The insured company (Aquagenics) entered into a contract with a municipal council in Tasmania for the design and construction of a wastewater treatment plant. The contract contemplated that once a certain phase of the project had been completed, then the council would provide a ‘seed sludge’ which would enable the insured to complete the project.

The parties fell into a dispute about whether the relevant phase of the project had in fact been completed: the insured demanded that the council provide the seed sludge and the council refused. Eventually, the council stepped in and took over the site.

The insured instituted arbitration against the council and claimed re-entry to the site and damages. The insured lost, and instead damages were awarded to the council for the insured’s failure to complete the project and for rectification of the work which it had completed, but which had design flaws.

Things got worse for the insured when it was placed into liquidation. The liquidator sued the insured’s professional indemnity underwriter after a claim under the insured’s architects and engineers’ policy was declined.

The policy covered liability arising out of any ‘wrongful act’ committed by the insured in the course of its ‘professional activities’. The underwriter’s essential argument was that the policy did not cover what was really just a contractual dispute about an incomplete project.

The Federal Court judge who heard the case decided:

…the subject matter of the claim was the failure to complete pre-commissioning in accordance with the contractual requirements. As it turned out, not only had Aquagenics failed to undertake some of the work forming part of pre-commissioning, there were some major defects in the design work it had done, which would have impacted on Aquagenics’ ability to achieve pre-commissioning. The fact that the Council did not know about the design defects at the time does 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. The liability attaching to the company for the defective design work arose from the same set of facts and circumstances entitling the Council to remove the remaining works from the hands of Aquagenics… The damages awarded in respect of the cost of rectification was part of the loss suffered by the Council by reason of Aquagenics’ breach of contract… albeit at the time the Council was unaware of the design defects and those defects only emerged later…

He ordered that the underwriter should indemnify the insured.

Aquagenics Pty Ltd v Certain Underwriters at Lloyd’s

The decision demonstrates the breadth of the terms ‘wrongful act’ and ‘professional activities’ as typically defined in a professional indemnity policy. What started off as a dispute about the insured’s right to go back on site to complete a project ended up being a liability to pay damages which was covered by the policy.