Question 2
80 It follows from my answer to question 1 that it is not the case, as submitted by Zurich, that the policy provides no "objective criteria for the determination of payments of claim expenses prior to final adjudication, but is tied to a decision of Zurich (a) as to coverage; and (b) in the exercise of its discretion". This proposition is correct only insofar as there remains uncertainty about the fact and extent to which the loss the subject of the claim is loss within the insuring clause.
81 The contention of the FKP parties is that, in the presently known circumstances, the loss the subject of the claim is wholly within the insuring clause so that Zurich must indemnify them for all of its claim expenses as incurred up to the limit of its liability under the policy. The FKP parties may be right or wrong about this contention, but the immediately relevant point is that they have a current entitlement to seek (and, if they can, obtain) a judicial determination to this effect. Contrary to Zurich's submissions, making such a judicial determination, if the Court determines it can and should be made, does not interfere with the commercial bargain of the parties, for the reason already given in answer to question 1 above. Zurich's submission to this effect is based on its misconstruction of the policy.
82 Further, if it is the case that the Court cannot or should not make such a determination on the facts of this case, this conclusion says nothing about any other case in which it might be both possible and appropriate for a court to make such a determination before a final adjudication of the claim. Each case will depend on the nature of the particular claim and its facts.
83 In the present case, Zurich contended in its written and oral submissions that the criteria which engage the insuring clause (loss incurred as a result of any claim for civil liability against the insured based on the insured's provision of professional services) mean that:
(1) the professional service must be personally performed by the insured. The insuring clause is not engaged if the insured merely has contractual responsibility for the performance of a professional service by another party;
(2) clause 3 of the extensions of cover provision is concerned with the legal liability of the insured for the conduct of others in providing professional services. In this regard, Zurich contended that:
(a) clause 3 depends on the insured being "legally liable" for the loss from any claim. This requires a judgment, arbitral award or settlement to operate. There is no such judgment, arbitral award or settlement in the present case and the FKP parties do not rely on clause 3 in their pleadings as the source of any present right to indemnity;
(b) given that the extensions operate "on the same terms and in the same manner as the Insuring Clause (except as expressly stated)", clause 3 does not extend cover beyond the provision of professional services;
(c) clause 3 operates to extend cover to the provision of professional services where the insured is not the provider of those services which are, instead, provided by a consultant, sub-contractor or agent of the insured. Contrary to the submissions of the FKP parties, clause 3 does not operate in respect of the insured being legally liable in its own provision of professional services for any conduct of a consultant, sub-contractor or agent of the insured (whether or not the provision of professional services by the consultant, sub-contractor or agent of the insured) because this adds a qualification beyond the language of the extension; and
(d) accordingly, if the reason for a construction defect is defective work by a sub-contractor and "there is no established deficiency in [FKP's provision of] project management services allowing the defect to exist", then there is no liability under the insuring clause or clause 3;
(3) while "project management" and "construction management" are within the scope of the definition of "professional services", to be professional services as defined, the "project management" and "construction management" must also satisfy the proviso in the definition ("performed by or under the direct supervision of a properly registered engineer, architect, or surveyor, or quantity surveyor (who is a member of the Australian Institute of Quantity Surveyors) or any other person (duly qualified by training or education)…") and not be within the exclusions (i) and (ii) in the definition;
(4) the fact that FKP Constructions may have personally performed some "professional services" within all requirements of the definition does not mean that all the work it performed is within the definition;
(5) the "based on" criterion means that the Supreme Court proceeding is to be treated as containing as many claims as there are different bases for relief (that is, there is a separate claim for each different basis of performed service) or, where a single claim (proceeding) consists of covered and uncovered matters the allocation provision applies;
(6) either way, only that part of the claim that is based on the insured's personal provision of the professional services is covered;
(7) the "based on" criterion requires that the cause(s) of action against the insured in the claim depend(s) on the insured's personal provision of the professional services. That is, the required causal relationship between the provision of the professional services and the claim must be one in which there is a causal connection between the insured personally providing the professional services and the residential building work in breach of the statutory warranties;
(8) accordingly, if FKP Commercial and FKP Constructions did not personally provide some professional service which caused (in some way) the residential building work in breach of the statutory warranty, then the insuring clause's "based on" requirement will not be satisfied;
(9) the breach of statutory warranties claim in the Supreme Court proceeding does not depend on FKP Commercial or FKP Constructions having personally provided any professional services. Rather, it depends on the fact of the residential building work having been done under a contract in breach of the statutory warranties, which was "causally irrelevant" to the construction defects; and
(10) as it is common ground that the other claims in the Supreme Court proceeding are not supported by any expert evidence, it is unnecessary to have regard to those claims.
84 Although (regrettably) not the focus of its written or oral submissions, it is apparent that Zurich also contended in the course of its communications with the FKP parties that the definition of "civil liability" is relevant. Under the insuring clause, the loss must be incurred as a result of any claim "for civil liability" based on the insured's provision of professional services. "Civil liability" is defined to mean liability of the insured on any civil cause of action for compensation based on its provision of, or failure to provide, the professional services. Zurich's position (as recorded in a letter dated 24 September 2021) is that a "cause of action for compensation that has its basis in faulty workmanship, where the error arises from negligent construction or negligent supervision of construction, is not a cause of action that is based on the provision of or failure to provide professional services". This letter continued as follows:
Under the HBA [Home Building Act] and DBPA [Design and Building Practitioners Act] , FKP Constructions' liability arises from works that FKP Constructions, as head D+C [Design and Construction] contractor, delegated to others. It is the scope of those delegated works which is material, not the project management services that FKP Constructions performed.
There is no suggestion in the pleadings that FKP Commercial is sued for any professional services it provided. It is therefore not entitled to any indemnity under the insuring clause…
Similarly, FKP Constructions having delegated out the design and construction elements of the development, the only professional services provided by FKP Constructions, being the project management services, did not cause any loss. It follows that the claim against FKP Constructions is not based on its provision of, or failure to provide, the professional services.
