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Insurers must pay COVID-19 BI claims

19 November 2020 Gareth Stokes

The Western Cape High Court has fired the latest shots in the “will non-life insurers be required to pay pandemic-related business interruption (BI) claims” debate. In a 17 November 2020 ruling, the High Court instructed Santam to indemnify Ma-Afrika Hotels & The Stellenbosch Kitchen “for such losses that they were able to prove to have suffered as a result of loss of revenue occasioned by the occurrence of a notifiable disease in the form of COVID-19”. The High Court indicated that the applicants had established their “existing contractual right to indemnity under the infectious diseases clause to their policies” before confirming an indemnity period of 18 months. Santam was ordered to pay the costs of the Court application, including the cost of three counsel.

Will this go to the Supreme Court?

Santam has indicated that any challenge to the High Court ruling would be subject to a close examination of its decision. One aspect that may influence an appeal decision is that the High Court did not deem it necessary to deal with their argument re the development of the common law pertaining to insurance contracts. “The Court is satisfied that the applicants have established the necessary conditions precedent for the exercise of the Court’s discretion in their favour,” they wrote, noting that they had not considered Santam’s alternative argument. Another influencer will be the High Court’s extensive reference to the test case before the UK courts, namely The Financial Conduct Authority v Arch Insurance (UK) Limited and Others. The UK Supreme Court has expedited an appeal hearing in this case, set down for hearing over four days, beginning 16 November 2020. 

South Africa’s non-life insurers have been fairly consistent in their position on whether or not to pay BI claims. Santam once again argued that the Covid-19 pandemic may have resulted in the interruption of the applicants’ businesses; but did not trigger liability for cover under the policies. In other words, to determine if an insured is covered for a BI loss requires a close examination of the policy wordings and the application of legal principles. Santam’s position was that cover for infectious diseases was “limited to causative events that are local to the insured premises”. What should have happened for a valid claim against their BI extension? 

Understanding the insured peril

Santam believes that it is necessary to identify the insured peril with reference to the policy wording before establishing whether the insured peril is the proximate cause of the business interruption and subsequent loss. Per the High Court papers: “Santam emphasised that the proximate cause is the dominant effective or operative cause of the loss”. Those among us who have watched the BI saga unfold will be familiar with the proximate cause defence. It holds that “although COVID-19 may have been widespread, the extension requires that the local occurrence of a notifiable disease must cause the interruption of the applicants’ businesses and losses”. Santam did not consider the global pandemic and ensuing national lockdown, the proximate cause for the interruption, to be insured perils under their BI extension. 

This argument is similar that made in Café Chameleon versus Guardrisk, namely that the infectious disease extensions on the policy do not provide cover for global pandemic or its consequences, including government-imposed lockdowns. Santam was critical of the 26 June 2020 High Court decision against Guardrisk and included four main criticisms in support of its arguments. The first was that no particular attention was given to the language of the policy, the local nature of the insured events or the requirement that the notifiable disease peril which caused the loss should be one occurring within a prescribed radius. The second was that Café Chameleon’s business interruption and loss was a direct result of the lockdown regulatory regime, meaning that the High Court in that matter had identified the wrong counterfactual. “The High Court [in the Guardrisk matter]dealt with factual causation by finding a clear nexus between COVID-19 and the regulatory regime that caused the business interruption,” explained Judge Cloete, in his concurring arguments. 

‘But for’ and the proximate clauses

Santam’s third criticism of the Guardrisk judgment was that the Court, in finding legal causation was established, failed to consider whether the local occurrence of COVID-19 was the dominant and therefore the proximate cause of the loss. Santam argued that this was an incorrect approach in determining legal causation in insurance contracts. The final primary criticism was that “the High Court in Café Chameleon did not consider the trends clause”. Santam submitted that this clause was relevant to the construction of the policy and supported an interpretation that the insured peril must have caused the business interruption loss, applying the ‘but for’ test. 

Judge Cloete shot down each of Santam’s criticisms; but not before sharing some Insurance 101 re the well-established approach to causation in insurance contracts. “This requires that ‘but for’ the insured peril the loss would not have occurred, being factual causation, and that the insured peril is the proximate cause of the business interruption and loss, being legal causation,” he wrote. 

The ‘trends clause’ argument was also dealt with in the main judgement. The Western Cape High Court said it agreed with the approach taken by the UK High Court in the FCA test case. It wrote: “It is clear from the [UK High Court] judgment that the nature and extent of the insured peril is key for both causation and the trends clause. The Court defined the insured perils under disease clauses broadly to include the impact of the nation-wide pandemic, such that when analysing causation and trends clauses in relation to that cover, the counterfactual essentially excluded a world without COVID-19”. The SA High Court’s conclusion in this regard is as likely to rally further appeals as it is to stop them in their tracks, namely that an insured peril under a disease clause is of a ‘composite nature’. 

The full indemnity period applies

Ma-Afrika and The Stellenbosch Kitchen also petitioned the High Court for a declaratory order that the indemnity periods under their policies was for 18 months. Their policy wordings defined the indemnity period as: “The period beginning with the commencement of the damage and ending not later the number of months thereafter stated in the schedule during which the results of the business shall be affected in consequence of the damage”. This was indicated in the policy wordings as 18 Months. In what could become a victory for Treating Customers Fairly advocates, the High Court criticised the inconsistent inclusion of a secondary three month indemnity period, applicable to various policy extensions, but tucked away at the end of the schedule. 

The Court noted: “If the policy is capable of both a broader and narrower meaning it is that which is favourable to the insured … which must be employed”. They declared the indemnity period in respect of the infectious disease extension clauses on the applicants policies to be 18 months. 

Writer’s thoughts:
The 17 November ruling handed down by the Western Cape High Court is stacked with interesting arguments about general principles of interpretation and infectious disease extensions. It also offers rich comment on recent local and offshore BI court decisions. Do you believe that Ma-Afrika Holdings & The Stellenbosch Kitchen v Santam will be a ‘slam dunk’ for insureds? Or will Santam follow Guardrisk in taking the High Court decision on appeal? Please comment below, interact with us on Twitter at @fanews_online or email us your thoughts [email protected].

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