. Revised figures as at the first quarter of 2002 have taken the incurred loss position up to $8.5925m.
(i)	Conclusion
940.	I am sure that Mr Henton acted dishonestly:
i)	I am sure that he made no attempt to underwrite the risk:
a)	At the time that Mr Henton wrote the risk I am sure that he understood the statistics provided correctly and that the figures he produced in August 1998 was an attempt at justifying the writing of the programme. 
b)	The figures provided showed that the EEII book was disastrously loss making.
c)	There were figures on which he could calculate the performance of the CSLI book.
d)	He did not cross check the information that had been supplied for this programme with his file on Programme 15.
ii)	He provided cover on an RAD basis whereas the outwards reinsurance he was obtaining was on an LOD basis for 1998; for the reasons given at paragraph 1246.xii) of Part I, he knew that it was wrong to expose SD to the mismatch in terms for the reasons set out. It was particularly dishonest in the circumstances as the reinsurances he had provided on a 100% basis would run for four months of 1999 during which risks could be attached.
941.	I am sure that SCB knew that Mr Henton was acting in dishonest breach of duty and dishonestly assisted him in this: 
i)	This was one of the programmes written in the circumstances set out at paragraph 1538 of Part I.
ii)	Quite apart from the fact that they knew that Mr Henton was not authorised to write this risk as I am sure they knew that this was gross loss making business, they also knew that Mr Henton would write the programme without their having to provide proper information; this could be seen from the fact  that they did not bother to supply premium information about the CSLI book for the previous years even though as Mr Butler accepted it was the dominant part of the account.
iii)	As set out at paragraph 1246.xiii) of Part I, Mr Butler fully appreciated that no honest agent would expose his principal to the obvious risks in the then market arising from the mismatch between granting cover on an RAD basis but only obtaining reinsurance on an LOD basis. In this particular case, the mismatch was severe because of the four month period in 1999 during which more risks could be attached.