In Allstate Explorations NL v Blake Dawson Waldron (a firm)  WASC 97, Blake Dawson Waldron (BDW) was engaged by the first plaintiff, Allstate Explorations (Allstate), on behalf of itself and five other joint venturers to advise upon the drawing and settling of a construction contract. Among other things, the contract was to provide for insurance cover for various parties, including the proposed contractors, for a range of potential risks. The case involved questions concerning the nature and extent of the insurance cover for professional indemnity (PI) required under the contract.
Allstate argued that had the PI insurance called for by the contract been obtained and maintained by the contractors engaged to undertake the mining project (the BBR parties), Allstate would have been able to recover under that insurance for losses which it suffered as a result of a breach of professional duty by the BBR contractors. The essence of Allstate’s claim was that BDW negligently failed to advise them that the PI insurance cover obtained by the BBR parties failed to provide the full nature and extent of cover that the contract prescribed. The plaintiffs contended that BDW failed to inform them that the insurance cover procured did not name the principal as a co-insured, and that if BDW had advised them of the alleged deficiencies in the insurance cover, effective steps would have been taken to ensure that the BBR parties obtained full insurance cover.
Clause 3.9 provided:
"3.9 Professional Indemnity Insurance
The contractor shall effect and maintain both project specific and general professional indemnity insurance:
(a) which covers liability arising from a breach of a duty owed in a professional capacity, whether owed in contract or otherwise, by an act or omission of the Contractor or its employees in relation to the performance of the work under the Contract …"
The position of the defendant, BDW, was that cl 3.9 of the special conditions of the contract only called for PI insurance cover, and that such cover, even if it had been taken out in the name of the plaintiffs, would not have responded to the plaintiffs’ “first party loss” caused by the BBR parties’ non-performance of contractual obligations. BDW said that first party loss was not insurable under any PI policy available at that period, and that it is a loss of a different character from PI loss.
Heenan J said that he would need to ascertain whether the construction contract required the BBR parties to obtain and maintain project-specific and general PI insurance that would cover the plaintiffs for first party loss, as opposed to claims for losses solely arising from legal liability incurred by the plaintiffs in respect of the contract activities.
Heenan J concluded that the plaintiffs’ claims must fail because upon its proper construction, the construction contract did not specify or require insurance cover of a nature or character which would respond to first party loss claims. Heenan J was also satisfied that the type of insurance cover sought by the plaintiffs was not available at that time. While the PI insurance project-specific policy obtained and maintained by the BBR parties did not name, as it should have done, the first plaintiff as an additional insured, Heenan J was satisfied that that inadequacy did not cause or contribute to the plaintiffs’ loss, as the policy did not provide cover for first party loss suffered by the plaintiffs.
The position of Allstate as manager of the joint venture was found to be analogous to the right of a bailee to insure the full value of the property bailed into its possession. Despite Allstate’s limited interest in the property held and controlled in its capacity as a manager, Allstate had an insurable interest in its own right in all of the joint venture assets and property, and could insure it for full value. Allstate could recover the full amount of any loss, provided that it accounted to the other joint venturers for any excess over its own individual loss or damage. Heenan J found it necessary to establish whether or not the insured objectively intended to obtain cover that extended beyond its own limited interest. In this case, Heenan J found that any insurance effected in the name of Allstate as principal was to be held for the advantage of Allstate and the joint co-venturers, notwithstanding that the latter were not expressly named.
Heenan J reaffirmed that when construing a contractual provision, the court is to have regard to the objective meaning of that provision in the context of the contract read as a whole, and to objectively identify the commercial purpose pursued at the time when the agreement was reached. ;Where well-defined, commonly used and standard terms are used in the contract, such terms will be used in their standard and established meaning, although any departure from this meaning will be considered by having regard to the contract and any relevant and admissible external evidence. Heenan J said that treating established concepts as bearing their conventional meanings was even more important in the context of insurance contracts involving multiple parties, due to an even greater need for certainty and consistency in the objective meanings in established concepts. After having regard to the generally accepted meaning of PI cover as cover for loss or damage suffered by the insured because the insured incurred a liability to some third party, Heenan J saw no reason to apply a different approach to the construction of cl 3.9.
