There is no denying the devastating impact of COVID-19 thus far on the economy and businesses, particularly those in hospitality. The financial losses arising from the outbreak have placed focus on insurance policies and how businesses have attempted to indemnify themselves under insurance cover such as business interruption for losses arising from the outbreak.
Business interruption insurance exists to help a business get back on its feet after an unforeseen event and should be seen as a vital part of a continuity plan. It can mean the difference between surviving a disaster with the profits and turnover of the business intact, or shutting its doors, permanently. There are generally two types of business interruption insurance:
- a basic policy which requires physical damage to the business premises in order to trigger a claim; and
- a tourism/hospitality policy that contains a specific extension that includes interruption by infectious or contagious notifiable disease.
Despite many hospitality sector businesses holding policies with such extensions, and that COVID-19 qualifies as a declared notifiable disease, local insurance companies like Santam, Hollard, Old Mutual and Guardrisk refused to honour these business interruption claims. This has led to a number of class actions including the Insurance Claims Africa (“ICA”), a loss adjuster and specialist in preparing insurance claims, to act on behalf of about 500 claimants whose businesses have taken out business interruption insurance and believe they have a legitimate right to claim.
Insurance companies argue that the business interruption policies were never meant to cover pandemics and that government regulations in respect of the lockdown are the cause of the loss and not COVID-19. Their unwillingness to pay was evidenced on 12 June 2020 when Santam Insurance rejected a settlement proposal from one of ICA’s claimants saying that it wanted legal clarity on the matter and would go to court to get it.
Accordingly, the hospitality sector turned to the Financial Sector Conduct Authority (“FSCA”) which regulates South Africa’s financial institutions from banks to insurers. The FSCA subsequently weighed in on the subject of business interruption insurance by publishing Communication 34 of 2020 on 19 June 2020 (“Communication 34”) [hyperlink to Communication 34 to be inserted here].
However, on Tuesday 7 July 2020, the Western Cape High Court issued judgment in an insurance matter between Cafe Chameleon and Guardrisk Insurance (“Café Chameleon case”) that will have profound implications for the South African insurance industry, as well as the hospitality industry, which is standing in opposition to it.
Judge Andre le Grange focused on the content of the contract, as opposed to the insurance’s stance focusing on semantics, and referred to precedents set in higher courts, and stated the following –
“the court has navigated away from a narrow peering at words in an agreement and has repeatedly stated that words in a document must not be considered in isolation”.
The Judge ruled that the COVID-19 outbreak is the legal and factual cause of Cafe Chameleon’s loss resulting from the interruption to its business. Guardrisk is therefore liable to pay the applicant’s business interruption claim.
Although the Judge has granted Guardrisk Insurance leave to appeal, if the Café Chameleon case is unchallenged, the judgment could open the floodgates to billions of rand worth of claims as hundreds of restaurants, hotels and lodges lodge similar legal challenges.
The FSCA said on Thursday, 09 July 2020, that the judgment in this case accorded with its own views. Although the FSCA could not find evidence that the national lockdown could be a trigger for a valid BI insurance cover claim, policyholders are able to claim in instances where they can show that they have satisfied the requirements of their specific policy, whether it was before, during or after the lockdown, as outlined in terms of Communication 34.
Accordingly, the FSCA have communicated their view to insurers that the national lockdown cannot be used by an insurer as grounds to reject a claim, and that such conduct goes against the principles of treating customers fairly. The FSCA says it will take action against short-term insurers that continue to reject claims under business interruption policies on the ground that losses were caused by the national lockdown and not the infectious or contagious notifiable disease covered by the policies. Similarly, the ICA also welcomed the ruling and stated that the FSCA’s statement unequivocally rules out the insurers’ interpretation of the policies.
On Friday, 24 July 2020, the FSCA together with the Prudential Authority of the South African Reserve Bank issued a statement advising that an understanding with non-life insurers had been reached which would consider interim relief to their clients in the hospitality, leisure and non-essential retail services industries that have the appropriate contagious disease extensions.
Following such statement, insurance giants Santam and Hollard announced their plans to offer relief to thousands of hard-hit small and medium businesses in the tourism and hospitality sector that have business interruption policies with contagious and infectious diseases cover.
Large corporate clients are however excluded from such interim relief. At this stage it is unclear which claimants would fall within the ambit of “large corporate clients”.
The FSCA confirmed that this interim relief will take the form of once-off payments to policyholders in order to enable them to continue running their businesses while waiting for the outcome of the ongoing court cases (Santam’s court case will be heard on 1 September 2020 while the aforementioned Café Chameleon case is pending an appeal to the ruling by Guardrisk Insurance).
The legal nature of the “interim relief” is not clear. It does not constitute acceptance of a claim.
It appears to be an ex gratia payment to be made without admission of liability in terms of the policies. This may be inferred from the fact that should the insurers be successful in the ongoing court cases, the policy holders will not be required to repay the insurers the amount of the interim relief. However, in the event of the courts ruling in favour of the policyholders the interim relief funds will be deducted from the total claim amount payable by the insurer.
The FCSA have not confirmed exactly how the interim relief will be calculated. However, it is clear that the interim relief will be determined on a case by case basis and take into consideration various factors, including reinsurer support, financial impact and the number and types of policyholders.
While this is good news for the hospitality industry, the devil is in the detail, as in summary there is still uncertainty regarding:
- the meaning of small and medium businesses and therefore which claimants qualify;
- the legal nature of the interim relief; and
- in each case, the calculation of the quantum of the interim relief.