Third party claims and indemnity triggers: why precision in correspondence matters

The plaintiff entered a design and construct contract with SMLXL Projects (NSW) Pty Ltd for the construction and alteration of two mixed use commercial and residential buildings.The plaintiff sought damages to rectify defects to the buildings caused by alleged deficiencies in design and supervision provided by SMLXL during the project. The plaintiff also sought liquidated damages for delays to the project.

SMLXL subsequently entered liquidation and the plaintiff sought to pursue its breach of contract claims directly against SMLXL’s professional indemnity insurer, Chubb Insurance Australia Limited, under section 5 of the Act.

The 'well settled criteria' to obtain leave to proceed against an insurer under the Act includes:

• an arguable case that SMLXL was liable to the plaintiff;
• a reasonable possibility that SMLXL could not satisfy any judgment; and
• an arguable case that the contractor would be entitled to indemnity under the insurance policy if found liable.

The plaintiff has the onus of establishing each element of the legal test.

The relevant design & construct professional indemnity insurance policy provided cover on a claims-made basis for civil liability in respect of the conduct of professional services. Importantly, the policy required a 'written demand for civil compensation or civil damages or non-monetary civil relief' to trigger coverage.

As the policy was a claims-made policy, the plaintiff relied on project correspondence to establish the existence of a written demand during the relevant policy period, including:

• emails and letters sent to SMLXL raising concerns about defects and delays in the project and requesting SMLXL 'cease delays and reach practical completion as required by the Contract';
• notices under the contract referring to alleged breaches and requests for 'issues to be rectified promptly'; and
• general assertions of 'we reserve our rights' and 'we expect that any costs incurred will be addressed' and references to potential liability or contractual consequences including 'exposure to liquidated damages'.

Justice Williams found that while SMLXL’s insolvency and arguable liability to the plaintiff was not in dispute, the plaintiff failed to satisfy the third limb of the test. Specifically:

• The plaintiff’s correspondence did not constitute a ‘written demand’, either expressly or impliedly, for civil compensation, civil damages or non-monetary relief as required in the definition of ‘Claim’ in the policy.
• The court drew a distinction between asserting a right and making a demand, stating ’a demand must be more than an assertion of rights—it must be a request for something as due’.
• The correspondence relied upon by the plaintiff was anticipatory and lacked the necessary clarity and specificity to constitute a written demand. The language used was equivocal, often framed as part of ongoing discussions or dispute resolution processes. There was no express or implied request for payment or specific relief that would reasonably be interpreted as a demand under the policy.
• Applying a reasonable businessperson test, a recipient of the relevant correspondence would not interpret the communications as a demand for relief, but rather part of a broader negotiation or assertion of contractual rights.
• The liquidated damages claimed were characterised as a contractual debt, not a claim for civil compensation. Even if this characterisation was not accepted, in the absence of an express or implied request for payment, the correspondence could not be a demand ‘for’ civil compensation or damages.
• The plaintiff’s demands for SMLXL to cease delays and complete the project were not ‘non-monetary civil relief’ in the context of the definition of ’Claim’. A businesslike interpretation of the policy required ’non-monetary civil relief’ to be construed as only non-monetary legal or equitable relief of a kind which may be granted by a court or tribunal in civil proceedings. Complaints about delay, inconvenience, and cost, accompanied by a reservation of contractual rights, do not amount to a ’demand’ for ’relief’, and are not a ‘Claim for civil liability’. 

As a result, the plaintiff failed to establish an arguable case that SMLXL would be indemnified if found liable and leave to proceed against the insurer under the Act was refused.