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Chambers Member Daniel McLellan KC appears in recent Supreme Court decision on interpretation of an insurance policy


November 6, 2023

The Supreme Court recently released its decision in Local Government Mutual Funds Trustee Limited v Napier City Council [2023] NZSC 97.  Daniel McLellan KC was counsel for the Napier City Council, the successful respondent.

A group of apartment owners had sued the Napier City Council in 2013 over building defects. They said the Council had been negligent in issuing building consents, ensuring adequate inspections and issuing code compliance certificates.  Some of the building defects had related to weathertightness, but other defects did not.  The Council settled the claim against the apartment owners for around $12 million.  There was no apportionment in the settlement sum between the weathertightness and other defects.

The Council made a claim from on its liability insurer for the portion of remediation costs unrelated to weathertightness.  The insurer declined to cover the claim on the basis of an exclusion clause relating to weathertightness.  It said the claim could not be divided into separate parts.  In other words, because the apartment owners’ demand for compensation included weathertightness claims, and cover for liability arising out of weathertightness defects was excluded under the insurance contract, the insurer said that insurance cover was entirely excluded.  The Council sued the insurer for the non-weathertightness part of the settlement amount.

The High Court found in favour of the insurer.  The Court of Appeal reversed the decision of the High Court on liability.  The insurer appealed.  The primary question for the Supreme Court was whether the insurer was liable for a portion of the claim unrelated to weathertightness, as the Court of Appeal held; or whether the effect of the exclusion clause in the policy was to exclude cover for that part of the claim.

The Supreme Court unanimously dismissed the insurer’s appeal.  It adopted the general approach to contractual interpretation with the aim of ascertaining the meaning the document would convey to a reasonable person with all the relevant background knowledge.  The Court agreed with the Court of Appeal’s construction of the exclusion clause.  It considered that when the exclusion clause was read as a whole, in context, it was clear that the common intention was to exclude only the risks specifically referred to, namely weathertightness.  The Court did not see the contextual matters relied on by the insurer as sufficiently compelling to have any impact on the proper interpretation of the contract, nor did the insurer’s argument on commercial purpose add to its case.

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