The Supreme Court of Appeal (“the SCA”) recently delivered an important judgment in AIG South Africa Limited v 43 Air School Holdings (Pty) Ltd and Others [1] in relation to the much-debated question regarding the difference between joint and composite policies. 

The SCA found that, on the facts of the matter, the different entities insured under the Policy did not have the same, or a common interest in the subject-matter, namely business interruption cover for loss of gross profit but rather that each entity has a separate or different interest in its own loss of gross profit. Accordingly, the policy in respect of business interruption (for various separate entities) cannot be joint but is composite.  

The SCA also found that where a policy is composite in nature, the obligations under the policy apply individually to each insured and accordingly only the insured who complied with its reporting obligations under the policy is entitled to claim an indemnity under the policy. 

Background 

 43 Air School Proprietary Limited (“43 Air School”) is a wholly owned subsidiary of 43 Air School Holdings Proprietary Limited (“Holdings”). Holdings also holds shares in in PTC Aviation Proprietary Limited (“PTC") and Jet Orientation Centre Proprietary Limited (“JOC”). 43 Air School is the main operating entity of the group. 

 AIG issued an Assets All Risk policy to 43 Air School; National Airways Corporation (Pty) Ltd (“NAC”)(not Holdings) and its ‘subsidiary companies, managed, controlled, membered companies, joint ventures, sports, social and recreational clubs and societies and any other persons or entities for which they have the authority to insure, jointly or severally, each for their respective rights and interest’, covering, amongst other things, business interruption losses due to the outbreak of a notifiable diseases (i.e. COVID-19) within a 25-kilometre radius of its premises. 

Following the outbreak of COVID-19 in South Africa and the subsequent National lockdown, 43 Air School submitted two claims for loss of gross profit under the policy for two periods of business interruption, arising from the outbreak of COVID-19 within 25 kilometres of its premises in Port Alfred (“Claims 1 and 2”). AIG rejected Claim 1 and 2, on the basis that 43 Air School failed to prove a causal link between the COVID-19 outbreak within the specified radius and the alleged losses. 

43 Air School launched an application in the High Court of Johannesburg against AIG for a declaratory order that AIG was liable to compensate 43 Air School for business interruption losses. In the application, 43 Air School sought not only to hold AIG liable for Claims 1 and 2, but also for a new third claim relating to the outbreak of COVID-19 within 25 kilometres of the premises of 43 Air School’s subsidiary, 43 Advanced in Lanseria and an outbreak of COVID-19 within 25 kilometres of the premises of PTC and JOC in Gqeberha, which were subsidiaries of Holdings and not of 43 Air School (“Claim 3”). Claim 3 was premised on 43 Air School’s assertion that the policy was a joint policy i.e. a single contract not a composite one which consists of a bundle of numerous policies contained in one document, in which each insured party has its own divisible risk, rights and obligations.

AIG argued that the nature of the claims changed when they were incorporated in the application because 43 Air School seeks to hold AIG liable based on an outbreak in Gqeberha and Lanseria, not only Port Alfred. This is based on the contention that the policy was a joint one in respect of 43 Air School, PTC and JOC. AIG denies that the policy was a joint policy and submitted that it was rather composite. 

Whether the policy was composite or joint was fundamental to the success of each litigant because if the policy was joint (as alleged by 43 Air School) then proof of the composite peril (lockdown and outbreak of COVID-19 in Port Alfred) would trigger cover for all the listed insured parties. In a similar vein, notice by 43 Air School of Claim 1 and 2 would satisfy the reporting obligations of the other parties’ claims.

