DMC Category Rating: Developed

This case note is based on an Article in the March 2006 Edition of the ‘(Re)insurance Bulletin’, published by the Insurance/Reinsurance teams at the international firm of lawyers, DLA Piper Rudnick Gray Cary. DLA Piper is an International Contributor to this website

Background
In January 1990, three oil companies, Enterprise Oil Ltd, Amoco (UK) Exploration Company and Amerada Hess Ltd, entered into an operating agreement to explore and develop certain North Sea oil fields.

By contract dated 26 September 1997, Amoco agreed to hire a jack-up drilling unit (known as "Rowan Gorilla V", or "RGV") from British American Offshore Ltd ("BAO"). The hire term was at least one year at a daily rate of US$175,000. Under a service agreement between BAO and its US parent, Rowan Companies Inc, the performance of such drilling contracts was sub-contracted to Rowan. In consideration, BAO agreed to pay Rowan everything it earned from day rate billings.

The RGV drilling unit was delivered on 15 December 1998, but on 19 January 1999, Amoco purported to terminate the contract, claiming delivery was late and that the RGV was defective. Enterprise, as one of Amoco's co-venturers, agreed to and supported this termination.

This led to legal proceedings in England and in Texas. In the English proceedings between Amoco and BAO, Amoco sought a declaration that its termination of the RGV contract was valid, and BAO counterclaimed for about US$65m, equivalent to the daily hire rate for the rest of the term. The court held that Amoco had wrongly terminated the contract and awarded damages and interest of over US$73m plus costs of over £9.7 million.

Though not a party to these proceedings, under the terms of the operating agreement, Enterprise was obliged to contribute. It paid US$17.9 million towards the damages and £2.57m towards costs.

In Texas, Rowan brought proceedings against all three oil companies. Rowan alleged (amongst other things) that Enterprise had tortiously interfered with the Rowan/BAO Service Agreement. It claimed monies that would have been received but for the tort, consequential losses arising out of the termination, loss of cash flow and punitive damages.

One of the main consequential losses alleged concerned the cancellation of plans to buy back Rowan stock in January and February 1999, which, it was claimed, could then have been re-sold in February 2000 for a large profit. Other alleged losses included the cost of relocating RGV and five other rigs from the North Sea to the Gulf of Mexico and a subsequent drop in earnings.

The Texas proceedings were settled on 14 March 2002, before trial. The oil companies, including Enterprise, agreed to pay Rowan US$175m. This figure was stated to include sums paid by Amoco to BAO in partial satisfaction of the English judgment and costs. The balance due was, therefore, US$84m.

Other than this, the agreement did not apportion the settlement sum to particular heads of claim. It simply referred to the fact that Rowan asserted "various tort claims" against Amoco and the others. The oil companies decided between themselves what each would pay. Enterprise's share was US$20.5m, which it duly paid. It now sought recovery from its captive insurer, Strand.

The insurance
Under the policy, Strand agreed to indemnify Enterprise:

"for all sums which the Insured may be obligated to pay by reason of liability imposed on the insured by law or assumed under Contract or Agreement…or otherwise, on account of personal injury and/or bodily injury and/or loss of life and/or loss of and/or damage to tangible property…arising out of an occurrence occurring during the period of this Policy…"

The policy did not include a claims control clause, although there was a claims co-operation clause, which gave Strand the right to "associate with the Insured" in the defence and control of any claim.

Section IV(a) extended the meaning of "personal injury" to cover a wide range of other wrongs, including infringement of copyright "or of property or contract rights committed or alleged to have been committed in the conduct of the Insured's operations".

The applicable law of the policy was English law. The general insuring conditions provided that, in the event of any conflict of interpretation between the various clauses and conditions, "the broadest and least restrictive wording to the benefit of the Insured shall always prevail".

Strand's reinsurance was effectively back-to-back with the insurance, although reinsurers did have the right to exercise claims control. Effectively, therefore, it was Strand's reinsurers who were disputing Enterprise’s claim.

