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


In August last year we reported on the High Court ruling of Grice J in Napier City Council v Local Government Mutual Funds Trustee Limited (Risk pool). In that decision, His Honor ruled that the Council was not indemnified under his professional liability insurance policy with Riskpool since the claim against him related to both leaks and leaks. Consequently, the sealing exclusion clause of the policy applied to the entire loss. At the time, we noted 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 distinguish between leaking and non-leaking defects when considering compensation. Only where there was a defect that was caused or contributed to by an excluded peril was excluded from coverage.

The decision was appealed earlier this year. In a decision handed down only a few weeks ago, the Court of Appeal overturned the High Court’s decision. In doing so, the Court of Appeal confirmed that the correct approach is to differentiate between leaks and leaks when applying an exclusion. The decision also provided useful authority on the use of extrinsic evidence, the de minimis principle and distribution.

Background

In 2013, the owners of Waterfront Apartments sued Napier City Council and other defendants involved in the construction of the apartments, alleging faulty construction. The statement of claim pleaded a cause of action in negligence against the Council. Some of the defects were categorized as sealing or partial sealing defects, and some non-sealing defects, such as fire protection and structural defects.

The Council applied for cover under its policy with Riskpool. However, Riskpool declined cover on the grounds that the exclusion did not cover claims alleging or arising directly or indirectly from, or relating to weather sealing problems. Specifically, Riskpool argued that because the claim included leaks, the entire procedure was excluded from coverage.

The Council has commenced declaratory proceedings against Riskpool seeking an order requiring it to indemnify Riskpool for any liabilities it may have to the Council, as well as for its own costs and expenses incurred in connection of the procedure. Council has agreed not to be compensated for any leaks and/or partial leaks due to exclusion.

Initially, Riskpool sought to strike out the Council’s claim on the grounds that it had no valid claim, as the ordinary meaning of the policy’s weathertightness exclusion clause was that a “claim » was excluded in its entirety if it was marred by a defect of weathertightness. Neither the High Court nor the Court of Appeal were prepared to strike out the Council’s motion at the 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, Mr Justice Grice held that determining the meaning of ‘claim’ was key to deciding whether the exclusion applied only to leaks or to the whole proceeding. In interpreting the meaning of the word “claim”, His Honor concluded that there was no coverage for “liability for claims [being the demands for compensation made by a third party…] alleging or arising directly or indirectly from…” leaks. She argued that it was clear that the word “responsibility” governed the word “Claims” rather than the leaks.

Grice J noted that to interpret the true meaning of the exclusion clause, one must consider the mutual intention of the parties. This requires an objective assessment taking into account all background information known or reasonably available to the parties at the time of entering into the contract. This approach led the High Court to admit as evidence an earlier refusal by Riskpool to a similar request made by the Board. His Honor took this earlier disclaimer as evidence of mutual intent as to the operation of the disclaimer, although it was noted that Council had not responded to the disclaimer.

In response to the Council’s assertion that Riskpool’s asserted position would mean that a minor weathertightness complaint could taint a large non-weatherproof claim, Grice J accepted the submissions of Riskpool’s solicitor according to which the de minimis doctrine would apply. It is the concept that the law does not concern itself with trivial matters and therefore where the weather tightness issue is minor, the exclusion would not apply to the entire claim.

In view of Judge Grice’s view that the policy excluded cover for the entire claim, the issue of apportionment was dealt with only briefly in the High Court’s decision. At the time of the High Court hearing, Council had settled the owners’ claims without dividing the overall payment between leaks and other defects. Essentially, Grice J argued that the allocation would be determined by reference to what would have been a reasonable allocation of the lump sum at the time of settlement, taking into account the evidence at the time.

Court of Appeal Decision

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

Admissibility of an earlier declension

The Court of Appeal first considered the admissibility of extrinsic evidence, including the dismissal of an earlier claim on the grounds of the exclusion of waterproofing. The Court of Appeal explained that extrinsic evidence will be admissible if it is relevant and probative, however, evidence of the prior declination of this claim was neither.

In the case of contractual interpretation, the Court of Appeal noted that the meaning intended by the parties is that which the contract would convey to a reasonable person possessing basic knowledge reasonably available at the time. The Court said that in cases like this, the parties have their contract in writing and the intended meaning can be extracted from the document itself. The language of the document retains primacy, and the evidence outside the document is limited to what a reasonable person would consider relevant.

In this case, the Court of Appeal concluded that the previous declination did not demonstrate mutual consent. It only showed Riskpool’s subjective (and incorrect) interpretation of the disclaimer. The Council’s silence in response to the disclaimer does not indicate that it intended the exclusion to apply in the manner asserted by Riskpool. It may be due to other reasons. The Court of Appeal therefore ruled that the 2012 statement was irrelevant and inadmissible.

Interpretation of the exclusion

In interpreting the exclusion clause, the Court of Appeal concluded that the wording made it clear that coverage was excluded for all leaks. However, the wording does not indicate that the business purpose extends to exclude liability for leaks when combined in a claim for leaks. On the contrary, the Court considered that the wording indicated that Riskpool would continue to cover leaks.

In dealing with the definition of “claim”, the Court of Appeal held that the wording of the wording clarified the definition – coverage does not extend to liability for claims alleging or arising directly or indirectly from leaktightness. severe weather. default. These words deal with the degree of proximity between the claim for payment and the underlying liability necessary to trigger the exclusion.

The Court of Appeal held that the High Court relied on the de minimis pointless principle. No case law has been cited in which the principle has been used in relation to the meaning of a contractual obligation. The Court concluded that it follows that the wording did not permit such a term to be implied. Moreover, the de minimis principle would add a new layer of ambiguity because it raises the question of what is the true measure of “negligible”, or what threshold value must be crossed.

In considering 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 part of that sum should be attributed to the debts covered. The case was sent back to the High Court to determine an appropriate allocation.

Commentary (Virginia Wethey)

This decision will be good news for many in the insurance industry as it reinstates the approach commonly taken by claims handlers over the years – that if a policy contains an exclusion for weathertightness defects, then only defects that have a causal link with the weathertightness are excluded from coverage.

It is important to note that this decision does not change the Wayne tank top principle, which provides that when two or more causes are intertwined – one cause being insured by the policy and another excluded – then the entire loss is excluded. In fact, the decision seems to conform to this principle.

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

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