23 August 202218 minute read

DLA Piper's Practical Guide for Claims Managers in 2022 – Part 8


This month’s Practical Guide for Claims Managers covers the topic of settlement of insurance claims and coverage disputes. Similar – but additional – settlement issues arise when settling underlying litigation, and also when considering settlement of reinsurance contract disputes, which we do not address here. Each insurance claim will inevitably require its own specific consideration. We provide tips on the key questions to ask (and answer) that should help shape your negotiation and the key provisions of your settlement agreement. We do not address the terms of standard or boilerplate clauses in this month's Guide, but we have our own recommended set of standard provisions, if you need assistance with your settlement agreements.

We also do not address tax issues here. Tax is a specialist topic in respect of which we always recommend specific advice is sought.

Reinsurance settlements can often give rise to a host of additional considerations. We will consider these in a subsequent edition. Of course, insurers should always keep in mind their outwards reinsurance programmes when making inwards settlements and we comment briefly on this aspect below.

Preparing for settlement: key points of negotiation

You might think that the insurance claim that you are seeking to resolve is fairly typical and that – assuming you can reach an amenable compromise on quantum – agreeing the remainder of the settlement terms should be straightforward. Sometimes it can be.

However, the more you can do to prepare ahead of engaging in settlement discussions, the better equipped you will be to negotiate: you will know if there are particular issues of importance to you or unusual features of the settlement structure that you need to address in order to meet business or commercial needs or which might require a more nuanced approach.

The following points aim to assist you with your preparation.

1. Scope of the settled "claim"

The first but not always most straightforward question to consider is this: what are you settling?

Whilst insurance claims commonly consist of a single known claim, particular thought should be given to the exact definition of the "claim" that is being settled. This will be one of the top priorities to address.

It may be that the subject matter of the claim is specific and easily identifiable, such as the subject matter of Court proceedings, or if you are settling any claims that might emerge from notified circumstances, it may be that those circumstances are only likely to lead to one easily identifiable claim, such as a claim for property damage as a result of a fire.

In other cases, the position will not be quite so straightforward. Consideration should be given to the breadth of the subject matter of the claim or circumstances, and the prospects of any (or any further or related) claim arising out of that same subject matter and whether the settlement is intended, as typically will be the case, to be wide enough to extinguish both the known and unknown aspects of the subject matter at hand.

To take the example of a COVID-19 business interruption claim, in these kinds of cases there may have been multiple lockdowns or waves of infections triggering business interruption cover under more than one limb of a policy or perhaps more than one policy issued by the same insurer. In these circumstances, insurers are likely to want any settlement to encompass all claims "arising out of or in any way connected to" the outbreak of COVID-19.

Another example is claims under warranty and indemnity policies, where the subject matter of multiple separate claims is often unrelated, save that the problems have all been discovered in respect of the same corporate transaction, following completion. In such cases, insurers may be looking to settle all breach of warranty claims that could be brought under the policy, at any time, perhaps with a carve-out for tax indemnities only. Reaching an agreement that is clear where the settlement ends and the carve-out begins is crucial.

2. Who needs to be a party to the settlement and/or benefit from its terms?

Most insurance policies are composite policies, meaning that the policy operates as a separate contract of insurance between the insurer and each insured under the policy.

That means that, as well as focusing on the signatories to any settlement agreement who will be bound by its terms, insurers should also be thinking about (at least) two other categories of parties who might be impacted by the settlement:

  • Other insured entities (including individuals) who might be able to bring a claim relating to the same subject matter.

This issue warrants particular consideration if, for example, a parent company is negotiating the settlement of an insurance claim where the loss has been suffered at the subsidiary level; or where the company is resolving insurance claims in connection with litigation brought against both the company and its employees. In these situations, insurers should be asking the parent to warrant that it is authorised to bind its subsidiaries and employees to the terms of the settlement and the "claim" and "release" language (see below) should encompass the parent company as well as the relevant subsidiary and all other relevant entities or persons that are caught within the “insured” definition in the policy.  

