COVID-19 and business interruption cover
Updated: Sep 8
Author: Sheila Moagi – Candidate Attorney
*Supervised by Ushir Ahir – Senior Associate
Since the outbreak of the Covid-19 pandemic and the resultant lockdown in South Africa, hesitance to pay out claims by large insurance companies has become greatly evident. Insurers are claiming that the income losses experienced by businesses are a result of the government-imposed lockdown and not the disease itself.
In the recent High Court judgment in Café Chameleon CC v Guardrisk Insurance Company Ltd (5736/2020)  ZAWCHC 65, Judge Le Grange held that Guardrisk Insurance Company was liable for the indemnification of Café Chameleon CC in terms of the Business Interruption section of their policy for any losses suffered since 27 March 2020 as a result of the Covid-19 outbreak in South Africa.
Briefly the facts are as follows: Café Chameleon and Guardrisk entered into a written contract of insurance (policy) in 2017, which had been renewed and extended annually since its inception.
On 15 March 2020, the Head of the National Disaster Management Centre, after assessing the potential magnitude and severity of the Covid-19 pandemic in the country, declared a national disaster. On the same date, the Minister of Cooperative Government and Traditional Affairs declared the Covid-19 pandemic a national state of disaster. Thereafter the Minister, in terms of section 27(2) of the Disaster Management Act No 57 of 2002, issued regulations prohibiting public gatherings of more than 100 people. These regulations were published in Government Notice 318 dated 18 March 2020.
On 25 March 2020, the Minister again acting in terms of the Disaster Management Act, amended the regulations and introduced what became known as the “Lockdown Regulations” in effect from 23:59 on 26 March 2020 to 23:59 16 April 2020, and since extended.
Of particular importance to the current matter was Regulation 11B(1)(b) which provided that:
“All businesses and other entities shall cease operations during the lockdown, save for any business or entity involved in the manufacturing, supply or provision of an essential good or service.”
Although these prohibitions were somewhat relaxed from 1 May 2020, permitting Café Chameleon to produce and sell cooked food, but only for home delivery, the collection of take away food by patrons remained forbidden and only members of the public who work in the food delivery business were permitted to enter Café Chameleon’s premises to collect food. Members of the public had since 25 March 2020 been prohibited from leaving their places of residence, except for very limited purposes.
Essentially, the Lockdown Regulations had severely interrupted business operations for Café Chameleon.
In its claim against Guardrisk, Café Chameleon had relied on sub-clause (e) of the Business Interruption section of the policy which provides coverage for the
(e) interruption or interference with the business due to notifiable disease occurring within a radius of 50 kilometres of the premises.
Notifiable disease is defined in the Special Provisions of the policy as:
… 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 to them, but excluding Human Immune Virus (H.I.V), Acquired Immune Deficiency Syndrome (AIDS) or AIDS related conditions.
Guardrisk fully dealt with the origins of the phrase “competent local authority”, the history of the extension and special provision, as well as the legislative environment.
Guardrisk denied that the competent local authority had stipulated that Covid-19 shall be notified to them, as stipulated in the policy. It asserted that Café Chameleon’s business was interrupted by regulations that were promulgated to prevent the spread of Covid-19 and to “flatten the curve” and not because of the presence of the disease in a particular area. Guardrisk therefore submitted that Café Chameleon’s claim did not fall within the insuring clause.
The court held that these contentions were misguided. It was common cause that the regulations were promulgated under the Disaster Management Act and had a countrywide effect, but that was not the end of the matter. In terms of the National Disaster Management Act, the National Disaster Management Centre (NDMC) is an institution within a department of state for public service for which the Minister is responsible. The object of the NDMC is to promote an integrated and co-ordinated system of disaster management, with special emphasis on prevention and mitigation by national, provincial, and municipal organs of state, statutory functionaries, other role-players involved in disaster management and communities.
The court held that, having regard to this legislative framework, it was evident that once Covid-19 was by law reportable to a competent local authority, it surely cannot matter that the source of that obligation is national legislation, rather than an ordinance, bylaw or other subordinate legislation enacted by a local authority. The principal reason why the notification requirement was introduced to the Notifiable Disease Extension clause of the policy, was to ensure that cover thereunder would be triggered only by outbreaks of the most serious diseases and not whether the source of that obligation to report a disease outbreak was national legislation or subordinate legislation enacted by a local authority.
On the issue of causation and whether Covid-19 as a notifiable disease caused or materially contributed to the lockdown regulations that gave rise to Café Chameleon’s claims, Judge Le Grange held that it would be difficult not to accept that there is indeed a clear nexus between the Covid-19 outbreak and the regulatory regime that caused the interruption of Café Chameleon’s business. The imposition of the lockdown regulations was a national public health response to the Covid-19 outbreak, which caused the peril of business interruption and the common cause facts in this instance demonstrated that Café Chameleon had brought its claim within the causal regime as contemplated in the Notifiable Disease clause.
Guardrisk also raised an argument that if an order that favoured Café Chameleon was granted, it would create a precedent which would open the floodgates of liability (whether generally or in relation to Guardrisk). To this, the court held that it cannot be a defence for an insurer to say that it must be excused from honouring its contractual obligations because its business unexpectedly incurred greater debt that it had expected.
As a result, the court was satisfied that it would be fair, reasonable, and just that Guardrisk be burdened with liability.
Following this key court judgment, which will potentially see insurers re-evaluating their position regarding Business Interruption claim disbursements during the Covid-19 pandemic, Guardrisk confirmed that they have decided to approach the court for leave to appeal. This decision comes despite the Financial Sector Conduct Authority (FSCA) issuing a statement expressing its concern about the behaviour of some insurers who are deliberately avoiding paying business interruption claims where no grounds exist.
In their statement, the FSCA sternly stated that the national lockdown cannot be used by any insurer as grounds to reject a claim as such conduct goes against the principles of treating customers fairly and breaks down confidence and trust in the insurance sector. The FSCA has communicated this view to insurers and also indicated that action will be taken against those that do not treat their clients fairly.
Notwithstanding Guardrisk’s position on the matter, Café Chameleon remains confident that the Supreme Court of Appeal will confirm the High Court judgment and that they will remain victorious.
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