Covid-19 and business interruption insurance

Marnus Fourie, partner, BDO Financial Services

The hotel's holding company, Orient-Express Hotels, submitted a claim that was rejected by its insurance company on the grounds of how business interruption policy was interpreted. The company took the insurer to court and ultimately settled before the Court of Appeal hearing. The outcome of this case formed the basis for business interruption claims and policy wording, until the outbreak of Covid-19 lead to numerous court cases, challenging the legal precedent set by the outcome.

The pandemic has resulted in a slew of global insurance claims for business interruption, and there are two categories of business interruption insurance business owners can use.

The first category is known as standard business interruption insurance, which traditionally requires an underlying physical damage to or loss of property as a claim event. In South Africa, most business interruption policies relate to this type of insurance, but insurance companies have taken the view that Covid-19 does not meet these criteria and claims under this type of insurance have been rejected.

The second category is where a policy has an extension for infectious or contagious diseases, often referred to as the notifiable disease, within a stipulated radius of the policy holder’s business in the policy wording.

The Santam judgement in the Western Cape High Court, on 16 November 2020, which found in favour of the policyholder and against the insurer, makes for fascinating reading. The plaintiffs had two declaratory orders that it wanted the court to rule on, namely that Santam is liable to indemnify them in terms of the business interruption section of the relevant insurance policies, for losses "…occasioned by the occurrence of a notifiable disease in the form of Covid-19 occurring within a radius of 40km of the insured premises’ and ‘that the indemnity period for the losses incurred is for 18 months".

There are three noteworthy areas from the judgment:

Treatment of claims in different jurisdictions

The judgement refers to both the Guardrisk decision in South Africa as well as Financial Conduct Authority[3] judgement in the UK. The latter judgement carries considerable influence as it was essentially a test case in a policy interpretation exercise, and may impact similar cases, in particularly common-law countries. Cases in Europe have largely been in favour of the policyholders claiming compensation and is being used in test cases in Australia, New Zealand and Canada.

Generally, the Covid-19 business interruption response from European insurers appears to be more favourable to policyholders than the United States, where the legal disputes have centred around whether the Covid-19 pandemic and the related government shutdown orders represent a “direct physical loss or physical damage” that triggers coverage under the policies.

While policyholders in the United States will continue to experience widely diverging results in different jurisdictions, the ruling in favour of the Studio 417 case, was adopted in subsequent rulings in favour of the policyholders. In this case the court examined the plain and ordinary meaning of the phrase “physical loss” and ruled against the insurer. The court held that it was broad enough to include loss of use of property caused by a natural phenomenon like a virus.

It is about the detail – the FCA case

The FCA case carries the importance it does, due to it being a determination as to whether the cause of the business losses were as a result of an occurrence of Covid-19 within a certain radius or, as a result of the closure of the business following government restrictions due to Covid-19, for cover to be triggered.

The FCA case in the UK grouped policy wordings in three broad clauses namely 1) infectious disease 2) hybrid 3) denial of access and examined each group.

The first clause is where a notifiable disease has occurred in the vicinity, or within a given radius of the premises of a policyholder. The second clause refers both to restrictions imposed on the relevant premises and to the occurrence of a notifiable disease. The third clause is where there has been a prevention or hindrance to or use of the premises because of restrictions imposed by a public authority.

The UK court found that most of the “disease” and “hybrid” clauses provided cover for Covid-19 business interruption claims. Also, certain of the “denial of access clauses” did so as well, depending on whether there was a mandatory ordered closure, or a complete shutdown of the business. The court did not make blanket rulings in these categories noting that the outcome will depend on the policy language and facts of the case, however the court’s ruling essentially favoured the FCA representing the policyholders, on key issues of coverage, causation and trends clauses.

Policy wording and the interpretation of the policy

The High Court judgement cited the central issue of the Santam case to be around the interpretation of the policy wording, specifically with reference to the nature and scope of the insurance peril and whether the cause of the insurance event, being loss of income, was due to Covid-19, the “notifiable disease” or the government enforced lockdown.

When it comes to the interpretation of the policy, it was noted that interpretation of contracts has evolved towards a practical and common sense approach. The meaning of words used in contracts are interpreted to be consistent with the surrounding circumstances known to the parties at the time of the formation of the contract, having regard to their context concerning the contract and considering the nature and purpose of the contract. Consequently, an intentional approach to the interpretation of the policy wording is required, in a manner that provides an interpretive outcome that is fair, sensible and businesslike.

The details of this case and many like it, has illustrated the complexity around Covid-19 claims. In this case, Santam did not dispute the fact that Covid-19 is a notifiable disease. The basis of declining the claims were more nuanced than that. The policyholder had an initial claim, due to staff being quarantined for two weeks, that Santam accepted liability for. Subsequent claims were submitted, and these were rejected on the basis that none of them were caused by a notifiable disease occurring within the 40km radius of the business premises, but rather because of a national lockdown, which is not included in the policy wording. Remember the Windsor Court Hotel case? There the argument was that the hotel didn’t suffer revenue loss due to physical damage, but due to the city being evacuated, an insured event not covered by the policy.

These cases highlight the emergence of business continuity threats for insurers, due to the quantum of the claims, as well as the importance of clear policy wording. Insurers’ solvency capital requirements (SCR) will be under pressure, due to potential large claim pay-outs. New policies and renewed policies, specifically exclude Covid-19. It can be expected that policy wordings will be amended to reduce interpretation issues going forward, and insurers should be explicit in what is and what is not covered.