You get what you pay for: interpretation of insuring clause and conditions under a Design and Construction Professional Indemnity Insurance policy

FKP Commercial Developments Pty Ltd v Zurich Australian Insurance Limited [2022] FCA 862

By Bridget Wall and Tammy Tang

A recent Federal Court case is an important reminder for developers and head contractors to consider obtaining separate developers and design construction works style insurance policies, rather than relying solely on professional indemnity insurance.

Background

FKP Commercial Developments Pty Limited (FKP Commercial) was the principal/developer of a residential and commercial building project at Rosebery in New South Wales under a contract with FKP Constructions Pty Limited (FKP Constructions) as head contractor. FKP Constructions used third party consultants and sub-contractors and did not itself perform any design or construction works.

In related ongoing NSW Supreme Court Proceedings, the Owners of Strata Plan No 84298 (Owners of SP 84298), the registered proprietor of the common property in the residential and commercial buildings at Rosebury, allege as against both FKP Commercial and FKP Constructions (FKP Parties):

• numerous defects and non-complying construction works in the common property of the building; and
• loss arising from breaches of the statutory warranties under the Home Building Act 1989 (NSW) and/or a common law or statutory duty of care.

The FKP Parties held at the relevant time a ‘Design and Construction Professional Indemnity’ insurance policy (Policy) with Zurich Australia Insurance Limited (Zurich).

In Federal Court proceedings before Justice Jagot (as she then was), the FKP Parties sought indemnity from Zurich under the Policy in relation to any liability owed to the Owners of SP 84298. The FKP Parties asserted that under the Policy’s insuring clause, they were entitled to indemnity for all liability to the plaintiff and they sought that Zurich pay their ‘claim expenses‘, which included legal costs and expenses incurred in the defence of the Supreme Court proceeding. Zurich did not accept that the FKP Parties’ potential liability was based on the provision of professional services as defined under the Policy.

Zurich’s position was that the payment of claim expenses did not fall within the application of the insuring clause, but was dealt with exclusively under the claims condition 1 ‘Advance payment of claim expenses’ of the Policy (Advancement Provision).

The Advancement Provision stated that Zurich will advance ‘claim expenses’ incurred by the insured prior to the final adjudication of the claim, and that all payments are to be repaid to Zurich if the insured is not entitled to payment of these expenses under the Policy. The Policy also contained a claims condition 2 ‘Allocation’ (Allocation Provision), which stated that Zurich is only liable for amounts attributable to covered matters, including ‘claim expenses’, otherwise costs payable by Zurich would be reduced to reflect a fair and proper allocation. If the insured and Zurich fall into dispute as to the advance payment of the claim expenses, that dispute would be submitted to senior counsel for a determination.

Issues

The issues to be determined were:

• did the Policy on its proper construction provide that the FKP Parties’ sole right to payment of claims expenses prior to final adjudication of the claim was under the Advancement Provision of the Policy? (Issue 1); and
• whether the claim made against the FKP Parties in the Supreme Court proceeding was a ‘claim for civil liability…based on the insured’s provision of professional services’ within the meaning of the Policy’s insuring clause (Issue 2), in circumstances where:
  • FKP Commercial was a developer within the meaning of the Home Building Act;
  • FKP Constructions entered into a design and construct contract with FKP Commercial (Head Contract);
  • FKP Constructions sub-contracted the design and construction works it was obliged to perform under the head contract, and only performed project and construction management services (which are considered to be services within the definition of ‘Professional Services’ in the Policy); and
  • there was no causal connection between the provision of the professional services by the FKP Parties and the alleged defect.

Findings

The Court found the answers to both issues to be no. Although interestingly, while her Honour ultimately found that the FKP Parties were not entitled to cover under the Policy, she did not find that it was on the basis of the arguments put forward by Zurich.

Issue 1

The FKP Parties’ position was that the covered and uncovered loss could be determined in the Federal Court proceeding, before a determination of the Supreme Court proceeding. Further, and in any event, FKP Parties submitted that all of the loss in the Supreme Court proceeding would be ‘loss’ incurred within the meaning of the insuring clause.

