Legal Directions


In its recent decision in Underwriters at Lloyds v Aquagenics Pty Ltd (in liquidation) [2018] FCAFC 9, the Full Federal Court confirmed the trial judge’s findings that the policyholder’s deliberate decision to abandon a contract was a ‘wrongful act’ which arose ‘in the course of [its] professional activities’. The author discussed the decision at first instance in our 3 July 2017 edition of Legal Directions.


The respondent (Aquagenics) carried on a water treatment engineering business and held an architects and engineers professional indemnity policy with the appellant insurers. Aquagenics contracted to perform works for the Break O’Day Council (the Council) for the design and construction of a waste water treatment plant in Tasmania.

A dispute arose between Aquagenics and the Council over whether Aquagenics had conducted the pre‑commissioning tests it was required to perform under the terms of the contract. After giving Aquagenics notice to show cause, the Council took the work out of its hands. After serving its own notice to show cause, Aquagenics asserted that the Council had repudiated the contract and elected to accept the repudiation and terminate the contract.

The dispute went to arbitration, and the Arbitrator awarded the Council damages of over $1.3 million. The arbitrator’s findings included that Aquagenics had failed to comply with its design and construction specifications under the contract, and the damages awarded included the costs to rectify the design defects.

Aquagenics made a claim under its professional indemnity insurance policy. Its insurers denied cover.

Issues determined

The trial judge found that even though the decision of Aquagenics to abandon the contract was not unintentional, it was a ‘wrongful act’ within the meaning of the policy. The trial judge also found that the claim arose ‘in the course of its professional activities’

The respondent appealed, contending that the trial judge misconstrued the policy in how the insuring clause operates.

‘Wrongful act’

The insurers argued that it was apparent from a contextual reading of the phrase ‘wrongful act’ that it was intended to cover acts that are inadvertent. The Full Court agreed with the trial judge’s finding that the decision of Aquagenics to abandon the contract had not been a commercial decision, but that it could do no further work until seed sludge was made available by the Council. It also agreed with the trial judge’s reasons that:

  • this phrase, on its ordinary meaning, was not confined to inadvertent or unintentional acts, errors or omissions;
  • the extensive exclusions in the policy suggested that the definition was not intended only to cover inadvertent or unintentional acts, errors or omissions; and
  • the policy was a commercial contract and should be given a business-like interpretation, and that this construction was not inconsistent with the commercial purpose of the policy.

‘In the course of its professional activities’

The insurers argued that the wrongful act did not arise in the course of Aquagenics’ professional activities because the non‑completion of the work did not involve any professional judgment or skill; it was the mere assertion of a contractual position.

The Full Court disagreed, and stated that the questions of pre-commissioning and commissioning do involve professional skill. Further, that the maintenance of a contractual position based on these questions can be seen to be in the course of professional activities. It said that this was the trial judge’s implicit (and correct) finding.

‘As a result of’ the claim

The insurers also argued that to the extent that a ‘claim’ was made during the policy period, the claim was only in relation to the failure to complete the pre‑commissioning works. They argued that the defects in design works were not known by the Council at the time Aquagenics notified the insurers of the initial claim, and that the award of damages made in relation to defective works did not arise, ‘as a result of’ the ‘claim’.

The Full Court found that there was no error in the trial judge’s finding that liability for design costs was as a result of the claim that was initially made for pre-commissioning and commissioning. It said that as a result of the claim, work was done by others and defective design discovered. Further, the costs of that were part of the legal liability. This was causally related to the claim, in that it was a result of the claim.


This case suggests that a court will give an expansive construction of a professional indemnity policy, and confirms that a court will approach the policy as a commercial contract and give it a business‑like interpretation. When drafting, and subsequently interpreting, the policy provisions it is important to focus on the language used in the context of the policy as a whole, and the commercial purpose and object of the policy in determining how a reasonable person in the parties’ position would understand the language used.

It also demonstrates that when assessing whether liability in respect of which indemnity sought arises in the course of a policyholder’s ‘professional activities’ and whether the loss claimed is ‘as a result’ of a ‘claim’ made in the insuring period, a court will focus on the underlying facts.

Authored by Greg King, Special CounselMelbourne 

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