Napier City Council v Local Government Mutual Funds Trustee Ltd [2021] NZHC 1477 (RiskPool)

RiskPool concerned a contract for indemnity insurance for local authorities.

The 'RiskPool Scheme' was a mutual scheme arrangement, of which Napier City Council was a member. Local Government Mutual Funds Trustee Ltd (RiskPool) was the Scheme's trustee.

In the early 2000s, it became clear that extensive liability for local authorities would arise from the leaky homes crisis across the country. In 2009, RiskPool decided to carve out an exclusion for claims relating to a weathertightness issue, and inserted Exclusion 13 into its Protection Wording:

13) This Section of the Protection Wording does not cover liability for Claims alleging or arising directly or indirectly out of, or in respect of:

a) the failure of any building or structure to meet or conform to the requirements of the New Zealand Building Code contained in the First Schedule to the Building Regulations 1992 and any applicable New Zealand Standard (or amended or substituted regulation or standard) in relation to leaks, water penetration, weatherproofing, moisture ingress, or any water exit or control system; or

b) mould, fungi, mildew, rot, decay, gradual deterioration, micro-organisms, bacteria, protozoa or any similar life forms in building or structure

The claim

In or around 2014, the Council was sued by the owners of the Waterfront Apartment buildings, which had a mix of weathertightness and non-weathertightness defects. Council subsequently settled the claim with the owners.

Council notified RiskPool of the claim. RiskPool declined Council's claim in full on the basis that Exclusion 13 applied to all of its liability in light of the weathertightness defects. Council had notified a similar claim in 2012 that RiskPool declined on the same basis.

Council issued proceedings against RiskPool. The case turned on the breadth of the term 'Claims' in the exclusion clause. 'Claims' was defined in the Protection Wording as, 'the demand for compensation made by a third party against the Member'.

Council argued that a straightforward reading of Exclusion 13 was that it only applied to the elements of a demand for payment arose from weathertightness complaints, such that the exclusion would not exclude the parts of a demand for payment that related to non-weathertightness issues. Council argued its interpretation was consistent with the natural and ordinary meaning of the words, focusing on the exclusion of liability for Claims arising from weathertightness, as opposed to Claims generally or in totality. It also noted:

• The policy's purpose was to provide a wide form of indemnity insurance to protect councils against their exposure for negligence in performing public functions, equal or better to that available in the commercial market. This purpose would be defeated by RiskPool's interpretation and render the policy "practically illusory".
• RiskPool could have explicitly excluded building defect liability for non-weathertightness related losses. Mr Carpenter, witness for RiskPool, in cross-examination had accepted that '...[RiskPool] were taking away weathertightness but… weren’t taking away non-weathertightness'
• A reasonable reader would not interpret Exclusion 13 to exclude liability which had no causal relationship to the specified excluded risks.
• RiskPool's interpretation would produce perverse and absurd results. For example, it would mean that where a claim against Council was subsequently amended to include a new and unrelated weathertightness complaint, that would lead to exclusion of previously insured loss.
• Even if RiskPool's interpretation is available the exclusion is ambiguous and must be construed against RiskPool as the party who drafted it.

RiskPool argued that a literal interpretation should be adopted in relation to the indemnity clause and Exclusion 13, noting indemnity was provided for 'Claims' and that Exclusion 13 was carving out an exception to that. RiskPool argued that 'Claims' in Exclusion 13 included all components of a demand for compensation. If a demand for payment (i.e. Claim) was made against Council based on both weathertightness and non-weathertightness building defects, as was the case here, then the entirety of the claim would be excluded. RiskPool also argued:

• The 'de minimis' materiality applies, so the absurd result of a minor weathertightness complaint causing an otherwise covered claim to be excluded would not occur.
• What constitutes a demand for payment, and whether there are several demands, is a factual question, looking at the nature and timing of the demand for payment, the number of contracts and their relationship with one another, and the claimant(s). The way the demand is made and how it is described by the person making it are starting points.
• Insurance contexts, claims were generally treated as a whole and not subdivided into their constituent parts.
• The Waterfront Apartments claim and settlement were not separated out into its weathertightness and non-weathertightness components.
• A wide application of Exclusion 13 is indicated by the words 'alleging or arising directly or indirectly out of, or in respect of …'  In insurance contexts, with 'in respect of' is one of the widest expressions expressing a connection or relationship.  
• In the alternative, it argued the 'twin causes principle' applies by analogy (with weathertightness and non-weathertightness defects being a 'type' of liability, rather than a 'cause') such that where there were both types of liability underlying a demand for payment, the whole demand for payment should be excluded.
• The extrinsic evidence shows that the parties intended RiskPool's meaning.

Strike out application 

RiskPool applied to strike out the claim on the basis it could not succeed. That application failed in the High Court so RiskPool appealed. The Court of Appeal was unwilling to strike out Council's claim. One reason was that the Court thought there might be useful evidence from the parties which indicated what they agreed the policy contract meant.

As the strike out application failed, the case went to trial.

Plain wording

The High Court started from the position that the meaning of 'Claims' in the exclusion could be determined from the exclusion's own wording and in the context of the contract. Justice Grice considered the exclusion in the general context of the insurance contract and considered relevant case law. Her Honour concluded that the plain meaning of 'Claims' was broad, such that the entirety of a claim which involved weathertightness and non-weathertightness issues would be excluded.

