Does 'a prudent uninsured' still need the insurer's consent to settle with a third party in England and Wales?

Insurance policies typically require the insured to obtain its insurer's consent to a settlement with a third party.

If an insurer has denied cover, or wants more time to decide whether a claim is covered, it will often tell its insured to act as a "prudent uninsured". This effectively means that the insured should make decisions regarding the defence and settlement of claims as if it did not have any insurance cover.

Insurers do this in order to avoid the argument that they have accepted that there is a valid policy in place or that a claim is covered by exercising the claims control provisions of the policy (as this may constitute a waiver of coverage arguments, affirmation of the policy and/or give rise to estoppel arguments).

Duties of the insured

The origin of the practice of telling an insured to act as a prudent uninsured is unclear under English law.

Insureds have no duty to take reasonable steps to avoid or minimise loss, in the absence of any express wording to the contrary in the policy. At most, an insured is under a duty not to prejudice insurers' subrogation rights if the insured has a potential claim of its own against a third party and has not yet been paid under the insurance policy. Accordingly, in the absence of an express term, insurers' rights are limited to arguing that the insured should settle claims in good faith.

What if a third party is threatening to sue the insured?

Difficulties can arise for insureds where their policy requires them to obtain prior consent from insurers before settling with a third party. If the insurer has told the insured to act as a prudent uninsured, would the insured be entitled to settle without getting that consent first? Or will the insurer be able to rely on a breach of the policy term requiring consent to deny cover?

That was the issue that arose in the recent case of Technip Saudi Arabia Ltd v The Mediterranean and Gulf Cooperative Insurance and Reinsurance Company.

The insurer had denied liability and told the insured to act as a prudent uninsured. When the insured settled a third party's claim against it, without first obtaining the insurer's consent (as the policy required), the insurer raised that as a further ground for denying cover.

Although the judge did not need to decide this issue, he made it clear that he believed that there had been no need for the insured to seek consent in these circumstances. As he put it: "It would in my view be a surprising result if an insurer could defend an insurance claim on the basis of absence of consent to a settlement in circumstances where there had been a denial of liability and the insured had been told to act as a prudent uninsured. … An uninsured person would, by definition, have no reason to consult or seek the consent of an insurer. I consider that a court would have little difficulty in concluding that the insurer had waived any requirement for the insured to seek its consent or was estopped from asserting that such consent should have been sought".

Although the insurer in this case had denied liability, it is arguable that the same view could apply wherever the insurer tells its insured to act as a prudent uninsured (including where an insurer has neither confirmed nor denied liability yet) on the basis that this is effectively a waiver of any requirement to seek prior consent.

While potentially persuasive, the judge's view will not be binding on other High Court judges (since he was not required to decide the point).

There is also a tension between this judgment and an earlier Privy Council decision, Diab v Regent Insurance Co Ltd (2006) (not referred to in this latest judgment). In that case it was said that an insured must still comply with a condition precedent in the policy (in that case, to notify claims within a certain timeframe) even though the insurer had indicated that it would reject any such claim (although the insurer had not specifically told the insured to act as a prudent uninsured in that case).

Where does this leave insureds and insurers?

Although this latest decision gives some comfort that being told to act as a prudent uninsured allows an insured flexibility when negotiating and settling with third party claimants, the safest course will still be to seek to comply with any policy conditions regarding consent to settlement, even where insurers are unresponsive.

If no response is received, insureds will then need to balance the risks and advantages of settling the claim and then seeking to rely on the comments made in Technip to demonstrate that consent was not required.

In any event, under English law, showing that a settlement was reasonable is not in itself enough to establish liability under a policy. The insured must still also prove that i) it was in fact legally liable to the third party; and ii) it would have been liable for at least the amount of the settlement had the third party claim been litigated instead (see Enterprise Oil v Strand (2006)).

In practice, it is difficult for insurers to challenge settlements after the event unless the settlement has clearly been made at too high a level or compromises uninsured liabilities.

For insurers, the appeal of advising insureds to act as prudent uninsured may have been dampened by the Technip decision as it suggests that this approach effectively waives the requirement of prior consent. The decision may place insurers under pressure to form a concluded view on coverage more quickly and/or consult with the insured regarding any potential settlement subject to a reservation of rights in respect of any unresolved coverage issues.