FARMERS MUTUAL GROUP ASSOCIATION LIMITED v MICHAEL WATSON AND PATRICIA WATSON [2001] NZCA 284 (23 August 2001)

IN THE COURT OF APPEAL OF NEW ZEALAND

ca1/01

	between	farmers mutual group association limited
		Appellant

	and	michael watson AND patricia watson
		Respondents

Hearing:	27 June 2001
Coram:	Gault J Anderson J William Young J
Appearances:	C R Langstone and V S Wethey for Appellant
	G W Calver for Respondents
Judgment:	23 August 2001

judgmentS of the court

JudgmentsPara No.

Gault and Anderson JJ[1] - [45]

William Young J[46] - [50]

GAULT AND ANDERSON JJ (DELIVERED BY ANDERSON J)

Nature of the case

[1] This appeal against a summary judgment by a Master in favour of the respondents, as plaintiffs in the High Court, concerns the interpretation of an insurance policy.The appellant is the insurer.

[2] The subject of the policy is the respondents' home.Like the house in the parable it was built on unfirm ground, but not by the respondents.They bought it as a new house for their retirement, from a developer.He had bought the land from a subdivider who allegedly filled in a gully which had served as a rubbish dump.It is alleged that the fill was placed over refuse, such as car wrecks and organic materials which are disintegrating and compressing.The result is that the respondents' land has become unstable and their house and other improvements are being gravely damaged.The statement of claim alleges that in or about April 1999, which is some three years after they settled the purchase, the retired couple noticed significant damage to fences, a concrete driveway, paths and gardens.Subsequent investigations revealed that their lot is utterly unsuitable for residential housing.

[3] There are many defendants to the respondents' claim.They comprise the original subdivider who filled the gully, the local authority which approved the subdivision, an engineer whose report to the local authority allegedly influenced the permission to subdivide, the developer, the builder, the respondents' solicitor, and of course the insurer.The litigation may well be extensive, costly and very distressing to the respondents.

[4] If the insurer is liable to reimburse the respondents it would pursue remedies against other defendants in reliance on its subrogated rights under the policy, thereby relieving the respondents of the burden, which is not merely financial, of the litigation for a remedy.It was therefore considered expedient for both insurer and insured to have determined by way of the summary judgment procedure whether or not the insurer is liable.

The policy

[5] The policy in issue is a house owners policy which is included in a suite of policies marketed by the appellant as the "60 plus pack".This is aimed at the indicated age demograph.It is presented in a folio, the cover of which invites participants to -

Enjoy complete protection with total confidence.

[6] The general scope of the house owners policy is described in Section One, clause 1, in these terms:-

You have cover for Accidental Loss to Your House unless the Loss is excluded ...

[7] The preceding general introductory terms applying to the suite of policies include the following:-

General Exclusions to all Policies

There is no cover under any of these Policies for any of the following:

1. [Not relevant]

2. War, nuclear, and Natural Disasters

There is no cover for any Loss or liability caused directly or indirectly in any way by:

* War, invasion, act of foreign enemy, warlike operations (whether war is declared or not)

* Civil war, mutiny, rebellion, revolution, insurrection, military or usurped power

* Earthquake, hydro thermal activity, land slip, subterranean fire, volcanic eruption, and subsidence or erosion of the land

* Normal settlement, shrinkage or expansion of buildings, foundations, walls, pavements, roads and other structural improvements

* Ionising radiations or contamination by radioactivity from any nuclear fuel or from any nuclear waste from the combustion of nuclear fuel.(For the purpose of this exclusion, combustion includes any self sustaining process of nuclear fission)

* Nuclear weapons material

[8] It is the general exclusion relating to "subsidence ... of the land" which the appellant contends excludes liability to the respondents for the damage to their house and improvements.

The judgment under appeal

[9] In his judgment the Master considered the policy to be poorly drafted and in many respects ambiguous.Any relevant ambiguities should be interpreted against the insurer as the drafter of the agreement pursuant to the contra proferentem principle.The Master considered there to be two questions requiring answers.These were:-

[1] Does the policy exclude man-made subsidence, in other words those caused by human intervention?

[2] Was the subsidence in this case man-made?

[10] In respect of the first question the Master thought it arguable that because the word "subsidence" appears in a section headed "War, nuclear and Natural Disasters", and is preceded by five examples of events that all relate to natural phenomena, the intention of the parties was to exclude loss caused only by natural subsidence.A counter argument, namely that the word used in the exclusion clause is "land slip" not "natural land slip", but thought that an argument on those lines merely added to the ambiguity of the clause, thereby allowing the contra proferentem rule to apply.

