When a director's $3.7m cladding bill falls through the cracks of his PI cover

If you insure construction industry participants, broker their cover, or are a director of a building company, the Supreme Court of Victoria has handed down a relevant decision involving a design and construct contractor who was found not to be entitled to indemnity under their professional indemnity insurance policy in respect of a multi-million dollar cladding liability.   

In Owners Corporation 1 Plan No. PS 640567Y v Shangri-La Construction Pty Ltd [2026] VSC 117 (Shangri-La), a managing director of a design and construct builder, having been ordered to pay over $3.7 million (including interest) to the State of Victoria under the cladding subrogation provisions of the Building Act 1993 (Vic) (Building Act), was denied any entitlement to indemnity under the company’s historical claims made and notified professional indemnity policies.

While the Court accepted that the director was an ‘Insured’ under the policies, it found that no ‘Claim’ had been made and notified during the relevant policy periods, and that in any event his liability was not ‘incurred in [the] conduct of the Professional Business’ within the meaning of the relevant insuring clause.

Factual background

In 2011, Shangri-La Construction Pty Ltd, a residential design and construct contractor, (Shangri-La) entered into a domestic building contract for the design and construction of an apartment building in Clayton, Victoria (the Building). During the project, the managing director, Mr Obaid Naqebullah, recommended that the external façade be clad with 100mm expanded polystyrene (EPS) panels finished in acrylic render. The EPS recommendation was accepted by the project manager, the specification was drafted (largely by Mr Naqebullah himself), and the building was constructed in accordance with his recommendation.

Unfortunately for the apartment owners, and ultimately Mr Naquebullah, the EPS recommendation resulted in the construction of an apartment building by Shangri-La in breach of the warranty implied by s 8(f) of the Domestic Building Contracts Act 1995 (Vic). That is, where the contract specifies a particular purpose for which the work is required, or result the owner wishes the work to achieve, the builder relevantly warrants that the work ‘and any material used in carrying out the work will be reasonably fit for that purpose’. 

In this instance Shangri-La’s warranty breach occurred because the EPS panels installed at the property were combustible; were not approved for use under the Building Code of Australia; their use was not signed off by the relevant building surveyor, as an alternative solution; and they did not match the approved drawings.[1]

In 2020, following the enactment of the cladding rectification regime, the State of Victoria via Cladding Safety Victoria provided financial assistance to the owners to rectify the non-compliant cladding. It then sought to recover the amounts paid rectifying the cladding defects by exercising its statutory right of subrogation under s 137F of the Building Act, a strict liability provision enabling the State to pursue not only the company but also the people who were its officers at the relevant time.[2]

In October 2025, the Court granted judgment in favour of the State against Mr Naqebullah personally in the amount of $3,174,775.99 (excluding GST) plus $550,672.14 in interest.[3] Enforcement of that multimillion-dollar judgment was deferred pending determination of Mr Naqebullah’s third-party claim for indemnity against Certain Underwriters at Lloyd’s (together, Underwriters)  pursuant to two design and construction PI policies of insurance covering the periods 6 August 2017 to 6 August 2018 and 6 August 2018 to 6 August 2019 (Policies).[4]

The Policies were written on a ‘claims made and notified’ basis.[5] The relevant Insuring Clause in the Policies (Insuring Clause) provided that the Underwriters would:[6]

‘Indemnify the Insured against any Claim first made against any of them, during the Period of Insurance and notified by the Insured to Underwriters in writing during the Period of Insurance in respect of any civil liability incurred in their conduct of the Professional Business.’

The definition of ‘Professional Business’ relevantly included the design, drafting, technical calculation and specification work,[7] and ‘Claim’ was relevantly defined to include an originating legal or arbitral process alleging breach of professional duty (limb (a)); or any demand alleging civil liability or breach of professional duty in the conduct of the Professional Business (limb (b)).[8] The definition of ‘Claim’ also included the following aggregation provision:[9]

‘All Claims arising from the same act error or omission, or consequent upon or attributable to one source or original cause, shall be deemed to be a single Claim.’

Key issues before the Court

There were three key questions that the Court considered necessary to determine, namely:

• was Mr Naqebullah an ‘Insured’ under either of the Policies[10]
• was a ‘Claim’ first made against him and notified to underwriters within the period of insurance of either of the Policies,[11] and
• was the liability ‘a civil liability incurred in [the] conduct of the Professional Business’.[12]

The Court’s decision

Justice Delany found in Mr Naqebullah’s favour on the first question only and dismissed the third-party claim.[13] His Honour held that:[14]

• Mr Naqebullah was an Insured under the Policies
• no Claim had been first made against Mr Naqebullah and notified to Underwriters within the period of insurance of either of the Policies, and
• the indemnity sought was not in respect of a civil liability incurred in the conduct of the Professional Business.

