3/08/2023·3 mins to read
Supreme Court confirms the orthodox insurance approach to exclusion clauses for mixed defects
The Supreme Court has upheld the Court of Appeal’s decision in Napier City Council v Local Government Mutual Funds Trustee Limited (RiskPool).
RiskPool declined a claim by the Council on its professional indemnity policy relying on a weathertightness exclusion. It said the exclusion meant that there was no cover for liability for both weathertightness and non-weathertightness defects.
The Supreme Court disagreed. The Court held that because the weathertightness and non-weathertightness defects were divisible, the Council should be indemnified for the non-weathertightness defects.
The Supreme Court’s decision will come as a relief to many in the insurance sector as it confirms a generally understood approach to claims and the application of exclusion clauses to mixed claims.
- The exclusion clause is a common exclusion clause in professional indemnity policies.
- The correct application of the exclusion clause is that cover for weathertightness defects is excluded but where an insured can point to separate non-weathertightness defects, there should be cover for those defects.
- The Supreme Court’s decision does not change the Wayne Tank principle. Where a defect has two or more causes, one of which is excluded, cover for the entire defect is excluded.
The owners of Waterfront Apartments sued the Council and others alleging leaky building problems and a range of other defects, including structural problems and inadequate fire protection.
The Council made a claim on its insurance policy. RiskPool declined cover. It said the exclusion clause meant it had no liability for claims alleging or arising directly or indirectly out of, or in respect of, weathertightness issues. As the claim involved weathertightness issues, RiskPool said the entire claim was excluded and not just liability for weathertightness defects.
The High Court decided in favour of RiskPool but that decision was overturned by the Court of Appeal. RiskPool appealed to the Supreme Court.
The Supreme Court found that:
- When the exclusion clause was read as a whole, in context, the common intention was to exclude only the risks specifically referred to, namely, weathertightness.
- Even though owners had made ‘one claim’ for all of their losses (so, weathertightness and non-weathertightness defects combined), it was possible to identify that part of the Council’s liability relating to each.
- Where the Council faced liability for separate and divisible loss arising from weathertightness and non-weathertightness aspects of the Building Code, only the former are excluded.
- Clearer language would be required to exclude non-weathertightness issues also.
RiskPool also argued the Court of Appeal had failed to apply the Wayne Tank principle. That principle is that where there are two or more proximate causes of the loss, one covered and one excluded, the exclusion applies to the whole claim. However, the Supreme Court said that the Wayne Tank principle was irrelevant to liabilities which result solely from non-weathertightness issues because those liabilities are a result of a non-excluded clause.
The Supreme Court’s decision will be welcomed by the insurance industry as it reinforces a common approach to the application of exclusion clauses to mixed claims. It also makes sense when considering the context of the exposure that RiskPool wanted to avoid – expensive leaky building claims and not building claims in general.
Weathertightness exclusions are common, with most insurers including them after the leaky homes crisis lead to expensive repairs and numerous claims. Insurers have, however, continued to offer cover for building claims. As the Supreme Court’s decision makes clear, the purpose of the exclusion clause was solely related to weathertightness defects and clearer language was required to exclude divisible parts of a claim not related to weathertightness.
Some may fear that insurers will now amend their policy wordings to include that clear language. We doubt they will because the Supreme Court’s decision aligns with the approach most insurers have taken to mixed claims.
It is important to be mindful that the success or failure of each insurance claim will depend on the policy wording and relevant facts, but the entire insurance industry is facing increased regulation with a focus on clearer policy terms and treating customers fairly. Within the next 18 months we expect:
- The Insurance Contracts Bill will be passed, which introduces the duty of “utmost good faith” and extends the unfair contract terms regime to insurance contracts (which you can find out about here); and
- Insurers will need to introduce fair conduct programmes to ensure consumer customers are treated fairly throughout the insurance and claims handling process (you can find out more about that here).
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