A director personally hit with a $3.7 million cladding judgment has been denied indemnity under his company's professional indemnity policy by the Victorian Supreme Court.
In a judgment handed down on March 16, 2026, Justice Delany dismissed the third-party claim brought by Obaid Naqebullah, the managing director of Shangri-La Construction Pty Ltd, against Certain Underwriters at Lloyd's in Owners Corporation 1 Plan No. PS 640567Y v Shangri-La Construction Pty Ltd [2026] VSC 117.
The dispute arose from Shangri-La's use of expanded polystyrene (EPS) cladding on a residential building - a product the Court found was non-compliant with the Building Code of Australia and not permitted under the relevant regulations. The State of Victoria, exercising its subrogation rights under the cladding rectification provisions of s 137F of the Building Act 1993 (Vic), obtained summary judgment against Mr Naqebullah in October 2025 for $3,174,775.99 (excluding GST) plus $550,672.14 in interest. His liability was strict - imposed solely because he was an officer of the company at the time of the breaches.
Mr Naqebullah sought to recover under two consecutive design and construction professional indemnity policies issued by Arch Underwriting at Lloyd's (Australia) Pty Ltd, covering consecutive periods from August 2017 to August 2019.
The Court addressed four questions, finding in Mr Naqebullah's favour on only one.
On whether he qualified as an "Insured," Justice Delany said yes. The Proposal Forms had asked detailed questions about directors' qualifications, experience, and professional memberships - and the definition of "Insured" in the policy terms referred to "directors, company ... the legal entity specified in the Schedule and Employees thereof." The Court concluded that directors were intended to be covered, even without being individually named in the Certificate of Insurance. That finding alone should give pause to professional indemnity insurers reviewing how their proposal forms interact with their policy definitions.
But the remaining findings went against Mr Naqebullah. Both policies were "claims made and notified" in nature, requiring a claim to be first made and notified during the policy period. The legislation underpinning his personal liability did not come into operation until December 16, 2020 - well after both policy periods had expired. The State's claim against him was not made until September 2022.
Mr Naqebullah argued that the aggregation clause - which deems claims arising from the same original cause to be a "single claim" - should pull his 2022 exposure back into the earlier policy periods, linking it to claims made against Shangri-La in 2017 and 2019. The Court rejected that argument, holding that such a reading would undermine the commercial purpose of claims-made-and-notified coverage.
On the question of whether his liability arose "in the conduct of the professional business," the Court again sided with the underwriters. While Mr Naqebullah had undeniably provided design advice and drafted the building specification, his statutory liability under s 137F arose from the installation and use of non-compliant cladding - construction-related activities expressly carved out from the policy's definition of professional business. As the court put it, the liability arose from what was built, not from what was designed or recommended.
A fourth question, regarding a cladding endorsement in the later policy, did not need to be reached.
The case highlights a coverage gap at the intersection of cladding liability legislation and professional indemnity insurance - one that insurers, brokers, and policyholders in the building sector will need to watch closely.
