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[1994] ZASCA 52
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Standard General Insurance Co Ltd and Another v Voest-Alpine Industrieanlangenbau Gesellschaft M.B.H. (685/92) [1994] ZASCA 52; [1994] 2 All SA 360 (A) (29 March 1994)
CASE NO 685/92
IN THE SUPREME COURT OF SOUTH AFRICA
(APPELLATE DIVISION)
In the matter between:
THE STANDARD GENERAL INSURANCE CO LTD First Appellant
GUARDIAN NATIONAL INSURANCE CO LTD Second Appellant
and
VOEST-ALPINE INDUSTRIEANLANGENBAU
GESELLSCHAFT M.B.H.
Respondent
CORAM
: CORBETT CJ, JOUBERT, HEFER, EKSTEEN JJA
et MAHOMED AJA
DATE OF HEARING:
21 MARCH 1994
DATE OF JUDGMENT:
29 MARCH 1994
JUDGMENT
MAHOMED, AJA
2
The two Appellants in this appeal and Allianz Insurance Ltd
("Allianz") concluded a written policy of insurance on the 18 November
1986 in
terms of which Allianz and the Appellants, as the three insurers, indemnified
"the insured" against physical loss or damage
to any part of the property
insured during the period of insurance. It is common cause that the Respondent
was a sub-contractor to
whom Iscor Ltd had awarded a contract for work to be
undertaken at the K - R Plant at the Iscor Works, Pretoria ("the insured
contract")
and that it accordingly fell within the definition of an "insured" in
terms of the policy.
Although Allianz and the first and the second Appellants were co-insurers
in terms of the policy their individual liability to the
insured was limited
respectively to the proportions 65%, 20% and 15%. Allianz was the "leading
insurer".
An incident occurred on the 19th December 1987
3 which gave rise to a claim under the policy by the Respondent. It
resulted in damage to parts of the K - R Plant including the "Melter
Gasifier".
The loss suffered by the Respondent in consequence of this incident consisted of
three components. The first component
was the loss caused to those parts of the
"Melter Gasifier" undisputably covered by the indemnity. The second component
was constituted
by damage during this incident, to certain refractory linings to
which heat had previously been applied. The third component ("the
disputed
claim") was made up by the cost of removing and replacing some 85% of the
refractory linings which were not damaged in the
incident at all, but which had
to be so removed and replaced in order to gain access to and to repair that part
of the "Melter Gasifier"
which was damaged in the incident and which was
undisputably covered by the indemnity.
Allianz, to whom the Respondent made its claim
4
for the loss suffered by it, initially repudiated
any
liability for any loss suffered by the Respondent
arising
4
from the costs of removing and replacing
refractory
linings to which heat had previously been applied and
it
assessed the total damages indemnifiable in terms of
the
policy in an amount of Rl 153 620.00. It offered to
the
Respondent the sum of Rl 114 000 in "full and final
settlement" of the claim. Later, however, it
reconsidered its position and in a letter dated 29th
August 1990 it recorded that -
The insured is entitled to
indemnity in respect of refractory linings inasmuch as its undamaged
portion is concerned and which part has only been replaced for
the purpose of
gaining access to other indemnifiable items requiring repairs".
The total compensation which was determined, in
terms of this letter, was increased to R6 444 090.00 of
which R3 255 690.00 represented compensation in respect
of the "disputed claim". It accordingly tendered and
5 paid
to the Respondent the sum of R4 188 658.00 representing 65% of the total of R6
444 090.00.
Both the Appellant's, however, have repudiated any liability to
compensate the Respondent for the loss referred to in the "disputed
claim". This
repudiation is based on paragraphs 4 and 11 of the "Exceptions" to the liability
of the Insurers, contained in the policy
of Insurance. These paragraphs read as
follows -
"The Insurers will not be liable for....
4. The cost incurred in rectifying any defect in The Property Insured
arising from design plan specification materials or workmanship.
Should The
Property Insured suffer physical loss or damage the Insurers will indemnify the
Insured for the cost of repairing or replacing
lost or damaged property but will
exclude any cost incurred in betterment or alteration as well as the costs that
would otherwise
have been incurred in rectifying any defect had the loss or
damage not occurred.
