Aggregating non-damage Business Interruption losses, to claim under a Property Catastrophe Excess of Loss reinsurance

 UNIPOLSAI ASSICUTRAZIONI SPA V COVÉA INSURANCE PLC  

[2024] EWCA Civ 1110

The Facts

Covéa provided property insurance to policyholders who ran children’s nurseries and childcare facilities, based on its standard NurseryCare Policy wording.  This included cover for business interruption (“BI”) caused by a peril other than physical damage: for example, prevention of access to the insured’s premises due to action of the authorities in containing the spread of a notifiable disease.

On 18 March 2020, in the face of exponential growth in the number of cases of Covid-19, the Government instructed all schools, colleges and early years facilities in England to close with effect from 20 March 2020.  The instruction was endorsed in law by regulations made on 26 March 2020. 

The phased re-opening of schools, colleges and nurseries began some two and a half months later, on 1 June 2020. Covéa paid claims submitted by policyholders who had sustained BI losses arising from the prevention of use of their premises during the period of lockdown.

Covéa in turn sought to recover an indemnity for the losses it had paid out, under its Property Catastrophe Excess of Loss Reinsurance, underwritten by Unipol. A central issue here was whether Covéa was entitled to aggregate the losses it had paid out to policyholders, in order to exceed the £10m retention applying to the reinsurance and recover the balance of its aggregated loss from Unipol.  

The reinsurance permitted the aggregation of underlying individual losses “arising out of and directly occasioned by one catastrophe”. The policy wording did not define “catastrophe”, the term had not previously been considered judicially and it was common ground that there was no special understanding given to the term in the insurance or reinsurance market.  Covéa contended that the events of March 2020, described above, were a catastrophe as that word was to be understood  in the reinsurance agreement. 

The reinsurance also contained an “Hours Clause”, the purpose of which was to define the basis on which Covéa might aggregate losses arising from various types of catastrophe, named examples of which included windstorm, volcanic eruption, civil commotion and flood.  The clause confirmed cover, in excess of the retention, for each and every loss arising out of a catastrophe, subject to a limit if the catastrophe was of longer duration that a specified number of consecutive hours.  In the event that Covéa was able to establish that the facts described above could properly be characterised as a catastrophe, the catch-all limit under the Hours Clause of 168 hours would apply.  Covéa, as the reinsured, was entitled to choose the date and time when the period of consecutive hours commenced.

The Issues – Aggregation

Unipol resisted the aggregation of losses contended for by Covéa on the basis that, pursuant to caselaw developed by the courts in recent decades, loss aggregation provisions in excess of loss reinsurance contracts are to be understood as follows:

• Where an excess of loss reinsurance permits the reinsured to aggregate a series of losses “arising out of one event”, the “event” in question must be something which happens at a particular time, at a particular place, in a particular way (this is referred to as the requirement for ‘the unities’);

• By contrast, a provision which permits the aggregation of losses arising out of the same “originating cause” is altogether less constricted.  The unifying cause can be a continuing state of affairs, or the absence of something happening (AXA v Field, 1996 HL).

It was Unipol’s case that, by using the word “catastrophe”, the parties to the reinsurance had agreed that losses could be aggregated in the case of an event-type unifying happening.  Therefore, in order for  Covéa to be entitled to aggregate losses for the purpose of a claim on the Unipol reinsurance, the underlying circumstances must have been sudden and violent and must themselves have caused, or been capable of causing, physical damage.  Unipol argued that the circumstances of March 2020 did not amount to such an event, but instead merely to a state of affairs, being part of a global pandemic which began in 2019 and which was still going on in 2024: the outbreak in England could not be isolated from that overall state of affairs.

The decision – However, first an arbitration tribunal, then the Commercial Court in the exercise of its supervisory powers over arbitrations, and then the Court of Appeal (“CA”), all found in favour of Covéa.  The reasoning at all three levels was broadly to the same effect, as follows.  

Regard could be had, amongst other matters, to the well-documented intention of those who had drafted the original version of the reinsurance wording, who had recorded that they used the word “catastrophe” because it was felt to be more specific and implied a violent happening which itself caused damage,  whereas the word “event” could apply to something which might have been the cause of a catastrophe, rather than the catastrophe or disaster itself.  

However, regard should also be had to the expert evidence in this case to the effect that, in recent years, it had become usual for risks written in an insurer’s property department to include business interruption loss caused by non-physical perils, such as the risk of prevention of access due to the actions of a governmental authority.

Therefore, although the wording of the direct insurances could not be read across into the reinsurance, Unipol could be taken as knowing the nature of the underlying book of business.  On that basis, circumstances not involving physical damage to property but taking the form of a number of nurseries being prevented from operating by the action of the authorities in seeking to control the spread of a notifiable disease, could in principle properly be characterised as a catastrophe for the purposes of the reinsurance and entitle the reinsured to aggregate losses arising therefrom under the reinsurance.

As to the particular features that circumstances must have, in order to be capable of characterisation as a “catastrophe” for the purposes of this reinsurance, the Commercial Court found that (i) as required by the reinsurance wording, the catastrophe must be something capable of directly causing individual losses, (ii) the word “catastrophe” meant something which could fairly be regarded as “a coherent, particular and readily identifiable happening, with an existence, identity and ‘catastrophic character’ which arises from more than the mere fact that it causes substantial losses”; (iii) it ought to be possible to identify broadly when a catastrophe comes into existence and when it ceases and (iv) a catastrophe will involve an adverse change on a significant scale from what preceded it.  

The CA did not regard this finding to be erroneous and added that the reinsurance wording itself made clear that use of the word “catastrophe” stretched the unities greatly, as a catastrophe could have a wide field of impact and last for a number of weeks if not months.  

Effect of the Hours Clause

Unipol argued that, even if the Covid-related circumstances of March 2020 were properly to be characterised as  a “catastrophe”, the effect of the Hours Clause was that only losses from business interruption that actually occurred during the 168 hour period itself could be aggregated.

The decision – However, the CA held that what could be aggregated was individual losses which first occurred during the relevant 168 hour period, even if the financial loss in question continued to develop over time after the 168 hours had expired.  An individual loss first occurred when the covered peril affected the insured premises.  In a case where the covered peril which struck the premises was the loss of the ability to use the premises (whether through damage to other premises or through a closure order, as in the present case), the individual loss occurred at the same point.

Lovetts’ comment

Where “catastrophe” is used as the unifying factor for aggregation in excess of loss reinsurance, it is necessary to identify a specific happening, catastrophic in nature, with a recognisable beginning and end.  What will constitute a catastrophe is coloured by the type of underlying risks being protected by the reinsurance.  Given the breadth of the covers written nowadays in property departments, “catastrophe” as a unifying factor for the aggregation of losses may be wider than a unifying factor such as “event”, particularly as it is not necessary to prove that the circumstances relied upon satisfy the “unities” requirement referred to in AXA v Field. Meanwhile, the Hours Clause limits how losses arising from the catastrophe may be aggregated for the purpose of claiming under the XL reinsurance.  

For further information, please contact Wendy Miles, Chris Earl-Anderson or William Sturge at Lovetts.