Corbett v Vero Insurance New Zealand Limited [2019] NZHC 1823

Corbett v Vero Insurance New Zealand Limited [2019] NZHC 1823 [30 July 2019]IN THE HIGH COURT OF NEW ZEALANDAUCKLAND REGISTRYI TE KŌTI MATUA O AOTEAROATĀMAKI MAKAURAU ROHECIV-2018-404-1991[2019] NZHC 1823BETWEEN BARBARA ANNE CORBETT,FREDERICK JOHN McCALL andGIBSON SHEAT TRUSTEES LIMITED astrustees of the Mathews Family TrustPlaintiffAND VERO INSURANCE NEW ZEALANDLIMITEDDefendantHearing: 7 March 2019Counsel: NR Campbell QC for plaintiffsCM Brick and AR Durrant for defendantJudgment: 30 July 2019JUDGMENT OF FITZGERALD JThis judgment was delivered by me on 30 July 2019 at 3:45 pm,pursuant to Rule 11.5 of the High Court Rules.Registrar/Deputy RegistrarDateSolicitors: Gibson Sheat, Wellington (F Collins)Fee Langstone, AucklandIntroduction[1] This proceeding turns on whether windows which were scratched during theconstruction of a house are "damaged", or "defective", or "defective" because they are"damaged".[2] The issue arises because if the windows are damaged but not defective, the costto repair or replace them will be covered by a construction works policy taken out bythe plaintiffs with the defendant (Vero). If the windows are defective, however, anexclusion clause in the policy will apply and cover will be excluded. The windowsare bespoke, high quality, triple-glazed joinery made in Germany. The cost to repairor replace them has been estimated at around $385,000.[3] In December 2018, Associate Judge Bell directed that there be a hearing of thefollowing separate question:Is the plaintiffs' claim under the contract works insurance policy for scratchingto the 54 glazing units as pleaded in the statement of claim excluded by thefollowing exclusion in the policy:The Company will not indemnify the insured against:6. the costs of repairing, replacing or rectifying any part of the contractworks which is defective in material or workmanship.However, this exclusion shall only apply to that part of the machineor structure immediately affected, and not to loss or damage to otherparts of the contract works resulting therefrom.[4] This judgment determines the separate question.Factual background[5] The plaintiffs are the trustees of a family trust which owns the property andhouse in question. In or around December 2015, they contracted with a buildingcontractor for the construction of a new house on the property (the constructioncontract).[6] At the same time, the plaintiffs took out a Contract Works Insurance Policywith the defendant (Vero) in respect of the construction contract (the Policy).[7] Under the construction contract, the builder was obliged to leave the new houseclean and tidy at practical completion. In fulfilment of this obligation, the builderengaged a subcontractor to carry out a clean of the entire house prior to practicalcompletion, which included cleaning the windows. The cost of the cleaning work wasincluded in the contract price payable by the plaintiffs.[8] In about late May 2017, prior to practical completion or the plaintiffs takingpossession of the new house, the subcontractors cleaned the house, including thewindows. There was dust and grit on the windows which was not removed before themain clean. As a result, the dust and grit was rubbed into the windows' glass, with theresult that all or many of the windows were scratched.[9] In August 2017, the plaintiffs made a claim under the Policy in relation to thescratched windows. There is no dispute for the purpose of determination of theseparate question that:(a) the subcontractors' cleaning works were works carried out under theconstruction contract;(b) the cleaning works were part of the works to be carried out in order toachieve the contractual works under the construction contract;(c) the windows were part of the 'contract works' as defined in and insuredunder the Policy at the time the scratching occurred;(d) the scratching occurred during the period of insurance under the Policy;and(e) that as a result of the scratches, the windows have suffered physicaldamage.[10] Vero declined cover on the basis that, as a result of being scratched, thewindows were "defective in workmanship," and thus the exclusion clause set out at[3] applied (Exclusion 6).Other relevant terms of the Policy[11] The Policy's insuring clause provides as follows:If at any time during the period of insurance physical loss of or damage occursto any item of the property insured, then subject to the terms, conditions andexclusions of this policy the Company will indemnify the insured for such lossor damage.[Emphasis added][12] The clause refers to the "property insured", a term which is not defined in thePolicy. However, as noted at [9](c), the parties agree the windows were part of thecontract works insured under the Policy.[13] The Policy then contains a series of exclusions to the above insuring clause(including Exclusion 6). It is necessary to set them out in full:The Company will not indemnify the Insured against:1. loss or damage directly or indirectly caused by earthquake,hydrothermal activity or volcanic eruption;2. loss or damage to any item of machinery or plant, which has beeninstalled as part of the insured contract, directly caused to that itemby its testing or commissioning.However, this exclusion shall not apply to new building services plantforming an integral part of new buildings being constructed andinsured by this policy, unless such plant is more specified by the sub-contractor(s);3. consequential loss, loss of use, loss due to delay, penalties, fines,liquidated damages aggravated, punitive or exemplary damages, orliability of any nature whatsoever;4. loss or damage to property directly caused by cessation of workwhether total or partial;5. the cost of repairing, replacing or rectifying any part of the contractworks in which there is a fault, defect, error or omission in design,plan or specification.However, this exclusion shall only apply to that part of the machineor structure immediately affected by such fault, defect, error oromission, the Company's liability in respect of loss or damage to otherparts of the contract works resulting therefrom shall not exceed$25,000;6. the cost of repairing, replacing or rectifying any part of the contractworks which is defective in material or workmanship.However, this exclusion shall only apply to that part of the machineor structure immediately affected and not to loss or damage to otherparts of the contract works resulting there from;7. loss or damage to:a. any employees tools and equipment unless otherwise agreedby endorsement;b. any item of contractors plant (which may also be described asconstruction plant) shown in the policy schedule directlycaused by its own explosion, mechanical or electricalbreakdown, derangement or other operating cause, butresultant damage arising from such causes is insured;8. loss or damage caused by wasting, wearing away, discolouration,staining, aesthetic defects, delamination, corrosion, erosion or gradualdeterioration, including that due to atmospheric conditions;9. loss or damage arising out of or resulting from