Legal defence costs and the limits of professional indemnity insurance

The Court of Appeal confirmed last month that professional indemnity insurers can apply a very strict interpretation of which business activities are insured under a PI policy. Just because an activity is part of a business enterprise does not mean cover applies for any and all professional liability which may arise.

JCS Cost Management Limited v QBE Insurance (International) Limited [2015] NZCA 524 concerned a company which claimed its legal defence costs from its PI insurer after Auckland Council had brought an unsuccessful court case against it.

Background Facts

JCS Cost Management Limited is a firm of quantity surveyors and construction project managers. In 2009, JCS' director, Mr Johnston, visited an open home with a potential purchaser. Mr Johnston went to help the potential purchaser decide whether renovations she had in mind were feasible. He wasn't paid for his time, but agreed to go as a means of marketing his company, hoping to secure the project management of any of the purchaser's planned renovations. Ultimately, the client bought the house, and JCS managed some renovations.

It transpired that the house had significant weathertightness issues. The homeowner sued Auckland Council, which then joined JCS and Mr Johnston to the proceedings on the basis that Mr Johnston gave pre-purchase advice to the homeowner. The Council's third party claim against Mr Johnston failed on the basis that he did not give pre-purchase advice about weathertightness, and he was awarded costs on the proceedings, payable by the Council. However, even with the costs awarded he was left $53,000 out of pocket.

Mr Johnston looked to his professional indemnity insurer, QBE, to fund his defence costs, on the basis that QBE insured his (and JCS') business activities. QBE declined Mr Johnston's claim, saying that the weathertightness proceeding was the result of a professional activity outside the remit of his PI policy. The High Court supported QBE's position, and Mr Johnston appealed.

Policy Terms

The discussion in the Court of Appeal centred on whether the Auckland Council had a valid claim against JCS and Mr Johnston for the purposes of the policy. The QBE policy provided:

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... A valid claim was defined in standard terms by the policy as a...

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