Professional Liability Guide

CHAPTER 15 – PRIOR WRITTEN CONSENT

In the case of a denial of indemnity, the available authorities draw a distinction between whether an insurer’s declinature amounts to a repudiation of the policy (i.e. denying the policy’s existence) or simply a repudiation of liability under it (but accepting the existence of a binding contract). In Distillers Company Bio-Chemicals (Australia) Pty Ltd v Ajax Insurance Company Ltd , Menzies, J acknowledged that ‘the insured may make a reasonable settlement where the insurer breaches the contract by denying liability and refusing to defend or settle’. 616 In that instance, however, there had been no repudiation of the policy, so the insurer was able to rely on the compromise clause. Conversely, in General Omnibus Company Ltd v London General Assurance Company Ltd 617 (cited in Distillers ), it was held that a compromise clause could not be relied on by an insurer who had denied liability in respect of a particular claim the insured had subsequently settled on reasonable terms. More recently, in Commercial Union Insurance Company Limited v Willetts Radio & TV Limited, 618 the New Zealand Court of Appeal also found the insurer’s denial of indemnity amounted to a repudiation of the policy, thereby disentitling the insurer to rely on a compromise clause. The Court explained the distinction between a repudiation of the policy and a repudiation of liability in the following terms: ‘The distinction lies between the insurer saying, on the one hand, that there is no contract between it and the insured named in the policy in respect of the loss resulting from a particular occurrence, that such occurrence is outside the terms of the policy altogether, and saying, on the other hand, that because of some failure to comply with a term of the policy, or, with a policy such as the present one, because it considers that the insured has not become liable to another, notwithstanding that the risk is one coming within the policy, the insurer is not liable. The first is a repudiation of the policy, the second of liability; in the first it cannot raise as a defence to a claim by the insured failure on the latter’s part to comply with the conditions of the policy, in the second it can.’ 619 A similar situation may arise when an insured is directed to act as a ‘prudent uninsured.’ In CGU Insurance Ltd v AMP Financial Planning Pty Ltd, Gleeson and Crennan JJ, in adopting the reasoning of Gyles J from the proceeding below, said that: ‘To act as a prudent uninsured is, for relevant present purposes and leaving aside onus, similar to the position of an insured denied cover in breach of contract. A prudent uninsured might arrive at an objectively reasonable settlement in the light of its potential liability and pay accordingly.’ 620 The use of this oft-quoted phrase, without clarification by the user as to precisely what is intended, may have the unintended effect of preventing reliance on a compromise clause, where a settlement is otherwise objectively reasonable. In the latter instance, provided an insured can establish a settlement is reasonable, it will be entitled to indemnity.

What then constitutes a reasonable settlement?

616 (1974) 130 CLR 1, 9. 617 [1936] IR 596. 618 (1985) 3 ANZ Ins Cas 60–677. 619 Ibid 79,253. 620 (2007) 235 CLR 1, 10.

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