It is often said that English law is more favourable to insurers than the laws of many other countries in the developed world. The context for this tends to be the general duty imposed under the Marine Insurance Act 1906 on all insureds to disclose all facts material to an appraisal of the risk and the corresponding remedy open to insurers to avoid the contract of insurance for failure to do so.
For many years now the Law Commission has been grappling with proposals for reform of this aspect of English insurance law. (A new Insurance Contracts Act is indeed now firmly on the horizon and will be the subject of future blogs.)
How English Law Tilts Toward Insurers
There is, however, another less well understood and appreciated aspect of English law specific to liability insurances which can also tilt the playing field in an insurer’s favour in ways that may contain unpleasant surprises for an unsuspecting insured.
One of the main reasons for buying errors and omissions or directors’ and officers’ liability insurance is surely to protect against the risk that those individuals or companies may need to pay sums of money by way of damages or settlements at the conclusion of proceedings if their defences have not been wholly successful.
Leaving aside particular terms, conditions and exclusions which vary considerably from policy to policy, purchasers of liability insurance have a perfectly reasonable expectation that insurers will stand behind them (absent evidence of dishonesty) and meet both of these exposures.
But What Happens in Settlements?
So far so good, but what is the position where an insured enters into a good faith compromise or settlement with a claimant on the basis of strong and competent legal advice to the effect that the relevant settlement or compromise is both business-like and reasonable? Can an insured who enters into such a settlement claim indemnity from insurers under English law? This is where it can get murky.
The problem is that there remains overwhelmingly strong authority under English law for the proposition that:
“… the insured under a liability insurance policy will need to establish actual legal liability to a third party claimant before it can recover from the insurer unless the particular language of the policy clearly provides to the contrary…”(emphasis added)
That is the conclusion reached by Mr. Justice Flaux in the recent case of AstraZeneca Insurance Company Limited v XL Insurance (Bermuda) Limited and another following an exhaustive review of the relevant English case law.
The leading case in this area is the 1998 Court of Appeal decision in Skandia International Corporation v NRG Victory Reinsurance Limited. The facts in that case throw strong light on the implications of this rule.
In that case the reinsured had settled a claim brought in Texas and sought to justify the settlement by reference to advice from a Texas lawyer to the effect that the settlement opportunity was attractive given the likelihood of a significantly more adverse finding by a Texas jury under direction from a judge without specialist knowledge of the relevant law.
The English Court of Appeal found that this was not enough to establish the reinsured’ s liability to trigger an obligation by the reinsurer to pay. Instead, the reinsured had to demonstrate “actual liability”. What this means in practice is that an insurer is entitled to challenge any settlement reached with a third-party claimant on the basis that it must provide conclusive proof of an actual underlying legal liability
Unfortunately, English courts do not provide an answer as to how an insured is supposed to demonstrate “actual liability” after a settlement has been concluded. Indeed, short of a mock trial to decide liability on the disputed facts, it is hard to see how that could be achieved.
What this means in practice is that the failure to secure insurers’ prior consent to settlement can create real problems for insureds in seeking to recover sums paid to claimants even where the insured have acted quite reasonably and sensibly. For practical purposes, the only real way of preventing these problems is to ensure that insurers’ consent to settlement is obtained up front.
That is sometimes easier said than done. Insurers have been known to say that the insured must act as “prudent uninsureds” whilst they consider their coverage position.
The status of prudent uninsureds (perhaps like that of the mythical common-law wife) is not recognised under English law. For that reason, the danger of settling proceedings without insurers’ consent should not be underestimated.