I think there should be a workaround (such as modifying grub, etc.). If there is no way it can be installed on an external HD, then, in my opinion this qualifies as a bug
I've not tried LVM, but I have installed 2011 on an external hard drive using custom partitioning so if there is a problem it must be the combination of External+LVM, or be specific to certain hardware.
The procedure I followed (disk selection stuff only) was:
[Ensure that USB HDD is ahead of internal HDD in the BIOS boot sequence (The order I have is CD, USB, Internal).]
Select disk --> /dev/sdb
Custom partitioning: Make 3 partitions: 15Gb for /, 1Gb for swap and the rest (about 23 Gb) for /home.
Install grub on MBR of /dev/sdb
I was actually somewhat surprised that it found the Kubuntu boot options from /dev/sda & lists them as well (though I think that the machine has been upgraded through enough Kubuntu releases it may not have transitioned to grub2).