Insurance cover for weathertightness defects have been excluded by most insurance policies for many years in New Zealand – a consequence of the prolific leaky building claims of the 2000s.
The Court of Appeal has recently considered whether a weathertightness exclusion can apply to exclude an entire claim, even if a significant portion of the claim does not relate to weathertightness defects (Napier City Council v Local Government Mutual Funds Trustee Limited [2022] NZCA 422).
The Court of Appeal held that the exclusion only applied to the extent that the Council’s liability arose from weathertightness defects (or combined defects). In doing so, it overturned the High Court Decision of Justice Grice.
Background
In 2013, the owners of a multi-unit apartment block issued proceedings against Napier City Council and other parties involved in the apartment’s construction. There were three broad categories of alleged defects: fire protection, structural, and watertightness (though some were a combination).
The owners sought compensation from the Council for negligently issuing the building consent. They claimed the total cost to remedy the defects from the Council, which included all categories of defects.
The Council sought cover from its insurer. However, Riskpool declined cover in reliance on a weathertightness exclusion. Riskpool said that as there was only one claim against the Council (the claimants seeking the full sum to remedy all the issues), the exclusion could be relied on. This was despite the fact that there were some defects that did not relate to weathertightness at all.
The Council settled the owners’ claims and issued proceedings against Riskpool for breaching the policy. The High Court found in favour of Riskpool – the exclusion did exclude the entire claim.
Court of Appeal decision
The Court of Appeal adopted what has been the generally agreed approach to interpreting insurance policies – insuring clauses should be given liberal constructions in favour of cover, and exclusion clauses should be construed strictly and narrowly.
The Court accepted Riskpool’s submission that a claim, at its highest level, can be described as a demand for compensation. However, the application of the exclusion required an inquiry into the real nature of the Council’s liability, which may descend into the level of particulars. A casual connection between the weathertightness defect and the Council’s liability to pay the compensation demanded was needed. The Court concluded that the language of the exclusion meant that a claim is not covered only to the extent that weathertightness defect was a direct or partial cause of the loss for the compensation claimed.
The Court of Appeal considered that it would be commercially absurd to accept Riskpool’s interpretation as there would be no cover for an entire claim just because “a trifling part of the demand is causally connected to weathertightness.” Justice Grice had adopted the de minimis concept to overcome this absurdity, but the Court of Appeal found that principle had no application here.
Key takeaways
The Court of Appeal’s decision returns the law to the conventional understanding the application of exclusion clauses. This has allowed parts of building defect claims to be covered while other parts are excluded. Insurers have adopted this approach for many years, including during the leaky building claims period.
This decision is a good reminder for insurers and brokers of the impact of exclusions and how they will be interpreted. Exclusions must be drafted with the most explicit language. The Court did confirm, however, that exclusions can carve out coverage to an “extensive degree,” subject to clear drafting.
The decision is worth a read. In addition to the above, it also includes: (i) the application of the recent Supreme Court decision on the approach to the admissibility of pre contractual negotiations in the interpretation of contracts; and (ii) what is required of an insured where it settles a claim in circumstances where an insurer has incorrectly declined cover for the claim. We understand that an appeal to the Supreme Court is being considered.
Darroch Forrest regularly acts for both insurers and insured businesses in construction litigation claims. If you have any questions about this article or indemnity coverage in the construction space, please don’t hesitate to reach out.
