The decision of the Supreme Court in Local Government Mutual Funds Trustee Ltd v Napier City Council¹ provides important insight as the first Supreme Court decision addressing a complex contractual interpretation issue following its leading judgment in Bathurst. Overall, the Supreme Court’s decision in LGMFTL v NCC confirms that contractual interpretation remains a fundamentally textual exercise, with limited scope for extrinsic evidence. The decision interpreted the relevant contractual provision (an exclusion clause in an insurance policy) based on the natural and ordinary meaning of the provision, read in the context of the contract as a whole. The Supreme Court agreed with the Court of Appeal’s earlier decision that the extrinsic contextual material relied upon by the insurer (“Riskpool”) was not sufficiently compelling to have any impact on the proper interpretation of the exclusion clause. Both the outcome of the case, and the approach to interpretation applied by the Supreme Court, illustrate that the test for admission of extrinsic evidence as set in Bathurst has not, in practice, altered the fundamentally textual approach to contractual interpretation in New Zealand.

The Supreme Court’s decision is significant for both insurers and insureds as it provides authoritative guidance regarding the correct approach to interpretation of exclusion clauses in insurance contracts. The weathertightness exclusion clause in issue is a common industry wording, so the decision provides helpful clarity for parties involved in building defect litigation involving different types of building defects.

The long running dispute centred on the scope of a “weathertightness exclusion” in a professional indemnity insurance policy. The issue was whether the drafting of the weathertightness exclusion meant that non-weathertightness building defects were also excluded wherever a claim involved weathertightness defects. Riskpool argued that it did, because the introductory wording to the exclusion said that the policy did not cover “liability for claims.. alleging… weathertightness”, and the third party claim against the insured constituted a single indivisible “claim”. Upholding the Court of Appeal’s decision, the Supreme Court held that when read as a whole and in context, the purpose of the exclusion was to exclude the risk of weathertightness defects, and therefore only liability with a causal connection to weathertightness was excluded.

It is rare for insurance policy interpretation disputes to make it to the Supreme Court, so this decision provides useful guidance on several points of general significance. Key takeaways include:

(a) The correct application of the weathertightness exclusion is that only cover for weathertightness defects is excluded; where there is divisible loss caused by non-weathertightness defects those will remain covered. The exclusion wording is common to professional indemnity policies in New Zealand, so the outcome will be welcomed by insureds.

(b) When interpreting an exclusion clause, ascertaining purpose is critical. What is the nature and scope of the risk which the parties were seeking to exclude – “the Court is looking at what it is the clause is driving at, its purpose – what is it that is excluded?”²

(c) The interpretative focus must be on the words of the exclusion read as a whole and in context, rather than “focusing unduly on only one part” of the clause.

(d) The judgment reiterates, albeit with limited analysis, the often-cited principle that exclusion clauses in insurance policies are to be interpreted narrowly against insurers.

(e) The principle in Wayne Tank³ is not applicable where it is possible to apportion a divisible loss between insured and uninsured (i.e. excluded) causes. Wayne Tank is authority for the well-recognised principle that where there are two equally effective and interdependent causes of loss, one which is covered and one which is excluded, the exclusion applies to the entire loss.

 

Background

The full background and litigation history is set out in our earlier articles about the High Court and Court of Appeal’s decisions:

https://wilsonharle.com/publications/court-clarifies-correct-approach-to-interpretation-of-exclusion-clauses-in-insurance-contracts

By way of summary, the owners of the Waterfront Apartments complex in Napier pursued proceedings against Napier City Council (“NCC”) seeking damages for a mixture of weathertightness and non-weathertightness building defects that were allegedly caused by NCC’s negligence. NCC sought indemnity from its insurer, Riskpool, for its liability relating to the non-weathertightness defects. Riskpool relied on a weathertightness exclusion to decline cover entirely, arguing that the entire Waterfront Apartments proceeding was one indivisible “claim”, and that because it included allegations of weathertightness defects, the exclusion applied to the “claim” in its entirety. Following the declinature, NCC defended the proceeding through to a confidential settlement and then pursued separate proceedings against Riskpool seeking indemnity for the proportion of the settlement sum that related to divisible non-weathertightness defects (and defence costs).

At first instance, the High Court held that the entire Waterfront Proceeding was entirely excluded from cover. Grice J accepted Riskpool’s argument that the word “claim” was critical to the scope of the exclusion, that the Waterfront Proceeding constituted only one claim, and therefore the entire “claim” was excluded wherever a weathertightness defect was alleged. In reaching this conclusion, the High Court placed significant weight on background materials that were extrinsic to the insurance contract, with 120 paragraphs of the judgment devoted to canvassing the background materials.

