ARROW INTERNATIONAL LIMITED V QBE INSURANCE (INTERNATIONAL) LIMITED CA CA426/2009

ARROW INTERNATIONAL LIMITED V QBE INSURANCE (INTERNATIONAL) LIMITED CA CA426/2009 8 September 2010IN THE COURT OF APPEAL OF NEW ZEALAND CA426/2009 [2010] NZCA 408BETWEEN ARROW INTERNATIONAL LIMITED Appellant AND QBE INSURANCE (INTERNATIONAL) LIMITED Respondent Hearing: 22 June 2010 Court: O'Regan, Ellen France and Randerson JJ Counsel: P H Thorp and L M Smit for Appellant M G Ring QC and L J Taylor for Respondent Judgment: 8 September 2010 at 11.30 amJUDGMENT OF THE COURT A The appeal is dismissed. B The appellant must pay to the respondent costs for a standard appeal on a band A basis and usual disbursements.____________________________________________________________________REASONS OF THE COURT(Given by O'Regan J)Introduction[1] This appeal involves an insurance claim by a contractor that was responsible for the building and design of a complex of leaky homes. On 30 May 2002, Arrow International Ltd (Arrow) took out insurance with QBE Insurance (International) Ltd (QBE) over a property development for which it was the head contractor. The main issue raised on appeal is whether compensation paid by Arrow for the damage to the complex was covered by this insurance policy. [2] The development was Luxford Villas, an apartment complex in Berhampore, Wellington comprising 40 residential and 5 retail units. The villas were completed in December 2000. In August 2003, a tile on the deck of one of the units collapsed while being walked on. Arrow had work done to remedy the eastern side of the building and made an insurance claim to QBE. In early 2006, it was revealed that further, extensive rotting and water damage to timber on the deck had occurred. Repair or replacement of all the balconies, walkways, cladding and joinery was required. [3] The body corporate and unit owners commenced proceedings against Arrow and other parties. Settlement was reached. Arrow sought to recover its net liability under the settlement from QBE. It failed in the High Court and appeals to this Court.1Background[4] Prior to February 2002, Arrow's cover was provided by another insurer. It took out a policy with QBE commencing on 30 May 2002, which was renewed in 2003 on the same terms until 30 May 2004. From 30 May 2004 onwards, the insurance policy provided an exception from cover for building defects. It is common ground that no such exception was included in the 30 May 2002 to 30 May 2004 policy.1 Arrow International Ltd v QBE Insurance (International) Ltd HC Wellington CIV-2007-485-74, 23 June 2009.[5] The terms of the 30 May 2002 policy are particularly relevant, since Arrow claims that its liability accrued during this period. The policy provided:INDEMNITY FOR DAMAGESThe Company will indemnify the Insured in respect of all sums that the Insured becomes legally liable to pay by way of compensation consequent upon: (a) accidental physical loss of or damage to any tangible property; ... happening within the Territorial Limits specified in the Schedule during the Period of Insurance and resulting from Occurrences in connection with the Business. The Company's liability under the Indemnity for Damages clause for all sums payable to all claimants in respect of any one Occurrence (or if so specified, in the aggregate in respect of all occurrences of Damage or Injury during the Period of Insurance) will not exceed the applicable Limit of Indemnity specified in the Schedule.[6] Arrow argued in the High Court that it was entitled under this clause to indemnity for the compensation it paid to the body corporate and unit owners. MacKenzie J ruled against Arrow and it now renews the argument in this Court. [7] The other clause on which argument in the Court below centred was the exclusion for "Defective Products". In essence this absolved QBE of liability for the cost of rectifying a defect in any "Product" (as defined) by reason of the Product proving defective, harmful or unsuitable for its intended purpose. There was a dispute as to whether this exclusion applied, which MacKenzie J resolved in favour of QBE. This finding was also under appeal, but comes into play only if Arrow succeeds in establishing that it is entitled to indemnity under the policy.Facts[8] The parties do not challenge any of the lower Court's key factual findings. The summary that follows reflects those findings.[9] Arrow was the head contractor on Luxford Villas and was responsible for the design and construction. It subcontracted all of the work and effectively acted as the project manager. [10] The building defects first become apparent in August 2003, but the full extent of the damage was not revealed until October 2006, when the body corporate commissioned a report of the state of the building, which revealed extensive rotting, water damage and leaking. There is substantial agreement about the damage to the building. In particular, it was agreed that the rotting and water damage was caused by microbiological decay that is common in untreated radiata pine. This is set out more fully in MacKenzie J's judgment. 