It’s all in the construction: Zurich Australia Insurance Ltd v FKP Commercial Developments Pty Ltd  FCAFC 188
By Bridget Wall and Daniel Simpson
The Full Court of the Federal Court of Australia has dismissed an appeal by Zurich Australia Insurance Limited (Zurich). This appeal challenged a prior ruling that determined FKP Commercial Developments Pty Limited (FKP Commercial) had the right to coverage for ‘claim expenses’.
Importantly, the claimed coverage did not fall under the insuring clause rather an extension that specifically covered professional services provided by subcontractors for which the insured is responsible, as outlined in the Design and Construction Professional Indemnity Insurance Policy.
Background to the appeal
FKP was the developer of a residential and commercial building project in Rosbery, New South Wales with FKP Constructions Pty Ltd (FKP Constructions) as head contractor. It subcontracted the whole of the design and construction works but maintained control as project managers.
The owners of the common property jointly sued FKP Constructions and FKP Commercial (together known as FKP), alleging various construction defects and losses due to breaches of statutory duties under the Home Building Act 1989. FKP sought indemnity under its Design and Construction Professional Indemnity Insurance Policy including payment of its ‘claim expenses’ related to the legal proceedings. Zurich disputed that ‘claim expenses’ fell within the insuring clause and argued it was only liable for amounts attributable to covered matters under the ‘Allocation’ provision and those costs assessed at the conclusion of the proceedings under the ‘Advance payment of claim expenses’ provision (Advancement Provision).
Her Honour Justice Jagot divided the proceedings into three distinct questions. These were:
- ‘Does the Policy on its proper construction provide the insured’s sole right to payment of claims expenses prior to final adjudication of the claim is under the Advancement Provision’;
- ‘Is the whole of the claim made against the Applicants [FKP] in the OC Proceeding [brought by the owners of the common property] a “claim for civil liability…based on the insured’s provision of the professional services’ within the meaning of the insuring clause”; and
- ‘Is the whole of the claim made against the Applicants in the OC Proceeding “claim arising from the conduct of any consultants, subcontractors or agents for which the insured is legally liable in the provision of the professional services” within the meaning of the extension (Extension 3).
Her Honour answered ‘no’ to the first two questions. She found that FKP was not entitled to cover for ‘claim expenses’ because the alleged duties said to have been breached were in their capacity as the developer and head contractor rather than ‘professional services.’ As a result, Her Honour concluded the insuring clause wasn't activated because there wasn't a strong enough connection between the claim and the policy's insuring clause.
Her Honour remarked that FKP could have obtained an insurance policy that covered the loss for the specific circumstances rather than relying on a general professional indemnity policy. We reported on this decision.
In answer to question three, His Honour Justice Jackman (as Her Honour Justice Jagot had left the court) answered ‘yes’ (in FKP Commercial Developments Pty Ltd v Zurich Insurance Ltd (No 2)  FCA 582).
His Honour found that, unlike the insuring clause, Extension 3 did not require the claim in question to be one of ‘civil liability.’ On this basis, His Honour found Extension 3 did not confine operation to circumstances where the liability on the part of the insured involved a breach of professional services.
As FKP had subcontracted the design and construction, its role as project manager fell within the meaning of ‘professional services’. For that reason, His Honour was satisfied that cover was available under Extension 3.
Zurich appealed question three specifically.
The central contention by Zurich was that Extension 3 did not respond to services provided by the sub-contractor as these were ‘in the nature of construction’ rather than the ‘professional services.’ Specifically, Zurich submitted that Extension 3 was limited to the provision of professional services by the insured personally.
His Honour Justice Stewart was not convinced by Zurich’s argument. His Honour observed that the only services provided by FKP were project management and construction management services including managing the design and construction works by its sub-contractors. His Honour deemed those services to be ‘professional services’ under the policy and that was more than a purely temporal connection. His Honour noted the use of the word ‘their’ instead of ‘the’ in Extension 3 (ie in their provision of professional services) would have easily achieved Zurich’s intention.
His Honour agreed with Justice Jackman that Extension 3 ‘extends beyond the cover provided by the insuring clause on its own.’ His Honour added that:
‘Extensions to claims arising from any consultants, sub-contractors or agents for which the insured is liable in the provision of professional services, where it is not required that consultants etc. were providing professional services, is not an entirely new category of cover.’
His Honour confirmed there was no reason why the limited extension under Clause 3 should not be regarded as properly forming part of the professional indemnity insurance.
His Honour agreed with Justice Jagot that the policy construction was commercial in that it covered the insured for their own professional services and that of any consultant, sub-contractor or agent providing ‘professional services’, but not other types of services they might offer.
Finally, His Honour agreed the language used in Extension 3 was ‘too intractable’ for Zurich’s appeals to commercial reasonableness to be treated as paramount to the broad ordinary and natural meaning of the provision. It was noted that in the context of the legislative regime governing building projects, developers and builders are exposed to the liability for the conduct of their subcontractors, even where the role is no more than project management (ie professional services) role.
His Honour also remarked the insurer has a contractual right of subrogation by which it can seek to recover against sub-contractors that may be at fault, which provides a commercial mitigant.
His Honour concluded by stating that:
‘Zurich’s criticism stems from an a priori position, namely that the policy is limited to cover for liability for professional services. However, the metes and bounds of cover must be discerned from the terms of the policy. They cannot be presupposed and imposed on the terms of the policy.’
- When interpreting an insuring clause and the effect of an extension of cover, the ‘metes and bounds’ of cover must be discerned from the exact terms of the policy rather than imposed by interpretation. This highlights the importance of using the correct words (ie ‘their’ instead of ‘the’) over and above interpretation after the fact.
- In the view of the court, there is a commercial utility to insurers providing cover in respect of developers and project managers including to their sub-contractors, but not for their provision of other services. The commercial utility stems from the context of the legislative regime and statutory framework including the rights of subrogation.
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