Napier City Council v Local Government Mutual Funds Trustee Ltd
[2021] NZHC 1477
•21 June 2021
JUDGMENT FOR PUBLIC RELEASE: SEE ADDENDUM. IN THE HIGH COURT OF NEW ZEALAND NAPIER REGISTRY
I TE KŌTI MATUA O AOTEAROA AHURIRI ROHE
CIV-2017-441-070
[2021] NZHC 1477
BETWEEN NAPIER CITY COUNCIL
Plaintiff
AND
LOCAL GOVERNMENT MUTUAL FUNDS TRUSTEE LIMITED
Defendant
Hearing: 27 July 2020 to 12 August 2020 (further submissions received
September 2020)
Counsel:
D H McLellan QC and G Tompkins for Plaintiff
M G Ring QC, C J Hlavac and K Welsford for Defendant
Judgment:
21 June 2021
JUDGMENT OF GRICE J
Contents
Para
Introduction[1]
Background[9]
Notification of claim[17]
The RiskPool scheme[22]
The Scheme’s documents[32]
Strike out application[50]
The Waterfront claim[55]
The issues[68]
Contractual interpretation[75]
The Protection Wording (the Guidelines)[79]
The Parties’ interpretations[95]
NCC’s interpretation[95]
RiskPool’s interpretation[117]
The “Claim” cases[137]
Extrinsic evidence in contractual interpretation[176]
The evidence of Mr Carpenter (admissibility issues)[186]
The events leading to the introduction of Exclusion cl 13(a)[232]
Analysis[239]
Reasonable availability of evidence[239]
Conclusion on admissibility of evidence[254]
NAPIER CITY COUNCIL v LOCAL GOVERNMENT MUTUAL FUNDS TRUSTEE LIMITED [2021] NZHC 1477 [21 June 2021]
Conclusion in relation to the 2012 Dalton Street claim [258] General communications to Members [279] Evolution of Exclusion cl 13 [282] Analysis on liability [297] Contra proferentum [327] Commercial reality [328] The 2015 fire defect notification [335] Conclusion [341] The approach if RiskPool had been liable [348] Repudiation [367] How does the global settlement figure get apportioned? [376] Apportionment [394] Defects 15–19 (fire safety compliance) [422] Defects 20–21 (structural northern decks) [430] P&G and scaffolding [432] Non-defects [437] Conclusion on apportionment [438] Other claims [439] Defence costs [440] Costs [442] Confidentiality [443] Addendum: [444] Attachment 1 – Waterfront Plaintiffs’ Claim page 128 Attachment 2 (Multi Building Exclusion and Sublimit) page 129 Attachment 3 (Present Exclusion cl 13) page 131
Introduction
[1] Napier City Council (NCC or the Council) was a member of a mutual scheme arrangement that brought together local authorities in New Zealand. The scheme provided an indemnity cover for its local authority members for various risks including civil liability.1
[2] The scheme was established in 1997 under a trust deed (Trust Deed) in response to a growing dissatisfaction by local authorities with the commercial insurance sector’s response to their insurance needs. It was known as the New Zealand Mutual Liability RiskPool Scheme (RiskPool Scheme or Scheme). The defendant, Local Government Mutual Funds Trustee Ltd (RiskPool), was the trustee of the scheme.2 It was a subsidiary of New Zealand Local Government Insurance Corporation Ltd (LGIC), which was essentially owned by the members. The Riskpool Scheme no longer offers indemnity cover.
[3] Mr Paul Carpenter of the insurance brokers Jardine Lloyd Thompson (JLT) was involved in the setting up and management of the scheme. The RiskPool Scheme operated in much the same way as an insurer. It issued “Protection Wording” similar to that contained in a commercial insurance policy and offered its members claims’ handling and risk management services. It also negotiated with and obtained reinsurance from commercial underwriters.3
[4] The Scheme operated well for the first few years of its existence but in the early 2000s the level and nature of some claims were causing concern. The claims were largely as a result of what has been described as the “weathertight” or “leaky building” crisis. In particular, the Scheme was exposed to substantial costs for remedial work associated with weathertight complaints in relation to multi-unit dwellings.
1 Including professional indemnity cover.
2 The defendant and New Zealand Local Government Insurance Corporation Limited are parties to a Deed of Trust made on 1 July 1997 varied on 22 June 2007.
3 Mr Carpenter said the wording was based on the 1990s wording used by the commercial insurer FAI Insurance Ltd.
[5] RiskPool took various steps to limit its exposure to those claims culminating in the introduction of a weathertight exclusion. That exclusion was added as cl 13(a) (the weathertight exclusion) to the list of exclusions in the Protection Wording in 2009 and included in the terms for the annual renewals from that date. It is the meaning of the indemnity cover and Exclusion cl 13(a), which is at the heart of this case.
[6] The Council is suing RiskPool for breach of contract and seeks contribution to a settlement payment it made in 2019 to settle proceedings involving weathertight and other building defects filed in 2014 against the NCC by owners of a multi-apartment complex known as the Waterfront Apartments. The settlement was negotiated at mediation. [redacted]. The global figure was paid in full and final settlement for the cost of the works required to remedy weathertight and non-weathertight building defects as well as structural and fire safety compliance failures. [redacted]. The global settlement agreement did not make any specific allocations in relation to the matters settled.
[7] Put simply, RiskPool says it is not liable to contribute anything toward the settlement amount because there was only one “Claim” against the NCC. Exclusion cl 13(a) excluded all other building defects and compliance failures from cover when a weathertightness4 complaint was involved. This included non-weathertight defects discovered as a result of the investigation or in the repair of the weathertight defects.
[8] The NCC says that while the weathertight as well as mixed weathertight and non-weathertight complaints are excluded from cover, non-weathertight building defects, structural and fire safety compliance issues discovered in investigations or in the course of the works are not. 5 Further issues arise concerning the apportionment of the global settlement figure if RiskPool does not succeed in its primary argument that cover was excluded.
4 For the purposes of this judgment “weathertight” complaints or defects bears the meaning to the failure of any building to meet the relevant requirements of the New Zealand Building Code in relation to “leaks, water penetration, weatherproofing, moisture or any water exit or control system”. This is the wording of the weathertight Exclusion cl 13(a). See below at [47].
5 Complaints is adopted as a neutral term as it was by the Court of Appeal in Local Government Mutual Funds Trustee Ltd v Napier City Council [2019] NZCA 444 at [17] [“Reasons Judgment of the Court of Appeal”].
Background
[9] In 2007 the NCC issued completion certificates for a 52 apartment complex in Humber Street, Napier, known as the Waterfront Apartments. As the relevant local authority, it had been responsible for the issue of the original building consents as well as for the relevant inspections undertaken in the course of construction and the issue of the code compliance certificates.
[10] In October 2014 the NCC was served with proceedings brought by the Waterfront apartment owners and its body corporate (the Waterfront plaintiffs) for an amount not then quantified for the repair of extensive building defects and compliance failures.
[11] The Waterfront plaintiffs’ statement of claim pleaded only one cause of action against the NCC. It was in negligence alleging a breach of duty to exercise reasonable care and skill in: issuing the building consents; carrying out the inspections; deciding whether to issue the code compliance certificates; and by failing to establish and enforce a system that would give effect to the Building Code. The damages claimed were for repair costs together with consequential losses and general damages.
[12] The initial Waterfront plaintiffs’ statement of claim6 served in October 20147 listed the complaints as: plumbing (various defects in the bathrooms); air conditioning (inadequate heating and cooling air conditioning system); roof structure; breeze way floors – membrane (allowing moisture to enter into the basement carpark below); roof cladding – membrane (failing and allowing moisture to enter into the structure below); basement tanking (precast concrete joints and pockets in the basement failing allowing moisture ingress); and rain screens to precast concrete panels. The defects were said to have resulted in damage including the movement of the roof structure, excessive noise during high winds and moisture ingress through the exterior envelope into the structure of the building so that it did not comply with the building code.8
6 Statement of Claim – Body Corporate 388915 v HBS Pandora Prop Limited & Ors, 9 October 2013, CBD 306.2549.
7 It was filed in 2013.
8 Statement of Claim – Body Corporate 388915 v HBS Pandora Prop Limited & Ors (Waterfront Plaintiffs’ Claim), 9 October 2013, at [24] CBD 306.2549.
[13] The claim was not quantified but a schedule was attached to the statement of claim listing the general damages claimed by the various apartment owners totalling
$1.825 million. By October 2018 the claim had been quantified at $11,804,887.25 including $10,287,039 for remedial work and $1,57,848.25 for consequential losses.
[14] On the eve of the mediation held on 14 February 2019, a Schedule of Claim was presented to the NCC which is Attachment 1 to this judgment. The amount of the claim had increased. The list of defects alleged had also changed over time.
[15] The relevant NCC officers and the NCC’s lawyers and experts had worked intensively in the weeks before the mediation to clarify the claim and to prepare and revise their advice to the Council in preparation for the mediation.
[16] By the time the matter went to mediation in February 2019, the NCC and 15 other defendants were involved. One of the risks the NCC faced was that the other defendants became insolvent and would be unable to contribute by the time the matter went to trial. As the defendants were jointly and severally liable the NCC negotiated the contributions of the other defendants who were able to pay, and the settlement offers were made as global figures. The claim settled at mediation on 14 February 2019.
Notification of claim
[17] The NCC had notified RiskPool shortly after it had received the Waterfront plaintiffs’ statement of claim. RiskPool declined cover on the basis that indemnity cover was excluded. It pointed to Exclusion cl 13(a) and said that the notification had arisen due to allegations which included weathertight complaints and therefore all building defects in the claim were excluded.9
[18] NCC therefore instructed Ms Helen Rice of the legal firm, Rice Speir, to manage its defence of the Waterfront claim. Ms Rice had been the lawyer recommended by RiskPool. NCC put RiskPool on notice that it might challenge the declinature when it had further information.
9 When I refer to non-weathertight building defects I include structural defects and fire compliance failures.
[19] The terms of the settlement were confidential, but the agreement has been made available to the Court. The settlement agreement records a global sum payment to the Waterfront plaintiffs. It is not broken down by amounts to remedy specific defects nor into weathertight and non-weathertight amounts. [redacted].
[20] NCC accepts that RiskPool is not liable for the full amount of the settlement sum as it relates to compensation for the remedy of weathertight and mixed defects. However, it says RiskPool is liable for an amount attributable to the non-weathertight defects.
[21] The NCC now seeks judgment for the amount of the global settlement which it contributed together with defence costs and expenses.10 It has put RiskPool to proof as to what amount is excluded from the indemnity.
The RiskPool scheme
[22] RiskPool emphasised that it operated a mutual fund scheme for the benefit of its members. It was not a “for profit” and not a commercial operation. RiskPool was established in 1997 by the LGIC and JLT to provide liability services for its member local authorities. This included an indemnity cover for civil liability and a claims handling service tailored to the needs of local authorities.
[23] The indemnity cover was for public liability and professional indemnity. Its terms were set out in the Protection Wording, which was amended from time to time. In general terms members renewed their cover annually. Members came and went from the scheme over time.
[24] Mr Paul Carpenter of JLT, who had been involved in the establishment of the RiskPool Scheme, managed the Scheme and the claims handling service as well as arranging the reinsurance from the Scheme’s inception in 1997. Mr Carpenter reported to the board of RiskPool (RiskPool’s Board or Board) and the reinsurers.
10 The parties reached agreement concerning the quantum of defence, costs and expenses in relation to the Waterfront claim, subject to an adjustment depending on a finding concerning liability for bathroom defects, being $737,832.91 or $748,995.41.
