SCA rules on BI indemnity period

19 October 2021 Gareth Stokes

On 7 October 2021, the Supreme Court of Appeal of South Africa (SCA) finally handed down its judgement to ‘cement’ legal certainty on the indemnity period applicable to pandemic-related contingent business interruption (CBI) covers underwritten by Santam. The judgement in Santam Limited v Ma-Afrika Hotels (Pty) Ltd & Another ended a months-long legal wrangle that first had to establish what constituted a valid claim under CBI covers issued by Santam’s Hospitality & Leisure division, and then determine the indemnity period that applied.

Setting the scene for a court challenge

“The SCA has handed down judgment dismissing, with costs, an appeal against the decision of the Western Cape (WC) Division of the High Court of South Africa, Cape Town,” writes the Registrar of the SCA. “This appeal concerned the applicable indemnity period in relation to business interruption losses under insurance policies”. The judgement also offered brief insights into the matter of whether or not Ma-Afrika was indemnified in relation to the outbreak of contagious disease by revisiting the high court’s original conclusions in that regard. According to the SCA, the insurable event in terms of Ma-Afrika’s policy was the outbreak of a ‘notifiable disease’ at or within a 40 km radius of the establishment. 

In November 2020, the WC High Court ruled that Covid-19 and government’s response to the disease were an inseparable part of the same insured peril and that the breakout of a notifiable disease, whether reported to a local or national authority, always came with the risk of a government response. In other words, government’s response was part of the insured peril of notifiable diseases. The WC High Court ruling drew on the UK High Court’s interpretation of various policy clauses to firm up their view on causation. “The UK High Court concluded that most of the causation issues raised [by the respondents] fell away upon concluding that the nationwide outbreak of COVID-19 and the resulting government and public response formed a composite peril,” they wrote. 

Seeking a 6x policy indemnity period

Santam took the high court ruling on appeal, because it was not happy with the interpretation around causation and the insured peril, the trends clause and the indemnity period. The court had ordered Santam to pay its insured for loss of profits over a period of 18 months, without limitations… “According to Santam, the policy defines an indemnity period as commencing with the damage as contemplated, which results in the loss, and ends ‘not later than the number of months thereafter stated in the schedule during which the result of the business shall be affected in consequence of the damage,” writes the Registrar of the SCA. And this, claimed the insurer, meant that the maximum period of the indemnity should be limited to just three months, which was the term stated in a ‘memorandum’ to the BI section of the policy. Ma-Afrika contended that the indemnity period was 18 months. 

It is difficult to write up a summary of a complex court judgement, so we have pulled some key comments from the Registrar of the SCA’s summary of the case. Observations include: 

  • The first step in interpreting the policy, was to determine what policy sections were in force. In Ma-Afrika’s case, their policy schedule showed that a Business Interruption Section was included.
  • The second step was to “consider the perils which might result in business interruption, in respect of which the insured would enjoy insurance cover”. It is not in dispute that notifiable infectious diseases were among the perils under the BI section.
  • The third step, was to consider for which losses following from a business interruption due to a notifiable disease the insured would receive cover. Per the Main Schedule, the court surmised that loss of revenue and the additional increase in cost of working that ensued from that would be covered.
  • As for the indemnity period, the Main Schedule mentioned that an indemnity in relation to those losses would extend for a period of 18 months. 

The policy wording is gospel

The SCA held that the words under the Section in the memorandum should be understood to refer to the ‘Extensions and Clauses’ section within the second large block of the Schedule, and not as contended by Santam, to the first block. The registrar wrote: “In the court’s view, the indemnity period in relation to claims for loss of revenue due to business interruption, ineluctably, was 18 months. In any event, given that the policies were admittedly difficult to navigate, and assuming, at best for Santam, that there was a meaningful degree of uncertainty concerning the indemnity periods, a conclusion might be reached that on that aspect the policies were ambiguous”. And as most insurance stakeholders know, ambiguity is resolved in favour of the insured, per the long-standing contra proferentem rule. 

Santam has since issued a SENS announcement in which it noted the judgement. “Santam has noted today’s judgment on the length of the indemnity period to be applied to the Ma-Afrika Hotels and Stellenbosch Kitchen policies with CBI extensions,” they wrote. “We accept the outcome of the appeal, which provides the legal clarity we were seeking”. The insurer has undertaken to finalise claims that are directly impacted by the SCA judgment, which amount to fewer than a third of the 3200 notified claims. Gross CBI claim payments to end-August 2021 now total more than R2.1 billion. Santam also indicate that, based on the CBI claims settled and the expected reinsurance recoveries, no adjustment to its net CBI claims estimate of R1.7 billion was expected. 

Public trust will suffer a big hit!

All good then? We accept the insurer’s right to seek legal certainty; but wondered whether some of the drawn out court action could have been avoided by simply taking a more pragmatic approach. One of the SCA observations leaves a bit of a sour taste for those who take the trust factor in insurance to heart. The SCA pointed out that there was some force in the argument on behalf of Ma-Afrika and the Stellenbosch Kitchen that “Santam had twisted and turned and changed tack in order, studiously, to avoid liability”. Much distrust and heartache could have been avoided had all local insurers simply made swift pay-outs on pandemic-related CBI claims when the claims were first notified. 

Writer’s thoughts:
My gut tells me that much of the 2020/21 CBI claims debacle could have been avoided had brokers, insurers and reinsurers paid closer attention to policy wordings pre-pandemic. Santam has since indicated that it will be reviewing BI policies to prevent future uncertainty; but the damage is already done. With hindsight, should insurers have simply paid CBI claims rather than seeking legal certainty through the courts? Please comment below, interact with us on Twitter at @fanews_online or email us your thoughts [email protected]



Added by Gareth Stokes, 26 Oct 2021
Thanks to @Jan & @Brian for sharing your thoughts. It must have been hell for the executives making the call on these pandemic claims… One cannot fault insurers for seeking clarity given the size of their exposures; but the uncertainty their decisions introduced, and the perception it caused among insureds, has caused tremendous harm insofar consumers’ trust in the sector.
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Added by Jan Schubart, 19 Oct 2021
I am in agreement that had the policy wording been correctly read and interpreted, there would have been no reason for the waste of all the litigation costs. Insurers should have heeded the "rules" of interpreting the policy.

A shame on the industry for not being sufficiently capable of basics in our market.
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Added by Brian Oxley, 19 Oct 2021
I remember being told during my training as an underwriter "if there are 90 reasons not to pay and 1 reason to pay...then you pay. It is what we do"
The judgement Is a clear warning that policies are getting to complicated and we have lost sight of our primary role of indemnifying our clients.
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