Strike out–tenable argument–Insurance Law Reform Act 1977 s9 –contract of insurance – Local Government Mutual Funds Limited v Napier City Council [2023] NZSC 97– contract interpretation –hierarchy of documents –wording context–Breach of contract– estoppel–Fair Trading Act 1986–doctrine of election

Auckland Council v Local Government Mutual Trustee Limited [2024] NZHC 1316

Local Government Mutual Trustee Limited’s (Riskpool) applied to strike out Auckland Council’s claim for payment for non-weathertight building defects. This was denied.

Riskpool was a mutual fund for councils, providing professional indemnity cover. It was established in 1997. Auckland Council was a member until 2015 and the scheme ended in 2017.

In 2009 Riskpool excluded weathertight claims. It also declined other building defects, included mixed claims where there was a weathertightness component.

But in 2023, the Supreme Court held in Local Government Mutual Funds Limited v Napier City Council that Riskpool was in breach of the scheme by not accepting the non-weathertight components in mixed claims. Following that decision, the council sought indemnity for the funds it had paid for nonweathertight building defects of mixed claims.

The council pleaded five grounds. First, it said s 9 of the Insurance Law Reform Act 1977 applied because the governing documents, the deed, the scheme rules (SR) and the protection wording (PW) were a contract of insurance. In the event of conflict between the documents, the PW was subject to the SR and the SR was subject to the deed.

The deed recorded that the scheme was established for the benefit of councils and ratepayers. The deed gave the board the discretion to decide whether a member’s claim should be met from the pooled funds.

The SR contained the rules of the scheme and its administration mechanisms. The SR wording was mandatory. The PW was issued annually and was tailored to the individual council members, recording the member-specific terms and conditions of cover. It also included a late notification exclusion in clause 6(c).

The council distinguished Wellington City Council v Local Government Mutual Funds Trustee Ltd [2017] NZHC 2901, submitting that this decision did not include an in-depth analysis of whether a contract of insurance existed. The case was decided mainly on other issues and the court was not bound by it, the council said.

Second, Riskpool breached its contractual and/or fiduciary obligations by declining the claims because the SR stated “…the Scheme will indemnify each Member for damages in accordance with the Protection Wording”.

Third, Riskpool was estopped from declining the claim due to late notice because the council failed to notify the claim in reliance on Riskpool’s representation. Riskpool encouraged the council not to notify, the council was prejudiced and it would be unconscionable for Riskpool to avoid liability.

Fourth, Riskpool’s actions were a breach of the Fair Trading Act 1986. Finally, Riskpool had relied on its exclusion of weathertight claims and it could not at this late stage change this and try to rely on the late notification exclusion.

Riskpool claimed in its strike out application that the scheme was a mutual scheme, so it was not a contract of insurance and the Act did not apply. It claimed that although the scheme rules labelled the scheme as insurance when it referred to “contract of insurance”, the board (unlike insurance providers) had absolute discretion to either accept or decline a claim.

Second, since the board had a discretion to deal with a claim, its obligations arose only when the claim was before the board for consideration. Third, the council notified mixed claims, even after it had been advised they would not be accepted. This argument was also used in response to the council’s Fair Trading Act grounds. Finally, the doctrine on election applies only when the rights claimed are mutually exclusive.

Applicable principles: strikeout –whether there is no realistic prospect of success – jurisdiction exercised sparingly – whether determination of facts necessary – jurisdiction includes questions of law–whether developing law to be considered –contract interpretation–whether hierarchy of documents is relevant–whether there is a contract of insurance–whether term or obligation breached– whether there has been material prejudice–estoppel–whether an expectation created and relied on–whether party suffered detriment–whether unconscionable to revoke expectation–whether party waived alternative grounds–whether alternative grounds must be mutually exclusive.

Held: The strikeout application was declined because the council had a tenable argument that:

• the scheme was an insurance contract and s 9 applied; and
• Riskpool breached the terms of the contract by declining cover, despite no material prejudice.

Estoppel and the Fair Trading Act issues are factual issues to be examined at trial, the court said. Further, although election may not be a separate cause of action from estoppel, evidence in support of this argument is also required.

After 14 years as general counsel for a local authority, Andrea Hilton is now a sole practitioner practising local government law

Auckland Council v Local Government Mutual Funds Trustees Ltd [2024] NZHC 1316