Design and Construction Professional Indemnity (D&C PI) policies have traditionally applied only to liability resulting from breaches of professional services obligations. Typically, these breaches occur in relation to the provision of project management, design and drafting services, and not to building or construction work. However, two recent decisions of the Federal Court of Australia appear to have upset this status quo; concluding that D&C PI policies may be relied upon by an insured in additional circumstances to those usually contemplated.

The scope and operation of D&C PI policies is particularly important at a time when developers and builders are increasingly looking to their D&C PI policies to cover them for statutory claims under the Home Building Act 1989 (NSW) (Home Building Act) and the Design and Building Practitioners Act 2020 (NSW) (DBP Act). This is especially the case given current market conditions where margins on construction and development projects are becoming increasingly tight.

But is it possible for claims to be covered under a D&C PI policy in instances where the builder or developer has not provided professional services itself? Two recent decisions of the Federal Court of Australia provide clarification as to this point.

Background

FKP Commercial Developments Pty Limited (FKP Commercial) and FKP Constructions Pty Limited (FKP Constructions) (collectively, FKP) held a D&C PI policy (Policy) with Zurich Australian Insurance Limited (Zurich).

FKP sought indemnity in respect of their liability to the Owners Corporation of Strata Plan No 84298 (OC), which was the registered proprietor of common property of two developments (Development) with which FKP had been involved.

In this context of the Development, FKP Commercial had been the developer and, in a separate contract with FKP Constructions, engaged the latter as the head contractor to carry out the construction of the Development. However, FKP constructions did not itself carry out any design or construction works; it had engaged third parties to do so.

The OC subsequently commenced proceedings in the Supreme Court of NSW seeking damages for defective and non-compliant construction works against FKP (Separate Proceedings). FKP then sought indemnity under the Policy in relation to any liability it may have to the OC in the Separate Proceedings, including the costs of defending the same.

The insuring clause of the Policy relevantly provided:

We agree to indemnify the insured against loss incurred as a result of any claim for civil liability first made against the insured and notified to us during the period of insurance, based on the insured’s provision of the professional services.

(Insuring Clause)

FKP No 1

The operation of the Insuring Clause was considered in FKP Commercial Developments Pty Limited v Zurich Australian Insurance Limited [2022] FCA 862 (FKP No 1).

The Policy contained a broad definition of professional services, as follows:

1. design, including advice in relation to design, in accordance with all relevant building, construction or engineering codes and standards;
2. drafting;
3. technical calculation;
4. specification;
5. project management;
6. construction management;
7. feasibility studies;
8. programming and time flow management;
9. quantity surveying;
10. surveying;
11. training in respect of (a) to (j) above, provided it is performed by or under the direct supervision of a properly registered engineer, architect, or surveyor, or quantity surveyor (who is a member of the Australian Institute of Quantity Surveyors) or any other person (duly qualified by training or education) providing a professional service of a skillful nature, according to an established discipline appropriate for the professional services being performed or supervised.

The Policy also noted that professional services does not include:

(i)    performance or supervision (where such supervision would normally be undertaken by a building contractor) of the construction, manufacture, assembly, installation, erection, maintenance or physical alteration of buildings, goods, products or property; or

(ii)    environmental protection, workplace health and safety or industrial relations matters which would normally be overseen by a building contractor.

(Exclusion Provision)

The Court noted that in order for the Insuring Clause to be enlivened:

the cause(s) of action must depend on the insured’s “provision of, or failure to provide, the professional services.

The Court ultimately concluded the causes of action against FKP in the Separate Proceeding resulted from their roles:

 …as owner/developer and as head contractor respectively, and does not depend on either one of them having provided any professional services from their role as head contractor rather than as a consequence of the provision of professional services.

This conclusion followed an analysis of the work FKP had actually engaged in referable to the Development. In doing so, it was noted:

As matters presently stand, the liability of the FKP parties in the Supreme Court proceeding may wholly be based on or arise from “construction, manufacture, assembly, installation, erection, maintenance or physical alteration of buildings, goods, products or property” and/or defects in or lack of suitability of products and goods used in the construction of the common property of the residential building. It follows that the FKP parties have no present entitlement to indemnity under the insuring clause.

