Garnett v Tower Insurance Limited [2011] NZCA 576 (15 November 2011)

Last Updated: 24 November 2011

IN THE COURT OF APPEAL OF NEW ZEALAND

CA4/2011 [2011] NZCA 576

BETWEEN STEPHEN WILLIAM GARNETT Appellant

AND TOWER INSURANCE LIMITED First Respondent

AND THREE TUIS LIMITED Second Respondent

AND NELSON FOREST LIMITED Third Respondent

AND NEW ZEALAND FIRE SERVICE COMMISSION Fourth Respondent

Hearing: 26 October 2011

Court: O'Regan P, Randerson and Harrison JJ

Counsel: S J Zindel for Appellant R B J Hern for First Respondent

Judgment: 15 November 2011 at 11.15 am

JUDGMENT OF THE COURT

1. The appellant’s application for leave to adduce further evidence is dismissed.
   
2. The appeal is allowed.
   

100. The order for summary judgment in favour of the first respondent is set aside.
     

4. The order for costs made in the High Court is quashed. Costs are to be fixed in that Court.
   
5. The first respondent must pay the appellant costs equal to 50 per cent for a standard appeal on a band A basis and all usual disbursements.
   

REASONS OF THE COURT

(Given by Harrison J)

Introduction

[1] At issue on this appeal is the construction of three discrete provisions of an insurance policy designed to indemnify farm owners against third party liability.
[2] Three Tuis Ltd (TTL) owns a lifestyle farming property at Glenhope southwest of Nelson. It is a 21.6 hectare block with a 170 square metre house and some farm related improvements. Stephen Garnett, the appellant, and his partner, Tracey Lynch, own TTL. The company bought the Glenhope property in December 2002.
[3] In early 2005 TTL constructed two tourist cabins on the Glenhope property. The income was used to meet the company’s mortgage commitments. Mr Garnett worked full time maintaining the cabins, some livestock and other property in general. Ms Lynch worked separately as a travel agent in Richmond.
[4] Two tourists, Paul and Donna Maddock, occupied one cabin on 24 and 25 November 2009. They lit a fire and used the fireplace. Mr Garnett cleared the fire grate of debris in the morning on 26 November. Afterwards he disposed of the debris at the edge of a grassed paddock near the cabin. Later on 26 November two forestry workers observed smoke rising from that vicinity and alerted Mr Garnett. The three of them discovered that a small woodshed in the scrub was alight. The fire quickly developed and spread, causing damage to neighbouring forests owned by Nelson Forest Ltd (NFL).
[5] NFL has issued a proceeding in the High Court at Nelson claiming judgment against TTL and Mr Garnett for $484,853 for loss caused by the fire. The New Zealand Fire Service Commission (the Commission) and the Waimea Rural Fire Committee have issued a separate proceeding claiming judgment against Mr Garnett and TTL for $602,861 for the cost of extinguishing the fire.
[6] The two proceedings have since been consolidated. Both claims are based upon liability arising under s 43 of the Forest and Rural Fires Act 1977. Mr Garnett and TTL deny liability for each. NFL alleges additionally that TTL or Mr Garnett caused the fire by negligently depositing ash and embers on TTL’s property without ensuring that they were first extinguished or by not disposing of them safely.
[7] At the time of the fire Mr Garnett and Ms Lynch were parties to a policy of material damage and liability insurance with Tower Insurance Ltd, the first respondent. Mr Garnett joined Tower as a third party in both proceedings claiming contribution or indemnity for his liability, if any, either to NFL or the Commission. Tower filed a statement of defence and applied for summary judgment against Mr Garnett in the NFL proceeding. Associate Judge Osborne granted Tower’s application.[1] Mr Garnett now appeals.
[8] We note that, while TTL was sued separately in its capacity as owner of the property, it did not claim indemnity against Tower. That was because by an apparent oversight it was not named as a party to the policy. In this Court Mr Hern for Tower responsibly accepts that TTL should have been nominated throughout as an insured party. Accordingly, it will be entitled equally with Mr Garnett to the benefits of any rights of indemnity.