rot, mould, mildew,fungi;10. loss or damage to accounts, bills, bonds, currency, stamps, deeds,evidence of debt, money, notes, securities, cheques, credit cards, files,computer software, drawings and plans;11. loss of any property by disappearance or shortage revealed only bythe making of an inventory or by periodic stocktaking, and where suchloss is not traceable to any specific event;12. loss or damage to the contract works or any part thereof which hasbeen taken into use or occupation by the principal, unless such loss ordamage occurred during any maintenance period specified in thepolicy schedule and arose in the course of any operations carried outby the contractor solely for the purpose of complying with the statedobligations under the maintenance clauses of the contract;13. loss or damage to any existing structures belonging to the principal,unless such loss or damage occurred to property specified in the policyschedule which forms part of the insured contract and arose directlyout of the performance of the insured contract;14. loss or damage arising out of rectifying existing or aggravated defectsnot forming part of the insured contract;15. the excess shown in the policy schedule which shall be the amountborne by the Insured in respect of each and every claim for whichindemnity is provide under Section 1.For the purposes of this exclusion:a. a series of events arising from or caused by subsidence,erosion, flood, inundation, landslip, cyclone, storm or tempestduring any period of 72 consecutive hours will be treated asone event for the purposes of applying the excess;b. the excess shown as applying to contract works shall also beapplicable to architects fees and removal of debris. In theevent of a loss arising from the same source and original causegiving rise to a claim against more than one of these items,the excess will not be cumulative. The aggregate adjustedloss will be subject to the highest excess only being applied.[14] There then follows a series of conditions, only the first of which is relevant:In the event of loss or damage to the property insured, for which indemnity isprovided under this policy, the basis of any settlement shall be:(a) in the case of damage which can be repaired, the cost of therepairs necessary to restore the item(s) to their conditionimmediately before the occurrence of the damage less anysalvage; or(b) in the case of a total loss, the actual value of the item(s)immediately before the occurrence of the loss less salvage.[15] There follows a series of "General exclusions", none of which are relevant forcurrent purposes.The parties' submissionsPlaintiffs' submissions[16] The crux of the plaintiffs' argument is that the scratched windows are notdefective in material or workmanship, but rather they are damaged. They say it doesnot matter that the damage was caused by work carried out under the constructioncontract. They say Vero could have, but did not, exclude damage caused by defectiveworkmanship. They say there is no basis for rewriting Exclusion 6 of the Policy, whichVero drafted, in its favour.[17] The plaintiffs expand on the above key proposition by submitting thefollowing.[18] First, prior to the cleaning, the windows were not in any sense defective (eitherin material or in workmanship). During the cleaning, the windows were scratched.They thereby underwent a physical change that (the plaintiffs say) made them lessuseful.[19] As a matter of ordinary language, settled usage in the insurance industry andas a matter of construction of the Policy, the plaintiffs say the windows were thereforedamaged. They did not become defective. Items being defective do not involve aphysical alteration or change.[20] Mr Campbell QC, counsel for the plaintiffs, submits the Policy wording itself,including the proviso to Exclusion 6, draws a clear distinction between property thatis defective and property that is damaged. By reference to a number of New Zealandand international authorities, Mr Campbell submits this distinction is also well-recognised and understood in insurance law and practice. He says Vero's approachcollapses the distinction between defective and damaged property.[21] The plaintiffs say the above interpretation is consistent with the purpose ofExclusion 6, which is to ensure that where a part of the contract works is defective,and it then suffers loss or damage (thus triggering the insuring clause), Vero does nothave to pay for the cost of repairing, replacing or rectifying that part – given it wouldhave needed to be repaired, replaced or rectified in any event. In this context, theplaintiffs rely on the English Court of Appeal's decision in CA Blackwell (Contractors)Ltd v Gerling (Blackwell), in which the Court considered a similar (but not identical)exclusion clause. In Blackwell, Tuckey LJ said the following:1[The exclusion clause's] purpose is clear. It prevents the insurer from havingto pay for the replacement, repair or rectification of property which wasalready in a defective condition at the time the fortuity covered by the policyoccurred. If the defect is one of design, plan, specification, materials, orworkmanship the property would have had to be repaired, etc. by thecontractor or others in any event.1 CA Blackwell (Contractors) Ltd v Gerling Allegemeine Verischerungs [2007] EWCA Civ 1450 at[16]. Lord Justices Kay and Hooper agreed with Tuckey LJ.[22] The plaintiffs say it is accordingly clear that Exclusion 6 does not apply whereproperty that is not defective is damaged, even if the cause of the damage is defectivematerial or workmanship. The plaintiffs again refer to Blackwell:[17] [T]he exclusion would not apply [in such circumstances]. Thedamage would have been caused by defective workmanship but the propertyinsured was not in a defective condition.[23] The plaintiffs emphasise that Exclusion 6 must be interpreted in the context ofthe broader Policy. They say the insuring clause of the Policy provides indemnity forphysical loss of or damage to any item of the property insured. In the case of damagethat can be repaired, condition 1(a) (reproduced at [14] above) provides that the basisof indemnity is the cost of repairing the item to its condition before the damageoccurred. Mr Campbell notes that these two clauses reflect two different concepts,being:(a) first, under the insuring clause, the insured event – being physical lossof damage to any item of the property insured; and(b) second, under condition 1(a), the financial loss resulting from thatinsured event, typically the cost of repair or replacement, in respect ofwhich indemnity is provided.[24] Mr Campbell says those two concepts are in turn reflected in the exclusions inVero's Policy (reproduced at [13] above):(a) some of the exclusions (namely 1, 2, 4, 7(b), 8, 9 and 14) are directedat the insured event, and thereby exclude loss or damage caused bycertain risks;(b) others (exclusions 3 and 15) are directed at types of financial loss thatmay result from an insured event;(c) some (exclusions 7(a), 10, 12 and 13) are directed at certain types ofproperty, irrespective of what might have caused the loss or damage tothem; and(d) exclusions 5 and 6 exclude certain types of financial loss in respect ofcertain types of property, again irrespective of what caused thatfinancial loss.