BY: EPHRAIM KUNGWIMBA
20 JULY 2020
The lockdown which was implemented in South Africa from 26 March 2020 has had a disastrous effect on some businesses. Many businesses have had to close their doors permanently due to financial distress, this despite the government having implemented a less restrictive level on businesses from 1 June 2020.
Many businesses had business interruption policies which they believe covered the Covid 19 Outbreak. Some insurers however have claimed that their policies did not cover an event such as the outbreak of covid 19. Such a refusal to pay by the insurers has caused a stir and outrage by some on social media because they believed that they are living up to the old adage that insurers will always find a way not to pay.
So, is there any merit in the insurers refusal to pay? A recent case which was heard in the Western Cape High Court has shed some light on this in a judgment which was handed down on 26 June 2020.
But before we delving into the technicalities of the judgement, it is vital to have an understanding of the underlying principles in terms of insurance law.
There are two types of insurance’s in South Africa, namely indemnity insurance and non-indemnity insurance, the former will form the basis of this discussing.
Policies regarding indemnity insurance is where the insurer expressly undertakes to indemnify the insured against loss or damage. The concept of insurable interest is of vital importance with regards to insurance law.
The English case of Castellain v Preston stated that an insurable interest is the object of the insurance and that only those who have an insurable interest can recover on the insurance contract. The court added that an insured could recover to the extent to which his insurable interest had been impaired by the insured peril and no more. This view has been implemented in South African law.[1]
The South African case of Littlejohn v Norwich Union Fire Insurance Society 1905 TH 374 380 – 381 provides South Africa’s first jurisprudence regarding a definition which is as follows: “ If the insured can show that he stands to lose something of an appreciable commercial value by the destruction of the thing insured, then even though he has neither a jus in re or a jus ad rem to the thing insured his interest will be an insurable one.”[2]
The object of insurance is an intangible interest and not a physical object. In the case of indemnity insurance, the object of the risk is a physical or non-human object, whereas with non-indemnity insurance relates to a person.[3]
Examples of indemnity insurance include: house insurance, motor vehicle insurance and business interruption insurance.
Non-indemnity insurance mainly the insurance of lives. Insurable interest for the purposes of non-indemnity insurance is in principle of a financial nature and the life of a third party can only be insured if the insurance is supported by an economic interest[4].
Examples of non-indemnity insurance includes life insurance in one’s own life; interest in a husband or wife; or interest in the life of an employee, employer or key person.
THE CASE:
Cafe Chameleon CC v Guardrisk Insurance Company Ltd (5736/2020) [2020] ZAWCHC 65 (26 June 2020)
Background
The Applicant (Café Chameleon CC) and the Respondent entered into a written contract of insurance (the Policy). The Policy commenced in 2007 and contained various sections. The Policy was renewed and extended annually since its inception. The latest renewal date of the Policy was with effect from 1 April 2020 and remains in force. The Applicant recorded that the events giving rise to its claim arose on 27 March 2020 that was within the period of the previous insurance policy of 1 April 2019 to 1 April 2020.
On 15 March 2020 the Head of the National Disaster Management Centre, after assessing the potential magnitude and severity of the Covid-19 pandemic in the country, acting in terms of section 15(1)(aA) read with section 23(8) of the Disaster Management Act[2] declared a national disaster.
On the same date the Minister of Cooperative Government and Traditional Affairs (“the Minister”), declared the Covid-19 pandemic a national state of disaster.[4] Thereafter the Minister, in terms of section 27(2) of the Disaster Management Act made certain Regulations.[5] These Regulations did not initially envisage a “Lockdown” but prohibited gatherings of more than 100 people.[6]
On 25 March 2020, the Minister acting again in terms of the Disaster Management Act amended the Original Regulations and introduced a new Chapter 2, containing new Regulations 11A to 11G, and also introduced new annexures “A” to “D”. The new Regulations introduced was what we came to know as the “Lockdown”. The salient provisions introducing the Lockdown provided the following:
Regulation 11A defined “lockdown” as “the restriction of movement of persons during the period for which these regulations are in force and effect namely from 23H59 on Thursday, 26 March 2020, until 23H59 on Thursday 16 April 2020, and during which time the movement of persons is restricted”.
