Case: Enterprise Oil Limited v Strand Insurance Company Ltd [2006] EWHC 58 (Comm)
Outcome: considered
In any event, the principle formulated in Lumbermens has been the subject of controversy. A little over a year after judgment in Lumbermens , Aikens J in Enterprise Oil Limited v Strand Insurance Company Ltd [2006] EWHC 58 (Comm) said at [166- 171]: Therefore, contrary to the view expressed by Colman J at paragraph 47 of his judgment in Lumbermen's , in my view those cases do not establish that it is a pre-condition for recovery under a liability policy that the insured has 'ascertained', by virtue of the wording of a judgment, or award or settlement agreement itself, the 'specific cost to the insured of discharging its insured liability'. In other words, in my view an insured does not have to show an amount of its loss to be claimed under an insured peril covered by the liability policy has been 'specifically ascertained' in the wording of a judgment, award or settlement. I say this for two particular reasons, quite apart from the fact that neither case uses such language. [original emphasis] The most important, if obvious, point is that an insurer always has the right to challenge whether the insured's right to indemnity under the policy has been established. Therefore it has the right to challenge whether the insured was, in fact and law, liable to the third party. It has the right to challenge the quantum of the liability. And it must also have the right to challenge whether, on the facts of the case, the insured's liability to the third party is a loss within the scope of the liability policy, whatever is stated in a judgment, award or settlement. Apart from anything else, the insurer will not be a party to the judgment, award or settlement, unless specifically involved. I accept that in the case of judgments and awards, the conclusion of a competent tribunal on the merits as to liability and quantum is unlikely to be upset in an action on the liability policy. But I cannot see why, in principle, it should not be challenged. In the case of settlements, Colman J himself specifically accepted that an insurer is not bound by a settlement agreement between the insured and the third party as to liability, or quantum. However, Colman J draws a distinction between two functions of 'ascertainment' by judgment, award or settlement. He describes one function as a 'source of evidence' as to liability and quantum of the insured to the third party. He says that cases affirming an insurer's right to challenge issues of liability and quantum in a settlement agreement are concerned only with that function of 'ascertainment'. But he states that the primary function of 'ascertainment' is to identify and 'thereby represent the assured's loss attributable to the relevant liability'. I cannot find that function identified in any of the cases to which Colman J refers. Moreover, it seems to me wrong in principle for the reason that I have already given, ie. that a judgment, award or settlement between an insured and a third party is not concerned to 'ascertain' the loss of the insured under a liability policy; it is irrelevant to those parties. I accept that if the insured has negotiated a settlement which identifies certain heads of claim as being referable to certain causes of action that are within the perils insured under the insured's liability policy, then that will be evidence that the insured has suffered a loss that is covered by the policy. But, as the case of MDIS Ltd v Swinbank shows, that can be challenged by underwriters. If it is challenged, then the question of whether there has been a loss covered by the policy terms will be decided on evidence that is extrinsic to the settlement agreement itself. If that exercise is permissible, which it must be, then I cannot see the basis for saying that an insured has no cause of action against a liability insurer unless it can demonstrate that there was a pre-existing determination, in the settlement agreement itself, of the precise amount of its liability to a third party that is attributable to a peril insured under the liability policy. Therefore, on principle, I think that it is open to an insured to assert and prove, by extrinsic evidence, that it is liable to a third party for a particular sum under a settlement that has been made and that the particular sum represents a loss covered by an insured peril under the liability policy. Equally, if an insured had made a settlement which purported to identify a particular sum as representing the quantum of liability for a particular type of loss that equated to an insured peril under the liability policy, the insurer would be free to challenge the insured's liability to the third party, the quantum of the liability and whether the particular liability identified in the settlement did, in fact, constitute a loss covered by an insured peril under the policy. These comments are obiter. Nevertheless they were adopted by Morrison J, also in obiter, in AIG Europe (Ireland) Limited v Faraday Capital Limited [2006] EWCH 2707 (Comm) at [69].