Background
In Absolute Tiling Solutions Pty Ltd v Certain Underwriters at Lloyds [2024] NSWSC 364, the court considered a number of coverage issues, including the level of knowledge required to be attributed to an insured to rely on a prior known claim or circumstance exclusion. The Insured had policies with the Underwriters for three consecutive years under the 2018/19 and subsequent 2019/20 and 2020/21 policy periods (collectively, the Policies).
The dispute concerned whether the Insured was entitled to indemnity under the 2020/21 Policy in respect of a claim made by Toga Constructions NSW Pty Limited (Toga). That claim arose from a contract under which the Insured designed and installed sandstone cladding for Toga at a mixed-use residential development. Following completion of the sandstone cladding works, the tiles began to detach despite rectification works (the Claim).
The Underwriters denied indemnity, amongst other things on the basis of certain exclusions in the 2020/21 Policy and the Insured’s failure to comply with its disclosure obligations.
The Insured alleged the Underwriters wrongfully denied indemnity and therefore breached their obligations under the 2020/21 Policy and in the alternative brought a claim against the brokers who arranged the Policies.
Application of the Insuring Clause in the 2020/21 Policy
The insuring clause of the 2020/21 Policy provided coverage for “any Claim first made against the Insured during the Period of Insurance resulting from the conduct of the Insured Activities”.
“Insured Activities” included design, drafting, technical calculation, technical specification, project management, inspection etc. However, the definition excluded “performance or supervision…of…installation”.
In essence, the Insured contended the Claim resulted from its design of the tiling system and as such fell within the definition of “Insured Activities”. The Underwriters did not dispute this but relied on a carve-out for deficiencies in the “performance … of… installation” of the tiles that caused their detachment.
The parties’ experts prepared a joint report to the effect:
(a) Detachment was primarily due to the adhesion/cohesion failure of the waterproofing, which the Insured was not responsible for;
(b) Any deficiencies in the method of adhering the tiles made a minimal contribution to the detachment;
(c) Mechanical fixing of the tiles would have eliminated the risk of detachment; and
(d) The use of a tile adhesive system rather than a mechanical fixing system was a design flaw.
On this basis, the Court found the Claim resulted from the design and fell within the insuring clause.
Prior known knowledge of claim or circumstance
The Policies contained an exclusion for any claim “arising out of, related to, or in connection with any fact, matter or circumstance known to the Insured… prior to the inception of this policy…which the Insured knew or a reasonable person in the Insured’s profession could, in the circumstances, be expected to know or have known might give rise to a Claim against the Insured” (the Exclusion) (our emphasis).
The Exclusion was subject to a continuous coverage clause and consequently had no application unless it was established the Insured had knowledge prior to the inception of the first of the Policies i.e., before the 2018/19 Policy.
The earliest documented evidence of the Insured referring to tile detachment was 12 January 2018, before the Insured entered the 2018/19 Policy on 31 January 2018. Accordingly, the Underwriters alleged the Insured had knowledge of circumstances that might give rise to a claim prior to the inception of the 2018/19 Policy.
The Court held the reference to a “fact, matter or circumstance” was an objective matter rather than a subjective state of mind or belief,1 and the phrase “known to the insured” is not satisfied by anything less than actual knowledge.2
The test from FAI General Insurance Co Ltd v McSweeney3 was applied to assist interpretation of the phrase “may give rise to a claim”, which held there needs to be more than the mere existence of a legal liability, rather the bringing of a claim against an insured must be a “definite risk”, a “real possibility” or “on the cards”.
The Court therefore found as of 12 January 2018 there was limited and isolated detachment of tiles, no repair work had been undertaken and the scope of any problem and necessary rectification work were unknown. In those circumstances a reasonable person in the Insured’s profession would not have realised there was a “definite risk” of a claim or that such a claim was “on the cards”. Accordingly, the Exclusion could not be relied upon to refuse cover.
Disclosure obligations under the Insurance Contracts Act
The Underwriters contended sections 21 and 28 of the Insurance Contracts Act (ICA) applied to reduce their liability for the Claim to nil. Those provisions require an insured to disclose to an insurer, before the relevant contract of insurance is entered into, every matter the insured knows or ought to reasonably know is relevant to the insurers’ decision whether to accept the risk.
The Court disagreed with the Insured’s submission that the continuous coverage clause constituted a waiver of their duty of disclosure under s 21 of the ICA. This was because the 2020/21 Policy included a notice requiring the Insured to inform the Underwriters of anything they knew, or could reasonably be expected to have known, may affect the Underwriters decision to insure and on what terms.
Nonetheless, the statutory provisions did not assist the Underwriters because even if a contravention was established, the Underwriters’ only remedy was to have their liability in respect of the Claim reduced to the amount it would have been had the relevant failure not occurred.
The Court found the Underwriters’ liability would have remained unaltered had the Insured notified them of the existence and extent of the problem regarding the detachment of tiles during the 2019/20 Policy because the terms of the 2019/20 Policy and 2020/21 Policy are materially the same.
Accordingly, the Underwriters’ “position” is the same regardless of which policy applied and the Insured’s “failure” did not impact the Underwriters’ liability.
Nature of the business
The Underwriters contended the work undertaken by the Insured included the installation of tiles to external areas and was not limited to internal building “fit out” works, and that they would not have provided professional indemnity cover on any terms to the Insured had they been aware of that.
The statutory test for disclosure under section 21 of the ICA focuses on the ‘reasonable insured’, not the ‘prudent insurer’.4 The Underwriters did not suggest the Insured knew the performance of external tiling or cladding work was relevant to the Underwriters’ decision to accept the risk under the Policies. Consequently, the issue for determination was whether a reasonable person in the position of the Insured could be expected to know it was a matter of relevance. The Court held that in assessing this, regard should be had to the questions asked (or not asked) in the proposal form.5
The proposal forms for the Policies and related correspondence did not inquire whether external cladding works were undertaken. On this basis, it was found a reasonable person in the Insured’s position could not be expected to know the fact it conducted external cladding works was a matter relevant to the Underwriters’ decision whether to accept the risk under the Policies. In addition, the Court was not satisfied that had the Insured disclosed this fact, the Underwriters would have refused cover.
Claim against Brokers
Although the claim against the brokers was not pressed due to the Court finding the Insured was entitled to indemnity under the 2020/21 Policy, the Court considered the claim and found there was no breach of duty by the brokers and it dismissed that claim.
Conclusion
This case considered a number of issues which often arise when determining the application of a professional indemnity insurance policy, namely, the definition of insured activities, prior known circumstances and non-disclosure.
The judgement illustrates how important it is to have regard to the insured’s actual knowledge of potential issues that can impact their ability to claim under a policy.
The costs consequences of an unfavourable outcome is a reminder of the evidential onus on insurers to justify any decision to decline indemnity based on the specific facts of a claim, including the insured’s actual knowledge in the context of the specific wording and applicable case law.
1 CGU Insurance Ltd v Porthouse (2008) 235 CLR 103.
2 Permanent Trustee Australia Ltd v FAI General Insurance Co Ltd (In Liq) (2003) 214 CLR 514.
3 (1999) 10 ANZ Insurance Cases 61-443.
4 CGU Insurance v Porthouse (n 1).
5 At [21], applying Stealth Enterprises Pty Ltd t/as The Gentlemen’s Club v Calliden Insurance Limited [2017] NSWCA 71.
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The material contained in this publication is in the nature of general comment only, and neither purports nor is intended to be advice on any particular matter. No reader should act on the basis of any matter contained in this publication without considering, and if necessary, taking appropriate professional advice upon their own particular circumstances.
