Reinsurance In The Time Of COVID-19 ' Part 2

• Published date: 10 June 2020
• Author: Mr Sam Tacey and Benjamin Sharrock
• Subject Matter: Insurance, Coronavirus (COVID-19), Insurance Laws and Products, Reinsurance, Insurance Claims
• Law Firm: Cooley LLP

In part 2 of our blog series on reinsurance issues arising from COVID-19, we consider the difficulties that might arise from the application of aggregation clauses in reinsurance policies to COVID-19 losses.

Aggregation clauses are extremely common in reinsurance policies, and they are intended to allow two or more separate losses to be treated as a single loss for the purposes of a deductible or limit. Depending on the circumstances, such clauses may be of benefit to a reinsured (for example, to aggregate a large number of losses so as to exceed a deductible) or a reinsurer (for example, to aggregate several large losses, each of which would exceed the per occurrence limit of the policy, so that the limit is paid out only once).

The question of whether losses should be aggregated will depend on the contractual unifying factor set out in the relevant policy language. Here we consider the two main types of such unifying factors: occurrence or event based clauses, and cause or originating cause based clauses.

Occurrence/event clauses

There is no single standard wording for occurrence/event clauses, but typically, such clauses will state that indemnification will be provided under the policy for "each and every loss arising out of one event/occurrence", or words to that effect.

Over time, the courts have adopted a number of approaches to determining whether a particular "happening" can be considered an event or occurrence for the purposes of an aggregation clause. For example, in Caudle v Sharp [1995] CLC 642, Evans LJ stated that there were three requirements for something to be an "event" for the purposes of this type of aggregation clause, namely that: (1) there be a common factor that can be properly described as an event, (2) that event satisfies the test of causation, and (3) that event was not too remote.

Subsequently, what is known as the "unities test" has often been applied to determine whether the event in question is sufficiently connected to the loss(es) for the purposes of aggregation. The test was first articulated in the public domain by Mr Justice Rix (as he then was) in Kuwait Airways Corporation v Kuwait Insurance Co SAK [1996] 1 Lloyd's Rep 664, where he stated the "losses' circumstances must be scrutinised to see whether they involve such a degree of unity as to justify their being described as, or as arising out of, one occurrence. The matter must be scrutinised from the point of view of an informed observer placed in the position of the...