Insights into the interpretation of a professional indemnity policy

by Debbie Kaminskas, Gavin Creighton
12 February 2018

In brief - Insurers be aware that issues with insurance policy wording are usually construed against the policy drafter  

In Certain Underwriters at Lloyds subscribing to contract number NCP106108663 v Aquagenics Pty Limited (in liquidation) [2018] FCAFC 9, the Full Federal Court comprising Allsop CJ, Dowsett & Kerr JJ, sought to interpret the wording of a professional indemnity policy of insurance to determine whether the circumstances arising from a dispute involving a design and construct contract (D&CC) operated to provide indemnity to the insured, Aquagenics Pty Limited (in liquidation) (Aquagenics).

Specifically, the Full Court was asked to consider:
  • the definition of "claim" (and whether the circumstances constituted a claim)
  • the definition of "wrongful act" (and whether the claim arose from a "wrongful act")
  • whether the wrongful act was committed in the course of professional activities, and 
  • the application of the contractual liability exclusion in the policy

Dispute arises over whether Aquagenics failed to undertake pre-commissioning testing

Aquagenics entered into a D&CC with Break O'Day Council for the design, construction, testing, commissioning and process proving of a wastewater treatment plant. Relevant to the circumstances of the claim, was a clause which provided that either party could serve a notice to show cause in the event of substantial breach of the receiving party. 
 
Clause 44.6 of the contract also provided that if Aquagenics failed to show reasonable cause, the Council was entitled to remove the work from Aquagenics with the added ability of recovering from the contractor any additional costs incurred in completing the work (if those costs were greater than the initially agreed amount). 
 
In May/June 2007, a dispute arose as to whether pre-commissioning testing had been undertaken by Aquagenics. On 30 June 2007, the Council gave Aquagenics notice to show cause. 
 
On 30 August 2007, the Council gave Aquagenics a further notice that they sought to exercise the right to "take out of your [Aquagenics] hands" the pre-commissioning works. Aquagenics disputed the Council's further notice.
 
On 19 September 2007, the Council confirmed that they would also be exercising their right to claim damages/compensation in respect of Aquagenics' breach of contract. Aquagenics alleged that this letter amounted to a repudiation of the contract.
 
In late 2010, the parties proceeded to arbitration. The Council was successful at arbitration as the arbitrator determined that Aquagenics had failed to undertake the pre-commissioning works. The arbitrator considered that the breaches included both faulty design and construction defects. 

Insurer disputes indemnity 

Aquagenics entered into administration with the administrator making a claim under Aquagenics' professional indemnity insurance policy for the amount awarded to the Council by the arbitrator. 

The insurer disputed indemnity for the following reasons:
  • that a "claim" as defined by the policy had not been made
  • that a "wrongful act" as defined by the policy had not occurred
  • that if a "wrongful act" were found to have been committed, that act was not committed in the course of professional activities as defined by the policy, and
  • exclusions 6 and 11 (Contractual Liability and Goods and Workmanship) applied to exclude the claim in the event that the insuring clause responded

Interpretation of policy's "wrongful act" definition

"Wrongful act" was defined to mean any:
(a) act, error or omission, misstatement or misrepresentation

The insurer submitted that the word "unintentional" should precede the phrase "act, error or omission" as the "act or omission" was Aquagenics' refusal to proceed with the pre commissioning phase of the project which involved intent and so should not fall for cover under the policy. The Primary Judge refused to construe clause (a) in such a narrow way. 

The Primary Judge (with whom the Full Court agreed) stated (at [54]):
 
The policy is a commercial contract and should be given a business like interpretation, paying attention to the language used by the parties and the commercial purpose and object of the policy, in determining how a reasonable person in the position of the parties would understand the language used: Todd v Alterra [2016] FCAFC 15; (2016) 239 FCR 12 at [42]. Applying these principles, I am unable to accept the construction of subparagraph (a) urged by Counsel for the insurer. First, the word "unintentional" does not qualify the words "act, error or omission, misstatement or misrepresentation" in subparagraph (a) in contraction to subparagraphs (b) to (f). The omission of the word "unintentional" in subparagraph (a) is, in my view, contextually significant against the proposition that the term "wrongful act" was only intended to cover unintentional "acts, errors or omissions." …

The Primary Judge also referred to the ordinary meaning of the phrase "act, error or omission, misstatement or misrepresentation" to include the possibility of deliberate conduct. The Full Court agreed with Her Honour's interpretation.

Although we have seen "deliberate or intentional acts" excluded from other policies, based on the Full Court's judgment, it is not known if such an exclusion existed in this policy (although we consider it unlikely). If such an exclusion existed, the Full Court's approach may have been very different. 

Should the faulty design claim be covered pursuant to the policy?

The insurer submitted that although the 19 September 2007 letter from Council may constitute a claim, the claim did not arise from the defects in design work because the Council did not know about the defects at that time that the letters of demand (show cause letters) were sent. Only after new contractors were engaged did Council come to learn of the design defects. 

The Primary Judge determined, with the Full Court agreeing, that as the claim related to pre-commissioning, commissioning and process proving not being completed by Aquagenics, design defects that were causally related to the these acts/omissions should form part of the damages awarded to the Council and so fell for cover. 

Contractual liability exclusion

Finally, the Full Court considered the Primary Judge's interpretation and application of the contractual liability exclusion upon which the insurer relied. The Primary Judge rejected the application of exclusion 6 (with the Full Court agreeing) as it was determined that Aquagenics did not agree to a liability that was "more extensive than the limit of the ordinary liability otherwise imposed by general law."

Insurers need to be mindful that issues with wording are usually construed against the drafter of the policy 

This is a reminder that insurance policies, as contracts, need to be drafted with particular attention given to the absence of phrases where those phrases are specifically included in other subclauses/clauses of the policy. The absence of specific phrases will more likely than not (depending on the circumstances of the case and the wording being considered) result in a finding that such a phrase was never intended by the policy. 
 
If a specific exclusion for "intentional acts, errors or omissions" was included within the policy, we would be hesitant to suggest that the result would be the same. As with all cases, however, this can only be answered depending upon the circumstances of each case. 

This article has been published by Colin Biggers & Paisley for information and education purposes only and is a general summary of the topic(s) presented. This article is not specific legal advice. Please seek your own legal advice for any questions you may have. All information contained in this article is subject to change. Colin Biggers & Paisley cannot be held responsible for any liability whatsoever, or for any loss howsoever arising from any reliance upon the contents of this article.

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Debbie Kaminskas Special Counsel

Gavin Creighton Partner

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