Why a building contractual dispute doesn’t necessarily trigger a policy claim: Clarification from NSWSC in New South Head Road v SMLXL Projects

Claims notification under a professional liability policy and construction disputes. The test to join an insurer to a claim. The decision made in the Supreme Court of New South Wales in 374, 376 New South Head Road Pty Ltd v SMLXL Projects (NSW) Pty Ltd [2025] NSWSC 886 addresses a key contention at the intersection between alleged building contractual disputes and professional indemnity insurance coverage.

The courts refusal to grant leave to commence proceedings against the insurer, based on the finding that there was no arguable case of coverage under the insurance policy, underscores the notion that not all contractual disputes automatically give rise to an insurable claim. 

Brief Factual Overview

The plaintiff, the registered proprietor, of the property 374 and 376 New South Head Road entered into a design and construct contract with the first defendant, SMLXL Projects for alterations and additions to an existing building. SMLXL was insured by the second defendant, Chubb Insurance Australia Ltd under three design and construct professional indemnity insurance policies under three consecutive policy years on a claims made basis. SMLXL entered into liquidation without achieving practical completion of the contracted works and so the plaintiff sought leave under section 5 of the Civil Liability (Third Party Claims Against Insurers) Act 2017 (NSW) to commence proceedings against Chubb Insurance. The plaintiff’s claims against SMLXL were for the alleged breach of the building contract, including claims for liquidated damages and defects in the design and construction of various building elements. 

The plaintiff could not demonstrate an arguable case that SMLXL’s liability was covered under the policy and so the court ordered that the plaintiff’s claim for leave to join the insurer was dismissed and costs be paid by the plaintiff, in this instance, the court found a mere notice of a contractual dispute did not satisfy a policy claim.

Legal Issues and Court Reasoning

For leave to be granted under section 5, the applicant had to establish three elements; (a) an arguable case that SMLXL is liable to them, (b) a reasonable possibility that SMLXL will be unable to satisfy in full any judgement that may be entered against it in respect of that liability, and (c) an arguable case that any liability of SMLXL would be an “insured liability” under the insurance policy with Chubb. The standard of an arguable case is ‘fairly low’ but as Chubb submitted, not automatic and determination of such relies on proper characterisation of written correspondence based on the standard of an ‘ordinary businessperson’. There were no substantive issues regarding limbs (a) and (b). 

However, limb (c), the fact that SMLXL would be entitled to an indemnity for such liability under its insurance policies was opposed by Chubb. This was based on the fact that the plaintiff made no written demand for civil compensation, civil damages nor non-monetary civil relief against SMLXL during the policy period, and the plaintiff’s contractual demands were not notified to Chubb during any policy year. So it was argued no resulting valid ‘insured’ claim for loss had occurred. The court held that a valid ‘claim’ under the policy could be express or implied, but the evidence presented by the plaintiff in respect of all six of their building claims did not sufficiently amount to a ‘claim for civil liability in respect of the conduct of professional services’, as required by the precise wording of the policy. 

Evidence of written email correspondence between the plaintiff and SMLXL alongside sworn affidavits of the project manager were considered. The court found they merely conveyed the plaintiff’s dissatisfaction and contractual entitlements to liquidated damages, but did not constitute a written demand for civil compensation or civil damages’ as required by the policy. Relevantly a reservation of a contractual right, a claim for liquidated damages or the exercising of a right of set off under a building contract was not a claim under the policies.

With regard to the plaintiff’s defect claims, the court accepted Chubb’s submission that the relevant correspondence only alleged contractual non-compliance and not an actual claim for compensation. Much of the correspondence regarding defects was seeking SMLXL’ s response to addressing the plaintiff’s concerns.

The court also found the plaintiff had not satisfied it that the building claims were, in any event, arising out of the Professional Services provided by SMLXL, as defined in the policies.

Thus, the plaintiff failed to present an arguable case under limb (c), that SMLXL would have been indemnified under the insurance policy and the application for leave was dismissed. 

Implications 

The Supreme Court’s decision has emphasised the need for a clear, written demand for compensation to satisfy a definition of a “Claim” required by a policy. An assertion of a right of a claim to be made under a professional liability policy is distinguishable from the mere assertion of rights under a building contract between builder and owner and an arguable case to be made under section 5 of the Civil Liability Act, notwithstanding that there may be genuine and arguable claims between owner and builder.

As always, the wording of the policy and the definition of a Claim in the policy is important, as are the facts behind the claim communications. The court considered other decided cases that had found a claim had been made by characterising the totality of the communications in the context of the notification.  

Importantly the case shows a mere dispute over a problematic building project and rights under the relevant building contract may not be enough to trigger a policy response.

In this case the joinder of an insurer, which requires an otherwise low threshold, was denied following the liquidation of the builder despite the existence of what appeared to be a valid contractual dispute.