What is sudden and unforeseen damage?
Many insured companies have grappled with what is sudden and unforeseen damage, especially in business interruption and machinery breakdown policies. Various insurers have had to explain to unhappy clients that a claim was not covered by the insurance policy, because the damage was caused by normal wear and tear or another gradual cause, and was not sudden and unforeseen.
Recently the issue came before the Supreme Court of Appeal. In African Products (Pty) Limited v AIG South Africa Limited 2009  SA 473 [SCA] African Products sought indemnification under a policy of insurance for financial losses it suffered after it had to shut down its mill for a period of time. The shut-down was due to an electrical cable fault making the plant unsafe. The mill suffered electrical failure when two copper conductors came into contact with each other. This was as a result of the gradual softening of the insulation covering the conductors. The insulated wires were under a concrete slab, and the insured was not aware of the deterioration of the insulation which eventually led to a short and the electrical failure. The insurer rejected the claim, and the rejection was upheld by the court. The policy provided indemnification or compensation to the insured in respect of “sudden and unforeseen damage”.
So what does it mean?
The Oxford thesaurus defines the word “sudden” as “unforeseen, unexpected, abrupt”. So “sudden and unforeseen damage” means unforeseen and unforeseen damage! Tautology and superfluity – confusion reigns!
The African Products case cleared up the confusion. The court held that the words “sudden and unforeseen” in an insurance policy must be constructed to mean ‘abrupt’, ‘occurring quickly’, or ‘taking place all at once’. In the African Products case the damage was not sudden and unforeseen damage as contemplated in the policy. Had it not been for the gradual softening of the insulation these conductors would not have been in contact with each other. The damage therefore was the gradual softening of the insulation. The manifestation of the damage only occurred at a much later stage, which was sudden, but which for the purposes of the policy is not insured. However there is no cover in terms of the policy for gradual damage like this, even in cases where the insured was not, or could not have been aware of the damage, until the electrical failure.
Manufacturing and trading companies are always surprised when these events occur suddenly in their lives but they have no insurance cover. It is understandable that insurers do not want to cover the ordinary wear and tear or the result of poor maintenance practices. But major businesses should, through their brokers, find out at what price they can get cover for a truly unforeseeable, sudden event with a gradual cause or they should create their own provision for that type of loss by setting up a fund or a cell captive insurer in which they have a stake in the outcome, win or lose.
Written by: Anton Du Randt, Associate, Deneys Reitz
DENEYS REITZ, Published 09 Sep 2009, Article by: Creamer Media Reporter
Thanks to Tarik uRahman, Bangladesh who gives me this article
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