by Jason Symons
In a recent Victorian Supreme Court decision, the trial judge was required to consider whether a claim which had been made by Timelink Pacific Pty Limited (Timelink) against Major Engineering Pty Limited (Major) triggered the provision for the payment of legal costs in the insurance policy between Major and CGU Insurance Limited (CGU).
In December 2004, during the Sydney to Hobart Yacht Race, the maxi racing yacht “Skandia” was damaged when its piston rods on the canting keel buckled and broke, causing the keel to detach from the hull, forcing the crew to abandon the yacht. Timelink brought an action against Major, which had designed and manufactured the hydraulic cylinders that controlled the keel of the yacht, alleging Major had caused the loss by its defective performance or failure to perform the formulating of the design. Relevantly, Timelink did not allege that the hydraulic cylinders were defectively constructed. The claim was ultimately determined in Major’s favour. Major had incurred $1.1 million in legal costs, of which $162,500 was settled, leaving over $900,000 in legal costs unpaid.
On 10 January 2005, Major notified CGU of the claim by Timelink and provided a copy of the Statement of Claim. Major had effected a products liability policy with CGU under which CGU agreed to pay damages for an occurrence caused by an unknown defect in Major’s products, and in certain circumstances, to pay Major’s legal costs. On 15 April 2005, CGU denied indemnity, relying on an exclusion in the policy for liability arising from the rendering of professional advice or service or the making or formulating of a design or specification within the domain of the engineering profession.
Consequently, Major brought an application against CGU seeking indemnity for the unpaid legal costs. The application was dismissed.
Central to Major’s application was whether Timelink’s claim against Major fell within the legal costs clause of the products liability policy. According to Pajone J, whether the policy responds to the claim:
“… depends upon the proper construction of the terms of the policy, an adequate identification of the claim and an evaluation of whether the claim falls within the terms of the policy as properly construed.”
With regard to the task of properly construing the terms of the policy, his Honour considered that:
“… it is always essential to bear in mind that what is to be determined is whether the intention of the parties as revealed by the insurance contract was to cover the particular claim which the events gave rise to.” (our emphasis)
His Honour did not consider that the actual facts of the case, nor the particular formulation of the claim, were determinative in relation to policy response in the circumstances. Rather, Pajone J stated:
“It’s the true nature of the claim that must be considered and for that purpose it is necessary to make such enquiry as is necessary.” (our emphasis)
Further, it was not relevant to the determination of policy response to address whether the claim would have succeeded or not. In that regard, Pajone J stated:
“The obligation to provide legal costs for a defence must be judged in this policy upon the assumption that the claim brought would succeed.”
Counsel for Major argued that the true nature of the claim against Major was not for defective design. However, in his Honour’s view, the claim was not one of product liability, since at no stage did Timelink contend that there was any defect with the product supplied (the hydraulic cylinders) other than its unsuitability for its intended purpose. His Honour found:
“Timelink’s claim may, perhaps, never have been capable of success, but if it had succeeded it would not have been a claim of a defect in Major’s product capable of engaging the right of indemnity under its contract of insurance with CGU.”
Pajone J also found the claim brought by Timelink fell within the terms of an exclusion in the policy for liability arising out of Major rendering professional advice or in making a design. Consequently, even if Timelink was successful, CGU would not have been obligated to indemnify Major.
Interestingly however, his Honour commented on the interpretation of the term “professional advice” when referred to in an exclusion. Pajone J stated:
“It may be accepted, for present purposes, that a professional negligence exclusion may be read contra proferentum, so as to give a wider meaning to the concept of “professional advice” in an insuring clause than in an exclusion clause, but here the claim was of a liability caused by or arising out of Major’s performance or failure to perform the rendering of professional advice or service through the supply of a product which, in itself perhaps not defective, was claimed to have been unfit for the design it had been supplied to satisfy.” (our emphasis)
His Honour appears to suggest that a court would be more willing to accept that “professional advice” falls within the ambit of a professional indemnity policy, rather than accept that such advice is excluded by a products liability policy. However, the Court was satisfied in this case that the “professional advice” which was the subject of the claim by Timelink fell squarely within the scope of the exclusion.
In this case, the Supreme Court of Victoria has provided some interesting points of reference in relation to the determination of policy response. In summary, whether a policy responds to a claim will depend upon:
- the proper construction of the terms of the policy
- an adequate identification of the claim and an evaluation of whether the claim falls within the terms of the policy as properly construed; neither the actual facts nor the particular formulation of the claim will be determinative
- the true nature of the claim must be considered
- whether it was the intention of the parties as revealed by the insurance contract to cover the particular claim which the events in question have given rise to, and
- a professional negligence exclusion may be read contra proferentum so as to give a wider meaning to the concept of “professional advice” in the insuring clause than in an exclusion clause.
Major Engineering Pty Limited v CGU Insurance Limited  VSC 504