How to achieve an effective insurance settlement

United Kingdom
Following the Woolf reforms and the increasing prevalence of pre-action protocols in dispute resolution, those responsible for dealing with claims on behalf of insured defendants have been seeking, where appropriate to do so, to resolve claims as quickly and cost-effectively as possible. In many cases, the claimant may have selected your insured from a number of possible targets, some of which may also have received claims – if so, the claimant should tell you about it – but some may not (yet) have been targeted. In essence, your insured may be the first port of call, but may well not be the last, before the claimant's voyage of recovery is over.

If you decide that an early settlement with the claimant is your objective, what steps can you take to ensure finality? The batch of appeals recently decided by the House of Lords with Cape & Dalgleish -v- Fitzgerald (where we acted for the successful respondent accountants) provides some useful guidance; however, from your insured's perspective, the ideal outcome is unlikely always to be readily negotiable.

Issues to consider

It is important at the outset to analyse the position your insured is in, as compared with other potential targets for the claimant.

Where your insured is liable only for the damage that they have caused (although that may not be the entirety of the damage suffered by the claimant), then a settlement can be negotiated without concern for the possible problems which arise when statutory rights (by virtue of the Civil Liability (Contribution Act) 1978) to contribution come into play between concurrent wrongdoers who are liable to the claimant for the same damage.

It may be helpful to illustrate the issues which can arise by reference to two of the numerous situations which were considered by the House of Lords:

  • The managing director of a company is suspected of trying to commit a fraud which the auditors should have identified, and thereby prevented; the managing director and the auditors are said to be concurrent wrongdoers responsible for the harm to the company, and each of them is liable to the company for the entirety of the damages resulting from the harm; that said, there are statutory rights of contribution between the managing director and the auditors so that, if the company obtains judgment against only one them, a claim can be made by the paying party against the other concurrent wrongdoer encompassing the whole amount paid. But what is the effect on the auditors of an early settlement between the company and the managing director, made before the full extent of the losses is known?

  • A purchaser pays £10 million for shares which are warranted at that value by the vendor; the purchaser's accountants have negligently valued the shares at £7.5 million when they were, in fact, worth £5 million. The vendor is liable to the purchaser for £5 million (i.e. £10-£5 million) pursuant to the warranty that he has given, but the accountant is only liable for £2.5 million (i.e. £7.5-£5 million); accordingly, there is only a right of contribution between the vendor and the accountants to the extent that there is concurrent liability i.e. only £2.5 million rather than £5 million.

The first step, therefore, is to determine which situation your insured is in: if your insured is one of a number of concurrent wrongdoers (some of whom may not as yet, have received claims from the claimant) faced with a claim for unliquidated damages and you wish to settle, what can you do to achieve an effective settlement?

One approach (although difficult to achieve) will be to try to negotiate a settlement which will fix the full measure of the claimant's loss. If you succeed, and this proves to be the proper construction of your settlement agreement, then the claimant's claim will be extinguished by the discharge of the settlement, and the claimant will not have any claim which he can then pursue against other targets which could, in turn, lead to claims for contribution against your insured.

Although stated simply in this way, there has been considerable uncertainty surrounding this issue following Jameson -v- CEGB which was decided by the House of Lords in 1999. Mr Jameson died of mesothelioma caused by exposure to asbestos at various premises, including those owned by CEGB, during the course of his employment. Mr Jameson agreed to accept £80,000 (against a claim where full quantum was broadly agreed to be £130,000) in respect of his injuries from his former employer on terms which provided that it was "in full and final settlement of all the causes of action in respect of which the Plaintiff claimed in the Statement of Claim".

After Mr Jameson's death, his widow brought a further claim against the CEGB under the Fatal Accidents Act; that claim failed and the reasoning has been the subject of much debate, but, for present purposes, the relevant question is whether the claimant is accepting "full compensation" for the damage suffered, damage being a necessary ingredient for a successful claim in tortious negligence.

