Balderstone Hornibrook Engineering Pty Limited v Gordian Runoff Ltd & Ors  NSWCA 243
Balderstone Hornibrook Engineering Pty Limited ('BHE') has lost an appeal to the NSW Court of Appeal against a finding that it was not entitled to cover under professional indemnity policies put in place for the benefit of all consultants working on the design of Sydney Airport's third runway. The decision was on the basis that the claim related to construction defects which fell outside the scope of the insuring clause of the policies and was subject to clauses excluding liability for defective construction.
The background to the claim and decision at first instance were summarised in our June 2006 edition of Legal Directions. BHE was appointed by the Federal Airports Commission (now the Sydney Airports Corporation Limited ('SACL')) in 1992 as the head contractor responsible for the design and construction of the third runway at Sydney's Kingsford Smith Airport. The work included the design and construction of reinforced earth walls around the perimeter of the runway.
BHE engaged subcontractors including Reinforced Earth Pty Limited ('RE') in relation to the design of the reinforced earth walls and Connell Wagner NSW Pty Limited ('CW') in relation to the provision of engineering services. Work commenced in early 1993 with practical completion in August 1994. By late 1996 subsidence of backfill behind the facing panels of the reinforced earth walls was discovered.
SACL brought a proceeding against BHE in 2002 which was ultimately settled on the basis that BHE agreed to rectify the walls at an anticipated cost exceeding $60M. BHE then made claims under various policies of insurance.
Program of insurance
The Federal Airports Commission had secured a project-specific multi-layered program of insurance for the benefit of all consultants undertaking responsibilities in the design and construction of the third runway.
HIH underwrote the bottom layer of $20M on the project-specific program. Gordian Runoff Limited provided the next $10M. QBE Insurance Limited, later CGU Insurance Limited and a Lloyd's Syndicate provided 3 further layers of $6M, $5M and $9M respectively. The policies under the projectspecific program covered professional indemnity risks, but not construction risks.
Independently, BHE had its own policy of professional indemnity insurance underwritten by AMP ('AMP').
HIH, by then in provisional liquidation, confirmed indemnity under its layer of the project-specific program, subject to the policy terms and conditions and on the basis of facts then known to HIH. The action of HIH was said by BHE to trigger the liability of the other upper layer insurers.
Proceeding against insurers
BHE issued proceedings against various upper layer insurers in December 2003. It subsequently joined AMP to the proceeding (AMP had agreed to indemnify BHE for $20M, but declined cover in respect of a second claim for a further $20M). The claim against AMP (represented by Moray & Agnew) was summarily dismissed on the 45th day of the trial and the claims against QBE and Lloyds were settled, leaving only Gordian and CGU as defendants. Each of the Gordian and CGU policies adopted the terms of the HIH underlying policy, to the extent the HIH wording was not inconsistent with their respective wordings.
BHE and CW were named as insureds in the HIH policy and RE fell within a class of insureds described as 'all consultants'. The 'profession' was stated in the policy schedule to be 'engineers as defined herein'.
The primary insuring clause covered the insureds in respect of claims 'for breach of professional duty in the profession stated in the Schedule ...'.
A policy endorsement extended cover to 'checking of designs and plans prepared by others' and 'preparing detailed drawings'.
A further insuring clause (the second insuring clause) provided cover for the insured against their legal liability for claims 'arising out of any act, error or omission in the conduct of professional activities or duties committed by specialist designers or consultants acting on the insured's behalf pursuant to any contract for service and for whom the insured are responsible'.
The policy contained an exclusion in respect of claims 'arising out of construction work performed involving the means, methods, techniques, sequences, procedures and use of equipment, of any nature whatsoever which are employed by the insured's contracting staff or others in executing any phase of the Project'.
Judgment at first instance
Einstein J, giving judgment at first instance, found that BHE was not entitled to indemnity under the Gordian or CGU policies.
Einstein J accepted evidence that the subsidence had been caused either because the earth fill in the wall had not been compacted to the required density (and would therefore tend to settle under the influence of the tide) or because, even if the fill was originally compacted to the required density, sufficient care had not been taken to ensure that geotextile strip (placed over joints in the concrete panels at the sides of the walls) did not stretch or fold or trap fill between the strips and the panels.
The parts of the judgment which are relevant to the appeal were as follows:
- That the primary insuring clause was not engaged because the claims related to the activity of carrying out construction work which was not an activity within the field of a consultant engineer and that BHE did not engage in design work
- That the second insuring clause did not apply because, although RE and CW did commit an act, error or omission of a relevant design character, BHE's liability to SACL did not 'arise out of' or 'sufficiently spring out of' that act, error or omission
- That the exclusion clause was engaged because the claim made against BHE was 'aptly described as sufficiently springing from the undertaking of construction work' and the exclusion was engaged if 'the construction was a significant cause of the claim made against [BHE]'.
NSW Court of Appeal
Allsop P, giving the unanimous judgment of the Court of Appeal, upheld Einstein's judgment in all respects except for the finding that BHE had had no relevant design involvement in the construction of the walls. The involvement comprised the failure to include in the technical specifications or drawings more detailed instructions to BHE (as constructor) as to how to execute compaction of the soil.
The Court of Appeal was of the view, however, that the proximate cause of the claim against BHE was defective construction. It referred to the principle established in Wayne Tank & Pump Co. Limited v The Employers Liability Assurance Corporation Limited  QB 57, to the effect that where there are two or more causes of a loss, one falling within an insuring clause and another falling within an exclusion, the policy will not respond. In this case, therefore, the policy did not respond to the claim as a result of the excluded cause (construction).
Allsop P noted this was a matter of construction of the policy, not a rule. The issue, he said, was whether the parties intended the policy to respond where a claim is brought in circumstances that are encompassed by a contractual exclusion. Here, he noted, the exclusion clause was 'tolerably clear'. He said that, in his view:
'there could be no doubt that a cause, being the relevant proximate cause, of the claim was this construction inadequacy of BHE in its means, methods, techniques and procedures of construction such that the claim arose out of that. To construe the clause more narrowly such that in the circumstances of this case the policies responded would be to ignore the words of [the exclusion].'
The case (both at first instance and on appeal) provides a useful analysis of the design / construction issue in the context of a professional indemnity policy containing a construction exclusion and the upholding of the decision at first instance will be welcomed by professional indemnity insurers. As noted in our summary of the decision at first instance, the case highlights the need to ensure that the insureds are comprehensively covered for all their business activities.
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