Covid-19 Business Interruption Ruling – Reinsurers must pay

The most recent judgment on Covid-19 Business Interruption was based on a reinsurance claim (Unipolsai Assicurazioni SPA v Covéa Insurance PLC, and Markel International Insurance Company Limited v General Reinsurance AG). 

The ruling concerned losses related to the closure of nurseries and childcare facilities due to Government enforced Covid-19 rules, and therefore their inability to trade. 

At the heart of the dispute was whether the circumstances of the Covid-19 pandemic and the later Government action constituted a catastrophe within the meaning of the reinsurance cover and whether the individual losses for ‘non damage’ business interruption were restricted to 168 hours (as specified in the ‘hours clause’ of the same cover). 

The court ruled there was a ‘catastrophe’ and the reinsurance was payable on both covers for the full extent of the individual losses.  

The decision has significant financial ramifications for insurers and reinsurers and it remains to be seen whether there will be a further appeal.  

Unipolsai Assicurazioni SPA v Covéa Insurance PLC, and Markel International Insurance Company Limited v General Reinsurance AG 

This case is the latest in the series of cases relating to “non-damage” business interruption losses resulting from the outbreak of the Covid-19 pandemic in the UK. This time it concerned a claim at the reinsurance level.

Background

The underlying losses arose from the denial of access to nurseries and childcare facilities, and their inability to trade, due to the UK Government’s Closure Order of 18 March 2020. 

The cedants, Covéa and Markel, sought to recover their losses from their reinsurers under Property Catastrophe Excess of Loss Reinsurance contracts.  In dispute was the following: 

1. Were the circumstances leading to the closure of the nurseries and childcare facilities a catastrophe within the meaning of the reinsurance cover. 
2. Did the “non-damage” business interruption losses of the original insureds cease to be reinsured at the end of the period of hours specified in the “Hours Clause” in the reinsurance cover. 

Catastrophe

This is the first time a Court has considered the meaning of “catastrophe” within a reinsurance contract. The Judge noted that a catastrophe possessed the following qualities: 

1. It need not cause physical property damage  
2. It does not require a sudden and violent event. 
3. It is distinct from an event and the “three unities” test of cause, place and time, which is typically used for ascertaining an aggregating event was not applicable, not least because the Hours Clause contained references to Loss Occurrences/Events with a broad geographical scope. 

The Judge refused to provide a test or definition for the meaning of “catastrophe” as he considered this ultimately depended upon its contractual and commercial context.  In this particular context, he said: 

• A catastrophe must be something capable of directly causing individual losses. 
• It must be a coherent, particular and readily identifiable happening with a distinct and catastrophic character. 
• It should be possible to identify when the catastrophe comes into existence and ceases to be (in contrast to a continuing “state of affairs”).  
• It involves an adverse change on a significant scale from that which went before. 

Accordingly, under Covéa’s reinsurance the Judge held that the outbreak of Covid-19 in the UK, reflected in an exponential increase in the number of infections during a period up to and including 18 March 2020, was a “catastrophe” within the meaning of the reinsurance cover.  

Under Markel’s reinsurance, the Judge held that the 18 March 2020 Closure Order and the “emergency of a devastating pandemic” with which it was “inseparably linked” was a coherent and discrete happening, with an existence, identity and “catastrophic character” independent of the fact that it caused substantial losses. 

Hours Clause

The operation of an Hours Clause in the case of, for example, a hurricane causing property damage is well understood. The Judge was not persuaded there was a distinction between “damage” and “non-damage” business interruption covers. He considered that the original insured’s inability to use premises through the denial of access (for whatever cause) could be regarded as inherently and immediately detrimental to the user of those premises and was therefore comparable with damage to property. 

That being so, the Hours Clause operated in the usual way to allow for the recovery of all business interruption losses that first occurred within the hours period (168 hours) of a catastrophe (in this case the emergency of the Covid-19 pandemic and the 18 March 2020 Closure Order) even though the business interruption losses continued after the 168-hour period. 

Comment

This judgment provides a useful reminder of the approach to be taken to the construction of clauses in market wordings, the regard to be had to the origins and history of evolution of particular clauses, and the admissibility of certain material and commentary from market practitioners in ascertaining the factual matrix in which they operated. Whilst in the 1960s and 1970s a reinsured’s property account may not have included non-damage perils, the Judge had no hesitation in concluding that a modern policyholder’s rights encompass the use of property and that the denial of access to insured property involves an interference with the original insured’s premises, the losses arising from which were apt to be covered by a Property Catastrophe Excess of Loss Reinsurance. 

This case took the form of a conjoined appeal from the decision of two separately constituted and highly distinguished arbitral panels and it was heard by David Foxton J, himself a highly regarded commercial silk at the (re)insurance bar. So, his judgment provides especially illuminating guidance on the meaning of catastrophe and the effect of an Hours Clause in non-damage business interruption covers. It will no doubt prove invaluable for cedant insurers in current cases where similar Catastrophe XL wordings are used, although it does remain to be seen whether the decision will be appealed given the very significant financial ramifications involved.