[11] As to the second question he noted the argument on behalf of the insurer that subsidence is always natural, but considered that the proximate cause of the damage to the insured's land was the use of the site as a rubbish dump and he regarded that proximate cause as one which was man-made.

[12] The Master concluded that a fair and reasonable interpretation of the exclusion clause is either that subsidence of the kind which happened here was not meant to be excluded, or that the clause is so confusing that the contra proferentem rule should be applied thus requiring the clause to be construed against the insurance company.Either way the damage to the property was not excluded by the policy.

Appellant's arguments

[13] The appeal was founded on two principal arguments.The first is that there was an inadequate evidential basis for a summary judgment.The second is that the insured's loss was excluded by the subsidence exclusion in the policy.

[14] It was submitted on behalf of the appellant that the only evidence directly related to the issue of causation was the reference in Mr Watson's affidavit in support of summary judgment in these terms:-

We have had engineering tests carried out which confirm the presence of substantial quantities of rubbish directly underneath us.As the organic material underneath us rots and as inorganic decays, rusts or breaks down, our properties will continue to slump.Already cracks are appearing all over our house, and in concrete paths and driveway.

[15] It was argued on behalf of the appellant that this evidence is unsatisfactory because it is hearsay and also, having regard to the absence of any detail about the nature of the engineering tests and their results, is inadequate.

[16] It was, however, acknowledged on behalf of the appellant that the statement of claim alleged that investigations by the plaintiffs have revealed that their lot is utterly unsuitable for residential housing purposes and that the fill under the subsurface includes rubbish of various types, including organic material, wood, metal, and plastic.

Disposal of appellant's first major ground

[17] Counsel for the respondent submitted that it was disappointing that the appellant should raise this argument on the eve of the appeal because the claim was brought in the way it was with the concurrence of the appellant.It was considered appropriate by the parties to obtain a ruling by way of summary judgment so the parties would know at the early stages of potentially protracted litigation whether the respondents themselves or their insurer would be carrying the burden of it.

[18] For our part, we think it surprising that the appellant should take this position on the appeal.The Master's judgment notes in its second sentence that counsel agree there are no disputed matters of fact.The issue then was one of interpretation, not evidence.

[19] In any event, there is an adequate evidential basis for the purposes of the real issue between the appellant and the respondent, which is one of interpretation.The statement of claim was verified by Mr Watson's affidavit, as is usual in summary judgment cases.It alleges that -

[a] Subsidence is occurring as rubbish rots, decomposes, rusts, and generally breaks down and consolidates, and this process will continue for many years to come.

[b] As a result of the subsidence under the surface of Lot 3 damage has occurred to the plaintiffs' home, to outbuildings, fences, lawns, gardens, concrete paths and drives, and such damage will continue and worsen in the future.

[20] Accordingly we reject the first principal ground.

The issue of interpretation - the appellant's second principal ground

[21] The noun "subsidence" is derived from the verb "subside" which now means, in English, "to sink down".In relation to land "subsidence" means a sinking, or fall, in the level of ground (Oxford Dictionary, Vol. XVII pp58-59).The appellant's contention is that where the term is used in the exclusions to the policy it should carry that usual, unqualified, meaning.

[22] It is submitted on behalf of the appellant that insurance policies, as commercial contracts, should be given a businesslike interpretation which has regard to the commercial and social purposes for which the policy was written. Reliance is placed on observations to this effect in McCann v Switzerland Insurance Australia Limited [2000] HCA 65; (2000) 176 ALR 711.

[23] It was submitted that the Master erred in having recourse to the heading of the exclusion clause, namely "War, nuclear and Natural Disasters", to interpret the subsidence exclusion.It was further submitted that the five preceding events are not all natural phenomena because, for example, subterranean fire can be caused by human activity such as mining and land slip can be caused by human activity such as excavation.In that last respect there is some difficulty for the appellant because counsel appearing for the appellant on the summary judgment application is noted in the Master's judgment as having conceded that subsidence may be covered under the policy if caused by negligent excavation of a neighbouring property.However, the point is made on behalf of the appellant that the Master was wrong in his premise that the preceding phenomena were all natural.

[24] Counsel for the appellant also submitted that because the phrase "natural land slip" appears elsewhere in the policy, the absence of qualification in relation to "land slip" in the exclusion clause suggests that the term was not intended to be read down in that clause.

