BY Rob Scott AND Zara Sher
South Africa: COVID-19 related insurance claims and coverage: the arguments for and against coverage
The outbreak of the Coronavirus (COVID-19) pandemic has raised a lot of questions around insurance coverage in relation to COVID-19 related losses, exposures and liabilities.
We have considered extensively the coverage issues and potential arguments, both for and against coverage, relative to potential COVID-19 related losses and liabilities (both directly and indirectly related), and relative to various policy wordings in the South African market. We provide insight into these issues and arguments based on our experience, and in the context of relevant insurance policies.
Importantly, the assessment of coverage in terms of an insurance policy is an interpretative exercise. The interpretation of an insurance policy has been firmly established in our law as a unitary and objective legal exercise, involving considerations not only of the wording of the policy but also context and the application of commercial or business-like sense.
BUSINESS INTERRUPTION CLAIMS
Business interruption cover may be found in Assets All Risks or Commercial Policies generally.
The Business Interruption section of a policy is ordinarily only triggered by physical damage to the insured property. It may however also be triggered by certain expressly defined events in the policy unrelated to physical damage, such as the occurrence of a contagious and infectious disease under a Contagious and Infectious Disease extension.
“Physical Damage” requirement
The Financial Sector Conduct Authority (“FSCA”) and the Prudential Authority (“PA”), in Joint Communication 5 of 2020, recently communicated that, in respect of standard business interruption insurance policies which require physical damage to the policyholder’s premises, “an insurer would be obliged to indemnify a policyholder for loss of income only if a policyholder is able to prove physical damage”. On this basis, in their view, “COVID-19 will not be covered in the standard policy”.
This communication may however be premature as the interpretation of “physical damage” may be a contentious issue. It has not been decided by South African courts (as is being argued in other jurisdictions) whether the actual physical presence of the virus itself at the insured’s premises constitutes “physical damage” or whether “physical damage” can be interpreted to mean the loss of use or functionality. The physical presence of COVID-19 at the insured premises may in fact trigger business interruption cover in terms of Assets All Risks Policies.
Contagious and Infectious Disease extensions
While a number of Contingent Business Interruption extensions are being relied on, of particular relevance are the Contagious and Infectious Disease extensions, which do not require physical damage.
An example of such a clause is:
“Loss following interruption of or interference with the Business in consequence of contagious or infectious diseases within a 50km radius of the Premises”.
However, a large number of insurers (and reinsurers), and even the brokerage market, are taking the position that these policies do not respond to COVID-19 related claims, or only respond in very limited circumstances. We have seen a number of contentions put forward in this regard, for example, insurers are denying/avoiding cover on the basis that:
- “It was never the intention of the extension to provide cover for a pandemic event affecting the whole of South Africa" but rather it was only "meant to provide protection against a local outbreak of infection”.
- The “lockdown is a separate event from the contagious disease”, which intervenes and substitutes the disease as the true and proximate cause of the business interruption loss, whereas such loss must be "caused by the presence of the disease itself, distinct from the impact of the lockdown”.
- The “radius requirement” requires medical proof of persons infected with “COVID-19 within the radius”, in order to demonstrate that such infected persons proximately caused the business interruption loss.
- Cover is only provided for business interruption loss resulting directly and solely as a result of the presence of COVID-19 discovered at the insured’s premises, which is reported via the required governmental channels, and requires the policyholder to shut down its operations in order to sanitise the premises, and only for the duration of such required shut down to eradicate the outbreak of COVID-19 at the insured’s premises.
- The occurrence of a contagious or infectious disease within the required radius of the insured’s premises or at the insured’s premises must be shown to be the sole and direct cause, to the exclusion of all other causes, of the business interruption loss.
The FSCA and the PA themselves, in their recent joint communication, have echoed these contentions, noting that “insurers and reinsurers are interpreting the infectious/contagious disease extension and in relation to the COVID-19 pandemic to apply only where the loss of business income was due to the business being interrupted as a result of a localised COVID-19 infection and not as a result of other related actions such as lockdown introduced by government”.
These contentions may be too simplistic relative to the legal interpretative process applicable to insurance policies, which requires a contextual and commercial construction. For instance:
- The interpretation of a policy does not contemplate the subjective intention of the parties and neither does it entertain considerations of what, a party might subsequently contend, was intended to be covered.
