SCA clarifies when an insurance policy is a joint one

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The High Court erred when it found that, because the entities insured under an insurance policy shared the same facilities, the policy was a joint one, the Supreme Court of Appeal (SCA) has ruled.

The SCA’s decision, handed down last week, clarifies aspects of interpreting business interruption (BI) insurance policies, including the distinction between composite and joint policies.

The appeal court also reiterated that the national lockdown was sufficient to establish the factual and legal cause of BI and an insured’s consequent losses.

At the same time, the court’s findings highlight the need for insureds to report claims promptly and for the courts to interpret insurance contracts based on their specific wording and context.

Three Covid-related BI claims lodged with AIG

The judgment was the outcome of an appeal brought by AIG South Africa Limited against four respondents collectively described as the 43 Air School Group.

In February last year, the High Court in Johannesburg found that AIG was liable to compensate 43 Air School for BI claims that arose because of the lockdown in 2020.

The 43 Air School Group consists of four entities. The group’s main operating entity, 43 Air School (Pty) Ltd, is a wholly own subsidiary of 43 Air School Holdings (Pty) Ltd. It provides pilot and air traffic control training from its premises at the Port Alfred (Eastern Cape) aerodrome.

PTC Aviation (Pty) Ltd is 50%-owned by Air School Holdings. PTC, at its premises in Gqeberha (Eastern Cape), provides a pilot preparation service to candidates from 43 Air School.

The fourth entity, Jet Orientation Centre (Pty) Ltd (JOC), provides flight simulators for lease at its Gqeberha premises. Some of these simulators are used by 43 Air School at its Lanseria premises, where it operates as 43 Advanced, but the simulators are used primarily by PTC in Gqeberha for pilot training. The group averred that 43 Air School and PTC are fifty-fifty shareholders in JOC.

43 Air School submitted BI claims in May and June 2020, for the periods 26 to 30 April 2020 (first claim) and for 1 to 31 May 2020 (second claim). 43 Air School alleged that AIG’s liability under the policy had been triggered by the outbreak of Covid-19 within a 25km radius of its premises in Port Alfred.

AIG repudiated both claims, saying 43 Air School had not proved a causal connection between the Covid outbreak and its loss.

43 Air School went to the High Court to hold AIG liable for the claims. In addition, in its application, 43 Air School sought to hold AIG liable for a third claim. This related to an outbreak of Covid-19 within 25km of 43 Advanced’s premises in Lanseria and within 25km of PTC and JOC’s premises in Gqeberha.

What makes a policy a joint one?

A key issue before the SCA was whether the policy in respect of the BI cover was joint or composite.

43 Air School contended the policy was joint, essentially covering all the entities in the 43 Air School Group. Accordingly, the outbreak of Covid-19 in Gqeberha on 21 March 2020 and the outbreak at Lanseria on 27 March 2020 triggered AIG’s liability for BI cover in respect of all the claimants within the group.

43 Air School said the following supported its contention:

  • The corporate and operational interrelationship between Air School, PTC, and JOC.
  • The definition of the term “insured” in the policy.
  • The definition of the term “business” in the policy, and the entities were part of a group.
  • The BI cover was a globular amount of R66 443 230, with no distinction made between the different insured entities.
  • The premium was also expressed as a globular amount of R59 600 plus VAT for all the insured (not split per insured).

But AIG said the policy was composite, not joint, in respect of the BI cover. This was because gross profit was the basis of the insurance, and the gross profit of each of the entities was separate and distinct. Each entity had an interest in its own gross profit, and that interest was not shared by the other entities.

The SCA agreed with AIG.

On behalf of the court, Acting Judge of Appeal Phillip Coppin said the High Court erred in finding that the policy was joint. First, there was no evidence that any of the respondents shared the same facilities. Second, and more importantly, there was no evidence that the respondents had or shared a common gross profit, or that they had a joint and common interest in each other’s gross profit.

The fact that several persons or entities are insured under one policy, or that the entities may share facilities or be interrelated operationally, or that the maximum cover is a single globular amount, or that the premium is payable in a single globular amount does not mean the policy is a joint one, the SCA said.

It is established law that the decisive factor that determines whether a policy is joint or composite is the nature of the interest of the insured persons or entities, the SCA said.

If their interest in the subject-matter of the insurance is joint, in the sense that they are exposed to the same risk and will suffer the same loss when the peril insured against occurs, that may indicate that the policy is joint. However, where their interests are different, even though it is in respect of the same subject-matter, the policy will not be joint; the policy is intended to insure each insured separately in respect of its own interest.

PTC was not an insured

AIG’s defences against 43 Air School’s third claim were that PTC was not an insured under the policy and PTC and JOC did not comply with the reporting clause in the policy.

