TIMTECH CHEMICALS LIMITED V QBE INSURANCE (INTERNATIONAL) LIMITED COA CA219/2011

TIMTECH CHEMICALS LIMITED V QBE INSURANCE (INTERNATIONAL) LIMITED COA CA219/2011 [28 June 2012]IN THE COURT OF APPEAL OF NEW ZEALANDCA219/2011[2012] NZCA 274BETWEEN TIMTECH CHEMICALS LIMITEDAppellantAND QBE INSURANCE (INTERNATIONAL)LIMITEDRespondentHearing: 28-29 February 2012Court: Arnold, Stevens and Wild JJCounsel: P J McDonald and N R Campbell for AppellantP M Fee and M Atkinson for RespondentJudgment: 28 June 2012 at 4.00 pmJUDGMENT OF THE COURTA The appeal is dismissed.B The appellant must pay the respondent costs for a standard appeal on a band A basis and usual disbursements. We certify for second counsel.____________________________________________________________________REASONS OF THE COURT(Given by Stevens and Wild JJ)Table of contentsPara NoIntroduction [1]Factual background [3]Insurance history [11]The professional indemnity policy [17]TimTech's argument on appeal [23]High Court decision [28]Our evaluation [31]Nature of the liability [33]Fixing of the set points as a form of advice [39]Faulty workmanship not design failure [43]Result [48]Introduction[1] The question on this appeal is whether the claim of the appellant, TimTech Chemicals Ltd (TimTech), is within the cover provided by the professional indemnity insurance policy it held with the respondent, QBE Insurance (International) Ltd (QBE). The appeal thus involves interpreting the policy and deciding whether on the undisputed facts Keane J was right to hold that it did notcover TimTech's claim.1[2] First, we will summarise the factual background, in particular the events that led to TimTech incurring the liability for which it made a claim under the policy. Wewill then refer to some relevant aspects of TimTech's insurance history with QBE.That lays the groundwork for looking at the policy and considering whether theJudge was correct to find that it did not cover TimTech's claim.Factual background[3] TimTech's business is supplying chemicals for treating timber. In 2007 TimTech agreed with Carter Holt Harvey (CHH) to treat the latter's timber using new technology known as a "Uniplant". Under licence from an AustralianCommonwealth Research Consortium (CRC), TimTech had exclusive New Zealand rights to use the Uniplant technology. The Uniplant comprises two chambers: a pressure chamber in which the timber is impregnated with preservative, and a vacuum chamber in which excess preservative is drawn out of the timber. The Uniplant treats timber rapidly, in minutes instead of hours. Critical to the working of the Uniplant are three computer operated settings (or set points) which control the pressures and vacuums in the two chambers during the treatment process.[4] The agreement between TimTech and CHH was recorded in a draft terms sheet, never signed but accepted as accurately recording the agreement. This part of the introduction of the terms sheet gives the gist:1 TimTech Chemicals Ltd v QBE Insurance (International) Ltd HC Auckland CIV-2009-404-2194, 28 March 2011.B. TimTech supplies chemicals that are used for the protection of timber. TimTech is licensed exclusively by CRC to commercialiseCRC's technology relating to the construction of plants for thetreatment of timber. Those plants are called UniPlants.C. Carter Holt Harvey wishes to purchase UniPlants from TimTech and TimTech has agreed to supply and commission those UniPlants for Carter Holt Harvey. TimTech has also agreed to supply the first UniPlant to Carter Holt Harvey free of charge.D. Carter Holt Harvey and TimTech have agreed that TimTech will supply the Chemicals and operate the UniPlants to treat timberproduced by Carter Holt Harvey's mills at agreed Treatment Prices.[5] TimTech was to be responsible for all the work involved in commissioning each Uniplant. Supply of the first Uniplant to CHH was at TimTech's expense. Titlein that first Uniplant was to pass to CHH five years from the start of the agreement. TimTech was to be the exclusive supplier of chemicals to CHH and was to provide CHH with technical support services including general advice about the treatment of timber.[6] The terms sheet also provided that TimTech was to establish a specialpurpose company to treat CHH's timber. CHH was to pay a fixed price for eachcubic metre of timber treated by TimTech. There were detailed provisions requiringTimTech to treat the timber to CHH's specifications and to provide warranties inthese terms:2TimTech warrants that it has complied with all relevant Standards and Guidelines in the treatment of the Timber, and that all product treated by it will (initially and on an ongoing basis) achieve the requisite penetration and retention levels and the durability requirements of all such Standards and, if applicable, the Guidelines and that the moisture content of the treated Timber is within the greater of (i) the range specified in the Standards; or(ii) the range represented in Carter Holt Harvey's product literature (being, atthe date of entry into this Terms Sheet, for Boron treated timber, 90% of such timber having a moisture content less than or equal to 26%).