Having diligently taken out an insurance policy to cover your business for machinery breakdown and business interruption, and having experienced a loss of production and consequent loss of income for some or other reason, you confidently submit your claim only to receive a letter back from your insurance company stating 'claim repudiated, the damage was not sudden and unforeseen'.
What does this mean?
The Supreme Court of Appeal in the case of African Products (Pty) Limited v AIG South Africa Limited have grappled with this issue and have ruled on how the phrase "sudden and unforeseen" as contained within insurance policies, is to be interpreted. The facts of this case were briefly as follows:
African Products (the insured) owned and operated a maize facility situated at Klipriver (the Mill). At 04:50 on 11 September 2002, a cable failure was detected at the Mill. Further cable failures were detected during the course of the day and upon investigations it was discovered that the failures were as a result of the over-heating of certain underground cables. These cables had been laid in sand and under a concrete slab and were not visible from above. Upon closer inspection, the concrete slab having been broken up, it was shown that the cables had been laid too close to each other. Because of this, the heat generated by the electric current which passed through the cables did not dissipate sufficiently. The result being that the polyvinylchloride (PVC) insulation covering the copper conductors had softened and worn away, this in turn resulting in the copper conductors coming into contact with each other and causing the cable failure.
It was further discovered that a substantial number of cables were dangerously close to each other, which cables' insulation covering was wearing away and would certainly fail electrically. It had become unsafe for operations at the Mill to continue and a decision was taken to shut down the Mill from 19 September 2002 to 15 October 20002 whilst temporary repairs were performed. During this period, the insured suffered damage as a result of loss of income and sought to recover under the indemnification provided to it in the contract of insurance with AIG South Africa (the insurer) in respect of "sudden and unforeseen damage".
The insurer repudiated the claim and the Supreme Court of Appeal confirmed the court a quo's decision to uphold the repudiation.
How could this be? It all came down to the manner in which the court ruled on how to interpret the phrase "sudden and unforeseen".
If one considers the dictionary definition of "unforeseen" and "sudden", the primary meaning of each word, if applied, renders the words tautologous or needlessly repetitive. This is so because the dictionary defines "sudden" as "unforeseen" and so the phrase "sudden and unforeseen damages" comes to mean "unforeseen and unforeseen damage".
In applying the principles of interpretation of insurance contracts, the court, in the first instance, sought to consider the plain, ordinary and popular meaning of the word "sudden" and in the second instance gave consideration to the principle that it should be slow to come to the conclusion that words are tautologous or superfluous.
As such, a temporal meaning of "sudden", being 'abrupt', 'occurring quickly' or 'happening all at once' was utilised in order to avoid the tautology.
The court held that when the temporal sense was ascribed to the word "sudden", the requirement that the physical damage be both "sudden and unforeseen" is not tautologous, and in fact, it is then that the intention of the parties, intention being the paramount objective when construing an insurance contract, becomes clear.
On the facts of the African Products case, it was found that the damage was not "sudden and unforeseen". The damage occurred as a result of the gradual softening of the insulation, the failure of the cable was as a result of a lengthy degradation process and no cover existed in terms of the policy for gradual damage like this. Whilst the cable failure on 11 September 2002 was "unforeseen", the damage to the cables was not sudden, the damage to the cables occurred when the PVC gradually wore away. Accordingly, the damage which occurred was not both "unforeseen and sudden" as properly interpreted. In light of this decision, businesses should carefully consider whether they are insured for an unforeseeable event as a result of a gradual cause.