Supreme Court confirms orthodox approach when interpreting scope of exclusion clause

Napier City Council v Local Government Mutual Funds Trustee Limited [2022] NZCA 422


This case arose out of a building defect claim against Napier City Council (the Council) by the Body Corporate and owners of units in a multi-unit apartment block called the Waterfront Apartments in Napier.  The proceeding was filed in 2013 and the claim against the Council involved a mix of weathertightness, structural and fire-proofing defects.  The Council notified the claim to its insurer RiskPool, which declined cover for the entire claim based on a weathertightness exclusion clause.

In 2019 the Council settled with the building owners at mediation and paid a global figure in full and final settlement for the cost of the works required to remedy weathertight and non-weathertight building defects as well as structural and fire safety compliance failures.  The global settlement agreement did not make any specific allocations in relation to the matters settled.  In view of the limited capacity of the other defendants to pay, the Council paid $12.355 million out of the total settlement of $13.65 million.

The Council sued RiskPool for breach of contract and sought a contribution to the settlement payment.

In the High Court, the insurers’ decision to decline indemnity was upheld.  The Court found a single claim including a mix of defects could not be broken down into its component parts with some being excluded and others covered.

The Court of Appeal ruled otherwise.  It held that the exclusion clause only removed cover for the claim to the extent that the Council’s liability allegedly arose directly or indirectly out of, or in respect of weathertightness defects.  This meant the Council’s liability for other defects which fell within cover were not excluded.

Supreme Court’s decision

In the Supreme Court the parties’ arguments focussed on different words and phrases used in the exclusion clause to support their positions.  RiskPool argued that the focus of the exclusion clause was upon the “Claim” and not upon the factual source or causation of the Claim.  It maintained that “alleging” and/or “in respect of” were ‘qualifying links’ in the clause which did not refer to a causative connection.  The Council submitted RiskPool’s approach ignored words in the clause, its arguments about “qualifying links” were contrary to principle and that the divisibility of claims was the orthodox approach. 

The Supreme Court agreed that RiskPool’s interpretation erred in focusing unduly on one part of the exclusion clause, observing RiskPool’s approach required dissection of the clause to focus unduly on individual words.  The Court observed the definition of “Claim” was not within the clause itself – it appeared elsewhere and was a general multi-purpose definition, but concluded: “When read as part of the whole clause and in context, that word simply cannot carry the weight argued for by RiskPool.”  It also considered the result advanced by RiskPool was “textually awkward”

The Court concluded there was nothing in the language of the exclusion clause which would convey to the reader that divisible parts of a claim that do not relate to weathertightness are excluded.  It said “[c]learer language would be required to exclude liability for that part of the claim relating to non-weatherightness defects which would otherwise have come within the insuring clause.”

What to Remember

The key takeaway from the decision is that when interpreting exclusion clauses beware of giving emphasis to a word or phrase if that creates an unnatural meaning to the text.  Even a defined term may not be strictly applied if an alternative and clearer meaning can be established from the exclusion clause as a whole.

If you have any questions about insurance policy wordings, please get in touch with our Insurance Team or your usual contact at Hesketh Henry.

Disclaimer:  The information contained in this article is current at the date of publishing and is of a general nature.  It should be used as a guide only and not as a substitute for obtaining legal advice.  Specific legal advice should be sought where required.

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