The enforceability of extension clauses relating to contagious or infectious diseases contained in certain business interruption insurance policies has raised legal and policy considerations, with different opinions being advanced from within legal circles.
The South African Financial Sector Conduct Authority (FSCA) and Prudential Authority (PA) (collectively, the Authorities) have released Joint Communication 5 of 2020. This regulatory response to business interruption insurance clauses requires, inter alia, clear communication from insurers to their policyholders regarding the extent of the insured’s cover in relation to COVID-19 and the adoption of an approach that will ensure fair outcomes for the parties. It was confirmed that the Authorities were not considering initiatives that require insurers to retroactively cover losses related to COVID-19, which were specifically excluded from policies.
This position is similar to the position that has been adopted by the United Kingdom’s Financial Conduct Authority (FCA) in its final guidance for firms. The FCA has obtained samples of policy wordings for business interruption clauses and will be approaching the courts in a test case to ascertain the liability of insurers for claims related to the coronavirus pandemic. The final guidance for firms published by the FCA requires insurers to inform policyholders of affected claims and inform policyholders of the test case and the impact that the test case may have on their claims. Insurers are also required to fairly resolve claims once the test case has been concluded.
Whilst developments in this regard will be followed with interest, of equal importance is the position likely to be adopted by insurers and regulators in relation to future pandemics. With scientific reports pointing towards the intensification of pandemic risks due to globalisation and urbanisation, it is no surprise that some insurers have moved towards the mid-term withdrawal of cover relating to infectious or contagious diseases. Pandemic risks, due to the magnitude of the number of potential policyholders affected, coupled with the substantial period of time required for the risk to dissipate, present significant obstacles for private insurers to provide cover. In addition, the losses are driven by considerations of public policy and by public policy decision makers as was the case with the implementation of the ‘hard lockdown’ and regulations promulgated under the Disaster Management Act. This uncertainty threatens insurers with potential material solvency risks and undermines their ability to settle other types of claims.
A different suggestion has been offered by the legislators in the United States of America. A bill titled ‘Pandemic Risk Insurance Act’ was introduced by Congresswoman Carolyn Maloney on 26 May 2020, and is currently being considered by the House Committee on Financial Services. The bill seeks to legislate business interruption and event cancellation reinsurance by the government for stated losses incurred by participating insurers for a specified period. Insurers would be able to cover pandemic related business interruption claims with government providing cover of up to 95% of the losses incurred by insurers in specified instances. The bill seeks to provide cover in instances where a public health emergency, as with the COVID-19 pandemic, is identified and declared as such in terms of the applicable legislation.
As the lockdown restrictions slowly lift and businesses seek to resume operations, many are likely to renew leases, invest in real estate, incur operational expenses related to their industries and ensure that these initiatives are covered for losses in the event of a resurgence of the coronavirus and future pandemics. A public-private partnership between the South African government and the insurance sector, such as that proposed by the USA’s Pandemic Risk Insurance Act, may provide some comfort as it will mitigate against the losses that businesses and the insurance sector may jointly incur.
Authors: Byron O’Connor and Akhona Mdunge