[25] Mr Campbell says the contrast between Exclusion 6 (and exclusion 5) and theother exclusions therefore emphasises what Exclusion 6 does not do, namely toexclude "loss or damage" caused by defective materials or workmanship. Rather, hesubmits the clause only extends to excluding financial loss to items that are in aparticular state, namely defective in either material or workmanship.[26] The plaintiffs acknowledge that in Holmes Construction Wellington Ltd v VeroInsurance NZ Ltd, the District Court considered an exclusion clause in the same termsas Exclusion 6, and its application to facts not dissimilar to this case, and held theexclusion applied.2 I will discuss Holmes in more detail later in this judgment. Forpresent purposes, however, Mr Campbell submits the Judge's reasoning was flawed,in that he effectively assumed the contract works in that case were "defective" simplybecause they were "damaged". Mr Campbell says this overlooks the distinctionbetween the two concepts. He contrasts this with the Supreme Court of Canada'sdecision in Ledcor Construction Ltd v Northbridge Indemnity Insurance Company,3which again concerned facts similar to this case. In that case, windows had beenscratched by cleaners hired to clean during the construction of a building. They hadto be replaced and an insurance claim was made. The insurers denied coverage, relyingon an exclusion in the following terms:4This policy section does not insure:[](b) The cost of making good faulty workmanship, construction materialsor design unless physical damage not otherwise excluded by thispolicy results, in which event this policy shall insure such resultingdamage.2 Holmes Construction Wellington Ltd v Vero Insurance NZ Ltd DC Masterton CIV-2005-035-315,4 December 2007.3 Ledcor Construction Ltd v Northbridge Indemnity Insurance Company [2016] SCC 37, [2016]2 SCR 23.4 At [10].[27] The Supreme Court held that the exclusion merely excluded from cover thecost of redoing the faulty cleaning work; it did not exclude the cost of replacing thewindows that had been damaged by the faulty workmanship. While the clause is indifferent terms to Exclusion 6, Mr Campbell nevertheless says the decision highlightsthe distinction between defective property and damaged property.[28] Finally, on the plaintiffs' interpretation, something which is defective inworkmanship would not be covered by the Policy, given the insuring clause istriggered by physical loss or damage. The question of redundancy therefore arises.Mr Campbell submits, however, that Exclusion 6 "still has work to do" in suchcircumstances, because it will apply where contract works which are defective (ineither material or workmanship) are then damaged. Referring again to Blackwell,Mr Campbell reiterates that the rationale of the exclusion applying in thosecircumstances is because the relevant item of contract works would have had to havebeen repaired or replaced in any event, irrespective of the later damage.Vero's submissions[29] For the purposes of determining the separate question, Vero accepts thePolicy's insuring clause applies to the scratched windows and therefore that thewindows have suffered physical loss or damage. Ms Brick, counsel for Vero, alsoaccepts that Vero bears the onus of satisfying the Court that Exclusion 6 applies.[30] Relying on dictionary definitions of "defect" and "defective", Ms Bricksubmits that the scratching of the windows falls squarely within the concept of thewindows being "defective" as a result. She agrees with Mr Campbell that there is asettled meaning or understanding of the concept of "damage" in insurance law, namelya detrimental physical change or alteration to the property concerned. She says,however, there is no such settled meaning of the words "defective" or "defective inworkmanship".[31] Ms Brick says that for the purposes of Exclusion 6, there is no properdistinction between a part of the works being defective and being damaged; it is anatural and ordinary use of language to describe the windows as defective inworkmanship due to the shortcomings in the work performed directly on them. In herwritten submissions, she submits the following:Where a building or an item is under construction, it is an ordinary use oflanguage to describe the item as defective in workmanship where it has beenmarred because the workmanship was done in a faulty or incorrect way. Thisis the case whether the item was constructed incorrectly from the outset, or ithas been damaged while being worked on. For example, the architrave arounda doorway may be defective in workmanship because it was built out ofsquare, or because the builder has gauged it with tools or split the timber inthe process of attempting to fix the architrave to the wall. In both cases, thearchitrave will be readily described as defective in workmanship.[32] Reinforcing the proposition that there is no distinction between damage anddefects, Ms Brick notes that it is common in the construction industry to prepare"defect lists," which will regularly include items that might also be regarded asdamaged.5[33] Ms Brick also relies on various authorities, including Prentice Buildersv Carlingford Australia General Insurance Ltd, Randerson J's decision in RecreationalServices v QBE Insurance (International) Ltd, the Court of Appeal's decision inMolyneux Holdings Ltd v IAG New Zealand Ltd and the District Court's decision inHolmes as supporting Vero's interpretation of Exclusion 6.6 Rather than set out hereMs Brick's detailed submissions on each of these authorities, I address the points madein relation to them later, in the analysis section of my judgment.[34] Ms Brick also places significant emphasis on what she says is the commercialcontext to the Policy, namely that it is important there be normal business incentiveson contractors to build high quality products and to discourage substandardworkmanship.[35] Building on this theme, Ms Brick refers to various insurance commentaries andcases which she says demonstrate that property and liability policies are not intended5 Referring to AXA Global Risks (UK) Ltd v Haskins Contractors Pty Ltd [2004] NSWCA 138,(2004) 13 ANZ Insurance Cases 61-611, at [12]-[17].6 Prentice Builders v Carlingford Australia General Insurance Ltd (1990) 6 ANZ Insurance Cases60-951; Recreational Services v QBE Insurance (International) Ltd HC Auckland CIV-2004-404-7111, 14 September 2005; Molyneux Holdings Ltd v IAG New Zealand Ltd [2007] NZCA 254;Holmes Construction Wellington Ltd v Vero Insurance NZ Ltd, above n 2.to insure contractual performance, or to insure the quality of contract works.7 She alsorefers to the insurance text The Law of Liability Insurance, in which the authorsexplains that business risk exclusions are meant to prevent the insured from passingon to their insurers the ordinary costs of doing business, including, relevantly, theordinary cost of poor performance.8[36] Ms Brick says that if the plaintiffs' approach to interpretation is correct, thereis also an element of redundancy in the very presence of the clause. She notes that ifthere is a distinction between a part of the contract works being defective and beingdamaged, then a defective element of the contract work would not trigger the insuringclause in the first place. There would accordingly be no need for Exclusion 6.Ms Brick therefore submits the very presence of Exclusion 6 reinforces the propositionthat loss or damage to a contract work (when caused by poor or faulty workmanship)is encapsulated within the meaning of "defective in workmanship".