A Recent case of the NSW Court of Appeal provides a cautionary reminder on the use of cap and collar agreements and how they can impact on cover under Broadform liability policies and the interpretation of professional services exclusions. In Weir Services Australia Pty Ltd v AXA Corporate Solutions Assurance [2018] NSWCA 100 (Weir), the NSW Court of Appeal dismissed Weir’s appeal from a decision that an insurer (AXA) was not liable the costs of an arbitration or liability incurred under a cap and collar agreement.

There are a number of legal issues considered in the recent decision of Weir. Our discussion is limited to the Court’s findings in relation to the impact of the cap and collar agreement on indemnity and interpretation of the “professional services’ exclusion.

Weir had claimed that AXA was required under a Broadform legal liability insuring clause to indemnify it for the collar amount of $2 million USD that it was liable to pay third party Phil Gold and for its defence costs in participating in an arbitration under the same cap and collar arrangement. The underlying claim was said to arise due to the disintegration of a circumferential weld disintegrating, causing an end plate to become detached from an semi-autogenous mill and allegedly causing extensive damage.

Barrett AJA (with whom Meagher JA agreed) found that AXA’s Broadform liability policy was not triggered by a loss occasioned pursuant to a cap and collar arrangement as it resulted in a “settlement” that did not trigger a legal liability to which clause 2.1 of the Broadform policy would respond.

It is also significant that the Court upheld the trial judge’s findings that the failure of the circumferential weld at the subject property was not an ‘occurrence’ which triggered the policy as it was damage rather than an event causative of the loss. Further, it was also found that the professional services exclusion applied to the entire claim because Weir’s actual work included both mechanical refurbishment of the failed mill and the conduct of quality assurance in accordance with sound engineering practice in circumstances where the allegations against it went beyond mere “faulty workmanship”. The professional services exclusion was also engaged because Weir made representations as to the quality of the work completed.

This case demonstrates that insureds must carefully consider the impact a potential settlement arrangement on the right to claim for indemnity under an insurance policy.  It is good practice to ensure that an insurer is notified before such an arrangement is made. It is also important to take a holistic approach when considering a “professional services” exclusion and how it will apply to work undertaken by an insured.

Read more here.