Assured to act as ‘prudent uninsured’

A recent decision of the High Court of Australia, CGU Insurance Ltd v AMP Financial Planning Pty Ltd [2007] HCA 36, is a critical one. It deals with a question which is raised very frequently in practice but to date not satisfactorily resolved: if liability insurers refuse to accept liability but require the assured to act as a ‘prudent uninsured’, and the assured reaches a settlement with third party claimants, are the insurers in any way prevented from relying on their rights under the policy? The matter is complicated in Australia by the intervention of s13 of the Insurance Contracts Act 1984, which states that ‘a contract of insurance is a contract based on the utmost good faith and there is implied in such a contract a provision requiring each party to it to act towards the other party, in respect of any matter arising under or in relation to it, with the utmost good faith’. English law has not yet adopted this principle, although recent court decisions on avoidance and on claims handling come close to it, and the Law Commissions are presently considering whether the principle should become statutory. CGU v AMP is, therefore, of great importance to the common law world as a whole.