When Nick Prettejohn was at school his father wanted him to be a lawyer. But Prettejohn was not particularly keen. “My father was disappointed at the time,” he says. “But he’s over it now.”
Hardly surprising. Nick Prettejohn rose to the rank of chief executive of one of the oldest institutions in London before he was 40 years old. And, if his father needs any further comfort, Prettejohn is married to a lawyer who works in private practice, so he knows a thing or two about the legal profession. And he holds some firm views – not all positive.
“I have seen some very good lawyers in operation, but at the same time I have seen some bloody awful ones,” he says. “A bad lawyer presents you with immensely technical erudite opinions that either tell you nothing or will say that you can’t do what you want to do, without presenting you with any alternatives – glorifying in the intellectual trapeze artistry and then charging you an enormous fee.”
Prettejohn joined the Corporation of Lloyd’s in 1995 as head of strategy. It was a crucial time for the group as it was grappling with a vast deluge of litigation.
Liabilities that had arisen over decades came to a head in the late 1980s and early 1990s. At the same time there were catastrophic disasters such as Piper Alpha. Due to the spiral effect – whereby people insured a risk, then unknowingly got it back through the reinsurance of someone else – huge losses fell on a relatively small number of people, the ‘Names’.
“It was a unique set of circumstances that led to a vast amount of litigation. By the mid-1990s there were so many cases that it was in danger of clogging up the UK legal system,” says Prettejohn.
It was a problem for the courts and a problem for Lloyd’s. “We did not want to wash our dirty linen in public and there was a potential for the market to grind to a halt.”
Through the reconstruction and renewal (R&R) process, Lloyd’s reached a massive settlement, which was financed by a combination of existing funds available to the market, plus extra funds from a number of sources, including agencies and brokers. This formed a settlement fund of between £3bn and £3.5bn. In addition, Lloyd’s created a reinsurance vehicle – Equitas – into which pre-1992 business was reinsured.
The deal was that the Names would agree to stop litigating in return for access to the settlement funds and would agree to Equitas reinsurance.
The majority of Names accepted the offer and the minority went on to challenge Lloyd’s. At the end of last year Lloyd’s successfully defended itself against allegations of fraud in the largest action – the Jaffray case – in what was described by the judge as the most complex piece of litigation that his jurisdiction had ever seen.
Following completion of the process, Prettejohn set about putting in place the modernisation programme in preparation for an increasingly competitive global insurance market. “The stark realisation post-R&R was that the world is very different now. We have an ongoing market clear of pre-1992 liabilities but a whole bunch of business practices that have not changed for years,” he says.
The modernisation process was no mean feat – Lloyd’s had existed more or less in the same form for 300 years. And no area of the business was immune – least of all the legal function.
“Consistent with the underlying culture of the corporation of Lloyd’s, the legal team was not predominantly of a commercial mind,” Prettejohn says. “There were a lot of very bright intellectually able people, but the lawyers then were much more fascinated with the enormous complexities of Lloyd’s as an institution, rather than aiming to understand what the business objectives were and trying to get there as soon as possible.”
Before the modernisation programme there were more than 50 lawyers at Lloyd’s – a large proportion of whom were devoted to the litigation in which the group was deeply enmeshed. The team had a back-office approach, with very little communication with the rest of the business, says Prettejohn.
Litigation partner Jo Rickard was seconded from Freshfields to head the legal function over the period of the R&R process. Her main function was to manage the litigation strategy around the world. While Rickard managed the global litigation strategy, Freshfields’ corporate team worked closely with the in-house team on other aspects of the R&R plan.
Rickard began the process of change, says Prettejohn. “She did a lot to change the personnel and change practice – simple things such as the lawyers leaving their doors open and calling the business people clients.”
But it is James Butler, who joined Lloyd’s as head of legal in 1996, who is credited with preparing the legal function for the 21st century. While Rickard was tied up in litigation, when Butler joined, R&R was largely completed. “He did a lot to get the personnel changes moving and generated a culture of expertise and business-focused experience-sharing. He made sure people did not hoard expertise, but shared it, which is very important. James did an awful lot,” says Prettejohn.
