COVID-19 South Africa: Authorities' stance vis-à-vis business interruption insurance
Legal Development13 May 202013 May 2020
On 12 May 2020, the Financial Sector Conduct Authority ("FSCA") and the Prudential Authority ("jointly referred to as the Authorities") collectively issued Joint Communication 5 of 2020 ("Communication"), which sets out the Authorities' position on certain aspects relating to Business Interruption ("BI") insurance in light of COVID-19 and the Authorities' expectations on non-life insurers and intermediaries pertaining to policyholders with BI claims related to COVID-19.
The Authorities' engagements with various non-life insurers revealed that there are generally two broad categories of BI insurance in the market namely: (i) standard BI insurance which requires physical damage to the premises as a trigger for the policy to respond; and (ii) BI insurance that contains a specific extension for infectious/contagious diseases.
In respect of standard BI insurance:
The Authorities expressed the view that COVID-19 in itself will not trigger cover under standard BI insurance policies as it does not cause physical damage to an insured's premises and the Authorities see no basis to intervene in instances of repudiation of cover.
Insurers however are required to clearly communicate exclusions to policyholders and quote the relevant provisions of the policy document.
In respect of extension for infectious/contagious diseases:
The Authorities' engagements indicate that there is only a small percentage of policies that offers this type of cover and that there are various interpretations in the market as to what the trigger for cover is and how exclusions for pandemics should be applied.
The Authorities' understanding is that cover will only be triggered where the loss of income was due to the business being interrupted as a result of a localised infection of COVID-19. On this interpretation, the insured will not be entitled to claim for loss which solely arose as a result of other related actions such as the national lockdown introduced by government.
The Authorities emphasise that insurers must communicate such interpretation (and effects thereof) clearly to policyholders (either directly or through their intermediaries).
Endorsements to policies
From the Authorities' engagement with insurers pursuant to FSCA Communication 12 of 2020 it is apparent that insurers are primarily intending to withdraw indemnity for infectious or contagious disease extensions during the term of the BI policy.
Where insurers intend varying the terms of an existing policy, the Authorities have delineated the following factors which should be considered by insurers: (i) Whether there is a term in the insurance contract permitting unilateral variation of the terms and conditions; (ii) whether contractual due process has been applied to the terms and conditions, in accordance with contractual requirements; (iii) whether regard has been given to the interests of policyholders and the principles of the treating customers fairly, including that the variation is communicated clearly, fairly and is not misleading; (iv) whether insurers through the intended variation have balanced the interests of policyholders with that of their own interests (it must be the most appropriate decision and fair outcome); and (v) whether there is any other reason in law or any other relevant regulatory requirement for the variation, and whether insurers are complying with such requirements.
Moreover, the Communication sets out the Authorities' expectations on insurers in relation to pending claims, namely ensuring there is regular feedback to policyholders in respect of claims and claims must be determined within a reasonable period after receipt of the claims, in accordance with the principles of treating policyholders fairly.
We take note of the general approach being adopted in the market in respect of extensions for infectious/contagious diseases in BI policies. However, in our experience, having seen and advised on several BI policy wordings, whether or not a claim submitted will be covered under such extensions, the policy wording will be decisive. As such, it is crucial that advice is taken on specific wordings and situations.