The approach on insurers has been unprecedented in South Africa and the pandemic highlighted two categories of business interruption insurance that could possibly respond to claims made by policyholders relating to business interruption losses suffered by them due to Covid-19.
The first category identified is what has collegially become known as standard business interruption insurance which traditionally requires an underlying physical damage to or loss of property as a trigger. In South Africa, most business interruption policies relate to this type of insurance where a policyholder must prove physical damage to the business property covered under the policy, before being entitled to a claim for business interruption losses.
South African insurers have taken the view that Covid-19 does not cause physical damage to or loss of property and claims under this type of insurance have been rejected. We are aware that a different approach has been taken in other countries, such as the United States where Covid-19 has been found to render property exposed to the disease as unsafe and unfit for their intended use, thereby amounting to "physical property damage or loss". Nevertheless, this approach has not been followed by South African insurers and is unlikely to be the position held by South African courts.
The second category of business interruption insurance identified is where a policy has an extension for infectious or contagious diseases. This category of cover has caused consternation throughout the sector as both insurers and policyholders have sought legal opinions on the interpretation of what would trigger a valid claim and how exclusions for pandemics ought to be applied.
Most clauses within this second category contain similar requirements, albeit in different language, the most typical being:
a consideration of proximate cause; and
As the disease has progressed throughout the country, so too have the varying interpretations of these elements contained in the clause.
Arguments have ranged from whether the insured peril must be a local occurrence of the disease as opposed to a national pandemic, to the meaning of proximate cause and whether a government-imposed lockdown is an inevitable consequence of the national pandemic and its local outbreaks.
As at the time of writing this article, we are aware of three court cases brought against insurers in South Africa for an order that insurers are obliged to indemnify them under similar extensions.
In the first case of Café Chameleon CC v Guardrisk Insurance Company Ltd (case No 5736/2020, dated 26 June 2020), the applicant sought urgent declaratory relief to the effect that the respondent insurer was obliged to indemnify it in terms of an extension under the business interruption section of an insurance policy, for losses it suffered due to the closure of its restaurant following the government lockdown.
The insurer in that matter argued that the policy covered losses resulting from business interruption where the interruption was due to the notifiable disease occurring within the stipulated radius and did not cover losses as a result of other causes such as the lockdown.
The court rejected that argument and found that there was a clear connection between the Covid-19 outbreak and the government action that caused the interruption of the policyholder’s business. It therefore concluded that the insurer was liable to indemnify the policyholder for any loss suffered since 27 March 2020 resulting from the Covid-19 outbreak in South Africa which in turn resulted in the promulgation of the lockdown regulations.
Insurers have disagreed with the outcome and this judgement has been taken to appeal. The case is expected to be argued before the Supreme Court of Appeal in late November 2020.
Other cases brought by policyholders against their insurers have raised similar arguments and it remains to be seen whether the high court hearing those arguments will arrive at a conclusion different to that of the Café Chameleon case.
In the meantime, the South Africa’s regulators in the form of the Financial Services Conduct Authority (FSCA) and the Prudential Authority (PA), which are entrusted with the regulation of insurers in South Africa, have also entered into the debate.
In a circular promulgated on 18 June 2020, the FSCA compared different claims that may be presented to insurers depending on the wording of the insuring clause in question and provide suggestions as to how such claims are to be treated. The FSCA then stated that insurers who did not deal with BI claims as referred to in that communication would be directed to do so in terms of the Financial Sector Regulation Act 9 of 2017.
Debates have been raging as to whether the FSCA is empowered to direct an insurer to interpret its contracts in a particular way in terms of this legislation, but this issue has not been tested because several insurers entered into agreements with the FSCA that they would make interim relief payments to their policyholders in relation to business interruption claims.
In its press release of 24 July 2020, the FSCA stated that together with the PA, it had reached, "an understanding" with non-life insurers in this regard. This understanding did not take the form of a binding directive that was in the nature of an agreement between the parties.
The understanding was that non-life insurers could make interim payments either on an interim basis pending legal certainty (through the court actions instituted) or in full and final settlement if insurers wished to do so.
Payments made by non-life insurers on this basis have caused reinsurers some concern, particularly relating to issues of aggregation of individual claims. As in other jurisdictions, most reinsurance contracts provide for aggregation of individual insured losses under certain conditions, mostly on the provision that payments by the underlying insurers have been made within the terms and conditions of the original policies. Some reinsurance contracts make provision for ex gratia payments to be aggregated only in circumstances where reinsurers have themselves consented to those payments in writing.
It is not clear whether reinsurers' written consent to such interim relief payments was obtained in the course of the understanding reached by the underlying insurers with the regulator, and whether those payments will be capable of aggregation.
Other reinsurance issues arise from the outbreak of the disease. The question has been raised globally whether in the context of a global catastrophe such as a global pandemic, underlying insurers can group multiple individual claims for the purposes of aggregation. In order to do so, a unifying factor that would bind the claims together would have to be identified. While in some policies such as accident and health policies, the direct cause of the loss and unifying factor can be established to be the disease, it may be more difficult to identify a unifying factor in respect of multiple outbreaks of the same disease within a country. The wider the spread of the disease in terms of time and place, the less likely a potential unifying factor can be found.
Over and above this, the language of the reinsurance contract must be considered to determine whether a causative link is required (in the form of proximate cause) or whether a common factor which could be described as an event is required. As in other jurisdictions, the wording of a particular reinsurance contract and the particular circumstances of each case must be considered.
Ultimately, South Africa’s insurance sector remains shrouded in a cloud of uncertainty while it awaits the outcome of the various court cases instituted. Never in its history has the Chamberlain Curse rung more true: "I think that you will agree that we are living in the most interesting times".