[37] Finally, in response to a query from me as to whether Vero's interpretationwould result in the exclusion clause becoming extremely wide (in terms of notcovering any physical loss or damage to the construction works caused or attributableto defective workmanship on site), Ms Brick submits there would still be meaningfulpolicy coverage. Vero accepts the concept of being "defective in workmanship" meansthe workmanship which causes the damage must be workmanship done in relation tothat particular item itself. Ms Brick gave the example of a workman working on a topfloor of a building dropping a hammer, which falls through a number of (yet to beconstructed) floors and causes damage to a part of the contract works on the groundfloor. She says that even though defective workmanship might have caused thedamage, the ground floor contract works would not be "defective in workmanship",because the defective workmanship was too removed from the damaged item itself.Ms Brick accepts the dividing line could become grey or unclear at times, but saysthat will be inevitable whenever there is a dividing line. Ms Brick further says thehammer example is captured by the proviso to the exclusion, which carves out from7 Noting that a Contract Works Policy is not a performance bond, citing ANZ InsuranceCommentary (online looseleaf ed, CCH) at [1-660].8 Desmond Derrington and Ronald Ashton The Law of Liability Insurance (3rd ed, LexisNexis,Sydney, 2013) at [10-80].the exclusion physical damage to other parts of the contract works caused by defectiveworkmanship.Analysis – proper approach to interpretation[38] Insurance contracts are to be interpreted according to the ordinary principlesof contractual interpretation.9 On this basis, the approach is an objective one, the aimbeing to ascertain the meaning which the document would convey to a reasonableperson, having all the background knowledge which would reasonably have beenavailable to the parties in the situation in which they were at the time of the contract.10[39] While context is relevant, the text of the contract remains centrally important.If the language at issue, construed in the context of the contract as a whole, has anordinary and natural meaning, that will be a powerful, albeit not conclusive, indicatorof what the parties meant.11 But the wider context may point to some interpretationother than the most obvious one, and may also assist in determining the meaningintended in cases of ambiguity or uncertainty.12[40] In terms of the "structure of the bargain" (or the "commercial purpose" of thecontract13), the majority of the Supreme Court in Firm PI v Zurich confirmed thatcourts should have regard to commercial purpose and to the structure of the parties'bargain when interpreting commercial contracts, "to the extent that they can reliablybe identified".14 The majority noted there are some dangers in this approach,however,15 and that "where contractual language, viewed in the context of the wholecontract, has an ordinary and natural meaning, a conclusion that it produces acommercially absurd result should only be reached in the most obvious and extremecases".169 Trustees Executors Ltd v QBE Insurance (International) Ltd [2010] NZCA 608, (2011) 16 ANZInsurance Cases 61-874 at [38].10 Firm PI 1 Ltd v Zurich Australian Insurance Ltd [2014] NZSC 147, [2015] 1 NZLR 432 (SC) at[60].11 At [63]. See also the Court of Appeal's recent decision in Malthouse Ltd v Rangatira Ltd [2018]NZCA 621, at [21]-[23], where the Court reinforced the central importance of the contract's text.12 Firm PI 1 Ltd v Zurich Australian Insurance Ltd, above n 10, at [63].13 Kim Lewison The Interpretation of Contracts (5th ed, Sweet & Maxwell, London, 2011) at 42, ascited by the majority in Firm PI 1 Ltd v Zurich Australian Insurance Ltd, above n 10, at [77].14 At [79].15 At [79]16 At [93].[41] Parties to contracts will also sometimes use words that have specialisedmeaning within a particular profession, industry, trade or locality, and a court isentitled to receive evidence which demonstrates that the parties have adopted such aspecialised meaning.17 I mention this point for two reasons. First, as noted earlier, theparties agree that the concept of "physical damage" has an agreed and specialisedmeaning in the insurance industry. Second, the concept of something being "defectivein material or workmanship" is perhaps not the most natural or ordinary usage oflanguage. This becomes relevant to the discussion later in this judgment of thepotential origin of Exclusion 6 in long-standing exclusion clauses drafted by theinsurance industry.[42] In addition, there is no doubt that if the overall meaning of a policy wording isunclear, the policy, as the insurer's document, falls to be interpreted on a contraproferentem basis.18 In cases of ambiguity, exclusion clauses in insurance policiesshould also be read down, in favour of cover.19[43] One final matter worth noting at this point is Ms Brick's submission that a keyaspect of the commercial context in which Exclusion 6 ought to be interpreted is thatan insurer will not unreasonably insure a risk.20 In my view, some care needs to betaken in this regard. If the approach to interpretation outlined above leads to aparticular result, then it may or may not be viewed, by the insurer at least, as meaningit unreasonably insures a risk. What is and is not unreasonable will "tend to lie in theeye of the beholder".21 I return to these points later in this judgment when addressingVero's submissions on the commercial context. But a case relied on by both parties,AXA Global Risks (UK) Ltd v Haskins Contractors Pty Ltd, is a good example of theoutcome of a particular interpretation not altering what the words, in their plain andordinary usage, mean.22 Windeyer J in that case observed:2317 At [84].18 Tower Insurance Ltd v Skyward Aviation 2008 Ltd [2014] NZSC 185, [2015] 1 NZLR 341, at [32].19 Fund Managers Canterbury Ltd v AIG Insurance New Zealand Ltd [2017] NZCA 325, (2017) 19ANZ Insurance Cases 62-146, at [39].20 Referring to observations of Fogarty J in Body Corporate 83501 v Christchurch City Council[2013] NZHC 2472 at [51]-[57].21 Firm P1 Ltd v Zurich Australian Insurance Ltd, above n 10, at [90], albeit in the context ofconsiderations of commercial absurdity.22 AXA Global Risks (UK) Ltd v Haskins Contractors Pty Ltd , above n 5.23 At [88].Although I find it extraordinary that an insurer should agree to indemnify aninsured on the basis that, when a wall which was always badly built, falls downas a result of being badly built, the falling down will be damage to propertycovered by the policy and the insured will be entitled to reinstatement by wayof a wall properly built, I am satisfied for the reasons given by Mason P, thatis the position.Analysis – does Exclusion 6 apply to exclude cover in this case?Exclusion 6 in its contractual context[44] I begin by considering Exclusion 6 in its contractual context. For ease ofreference, I set out the text of the clause again:The Company will not indemnify the insured against:6. the costs of repairing, replacing or rectifying any part of the contractworks which is defective in material or workmanship.However, this exclusion shall only apply to that part of the machineor structure immediately affected, and not to loss or damage to otherparts of the contract works resulting therefrom.