Claiming indemnity
Enterprise argued that Strand had agreed to indemnify all sums Enterprise was obliged to pay by reason of liability "assumed under contract or agreement or otherwise", which, in this case, meant the settlement agreement. The liability must be "on account of personal injury…committed or alleged to have been committed" in the course of the insured's operations. Under the terms of the policy, personal injury covered infringement of contract rights. It was not in dispute that this was capable of covering tortious interference with a contract.

The effect of this wording, according to Enterprise, was that it only had to prove that the sum paid under the settlement agreement was reasonable and was paid under an honest and businesslike settlement of arguable liability for a peril insured under the policy. In addition, it relied on the interpretation clause, which required that the broadest and least restrictive wording to the benefit of the insured should prevail.

Strand, however, maintained that, in order to claim under the policy, Enterprise had to prove it was actually liable to Rowan for the tort of wrongful interference in the Rowan/BAO Service Agreement. In addition, to prove the settlement was reasonable, it had to show that it was liable for an amount equal to or more than the settlement figure.

The phrase "liability…assumed under contract or agreement" referred to contracts that preceded the loss giving rise to the liability. It did not apply to liabilities assumed under a settlement agreement that came into being after that loss. The insurance was intended to cover the sort of pre-existing indemnity and hold harmless provisions that are commonplace in oil and drilling contracts.

Judgment
Mr Justice Aikens agreed. The indemnity was for all sums the insured may be obligated to pay "on account of personal injury" (as defined), not alleged personal injury. In the absence of express wording, cover under an indemnity policy only extends to actual liability, not alleged liability (McDonnell Information Systems Ltd v Swinbank and Others [1999 Lloyd’s Rep 98].

When Enterprise entered into this settlement agreement, it did not "assume liability" on account of personal injury. The settlement agreement was a compromise of the question whether or not there was, in fact, any liability. The phrase "assumed under contract or agreement" was not intended to convert an arguable liability into an actual liability simply by virtue of that settlement. Consequently, Enterprise could only recover if it could demonstrate that it was, or would have been, actually liable to Rowan in the Texas proceedings in respect of the alleged tortious interference.

Decisions of foreign courts
This raised a technical issue. Did the English court have to decide what the judge and jury in the Texas court should properly have decided on these issues, or (as Enterprise argued) what the judge and jury in Texas could legitimately have decided?

Mr Justice Aikens, relying on Commercial Union Assurance Co. Plc v NRG Victory Reinsurance Ltd [1998] 2 Lloyd’s Rep 600, summarised the principles to be applied in such cases:

• When an English court has to consider whether one party is liable to another under a contract and that matter has been decided by a foreign court, then the English court should accept the decision of the foreign court as to relevant liability.
• In cases where the foreign court has not actually determined the matter, then the English court has to decide what the foreign court's decision would have been, following the applicable law and any relevant rules of construction.
• It is for the English court to determine, by evidence, the applicable law.
• The presumption of the English court should be that the foreign court would arrive at a decision according to law, whether the decision was by a judge's ruling or a jury's verdict.
• Extraneous reasons for saying that a jury would arrive at a particular verdict are irrelevant, at least when such a verdict would be contrary to the applicable law.

The judge’s task, therefore, was to decide what the outcome of the case would have been, applying Texas law and procedure to the facts as he found them and acting as both judge and jury.

After examining the evidence, the judge was satisfied that Enterprise had failed to prove it had interfered with the service agreement and this was enough to defeat its insurance claim altogether.

The Lumbermen’s issue
An issue of wider interest was the question of recovery of a settlement amount under a liability policy. Although the point was no longer relevant, Mr Justice Aikens chose to give his views because of the controversial conclusion Mr Justice Colman reached in Lumbermen's Mutual Casualty Co v Bovis Lend Lease Ltd [2005] 1 Lloyd’s Rep 494.