The Court of Appeal overturned the High Court decision, and held that, when read as a whole, the clear intention of the weathertightness exclusion was to only exclude cover for liabilities that had a causal link to weathertightness defects. The Court of Appeal did not consider it helpful to focus unduly on the word “claim” in isolation. While the Waterfront Proceeding was one “claim” against NCC, for insurance purposes a claim may be either aggregated or divisible. The Waterfront Proceeding consisted of “mixed claims” because they involved a mixture of liabilities with distinct and divisible underlying causes (weathertightness and non-weathertightness). The wording of the weathertightness exclusion clearly contemplated divisibility as, read as a whole, it was aimed solely at excluding cover for liability arising out of weathertightness defects. In the Court of Appeal’s view, the exclusion wording used language of causation, so clearly contemplated an inquiry into the “real nature” of NCC’s liability to determine whether, and to what extent, the exclusion applied. The Court of Appeal did not consider the extensive extrinsic evidence relied upon by the High Court to be particularly helpful although, in its view, considerations of commercial purpose supported the conclusion that only losses causally linked to the excluded peril were excluded.

 

Supreme Court decision

The Supreme Court agreed with the Court of Appeal’s interpretation of the weathertightness exclusion, although its decision places emphasis on slightly different points. Contracts of insurance are to be interpreted in the same way as any other contract⁴ – it is an objective exercise with the aim of ascertaining the meaning which the document would convey to a reasonable person who had all the background knowledge which would reasonably have been available to the parties at the time of the contract.⁵ The Court also reiterated the point made by the Supreme Court in Firm PI that while, context is a necessary element of the interpretative process, the text remains centrally important and the focus is on interpreting the document as a whole rather than particular words. Notwithstanding these general points, the Supreme Court also acknowledged the generally accepted principle that exclusion clauses to insurance contracts are to be construed strictly.⁶

Riskpool’s interpretation erred by focusing unduly on only one part of the exclusion clause – the word “claim”. Its approach sought to “dissect the clause to focus unduly on individual words”.⁷ However, when the exclusion clause was read as a whole, the meaning was clear and there was nothing in the language which would convey to a reader that divisible parts of a “claim” unrelated to weathertightness defects were being excluded.⁸ When the word “claim” was read as one part of the whole clause and in context, it simply could not carry the weight argued for by Riskpool.⁹  While the Court of Appeal’s analysis used “the language of causation”, in the Supreme Court’s view, the Court of Appeal was essentially assessing “what it is the clause is driving at, its purpose – what is it that is excluded”.¹⁰ There was no error in that focus. Finally, the Supreme Court noted that, had it been the parties’ intention to exclude both weathertightness and non-weathertightness liabilities, clearer language would have been used to convey that a claim’s divisible portions were also excluded.¹¹

The Supreme Court reached its conclusion through textual analysis of the words used in the contract, read as a whole and in context. Having done so, it noted that none of the authorities relied on by the parties or the extrinsic materials altered its analysis. The authorities referred to reflected the particular context and/or contract wording that was in issue in those cases.¹² The extrinsic evidence emphasised by Riskpool was not “sufficiently compelling” to have any impact on the proper interpretation of the contract. In the Supreme Court’s view, the submissions made regarding commercial purpose were essentially another way of putting the submission about the meaning of the text.¹³

 

Endnotes

¹[2023] NZSC 97, [2023] 1 NZLR 184.
²At [47].
³ Wayne Tank and Pump Co Ltd v The Employers’ Liability Assurance Corporation Ltd [1974] 1 QB 57 (CA).
⁴ At [37].
⁵ Firm PI 1 Ltd v Zurich Australian Insurance Ltd [2014] NZSC 147, [2015] 1 NZLR 432 at [60]–[63], [77]–[79], [84] and [88]–[93] per McGrath, Glazebrook and Arnold JJ. This was endorsed in Bathurst Resources Ltd v L&M Coal Holdings Ltd [2021] NZSC 85, [2021] 1 NZLR 696 at [43]–[47] and [57] per Winkelmann CJ and Ellen France J and [232] per Glazebrook, O’Regan and Williams JJ.
⁶ At [68].
⁷ At [49].
⁸ At [48].
⁹ At [43].
¹⁰ At [47].
¹¹ At [48].
¹²  At [50].
¹³ At [70].