RECREATIONAL SERVICES LIMITED V QBE INSURANCE (INTERNATIONAL) LIMITED HC AK CIV-2004-404-7111

RECREATIONAL SERVICES LIMITED V QBE INSURANCE (INTERNATIONAL) LIMITED HC AK CIV- 2004-404-7111 14 September 2005IN THE HIGH COURT OF NEW ZEALAND AUCKLAND REGISTRY CIV-2004-404-7111BETWEEN RECREATIONAL SERVICES LIMITED Appellant AND QBE INSURANCE (INTERNATIONAL) LIMITED Respondent Hearing: 8 June 2005 Counsel: P W David and J S Langston for Appellant P J Napier for Respondent Judgment: 14 September 2005RESERVED JUDGMENT OF RANDERSON JThis judgment was delivered by me on 14 September 2005 at 11 am, pursuant to r 540(4) of the High Court Rules Registrar/Deputy Registrar Solicitors: Wilson Harle, PO Box 4539, Shortland Street, Auckland Keegan Alexander, PO Box 999, Auckland 1.Introduction[1] The appellant Recreational Services Limited was contracted by the Maramarua Golf Club to carry out ongoing maintenance work on the club's greens. In November 2001 the appellant's workman applied herbicide to some of the greens when fungicide should have been applied. Substantial damage was caused to the greens and their repair took some months to achieve. During this period the club suffered a loss of profits even though temporary greens were established. [2] After carrying out the restoration work, the appellant made a claim on the respondent insurer under a liability policy entered into on 13 March 2000. The insurer met the cost of establishing the temporary greens and the loss of profits claim. But it declined cover for a sum of approximately $70,000 incurred by the appellant in restoring and resewing the damaged greens. Cover was declined in reliance on two clauses in the policy which excluded the cost of remedying faulty workmanship and damage to property which the insured was working upon. [3] The appellant then sought summary judgment against the insurer in the District Court. Judge Hole declined summary judgment in a succinct decision issued on 19 November 2004. He held that the insurer was entitled to rely on the exclusion clauses in declining cover. [4] In this appeal, the sole issue is whether the Judge was correct to find that the exclusions applied.The Relevant Terms of the Policy[5] The primary clause providing cover stated:1. Public and Product LiabilityQBE will indemnify the Insured for all sums which the Insured shall become legally liable to pay by way of compensation in respect of Personal Injury or Property Damage happening during the Period of Insurance caused by an Occurrence in connection with the Business of the Insured.[6] The expressions "Occurrence" and "Property Damage" were defined by the policy:"Occurrence" means:An event, including continuous or repeated exposure to substantially the same general conditions, which results in Personal Injury or Property Damage that is neither expected nor intended from the standpoint of the Insured."Property Damage" means:13.1 Physical injury to or destruction or loss of tangible property including the loss of use thereof at any time resulting therefrom, or; 13.2 Loss of use of tangible property which has not been physically injured or destroyed provided such loss of use is caused by an Occurrence.[7] In the section of the policy dealing with exclusions it is stated that:QBE shall not indemnify the insured for any liability in respect of : 17. Faulty WorkmanshipThe cost of: 17.1 rectifying, repairing or replacing defective or faulty materials; 17.2 remedying any failure or fault, defect, error or omission in any design, plan or specification; 17.3 remedying faulty workmanship; 17.4 correcting or improving any work undertaken by the insured. 18. Property Being Worked UponAny Property Damage to property on which the Insured is or has been working upon, and which has arisen from the manufacture, testing, repairing, cleaning, restoring, alteration, erecting or servicing by the Insured.Principles of Interpretation[8] The Judge accepted the principles of interpretation were correctly set out in paragraphs 12, 13 and 14 of the appellant's submissions in the District Court. Those principles are not in dispute on appeal. They are:12. The principles for interpreting contracts of insurance are also well established. As with other contracts, the terms of contracts of insurance are to be construed according to their ordinary meaning. The ordinary meaning of words is the meaning when read in context, not in isolation. The context includes the policy as a whole and the objects for which the policy was intended to achieve (Clarke, M.A. The Law of Insurance Contracts (4th Ed) (2002) "Clarke" p 419). The question is what meaning would a reasonable commercial person standing in the position of the parties give to the contract. 13. In the case of ambiguity in the contract, the contra proferentem rule applies. The wording of a contract is to be construed against a party who seeks to rely on it in order to diminish or exclude his basic obligation, and the wording is to be construed against the party who proposed it for inclusion in the contract (Youell v Bland Welch & Co Ltd) [1992] 2 Lloyd's Rep 127, 134). 