[25] In 2012, Civil Financial Services Ltd took over the Scheme management but JLT through Mr Carpenter retained the claims management role. Mr Carpenter continues to manage the run-off claims for the RiskPool scheme and the reinsurers as well as managing various territorial authorities’ insurance arrangements. This cover is now taken out directly with commercial insurers.
[26] Mr Carpenter gave evidence for RiskPool. He emphasised that the Scheme’s mutual character had given it a point of difference from an arm’s length “commercial” insurer, which was focused on profit. The idea of the Scheme was that the members would fund a pool of money that could pay claims. The Scheme held a self-insured retention with separate funds established annually so that claims would be paid out of the fund established for the year in which they were notified.
[27] In the first few years of the Scheme’s operation, RiskPool had been able to maintain a reasonable self-insured retention pool. That retention was funded by member contributions and investment income. RiskPool had initially intended to build a surplus to maintain its self-insured retention over time. However, the retention was wiped out by claims in the early 2000s. The members funded the claims to the extent of their annual contributions and any calls made on them for additional contributions for a fund year deficit.
[28] The Scheme indemnity cover responded on a “claims made” basis.11 From 2009 onwards claims largely relating to weathertight issues led to calls being made on members over a series of fund years. Some local authorities had to pay although they were no longer members at the time of the call but had been in the fund years which had gone into deficit due to substantial claims made. Mr Carpenter said this led to members and ex-members expressing unhappiness because they were being exposed to calls arising from weathertightness claims well after the relevant fund year. Mr Carpenter said this was probably the predominant factor causing members to leave, leading to the failure of the Scheme.
11 In simple terms, “claims made” cover responds when a claim is made, regardless of when the claim event occurred. It provides cover only for claims made during the period of cover.
[29] The Scheme reinsured its risk through a commercial reinsurance scheme brokered by JLT. The wording and cover provided by the reinsurance arrangements did not mirror the Protection Wording. NCC said it was not aware of the wording of the reinsurance policy.12 The reinsurer has played no part in these proceedings.
[30] The Board had six members, four of whom were senior local government employees such as chief executives or directors of finance of member local authorities. The Board included a representative from JLT (Mr Carpenter) and one from Civil Financial Services Ltd, which took over the role of the Scheme’s manager in 2002.
[31] The Scheme documents set out the relationship between RiskPool and its members including the NCC.
The Scheme’s documents
[32] LGIC established the Scheme and the Trust and held the shares in the trustee company (RiskPool) on trust for the members.
[33] The Trust Deed provided that the Scheme documents (Scheme’s Documents) would be construed in the following order of priority:
(a)the Trust Deed,13 which was paramount;
(b)Scheme Rules;
(c)the Constitution;
(d)the Deed of Participation; and
(e)the Guidelines (the Protection Wording) for each member.
12 For instance, the Scheme continued to offer indemnity cover for weathertight claims to members after 2006 when the reinsurers excluded it.
13 This was dated 1 July 1997. The document produced was an amalgam of the Deed of Trust dated 19 July 1997 and the Deed of Variation of Deed of Trust dated 22 June 2007.
[34] The Deed of Participation, which was signed by each member as they joined the Scheme, recorded that the member agreed to observe and be bound by the terms of the Deed of Trust and Scheme’s Documents as if the member were a party to those documents (amended from time to time).
[35] The Trust Deed recorded the Scheme’s purpose under “Background” as follows:
3.1.1To establish and maintain an Annual Fund for each Fund Year for the benefit of Members … to pay the Civil Liabilities of the Members arising from the Risks covered by the Scheme and specified in the Scheme Documents with the intention that Members’ needs for insurance cover and insurance expenses are reduced for the benefit of residents and ratepayers;
3.1.2To provide Pooled Cover in respect of Risks [both as defined in the Trust Deed] as may be determined from time to time by the Board [of RiskPool];
3.1.3To manage and settle or pay Claims made against Members;
[36]The Trust Deed contained an interpretation section relevantly providing:
“Annual Fund” means the separate fund established, pursuant to the Scheme Documents, for each Fund Year of the Scheme.
…
“Civil Liability” means any civil liability resulting from an obligation, function, power or duty of a Member arising under law and includes any public liability and any liability for negligence of the Member.
“Claim” means any claim by a Member in respect of that Member’s Civil Liability during the term of the Scheme in respect of the Risks.
…
“Deed of Participation” means the deed of participation required to be entered into by each Member pursuant to clause 16.
“Fund” means all assets and property of the Scheme and includes each separate Annual Fund.
…
“Fund Year” means the year commencing 4.00pm on 30th June in each year and terminating 4.00pm on 30th June in the next following year, or as otherwise determined by the [directors of the defendant].
…
“Indemnity Cover” means insurance cover purchased by the [directors of the defendant] on behalf of Members to meet the Claims of the Members in the amount and in respect of the Risks determined from time to time by the [directors of the defendant] being amounts payable in excess of the pooled cover.
…
“Member” means any person or body (whether incorporated or not) admitted as a Member to the Scheme pursuant to the Scheme Documents.
“Pooled Cover” means cover provided from the Fund to manage and, if the Claims are accepted by the [directors of the defendant], settle or pay the Claims against the Members in respect of the Risks.
“Risks” means those risks of Civil Liability of each Member and which fall within the Guidelines for Exercise of Discretion for the relevant Fund Year.
…
“Scheme Documents” means this deed, the Scheme Rules, and the Constitution of Trustee Company and for each Member, its Deed of Participation and the Guidelines.
…
“Scheme Rules” means the rules of the Scheme as promulgated by the [directors of the defendant] from time to time.
…
“Underlying Claim” means any claim for civil liability (covered for the time being under the Guidelines) made against a Member which may give rise to a Liability; but also includes a claim which may give rise to a Liability to a Member under any other category of risk to that Member which the Guidelines of the Scheme may properly have been extended to cover pursuant to the terms of this deed.
[37] The Trust Deed also provided that “unless the context clearly otherwise required” words importing the singular included the plural and vice versa.
[38]The Trust Deed included the following:
(a)that LGIC appointed RiskPool’s Board (RiskPool was a subsidiary of LGIC);
(b)that the Board was responsible to LGIC as a shareholder (as trustee for the members); and
(c)that the Board could act in the best interests of LGIC notwithstanding that it may not be in the best interests of RiskPool.
[39] The Trust Deed provided for the setting up of the annual funds to which Members for that year would contribute in proportions determined by the Board. Underlying claims made on any Members during the relevant fund year would be met from the pooled cover for that fund year. Any further amounts would come from the indemnity cover for that fund year. If the underlying claim exceeded the pooled and indemnity cover for the fund year the excess came from surpluses from previous fund years and from additional contributions by Members to the limit of the guarantee by LGIC.
[40] The purpose of the Scheme rules was to set out the administrative mechanisms “by which the scheme is administered so as to put the purpose and intent of the Deed of Trust into effect”.
[41]The Scheme Rules set out the following definitions:
‘Claim’ means any claim made under the Protection Wording;
‘Fund’ means each separate annual fund established pursuant to clause 4 of the Deed of Trust; ‘Fund Year’ has a corresponding meaning; the first Fund Year is from 4.00 pm on 30 June 1997 to 4.00 pm on 30 June 1998; subsequent Fund Years are from 4.00 pm on 30 June in a calendar year to
4.00 pm on 30 June in the next calendar year, unless otherwise determined by the Board;
…
‘Member’ means any person or body (whether incorporated or not) admitted as a member of the Scheme pursuant to clause 11.1 of the Deed of Trust and these Rules; ‘Membership’ has a corresponding meaning;
‘Protection Wording’ means, in relation to any particular Member and Fund Year, the combined liability protection wording issued to that Member by the Scheme setting out the risks covered by the Scheme and the terms, conditions and limits in respect of those risks: this term equates to the term ‘Guidelines’ in clause 8.1. of the Deed of Trust; …
‘Scheme’ means the scheme more formally known as the New Zealand Mutual Liability RiskPool;
…
[42] The Scheme Rules provided that an offer of membership could be made to any organisation approved for admission by the Board.
[43]The Scheme also provided:
(a)Prior to the end of the Fund Year, the Board would provide written notice to each member of the Fund advising whether the Member would be offered Membership for the next Fund Year and if so the initial contribution payable by the member in respect of that Fund Year.
(b)Members who did not accept membership were required to give the Scheme Manager written notice of the decision within a certain timeframe. If a member failed to give that notice (so presumably left) the Fund closed. The member was required to reimburse the Scheme within 20 days for its share of the reinsurance and other expenses that had been incurred by the Fund because of the expectation of the member’s participation, estimated to be 25 per cent of the initial contribution.
(c)A local authority became a member of the Fund by notifying the Scheme Manager in writing that it accepted the offer of Membership14 and paying the initial contribution within 20 days of the start of the relevant Fund Year otherwise the offer of membership lapsed.15
[44] RiskPool agreed to indemnify each Member for damages or compensation for professional indemnity claims in accordance with the Protection Wording (the Guidelines) during the Annual Fund period. It set out the “risks covered by the Scheme and Members and the terms, conditions and limits in respect of those risks”.
14 Scheme Rules as annexed to RiskPool’s Annual Report 2015 at 27 [“Scheme Rules”] at [4(a)].
15 At [4(b)].
[45] The relevant terms and conditions of the indemnity cover were set out in the Protection Wording.16 The Protection Wording for the year in which the claim was made, 2014/15, as in earlier years was contained in a document entitled “Combined Public Liability and Professional Indemnity Protection Wording” issued for that year.
[46] That Protection Wording provided general indemnity claims’ cover and defined “Claim”.17
[47] The exclusions to the general cover were set out in an Exclusions section18 which insofar as relevant read as follows:
Exclusions
This Section of the Protection Wording does not cover liability for:
1)the first amount of any Claim shown as the Excess in the Schedule and for the avoidance of doubt, the “WHRS/WHT” Excess applies to any Claim directly or indirectly arising out of, resulting from, or in connection with Claims registered pursuant to the Weathertight Homes Resolution Service Act 2002 or the Weathertight Homes Resolution Services Act 2006, or any Act in substitution thereof, and applies to all Claims in connection with registrations lodged with the Weathertight Homes Resolution Service or the Weathertight Homes Tribunal pursuant to that legislation;
2)any legal liability of whatsoever nature directly or indirectly occasioned by, happening through or in consequence of war, invasion, act of foreign enemy, hostilities …;
3)any legal liability of whatsoever nature directly or indirectly caused by or contributed to by or arising from ionising radiation …;
4)negligent acts, errors or omissions occurring within the United States of America or the Dominion of Canada …;
5)Claims made or actions instituted outside the Dominion of New Zealand or the Commonwealth of Australia;
16 The Trust Deed and Scheme Rules constituted a contract for insurance between RiskPool and Napier City Council on the terms and conditions of the Scheme documents including the applicable Protection Wording.
17 See below at [80]–[81].
18 Combined Public Liability and Professional Protection wording. Section 13 – Professional Indemnity Exclusions (CB 302.1015).
6)any Claim:
(a) notified or arising out of circumstances notified under any previous Protection Wording or insurance contract of the Member;
(b) made or threatened … on or before the attachment date of the Protection Wording as specified in the Schedule; …
7)any Claim:
a) for breach of contract; or
b) arising out of the Member’s involvement in a tender or a tender process.
