Lumbermens Mutual Casualty Company v Bovis Lend Lease Ltd

Under a liability insurance policy, the assured’s cause of action requires an insured liability to a third party and a specifically ascertained loss caused by that liability. Ascertainment must be by judgment, arbitration award or settlement agreement. A global settlement which does not identify the cost of discharging the insured liability cannot be supplemented by extrinsic evidence.

A settlement is not conclusive evidence of liability or quantum. The assured must still prove that the liability was insured and that the settlement was reasonable. Policy wording covering “error or omission” may extend to non-negligent, non-deliberate conduct giving rise to liability. Contractual facts may therefore trigger cover under a negligence-related clause where they independently create such liability. A disclosed express quality warranty may also fall within wider cover for reasonable fitness or suitability.

Bovis was insured by Lumbermens under construction, engineering and design professional liability policies. Disputes concerning the Braehead Retail and Leisure Centre led to substantial contractual claims and counterclaims. The parties later entered into a global settlement under which Braehead paid Bovis £15 million, without allocating the sum between Bovis’s claims, Braehead’s counterclaims, costs or other settlement benefits.

Lumbermens sought declarations that it was not liable under the policies. Four preliminary issues concerned ascertainment of liability and loss, the measurement of loss, the meaning of “neglect error or omission”, and cover for breach of a contractual warranty concerning the quality of materials and workmanship. The court also considered the effect of the policy’s annual declaration requirement.

1. Issues 1 and 2. The court held that a liability policy contains an implied pre-condition requiring the assured’s loss to be specifically ascertained by judgment, arbitration award or settlement agreement. The relevant loss is the cost of discharging the insured liability, not merely the overall amount paid under a settlement. This follows Post Office v Norwich Union Fire Insurance Society Ltd [1967] 2 QB 363 and the majority reasoning approved in Bradley v Eagle Star Insurance Co Ltd [1989] 1 AC 957.
2. A judgment or award will ordinarily be conclusive evidence of liability and quantum, subject to recognised qualifications. A settlement proves the amount agreed to discharge the claim but is not conclusive between assured and insurer. The assured must prove both insured liability and the reasonableness of the settlement. However, extrinsic evidence cannot cure a settlement agreement which fails to identify the loss attributable to the insured liability. The global Braehead settlement therefore did not satisfy ascertainment, and issues 1(a), 1(b) and 2 were answered “No”.
3. The reasoning in P & O Developments Ltd v Guy’s & St Thomas’ National Health Service Trust [1999] BLR 3 concerned proof of damages for breach of contract and did not govern the distinct contractual ascertainment requirement in liability insurance.
4. Issue 3. “Error or omission” in insuring clause 1 was not confined to negligent conduct. It covered non-negligent but non-deliberate conduct giving rise to liability. Clause 1 could also respond where facts constituted breach of contract but independently gave rise to liability which would exist even without the contractual claim. Issues 3(a) and 3(b) were answered accordingly.
5. Issue 4. The warranty concerning new and satisfactory materials, and appropriate workmanship, related to intrinsic quality and fell within insuring clause 2. Because the contract had not been declared under memorandum 7(i), there was no cover under clause 2 for loss exclusively attributable to that warranty. The same facts could nevertheless support cover under clause 1 if they independently gave rise to negligence or other insured liability. Issue 4 was answered “No”.

First-instance decision determining four preliminary issues in the Commercial Court. No appellate history is stated in the judgment.