In the context of D&O policies, there may be good reason for the settlement to focus solely on the resolution of one director's claim only, perhaps with another director's claim being unaffected. Again, the definition of "claim" and the scope of the "release" language will be key to achieving that result.

  • Other parties who might reasonably wish to rely on the terms of the settlement, for example, to obtain a full release of all liability to the counterparty.

Typically, in a coverage dispute, the insurer that issued the policy will be the target of any claim, but sometimes an insured will (or might in the future) pursue claims against other companies within the same insurance group, particularly in a complex insurance programme, or one which has a local fronting arrangement. This issue requires particular consideration when settling claims brought against UK insurers who – in order to deal with Brexit - re-distributed their business between UK and EU entities. If there is any doubt as to where/by whom the risk is insured, it may be advisable to ensure that both entities are parties to the settlement agreement.

Alternatively, the settlement agreement may identify one or more third parties, for example an associated company or its employees, directors or officers etc, as named “releasees” in the settlement agreement. Under English law, it is not necessary for such entities or individuals to actually be parties (or signatories) to the settlement agreement in order to take the benefit of any release of liability that is negotiated on their behalf; so long as the agreement expressly identifies these third parties by name, as a member of a class, or as answering to a particular description, they can assert the benefit of the settlement agreement pursuant to the Contracts (Rights of Third Parties) Act 1999.  

3. Scope and timing of the "release"

Broadly speaking, in return for the payment of the settlement amount, an insurer will be released from all liability in respect of the insured’s "claim". The release should be drafted in as simple terms as possible, while covering all, but not more than, the range of claims that the parties intend to release and which are “caught” by the agreed definition of "claim" as used in the settlement agreement. 

A point that needs to be negotiated is when the release of liability in insurers’ favour takes effect. Insurers will want to be released from all liability at the earliest opportunity, such as upon execution of the settlement agreement. Some insureds may be comfortable with this approach, acknowledging that insurers routinely engage in settlements and (absent unforeseen circumstances) cannot afford to gain a reputation for defaulting on settlement payment obligations.

Alternatively, the agreement may provide that the insurer is released from liability only once all settlement monies are received and cleared in the insured's account. This point can be difficult to resolve where large subscription markets are involved in the settlement and the mechanics of collection and payment to the insured may take some time. A compromise may be to agree that the payment obligations of each insurer are several (not joint) and the release will be effective in respect of each insurer upon that insurer's payment of its respective share of the settlement sum to the insured.

It is not uncommon for releases to be agreed on reciprocal terms, such that insurers agree to provide a corresponding release to the insured in respect of all claims also.

A particularly sensitive issue in this regard is what to do about fraud. Fraud may be rare, but most insurers will want to have recourse against an insured in the event that a settled claim turns out to have been made fraudulently. If the insurer wishes to preserve the ability to bring a claim for fraud later on, this should be expressly carved out of the scope of the release granted by the insurer.

Insurers should also check that the effect of any "entire agreement" clause (ie which says the settlement agreement constitutes the whole and only agreement between the parties relating to the subject matter of the settlement agreement) does not preclude them from bringing an action against the insured for fraudulent misrepresentation.

4. Who is paying whom? And how much?

The settlement amount will clearly be a key commercial term in any settlement negotiation.

Any settlement agreement should make clear the amount for which each insurer agreeing to settle a claim is responsible. This point is especially important to draft clearly when dealing with a subscription market and/or where the "following" insurers are not signatories to the agreement, but have granted authority to the lead insurer(s) on their slip to agree settlement terms on their behalf. Where multiple insurers are contributing to a settlement payment, each insurer is likely to want to ensure that their respective liability for their share of the settlement sum is several from that of the other insurers.

The agreement should also make clear what the position is on costs; are the parties each to bear their own costs of the claim or dispute? Or is there an agreement that one party will be responsible for (some of) the other party’s costs? If no provision for costs is made, the Court will not imply a term in relation to costs. The natural inference will be that each party will bear its own.

