Liability insurance: establishing legal liability to third parties
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.
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.
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 judgment, or to show that in fact the liability fell within an exclusion. Equally, the insured must be able to claim that any finding in the judgment was not correct, or to claim that it was also liable on other grounds.
The decision will be of interest to all liability insurers. It was previously thought that the courts were likely to view a judgment (or other binding determination) as conclusive when considering the basis on which an insured under a liability policy is liable to a third party (and so whether the loss is covered under the policy). This case suggests this will not always be the case. Although in practice the judgment may settle the question, it will not always be seen as conclusive and the courts may, in appropriate circumstances, be prepared to look beyond the judgment to determine the issue.
The position of third party claimants against insolvent insureds will be simplified by the Third Parties (Rights Against Insurers) Act 2010 which received royal assent on 25 March 2010. The Act is not yet in force but will allow a third party who claims to have rights under a contract of insurance to bring proceedings directly against the insurer, without first having to establish the liability of the insured. The court will be able to make a declaration of the insured’s liability to the third party at the same time as deciding the insurer’s liability under the policy.
This article first appeared in Law-Now, CMS Cameron McKenna's free online information service, and has been reproduced with their permission. For more information about Law-Now, please go to www.law-now.com