Implication of "'water shedding' on business operations and insurance

George Davis

Drought conditions have many devastating effects on communities and the surrounding environment. While the devastating effects of drought are first realised within the agricultural sector, the ripple effect into other sectors and consumers’ personal lives is quickly felt. 

This is according to George Davis, Head: Construction and Engineering at Risk Benefit Solutions (RBS), one of South Africa’s largest independent insurance and risk specialists, who says that this has already become evident with the implementation of water restrictions in Gauteng last week. 

“Businesses – across all sectors – need to start realising the potential devastation and associated costs that can arise from the current drought conditions, and should be implementing risk management strategies accordingly.” 

South African Water Minister, Nomvula Mokonyane1, was recently quoted stating that South Africa is currently experiencing its worst recorded drought since 1992, and as a result two of the nine provinces - Mpumalanga and Limpopo – have been declared disaster areas for agriculture. 

Davis says that while the agriculture sector has already been severely impacted by the drought, many sectors, such as energy and manufacturing, also require water for their processes. 

“The water restrictions are put in place to preserve water for the long term. While it may seem an inconvenience for consumers, communities need to ration water consumption in order for the reservoirs and streams to be replenished. This is vital to ensure that the needs of utility companies and industries that require water to operate are met, as well as the wellbeing of the local ecosystem as a whole. During times of drought, water may become polluted due to the lack of rain water to dilute industrial and agricultural chemicals. This toxic water can be harmful to plants and animals that use it, as well as make it difficult to purify for human consumption.”  

He says that a prolonged drought could also reduce electricity generation. “Most power generation processes depend on the use of water for hydropower or coal-burning and nuclear plants. Therefore if water use is restricted, power plants may need to be shut down. This challenge is escalated when the drought is accompanied with high temperatures, driving an increased demand for temperature controlled environments.”

With the South African Weather Service1 reporting that the current dry weather conditions will likely continue into March 2016, Davis says that it is becoming increasingly clear that businesses need to be making provision for water shortages within their risk management strategy. 

“If a business’ industry is heavily reliant on water to manufacture or produce certain products, the lack of water will have a direct impact on the business’ balance sheet. 

He stresses that businesses need to know that such an occurrence is not an insurable event. “Insurance sometimes provides a false sense of security for businesses, but owners should not be relying on their policies to cover losses associated with water interruptions.

“Most insurance policies for industry will contain specific exclusions such as ‘the deliberate withholding by the supply authority of water, electricity, gas, fuel, steam or refrigerant’. Insurance will therefore only respond to an unexpected, unforeseen or sudden event.”  

Davis says it is for this reason he stresses that businesses who will be impacted by water supply interruptions review their risk management strategy. “Depending on the type of industry and location, businesses could install additional water tanks. Alternative supply through bore holes may be considered, but a long term drought would most probably render the bore hole dry.

“A risk management strategy will therefore ensure a business is adequately covered for possible risks arising from water shortages – both from a damages and liabilities standpoint,” concludes Davis.