In Omega Proteins Ltd v Aspen Insurance UK Ltd [2010] EWHC 2280, 10 September 2010, is a case which explores what happens when a policy of liability insurance contains an exclusion in respect of liability arising under a contract, "unless such liability would have attached in the absence of that contract".

If the insured under the policy has been held liable in underlying litigation specifically for breach of contract (and breach of contract alone), does that mean it cannot recover under the policy from its insurers?

Omega Proteins Ltd (Omega) processed meat by-products from animal carcasses. These by-products were then sold on, for example to pet food manufacturers. Omega inadvertently processed and sold certain products that were in fact fit only for disposal. Omega was sued by the end recipients of these products, and joined its supplier, Northern Counties Meat Ltd (Northern Counties) to the litigation.

The outcome of the hearing was that Omega was ordered to pay damages to the end recipients, but Northern Counties was to indemnify it. Unfortunately, Northern Counties was by this stage insolvent. Omega therefore sought to recover the amount of the indemnity from Northern Counties' product liability insurers, pursuant to the Third Parties (Rights against Insurers) Act 1930 (the 1930 Act). Where an insured has incurred liability to a third party and then becomes insolvent, the 1930 Act allows the insured's rights to claim from its insurer to vest in that third party.

The insurance policy in question contained an exclusion clause, stating that the insurer would not indemnify the insured against liability arising under a contract "unless such liability would have attached in the absence of such contract". The underlying claim, which had been brought against Omega and others, and in which Omega had joined Northern Counties, had been framed purely as a case of breach of contract, and the judgment had reflected this. The judge had found no liability on any other basis, not least because he had not been asked to (in particular, there had been no negligence claim). The insurer argued that the judgment had definitively established Northern Counties' liability as being liability arising under a contract. Therefore, the exclusion applied and Omega could not recover under the policy. Omega argued that the judge's failure to deal with the question of what liability might have arisen in the absence of a contract could not have been intended to determine whether Omega could go on to recover from Northern Counties' insurers. Further, in most cases the insured is the person who claims from the insurer, having first received a claim from a third party. The third party chooses which claim to bring; the insured has no say in the matter. It did not make sense that the question of insurance cover could be determined by the third party's choice.

The court was of the view that Omega should not be prevented from recovery simply because of the terms of an underlying judgment. Although a judgment against an insured in underlying litigation might establish loss, it did not necessarily settle matters as between the insured and the insurer. It was still open to the insurers to dispute that the insured was liable (or dispute that the loss was covered by the policy), and equally it was open to an insured to challenge the basis of underlying liability. Further, a judgment given in proceedings between two parties, A and B, was not binding on a third party, C, in subsequent proceedings against C.

Consequently, although the judgment in the underlying action between Omega, Northern Counties and the end recipients of Omega's products was conclusive as to the obligation on Northern Counties to indemnify Omega, it was not evidence that Northern Counties, having been found liable in contract, had no liability in tort. On the facts, it was held that Northern Counties would have been liable in negligence in the absence of a contract. The exclusion clause in the insurance policy therefore did not apply.

Comment: This case is an important reminder that a party found liable in contract may equally be found liable on the same facts in tort. The underlying claim here was brought purely as a breach of contract claim, but it is clear that it could also have been brought as an action for negligence. The concept of bringing such alternative claims, whilst common to the jurisdiction of England and Wales, is not one that is so familiar in many other jurisdictions.

Further, Omega's case against Northern Counties' insurer was brought under the 1930 Act. The Third Parties (Rights against Insurers) Act 2010 (the 2010 Act) received royal assent in March 2010 and, once it comes into force, will repeal the 1930 Act. The 2010 Act aims to simplify the process for third parties claiming against insurers. Under the 1930 Act, a third party must first establish the existence and amount of the insured's liability before claiming against the insurer. Under the 2010 Act, there is no need for a third party to obtain judgment against the insolvent insured entity before claiming from the insurer. Instead, proceedings can be issued directly against the insurer and all issues will be decided within those proceedings. The 2010 Act also improves a third party's rights to obtain information about the insurance policy taken out by the insured (allowing it to form a view as to whether to pursue the insurer at all). At present, unfortunately, there is no indication from Government as to when the 2010 Act will come into force.

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