Business interruption

insurance
 introduction
• Business insurance is an umbrella term which refers to various types of insurance cover that protects your business against serious financial loss. Financial loss can
occur due to a number of uncontrollable factors which all business owners can potentially face at any given time during the normal course of business.

• Property Insurance: This type of insurance covers the physical premises of your business, as well as the contents, equipment, and stock. It can protect against
damage caused by fires, storms, floods, earthquakes, and other natural disasters.

• Business Liability Insurance: Business liability insurance protects any damage or injury to third parties caused by your business. It can also cover the costs of
defending yourself against such claims.

• Employers’ Liability Insurance: This kind of insurance is compulsory for businesses with employees in South Africa. It covers the costs of compensation and legal
fees that may be payable if an employee is injured or becomes ill as a result of their work.

• Motor Vehicle Insurance: Insurance for your vehicles is compulsory for businesses that operate on the road in South Africa. It covers the costs of repairs and
medical expenses that may be incurred due to an accident involving a business-owned vehicle.

• Business All Risks Insurance: If your business has many moving parts - this is the insurance for you. Industries like transport, shipping, or moving companies can
also include All Risks Transit Insurance for their clients. This can help protect your business from liability if the goods are damaged or lost while in transit.

• Business interruption cover may be found in Assets All Risks or Commercial Policies generally. The Business Interruption section of a policy is ordinarily only
triggered by physical damage to the insured property.

• Business interruption cover may be found in Assets All Risks or Commercial Policies generally.

• The Business Interruption section of a policy is ordinarily only triggered by physical damage to the insured property. It may, however, also be triggered by certain
expressly defined events in the policy unrelated to physical damage, such as the occurrence of a contagious and infectious disease under a Contagious and
Infectious Disease extension.
 What is Business Interruption Insurance ?
• There are various types of business insurance available, and what you need will depend on the nature of your business and the risks it faces.

• Business Interruption Insurance refers to insurance coverage that helps replace lost income (profits) in the event that a business is halted as a
result of direct physical loss, damage or destruction to insured property, by a covered risk.

• Covered risks may include the following:

• fire, theft, natural disasters (such as, storms, earthquakes, etc.),

• damage caused by riots, vandalism or civil unrest, unless the respective policies specifically exclude these events.

• Business interruption policies may reimburse the necessary extra expenses that may be incurred by the insured party. These include but not
limited to operating expenses caused by the disruptive event, rent expenses incurred when moving to a temporary location, etc

• An extended period of indemnity is commonly found within business interruption insurance policies. (Period of indemnity is the period
during which the insured business incurred financial losses or expenses as a result of an interruption to the insured business as defined in this
policy)

• Business interruption insurance covers the revenue or income that a company has lost as a result of damage to their establishment.

• Example: Company ABC pty Ltd endures a natural disaster, there was a wild fire which spread and burnt down their factories, fortunately
the property insurance policy would cover the cost of the repairs. The business interruption insurance would cover the lost revenue from the
lack of sales as of result of being shut down while the repairs are completed.

