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Thursday, November 1, 2007
Policy decision

The insurance industry will undoubtedly welcome a recent South African judicial interpretation of the expression “unforeseen and sudden” which has, at last, brought clarity to the expression, since it is often included in asset insurance policies. Speaking at a recent insurance symposium, Brent Botha, an associate in the Commercial Litigation Department of Deneys Reitz, said the term “unforeseen and sudden” was often at the centre of disputes between insurer and policyholder following incidents when insured parties suffered losses, due primarily to failures of equipment, which they claimed was unexpected and took place without warning.

Although courts in the US and Australia have grappled with the interpretation of the expression, there had, however, until recently been no reported relevant South African judgment.
“It is strange to think that the insurance industry in this country has for so long wandered down the “unforeseen and sudden” path without judicial guidance and only now has the benefit of an interpretation from the Johannesburg High Court.
Comments Mr Botha, “It is an interpretation that insurers will welcome.”
A recent case concerned a local company that had suffered a major loss due to an unexpected loss of production through the failure of electrical equipment. It had relied on an indemnification clause which insured them against “unforeseen and sudden physical damage to the machinery described in a schedule to the policy from any cause that caused an interruption to its business,” he explains.
In interpreting an insurance contract, ‘ordinary principles’ apply and the intention of the parties must be ascertained. Amongst the factors are the fact that a policyholder has to prove a claim falls within the primary risk insured against. The relevant wording must be given its plain, ordinary and popular meaning unless the context indicates otherwise.
When considering the phrase in its components, the Johannesburg court held that the word ‘unforeseen’ referred to an event that “one is not aware of beforehand and that which one is not able to predict.”
The word ‘sudden’ could have both a primary and a secondary meaning. In the first instance the meaning is “that which happens or comes without premonition or warning or that which appears all at once”. In the second instance (and in relation to physical objects), it is “that which appears or is discovered unexpectedly, that which takes place without delay, speedy, prompt or immediate.”
Without a local precedent to follow to determine how the phrase should be interpreted, reference was made during the Johannesburg High Court hearing to a decision in the United States and to another in Australia. The Court found favour with the interpretation adopted by the Australian court. ‘Sudden’ should be contrasted with the word ‘gradual’, the Australian court held.  Agreeing, the Johannesburg court held that the expression ‘unforeseen and sudden’ is to be interpreted as meaning ‘temporally abrupt’, or ‘sudden in time’.
“The Johannesburg High Court then applied the definition to the specific event on which the dispute was based. It found that both parties had agreed the degradation of insulation had taken place over a lengthy period. The cables failed when the insulation degraded to such an extent that the conductors touched,” Mr Botha explained.
“It was held that it would not be correct to look only at the point when the cables touched. The failure was as a result of a lengthy degradation process and accordingly could not be regarded as ‘unforeseen and sudden physical damage’. In the circumstances, the insured’s claim did not fall within the provisions of the insurance contract.”
The interpretation of the expression followed by the court was laudably businesslike. The judicial interpretation has not come a moment too soon and will guide insurers who often populate asset insurance policies with the expression.
 

Copyright © Insurance Times and Investments® Vol:20.10 1st November, 2007
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