By Louise Cantrill, Partner and Cassandra McAlary, Lawyer

Stevenson J held in Liberty Mutual Insurance Company, Australia Branch v SunWater Ltd (No 2) [2021] NSWSC 1582 that an exclusion clause for claims “arising out of the rendering of or failure to render professional advice or service for a fee” applied to exclude claims arising from the business activities of the insured more broadly than just those claims arising from breach of professional duty. Its application is also not limited to claims by the recipient of the advice or service. However, the interpretation is dependent on the usual principles to be applied when construing any insurance contract.

Background

The Queensland Bulk Water Supply Authority t/as Seqwater was the owner and operator of two dams in the Brisbane River Basin. Seqwater and SunWater entered into a service level agreement in which SunWater would provide Seqwater with “flood management services” for the dams pursuant to a prescribed manual.

In January 2011, Greater Brisbane and Ipswich regions were flooded causing extensive property damage (the flooding). Mr Robert Ayre was acting as the Senior Flood Operations Engineers for SunWater at the time of the flooding.

Rodriguez & Sons Pty Ltd (Rodriguez) commenced a class action (the class action proceedings) against Seqwater, SunWater and the State of Queensland (the defendants). Rodriguez claimed insufficient releases of water were made in the days prior to the flooding. Beech-Jones J held that Mr Ayre had breached his duty of care and that SunWater was vicariously liable for Mr Ayre’s breach of duty. This decision was appealed by the defendants and Rodriquez filed a cross-appeal. Subsequently, a deed of settlement was entered between SunWater and the State of Queensland with Rodriquez (deed of settlement).

Subject proceedings

The Defendant, SunWater held a valid general liability and professional indemnity insurance with QBE Underwriters and several levels of excess cover for general liability which included a policy issued by the plaintiff, Liberty Mutual Insurance Company.

The plaintiff commenced proceedings against the defendant claiming an exclusion clause applied and as such it was not liable indemnify SunWater in relation to the class action proceedings.

In summary, Liberty argued that General Exclusion 8 (the “Exclusion”) applied 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”.

Sunwater’s response to this was, in summary:

1. The “services” provided by SunWater were in the nature of a labour hire agreement (ie, they provided Mr Ayre to provide services Seqwater who then provided those services at the direction of Seqwater) rather than the provision of a professional service per se.
2. The Exclusion is limited to claims made by the recipient or intended recipient of the professional advice or service which, in this case, would be Seqwater.
3. An Exclusion for claims arising out of the rendering of a professional service is the same as an Exclusion for claims arising out of a breach of professional duty; and
4. A narrow construction of the Exclusion should be applied rather than the Exclusion being read in a broad sense in the context of the policy.

Decision

His Honour was satisfied that SunWater, through Mr Ayre, was providing professional engineering services to Seqwater so as to enliven the Exclusion. The claim did not need to be one based on breach of professional duty or brought by the recipient of the services.His decision was based on the application of the usual principles for interpreting an insurance contract, which his Honour confirmed included:

1. commercial contracts are read in a businesslike interpretation with the words construed according to their “natural and ordinary meaning” taking into account the language used by the parties, the circumstances known to the parties and the commercial purpose of the contract.
2. a clause may be construed contra proferentum in the case of ambiguity, but this is a rule of last resort.

As a result, parties to an insurance contract should be aware of the greater scope for an exclusion clause which refers to claims arising out of the rendering of a professional service as opposed to breach of professional duty. The case is also a useful reminder of the general principles applicable in construing an insurance contract, including the fact that the principle of contra proferentum is one of last resort.