Hamilton Perspectives Nyhetsbrev

The Supreme Court rules on the interpretation of a professional liability insurance

Professional li­a­bi­li­ty po­li­ci­es of­ten ex­clu­de fi­nes, liqui­da­ted da­ma­ges and pu­ni­ti­ve da­ma­ges. In a re­cent ru­ling, the Swedish Supreme Court held that liqui­da­ted da­ma­ges sustai­ned by an in­su­red’s coun­ter par­ty we­re co­ve­red by a pro­fes­sio­nal li­a­bi­li­ty po­li­cy when the coun­ter par­ty clai­med da­ma­ges from the in­su­red cor­re­spon­ding to the liqui­da­ted da­ma­ges. The pre­ce­dent has an­swered a ques­tion of im­por­tan­ce for the in­su­ran­ce and con­struc­tion in­du­stri­es.

The back­ground of the ca­se no. NJA 2018 p. 834

The con­struc­tion com­pa­ny Byggdialog AB (“Byggdialog”) was contrac­ted by Bo i Väsby AB (“BVAB”) to build a school. Byggdialog contrac­ted the te­ch­ni­cal con­sul­tan­cy com­pa­ny Integra Engineering AB (“Integra”) to pro­du­ce the con­struc­tion docu­ments for this pur­po­se. Pursuant to the ap­pli­cab­le ge­ne­ral con­di­tions agreed between Byggdialog and Integra, Integra would be li­ab­le for loss cau­sed by a neg­li­gent per­for­man­ce of the contract. Byggdialog and BVAB had in turn agreed that Byggdialog was li­ab­le to pay liqui­da­ted da­ma­ges for de­lays in the con­struc­tion.

Integra did not pro­du­ce the con­struc­tion docu­ments in ac­cor­dan­ce with the contract, which cau­sed a de­lay in the con­struc­tion pro­ject. Byggdialog was ob­li­ga­ted to pay liqui­da­ted da­ma­ges in the amount of 2,700,000 SEK pur­su­ant to its agre­e­ment with BVAB and sub­se­quent­ly ma­de a re­co­ve­ry claim against Integra cor­re­spon­ding to this amount.

Integra no­ti­fi­ed the claim to its in­su­rer un­der its pro­fes­sio­nal li­a­bi­li­ty po­li­cy. However, the in­su­rer decli­ned the claim with re­fe­rence to the po­li­cy ex­clu­sion for liqui­da­ted da­ma­ges, which pro­vi­ded that fi­nes, liqui­da­ted da­ma­ges or pu­ni­ti­ve da­ma­ges we­re not co­ve­red un­less the­re was such li­a­bi­li­ty for da­ma­ges co­ve­red by the po­li­cy re­gard­less of if the claim is la­bel­led fi­nes, liqui­da­ted da­ma­ges or pu­ni­ti­ve da­ma­ges.

Integra chal­leng­ed the in­su­rer’s co­ve­rage po­si­tion and ini­ti­a­ted an ac­tion in the District Court, which used the pro­ce­du­ral pos­si­bi­li­ty to re­fer a spe­ci­fic is­sue to the Supreme Court. The is­sue be­fo­re the Supreme Court was whet­her the ex­clu­sion clau­se was ap­pli­cab­le in re­la­tion to Integra’s claim.

The re­a­so­ning of the Supreme Court

The Supreme Court held that the wor­ding of an in­su­ran­ce clau­se is ty­pi­cal­ly fun­da­men­tal for its in­ter­pre­ta­tion. However, whe­re the wor­ding do­es not pro­vi­de a clear in­ter­pre­ta­tion, gui­dan­ce can be de­ri­ved from the sys­te­ma­tics of the po­li­cy and its ot­her terms and con­di­tions. Other factors, such as the pur­po­se of the clau­se and what would be an ob­jecti­ve and re­a­so­nab­le in­ter­pre­ta­tion may al­so be re­le­vant.

