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Reinsurance “catastrophes” and “hours clauses” – the Court of Appeal weighs in

Briefing
31 October 2024
7 MIN READ
2 AUTHORS

It is rare for reinsurance claims to make it into the English courts and a recent judgment of the Court of Appeal1 will be of great interest to both the insurance and reinsurance markets.

The reinsured provided direct cover to policyholders that ran children’s nurseries and childcare facilities in 2019/20 for COVID-19-related non-damage business interruption losses, and this case concerned the reinsured’s claim under its UK Property Catastrophe Excess of Loss Reinsurance in relation to those losses.

The relevant reinsurance agreement contained an “Hours Clause”, based on the LPO 98 wording, where the meaning of “Loss Occurrence” was: “all individual losses arising out of and directly occasioned by one catastrophe“.

The claim was arbitrated, and the resulting award appealed to the English Commercial Court under section 69 of the Arbitration Act 1996 (on a point of law, rather than fact). The case was originally joined with another arbitral appeal with remarkably similar facts and reinsurance wording; however, that case settled before the Court of Appeal hearing.

The two issues of law that were appealed under section 69, and which were further appealed with permission from the Judge at first instance (Mr Justice Foxton) to the Court of Appeal, were:

  1. Whether the COVID-19 losses were occasioned by one “catastrophe”; and
  2. The correct application of the “Hours Clauses” to non-damage BI losses.

Catastrophe 

Mr Justice Foxton found at first instance that a “catastrophe” in this context:

  • was not confined to catastrophes that cause or can cause physical damage;
  • did not require a sudden and violent event or happening; and
  • was not a species of “event” or “occurrence” that must satisfy the well-known unities test from Axa v Field (i.e., something that happens at a particular time, at a particular place, in a particular way).  The unities would only have the most generous application, if at all.

Foxton J did not set out a test or definition of catastrophe for all purposes, as the answer is likely to depend on the commercial and contractual context in which the term arises.  However, Foxton J did give the following guidance in this context:

  • a “catastrophe” must be something capable of directly causing the individual losses (as required by the Hours Clause);
  • it must be capable of being regarded as a coherent, particular and readily identifiable happening, with an existence, identity and “catastrophic character” that arises from more than the mere fact it causes substantial losses;
  • it should be possible to identify broadly when the catastrophe comes into existence and ceases to be;
  • there should be an adverse change on a significant scale from that which predated it.

Applying these factors, Foxton J decided that the tribunal were correct in finding that the outbreak of cases of COVID-19 in the UK in the period immediately before the closure of schools and nurseries on 20 March 2020 was a “catastrophe” within the meaning of the reinsurance policy. He also accepted that – even if there was a suddenness requirement – the exponential increase of cases of Covid-19 in March 2020 could qualify as “sudden” in this context.  The Court of Appeal confirmed that the Judge’s reasoning “cannot be faulted“.  It also rejected arguments that Foxton J had conflated the nature of cover under Property Catastrophe XL Reinsurance with Stop Loss/Aggregate XL cover or wrongly assumed the underlying direct policies could be read across into the reinsurance. 

Hours Clause

The reinsurer contended that, even if there had been a catastrophe, only business interruption losses during the first 168 hours stipulated in the Hours Clause could be relied upon when seeking an indemnity.

The Court of Appeal considered that the central question for the application of the Hours Clause was the point at which the relevant “individual loss” first occurs.  The judgment, which also followed both the tribunal and Foxton J’s reasoning, was that the “individual loss” first occurs when the covered peril strikes or affects insured premises or property.

The expert evidence before the tribunal and the Court, which was undisputed, was that market practice is to treat damage business interruption loss as occurring simultaneously with property damage.  The Court of Appeal agreed with the tribunal and the Judge that there was no basis for treating non-damage business interruption losses any differently. This is consistent with the analysis in the now well-known Stonegate, Various Eateries and FCA v Arch decisions.

Accordingly, the “individual loss” occurred at the time of the closure order and, for the purposes of the Hours Clause, this was the only date that mattered.  Irrespective of how long the losses are suffered, they can all be considered to flow from this “individual loss” first occurring. 

There was also found to be nothing in the specific Hours Clause to support an argument for any apportionment of the “individual loss”, such that only the first 168 hours would be indemnifiable, as argued by the reinsurer.

Comment

This case is the first time that the English courts have considered the meaning of “catastrophe” and the Court of Appeal decision therefore provides guidance for practitioners on the meaning of the term (although any future interpretation of the term will remain fact and policy specific).

It also confirms the market custom and practice of treating business interruption losses as incurred as at the date of property damage and “deemed damage” where some form of restriction has been put in place.

Footnote

  1. Unipolsai Assicurazioni SPA v Covéa Insurance Plc [2024] EWCA Civ 1110

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