Cladding, Directors and the Limits of Professional Indemnity Insurance: Lessons from Shangri‑La for English and Welsh Practitioners

The Supreme Court of Victoria’s recent decision in Owners Corporation 1 Plan No. PS 640567Y v Shangri‑La Construction Pty Ltd [2026] VSC 117 (“Shangri‑La”) is an Australian judgment that sits at the intersection of three issues: the post-Grenfell cladding liability landscape, the proper construction of professional indemnity (“PI“) insurance and the exposure of directors to personal liability for the defaults of their companies.

What happened and how did the policy respond?

The underlying dispute concerned non-compliant expanded polystyrene foam (“EPS”) cladding installed on a residential building, which was not a product permitted for such use by the relevant regulations and codes. Remediation works were funded by the State of Victoria (the “State”). The State then commenced legal action against Mr Naqebullah (a director of Shangri‑La Construction Pty Ltd (“SCP”)) to recover the cost of such works.

Delany J gave judgment for the State against Mr Naqebullah in the amount of AUD$3.17 million (plus tax and interest). The liability originated from s137F(3) of the Building Act 1993 (Vic), which provides that where a right or remedy is exercisable against a non‑individual entity, it is enforceable jointly and severally against the entity and its officers at the time the relevant act or omission occurred.

Mr Naqebullah then brought a third-party claim for indemnity under two PI policies (2017/18 and 2018/19 (the “Period of Insurance”)) incepted by SCP.

There are three key issues (amongst others) that fell for determination:

1. whether Mr Naqebullah was an insured under the PI policies;
2. whether there was a claim made and notified within the Period of Insurance; and
3. whether the indemnity was “in respect of any civil liability incurred in their conduct of the Professional Business“.

Issue 1: Was the Director an ‘insured’?

It was held that Mr Naqebullah was an insured under both policies. Viewed objectively, the parties to the contracts of insurance intended for any directors of the insured company to be covered, even without their names appearing on the certificate of insurance. The court relied on the structure of the proposal forms as a whole. The definition of insured was implied to read as follows: “directors [of the] company … the legal entity specified in the Schedule and Employees thereof”.

Relevance to England and Wales

English law takes a similarly purposive, businesslike approach to construing insurance policies, following Investors Compensation Scheme Ltd v West Bromwich Building Society [1998] 1 WLR 896 and the Supreme Court’s confirmation in Arnold v Britton [2015] UKSC 36. Where the policy wording is ambiguous, courts will consider the factual matrix, commercial purpose and the reasonable expectations of the parties.

The contra proferentem principle (that ambiguous policy language is to be construed in favour of the insured), though applied cautiously, remains available where policy language drafted by the insurer creates genuine ambiguity, a point the Victorian court itself endorsed.

Issue 2: Claims Made and Notified – Can You Aggregate Your Way Back Into Cover?

The court held that there was no claim made and notified within the Period of Insurance of either policy. The key difficulty for Mr Naqebullah was temporal. Mr Naqebullah did not have a claim first made against him within the Period of Insurance of either policy. The originating legal process was not served on him until well after 6 August 2019 and more importantly the State’s claim against him was first communicated in late September 2022.

Mr Naqebullah sought to rely on the aggregation clause, which deems “[a]ll Claims arising from the same act error or omission, or consequent upon or attributable to one source or original cause” to be “a single Claim”, to link his 2022 claim back to an earlier claim notified against SCP during the policy period. The court rejected this approach. The “single Claim” principle is intended to limit underwriters’ liability where there are multiple claims from one source. They do not extend the insuring clause to a claim first made and notified after the expiry of the Period of Insurance.

Relevance to England and Wales

This will strike domestic insurance lawyers as entirely consistent with domestic authority. The nature and purpose of claims-made policies is well established: the insurer’s exposure is strictly bounded by the policy period and the obligation to notify within that period is a condition precedent to cover.

The treatment of aggregation clauses mirrors English and Welsh jurisprudence. In AIG Europe Ltd v Woodman [2017] UKSC 18, the Supreme Court considered the aggregation of claims by reference to “one source or original cause” and emphasised that such clauses serve to cap the insurer’s exposure and set the deductible, not to extend the temporal scope of cover.

The lesson for English and Welsh practitioners (and their construction-sector clients) is stark: ensure that every potential claimant is identified and every potential claim is notified within the correct policy year. Relying on aggregation language to pull a late claim back into an expired policy is, as Shangri‑La confirms, a commercially untenable and textually unsupported argument.

Issue 3: Was the Liability “Incurred in the Conduct of the Professional Business”?

The court further held that the indemnity sought was not in respect of civil liability incurred in the conduct of professional business. Mr Naqebullah’s unchallenged evidence established that he provided at least some of the services specified in the definition of professional business, including design advice and preparation of the specification. As a registered building practitioner who had completed his Diploma of Building Surveying, the court accepted he provided a professional service of a skilful character.

The word “incurred” in the insuring clause was critical. Mr Naqebullah’s liability was incurred by means of the State’s pleaded case and the subsequent judgment which stemmed from the strict liability legislation. No element or part of which required a consideration of his provision of design, specification or advice services. The State’s right of subrogation under s137F(2) was “in relation to the installation or use of” non‑compliant cladding not the design services or advice that led to the selection of the product.

Relevance to England and Wales

This issue goes to the heart of what PI policies are designed to cover: professional services involving the exercise of skill and judgment, not strict or statutory liabilities arising from a person’s status.

Under the Building Safety Act 2022 (“BSA“), England and Wales have developed their own expansive regime of liability for building safety defects. Section 38 of the Building Act 1984 creates a civil right of action for breach of building regulations. The new-build liability provisions in s148–150 of the BSA impose retrospective liability on those responsible for building work.

The key question for English and Welsh practitioners is whether liability imposed under these statutory provisions will fall within the insuring clause of a PI policy. Shangri‑La suggests that where the statutory cause of action targets the physical product (i.e. defective materials, non-compliant installation) rather than the professional service (i.e. negligent design, specification or advice), the nexus to “Professional Business” may be broken.

Key Takeaways for English and Welsh Practitioners

1. Define “Insured” with precision

Ambiguity in the definition of “Insured” in PI policies can cut both ways. Shangri‑La favoured the director, but the safer course is to ensure that directors, partners, consultants and any other intended beneficiaries are expressly named or clearly captured.

2. Aggregation clauses are shields, not swords

Aggregation and “single claim” provisions serve to cap the insurer’s liability. They cannot be used to extend the temporal scope of cover by linking a late claim back to an earlier, related notification.

3. The “incurred in the conduct of” professional services nexus must be real

It is not enough that the insured in fact performed professional work that contributed to the loss. The critical question is whether the civil liability as actually incurred was incurred in the conduct of the insured professional business. Strict statutory liabilities that target what was physically built, rather than the professional process of design or specification, may fall outside the insuring clause.

4. The post-Grenfell statutory landscape demands a fresh look at cover.

The BSA, the amended Defective Premises Act 1972 and s38 of the Building Act 1984 have fundamentally altered the liability landscape for construction professionals and building companies in England and Wales. The assumptions underpinning existing PI wordings (many of which were drafted long before these reforms) may no longer hold. A proactive review of policy terms is essential.

Conclusion

Shangri‑La is an Australian case, but its lessons travel well. It is a cautionary tale about the limits of PI insurance in the face of expanding statutory liability regimes; a tale that English and Welsh practitioners, insurers and policyholders would be wise to heed. As the BSA continues to reshape the construction liability landscape, the questions raised by Shangri‑La will only become more pressing.

If you would like to discuss the implications of this case, please contact our Construction and Insurance Disputes teams.