Most South African businesses – big and small – are being affected by the global outbreak of the coronavirus and the subsequent harsh measures to curb the spread of the disease. Many are now fervently reading their insurance policy documents trying to find answers to their financial woes. However, very few will be finding the answers they're looking for.
Donald Dinnie, director at law firm Norton Rose Fulbright, says many will be looking to see if their insurance policies include business interruption, liability and event cancellation clauses.
A business interruption policy, a form of a contingency policy, underpins an underlying property damage insurance policy such as an assets all-risks insurance policy, a machinery breakdown or a marine hull policy.
Pamela Ramagaga, acting general manager for insurance risks at the SA Insurance Association (SAIA), says business interruption insurance is not sold as a separate policy, but is an add-on to an existing insurance policy.
“This also means that a business interruption claim would normally only be triggered if there is physical damage to an insured property from an insured peril or occurrence or risk.”
According to A-Z Claims Adjusters, based in Florida in the US, the top five causes of business interruptions include fire or explosion (44%), natural catastrophes or water damage (43%), supplier failure (33%), cyber- attacks (29%) and machinery breakdown (29%).
Ramagaga says some common types of contingency policies are linked with sports, leisure and entertainment and can encompass a multitude of exposures such as an event cancellation policy, which provides for financial loss due to cancellation, abandonment, postponement, interruption, curtailment or relocation of any type of outdoor or indoor event due to, for example, a force majeure.
“A force majeure is a circumstance beyond one’s control, such as an earthquake, hurricane, natural disaster or freak accident, unless specifically excluded. Cover can be for expenses or a loss of gross revenue and includes additional expenses to mitigate any loss – very much like a business interruption-type cover,” she says.
Policy structure and wording
Dinnie warns that companies will have to look carefully at the structure and wording of their policies, especially the “business interruption” wording. He refers to a case brought in Illinois in the US where it was argued that the presence of, or contamination by, coronavirus constituted physical impairment to the property.
The Big Onion Tavern Group, were owners and operators of restaurants and movie theatres in Chicago, was forced by the state of Illinois to cease their operations as part of the state’s efforts to slow the spread of the Covid-19 global pandemic. The group argued that the closures presented an existential threat to these small, local businesses. In an effort to protect the businesses, the group obtained business interruption insurance from an insurance company, Society Insurance.
The insurer denied claims arising from the state- ordered interruption of their businesses. They based their denial on the assertion that the “actual or alleged presence of the coronavirus”, which led to the closure orders, did not constitute “direct physical loss”.
However, the court found that Society Insurance’s policies did not have an exclusion for loss caused by a virus. The Big Onion Tavern Group therefore reasonably expected that the insurance they purchased from Society Insurance included coverage for property damage and business interruption losses caused by viruses such as the coronavirus.
Mind the exclusions
The court said the insurance industry has created specific exclusions for pandemic-related losses under similar commercial property policies. These specific exclusions undermined Society Insurance’s assertion that the presence of a virus, like the coronavirus, does not cause “physical loss or damage” to property.
Indeed, if a virus could never result in a “physical loss” to property, there would be no need for such an exclusion, the court found. Dinnie says in general SA courts require there to be physical damage or an alteration to the structure for the claim to be successful. “It is not good enough that there is contamination. However, the question is whether the impairment of use and function constitute physical damage as well.”
There are many businesses which are not directly or physically affected by the coronavirus but are losing income because of the statutory lockdown under the Disaster Management Act. “None of those are indemnifiable under the traditional defined events under the business interruption section of the policy,” says Dinnie. He notes that there are instances where there are specific extensions to the cover. It depends on what type of business is being insured. In the case of the hospitality industry, it is possible that the insured business has taken an extension for events such as cancellation of bookings.
There are policies that provide, under extensions, cover for loss caused by infectious diseases. But, he says, policies may have a “general section” that contains “general conditions and exceptions” that may have a “catch-all exclusion”, for example infectious diseases.
Dinnie says chances are that most policies only contain the traditional wording (requiring physical damage for a business interruption contingent policy cover to be triggered), which will not assist in the current environment.
It’s tough times for businesses, he says. They’ll need to take a hard look at their policies and the extensions they have, and they’ll need to get advice from their insurance brokers or legal representatives.Proper risk analysis
“Often insurance is an afterthought,” says Dinnie. “Maybe the lesson from the Covid-19 outbreak is to properly consider the risks and to properly underwrite the risks, where traditionally it has been done on a standard basis.”
He says it is not unthinkable that insurers will ensure that pandemics or epidemics are excluded from cover because of the significant financial exposure to the insurance industry.
Insurers may be amending their policies in the next few months to exclude Covid-19-related claims, so that if there is a resurgence in 2021, they will not be exposed to it.
There are some specialised insurance policies that can protect against more unusual risks or against specific situations which could completely derail a business that has taken many years to build, says PJ Veldhuizen, managing director of law firm Gillan & Veldhuizen.
This includes key person insurance, contingent liability insurance, life insurance on co-owners and business overhead expense disability insurance. The coverage of each policy depends on its structure and wording. Some policies from different insurers which are superficially similar may actually be very different.
Veldhuizen, a board member of the South African Institute of Tax Professionals, warns that some insurance policies may have tax implications, particularly in the context of estate duty.
Ramagaga says there are some risks that are “riskier” than others and are generally deemed “uneconomical to insure”. In SA, for example, reinsurers have found the risk related to drought insurance for the agricultural sector uneconomical due to the high claims experienced.
The question remains whether companies have the capacity to self-insure against risks that insurance companies consider “uneconomical” to insure.
This is an extract of the cover story that originally appeared in the 7 May edition of finweek. For the full story, you can buy and download the magazine here.