[7] Finally, the terms sheet required TimTech to carry specified insurances, notably professional indemnity cover.[8] TimTech began treating CHH's timber in 2007, initially on a trial basis. InOctober 2007 CHH complained of patchiness in the distribution of dye (and thus2 Clause 78 of the terms sheet.preservative liquid) in the treated timber. Dr Hann, an Australian consultant instrumental in developing the Uniplant technology, came to New Zealand and advised TimTech on the re-adjustment of the set points. CHH complained again to TimTech in February 2008, this time about the dimensions and moisture content of the treated timber. These problems resulted from the uptake of too much treatment fluid, because the set points of the Uniplant were still incorrectly adjusted.[9] Treatment of timber resumed after TimTech had made further adjustments to the set points on the Uniplant in April 2008. Following that there was no recurrence of problems with the quality of the timber treatment.[10] A result of the incorrect operational settings on the Uniplant was that CHH had to sell a substantial quantity of incorrectly treated timber overseas at a loss. Its claim on TimTech for that loss was eventually settled, TimTech agreeing to pay CHH $1,462,500.00 inclusive of GST. It was for that sum that TimTech claimed on QBE under its professional indemnity policy.Insurance history[11] TimTech had a history of insuring with QBE. One of the policies it held withQBE in 2005 was a general liability policy, which included, at TimTech's specific request, a products guarantee extension. The premium for the general liability policy was $19,687.50, with an additional premium of $54,885.71 for the products guarantee extension. That extension was cancelled by TimTech with effect from 1 November 2005. QBE accepts that TimTech's claim for the $1.46 million GSTinclusive it paid to CHH would have been covered by that product guarantee extension, had TimTech kept it up.[12] There is no dispute that QBE had a copy of the draft terms sheet between TimTech and CHH. It had been emailed to QBE by TimTech's broker on20 February 2007. After receiving the terms sheet, QBE completed an internal review of it in February 2007. In the course of correspondence between QBE andTimTech's broker early in March 2007, QBE inquired whether anything had come of the terms sheet. It seems that TimTech did not respond to that inquiry.[13] By proposal form dated 15 June 2007, TimTech made a formal proposal to QBE for the professional indemnity cover the terms sheet required it to have. This proposal included the following requests/questions by QBE, and answers by TimTech:5 Please provide details of the precise nature of activities of thebusiness, including details of advice given. MANUFACTURER + SUPPLY OF WOOD PRESERVATIVES +ASSOCIATED PLANT EQUIPMENT. TECHNICAL ADVICE.6 Please categorise the activities of the business outlined above and indicate the approximate percentage of your income derived from those activitiesType ofwork% Type ofwork%SUPPLY OFCHEMICALS98PLANT +EQUIPMENT27 Please define and describe what you consider to be the primary and major loss exposure for which you are seeking Professional Indemnity InsuranceGIVING OF INCORRECT ADVICE.8 Does any contract or client represent more than 20% of your annual work or fees?If Yes, please provide full detailsYes  No5 YEAR SUPPLY CONTRACT WITH CARTER HOLT HARVEYLIMITED10Do you envisage any substantial changes in your activities or are there any major new operations contemplated during the next 12 months?Yes  NoTIMTECH PLANS TO INSTALL + OPERATE ± 5 NEW TREATMENTPLANTS FOR CARTER HOLT.[14] On 20 June 2007 QBE sent TimTech a quotation for professional indemnitycover. This quotation stipulated TimTech's professional duty as:Technical advice regarding the supply and use of wood processing chemicals and the associated equipment.[15] TimTech's broker confirmed acceptance of QBE's quotation on 27 June 2007.TimTech paid a premium for the professional indemnity cover of $7,500.00.