Building defects – weathertightness – insurance claim – insurance contracts – exclusion clause – partial or full exclusion – contractual interpretation – commercial purpose – Wayne Tank and Pump Co Ltd v The Employers’ Liability Assurance Corporation Ltd [1974] 1 QB 57 (CA)

Local Government Mutual Funds Trustee Ltd v Napier City Council [2023] NZSC 97.

In 2013, a group of apartment owners sued the Napier City Council over building defects. They said the council had been negligent in issuing building consents, ensuring adequate inspections, and issuing code compliance certificates. Some of the building defects related to weathertightness. Others did not – some related to fire risk and structural integrity issues, for example.

The council settled the owners’ claim for about $12 million. There was no apportionment in the settlement sum between the weathertightness and other defects. However, expert evidence had calculated that some of the remediation cost was attributable to the weathertightness defects.

The council made a claim from its insurer, Local Government Mutual Funds Trustee Ltd (RiskPool) for the portion of the remediation costs unrelated to weathertightness. This portion had been costed at $4.4m.

RiskPool declined cover on the basis that an exclusion clause relating to weathertightness applied. Exclusion 13(a) stated the relevant section of the insurance contract “does not cover liability for claims alleging or arising directly or indirectly out of, or in respect of” weathertightness defects.

The council subsequently sued for part of the settlement amount from RiskPool, relying on its indemnity. It argued exclusion 13(a) excluded only those parts of the claim concerning weathertightness. Demands not relating to weathertightness (eg, fire risk defects) were not excluded. RiskPool argued that because the owners’ demand for compensation included weathertightness claims, the whole claim was excluded.

The High Court found in favour of RiskPool, holding the exclusion clause excluded cover for weathertightness and non-weathertightness complaints where a weathertightness complaint is made.

On appeal, the Court of Appeal disagreed and concluded that exclusion 13(a) removed cover only to the extent the alleged liability arose out of weathertightness claims.

The Supreme Court granted RiskPool leave to appeal. The primary question before the court was whether RiskPool is liable for a portion of the claim unrelated to weathertightness (as the Court of Appeal held) or whether the effect of the exclusion clause in the policy is to exclude cover for that part of the claim.

Applicable principles: insurance contracts interpreted the same as any other – application of general principles of contractual interpretation – consideration of text and structure of exclusion clause, context and commercial purpose – whether the Court of Appeal gave the text of the exclusion clause the necessary prominence – whether the Wayne Tank principle applied to exclude the present claim where one concurrent cause was expressly excluded – whether contextual matters (evolution of wording and contemporaneous correspondence) were sufficiently compelling to affect the proper interpretation of the contract.

Held: The appeal is unanimously dismissed.

There was no error in the Court of Appeal’s construction of the exclusion clause nor in the associated conclusion as to liability under the contract.

Local Government Mutual Funds Trustee Ltd v Napier City [2023] NZSC 97