Lumbermens Mutual Casualty Company v Bovis Lend Lease Ltd [QBD (Comm)]
| Jurisdiction | England & Wales |
| Judge | Colman J. |
| Judgment Date | 05 October 2004 |
| Date | 05 October 2004 |
| Court | Queen's Bench Division (Commercial Court) |
Queen's Bench Division (Commercial Court).
Colman J.
Gavin Kealey QC and David Allen (instructed by Kendall Freeman) for the claimants.
Roger Stewart QC and Paul Sutherland (instructed by Masons) for the defendants.
The following cases were referred to in the judgment:
Baker v Black Sea and Baltic General Insurance Co Ltd [1995] LRLR 261.
Biggin & Co Ltd v Permanite LtdELR [1951] 2 KB 314.
Bradley v Eagle Star Insurance Co LtdELR [1989] AC 957.
Commercial Union Assurance Co plc v NRG Victory Reinsurance Ltd [1998] CLC 920.
Davies v HoskenUNK [1937] 3 All ER 192.
George Wimpey & Co Ltd v DV PooleUNK (1984) 27 BLR 58.
Goddard & Smith v FrewUNK [1939] 4 All ER 358.
Hadley v BaxendaleENR (1854) 9 Ex 341; 156 ER 145.
Haseldine v HoskenELR [1933] 1 KB 822.
King v Brandywine Reinsurance Co (UK) LtdUNK [2004] EWHC 1033 (Comm); [2004] 2 CLC 981
McDonnell Information Systems v Swinbank [1999] Ll Rep IR 98; [1999] CLC 1800 (CA).
P & O Developments Ltd v Guy's & St Thomas' NHS TrustUNK [1999] BLR 3.
Post Office v Norwich Union Fire Insurance Society LtdELR [1967] 2 QB 363.
Royal Brompton Hospital NHS Trust v HammondUNK [1999] BLR 162.
Rylands v FletcherELR (1868) LR 3 HL 330.
Structural Polymer Systems Ltd v Brown [1999] CLC 268.
Versicherungs und Transport A/G Daugava v HendersonUNK (1934) 39 Com Cas 312.
West Wake Price & Co v ChingWLR [1957] 1 WLR 45.
Insurance — Disputes under building contract — Settlement agreement between contractor and employer — Construction, engineering and design professional liability policy and commercial excess liability policy — Whether insured contractor's liability had been ascertained by settlement — Whether insured could establish legal liability to employer so as to give rise to entitlement to an indemnity — Whether alleged loss properly measured on subjective approach — Whether words “as a result of any neglect error or omission' in insuring clause 1 of primary policy required insured to establish liability in negligence in order to trigger coverage — Meaning and effect of insuring clause 2.
This was a trial of preliminary issues in an action between the claimant insurers and the defendant insured (Bovis) under a construction, engineering and design professional liability policy and a commercial excess liability policy.
Bovis was engaged as a contractor under a 1997 contract by Braehead, a retail property developer, to design and construct a retail and leisure centre in Glasgow. Disputes arose under the building contract and Bovis commenced proceedings in the Technology and Construction Court in which it claimed £37,778,266 allegedly due under that contract. That was a balance outstanding from a total of £254,153,124 after giving credit for amounts paid by Braehead totalling £216,374,898. The gross amount was made up of six elements, namely amounts due and payable in respect of common user, post novation design fees, an amount due in respect of preliminaries and loss and expense, a management fee and interest.
Braehead served a defence and counterclaim. The latter included a claim for mismanagement of the project by Bovis in the sum of £49,524,189 made up of £43,911,439 being the difference between Bovis's claim under the contract and the amount which the works would have cost if the project had been properly managed together with a number of additional items said to be caused by defective management. The claim for mismanagement was put in the alternative in the sum of £21,700,047. That was calculated by reference to the cost of eight specific instances of mismanagement plus further additional costs on nine sub-contract packages together with additional professional and management fees. The counterclaim also included a claim for £46,685,178 in respect of defective and non-compliant work and a claim for liquidated damages in the sum of £7,385,000. Thus, whereas Bovis' total claim amounted to £37,778,226, Braehead's counterclaim totalled £103,594,367 or alternatively £75,770,225.