8)Claims caused by or arising from:
a) the approval of land for subdivision; or
b) the issue of a building permit or a building consent as the case may be;
…
9)Claims arising from the sale the sale or the negotiations to sell by the Member of real or personal property, or Claims arising directly or indirectly from the acquisition or disposal or otherwise dealing with land under the Public Works Act 1981 or any Act in substitution thereof;
10)any amount(s) awarded by any Court of law against the Member as exemplary and/or punitive damages or fines and/or penalties imposed by a Court and/or Tribunal;
…
12)This Section of the Protection Wording does not cover liability for any legal liability of whatsoever nature directly or indirectly, caused by, or contributed to, or arising from or in connection with asbestos or asbestos containing material.
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.19
[Emphasis added]
[48] NCC says that the plain and natural meaning of the Protection Wording was that Exclusion cl 13(a) did not exclude liability for claims apart from those relating to weathertightness. It says the exclusion was never intended to operate as a broader exclusion to exclude building or compliance defects beyond weathertightness. Non-weathertightness complaints created a separate liability even if they were included as part of a complaint about weathertight defects or were discovered as a result of investigations or work triggered by the weathertight complaints. I refer to this as the NCC meaning.
[49] RiskPool on the other hand says Exclusion cl 13(a) was intended to exclude all building defects and compliance liability in any claim “alleging or arising directly or indirectly out of or in respect of” weathertight claims.20 It says the liability risk faced by the Scheme which it was intending to exclude under Exclusion cl 13(a) was not just for weathertightness complaints but included non-weathertight complaints, which were part of the claim. The risks intended to be excluded were the building defects and structural failures which were the ultimate result of the systemic failure of the building industry to respond properly to the introduction of performance-based building regulation and widespread defective construction, design and workmanship.
Strike out application
[50] RiskPool had pursued an application to strike out the plaintiff’s claim saying it disclosed no cause of action because the plain meaning of the indemnity cover clause and Exclusion cl 13(a) was that a “Claim” that involved a weathertight complaint included liability for all building and structural defects augured by the demand for compensation or the Claim. There was no differentiation based on the nature of the liability or the loss whether that might be by the nature of the defects or more generally by weathertight or non-weathertight categorisation. RiskPool says the word “Claim”
19 I refer to this clause in italics as “Exclusion cl 13”.
20 Exclusion cl 13, above n 19.
is as defined in the definition section of the Protection Wording. A “Claim” is “the demand for compensation made by a third party against the member…”. RiskPool said the Claim was the first demand based on the alleged breach and the “factual skeleton”, which may require further details to be later supplied in pleadings, particulars, schedules of defects or otherwise. A Claim was excluded in its entirety if it was tainted by a weathertight complaint. I refer to this as the RiskPool meaning.
[51] The High Court dismissed the strike out application. Hinton J found that Exclusion cl 13 could relate to a number of claims in one demand.21 These might include weathertight and non-weathertight complaints. Only the compensation attributable to the weathertight defects was excluded.22
[52] In the appeal from the dismissal of the strike out application the Court of Appeal reached the same conclusion as the High Court for “slightly different reasons”.23 Kós P noted that, on a literal view of the drafting, RiskPool had a point but that meaning had the “heady consequence” that a claim based upon a structural defect (which would be covered) suddenly becomes uncovered because a third party plaintiff tips a minor weathertightness complaint (to use an undefined term) into the Claim (to use the defined term):24 was that what the parties intended? The Court gave an example of a claim involving non-excluded structural defects requiring say
$5 million but that to remedy a single defective leaking window flashing required say
$1,000 to remedy. On RiskPool’s argument the entire loss would be excluded.25
[53] The Court of Appeal was struck by the “variegated series of exclusion clauses”. It noted that there was room for “extrinsic evidence as to context and purpose, in construing what the parties were seeking to achieve in the somewhat erratic drafting of the exclusion wording”.26 It said that the issue would be more effectively resolved at trial in light of the evidence and any extrinsic evidence called.27
21 Napier City Council v Local Government Mutual Funds Trustee Ltd [2018] NZHC 2269 [“High Court Strike Out Judgment”].
22 NCC conceded that mixed weathertight and non-weathertight defects were also excluded.
23 Reasons Judgment of the Court of Appeal, above n 5, at [30].
24 At [36].
25 At [27].
26 At [38].
27 At [41].
[54] Extrinsic evidence to aid interpretation was called by both parties. I deal with that later.
The Waterfront claim
[55] The Waterfront plaintiffs’ proceedings were served on the NCC in October 2014.28 On 16 April 2014, the NCC notified RiskPool of the circumstance.
[56] On 16 October 2014 the NCC sent an email to RiskPool with the subject line: “Building Defects Claim – Body Corporate 388915 (Waterfront Apartments) – 7 Humber Street, Napier – High Court proceedings CP: 2013-441-402”. In the letter the NCC referred to attached copies of correspondence and related information received by it relating to the claim and said, “it is the NCC’s view that indemnity should be provided pursuant to the cover provided to NCC under its membership/insurance policy with New Zealand Mutual Liability RiskPool”. The letter went on to ask for instructions as to the appropriate course of action and noted a statement of defence was required to be filed.
[57]RiskPool responded on the same day with a covering email saying:
I am afraid that NCC has not had cover in place for any property suffering any degree of moisture ingress defects since 30 June 2009. As such, there is no cover with RiskPool for this notification.
We are happy to assist with risk advice and/or reconsider our position on the receipt of new information in the alternative.
I have also copied Helen Rice into this email as Helen may be able to assist NCC with legal opinion in defence of allegations made.
[58] Attached to RiskPool’s email was a formal letter dated 16 October 2014 addressed to Mr Bryan Faulknor, the Corporate Property Manager.29 It said:
… our position is the RiskPool protection wording does not respond on this occasion. We ask that you refer to Exclusion 13a of our protection wording –
…
28 The Statement of Claim was dated 9 October 2013 and the proceedings were filed in October 2013.
29 Mr Faulknor had dealt with the 2012 Dalton Street claim for the NCC.
This notification has arisen due to claimant allegations including Weathertight defects at their property. As such, any claim that may follow is excluded. However, we are available to assist NCC with any liability advice they require.
[59] The NCC, through Mr Faulknor, responded by letter of 30 October 2014. It said:
We refer to your letter 16 October 2014 advising that exclusion 13(a) of FY 18 protection wording applies to this claim.
Your letter advises that the notification “has arisen due to claimant allegations including Weathertight defects at the property”.
Paragraph 23 of the statement of claim dated 9 October 2013 lists 19 defects as follows:
a)Plumbing\air conditioning;
b)Roof structure;
c)Defective membranes to the breezeway floors and roof;
d)Basement tanking;
e)Rain screens to pre-cast concrete panels; and
f)Other.
At paragraph 24, the pleaded damage is:
a)Movement of the roof structure;
b)Excessive noise during high winds; and
c)Moisture ingress through the exterior envelope and into the structure of the building.
The claimants have not particularised which clauses of the building code they allege have been breached.
The claimants’ solicitors have advised that an expert report will be obtained before the end of the year. It is anticipated that the report will result in amendment of the claim to provide further information about the defects and damage.
It is the Council’s position that it is premature for RiskPool to decline the claim based on exclusion l 3(a) simply based on the statement of claim in its current form. The Council places RiskPool on notice that it may challenge the declinature pending receipt of further information and documentation about the defects and damage/loss.
In the interim, the Council will instruct Rice + Co Lawyers to manage its defence and would be grateful if RiskPool could confirm its agreement to the Council's proposed plan of action.
[60] Following that letter, RiskPool referred the matter to the Scheme Manager, Mr Carpenter, to review. The RiskPool Assistant Claims Manager, Mr Tim Clarke, emailed the NCC on 6 November 2014 saying that Mr Carpenter had reviewed the statement of claim and
… Our previously advised position remains. This property is the subject of moisture ingress defects regardless of any amended statement of claim the claimants may issue and/or any particularised causes they identify under the Building Act. It follows that any claim by NCC on RiskPool for this property is subject to Exclusion 13(a) which has been in place since 30 June 2009. The appointment of defence solicitors in the general conduct of this matter is for Council to consider. …
[61] Mr Clarke suggested that if Mr Faulknor wished to discuss it further he should contact Paul (Carpenter).
[62] Some nine months later, on 7 July 2015 the NCC, through Mr Faulknor, again emailed Mr Clarke, saying:
…
Council has subsequently received further information relevant to this matter relating to fire defects issues which was not part of the original claim.
This is a High Court building defects claim. The claimants served proceedings on the Council in 2014. The current statement of claim pleads weathertightness defects and structural defects, but no fire defects. The claimants have not yet quantified their claim.
The fire defects do not appear to relate to leaks, water penetration, weather proofing or moisture; so it appears exclusion 13 (a) should not apply to the fire defects.
[63] The email attached a copy of the report from Anvil Fire Consultants Ltd and advised that the purpose of the email was “to notify Council’s appropriate insurer” of the fire defects claim.
[64]Mr Clarke responded by email the same day taking the same position:
… as explained on West Quay applies also to Humber Street. Should one or more weathertight defect [sic] exist, the entire building is excluded … . The wording does not operate to cover or exclude on a per defect basis.
[65]Mr Clarke offered to discuss this further.
[66] On 2 September 2015 the NCC again wrote to RiskPool saying it was struggling to understand the basis for the declinature and sought a copy of the legal advice that RiskPool had relied on so the NCC could understand the basis for the declinature. Mr Carpenter replied on 2 November 2015 confirming the weathertight Exclusion had applied since June 2009 saying:
The principal reason for the exclusion is that the systemic failures that gave rise to weathertight issue throughout the country became uninsurable and un- reinsurable.
Often weathertight claims also exhibit building defects that are not weathertight in nature. The definition of a Claim is a third party demand for compensation for a breach of a professional duty arising out of any negligent act, error or omission. The weathertight exclusion excludes any Claim that arises directly or indirectly from the failure of a building to conform with the Building Code in relation to leaks, water penetration etc.
…
Because the single Claim in respect of 17 Humber Street includes weathertight features, the Claim is completely excluded by weathertight exclusion. Council professional indemnity covers do not operate on a defect by defect basis.
[67] Mr Michael James, a fire engineer, had provided a report to the NCC dated 27 July 2015. He said that the fire defects listed in that report had not been caused by weathertightness issues “and the scope of repair could be carried out independently of recladding the building”. Mr James was not called in these proceedings to give evidence.
The issues
[68] RiskPool conceded that the NCC was liable to the Waterfront plaintiffs for negligent breach of its statutory duty which led to weathertight failures for which remedial work was required on the Waterfront Apartments. However, RiskPool denies it was liable to indemnify the NCC for the Waterfront plaintiffs’ underlying claim.30 It puts the NCC to proof both on liability and the reasonableness of the settlement amount insofar as it can be attributed to any exclusively non-weathertight complaints.
30 The amended statement of defence to the first amended statement of claim refers to the weathertight and non-weathertight defects by reference to Schedule 3 of the Waterfront Plaintiffs’ Statement of Claim of October 2018. The weathertight defects are defects number 1–14 and the non-weathertight defects are defects number 15–22 (with the fire defects being defects number 15–21 and structural defects being number 22).
[69] The parties each formulated the core issues differently. I consider the core questions in this proceeding are:
(a)Does the RiskPool Scheme provide indemnity for the NCC’s liability to the Waterfront plaintiffs in circumstances where the building failed to conform to code compliance for weathertight and non-weathertight standards?
(b)If the liability is within the cover is it nevertheless excluded by exclusion cl 13(a) (the weathertight exclusion)?31
(c)If RiskPool is liable what is the extent of that liability and the quantum?
[70] Those core questions involve a number of sub issues that I will deal with under the main headings below.
