Insurers have been warned to take a closer look at their reinsurance policies after a High Court ruling.

The question in Faraday Capital v Copenhagen Re was whether the primary insurer, Faraday, could recover under a facultative reinsurance policy after agreeing a without prejudice settlement with its insured.

The reinsurance policy included a 'follow the settlements' clause which excluded settlements made on a without prejudice or ex-gratia basis.

Faraday argued that the reference to "without prejudice settlements" should be construed as being limited to provisional, non-final or non-binding settlements. It suggested that excluding settlements such as the agreement with its insured would be uncommercial and could not have been intended.

But Copenhagen Re argued that the term "without prejudice" was intended to refer to any settlement in which liability was not admitted. The parties had agreed to exclude settlements of this kind, and there was nothing uncommercial about giving effect to such an agreement, it said.

The court preferred Copenhagen Re's construction, ruling that "settlement" meant any binding agreement. The reference to without prejudice settlements, therefore, could only be a reference to settlements without admission of liability.