Nelson Forests Limited v Three Tuis Limited HC Nelson CIV 2010-442-84

[2010] NZHC 2178

IN THE HIGH COURT OF NEW ZEALAND NELSON REGISTRY

CIV-2010-442-000084

BETWEEN  NELSON FORESTS LIMITED Plaintiff

ANDTHREE TUIS LIMITED First Defendant

ANDSTEPHEN GARNETT Second Defendant

ANDTOWER INSURANCE LIMITED Third Party

Hearing:         2 November 2010

Appearances: R Hern for Third Party

S J Zindel for Second Defendant

(Other attendances excused) Judgment:  9 December 2010

JUDGMENT OF ASSOCIATE JUDGE OSBORNE

as to Third Party’s Summary Judgment Application

Introduction

[1]      On 26 November 2009 a fire took hold of the Golden Downs Forest at Glenhope, near Nelson.  The damage was substantial.  In this proceeding the forest owner sued a neighbouring owner (Three Tuis Limited) and a neighbouring occupier

(Stephen Garnett).

NELSON FORESTS LIMITED V THREE TUIS LIMITED AND ANOR HC NEL CIV-2010-442-000084  9

December 2010

[2]      The forest owner alleges that the fire had spread to its forest after Three Tuis or Mr Garnett had deposited ash and embers on Three Tuis’ land without ensuring that the ash and embers were extinguished prior to disposal.

[3]      Three Tuis and Mr Garnett filed a defence denying those allegations.

[4]      Mr  Garnett  had  an  insurance  policy  with  Tower  Insurance  Limited. Mr Garnett  joined  Tower  Insurance  as  a  third  party.    He  referred  to  the  forest owner’s claim against him and alleged that if it was proved that he had caused the fire by spreading ash on the Three Tuis land then it was an accident for which he was entitled to contribution or indemnity from Tower  Insurance under his insurance policy.

The Tower Insurance summary judgment application

[5]      I am  dealing with  a summary judgment  application  by Tower  Insurance against Mr Garnett.  Tower Insurance says that Mr Garnett’s cause of action against it cannot succeed.

[6]      For Mr Garnett, Mr Zindel’s submissions as to an arguable case rested on two propositions:

[1]      that the forest owner’s underlying contention as to the cause of fire was open to argument; and

[2]      that even were it indisputable that the second defendant had caused the fire, it was arguable that Mr Garnett’s policy responded to the incident.

Other proceedings

[7]      The  same  defendants  are  sued  in  relation  to  the  same  fire  in  another proceeding (CIV-2010-442-000396 – New Zealand Fire Service Commission and Waimea Rural Fire Committee v Three Tuis Limited and Stephen Garnett).   The

plaintiffs in that proceeding assert rights of recovery pursuant to the Forest and Rural

Fires Act 1977 for the costs of fighting the fire.

[8]      While the two proceedings remain separate, and Tower Insurance has not been joined as a third party in the Fire Service proceeding, counsel accepted at the start of the hearing that the outcome of the summary judgment application in this proceeding will apply in relation to the Fire Service proceeding.

Jurisdiction - summary judgment claim by third party

[9]      To bring its summary judgment application, Tower Insurance invoked the jurisdiction under r 12.2(2) High Court Rules which provides:

The court may give judgment against a plaintiff if the defendant satisfies the court that none of the causes of action in the plaintiff’s statement of claim can succeed.

[10]     Counsel proceeded on the basis that such jurisdiction is equally available to a third party against a claimant defendant.  I agree that that is so by reason of r 4.7(2) which gives third, fourth and subsequent parties the same rights as a defendant.

[11]     I therefore have jurisdiction to entertain the third party’s application in this case.

The cause of the fire

Cause – the investigations

[12]     The Tower Insurance summary judgment application proceeds upon the basis that the fire arose in connection with the defendants’ operation of two cabins as holiday accommodation.

[13]     Tower  Insurance’s  evidence  as  to  the  cause  of  the  fire  came  from  two witnesses, namely David Noble who is a fire cause and origin consultant and John Oakley  who  is  a  private  investigator.    I  summarise  the  effect  of  their  initial affidavits:

a.   The fire occurred on 26 November 2009.

b.   Mr Noble examined the scene on the same day and interviewed Mr

Garnett.

c.   Mr  Oakley  interviewed  Mr  Garnett  on  two  occasions  on  27  and

28 November.

d.Mr   Noble   also   obtained   (through   others)   statements   by  other witnesses.

e.   Mr Garnett and Ms Lynch live on their 60 acre farmlet which they have owned through Three Tuis since 2002.  They had a house and farm buildings.  In 2005 they constructed two timber cabins to use as tourist cottages.

f.   Mr Noble summarised the outcome of his interview of Mr Garnett by deposing that Mr Garnett advised him that:

i.He maintained the cabins, livestock and property in general, Ms Lynch works as a travel agent.

ii.Paul and Donna Maddock, Australian tourists, occupied one of the cabins (cabin 1) on the evening of 25-26 November

2009.    Mr  and  Mrs  Maddock  had  used  the  fireplace. Mr Garnett   cleared   the   fire   grate   of   debris   after   the

Maddocks’ departure.   Mr Garnett disposed of the ash and embers at the edge of a grassed paddock in the immediate

vicinity of cabin 1.

iii.       Two  forestry  workers  working  across  the  road  from  the property in a small block jointly owned by Nelson Forest Service (the plaintiff) and Mr and Mrs Taylor, arrived at the main residence (at which Mr Garnett/Ms Lynch live) at approximately 4pm, 26 November 2009.   The employees had smelt and then observed smoke rising from the vicinity of cabin 1.  Mr Garnett and the Nelson Forest workers went to the site  where they discovered a  small woodshed  and scrub alight.

iv.       The NZFS was notified at 4.18pm on 26 November 2009, it took approximately 39 minutes for the NZFS to arrive given the isolation of the property.   By that stage the fire had become a major conflagration.

[14]     In the record of interview which Mr Garnett gave to Mr Noble, Mr Garnett said that his visitors had left at 10am and he had cleaned the cabin out at 2 p.m.

[15]     In addition to evidence of his own investigation, Mr Noble exhibited a fire investigation report prepared by Mr Chris Millson as investigating officer on behalf of the New Zealand Fire Service.  Mr Millson reported that Mr Garnett had shown him the location of the fire ashes which Mr Garnett had discarded.   Mr Millson referred to statements by other witnesses who had been spoken to by another investigator, which included an apology by Mr Garnett who was alleged to have stated to a Mr Alan Payne:

The fire could have started from ashes discarded from log fire in cabin used the previous night.

[16]     Mr Millson concluded that Mr Garnett had discarded embers within two hours of the fire ignition that very feasibly could have been live.   His report commented that statements taken from the first respondents to the fire and from affected neighbours stated that Mr Garnett had accepted responsibility for the fire.

