Unnoticed changes to documents crucial to BI dispute between mall owners and insurers

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Litigation between five insurers and the owners of the Fourways Mall over which document constituted the contract of insurance had its origins in “a series of mishaps” at quotation stage.

The mall’s owners, Azrapart (Pty) Ltd and Accelerate Property Fund Limited, have instituted a claim of more than R1 billion against the insurers for loss of rental income during the Covid-19 lockdown.

According to the plaintiffs, the insurers had indemnified them against business interruption (BI), which included loss caused by infectious and contagious diseases (ICD). But the insurers disputed this, saying ICD did not form part of the cover.

The lead insurer (and first defendant) was AIG, which assumed 70% of the risk, followed by Old Mutual Insure (14%) and Bryte (8%). According to the plaintiffs’ particulars of claim, the balance of the risk was assumed by Guardrisk; alternately, it was split between Guardrisk, 3%, and Insurance Underwriting Managers (IUM), 5%.

The mall’s owners and the insurers, except IUM, asked the High Court in Johannesburg to rule on three issues separately from the main case. Significantly, if any one of the three was resolved in the insurers’ favour, the owners would not have a claim.

Of the three separated issues, the most important was whether ICD insurance formed part of the agreement between the parties. “Extraordinary as this might seem, it turns on the legal implications of oversights in reading documents by employees of the parties,” Judge Norman Manoim remarked in a judgment handed down on Friday.

In July 2019, Azrapart and Accelerate engaged Marsh (Pty) Ltd to secure insurance for the mall.

Between the first request for a quotation in July 2019 and the signing of the final policy in March 2020, the contract went through 10 iterations, with the term “ICD” variously in or out. But not once were these modifications noticed by the party to whom the document had been sent, Judge Manoim said.

The judge said there was a simple explanation for this. “Insurance contracts are filled with dense type, most of which is unchanging. What the professionals keep a look out for are the highlighted changes, and then the exclusions, the premiums, and the limits. But where a term is not highlighted and is buried in a long list of densely typed terms, infrequently modified, they remain imperceptible to the quick-look scrutiny that these professionals typically exercise. Such is what happened in this case.”

Changes go unnoticed

The negotiations were conducted by “AS”, a new business development manager at Marsh, and “VW”, a senior underwriter at AIG. Both were experienced insurance professionals who had dealt with each other for several years.

The quoting slip that AS sent to VW on 23 July 2019 was Marsh’s standard contract, which listed ICD cover as a specific BI extension.

But the slip that VW sent back to AS on 5 August omitted ICD from the specific extensions cover. The omission was not highlighted or signalled by a strike through.

On 16 August, AS asked VW for an improved quote. ICD was included in this quoting slip, although this was not highlighted. AS was working off his standard document and was unaware of the previous omission of ICD, the judgment said.

On 19 August, VW sent back her new quote. This time, no doubt because she worked off AS’s last draft, ICD cover was back in.

Meanwhile, AS followed up with other insurers to see whether they would follow AIG’s lead and insure a proportion of the insured value. Old Mutual, Bryte, Guardrisk, and IUM each received a quote that included ICD cover.

But on 17 September, AIG sent back a quoting slip excluding ICD cover.

“Again, there was a covering letter from [VW] which makes no mention of this omission. It is not clear whether [VW] had worked off her prior document, sent in August (with ICD out), or whether she applied her mind to what had been sent to her by Marsh and deleted it again. Since she did not testify, we do not know,” the judgment said.

On 14 November, AS asked VW for “the updated quoting slip asap” because the client wanted to go on risk within days. VW replied on the same day, but the quoting slip she sent excluded ICD cover. AS circulated this slip to the other four insurers.

On 29 November, AS sent an email to VW and the other four insurers stating that the client would be on risk from 1 December.

Subsequent events added to “the confusing picture”.

Once a quote has been accepted by the broker on behalf of the client, the broker prepares a placing slip, which is circulated to the insurance companies that submitted the quotes. The placing slip is meant to follow the terms of the quote that was accepted.

But when the placing slip was circulated to the insurers, ICD cover was back in. The placing slip was circulated after the defendants were on risk.

The insurers signed the placing slip between 12 December and 21 January. AIG made amendments to the placing slip, and highlighted them, but ICD cover remained in.

On 10 March 2020, the policy was sent to VW for final signature. The evidence before the court indicated VW took time to review the policy carefully before signing it. The final policy, like the placing slip, included ICD cover.

‘Parol evidence rule’

The parties drew opposing legal conclusions from what Judge Manoim called the “series of mishaps” chronicled above.

Azrapart and Accelerate contended that the policy was the contract between the parties because it was the final version of the contract.

AIG, Old Mutual, Bryte, and Guardrisk contended that the quoting slip of 14 November was the contract, because this was the one that came into existence when AS accepted it on 29 November, by informing the insurers that they were on risk from 1 December. (The judgment described IUM’s case as confusing.)

Judge Manoim said although it was clear with hindsight that the presence or absence of ICD cover was crucial, it was not seen that way at the time.

AS, who testified for the plaintiffs, conceded this point. The judge said because the defendants chose not to call VW to testify, the court did not have direct evidence from her.

However, there was no evidence from VW’s many emails that she gave the ICD issue any consideration, Judge Manoim said. VW appeared to have been “a most fastidious reader” of the documents, yet “the inclusion or re-inclusion of the ICD cover passed her by”.

The court decided the issue of which document was the contract by applying what is called the “parol evidence rule” to the evidence before it.

This principle holds that once parties have reduced a contract to writing, in general, in a lawsuit between the parties, no evidence to prove its terms may be given except the document or secondary evidence of its contents, nor may the contents of such document be contradicted, altered, added to, or varied by parol evidence – that is, evidence outside of a written contract that the parties may try to introduce to explain or interpret the terms of the contract.

The court found that the final policy was the contract and ICD cover was therefore included.

Other separated issues

The other two separated issues were:

  • Whether the contract of insurance stood to be rectified, as pleaded by the insurers. Judge Manoim ruled against the defendants and in favour of Azrapart and Accelerate.
  • Whether the mall owners had not paid the full premium and hence were not entitled to be indemnified.

The insurance was based on an estimated turnover, with the owners required to pay 65% upfront and declare the actual turnover at the end of the policy period. AIG, Old Mutual, Bryte, and Guardrisk claimed the owners never made this declaration or paid any additional premium due.

The owners countered that no penalty was stipulated for failing to make the declaration, the insured event occurred before the balance of the premium was due, and the insurers did not request the declaration. They argued that even if a declaration had been made, no additional premium would have been owed, and the policy was renewed without any demand for a premium top-up. Additionally, they stated they offered to pay any outstanding premium.

Judge Manoim found in favour of the owners, noting that the policy did not specify a penalty for non-payment, and there was no evidence that a top-up premium was due.

He awarded costs against the insurers, including the costs of two counsel.

Click here to download the judgment.