Summary judgment

[9] The principles governing an application for summary judgment are clear. This remedy is normally sought between primary parties. But it is also available to a third party.[2] However, the third party must satisfy the Court that none of the causes of action in the defendant’s statement of claim can succeed against it. The remedy is of a strictly interlocutory nature: the application proceeds on the premise that the plaintiff and defendant will be able to prove their respective claims at trial – not that they are proved.
[10] Mr Garnett’s statement of claim for indemnity against Tower was brought on an expressly contingent ground – that is, “if it is proved [Mr Garnett] caused the fire ...”. Mr Garnett denied such liability but proof of the fire’s causation was a separate issue for trial on NFL’s primary claim. The question would only concern Tower if it agreed or was ordered to indemnify Mr Garnett and participated in its subrogated capacity at trial.
[11] Nevertheless, for reasons which are unexplained, Tower set out in its application for summary judgment to prove NFL’s case against Mr Garnett and contingently against itself. Tower filed three affidavits in support. One was from David Noble, a private investigator. Mr Noble purported to express an opinion that Mr Garnett’s negligent disposal of debris comprising hot embers caused the fire. Mr Noble’s affidavit generated an affidavit in answer from Mr Garnett. Mr Noble then filed an affidavit in reply.
[12] Tower’s approach led to diversion and ultimately confusion in the High Court. Mr Garnett filed evidence and Mr Zindel advanced argument on causation. The Associate Judge addressed the issue in detail before originally finding as a fact without cross-examination and in NFL’s absence that Mr Garnett’s actions in disposal of debris comprising hot embers caused the fire.
[13] Mr Garnett’s original notice of appeal included a challenge to this causation finding. He also applied to recall the judgment. After some further interlocutory activity, the Associate Judge recalled that part of his judgment on the causation finding. By consent, he recited that causation would be assumed as pleaded for the purpose of resolving Tower’s application.[3] That should have always been the position. However, we must emphasise that responsibility for the fire is no longer an issue on this appeal and that the Associate Judge’s original finding cannot be raised to create an issue estoppel against any party if the case goes to trial. Tower would, of course, face credibility difficulties if at trial it sought to contradict or resile from Mr Noble’s evidence.
[14] Despite the successful recall application, Mr Zindel applied for leave to adduce further evidence from the Maddocks in support of Mr Garnett’s appeal to this Court to the effect that they stayed in the cabin for two nights, on 24 and 25 November, but only lit a fire on 24 November. The purpose of their evidence is to support an inference that the fire debris could not have been alive when deposited in the paddock some 36 hours later. For the reasons given, Mr Garnett’s application is not relevant to the issues now alive on the appeal which relate solely to construction of the policy. The application for leave to adduce further evidence is therefore dismissed.

Appeal

(a) Liability protection

[15] Mr Zindel relies on three liability provisions in Tower’s policy to support Mr Garnett’s claim for indemnity.
[16] First, Mr Zindel relies on this provision:

What you are covered for

We will cover you for up to $2,000,000 for your legal liability (including your defence costs) for claims made on you for compensatory damages for injury or property damage as a result of accidents in connection with your business occurring within the geographical limits during the period of insurance unless excluded by this policy.

(Original emphasis.)

[17] The policy is known as a Provider Farm Policy. It defines the word “business” as “the type of farming operation carried on by you and declared to us”.
[18] The relevant provision is located in the policy within a section headed “SECTION 4 – LIABILITY PROTECTION”. In contrast to the following 14 nominated “SPECIAL BENEFITS”, it is not given a specific heading. That is probably because it is of general application. We shall refer to the provision as “the liability protection extension”.
[19] In November 2003 Mr Garnett and Ms Lynch signed a formal proposal for insurance with Tower. Together the proposal and the policy comprised the relevant contract of insurance. The proposal included a question about whether any part of the house or land was used for any business activity or whether the proponents operated a boarding house or bed and breakfast accommodation on the property: Mr Garnett and Ms Lynch answered “No Business Use”. By reference to the liability protection extension they answered “LIFESTYLE BLOCK 50 ACRES”.
[20] In March 2005 Ms Lynch advised a Tower representative that TTL’s property was now run as a tourism venture. Tower responded that it was unable to offer cover for this type of commercial use. Ms Lynch said that she would make enquiries elsewhere and notify Tower when to cancel the policy. However, after obtaining a quote from another insurer for an additional $4,000 premium, Mr Garnett and Ms Lynch decided not to insure the cabins. Instead, they continued to renew the existing policy with Tower.
[21] The policy renewal certificate issued by Tower to Mr Garnett and Ms Lynch on 15 February 2009 was the contract of insurance in force when the fire occurred. The certificate recited:

SECTION 4 – LIABILITY PROTECTION:

YOU have declared that the type of farming which YOU undertake is lifestyle farming which means YOU derived less than $10,000 PA in gross income from any activities associated with the BUSINESS and the Block of land is less than 10 hectares.

