Insurance beast Guardrisk vs small business: How Café Chameleon scored Covid victory – expert

The reluctance of big insurers to pay for business interruption claims threatens the survival of many small businesses in the hospitality and tourism sector. The insurance industry’s regulatory body – the Financial Services Conduct Authority (FSCA) – stated in July that insurers cannot use the national lockdown as grounds to reject a client’s claim. While Santam and other large short-term insurers have paid out business relief to some of their policyholders, Santam refuses to pay out for business interruption claims linked to Covid-19. Insurance Claims Africa (ICA) joins Ma-Afrika Hotels in its litigation against Santam on 1 September and this all-important case will set the precedent for business interruption claims in the future. Café Chameleon was one of the first restaurants to take on its insurer in a legal battle and Guardrisk Insurance was ordered to pay the losses Café Chameleon was able to calculate and quantify as well as its legal costs. – Claire Badenhorst

Guardrisk vs small business: How insurance underwriters handed Café Chameleon its court case victory

By Tony Clulow* 

When Guardrisk received legal documents setting out a claim made by Café Chameleon, it consulted experienced insurance professionals who advised the insured had no case. Nonetheless, Café Chameleon succeeded. This article is an attempt to understand why.

Tony Clucow
Tony Clulow

The insured based its case on an extension in its business interruption policy where cover was promised for, interruption or interference with the business due to notifiable disease occurring within a radius of 50km of the premises. Covid-19 was a notifiable disease and the National Lockdown was due to its occurrence and there were some 85 cases in the City of Cape Town, when it was proclaimed. The insured claimed the losses it suffered were by reason of being closed for business because of the lockdown.

In response to the claim an assessor appointed by the underwriters wrote:

If evidence of the occurrence of Covid-19 at or in the stated radius of the insured premises exists, this along with proof of the extent to which this incident has directly resulted in or proximately caused the interruption or interference with the business, must be submitted.

On this approach each case of the virus within the radius is a separate, insured peril. The insured may claim in respect of each case, but will have to demonstrate in each individual claim, what loss was caused by each individual case. “…the peril which is insured is the occurrence of a notifiable disease within 50 km of the Applicant’s premises, and not a general outbreak of Covid-19.”

The insured did not accept the underwriters’ interpretation of the extension. Instead it considered once a local case had been identified, the stipulation, within a radius of 50 km could be regarded as having been complied with and the threshold crossed, and it could claim losses suffered as a result of the general outbreak and the ensuing lockdown. The approach of the insured could be called the threshold approach, while the approach of the underwriters, who regarded the 50km provision as an integral part of the cover which could never be disregarded, might be called the, integral approach.

The insured instituted proceedings by way of application, which meant all evidence and legal contentions were made on affidavit and no oral evidence was led.  

Read also: Santam: ‘Please look into our faces, see our pain’ – tourism boss. Business insurance scandal

The founding affidavit on behalf of Café Chameleon was made by Nico Schoeman, the restaurant proprietor, and the answering affidavit by Richard Eales, the managing executive of Guardrisk. His testimony was backed up not only by his assessors, but by a number of experienced independent insurance experts.

Mr Schoeman set the scene in the first few paragraphs of his affidavit and then, clearly conscious of the importance of conveying to the Court his understanding of the policy cogently and early in the piece, addressed it in paragraph 13 (which was headed PROPER INTERPRETATION OF THE NOTIFIABLE DISEASE EXTENSION). Paragraph 13 was divided into 4 sub paragraphs and contained everything which Mr Schoeman wished to say about interpreting the 50 km provision. In his answering affidavit, Mr Eales robustly set out the underwriters’ contentions in over more than a hundred paragraphs- including particulars of  the four discrete defences subsequently identified by the Court- and started responding to Mr Schoeman’s paragraph 13 in his paragraph 108.

In paragraph 13(1), Mr Schoeman makes the point in the case of say, a shark attack, the business interruption is realised because the event discourages customers from patronising the business. This is a fairly uncontentious observation, but in paragraph 108(1) of his answering affidavit, Mr Eales responds: What is set out in paragraph 13.1 is an incorrect paraphrasing, and a wrong interpretation of the relevant clause of the policy. Accordingly I deny the allegations in this paragraph.

This is strange, as Mr Schoeman was making an observation rather than paraphrasing or interpreting a clause. However in paragraph 108 (2), in an abrupt change of stance, Mr Eales concedes:

I admit paragraph 13.1

In paragraph 13.2, the insured’s affidavit builds on his observations about a shark attack, by saying the provisions concerning a serious contagious disease follow the same pattern. In the second and third sentences he adds: The event it describes is the outbreak of a serious contagious disease in close geographical proximity to the insured premises. But such an outbreak without more, cannot cause a business interruption.

