WASTE NOT, WANT NOT: A QUESTION OF INTERPRETATION

Legal Directions

Aquagenics Pty Ltd (in liquidation) v Certain Underwriters at Lloyds subscribing to contract number NCP106108663 [2017] FCA 634

Introduction

In a recent Federal Court decision, the Court considered the construction and interpretation of a professional indemnity policy. The Court considered whether a ‘wrongful act’ as defined in the policy was limited to an inadvertent or unintentional act. It also considered the connection required between the insured’s liability and the ‘claim’ which was originally made.

Facts

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

Whether Aquagenics’ insurers were obliged to pay Aquagenics the amounts claimed, depended on whether (1) a ‘claim’ was made; (2) which arose out of any ‘wrongful act’ committed by Aquagenics; (3) in the course of its professional activities; and if so, whether (4) Aquagenics became ‘legally obliged’ to pay the amounts in respect of which indemnity was claimed ‘as a result of’ the claim; and (5) certain exclusions did not apply.

‘Wrongful act’

It was common ground that a claim as defined had been made in the policy period, although there was argument about the ambit of that claim. The insurers argued that ‘wrongful act’ in its defined sense only covered an inadvertent and not an intentional ‘act, error or omission’. They submitted that Aquagenics’ liability arose from its deliberate decision to walk off the job and terminate the contract. The Court disagreed and held that this phrase was not confined to inadvertent or unintentional acts, errors or omissions. It said that 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.

The Court stated that the construction contended by the insurer required the implication of the word ‘intentional’, but unless the context required otherwise, words should be given their ordinary meaning. It said that an error or omission in ordinary meaning can involve deliberate conduct. It also said that the extensive exclusions in the policy suggested that the definition was not intended only to cover inadvertent or unintentional acts, errors or omissions.

In the course of its professional activities

The insurers also argued that the non‑completion of the work by Aquagenics and its ‘abandonment’ of the contract was not a wrongful act ‘in the course of’ its professional activities. The Court disagreed and found that the claim arose from a ‘wrongful act’ referrable to the work carried out by Aquagenics. In particular, that the central issue in the arbitration proceedings was whether the pre‑commissioning works had been completed, and whether or not those works were properly taken out of its hands.

‘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 awards of damages made in relation to defective works did not arise ‘as a result of’ the ‘claim’.

The Court accepted that none of the correspondence which Aquagenics relied on as constituting the ‘claim’ included any express claim related to the defective work. However, it held 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. Further, that the phrase ‘as a result of’ required a causal connection between the damages awarded for the defective work and the ‘claim’ that was made, but it did not require that the claim should be the direct cause of the liability incurred; nor must the liability precisely correlate with the ‘claim’ that was first made and notified.

The Court said that it was necessary to focus on the underlying facts, rather than the legal or factual assertions in the ‘claim’ made against the company in the insuring period. It held that the additional costs of rectifying the defects which, at the time of the arbitration proceedings, had then become apparent, fell within the scope of the original claim arising out of Aquagenics’ failure to complete pre‑commissioning. The fact that the Council did not know about the design defects at the time the claim was notified did 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. It said that the right to be indemnified for the loss occasioned by the design defects arose because of the nature of the claim directly engaging the insuring clause, that is, Aquagenics’ failure to complete pre‑commissioning. Further, that the liability arising to Aquagenics for the defective design work arose from the same set of facts and circumstances entitling the Council to remove the remaining works from its hands and pursue damages for breach of contract. The insurers were therefore liable to indemnify Aquagenics for all the amounts claimed.

The respondents were also unsuccessful in their attempts to rely on certain exclusions, including a contractual liability exclusion, contained in the policy terms.

Comment

This case confirms that in the construction and interpretation of a policy of insurance, a court will approach the policy as a commercial contact and give it a business‑like interpretation. In doing so, it will focus on the language used by the parties and the commercial purpose and object of the policy in determining how a reasonable person in the parties’ position would understand the language used. Further, it suggests that when assessing whether liability in respect of which indemnity sought is ‘as a result’ of a ‘claim’ made in the insuring period, a court will focus on the underlying facts, rather than the legal or factual assertions in the ‘claim’ initially made against the company in the insuring period.

Authored by Greg King, Special Counsel, Melbourne.


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