[45] As noted earlier, the phrase "defective in material or workmanship" is not aparticularly natural or ordinary usage of language. I consider that what the phraseseeks to convey is that the exclusion applies to any part of the contract work which isdefective due to the materials used in it, or workmanship carried out on it. In this way,the use of the word "in" can be seen to be a short form way of saying "due to".[46] I am of the view that there is a natural distinction between a part of a contractwork being "damaged" and being "defective". Before being scratched, the windowsin this case had been installed correctly and there is no suggestion they were notcapable of performing and being operated as expected. The windows were thereforenot in a defective condition (due to either materials or workmanship) at the point atwhich they were then damaged, in the sense of having undergone a physicaltransformation. And as a result of being damaged, (and even if due to defectiveworkmanship), I do not consider they became "defective". The concept of somethingbeing "defective" conveys an inherent issue or fault with the windows or the way inwhich they have been built.24[47] The contractual context to Exclusion 6 supports this interpretation. AsMr Campbell notes, the exclusions to the insuring clause are directed to differentthings. Exclusion 6 is not directed to the insuring event itself (i.e. physical loss ordamage) or, importantly excluding certain risks which cause that damage (forexample, defective workmanship). Rather, it is directed to contract works which arein a particular state. The distinction is also seen in the proviso to Exclusion 6, whichcarves out of the exclusion loss or damage to other parts of the contract works resultingfrom the part which is defective.[48] Mr Campbell refers to a number of authorities to demonstrate that an exclusionfor physical loss or damage caused by defective workmanship is not uncommon, andreinforces that this is not what Exclusion 6 does.25 Some care is required in thiscontext, given Exclusion 6 might simply be another way of saying the same thing. ButI accept the form of the exclusion clauses in the authorities to which Mr Campbell hasreferred me is a much more natural and ordinary way of expressing the result Verosays should occur in this case.Authorities which draw a distinction between "defective" and "damaged"[49] I also agree with Mr Campbell that a number of authorities support thedistinction between something being "damaged" and being "defective".24 Both parties referenced various dictionary definitions of "defect", "defective" and "damage". Ido not draw any significant guidance from those definitions; reference to many differentdictionaries will inevitably disclose some stated meaning which supports a given case. But thedefinitions do not undermine or disprove the ordinary and natural usage of the language I have setout at [45]-[46] above.25 See, for example, the exclusions in Pentagon Construction (1969) Co Ltd v United States Fidelity& Guaranty Co [1978] 1 Lloyd's Rep 93 at [16] ("loss or damage caused by (i) faulty or impropermaterial, or (ii) faulty or improper workmanship, or (iii) faulty or improper design"), WalkerCivil Engineering Pty Ltd v Sun Alliance (1999) 10 ANZ Insurance Cases 61-418 (exclusion for"loss or damage directly caused by defective workmanship, construction or design"); GrahamEvans & Co (Qld) Pty Ltd v Vanguard Insurance Co Ltd (1986) 4 ANZ Insurance Cases 60-689(set out at [50] below). In a text relied on by Vero, Derrington and Ashton, above n 8, a number ofother examples of exclusion clauses concerning damage caused by defective workmanship aregiven (at [10-123]). Again, however, these are framed in a different way to Exclusion 6, andexpressly provide for the exclusion of damage caused by work/defective work by the contractor.[50] In Graham Evans & Co (Qld) Pty Ltd v Vanguard Insurance Co Ltd, theSupreme Court of New South Wales considered the ambit of an exclusion clause inthe following terms:26Loss or damage directly caused by defective workmanship, construction ordesign or wear and tear, or material breakdown or normal upkeep or normalmaking good but this exclusion shall be limited to the part which is defectiveand shall not apply to other part or parts lost or damaged in consequencethereof.[51] Foster J stated:27Leaving aside the question of whether the word "defective" carries with it aconnotation of fault or negligence, it is apparent that, even if it does not, theimpugned workmanship in the present case can relate only to the preparationand/or application of the Sno-Cen primer coat. There is no doubt in my mindthat the workmanship was defective in that the primer coat, after itsapplication, suffered damage in that it lost both adhesion and cohesion so thatit ceased to function as a primer. It clearly underwent changes which, in myview, can property be described as damage to it. Insofar, therefore, as therewas damage directly caused by defective workmanship it was caused to theprimer coat, in my opinion.[Emphasis added][52] Accordingly, "defective" workmanship led to "damage" to insured property.[53] A similar distinction is evident in the Supreme Court of Canada's decision inLedcor Construction Ltd v Northbridge Indemnity Insurance Co.28 As noted above at[26]-[27], that case involved remarkably similar facts to this case; windows scratchedby the builder's cleaners.[54] The Supreme Court held that the exclusion (set out at [26] above) merelyexcluded from cover the cost of redoing the faulty cleaning work, and did not excludethe cost of replacing the windows that had been damaged by the faulty cleaning work.No particular guidance can be taken from the exclusion clause itself, which is framedin very different terms to Exclusion 6. But the decision supports a distinction betweenthe concepts of something being faulty (or defective) and physical damage.26 Graham Evans & Co (Qld) Pty Ltd v Vanguard Insurance Co Ltd, above n 25, at 74,100.27 At 74,101.28 Ledcor Construction Ltd v Northbridge Indemnity Insurance Co, above n 3.