The Court of Appeal recently provided clarity on the recovery of business interruption losses caused by the Covid-19 pandemic under excess of loss reinsurance policies.
In the case of Unipol Sai Assicurazioni SpA v Covéa Insurance Plc [2024] EWCA Civ 1110, the court determined that the outbreak of Covid-19 was a “catastrophe” and provided helpful insight into aggregation under reinsurance policies containing ‘hours clauses’. Associate Claudia Seeger examines the decision.
Background
Covéa provided cover to policyholders that ran children’s nurseries and childcare facilities, including cover for business interruption caused by perils other than physical damage to insured property. Such policyholders incurred losses as a result of instructions from the UK government to close childcare facilities from 20 March 2020 in response to the Covid-19 pandemic. Covéa indemnified its policyholders and consequently sought the recovery of such losses from reinsurers UnipolSai under its property catastrophe excess of loss reinsurance policy (the “Reinsurance Policy”). The case concerned an appeal from an arbitration award, where the arbitration tribunal had determined Covéa was entitled to an indemnity under the Reinsurance Policy.
The Reinsurance Policy indemnified for “each and every Loss Occurrence”, which was defined as losses arising out of and directly occasioned by “one catastrophe”. The duration of the “Loss Occurrence” was limited to “168 consecutive hours for any Loss Occurrence of whatsoever nature”, with Covéa being entitled to choose the date and time when any period commenced (the “Hours Clause”).
UnipolSai raised two key objections to payment under the Reinsurance Policy. Firstly, UnipolSai argued that the outbreak of cases of Covid-19 in the UK in the run-up to the closures from 20 March 2020 was not a “catastrophe”, as required for cover to be triggered under the Reinsurance Policy. Secondly, UnipolSai argued that for aggregation purposes, the Hours Clause limited the recovery of losses to payments only within the stipulated 168-hour period (and not to losses occurring outside this period).
“Catastrophe”
The Reinsurance Policy did not contain a definition of “catastrophe”, and it was common ground that there was no special market definition or meaning of the word. Therefore, the arbitral tribunal had turned to the meaning of “catastrophe” in ordinary language to determine whether the outbreak of Covid-19 constituted a “catastrophe”.
UnipolSai argued that there were three aspects of the word “catastrophe” the arbitral tribunal had failed to recognise:
- that it must be an event or species of event, whereas Covid-19 was a state of affairs,
- that it must be a sudden and violent event, and
- that it must cause or be capable of causing physical damage.
UnipolSai’s first argument drew on the distinction made in Axa v Field [1996] 1 WLR 1026 between “event” and “originating cause”. The judges considered the fact that the word “event” was not used in the Reinsurance Policy and, if the intention was that “catastrophe” was to be synonymous with “event”, the Reinsurance Policy would have said so or would have specifically used the word “event”. Similarly, the word “occurrence” was also not used in the Reinsurance Policy outside of the phrase “Loss Occurrence”, which was separately defined by reference to “one catastrophe”. The judges maintained that in such circumstances, what “occurrence” means in underlying contracts, such as those considered by the Supreme Court in the FCA Test Case, is irrelevant.
In applying the principles held in Axa v Field, the judges determined that a broad application of the two unities of time and place was most appropriate. For example, the terms of the Reinsurance Policy envisaged that a flood could last three weeks and be considered a “catastrophe”, as could Australian bush fires that develop over an extended period of time. Consequently, the judges disagreed with UnipolSai’s contention that the outbreak of Covid-19 in March 2020 could be considered a “state of affairs”.
In relation to UnipolSai’s second argument (that a “catastrophe” must be a sudden and violent event), the judges held that while some definitions included reference to sudden happenings, not all did. The judges noted that many of the perils identified in the Reinsurance Policy were not necessarily sudden in their inception or violent in their impact. For example, riots and civil commotions are not always sudden and often develop over time, as do floods, for example, with long periods of heavy rainfall. Nevertheless, the judges determined that if an element of suddenness was required, this had been satisfied in any event. The court agreed with the tribunal’s comment that “it is evident that the exponential increase in Covid-19 infections in the UK during the first three weeks of March 2020 did amount to a disaster of sudden onset such as to qualify as a catastrophe”.
Finally, the judges rejected UnipolSai’s third argument that a “catastrophe” must cause or be capable of causing physical damage. The judges noted that such a requirement is not inherent in the word’s ordinary meaning. In arguing this point, UnipolSai attempted to rely on the principle of ejusdem generis, which is the principle that where general words follow specific words, the general words are limited to (or, in other words, are ejusdem generis with) things of the same class as the specific ones. The judges considered this approach to be misconceived. They held that the Hours Clause did not purport to set out a defined class; it simply ascribed hours to specific recognised catastrophes. Additionally, the words “any Loss Occurrence of any whatsoever nature” are extremely wide and intended to encompass other non-identified catastrophes.
The judges, therefore, unanimously rejected UnipolSai’s arguments, finding that the analysis of the arbitration tribunal was correct and that the outbreak of cases of Covid-19 in the UK in the run-up to 20 March 2020 was a “catastrophe”.
Aggregation and application of Hours Clause
The central question for determining the application of the Hours Clause was when does the “individual loss” (being the loss incurred by the original policyholder) occur? Clearly, where the individual loss occurs outside the relevant period of hours, here being 168 hours, it cannot be included in the Loss Occurrence.
The judges held that “occur” is to be read as “first occur”, such that all individual losses that first occur during the relevant period can be aggregated, even where the financial loss resulting from the individual losses continues to develop after the 168 hours has expired. Reinsurance market practice is to treat damage business interruption loss as occurring simultaneously with property damage; the judges did not consider there was any basis to treat non-damage business interruption losses any differently.
Consequently, the judges held that an “individual loss” first occurs when a covered peril affects the insured premises and where this is a loss of use, the individual loss occurs at the same point as that loss of use. Additionally, an “individual loss” only occurs once for the purposes of the Hours Clause, irrespective of how long the financial loss suffered continues; the “individual loss” encompasses the entirety of the loss sustained as a result of the relevant catastrophe.
The judges found there was nothing in the Hours Clause requiring the loss to be apportioned such that only the part sustained during the 168-hour period is to be indemnified. Such conclusion is logical in light of other provisions of the Reinsurance Policy, as well as the principle of “losses occurring during” (re)insurance, where the loss is attributable to the policy year in which it first occurs. The judges considered UnipolSai’s approach “artificial and gives rise to considerable practical difficulties” such as “slicing and dicing” a net loss arrived at in the underlying insurance.
Conclusion
The Court of Appeal’s decision will be a welcome one for insurers seeking recovery of Covid-19 losses under excess of loss reinsurance policies. The Court of Appeal’s determination that financial losses incurred outside of the relevant period of hours stipulated in an ‘hours clause’ can be indemnified (provided they result from an “individual loss” first occurring within the relevant period) is particularly helpful for insurers seeking to maximise their recovery under their policies.
The decision is also consistent with Mr Justice Butcher’s ruling in Stonegate v MS Amlin [2022] EWHC 2548 (Comm) that coverage of the insured’s business interruption losses extended until at least the end of the lockdown period that had begun during the period of insurance, despite the fact that the period of insurance had expired in the meantime. As such, the Court of Appeal’s decision may have some further application in the context of aggregation disputes under direct insurance policies as well as reinsurance.
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