Water water everywhere, but not a drop to drink

I have been dabbling in insurance law for the last 20 years and it is always a surprise to an insured how far reaching certain exclusions in a liability policy can appear to be. I would like to focus on some of these exclusions in this article and the next, to demystify how far reaching they are and how they work with the rest of the policy.   I would however caution that an insured should always talk with their broker before making any decisions on insurance products.

Weathertightness exclusions

The late 1990’s, for those that can remember that far back, I can, was the start of the leaking building crisis. Homes in New Zealand were leaking like sieves and mould was growing up the walls. In response to this, insurers across the market started to impose weathertightness exclusions.  Put simply the exclusion excludes claims alleging or arising directly or indirectly out of weathertightness issues.  Weathertightness issues are put generally, those that relate to leaks, water penetration, waterproofing, moisture, or any water exit or control system.

As you will appreciate a building defect and a building claim can have a number of causes so there is no simple approach to what is “in” and what is “out” of the policy.  The case law in New Zealand appears to be in favour of restricting the application of such exclusions (so they favour the insured) by allowing the division of defects and loss into what is and what is not a weathertightness issue.[1]   This is to be compared to the approach of declining the whole claim where there is any allegation of a weathertightness defect or loss.

The other matter to consider is that the claim is but one matter to consider when considering whether a defect and its loss is caught by such an exclusion.  The factual finding of the defect and the loss will override the allegation as presented as would be the case when the matter was heard by a court in liability hearing.  So it is important for an insured to consider, what is the real cause of the defect and the loss.[2]

The glaring example I recall is where a row of town houses suffered dampness in their lower floors.   A local authority claimed under their insurance which contained a weather tightness exclusion. The retaining wall behind the town houses was diverting water down the hillside behind the houses into the garages.  Acting for the insured we argued that the dampness in the houses was present because of the alleged negligent engineering works on the retaining wall and should be covered.  The houses were not without weathertightness issues but the dampness only occurred because of the large amounts of water being diverted into them by the retaining wall.  In this case allocation of the claim was sought by the insured; to seek indemnity for 70% of the damage. The other 30% of the damage was excluded because of the defective waterproof cavity which allowed dampness to ingress up into the walls and ceiling.

A great overview of how weather tightness exclusions are approached by the courts in New Zealand is in Napier City Council v Local Government Mutual Funds Trustee Ltd[3] which was an application to strike out a declaratory proceedings against the Napier Council’s insurer, Riskpool. The application was declined and went to the Court of Appeal where it was declined again.[4] It remains to be seen whether the exclusion will apply to this claim and that will be determined at the substantive trial.

No matter what the legal position is on a weather tightness exclusion, there is always the commercial aspect; what is the market doing to provide cover or clarify cover for weather tightness claims.  We understand that some insurers are providing cover on a limited basis, some insurers are providing cover for defence costs only for such claims, again on a limited basis.  The insurance market is dynamic and policies are updated to meet the market all the time.

[1] See for example the approach taken by Gilbert J in the High Court decision of Body Corporate 326421 v Auckland Council (the Nautilus) [2015] NZHC 862 in which he analysed the statement of claim defect by defect.

[2] See for example Quintano –v– B W Rose Pty Ltd & Ors [2008] NSWSC 793 where the Supreme Court held that “…but the craftiness or clumsiness of the claimants pleading is not determinative of the characterisation of the claim.”

[3] Napier City Council v Local Government Mutual Funds Trustee Ltd [2018] NZHC 2269

[4] Local Government Mutual Funds Trustee Ltd v Napier City Council [2019] NZCA 444

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