The outbreak of the coronavirus (COVID-19) pandemic has raised many questions around insurance coverage with regard to COVID-19 related losses, exposures and liabilities.
We have considered the issues and potential arguments, both for and against coverage, pertaining 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 the 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 due to interruption of or interference with the business in consequence of contagious or infectious diseases manifested by any person whilst at the premises or an outbreak of a notifiable infectious or contagious disease 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:
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:
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:
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:
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. As also emphasised by the FSCA and the PA, where cover is denied by an insurer, a policyholder need not simply accept this position.
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 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.
It is recommended that anyone affected 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.
Scott is an Executive and Sher a Senior Associate, Dispute Resolution practice, ENSafrica.