[17]     Mr Oakley’s report was to similar effect, concluding that the Maddocks (the visiting  Australian  tourists)  had  rented  the  property  on  the  evening  of  25-26

November 2009; that Mr Garnett had cleaned the cabin out at about 2 p.m. on

26 November 2009, taking a small tray of ashes which appeared to be just about an inch of white ash; and that he had placed the ashes on the mowed lawn area near the tourist units.

[18]     When interviewed by Mr Oakley on 27 November 2009, Mr Garnett and Ms Lynch stated that the Maddocks must have had a fire in the wood-burner the night of 25 November 2009 because when cleaning out the unit on 26 November

2009 Mr Garnett had found about one inch of ashes in the ash pan of the wood- burner.  In his statement Mr Garnett had said that the white ash all appeared to be out with no smoke or burning at all.

[19]     Against this background, Mr Noble went on to detail his scene examination and  conclusions.    I  will  return  to  those  shortly.    Underlying  his  conclusions, Mr Noble stated this:

Mr Garnett likely believed that the debris was cold white ash only. Accordingly, he disposed of it without being aware that it contained hot embers, that had cooled sufficiently to be rendered safe.

[20]     In the evidence filed in support of the application there was no detailed analysis or commentary on the length of time that ashes and/or embers in a wood- burner would remain “live”.   It is however apparent that there is an underlying assumption from the explanations which the investigators had been given that the ashes disposed of by Mr Garnett related to a fire which had been active in the wood- burner on the evening of 25/26 November 2009.

[21]     Mr Garnett filed evidence in opposition less than a week before the hearing. Mr Hern did not object to the late filing and his client filed affidavits in reply to Mr Garnett’s evidence.   The hearing before me proceeded on the basis of all the affidavit evidence.

[22]     It had apparently occurred to Mr Garnett that discussions which he had had with the investigators about the Maddocks staying the night before the fire had given less than the full picture.  Indeed, an invoice which Mr Oakley had obtained from Mr Garnett and exhibited to his evidence records the fact that Mr and Mrs Maddock had arrived on 24 November leaving on 26 November, a stay of two nights.

[23]     Whereas Mr Garnett in his discussions with the investigators appears to have made  an  assumption  that  the  Maddocks'  fire  had  been  on  the  night  of  25/26

November he points to the possibility that the fire had been on the night of 24/25

November and that the ashes had therefore been approximately 40 hours old.  While he has not obtained affidavit evidence from Mr and Mrs Maddock he exhibited an email exchange which he had had with Mr Maddock.   Mr Maddock incorrectly referred to the stay as having been on 25 and 26 November (rather than 24 and 25

November).   Mr Maddock in his email indicates that the Maddocks had a fire on their first night but not their second night (albeit he refers to dates incorrectly).  Mr Maddock refers to digital photographs with time recordings which he says in his

email indicate that at 7.30 a.m. on 26 November there was no fire in progress in the wood-burner.

[24]     Against this background Mr Garnett deposes that when he told Mr Oakley that the fire had been used the night before, it was a faulty assumption formed without talking to his guests.  Mr Garnett deposes that when he deposited the small amount of ashes on the mowed lawn area near the cabin, it was just white ash with no embers, no heat, no smoke and no burning at all.  Mr Garnett deposes that he is a careful man and is adamant that he checked the ashes and that there was nothing in the ashes which gave him any concern about them.

[25]     In  an  affidavit  in  reply,  Mr  Noble  made  some  specific  comments  on

Mr Garnett’s evidence before concluding:

Multiple  independent  investigations  reached  the  same  conclusion  –  that Mr Garnett’s  disposal  of  the  ashes  from  the  cabin  was  responsible  for causing the fire.  Of note, is that Mr Garnett admitted as much as [sic] the time of the fire. This is the only credible explanation for the fire occurring.

[26]     I will return to other aspects of the fire evidence but focus at this point on the evidence as to the fire in the cabin.   In my judgment it is clear that the investigators at the time of their investigation and at the time of their initial evidence in this Court placed some significant reliance upon Mr Garnett’s statements as to the fire and his “admission”.   In Mr Noble’s conclusion, which I have just quoted, it is Mr Noble who still identifies Mr Garnett’s admission as being “of note”.

[27]     I do not elevate the Maddocks’ email exchange with Mr Garnett to the level of  direct  evidence.     What  the  email  exchange  does,  however,  is  to  explain Mr Garnett’s retreat from what Mr Noble refers to as his “admission”.   It is clear from  the  investigator’s  contemporary  reports  that  Mr  Garnett  had  made  an assumption  as  to  a  fire in  the  wood-burner  in  the  cabin  on  the  night  of  25/26

November 2009.   That conclusion was only as good as the information on which

Mr Garnett was operating.

Cause – the timing of the Maddocks’ fire

[28]     The plaintiff produces no evidence (other than what Mr Garnett said) as to the timing of the fire in the wood-burner in the cabin.   The evidence clearly establishes that the Maddocks stayed for two nights.  The Court cannot be satisfied that the cabin fireplace was used on the night of 25/26 November.

[29]     I do not find the evidence to establish indisputably that there had been a fire in the wood-burner in the cabin on the night of 25/26 November 2009.  Put the other way, I find it arguable that the wood-burner had not been used that night but rather had been a used the previous night.

[30]     Against, this background, and to the extent that Mr Noble puts emphasis upon Mr Garnett’s admission at the time, I find Mr Garnett’s statements (through the limited information on which he was operating at the time) to be insufficient to lead to indisputable conclusions.  The danger of seeking to draw indisputable conclusions from such an admission is illustrated by the “apology” which Mr Garnett is said to have given to a Mr Payne (above at [15]) that “the fire could have started from ashes discarded from log fire in cabin used the previous night”.  I note both the assumption as to “the previous night” and the fact that the statement is in any event qualified by the use of “could have”.

Cause – the period since the Maddocks’ fire

[31]     Against this background I then look to any evidence as to the period in which ash and embers would remain “live” after an active fire in the wood-burner.  On the defendant’s case the fire would have started burning down from some time in the middle of the night of 24-25 November 2009.  Mr Garnett puts it at approximately

40  hours.    On  the  basis  that  the  fireplace  was  emptied  around  2  p.m.  on  26

November that requires it to have started burning down at approximately 8 p.m. on

24 November 2009.  Whether the period was of that range or something shorter, say

36 hours based on midnight, there is a distinct factual difference caused by the intervening day.