[25] Counsel further relied on the exclusion, immediately following that relating to subsidence, in respect of "normal settlement, shrinkage or expansion of buildings, foundations, walls, pavements, roads and other structural improvements".Because that exclusion is not comprehended by the description in the heading, "War, nuclear and Natural Disasters", the heading is plainly not intended to define the nature of the specified exclusions.

[26] Counsel submitted that although there is no prohibition against considering a heading in a contract to assist interpretation, in this case there is no need to have recourse to the heading.

[27] Counsel further submitted that the interpretation is affected by provisions in the Earthquake Commission Act 1993 which automatically provides cover to insured under a contract of fire insurance with an insurance company in respect of any residential building, residential land and personal property situated in New Zealand.That automatic cover is in respect of "natural disaster", which is defined in the Act in terms which include "natural land slip".Counsel submitted that the statutory cover is the reason why contracts of insurance exclude cover for natural disasters.However, since he acknowledged on behalf of the appellant, obviously correctly, that the type of loss or damage in the present case would not be covered in terms of the Act, the cogency of the argument eludes us.It might be thought that where there is no statutory cover the hiatus is an appropriate objective of contractual cover.

Respondents' arguments

[28] Counsel for the respondent submitted that consideration of the issue begins with the proposition that the onus is on the insurer to establish that the policy clearly and specifically excludes cover.Then, any ambiguities should be construed against the insurer.Counsel then submitted that all the events and occurrences in the six bullet points in the exclusion provision should be governed in their interpretation by the introductory words "War, nuclear and Natural Disasters".In short, the Master was right in his reasons and conclusion.

Judgment

[29] Counsel suggested that this case has general significance for policies written in the context of the statutory cover, but again we have difficulty with this submission.We are dealing with one interpretation issue in relation to an idiosyncratic policy which seems to include provisions from a time which favoured the random use of uppercase letters.This somewhat eccentric montage causes difficulties of interpretation.

[30] It is trite that questions of interpretation of part of a document require consideration of the document as a whole, and this case is no exception.The policy in issue adopts a format of sections or categories plainly intended to indicate cohesion within a category and distinction from another category.The cohesions and distinctions are more or less subtle according to their content, but there would be no purpose in adopting that format unless it were intended to indicate the relationship between different concepts.It must be assumed that intended meanings are coloured by a perception that items occur in a particular category because they have a similarity or correlation of factors, connotations, or qualities.

[31] General exclusion 2 is a category intended to circumscribe risks in the nature of war, nuclear disasters, and natural disasters.The first two bullet points indicate sub-categories plainly in the nature of war, and the last two bullet points indicate risks plainly in the nature of nuclear disasters.The other two sub-categories indicated by bullet points are not in the nature of war risks or nuclear disasters, and by necessary inference must be intended to be comprehended by the definition "natural disasters".One of these is the normal settlement, shrinkage or expansion of structures, and if the respondents' damage, plainly arising from settlement, was the product of normal settlement the loss would be excluded.The respondents' case, however, is that the settlement is not normal.

[32] The third sub-category includes earthquake, hydro thermal activity, and volcanic eruption, all of which are plainly disasters arising from nature.The other items, land slip, subterranean fire, and subsidence or erosion of the land may occur naturally but not necessarily so.

[33] To use an example mentioned by Mr Langstone, a fire might be ignited in a mineshaft; or, reverting to an example conceded on behalf of the appellant by counsel appearing before the Master, although Mr Langstone now appears ready to resile from the concession, subsidence could be caused by a negligent excavation of a neighbouring property.Such an excavation might, of course, also lead to a land slip.

[34] Yet apart from these three risks, which may be either naturally occurring or humanly created, every other item in the second category is clearly comprehended by the term "War, nuclear, and Natural Disasters".Is the Court to assume that logic informs only part of the category?We think not.In our view the terms "land slip", "subterranean fire", and "subsidence" are qualified by the heading "Natural Disasters" so as to leave unexcluded such risks which are not the product of nature but of human conduct.

[35] No loss is excluded unless it is caused, directly or indirectly, by a specified occurrence.The initial consideration is causation, and in any particular case that must be examined in a way that has regard to a reasonable appreciation of how loss occurs.

[36] Whether the exclusion which the insurer relies on defeats the insured's claim requires a reasonable consideration of the cause of the loss.It would be inconsistent with the commercial nature of the contract to take a microscopic view of the physical mechanism.Such a view would be inconsistent with the policy's bold assurance of "complete protection with total confidence".

