Are settlements covered under liability policies if not consented to by the insurer? Does it make any difference if the insured was told to "act as a prudent uninsured"?
In the recent case of Technip Saudi Arabia Limited v The Mediterranean and Gulf Cooperative Insurance and Reinsurance Company [2023] EWHC 1859 (Comm), the English High Court (Jacobs J) considered this very question.
The key takeaways from the case are summarised below, before we look at the case in more detail.
Key takeaways
Liability policies typically state they cover "legal liability" or "damages". They will also typically clarify that this can be in the form of judgments, awards or settlements, entered into with consent. The most important points that arise from the case are that:
- Even if the insurer has not consented to a settlement, the liability policy will still cover the settlement up to the amount (if any) that the insured can demonstrate was within its "actual legal liability", i.e. what the insured would have been found liable for at trial (had there been no settlement)1. In other words, any consent requirement is redundant (potentially even if expressly labelled a condition precedent), where the settlement was of an actual legal liability.
- Further, if the insured has been directed to act as a prudent uninsured, that will anyway amount to a waiver of the insurer's consent rights with regard to the settlement. As the judge noted, "[a]n uninsured person would, by definition, have no reason to consult or seek the consent of an insurer".
- On the other hand, to the extent the insured cannot demonstrate that the amount of the settlement was within its actual legal liability, the policy will not cover the settlement, unless it was negotiated, or otherwise expressly consented to by, the insurer, even if the insured reached the settlement after having been told to act as a prudent uninsured. This is what happened in Technip v Medgulf – Technip settled a claim against it for $33m without consent and despite the judge finding the insurer had waived the right to consent (because it told Technip to act as a prudent uninsured), Technip could only recover a maximum of $7.4m2 from the insurer as its actual legal liability did not exceed this sum.
- The coverage under liability policies for settlements in the absence of actual legal liability, i.e. for commercial settlements, is therefore perhaps best seen as a separate head of cover to the main legal liability coverage and which is invariably caveated by the need for the insurer's prior written consent to the settlement.
Liability insurance and settlements (short scene-setter)
Most liability claims against the insured are settled prior to a court judgment (or arbitration) deciding whether the insured is liable and if so in what sum, and most settlements are negotiated or approved by the liability insurer.
Further, many settlements are reached where the insurer considers the insured is probably not liable. The insurer appreciating there is, nonetheless, litigation risk, and mindful of the worst-case scenario (paying the full damages claimed, plus interest, plus claimant's costs, and failing to recover any of the defence costs) negotiates, or approves the insured reaching, a reasonable "commercial settlement" with the claimant. Such a settlement will reflect a reasonable discount to the claimant's claim in light of the litigation risk and the best and worst case scenarios.
There will, however, be cases where, for whatever reason, the insured has settled with the claimant without any involvement of the insurer and without the insurer's approval. Technip v Medgulf was such a case. It was also a case where the insured had reached that settlement, after the insurer had declined the claim and directed the insured to act "as a prudent uninsured". The Court was required to decide, against that background, whether and to what extent Technip could claim an indemnity for the settlement.
Technip v Medgulf in more detail
Background
Technip was a contractor that had agreed to perform certain work for a joint venture known as the Al-Khafji Joint Operation (”KJO”), in relation to a platform in the Khafji Field, offshore Saudi Arabia ("the Platform"). In its role as contractor, Technip had chartered a vessel, which had collided with the Platform, causing damage and resulting in Technip incurring liabilities to KJO, including for the costs of repair to the Platform.
Technip notified the incident in August 2015 under the liability section of its offshore construction insurance ("the Policy"), insured by Medgulf ("the Insurer").
The claim
On 29 July 2016, Medgulf declined cover based on policy exclusions ("the exclusions defence") and asserted to Technip that it should act as a "prudent uninsured".
On 16 October 2019, Technip reached a settlement with KJO, whereby Technip agreed to pay KJO $25 million for the costs of repair plus $8 million for KJO's other losses (the total settlement sum was $33 million), but KJO agreed to make a like payment to Technip in respect of claims that Technip had amassed against KJO during the life of the Project. A clause in the settlement agreement recorded that the competing claims cancelled each other out, so that, no party needed in fact to make any payment to the other ("the set off clause").
