| Date | 27 October 2004 |
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| Judgment | Lumbermans Mutual Casualty Company v Bovis Lend Lease Limited, KBD 5 October 2004 |
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| The Issue | Whether settlement agreements can be used to ascertain loss in the context of subsequent insurance claims. |
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| Implication |
A global settlement agreement may not satisfy the requirement of ascertainment of loss under professional indemnity liability insurance policies and it will be necessary separately to establish the nature and extent of liability. |
printIn 1996 Bovis Lend Lease entered into contract with Braehead Glasgow Ltd for the construction of the Braehead Retail and Leisure Centre in Glasgow. The project was substantial and complex and created a number of disputes. Bovis commenced proceedings in the Technology and Construction Court for additional design and management fees, preliminaries and loss and expense amounting to some £38m. Braehead counterclaimed for mismanagement by Bovis including defective works and late completion totalling £103m. Prior to the trial of these matters the disputes were settled by an agreement in January 2002 by which Braehead agreed to pay Bovis £15m in full and final settlement of all disputes under the building contract. The method of calculation of that global sum was not identified in the agreement. In particular, there was no identification within the agreement indicating which elements of Bovis's claim or Braehead's counterclaim had been treated as valid. In fact the settlement agreement gave no indication as to whether the parties agreed that there was any substance to any of the elements of Braehead's counterclaim. Nevertheless, Bovis contented that the settlement dealt with the balance between its valid claims and Braehead's valid counterclaims and in respect of those counterclaims Bovis considered that it was entitled to seek an indemnity from its insurers. Bovis assessed this in the amount of approximately £19m. The policies of insurance carried by Bovis gave it an indemnity against any sum which Bovis became legally liable to pay as a result of any neglect, error or omission on the part of Bovis. Bovis's insurers, Lumbermans Mutual Casualty Co, rejected the claim and applied to the court for a declaration that they were not liable to Bovis. Lumbermans' case was very simple. They contended that under the insurance policy, Bovis could recover an indemnity only in respect of a legal liability which had been ascertained by a judgment or arbitration award or, in the case of a settlement, proved to exist. In the present case there had been no ascertainment of liability or loss by a judgment of the court or by an arbitration award. Lumbermans complained that the global settlement agreement between Braehead and Bovis did not identify any loss caused to Bovis by any legal liability in respect of Braehead's counterclaim. In the absence of any such ascertainment of loss there was no basis for recovery under the insurance policy. There was simply no cause of action. Bovis countered these propositions by arguing that there was no rule of law which stated that in order for an insurance indemnity to be triggered it must be possible to discern the extent of an insured's liability from the terms of the settlement itself. In such cases the court, having held that the settlement agreement does not ascertain the liability or the loss, does not go on to reject the claim for an indemnity but proceeds to determine if the insured was liable to the third party and in what amount. Bovis argued that it was rare for settlements to ascertain the component amounts of the loss. The settlement often covered a number of different claims and any breakdown agreed within the settlement would not be binding upon the insurers who would want to go behind the terms of the agreement and prove the amounts to be unreasonable. Indeed, Bovis argued, it would be contrary to public policy and contrary to commonsense to impose a requirement that the terms of any settlement agreement must identify the amount that the insurer might be obliged to meet. If the settlement had included an apportionment between the different parties' claims it is doubtful whether that would have improved the justice of the case. The parties could have agreed to divide the money in any way they chose without reference to the true value of the claims. Relying upon advice given by their solicitor some three years earlier, Bovis indicated that the extent of the valid counterclaims which they faced from Braehead was of the order of £19m and that this had been properly and reasonably compromised by the settlement agreement. Bovis contended that it was entitled to bring evidence in addition to the settlement agreement that it was in truth liable to Braehead and that the true amount of that liability was at least in the amounts factored within the settlement agreement. In hearing these matters, Justice Colman held that it was an implied term of a contract of indemnity that the insured's loss had been specifically ascertained by means of a judgment, arbitration award or settlement agreement. As a matter of law, an insured who relied on a settlement as a means of ascertainment had to prove that he was in truth under a liability insured by the policy and that what he paid by way of settlement of that liability was reasonable. Crucially, a settlement agreement which did not identify the loss suffered specifically by reference to the insured liability did not amount to a valid ascertainment. The court could not open up a global settlement and evaluate the reasonableness of Bovis's own assessments of the amounts allocated to each claim against its insurer. If the settlement agreement did not specifically identify the cost to the insured of the claims which were said to be within the scope of the insurance cover, evidence could not be brought to fill that gap.
CJ-0443
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