Lumbermens Mutual Casualty Co v Bovis Lend Lease Limited EWHC 2197 (Comm): 5 October 2004
Between May 1996 and September 1997, Bovis was the main contractor on a project to build the Braehead Retail & Leisure Centre in Glasgow. Disputes arose under the building contract, which resulted in Bovis issuing proceedings against the employer for over £37 million. The claim was made up of a number of elements, including a management fee and interest.
The employer served a counterclaim claiming £103 million or, alternatively £75 million, alleging that the project had not been properly managed and claiming for defective and non-compliant work and liquidated damages.
The litigation was settled in January 2002 by an agreement under which the employer agreed to pay Bovis £15 million in full and final settlement of all disputes under the building contract. How this figure was calculated was not set out, nor was there any breakdown of the parties’ claims or explanation how they had been taken into account. Consequently, there was no indication to what extent the parties had treated the various items in the counterclaim as valid and whether these were set off against Bovis’ claim for its management fee.
Bovis’ liability insurance comprised a primary policy with an indemnity limit of £5 million per claim and a retention of £525,000 per claim and excess of loss cover of up to US $75 million per claim and in the aggregate.
The insuring clause in the policies provided that insurers would indemnify the insured “for any sum which the Insured may become legally liable to pay arising from any claim or claims first made against the Insured …during the Period of Insurance….”
Condition 7 was a claims clause, which gave insurers the right to take over and conduct the defence or settlement of the third-party claim and required Bovis to co-operate with insurers and not to make any admissions of liability. In this instance, insurers decided not to take over the conduct of the defence. They had, however, been given a breakdown of the counterclaim prepared by Bovis’ solicitor and had seen a draft version of the global settlement agreement.
On 15 May 2003, Bovis sent insurers a formal letter claiming an indemnity of £19.22 million. This set out its solicitors’ calculation estimating the valid parts of the counterclaim at £19.46 million. Insurers denied the claim and issued these proceedings for negative declaratory relief, that is to say, a ruling that they were not liable under the policies.
They argued that Bovis could only claim an indemnity if it could prove (1) a legal liability covered by the insurance which had been ascertained or (in the case of a settlement) proved to exist and, (2) in an amount which had been ascertained by judgment, arbitration award or (in the case of a settlement) which did not exceed the amount for which the insured would have been liable had no settlement been reached. Neither of these requirements had been met. The global settlement did not identify any loss caused to the insured by any legal liability in respect of the counterclaim, nor did it quantify such loss. Without such ascertainment there could be no basis for recovery.
Bovis argued that it was rare for settlements to itemise the insured’s loss and it would be against public policy to make it a requirement. The extent of its liability did not have to be set out in the agreement because the court could retrospectively determine if it was liable to the employer and, if so, in what amount. Even if there had been a breakdown of the global settlement figure, it would not have bound insurers, since they were still entitled to go behind the terms of a settlement to try to prove the amounts were unreasonable.
The judge, Mr Justice Colman, reviewed the line of cases examining insurers’ obligation to indemnify the insured under a liability policy. In Post Office v Norwich Union Fire Insurance Society Ltd  2 QB 363, the Court of Appeal established that, firstly, something has to have happened which renders the insured liable to the third-party; secondly, that event and the insured’s liability have to be within the scope of the insurance cover; and, thirdly, it has to be shown that the liability caused loss to the insured of an amount within the indemnity limit.
This approach was approved by the House of Lords in Bradley v Eagle Star Insurance Co  1 AC 957, where it was said:
“…under a policy of insurance against liability to third parties, the insured person cannot sue for an indemnity from the insurers unless and until the existence and amount of his liability to a third-party has been established by action, arbitration or agreement …”
From his review of these authorities, Mr Justice Colman found that there were two facets to the concept of ascertainment. Firstly, it provided the crucial link between the insured event, the insured’s liability for that event and the actual loss suffered and, as such, was the basis for the insured’s cause of action against insurers. In his view, there was an implied term in all contracts of liability insurance that the insured’s loss must be ascertained by means of a judgment, arbitration award or settlement and that this was a pre-condition to the insured recovering under the policy.
The second facet of ascertainment was that it provided evidence as to the amount of the loss. In most cases, a judgment would normally be conclusive evidence both as to liability and quantum. An arbitration award gave rise to a similar result. But a settlement of claim had a different effect. It evidenced the amount which the insured had agreed to pay in respect of its liability, but this was not conclusive evidence, as between insured and insurer, either as to whether there was an insured liability or, if so, the true amount of that liability.
Consequently, an insured who relied on a settlement agreement as the basis for his insurance claim had to prove by extrinsic evidence that he was under a liability covered by the policy and that the amount paid was reasonable – that is, not more that would have been awarded had the matter gone to trial. In McDonnell Information Systems Ltd v Swinback  1 Lloyd’s Rep IR 98, the third party’s claim against the insured alleged negligence and was settled on that basis. Negligent error and omissions were covered by the policy. But insurers said the true cause of the insured’s liability was dishonesty, which was excluded from the cover. It was held that the insured could not simply rely on the way in which the claim had been formulated and settled. It had to prove by extrinsic evidence the true proximate cause of the loss.
In this case, however, the global settlement agreement did not even identify the insured loss in respect of any identifiable insured event. Mr Justice Colman had no doubt that, in such circumstances, the agreement could not amount to a valid ascertainment of loss under the policies. Nor could he find any authority to suggest that, if the settlement did not identify the cost to the insured of discharging the insured liability, the settlement could be opened up and the loss retrospectively ascertained by extrinsic evidence – whether that evidence was subjective or objective. This was the logical conclusion of the line of cases leading up to Bradley v Eagle Star and it was not for the court to superimpose a different view.
In this case, therefore, Bovis had failed to ascertain its loss and so there was no basis on which it could claim against insurers.
The unfortunate situation in which Bovis found themselves in this case could have been avoided had the settlement itemised every head of claim, but this can be difficult in a complex case such as this where there were claims and counterclaims, insured and uninsured items, especially where (as often happens) the settlement involved an element of horse trading. The only other protection would have been to involve insurers in the settlement process from an early stage and to get their confirmation that they were happy with the terms of any proposed agreement and the allocation of settlement monies to insured items, before the settlement agreement was finalised. That too, might have been difficult to achieve.