Regulation 11B(1)(a) provided that “for the period of the lockdown (i) every person is confined to his or her place of residence unless strictly for the purpose of performing an essential service, obtaining an essential good or service, collecting a social grant or seeking emergency, life-saving or chronic medical attention … ”
Regulation 11B(1)(b) provided that “all businesses and other entities shall cease operations during the lockdown, save for any business or entity involved in the manufacturing, supply, or provision of an essential good or service”.
Regulation 11B(4) provided that “all places or premises provided for in Annexure D must be closed to the public except to those persons rendering security and maintenance services at those places or premises”. Annexure “D” referred to various places normally open to the public, but did not initially refer to restaurants.
The Minister thereafter, further amended the Original Regulations[8].. The salient provisions of the further amended Regulations provided as follows:
Regulation 11B(1)(b) was amended to provide that “during the lockdown, all businesses and other entities shall cease operations, except for any business or entity involved in the manufacturing, supply or provision of an essential good or service, save where operations are provided from outside of the Republic or an be provided remotely by a person from their normal place of residence”. Annexure “D” was amended by the introduction of the item “restaurants”.
The Applicant’s Arguments
According to the Applicant, the regulatory regime as above-mentioned had the following impact on the business. The first, and most direct was the interruption since 25 March 2020, from conducting its business operations, and it has since 26 March 2020 been prohibited from permitting members of the public into its business premises. And, although these prohibitions were relaxed somewhat from 1 May 2020, permitting the Applicant to produce and sell cooked food, but only for home delivery, the collection of take-away food by patrons themselves remains forbidden and only members of the public who work in the food delivery business (for example, employees of “Mr Delivery” or “Uber-Eats” are permitted to enter the Applicant’s business premises to collect food.
Secondly, members of the public have since 25 March 2020 been prohibited from leaving their places of residence, except for very limited purposes. That prohibition remained in place as far as the Applicant’s business was concerned (except, it appeared, in relation to members of the public who work in the food delivery business).
According to the Applicant, at the time of hearing of the case, the vast majority of potential patrons of the Applicant’s business have been, and are still, prohibited from leaving their places of residence to travel to or be inside the applicant’s business premises.
The Applicant further recorded that its business is primarily a sit-down restaurant and prior to the Covid-19 pandemic an estimated 5% of its turnover was generated by food deliveries and it is not a market for which the Applicant’s business is geared. According to the Applicant, the direct result of the regulatory regime as described above is that the Applicant has since 27 March 2020 been unable to trade or to receive customers, and that it has therefore, since that date, suffered significant business interruption.
The Applicant further contented that the Lockdown Regulations has severely interrupted his business to the extent that the services of its 41 employees could not be utilized since 27 March 2020. According to the Applicant it did not retrench its staff, who depends on the business for their livelihoods, but cannot afford to pay the wage bill of its employees which amounts to R165 000.00 per month. The employee’s full salaries were paid for March 2020.
According to the Applicant it also applied to the Unemployed Insurance Fund (UIF) Covid -19 TERS National Fund for assistance. The Fund made payment on account of only 25 employees in the amount of R 106 000 and the sole member of the Applicant had to use his own resources to pay the rest of the employees between 20%-30% of their ordinary salaries in respect of April 2020. The assistance for the month of May 2020, at the time of the hearing was still uncertain, as the Department of Employment and Labour, at 25 May 2020, was still not accepting applications for the month of May. It was further recorded that the sole-member of the Applicant have exhausted his own personal funds and will be unable to further assist the business and its employees.