85 Zurich referred to a number of decisions said to support these propositions, as follows.
86 GIO General Limited v Newcastle City Council (1996) 38 NSWLR 558 at 568-569 concerned an exclusion of liability which confined indemnity for a claim for "the rendering or failure to render professional advice or service" to a particular insuring clause. The observation of Kirby P (as his Honour then was) at 568 is that "relevant activities conducted by the respondent must be examined to see whether, in their nature, they are properly characterised as "professional"" (noting that "professional service" was not a defined term in the policy).
87 Government Insurance Office of New South Wales v Penrith City Council [1999] NSWCA 42; (1999) 102 LGERA 102 concerned the meaning of "conduct of any business dependent wholly or mainly on personal qualifications conducted by or on behalf of the Insured in a professional capacity" and its application to the facts of that case.
88 AIG Australia Limited v Kaboko Mining Limited [2019] FCAFC 96 concerned an exclusion from an insuring clause. The exclusion was "for any Loss in connection with any Claim arising out of, based upon or attributable to the actual or alleged insolvency of the Company…". The term "Claim" was defined by reference to matters such as a written demand or proceeding for a specified act, error or omission, an investigation or an extradition proceeding (at [29]). The claim was by the company against former directors and officers for breach of their duties as directors in managing the company. The directors and officers claimed under the policy. The insurer denied indemnity on the basis that the claim was excluded by the insolvency exclusion. The insurer argued that the exclusion applied if (at [38]):
there was the requisite insolvency connection with either the bringing of the Claim or the nature of the Loss for which indemnity was sought (irrespective of whether the liability for the Loss was itself established by reference to a cause of action that depended upon demonstrating insolvency or a head of loss that was alleged to have been caused by insolvency).
89 The Full Court disagreed as:
(1) "[t]he insolvency exclusion could have been expressed as applying to any Loss arising out of, based upon or attributable to Kaboko's insolvency or inability to pay debts. Had it done so then the specified insolvency link (arising out of, based upon or attributable to) would have to be evaluated by reference to an amount which AIG was otherwise liable to pay under the policy": [45];
(2) "[t]he qualifying words that specify the insolvency link should not be read as applying to the Loss. Such an approach would give the words 'in connection with any Claim' no work to do. Rather, the insolvency link qualifies the types of Claims for which indemnity for Loss must be provided. If the Loss (liability to pay) is 'in connection with' any Claim with the specified insolvency link then it is excluded"; [47];
(3) "[t]he key question is whether it is the subject matter of the Claim that must have the specified insolvency link or whether the link is also established where, by reason of the circumstances that have led to the bringing of the claim, it can be said that the Claim arises out of, is based upon or is attributable to the actual or alleged insolvency of Kaboko or its inability to pay its debts when due": [48];
(4) "…for the purposes of the insolvency exclusion, a Claim does not arise out of, is not based upon and is not attributable to the insolvency of Kaboko or its inability to pay its debts unless the subject matter of the Claim has that character (being a character derived in the case of civil proceedings from the acts, errors or omissions that are the subject of the proceedings and the associated loss that may become the Loss if the proceedings are successful). The exclusion is not to be read as applying where the insolvency of Kaboko or its inability to pay its debts might be said to have motivated or led to the Claim being brought (for reasons other than providing a material part of the basis of the Claim)": [50];
(5) "[t]he clause does not refer to a Claim that is brought because of the insolvency of Kaboko. Rather, it refers to the Claim itself 'arising out of, based upon or attributable to' Kaboko's insolvency or inability to pay debts. Given the nature of a Claim and the stated connection with Loss (resulting from a Claim) the language is more apt to direct attention to the subject matter of the Claim than the reasons why it was brought": [53]; and
(6) "…the qualifying words which specify the insolvency link describe a Claim 'arising out of, based upon or attributable to' the insolvency of the company the subject of the policy or the company's ability to pay its debts. The words used, especially 'arising out of' and 'based upon' indicate a focus upon the subject matter of the Claim": [56].
90 Allianz Australia Limited v Wentworthville Real Estate Pty Ltd trading as Starr Partners (Wentworthville) [2004] NSWCA 100; (2004) ANZ Ins Cas ¶61-598 at [45] said that where an exclusion was for claims of a particular character it was necessary to consider the substance of the claim. In reaching this conclusion, it should be noted that Mason P (with whom Sheller JA and Pearlman AJA agreed) said at [23]-[24]:
It is submitted that the court must look at the substance of the claim, not the legal tag or tags which may be attached to it to signify the cause(s) of action, to determine whether the claim attracts indemnity under the policy. The manner in which a claim is framed against the insured will not be decisive as to whether liability falls within cover.
This legal proposition should be accepted. It is supported by the authorities cited by the appellant (see West Wake Price & Co v Ching [1957] 1 WLR 45 at 55-6, Elders Ltd v Swinbank [1999] FCA 798 at [97]-[107], State of New South Wales v AXA Insurance Australia Ltd [2002] NSWCA 63. See generally Nigel G Rein, "Liability Policies: The Relationship of the Claim against the Insured and the Insured's Claim on the Insurer" (1994) 6 Ins LJ 193).
91 I note that in Elders Ltd v Swinbank [1999] FCA 798, Mansfield J said:
[96] The underwriters submit that those claims are properly determined by reference to the nominal causes of action alleged against the applicants in the counterclaim. I do not accept that submission. It is appropriate to refer to the pleadings in the Northern Territory proceedings to define and articulate the "claims" made against the applicants and notified to the underwriters to determine whether they arise out of any negligent act or omission committed or alleged to have been committed by the applicants. In my judgment, however, the appropriate consideration in addressing that question is to look at the substantive nature of the claims made, rather than the name or names of the causes of action ascribed to the conduct complained of. In Rigby v Sun Alliance & London Insurance Ltd (1980) 1 LLR 359, per Mustill J at 363, his Lordship applied West Wake (above) [West Wake Price & Co v Ching [1957] 1 WLR 45] in the following terms:
"In order to decide whether the putative liability of the plaintiffs to the claimants was a liability which [fell within the policy cover], it is necessary to ascertain the legal basis of the claim in the main action. For this purpose it is common ground that one must look at the true nature of the cause of action and not at the way in which the claimants happen to have expressed it."
