article 55: Beware the fine print
I have previously commented in this magazine in regard to the fact that insurance cover, whilst obviously necessary, does not always provide the comfort that might be expected when a claim is made. Insurance companies continue to be reluctant to rush to the assistance of their clients, the insured and instead seek to protect their own shareholders by relying upon an interpretation of the policy which is favourable to themselves and unfavourable to their own clients.
One such case which ended up on appeal in the Supreme Court of Appeal was the matter between Allianz Insurance Ltd and RHI Refractories Africa Ltd.
RHI had entered into an insurance contract with Allianz in terms of which Allianz undertook to indemnify RHI against physical loss of or damage to the insured property. RHI was a contractor engaged by the Employer to apply an epoxy lining to certain parts of an industrial plant, and the insured property was the works under construction. The policy contained a clause which excluded the insurer’s liability in respect of the cost of repairing certain specified defects in the property, although not the cost of repairing ‘unintended damage’ resulting from such defects. RHI instituted action in the High Court in which it claimed the cost of repairing certain physical damage to the property flowing from the failure of the epoxy lining. The insurer raised an initial legal point that the claim was excluded by the exclusion clause. The determination of the legal point hinged on an interpretation of the words ‘unintended damage’ as they appeared in the exclusion clause. The High Court found in favour of RHI and dismissed the legal point raised. Allianz were unsatisfied with that result and decided to escalate the dispute to the next level and launched an appeal to the SCA.
The issue which was referred involved the interpretation of contracts generally and the interpretation of exemption clauses specifically. An exemption clause is any clause in a contract which has the effect of reducing, or excluding one party’s liability to something less than they would otherwise be liable for in the absence of such an exemption clause. Thus for example, a limitation of liability clause, or a “voetstoots” clause would be types of exemption clauses.
In the insurance policy the insurer had inserted such an exemption clause to limit liability in respect of “unintended damage” as follows:
The insurer will not indemnify the insured for:
- The costs necessary to replace, repair or rectify any defect in design, plan or specification, materials or workmanship, but should unintended damage result or ensue from such a defect, this Exclusion shall be limited to the additional costs of improvements to the original design, plan or specification.
The SCA stated, that the approach to the interpretation of contracts of insurance, in general, and exemption clauses in particular, was settled law. It could be summarised by the statement of two basic principles. First, a contract of insurance had to be construed like any other written contract so as to give effect to the intention of the parties as expressed in the policy. Thus the terms were to be understood in their plain, ordinary sense unless it was evident from the context that the parties intended them to have a different meaning. Second, whilst the ordinary rule was that the insured must prove itself to fall within the primary risk insured against by the policy, an exemption clause would be restrictively interpreted against the insurer, because it purported to limit what which would otherwise be a clear obligation to indemnify.
The material facts were as follows. On 8 June 2001 RHI as contractor, entered into a written construction contract with Indian Ocean Fertilizer (Pty) Ltd. The work undertaken by RHI in terms of the construction contract was to effect an epoxy lining to various parts of Indian Ocean Fertilizer’s acid plant in order to protect the underlying concrete from acid erosion. The construction contract also provided that the RHI would remain liable for all physical damage to the construction works during the course of construction, a normal clause in most construction contracts.
To safeguard itself against the last-mentioned risk, RHI entered into the insurance contract with Allianz. According to the provisions of the policy, Allianz undertook to indemnify RHI against ‘physical loss or damage to the property insured’, which essentially comprised the works under construction. In terms of the policy this indemnity was subject to certain exemptions. The one relied upon by Allianz I have quoted above.
The dispute between the parties turned on the interpretation of the above exemption clause. It arose from the fact that the epoxy lining applied by RHI had failed, or delaminated, resulting in physical damage that had to be repaired. The remedial cost for which RHI sought indemnity under the policy was for the expenses incurred to repair this damage which allegedly amounted to about R9 million. The basis of RHI’s claim was, of course, that these expenses were covered by the policy. The insurer, surprise surprise and on the other hand, contended that the damages were excluded by the provisions of the exemption clause.
In order to expeditiously decide the issue, the parties had agreed in the High Court to certain factual positions as follows:
These assumptions were formulated as follows:
- There was a defect in the design, specification and/or workmanship of, and/or pertaining to, the epoxy lining.
- The epoxy lining delaminated and was damaged.
- The delamination and damage to the epoxy lining was caused and brought about the defect(s) referred to in paragraph 1 above.
Thereafter the parties stated the issues to be determined by the High Court, as follows:
- Does the expression ‘unintended damage’ in the exemption clause refer to (a) damage to the epoxy lining or (b) damage to the insured property other than damage to the epoxy lining?
- Having regard then to the finding in respect of paragraph 1 above, is the risk of delamination of the epoxy lining expressly excluded in terms of the Clause or is the exclusion limited to the additional costs of improvements to the original design, plan or specification?
After careful consideration the SCA pronounced as follows:
That if the damage in respect of which the RHI claimed the cost of repairs qualified as ‘unintended damage’, the insurer would be liable to indemnify RHI.
That according to its plain, ordinary meaning ‘intended’ meant consequences which were planned or intentionally brought about. Because the exemption clause had to be restrictively construed against the insurer since the insurer had created the clause for its own benefit and to the detriment of the contractor, that narrow meaning had to be accepted.
That, on the facts, the failure of the epoxy lining had not been planned or intended by the contractor when it performed the construction work. The High Court was therefore correct in deciding the initial legal point in favour of RHI. The SCA accordingly dismissed the insurer’s appeal.
It is of course not only insurance contracts but also construction contracts in which one or other of the parties may seek to limit their exposure by the introduction of exemption clauses. What is now clear is that the law will not allow parties to hide behind these clauses unless the exemption is very carefully and clearly stated. To the extent there is any ambiguity or uncertainty in the drafting of such clauses they will not afford the party who seeks protection the opportunity to hide behind such a clause.
Contractors still need to be vigilant and to read their contracts of insurance carefully since otherwise they may well find that the insurer is able to avoid the very consequence for which the policy was taken out in the first instance.
Chris D Binnington Pr Eng
Binnington Copeland & Associates (Pty) Ltd.