The litigation was settled by agreement in 2002. Under the settlement agreement Braehead agreed to pay Bovis £15 million in full and final settlement of all disputes under the building contract. The method of calculation of that global sum was not identified in the agreement. In particular, there was no indication as to the extent if any to which Bovis's claim of £37,778,226 had been treated as validly in excess of £15 million or which if any of the many detailed elements of Braehead's counterclaim had been treated as valid. 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 or that Bovis's claim fell to be reduced because it was partly intrinsically defective or because part of Braehead's counterclaim could be set off against it.
Bovis's policies with the insurers included a primary policy subject to a limit of £5 million per claim and a self-insured retention of £525,000 per claim. There was also an excess of loss policy for the same period which protected up to US$75 million per claim excess of the primary policy with an aggregate cover of US$75 million.
Bovis sent to the insurers a formal letter of claim for an indemnity under the policies. The total claim was for £19,222,722.40. The insurers issued a claim form for negative declaratory relief and Bovis counterclaimed on the basis that it had suffered insured losses in the amount claimed caused by its liability to Braehead in relation to its breaches of duty under the building contract.
The insurers submitted that, since the policies were liability policies, the assured could recover an indemnity only in respect of a legal liability which had been ascertained or, in the case of a settlement, proved to exist and in an amount which had been ascertained by judgment or arbitration award or, in the case of a settlement, which did not exceed the true amount for which the assured would have been liable to the third party but for the settlement. The insurers contended that the global settlement agreement did not operate to identify any loss caused to the assured by any legal liability in respect of Braehead's counterclaim nor did it quantify any such loss. Accordingly there had been no ascertainment of such loss by the settlement agreement and, in the absence of such ascertainment, there was no basis for recovery under the policy since there was simply no cause of action.
Bovis submitted that there was no rule of law that it must be possible, in order for an entitlement to indemnity to be triggered, to discern the extent of an insured's liability for insured matters from the terms of the settlement itself and that it was open to the court to determine if Bovis was liable to Braehead and, if so, in what amount.
Held, ruling accordingly:
1. The concept of ascertainment in the context of a contract of indemnity and specifically of liability insurance had two quite distinct facets. First, it provided the essential link between the insured eventuality which has created the insured liability on the one hand and the actual loss sustained by the assured. It is the judgment, arbitration or settlement agreement which had imposed on the assured a judgment debt or a contractual obligation to satisfy an award or to perform a settlement agreement which constituted the assured's loss caused by the assured's liability. It was thus an essential element of the assured's cause of action on the policy. In the case of a settlement agreement, that which had to be distinctly ascertained was thus the cost of the insured liability. The basis for that principle was that there was an implied term in a contract of indemnity in the form of a liability policy that it was an essential element of the assured's cause of action that his loss has been specifically ascertained by means of a judgment, arbitration award or settlement agreement. (Post Office v Norwich Union Fire Insurance Society LtdELR[1967] 2 QB 363andCommercial Union Assurance Co v NRG Victory Reinsurance Ltd[1998] CLC 920applied.)
2. The second facet of the concept of ascertainment in the context of a liability policy was that it was a source of evidence. A settlement of a claim by a third party evidenced the amount which the assured had agreed to pay to discharge the claim in respect of the assured's liability but it was not conclusive evidence as between assured and insurer either as to whether there was in truth liability or, if so, what the true amount of that liability was. Thus as a matter of law an assured who relied on a settlement as a means of ascertainment had to prove by extrinsic evidence that he was in truth under a liability insured by the policy and secondly that what he paid by way of settlement of that liability was reasonable having regard to the amount of damages that he would have had to pay if the matter had gone to trial. The latter requirement of reasonableness was normally satisfied by proof that such amount of damage would be at least as much as the amount paid under the settlement. (McDonnell Information Systems Ltd v Swinbank[1999] CLC 1800andStructural Polymer Systems v Brown[1999] CLC 268considered.)
3. Just as a judgment which went no further than a declaration of liability to the third party could not amount to a valid ascertainment of loss caused by such liability so a settlement agreement deficient in the identification of the loss suffered specifically by reference to the insured liability could not amount to a valid ascertainment. The court could not open up a global settlement and evaluate for reasonableness the assured's own assessments of the amounts allocated to each claim against the assured. A global settlement agreement of the nature of that found in the present case did not satisfy the requirement of ascertainment of loss under the liability...
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