In October 2025, the New South Wales Court of Appeal addressed the significant question in insurance law whether the insured who terminates a policy following the wrongful repudiation by the insurer remains to get the bound insurer’s consent to settle their liability to a third party. The case arose from an accident on a construction site, where a worker sustained injuries and obtained a consent judgment against the insured builder.
The court confirmed that once an insurer wrongfully repudiates a policy and the insured accepts that repudiation and terminates the policy, the insured is no longer bound by policy conditions requiring the insurer’s consent to settle. In such circumstances, the insured may recover under the policy if the settlement reached with the injured third party relates to a liability to which the policy would have responded and if the amount is reasonable in light of the circumstances. The assessment of reasonableness considers factors such as the potential exposure to a higher judgment, evidentiary risks, and litigation costs. In this case, the consent judgment of $430,000 was found to be reasonable given the original claim exceeded $1 million, the nature of the injuries, and expert evidence pointing to a managerial failure on site causing the injury.
As a result of this finding, the heart of the matter was the interpretation of the policy’s insuring clause, which promised indemnity for “all sums that you become legally liable to pay as compensation for Personal Injury.” The insurer argued that this clause required liability imposed by law rather than assumed by agreement, and that the insured’s failure to obtain consent for the settlement breached policy conditions. The court rejected this argument, holding that legal liability includes liability determined by judgment or settlement, provided the agreement is bona fide and objectively reasonable. This interpretation is consistent with long-standing authority, including Post Office v Norwich Union Fire Insurance Society Ltd and subsequent Australian decisions.
The court emphasised that the insured was not required to prove actual liability to the claimant; it was sufficient to demonstrate that the settlement was objectively reasonable and related to a risk covered by the policy.
This decision reinforces important principles in liability insurance. Wrongful repudiation leading to termination by the insured releases the insured from compliance thereafter with consent conditions, and a settlement reasonably concluded with the third party in all the circumstances may establish indemnity without proof of actual liability. It also clarifies that “legal liability” under such policies encompasses liabilities determined by settlement, provided the agreement is genuine and reasonable. For insurers, the case serves as a caution against ill-conceived repudiation. But for the wrongful repudiation in the present matter, the insured would have required the insurer’s consent to settle the third-party claim.