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Our client's general liability policy contains the following exclusion: "Building defects alleging, arising directly or indirectly out of, or in respect of:
2.1 the failure of any building or structure to meet or conform to the requirements of the New Zealand Building Code contained in the First Schedule to the Building Regulations 1992 or any applicable New Zealand Standard (or any amended or substituted regulation or standard) in relation to leaks, water penetration, weatherproofing, moisture, or any effective water exit or control system; or
mould, fungi, mildew, rot, decay, gradual deterioration, micro-organisms, bacteria, protozoa or any similar or like forms, in any building or structure."

Our client installs equipment on to roofs. An installer drilled holes during a typical installation. The roof subsequently leaked through the holes made for the installation of the equipment. There was damage to third party property arising out of the leak.
The insurer has declined the claim for repairing the hole and the third-party damage that resulted from the leak, citing the building defect exclusion. Has the insurer applied the exclusion correctly or should they pay the client's claim for the damage to the third-party property?


Reply: Crossley Gates

Assuming the installation was contrary to the NZ Building Code or an applicable NZ Standard, the exclusion will technically apply. 
However, as you will know, the exclusion was introduced in about 2002 to address the leaky building crisis. The trouble is that it was drafted so widely it excludes not only the leaky building deficiencies but also all “normal” deficiencies by tradespeople that result in a lack of weathertightness, even though they are not connected with the leaky building issues. This appears to be a case in point.

All I can suggest is that you make this point to the underwriter and seek payment based on this not being a leaky building issue. The exclusion was not intended to defeat these normal liability exposures.

Sept 2019

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