In response to this Mr Eales states:

The second and third sentences… do not make sense. Accordingly, I deny the allegations in these sentences. The relevant peril that is insured is the occurrence of a notifiable disease. The policy indemnifies the interruption of the business due to the occurrence of a notifiable disease within 50km of the premises. The policy does not indemnify the interruption of the business due to the closure of the premises following an order by the government to close the premises.

Everything said by Mr Schoeman in the whole sub-paragraph makes perfect sense. Secondly the underwriters’ whole case is the policy provides cover against cases in Cape Town, not nationwide. So why is Mr Eales denying the allegation the policy covers disease in close geographical proximity?  Thirdly, the third and fourth sentences in Mr Eales’ response are his best expression of the integral approach in his whole affidavit, but, they have been put in the wrong sub-paragraph. They do not relate to Mr Schoeman’s paragraph 13.2. The judge may note them and apply them when appropriate. On the other hand, he may see them as another puzzlement and simply disregard them. It obviously does not help that this unforced error immediately follows that made in responding to paragraph 13.1.

Mr Schoeman concludes in the fourth and fifth sentences of 13.2:

It can only realise the peril of business interruption if it discourages, disables or otherwise deters potential customers from patronising the insured business. Absent such deterrence of potential customers, a disease would not cause business interruption and the Extension would be meaningless.    

Mr Eales makes no response to this despite the convention that in an answering affidavit, the deponent should address every allegation made in the founding affidavit. This seems to add further support to the proposition that a large chunk of text, more than half a page in length, has found itself in the wrong place.

In paragraph 13.3 Mr Schoeman says:

The dual requirements of (a) a “notifiable disease” occurring (b) within “a radius of 50 kilometres“ of the insured premises express the threshold for indemnification, namely that the disease in question is in fact a serious disease and that in fact broke out in close geographical proximity to the insured premises.

Mr Eales responds:

Paragraph 13.3 is incomplete. It is correct there must in fact be an occurrence of a notifiable disease within 50km of the premises. But in addition, the interruption of the business must be due to that notifiable disease and only then does the policy indemnify the applicant and only for those losses. The applicant has overlooked the causative requirement for indemnity.

Mr Eales has pertinently addressed what is an important contention by the insured. However, his response would have carried more weight if he had said the interruption of the business must be DUE AND SOLELY DUE TO THE LOCAL OUTBREAK of the notifiable disease…

His response would have even been better if he had referred back to the affidavits of his experts he has filed, which attest in the insurance industry this provision is understood to cover only interruption of business due to a local outbreak of the disease. The opinions of his experts as presented did not persuade the judge. Had their essential elements been brought to his attention a second time and directed against Mr Schoeman’s recital of the threshold approach, they may have made more impact.

Having carefully laid the groundwork Mr Schoeman proceeds in sub-paragraph 4:

Once the threshold for indemnification has been established the only remaining requirement is that the outbreak of the disease in fact caused business interruption by deterring potential customers from patronising the insured business. The exact chain of causation between the outbreak of the disease and customer deterrence is not specified. Several scenarios are conceivable…         

The first sentence is the most important statement in his documents. Having built up to this moment, Mr Schoeman has revealed his strategy; he has clearly and boldly stated his threshold theory viz once a case of the disease within 50km has been established, the court can totally disregard the phrase within a radius of 50km when giving effect to the policy.

Obviously a similarly clear and bold response is called for.

Mr Eales’ response:

I deny paragraph 13.4. The applicant has ignored the plain words of the policy, which require the interruption of the business to be due to notifiable disease. The point of the inquiry is not what caused the, “customer deterrence.”  Further the applicant’s importation of, “notifiable” into the causation issue is wrong.

If we isolate Mr Schoeman’s first sentence, it is clear Mr Eales has denied it as part of a general denial of the whole paragraph.

The next two sentences appear to relate to the second sentence of the subparagraph. But even if we assume the second sentence applies to Mr Schoeman’s first sentence, it does not pack much of a punch. It does not help Mr Eales to say the interruption must be due to the notifiable disease. Nobody disputes that. What he needs to say is the interruption must be due to the notifiable disease occurring within 50km of the insured premises. This he has not done.

It must be borne in mind at this stage the underwriters have admitted there was an outbreak of the disease within 50 kilometres. Accordingly, what was required of Mr Eales was he put a silver stake through the heart of the threshold approach and give a defence of the belief he and his experts hold, namely the extension gave indemnity for business interruption caused, BY AN OCCURRENCE OF THE DISEASE WITHIN 50 KILOMETRES OF THE INSURED PREMISES AND CAUSED BY THAT ALONE.

