Insurers make concessions in business interruption cover battle

Insurance giants Santam and Hollard announced over the weekend plans to offer interim relief to thousands of hard-hit small and medium businesses in the tourism and hospitality sector that have business interruption insurance policies with contagious and infectious diseases cover.

This comes as short-term insurers, including Guardrisk (part of Momentum Metropolitan), Bryte Insurance and Old Mutual, are facing court battles over the non-payment or delayed payment of such claims linked to the Covid-19 pandemic. The industry is hoping to secure “legal certainty” on the matter.

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Santam, which is listed on the JSE and is South Africa’s largest short-term insurer, said on Sunday that it will “pay up to R1 billion in urgent relief to policyholders in the hospitality, leisure and non-essential retail services industries” that have contingent business interruption extensions.

Privately owned unlisted peer Hollard announced a similar move on Saturday. Hollard did not reveal the total rand value of the interim relief but said that more than 1 000 of its affected small business policyholders could benefit.

Guardrisk also intimated earlier this month that it would offer relief to policyholders with similar business interruption insurance cover (for contagious diseases) but has not yet released any details.

‘Understanding’ reached

The latest moves by Santam and Hollard follow a statement issued on Friday night by the Financial Sector Conduct Authority (FSCA) together with the Prudential Authority of the SA Reserve Bank (Sarb), which notes that “an understanding with non-life insurers” had been reached. This would see such insurers “consider interim relief to their policyholders” that have “the appropriate contagious disease extensions”.

Read: Hollard to pay relief to clients hit by lockdown

The FSCA stopped short of referring to the “understanding” with the short-term insurance industry as a settlement.

Worth noting is that the agreement won’t just see affected businesses paid out relief funds – they won’t need to pay the insurers back if the insurers win the legal battle.

If the courts find in favour of policyholders, the funds will however be deducted from the total claim amount payable by the insurer.

“This interim relief will take the form of once-off payments to policyholders to enable them to continue running their businesses while waiting for the outcome of the legal process,” the FSCA said in its statement.

“This arrangement follows discussions between the authorities [FSCA and Prudential Authority] and the non-life insurers.

Two issues of concern

“The discussions were primarily aimed at addressing two main issues which are of concern to the FSCA. The first is the impact of the repudiation of contingency business interruption cover claims by some non-life insurers [and delays in processing policyholders’ claims] and the second is the impact of this matter on the reputation of the non-life insurance industry,” it added.

While the FSCA reiterated the complex nature of business interruption insurance, it stressed that valid claims that have cover extensions for infectious diseases should be honoured.

Read:

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“[The Covid-19] lockdown should not be used as a ground to repudiate these claims. This approach has also been adopted by some international conduct regulators but is being challenged by insurers and reinsurers globally and locally, which means that legal certainty will have to be obtained from the courts,” it pointed out.

‘Legal certainty will take time’

“The legal certainty will undoubtedly take time to achieve, with dire consequences for policyholders who have already been impacted severely by Covid-19 and the national lockdown, and it is in their interest that the authorities and the affected non-life insurers have reached understanding that interim relief payments should be made,” it added.

“The interim relief to be provided by non-life insurers will differ from case to case dependent upon reinsurer support, financial impact and the number and types of policyholders,” the FSCA noted.

The FSCA together with Sarb’s Prudential Authority have established the following “guiding principles” to be applied in determining the interim relief:

• The interim relief should at the very least focus on those businesses most impacted by lockdown (for example, the hospitality industry) and also on small businesses;
• The funds provided to a policyholder as interim relief shall not be claimed back by any non-life insurer from a policyholder should the courts decide in favour of insurers. However, should the courts find in favour of policyholders, these funds will be deducted from the total claim amount payable to a policyholder by a non-life insurer; and
• This relief should be on either an interim basis pending legal certainty or, if non-life insurers wish to offer a full and final settlement, such settlement should reflect reasonable value to a policyholder and the implications thereof should be clearly explained in writing should a policyholder wish to accept the settlement on this basis.

This extraordinary move by the regulatory authorities comes in the wake of not only the insurance industry coming in for widespread criticism of its handling of the issue, but the FCSA itself being called on to take a tougher stance. The Tourism Business Council of SA (TBCSA) last month even called for Finance Minister Tito Mboweni’s help in resolving the stand-off.

Read:

TBCSA wants Mboweni to intervene on Covid-19 insurance claims

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Insurance Claims Africa, which is representing more than 500 tourism and hospitality businesses on such claims, has been one on the most vocal on the issue.

The non-payment of claims has been thrust further into the limelight following last week’s national protest by sit-down restaurants.

While the protests were largely against government restrictions to trade (such as the alcohol ban and 21:00 curfew aimed at curbing the spread of Covid-19), many restaurants used the opportunity to include the non-payment of business interruption insurance claims in their protest placards.

Reinsurers not yet in the loop

Meanwhile, the FSCA also noted in its statement that the affected insurers “are providing financial relief to their policyholders without the support of their reinsurers at this stage”.

It remains to be seen whether South Africa’s short-term insurance industry will take up the fight with reinsurers (global insurance groups that cover insurance companies), especially if local insurers lose the Covid-19 business interruption insurance battle with policyholders.

“The [regulatory] authorities will continue to work with non-life insurers that are most affected by these business interruption cover claims to ensure … claims are resolved as quickly as possible and that trust and confidence in the non-life insurance industry can be restored,” the FSCA said.

“The efforts by these insurers to provide interim relief to their policyholders with no intention of claiming the funds back from their policyholders is appreciated by the authorities,” it noted.