U.K. Supreme Court BI ruling has reinsurance implications
The case provides new law on issues of causation and overturns a previous 'insurer-friendly' decision.
In January, the U.K. Supreme Court handed down its judgment in the leapfrog appeal of the Financial Conduct Authority (FCA) business interruption insurance test case. Although the lower court had largely found in favor of the FCA, both Insurers and the FCA appealed on various issues.
The Supreme Court broadly accepted the FCA appeals (with some qualifications). The outcome of this decision means that all insuring clauses that were being considered in the appeal will provide cover for losses caused by COVID-19, and these losses will not be reduced by reference to any COVID-19-related losses that occurred prior to policies being triggered.
The case provides new law on issues of causation and overturns the arguably insurer-friendly decision in Orient Express Hotels v Assicurazioni Generali SpA.
The Supreme Court’s decisions have effectively widened the scope of cover available to policyholders, applying an even broader interpretation than the already generous application of the High Court. It is anticipated that this decision could cover some 700 types of policies across over 60 different insurers, potentially affecting 370,000 policyholders.
Additionally, both cedants and reinsurers are going to have to consider the extent to which their reinsurances cover the original losses.
Reviewing reinsurance implications
Aggregation provisions take many forms in reinsurance contracts, but generally, the unifying factor for aggregating losses is defined by reference to “events” or “occurrences,” “originating cause” or “common cause,” or (in the case of CAT XOL in particular), “catastrophes.” The Supreme Court considered application of the words “event” and “occurrence.” Although this was in the context of the primary wordings (reinsurance not being in issue before the court), the Court referred to the unities test, derived from well-known reinsurance cases:
“The word “occurrence,” on the other hand, like its synonym “event” has a widely recognized meaning in insurance law which accords with its ordinary meaning as “something which happens at a particular time, at a particular place, in a particular way”: See AXA Reinsurance (UK) plc v Field [1996] 1WLR 1026, 1035 (Lord Mustill); Kuwait Airways Corp v Kuwait Insurance Company SAK [1996] 1 Lloyd’s Rep 664, 683-686 (and the discussion in that case of the Dawsons Field Award); Mann v Lexington Insurance Company [2001] 1 Lloyd’s Rep 1 (CA).”
Applying this, the majority in the Supreme Court observed:
“A disease that spreads is not something that occurs at a particular time and place and in a particular way: it occurs at a multiplicity of different times and places and may occur in different ways involving differing symptoms of greater or less severity. Nor for that matter could an “outbreak” of disease be regarded as one occurrence, unless the individual cases of disease described as an “outbreak” have a sufficient degree of unity in relation to time, locality and cause. If several members of a household were all infected with COVID-19 when a carrier of the disease visited their home on a particular day that might arguably be described as one occurrence. But the same could not be said of the contraction of the disease by different individuals on different days in different towns and from different sources. Still less could it be said that all the cases of COVID-19 in England (or in the United Kingdom or throughout the world) which had arisen by any given date in March 2020 constituted one occurrence. On any reasonable or realistic view, those cases comprised thousands of separate occurrences of COVID-19.”
These observations appear to indicate that, it is at best problematic for COVID-19 to constitute a unifying factor under an event or occurrence-based aggregation clause. Issues may well, therefore, arise as to what circumstances actually do fit within the confines of an “event” or “occurrence.”
On the other hand, aggregation clauses based on “common cause” or “originating cause,” or similar wording, enable a search for a unifying factor that is “altogether less constricted” (AXA Re v Field) and may include a state of affairs.
As to what constitutes a “catastrophe,” which is often the unifying factor under CAT XOL wordings, there has been no real judicial guidance. The Supreme Court decision does not change that.
Other reinsurance issues that may arise from COVID-19 claims include the application of hours clauses and allocation to contract years (a likelihood that has increased now that the pandemic has straddled more than one calendar year, and in circumstances where an applicable exclusion clause may have been inserted in the renewed reinsurance).
The decision of the Supreme Court clarifying original coverage may have reduced the likelihood of “follow the settlements” disputes, particularly under qualified follow clauses. As specific scenarios play out, areas of dispute will become clearer.
Stephen Carter is a partner with Carter Perry Baily LLP.
Samantha Zaozirny is an associate with Carter Perry Bailey LLP.
Opinions expressed here are the authors’ own.
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