• This is a type of insurance that covers the loss of income that a business suffers after a disaster.
 What is Business Interruption Insurance
• BI insurance is designed to compensate an insured for the financial impact of the
interruption/interference to that business as a result of physical damage to insured property or
other key external events, such as damage at a supplier’s or customer’s premises.
• The intention is to restore the business to the same financial position as if the loss had not
occurred, subject always to the terms and conditions of the policy.
Covid 19 and business interruption claims
• The closure of manufacturing plants, restaurants, retail establishments and other places of business to
limit the spread of COVID-19 which resulted in significant business interruption losses, the COVID-19
pandemic then led every business to assess their existing insurance cover in the hope that they have
business interruption cover in place.
• The COVID-19 crisis affected all business sectors and insurers were inundated with claims across multiple
lines whether that be for health, life or non-life cover.
• Most BI insurance available in South Africa only covers physical damage to an organization's assets which
render it unable to operate this is because the insurer deliberately introduced exclusion clauses for
communicable diseases and epidemics/pandemics into their non- indemnity products such as business
interruption (BI) -
• With regards to Covid-19 the insurers’ positions were that coronavirus related claims were not covered by
these policies.
 Covid 19 and business interruption claims
• Insurers contend that business interruption policies were intended to cover localised outbreaks of a notifiable
disease at or near the insured premises. They have accordingly not insured a national pandemic, such as
Covid-19.
• They have also argued that for many businesses, the business interruption’s cause was the lockdown itself –
and by extension the legislative framework of the Disaster Management Act – and not the existence of the
notifiable disease at or near the insured premises (as required by the wording of the Policy).
• Many property or casualty policies incorporate Business Interruption Insurance clauses. There however
remains a great deal of uncertainty on the question of whether Business Interruption Insurance covers losses to
businesses, occasioned by the pandemic. Some decisions relating to the pandemic have been ruled in favour of
insurance companies (“the insurer”), who have attempted to deny coverage for COVID-related claims, whereas
other decisions have favoured the insured parties (“ the insured”).
• In South Africa, the recent landmark judgments in Ma-Africa Hotels (Pty) Ltd and Another v Santam Limited, and
the earlier Cafè Chameleon CC v Guardrisk Insurance Company Ltd, demonstrate such cases that were decided in
favour of the insured parties.
 insurance industry regulators on covid 19 claims
• The Financial Sector Conduct Authority (FSCA) is a unique independent institution established by statute to ensure a fair and stable financial market
where consumers are informed and protected and where those that jeopardise​the financial wellbeing of consumers are held accountable.
• During the 2020 Covid 19 crisis the insurance industry regulators, the FSCA and the PA ( Prudential Authority), dispatched a number of
communications, joint communications and press releases to the industry and to the public.
• On 9 July 2020, the Financial Sector Conduct Authority (FSCA) issued a press release on its stance regarding the behaviour of insurers who are
deliberately repudiating Business Interruption (BI) claims where no grounds exist to do so.
• The FSCA reiterated that the National Lockdown implemented in terms of the Regulations under the Disaster Management Act, 2002, as a response to
the COVID-19 pandemic (National Lockdown), cannot be used by any insurer as a ground to reject a claim. An attempt to do so goes against the
Treating Customers Fairly Principles and it breaks down trust and confidence in the insurance sector.
• The FSCA warned that it will take action against insurers that do not treat customers fairly. Despite the FSCA’s released Communication 34 of 2020
(Communication 34) which formalised its concern and focused on specific aspects of BI, the FSCA has nevertheless continued to receive complaints on
insurers repudiating or delaying BI claims.
• The FSCA provided an example of a claim where the BI policy has a radius clause. If the policyholder can prove that it suffered a loss as a result of
contagious/ infectious disease in the area specified in the radius clause, and its business was interrupted or interfered with as a result of measures
taken as a consequence of that contagious/ infectious disease, including the National Lockdown, then the policyholder has a valid claim.
• The decision of the insurers to appeal in Cafè Chameleon CC v Guardrisk Insurance Company Ltd prompted a joint statement from the FSCA and the PA
that provided for an interim payment to be made by the insurers pending the outcome of the appeal. The regulators recommended that the claims
should be honoured. The insurers nevertheless proceeded to appeal the decision.
 Café Chameleon CC v Guardrisk Insurance Company Ltd
• SUMMARY OF THE FACTS
• Café Chameleon CC (Café Chameleon) took out an insurance policy with Guardrisk Insurance Company Ltd (Guardrisk) in terms of which
Guardrisk indemnified Café Chameleon pursuant to a business insurance policy extension for business interruption occasioned by “human
infectious or human contagious disease, an outbreak of which the competent local authority has stipulated shall be notified to them” if such contagious
disease is reported within a 50 kilometre radius of Café Chameleon’s premises.

• The pronounced lockdown regulations, for the duration of the lockdown, initially being from 26 March 2020 to 16 April 2020, every person
was confined to his or her residence unless strictly for the purpose of performing an essential service or obtaining an essential good or
service. Café Chameleon was operating as a restaurant could not operate during this lockdown period.

• Due to the business interruption, Café Chameleon sought to claim under the business interruption policy extension, the claim to which
Guardrisk did not timeously respond. Guardrisk argued that it was still waiting for more information from Café Chameleon and it would be
premature to accept liability or reject Café Chameleon’s claim. Café Chameleon argued that it was under financial distress and should
Guardrisk not respond in time, there was an imminent danger that the policy would cease as Café Chameleon would be liquidated.
Therefore, as it would be premature to determine the quantification of Guardrisk’s liability, Café Chameleon applied for a declaratory order
with regard to Guardrisk’s antecedent liability under the policy.
 Café Chameleon CC v Guardrisk Insurance Company Ltd
• Pursuant to a financial evaluation by a loss adjuster, Guardrisk argued that in terms of the business policy extension, Café Chameleon must
prove that there was the existence of a COVID-19 incident within a 50km radius and that the loss suffered must be due to this incident.

• it was argued that the loss suffered by Café Chameleon was in fact due to the lockdown regulations and was not related to the individual
COVID-19 incidents themselves. Guardrisk contended that the policy extension requirements were not satisfied in circumstances where there
was a generalised or national occurrence of COVID-19; nor if there was a general concern that COVID-19 may be present within the area.