Regarding the first defence, at issue was when 43 Air School Holdings acquired 43 Air School (Pty) Ltd and whether this change in ownership was reflected in the policy.

When the policy for the year 1 July 2019 to 30 June 2020 was renewed, the insured were identified as National Airways Corporation (Pty) Ltd (NAC) and 43 Air School (Pty) Ltd and their “subsidiary companies, managed, controlled, member companies, joint ventures sports, social and recreational clubs and societies, and any other persons or entities for which they have the authority to ensure, jointly or severally, each for their own respective rights and interests”.

AIG contended that neither 43 Air School Holdings nor its subsidiary, PTC, was identified as the insured.

A management buyout resulted in 43 Air School Holdings acquiring 100% of 43 Air School (Pty) Ltd from NAC.

43 Air School contended that Holdings acquired the shares at the end of June 2019, and the broker was made aware in June of the upcoming change in ownership.

But the SCA found that the acquisition had still not taken place by 31 July 2019, and when the policy was eventually renewed at the end of October 2019, NAC still appeared as an insured, with no mention of Holdings. Furthermore, AIG had not been instructed to change the names of the insured.

Instituting legal action doesn’t satisfying the reporting requirement

Further to the third claim, the respondents failed to adhere to the reporting conditions as stipulated by the policy wording. They attempted to justify their non-compliance on the following grounds:

  • AIG rejected 43 Air School’s first and second claims “in principle” without investigating them, which clearly showed that AIG did not intend to honour its obligations under the policy.
  • The terms of the policy did not expressly require that notice of the claim be given before the institution of litigation.
  • Where defendants have tried to resist a claim on the basis that no notice or demand has preceded the issue of summons, the courts have held that the summons or application is in itself a demand.

The SCA rejected these defences.

The fact that AIG in principle rejected the first two claims did not mean that 43 Air School, in respect of its third claim, or the other insureds who wanted to claim under the policy, did not have to comply with the reporting conditions.

The rejection of a claim brought under the policy is not necessarily a repudiation of the policy itself, and the respondents did not allege that AIG had repudiated the policy.

It is “a matter of common sense” that an insurer should be notified of claim before an insured resorts to enforcing the claim through litigation. The policy’s conditions required reporting “on the happening of the event”, which implied prompt reporting and did not allow for reporting only after the insured had resorted to litigation to enforce the claim.

The reporting requirement is not the equivalent of a demand. Usually, a demand follows once all conditions precedent in a contract or transaction have been met. The reporting requirement, on the other hand, is a condition precedent for AIG’s liability in terms of the policy. The service of the application, while essential, cannot qualify as such, Coppin AJA said.

In the result, the SCA upheld AIG’s appeal against the third claim. PTC’s claim failed because it had not proved it was an insured under the policy and it did not report the claim as required in terms of the policy. JOC’s claim also failed because its claim was also not reported as required.

The disease and the response are interconnected

In respect of the first and second claims, AIG argued that 43 Air School was not entitled to indemnification under the policy unless it could prove a direct causal connection between the outbreak of Covid-19 within a 25km radius of its premises and its loss. It said the BI was a consequence of the national lockdown, not the local occurrence of the disease.

The SCA rejected AIG’s submission. It referred to the legal principles relating to the link between notifiable diseases and causation in respect of BI policies established by the High Court in Café Chameleon CC v Guardrisk Insurance Company Ltd and Ma-Afrika Hotels (Pty) Ltd and Another v Santam Limited and when the SCA heard these matters on appeal, Guardrisk Insurance Company Limited v Cafe Chameleon CC and Santam Limited v Ma-Afrika Hotels (Pty) Ltd & Another.

The key principle to emerge from these cases is that the outbreak of a disease and the government’s response to it are inseparable and constitute a single insured peril.

Referring to what the appeal court held in Guardrisk, the SCA said it is precisely because certain notifiable diseases have the potential to spread that they may require government action nationally, provincially, or locally to prevent their spread.

The government’s response in that case was integral to the insured peril – the outbreak of an infectious disease within the defined radius – and the government’s response may come before or after that localised outbreak. Thus, the government’s response and the outbreak must be regarded as “part and parcel” of the insured peril.

Significantly, Coppin AJA said, the SCA accepted that “because it is part of the insured peril, the government’s response is covered, not because it is caused by what was insured against; it is covered because it is what is insured against”.

The SCA therefore found that the national lockdown and the outbreak within the radius of 43 Air School’s business premises in Port Alfred was sufficient to satisfy the requirement in the policy. If it had not been for Covid-19 and the government’s response, the business of 43 Air School would not have been interrupted, and it would not have suffered the loss.

The court ordered each party to bear its own costs.

Click here to download the full judgment.