2 The Judge recorded that the expert witnesses for each side agreed that this process of microbiological decay of the timber had commenced prior to 30 May 2002, that is, prior to the insurance policy being entered into with QBE. 3 Further, both witnesses agreed that the scope of work required would have been substantially the same whenever the problem was addressed, unless the defects had been identified very early, before there was any manifestation of their existence. 4 Accordingly, the Judge made a finding of fact that the damage giving rise to Arrow's liability had arisen before 30 May 2002. 5[11] After the initial discovery of the defects in August 2003, Arrow made an insurance claim against QBE. On 26 November 2003, Arrow was advised that an assessor had been instructed to look into liability, but that QBE was expecting Arrow to hold its subcontractors liable. QBE advised Arrow on 7 May 2007 that it had elected to no longer conduct Arrow's defence, although it did not wholly deny the claim. [12] In September 2008, the proceedings commenced by the body corporate and unit holders were settled out of Court. That settlement required Arrow to pay $5 million. Although Arrow had joined QBE as a third party to the proceedings, QBE was not involved in the settlement. Nevertheless, QBE had knowledge of Arrow's intended offer, and consented to Arrow settling in principle; so long as2 At [25]-[39].3 At [32].4 At [37].5 At [83].Arrow considered that it was acting as "a prudent uninsured person" and it in fact did act in that manner. Of the settlement sum, Arrow's net liability was $3.78 million, as it recovered the remainder from other parties. Arrow now seeks to recover that $3.78 million from QBE. QBE does not dispute that, if Arrow's claim succeeds, $3.78 million is the correct amount. Arrow also claims for costs of $1 million. Again, QBE successfully resisted liability for those costs in the High Court but there was no dispute about the quantum of those costs.High Court judgment[13] In the High Court, MacKenzie J gave judgment in favour of QBE. He interpreted the operative clause of the policy to require the Court to identify the time at which the legal liability occurred. He saw this time as arising not at the point where the damage first occurs, nor at the point at which the damage becomes manifest. Rather, MacKenzie J considered that "each case must be examined on its own facts to determine when an alteration to the physical state has occurred which is more than de minimis so that the point has been reached where physical damage has happened." 6 The Judge held that on the evidence, the physical damage to the property had occurred prior to the inception of the policy on 30 May 2002 and that Arrow's liability was consequent upon the damage that occurred in that period (prior to the commencement of the QBE policy). 7 Thus the operative clause of the policy did not cover the claim. [14] The Judge also held that if he had been wrong, the exclusion in the policy for Defective Products would nevertheless have precluded QBE from liability. 8 He left open the question of the defence costs. 96 At [82].7 At [84].8 At [92].9 At [98].Issues on Appeal[15] Arrow did not seek to challenge the Court's factual findings on appeal. Rather, it identified the following key legal issue: Is QBE liable to indemnify Arrow for the settlement reached with the owners and others: (a) on the basis that damage occurred during the relevant period of insurance? (b) or, on the basis that the damage that was happening both before and during the relevant period of insurance first became actionable during the relevant period of insurance (i.e when it caused loss to the owners and completed their cause of action against Arrow)? (c) or, on the basis that the extent of the damage first became manifest during the relevant period of insurance? [16] If that issue is resolved in favour of Arrow, three other issues would arise: (a) if QBE is liable, whether this liability is excluded by the "Defective Products" exclusion in the insurance policy; (b) if QBE is liable, whether the full amount of settlement should be apportioned between the insured and uninsured heads of claim on which the settlement was based, so that QBE is liable only for the insured aspects; (c) whether Arrow is entitled to recover its defence costs from QBE.Our approach[17] On the approach we take to the case, it is necessary for us to deal only with the first issue identified above. 10 Because our views correspond closely to those of MacKenzie J, we can set them out relatively briefly. [18] We start with the proposition expressed by MacKenzie J in his judgment to the effect that the search for a trigger for coverage under a public liability policy must be firmly grounded in the policy wording. 11 We agree. In the present case, Arrow will be entitled to indemnity only if the sums for which it became legally liable to pay by way of compensation to the owners of the leaking apartments and retail units was a liability that was "consequent upon... physical... damage... happening... during the period of insurance". [19] There was no dispute that Arrow did become legally liable to pay a sum by way of compensation for accidental physical damage to the Luxford Villas arising from an "Occurrence" as defined in the policy. Nor is there any doubt that some physical damage was happening during the period of insurance. However, the question which must be answered is whether the compensation that Arrow became legally liable to pay was "consequent upon" damage that was happening during the period of insurance. [20] MacKenzie J found that there had been an alteration to the physical state of the timber which had rotted in the complex to an extent which was more than de minimis so that the point had been reached where physical damage had happened before (indeed, well before) 30 May 2002, i.e. before QBE became on risk under the policy it issued to Arrow. 