[71] At the heart of the case is the interpretation of the Scheme’s Documents and the meaning of “Claim” used in context. Both parties called witnesses to give evidence designed to shed light on the mutual intention of the parties as to the meaning.
[72] In that regard RiskPool called Mr Carpenter. The Council objected to substantial parts of Mr Carpenter’s evidence. I deal with that below. NCC called Mr Wayne Jack, the Chief Executive of the Council at the time of the mediation. He attended the mediation on 14 February 2019 and had authority to settle up to a set amount on the Council’s behalf. NCC also called Ms Rice, its lawyer, who had advised it on the Waterfront claim and settlement. Ms Rice was present at the mediation. Mr Mark Powell, the building surveyor who had advised NCC on the Waterfront claim was also called. He also gave expert evidence on the apportionment of the global sum for the purposes of these proceedings.
31 This is a shorthand description of Exclusion cl 13(a) in the Protection Wording which is set out in full below and refers to the failure of any building to conform with the New Zealand Building Code and applicable standards in relation to “leaks, water penetration, weather proofing, moisture ingress, or any water exit or control system”.
[73] Before looking at the extrinsic evidence the wording of the relevant text needs to be examined.
[74] Acceptance of an offer of membership of RiskPool created a contract between the member (NCC) and the Scheme. Therefore, the Scheme’s Documents including the Protection Wording are to be interpreted according to the usual rules of contractual interpretation.
Contractual interpretation
[75] Tipping J in Vector Gas Ltd v Bay of Plenty Energy (Vector Gas) noted that the “ultimate objective in a contract interpretation dispute is to establish the meaning the parties intended their words to bear”.32
[76] More recently, the Supreme Court in Firm PI 1 Limited v Zurich33 noted that the contractual language must be interpreted within its overall context broadly viewed. It said that a purpose or contextual interpretation “is not dependent on there being an ambiguity in the contractual language”.34 However, the Court warned that the language of many commercial contracts had features that ordinary language is unlikely to have as it is the result of a process of negotiation. The written contract when finally agreed is an attempt to record in a formal way “the consensus reached and will have the important purpose of creating certainty, both for the parties and for third parties…”.35
[77] The Court went on to say that while the context was a necessary element of the interpretative process and the focus is on interpreting the document rather than the particular words, “the text remains centrally important”. If the language at issue, construed in the context of the contract as a whole, has an ordinary and natural meaning, “that will be a powerful, albeit not conclusive, indicator of what the parties
32 Vector Gas Ltd v Bay of Plenty Energy Ltd [2010] NZSC 5, [2010] 2 NZLR 444 [“Vector Gas”] at 457 per Tipping J at [19]; and D A Constable Syndicate 386 v Auckland District Law Society Ltd [2010] NZCA 237, [2010] 3 NZLR 23 [“D A Constable Syndicate (CA)”] at [23].
33 Firm PI 1 Ltd v Zurich Australian Insurance Ltd T/A Zurich New Zealand [2014] NZSC 147, [2015] 1 NZLR 432 [“Firm PI 1 Ltd”].
34 Firm PI 1 Ltd v Zurich Australian Insurance Ltd T/A Zurich New Zealand, above n 33, at [61].
35 At [62]. The Court also referred to D A Constable Syndicate (CA), above n 32, in relation to the Court of Appeal’s interpretation of the wording of an insurance policy: Firm PI 1 Ltd, above n 33, at fn 49.
meant”.36 Nevertheless, the wider context may point to an interpretation other than the obvious one and may also assist in determining the meaning intended in cases of ambiguity or uncertainty.37
[78] I now turn to the relevant text of the Scheme’s Documents and, in particular, of the Protection Wording.
The Protection Wording (the Guidelines)
[79] The word “Claim” (with a capital “C”) was used in both the general indemnity cover clause and in Exclusion cl 13 of the Protection Wording.38
[80] The general indemnity claims’ cover (the Indemnity Cover Clause) reads as follows:
To indemnify the Member up to but not exceeding the amount specified in the Schedule, against Claims first made against the Member and reported to the Fund during the period specified in the Schedule for breach of Professional Duty arising out of any negligent act, error or omission … committed or alleged to have been committed on the part of the Member including:
a) all costs and expenses incurred with the written consent of the Fund in the defence or settlement of any such Claim;
…
[81]“Claim” has a defined meaning in the section headed “Definitions” as follows:
The term “Claim” shall mean the demand for compensation made by a third party against the Member including the costs and expenses incurred in the defence of any such Claim but shall not include the Member’s costs and expenses.39
[82] Exclusion cl 13 was added to the list of exclusions set out under the section headed “Exclusions” in the Protection Wording in 2009.40
36 Firm PI 1 Ltd, above n 33, at [63].
37 At [63].
38 See above at [46]–[47].
39 I refer to Clause 3 as the “Definition of Claim”.
40 This is set out in full above at [47].
[83] The present Exclusion cl 13 was the latest addition to the list of Exclusions. The Exclusions section had been amended by additions and deletions from time to time. There appears to have been little thought given to redrafting the Exclusions section as a whole to make it consistent.
[84] The basis for the wording of Exclusion cl 13 was wording used in an earlier Exclusion for multi-unit structures, which was entitled: “Multi Unit Building Defect Claims Involving Moisture Ingress.” An Extension had provided a sublimit of
$500,000 on claims for multi-unit building defect claims involving weathertight claims.41 This was inserted in 2006 and subsequently deleted in favour of the present Exclusion cl 13, which was introduced initially as a sublimit before being amended to a total exclusion.
[85]The word “Claim” is used in other Exclusions. For instance:
(a)Exclusion cl 1: in relation to the Weathertight Houses Resolution Service claims excess: “The first amount of any Claim shown as the Excess in the Schedule and for the avoidance of doubt, the “WHRS\WHT” excess applies …”.
(b)Exclusion cl 5: “Claims made or actions instituted outside …” New Zealand or Australia.
(c)Exclusion cl 6:
Any Claim:
a)notified or arising out of circumstances notified under any Previous Wording or insurance contract of the Member;
…
d)… otherwise notified or arising from circumstances known to the Member prior to inception …
41 Multi-unit included ten or more units. The heading and text of the multi-unit Exclusion is set out in Attachment 3.
(d)Exclusion cl 7: “Any Claim: … for breach of contract or due to involvement in a tender process”.
(e)Exclusion cl 8:
Claims caused or arising from: …
a)the approval of land for subdivision; or
b)the issue of a building consent.
(f)Exclusion cl 9: “Claims arising from the sale …” by the member of real or personal property.
(g)Exclusion cl 11: “The Fund will not meet any Claims made by any Member in respect of the liability or losses incurred where that liability or loss: …” relates to processes or data affected by dates or times recorded by electronic devices. This appears to be related to the anticipated difficulties with computer devices maintaining data due to date changes at the millennial rollover into 2000.
(h)Exclusion cl 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: …” weathertight complaints. This is the Exclusion at issue in these proceedings.
[86]Some of the clauses in the Exclusions section do not use the word “Claim”:
(a)The chapeau for the Exclusion section as a whole reads: “This Section of the Protection Wording does not cover liability for:” (Emphasis added).
(b)Exclusion cl 2: “any legal liability of whatsoever nature … relating to war …” (Emphasis added).
(c)Exclusion cl 3: “any legal liability of whatsoever nature directly or indirectly caused by or contributed to by or arising from ionising radiation …” (Emphasis added).
(d)Exclusion cl 4: “negligent acts, errors or omissions occurring within the United States …” (Emphasis added).
(e)Exclusion cl 10: “any amount(s) awarded by any Court of law against the Member as exemplary and/or punitive damages or fines and/or penalties imposed by Court and/or Tribunal” (Emphasis added).
(f)Exclusion cl 12: “This Section of the Protection Wording does not cover for any legal liability of whatsoever nature directly or indirectly, caused by, or contributed to, or arising from or in connection with asbestos or asbestos containing material”. (Emphasis added).
[87] The word “Claim” is used with a capital “C” in the Exclusions, which indicates the use of the defined meaning: “the demand for compensation made by the third party against the Member”.42 In turn, the general indemnity cover clause refers to: “Claims, first made against the Member and reported to the Fund during the period specified in the Schedule for breach of professional duty arising out of any negligent act …”.
[88] Also relevant is the Excess clause set out in the “Conditions” section of the Protection Wording. This is an excess aggregation clause which says “for the purpose of” that condition the term “Claim”:
… shall be understood to mean any and all Claims which are within the scope of this Section of the Protection Wording and any Extension which may be included, and which arise out of the one event or by reason of the same negligent, act, error or omission.
[89] The member must “as soon as practicable” give written notice of any occurrence of which they became aware which might give rise to a claim against them. The timing of a notification of a claim is important as the cover or fund in place in the year in which the claim is notified responds. This is a claims made cover. An
42 The definition of “Claims”: see above at [81].
underlying claim by a third party must be notified by the member of the time it becomes aware of the claim. It will generally not be covered if the member notifies it in a later year.
[90] If there is to be any assistance from a comparison of the wording of the Exclusions, it would indicate that, in Exclusion cl 13, “Claims alleging” weathertight complaints, has the widest ambit, as it refers back to the demand for compensation first made against the member. On a literal meaning, the making of a weathertight allegation taints the whole claim. In comparison, the asbestos exclusion (Exclusion cl 12) excludes “legal liability of whatsoever nature directly or indirectly, caused by, or contributed to, or arising from or in connection with asbestos or asbestos containing material”. So non-asbestos defects not connected or arising from asbestos material even if it was discovered as a result of the asbestos investigation or works would not be excluded. Whereas Exclusion cl 13 covers all liability for Claims where a weathertight complaint has infected the Claim, so all non-weathertight defect liability is also excluded.
[91] The use of the words “negligent acts …” and “amounts” (for damages) in Exclusions are more specific to the legal formulation of the Claim.
[92] However, the Court of Appeal was not sure there was any assistance to be had from the drafting of the Exclusions. It observed that there were a number of “curiosities” about the drafting saying:43
[31] … The insuring clause is an indemnity “against Claims” made for breach of professional duty arising out of negligence. The chapeau to the exclusion clauses provides that that section of the protection wording “does not cover liability” for certain items. So the clause immediately sets up a contest between cover for Claims, and certain defined liabilities which are excluded.
[32] It may also be observed that those excluded liabilities are set out in several varying fashions: (1) “amounts [of any claim]”;44 (2) “legal liability” for certain events;45 (3) “negligent acts, errors or omissions” of certain kinds;46
43 Reasons Judgment of the Court of Appeal, above n 5.
44 Exclusion cls 1 and 10.
45 Exclusion cls 2, 3 and 12.
46 Exclusion cl 4.
(4) “claims” in an undefined sense;47 (5) “Claims” in a defined sense;48 and then — critically for present purposes — (6) “liability for Claims”.49
[33] If this is deliberately differentiated drafting, then the differentiation approaches fine art. The alternative view open is that it is all just a bit of a mess. Not art, and not fine at all.
[34] The essential question is what effect the parties intended this exclusion clause to have. Is the drafting deliberately intended to convey different outcomes according to whether one is dealing with an act, liability for an act, a “claim” or a “Claim” or “liability for [a] Claim”?
[35] Of particular interest are exclusion cls 12 and 13. They appear to be words added later. The drafter has overlooked the chapeau wording at the start of the exclusion clauses, to which those clauses do not respond. Exclusion cl 12 excludes “liability for any legal liability” (arising from asbestos). (The case for the drafting being a mess gains some traction at this point.) Exclusion cl 13(a) excludes “liability for Claims” alleging or arising directly or indirectly out of or in respect of water ingress.