[16] In addition to the professional indemnity policy in issue on this appeal, TimTech took out three other insurance policies with QBE. All four policies were specifically requested by TimTech or its broker. This is not a case where TimTech provided the terms sheet to QBE and asked for its advice on what insurance(s) was required to cover it for its business relationship with CHH, as detailed in the terms sheet. TimTech and its broker made the decisions as to the insurances TimTech required. This is relevant to the wording "any other underwriting information provided", which appears in the operative clause in the policy set out in the nextparagraph.The professional indemnity policy[17] The operative clause in the policy provided cover for civil liability in the following terms:In consideration of the payment of the premium to QBE Insurance(International) Limited ("QBE") and in reliance on the written proposal,declaration and any other underwriting information provided, which shall bedeemed to be incorporated into and to be the basis of this Policy, QBE will indemnify the Insured as follows:INSURING CLAUSES1. Civil LiabilityQBE shall indemnify the Insured for any Valid Claim subject to the terms of this Policy.[18] A "Valid Claim" was defined in the policy to mean:Any Claim:15.1 first made against the Insured during the Period of Insurance; and15.2 notified in writing by the Insured to QBE during the Period of Insurance; and15.3 alleging civil liability, by any act, error, omission or conduct that occurred subsequent to the Retroactive Date in connection with theInsured's Professional Business Practice.Any Claims that do not satisfy 15.1, 15.2 and 15.3 of this definition shall not be covered under this Policy.[19] "Professional Business Practice" was also defined in the policy to mean:"The business conducted by the Insured as specified in the Schedule". TimTech's Professional Business Practice was described in the Policy Schedule as: "Technicaladvice regarding the supply and use of wood processing chemicals and theassociated equipment".[20] The policy included a number of "Automatic Extensions" to the principalinsuring clause, relevantly:QBE shall, subject to the terms of this Policy, Indemnify the Insured for any Valid Claim as follows:1. Breach of contractClaim for the actual or alleged breach of a contract for the provision of professional services.2. Consultants, Subcontractors and AgentsClaim for any act, error or omission committed by any consultant, subcontractor or agent for whose act, error or omission the Insured is legally liable. Provided always that this indemnity shall not extend to any such consultant, subcontractor or agent.6. Intellectual PropertyClaim for unintentional infringement of copyright, trademark, registered design or patent, plagiarism or breach of confidentiality, arising directly from the Professional Business Practice.[21] Significantly the policy also included the following endorsement:Design and ConstructQBE shall indemnify the Insured, in accordance with this Policy, for Valid Claimsarising from the Insured's faulty or inadequate design or specification.Furthermore, QBE shall not be liable in respect of any Claim alleging or in respect of:(a) faulty or inadequate manufacture, or;(b) faulty or inadequate workmanship, construction or fabrication, or;(c) faulty or inadequate supervision of manufacture, workmanship, construction or fabrication, or;(d) breach of any express or implied warranty arising out of the sale of goods.[22] The policy also contained a number of exclusions of liability. One exclusion was that QBE shall not be liable in respect of any claim:18. Supply of GoodsAlleging or arising from the sale, supply, installation, efficacy, or manufacture of goods by or on behalf of the Insured.TimTech's argument on appeal[23] There were four key propositions put to us by counsel in arguing that Keane Jhad erred in holding that TimTech did not have a "Valid Claim" for the $1.46 millionGST inclusive.[24] First, given the broad nature of the phrase "in connection with" in 15.3 of thedefinition of "Valid Claim" in the policy (this definition is set out in [18] above), it was sufficient for TimTech to show that the conduct (the incorrect fixing of the setpoints on the Uniplant) that caused the $1.46 million GST inclusive liability was connected with or related to its Professional Business Practice. The policy wording did not require TimTech to show that the conduct was part of that practice. Nor did it require TimTech to establish that the liability was of any particular nature, for example, liability for negligent advice.[25] Second, the policy definition of "Professional Business Practice" referred generally to TimTech's business rather than to particular activities TimTechundertook. Thus, it was not necessary for TimTech to show that the relevant conduct was an activity specified in the Policy Schedule. It was sufficient that the conductwas "in connection with the Insured's Professional Business Practice", thedescription of which was not intended to be exhaustive.