South African Ruling Exposes Continental Divide over Cause of COVID-19 Business Interruption Losses
The High Court of South Africa in Cape Town recently issued a detailed opinion on the issue of causation in the context of COVID-19 business interruption claims. While this court considered an affirmative grant of infectious disease coverage, its reasoning sheds light on the application of virus exclusions in the U.S.
In Ma-Afrika Hotels (Pty) Ltd and Another v Santam Limited, the policyholder purchased a policy with a coverage extension affirmatively providing coverage for loss of business income due to the outbreak of infectious disease. In substance, this extension covered:
Loss resulting in interruption or interference with the Business due to Notifiable Disease occurring at the Premises or Notifiable Disease occurring within a radius of 40 kilometers of the Premises.
“Notifiable Disease” shall mean illness sustained by any person resulting from any human infections or human contagious disease an outbreak of which the competent local authority has stipulated shall be notified to them.
The parties agreed COVID-19 constituted a Notifiable Disease under South African law and an outbreak of COVID-19 occurred within 40 kilometers of the insured premises.
However, the insurer denied coverage arguing that the cause of the business income loss — the government lockdown orders — resulted from a global outbreak of infectious diseases, not a local outbreak contemplated by the extension. In other words, the insurer took the position the existence of COVID-19 and the reason for the government response to COVID-19 amounted to two separate perils or causes of loss both of which had to be local for the coverage to apply.
The South African court exhaustively reviewed business income litigation throughout common law jurisdictions of the United States, UK, Canada, New Zealand and Australia as well as cases in Switzerland, The Netherlands and Germany. Focusing on the initial ruling in the UK test case, the South African court observed:
The Court concluded that most of the causation issues raised fell away upon concluding that the nationwide outbreak of Covid-19 and the resulting government and public response formed a “composite peril”. The approach adopted by the Court with regard to policy construction, resulted in the Court effectively avoiding issues of causation which may have arisen, by concluding that the peril insured was a “composite peril” indivisibly comprising the nationwide outbreak of Covid-19 and the resultant government and public response.
Turing back to its own country, the South African court concluded “Covid-19 and government response to Covid-19 are an inseparable part of the same insured peril.”
In the United States, policyholders and insurers have swapped positions. In general, U.S. policyholders argue that the lockdown orders — not the virus — caused their business income losses while the insurers argue the virus and lockdown orders are inextricably intertwined. The reason for the game of musical chairs is the virus exclusion, which typically states:
We will not pay for loss or damage caused by or resulting from any virus, bacterium or other microorganism.
Through this impressive display of cross-continental intellectual flexibility, insurers seem to be gaining traction in the U.S. with the same “composite peril” argument they vigorously resist abroad.
Most recently in Chattanooga Professional Baseball LLC v. National Casualty Co., No. CV-20–01312-PHX-DLR (D. Ariz.), the court rejected the policyholder’s assertion that its business income losses were caused by the government’s orders in response to the virus but not by the virus itself:
There is no allegation in the complaint that absent the pandemic, the government would have been prompted to issue stay-at-home orders or otherwise inhibit access to the ballparks. Similar COVID-19 causation arguments have been consistently rejected. See Diesel Barbershop, LLC v. State Farm Lloyds, №5:20-CV-461-DAE, 2020 WL 4724305, at * 6 (W.D. Tex. Aug. 13, 2010) (“While the Orders technically forced the Properties to close[,] the Orders only came about sequentially as a result of the COVID-19 virus. . . Thus, it was the presence of COVID-19 . . . that was the primary root cause of Plaintiffs’ business temporarily closing.”); Franklin EWC, Inc. v. The Hartford Finn. Servs. Grp., Inc., №20-cv-04434 JSC, 2020 WL 5642483, at *2 (N.D. Cal. Sept. 22, 2020) (“[U]nder Plaintiffs’ theory, the loss is created by the Closure Orders rather than the virus, and therefore the Virus Exclusion does not apply. Nonsense.”).
Just as policyholders are not a coordinated and homogeneous collection of interests, the global “insurance industry” is made up of thousands of unrelated insurance companies and insurance groups. Nevertheless, it does little to build trust and confidence among the public and policymakers when the insurance industry seems to be taking whichever side of an argument supports a denial of coverage.
