Professional Indemnity Policies and liability in the conduct of the Professional Business (Australia)

In this Supreme Court of Victoria judgment, the court considered coverage implications arising from the closeness or otherwise of the relationship between “claim” as made and the “professional services” that were insured.

The judgment on its facts and in the context of the wording held that the words “incurred in conduct of Professional Business” required a strong connection between a “Claim” and the professional business insured.

The court considered whether civil liability was incurred in the conduct of Professional Business.

The judgment confirms that the words "incurred in the conduct of Professional Business" in a professional indemnity insuring clause require a strong and direct connection between the claim and the professional services insured - a connection that was absent where the claim was founded entirely in a strict liability statutory provision.

The judgment concerned a claim for indemnity by a director of a construction company, against Lloyd's underwriters subscribing to two consecutive professional indemnity design and construction policies covering the periods August 2017 to August 2018 and August 2018 to August 2019.

The policies indemnified an insured against civil liability incurred in the conduct of the insured's "Professional Business", which included design and design advice in relation to building and construction codes and standards.

The construction company contracted with a principal for the design and construction of residential apartments. During the project, the director recommended combustible expanded polystyrene (EPS) cladding for the building's façade. The EPS cladding was non-compliant and breached the Domestic Building Contracts Act 1995 (Vic), which deemed the company to have warranted that all materials used would be reasonably fit for purpose.

Following cladding rectification funded by the State Government through Cladding Safety Victoria, the State sought to recover $3,174,775.99 from the director personally under the Building Act 1993 (Vic) - a strict liability subrogation provision directed at officers of contractors. Summary judgment was obtained against him.

Although the director was an insured in terms of the policies and provided design advice and specifications (which are services specified within the definition of "Professional Business” in the Policies),on the critical question of whether the claim fell within the insuring clause, the court found that the State's claim against the director was not "in respect of any civil liability incurred in the conduct of the Professional Business".

The liability arose solely from his status as an officer of the company under the strict liability provisions of the Building Act 1993 (Vic). No element of the State's case required consideration of any design, specification or advice services as contemplated by the policy's "Professional Business" definition. Nor did his liability depend upon breach of any professional duty.

Furthermore, the definition of "Professional Business" expressly excluded the "performance or supervision of construction-related activities" undertaken solely as a building contractor, which applied in this case.

[Owners Corporation 1 Plan No PS 707553K and Ors v Shangri-La Construction Pty Ltd and Another]

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