The core issues for consideration

The SCA was tasked to determine whether: 

• The policy (in respect of business interruption) was joint or composite (it found on the facts it was composite);
• PTC was insured under the policy (it found it was not, as it was a subsidiary of Holdings who were not a named insured);
• 43 Air School, PTC and JOC complied with the reporting obligations in the policy before it launched the application (and it found that 43 Air School had complied when it notified AIG of Claims 1 and 2, but not POC and JOC whose claims (Claim 3) were first notified in the High Court application); and
• 43 Air School (in respect of Claims 1 and 2) had proven a causal link between the business interruption losses and the insured event as defined in the policy (it found it was not necessary to prove causation but only the two elements of the composite peril: the lockdown and the outbreak in Port Alfred).

For the purposes of this article, our focus is on the SCA approach in distinguishing between joint and composite policies.

43 Air School’s argument:

In contending that the policy was a joint one, 43 Air School relied on the following points:  

• the interrelationship between itself, PTC, and JOC at corporate and operational levels;
• the definitions of "insured" and "business" in the policy, asserting that 43 Air School, PTC and JOC were all part of the “43 Air School Group”; and
• the fact that the business interruption sum insured and premium were stated as a single, globular amount for all insured entities.

If 43 Air School was correct in its argument that this was a joint policy, it would mean that the outbreak of COVID-19 within 25 kilometres of any one of its premises (Port Alfred and/or Lanseria and/or Gqeberha) would be sufficient to trigger AIG’s liability under the policy. 

AIG’s argument:  

AIG on the other hand contended that the policy was composite, as the subject-matter of insurance under the business interruption section was the interest that each entity held in its own gross profit, which was not shared by the others. 

SCA analysis – joint or composite policy

At the outset the SCA remarked that definition of ‘insured’ in the policy may indicate whether a policy is joint or composite, but this is not necessarily so. It may also be necessary to consider other clauses or provisions in the policy to determine whether the policy is the one or the other. 

It is accepted that where a policy covers more than one insured, it may either be joint (which effectively means that there is only one policy) or composite (which means that there is in fact a bundle of policies contained in one document).

Drawing on various authorities[2], the SCA held that the distinguishing factor between a joint and a composite policy lies in the nature of the interests of the insured parties, and it summarised as follows:  

A policy is joint: 

• If the parties' interest in the subject-matter of the insurance is joint, in the sense that they are exposed to the same risk and will suffer the same loss on the occurrence of the peril insured against. 

A policy is composite: 

• Where the parties' interests are separate and distinct, even though it is in respect of the same subject-matter, the policy would but composite, which is intended to insure each of the insured separately in respect of its own interests. 

In this instance, the SCA found that the subject-matter of the business interruption insurance is the gross profit of the insured entity. If the different entities do not have the same, or a common interest in each other’s ‘gross profit’, but have separate or different interests in that regard, the policy in respect of business interruption cannot be joint but is composite. The fact that each entity brought its own claim, in respect of its own interest, underscores the conclusion that the business interruption cover was composite. This was supported by the fact that the ‘Breach of Conditions’ clause in the policy provides: ‘The Conditions of this policy shall apply individually to each insured entity so that any breach shall prejudice only the Insured entity to which the breach applies.’ 

As the policy was composite PTC and JOC, whilst being subsidiaries of 43 Air School and insured entities under the policy, they had failed to comply with their individual reporting obligations.

Other issues considered by the SCA:

In considering whether Holding and PTC are ‘insured’ parties under the policy, the SCA had regard to the underwriting documents which made it clear that there was no evidence of the broker (acting on behalf of 43 Air School) ever giving instructions to AIG to change the name of the insured on the policy to include Holdings and PTC as insured parties following the transfer of ownership of NAC to Holdings (who held 50% of the shares in PTC). The final instruction the broker gave to AIG prior to the renewal of the policy was to leave the names of the insured on the policy as it appeared i.e. 43 Air School and NAC. Thus, neither Holdings nor PTC fell under the description of ‘insured’ in the policy and were accordingly not insured under this composite policy. 

In considering whether 43 Air School, PTC and JOC had complied with their reporting obligations under in the policy before launching the application, the SCA held that the reporting requirements stipulated in the policy constituted a clear condition precedent to AIG’s liability, in the sense that a failure to comply with the reporting conditions suspends AIG’s liability. 

