COVID-19: HIGH COURT DECISION ON BUSINESS INTERRUPTION INSURANCE CLAIM
On 26 June 2020, the Western Cape Division of the High Court in Cape Town (Court) delivered its judgment relating to a business interruption claim due to the COVID-19 pandemic. The judgment could have far-reaching implications on non-life insurers who provide cover for business interruption.
Café Chameleon launched an urgent application seeking a declaratory order that Guardrisk, a non-life insurer, is obliged to indemnify it, as policyholder, in terms of a Business Interruption clause in the insurance policy between the parties.
Café Chameleon contended that it suffered losses as a result of the interruption caused by the COVID-19 pandemic and the subsequent nationwide lockdown imposed by the Regulations under the Disaster Management Act, 2002 (DMA Regulations).
Café Chameleon lodged its claim under the Notifiable Diseases Extension clause in terms of the insurance policy, which provided business interruption cover for ‘a notifiable disease occurring within a radius of 50km of the premises’.
A notifiable disease is defined in the policy as, ‘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 HIV, AIDS or an AIDS related condition’.
Café Chameleon also contended that as a result of the restricted movement and shut down of various businesses in terms of the DMA Regulations it sustained significant financial losses as it could not trade or receive customers during the lockdown period, being a restaurant. Although the DMA Regulations were progressively relaxed to allow for the preparation and delivery of prepared food, as Café Chameleon is primarily a sit-down restaurant, income generated from food deliveries in the past only amounted to 5% of the restaurant’s turnover.
Guardrisk denied liability on the basis that the loss suffered by Café Chameleon was not covered under the Notifiable Diseases Extension clause in the insurance policy because the direct cause was the lockdown imposed by the DMA Regulations and not the COVID-19 pandemic. In other words, Guardrisk argued that there was no causal connection between the lockdown and the Notifiable Diseases Extension.
The Court disagreed with Guardrisk and held that the insurance policy must be interpreted so its provisions receive fair and sensible application having regard to the context and to ensure a business-like or commercially sound result. The Court further held that the policy cannot be interpreted with reference to other policies or based on generalised concerns about the impact of COVID-19 on the insurance industry at large.
Regarding whether COVID-19 falls within the Notifiable Disease Extension of the Policy, the Court held that it does. The Court found that although COVID-19 was determined as a notifiable disease by national government and not a local authority is irrelevant.
The Court also considered the issue of causation. The Court looked at factual causation and applied the but for test to hold that there is a clear nexus between the COVID-19 outbreak and the DMA Regulations, which caused interruption to the business of Café Chameleon.
On the question of legal causation, the Court held that the harm is not too remote from the peril and that it is fair, reasonable and just to burden Guardrisk with liability. The Court also found that, the argument of opening the floodgates of liability cannot stand because each case will be decided upon its own facts, policy wording and the law.
The Court issued a declaratory order to the effect that the Guardrisk is liable to indemnify Café Chameleon in terms of the Business Interruption clause contained in the insurance policy between the parties.
The judgment can be accessed here.
While the judgment is likely to be appealed, it demonstrates the Court’s view on causation in light of ‘modern risks’, as well as how insurers will rely on policy wording to deny liability, and that each and every policy wording needs to be considered to determine the liability of an insurer.