Ling Ong says parties entering into global settlements should be cautious about how they are structured

Global settlements may not seem to have that much impact on the insular world of UK insurance, but look at the controversial decision in Lumbermens Mutual Casualty Co v Bovis Lend Lease Limited [2004] which questions the insured's ability to recover amounts paid under a global settlement from its liability insurers.

Recent comments from the same court in Enterprise Oil v Strand Insurance [2006] suggest that the debate is far from over.

Lumbermens concerned a complex construction dispute. This was between the main contractor, Bovis, and the employer, which involved multi-million pound claims and counterclaims.

The litigation was settled in January 2002 when the employer agreed to pay Bovis £15m in full and final settlement of all disputes under the building contract. How this figure was calculated was not set out in the agreement. Nor was there any explanation of how the parties' claims and counterclaims had been taken into account.

Bovis sought to claim £19.22m under its liability policy, this being the amount its solicitors calculated was due for the original claim less the valid parts of the employer's counterclaim.

Ascertaining losses
Justice Colman, however, held there could be no recovery at all because the insured had failed properly to "ascertain" its loss.

Ascertainment is a precondition to recovery under a liability policy. Insurers are not liable to the insured until the insured has demonstrated it has suffered a loss by virtue of a legal liability covered by the policy which has been established (or "ascertained") by judgment, arbitration award or settlement agreement (Post Office v Norwich Union Fire Insurance Society [1967], Bradley v Eagle Star Insurance Co [1989]).

In most cases, a judgment or an arbitration award will be accepted as conclusive evidence as to liability to the third party.

However, a settlement of a claim only shows the amount which the insured has agreed to pay in respect of its liability.

It is 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 relies on a settlement agreement as the basis for his insurance claim still has to prove that he was under a liability covered by the policy and that the amount paid was reasonable. That is not more than would have been awarded had the matter gone to trial.

The settlement agreement in Lumbermens covered both insured and uninsured losses and did not allocate amounts to specific heads of claim. On its own, therefore, it could not amount to an ascertainment of loss under the insurance policy.

Justice Colman, however, went on to conclude that, where a settlement did not identify the cost of discharging insured liabilities, an insured could not - after the event - open up that agreement and retrospectively ascertain its loss by the use of extrinsic evidence.

The decision has caused a great deal of comment and concern. Most global settlements by their very nature contain an element of horse-trading and the prospect of having to allocate specific sums to specific items to ensure that a party can recover under its insurance seems both impractical and uncommercial.

A further concern is whether (as Justice Colman seemed to suggest) the same principles apply to reinsurance claims.

The trenchant views expressed by Justice Aikens in the recent case of Enterprise Oil v Strand Insurance [2006] will, therefore, be welcome to many.

The case concerned a global settlement of claims brought in Texas against Enterprise Oil and two other oil companies for "various tort claims", including wrongful interference with a contract.

Enterprise's liability policy covered liability for wrongful interference, but the judge found there had been no wrongful interference with the contract in question so the insurance claim failed.

Recoverability of monies paid under the settlement was, therefore, no longer an issue, but Justice Aikens chose to comment on it nevertheless, because he would have reached a different conclusion to that in Lumbermens.

In his view, none of the authorities established it was a precondition to recovery that wording of the judgment, award or settlement should ascertain the specific cost to the insured of discharging its insured liability.

Insurers' rights
In principle, an insurer always has the right to challenge whether the insured was liable to the third party and, if so, for how much and whether the liability falls within the cover.

If a settlement breaks down the figure into heads of claim, it may provide evidence of the insured's loss covered by the policy, but even that can be challenged by insurers. In which case, it must be permissible for the insured to prove by extrinsic evidence that it was liable to a third party for a particular sum under the settlement and that the particular sum represents a loss covered by an insured peril under the liability policy.

On a more general note, Justice Aikens said that if the Lumbermens approach was right, it would lead to: "Great commercial inconvenience and to artificial statements in judgments, awards and settlement agreements."

Judgments, awards and settlements are not concerned with insurers' potential liability under a party's liability policy, nor should they be forced to be involved.

There may be good reasons for parties to a settlement not wishing to identify which sums are attributable to which heads of claim.

Interestingly, Justice Aikens confined his comments to direct insurance.

In his view, analogies between liability insurance and reinsurance had to be approached with caution, in view of the long-running and unresolved debate about whether a contract of reinsurance is a liability insurance.

While these comments may be of great interest, they are obiter dictum and, until such time as the question comes before the Court of Appeal, the recoverability of global settlements remains unresolved.

In these circumstances, parties entering into a global settlement should remain cautious as to how the settlement agreement is structured and ensure that there is adequate allocation of the settlement sum to identifiable heads of claim. IT

' Ling Ong is a partner within the Reinsurance group at DLA Piper.