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South Africa’s courts charged with untangling the business interruption riddle

14 July 2020 Gareth Stokes

The highly charged question of whether business interruption (BI) insurance will pay-out due to a national lockdown has spilled over from the Western Cape High Court into the court of public opinion. On 26 June 2020, the court ruled in the matter between Café Chameleon CC and Guardrisk Insurance Company. It determined, or so the consumer media has written, that insurers must recognise lockdown as a trigger to pay-out claims against BI insurance policies with infectious diseases extensions. The court’s decision was soon followed by an apparently abrasive media release from the Financial Sector Conduct Authority (FSCA), which was widely picked up by the media to lambaste insurers.

Rallying the public to your cause

“Insurers cannot use lockdown as grounds to reject claims” said Moneyweb.co.za; “FSCA calls out insurers…” declared EWN; while Biznews.com led with “FSCA to act against insurers who refuse BI”. The consumer media’s position is nicely encapsulated in the latest member communication issued by the Financial Intermediaries Association of South Africa (FIA) in response to the FSCA. “Recent articles published by the mainstream media are useful to gauge public opinion; but you should rather trust your association or insurance partners for the facts,” they wrote. “Articles quoting the people heading up a major lawsuit against insurers must be read with that in mind; likewise, a promise by an insurer that it will ‘pay all BI claims’ should be considered in view of its participation in that market segment”. 

Whether or not insurers can pay claims against their Contingent BI (CBI) extensions is not as cut and dried as the consumer media and FSCA would have us believe. In its 9 July 2020 press release the authority initially stated that “national lockdown cannot be used by an insurer as grounds to reject a claim”. This is the line that the consumer media picked up on; but as you read further, a different picture emerges. The authority states: “Based on the information received and analysed by the FSCA to date, we found that, although we could not find evidence that the national lockdown could be a trigger for a valid BI insurance cover claim, policyholders are able to claim in instances where they can show that they have satisfied the requirements of their specific policy, whether it was before, during, or after the lockdown”. 

Largest insurer heads to court

Santam, which accounts for more than a quarter of the country’s non-life insurance premium, is heading to the High Court in September 2020 to seek legal clarity on its CBI claims position. We spoke to Asher Grevler, Chief Risk Officer at Santam and his colleague, Mokaedi Dilotsotlhe, Executive Head: Brand & Marketing, to find out more. 

“The premiums charged on our CBI extension, which covers for 10 types of risk including contagious and infectious diseases, are minimal,” said Grevler , Chief Risk Officer at Santam. He added that the insurer’s exposure in the CBI space was historically low; but would change if insurers were expected to respond to the unprecedented steps taken by government to rein in the spread of the coronavirus. Santam issued a SENS announcement to inform its stakeholders of the likely impact of CBI claims on its balance sheet. In this announcement it confirmed that its financial soundness was not under threat, whichever way the courts decided. “If the lockdown is not covered, we have a certain level of claims,” said Grevler. “If [the courts rule] that the lockdown is covered, obviously those claims go up much higher; but then we have reinsurance bought for it”. 

Why then is the insurer challenging the matter? We asked Santam whether they could not simply pay-out all CBI claims on the basis it would be socially responsible. “In an ideal world we would like to pay all these claims and recover them from reinsurance; but you cannot make a reinsurance claim, nor pay an insurance claim, if the peril is not covered by a policy wording,” said Grevler. He noted that if the insurer paid claims outside what is on cover on the policy it risks not being able to recover such payments from its reinsurer. The decision to test the matter in court is not intended to withhold claims pay outs to desperate businesses; but rather to enforce insurance principles and mitigate the risk of contravening reinsurance treaties. 

Asking the wrong questions

Has the Western Cape High Court erred in the Guardrisk decision? Donald Dinnie, insurance litigation director at Norton Rose Fulbright, said that the court answered the wrong question. “It ought to have asked whether ‘but for’ the local infections the BI would have occurred; instead it asked whether ‘but for’ the COVID-19 pandemic, which led to the lockdown regulations, the business would have closed”. Santam is not convinced by the ruling in the Guardrisk matter either. 

“We do not believe that the decision made in that case accurately reflects what was required by the policy wordings,” said Grevler, before adding that Santam’s opposing affidavit in its looming court case sets out the concept of causation and what needs to happen for a CBI claim to incept. The insurer’s position remains that if the insured cannot show a direct link between COVID-19 and the loss suffered, then it is not covered. They observe that reductions in turnover due to general fear among the public or the impact of national lockdown are intervening causes that result in an economic rather than insured loss. 

“We must respect what is covered in terms of the policy wording, in line with the principle of proximate cause,” said Dilotsotlhe. “This is important for Santam and for the entire insurance industry”. He reiterated that there was a clear distinction between economic losses, those that everyone in the country, including insurers, were suffering due to the lockdown-related economic contraction, versus insured losses. Insurance principles, imparted through policy wordings and exclusions, are designed to insulate insurers from pure economic losses. 

Authority wielding the whip

We wondered to what extent the FSCA or government might compel insurers to perform, regardless of insurance principles and policy wordings. Santam noted that the industry had engaged extensively with the authority and had carefully considered the authority’s interpretation of CBI policy wordings. “We believe that we are processing and managing our claims in accordance with FSCA Communication 34 of 2020,” said Grevler. He added that the insurer did not want to end up in a situation where the authority used its powers under the Financial Sector Regulation (FSR) Act to issue a directive against it. 

What happens next? Is Santam confident about their September court date? Are they concerned about the lasting damage this action could have to their brand? “We do not believe there is cover for the lockdown and [we have set out clearly in our answering affidavit] why we think a judge should rule in our favour,” concluded Grevler. This view is echoed by Norton Rose Fulbright, which recently opined: “It is not for the courts to construe exclusions in favour of the insured simply because it considers them to be unfair or unreasonable”. Dilotsotlhe, acknowledged the impact of COVID-19 on local businesses, many of which are Santam insureds. “We do not believe the policy responds,” he concluded. “If we start paying claims of our own accord, we take a huge risk that the reinsurers would not follow”. 

Writer’s thoughts:
The battle for CBI pay-outs has a long way to go. Most of the commentators we have spoken to suggest that the Guardrisk matter will be taken on appeal. And we will have to wait until September for the first round of Santam’s first court challenge. Our concern is two-fold. First, by the time these matters are resolved it will be too late for most businesses. Second, we worry that the decision to pay claims will not yield the cash amount that businesses believe they are due. We welcome your thoughts on the matter. Please comment below, interact with us on Twitter at @fanews_online or email me us your thoughts [email protected].

Comments

Added by Gareth, 29 Jul 2020
I agree with your comment, Cliff. There is certainly a sense that the FSCA is pushing for a ‘fair treatment’ outcome regardless of the contractual position. Insurers have since responded, with announcements of interim financial relief or claims settlement negotiations made over the weekend of 25-26 August. Some, like Santam, remain adamant they will follow the process through the courts; but one gets the sense they are hopelessly ‘trapped’ by the court of public opinion.
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Added by Cliff Taylor, 14 Jul 2020
In my opinion this had become a 'political' issue clouded somewhat by the FSCA's reference to 'treating customers fairly'.
Insurance is regarded by many as a 'grudge purchase' hence the public opinion based on sentiment rather than fact.
One of the basic principles of insurance is that of 'proximate cause' which is the main factor to be considered and if an event is NOT insured then so be it.
On what basis can an insurer be accused of not 'treating customers fairly' if an event is not covered in terms of the policy wording ?
Each claim needs to be viewed on the basis of the clients' policy wordings and the extent to which the event falls within such wording.

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