The first quarter of 2018 has seen some important decisions come out of the highest courts of our land relating to professional indemnity insurance. We highlight the following three cases for you, involving a certifier, a building inspector and an engineer respectively. We trust they are of interest to our readers working in the PI space.
High Court of Australia brings relief again to certifiers and their PI insurers
Starting with our highest court, in Chan & Anor v Ku-ring-gai Council & Ors [2018] HCASL 21 (available here), the High Court of Australia refused to grant the special leave application of Ms Chan, bringing to an end the battle over whether a certifier owes a duty of care to subsequent purchasers of property for pure economic loss.
My colleagues, Andrew Miers and Beth O’Connor, in the December 2017 Edition (available here), outlined the reasoning of the NSW Court of Appeal (comprising McCool JA, Meagher JA and Sackville AJA) in Ku-ring-gai Council v Chan [2017] NSWCA 226 when it allowed the appeal by the Council of the decision at first instance by Justice McDougall in Chan v Acres [2015] NSWSC 1885.
Certifiers and their insurers breathed a sigh of relief given that Justice McDougall’s judgment had put a large target on their foreheads.
However, Ms Chan was determined to not let this long running case end there, making an application to the High Court of Australia late last year. But the High Court (comprising Bell J and Nettle J) had other ideas, refusing the special application, holding that an appeal to the High Court would not enjoy sufficient prospects of success to warrant the grant of special leave. In other words, there were insufficient prospects of the NSW Court of Appeal’s decision being overturned.
It is now settled law, at least in the State of the mighty Cockroaches, that a principal certifying authority does not owe the purchaser of residential premises a duty to take reasonable care in the issue of an occupation certificate to avoid their suffering economic loss as a result of the previous owner builder’s defective work when no reliance or vulnerability on the certificate exists.
NSW Court of Appeal rejects PI/PL insurer trying to have it both ways
Next, in Pacific International Insurance Co Ltd v Walsh [2018] NSWCA 9 (available here), we saw the NSW Court of Appeal dismiss the appeal of an insurer of PI and PL policies of a building inspector after the court was not convinced a professional liability exclusion applied.
It is fair to say that professional indemnity insurance and personal injury claims don’t usually mix. I must confess that since moving from personal injury work to professional indemnity claims over a decade ago I have not had to deal with the complexities (and devastation) involved with cases such as this one involving a young girl being seriously injured after falling 2.5 metres from a balcony after a defect in a balustrade went undetected when inspected at the time of purchase.
I can understand then why a PI insurer might tend to deny a claim like this one (despite being so tragic) that relates to a personal injury. I can also see how the same insurer when providing simultaneous PL cover may deny cover when the personal injury is in connection with professional advice, commonly excluded by PL insurers.
But this decision of the NSW Court of Appeal demonstrates that an insurer may not have it both ways when providing back to back cover; that is, when PI and PL policies have inter-connected wordings, the court will look at the overall purpose of the insurance and the “hierarchy” of the provisions to find if cover is available.
The primary judge found (judgment of Montgomery ACJ available here) the building inspector was negligent in relation to the personal injury claims of the young girl and her mother and that the PL policy responded to the insured’s claim on the policy. The insured did not appeal the finding of negligence, but the insurer appealed the finding the PL policy responded. The District Court did not determine if the personal injury exclusion in the PI policy applied.
In the appeal, the insurer submitted that the primacy of the contractual text meant that the building inspection report was “professional advice” and therefore excluded by the PL policy via the professional liability exclusion. However, after highlighting that the definition of “Business Activities” (the trigger for cover) found in the Building Inspection Endorsement essentially ‘obliged’ the insured to produce building inspection reports containing “advice”, the court found the position cannot be that the policy excludes liability when advice is provided. The court indicated this was the case particularly when the “hierarchy” of the provisions (as specified by the wording) meant the Endorsement outranked the general exclusions if in conflict.
The NSW Court of Appeal also made much of the PL and PI policies working “harmoniously” together and that there was a “close textual connection” between the two wordings. The personal injury exclusion in the PI policy was said to “dovetail” with the insuring clause in the PL policy, and vice versa with the professional liability exclusion in the PL policy and the insuring clause of the PI policy. When speaking about both policies, Leeming JA referred to it being central to “the cover” purchased that it covered deficient inspection reports, and that it was easy to see the resulting damage could be economic loss or damages for personal injury. In other words, the court felt the purpose of the insurance was such that one of the policies had to respond to negligent inspection reports that result in damages of some kind.
Federal Court satisfied activities were in the course of professional activities
Finally, in Certain Underwriters at Lloyd’s v Aquagenics Pty Ltd (in liq) [2018] FCAFC 9 (available here), the Federal Court of Australia reinforced that the professional activities of an insured professional can include an insured’s refusal to undertake further work if they believe the work is done. In other words, doing nothing may be something when it comes to being in the course of professional activities, which is a common phrase used in PI insuring clauses.
The Federal Court in a combined judgment (comprising Allsop CJ, Dowsett and Kerr JJ) dismissed the appeal by the Lloyd’s underwriters seeking to overturn the decisions at first instance by Davies J (available here and here) ordering underwriters to indemnify a claim by the insured engineer under its professional indemnity policy after it was found liable to a Council on the east coast of Tasmania. The claim arose after the insured walked off site after it claimed it could not continue the contracted works until the Council delivered certain materials.
The insured’s contracted works included the design, construction and pre-commissioning testing of a wastewater treatment plant. The insured said it had completed the testing. The Council disagreed. The dispute went to arbitration at which the Council was successful and was awarded about $1.3 million. The insured subsequently went into administration and then liquidation. The administrator made the claim on the PI policy.
Underwriters denied cover on a number of grounds in a common cascading fashion. Firstly, underwriters denied there was a “claim” for lack of any demand for compensation in the relevant correspondence. Secondly, underwriters argued that if there was a claim, it did not arise from a “wrongful act” as required by the insuring clause. Thirdly, any wrongful act by the insured was not committed “in the course of professional activities”, which triggered the cover. However, underwriters lost on all fronts.
The decision by the Federal Court regarding the third indemnity issue is worth noting in our view. Underwriters argued the wrongful act was the insured abandoning the contract, which cannot be an act in the course of professional activities because it’s not doing anything, it’s just walking off the site. Underwriters said this was distinct from an omission when providing professional activities, such as a failure in design, which may be a wrongful act. But this was rejected by the primary judge and the Federal Court. It was found that the act of refusing to take further steps under the contract was one committed in the course of professional activities of a water treatment engineer. The insured took a position applying its professional skill and acted on it.
This article was written by Jason Symons, Partner.
Jason Symons
P: +61 2 9334 8715
E: jsymons@hwle.com.au