The Court’s reasoning

1. Was the director an Insured?

Although Mr Naqebullah was not named as an Insured on either Certificate of Insurance, the Court held that he was nevertheless an Insured under both Policies.[15] Objectively, it was clear that the parties to the contracts of insurance intended for any directors of Shangri-La would be insured under the Policies.[16] In reaching this conclusion, the Court drew on two observations:[17]

• first, the Proposal Form that demanded extensive information about directors including their names, ages, qualifications, professional memberships, locations of responsibility, and even their personal financial connections.[18] The form did not invite the person completing the form to name the directors who were intended to be insured.[19]
• second, the policy wording of ‘Insured’.[20] Though his Honour acknowledged its definition was ‘poorly structured and expressed’,[21] it was held that it extended to directors at the time as well as the company and its employees, when given a businesslike interpretation.[22]

In the alternative, his Honour found Mr Naqebullah qualified as a ‘third party beneficiary’ under s 48 of the Insurance Contracts Act 1984 (Cth) (Insurance Contracts Act), because he was named in the Proposal Forms in his capacity as a director of Shangri-La.[23]

2. Was there a timely Claim?

The insuring clauses in the Policies only provided indemnity to the Insured against any Claim first made or notified during the period of insurance.[24] This issue was fatal to Mr Naqebullah’s claim. The Court held that no Claim had been made against Mr Naqebullah personally during either period of insurance.[25] This was because s 137F of the Building Act, being the statutory basis for his personal liability, did not come into operation until 16 December 2020, well after both Policies had expired.[26] Mr Naqebullah was not joined to the proceeding until 2024.[27]

Central to his Honour’s finding on this issue was the word ‘incurred’ in the Insuring Clause. There was no Claim capable of being made or notified against Mr Naqebullah within either period of insurance because the relevant legislation did not exist until after the Policies had concluded.[28] Further, Mr Naqebullah only incurred his liability to the State upon it obtaining judgment against him in late 2025.[29]

Additionally, the Court had regard to the aggregation clause which ordinarily provides that all Claims arising from the ‘same act, error or omission’, or consequent upon ‘one source or original cause’, are deemed to be a single Claim. Mr Naqebullah’s argument was that this language collapsed his 2022 exposure into a 2017 or 2018 Claim. The Court rejected this argument entirely.[30] The deeming words in the definition of ‘Claim’ were found to operate to limit Underwriters’ exposure where there are multiple Claims sharing one original cause.

However, those words were not found to extend the temporal reach of the Insuring Clause by treating a later Claim as having been made within an earlier period of insurance.[31] To construe such a clause otherwise would, his Honour reasoned, expose insurers to claims many years after the expiry of the policy simply because those Claims arose from the same act or omission as a Claim made and notified during the policy period.[32] It was found that such a construction would ‘defeat the commercial purpose’ of a ‘claims made and notified’ policy.[33]

3. Was the liability ‘incurred in’ the conduct of the Professional Business?

Even if the Claim had been made and notified within time, the Court held that the action would nevertheless have failed on the basis that the liability in respect of which indemnity was sought was not ‘incurred in [Mr Naqebullah’s] conduct of the Professional Business’.

His Honour accepted that Mr Naqebullah had in fact provided some services falling within the definition of ‘Professional Business’ including the provision of design advice and the preparation of the EPS recommendation and that, as a registered building practitioner, he provided services of a ‘skilful character according to an established discipline’.[34]

However, the fact that he had performed professional services was not considered relevant.[35]  This was because s 137F imposes strict liability on the officers of a builder (such as Mr Naqebullah) for their act or omission in installing non-compliant cladding. It was held that s 137F does not require any allegation or finding of breach of professional duty.[36] The State was not required to establish any failure in design or specification, only that non-compliant cladding had been installed and that Mr Naqebullah was an officer of the company when it happened. In other words, s 137F imposed strict liability on Mr Naqebullah solely because he was an officer of Shangri-La at the time of the installation or use of non-compliant or non-conforming external wall cladding. As his Honour put it, the liability ‘arose from what was built, not from what was designed or recommended’.[37]

Key implications

• The failure to name directors in a policy schedule may not preclude their entitlement to indemnity under a policy, particularly where information sought and provided at the time of the proposal and the policy wording indicate an intention for directors to be separately indemnified. Where there is no intention for cover to extend to directors personally, this should be clearly stated in the policy.
• In claims made and notified policies, where the definition of Claim includes an aggregation clause, Courts may not be receptive to an argument that Claims first made long after the expiry of the period of insurance are to be aggregated as a single Claim within the period of insurance.
• Subject to the consideration of the PI policy wording in question, cladding liabilities imposed on directors pursuant to s 137F of the Building Act are unlikely to constitute civil liabilities incurred in the conduct of a professional business because they are instead strict liabilities imposed by statute as a result of the installation of non-conforming external wall cladding products.
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• [1] Owners Corporation 1 Plan No. PS 640567Y v Shangri-La Construction Pty Ltd [2026] VSC 117 at [28] (Shangri-La).

[2] Ibid at [28], [37], [123].

[3] Ibid at [4].

[4] Ibid at [1]–[2], [4].

[5] Ibid at [18].

[6] Ibid at [17].

[7] Ibid at [21].

[8] Ibid at [19].

[9] Ibid.

[10] Ibid at [52]–[79].

[11] Ibid at [80]–[81].

[12] Ibid at [134]–[168].

[13] Ibid at [11], [170]. See also: ibid at [172]–[173].

[14] Ibid at [11].

[15] Ibid at [11(a)].

[16] Ibid at [55].

[17] Ibid at [76].

[18] Ibid at [57]–[67].

[19] Ibid at [60].

[20] Ibid at [68].

[21] Ibid at [69].

[22] Ibid at [72]–[75].

[23] Ibid at [77]–[79].

[24] Ibid at [80].

[25] Ibid at [11(b)], [114].

[26] Ibid at [81], [123].

[27] Ibid at [81].

[28] Ibid at [123].

[29] Ibid at [122].

[30] Ibid at [125].

[31] Ibid at [127].

[32] Ibid at [126]–[127].

[33] Ibid at [128].

[34] Ibid at [154]–[155].

[35] Ibid at [156].

[36] Ibid at [163].

[37] Ibid at [162].