Legal
costs included in professional indemnity insurance cover defence costs only for
activities covered by the policy. Insured
for professional liability in respect of its project management business, JCS
Cost Management could not recover legal costs defending a claim centred on a
pre-project consultation.
Stephen Johnston met with an existing
client in March 2009 to view an open home in Takapuna, Auckland. Evidence was given that he expected his
company JCS Cost Management Ltd might project-manage any upgrade should the
client purchase. The client purchased
what proved to be a leaky home. Auckland
Council was sued. The Council in turn
sued Mr Johnston, alleging he was liable on pre-purchase advice given the
purchasers. The Council did not succeed
against Mr Johnston. He recovered a
contribution to his legal costs from the Council, but was left $52,000 out of
pocket. QBE Insurance denied this cost
was covered by his professional indemnity insurance.
The Court of Appeal ruled QBE could be
liable for defence costs only if the Council’s claim was hypothetically
successful and the nature of the claim fell within the terms of the policy. Mr Johnston said the client meeting at an
open home was related to his business.
He was seeking potential work.
The Court said “work” as defined by the QBE policy covered management of
projects for remuneration where there was a construction or development on foot. The uninvoiced client meeting at a open home
did not fall within the insurance policy definition. QBE was not obliged to pay defence costs.
JCS
Cost Management v. QBE Insurance – Court of Appeal (25.11.15)
16.011