Omega Proteins Ltd v Aspen Insurance UK Ltd

Under a liability policy excluding contractual liabilities unless the liability would have existed without the contract, the court must answer the contractual hypothetical posed by the policy. It is not confined to the basis on which liability was established in proceedings between the insured and a third party.

A judgment, award or settlement may establish that the insured has suffered a loss, but is not ordinarily determinative between the insured and insurers who were not parties. Subject to agreement, the insurer may investigate the true basis of liability, including whether liability existed in tort and whether the loss falls within the policy.

Where the exclusion contains an exception, the insurer must establish that the exception does not apply. On the facts, the supplier’s failure to comply with animal-material regulations supported an inference of negligence.

Omega supplied animal by-products to JG Pears (Newark) Ltd after Northern Counties Meat Ltd had supplied material wrongly certified as Category 3. The material contained specified risk material which should have been treated as Category 1 and was consequently unusable.

Pears obtained judgment against Omega. Omega obtained judgment against Northern Counties for an indemnity. Northern Counties was insolvent, and Omega claimed directly against its insurer, Aspen, under the Third Parties (Rights Against Insurers) Act 1930.

The policy covered accidental physical damage to tangible property but excluded liability arising under contract unless that liability would have attached in the absence of the contract. The central issues were whether the earlier judgment conclusively determined the basis of liability and whether Northern Counties would have been liable in negligence without the supply contract.

1. The claim succeeded. Omega was entitled to an indemnity for such legal liability as Northern Counties would have owed if there had been no contract between Northern Counties and Omega.
2. The contractual exclusion required the court to consider what liability would have attached in the absence of the contract, with the facts otherwise unchanged. It did not require an inquiry into what tortious liability would have arisen in the presence of the contract.
3. The earlier judgment established that Northern Counties had suffered a loss and was liable in contract. It did not decide, and could not have decided as part of its ratio, the hypothetical question required by the insurance policy. The judgment was therefore not conclusive between Omega and Aspen.
4. Absent agreement, a judgment or settlement between an insured and a third party is not binding on the insurer. The insurer may dispute whether the insured was liable, whether liability arose on the stated basis, and whether the true basis of liability was within an insured peril or an exclusion.
5. The policy’s exclusion operated on every contractual liability unless the liability would have attached independently of the contract. As the exclusion contained an exception, Aspen had to show that the exception was inapplicable. It had not done so.
6. The evidence supported the inference that Northern Counties failed to take reasonable care to ensure that the material supplied was lawful and safe, including that it would not render other Category 3 material unusable when mixed with it. A company operating in a heavily regulated industry had a duty to keep itself informed of relevant changes in the law.
7. Recovery was limited to liability which would have existed in tort without the contract. The court did not determine the quantum of any recoverable negligence liability. Omega accepted that the value of the supplied product itself was not recoverable on that basis.

A declaration was to be made in those terms, subject to submissions on the form of the order.

Not stated in the judgment.