Follow The Settlements? The Liability Of Insurers And Reinsurers To Contribute To A Settlement Payment

Article by Simon Cooper and Alex Kershaw

The recent decision of the English Commercial Court in Lumbermens Mutual Casualty Co v Bovis Lend Lease Ltd [2004] EWHC 2197 (Comm) has added to the body of case law which defines when an insurer will be liable to contribute to a settlement which its assured has made with a third party (or, in the case of reinsurance, an underlying assured). While the case arguably does not impose any new limitations on the ability of an assured to recover, it provides a fresh reminder of the need for carefully drafted settlement agreements dealing adequately with the assured's liability to make any underlying payment if it hopes to recover this from its insurer.

The Lumbermens case involved the building of a shopping centre in Glasgow, during the course of which numerous disputes arose between Bovis (the insured contractor) and the developer (Braehead). Bovis issued various claims against Braehead, which in turn counter-claimed for various other sums.

THE SETTLEMENT AGREEMENT

A global settlement was reached, entailing a payment by Braehead to Bovis. However, the settlement agreement did not identify how the payment sum had been calculated and, in particular, did not make it apparent how, if at all, Braehead's counterclaim had been taken into account in calculating the settlement figure.

Bovis' insurer, Lumbermens, issued a claim for a declaration of non-liability to Bovis. Bovis counter-claimed against Lumbermens on the basis that Bovis was entitled to claim from its insurers a sum which amounted to the value of Braehead's valid counterclaim. Bovis argued that this amount was to be calculated by setting off the actual settlement sum paid by Braehead against the damages which Bovis had been claiming from Braehead. While the details of the payment were not in the settlement agreement, Bovis sought to adduce evidence of their calculations of liability in the context of the settlement negotiations to demonstrate their liability.

Colman J rejected this approach. He held that a global settlement, such as the one which had been reached between Bovis and Braehead, did not satisfy the requirement that a loss be sufficiently ascertained if it is to form the basis of a recovery under a liability insurance policy. This was because the global settlement did not impose on the assured (Bovis) any identifiable loss in respect of any identifiable insured eventuality. It is necessary for a party to a settlement to be able to...