[32]     Mr Noble’s further evidence does not directly address any impact from a day’s difference in the timing of the wood-burner fire.  Rather, having referred to Mr Garnett’s assertion that the ashes would have been about 40 hours old, Mr Noble addresses the nature of material in the ash pile (to which I will return) and matters relating to the physical evidence of the fire growth and dynamics of the fire.  He also challenges Mr Garnett’s evidence that he deposited the ash on mowed lawn, saying that the ash had been placed on long grass in amongst bracken fern plants.   He deposes  that  it  only takes  one  ember  to  remain  and  to  initiate  the  combustion process, particularly if that ember comes to rest on dry leaves and fine fuels such as long grass.  What I do not find in Mr Noble’s evidence is a direct addressing of any difference the extra day might make.

[33]     The defendant has provided no expert evidence as to the “life” of ashes and embers in such a situation.  But equally the experts called by Tower Insurance have not provided the Court with any direct evidence on that issue.   Rather, the development  of  their  argument  (which  I  will  come  to  shortly)  involves  a consideration and elimination of other possible causes.

[34]     There  is  a  further  feature  of  the  evidence  which  was  not  significantly developed in the Tower Insurance evidence but which appears to underlie at least some of the initial conclusions.  Mr Noble referred in his evidence to the report of Mr Millson (the New Zealand Forest Service Fire investigating officer), exhibited the report and noted that it was consistent with his own conclusion.  A part of Mr Millson’s observations was that he:

verified the wood being burnt in the cabin fire was beach [sic] which leaves a burning ember for a considerable period – as opposed to firewood such as pine.

[35]     This appeared to tie in with information given to Mr Noble by Mr Garnett on

28 November 2009 in this exchange:

Q.        What type of timber would they (the Maddocks) have been burning? R.        Beech and a few bits of Manuka.

[36]     The relevance of the different fuel sources was not further developed in the initial evidence of the experts.

[37]     Mr Garnett responded to this evidence in this way:

I know that beech and manuka can smoulder a long time but the tourists hadn’t used beech or manuka.  They had used pine.  This is what they later told me.  I assumed that they used beech because beech and manuka were left in the wood box.   That is why my interview with David Noble…was incorrect about my referring to the use of beech and manuka.  In the nearby woodshed (about 50 metres in a south easterly direction towards the river bank) there were pine, pinecones, kindling, paper, petrol, manuka and beech.

[38]     Mr Garnett supported this evidence with an email exchange he had had with the Maddocks in which Mr Maddock recorded:

I do remember putting pinecones and sticks with pinecones on it to start the fire.  Thought it would be a good kindle.  I collected them from around the wood shed.

[39]     Mr Zindel appropriately conceded that, leaving aside issues of admissibility, the email from the Maddocks does not exclude the use of beech or manuka.  Indeed, the reference to “starting the fire” and “kindle” appear to refer specifically to the early stages of the fire and to not address the main fuel source used.

[40]     In relation to this issue, therefore, the defendants have provided no evidence as to the main fuel source actually used.  On the other hand, Tower Insurance equally did not obtain evidence from the Maddocks.   Clearly, the basis upon which the Tower Insurance investigators proceeded was the confirmation given by Mr Garnett at  the  time  that  beech  and  manuka  had  been  used.    Given  the  late  filing  of Mr Garnett’s affidavit, it is understandable that Tower Insurance would not have anticipated a need to identify the possibility of a different fuel source.

[41]     What the Court is left with is a lack of admissible evidence in relation to the use of the wood-burner in the cabin by the people who knew, namely the Maddocks. Instead, at the time of the Tower Insurance investigation the evidence before the Court points to certain assumptions made by Mr Garnett which may or may not have been accurate.   They were relayed to the investigators and incorporated into their reports.

[42]     In his evidence in reply Mr Noble does not directly address any difference the different types of wood might have made to the life of ash and embers.  The Court must take it that there might be significance in the different types of wood, both as a matter of commonsense and because Mr Noble saw fit to direct his third question to Mr Garnett to the type of timber that was being burnt.  Mr Noble then incorporated Mr Millson’s conclusion that beech leaves a burning ember for a considerable period (as opposed to firewood such as pine).  In his reply Mr Noble expressly quoted Mr Garnett’s discussion with the Maddocks concerning the use of pinecones and twigs but did not comment further on that matter.

Cause – path of fire spread

[43]     A further aspect of Mr Noble’s evidence which I must take into account is his identification of features of the path of fire spread from the area in which the ash was deposited.  Mr Noble noted an outward migration from the top of a steep bank lined with gorse, down a steep slope, to the river below.  The woodshed to which I have referred was consumed in that process.

[44]     Mr Millson reported that he had felt hot embers in the ash pile at the location where Mr Garnett had deposited the ashes.  In his report Mr Millson stated that Mr Garnett had discarded “embers” within two hours of the fire ignition.  He had then stated that “the same embers” were felt [by him] to be live at approximately 6.30 p.m., just over two hours after the fire report time.  However, Mr Millson has not given sworn evidence and his report contains the assumption that Mr Garnett discarded embers.  The assumption that what Mr Millson felt at 6.30 p.m. were “the same embers” is not explained and is open to argument.

[45]     Returning to Mr Noble’s evidence, it was deposed that:

Larger pieces of charcoal that had been produced by a previous fire were located beside the ash pile – indicating this site had been used on other occasion(s).   However, some smaller pieces found amongst the ash most likely  came  from  the  fireplace  on  the  afternoon  it  was  cleaned  by  Mr Garnett.

[46]     I find that evidence more considered than the statements within Mr Millson’s report.  I note particularly the words “most likely” rather than the black and white

statement of Mr Millson.  In summary, the Tower Insurance evidence leaves open the  possibility  that  the  pieces  of  charcoal  identified  by  both  Mr  Millson  and Mr Noble had not come from the fireplace ashes (in which event they logically might have been deposited there in the course of the much larger fire).

[47]     Mr Noble puts the area of the ash as the likely source of fire ignition, through what he describes as “dislodged embers”, which would have ignited a litter layer, dry grass and gorse in the surrounding area.   A southerly wind blowing and a high ambient temperature, with no recent rainfall, would have increased the likelihood of a small fire developing rapidly.  I cannot find this particular aspect of the physical evidence as indisputably pointing to Mr Garnett’s placement of the ashes as it still assumes living embers within or beneath the ash.

Cause – gathering the evidence

[48]     It is not every matter of defence or factual conflict which this Court will accept in a summary judgment context.  The Court is entitled to examine and reject spurious defences or plainly contrived factual conflicts.  The Court is also in relation to any defence entitled to look for appropriate particulars and a reasonable level of detail for substantiation.

[49]     Criticism can be levelled in this case at the defendants for not adducing in the time which was available affidavit evidence from the Maddocks.  On the other hand, the Tower Insurance investigators proceeded upon the basis of what Mr Barnett had told them as to what the Maddocks had done rather than contacting the Maddocks directly.  Mr Garnett has laid a credible foundation as to his having made incorrect assumptions particularly as to the night of the cabin wood-burner use.   Given the lateness of Mr Garnett’s evidence, it was open to Tower Insurance to seek an adjournment if it wished to obtain direct evidence as to their use of the fireplace. The Court is left with the evidence the parties have chosen to put before it.   The evidence raises a credible possibility that the use of the wood-burner was a day earlier than Mr Garnett had initially thought.   It also leaves open what fuel was burnt.

