Businesses to get some interim relief payments from insurers

Hundreds, possibly thousands, of small businesses operating mainly in the hospitality sector should get at least some financial relief from their insurance companies.

This comes after the intervention of two regulatory bodies, the Financial Sector Conduct Authority (FSCA) and the Prudential Authority (PA).

Under the agreement announced on Friday, small business claimants will get an interim once-off payment in an effort to help them remain solvent while disputes between the insurance companies and their policyholders over lockdown-related business claims drag slowly through the courts.

Interim payments from insurers are not refundable

Crucially, these interim payments are non-refundable. Even if a business loses its legal claim against an insurer, it does not have to pay the money back.

“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 a statement.

Businesses that have insurance for business interruption, and particularly cover for contagious diseases as part of their policy, are in dispute with insurers who are refusing to pay out their claims.

Among those most affected are restaurants, bars, coffee shops, guest houses, hotels and the like.

Insurance companies say lockdown not an insured risk

At stake is the assertion by the business policyholders that all the financial losses they have incurred since the onset of the pandemic in South Africa can be claimed from their insurers.

However, the insurance companies are saying that losses incurred during the lockdown phase of the pandemic are not a consequence of the disease itself, but rather of a government decision to prevent businesses from trading.

Such government action, they assert, is not covered by their policy terms and conditions.

Many desperate policyholders have said that they are going out of business as they wait for an insurance claim payout that may never come. Most say they cannot afford long and expensive litigation that may be drawn out by the big insurers and their legal teams.

Not all business interruption policies are the same

It its statement the FSCA said: “The Authorities acknowledged in previous communications that business interruption cover is a complex issue. There are different business interruption policies, i.e. standard business interruption cover and those that have an extension for infectious/contagious diseases and the latter constitutes approximately 3-5% of the policies.”

The FSCA said it believed that claims with an extension for infectious diseases should be honoured and that lockdown should not be used as a ground to repudiate these claims.

“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,” the FSCA said.

Relief payments will be restricted and may vary

At this stage, relief payments will apparently be restricted to small and medium-sized businesses and the size of the payment will vary from policyholder to policyholder.

According to the website Money Marketing, in a notice sent to its brokers, Hollard insurance acknowledged the severe economic damage caused by the national lockdown regulations, and their particularly devastating effect on smaller businesses.

Willie Lategan, CEO of the insurer’s short-term business unit, acknowledged the complexity of business interruption cover and highlighted Hollard’s recognition of its responsibility to pay all valid claims while maintaining a sustainable, stable and financially sound business for the good of all its policyholders.

Remain of the view that lockdowns are not insurable

“We remain of the view that nationwide government closures or lockdowns are not insurable risks and we believe that legal certainty regarding lockdown-related claims is urgently required,” Lategan is reported as saying.

“However, like the regulators, we are cognisant of the fact that this legal process is likely to take some time and we’re concerned that many smaller businesses will be unable to survive until legal certainty is established,” said Lategan.

But claimant says interim payout ‘is not a lifeline’

However, Insurance Claims Africa (ICA), an insurance consultancy representing over 600 businesses in the tourism and hospitality sector in their battle for compensation, cautioned that “to term this a lifeline would be an exaggeration”.

“While this is definitely a step in the right direction, it will be important to see what the quantum of the relief measures will look like,” ICA CEO Ryan Woolley said.

Regulatory authorities are applauded for their actions

“We applaud the regulatory authorities for calling the meeting with insurers and for ensuring claimants, who are in an extremely vulnerable financial position, are treated fairly,” he stated.

“While the interim payment could provide some relief for these businesses, it will be critical to understand what this relief will entail.

“From what we have seen thus far, it appears that the size of the interim relief is a small percentage of what the claimants are owed,” Woolley said.