Zurich Australian Insurance Ltd v FKP Commercial Developments Pty Ltd

The relevant policy terms 8 As mentioned, the policy is styled "Design and Construction Professional Indemnity" and both FKP parties are listed amongst the named insured in the schedule to the policy. 9 Noting that terms in italics are the subject of definitions, the insuring clause provides that: We agree to indemnify the insured against loss incurred as a result of any claim for civil liability first made against the insured and notified to us during the period of insurance, based on the insured's provision of the professional services. 10 The definitions include: Agent agent means a natural person or company or other entity that has a contract with the insured under which the insured engages the natural person or company or other entity to act for or on behalf of the insured in the provision of professional services. Civil liability civil liability means liability of the insured on any civil cause of action for compensation, based on its provision of, or failure to provide, the professional services. It does not include any liability, of whatever nature and however arising, for aggravated, punitive or exemplary damages or for civil or criminal penalties, fines or sanctions. Claim claim shall mean any oral or written demand for compensation received by the insured during the period of insurance including but not limited to a civil proceeding commenced by the service of a statement of claim, writ, complaint or similar pleading, or an arbitration or other alternative dispute resolution proceeding… Employee employee means any person, other than a director or officer of the insured, who is or has been under a contract of employment or apprenticeship or any work experience or similar scheme with the insured, solely in connection with the professional services provided by the insured. This definition does not include sub-contractors. Insured insured means the following: (a) the policyholder and any subsidiary at inception of the policy (or as otherwise agreed by us to be covered under Extension of Cover 18. 'Newly created / acquired subsidiary'); or (b) any current or former partner, principal or employee of the policyholder or any subsidiary in (a) above, but only whilst providing professional services on behalf of the policyholder or such subsidiary. 'You' and 'Your' is also used in this policy to mean one or more of the insured. Policyholder policyholder means the legal entity as specified in the schedule. Professional services professional services means one or more of the following services: (a) design, including advice in relation to design, in accordance with all relevant building, construction or engineering codes and standards; (b) drafting; (c) technical calculation; (d) specification; (e) project management; (f) construction management; (g) feasibility studies; (h) programming and time flow management; (i) quantity surveying; (j) surveying; (k) training in respect of (a) to (j) above, provided it is 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) providing a professional service of a skilful nature, according to an established discipline appropriate for the professional services being performed or supervised. Professional services shall not include: (i) performance or supervision (where such supervision would normally be undertaken by a building contractor) of the construction, manufacture, assembly, installation, erection, maintenance or physical alteration of buildings, goods, products or property; or (ii) environmental protection, workplace health and safety or industrial relations matters which would normally be overseen by a building contractor. Sub-contractors sub-contractors mean independent consultants or sub-contractors who provide services to the insured under a written or oral contract. This definition does not include any employee. 11 The extensions of cover provision states that: Cover is automatically provided, and on the same terms and in the same manner as in the Insuring Clause (except as expressly stated), for the extensions of cover described below. Each extension of cover is subject to all the other provisions of this policy, including any additional terms stipulated in connection with it. No feature shall increase our limit of liability unless expressly stated otherwise. 12 Clause 3 in the extensions of cover section is as follows: 3. Consultants, Subcontractors and Agents We agree to indemnify the insured for loss resulting from any 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. No indemnity is available to the consultants, sub-contractors or agents. 13 Clause 19 in the extensions of cover section is as follows: 19. Principal's indemnity To the extent that it is contractually required of the insured, we shall also indemnify any Principal in regards to professional services undertaken by or on behalf of the insured for the claim against a Principal, provided that: (a) the claim is such that if made upon the insured, the insured would be entitled to indemnity under the policy; (b) we shall have the conduct and control of all claims for which the Principal seeks indemnity hereunder or from the insured; (c) this policy shall not extend to provide cover in respect of the Principal's own breach of professional duty or other events not covered by this policy and the terms and conditions of this policy otherwise apply. For the purpose of this clause, the Principal shall be deemed to be an insured. Nothing in this clause shall preclude the insured (not being the Principal) from the right to indemnity under this policy should the Principal instigate proceedings against such other insured for a claim which results from the provision of professional services, in the Principal's own right.