14. The contra proferentem rule is particularly important in the context of insurance contracts, where insureds pay premiums on the presumption of cover. Contracts of insurance should not be construed so as to defeat the object of the policy, nor so as to render the benefits of the policy as practically illusory (Clarke p 429-430). This is sometimes referred to as a presumption in favour of cover.The Judge's Decision[9] Applying these principles, Judge Hole held that exclusion 17 was not ambiguous. He adopted a meaning of remedy from the New Shorter Oxford Dictionary as meaning "put right, reform (a status of things); rectify, make good". And he found that the works for which cover had been refused were plainly undertaken to remedy the faulty workmanship of the appellant. He further found that the wording of the exemption was not, as the appellant had submitted, restricted to the cost of performing the work the insured was originally required to perform. [10] In relation to exclusion 18, the insurer had submitted that property damage had occurred to the greens and that this had arisen from "servicing" by the appellant. The Judge upheld the insurer's contention and rejected the appellant's argument that the expression "servicing" simply referred to carrying out work on a manufactured product such as a vehicle or machine. The Judge considered that if this had been intended then the policy would have stated it. He found that the damage to the greens occurred while the plaintiff was servicing them within the meaning of exclusion 18.[11] The Judge did not accept the appellant's submission, that to interpret the exclusions in favour of the insurer would have the effect of rendering the policy nugatory. He also rejected the contention that the exclusions did not apply because the insurer had met the consequential loss claims.The Appellant's Submissions on Exclusion 17[12] Mr David for the appellant essentially repeated the contentions made on behalf of the appellant in the District Court. In relation to exclusion 17, Mr David's principal submission was that it excluded only the cost of carrying out the work again and did not exclude the cost of remedying property damage. He drew attention to the distinction between the wording of exclusions 17 and 18. The former referred only to the "cost of" remedying faulty workmanship while the latter referred to the exclusion of cover for property damage to property on which the insured had been working. He developed that argument by submitting that faulty workmanship does not necessarily result in property damage. On that basis, he submitted exclusion 17 could be read as applying only to cases where no property damage was caused. Alternatively, if clause 17 did apply to cases where faulty workmanship had resulted in property damage then it should be construed as covering only the cost of re-doing faulty work.Discussion[13] While accepting Mr David's submission that faulty workmanship does not necessarily cause property damage, I am not persuaded that the cost of remedying the faulty workmanship under clause 17 refers only to the cost of doing the work again properly. In my view, to remedy faulty workmanship means to make it good or put it right. Faulty workmanship does not occur in a vacuum. It is carried out on some object or thing. It follows that the cost of remedying faulty workmanship must include all the costs reasonably necessary to restore the subject matter of the faulty work to the state it would have been in if the work had been performed to the proper standard, including any property damage to the subject matter caused in the course of carrying out the faulty work.[14] Thus, where a builder has erected a building with faulty workmanship, the cost of remedying the faulty workmanship may include the cost of demolishing the faulty building work and repairing any incidental property damage as well as the cost of rebuilding to a proper standard. To take another example, where a painter is guilty of faulty workmanship, all that may be necessary to remedy the faulty workmanship is to repaint properly. But if it is reasonably necessary to sand back the paint or otherwise remove the old paint before repainting, then, in my view, the costs of remedying the faulty workmanship would include all additional costs necessarily incurred for preparatory work before repainting. Similarly, if damage were caused to the underlying material in carrying out the painting in a faulty manner. [15] Exclusions 17 and 18 are not to be read as mutually exclusive. That is because faulty workmanship under exclusion 17 may or may not result in property damage and because, under exclusion 18, property damage may occur independently of faulty workmanship. In other words, the scope of each exclusion is not co- extensive. Where faulty workmanship does cause property damage then the cost of remedying the faulty workmanship under exclusion 17 includes the cost of repairing the property damage whether or not the property damage is also excluded from cover under exclusion 18. [16] In the present case, the application by the appellant of herbicide not only killed the grass on the affected greens but also contaminated the soil. It was necessary to reconstruct each of the damaged greens, beginning with the application of charcoal to neutralise the chemicals in the soil. The greens were then prepared by coring and grooving and the sewing of seed followed. On Mr David's argument, all of these costs should have been covered by the policy, the only exclusion being the costs of applying fungicide to the affected greens. [17] With respect, Mr David's proposition is untenable. I agree with the Judge that if it had been intended that exclusion be limited to the cost of redoing the work then the policy would have said so. Mr David's argument does not give proper recognition to the natural meaning of the expression "remedy". Obviously, the extent of the work necessary to remedy faulty workmanship will vary from case tocase but, in my view, it must include whatever is reasonably necessary to put right that which was wrong. [18] The appellant's submission also adopts too narrow a view of the appellant's contractual obligations. Mr Dowd, the senior manager for the appellant, described the company's contract with the golf club as an exclusive agreement to maintain the golf course. That included of course maintaining the greens. As part of