[36] If one takes a very literal view of the drafting, RiskPool has a point. A “Claim” in its defined sense is a demand for compensation, and there is some serious authority to the effect that, in the world of insurers and insureds, you do not subdivide claims into their constituent parts — be they causes of action or something inferior again, such as a particular. Is that what the parties here intended by adopting the word “Claim” in exclusion cl 13(a)? If so, it has the rather heady consequence pointed out by Mr McLellan that a claim based upon structural defect (which would be covered) suddenly becomes uncovered because the third party plaintiff tips a minor weathertightness complaint (to use a neutral term) into the Claim (to use a defined term). Was that what the parties intended?
[37] The inquiry is then complicated by the fact that some exclusion clauses exclude “claims” (e.g. cls 5 and 8), some exclude “Claims” (e.g. cl 7), but cl 12 excludes “liability for any legal liability” and cl 13(a) excludes “liability for Claims”. Assuming deliberately differentiated drafting, as opposed to the alternative available theory, is there an intended difference between these formulae? In particular, is there a difference between excluding “Claims” and “liability for Claims”? To place one’s finger on the exact issue, was the latter formulation intended to exclude entirely bundled claims made which incorporate a weathertightness issue (even if merely minimally), or was it intended only to exclude the liability for that part of the claim asserting liability for damage caused by water ingress? Mr Ring says the former; Mr McLellan the latter.
47 Reasons Judgment of the Court of Appeal, above n 5, Exclusion cls 5 and 8.
48 Exclusion cl 7.
49 Exclusion cl 13.
[93] The Court of Appeal said that it was being asked to decide the meaning of “a highly variegated series of exclusion clauses in a contextual, factual vacuum”. It said it was unwilling to do that as:50
[38] … We consider extrinsic evidence may shed some light on intended meaning. In particular, contextual evidence on the circumstances in which exclusion cls 12 and 13 were added, on the implications for this mutual insurance scheme of weathertightness and other regulatory risk, and on the extent to which one, other or both were intended to be excluded from cover. The NCC wishes to call that sort of evidence at trial, although the exact detail of that evidence is not known to us at this still-interlocutory stage of the proceeding.
[94] In general terms I consider the wording of the other Exclusions provides little assistance in interpretation of Exclusion cl 13. Kós P wondered if they were “fine art” or “a bit of a mess”. It appears the latter is the case. No thought was apparently given to consistency by the draftsperson of the various Exclusions. That is borne out by the fact that Mr Carpenter said they were inserted as a cut and paste exercise.51
The Parties’ interpretations
NCC’s interpretation
[95] NCC says that a straightforward reading of Exclusion cl 13 leads to the conclusion that if a Claim (a demand for compensation) by a claimant against the Council was not caused by any of the excluded complaints – that is, the weathertight complaints – then the liability claim for non-weathertight defects is not excluded.
[96] NCC says this conclusion follows from an interpretation of the Exclusions based on the following:
(a)The interpretation gives precedence (as required by the canons of construction) to the natural and ordinary meaning of the words.
(b)It is consistent with the purpose of the policy.
50 Reasons Judgment of the Court of Appeal, above n 5, at [38].
51 See below at [298].
(c)If RiskPool had wanted to exclude building defect liability for non-weathertightness related losses, it would have said so explicitly.
(d)RiskPool’s interpretation would produce perverse and absurd results that the parties cannot be taken to have intended.
(e)At worst, for the Council, if RiskPool’s interpretation is even available, the exclusion clause is ambiguous and must be construed against the party who drafted it: RiskPool.
[97] NCC said that an exclusion clause should be construed in a manner consistent with the commercial purpose of the contract of insurance and where possible to avoid the exclusion operating to substantially defeat the indemnity granted by the policy and render the policy “practically illusory”.52
[98] The intention, Mr McLellan submitted, was that the RiskPool policy would provide member councils with equal to or better insurance protection than that which was available on the commercial market. The policy was to provide a wide form of indemnity insurance to protect councils against their exposure for negligence in carrying out their public functions, including in relation to building defect claims, which had always been a significant aspect of the risk against which the claims cover protected.
[99] Mr McLellan submitted that the natural and ordinary meaning of the words was that they excluded liability arising from weathertightness defects but did not exclude liability which had no causal connection to weathertightness as would be the case here. Exclusion cl 13 only dealt with liability arising from failures of buildings to conform to the requirements of the building code in relation to weathertight matters. There was no reference to failures of buildings due to other causes. Mr McLellan said it would have been straightforward for RiskPool to add words to the exclusion that made it clear that the exclusion applied notwithstanding that the building or structure
52 Ashmere Cove Pty Ltd v Beekink [2009] FCA 564, 15 ANZ Insurance Cases 61-826 at 104; citing Alex Kay Pty Ltd v General Motors Acceptance Corporation [1963] VR 458 (VSC) at 462–463, and Fraser v BN Furman (Productions) Ltd [1967] 1 WLR 898 (CA) at 905–906.
also failed to meet or conform to the requirements of other provisions of the building code.
[100] In support of the NCC meaning Mr McLellan also pointed to evidence of Mr Carpenter as to RiskPool’s intention at the time of the introduction of Exclusion cl 13. Mr McLellan took Mr Carpenter to a Board report and the following exchange occurred:
Q:So you were taking away weathertightness but you weren’t taking away non-weathertightness?
A: That’s correct.
[101] Mr McLellan points to the wording of Exclusion cl 13 and says that the use of the word “liability” supports NCC’s meaning of the Exclusion. The Exclusion says “this section of the Protection Wording does not cover liability for Claims …”. Mr McLellan says the word “liability” is a reference to the Council’s liability to third parties rather than RiskPool’s liability to the Council. The fact that the Exclusion does not say “does not cover Claims” (but includes the word “liability”) confirms that the Exclusion only excludes cover for liability relating to weathertightness complaints.
[102] Therefore, the NCC says the weathertightness Exclusion should properly be read in simple terms as follows:
Does not cover liability for [demands for compensation made by a third party] alleging or arising ... from weathertight complaints.
[103] The plaintiff noted there were 22 defects, which could be separated into weathertightness, structural and fire defects.
[104] Mr McLellan said that Exclusion cl 13 is limited to “liability for Claims alleging or arising” out of, which means caused by weathertightness peril. The test is whether the liability is caused by a weathertightness peril not whether the liability was discovered as a result of one.
[105] NCC says that in support of the meaning it contends for a “Claim” is the use of the plural in Exclusion cl 13(a). This logically means that one negligent act can give rise to multiple claims for the purposes of the insuring clause.
[106] NCC says its interpretation is reinforced by the words of the excess aggregation clause,53 which expressly provides that “[f]or the purpose of this Condition”, only one excess is payable for “Claims which arise out of the one event or by reason of the same negligent act …”. NCC says that the words “[f]or the purpose of this Condition”, do not detract from its argument that the wording illustrates the potential for multiple claims to arise. Otherwise it says there would have been no need for the additional clarification in the excess clause. That would not have been necessary if everything was included in the claim or original demand for compensation because if that were correct, only one excess would be payable regardless.
[107] Mr McLellan pointed to the approach taken by commercial insurers as illustrated in Body Corporate 326421 v Auckland Council (Nautilus).54 This involved a Zurich professional indemnity policy that defined “Claim” as including any form of “legal process served on the insured”. The insuring clause used the term “arising out of” to describe the link required between the Claim and “the excluded peril”. The underwriter in that case did not attempt to advance its argument on the same basis as RiskPool does in these proceedings when it was open to it given the wording of the insuring clause. This was despite the fact that Nautilus involved numerous different types of building defects with different causes giving rise to a divisible loss. Instead the underwriter denied liability on the basis that the relevant exclusion excluded defective workmanship.55
[108] In Nautilus, Gilbert J undertook a defect by defect assessment to ascertain the cause of each defect, what the loss was, and whether each was covered or excluded. NCC says that is what should occur in this case and not only does Nautilus demonstrate that RiskPool’s approach is unorthodox but, as the Protection Wording had been intended to afford similar if not better cover than that available on the commercial market, it should be construed in accordance with accepted insurance contract principles rather than at odds with the way in which the commercial market insurer and an experienced High Court Judge approached the matter in Nautilus.
53 See above at [88].
54 Body Corporate 326421 v Auckland Council [2015] NZHC 862 (Nautilus).
55 At [342].
[109] NCC says that a reasonable reader would not interpret Exclusion cl 13 to exclude liability which had no causal relationship to the specified excluded risks.
[110] NCC points to a decision where an insolvency Exclusion was held not to exclude a claim against directors brought after the company became insolvent.56 In AIG Australia Ltd v Kaboko Mining Ltd, the Federal Court of Australia Court said there was no substantive causal connection between the claim and the company’s insolvency.57 In that case, while the insolvency was the motivation for bringing the claim, the Court held the wording required an identified act to establish a claim. Insolvency was not such an act.58 The separate claim against directors was not therefore excluded.
[111] NCC submitted that it was absurd that a building defect claim for non-weathertightness losses became uninsured simply because the plaintiff introduced a weathertightness loss. It said that it was unprincipled that the mere incorporation of a new and unrelated loss would exclude previously insured losses. The example given was of a plaintiff suing a council for $10m of non-weathertightness losses and a weathertightness loss of $1,000.
[112] Mr McLellan also rejected RiskPool’s suggestion that this result might be resolved by implying into the policy a “de minimis” threshold. Mr McLellan said the “de minimis” argument did not get past the starter’s gun. An implied term to that effect could be the only contractual basis for such a submission. There was no such threshold in the Exclusion. Commercial certainty is a critical feature of the risk allocation exercise, the Council submitted, and the suggestion that either an insured or an insurer would read in an imprecise and undefined concept of “materiality” to define risk allocation was itself absurd.
[113] In addition to the natural and ordinary meaning of the words, NCC said a cross-check should be made against the underlying commercial purpose of the indemnity contract taking into account business common sense. It said the
56 AIG Australia Ltd v Kaboko Mining Ltd [2019] FCAFC 96, [2019] 20 ANZ Insurance Cases 62-205.
57 At [44].
58 See below at [150].
Protection Wording was intended as a substitute for commercial insurance and RiskPool marketed itself as providing no less cover than was available in the commercial market with its intention being to stay ahead of the commercial market in terms of the breadth of cover provided where it was possible to do so. NCC pointed to Mr Carpenter’s evidence that, at the time the Protection Wording was introduced in 2009, RiskPool was aware that professional indemnity coverage for building defect claims was an important protection for local authorities.
[114] Mr McLellan also said these matters can be inferred from the nature of the scheme regardless of extrinsic evidence. He said it was obvious that insured members would only move from commercial market options if they were able to access similar or better terms through RiskPool. He noted that Hinton J in the High Court saw the case as a contractual interpretation case and suggested that extrinsic evidence would not alter that. However, the Court of Appeal had said there was a case for looking at extrinsic evidence.
[115] In summary, NCC says that the natural meaning of the clause, when read in context and in view of the acknowledged intention that insurance cover for building defects was important to councils, was that the building defect cover would remain other than for weathertight defects. Objectively NCC says this can be taken to have been the intention of both RiskPool and the members.
[116] Finally, NCC said that if there was some ambiguity remaining it must be construed contra proferentum against the party who drafted it.59 This inevitably resulted in the Exclusion being construed narrowly against the drafter and any ambiguity should be resolved in the Council’s favour because it was not responsible for introducing the ambiguity.
