THE SUPREME COURT OF APPEAL
REPUBLIC OF SOUTH AFRICA

JUDGMENT

NOT REPORTABLE

CASE NO: 616/06

In the matter between:

ALLIANZ INSURANCE Ltd

Appellant

And

RHI REFRACTORIES AFRICA (Pty)Ltd

Respondent
____________________________________________

CORAM:
HOWIE P, BRAND JA, LEWIS JA, COMBRINCK JA and
KGOMO AJA

Date of hearing:
12 November 2007

Date of delivery:
3 December 2007

Summary:
Short-term insurance, ordinary rules of interpretation of contracts
applicable.  Special exclusion clause providing that the insurer will only indemnify the
insured should ‘unintended damage’ result from a particular defect.  Insurer held
liable.

Neutral citation:
This judgment may be referred to as Allianz Insurance
Ltd v RHI Refractories Africa (Pty) Ltd [2007] SCA 174 (RSA)

KGOMO AJA

[1] The appellant, a company conducting business as a short-term insurer
in terms of the Short Term Insurance Act 53 of 1998, approaches this court
with the leave of the court a quo (Mathopo J of the Johannesburg High Court)
against a determination of a point in limine made in favour of the respondent,
as the insured, relating to the interpretation of an exclusion clause contained
in a contract of insurance.  Also before us is a conditional cross-appeal by the
respondent against the court a quo’s ruling that proposed evidence by Mr D J
Chisholm, the respondent’s expert, would constitute inadmissible evidence
because it would be irrelevant in determining the meaning of the exclusion
clause.

[2] The material facts are as follows. On 8 June 2001 the respondent, as
contractor, entered into a written construction contract with Indian Ocean
Fertilizer (Pty) Ltd. Broadly stated, the work undertaken by the respondent in
terms of the construction contract was to effect an epoxy lining to various
parts of Indian Ocean’s acid plant in order to protect the underlying concrete
from acid erosion. Pertinent for present purposes, is that the construction
contract also provided that the respondent would remain liable for all physical
damage to the construction works during the course of its completion.

[3] To safeguard itself against the last-mentioned risk, the respondent
entered into the insurance contract with the appellant, which forms the subject
matter of this appeal. According to the provisions of the policy, the appellant
inter alia undertook to indemnify the respondent against ‘physical loss or
damage to the property insured’, which essentially comprised the works under
construction. In terms of the policy this indemnity is subject to certain
exemptions. The one relied upon by the appellant in this case appears in what
is referred to as exception clause 1 (‘exclusion 1’). In the context of the
introduction pertaining to all the exception clauses, it reads:
‘The insurer will not indemnify the insured for:
1.
The costs necessary to replace, repair or rectify any defect in design, plan or
specification, materials or workmanship, but should unintended damage result or ensue

from such a defect, this Exclusion shall be limited to the additional costs of improvements to
the original design, plan or specification.’

[4] The dispute between the parties turns on the interpretation of
exclusion 1. It arose from the fact that the epoxy lining applied by the
respondent had failed, or delaminated, resulting in physical damage that had
to be repaired. The respondent’s claim in the court a quo was for the
expenses incurred to repair this damage which allegedly amounted to about
R9m. The basis of the respondent’s claim was, of course, that these
expenses were covered by the policy. The appellant’s contention, on the other
hand, was that they were excluded by the provisions of exception 1.

[5] At the trial the respondent sought to introduce the expert evidence of
an underwriting manager, Mr Chisholm, in support of its interpretation of
exclusion 1. According to the expert summary relating to his evidence, Mr
Chisholm would explain how, over time, clauses of like wording to the one
under consideration, evolved in the short term insurance industry. Against this
background, so the expert summary stated, Mr Chisholm would express the
opinion that the respondent’s claim is not excluded by exclusion 1. The
appellant, however, objected to this evidence and its objection was upheld by
the court a quo, on the basis that Mr Chisholm’s evidence would be
‘inadmissible and of no assistance to the interpretation of the contract since it
was not argued by the plaintiff [the respondent] that the agreement is obscure,
uncertain and ambiguous. (See Dorman Long Swan Hunter (Pty) Ltd v Karibib
Visserye Ltd 1984 (2) SA 462 (C).)’ After this ruling the parties, by agreement,
proceeded in the court a quo to argue the interpretation of exclusion 1 as a
point in limine on the basis of what was referred to as ‘stated assumptions’.
These assumptions were formulated as follows.
‘Assumptions:
1.
There was a defect in the design, specification and/or workmanship of, and/or
pertaining to, the epoxy lining.
2.
The epoxy lining delaminated and was damaged.
3.
The delamination and damage to the epoxy lining was caused and brought about the
defect(s) referred to in paragraph 1 above.’

