This case concerned an NZI policy for a private house. The owners were adding an additional wing. When waterproofing the exterior walls, a contractor set fire to the new works which caused substantial damage to the whole house. NZI declined the claim on the basis that there was an exclusion for loss caused by structural additions or structural alterations to the home. The owners of the house sought summary judgment on the question of liability against NZI. The only question was whether the structural additions and structural alterations exclusion applied.
In full, the exclusion read:
CAUSES OF LOSS NOT COVERED
You are not covered for loss caused by:
1. Structural additions or structural alterations to the home, unless:
a. We have been notified of the additions and alterations beforehand and we have agreed in writing to cover this, or
b. Cover is provided under 'New Building Works Additional Benefit', or
NZI filed three affidavits in support of its arguments including one from an IAG underwriter and one from a Vero underwriter. Both gave evidence as to the New Zealand insurance market and what risks insurers intended to cover under home insurance policies.
The plaintiff sought to have these affidavits ruled inadmissible as they either dealt with the ultimate issue before the Court or were evidence of NZI's subjective intention.
This was the subject of a separate hearing. The Court held that the evidence of Mr O'Hara and Mr Godman would be of substantial assistance to the Court in understanding the commercial purpose of a domestic home policy and as a cross-check of the plain meaning of the words used. The latter derives from the Supreme Court decision in Vector Gas Limited v Bay of Plenty Energy Limited from earlier this year.
Completed works or works in progress?
The owners' primary argument was that the exclusion only applies to loss caused by the structural addition or alteration itself, not from losses caused by the building process. They said that was either the clear meaning of the exclusion or, if not, the exclusion was ambiguous and ought to be construed against NZI.
This argument was comprehensively rejected.
Looking at the natural and ordinary meaning of the words, 'additions' and 'alterations' can either refer to the completed structure or the building process of adding or altering. The Court was therefore required to look at the context of the exclusion to see which was the appropriate interpretation.
The first contextual clue came from the definition of 'home'. That definition excluded:
NZI submitted that the effect of this exclusion from the definition of home was that it was only when the alteration was fully constructed and suitable for occupation that it was covered by the principal insuring clause. That was good evidence that the structural alterations exclusion cannot have been intended to apply to the completed alteration but rather to the process of altering.
The Court agreed.
Next, the Court looked at the provisos to the structural additions exclusions set out above.
NZI submitted that the use of the word 'beforehand' in proviso (a) could only mean 'before the construction process commences'. That must be the case because once construction work is completed, the additions and alterations become part of the 'home' and are covered in that way.
The Court agreed with NZI.
Faulty workmanship exclusion
The owners then tried to rely on the common exclusion for design, workmanship or construction. Under the heading 'Types of loss not covered', this exclusion read as follows:
3. fault, defect, error or omission in design, workmanship, or construction ...
The owners argued that if the structural additions exclusion applied to the process of adding or altering, then it also would have referred to 'design, workmanship or construction'. The fact that it did not meant that the structural additions exclusion was only intended to refer to loss caused by completed additions or alterations.
NZI referred the Court to the fact that the structural alterations exclusion was for the cause of loss. That indicated that the words additions and alterations were to be read as verbs rather than as nouns. That supported NZI's interpretation that it was process rather than the completed article.
Terms of later NZI policy
The owners sought to interpret the policy they had by reference to an earlier NZI policy. That policy made it clearer that the exclusion was for the process of adding or altering.
Unsurprisingly, the Court was not prepared to draw any inference from the change in policy wording.
The Court reached the view that NZI's interpretation was to be preferred. It then cross‑checked that by reference to the commercial purpose of the policy and the parties' understanding as to the scope of cover.
In that context, the Court noted the owners' acceptance that structural work done on a home presents an increased risk to an insurer which is normally covered by construction works cover. The Court found that showed that its conclusion did not flout common sense.
The judgment is a useful guide to the way Courts set about interpreting insurance policies and the care they take to ensure the outcome reflects not only the words used but commercial common sense. It is useful to have a clear pronunciation that the structural additions exclusion, which is common to many domestic policies, operates in the way that insurers always assumed it did.
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