National lockdown will not serve as a trigger for your business interruption cover

Small businesses hoping that their business interruption (BI) insurance would somehow perform for losses consequent to South Africa’s national lockdown were dealt a hammer blow last week, when the Financial Sector Conduct Authority (FSCA) stated that lockdown “could not reasonably be interpreted to be a trigger for a valid BI insurance cover claim”. Their Communication 34 of 2020, published 18 June, confirmed the regulator’s position on various aspects of BI insurance cover.

Tackling tough BI questions

The latest notice should be read with Communication 12 of 2020, published 30 March, and Joint Communication 5 of 2020, issued 12 May. Communication 12 urged insurers to discuss “any new BI exclusions or requirements” with the authority before introducing them, while Joint Communication 5 shared the authorities’ views on Standard BI cover and BI Cover with an extension for infectious and / or contagious diseases. The latter also contained the authorities’ views on mid-term policy endorsements and pending BI insurance claims. 

Since 12 May, the FSCA has busied itself with answering difficult questions emerging from insurers’ BI claims handling following pandemic and the subsequent national lockdown. They requested insurers to share copies of policy wordings to establish how clauses were worded and likely to be interpreted. The authority observed that BI policy wordings could be broadly grouped into six categories; that some insurers had more than one BI clause that applied to different types of policies; and that the application of some of the policy wordings translated into different burdens of proof being placed on policyholders, depending on their insurer. What are the six categories? And how does the authority expect insurers and insureds to behave under each? 

1. Radius and notification: The FSCA said that most policy wordings required the following to hold for a valid BI claim: “The business must be interrupted as a result of a contagious disease at the premises or within a certain radius and the local authority must have formally declared that a disease exists within the area and / or that it has imposed quarantine regulations or restricted access to the area”. How do these requirements translate under COVID-19? 

Reducing the onus of proof

The FSCA said it was easy enough for a business to prove its case where the interruption related to one of its staff being tested positive for COVID-19; but that proving an interruption due to contagious or infectious disease “within the radius specified” was trickier. They proposed that insurers relax part of this ‘proof’ by accepting the existence of a contagious or infectious disease within the radius specified in a BI policy if: A major facility such as a hospital or large retail store, within the insured’s specified radius, was closed for a certain period due to a positive case of COVID-19 at its premises; and that the insured’s business premises were situated within one of the metros or districts that had been declared COVID-19 hotspots by government. 

Insurers may not see things the same way; but will certainly be up in arms over the FSCA’s interpretation of the second requirement for claims under this category. “The requirement [that a local authority declares the disease to exist] is unfair, as it means that the reimbursement of a policyholder for loss of business income is dependent on something which is totally beyond the control of the policyholder, particularly [given that] the response to the disaster is being addressed at national level”. The FSCA argues that BI claims should be paid in events where “the policyholder is unable to discharge the legal obligation paced on it with the application of this requirement by the insurer; but where the other requirements have been met”. 

2. Radius: The policy wordings used in this BI category suggest that the trigger for a valid claim “is the interruption of the business by a contagious or infectious disease at the premises or within a specified radius of the premises, to which the insurance relates”. Under this category, the insurer does not require a notification by a competent authority. This would suggest, according to the FSCA, that the policyholder must only supply evidence that the contagious disease occurred within the specified radius. In line with its argument in the first category, the FSCA said: “BI claims instituted with insurers under this category should be paid as long as the interruption to [the insured’s] business can be proven”. 

Requirement to notify authorities is unfair

3. Notifiable disease: Insurer wordings under this category centre on the definition of a notifiable disease as “an illness sustained by any person, resulting from an outbreak of which the competent local authority has stipulated to be notified to it”. According to the FSCA: “The requirements under this category appear to be that (1) there must be a notifiable disease and (2) which a competent authority has declared it shall be notified of, presumably by a policyholder or someone on behalf of a policyholder”. The authority believes that the second part of this requirement is unfair. In other words: “If a policyholder was infected with COVID-19, such policyholder must be reimbursed by an insurer irrespective of whether or not a competent authority has been notified of the infection”. 

4. General exclusion: A general exclusion frequently appears in the case where insureds are indemnified against BI losses under a contagious or infection disease extension, whether at the premises or within a specified radius of the premises. The exclusion, writes the FSCA, “overrides the aforementioned extension if there is an infectious epidemic or pandemic disease at the insured’s business premises or if the disease exists within a specified radius of the business premises”. This could be bad news for policyholders because COVID-19 has been declared as a pandemic by the World Health Organisation. 

5. Closure or restriction: The insurer’s policy wordings require the insured’s business to have been interrupted by a closure or restriction placed on the premises by the authorities as a result of a contagious disease occurring at the premises. Unless a policyholder can prove that the insured’s business was closed down as a result of COVID-19, at its premises, the FSCA’s view is that a policyholder would not have a valid BI claim. 

National lockdown will not suffice

6. Closure by order: The FSCA says this category of BI cover would be triggered if “the interruption of business by the outbreak of a notifiable disease or illness, or disease occurring at the premises of the insured, resulting in the closing or partial closing or other interference with the business by order of the state or government, local authority, or any other competent authority”. The trigger, explains the FSCA, is a COVID-19 infection at the business premises of a policyholder, which resulted in the business being closed completely or partially by an order of state or government. It could be argued that national lockdown constitutes such an order; but the insured would have to be able to prove that the lockdown followed a positive COVID-19 case at its business premises. 

Writer’s thoughts:
FSCA Communication 34 of 2020 makes for interesting reading. As the post-pandemic claims landscape becomes clearer, it seems more certain than ever that many BI claims will make their way to the country’s courts. Do you believe that non-life insurers will accept the authority’s view insofar unfair burden of proof? And more importantly, will the courts agree? Please comment below, interact with us on Twitter at @fanews_online or email me us your thoughts editor@fanews.co.za.

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