(Our emphasis.)

[22] So at the time of the fire the insured business was defined as a lifestyle farming operation from which Mr Garnett and Ms Lynch earned less than $10,000 per annum.
[23] The renewal certificate also reinforced the ongoing duty of disclosure imposed on Mr Garnett and Ms Lynch. Standard form notes attached to it gave express examples of information which would require disclosure. One was if the type of work undertaken by the business changed or there was any structural addition or alteration to the insured buildings. The buildings had been nominated throughout as a 170 square metre house. The certificate noted that it was “owner occupied with no boarders or homestay students”. There was no reference to the separate tourist cabins or business.
[24] Against this background Mr Zindel submits, as he did in the High Court, that for the purposes of the liability protection extension Mr Garnett’s actions in disposal of debris comprising hot embers caused the fire were “in connection with [the insured] business”. He submits that the words “in connection with” effectively qualify the literal interpretation of farm or farming. In his submission there is the necessary connection between the two cabins located on the farm, catering for farm tourists, with the farm operation itself.
[25] Mr Zindel submits that Associate Judge Osborne erred by treating the tourist cabins operation as a separate commercial business when it was no more than an element of lifestyle farming activity; and that he adopted an unnecessarily narrow view when concluding that:

[98] I return to and start with the policy’s liability protection provision, namely Section 4. It provides cover for property damage as a result of accidents in connection with Mr Garnett/Ms Lynch’s business within New Zealand. In this case the property damage occurred when Mr Garnett cleared out the grate of the wood-burner in the tourist cabin and deposited it onto the grass. This was in no usual sense an accident in connection with the type of farming operation which Mr Garnett and Ms Lynch carried on in 2002 and had declared to Tower Insurance as not involving any business use of their house for boarding or for bed and breakfast. The accident arose because Mr Garnett was conducting a tourist accommodation business, and in particular because he was carrying out the cleaning that arises through cabin use by customers.

[99] The connection of which the policy speaks is clearly intended to be an operative connection in the sense that the accident is connected to the operation of the business. The M Robinson (ed) Chambers 21st Century Dictionary (Chambers, Edinburgh, 1996) deals specifically with the expression “in connection with something” as meaning “to do with it, concerning it”. The accident in question in this case was to do with the tourist accommodation business. It was not to do with a farming business.

[100] Mr Zindel, in the submissions which I have quoted, sought to change the emphasis of the connection from a connection with the business to a connection with the land. He submitted that there was surely a connection between two cabins located on a farm (catering for farm tourists) and the operation of the farm itself. There is a connection, but it is a geographical connection, whereas Section 4 is concerned with business connection. By going on in his submissions to deal with the physical layout of the property, Mr Zindel again overlooked the fact that the required connection had to be in relation to the farming operation carried on and declared to Tower Insurance.

[101] In my judgment, Mr Zindel’s proposition that the accident was connected with the farming business fails at two levels. First, it was to do with the tourist accommodation business rather than the farming business. Secondly, the policy holders had never declared to Tower Insurance (in a policy context) that the lifestyle farming business now comprised also a tourist accommodation element.

[26] We respectfully adopt the Associate Judge’s reasoning in preference to Mr Zindel’s submission. The Associate Judge is correct that the word “connection” where used in the liability protection extension must refer to the legally operative connection between the accident alleged to give rise to the insured’s liability and the insured business – that of a lifestyle farming operation. The fire was the insured risk; the lifestyle farming operation was the insured activity. Proof of the connection or link between the two triggered Tower’s obligation to indemnify.
[27] It is plain that the liability protection extension applies to risks arising from TTL’s lifestyle farming operation. As Mr Hern submits, farming is the business of cultivating land or raising stock. The provision does not cover risks arising from renting out cabins. The two businesses are of a distinctly different nature. Contrary to Mr Zindel’s submission, operating tourist cabins could never qualify for definition as an element of cultivating land or raising stock. Ms Lynch herself understood this distinction when in 2005 she communicated to Tower TTL’s deliberate decision not to seek cover for the tourist operation. That business was never an insured activity.
[28] The fact that the tourism operation was physically or geographically connected with the lifestyle farming operation does not satisfy the requisite link. The operative connection in this case was between the accident – the fire – and the uninsured tourism business. The liability protection extension is not triggered by that connection. Mr Zindel’s argument to that effect contradicts the provision’s clear wording.
[29] In our judgment Tower’s liability protection extension does not indemnify TTL or Mr Garnett against liability for either NFL’s or the Commission’s and Rural Fire Committee’s claims.

