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A combination of policy wordings and legal precedent likely to determine BI claim outcomes

20 May 2020 Gareth Stokes

South Africa’s insurance regulators have entered the Business Interruption (BI) insurance debate with the publication of Joint Communication 5 of 2020 by the Financial Sector Conduct Authority (FSCA) and Prudential Authority (PA). Their communication, titled ‘COVID-19: Regulatory response – Business Interruption Insurance’ informs the market about BI principles and guides both intermediaries and non-life insurers on how to communicate to their policyholders about pandemic-related BI claims. The FSCA and PA (referred to as the Authorities) said that the content of their circular was informed by interactions with insurers and reinsurers during the COVID-19 outbreak. 

The South African Insurance Association (SAIA), which represents 57 non-life insurers, also issued a member communication to address BI cover under COVID-19, dated 15 May. They encouraged policyholders who had suffered financial hardship due to the pandemic and the ensuing national lockdown to “contact their brokers, financial advisers, or insurers to find out [how] insurers could assist in terms of their insurance premiums, insurance cover, and claims”. Commercial policyholders have welcomed the premium relief initiatives announced by some insurers; but remain deeply concerned about the prospect of successful claims under the BI sections of their property policies. 

Standard BI versus BI cover with extensions

SAIA’s communication informed policyholders about what to “typically expect” from their policies in response to losses suffered due to COVID-19 and / or the resultant lockdown. They mirrored the Authorities in separating the BI cover universe into ‘standard BI cover’ and ‘BI cover with extensions for infectious or contagious diseases’. The two communications confirm broad consensus among insurers and regulators as to how standard BI cover may perform, from an insurance principles perspective. 

SAIA observed that standard BI policies do not normally provide cover for business interruptions caused by pandemic. “Such policies usually require a physical damage ‘trigger’ for the BI cover to react – there should be direct physical loss or damage to the insured property,” they said. According to the Authorities most local BI covers were issued as standard BI policies that require the insured to prove physical damage to the business premises covered under the policy. The Authorities clearly stated that “an insurer would be obliged to indemnify a policyholder for loss of income only if the policyholder was able to prove physical damage, together with other requirements of the cover being met” and that “in the absence of such physical damage, an insurer is not contractually bound to provide policy benefits to a policyholder”. 

Both the Authorities and SAIA reiterated the need for insurers and insurance brokers “to communicate clearly to policyholders that policy benefits will be provided only if physical damage is proved – and provided that all other policy requirements for cover are met”. BI covers issued with extensions for infectious or contagious diseases may or may not include cover for COVID-19, depending on the contract between the insurer and the policyholder. The Authorities observed that these ‘specific’ extensions were only taken in a small percentage of policies with BI cover. There appear to be significant differences of opinion among insurers and reinsurers as to what constitutes a valid trigger against an infectious or contagious disease BI extension, as well as how pandemic exclusions should be applied. 

Lockdown never imagined as a peril

Early interactions between the Authorities and insurers suggest that the infectious or contagious disease extensions will only perform “where the loss of business income was due to the business being interrupted due to a localised COVID-19 infection”. 

In a recent presentation to an Insurance Talk webinar, held 14 May 2020, Christine Rodrigues, a partner at Bowmans, observed that even if there was an underlying BI cover for pandemic, nobody could have foreseen that business interruption losses could arise due to a lockdown. This explains why many insurers and reinsurers are seeking legal advice on their potential liabilities in this area. “Local insurers and policyholders will look at the international markets for precedent,” said Rodrigues. “Going forward they will have to ensure that policy wordings are expanded to exclude pandemic and any losses arising from government interventions due to those excluded events”. Pandemic-related legal battles are likely to focus on proximate cause and the link between the excluded peril (pandemic) and the lockdown, with any loss that stems from an excluded peril unlikely to hold an insurer liable. 

It may also be argued that a peril that is not expressly excluded, such as pandemic, has been tacitly included as an insured risk. “We are likely to see litigation, globally, that will deal with concepts such as does a lockdown create physical loss, damage, destruction, loss of access, and loss of use – and whether insurers can cover risks that cannot be contemplated and for which they never took premiums,” said Rodrigues. 

Concerns about mid-term endorsements

One of the complaints beginning to surface in short-term insurance forums is the decision by insurers and reinsurers to implement mid-term endorsements to existing commercial insurance policies. The FSCA has already issued a communication in this regard, directing insurers to communicate with the regulator before introducing “any new exclusions or requirements during the period of the COVID-19 pandemic”. Based on their interactions with insurers to date, the FSCA expects most insurers to add general exclusions for infectious or contagious diseases to policies. 

The abovementioned communications suggest that there is a great deal of uncertainty in the industry about what is covered under policies with either standard BI or BI with extensions for infectious or contagious diseases. After attending numerous presentations and reading dozens of articles, the author concludes that it is not so much uncertainty about how these policies should perform that is the problem; but the misguided hope that  contracts for insurance can somehow be modified to perform post-event. Insureds who were hoping for some intervention from the Authorities or government could be sorely disappointed. 

Joint Communication 5 clearly states: “COVID-19 will not be covered in the standard BI policy and the Authorities see no reasonable grounds to intervene, since this is what a policyholder and insurer agreed upon when the insurance contract was concluded”. Insurers will have to do plenty of legwork to align their policy wordings with the ever-evolving risk landscape. “Insurers need to undertake an exhaustive overhaul of their policy wordings,” concluded Rodrigues. “They must take greater care in explaining to their insureds what the policy does and does not cover, whether directly or via their intermediary distribution force”. 

Writer’s thoughts:
The COVID-19 pandemic is not the first unanticipated risk event that the non-life industry has dealt with. We have seen global exclusions for Nuclear Risk (1950s); War & Terrorism (2000s); and local exclusions for civil commotion, public disorder, strikes, riots, and terrorism (1970s). What are your thoughts and experiences insofar insurers’ introduction of endorsements to insurance policies mid-term? Please comment below, interact with us on Twitter at @fanews_online or email me us your thoughts [email protected].

Comments

Added by Peter Dexter, 20 May 2020
I agree with Wally: The majority of policies in the market are perils based and require material damage under the fire perils as the trigger for a BI claim. However, there are always exceptions to the rule, some are written on an all risks basis and may include or exclude communicable disease extension. As always, the policy wording is the contractual agreement between the insurer and insured.
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Added by Wally Walton, 20 May 2020
Santie. The underlying policy (fire, combined etc) is on specified perils and as such there can be no all inclusive cover as you state. That applies only to an extent for assets all risks policies.
So the norm is - if it is not specified there is no cover. You want a virus to be regarded as a fire?
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Added by Gareth Stokes, 20 May 2020
To Santie: It looks certain that many issues around policy performance will make their way to courts in the coming months. We will watch with interest.

To Lucille: Experience suggests that governments step in to cover catastrophe events where losses are not on cover with insurers. In that sense the expectation for insurers to perform beyond their contractual agreements is bizarre. The collaboration between insurer and government would be to find a more sensible way to cover future pandemic risks.
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Added by Santie Opperman, 20 May 2020
The norm is that if there is no exclusion it is automatically included. Taking the response of Insurance Companies by slipping an endorsement on all commercial policies without the 30 day notice period is and will be unacceptable.
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Added by Lucille Horn, 20 May 2020
Government should be held responsible, not the nsurers
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