The devil is in the detail but UK shows SA policyholders have a shot

For several months, insurance beasts have been trying to wriggle their way out of paying for business interruption claims. Their reluctance to cough up 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. 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. An expert on the matter, Tony Clulow gives us his thoughts on the implications for South African business interruption policyholders of the recent FCA rulings in the UK. It seems each case is unique and once again, it all comes down to the nitty gritty of the wording. – Claire Badenhorst 

Café Chameleon: Are the walls closing in on underwriters?

By Tony Clulow* 

Tony Clucow
Tony Clulow

The Financial Conduct Authority of the United Kingdom took it upon itself to obtain rulings on the extent to which insurers were liable for claims for business interruption, arising from Covid-19. It identified 21 widely written policies and commenced proceedings against eight underwriters who issued them, for guidance as to the cover provided. Judgement was given on 15 September, 2020.

While the judgement would not be binding on a South African court, what the court decided is obviously of great interest to South African holders of business interruption policies; particularly as the notifiable disease extension was developed in the United Kingdom before being adopted by South African underwriters.

Unfortunately the wording in the policies considered by the English court was not identical to the Café Chameleon case. Nonetheless, it is instructive to consider how the Court approached similarly worded policies.

Business Interruption Case One: Royal and Sun Alliance Insurance

The court considered a policy issued by Royal and Sun Alliance Insurance PLC, which read:

We shall indemnify you in respect of interruption or interference with the Business… following any occurrence of a Notifiable Disease within a radius of 25 miles of the Premises. 

The defences raised by Royal and Sun were among those raised by Guardrisk in the Café Chameleon case. Namely, the policy covered only loss caused by a local outbreak and did not cover loss caused by the state’s social distancing and closure measures.

The court considered the meaning of the word following and held it meant more than coming after or succeeding and required a causal connection between the notifiable disease and the loss, but not necessarily one of proximate causation.

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

The court then held the insured would have a claim if there was a case of the disease within the radius and if that occurrence was part of a wider picture which dictated the response of the authorities and the public, which itself led to the business interruption or interference.

Up until now the judgement does not hold much joy for South African policy holders, as the wording in the Café Chameleon policy requires the interruption must be due to rather than following the occurrence of the disease.

However the court continued and considered what the position would be if it was necessary to prove the disease was the proximate cause.

It held the requirement of proximate cause would be satisfied where there is a national response to the wider outbreak of a disease. The court went on to hold the proximate cause of the business interruption is the Notifiable Disease, of which the individual outbreaks form indivisible parts.

In the Café Chameleon case, Mr Schoeman, the restaurant proprietor, contended once a case of the virus had been identified within the prescribed radius, a threshold had been crossed and the policy could be considered without further reference to the words within a radius of 50km. Judge le Grange in effect accepted this contention. While the English judgement is understandably rather more cerebral, (15 Queen’s Counsel and 20 Junior Counsel are listed as having contributed to the arguments,) it seems the result is the same.

Business Interruption Case Two: QBE Limited          

Starting on page 70, the court considered the wording of a policy issued by QBE Limited, which covered;

Loss resulting from interruption of or interference with the business in consequence of any of the following events:

  • any occurrence of a notifiable disease within a radius of 25 miles of the premises

Provided that:

  1. the insurer shall only be liable for loss arising at those premises which are directly subject to the incident;

The use of the phrase in consequence of implies a closer causal connection between the insured peril and the business interruption, than the word following.

The reference to events was held to indicate the event insured was a single occurrence of the disease rather than a general outbreak. This is reinforced by the insurer only being liable for loss at the premises which were subject to the incident.

The court held the underwriters would not be liable on this policy for losses caused by the state’s social distancing and closure measures.

Read also: Business interruption claims fiasco: tourism, hospitality operators get set for court battle. LISTEN

Business Interruption Case Three: Café Chameleon

In the Café Chameleon case the policy insured:

Loss as insured by this Section resulting in interruption or interference with business due to:

  • notifiable Disease occurring within a radius of 50 kilometres of the Premises

The question which arises, is this wording closer to the Royal and Sun wording or to that used by QBE?

The first issue to be considered is there is a mistake in the wording of the policy.  It was intended to read:

Loss…resulting from interruption or interference…

Assuming this is the correct reading, one can then confidently say that the phrase due to used in the Café Chameleon wording is closer in meaning to in consequence of than to following. This is in favour of the insurers.

Unfortunately for underwriters, Guardrisk insured notifiable Disease occurring rather than any occurrence of the disease. This would appear to indicate Guardrisk was accepting a wider liability.

What have we learnt from the Financial Conduct Authority Case?

  1. Judges will deal with business interruption cases fairly and not allow themselves to be distracted by claims their rulings will bankrupt the insurance industry.
  2. Expert witnesses for Guardbank supplied testimony to the effect the Notifiable Disease Extension did not cover losses as a result of action by the state. Judge le Grange did not accept this in the Café Chameleon case nor did Lord Justice Flaux in the FCA proceedings. In the circumstances it appears highly unlikely the judges of the Supreme Court of Appeal will entertain this notion when Café Chameleon comes before them.
  3. Expert witnesses also testified the Notifiable Disease Extension was intended to cover losses caused solely by local cases rather than losses caused by a country wide outbreak. The FCA judgement shows many of the wordings did indeed give cover for a national outbreak, although some did not.
  4. Lord Justice Flaux painstakingly analysed all the wordings placed before him and attached significance to each word used. Because he did this the meaning and effect of each wording generally became clear without the need to submit it to a but for test or consider previous rulings. In the South African context it means if different insurers used different wordings, some underwriters may be liable for business interruption claims and others not.
  5. Café Chameleon hold the on-field decision and there was nothing in the FCA judgement to suggest Judge le Grange misdirected himself; on the contrary his judgement holds up well next to the FCA decision. Some points raised by insurer in its Appeal document must be regarded as dead in the water. Nonetheless, one can be sure the Supreme Court of Appeal will subject the wording of the Guardrisk policy to its own meticulous examination.

*Tony Clulow is an attorney, in Pinetown, KwaZulu-Natal.

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