UnipolSai Assicurazioni S.p.A v Covéa Insurance plc and Markel International Insurance Company Limited v General Reinsurance AG [2024] EWHC 253 (Comm)
Reinsurance contracts typically leave the word ‘catastrophe’ undefined, and what is or is not a ‘CAT’ is the subject of perennial speculation. This case – subject to any appeal – goes some way to settle these debates.
Markel and Covéa took out separate property reinsurance to cover their liabilities arising from nursery and childcare businesses. Each insurer paid out tens of millions of pounds in total to nurseries and childcare policyholders for Covid-19 business interruption (BI) claims.
The Covéa reinsurance was in three layers. The lowest layer had a deductible of “GBP 10,000,000 … Ultimate Net Loss each any every Loss Occurrence”. The contract defined ‘loss occurrence’ as “all individual losses arising out of, and directly occasioned by one catastrophe”.
Markel’s reinsurance was “in excess of GBP 10,000,000 any one loss and/or series of losses arising out of one Event”. The contract defined ‘event’ as “all individual losses arising out of, and directly occasioned by one catastrophe”.
Covéa and Markel, therefore, both needed to show they had incurred more than £10m “per catastrophe” to be able to claim from reinsurers. Neither reinsurance contract defined catastrophe.
Furthermore, both reinsurance contracts contained ‘hours clauses’. Covéa’s hours’ clause said that “no individual loss from whatever insured period, which occurs outside [a 168-hour period] shall be included in [a] “Loss Occurrence”. Markel’s hours’ clause said that “no individual loss from whatever Insured peril, which occurs outside [a 168-hour period] shall be included in [an] ‘Event’”.
Although these clauses were slightly different, the net result was that even if there was just one catastrophe, Covéa and Markel could only aggregate individual losses which ‘occurred’ within a 168-hour period.
Separate aggregation disputes arose under each reinsurance contract leading to arbitral awards which were appealed and dealt with in a combined judgment by Mr Justice Foxton.
Markel argued that “the [UK Government’s] order as necessitated by the pandemic was to be regarded as a catastrophe” and that the pandemic and the Government’s response to it could not be disentangled. Covéa argued that “the outbreak of Covid-19 in the United Kingdom, reflected in an exponential increase in the number of infections during a period up to and including 18 March 2020 [i.e. the date of the 18 March 2020 Order], was a ‘catastrophe’.”
The judge agreed with both cedants, holding that a catastrophe does not have to:
(a) cause physical damage, even where the reinsurance concerns property insurance (obviously important for non-damage BI cover);
(b) be a sudden or violent event or happening; or
(c) satisfy Mustill LJ’s “unities” test for an event from Axa v Field (“something which happens at a particular time, at a particular place, in a particular way”).
The judge also said that, although the true meaning of catastrophe is likely to be heavily dependent on the commercial and contractual context, in the context of these reinsurance contracts, a catastrophe should:
(a) be something capable of directly causing individual losses under the cover;
(b) be something which can fairly be regarded as a coherent, particular and readily identifiable happening with an existence, identity and “catastrophic character” which arises from more than the mere fact that it causes substantial losses;
(c) allow one to identify “in a broad sense … when the catastrophe comes into existence and ceases to be”; and
(d) involve an adverse change on a significant scale from the state of affairs which preceded it.
It will be interesting to see how this test fares under other CAT fact patterns in the future.
Reinsurers argued that even if there was just one catastrophe, under the relevant hours clause in each reinsurance contract, Markel and Covéa could only aggregate business interruption losses occurring over a 168-hour period – obviously much less than the total BI losses under the underlying policies.
Foxton J again disagreed with reinsurers. He held that business interruption losses “occur” when the insured peril “strikes or affects” the insured premises – which for the claims in question meant the individual BI losses “occurred” on the date the insured lost the ability to use the premises. In doing so, he overturned the finding of the tribunal in the Markel v Gen Re arbitration which had concluded that “it is natural to think that business interruption occurs day by day” and found there was reinsurance cover for the nursery and childcare provider BI losses even where policyholders’ loss of use continued for months after the 168-hours in the hours clauses expired.
Parties whose view of what does and does not constitute a catastrophe differs from Foxton J may want to consider defining catastrophe in their reinsurance agreements. Since the judge found BI losses occur on the “strike date”, reinsurers and cedants considering aggregation of BI losses may also want to check if any hours clause achieves their goals.
If you would like to discuss more on this topic, get in touch.
Andrew Schütte, Partner
Scott Harwood, Partner
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