Australia: Insured entitled to indemnity for defence costs

Legal Directions - October 2011
Last Updated: 2 November 2011
Article by Nancy Wilson
Major Engineering Pty Limited v CGU Insurance Limited [2011] VSCA 226


In this case the Court of Appeal of Victoria found that an insured was entitled to recover defence costs pursuant to a costs extension clause in a policy in circumstances where the insured had successfully defended the claim made against it.


Major Engineering Pty Limited ('Major') held a broadform liability policy with CGU which provided public and product liability cover and an additional benefits extension providing cover for certain legal costs. Major sought indemnity under the policy for a claim brought against it by Timelink Pacific Pty Ltd.

Timelink's claim was for damages arising out of the failure of two hydraulic cylinders that were supplied by Major for the racing yacht 'Skandia' owned by Timelink. The hydraulic cylinders were fitted to the specially designed 'canting' keel of the yacht. During the 2004 Sydney to Hobart yacht race, the hydraulic cylinders failed causing the yacht to capsize resulting in loss and damage to Timelink.

Timelink initially alleged that Major breached the terms of a contract with Timelink to 'design, manufacture and sell' a hydraulic cylinder system having certain operating specifications on the basis that the hydraulic cylinder system supplied was not reasonably fit for the purpose of controlling the canting keel on the yacht in racing conditions. However, Timelink's case as ultimately put to the court and adjudicated upon was based solely upon the 'supply' of hydraulic cylinders which did not meet the required specifications.

Major eventually succeeded in defending Timelink's claim although it incurred significant costs in doing so. Major commenced a claim against CGU seeking indemnity for the defence costs not recovered from Timelink pursuant to the costs extension clause.

Trial decision

At first instance, the trial judge determined that in order for the costs extension clause to apply, indemnity must be available under the policy for the claim, if successful. Therefore, the claim made by Timelink against Major must be a claim of product liability to which the policy responds. The trial judge held that Timelink's claim was not a claim of product liability, because Timelink never contended that there was any defect in the hydraulic cylinders, merely that they were unsuitable for their intended purpose. This finding was made despite CGU having conceded at trial that Timelink's claim was a claim for a 'defect' within the meaning of the policy.

Additionally, the trial judge concluded that, even if the claim had been one of product liability, two exclusions in the policy would have operated to exclude cover under the costs extension clause. The relevant exclusions related to the performance or failure to perform the rendering of professional advice or service and the performance or failure to perform the making or formulating of a design or specification within the domain of the engineering profession. Accordingly, Major's claim against CGU was dismissed.

Court of Appeal decision

Major appealed the trial judge's decision to the Court of Appeal. In considering the costs extension clause the Court emphasised the general principle that a policy of insurance should be given a business-like interpretation having regard to the commercial context and intention of the parties.

In applying this principle, the Court decided that the purpose of the costs extension clause was to provide cover to a policy-holder for costs in specified circumstances, including where a claim has been made against the policy-holder in respect of which indemnity would have been available under the policy if the claim were successful.

Further, if an exclusion applied to deny indemnity there was no entitlement to cover under the costs extension clause.

The Court held that had Timelink's claim succeeded, the liability imposed on Major would have been concerned with the failure to supply hydraulic cylinders which met the required specifications. Therefore, product liability cover would have been available for Timelink's claim subject to any applicable exclusions.

In respect of the exclusion related to the performance or failure to perform the rendering of professional advice or service the Court held this did not apply to the claim. The Court found that the only service provided by Major was the supply of the hydraulic cylinders to Timelink, which 'could not be sensibly characterised as 'professional' or as a service'.

The second exclusion regarding the performance or failure to perform the making or formulating of a design or specification within the domain of the engineering profession was also held to not apply. The Court found that the trial judge erred in characterising the claim as including allegations of faulty design, because the claim which was ultimately heard by the court was not based on the early design allegations and the underlying facts showed that Major was never involved in the design of the hydraulic cylinders.

Therefore, Major would have been entitled to indemnity under the policy had Timelink's claim succeeded and CGU was required to provide cover under the costs extension clause.


This decision by the Court of Appeal highlights two important principles to be applied when interpreting a policy of insurance to determine whether an insured is entitled to cover.

Firstly, as a commercial contract, a policy of insurance should be construed in a businesslike manner having regard to the specific wording of the policy, the commercial circumstances and the intention of the parties.

This requires consideration of the business of the insured for which the insurance was effected, the risks covered by the policy and the purpose of the policy.

Secondly, in determining whether a claim falls within the cover provided by the policy, care should be taken to not give too much weight to the form of the claim as articulated by the claimant. What is important is the nature of the claim, which requires consideration of both the substance of the claim and the underlying facts.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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