Business interruption insurance is becoming a huge issue – but there may be a compromise

5 Jul 2020

South Africa’s insurance industry is pitted against the tourism sector in what could be a battle for the survival of each. Legal firm ENSAfrica believes it has a solution.

Santam, one of the largest insurance companies in South Africa, has agreed to expedite court processes in a bid to get legal certainty on the vexed subject of business interruption insurance.

Along with other big insurers, Santam is the subject of business interruption claims that have climbed into the billions. With some exceptions, most of these claims have been denied by the big insurers.

Business interruption insurance exists to help a business get back on its feet after an unforeseen event, says Santam. It’s a crucial survival tactic as it insures a business against loss of revenue and helps it to continue to pay overheads and expenses such as rental during a period of downtime.

South Africa’s tourism sector, which was shut down by the imposition of a national lockdown due to Covid-19, has lost in the region of R72-billion, says Tshifhiwa Tshivhengwa, CEO of the Tourism Business Council of SA.

And this does not account for indirect spending. Tourism is an apex industry with a long and deep supply chain that generates a further R206.5-billion of supply chain, and capital spending in the economy annually, he says.

The claimants, the smaller hotels, lodges and restaurants which make up the rump of South Africa’s tourism sector, believe they are insured under their business interruption insurance, which makes specific provision for closures forced by pandemics.

The insurers think differently.

The devil, as is often the case with insurance, is in the detail.

“Our policy wording is very specific,” says Asher Grevler, Santam’s chief risk officer. “We cover businesses for interruptions as a result of the outbreak of a disease at a local level. What people misunderstand is that a business needs to be directly impacted by a disease such as Covid-19 in order for the cover to respond. If a policyholder can show this to be the case, we will pay the claim.”

The mere presence of the disease in the area of the affected business is not sufficient to have a valid claim – it must be the specific reason that that the establishment was closed.

For instance, ahead of the lockdown, Santam paid a restaurant in the Cape Winelands which hosted clients who proved to be Covid-19 positive. The restaurant was forced to close to undergo a deep clean and was covered for that closure.

Similarly, every time one of the Shoprite stores closes because of an outbreak of Covid-19 among their staff, those losses are covered by Santam.

“There is this notion that we are not paying out claims, but that is not true,” says Andrew Coutts, head of Intermediated Distribution at Santam.

Insurance company Outsurance, which is a much smaller player in the business interruption market, has adopted a different stance and is paying out claims.

The insurer is very specific about the claims it will and won’t pay, and is adamant that there is no cover where the national lockdown is the cause of interruption or interference to the business, a sentiment with which the South Africa’s Financial Sector Conduct Authority agrees.

“We are clear internally about how our policies react. However, there is considerable uncertainty in the market, which is why we welcome the legal process. We would also like a definitive answer. If it turns out our policies are wrong – we will honour them,” he says.

Loss adjusters like Insurance Claims Africa have attempted to negotiate a compromise settlement with the big insurance companies. This is in recognition of the fact that the payouts might be quite big and in an effort to avoid a lengthy and expensive legal process.

“I understand that we are coming across as insensitive, heartless people. But we don’t want to settle on a compromise that is not founded on insurance processes,” says Mokaedi Dilotsotlhe, Santam chief marketing officer. “Settlements create grey areas and we would like certainty.”

Insurance company Outsurance, which is a much smaller player in the business interruption market, has adopted a different stance and is paying out claims.

“We are not settling claims because of the lockdown,” says Natasha Kawulesar, head of client relations at Outsurance. “We are settling claims because of the impact that the outbreak of a contagious disease in our country had on our clients’ businesses. We are covering clients for the period that they experienced a drop in their turnover until the end of their indemnity period or until their business reaches the pre-incident turnover levels, whichever occurs first. We do not have a specific date span for these claims.”

This implies the issue may not be as clear cut as some believe.

Legal firm ENSAfrica has considered the issues and potential arguments, both for and against coverage, relative to potential Covid-19 related losses and liabilities, and relative to various policy wordings in the South African market.

The first thing to note, as Rob Scott and Zara Sher, dispute resolution experts at the firm, explained to Business Maverick, is that the assessment of coverage in terms of an insurance policy is an interpretative exercise.

“The interpretation of an insurance policy has been firmly established in our law as a unitary and objective legal exercise, involving considerations not only of the wording of the policy, but also context and the application of commercial or business-like sense,” Scott says.

A large number of insurers (and reinsurers), and even the brokerage market, are taking the position that these policies do not respond to Covid-19 related claims because “it was never the intention of the extension to provide cover for a pandemic event affecting the whole of South Africa; because the cover is only provided for business interruption loss resulting directly and solely as a result of the presence of Covid-19 discovered at the insured’s premises”.

While the results of the test case, which will be heard in July 2020, will be legally binding on the insurers who are parties to the case, the test case will provide persuasive guidance for the interpretation of similar policy wordings and claims.

These contentions, says Scott, may be too simplistic, relative to the legal interpretative process applicable to insurance policies, which requires a contextual and commercial construction.

“This is central to the whole argument,” he adds.

The stakes are very high. On the one side, is the tourism industry which is on its knees; on the other is an industry that globally could be facing the largest insurance event in the history of insurance.

It is in no one’s interest to destroy either one.

“We’ve been asking ourselves what is the way forward here,” says Sher. “A court process is not necessarily the most expedient or best solution. A court decision may be specific to a particular case. What about others? And what if there are decisions that are contradictory?”

“Steps that are being taken in other jurisdictions may be instructive, even if there are policy or regulatory differences.”

In the UK, the Financial Conduct Authority (FCA) announced that it will seek a court declaration in order to assist with the potential and ongoing disputes over business interruption insurance written by FCA-regulated UK insurers. It will put the various policy wordings before the English courts on an agreed basis with the relevant insurers.

While the results of the test case, which will be heard in July 2020, will be legally binding on the insurers who are parties to the case, the test case will provide persuasive guidance for the interpretation of similar policy wordings and claims.

This process spurred ENS into exploring a similar strategy. It also envisages a judicial determination, but in the form of arbitration, overseen by a credible judge.

“We see this as the way forward. It would be similar to the FCA process, but shorter and more inclusive,” says Scott.

It does, however, require the buy-in of the insurance sector, and ENSAfrica is currently in discussion with various parties to assess their appetite for this route.

There are no real winners here, but the alternative – multiple long, drawn-out and costly processes – is potentially more harmful. DM/BM

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