Cladding liability and PI cover: Court confirms strict liability falls outside professional indemnity insurance

In 2025, the State of Victoria obtained summary judgement for approximately $3.1 million plus interest against Mr Naqebullah, the managing director of Shangri-La, under section 137F of the Act. This provision allows the state, after providing financial assistance for rectification of non-compliant or non-confirming external wall cladding, to exercise subrogated rights of the building owner against responsible parties. 

The subrogation right contained within the Act is enforceable jointly and severally against a company and any individuals who were its officers at the time of the act or omission that gave rise to the liability. 

Mr Naquebullah sought indemnity from certain underwriters at Lloyd’s, under two ‘Design and Construction Civil Liability’ professional indemnity policies issued by Arch Underwriting at Lloyd’s (Australia) Pty Ltd. The policies were for the 2017/2018 and 2018/2019 policy period and were both written on a claims made and notified basis (PI policies). 

Enforcement of the summary judgment by the state was stayed pending determination of Mr Naqebullah’s entitlement to indemnity under the PI policies.

The court identified the relevant provisions and documents comprising each contract of insurance, including a proposal form, certificate of insurance and policy wording. 

Key provisions included:

• Insuring clause: Underwriters agreed to indemnify 'the Insured against any Claim first made against any of them, during the Period of Insurance and notified … during the Period of Insurance in respect of any civil liability incurred in their conduct of the Professional Business'. 
• Claim:
  • originating legal process served on an insured alleging breach of professional duty in the conduct of the professional business; or
  • any demand alleging civil liability or breach of professional duty by the Insured in their conduct of the professional business, communicated by whatever means;
  • with all claims from the same act or original cause 'deemed to be a single claim'.   
• Insured:
  • 'the person(s), principal(s), members of the partnership, directors, company or corporation, statutory authority, association or the legal entity specified in the Schedule and Employees thereof …'; and
  • any person who becomes a partner, director or employee during the period, but only for work for or on behalf of the insured and in the conduct of the professional business. 

Professional business: includes design, drafting, technical calculations and specification, provided by suitably qualified professionals or other persons providing professional services of a skilful character; but expressly excludes the performance or supervision of construction related activities undertaken solely in the capacity of a building contractor. 

Underwriters argued that only entities named in the schedule and their employees were covered, and that directors were not insured unless expressly listed. 

Mr Naquebullah argued that, properly construed, the definition of ‘insured’ extended to directors of Shangri-La, supported by the proposal forms and policy wording that showed intention. 

The court applied the usual insurance construction principles in order to resolve this dispute. It took into account the fact that the proposal forms had to be completed by a partner/principal/director and contained detailed questions about directors’ qualifications, experience, responsibilities, associations and claims history. This all reflects information which speaks to the underwriters wanting to assess the risk to insure the directors personally, as well as the company and staff.  

The court also commented that the definition of ‘insured’, while poorly structure and ambiguous, if read commercially the phrase 'directors, company … the legal entity specified in the Schedule and Employees thereof' should be understood as covering directors of the scheduled company, even if not named.’

Ultimately, the Court held that Mr Naquebullah was an insured under the PI Policies, as the definition of ‘insured’ included directors, employees and predecessors in the professional business. 

In the alternative, he was also a third-party beneficiary entitled to the benefit of insurance under section 48 of the Insurance Contracts Act 1984 (Cth) (ICA), as he was identified in the proposal forms as a person to whom cover extended.  

As the PI policies were ‘claims made and notified’, cover required a claim (as defined in the PI policies) to be both made and notified during the same policy period. 

On 10 August 2017, Mr Naquebullah received two letters from the Owner’s Corporation’s solicitors, indicating a future claim for damages against Shangri-La.

He argued these letters constituted a ‘claim’ under the PI policies. 

On 11 August 2017, he informed and instructed his broker to notify underwriters and later relied on section 54 of the ICA to overcome the broker’s failure to notify. 

Alternatively, he argued that a building notice received on 19 June 2019 (which was passed to underwriters during the 2018/2019 policy), and Shangri-La’s awareness of VCAT proceedings being commenced on 2 July 2019, constituted claims made within the 2018/19 policy period. 

Section 54 of the ICA prevents insurers from refusing indemnity solely due to any act or omission by the insured occurring after the contact was entered into, such as late notification. Instead, the insurer’s liability is reduced only by the extent that their interests were prejudices by that act. 

Mr Naqebullah sought to rely on the 'single claim' wording, arguing that all claims arose from the same cause (EPS cladding) and should be treated as one claim, with section 54 of the ICA operating to mean that continuity provisions should preserve cover. 

Underwriters countered that aggregation provisions limit the number of policy limits available but cannot rewrite when a claim is first made under a claims‑made policy, nor can section 54 create a claim that could not legally exist during the period. The court found that no claim against Mr Naquebullah was made during either policy period.. 

His civil liability only arose only later, when amendments to section 137(F) imposed strict liability on directors at the time the non-compliant cladding was installed. This was not until December 2020. 

This means the liability under the Act, or potential liability, did not exist when the Owners Corporation’s solicitors sent the correspondence in August 2017. Irrespective, the August 2017 correspondence and the building notice were communications of claims against Shangri-La only, not Mr Naqebullah personally. 

Interestingly, Mr Naquebullah did not rely on the remedial provision of section 40(3) of the ICA with respect to the notification of the building notice to underwriters. This provision allows an insured to notify in writing the insurer of facts that might lead to a future claim, as soon as was reasonably practicable after the insured became aware but before policy expires. If that happens, the policy can still respond even if the claim (which must have a connection to the facts notified) is made after expiry. 

It is likely this argument was not used because, at the time of notification, there was no statutory liability claim in existence. On an objective assessment of the facts (even taking into account Mr Naquebullah’s knowledge at the time), the notification could not be characterised as relating to a claim that did not yet exist in law. 

Although the PI policies were not triggered as the statutory liability claim had not been made against Mr Naquebullah in the policy period, the court considered whether the liability arose in the conduct of the professional business, as required by the insuring clause. 

Mr Naquebullah gave evidence that he provided some services falling within the policy’s definition of professional business, including providing design advice and preparing specifications. 

However, the court considered the word ‘incurred’ to be critical. His liability was imposed by the strict statutory regime under section 137F(3) of the Act, because of his role as a director of Shangri-La, rather than his professional services. 

The PI policies explicitly carved out from the definition of professional business ‘performance or supervision of construction related activities by the Insured or its Agent, where such performance or supervision is undertaken in the capacity solely as a building or engineering contractor.’ This is the very activity, the court argued, that section 137F of the Act is directed towards. 

Consistent with the decision in Blakeley, courts will consider insuring clauses and the words ‘in the conduct of’ with a generous and wide interpretation. It may be that, had the wording not carved out the very activities that section 137F is directed towards, the court may have determined this issue differently, notwithstanding that the liability still arose against him as a director.