“Professional Services” exclusion engaged and not confined to claims made by recipient of the professional services

Liberty Mutual Insurance Company, Australia Branch v SunWater Ltd 

In Liberty Mutual Insurance Company, Australia Branch v SunWater Ltd [2021] NSWSC 1582, the Supreme Court of NSW found that the insurer was not liable to indemnify the insured due to the enlivened professional services exclusion. 

The Court held that the insured’s liability was one arising out of the rendering of professional advice or service, notwithstanding a finding by the Court that the insured did not itself owe a duty of care to the class action group members.  That is, on its proper construction, the exclusion was not confined to claims made by the recipient or the intended recipient of the professional advice or service in question.

Background Facts

An entity trading as Seqwater owned and operated two dams in the Brisbane River Basin.  Seqwater entered into a “Manual of Operational Procedures for Flood Mitigation” (the Agreement) with SunWater Ltd (SunWater) for the provision of “flood water management services” in relation to the dams.  SunWater employed a Senior Flood Operations Engineer (the Engineer) to render the services pursuant to the Agreement.

From 2001 to 2008, severe drought was experienced in eastern Australia, including South East Queensland.  By 2009, the drought had broken and, towards the end of 2010 significant rainfall was expected and fell in South East Queensland as the effect of a “La Niña” climate phase took hold.  The rainfall caused the declaration of a number of “flood events” and the conduct of flood operations at Wivenhoe Dam and Somerset Dam in the last three months of 2010.

By early January 2011, the catchment area of the Brisbane River was saturated.  Despite significant flood releases having been made during December 2010, by early January 2011, each dam was above its so-called “Full Supply Level” and parts of the Brisbane and Ipswich areas (which were located downstream from the relevant dam) were inundated by floodwaters resulting in over 90 towns being evacuated and widespread property damage.[1]

In 2017, a class action was commenced against Seqwater, SunWater and the State of Queensland by Rodriguez & Sons Pty Ltd (Rodriguez) on behalf of group members who had suffered damage in the floods.  

Amongst other claims, Rodriguez brought a claim against SunWater for its own acts or omissions (based on its contractual obligations to conduct flood mitigation operations under the Agreement with Seqwater), or alternatively, based on an allegation that SunWater was vicariously liable for breaches of duty committed by its employee, the Engineer.

In the initial class action proceeding, Beech-Jones J determined that each of the flood engineers, including the Engineer, owed a duty of care to Rodriguez and to the group members in conducting flood mitigation operations before and during the 2011 flood event.  Further, the Court found that the Engineer acted in breach of that duty and that SunWater was vicariously liable for the Engineer’s breach of duty.

SunWater, Seqwater and the State of Queensland appealed.  Rodriguez cross-appealed. Before the hearing of the appeal, on 29 April 2021, Rodriguez, the State of Queensland and SunWater entered into a Deed of Settlement which involved a payment to Rodriquez and the 6,700 group members in the amount of AUD 440million.

SunWater’s claim for indemnity

SunWater held a combined policy of general liability and professional indemnity with QBE (Primary Policy).  SunWater also maintained excess cover with Liberty Mutual Insurance Company (Liberty), which provided cover in respect of the first excess layer of insurance under SunWater’s general liability insurance (Liberty Policy).  

The Liberty Policy followed the form of the Primary Policy and contained an exclusion (general exclusion 8) which excluded liability for claims:  

“[A]rising out of the rendering of or failure to render professional advice or service for a fee by The Insured” (the professional services exclusion).

Liberty commenced proceedings seeking declaratory relief to the effect that the professional services exclusion was engaged and it was not therefore liable to indemnity SunWater in respect of the liability arising out of both of Beech-Jones J’s judgment and arising out of the Deed of Settlement.

The Decision

Stevenson J held that the claim made against SunWater by the group members was a claim “arising out of the rendering of failure to render professional advice or service for a fee” and the professional services exclusion in the Primary Policy was engaged.

The Court’s reasoning

The provision of “Professional Services”

While SunWater did not dispute that it was providing a “service” to Seqwater, SunWater argued that the Agreement was properly characterised as a “labour hire arrangement rather than a professional services arrangement”.  Stevenson J rejected this finding that:

  • SunWater, by its employee, was providing professional engineering services.
  • It was SunWater that was providing the flood management services to Seqwater, with one of those services being the provisions of “appropriately qualified and experienced personnel”, which in this instance, was the Engineer.
  • Even though Beech-Jones J found that SunWater did not owe a duty of care to the group members, it did not follow that SunWater was not providing professional engineering services under the Agreement.

Is the exclusion confined to professional advice or service rendered to Seqwater?

SunWater argued that the proper construction of the exclusion was that it only applies to claims made by Seqwater, being  the recipient or intended recipient of the professional advice or service given for a fee by SunWater.

Stevenson J considered the relevant case law and drew a distinction between those cases which arose from a breach of a professional duty as opposed to the rendering of professional advice. 

Stevenson J drew assistance from the Court of Appeal in Transfield Services (Australia) v Hall [2008] NSWCA 294 where Campbell JA (in dissent) rejected the construction of the exclusion as being confined to or by “the person whom the advice was given, or the person who commissioned the advice”His Honour noted that there was no “textual support” for reading down the exclusion so that it applied only to claims made by the intended recipient of the “professional advice or service”.

Key takeaways

Professional services exclusions are often a fixture in general insurance and public liability policies whether they refer to an insured’s “professional services” or “professional business”, or a breach of duty owed in “professional capacity” or a liability caused or arising out of the rendering or the failure to render professional advice or service by the insured for a fee. 

In this case, the professional services exclusion was expressed by reference to claims arising out of the rendering of professional advice, rather than claims arising out of a breach of professional duty and there was no dispute in this case that the advice given by the Engineer, and thus, by SunWater, was professional advice.  Nor was there any dispute in this case that the advice given by SunWater was given “for a fee”.

Any professional services exclusions will be read in accordance with the well-established principles of policy construction but it should be remembered that, where a policy contains a professional services exclusion, that exclusion will not be limited to claims made by recipients or intended recipients of the professional service or advice.

Read other items in Professions and Financial Lines Brief - May 2022

Read other items in the Australian Insurance Brief - April 2022

Footnotes 

[1] It ought be acknowledged that a severe flash flooding occurred in Toowoomba and the Lockyer valley including the towns of Helidon and Grantham. Tragically, a number of people lost their lives.