Industry Insights: Business Interruption Insurance Claims

It was an act of God. Surely I am covered? This sentiment is often echoed in the insurance world and in many cases is the cause of a relationship to sour when a claim is repudiated. Further, it degrades the image of the industry – we all know the common perception of insurance brokers!

In light of this I thought it would be interesting to share some insight of rumblings currently going on in the industry with you. Understandably this is not a read for everyone, not everyone shares our passion for risk! You may however find it very interesting. 

At GRIB, we pride ourselves in being healthily pessimistic and passionately risk minded, knowing all too well what can go wrong, seeing it all too often come across our desks. In January of this year when Covid-19 first reared its head in Wuhan, we immediately paid attention. Shortly thereafter, we advised all of our commercial clients to consider Contingent Business Interruption cover if afforded under their existing policy. Contingent Business Interruption in a nutshell is an extension of the Business Interruption section that provides cover for loss or damage from infectious disease outbreaks occurring within a defined radius from the business (or at the premises – depending on the policy). Many heeded our call to action and now have claims lodged with the insurers. These we continue on the front line to battle.

The Unfortunates: Policyholders throughout the country, who have Business Interruption cover but not the Contingent Business Interruption extension, have been fraught with the above sentiment. In some instances lawyers are taking advantage of this and pursuing class suit action against insurers. The wordings however, are very clear when it comes to triggering a claim and it is unlikely that any success will come of it.  

The Unfortunate Fortunate? (we certainly hope not) Those Policyholders who have the cover have lodged claims if the provisos to trigger a loss event has occurred. These typically are, if any person,  who within a defined radius from the premises (or at the premises – policy dependent), sustained a notifiable disease (epidemic / pandemic), being an outbreak, and which is infectious, must notify the competent local authority.

Many insurers however, are interpreting the Contingent Business Interruption extension 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 localized Covid-19 infection, and not as a result of other related actions such as lockdown introduced by Government. In their opinion, there is little or no validity to these claims.

Welcome to the frontline.

There is an old insurance adage, “There is no such thing as a bad risk, only a poorly priced risk”. On the Covid-19 battlefield, it would appear as if the insurers have this adage echoing in their minds right now. They simply never saw a South African pandemic of this magnitude coming, let alone a global pandemic of such epic proportion.

To unpack it further:

The basic principle of insurance is, among others:

1. To provide cover for insurable risks,

2. to indemnify the insured i.e. to put a client in the same position as he/she was before the loss or damage,

3. whereby the losses of few are paid for by the contribution of many.

In insurance there are certain types of risks that are insurable, “Speculative risk” for example (i.e. chance of loss, gain or no outcome), is not insurable, but let’s not get too technical. In the case of Covid-19 however, it is known as what we call “Fundamental risk”. This type of risk results in widespread damage or loss resulting from a situation affecting a large group of people or firms, and caused by natural phenomenon. Fundamental risk may, or may not be insurable.

Therein lies the crux. We believe that the intention of the insurers may have been to indemnify the insured for what we call a “Particular risk”, which is an individual event and which its impact is locally felt (i.e. a limited number of people are affected). Simply put, insurers have been caught with their pants down by their own policy wordings, essentially providing cover for a risk that they did not price. Ultimately, it is a fight for survival for some insurers as the volume and quantum of these claims are massive.

The nexus of the battle ahead. Unfortunately for the insurers, none of the words in the Contingent Business Interruption extension are susceptible to more than one meaning – the policy wordings are unambiguous and clear. Furthermore, the cardinal rule of all interpretation of insurance contracts is that the intention of the parties shall prevail as appears from the ordinary grammatical meaning of the words used.

As mentioned earlier on in this letter, the common narrative received from insurers in response to claims made, typically go along the lines of: “the loss, on the face of it, is due to the Government enforced national lockdown and this is unfortunately not covered”. i.e. that Covid-19 is not necessarily to blame for the loss in profits, but rather the lockdown itself. Which they say is not covered.

The nexus however, (for now at least), is what we call “Proximate Cause”, this is the active efficient cause that sets in motion a train of events which brings about a result for which the Insured shall be indemnified.

 In the case of Covid-19, the proximate cause was:

1. the event Covid-19, a contagious and infectious notifiable disease,
2. for this reason a National Lockdown occurred (it is important to note the train of events after the first positive case of Covid–19 was reported on 9 March in South Africa):

• • On 15 March, the President declared a national state of disaster

  • On the 18 March travel restrictions and the closure of schools, among others restrictions were implemented

  • On the 23rd March a national lockdown was announced starting on the 26th of March 2020 – now known as Stage 5

Folks, this is where we find ourselves in this battle, we await the insurers response. 

These are extremely challenging times and the context is entirely unchartered, but we will continue to do everything in our capacity to fulfill successful claims on behalf of our  claimants. That is why we exist.

A “Pyrrhic” victory. Despite our duty, and no matter who comes out on top, there will be few winners. Ultimately, we will all feel the impact. A colossal mess indeed, but of course, we shall prevail, we always have. Watch Simon Sinnek’s recent interview here, brilliant!

 * This article is provided for informational purposes only and should not be construed as legal or financial advice.