RiskPool’s interpretation
[117] Mr Ring suggests that a literal interpretation should be adopted in relation to both the indemnity cover clause and Exclusion cl 13(a). This favours the RiskPool meaning. He says the word “Claim” bears the meaning set out in the Definitions
59 Daken v Hartford Fire Insurance Co Ltd [1971] NZLR 971 (SC).
section of the Protection Wording being “the demand for compensation made by a third party against a Member”. The words in the general indemnity clause in the Protection Wording provided indemnity “against Claims first made against the Member and reported to the Fund during the period… ”.60 Exclusion cl 13(a) carves out from that cover the Claims that have weathertightness elements.
[118] Therefore the “Claims” made against the NCC by the Waterfront plaintiffs for the negligent acts, errors or omissions in undertaking its statutory responsibilities in issuing building consents and inspecting and issuing the completion certificates for the Waterfront Apartments were excluded in their entirety. The weathertight complaints tainted all other complaints in the Claim whether they be later particularised or otherwise differentiated.
[119] RiskPool says Exclusion cl 13 means that all building defect and structural complaints that are involved with a weathertight complaint are one claim subject to “de minimis” materiality.
[120] If that argument fails, then RiskPool says the wording used in Exclusion cl 13(a) was broad enough to extend to all non-weathertight complaints that arose “directly or indirectly out of, or in respect” of the weathertight Claim. The weathertight issues had precipitated the investigations and work that led to the discovery of the other defects requiring remedial work.
[121]In summary RiskPool says:
(a)A Claim is defined as a “demand for compensation”. A demand is merely an assertion of an obligation to pay and “nothing more is necessary”.61 It is a “factual skeleton”.
60 See above at [46].
61 Referring to Financial Construction Services Ltd v Negril Holdings Ltd [2004] UKPC 40, [2005]
2 LRC 351 (PC) at [40]; citing Re Colonial Finance Mortgage Investment & Guarantee Corporation Ltd (1905) 6 SR NSW 6 at [9].
(b)The Statement of Claim is not the “Claim”, but the causes of action are merely the vehicles for legal enforcement of the Claim.62
(c)Whether there are one or more demands for compensation depends on the facts of the case and the context. The characteristics that assist in assessing whether there is one Claim include: 63
(i)the number of claimants;
(ii)the number of contracts and their relationship with each other;
(iii)the nature of the claim; and
(iv)the timing of claims.
(d)A starting point is the way that the demand is made and how it is described by the insured or its solicitors.64
(e)Of particular significance is that a lump sum is demanded in compensation against the defendant.65
[122] RiskPool pointed out that NCC’s solicitors in their advice in their first settlement recommendation in December 2018 had described the proceedings as a “claim” that the Waterfront Apartments contained various defects requiring remediation and went on to list the defects including the non-weathertight defects.
[123] The Court of Appeal noted that there was some serious authority in the “world of insurers and insureds” that you did not subdivide claims into their constituent parts
62 Thorman v New Hampshire Co (UK) Ltd [1988] 1 Lloyd’s Rep 7 (CA) [“Thorman”] at 16 per Stockman LJ; and Baulderstone Hornibrook Engineering Pty Ltd v Gordion Runoff Ltd [2006] NSWSC 223, 14 ANZ Insurance cases 61–701 [“Baulderstone Hornibrook”] at [903].
63 Mabey and Johnson Ltd v Ecclesiastical Insurance Office PLC (No 2) [2003] EWHC 1523 (Comm) [“Mabey v Johnson Ltd”] at [12]–[13].
64 Haydon v Lo & Lo [1997] 1 Lloyd’s Rep 336 (PC) at 340.
65 Citibank NA v Excess Insurance Company Ltd [1999] 1 Lloyd’s Rep 122 (HC) [“Citibank”] at 127–128. In that case there were two or three causes occurring some years apart but there was no suggestion that this gave rise to more than one claim in respect of Citibank’s cumulative financial loss. The Court held that “there was one claim by Citibank by the damage caused by the fire”.
whether that was causes of action “or something inferior again such as a particular”.66 RiskPool again relied on those decisions, some of which I refer to below.67
[124] RiskPool also pointed out that the compensation would be necessarily a global sum. This was because the essential nature of the Waterfront plaintiffs’ loss that could be compensated was economic loss by way of depreciated market value whether that was measured by the costs of repairs or depreciation in the market value, depending on the circumstances. But the compensation was an amount attributable to the totality of the defects and not for the separate physical effects of each of the defects. This supported there being only one claim.
[125] Mr Ring pointed out there was no attempt in the Waterfront plaintiffs’ Statement of Claim to categorise defects as weathertight and non-weathertight breaches of the Building Code. There was only one single demand by each plaintiff on NCC that because of the defects their apartments were not constructed to comply with all the requirements of the Building Code.
[126]Mr Ring said in summary:
(a)There were 51 demands for compensation, which the Protection Wording treated as 51 claims for the purpose of the insuring clause in reference to Claims but one “Claim” for the purpose of applying the excess because of the excess aggregation clause.68
(b)There was no contract between the Waterfront plaintiffs and the NCC but there was one single statutory engagement to undertake all three components of the inspection role for the construction of the complex giving rise to the separate duties to the plaintiffs.
(c)NCC had negligently performed its regulatory functions, which caused financial loss and grounds for a claim of compensation.
66 Reasons Judgment of the Court of Appeal, above n 5, at [36].
67 See below at [150]–[161].
68 For the purposes of cl 1 of the excess condition, the aggregation was based on establishing one event or “… the same negligent, act, error or omission.”
(d)All the defects were caused in the course of a single construction project.
(e)The demand for compensation was made and negotiated as a lump sum.
[127] In conclusion, RiskPool says that an objective analysis as to what the “Claim” was in the Statement of Claim between the Waterfront plaintiffs and NCC is not influenced by the terms of the insurance cover and exclusions, but rather by the application of the meaning of “Claim”. The Waterfront plaintiffs did not need to categorise the defects for the purposes of the claim and they did not do so. There was one claim against each of the various defendants in the Waterfront proceedings. The accusations against each of the defendants related to responsibility for the compensation uncategorised at that stage in a single cause of action in negligence.
[128] The year of notification was critical. The members on risk in the relevant Annual Fund year might face a call if that year was in deficit and they may be different from those on risk in a subsequent year.
[129] RiskPool submitted that Exclusion cl 13(a) was clear on its face. It carved out an Exclusion to the general cover for “Claims alleging or arising directly or indirectly out of, or in respect of … the failure of” the Waterfront plaintiffs’ complex to comply with weathertight requirements (E2 of the Building Code) in “relation to leaks, water penetration, weatherproofing, moisture, or any water exit or control system”.
223 D A Constable (HC), above n 194, at [145].
224 At [144].
225 At [136].
226 Now replaced by the Commercial and Contract Law Act 2017 in essentially the same terms.
227 D A Constable Syndicate (CA), above n 32, at [75].
228 D A Constable Syndicate (HC), above n 194, at [149].
229 At [151].
230 At [156] and [157].
231 Royal Insurance Fire and General (NZ) Ltd v Mainfreight Transport Ltd [1993] 7 ANZ INS CAS 61- 172 (CA).
and was required to have liability and quantum determined by a Court before claiming against the insurer.232 It concluded that having repudiated liability in breach of contract the underwriter could not later challenge a settlement arrived at by the insured when it was acting reasonably.233 Both parties remained bound by the terms of the policy in relation to any other claims or potential claims.234
[374] Mr Ring pointed out the Court of Appeal’s criticisms of the High Court’s decision in D A Constable. It had said:
[83] There is some debate about the concept of repudiation and in particular how the approach taken in relation to insurance contracts in cases like the present sits with repudiation in contract law generally. For example, Neil Campbell in an article on the High Court decision in this case expresses agreement with the outcome but questions the reasoning of the Judge on the effect of condition 2:235
Certainly the insurer appears to have repudiated (assuming, of course, that Cooper J’s decision on cover is correct), but there is no suggestion that the ADLS ever accepted that repudiation by electing to cancel the policy. Without cancellation of the contract, both parties remained obliged to perform their obligations under the policy; see Burrows, Finn & Todd Law of Contract in New Zealand (3rd ed, 2007) para 18.3.1.
[375] Mr Ring says D A Constable is out of date. It predated the Supreme Court decision in Kumar v Station Properties Ltd (Kumar),236 now the leading New Zealand case on repudiation. He also pointed out a number of more recent Australian authorities which are inconsistent with D A Constable. In addition, RiskPool argued that the indemnity here was a contract for insurance not a contract of insurance as had been the case in D A Constable. In that case, the underwriter was obliged to indemnify the insured’s legal liability to pay for claims arising out of the relevant “negligent act, error or omission”. On the other hand, in a contract of insurance RiskPool’s obligation was to properly consider the NCC’s application for indemnity.
232 D A Constable Syndicate (CA), above n 32, at [79].
233 At [79].
234 At [84].
235 Neil Campbell Insurance Law Review [2009] NZ L Rev 725 at 740.
236 Kumar v Station Properties Ltd (in liq and in rec) [2015] NZSC 34, [2016] 1 NZLR 99.
How does the global settlement figure get apportioned?
[376] The distinction between contract for insurance and contract of insurance does not affect RiskPool’s liability for damages. It had agreed to consider the claim and while it may have retained a discretion that consideration was to be undertaken in accordance with the Protection Wording. If it was wrong about cover, it declined the claim wrongfully.
[377] Mainfreight237 is authority for the proposition that if an insurer wrongfully declines liability and leaves the insured to act as a “prudent uninsured” the insurer has breached the essence of the contract for indemnity which gives rise to a right to cancel for repudiation. However, if cancellation does not occur the insured may nevertheless claim damages based on the denial of liability as it amounts to a serious breach of contract, anticipatory or otherwise.238 This may be described as a “repudiatory” breach in general terms. It is not relevant, in this case, whether repudiation was accepted or not. Provided that the insured acted reasonably in settling the claim, the measure of damages is the amount paid in settlement together with costs.239 The fact that in this case it was a contract for insurance, and that RiskPool’s obligation was to properly consider the claim does not change the availability of damages for breach. Once RiskPool had wrongfully declined the claim, for the purposes of establishing quantum of a global settlement, the approach begins with consideration of whether it was a reasonable settlement insofar as is relevant to the part of the third party claim which should have been covered.
[378] It is not necessary to prove that the repudiation was accepted in order for the insured to be able to rely on a reasonable settlement (as at the time it was entered into) to establish the quantum of the loss. Nor is it necessary to plead that the breach gave rise to a right to repudiate.240 In D A Constable the Court noted that it was the seriousness of the breach which gave rise to the right to repudiate. The breach itself
237 Royal Insurance Fire and General, above n 194, at 77,974.
238 At 77,975. It is not necessary to consider the issue of damages for anticipatory breach were there has been no acceptance of repudiation as the breach could also be regarded as an actual breach.
239 Royal Insurance Fire and General, above n 194, at 77,975.
240 A breach giving rise to a right to repudiate allows the innocent party to wait until performance is due and sue for damages: (Chitty on Contract. Vol 1, 23rd Ed Sweet + Maxwell 2018 London at [24-022].
was properly pleaded here and the circumstances of the breach and its effect were made clear to RiskPool. RiskPool was on notice. It was not necessary for NCC to plead that it relied on the breach to give rise, by operation of law, to its ability to rely on the reasonableness of the settlement to establish the loss. RiskPool does not say it was taken by surprise by NCC’s approach.
