Interpretation of indemnity clauses

The applicants in Grassy Knoll Trading 78 CC t/a Fat Cactus and Another v Guardrisk Insurance Company Limited [2021] 1 All SA 503 (WCC), sought a declaratory order that Guardrisk was obliged to indemnify them under their insurance policy for Covid-19 related losses since they amounted to an interruption of, or interference with their business due to ‘notifiable disease occurring within a radius of 50 km of the premises’.

By Merilyn Rowena Kader LLB (Unisa), Legal Editor at LexisNexis South Africa.

Interpretation of indemnity clauses: In March 2020, the COVID-19 pandemic was declared a national disaster in South Africa. Regulations were then issued in an attempt to curb the spread of the virus including a national lockdown and a prohibition on the sale of alcohol.

The applicants in Grassy Knoll Trading 78 CC t/a Fat Cactus and Another v Guardrisk Insurance Company Limited [2021] 1 All SA 503 (WCC) operated restaurants in Cape Town. The impact of the pandemic led to a decline in their business, exacerbated by the alcohol ban. In order to reduce overall losses, the applicants closed their restaurants. In June 2020, the applicants submitted claims to the respondent (Guardrisk) under a business interruption section of their insurance policy, for losses, which they suffered. The ‘disease clause’ on which they relied, insured them against loss resulting from interruption of, or interference with their business due to ‘notifiable disease occurring within a radius of 50 km of the premises’. The claims were rejected on the ground that the applicants had not provided evidence that their loss was a consequence of a confirmed case of COVID-19 within the specified radius of their premises. Guardrisk maintained that the business interruption suffered by the applicants was not caused by the occurrence of COVID-19 within a 50 km radius of their premises, but by the global COVID-19 pandemic and the government’s response to it, which in Guardrisk’s submission were not perils covered by the policy.

The applicants sought a declaratory order that Guardrisk was obliged to indemnify them under their insurance policy.

It was held by Norton AJ that insurance contracts must be interpreted in accordance with the usual rules of interpretation, having regard to their language, context and purpose, and preferring a commercially sensible meaning over one that is insensible or at odds with the purpose of the contract. A commercially sensible meaning, in respect of an insurance contract, is a meaning that both the prospective insured and the insurer must have regarded as meeting their aims in concluding the policy.

The first aspect addressed by the court was the required causal relationship between the notifiable disease peril and the business interruption in the policy. The general approach, unless a different intention appears from the insurance contract, is that the insured peril must be the factual cause and the legal cause of the loss or occurrence, which is covered by the contract. When there are two or more possible causes of the loss or occurrence, which is covered by the contract, a court must determine which is the proximate cause. The disease clause in this case was found to provide cover where the insured peril was the factual and legal cause of the insured’s business interruption, and the proximate cause if there were other competing causes.

On a proper interpretation of the disease clause, the court concluded that the clause provided cover for business interruption caused by the COVID-19 pandemic and the government’s response to it, provided that there had been an occurrence of COVID-19 within the specified radius of the insured’s premises. The applicants were granted the declaratory relief sought regarding Guardrisk’s liable to indemnify them for losses resulting from the business interruption.

Merilyn Rowena Kader
Legal Editor at LexisNexis