In Local Government Mutual Funds Trustee Limited v Napier City Council [2023] NZSC 97 the Supreme Court delivered a decisive judgment in a long running dispute over whether an exclusion clause in an insurance policy excluded cover for non-weathertightness building defects.
The Napier City Council had paid $12.355 million to settle a building defects claim brought against it by the owners of the Waterfront Apartments, a 51-unit apartment complex. The Council accepted that it had no insurance cover in respect of its liability for weathertightness defects in the Waterfront Apartments, but it maintained it had cover for non-weathertightness defects. The insurer declined to cover the Council, so the Council sued its insurer. The High Court upheld the insurer’s position, but the Council successfully appealed to the Court of Appeal. The Council’s insurer then appealed to the Supreme Court. As noted above, the Supreme Court has now dismissed the insurer’s appeal.
Background
In 1997 the New Zealand Local Government Insurance Corporation Ltd established RiskPool, a mutual scheme, to provide an alternative to commercial insurance for councils. The purpose of RiskPool was to enable local authorities to pool risk and to act as insureds and insurers.
Initially, RiskPool provided professional indemnity insurance to councils and covered weathertightness claims. However, leaky building claims and the unavailability of reinsurance, meant that cover for weathertightness claims was phased out over time.
From 2009 onwards, RiskPool excluded cover for weathertightness claims. It introduced, and relied on, an exclusion clause which stated that the insurance contract did:
“not cover liability for Claims alleging or arising directly or indirectly out of, or in respect of … the failure of any building or structure to meet … the requirements of the New Zealand Building Code … in relation to leaks, water penetration, weatherproofing, moisture, or any water exit or control system”.
(the exclusion)
In 2012, and in relation to a different building, Napier City Council notified a claim to RiskPool which alleged losses arising from weathertightness and non-weathertightness defects (the 2012 Claim). RiskPool declined to indemnify the Council for the 2012 Claim on the basis that the weathertightness exclusion excluded that claim entirely. The Council did not reply to RiskPool, and instead appears to have accepted RiskPool’s position in relation to the 2012 Claim.
In 2013 the Napier City Council was sued by owners of a 51-unit development known as the Waterfront Apartment complex. The owners claimed the Council had been negligent in issuing building consents, failing to ensure adequate inspections took place, and issuing code compliance certificates. The owners alleged a range of construction defects. This included weathertightness defects and other defects that did not involve any weathertightness aspect such as structural or fire defects.
The Council notified RiskPool of this claim, and RiskPool declined cover on the same basis as it had in relation to the 2012 Claim.
In 2019 the Council settled with the owners and other parties involved in the construction of the Waterfront Apartments. The Council paid $12.355 million towards a global settlement. The other parties paid a further $1.295 million towards that settlement.
The Council then sued RiskPool seeking indemnity for the non-weathertightness part of the settlement. The Council accepted that the weathertightness excluded cover for the cost to repair all weathertightness defects, but RiskPool declined the entire claim on the basis that the exclusion (as set out in full above) excluded the entire claim.
At first instance, the High Court agreed with RiskPool. The High Court reached its decision partly by relying on correspondence relating to the 2012 Claim.
However, the Council appealed, successfully, to the Court of Appeal.
Interpretation of the exclusion
The Court of Appeal noted that contracts of insurance are to be interpreted in the same way as any other contract. Interpretation is an objective search for common intention. The Court of Appeal cited with approval a leading insurance law text (Derrington and Ashton) which explained, that as a general principle, an insuring clause should be given a liberal construction in favour of cover, while an exclusion should be construed strictly.
The Court of Appeal found that the Policy made it clear what was meant: cover does not extend to liability for claims “alleging or arising directly or indirectly out of, or in respect of” a weathertightness defect. So, an inquiry into the nature of the Council’s liability was required.
For the exclusion to apply, there had to be a connection between a weathertightness defect and the Council’s liability.
The Court of Appeal also found that the weathertightness exclusion only applied to the extent that weathertightness defects caused (directly or indirectly) the loss for which compensation was claimed. The Court of Appeal did not consider that Riskpool and the Council had intended to exclude liability for sums not causally related to weathertightness. The language used did not support this conclusion.
