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Introduction
In
a landmark judgment handed down by Mr Justice Colman in Lumbermens
Mutual Casualty Company v Bovis Lend Lease Limited in
the
Commercial Court
in
London
on
Tuesday 5 October 2004
, important issues in the context of
liability insurance were decided. The decision of Mr Justice
Colman has important implications for insurers and reinsurers
worldwide who reach a settlement
which they seek to use to recover from reinsurance in the
UK
. This will also impact upon contractors
and consultants in the construction industry internationally
who rely on liability insurance from the
London
market to protect themselves against
claims.
Background
The
dispute arose out of the construction of the Braehead Retail
and Leisure Centre in
Glasgow
by Bovis between May 1996
and September 1999 under a design, manage
and construct contract with Braehead Glasgow Limited, a
subsidiary of Capital Shopping Centres Limited. Bovis Lend
Lease Limited was the contractor for the project and Braehead
was the retail property developer and employer for the
project.
Bovis
and Braehead fell into dispute as to the sums due between
them under the building contract. Bovis commenced proceedings
against Braehead in the Technology and
Construction Court
for monies allegedly due and payable
under the building contract in the amount of £37,778,266.
This amount represented the difference between Bovis's
assessment of its total entitlement under the building
contract and the amount already paid to it by Braehead.
Braehead served a defence and counterclaim on Bovis alleging
that, far from being indebted to Bovis, Braehead had overpaid
Bovis and was entitled to recover the sum of £103,594,367
from Bovis in respect of many instances of mismanagement;
defective workmanship and delay.
Settlement
of the litigation between Bovis and Braehead was achieved by
means of a global settlement agreement. Under this settlement
agreement, Braehead agreed to pay to Bovis £15,000,000 in
full and final settlement of all disputes under the building
contract. This settlement sum was not broken down in any way
in the settlement agreement and the method of calculation of
this global sum was not identified. There was, in particular,
no indication in the settlement as to the extent to which
Bovis's claim of £37,778,226 had been treated as valid, nor
as to which (if any) of the individual heads of Braehead's
counterclaim had been treated as valid. In other words, the
settlement reached between Bovis and Braehead in respect of
Bovis's claim and in respect of Braehead's various claims
against Bovis was a purely global settlement and did not
break down or allocate separate amounts to the various claims
made against Bovis by Braehead or Bovis's claim against
Braehead. Indeed, it did not record that anything was to be
paid by Bovis to Braehead.
Insurance
policies
Bovis
was insured by the claimant insurers, Lumbermens Mutual
Casualty Company under a construction, engineering and design
professional liability policy and a commercial excess
liability policy. Certain parts of Braehead's counterclaim
were potentially covered by these policies; others were not.
As a result of the global nature of the settlement between
Bovis and Braehead, there was no indication in the settlement
agreement as to whether particular sums were attributable to
those parts of the counterclaim which were potentially
covered.
Following
its settlement agreement with Braehead, Bovis sent Lumbermens
a formal letter of claim requesting an indemnity in the sum
of £19,222,722 under its two policies with Lumbermens. In
submitting this claim, Bovis sought to rely, as proof of its
insured loss, upon its solicitors' earlier assessment of the
value of its claim against Braehead and of Braehead's
counterclaim against Bovis. The figure of £19,222,722 had
been calculated by reducing the amount which Bovis was
entitled to claim for the contract works and then setting off
a heavily discounted value for Braehead's counterclaims. It
should be noted that this assessment was a unilateral and
subjective assessment by Bovis of the value of its claim and
Braehead's counterclaim and there was no evidence to suggest
that Braehead had accepted this assessment.
Lumbermens
responded by commencing proceedings in the
Commercial Court
for negative declaratory relief that they
had no liability to Bovis under the policies. Bovis
counterclaimed asserting that it had suffered an insured loss
in the amount of £19,222,722 caused by its liability to
Braehead in relation to its breaches of duty under the
building contract. In its defence and counterclaim, Bovis
described this breakdown of the settlement as a
"subjective approach" reflecting its
"contemporaneous assessment", and stated that it
was supported by a "retrospective objective
assessment".
Trial
of preliminary issues
Several
preliminary issues were heard by Mr Justice Colman on 26 and
27 July 2004
. The most important of these were:
"Issue
1
(a)
Has Bovis's liability to any third party been
ascertained by judgment, award or settlement?
