The recent decision FKP Commercial Developments Pty Ltd v Zurich Australian Insurance Limited [2022] FCA 862 confirms that professional indemnity insurance policies taken out by construction companies will not cover losses that are not sufficiently connected to the provision of “professional services”. The Court also made it clear that professional indemnity insurance policies are to be interpreted as “whole” rather than reading individual clauses in isolation.
The facts of the matter are set out as follows.
FKP Commercial Developments Pty Limited and FKP Constructions Pty Limited (FKP Parties) secured a Professional Indemnity insurance policy issued by Zurich (the policy).
In an underlying Supreme Court proceeding, the owners of Strata Plan No 842398 claimed damages from the FKP Parties due to defects to the common property of residential buildings located in Rosebery, NSW. More particularly, the owners claimed that FKP were responsible for the loss suffered by the plaintiff as the FKP Parties had breached statutory warranties in the Home Building Act 1989 (NSW) as well as common law and other statutory obligations. The FKP Parties defended the Supreme Court proceeding and incurred significant costs associated with that defence.
The FKP Parties requested that Zurich cover the liability it might have to the plaintiff in the Supreme Court proceeding as well as the costs of defending the matter. Zurich provided cover to the extent that there were both covered and uncovered losses pursuant to the “insuring clause” in the policy. The “insuring clause” is the section of the insurance policy that sets out the scope of the risk that will be covered. In this case, the insuring clause covered the FKP parties against loss incurred as a result of any claim for civil liability based on the provision of “professional services”.
The FKP Parties applied to the Federal Court to determine the application of the “insuring clause”. Zurich contended that the Court could not determine the matter as the Supreme Court proceeding had to be adjudicated first and that any claim for defence costs could only be made under the “advancement provision” in the policy. The “advancement provision” stipulated the rules around if and when the payment of claims expenses can be made. It was Zurich’s view, that the “advancement provision” and “insuring clause” operated independently of each other. However, the Court determined that the “advancement provision” did not contain any direction that underlying proceedings had to be resolved before allocations of claims expenses could be made and, in any event, the “advancement provision” was not the only available avenue of recovery for the FKP parties.
The judgment cites many relevant authorities as to how insurance policies should be interpreted. The main message here is that policies need to be read as a whole, rather than focusing on individual clauses. It was the Court’s view that the “insuring clause” and the “advancement provision” should be read together so that the provisions operated in a way that made commercial sense.
Although Zurich’s arguments concerning the “advancement provision” were unsuccessful, it did not follow that cover extended to the FKP Parties as the Court had to determine whether or not, the “insuring clause” was triggered. The Court noted that the “insuring clause” was only invoked if the causes of action against the insured depended on the relevant provision of “professional services”. The scope of “professional services” was also defined in the Policy. The definition rather extensively set out the types of services that professionals are commonly engaged for (design, specification, surveying and construction management to name a few). The definition also sets out what was not covered under professional services which included responsibilities such as performance or supervision of the construction and environmental protection.
The Court therefore concluded that “…the lack of sufficiency of any connection is reinforced by the fact that it is not presently apparent that any cause of action, either in whole or in part, depends on the FKP Parties having provided professional services”.
The Court decided that the allegations made against the FKP parties arise from “construction, manufacture, assembly, installation, erection, maintenance or physical alteration of buildings, goods, products or property” and/or defects in or lack of suitability of products and goods used in the construction of the common property of the residential building” and therefore the FKP Parties had no entitlement to indemnity under the “insuring clause”.
Appropriately, the Court remarked that the FKP Parties could have obtained a “developers and design and construction style insurance policy” which would not be confined to a form of professional indemnity insurance, therefore providing the appropriate cover for their work.
The complete judgment can be found here.
Lessons learned
It is important for consultants to understand what if any insurance cover builders have. It seems to us that consultants should be aware that:
- construct-only builders are unlikely to have any professional indemnity insurance cover at all; and
- builders who have in-house design teams or who work on design and construct projects may have professional indemnity insurance, but as this case demonstrates professional indemnity insurance will only cover professional services like design and will not generally cover construction defects.
Unfortunately, all too often builders as well as construct-only builders are not adequately insured and so when problems arise on projects, it is too easy to target consultants for these claims.
Kathryn Budd
Risk Manager
This article is only general advice in respect of risk management. It is not tailored to your individual needs or those of your business, nor is it intended to be relied upon as legal or insurance advice. For such assistance you should approach your legal and/or insurance advisors.