Coverage disputes can arise out of combined professional indemnity (PI) and public liability (PL) insurance policies where a claim appears to fall between the two policies.
In Pacific v Walsh ( NSWCA 9), the NSW Court of Appeal declined to construe a combined policy literally, as this would have resulted in no cover for the insured.
The decision provides some guidance on how not to construe combined policy wordings.
The plaintiff bought a property and sued the defendant – a building inspector – in relation to his pre‑purchase report.
The report did not identify any major defects in the balcony of the plaintiff’s property. However, the balcony’s wooden baluster later gave way, causing the plaintiff’s daughter to fall on to a concrete pavement.
The plaintiff sought to recover damages from the defendant for the physical injury and mental harm suffered by her and her daughter.
The defendant brought a cross-claim against his insurer, Pacific International Insurance Pty Ltd (Pacific), seeking indemnity for the plaintiff’s claim.
At first instance, the NSW District Court found the defendant was negligent and Pacific was liable to indemnify him. Pacific appealed the decision to the NSW Court of Appeal.
The defendant’s insurance policy was a combined PI/PL policy.
The PL policy provided that Pacific would indemnify the defendant for “Personal Injury or Property Damage occurring in connection with the Business Activities”. However, clause 6.19 excluded cover for claims arising out of the insured’s negligence in providing professional advice or services.
Meanwhile, the PI policy provided cover for claims arising out of actual or alleged breach of professional duty in connection with the Business Activities. However, clause 7.17 excluded cover for claims arising out of or in any way connected with any personal injury and property damage.
‘Business Activities’ was defined in an Endorsement as including a Pre-Purchase Building Inspection and Building Inspection Report. The Endorsement specified the content to be included in the insured’s reports.
Clause 4.5 of the PL policy specified that Special Conditions should prevail over General Conditions.
Pacific argued that the exclusion clauses in each policy applied to exclude cover for the claim.
The NSW Court of Appeal, led by Leeming JA, dismissed Pacific’s appeal. In summary:
- The PI and PL policies must be considered as a whole.
- Applying both clause 7.17 (in the PI policy) and clause 6.19 (in the PL policy) would contradict the purpose of the combined policy, which was to provide the defendant with insurance against liabilities incurred as a result of performance of its normal business activities. In those circumstances, it would be “troubling” if cover was not available.
- The court focussed on the PL policy. There was no doubt that personal injury damage was regarded as central to the risk and that the risk extended to personal injury occurring as a result of the insured’s advice.
- The insurer could not require the insured to give advice, as it had sought to do in the Endorsement, and at the same time exclude indemnity for the provision of that advice.
- In those circumstances, there were two ways in which to achieve the commercial objective of the policy.
- Clause 6.19 of the PL policy should be construed narrowly so that advice given in the course of providing the ‘Business Activities’ was not excluded.
- Alternatively, if Clause 6.19 was construed more broadly, then there was a conflict between Clause 6.19 and the Endorsement which was to be resolved in accordance with Clause 4.5 (the hierarchy clause). Under that clause, the Endorsement prevailed over Clause 6.19, as the Endorsement was a Special Condition and Clause 6.19 was a General Condition, and Clause 4.5 provided for Special Conditions to prevail over General Conditions.
- Either way, indemnity was available under the PL policy.
Here, two policies, a PI policy and a PL policy, had been combined into a single policy.
The NSW Court of Appeal’s decision appears to have been driven by a consideration of:
- the commercial purpose of the combined policy, which the court found was to provide cover to the insured in relation to his normal business activities, and
- the need to construe the combined policy as a whole, consistently with that commercial purpose.
The decision serves as a reminder that the courts will be disinclined to construe a policy literally if that will defeat the commercial purpose of the policy.
The decision highlights a risk for insurers of imposing requirements on insureds to carry out their business activities in a certain way if insurers do not intend to cover those activities. Conversely, insurers should be wary of declining cover in relation to business activities which have been the subject of those requirements.
Finally, watch out for hierarchy clauses, as they may impact on how the policy is to be construed where there is a conflict between provisions.