The legal team is now a centralised function of 30 lawyers.
Last year the market was surprised when Sean McGovern was appointed to the top legal position, following Butler’s departure to internet bank Egg. Not because of his ability, but because of his age. At 29, he was one of the youngest lawyers to make it to that leading corporate position.
Unsurprisingly, age is not an issue for Prettejohn, who was 39 when he was appointed chief executive of the group. “I am intolerant of people who say you can be too young to do senior jobs. I think British industry has suffered chronically from saying you can’t do a job until you are x or y age. Equally, at the other end of the spectrum, saying people are too old is wrong – for me, it is much more about attitude and ability.”
The modernisation process has seen the legal function take on a more prominent role in the running of the business. Even aside from the litigation issues over the last decade, because of the way Lloyd’s is structured, Prettejohn says the legal function has a hugely important role to play in moving the business forward – not least because of the nature of the organisation. The Lloyd’s Act 1982 governs what the management do and there are byelaws that regulate the way the company functions.
Self-regulating until now, this is set to change. In a 1997 review of its regulatory arrangements the group decided it was in its interest to be externally accountable and it is now regulated by the Financial Services Authority.
“Because of the way we are structured, everything has a legal aspect. There are no major issues that do not have significant legal implications and lawyers can either make things very difficult or very easy,” says Prettejohn.
For lawyers to make it easy, he says, it is crucial that they have a close relationship with the management. Lloyd’s now has a management team that meets every week. McGovern sits on the team and all the regulatory bodies that govern the affairs of Lloyd’s.
“Sean is completely plugged in to the decision-making process and works closely with the directors and me,” says Prettejohn. “I do not understand how lawyers can operate if they are not integrated into the management decision-making process – although there have been occasions when they have not been. This has taught me that the biggest mistake you can make is not to involve the legal function at the earliest possible opportunity – like all the time.”
Prettejohn denies there is a link between the previous structure of the legal function and the problems experienced by Lloyd’s in the 1980s. He says these were unavoidable. But he has no intention of allowing any similar problems to besiege the group.
“I am temperamentally never satisfied – as soon as I have achieved something I want to move on or redo it. In today’s business environment, you have to be like that. You cannot think, ‘We’ve done that now. Let’s take a bit of time off’, because the chances are that as soon as you have something right, you need to be thinking about what needs to be done next.”
External advisers
Freshfields and Lloyd’s of London go back a long way. The bank has instructed the firm for decades, long before it became Freshfields Bruckhaus Deringer.
The relationship is one of the few remnants of the old Lloyd’s of which Prettejohn wholeheartedly approves: “They understand the complexities of the place and how all the different bits interrelate – so it makes sense to have the overarching relationship. We need a firm that can see institutionally the ramifications of the issues, otherwise we would trip over ourselves all the time.”
The firm seconded out a partner during the crisis in the early 1990s and effectively took over handling the legal aspects of the R&R programme.
“When they were handling R&R they had to plug into every part of the business because that is the only way that they could operate,” says head of legal Sean McGovern. “It is now more of a normal relationship. We, the legal team, manage the relationship and whether and to what extent the firm gets involved.”
Freshfields was instructed in the Jaffray case. Lloyd’s annual report this year refers to “exceptional” costs relating to litigation and there are reports that legal fees topped £20m.
Prettejohn declines to comment on the figure, but says the case was extremely complex.
He says that as a business user he looks for much the same qualities in an external adviser as an in-house lawyer.
“Basically, someone who is not afraid to present me with a problem. But the corollary of that is that they also have to think about ways to solve the problem. In most business situations it is very easy
to find reasons why you cannot do something.”
He says he has no strong views on law firm fees, although Lloyd’s will monitor rate rises. “We know what they are and it is up to us to use the firms in the right way. If there is an ongoing rate for a job, there is no point in railing against it,” he says.
Macfarlanes is also instructed on small-scale work. Clifford Chance recently won work through a beauty parade, to act on the Lloyds.com initiative.
“As the plan was to set up Lloyds.com as a fully functioning business in its own right, the aim was to give it a degree of independence, and one of the best ways to do this was to give it separate advisers without Lloyd’s baggage,” says McGovern.
