The True Construction of the Professional Services Exclusion Clause
117 Clause I(A) of the D&O policy (the insuring clause in respect of executive liability) provides broad cover for executives of RBG and its subsidiaries for wrongful acts or omissions committed by such persons while acting in the capacity of an executive of RBG or one or more of its subsidiaries.
118 That broad cover is, of course, limited by a number of express exclusions (including the professional services exclusion with which we are presently concerned).
119 In 2010 and 2011, RBG and, in particular, Reed, were construction companies involved in large construction projects as the principal contractor. The sums to be paid to RBG and Reed in respect of those projects were substantial and the risk that their executives might incur substantial liabilities to other persons and entities in the course of carrying out their duties for the Reed group of companies was very real. The D&O policy was intended to protect those executives from the consequences of incurring such liabilities.
120 The D&C Contract pre-dated the D&O policy. It should be inferred that, when they procured the D&O policy, RBG and Reed had in mind the potential for their executives to incur liabilities to others as a result of carrying out their duties as executives of those companies in respect of the Leopold Project and generally.
121 Chubb submitted that a professional services exclusion clause in a D&O policy should be construed by paying regard to the commonly understood scope of cover usually provided under professional indemnity policies in the insurance marketplace. There was no basis, so Chubb submitted, for construing an exclusion clause of this type more narrowly than an insuring clause providing such cover. Chubb went on to submit that the primary judge erred in the present case by construing the professional services exclusion clause too narrowly. Chubb then sought to illustrate the point by referring to the insuring clause in the professional indemnity policy which RBG and Reed had taken out with Liberty International Underwriters.
122 The terms of the Liberty policy are of no assistance or relevance to the interpretation of the professional services exclusion clause in the D&O policy. The primary judge took the same view. Had RBG taken out professional indemnity cover with Chubb, the terms of that particular cover may have been of some assistance in the construction of the professional services exclusion clause in the D&O policy. However, no such cover was taken out by RBG or by Reed.
123 Whether the primary judge interpreted the professional services exclusion clause too narrowly is a matter which must be considered as part of the present construction task.
124 We do not agree that, in every case, the scope of an exclusion in respect of professional services in a D&O policy must correspond with the scope of cover provided by the commonly used insuring clause in policies which provide professional indemnity cover. That is far too general a statement and ignores the importance of the principles explained by the High Court in Delco and in Selected Seeds.
125 Here, the loss which an Insured under the D&O policy might become legally obliged to pay which is excluded by the professional services exclusion clause in the D&O policy is loss in respect of any claim for an act or omission on the part of an executive of RBG or of one or more of its subsidiaries done (in the case of an act) or not done (in the case of an omission) "… in the rendering of, or actual or alleged failure to render, any professional services to a third party." Both parties agreed that the critical words for present purposes are those which we have highlighted in italics. Here, of course, we are not concerned with an actual or alleged failure to render professional services to a third party. Rather, Chubb relies upon the positive acts of Mr Robinson as constituting the requisite "rendering" of professional services to a third party within the meaning of the clause.
126 In order for the exclusion to be engaged, the relevant act or omission must be done or not done (as the case may be):
(a) in;
(b) the rendering of;
(c) a professional service or professional services;
(d) to a third party.
Under cl XXII(D) of the GTC in the D&O policy, the singular includes the plural and the plural includes the singular, unless otherwise indicated. Thus, the expression "professional services" in the professional services exclusion clause includes a professional service (singular).
127 Chubb submitted that the word "in" should be interpreted as "in the course of". Read in this way, the exclusion would apply not only to loss in respect of a claim for an act or omission that constituted or comprised the actual rendering of a professional service or professional services to a third party but also an act or omission which was merely a step which formed part of the rendering of such a service or such services.
128 This submission is correct and we accept it.
129 The word "in" operates as the linguistic expression of the necessary connection between the relevant act or omission and the rendering of a professional service or professional services to a third party.
