Professional Liability Guide

CHAPTER 15 – PRIOR WRITTEN CONSENT

The section was introduced to overcome the problem exemplified in Distillers , where an insurer who has not repudiated a policy (but has not admitted any liability to indemnify an insured) can rely on a compromise clause. The section is designed to prevent an insurer from fence-sitting by compelling it to decide either to accept or reject liability. Where the insurer does not elect within a reasonable time or rejects liability, the insured is relieved of its obligations under the compromise clause. Conversely, it was considered in Drayton v Martin 627 that the section is not intended to address a case where an insurer has wrongfully repudiated a policy. In those circumstances, an insured can settle or compromise a claim in the absence of an insurer’s consent without adverse consequences (as in the cases General Omnibus Company v London General Assurance Company 628 and Commercial Union Insurance Company Limited v Willetts Radio 629 ). When section 41 is invoked, an insured is, of course, under a duty to act in good faith to an insurer, have proper regard for its interests, and establish that any settlement effected is objectively reasonable.

627 (1996) 67 FCR 1. 628 [1936] IR 596. 629 [1985] NZHC 556.

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