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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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