[97] Thorman v New Hampshire Insurance Co (UK) Ltd (1988) 1 LLR 7 adopted the same approach, per Sir John Donaldson, MR, Stocker and Russell LJJ. Stocker LJ at 16 said:
"Plainly, a claim can only be enforced by legal proceedings where the appropriate cause of action is pleaded and proved, but the cause of action is not, itself, a claim but the necessary vehicle for its legal enforcement …"
[98] Devlin J in West Wake (above, at 55) said:
"I think that the primary meaning of the word "claim" - whether used in a popular sense or in a strict legal sense - is such as to attach it to the object that is claimed; and is not the same thing as the cause of action by which the claim may be supported or as the grounds on which it may be based. …
…
If the word is to be used with any precision, it must be defined in relation to the object claimed. The grounds for the claim or the causes of action which support it can give it colour and character, but cannot give it its entity. (at 57)
and later in that passage his Lordship said:
"It follows, I think, that if there is only one object claimed by one person, then there is only one claim, however many may be the grounds or the causes of action which can be raised in support of it: likewise, where several claims are each dependent on the same cause of action (as, for example, where one cause of action leads to alternative claims for an injunction, damages or an account or other different forms of relief), there remains only one cause of action, however many claims it may give rise to. In my judgment there is in each of these actions against the insured only one claim and I have therefore to consider whether this "mixed" claim is a claim in respect of negligence within the meaning of the policy."
[99] The approach of looking at the substance of the matter, has also been adopted by the Court of Appeal of New South Wales (Kerr CJ, Hardie and Bowen JJA) in Walton v National Employers' Mutual General Insurance Association Ltd (1973) 2 NSWLR 73. Bowen JA at 83 said in respect of an insurance clause entitlement to indemnity which arose "out of negligence in the conduct of the insured business as stockbrokers":
"Negligence in this context I take to mean a want of care or skill. I do not read it as referring in a technical sense to the tort of negligence. The policy is designed to protect the insured against the consequences of negligence in the conduct of the business of stockbrokers. The condition is met if the claim arise from a want of care or skill in the conduct of the business, whether the cause of action happens to be based on contract or tort. The words "arising out of" I take to mean originating in or springing from."
[100] Kerr CJ at 79 noted the same point in the following terms:
"If the breach occurred because of negligence in the conduct of the insured's business as stockbroker, the claim in respect of the breach could be said to arise out of that negligence, even though the negligence was not the basis of the third party's claim against the insured. The negligence in the conduct of the business has caused the contractual breach, though it is not the basis of legal liability. A policy of the kind involved here would, in my opinion, extend to claims of this kind arising out of negligence in the conduct of the business."
92 In Giabal Pty Ltd v Gunns Plantations Ltd (In Liquidation) [2020] NSWSC 1070 at [22], to which Zurich also referred, Ball J said:
It is important to know what counts as a single claim for the purpose of the application of the conflicts of interest exclusion because the exclusion applies by reference to a "Claim". It excludes liability in respect of a Claim that has the requisite character. It does not exclude liability in respect of other Claims that do not have that character. But the answer to the question what constitutes and what does not constitute a single Claim for the purposes of the exclusion is not to be found in the definition of the term. The use of the defined term "Claim" in the exclusion is obviously intended to pick up Claims covered by the insuring clause. But like the use of the defined term in the insuring clause, it is not intended to answer the question what counts as the claim for the purpose of the application of the exclusion - except that of course it must be made by way of a demand in writing or a proceeding of the relevant type. In particular, it is not saying that because there is one proceeding, there can only be one claim for the purpose of the application of the exclusion.
93 Paramasivam v Flynn [1998] FCA 1711; (1998) 90 FCR 489 concerned the meaning of "based on" in the context of s 33 of the Limitation Act 1969 (NSW) in which the limitation period did not commence for a cause of action "based on" fraud or deceit in the specified circumstances until the fraud or deceit was discovered. Miles, Lehane and Weinberg JJ said at [96]-[97] that:
If fraud or deceit is not an ingredient of the cause of action relied on, then allegations of fact from which fraud or deceit might be inferred are to be ignored for the purpose of s 33(1)(a). Clearly the section is not intended to confer benefits on a plaintiff who makes general allegations of fraud or deceit in a statement of claim which does not rely on such fraud or deceit to provide a basis for any cause of action sued upon.
An action for assault cannot be "based on" fraud or deceit since fraud or deceit does not constitute an ingredient of a cause of action in assault.
94 In Walton v National Employers' Mutual General Insurance Association Ltd [1973] 2 NSWLR 73 at 83F-84C Bowen JA said in respect of a clause providing that the insured was indemnified against "any claim for which the Insured is legally liable arising out of negligence in the conduct of the Insured's business" that:
The learned trial judge took the view that, before a claim "for which the insured is legally liable" can be said, within the meaning of s. 3B, to "arise" out of negligence, it must be a claim of a kind in which negligence necessarily enters into its "legal determination". In other words his Honour took the view that for a claim to fall within s. 3B it must be a claim based upon or formulated as a claim for negligence.
While I agree that such claims would be covered by s. 3B I am not satisfied that s. 3B was intended by the parties to be restricted in this way. It would have been a simple matter to describe the claim indemnified against as any claim "for" or "based upon" negligence. The words used "arising out of negligence in the conduct of the insured's business" appear to me to be intended to cover a somewhat wider field…
The test whether a claim arose out of negligence for the purposes of s. 3B seems to me to be not so much whether the claim made is itself based on negligence (where it could certainly be said it arose out of negligence), but whether the claim made originated in or sprang from negligence in the conduct of the business regardless of whether negligence is the legal basis of the claim made.
95 The FKP parties relied on XL Insurance in which there was an exclusion for loss "directly or indirectly arising out of, based upon, attributable to or in consequence of… any valuation undertaken by on or behalf of [a certain class of lender]… unless the following "Prudent Lender Clause"… is included in any such valuation report". The primary judge had found that the exclusion operated only where there was a causal connection between the loss and the absence of the prudent lender clause in the valuation report (at [21]). The NSW Court of Appeal held that was in error. The qualification "unless… the following "Prudent Lender Clause"… is included" was not required to be causally connected to the loss. All that the exclusion required to be engaged was an indirect causal relationship between the loss and the specified matter engaging the exclusion (ie, the absence of the "Prudent Lender" clause): [68]-[70]. I note that this conclusion is consistent with the broad kind of causal relationship required by the phrase "arising out of…", and the Court did not have to consider the relationship required by the concept of "based upon".