• The court disagreed with Guardrisk in this regard. The court held that in interpreting the business policy contract, the interpretation must be
sensible and not have an “un-business-like” result and that these factors should be considered holistically. Considering this, the court held
that it was clear that COVID-19 is a notifiable disease. Regardless of the fact that the by-laws of the City of Cape Town do not require
notification of a notifiable or communicable disease, the clause could not sensibly be interpreted to exclude such reporting to the National
Government.

• the Western Cape High Court in the case of Café Chameleon v Guardrisk Insurance Company Ltd ruled against an insurer for payment of
damages arising from a business interruption policy extension due to the COVID-19 pandemic. The matter was taken on appealed to SCA by
the insurers.

• On appeal the insurer argued that the Government’s national response to the pandemic was not covered under the insurance. What was
covered in their view was a response aimed only at local occurrences of the disease within 50 km of the business.

• The SCA considered the matter and upheld the decision of the High Court, confirmed that the insurer is liable. In arriving at its decision, the
court determined that the question was whether or not Café Chameleon’s infectious disease clause, if properly interpreted, covered the loss
they suffered. In considering whether it did, the Court mentioned various principles that would apply to such an interpretation.
 Café Chameleon CC v Guardrisk Insurance Company Ltd
• the court held that the language, context and purpose of an insurance contract should all be considered together when
interpreting a clause. Insurance contracts must be considered objectively, in an attempt to achieve what the parties
intended, having regard to the words used in the contract and the circumstances that lead to the conclusion of the contract.
As insurance contracts are entered into with the purpose of indemnifying a party from possible damage, they should
therefore be interpreted ‘reasonably and fairly’ to achieve such a purpose.

• The Court further held that the most important rule when interpreting a policy is that the policy must be liberally
considered in favour of the insured, so that the claim for indemnity does not fail without reason, as obtaining the indemnity
was the reason why he entered into the insurance contract. When a policy may be interpreted in two possible ways, the
interpretation that will sustain the claim and indemnify the loss should be preferentially applied.

• By applying these principles, the Supreme Court of Appeal therefore found in favour of Café Chameleon and held that the
insurer is liable to indemnify Café Chameleon for their loss suffered as per the policy.
 Ma-Africa Hotels (Pty) Ltd and Another v Santam Limited
• The first respondent (Ma-Afrika) operated hotels and businesses in the Western Cape, and the second respondent (the Kitchen) was a
restaurant that operated on the premises of one of those hotels.

• In terms of insurance policies with the appellant (Santam), infectious disease indemnity cover was provided to the respondents. The
policies also offered business interruption cover, and the respondents were indemnified for loss of revenue. The insurable event was the
outbreak of a ‘notifiable disease’ at or within a 40km radius of each of the establishments.

• On the outbreak of the COVID-19 pandemic in South Africa, the respondents claimed for business interruption losses under insurance
policies.

• Santam upheld only one of five claims, in respect of the hotel and only for the period 15 to 27 March 2020, due to the outbreak at that
establishment, causing revenue losses only for that period. The remaining claims were rejected on the basis that none of the losses
claimed were caused by a notifiable disease occurring within a 40km radius of the premises. Santam contended further that the losses
suffered were because of a government lockdown and general concern or fear instead of a local outbreak of the notifiable disease.

• The respondents sought a declaration in the High Court that the indemnity period for the loss of revenue claim was 18 months.

• The High Court granted declaratory relief confirming Santam’s liability to indemnify the businesses. Santam’s appeal focused on the
applicable indemnity period in relation to business interruption losses under the policies.
 Ma-Africa Hotels (Pty) Ltd and Another v Santam Limited
• The issue on appeal in Santam Limited, a division of which is Hospitality and Leisure Insurance
v Ma-Afrika Hotels (Pty) Ltd and Another [2022] 1 All SA 376 (SCA), required a consideration of
the period during which, according to the policy, the indemnity operated.
• Undertaking an interpretation of the policy and the Schedules, thereto, the court restated the
approach in interpreting insurance contracts. Language, context, and purpose must be
considered in a unitary exercise. A commercially sensible meaning is to be adopted.
• The analysis is objective and is aimed at establishing what the parties must be taken to have
intended, having regard to the words they used in the light of the document as a whole and of
the factual matrix within which they concluded the contract.
• Applying that approach, the court concluded that the indemnity period in relation to claims for
loss of revenue due to business interruption was 18 months. The appeal was dismissed with
costs.