[379] It is not necessary to further consider D A Constable, except to note that it was important for the insured in D A Constable to establish repudiation had actually occurred so that the conditions of the contract, one of which was to obtain consent to the incurring of costs, were not binding on the insured. In this case RiskPool consented to the incurring of costs by suggesting that the NCC take steps to defend the claim and instruct a lawyer. Therefore, it is not necessary to establish repudiation.241
[380] The next step is to divide the undivided global settlement figure between exclusively non-weathertight defects and defects involving weathertight or mixed issues.
[381] In Enterprise Oil Ltd v Strand Insurance Co Ltd ,242 a global settlement figure had been agreed covering a number of causes of action and heads of damages which included consequential losses.243 A number of defendants had contributed to the settlement figure including Enterprise Oil. The defendants decided amongst themselves what share they should contribute to the global settlement.
[382] Enterprise Oil was liable only for some of the causes of action compromised in the settlement. The Court there said it had to look at the actual liability of Enterprise Oil in order to ascertain whether the liability did fall within the claims cover. To do that it conducted an analysis of the liability.
[383] Enterprise Oil did not follow the earlier English decision of Lumberman Mutual Casualty Co (Lumberman).244 That had held that the insured was under no
241 In much the same way as consent was established in Arrow International Ltd v QBE Insurance. See below at [386].
242 Enterprise Oil Ltd v Strand Insurance Co Ltd [2006] EWHC 58 (Comm), [2006] 1 Lloyd’s Rep 500 [“Enterprise Oil Ltd”].
243 Enterprise Oil Ltd, above n 242, at [15].
244 Lumberman’s Mutual Casualty Co v Bovis Lend Lease Ltd [2005] 1 Lloyd’s Rep 494.
liability to contribute where cover would have been available for some of the claims settled but the heads of claim were not identified and damages apportioned in the settlement agreement.245
[384] The Judge in Enterprise Oil was required to determine what the liability of Enterprise Oil would have been under Texas law. The Court completed that assessment and was satisfied that there would have been actual liability established.246 The fact that a global settlement had been reached that partly included compromising liability for which Enterprise Oil was not responsible, did not preclude recovery by it from the insurer. The Judge was satisfied that on the basis of the expert evidence that the settlement figure was in excess of what would have been a reasonable settlement for the insured’s liability.
[385] The Court in Enterprise Oil concluded that an insurer always has a right to challenge whether the insured’s right to indemnity under a policy has been established.247 It had a right to challenge quantum and whether, on the facts of the case, the insured liability was within the scope of the liability policy.
[386] In Arrow International Ltd v QBE Insurance,248 MacKenzie J would have been required to apportion a settlement figure between the insured and a third party if the insured had established liability against the underwriter – which it had not. The Judge did not deal specifically with whether or not repudiation had been established despite the fact that it had been pleaded by the insurer in that case.249 The Judge followed Enterprise Oil Ltd and not Lumberman in that he accepted that despite an unapportioned global settlement figure the underwriter could be liable for that part of the settlement that could be attributed to the insured liability.
245 Enterprise Oil Ltd, above n 242, at [150]–[151].
246 At [143].
247 At [167].
248 Arrow International (HC), above n 194.
249 The Judge did not need to consider the issue of repudiation as, although he had granted leave to amend the statement of claim to plead repudiation six months before the hearing, the claim was withdrawn by counsel for Arrow in the course of opening. The reasons for that course of action are obscure. Arrow International Ltd (CA), above n 205, at [93]; and Enterprise Oil Ltd, above n 242.
[387] MacKenzie J dealt with the apportionment on a hypothetical basis. The Judge had determined that the insurer was not liable as the policy was not in place at the time the loss was found to have occurred.
[388] MacKenzie J went on to consider what the apportionment of the global figure would have been in order to attribute a figure for the excluded liability. The Judge was satisfied on the evidence that various items had been discounted by the plaintiff in the settlement negotiations based on the plaintiff’s assessment of the likelihood of success on these items. The Judge noted the exemplary and stigma damages would have remained on the table if settlement had not been achieved250 but he concluded that for settlement purposes the plaintiffs entirely discounted those parts of the claim therefore it would have been artificial to attribute any part of the settlement to those items.251 The Judge concluded those items could be deducted from the total settlement sum and then an apportionment exercise would be carried out between the repair costs not payable by the underwriter and those not excluded under an exclusion clause for defective products, had the claim not failed entirely.
[389] MacKenzie J approached the apportionment by determining what would have been a reasonable apportionment of the global sum at the time of settlement. For that purpose, he looked at the evidence available of what the insured had discounted in its assessment for the purpose of negotiations. Although the Judge recognised that the discounted heads of claim would nevertheless have been pursued had the matter gone to trial, he made an assessment that the insured did not consider those grounds were strong so would have let them go to get a settlement.
[390] MacKenzie J did not follow Enterprise Oil insofar as it was authority for the proposition put forward by Mr Ring that in the case of a global settlement an insured must prove “at trial liability”. MacKenzie J referred to Enterprise Oil but only to indicate that he would not follow Lumberman’s finding that a global settlement sum could not be apportioned between Heads of Liability and so the whole claim failed.
250 Arrow International (HC), above n 194, at [95].
251 At [94].
[391] It is apparent that MacKenzie J was following the earlier New Zealand Court of Appeal authorities, which had looked at whether the settlement was reasonable and what a reasonable apportionment would have been at the time. That established the quantum for the purposes of the insured’s liability.
[392] I propose adopting the same approach as MacKenzie J which is supported by the New Zealand Court of Appeal authority, binding on this Court.
[393] Therefore, the next step, if I had found RiskPool liable, would have been to look at the apportionment of the global settlement paid to the Waterfront plaintiffs by determining what would have been a reasonable apportionment between the weathertight/mixed defects and the other defects, as at the date of settlement.
Apportionment
[394] Ms Rice, who was acting for the NCC on the Waterfront plaintiffs’ claim, gave evidence that she had kept RiskPool advised and gave it access to all the documentation on the Waterfront plaintiffs’ claim. She took the view that the NCC needed to act as a prudent uninsured and advised it accordingly.
[395] Ms Rice attended the mediation on 14 February 2019 along with representatives of the NCC and a number of experts for the NCC. She indicated she had invited RiskPool to the mediation but it seems they were “uninvited” by the lawyers acting for the NCC in these proceedings. I do not consider this is relevant to the present exercise. If RiskPool had declined the claim wrongfully, it could not reasonably expect to sit in on the mediation.
[396] Ms Rice and Mr Jack described the mediation. The process was facilitated by a very experienced mediator, according to Ms Rice. It had quickly moved from discussions about the defects and testing the evidence into a global figure negotiation.
[397] Ms Rice said there was little, if any, discussion as to what defects and costs were being settled in the global settlement. She said there had been a series of global sum offers that had been exchanged between the parties in an attempt to reach a settlement figure. The final amount had not been negotiated in her presence. Mr Jack,
the NCC CEO and the lead negotiator for the Waterfront plaintiffs, met separately (without counsel present) toward the end of the mediation in order to “bridge the gap” and reached the final settlement figure.
[398] In this claim the issue is not the amounts required to remedy the defects as they are taken from the Waterfront plaintiffs’ claim. The challenge is on the apportionment of these numbers.
[399] The NCC’s experts who gave evidence covering the appropriate apportionment were Mr Powell, a building surveyor, and Mr White, a quantity surveyor. Mr White did not inspect the Waterfront Apartments but relied on information from Mr Powell to make the apportionments. They examined the quantum of loss attributable to various defects and categorised each item of claimed work into one of four categories. The defects were numbered from 1 to 22 using the same numbering as had been used in the Waterfront plaintiffs’ claim. Colours were then allocated to each category of claimed work as a convenient way to show the separate defects and their categories: remedial work only required as a result of non-weathertightness defects (orange); remedial work required for both weathertightness and non-weathertightness defects apportioned between the weathertightness defect remedial work and the remedial work only required due to non-weathertightness defects (green); remedial work required for both weathertightness and non-weathertightness defects (purple) and remedial work required exclusively for weathertightness defects (blue).
[400] For the orange category (exclusively non-weathertight defects) NCC claimed that the full amount of the remedial work was covered by the RiskPool indemnity. For the green category, the amount of the cover was the balance of costs required to remedy the defect over and above the cost to remedy the weathertightness defect. Both the purple (mixed causes of the same loss) and the blue (all weathertight defects) losses were excluded.
[401] Mr Smith gave the expert quantum evidence for RiskPool. He is a registered building surveyor and quantity surveyor who has extensive experience in defective building claims. He had visited the Waterfront Apartments on one occasion.
[402] The apportionment was refined in the course of the hearing as the experts’ positions were clarified and areas of common ground were established. I will comment briefly on the experts’ evidence below. However, the starting point must be the claim made by the Waterfront plaintiffs and what a reasonable apportionment of the global sum would have been at the time of settlement.
[403] This was the approach taken by MacKenzie J in Arrow International. He looked at the evidence at the date of settlement to ascertain how a reasonable apportionment might be achieved at that date. As in Royal Insurance Fire and General, the Court noted that the assessment of reasonableness was as at the time of settlement.
[404] The most reliable proximate evidence of how the insured might have apportioned the claim sum by defect was set out in the letter of advice to the NCC from Rice Speir, its lawyers, dated 1 February 2019. This was an updated settlement recommendation for the NCC and was prepared for an extraordinary general meeting of the NCC, convened to give authority up to a specified limit to Mr Jack to enable him to settle at the scheduled mediation.
[405] The claim by the Waterfront plaintiffs at that stage was $20.5m made up of estimated repair costs of $15.5m, remedial consultants of $1.2m, consequential losses of $1.3m, general damages of $1.25m, interest of $170,000 and legal and expert litigation costs of $1m.252
[406] Rice Speir, in its letter, indicated it considered the NCC had no liability for the following defects:
(a)bathrooms (non-weathertight) defects 13 and 14;
(b)main roof (weathertight) defect 2; and
(c)structural (non-weathertight) defect 22.
252 These figures were adjusted before the mediation by Waterfront plaintiffs.
[407] The estimate by Rice Speir based on expert advice was that those three sets of defects were worth a total of $2.2m.
[408] Having made those deductions, together with an overall discount for trial risk, costs of trial and uncertainties, it advised the NCC that settlement of the proceedings might be possible at [redacted]. This included an estimated contribution of the other parties to settlement of up to [redacted]. The contribution by the NCC therefore was suggested as [redacted]. This was just over 60% of what it considered was the realistic quantum at that stage.
[409][redacted].
[410] [redacted]. Ms Rice appeared at that meeting. The minutes note that she said there were some good defences available should the matter move to a court hearing, for example, in relation to bathroom defects.
[411] Mr Smith, the building surveyor/quantity surveyor expert called by RiskPool, commented in his evidence that Mr White, the NCC building surveyor expert, had at the time of the settlement in 2019 advised NCC using an accepted method of calculation known as “measure and price methodology”. [redacted] deduction made by Rice Speir for claims the advice given was that the NCC was not liable. For the purposes of his evidence in these proceedings Mr White had changed methodology and was using a “contractor’s claim and estimate” to assign the costs to the work.
[412] While there was no doubt some litigation risk was involved, as explained by Rice Speir in its letter and by Ms Rice in her evidence, it appears that the advice from Rice Speir was firm that there [redacted] (for defects 13, 14 and 22) as no liability existed for those defects. Ms Rice specifically advised the Council that she considered that the exclusion of those defects (with particular reference to the bathroom defects numbers 13 and 14) was based on strong arguments that could be advanced at trial.