(b) Forest and Rural Fires Act 1977 Liability

[30] Second, Mr Zindel relies upon what is described as a “special benefit” within Section 4 as follows:

FOREST AND RURAL FIRES ACT LIABILITY

This section is extended to cover you up to $200,000 or up to the sum insured shown in the certificate of insurance, for your legal liability arising under the provisions of the Forest and Rural Fires Act 1977 or any amendments.

(Original emphasis.)

[31] Mr Zindel submits that Tower must indemnify Mr Garnett under this provision (the statutory liability extension) for an amount up to $2 million. He relies on a statement in the renewal certificate that the sum insured for liability protection under Section 4 is $2 million. He says that in terms of the statutory liability extension this is the statement “shown in the certificate of insurance” of “the sum [of $2 million]”.
[32] Associate Judge Osborne rejected Mr Zindel’s argument on this ground:

[114] The extension under the Forest and Rural Fires Act is in no different category. It is an extension of the cover under the primary liability protection provisions in Section 4 for this farming business. The possibility is contemplated, precisely as has occurred in this case, that there will be a claim not simply for compensation for negligence but also for liability under the Forest and Rural Fires Act. That is a different form of liability from the primary cover under Section 4. Hence the extension. I do not accept Mr Zindel’s invitation to read the term “extended” as suggesting that the parties to the contract intended that the insured would have cover in relation to a different form of business operating on the property than that which had been declared for the purposes of insurance. The extension clearly arises simply because it is in relation to a specific form of statutory liability.

[33] Mr Zindel submits that, on the Associate Judge’s interpretation, the special benefit otherwise available under the statutory extension adds nothing. The clause should be construed as providing a stand-alone benefit separate from and additional to the primary cover.
[34] We note that the statutory liability extension is one of 13 special benefits nominated in Section 4. With one exception, each benefit is in the nature of a discrete liability extension starting with the words:

This section is extended to cover your legal liability [or you or claims made on you]...

[35] It is common ground that Mr Garnett and Ms Lynch’s policy included both the liability protection extension and the 13 special benefits. As Mr Zindel points out, proof of the insured’s liability in connection with its business was only a specified precondition to indemnity for one special benefit – the fines and legal defence costs extension. Otherwise the application of the special benefits was not expressly related to the business of lifestyle farming. For example, under the bailee’s liability extension, the first special benefit, the insured’s physical or legal control of goods was the operative pre-requisite for indemnity. And the social and recreational activities liability benefit specifically applied to liability for accidents arising from those activities. By definition those activities are the antitheses of a commercial activity.
[36] We are satisfied that the statutory liability extension is not limited to liability for accidents in connection with TTL’s lifestyle farming business. With respect, we think the Associate Judge erred in accepting Mr Hern’s argument to the contrary. Legal liability however arising under the Forest and Rural Fires Act was sufficient to attract indemnity; if the position were otherwise, the statutory liability extension would have stipulated, like the preceding special benefit for fines and legal defence costs, that liability must arise in connection with the insured business.
[37] In this respect we agree with the Associate Judge that Forest and Rural Fires Act liability is of a different nature from liability for negligence. Section 43 of the Act materially provides:

43. Recovery from person responsible for fire

(1) Where any property has wholly or partially been destroyed or damaged by or safeguarded from an outbreak or threat of outbreak of fire, and responsibility for the outbreak is acknowledged by, or is established by action or otherwise as caused by, any person—

(a) The costs of control, restriction, suppression or extinction of the fire may be recovered from that person by the Fire Authority or the New Zealand Fire Service Commission or the eligible landholder or eligible landholders of the forest area affected, as the case may be, incurring those costs pursuant to fire control measures under this Act; and

(b) Any loss in, or diminution of, value of that property, and any consequential loss or damage not too remote in law, may be recovered from that person by the owner of the property.

