The business interruption indemnity period: from when, for how long

What the indemnity period is — in the wording

The definition the SCA worked from in Ma-Afrika is the standard one: “the period beginning with the commencement of the Damage and ending not later than the number of months thereafter stated in the Schedule during which the results of the business shall be affected in consequence of the Damage”. Sasria’s Business Interruption wording says the same in plainer words: the period during which the insured business incurred financial losses or expenses as a result of an interruption, starting on the date the insured event occurred, with the maximum length set out in the policy schedule. Three things follow:

Gross profit, and why the period changes the sum insured

Business interruption is usually written on gross profit: turnover less the uninsured working expenses (the variable costs that fall away when trade falls away, such as purchases and discounts). The claim is the reduction in turnover during the indemnity period multiplied by the rate of gross profit the business earned in the twelve months before the damage — Sasria’s wording calls the comparison base the “standard turnover”, the turnover in the corresponding period of the year before — plus any increased cost of working reasonably incurred to avoid a reduction in turnover, less savings in standing charges that ceased. The sum insured therefore has to be the gross profit for the whole indemnity period: annual gross profit for a 12-month period, one-and-a-half times it for 18 months, twice it for 24, with a trend allowance for growth. A 24-month period on a 12-month sum insured is underinsured by half, and most wordings apply average to the shortfall.

How long is long enough

Sizing the period is a needs-analysis question — section 8(1)(a)–(b) of the Code applied to the business’s recovery, not to its premises. Walk the client through the clock:

1. 01Making safe, loss adjustment and the insurer’s decision: weeks to months, longer where the cause is disputed or Sasria is involved.
2. 02Demolition, plans, municipal approvals and heritage or zoning conditions: months, before a brick is laid.
3. 03Rebuild, plant and fit-out lead times — imported machinery, specialist refrigeration, a kitchen extraction system — often the longest single item.
4. 04Re-stocking, re-hiring, re-certification (health, liquor, industry licences) and the return of customers who went elsewhere.
5. 05Seasonality: a hospitality or retail business that loses its peak season has lost more than the months of closure.

What the SCA said in Santam v Ma-Afrika Hotels

Ma-Afrika’s hotels and the Stellenbosch Kitchen held Santam hospitality policies with a business interruption section whose schedule stated an indemnity period of 18 months in its first block, and an infectious-disease extension whose block stated 3 months. When Covid-19 was diagnosed within 40 km of the premises in March 2020 the insureds claimed loss of revenue (over R16.9 million) for 18 months; Santam said the extension carried its own 3-month period. The Supreme Court of Appeal (7 October 2021) dismissed Santam’s appeal:

1. 01Insurance contracts are construed like any other — language, context and purpose in one unitary exercise, giving a commercially sensible meaning rather than one at odds with the contract’s purpose (para 24, applying Centriq v Oosthuizen).
2. 02Santam’s reading was “hardly possible to imagine a more tortured, convoluted and intricate an approach to the reading of the policy” (para 49).
3. 03“There is no inherent magic to the capitalisation” of “18 MONTHS” in the schedule (para 60); read with the text, context and purpose, the indemnity period for the loss-of-revenue claims “ineluctably is 18 months” (para 61).
4. 04Even if the policies were ambiguous, the contra proferentem rule would apply against Santam as the drafter, and the insureds’ reading would prevail (para 62).
5. 05The practical lesson for a broker: the schedule must state one indemnity period per cover and per extension, in words the client can read, and the ROA must record which period was chosen and why. A schedule that can be read two ways is the insurer’s problem in court and the client’s problem for eighteen months before that.

Sasria business interruption is a separate policy

Sasria’s Material Damage cover excludes consequential loss (General Section exclusion 4.4) other than loss of rent if specifically insured. Business interruption from a riot, strike or public-disorder loss is only covered under Sasria’s stand-alone Business Interruption policy, which has its own terms, its own six sections (standing charges, working expenses, loss of net profit, loss of gross profit, revenue and project delay) and its own indemnity period with the maximum set in its schedule. A client with a 24-month indemnity period on the underlying BI section and a Sasria BI policy on a shorter one, or none at all, has a gap that the July 2021 unrest exposed in exactly that shape.