The Applicant has also advanced the proposition that, once Covid-19 was by law reportable to a competent local authority, it matters not that the source of that obligation is national legislation, rather than an ordinance, bylaw or other subordinate legislation enacted by a local authority. According to the Applicant, such distinction is irrelevant to the gravity of the peril insured against under the Notifiable Disease Extension. And accordingly, insofar as the indemnity is conditioned upon a ”human infectious or human contagious disease, an outbreak of which the competent local authority has stipulated shall be notified to them”; Covid-19 falls substantially within the ambit of the Notifiable Disease Extension, properly interpreted.
The Respondent’s Arguments
It was argued by Counsel for the Respondent that the granting of the declaratory relief sought by the Applicant would be flawed as the Respondent was still waiting for more information from the Applicant, and as such it would be premature to accept liability or reject the Applicant’s claim. Furthermore, it argued that the Applicant on its own version has a complete cause of action and can sue the Respondent for specific performance in terms of the Policy.
At the heart of it all is the Respondent’s assertion that firstly, prior to the Covid-19 crisis, and the imposition of the national lockdown there were several types of insurance cover available in the South African insurance market that would have offered cover to the Applicant for losses it may have suffered as a result of the national lockdown but the Applicant did not do so; Secondly, the insurance industry view the losses suffered as a result of the national lockdown to not fall to be indemnified under a Notifiable Disease type insuring clause; and thirdly, if the insured are simply to be indemnified within their policies for the Covid -19 losses they may have suffered, without applying the terms of the policies, it may have the potential to destabilise the global and the South African insurance market.
The Courts’ Considerations
The Court stated that the Applicant in this instance relies on sub- clause (e) of the Business Interruption section of the Policy which provides as follows:
(e) notifiable Disease occurring within a radius of 50 kilometres of the Premises
Special Provisions
(a) Notifiable Disease shall mean illness sustained by any person resulting from any human infectious or human contagious disease, an outbreak of which the competent local authority has stipulated shall be notified to them, but excluding Human Immune Virus (H.l.V), Acquired Immune Deficiency Syndrome {AIDS) or an AIDS related condition.
“According to the Respondent, The City of Cape Town by-laws, insofar as they have been able to ascertain, does not have a provision which requires notification to it of a notifiable medical condition or communicable disease.”
“In this instance the Respondent has admitted that Covid-19 occurred within 50 kilometres of the Applicant’s premises, that Covid-19 is a human infectious disease and there has been an outbreak.”
“The Respondent however denies that the competent local authority has stipulated that Covid-19 shall be notified to them, as stipulated in the contract. Moreover, the Respondent asserted that the Applicant’s business was interrupted by regulations that were promulgated to prevent the spread of Covid-19 and to ‘flatten the curve’ and not because of the presence thereof in a particular area, accordingly it was submitted that the Applicant’s claim does not fall within the insuring clause.”
“These contentions in my view are misguided. In South Africa, s 29(1) of the National Health Act[39] provides for the establishment of a district health system. According to s 29(2) the system consists of various health districts, the boundaries of which coincide with district and metropolitan municipal boundaries. According to s 30 health districts may be subdivided into sub-districts.”
“It is by now accepted throughout the world that Covid-19 is a respiratory disease caused by a novel respiratory pathogen, as contemplated and exemplified in Annexure A, Table 1, of the Surveillance Regulations.
It can only follow that Covid-19 falls within the ambit of Regulation 13 read with Annexure A, Table 1, of the Surveillance Regulations. It is therefore a category 1 notifiable medical condition, as defined in Regulation 1, which must be reported by the most rapid means available to the focal person at the health sub-district level.”
“Having regard to the abovementioned legislative framework it is evident that once Covid-19 was by law reportable to a competent local authority, it surely cannot matter that the source of that obligation is national legislation, rather than an ordinance, bylaw or other subordinate legislation enacted by a local authority. Based upon an interpretative approached, the principal reason why the notification requirement was introduced to the Notifiable Disease Extension, was to ensure that cover thereunder would be triggered only by outbreaks of the most serious diseases, and not whether the source of that obligation to report the gravity of the threat was national legislation, rather than subordinate legislation enacted by a local authority.”
