Delany J, Owners Corporation 1 Plan No. PS 650567Y v Shangri-La Construction Pty Ltd [2026] VSC 117

In a recent decision, Delany J of the VSC has refined the interpretation of Claims Made insurance policies against the backdrop of the EPS cladding fiasco.

Factual Background

Mr Naqebullah was a Director of Shangri-La, a contractor who gave advice on the design and construction of residential buildings. Shangri-La was contracted by MMD Mazor Construction to build apartments in Clayton. The contract was governed by the Domestic Building Contracts Act 1995 (Vic) (‘DBC Act’)

During construction, Mr Naqebullah advised MMD to use EPS cladding, which was a non-compliant material. This breached the guarantee of fit for purpose compliance under s 8(f) DBC Act. The remediation of the cladding was paid for by the State of Victoria, who thereby subrogated MMD’s ‘rights and remedies’ exercisable against Shangri-La pursuant to s 137F(2) of the Building Act 1993 (Vic) (‘BA’).

The State then sought to recover $3,174,755.99 in damages from Mr Naqebullah personally, as an officer of Shangri-La under s 137F(3) BA. The State obtained Summary Judgment in their favour. Mr Naqebullah requested indemnity from two insurance policies underwritten by various subscribers at Lloyd’s.

The policies covered the periods of 2017/18 and 2018/19.  They were ‘claims made and notified’ policies issued ‘in respect of any civil liability incurred in [Shangri-La’s] conduct of the Professional Business’. Indemnity was denied and Mr Naqebullah issued proceedings against the Underwriters.

The Contracts of Insurance relevantly included the Proposal Forms, the Policy Terms (including the definition of ‘insured’) and the Certificates of Insurance.

Legal Principles

The case provides a useful recapitulation of how the court construes contracts of insurance. The guiding principles are ‘not controversial’ (Delany J, Shangri-La [46]).

The text of the policy is paramount and must be construed as a unified whole in light of its commercial context and purpose (MLC Nominees v Daffy; Beech J in Todd v Alterra at Lloyd’s). This effectively requires the Court to ask what a ‘reasonable businessperson’ would have understood the words of the policy to mean (Bathurst CJ in Bank of Queensland Ltd v AIG Australia Ltd).

If ambiguity persists, it is ordinarily resolved in favour of the insured but still within the ambit of the ‘natural meaning of the words’ (Gibbs CJ in Australian Casualty Co Ltd v Federico). Typically, the court uses a more ‘liberal’ approach to resolving ambiguity in insurance policies compared to other commercial contracts (MLC Nominees v Daffy).

Judgment

There were three questions answered by the court:

1. Whether Mr Naqebullah was ‘an insured’. He was.
2. Whether there was a ‘claim made and notified’. There was not.
3. Whether the indemnity was in respect of ‘civil liability’ incurred during the conduct of ‘professional business’. It was not.

Policy Coverage

An ‘Insured’ was poorly defined in the Policy Definitions, referring to the ‘legal entity specified in the schedule and employees thereof’. It did not specify whether directors were covered. There was also an ambiguity as to whether the Proposal Form included directors of the company.  Relevantly, the court considered that the form did not (impliedly or otherwise) require the Directors to be listed individually and that it asked several questions about the professional qualifications, experience and status of the directors.

From a proper interpretation of the holistic Contracts of Insurance, the court found ‘an insured’ was to extend to any directors of the insured companies. Mr Naqebullah was a director of Shangri-La, and by that token he was an ‘insured’. In the alternative, he was a third-party beneficiary pursuant to s 48 of the Insurance Contracts Act 1984 (Cth).

Claims Made and Notified

Relevantly, the 2017/18 and 2018/19 policies indemnified for:

• Any Claim first made against any of the Insureds;
• During the Period of Insurance; and
• Notified by the Insured to the Underwriters, in writing, during the Period of Insurance.

However, the s 137F BA right of subrogation only passed into law in 2020, after both policies’ periods had expired. The state availed itself of that right against Mr Naqebullah in 2022. The liability incurred by Mr Naqebullah was incurred pursuant to that availing, such that the ‘claim first made against’ Mr Naqebullah was the claim founded by s 137F BA in 2022. Consequently, there was neither claim nor notification during the period of insurance which pertained to that liability.

Mr Naqebullah argued that the State’s 2022 claim should be aggregated with earlier claims against his EPS cladding advice that were putatively made and notified during the policy periods. The court rejected this argument, finding that a later claim arising after the expiry of the policy period cannot be aggregated back to claims made within it. To hold otherwise could dramatically widen the insurer’s liability beyond the relevant policy period. This was not supported by the text of the policy, and it would have ‘defeat[ed]’ the commercial objective of ‘made and notified’ policies (Delany J, Shangri-La [128]).

Strict Liability

The court also found that the nature of Mr Naqebullah’s liability was not ‘in respect of any civil liability’, and therefore not covered by the policy. Mr Naqebullah had strict, statutory liability under s 137F(2) BA. This was not ‘civil liability’ incurred during ‘Professional Business’. That is, Mr Naqebullah was not liable under s 137F(2) BA for any personal wrongdoing. Rather, he incurred liability in his capacity as a director of a company, where that advice was given, he was aware that it had been given, and it had breached the statutory warranties under s 8 DBC Act.

Thus, even if the claim had been made and notified in the relevant period, the liability was not of a kind covered by the policy. Mr Naqebullah’s claim against the Underwriters was dismissed.

Key Takeaways

Insurance Policy Interpretation

Policies are interpreted as a whole, starting with the text in light of its commercial context and purpose. Ambiguities are ordinarily resolved in favour of the Insured within the natural meaning of the words. The court may look to extrinsic material for assistance.

Policy Blind Spots

The court’s interpretive exercise can catch both policy holders and insurers by surprise. Directors of companies, like Mr Naqebullah, may be covered by an insurance policy even if they are not named personally. Further, Professional Indemnity Policies might not extend to cover you for statutory liabilities.

This reinforces the importance of carefully understanding the language and effect of your insurance policies. If you are ever unsure, you are well advised to contact experienced insurance lawyers like Elit Lawyers by McGirr and Snell.

Danielle Snell, Managing Partner & Co-Founder | [email protected] | 0401 812 885

Robert McGirr, Partner & Co-Founder | [email protected] | 0413 944 023

Article co-authored by Ned Dwyer, Paralegal at Elit Lawyers