The proceeding below 14 The then docket judge, Jagot J, initially ordered that the following two questions be heard and determined prior to and separately from any other questions in the proceeding: (1) Does the Policy on its proper construction provide that the insured's sole right to payment of claims expenses prior to final adjudication of the claim is under the Advancement Provision (Claims Condition 1)? (2) Is the whole of the claim made against the Applicants in the OC Proceeding a "claim for civil liability … based on the insured's provision of the professional services" within the meaning of the Insuring Clause: (a) where the First Applicant was a developer within the meaning of the Home Building Act to whom the OC was the immediate successor in title; (b) where the Second Applicant entered into a design and construction contract with the First Applicant in the form of the head contract; (c) if the Second Applicant sub-contracted the design and construction works it was obliged to perform under the head contract and itself performed only project management and construction management services, being services within the definition of 'professional services' in the Policy (Professional Services); and (d) even if there is no causal connection between the provision of the Professional Services and the defects alleged in the OC Proceeding? 15 Justice Jagot answered the first question "no" and the second question "no, in that the asserted facts are not sufficient to engage the insuring clause in the policy": FKP Commercial Developments Pty Ltd v Zurich Australian Insurance Ltd [2022] FCA 862 (PJ1). The issue raised by that first question has been superseded by the fact that the Owners Corporation proceeding has since been settled. 16 It is to be observed that the second question concerned whether the respondents were indemnified under the insuring clause. Having received a negative answer to that question, at least on the assumed facts, FKP sought to rely instead on cl 3 of the extension of cover section of the policy, ie extension 3. As a result, Jagot J ordered that a third separate question be heard and determined prior to and separately from any other questions in the proceeding. 17 As subsequently amended, the third separate question is as follows: Is the whole of the claim made against the Applicants in the OC Proceeding a "claim arising from the conduct of any consultants, subcontractors or agents of the insured for which the insured is legally liable in the provision of the professional services" within the meaning of clause 3 of the extensions of cover in the Policy: a) where the First Applicant was a developer within the meaning of the Home Building Act to whom the OC was the immediate successor in title; b) where the Second Applicant entered into a design and construction contract with the First Applicant in the form of the head contract; c) if the Second Applicant sub-contracted the design and construction works it was obliged to perform under the head contract and itself performed only project management and construction management services, being services that satisfy all elements of the definition of "professional services" in the Policy and do not fall within either exclusion (i) or (ii) of that definition (Professional Services); and d) even if there is no causal connection between the provision of the Professional Services and the defects alleged in the OC Proceeding? 18 Justice Jagot having left the Court, Jackman J heard and determined the third separate question. His Honour answered the question "yes": FKP Commercial Developments Pty Ltd v Zurich Australian Insurance Ltd (No 2) [2023] FCA 582 (PJ2). It is against that answer that Zurich seeks to appeal. Leave to appeal is required because the judgment is an interlocutory judgment withing the meaning of s 24(1A) of the Federal Court of Australia Act 1976 (Cth).

Leave to appeal 19 FKP does not oppose leave to appeal being granted. Clearly with reference to the complexity of the issues, which will shortly become apparent, and the importance of the outcome to the parties, leave to appeal should ordinarily be readily granted. There is, however, one issue to consider in relation to leave to appeal. It is whether the relief sought in the proceeding would constitute merely an advisory opinion of the Court, and for that reason should not be dealt with piece-meal on appeal, because of the way in which that relief in the form of the separate question is built on assumptions which have not yet been, and may never be, proved. 20 Justice Jackman recognised the importance of that consideration and dealt with it up front. With reference to Bass v Permanent Trustee Company Ltd [1999] HCA 9; 198 CLR 334 at [52]-[53], his Honour stated that it is open to the Court to state a preliminary question by way of reference to assumed facts; that is, facts assumed to be correct for the purposes of the preliminary determination: PJ2 [4]. 21 After the hearing on appeal, the parties filed a joint submission which identifies how a definitive answer to the third separate question will curtail the evidence that will have to be adduced at trial. That explanation has its foundation in an affidavit in the hearing before Jackman J which explains that if Zurich's position is correct, it will be necessary for the parties to adduce evidence on the root cause of every one of the more than 1,500 defects that were alleged by the Owners Corporation in the OC proceeding. However, if the separate question is resolved in favour of FKP, there will be a significant narrowing of the dispute between the parties. The parties submit, and I accept, that in answering the separate question, the Court is exercising judicial power to quell a controversy as to the proper construction of extension 3. 22 As the parties point out, it was confirmed in Director of Public Prosecutions (Cth) v JM [2013] HCA 30; 250 CLR 135 at [29]-[34] that it is possible before the trial to decide an issue between the parties about how the law applies to the facts on which one party intends to rely; even though the question may be said to be contingent on those facts being proved in due course, the question is not hypothetical. If the facts that will be determinative of the legal issue are stated in such a way that they are identified with precision, there is no objection to deciding the legal issue on the basis of such assumed facts. As was observed by Leeming JA in HP Mercantile Pty Ltd v Hartnett [2016] NSWCA 342 at [81]-[82], there is no difficulty where, as here, the question of construction thrown up by the separate question will be determined finally - the question raised by the separate question is squarely based on the transaction between the parties and its answer will bind them and reduce the controversy between them. See also Payne JA at [193]. Atwells v Jackson Lalic Lawyers Pty Ltd [2016] HCA 16; 259 CLR 1 at [21]-[26] is to similar effect. 23 For those reasons, I am satisfied that this is a proper case for the determination of the separate question, and that leave to appeal should accordingly be granted.

