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Business not insured for all activities

In October 2022, a construction company entered into a $6,000,000 construction contract with ABC Limited to construct a building. The construction company engaged subcontractors to carry out certain aspects of the work. One of the subcontractors required a specialised piece of equipment, and the construction company’s site manager hired the equipment for them.

After the subcontractor had done their part of the work, it was discovered that the equipment was defective, and the work had to be rectified. The construction company arranged for the work to be remedied by another subcontractor at a cost of $100,000 + GST.

They then lodged a claim under their professional indemnity insurance policy for this loss.

The insurer said the insurance policy provided cover for acts or omissions by the construction company carried out as part of their ‘professional business practice’. They did not believe that hiring a piece of equipment constituted professional business practice. The insurer declined the claim.

The construction company complained to FSCL.

Dispute

The construction company said they were the project manager for the building project, and that negligent acts or omissions carried out as project manager were covered by the policy. They said their failure to check the equipment they had hired before passing it on to the subcontractor was an omission in their role as project manager. Therefore, the insurer was wrong to decline the claim.

The insurer did not accept that the construction company had a valid claim under the policy. While they agreed the construction company was the main contractor for the project, they did not agree that passing on a piece of equipment to the subcontractor involved the company’s professional business practice. 

Review

With professional indemnity insurance, the insurer generally offers cover for acts or omissions that are in breach of the insured’s professional duties. In the construction industry, this type of insurance is intended to provide cover for losses arising from faulty professional advice or design.

The policy in this case defined professional business practice as carrying out consultancy, certification or project coordination services. The insurer, therefore, had not offered cover for all of the construction company’s activities. Cover was limited to the construction company’s professional practice as defined in the policy. The construction company’s liability to ABC Limited to rectify the work had not arisen from providing ABC Limited with consultancy, certification or project coordination services.

We found the construction company had not established a valid claim under the policy.

Resolution

The construction company accepted our finding, and discontinued their complaint. 

Insights for consumers

It is important for consumers to carefully review their professional indemnity policies, and ensure they understand the scope of their professional indemnity cover as they may not be covered for the entire range of their business activities.