Supreme Court rules in favour of Napier City Council in insurance claim over building defects

Council settled the claim of apartment complex owners for $12m

Supreme Court rules in favour of Napier City Council in insurance claim over building defects

In a recent case, the Supreme Court has ruled in favour of the Napier City Council in an insurance claim involving building defects.

In Local Government Mutual Funds Trustee Limited v Napier City Council [2023] NZSC 97, the owners of the Waterfront Apartment complex in Napier sued the Napier City Council and others over building defects. The owners alleged that the council had been negligent in issuing building consents, ensuring adequate inspections, and issuing code compliance certificates. Some building defects were related to weathertightness, while others were related to a fire risk and other alleged breaches of the Building Code.

The council settled the claim for about $12m without specifying an apportionment between weathertightness and other defects. The council's insurer, RiskPool, declined to cover the claim based on an exclusion clause that stated that the insurance contract did not cover liability for claims related to weather tightness defects.

The council argued that the exclusion clause only excluded the weather tightness-related portion of the claim, so demands not relating to weather tightness, such as fire risk defects, were not excluded. However, RiskPool contended that the exclusion clause meant that the entire claim, including non-weather tightness defects, was excluded from insurance coverage.

The case went through the High Court and the Court of Appeal, with the High Court ruling in favour of RiskPool on liability, while the Court of Appeal reversed the decision and found RiskPool liable for the portion of the claim unrelated to weathertightness.

The parties raised the matter to the Supreme Court about whether RiskPool is also liable for the part of the claim unrelated to weathertightness.

RiskPool argued that once it is determined the plaintiffs each had a single claim, including weather tightness, that is the end of the inquiry. RiskPool contended that the subject of the exclusion is the "claim," which is not divisible. This building defect claim was excluded as it predominantly concerned weather tightness defects.

On the other hand, the council argued that RiskPool's approach focused unduly on the word "claims" in the exclusion clause, invoking its definition, and would have the court ignore words running counter to its argument, particularly "liability for claims."

The Supreme Court noted that "if the language at issue, construed in the context of the contract as a whole, has an ordinary and natural meaning, that will be a powerful, albeit not conclusive, indicator of what the parties meant." The court also stressed that the wider context might point to some interpretation other than the most obvious one. It may also assist in determining the meaning intended in cases of ambiguity or uncertainty.

The court found that when read as a whole and in context, the exclusion clause intends to exclude only the risks expressly referred to, namely, weather tightness. The supreme court acknowledged the high court's finding that it was possible to identify a part of the settlement which addressed liability not arising directly or indirectly from weathertightness defects. In this situation, where the council faced liability for separate and divisible loss arising from the breaches of the weathertightness and non-weathertightness of the Building Code, only weathertightness is excluded from cover, notwithstanding that the claim was presented on a mixed basis.

RiskPool relied on the court of appeal's finding that one "claim" arose from the same negligent course of conduct. However, the court agreed with the council's argument that nothing in the exclusion clause's language would convey to the reader that divisible parts of a claim that do not relate to weather tightness are being excluded. The court stressed that clearer language would be required to exclude liability for that part of the claim relating to non-weather tightness defects, which would otherwise have come within the insuring clause.

RiskPool further argued that the commercial purpose of the exclusion clause was to exclude weather tightness claims, including mixed claims. RiskPool asserted that weathertightness defects are often closely connected with other building defects, and it is not always easy to distinguish them by cause.

However, the supreme court held that RiskPool's argument on commercial purpose did not help its case. Rather, the court found that it is essentially another way of putting the submission about the meaning of the text. The court said the purpose supports the view that claims such as those brought by the plaintiffs are only excluded to the extent they are linked, in the way envisaged by the clause, to weathertightness defects.

The court ultimately concluded that there was no error in the court of appeal's construction of the exclusion clause nor the court's associated conclusion as to liability under the contract.

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