Business Interruption Insurance…Interrupted

Author: Derrick Kaufmann

Service: Corporate, Mergers & Acquisitions, and Litigation & Dispute Resolution


The Constitutional Court judgment attempts to resolve several questions regarding the constitutional approach to the judicial interpretation of contractual terms and, in particular, the public policy grounds upon which a court may refuse to enforce them.

In this article, we look at the recent judgement delivered in in the Western Cape Division of the High Court of South Africa in the matter of Café Chameleon CC v Guardrisk Insurance Company Limited. This judgement is a huge blow to the insurance industry, which has taken the position that claims lodged in the wake of the national COVID-19 lockdown implemented by the government with effect from 26 March 2020, are not covered by the Business Interruption insurance policies issued by them. This judgement creates a precedent and a legal basis for a potential pay-out of Business Interruption insurance claims and indeed, possibly opens the door for an avalanche of litigation and further claims.

At the commencement of lockdown, we posted a short video clip explaining why Business Interruption insurance would not likely respond to the COVID-19 lockdown. The Western Cape High Court had a different perspective of matters. In this case, the Applicant (Café Chameleon) approached the High Court for an urgent declaratory order that the Respondent (Guardrisk) was obliged to indemnify it under a Business Interruption policy taken out with Guardrisk, for the losses suffered by Café Chameleon as result of the COVID-19 lockdown. Guardrisk opposed this application on the basis that inter alia (i) Café Chameleon’s loss was not caused by the occurrence of COVID-19 but by the imposition of the lockdown regulations; (ii) that their loss (if any) was not covered by the Infectious Diseases extension in the policy and (iii) that there was no causal link between the lockdown regulations and the Infectious Diseases extension (i.e. that the lockdown regulations themselves did not trigger the Infectious Diseased extension in the Business Interruption policy).

The basis of Café Chameleon’s argument was that the regulatory regime had created a situation which had severely interrupted its ability to conduct its business. The Court agreed with this.

The fact that Café Chameleon was unable to show (as required by the policy) that a COVID-19 case had been established within a 50km radius of the insured premises and that such infection was the cause of the lockdown affecting the business, was rejected by the Court because Guardrisk had in fact admitted that at least one case of COVID-19 had occurred within the required radius.

The Court, in its judgement, relied on the South Gauteng Division case of Grand Central Airport (Pty) Ltd v AIG SA Ltd to advance the proposition that an insurance policy must be interpreted in manner that imports a “businesslike” approach and referred to an extract of the Grand Central case (with approval) that “an insurance policy should be construed with sound commercial principles and good business sense, so that its provisions receive fair and sensible application” and that a restrictive consideration of the policy wording without regard to context, was to be avoided. It went further to say that it was not acceptable that a policy should be interpreted with reference to other policies or generalised concerns about the impact of the COVID-19 pandemic on the insurance industry at large – none of which are contained in the policy – and that the policy must be considered on the contractual terms to which both parties have assented, in a sensible manner which underpins sound commercial sense, and not to have an un-business like result.

The question of whether the claim fell within the wording of the policy was argued and Guardrisk presented the position that Café Chameleon’s business was interrupted by regulations that were promulgated to “flatten the curve” and not because of the presence of the of the COVID-19 virus in the 50km radius in question – and for this reason fell outside of the ambit of the insuring clause in the Infectious Diseases extension of the Business Interruption policy taken out by Café Chameleon. This argument was rejected by the Court. Guardrisk had conceded that there had in fact been a COVID-19 positive case reported within the 50km radius of the business. It was on this basis that the Court held that it was difficult not to accept that there was a clear nexus between the COVID-19 outbreak and the regulatory regime that gave rise to the lockdown and (more importantly) that the notion that the regulatory regime was imposed to “flatten the curve” and had little to do with the outbreak itself, was misplaced.

The Court made an interesting observation that the suggestion that this judgement would result in a flood of claims which could lead to potentially substantial losses to insurers, was not a consideration in the interpretation of the Infectious Diseases extension of the Business Interruption policy in question.

It is almost certain the insurance industry will not accept this judgement as the final word on the matter and will no doubt look to take this decision on appeal.

We will keep you updated on developments.