The Court therefore determined FKP was not entitled to rely on the Insuring Clause as the work it had engaged in fell within the purview of the Exclusion Provision, and  did not result from the provision of professional services.

FKP No. 2

Following judgment in FKP No 1, the Court made orders for the hearing and determination of a separate question, namely:

is the whole of the claim made against the Applicants in the OC Proceeding a “claim arising from the conduct of any consultants, subcontractors or agents of the insured for which the insured is legally liable in the provision of the professional services” within the meaning of clause 3 of the extensions of cover in the Policy…

This separate question was heard and determined in FKP Commercial Developments Pty Limited v Zurich Australian Insurance Limited (No 2) [2023] FCA 582 (FKP No 2). In doing so, the Court considered sub-questions, namely:

• whether the claim constituted by the OC Proceeding arises from the conduct of FKP’s sub-contractors;
• whether FKP is legally liable for the conduct of its sub-contractors; and
• whether FKP is legally liable in the provision of the professional services.

These three questions were posed in the context of the extension of cover provision within the Policy, which provided:

Cover is automatically provided, and on the same terms and in the same manner as in the Insuring Clause (except as expressly stated), for the extensions of cover described below. Each extension of cover is subject to all the other provisions of this policy, including any additional terms stipulated in connection with it. No feature shall increase our limit of liability unless expressly stated otherwise.

3. Consultants, Subcontractors and Agents

We agree to indemnify the insured for loss resulting from any claim arising from the conduct of any consultants, sub-contractors or agents of the insured for which the insured is legally liable in the provision of the professional services. No indemnity is available to the consultants, sub-contractors or agents.

(Extension Provision)

The Extension Provision, if enlivened, would have the effect of indemnifying FKP for the claim in the Separate Proceedings given that it arose from the conduct of subcontractors.

The Court considered it was uncontroversial FKP was not directly responsible for the performance of the design and construction work related to the Development. Rather, all residential building work referable to the Development were completed by sub-contractors engaged by FKP. Consequently, any claim in respect of that same work being defective and/or in breach of statutory warranties under the Home Building Act necessarily arose from the sub-contractors’ conduct.

The Court then turned to the question of whether FKP was liable for the work of its subcontractors. In doing so it was noted that the contract entered into by FKP Commercial and FKP Constructions was a contract for residential building work for the purpose of the Home Building Act. Consequently, the statutory warranties in the Home Building Act were implied terms of that contract, and necessarily conferred liability on FKP for any breach committed by subcontractors in circumstances where the work done by the sub-contractors led to the claim that FKP breached the statutory warranties.

Finally, the Court turned to the question of FKPs’ liability in the provision of professional services. The Court found, that on the proper construction of the Extension Provision:

…provides indemnity for claims arising from the conduct of any of the insured’s sub-contractors where a substantive element of the factual matrix in which liability arises is the provision by the insured of professional services.

While FKP Constructions had outsourced the construction work referable to the Development, the Court found it had ‘maintained its role as project manager and construction manager’. This work clearly fell within the definition of professional services under the Policy, and therefore flowed from the provision of the same. The exact source of legal liability was, in this sense, considered to be immaterial.

An appeal of FKP No 2 was dismissed by Full Court of the Federal Court of Australia on 1 December 2023.

Implications

While these matters serve as trite reminder that it is essential for an insured to obtain appropriate levels of cover, they also support the proposition that legal liability does not solely have to arise in the context of the provision of professional services by an insured to fall within the scope of a D&C PI policy.

This is a broad statement, and each D&C PI policy will have differently worded insuring clauses, which must be carefully considered against the actual claims being made. Nevertheless, these authorities but may assist builders obtain coverage under their D&C PI policies when defending defect claims or possibly provide an avenue for developers in claiming directly against a builder’s D&C PI policy where the builder becomes insolvent.