Insurance policy exclusion clauses back in the spotlight

5 October 2022

An exclusion clause has the potential to significantly limit the scope of cover provided by an insurance policy. How should the courts interpret exclusion clauses? And just how far can an exclusion clause go? 

The Court of Appeal recently considered these questions in a case brought by the Napier City Council against its insurer, RiskPool.1


In 2013, the owners of an apartment complex sued the Council for negligently issuing building consents. The owners claimed that this resulted in building defects, some of which related to weathertightness issues, and some of which did not. The owners claimed the total cost of remedying the defects from the Council.

The Council settled the owners’ claims for a global sum, and then claimed under its insurance policy with RiskPool.

That policy covered the Council for liability arising from negligently issued building consents. However, there was also a weathertightness exclusion. It excluded liability for claims arising out of the failure of a building to comply with the Building Code in relation to weathertightness issues.

RiskPool rejected the Council’s claim in its entirety. It said that there was a single claim by the owners against the Council, with a single sum claimed in respect of damages, and that the claim included weathertightness defects. As a result, it said that the exclusion applied to all of the Council’s claim.

The High Court upheld RiskPool’s position, and the Council appealed.

Courts of Appeal judgment

The Court of Appeal overturned the High Court’s decision, ruling that the exclusion clause only removed cover for the owners’ claims to the extent that the Council’s liability arose out of weathertightness defects. The clause did not exclude non-weathertightness defects, even if they formed part of a single claim by a building owner.

In reaching this conclusion, the Court of Appeal set out what it considered to be the proper approach to the interpretation of exclusion clauses.

Narrow Interpretation?

The Court of Appeal said that, while insuring clauses should be “read broadly” and given a “liberal construction in favour of cover”, exclusion clauses should be “read narrowly” and “construed strictly”. That interpretative approach favoured the Council’s position.

Interestingly, the only authority cited by the Court of Appeal for these principles was an Australian text book. However, in a trilogy of cases over the past decade, the Court of Appeal has also said that, while exclusion clauses should be construed narrowly, this should not be done in a strained or artificial way.  Instead, the overall objective in interpreting an exclusion clause is to ascertain the mutual intention of the parties.2

Commercial Purpose?

The Court of Appeal also focused on what it described as the “commercial purpose” of cover and the “structure of the parties’ bargain”. It said that “the evidence does not show” that the commercial purpose extended to excluding liability for non-weathertightness defects when combined in a claim for weathertightness defects.

However, it is unclear how the Court derived this commercial purpose, and what evidence it relied on in support of its conclusion. It is also unclear how the Court balanced its assessment of commercial purpose with the language of the policy. Indeed, the Court also observed in its judgment that “the language of the document retains primacy”.

Commercial Absurdity?

The Council argued that, if RiskPool’s interpretation were adopted, the exclusion would substantially defeat the indemnity, and that this could not have been intended. The Court of Appeal did not agree. It said that exclusion clauses can have the potential to carve out liability to an “extensive degree”.

The Council also argued that, if RiskPool’s interpretation was correct, RiskPool could deny an entire claim, even if a “trifling” part of the claim is connected to weathertightness. The Court of Appeal said that this was a more persuasive argument, and showed that this could not have been the intention of the exclusion.

Prior Negotiations?

RiskPool argued that, before the policy was entered into, the Council had made a separate claim under an earlier version of the policy with the same exclusion. That claim involved a different building owner who had alleged both weathertightness and non-weathertightness issues. 

RiskPool rejected the claim in full, and the Council did not object. RiskPool said that this showed that, at the time the policy was entered into, both it and the Council knew that the policy did not cover claims involving weathertightness issues.

While the Supreme Court has recently adopted an expansive approach to the admissibility of such evidence in the interpretation of contracts, the Court of Appeal in this case sought to limit that approach. It emphasized that pre-contractual material will not be admissible unless it meets the threshold questions of (1) relevance and (2) the probative value of the evidence, relative to the risk that it will needlessly prolong the proceeding. 

Importantly, the Court of Appeal said that a court may make an assessment as to whether the likely probative value of the evidence justifies the costs of adducing that evidence before those costs are incurred. 

This is a welcome development. While on occasion the prior negotiations may yield some helpful evidence, in the vast majority of cases that evidence is inconclusive, and trawling through the background material instead serves only to increase the costs of litigation.

Indeed, that is what the Court of Appeal concluded here, suggesting that this evidence was not helpful and should not have been admitted, and ruling that, in any event, it did not support an inference that the Council shared RiskPool’s views.


It remains to be seen whether RiskPool will seek leave to appeal to the Supreme Court. In the meantime, both insurers and insureds will need to be aware of the approach taken by the Court of Appeal when reviewing exclusion clauses.

If you have any questions about the matters raised in this article, please get in touch with the contacts listed, or your usual Bell Gully adviser.

1 Napier City Council v Local Government Mutual Funds Trustee Ltd [2022] NZCA 422 (8 September 2022)2 AMI Insurance Limited v Legg [2017] NZCA 321, Trustees Executors Limited v QBE Insurance (International) Limited [2010] NZCA 608, and Lumley General Insurance (NZ) Limited and Ace Insurance Limited v Body Corporate No205963 [2010] NZCA 316.

Disclaimer: This publication is necessarily brief and general in nature. You should seek professional advice before taking any action in relation to the matters dealt with in this publication.