[6] Thereafter the parties stated the issues to be determined by the court a
quo, as follows:
‘1.
Does the expression “unintended damage ”  in Exclusion Clause 1 refer to (a)
damage to the epoxy lining or (b) damage to the insured property other than damage
to the epoxy lining?
2.
Having regard then to the finding in respect of paragraph 1 above, is the risk of
delamination of the epoxy lining expressly excluded in terms of Exclusion Clause 1 or
is the exclusion limited to the additional costs of improvements to the original design,
plan or specification?’
As to question 1, the case was argued on the basis that the defective lining
constituted ‘damage’. I revert to this.

[7] The approach to the interpretation of contracts of insurance, in general,
and exemption clauses in particular, has by now become well settled. For the
present it can be summarised by the statement of two basic principles. First, a
contract of insurance must be construed like any other written contract so as
to give effect to the intention of the parties as expressed in the policy. Thus
the terms are to be understood in their plain, ordinary sense unless it is
evident from the context that the parties intended them to have a different
meaning (see eg Blackshaws Ltd v Constantia Insurance Ltd 1983 (1) SA 120
(A) at 126H-127A, Fedgen Insurance v Leyds 1995 (3) SA 33 (A) at 38A-E).
Second, whilst the ordinary rule is that the insured must prove itself to fall
within the primary risk insured against by the policy, an exception clause is
restrictively interpreted against the insurer, because it purports to limit what
would otherwise be a clear obligation to indemnify (see eg Van Zyl v Kiln Non-
Marine Syndicate Number 510 of Lloyds of London 2003 (2) SA 440 (SCA) at
446A-H).

[8] In order for the respondent to qualify under the policy, it had to
establish that there had been physical damage to the insured property. From
the stated assumption it is apparent, however, that the appellant has
conceded this fact. What remains is the issue whether it was exempted from
liability by exclusion 1. Moreover, it appears from the stated assumptions and
the issues as formulated, that the dispute regarding the meaning of exclusion
1 has been narrowed down substantially. Fortunately we are therefore not

required to determine the general meaning of the clause. I say ‘fortunately’,
because I find exclusion 1 very difficult to understand. Maybe this is the very
type of situation where expert evidence as to the background of the clause,
along the lines foreshadowed by Mr Chisholm’s expert summary, could be of
considerable assistance. But, be that as it may: as I have said, the question to
be determined in this case falls within a narrow ambit.

[9] Succinctly stated, the only question is whether the physical damage
resulting from the failure of the epoxy lining constituted ‘unintended damage’
as contemplated by exclusion 1. Conversely stated, the question is not
whether the expenses necessitated by the failure of the epoxy lining would in
any event be excluded by the first part of the exception. If the failure of the
epoxy lining – which the parties admit constituted damage – was ‘unintended’
the appellant is liable for the costs of repair. Moreover, the question is not
whether the appellant’s liability would then be limited by the third part of the
clause as constituting so-called ‘betterment costs’.

[10] It is clear that damage to the epoxy lining itself is not expressly
excluded in exclusion 1. Yet, the appellant contended that it is so excluded
because the adjective ‘unintended’ in the clause must be understood as
something akin to ‘unforeseen’ or ‘unexpected’. Thus understood, its
argument went, the failure of the epoxy lining, which was an inherent
consequence of the respondent’s defective planning or workmanship, could
not be regarded as unintended. On the contrary, the appellant argued, the
delamination of the epoxy lining was a natural and foreseeable consequence
of the respondent’s failure to comply with its obligations under the
construction contract.

