A New Zealand council has won a court battle with its insurer over a defects exclusion after the owners of the Waterfront Apartment complex in Napier took action against the local government due to building failings.

The owners said the council had been negligent during 2006 and 2007 in issuing building consents, ensuring adequate inspections, and issuing code compliance certificates.

The Napier City Council settled the owners’ claim for about $NZ12 million ($11.1 million) and sought to recover part of the total though its insurance policy, which had an exclusion for weathertightness defects.

But Local Government Mutual Funds Trustee Ltd declined cover, arguing the exclusion related to the entirety of the claim. RiskPool was the scheme trustee.

The exclusion clause said the contract did “not cover liability for claims alleging or arising directly or indirectly out of, or in respect of” weathertightness defects.

RiskPool said the claim could not be divided into separate parts and the insurer was liable neither for weathertightness issues nor for the unrelated defects.

The High Court initially found in favour of RiskPool, but the Court of Appeal disagreed. The dispute then went to the Supreme Court, which yesterday supported the appeal court decision in favour of the council.

“When the clause is read as a whole, in context, it is clear that the common intention was to exclude only the risks specifically referred to, namely, weathertightness,” Chief Justice Helen Winkelmann and Justices Mark O’Regan, Ellen France, Joe Williams and Stephen Kos said.

The court heard that some $NZ4.4 million ($4.1 million) of the total was identified as attributable to other defects, such as relating to fire safety compliance and structural issues.

“The council is correct to say that there is nothing in the language of the exclusion clause which would convey to the reader that divisible parts of a claim that do not relate to weathertightness are being excluded,” the justices said.

The decision says RiskPool’s interpretation errs in focussing unduly on one part of the exclusion clause and the result advanced is “textually awkward” and ignored certain words.

The mutual fund scheme was set up in 1997 in response to dissatisfaction by local authorities with the commercial insurance market. The Court of Appeal said it appeared there were “high hopes” for RiskPool when it was started, but an initial surplus was wiped out by leaky building claims in the early 2000s.

Napier council left the mutual at the end of 2014/15 and the scheme subsequently ceased offering liability cover.

The Supreme Court decision is available here.