[50]     Gathering the evidence to this point, I find:

a.   Mr Garnett deposited ashes from the cabin on an area of vegetation (grass   or   otherwise)   around   2   p.m.,   26   November   –   this   is indisputable.

b.The ashes came from use of the wood-burner in the cabin on the night of either 24/25 November or 25/26 November.   There is an open question as to how long embers in the ash would remain live.

c.   By 4 p.m. 26 November (within two hours of the deposit of ashes) a fire which had started in the area the ashes were deposited had spread to surrounding land and was noticed.

[51]     This evidence establishes the deposit of the ashes as the likely cause of the fire but, without assessment of the likelihood of any other cause, Tower Insurance would not have discharged the onus upon it in a summary judgment context.

Cause – elimination of other causes

[52]     I must then ask myself whether the remaining considerations which informed the expert evidence before me are such as to point indisputably to the ashes Mr Garnett discarded as the source of the fire regardless of any possible misunderstanding concerning the timing or fuel source of the wood-burner fire.  Can Tower Insurance establish that the absence of any other likely cause leaves the ashes as the indisputable cause?

[53]     Mr Noble deposes that there are no other possible scenarios, leaving a living ember from Mr Garnett’s deposit as the only possible cause of the fire.  In his report, Mr Noble identifies six alternative scenarios, each of which he eliminated on the basis  of  his  inquiries.    These  were  insurance  fraud;  illegal  activities  such  as burglaries; electrical failure, spontaneous combustion; actions of a third party; and alternative ignition sources such as light refraction through glass as from a broken bottle.

[54]     Mr Garnett in his affidavit identified two of Mr Noble’s quoted scenarios as possible.  Implicitly he agrees with Mr Noble that the other four scenarios are not possible.  Mr Garnett is not an expert.  His evidence therefore cannot be used to draw expert conclusions but it might be used to point to factual situations which establish a line of inquiry (when Mr Noble had in his report found none to exist).

Cause – elimination of glass as a cause

[55]     Mr Garnett’s suggestion  was that the fire might have started through  an alternative ignition source such as glass – through the northern aspect of the Riverstone woodshed (a building nearby on the Three Tuis’ land) being open and light  reflecting  off  glass.    Mr  Noble’s  report  had  made  clear  that  the  sort  of alternative source he had in mind would be broken glass such as in a broken bottle. In his reply evidence he rejected a suggestion that an intact bottle in proximity to the wood pile would have generated sufficient energy to raise solid timber to an ignition temperature.  In the absence of any proper foundation by way of expert evidence, it is not appropriate to elevate this suggestion by Mr Garnett to the level of an arguable scenario.  Mr Noble, expertly qualified, rejects it.

Cause – elimination of third parties as a cause

[56]     Mr Garnett’s only alternative scenario lay in the actions of a third party.  He proposed that this would have been through a contractor in the area (Tasman Pest Control) who was working nearby.  He exhibited a letter from Tasman Pest Control Limited to Three Tuis dated 19 October 2009.  The letter advised that Tasman Pest Control  was  preparing  to  commence  annual  maintenance  control  in  the  area, including Three Tuis’ property and would be looking to commence ground work around 9 November 2009.  The work would be completed in four to five weeks.  The letter stated that all landholders would be contacted personally in the near future and discussion held about methods to be used and conditions of entry for their staff prior to any work commencing.

[57]     I cannot view this evidence as raising an arguable case that someone from

Tasman Pest Control may have been on the Three Tuis property on or around 26

November and been responsible for the fire.  Mr Garnett has given no evidence as to any of the prior contact which Tasman Pest Control advised would occur.  Nor has he given any evidence of any effort to obtain details from Tasman Pest Control of the actual movements of their personnel in the relevant period.  On the other hand, it is  clear  that  Tower  Insurance’s  investigators  did  investigate  with  a  view  to identifying any contractors in the area on the day and were unable to identify the presence of any contractor.   The plaintiffs have failed to establish an evidential foundation for this scenario.

Conclusion: Mr Garnett’s ashes as the cause

[58]     Having regard to the absence of any reasonable level of substantiation of an alternative  cause,  and  the  evidence  establishing that  the  ashes  deposited  by Mr Garnett probably caused the fire, Tower Insurance’s evidence satisfies me that Mr Garnett’s  depositing of  the  ashes  was  undisputably the  cause of  the  fire  on  26

November 2009.

The insurance question

[59]     Tower Insurance must then also satisfy me that Mr Garnett did not have insurance for such an event.  If there is a tenable argument that Mr Garnett’s policy responded  to  the  incident,  then  Tower  Insurance  is  not  entitled  to  summary judgment.

Mr Garnett’s insurance policy

The policy: background to the policy

[60]     There is no dispute as to many of the facts surrounding the insurance policy.

[61]     Mr Kevin Meekan, the chief underwriting manager for Tower Insurance, gave  an  affidavit  through  which  he  provided  the  relevant  background  and documents.

[62]     Mr Garnett and Ms Lynch settled the purchase of the Three Tuis property on

19 December 2002.  It is a 21.6076 hectare block with a 170 sq m house and some farm-related improvements.

[63]     In November 2003 Mr Garnett and Ms Lynch obtained from Tower Insurance a form of farm insurance called a “Provider Farm Policy”.  The policy was thereafter renewed annually.  I will return to some detail of the content of the policy.

[64]     In early-2005 Mr Garnett and Ms Lynch completed the construction of their two tourist cabins on the property.  Ms Lynch, on 1 March 2005, made a five-minute telephone call to Tower Insurance.  The Tower Insurance representative recorded the enquiry in this way:

mrs called.  property now run as tourist venture, advised we are unable to cover commercial such as this.  she will make enquiries elsewhere, and will let us know when to cancel.

[65]     Mr Garnett has deposed that Ms Lynch was told by another prospective insurer that $4000 in annual premiums would be involved, and that he and Ms Lynch decided not to insure the cabins.

[66]     Mr Garnett and Ms Lynch did not subsequently cancel the Tower Insurance policy.  Rather, they continued to renew it annually.  The most recent renewal was on 15 February 2009, still as a Provider Farm Plan Policy.

[67]     Mr Oakley interviewed Mr Garnett twice, first on 27 November 2009 and secondly on 28 November 2009.

[68]     When Mr Garnett was asked in the first interview what damage had been done to his property, he replied:

The tourist unit at the top and the woodshed at the bottom.  The units are not insured at all under the policy.  We had hydroelectricity which is damaged. That is our major loss.