[26] Third, the reference to "advice" in the description of TimTech's ProfessionalBusiness Practice included the communication of a professional judgment, which could be communicated through design. TimTech was covered if the fixing of the set points on the Uniplant was "in connection with" TimTech's business of "technicaladvice [including design] regarding the supply and use of wood processingchemicals and the associated equipment". The fixing of the set points did not haveto be advice or design. Liability arising from a mistake by TimTech (by its consultant, Dr Hann) in providing technical advice about the treatment of CHH'stimber was a sufficient foundation for liability under the policy.[27] Fourth, if it were necessary for the fixing of the set points to constitute adviceor design, then it did so. A "design" is an idea, conception or plan. Fixing the setpoints of the Uniplant was a matter of design, although of a process rather than a physical object. That design was not merely internalised for TimTech's ownpurposes, but was used in treating timber for CHH. Implicit in this submission is design being a form of advice.High Court decision[28] The propositions made by counsel for TimTech in this Court were essentially the arguments put to and rejected by Keane J in the High Court. The Judge firstaddressed the argument that in order to establish a Valid Claim, all TimTech had to do was demonstrate a link between the liability it incurred and the conduct of its business. Although the Judge accepted that the words "in connection with" are notprescriptive as to the type of link called for,3 he otherwise rejected TimTech'sargument and held:[46] In equating its 'professional business practice', even as defined, withits business, writ large, and in thus contending that its practice includes even those parts of its business that are not professional in character, Timtech negates the function of that definition; and that function is basic to the logic and extent of the policy. It serves to demarcate the scope of the indemnity QBE has assured Timtech.[29] The Judge noted that the definition of Professional Business Practice in the policy derived directly from the information TimTech provided to QBE in the insurance proposal (for example, see question and answer 5 set out in [13] above),4and that TimTech must now be "fixed with its own description".5[30] The Judge also considered the argument that a design or specification (such as fixing the set points on the Uniplant) could be technical advice regarding the"supply and use of wood processing chemicals and the associated equipment". However, he rejected this argument as TimTech's liability did not arise from givingincorrect advice to CHH regarding the use of preservative, but from a breach ofcontract: failure to treat CHH's timber to specification.6Our evaluation[31] We agree with Keane J's conclusion that TimTech's claim was not within the scope of its professional indemnity policy with QBE. Citing this Court's judgmentin Molyneux Holdings Ltd v IAG New Zealand Ltd,7 the Judge pointed out that the rules of construction for insurance policies are the same as for ordinary contracts. Words are to be construed in context according to their ordinary meaning. The one3 TimTech Chemicals Ltd v QBE Insurance (International) Ltd, above n 1, at [45].4 At [48].5 At [51].6 At [54] and [55].7 Molyneux Holdings Ltd v IAG New Zealand Ltd [2007] NZCA 254, (2007) 14 ANZ InsuranceCases ¶61-733 at [22].special rule when interpreting an insurance policy is that exclusion clauses are normally construed narrowly.[32] Adopting this interpretative approach to the policy here, two interrelatedpoints were fatal to TimTech's claim. We will deal with each of these two pointsseparately, and then with a third difficulty we see with TimTech's claim.Nature of the liability[33] TimTech does not have a Valid Claim under the policy with QBE as it did not incur the liability for which it claimed in the course of its Professional Business Practice, as defined in the policy (and set out in [19] above). The liability was incurred because, as a result of the incorrect fixing of the set points, the timber TimTech treated for CHH was not in accordance with the agreed specifications, which was a breach of contract. QBE was right to acknowledge that TimTech would have had cover under the product guarantee extension to its general liability policy, had it kept that extension up. Liability for a faulty product was exactly what TimTech incurred.