Third Party Claim Against Insurer

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...