All in a state: The pitfalls of negotiating professional indemnity insurance in large scale commercial contractsAuthor : Callan O'Neill

Construction and Contract Works

Introduction

In Allstate Explorations NL v Blake Dawson Waldron (A Firm) [2010] WASC 97, Heenan J of the Supreme Court of Western Australia was required to consider whether a firm of solicitors had been negligent in the provision of advice relating to the insurance provisions within a joint venture mining and backfill construction contract (the contract) at Beaconsfield Goldmine in Tasmania (the mine).

The matter included an examination of the nature and extent of professional indemnity cover required for projects of this nature and provides a poignant insight into the complexities of arranging proper insurance cover for large scale joint ventures.

Facts

The mine was owned by a joint venture consisting of 5 of the 6 plaintiffs (JV parties).  In 1998 Allstate Prospecting Pty Ltd (Allstate) as the manager of the mine, engaged Blake Dawson to advise on the settling of the contract.  The contract was valued at approximately $20 million.

The contractual negotiations considered insurance cover, including professional indemnity cover for the proposed contractors (the contractors).

After construction began the contractors did not meet their performance obligations and a major dispute resulted between them and the JV parties over the contractors’ liability for alleged inadequate performance.  At arbitration, the JV parties were awarded in excess of $60 million, but the contractors were unable to satisfy the arbitration award and became insolvent.  The JV parties recovered very little of the $60 million owing to them.

The JV parties and Allstate then considered recovery under the insurance arrangements negotiated under the contract.  The contractors were obliged by the contract terms to obtain and maintain project-specific and general professional indemnity insurance for $20 million.

It was accepted that the award for $60 million against the contractors included claims for professional negligence.  It was also accepted that liability for those claims amounted to at least $20 million (being at least the limit of the insurance indemnity).

A claim was made but the professional indemnity insurer denied liability on the grounds of a material non-disclosure.  Threats of litigation were made.  Without litigation ever being commenced, the insurer and the plaintiffs (both Allstate and the JV parties) settled (without any admission of liability) for $13 million.

The plaintiffs then sued Blake Dawson claiming they failed to advise that the insurance cover that was actually written by the insurer for the professional indemnity risks did not meet the requirements of the contract. Essentially, the plaintiffs’ complaint was that they had received $7 million less than what they would have received had the contractors’ insurer been liable to indemnify them to the full extent of what was contractually agreed.

The hurdle

In order to succeed the plaintiffs had to prove that had they been advised of the alleged inadequacies in the insurance cover they would not have allowed the contract works to begin until satisfactory insurance cover had been procured and verified or, failing that, they would have given consideration to terminating the contract entirely.

At trial an issue arose as to whether the insurance cover required under the contract was actually available either at all, or at a reasonably acceptable cost.

Blake Dawson argued that the type of professional indemnity cover required on the plaintiffs’ interpretation of the contract was not available.

Finding

The Court made 3 relevant findings:

  • on the proper construction the contract did not specify and require insurance cover of the nature or character which would respond to the kind of claim advanced by the plaintiffs;
  • on the expert evidence, insurance cover of the nature contended for by the plaintiffs was not available from underwriters at any material time; and
  • any inadequacy with the professional indemnity insurance obtained did not cause or contribute to the loss of which the plaintiffs complained, as the policy would not have responded in the way the plaintiffs contended in any event.

Implications

This case highlights the following:

  • Negotiating contractual insurance provisions should involve specialist brokers who are aware of the limitations and availabilities of cover available in the market.  Here there was some disparity between what cover was then available and what the plaintiffs believed the contract required.  This led to confusion in relation to the type of cover being obtained.
  • Specialist broking advice on both sides of a transaction is critical to ensure that parties are appropriately protected.
  • There are significant risks involved in leaving insurance arrangements to be dealt with once all other contractual matters have been negotiated.  While there is nothing wrong with negotiating insurance after other parts of the commercial contract have been agreed, doing so is risky unless the parties are fully advised of the coverage required and the cover that is available.
  • Finally, the Court will look to the commercial reality of the products available in the market at the time of creating the deal as the ultimate test of what can be achieved.  Specialist advice is critical to ensure that contracts require insurance that is available.

For more information contact Adam Chylek 8273 9940.

07/07/2010