UK: Interpretation and Application of the "Contractual Liability" Exclusion in a Liability Insurance Policy

Omega Proteins Ltd v Aspen Insurance UK LTD [2010]

Commercial Court 10 September 2010

This case considered whether, where a liability policy contained an exclusion excluding liability arising under a contract, unless such liability would have attached in the absence of such a contract, and where there was a judgment finding the insured liable for breach of contract, that foreclosed the question as to whether there was also tortious liability that would fall within the terms of cover.

The Claimant, Omega Proteins Limited ("Omega") claimed against the defendant insurer, Aspen Insurance UK Limited ("Aspen") under the Third Parties (Rights Against Insurers) Act 1930.

Omega carried on business processing by-products from animal carcasses used in the meat industry, which it then supplied to pet food manufacturers and others. A meat processing company, Northern Counties Meat Limited ("Northern Counties") supplied Omega with contaminated animal carcasses which Omega then, unaware of the contamination, supplied to one of its customers who used the material and suffered losses in consequence. In the ensuing litigation, Omega was found liable to pay damages to its customer for breach of contract and Northern Counties was found liable to indemnify Omega against its liability to its customer. The judgment against Northern Counties was based purely in contract, namely breach of an express contractual term regarding the category of material to be supplied, as well as a breach of the implied terms of satisfactory quality and fitness for purpose. No claim or allegation was made in those proceedings that Northern Counties had been negligent or was liable to Omega by virtue of any non contractual obligation.

Northern Counties was in liquidation and was unable to satisfy the judgment against it. Omega therefore claimed against Northern Counties' insurer, Aspen, under a combined liability insurance policy providing coverage against employers' liability, public liability, product liability and pollution liability. The relevant insuring provision provided:

"Section C: Product Liability

The Company will indemnify the Insured against all sums which the Insured becomes legally liable to pay for damages and claimants' costs and expenses arising out of or in connection with

i) accidental Bodily Injury to any person

ii) accidental loss of damage to tangible property

happening during the Period of Insurance in connection with the Business and caused by any Product.

The Company will also pay Defence Costs in addition to the Limit of Indemnity."

The policy also included the following exclusion:

"The Company will not indemnify the Insured against any liability arising ... under any contract or agreement unless such liability would have attached in the absence of such contract or agreement."

Aspen, relying on London Borough of Redbridge v Municipal Mutual Insurance Limited [2001] Lloyd's Rep IR 545, submitted that Omega could not go behind the judgment, which conclusively determined that the liability of Omega was in contract and lacked any finding of liability on any other basis.

Omega argued that such a proposition would mean re-writing the exclusion so as to read: "unless the judge in the trial which established liability had expressed the view that liability would arise in the absence of contract" or something to that effect. Further, Omega argued that in most cases it is the insured who claims against the insurer, having received a claim from a third party, and it cannot be right, and the parties cannot have intended, that the question of what cover the insured is entitled to under the policy should be determined by the choice that the third party makes in relation to the claims it makes against the insured.

Having considered the arguments, the court held as follows:

1. The exclusion clause invited consideration as to what liability would have attached in the absence of a contract; not as to what liability in tort would have arisen in the presence of one; nor as to whether there was liability in tort as well as in contract. The court had to consider what liability there would have been if there had been no contract between Omega and Northern Counties but the facts were otherwise as they were. On those facts there would have been a liability on Northern Counties in tort if it had been negligent in allowing the material to be supplied without any warning that it was only fit for disposal: an action which would foreseeably cause and did cause actual physical damage to Omega's property.

2. In relation to liability insurance the insured must establish that it had suffered a loss which was covered by one of the perils insured against.1 That may be done by showing a judgment or an arbitration award against the insured or an agreement to pay. The loss must be within the scope of the cover provided by the policy. As a matter of practicality, the judgment, award, or agreement might settle the question as to whether the loss was covered by the policy because the insurers would accept it as showing a basis of liability which was within the scope of the cover. But neither the judgment nor the agreement are determinative of whether or not the loss is covered by the policy (assuming that the insurer was not a party to either and that there was no agreement by the insurer to be bound). It is, therefore, open to the insurers to dispute that the insured is in fact liable, or that it was liable on the basis specified in the judgment; or to show that the true basis of liability fell within an exception.2 It was no part of the judge's function in the earlier action to decide whether the liability of Northern Counties came within the cover of the policy, much less to decide the hypothetical question as to whether or not, in the absence of a contract, Northern Counties would have come under any liability. The judgment was conclusive that Northern Counties had suffered a loss, but it was not evidence that Northern Counties has no tortious liability. It was open to either party to show what the cause or causes of the loss were. The insurers were at liberty to seek to show that the loss was not (in whole or part) caused by a peril insured against and Northern Counties to show that it was.

3. Northern Counties would have been liable in negligence in the absence of a contract.

4. In order for the insurer to bring itself within the exclusion in must show that the liability in question arose under a contract and that the exception is inapplicable. In this case that would involve showing that, absent a contract, there would have been no liability in negligence. Insurers did not establish that to be so.

Judgment for Omega.

Footnotes

1. West Wake Price & Co v Ching (1957) 1 WLR 45 QBD

2. MDIS Ltd v Swinbank (1999) 2 All ER (Comm) 722 CA (Civ Div) and Enterprise Oil Ltd v Strand Insurance Co Ltd (2006) EWHC 58 (Comm), (2006) 1 Lloyd's Rep 500 considered and Redbridge LBC v Municipal Mutual Insurance Ltd (2001) Lloyd's Rep IR 545 QBD (Comm) doubted

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