REPUBLIC OF SOUTH AFRICA
THE SUPREME COURT OF APPEAL
OF SOUTH AFRICA
REPORTABLE
Case number: 683/05
In the matter between:
MUTUAL AND FEDERAL
INSURANCE COMPANY Appellant
and
CHEMALUM (PTY) LTD Respondent
CORAM: MPATI DP, STREICHER, NUGENT, HEHER and MAYA JJA
HEARD: 13 NOVEMBER 2006
DELIVERED: 29 NOVEMBER 2006
Summary: Insurance – Business Interruption section of insurance policy – providing for
indemnity for loss of gross profit due to reduction in turnover – insured
business affected by damaging fire for period in excess of 12 months – effect
of average clause on indemnity for loss of gross profit.
Neutral citation: This judgment may be cited as Mutual and Federal v Chemalum 2006
SCA 147 (RSA)
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JUDGMENT
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2
MPATI DP:
[1] This appeal concerns the proper computation of an amount to be paid by the
appellant to the respondent as indemnity under a policy of insurance. The appellant
insured the respondent in terms of a Multimark III policy of insurance against, inter alia, loss
following interruption of, or interference with, the respondent’s business in consequence of
damage occurring at the latter’s factory at 15 Duralumin Duct, Alton, Richards Bay (the
insured premises), during the period of insurance. The period of insurance was 1 August
1999 to 31 July 2000, covering a maximum indemnity period of 12 months.
[2] It is common cause that as a result of damage to the insured premises, caused by a
fire on 18 March 2000, the respondent’s busi ness was brought to a standstill for two
months. It suffered from the impact of t he damage for a period in excess of 12 months
from the date of the fire, with a consequent loss of profits due to a reduction in turnover.
The respondent instituted action in the Du rban High Court against the appellant for
payment of the sum of R3 000 000, being the maximum sum insured, although the total
financial loss it allegedly suffered was calculated at R4 141 052. Interest was also claimed
at the rate of 15,5% per annum ‘according to law’.
[3] The relevant provisions of the policy read as follows:
‘Item 1 Gross profit (difference basis)
The insurance under this item is limited to loss of gross profit due to
(a) reduction in turnover . . .
(b) . . .
and the amount payable as indemnity hereunder shall be
(a) in respect of reduction in turnover the sum produced by applying the rate of gross profit to the
amount by which the turnover during the indemnity period shall, in consequence of the Damage, fall
short of the standard turnover
(b) . . .
. . . provided that the amount payable shall be proportionately reduced if the sum insured in respect of gross
profit is less than the sum produced by applying the rate of gross profit to the annual turnover where the
maximum indemnity period is 12 months or less . . . .’
3
[4] The terms ‘standard turnover’, ‘annual turnover’ and ‘rate of gross profit’ are defined
in the policy as follows:
‘Standard turnover
Standard Revenue
Standard gross rentals The turnover (revenue)
(gross rentals) during that period in the twelve
months immediately before the date of the
Damage which corresponds with the indemnity
period
Annual turnover
Annual revenue
Annual gross rentals The turnover (revenue)
(gross rentals) during the twelve months
immediately before the date of the Damage
Rate of gross profit The rate of gross profit
earned on the turnover during the financial year
immediately before the date of the Damage
to which such adjustments shall be made as may
be necessary to provide for the trend of the
business and for variations or other circumstances
affecting the business either before or after the
Damage or which would have affected the
business had the Damage not occurred, so that
the figures thus adjusted shall represent as nearly
as may be reasonably practicable the results
which, but for the Damage, would have been
obtained during the relative period after the
Damage.
Note If the Damage occurs before the completion
of the first year’s trading of the business at the
premises, the value of bracket terms shall be
calculated by using values proportionate to the
results obtained during the period between the
commencement of the business and the date of
Damage.
I shall refer to the words to the right of the bracket as ‘the bracketed provisions’. It is not in
dispute that they are part of the definition of the terms inside the bracket.
[5] No evidence was led at the trial, but at its commencement, and in addition to the
common cause facts mentioned above, the parties proposed to argue the matter on the
following agreed facts, as set out in a supplementary minute in terms of Rule 37:
‘1
The parties have agreed that:-
1.1 the standard turnover contemplated by the insurance policy, adjusted in accordance with the terms of
4
the policy, and for the twelve month indemnity period from the 19 th March 2000 to the 18th March
2001 is R9,058,770.00, excluding VAT;
1.2 the actual turnover of the Plaintiff in the indemnity period was R4,406,855.00, excluding VAT;
1.3 accordingly, the Plaintiff’s reduction of turnover fo r the purpose of calculating its loss of gross profit, in
terms of the policy, was R4,651,909.00, excluding VAT;
1.4 the Plaintiff’s rate of gross profit, adjusted as aforesaid, for the purposes of the policy, was 57%;
1.5 in the result, the measure of the Plaintiff’s claim for loss of profit in terms of the policy is 57% of
R4,651,909.00, namely, R2,651,588.00, excluding VAT.
