Business Maverick

Business Maverick

Insurers claim Covid-19 does not trigger “infectious disease” insurance claims

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South Africa’s financial regulator does not see the lockdown as a trigger for business interruption claims, but it does provide some good news for the beleaguered hospitality industry.

The Financial Sector Conduct Authority, which regulates South Africa’s financial institutions from banks to insurers, has weighed in on the subject of business interruption insurance, bringing a ray of hope to the many restaurants, hotels and lodges facing economic ruin as a result of the Covid-19 pandemic and subsequent lockdown.

The hospitality sector had turned to the regulator in the hope that it would be able to intervene in what was turning into a battle royale between insurance companies and their clients, those businesses that had taken out business interruption insurance and believe they have a legitimate right to claim.

In short, business interruption insurance exists to help companies survive following an unanticipated event. There are generally two types of BI 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. 

While Covid-19 qualifies as a declared notifiable disease, local insurance companies like Santam, Hollard, Old Mutual and Guardrisk have, at this point, refused to honour these claims. 

They argue that the policies were never meant to cover pandemics and anyway, that government regulations in respect of the lockdown are the cause of the loss, not Covid-19. 

Acting on behalf of about 500 claimants is Insurance Claims Africa, a specialist claims preparing company that has dealt with complex claims including the Cyclone Domoina floods in 1984, the Knysna fires in 2017 and the 2019 floods in Mozambique caused by Cyclone Idai.  

“Our view, from outset, has been that the insurers and the clients with legitimate claims should reach a sensible compromise settlement,” says Ryan Woolley, CEO of Insurance Claims Africa. “This will allow claimants to receive the payouts due to them quickly and in the process, they can protect and preserve jobs.”

The tourism and hospitality sector sustains over 740 000 direct and 1.5 million indirect jobs and in 2018 directly accounted for 2.8% of GDP,  which equates to R139-billion.

Lengthy court processes will only benefit the insurance industry, Woolley says and will cause mass closures of tourism businesses. 

However, on Friday, 12 June, Santam, one of the largest insurers in South Africa rejected a settlement proposal from ICA’s claimants, saying that it wanted legal clarity on the matter and would go to court to get it.

Alarmed by complaints it was receiving, the Financial Sector Conduct Authority (FSCA), asked all insurers to provide it with their individual policy wording to determine whether insurers are acting in line with the Treating Customers Fairly regulatory guidelines.  

“We have not heard from our insurance assessor since the 8th of May,” says Kobus Botha, CEO of the Cradle Nature Reserve and Boutique Hotel. “We use brokers that are specialists in the hotel industry, and we cover ourselves for every eventuality possible. We pay our dues and we do not cut corners. But now our insurer, Santam, and their underwriter H&L will not recognise our claim.

“There is all this talk about small companies, but everywhere we go we are challenged – from UIF to insurance. When push comes to shove we are shoved in a corner. I don’t know how long we can hang on.”

In a communication issued on Friday, the FSCA noted categorically that there is “no evidence in support of the view that the national lockdown could be a trigger for a valid BI insurance cover claim.”  

However, this is a blanket statement and should not necessarily spell despair for the many tourism and hospitality claimants. 

The FSCA then went on to offer its view on insurers’ policy wording on infectious and notifiable diseases and issued instructions on these. 

While business interruption insurance is complex, it is broadly uniform across the industry and can be divided into six categories, says FSCA. 

In three of the six categories, the FSCA believes that policyholders have a valid claim and should be paid out expeditiously, providing they can satisfy the burden of proof.

In particular, the regulator says, a policyholder will have a valid claim if their policy stipulates business interruption as a result of a contagious disease at the premises or within a certain radius, provided the local authority has formally declared that a disease exists within the area and has imposed quarantine regulations or restricted access to the area. 

Where claimants will have no joy is if their policy contains a general exclusion clause which specifically excludes pandemics; or if their insurance covered them only if the business was closed by the authorities as a result of a contagious disease occurring at or near their premises. 

The regulator also dealt with the requirements for the lodging of a valid claim, declaring that some of the requirements imposed by insurers were excessively onerous. 

For instance, where it comes to proving the existence of Covid-19 within the radius specified in a policy, it’s good enough to show that a major facility like a hospital or large retail store (within the specified radius) was closed for a certain period due to a positive case of Covid-19 at its premises, or that the insured’s business premises are situated within one of the metros or districts that have been declared Covid-19 hotspots by Government.

“We see this as a hugely positive step,” says Woolley. “The regulator has provided clarity on where policyholders have a legitimate claim and where they don’t.”  

The insurers are still studying the guidelines.

We note the content of the FSCA’s communications and are working through the detail to understand how this applies to Santam,” says Thabo Mabaso, Santam head of corporate communication. “We have engaged with the FSCA to ask for more detail on a number of issues where we require further clarification. We will be in a position to respond to the FSCA’s communication once we receive this further information.”

Woolley believes the clarification provided by the regulator will support ongoing negotiations with the insurance companies.

“Some companies [Hollard for example] have agreed to meet with us. We need to settle urgently, our clients are on the brink. We need to expedite these matters this week. Court action is a possibility, but it’s not ideal as it simply drags things out – a business in liquidation will no longer have a claim.” 

For Rob More, CEO of the More Group which operates 3 boutique hotels and 9 lodges including Lion Sands Game Reserve and Madikwe Safari Lodge, every month that goes by is critical.

The group employs 843 people, 60 of whom are currently working on reduced salaries. The balance of staff is being paid by UIF, which last paid out in May.

“We will survive,” he says. “But survival is relative. We may only have one property left.”

The insurance industry has retreated into a lager. “There is no one company that has stepped forward to pay its claims. They are not even prepared to negotiate.”  

While the regulator’s decisions are binding, the industry can appeal to the Financial Services Tribunal, and these decisions can be taken on review to the High court. In other words, the process can be as long as those with the deepest pockets wish.

This “may not serve the best interests of policyholders who have already suffered huge financial losses due to Covid-19 and the National lockdown,” says the FSCA in its communication. 

The FSCA promises to explore alternatives to close these matters and avoid costly and protracted litigation. BM/DM

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