High Court rules on insurers’ liability in business interruption claims: What this means for insurers and insured’s

Although the controversy and uncertainty on how insurers should handle business interruption claims (“BI Claims”) showed signs of coming to an end with the Financial Sector Conduct Authority’s communication on 18 June 2020, the battle between David and Goliath has continued in court.¹

In a recent judgment handed down by the Western Cape High Court, an urgent declaratory order was successfully obtained against GuardRisk Insurance (“Guardrisk”) by Café Chameleon (“Chameleon”) ordering Guardrisk to pay out Chameleon’s BI claims arising from the COVID-19 pandemic

Chameleon’s claim was for loss suffered as a result of the interruption to its business following the imposition of lockdown regulations in the wake of the COVID-19 pandemic.

Guardrisk, in opposing the relief sought by Chameleon, raised the following grounds of attack:

• that the matter was not urgent;
• the relief claimed by Chameleon in the form of a declaratory order was inappropriate;
• Chameleon’s loss is not insured under the Infectious Diseases Extension clause in the Policy; and
• there is no causal link between the lockdown regulations and the Infectious Diseases Extension clause.

The Court dismissed Guardrisk’s arguments on urgency and the appropriateness of declaratory relief and found in favour of Chameleon on both these aspects. We deal with the Court’s findings on the latter substantive aspects of the arguments in more detail below.

Infectious Diseases Extension of the Policy

The BI section of the Policy provides coverage for “interruption or interference with the business due to notifiable disease occurring within a radius of 50 km of the premises”.  It further records under Special Provisions that:

“Notifiable Disease shall mean 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.” (our emphasis)

The nub of Guardrisk’s argument that Chameleon’s BI Claim does not fall within the Infectious Diseases Extension clause of the Policy was two-fold:

• it denied that a competent local authority had stipulated that COVID-19 shall be notified to it, as required in terms of the Policy; and
• it contended that Chameleon’s business was interrupted by the Lockdown Regulations promulgated to curb the spread of COVID-19 and not because of an outbreak of COVID-19 in a particular area.

In reaching its decision, the Court took into account that while no local authority has stipulated that the outbreak of any contagious disease must be notified to it, the Minister of Health and Government, on a national level, have declared that COVID-19 is notifiable or reportable. The court reasoned that the main reason why the notification requirement was introduced to the Notifiable Disease Extension clause was to ensure that cover would be only be triggered by outbreaks of the most serious contagious diseases. Cover under this clause is therefore not dependent on whether a local authority has requested it to be notifiable to them, especially in this instance where Government has issued Lockdown Regulations which indicate the seriousness of COVID-19. The Court therefore found that COVID-19 falls within the ambit of the Notifiable Disease Extension.

Causation

In dealing with the issue of causation, the court considered both factual and legal causation. Factual causation entails a “but for” enquiry where the question is asked: “but for the Covid-19 outbreak, would the interruption or interference to Chameleon’s business have occurred?”. The test for legal causation involves considerations of legal policy, reasonableness, fairness and justice. 

The court found that both factual and legal causation had been established by Chameleon and accordingly that Guardrisk was liable to indemnify the insured for its BI Claim.

Conclusion

While this outcome may offer hope to hard pressed industries hoping to get some relief from insurance payouts, this issue is only likely to be resolved on appeal to the higher courts. We will continue to follow and report on this issue as it unfolds. 

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