...

(3) This section shall be deemed to be supplementary to and not in substitution for any other rights of recovery that may exist in law or by enactment or otherwise howsoever.

[38] While by s 43(1) a person who is responsible for causing a fire in a forest or a rural area is strictly liable for costs incurred both in fighting the fire and for damage done to property – that is, without proof of negligence or want of care, s 43(3) preserves a claimant’s common law right to sue for damages.
[39] Unlike the Associate Judge, however, we do not read a claim under s 43(1) as being distinct from a claim for “compensatory damages” covered by the liability protection extension. The Associate Judge relied on finding this distinction to justify his conclusion that one provision – the statutory liability extension – must be read as an extension of and dependent upon the other – the liability protection extension. In this respect we are satisfied that he erred. An insured party would arguably be entitled to indemnity under the liability protection extension for a claim under
s 43 (1) providing the amount was below $2 million. That is because the award of statutory damages would be of a compensatory nature. The statutory liability extension is of a more limited nature. But the two covers are neither mutually exclusive nor interdependent. We agree with Mr Zindel that the statutory liability extension stands alone and indemnifies TTL and Mr Garnett against liability for NFL’s claim.
[40] However, we are satisfied that this right of indemnity is limited to a maximum of $200,000. The statutory liability extension provides indemnity of up to $200,000 or a sum shown in the certificate of insurance. The renewal certificate states:

LIABILITY PROTECTION – SECTION 4. Sum insured two million dollars

[41] In our judgment that sum of $2 million plainly relates to the liability protection extension; it is the same sum as is nominated in the policy. But that level of cover is only available if TTL or Mr Garnett is entitled to indemnity under the liability protection extension. We have found to the contrary.
[42] The issue is put beyond doubt by the General Notes at page four of the renewal certificate. They confirm that:

Cover was not requested for –

Additional Forest & Rural Fires Liability

...

Mr Zindel accepts that neither TTL nor Mr Garnett paid an additional premium for additional statutory liability cover. Without it, the insured figure under the statutory liability extension remains at $200,000.

[43] In our judgment TTL and Mr Garnett are entitled to indemnity from Tower for liability up to $200,000 on the s 43(1) claims by NFL and the Commission.

(c) Personal liability

[44] Third, Mr Zindel relies upon another special benefit under Section 4 of the policy as follows:

PERSONAL LIABILITY

This section is extended to cover your legal liability following accidents not related to any business activity whether for profit or not.

(Original emphasis.)

[45] Mr Zindel advanced the same argument before us as he did in the High Court. The Associate Judge described it thus:

[118] The extension expressly excludes personal liability cover if it is related “to any business activity whether for profit or not”. Mr Zindel’s submission, invoking this extension, proceeded in this way. There had been an “accident”, namely the fire. Legal liability flows from that accident. Then, says Mr Zindel, the accident is not related to a business activity because the actual activity, not only of removing the ash but in the manner of its disposal by Mr Garnett, is related to Mr Garnett’s own actions. Mr Zindel described those as “an element of personal choice, rather than being related to the letting out of the cabins”.

[46] Mr Zindel’s argument is untenable. The Associate Judge was of the same view. The distinction which Mr Zindel attempts to draw is artificial. It requires the personal liability extension to be read contrary to its plain words. The fact that Mr Garnett acted in his personal capacity in depositing the ash which allegedly caused the fire is irrelevant. What is relevant for indemnity purposes is that the insured event – the fire – was directly related to the business activity of running tourist cabins.
[47] In our judgment Tower’s personal liability extension does not operate to indemnify TTL or Mr Garnett.

Result

[48] Mr Garnett’s appeal is allowed. The order for summary judgment for Tower is set aside. The order for costs made in the High Court is quashed. Costs are to follow the event and to be determined by the Associate Judge if the parties are unable to agree.
[49] Costs must follow the event in this Court. However, in view of Mr Garnett’s limited success, Tower is ordered to pay him costs equal to 50 per cent for a standard appeal on a band A basis together with all usual disbursements.

Solicitors:
Zindels, Nelson for Appellant
McElroys, Auckland for First Respondent

---

[1] Nelson Forests Ltd v Three Tuis Ltd HC Nelson CIV-2010-442-84, 9 December 2010.
[2] High Court Rules, rr 4.7(2) and 12.2.
[3] At [58].