Canadian Underwriter

How a South African court applied the U.K. test case in a B.I. dispute

December 8, 2020   by David Gambrill

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South Africa’s Western Cape High Court has ordered an insurer to pay a retailer of luxury travel goods up to a maximum of six months’ worth of business interruption coverage (about Cdn$1.5 million), following a dispute over losses arising from government-ordered lockdowns related to COVID-19.

The South African decision is notable for its reference to the recent decision in the U.K. concerning the Financial Conduct Authority (FCA)’s test case of B.I. policy wordings. The South African court made it clear that it would only reference the FCA case insofar as the facts and the law were applicable to the local case at bar.

“A cautionary observation,” Western Cape High Court Justice Dennis Davis wrote for the South African High Court in Interfax (Pty) Ltd and Another v Old Mutual Insure Limited, released Nov. 25. “The use of comparative law to assist in the determination of a dispute should not be an exercise in a jurisprudential Cook’s tour.  It must focus on whether the dispute before the foreign court and the law applied in the foreign judgment so cited can assist in the application or development of domestic law.”

The thought echoes what some Canadian insurers have said about drawing conclusions from the U.K. court decision about business interruption coverage. Before the U.K. decision was rendered in September 2020, Canadian Underwriter had asked Jason Storah, CEO of Aviva Canada, about any potential application of the case to Canada.

“Do I think there will be very interested bystanders and watchers of the FCA test case? Absolutely. But it’s not going to be resolved tomorrow,” Storah replied in August to a question about the FCA test case during a call about the company’s 2020 half-year results. “There will be appeals and a process that it will go through. And I am also cognizant that the U.K. legal system has some very distinct differences to the Canadian legal system. Whilst people may look to read [the result] across [jurisdictions], they also have to take into account some of the differences between the judicial and legal systems.”

In South Africa, the court considered a commercial policy dispute over whether the claimant’s business was interrupted because of a loss caused by a “contagious or infectious disease” within a 50-km radius of its various premises, which in turn triggered a national regulatory response.

The claimant, InterFax (Pty) Ltd., a 40-person retail business that makes luxury travel items such as luggage, has a flagship store in Cape Town’s V&A Waterfront and outlets in Kenilworth and Bellville.

The wording of the commercial policy at issue provides coverage for “contagious or infectious disease,” but the insurer, Old Mutual Insure Ltd., denied coverage to Interfax. Essentially, Old Mutual argued that a local government, not the national government, had to order the lockdown in order for there to be a causal connection between the government order and the interruption of the business due to the pandemic.

The disputed clause in InterFax’s commercial policy, headed ‘Murder, Suicide, Food Poisoning etc.’ offers business interruption coverage for “contagious or infectious diseases within a 50 km radius of the premises.” Additionally, there is a provision in the policy for in situations in which:

“…the local, regional, municipal or government authority responsible for the area has declared a notifiable medical condition or communicable diseases to exist within the area and/or has imposed quarantine regulations and/or acted to restrict access to the area in terms of any local, regional, municipal or national law or bye-law or regulating pertaining to public health and safety.”

South Africa’s minister of cooperative governance and traditional affairs imposed a lockdown of all non-essential businesses on Mar. 25, 2020, about two weeks after the World Health Organization declared COVID-19 to be a global pandemic.

InterFax sought a court order declaring that the minister’s regulations in response to the outbreak of the COVID-19 pandemic in South Africa, as well as the consequent interruption of its businesses, was indeed covered under its insurance policy.

The South African dispute is similar to one of several scenarios raised in the U.K.’s FCA test case, in which the U.K. regulator sought a court judgment on whether various different policy conditions granted pandemic coverage. In the U.K. test case, insurers denied coverage under similar circumstances because although the national government lockdown order interrupted the business, the lockdown was not in response to a specific instance of a COVID-19 outbreak within the radius defined in the policy.

In the South African fact situation, there was in fact a case of COVID-19 within the 50-km area. But the insurer argued that the national lockdown was not in response to what was happening to the local case within 50 km. But the South African court found that there was a causal connection between the national government’s lockdown and the local case of COVID-19.

“The wording of the policy indicated that there should be an outbreak of the disease within the 50 km radius as defined,” Davis wrote. “It also required that the relevant authority restricted access to the area and/or imposed quarantine restrictions. However, nothing in the wording of the policy required that the response of the relevant authority was restricted to dealing exclusively with a local area….”

In obiter remarks unrelated to the central decision, the South African court did note that some confusion may arise from outcomes of the FCA test case.

“I do not propose to engage in a totally unnecessary hermeneutic exposition [an analysis of meaning and interpretation] of the whole [FCA] judgment but prefer to focus upon that those sections which hold clear relevance to the present dispute,” David at one point wrote for the West Cape High Court. “I say this because the judgment is hardly a model of clarity, which is partly the result of complex pleadings instituted by the Financial Conduct Authority, which requested the court to construe a number of wordings of different policies [that] contain non-damage extensions to the standard business interruption cover provided by the relevant insurers.”


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