Partner, Head of Financial Services
Out-Law Guide 3 min. read
22 Sep 2010, 6:14 pm
Omega Proteins Limited v Aspen Insurance UK Limited
The insured was a meat processing company. Between May and July 2006, it failed to ensure that meat supplied to Omega was categorised according to current EC regulations, which had recently changed.
As a result, the material was wrongly classified as "not for human consumption" when in fact it should have been "for disposal only". Unaware of this, Omega intermingled the meat with sound material and sold it to a company called Pears, who processed it and sold it on as meat and bone meal.
Omega and the insured were joined as third and fourth parties to an action brought against Pears by one of its customers. The judge found that Omega was liable to pay damages for breach of contract to Pears and that the insured was liable to indemnify Omega against that liability.
Omega's claim against the insured was based wholly in contract. It was an express term of the contract that the material supplied to Omega should be of a particular category. In addition, the judge found that the insured had breached implied warranties of fitness for purpose and satisfactory quality.
The insured went into liquidation. Omega brought a claim against the insured's product liability insurer under the Third Party (Rights against Insurers) Act 1930. The insurer denied the claim.
The policy covered the insured against "all sums which the insured becomes legally liable to pay" for damages arising out of accidental loss of or damage to property caused by any product.
There was, however, an exclusion which stated that the insurer would 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".
The insurer argued that the claim fell within this exclusion. The court had conclusively determined that the basis of the insured's liability to Omega lay in contract. It was not possible to look beyond the terms of that judgment to find grounds for an alternative claim in negligence so as to bring it within the cover.
Omega, however, maintained that that the fact that the insured's liability arose under contact did not automatically mean the policy claim fell within the exclusion. Whether or not there was cover depended on whether "such liability would have attached in the absence of such contract or agreement."
The judge agreed with Omega. The question was whether the insured would have been liable to Omega even if there had been no contract between them.
The judge was satisfied that the answer was yes, if it could be shown the insured was negligent in allowing contaminated material to be supplied without proper categorisation. This was an action that would foreseeably cause (and did cause) physical damage to Omega's property (the uncontaminated meat).
The issue of negligence had not arisen in the previous court action and so was not something the judge had needed to decide. But an insurer's liability to its insured depended on the true nature of the claim and not simply on the way a third party claimant had chosen to put its case.
In liability insurance, the insured must establish that it has suffered a loss within the scope of the policy. This may be done with reference to a court judgment, arbitration award or a settlement agreement. In many cases, the insurer will accept this as showing that the liability falls within the cover.
But a judgment or award will not be determinative. Unless the insurer was a party to the proceedings, or had agreed to be bound by the outcome, it is open to it to dispute that the insured was, in fact, liable or that it was liable on the basis specified in the judgment, or that the true basis of the liability fell within an exclusion.
Would liability have attached to the insured in the absence of a contract? The judge concluded that it would.
It was incumbent on the insured, as a meat processing company, to keep itself informed of the up to date laws and regulations. It had failed to take reasonable care to see that the material it supplied to Omega was lawfully supplied and was safe in the sense that it could be used without unacceptable risk and without damaging any other product with which it would foreseeably be mixed.
Under the terms of this exclusion, every liability that arose under any contract would be excluded unless it would have attached anyway. The insurer had failed to show that the insured would have had no liability in the absence of a contract, so it was bound to indemnify Omega under the policy.
The decision makes it clear that insurer and insured (or in this case a 1930 Act claimant) may "go behind" the terms of a judgment or award to determine the true nature of the insured's liability.
An insured found negligent by a court may, therefore, find that his insurer seeks to show that the claim was really a fraud claim and so is not covered at all or falls within a fraud exclusion. Conversely, an insured who has been found liable in fraud may be able to show that, whatever the judge decided, he was not fraudulent but merely negligent and so is entitled to the cover.
Partner, Head of Financial Services