The reasoning on the third question 24 Citing Bass at [57], Jackman J recognised that as the question before him was a continuation of the trial before Jagot J he was not able to depart from any matters of fact and law involved in Jagot J's determination (at PJ2 [5]). As Jagot J found it "necessary" to consider the proper construction of extension 3 in order to answer the second question concerning the insuring clause (at PJ1 [98]), the reasoning of Jackman J had to proceed on the assumption of the correctness of that construction and not depart from it in any way in answering the third question. His Honour nevertheless recorded that he was in any event in complete agreement with the reasoning of Jagot J. 25 The result is that in the appeal it is the reasoning of both Jagot J and Jackman J that is the subject of criticism by Zurich, and the reasoning in both judgments as it affects the answer to the third question needs to be identified. 26 There are a number of aspects of the reasoning of Jagot J that bear on the construction of extension 3. They may be summarised as follows: (1) Unlike the insuring clause, extension 3 does not require that the claim in question be one for "civil liability" as defined in the policy; extension 3 requires only that the claim be one "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": PJ1 [99]. (2) The required provider of the professional services in extension 3 is the insured, not the insured's sub-contractors: PJ1 [100]-[104]. Her Honour held so much to be clear not only from the ordinary grammatical meaning of extension 3 (PJ1 [101]) but also from the structure of the policy, which does not displace ordinary principles of agency but rather recognises them in extension 19: PJ1 [103(3)], [104]. Her Honour held that extension 3 would have little or no scope of operation if all it is doing is providing indemnity for the insured's liability for the acts of consultants, sub-contractors and agents in providing professional services, since the insured is liable as principal for those acts and indemnity for such acts is already provided by the insuring clause: PJ1 [103(4)]. Rather, her Honour considered the clear and commercially sensible field of operation of extension 3 is that it applies to any conduct of a consultant, sub-contractor or agent for which the insured is legally liable in the insured's provision of professional services: PJ1 [102], [103(5)]. Her Honour therefore held that, for the purpose of extension 3, the conduct of the consultant, sub-contractor or agent giving rise to the claim need not involve the provision of professional services by the consultant, sub-contractor or agent. (3) The connection required by extension 3 between the claim and the conduct of any consultant, sub-contractor or agent is only that the claim is one "arising from" such conduct, which is broader than "based on" and will usually require only that the claim "originate in" or "spring from" the identified subject matter, citing Walton v National Employers' Mutual General Insurance Association Ltd (1973) 2 NSWLR 73 at 83-84: PJ1 [91], [94]. Her Honour held that a claim may "arise from" conduct without that conduct necessarily entering into the legal determination of the claim: Walton at 83: PJ1 [94]. Put another way, a claim may "arise from" conduct without that conduct being a necessary element of the cause of action relied upon for the relief sought in the claim. (4) The requirement in extension 3 that the insured is legally liable in the provision of professional services for the conduct of its consultants, sub-contractors or agents is also not a causal requirement: PJ1 [108(4)]. Her Honour held that extension 3 does not require that the claim arising from such conduct be caused by the insured's provision of professional services; it requires only that the insured is legally liable for the conduct in its provision of professional services, irrespective of the source of the legal liability. 27 Justice Jackman dealt with the third question by reference to the three components of extension 3. 28 The first component is whether the claim constituted by the OC proceeding is a claim "arising from" the conduct of the respondents' sub-contractors. On this aspect, Jackman J recognised that assumption (c) underlying the third question has the result that the claim made in the OC proceeding as to defective or non-complying building work must arise from the conduct of the sub-contractors of FKP Constructions in carrying out the residential building work on the land. That is because the words "arising from" have the meaning "originating in" or "springing from" and Jagot J (at PJ1 [155(1)]) had held that in extension 3 the required relationship is only as a matter of fact between the claim and the specified matter and the claim need not be "for civil liability" as defined. (At PJ2 [9]-[11].). 