Santam, South Africa’s leading non-life insurer, issued an “operational circular” on 15 March that could have a significant impact on commercial clients’ existing cover for business interruption resulting from extended cover for losses emanating from public utilities and/or public telecommunications.

It appears that the aftershock of claims emanating from Covid-19 resulted in a review in order to prevent a recurrence of “non-defined” perils.

Most short-term insurers were very quick to remove contingent business interruption (CBI) cover for losses resulting from a contagious, reportable disease after Covid became a reality in March 2020. In the case of Santam, all such cover ceased from 1 June 2020.

Background

Santam explains as follows:

“Following the Covid-19 pandemic, which impacted most countries worldwide, international support for covers that do not follow ‘defined events’ is no longer available. Contagious and infectious disease cover, for example, did not require a material damage peril to operate (e.g., fire, lightning or explosion) and is therefore deemed ‘non-damage’ (or non-physical damage).

“‘Defined events’ are perils such as fire, lightning, explosion, special perils (e.g., storm) and malicious damage. These perils are usually found in the material damage sections, such as the fire, buildings combined and office contents sections. ‘Extended cover’, as seen in public utilities – extended cover and public telecommunication – extended cover, provides for perils much wider than ‘defined events’ mentioned above. They offer ‘failure’ or ‘partial failure’, which incorporates cover that has a very wide range of possibilities and levels of additional risk for insurers and reinsurers.

“Although this cover has been in existence for many years, there are increasing concerns that power supply and various associated utilities could fail, resulting in large-scale losses. With these concerns in mind, reinsurers have withdrawn their support for business interruption covers that provide for ‘non-damage’ (or non-physical damage) extensions, such as the ‘extended covers’ referred to in this circular.

“This systemic risk could have a catastrophic impact on the entire industry without reinsurer support, so providing this cover would be unsustainable.”

Unlike the abrupt removal of cover for losses as a result of the pandemic, the removal of these extensions will be phased out. For new business, it will no longer be available from 1 July 2022. Existing policies will be amended at renewal.

Products affected

These changes affect all products that have a business interruption section, including policies issued by Santam and broker- or administrator-issued policies.

Impact on premiums

In terms of quotations effective from 1 July 2022, the cover for these extensions will no longer be available, so no premiums can be raised. For renewals, where the extension was being charged for, this premium component will fall away, because the cover is cancelled at the renewal date. The perils-based (“insured perils”) version will replace the previous “extended cover” version where the “extended cover” version included the “insured perils” cover, and a new premium will be calculated, which will be less than the original premium that included the extended cover.

Impact on wording, clauses or endorsements

The impact on Santam’s various contractual wordings is dependent on how such wording is arranged or constructed. Most wordings are similar for these extensions, so removing them from the contract is fairly simple.

These extensions need to be removed, and any other references to the extensions within the policy wording need to be adjusted. Santam will work closely with brokers to manage these changes, where products are bespoke. Santam’s own wordings will be similarly amended.

All endorsements, additional wording components, extensions and clauses that exist will also be amended accordingly. Previous endorsements that refer to the extensions in question (e.g., clause 2218) will also be amended, to remove reference to the cover.

Wordings that only offer the “extended” coverage will require amendment to comply with the perils-based version, and Santam will assist brokers to achieve this product change, where applicable.

Brokers are requested to contact their relationship manager or the commercial contact centre if they have any queries about the circular.

Reinsurer withdrawal

There can be little doubt that, during the ongoing legal battle to determine whether the coronavirus or the government lockdown was the insured peril, hectic behind the scenes discussions were taking place between insurers and their various reinsurers. It therefore comes as no surprise that reinsurers have done their homework to prevent getting caught out again.

No doubt, other insurers will be forced to follow suit.

During the court battle around the term of CBI cover, much was made about the nebulous wording upon which legal experts could not agree. What about the man in the street then, who was supposed to interpret and understand it?

Perhaps this is a timely warning for all insurers to revisit their contracts as a whole to see that they conform to today’s demands, rather than the contracts drawn up in a coffee shop by the Thames in the 1650s.

Article By Paul Kruger
Featured in Moonstone
Photos by Pixabay