(b)
If the answer to (a) above is no, can Bovis
nevertheless establish that it has become legally liable to
pay a sum to Braehead, within the meaning of insuring clause
(a), so as to give rise to an entitlement to an indemnity
from [Lumbermens]?
Issue
2
Whether
Bovis' alleged loss in respect of Braehead's heads of
counterclaim.....is properly measured on a "subjective
approach"…..or on any basis and, if so, what?"
Insuring
clause (a) of the professional liability insurance read as
follows:
"We
the Insurers hereby agree to indemnify the Insured up to but
not exceeding the Limit of Indemnity
(a)
for any sum which the Insured may become legally
liable to pay arising from any claim or claims first made
against the Insured…"
Mr
Justice Colman's decision
Mr
Justice Colman answered each of the above preliminary issues
in the negative: he was in no doubt that a global settlement
agreement of the type in this case did not satisfy the
requirement for ascertainment of loss under a liability
insurance policy, since it did not impose on Bovis any
identifiable loss in respect of the insured events. It
followed that neither a "subjective approach" nor
an "objective retrospective assessment" of Bovis's
alleged loss was appropriate.
In
reaching his decision, Mr Justice Colman considered what
constituents of the obligation to indemnify an insured in the
context of a liability policy have to be established before
it can be said that there is a cause of action. These
constituents are as follows:
1.
there must have occurred an
event which renders the insured liable to a third party;
2.
the event and the consequent
liability has to be within the scope of the cover provided by
the liability policy in question; and
3.
it
must be established that the liability has caused loss to the
insured of an amount which is within the scope of the
contractual indemnity.
Mr
Justice Colman held that the concept of ascertainment,
specifically in the context of liability insurance, has two
distinct facets. Firstly, it is an essential element of an
insured's cause of action as it provides the necessary link
between the insured event which has created the insured
liability and the actual loss sustained by the insured. The
insured's liability to the third party has to be ascertained
and determined to exist, whether by a judgment, an arbitral
award, or a settlement agreement. In the context of a
settlement agreement, it is the cost of the insured liability
which has to be distinctly ascertained. It was found that a
term will be implied into a contact of indemnity to this
effect.
Secondly,
Mr Justice Colman regarded ascertainment as an important
source of evidence. This could operate in several ways: a
judgment or award will normally be conclusive evidence as to
liability and quantum. However, a settlement has a different
effect: it evidences the amount the insured has agreed to
pay, but is not conclusive as to liability or quantum. The
insured will still have to prove that he was under an insured
liability and that what he paid was reasonable in relation to
the damages he would have been ordered to pay had the matter
proceeded to award or judgment.
Mr
Justice Colman considered that, in view of the first facet of
ascertainment, the argument that extrinsic evidence can be
adduced to supply an ascertainment of the relevant loss must
fail: he equated a settlement agreement, which is deficient
as regards the identification of the loss suffered by
reference to the insured liability with a judgment which
merely declares liability. In neither case is there a valid
ascertainment of the loss caused by the liability.
A
clear distinction was also drawn between the function of
ascertainment of loss in the context of indemnity insurance
and the process of proving the amount of loss caused by
breach of contract where the consequence of the breach is
liability of the claimant to a third party with whom a
settlement has been reached. In the latter case the courts
may open up the global settlement figure and consider what
would be reasonable for each of the separate heads of claim
(see the decision of His Honour Judge Bowsher QC in P&O
Developments Ltd v Guy's and St Thomas' NHS Trust
[1999] BLR 3).
In the former case they will not: the process of
ascertainment is not merely the process of evidencing loss,
but represents an essential element in the cause of action
against an indemnity insurer.
Comment
The
effect of this judgment is that an insurer will not have to
pay under a liability policy where the insured enters into a
global settlement which covers a number of claims, some of
which are within the policy, and others of which are outside
the scope of cover, and where the settlement figure is not
broken down between the individual claims. Furthermore, the
courts will also refuse to give effect to any unilateral
assessment or permit any retrospective assessment.
This
is important to consider when finalising settlement
agreements where one is looking to recover from reinsurance
protection in the
UK
, as
the English courts will not be willing to open up global
settlement figures to distinguish between individual heads of
claim. Insurers and reinsurers
must ensure that settlement agreements define heads of claim
to satisfy the requirements for ascertainment of loss under
liability policies before coming to
London
.
*
Sarah
Hills
Solicitor
at Kendall Freeman
sarahhills@kendallfreeman.com
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