“The problem with P”

Charles discovered his tenanted apartment had been contaminated by methamphetamine residue. The apartment complex was part of a body corporate which held an insurance policy that covered Charles’ apartment.

Charles claimed $13,000 from the insurer to cover decontamination and drug testing costs, loss of rent for around 3 months while the apartment was being repaired and a replacement blind.

The contamination levels were reasonably low, suggesting the contamination was likely caused by use, as opposed to cooking of methamphetamine at the apartment. As a result, the insurance company declined the claim.

The insurer pointed to the clause of the policy that covered loss resulting from chemical contamination in connection with the manufacture, storage, or distribution of an illegal drug from the property and for loss resulting from fire or explosion. It explained that it only covered loss in a ‘P-lab’ situation, where methamphetamine is being manufactured or larger volumes are being stored or distributed from the premises, not the use of methamphetamine.

Dispute

Charles complained to FSCL that the insurer should have paid out his claim. He argued that there was contamination in connection with storage, on the basis that the methamphetamine used in the apartment must have been stored in the apartment for at least a short time prior to use. Charles also argued that :

  • The absence of methamphetamine precursors in the test samples did not necessarily mean that ‘cooking’ of methamphetamine did not occur in his apartment.
  • The policy did not refer specifically to P-labs, the volume of manufacture required, or the amount of storage or distribution required, to trigger cover. On this basis, the policy should be interpreted in his favour.
  • Because the contamination clause said ‘manufacture, storage, or distribution’, all three elements did not need to be present.
  • There were body corporate minutes recording clandestine meetings between Charles’ tenant and the neighbouring tenant and the neighbouring apartment was contaminated by methamphetamine at the same time as Charles’ apartment. Charles said this suggested the methamphetamine was stored at his apartment.
  • A letter from the neighbouring landlord to the body corporate’s property manager said the property manager’s staff member recorded feeling dizzy, with his eyes watering, after visiting the neighbouring property. There was also the indication the neighbouring apartment was cleaned prior to testing, meaning contamination levels at that apartment could originally have been higher.

Review

No cover for contamination resulting solely from ‘use’

On a plain reading of the contamination clause, losses resulting from contamination caused only by use were not covered. When looking at the policy wording as a whole, including that the clause also provided cover for loss resulting from fire or explosion, we found that the clause was designed to cover a ‘P-lab’ situation. The fact the policy did not refer specifically to P-labs, or the volume of manufacture, storage, or distribution required, did not change this.  

Had it been intended for the clause to cover contamination arising from use alone, the word ‘use’ could have been added to the list of ‘manufacture, storage, or distribution’. We spoke with the policy underwriter who confirmed the clause’s intention was to cover commercial P-lab situations, but not situations where there has just been use.

Was ‘manufacture’ proved?

Although manufacture could not be definitively ruled out, the absence of precursors meant it was more likely than not that methamphetamine had been used rather than manufactured at Charles’ apartment. There was also no other evidence of manufacturing such as the presence of manufacturing tools.

It appeared there was a drug-related relationship between Charles’ tenant and the tenant next door. However, there was insufficient evidence that methamphetamine was manufactured at either property.

‘In connection with’ at law

The only other way the policy may have provided cover was if the methamphetamine use had been ‘in connection with’ manufacture, storage, or distribution of methamphetamine.

With reference to the cases IAG NZ Ltd v Jackson [2013] NZCA 302, and JCS Cost Management Limited v QBE Insurance (International) Limited [2015] NZCA 524, the phrase ‘in connection with’ requires a nexus between two things, but the nature of closeness of the required connection will depend on context and purpose. ‘In connection with’ does not necessarily require the connection to be one of direct or proximate cause, and the connected thing may follow after the liability in time. There just needs to be a connection of sufficient consequence or significance in the circumstances of the case.

With this in mind we considered that saying manufacture, storage, or distribution accompanies use, or that use assumes manufacture, storage, or distribution, was a leap too far.

Applying the law to the circumstances in Charles’ case

Not all three elements of ‘manufacture, distribution, or storage’ needed to be present for there to be cover. It was enough if one of the elements was present. Charles was unable to prove manufacture. This meant there had to be sufficient evidence of either storage or distribution of methamphetamine at Charles’ property, and evidence that the storage or distribution was to such a level that contamination occurred for the policy to provide cover.

There was no evidence of distribution. As the insured, the onus was on Charles to prove, on a balance of probabilities, that the drug had been stored at the property.

It could be argued that the tenant must have used methamphetamine regularly and there must have been storage of the drug at the apartment at some point, rather than all the instances of use being immediate and complete consumption of all the methamphetamine held by the tenant at any particular time. However, there was insufficient evidence to find that storage could be assumed from the mere fact there was methamphetamine use.

Resolution

We formally recommended that Charles discontinue is complaint. As a formal Recommendation is the final step in our process, we then closed our investigation.