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Business Interruption Insurance – Indemnity period now the bone of contention

Whilst the UK Supreme Court will deliver its judgment on the FCA test case on Business Interruption Insurance policy wordings tomorrow morning, South African insurer Santam commenced with a process for settling Covid-19 business interruption claims.

Earlier this month the FSCA announced that it expects the non-life insurance industry to honour its CBI cover obligations without delay. Santam was one of the first insurers to react and announced the commencement of calculation of valid claims. However, the insurer also pointed out that it still believes that there are valid reasons to appeal the judgment of the Western Cape High Court in the Ma-Afrika case with respect to the indemnity period.

A particular bone of contention is Santam’s final settlement offer to affected policyholders which is limited to three months only, even where longer periods are indicated in the contract.

Recapping the court’s ruling on indemnity period

“The applicants have established that they have an existing contractual right to indemnity under the infectious diseases clause to the policies, and to an indemnity period of eighteen (18) months,” the Western Cape High Court’s judgment reads.

[87] It is evident that the infectious disease clause is not one of the twenty-six items listed under the “Extensions and Clauses” heading in the schedule.  Some of these items, like “Loss of Tourist Attraction” and “Loss of Aesthetic Attraction” expressly record an indemnity period of three months.  Others do not, like the “Bush Fire” extension.  It appears that the residual three-month period may be applicable to these listed extensions.  It could be reasonably concluded that the residual indemnity period does not apply to the infectious disease clause because it is not a listed extension.  Instead, it comes as a standard feature of the business interruption section.

In the circumstances, the court ruled that the contra proferentum principle should be invoked. This is a legal doctrine in contract law which states that any clause considered to be ambiguous should be interpreted against the interests of the party that created, introduced, or requested that a clause be included. “If Santam wanted to limit the indemnity period for infectious diseases to three months in this contract that it drafted, it could simply have added the clause to the long list of specific extensions.”

Santam’s settlements criticised

Public loss adjustment firm Insurance Claims Africa (ICA), which represents around 700 clients in relation to such claims, called Santam’s settlement offer “unconscionable” since policyholders are covered for longer periods. “ICA is unsurprised but disappointed by Santam’s decision to limit its full and final settlement offers to three months, while there is an appeal pending at the SCA [Supreme Court of Appeal] in respect of the indemnity period,” ICA responded in the media.

Ryan Woolley, CEO of ICA, said that the judgment against them in the Ma-Afrika matter, should not be ignored. “The only way for them to treat their customers fairly is to offer an interim payment of three months and leave the balance to be dealt with after the SCA appeal.

Santam responded to Moneyweb, saying that it is of the view that the High Court “erred in its judgment in applying an 18-month indemnity period across the entire policy” of the Cape-based hotel group, Ma-Afrika. “…the indemnity period in the standard cover provided by the business interruption section policy in the Ma-Afrika policy is 18 months. This is not common across all policies.  Most policies generally have shorter indemnity periods.”

Santam further stated that the Hospitality & Leisure Division policies that are impacted by the recent court rulings and are currently being processed specifically carry three-month indemnity periods. “It is for this reason that Santam is offering full and final settlements in respect of these claims.”

While the insurers and courts battle out the technicalities, policyholders are suffering, and many small businesses have had to close their doors. This is not good for the already struggling South African economy.

If your clients are affected, you may want to obtain written confirmation from the insurer regarding the client’s claim status in instances where their businesses have gone bankrupt, or where they had to close such enterprises.

Click here on the links to read the Moneyweb articles:

Santam business interruption settlement offer unconscionable: ICA

Santam: High Court ‘erred’ in business interruption judgment

Click here to download the judgment notes in the matter between Ma-Afrika hotels (PTY) and Santam Limited


Related article: Business Insurance Update – Santam commences calculation of valid claims

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