His Honour found that the advice sought by Allstate, and provided by BDW, was consistent with the traditional and established scope of PI insurance and did not support the plaintiffs’ contention that the PI insurance to be obtained would include first party loss cover for the principal or co-insured. This was further supported by evidence of negotiations between the parties. Heenan J found that the methods used by the parties to achieve Allstate as principal being immune to any deficiencies in the cover obtained by the BBR parties were restricted to securing PI insurance. As such, Heenan J said that one would expect that the construction contract would include a distinct head of insurance to provide for first party losses, rather than asking cl 3.9, which dealt specifically with PI insurance, to create an obligation to obtain a distinctly different kind of insurance cover.
Having regard to established meanings, Heenan J found that except for some immaterial extensions, PI insurance is liability-based. He considered that even a solicitor or broker with extensive experience could reasonably be mistaken in failing to ascribe a different meaning to cl 3.9. Heenan J said that the proper construction of cl 3.9 shows that BDW was correct in law in its appreciation of the meaning of that clause; therefore, any omission to advise the plaintiffs that cl 3.9 called for a different form of professional indemnity cover would not have been negligent.
The plaintiffs submitted that cl 3.9 gave an obligation to obtain first party loss cover for loss suffered by the plaintiffs as a result of the performance of the BBR contractors, rather than merely requiring cover indemnifying the plaintiffs for any legal liability that they may have to others for the breach of professional duty. BDW submitted that only “liability loss” is understood and accommodated within the accepted meaning of PI insurance, as it is an insurance for the consequences of incurring a legal liability to others rather than insurance for losses directly suffered by the insured as a result of the breach of duty by others.
Heenan J said that the plaintiffs were complaining about their inability to recover from an underwriter for the loss and damage suffered as a result of the BBR parties breaching their professional obligations. Heenan J categorised this as “first party loss” as opposed to “liability loss”, which is a loss suffered by the plaintiffs as a result of a breach of professional duty, either directly or vicariously, to some third party. Heenan J clearly stated, however, that such cover was outside the traditional and characteristic scope of PI insurance, as it was not cover indemnifying the insured for its own legal liability but rather insurance to cover the insured for losses which the insured suffers by the breach of duty of another entity.
The “Beaconsfield parties” were three of the companies participating in the joint venture arrangement — namely, Beaconsfield Gold NL, Beaconsfield Operations Pty Ltd and Beaconsfield Tasmania Pty Ltd. Heenan J noted that the parties were aware of the possibility that the Beaconsfield parties’ own insurance cover could be defeated or limited if the contract did not carefully divide liabilities. This proceeded from the realisation that if the Beaconsfield parties suffered a loss and claimed recovery from their own insurers, their insurers would be subrogated to their rights and entitled to pursue BBR. If, however, the Beaconsfield parties had limited BBR’s liability to any fixed sum, that could vitiate the Beaconsfield parties’ own insurance by restricting or limiting the insurer’s right of subrogation. Unsurprisingly, however, the BBR parties were not prepared to accept an uncapped overall potential liability under the contract. Heenan J also noted the fact that a right of subrogation may not be exercised against a co-insured. 
Heenan J recognised that requiring insurance to be taken out that will name and operate as if there was a separate policy covering the principal, the contractor and the subcontractors for PI insurance for liabilities incurred by the insured, arising from a breach of duty owed in a professional capacity by the contractor, achieves a significant and sensible commercial purpose. It covers the contractors for their professional liabilities and it covers the principal for its professional liabilities imposed vicariously or concurrently because of the contractor’s breach of professional duties. What it does not do, however, is cover the principal for loss or damage suffered directly by the principal as a breach of the professional duty of the contractor.
The plaintiffs argued that had BDW advised them of the deficiencies in the policy, steps would have been taken which would have resulted in the BBR parties obtaining project-specific PI cover, including cover for the principal for first party losses. Heenan J was satisfied, however, that the evidence did not establish that first party loss cover was available for the kind of losses suffered by the plaintiffs as a result of the negligent performance of the contract by the BBR parties. Further, he found that if such insurance said to have been necessary under cl 3.9 could not have been obtained, the parties would simply have continued with the contract. As such, the plaintiffs would have been no worse off than the course of events has left them in the present circumstances.
