Global Liability Settlements - Lumberman’s Revisited

On 26 January 2006 the Commercial Court handed down an important decision in relation to what an insured must prove in order to recover from its liability insurers in relation to settlements. In the decision of Enterprise Oil Limited v. Strand Insurance Co Ltd Aikens J confirmed that an insured must prove the following:

• Actual liability to a third party
• settlement must not be for more than the amount for which the insured would have been liable.

In common with Colman J’s decision in Lumberman’s Mutual Casualty v Bovis Lend Lease Limited, the insured’s contribution to the settlement did not apportion particular sums to particular causes of action or heads of damage. As such, the lack of structure in the agreement potentially gave rise to difficult legal issues as a result of the Lumberman’s decision. The judgment contains an important appraisal of the Lumberman’s decision which will serve as a useful point of reference for insureds and reinsureds in structuring settlements in the future.

Background

The case related to Enterprise Oil’s contribution to a settlement agreement in 2002 between Enterprise and various other defendant companies and a US company, Rowan, and its associates in relation to a drilling contract. In proceedings in Texas, Rowan alleged that the defendants had committed a variety of torts under Texas law. These included interference with a service agreement and interference with prospective contractual and business relationships. Under each cause of action Rowan sought damages for the monies it said it would have received “but for” the torts which had been committed.

The case settled before trial. The settlement agreement provided that liability of the defendants would be joint and several. The defendants decided amongst themselves what sums each would pay and executed the settlement agreement. The settlement agreement did not record any details as to how much each defendant contributed and in respect of which cause of action.

Aikens J heard the dispute which subsequently arose between Enterprise and its insurers in respect of Enterprise’s claim for an indemnity in relation to the settlement. Enterprise contributed $84.225m to the global settlement of $175m. The primary insurer was Strand Insurance Company Limited, Enterprise’s captive insurer. Strand had placed reinsurance on the Lloyd’s and Overseas Companies Markets on “back to back” terms with the original policy. The reinsurance contained a claims control clause. Therefore, the dispute between Enterprise and Strand was effectively reinsurers disputing the claim in the shoes of Strand.

What an Insured has to Prove

In order to obtain an indemnity under a liability policy it is a general principle of insurance law that an insured has to establish a legal liability to a third party (whether that liability arise by way of judgment, arbitration award or settlement). In relation to settlements, it is not sufficient to demonstrate liability to a third party simply by relying on the fact of the settlement. Further, any settlement has to be reasonable, that is to say that an insured must not settle for more than the amount for which it would have been liable.

Applicable Law

Aikens J held that the question as to whether Enterprise was or would have been liable to Rowan in Texas was governed by the principle established in the Court of Appeal decision of Commercial Union Assurance Company PLC v. NRG Victory Reinsurance Ltd. This case provides that in circumstances where proceedings have commenced but a foreign court has not actually determined a matter, an English court has to decide what the foreign court’s decision would have been following the principles of the applicable law and any relevant rules of construction. Such an approach allows the Court to consider factual evidence only. On the facts, and as a matter of Texas law, Aikens J concluded that Enterprise were not able to prove any interference with the Service Agreement and that, as such, Rowan would not have recovered anything from Enterprise under this head of loss. Effectively, that finding defeated the claim.

The Lumberman’s Point

Despite his finding on liability, Aikens J went on to consider what the consequences would have been for Enterprise if it had been found liable. Enterprise had entered into a settlement for a specified sum without any allocation of figures in order to compromise both insured losses (wrongful interference with the service contract) and uninsured losses (punitive damages and irrecoverable costs). Reinsurers relied upon Colman J’s Lumberman’s decision which provided that an insured cannot recover anything at all under a liability policy if the claim under the policy is founded on a settlement agreement with a third party which has not specifically identified an amount that is covered by an insured peril under the policy. Aikens J commented:

“Colman J’s decision therefore raises the stark issue of whether Enterprise could recover anything at all in this action, even if it proved that it was or would have been under a liability […] and the amount of that liability would have been at least $84m i.e. the settlement figure”.

Aikens J analysed the steps taken by Colman J in arriving at the Lumberman’s decision and concluded that, in his view, an insured does not have to attribute an amount of its loss to an insured peril covered under a liability policy in the wording of a judgment, award or settlement. His principal reason for this finding was that an insurer will always have the right to challenge whether an insured was, in fact and law, liable to a third party and has the right to challenge the quantum of that liability and whether the loss is within the scope of the policy whatever is stated in a judgment, award or settlement.

Aikens J also commented upon the function of “ascertainment” as identified by Colman J. Colman J found that “ascertainment” is a “source of evidence” as to liability and quantum of the insured to the third party. Aikens J accepted that if the insured has negotiated a settlement which identifies certain heads of claim as being referable to certain causes of action that are within the terms of the policy, then that will be evidence that the insured has suffered a loss under the policy. However, that would always be open to challenge by insurers. Colman J found that “no amount of extrinsic evidence” at a trial as to what part of a settlement constituted a loss under the policy could create a cause of action under the policy. He, therefore, concluded that where there is a failure to indicate losses in a settlement agreement by reference to insured liability, a claim under the policy would be bound to fail in total.

Aikens J, in disagreement with Colman J, stated that in circumstances where an insurer challenges a settlement (however well structured the agreement maybe) the question as to whether there has been a loss covered by the policy would have to be decided on evidence extrinsic to the settlement agreement as put forward by both parties.

Aikens J also commented that following Colman J’s conclusion would lead to great commercial inconvenience and to artificial statements in judgements, awards and settlements. He concluded that to insist that parties to a settlement identify the particular sums that are attributable to particular heads of claim would become a pre-condition of an insured recovering under its liability policy and would discourage the settlement of disputes and create more litigation.

Aikens J found that, had the point been relevant, reinsurers would not have succeeded in their argument that the Lumberman’s decision would have prevented Enterprise from making a recovery.

Conclusion

The comments of Aikens J in this case relating to Lumberman’s are not binding in that the issue relating to apportionment of settlement monies in global settlements did not have to be decided in this case. However, the analysis of the Lumberman’s decision will no doubt be heavily cited by insureds until such stage as this uncertain area of the law is ruled upon by a higher court.

For further background in relation to the Lumberman’s decision please click here.