Case: Lumbermens Mutual Casualty Company v Bovis Lend Lease Limited [2004] EWHC 2197 (Comm)
Outcome: distinguished
CGU argued that the judgment of Colman J in Lumbermens Mutual Casualty Company v Bovis Lend Lease Limited [2004] EWHC 2197 (Comm) supported this submission. In that case a builder, Bovis, sued an owner, Braehead, for about [sterling]37 million being the monies allegedly outstanding under a building contract. Braehead counter-claimed for about [sterling]46 million for defective and non-compliant work and for about [sterling]49 million for mismanagement, together with [sterling]7 million claimed for liquidated damages. The total of the counter-claim amounted to about [sterling]103 million. The litigation was settled by an agreement under which Braehead agreed to pay Bovis [sterling]15 million. 16 Bovis held a professional liability policy with Lumbermens. It made a claim on the policy following the settlement. Lumbermens refused to indemnify and bought proceedings for a declaration that it had no liability to indemnify under the policy. Colman J upheld Lumbermens' argument. He said that under a liability policy the insurer was not obliged to indemnify unless the liability of the insured was ascertained, in the case of the settlement, by the settlement agreement. Until the liability of the insured was ascertained the insured had no cause of action for an indemnity. He said at [55]: ... a global settlement agreement of the nature of that found in the present case does not satisfy the requirement of ascertainment of loss under these liability insurance policies. It does not impose on the assured any identifiable loss in respect of any identifiable insured eventuality. It merely identifies the overall price paid by the assured as consideration for a contract which conferred on the assured various different benefits including the dropping by Braehead of all claims in respect of the project. 17 The facts of the instant case are distinguishable from those in Lumbermens . In Lumbermens it was not possible to determine from the settlement agreement whether any liability for mismanagement, the only liability which attracted indemnity, was part of the settlement sum. Colman J described the position at [7] thus: ... The method of calculation of that global sum was not identified in the agreement. In particular, there was no indication as to what extent if any Bovis's claim of [sterling]37,778,226 had been treated as validly in excess of [sterling]15 million or which if any of the many detailed elements of Braehead's counterclaim had been treated as valid. Indeed, the terms of the Settlement Agreement gave no indication as to whether the parties agreed that there was any substance in any of the elements of Braehead's counterclaim that is to say whether there was any common position that the claim by Bovis fell to be reduced because it was partly intrinsically defective or because part of Braehead's counterclaim could be set off against Bovis's claim. Nor does it contain any indication as to whether any particular amount was paid to settle such part of the counterclaims as the Insurers could not dispute fell within the scope of the indemnity. 18 In the present case the settlement agreement provided for CCAS to consent to orders that: (b) the Trustee pay the Applicants' costs of the Proceeding including reserved costs and costs of the amendments to the statement of claim, to be taxed on a party/party basis in default of agreement such costs to be paid forthwith. Thus, in this case, the agreement itself specified the liability incurred by the insured. The agreement thereby ascertained the liability of CCAS. Hence, the lack of ascertainment of the liability incurred by the insured which was the reason for Colman J upholding Lumbermens' argument, does not exist in this case. Rather, the present controversy concerns the discharge by the settlement agreement of the liability of CCAS which was not covered by the indemnity provided by CGU. That liability, although not its amount, was obvious from the terms of the settlement agreement. 19 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]. 20 In the event that I am wrong in my view that Lumbermens is distinguishable, I would find the criticism of that case by Aikens J compelling and prefer the approach adopted by him. I would apply it in this case. The result would be to permit CCAS to lead evidence of the separate costs of the applicants suing the respondents other than AIMS in order to establish that the settlement agreement included a liability which attracted the indemnity provided by CGU and was reasonable. 21 It follows from the above reasoning that CCAS has leave to reopen its case to establish that part of the settlement which represents the reasonable costs of the applicants suing the respondents other than AIMS, and, hence, the amount of the indemnity which CGU has contracted to provide. 22 Ms Dealehr has been a legal costs consultant for nearly 20 years. She has had extensive experience in the area. When the consent order was made on 18 November 2003 consequent upon the settlement of the applicants' claims, Ms Dealehr was engaged by the applicants' solicitors to prepare the bill of costs. She spent a month in the offices of the applicants' solicitors for the purpose and had access to their files. The bill which she produced was 353 pages long. It itemised each step in the litigation with detailed notation. The bill contained just over 2,300 separate items. They were recorded after consideration of the material in the files of the applicants' solicitors and this recording was done approximately at the time when Ms Dealehr considered that material.