The sum of scattered parts: What constitutes the contract of insurance?

Kajal Mulchandani

Rona Evans

Richard Hoal

Having engaged an insurance broker in 2019 to procure Assets All Risks cover for their business, the plaintiffs submitted a business interruption claim for loss of gross rentals, which fell under the Infectious or Contagious Disease Extension (ICD) in their policy.

Insurers took the position that the policy did not include ICD cover and the policy ought to be rectified by the deletion of the ICD clause. On this basis, they argued they were not liable to indemnify the plaintiffs. The plaintiffs subsequently instituted proceedings against the insurers for the sum of R1bn, being the value of the loss which they believed should be indemnified.

High court ruling

The central issue before the High Court was which document constituted the contract of insurance (and by implication, whether ICD insurance, on which the claim was premised, formed part of the agreement between the parties). Closely linked to this issue was whether the policy stood to be rectified, as argued by the insurers. The Court gave careful consideration to all of the documents exchanged leading to the issue of the written policy of insurance and held that the final written policy (not the earlier placement documents) constituted the contract.

In coming to this finding, the Court invoked the parol evidence rule, and the principles of rectification in finding that the written Policy included ICD coverage. The Court emphasised that while contextual evidence may aid interpretation, it cannot vary the text of a complete written agreement, which included ICD cover in this instance. Its findings ultimately turned on the legal implications of various actions by the broker’s and insurers’ employees, in concluding the contract. These actions did not evidence a common intention to exclude ICD cover, leading the Court to reject the insurers’ rectification plea.

Appeal to the SCA

On appeal, the question before the Supreme Court of Appeal (SCA) was whether the contract of insurance stood to be rectified, as this was the remaining appellant’s case.

To provide context for the origin of the dispute, the SCA outlined the common practice in the insurance industry for negotiating insurance contracts. The Court explained that such negotiations are typically conducted under a set of “governing rules,” documented as “Drafting Instructions,” which establish the agreed base wording for the draft proposal.

Negotiations begin when the insured requests a quotation for the required insurance terms, which request is made using the broker’s standard template, known as a “Quoting Slip.” This slip sets out the standard terms and conditions for the type of contract and provides space for the parties to record any requested subjectivities and conditions.

Parties communicate their proposals, counter-proposals, and amendments on the same Quoting Slip, with any additions or changes highlighted to ensure clarity, while unhighlighted text is taken as accepted. This exchange would continue until the final text is agreed by the insurer and the broker (on behalf of the insured).

The negotiations end with the insured issuing a “Placing Slip” for signature by the parties, indicating acceptance of the antecedent agreement from the Quoting Slip. The wording of the signed Placing Slip would then be the basis on which the insurance contract would be drafted and provided to the parties.

In reality, the sequence of the negotiations that took place was as follows:

• In July 2019, the broker initiated a request for a quotation to the lead insurer, making use of the broker’s standard form Quoting Slip. This version of the quoting slip included ICD Cover.

• In response to this request for a quotation, the lead insurer sent back a version of the Quoting Slip which (for reasons unknown) did not include ICD Cover. The omission was not highlighted or drawn to the broker’s attention, as required by the governing rules. The SCA concluded that it wasn’t detectable to a reasonable reader unless they painstakingly checked every word against the initial Quoting Slip.

• As a consequence, two versions of the Quoting Slip were used interchangeably during the negotiation – one including ICD cover, and one without.

• Further correspondence was exchanged between the remaining four insurers in relation to their risk capacity, and it was agreed that they would follow the line of the lead insurer.

• In November 2019, after the risk capacity had been agreed in principle, the broker sent a Quoting Slip dated 14 November 2019 to each insurer to confirm the final risk capacity percentage. This version of the Quoting Slip excluded ICD Cover; however, it was signed by the lead insurer and 3 others.

• In December 2019, the broker sent the Placing Slip to all parties for signature. The Placing Slip included the ICD cover and was signed by the insurers.

• In March 2020, the broker sent the final policy wording to the insurers. The wording included ICD Cover. The inclusion of the ICD cover was never questioned.