Composite policies: a legal wake-up call for insurers
The Court of Appeal of England and Wales recently handed down a significant ruling on composite policies in the context of COVID-19 business interruption claims. In its judgment, the court confirmed that composite policies should be treated as separate contracts of insurance for each insured, meaning policy limits apply individually rather than in the aggregate. This interpretation has critical implications for insurers, particularly in how claims are assessed, and coverage limits are determined.
In their article, Court of Appeal Rules on Composite Policies in COVID-19 Business Interruption Claims, Sandra Sithole (Partner) and Rethabile Shabalala (Senior Associate) of Webber Wentzel highlighted the legal reasoning behind this judgment and its impact on the insurance industry. The case underscores the importance of precise policy wording to avoid ambiguity and unintended liabilities.
Expanding on this topic and its relevance to the South African insurance market, FAnews spoke to Shabalala & Sithole about the broader implications of this ruling, how insurers should reassess their policies, and what it means for underwriting, claims, and regulatory considerations.
Significance of the case for insurers and policyholders
The significance of this decision lies in its provision of clear guidance on the interpretation of composite policies. The ruling confirms that such policies should be treated as a series of separate contracts of insurance, with each insured treated individually. Sithole explained, “This clarification helps insurers understand how to structure and word their policies to avoid ambiguities and potential disputes relating to policy coverage issues.”
This judgment is crucial because it affects how insurers calculate their potential liabilities and manage their risk exposure under composite policies. The court made it clear that the policy limits apply separately to each insured, rather than as an aggregate limit across all insureds. This decision will impact how insurers assess risks and manage claims going forward.
Composite versus standard insurance policies
One of the key takeaways from the ruling is the distinction between composite policies and standard insurance contracts. Composite policies are designed to cover multiple insured parties, each treated separately with distinct rights and obligations. This means that if one insured party violates a policy condition, it does not necessarily affect the coverage of others. Shabalala highlighted, “Composite policies are most common in business and corporate insurance, such as group liability or multinational coverage.”
In contrast, standard policies typically cover a single insured party or entity, with all insured risks managed under one set of terms and conditions. A violation of the policy conditions by the insured party may void the entire policy. This distinction is important for insurers because it impacts how coverage limits, deductibles, and risk exposures are applied.
The ruling also draws a distinction between composite and joint policies. While both policies cover multiple parties, a composite policy treats each insured individually, whereas a joint policy insures multiple parties with a shared interest in the subject matter. “The distinction between the two is key because, depending on the wording, it has implications on the limits of indemnity that apply to claims, the application of deductibles, and the way in which the conduct of the different insureds has on one another,” Sithole explained.
Implications for South African insurers and courts
The ruling serves as a reminder to South African insurers to ensure that their policy wording accurately reflects the intentions of the parties involved.
According to Shabalala, “In certain instances, a joint policy makes practical and financial sense for policyholders who share interests and profits. In other instances, such as in this case, a composite policy is more suitable.” These decisions must be made at the underwriting stage to ensure that policyholders are given the most appropriate cover and that insurers are fully aware of the risk they are agreeing to indemnify.
Regarding the potential impact of the ruling on local courts, Shabalala pointed out that South African courts are already aligned with this judgment. “There was a recent judgment in the case of AIG South Africa Limited v 43 Air School Holdings (Pty) Ltd and Others, which dealt with similar facts. The Supreme Court of Appeal stated that the mere fact that there are several entities insured under one policy does not mean that the policy is a joint policy.” The court emphasised that the nature of the interest in the subject matter of the insurance is the determining factor for whether a policy is joint or composite.
Key risks and how to manage them
With this ruling in mind, insurers must be aware of the risks involved when structuring composite policies. One of the key risks highlighted by Sithole is that “each insured's claim must be assessed independently.” This ensures that insureds receive the full benefit of their coverage without being affected by the claims of other insureds. Policyholders must comply with the terms of the policy and file separate claims, even if they share a policy with others.
Brokers also have a crucial role to play. Shabalala emphasised, “Brokers must advise policyholders of the implications of obtaining cover under a composite policy, including the extent of coverage available and the consequences of failing to comply with policy obligations.”
Claims assessment, exposure, and regulatory considerations
Going forward, claims handlers and loss adjusters will need to assess each insured's claim independently, applying the policy limits and deductibles separately to each insured. As Shabalala explained, “On this basis, each insured should be able to claim up to the policy limit for their individual losses, without the limits being aggregated across all insureds unless the policy wording specifies otherwise.”
While this interpretation could lead to more claims being made, it is unlikely to result in increased claims exposure for insurers. Sithole explained, “Insurers merely need to be clear about their intention when underwriting composite policies. Because policy limits apply separately, insurers can manage their risk appropriately.” By ensuring clarity in policy wording, insurers can continue to effectively manage their liabilities.
When asked if regulatory bodies would weigh in on composite policy wording, Shabalala responded, “Not likely. Each case will be dealt with on its own facts and will largely depend on the particular policy wording.” This suggests that regulatory intervention may not be needed, as the interpretation of these policies will remain a legal issue to be determined by the courts.
In conclusion, this ruling serves as a reminder of the importance of precise policy wording in the insurance industry. For insurers, brokers, and policyholders, the biggest takeaway from this ruling is the importance of clarity in policy wording. By understanding the implications of composite policies and carefully considering the structure of their policies, insurers can better manage their risks and provide clear coverage to their clients.
Writer’s Thoughts
This ruling underscores the need for insurers to ensure precise policy wording to mitigate ambiguity and prevent disputes. For South African insurers, it highlights the importance of carefully evaluating the structure of composite policies to align with both legal and financial objectives. Do you agree? Please comment below, interact with us on X at @fanews_online or email me your thoughts [email protected].