The fact that AIG in principle rejected Claim 1 and 2 of 43 Air School does not mean PTC and JOC did not have to comply with the reporting conditions in respect of Claim 3. 

Concluding remarks

The question whether a policy is a joint or composite one will have far reaching consequences for insurers and brokers, particularly in instances where large corporate companies are insured under Assets All Risk policies and the sums insureds are calculated and recorded on a globular basis. 

This judgment again confirms that a policy must be interpreted as a whole, having regard to the language, context, and purpose of the policy. 

The fact that the definition of the term ‘insured’ may include wording commonly used to identify a composite policy namely, “they have authority to ensure jointly and severally each for their respective rights or interest” is in itself not sufficient to determine whether a policy is composite, albeit it may be indicative. It is still important to determine whether the actual interests insured under a policy (and in some instances the obligations under the policy) are joint or ‘divisible’ so to determine whether the policy is composite or joint. 

The SCA’s decision should also alert insurers and brokers to carefully consider the General Provisions of a policy, because if they refer to multiple insureds, it seems from the judgment that it is more probable than not that those type of clauses will be interpreted in favour of a composite policy construction. 

Lessons to be learnt 

1. The definition of ‘insured’ in the policy is crucial. The brokers and insureds need to take care when defining the ‘insured’ as they need to be able to prove the shareholding and other interests in the entities within the group they seek to insure. The practice of adopting a shotgun approach is ill advised.
2. In listing the named insureds on the schedule, proper instructions are required to ensure that those insureds listed are in fact subsidiaries.
3. According to the definition of ‘insured’, these may include the insureds’ subsidiaries, member companies managed or controlled by them, joint venture partners, social and recreational clubs, and societies (and any other persons or entities) for which they are authorised to insure. An additional entity that the insured wishes to have cover for should be specifically listed and its interest in the subject matter verified.
4. The underwriters need to satisfy themselves that they have a proper understanding of ‘who’ they insure.
5. Payment to one insured under a joint policy operates as a complete discharge of the insurer’s obligations under the policy in respect of all insureds’ claims, whereas in a composite policy the payment to one insured is to that individual entity only and does not impact the standing of the insurer with the other insureds’ claims. The Agreement of Loss needs to be clear in that regard.
6. In respect of the insured’s obligations under a policy, in a composite policy, each individual insured is under a duty to comply with the obligations recorded in the policy, whereas in a joint policy, it is sufficient for one insured to comply with the obligations.
7. In respect of limits of liability specified in the policy, especially for sub-limits, where it is a composite policy each limit of liability will apply separately to each insured as if a separate policy was issued. If this is not what the insurer intends (i.e. multiple sub-limited claims from multiple insureds), make its position clear in the policy documentation. The same principles apply to Deductibles, if not the premium is probably too low.
8. The Declared Values must include all the entities that could possibly fall under the umbrella of ‘insured’. It is preferable to get a full disclosure of each entity and their own address and the nature and extent of their own distinct and divisible interest. Whether a policy is composite or joint, may have an impact on, amongst other things:
   •    disclosure obligations;
   •    concentration of risk;
   •    compression of risk;
   •    target risk locations;
   •    calculation and payment of premium; 
   •    application of average.
9. It is important to understand the nature of the interest insured. As the nature of the interest insured may be indicative of the nature of the policy and whether it is composite or joint.
    

A copy of the judgment can be accessed here. 

[1] (640/2023) [2024] ZASCA 97.

[2] General Accident Fire and Life Assurance Corporation, Limited, and another v Midland Bank, Limited and others [1940] 2 KB 388 at 404-407; E J MacGillivray MacGillivray on Insurance Law 15th ed (2014) at para 1-203; Samuel Ltd v Dumas 1924 A. C 431 at 445; D M Davis Gordon & Getz: The South African Law of Insurance 4 ed (1993) at 142.