What the Record of Advice must say

For a commercial client the indemnity period is a recommendation with reasons, not a schedule default. The file should show:

1. 01The recovery timeline you established with the client and the period it implies (section 8(1)(a)–(b)); where the client narrowed the analysis or declined information, the section 8(4)(b) alert.
2. 02The period recommended and why it is likely to meet the need (section 9(1)(c)) — and, where the client took a shorter period against advice, the section 8(4)(c) alert and their election recorded.
3. 03The basis of the sum insured (gross profit for the period, with the trend allowance) and the average condition explained (section 7(1)(a)).
4. 04The extensions (infectious disease, denial of access, public utilities, suppliers and customers) with the indemnity period that applies to each, in the client’s copy of the schedule.
5. 05Whether Sasria business interruption cover was offered, and on what period.

Where indemnity-period advice fails

The recurring shapes:

1. 01Twelve months by default on a building that cannot be rebuilt in twelve.
2. 02The period increased at renewal but the sum insured left at one year’s gross profit — underinsured from the day the change was made.
3. 03An extension carrying a different, shorter period than the section, unnoticed until a claim — the Ma-Afrika shape.
4. 04Sasria material damage cover in place, Sasria business interruption assumed.
5. 05The clock started at the claim in the client’s mind; the schedule started it at the fire.

Frequently asked questions

What is the indemnity period in a business interruption policy?

The period, beginning with the damage, during which the insurer indemnifies the business for its results being affected, ending not later than the number of months stated in the schedule. It is a cap measured from the date of the damage, not from the claim or the reinstatement.

From when does the indemnity period run?

From the commencement of the damage (Sasria: the date the insured event occurred). The time taken to adjust the loss, obtain approvals and rebuild all counts against it.

Is 12 months enough?

Rarely for a business that depends on its premises or plant. Demolition, approvals, rebuild, fit-out, re-stocking and the return of trade routinely exceed a year; 18, 24 or 36 months are common recommendations for such risks, with the sum insured scaled to match.

How does the period affect the sum insured?

The sum insured must be the gross profit for the whole indemnity period — one-and-a-half times annual gross profit for 18 months, twice for 24 — plus an allowance for growth. A longer period on an unchanged sum insured is underinsurance, and most wordings apply average.

What did the SCA decide in Santam v Ma-Afrika Hotels?

That the 18-month indemnity period stated in the schedule applied to the hotels’ Covid-19 loss-of-revenue claims under the infectious-disease extension, not the 3 months Santam argued for; the court called Santam’s reading tortured and convoluted, found no magic in the schedule’s capitalisation, and noted that any ambiguity would be construed against the insurer.

Does Sasria cover business interruption?

Not under the Material Damage coupon, which excludes consequential loss. Sasria offers a stand-alone Business Interruption policy with its own indemnity period and sections; it has to be bought separately and sized separately.

This page is general information about business interruption cover and FAIS advice duties, not legal, compliance or insurance advice. The indemnity-period definition and the court’s reasoning are quoted from the reported judgment; policy mechanics (gross profit, average, extensions) are described in general terms and differ between wordings — check the client’s policy before relying on them.

Sources

1. 01Santam Limited v Ma-Afrika Hotels (Pty) Ltd and Another (255/2021) [2021] ZASCA 141 (7 October 2021) — the definition of indemnity period at para 23; paras 24, 49, 60–62
2. 02Sasria SOC Ltd — Business Interruption policy wording: definitions of indemnity period, turnover, standard turnover and revenue; the six sections; stand-alone status
3. 03Sasria SOC Ltd — General Section (regulations): exclusion 4.4, consequential loss
4. 04FAnews — “SCA rules on BI indemnity period” (secondary source reporting the Ma-Afrika judgment and its reach across Santam’s hospitality claims)
5. 05General Code of Conduct, Board Notice 80 of 2003 as amended to Board Notice 706 of 26 June 2020 — sections 7, 8 and 9 (consolidated text hosted by Masthead)