29 The second component is whether the respondents are "legally liable" for the conduct of their sub-contractors. His Honour recognised that FKP is liable for any breach of the statutory warranties irrespective of whether they performed the work themselves or engaged sub-contractors to perform that work. By reason of the assumption in para (c) of the third question, the building work for which FKP are said to be liable on account of its defects or non-compliance is taken to have been done by sub-contractors. It must follow that the claimed legal liability of FKP to the Owners Corporation is a liability for the conduct of their sub-contractors. (At PJ2 [12]-[13].) 30 The third component is whether the respondents are legally liable "in the provision of the professional services". This was the most contentious element before Jackman J, and it is the focus of the appeal. 31 As mentioned, Jagot J (at PJ1 [108(4)]) held that the requirement in extension 3 that "the insured is legally liable in the provision of the professional services" is not a causal requirement, and 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. This is in contrast to the insuring clause, which does require that the cause of action must depend on the insured's "provision of, or failure to provide, the professional services" (at PJ1 [134]-[135]). It was for that reason that the second separate question was answered against FKP on the assumed facts, ie the claim in the OC proceeding was not based on FKP's provision of, or failure to provide, professional services. 32 Justice Jackman, with reference to PJ1 [155(4)], held that the concept expressed as "legal liability in the course of the insured's provision of the professional services" would suffice for the purposes of extension 3. His Honour reasoned that that is the logical corollary of the conclusion that the concept "in the provision of" does not contain a causal requirement, and if the parties had intended a causal connection between the insured's legal liability for its sub-contractors and the insured's provision of professional services, that could easily have been expressed. His Honour accepted that the use of the preposition "in" suggests no more than a broad factual or temporal (but not causative) connection. (At PJ2 [16].) 33 Justice Jackman identified additional considerations in support of that construction. First, there is no requirement in extension 3 that the conduct of any sub-contractors involves the provision of professional services (as observed at PJ1 [105]), and the definition of "sub-contractors" does not contain any reference to "professional services", in contrast to the definition of "agent", and merely refers to "services" in general (at PJ2 [17]). Secondly, if extension 3 required a causal connection between the insured's legal liability for its sub-contractors' conduct and the insured's provision of professional services, there would be little or no scope for extension 3 to operate independently of the insuring clause (at PJ2 [18] with reference to PJ1 [134]). 34 Justice Jackman found that the assumed facts that FKP Constructions sub-contracted the whole of the design and construction works to sub-contractors but maintained its role as project manager and construction manager - services which are expressly included in the definition of "professional services" - are sufficient to meet the requirement for cover that the respondents' legal liability was "in the provision of the professional services". That was on the basis that "a substantive element of the factual matrix in which that liability arises is the provision by the insured of professional services". (At PJ2 [19].) 35 After identifying various submissions that were put on behalf of Zurich (at PJ2 [20]-[22]), Jackman J identified further aspects of the reasoning of Jagot J in support of the conclusion that the third component of extension 3 was satisfied. His Honour reasoned that the language expressly used in the policy does not confine the operation of extension 3 to circumstances where the relevant liability on the part of the insured involves a breach of a professional services obligation by the insured. In agreement with Jagot J (at PJ1 [102]), his Honour rejected Zurich's appeals to commercial reasonableness and reasoned that it is not commercially unreasonable for the insurer to sell cover (as an extension to professional liability cover) to developers and builders for their liability for the conduct of their sub-contactors, even where the developer or builder performs no more than a project management role. (At PJ2 [23]-[24].)

