Insurance Pandemic

It boils down to the wording of your contract and the cover you are afforded. When your attorney warns you to read the fine print carefully prior to concluding a contract, he/she was not joking. Whether there is a legitimate claim or not, the question posed is whether the insurance would have the ability to pay the insured’s legitimate claim.

A business has paid its annual or monthly premium to it’s insurance to plan for the unforeseen and have peace of mind. Therefore a business would approach their insurance for “business interruption” and submit a claim. One would have to identify the risks insured in their industries to be able to ascertain whether their business is covered during the pandemic or not.  

Whilst property insurance covers the actual physical damage to a building, BI (Business Interruption) insurance covers the consequential loss of income suffered by the business. It can be widely noted that there has been cover undertaken in BI insurance which would include “miscellaneous events”. These would include for example diseases specified and within a radius from the insured’s building.

The two burning questions an insurance poses to the insured:

1. What is the cause of the loss suffered?
2. Whether the loss suffered is covered by the insurance policy and to what extent?

There are many controversial discussions regarding the Government’s decision to take the measures of the National Lockdown and this determination cannot at this stage be cast in stone. Many view the measure as the cause of loss to their business and further state that there were various measures that could have been adopted.  The insurance industry has been placed in an invidious position as they are being called to pay the insured.

Interestingly to note, there is an umbrella for pandemic cover but did not have a vast appeal to businesses.

According to the Financial Sector Conduct Authority (FSCA) COMMUNICATION 34 OF 2020 (INS), The FSCA deal with the complaints and delays experienced by policyholders in the processing of BI insurance claims and repudiations of BI insurance claims by insurers. The FSCA noted the following, which was discussed further in it’s communication. The FCSA noted that there seems to be slight nuances in the BI policy wordings.

They went on further to group the policies into six different categories which are noted below:

Radius and Notification

 The FSCA noted that most policy wordings were required to have the following wording 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”.

 Reducing the onus of proof

The FSCA noted that 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. However, proving an interruption due to contagious or infectious disease “within the radius specified” was more difficult.

It was 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.

This view would not go lightly with insurers as the reimbursement of the insured for loss of business income is dependent on something which is totally beyond the control of the insured. 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”. This may be a saving grace to many insured businesses.

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”.

Notifiable Disease

The definition of a notifiable disease according to the insurers is 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

• there must be a notifiable disease and;
• 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 and noted further that if the insured was infected with COVID-19, such insured must be reimbursed by an insurer irrespective of whether or not a competent authority has been notified of the infection”.

General Exclusion

A general exclusion frequently appears in the case where the insured is indemnified against Business Interruption losses under a contagious or infection disease extension, whether at the premises or within a specified radius of the premises.

The FSCA noted that the exclusion “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”.

Closure or Restriction

Some of the insurers have policy wordings which indicate that the insured’s business must have been interrupted by a closure or restrictions placed on the premises by the authorities as a result of a contagious disease occurring at the premises.

Closure by Order

The trigger for a valid Business Interruption claim would be 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 FSCA acknowledges that BI claims are complex in their nature and that insurers that have policy wordings which fall under the following categories:

1. Radius and Notification,
2. Radius; and
3. Notifiable Diseases

must, when they have received all relevant documentation from the insured not delay the payment of any claim provided the insured is able to prove the requirements below:

Radius and Notification (burden of proof)

• The insured’s business premises would have been interrupted by a contagious or infectious disease if, for example, any staff member employed by that business owner tested positive for Covid-19 and the business had to be closed for a certain period.
• It is the FSCA’s view that what would constitute sufficient proof of the existence of a contagious or infectious disease with the radius specified in a BI policy would include that a major facility such as a hospital or large retail store (within the specified radius of the insured’s business premises) was closed for a certain period due to a positive case of Covid-19 at its premises and that the insured’s business premises are situated within one of the metros or districts that have been declared Covid-19 hotspots by Government.
• The second requirement relating to the declaration of a contagious or infectious disease within the specified radius is also onerous, as there is no known competent authority that has made such a declaration despite well-known cases that have been widely reported in the media. It is the FSCA’s view that this requirement is unfair as stated above. Therefore, it would seldom happen that a policyholder would be able to prove this requirement and claim successfully on its BI policy. It is the FSCA’s view that BI claims which have been instituted and lodged with the relevant insurer which contain this condition, but where the insured is unable to discharge the obligation placed on it with the application of this requirement by the insurer (but the other requirements have been met), those claims should be paid.

Radius

• It appears from the various policy wordings that the only requirement that must be proven in respect of this category is that the business of an insured was interrupted by a contagious or infectious disease either at the business premises or within the specified radius.
• The FSCA believes that BI claims instituted with insurers falling within this category should be paid by insurers as long as the interruption to its business can be proven.

Notifiable Diseases

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 the insured or someone on behalf of an insured. The FSCA’s view is that such a requirement is unfair and that if an insured 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 a Covid-19 infection. 

5.2       There is no sound basis for the FSCA to direct insurers that have policy wordings that fall under the “General Exclusion” category to pay any BI claims submitted by the insured.

5.3        For the categories of “Closure or Restriction” and “Closure by Order”, the trigger for a valid claim is the contagious or infectious disease at the business premises of a policyholder and not the National lockdown. Therefore, unless a policyholder can prove that the insured’s business was interrupted by the presence of Covid-19 at its business premises, the policyholder would have no valid claim.

5.4       All insurers affected are requested to action BI insurance claims in line with this Communication. The FSCA also invited any insurer that holds a view contrary to that expressed by the FSCA in its communication to inform the FSCA of its view and the basis upon which its view was formed as a matter of urgency.

5.5        The FCSA then recorded its intention to the insurers should the insurers not deal with BI claims as stated in its Communication. The FCSA will be directed to act in terms of section 144(1)(b) of the Financial Sector Regulation Act, 9 of 2017 (FSR Act) which provides that:

“The Financial Sector Conduct Authority may issue to a financial institution a written

directive requiring the financial institution to take action specified in the directive if – 

(b) the financial institution’s treatment of its financial customers is such that the institution will not be able to comply with its obligations in relation to the fair treatment of financial customers”

 It is clear from the above that the insurer must comply with it’s obligations and that if it is compelled or directed to pay the insured, it should do so or face the consequences thereto.