COVID-19 REGULATORY RESPONSE: Business Interruption

The COVID-19 disease and the national lockdown enforced by Government to curb it created financial strain for many business owners who are now wanting to claim for loss of income against their Insurance. After complaints received by authorities, the Financial Sector Conduct Authority (FSCA) and the Prudential Authority (PA) recently issued a joint statement in response to COVID-19 and Business Interruption.

Business Interruption Insurance cover can be classified into two broad categories.

1.        Standard Business Interruption.

2.        Business Interruption with an extension that includes infectious/contagious diseases.

Under the Standard Business Interruption Insurance, the underlying trigger would be physical damage. The insured needs to prove physical/material damage to the business property and consequential loss as a result. In the absence of such physical damage, an insurer is not contractually bound to provide policy benefits to a policyholder.

The reality is that very few Business Interruption insurance policies in South Africa are extended to include cover specifically for infections or contagious diseases. This extension to such an insurance policy in relation to COVID-19 will only apply if it is evident that the loss of business income was due to localised infection. Damages due to other related actions such as the national lockdown ordered by the Government cannot be claimed for, as these policies stipulate that damages must be as a direct result of disease infection.

According to the authorities’ statement, insurance companies will not be forced to pay as your Standard Business Interruption policy requires physical damage to business premises to trigger a claim. They said: “In the absence of such physical damage, an insurer is not contractually bound to provide policy benefits to a policyholder. Covid-19 will not be covered in the standard policy and the Authorities see no reasonable grounds to intervene since this is what the policyholder and the insurer agreed upon when the insurance contract was concluded.”

The FSCA and PA also made it clear that no insurer will retroactively be obliged to pay out for damages caused by the disease. They stated: “Requiring insurers to cover such claims could create material solvency risks and significantly undermine the ability of insurers to pay other types of claims. Such initiatives could ultimately threaten policyholder protection and financial stability, further aggravating the financial and economic impacts of Covid-19.”

It is not surprising that some insurers might attempt to back out of disease cover such as this, in policies that are already in force. Insurers must discuss any changes relating to exclusions or requirements introduced during the COVID-19 period with the FSCA. Policyholders are encouraged to discuss their Business Interruption cover with their broker again to understand exactly what they can and cannot claim for during a pandemic.