Liberty wins on ‘professional services’ exclusion clause
In the Supreme Court of New South Wales decision handed down on 3 December 2021, his Honour Stevenson J provided further guidance on interpretation of exclusion clauses in the context of claims under Combined General and Product Liability and Professional Indemnity Policy. The decision demonstrates that when faced with interpretation of exclusion clauses in terms of ‘breach of professional duty’ and ‘rendering of professional advice or service’ Courts will be guided by the ordinary principles of interpretation, the character of the duty owed and by reference to the character of the advice or service rendered and the context of the policy.
- In an important decision for insurance lawyers that arises out of the 2011 Brisbane floods, his Honour Justice Stevenson of the NSW Supreme Court considered the application of an exclusion clause that removed cover for claims ‘arising out of the rendering of or failure to render professional advice or service’.
In January 2017, Rodriguez & Sons Pty Ltd (Rodriguez) commenced class action proceedings in the NSW Supreme Court on behalf of group members who had suffered damage in the catastrophic 2011 Brisbane floods.
Rodriguez named Seqwater, SunWater and the State of Queensland as defendants.
Rodriguez alleged that SunWater was negligent in two ways:
- First, by reason of its own acts or omissions, referrable to its obligation to provide flood management services under a Service Level Agreement; or
- Second, because it was vicariously liable for the conduct of Mr Ayre, a Senior Flood Operations Engineer at the time of the floods, and an employee of Sunwater.
The class action proceedings were decided by the primary judge, his Honour Justice Beech-Jones, on 29 November 2019. His Honour held that each of the flood engineers, including Mr Ayre, owed a duty of care to Rodriguez (and the other group members) in conducting flood mitigation operations before and during the flood event. His Honour also found that Mr Ayre had acted in breach of his duty and that SunWater was vicariously liable for such breach. His Honour did not find that SunWater itself owed a duty of care to Rodriguez and the group members. For completeness, we note that his Honour also made several adverse findings against Seqwater and the State of Queensland.
SunWater, Seqwater and the State of Queensland each appealed the decision of the primary judge. Rodriguez filed a cross-appeal. However, prior to the hearing of the appeal, SunWater and the State of Queensland entered into a Deed of Settlement with Rodriguez. Under the terms of the Settlement Deed, SunWater agreed to pay, amongst other things, a portion of an agreed sum in settlement of Rodriguez’s and the group members’ claims in the class action proceeding.
Sunwater’s Claim for Indemnity
In January 2011, SunWater maintained a primary combined General and Products Liability and Professional Indemnity Policy with:
- Underwriting Members of Lloyd’s Syndicate 0386 DAC; and
- QBE Insurance (Europe) Limited
In relation to general liability only, SunWater also maintained various levels of excess cover, including an ‘Excess Liability Policy’ with Liberty Mutual Insurance Company.
The clauses of the Liberty Policy were the same as those in the general liability component of the primary policy. One such clause was General Exclusion 8 (Exclusion), which excluded liability for claims:
[A]rising out of the rendering of or failure to render professional advice or service for a fee by The Insured.
Liberty commenced proceedings in the NSW Supreme Court seeking declaratory relief to the effect that the Exclusion in the Liberty Policy was engaged and that it was not liable to indemnify SunWater in relation to the claims made in the class action proceedings, including those covered by the settlement deed.
His Honour Justice Stevenson considered the following issues, amongst others:
- Whether Sunwater itself, or Sunwater’s employed engineer, rendered professional service or advice?
- Was the Exclusion confined to professional advice or service to the recipient or the intended recipient of that advice?
- Whether there is a material difference between an exclusion of a claim arising from a breach of ‘professional duty’, or arising from the rendering of a ‘professional advice or service’?
- Whether the narrow construction of the Exclusion would give better effect to the apparent commercial purpose of the Primary Policy?
In relation to the first issue, it was accepted that SunWater was providing a ‘service’ to Seqwater and that the services that SunWater’s employee, Mr Ayre, was providing in his role as the Senior Flood Operations Manager was a ‘professional service’. However, Sunwater submitted that it was not itself rendering a ‘professional service’, but was merely ‘providing people to provide services’ and that the Agreement was properly characterised as ‘a labour hire arrangement rather than a professional services arrangement’.
Having considered the relevant provisions of the Agreement and the Manual, his Honour disagreed with SunWater’s submissions and held, at  to , that Sunwater was, by its employee, providing professional engineering services because:
- SunWater was providing Flood Management Services to Seqwater;
- One of those services was to provide ‘appropriately qualified and experienced personnel’;
- The standard of service that SunWater itself was to provide was that ‘expected of a contractor experienced in the provision of the Service’.
His Honour further held that it did not follow from the primary judge’s finding that SunWater did not owe a duty of care to the group members, that it was not providing ‘professional engineering services’ under the Agreement.
As to the second issue, Sunwater submitted that, on its proper construction, the Exclusion only applied to claims made by the recipient or intended recipient of the professional advice or service.