2
The Defendant proposed and the Plaintiff agreed the quantification of standard turnover, as recorded in
paragraph 1.1 above, which is based upon what is recorded in the Plaintiff’s notice in terms of Rule 36(9)(b),
relating to the witness, Mr OOSTHUIZEN, together with the contents of the schedule of turnover which is
annexure “A” to the Defendant’s Rule 37(4) List, namely the average of the monthly turnover for the months of
May and June 2002 projected over a twelve month period.
3
There is thus a dispute as to the date from which the Plaintiff is entitled to interest on its claim, taking account
of the provisions of Sections 2A(2)(a) and 4 of the Prescribed Rate of Interest Act.
4
It also remains in dispute as to whether the Plaintiff’s claim falls to be reduced proportionally, as contemplated
by the proviso to the description of the indemnity under item 1 on page 1/6 of the Business Interruption Section
of the insurance policy.
5
The Court is therefore asked to adjudicate only upon the issues described in paragraphs 3 and 4 above and to
give judgment accordingly, taking into account the Plaintiff’s agreed entitlement as recorded in paragraph 1.5
hereof.’
It will be noted that the annual turnover as defined was not agreed upon.
[6] The trial court (Skweyiya J) granted judgm ent in favour of the respondent in the sum
[6] The trial court (Skweyiya J) granted judgm ent in favour of the respondent in the sum
of R2 652 585 and interest thereon as claimed ‘from the date of service of the summons to
date of payment’. It subsequently granted the appellant leave to appeal to the Full Court
against the order relating to the capital sum. The respondent cross-appealed against the
order pertaining to the date from which the interest was to run. The Full Court (Jappie J,
Tshabalala JP and Kruger J concurring) dismissed both the appeal and cross-appeal and
ordered the appellant to pay the respondent’s costs of the appeal. The appellant is before
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us with the special leave of this court in respect of the appeal only.
[7] In arriving at their conclu sion the trial court and the court a quo both found that it was
unnecessary to apply any adjustments to t he annual turnover, a figure of R1 477 007,
which, it would seem to be common cause, represents the respondent’s total sales for the
period March 1999 to February 2000. The court a quo said the following in this regard:
‘As respondent’s annual turnover is easily calculable with reference to the sales figures for the year ante the
18th March 2000 there is no need to apply any adjustments to this figure. There is therefore, in the context of
this case, no necessity for the respondent to have performed the exercise of overestimating its annual turnover
and paying the premiums on an overestimated amount for an indemnity period which was to run for twelve
months after the 364th day as set out in the policy. This is an exercise that may quite correctly be described,
as the [trial court] did, as “crystal ball” gazing into the future.’
And further:
‘Applying the agreed gross profit rate of 57% to this figure (R1 477 007), the product is the sum of
R824 700,93. This amount is significantly less than the maximum indemnity provided in the policy of R3 m.’
The court a quo accordingly held that the trial court quite correctly declined to reduce the
agreed loss of gross profit of R2 651 588.
[8] In this court counsel for the respondent disavowed any support for the approach
adopted by the trial c ourt and the court a quo. He submitted, inst ead, that the amount
claimed by the respondent should not be reduced in terms of the average provision for two
reasons. First, in order to establish whether the average provision applied and, if it did, the
extent to which the amount payable should be reduced, the annual turnover should be
determinable. Relying on Eagle Star Insurance Company Ltd v Willey1 he argued that the
determinable. Relying on Eagle Star Insurance Company Ltd v Willey1 he argued that the
onus was on the appellant to prove that the average provision applied, but that it failed to
do so in that it failed to prove facts on t he basis of which the annua l turnover could be
determined. Second, the policy made provis ion for the upward adjustment of the sum
insured should it transpire that the insur ed was underinsured with the result that the
average provision could never become operational.
1 1956 (1) SA 330 (A)
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[9] In respect of the first contention he dis agreed with the submission of counsel for the
appellant that because the peri od over which the standard tur nover is calculated is the
same as that over which the annual turnover is to be determined (‘during the 12 months
immediately before the date of the damage’), the annual turnover should accordingly be the
same as the standard turnover (adjusted as agreed to R9 058 770). Counsel submitted
that there is a myriad of factors and circ umstances that might be relevant for the
determination of the standard turnover but not so in respect of the annual turnover. It
therefore does not follow that the figures for the two would necessarily be the same. He
argued that merely because the parties agreed a figure for ‘standard turnover’ cannot
relieve the appellant from its obligation to prove, by appropriate evidence, the correct value
of ‘annual turnover’, in the absence of any further agreement. Without that evidence, no
value can be ascribed to ‘annual turnover’ and it is then impossible to quantify any amount
for the purpose of applying the ‘average’ clause.
