The subdivision and the landslip
Hemi and Mary had been property developers for a number of years and in 2001 they subdivided a piece of land. Part of this process included the laying of drains which was signed off by engineers and certificates of title were issued. Hemi and Mary sold one of the bare sections to Jack and dana..
In August 2010 heavy rain caused a landslip on Jack and Dana’s section, leaving it unfit for use as a construction site without extensive remedial work. It was alleged that the cause of the landslip was the failure of the drainage and piping systems in the subdivision. In February 2012 Hemi and Mary were sued by Jack and Dana, who sought damages in relation to the problem with the land.
Mr and Mrs Webster defended the claim, incurring legal fees of around $30,000. They also paid a settlement amount of $5,000 without any acceptance of liability.
Hemi and Mary submitted a claim to their insurer to cover the $35,000. The insurance company declined the claim because Hemi and Mary were sued in their personal capacity and they were not named in their personal capacity as insured parties at the time of the landslip event. Instead their company, HM Builders, was the insured.
The insurance company also said that even if it could be proved that Hemi and Mary were covered in their personal capacity, an exclusion clause excluding cover for damage caused by faulty products sold by the insured, applied. The drains sold by Hemi and Mary were faulty.
Hemi and Mary then asked their insurance broking firm to pay the $35,000. They complained their broker led them to believe there would be cover under the policy for the costs they had incurred. Hemi and Mary said if their broker told them there was no cover, they would have taken other action and decided not to involve their lawyers.
Hemi and Mary were also of the view their broker had a duty to ensure they were covered under the insurance policy for public liability claims in their personal capacities, as well as in their capacities as company directors.
Hemi and Mary became clients of their broker in 2004.. However, any complaint about financial loss which may result from advice provided in 2004 could not be considered by FSCL because we cannot investigate complaints about advice provided prior to 1 April 2010.
However, it was the policy applicable to the 2010/2011 insurance year which was the relevant policy in relation to Hemi and Mary’s claim. This was because it was a ‘losses occurring policy’. Colinvaux’s Law of Insurance in New Zealand states:
“A “losses occurring” policy is one that responds to injuries inflicted upon the third party during the currency of the policy even though the negligent act giving rise to the negligence predated the policy and the assured’s liability for those injuries is not established until a later date”.
Even though the alleged negligent drain-laying took place in 2001, because the damage occurred in 2010, the 2010/2011 policy wording was relevant to the claim. We therefore looked at whether there was a duty on the broker in the years after it became Hemi and Mary’s broker to have been aware they may need cover in the event they were sued in their personal capacity.
Placement of cover
There was no evidence Hemi and Mary ever instructed their broker to include them in the personal capacity as insureds, until after the landslip. Our enquiries showed there may not have been any policy available to cover Hemi and Mary for their losses, in any event. Moreover, the insurance company said the exclusion clause would have applied to exclude cover, meaning any insurance claim would never have been paid.
We said that even if there was a policy that would have covered Hemi and Mary, the issue was whether the broker needed to do more to know that Hemi and Mary may need a policy to cover them for being sued in their personal capacity.
The broker would have been aware Hemi and Mary were the directors of a property development company. If Hemi and Mary routinely sold properties in their personal capacity in the way they did with this property, this might be something the broker should have known about. However, that did not appear to be the case.
Hemi and Mary had found themselves in a very difficult position. We noted Hemi and Mary did not physically lay or manufacture the faulty drains. It appeared the fault for the damage lay with one of the contractors who carried out the physical work on the property. We said Hemi and Mary may have a claim against the contractor(s) in question.
Did the broker mislead Hemi and Mary?
Hemi and Mary also complained the broker misled them following the landslip, that they would be covered under the policy for the costs of being sued.
There was a file note documenting Hemi and Mary’s lawyer’s contact with the broker on 1 June 2012, being when the claim was first notified to the insurer. The file note recorded that the broker said she would need to ascertain what policy was in place and put the insurer on notice. The broker did not say there would definitely be cover, but would look into it.
Without any documentary evidence to support Hemi and Mary’s view they contacted their broker prior to 1 June 2012 and were told they would be covered, we found they had not been misled.
We thought it would have been prudent for Hemi and Mary / their lawyer to contact the broker and insurer at the time proceedings were served (February 2012), to seek confirmation in writing whether there would be cover for legal costs likely to be incurred.
Unfortunately, there are some events which may not be insurable. However, it is best for people to discuss their insurance needs and requirements regularly with their broker or adviser.
 Colinvaux’s Law of Insurance in New Zealand (2014), General Editors: Robert Merkin and Chris Nicoll, at p.1032.