Issues on the appeal 36 The central contention by Zurich in the appeal is that cover under extension 3 depends on the consultants, sub-contractors or agents themselves providing professional services. Zurich contends that where, as on the assumed facts, the services provided by the sub-contractors from which the claim arises are services in the nature of construction work and therefore not within the definition of "professional services", extension 3 does not respond. 37 It is unnecessary to set out the grounds of appeal in the draft notice of appeal as it is common ground that the appeal raises the following three issues: (1) Issue 1 - Whether the insuring clause (as opposed to extension 3) required the "professional services" to be provided by the insured personally. (2) Issue 2 - Whether extension 3 required the insured's liability to involve a breach of a professional services obligation or only that "a substantial element of the factual matrix in which liability arises is the provision of professional services by the insured" (as expressed at PJ2 [19]). (3) Issue 3 - If the latter, whether the assumption specified in para (c) of the separate question was sufficient to establish such a connection in the present case.

Issue 1: the insuring clause and "professional services" 38 Zurich submits that there was an error made in determining the point of interface between the insuring clause and extension 3. Zurich submits that the conclusion of Jagot J that there is nothing in the insuring clause or extension 3 that suggests that the ordinary doctrine of agency is ousted, which led her Honour to the conclusion that "if an insured provides professional services via an agent, then the relevant provision is the insuring clause and not [extension 3]", was made without reference to any of the key definitions of the policy or consideration of how those definitions impact the distribution of coverage between the insuring clause and extension 3. It submits that instead of identifying that the insuring clause is only concerned with professional services personally performed by the insured, the primary judges proceeded on the basis that it covers any legal responsibility of the insured for any professional services performed, whether personally by the insured or by any agent or sub-contractors. This in turn, it is said, skewed consideration of the object of extension 3. 39 Zurich submits that the insuring clause operates where the insured is personally performing the professional service, which is a common feature of professional indemnity policy, whereas extension 3 picks up the liability of the insured where the personal performance is by someone other than the insured. 40 The complaint that Jagot J did not consider the "key" definitions in the policy is based on the definitions of "agent", "employee" and "sub-contractor". However, her Honour's construction of the insuring clause was not based on the meaning of "agent" as that particular term is used in the policy, or on the other terms referred to. Rather, it was based on the general law. Her Honour held that the acts of the insured's agent are the acts of the insured for the purpose of the insuring clause because "[t]he law of agency is part of the background common law against which the policy operates" (PJ1 [115]) and there is nothing in the policy to suggest that the law of agency is ousted: PJ1 [103(3)], [104]. That analysis is entirely orthodox and correct and is not displaced, or qualified or restricted, by the definitions. 41 Contrary to Zurich's submission, the fact that the definition of "insured" includes "any current or former partner, principal or employee of the policyholder or any subsidiary" and does not include an agent, does not mean that the acts of an agent which is not one of those listed officers or entities are not the acts of the insured. The general law would still have the effect that such acts were the acts of the insured, as explained by Edelman and Steward JJ in CCIG Investments Pty Ltd v Schokman [2023] HCA 21; 410 ALR 479 at [50]. The effect of the definition of "insured" is not to deal with whether those acts will be regarded as the acts of the insured, but rather the reverse, ie, to include certain third parties as insured, but "only whilst providing professional services on behalf of the policyholder or such subsidiary." That is to say, the policy gives cover to those third parties, not that the named insureds have cover for the acts of those third parties, a matter that is dealt with in the insuring clause and the extensions thereto and not in the definition of the "insured". 42 Similarly, and contrary to Zurich's submission, the fact that "employee" is included within the definition of "the insured" does not say anything about the liability of the insured for the conduct of its employees; rather, it means that employees are also covered under the insuring clause for their own liability based on their provision of the professional services. 43 Thus, the agent who is not a "current or former partner, principal or employee of the policyholder or any subsidiary" of the named insured (or policyholder) will not enjoy cover under the policy even when providing professional services on behalf of the policyholder. That is consistent with the express exclusion of such cover under extension 3, ie "[n]o indemnity is available to the consultants, sub-contractors or agents." Also, an agent who is within the definition of "insured" (eg an employee) will enjoy cover under the insuring clause but if their conduct is outside the insuring clause, they will not enjoy any cover under extension 3 notwithstanding that the insured might enjoy such cover. 44 Zurich draws particular attention to the difference in wording between the insuring clause and extension 3, namely "on the insured's provision of the professional services" and "in the provision of the professional services" respectively. It submits that that demonstrates that it is the insured's personal provision of the professional services that is covered under the insuring clause, whereas it is the agent's (or consultant's or sub-contractor's) provision of the professional services that is covered under extension 3. That submission is unconvincing because if that is what was intended it could so easily have been said by the use of the word "their" instead of "the" in extension 3, ie "in their provision of the professional services". For the reasons given by Jagot J, the insuring clause is not limited to the provision of professional services by the insured personally.