[69]     It is convenient to set out verbatim a lengthier part of the exchange which occurred in the second interview:

I reside at my address at 2454 Glen Hope Road with my partner Tracey

Christine LYNCH.

We have resided at this address for about 6 years in time now.

Q:When you say you are a property owner as an employment, what do you mean?

A:       I build and clean and run the two tourist units and check the e-mails’ and booking every day.  I also have some sheep and I maintain the property which is 50 acres

We have two tourist units which are away from our house on our property.  We rent these tourist units to people for mostly one or two nights, similar to motels I guess.

Q:       So your source of income is the tourist units mainly?

A:       Yes for me, but my wife (Tracey) works full time as a travel agent in Richmond.  The cabins pay the mortgage and really I earn nothing and Tracey is the only earner.

Q:       When was the business set up for the tourist cabins/units? A:        Four year

Q:       Did you ever have the tourist units insured with anyone at all? A:   No.

Q:Is your business Triple Tui Ltd for the tourist cabins insured or ever have they been insured with anyone at all?

A:       No.

Q:What would be you income per year roughly on the two tourist units at present?

A:       It only pays the mortgage there is no profit at all.

Q:You insure you house and contents with Tower Insurance, is that correct?

A:       Both Vehicles are insured with TOWER and out tractor a three bay shed and tools boat trailer and another trailer.

Q:       Why  didn't  you  insure  your  two  tourist  units  and  business  with

Tower Insurance or another insurance company?

A:It was too expensive for us at $4,000 a year to Bed and Breakfast for two units.

…

Q:Other than your house and contents insurance, do you have any other insurance policies at all?

A:       Everything is with Tower.

Q:In relation to property you lost in the fire on 26-11-2009, you main loss  was  an  uninsured  tourist  unit  and  two  wood  sheds  is  that correct?

A:       Yes.

Q:In respect of property that was insured you lost a hydro-electric unit is that correct?

A:Yes.  We also loss the hydro electric unit which is about $25,000 at the time of purchase.   Damage to fences and stuff tools and posts from the sheds.  I'm not sure if the woodsheds are covered, but they were there before the units were built as wood and utility sheds.

[70]     Mr Oakley recorded that Ms Lynch had been present through the whole of the second interview and agreed with what was said in the statement.

The policy: what Mr Garnett and Ms Lynch declared to the insurer

[71]     In 2003 the Three Tuis property was a lifestyle property.  Mr Garnett and Ms Lynch, in relation to their intended policy, answered the following question in this way:

Is any part of your house or land used for any business activity, or do you operate a boarding house or bed and breakfast from this property?

[Answer] No Business Use

[72]     While it is not suggested that Tower Insurance explained their underwriting approach in these terms to Mr Garnett and Ms Lynch, Mr Meekan deposed as to the underwriting relevance of the “business use” question that if dwellings on such property were to be used for commercial purposes then Earthquake Commission (EQC) ratings would be different.  EQC cover is provided only for private residential use.  It was these considerations which informed the nature of policies which Tower Insurance offered.   Hence the advice given to Ms Lynch on 1 March 2005 that Tower Insurance was unable to cover commercial use such as the tourist cabins.

[73]     Against this unpromising background, Mr Zindel was constrained to submit on behalf of Mr Garnett that (assuming, but not accepting that the deposited ash had caused the fire) the incident was covered by the policy.  In particular, the defendants

assert that they have liability protection covering them for the incident through the provisions of Section 4 of the policy.

The policy: liability protection under Section 4

[74]     Section 4 of the policy commences in this way:

SECTION 4 – LIABILITY PROTECTION

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.

If you have liability cover with us under any other policy or section of this policy, then our maximum combined liability for any one claim and during any one period of insurance under all policies is $2,000,000.

Section 4 goes on to provide for special benefits, which I will return to.

[75]     Both in the second defendant’s statement of claim filed in May 2010 and in a draft amended pleading provided at the hearing before me the defendants asserted that Tower Insurance was obliged to provide cover in relation to the fire as “an accident in connection with the first and/or second defendants’ farming operation in Glenhope in New Zealand”.

[76]     Before  me,  the  central  focus  of  counsel’s  submissions  as  to this part  of Section 4 was on the meaning of “business” and of the requirement for “connection” between the accident and the business (Tower Insurance did not suggest that the insured – “you” in Section 4 – did not encompass Three Tuis Limited as well as Mr Garnett and Ms Lynch).

The policy: principles of interpretation

[77]     There was no substantial difference between counsel as to the approach I must adopt in relation to contracts of insurance as a particular form of contract.  The Court of Appeal in Molyneux Holdings Ltd v IAG New Zealand Ltd (2007) 14 ANZ

Ins  Cas  61-733;  76,113  at  76,116  accepted  that  the  rules  of  construction  for insurance policies are the same as for ordinary contracts.

[78]     The approach which represents what might be called the modern approach to contractual construction as set out in Burrows, Finn and Todd Law of Contract in New Zealand (3rd ed, LexisNexis, Wellington, 2007) at 6.2.2(c) leads into a consideration of the authorities which both counsel accepted were the authorities that bind this Court.   That modern discussion begins with the formulation of Lord Hoffman in Investors Compensation Scheme Ltd v West Bromwich Building Society [1998] WLR 896 at 912-913. The statement of law in that case was adopted by the New Zealand Court of Appeal in Boat Park Ltd v Hutchinson [1999] 2 NZLR 74 at

81-82.  It is helpfully expressed so far as surrounding material is concerned in the judgment of the Court of Appeal delivered by McGechan J in Pyne Gould Guinness Ltd v Montgomery Watson (New Zealand) Ltd [2001] NZAR 789 at 799 in which his Honour said:

The best start to understanding a document is to read the words used and to ascertain the natural and ordinary meaning in the context of the document as a whole.  One then looks to the background - to “surrounding circumstances” to  cross-check  whether  some  other  or  modified  meaning  was  intended. Apart from matters of previous negotiation and matters of purely subjective intention as to meaning, both excluded on policy grounds, one looks at everything logically relevant.   At some extremes, background can be compelling.   If background shows natural and ordinary meaning flouts commonsense, natural and ordinary meaning very probably must give way.

[79]     The  Court  of  Appeal  has  recognised  the  limits  of  the  proper  use  of background.  I refer to the judgment of the Court of Appeal, delivered by Fisher J, in Potter v Potter [2003] 3 NZLR 145 at 156 where his Honour said:

[A]lthough a contract is to be interpreted in its factual setting, there is no justification for invoking rules which exist solely to resolve ambiguities in order to create an ambiguity which, according to the ordinary meaning of the words used in the document, is not there…

[80]     Where the Court is satisfied that an ambiguity does exist, the Court has available to it the contra proferentem maxim (full version – verba chartarum fortius accipiuntur contra proferentem).