[55] AXA Global Risks (UK) Ltd v Haskins Contractors Pty Ltd (AXA v Haskins) isperhaps more relevant again, in that it considered the difference between defectiveproperty and damaged property.29 In that case, the insuring clause provided that:30Underwriters will indemnify the insured in respect of all physical loss ordamage to the property insured occurring during the period of insurancearising from any cause whatsoever subject to the exclusions and conditionsstated herein as set out in this schedule".[56] The case concerned a crib retaining wall, and it was accepted that, because ofthe way it had been built, the wall was "defective". It was also accepted that the policyonly responded when physical loss or damage occurred to the wall. The issue beforethe Court was the timing of the damage; the insurer's position was that the wall wasdefective when built and "doomed from the start"; collapse was inevitable. As such,it said the damage had occurred at that point, and not at a later time during the periodof insurance.[57] In rejecting that submission, Mason P stated the following:31The insurer did not suggest that the Policy would not have responded merelybecause the original work and materials were defective. But it submitted thatthe Judge's findings went further, in establishing that the eastern wall wasdoomed from its inception. So much may be conceded, but there remains acritical distinction between property that is liable to become damaged andproperty that is damaged. The Policy did not respond until physical damageactually occurred. The Insuring Clause extended to physical loss or damage"arising from any cause whatsoever". It cannot be rewritten merely becauseof the absence of an exclusion clause broad enough to cover thesubcontractors' bad work and inadequate materials.[Emphasis added][58] Mr Campbell says, and I agree, that Mason P's reference to "property that isliable to become damaged" is property which is defective. I accept the question beforethe Court was almost the opposite to that in this case. In AXA v Haskins, the issue waswhether "defective" property was "damaged" property, whereas here, the issue iswhether "damaged" property is "defective" property. But the decision neverthelesssupports a distinction between the two.29 AXA Global Risks (UK) Ltd v Haskins Contractors Pty Ltd, above n 5.30 At [3].31 At [52].[59] Perhaps the authority of most relevance is the English Court of Appeal'sjudgment in Blackwell.32 The policy exclusion in that case was framed as follows:This policy excludes loss of or damage to and the costs necessary to replacerepair or rectifya) Property insured which is in a defective condition due to a defect in designplan specification materials or workmanship of such Property insured or anypart thereof.Exclusion a) above shall not apply to other Property insured which is free ofthe defective condition that is damaged in consequence thereof.For the purpose of the Policy and not merely this Exclusion the Propertyinsured shall not be regarded as lost or damaged solely by virtue of theexistence of any defect in design plan specification materials or workmanshipin the Property insured or any part thereof.[Underlining added][60] Mr Campbell submits that the underlined text is essentially the same asExclusion 6, with the additional words effectively running together Exclusions 5 and6 in this case. I accept that submission. And as noted at [45] above, in my view, theword "in" in Exclusion 6 is a short form way of saying "due to". The exclusion inBlackwell was also directed to excluding from cover property in a certain state, ratherthan excluding the insured event when caused by certain risks.[61] Lord Justice Tuckey, delivering the judgment of the Court of Appeal inBlackwell, first considered the proper interpretation of the exclusion clause, beforeturning its application to the facts. He said:16. Before engaging with these submissions it is I think important toconstrue the exclusion clause without regard to its application to thefacts of this case. Its purpose is clear. It prevents the insurer fromhaving to pay for the replacement, repair or rectification of propertywhich was already in a defective condition at the time the fortuitycovered by the policy occurred. If the defect is one of design, plan,specification, materials or workmanship the property would have hadto be repaired, etc. by the contractor or others in any event.17. What is important to note is that the exclusion is not of loss or damagecaused by a defect in workmanship, etc. The cause of the loss ordamage is irrelevant. Provided the insurer can show that the property32 CA Blackwell (Contractors) Ltd v Gerling Allegemeine Verischerungs, above n 1.was in a defective condition the exclusion applies. So, taking theexample given by Mr Ronald Walker QC for Blackwell in hisskeleton argument, if the capping and sub-formation were in adefective condition when damaged the exclusion would apply even ifthe damage had been caused by a bomb falling onto it. Conversely,if it was not in a defective condition, but the damage had been causedby a failure, say, to cover some part of the road with a tarpaulin, theexclusion would not apply. The damage would have been caused bydefective workmanship but the property insured was not in a defectivecondition. The insurers might have protected themselves by a policycondition requiring the contractor to take reasonable precautions toprevent loss or damage, but this policy contained no such condition.18. All this is, I think, self-evident from the wording of the exclusion. [underlining in original][62] The Court's observations, and the tarpaulin example given, draw a cleardistinction between items being in a defective condition, and being damaged becauseof defective workmanship. The distinction may seem slight, but it highlights thepurpose of the exclusion and the differing coverage which results. Like in Blackwell,I accept the purpose of an exclusion clause such as Exclusion 6 is to exclude the costof repairing, replacing, or rectifying any part of the contract works which is defective(either as a result of materials or workmanship), irrespective of separate damage doneto it – and the cause of that damage. As noted, the rationale is that the defective partof the contract works would need to be repaired, replaced or rectified in any event.[63] For completeness, I note that Vero suggests that Prentice Builders Ltdv Carlingford Australia General Insurance Ltd is an example where property initiallycorrectly constructed became defective in workmanship.33 But the exclusion clausein that case was framed in quite different terms to Exclusion 6, and, importantly, didnot require an inquiry into whether a contract work was "defective in workmanship".Rather, the exclusion clause excluded from cover the "cost of rectifying defectiveworkmanship", and was limited to "the part which is defective and shall not apply toany other part or parts lost or damaged in consequence thereof". A key issue inPrentice Builders was the suggested division between defective and non-defectiveparts for the purposes of the carve out to the exclusion. That does not assist in theinterpretation of the phrase "defective in workmanship", and the question of the carveout to Exclusion 6 is not at issue in this case.33 Prentice Builders Ltd v Carlingford Australia General Insurance Ltd, above n 6.The broader industry context to Exclusion 6[64] The text Construction All Risks Insurance contains a useful overview ofexclusion clauses of the type at issue in this case, which also supports the interpretationI have reached.34[65] The author provides a broad overview of the history of contract works policies,and then discusses a suite of standard form defect exclusion (DE) clauses, drafted in1985 (and updated in 1995) by a committee of leading insurers. The clauses arereferred to as "DE 1" to "DE 5", and provide in turn progressively wider coverage forthe consequence of defects.