Lumbermens Mutual Casualty Company v Bovis Lend Lease Limited

[2004] EWHC 2197 Comm
Colman J
October 2004

This case should now be read in the light of the decision of the Commercial Court in Enterprise Oil v Strand Insurance Co Ltd [2006] EWHC 58 (Comm), made on 26 January 2006. See summary which follows below.

To claim under a contract of indemnity liability insurance, the insured must show that its loss has been specifically ascertained by means of a judgment, arbitration award or settlement agreement. A settlement agreement between the insured and a third party must specifically identify the cost to the insured of relieving itself of its liability to the third party in respect of any identifiable insured eventuality.


Bovis Lend Lease were insured by Lumbermans under a construction, engineering and design professional liability policy and a commercial excess liability policy. Bovis had originally commenced proceedings against Braehead Glasgow Ltd (a retail property developer) for £37m due under a building contract for the construction of the Braehead Retail and Leisure Centre. Braehead had counterclaimed for damages of £75m or £103m for mismanagement of the project, defective work and liquidated damages. This litigation was settled by an agreement under which Braehead paid Bovis £15m in full and final settlement of all disputes under the contract. However, the agreement did not identify the method of calculating this £15m; nor did it record whether the parties recognised any substance in any of the counterclaims made by Braehead.

Bovis' solicitors had estimated in a report that Bovis was entitled to £32m from Braehead, from which must be deducted £19m (the quantum of Braehead's valid counterclaim). Following the settlement agreement, Bovis sought to recover the £19m from Lumbermans pursuant to its indemnification for breaches of duty under the building contract. Lumbermans resisted on the basis that, under a liability policy, an insured can recover an indemnity only in respect of (1) a legal liability, which has been "ascertained" or, in the case of a settlement, proved to exist by a judgment or arbitration award and (2) an amount, which has been "ascertained" by a judgment or arbitration award or, in the case of a settlement, which does not exceed the true amount for which the insured would have been liable but for the settlement.

The Judge held that there was an implied term in a contract of indemnity in the form of a liability policy that, to claim against the insurer, the insured's loss must have been specifically ascertained by means of a judgment, arbitration award or settlement agreement. While a judgment or arbitration award against it would normally provide conclusive evidence as to the insured's liability or quantum, a settlement agreement between an insured and a third party was not conclusive evidence as between the insured and the insurer either as to the insured's liability or the extent of that liability. If the settlement agreement fails to identify the loss suffered by specific reference to the insured's liability, it does not validly ascertain the liability of the insured or the loss stemming from that liability. The court will not allow extrinsic evidence to be adduced to ascertain the loss.

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