After Stonegate: Unpicking Covid-19 BI aggregation potential

Whilst the reinsurance market is likely to be starved of Covid-19 aggregation case law precedent due to its tendency to arbitrate disputes behind closed doors, it can do worse than to seek guidance from recent judgments at the direct insurance level. 

It would certainly be unwise to ignore those direct cases on the mistaken assumption that they have no relevance to the reinsurance context.

History shows that Courts and arbitral tribunals interpreting reinsurance contracts regularly rely on prior insurance judgments and vice versa.

Foundations from the FCA test case

In fact both the Divisional and Supreme Court relied on principles from reinsurance case law when they reached their rulings on key parts of the Test Case, which of course concerned direct insurance policies.

For example, the Supreme Court followed the Judgment of AXA Re v Field, a reinsurance case about aggregation, to confirm that the terms “event” and “occurrence” both describe something that happens at a particular time and place and in a particular way. The Judges did so despite being asked to consider these terms in the context of insuring clauses, rather than aggregation provisions.

The same Court also applied the aggregation concept of “originating cause” (again from AXA Re v Field) to its analysis of whether losses had arisen from insured perils.

In doing so, it created scope for those reinsurance parties with originating cause aggregation language to argue that the Covid-19 pandemic could be a unifying factor that could encapsulate losses that would not individually exceed a self-reinsured retention.

Distinctions between insurance and reinsurance contracts

Whilst the Courts and tribunals have demonstrated willingness to recognise similarities between insurance and reinsurance contracts, they can equally be expected to acknowledge relevant distinctions.

Insofar as aggregation is concerned, logic dictates that judges and arbitrators cannot require the link between aggregating factor and losses to be as strong in the reinsurance context as they might in the insurance context.

Reinsurance contracts will typically cover losses arising from multiple policyholders owning and operating multiple types of business in multiple locations; by contrast, insurance contracts typically cover a single policyholder operating the same type of business in a more confined geographical area.

For the same reason the time and spatial parameters of an aggregating “event”, “occurrence” or “cause” may not be decided to be as narrow in the reinsurance context as they might in the insurance equivalent.

Stonegate and the related judgments

In light of that background, the recent judgments of Mr Justice Butcher will be of particular interest to those in the market who have contracted on “event” or “occurrence” aggregation wordings.

These cases - Stonegate Pub Company Ltd v MS Amlin Corporate Members Ltd & Ors, Greggs Plc v Zurich Insurance Plc and Various Eateries Trading Ltd v Allianz Insurance Plc – all concerned well-known café, bar and restaurant chains seeking coverage for Covid-related business interruption losses under the prevalent Marsh Resilience wording.

The policyholders were generally arguing for no, or at least very limited, aggregation, which would entitle them to multiple limits of cover.

On the other hand, insurers contended for aggregation using several alternative arguments. If they were correct then the policyholder would receive the benefit of only one, or at least a very small number, of indemnity limits.

The wording included a provision allowing for the aggregation of multiple losses that “arise from, are attributable to or are in connection with a single occurrence”. Butcher J confirmed that the term “occurrence” was synonymous with the term “event” in this context, which (as stated above) according to AXA Re v Field denoted something that happens at a particular time and place and in a particular way.

He also recounted previous case law (at both the direct and reinsurance level) to establish the guidelines for determining whether losses could be aggregated under this type of wording.

This included consideration of whether the suggested “occurrence” was sufficiently concrete and whether the link between the aggregating factor and the losses was close enough considering factors such as geography, time and cause.

The judgements considered over twenty suggested aggregating occurrences by reference to those guidelines.

These included proposed occurrences based on virology (eg individual Covid-related viral genomes), individual cases of Covid-19, epidemiology (eg particular outbreaks of Covid-19) and, finally, governmental regulations (including theories based on individual regulations, sets of regulations and the package of measures as a whole).

The judgments decided that, in the direct insurance context at least, only the governmental regulation occurrences could have the aggregating effect contended for by insurers.

However, whilst the court was prepared to accept that UK-wide losses arising from the first lockdown measures could be aggregated together as a single loss, it did not allow aggregation of all UK-wide losses from all lockdowns based on the theory that the whole package of government measures and announcements constituted a single occurrence.

Essentially this was because it found that each of the devolved governments adopted their own varying measures following the expiry of the first set of restrictions in July 2020.

Comment

It is difficult to deny the relevance of the Stonegate judgments to event-based reinsurance contracts. Certainly, there is a very respectable argument that the aggregating occurrences accepted by Butcher J at the direct insurance level represent a “floor” for those seeking to aggregate losses at the reinsurance level.

The parties to the Stonegate judgments have been given permission to appeal and, as such, it may be that there will be further nuances introduced into the debate.

There will be some in the reinsurance market who might choose to wait the outcome of the appeal, or indeed of further case law which tries facts more closely resembling their own.

Nevertheless, Mr Justice Butcher’s guidance will be welcomed by others who are seeking to achieve pragmatic, commercial resolutions of disputes which could otherwise run on for years.

It may therefore be that the decisions will remove some blockage that has been caused by the uncertainty to date.

Simon Brooks is co-head of Global Insurance and Naz Gauri is principal associate at Eversheds Sutherland