Inside the looming court case that could force insurers to pay Covid-19 claims

A precedent-setting court case is about to hit the Western Cape High Court. Two Santam clients want to force the short-term insurer's hand to pay Covid-19 related claims for their hotels and restaurants.

A company which owns hotels and guest houses in Cape Town and Stellenbosch, and another one which owns several restaurants, plan to submit an urgent application to the High Court on Monday as Santam has rejected four of their business interruption claims.

Business interruption cover is a kind of insurance product that compensates businesses when they are not able to trade, mostly due to damage to their premises or assets. However, some insurers, including Santam, also promise to cover their clients for notifiable infectious diseases and the cover is largely sold to the hospitality sector.

Separating Covid-19 from the lockdown

However, according to Insurance Claims Africa (ICA), a firm that represents over 400 claimants in the tourism and hospitality sector, it is not just Santam - many other insurers have ruled out revenue losses occurring because of the lockdown.

Ryan Woolley, CEO of Insurance Claims Africa, said:

"The insurers have chosen a hard line on these things. They are trying to drive a wedge between Covid-19 and government restrictions. But there wouldn't be these restrictions if there was no Covid-19."

In the documents that are due to be filled in the Cape Town High Court on Monday, Santam clients detail that between 11 and 26 March, one of the hotels had already lost R5.1 million as clients cancelled reservations. The affidavits show that this is the only claim that Santam has accepted. Any losses from 27 March when the lockdown began are excluded.

Why insurers aren't covering the lockdown

"The national lockdown is not a peril that is covered by our policies and so they would not be able to make a successful claim for this event," said Santam in a written response.

The company added that in the case of a hotel owner who had a staff member testing positive for Covid-19, forcing the establishment to close would be an acceptable claim. The company said it was never its intention to provide cover for widespread pandemics or a national lockdown.

The other big insurers who offer business interruption cover, Old Mutual Insure and Discovery, said their policies are not able to compensate businesses for their revenue loss resulting from Covid-19 because they only cover business interruption resulting from physical damage to property, caused by specified events, like fire damage, and not global pandemics or infectious diseases. 

However, in the case of Old Mutual, cover for contagious diseases was extended to some clients. Again, only if was a specific case of Covid-19 on the premises or within the stipulated radius would those clients be covered.

Passing the buck?

Nicolene Schoeman-Louw, managing director at Schoeman Law Inc., says the problem is that business interruption insurance is not regulated. As a result, some of insurers' policy documents have left critical components on what is covered and when wide open to interpretation.

"Some of the contracts exclude government sanctions. Some of them are completely silent on that, which becomes a complete baseless position to take, to say the lockdown is not a pandemic and therefore we are not paying. You can only take that stance if the contract specifically excludes government sanctions and lockdown," she said.

Schoeman-Louw said some of the clients who have approached her firm have been sent from pillar to post. In some instances, the insurers are not rejecting the claims but keep shifting the goal post on the information and documents needed.

Reinsurers in the line of fire too

The insurers ordinarily pass unprecedented claims to their reinsurers, the bigger global players who insure regional and domestic players. However, in the case of business interruptions, it appears that reinsurers around the globe are pushing back. And if any local insurer were to open the door by paying for lockdown losses, it could open a flood gate that would cripple reinsurers.

"It is not just a South African issue. We are working with a number of clients, predominantly in the hospitality sector, against some of the biggest international reinsurance companies," said Schoeman-Louw.

In the UK, the Financial Conduct Authority has also approached the courts to seek clarity on this issue as it believes that under some policies, insurers have an obligation to pay out.

Woolley says it has become evident that insurers probably did not pay enough attention when they were underwriting these policies and are now trying to wiggle their way out of them. The ICA has met with one of the large short-term insurers to find a way forward and has scheduled meetings with the rest of the industry.

"Our proposal is to try and come up with a compromise settlement that the insurers can afford and will be enough for the clients to survive," added Woolley.

ZAR/USD
16.77
(-0.03)
ZAR/GBP
21.15
(-0.12)
ZAR/EUR
18.95
(-0.03)
ZAR/AUD
11.66
(-0.03)
ZAR/JPY
0.16
(-0.02)
Gold
1798.22
(+0.06)
Silver
18.69
(+0.13)
Platinum
824.50
(+0.30)
Brent Crude
43.14
(+2.10)
Palladium
1961.36
(+0.61)
All Share
55417.89
(-0.66)
Top 40
51154.08
(-0.74)
Financial 15
10472.31
(+1.28)
Industrial 25
76134.69
(-1.67)
Resource 10
52483.78
(-0.20)
All JSE data delayed by at least 15 minutes morningstar logo
Company Snapshot
Voting Booth
Please select an option Oops! Something went wrong, please try again later.
Results
I'm not really directly affected
18% - 1962 votes
I am taking a hit, but should be able to recover in the next year
23% - 2570 votes
My finances have been devastated
34% - 3822 votes
It's still too early to know what the full effect will be
25% - 2751 votes
Vote