The scope of ‘Design and Construct’ Professional Indemnity Cover

FKP Commercial Developments Pty Ltd v Zurich Australian Insurance Ltd [2022] FCA 862

Head contractors will often assume contractual responsibility for both design and construction of a development.  This remains their contractual responsibility, even if they engage consultants or subcontractors to carry out the design on their behalf. 

Often a principal will require the head contractor to take out professional indemnity cover, to provide insurance cover for the design risk.  But, usually, there is an important limitation to such cover – it will not always respond to a claim given the head contractor’s dual role of designer and constructor.  A recent decision from Australia looks at this issue and confirms that there must be a sufficient causal connection between the claim and the insured’s provision of professional services.

Facts

FKP Commercial Developments Pty Ltd was the developer for two apartment buildings at Rosebery, New South Wales.  FKP Constructions Pty Ltd was the head contractor pursuant to a design and construction contract. 

The apartment owners sought damages from the developer and head contractor alleging defects in the buildings.  They alleged breach of statutory warranties in the Home Building Act 1989 (NSW) and also breach of a duty of care.  Little detail was available as to the precise nature of the defects, as the hearing proceeded on the basis of a preliminary question.

The FKP parties held “Design and Construction Professional Indemnity” insurance with Zurich.  The main insuring clause stated:

“We agree to indemnify the insured against loss incurred as a result of any claim for civil liability first made against the insured and notified to us during the period of insurance, based on the insured’s provision of the professional services.”

‘Professional services’ was defined as including design, specification, project management or construction management.

The Federal Court of Australia was asked whether the whole claim made against the FKP parties was “a claim for civil liability … based on the insured’s provision of professional services” in circumstances where:

• FKP Constructions sub-contracted the design and construction works.

• It only performed project management and construction management services itself, which fell within the policy’s definition of “professional services”.

• There was no causal connection between the provision of those professional services and the alleged defects in the buildings.

Decision

The Federal Court of Australia answered this question “no”, and stated that “it must be asked, what does the liability of the insured on the causes of action depend on as matter of substance, not form?” 

The Court explained that while the insured itself may have provided professional services, it did not mean that the causes of action were based on the insured having provided those services.  In a ‘but for’ sense, the provision of professional services may have been necessary for the apartments to be built.  But this ‘but for’ test is not asking the right question, which is: what do the causes of action depend on?

A key authority relied on by the insurer was the New Zealand decision of TimTech Chemicals v QBE Insurance[1]  The Court inferred from this decision that a ‘but for’ connection is not enough to satisfy the requirement that the liability must arise from professional services which are covered by the policy.

The Court stated that “the source of the alleged duties is the position of the FKP parties as owner/developer and as head contractor respectively, and does not depend on either one of them having provided any professional services”.  The insured’s professional services were not the factual or legal foundation (whether causally, temporally or otherwise) for the insured’s potential legal liability.

In addition, the definition of professional services excluded “performance or supervision … of construction, manufacture, assembly, installation, erection, maintenance or physical alteration of buildings, goods, products or property”.  There was also a faulty workmanship exclusion.  The Court stated that the insured’s potential liability may be wholly based on or arise from those excluded matters.

Comment (Andrew Durrant)

This decision shows the importance of examining the basis of the insured’s potential liability when dealing with ‘design and contract’ professional indemnity policies.

It is not enough that the provision of the professional services provided the opportunity for the defective work to be performed.  To be covered, the claim against the head contractor must be based on the provision of professional services.  If the claim is based on faulty construction works, or simply the insured’s legal status as head contractor, the claim will fall outside cover.

andrew durrant is a special counsel at fee langstone

[1] [2012] NZCA 274.  Philippa Fee and Matt Atkinson were counsel for QBE.