[413] The global settlement figure paid by the NCC was [redacted], toward an aggregate settlement of [redacted]. That included all remedial work and consequential
damages. This was against the Waterfront plaintiffs’ claim of $19,875,400 by the time of the mediation, of which $16.2m was for remedial costs.253
[414] By the time of the mediation, the Waterfront plaintiffs had provided a remedial work cost estimate for defect number 22 of about $2.2m. Therefore, the total for the three sets of defects (2, 13–14 and 22) by the time of the mediation must have been in the region of $3–$3.6m. RiskPool pointed out that the NCC paid almost exactly [redacted] less than the Waterfront plaintiffs’ claims for the cost to remedy the defects, which was the figure that the plaintiffs were focused on recovering at the mediation. Mr Ring said the [redacted] figure was made up of [redacted] in relation to the non- claiming units, and [redacted], which would be the minimum figure for the defects that the Council had been advised that it was not liable for.254
[415] I am satisfied on the evidence that the NCC negotiated deductions from the remedial cost claims at the mediation, in the vicinity of somewhere between [redacted] and [redacted]. I accept that a figure in that range was deducted during the settlement negotiations for defects 2, 13, 14 and 22. This was a reasonable deduction. The NCC had received expert and legal advice. Ms Rice is a highly experienced lawyer in the area of building defect claims and her advice would have been influential in reaching the settlement figure.
[416] I am satisfied that a deduction of [redacted], being in the mid-range of the specified defect deductions and including the [redacted] allowance for the non- claiming units, was reasonable. I am satisfied that NCC would have refused to pay the claims for the liability of defects 13–14 and 22 and for the non-claiming units.
[417] That is the only portion of the global settlement to which a specific quantum is able to be allocated on the basis of the evidence available as to the deductions notionally made by the NCC for the purposes of settlement. To determine the balance of the apportionment of the global settlement I must review the evidence available at
253 $19,875,400 was made up of $15,846,000 for remedial work costs and $4,856,594 for consequential damages, which included $1.2m for costs of remedial consultants so formed part of the remedial cost figure.
254 The unit entitlement deduction had been agreed at [redacted] between the experts.
the time to NCC and assess that in light of the expert evidence called by both parties at the hearing.
[418]This leaves defects 1, 3 to 12, 15 to 19 and 20 to 21.
[419] I also bear in mind that RiskPool would not be required to pay for amounts for remedying:
(a)weathertight defects; and
(b)mixed weathertight and non-weathertight defects, relying on the authority of Wayne Tank.
[420] If the remedying of weathertight defects resulted in the remedying of the non-weathertight defects, RiskPool cannot be liable because it is providing an indemnity for covered claims excluding weathertight claims. Where one cause is within the general words and would render the insurers liable, and the other is within the Exclusion, the insurers can rely on the Exclusion clause, in the case of mixed claims.255 Similarly where one cause requires the same remedy as the excluded cause, the indemnifier can rely on the Exclusion.
[421] Of the 22 defects that the Waterfront plaintiffs listed: defects 1 and 3–12 are excluded, because they related to weathertight issues, and defects 2, 13, 14 and 22 would have been excluded in the settlement. I now turn to look at specific issues raised by the experts in relation to the defects 15 to 21.
Defects 15–19 (fire safety compliance)
[422] These defects relate to various fire safety compliance defects. Mr Ring says these were matters for a fire expert and there was no admissible evidence given by such an expert in these proceedings. The evidence in the common bundle was the fire compliance material and reports relied on in the Waterfront proceedings and in
255 Wayne Tank, above n 70, at [827] per Denning MR.
settlement negotiations. The authors of those did not give evidence in these proceedings.
[423] Mr Ring says they are hearsay statements attributable to the NCC’s fire and liability experts in the Waterfront proceedings.256 Therefore, he says, they are inadmissible under s 18 of the Evidence Act 2008, as those experts did not give evidence.
[424] However, hearsay evidence is admissible with the leave of the Judge under s 18(1) of the Act if the circumstances relating to the statements which are relied upon provide reasonable assurance that the statements are true and the Judge concludes that undue expense or delay would be caused if the makers of the statement were required to be witnesses.257
[425] In this case the impugned evidence was produced for the purposes of establishing that this was the basis for the claim by the Waterfront plaintiffs and so was relied on by the Council in relation to achieving a reasonable settlement insofar as it related to defects 15–19. I am satisfied that there is a reasonable assurance that those documents were relied on by NCC for that purpose. Mr Ring did not suggest otherwise. There was no dispute about the fact those reports had been used and relied upon in the Waterfront claim negotiations.
[426] I am assessing the reasonableness of the settlement and apportionment at the time of settlement. It would not have assisted me to have those experts give evidence here. Even if the content of the reports was shown to be deficient with hindsight it would not affect my assessment of the reasonableness of the NCC’s reliance on them at the time in the circumstances. Therefore, for the purpose of these proceedings, the circumstances relating to the statements provide reasonable assurance that the statements are true. There is no doubt their contents were relied upon in the settlement negotiation. Ms Rice, an experienced lawyer, relied on them, as did Mr Powell, at the time of settlement. Undue expense or delay would be caused if the makers of the
256 Mr James in relation to fire and Mr Flay in relation to liability.
257 Evidence Act 2008, s 18(1).
statements were required to be witnesses.258 Therefore even if they were hearsay, I give leave for them to be adduced.
[427] I am of the view that these defects would have been non-weathertight defects. They are described entirely in terms of fire safety and compliance.
[428] As to quantum, the differences between Mr Smith’s figure and Mr White’s figure for this defect of $2,674,503 and $2,933,210 respectively was largely due to the differences between the experts on the apportionment of scaffolding.259 I prefer Mr Smith’s figure for these defects based on my views concerning the allocation of the scaffolding costs set out below.
[429] Therefore, if RiskPool had been liable for these non-weathertight defects I would have found it was liable for the remedial costs based on the assessment of Mr Smith for defects 15–19.
Defects 20–21 (structural northern decks)
[430] These relate to passive fire-related defects which were alleged to have existed on the northern decks. Mr Smith says that the work required to repair these decks, claimed as non-weathertight defects, needed to be done anyway to remedy weathertight defects. Mr Powell accepted that the repair of the non-weathertight defects 20 and 21 would not have increased the costs which would otherwise be required to repair the weathertight defects required to be done in relation to the decks.
[431] Therefore, on the basis that the work would have been required to be carried out to repair weathertight defects, RiskPool would not have been liable for the costs to remedy them.
258 Evidence Act 2008, s 128(1).
259 See below at [432]–[435].
P&G and scaffolding
[432] Mr White initially said in his evidence that he had applied a 59%:41% (non-weathertight to weathertight) split over the P&G and scaffolding costs.260 Mr Smith accepts that apportionment for the P&G was relatively close to his own.
[433] However, Mr Smith takes issue with Mr White’s figures adopted for the scaffolding costs. Mr Smith points out the total cost for exterior scaffolding was
$870,000 and Mr White apportioned $512,432.29 to interior works. Mr Smith notes that the interior work only would have required some small working platforms and assigned a cost to those of $50,000. On Mr Smith’s calculation that amounts to a difference between Mr White and himself of some $462,432.29 (or with contingency and GST added, $555,728).
[434] Mr White conceded in cross-examination that the bathroom repairs had not used scaffolding. These were interior and would not have required external scaffolding. Mr White, the NCC quantity surveyor, had relied on Mr Powell, the building surveyor, for the information on the scaffolding as Mr White did not actually visit the site. Therefore, it appears that without proper investigation Mr White had allocated scaffolding costs without confirming where the scaffolding would actually be used.
[435] Mr Smith’s evidence about the costs, which should be attributed to interior scaffolding, is consistent with the fact that exterior scaffolding could not be used in the interiors and also supported by the concession made by Mr White.
[436] I prefer Mr Smith’s evidence as to the costs of the scaffolding. He had visited the site and was both a building surveyor and quantity surveyor. He was in a better position than Mr White to make a realistic estimate of the apportionment attributable to the scaffolding in those circumstances.
260 There was an arithmetical error. Mr White’s apportionment was in fact 56%:44% weathertight to non-weathertight. This is irrelevant for present purposes.
Non-defects
[437] RiskPool pointed to remedial work that was undertaken but for which claims by the Waterfront plaintiffs were not pursued. RiskPool says these should be deducted as RiskPool should not be liable for these. However, these do not seem to have featured in Ms Rice’s advice to NCC. I do not consider it is reasonable to deduct them. They would have been caught up in the global settlement figure which was a reasonable approach in the circumstances.
Conclusion on apportionment
[438] I have indicated the findings I would have made concerning apportionment of the global settlement had RiskPool been liable for the Claim. I would have left the detailed calculations for the parties following on my findings. Apart from the quantum I have determined in relation to the defects which I have found were not part of the global settlement amount, the balance of the global sum will require recalculation and adjustment in view of my findings.261 Leave would have been reserved to the parties to come back to the court if any issues arose in that regard.
Other claims
[439] The apportionment of consequential damages would be based on the apportionment between the weathertight and non-weathertight categories as a result of the recalculation of the quantum following my findings above.
Defence costs
[440] RiskPool had consented to the incurring of costs and expenses in writing, by declining cover and suggesting NCC obtain lawyers to protect its position and in fact suggesting Ms Rice as a suitable lawyer. NCC did instruct Ms Rice. MacKenzie J said in Arrow International262 that when QBE had told the insurer it would “bow out of the defence”263 it had likely given consent to the incurring of defence costs by the
261 See above at [416]. Not every issue raised in relation to the experts’ evidence has been dealt with as my approach to the reasonableness of the settlement at the time is likely to require a review of all adjustments.
262 Arrow International (HC), above n 194.
263 At [97].
insured. In this case the direction to NCC to incur costs was even clearer. RiskPool told NCC to instruct its lawyer and suggested who that should be.
[441] The parties have reached an agreement on the quantum of defence costs and, in view of my hypothetical findings above, they will be in a position to make any necessary adjustments. Leave would have been granted to return to the court if any issues arose in that regard.
Costs
[442] In view of my findings that RiskPool is not liable, there appears no reason why costs should not follow the event in the amount calculated on the category and band assigned for these proceedings. In the event the parties are unable to agree, memoranda should be filed by the defendant within 14 days of the date of the judgment, any response by the plaintiff within a further 14 days, and any reply within a further seven days.
Confidentiality
[443] At counsel’s request the judgment will not be published other than to the parties for a period of five days, or such further time as directed, following the delivery of this judgment to enable counsel to make further submissions concerning redactions and confidentiality. A separate minute has been issued in that respect.
Grice J
Solicitors:
Wilson Harle, Tāmaki Makaurau | Auckland, for the plaintiff. Young Hunter Lawyers, Ōtautahi | Christchurch, for the defendant.
Addendum:
[444] The complete version of this judgment was released only to counsel for the parties to enable them to advise whether there were any parts of the judgment which
they sought to have redacted from the public version of the judgment on grounds of confidentiality.
[445] The parties have sought redactions for reasons of confidentiality and commercial sensitivity to aspects of the judgment set out above.
[446] The court accepts that these redactions should be made to the judgment for reasons of confidentiality and commercial sensitivity.264
[447]The judgment with these redactions may now be released and published.
264 See Minute of Grice J, dated 29 June 2021.
Attachment 1 – Waterfront Plaintiffs’ Claim
[redacted]
Attachment 2 (Multi Building Exclusion and Sublimit)
The sub-limited extension was issued to all Councils except five which were subject to a total exclusion.
Attachment 3 (Present Exclusion cl 13)
13.) Exclusion
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 or any applicable New Zealand Standard (or amended or substituted regulation or standard) in relation to leaks, water penetration, weatherproofing, moisture, or any water exist 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.
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