That case involved the settlement of a complex construction dispute involving, insofar as Bovis was concerned, insured and uninsured losses. The parties reached a global settlement without breaking down the figure into heads of claim and Bovis sought to recover from its liability insurers. It failed. Mr Justice Colman held that an insured could not recover anything at all under a liability policy if the claim was founded on a settlement agreement that did not specifically identify an amount that referred to a liability covered by an insured peril under the policy terms.

In order to recover under a liability insurance, an insured has to demonstrate it has suffered a loss by virtue of a legal liability covered by the policy and that the loss has been "ascertained" by judgment, arbitration award or settlement of the third party's claim. Ascertainment of the insured’s liability is a precondition to recovery. But a settlement is not conclusive evidence of either liability or quantum. Both can be challenged by underwriters. The insured, therefore, still has to prove it was under a liability insured by the policy and that what it paid was reasonable.

Mr Justice Colman, however, went on to hold that, if a settlement agreement does not specifically identify the cost of discharging the insured liability, there is "no authority to suggest that…extrinsic evidence can be adduced to supply an ascertainment of that cost and therefore of the relevant loss". The global settlement in Lumbermen's did not satisfy the requirement of ascertainment because it did not impose on the insured any identifiable loss in respect of any identifiable insured eventuality.

The Enterprise settlement agreement raised the same issues as Lumbermen’s. It did not specifically identify the liability in respect of which the US$84m was to be paid by the three oil companies. It simply referred to "various tort claims". Nor did it provide a breakdown of specific sums linked to any particular claim or liability, whether by reference to the causes of action pleaded in the Texas proceedings or the terms of Enterprise’s liability insurance policy. On the question of recoverability, however, Mr Justice Aikens, would have reached a very different conclusion.

His first point was that, although Mr Justice Colman drew analogies between liability insurance and reinsurance cases, the question whether the same principles should apply to reinsurance had to be approached with caution, in view of the long-running and unresolved debate about whether a contract of reinsurance is a liability insurance. Mr Justice Aikens' comments, therefore, were confined to direct liability insurance.

His second point was to note that the cases on which Mr Justice Colman relied, Post Office v Norwich Union Fire Insurance Society [1967] 2 QB 363 and Bradley v Eagle Star Insurance Co Ltd [1989] 1 AC 957, were cases brought under the Third Parties (Rights against Insurers) Act 1930. In both cases, a third party tried - and failed - to claim directly from insurers without first having obtained a judgment, arbitration award or settlement against the insured.

Neither case, however, was concerned with the precise link between liability ascertained by judgment, award or settlement and the right to claim under a liability policy, or whether the liability insurer could challenge the assertion that the insured had suffered a recoverable loss. Nor, in Mr Justice Aikens’ view, did they establish that it was a precondition to recovery that the wording of the judgment, award or settlement should "ascertain" the specific cost to the insured of discharging its insured liability.

In principle, an insurer always has the right to challenge whether the insured was, in fact, liable to the third party, if so, for how much and whether the liability falls within the cover. This is so whatever is stated in the judgment, award or settlement.

If a settlement breaks down the figure into heads of claim, it will be evidence of the insured’s loss covered by the policy, but even that can be challenged (McDonnell Information Systems Ltd v Swinbank and Others [1999] Lloyd’s Rep 98). In which case, it must be permissible for the insured to prove by extrinsic evidence that it is liable to a third party for a particular sum under the settlement and that the particular sum represents a loss covered by an insured peril under the liability policy.

Lastly, he commented that, if Mr Justice Colman’s conclusion was right "it would lead to great commercial inconvenience and to artificial statements in judgments, awards and settlement agreements. Commercial law tries to avoid forcing parties to engage in commercially inconvenient and artificial practices…If the principle is correct it must apply to judgments and awards as well as settlements. But judgments and awards are not concerned with potential liability under liability policies and they should not be forced to be involved".

Comment
Although many will find these comments welcome, until such time as a similar case comes before the Court of Appeal, the recoverability of global settlements remains unresolved. To be on the safe side, insureds (and reinsureds) should, therefore, ensure settlement agreements allocate global sums appropriately and/or involve insurers in the discussions at an early stage and obtain their consent.

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