Notwithstanding statements by the High Court, an insurance policy is a commercial agreement between the parties and should be given a business like interpretation requiring attention to the language used by the parties, the commercial circumstances which the document addresses, and the object which it is intended to secure.
In this recent decision, Fitzpatrick v Robert Norman Job and Wendy Barbara Job trading as Jobs Engineering  WASCA 63, the West Australian Court of Appeal provided some guidance on where cover under a product liability policy ends and where professional liability begins. It adopted a narrow interpretation of two exclusions common in product liability policies relating to "professional capacity" and "defective design" to extend cover under a product liability policy to custom-made products.
Whether a person owes a duty in a "professional capacity" or their activities involve "design", however, is a vexed area in insurance law. Exclusions for a breach of duty owed by an insured in a "professional capacity" and "defective design" are common in public and product liability policies. Insureds should pay careful attention to the nature of their activities to ensure that professional liability and design exclusions do not preclude cover should their activities also involve a design or professional advice element.
Fitzpatrick purchased a wood processing machine from Ridolfo. The machine had originally been custom-made by a Tasmanian company named Jobs Engineering for Ridolfo without a cabin. Ridolfo later had a West Australian fabricator make a cabin for the machine. There was however no barrier between the cabin and an opening in the slitter box through which logs were fed.
Fitzpatrick adopted an unsafe system of use whereby he realigned logs using his foot rather than the metal hook which was part of the machine. When he attempted to give the wood a "quick shove kick", his foot became trapped. The injury led to the amputation of his left leg. He then sued Ridolfo and Jobs Engineering, claiming that they were both negligent and liable to pay him damages. The trial judge dismissed all claims against the defendants.
Jobs Engineering was insured under a product liability policy issued by GIO. At the trial, Jobs Engineering sought a declaration that if Fitzpatrick's claims were to succeed it was entitled to be indemnified by GIO for the verdict and for the costs of defending the action. At trial, both these claims were upheld.
GIO appealed against this decision arguing that it was not obliged to indemnify Jobs Engineering because of the two exclusion clauses in the policy relating to claims "arising out of a breach of duty owed in a professional capacity" and the other relating to "defective design".
Operation of "professional" duty exclusion
The West Australian Court of Appeal held that this exclusion would apply if Mr Fitzpatrick's claim against Jobs Engineering arose "out of a breach of duty owed [by Jobs Engineering] in a professional capacity". In this case, the alleged breach of duty arose from an allegation at trial that Jobs Engineering did not properly "advise or inform" Ridolfo of the need for a barrier or safety switch in the cabin.
Jobs Engineering designed, manufactured and supplied machinery and equipment, including the wood processing machine (either with or without a cabin). The Court held that the term "professional" will vary depending on the context in which it is used in a policy. For example, "professional" in a products liability policy may be interpreted differently to its meaning in a professional indemnity policy. The scope of a "professional capacity" may be significantly broader under a professional indemnity policy where the phrase is relevant to the insuring clause rather than in the context of an exclusion (click here for more on this).
In the context of the policy, "professional" was limited to claims arising out of breaches of duty owed by Jobs Engineering to persons who have retained it to perform work or services in the course of its business. Therefore, damage suffered by Fitzpatrick (a third party) as a result of negligent acts or omissions by Jobs Engineering in designing, manufacturing or supplying machinery and equipment, or involving a negligent failure of giving advice to Ridolfo, did not attract the exclusion.
Operation of "defective design" exclusion
At trial it was alleged that Jobs Engineering omitted to install an interlocking barrier over the splitter box on the machine it supplied. It was further contended that it was Jobs Engineering which should have installed the fixed barrier and an emergency switch. GIO attempted to establish that failing to install a barrier guard was a design defect and that the design exclusion would therefore apply to exclude GIO's obligation to indemnify Jobs Engineering under the policy.
The trial judge found that Fitzpatrick's injury was caused by the West Australian fabricator's failure to install a barrier between the cabin and the splinter box. As a result, the Court of Appeal upheld the trial court judge's finding that the defective design exclusion did not apply. Jobs Engineering was not the manufacturer or designer of the part of the product containing the alleged defects as it was not the manufacturer of the cabin. Ridolfo's failure to ensure that the West Australian fabricator installed a barrier could not be attributed to Jobs Engineering.
Costs extension clause
Under the policy, if Jobs Engineering was found liable to compensate Fitzpatrick, GIO, who would in turn be liable to indemnify Jobs Engineering, would be required to pay Jobs Engineering's legal costs. At trial it was held that despite a finding in favour of Jobs Engineering, GIO was still required to pay its costs.
The relevant clause stated that GIO will "pay" legal costs incurred as a result of "your entitlement to indemnity". Therefore, GIO was obliged to pay legal costs as the costs fell due for payment rather than the insured having to pay the costs and then seek indemnity. GIO's obligation to indemnify arose upon Jobs Engineering incurring an obligation, enforceable at law, to pay compensation in respect of the injury or damage in question. This reading of the clause was said to be both reasonable and businesslike.
A lesson for both insurers and insureds
Insureds and insurers need to be alert to the fact that similar terms in different policies will be interpreted in the context in which they are used.
Those insured under a products liability policy can take comfort from the narrow interpretation of the "professional capacity" exclusion and the finding that a "defective design" exclusion will only apply if the insured is the manufacturer or designer of the part of the product containing the alleged defect.
Nevertheless, insureds should be aware of the interface between product liability and professional indemnity policies to ensure that where professional services are provided they are adequately covered under a professional indemnity policy. As professional indemnity policies commonly exclude manufacturing or construction defects, as opposed to design defects, to cover all bases it is often wise to hold both types of policy.
To avoid arguments over whether breach of duty was in a "professional capacity" or involved "defective design", it is often beneficial to place both policies with the one insurer so that regardless of the characterisation of the act or omission the same insurer will be on risk.
Insurers should also take note of the decision and review their "professional capacity" and "defective design" exclusions to ensure that they operate as intended. If they are intended to exclude all professional services or design activities, regardless of how the liability may arise or who brings the claim against the insured, such exclusions may need to be revisited to avoid the above result.