Almost as important as the amount of the settlement payment will be the mechanics of that payment. In particular, the timing of the payment may be a keenly negotiated point. Factors such as the currency of the settlement and location of the insured may impact upon the timing of a settlement payment, especially if an insured is located in a territory that may require advanced KYC type checks before a payment by an insurer can be processed. Any delay in payment by an insurer and receipt of payment by an insured may have exchange rate implications, so the settlement agreement should be clear on all aspects of the payment to be made, including (but not limited to): amount, timing, currency, and account details.

Where payment is being made to an agent or intermediary, for example, to the insured's legal counsel or broker, it may be important to record in the settlement agreement that payment of the agreed settlement sum to that intermediary's account operates to discharge the insurers’ liability to make payment to the insured in respect of that sum.  This is to avoid the risk that insurers remain liable to the insured for the settlement sum in the event that the insured’s agent or intermediary fails, for any reason, to remit the payment to their insured client. For example, there have been numerous examples in the marketplace of settlement payment transfers being targeted by fraudsters looking for cyber security weaknesses in the chain of parties involved in a settlement payment.     

5. Is confidentiality an issue?

Whilst typically regarded as a boilerplate term, the confidentiality provision in a settlement agreement should not be overlooked, particularly in cases where insurers face claims from multiple (distinct) insureds in respect of similar claims, for example, COVID-19 business interruption claims; or in the context of D&O claims, where each director is a separate insured party who is likely to be in close contact with other directors who are all insureds under the same D&O policy. Agreeing settlement to dispose of one insured party’s claim might encourage others to be brought, and so confidentiality of the fact of the settlement, and its terms, will be key.  

That said, there will usually need to be well-defined carve-outs from the confidentiality provisions to permit the parties to disclose information to certain specified third parties. Insurers should give advance consideration as to who these parties may need to be, for example, reinsurers, parent companies, professional advisors, and regulators.

6. How do insurers preserve rights to pursue recoveries from a third party?

Insurers typically rely on two legal mechanisms to permit recovery actions:

  • The insured’s assignment of its rights to insurers, as a result of which insurers can pursue recoveries against third parties in the insurers’ own name(s). Assignment must be expressly provided for in the policy (or another contract).
  • Subrogation rights, as a result of which insurers effectively “step into the shoes” of the insured and can pursue recoveries in the insured's name.

Under English law, insurers acquire rights of subrogation automatically, upon payment of indemnity under a policy, ie payment of a sum due in respect of a covered claim.

However, most settlement agreements contain a provision setting out that no admissions are made by either party in respect of any liability to the other. In other words, insurers expressly disclaim that they have any liability to make the payment to the insured (other than pursuant to terms of the settlement agreement itself). Therefore, insurers will not ordinarily acquire subrogation rights in respect of a settlement payment.

If insurers wish to acquire rights that are equivalent to subrogation rights, the parties need to agree specific terms to deliver that outcome. This can be done, for example, by agreeing that, solely for the purposes of the application of the policy provisions relating to subrogation, the insurers' settlement payment shall be deemed to be payment of a covered claim.

Additionally (or alternatively), the express provisions that often appear in the policy that provide for the assignment of all rights to insurers could be incorporated into - or replicated in - the settlement agreement so that the insured has ongoing obligations to assign all rights to insurers to enable them to pursue any recovery action.

It may also be necessary to obtain a fresh undertaking from the insured (or to incorporate any pertinent provisions from the policy) to the effect that they will continue to co-operate with and provide assistance to insurers in respect of any recovery actions. The extent of the obligation to co-operate might be qualified by a reasonable/best endeavours obligation on the part of the insured.  

7. Consideration of outwards reinsurances

As noted above, it is very common for settlements to be made on a “non admission” basis, or “without prejudice” to either party’s strict legal rights. The payments made by insurers under these types of settlements may be referred to as “without prejudice” or even “ex gratia” payments.

Insurers will need to consider the impact that this type of provision in the settlement could have on their ability to recover under any applicable outwards reinsurance(s).

