With liquidations in South Africa increasing, there are fears that the South African business environment is becoming increasingly attritional. This environment was also reflected in the recently published Deloitte Restructuring Survey, which suggests that there may be a significant shift from business rescue to restructuring in the near future. The retail space, in particular Fourways Mall, were significant impacted.
Most of the liquidations we see are remnants from the COVID-19 pandemic, where certain companies were so significantly impacted that they could not claw back the ground lost during the interruption caused by the pandemic.
Business interruption (BI) insurance, a crucial tool for companies to recuperate some of the pandemic-induced losses, has been at the centre of numerous legal disputes. The recent victory of Fourways Mall in a significant court case regarding its BI claim is a testament to the importance of this insurance in the recovery process.
Important ruling
The joint owners of Fourways Mall have obtained important high court rulings in their attempt to claim more than R1 billion from five insurance companies for business interruption at the struggling super-regional mall linked to the COVID-19 pandemic.
The High Court in Johannesburg was required in terms of an application lodged by Azrapart (Pty) Ltd (controlled by Georgiou) and JSE-listed Accelerate Property Fund, each 50% owners of the mall, to issue an order on three separated issues relevant to the claim.
The importance of the rulings was that if any of the three separated issues was resolved in favour of the insurance companies, that would end the mall owners’ claim.
Image By: https://joburg.co.za
The article adds that, in a judgment handed down on 3 May, Judge Norman Manoim issued rulings on each of the three disputed points in favour of the mall owners.
Accelerate last month asked existing shareholders to stump up as much as R200 million through the issue of new shares to enable “the repositioning of Fourways Mall” and “to settle existing debt”.
The five insurance companies all assumed liability to indemnify the owners of the Fourways Mall for loss in various proportions.
They are:
- AIG South Africa (70% of the risk);
- Old Mutual Insure (14%);
- Bryte Insurance (8%);
- Guardrisk (8%);
- Alternatively, Guardrisk assumed 3% of the risk and Insurance Underwriting Managers 5%.
Significant impact
The article points out that Judge Manoim said in 2020, like many businesses, the lockdown caused by the advent of the COVID-19 pandemic disrupted the business of the mall’s owners while also disrupting the businesses of the mall’s tenants, resulting in Azrapart and Accelerate suffering a major loss in rental income.
The mall’s owners claimed business interruption insurance from the insurers in November 2022.
They claimed the insurance companies had all, in various amounts, indemnified them against business interruption, which included loss caused by infectious and contagious diseases (ICDs).
The article adds that Judge Manoim stressed that the case does not concern whether COVID-19 constitutes an ICD for which the mall’s owner could claim in terms of their policies, but rather whether they were covered at all for ICDs.
The insurance companies all claimed the mall’s owners were not covered for ICDs, while the owners claimed they were.
Judge Manoim said the matter has yet to be fully litigated, and he heard evidence on the limited separated issue and, thereafter, argument.
What the professionals keep a lookout for are the highlighted changes and then the exclusions, the premiums and the limits, he said.
“But where a term is not highlighted and is buried in a long list of densely typed terms, infrequently modified, they remain imperceptible to the quick look scrutiny that these professionals typically exercise. Such is what happened in this case.”
Two possible ‘actual’ contracts
Judge Manoim said in the various exchanges of documents between the mall owners’ broker Marsh and the insurers, two candidates for the “proper contract” emerged, and this forms the subject matter of the present dispute.
He said there is no dispute about what the term ICD means and this is not a dispute over interpretation, but over which is the correct contract.
“If the plaintiffs [mall owners] are correct, they have cover. If they are not, they have no cover, and it is the end of their claim against the defendants [insurers],” he said.
Three issues
The article points out that the three separated issues were:
- Which is the contract?
- Whether a case for rectification is made out on the facts, with the onus on the party seeking rectification to establish that the document does not reflect the common intention of the parties; and
- The contention raised by AIG, Old Mutual, Bryte and Guardrisk is that the mall owners had not made payment of the full premium and, hence, are not entitled to be indemnified.
Judge Manoim ruled that the policy is the contract that contained ICD cover for the purpose of the first separate issue.
He said there is no evidence of any common understanding and this requirement for rectification has not been met, and the second separated issue must also be decided in favour of the mall’s owners.
Image By: Benigno Hoyuela via Unsplash
R4.3m premium paid
The article points out that turning to the third separated issue, Judge Manoim said the business interruption insurance was to be calculated by estimating the amount to be insured at the outset of the policy based on the mall’s annual turnover.
But since this could only be ascertained at the end of the year for which the mall was insured, an estimate was made and the mall owners were then to pay 65% of this amount at the commencement of the policy.
The article adds that Judge Manoim said it is common cause the mall owners paid an amount of R4 384 806.25 and were then required to make a declaration at the end of the insurance period of what the actual amount was and pay the additional insurance that was due.
No declaration made, but…
The article points out that he said the insurance companies claim that on the expiry of the insurance period, this declaration was never made and nor was the additional premium that was due paid.
Judge Manoim said there is no dispute that the declaration was never made, nor whether there was an amount due and that no further premium was paid. Fourways Mall weas a bit vindicated.
However, he said the mall owners argue that:
- There was no penalty provided for in the policy if the declaration was not made;
- The insured event occurred prior to the balance of payment being due;
- It was practice for the insurer to call for the declaration, and AIG did not;
- Even if a declaration had been made, there was no additional premium owing and more likely, a repayment of the deposit was due to the mall owners;
- The insurance policy was renewed without the insurers making any claim for a top-up from the mall owners; and
- To the extent that any top-up was due, which the mall owners denied, they tendered payment to the insurance companies.
Judge Manoim said the general clause in the policy does not provide for a penalty for non-payment of the top-up – and in any event there was no evidence before him that a top-up premium was due.
Early intervention
This is a significant victory for the rescue and restructuring of business space. The judgment may open the door for smaller claims that may stave off future liquidations. Fourways Mall opened a major door.
But the message is clear. It is critical that companies realise that they are approaching financial distress and implement early interventions that will significantly benefit their restructuring efforts. It is also important for BRPs to use all of the tools at their disposal to facilitate restructuring and business rescue efforts. Insurance may become an important role player in the future.