[37] For these reasons we think that in relation to the exclusion relied on by the appellant, "subsidence ... of the land" must have a meaning which reasonably envisages a natural cause.

[38] Nor is the reference to indirect causation sufficient to allow the appellant to avoid liability by relying on the natural phenomena of, say, gravity or organic decomposition.These are merely part of the mechanism induced by the real cause or causes, or the actual or potential physical context in which the alleged torts are to be considered.An appreciation of this reality no doubt influenced the concession before the Master about human conduct which might cause subsidence.

[39] It is also to be borne in mind that where the cause of loss is human the insurer has legal recourse by way of subrogation.

[40] The question then resolves itself into a consideration of whether there is anything elsewhere in the policy which displaces an otherwise reasonable appreciation of what the parties intended, which of course included the assurance to the targeted market of complete protection with total confidence.

[41] One of the provisions which the insurer relies on to avoid liability is the specification in the policy of a definition for "Natural Land slip".That term is defined in the contract as meaning:-

The movement (whether by way of falling, sliding or flowing, or by a combination thereof) of land-forming materials composed of natural rock, artificial fill, or a combination of such materials, which before movement, formed an integral part of the ground; but does not include the movement of ground due to below ground subsidence, soil expansion, shrinkage, soil compaction, or erosion.

[42] However, the terms of the definition are less important than the specification of the concept.It is argued that because the particular part of the policy distinguishes a land slip by reference to what is natural, the use of the expression "land slip" in the second category of exclusions indicates an unqualified meaning, and by analogy the term "subsidence" in that exclusionary clause must be similarly unqualified.

[43] That argument overlooks the patchwork of this unusual policy.All the patches make up the whole but that does not mean that any patch necessarily has an intellectual or semantic empathy with another.It is plain that the particular definition has been adopted, not to influence the second category of exclusions, but to take account of the cover provided by the Earthquake Commission Act 1993.

Conclusion

[44] Having regard to the evidence available on the summary judgment application, the cause of the insured's loss is human conduct, by act or omission.To regard the loss as having been caused, even indirectly, by natural mechanisms would be an over-technical appreciation, quite at odds with the intention of the parties to assure the older demograph of confidence in their insurance cover.The policy having purported to be generous should not too readily be allowed to invoke a parsimonious interpretation.

[45] For these reasons the appeal is dismissed with costs to the respondents of $5000, together with such reasonable disbursements including counsel's travelling and accommodation expenses as may be fixed by the Registrar.

WILLIAM YOUNG J

[46] I regret that I am not able to agree with the majority judgment.I can express my reasons shortly.

[47] The relevant clause provides:-

War, nuclear, and Natural Disasters

There is no cover for any Loss or liability caused directly or indirectly in any way by:

* War, invasion, act of foreign enemy, warlike operations (whether war is declared or not)

* Civil war, mutiny, rebellion, revolution, insurrection, military or usurped power

* Earthquake, hydro thermal activity, land slip, subterranean fire, volcanic eruption, and subsidence or erosion of the land

* Normal settlement, shrinkage or expansion of buildings, foundations, walls, pavements, roads and other structural improvements

* Ionising radiations or contamination by radioactivity from any nuclear fuel or from any nuclear waste from the combustion of nuclear fuel.(For the purpose of this exclusion, combustion includes any self sustaining process of nuclear fission)

* Nuclear weapons material

(Italicisation added)

[48] The conclusion which has been expressed in the principal judgment is that heading, "War, nuclear and Natural Disasters", means that "subsidence" (along with "landslip" and "subterranean fire") are only excluded if within the concept of a "Natural Disaster", see paragraphs [30] and [31] above.If it were not for the next bullet point list of exclusions (which I have italicised) I would happily go along with this robust but contextual interpretation.

[49] What troubles me is that the exclusions which I have italicised could not fairly be described as being natural disasters.They are also obviously not subsets of the concepts of war or nuclear disaster.The corollary is that the clause as a whole cannot be construed as if all the particular exclusions are just instances of "War, nuclear and Natural Disasters".On this basis, the logic for a narrow construction of "subsidence" seems to me to be fatally undermined.

[50] If it is accepted that the meaning of "subsidence" is not controlled by the heading ("War, nuclear, and Natural Disasters"), there seems to me to be no escape from the conclusion that the claim is within the exclusion.

Solicitors

Jones Fee, Auckland, for Appellant

Gresson Grayson & Calver, Hastings, for Respondents