Business interruption insurance has been thrust into the spotlight recently as short-term insurers and the hospitality sector have waged war against one another as a consequence of business interruption claims that run into the billions. Whilst there have been some exceptions, for the most part the majority of the claims have been denied by the larger insurance companies.

Debate has been rife between insurers and the hospitality sector regarding the interpretation of the business interruption clauses as the insurers remain of the firm view that according to their policy wording businesses are covered for interruptions as a result of the outbreak of a disease at a local level, which in turn means that businesses need to demonstrate that they were directly impacted by a disease (ie. COVID-19) in order for the cover to be triggered.

The aforesaid contentious issues came to a head recently when a Cape Town restaurant, Café Chameleon, took on insurance giant Guard Risk by seeking an urgent declaratory order on the basis that Guard Risk was obliged to indemnify it in terms of the business interruption section of its policy for the loss suffered as a result of the interruption caused by the COVID-19 pandemic and consequent lockdown regulations enforced thereafter.

One of the insurer’s main grounds of opposition was that the restaurants loss, if any, was not insured under the Infectious Disease Extension clause in the policy and that there was no causal link between the lockdown regulations and the Infectious Disease Extension.

Café Chameleon alleged that the regulations precluded it from conducting its business operations as it has been prohibited from permitting members of the public into its business premises. Whilst these prohibitions were somewhat relaxed from 1 May 2020 by allowing restaurants to sell cooked food for home delivery, the collection of take-away food by patrons was forbidden. Café Chameleon’s business is primarily a sit-down restaurant and it has been unable to trade and receive customers resulting in a significant business interruption since 27 March 2020.

Does the claim fall within the insuring clause?

Café Chameleon relied on the clause in its policy which provides for ‘a notifiable disease occurring within a radius of 50 kilometers of the premises’. A notifiable disease was defined to mean an 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.

The insurer alleged that the restaurants business was interrupted by the regulations that were promulgated to prevent the spread of COVID-19 and ‘flatten the curve’ and not because of the presence in a particular area therefore the claim does not fall within the insuring clause.

The court disagreed with the insurers contentions and found that COVID-19 falls within the ambit of the Notifiable Disease Extension when interpreting the insurance policy in accordance with sound commercial principles and good business sense.

Causation

A claim in terms of a policy requires a claimant to prove not only of the peril and of the loss covered in the contract but a link between the two. In this case, the restaurant had to show that COVID-19 as a Notifiable Disease, materially contributed to the lockdown regulations that gave rise to the restaurants claim. If it did not, no legal liability could arise. If it did, the second question is whether the conduct is linked to the harm sufficiently closely for legal liability to ensue.

It was contended by the insurer that the restaurant failed to show that its business was interrupted due to the COVID-19 outbreak but rather that its business was interrupted by the regulations which was not insured under the policy.

The court questioned whether but for the COVID-19 outbreak, the interruption to the restaurants business would have occurred when the lockdown regulations were promulgated.

The court found that there was a clear nexus between the COVID-19 outbreak and the regulatory regime that caused the interruption to the business. The suggestion by the insurer that the regulations were introduced to ‘flatten the curve’ and had little to do with the outbreak was misplaced and the court consequently found the insurer to be liable to indemnify the applicant in terms of the business rescue section of its policy for any loss suffered since 27 March 2020 as a result of the COVID-19 outbreak. The court ordered that the insurer make payment is respect of such losses as the restaurant is able to calculate and quantify from time to time and the restaurant was also awarded its costs of the application.

This ground-breaking judgment will no doubt open the floodgates for business interruption claims against insurers, however, this will ultimately depend upon the wording of the business interruption clause in each policy. Whilst this judgment is a victory for businesses that seek indemnification under the business interruption section of its policy as a result of COVID-19, it may be premature to celebrate in light of the fact that the judgment is in all likelihood going to be appealed, however, the first round of the battle has been a huge victory for the hospitality and tourism sector and will remain precedent setting until it is appealed.