Broadform and public liability policies insure liability for property damage occurring during the period of insurance. In Arrow International Limited v QBE Insurance (International) Limited 1, the Court of Appeal has confirmed how these policies will respond to damage that progressively worsens across several policy periods.

Facts

Arrow was the design and build contractor of an apartment complex in Wellington. Construction of the complex started in November 1999 and it was practically completed in December 2000.

In August 2003, a tile on the deck of one of the units collapsed while being walked on. Subsequent investigation revealed extensive damage and water damage. In early 2006, the Body Corporate engaged consultants to investigate. That investigation showed major problems.

The apartment owners issued proceedings against Arrow and a number of other parties involved. These proceedings were settled and involved a substantial payment by Arrow.

Policy terms

QBE went on risk as Arrow's general liability insurer in May 2002.

The insuring clause of the QBE policy provided that there was cover for Arrow's legal liability 'consequent on... physical ... damage... happening...during the period of insurance...'

High Court findings

Arrow argued in the High Court that where damage occurred over a period, as was the case with wood rotting, and where the damage was hidden, the Court should only find that damage occurred when it became obvious and that the Court should not look for a single point in time when the relevant damage occurred.

The High Court disagreed with both points. Because the insuring clause used the words '...damage... happening... during the period of insurance', the policy was triggered at the point in time when damage occurred, not when it became manifest.

The High Court had found as a matter of fact that, before QBE came on risk, the wood had already rotted to such an extent that, although further rot occurred after QBE went on risk, it was not going to cost the owners any more to fix that further damage. As Arrow was already liable for the full amount of the claim before QBE was on risk, QBE had no liability under the policy.

Court of Appeal

The Court of Appeal approved this approach. It referred to an argument advanced by Mr Ring QC for QBE that if a car is damaged in an accident to the extent that it is a write-off, any further damage to that car by a second accident is irrelevant. The person responsible for the second accident has no liability to the car owner as that person has not caused any additional damage.

The Court of Appeal also agreed with the High Court that, because of the clear wording of the insuring clause, there was no basis for finding that liability is triggered only when the damage becomes manifest.

Implications for insurers

One further issue touched on by the High Court was the application in these circumstances of the products liability exclusion. Although it did not form part of the reasoning of the Court, Justice MacKenzie in the High Court thought that QBE would have been able to decline the claim on the basis that the apartments were Arrow's products. The Court of Appeal did not review this issue at all. This case provides useful guidance on the exposure of insurers for leaky building claims, especially where successive insurers have been involved. In this case, the work was completed in December 2000 and the Judge was satisfied that the damage had occurred before May 2002.

Whilst the time taken for rot to occur will vary, it is useful to note that the witnesses for both parties agreed that, once a building starts to leak, there will be enough moisture in the wood to promote fungal growth within 3-6 months. During the next 6 months, decay will advance so that it is well underway such that the strength of the wood is compromised. Physical damage in terms of the policy has occurred by then.

1. [2010] NZCA 408.

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