Causation:
“This brings me the question of causality. It is trite that in insurance contracts risk is commonly a causal concept: ‘the insurer’s duty to perform is made conditional upon a particular peril “causing” a particular consequence or “fact”, such as a loss or an occurrence. A claim in terms of an insurance contract therefore requires a claimant to prove not only of the peril and of the loss or occurrence as described in and covered by the contract, but also of a causal nexus or link between the two’.”
In the present instance, the only reference to causation in the Notifiable Disease Extension, is that cover is promised for ”interruption or interference with the business due to (e) notifiable disease occurring within a radius of 50 km of the premises”
The question that now arises, is whether the Applicant has established that the regulatory regime that was imposed on its business from 27 March 2020 was directly caused by the Covid-19 outbreak within the permitted radius of its premises and as a result suffered a loss. Put differently, whether the Covid-19 as a Notifiable disease, caused or materially contributed to the “Lockdown Regulations” that gave rise to the Applicant’s claim (this is a factual enquiry). If it did not, then no legal liability can arise. If it did, then the second question becomes relevant, namely whether the conduct is linked to the harm sufficiently closely or directly for legal liability to ensue, or whether the harm is too remote from the conduct [45].
On this issue, Mr. Rosenberg made the point that, the imposition of the Lockdown regulations was a national public health response to the Covid-19 outbreak, which caused the peril of business interruption and the common cause facts in this instance, demonstrated that the Applicant brought its claim within the casual regime as contemplated in the Notifiable Disease.
Mr. Burger argued that the Policy, in this instance, insures the loss resulting from interruption where the interruption is due to the Notifiable disease and not losses as a result of other causes. It was further contented that the Applicant failed to demonstrate that its business was interrupted due to the Covid-19 outbreak but rather that its business was interrupted by the regulatory regime which is not insured under the Policy. Furthermore, is was contended that there was no sufficient casual link between the Covid-19 outbreak and the Applicant’s eventual loss.
“Applying the above-mentioned approach to the facts in this case, it must be asked whether, but for the Covid-19 outbreak, the interruption or interference to the Applicant’s business would have occurred when the Lockdown Regulations were promulgated. In this regard it is common cause that the Head of the National Disaster Management Centre, on 15 March 2020 in GN 312, after assessing the potential magnitude and severity, classified the Covid-19 pandemic as a national disaster. The Minister of Cooperative Governance and Traditional Affairs, thereafter on the same day having considered the magnitude and severity of the Covid-19 outbreak declared a National State of Disaster. Thereafter, several regulations were published pursuant to the declaration of the National State of Disaster, including the restrictions on movement, and the closure of businesses like that of the Applicant, to the public. The Respondent has also admitted that Covid-19 occurred within 50 kilometres of the Applicant’s premises, that Covid-19 is a human infectious disease and there had been an outbreak. In these circumstances it is difficult not to accept that there is indeed a clear nexus between the Covid-19 outbreak and the regulatory regime that caused the interruption of the Applicant’s business. The suggestion therefore that the regulatory regime was only introduced to “flatten the curve” and had little to do with the Covid-19 outbreak is misplaced. In my view factual causation was established by the Applicant.”
In determining the presence of legal causation, the question is whether, having regard to the considerations alluded to, the harm is too remote from the conduct or whether, it is fair, reasonable and just that the Respondent be burdened with liability. In my view, the question should be answered against the Respondent.
The Respondent has advanced evidence to demonstrate that the business interruption losses caused by Covid-19, both worldwide and in South Africa, are likely to be very substantial, and that insurers are therefore likely to face a significant demand upon their resources. The latter may be true, but it is a general proposition and cannot be a consideration in the proper interpretation of the Notifiable Disease Extension in this instance.