96 Against this background, Zurich's contentions (as summarised at [83] above) may now be considered.
97 It is convenient to begin with the extension of cover, clause 3.
98 The FKP parties have not pleaded any present entitlement to indemnity under clause 3. The Statement of Claim of the FKP parties against Zurich asserts that the loss incurred and to be incurred in the Supreme Court proceeding is a result of a claim based on FKP's provision of professional services within the meaning of the insuring clause. Despite this, both parties called clause 3 in aid of their competing constructions of the insuring clause. The FKP parties also submitted that they are entitled to indemnity under clause 3. Given that clause 3 is relevant to the construction issues and, to this extent at least, has been relied upon by both parties, it is necessary to consider the clause.
99 The extension of cover provisions operate "on the same terms and in the same manner as the Insuring Clause (except as expressly stated)". The first respect in which clause 3 expressly states terms different from the insuring clause is obvious. The insuring clause is engaged if there is loss incurred as a result of a claim for civil liability based on the insured's provision of professional services. Clause 3 is engaged if there is loss incurred as a result of a claim arising from the conduct of any consultants, sub-contractors or agents of the insured for which the insured is legally liable in the provision of the professional services. In clause 3, the claim need not be a claim for "civil liability". The omission of "civil liability" in clause 3 must be deliberate as it is consistent with the fact that clause 3 involves the concept of "arising from" rather than "based on" in the insuring clause and the concept of "based on" is also part of the definition of "civil liability".
100 The next issue in respect of clause 3 is the required provider of the professional services. As noted, Zurich contended that clause 3 is engaged if the insured is legally liable for the conduct of any consultant, sub-contractor or agent in the consultant, sub-contractor or agent providing professional services as defined. The FKP parties contended that clause 3 is engaged if the insured is legally liable for any conduct of any consultant, sub-contractor or agent where the insured itself is providing the professional services (ie, the third party may but need not itself be performing the requisite professional services).
101 The contention of the FKP parties accords with the ordinary grammatical meaning of clause 3. The clause refers to "the conduct of any consultants, sub-contractors or agents of the insured for which the insured is legally liable in the provision of the professional services". The clause does not say, for example, "the conduct of any consultants, sub-contractors or agents of the insured in the provision of the professional services for which the insured is legally liable".
102 Zurich would have it that the policy is for the provision of professional services so it makes commercial sense for the insured to be covered for it providing professional services and consequently for any consultant, sub-contractor or agent providing professional services for the insured. This does make commercial sense. The problem for Zurich, however, is that it makes just as much (and, on further consideration, more) commercial sense for the insured to be covered for it providing professional services and for any legal liability the insured has for any conduct of any consultant, sub-contractor or agent (including but not limited to the provision of professional services) in the insured providing professional services.
103 Other indicators in the policy support the FKP parties' construction of clause 3. In particular:
(1) clause 3 expressly excludes any indemnity to the consultants, sub-contractors or agents. The extension in clause 3 applies only to the insured under the policy;
(2) the focus of the policy is the insured providing professional services;
(3) nothing in the insuring clause or clause 3 (or elsewhere in the policy) suggests that the ordinary doctrine of agency is ousted. To the contrary, clause 19 in the extension of cover provisions expressly contemplates that the insured may be an agent of a principal in the provision of professional services by the insured and, in that capacity, the insured and/or the principal may be sued; accordingly, if an insured provides professional services via an agent, then the relevant provision is the insuring clause and not clause 3, as the law will treat the provision of professional services by the agent as the provision of professional services by the insured as the principal;
(4) it follows that there is little scope for the operation of clause 3 as an extension of cover if all it is doing is covering the insured for the acts of consultants, sub-contractors and agents in providing professional services "for which the insured is legally liable". This is because if the insured is legally liable as a principal for those acts, then those acts will be treated in law as the provision of the professional services by the insured, which would be the subject of the insuring clause in any event;
(5) in contrast, clause 3 has a clear and commercially sensible field of operation if it applies to any conduct of a consultant, sub-contractor or agent for which an insured is legally liable in the insured's provision of the professional services; and
(6) all of this is consistent with the fact that clause 3 requires only loss resulting from a claim, not loss resulting from a claim for civil liability. If the claim had been confined to one for civil liability, clause 3 would not make sense as loss would have to result from a claim for a cause of action based on the insured's provision or failure to provide professional services. That could not operate with clause 3 which is focused on loss from a claim arising from the conduct of any consultants etc, for which the insured is legally liable in the provision of professional services.
104 In response to Zurich's contention (1) in [83] above, as noted, it is not the case that the professional services must be "personally performed" by the insured. Nothing in the policy speaks against the application of the common law doctrine of agency. Accordingly, if conduct of another person in providing professional services is to be treated as an act of the insured (in that the insured and the other person are in a principal-agent relationship), the insuring clause can apply. If conduct of a consultant, sub-contractor or agent (be it in providing professional services or not) is conduct for which the insured is legally liable in its provision of professional services, then clause 3 can apply.
105 In response to Zurich's contention (2), clause 3 is concerned with legal liability of the insured for the conduct of others. However, for the reasons given above, the conduct of the nominated others need not be the provision of professional services. It is sufficient if the insured is legally liable for any conduct of the nominated others in the insured's provision of professional services.
106 Further, Zurich's contention 2(d), that if the reason for the deficiency is defective construction by a sub-contractor and "there is no established deficiency in [FKP's provision of] project management services allowing the defect to exist" there is no liability under the insuring clause or clause 3, is wrong in principle on a number of counts.
