The English court of appeal has reminded us of two insurance principles that are worth remembering:

  1. If there is no “follow the settlements” clause in a reinsurance policy, in order to trigger liability the insured must establish that it is, as a matter of law, liable to the third party claimant and that the loss falls within the terms of its cover. Whether there is liability is a question of fact and depends on a settlement between insurer and insured, or on the decision of a court or arbitration tribunal. A settlement entered into between the insured and the third party claimant is not necessarily binding on the insurer if there is in fact no legal liability binding on the insurer.
  2. On defence costs, if there is no duty to defend claims and defence costs are included in the limits of indemnity, this means that defence costs can only be recovered if there is liability under the policy.

If you want the details read AstraZeneca Insurance Co Ltd v XL Insurance (Bermuda) Ltd and Another.