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The broker’s dilemma

13 January 2021 Gareth Stokes

A reading of the Western Cape (WC) High Court ruling in the matter Santam vs Ma-Afrika Hotels & The Stellenbosch Kitchen, handed down on the 17th of November 2020, reveals the complex world that commercial short-term insurance brokers face each day. These brokers have been writing business insurance (BI) and contingent business insurance (CBI) policies for over a century without a clear understanding of what these covers entail… And it is not entirely their fault.

Prof. Robert Vivian, University of Witwatersrand, points out: “Had a broker interrogated an insurer on the likely interpretation of an infectious diseases extension, pre-pandemic, the insurer might, and indeed should, have answered: ‘Put in a claim, we will see; until then we cannot tell you’”. This trite response is inevitable given the requirement to assess each claim in the context of the policy wording; the agreement between the insurer and the insured. Since there is no ‘one size fits all’ response to a simple motor vehicle accident claim you can imagine the risks in predicting the outcome of complex covers. But do not take our word for it… Consider, instead, some of the arguments offered by the applicants and respondent in what will eventually become case law insofar settling pandemic-related non-physical damage BI claims. These arguments are being repeated in courts around the world. 

The insurer’s position

Santam, the respondent in this matter, observed that the cover under its infectious diseases BI extension was “limited to causative events that are local to the insured premises”. Their interpretation was that the extension did not provide cover “for the consequences of a global pandemic or a nationwide disease such as Covid-19 … including government responses to such global pandemic or national outbreak by way of lockdown”. They further argued that their policy wording was clear insofar the perils on cover, namely “infectious diseases that were specifically local to the insured’s premises”. The locality was typically established by the occurrence of a notifiable disease within a certain radius of the insured’s premises. 

How would the insurer, based on its interpretation of the agreement between itself and the insured, assess the claim? According to Santam the correct approach would be to “identify the insured peril with reference to the policy wording and to thereafter establish whether that insured peril was the proximate cause of the interruption to the applicants’ business and any loss”. The proximate cause as stated by the insurer, is the dominant effective operative cause of the loss, being the contagious outbreak within the stated distance. The lockdown is a different peril and to hold that lockdown was the peril was a misidentification of the peril. Their argument that the misidentification of the insured peril was adequate to reject pandemic-related infectious disease BI claims has been rejected in multiple jurisdictions. 

Santam argued that a “local occurrence of COVID-19 [had to] be the proximate cause of any loss suffered” in order to trigger liability under its infectious diseases extension whereas the insured were seeking compensation for losses suffered due to the global COVID-19 outbreak combined with government’s response to the pandemic by way of lockdown. “These losses are therefore not insured perils under the extension [and] there is no need to exclude that which is not covered by the policy,” they argued. An extension of cover supplements the cover on a section of an insurance policy whereas an exclusion expressly reduces cover. 

The trouble with technical arguments

Santam’s position can be summarised as: “The applicants had failed to establish that the local occurrences [of the disease] were the proximate cause of the interruption of their business and loss of revenue, and accordingly, the applicants had not established that they had suffered any loss of revenue as contemplated by the policy, in consequence of an insured peril”. It should be noted that Santam was not disputing that COVID-19 constituted a notifiable disease in terms of the infectious disease part of their BI extension; merely that it was not the proximate cause of the loss. 

The WC High Court set about interpreting the agreement with reference to the nature and scope of the insured peril as contained in the infectious diseases clause. Their first task was to determine the proximate cause of the loss by applying tests for both factual and legal causation to the relevant facts of the case. They referenced various cases including City of Tshwane Metropolitan v Blair Atholl Homeowners Association and Centriq Insurance Company Ltd v Oosthuizen and Another. Quoting from the last mentioned case: “The consequence of adopting a business-like or commercially sensible construction of an insurance policy is that the literal meaning of words read in their context may have to yield to a fair and sensible application where they are likely to produce an unrealistic and generally unanticipated result, which is at odds with the purpose of the policy”. 

