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Insurance & Reinsurance
“The point is that, in the insurance context, a party gets the policy they pay for, not some other policy they could have paid for but (apparently) did not” is one of the concluding remarks in the recent decision of Jagot J.
This illuminating decision touches on some of the issues that insurers and builders grapple with on a daily basis. A typical claim under a Design & Construct Professional Indemnity policy will arise from a claim against a builder and developer under the Home Building Act 1989 (NSW) (HBA) and more recently, for alleged duty of care breaches under the Design and Building Practitioners Act 2020 (NSW) (DBPA).
D&C PI policies, such as the policy referred to in this case, are intended to provide cover for design, drafting, technical calculation and project management. What are commonly excluded under these policies are the performance of the construction, installation, or physical alteration of buildings, goods, products or property. This is because these types of policies are not designed to underwrite shoddy construction work.
However, a common occurrence is that insureds will attempt to shoehorn all manner of claims against it to an insurer for cover under a PI policy. What then typically follows is a proverbial game of cat and mouse where an insurer will seek to understand the underlying factual matrix of a claim and whether the insured’s liability arose from the provision of professional services under a policy.
The decision of Jagot J (as she then was) in FKP Commercial Developments Pty Limited v Zurich Australian Insurance Limited  FCA 862 sheds light on the policy response considerations insurers should be aware of when determining whether a relevant professional indemnity policy responds to a claim under the HBA or DBPA.
The applicants, FKP Commercial Developments Pty Ltd (FKP Commercial) and FKP Constructions Pty Ltd (FKP Constructions) (together, the FKP Parties) were the insured under a Design and Construction Professional Indemnity policy (the Policy) issued by the respondent, Zurich Australian Insurance Limited (Zurich).
In separate proceedings, the owners of Strata Plan 84298 (Strata Plan), as the registered proprietor of the common property at two residential and commercial apartment buildings located in Rosebery, NSW (Buildings), claimed damages from the FKP Parties as defendants (Separate Proceeding). The Strata Plan claimed damages against the FKP Parties for alleged defects that exist in the common property of the Buildings and alleged that the FKP Parties are in breach of the statutory warranties under the HBA. The Strata Plan further alleged that the FKP Parties owed a common law or statutory duty of care to the Strata Plan.
FKP Commercial was the registered proprietor of the land on which the development was constructed prior to the registration of the Strata Plan. FKP Commercial entered into a contract with FKP Constructions to carry out the residential building work either through itself or through third parties (the Head Contract).
FKP Constructions performed its obligations as head contractor under the Head Contract by using third party consultants and sub-contractors, and the evidence suggests that it did not perform any design or construction works. It would appear that FKP Commercial also did not perform any design or construction works in relation to the Buildings.
The FKP Parties sought indemnity from Zurich under the Policy in respect of any liability it might have to the Strata Plan in the Separate Proceeding.
The Policy contained the following relevant clauses and conditions:
We agree to indemnify the insured against loss incurred as a result of any claim for civil liability first made against the insured and notified to us during the period of insurance, based on the insured’s provision of the professional services.
(the Insuring Clause)
We will advance claim expenses incurred by an insured in the defence of a claim, as they are incurred and prior to the final adjudication of the claim, where:
(a) indemnity under this policy is confirmed in writing by us; or
(b) at our absolute discretion, without admitting indemnity, we agree to advance such claim expenses.
All such payments shall be repaid to us by the insured (or where more than one insured has received such payments, by such insureds severally and according to their respective interests) in the event and to the extent that the insured is not entitled to payment of such claim expenses under the terms and conditions of this policy.
(the Advancement Provision)
Professional services were defined broadly in the Policy to include the following:
This case presented two primary issues for the Court to determine:
Jagot J answered both of these questions in the negative. Whilst her Honour found that the FKP Parties were entitled to the payment of claims expenses prior to final adjudication, she ultimately determined that the FKP Parties did not engage in “professional services” within the meaning of the Policy, nullifying any entitlement to indemnity under the Policy.
In response to the Advancement Question, Jagot J found that the Advancement Provision operated in all cases where there was uncertainty about the fact or the extent of the loss within the Insuring Clause. Such uncertainty does not exist if a court determines (or Zurich determines under sub-section (b) of the Advancement Provision) that the claim is for loss wholly within the Insuring Clause, in which event the Insuring Clause would operate in accordance with its terms prior to the final adjudication. Therefore, on a proper interpretation of the Policy, the insured retains the right to payment of claim expenses prior to the final adjudication of the claim under both the Advancement Provision and the Insuring Clause, provided that the clauses are enlivened according to their terms.
In response to the Coverage Question, Jagot J found that the Insuring Clause required Zurich to indemnify the FKP Parties against a loss incurred as a result of any claim for civil liability which was based on the FKP Parties’ provision of professional services.
Jagot J provided a literal translation of the Insuring Clause to mean:
“We agree to indemnify the insured against loss incurred as a result of any claim [demand for compensation] for civil liability [liability of the insured on any civil cause of action for compensation based on its provision of, or failure to provide, professional services] … based on the insured’s provision of the professional services”.
Jagot J’s interpretation of the Insuring Clause found that the term “civil liability” was synonymous with the term “cause of action”. This meant that, in order for the FKP Parties to successfully claim under the Policy, the cause of action of the claim for which the FKP Parties sought indemnification must have been based on the FKP Parties’ provision of professional services within the meaning of the Policy.
The relevant causes of action forming the claim against the FKP Parties were as follows:
Jagot J found that none of the causes of action were based on the FKP Parties having provided “professional services”, rather they were based on the statutory and common law duties which were allegedly owed to the Strata Plan due to the FKP Parties’ respective positions as the owner/developer and head contractor.
None of the causes of action were contingent upon the FKP Parties providing professional services within the meaning of the Policy.
Jagot J ultimately found that both of the FKP Parties would have been in the same position with respect to the Separate Proceedings regardless of whether either party provided “professional services”. Jagot J did note however, that while both FKP Parties may have provided professional services in respect of the residential building work, the statutory and common law causes of action were not based on the provision of those professional services, and therefore the elements of the Insuring Clause were not satisfied.
Construction and engineering professional indemnity insurers should be aware of the terms of their insuring clauses present in any professional indemnity policy. In this matter, the effect of the words “civil liability … based on the insured’s provision of the professional services” ultimately determined that the Policy did not respond to the claim for indemnity. Whilst the wording of insuring clauses are not the same across D&C PI policies, it is likely that a similar interpretation to that adopted by Jagot J in the present case could apply to insuring clauses of a similar nature.
Claims under the HBA and the DBPA are based on statutory duties of care and as such, are causes of action which arise due to an insured's capacity or position as a person who owes such duties, regardless of their actual conduct. In the context of developers and builders, the causes of action under these acts do not necessarily require that the relevant entity undertake any professional services for liability to attach, instead the duties of care arise due to the position held by the insured in the relevant contractual matrix.
While there may be claims under these acts that arise from the provision of professional services, the source of the duties under these acts will not immediately result in a finding that the person subject to the duties provided professional services, quite the opposite. Each claim should be subject to thorough scrutiny as to the genuine source of the civil liability. Insureds will also need to be on notice that insurers will be entitled to rigorously test all claims that are submitted under D&C PI policies in order to ensure that insureds benefit from cover under policies of the kind they have paid for, not some other policy they could have paid for but (apparently) did not.