Issue 2: extension 3 and "professional services" 45 Zurich submits that there was an error by the primary judges in not considering the "framework" of the insuring clause when considering the proper construction of extension 3, relying on Intergraph Best (Vic) Pty Ltd & Ors v QBE Insurance Ltd [2005] VSCA 180; 11 VR 548 at [28]. It submits that the character of the bases for claim under each of the insuring clause and extension 3 differ, the insuring clause requiring the claim against the insured to be "the Insured's provision of the professional services" and extension 3 requiring the claim against the insured to (i) arise from the conduct of the non-insured (consultants etc) and (ii) the insured to be "legally liable in the provision of professional services". Zurich submits that the prepositional phrase "in the" serves to limit the category of legal liability being covered, whereas both primary judges read the words in a relational sense. It is said that by holding that it is sufficient if the provision of professional services by the insured was part of the "factual matrix", Jackman J erroneously brought into reckoning provision of services by the insured (the province of the insuring clause) and created an extraordinarily loose relational concept to that provision. 46 Zurich's reliance of Intergraph is based on the submission that the preamble to the extension clause in that case is to the same effect as in the present case, but that assumption is wrong. In Intergraph the preamble stated that "each Extension is subject to the … Insuring Clauses … (unless otherwise stated herein)" (at [12]), whereas in the present case the preamble provides that cover is provided for the extension of cover "on the same terms and in the same manner as in the Insuring Clause (except as expressly stated)" and "subject to all the other provisions of [the] policy". Thus, extension 3 is not "subject to" the insuring clause; it is an extension of the insuring clause and "subject to" the "other" terms of the policy. Contrary to Zurich's submission, the insuring clause is not one of the "other" provisions of the policy - "other" is used in the second sentence of the preamble to the extensions of cover to distinguish the provisions referred to in that sentence from the provision referred to in the first sentence, namely the insuring clause. 47 In Intergraph, the relevant extension to a common-form directors and officers liability insurance policy was held to extend the cover provided by the two principal insuring clauses to circumstances anterior to a claim against a director and officer by covering preliminary official inquiries; ie to a time when there was no claim and there might never be a claim (at [28]). It was in that context that it was held that the extension clause in question did not "transform the policy into one which offers an entirely new category of cover", namely cover to the corporation with respect to loss which does not arise out of a legal obligation of the officers and directors (at [28]). The point for present purposes is that the decision in Intergraph, obviously enough, turned on the nature of the policy under consideration (at [23]-[26]) and the specific terms of the policy (at [28]). It does not, and does not purport to, provide some general rule that an extension clause does not or cannot offer "an entirely new category of cover", and certainly does not say anything about the nature or reach of extension 3 in the present case or whether on the primary judges' construction it might properly be characterised as "an entirely new category of cover". 48 Rather, as its name suggests, extension 3, as with the relevant extension in Intergraph, extends cover beyond the cover provided by the insuring clause on its own. That extension to claims arising from any conduct of consultants, sub-contractors or agents for which the insured is liable in the provision of professional services, where it is not required that the consultants etc were providing professional services, is not "an entirely new category of cover". It is a logical and limited extension to the cover provided by the insuring clause, in particular as it still requires that the insured was providing professional services and that the claim is one "for which the insured is liable in the provision of the professional services". There is no reason why that limited extension should not be regarded as properly forming part of professional indemnity insurance. 49 Zurich also somewhat elusively submits that there was a further error in not approaching the construction on an iterative basis so as to check rival meanings to investigate their commercial consequences for the cover as a whole; that is, the substantive intellectual process of evaluating the degree of operative coherence and consistency between the alternative constructions and the other terms of the policy. Zurich submits that there is a natural scope for extension within the object and purpose of professional indemnity cover whose primary insuring clause is focused on personal breach by the insured - being professional services exposures that the insured may be exposed to because of the conduct of others. Zurich submits that an oddity of Jackman J's construction of extension 3 is that it gives the insured cover against construction defects, but only if the construction is done by sub-contractors and not if the construction is done by the insured itself. 