[81]     As applied to an insurance company, the maxim means that the company which  prepares  documents  for  the  purpose  of  insurance  is  bound  to  make  the meaning  of  them  as  clear  as  possible.     If  the  company  leaves  the  meaning ambiguous, that meaning must be chosen which is the less favourable to the insurer.

[82]     Mr Hern submitted correctly that the contra proferentem maxim represents a principle of construction of “last resort”, to adopt the expression of Mahon J in Smith v National Mutual Fire Insurance Co Ltd [1974] 1 NZLR 278 at 284. But as his Honour observed in the passage immediately following, the doctrine:

… inexorably applies to any ambiguity found to exist in a condition formulated by an insurance company for its own protection.

[83]     These strands were helpfully brought together by Kirby J in his frequently- cited judgment in Johnson v American Home Assurance Co (1998) 192 CLR 266 at [275]:

More recently, it has been accepted that the contra proferentem principle may still be useful where each of the competing constructions is strongly supported by argumentation and where dictionaries and logic alone cannot readily carry the day for either party.   Then, it is not unreasonable for an insured to contend that, if the insurer proffers a document which is ambiguous, it and not the insured should bear the consequences of the ambiguity because the insurer is usually in the superior position to add a word or a clause clarifying the promise of insurance which it is offering.

[84]     It is against the background of these principles that I turn to examine what this contract of insurance says.

The policy: what was Mr Garnett/Ms Lynch’s “business”?

[85]     The starting point for consideration of the liability protection of Mr Garnett and Ms Lynch under Section 4 of their policy (see above at [74]) is the meaning of “business”.

[86]     The word “business” as it appeared in Section 4 was emboldened.   As an emboldened word it was then defined towards the end of the contract in this way:

“Business” means the type of farming operation carried on by you and declared to us.

[87]     Mr Garnett and Ms Lynch were purchasing farm insurance in the form of a contract entitled “Provider Farm Policy”.

[88]     Tower Insurance, in the first narrative in the policy, under a heading “OUR GUARANTEE” advised the policy holders:

If you are not completely happy with your policy, please tell us within 30 days of its commencement date.  We may agree to change the policy to suit you.  If not, and you wish to cancel the policy, you can as long as you have not made any claims.  We will then refund any premium you have paid and we will both regard this policy as never commencing.

[89]     On the next page, under a heading “Welcome!”, Tower Insurance told its policy holders:

We welcome you as a valued client of Tower Insurance.  You have entrusted us with the insurance of your farm.

[90]     Further  on,  under  a  heading  “WHAT  YOU  MUST  TELL  US”,  Tower

Insurance said this:

We would like to point out some of the important obligations under this policy.

It is essential all statements made are correct.  We must receive all relevant information.   This means that you must tell us everything you know, or could reasonably be expected to know, that may influence our decision to insure you.  If any circumstances change or may change during the time we provide your insurance you must tell us.   Examples of a change in circumstances or any other information may include:

•  if the use or occupation of the land at this situation changes to include any business use other than your business;

These examples are a guide only.   If you are in any doubt you should disclose information, whether or not we have asked questions that relate to it.  If we are not told we have the option to decline any claim, or to avoid this policy from the date of the change.

[91]     The policy is then divided into sections.  Section 1 covers farm assets, and includes coverage for farm buildings which Tower Insurance accepted in this case was within the cover.  Section 2 covers the house on the property.  Section 3 covers contents, including business tools.

[92]     Thus far, it is objectively clear that through the policy Tower Insurance was insuring the farm.

[93]     That view of the contract is reinforced by the answer which Mr Garnett and Ms Lynch gave to the boarding house/bed and breakfast question when they purchased the property in 2003 (see above at [71]).  In relation to their house and land, they declared “No Business Use”.  The answer they gave in 2003 was of course entirely correct – the tourist cabins were built two years later.

[94]     As  the  relevant  contract  of  insurance  flows  from  the  annual  renewal  in February 2009, the next intervening event is Ms  Lynch’s five-minute telephone conversation with Tower Insurance on 1 March 2005 (above at [64]).  The relevance of that conversation is not in relation to any subjective view on the part of Ms Lynch as to the meaning of the contract, as that is not an admissible aid to interpretation. The conversation is, however, directly relevant to determine whether Mr Garnett and Ms Lynch had in 2005 declared a different business use in the sense that they had added tourist accommodation to the farming business which had until then been the sole subject of insurance.   It is clear that nothing in the conversation altered the subject matter of the insurance.  It would be more accurate to describe Ms Lynch’s conversation as a disclosure and an inquiry rather than a declaration.  A declaration assumes that Tower Insurance has a policy to offer and that the insured declares the nature of his or her business whereupon Tower Insurance can offer terms of insurance.  In 2005 Tower Insurance, upon Ms Lynch’s disclosure that the property was now run as a tourist venture, indicated in the clearest terms that commercial cover such as that was not available from Tower Insurance.  Ms Lynch’s disclosure did not become a declaration for the purposes of insurance cover.  Rather, Ms Lynch made it clear that she and Mr Garnett would pursue cover for the tourist venture elsewhere.

[95]     Accordingly, when the policy was removed on 15 February 2009, I find that the “business” referred to in Section 4 of the policy was the business of lifestyle farming as declared by Mr Garnett and Ms Lynch in 2003.

The policy: what is an accident in connection with the Garnett/Lynch lifestyle farm business?

[96]     It is convenient to quote Mr Zindel’s submission arising from the requirement that any cover for an accident under Section 4 of the policy has to have been “in connection with” the defined business.  In the event that the Court found the ashes were indisputably the cause of the fire, then Mr Zindel submitted this:

… the actions of [Mr Garnett] as farm manager and occupant in removing and disposing of ash to the ground were actions properly in connection with the insured’s business even if the ashes themselves came as waste product from the operation of an adjunct to the farming business.   Meanings of connection in the Oxford English Reference Dictionary include: “A link, a relationship or association…”   There is surely a connection between two cabins located on a farm, catering for farm tourists… with the operation of the farm itself.  The position of the two cabins may be seen in Mr Noble’s report… as forming two points of an upside down triangle with the main residence being the apex and the triangle spanning tracts of farmland.

[97]     Mr Hern submitted that Mr Garnett was straining the ordinary and natural meaning of the policy.  He submitted that the operation of tourist cabins could not conceivably be described as a farming operation.   He submitted that the fire was occasioned by Mr Garnett undertaking work in connection with the tourist venture, namely cleaning the wood-burner out after the departure of tariff-paying guests.

[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 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.

The policy: tourist cabins and utility sheds not covered

[102]   Mr Garnett does not suggest that the buildings comprising the two tourist cabins were covered for damage.  Equally, he does not contend that two utility sheds which were destroyed in the fire, were covered.  That was because those buildings had not been declared to Tower Insurance and cover had not been obtained for them. It is consistent with that approach that I should find cover was also not obtained for the consequences of the tourist accommodation business, which had equally not been declared to Tower Insurance.

