Business Interruption Insurance (referred to henceforth as "BI insurance") covers financial loss as a result of disruptions to the functioning of a business. The purpose of this insurance is to put the business in the same financial position it would have been had the interruption not occurred. Some BI insurance policies also cover additional expenses incurred as a result of the interruption.
General standards of coverage are premised around a 15km radius of the insured property, the specific customers and suppliers in the policy, claim limits and interruption periods of between 30-60 days. A major factor of this insurance is that the disruption must arise from an unforeseeable physical event. It makes sense that one takes precautions to mitigate or limit the scale of impact of a foreseeable event. The responsibility to mitigate the adverse effects of the event is part of the reason one observes that most insurance companies did not pay out claims resulting from South African Eskom's load shedding, because businesses were expected to take precautionary measures. This challenge is just a tip of the iceberg.
Physical damage requirement
The word “physical" in some, if not all, policies requires that there must be “physical destruction or harm” to the property of the business (i.e. from floods, fire, explosions, etc.), and it also could be damage to the tools of trade.
In the United States, this requirement has been a contentious point in the courts. In the case, Gregory Packing Inc. v. Travelers Prop. Cas. Co. of Am., (No. 2:12-cv-04418. D.N.J Nov. 25 2014), the District Court of New Jersey held that; “courts considering non-structural property damage claims have found that buildings rendered uninhabitable by dangerous gases or bacteria suffered direct physical loss or damage”. This position may be used as precedent to argue that the “physical damage requirement” is not only construed to mean that there must always be destruction to the property of the business. The term may be used to include: “loss of use, loss of access and loss of functionality”, as held in the American Guarantee & Liability Insurance Co. v. Ingram Micro Inc. (No. 99-185 TUC ACM, 2000 WL 726789 at **1-2 D. Ariz. April 18, 2000) case. In practice, this finding means that even technology companies trading in software or utilizing it as a tool of trade, may take out BI insurance policies.
Business Interruption Insurance in light of the Covid-19 pandemic
Standard BI Insurance policies do not reimburse policyholders in the event that their businesses are closed as a result of a pandemic. Also, some all-risk insurance plans contain specific exclusions for losses caused by viruses or bacteria. Physical damage is the trigger for a BI insurance claim to be paid out. Since the Covid-19 pandemic hit towards the end of 2019 and at the beginning of 2020, insurance coverage law suits continue to be filed around the world, relating to the question of whether BI insurance covers pandemic-related losses. There appears to be a great deal of uncertainty in this regard, as evidenced by the contrasting interpretation of courts in different jurisdictions.
Covid-19 is a virus that by its nature, cannot cause any physical damage. Following the courts' interpretation of the “physical damage requirement” in the US, it may be concluded that claims have high chances of success- not that they “will" definitely succeed because each case is adjudicated on it’s own merits. However, in South Africa, our courts may interpret the requirement differently. Section 39(1)(c) of the Constitution of the Republic of South Africa of 1996 grants discretionary powers to courts to decide whether or not to accept foreign law. Although bound by international law in terms of section 39(1)(b), South African courts are not bound by the national laws of other countries. Should our courts follow the US interpretation, chances of success with the BI insurance claims will be high, even when they are contested in courts.
On the other hand, the implications of South African courts not following the US interpretation or rather the teleological approach would be having various claims denied by the insurers. Insurers whose policies require “physical damage” will be well within their rights to deny the claims.
Some insurers do, however, include pandemics in their coverage policies. It is problematic that they then go on to indicate which pandemics are covered, and any other closely related to the already-known pandemics. Assuming that the policies did not include the Severe Acute Respiratory Syndrome (SARS) on the list of pandemics covered, Covid- 19 claims may be declined because the coronavirus pandemic would not be closely related to any pandemics listed in the policies. As a result, the requirements would likely be to the detriment of the policyholders.
How likely are pandemics or disruptions such as viruses or floods to happen ? It is safe to say that they are highly unforeseeable and unlikely - in cases of floods, exception would be given to coastal cities. Businesses, especially the smaller ones may not be in a position to take out BI insurance for each specific possible interruption. It would cost a lot of money for the businesses, and for a highly unforeseeable event, they would potentially not care to take out the coverage. Insurers in this regard tend to offer the BI insurance as part of a comprehensive insurance policy. These comprehensive policies still do not resolve the challenges because of both the "physical damage requirement" and "specific pandemic coverage". These two challenges may see some BI insurance policy claims denied even though the businesses have been paying premiums for a significant amount of time.
Always question before you sign- seek legal help if you must
Ensure that you understand your policy well,
Ask yourself if the policy covers exactly what you intended to be covered therein,
Ask questions and get confirmation from the respective insurers,
In the event that you think that the policy does not properly cover what you intended, inform the insurer and explain what you need for the policy to cover,
If the insurer is unable to satisfy your specifications, seek another insurer,
It is permissible to write out on the policy the clauses that you want to be incorporated therein,
When you submit the policy and it is subsequently accepted, request a copy of the policy that includes the clauses that you wanted to be added,
As soon as you receive the copy, the contract is valid,
It will remain subject to cancellation without liability to either party, within 5 days. This is the current position in South African law.
The main point is that one needs to understand their insurance policies and ensure that everything that they intended to be covered has been covered. It would be devastating in the event that an insurer refuses to pay out a flood policy claim because of a minor detail such as the water temperature of the water is not within the permitted range.
Covid-19 BI Landmark Judgments
Le Grance, J held that,
[84] “...[The court] is satisfied [that] the Applicant has established that the Respondent is liable to indemnify the Applicant in terms of the Business Interruption section of Policy number HIC 0000-02950 for any loss suffered since 27 March 2020 as a result of the Covid-19 outbreak in South Africa, which resulted in the promulgation and enforcement of Regulations made by the Minister of Co-operative Government and Traditional Affairs under the Disaster Management Act, 57 of 2002. It follows that the Application must succeed with costs.”Ma-Afrika Hotels (Pty) Ltd and Another v Santam Limited (6499/2020) [2020] ZAWCHC 160 Goliath, DJP held that,
[29] “...There is no real difficulty in accepting that both factual and legal causation are established, since there is no concurrent or intervening event... [30] I thus conclude that in the present case the local occurrences of Covid-19 within the 40 kilometre radial limit and the government’s response to the presence of the disease in South Africa (including those local occurrences, on my reasoning) are inseparably part of the same insured peril; that but for the presence of those local occurrences (which of themselves were part of a broader health risk) the business interruption would not have occurred; and that the insured peril was the proximate cause of the business interruption and any consequent loss.“