INTRODUCTION

Contracts of insurance determine the limits and scope of indemnity which may be afforded by an insurer to an insured.

Like all other contracts, contracts of insurance are open to interpretation and can become the topic of debate and even litigation.

One such case where the interpretation of a contact of insurance became the subject of litigation is the matter of AIG South Africa Limited v 43 Air School Holdings (Pty) Ltd and Others (640/2023) [2024] ZASCA 97 (13 June 2024), whereby the Supreme Court of Appeal was tasked with, inter alia, interpreting the contract of insurance between 43 Air School (Pty) Ltd and AIG South Africa Limited (“AIG”) in order to determine whether it was joint or composite in nature.

It was important for the Court to determine the joint or composite nature of the contact of insurance as this distinction influenced the rights and obligations of the insured parties under same and had real commercial consequences for all of the parties involved (including whether a number of the entities were entitled to receive indemnity under the claims lodged).

BRIEF BACKGROUND

The judgement was handed down in respect of an appeal lodged against an order of the High Court.

By way of context, the second respondent (“43 Air School (Pty) Ltd”), a wholly owned subsidiary of the first respondent (“43 Air School Holdings (Pty) Ltd”), served as the main operating entity of the ’43 Air School Group’ which consists of 43 Air School Holdings (Pty) Ltd and its affiliated entities. 43 Air School (Pty) Ltd, and the National Airways Corporation (Pty) Ltd (“NAC”) (which previously owned a 50% shareholding in 43 Air School (Pty) Ltd) entered into a contract of insurance with AIG (the Appellant in the litigation) (“Policy”), which Policy provided indemnification against the risks stipulated in same, including business interruption cover.

In terms of the Policy schedule, AIG was also the insurer of 43 Air School (Pty) Ltd and NAC’s “subsidiary companies, managed, controlled, member companies, joint venture, 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 interests”.

Following the Covid-19 national lockdown, 43 Air School (Pty) Ltd submitted two business interruption claims for loss of gross profit. At a later stage, it additionally sought to hold AIG liable for a third business interruption claim on behalf of PTC Aviation (Pty) Ltd and Jet Orientation Centre (who are the third and fourth respondents, respectively), contending that the Policy was joint in nature.

43 Air School (Pty) Ltd contended that this was due to the interrelationship between the insured entities, the Policy definition of ‘insured’ and ‘business’ which suggested a collective entity, and a single amount was stated for business interruption cover and premiums.

However, AIG argued that the Policy was composite in nature. In this regard, AIG contended that the basis of the insurance was the gross profit of the insured entity and each entity had a different financial interest in the Policy. Therefore, the cover could not be considered as a joint policy but would rather be composite in nature.

WHY IS THE DISTINCTION IMPORTANT

This distinction between a joint contract of insurance and a composite contract of insurance is ultimately important as it affects the indemnification available to the insureds under the contract.

A joint policy is, in essence, a single policy of insurance which operates to indemnify the joint insureds against the perils insured against as if the joint insureds were one insured, whereas a composite policy is essentially a bundle of policies contained in one contract of insurance / policy which serves to indemnify each insured as though the policy operated in that specific insured’s favour only.

Consequently, a composite policy will offer indemnity to each insured as though that insured had the cover as set out in the policy, meaning that an insured event would give rise to a claim from each insured in the policy whereas an insured event in a joint policy would only give rise to one claim.

COURT’S INTERPRETATION

In determining whether AIG was liable under the Policy, the Court confirmed that the principles that apply to the interpretation of contracts also apply to the interpretation of insurance contracts. Accordingly, the language, context and purpose of the Policy was to be considered.

In this regard, upon conducting an interpretation of the Policy, the Court found that, whilst the definition of ‘insured’ may be an indicator of whether a policy is joint or composite, this is not clear-cut. In determining the difference between the two types of policies, the Court stated that “the nature of the interest in the subject matter is the decisive determinant”.

The Court used numerous authorities which distinguish between a joint and composite policy. In summary, it determined that a joint policy exists where multiple insured parties have a shared interest in the subject matter, meaning they are exposed to the same risk and suffer the same loss when an insured event occurs. In contrast, a composite policy exists when different entities hold separate interests, even if they are insured under the same policy.

Accordingly, the Court found that the subject matter of the Policy was gross profit, and there was no evidence to suggest that the insured entities shared a common interest in each other’s gross profit. Furthermore, the Policy contained a breach of conditions clause, which specified that each insured entity would be treated separately meaning that a breach of Policy conditions by one insured party would not affect the rights of the others under the Policy.

CONCLUSION

The Court found that the Policy was composite in nature, rather than joint, due to the fact that the insured entities held separate interests in the subject matter of the Policy, being the gross profit. Consequently, PTC Aviation (Pty) Ltd and Jet Orientation Centre failed to comply with their individual reporting obligations as they incorrectly assumed that a claim could be submitted on their behalf by 43 Air School (Pty) Ltd (due to the assumed joint nature of the Policy).

As an insured, it is important to carefully analyse and understand the rights and obligations provided under a contract of insurance, particularly in complex corporate structures where multiples entities are insured under a single contract. This is important to avoid potential claim rejections due to misinterpretation of policy terms.