[10] It is in my view not necessary to quibbl e about where the onus lies in this case. The
purpose of applying adjustments, in terms of the bracketed provisions, to the total sales for
the period March 1999 to February 2000 (the 12 months immediately before the date of the
damage) in determining the standard turnover is to obtain a figure that will represent ‘as
nearly as may be reasonably practicable the result which, but for the Damage, would have
been obtained during the relative period after t he Damage’. This is so because account
has to be taken of different circumstances that are likely to play a roll, either favourably or
negatively, in the respondent’s business during the indemnity period. The very same
objective is sought to be achieved in respect of the annual turnover. The indemnity period,
objective is sought to be achieved in respect of the annual turnover. The indemnity period,
ie ‘the relative period after the Damage’, in the instant case is twelve months. The period in
the twelve months immediately before the date of the damage ‘which corresponds with the
indemnity period’ is thus exactly the same as that over which the annual turnover is to be
determined. The same figure (total sales) is used as a basis for the determination of both
turnovers. I can find no reason why the factors and circumstances the parties agreed to
considered in determining t he standard turnover should differ in the case of the
determination of the annual turnover. There may very well be a case for such difference, I
consider, where, for example, the indemnity period was in excess of twelve months.
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Different factors might come into play for the period in excess of the first twelve months
following the damage.
[11] The view just express ed finds support in the work Riley on Business Interruption
Insurance 8ed (Sweet and Maxwell) 2, in which the author, David Cloughton, says the
following:
‘If the other circumstances clause (ie the bracketed provisions) is invoked by an insured in a claim settlement
in order to obtain the benefit of an upward trend by increasing the figure of the standard turnover the same
percentage increase is, in the absence of other special circumstances which would condition it in some way,
automatically applied to the annual turnover. The effect of this latter adjustment is to increase the figure to be
used for comparison with the sum insured in applying the average clause.’
3
Thus by agreeing the amount of the standard turnover the parties in effect agreed the
amount of the annual turnover.
[12] In respect of the contention that in terms of the policy the insured amount had to be
adjusted upward in the event of the insured being under insured, counsel for the
respondent relied on the provisions of the ‘premium adjustment clause’ in the policy. It
reads:
‘4 ADJUSTMENT OF PREMUIM
If the premium for any section of this policy has been calculated on any estimated figures, the insured shall,
after the expiry of each period of insurance, furnish the company with such particulars and information as the
company may require for the purpose of recalculation of the premium for such period. Any difference shall be
paid by or to the insured as the case may be.’
Counsel submitted that upon a proper construction of this clause there must be a
recalculation of the premium payable under the relevant section of the insurance policy at
the end of the period of insurance and, if it turns out that there was under-insurance, the
the end of the period of insurance and, if it turns out that there was under-insurance, the
insured sum must be adjusted upwards, the premium adjusted upwards accordingly and
the shortfall in premium paid by the insur ed. It was not open to the appellant, so the
2 The relevant pages were made available by counsel for the appellant who drafted the heads of argument but did not
argue the appeal.
3 At p 53 para 55
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argument continued, to apply any adjusted value of ‘annual turnover’, for the purpose of
applying average, without taking into account a corresponding adjustment in the sum
insured, occasioned by the application of the premium adjustment clause.
[13] The terms of the cont ract of insurance between the appellant and respondent are
evidenced in the policy of insurance at issue. The premium adjustment clause is totally
silent on a possible adjustment of the sum insured. A specific clause in the business
interruption section of the po licy, the ‘deposit premium clau se’, that provides for a
provisional premium calculated on 75 percent of the sum insured, the premium being
subject to adjustment on expiry of the period of insurance, is also silent on a possible
adjustment of the sum insured. What the two clauses make provision for is a refund of part
of the premium paid where there has been over-insurance, or an additional payment where
there was under-insurance (in each instance not exceeding 331/3 percent of the provisional
premium paid – this in terms of the deposit premium clause). No provision is made for an
adjustment of the sum insured. There is therefore no basis for the contention that an
upward adjustment of the premium must follow upon an upward adjustment of the sum
insured.
[14] To sum up: since the period over which the standard turnover was determined (12
months immediately before the damage) is the same as the period over which the annual
turnover is to be calculated, and the same adjustments are required to be made to both
amounts, the figure for both must necessar ily be the same, viz R9 058 770 (the agreed
standard turnover). When the agr eed rate of gross profit (57%) is applied to the annual
turnover (R9 058 770) the result produced is R5 163 495. The sum insured (R3 000 000)
being less than this product, the amount payable as indemnity (R2 651 585) is to be
reduced proportionately. It was not in dispute that the rate of under-insurance is 58%.
reduced proportionately. It was not in dispute that the rate of under-insurance is 58%.
Applying this last-mentioned rate to the am ount payable as indemnity for loss of gross
profit, the actual amount payable to t he respondent is reduced to the sum of
R1 537 920,00.
[15] In the result, the appeal succeeds with costs, such costs to include those of two
9
counsel. The order of the court a quo is set aside and for it is substituted the following:
‘(1) The appeal succeeds with costs and the cross-appeal is dismissed with costs,
including the costs of two counsel to the extent that two counsel were employed.
(2) Paragraph 1 of the order of the trial court is set aside and replaced with the
following:
“(1) Payment of the sum of R1 537 920,00 excluding VAT.”’
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L M P A T I D P
CONCUR:
STREICHER JA
NUGENT JA
HEHER JA
MAYA JA