[103]   I conclude that the defendants do not have an arguable case as to cover under the primary liability protection provisions of Section 4 of their policy.  That leaves the suggestion that they might have cover for special benefits.

The policy: do the defendants have cover for special benefits in relation to Forest and Rural Fires Act liability?

[104] Beyond the primary cover provided under Section 4 (for compensatory damages for injury or property damage) there are special benefits which are covered and defined in the balance of Section 4 of the policy.

[105]   Mr Zindel relied on two particular provisions, the first of which relates to liability under the Forest and Rural Fires Act.  It is worded thus:

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.

[106]   It was Mr Zindel’s submission that this provision is appropriately worded as an “extension” because it extends rather than limits or describes the “main” cover at the start of Section 4.   In short Mr Zindel submitted that this is additional cover, unaffected  by the  requirement  that  the  damage-causing accident  should  arise  in connection with the business for which liability protection was obtained.

[107]   In considering this submission I note that the first cause of action against the defendants is indeed pursuant to s 43 Forest and Rural Fires Act.  It is in relation to that cause of action that Mr Zindel’s submission arises.  The plaintiff also sues the defendants for compensatory damages in the tort of negligence.   Mr Zindel’s submission cannot extend to that cause of action, which is unrelated to the Forest and Rural Fires Act.  The liability in tort falls squarely to be determined by the primary provisions of Section 4 and is not covered for the reasons I have already stated.

[108]   Against  this  background  I  can  recast  Mr  Zindel’s  submission  into  this question:

Although Mr Garnett’s liability to pay damages for the tort of negligence is not covered by Section 4 of the policy because the accident was not in

connection with the declared business, is Mr Garnett nevertheless covered by the extension to Section 4 for Forest and Rural Fires Act liability connected with a business other than that declared to Tower Insurance?

[109]   At the heart of Mr Zindel’s submission was the proposition that the activity covered by the Forest and Rural Fires Act extension covered any activity of the property owner or occupier, regardless of its connection or disconnection with the business declared to Tower Insurance.  Mr Zindel correctly referred to the fact that in other special benefit extensions there is an express relationship to the business.  For instance the “fines and legal defence costs” extension is in relation to fines and other imposts “as a result of an occurrence arising from your business”.  Similarly, the “overseas visits” extension relates to legal liability following accidents arising during overseas visits “on business by you or your employees”.

[110]   As Mr Zindel submitted, two of the thirteen extensions under Section 4 make specific reference to the business.   Mr Zindel, by implication invites the Court to conclude as a matter of interpretation that the failure to include a connection to the business in other extensions excludes that  requirement in those extensions.   By examining the other extensions, I do not find such a principle of interpretation to be helpful in relation to Section 4 of the contract.   When read in their entirety, the extensions are predicated upon the operation of the farm as a farm and/or a farming business.  There is nothing of strength to suggest that the connection with business required by the primary provisions of Section 4, to which the extensions relate, is intended to drop away for the purpose of the extensions.

[111]   The correct approach to interpreting the Forest and Rural Fires Act, as well as other extensions, can be illustrated by the first three extensions.   First, there is an extension for the bailee’s liability “for goods in your physical and legal control up to

$10,000”.  That cannot reasonably be taken to be an extension for goods which the insured have on bailment in connection with a business other than the business of farming.  The insurer cannot be taken in terms of that extension to have intended to cover whatever business, borrowing whatever goods.

[112]   The  second  extension  relates  to  customers’  or  visitors’  motor  vehicles. Again, it is clearly implicit that the insurer is not providing insurance cover in

relation to customers of a business other than that declared by the insured.   The customers are clearly customers of the business referred to in the primary provision of Section 4, being customers of the farm business.

[113]   The  third  extension  relates  to  employer’s  liability.    Again,  no  express reference is made to the farming business.   But no objective assessment of the intention of the parties through this provision would lead to a conclusion that the insurer  was  providing  insurance  in  relation  to  the  employees  of  a  business undeclared by the insured to Tower Insurance.   If Mr Zindel’s submission were correct, the cover under this third extension would have covered employees in a high-risk operation established by the insured on their farm but undeclared to the insurer.

[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.

[115]   I do not find it arguable that the Forest and Rural Fires Act liability extension covers the defendants in relation to the fire in question.

The  policy:  are  the  insured  covered  by  the  Personal  Liability  extension  under

Section 4 of the policy?

[116]   The personal liability extension to Section 4 provides:-

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

[117]   It is the defendants’ contention that the special benefit for personal liability covers the fire in this case.

[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”.

[119]   I  find  no  merit  in  this  submission.    The  cleaning  of  the  cabin  and  the depositing of the ash were clearly related to a business in which customers paid for accommodation.   Mr Zindel’s submission is tantamount to suggesting that Mr Garnett’s conduct should not be related to his business activities because he was acting in an un-businesslike manner.  While the objective observer might view the latter comment as true, it is simply incorrect to therefore view the depositing of the ashes as unrelated to a business activity.

[120]   The personal liability extension cannot arguably cover the defendants in this case.

The policy: the contra proferentem principle

[121]   The contra proferentem principle applies, as I have recited above at [80] to [83], where ambiguities exist.  This case is not one in which the Court is unable with dictionaries and logic alone to interpret the insurance contract.  The circumstances for adoption of the contra proferentem rule therefore do not arise for the reasons enunciated by Kirby J in Johnson (above at [83]).

Is s 11 Insurance Law Reform Act 1977 applicable?

[122]   The application of s 11 Insurance Law Reform Act was not addressed in the defendants’  notice  of  opposition  to  the  summary judgment  application.    It  was

nonetheless addressed by both counsel in their submissions and I therefore deal with it.

[123]   Section 11 Insurance Law Reform Act provides:

11       Certain exclusions forbidden

Where—

(a)By the provisions of a contract of insurance the circumstances in which the insurer is bound to indemnify the insured against loss are so defined as to exclude or limit the liability of the insurer to indemnify the insured on the happening of certain events or on the existence of certain circumstances; and

(b)In the view of the Court or arbitrator determining the claim of the insured the liability of the insurer has been so defined because the happening of such events or the existence of such circumstances was in the view of the insurer likely to increase the risk of such loss occurring,—

the insured shall not be disentitled to be indemnified by the insurer by reason only of such provisions of the contract of insurance if the insured proves on the balance of probability that the loss in respect of which the insured seeks to be indemnified was not caused or contributed to by the happening of such events or the existence of such circumstances.

[124]   For Mr Garnett, Mr Zindel submitted in this case that by confining the public liability protection to the defendants’ farming business, the policy had “excluded or limited the liability of the insurer” in terms of s 11 of the Act.