12He found that the extent of the damage to the timber by 30 May 2002 was such that, had the damage been observed in any part of the building, the only practical means of repairing the damage would have been to open up all areas where exposure of the10 At [15].11 At [66].12 At [83].timber to moisture was likely to have occurred, and to replace the affected timber. 13He found that this would have entailed a scope of works broadly similar to that in fact held to be necessary when the value of the remedial work was later assessed. [21] As counsel for QBE, Mr Ring QC submitted, these unchallenged findings leave no room for the appellant's argument that the compensation paid by Arrow was "consequent upon" the damage which was happening in the building complex during the period that QBE was on risk. On the contrary, the damage leading to the liability to pay compensation had already happened before QBE came on risk under the policy. The physical damage which was happening during the period after QBE came on risk did not therefore trigger a liability to pay compensation over and above the liability in existence at the policy commencement date (i.e. the liability for the damage that had been happening before that date). [22] As Mr Ring suggested, the situation was analogous to a car that had been involved in an accident and damaged to the extent that it was a write-off. The insurer for the party at fault for the first accident would be liable for the full value of the car. If, while the wreck was on the side of the road, another car smashed into it, making the damage even worse, the insurer for the driver of the second car would have no liability because the car was already a write-off before that second accident occurred. [23] Our conclusion makes it unnecessary for us to address in any detail the arguments before us on theories as to the trigger for insurers' liability under public liability policies. The cases proposing these different theories are of limited relevance, given the clear wording of the policy in issue in this case. [24] MacKenzie J was asked by Arrow to accept the proposition that the use of the term "happening" in the policy meant that the policy provided for cover for continuous exposure, so that there may be multiple triggers of the policy, and in a situation where there are different insurers for different periods, the possibility exists that each may be partially liable. MacKenzie J determined that, given the wording of13 At [84]-[85].the current policy, it was necessary to establish a single trigger. 14 He found that the reference to "damage happening" was consistent with a requirement to fix a single point at which coverage under the policy is triggered. [25] On the facts of this case it was not necessary to decide whether it required that a single point in time be fixed and it is not clear to us that the wording required this. In fact, MacKenzie J was unable to do so on the evidence before him. There may be cases where, at best, the evidence can narrow the period of damage down as occurring within a period of time in which different insurers were on risk. In such cases, it may be an appropriate to apportion liability between them. 15 As this was not such a case, it is not necessary for us to express a view on that. [26] We do not see any need to engage further with this aspect of the case, because on the Judge's factual finding the full amount of the liability for compensation incurred by Arrow was already incurred before QBE came on risk. While damage was happening during the period of the QBE policy, no liability for that damage was being incurred. [27] MacKenzie J also dealt with the argument that the reference to damage happening during the period of cover should be interpreted as meaning damage which becomes manifest during the policy period. That would make the trigger for liability the manifestation of damage, rather than the occurrence of damage which has the consequence of a legal liability to pay compensation. MacKenzie J reviewed the authorities and concluded that there was no basis for adopting the manifestation theory in the present context. We agree with MacKenzie J that, given the clear words of the policy, there is no basis for finding that liability under the policy is triggered only when damage becomes manifest. It is not necessary for us to engage further with the manifestation theory.14 At [74].15 As occurred in Bernard Alie v Betrand & Frere Construction Company Ltd (2003) Carswell Ont 2886 at [138].Result[28] We dismiss the appeal.Costs[29] We award costs to the respondent for a standard appeal on a band A basis and usual disbursements.Solicitors: Dawson Harford & Partners, Auckland for Appellant Hazelton Law, Wellington for Respondent