50 The primary judges both gave careful consideration to Zurich's arguments based on the commercial rationale for the type of cover under consideration. Justice Jagot recognised that there is commercial sense in Zurich's construction that has the result that the insured is covered for its provision of professional services and consequently for any consultant, sub-contractor or agent providing professional services for the insured, but not for their provision of other services. However, her Honour recognised that there is more commercial sense for the insured to be covered for its provision of professional services and for any liability it 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". (At PJ2 [102].) 51 Justice Jackman concluded that the language used in extension 3 is too intractable for Zurich's appeals to commercial reasonableness to be treated as paramount to the broad ordinary and natural meaning of the provision. His Honour recognised that in the context of the legislative regime governing building projects, including the statutory warranties relied on by the Owners Corporation, developers and builders are exposed to liability for the conduct of their sub-contractors, even where the developer or builder performs no more than a project management (ie professional services) role. His Honour reasoned that it did not strike him as commercially unreasonable that insurers would want to sell such cover by way of an extension to a design and construction professional indemnity policy. Further, the fact that the insurer also has a contractual right of subrogation by which it can seek to recover against sub-contractors etc which may be at fault provides a commercial mitigant to the insurer. (At PJ2 [24].) 52 There is no error in the reasoning of the primary judges on this point, which I adopt. Zurich's criticisms stem from an a priori position, namely that the policy is limited to cover for liability for professional services. However, the metes and bounds of the cover must be discerned from the terms of the policy. They cannot be presupposed and imposed on the terms of the policy.

Issue 3: assumption (c) 53 Zurich submits that even on his Honour's construction, Jackman J erred in applying it to the facts. Zurich submits that what Jackman J seems to have suggested is that provided that the defective activity of the sub-contractor was taking place at the same time that the insured was undertaking some form of professional services, then the "broad factual or temporal (but not causative) connection" (at PJ2 [16]) would be satisfied. It is said that the fundamental problem with that analysis is that it bears no relationship to the claim made against the insured. That is because the claim against FKP has no element of actual performance by them - it is simply based on the state of the completed works which was done by the sub-contractors. 54 There is no error in Justice Jackman's reasoning and conclusion on this point. The connection between the work of the sub-contractors and the provision of professional services is more than purely temporal. As submitted by FKP, FKP Constructions sub-contracted the whole of the design and construction works it was obliged to perform under the head contract with FKP Commercial to sub-contractors. The only services FKP Constructions performed were project management and construction management services, managing the design and construction works by its sub-contractors. Those services were "professional services" under the policy. FKP Constructions' legal liability for the conduct of its sub-contractors in performing the residential building work on its behalf is factually and temporally connected with its provision of project management services. In a practical sense the factual connection is direct. FKP Constructions' legal liability for its sub-contractors' conduct arises because it is liable for its sub-contractors' conduct as explained above, both under the Home Building Act and at general law. The relationship which is the source of that liability is at the heart of the project management services performed by FKP on the project.

Conclusion 55 In the result, I am not satisfied as to any of the contended for errors in the primary judges' reasoning asserted by Zurich. The reasoning is correct. The appeal must be dismissed. There is no reason why the costs should not follow the event. 56 I would accordingly make orders that leave to appeal be granted, the appeal be dismissed and the appellant pay the respondents' costs. I certify that the preceding fifty-five (55) numbered paragraphs are a true copy of the Reasons for Judgment of the Honourable Justice Stewart.

CHEESEMAN J: 57 I have also had the benefit of reading, in draft, the reasons of Stewart J. For the reasons his Honour gives, I agree that leave to appeal should be granted, and that the appeal should be dismissed with costs. I certify that the preceding one (1) numbered paragraph is a true copy of the Reasons for Judgment of the Honourable Justice Cheeseman.