Zurich submitted that the Allocation Provision only allows a single allocation, not multiple allocations throughout the litigation, therefore the allocation loss could only take place at the final determination of the Supreme Court proceeding when all losses are known. Even if it could be determined, any payment of claim expenses could only be made under the Advancement Provision which operates to the exclusion of the Insuring Clause regarding the payment of claim expenses prior to the final adjudication of a claim.

Ultimately the Court found as follows:

• The fact that the advancement provision is styled as a claim condition did not explain in of itself why it would operate to the exclusion of the insuring clause.
• The Advancement Provision did not state that it operated to the exclusion of the insuring clause, nor did it purport to prevent an insured from seeking and obtaining a judicial determination that all loss the subject of the claim will be loss within the insuring clause.
• Instead, the Allocation Provision recognised that claim expenses are within the definition of loss and that claim expenses are able to be incurred before the final adjudication of a claim.
• The Allocation Provision and the Policy as a whole leave it to Zurich (if it agrees with the insured) or, failing agreement, a court to decide as to whether the whole or part (and if so what part) of the claim expenses are within the definition of loss and accordingly the insuring clause prior to a final adjudication of a claim.

Issue 2

Zurich contended that for the insuring clause to be engaged, the professional services must be personally performed by the FKP Parties as insureds under the Policy, and not in circumstances where the FKP Parties merely had contractual responsibility for the performance of a professional service by another party. Zurich submitted that not all the works performed by FKP were within the definition of ‘Professional Services’.

Moreover, Zurich submitted that the extension of cover clause (Extension Clause) only applied if the FKP Parties were ‘legally liable’ via a judgment or settlement for the conduct of any sub-contractor/agent, where the third party itself provided the professional services.

The FKP Parties asserted that the loss incurred in the Supreme Court proceeding was a result of a claim based on the FKP Parties’ provision of professional services within the meaning of the Insuring Clause. They submitted that they were entitled to indemnity under the Extension Clause, which applied if it was legally liable for the conduct of any sub-contractor/agent where the FKP Parties themselves were providing the professional services.

The Court said that the insuring clause will only be engaged if there is loss incurred as a result of a claim for ‘civil liability’ based on the insured’s provision of professional services. On the other hand, the Extension Clause will be engaged if there was loss incurred as a result of a claim arising from the conduct of any sub-contractors/agents of the insured.

The Court determined that the source of the alleged duties in the Supreme Court proceedings of the FKP Parties was as owner/developer and as head contractor respectively, instead of them having provided any ‘professional services’. Therefore, the insuring clause was not triggered as the FKP’s actions did not have sufficient connection with ‘professional services’ as defined in the Policy.

The Court characterised the liability of the FKP Parties in the Supreme Court proceeding as wholly based on or arising from the following which were not covered under the policy:

• ‘construction, manufacture, assembly, installation, erection, maintenance or physical alteration of buildings, goods, products or property (which are excluded from the definition of ‘Professional Services’); or
• ‘defects in or lack of suitability of products and goods used in the construction of the common property of the residential building‘ (which are caught by an exclusion clause under the Policy).

Key takeaways

So what are the key takeaways from the decision?

• First, an advance payment type clause in a Design and Construction Professional Indemnity Insurance policy operates where there is uncertainty about the extent of loss within an insuring clause. An advancement provision (even if it is written as a condition) does not intend to operate to the exclusion of the insuring clause.
• Second, of the professional services performed by the insured must have some identifiable causal relationship with the cause of action in order for them to be covered by an insuring clause of the policy.
• Finally, as Her Honour said, ‘a party gets the policy they pay for’. It was noted that the FKP Parties could have obtained an insurance policy which would have provided cover for this loss. The decision is an important reminder for developers and head contractors who fall within the scope of the Design and Building Practitioners Act 2020 (NSW) that consideration should be given to obtaining a separate developers and design and construction style insurance policies. If you are relying solely on a form of professional indemnity insurance, you may find yourself without cover for these types of claims.