Case of the failed exclusion clause!

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The recent Auckland High Court case — Body Corporate No. 205963 & Others v Leuschke Group Architects Ltd (in Liquidation) & Others (CIV-2006-404-5572) — required the presiding judge, Justice Stevens, to consider whether an exclusion clause contained in a professional indemnity insurance policy was sufficient to exclude the liability of two insurers for damage caused by water ingress to the plaintiffs’ property.

As the insurers were the only remaining viable defendants, a determination that excluded their liability would have left the plaintiffs with no recourse at all. 

Background

The claim related to a residential complex, comprising 60 units, on Morningside Drive, Auckland, which was designed and built in 1999 to 2001. The complex suffered from leaky building syndrome to such an extent that in excess of $3 million would be required to make it safe and weathertight.

The home owners (plaintiffs in this case) sought to identify and pursue remedies against those responsible for the construction of the complex, including the developer, builder and building certifier.

However, it transpired that the only solvent defendant was Leuschke Group Architects Ltd, who had prepared the plans, drawings and specifications for the complex, which were said to have been defective and to have caused loss to the plaintiffs.

After proceedings were commenced against Leuschke for negligent architectural services, the company was placed in liquidation. The plaintiffs then sought to join Leuschke’s professional indemnity insurers, Lumley General Insurance (NZ) Ltd and Ace Insurance Ltd, as parties to the claim.

Issue

Whilst the two insurers consented to being joined as defendants to the substantive claim, they first wanted the court to determine a question of interpretation, regarding clause 2.04 of their indemnity policy. Clause 2.04 said: “The companies shall not indemnify the insured against liability:

For loss or damage of whatsoever nature to any building or structure arising directly or indirectly from moisture or water ingress through any exterior cladding or roofing system (and any associated waterproofing treatment and flashings) designed, specified or approved by the insured, including but not limited to monolithic claddings and face sealed systems, fibre cement sheets, expanded polystyrene sheets, cellulose fibre sheets, PVC sheets, stucco plaster and proprietary plaster systems.”

The question before the court was whether clause 2.04 applied to exclude the liability of Lumley and Ace arising from damage to the plaintiffs’ property from water entry and moisture damage via:

• metal balustrades that were fixed through horizontal surfaces on the decks to a number of units, causing the puncturing of the butyl rubber membrane,
• metal cappings that were fixed through the top vertical surfaces of the balconies with timber-framed balustrades,

• metal cappings on the tops of wing walls between units, and
• the penetration by stormwater downpipes at the top of the wing walls between the units.

It was always the plaintiffs’ position that the damage to the units fell outside the policy exclusion in that the damage had been caused to the building or structure other than by water ingress through (a) the exterior cladding or (b) the roofing system. Conversely, the defendants contended that all the damage to the units was excluded by clause 2.04.

For the defendants’ position to be valid, the word “system” would have to be read into clause 2.04 after the phrase “exterior cladding”.
The plaintiffs maintained that if the insurers intended the exclusion to refer to an “exterior cladding system” it would simply have worded the clause in such a way.

Justice Stevens agreed with the plaintiffs and accepted that, within clause 2.04, the words “exterior cladding” sat comfortably together without the word “system”, which the defendants had sought to have read into the section.

His Honour was willing to accept, on the plaintiffs’ evidence, that “exterior cladding” has a different connotation to the phrase “exterior cladding system”.
Further, as the wording of the section was ambiguous, it was considered appropriate to adopt an interpretation that favoured the plaintiffs, following the contra proferentum rule.
His Honour could see no compelling reason to stretch the natural and ordinary meaning of the words in clause 2.04, as the court had been requested by the defendants.

Decision

The plaintiffs alleged four types of damage to their property from moisture ingress. The defendants maintained that this damage arose directly or indirectly from water ingress through the exterior cladding and/or roofing system and, therefore, was excluded by clause 2.04.

In applying his interpretation of clause 2.04, Justice Stevens found that Leuschke did have cover for such liability, and that the clause was not effective to exclude it. In particular: 

• Metal balustrades — the water ingress occurred under the plates of the metal balustrades through holes made by the screws through the cladding and then through the waterproofing membrane. The water did not enter by virtue of a defect in the exterior cladding or roofing system, nor through that exterior cladding or roofing system; it entered through a hole in the external cladding.

• Metal cappings — the balconies with timber-framed balustrades had metal cappings fixed through the top vertical surfaces. Water gained entry at these points which led to cracking of the plaster and extensive decay in the timber. The metal cappings could not be considered part of the exterior cladding or roofing system and, therefore, could not be excluded.
• Wing walls — the wing walls between the units on the top level of the building complex had metal flashings that were flat. The defects associated with the metal flashings led to water ingress into the building envelope resulting in cracking of the external plaster cladding and damage to the timber framing. Again, the metal flashings were not deemed to be part of the exterior cladding or roofing system. 

Downpipes — at the top of the wing walls, stormwater downpipes penetrated the top surface of the cappings. Water entered the wing walls through the penetration made by the downpipes, causing serious damage to the timber framing beneath. His Honour determined the stormwater downpipe penetrations were also not part of the exterior cladding or roofing system.

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