Was it ‘resultant damage’?

Bob’s Builders had a contract to build an apartment block in central Christchurch. The build went well and was nearly complete when Bob, the director of Bob’s Builders, realised the back exterior wall of the block had been painted the wrong colour.

Bob organised a quote from a local paint-stripping business, Paint ChCh, for the necessary paint-stripping work. Bob was happy with the quote and decided to get Paint ChCh in to do the work.

The day after the paint had been stripped, Bob noticed that the wall’s cladding had several dents that weren’t there before the paint was stripped, so he called Paint ChCh to let them know. Paint ChCh told Bob that the dents should ease over the next couple days, but they didn’t. The cladding was permanently damaged.

Bob needed to replace the cladding, so he made a claim with his insurer for this work. Bob’s insurer told Bob that his policy did not cover the costs of fixing faulty workmanship, and they declined his claim.

Bob was not happy with the insurer’s decision, so he complained to FSCL.

Dispute

Both Bob and his insurer agreed that the cladding was damaged due to Pain Chch’s faulty workmanship. However, the policy exclusion said that whilst the cost of fixing faulty workmanship was not covered, any costs for repairing ‘resultant damage’ was covered.

Bob argued that replacing the damaged cladding was covered under the policy because this damage was ‘resultant damage’. Bob accepted that redoing the paint-stripping work would be excluded under the clause, but he said this is not what he was claiming for.

Bob’s insurer said that the damage to the cladding was caused by the faulty workmanship, so the exclusion for ‘fixing faulty workmanship’ extended to replacing the cladding, and meant these costs were not covered.

Review

We had to decide whether we agreed with Bob’s narrower interpretation of the exclusion clause, or with his insurer’s broader interpretation.

We looked at the specific wording of the clause, the rules of contractual interpretation, and some case law.

We noted that courts generally prefer a wider interpretation of insuring clauses and a narrower interpretation of exclusion clauses, and that there is typically a presumption in favour of cover.

We also noted that the purpose of an insurance policy is crucial in determining the parties’ reasonable expectations as to the meaning of an exclusion clause. We considered that in this case, the purpose of Bob’s policy was to provide broad coverage for construction work, and that Bob’s narrower interpretation of the exclusion clause supported this purpose.

Based on our review, we decided that Bob’s interpretation of the faulty workmanship exclusion clause was correct. It was our view that the damage to the cladding was ‘resultant damage’ that was covered under the policy, so we told Bob’s insurer that we thought they should accept Bob’s claim for the cost of replacing the cladding.

Resolution

Both Bob and his insurer accepted our decision. The insurer accepted the claim and paid for the replacement of the damaged cladding.

Insights for consumers and participants

Clauses in insurance contracts can be complex, and sometimes the meaning of a specific clause is ambiguous.

In instances where the meaning of a clause is not clear, or different parties to a dispute argue about how a clause should be interpreted, we will look to the law for the rules about interpreting contracts and for examples of previous cases that have gone before the courts.

Disputes over the meaning of specific wording used in insurance policies will arise from time to time, so we recommend that policyholders carefully read over any policy they wish to buy so that they can get an idea about what is likely to be covered, and what isn’t.

If you’re unsure what is or is not covered, ask your insurer or insurance broker.

Insurers need to be particularly careful in their drafting of policies, because when ambiguity arises, applying contractual interpretation rules mean it is possible that we will prefer an interpretation that is not in their favour.