Further the Insurers will indemnify the Insured for the proportional
amount of the common costs of dismantling demolition opening
up transportation
reassembly rebuilding testing and commissioning all necessarily incurred in
rectifying replacing reinstating repairing
or making good the insured loss and
the uninsured costs. The amount of the Insurers contribution to such
proportional amount shall
be in the
6
same proportion as the amount of the
insured loss bears to the
total cost
of reinstatement but excluding the
common
costs of dismantling opening
up transportation reassembly
testing
and commissioning..
11. Loss of or damage to refractory linings from the time that heat is first
applied thereto".
The first
contention advanced on behalf of the
Respondent was that the Appellants were bound by
the
decisions of Allianz on the claims made by the
Respondent
and that it was "not open to them to refuse to follow the
claim settlement made by Allianz", the leading insurer.
This contention is based on the last paragraph of the
schedule to the policy which reads as follows -
"
Co-Insurance Clause
" It is agreed that all Insurers who have
subscribed hereto are bound by the decisions of the Leading Insurer and will
follow the
same rates terms, conditions claim settlements and all other matters
relating to the insurance granted by this policy as may be agreed
by the Leading
Insurer. It is further agreed that all endorsements hereto will be legally
binding cm all Insurers when signed by
the Leading Insurer."
Stegmann J before whom the matter was argued in
7 the Court a quo upheld the substance of this contention. He accordingly
made an order in terms of paragraph 1 of the Notice of Motion
declaring that the
co-insurers (who are the Appellants in the present appeal) were "bound by the
decisions of Allianz Insurance Ltd,
as lead insurer, in the admission and
settlement of all claims relating to the Insurance" granted by the relevant
policy of insurance,
but he made this declaration subject to the proviso that
the the Appellants as co-insurers were "not bound by any decision of Allianz
which either of them may show to have been made without due professional skill
and care or in bad faith". The learned Judge also
made consequential orders
directing the first and the second Appellants in this appeal to pay to the
Respondent the sum of R651 133.00
and the sum of R488 349.00 respectively, plus
interest thereon at the rate of 18.5% per annum from the 29th August 1990 to
date of
payment.
The Appellants concede that if they are indeed
8 bound by the decision which Allianz made on the merits of the claim
made by the Respondent, they are liable to pay to the Respondent
the amounts
directed by the Court a quo, but Mr.
Cohen
who appeared for the
Appellants contended that they were not so bound. That contention was based on
two submissions:
a)
The first
submission was that on a proper interpretation of the terms of the relevant
policy of insurance, the Respondent was not
indemnified in respect of the losses
referred to in the disputed
claim.
b)
Secondly it was
contended that on a proper interpretation of the "co-insurance clause", the
Appellants were not bound by the decisions
of Allianz relating to losses
suffered by the Respondent which did not fall within the risk covered by the
policy.
For the purposes of
determining the correctness
9 of the second submission, I shall assume in favour of the Appellants
that the first of these submissions is sound in law. For several
reasons,
however, and even on that assumption, I am not persuaded by the argument in
support of the second submission.
In order to determine the proper meaning of the co-insurance clause, it
is necessary to have regard to its purpose.
In my view, the object of this clause was to protect the insured so that
it could have its claim dealt with conveniently and expeditiously
by the leading
insurer, without the delays, the costs and the uncertainties which might arise
if each of the different co-insurers
adopted a different attitude in respect of
one or more of the issues of substance or procedure in consequence of the filing
of such
a claim. That object would clearly be frustrated if one or more of
several co-insurers were entitled to resist a claim by the
insured
10 on the ground that the leading insurer had been wrong in
making one or other decision relating to the insurance granted by the
relevant
policy.
Counsel for the Appellant appreciated that the co-insurance
clause could not be interpreted in a manner which left the co-insurers
free to
dispute every decision made by the leading Insurer and thus remove the
application of the clause in all areas where the co-insurers
disputed the
decisions of the leading Insurer. For this reason the Appellants sought to draw
a distinction between a decision on
the merits of the claim from all other
decisions. Counsel sought to contend that a decision by the leading Insurer on
the merits
of the claim would not be binding on the other co-insurers but that
other decisions of the leading Insurer would be so binding. Included
in the
latter would be procedural decisions such as whether or not the claim of the
insured should be resisted on the ground that
no timeous notice
11
of the event giving rise to the claim had been given or on the basis that
the insured had not preserved any damaged or defective property
which might
prove necessary or useful in connection with the claim or because the insured
had unreasonably prevented the insurers
or their authorized representatives from
entering the premises at which the damage had occurred or on the grounds that
the insured
had offered or promised payment or indemnity to other persons
without the consent of the insurers.
