When FKP took out a professional indemnity policy with Zurich, they thought it would protect them in relation to construction disputes. They thought wrong. A tough lesson in obtaining the most appropriate insurance policy in the services you provide.
The preliminary determination of two questions
- Does the Policy on its proper construction provide that the insured’s sole right to payment of claims expenses prior to final adjudication of the claim fall under the Advancement Provision (Claims Condition 1)?
- Is the whole of the claim made against the Applicants in the OC Proceeding a 'claim for civil liability...based on the insured’s provision of the professional services' within the meaning of the Insuring Clause.
The applicants to the proceedings, FKP Commercial Developments Pty Limited and FKP Constructions Pty Limited (collectively, the FKP parties), obtained a Design and Construction Professional Indemnity policy from the respondent, Zurich Australian Insurance Limited (the policy).
The FKP parties sought an indemnity under the policy for loss suffered by reason of breach of statutory warranties under Home Building Act 1989 (NSW).
FKP alleged that the loss the subject of the claim fell wholly for cover within the insuring clause, and accordingly that Zurich must indemnify it for all claim expenses incurred up to the limit of liability under the policy. Zurich formed the view that there were both covered and uncovered losses, requiring apportionment. In circumstances where the parties could not agree on the operation of the insuring clause, FKP requested that the Court determine the application of the insuring clause.
Zurich disputed that the Court could make such a determination on the basis that the covered and uncovered loss could not be judicially determined as the underlying proceedings in the Supreme Court had not yet been finally adjudicated. Further, Zurich asserted that any claim expenses could only be made under the advancement provision which operated independently of the insuring clause.
The decision at trial
On 25 July 2022 Jagot J determined that each of the two questions above was to be answered ‘no’.
Her Honour found that the policy did not specify that questions around allocation were required to be determined after final adjudication of the underlying proceeding, or specify that there could be no arbitration or determination regarding allocation prior to final adjudication.
Further, the policy did not provide that the insured's only right to payment of claims expenses prior to final adjudication of claim was under the Advancement Provision.
With respect to whether the insuring clause had been triggered, fully or in part, the Court concluded that the source of FKP’s liability was as head contractor rather than in their capacity as having provided any ‘professional services’.
Ultimately, the Court found that the insuring clause had not been enlivened in this matter as there was insufficient connection between FKP’s actions and the provision of ‘professional services’. The Court found that the claim pertained to 'construction, manufacture, assembly, installation, erection, maintenance or physical alteration of buildings, goods, products or property', which was not covered under the policy.
Implications for you
This case provides a detailed example of why, when interpreting a policy, it is essential to consider how it operates as a whole, as opposed to focussing on its constituent parts. In this case, her Honour adopted a construction of both the insuring clause and Advancement Provision which allowed those parts of the policy to interact in a manner which made commercial sense.
For insureds and brokers, the case also demonstrates the importance of considering the different nature of the risk confronted by entities who engage in the management, as opposed to the performance, of construction activities.