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Focus: Being 'professional' under D&O insurance policies

8 March 2016

In brief: In a recent decision, the Full Federal Court has clarified the scope of a 'professional services' exclusion in a Directors & Officers insurance policy. Partner Andrew Maher (view CV) and Senior Associate Andrew Lazzaro report on a case that gives some guidance on the relationship between professional indemnity and D&O insurances. 

 
 

How does it affect you?

  • When negotiating D&O insurance, it should not be assumed that all liabilities covered by a professional indemnity policy will be excluded by a standard professional services exclusion in the D&O policy.
  • The fact that an organisation holds professional indemnity insurance or otherwise conducts a profession does not mean that all acts or omissions of its insured directors and officers which give rise to liability will have the requisite 'professional services' character to trigger the professional services exclusion in the D&O policy. Routine managerial activities will not usually exhibit the requisite 'professional services' character.
  • To increase the certainty of 'professional services' liability cover and, in particular, to limit the potential for double insurance under professional indemnity and D&O insurance policies, careful consideration should be given to defining 'professional services' in the D&O policy.

Background

D&O insurance policies typically contain ‘professional services’ exclusions. The reason for this is that the liability risks to directors and officers arising from their performance of any professional services should be separately insured under a professional indemnity insurance policy.

The facts

Reed Constructions Australia Pty Ltd entered into a contract with 470 St Kilda Road Pty Ltd for the design and construction of residential apartments and office suites.

Reed claimed progress payments for its work under the contract. One of these claims was supported by a statutory declaration made by an officer of Reed, Mr Robinson. The statutory declaration contained details of payments made by Reed to its subcontractors.

After Reed was placed into liquidation, 470 St Kilda Road took the view that Reed had claimed progress payments to which it was not entitled.

470 St Kilda Road commenced proceedings against Mr Robinson, claiming damages for misleading and deceptive conduct and negligence in connection with the statutory declaration. 470 St Kilda Road alleged that, contrary to Mr Robinson’s statutory declaration, a number of Reed’s subcontractors had not been paid.

Mr Robinson sought indemnity from Reed's D&O insurer. The insurer relied on the professional services exclusion in the D&O policy to deny indemnity. That exclusion provided that the insurer would not be liable for loss in respect of any claim for an act done  '… in the rendering of, or actual or alleged failure to render any professional services to a third party'.

Mr Robinson brought a claim against the insurer in the Federal Court, seeking to be indemnified under the policy. The judge at first instance found that the exclusion did not apply and, accordingly, declared the insurer liable to indemnify Mr Robinson. The insurer appealed to the Full Federal Court.1

The decision

The key issue was whether the making of the statutory declaration by Mr Robinson was 'in the rendering of professional services' within the meaning of the professional services exclusion. The term 'professional services' was not defined in the D&O policy.

The insurer argued that the professional services exclusion was triggered because:

  • Mr Robinson made the statutory declaration in the course of providing project management services; and
  • project management is a recognised discipline that should properly be characterised as professional.

The insurer also contended that a professional services exclusion in a D&O policy should be construed by paying regard to the commonly understood type of cover usually provided under professional indemnity policies in the insurance marketplace and that an exclusion clause of this type should not be construed more narrowly than an insuring clause providing that cover.

Mr Robinson argued that the professional services exclusion must relate to a narrower band of activity than the work that generally comprises or supports the delivery of building and construction activities by Reed. Otherwise, the cover provided under the D&O insurance would be inappropriately circumscribed.

The Full Court dismissed the insurer's appeal, and found that the professional services exclusion did not apply. Consequently, the insurer was held liable to indemnify Mr Robinson.

In reaching this decision, the Full Court made the following findings:

  • The scope of a professional services exclusion in a D&O policy need not, in every case, correspond with the scope of cover provided by the commonly used insuring clause in professional indemnity policies.
  • The expression ‘professional services’ in the exclusion clause in this case meant services of a professional nature involving the application of skill and judgment and which fall within the scope of a vocational discipline which is generally regarded as a profession.
  • The purpose of the exclusion was to exclude activities that are truly professional in nature and was not intended to apply to the routine activities of Reed or its executives. The making of progress claims under the design and construct contract were routine activities that did not constitute the rendering of professional services to 470 St Kilda Road (nor the rendering of any services at all).

The evidence led by the insurer at trial did not establish that project management was generally regarded as a profession at the date of the policy. However, even if it was a profession, Mr Robinson’s conduct in making the statutory declaration did not constitute project management and it did not constitute the rendering of any professional services.  

Footnotes
  1. Chubb Insurance Company of Australia Limited v Robinson [2016] FCAFC 17.

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