Insurance exclusion clauses: Supreme Court favours orthodox approach to interpretation

The Supreme Court yesterday released its decision in Local Government Mutual Funds Trustee Ltd v Napier City Council [2023] NZSC 97. The Supreme Court dismissed the appeal by the Local Government Mutual Funds Trustee Ltd (also called RiskPool) regarding the interpretation of an exclusion clause for "Claims alleging or arising directly or indirectly out of, or in respect of" weathertightness defects.

The Supreme Court confirmed the well-established "general rule that contracts of insurance are interpreted in the same way as any other". That is, it is an objective approach where the text is centrally important but to be understood in the context of all the background knowledge reasonably available to the parties at the time of entering the contract.

• On the text of the policy itself, the Supreme Court confirmed that the clause must be read as a whole and in context. The Court considered RiskPool's arguments focussed unduly on only one part of the exclusion clause that would result in a textually awkward result, and which would require ignoring some words within the exclusion clause.
  
  
• It was also unconvinced by an argument that the exclusion clause excluded liability for "Claims", meaning claims against Council, and each single Claim by an individual third party was not divisible. The Court noted that the policy definition for "Claims" was "...a general, multipurpose, definition. When read as part of the whole clause and in context, that word simply cannot carry the weight argued for by RiskPool."

• The Supreme Court also dismissed RiskPool's arguments based on the context at the time of entering the policy, concluding:
  
  
  • The use of the term "involving" in prior correspondence and endorsements regarding "Building Defect Claims for Moisture Ingress" was not relevant to the weathertightness claims exclusion.
  • Contemporaneous correspondence from RiskPool to Council that it had resolved to cease providing weathertightness cover but would "continue to manage the administration of [Council's] weathertight claims for the broader benefit of Local Government" was unhelpful and unclear in its meaning.

RiskPool had also raised the Wayne Tank principle, that where there are two concurrent and proximate causes of the loss claimed under an insurance policy, one within cover and the other excluded, the exclusion applies to the claim as a whole. The Supreme Court held that the principle was irrelevant and distinguished Napier City Council's claim on the basis that it was possible to apportion loss between weathertightness (including a mixture of weathertightness and other issues) and non-weathertightness causes.