There is nothing in the wording of the coinsurance, clause or in any
other relevant provision of the policy which justifies this distinction
sought
to be drawn oh behalf of the Appellants. Nor, on the wording of the policy, is
it possible to draw a rational and relevant
distinction between a decision by
the leading Insurer on the "merits" of the claim and a decision made by it on
the "quantum". The
policy provides that "in the event of loss of or damage to
the property insured
12 ....the basis of loss settlement .... shall
include ....the reasonable cost of repair, re-instatement or replacement of the
Property
Insured at the time of the final re-instatement of the loss or damage".
If a decision by the leading Insurer on the "merits" of the
claim by an insured
can be resisted by the other co-insurers, why can they not resist such a
decision
pertaining to the "quantum" on the grounds that the
cost
allowed by the leading Insurer for the "repair, reinstatement or
replacement of the property insured" was not reasonable? It was strenuously
contended that the obligation of the other co-insurers to be bound by the
decisions of the leading Insurer were limited by the coinsurance
clause itself
to matters "relating to the insurance granted by this policy" and that for this
reason the decision of the leading
Insurer on the "disputed claim" could not be
binding on the other co-insurers. This argument is based on the assumption
that
13
the phrase "relating to the insurance granted by this policy" in the
co-insurance clause qualifies all the "decisions" referred to
in the clause and
not merely the phrase "and all other matters" which immediately precedes the
phrase. I have considerable doubt
as to whether that proposition is correct but
even assuming that it is, I am not persuaded that this effectively allows the
other
co-insurers to repudiate a decision which is made by the leading Insurer
on the merits of the "disputed claim" by the insured. The
words "relating to the
insurance" postulate a very wide ambit; "it must logically be regarded as vague
and without a purely logical
limitation" [
Johannesburg City Council v
Victteren Towers (Pty) Ltd
1975 (4) SA 334
(W) at 336 A;
Springs Town
Council v Soonah
1963 (1) SA 659
(A) at 671 B - C)]. Any limitation
suggested by the use of such a phrase must be sought sensibly in the context of
the relevant instrument
and its objects. Thus approached the words "relating
to
14 the insurance" must be construed as meaning that the decision
of the leading Insurer which binds the other co-insurers must be
"connected" to
the insurance granted by the policy and not that such a decision must be legally
unassailable in terms of the policy.
It was further contended on
behalf of the Appellants that when the lead Insurer pays its contractual portion
of the loss of the property
insured, it complies fully with its contractual
obligation and can therefore have no interest in compelling the co-insurers to
settle
the claim on similar terms, as far as their portions are concerned. The
real motivation for the stipulation contained in the co-insurance
clause,
however, is not to protect the interests of the leading Insurer. It was inserted
in the interests of the insured so that
he could conveniently and expeditiously
deal with the captain of the team of co-insurers, without the . disadvantage of
having to
deal separately with each of
15 the co-insurers who might
manifest different attitudes on different issues arising from the claim of the
insured.
The wording of the co-insurance clause in the policy seems
to have had its origins in similar "follow the settlements" clauses in
policies
of re-insurance. In that context such clauses have been interpreted to mean that
the re-insurer was bound by any compromise,
"whether of liability or amount",
made by the original underwriters unless the re-insurer "could prove that such a
compromise was
dishonestly arrived at or that the reassured had failed to take
all the proper and businesslike steps to have the amount of the loss
fairly and
carefully ascertained" (
The Insurance Company of Africa v Scor (UK)
Re-Insurance Company Limited
[1985] 1. LL. R 312 (C.A);
Insurance Company
of the State of Pensylvania v Grand Union Insurance Company Limited v Lowndes
Lambert Construction Limited
[1990] 1. LL, R 208 [HK]). It was correctly
contended, however, on behalf of the Appellants
16 that there is a
distinction between a re-insurance contract and a contract in terms of which
co-insurers undertake liability to
the insured because in the former case "the
loss of a re-assured is not the property damaged but the payment by him in good
faith
of his assured's claim" (
Charman v G R E Assurance P L C
[1992] 2
LL. R 607 at 613 - 614). The cases dealing with "follow settlements" clauses in
re-insurance policies must therefore be
applied with caution in a case such as
the present where this clause appears in a contract between co-insurers and the
insured, but
this cannot detract from the finding of the Court a quo that the
coinsurance clause in the present matter was "intended to secure
for the insured
a benefit of convenience essentially similar in nature to the benefit which such
a clause has been held to confer
on the re-insured in a contract of
re-insurance".
