Bankrupt US bank Lehman Brothers has reached a settlement with its Bermuda-based Lehman Re life insurance unit, reducing the subsidiary’s $2.3 billion in claims to $1 billion, according to a filing in federal bankruptcy court in Manhattan.

The settlement resolves claims connected to a 1999 repurchase agreement involving residential and commercial mortgages as well as a 2007 “Net Worth Maintenance Agreement”, lawyers for the entities said.

The repurchase agreement claim is now valued at $490 million and the maintenance agreement is now a claim of $415 million, the attorneys said.

Lehman Re filed a Chapter 15 petition for bankruptcy protection in August 2009, citing alleged shortfalls on its reinsurance obligations and lawsuits against it in the US.

Once America’s fourth-largest investment bank, Lehman Brothers International filed the biggest bankruptcy in US history, listing $613 billion in debts. It failed because of risky real-estate bets and too much debt which it tried to hide from its investors, according to an investigation into Lehman’s demise.

Now, the task of sorting through Lehman Brothers’ assets in the wake of its collapse has taken on a whole new level of difficulty after a UK court ruled that all of the bank’s former clients should have access to money recovered.

In a landmark decision, the British supreme court ruled that Lehman Brothers International must pay back clients who had money in their accounts at the time of the company’s collapse.

By law, firms are required to keep the money they trade on clients’ behalf separate from money of their own, to keep it safe from creditors seeking to recuperate losses in the event of a bankruptcy.

But Lehman Brothers, the court ruled, failed to do this “on a truly spectacular scale” and said the company “routinely” failed to treat options and derivatives transactions as client money.

The investment bank kept $2.16 billion of client money separate, but mixed a far greater sum of money with its own, causing vast confusion when subprime mortgage losses caused the investment bank to collapse in 2008, marking the height of the financial crisis.

PricewaterhouseCoopers (PwC), which is leading the administration, has said only $1.1 billion was found and the rest of the $2.16 billion had been wrongly mixed in with the firm’s own money.

Yesterday’s ruling means that the cash earmarked as belonging to clients at the time of the firms collapse should be divided up among all its clients, including those whose cash the investment bank mixed with its own.

PwC will now have the arduous task of trying extracting that $1.1 billion from the administrations general funds and dividing it between more people.

The biggest group of clients claiming money were the firm’s own affiliates who are trying to recover more than $3 billion.