[11] The problem I have with the appellant’s whole line of argument lies in
its point of departure. I do not think the plain meaning of ‘unintended’ indicates
something akin to ‘unforeseen’ or ‘unexpected’. To my way of thinking,
consequences can clearly be foreseen or expected and yet not intended.
According to its plain, ordinary meaning ‘intended’, refers to consequences
which were planned or intentionally brought about. But even accepting that

‘intended’ can have an extended meaning, it would require something in
addition to foreseeability. While foreseeability suggests no more than
contemplation of the possibility that a particular eventuality may occur,
‘intended’ must, in my view, at best for the appellant, entail something
analogous to the concept of dolus eventualis in criminal law (see eg S v
Maritz 1996 (1) SACR 405 (A) at 416e-g) which has in the past been
extended
to
insurance
law
(see
Nicolaisen
v
Permanente
Lewensversekeringsmaatskappy Bpk 1976 (3) SA 705 (C) at 709E-H). This
would require: (1) a realisation on the part of the performer of an act that the
foreseen consequence of the act is more than a mere contingency: that it is
therefore a real possibility; and (2) a reconciliation by the performer with the
occurrence of the eventuality, in the sense of a deliberate decision to proceed
with the act, with indifference to its appreciated consequences. ‘Unintended
would of course have the opposite meaning: the damage was not regarded as
a real possibility, with the consequence that there would be no need to
consider steps to avoid the damage or to contemplate an alternative design.

[12] The appellant’s further argument appears to have been that if what I
consider to be the natural meaning of ‘unintended’ is attributed to exception 1,
it would render exception 1 nugatory, because no contractor would
intentionally cause physical damage to the works. Again, I do not agree.
Experience has shown that damage is sometimes intentionally caused to a
perfectly working or undamaged part of the works so as to remedy the
defective or damaged part. Such intentional damage to gain access was
considered, for example, in Standard General Insurance Co Ltd v Voest-
Alpine Industrieanlangenbau GMBH 1994 (3) SA 356 (A). But even if, at best
for the appellant, ‘unintended’ could be interpreted to mean ‘unforeseeable’, it
has failed to exclude the possibility that the adjective must be afforded what I
consider to be its plain meaning, namely of consequences which are intended
or planned. And because exclusion 1 must be restrictively construed against
the appellant, this narrower meaning must be accepted.
[13] Reverting to the facts, it is not suggested that the delamination and
damage to the epoxy lining was planned or intended by respondent – even in
the extended sense discussed in para 11 – when it designed or performed the

construction work. On the contrary, the probabilities seem to indicate that
these were consequences it would strive to avoid. Hence I agree with the
decision of the court a quo that the point in limine should be decided in favour
of the respondent. In consequence, the conditional across-appeal need not be
considered.

[14] It is therefore ordered that the appeal is dismissed with costs, including
the costs occasioned by the employment of two counsel.

____________________________
FD KGOMO
ACTING JUDGE OF APPEAL

CONCUR:

HOWIE P
BRAND JA
LEWIS JA
COMBRINCK JA
THE SUPREME COURT OF APPEAL
REPUBLIC OF SOUTH AFRICA

MEDIA SUMMARY – JUDGMENT DELIVERED IN THE SUPREME COURT OF APPEAL

From:              The Registrar, Supreme Court of Appeal

Date:               3 December 2007

Status:            IMMEDIATE

Please note that the media summary is intended for the benefit of the media
and does not form part of the judgment of the Supreme Court of Appeal.

ALLIANZ INSURANCE Ltd v RHI REFRACTORIES AFRICA (Pty) Ltd
[2007] SCA (RSA)

Today the Supreme Court of Appeal dismissed with costs an appeal by
Allianz Insurance Limited against the judgment and order of the
Johannesburg High Court granted in favour of Refractories Africa (Pty) Ltd.  In
June 2001 Refractories Africa, a contractor, entered into a written construction
agreement with a third party called Ocean Fertilizer (Pty) Ltd whereby
Refractories Africa carbon-bricked and acid-proofed the lining of cooling
towers belonging to Ocean Fertilizer in the Richard Bay area.  The purpose of
the undertaking was to insulate and protect the concrete surface of the towers
against the ravages of the acid content of the circulating water and the
presence of acid vapours in the air.

During the course of Refractory Africa carrying out the work the material used,
called epoxy lining, applied by Refractory failed to stick to the surface and
delaminated or peeled off which required the insulation to be redone.

Allianz Insurance rejected Refractory Africa’s claim claiming that the aforesaid
adhesion material used for the lamination had a manufacturing defect and that
Refractory Africa was disqualified from indemnification because the clause in
the insurance policy excluded “unintended damage”.

The Supreme Court of Appeal rejected this defence by Allianz Insurance on
the basis that interpreting the expression“unintended damage” in its proper
context shows that the insurance contract refers to damage to the entire
property (the cooling towers) and that the said epoxy lining material was not
expressly excluded in terms of the exclusion clause.