In “UnipolSai Assicurazioni SPA v Covea Insurance PLC,” the UK’s Court of Appeal affirmed that Covea Insurance PLC, as the reinsured, is entitled to indemnity under its property catastrophe excess of loss policies for substantial payments made in response to COVID-19 business interruption (BI) claims.
This ruling, based on policies with various reinsurers, clarifies the interpretation of aggregation clauses and the definition of "catastrophe" in treaty reinsurance agreements, according to insights from Fenchurch Law.
The case centered on claims arising from the closure of children’s nurseries insured by Covea between March and July 2020 due to the pandemic.
According to Fenchurch Law, reinsurers appealed the first-instance decision on two key questions: whether COVID-19 constituted a “catastrophe” under the terms of the reinsurance contract and how losses should be aggregated under the “Hours Clause.”
At first instance, Justice Foxton found that COVID-19 met the definition of a “catastrophe” under the reinsurance wording. Reinsurers argued on appeal that a catastrophe must involve a sudden or violent event capable of causing physical damage, a condition they claimed the pandemic did not satisfy.
The Court of Appeal disagreed, stating that the policy did not explicitly require a catastrophe to involve a sudden or violent event. Drawing on the “Axa v Field” unities test, the court noted that a broad application was appropriate and that suddenness was not universally required.
The rapid escalation of COVID-19 infections in the UK constituted a disaster of sudden onset. Furthermore, the court rejected the reinsurers’ assertion that physical damage was a prerequisite for a catastrophe, referencing evidence that BI policies often cover non-damage-related losses.
Fenchurch Law noted that the decision reflects the flexibility courts may apply when interpreting broadly worded reinsurance contracts.
The Hours Clause, which governs the duration of “Loss Occurrences” for aggregation purposes, required the court to determine when a loss first occurred. Reinsurers argued that losses outside the stipulated 168-hour period could not be aggregated, while Covea maintained that all financial consequences of a BI claim should be included once the covered peril occurs.
The court upheld the first-instance finding, ruling that for BI claims involving the loss of the ability to use insured premises, the relevant loss occurs at the moment the financial impact begins, regardless of its duration.
The court rejected an approach that would require apportioning financial losses over time, citing practical difficulties and inconsistency with policy language. This interpretation aligns with earlier rulings in “Stonegate” and “Various Eateries,” confirming that financial consequences of losses sustained during the indemnity period remain covered.
Fenchurch Law emphasized the significance of this interpretation for policyholders, as it ensures that once a BI loss falls within the indemnity period, its total financial impact is recoverable, simplifying claims processing and reducing disputes over loss allocation.
The ruling has substantial implications for the insurance industry, particularly for cedants with similar reinsurance arrangements. According to the Association of British Insurers, total payouts for COVID-19 BI claims are estimated at £2 billion.
The decision provides clarity on aggregation and coverage for BI losses and serves as a rare example of a judicial precedent in reinsurance disputes, which are often resolved through confidential arbitration.
While the decision is expected to benefit cedants seeking to recover COVID-19-related payouts, Fenchurch Law highlighted that it also underscores the importance of clear drafting in reinsurance agreements to avoid ambiguity in the interpretation of key terms like “catastrophe” and “Loss Occurrence.”
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