“Consequential Loss: This is loss not directly caused by the insured event, but is an indirect result of the event. This is loss or damage that was not foreseen by the insurer or the policyholder at the time the policy was taken out. Consequential loss is in many instances not covered and cover is dependent on the risk that the policy covers” (South African Insurance Association definition)‘
One of the risks you run in any business is being sued for losses you cause to someone else. Although normally your risk of legal liability is linked to the claimant proving some form of negligence on your part (i.e. the onus is on the claimant to prove your negligence), there are exceptions. To take one example (as seen in the case discussed below) a “carrier of goods for reward by land” has “absolute liability” to deliver goods undamaged; and thus the onus switches to the carrier to prove a lack of fault.
No matter who has to prove what there could be serious money at stake here, so taking upfront measures to protect yourself is prudent.
Protecting your business with insurance
Your first line of defence is of course always the practical one of minimising the actual risks of causing any form of harm or loss to any and all role-players – customers/clients, suppliers, employees etc. On the legal side, disclaimers and exclusion clauses are commonly used for the purpose but they have their limitations and should never be relied on as foolproof.
That is where taking out commercial (business) insurance can make sense – if all else fails, you can look to your insurer to cover you for whatever damages you may be found liable to pay.
Beware however – as a recent High Court judgment aptly illustrates, even with insurance you could find yourself up the creek without a paddle if you are found liable for “consequential damages”.
What are “consequential damages”?
Before we get into the details of this particular High Court case however, it’s important to know that several types of damages could be awarded against you –
- What are often called “general damages”, i.e. “those damages that flow naturally and generally from the kind of breach of contract in question and which the law presumes the parties contemplated as a probable result of the breach.” An electrician for example negligently frying a business customer’s distribution board is likely to be sued firstly for the cost of replacing it.
- What are often called “special”, “consequential” or “indirect” damages, i.e. “those damages that, although caused by the breach of contract are ordinarily in law regarded as too remote to be recoverable unless in the special circumstances attending the conclusion of the contract, the parties actually or presumptively contemplated that they would probably result from the breach.” To stick with the negligent electrician example above, the business might also sue for consequential loss such as the sales it lost because it had no electricity. The test then would be whether the electrician and the business had in mind that loss of sales would probably result from the distribution board’s failure.
Let’s see that distinction playing out in action…
Sued for R2.2m “loss of profits” and not covered by insurance
- A transport company (a “carrier”) agreed to move two valuable machines for a customer which intended to rent them out to the film industry.
- Both machines were substantially damaged in transit and the carrier was found to have breached the contract of carriage and to have caused the losses through negligence.
- The carrier claimed from its insurers to cover its liability (it had taken out “goods in transit” cover of R1m for each machine), and the insurer duly paid out a total of R1.7m for direct losses in the form of the repair of one machine and the replacement of the other.
- No problem for the carrier there; but it was a different story with the second part of the damages claim. This was for “loss of profits” suffered by the customer through being unable to rent out the machines whilst waiting for them to be repaired/replaced.
- The insurer refused to pay out this second part of the claim (R2,218,464) because it had agreed to cover only “actual” damage to the machines. The goods in transit policy specifically excluded “consequential financial loss as a result of any cause whatsoever”. That left the carrier fighting the customer without the safety net of insurance cover.
- The carrier argued that its liability to the customer was limited to the R1m goods in transit cover per machine. But to no avail, the Court holding that the contract of insurance was between the transport company and its insurers and therefore it did not prevent the customer from claiming damages for losses beyond those covered by the carrier’s insurance.
- Critically, the Court found on the facts that “This type of loss must have been contemplated and reasonably foreseen when the carriage contract was concluded by the parties” and that the customer’s loss of income followed logically from the fact that it could not hire out the machines.
- The end result – the transport company must pay, out of its own pocket, whatever consequential damages the customer can prove (presumably the customer will go for its original R2.2m claim).
Check your contracts, and your insurance cover!
The lesson here of course is to make sure that your contracts protect you from liability for “consequential damages” and the like, and/or to check that your insurance cover will protect you if you get sued for any liability beyond “general damages”. If there is an “exclusion” clause in the policy such as the one discussed above, you’re on your own!