This quote is important in that it leans towards fairness and intention over ambiguity and complexity. The WC High Court in the Santam matter observed that “a purposive approach to the interpretation of the policy wording was required, in a manner that provides an interpretive outcome that is fair, sensible and business-like,” noted the ruling. It is apparent that the court has introduced a new basis of interpretation for contracts, being that of business-like or commercially sensible construction, which deserves a more detailed discussion under a separate header. 

Ambiguity counts against insurers

Case law is specific insofar the treatment of ambiguity in an insurance contract. The judges noted that the application of the contra proferentem principle meant ambiguous clauses would be interpreted in favour of the policyholder. The reason for this is that insurers enter into contracts of indemnity with insureds in which the insurer benefits from the limitation of the scope and purpose of the contract. This conflict between claims decisions and underwriting profits inspired a recent insurance start-up, Naked Insurance, to break “the age-old cycle of distrust between insurers and their customers”. They redesigned the insurance business model to remove the profit conflict from their claim decisions. 

A precursor to the WC High Court ruling appeared as early as paragraph 40 of the judgement, when the judge opined: “The infectious diseases clause covers notifiable diseases which are, by their nature, diseases that entail a government response, or at least the risk of a government response …. it appears to be a logical conclusion that the only textual and purposeful interpretation of the clause is that the insured peril covers COVID-19 and the government’s response to it”. 

This conclusion is similar to that made by the UK High Court in a test case brought against eight insurers by the UK Financial Conduct Authority (FCA). It also echoes the decision in the matter of Café Chameleon vs Guardrisk and the guidance given by the South African market conduct regulator. 

Agreeing with the FCA

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. The UK High Court thus determined that the outbreak of COVID-19 and government’s consequent response were indivisible. That decision is however on appeal. 

The judges then crossed into a subjective debate over the role of insurance in the broader social context. They noted that “insurance is intended to serve as a social safety net to cover financially devastating losses and compensate injured parties” before concurring with the FCA’s view that “insurers must have contemplated that the authorities might take action in relation to the outbreak of a notifiable disease as a whole and not to particular parts of an outbreak”. The FCA contended that the notifiable authorities would be most unlikely to act based on whether cases fell within or outside a notional line drawn 25 miles away from insureds’ premises. 

A damning ruling…

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. This made the government’s response part of the insured peril of notifiable diseases. Santam, which is still awaiting the outcome of its appeal, recently announced that it will reassess all claims against its infectious disease extension clauses in light of the latest court decisions. 

Santam is clearly worried about the WC High Court’s determination of the indemnity period; but will have to wait until at least February 2021 for further clarity. The ruling reads: “The applicants have established that they have an existing contractual right to indemnity under the infectious diseases clause to the policies, and to an indemnity period of 18 months”. The Supreme Court will re-test the WC High Court decision insofar composite perils and the social role of insurers alongside the damaging declaration of an 18-month indemnity period. But that is a matter for another newsletter. 

Writer’s thoughts:
It took pandemic to focus industry stakeholders on an insurers’ obligation under its policy wordings. In most cases it is easy enough to figure out what perils are on cover and what sums insured are involved; but there are many examples where agreements are open to interpretation. What are your thoughts on the risk to commercial short-term insurance brokers in advising clients on covers when the outcome of potential claims is indeterminate? Please comment below, interact with us on Twitter at @fanews_online or email us your thoughts [email protected].

Comments

Added by Gawie, 13 Jan 2021
Please send me a copy of the 21 questions
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Added by Barry Pringle, 13 Jan 2021
Please send me a copy of the 21 questions.
Thank you.
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Added by Derek Smorenburg, 13 Jan 2021
So the question is; irrespective of whether the Insured is dealing through an Advisor, Agent, Broker or a Call Centre Agent (The Party) has this party carefully read and reviewed the policy wording including all exclusions and limitations in an Insured (Client) easily clear and understandable way on an annual basis following the Parties 'Due Diligence' of Product responsibilities! The Parties receive some form of remuneration that contractually should incorporate the need for this step as part of their Service Level Agreement (SLA) as the basis of the contractual relationship! SAIFAA has launched the unique '21 Due Diligence Questions' that all Clients and the Public is recommended to ask their existing and potential Financial Advisor and Broker. I will provide all who want this world first 21 Questions with pleasure - [email protected]
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