107 Neither the insuring clause nor clause 3 refer to any concept such as "defect" or "fault" either on the part of the insured or on the part of any consultant, sub-contractor or agent. What is required by the insuring clause is loss incurred as a result of a claim for civil liability against the insured based on its provision of professional services of the requisite character. The definitions of "claim", "civil liability" and "loss" also do not include any notion of "defect" or "fault". If that had been intended, then it would have been an easy matter for the definitions to confine indemnity to loss resulting from claims based on the insured's defective, faulty or negligent provision of the professional services. "Loss", however, means compensation and/or costs for which the insured "is legally liable", regardless of the cause of the insured's legal liability. The concepts of "defect", "fault" and "negligence" in the insured's provision of professional services are not necessary for the policy to respond, but may be sufficient for it to do so as they may satisfy the terms of the insuring clause (for a claim for civil liability based on the insured's provision of the professional services) or clause 3 (for a claim arising from the conduct of another for which the insured is legally liable in the insured's provision of the professional services). In this regard, I note that the definite article "the" before "professional services" in both the insuring clause and clause 3 means the professional services the subject of the claim for civil liability (for the insuring clause) and the subject of the claim (for clause 3).
108 It also follows that there is no necessity for any causal connection between the "defective" construction and the insured's provision of the professional services in the sense Zurich proposes, that the insured's defective provision of professional services "allowed" the defective construction to exist. This not what either clause says. To the contrary:
(1) the only causal requirement in the insuring clause is that the loss results from a claim of the requisite type;
(2) the requirement of "based on" in the insuring clause is not necessarily a purely causal requirement. The connective phrase "based on" does not require that the claim be caused by, result from or arise from the insured's provision of professional services, albeit that such a claim may satisfy the "based on" requirement;
(3) the only causal requirements in clause 3 are that the loss results from a claim of the requisite type, which is a claim "arising from" the conduct of a consultant, sub-contractor or agent as described; and
(4) the requirement in clause 3 that "the insured is legally liable in the provision of the professional services" is also not a causal requirement. It does not require that the claim be caused by, result from or arise from the insured's provision of professional services. It requires only that the insured is legally liable for the conduct in its provision of the professional services, irrespective of the source of the legal liability.
109 In response to Zurich's contention (3), it is correct that the exclusions (i) and (ii) in the definition of "professional services" apply. However, this does not necessarily mean that if a person other than the insured has engaged in conduct within the exclusions in (i) and (ii), in a claim against the insured relating to such conduct: (a) the insuring clause is not engaged, or (b) the allocation provision is engaged. The relevant issue is whether the claim against the insured is of the requisite character or not, and not whether the same or related conduct might result in liability against some other person.
110 In response to contention (4), it may be that an insured in a particular case has both provided professional services and provided other services (such as performing construction works). In that event, if the insured is the subject of a claim based on the other services only, the policy provides no indemnity. If the insured is the subject of a claim for civil liability based on its provision of professional services only, the fact that it also provided other services is immaterial. If the insured is the subject of a claim based on both its provision of professional services and other services, then subject to any exclusionary provision such as exclusion clause 8, the allocation provision may apply.
111 In response to contention (5), it is necessary to distinguish between "claim" and "civil liability" in the insuring clause. In the insuring clause, the claim must be one "for civil liability". That is, the demand for compensation must be for a civil cause of action based on the insured's provision of, or failure to provide, the professional services. Read literally, the insuring clause is as follows:
We agree to indemnify the insured against loss incurred as a result of any claim [demand for compensation] for civil liability [liability of the insured on any civil cause of action for compensation based on its provision of, or failure to provide, professional services]…based on the insured's provision of the professional services.
112 This formulation of the right of indemnity, with its in-built redundancy, means that the distinction between a "claim" and a "cause of action" is irrelevant for the operation of the insuring clause (but is relevant for the operation of clause 3 which does not require the claim to be for civil liability).
113 In the present case there is one claim (for damages) against the FKP parties. At its highest level of generality that claim is based on (and arises from) the fact of residential building work having been done. That one claim is founded on three causes of action - two sourced from statute and one sourced from the common law.
114 Contrary to Zurich's contentions: (a) the reason(s) for or causes of the claim and the causes of action, (b) the existence of any defect or fault on the part of the FKP parties in their provision of the professional services, and (c) the existence of any defect or fault on the part of any other person may be relevant facts (as they may be sufficient to satisfy the insuring clause or clause 3), but are not necessary facts, in that the insuring clause and clause 3 do not require any defect, fault or negligence to be engaged.
115 In response to contention (6), as discussed, the insured need not "personally" provide the professional services for the policy to respond. The law of agency is part of the background common law against which the policy operates.
116 In response to contention (7), Zurich reintroduces a variety of causal requirements that may be sufficient, but are not necessary to engage the insuring clause or clause 3. A claim need not causally depend on the insured's provision of professional services for the claim to be based on the insured's provision of professional services. Further, there is no required causal connection between the insured providing the professional services and the residential building work in breach of the statutory warranties.
117 In response to contention (8), for the same reasons as discussed above, I disagree.
118 In response to contention (9), Zurich misses the key point that it may well be legitimate to characterise a claim or claims in multiple ways. The fact that, for one purpose, the claim(s) may have one character does not mean that, for another purpose, they are unable to have another character. In short, it is no answer to the case of the FKP parties that the claim in the Supreme Court proceeding may be characterised as depending on the fact of the residential building work having been done under a contract in breach of the statutory warranties.
119 None of this means that Zurich's ultimate position is wrong, however. Question 2 remains whether the Supreme Court proceeding involves a claim for civil liability (that is, a civil cause of action for compensation based on the insured's provision of, or failure to provide, professional services) based on the provision of professional services by FKP Commercial and/or FKP Constructions.
120 In this regard, it is important to note that the conditions to which question 2 is subject involve three issues of fact (conditions (a), (b) and (c)), and one issue of law (condition (d)). Condition (d) is important. Condition (d) is "even if there is no causal connection between the provision of the Professional Services and the defects alleged in the OC Proceeding [the Supreme Court proceeding]". This condition is important because it is apparent from the communication between the parties and their competing submissions that Zurich's position depends on its proposition that it is liable to indemnify the FKP parties only where the FKP parties prove that the provision of professional services by one or other of them caused the alleged defects said to involve breach of the statutory warranties in the Supreme Court proceeding.
