UK: Lumbermanīs Dealt a Blow

Last Updated: 23 February 2006
Article by John C.G. Lockey

The recent decision of Aikens J in Enterprise Oil Limited v Strand Insurance Company Limited [2006] EWHC 58 Comm ("Enterprise Oil") goes some way to put at rest fears that the decision of Colman J in Lumbermanís Mutual Casualty Co v Bovis Lend Lease Ltd [2005] 1 Lloydís Rep 494 ("Lumbermanís") has rendered it impossible for insureds to recover from their liability insurers anything paid under a settlement of insured and non-insured liabilities unless the settlement itself identified what was agreed to be paid in respect of the insured liabilities. However, until there is a judgment of the Court of Appeal on this point, uncertainty about the consequences of Lumbermanís remains.

The Enterprise Oil case concerned a claim for an indemnity under a liability policy. The Claimant, Enterprise Oil, was a defendant in US proceedings brought by a US drilling company, Rowan. Various claims were advanced by Rowan against Enterprise Oil, including a claim for tortious interference with a contract. Following a dry run of the trial before a mock jury, the defendants, including Enterprise Oil, concluded a Settlement Agreement with Rowan. The Settlement Agreement provided for the payment of a single lump sum amount to Rowan. It also provided that each defendant was jointly and severally liable to Rowan for the lump sum. The Settlement Agreement did not divide up the lump sum between the defendants. Instead, the defendants agreed between themselves the amount each was to pay towards the total. Nor did the Settlement Agreement apportion particular sums to particular causes of action or heads of damage claimed in the action.

Enterprise Oil paid its agreed share of the settlement sum and sought reimbursement of its share from its captive liability insurer, Strand. The policy issued by Strand to Enterprise Oil indemnified Enterprise Oil in respect of all sums which Enterprise Oil may be "obligated to pay by reason of liability imposed by law or under agreement or otherwise" on account of (amongst other perils) the infringement of contract rights.

Enterprise Oilís case was that by reason of the Settlement Agreement, it had incurred an insured liability (tortious interference with contract) and was entitled to indemnity in respect of the amount it had paid. Enterprise Oil accepted that Rowan had claimed in the US proceedings matters for which Enterprise Oil could not claim indemnity from Strand, including punitive damages and irrecoverable costs, and that these claims had been disposed of within the settlement.

At the instigation of its reinsurers, Strand denied indemnity on a number of grounds. One of the grounds for refusing indemnity was that because there was no specific identification in the Settlement Agreement of the cost to Enterprise Oil of the only (alleged) liability which was insured under the policy (tortious interference), Enterprise Oil could recover nothing.

The basis for this somewhat unattractive proposition was Colman Jís decision in Lumbermanís. At paragraph 47 of the judgment in that case, Colman J had held that if a settlement agreement is made in respect of liability to a third party for several heads of loss, only one or some of which are insured under the policy, then unless the settlement agreement specifically identifies that part of the settlement sum that represents a loss by an insured peril under the policy, the insured loss has not been ascertained. This lack of ascertainment is then fatal to a claim under a liability policy. No amount of "extrinsic evidence" as to what part of the settlement was attributable to the insured peril is admissible.

Although an appeal was lodged, the Lumbermanís dispute was settled before the appeal could be heard.

The repercussions of Lumbermanís are potentially widespread. If the case stands, settlements which cover insured and non-insured liabilities, without an apportionment of the settlement sum appearing in the settlement agreement, have become irrecoverable, even where there is clear evidence of agreement in the course of negotiations as to what part of the settlement sum is to be apportioned to the insured liabilities. For the future, those concluding settlements of insured and non-insured liabilities would have to be astute to apportion sums to the insured liabilities Ė although it was one of the oddities of Lumbermanís that such an apportionment, regarded by Colman J as being crucial to the accrual of the cause of action for indemnity, is not binding on the insurer, who can challenge both his insuredís liability, and the apportionment of quantum, by reference to extrinsic evidence: see eg MDIS v Swinbank [1999] Lloydís Rep IR 516.

How does an insured insist that the settlement agreement apportions the settlement sum across the insured and non-insured claims? A third party claimant may not be particularly interested in structuring the settlement so as to make it easier for the defendant to recover from his liability insurers, except perhaps in the case of potential insolvency, and he may not want particular sums to be allocated to particular claims in the settlement agreement. Furthermore, it is somewhat odd that the law should require an insured settling a third partyís claims to have to admit, in the settlement agreement, a particular amount in respect of a particular claim in order to maximise the insuredís chances of recovery from his liability insurer.

