Worldwide: Professional Indemnity Insurance - Nature Of Risk - Policy Does Not Respond Where Engineer Has Design Responsibility But Loss Was Caused By Negligent Performance Of Work

Baulderstone Hornibrook Engineering Pty Ltd -v- Gordian Runoff Limited and Ors [2008] NSWCA 243 (9 October 2008)

In Brief

In a claim under a P. I. policy arising from construction work, it is necessary to identify whether the cause of the loss was negligence in the mandating of the technique for the performance of the work (a P. I. risk) or negligence in the manner in which that work technique was performed (a construction risk).

Background

BHE was the head contractor for the third runway construction at Sydney Airport. A dispute arose between the "Airport" and BHE about the adequacy of the construction of the reinforced earth walls forming the perimeter of the third runway and the adjacent area known as the Millstream Channel Diversion. After practical completion, subsidence of backfill behind the facing panels of the reinforced earth walls was discovered.

The "Airport" sued BHE, and the proceedings were settled with BHE undertaking to rectify the defects at a likely estimated cost exceeding its levels of insurance. BHE sought indemnity from the insurers participating in the professional indemnity program.

One insurer granted indemnity to BHE with respect to the claim. Gordian and CGU denied liability to indemnify on the basis that the claim did not come within the insuring clauses of the policies or, if they did, were excluded from coverage.

The Insurance Policy

The policy covered the insured against claims for breach of professional duty in the profession stated in the schedule (engineers) by reason of any act, error or omission committed by the insured in the conduct and execution of the Professional Activities and Duties as defined.

Paragraph 2 of the policy provided that coverage was extended to indemnify the insured against 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.

Supreme Court Proceedings

At first instance, Einstein J concluded that neither the Gordian nor the CGU policies responded because the liability of BHE for the "Airport's" claim against it under the design and construction contract could be described for the purposes of the policy as arising out of (uninsured) construction risks and not arising out of (insured) professional indemnity risks.

Court of Appeal

The trial judge and the appeal judges¹ examined in extraordinary detail the cause of the failure of the earth walls of the runway that required rectification, the cost of which was the subject of the claim.

As to whether the circumstances of the claim arose from a breach of professional duty, the court considered whether the facts established that there was a compaction technique mandated by BHE (in its capacity as designer) or whether the loss occurred by reason of the manner in which the backfilling was performed in the absence of any mandated technique in the contract documentation.

The court found that BHE had design responsibility, however, once it was established that the design documentation did not mandate the particular (defective) method of backfilling and compacting, the circumstances established the adoption of inadequate construction techniques. This was not a claim for breach of professional duty under a design and construction contract, but rather the negligent performance of construction work by BHE that was not covered by the professional indemnity insuring clause.

The case demonstrates that a close analysis of the facts and circumstances is required to identify whether the cause of the loss resulted from the design of the work and how that work was to be implemented and performed (giving rise to a professional duty) or the way in which the work was in fact performed (giving rise to a construction duty). The former being covered by a professional indemnity policy. The latter being a construction risk and not covered by the professional indemnity policy.

The case also dealt with the issue of the extent to which, if at all, an insured can rely upon communications between an insurance broker and the insurers before the contract was entered into. The broker wrote to the insurers as follows:

BHE relied upon this communication for a construction of a provision in the policy that would have operated to its benefit. The court rejected this attempt. It stated:

The court also made a number of comments concerning the manner in which the parties had conducted the litigation between them. It appeared that the lawyers for the insurers were under a misapprehension as to the nature and basis of certain concessions they believed had been made by BHE. It subsequently emerged that the concession had not been made and there was a misapprehension on the part of the lawyers for the insurer and this affected the manner in which the case was conducted. The appeal judges made the following statement in relation to the manner in which there should be mutual co-operation between the legal representatives of the parties in the following terms:

Footnote

^{1. Allsop J; Beazley and Campbell JJA}

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