130 "Third party" when used in the professional services exclusion clause is not defined in the GTC or in the D&O policy. We think that that expression, when used in the professional services exclusion clause, means a person or entity which is not a party to the D&O policy and which is not insured under that policy. The persons and entities insured under that policy were RBG itself (as the "Principal Organisation"), RBG's subsidiaries and executives employed by RBG and/or one or more of its subsidiaries. It follows that, if professional services are rendered to RBG or one of its subsidiaries (such as Reed), those services would not be rendered to a "third party" within the meaning of that expression in the exclusion clause. The services must be rendered by [our emphasis] a person or entity which is insured under the D&O policy to a person or entity which is outside the Reed group of companies.
131 The critical interpretation question in the present case is: What is the meaning to be attributed to the expression "professional services" in the professional services exclusion clause?
132 On this point, Chubb submitted that:
(a) Professional services can be defined satisfactorily as "services of a skilful character according to an established discipline" (see the definition attributed to the expression by Kirby P in GIO General Ltd (t/a GIO Australia) v Newcastle City Council (1996) 38 NSWLR 558 at 568). If an occupation falls within the ordinary meaning of the word "profession", then that is the end of the enquiry unless something in the context of the relevant contract suggests a narrower meaning should be attributed to the expression. Whether an occupation is a profession is a question of fact;
(b) Therefore, the correct starting point here is whether the ordinary reasonable person would now say, in the time in which we live, that a particular occupation is properly described as a profession (see Carr v Inland Revenue Commissioners [1944] 2 All ER 163 at 166; and Bradfield v Federal Commissioner of Taxation (1924) 34 CLR 1 at 7); and
(c) Project management satisfies that description now and also satisfied that description in 2010 and 2011.
133 Chubb went on to submit that Chemetics involved a vigorous application of the contra proferentem rule against the insurer in that case from the outset. Chubb also submitted that the Court of Appeal of British Columbia approached the application of that rule in a way which did not conform with the law in Australia which is to the effect that that rule is one of last resort. Chubb submitted that Chemetics was an unsound foundation for the line of authority which has been built upon it.
134 In Chemetics, the relevant exclusion applied to "errors or omissions in the rendering of professional services". In Chemetics, the plaintiff engineered and supplied the equipment and materials for the erection of a pulp bleach plant in the state of Virginia, USA. After that plant had been constructed, it was damaged and the purchaser of the plant successfully sued the plaintiff for damages in the State of Virginia, alleging that the plaintiff had failed to give adequate operating instructions either orally to the purchaser's personnel or in writing in the operating manual which was supplied by the plaintiff to the purchaser. In particular, the plaintiff had failed to give any warning that overfilling a tower in the plant could cause damage to or a rupture of the plant's conical roof. The plaintiff claimed indemnity from its insurer which was the defendant in the action in the Supreme Court of British Columbia. The defendant denied liability on the basis of an exclusion clause in the relevant policy.
135 Justice of Appeal Esson gave the judgment of the Court.
136 At 62, Esson JA said:
The Chief Justice decided the case on the assumption that liability was imposed on that basis [ie the failure to give adequate operating instructions] and I will assume that he was right in doing so. The gist of his decision on this aspect of the case was that the function of giving a warning of the particular risk would not necessarily be a professional service and that the exclusion therefore does not apply. His view was that, even if one accepts that the giving of instructions involved the rendering of professional services, the particular instruction which would have avoided the risk would not have been a professional service. While I do not disagree with his conclusion on that question, I prefer to rest my decision on a somewhat broader ground. That is that, while Chemetics was obliged in fulfilment of its contractual duty to [the purchaser] to provide operating instructions, both orally and in the manual, the provision of those instructions was not the rendering of professional services as those words are used in the exclusion.
137 His Honour placed significance on the fact that the words under consideration appeared in an exclusion clause and not in the insuring clause. He then noted that, in such a case, there was a general rule that language should be construed in a manner favourable to the insured. We pause to note that this last remark does not reflect the law in Australia.
