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COVID-19 insurance risks: What are they?

20 August 2020 This is part one in a series of six blog posts providing COVID-19 risk advice.

This is part one in a series of six blog posts providing COVID-19 risk advice.

The risk management process starts with establishing the context of an organisation, followed by the identification, analysis and evaluation of risks. The next step requires that risks are treated effectively to ensure they are within the organisations risk tolerance or appetite.

One of the ways that risks can be mitigated is to transfer risks to a third party, the most common method to transfer risk is through an insurance contract. Before one is able to transfer risks, one first needs to classify the risks into insurable and uninsurable risks. Keeping the above in mind, the question then is what risks associated with the impact of COVID-19 are insurable? Conversely, what risks related to COVID-19 are uninsurable and therefore require controls to be implemented to reduce the uncertainty around current and emerging COVID-19 risks.

Firstly, let’s clarify the current position. Insurers provide Business Interruption (BI) cover to businesses to indemnify clients against loss of income that a business suffers after a disaster causing physical damage. Typical disasters include fires and floods that result in the destruction of a property, which leaves the business unable to trade until its premises has been reconstructed or repaired, or an alternative premises has been acquired.

Prior to the global COVID-19 pandemic outbreak, insurers provided BI insurance with an extension for infectious disease outbreak which, depending on the specific policy, may indemnify the organisation in the event that the business is forced to close as a result of an infectious disease outbreak. Unfortunately, this cover is no longer available as insurers have now cancelled or excluded all pandemic and infectious disease cover relating to COVID-19, due to international reinsurers withdrawing their support.

Consider the Café Chameleon vs Guardrisk judgement for the latest on the contingent BI cover status relating to the lockdown and the COVID-19 outbreak, where it was determined that each case must be “decided upon its facts and the law” but this does not open “the floodgates of liability”. In his finding, Judge Le Grange applied the “but for” test to assert that, “without the prevalence of COVID-19, there would not have been a national lockdown, therefore the national lockdown forms part of the proximate cause.”

The subsequent response by Santam to the ruling is as follows: “It is our contention that a national lockdown would not be implemented for an outbreak within a specific area and that by application of the Trends clause, irrespective of an incidence of disease around a specific premise, all revenue would be impacted. As a result, claims resulting from an interruption due to the national lockdown are not covered. In our view the national lockdown is not a direct consequence of any specific insured event or a response thereto. It was a pre-emptive measure to prevent and delay the spread of the virus.”

Legal certainty is required in order to give clarity on the way forward for both insurers and insureds. Interim relief is being provided until legal certainty has been obtained subject to specific criteria. Insurers like Old Mutual, for example, have engaged with the Financial Sector Conduct Authority on this matter and has committed “to provide BI support to SMEs to make commercial settlements to compensate them with an annual BI sum insured of R5 million or below, for their BI losses based on specific criteria, to enable them to continue operating”.

The second type of insurance relates to Directors and Officers (D&O). Directors and officers are particularly affected by COVID-19 because these individuals are responsible for the governance and leadership in an organisation. COVID-19 threatens multiple stakeholders, specifically employees and customers who are potentially exposed, and if the regulatory requirements for prevention, testing and cleaning are not adhered to, the directors and officers may be held liable if they were negligent in their duties.

D&O insurance will not cover the directors and officers for any illegal act and these insurers are asking COVID-19 related questions to understand their exposure and more importantly how the organisation is dealing with the management of the business. What measures have been put in place to protect the business or staff and customers, as well as ensure ongoing continuity of the operations?

There is also a health and safety concern which arises due to the thousands of employees who are now working from home. Employers remain responsible for the health and safety of their employees, this is problematic and exposes employers to potential liability in the event that the employee is injured while working from home.

The bottom line is that risks emerging from the COVID-19 crisis and ongoing lockdown regulations must be viewed as uninsurable and require improved risk management.

Read part two in our risk advice series: What do these risks mean for insurers?

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