that contract, the appellant was obliged to manage disease, weeds and insects on the greens (primarily by spraying) and the contract also provided that it was the appellant's responsibility to supply and apply fungicide, insecticide and weedicide sprays. Essentially, the mistaken application of insecticide instead of fungicide was a failure of the appellant's broader obligation to maintain the greens in a proper and workmanlike manner. To remedy that default, that is the failure to properly maintain the greens, necessarily required not only the proper application of fungicide but also the restoration of the greens to a standard consistent with proper workmanship.The Appellant's Submissions on Exclusion 18[19] There is no dispute that "property damage" was caused to "property on which the Insured [had] been working upon" in terms of exclusion 18. But, the appellant's principal submission was that the exclusion should be interpreted as relating to situations where the insured supplied a product or manufactured item which was then worked upon. To interpret the expression "servicing" otherwise, it was submitted, would render the policy nugatory or at least unreasonably restrict the scope of the policy in a way which would be inconsistent with its commercial purpose. [20] It was further submitted that the primary meaning of the expression "servicing" is servicing equipment. Reference was made to a number of dictionary definitions to support that proposition including the Oxford English Dictionary (2ndEd) 1989 pp 38 and 39.Discussion[21] Here, I have some sympathy with the appellant's argument. While I accept that servicing is similar in meaning to maintaining, as Mr Napier submitted for the insurer, the maintenance of greens at a golf club does not fall naturally within the ordinary meaning of servicing. I am of the view that "servicing" is apt to refer to periodic checks carried out in respect of a product supplied or the carrying out of servicing work at periodic intervals on a motor vehicle or some other item of machinery or equipment. The expression "servicing" takes colour from the other expressions used in the clause such as manufacture, testing and repairing. Those expressions and the others used in the clause apply more naturally to a product, a piece of equipment or some other object or article. To the extent that the clause may be ambiguous in this respect, the contra proferentem principle must apply in favour of the appellant. [22] Accordingly, and with respect to the Judge, I take a different view about exclusion 18. In my view, it should not be interpreted as excluding cover in this case because applying fungicide or herbicide to the club's greens is not naturally to be regarded as "servicing" as contended by the insurer. [23] Looking at the policy more broadly, it is common ground that it is a policy intended to cover the insured for its legal liability for personal injury or property damage arising from occurrences in connection with the insured's business. The policy follows the common pattern of excluding cover for the cost of repairing or replacing faulty materials, defects or errors in design, remedying faulty workmanship and correcting work undertaken. It also excludes cover where property damage is sustained while the insured is working on a product or other article or piece of equipment. [24] However, the insured is covered for consequential loss. That explains why the insured met the loss of profits claim and the cost of the temporary greens which was recognised by the insurer as a proper cost because it was incurred as a step taken to minimise the loss of profits which would otherwise be sustained. It follows fromthis analysis that, to construe the policy in the way contended for by the insurer, does not render it nugatory. Valuable cover is still obtained. Whether the appellant believed it would be covered for the type of loss at issue here is beside the point. The scope of cover is to be determined by reference to the terms of the policy.The Insurance Certificates[25] A final argument relied upon by the appellant was based on the terms of certain insurance certificates issued by the insurer to third parties in respect of specific contracts for the mowing of parks, reserves and berms. These certificates were provided by the insurer to the appellant's employer as confirmation of the public liability cover held by the appellant. At least some of these certificates stated the policy provided indemnity for "claims arising from Materials, Goods and/or Services supplied, constructed, repaired, altered, renovated, serviced or installed". It was submitted the appellant was entitled to rely on these certificates as establishing the scope of cover. [26] There are several difficulties with the appellant's proposition in this respect. First, the certificates clearly state that the indemnity is "subject to the terms of the policy". Secondly, there is no evidence a certificate of this kind was issued in respect of the Maramarua Golf Club contract. Thirdly, there is no evidence that the appellant was somehow misled into a false view as to the scope of cover. I am not persuaded that the issue of the certificates has any bearing on the true construction of the policy which falls to be determined in accordance with its terms.Conclusion[27] The appeal will be dismissed because although I have found for the appellant on exclusion 18, the respondent was entitled to decline cover under exclusion 17. If counsel are unable to agree on costs, the respondent is to file and serve a memorandum within two weeksof the date of this decision and the appellant within two weeks of receipt of the respondent's memorandum. _____________________________ A P Randerson, J Chief High Court Judge