What is the position where there has been no agreement at all on the amount to be attributed to the insured liability, and simply a commercial settlement for a lump sum? Is the insured to be allowed to demonstrate that he was under a liability to the third party for a particular amount, or does Lumbermanís mean that he can recover nothing from his liability insurer because the settlement relied on as the ascertainment does not state the amount paid in respect of the insured liability?

Lumbermanís may also cause difficulty where there is a judgment or award for a single sum in proceedings in which insured and non-insured liabilities have been alleged. For example, there may be US claims in respect of an insured liability and a non-insured liability, and the jury returns with a single verdict that the insured must pay $100 million. Or an arbitration panel returns an award of a single sum. Does Lumbermanís mean that because there has been no ascertainment in the judgment of the amount payable in respect of the insured liability, there is no recovery? Although Colman J does not say in Lumbermanís that the same principle applies to these other forms of ascertainment, it is difficult to see why it would not.

The repercussions of Lumbermanís also appear to extend beyond liability insurance into the realms of reinsurance. Suppose a reinsured settles a whole number of inwards claims made by his insured in return for a single lump sum. Some of those claims, if they had been paid in full by the reinsured, would have been recoverable from his reinsurer, but others would not. Many forms of reinsurance contract have been treated as akin to liability insurance. For example, in excess of loss reinsurance, the cause of action accrues when the reinsuredís liability for the inwards claim has been ascertained by judgment, award or agreement. Colman Jís decision would seem to apply with equal force in the excess of loss reinsurance context. Indeed, in reaching his conclusion in Lumbermanís, Colman J drew some analogies with reinsurance cases. It is difficult to see how the principles enunciated in Lumbermanís could be limited to liability insurance and could be said to be inapplicable as a matter of principle to any form of reinsurance contract.

Accordingly, in the reinsurance context, similar issues would appear to arise. Must the ascertainment of the amount of the reinsured liability appear in the settlement agreement? Is extrinsic evidence of the amounts attributed to particular claims inadmissible? What if the parties do not agree to attribute sums to particular claims, but the reinsured can show that he would have been liable for at least the full amount of the lump sum on those inwards claims that were covered by the reinsurance? Lumbermanís, if correct and if applicable, would appear to rule out recovery for any form of settlement or commutation which did not contain a specific identification of the amount paid in respect of the reinsured liabilities. Lumbermanís therefore presents yet another point for reinsurers to take in response to demands to pay a share of a commutation payment.

In the Enterprise Oil case, Aikens J has now expressed the opinion, obiter, that Colman J was wrong in holding that the settlement agreement itself must identifies specific amounts for those claims in respect of which the liability policy responds.

Before reaching that decision, Aikens J held that where (as is common) a liability policy provides indemnity in respect of "sums which an insured may be obligated to pay" by reason of liability imposed on the insured "by law" or "assumed under contract or agreement", the assured must show that he was liable in law to the third party. It is not enough to point to a liability assumed under a settlement agreement in respect of an alleged liability to the third party. Although there was already authority which indicated that this was indeed the position, Aikens Jís judgment on the point is clear and welcome.

Having reached that conclusion, Aikens J decided that it was necessary for Enterprise Oil to show that the judge and jury in the Texas court would have held Enterprise Oil liable for interference with contract, applying Texas law. It was enough to show that Enterprise Oil could have been found liable. On the evidence of Texas law, Aikens J decided that Enterprise Oil could not show that there was a liability under Texas law and therefore there was no basis for any claim under the Strand policy.

Aikens J also rejected Enterprise Oilís claim that its defence costs were recoverable, even though there was no express provision to that effect in the Strand policy. Aikens J concluded that the indemnity provided in respect of sums which an insured may be "obligated to pay by reason of liability imposed on the insured by law or assumed under contract or agreement" did not cover the insuredís own costs of defending the claim.

Having found that there was no insured liability, the claim against Strand fell to be dismissed. It was therefore unnecessary for Aikens J to consider the Lumbermanís point. However, he decided to express his views because the point had been fully argued. In short, Aikens J was of the opinion that Colman J was wrong in concluding that the well-known authorities on the accrual of a cause of action for the purposes of the Third Party (Rights against Insurers) Act 1930 (particularly Post Office v Norwich Union [1967] 2 QB 363 and Bradley v Eagle Star [1989] 1 AC 957) lead to the conclusion that it is a precondition for recovery under a liability policy that the insured has "ascertained", by virtue of the terms of the judgment, award, or settlement agreement, the specific cost to the insured of discharging the insured liability. Aikens J was of the view that it was indeed open to the insured to assert and prove, by extrinsic evidence, that it was liable to the third party for a particular sum under a settlement that has been made and that the particular sum represents a loss covered by an insured peril. He held, with respect correctly, that none of the cases referred to by Colman J actually required that the specific cost be identified in the judgment, award or agreement relied on as having ascertained the liability.