Notably, Her Honour accepted that whether separate complaints constituted one claim or multiple distinct claims was a factual inquiry. It is clear from Her Honour's reasoning, that the way the Waterfront Apartment owners had pleaded their claim against Council was relevant, although not decisive. Other factors considered were how the individual complaints had manifested and arisen, and the nature of the complaints and what they related to. Here, there was a single development and although individual defects arose in relation to different consents, inspections and compliance certificates, the claim against Council had included all these complaints.

De minimis defects

Council argued that the plain wording could not be correct on the basis it would result in minor weathertightness defects leading to the exclusion of significant non-weathertightness claims. Interestingly, however, Justice Grice agreed with RiskPool that the de minimis doctrine would apply — where there is an objectively minor or non-material weathertightness defect existing in a significant non-weathertightness claim then the Protection Wording would not exclude the entire claim.

Extrinsic evidence

While the Court concluded that, on its face, the exclusion was effective to exclude all complaints, the Court also went on to look at contextual evidence to check that conclusion.  

Justice Grice considered that the communications between Council and RiskPool relating to the declinature of the 2012 claim supported the plain meaning being the intended meaning. In declining the 2012 claim, RiskPool had explained its reasons for declinature - that the exclusion applied to the whole claim and not just parts of it that were weathertightness complaints.  Council gave evidence that it decided not to challenge this at the time as it thought it would be better to wait for a "better case" in which to challenge the exclusion.  Interestingly, Council did not call its employee who dealt with, and exchanged correspondence with Riskpool regarding, its 2012 claim.  Instead, Council relied on its CEO to give evidence on Council's approach.

Therefore, RiskPool's declared reasons in 2012 as to the meaning and application of the exclusion were relevant to interpreting the 2014/2015 Protection Wording, which was in the exact same terms.  It was critical that Council had renewed while understanding RiskPool's intention and had not disputed it.  The contract renewed annually and so when Council accepted the Protection Wording at the next renewal with the knowledge of RiskPool's intended meaning, it must be taken to have accepted that meaning for the purposes of objective contract interpretation.  That Council secretly intended a different meaning was irrelevant.

Duties at renewal

Related to Council's decision not to challenge the 2012 claim and to wait for a better claim, Justice Grice made some interesting comments on Council's duty to act in good faith towards the Scheme. In particular, Her Honour noted the obligation extends to requiring an insured to disclose anything material to the insurer that may affect risk, and so concluded that Council had a positive duty to advise RiskPool that it did not intend to accept RiskPool's interpretation of the exclusion. Her Honour further observed that, had RiskPool known that Council intended to wait and challenge the meaning RiskPool had conveyed in its declinature, RiskPool would have been able to reassess the risk of covering Council and then refused to renew or require increased contributions. 

An absurd result?

Council also argued that the application of the meaning argued by RiskPool would be commercially unrealistic or absurd, because if the exclusion extended to all building defects, there would be no build defect cover left.

In its decision not to strike out the claim, the Court of Appeal had expressed some disbelief at the meaning, which Council had pointed out would have the consequence of a claim based on a structural defect (which would be covered) suddenly falling out of cover because the person claiming against Council had added a minor weathertightness complaint into the Claim.  

Ultimately, Justice Grice dismissed Council's argument on this point, noting that cover remained for other building defect claims which had no element of weathertightness complaints, and that there was no evidence to support a finding of commercial absurdity or unreality.  

It is also worth noting that Her Honour had held that the de minimis principle would apply, and so the exclusion would not operate to the extent as described by Council — if a weathertightness complaint was truly minor or not material in the context of the claim, then the exclusion would not apply.

Concluding remarks

RiskPool demonstrates that conduct prior to renewal of a policy may affect the meaning of that policy. The fact RiskPool had made its intended meaning of 'claim' in the exclusion clause abundantly clear to Council and the fact Council remained silent and accepted renewal, was strong evidence that that was the objective meaning following renewal. This reemphasises the importance of addressing disagreements in policy wordings and considering how conduct may affect the future meaning of the policy.

Justice Grice's comments on the application of the duty of good faith are also interesting and constitute a rather broad interpretation of the duty.  However, we consider the lasting impact of this may be limited given Her Honour's ruling that Council's acceptance of the renewal with the same exclusion and knowledge of RiskPool's intended meaning established an objective meaning.

We understand that the decision has been appealed. 

*Update 

Since the RiskPool decision, the Supreme Court has issued its decision in Bathurst which has made further comment on the interpretation of contracts. We consider that Justice Grice's approach in RiskPool, which determined whether evidence was admissible based its tendency to show the objectively mutual intention of the parties, is consistent with Bathurst.

Interestingly, RiskPool had argued Justice Thomas' 'speaking silence' approach in Gibbons was applicable here (i.e. that the Court may take an adverse inference from the fact that one party had failed to actively dispute the declared intended meaning when it had opportunity to do so). However, given Justice Grice's conclusion that it was not subsequent conduct in the true sense Her Honour considered it a moot point. In light of the Supreme Court's comments Bathurst, it is clear that there is a reasonable argument to be made on this point.