Interestingly, it was during the last major credit crunch (the Wall St. Crash) that the law of Torts was inflated to almost rival the domination of criminal and contract law in the common law legal world.
It happened in 1932, in Donoghue v Stevenson [1932] AC 562. The defence in the case relied on the fact that the Plaintiff had no privity of contract with the Defendant. She, the Plaintiff had consumed some of the contents of a bottle of ginger beer. She discovered what she perceived as the remains of a decomposing snail in the bottom of the bottle and became ill as a consequence. She had been given the beer by the purchaser.
The court found in her favour by extending the reach of of the law of negligence. Before 1932 the law of negligence was a wilderness of special circumstances in which liability would be fixed on particular people. The liability of common carriers was typical of this.
The consequential growth of the law of negligence was limited by the fault principle and the proximity principle. The defendant would only be liable if the plaintiff could show that the defendant was guilty of doing something or failing to do something which the defendant ought to have done or not done and thus caused the damage to the plaintiff. In addition, the plaintiff had to show that the injury to the plaintiff was reasonably foreseeable by the defendant. If the causation chain was too long the defendant was not liable.
The law of tort does not deliver the benefits of universal insurance.
A similar result, albeit for different reasons, was reached by Cardozo J. in a New York State case involving Buick automobiles a few years previously (the citation escapes me at the moment).
In that case the plaintiff’s new Buick was involved in an accident due to a flaw in the manufacture of the wheels. They successfully sued Buick as Buick had combined the wheels (which had been made by a 3rd party wheelright) with other components to make the vehicle. The plaintiff was entitled to assume that Buick would have done sufficient testing of all components and as such was responsible for the quality of the wheels.
What relevance might that have for financial services companies that bundled debt products together for resale?