As its name implies, the insurance industry originally designed professional indemnity policies (PI policy) for insuring the traditional professions against legal liability, principally, for providing negligent advice. The world has moved on in terms of who is a professional, but the PI policy has not. Kelly and Ball in their text Principles of Insurance Law sum the position up nicely in the opening paragraph of their section on the PI policy as follows:
Despite its name, this cover is available not only to people practising in what have traditionally been regarded “the professions”, but also to persons (for example moneylenders, financial advisers) who do not work in any of those areas. It might be more accurately described as “occupational” or “business” liability insurance.
The way the courts are interpreting the word “professional” in a PI policy varies depending on whether it appears in the insuring clause or in an exclusion. While in both cases, the courts’ interpretation leads to wider cover for the insured, in some wordings this different interpretation is also starting to undo the demarcation between a PI policy and a public liability policy (PL policy). This is undesirable. It will lead to disputes about coverage and arguments about double insurance.
What amounts to advice?
The word “professional” usually appears in a policy wording as an adjective before “advice”. Before we look at the word professional, let’s clarify what amounts to advice in the first place.
The Court of Appeal considered this in the context of a liability policy in TimTech Chemicals Limited v QBE. TimTech manufactured and sold a timber treatment plant. TimTech developed leading edge computer technology to operate the plant. The successful operation of it relied on three critical computer set points. TimTech did not set them correctly, leading to the owner of the plant incorrectly treating its timber and suffering a loss as a result.
Even though it sold equipment, TimTech did not arrange public liability insurance. It only held a PI policy insuring “technical advice”. The Court of Appeal had to decide whether TimTech’s error amounted to advice. If it didn’t, there was no cover at all.
The Court of Appeal held that advice requires the communication of information to someone else. Until it is communicated to someone else, advice is merely an internalised opinion held by the person who forms it. Here TimTech didn’t communicate the settings to the owner of the plant, rather it set them itself. The Court of Appeal held this did not amount to advice and so the PI policy did not respond.
Professional advice – insuring clause
The PI policy insuring clause usually names the insured’s type of discipline or business and limits the cover to liability in connection with that discipline or business. In so doing, many insuring clauses also limit cover to professional advice in the course of that discipline or business.
Does this add an extra qualification to the cover and, if so, what is that qualification? In other words, is all advice given in connection with the discipline or business potentially covered, or is only a subset of that advice called “professional advice”, and how do you determine that subset?
In the Victorian Court of Appeal decision Suncorp Metway Insurance Limited v Landridge Pty Limited, the insurer ran the argument that its policy only covered the subset. It lost.
The insured business was a real estate agency. Like many real estate agencies, it managed the tenancy of properties on behalf of their owners. A tenant in one of the properties complained to the insured about a hole in the garage floor of the property. The insured failed to take any steps to remedy it. Subsequently, the tenant injured himself when he stepped into the hole and sued the insured for negligently failing to take steps to fix it.
The insured’s PI Policy described the business insured as a real estate agency. The insuring clause also referred to insuring breaches of “professional duty”. The insurer argued that the insured’s omission to fix the hole was not a breach of professional duty even though it was in the course of running a real estate agency. The Court of Appeal rejected this argument and said all that matters is whether the omission was in connection with the nature of the business stated. The requirement that the omission be professional adds little.
Other Australian decisions have taken a similar approach finding that in an insuring clause the word “professional” just means advice of a skilful nature according to an established discipline, and nothing more. It is not limited to the traditional professions. In addition, this definition is applied at an organisational level, rather than focusing on the position of the individual employee who carried out the act or omission. In other words, as long as the nature of the business involves the giving of advice of a skilful nature in an established discipline, it doesn’t matter that the individual who gave it did not possess those attributes.
The New Zealand Court of Appeal in Aon New Zealand Limited v Attorney-General has adopted the same approach. In that case, the insuring clause of the PI policy changed on renewal and the insurer argued the changed words altered the cover. In year one of the cover the PI policy’s insuring clause covered any claim:
… arising out of any act, error or omission on the part of the insured in the conduct of the insured’s business.
