(Article from Insurance Law Alert, February 2024)
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Holding
The High Court of England and Wales ruled that arbitration tribunals correctly held that ceding insurers were entitled to indemnity under excess-of-loss reinsurance policies for business interruption losses resulting from the COVID-19 pandemic, finding that an infectious disease outbreak constituted a “catastrophe” under the policy language. Markel International Ins. Co. Ltd. v. General Reinsurance AG, No. CL-2023-000132 (Business and Property Courts of England and Wales, Commercial Court Feb. 9, 2024); Unipolsai Assicurazioni SPA v. Covéa Ins. PLC, No. CL-2023-000494 (Business and Property Courts of England and Wales, Commercial Court Feb. 9, 2024).
Background
In two reinsurance arbitration proceedings, tribunals ruled in favor of the ceding insurers, Covéa and Markel, which had issued direct policies to childcare businesses that sustained economic losses in the wake of the COVID-19 pandemic.
In the Covéa proceeding, the tribunal ruled that the exponential increase in COVID-19 infections in the U.K. during the first three weeks in March 2020 amounted to “a disaster of sudden onset such as to qualify as a catastrophe.” The Covéa tribunal also addressed the proper interpretation of an “Hours Clause,” which provided indemnity for “individual losses” during certain specific durations of time. It concluded that reference to “individual loss” in that provision meant “a loss sustained by an original insured which occurs as and when a covered peril strikes or affects insured premises or property.” The tribunal further held that “individual loss” occurred when the nurseries were closed on March 20, 2020, “with loss which the insured continues to sustain afterwards being aggregated with the loss sustained during the 168 hour period.”
In the Markel arbitration, Markel initially argued that the relevant catastrophe was the COVID-19 outbreak, but subsequently took the position that the government’s decision to close all childcare centers in March 2020 was the operative catastrophe. The tribunal concluded that the government order may be deemed a catastrophe, emphasizing that the order “cannot be viewed separately from the pandemic which demanded (however controversially) its response.” As to the Hours Clause in that reinsurance policy, the tribunal held that coverage was limited to individual losses which occurred during the 168 hour period specified in the policy.
The reinsurers’ appeals raised two primary issues: (1) whether the losses for which the ceding insurers sought indemnity “arose out of and were directly occasioned by” a catastrophe under the reinsurance policies; and (2) whether the “Hours Clauses” in the reinsurance policies, which “confined the right to indemnity to ‘individual losses’ within a set period, had the effect that the reinsurances only responded to payments in respect of the closure of the insured’s premises during the stipulated period.” The court answered the first question in the affirmative and the second question in the negative.
Decision
The court ruled that the cedents’ claims for indemnity under the reinsurance policies “arose out of and were directly occasioned by one catastrophe.” The court rejected the reinsurers’ assertions that a catastrophe requires physical damage to property, as well as a “sudden or violent event or happening,” finding a lack of support in case law or dictionary definitions for such an interpretation.
The reinsurers also argued that even if there had been a catastrophe for purposes of reinsurance coverage, only business interruption costs incurred during the 168 hours stipulated by the relevant section of the “Hours Clause” could be relied upon in seeking indemnity. The court rejected this contention as well, deeming it inconsistent with the overall language and intent of that provision.
Comments
In its discussion of whether the losses arose from a “catastrophe,” the court also addressed a more nuanced argument. The reinsurers argued that a catastrophe is a type of “occurrence” or “event” and must therefore satisfy the “unities” of “time, place and way which occurrences or events must ordinarily satisfy.” The court deemed this argument “both the easiest and most difficult of the issues” raised on appeal.
The court easily concluded the unities of time and place need not be satisfied in this case because neither reinsurance policy used the term “Loss Occurrence” or “Event” as a standalone term. Further, the court noted that overall policy language suggested an intent to give a broad definition of “catastrophe”—one that the parties conceded would include events such as bush fires that develop in a variety of locations over several weeks.
However, the court acknowledged the difficulty of distinguishing between a
catastrophe properly so-called, which is an appropriate basis for aggregating individual losses when seeking indemnity under a property catastrophe excess of loss policy, and a series of discrete losses which share some common point of ancestry, but the adverse effect of which so far as a direct insurer is concerned are properly the subject of stop-loss protection.
The court noted that it need not answer that more challenging query because in the present case, the elements of a catastrophe were clearly satisfied. The court observed that in other cases, the answer to that question is “likely to be heavily dependent on the commercial and contractual context in which it arises.”