🔒 WORLDVIEW: The battle over insurers’ Covid-19 obligations to business

As discussed on our Inside Covid-19 podcast, there is a major battle brewing between big South African insurers like Santam and their policyholders over whether losses due to the Covid-19 lockdown should be covered.

At issue are so-called business interruption (BI) insurance policies, intended to pay out when businesses face losses due to covered events. A common example would be a fire – a business interruption policy would cover the sales revenues that the business would miss out on due to the fire-related closure (coverage for the actual physical damage caused by the fire would be a separate policy, or included as a separate matter in the business interruption policy).

Many businesses in SA – especially those in the tourism industry – purchased BI insurance that included coverage for infectious illness events (for example, if there was an outbreak of Legionnaires’ disease at a hotel that forced it to close for repairs and disinfection). Now, these businesses argue that they should be compensated for losses during the Covid-19 lockdown because the lockdown was a result of an infectious disease – this is a simplification, of course, but that’s the gist of their argument.

The insurance companies disagree. They argue that the contracts cover only interruptions that result directly from an infectious disease. So, for example, if a shop had to close because two workers developed Covid-19, the losses incurred during that closure would be covered. However, if a shop had to close because of a government mandate – in this case, the nationwide lockdown – that is not covered because the insurance policy doesn’t cover losses incurred as a result of government rules and regulations.

In other words, businesses are arguing that because the lockdown was the result of an infectious disease it should be covered; insurers are arguing that closures were due to an uncovered event (government rules) and are therefore not covered.

So far, it looks like the Financial Conduct Authority (FCA) agrees with the insurance companies. And, while court battles are brewing and insurance companies have been lambasted in the press, so far they are standing firm (those who reject the claims, that is, some insurers have paid out on BI claims related to the lockdown).

What’s at stake?

There is a lot at stake in this battle.

On the one hand, there are thousands of South African businesses that are going to collapse into bankruptcy as a result of the lockdowns. This will have a devastating effect throughout the economy – thousands of jobs will be lost, innovation and competition in various industries will take a knock, and government revenues will suffer as a result of lost taxes. Recovering from this type of extinction event would be a challenge for a strong, healthy economy – for the struggling SA economy, it may be an impossibility.

On the other hand, the long-term stability and financial health of the South African insurance industry are also at stake. Although insurers like Santam have stated categorically that they have plenty of reserves to cover claims, few insurance companies could realistically handle open-ended pandemic-related claims that could continue to grow even as lockdowns end (assuming long-term economic damage, which seems reasonable). At best, insurance premiums would skyrocket, and businesses would struggle to find companies willing to issue BI policies in the future. At worst, major insurers could collapse, which would most likely necessitate a government bailout to avoid the broader collapse of the financial system, and which would threaten SA’s ability to borrow in global markets.

In short, the words “rock” and “hard place” spring to mind.

Like Covid-19, this problem is everywhere

This high-stakes battle is not unique to SA. Around the world, insurance companies and businesses are locked into similar battles, from the US to the UK and beyond. The core of the problem is that we may have to choose between the survival of real businesses and the stability of the financial system. And the depressing part is that no matter what happens, taxpayers are likely to end up on the hook – either covering unemployment benefits and social costs related to job losses and business failures or covering the cost of a big financial system bailout.

Ultimately, the brutal human and economic costs of the Covid-19 pandemic will have to be paid. Our best hope is that, in the case of BI insurance at least, policyholders and insurers can negotiate and come to a mutually acceptable solution. If not, the courts, business leaders, and politicians have the unappealing task of apportioning how those costs will be borne.