The Covid-19 pandemic together with the ensuing national lockdown has caused many businesses throughout South Africa to suffer severe financial strain and hardship. This has resulted in businesses facing a sharp increase in unforeseen risks which directly impact the sustainability of such businesses and the livelihoods of its workforce.

In order to mitigate such unforeseen risks many businesses look to business interruption (“BI”) insurance as a mechanism to mitigate such risks. BI insurance assists a business in catering for losses which arise from unforeseen events and allows a business to get back on its feet after such unforeseen event. BI insurance will generally insure a business against loss of revenue and will assist the business in continuing to pay overheads and expenses, such as rent and salaries, during a period of downtime with the aim of helping a business return to the same financial position it was in prior to an incident.

As a result of the national lockdown and the severe hardships faced by businesses during these times, many businesses with BI insurance coverage in place have begun calling upon such policies for assistance.

However, as many South African businesses have recently encountered, the process of doing so has not been as simple as they may have hoped for with multiple South African insurers repudiating BI insurance claims owing to the particular nuances contained in the policy wording of each BI insurance policy.

The South African courts have now weighed in on this matter in the recent court challenge between Café Chameleon Closed Corporation and Guardrisk Insurance Company Limited. This brings with it the question as to whether the floodgates are now open for a myriad of future BI insurance claims?

Café Chameleon Closed Corporation v Guardrisk Insurance Company Limited:

On 26 June 2020, the High Court of South Africa, Western Cape Division heard an application by Café Chameleon Closed Corporation (“Applicant”) against Guardrisk Insurance Company Limited (“Respondent”) regarding a repudiated BI insurance claim.

The Applicant operated a restaurant situated in the Western Cape and like many other businesses, saw a significant reduction in its business during the national lockdown. The Applicant contended that since the national lockdown it has been unable to trade or to receive customers and has therefore suffered a significant business interruption. The Applicant had a BI insurance policy in place with the Respondent.

The essence of the claim by the Applicant was that the Respondent was obliged to indemnify it for the losses it suffered as a result of the business interruption caused by the Covid-19 pandemic and the consequent enforcement of the national lockdown. Particularly, the Applicant relied on the notifiable disease clause of the BI insurance policy which covers a notifiable disease occurring within a 50km radius of the premises (the Applicant’s restaurant).

The Respondent opposed the application by arguing that the Applicant’s claim was not valid as the loss suffered by the Applicant was as a result of the national lockdown regulations which were promulgated to prevent the spread of the Covid-19 pandemic, and not due to the presence of the Covid-19 pandemic in a particular area (a 50km radius of the Applicant’s restaurant). As a result, the Respondent argued that the Applicant’s claim did not fall within the insuring clause.

In reaching its decision the court held that it is crucial for insurance policies to be interpreted so that its provisions receive fair and sensible application and that a restrictive consideration of words without regard to the context as a whole must be avoided. Additionally, that an insurance policy should not be interpreted with reference to other policies or on the basis of generalised concerns about the impact of the Covid-19 pandemic on the insurance industry at large.

In addition to the above, the court also stated that the specific provisions in an insurance policy, such as the type of policy, the nature of the risk insured against and the conditions of the policy is key in determining whether there is factual causation and whether a BI insurance claim is triggered.

The court held that it must be asked whether, but for the Covid-19 pandemic, the interruption to the Applicant’s business would have occurred when the national lockdown regulations were promulgated. In conclusion the court stated that it is difficult not to accept that there is indeed a clear nexus between the Covid-19 pandemic and the regulatory regime which caused the interruption to the Applicant’s business.

The court ordered in favour of the Applicant and declared that the Respondent is liable to indemnify the Applicant in terms of the BI section of its insurance policy for any loss suffered by the Applicant as a result of the Covid-19 pandemic outbreak in South Africa.

The Respondent has now indicated that it will be appealing the judgment.

Are the floodgates for BI insurance claims now open?

The Financial Sector Conduct Authority (“FSCA”) has weighed in on the subject of BI insurance in terms of a press release published on 09 July 2020. The FSCA has expressed the view that it is concerned that some insurers are deliberately avoiding paying BI claims without any valid grounds. Particularly as this violates the principles of treating customers fairly and places the insurance sector in a bad light together with negatively affecting consumer confidence and trust in the insurance industry. This is in light of complaints the FSCA has received relating to delays experienced by policyholders in the processing of BI insurance claims and the repudiation of BI insurance claims by insurers.

The FSCA has stated that policy holders are able to claim in instances where they can show that they have satisfied the requirements for the specific policy whether before, during, or after the national lockdown. The FSCA further advised all affected insurers to action BI insurance claims in line with its communication of 09 July 2020.

An important remark of the court in the aforementioned judgment was that each case regarding BI insurance claims must be assessed upon its own facts and the law. Particularly in light of the precise wording of each BI insurance policy. Many insurers have now issued statements along these lines stating that not all policies are worded the same and that each claim must be assessed individually.

Whilst the floodgates for BI insurance claims may not have been opened per se, the number of insured entities challenging the repudiation of BI insurance claims by insurers will inevitably increase with further court challenges currently pending.

VDMA’s team of experts are able to assist you and your business with interpreting insurance policy documents and the specific wording contained therein, as well as facilitating claims regarding BI insurance policies.

Published: 16 July 2020