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Big win for hospitality sector after appeal court rules against Guardrisk

Big win for hospitality sector after appeal court rules against Guardrisk
Illustrative image by Gallo Images/Misha Jordaan)

Ten months after lockdown was announced, the Supreme Court of Appeal has ruled in favour of a Cape Town restaurant. It’s deemed to be a massive win for the battered tourism and hospitality sector, with the potential to bring the short-term insurance sector to its knees.

The lockdown – and not government action – resulted in business closures and losses, which means short-term insurers will now have to pay their clients. On Thursday 17 December the Supreme Court of Appeal (SCA) ruled in favour of Cape Town restaurant Café Chameleon in its case against insurer Guardrisk. 

The ruling, made with a costs order, was welcomed as precedent-setting because it could close the door on the controversy around the business interruption (BI) insurance claims. But for insurers, it’s a potentially ruinous lesson about shoddy underwriting as it will set them back billions of rand – and could open the floodgates for further claims.

Until 26 November, BI claimants had all emanated from the tourism and hospitality sector. Then, the Western Cape High Court ruled in favour of luggage retailer Interfax in its case against Old Mutual Insure, finding it liable for the company’s pandemic-related losses for a maximum of R17.6-million.

And now Guardrisk – a subsidiary of Momentum – will have to pay Café Chameleon its full BI claim.

The appeal stems from Guardrisk’s loss in the Western Cape High Court on 8 July, when it was found liable to pay Café Chameleon’s claim for losses suffered due to the lockdown.

On 18 November, Santam – South Africa’s biggest short-term insurer and the “face” of the BI issue due to the number of hospitality sector clients at loggerheads with the insurer over payouts – lost against Ma-Afrika Hotels and Stellenbosch Kitchen.

More twists and turns in business interruption judgment

Santam had hoped to join forces with Guardrisk in the appeal, which was lodged on an urgent basis due to the crisis in the hospitality sector, but the SCA would not entertain it. The Santam appeal, which was due to be heard earlier in December, has since been postponed sine die.

The SCA judgment –  deemed to be the “last word” on the case as it’s unlikely to be heard in the Constitutional Court – says that the government’s imposition of the lockdown in response to outbreaks of a notifiable or contagious disease (Covid-19) was covered by the infectious diseases clause. 

It also reinforced the position taken in the UK’s Financial Conduct Authority test case and Western Cape High Court judgments in the Ma-Afrika Hotels-Stellenbosch Kitchen v Santam and Interfax v Old Mutual cases.

Public loss adjuster Insurance Claims Africa (ICA), which has been at the centre of the fight for the hospitality and travel sector, has welcomed the judgment, saying now that legal certainty had been established, “there should be nothing left for insurers to do but resolve their customers’ claims”.

ICA represents more than 750 hospitality and tourism clients of Santam, Bryte, Hollard, Guardrisk, Old Mutual and others in the BI matter.

ICA CEO Ryan Woolley said the Café Chameleon ruling was a “significant win” for an industry that had suffered tremendous losses.

Without urgent payouts from insurers, many doors are going to close, and many more thousands of jobs are going to be decimated.

“As South Africa faces a second wave of the Covid-19 pandemic, hope of survival is fast evaporating for many of these businesses who were counting on the summer holidays to carry them through to 2021. The latest statistics show that Cape Town hotel occupancy is sitting at a devastating 18%. The rest of the country is in a similar position. 

“Without urgent payouts from insurers, many doors are going to close, and many more thousands of jobs are going to be decimated.”

Café Chameleon owner Nico Schoeman did not respond to a Business Maverick query about the quantum of the claim but his attorney, Ren Dunster said, “We applaud the urgency and clarity with which the judges dealt with the matter. We are privileged to have such a strong judiciary in South Africa.”

Ma-Afrika CEO André Pieterse called on Santam to stop delaying the issue, saying it has shown a “total disregard” for the decisions of eight high court judges who had ruled against them and other short-term insurers.

“It will be a total disgrace and do irreparable harm to the tourist industry and to the short-term insurance business if Santam should ignore today’s ruling by the Supreme Court of Appeal and continue with their application seeking leave to appeal.”

In July, Santam had offered R1-billion in relief for clients. The insurer denied it was under pressure from the Financial Sector Conduct Authority (FSCA) to establish the fund, claiming it wanted to “do the right thing” for its hospitality clients due to the claims likely to arise from Covid-19.

Group chief executive Lizé Lambrechts said, “We really want to help our clients; we are not unsympathetic to what the lockdown has done to them.”

The ex gratia payments, offered by some insurers after the FSCA’s intervention, were only offered to policyholders with contingent business interruption insurance in place that had policy extensions for contagious diseases, while legal certainty was sought through the courts.

Lambrechts said Santam believed its CBI policy wording was specific, only covering businesses for localised disease outbreaks. The extensions were only offered to clients before the cut-off date of 18 March 2020. The payments ranged from R25,000 to R1.5-million.

On Thursday, Santam said it had taken note of the judgment and that “matters involving contingent business interruption are complex in nature and require careful consideration”.

The insurer said it would consider the judgment and its potential impact on its own appeal involving Ma-Afrika Hotels and Stellenbosch Kitchen.

But, true to form, it said while there are “similarities” between the cases, there are also material differences in the initial judgments that were handed down by the Western Cape High Court.

“Santam maintains its commitment to achieving legal finality as soon as possible.”

Insurers, though, have been accused of stalling on their obligations to their clients.

I doubt the ConCourt will overrule the SCA on this, especially when the SCA – due to the origins of insurance law – followed UK law and the position of its FCA in its judgment.

Guardrisk could attempt launching a Constitutional Court appeal with the consent of the SCA, but the apex court is unlikely to hear the matter, says Professor Birgit Kuschke from the University of Pretoria.

“I doubt the ConCourt will overrule the SCA on this, especially when the SCA – due to the origins of insurance law – followed UK law and the position of its FCA in its judgment. 

“The ConCourt will protect the fundamental rights of individuals more than the profitability of big business, unless the latter’s status impacts significantly on individuals, to the extent that society as a whole suffers. The ConCourt should focus more on the interests of SMEs, and the individual, than on big business at the moment.”

Kuschke said the insurers have always maintained that the lockdown was an intervening cause, to try to break the physical chain of events. The Covid-19 pandemic and the lockdown were inevitably linked and not new events.

“Once you’ve proven the factual causation of the lockdown – that the government didn’t have an option but to lock us down as it was an absolutely necessary consequence of the pandemic – it creates a joint causal event that leads to the damages.”

Kuschke, a practising attorney specialising in insurance and contract law, leads a coalition of policymakers, law firms and advisory groups in the BI battle against some of South Africa’s leading short-term insurers.

She said insurers must be held liable in accordance with their policy wordings because they simply ignored infectious diseases, despite Sars, Mers and Ebola being well-documented for over a decade.

“It was inevitable that we would suffer under some sort of universal disease sooner rather than later. We’ve known about these infectious contagious diseases for over a decade but they ignored it.” BM/DM

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