A recent High Court judgment provides guidance on joint and composite policies and the treatment of claims by multiple policyholders under one policy in the context of Covid-19 business interruption (BI) claims, according to law firm Clyde & Co.
Who were the parties to the litigation?
There were four applicants:
- 43 Air School Holdings (Pty) Ltd.
- 43 Air School (Pty) Ltd (hereafter “43 Air School”), which is wholly owned by Air School Holdings. 43 Air School is the main operating entity.
- PTC Aviation (Pty) Ltd, which is 50%-owned by Air School Holdings, with the balance held by a trust.
- Jet Orientation Centre (Pty) Ltd. PTC and 43 Air School hold shares equally in JOC, making 43 Air School an effective holder of 75% of the shares in JOC.
The applicants operate in the aviation field, and provide, inter alia, pilot training, air traffic control training and airline pilot preparation services for the commercial, private, general, and military airline sectors.
43 Air School operates from the Port Alfred Aerodrome, and PTC and JOC operate from Gqeberha, which is also in the Eastern Cape. There is also a business premises in Lanseria in Gauteng.
The respondent was AIG South Africa Limited.
What did the policy provide?
43 Air School had a short-term insurance policy, which included BI cover, with AIG. The policy included an extension of BI cover for an outbreak of infectious or contagious disease within a radius of 25 kilometres of the premises, which the policy defined as “any premises used for the purpose of the insured”. It applied to the business and premises in Lanseria, Port Alfred and Gqeberha. The BI cover amount was R66 443 230.
What was the basis of 43 Air School’s insurance claim?
Following the implementation of the national state of disaster and the lockdown on 26 March 2020, 43 Air School submitted a BI claim for losses sustained by it at the premises in Lanseria, Port Alfred and Gqeberha.
Clyde & Co pointed out that PTC and JOC did not submit separate claims at this time, but the losses suffered included those of PTC and JOC.
43 Air School said it was compelled to change its business location because it was fundamentally impacted by the lockdown and Covid-19 was diagnosed within a 25km radius of the Lanseria business. The business operating from Port Alfred was also affected because Covid-19 was diagnosed within a 25km radius of the premises.
Why did AIG reject the claims?
AIG rejected 43 Air School’s first claim because:
- The lockdown was not in response to a case of Covid-19 within a 25km radius of the premises in Port Alfred;
- The policy was not underwritten on a joint basis; and
- A case of Covid-19 in Gqeberha could not constitute a trigger event for 43 Air School operating in Port Alfred.
It rejected 43 Air School’s second claim because it was not submitted before the launch of the High Court application, and because it was not a joint policy.
PTC’s claim was rejected because AIG asserted it was not submitted prior to the launch of the application and because PTC was not insured under the policy.
JOC’s claim was rejected because it was not submitted before the launch of the application.
What relief did the applicants seek?
The applicants approached the High Court in Johannesburg and sought an order:
- Declaring that AIG is liable to compensate 43 Air School, PTC and JOC in respect of BI cover from 27 March 2020 to 31 May 2020;
- Directing AIG to engage 43 Air School, PTC and JOC “meaningfully” to quantify their BI claims for 27 March 2020 to 31 May 2020; and
- Directing AIG to pay the applicants’ costs.
What were the issues before the court?
The High Court said the following three issues had to be determined:
- Whether PTC was insured under the policy;
- Whether 43 Air School, PTC and JOC were entitled to the declaratory relief sought when only 43 Air School submitted a claim; and
- Whether 43 Air School was entitled to indemnification for the period during which its business was interrupted because of the lockdown but where the outbreak of Covid-19 occurred thereafter and could not have been the cause of the lockdown.
Was PTC covered?
The reasons counsel for AIG put forward for disputing that PTC was covered under the policy included:
- There was no shareholder relationship between 43 Air School and PTC;
- The policy did not refer to PTC;
- PTC did not prove it was covered under the policy;
- PTC was a subsidiary of 43 Air Holdings, not of 43 Air School, and 43 Air School could not have arranged insurance for PTC as a subsidiary; and
- It was clear from the wording of the policy that insurance was afforded to National Airways Corporation (NAC), 43 Air School and subsidiary companies “managed” and “controlled” by NAC and 43 Air School and for which they have authority to obtain insurance.
NAC sold 43 Air School to its management team and a private equity consortium in July 2019.
Counsel for the applicants directed the court’s attention to the information that had been provided to the insurance broker and underwriter when the policy was renewed in July 2019.
Counsel contended it was evident that the policy was renewed as a composite insurance policy including NAC and 43 Air School (Pty) Ltd. The annexures reflected property belonging to PTC and JOC.
The High Court concluded that PTC was insured under the policy for the reasons put forward by 43 Air School. In addition, AIG had previously paid a claim of PTC under the policy.
The court also noted that, in its answering affidavit, AIG had admitted there was a history of covering both NAC and 43 Air School, which would include 43 Air School Holdings and its subsidiaries and 43 Air School and its subsidiaries.
Were the applicants entitled to indemnification?
Turning to the basis on which the policy was underwritten and whether the applicants were entitled to indemnification, Clyde & Co said the court made the following key observations and findings:
- It was evident that the policy refers to companies that are managed and controlled, as well as subsidiaries, which are clearly under the control of 43 Air School Holdings, which replaced NAC, and 43 Air School, which manages some subsidiaries and arranges insurance.
- A composite policy is identified in the description of the insured, namely where they have authority to insure, jointly and severally, each for their respective rights or interests.
- Having regard to the description of the training services offered by the applicants and the specialised field in which the applicants operate, it was apparent that the facilities were interrelated and supportive, and that an interruption at one site would impact another site.
- A flexible common-sense approach must be adopted over strict logic in insurance contracts to give effect to the intention of the parties to the contract.
What did the court find and order?
The court was persuaded that the applicants should be afforded relief, particularly where they shared the same facilities to conduct training and provide support services. The court stated that not to allow this would lead to “an absurdity” that neither the insurer nor the insured had contemplated.
The court made the following order:
- AIG was liable to compensate 43 Air School, PTC and JOC in respect of BI cover for 27 March 2020 to 31 May 2020;
- AIG was directed to engage the applicants meaningfully to quantify their BI claims; and
- AIG must pay the applicants’ costs.
What are the key learnings from this case?
Clyde & Co made the following observations about the judgment:
- It provides useful guidance on the factors a court will take into account when determining whether the impact of an event at one location can be used as a trigger event for cover at another location, namely the field in which the businesses operate, and the factual extent to which the business operations are interrelated and supportive of each other.
- Although the court did not address how this impacted the quantification of claims, it is critical from a loss adjustment perspective because it can affect the “start date” of cover, and the application and treatment of sub-limits and deductibles, depending on the facts of the claim and the provisions in the policy wording.
- Insurers and loss adjusters should note the factors highlighted in the judgment when considering claims involving an insured business that operates through various subsidiaries or managed/controlled companies and at various premises.
