COVID-19: How sure are you about your insurance?

With the recent outbreak of the COVID-19 (“Coronavirus”) in South Africa, the economy has taken a hard hit and businesses are losing revenue due to the implications of this fast-spreading virus.

Recent travel bans have impacted South Africa’s mostly tourist and export-based economy and businesses all over South Africa are feeling the effects.

In light of the current uncertainty amongst consumers, many businesses, especially small to medium businesses, will experience a slowdown in business and a loss of income. With the looming possibility of a recession towards the middle of this year, businesses will look toward their insurers for a lifeline.

The purpose of business insurance is to protect against income losses which arise as a result of disruption to business operations. Generally speaking, a business should protect itself against loss following interruption of or interference with the business as a result of damage occurring during the period of insurance.

As a starting point, the impact of Covid-19 on business interruption policies depends on the specific language of each insurance policy and companies should familiarise themselves with their policy, specifically whether there are exclusions included in the policy document, to the effect that ‘infectious disease’ is expressly excluded.

However, the loss envisaged in many policies is direct, physical loss of or damage to insured property (the business operations). In respect of a claim for Coronavirus related business interruption, this begs the question whether the following scenarios would constitute direct, physical loss and/or damage:-

    1. Inability by a business to import and/or export goods due to the possibility of the goods being contaminated and/or the cessation of business activities internationally;
    1. When a company’s supplier unexpectedly ceases operations, overseas factory shutdowns, broken supply chain links;
    1. Lack of workforce due to government and/or self-imposed quarantine and or diagnosis;
    1. Unforeseen operating expenses, a move to an alternative location, payroll, taxes and loan payments.

The requirement of “direct loss” may well not be satisfied as, in the case of a broken supply chain, the cause of the loss is not the virus per se but the inability on the part of their supplier to supply goods. That supplier might be experiencing “direct” loss but it could be argued by the insurer that the next company in the chain of supply is not experiencing “direct” loss.

In addition, there is uncertainty at this stage as to whether it would constitute “physical loss”, as many business interruption policies protect against interruption where there has been physical loss or damage to the property of the business i.e. factory burning down, equipment being compromised due to a flood etc. Many businesses will not be able to claim on policies for business interruption as viruses and disease are typically not an insured peril unless added by endorsement.

As a result of the 2013 SARS (Severe Acute Respiratory Syndrome) outbreak, a substantial number of insurers specifically excluded infectious diseases from their policies. This type of cover needs to be specifically negotiated and included in the business interruption policy at the time when the policy goes into effect.

However, it is noteworthy that certain policies provide coverage for business interruption sustained when a “civil authority” imposes restrictions that impact the operations of a business and therefore, depending on the wording of a specific policy, the requirement of physical loss may not be relevant. Accordingly, in the event that government limits access to or from areas where transmission Covid-19 is prevalent, companies may be protected for business interruption on this score.

Unfortunately, many businesses will be left in a vulnerable position by virtue of a potential requirement that the loss must be related to direct, physical loss or damage. It goes without saying that companies should carefully evaluate the wording of their respective policies and ensure that they are proactively managing their Covid-19 exposure.

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