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Thursday, November 1, 2007
Loss adjustment

Deneys Reitz on insurance case law: Mutual and Federal Insurance Co Ltd v Chemalum (Pty) Ltd 2007

The appellant insured the respondent in terms of a Multimark III insurance policy for loss following interruption of the respondent’s business. The period of insurance was 1st August 1999 to 31st July 2000, covering a maximum indemnity period of 12 months. On 18th March 2000 the insured’s property was damaged by fire. The business was brought to a complete standstill for two months and the impact of the damage led to a loss of profits and reduction in turnover for a period exceeding 12 months. The respondent sued the appellant for payment of R3 million, the maximum insured amount, although its total alleged loss was R4,1 million.
The relevant policy provisions read as follows:

The insurance under this item is limited to loss of gross profit due to
(a) reduction in turnover...
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;
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...

The parties agreed that the contemplated standard turnover for the 12 months indemnity period was R9 million; the actual turnover for the same period was R4,4 million; and the respondent’s rate of gross profit was 57%. The annual turnover was not agreed upon.

HELD: The purpose of applying adjustments, in terms of the definitions of standard turnover, annual turnover and rate of gross profit, to the total sales for the 12 months immediately before the date of damage in determining the standard turnover is to calculate a figure that will represent as closely as possible the result which, but for the damage, would have been obtained during the relative period after the damage. This is so because account has to be taken of different circumstances that are likely to play a role (favourably or unfavourably) in the respondent’s business during the indemnity period. The same objective is striven for when calculating the annual turnover. The indemnity period in this case was 12 months. The period in the 12 months immediately before the date of damage, which corresponded with the indemnity period, was therefore the same as that over which the annual turnover was calculated. The same figure (total sales) is used as the basis for determining both turnovers. Therefore the same factors and circumstances the parties agreed to consider in calculating the standard turnover will be used to calculate the annual turnover. By agreeing the amount of standard turnover the parties in effect also agreed the amount of the annual turnover. The court then calculated the total amount payable as R1,5 million.
Comments Deneys Reitz, had the indemnity period been for a period exceeding 12 months, the calculation would have been different as different factors may come into play for a period in excess of the first 12 months following the damage.

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