A recent High Court decision, IAG New Zealand Ltd v Aubrey, delivers a pointed reminder to insurers: ambiguous exclusion clauses will be construed against the party that drafted them - and standard form wording that has served an insurer well in one policy may not carry the same meaning in another.
The Court’s application of that principle to a clause excluding the cost of “fixing faulty workmanship” shows just how carefully insurers must approach exclusion drafting. Language that appears straightforward on its face may, when read in the context of a particular policy type, yield a meaning that is considerably narrower – and more favourable to the insured – than the insurer intended.
The decision is also a timely reminder that an insured’s decision to refer a dispute to the Insurance and Financial Services Ombudsman (IFSO) does not foreclose the insurer’s access to the courts. IFSO’s own Terms of Reference expressly contemplate that a participant may institute High Court proceedings to resolve a disputed interpretation issue by way of declaratory judgment – a pathway that this Court confirmed, in an earlier case, is consistent with the Scheme’s rules.
Background
As part of the construction of a new home in Twizel, the Aubreys engaged Infinite Energy Ltd (IEL) to supply and install a solar PV system on their roof. In the course of the installation, IEL’s workers dented several roof sheets, causing damage of $96,651.98. The Aubreys held an NZI Contract Works – Single Project policy with IAG, covering the period of the building works.
IAG declined the claim, relying on faulty workmanship exclusion (FWE) in the policy, which provided that the policy did not insure the cost of “fixing faulty workmanship.” This was subject to a proviso, stating that the exclusion did not apply to “any resultant sudden and accidental loss to separate insured property or to other parts of the same insured property arising from [the faulty workmanship].”
The Aubreys challenged IAG's declinature before IFSO. IFSO found in the Aubreys' favour, concluding that the claim fell within the exception to the FWE and that IAG was required to meet it.
IAG seeks declaratory relief from the High Court
Rather than accepting IFSO’s determination, IAG commenced High Court proceedings seeking a declaratory judgment on the correct interpretation of the FWE and its proviso. IAG gave the undertakings prescribed by IFSO’s terms of reference (i.e. IAG agreed to pay the Aubreys’ claim in full on a without prejudice basis and agreed to meet their costs on a solicitor and client basis) and pursued declaratory relief. Both the FWE and its proviso were standard language used across a number of IAG policies.
However, ultimately, the Court preferred the position advanced on behalf of the Aubreys, finding that the “cost of fixing faulty workmanship” is limited to the cost of redoing that primary task – not the cost of repairing consequential physical damage caused to other parts of the property in the course of the works. In reaching this decision, the Court noted the difficulties in drawing a distinction between work integral to the performance of the contract and extraneous activities, and referred to other exclusion wordings which could have been used to clearly exclude claims of this nature. The Court also commented that, while the Court of Appeal had adopted a broad interpretation of the word “workmanship” in TimTech, that case concerned the interpretation of a general liability policy – and the same definition did not apply to the contract works policy at issue.
The High Court's decision
IAG argued for a broad interpretation of "workmanship", drawing on the Court of Appeals definition of TimTech Chemicals Ltd v QBE Insurance (International) Ltd, which had described workmanship as "the combination of the skills directed at completing the relevant contractual obligation", covering "the whole physical responsibility of performing the contracts." On that basis, IAG contended that "workmanship" extended to integral protective or preventative measures undertaken in the course of performing the primary contractual task - such as the obligation to protect the roof sheets while carrying equipment across them - but drew a distinction between those integral responsibilities and genuinely extraneous activities giving rise only to a general duty of care.
The Court declined to make a declaration on the meaning of the proviso, noting that there was not enough material before the Court for it to be comfortable that unintended consequences would not flow from a declaration.
This aspect of the case carries an important practical reminder for insurers: an IFSO determination does not foreclose the option of seeking clarification from the courts. Where a policy interpretation question has wider ramifications for an insurer’s book of business, declaratory relief remains available under IFSO’s terms of reference.
What this means for insurers
1. Clarity in drafting is essential
The Court’s decision is a reminder that ambiguity in exclusion clauses will be resolved against the insurer. Where the text of an exclusion is unclear, New Zealand courts will apply the contra proferentem principle — construing the ambiguity narrowly, against the party that drafted the relevant clause.
The practical consequence is clear: if insurers do not intend to cover consequential damage caused incidentally in the course of faulty workmanship, that intention must be expressed in clear and unambiguous terms. It cannot be assumed that a word used in one policy type will have the same meaning across other policy types.
2. IFSO determinations are not the final word
This case is also a timely reminder that the IFSO complaints process is not the end of the road for insurers who disagree with a determination. Where a policy interpretation question has material implications for an insurer’ wider business, seeking declaratory relief from the High Court remains available.
Insurers facing adverse IFSO outcomes should consider carefully whether the issues at stake warrant further engagement with the courts, particularly where the policy language in question appears across multiple products of the same type.
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