INSIGHTS: What does a ‘professional service’ mean in the context of a D&O policy exclusion clause?

March 7, 2016

Posted by Julie Somerville, Principal, Meridian Lawyers:

Many companies will take out a suite of policies to cover all potential exposures involved with running a business. Often that suite will include a directors & officers policy and a professional indemnity policy, both containing exclusion clauses which operate to make the policies complementary and mutually exclusive. However situations can arise whereby a gap in the cover is created. This is the situation that Mr Robinson, the chief operating officer of Reed Constructions Australia (“Reed”) found himself in.

Reed was a construction company that entered into a design and construct contract for the redevelopment of an office building and the construction on a large residential apartment block on St Kilda Road, Melbourne (“St Kilda”). Mr Robinson did not have the day to day control of, or direct responsibility for, the St Kilda project, however he did receive regular reports on its progress.

Under the contract Reed was required to provide a statutory declaration by an officer or employee verifying that the amounts claimed in any progress claim under the contract were properly due and payable. Mr Robinson verified Progress Claim 15. St Kilda later commenced proceedings against Mr Robinson alleging that Reed was not lawfully entitled to the amounts claimed in Progress Claim 15 and alleged that Mr Robinson was negligent and engaged in misleading and deceptive conduct.

Reed’s parent company had taken out a D&O policy with Chubb, Mr Robinson fell within the extended definition of an “insured” under the Chubb policy. Mr Robinson sought indemnity from Chubb for St Kilda’s claim. However, Chubb denied indemnity on the basis that the claim against Mr Robinson fell within the Professional Services Exclusion as St Kilda’s claim arose from the “rendering of … a professional service to a third party“.

Chubb considered that Mr Robinson’s verification of the statutory declaration took place in the course of rendering professional project management services to St Kilda, and therefore was excluded by the Professional Services Exclusion. The issue came before the Court for consideration as a preliminary separate question.

Mr Robinson was successful, at first instance and on appeal, in obtaining a declaration that the Professional Services Exclusion was not triggered. Chubb was required to indemnify him for any liability he may have to St Kilda.

Why did the Court reach that conclusion?

  • First, it did not accept that the term “professional” in an exclusion clause bears an identical meaning as it would in an insuring clause of a professional indemnity policy. The phrase needed to be considered in light of its purpose, that is to confine the scope of cover. The Court considered that in this case “professional services” meant services involving the application of skill and judgment of the person within the scope of a vocational discipline.
  • Chubb argued that the services provided by Mr Robinson were those provided by a project manager. Chubb tendered evidence that project management was a recognised discipline in 2013. However, the Court did not accept that that evidence proved that project management was a recognised “profession” in  2011 when statutory declaration verifying Progress Claim 15 was sworn.
  • However, even if it was established that project management was a recognised profession in 2011, the Court characterised Mr Robinson’s execution of the statutory declaration as an act done on behalf of Reed in execution of its contractual duties owed to St Kilda  …. “nothing more than the routine compilation of factual material in order to secure a contractual payment“. Therefore the activity to which the allegations related was an administrative activity, not one that required the application of skill and judgment of the person within the scope of a vocational discipline

So when considering whether a professional services exclusion may be triggered in a D&O policy it pays to consider whether the act or omission which is the subject of the claim:

  • was a service that required the application of the skill or judgment of a person trained in a particular vocational discipline; and
  • whether that vocational discipline was a recognised profession at the time it was rendered.

As with all policy interpretation issues. you will need to consider the precise wording of the policy and the nature of the acts complained, however consideration of Chubb Insurance Company of Australia Limited v Robinson will provide some guidance.

Meridian Lawyers has extensive experience in insurance litigation and indemnity disputes generally but in particular in relation to professional indemnity and D&O policies. Please contact me if you are interested in learning more about how we can work with you in these areas.

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