Aikens J also relied on the fact that Colman Jís conclusion to the opposite effect would lead to "great commercial inconvenience" and to "artificial statements in judgments, awards and settlement agreements." He recognised that parties to settlements, for good commercial reasons, may not wish to identify the particular sums that are attributable o particular heads of claim or alleged types of loss. These factors also drove him to conclude that Colman J was wrong.

Aikens Jís conclusions, although obiter, are to be welcomed, as they appear to mark the beginning of the end of the Lumbermanís point. But the end has not yet been reached. A judgment of the Court of Appeal on the point is needed. Even if there is an appeal in the Enterprise Oil case, it seems unlikely that the Court of Appeal would get to the Lumbermanís point, which would arise only by way of a Respondentís Notice. The Court of Appeal is notorious for not deciding points unless they really have to (see for example Tioxide v Commercial Union [2005] EWCA Civ 928, where the Court of Appeal, having decided that the appeal could be dismissed on the grounds of late notification of the claim, decided none of the interesting issues which had arisen in the first instance judgment at [2004] EWHC 2116 Comm). In the meantime, Judges of the Commercial Court are free to depart from Lumbermanís and to follow Enterprise Oil, whilst because of our doctrine of precedent, Colman Jís decision in Lumbermanís appears to remain binding on arbitrators as "inferior tribunals".

This article was previously published in Issue 112 February 2006 of Sweet & Maxwellís† Insurance and Reinsurance Law Briefing.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Authors
 
In association with
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think youíve read our Disclaimer).
 
Email Address
Company Name
Password
Confirm Password
Position
Mondaq Topics -- Select your Interests
 Accounting
 Anti-trust
 Commercial
 Compliance
 Consumer
 Criminal
 Employment
 Energy
 Environment
 Family
 Finance
 Government
 Healthcare
 Immigration
 Insolvency
 Insurance
 International
 IP
 Law Performance
 Law Practice
 Litigation
 Media & IT
 Privacy
 Real Estate
 Strategy
 Tax
 Technology
 Transport
 Wealth Mgt
Regions
Africa
Asia
Asia Pacific
Australasia
Canada
Caribbean
Europe
European Union
Latin America
Middle East
U.K.
United States
Worldwide Updates
Check to state you have read and
agree to our Terms and Conditions

Terms & Conditions and Privacy Statement

Mondaq.com (the Website) is owned and managed by Mondaq Ltd and as a user you are granted a non-exclusive, revocable license to access the Website under its terms and conditions of use. Your use of the Website constitutes your agreement to the following terms and conditions of use. Mondaq Ltd may terminate your use of the Website if you are in breach of these terms and conditions or if Mondaq Ltd decides to terminate your license of use for whatever reason.

Use of www.mondaq.com

You may use the Website but are required to register as a user if you wish to read the full text of the content and articles available (the Content). You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these terms & conditions or with the prior written consent of Mondaq Ltd. You may not use electronic or other means to extract details or information about Mondaq.comís content, users or contributors in order to offer them any services or products which compete directly or indirectly with Mondaq Ltdís services and products.

Disclaimer

Mondaq Ltd and/or its respective suppliers make no representations about the suitability of the information contained in the documents and related graphics published on this server for any purpose. All such documents and related graphics are provided "as is" without warranty of any kind. Mondaq Ltd and/or its respective suppliers hereby disclaim all warranties and conditions with regard to this information, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. In no event shall Mondaq Ltd and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use or performance of information available from this server.

The documents and related graphics published on this server could include technical inaccuracies or typographical errors. Changes are periodically added to the information herein. Mondaq Ltd and/or its respective suppliers may make improvements and/or changes in the product(s) and/or the program(s) described herein at any time.

Registration

Mondaq Ltd requires you to register and provide information that personally identifies you, including what sort of information you are interested in, for three primary purposes:

  • To allow you to personalize the Mondaq websites you are visiting.
  • To enable features such as password reminder, newsletter alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our information providers who provide information free for your use.

Mondaq (and its affiliate sites) do not sell or provide your details to third parties other than information providers. The reason we provide our information providers with this information is so that they can measure the response their articles are receiving and provide you with information about their products and services.

If you do not want us to provide your name and email address you may opt out by clicking here .

If you do not wish to receive any future announcements of products and services offered by Mondaq by clicking here .