- The words used in these clauses such as “in consequence of” or “due to” must be interpreted when determining whether or not the disease remains the true or proximate cause of the loss, notwithstanding the subsequent governmental steps taken in consequence and in mitigation of the disease.
- Similarly, the words “within a radius of” must be interpreted commercially and within the context of the global pandemic.
Denial of Access and Acts of Authorities extensions
Policyholders are also, often on the advice of their brokers, relying on Denial of Access and/or Acts of Authorities extensions to claim for business interruption losses resulting from the national lockdown.
These clauses, however, need to be carefully considered when assessing or submitting such claims, as they often require that the prevention of access or use be preceded by physical loss, destruction or damage (commonly termed “Damage”), or a defined insured event under the policy. Such limitations may serve to exclude cover under these clauses for losses resulting from the lockdown, absent physical damage to the insured premises. Examples of such clauses include:
- Denial of Access: “Loss resulting from interruption of or interference with the business in consequence of Damage to property by an Insured Peril within a 20km radius of the Insured’s premises, destruction of or damage to which shall prevent or hinder the use of the premises or access thereto, whether the premises or property of the Insured therein shall be damaged or not”
- Acts of Authorities: “The Insurer shall indemnify the Insured in respect of any period of restriction of access to or use of any part of the Premises by action of a civil, public or other regulatory body following a Defined Event, provided that any action of a civil, public or other regulatory body which restricts or denies access follows Damage to Insured Property”
Additional policies to be considered
Due to the far reaching and global impact of COVID-19, there are a wide range of other policies in terms of which claims may be triggered directly or indirectly by COVID-19. These include Cancellation of Bookings covers, all subclasses of General Liability covers (inclusive of Employers and Public Liability), Travel and Accident covers, Cyber and Network Interruption covers, Directors’ All Risk/Directors’ and Officers’ (“D&O”) Liability covers and Political Risk covers. For example:
- Cyber and Network Interruption covers: Not only has there been an increase in cyber-attacks via phishing and “social engineering” events linked to COVID-19 information, but the increase in remote working has also resulted in an increase in cyber and network related losses and liabilities. For instance, network capacity constraints may result in outages causing loss of revenue and additional expenses, and organisations may be more susceptible to cyber-attacks where less secure networks are used or privacy policies and procedures relaxed.
- Directors’ All Risks/D&O covers: Directors and Officers responsibilities may be considered heightened by virtue of current circumstances. Additionally, Directors and Officers face a minefield of business risks in the current climate as well as overall market volatility. Public communication and disclosure requirements, stakeholder responsibilities and employment practice obligations are also necessarily more onerous in this climate. The combination of these factors are likely to result in an influx of claims in due course against Directors and Officers for alleged wrongful acts.
It is important that both insurers and policyholders seek legal advice in relation to COVID-19 related claims made under their policies.
Insurers must carefully consider coverage relative to the circumstances giving rise to each claim, with specific reference to the policy wording, prior to simply adopting a blanket denial approach. Insurers are required to give justifiable reasons for accepting or denying coverage, as emphasised by the FSCA and the PA.
Likewise, policyholders must understand whether their policies afford protection against the impact of COVID-19, and if so, ensure compliance with claims notification and submission requirements and ensure that claims are well-articulated and presented within the contemplation of the policy wording. Where cover is denied by an insurer, a policyholder need not simply accept this position, as also emphasised by the FSCA and the PA.
POLICY ENDORSEMENTS AND RENEWALS:
We have seen a number of policy endorsements being issued mid-term to exclude and/or limit coverage in relation to COVID-19 related claims. Policies are also being renewed without cover for such losses and liabilities.
The FSCA and the PA have communicated their expectations of insurers and cautioned insurers to consider whether they are legally and contractually entitled to amend coverage under any policy prior to doing so.
Insurers and policyholders must also appreciate that policy amendments do not affect coverage for insured events that have already occurred – the claim is preserved and the policy in force at the time when the claim arose will apply regardless of subsequent amendments.
It will be evident from the above that the interpretive process is complex, with various arguments both for and against cover. The process is further complicated by the novelty of the COVID-19 pandemic.
ENSafrica has the necessary expertise and experience to offer coverage advice, guidance and assistance with the claims process, to handle any disputes, negotiations or legal proceedings, and to assist with and offer advice in relation to policy endorsements and renewals.
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