03.07.2015

Body Corporate 326421 v Auckland Council [2015] NZHC 862

This was a substantial claim for construction and design defects in a 12 floor apartment building called the Nautilus.  The unit owners and Body Corporate sued the Council, the head contractor, the architect, the cladding subcontractor and the tiler.  They were largely successful, and were awarded $25.07 million in total.  However, most of the defendants were insolvent: only the Council and the tiler (whose liability was limited to certain defects) remained.

The head contractor was Brookfield Multiplex Constructions (NZ) Ltd (in liquidation) (BMX).  It was found liable for all of the defects.  A question arose as to whether a professional indemnity policy held by BMX, under which Zurich Insurance plc was the lead underwriter, would respond to the claim.

Under the policy, BMX was covered for contractual or other claims arising out of negligent performance of “Professional Activities and Duties”.  That cover extended to any negligent acts of consultants prior to novation of the consultancy agreement to BMX.   “Professional Activities and Duties” meant activities undertaken by, or under the supervision of professionally qualified persons of at least five years relevant experience, but excluded day-to-day supervision of construction work.  The policy also excluded claims arising out of defective workmanship or materials, unless the claim related to the negligent design of materials or the negligent specification or selection of materials.

Although the consultancy agreement between the developer and the architect had been novated to BMX, the terms of the novation excluded liability for the design of the Nautilus, other than for minor errors and omissions which an experienced contractor would be expected to foresee, or design changes introduced for BMX’s benefit.

BMX had the onus of establishing that every defect for which indemnity was sought came within the insuring clause, including the “Professional Activities and Duties” definition.  The underwriters had the onus of proving that the exclusion then applied to exclude BMX’s claim in relation to each defect.

The Court held that if a claim had multiple causes, it would be covered if one of the causes fell within the insuring clause, provided none of the causes fell within the exclusion for defective workmanship or materials.  A “cause” need not be the proximate cause, it could be simply a material contributing factor.  If defective workmanship was a material contributing factor to any particular defect, the claim in relation to that defect would be excluded.

The Court examined each cause of action set out in the statement of claim.  The plaintiffs’ claim against BMX for breach of the head contract (which was assigned to the plaintiffs by the developer) was for failure to correct defective workmanship and materials in the defects liability period.  There was no allegation of defective design, and the insuring clause was not activated.

The plaintiffs’ claim in negligence was for a breach of a duty of care “relating to design and construction issues”.  Those issues included modifying the design of the cladding system, construction of the Nautilus with the defects and failing to rectify the defects during the defects liability period.  The underwriters claimed that defective workmanship was a material contributing cause in respect of all such losses.  A review of each of the defects and their proven causes indicated that poor or defective workmanship was indeed a material cause of each head of loss.  As a result, the policy did not respond to any part of the plaintiffs’ claim.

This case demonstrates the limitations of professional indemnity policies for head contractors, and a potential exposure for principals if the contractual design risk is shifted from the design consultant to the head contractor.  While BMX only assumed a limited design risk under the terms of its novation, had the complete risk in fact been transferred, the exclusion in the policy would have applied to all claims for defective design.

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