The wording of the reinsurance contract, particularly any “follow the settlements” provision, should be considered to ensure that, insofar as practicable, the inwards settlement being negotiated will fall within the scope of any outwards reinsurance cover.

Often, inwards settlements will only be required to be reasonable (or proper and businesslike) in order to meet the requirements of the reinsurance programme in this regard. However, there are circumstances in which the cover provided by outwards reinsurance programmes can be narrower.

Insurers will wish to check whether “without prejudice” or “ex gratia” payments are expressly excluded from their outwards protections and, if so, whether any additional steps could be taken (eg via dialogue with reinsurers prior to agreeing the settlement) to preserve the outwards protection that would otherwise be available.

For example, although insurers may have adopted a negotiating position on the inwards settlement that no payment was due and insurers were only settling for commercial reasons without any admission of liability, insurers may be able to evidence separately to reinsurers that there was an actual liability under the original policy such that insurers' payment should not be regarded as an “ex gratia” payment under the reinsurance.

8. Formalities for conclusion of proceedings

Where formal proceedings have been commenced against insurers, the settlement agreement should make clear that the insured must take all necessary steps to bring those proceedings to a conclusion and provide evidence to insurers of the same.

When proceedings have been commenced in another jurisdiction in particular, to be certain that the requisite steps are taken, insurers may want to insist that these steps are completed after the settlement agreement has been signed but in advance of insurers being obliged to pay the settlement sum.

In English court proceedings, it may be appropriate to embody the settlement agreement in a “Tomlin” order whereby the settlement terms are set out in a schedule to the order that the parties ask the court to approve to conclude the proceedings.

Another approach would be to make "time of the essence" in respect of these types of obligations meaning that, if the insured failed to take such steps on a timely basis, insurers would be entitled to terminate the settlement agreement.

The specific formalities for concluding the proceedings must be considered both in the wider context of the settlement and in the terms of the settlement reached; for example, are the proceedings to be stayed, discontinued or dismissed? A stay, which is typical in a “Tomlin” order in English proceedings, will only suspend proceedings (which could be useful if the proceedings need to be resolved in the event of a default of the settlement terms), whereas a discontinuance or a dismissal will bring the proceedings to a permanent close.

9. Does the governing law of the policy have to be the law of the settlement agreement?

The governing law of a settlement agreement will often be the same system of law that governs the policy. However, under English law, the settlement agreement can be subject to a different governing law. This may not be the case under other systems of law and the law governing the policy should be considered in this respect.   

In any case, it is almost always advisable to ensure that the settlement agreement contains a clearly drafted express choice of law clause and an express clause that identifies the forum or jurisdiction in which any dispute under or concerning the settlement agreement should take place. Such a jurisdiction clause may provide that the courts of the chosen jurisdiction may have exclusive or non-exclusive jurisdiction to determine the claim (we will cover jurisdiction agreements in more detail in a future edition of this Practical Guide).  

Following Brexit, the Hague Choice of Courts Convention provides for the recognition of certain types of English choice of court clauses and enforcement of English judgments in EU member states, Singapore, Mexico, and Montenegro (although insurers should be aware that the Convention is not applicable to all contracts of insurance). Further details about these issues can be found in our article, Brexit: Choice of Law, Jurisdiction, Enforcement, and Service.


Jane Childs is a Partner and leads DLA Piper's International Financial Lines Insurance Disputes group. David Evans is an Associate in the Insurance and Reinsurance Disputes team in the UK. The UK Insurance and Reinsurance Disputes team forms part of DLA Piper's leading, multi-disciplinary, global insurance sector, consisting of over 400 lawyers representing major insurance and reinsurance companies internationally on all aspects of their business, including claims, disputes and investigations, transactional, regulatory and all forms of commercial advisory work.

To find out more about DLA Piper's insurance capabilities in the UK and globally, please click here.

This publication is intended as a general overview and discussion of the subjects dealt with under English law at the time of original publication and does not create a lawyer-client relationship. It is not intended to be, and should not be used as, a substitute for taking legal advice in any specific situation.