Popular Cape Town restaurant Café Chameleon has taken on insurer Guardrisk for non-payment of business interruption insurance linked to the Covid-19 pandemic – and won.
The win in the Western Cape High Court on June 26 only came to light on Monday night in a Facebook post, but could have major ramifications for other short-term insurers that are either refusing to pay or delaying similar claims.
Speaking to Moneyweb, Café Chameleon’s owner Nico Schoeman said while he is pleased with the successful declaratory court order ruling, for now “we can’t get too excited because we expect an appeal”.
The news has nevertheless buoyed the spirits of other players in the distressed tourism and hospitality industry who are also taking on big insurance companies on the issue.
“There are probably other small businesses like ours with the same policy wording who are following this case and for whom this is likely to have an impact. We built this business for 20 years and just want our businesses to continue and provide an income for our employees who are among the less privileged in society,” said Schoeman.
In the 38-page judgment handed down by Judge Andre le Grange, Guardrisk is declared liable to pay out Café Chameleon “in terms of the business interruption section of the policy for any loss suffered since 27 March 2020 as a result of the Covid-19 outbreak in South Africa.”
Le Grange also ordered Guardrisk to pay the legal costs of Café Chameleon in relation to the case.
Guardrisk, which is a subsidiary of JSE-listed Momentum Metropolitan (formally MMI Holdings), said in a brief response to Moneyweb that it had noted the High Court ruling.
It did not say whether it would be appealing the decision; however, an appeal is likely considering the significance of the case for both the group and the broader insurance industry.
“Guardrisk and HIC [HIC Underwriting Managers] recognise the plight of business owners in the hospitality industry and the need to get clarity on Covid-19 related business interruption insurance as a matter of extreme urgency,” it said.
“We have been paying and will continue to pay claims in line with our policy wordings. In addition, we have noted the ruling made in the Western Cape Division of the High Court on the matter between Café Chameleon CC and Guardrisk Insurance Company Limited. We are in the process of engaging with our legal team to study the judgment and consider the next steps,” it added.
In their submission, Café Chameleon’s lawyers highlighted that the “regulatory regime” (essentially government’s lockdown regulations) in the wake of the Covid-19 outbreak had “severely interrupted” the business, affecting the livelihoods of some 41 employees. The restaurant did not retrench staff, however the government’s UIF Ters programme only paid out for 25 employees in April.
Guardrisk’s legal counsel’s grounds for opposing the matter included:
- The lack of urgency as Café Chameleon “is currently not entitled to any relief under the policy”;
- The relief claimed is inappropriate;
- The restaurant’s loss is not covered under the infectious diseases extension clause in the policy; and
- There is no causal link between lockdown regulations and infectious diseases extensions.
It was also argued by Guardrisk that business interruption losses caused by Covid-19, both worldwide and in South Africa, are “likely to be very substantial” thus placing “significant demand” on insurers resources.
The group warned of a creating a precedent if the court order was in favour of Café Chameleon, which would “open the floodgates of liability” not just for it but the insurance industry more generally.
Le Grange, however, noted that Guardrisk did not provide any basis for this. “In any event, each case must be decided upon its own facts and the law. Whether the floodgates will open, as suggested by the respondent, will ultimately depend upon the prevalence of the precise wording of the notifiable disease extension in any contract of this nature.”
He added: “The gloomy predictions of industry collapse within the insurance world … are therefore nothing more than speculation. No substantive information was provided by the respondent [Guardrisk] regarding its own exposure [for instance its assets and liabilities, its reinsurance cover, and the estimated liability to its clients as a result of business interruption due to Covid-19].”
Weak point shot down
The judge had even harsher words for Guardrisk, pointing out that even if the company “is confronted with substantial insurance claims” there is no reason for it to discharge its obligations.
“It cannot be a defence for an insurer to say that it must be excused from honouring its contractual obligations because its business has unexpectedly incurred greater debt than had been expected,” he said.
Loss adjustment firm Insurance Claims Africa (ICA) has welcomed the court’s decision. It is currently representing more than 500 clients in the tourism and hospitality sector, trying to secure payment or some sort of settlement on similar claims with most short-term insurers.
“This case quite clearly dealt with the aspects [of business interruption insurance non-payment] that we were challenging,” ICA CEO Ryan Wooley told Moneyweb, describing it as a major, precedent-setting win for the tourism and hospitality sector.
“Realistically speaking, we expect the judgment to be appealed, however it has caused us to rethink our legal strategy …. If it goes to the Supreme Court of Appeal [SCA] on appeal and the insurers lose, it could spark a big financial crisis for the short-term insurance industry.
“I am told this form of insurance cover represents just around 3% of the sector, so the industry can afford to take some pain, especially if insurers opt for a settlement or arbitration,” said Woolley.
“If they lose at the SCA, they are running the gauntlet of ending up paying the full amount, which will run into billions of rand.”