Professional indemnity insurance — limitations to cover

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Timothy Bates of Auckland law firm Legal Vision.

In this first article for 2016 I’ll look at the recent Court of Appeal decision of JCS Cost Management Ltd v SR Johnson & QBE Insurance (International) Ltd, which shows the limitations that come with professional indemnity cover.

 

Facts

In this decision, which was an appeal from a High Court decision in favour of QBE, the QS (Mr Johnston) attended an open home in Takapuna with an existing client, Mrs Johnson.

His evidence was that he had attended this open home only in the expectation that he might project manage the renovation as he had done similar work for this client in the past.

The Takapuna house turned out to be a leaky building and, in turn, Mr and Mrs Johnson issued proceedings in the High Court against the council. The council, in turn, joined in JCS Cost Management and Mr Johnston as third parties to the High Court claim.

The council alleged that Mr and Mrs Johnson had purchased the house in reliance upon the QS’s advice that the house was weathertight.

The third party claims against the QS failed at trial, the court ruling that Mr Johnston had not provided any advice as to the condition of the house as alleged by the council.

However, in defending the High Court proceedings, Mr Johnston was left with $52,960.50 of defence costs to meet once collecting the costs order in favour of him from the council.

In turn, JCS and Mr Johnston brought a claim in the High Court to recover these losses as against its professional indemnity insurer, QBE.

At first instance, Mr Johnston failed in the High Court. This article focuses upon the Court of Appeal decision as to insurance cover.

 

Court of Appeal decision 

The majority in the Court of Appeal upheld the High Court’s finding that there was no cover for defence costs (albeit for different reasons).

The issue at stake was whether, in fact, there was insurance cover for the defence costs incurred by Mr Johnston.

In particular, the insuring clause at stake only covered costs and expenses “incurred with the written consent of QBE in the defence or settlement of any Valid Claim.”

The court held that, in order to determine whether an insured is entitled to defence costs, two questions arise:

If the claimant succeeded what is the factual basis on which the insured would have been liable?

Having regard to the true nature of the claim, would the claim against the insured have fallen within the scope of the policy?

In respect of the first question, the court ruled that in order for the council to have succeeded against him it would have had to have shown that Mr Johnston attended the open home in the capacity to give advice on the condition of the house.

The council claim failed because he did not attend on this basis, and gave no weathertightness advice.

In respect of the second question, the court went on to hold that even if it could have been shown that Mr Johnston had attended the open home to give advice on the condition of the house and, in turn, had given negligent advice, there would have been no cover under the policy.

The reason for this was that providing such advice would not have fallen within the definition of Mr Johnston’s “Professional Business Practice”.  At paragraph 64, the court states:

“[64] Whilst Mr Johnston’s marketing efforts to obtain project management work can be viewed as being connected with JCS’s business, any liability could only have arisen from pre-purchase advice. Such advice would not have fallen within the definition of ‘Professional Business Practice’, which identifies very specific parameters.”

“Professional Business Practice” was defined in his policy as the business of quantity surveyor and project manager.

Ultimately, the Court of Appeal ruled there was no cover in place to meet the defence costs of Mr Johnston. Whilst it would have been a disappointing result for the QS, the decision does seem to be correctly based upon the policy wording.

So, keep in mind the following regarding professional indemnity insurance:

It will only cover liability arising from the core business/services you provide, so once you step outside your core services, you are likely to be operating in an uninsured position.

You will only get defence costs where you are being claimed against for breaches of your core business services.

Always fill in insurance proposals carefully as well as any claim forms. Failure to disclose full facts or answer correctly the questions outlined in the policy/claim form can result in declinature.

There will always be in place limitations to the insurance cover provided.

With the current litigious mindset across all aspects of the construction industry, you cannot trade safely without liability cover.

 

Note: This article is not intended to be legal advice (nor a substitute for legal advice). No responsibility or liability is accepted by Legal Vision or Building Today to anyone who relies on the information contained in this article.

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