After settling with KJO, Technip claimed an indemnity from Medgulf under the Policy for the sum of $33m. This was the sum of Technip's settlement of KJO's claim against it, as set out in the settlement agreement. Medgulf maintained its declinature and proceedings were eventually commenced by Technip against Medgulf.
In the proceedings, the Insurer (Medgulf) denied liability under the Policy, arguing (in addition to the exclusions defence):
- Technip had no actual legal liability to KJO ("the actual legal liability issue"); and,
- Even if Technip had an actual legal liability, there was still no cover, because the settlement was entered into without its consent ("the consent issue").
Ultimately, the judge held Medgulf not to be liable under the Policy, because of the exclusions defence3, and granted Technip permission to appeal the case on that point, but the case is most interesting because of the judge's decision on these prior issues.
The Policy
So far as relevant to this article, the material terms of the Policy were as follows:
- The relevant insuring clause of the Policy indemnified against "…Loss which the Insured(s) shall be obligated to pay by reason of [i] liability imposed upon the Insured(s) by law, and/or [ii] Express Contractual Liability".
- As is fairly typical, "…Loss" was defined by the Policy to mean defence costs and "compensatory damages, monetary judgments, awards, and/or compromise settlements entered with Underwriters’ consent…".
The actual legal liability issue
It was seemingly common ground between the parties that:
- It was not relevant for the purposes of Technip's claim under the Policy, if the settlement it had reached with KJO, was a reasonable commercial settlement.
- As Technip had settled without consent, to recover from the Insurer under the Policy, Technip needed to prove the amount of damage for which it would have been liable to KJO for, had KJO's claim against Technip proceeded to trial. Under the Policy, Technip could recover no more than this "actual legal liability".The settlement agreement therefore merely set the cap for Technip's claim under the Policy ($33m).
- Since KJO's claim against Technip would have been subject to Saudi law and Saudi arbitration, the relevant law to be applied to the actual legal liability issue was Saudi law. However, as neither party argued that Saudi law differed in any material respect from English law, the judge should decide the actual legal liability issue by reference to English law.
In the words of the judge, the case therefore serves as a stark reminder that:
"[t]he basic rule under English law is that where a policyholder settles its liability to a third party claimant, and wishes to claim under its liability policy, it is not sufficient for the policyholder simply to establish the reasonableness of the settled amount. In order to succeed, the policyholder must prove (i) that it was in fact legally liable [under the governing law of the third party's claim] …and (ii) that the amount for which it would have been liable [under such law] had the matter been litigated is at least as much as the amount paid under the settlement…".
The judge further noted that, whilst New York Law and "other common law jurisdictions take the view that [at least if the insurer has declined cover before the settlement] …the policyholder’s settlement with the third party is binding on the insurer if reasonable…English law… takes a different approach".
On the facts, the judge found that Technip was liable to KJO for the reasonable repair costs and certain other losses, but only in the sum of c. $7.4m (the settlement having been, as above, $33m). It followed the maximum Technip could recover under the Policy for its legal liability to KJO (but for the exclusions defence) was that drastically reduced figure of $7.4m.
The Insurer did not seek to argue that even that reduced $7.4m figure should not be recoverable under the Policy, given the set off clause meant nil (net) was payable by Technip to KJO under the settlement agreement. As such, the case also illustrates that an insurer cannot reduce its indemnity to the insured, on the basis the insured has a counterclaim against the claimant4.
The consent issue
As noted above, the Policy contained a fairly typical definition of "…Loss", namely "compensatory damages, monetary judgments, awards, and/or compromise settlement entered with Underwriters’ consent…".
The Insurer accepted that the consent requirement was not a condition precedent, but argued references to condition precedent are not relevant, because the requirement was within the insuring clause. The judge's conclusion on consent (explained below) would, however, not likely have been different, had there been an express condition precedent.
The Insurer argued that, given Technip had settled with KJO, the only applicable phrase within the definition of "…Loss" in the Policy, was "and/or compromise settlements entered with Underwriters’ consent…", and that, since it had not consented to the settlement agreement, it was therefore not a "…Loss" as defined.
