Collisions, Allisions and Prudent Uninsureds – Technip v Medgulf, and insurance for unauthorised settlements

1 August 2023By Fenchurch Law

Technip Saudi Arabia Ltd v Mediterranean and Gulf Cooperative Insurance and Reinsurance Company [2023] EWHC 1859 (Comm) (21 July 2023)

This decision provides helpful insight into how the Courts will deal with insurance claims for sums due under a settlement agreement.

Technip was the principal contractor for a project in an offshore oil and gas field in the Persian Gulf. In 2015, a vessel that Technip had chartered collided with and damaged a platform in the field. Technip and the platform owner, KJO, reached a settlement for US$25 million, which Technip sought to claim from the defendant insurer (“Medgulf”), along with other alleged losses, under the liability section of its Offshore Constructions All Risks policy. The settlement had occurred some three years after Medgulf had declined indemnity for the original claim, instead telling Technip that it should act as a “prudent uninsured”.

Claiming losses under Settlement Agreements

Technip -v- Medgulf confirmed the general principle under English Law that it is not enough for a policyholder simply to prove that a settlement agreement reached with a third party is reasonable in order to claim for the resulting loss under a liability policy, but it must also prove that there was a legal liability to the third party and that the settlement does not exceed the amount of that liability. In other words, the law does not provide a carte blanche to policyholders to settle disputes with third parties and expect a liability insurer to pick up the tab.

Settlement Agreements and Insurer’s Consent

Liability policies very commonly require the insurer’s consent before a policyholder takes various steps during a dispute with a third party. These can include admission of liability, settlement discussions, negotiations and entering settlement agreements.

Here, the Policy provided an indemnity to Technip for its ‘Ultimate Net Loss’ (“UNL”), which was defined as:

the total sum the Insured is obligated to pay as Damages …”

Damages were defined as:

“…compensatory damages, monetary judgments, awards, and/or compromise settlements entered with Underwriters’ consent, but shall not include fines or penalties, punitive damages, exemplary damages, equitable relief, injunctive relief or any additional damages resulting from the multiplication of compensatory damages”. (Our emphasis)

Technip did not obtain Medgulf’s consent before concluding the settlement agreement, and Medgulf predictably argued that the settlement sum therefore did not fall within the definition of  “Damages”.

Technip successfully argued that the sums payable under the Settlement Agreement comprised, in part, “compensatory damages” and so fell under the definition of “Damages” under the Policy. Medgulf had argued that the four categories identified in the first part of the definition of “Damages” had a degree of separation and that, crucially, “compensatory damages” must be sums awarded by a court or tribunal, which would not be applicable to the US$25 million Technip paid to KJO. The Court rejected this argument, however, and did not view the four categories as disjunctive: the settlement payment was caught by the definition of “compensatory damages” within the ordinary meaning of the term, with the result that the absence of consent by Medgulf was irrelevant.

Furthermore, Technip argued that, even if the settlement sum did not constitute “compensatory damages” and instead was only potentially covered as a “compromise settlement”, there was still no need for Medgulf’s consent given that it had refused to indemnify Technip in 2016 (three years before the Settlement Agreement) and told Technip to act as a ‘prudent uninsured’. Technip contended that, in these circumstances, the provision requiring consent could not apply, as the provision presupposed the insurer’s acceptance of liability under the Policy.

The Court agreed with Technip and held that it “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”. So, in short, the Court found that Medgulf was prevented from relying on the “Underwriter’s consent” part of “compromise settlements”.

Summary

Although Technip’s claim for an indemnity ultimately failed on other grounds, the Court’s comments concerning insurers’ inability to rely on terms requiring their consent once they have told the policyholder to act as a prudent uninsured (or use similar language) are plainly useful for other policyholders. The decision stands in welcome contrast to the Privy Council’s judgment in Diab v Regent [2006] UKPC 29, which had seemingly held that, where an insurer has declined indemnity, a policyholder is still bound by all the claim conditions, including the need to seek insurer’s consent for a settlement. The policyholder in Diab had also raised an estoppel argument, which failed because the Court viewed the alleged representation of the insurer as essentially a warning not to pursue a claim under the policy, and not as an indication that, if the policyholder did pursue the claim, it would not be expected to comply with the procedural requirements of the policy.

Fun Fact: The event leading to the Damage in Technip -v- Medgulf was referred to throughout the Trial as an allision rather than a collision, an allision being where one of the objects involved is stationary.

Authors:

Dru Corfield, Associate

Toby Nabarro, Associate

Jonathan Corman, Partner

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