What insurers’ grid failure exclusions mean for clients

In this article, Oswald Kuyler, the head of short-term insurance at Consult by Momentum, considers the implications for clients of insurers’ decision to exclude cover for national grid failure and load shedding.

It is important to understand the difference between load shedding and electrical grid failure. Load shedding, as we understand it today, is a controlled interruption of the electricity supply to the public. These scheduled interruptions do not affect a municipal institution; however, electrical grid failure will affect municipalities and any public infrastructure.

The prospect of a complete blackout for an indefinite period demands attention from insurers, which are predicting an increase in losses if grid failure becomes a reality.

A few insurers have reacted to the risk of grid failure with notices to clients of the imminent tightening of policy terms and conditions, to mitigate their exposure and align to their reinsurance treaty requirements.

Reinsurers support or provide cover to insurers, particularly in the event of a catastrophe. For the reinsurance policy to perform, the insurer has no choice but to comply with the requirements of the agreement. This is similar to a general policy condition to which a client must adhere for the insurer to honour their claim.

How will this play out for South Africans? From a personal and commercial policy perspective, I think it’s clear that insurers have learned from the business interruption claims of the past and have improved on their ability to pre-empt exposure and therefore implement proactive risk-mitigation measures.

Consequential loss

Initial commentary from the insurers has been somewhat ambiguous in terms of what is covered and what is not. What seems to be clear is that there is a definite push to avoid any losses associated with grid failure.

Herein lies endless questions around consequential loss and whether it can be directly associated with a particular claim. We’ve also seen some insurers saying that if the grid failure results in any other public supply being affected (for example, water), then any consequential loss might also not be covered. This raises the question, what exactly will be covered?

The breadth of exclusions of cover remains significant based on the initial reaction from insurers. However, some alternative views have come through that if the grid failure is not material to the loss, the client will continue to enjoy cover.

This sparks questions around security requirements at your property if you’re to maintain your cover. If your alarm is not in working order during grid failure and a theft occurs, will you still be covered? Possibly not, and so it’s important to be clear on the policy conditions and decide whether it makes sense for you to remove your alarm as a condition of your cover and pay a higher theft premium (that is if the insurer does not exclude theft in totality during grid failure).

It’s also clear that just as with claims resulting from load shedding, insurers will not cover any business interruption claim caused by grid failure. Therefore, if a defined event takes place at your premises because of grid failure (fire, stock deterioration that has caused financial loss to the business), there will be no cover.

The best approach is to invest in alternative energy solutions that can power your alarm systems, outdoor lights and electric fences. From a business perspective, ensure that you regularly back up data via Cloud solutions, consider the amount of stock you hold at given a time, and possibly evaluate your business model for opportunities to be less energy dependent.

I believe each insurer will ultimately react in its own way within the ambit of its risk appetite and reinsurance agreement. It’s therefore of utmost importance that South Africans engage with a qualified short-term insurance adviser who can interpret an insurer’s policy wording and advise consumers accordingly.