WSP Structures Pty Ltd v Liberty Mutual Insurance Company t/as Liberty Specialty Markets [2023] FCA 1157

At a glance

• On 28 September 2023, the Federal Court of Australia found a liability policy covered a sub-contracting engineer and opened up double insurance claims.
• The case involved claims against WSP, the structural engineer for Sydney’s Opal Tower project, regarding the 2018 structural cracking of the tower. The claims were settled in 2022.
• WSP made a claim for indemnity and its legal costs on the head contractor Icon’s third party liability policy. Icon’s insurers, which included a primary insurer and two excess layers, declined to cover WSP for different reasons. WSP disputed the declinature.
• While the judgment covered several issues, this article focuses on:
  • WSP’s entitlement to coverage as Icon’s ‘sub-contractor’ under the liability policy, and
  • the double insurance implications arising from WSP’s claim for indemnity.
• This decision will have implications for liability and professional indemnity insurers alike.

Background

WSP Structures Pty Ltd (WSP) was the structural engineer for Sydney’s Opal Tower project, which infamously suffered structural cracking on Christmas Eve 2018 that led to a dramatic evacuation. WSP was engaged by Icon Co NSW Pty Ltd (Icon) under a sub-contract. Icon was the head contractor for the Opal Tower project.
The resulting Opal Tower litigation consisted of three sets of Supreme Court of New South Wales proceedings. Part of that litigation involved Icon suing WSP, as Icon claimed that WSP was responsible for the structural cracking. The claims against WSP were settled in 2022. That included WSP paying:

• an amount to settle Icon’s claim – WSP’s parent company paid this amount (WSP Payment), and
• an amount to settle a class action brought by the apartment owners – WSP’s professional indemnity insurer paid this amount (WSP Indemnity Insurer Payment).

WSP’s parent company also paid its legal costs of the proceedings.

Liability policy

WSP subsequently made a claim for indemnity for the WSP Payment and its legal costs on Icon’s third party liability policy (the Liability Policy). The Liability Policy insurers, which included a primary insurer and two excess layers, declined to cover WSP for different reasons, specifically:

• the primary insurer accepted that the WSP Payment was covered, but not WSP’s legal costs because WSP had elected to claim indemnity under its professional indemnity policy, and
• the excess insurers did not accept that WSP was covered under the Liability Policy at all. They also made the point that, because WSP was covered under its own professional indemnity policy, it was up to the professional indemnity insurer to bring a contribution claim – in other words, they argued that this was really a double insurance issue.

WSP disputed the declinature. It brought proceedings against the Liability Policy insurers and sought a declaration that it was entitled to cover.

Cover as a ‘sub-contractor’ under the Liability Policy

The Liability Policy’s definition of “Insured” included:

WSP agreed that it did not fall within item 8 because it did not conduct any on-site activities. Instead, it argued that it fell within item 4 because it was Icon’s sub-contractor.

The excess insurers argued that engineers were covered only under item 8, and that WSP did not fall within the definition of “sub-contractor” under item 4. The essence of this argument was that items 4 and 8 were intended to cover distinct risks as:

• item 4 concerns construction sub-contractors, and
• item 8 concerns design sub-contractors.

The Court did not accept the argument that item 4 was confined to construction contractors. Justice Colvin said that:

“… no aspect of the policy adopts terminology which indicates that it is intended to apply only to insureds who are construction contractors as distinct from those who may take on responsibilities for development and design as well as construction. Rather, the nature and extent of coverage depends to a considerable degree upon the description of the ‘Insured’s Business’ as stated in the Schedule. This may be expected to be crafted to reflect the nature of the business of the particular insured. In the present case, that description is not limited to the business of ‘builders’ or ‘construction contractors’ but is much more broadly expressed in the following phrase:
… builders, engineers, construction contractors, project managers, construction managers, property developers, plant and equipment owners/operators and hirers, property owners and occupiers, lessees and lessors …”

The Court noted that Icon’s sub-contractors could be engineers, construction managers, or plant and equipment operators. The term ‘sub-contractor’ has a plain meaning, which is a party contracted to perform a second party’s contractual obligations under a contract with a third party. Justice Colvin held that WSP was a ‘sub-contractor’ for the purposes of item 4 because it had been sub-contracted by Icon to undertake the engineering design obligations that Icon had agreed to perform under the head contract.

The Court also acknowledged that there was no evidence provided about the commercial context in which design professionals, such as engineers, have their own professional indemnity insurance. So, whether the inclusion of engineers or other professionals as insureds under liability policies will likely result in additional premiums and more double insurance claims was not closely scrutinised here.