Since liqui­da­ted da­ma­ges in a contract con­sti­tu­te com­pen­sa­tion for loss agreed in ad­van­ce, the Supreme Court held, with re­fe­rence to the wor­ding of the first part of the ex­clu­sion, that a claim for liqui­da­ted da­ma­ges against the in­su­red was not co­ve­red by the po­li­cy. However, the Supreme Court furt­her held that the wor­ding of the clau­se did not in­clu­de liqui­da­ted da­ma­ges that had be­en paid in a pri­or stage in the contract chain and pas­sed for­ward as a claim for da­ma­ges against the in­su­red.

Further, the Supreme Court held that liqui­da­ted da­ma­ges ty­pi­cal­ly would be a claim for da­ma­ges when it is pas­sed for­ward in the contract chain. Consequently, the Supreme Court con­si­de­red Byggdialog’s claim against Integra as a claim for da­ma­ges.

In terms of the pur­po­se of the ex­clu­sion, the Supreme Court con­clu­ded that it was pro­bab­le that the in­su­rer desi­red to ex­clu­de com­pen­sa­tion for loss that did not ha­ve any con­nec­tion with a re­al loss and that com­pen­sa­tion for liqui­da­ted da­ma­ges can in­clu­de mo­re than the ac­tu­al loss sustai­ned. According to the Supreme Court, ho­wever, that pur­po­se was not sta­ted clear enough by the wor­ding of the clau­se.

The Supreme Court al­so con­si­de­red ot­her re­le­vant factors when in­ter­pre­ting the ex­clu­sion clau­se. A uni­form practice in the in­du­stry re­gar­ding the ex­clu­sion had not be­en established in the ca­se and the Supreme Court con­clu­ded that the in­su­rer could ha­ve for­mu­la­ted the ex­clu­sion clea­rer. Furthermore, the Supreme Court con­clu­ded that an in­ter­pre­ta­tion whe­re liqui­da­ted da­ma­ges we­re co­ve­red by the in­su­ran­ce was re­a­so­nab­le. For this con­clu­sion the Supreme Court con­si­de­red that a fai­lu­re to per­form correct con­struc­tion docu­ments ty­pi­cal­ly can de­lay a pro­ject and le­ad to pe­nal­ti­es for the con­structor. Consequently, the Supreme Court found that Integra was en­tit­led to in­dem­ni­fi­ca­tion un­der the in­su­ran­ce.

Comments

The Supreme Court’s ru­ling an­swers the im­por­tant ques­tion if liqui­da­ted da­ma­ges that are pas­sed for­ward through the contract chain can be con­si­de­red a claim for da­ma­ges and hence co­ve­red by a pro­fes­sio­nal li­a­bi­li­ty po­li­cy. Liquidated da­ma­ges are of­ten in­clu­ded in contracts and may ha­ve se­ve­ral pur­po­ses. They may pre­vent bre­aches of contract; pro­vi­de a lar­ger com­pen­sa­tion when a bre­ach oc­curs; li­mit the li­a­bi­li­ty for a bre­ach; and to simp­li­fy the pro­cess of cal­cu­la­ting the loss sustai­ned by a bre­ach of contract (the­re is no requi­re­ment to establish the ex­istence or quan­tum of a loss).

Since the amount of the liqui­da­ted da­ma­ges will not be de­ter­mi­ned by the si­ze of an ac­tu­al loss, the in­su­rer may ha­ve dif­ficul­ti­es in set­ting the pre­mi­um for a pro­fes­sio­nal li­a­bi­li­ty in­su­ran­ce if liqui­da­ted da­ma­ges pas­sed for­ward are co­ve­red by the in­su­ran­ce. The ru­ling may cau­se in­su­ran­ce com­pa­ni­es to ad­just the ex­clu­sion clau­ses for liqui­da­ted da­ma­ges in their pro­fes­sio­nal li­a­bi­li­ty po­li­ci­es. However, con­struc­tion com­pa­ni­es should be awa­re that they might ha­ve a contractu­al ob­li­ga­tion to ha­ve an in­su­ran­ce that co­vers its contractu­al ob­li­ga­tions. A con­struc­tion com­pa­ny that do­es not ha­ve a pro­fes­sio­nal li­a­bi­li­ty in­su­ran­ce that co­vers a claim li­ke the one in this pre­sent ca­se might not ful­fil its contractu­al ob­li­ga­tion. The in­su­rer and in­su­red should di­scuss the­se is­sues.