121 As discussed, I disagree with Zurich in this regard. If the provision of professional services caused a breach of a statutory warranty then it may well be that the claim for civil liability for that breach is based on or arises from the insured's provision of professional services. But the fact (if it be the fact) that the insured's provision of professional services did not cause the alleged defects said to involve breach of the statutory warranties in a claim does not necessarily mean that the claim is not one for a cause of action based on the insured's provision of professional services or that the claim is not one arising from the conduct of another person for which the insured is legally liable in the provision of professional services. This is because it may be arguable that a claim is for a cause of action based on (or arising from) an insured's provision of professional services if the cause of action or claim, in substance, exposes some other connection (factual, temporal or otherwise) between the cause of action or claim and the insured's provision of professional services.
122 As noted, in Paramasivam v Flynn, the Full Court said that for a cause of action to be based on fraud or deceit, the fraud or deceit had to be an ingredient of the cause of action. Further, the authorities disclose that the labels used to describe the underlying cause(s) of action in a claim or the claim itself do not determine its character for the purpose of the insuring clause. This is because the parties to the policy could not have expected that a person making a claim against the insured would do so in terms neatly referable to the policy. They would be taken to understand that in referring to a claim for a cause of action "based on" the provision of the professional services (in the insuring clause) or a claim "arising from" the conduct of consultants (etc) (in the extensions of cover, clause 3), it could never have been anticipated that a claim or cause of action would use the language or concepts of the policy. Accordingly, a process of characterisation of the claim is called for by the language of the policy. In the insuring clause the question is whether the claim is for a cause of action "based on" the insured's provision of or failure to provide the professional services. In clause 3 the question is whether the claim arises from conduct of a consultant (etc) for which the insured is legally liable in the insured's provision of the professional services.
123 For the purpose of the insuring clause, it must be asked, what does the liability of the insured on the causes of action depend on as a matter of substance, not form? There are different levels of generality and specificity at which this question may be answered. At the highest level of generality, the causes of action each depend on the fact of residential building work having been done under contract (Zurich's characterisation). The problem with this characterisation is that it is too general in that it does not identify why the FKP parties are liable (or alleged to be liable) for that residential building work. This indicates that a more specific characterisation is called for by the insuring clause.
124 Focusing on the Home Building Act cause of action, the alleged liability of FKP Constructions depends on the facts that: (a) it was contracted to do residential building work and held (or was required to hold) a contractor licence to do so, (b) it entered into sub-contracts to do everything required for the residential building work, (c) the statutory warranties are implied by s 18B into both the head contract and sub-contracts, (d) the plaintiff has the benefit of the statutory warranties against FKP Constructions because it is the successor in title from FKP Commercial to the land on which the residential building work was done (s 18D of the Home Building Act), and (e) the residential building work (allegedly) does not comply with the statutory warranties.
125 Focusing on the Home Building Act cause of action, the alleged liability of FKP Commercial depends on the facts that: (a) it owned and/or was the developer of the land on which it procured the doing of the residential building work, (b) the plaintiff has the benefit of the statutory warranties against FKP Commercial as the successor in title to FKP Commercial where FKP Commercial is a former holder or a developer who has done residential building work on land and, accordingly by virtue of s 18C of the Home Building Act, the residential building work done on behalf of a developer is taken to have been done by the developer.
126 The causes of action against the FKP parties therefore depend on: (a) FKP Commercial having procured FKP Constructions to do the residential building work on the land, (b) FKP Constructions having procured sub-contractors to do the residential building work on the land, and (c) the doing of residential building work on the land.
127 The FKP parties put their case on their entitlement to indemnity under the insuring clause in various ways. They said:
In the present case, a claim has been made and a basal precondition or cause of the claim is that FKP Constructions provided "professional services", because in the absence of the provision of those "professional services' under the Head Contract, there would be no claim under the HBA [Home Building Act]. The same is true for the damages claim for common law negligence. That the factual matrix giving rise to a breach of the warranties under the HBA - namely, that defects exist which may themselves not have been caused by the provision of professional services - is irrelevant to considering whether the "oral or written demand for compensation" against FKP is based on FKP's provision of "professional services".
128 The FKP parties also said:
Applied to the present case, only an indirect causal relationship is required between the "claim" and FKP's "provision of the professional services", which does not require proof that the proximate cause of the defects in the Project was the provision of professional services. It requires only that the claim answer the description of one which involves the provision of professional services.
129 They said:
In any case, even if the Insuring Clause requires a connection between the facts giving rise the liability alleged in the [Supreme Court] Proceeding (i.e., the cause of action, as distinct from the claim) and the provision of professional services, such a connection exists in the present case. As explained above, the liability of FKP Constructions and FKP Commercial on the HBA [Home Building Act] Cause of Action, as imposed by sections 18B, 18C and 18D of the HBA, is "based on" FKP Constructions' entry into and performance of professional services under the Head Contract. A necessary element of the factual matrix giving rise to FKP's alleged liability under the HBA Cause of Action is FKP Constructions' role as head contractor on the Project.
130 They said:
The claim made against FKP in the [Supreme Court] Proceeding is, so far as the HBA Cause of Action is concerned, based on FKP Constructions' role as head contractor under the Head Contract, in which role it performed project and construction management services which are covered by the Policy. That the HBA Cause of Action is also based on the presence of defects in the Project which in part may be due to defective construction work by subcontractors is no answer to FKP's claim to indemnity. At most, the presence of defects is another "cause" of FKP's legal liability to the [plaintiff] (in the sense that, but for the defects, it would have no liability), but does not gainsay the fact that FKP's liability to the plaintiff] is also "caused" by its entry into the Head Contract under which it provided professional services (and only professional services).
131 They said:
FKP maintains that it is not necessary for an insured to show that the provision of professional services is an "ingredient in the cause of action" (cf ZS [114]). As submitted in chief, that is to confuse the claim with the cause or causes of action on which it is based.
