Business Interruption Insurance in light of COVID-19: Does it cover pandemic-related losses caused by the damage and destruction to insured property?

The COVID-19 pandemic has hitherto led to unprecedented disruptions, not only to our daily lives but also interruptions to business activities and economies around the world. Since the World Health Organization (WHO) declared the novel coronavirus (COVID-19) outbreak a global pandemic in March 2020, there have been over 1,000 insurance coverage claims and lawsuits filed by businesses globally. These lawsuits concern the scope of coverage for COVID-related losses, as will be shown below. The insurance industry globally has denied cover for business interruption losses that resulted from COVID-19 and the lockdown and refused to indemnify businesses for losses sustained. COVID insurance coverage litigation is likely to be protracted and findings will also likely continue to vary across jurisdictions.

Many property or casualty policies incorporate Business Interruption Insurance clauses. There however remains a great deal of uncertainty on the question of whether Business Interruption Insurance covers losses to businesses, occasioned by the pandemic. Some decisions relating to the pandemic have been ruled in favour of insurance companies (“the insurer”), who have attempted to deny coverage for COVID-related claims, whereas other decisions have favoured the insured parties (“ the insured”). In South Africa, the recent landmark judgments in Ma-Africa Hotels (Pty) Ltd and Another v Santam Limited,[1] and the earlier Cafè Chameleon CC v Guardrisk Insurance Company Ltd,[2] demonstrate such cases that were decided in favour of the insured parties. These decisions could potentially provide precedent for the adjudication of COVID-related business interruption insurance matters in the future. 

What is Business Interruption Insurance?

Business Interruption Insurance refers to insurance coverage that helps replace lost income (profits) in the event that a business is halted as a result of direct physical loss, damage or destruction to insured property, by a covered peril. Covered perils may include the following: fire, theft, natural disasters (for example, storms, earthquakes, etc.), damage caused by riots, vandalism or civil unrest, among others, unless the respective policies specifically exclude these events. Additionally, business interruption policies may reimburse the necessary extra expenses that may be incurred by the insured party. For example, operating expenses caused by the disruptive event, rent expenses incurred when moving to a temporary location, etc.

Key Features and Elements of Business Interruption Insurance

There cannot be a Business Interruption Insurance claim without property damage, which is the trigger for indemnification to ensue. The policy protects against actual loss that has been sustained by the insured. This type of policy pays out only if the cause of the business income loss is covered in the underlying property or casualty policy.

Business Interruption Insurance is not sold as a separate policy but is either added to a property or casualty policy or included in a comprehensive package policy as an add-on, therefore it is part of the underlying property or casualty policy. It could also appear as an added endorsement that may include extensions of coverage.

Furthermore, the loss sustained by the insured is subject to the coverage limit, meaning that the maximum amount that the insurer will pay out towards a claim is restricted by such a limit. Financial losses that exceed the coverage limit are borne by the insured, as it is their responsibility to cover the additional costs.

Business interruption coverage persists until the end of the business interruption period, as stipulated in the policy. Most policies determine the period from the date that the covered peril began until the date that the damaged property is physically restored to the condition that it was prior to the covered peril occurring. Therefore, insurers are only liable for loss of business income during the period of restoration i.e. the length of time required to rebuild, repair or replace the damaged or destroyed property.

Moreover, these forms of insurance impose a duty on the insured to mitigate losses. Business owners need to take reasonable steps to repair their property after the covered event occurs, to minimise further damage. Some insurers will reimburse some of these repair costs, as long as they do not exceed the loss itself. 

Are COVID-related business insurance claims covered?

This inquiry is a hugely controversial one and has created uncertainty, especially since the pandemic. Standard Business Interruption Insurance do not reimburse policyholders if their business activities are halted as a result of a pandemic. Even some all-risk insurance policies have specific exclusions for losses caused by viruses or bacteria.

As aforementioned, physical damage is the trigger for a policy to be paid out. It cannot be said that COVID-19 causes physical damage, thus making it difficult to extend the application of the policy wording. Unless a business interruption policy expressly lists pandemics or contagious illnesses as being covered thereunder, they may not be. Where these policies contain ambiguous language, judicial intervention may be necessary to ascertain whether certain categories of losses will be covered.

However, insurers have attempted to deny coverage even in circumstances where policies expressly cover losses caused by “notifiable diseases”. They are of the view that the actual infection may be an insurable event if the policy document covers business interruption in respect of infectious diseases, but not the lockdown that resulted from COVID-19.

The Western Cape High Court in the Santam case determined that the "notifiable disease" coverage extensions to Business Interruption Insurance policies provide coverage for losses caused by the government-imposed lockdown. This was the second South African case after Cafè Chameleon that was filed by a business after its insurers rejected their claim as a result of the losses and damages that were suffered due to business interruption caused by COVID-19.  In Cafè Chameleon, the Court dealt with an identically worded policy to the one in the Santam case, as shown below, and ruled in favour of the policyholder. The insurer’s arguments were similar to those of the insurers in the Santam case below.

The Santam case arose when Ma-Africa Hotels (a hotel chain) and Stellenbosch Kitchens (a restaurant) joined forces with Insurance Claims Africa (ICA), a public loss adjustment company, after they were forced to shut down following the government-imposed lockdown in South Africa. Both the hotel chain and restaurant had purchased Business Interruption Insurance that expressly covered losses “…occasioned by the occurrence of a notifiable disease in the form of Covid-19 occurring within a radius of 40 kilometres of the insured premises.”  They argued that the losses they suffered were as a result of the outbreak of a notifiable disease within a specified radius of the insured premises i.e. there can be no lockdown without the outbreak.

The insurer, Santam, alleged that the loss of revenue was not caused by the outbreak of the disease, but by government action of instituting lockdown, therefore there was no causal link between the disease and the losses suffered. It further argued that its policies covered only purely local outbreaks of infectious diseases, not a global pandemic, and that it was never the intention of the insurer to cover the lockdown.

The High Court explained that: “The policy does not state that the infectious disease must be limited to a local outbreak only, or that the local authority response must be exclusively due to such local outbreak only, and no other, or that the policy does not respond where the disease and the response is broad and national.” It, therefore, concluded that "…it cannot be said that the nationwide or global events were not contemplated or insured” by the policies. The court further held that the “notifiable disease” coverage extensions “are exactly what they had insured themselves against" when purchasing the notifiable disease coverage. Santam has since appealed the court’s decision.

It is noteworthy that the court referred to the English High Court’s ruling in the UK test case in The Financial Conduct Authority v Arch Insurance (UK) Ltd and Others (FCA Test Case).[3] This decision is another that found in favour of the insured and cited the South African Café Chameleon case, both finding that COVID-19 and the government’s response to the pandemic are inseparably part of the same insured peril. The FCA also set out the so-called ‘But-For’ test, commonly used in the Law of Delict and Criminal Law, as an important determiner for a business interruption claim. To ascertain the financial impact on a person’s business, they would ordinarily consider what their profits would have been, but for the peril.

The decisions in both the Café Chameleon and Santam cases ought not to be interpreted as a confirmation that all Covid-related losses to businesses are covered under business interruption policies. They should instead be seen as confirmation that an interpretation of business interruption policies that is in favour of such indemnification can be applied. However, the policy wording of each policy remains the key to whether a particular business is covered or not.

It is evident that there is a need for legal certainty for all parties in insurance claims, pertaining to the question of whether Business Interruption Insurance policies cover pandemics such as Covid-19. Certainty could be achieved through legislative action to address pandemic-related losses and the scope of business insurance coverage.