Umbrella closes for Santam as court forces it to pay out for Covid-19 losses

Two hospitality firms with business interruption cover of R122m between them have successfully sued Santam, which refused to compensate them for Covid-19 revenue losses.

Tuesday’s Cape Town High Court victory is the second case in which insurers have been taken to task for their attempts to spurn Covid-19 claims and Western Cape deputy judge president Patricia Goliath described it as a “litmus lawsuit”.

The judgment means sister companies Ma-Afrika Hotels and The Stellenbosch Kitchen are entitled to 18 months of the revenue they have lost or will lose as a result of the pandemic.

They each have business interruption policies with Santam subsidiary Hospitality and Leisure Insurance, which, in common with insurers globally, refused to indemnify its clients for losses sustained as a result of Covid-19 and lockdown.

Ma-Afrika’s business interruption policies, providing cover of R105.5m, are for the Best Western Cape Suites Hotel in District Six, Cape Town, and Stellenbosch establishments Coopmanhuijs Boutique Hotel & Spa, Rivierbos Guest House and Stellenbosch Hotel. The Stellenbosch Kitchen, with cover of R17m, is a restaurant that operates at the latter.

The sister companies successfully asked the court for orders that Santam pay out for losses “occasioned by the occurrence of a notifiable disease in the form of Covid-19 occurring within a radius of 40km of the insured premises” and that the indemnity period for losses is 18 months.

The judgment paralleled another issued by the same court on June 26, in which the judges said Guardrisk must pay out Café Chameleon, in Plattekloof, Cape Town, because the interruption to its business would not have occurred without Covid-19.

The judgment also dismissed Guardrisk’s argument that an order forcing it to honour a contractual obligation would destabilise the insurance industry by opening the floodgates for similar claims. 

Ma-Afrika said in the two weeks after the first Covid-19 cases in Cape Town on March 10, 241 rooms were cancelled at its hotel in District Six. Another 585 were cancelled at its Stellenbosch properties.

By March 26, the companies had lost revenue of more than R5.1m and on April 1 they made insurance claims through their broker. On May 26, Santam rejected four of the five claims and said it would pay out for revenue lost as the result of a 12-day closure of The Stellenbosch Hotel after a Covid-19 case there.

In its letter of rejection, it said none of the losses were caused by a notifiable disease occurring within 40km of the business premises. Instead, it said lockdown and the public’s general concern or fear were responsible.

The insured companies said Santam’s interpretation of the wording of its policies was disingenuous and contrived, especially since it added a specific coronavirus exclusion to its policies with effect from June 1.

In her judgment, Goliath said: “The central issue in this matter is the interpretation of the policy with reference to the nature and scope of the insured peril in question, and whether the insured peril caused the business interruption and losses sustained that the applicants claim.”

She said courts’ interpretation of contracts had evolved towards a “practical, common-sense approach”. On that basis, “it 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”.

In our view the applicants’ losses are exactly what they had insured themselves against.

—  Western Cape deputy judge president Patricia Goliath

Goliath added: “Insurance is intended to serve as a social safety net to cover financially devastating losses and compensate injured parties. This is precisely the safety net required as a result of the unprecedented Covid-19 pandemic.

“Covid-19 and the government response to Covid-19 are an inseparable part of the same insured peril. The breakout of a notifiable disease, whether reported to a local or national authority, always comes with the risk of a government response and makes the government response part of the insured peril of notifiable diseases.

“Had it not been for Covid-19 and the government’s response, the applicants’ business would not have been interrupted and they would not have suffered their loss. In our view the applicants’ losses are exactly what they had insured themselves against.”

Even though the indemnity period under its business interruption policies is 18 months, Santam argued that it should have to cover only three months of lost revenue.

Said Goliath: “[It] focused on a ‘memorandum’ tucked away at the end of the schedule, which reflects in fine print: ‘Extensions under the section are limited to an Indemnity period of 3 months’.”

But she said the infectious disease clause in the policy is not one of the 26 items listed under the “extensions and clauses” heading in the schedule.

“Santam’s insistence on a three-month limit to the clause essentially amounts to a limitation on a clearly expressed obligation to indemnify,” said the judge.

“If Santam wanted to limit the indemnity period for infectious diseases to three months in this contract that it drafted, it could simply have added the clause to the long list of specific extensions.”