Jury still out on insurers’ liability for business interruption claims

Santam says it is liable to pay R250 million, but has set aside R1.3 billion.

The jury is (literally) still out when it comes to deciding the extent to which short-term insurers are liable to pay claims for losses in terms of contingent business interruption (CBI) cover.

Santam chief executive Lize Lambrechts mentioned during the presentation of the company’s interim results on Thursday morning that the Western Cape High Court heard Santam’s Ma-Afrika case only a few days ago and must still rule on the matter.

Central to the case is the small print of insurance policies that include cover for interruption of business operations and losses associated with contagious and infectious diseases.

The small print

“Santam’s position is that a policyholder’s loss must be due to an interruption of the policyholder’s business directly attributable to a localised Covid-19 infection, which is the peril insured under Santam policies,” says Lambrechts.

This interpretation of the wording of insurance contracts that include CBI cover means that Santam is not liable to pay for losses due to the general lockdown announced by government, but only for losses when a business had to close when its staff members were infected.

With this view, the national lockdown and similar international responses to the pandemic are not considered insured perils in term of the policies.

Lambrechts says this view is shared by the majority of short-term insurers and reinsurers in the non-life insurance industry worldwide.

She also refers to a recent court ruling on another insurance company’s policy wording that found the insurer liable to indemnify the insured in terms of the business interruption section of its policies for any loss suffered since March 27 as a result of the Covid-19 outbreak in SA.

However, the case continues as the court granted leave to appeal, which will be heard later this year.

Santam taking sides with policyholders?

It is interesting, when reading carefully through Santam’s interim results announcement, that policyholders are not necessarily left high and dry.

In fact, it seems Santam is taking policyholders’ side against itself.

Lambrechts and CFO Hennie Nel mentioned in a webcast of Santam’s interim results that according to Santam’s view of the matter, it would have to settle claims to the value of R250 million, according to the narrow interpretation of the insurance contract’s wording.

In addition, Santam has set aside R1.3 billion to provide assistance to policyholders that do have CBI cover, effectively showing a willingness to pay these claims.

Lambrechts says R950 million of this has already been distributed to small and medium businesses in industries that were affected the most, such as those in the hospitality, tourism and non-essential retail sectors that had to close during the lockdown.

The court case looks like a practised dance – on ice – to ensure the best outcome for policyholders and shareholders.

Santam’s reinsurers will hopefully foot the bill at the end of the day.

A few paragraphs in the formal results announcement allude to this: “It is important to note that Santam’s reinsurance programme will only respond to claims covered under the terms of our policies.

“In order to formulate a reinsurance claim under a different interpretation of the policy wording to our own, such interpretation would have to be definitively decided by the SA courts,” reads the announcement signed off by Lambrechts and chair Vusi Khanyile.

The claims provision of R1.29 billion (as at June 30) is Santam’s best estimate of its exposure relating to policies with CBI extensions, according to the announcement. “Given the current legal process, there is, however, significant uncertainty regarding the quantification of these claims.

“The claims provision held is higher than the best estimate of our net exposure to reflect this legal uncertainty. The level of claims provisions will be reviewed upon receipt of additional clarifying information,” says management.

The provision is to be used for the R1 billion relief payments, most of which have been distributed already, effectively meaning that Santam is paying these claims.

Results

Meanwhile, management maintains that operational results were satisfactory under the very difficult economic circumstances.

Similar to other companies, Santam says that the SA economy was already weak before the pandemic hit and deteriorated substantially from February 2020, when government implemented strict measures to control the spread of Covid-19.

Nel says the group’s conventional insurance book achieved gross written premium growth of 4% (6% when excluding premium relief support to policyholders during April and May), but net underwriting margins fell to 4.3% compared to 5.3% in the first half of the 2019 financial year, leaving net insurance premium revenue largely unchanged.

Santam’s traditional businesses performed well, aided by lower motor vehicle claims as people travelled significantly less during the six months to June.

The results were however marred by large losses and write-downs in associate businesses and joint ventures in other African countries, Malaysia and India.

Excluding the impairment of these businesses, headline earnings declined by 35% to R713 million and headline earnings per share by 33% to R6.63 in the six months to June.

The results were seemingly expected, with the share price strengthening by nearly 1% to R250 after the figures were announced – while the market ended the 2.5% lower.

The share price is about 15% lower than in January, but 13% better than its low of R221, making it one of the better performers in the financial sector. Further recovery will depend on earnings growth.

That will depend on the economy recovering, says Lambrechts.

Santam share price over the past year