If the claimant is found to have accepted "full compensation" for the damage, he will be prevented by the settlement with your insured from suing any other concurrent tortfeasor, and contribution issues will not arise. In this context, the judgment of Thomas J in Allison -v- KPMG Peat Marwick [2000] was cited with approval by the House of Lords:

"Satisfaction discharges the loss. It is in the nature of an executed judgment in its effect. The loss no longer exists. There is nothing left for anyone to sue on; the injury or loss has been satisfied. As between the parties there is no problem. Where the co-Defendants are concurrent tortfeasors, however, concurrently liable on a different cause of action, the satisfaction of one obligation cannot in itself discharge the other obligation. The concurrent tortfeasor will be released only if the satisfaction satisfied the injury or loss which flows from his or her separate cause of action. Its extinction is then independent of the agreement between the Plaintiff and the Defendant. Simply put, no injury or loss exists on which to sue".

The position in relation to concurrent breaches of contract (where proof of damage is not a necessary ingredient to a cause of action) is less easy to state. However, it remains arguable that there is no reason in principle why the same approach should not be adopted to cases where there may be two or more claims for breaches of different contracts against different defendants; see, for example, Lord Rodger in Heaton & Others -v- Axa Equity and Life Assurance Society Plc & Others.

"I detect no reason in principle why the approach adopted in Jameson should not be applied in the case ….. where two claims are for breach of contract. Settlement of the first claim cannot, of course, prevent a Claimant from bringing an action for nominal damages for breach of the second contract. But, if the settlement of the first action is to be interpreted as constituting full satisfaction of the loss and injury which the Claimant suffered as a result of both breaches of contract, then it must follow, on the Jameson approach, that he has no right to recover substantial damages against the second contract breaker".

It is difficult to envisage circumstances, in reality, where a claimant will wish to incur costs in pursuing such a second action for breach of another contract when only nominal damages will be at stake; such circumstances must surely be rare.

What steps can you take?

It must be borne in mind that, in construing the settlement between the claimant and your insured, the Court will enquire, taking into account the relevant factual matrix, whether the settlement terms show that the parties' intention was that the settlement should be in full satisfaction of the harm done to the claimant.

It will greatly assist your insured, of course, to spell this out expressly in the settlement agreement, but this may be unacceptable to the claimant; indeed, you may not even (depending on the circumstances) wish to raise it in negotiations as it may only serve to encourage the claimant's interest in other possible targets. Without such precise express wording, however, the effect of the agreement is unlikely to be free from doubt.

The Court may take into account indications in the agreement, express or implied, as to whether the claimant envisages future claims against other targets but, as there is no necessity for a claimant to maintain an express reservation of rights to make such future claims, any such indications may be afforded little weight.

Moreover, provisions prohibiting claims and cross claims between the claimant and your insured, whilst comforting to read, will have no bearing on the question as to whether the settlement was in full satisfaction in the harm done to the claimant.

Much may depend, in terms of approach, on the size of the payment to be made by your insured; the greater the sum, or proportion of the total alleged claim, the more likely you are to be able to negotiate the fixing of the full measure of the claimant's loss in the terms of the settlement.

Short of achieving this goal, there are, as per the House of Lords, only two ways of achieving protection from future claims for contribution against your insured:

  • negotiation of an enforceable undertaking from the claimant not to pursue anyone else in relation to the subject matter of the settlement with your insured or

  • obtaining an indemnity from the claimant against any liability to which your insured may become subject in relation to the subject matter of the settlement.

Conclusion

So, in summary, it is likely to be helpful to bear the following questions in mind:

  • Is your insured a concurrent wrongdoer (either in contract or tort) with others, possibly not yet targeted by the claimant?

  • Can you, or should you, attempt to fix the full measure of the claimant's loss in your settlement agreement? If so, clear express terms will be required.

  • If not can you obtain, during your negotiations
    - an undertaking from the claimant not to pursue anyone else? or
    - an indemnity from the claimant against any liability to which your insured may be exposed by a claim for contribution.

Cape & Dalgleish -v- Fitzgerald, Heaton & Others -v- Axa Equity and Law Assurance Plc & Others, Co-operative Retail Services Limited & Others -v- Taylor Young Partnership & Others, Royal Brompton Hospital National Health Service Trust -v- Hammond & Others, House of Lords 25th April 2002.

For further information, please contact Richard Curd by e-mail at richard.curd@cms-cmck.com or by telephone on +44 (0)20 7367 2791.