Facts
The insured, Budgett Sugars Limited, took out a combined commercial policy underwritten by G A Bonus plc (later taken over by Norwich Union). The liability section of the policy covered public and product liability and defined "damage" as "physical damage" and "property" as "material property". It then provided:
"Event:
In the Event of accidental:
1. personal injury, or
2. loss of or damage to property, or
3. obstruction, trespass, nuisance or interference with any right of way, air, light or
water or other easement
which arises in connection with the Business and occurs during the Period of Insurance and within the Territorial Limits
Indemnity
In respect of such an Event the Company will provide indemnity against:
a) legal liability for compensation up to the Limit of Indemnity, and
b) Costs and Expenses".

In 1996 the insured, Budgett Sugars, sold and delivered 200 tonnes of raw cane granulated sugar to Kerry Ingredients (UK) Limited, which Kerry used in the manufacture of mincemeat. It was later found out that the sugar had been contaminated. Kerry sued Budgett, claiming damages for breach of contract, including damages for loss of business because one of their customers ceased to trade with them and another insisted on renegotiating the terms of its contract. Budgett denied liability on the grounds that neither loss was caused by its breach of contract and that the loss was, in any event, too remote to be recoverable.

The only issue in these proceedings, however, was whether insurers would be bound to indemnify Budgett, if the latter were held liable in respect of the losses claimed.

Budgett argued that the indemnity clause contained an undertaking to indemnify the insured against any legal liability linked to an event of the kind described in the Event clause. Insurers argued that the cover was not intended to provide cover for consequential losses of the sort claimed. The intention of the policy was to define an event in physical terms - loss of or damage to property - and to provide an indemnity against liability in respect of the event as defined.

Insurers relied on two cases. In A S Screen Print Limited v British Reserve Insurance Co. Limited [1999] Lloyd's Rep IR 430, insurers agreed to indemnify the insured "against all sums which the insured shall become legally liable to pay in respect of death, bodily injury, illness, loss or damage". The insured supplied printed card to a packager who made it up into boxes for sweets. Sweets packed in the boxes were contaminated by the packaging. The packager claimed for loss of business because a customer decided to cease trading with it. The Court of Appeal construed "loss or damage" in the policy to mean physical loss or damage and held that the indemnity had to be "in respect of" that loss or damage. The loss in question was not physical loss or damage caused by the defective goods but an economic loss caused by the decision of the customer to cease trading with the packager.

In Rexodan International Limited v Commercial Union Assurance Co plc [1999] Lloyd's Rep IR 495, Rexodan supplied soap powder in bulk to Newbright for re-packaging and distribution to consumers in cardboard cartons. Defects in the powder caused staining of the cartons and the absorption of water from the atmosphere, which, in turn, caused the powder to cake. As a result, Newbright ceased doing business with Rexodan.

Rexodan’s liability cover provided an indemnity against "all sums which the insured shall become legally liable to pay for compensation and claimants’ costs and expenses in respect of any Occurrence to which this cover applies". Occurrences under the policy included "loss of or physical damage to property… caused by any commodity supplied by the Insured".

The Court of Appeal held the policy did not cover the loss of profits claimed. The words "in respect of" required that the liability had to relate to the identified occurrence, not merely have a connection with it. The policy was confined to liability for physical consequences caused by the commodity supplied. Whilst, in some cases, liability for physical loss or damage may include some item of consequential loss, such as (in the case of personal injury) compensation for future loss of earnings, the loss claimed by Rexodan related to the future non-performance of its obligations towards Newbright, not to the loss Newbright suffered as a result of the physical occurrence.

The judge found in favour of the insurers. The policy was a standard policy, purchased off the shelf and not negotiated between the parties. The Event and Indemnity clauses were not very happily worded, but when read together as a single sentence they made sense, defining the circumstances giving rise to liability in respect of which the insurers would provide an indemnity. On this reading, the words "in respect of such an Event" limited the extent of the indemnity to losses relating to physical damage.

The losses claimed by Kerry against Budgett were not losses relating to the physical damage to the mincemeat but were, at best, losses relating to the latter’s breach of contract. As such they did not fall within the policy.