To do this he could have quoted one of his experts, for example Trevor Alan Clegg, who testified:

In order to be able to responsibly calculate the risk of an occurrence of an infectious disease, and an appropriate premium, that must be done on the basis of a localised, actual occurrence of an infectious disease. It is this that the extension is intended to cover. 

Or Mark John Haken who said:

…it is accepted that this standard type of cover does not provide insurance for generalised government actions; instead it provides cover for only a notifiable disease within the localised area.

In application proceedings, the applicant has the right to file a replying affidavit disputing new evidence or contentions raised by respondent in his answering affidavit. Mr Schoeman does not trawl through Mr Eales documents, dealing with each new allegation. Instead he elects, as he says, to highlight certain aspects.

He does not revisit Mr Eales’ response to paragraph 13; possibly because he considers the insured’s evidence and opinions have not been seriously challenged. Although he is a layman, he tells the insurance professionals what their case is – they are contending the lockdown is a novus actus interveniens (a new intervening act), this despite Mr Eales having never mentioned this phrase and having simply said the lockdown was not caused by the Cape Town cases.

With regard to the underwriters’ contention there were other policies which would have covered state action, Mr Schoeman asserts he was not aware of these and then goes on to assure the Court it need not concern itself should a judgement against the insurers unleash an avalanche of claims, which bankrupts the insurance industry.

The high point of his response is when he dismisses the views of the experts marshalled by Guardrisk by saying they demonstrate that insurers generally do not actually mean to provide cover in accordance with THE LITERAL MEANING OF THE EXTENSION. Clearly Mr Schoeman considers underwriters have missed a crucial tackle and the insured is now running free.

The initial concern of a judge is to understand what the case is about, so he looks for a clear, coherent narrative, and if possible a trustworthy guide to take him through pages of affidavits and annexures. In both his founding affidavit and his reply Mr Schoeman has been clear and coherent and easy to follow.

Read also: Lawyers slam insurers’ business interruption relief as ‘kick in teeth’ for hospitality companies

The answering affidavit of Mr Eales is in many ways a considerable achievement and an impressive construction, bearing in mind there were only five clear business days between the underwriters receiving the papers and Mr Eales signing his affidavit, which was 44 pages long. The supporting documents to his affidavit amount to about 220 pages, and include the full text of the UK Public Health (Control of Disease) Act 1984; there is thus a wealth of information available. Anyone seeking a crash course on business interruption insurance, could do worse than read the answering affidavit with annexures

But with such a mass of paper, it may have helped the court had Mr Eales collected together references to important contentions and directed the court’s attention pertinently to those. Mr Schoeman dismissed the evidence of the insurance experts as extremely arcane. Had some of their more pithy observations been isolated and presented in response to the insured’s paragraph 13, they may have been judged rather to be sound common sense. And the underwriters’ position was not helped by errors in putting together the text.  Having said that, judges often decide what a contract means without being influenced by opinions expressed by litigants, especially if there is no ambiguity and the literal meaning is clear. Moreover it may be the oral arguments presented by counsel were decisive.

In his judgment Judge le Grange carefully examined the history of the relevant legislative provisions and the events leading to the declaration of the lockdown, and then rejected underwriters’ assertion the insured had no claim because decisions were made by national government, rather than a competent local authority as stipulated in the policy. When he gets to the meaning of the extension, he is clearly adopting the approach of the insured:

The views of the insurance industry that demonstrate insurers generally do not actually mean to provide cover in accordance with the literal meaning of the Extension is insightful, but in this case, it is hardly of assistance to the Respondent.

The judge then concludes his consideration of the evidence of the experts, including important testimony the extension does not cover state action, by ruling:

It is inconceivable to reasonably expect that an ordinary person who is not involved in the insurance industry must have such insight and knowledge of the industry when entering into an insurance contract. 

In paragraph 69 the following appears:

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….

The second sentence is pure threshold approach. The effect of the virus is being addressed without the qualification, occurring within a radius of 50 km of the premises.

Once the judge decides the extension covers the countrywide outbreak of the disease, he has no difficulty going forward. Discussing causation is where judges can show their paces and Judge Le Grange has a toolkit, which includes concepts such as legal policy, reasonableness, fairness and justice and using these concepts, he finds for Café Chameleon.

In some commentary this case is portrayed as showing all enterprises holding business interruption insurance with the notifiable disease extension, have valid claims and all underwriters who have not made offers, are dragging their heels. Perhaps a better conclusion is this case shows an audacious David with the benefit of sound strategic advice can get the better of a well-resourced, corporate Goliath.

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