Contractual obligations not covered under a liability policy: Fletcher v Chubb & BHSI

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The Fletcher Construction Company Ltd v Chubb & BHSI [2023] NZHC 943

The New Zealand High Court recently looked at whether a third-party liability policy provided any cover to a head contractor for its liability to the principal under an indemnity clause in the  construction contract. This decision provides helpful guidance on the applicable legal principles.

Facts

In October 2019, there was a fire at SkyCity's new convention centre in Auckland while still under construction.  Water from fire-fighting efforts damaged 600 car parks in the basement and delayed completion of another 624 carparks.

SkyCity had agreed to deliver the carparks to MPF Parking within a certain timeframe. Under its contract with MPF, SkyCity elected to reinstate the carparks and pay a daily sum per car park for late delivery.

SkyCity then demanded that the head contractor, Fletcher Construction, indemnify it for the late delivery payments.  Pursuant to the head contract, Fletcher had agreed to indemnify SkyCity for certain liabilities in respect of damage to property.

Fletcher sought cover under its third-party liability cover for the project. 

  • The policy covered "sums which the Insured shall become legally obligated to pay as compensation in respect of or consequent upon (a) Personal Injury; or (b) Property Damage; or (c) interference with traffic or to property or the enjoyment of use thereof by obstruction, trespass, loss of amenities, nuisance ..."

  • The policy excluded "liability for loss or damage to the Project" but this exclusion did not apply to damage to any part of the project that had achieved practical completion and been handed over.

The insurers accepted cover for Fletcher's claim in relation to the 600 already completed carparks.  But they declined the claim in respect of the other 624 carparks which had not yet been completed. 

Fletcher sought a declaration, by way of summary judgment, that its insurance policy covered any liability it may have to SkyCity for the car park claim.

Issue 1 - Contractually Assumed Liability

The first issue was whether the insuring clause had been triggered.  It was common ground that the policy covered liability in tort, and also concurrent liability in tort and contract.  But the insurers argued that the policy did not cover purely contractual obligations.

The Court pointed out that the insuring clause refers to personal injury, property damage, and interference with property, which correspond to classes of liability in tort.  The Court was not convinced that "legally obligated to pay compensation" applies to an obligation voluntarily assumed in contract.

The Court explained that "it makes sense that a third-party liability policy would not insure against liabilities assumed under a contract unless specifically provided.  It would be impossible for an insurer to assess their potential exposure if they were required to indemnify the insured against any liability the insured assumed to a third party."

The insured's application for summary judgment was refused. The Court concluded that it was "reasonably arguable" that the parties did not intend for the policy to cover liabilities assumed under contract, unless specified in the policy.  It was unnecessary for the Court to be more definitive given that the matter proceeded by way of summary judgment. 

Issue 2 - Exclusion for Damage to the Project

The second issue was whether the exclusion for "liability for loss or damage to the project" applied.  The Court concluded that it was reasonably arguable that the parties intended this to exclude liability to third parties for economic losses originating from damage to the contract works.

The Court stated that the policy concerns liabilities to third parties, not the risk of loss or damage to the contract works, nor the head contractor's liability to the principal for such loss or damage.  Fletcher had contract works insurance for its liability to reinstate damage to the contract works.  This kind of liability was never within the scope of the third-party liability cover.  It would not make sense to confine the exclusion to a liability that was never within the cover.

For that reason, the Court preferred the view that the exclusion also applied to liability to a third party for economic loss originating from loss or damage to the contract works.

Extrinsic Evidence - Contractual Interpretation

The Court explained that the above insuring clause and exclusion should be interpreted at a full trial with extrinsic evidence.  This may include evidence from the underwriter and broker about commercial context and negotiations, such as:

  • The standard group of insurance policies that parties involved in large construction projects typically arrange.

  • The policies that were actually put in place for the project.

  • The general purpose of a third-party liability policy, and the type of risk that policy is designed to cover, in the context of a large construction project.

  • Evidence of any special meaning given to words or phrases in the insurance industry.

While such extrinsic evidence was relevant, the words of the policy remained of primary importance.

Comment (Andrew Durrant)

This decision is a reminder that general liability policies typically do not cover contractually assumed liabilities.  Parties involved in construction projects will often assume contractual obligations which do not exactly align with liability in tort or statute.  When dealing with such claims, it is necessary to determine whether the insured has a concurrent liability in tort or statute, since it is this liability, not any contractually assumed liability, to which the liability policy will respond.   

 

Andrew durrant is a special counsel at fee lanstone