[34] We agree with Keane J's reasoning on this first point, as we have summarisedit in [28] to [29] above. The policy definition of TimTech's Professional BusinessPractice was TimTech's own definition, which emerged from its proposal. TimTechdid not mention in its proposal that it would be treating large quantities of timber forCHH under contract. There was only TimTech's answer to question 10, set out in[13] above, advising that it intended to install and operate about five new treatmentplants for CHH. The whole focus of TimTech's proposal, and thus the scope of thecover provided by the policy, was on TimTech giving technical advice. The liability TimTech incurred for a faulty product was too remote from its Professional BusinessPractice to be "in connection with" that practice, and did not result from TimTechgiving technical advice.[35] The automatic extensions to the policy we have set out in [20] above reinforce this interpretation. The breach of contract extension applies only to a contract for the provision of professional services, which underscores the type ofbusiness for which TimTech obtained cover. Similarly, the intellectual propertyextension applies to claims arising directly from TimTech's Professional BusinessPractice.[36] Further reinforcement emerges from the Design and Construct endorsement set out at [21] above. The exclusions from that endorsement include claims for faulty manufacture and for breach of any warranty arising out of the sale of goods. Those exclusions neatly encompass the liability TimTech incurred to CHH.[37] The more general exclusions to the policy also demarcate the scope of a claim. For example, the exclusion for supply of goods (set out at [22] above) excludes liability in respect of any claim arising from the sale, supply, installation, efficacy or manufacture of goods.[38] This case instances the trend over recent years for insurers to issue professional indemnity policies to insured parties who are not professionals, at least not in the traditional or strict sense of that term (for example, doctors and engineers). Counsel for QBE made this point in their submissions. Because the giving of advice generally forms only part of the business of this type of insured, policies issued to them carefully define the scope of their professional business practice, and equally carefully exclude risks usually insured under a general liability policy and product liability policy. If that were not the case, sloppy workmanship by the insured would be encouraged, if not rewarded.8Fixing of the set points as a form of advice[39] TimTech argued that its liability to CHH resulted from its design – that is, its fixing – of the set points on the Uniplant, which was "technical advice". Thisargument was based on the proposition that design can be a form of advice, a proposition which QBE accepted, as do we.8 See Pier Mac Petroleum Installation Ltd v Axa Pacific Insurance Co (1997) 41 BCLR (3d) 326(BCSC) at [20]–[21].[40] The fatal flaw in this argument is that TimTech did not communicate that"technical advice" (that is, the design or fixing of the set points on the Uniplant) toCHH. In the text Professional Indemnity Insurance Law, advice is defined as "the communication of information or opinion, perhaps even couched in the form of apromise".9 The information comprising the advice may be communicated in a number of forms.10 But, however it is done, communication to the recipient is an essential element of advice. Unless communicated, the advice is merely an internalised opinion. This stems from the notion that advising third parties is an important activity of a professional.[41] CHH knew nothing of the set points. Getting the set points right was whollyTimTech's concern, as part of its operation of the Uniplant. CHH was but TimTech'scustomer: the owner of the timber TimTech was treating under contract. Advicecannot result in a liability if it is not communicated. When TimTech treated CHH'stimber to CHH's specifications using the Uniplant, it involved an internalisedopinion, skill or knowhow held by TimTech in relation to the new Uniplant technology.[42] We disagree with TimTech's submission that the Design and Constructendorsement removed the requirement for communication. Such removal would fundamentally change the nature of the professional indemnity policy. We consider the purpose of the endorsement was to cover TimTech in certain limited circumstances. An example would be where advice was provided but communicated indirectly, as part of design and build services. Such cover would have been important to TimTech as it intended in the future to transfer to CHH the new Uniplant technology. Counsel for QBE accepted, correctly in our view, that when a customer contracts with a manufacturer or supplier to design and build a product, the provision of the resulting product to the customer is the embodiment of themanufacturer's design and therefore is a species of advice.119 WIB Enright and Digby C Jess Professional Indemnity Insurance Law (2nd ed, Sweet &Maxwell, London, 2007) at [10–035] (footnotes omitted).10 Professional Indemnity