Liability insurers, especially those involved in leaky building claims, can breathe a sigh of relief at the Court of Appeal's decision in Lumley General Insurance v Body Corporate 205963 and Leuschke Group Architects Limited (In Liquidation).
Leuschke Group were architects involved in designing residential units in Auckland. The units leaked and require repairs costing more than $3 million.
As Leuschke was in liquidation, the home owners applied to join Leuschke's insurers, Lumley and ACE, to the proceedings. Lumley consented to being joined only on the basis that the Court ruled on whether the policy applied.
Lumley argued that the policy did not apply due to a leaky building exclusion. The leaky building exclusion provided that Lumley had no liability to indemnify Leuschke against liability:
"For loss or damage of whatsoever nature to any building or structure arising directly or indirectly from moisture or water ingress through any exterior cladding or roofing system (and any associated waterproofing treatment and flashings).
Designed, specified or approved by the Insured, including but not limited to monolithic claddings and face sealed systems, fibre cement sheets, expanded polystyrene sheets, cellulose fibre sheets, PVC sheets, stucco plaster and proprietary plaster systems.
This exclusion shall not apply to any exterior cladding system, the design of which allows or promotes the ready escape of moisture and moisture vapour."
The issue in this case was that some of the leaks were not through the exterior cladding but were through metal balustrades fixed through horizontal surfaces of the decks; metal cappings fixed through to the top vertical surfaces of the balconies; metal cappings on the tops of wing walls between the units; and downpipes penetrating the top of the wing walls between the units.
The home owners said that those defects were not caught by the exclusion as it was not a claim arising from water ingress through any exterior cladding.
Lumley argued that the exclusion dealt with liability for water ingress through any exterior cladding system. Lumley said that the phrase 'exterior cladding or roofing system' really meant any exterior cladding system or roofing system.
This argument failed in the High Court which said that the word system only related to roofing.
This approach was rejected by the Court of Appeal.
The Court of Appeal judgment started by saying that, although an exclusion clause should be construed narrowly, that does not mean a strained interpretation is to be adopted. The Court then went on to say that the word 'or' in the phrase any 'exterior cladding or roofing system' was not disjunctive so that the phrase concerned two distinct concepts. Rather the word system was associated with both exterior cladding and roofing. That was the natural and ordinary meaning of the language used.
The Court backed that up in two further ways. First, it looked at the list of claddings in the second half of the exclusion. Some of those things, like stucco plaster, must relate back to exterior cladding and could not only relate to roofing systems.
The next critical feature was that the proviso made no sense if exterior cladding in the first part of the exclusion did not include an exterior cladding system. There would have been no need to write back cover for an exterior cladding system in the proviso if it had not already been excluded by the first part.
These conclusions now seem obvious. Reassuringly, the Court of Appeal did not strain to find against the insurer. Rather, it used ordinary principles of contractual interpretation to find a sensible, logical and rational result.
New Zealand Insurance