Court of Appeal confirms Covid-19 was a "catastrophe" in first reinsurance claim to reach appeal

The decision of the Court of Appeal in Unipolsai Assicurazioni S.p.A. v Covéa Insurance Plc [2024] EWCA Civ 1110 has ruled in favour of the reinsured by confirming coverage under a Property Catastrophe Excess of Loss Reinsurance policy (the Reinsurance) for non-damage business interruption (BI) claims on the basis that the outbreak of the Covid-19 pandemic was a "catastrophe".

The Court of Appeal also found in favour of the reinsured on the operation of Hours Clause contained in the Reinsurance, by holding that the Hours Clause defined the extent and duration of the "Loss Occurrence" itself and not the duration of the individual losses flowing from it.  Therefore, consistent with the judgment of Butcher J in the Stonegate and Various Eateries cases, the reinsured was entitled to claim for all individual losses which were a direct result of premises closures that occurred within the 168 hour period.

BACKGROUND

Covéa Insurance Plc (Covéa) provided cover to policyholders running nurseries and childcare facilities. Covéa had paid out losses under various policies totalling over £90m as a result of the government closure of schools, colleges, and early years facilities in the UK from 20 March 2020 due to the Covid-19 pandemic. Covéa sought recovery from its reinsurer Unipol Re (the reinsurer), which denied the claim.

The dispute was initially heard by an arbitral tribunal. The reinsurer appealed that decision under s.69 of the Arbitration Act 1996 on the basis of an error of law. Foxton J in the Commercial Court dismissed the appeal and the reinsurer then appealed to the Court of Appeal.

This appeal raised two main issues:

1. Whether the Covid-19 losses arose out of and were directly occasioned by one "catastrophe" (the Catastrophe Issue). The definition of a Loss Occurrence under the Reinsurance was defined as:

"all individual losses arising out of or directly caused by one catastrophe"

2. Whether the effect of the Hours Clause in the Reinsurance, which confined the right to indemnity to individual losses within a set period, meant that the Reinsurance only responded to payments in respect of the closure of the insured's premises during the set period (the Hours Clause Issue).

GROUNDS OF APPEAL AND SUBMISSIONS

The Catastrophe Issue

The Tribunal and Commercial Court held that the exponential increase in Covid-19 cases in the UK during the weeks preceding the closure of schools and nurseries amounted to a large-scale national disaster which could properly be described as a "catastrophe".

The reinsurer's principal argument before the Court of Appeal was that the Covid-19 pandemic was merely a "state of affairs" rather than a single event or catastrophe within the meaning of the Reinsurance. The reinsurer also argued that a "catastrophe" must be a sudden and violent event capable of causing physical damage.

The Hours Clause Issue

The Reinsurance also contained an Hours Clause based on the LPO 98 wording. This clause provided that the term "Loss Occurrence" means all individual losses arising out of and directly occasioned by one catastrophe. In addition, the clause limited the duration and extent of any Loss Occurrence (relevantly) to "168 hours of any Loss Occurrence of whatsoever nature".

The reinsurer argued that only BI losses suffered during those 168 hours were indemnifiable under the Reinsurance.

Covéa argued that losses continuing beyond this period should still be aggregated if they originated from the same catastrophe. The Tribunal and Commercial Court agreed with Covéa.

COURT OF APPEAL DECISION

The Catastrophe Issue

The reinsurer argued that the word "catastrophe" meant something which: 

• is a species of "occurrence" or "event" (so must satisfy Lord Mustill's three "unities" as per Axa v Field [1996]), as opposed to being a mere "state of affairs"; 

• requires a sudden and violent event; and

• causes or is capable of causing physical damage to property.

The Reinsurance did not contain a definition of "catastrophe" and it was common ground that there is no special market definition or meaning, in contrast with "event" or "occurrence".

Is a catastrophe a species of event or occurrence which must satisfy the unities test (per Axa v Field)?

The Court of Appeal agreed with the Commercial Court and Tribunal that Lord Mustill's unities test was not applicable. The Reinsurance did not use the word “event” or use “originating cause”. Instead, the wording pointed strongly away from anything other than the most generous application of two of the unities, i.e. time and place. For example, the Reinsurance contemplated that something could have a duration exceeding three weeks and still be a catastrophe. Similarly, losses covered by the Reinsurance could have broad geographical limits (such as a country, town, or city), which suggested the catastrophe did not have to occur at a highly specific location.

The finding that the outbreak of Covid-19 was a "catastrophe" also involved an evaluative judgement on the facts as they were found by the Tribunal and did not involve an error of law, from which it follows that they could not be the subject of an appeal under s.69 of the Arbitration Act.