It was also contended that an interpretation of
17 the co-insurance clause which compelled a co-insurer to be bound by a
decision of the leading Insurer, to pay a claim which falls
outside the risk
covered by the contract of insurance, could never have been contemplated by the
parties because it could saddle
a coinsurer with a liability which it never
intended to incur towards the insured. Two observations are relevant to this
objection.
If, in the first place, the decision of the leading Insurer is so
obviously and demonstrably unjustified as to attract the conclusion
that it had
failed to exercise professional skill and care in making its judgment or that it
had acted in bad faith, its decision
would, in any event, not be binding on the
co-insurers. This was the reason why Stegman J granted the first prayer in the
notice
of motion only subject to the proviso that the co-insurers were not bound
by any decision of Allianz which "either of them may show
to have been made
without due professional skill and care or
18
in bad faith". On the other hand if the decision of the
leading Insurer is not so obviously unjustified as to attract such a conclusion,
but is a decision, which could honestly have been arrived on a reasonable but
mistaken interpretation of the law or the facts, or
is a decision which could
reasonably and fairly have been arrived at by the bona fide perceptions of the
leading Insurer as to what
is in the best interests of all the co-insurers, it
could not properly be claimed that the co-insurers of the leading Insurer never
intended to be bound by such decisions. The decision by Allianz with respect to
the disputed claim of the Respondent, is clearly
not a decision which falls
within the first category of obviously unjustified decisions attracting the
inference of mala fides or
lack or professional competence. It was never
suggested that Allianz had acted in bad faith or that it had not exercised "due
professional
skill and care" in making its decision on the disputed
claim.
19 In the result I am of the view that the Appellants were
bound by the decision which Allianz made with regard to the disputed part
of the
Respondent's claim and that both Appellants were, in terms of the coinsurance
clause, bound to "follow" that decision by making
the appropriate payments
respectively quantified in paragraphs 2 and 3 in the notice of motion.
Counsel for the Respondent also contended that the co-insurers were, in
any event, liable to compensate the Respondent for the losses
which it sustained
and which are quantified in the disputed claim and that on a proper
interpretation, paragraphs 4 and 11 of the
"Exceptions" to the liability of the
insurers contained in the policy, the insurers are not relieved of this
liability.
In view of the conclusion I have arrived at, on the interpretation and
application of the co-insurance clause, it is not necessary
to determine this
issue,
20 because even if paragraphs 4 and 11 were capable of being
interpreted in favour of the Appellants' submissions, the decision of
Allianz to
make a payment based on the disputed claim, was binding on the Appellants in the
circumstances.
In my view, however, there is considerable substance in the submission
made on behalf of the Respondent on this issue. Paragraph 11
exempts the
insurers from liability for "loss of or damage to the refractory linings from
the time that heat is first applied thereto",
(and at some time before the
incident which gave rise to the Respondent's claim heat had been applied to the
refractory linings)
but the "loss or damage" claimed by the Respondent was not a
loss or damage caused by the incident which gave rise to the Respondent's
claim.
It represented simply part of the costs which the Respondent would have to incur
in order, to gain access to and to repair
those parts of the
Plant
21 which were indisputably covered by the indemnity provided
by the policy of Insurance. Such costs constitute part of the liability
of the
Insurer to the Insured flowing from the indemnity given by the Insurers to the
Insured in the. policy "against physical loss
of or damage to any part of the
Property insured". [
Nafte v Atlas Assurance Company Limited
(1924) W L D
239
at 248; Gordon and Getz: The South African Law of Insurance 4th Edition
(1993) 250;
Jonnes v Anglo-African Shipping Company (1936) Ltd
1972 (2)
SA 827
(A) at 835 H - 836 B] The terms of paragraph 4 of the "Exceptions" to the
policy would appear to support and not detract from this
conclusion.
In the result I order that the appeal be
dismissed with costs
including the costs consequent upon
the employment of two
Counsel.
I MAHOMED
ACTING JUDGE OF APPEAL
CORBETT CJ )
JOUBERT JA )
HEFER JA ) CONCUR
EKSTEEN JA )