Information Collection and Use

We require site users to register with Mondaq (and its affiliate sites) to view the free information on the site. We also collect information from our users at several different points on the websites: this is so that we can customise the sites according to individual usage, provide 'session-aware' functionality, and ensure that content is acquired and developed appropriately. This gives us an overall picture of our user profiles, which in turn shows to our Editorial Contributors the type of person they are reaching by posting articles on Mondaq (and its affiliate sites) Ė meaning more free content for registered users.

We are only able to provide the material on the Mondaq (and its affiliate sites) site free to site visitors because we can pass on information about the pages that users are viewing and the personal information users provide to us (e.g. email addresses) to reputable contributing firms such as law firms who author those pages. We do not sell or rent information to anyone else other than the authors of those pages, who may change from time to time. Should you wish us not to disclose your details to any of these parties, please tick the box above or tick the box marked "Opt out of Registration Information Disclosure" on the Your Profile page. We and our author organisations may only contact you via email or other means if you allow us to do so. Users can opt out of contact when they register on the site, or send an email to unsubscribe@mondaq.com with ďno disclosureĒ in the subject heading

Mondaq News Alerts

In order to receive Mondaq News Alerts, users have to complete a separate registration form. This is a personalised service where users choose regions and topics of interest and we send it only to those users who have requested it. Users can stop receiving these Alerts by going to the Mondaq News Alerts page and deselecting all interest areas. In the same way users can amend their personal preferences to add or remove subject areas.

Cookies

A cookie is a small text file written to a userís hard drive that contains an identifying user number. The cookies do not contain any personal information about users. We use the cookie so users do not have to log in every time they use the service and the cookie will automatically expire if you do not visit the Mondaq website (or its affiliate sites) for 12 months. We also use the cookie to personalise a user's experience of the site (for example to show information specific to a user's region). As the Mondaq sites are fully personalised and cookies are essential to its core technology the site will function unpredictably with browsers that do not support cookies - or where cookies are disabled (in these circumstances we advise you to attempt to locate the information you require elsewhere on the web). However if you are concerned about the presence of a Mondaq cookie on your machine you can also choose to expire the cookie immediately (remove it) by selecting the 'Log Off' menu option as the last thing you do when you use the site.

Some of our business partners may use cookies on our site (for example, advertisers). However, we have no access to or control over these cookies and we are not aware of any at present that do so.

Log Files

We use IP addresses to analyse trends, administer the site, track movement, and gather broad demographic information for aggregate use. IP addresses are not linked to personally identifiable information.

Links

This web site contains links to other sites. Please be aware that Mondaq (or its affiliate sites) are not responsible for the privacy practices of such other sites. We encourage our users to be aware when they leave our site and to read the privacy statements of these third party sites. This privacy statement applies solely to information collected by this Web site.

Surveys & Contests

From time-to-time our site requests information from users via surveys or contests. Participation in these surveys or contests is completely voluntary and the user therefore has a choice whether or not to disclose any information requested. Information requested may include contact information (such as name and delivery address), and demographic information (such as postcode, age level). Contact information will be used to notify the winners and award prizes. Survey information will be used for purposes of monitoring or improving the functionality of the site.

Mail-A-Friend

If a user elects to use our referral service for informing a friend about our site, we ask them for the friendís name and email address. Mondaq stores this information and may contact the friend to invite them to register with Mondaq, but they will not be contacted more than once. The friend may contact Mondaq to request the removal of this information from our database.

Security

This website takes every reasonable precaution to protect our usersí information. When users submit sensitive information via the website, your information is protected using firewalls and other security technology. If you have any questions about the security at our website, you can send an email to webmaster@mondaq.com.

Correcting/Updating Personal Information

If a userís personally identifiable information changes (such as postcode), or if a user no longer desires our service, we will endeavour to provide a way to correct, update or remove that userís personal data provided to us. This can usually be done at the ďYour ProfileĒ page or by sending an email to EditorialAdvisor@mondaq.com.

Notification of Changes

If we decide to change our Terms & Conditions or Privacy Policy, we will post those changes on our site so our users are always aware of what information we collect, how we use it, and under what circumstances, if any, we disclose it. If at any point we decide to use personally identifiable information in a manner different from that stated at the time it was collected, we will notify users by way of an email. Users will have a choice as to whether or not we use their information in this different manner. We will use information in accordance with the privacy policy under which the information was collected.

How to contact Mondaq

You can contact us with comments or queries at enquiries@mondaq.com.

If for some reason you believe Mondaq Ltd. has not adhered to these principles, please notify us by e-mail at problems@mondaq.com and we will use commercially reasonable efforts to determine and correct the problem promptly.