The Federal Court held that not only was an insurer obliged to indemnify its insured because the claim arose out of a "wrongful'act under the policy, it was also liable for ancillary amounts claimed because they arose from the same set of circumstances that gave rise to the claim.

In Issue

  • Interpretation of Professional Indemnity insurance policy.

Background

Aquagenics Pty Limited (Aquagenics) operated a water treatment engineering business. It had effected a professional indemnity policy, under which the insurers agreed to indemnify Aquagenics for all sums it became:

legally obliged to pay…as a result of any claim first made against the company…and notified to [insurers] during the period of the policy arising out of any wrongful act committed by [Aquagenics] in the course of [its] professional activities”.

In early 2006, Aquagenics was contracted by Break O’Day Council (the Council) to design, construct, test and commission a wastewater treatment plant. In May 2007, towards the end of the construction process, a dispute arose between Aquagenics and the Council over whether pre-commissioning tests had been carried out as required under the contract. The Council subsequently refused to provide the seed sludge for the establishment of the treatment process. Aquagenics then left the site as it could not proceed without the seed sludge.

The Council completed the remaining work using its own staff and other contractors. The Council expressed its intention in four separate letters between June 2007 and October 2007 (the Letters of Demand) to bring a claim for damages/compensation for Aquagenics’ failure to complete the pre-commissioning and the costs of outsourcing the unfinished work. The parties entered into arbitration, which resulted in a determination that Aquagenics was to pay $1,346,111.57 in damages to the Council. The damages comprised losses arising for the pre-commissioning failure but also defective aspects of Aquagenics design.

Aquagenics had notified insurers of the claim, however indemnity was denied on the basis that the Council’s claim did not arise from a “wrongful act” as defined by the policy and that the sum of the arbitration award extended beyond the “claim” made by the Council against Aquagenics during its policy period. Aquagenics brought a claim in the Federal Court, seeking indemnity for its liability incurred following the arbitration award.

Decision

The court’s decision fundamentally turned on three main issues:

  1. whether the Council’s claim could properly have been understood to have arisen from a “wrongful act” as defined by the policy;
  2. whether Aquagenics’ legal obligation to pay the full damages sum awarded at arbitration properly arose “as a result of” the Council’s initial claim; and
  3. whether the claim engaged the contractually assumed liability exclusion.

The policy relevantly defined a “wrongful act” as an “act, error or omission, misstatement or misrepresentation” or various “unintentional” breaches of duty.

Insurers argued that a “wrongful act” as defined by the policy implied that any “act, error or omission” must also be inadvertent, unintentional or accidental and there was nothing unintentional about Aquagenics’ decision to leave the site and its subsequent failure to complete the pre-commissioning.

However, the court rejected this interpretation, stating that policies should be given a businesslike interpretation which takes into account its commercial purpose. To confine the covered acts, errors and omissions to those that were inadvertent or unintentional was inconsistent with the policy’s commercial purpose and the ordinary meaning of the phrase “act, error or omission”.

The court also found that although Aquagenics stopped work and did not complete the pre-commissioning, this was still “in the course of its professional activities” as Aquagenics left the site because no further work was possible until the sludge was made available for seeding, rather than abandoning the contract.

The second issue was whether the arbitration award arose “as a result of” the Council’s initial claim. Insurers argued that, even if it was accepted that a claim had been made by the Letters of Demand during the relevant period of insurance, that claim was only in respect of the pre-commissioning failure and did not extend to cover the subsequent claim for defective works.

However, the court stated that it is necessary to focus on the underlying facts rather than legal or factual assertions of a “claim”. The liability attaching to the defective work arose from the same set of facts and circumstances as the pre-commissioning failure. There was also expert evidence that Aquagenics would have been unable to complete the pre-commissioning without rectifying the design defects.

The final issue determined by the court was whether any exclusion clauses were engaged, with the main consideration given to exclusion clause 6, which excluded any claim arising from liability assumed under an express warranty, agreement or guarantee unless that liability would have attached to Aquagenics in any event.

Insurers argued that if all liability ultimately flowed from the failure to undertake pre-commissioning, this was a contractual obligation which would not ordinarily arise under tort law and so would engage exclusion clause 6.

The court rejected this argument, finding that the exclusion was intended to apply to liability specifically assumed (by an indemnity or guarantee), rather than a failure to discharge contractual obligations. In addition, the award made by the Arbitrator was measured to put the council back in the position as if there had been no breach of contract, meaning that Aquagenics’ liability was no greater than its tortious liability.

Implications for you

There are two key points to take from this case.

It serves as a reminder of the court’s approach to interpreting policies generally and specifically the emphasis on giving effect to commercial purpose and ordinary meaning of words. In this instance, had insurers been successful with the argument that a “wrongful act” must be unintentional, the commercial efficacy of the policy would have been impacted.

Secondly, it shows that insurers need to be cautious when denying liability for additional claims under a separate cause of action, but arising under the same or similar underlying facts, particularly as the courts will interpret insuring clauses broadly.

Aquagenics Pty Limited (in liquidation) v Certain Underwriters at Lloyd's Subscribing to Contract Number NCP106108663 [2017] FCA 634 (5 June 2017).