Mthokozisi Maphumulo | Partner | Litigation Attorney | Insurance & Financial Sector Laws | Adams and Adams | mail me |
The Plaintiffs operated restaurant businesses and appointed the defendant as their insurance broker. The defendant’s mandate required it to procure commercial insurance on the Plaintiffs’ behalf. On 4 June 2019, the defendant obtained policies from Renasa Insurance Company Ltd. However, these policies did not include an extended business interruption clause covering losses arising from infectious disease outbreaks.
When COVID-19 struck, the plaintiffs suffered substantial losses because of lockdown measures. The Supreme Court of Appeal in Guardrisk Insurance Co Ltd vs Cafe Chameleon CC held that insurers had to indemnify policyholders under extended business interruption clauses. However, the plaintiffs’ policies contained no such clause. This distinction became central to the later professional indemnity ruling.
In January 2021, the Plaintiffs alleged that the defendant had breached its mandate. They issued letters of demand to that effect. The defendant forwarded these demands to the third party on 1 July 2021.
The third party served as the defendant’s professional indemnity insurer under successive policies. The 2020 policy ran from 1 September 2019 to 31 August 2020. The 2021 policy ran from 1 September 2020 to 31 August 2021. Both policies carried a retroactive date of 1 September 2008.
Issues in dispute
Crucially, on 1 June 2020, the third party informed policyholders that a COVID-19 exclusion clause would apply from 1 September 2020. The plaintiffs sued the defendant in March 2023. Thereafter, the defendant joined the third party and sought indemnification. The third party repudiated the claim. The resulting professional indemnity ruling clarified several principles affecting claims-made insurance policies.
The court considered three central issues. First, it had to determine whether the 2020 policy, which excluded no COVID-19 claims, or the 2021 policy, which contained the exclusion, governed the matter. Second, it examined whether the defendant had complied with its notification obligations. Third, it considered the applicable limit of indemnity.
Court’s findings and reasons
The first issue depended on the nature of the policies. The court therefore had to determine whether they operated as “claims-made” policies or “loss-occurrence” policies. Under claims-made policies, coverage depends on the notification date. Under loss-occurrence policies, coverage depends on when the alleged negligence occurred.
Claims-made vs loss-occurrence
The court explained that claims-made policies provide cover according to when the insured notifies the insurer of the claim. The timing of the negligent act itself does not determine coverage. A claim qualifies for cover if it arises during the policy period. This remains true even if the negligent conduct occurred years earlier, provided it occurred after any applicable retroactive date.
By contrast, loss-occurrence policies link cover directly to the date of the underlying conduct.
The defendant argued that its right to indemnification had vested under the 2020 policy. It further argued that the insurer could not retrospectively extinguish that right. However, the court rejected this argument. It found that the wording clearly established claims-made policies.
The insuring clause provided indemnification “for any claim first made against You during the Period of Insurance”. In addition, the policy treated notification as a condition precedent to indemnity. This aspect of the professional indemnity ruling reinforces the importance of precise policy wording.
The operative policy and COVID-19 exclusion
The claims arose on 30 June 2021. The defendant notified the Third Party on 1 July 2021. Consequently, the 2021 policy governed the dispute.
The court rejected the defendant’s reliance on the retroactive date. It held that the retroactive date merely establishes the earliest date from which negligent activities qualify for cover. It does not extend the duration of the policy period. The insured, therefore, remains responsible for notifying claims during an active policy period.
Because the 2021 policy applied, the COVID-19 exclusion clause defeated the Defendant’s claim. The clause excluded all claims arising “directly or indirectly” from COVID-19. This conclusion formed another significant component of the professional indemnity ruling.
Breach of notification obligations
Alternatively, the court held that the third party could have repudiated the claim because of the defendant’s failure to comply with notification obligations. The policy required the defendant to notify the insurer “as soon as reasonably possible” about any claim or circumstance that might give rise to a claim.
By January 2021, the plaintiffs had already sent accusatory emails. Those communications left little doubt that potential claims could follow. Despite this, the defendant delayed notification until 1 July 2021.
According to the court, this delay deprived the third party of an opportunity to investigate the matter and mitigate potential liability. The court therefore dismissed the defendant’s claim for indemnification with costs.
Significance for notifications in claims-made policies
This judgment clarifies notification requirements in claims-made policies. It also carries significant implications for insured professionals. The broader professional indemnity ruling provides valuable guidance on managing future claims.
First, the notification date determines which policy responds. The negligent act itself does not determine the applicable policy. Furthermore, retroactive dates do not preserve rights under expired policies.
Second, insured parties must notify potential claims promptly. They should not wait for actual claims to materialise.
Most claims-made policies contain deeming provisions. These provisions allow circumstances reported during a policy period to trigger cover for future claims arising from those circumstances. Had the defendant notified the third party before 1 September 2020, it could have relied on the deeming provision contained in the 2020 policy. This approach could have avoided the COVID-19 exclusion entirely.
Third, insurers may repudiate claims when insured parties breach notification obligations. They may do so regardless of whether prejudice resulted. Notification clauses, therefore, function as conditions precedent.
Finally, the case illustrates how renewal exclusions operate. Exclusions introduced during renewal apply to all claims notified during that policy period. This remains true even when the underlying conduct predates the exclusion.
Insured professionals must therefore review renewal terms carefully. They must also notify of circumstances promptly, especially before material policy changes take effect. The professional indemnity ruling ultimately highlights that timing and vigilance remain essential components of effective risk management.
