Insurance – Court of Appeal overturns decision on effect of weathertight exclusion clause in ‘mixed’ claim.
In the latest decision in a long running dispute, the Court of Appeal* has allowed Napier City Council’s appeal against the decision of its insurer at the time to decline cover for the entirety of a $12,355,000 settlement on a building defect claim, and found that the Council was entitled to cover for defects which were not related to weathertightness defects.
Background
We have previously set out the background in some detail in our article relating to the High Court decision. In summary, this case arose out of a building defect claim against the Council by the Body Corporate and owners of units in a multi-unit apartment block called the Waterfront Apartments in Napier. The claim 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.
The High Court upheld the insurers’ decision to decline indemnity, holding amongst other things that a single claim including a mix of defects could not be broken down into its component parts and some excluded under the protection wording while others were covered.
Court of Appeal decision
The Court of Appeal disagreed with the High Court. In short, it held that the exclusion clause only removed cover for the claim to the extent that it allegedly arose directly or indirectly out of, or in respect of weathertightness defects, and that any other distinct part of the claim that fell within cover could not be excluded. It also held that extrinsic evidence (such as communications between the parties) may also assist in certain circumstances in interpreting the insurance policy, if it is relevant and of probative value.
The Court of Appeal also considered the result of the settlement at mediation, and held that the overall settlement of the case was reasonable. The case was remitted back to the High Court to fix the amount of Riskpool’s liability.
Brief observations
This is an important decision in the weathertightness/insurance/liability space. It is common for building defect claims to be ‘mixed’. As with any coverage issue, the starting point will be the terms and conditions of the insurance policy. Subject to those policy terms, the Court’s decision supports a careful analysis of whether or not non-weathertightness defects are related to the weathertightness defects, including the remedial work required as a result of those defects.
We understand that an appeal to the Supreme Court is likely to follow. We will have to watch this space.
*Napier City Council v Local Government Mutual Funds Trustee Limited [2022] NZCA 422.