Admissibility of extrinsic evidence
The Court of Appeal also gave useful guidance on the Supreme Court decision of Bathurst Resources Ltd v L & M Coal Holdings Ltd [2021] NZSC 85, [2021] 1 NZLR 696. In Bathurst the Supreme Court held that the admissibility or otherwise of extrinsic evidence, to interpret a contract, is to be regarded as an evidential issue. The approach taken in Bathurst is very open and could potentially render almost any background information relevant to contractual interpretation. Fortunately, however, the Court of Appeal has walked back the potential open-endedness of Bathurst.
The Court of Appeal said that the objective approach to contract interpretation is grounded in policy objectives of certainty, of holding people to their bargains, and of efficiency in the conduct of proceedings. Where parties have framed their contract in writing the intended meaning is extracted from the document. The language of the document retains primacy, and evidence extrinsic to the document is confined to what a reasonable person would consider relevant.
In a statement that may be widely cited in the future, the Court of Appeal said:
So extrinsic evidence is admissible if it crosses a threshold of a) relevance and b) probative value relative to the risk that it will needlessly prolong the proceeding. When approaching the threshold courts must look first to the language of the contract, interpreted in accordance with ordinary usage. That language retains primacy and its ordinary meaning is a powerful, but not conclusive, indication of shared meaning. Extrinsic evidence must be adjudged reasonably capable of altering the ordinary meaning before it is admissible. As with any reasonableness standard, this calls for the exercise of judgement.
Applying these principles, the Court of Appeal disagreed with the approach taken by the trial Judge, who had reached their conclusion in part based on the evolution of the Policy, and the parties’ conduct after it took its final form in 2009. The Judge had reasoned that this evidence might resolve ambiguities in the language of the Policy. However, the Court of Appeal considered that there was no ambiguity in the language of the Policy, so there was no need to have regard to this material. Similarly, the correspondence in relation to the 2012 claim was found to be irrelevant and inadmissible to interpret the Policy.
The Court of Appeal also rejected an argument by RiskPool that it had intended to exclude cover for all claims “involving” moisture ingress. RiskPool had used the word “involving” in some extrinsic materials it prepared in relation to the weathertightness exclusion. But the word “involving” did not appear in and was not relevant to interpreting the exclusion.
Commercial Absurdity?
The Council argued that RiskPool’s approach would lead to absurdity and gave the scenario whereby it was sued for entirely non-weathertightness defects (so the claim was covered) but the claimant then amended the claim to include a single weathertightness defect. At that point the claim which was previously entirely covered would become entirely uncovered because it was “tainted”.
The Court of Appeal considered this to be a telling argument. If Riskpool was right a claim would be excluded if a “trifiling” part of it was casually connected to weathertightness. This would amount to the “tail wagging the dog” and the Court of Appeal did not see any intention in the Policy, or the context, to permit that.
Supreme Court
In the Supreme Court RiskPool’s argument focused closely on the meaning of the word “Claim”. Riskpool argued that each of the unit owners had a single claim and as their claims included weathertightness (given the weathertightness defects were present in the building) that was enough to exclude cover.
RiskPool also argued that the subject of the exclusion was the Claim and that the Claim could not be divided into weathertightness and non-weathertightness defects.
The Supreme Court disagreed. It concluded when the exclusion clause was read as a whole, in context, it was clear that the common intention was only to exclude weathertightness risks. However, the Council faced liability for separate and divisible loss for breach of weathertightness and non-weathertightness breaches of the Building Code. The Supreme Court also concluded that the correspondence between Riskpool and the Council did not assist with interpreting the meaning of the exclusion clause, and that there was no error in the Court of Appeal’s interpretation of the exclusion clause.
Outcome
In the end result the exclusion did not apply. So, Napier City Council may recover a portion of the $12.355 million it paid to settle the claim against it. The figure payable to the Council by Riskpool is still to be confirmed.
If you would like to discuss any of the issues raised in this article, please contact Geoff Beresford | Civil Litigation and Insurance Partner | 0277 396 896
Disclaimer. The information in this article is intended to provide a summary of the topic covered and is for general information only. It is provided without charge, is not comprehensive, and does not provide legal advice or other advice. Please seek independent advice before acting on any information in this article.