[66] DE 1 is referred to as "an outright defects exclusion", and provides as follows:This policy excludes all loss of or damage to the property insured due todefective design, plan, specification, materials or workmanship".[67] The text describes the effect of DE1 as being that "defective design [etc] isan excluded peril. This is a very wide exclusion and probably unacceptable to manycontractors."35[68] Exclusion 6 is not framed in a similar way to DE1. Rather, it (when runtogether with Exclusion 5) has all the hallmarks of DE3, described in the text as a"limited defective condition exclusion":This policy excludes the costs necessary to replace, repair or rectify any of theproperty insured which is in a defective condition due to a defect in design,plan, specification, materials or workmanship, but this exclusion shall notapply to the remainder of the property insured which is free of such defectivecondition but is damaged as a consequence of such defect.[69] The author of the text states that DE3 is the most widely used of the fiveclauses, and that:36 it is clear that the exclusion will not apply to damage inflicted directly bynegligent working; so far as workmanship is concerned, it is only errors thatget 'built into' the works that trigger the clause.34 Paul Reed Construction All Risks Insurance (Thomson Reuters, London, 2014).35 At [15-030].36 At [15-037], also with reference to Blackwell.[70] This supports the conclusion that Exclusion 6 excludes the costs to repairworks in a defective condition because of workmanship carried out on them, but doesnot extend to works which are damaged because of defective workmanship.The plaintiffs' interpretation does not result in insurance of contractual performance[71] The discussion of contracts works policies in Construction All Risks Insuranceis also relevant to Ms Brick's submission that these types of policies are not intendedto insure contractual performance or insure the quality of contract works, which shesays is important context to the proper interpretation of Exclusion 6.[72] The author of Construction All Risks Insurance notes that:37There are some risks that are rarely insured by any form of constructioninsurance, the most notable of which is defective workmanship of a contractorthat does not result in physical damage.[73] The reason for this is that, as Ms Brick rightly notes, it would make the insurera guarantor for the proper performance of the construction works, removing anyincentive for the contractor to complete the works to the contract standard. But thatrationale is directed to the exclusion of the risk of defective workmanship that has notresulted in physical damage. The author of Construction All Risks Insurance explains:There is a market demand for, and willingness of insurers to provide, coverfor accidental damage that is brought about by defectives in the design or buildof the insured property. As regards defective workmanship, mistakes willalways occur even in well-managed projects, which result in damage to theworks.[74] As the authors of Burrows, Finn & Todd note, a party wishing to rely onbusiness common sense to influence interpretation is on firmest ground when able toshow that the alternative reading "makes no sense in the circumstances".38 In my view,an outcome in which the Policy covers physical loss or damage to contract workscaused by defective workmanship is not an outcome which makes no sense in thecircumstances. On the contrary, it is an outcome which appears to be not unacceptablein the broader insurance market.37 At [1-008]. Mr Reed notes (at [1-007]) that this such risk will usually rest with the contractor.38 Jeremy Finn Stephen Todd and Matthew Barber Burrows, Finn and Todd on the Law of Contractin New Zealand (6th ed, LexisNexis, Wellington, 2018) at [6.3.5].[75] Accordingly, while Ms Brick's point may have gained more traction had theplaintiffs sought cover for the cost of re-doing the defective workmanship itself, andnot only the resulting physical damage or loss, the commercial context to contractsworks policies does not undermine (and if anything, tends to support) theinterpretation set out at [45]-[46] above.The interpretation reached is not altered by the authorities relied on by Vero[76] Finally, I am also not persuaded that the authorities upon which Vero reliesalter the conclusion I have reached.[77] I am of course conscious that there is a decision of the District Court whichreached a contrary conclusion to the interpretation of Exclusion 6.39 In that case, acontractor was engaged to undertake exterior plastering and painting of a house duringits construction. It failed to adequately protect or mask the recently installed windows,which resulted in overspray and spillage of plaster onto the windows. Removing theplaster from the windows revealed damage, of a type and extent which meant all thewindows needed to be replaced. A claim was made under the same type of policy atissue in this case. Vero declined cover, also on the basis of Exclusion 6.[78] The judgment in Holmes suggests that there was not any substantive argumenton the distinction between contract works being damaged or defective. Rather, theJudge reasoned that the windows were defective because "if they had not been faultyor defective there would have been no need to replace each and every window in thebuilding".40 However, this would also have been the case if the windows were simplydamaged, rather than being "defective in workmanship". The judgment states that the"main dispute" between the parties was the meaning of the words "in workmanship",given the subcontractor was not working on the windows, but on the externalplastering. The Judge found in favour of Vero on that issue, given that thesubcontractors' contractual obligations expressly extended to protecting and notdamaging adjacent works.39 Holmes Construction Wellington Ltd v Vero Insurance New Zealand Ltd, above n 2.40 At [23].[79] Accordingly, while I am not bound by the District Court's decision, the keymatter in issue in this proceeding was not the focus of the argument in the DistrictCourt in any event.