Contractual liability – Exclusion clauses – Liability insurance – Burden of proof

Omega Proteins Ltd v Aspen Insurance Uk Ltd: QBD (Comm) (Mr Justice Clarke): 10 September 2010

The claimant company (C) claimed against the defendant insurer (D) under the Third Parties (Rights against Insurers) Act 1930.

C carried on business processing by-products from animal carcasses used in the meat industry which it then supplied to pet food manufacturers and others. C was supplied with animal carcasses by a meat processing company (N).

N failed to comply promptly with new regulations relating to material which was for disposal only. It accordingly continued to supply animal material for processing by C which was in fact only fit for disposal. That material was mixed with other material and supplied by C to a customer (P).

That contravention of the law was discovered by the State Veterinary Service which required the contaminated material to be disposed of. The judge held that C was liable to pay damages to P for breach of contract and that N was liable to indemnify C against its liability to P. N was in liquidation and unable to satisfy the judgment against it. C therefore claimed against D, which provided N with product liability insurance cover. The insurance contained an indemnity in respect of all sums which the insured became legally liable to pay but also an exclusion in respect of liability arising under a contract unless such liability would have attached in the absence of such contract.

D submitted that C could not go behind the judgment, which conclusively determined that the liability of C was in contract and did not find that there was liability on any other basis.

Held: (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 C and N but the facts were otherwise as they were. On those facts, there would have been a liability on N 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 C’s property.

(2) In relation to liability insurance, the insured had to establish that it had suffered a loss which was covered by one of the perils insured against, West Wake Price & Co v Ching (1957) 1 WLR 45 QBD applied. That could be done by showing a judgment or an arbitration award against the insured or an agreement to pay. The loss had to 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 were determinative of whether or not the loss was 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 was, therefore, open to the insurers to dispute that the insured was 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, MDIS Ltd (formerly McDonnell Information Systems 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. The judgment was conclusive that N had to pay C the amount of the judgment sum but it was not evidence that N, although liable in contract, had no tortious liability.

The cover in the present case was against all sums which the insured became legally liable to pay. Where no cause of action or issue estoppel arose, the insured and the insurer were both, absent some special agreement, entitled to have the matter determined by the judge who heard the suit to which they were both party. Thus the judgment did not foreclose the question whether the liability of N came within the cover. The judgment established that N had suffered a loss and it was then open to either party to show what the cause or causes of the loss was or were.

(3) N would have been liable in negligence in the absence of a contract.

(4) The burden was on D to show that the exception to the exclusion clause was inapplicable and it had failed to do so.

Judgment for claimant.

George Leggatt QC (instructed by Clyde & Co) for the claimant; Andrew Prynne QC, Angus Withington (instructed by Kennedys) for the defendant.