Insurance Law at [10–061].11 Counsel cited Structural Polymer Systems Ltd v Brown [2000] Lloyd's Rep IR 64 (QB).Faulty workmanship not design failure[43] There is a further difficulty with TimTech's contention that the fixing of theset points was a form of design and therefore advice, in that the mistake in determining the set points is more naturally characterised as faulty workmanship on the part of TimTech. The distinction between faulty workmanship or manufacture on the one hand, and faulty advice or design on the other, is established in insurance law. Derrington and Ashton in The Law of Liability Insurance describe workmanshipas "the performance or execution of work; not the simple acts involved in doing thework, but the production of the finished work from nothing".12[44] Various authorities support the proposition that the manner in which a task is completed, or the procedures or skills used to implement a design or specification, constitute workmanship rather than design.13 For example, in Bird Construction Co Ltd v United States Fire Insurance Co, the insured was seeking indemnity for damage to a building it was constructing. In particular, damage to a steel roof truss had occurred as a result of defective erection procedures. In rejecting the insurer'sargument that the faulty erection procedures were part of the design, plans or specifications (so came within an exclusion clause), the Saskatchewan Court of Appeal held:14 design is the concept of the project when finally completed. A plan is adescription of that design set out graphically. Specifications detail the kind and type of material to be used to construct a project, and in this case would include loading capacity of the trusses. The plans and specification do not contain a description or instructions for the erection or installation of the trusses and, in my opinion, it is unnecessary. I therefore conclude that erection procedures are not part of design, plan or specifications .The Court accepted that the erection of the truss was part of the work on the building, and that the procedure to erect that work was faulty. The failure of the12 Desmond Derrington and Ronald Shaw Ashton The Law of Liability Insurance (2nd ed,LexisNexis, Chatswood (NSW), 2005) at [10-74].13 The authorities include Manufacturers' Mutual Insurance Ltd v The Queensland GovernmentRailways (1968) 118 CLR 314 at 323; Keir Construction Ltd v Royal Insurance (UK) Ltd (1992)30 ConLR 45 (QB) at 75; and Bird Construction Co Ltd v United States Fire Insurance Co(1985) 25 DLR (4th) 104 (SKCA).14 At 108–109. Cover was therefore excluded under a different subclause within the policy.truss was therefore faulty workmanship.15 This was notwithstanding the fact that the erection procedures were devised in advance of the work and were communicated formally in a memorandum.[45] We therefore accept Ms Fee's submission that workmanship is thecombination of skills directed at completing the relevant contractual obligation, so that it is apt to cover the whole physical responsibility of performing the contract. On the facts of this case, incorrectly fixing the set points was a failure of this kind. That is because the fixing of the set points related solely to the operation of the Uniplant. There was no design failure in the plant itself; it was perfectly capable of treating the timber to specification if the points were set correctly. And it ultimately did, when the adjustment of the points was corrected. Treatment of the timber in theUniplant was part of the work undertaken on CHH's timber, and fault in theprocedure to undertake that work (such as incorrectly fixing the set points) therefore resulted in faulty workmanship.[46] We summarise our conclusions. First, TimTech did not incur the liability toCHH in the course of its Professional Business Practice. Second, TimTech's fixingof the set points on the Uniplant was an integral part of its faulty workmanship, and was not design capable of constituting "technical advice". Third, even if TimTech's fixing of the set points on the Uniplant was capable of constituting "technical advice", TimTech did not communicate that advice to CHH.[47] For those reasons TimTech has failed to show a Valid Claim as defined by the policy. It cannot be indemnified in respect of the liability it incurred to CHH, either under the main insuring clause (see [17] above) or under any of the other clauses extending cover (see [20] and [21] above) that also require a Valid Claim.Result[48] For the reasons we have given the appeal is dismissed.15 At 109.[49] TimTech must pay QBE's costs for a standard appeal on a band A basis withusual disbursements. We certify for second counsel.Solicitors:Peter McDonald, Auckland for AppellantJones Fee, Auckland for Respondent