In JCS v QBE the New Zealand Court of Appeal had to determine whether defence costs were covered by the terms of a professional indemnity policy. The Court’s decision is considered by Pippa Manby of 4 New Square.
JCS was insured under a professional indemnity policy with QBE. The insuring clause read: “QBE shall indemnify the Insured for any Valid Claim subject to the terms of this Policy. In addition, QBE shall pay Costs and Expenses incurred with the written consent of QBE in the defence or settlement of any Valid Claim…”
The term “Valid Claim” meant one “made and notified during the period of insurance … alleging Civil Liability by any act, error, omission or conduct… in connection with the Insured’s Professional Business Practice.”
“Professional Business Practice” was defined as the business of quantity surveyor and project manager, including “the provision of consultancy, certification or project coordination services for construction or development projects.”
JCS attended an open home viewing with an existing client, Mrs Johnson, in the expectation that it might project manage any upgrade to the house if it was bought. Mrs Johnson and her husband bought the house and JCS project managed the upgrade. The house proved to be leaky and the Johnsons sued the Council which joined JCS in its capacity of “consultant on property matters”, pleading that the Johnsons had bought the house in reliance on JCS’s advice that it appeared to be watertight. The additional claim failed at trial and JCS recovered some of its legal costs but was left with a shortfall.
JCS sought to recover its shortfall from QBE. It was agreed that the policy did not extend to pre-purchase advice on the property’s condition. However, JCS argued that its attendance at the home was in a professional capacity, looking for and subsequently performing work of a kind to which the policy would have responded had it been the subject of a claim against him. JCS argued that the claim against it was in connection with the business and cover depended not on the Council’s pleaded case but upon the actual facts. QBE argued that (i) the scope of cover was confined to the third-party statement of claim and (ii) the true nature of the third-party claim was for pre-purchase advice. QBE applied for and obtained summary judgment.
THE COURT OF APPEAL DECISION / REASONING
The CA dismissed JCS’s appeal, with Miller J dissenting. The primary purpose of liability insurance was to respond to actual liability since only actual liability could produce any loss requiring indemnity. Conversely, indemnity for defence costs was usually available in response to allegations so that the insured could benefit from the indemnity as the costs were incurred. However, cover for defence costs was usually ancillary to the indemnity provided for liability to third parties and depended on the claim against the insured being within the scope of the policy.
The question as to whether a claim against an insured fell within the policy was to be determined by the facts showing the true nature of the claim, not just the way in which the third party had pleaded it. In terms of whether an insured could recover defence costs there were two questions: (i) on what factual and legal basis would the insured have been held liable had the third party’s claim succeeded and (ii) considering the answer to (i), did the true nature of the claim fall within the scope of the policy?
On the facts of this case, had the Council’s claim succeeded it would have been on the basis that JCS had attended the property in a capacity that gave rise to a duty to give pre-purchase advice on watertightness. Such conduct would not have fallen within the “Professional Business Practice” definition. Whilst JCS’s presence at the property was for the purpose of securing future work and in connection with its Professional Business Practice, in the view of the majority that was insufficient: the relevant question was not what JCS actually did, it was what its notional liability to the third party would have been. JCS’s notional liability to the Council was not causally connected (as required by the use of the word “by” in the policy) to the conduct that JCS engaged in as part of its Professional Business Practice.
The dissenting judge, Miller J, would have allowed the appeal and for the matter to proceed to trial on the basis that the word “by” could encompass a meaning wider than a direct causal link and that it was possible that JCS had, therefore, been acting within its Professional Business Practice.
Conduct in connection with the insured’s “Professional Business Practice” was strictly interpreted on a narrow basis. The case should serve as a cautionary tale to insureds to consider carefully the nature of the services that they provide (even if provided gratuitously) to ensure that such services fall within the scope of their insurance cover. Insureds should be careful not to stray into acting or advising on matters which do not fall within the scope of their insurance policy and should set out the full nature of the work they do (including any subsidiary services) in their proposal forms.
Editorial note: on 4 April 2016, the Supreme Court of New Zealand granted permission to appeal.