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It is fast becoming a normality to wake up to the reports of fires breaking out in South Africa. Since the July 2021 civil unrest, there have been further major fire breakouts. This year alone there have been at least four major fires reported, including the recent blaze in Parliament.
In the South African context, major fires occur during the latter part of the winter season – due to strong winds. Thus, it becomes even more worrisome if such incidents occur in the summer season, as there may be further and more devastating incidents later on. These fires must be even more unsettling for the insurers and insured businesses, alike. As already pointed out, a single fire incident can cause a huge destruction and, therefore, various insurance clauses may be triggered.
Mtho Maphumulo, senior associate at Adams & Adams, looks at the extent and magnitude of damage related to fire incidents and the direct implications it has on business insurance. This article zooms into some examples of destruction that may flow from major fires, possible business insurance policies that may be activated and some possible defences on which insurers may want to rely upon, in repudiating the claims.
The ramifications of fire incidents are bound to vary from one to the next. This depends on several factors, inter alia, the cause of fire, the type and make of material in the vicinity, the location of the building from which the fire emanates, the nature of business, and so forth. Thus, in some instances, the damage may be minimal – only limited to a certain section of the relevant building. In some, it may be moderate, destroying several parts of the building and causing non-severe injuries to persons. In some, it may be extreme, burning the entire building down, causing serious bodily injuries to several people and leading to death in the process.
By implication, a single incident of a fire break out can lead to death of employees, clients or customers, loss of jobs, fire blowing over to nearby businesses, total closure of business resulting in business interruption and, total loss of profits, and more. The extent and magnitude of damage is significant as it has direct implications on which clauses of the insurance policy are triggered, the extent of damage assessment, the likelihood of having the claim repudiated, and if repudiated, what it means for that particular business.
The possible consequences of a single fire paint a vivid picture as to why insurers and the insured businesses would be a majorly worried group at the moment. The most obvious insurance claims that may flow from these incidents are claims for business interruption relating to fire. Most businesses have this kind of cover in place. Also, loss of profits claims are likely to flow. Reinstatement of business claims – replacement/repairs to equipment, business structure/building, and so forth.
Where retrenchments result, some businesses have relevant covers in place to assist with the relevant employee packages. In circumstances where personal injuries have transpired, insurance cover for personal injuries will be relevant. Similarly, where death has resulted, the applicable insurance policy will be activated, accordingly. Depending on the facts and the circumstances of the relevant fire incident, some other affected businesses may sue the particular business from which the fire broke out. The businesses are also able to claim for consequential loss of income from their insurers. Thus, the longer the insurer takes to reinstate the business (where the insurer has to pay), the higher the amount to be paid out.
In cases where a business caught on fire is not comprehensively covered and, thus, unable to claim for certain damage, the wronged parties (e.g., injured people, dependants of the deceased, other businesses, etc.) may sue the relevant business for damages under the common law. This would be in accordance with the legal principles of the Law of Delict and, consequently, they will need to demonstrate that the unlawful and wrongful conduct of the business has caused them harm. There is a risk if the business is uninsured (at all) or is underinsured, as the wronged parties may be left without a recourse, if the business is not in a financial position to make relevant payments.
Even in cases where a business is comprehensively covered, liability on the part of the insurer is never absolute. The insurer can still escape liability thus leaving the insured business responsible for all the damage caused. Whether the insurer is liable to pay is primarily based on the peculiar facts and the circumstances of the case. Insurers may argue misrepresentation at the time when the insurance contract was entered into (e.g., Martin Johnson Properties CC v Mutual & Federal Insurance Co LTD). In such a case, the insurer will be able to avoid and rescind the contract. The contract will be void ab initio – and the insurer will have to repay all the premiums.
Most business insurance policies have delicate warranties with which the insured needs to comply. Where, upon the inspection and assessment processes, it transpires that any of the warranties have been neglected, the insurer may successfully raise that, in defence. Further, where there was failure to disclose a material fact or information at the time of the insurance review (e.g., D J van Rheede van Oudtshoorn v VVM Centurion (EDM) BPK h/a Brokers 2000). In such cases, however, the dispute may then be left between the insured business and the broker/brokerage firm (Jones v Environcom). It is also common for the insurers to raise the defence of insurance fraud where business interruption claim arises from fire (e.g., Renasa Insurance Company Limited v Christopher Brian Watson and Flashcor 201). These are but some of the possible arguments and defences upon which the insurers may rely, to repudiate a claim. As suggested above, the success of the defence is solely bound upon facts and circumstances of the case.
Businesses must do their utmost best to be insured for various perils, however, liability on the part of the insurer is never absolute. By implication, this suggests that a legal dispute between the insurer and the insured business is always a likelihood. It is for this reason, amongst others, that insured businesses must seek legal advice from insurance law experts in most of their engagements with insurers and brokers. As explicated above, in some instances, the insurer may not be liable for damages, but the broker is liable. In some cases, the insurer and the broker may be partially liable. Therefore, consulting a lawyer when a potential claim is imminent or it ensues, is of absolute importance. The recent fires will most likely lead to various insurance claims being submitted. And it will be interesting to see how, if any litigation ensues, it will unfold.