Does a prudent uninsured need to obtain insurers’ consent to settle with a third party?

The Court has handed down judgment in the case of Technip Saudi Arabia Limited v The Mediterranean and Gulf Cooperative Insurance and Reinsurance Company (“MedGulf”) [2023] EWHC 1859 (Comm) dismissing a US$31m claim under an offshore construction all risks insurance policy on the WELCAR form.

Clyde & Co acted for the successful insurer defendant, MedGulf in a coverage and quantum dispute which is the subject of our previous article available here.   

In addition to the central issues covered in that article, an ancillary point arose concerning the impact of MedGulf’s denial of cover and their instruction to the insured to act as a prudent uninsured. Technip persuaded the judge (albeit the comments are obiter) that such a denial and instruction negated the effect of the policy’s requirement for the insured to obtain the insurer’s consent before settling a claim with a third party. 

Facts and denial of claim

The claim related to an allision in 2015 between a vessel chartered by the insured, Technip, to carry out certain offshore construction works in the Khafji oilfield, offshore Saudi Arabia, with an existing wellhead platform in the vicinity of the project works which was owned by the field operator, KJO.  

Technip was liable to KJO for the repair of the platform and brought a claim accordingly under the project’s liability policy (on the standard market wording, WELCAR Section II).  

MedGulf declined the claim and confirmed to Technip that it should act as a prudent uninsured.  Technip subsequently reached a settlement with KJO, as owner of the platform. Technip informed MedGulf of the settlement afterwards. 

The dispute

In addition to its primary coverage defence (that the claim was excluded), MedGulf also argued that, as Technip did not obtain the insurer’s consent to the settlement, the loss did not fall within the definition of “Damages” in the policy. Damages was defined as “compensatory damages, monetary judgments, awards, and/or compromise settlements entered with Underwriters’ consent…”

The judge did not need to determine this issue in light of his findings on coverage. However, he made it clear that, in circumstances where the insurer had declined cover for the claim and informed Technip that it should act as a prudent uninsured, Technip did not need to obtain the insurer’s consent to the settlement. He said that it would “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” and that he considered 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 and insured”.

What does this mean for insurers?

The comments by the judge were made obiter and therefore will not be binding precedent but will likely be taken into account by, and be persuasive to, other judges.

There is a notable conflict between the judge’s comments and the decision of the Privy Council in Diab v Regent Insurance Co Ltd [2006] UKPC 29. In that case, it was held that, where an insurer had denied cover, the insured is still bound by all the conditions precedent, including the need to seek insurer’s consent for a settlement. It should be noted that the insurer in that case did not specifically tell the insured to act as a prudent uninsured, however, it is unclear whether this is the reason for the contradictory judgments.

In light of these conflicting cases, insurers should carefully consider whether they want to waive a condition precedent requiring the insured to obtain consent prior to settlement with a third party before they advise an insured to act as a prudent uninsured. In Technip v MedGulf, MedGulf had denied cover, however, insurers should bear in mind the potential waiver even if they are in the process of investigating the loss and have not determined their position on coverage yet.

In practice, however, even if the insured is no longer obligated to seek insurers’ consent to settlement, this does not mean that the insured can negotiate a high settlement and recover the full amount from insurers. The court in Technip v MedGulf confirmed that proving that a settlement was reasonable is not in itself sufficient to establish liability under a policy. The insured has to (a) prove that it was liable to the third party; and (b) that it would have been liable for at least the amount of the settlement had the third party claim been litigated instead.

Please click here for the judgment.

Clyde & Co acted in this matter for MedGulf, led by Angela Flaherty and assisted by Abigail Li, Alice Hodgson and William Oakhill.