The Court of Appeal confirmed last month that professional indemnity insurers can apply a very strict interpretation of which business activities are insured under a PI policy. Just because an activity is part of a business enterprise does not mean cover applies for any and all professional liability which may arise.
JCS Cost Management Limited v QBE Insurance (International) Limited  NZCA 524 concerned a company which claimed its legal defence costs from its PI insurer after Auckland Council had brought an unsuccessful court case against it.
JCS Cost Management Limited is a firm of quantity surveyors and construction project managers. In 2009, JCS' director, Mr Johnston, visited an open home with a potential purchaser. Mr Johnston went to help the potential purchaser decide whether renovations she had in mind were feasible. He wasn't paid for his time, but agreed to go as a means of marketing his company, hoping to secure the project management of any of the purchaser's planned renovations. Ultimately, the client bought the house, and JCS managed some renovations.
It transpired that the house had significant weathertightness issues. The homeowner sued Auckland Council, which then joined JCS and Mr Johnston to the proceedings on the basis that Mr Johnston gave pre-purchase advice to the homeowner. The Council's third party claim against Mr Johnston failed on the basis that he did not give pre-purchase advice about weathertightness, and he was awarded costs on the proceedings, payable by the Council. However, even with the costs awarded he was left $53,000 out of pocket.
Mr Johnston looked to his professional indemnity insurer, QBE, to fund his defence costs, on the basis that QBE insured his (and JCS') business activities. QBE declined Mr Johnston's claim, saying that the weathertightness proceeding was the result of a professional activity outside the remit of his PI policy. The High Court supported QBE's position, and Mr Johnston appealed.
The discussion in the Court of Appeal centred on whether the Auckland Council had a valid claim against JCS and Mr Johnston for the purposes of the policy. The QBE policy provided:
- QBE shall indemnify the Insured for any Valid Claim subject to the terms of this Policy"
- "In addition, QBE shall pay Costs and Expenses incurred with the written consent of QBE in the defence or settlement of any Valid Claim...
A valid claim was defined in standard terms by the policy as a claim alleging civil liability by any act, error, omission or conduct ... in connection with the insured's professional business practice.
Professional business practice was stated in the insurance schedule as JCS' quantity surveying and project management.
QBE maintained its policy would only respond if Auckland Council's weathertightness claim resulted from JCS' quantity surveying or project management activities. Mr Johnston said his marketing activity was carried out in his professional capacity as a project manager, and that his defence costs should be covered (at ).
The majority of the Court of Appeal (Courtney and Clifford JJ) considered that QBE was not liable for JCS' legal costs, because marketing and providing pre-purchase advice fell outside the strict policy definition of JCS's professional business practice (at ). Although visiting the house with the potential purchaser was done in the course of JCS' business, it was not quantity surveying or project management, so was not insured under the wording of the QBE policy.
Justice Miller did not agree with the other two judges. His dissenting judgment cited previous cases (for example IAG New Zealand Limited v Jackson  NZCA 302) in which the phrase 'in connection with' had been given a wider interpretation, making it possible that JCS' marketing (in the hope of securing project management work) could be interpreted within the bounds of the policy professional business practices. Miller J thought that QBE could not fully establish that Auckland Council's claim was not a valid one under the policy, and said a full trial would be needed to decide that point, instead of the summary judgment QBE had been granted in the High Court.
Accordingly, the Court of Appeal found that there was no cover for Mr Johnston's legal costs, although an appeal is likely.
The Court of Appeal cited the fundamental principle that insurers are only liable for loss proximately caused by an insured peril (at ). Insurers will be pleased that the Court of Appeal (majority, anyway) was not tempted to interpret the stated categories of professional business practice loosely, instead reinforcing a strict policy interpretation.
Every individual and business with professional indemnity insurance should take note of the Court's narrow interpretation approach, and re-check its PI policy schedule/summary for covered business activities. Mr Johnston did not act unusually in attending a gratis preliminary meeting in the hope of securing future work; many would expect such activities to fall within their PI cover. Unfortunately for Mr Johnston in this proceeding, his marketing activity was outside the strict limits of his cover, leaving him with unrecoverable legal defence costs.
If the Supreme Court grants leave to Mr Johnston to appeal this decision, the insurance industry can expect a 'final word' on the flexibility of the insured activities categories in PI policies.
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