This autumn, the Court of Appeal of England and Wales handed down judgment in UnipolSai Assicurazioni SpA v Covéa Insurance Plc [2024] EWCA Civ 1110. This was an appeal of an Award made in a reinsurance arbitration under section 69 of the Arbitration Act 1996. UnipolSai’s challenge was at first instance before (and dismissed by) Mr Justice Foxton in the Commercial Court. The Court, at both first instance and appeal, considered the recoverability of business Covid-19 interruption losses under a reinsurance policy, and in particular two key issues:
- Whether the Covid-19 losses for which Covéa sought indemnity under the Reinsurance Policy arose out of and were directly occasioned by one ‘catastrophe’ on the proper construction of the Reinsurance Policy.
- Whether the effect of the “Hours Clause” in the Reinsurance Policy, which confined the right to indemnity to “individual losses” within a set period, had the effect that the reinsurance only responded to payments in respect of the closure of the insured’s premises during the stipulated period.
At first instance, Foxton J decided both issues in favor of the reinsured, Covéa (you can read his judgment here). The Court of Appeal upheld Foxton J’s decision.
Following a string of policy-holder friendly decisions by the Courts (you can read our most recent update here) this will be welcome news to insurers, albeit to the detriment of their reinsurers, and not original policyholders.
Background
The original insureds were operators of children’s nurseries and related childcare facilities. They purchased insurance from Covéa for various property-related perils, including non-physical damage business interruption cover. Covéa, in turn, purchased reinsurance from UnipolSai in the form of a Property Catastrophe Excess of Loss Reinsurance policy (the “Reinsurance Policy”).
As a result of the onset of the Covid-19 pandemic, and the consequent closure of nurseries, schools, and colleges, Covéa paid out significant sums under the insurance, and sought an indemnity under the Reinsurance Policy.
Issue in Appeal
UnipolSai raised two objections in refusing to pay the indemnity. First, it argued that Covid-19 losses did not arise out of and were not directly occasioned by a ‘catastrophe’.
Secondly, it contended that, for the purposes of aggregation, the ‘Hours Clause’ in the Reinsurance Policy had the effect of limiting any recovery of Covid-19 business interruption losses to payments in respect of the closure of insured premises during a stipulated period of 168 hours (on the basis that no “individual loss” which occurs outside that period could be included).
Application of “Catastrophe”
First, the Court of Appeal held that the underlying Tribunal’s conclusion on this issue was “evaluative” in nature, and did not involve an error of law. As a result, it was not open to UnipolSai to appeal the Tribunal’s decision.
However, potentially of more interest, is the Court of Appeal’s additional finding that the Covid-19 pandemic was, in any event, capable of being a ‘catastrophe’. As the Reinsurance Policy did not define “catastrophe”, and in the absence of a market definition, the Tribunal considered the ordinary meaning of the word by reference to dictionary definitions and expert evidence. It decided that there was no applicable law or market practice that would limit the meaning of “catastrophe”.
UnipolSai, in the Court of Appeal, argued there were three aspects of the word “catastrophe” that 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. The Court of Appeal rejected this, upholding the Tribunal’s determination that a “catastrophe” was not limited by a requirement that it is a species of event since neither the word “event” nor “occurrence” appeared in the Reinsurance Policy [paras 105 and 132-137].
- That it must be a sudden and violent event. This was also rejected, with the appeal judges agreeing with the Tribunal’s finding 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” [paras 138-139]
- That it must cause or be capable of causing physical damage. This too was rejected, with a finding that UnipolSai’s attempt to rely on the ejusdem generis principle (i.e., where general words follow particular and specific words, the general words must be confined to things of the same kind as those specifically mentioned) was misconceived [paras 140-143]
The Court of Appeal therefore rejected all of UnipolSai’s arguments and concluded that the Covid-19 outbreak did constitute a ‘catastrophe’ under the terms of the Reinsurance Policy.
The “Hours Clause”
The key issue considered by the Court was identifying when the “individual loss” incurred by the original policy holder(s) occurred – if the individual loss occurred outside the relevant period of hours (in this case, 168 hours), it could not be included in the “Loss Occurrence” (as per the wording in the Hours Clause).
The Tribunal found that an “individual loss” occurred for the purpose of the “Hours Clause” when the nurseries were closed on 20 March 2020. This was despite the fact that the business interruption continued until the nurseries were allowed to re-open when the first lockdown restrictions were lifted, that being when ” indemnifiable business interruption loss within a nominated 168 hour period” [PARA REF.]. It followed that the loss which the insured continued to sustain afterwards would be aggregated with the loss sustained during the 168 hour period.
The Court again agreed with the Tribunal’s analysis, finding that “individual loss” first occurs when a covered peril strikes or affects insured property. Further, when the covered peril which strikes the property is the loss of the ability to use it (whether through damage to other property or premises or through a closure order as in this case) the individual loss occurs at the same point. The Court also considered it immaterial for these purposes how precisely the property is affected and by what type of peril occurs. The “individual loss” encompasses the entirety of the loss caused by the relevant peril (or to use the wording in the Reinsurance Policy in this case, the relevant catastrophe).
Finally, the Court held that “occur” in this case meant “first occur” so that what can be aggregated is individual losses which first occur during the relevant period here (the 168 hours or one week) even if the financial loss in question continues to develop over time after the 168 hours has expired.
Conclusion
Following a string of policyholder victories since Financial Conduct Authority v Arch Insurance (UK) Ltd & others, some insurers will no doubt breathe a sigh of relief following the Court of Appeal’s decision in this case. It is equally helpful that reinsured’s will be able to rely on a public judgment, given that reinsurance disputes are often resolved in confidential arbitrations.
Insurers are expected to pay an estimated £2bn in Covid-19 business interruption claims, in part as a result of the Courts’ various decisions on business interruption cover. But now that the Court has curtailed reinsurers’ chances of challenging claims paid by their cedants, it may relieve some of the potentially heavy financial exposures faced by paying insurers.