BUILDER LOSES OUT IN COVERAGE DISPUTE: INSURER WINS ON PROFESSIONAL SERVICES EXCLUSION
January 10, 2018
Metricon Homes Pty Ltd v Great Lakes Insurance SE  VSC 749
Metricon, a volume residential builder, had built a home for landowners under a design and construct contract. The owners brought proceedings against Metricon, alleging defective design and construction of the home’s concrete slab and roof trusses, as well as various workmanship defects. Those proceedings were resolved. Metricon then sought indemnity, under its combined building contracts insurance policy, for the settlement sum and defence costs. While accepting the reasonableness of the settlement, the insurer denied that the policy responded. The resulting coverage dispute was recently decided by the Supreme Court of Victoria. In doing so, the Court had to consider various arguments over the interpretation of the policy.
Metricon sought cover under section 3 of the policy. It responded to liability to pay compensation for damage to property not owned by Metricon.
The insurer first argued that the settlement arose not from damage to property, being the home, but from Metricon’s failure to construct it in accordance with its contractual obligations. The Court rejected this argument. It considered that the plain words of the insuring clause covered Metricon’s liability to pay compensation in respect of a contractual liability. That said, the judge considered the argument was also defeated by the fact that the breaches of contract had resulted in consequential damage to the home, after it had been handed over to the owners.
Secondly, the insurer argued that, as the cover was limited to liability for damage to property not owned by Metricon, the damaged property could not have been supplied by Metricon in the first place. The Court disagreed, suggesting that such an interpretation was contrary to the ordinary meaning of the policy, and otherwise illogical. To illustrate the second point, the judge gave an example of faulty plumbing causing a flood in the home, suggesting there was no logical reason why liability for damage to carpet or furniture should be covered, but not for damage to skirting boards and other fixtures and fittings supplied and installed by Metricon.
Finally, the insurer pointed to section 2 of the policy, which provided cover for Metricon’s contractual liability for damage to property. It argued that section 3 should be read down in light of the more specific cover in section 2, which had different exclusions and a lower coverage limit. The court rejected that argument, as elements of the section 2 cover were not provided by section 3, some of the exclusions to section 3 assumed that it would otherwise cover the contractual liability indemnified under section 2, and there was evidence of a separate premium having been paid for the section 3 cover.
In the result, the court found that, subject to its exclusions, Metricon was covered by section 3 of the policy.
Professional advice / services exclusion
One of those exclusions applied to liability arising out of the ‘rendering of or failure to render professional advice or service by the Insured or any error or omission connected therewith’. The insurer accepted that in such an exclusion a narrow meaning is given to ‘professional service’, such that it would not extend to all services provided by Metricon as a builder, as otherwise the cover would be ‘inappropriately circumscribed’. However, it contended that the settlement arose out of services within that narrow meaning, being services traditionally regarded as being professional such as architectural design, engineering, surveying and quantity surveying.
Metricon did not dispute that was the case, but argued that the insurer had failed to discharge an onus of establishing what proportion of the settlement arose from the professional services, as opposed to non-professional services such as defective construction.
The court accepted that the services rendered by Metricon, albeit through its subcontractors, in relation to the design of the slab and roof trusses constituted professional services within the meaning of the exclusion. The wording of the exclusion, particularly the introductory phrase ‘arising out of’, meant it was only necessary that the allegations concerning those services be one ingredient of the liability that would be otherwise covered. As they were a significant part of the case against Metricon, the professional advice / services exclusion applied.
Despite that conclusion, the judge went on to consider a number of other exclusions to the Section 3 cover. In short, he found that two applied, but that Metricon was entitled to the benefit of a write back which would provide some cover.
The two applicable exclusions applied to liability for defects in the ‘Insured’s Products’, and the Court found that the home satisfied the definition of that term. ‘Insured’s Products’ was defined to include ‘any…products…manufactured, assembled…constructed, erected…sold…supplied… [and/or] distributed…by the Insured… (after such goods and/or products ceased to be in the possession and/or under the control of the Insured)’.
One of those two exclusions, with a narrower scope than the other, was subject to the write back. Even though the second exclusion made no mention of it, the Court held that it should be read as if it were subject to it. The policy would not otherwise make commercial sense. It was not however necessary to read the professional advice / services exclusion as being subject to the write back, given that it dealt with a different type of liability.
The write back preserved cover for Metricon’s liability for loss consequent upon a defect. The Court considered that Metricon had failed to adduce sufficient evidence to identify what part of the settlement related to the consequential loss as opposed to the defects themselves. On that basis, even if the professional advice / services exclusion did not apply, Metricon would only have been entitled to nominal damages.
One of the section 3 exclusions that the Court found inapplicable was the one for contractual liability. It was subject to exceptions for liability implied by law, as well as liability assumed either under a warranty of fitness or quality concerning the insured’s products, or under a construction contract in the normal course of Metricon’s business. While the insurer had not relied on that exclusion, the Court requested submissions on its application. However, it ultimately agreed with the insurer that it was inapplicable, saying it would only exclude cover where Metricon had assumed a specific contractual liability outside of its normal contractual arrangements. By way of an example of that, it suggested the exclusion would apply if the settlement had related to a claim arising solely from damage to the home caused by the owners themselves, and not from any construction defects.
This case is a reminder of the importance of policy drafting, in minimising the risk of coverage disputes, and particularly the need to maintain a logical consistency between different parts of the policy, be they insuring clauses, exclusions or otherwise. It is also a reminder that the introductory words to an exclusion clause can result in cover for a claim being unavailable, even where the claim has parts which fall outside the exclusion.
Authored by Scott Krischock, Special Counsel, Melbourne.
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