It was not in dispute that ordinary principles of contractual interpretation applied with respect to the interpretation of the exclusion clauses. His Honour agreed that exclusion clauses are to be interpreted by construing the clause according to its natural and ordinary meaning, read in the light of the contract as a whole and, where appropriate, construing the clause contra proferentem in case of ambiguity. His Honour also noted that an exclusion clause should not be interpreted so as to circumscribe excessively an insuring clause.
Guided by the manner in which exclusions have been construed in the decisions of the Western Australia Court of Appeal in Fitzpatrick v Job t/as Jobs Engineering1, the New South Wales Court of Appeal in Vero Insurance Ltd v Power Technologies Pty Ltd2, the later decision of the New South Wales Court of Appeal in Transfield Services (Australia) v Hall3, and of Rein J in Limit (No 3) Ltd v ACE Insurance Ltd4, his Honour focused on the distinction between exclusion clauses in terms of professional duty, and exclusion clauses in terms of rendering professional services.
Unlike the exclusions considered in Fitzpatrick and Vero, the Exclusion in the case at hand was expressed by reference to claims arising out of the rendering of professional advice and, as such, his Honour distinguished the conclusions reached in Fitzpatrick and Vero. That said, his Honour did find assistance in the Court of Appeal decision of Transfield, particularly the reasoning of Campbell JA.
The exclusion in Transfield was in respect of liability:
Caused by or arising out of the rendering of or failure to render professional advice or service by the Insured or any error or omission connected therewith. Advice, design, formula or specification given for a fee.
Whilst in relation to the first component (claims arising out of ‘the rendering of or failure to render professional advice or service’) Campbell JA concluded that the exclusion was not engaged because advice given by the insured in that case was not ‘professional’ advice, in relation to the second aspect of the exclusion clause (‘advice … given for a fee’) Campbell JA explicitly rejected the construction of the exclusion as being confined to or by ‘the person to whom the advice was given, or the person who commissioned the advice’.
Although Campbell JA was in dissent on the result in Transfield, his Honour agreed with Campbell JA’s view that there was no ‘textual support’ for reading down the Exclusion so that it applied only to claims made by the intended recipient of the ‘professional advice or service’.
His Honour finally also said that Rein J was incorrect in concluding in Limit that:
In my view an interpretation of ‘professional services’ that is not restricted to professional clients of the JV would cut back the cover dramatically and pays insufficient regard to the obvious commercial purpose of the policy and I adopt the approach taken in Fitzpatrick, Vero and Transfield, which is to read down the clause as dealing with liability to a client.
As to the third issue, his Honour accepted Liberty’s submissions that there was a material difference between exclusion clauses excluding claims arising from a breach of professional duty, and exclusion of claims arising out of the rendering of a professional service. His Honour agreed that whilst one operates by reference to the character of the duty the insured owed, the other operates much more broadly simply by reference to the character of the advice or service.
His Honour held that if a claim arises from a breach of professional duty, it is hard to see how it would not also arise from the rendering of the professional service that gave rise to that breach of professional duty. But if a claim arises from the rendering of a professional advice or service it might not arise from a breach of professional duty. The question of whether it does will depend on how the professional advice or service exclusion is construed.
His Honour observed that if the Exclusion referred to breaches of professional duty and not provision of professional service or advice, then the decision in Vero would apply and the Exclusion would not be engaged. Finally, as to the fourth issue, his Honour rejected SunWater’s submission that if any negligent acts of SunWater’s engineers were to be characterised as the rendering or failure to render professional advice or services within the meaning of the Exclusion, the insurance coverage would be ‘severely circumscribed’ given SunWater’s role, as described in the opening words of ‘Business Description’ was to ‘principally…undertake[s] the management of water infrastructure…maintain water infrastructure…undertake[s] engineering consultancies…”.
In rejecting that submission, His Honour closely reviewed the definition of ‘Business Description’ and found that it included a description of a range of services which could not be described as ‘professional’.
His Honour concluded that the description of ‘Business Description’ was ‘neutral’ in relation to the proper construction of the Exclusion.
Ultimately, His Honour was of the view that construction of the Exclusion as excluding liability for a claim in professional negligence in circumstances where the same policy provided professional indemnity cover, did not seem to produce an uncommercial or unreasonable result or to circumscribe unduly the ambit of the cover afforded under the general liability provisions in the Primary Policy. His Honour concluded that the natural reading of the Exclusion so as to exclude claims for professional negligence sit comfortably within the structure of the Primary Policy as a whole.
His Honour concluded that the claim made against SunWater by the group members in the class action proceedings was a claim ‘arising out of the rendering of failure to render professional advice or service for a fee’ and was accordingly excluded from cover by the Exclusion.
Implications for you
This is an important decision that addressed an exclusion that is often part of a large number of general insurance policies (in one form or another). For this reason, it deserves scrutiny, including as to the progress of any appeal filed (which appears likely).
The decision also again illustrates the importance of ensuring exclusion clauses in policies are drafted broadly with language that accords with the overall intentions of the insurer. It also serves as a reminder that the interpretation of any exclusion clause will depend upon the precise factual circumstances surrounding the claim for coverage that has been made.