GRID collapse exclusions and amendments to suppliers’ extensions under the Business Interruption section of an Assets policy

It is well known that the electricity supply challenges faced by South Africa has had a severe impact on businesses and private individuals.

It is not only business enterprises that have had to assess the risk implications brought about by this situation but also the insurance market which has had to assess how to manage their underwriting risks and exposures going forward.

During the latter part of 2022 and currently in 2023 many insurers and reinsurers have started imposing restrictions and limitations pertaining to the potential risk of a national grid failure.

As your Broker we will always strive to obtain the best cover for our clients and try to resist onerous or unreasonable policy restrictions. Unfortunately, the actions taken by the insurers to manage the underwriting risks associated with the failure of electricity supply has left very little, if any, scope for compromise in the circumstances. It should also be pointed out that the restrictions and amendments incorporated into the various policies differ from insurer to insurer.

The purpose of this communication is to make you aware of the general intention behind the amendments that have been imposed by insurers.

In this communication we have highlighted the type of amendments that have been introduced in the form of general policy exclusions, as well as the amendments that pertain in relation to the policy extensions for business interruption cover as a result of the potential failure of the supply of electricity and other services. Please note that individual policies may differ significantly and, therefore, from a policy interpretation point of view the specific policy applicable to an individual policyholder would need to be considered in conjunction with the circumstances of any loss or damage event in order to determine the position regarding individual policy response.

General policy exclusions in relation to the total or partial failure of the supply of electricity:

Policy exclusions that specifically refer to an “electricity grid interruption”:

Some insurers specifically refer to an “electricity grid interruption” in the wording of their exclusion. Such policies may, for example, provide that the policy excludes any loss, damage, liability, cost, or expense, of whatsoever nature, including any consequential losses in terms of any section of the policy, directly or indirectly caused by, attributable to by, resulting from, arising out of or in connection with any electricity grid interruption.

In the abovementioned example, the policy may then define an “electricity grid interruption” to mean a total or partial interruption, interference, suspension, blackout, and/or failure of the electricity supply from the national, regional, or private, grid to the electricity grid of South Africa to the business of the insured by any cause whatsoever.

Some insurers, on the other hand, use the term “National Electricity Grid Interruption” without referring to a regional or private electricity grid. In this case a “National Electricity Grid Interruption” may then, for example, be defined to mean an interruption or suspension of the electricity supply from the national electricity grid of South Africa concurrently for whatsoever reason, whether due to Damage, an inability and/or failure (whether partial or total) of the utility supplier to generate, transmit or distribute electricity, or otherwise.

Policy exclusions that specifically refer to a total or partial interruption of services:

Some policies do not specifically refer to a grid failure or a national grid failure. The exclusion simply refers to a total or partial interruption of certain services including the supply of electricity.

This type of exclusion may, for example, provide that the policy does not cover any loss, damage, claim, cost, expense, other sum, or any consequential loss directly or indirectly caused by, attributable to, or occurring in consequence of a total or partial interruption of electricity supply, gas, water, communications, telecommunications or data processing services or storage facilities, steam, sewerage or other similar services directly or indirectly from the failure of the supplier to generate , transmit or distribute whether such failure is deliberate or not.

Amendments introduced to the Extended Damage Extension or Public Utilities Extension under the business interruption section of the policy:

An assets policy will sometimes provide an extension referred to as an Extended Damage Extension or a Public Utilities Extension which is intended to provide cover for any loss resulting from the interruption or interference of the business in consequence of damage that has occurred at other premises apart from the insured’s own premises. In particular, for the purposes of this article, the focus is on the extension of cover for damage that has occurred at the premises of a supplier of electricity.

A typical Extended Damage Extension included in the business interruption section of the policy may, for example, provide that the business interruption section extends to include loss due to the interruption of or interference with the business in consequence of the total or partial failure of the supply to the Insured of consumables such as water and electricity which is solely due to insured Damage. The extension would usually incorporate several exclusions where the extension does not apply such as, inter alia, in relation to loss brought about by drought or the shortage of fuel or water or the interruption of or interference with the Business by any act, action or omission, or restriction by a supplier, including but not limited to the right of the supplier to withhold or restrict supply.

Recently, some insurers have introduced additional exclusions to this type of extension. Such additional exclusions are, for example: -

• The exclusion of cover due to grid failure, which is defined to mean a failure or inability for whatsoever reason (whether due to Damage or otherwise) of a utility supplier to generate, transmit or distribute electricity.
• The exclusion of cover due to the interruption of or interference with the business by any act, action or omission, or restriction by an Authority, including but not limited to the right of the Authority to withhold or restrict supply.

Please note that notwithstanding the amendments to the Extended Damage Extension or the Public Utilities Extension, any general policy exclusion, such as that pertaining to electricity grid interruption would, in any event, also apply to all sections of the policy.

Conclusion:

To shape better decisions, it is important for you to speak to your Aon Broker to consider the risk profile of your business in the light of the evolving challenges that face the current business environment. A business continuity plan which outlines the actions following supply chain and public utility interruptions is critical and should be considered in conjunction with the current risk considerations that prevail.