[80] Vero also relies on Randerson J's decision in Recreational Services Ltd v QBEInsurance (International) Ltd.41 In that case, the appellant had been contracted tomanage the greens at a golf club. It mistakenly applied herbicide to the greens insteadof fungicide, which caused substantial damage to the greens. The golf club suffered aloss of profits during the time it took for the greens to be repaired. The appellant latermade a claim under its liability policy with the respondent. The respondent met thecost of establishing temporary greens and the loss of profits claim. But it declinedcover for the sum of approximately $70,000 incurred by the appellant in restoring andresewing the damaged greens. This was on the basis of an exclusion clause whichexcluded "the cost of remedying faulty workmanship".[81] Randerson J rejected the appellant's argument that the exclusion applied onlyto the cost of redoing the work, that is the cost of respraying the greens. His Honourstated:42In my view, to remedy faulty workmanship means to make it good or put itright. Faulty workmanship does not occur in a vacuum. It is carried out onsome object or thing. It follows that the cost of remedying faultyworkmanship must include all the costs reasonably necessary to restore thesubject matter of the faulty work to the state it would have been in if the workhad been performed to the proper standard, including any property damage tothe subject matter caused in the course of carrying out the faulty work.[82] Randerson J considered the appellants' argument did not give properrecognition to the natural meaning of the expression "remedy".43[83] The Court of Appeal rejected an application for leave for a second appeal.44 Itstated:4541 Recreational Services Ltd v QBE Insurance (International) Ltd, above n 6.42 At [13].43 At [17].44 Recreational Turf Ltd v QBE Insurance (International) Ltd (2006) 14 ANZ Insurance Cases 61-690.45 At [9].In our view the issue is not one of construction but one of application. Theexpression "the cost of remedying faulty workmanship" is a simple phrase andtautology will add no enlightenment. In any particular case the issue will bewhether the monies sought can be categorised as a cost of remedying faultyworkmanship. That is essentially a question of fact. The question might bedifficult to answer in some situations but in the present case the costs incurredwere undoubtedly remedial. The remedy was required because of faultyworkmanship, and the remedial works were in respect of the very thing towhich the workmanship related, namely, the greens.[84] Ms Brick submits that the exclusion clause in Recreational Services is similarto the defective workmanship exclusion in Vero's policy. She says the exclusion inRecreational Services applies to "the cost of remedying faulty workmanship", andExclusion 6 applies to "the cost of repairing, replacing or rectifying any part of thecontract works which is defective in material or workmanship". She says the damageto the greens caused by the herbicide in Recreational Services is analogous to thedamage to the windows caused by the cleaning work. She submits the reasoning inRecreational Services is therefore applicable to the present case.[85] While the damage to the greens could be said to be analogous to the damageto the windows in this case (both being physical damage caused by defectiveworkmanship), direct application of the reasoning in Recreational Servicesdemonstrates the risk of adopting reasoning based on differently worded contractualprovisions. The focus of the exclusion clause in Recreational Services was quitedifferent to Exclusion 6, necessitating an inquiry as to whether the costs for whichindemnity was sought were costs of remedying faulty workmanship. That required aninquiry as to causation and remoteness.46 The inquiry was not directed to the state orcondition of a part of the insured works, as in this case.[86] Vero also relies on the Court of Appeal's decision in Molyneux Holdings Ltdv IAG New Zealand Ltd.47 Molyneux operated a cherry pack house which providedservices for cherry growers. The cherries were delivered to Molyneux who thenwashed them and quickly cooled them to preserve their quality, before packing themfor export. The cherries were found at destination (mainly in Taiwan) to be rotten,which was found to have resulted from being contaminated with a pathogen during46 The Court of Appeal noting (at [9]) that "the remedy was required because of faulty workmanship,and the remedial works were in respect of the very things to which the workmanship related".47 Molyneux Holdings Ltd v IAG New Zealand Ltd, above n 6.Molyneux's cleaning process. Molyneux was liable to its growers for their losses asa result of the damage to their fruit.[87] Molyneux claimed under a broad form liability policy. The policy containedan exclusion for liability for property damage to "any product where liability isconnected with any fault or defect in work done to the product". The exclusionwas subject to a proviso that it did not apply to liability for resultant property damageto other separate property or part.[88] The central issue was whether Molyneux's cleaning and cooling process was"work done" to the cherries for the purpose of the exclusion. Molyneux argued thatfor there to be "work done" to the cherries, there must have been some physicalmodification to the cherries, which did not occur in that case. It also argued that itswork was not the proximate cause of the damage to the cherries, which was thepathogen itself.[89] The Court of Appeal had no difficulty in dismissing the appeal. It concludedthat the "process to which Molyneux was required to subject the fruit could notsensibly be described other than as 'work done' to the cherries." In particular, it sawnothing in the words of the policy or the principles of construction to suggest physicalalteration to the cherries was required in order for there to be "work done" to them.48[90] Ms Brick submits this decision is significant, because the Court found that acleaning process was defective work, and that damage caused by that cleaning processwas not resultant damage to other property. I do not see Molyneux as relevant to theissue in this case. There is no dispute the damage to the windows in this case wascaused by defective workmanship. Molyneux concerned a quite different exclusionclause, and as noted, the key issue was whether the appellant's work was "work done"on the cherries. The outcome of the appeal was unsurprising given the wording of theexclusion. It does not shed any light on whether the windows in this case are"defective in workmanship" for the purposes of Exclusion 6.48 At [28].Result[91] For the above reasons, I conclude that Exclusion 6 does not apply to thescratched windows in this case. The answer to the separate question is therefore "no".Costs[92] The plaintiffs seek costs. On the materials presently before the Court, therewould seem to be no reason why costs ought not to follow the event in the ordinaryway, on a 2B basis. I would not certify for second counsel.[93] If the parties cannot agree costs, the plaintiffs may file and serve a costsmemorandum within 15 working days of this judgment. Vero may file amemorandum in response within a further five working days. No memorandum is tobe longer than three pages in length. I will thereafter determine costs on the papers.____________________Fitzgerald J