Liability Insurance: Establishing Legal Liability To Third Party

In a recent case under the Third Parties (Rights Against Insurers) Act 1930, the insured's liability to a third party had been established by an earlier judgment for breach of contract. The Commercial Court was nevertheless prepared to look beyond the judgment to determine the basis of the insured's liability and whether there was cover under a combined liability policy.

Background

The insured had combined liability cover, including product liability cover for damages and costs that it became legally liable to pay. The policy contained an exclusion for liability arising "under any contract or agreement unless such liability would have attached in the absence of such contract or agreement".

A previous judgment had established the insured's liability to the third party, Omega, a pet food manufacturer, for breach of contract. The insured had supplied Omega with defective goods, being contaminated animal carcasses. Omega's claim against the insured had not, however, been framed in tort and the judgment did not therefore contain a finding of negligence against the insured.

After the insured became insolvent, Omega sought to recover from the liability insurer under the Third Parties (Rights Against Insurers) Act. As a third party claimant under the Act, Omega could be in no better position than the insured would have been in bringing a claim. The exclusion for liability arising in contract therefore applied to Omega's claim but, Omega argued, the insured had also been liable to it in tort.

Decision

The court held that the claimant could go behind the judgment to establish that although the insured was liable in contract it was also liable in tort. The policy therefore responded in so far as the insured had a legal liability assuming there was no contract.

The general position in liability insurance is that the insured must establish it has suffered a loss which is covered by one of the perils insured against. This can be achieved by relying on a judgment or arbitration award against the insured. The judgment or award may settle the question of whether the scope of the loss is covered by the policy because the insurer may accept it as setting out a basis of liability within the scope of the cover. However, the judgment or award is not itself determinative of whether or not the loss is covered by the policy.

It is therefore open to insurers to dispute that the insured was in fact liable, or that it was liable on the basis specified in the...