Does a catastrophe require a sudden and violent event or happening?

In the absence of a market-wide understanding of what constitutes a catastrophe, the Court of Appeal noted that the dictionary definitions relied upon both offered meanings of "catastrophe" which did not require suddenness. Instead, they emphasised the need for a significant break with the position up to that point and something which is seriously adverse in its nature or effects.

The Court of Appeal also considered the Reinsurance wording itself as being of particular significance, noting that the range of risks covered would not always be sudden or violent, including "collapses caused by weight of snow" and some types of flooding.

Must a catastrophe be something which causes or is capable of causing physical damage?

The Court of Appeal considered that the established market practice by the time the Reinsurance had been written provided strong support for the rejection of a need for physical damage. Many of the texts relied upon by the reinsurer in support of its position were now well out of date.

Further, the broad wording in the Hours Clause ("of whatsoever nature") meant that the clause was not intended to be limited to physical damage only.

The Court of Appeal considered that the Commercial Court's conclusion that the outbreak of cases of Covid-19 in March 2020 was a "catastrophe" was plainly correct.

The Hours Clause Issue

The reinsurer argued that the judge had impermissibly imposed the terms in the direct policy regarding the calculation of loss on the Reinsurance, which was a separate contract. They argued that "individual losses" were the losses sustained by any Covéa policyholders on a day-to-day basis, and that the function of the Hours Clause was to aggregate those losses and allocate them to a 168 hour "Loss Occurrence". The reinsurer contended that Business Interruption loss can occur only when revenue is in fact lost on a day-to-day basis and does not occur in its entirety at the time when the peril strikes.  

Does the same concept of "individual loss" apply to non-damage BI?

The reinsurer sought to distinguish between physical damage and non-damage BI cover when it came to whether the loss occurs when the peril strikes or only when the revenue loss is in fact suffered on a day-to-day basis.

The Court of Appeal, however, was not persuaded that there was any sufficient basis to distinguish between damage and non-damage BI losses. The term "individual loss" encompasses the entirety of the loss sustained by the original insured as a result of the relevant catastrophe striking the insured property, without differentiation.

When does an "individual loss" occur for the purposes of an Hours Clause?

The Court of Appeal was then required to determine when an "individual loss" occurs for the purposes of an Hours Clause.

Covéa argued that, for this purpose, "occur" here must mean "first occur", so that what can be aggregated is the individual losses which first occur during the relevant period, even if the financial loss in question continues to develop over time after the 168 hours has expired. An "individual loss" first occurs when a covered peril strikes or affects an insured premises or property.

The Court of Appeal rejected the reinsurer’s argument that business interruption losses occur day-by-day, finding that this approach was artificial and impractical, as it would involve “slicing and dicing” the net loss (which is unlikely to be linear) at the direct insurance level into small periods of time.

This analysis is consistent with the recent judgments of Mr Justice Butcher in Stonegate Pub Company and Various Eateries (covered in our blog post here) which reinforced that if the forced closure of a premises takes place within a period of insurance, an insured's recovery of BI related losses has a continuous effect (i.e. an insured can claim up until the point at which the premises reopened subject to any maximum indemnity period) irrespective of whether the period of insurance had expired.

Sir Julian Flaux C considered that the Commercial Court's analysis "cannot be faulted" and so that ground of appeal was also dismissed.

COMMENT

The Court of Appeal agreed that the outbreak of the Covid-19 pandemic was a "catastrophe" within the terms of the Reinsurance. Covéa was entitled to recover for all individual losses which were a direct result of premises closures that occurred during the relevant period, even if the financial loss continued to develop after that period had expired.

The Court of Appeal's decision provides useful guidance on Covid-19 BI losses in the context of reinsurance claims. In relation to the Hours Clause Issue, the decision builds on recent case law and helpfully clarifies the court's approach to damage and non-damage BI losses, and clearly defines the time at which an individual loss occurs (and the recoveries that can be claimed thereafter).

The Court of Appeal's finding in respect of the Catastrophe Issue is also significant, rejecting as it did the limitations which the reinsurer looked to incorporate into the concept, notably any requirement that it satisfied the Axa v Field "unities", was sudden or violent, or caused physical damage. The case also highlights the evolving nature of insurance risks and the importance of construing reinsurance terms in that context.

From a procedural perspective, it serves as a reminder that successful appeals under s.69 Arbitration Act on grounds that there has been an error of law are few and far between, and this decision does not add to that population.