Double insurance issues

Justice Colvin determined WSP was an insured under the Liability Policy. WSP was also covered under its own professional indemnity policy.

Where two insurers cover the same risk, and one of them has indemnified the insured, the other insurer may plead this as a defence to the insured’s claim. However, the issue here was how far WSP’s professional indemnity claim needed to advance before the Liability Policy insurers could plead WSP’s professional indemnity policy cover as a defence to WSP’s claim on the

Liability Policy. The facts relevant to this issue were:

• in November 2021, WSP’s professional indemnity insurer confirmed cover for WSP’s liability arising from the Opal Tower litigation
• in July 2022, lawyers for WSP’s professional indemnity insurers invited WSP to claim reimbursement of its defence costs
• in September 2022, WSP’s professional indemnity insurer’s lawyers explained the consequences of WSP commencing proceedings against the Liability Policy insurers, including

(a) if the professional indemnity insurers indemnify WSP for the WSP Payment and its defence costs, that will have the effect of stifling WSP’s claim on the Liability Policy
(b) irrespective of the outcome of WSP’s proceedings against the Liability Policy insurers, WSP is entitled to indemnity from its professional indemnity insurers, and

• in November 2022, WSP’s professional indemnity insurers paid the WSP Indemnity Insurer Payment as part of the settlement of the Opal Tower litigation.

Given these facts, the Court found that WSP’s professional indemnity insurer was willing to indemnify WSP for its legal costs if called on to do so.

The excess insurers argued that:

• WSP had, practically speaking, received a full indemnity from its professional indemnity insurer because it had been granted indemnity for the Opal Tower litigation, and
• the only reason WSP’s professional indemnity insurer had not paid the WSP Payment was that WSP had told it to hold off, and all WSP had to do was ask its professional indemnity insurer to make payment.

Justice Colvin rejected this argument on the basis that:

• it is the actual receipt of payment by the insured from the first insurer that discharges the second insurer from a claim by the insured
• the grant of indemnity was simply an admission of the professional indemnity insurer’s obligation to indemnify the insured
• it is the payment by the first insurer to the insured that results in there being nothing for the second insurer to indemnify – until then, the insured may pursue both insurers until payment is received, and
• this position is confirmed by section 76(1) of the Insurance Contracts Act 1984 (Cth), which is expressed in terms of actual recovery of loss, not in terms of any admission of liability, or agreement to indemnify (such as a conditional grant of indemnity).

Justice Colvin summarised his reasons by noting:

“… it is the actual discharge by another insurer of the loss the subject of the claim that gives rise to the availability of the valid defence on the part of the second insurer to the effect that indemnity has been afforded to the insured. Unless and until there has been payment to the insured or at the direction of the insured there has been no indemnity in fact and no basis for a defence by the second insurer that indemnity has been given.”

The Court also rejected the primary insurer’s alternative argument that WSP had elected to recover its defence costs from its professional indemnity insurers. It stated the fact that WSP’s parent company had paid WSP’s legal costs and the WSP Payment did not relieve the Liability Policy insurers of their obligation to indemnify WSP for those claims. The Court inferred that the payments made by WSP’s parent company were not made to reduce the same liability for which WSP sought indemnity under the Liability Policy. Rather, the parent company was simply the source of funds that WSP used to make the payments.

Implications for insurers

If an insured is entitled to cover under two policies, it is permitted to pursue each policy until it receives full payment. The indemnifying insurer retains a right to seek contribution from the other insurer. The grant of indemnity by the first insurer is not enough for the second insurer to raise a defence based on the argument that there is nothing left for it to indemnify. For that defence to be viable, the insured needs to be paid out under the first policy.

In light of this decision, liability insurers should review the extent of cover available under their policies for ‘sub-contractors’, including engineers and other professionals. The policy wording and circumstances of this case allowed a professional to claim cover as a ‘sub-contractor’ under a liability policy. The underwriters were unlikely to have intended that outcome. Amending the policy definition of an ‘insured’ to expressly state that engineers (and other design professionals) are not to be treated as ‘sub-contractors’ is one way of dealing with this issue.

Conversely, if similar policy wording and circumstances arise, professional indemnity insurers may now have another avenue available to them to claim contribution.

As Justice Colvin acknowledged, inclusion of engineers and other professionals as insureds under liability policies could result in burdensome additional premiums, and unnecessary double insurance claims. This obviously has implications for professional indemnity and liability insurers alike.