In the wake of the COVID-19 pandemic, the insurance industry has experienced a surge in business interruption claims which the industry has denied globally.

Following on from the landmark judgment delivered by the Western Cape High Court in the case between Café Chameleon CC v Guardrisk Insurance Company (which was taken on appeal and the outcome still to be delivered), the Western Cape High Court was faced with an identically worded policy when determining the application by Ma- Afrika Hotels (Pty) Ltd and The Stellenbosch Kitchen (Pty) Ltd for a declaratory order to the effect that Santam is liable to indemnify them in terms of the business interruption section of the relevant policies ‘for losses occasioned by the occurrence of a notifiable disease in the form of COVID-19 occurring within a radius of 40 kilometres of the insured premises’ and that the indemnity period for the loss incurred is 18 months.

On 15 March 2020, a first case of COVID-19 was identified in one of the applicant’s establishments in Stellenbosch, as a result thereof, the staff had to quarantine for 2 weeks. Santam accepted liability under the policy but specified that cover would run from 15 March 2020 until 27 March 2020 (when the national lockdown commenced). Santam rejected four of the applicants claims on the basis that the loss that the applicants suffered was as a result of the lockdown and/or the general concern or fear of the public.

POLICY WORDING The court found that the infectious diseases clause covers notifiable diseases which are, by their nature, diseases that entail a government response. A notifiable disease and government response are inextricably linked due to the public health risk imperatives.

CAUSATION The court concluded that COVID-19 and the government response are an inseparable part of the same insured peril. The breakout of a notifiable disease, whether reported to a local or national authority always comes with at the risk of a government response. Had it not been for COVID-19 and the government’s response, the applicant’s business would not have been interrupted and they would not have suffered a loss. TRENDS

CLAUSES A trends clause is fairly standard in business interruption policies and is a mechanism which allows for an adjustment to be made to the policyholders’ losses to account for circumstances/trends affecting the business. Santam contended that even on the assumption that the local occurrence was the proximate cause of the loss, the trends clauses would deny the applicants cover as the applicants would still have suffered a loss of revenue as a result of the lockdown regulations. The government’s response to COVID-19 could not be legitimately interpreted as a trending circumstance which would have the absurd effect that renders the applicant’s business without business interruption cover. The court found that the applicants had to be put in the position they would have been in had the insured peril not occurred, consequently Santam’s interpretation of the trend’s clause was unsustainable.

INDEMNITY PERIOD Santam submitted that the infectious disease clause is an extension to business interruption cover therefore the indemnity period is limited to 3 months and referred to a memorandum hidden at the end of the schedule which reflected in fine print ‘extensions under the section are limited to an indemnity period of 3 months’ however, the court found that if Santam wanted to limit the indemnity period for infectious diseases to 3 months in this contract that it drafted, it could have added the clause to the long list of specific extensions therefore, the court found that the indemnity period was 18 months. Santam was held liable to indemnify the applicants for such loss that it is able to prove to have suffered as a result of loss of revenue occasioned by the occurrence of COVID-19.

This is the second groundbreaking judgment by the Western Cape High Court for business interruption claims against insurers and another precedent for the hospitality sector that has been significantly impacted by the COVID-19 pandemic although an appeal is expected. The Supreme Court of Appeal reserved judgment in the Café Chameleon appeal which once delivered will provide legal certainty around whether short-term insurers are liable to pay business interruption losses linked to the COVID-19 pandemic and lockdown regulations.