Briefing

High Court considers meaning of ‘event’ in contingency excess of loss reinsurance treaties

In WRBC Corporate Member Limited v AXA XL Syndicate Limited and others,¹ the Commercial Court considered the aggregation of COVID-19 losses under two multi-line excess of loss reinsurance treaties, in the light of arguably conflicting uses of the terms “event” and “Any One Event” in different sections of the treaty wording. Reinsurance judgments are a relative rarity but this case represents the latest in a series of such judgments handed down by the English Courts recently.

Background

WRBC was reinsured under two excess of loss reinsurance treaties – both with materially identical terms – for the period 1 April 2019 to 31 March 2020. The treaties covered six classes of business: Fine Arts, Jewellers Block and General Specie; Contingency; Political Risks; Accident; Construction and Engineering; and Political Violence. WRBC, as insurer, settled a large number of claims for contingency losses made against it by various insureds. The claims were made in respect of conferences and similar events which were cancelled by the insureds as a result of measures imposed by the authorities in various locations due to the COVID pandemic. There were seven jurisdictions involved: the States of California, Colorado, Florida, Illinois, Nevada and New York in the USA, and England.

There were 174 individual losses in total, and for the purposes of its claim against reinsurers, WRBC aggregated all of the losses in each jurisdiction together, so that there were seven groups of losses. This was on the basis that all of the losses in each jurisdiction could be said to have been losses “arising out of one event” as set out in the relevant limits provision in the treaties, which referred to:

“each and every loss, any one risk, or each and every loss or series of losses arising out of one event“.

WRBC said that the “event” concerned here was the relevant measure, or group of measures, taken in each jurisdiction that caused the underlying conferences etc. to be cancelled. On that basis, each group of losses comfortably exceeded the relevant $1m deductible set out in the treaties.

Reinsurers, on the other hand, argued that the word “event” in the phrase “arising out of one event” did not refer to a causative event such as a COVID-related measure restricting or prohibiting large gatherings, but instead imported the definition of “Any One Event” contained in the Class Definitions section of the treaties. This read as follows:

“It is agreed that “Any One Event” is to mean any one Conference or Exhibition or convention or any other “Event” accepted by the Reinsured including the period of installation or dismantling and arrangements directly connected with the “Event”.“

On that basis, reinsurers argued that the relevant loss or series of losses were such losses arising from the relevant individual cancelled conference. If so, there could be no aggregation and the $1m deductible would need to be applied to each of the individual 174 losses claimed (most of which were below $1m). As a result, reinsurers said that WRBC was entitled to very much less than the approximately $61m that was claimed.

There was also a dispute between the parties as to how losses should be aggregated in the event that WRBC was correct on the interpretation of “event”. WRBC said that, within each of the seven jurisdictions, it was the same measure (or group of measures) which caused each of the individual cancellations. Reinsurers argued that in some cases the reason for the cancellation was not a measure at all, or it was a different measure from that which caused other cancellations within the same jurisdiction. On the reinsurers’ approach, additional $1m deductibles would be applicable, which would have diminished the sums due from them.

Neither party argued that the COVID-19 pandemic generally, or its original outbreak in Wuhan, were an “event” for aggregation purposes.

The issues

The issues to be decided by the Court were therefore twofold:

What was the correct interpretation of the word “event” in the limits clause of the treaties?

In the event that WRBC’s interpretation of “event” was the correct one, how should the 174 underlying claims be aggregated?

Decision

The construction issue

Waksman J concluded that on the basis of the textual analysis, WRBC’s interpretation of the word “event” in the limits clause was clearly to be preferred. In other words, “event” referred to an occurrence with a causal link to the losses claimed, as opposed to the meaning given in the “Any One Event” definition.

In coming to that conclusion, the Judge noted that cases of “pick and mix” drafting – where the contract uses a selection of different clauses without any attempt to ensure that the language is used consistently – were common in insurance contracts. In such cases, an inference that terminology has been used consistently throughout the contract “has little force”.² In those circumstances, it did not follow that where “event” was defined elsewhere, that definition must apply to the use of “event” in the relevant clause.

In addition, Waksman J noted that the phrase “arising out of one event” is a familiar expression in contracts of reinsurance, particularly where there are high deductibles which indicate that the contract was intended to respond to catastrophic events. This clearly shows that the “event” is a unifying factor with a degree of causative effect, and the use of the word “event” elsewhere in a different expression did not negate this. Moreover, the phrase “Any One Event” was not actually present in the limits clause, nor were the words “one event” capitalised. It was also the case that if the definition of “Any One Event” was deployed in the limits clause, there were various elements of contingency covered for which this would make no sense at all, including Confidential Life, Trade Name Restoration, Failure to Survive and Mathematical Prize Indemnity.

Reinsurers had also argued that the “Any One Event” definition would be redundant if WRBC’s interpretation was preferred. As to this, the Judge noted that one can and should treat such “surplusage” arguments with caution, particularly in circumstances where there were other linguistic and commercial considerations which supported WRBC’s interpretation, and also where certain clauses in the treaties may have been copied and pasted over the years without regard to consistency.

Contextual analysis

Notwithstanding his finding that the correct interpretation of “event” was already clear without the need for a contextual analysis, Waksman J nonetheless went on to consider the parties’ arguments on this. WRBC had argued that the submission documents prepared by the broker for both the policy year in question as well as for earlier treaties, and certain placement correspondence, showed that both parties understood that contingency losses were to be aggregated on the basis of a causative event. In summary, the Judge found that the understanding to be gained from the submission documents and relevant contemporaneous emails was that the treaties were structured so as to provide cover against catastrophic losses across all classes of business (including contingency), which supported the notion that there was to be event-based aggregation for all classes of business, as argued by WRBC.

The aggregation issue

On the question of aggregation, Waksman J considered the key principles established in relevant COVID-related case law and found broadly in favour of WRBC, allowing the vast majority of the 174 claimed losses and aggregating most of those losses with other claims in the same jurisdiction. The claims which were not allowed were those in which events were cancelled or postponed where there was no prior restrictive measure, or where the only measure relied upon was a declaration of emergency or similar.

Conclusion

Whilst this was a case that turned largely on its own facts, it should serve as a cautionary tale for insurers and insurance intermediaries alike regarding the use of “pick and mix” wordings. In circumstances where a contract uses a selection of different clauses copied from other contracts or from standard-form repositories, care should be taken to ensure that the contract makes sense when read as a whole. Otherwise, disputes as to conflicting interpretations of key policy provisions can easily arise (as happened here). We note that an appeal has been filed in the case, and so we wait to see the final outcome.

More generally, we have seen a higher than usual number of reinsurance cases decided by the English Courts in recent times. Such disputes are usually resolved by arbitration, which confers on the parties the benefit of confidentiality, but the increasing preference for arbitrating reinsurance disputes has also slowed the development of the law in this area. Whether we are witnessing the start of something of a trend in the reinsurance market’s preference for resolving disputes – away from arbitration as the default and towards litigation – remains to be seen, but it is something that will be monitored with interest.

Footnotes