[125]   For  Tower  Insurance,  Mr  Hern  submitted  that  s  11  of  the  Act  has  no application in relation to the policy in the present case and cannot have a redemptive effect on the defendants’ claim.   It was his submission, based on New Zealand authority, that s 11 of the Act does not apply to insurance policy provisions, such as the present, which prescribe the scope of the insuring promise or operative clause.

[126]   Reference may be made to two cases in particular.

[127]   In Barnaby v The South British Insurance Co Ltd (1980) 1 ANZ Ins Cas

77,003, a policy for the replacement cost of walls had excluded liability in respect of “fault, defect, error or omission in design”.   The Court found that a wall collapse which had occurred was due to fault or defect in design.  In giving judgment, Hardie

Boys J at 77,008 then turned to s 11 of the Act, which the plaintiffs had invoked. His Honour found:

The section is not designed to deal with exclusion clauses which specify the kind of loss or the quantum of loss to which the cover does not apply at all. The latter is the case here.   The exclusion clause in question is one of a number, all of which specify kinds of loss (e.g. damage to motor vehicles, destruction caused by nuclear weapons or insects) or of amounts of loss (e.g. the first $25 of each claim) that are not covered.  A “fault, defect, error or omission in design” is not a circumstance the existence of which excludes liability on the part of the insurer for a loss otherwise covered, nor is it a circumstance likely to increase the risk of occurrence of a loss otherwise covered – it is a kind of loss which the policy does not cover at all.   I therefore accept Mr Upton’s submission that this section has no application to the present case.

[128]   In Hall v FP North Ltd (in liq) (2010) 16 ANZ Ins Cas 77,946, this Court followed Barnaby.   In that case, the defendant investment advice company had an Investment Advisers  Endorsement on its policy which provided that  the insurer would not indemnify the insured in relation to claims arising out of depreciation in the value of any investments.  In following Barnaby, Associate Judge Abbott took the view that the investment advisers endorsement defined the scope of cover under the policy rather than events or circumstances which excluded a liability which otherwise existed.  His Honour observed, at [25]:

The principle to be taken out of Barnaby is that s 11 does not apply to exclusion clauses which determine the scope of cover under an insurance policy  by  specifying  a  kind  of  loss  or  quantum  of  loss  that  is  not indemnified. It is intended to apply to clauses which purport to exclude liability for a loss that is otherwise covered.

[129] I respectfully adopt the above conclusions.   Both Courts reached their conclusions upon analysis of the statutory provision.  To me, the conclusions also accord with commonsense in a situation such as the present.  The insured apply for and obtain a policy which covers their farming business and not an accommodation business.  The insured then develop an accommodation business and make a decision not to obtain specific cover for that business.   When the contracting parties have chosen the activities that will be covered by the policy, there can be no compelling argument in terms of fairness to the consumer to justify an interpretation of s 11 of the Act which extends cover to a business activity which the parties did not agree would be covered.

[130]   For  the  defendants,  Mr  Zindel  in  this  context  again  identified  what  he submitted was the close relationship between the farming operation and the accommodation business – the latter being “very much tied up with the operation of the farm”.   As such, he submitted, it may be that for Tower Insurance the accommodation business “increased the risk of… loss occurring” in terms of s 11(b). He submitted that the defendants were entitled to have explored at a trial the factual issue  as  to  whether  the  risk  of  loss  had  been  increased  by the  accommodation activity.

[131]   I find that while a risk examination could clearly be carried out in the way Mr Zindel contends, the analysis is in fact irrelevant and would be academic for the reasons identified by this Court in Barnaby and in Hall.

[132]   Mr  Zindel  referred  me  to  disapproval  of  Barnaby  in  Kelly  and  Ball,

Principles of Insurance Law in Australia and New Zealand (Butterworths, Sydney,

1991) at 275.  At [6.146] the authors had referred to the conclusion in Barnaby that s

11 does not apply to clauses that specify the kind of loss to which the cover does not apply at all.  At [6.147] the authors went on to state:

But there is nothing in the section to justify that conclusion.  The exclusion was part of the definition of the risk.  It excluded the insurer’s liability by reference to certain circumstances.

[133]   Mr Zindel was referring the Court to an earlier edition of Kelly & Ball.  In the current (looseleaf ed, LexisNexis) edition, the parallel discussion in relation to the New Zealand legislation is dealt with at [5.0190.25].  The authors have brought the  commentary  up-to-date  to  include  reference  to  the  decision  in  Hall.    The rejection of Barnaby in the previous edition (above [132]) is softened but arguably still there in these words:

The main purpose of the section was to modify the effect of temporal exclusions. However, the wording of the section is much wider than that.

[134]   I find a parallel in the approach urged on me by Mr Zindel to that which appears to continue to find favour with the authors of Principles of Insurance Law. By reference to the “strict” words of s 11 of the Act, they would assert justification

for imposing upon an insurer a liability in relation to a type of business which the parties to the insurance contract did not intend to cover.

[135]   Reference may be made to other commentaries which appear to recognise the validity of the distinction drawn in Barnaby and in Hall.

[136]   For instance, in Australian and New Zealand Insurance Commentary (online looseleaf ed, CCH Australia) at [14-140] (in relation to the New Zealand position) the commentators say:

… the section speaks in terms of the insurer’s definition of the cover in a way that limits or excludes loss and it will be necessary in some cases to distinguish carefully between claims that are outside the general scope of the insuring promise, which are not the subject of the section, and those that are within  the  general  scope  but  where  some  limit  or  exclusion  has  been imposed in respect of particular risks within that scope, which are within the section… [reference then being made to Barnaby and to Hall]

[137]   Similarly, in Tarr and Kennedy Insurance Law in New Zealand (2nd ed, The Law Book Company, Sydney, 1992) at 151-152 the authors refer to Barnaby as an “important case” in which the learned Judge had concluded that s 11 had no application to the case at all, as the loss which had occurred was not covered by the policy.

[138]   I respectfully adopt the conclusions in Barnaby and in Hall.  Section 11 of the Insurance Law Reform Act is inapplicable in this case.   It does not operate to give the defendant cover for a business which Tower Insurance had not agreed to cover.

Judgment

[139]  I order that judgment be entered for the third party against the second defendant.

[140]   The second defendant is to pay the third party’s costs on a 2B basis together with disbursements to be fixed by the Registrar.

[141]   I direct the Registrar to convene a joint telephone conference of counsel in this proceeding and in CIV-2010-442-000396 at 4 p.m., 13 December 2010. Notwithstanding the order contained herein, I request that counsel for the third party, for the convenience of the Court, also attends that conference so that any residual matters affecting the third party may be dealt with.  I direct counsel for the plaintiffs and  the  defendants  to  confer  before  that  conference  with  a  view  to  identifying

appropriate directions to be made at the conference.

Associate Judge Osborne