Arrow International Ltd v QBE Insurance (International) Ltd
[2010] NZCA 408
•8 September 2010
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NOTE
Arrow International Ltd v QBE Insurance (International) Ltd
Court of Appeal Wellington CA426/2009; [2010] NZCA 408
22 June; 8 September 2010
O’Regan, Ellen France and Randerson JJ
Insurance – Liability of insurer – Policy construction – Cover for damage
occurring “during period of insurance” – Whether deterioration by water ingress into building occurred “during period of insurance” – Whether policy to be construed contra proferentem.
Contract – Interpretation – Whether insurance policy to be construed contra proferentem.
Arrow International Ltd appealed from the judgment of MacKenzie J reported at [2009] 3 NZLR 650 (HC) and the Court of Appeal dismissed the appeal, upholding the reasoning of MacKenzie J.
The reasons of the Court were given by
O’REGAN J.
[Editorial note: [1]–[14] are omitted from this note.]
Issues on appeal
[15] Arrow did not seek to challenge the Court’s factual findings on appeal. Rather, it identified the following key legal issue: is QBE liable to indemnify Arrow for the settlement reached with the owners and others:
(a) on the basis that damage occurred during the relevant period of insurance;
(b)or, on the basis that the damage that was happening both before and during the relevant period of insurance first became actionable during the relevant period of insurance (that is, when it caused loss to the
owners and completed their cause of action against Arrow);
(c) or, on the basis that the extent of the damage first became manifest
during the relevant period of insurance?
[16] If that issue is resolved in favour of Arrow, three other issues would arise:
(a) if QBE is liable, whether this liability is excluded by the “Defective
Products” exclusion in the insurance policy;
(b) if QBE is liable, whether the full amount of settlement should be apportioned between the insured and uninsured heads of claim on which the settlement was based, so that QBE is liable only for the
insured aspects; and
(c) whether Arrow is entitled to recover its defence costs from QBE.
Our approach
On the approach we take to the case, it is necessary for us to deal only with the first issue identified above.10 Because our views correspond closely to those of MacKenzie J, we can set them out relatively briefly.
We start with the proposition expressed by MacKenzie J in his judgment 5 to the effect that the search for a trigger for coverage under a public liability policy must be firmly grounded in the policy wording.11 We agree. In the present case, Arrow will be entitled to indemnity only if the sums for which it became legally liable to pay by way of compensation to the owners of the leaking apartments and retail units was a liability that was “consequent upon ... 10 physical ... damage ... happening ... during the period of insurance”.
There was no dispute that Arrow did become legally liable to pay a sum by way of compensation for accidental physical damage to the Luxford Villas arising from an “occurrence” as defined in the policy. Nor is there any doubt
that some physical damage was happening during the period of insurance. 15
However, the question which must be answered is whether the compensation
that Arrow became legally liable to pay was “consequent upon” damage that was happening during the period of insurance.
MacKenzie J found that there had been an alteration to the physical
state of the timber which had rotted in the complex to an extent which was 20 more than de minimis so that the point had been reached where physical damage had happened before (indeed, well before) 30 May 2002, that is, before QBE became on risk under the policy it issued to Arrow.12 He found that
the extent of the damage to the timber by 30 May 2002 was such that, had the damage been observed in any part of the building, the only practical means of 25 repairing the damage would have been to open up all areas where exposure of
the timber to moisture was likely to have occurred, and to replace the affected timber.13 He found that this would have entailed a scope of works broadly similar to that in fact held to be necessary when the value of the remedial work
was later assessed. 30 [21] As counsel for QBE, Mr Ring QC submitted, these unchallenged findings leave no room for the appellant’s argument that the compensation paid
by Arrow was “consequent upon” the damage which was happening in the building complex during the period that QBE was on risk. On the contrary, the damage leading to the liability to pay compensation had already happened 35 before QBE came on risk under the policy. The physical damage which was happening during the period after QBE came on risk did not therefore trigger a liability to pay compensation over and above the liability in existence at the policy commencement date (that is, the liability for the damage that had been happening before that date). 40 [22] As Mr Ring suggested, the situation was analogous to a car that had
been involved in an accident and damaged to the extent that it was a write-off. The insurer for the party at fault for the first accident would be liable for the full value of the car. If, while the wreck was on the side of the road, another car
At [15].
11 At [66].
At [83].
At [84]–[85].
smashed into it, making the damage even worse, the insurer for the driver of the second car would have no liability because the car was already a write-off before that second accident occurred.
[23] Our conclusion makes it unnecessary for us to address in any detail the
arguments before us on theories as to the trigger for insurers’ liability under public liability policies. The cases proposing these different theories are of limited relevance, given the clear wording of the policy in issue in this case. [24] MacKenzie J was asked by Arrow to accept the proposition that the use of the term “happening” in the policy meant that the policy provided for cover
for continuous exposure, so that there may be multiple triggers of the policy, and in a situation where there are different insurers for different periods, the possibility exists that each may be partially liable. MacKenzie J determined that, given the wording of the current policy, it was necessary to establish a single trigger.14 He found that the reference to “damage happening” was
consistent with a requirement to fix a single point at which coverage under the policy is triggered.
[25] On the facts of this case it was not necessary to decide whether it required that a single point in time be fixed and it is not clear to us that the wording required this. In fact, MacKenzie J was unable to do so on the
evidence before him. There may be cases where, at best, the evidence can narrow the period of damage down as occurring within a period of time in which different insurers were on risk. In such cases, it may be appropriate to apportion liability between them.15 As this was not such a case, it is not necessary for us to express a view on that.
[26] We do not see any need to engage further with this aspect of the case, because on the Judge’s factual finding the full amount of the liability for compensation incurred by Arrow was already incurred before QBE came on risk. While damage was happening during the period of the QBE policy, no liability for that damage was being incurred.
[27] MacKenzie J also dealt with the argument that the reference to damage happening during the period of cover should be interpreted as meaning damage which becomes manifest during the policy period. That would make the trigger for liability the manifestation of damage, rather than the occurrence of damage which has the consequence of a legal liability to pay compensation.
MacKenzie J reviewed the authorities and concluded that there was no basis for adopting the manifestation theory in the present context. We agree with MacKenzie J that, given the clear words of the policy, there is no basis for finding that liability under the policy is triggered only when damage becomes manifest. It is not necessary for us to engage further with the manifestation
theory.
Result
[28] We dismiss the appeal.
Costs
[29] We award costs to the respondent for a standard appeal on a band A basis
and usual disbursements.
Appeal dismissed.
14 At [74].
15 As occurred in Bernard Alie v Betrand & Frere Construction Company Ltd (2003)
Carswell Ont 2886 at [138].
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