138 Justice of Appeal Esson then observed that the contract which had been the subject of litigation in Virginia was one which the parties to the relevant policy specifically intended would be covered by the policy. Cover for liability arising out of Chemetic's performance of the relevant contract was specifically covered under the policy by means of an endorsement issued by the insurer. That contract was one which was known to both the insured and the insurer to include the provision of some matters, such as engineering and design, which would fall within the description of "professional services" and some which would not.
139 At 63-64, his Honour said:
In my view, the insurer has not shown that the training of operators called for by cl. 1.3 was the provision of professional services. In the words of the contract, it was the provision of services of a competent supervisory operating engineer. That requirement could have been satisfied by providing a person experienced in the operation of plants and knowledgeable as to the operating characteristics of this particular plant. That person would more appropriately be described as a technician. No doubt he would have to be a professional as distinguished from an amateur. But that is not the meaning of "professional" as used in the exclusion. In that context, it is intended to refer to the kind of services, such as design of the plant, which could normally be expected to be provided only by a professional engineer.
140 His Honour then said that the reasons which he gave at 63-64 were sufficient to dispose of the appeal.
141 Chemetics stands as authority for the proposition that the fulfilment of a contractual obligation by one party to a contract to its counter-party where performance of that obligation involves the use of technical skills on the part of the party performing the relevant obligation, does not necessarily constitute the rendering of professional services to the counter-party or to anyone else.
142 In Fitzpatrick v Job, Buss JA held (at 76,076 [264]) that the term "professional" in the insuring clause of a professional indemnity policy does not necessarily bear an identical meaning in an exclusion clause of a public liability or products liability policy. The same may be said of an exclusion clause in a D&O policy. His Honour went on to observe that the context in which the term "professional" is used in an insurance policy may be significant in determining its meaning.
143 We agree with Buss JA.
144 At 76,076 [267] and 76,076-76,077 [268], his Honour said:
267 At all material times, the core activities of Jobs Engineering's business comprised the design, manufacture and supply of machinery and equipment, including the machine in question with and without a cabin.
268 By the indemnity clause in the products liability cover, GIO agreed to indemnify Jobs Engineering, relevantly, in respect of sums which Jobs Engineering "shall become legally liable to pay for compensation in respect of bodily injury or damage to property as a result of an occurrence" and caused by "the nature, condition or quality" of any goods or products sold or supplied by it. If the nature, condition or quality of any machinery or equipment designed, manufactured and supplied by Jobs Engineering were to cause personal injury or property damage to any person, and the relevant nature, condition or quality was attributable to the negligent act or omission of Jobs Engineering, there is a significant likelihood that the person suffering the injury or damage would have a cause of action against Jobs Engineering. If any and all negligent acts and omissions of Jobs Engineering, of the kind I have just mentioned, were to be characterised as breaches of duty owed by it in a professional capacity, within exclusion 10(a), the cover under the indemnity clause of the products liability insurance would be severely circumscribed. The indemnity clause would not respond unless Jobs Engineering's legal liability to pay was not attributable to its negligence or other breach of duty owed by it in a professional capacity, but arose on some other legal basis. The parties cannot have intended such an uncommercial and unreasonable result, and it is not a construction which the language of the policy unequivocally requires.
145 His Honour ultimately held that the relevant professional liability exclusion in the case before the Court was limited to claims arising out of breaches of duty owed by the insured to persons who had retained it to perform work or services in the ordinary course of its business. At 76,077 [270], his Honour said:
I consider that exclusion 10(a) is limited, in the context of the products liability cover, to claims arising out of breaches of duty owed by Jobs Engineering to persons who have retained it to perform work or services in the course of its business. The exclusion does not extend to breaches of duty owed to third parties who may suffer foreseeable loss or damage as a result of negligent acts or omissions by Jobs Engineering in designing, manufacturing or supplying machinery and equipment, including the negligent failure to give advice of the kind which it should have given to V & D Ridolfo. My construction of exclusion 10(a) is consistent with the evident object of the products liability cover, namely, to provide indemnity, of real and not negligible value, in respect of claims for personal injury and property damage caused by defective goods and property designed and manufactured by Jobs Engineering, and put into circulation within Australia.