The judge disagreed, noting that what mattered was that, since Technip was actually legally liable to KJO for "compensatory damages" of $7.4m, the settlement agreement represented a "…Loss" in that sum. The fact it was paid pursuant to a settlement agreement did not prevent it from being "compensatory damages". Technip could therefore recover the $7.4m (being its actual legal liability) under the Policy, by relying on the words "compensatory damages" in the "…Loss" definition.
The judge rejected the Insurer's argument that, if that was correct, the words “compromise settlement entered with Underwriters’ consent" were then made redundant. The judge pointed out that, the purpose of those words, was to ensure that a commercial settlement, i.e. one where there was not an actual legal liability for the amount of the settlement sum, would be covered, if consented to by the insurer.
The judge anyway also agreed with Technip that, because the Insurer had told Technip to act as a "prudent uninsured", the Insurer had actually waived its consent rights in any event. This was on the basis that, in having settled without the Insurer's consent, Technip was doing precisely what it had been told to do. The judge noted that "[a]n uninsured person would, by definition, have no reason to consult or seek the consent of an insurer".
Technip did not seek to argue that, by directing it to have acted as a prudent uninsured, the Insurer had not only waived its consent rights, but had also waived its right to require Technip to prove an actual legal liability. Had this been argued and had the judge found such waiver, if in settling with KJO for the full $33m Technip had acted prudently, Technip would presumably have been awarded an additional $25.6m in indemnity.
Comment
It is notable that the Insurer's lack of consent to Technip's settlement, did not provide a complete coverage defence. As above, the judge decided this was because, to the extent of its actual legal liability ($7.4m), Technip could rely on the part of the insuring clause that covered "compensatory damages", and was therefore (in relation to the $7.4m only) allowed to side step the consent requirement for settlements.
It might be said that this was to overlook that as a matter of law an insured's actual legal liability is only covered in the event of a judgment, arbitral award or settlement requiring it to pay5, and therefore since Technip had not been sued to judgment (or an arbitration award) in the underlying dispute with KJO (i.e. it could never show "monetary judgments [or] awards"), it still needed to show a “compromise settlement entered with Underwriters’ consent", in order to prove a "…Loss" and recover under the Policy.
Technip had argued that the Insurer was retrospectively obliged to give consent (nb "prior" consent was not mandated, just "consent"), at least up to the value of Technip's actual legal liability, and so the case could be explained on these alternative grounds, although they do not form part of the judge's stated reasoning. The case can also be explained on the grounds that, as the judge held, the consent requirement had been waived in any event, due to the insurer having directed the insured to act as a prudent uninsured. For these reasons, we can therefore see subsequent cases being decided differently (i.e. the insurer having a complete defence), especially if the insurer has not told the insured to act as a prudent uninsured.
It should also be noted, that the lack of consent seemingly did provide the insurer with a partial defence, i.e. to the amount of the settlement agreement for which Technip could not demonstrate an actual legal liability ($25.6m). Technip was not awarded this balance, even though there was no argument recorded by the Insurer that $33m was not a reasonable commercial settlement.
As noted above, there was no argument by Technip that, in having directed it to act as a prudent uninsured, the Insurer had waived the right to decline cover for a reasonable commercial settlement. It remains to be seen whether subsequent cases will decide that the insured can recover for a reasonable commercial settlement, if entered into without consent, after having been told to act as a prudent uninsured6. After all, a prudent uninsured would very often settle for a percentage of the third party's claim, to reflect litigation risk (as do insurers).
If the insurer wants to reserve the right to take a coverage defence based on a lack of consent and/or that the settlement sum went beyond the insured's actual legal liability, the insurer should still probably avoid directing the insured to act as a prudent uninsured.
1If the policy refers to insuring "damages", the actual legal liability would have to be for damages, not e.g. restitution.
2Note this is the $10.4m figure referred to in the judgment, less the aspect of that figure that related to Technip's first party loss rather than legal liability.
3The judge held the claim was excluded by the Existing Property Exclusion.
4Leaving aside the doctrine of setoff, the existence of the counterclaim is not a liability or quantum defence, and so is not relevant to the question of actual legal liability. Further (unless a counterclaim for indemnity), the counterclaim is not something the insurers would be subrogated to.
5Post Office v Norwich Union Fire Insurance Society Ltd [1967] 2 QB 363.
6This appears to have been the view of the High Court of Australia in CGU Insurance v AMP Financial Planning [2007] HCA 36