In year two, this was changed to cover any claim:
… by reason of any act, error or omission or conduct constituting a breach of professional … duty committed or omitted … by the insured in the conduct of their business.
The insurer argued that the second formulation was narrower than the first because of the reference to professional duty. The Court of Appeal rejected this and said there was no difference between the two insuring clauses. So long as the claim fell within the business description named, cover applied.
In summary, a reference to professional advice or professional duty in an insuring clause adds little if anything. All that matters is whether the act or omission in question is in connection with the business description named. Getting that business description accurate and sufficiently broad is critical.
On this basis, any continued reference to professional advice or duty in an insuring clause is undesirable. The law is clear; it has no effect on the level of cover. Its continued use runs the risk of leading well-meaning claims handlers into error. This tarnishes the reputation of the insurance industry.
Professional advice – exclusions
Interestingly, when the same words appear in a policy exclusion, the courts are giving them a narrower interpretation more consistent with limiting them to the traditional professions. This seems unusual but is perhaps consistent with the law requiring exclusions to be interpreted narrowly.
For example, in Chubb Insurance Co of Australia Ltd v Robinson, Robinson was a senior executive of a project management company. In accordance with the terms of the construction contract, he was required to sign a statutory declaration about the state of progress of construction before the principal made progress payments. He signed a statutory declaration that was misleading. He lodged a claim under his D & O Policy, which excluded liability to third parties for professional services. The Federal Court held that the exclusion didn’t apply to Robinson’s actions. All he was doing was completing a prerequisite for the sub-contractors to be paid; he was not carrying out a professional service.
In order to demonstrate the different approach taken by the courts between the same words in the insuring clause and in an exclusion, let’s assume the project management company itself held a PI policy covering its project management business and the insuring clause also referred to professional services in the insuring clause.
An argument that there is no cover for the company under that policy because the signing of the statutory declaration by the senior executive was not a professional service is unlikely to succeed. Project management companies often control progress payments and the executive’s negligent action easily comes within the description of the business.
Demarcation problem
You might say this is all fine; however, where is the problem here?
The problem arises when trying to dovetail different liability policies together in order to achieve seamless cover. For example, ideally there should be no overlap between a PL policy and a PI policy. Overlaps are wasteful to the insured as they potentially create unintentional double insurance (and in theory partial double-ups in premium). This may lead to disputes, particularly if each policy is with a different insurer.
The key difference between those two types of policy centres on advice. A PL policy covers liability in connection with goods supplied or repaired, but does not cover liability arising from advice given, whereas the position is the other way around for a PI policy (mostly).
Now let’s add the word “professional” to the word “advice” in both polices. In the PL policy, the word “advice” appears in an exclusion. When the word “professional” is added, this means it will be interpreted narrowly and only apply to the traditional professions. This leaves advice by the non-traditional professions covered under a PL policy. Turning to the PI policy, the word “advice” appears in the insuring clause. As noted above, adding “professional” adds little, if anything, and all advice within the ambit of the business description is covered. This means that even when the word “professional” is added, both traditional and non-traditional professions are covered under a PI policy.
The net result is that by using the word professional, a PI policy covers advice by both traditional and non-traditional professions and a PL policy covers advice by non-traditional professions. Subject to their double insurance clauses, this means there is potentially double insurance for the non-traditional professions.
I suspect this outcome may come as a surprise to some liability insurers.
Conclusion
The insurance industry must make sure its products are fit for purpose. I suggest policy drafting that overlooks legal precedents, leading to unintended overlaps (and therefore disputes) is sloppy and not fit for purpose.
If the intention is for products to work together seamlessly then it is incumbent on the industry to ensure they do so – not pass the cost of a mismatch on to the insured by way of a dispute. That is not delivering peace of mind.
By Crossley Gates
Crossley Gates is a partner at Keegan Alexander.
Email: cgates@keegan.co.nz
Direct Dial: (09) 308 1809