146 In Vero, at 76,335-76,337 [138]-[150], Beazley JA (with whom Campbell JA and Harrison J agreed) considered the interpretation of an exclusion clause in a public liability policy which excluded liability for a breach of duty by the insured owed in a professional capacity.
147 At 76,336-76,337 [148]-[150], her Honour said:
148 In my opinion, the approach taken by Buss JA in Fitzpatrick should be applied here. The exclusion clause considered here is sufficiently identical to that in Fitzpatrick and the type of policy involved was relevantly similar, in the sense that it was to provide specific cover to the respondent for claims for sums which it became legally liable to pay for bodily injury. The construction given to the exclusion clause by the Western Australian Court of Appeal enables the policy to provide the indemnity which the parties undoubtedly intended the policy to have. To adopt a different construction would have significantly undermined the commercial purpose of the policy. Insurance policies are rarely confined in their terms by state boundaries and it is important that the clauses which are relevantly the same should be given the same construction. Finally, this Court should apply the decisions of a court of equal status unless the Court considers that the decision is wrong and should not be followed: see Australian Securities Commission v Marlborough Gold Mines Limited (1993) 177 CLR 485 at 492; [1993] HCA 15; Farah Constructions Pty Ltd v Say-Dee Pty Ltd (2007) 81 ALJR 1107; [2007] HCA 22 at [135].
149 The policy was a public liability policy. It excluded claims arising out of a breach of duty owed in a professional capacity by the respondent. The respondent did not owe a professional duty to Mr Barlow. Rather, it owed him a duty of care as a third party in respect of whom it was reasonably foreseeable might suffer damage as a result of its negligence in designing and supplying plant and equipment to Delta and its predecessors and in the manner in which it carried out maintenance on that plant and equipment.
150 Accordingly, I am of the opinion that the exclusion does not operate in this case so as to disentitle the respondent to indemnity under the policy.
148 In the present case, at 427 [71] and at 431-434 [90]-[106], the primary judge explained why she considered some authorities relied upon by Chubb as being of little or no assistance to the resolution of the question of construction with which we are confronted. The cases which her Honour found to be most helpful were Chemetics, Fitzgerald v Job and Vero and, to a lesser extent, FAI General Insurance Co Ltd v Gold Coast City Council [1995] 2 Qd R 341. In that case, the Queensland Court of Appeal held, at 344, that, while the meaning of "professional" varied according to the context in which it was used, generally the word "professional" connoted "pertaining or appropriate to a profession" and "engaged in one of the learned professions".
149 As submitted by Mr Robinson, the professional services exclusion in the present case must relate to a narrower band of activity than the work that generally comprises or supports the delivery of building and construction activities by the Reed group of companies. If this were not so, the cover provided by the D&O policy would be inappropriately circumscribed. This is what the primary judge held at 435 [109].
150 It seems to us that the expression "professional services" in the relevant exclusion clause in the present case means services of a professional nature furnished by RBG or one of its subsidiaries involving the application of skill and judgment by the person or persons who carried out the relevant activities on behalf of RBG or one of its subsidiaries being services which fall within the scope of a vocational discipline which is generally regarded as a profession.
151 Thus, in our view, the professional services exclusion in the D&O policy in the present case operates to exclude from the cover provided under that policy, cover in respect of liability incurred by an insured under the policy (viz the relevant companies and/or their executives) for loss suffered by others as a result of acts or omissions on the part of such executives which acts took place in the course of the rendering of services (which services have the requisite professional character as explained at [150] above) by one or more of the companies in the Reed group of companies or their executives to a third party.
152 This interpretation is consistent with her Honour's interpretation of the clause. At 436-437 [115], her Honour held that the obvious purpose of the exclusion was to exclude activities that are truly professional in nature, such as architectural design, engineering, surveying and quantity surveying. The clause was not intended to apply to the routine activities of Reed or of its executives. The provision of progress claims under the D&C Contract were routine activities and did not constitute the rendering of a professional service to St Kilda or to anyone else.