Lumbermens' demon

A controversial decision by Judge Colman just over a year ago in the case of Lumbermens Mutual Casualty Company vs Bovis Lend Lease Ltd has been challenged by a recent case. The issue at stake is whether a global settlement that does not break down the payment between individual claims is sufficient to trigger the payment of an insurance policy.

In 2004 Judge Colman decided that Bovis could not recover any part of the amount paid in settlement of its claims and counterclaims with Lumbermens under its liability insurance policy because the settlement agreement had not apportioned particular sums to particular causes. He reached this conclusion because in his opinion a judgment, award or settlement crystallised a loss for the purposes of liability under the insurance policy. If, therefore, the judgment, award or settlement had not specifically identified the cost to the insured of the discharge of the claims said to be within the scope of the policy, this deficiency could not be supplied by recourse to evidence. It mattered not that a court could go beyond the terms of the settlement to investigate whether there was in truth a liability and, if so, for what amount.

This view of the insured's rights was to be contrasted with the rights of insurers to open up and challenge any settlement agreement reached between the insured and a third party.

The ramifications of this for the industry were enormous. Global settlements were clearly excluded if either of the parties hoped subsequently to seek recovery under a liability policy of insurance. Either the parties would have to agree each claim item by item or proceed to a judgment or award on each head of claim. The former would be a disincentive to parties settling matters because neither party generally wishes to allocate a sum of money to each head of claim as it is likely to lead to cherry picking by the other side. And how was a claimant to deal with a settlement offer or a payment into court? It would have to make a decision either to accept the payment and forfeit the right to recovery under a liability policy or fight on and suffer the potential costs.

In the recent case of Enterprise Oil Ltd vs Strand Insurance Company Ltd judge Aiken was faced with precisely the same issue as judge Colman. The issue did not fall for his decision, because of his other findings in the case, but he was clearly so concerned about the judgment in Lumbermens that he nevertheless gave his views. Technically, therefore, Lumbermens is still the law but it is hard to imagine that it will be followed in the future.

Judge Aiken clearly had difficulty with the concept of heads insurers win and tails the insured loses. He saw no reason why an insured had to show that for its loss to be claimed under a liability policy that loss had to have been specifically ascertained in the wording of a judgment, award or settlement.

There were two reasons for this. The first was the right of insurers in any event to challenge whether the insured's right to indemnity under the policy had been established. The judgment, award or settlement between an insured and a third party in his view was not concerned to "ascertain" the loss of the insured under the liability policy as it is irrelevant to those parties.

Contrary to the Colman decision, Aiken's view was that it was open for both the insured and the insurers to bring extrinsic evidence to prove whether or not the amount of a settlement, or any aspect of it, was attributable to a peril insured under the policy.

Second, he said that it would lead to great commercial inconvenience and to artificial statements in judgments, awards and settlement agreements. Parties to a settlement may not wish to identify the particular sums attributable to particular heads of claim or alleged types of loss for good commercial reasons. To insist that this is done as a precondition to recovery under a liability policy is likely to discourage settlements and create more litigation to no advantage.

So, commercial reality may prevail in the end, but it does now require higher judicial attention to excise the demon of Lumbermens.