Heenan J was satisfied that BDW was not retained to advise generally or to comprehensively examine all of the insurance arrangements in the contract, or to suggest ways by which the insurance might be improved. Instead, the firm was retained to advise and redraft the contract, in particular special condition 3, to reflect the ultimate agreement between the parties. Accordingly, the nature and measure of the responsibility of BDW in dealing with queries about the sufficiency or suitability of PI insurance must be viewed solely on the basis of whether or not the proposals or policies submitted satisfied the obligations of the BBR parties with respect to insurance under cl 3.9 of the contract. Further, Heenan J said that not every error, mistake or omission is negligent. It is only those errors, mistakes or omissions which reveal a failure to exercise reasonable care that are tortious or in breach of the professional obligation. Honest, non-negligent errors or omissions or misjudgements can and do happen. 
Heenan J found that there was no sufficient reason or basis to conclude that Allstate did not require or expect satisfaction of cl 3.9(c) of the special conditions. He concluded that cl 3.9 required the contractors to take out and maintain project-specific and general professional indemnity insurance naming the contractors, and Allstate as principal, as insureds and covering the insureds for any liability arising out of the BBR parties breaching their professional obligations. Heenan J said, however, that this did not require insurance to be taken out which covered Allstate as principal or any of the joint venture parties for any first party loss.
While accepting that they were advised that the policy did not name Allstate as an additional insured, the plaintiffs’ case was that the defendant was still negligent and in breach of duty in failing to repeat that advice or make it more explicit when endorsing the acceptance of the modified policy from QBE. BDW submitted that it is inconceivable that such an obvious omission would have gone unnoticed or unremarked by so many people who were aware of the contract requirements unless it had been dispensed with as a requirement under the contract; however, it did not meet the burden of proof to satisfy this submission.
Heenan J considered the possibility of what would have happened if the omissions in the QBE policy were fully appreciated. He said that if Allstate was added as an additional insured as principal to be covered for any civil liability, Allstate had an insurable interest of this kind, and there was at least the potential for it to incur vicarious liability because of actions or omissions of the contractors. Heenan J said that while such cover was available, even if such a compliant PI policy had been issued and maintained by the contractors, as required by cl 3.9, it would not have responded to the claim advanced by the plaintiffs. This was because the plaintiffs’ claim in this action was not a liability-based claim, but rather a first party loss claim. Therefore, notwithstanding the fact that the QBE policy did not comply with the requirements of cl 3.9, neither Allstate nor the other plaintiffs could demonstrate that they suffered any loss because a policy satisfying the contract’s requirements would not have responded either. In other words, if BDW had pointed out to Allstate that the QBE policy did not fully comply with the requirements of cl 3.9, neither Allstate nor any of the plaintiffs would have been in any better position by securing a policy rectifying the deficiencies. Therefore, the plaintiffs were unable to establish any damage arising from BDW’s failures to advise, and the claim for damages in negligence had to fail.
Interestingly, Heenan J noted in relation to this issue of damages and causation that, had it been necessary for him to do so, he would have upheld the plaintiffs’ submissions that once liability is established, a full entitlement to damages without reduction necessarily follows. His Honour said that once liability and causation were proved, there is no reason to conclude that the entitlement to an indemnity under the policy would have been anything less than complete; Heenan J said that once it is established that the contractual entitlements meant that Allstate should have been named as a co-insured under a policy which would respond to the first party loss which it claimed, then, assuming that the underwriter was reputable and solvent, a right to a full indemnity should follow. Accordingly, the loss of the right to an indemnity in the situation hypothesised by the plaintiffs is more than the loss of a chance; it is a loss of a right which can be measured in value without any need or justification for a discount.
This article was first published in the Australian Insurance Law Bulletin, Volume 25 No 10, October 2010.
Petrofina (UK) Ltd v Magnaload Ltd  QB 127;  3 All ER 35;  2 Lloyd’s Rep 91;  3 WLR 805. Back to article
McCann v Switzerland Insurance Australia Ltd (2000) 203 CLR 579; 176 ALR 711;  HCA 65 at . Back to article
Woodside Petroleum Development Pty Ltd v H & R — E & W Pty Ltd (1997) 18 WAR 539; (1997) 10 ANZ Ins Cas 61-395; Co-operative Bulk Handling Ltd v State Government Insurance Commission (1990) 3 WAR 145; (1990) 6 ANZ Ins Cas 60-992. Back to article
Heydon v NRMA (2000) 51 NSWLR 1; 36 ACSR 462;  NSWCA 374. Back to article
Tabet v Gett (2010) 240 CLR 537; 265 ALR 227;  HCA 12; compare Sellars v Adelaide Petroleum NL (1994) 179 CLR 332; 120 ALR 16;  HCA 4. Back to article