In August last year we reported on the High Court decision of Grice J in Napier City Council v Local Government Mutual Funds Trustee Limited (Riskpool). In that decision, Her Honour held that the Council was not indemnified under its professional indemnity insurance policy with Riskpool as the claim against it was in respect of both weathertightness and non-weathertightness defects. Consequently, the policy’s weathertightness exclusion clause applied to the entire claim. At the time, we commented that the decision may have come as a surprise to many in the insurance industry as it went against the approach taken by many insurers, which was to differentiate between weathertightness and non-weathertightness defects when considering indemnity. It was only when there was a defect which was caused or contributed to by an excluded peril that was excluded from cover.

The decision was appealed earlier this year. In a decision released only a few weeks ago, the Court of Appeal has reversed the High Court’s decision. In doing so, the Court of Appeal has confirmed that the correct approach is to differentiate between weathertightness and non-weathertightness defects when applying an exclusion. The decision has also provided useful authority on the use of extrinsic evidence, the de minimis principle and apportionment.

Background

In 2013, the owners of Waterfront Apartments issued proceedings against Napier City Council and other defendants involved in the construction of the apartments, alleging defective construction. The statement of claim pleaded one cause of action in negligence against the Council. Some of the defects were categorised as being weathertightness or part-weathertightness defects, and some non-weathertightness defects, such as fire protection and structural defects.

The Council sought cover under its policy with Riskpool. However, Riskpool declined cover on the basis that the exclusion did not cover claim(s) alleging or arising directly or indirectly out of, or in respect of, weathertightness issues. Specifically, Riskpool argued that as the claim included weathertightness defects, the entire proceeding was excluded from cover.

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

Initially Riskpool sought to strike out the Council’s claim on the basis that it had no tenable claim for indemnity as the plain meaning of the policy’s weathertightness exclusion clause was that a “Claim” was excluded in its entirety if it was tainted by a weathertightness defect. Neither the High Court not the Court of Appeal was prepared to strike out the Council’s application at an interlocutory stage. As a result, the proceedings returned to the High Court for a full hearing before Grice J in July and August 2020.

High Court decision

In the High Court, Grice J held that ascertaining the meaning of “Claim” was key to deciding whether the exclusion applied only to weathertightness defects or to the entire proceeding. In interpreting the meaning of the word “Claim”, Her Honour concluded that there was no cover for “liability for Claims [being the demands for compensation made by a third party…] alleging or arising directly or indirectly out of…” weathertightness defects. She held that it was clear that the word “liability” governed the word “Claims” rather than the weathertightness defects.

Grice J noted that to construe the true meaning of the exclusion clause, there needs to be consideration of the parties’ mutual intention. This requires an objective assessment having regard to all the background information known or reasonably available to the parties at the time the contract was entered into. This approach led the High Court to admit, as evidence, a previous declinature by Riskpool for a similar claim made by the Council. Her Honour considered that this previous declinature was evidence of mutual intention as to the operation of the exclusion clause, although, it was noted that the Council did not respond to the declinature.

In response to the Council’s submission that the position claimed by Riskpool would mean a minor weathertightness complaint could taint a significant non-weathertightness claim, Grice J accepted submissions from Riskpool’s counsel that the de minimis doctrine would apply. This is the concept that the law does not concern itself with trivial matters and therefore, when the weathertightness issue is minor, the exclusion would not apply to the whole claim.

Given Grice J’s view that the policy excluded cover for the entire claim, the issue of apportionment was only dealt with briefly in the High Court decision. By the time of the High Court hearing, the Council had settled the owners’ claims without apportioning the global payment between weathertightness defects and other defects. In essence, Grice J held that apportionment would be determined by reference to what would have been a reasonable apportionment of the global sum at settlement, taking into account the evidence at the time.

Court of Appeal’s Decision

As noted above, the Court of Appeal has overturned the High Court’s decision and provided further clarity on the key issues of this case.

Admissibility of earlier declinature

The Court of Appeal first dealt with the admissibility of extrinsic evidence, in particular the declinature of an earlier claim on the grounds of the weathertightness exclusion. The Court of Appeal explained that extrinsic evidence will be admissible if it is relevant and probative, however, evidence of the earlier declinature of this claim was neither.

In the case of contractual interpretation, the Court of Appeal noted that the parties’ intended meaning is that which the contract would convey to a reasonable person with the background knowledge reasonably available at the time. The Court stated that in cases such as this one, the parties have framed their contract in writing and their intended meaning can be extracted from the document itself. The document's language retains primacy, and evidence outside the document is confined to what a reasonable person would consider to be relevant.

In this case, the Court of Appeal found that the previous declinature did not show mutual consent. It only showed Riskpool’s subjective (and incorrect) interpretation of the exclusion clause. The Council’s silence in response to the declinature does not indicate that it intended the exclusion to apply in the way Riskpool asserted. It could be due to other reasons. The Court of Appeal therefore found that the 2012 declinature was irrelevant and inadmissible.

Interpretation of the exclusion

In interpreting the exclusion clause, the Court of Appeal found that the wording made it clear that cover was excluded for all weathertightness defects. However, the wording does not indicate that the commercial purpose extended to exclude liability for non-weathertightness defects when it is combined in a claim for weathertightness defects. On the contrary, the Court considered that the wording indicated that Riskpool would continue to provide cover for non-weathertightness defects.

In dealing with the definition of “Claim,” the Court of Appeal held that the terms of the wording make the definition clear – cover does not extend to liability for Claims alleging or arising directly or indirectly out of, or in respect of, a weathertightness defect. These words address the degree of proximity between demand for payment and the underlying liability necessary to trigger the exclusion.

The Court of Appeal found the High Court’s reliance on the de minimis principle unhelpful. No authority had been cited where the principle was used in relation to the meaning of a contractual obligation. The Court found that it follows that the wording did not permit for such a term to be implied. Furthermore, the de minimis principle would add a new layer of ambiguity as it raises the question of what is the true measure of “negligible”, or what value threshold must be crossed.

In addressing the issue of apportionment, the Court of Appeal held that it would be for the Council to show what was the value of the total claim and what portion of that sum should be attributed to covered liabilities. The case was referred back to the High Court to assess an appropriate apportionment.

Comment (Virginia Wethey)

This decision will be welcome news to many in the insurance industry as it reinstates the approach routinely taken by claims handlers over the years – that is, if a policy contains an exclusion for weathertightness defects, then only those defects which have a causal relationship with weathertightness are excluded from cover.

It is important to note that this decision does not change the Wayne Tank principle, which provides that where two or more causes are intermingled – one cause being insured under the policy and one excluded – then the entire claim is excluded. In fact, the decision appears consistent with that principle.

We see the decision as being a return to the normal approach taken by the courts when considering interpretation of an insurance policy, and how to apply these principles to specific claims.

Resources

A return to ‘normal’ - Napier City Council v Local Government Mutual Funds overturned on appeal

Fee Langstone