Claims involving weathertightness and other defects. In or out, or a mix of both?

The recent Court of Appeal judgment involving Napier City Council and Riskpool¹ resolves the issue of whether a claim involving both weathertightness and other defects may be wholly excluded based on a weathertightness exclusion. It also provides useful commentary on the use of extrinsic evidence to assist with contractual interpretation and how liability is proved when an insurer declines cover, leaving an insured to act as a prudent uninsured.

In 2013 Napier City Council (Council) was sued by owners of the Waterfront Apartments for negligence in issuing building consents, ensuring adequate inspections, and issuing code compliance certificates. There were mixed defects pleaded, some of which concerned weathertightness, and some of which did not.

Council notified the claim to its insurer, Riskpool, which declined cover. As the demand included compensation for weathertightness defects, Riskpool maintained the weathertightness exclusion applied to the entire claim. Council settled the Waterfront owners’ claims and sued Riskpool.

In the High Court, Grice J found in favour of Riskpool on the primary issue concerning interpretation of the weathertightness exclusion.² Her Honour held that:

• The plain meaning of ‘claim’ could be determined from the wording of the exclusion and in the context of the insurance contract. ‘Claim’ was sufficiently broad that the entirety of a claim involving weathertightness was excluded.
• There was one claim concerning a single development brought on behalf of all owners.
• Where there is an objectively minor or non-material weathertightness defect existing in an otherwise non-weathertightness claim, then the wording would not exclude the entire claim, with the de minimis doctrine to apply.
• This conclusion was supported by extrinsic evidence relating to an earlier claim (Dalton St) that Riskpool had declined on the same grounds, which Council did not challenge. She considered that Council must be taken to have accepted Riskpool’s interpretation of the exclusion because it did not convey any objection to that interpretation.
• There was no evidence to support a finding of commercial absurdity or unreality as cover remained for other building defects claims with no element of weathertightness.

Council appealed. The Court of Appeal issued its judgment on 8 September 2022, allowing the appeal.

Both at first instance, and on appeal, there was considerable discussion about what constituted a ‘claim’. The Court of Appeal was not persuaded by Riskpool’s argument that there was one claim involving a single demand for compensation which was excluded because it included compensation for weathertightness defects. In particular, while accepting that a claim is a demand for compensation, with a single demand in this case, the Court:

• Considered the key question was whether the policy wording contemplates that a claim is divisible when it incorporates insured and excluded liabilities that are not co-extensive, in the sense that to pay one is to discharge the other. It was accepted the exclusion could not be interpreted to force Riskpool to indemnify Council for a liability which was outside the cover provided by the policy.
• Accepted that the exclusion necessarily contemplates an inquiry into the real nature of Council’s liability, being the orthodox approach when deciding whether an exclusion applies. The exclusion contemplates that a claim may incorporate a number of Council liabilities. It removes cover only to the extent that Council’s liability arose directly or indirectly out of, or in respect of, weathertightness defects.
• Did not necessarily agree with Council’s argument that the exclusion would substantially defeat the indemnity. That was debatable as it would only do so to the extent the indemnity covered construction related liabilities involving weathertightness.
• Disagreed with the High Court that the de minimis doctrine applied where only a small part of a Claim was causally connected to weathertightness such that the entire claim was excluded. There were two clear objections to this doctrine applying to a contractual obligation. Firstly, that the threshold could not be defined with sufficient precision and, secondly, even if it was set at a generous level, there is nothing in the wording or context of the policy which suggests an intention to permit that.

As to the use of extrinsic evidence, the Court found that the inference drawn in the High Court was unjustified for various reasons. Evidence regarding Riskpool’s declinature of the earlier Dalton St claim was inadmissible when considering contractual interpretation. With the benefit of the Supreme Court’s decision in Bathurst Resources Ltd,³ the Court of Appeal held the correct approach was:

• An objective one with the parties’ intended meaning being what the contract would convey to a reasonable person with the background knowledge reasonably available to the parties at the time.
• Grounded in policy objectives of certainty, holding people to their bargains, and of efficiency in the conduct of proceedings.
• Where the parties have framed their contract in writing, their intended meaning is extracted from the document.
• The language of the document retains primacy. Extrinsic evidence is confined to what a reasonable person would consider relevant and if it meets the threshold of probative value relative to the risk that it will needlessly prolong the proceedings.

The Court of Appeal found that Riskpool’s conduct was a repudiation in the sense that it was in breach of contract when, having been given notice of a claim, it made clear that it would not indemnify Council. The claim against Riskpool was one for damages for breach of contract, not a claim for indemnity under the policy.

In assessing loss, the Court of Appeal accepted the High Court’s findings as to the correct approach to take. The question is whether Council acted reasonably in settling Waterfront’s claim. In this respect, Council had the onus of proving reasonableness which it could do if, judged objectively, the settlement compensated the claimants for the value of the claim by reference to its prospects of success, assessed on available information then known. The settlement at mediation (of $12.355 million) was considered reasonable.

As to allocation, where the claim involves mixed defects, only some of which are excluded, the insured must prove that part of the settlement which falls within the cover. Although for reasons which this summary does not cover, quantum was remitted back to the High Court to fix Riskpool’s liability, the four categories of remedial work considered related to:

• Only non-weathertightness defects. The full amount of work is insured.
• Both weathertightness and non-weathertightness defects are apportioned. The insured amount is the balance of costs required to remedy the defect over and above the cost to remedy the weathertightness defect.
• Both weathertightness and non-weathertightness defects where the mixed cause gives rise to the same loss are excluded.
• Remedial work required exclusively for weathertightness defects are excluded.

The apportionment of consequential damages (and defence costs, had they not been agreed) would be based on the apportionment between the weathertight and non-weathertight categories as a result of the re-calculation of the quantum in the High Court.

The outcome in the Court of Appeal reflects an approach many insurers have traditionally adopted, and accords with accepted principles of contractual interpretation, without the need to consider extrinsic evidence, or fall back on the contra proferentum rule.

Going forward, it is expected the key issues between insurers and insureds will move back to being primarily one of assessing and apportioning the remedial costs arising from those defects which are covered under the policy, and those which are excluded. Normalcy resumes.

This publication is intended as a general overview and discussion of the content dealt with. It should not be used in any specific situation, in which case you should seek specific legal advice.