Settlement by Insured with third party without Insurers’ prior consent in breach of policy conditions

Netherlands, UK

In this Dutch case, VolkerWessels v PI-Insurers, the Court found that an Insured who entered into a settlement agreement with a third party without Insurers’ prior written consent breached policy conditions. CMS acted on behalf of PI Insurers.

The Court held that there may be circumstances in which an Insured may enter into a full and final settlement with a third party without breaching specific policy conditions, but the Insured must (1) obtain explicit consent from PI Insurers; or (2) have been able to evidence such consent from Insurers' conduct.

While Dutch law applied, it is of interest to London market Insurers for two reasons:

  1. The Court affirmed that when interpreting policy wording placed in the London market, London insurance market practices may be taken into consideration by the Dutch Courts; and

  2. The Court’s primary consideration was the objective meaning of the policy wording, and the Court dismissed arguments around a more limited interpretation of the phrase “provided that the rights of recourse…are not waived”.

Background

The matter concerns a project to build residential and office towers in Amsterdam. The Insured, a VolkerWessels consortium, was the main contractor who appointed a subcontractor to, amongst other things, prepare measurements relating to the excavation pit.

It was common ground that the subcontractor had made an error, causing loss in the region of EUR 9 million. The Insured sought to claim against the subcontractor, and also put its own PI Insurer on notice.

The Insured entered into settlement discussions with the subcontractor, where the figure of EUR 1.5 million was discussed, being the limit of the subcontractor’s own PI policy. Any settlement would be on a full and final basis. This figure aligned with the Insured’s excess under its PI policy, and under Dutch law the Insured would retain this full sum.

Ahead of entering into the settlement agreement, the Insured informed its PI Insurers of the proposed settlement and indicated that it wished to enter into this in short order, given rumours concerning the financial position of the subcontractor.

PI Insurers were provided with the draft settlement agreement, but as no information was provided in relation to the subcontractor’s financial position, PI Insurers did not agree to the settlement proposal. PI Insurers specifically wrote stating that the Insured was advised to “act as a prudent uninsured…any deal should NOT be in full and final settlement…this is Without Prejudice to the policy position”.

The Insured nevertheless entered into the settlement agreement, and sought to claim the balance of the loss from PI Insurers under a vicarious liability clause in the PI policy. PI Insurers declined cover, relying on wording in the vicarious liability clause reading “Insurers will indemnify the Insured in respect of its liability arising out of negligence by…sub-contractors…provided that the rights of recourse against such specialist designers, consultants or sub-contractors are not waived”. There was a further proviso that read “provided always that…The Insurers will become subrogated to all rights of recourse of the Insured against such specialist consultants or sub-contractors”. PI Insurers also noted that the Insured had acted against PI Insurers’ instructions and had prejudiced their interests in doing so.

The dispute

The Insured challenged the declinature. A variety of arguments were put forward as to the interpretation of the policy wording, the key argument being that the wording “provided that the rights of recourse…are not waived” applied only to waivers in the underlying contracts and not a full and final settlement entered into after the underlying contracts and PI policy are entered into. As there was no such waiver in the contract between the Insured and the sub-contractor, it was argued that the full and final nature of the settlement agreement did not breach the policy conditions.

PI Insurers’ position was straightforward: the wording and intention of the policy was clear, there was no wording that suggested the “waiver” was limited to the underlying contracts, and the Insured acted contrary to the specific instructions of PI Insurers. In relying on the policy conditions, PI Insurers had not acted unreasonably or unfairly (a requirement that it is necessary to demonstrate under Dutch law).

The law

It was not disputed between the parties that the PI policy was concluded in the London market and that the disputed provision(s) in the PI policy were not negotiated.

The Court set out the established law that in such cases, the interpretation of insurance terms and conditions is to be based on an objective reading of the wording, taking into account the meaning and effect of the policy terms and conditions as a whole and any explanatory notes. When interpreting the wording, London insurance market practices may be taken into consideration.

Decision

The Court dismissed the Insured’s interpretation of the policy wording. The Court looked to the objective meaning of the wording, and held that the provisos in the vicarious liability clause were not limited to the underlying contracts and applied to later events giving rise to the loss.

It was not in dispute that the Insured did in fact waive the rights of recourse against the subcontractor. The Court therefore held that the policy conditions had not been met and, so, no cover was available.

The Court added that the position could be different in circumstances where PI Insurers had given consent to enter into a full and final settlement with the subcontractor, or if an Insured could demonstrate such consent by the PI Insurers’ conduct. However, in these circumstances not only had no consent been given, but PI Insurers also explicitly directed the Insured not to settle on a full and final basis.

The Court rejected the Insured’s argument that PI Insurers’ approach was, in view of the subcontractors’ financial position, unacceptable according to standards of reasonableness and fairness. The Court noted that a PI Insurer is entitled to determine the limits and conditions on which it is prepared to provide cover, and that relying on those conditions will not easily be unacceptable.

Comment

While the Court applied Dutch law, the decision is of interest to London market Insurers:

  1. The Court acknowledged that London market practice can be relevant for the interpretation of a policy. However, in this case the Court based its judgment on an objective reading of the wording of the policy and, while both parties sought input from English lawyers, the Court did not find this to be of particular persuasion in this matter. We would however note that in such matters, it remains sensible for legal advice under both Dutch and English law to be sought, in order to marry up the provisions of Dutch law with London market practice; and

  2. The Court’s primary consideration was an objective reading of the policy wording. The Court did not entertain protracted legal arguments seeking to limit or “spin” the meaning of the wording, which underlines the general approach that the wording is key (especially where the parties did not negotiate the wording of the relevant policy conditions).

In relation to Dutch law, the Court referred to the landmark judgment in the so-called Valschermzweeftoestel judgment (in English: the parachute glider plane judgment)  in which the Dutch Supreme Court founded the legal concept of “primary description of cover”. This legal concept provides that an Insurer is in principle free to determine the limits within which they are prepared to provide cover. While it is possible that reliance on policy limits and conditions could be deemed unacceptable according to standards of reasonableness and fairness, this would only be in extraordinary circumstances.

Finally, this case is a reminder to Insureds of the importance of providing all necessary information to Insurers, and to comply with both the policy conditions and Insurers' instructions.

VolkerWessels v PI-Insurers ECLI:NL:RBROT:2022:2677