Progress report on claims processing under Business Interruption Insurance

Feedback from a Whatsapp group of policyholders affected by the drawn-out saga around business interruption as a result of the Covid-19 pandemic indicates that there is widespread confusion and dissatisfaction about how the quantum of the claims are being assessed.

Most concerns centre around how insurers calculate “savings” and government assistance in the form of grants and subsidies such as TERS payments.

One example shows a client whose standard turnover reduced from R8 million to R45 000. After applying items such as “Rate of gross Profit” and “Savings”, the nett claim, including VAT, was reduced to just under R1.4 million. Hereafter it was averaged out over three months to R1.29 million. After deduction of the interim payment for two months, the “Net Claim Owing” came to R37 198.

BI Cover is a global phenomenon

Interestingly, the UK courts, in deciding on the eligibility of BI cover in the wake of Covid took guidance from the ground-breaking case of Café Chameleon in the Western Cape High Court. In return, further local cases again made liberal use of the views and findings contained in the UK High Court test case, initiated by the Financial Conduct Authority.

There appears to be a common thread between what is happening here and in the UK.

A document titled FCA Updated statement on non-damage BI settlements and deductions made for government support sheds some light on what transpired since a statement published in August 2020 to guide insurers on how to make deductions from business interruption (BI) insurance claim payouts for some types of government support given to policyholders. This was expanded on in a “Dear CEO letter” dated 18 September 2020 which clarified the regulator’s expectations:

  1. The Government’s treatment of the Small Business, Retail, Hospitality and Leisure or Local Authority Discretionary grants for tax purposes is not a proper basis for insurers to treat these payments as turnover under the policies.
  2. Insurers could not apply these amounts as savings against fixed business expenses. This is because these amounts are not made for any particular business expense and policyholders will have used the grants in different ways.

“We confirmed our expectation that firms explicitly consider the treatment of the various forms of government support at Board level and appropriately document their consideration and conclusions. We told insurers that we would follow up with them individually as appropriate.  We also advised that we would continue to consider the appropriateness of any deductions of any other form of Government support when calculating the BI losses.”

“On 25 September 2020, in discussions between the Association of British Insurers (ABI) and The Economic Secretary to the Treasury, the ABI confirmed that a number of insurers have agreed not to deduct certain grants from Covid-19 claim payments.”

Regulatory involvement

Policyholders who took the rejection of their initial claims to the Short-term Ombud were informed last week that these complaints were now viewed as finalised as the insurers had admitted liability. They are at liberty to approach the ST Ombud again should they not be satisfied with how the claims are handled.

An update from the FSCA in February 2021 stressed that “…insurers must ensure that policyholders do not face unreasonable post-sale barriers to submit CBI claims.”

The regulator also expanded as follows on the so-called Trends clause contained in most contracts:

This is a clause in an insurance contract the purpose of which “is to adjust the loss an insured has suffered as a consequence of the insured peril, so that the insured is put in the same trading position after the business interruption, as if it had not happened”.

“The FSCA requested insurers to be mindful of the factors to be considered when applying the “trends clause” and to ensure that it is applied in line with the court judgment. This means that no insurer may, when it considers adjusting the loss that a policyholder has suffered as a consequence of Covid-19 and the government’s response to it (composite insured peril), take into consideration circumstances which are part and parcel of the composite insured peril. The FSCA will closely monitor how the “trends clause” will be applied by the non-life insurance industry.”

Judging by the turn of events prior to accepting liability, finalising claims to the satisfaction of both parties could still take some time. In the meantime, most businesses in the hospitality sector are under great financial stress, and are running out of resources. This is not helped much by the government’s decision to provide financial aid in line with BEE principles. This is not the time to encourage start-up businesses; there are tens of thousands of employees who are likely to lose their jobs if existing businesses are allowed to go under.

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