Key Point
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Care needs to be taken to correctly characterise a Claim so as to properly determine whether an exclusion applies.
A recent Federal Court decision serves as a reminder of the care that needs to be taken when determining whether a claim falls for indemnification under a policy. Each element of the claim needs to be properly characterised. For example: If there is a contractual liability, what is the precise basis of that liability? Are there any elements of that liability which fall outside the primary insuring clause? Has there been a wrongful act? Was the wrongful act in the course of professional activities? Can the contractual liability exclusion be applied? Can the goods and workmanship exclusion be applied?
In Aquagenics Pty Limited (in liquidation) v Certain Underwriters at Lloyd’s Subscribing to Contract Number NCP106108663 [2017] FCA 634, the Federal Court had to deal with a number of issues arising from a claim by an insured under an Architects and Engineers professional indemnity policy.
In March 2006, pursuant to a contract with the Break O’Day Council, Aquagenics commenced work for the Council for the design and construction of a wastewater treatment plant at St Helens, Tasmania.
In around June 2007, a dispute arose between the 2 parties. The dispute commenced with an argument as to whether Aquagenics, had complied with its pre-commissioning obligations under the contract. Each party contended that the other party was in breach of contract.
With effect from 30 August 2007, the Council took the completion of the pre-commissioning and commissioning works under the contract out of the hands of Aquagenics.
On 19 September 2007, the Council’s solicitors made a demand for compensation on Aquagenics.
The Council then completed and/or corrected some of the work using its own employed staff and engaged contractors to complete the remaining work.
The dispute went to arbitration and in May 2013, the Arbitrator awarded the Council damages quantified in the amount of $1,346,111.57 plus interest, legal costs and fees. The Arbitrator found that Aquagenics, due to its own default, had failed to undertake pre-commissioning as required by the contract. Some of the damages awarded against Aquagenics were for the cost of repairing or replacing defective works.
Aquagenics’ insurers were on risk under the professional indemnity policy for the period 18 April 2007 to 18 April 2008.
In May 2014, Aquagenics (then in administration) gave notice to the insurers that the Council had made a claim against it during the period of the policy triggering the company’s entitlement to be indemnified under the policy in respect of the damages, interest, costs and fees awarded by the Arbitrator. The insurers denied liability to indemnify on a number of bases.
Under the policy the insurers agreed to pay, on behalf of Aquagenics, all sums which Aquagenics became “legally obliged to pay…as a result of any claim first made against the company…and notified to [the insurers] during the period of the policy arising out of any wrongful act committed by [the company] in the course of [its] professional activities”. Wrongful act was defined to include any act error or omission. The policy included a “contractual liability” exclusion and a “goods and workmanship” exclusion.
The insurers argued:
- that the demand made on Aquagenics did not arise out of any “wrongful act” committed by Aquagenics because the act, error or omission of Aquagenics, for it to fall within the primary insuring clause, had to be inadvertent, unintentional or accidental. The judge came to the firm conclusion that the policy contained no such requirement.
- that the conduct by Aquagenics did not fall within the primary insuring clause because it was not conduct “in the course of its professional activities”. The insurers argued that the requirement that the wrongful act be committed by the insured “in the course of” its professional activities could only be engaged if the wrongful act is committed by the insured in performing its contracted services. It was argued that Aquagenics had abandoned its contract before the contracted work was finished and it was this that gave rise to its liability rather than anything in relation to its professional activities. The judge found that it was the failure to comply with the contractual obligations with respect to pre-commissioning that gave rise to the claim and that therefore the claim arose from a “wrongful act” referable to the work carried out by Aquagenics “in the course” of its professional activities.
- that the “claim” made against Aquagenics during the period of insurance was only in respect of Aquagenics’ failure to complete pre-commissioning and did not include the subsequent claim for defective works that the Council made against Aquagenics in the arbitration, which was the subject of awards made by the Arbitrator. The insurers argued that the defective works component of the award was therefore not indemnifiable under the policy. The judge accepted that none of the correspondence on which Aquagenics relied as constituting the “claim” included any claim for money or compensation related to the defective work. However the judge pointed out that the insuring clause was triggered if Aquagenics became legally obliged to pay the cost of rectification of the defects “as a result of” the claim for compensation that was made by the Council against Aquagenics during the period of the policy. Although the phrase “as a result of” requires a causal connection between the damages awarded for the defective work and the “claim” that was made, the phrase “as a result of” does not require that the claim be the direct cause of the liability incurred. The fact that the Council did not know about the design defects at the time the claim was made does not mean that the later damages award in respect of the design defects was the result of a new and unrelated claim for compensation not made during the period of insurance.
- that the exclusion “for any claim…arising directly or indirectly from any liability that [the insured] assumed under an express warranty, agreement or guarantee unless such liability would have attached to [the insured] notwithstanding such express warranty, agreement or guarantee” allowed them to deny indemnity. In particular the insurers argued that the exclusion excludes liability arising directly or indirectly from the contractual obligation to undertake pre-commissioning in the manner and form prescribed by the contract and that the contractual requirements with respect to pre-commissioning were not obligations which would arise in tort under general law absent the contract; The judge disagreed and pointed out that the exclusion clause, on its proper construction, is not engaged, as in this case, by a “claim” arising directly or indirectly from a failure to discharge the contractual requirements in respect of the work to be performed under the contract. Moreover the award against Aquagenics followed contractual principles of damages.
- that they could deny indemnity, at least in part, arising from the goods and workmanship exclusion for any claim arising directly or indirectly out of or relating to goods or products “supplied, distributed, repaired, altered, manufactured, assembled, processed, installed or maintained” by the insured or from workmanship in the “manufacture, fabrication, construction, erection, installation, assembly, alteration, servicing, remediation, repair, demolition or disassembly”. Aquagenics accepted that any claims for indemnity arising out of poor workmanship are excluded by the policy but contended that none of the amounts in respect of which indemnity is sought relate to poor workmanship but, instead, relate to design defects. The judge found that because it was the defect in design which gave rise to the liability relating to the defective work, and not the products or workmanship themselves, the exclusion clause does not apply.
Post by Paul Hendriks