Scope and limit of weathertightness exclusions

Napier City Council v Local Government Mutual Funds Trustee Ltd [2018] NZHC 2269

A recent High Court decision by Justice Hinton has considered whether an insurer can rely on an exclusion clause to deny indemnity in respect of an entire claim, where only parts of the claim were likely caught by the exclusion.

Background

In 2013, the owners of the Waterfront Apartments issued proceedings against Napier City Council (the Council) and ten others involved in the construction of the apartment complex.  The statement of claim pleaded one cause of action in negligence against the Council, namely that it breached its duty of care in each of the three components of its role (issuing building consents, inspection/construction, and issuing Code Compliance Certificates).  As a result of the breaches, the plaintiffs claimed that the apartments were defectively constructed.

The alleged defects were categorised based on the part of the Building Code that had allegedly been breached.  Some of these breaches and therefore defects, were categorised as being weathertightness or part-weathertightness defects, and some non-weathertightness defects.  The total cost of remedial work was estimated at $9,336,298.

The Council sought cover in relation to the claim from its insurers, Local Government Mutual Funds Trustee Ltd (Riskpool).  However, Riskpool declined the Council’s claim for indemnity on the basis that the policy excluded cover for claims alleging or arising directly or indirectly out of or in respect of weathertightness issues.

The Council issued declaratory proceedings against Riskpool seeking an order that Riskpool has to indemnify it for liabilities the Council may have to the plaintiffs, arising from non-weathertightness defects, together with its own costs and expenses incurred in the proceedings.  The Council accepted that it would not be indemnified for any weathertightness defects and/or part-weathertightness/mixed defects, due to the policy exclusion.

Riskpool’s Application

Riskpool sought to have the Council’s application struck out on the basis that the Council had no tenable claim for indemnity in respect of any liability the Council had to the Waterfront Apartments plaintiffs.  The essence of Riskpool’s argument was that if the liability faced by the Council at all related to weathertightness defects, then the exclusion applied and Riskpool had no obligation to indemnify, even in respect of those portions of the claim which had nothing to do with weathertightness defects.

Riskpool’s argument centred around the meaning of the term “Claim”.  The policy defined “Claim” to be “the demand for compensation made by a third party against [the Council].”  Therefore, Riskpool argued that the “Claim” was the entirety of the plaintiffs’ claim against the Council as it was contained in one statement of claim with one demand for compensation.  On that basis, Riskpool argued that the “Claim” as pleaded “alleges or arises directly or indirectly out of, or is in respect of” weathertightness defects (at least in part) and therefore the exclusion applies to the entire pleaded claim.

Justice Hinton did not accept Riskpool’s argument.  In Her Honour’s view, the focus needs to be on the language of the exclusion and not on the meaning of “Claim”.  The exclusion referred to “Claims” (plural) arising out of the failure of a building (singular). Accordingly, Her Honour read the exclusion as referring to claims in relation to different defects as it excluded cover for “Claims” arising out of the failure of any building to meet the Building Code in relation to weathertightness defects.  Her Honour considered that it logically followed that the policy covered liabilities for claims arising out of the failure of any building not in relation to weathertightness defects, or more precisely, that such liability was not excluded.

In reaching this decision, Her Honour felt that it was necessary to overlook “craftiness or clumsiness” of a pleading and look at the “real nature” of the claims.  Therefore, the single pleading of negligence was not a barrier to the Council arguing for a separation of the multiple defects. Further, Her Honour held that for Riskpool to succeed in its “all or nothing position” that the entire claim was excluded, it would have had to have made the wording in the policy unequivocal about the limits of the exclusion.  

Ultimately, the Court concluded that the Council could arguably demonstrate at trial that while there was a single statement of claim, it nevertheless could incorporate multiple distinct claims, some caught by the exclusion and some not.  Her Honour therefore declined Riskpool’s strikeout application.

Comment from Virginia Wethey (Senior Associate)  

The case serves as a useful tool in policy interpretation.  Most liability policies include some form of weathertightness exclusion or sub-limit and it is useful to understand how the Court views these to operate where proceedings are brought that include a mixture of claims alleging weathertightness defects and non-weathertightness defects.