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Recent judgement on COVID-19 insurance claims brings to mind TCF principles

19 November 2020
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On 17 November 2020, the Western Cape High Court (High Court) found that Santam Ltd (Santam) was liable to indemnify its policy holders, Ma-Afrika Hotels (Pty) Ltd (Ma-Afrika) and the Stellenbosch Kitchen (Pty) Ltd (Stellenbosch Kitchen) (collectively, the Applicants) for loss of revenue due to COVID-19, in terms of their business interruption insurance policy (Policy). The Policy included extension cover in an infectious diseases clause.

This judgment is another example of how courts, both locally and internationally, are in practice applying the spirit of Treating Customers Fairly (TCF). In South Africa, this case, as well as that of Café Chameleon CC v Guardrisk Insurance Company Ltd (Café Chameleon Case), (access our other articles on this case here) have kick-started a more ‘equitable’ approach as envisaged by the TCF principles, even if this is not overtly stated by the courts.

In this matter, the High Court stated that the central issue for determination was the interpretation of the policy of the Applicants with reference to the nature and scope of the insured peril in question, and whether the insured peril caused the business interruption and losses sustained as claimed by the Applicants.

In order to make this determination, the High Court considered the proximate cause of the loss and applied the tests for factual and legal causation to the relevant facts of the case.  

The court made reference to litigation relating to business interruption insurance around the world, taking an in-depth look at the UK test case in The Financial Conduct Authority v Arch Insurance (UK) Ltd and Others (FCA Test Case), in which judgement was handed down on 15 September 2020. Access our previous article on this matter here.

A crucial issue in the FCA Test Case was a determination as to what the cause of the business losses had to be in order for cover to be triggered: either an occurrence of COVID-19 within a certain radius or as a result of the closure of the business following government restrictions due to COVID-19. The Queen’s Bench found that the applicable policy wording properly construed, did not require the occurrence to be only in the local area, due to the nature of a notifiable disease which is susceptible to spreading widely.

The Queen’s Bench concluded that most of the causation issues raised fell away upon concluding that the nationwide outbreak of COVID-19 and the resulting government and public response formed a ‘composite peril’

The approach adopted by the Queen’s Bench with regard to policy construction, resulted in the court effectively avoiding issues of causation which may have arisen, by concluding that the peril insured was a ‘composite peril’ indivisibly comprising the nationwide outbreak of COVID-19 and the resultant government and public response. 

As a starting point in the Santam matter, the High Court noted that the nationwide or global events were contemplated and insured in terms of the policy.

The High Court held that the reasoning in the FCA Test Case relating to causation was persuasive, therefore concluding that the COVID-19 and government response to COVID-19 are an inseparably part of the same insured peril. 

As a result, the High Court was satisfied that both factual and legal causation were established in respect of the trigger event referred to in the policy. Accordingly, the High Court concluded that the national response to the COVID-19 disease that has a local occurrence was sufficient to satisfy the policy. It stated that: ‘[h]ad it not been for Covid-19 and the government’s response, the applicants’ business would not have been interrupted and they would not have suffered their loss. In our view the applicants’ losses are exactly what they had insured themselves against’.  

The High Court also stated that ‘a purposive approach to the interpretation of the policy wording is required, in a manner that provides an interpretive outcome that is fair, sensible and business-like’ (our emphasis). 

We note that the Applicants did raise an alternative argument relating to the development of the common law pertaining to insurance contracts based on considerations of fairness, reasonableness and justice, which the High Court did not deem necessary to deal with in light of their findings.

This is the second South African case (after the Café Chameleon Case, which was also cited in the FCA Test Case) that was filed by a business entity after the insurers rejected its claim for business interruption insurance cover as a result of COVID-19. 

In that matter the Court dealt with an identically worded policy and ruled in favour of the policyholder. The Café Chameleon Case is on appeal to the Supreme Court of Appeal and judgement is expected on 23 November.

The UK Supreme Court has expedited an appeal hearing in the FCA Test Case. The matter was set down for hearing starting earlier this week, on 16 November 2020, over a period of four days.

In addition, in other jurisdictions such as the United States, legislation is being developed to deal with losses resulting from pandemics. This is similar to what occurred following the 9/11 terrorist attacks (click here for more on this) where each State would be required to pay for certain COVID-19 business losses experienced by small businesses in exchange for a reinsurance-like ‘backstop’, funded by the US Treasury.

The Business Interruption Relief Act of 2020 has been introduced into Congress and referred to the House Committee on Financial Services and will go through the US law making process.

The South African High Court case can be accessed here.