Can an exclusion in a liability policy that only applies to part of a claim still exclude the whole claim because of the definition of ‘Claim’ and the way the third party has pleaded its claim against the insured?
The owners of an apartment block suffering from weather-tightness issues are suing the Napier City Council.
The owners plead in their statement of claim one cause of action only in negligence (breach of duty of care by the Council in performing its regulatory functions). In turn, they plead this led to multiple defects in the building.
Many of the defects relate to weather-tightness issues, but some do not
The Council’s liability policy defines ‘Claim’ as:
… the demand for compensation made by a third party against [the insured] …
It contains the usual leaky-building exclusion as follows:
This [policy] does not cover liability for Claims alleging or arising directly or indirectly out of, or in respect of [weather tightness issues].
The parties agree that the leaky-building exclusion applies to all the weather-tightness defects pleaded. However, the Council says cover remains under the policy for the non-weather-tightness issues.
The insurer disagrees. It says the ‘Claim’ the weather-tightness exclusion is referring to is ‘…the demand for compensation ….’ As there was only one cause of action pleaded, the exclusion applies to that one demand for compensation. As the exclusion refers back to that ‘Claim’, it must apply on an all-or-nothing basis to that one demand. As it clearly applies to part of the demand, there is no cover under the policy.
The insurer sought to strike out the Council’s proceeding against it.
In Napier City Council v. Local Government Mutual Funds Trustee Limited  NZHC 2269 the Auckland High Court found against the insurer.
The Court applied the traditional ‘tool box’ of contract interpretation rules to reach its decision. It reasoned as follows:
- Both the insuring clause and the leaky building exclusion refer to ‘Claims’ (plural). They envisages a number of claims arising out of the property damage. In this sense, the word ‘Claims’ is referring to defects, and the leaky building exclusion only applies to those defects that come within its terms. By implication, the other defects remain covered.
- The definition of ‘Claim’ refers to ‘the’ demand for compensation suggesting there is only one ‘Claim’ by a third party. However, looking at the policy as a whole it does not preclude there being a number of ‘Claims’ constituting a number of demands for compensation. This is confirmed by the use of the plural in the insuring clause and the leaky building exclusion. If the insurer’s interpretation was intended, the Court expected much clearer language to this effect in the policy.
- The Court will always look at the real nature of the claims in a pleading, irrespective of the form of the pleading itself. The Court noted the English authorities that say the ‘craftiness’ or ‘clumsiness’ of the claimant’s pleading is not determinative of the characterisation of a claim for the purposes of professional indemnity insurance.
- The Court noted that the policy had not used the word ‘Claim’ throughout the policy with precision. In one part of the policy, it used the defined word in the context of the insured’s claim on the policy, rather than the third party’s claim against the insured. This was clearly incorrect and supported the argument that the special definition was not meant to be applied rigorously.
- Applying the business efficacy rule of contract interpretation, the Court found the insurer’s position lacked commercial reality. It considered it illogical that because of a single allegation of a weather-tightness defect in a statement of claim, the insurer could maintain a wholesale denial of liability against the Council.
In our experience, many claims-made policies confuse the claim made by the third party against the insured with the insured’s claim under the policy. It is unfortunate they both commonly use the word ‘claim’. It is interesting to see the Court partly relying on this confusion in refusing to apply the special definition in the policy in a strict and literal way. The message here must be: get the drafting right throughout the policy or the special definition may not stick.
In our view, the insurer’s argument was always going to be difficult because it relied on the way the claim against the insured was framed in the statement of claim, and required the Court to apply a strict and literal interpretation of the special definition, when other parts of the policy didn’t support this.
The insurer may have been tempted to run this argument because of the cover for defence costs. Any cover remaining for the possibly small number of non-weather-tightness issues meant the insurer had to meet the insured’s defence costs. The trouble is, with lengthy and complicated litigation like this, it is difficult to divide the defence costs between the insured and uninsured issues.
This case is another good example of the Court using the established rules of contract interpretation to come to a decision about the correct interpretation of the policy.