132 They said:
…the cause of action against both FKP Commercial and FKP Constructions depends on FKP Constructions' performance of the "the residential building work" under the contract with FKP Commercial…
FKP Constructions' performance of the Head Contract involves the provision of "professional services" (being project management and construction management services which were the only services FKP Constructions undertook in the performance of its contractual obligations under the Head Contract). The very role of head contractor and act of sub-contracting "the residential building work" is itself the provision of project management and construction management services. That is, the entirety of FKP Constructions' provision of "the residential building work" derives from FKP Constructions' provision of project management and construction management services.
Merely because the presence of defects on the Project is an ingredient in the HBA cause of action brought against FKP, which defects may or may not themselves be caused by the provision of professional services, does not alter the fact that the entirety of FKP's liability under the HBA cause of action derives from FKP Constructions' provision of project management and construction management services as head contractor under the Head Contract. But for FKP Constructions' provision of project management and construction management services in its role as project and construction manager, "the residential building work" would not have been completed so as to give rise to liability under the HBA. FKP Constructions' project management role is therefore not "causally irrelevant" to the connection required by the Insuring Clause (cf ZS [120]).
…
…once the sufficiency of the connection between FKP's project management role and the basis for the [Supreme Court] Proceeding is accepted, the whole of the [Supreme Court] Proceeding is properly to be regarded as a claim based on the provision of professional services within the meaning of the Insuring Clause.
133 I have recorded these submissions to expose the different threads which underlie them, some of which I accept and others of which I do not accept. I explain this below.
134 For the purpose of the insuring clause, any confusion between "claim" and a "cause of action" is immaterial because, as noted, the insuring clause requires the claim to be for civil liability which is defined as "liability … on a civil cause of action, based on [the insured's] provision of, or failure to provide, the professional services". It follows that the better view on the authorities is that for the purpose of the insuring clause (but not clause 3) the cause(s) of action must depend on the insured's "provision of, or failure to provide, the professional services". I prefer to use the concept of a cause of action depending on the insured's "provision of, or failure to provide, the professional services" rather than the concept of a cause of action in which the relevant provision (of the professional services) is an "ingredient". This is because the concept of "depends on" better enables a focus on the substance of the circumstances on which the cause of action is based, whereas "ingredient in" might misdirect the inquiry into a search for a specific reference in the cause of action to the relevant provision (of the professional services).
135 Accordingly, for the insuring clause (but not clause 3), I consider that it is necessary that the cause(s) of action depend(s) on the relevant provision of the professional services.
136 I agree with the FKP parties that under the insuring clause (and clause 3) it is not determinative that "defects exist which may themselves not have been caused by the provision of professional services". I also agree that it does not matter that, but for the alleged defects, there may have been no cause of action at all.
137 The more difficult proposition of the FKP parties is that the cause(s) of action depend(s) on the FKP parties having provided the professional services.
138 One approach the FKP parties use to support this proposition is the "but for" test - they say "in the absence of the provision of those "professional services" under the Head Contract, there would be no claim". I am unable to agree. While, at one level, for this residential building work to be completed, there needed to be: (a) the contract between the FKP parties (the head contract), (b) contracts between FKP Constructions and third parties, and (c) provisions in either or both the head contract and some of the other contracts requiring work to be done which were "professional services", the causes of action in the Supreme Court proceeding do not depend on either of the FKP parties or any agent on their behalf (in the sense that the conduct of the agent is taken to be conduct of the FKP parties) having provided professional services.
139 Insofar as FKP Commercial is concerned, its liability for all cause(s) of action depend(s) on the fact that it contracted for residential building works to be done on the land. It does not matter if that contract or any contract entered into by its contractor did or did not require the provision of professional services. FKP Commercial would be liable for any breach of the statutory warranties under the Home Building Act whether or not professional services were provided. FKP Commercial's potential liability under s 37 of the Design and Building Practitioners Act and at common law in negligence also does not depend on the head contract having included any requirement for professional services. It depends on whether: (a) FKP Commercial can be said to be a person who has carried out construction work within the meaning of s 37 of the Design and Building Practitioners Act or is responsible as a principal for the carrying out of construction work by others under the common law, and (b) if so, whether the construction work breached the duty of care owed in some or other respect, which may or may not have involved the provision of professional services. It is not that the provision of professional services needs to have caused or resulted in the breach of the duty of care, but the provision of professional services must have some identifiable relationship with the cause(s) of action which is not presently apparent.
140 FKP Constructions also would be in the same position under the Home Building Act whether or not it had provided any professional services. Insofar as the statutory and common law duties of care are concerned, FKP Constructions is in the same position as FKP Commercial.
141 Another approach of the FKP parties is that there exists an indirect causal relationship between the claim and the FKP parties' "provision of the professional services". The problem with this analysis is that it is derived from authorities concerning insuring provisions different from the present case which use the concept of "based on" as a mere alternative to other kinds of connection such as "arising from". The FKP parties also overlook that the indirect causal relationship (which may suffice for clause 3, but not the insuring clause) must be between the claim and the conduct of the other person for which the insured is legally liable in the insured's provision of the professional services.
142 It is also not the case that a "necessary element of the factual matrix giving rise to FKP's alleged liability under the HBA Cause of Action is FKP Constructions' role as head contractor on the Project". FKP Commercial would be in the same position irrespective of the head contract with FKP Constructions. Any contract into which FKP Commercial entered in its capacity as the owner and developer of the land would have exposed it to the claims under the Home Building Act. The interposition of FKP Constructions as head contractor merely extended that potential liability for breach of the statutory warranties to FKP Constructions.
143 In one of the letters from Zurich's lawyers concerning indemnity, the lawyers referred to TimTech Chemicals Limited v QBE Insurance (International) Limited [2012] NZCA 274. In that case, TimTech was in the business of supplying chemicals to treat timber. As part of this activity it supplied a piece of plant to a customer and was responsible for plant commissioning. TimTech remained the owner of the plant for a period after commissioning and supplied the chemicals used in the plant for treating the timber. For a period, the plant did not effectively treat the timber because the set points for the uptake of the treating fluid were incorrect. The customer had to sell that timber at a loss.
