Hamilton Perspectives Publications

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.