Supreme Court rules on scope of insurance exclusion clause

4 August 2023

The Supreme Court this week delivered a judgment on the scope of an exclusion clause in a liability insurance policy, in Local Government Mutual Funds Trustee v Napier City Council.1 While the particular exclusion clause at issue concerned the Council’s liability for weathertightness issues, the case raised broader issues as to the proper interpretation of exclusion clauses.


In 2013, the owners of an apartment complex sued the Napier City Council for negligently issuing building consents. The owners claimed that the buildings had a range of 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 about $12 million and claimed that cost under its insurance policy. The insurer declined cover. While the policy covered the Council for liability arising from negligently issued building consents, it also contained a weathertightness exclusion: the policy did “not cover liability for Claims alleging or arising directly or indirectly out of, or in respect of” the failure of a building to meet the requirements of the Building Code in relation to leaks, water penetration, or moisture. 

The $12 million that the Council had paid was not specifically apportioned to different alleged defects, but it was later found that approximately $8 million related to weathertightness defects, and $4 million was attributable to defects not relating to weathertightness issues.  The insurer said that, because the claims against the Council involved weathertightness defects, the claims were excluded from cover in their entirety. 

High Court

The High Court agreed with the insurer. In doing so, the High Court relied on contemporaneous correspondence that it said provided evidence of the parties’ intention about how the exclusion would operate. In particular, the correspondence addressed the reasons why the exclusion was introduced, and indicated that the exclusion was not intended to materially change the position from that which applied under a previous version of the exclusion, which excluded claims as a whole. 

The result was that Council had no cover at all for the $12 million.

Court of Appeal

The Court of Appeal allowed an appeal by the Council. It said that the exclusion only removed cover for the owners’ claims to the extent that the Council’s liability arose out of weathertightness defects – even though the clause did not expressly say that. 

Unlike the High Court, the Court of Appeal did not find contemporaneous correspondence to be helpful. The Court of Appeal primarily focused on what it considered to be the commercial purpose of the clause, although it was unclear how the Court of Appeal derived that purpose from the policy. See our discussion of the Court of Appeal’s judgment in our earlier article here.

Supreme Court

The Supreme Court upheld the Court of Appeal’s decision, although it primarily focused on the words of the policy, rather than any broader commercial purpose.

The Supreme Court said that the exclusion clause only excluded liability for claims made against the Council, not the claims themselves, and so the exclusion clause only applied to the extent that the Council’s liability arose out of weathertightness defects. As a result, the Council continued to have cover for the $4 million of liability not attributable to weathertightness defects.

The Supreme Court did not consider the contemporaneous correspondence to be relevant, saying that the meaning of that correspondence was “unclear”. Importantly, it did not disagree with the Court of Appeal’s comments that pre-contractual material will only be admissible if it meets the threshold questions of (1) relevance and (2) probative value, relative to the risk that such evidence will needlessly prolong the proceeding.

In our view, it is helpful that the Supreme Court did not reject the Court of Appeal’s comments on this point. While prior negotiations may, in some cases, yield helpful evidence, in the vast majority of cases that evidence is inconclusive. Trawling through the background material serves only to increase the costs of litigation.

Finally, the Supreme Court observed that exclusion clauses in insurance contracts need to be interpreted “strictly”, accepting the Court of Appeal’s observation that clearer language would be required to exclude liability for non-weathertightness defects. Both insurers and insureds will need to take this into account when assessing the scope of exclusion clauses in insurance policies.

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 Local Government Mutual Funds Trustee Ltd v Napier City Council [2023] NZSC 97.

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.