Two councils sought indemnity worth millions, but the High Court found the cover was discretionary
A discretionary mutual fund that protected councils against leaky-building liability was never a contract of insurance, the High Court has ruled.
In Queenstown Lakes District Council v Local Government Mutual Funds Trustee Limited [2026] NZHC 1486, McHerron J held that s 9 of the Insurance Law Reform Act 1977 (ILRA) did not apply to the New Zealand Mutual Liability Riskpool Scheme, either expressly or by implication.
The Riskpool Scheme operated from 1997 as a not-for-profit mutual liability fund that helped local authorities manage claims alleging negligence in issuing and overseeing building consents. It provided public liability and professional indemnity cover as an alternative to private market insurers, and ceased operating in 2017 - except to provide run-off cover - largely because of the leaky building crisis.
Napier City Council (NCC) and Queenstown Lakes District Council (QLDC) sued the scheme's corporate trustee over three declined claims. Each claim partly concerned weathertightness defects and partly non-weathertightness defects, so the parties described them as "mixed defect claims." They were the West Quay claim against NCC and the Oaks Shores and Oaks Club claims against QLDC.
Riskpool originally declined all three claims under exclusion 13, a weathertightness exclusion it added to the Protection Wording in 2009. The Court of Appeal and the Supreme Court later determined in Waterfront that exclusion 13 did not extend to non-weathertightness defects. Riskpool no longer relied on the exclusion and instead denied indemnity because the councils notified each claim late.
The councils did not dispute that the non-weathertightness component fell within the scope of cover, or that none of the three claims reached Riskpool within the policy time limit. NCC made the West Quay claim in March 2012 but did not notify Riskpool until July 2015. QLDC received the Oaks claims in 2015 and 2016 but did not notify them until October 2020, more than four years after it left the scheme.
The threshold issue was whether s 9 of the ILRA excused the councils' late notifications, which depended on whether a contract of insurance existed between the councils and Riskpool. The ILRA does not define "contract of insurance."
McHerron J concluded that no contract of insurance existed. Riskpool had not promised to provide either council with indemnity, and the risk of liabilities never transferred to the scheme. Any indemnity remained discretionary. The judge held that Riskpool promised only to properly consider the councils' claims in the exercise of its discretion, subject to prior compliance with applicable conditions precedent, including timely notification.
The judge reached essentially the same conclusion as Collins J in Wellington City Council v Local Government Mutual Funds Trustee Ltd (Lofts), which considered materially the same scheme documents. He rejected the councils' submission that a valid claim carried a legal entitlement to be paid regardless of when the council notified it.
Applying authorities including Medical Defence Union v Department of Trade and Commissioner of Inland Revenue v Motorcorp Holdings Ltd, McHerron J held that a contract of insurance required an absolute entitlement to money or money's worth, not merely an entitlement to have a request properly considered in a discretionary context. The deed of trust gave Riskpool's board an absolute and unfettered discretion over whether to meet claims.
The judge also declined to imply a term that the protection wording was subject to the ILRA. The scheme documents expressly provided for the eventuality of late notification, so the test of strict necessity restated in Bathurst Resources Ltd v L&M Coal Holdings Ltd was not met. A proposed implied term could not contradict the express conditions precedent and the board's discretion.
Despite those findings, McHerron J held that Riskpool's board had an obligation to consider even claims made in breach of the notification condition precedent. He found that the claims manager declined each claim without the knowledge, oversight or authority of Riskpool's board, and that no one gave reasoned consideration to the late notification. On that basis, the judge held that the board had not yet made a decision declining the three claims.
On the councils' alternative claims, the judge found they did not establish that Riskpool's conduct was an operating cause of their late notification. The council witnesses accepted that internal inadvertence, rather than anything Riskpool said about the weathertightness exclusion, caused the failures to notify. As sophisticated insured parties with in-house expertise and access to legal advice, the councils continued notifying mixed defect claims throughout, which undermined any claim of reliance.
The judge accepted expert evidence that Riskpool's reinsurers would not have to pay for the late-notified claims, so indemnifying the councils would prejudice the scheme's other members, who would likely fund the payments.
McHerron J issued the decision as an interim judgment because Riskpool's board had not yet determined the claims, and the councils may seek leave to amend their pleadings to seek such an order. He directed the parties to file a joint memorandum on next steps within 14 days.
