The text of the spell is unclear about whether the healing replaces all damage or just the amount of damage converted to healing. The spell converts the first 20...84 damage from the next damage source into healing, with no effect on further damage. For example, if a monk with 16 ranks of Protection Prayers casts Life Sheath on himself and a foe with 16 ranks of Fire Magic casts Fireball on him, he will be healed for 105 health and take 14 damage, resulting in a net gain of 91 health, while an attack with over 210 damage such as Dark Chain Lightning would result in a net loss of health.
If damage is dealt in separate packets, such as from Deathly Chill, Life Sheath will only negate damage from the first packet.
If multiple sources of damage are dealt instantaneously, Life Sheath appears to act upon the largest source of damage. This can be observed when a player with the enchantments Retribution and Shield of Judgment is attacked by an enemy enchanted by Life Sheath; regardless of the order in which Retribution and Shield of Judgment are cast, Life Sheath will always act upon Shield of Judgment.
Life Sheath and Reversal of Fortune do not stack together. If both spells are cast on a player and he takes damage, player will only get healed once, and both spells will end.
Heroes will not use Life Sheath to remove conditions, but only if you are taking damage.