How to update my already installed Ubuntu Touch image?

Updating through the system settings will do an image upgrade which only works when the image is not in writable image mode.

This rather different than doing a package update through apt-get.

These two mechanisms are mutually exclusive:

• Image Based Upgrades work on non writable images (read only filesystem)
• Apt get works on writable images

Once on writable image mode the way to get back is to reflash the system (not necessarily losing your user data).

adb shell rm /userdata/.writable_image
ubuntu-device-flash [--channel channel_name]

Details on image based upgrades can be read further here: https://wiki.ubuntu.com/ImageBasedUpgrades

There is a third possibility and that's the one that you may have installed a cdimage based image which is writable by default and today is considered an intermediate image to get to the system images.

For those who stumble upon this question looking for support for Ubuntu Touch. Canonical stopped support for Ubuntu Touch on 5 April 2017. The project was taken over by UBports as a community project. You can install and maintain Ubuntu Touch on their website Ubuntu Touch