The COVID-19 pandemic has undoubtedly led every business to assess their existing insurance cover in the hope that they have business interruption cover in place. Many would have been excited at the inclusion of a section titled “Business Interruption” in their policy wording, but in the insurance world, that blanket term does not guarantee cover when business is interrupted.
In this regard, pandemic and infectious disease risks do not typically fall within the terms of standard insurance cover, including the standard policy wording of a business interruption clause. Ordinarily, coverage relating to losses sustained as a result of a pandemic and/or infectious disease outbreak (particularly in a business interruption context) is only available under a very specifically worded policy extension. That policy extension will include specific wording relating to the events that will give rise to a claim and the types of losses that will be covered under that extension.
The reason for specificity in policy wording and the interpretation thereof is because insurers only accept risk (and provide cover) under very specific terms, after having assessed the risk posed (and the premium payable) in terms of the disclosures made by the insured and the specific terms of the policy. An insurer cannot be expected to provide blanket cover under very general terms, as the insurer has not assessed its risk in general terms. The precision of the policy wording allows insurers to assess and manage their exposure.
The specificity of the policy wording dictates whether an insurance policy will respond to a claim. Even for those policy wordings that do contain wording relating to pandemic and infectious disease in a business interruption context, there is no guarantee that the policy will respond to a business interruption claim that has arisen as a result of the COVID-19 pandemic. Again, the policy wording needs to be carefully assessed in order to determine whether the facts giving rise to the claim are covered by the policy.
The uncertainty relating to the interpretation of policy wordings in respect of business interruption claims is something that is presently being grappled with by insureds, insurers and financial regulatory authorities globally. In an effort to provide some degree of certainty to insureds, the Financial Conduct Authority of the United Kingdom (FCA) published a statement on 1 May 2020 in which it announced that it intended to obtain a declaration from the courts (in the form of declaratory judgments) to resolve the contractual uncertainty relating to business interruption insurance cover, but more specifically to address the uncertainties relating to application by insurers of the policy wordings of business interruption clauses. The hope in this regard is that the judgment(s) would clarify the meaning of the more frequently used policy wordings and guide insureds and insurers on the way forward.
Whilst the FCA does not regulate the South African short-term insurance market, the fact that a declaratory order is being sought in the English courts could have an impact on South African insureds and insurers. In this regard, English insurance law remains a persuasive source of South African insurance law and English decisions can potentially be relied on as authority in South Africa, particularly where we do not have developed law on the subject.
With so much uncertainty in the world, some certainty in relation to business interruption cover in the current context would be welcomed. Local insureds and insurers will undoubtedly pay close attention to the outcome of the FCA’s declaratory actions.
Tim Smit
