On 17 November 2020, the Western Cape High Court delivered the much anticipated Covid-19 business interruption (“BI”) judgment in the Ma-Afrika Hotel v Santam Limited case.  The High Court ruled that insurers are liable for BI claims with extensions for outbreaks of Infectious Diseases within a specific radius.  But will this be the straw that breaks the camel’s back?  

The facts of this case are similar to the much publicized case of Cafè Chameleon CC v Guardrisk Insurance Company Ltd. This time the protagonist is Ma-Afrika Hotel, which operates a number of well-known hotels in the Western Cape, and Stellenbosch Kitchen, a restaurant on the premises of one of Ma-Afrika’s hotels (the “Policyholders”).

The Policyholders took out BI cover with Santam prior to the Covid-19 pandemic, which included an Infectious Disease extension for BI caused by loss due to a Notifiable Disease occurring:

• at the premises or attributable to food or drink supplied from the premises; or
• within a radius of 40 kilometres of the premises (the “Policy”).

After the lockdown’s disastrous effect on the hotel and restaurant industry, the Policyholders submitted claims to Santam for loss of revenue alleged to have been caused by Covid-19.  The claims were rejected. Santam’s reasoning for the rejection of the claim was that Covid-19 was not the proximate cause of the loss, but rather that the national government’s response to Covid-19,being the lockdown, was the proximate cause of the loss.  Dissatisfied, the Policyholders brought an application for a declaratory order holding Santam liable for the claims.

Interpretation of the Infectious Disease BI Extension

The Court recorded that the interpretation of the Infectious Diseases Extension was at the heart of the matter. Santam argued that although Covid-19 resulted in the interruption of the Policyholders’ businesses and is classified as an infectious disease, it did not trigger cover under the Policy as the Policy wording requires Covid-19 to have been a local occurrence within a 40 kilometre radius of the insured premises. 

Specifically, Santam argued that the Extension did not provide cover for the consequences of the global pandemic, which include the implementation of the nationwide lockdown as an attempt by government to curb the spread of Covid-19.  The local occurrence of the notifiable disease therefore needed to be the proximate cause of the Policyholders’ BI loss. 

In interpreting the relevant clauses of the Policy, the Court considered both the Policy’s textual meaning and its purpose.  The finding of the Court was that the purpose of the Policy was to provide protection to Policyholders in the event of their business being interrupted.  The interruption had to be due to the outbreak of an infectious disease that had a local occurrence and which triggered a response from the authorities. 

The Court went further to add that notifiable diseases are by their nature diseases that force a government response, or at least the risk of a government response.  A notifiable disease and the government’s response are indivisible because of the risk to public health.  Therefore, a public health risk cannot be confined to a localised area.  In this regard, the Court held that:

“It therefore, appears to be a logical conclusion that the only textual- and purposeful-interpretation of the clause is that the insured peril covers Covid-19 and the government’s response to Covid-19”.

Causation and the Insured Peril

The core of the legal debate is whether Covid-19 is both the factual and legal cause of the loss as an insurer is only liable to indemnify loss which is covered by an insured peril.

In proving that Covid-19 was the factual and legal cause of the loss, the Policyholders were required to satisfy the “but for” test in order to establish that the insured peril was the proximate cause of the loss.

Santam’s case is that the local occurrence of Covid-19 was the proximate cause of the interruption of the business and resulting loss. In arguing this position, Santam proposed that if one “imagines away the local occurrences of Covid-19 within 40 kilometres of applicants’ business, the national lockdown would nevertheless have been declared and businesses affected”.  The loss therefore would have been caused by the global spread of Covid-19, preventative measures taken by governments and the restrictions imposed by the South African government. However, Santam argued that the policy wording required that a causal connection must exist between the insured peril (the local occurrence) and the business interruption.

Despite this, the Court recorded that the purpose of insurance is to be a proverbial scrum cap and cover financially devastating loss and compensate injured parties.  In this vein, the Court held that the Policy did not state that:

• the infectious disease must be limited to a local outbreak only;
• the local authorities response must be exclusively due to such local outbreak only (and no other); and
• the Policy is not triggered where the disease and the response is broad and national.

Deputy Judge President Goliath concluded that the insurer must have contemplated that government’s response forms part of the insured peril being the notifiable disease.

Importantly, the Court concluded that Covid-19 and government’s response to Covid-19 are inseparably part of the same insured peril.

Accordingly, the Court held that both factual and legal causation were established by the Policyholders in respect of the trigger event referred to in the Policy.  The Court ordered Santam to indemnify the Policyholders for the BI loss as a result of Covid-19 and government’s response.

Conclusion

The appeal of the Café Chameleon matter is set down for 26 November 2020 and so the question remains – will the Supreme Court of Appeal concur with the decisions in Café Chameleon and Ma-Afrika or will the insurers make a comeback in the second half?

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Written by partner Deanne Wood and candidate attorneys Emma Alimohammadi and Wesley Fletcher for Fasken