144 TimTech held professional indemnity insurance with QBE. The policy gave indemnity for any "Valid Claim" which was defined to mean, relevantly, 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 defined to mean the "business conducted by the Insured as specified in the Schedule". The Schedule referred to "[t]echnical advice regarding the supply and use of wood processing chemicals and the associated equipment". Indemnity extended to claims "for any act, error or omission committed by any consultant, subcontractor or agent for whose act, error or omission the Insured is legally liable".
145 The policy included this endorsement:
Design and Construct
QBE shall indemnify the Insured, in accordance with this Policy, for Valid Claims arising from the Insured's faulty or inadequate design or specification.
Furthermore, QBE shall not be liable in respect of any Claim alleging or in respect of:
(a) faulty or inadequate manufacture, or;
(b) faulty or inadequate workmanship, construction or fabrication, or;
(c) faulty or inadequate supervision of manufacture, workmanship, construction or fabrication, or;
(d) breach of any express or implied warranty arising out of the sale of goods.
146 The policy contained exclusions including for claims:
18. Supply of Goods
Alleging or arising from the sale, supply, installation, efficacy, or manufacture of goods by or on behalf of the Insured.
147 TimTech argued that the incorrect fixing of the set points of the plant was "in connection with the Insured's Professional Business Practice" and that "technical advice" could be communicated through the design of the plant.
148 The primary judge rejected TimTech's claim to indemnity on the basis that TimTech's approach would negate the function of the definition of the insured's "professional business practice" which was fundamental to the policy and served to demarcate the scope of the indemnity: [28]. The appellate Court agreed, on the basis that TimTech did not incur the liability in the course of its "Professional Business Practice". The liability was for a faulty product which "was too remote from its Professional Business Practice to be "in connection with" that practice, and did not result from TimTech giving technical advice": [34].
149 I consider this analysis useful. The required relationship for the policy in that case was a claim "in connection with" the insured's "Professional Business Practice". It could be concluded that a "but for" connection did exist. But for TimTech having contracted to provide the technical advice it would not have contracted to provide the plant. In the present case, but for FKP Commercial deciding to develop the land and appointing FKP Constructions its head contractor, the FKP parties would not have been liable for the residential development. In both cases, the connection between the covered matter and the liability is too remote (or, in the present case, too remote as the evidence currently stands). In the present case, the lack of sufficiency of any connection is reinforced by the fact that it is not presently apparent that any cause of action, either in whole or in part, depends on the FKP parties having provided any professional services.
150 Accordingly, while I accept that: (a) FKP Constructions must have performed project and construction management functions in respect of the residential building work which may satisfy all of the requirements of the definition of "professional services", and (b) it may well be the case that FKP Constructions may have done nothing other than provide professional services in respect of the residential building work, I am unable to accept that the causes of action against FKP Constructions are based on it having provided those professional services. As I have said, under the Home Building Act, the provision of professional services by or on behalf of the FKP parties by an agent is not a factual or legal foundation (causally, temporally or otherwise) of the potential liability of the FKP parties. Under the statutory and common law duty of care causes of action, as noted, again, the provision of professional services by or on behalf of the FKP parties by an agent is also not a factual or legal foundation (causally, temporally or otherwise) of the potential liability of the FKP parties. The source of the alleged duties is the position of the FKP parties as owner/developer and as head contractor respectively, and does not depend on either one of them having provided any professionals services.
151 As matters presently stand, I am unable to say that there is a connection between the potential liability of the FKP parties under the causes of action in the Supreme Court proceeding and either or both of the FKP parties having provided professional services in respect of the residential building work other than that, in order for the residential building work to be done, someone (but not necessarily either of the FKP parties or any agent for them) had to provide professional services.
152 For the purpose of the insuring clause, I do not consider such a potential connection to be sufficient to conclude that any of the causes of action in the Supreme Court proceeding are based on either of the FKP parties having provided the professional services. As in TimTech, the demarcation in the policy is between the insured's "provision of professional services" (which are covered whether the provision is by an insured or an agent) and other matters (the "construction, manufacture, assembly, installation, erection, maintenance or physical alteration of buildings, goods, products or property" as excluded from the definition of "professional services" and "any defect in or lack of suitability of any product or good unless it arises directly out of the provision of professional services" as excluded by clause 8 of the exclusions) which are not covered.
153 As matters presently stand, the liability of the FKP parties in the Supreme Court proceeding may wholly be based on or arise from "construction, manufacture, assembly, installation, erection, maintenance or physical alteration of buildings, goods, products or property" and/or defects in or lack of suitability of products and goods used in the construction of the common property of the residential building. It follows that the FKP parties have no present entitlement to indemnity under the insuring clause. No doubt, the FKP parties could have obtained developers and design and construction style insurance policies not confined to a form of professional indemnity insurance. In NSW, for example, Pt 6 of the Home Building Act requires insurance (including for breach of statutory warranties) for a person who does residential building work and for a developer, but various buildings (including retirement villages and multi-storey buildings) are exempt from this requirement pursuant to Pt 6 of the Home Building Regulation 2014 (NSW). The point is that, in the insurance context, a party gets the policy they pay for, not some other policy they could have paid for but (apparently) did not.
154 Therefore, question 2 should be answered "no, in that the asserted facts are not sufficient to engage the insuring clause in the policy".
155 As discussed, I do not consider it appropriate to provide any answer to an unasked question about the extension provision, clause 3. The keys to that provision are that:
(1) the required relationship is between only the claim and the specified matter (the claim need not be "for civil liability" as defined);
(2) the required relationship is "arising from" which the authorities indicate, in the context of a claim and liability, is a causal relationship which is broader than "based on";
(3) the specified matter involves any conduct of any consultants, sub-contractors or agents of the insured (including but not limited to their conduct in providing professional services);
(4) the specified matter involves the insured being legally liable for that conduct in the (ie, the insured's) provision of professional services (for which a factual and non-causal connection, such as the concept of "legally liable in the course of the insured's provision of the professional services", may perhaps suffice); and
(5) the concept of the "insured's provision of professional services", as discussed, is to be understood against the common law doctrine of agency in which conduct of another may be required to be treated as conduct of the insured for the purpose of clause 3.