In a recent decision, the Supreme Court has confirmed the approach to be taken when interpreting exclusion clauses in insurance policies. This issue arises on a regular basis, so this guidance from the Supreme Court will provide useful clarity for the future. The decision was Local Government Mutual Funds Trustee Ltd v Napier City Council [2023] NZSC 97, which will be known as the RiskPool decision.
Background
RiskPool was an insurance scheme set up by local authorities in 1997. It operated as a mutual scheme, where the local authorities pooled risk, acting as both insured and insurer. Some of the risk was reinsured through commercial insurers.
In 2013, the owners of an apartment complex in Napier sued the Napier City Council in relation to building defects. Some of the defects related to weathertightness, while others related to other breaches of the Building Code, including fire risk.
The Council settled the claim with the owners, and made a claim on RiskPool for a portion of the settlement amount, being the amount unrelated to weathertightness. RiskPool declined the claim on the basis of an exclusion clause, Exclusion 13(a). This clause excluded cover for liability for claims “alleging or arising directly or indirectly out of, or in respect of” a range of factors relating to weathertightness.
RiskPool declined cover for the entire claim, saying that because the owners’ demand for compensation included weathertightness defects their claims were entirely excluded.
The High Court’s decision
The High Court found in favour of RiskPool, deciding that the exclusion clause excluded cover in its entirety, if a claim involved an element of weathertightness issues. Justice Grice decided that this was the mutual intention of the parties, demonstrated by the commercial reality that RiskPool could not continue to make significant losses due to building defects associated with weathertightness claims.
The Court of Appeal’s decision
The Court of Appeal overruled the High Court’s original decision, deciding that that it was necessary to inquire into the real nature of the Council’s liability, and that the words “alleging or arising directly or indirectly out of, or in respect of” in Exclusion 13(a) contemplated an indirect (but specific) causal connection to weathertightness. As there were aspects of the claim which were not connected to weathertightness, cover was available for those.
The Supreme Court’s decision
The Supreme Court’s decision focused on the interpretation of the agreement. The Court acknowledged their decision in Firm PI 1 Ltd v Zurich Australian Insurance Ltd [2014] NZSC 147, [2015] 1 NZLR 432, where they said that the approach is an objective one, with the aim of ascertaining the meaning the document would convey to a reasonable person with the background knowledge of the parties. They also acknowledged that while it is necessary to consider context when interpreting an agreement, “the text remains centrally important”.
The Court therefore decided that:
“When the clause is read as a whole, in context, it is clear that the common intention was to exclude only the risks specifically referred to, namely, weathertightness. The High Court found that it was possible to identify a part of the settlement which addressed liability not arising directly or indirectly from weathertightness defects. In this situation, where the Council faced liability for separate and divisible loss arising from breaches of the weathertightness and non-weathertightness aspects of the Building Code, only the former are excluded from cover notwithstanding that the claim was presented on a mixed basis.”
The Supreme Court disagreed with the argument from RiskPool that the Court of Appeal did not apply the principle in Wayne Tank and Pump Co Ltd v The Employers’ Liability Assurance Corporation Ltd [1974] 1 QB 57. The Wayne Tank principle says that where a loss has two causes, one covered and the other excluded, the exclusion applies and there is no indemnity under the policy. The Supreme Court considered that Wayne Tank did not assist RiskPool, because that case deals with circumstances where the loss cannot be apportioned. Instead:
“it is possible in this case to apportion loss as between that caused by weathertightness (or by a mixture of weathertightness and other issues) and that not caused by weathertightness.”
In this case, the claims could have been brought separately, for each of the breaches claimed by the apartment owners. The fact that they were brought together should not prevent insurance responding to breaches that were not excluded in the policy.
Comment
The interpretation of an insurance policy, particularly its cover and exclusions, has long been a fraught area, because of the importance to determining whether the insurer has any liability. This decision provides welcome clarification for both liability and quantum of the situation where an exclusion is present, but covers only part of the entire claim.
If you have any questions about this decision, or the interpretation of your insurance policy, please contact a member of our insurance team.
Disclaimer: The content of this article is general in nature and not intended as a substitute for specific professional advice on any matter and should not be relied upon for that purpose.
