The leading authority on the application of section 11 of the
Insurance Law Reform Act 1977 is New Zealand Insurance Co
Limited v Harris1. A recent High Court decision
applies an interesting approach to the application of the
In Harris, the Court of Appeal said section 11
contemplates a two stage test:
1 Was the exclusion so defined because 'the happening of
such events or circumstances was in the view of the insurer likely
to increase the risk of loss occurring'?
2 Was the loss caused by or contributed to by the happening of
these events or circumstances?
If the answer to both questions is 'yes', the exclusion
can be applied to exclude the claim.
In the recent High Court decision of Hall v FP
North2, Associate Judge Abbott considered this two
stage test in the light of an exclusion and an endorsement under a
professional indemnity policy.
FP North recommended an investment portfolio to the claimants.
The claimants lost their money in the investments because all the
companies involved in the portfolio went into receivership or the
creditors agreed to moratoriums.
FP North held a professional indemnity policy with QBE. As FP
North was insolvent, the claimants sought leave to bring an action
directly against QBE. The claimants said that QBE was liable to
indemnify FP North in respect of the claim under its professional
QBE said that the claimants' claims were excluded by two
terms of the policy:
An insolvency exclusion, excluding indemnity for 'claims
relating directly or indirectly, attributable to or in consequence
of the insolvency of any financial institution or fund
An investment adviser's endorsement, excluding claims
'alleging, arising out of, based upon...depreciation, or
failure to appreciate in value, of any investments...'
Associate Judge Abbott looked into the first limb of the
Harris two stage test and found that section 11 did not
apply to the insolvency exclusion or the investment adviser's
1 Neither the exclusion nor the endorsement defined events or
circumstances that were likely to increase the risk of liability
arising in the first place. The insolvency of a financial
institution and the depreciation in value of investments were not
matters which were likely to increase the risk of FP North's
liability. They were only relevant to the measure of loss that
resulted. They did not increase the risk that FP North would act in
a way that increased its risk of liability to the claimants.
2 The exclusion and endorsement defined the scope of cover under
the policy in the first place rather than events or circumstances
which affected a liability that was otherwise
For completeness, Associate Judge Abbott then looked into the
second limb of the Harris two stage test. He found that
even if the first limb did apply, section 11 did not save FP
North's claim because the alleged liability was caused or
contributed to by the insolvency or depreciation of the
The decision walks a fine line between a term of a policy that
defines the scope of cover in the first place, and one that applies
a limitation or exclusion within that cover. Where the dividing
line between these two is is unclear.
1  1 NZLR 10.
2 21/05/09, Associate Judge Abbott, HC New Plymouth,
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Contractors and principals should ensure they have appropriate insurance coverage instead of relying on indemnity clauses.
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