Getting to grips with business interruption cover during pandemic

A briefing by National Treasury (Treasury) on the financial impact of COVID19 on both the economy and national budget, published 30 April 2020, makes for depressing reading. Treasury indicated that the IMF estimate of a 5,8% contraction in domestic GDP for 2020 was optimistic given the “high levels of uncertainty [about the] duration and intensity of the pandemic, the subsequent macroeconomic fallout, and the associated stresses in financial and commodity markets”. They warned that tax revenue could decline by almost a third and predicted that between 690 000 and 1,7 million full-time equivalent jobs could be lost. Six weeks into lockdown, and with no sign of an end to the crisis, businesses are taking strain.

South Africa’s small and emerging enterprises (SMEs) will be closely examining their insurance policies for any relief from lockdown-related losses. It is logical that their interrogation begins with the business interruption (BI) cover that may be included on one of their asset policies. The truth is that BI cover was designed to compensate property owners against loss of business income as a result of  disruption to their business activities due to physical damage to the insured property, caused by perils like earthquake, fire, flood, hail, or wind. Seamus Casserly, CEO at Lockton South Africa, said that standard BI covers make no mention of pandemic and that attention will invariably shift to contingent business interruption (CBI) extensions, some of which do not require physical damage to an insured asset to perform.                                                              

Guided by insurance principles

Robert Vivian, Professor of Finance and Insurance at the University of the Witwatersrand, said that it was important to consider insurance fundamentals when assessing how BI policies would respond to pandemic-related claims. “Short term insurance policies are essentially property damage policies that offer cover on the basis of indemnity; the insured is indemnified against the loss,” he said. “Because BI requires an underlying property damage policy to respond it should be clear that an interruption of business activity as a result of lockdown will not result in a BI claim”.

BI cover is not issued as a standalone policy; but as a section of cover linked to an underlying property policy, for example fire, buildings combined, office contents, and even electronic equipment. “CBI and other BI extensions, which may include cover for infectious disease and non-physical damage, will only apply to customers who elected such additional covers,” said Casserly. He estimated that as few as four in a hundred domestic commercial policyholders would have such extensions under their BI sections. 

We asked Bryte Insurance, a leading domestic short term insurer, whether their BI policyholders would be able to claim for loss of business income or other expenses following COVID19 and the resulting nationwide  lockdown. “BI covers are intended to respond to financial losses or unexpected expenses incurred by commercial enterprises, due to certain unforeseen events, following material physical damage to the insured property,” they said. They reiterated that BI policies would not respond to subsequent losses if the peril, such as COVID19, did not cause material damage to an insured property. The notable exception is where policyholders have chosen policy extensions under the CBI section of their policy. 

Limited cover for consequential losses

In such cases they might, subject to policy wordings, enjoy limited cover for consequential losses due to the pandemic. Bryte said that its specialist hospitality products included an optional extension pertaining to certain losses for cancellation of bookings, which in current circumstances may provide cover due to COVID19. The insurer reminded readers that it was impossible to provide generic responses to questions about how BI cover, even with CBI extensions, may perform. “Policies, and the additional options chosen, vary from customer to customer and from one policy to the next – each claim received is assessed on its individual merits, as interpreted against the actual policy wording and schedule of cover,” said Bryte. 

Short term insurance brokers are struggling with record levels of uncertainty caused by COVID19, the National State of Disaster, and the subsequent nationwide lockdown. “If your client has an extension under their BI policy then it makes sense to notify the insurer that there is a claim,” said Casserly. “Whether or not the client has a valid claim will become apparent as we emerge from lockdown”. He warned that short term brokers would inevitably face challenges from clients that were unhappy with how their insurance performed through the crisis: “The complexity around BI, CBI, and other BI extensions introduce many areas where the suitability of advice could come into question”. 

South Africa’s largest short term insurer, Santam, will likely consider three factors when considering contagion claims on its CBI extension: First, it must occur in a radius defined in the extension in the policy; second it must cause an authority to act; and third, it must directly impact on the insured business’ turnover. Insureds could be in for a long wait in the event their insurer entertains their claim. “An insurer that has liability in these unusual circumstances will want to assess the insured’s loss of income over 12 months rather than over a four or eight week lockdown period,” said Casserly. “In many cases the turnover dip during lockdown could be made up in the ensuing months due to pent up demand”.

State of Disaster is not a peril

It is difficult to assess the impact of the coronavirus pandemic on the broader insurance sector. “Reinsurance treaties are designed to respond to material damage claims,” concluded Bryte. “The short term insurance industry is engaging with reinsurers to clarify the response of reinsurance treaties, and it is likely that this position will only become clear post the lockdown, when all potential claims have been lodged and assessed”. Casserly concluded that it was unclear whether a State of Disaster qualified as an event in terms of the material damage provision. “Insurers are meeting with Treasury to determine if anything can be done to meet Treasury’s expectations re their COVID19 performance; but to try and suggest that the lockdown constitutes a peril that is insured in terms of a fire type policy, for example, is a step that will likely be challenged legally,” he said. 

Writer’s thoughts:
Business interruption (BI) is a complex cover type that presents many challenges for short term brokers and their clients. One wonders whether any broker could have envisaged the impact of the coronavirus pandemic on his or her client when putting this cover type in place during 2019. Do you believe that a national lockdown should trigger a BI claim? And what approach have you taken re your client’s financial losses due to lockdown? 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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