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This was an appeal from a summary judgment[1] dismissing a claim for civil liability cover under a professional indemnity policy on the basis the claim made against the insured was not in connection with his professional business practice. It highlights the need for insureds to consider carefully the nature of the services they provide, and whether their policy covers all of their business activities.
Background
The proceeding arose out of litigation concerning the purchase of a leaky home.[2] Mr Johnston, a director of JCS, a quantity surveying and project management company, attended an open home with a client in the hope of securing future project management work. The client had indicated that if she purchased the property, she intended to carry out significant renovations.
Following the purchase, the client retained JCS and began the renovations. Weathertightness issues were identified. The client and her husband sued Auckland Council, which joined Mr Johnston as a third party. The Council alleged that the purchasers bought the house in reliance on pre-purchase advice given by Mr Johnston as a “building appraiser”. The Council’s claim failed on the facts.
Mr Johnston incurred costs defending the Council’s claim which exceeded the costs award. He brought a claim against QBE to recover the difference in costs under his professional indemnity insurance policy, plus compensation for damage to JCS’s business and general damages. QBE rejected the claim and sought summary judgment, on the basis that the Council’s claim was not connected to JCS’s project management business. The High Court found in favour of QBE.
Cover under the insurance policy
The insurance policy included two significant clauses:
- 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, up to the Limit of Indemnity or $1M, whichever is the lesser.
Both of the clauses contain the term “Valid Claim”, defined as a claim “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 Insured’s business of quantity surveyor and project manager. “Project Manager” was further defined as “the provision of consultancy, certification or project coordination services for construction or development of projects where… those services are rendered for remuneration and the services fall within the insured’s Professional Business Practice”.
Mr Johnston was only entitled to defence costs under the policy if the claim made by the Council would – if successful – be a “Valid Claim”. It was accepted that Mr Johnson attended the open home in connection with his business. However the majority of the Court held that a Valid Claim required a causal connection between Mr Johnston’s notional liability for the pre-purchase advice (“the act, error, omission or conduct”) and the Professional Business Practice covered by the policy. “Professional Business Practice” was narrowly defined: it only covered consultancy services for construction or development projects where the services were rendered for remuneration. Free advice given during a marketing exercise for a prospective project did not fall within this definition.
The majority accordingly held that the Council’s claim against Mr Johnston was not a Valid Claim and dismissed the appeal against summary judgment. The minority judge, Miller J, took the view that the word “by” could encompass a meaning wider than a direct causal link, and would have left the interpretation of the policy to be determined at trial.
[1] QBE Insurance (International) Ltd v Wild South Holdings Ltd [2014] NZHC 2718
[2] Johnson v Auckland Council [2013] NZHC 165; Johnson v Auckland Council [2013] NZCA 662.