The same applies with regard to the argument that if, an order favours the Applicant, it will create a precedent which will open the floodgates of liability (whether generally or in relation to the Respondent). The Respondent did not provide any basis for this suggestion. In any event, each case must be decided upon its own facts and the law. Whether the floodgates will open as suggested by the Respondent will ultimately depend upon the prevalence of the precise wording of the Notifiable Disease Extension in any contract of this nature. The gloomy predictions of industry collapse within the insurance world by the Respondent are therefore nothing more than speculation. No substantive information was provided by the Respondent regarding its own exposure (for instance, its assets and liabilities, its reinsurance cover, and the estimated liability to its clients as a result of business interruption due to Covid-19).
However, it may happen that the Respondent is confronted with substantial insurance claims, but there is no reason to suppose, whatever the general concerns in the insurance industry may be, that it will be unable to discharge its obligations in the ordinary course. But even if a problem should arise in this regard, it cannot be a defence for an insurer to say that it must be excused from honouring its contractual obligations because its business has unexpectedly incurred greater debt than had been expected.
In my view it will therefore be impermissible to determine the Respondent’s liability with reference to the alleged condition of the insurance industry in general. It follows, in determining the presence of legal causation and having regard to the relevant considerations alluded to, namely whether the harm is too remote from the conduct or whether, it is fair, reasonable and just, that that the Respondent be burdened with liability, that the question should be answered against the Respondent.
Order
“The Respondent is declared liable to indemnify the Applicant in terms of the Business Interruption section of Policy number HIC 0000-02950 for any loss suffered since 27 March 2020 as a result of the Covid-19 outbreak in South Africa which resulted in the promulgation and enforcement of Regulations made by the Minister of Co-operative Government and Traditional Affairs under the Disaster Management Act, 57 of 2002.
“The Respondent is ordered to make payment(s) in respect of such losses as the Applicant is able to calculate and quantify from time to time.”
SYNOPSIS AND CONCLUSION
The judgment hinged on two factors, mainly the wording and interpretation of the contract.
Anyone looking to take out insurance is advised to peruse the contract from top to bottom several times. Wording, wording, wording!
It was argued by the Respondent that the Covid-19 pandemic is of such great proportions that the insurance industry cannot simply cope should they be compelled to pay out claims.
This is the first red flag in the Respondent’s case. From this wording it can be argued that the insurer did not have a contractual defence but simply relied on the enormity of the impending claims and affordability.
What companies and individuals should take away from the judgement is that they need to ensure they are insured for something they intended to be insured for. The insured interest which was discussed above becomes vital in this regard.
A large part of the argument in this case hinged on the “reportable infectious disease argument”. This was argued to great length by the Respondent but the Judge in applying the interpretative approach ruled in favour of the Applicant.
Insurance law is simple if you get the basics right. The contract needs to reflect the true intention of the parties and again not to sound like a broken record, but it all comes down to the wording of the contract. Definitions are often the most overlooked feature of a contract, but they can be a lifesaver in avoiding confusion and vagueness.
Causation is a two-pronged enquiry of factual and legal causation. Factual causation will always hinge on the wording of the contract. Legal causation as alluded to by the Judge is a more flexible approach and having considered the various factors such as proximity, public policy/boni mores ruled in favour of the Applicant.
Companies and individuals are encouraged to shop around for a policy that suits their needs. If an insurer is unwilling to amend its standard template terms and conditions then it is advisable that the prospective insured seeks a policy which fits its needs.
The insurer vs insured battle is not over yet especially with the pandemic still ongoing.
Finally to answer the question posed by this article, to insure or not to insure? My answer? Insure with certainty!
[1] South African Insurance Law. Author, M. F. B. Reinecke. Publisher, LexisNexis, 2013.
[2] Ibid
[3] Ibid
[4] Ibid
