The recent NSW Supreme Court decision of Liberty Mutual Insurance Company, Australia Branch v SunWater Ltd [2021] NSWSC 1582 restates the relevant principles to be applied when considering the application of professional services exclusion clauses when construing an insurance contract.

The facts

Seqwater, (the trading name of The Queensland Bulk Water Supply Authority) owned and operated two dams in the Brisbane River Basin. 

Pusuant to a Service Level Agreement (‘the Agreement’), Seqwater engaged SunWater Ltd (‘SunWater’) to provide it with flood management services in accordance with a “Manual of Operational Procedures for Flood Mitigation at Wivenhoe Dam and Somerset Dam” (‘the Manual’). 

SunWater employed a Senior Flood Operations Engineer, Mr Ayres, to render this service.

In January 2011, the Brisbane and Ipswich areas (located downstream from the dam) were inundated by floodwaters which caused widespread property damage. 

In 2017, a class action was commenced by Rodriguez & Sons Pty Ltd (‘Rodriguez’) against Seqwater and SunWater, as well as the State of Queensland.  The class action alleged that in the days leading up to the 2011 flood there was insufficient releases of water from the dam, which ultimately exacerbated the impact of the flood when the dam operators were forced to release large volumes of water.

The class action was decided by Beech-Jones J, who held that Mr Ayre owed a duty of care to Rodriguez and breached that duty and SunWater was vicariously liable for this breach.  The class action was eventually settled during the appeal process with SunWater agreeing to pay a portion of the settlement sum. 

At the time of the flood in January 2011, SunWater held a general liability and professional indemnity policy with QBE Underwriters (‘the Policy’). 

In relation to the general liability, SunWater maintained various levels of excess cover, one of which was with Liberty Mutual Insurance Company (‘Liberty’), the plaintiff.  Liberty’s obligation to indemnify SunWater under the Liberty Policy was “in accordance with the applicable terms, exception, conditions and endorsements” of the Policy. 

One of those terms was General Exclusion 8 (‘the Exclusion’), which excluded liability for claims:

“Arising out of the rendering of or failure to render professional advice or service for a fee by the Insured.”

In light of the Exclusion, Liberty brought proceedings against SunWater alleging that the Exclusion is engaged, and that it was not liable to indemnify SunWater in relation to the claims made in the class action.

SunWater submitted that:

• SunWater itself was not rendering professional services and was merely providing people to provide services in a type of labour hire arrangement;
• The Exclusion only applies to claims made by the recipient or intended recipient of the professional advice or service (that is, Seqwater and not Rodriguez);
• There is no distinction between an exclusion for claims arising from a breach of professional duty and those arising out of the rendering of a professional service; and
• A narrow construction of the Exclusion should be accepted to give better effect to the commercial purpose of insurance policies.

The decision

Stevenson J accepted that under the Agreement SunWater had agreed to provide Seqwater with professional services, and that Mr Ayre, the Senior Flood Engineer, was employed by SunWater to undertake this service in accordance with the Manual which set out the responsibilities of the Senior Flood Engineer. 

SunWater therefore provided professional engineering services even though, as held by Beech-Jones J, it was “not an engineer”.

His Honour rejected SunWater’s submission that it was merely providing Seqwater with people to provide services in a type of labour hire arrangement, noting that under the Agreement SunWater was providing Flood Management Services and one of those services was to “provide appropriately qualified and experienced personnel”.  SunWater, through Mr Ayre, was providing professional engineering services.

His Honour accepted Liberty’s submission that a claim which arises from the rendering of a professional advice or service may not arise from a breach of professional duty.  It will depend on how the professional advice or service exclusion is construed.

His Honour rejected the submission that the Exclusion should be construed as being confined to claims made by the party to whom the advice was given. 

His Honour found no textual support for reading down the Exclusion so that it only applies to claims made by Seqwater, and found that on its proper construction, the Exclusion was not confined to the claims made by Seqwater of the professional service given.

In relation to the narrower reading of the business description of SunWater, His Honour found that the business did not only deal with water management - but rather, a range of services and activities which could not be described as “professional”.

His Honour found that the “business description” relied on by SunWater had no bearing on the proper construction of the Exclusion, and confirmed that it was important to ascertain the intention expressed in the Policy.

Principles

The matter of Liberty Mutual Insurance Company, Australia Branch v SunWater Ltd [2021] NSWSC 1582 reinstates the principles to be applied when construing an insurance contract which Stevenson J notes are:

• An insurance policy is a commercial contract and should be given a business-like interpretation.
• The meaning of a commercial contract requires consideration of:
  • the language used by the parties;
  • the surrounding circumstances known to them; and
  • the commercial purpose, or objects to be secured by the contract.
• A construction that would defeat the commercial purpose of the contract of indemnity is to be avoided.
• 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 proferentum in case of ambiguity, although this is the rule of last resort.
• An exclusion clause should not be interpreted to excessively circumscribe the insuring clause.

Final comments

The case illustrates that courts will read a professional service exclusion as being wider than a professional duty exclusion clause - and that in the absence of any textual support in the policy, an exclusion clause should not be read down so that it only applies to claims made by the intended recipient of the professional advice or services. 

If an Insured has rendered professional advice or a professional service, then its liability arises out of the rendering of that advice or service.

It is worth reinforcing the circumstances in which the contra proferentum rule is to be applied.  Commonly it is seen as the rule to be applied first when as stated it is a rule of last resort.

Finally the decision adds to the wealth of decisions on this often disputed topic.

If you have a query relating to any of the information in this article, or would like to speak with a member of Holman Webb’s Insurance Group in respect of a matter of your own, please don’t hesitate to get in touch today