Once upon a time, you could end a dispute with a global settlement and trot off to your insurer to ask for compensation. It is no longer that simple

Insurance against liability for defective design or poor management is relied on by most consultants and many contractors as protection against claims. Equally common is the practice of resolving claims on the basis of a simple “horse deal”, after which a global figure changes hands.

Following a court decision in the Lumbermens Mutual Casualty Company vs Bovis Lend Lease Ltd case on 5 October, these two practices are irreconcilable: a global settlement that does not break down the payment between individual claims will not be sufficient to trigger payment under an insurance policy.

This is the latest in a series of legal actions arising out of the construction of the Braehead Retail and Leisure Centre in Glasgow by Bovis Lend Lease under a design, manage and construct contract with Braehead Glasgow, a subsidiary of Capital Shopping Centres.

Bovis began proceedings against Braehead for £37,778,266 (the difference between Bovis’ view of its entitlement under the contract of £254,153,124 and the amount paid of £216,374,898). Braehead counterclaimed £103,594,367 for mismanagement, multiple defects in design and workmanship and liquidated damages.

The initial litigation was settled by Braehead’s paying Bovis £15,000,000 in full and final settlement of all disputes under the contract. This sum was not broken down and there was no indication of the value placed on either Bovis’ claim or Braehead’s counterclaim. Bovis had taken out indemnity insurance with Lumbermens Mutual Casualty Company. Parts of Braehead’s counterclaim were potentially covered by this insurance; others were not.

The settlement agreement did not identify any sums as attributable to those parts of Braehead’s counterclaim that were potentially covered.

Bovis claimed £19,222,722 from Lumbermens, based on Bovis’ own “subjective” and “contemporaneous assessment” of Braehead’s counterclaim and supported by its “retrospective objective assessment”. Importantly, this was Bovis’ unilateral assessment, it had not been agreed with Braehead.

Effectively, Bovis was arguing that but for the counterclaim it would have not have incurred this loss of £19,222,722.

Mr Justice Colman decided in favour of Lumbermens: he was in no doubt that a global settlement of this type did not satisfy the requirement for ascertainment of loss under a liability insurance policy, as it did not impose on Bovis any identifiable loss in respect of the insured events. It followed that neither a subjective nor an objective retrospective assessment of Bovis’ alleged loss was appropriate.

To give rise to a claim under an insurance policy, the insured’s liability to the third party must be ascertained and determined to exist, either by a court judgment, an arbitrator’s award, or a settlement agreement. The concept of ascertainment provides the essential link between the insured event and the loss suffered by the insured, and it follows that the cost of the insured liability must be identified by the settlement agreement.

The judge also drew a distinction between ascertainment under an insurance policy and that in respect of an ordinary breach of contract. In the latter case the courts will open up the global settlement figure and consider what loss would be reasonable for each of the separate claim items. But they will not do this in respect of an insurance claim: the process of ascertainment represents an essential element of the cause of action against an indemnity insurer.

Following this judgment, an insurer will not have to pay out when the insured enters into a global settlement that is not broken down between individual claims, some of which are covered and others of which are not covered by the policy.

To avoid this problem contractors and consultants will have to ensure that the settlement agreement properly records the basis on which the settlement sum was calculated, the values attributed to both the claim and counterclaim, and allocates the amounts paid against individual items.

David Johnson is a partner and head of construction law at Kendall Freeman