Johannesburg High Court provides guidance on joint and composite policies and related issues in the context of COVID-19 business interruption claims, Amelia Costa, Celeste du Toit

The Johannesburg High Court recently released a decision in the case of 43 Air School Holdings Proprietary Limited and Others v AIG South Africa Limited 2023 ZAGPJHC 186, which 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 claims. A copy of the judgment can be accessed here.

Background

The second applicant in the matter, 43 Air School Proprietary Limited (“43 Air School”), is a wholly owned subsidiary of the first applicant, 43 Air School Holdings Proprietary Limited, which is also a shareholder in the third applicant, PTC Aviation Proprietary Limited (“PTC”) and the fourth applicant Jet Orientation Centre Proprietary Limited (“JOC”). 43 Air School is the main operating entity of all four of the applicants.

The applicants operate in the aviation field, and provide inter alia pilot training, air traffic control training and airline pilot preparation services for commercial, private, general and military airline sectors. 43 Air School operates from an aerodrome located in Port Alfred in the Eastern Cape, and both PTC and JOC operate from Gqeberha (formerly Port Elizabeth) in the Eastern Cape. There is also a business premises in Lanseria, Gauteng.

43 Air School held business interruption cover with the insurer, which included an extension of the cover for an outbreak of infectious or contagious disease within a radius of 25 kilometres of the premises, which was defined in the policy to mean “any premises used for the purpose of the insured”. This cover extended to the business and premises in Port Alfred, Gqeberha and Lanseria.

Following the implementation of the national state of disaster and national lockdown due to COVID-19 which came into effect on 26 March 2020, 43 Air School submitted a business interruption claim to the insurer for losses sustained by it at the premises in Lanseria, Port Alfred and Gqeberha. It is important to note that PTC and JOC did not submit separate claims at this point in time, but the losses suffered included those of PTC and JOC. The basis of the claim was that it was compelled to change its business location as the Lanseria business was closed. The business operating from Port Alfred was also affected due to COVID-19 within a 25km radius of the premises which only occurred after the imposition of the national lockdown.

The insurer rejected the claim on inter alia the bases that:

The national lockdown was not in response to an incident of COVID-19 within a 25km radius of the premises in Port Alfred as it only occurred thereafter;
The policy was not underwritten on a joint basis and therefore;
PTC was not insured under the policy and was not entitled to indemnification based on a claim of 43 Air School; and
a case of COVID-19 in Gqeberha could not constitute a trigger event for 43 Air School operating in Port Alfred.

The applicants instituted an application to contest the rejection of the claim and it sought declaratory relief that the insurer was liable to 43 Air School, PTC and JOC in terms of the policy.

Analysis by the court

The court was tasked with determining whether:

PTC was insured under the policy;
43 Air School, PTC and JOC were entitled to the declaratory relief sought where only 43 Air School submitted a claim; and
43 Air School was entitled to indemnification where its business was interrupted but the outbreak of COVID-19 occurred only after the imposition of the national lockdown, or whether it was entitled to rely on the outbreak of COVID-19 in Gqeberha as a trigger event for cover.

In considering whether PTC was covered under the policy, the Court had regard to the information submitted by 43 Air School at the renewal of the policy for the relevant period, which referred to property belonging to PTC and JOC, as well as the history of management and control between 43 Air School and PTC. This, together with the fact that the insurer had previously paid a claim of PTC’s under the policy, led to the finding that PTC was insured under the policy.

Turning to the issue of the basis on which the policy was underwritten, and whether 43 Air School, PTC and JOC were entitled to indemnification in the circumstances, the court made the following key observations and findings:

It was evident from the policy that it refers to companies which are managed and controlled, as well as subsidiaries.
A composite policy is identified in the description of the insured, namely where they have authority to insured, 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 is apparent that the facilities are interrelated and supportive, and that an interruption at one site will impact another site.
A flexible common-sense approach must be adopted over strict logic in insurance contracts so as to give effect to the intention of the parties to the contract.

On this basis, the court was persuaded that the applicants should all be afforded relief, especially where they shared the same facilities to conduct training and provide support services. The court stated that to not allow this, would lead to an absurdity that was not contemplated.

The court therefore granted an order finding the insurer liable to compensate 43 Air School, PTC and JOC, with the quantification to take place between the parties.

Concluding remarks

The judgment 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.

While the impact of this on the quantification of claims was not traversed, it is critical from a loss adjustment perspective as it can impact on 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 are advised to take note of this judgment and the factors highlighted therein when considering claims involving an insured business which operates through various insured subsidiaries or managed/controlled companies, and at various premises.

Should you require further information regarding the judgment and the impact thereof, please contact Amelia Costa.