Introduction

1. COVID-19 is the most wide-ranging epidemic for a century. The World Health Organization (WHO) established its task force in early January 2020. On 30 January 2020, WHO described the epidemic as a public health emergency of international concern (PHEIC). On 11 February 2020, the WHO named the disease COVID-19 (before then it was novel coronavirus) and on 11 March 2020, the disease was identified as a pandemic.
2. In a globalised economy and in a globalised world, the COVID-19 pandemic is unprecedented in its impact on commercial operations and on currency, equity, bond and commodity markets.
3. In these circumstances, where companies and individuals have lost revenue, profits and business, they look to their insurance policies for cover. The types of insurance policies under which claims may be made include Business Interruption, Event Cancellation, Political Risks, Trade Credit, Marine and Aviation, and the full range of Liability policies. Sitting atop all of these products are Reinsurance Policies.
4. Given the scale and depth of the COVID-19 pandemic and its global effect, one of the most pressing insurance and reinsurance issues is that of aggregation. To what extent can separate losses and claims be treated as one (aggregated) for the purposes of applying policy limits and/or deductibles?
5. Because aggregation may stand to benefit either the (re)insured or the (re)insurer, where the same aggregation language applies to both limits and deductibles in the one policy, aggregation clauses “are not to be approached with a predisposition towards either a broad or narrow interpretation”.
6. In order to consider the opportunities for aggregation, one must identify COVID-19 and analyse the governmental and commercial responses to it.

COVID-19

7. COVID-19 is a coronavirus disease. It is caused by severe acute respiratory syndrome coronavirus 2 (SARS-CoV-2).
8. SARS-CoV-2 belongs to the Coronavirus family: one of seven human pathogens and one of three causing a severe clinical syndrome, the other two being SARS-CoV and (MERS)-CoV. SARS-CoV-2 shares a substantial proportion of its genome with SARS-CoV.
9. In the midst of WHO’s designation of COVID-19 as a PHEIC on 30 January 2020 and the introduction of WHO guidelines, including for public health measures and infection control, certain national governments and agencies began to take steps to contain or delay the spread of the SARS-CoV-2 virus.
10. In early March 2020, the UK government introduced the Health Protection (Notification) (Amendment) Regulations 2020 (SI 237/2020), amending the Health Protection (Notification) Regulations 2010, which had the effect of classifying COVID-19 as a notifiable disease, e. imposing an obligation on registered medical practitioners to notify the relevant authorities of any suspicion that a patient has the disease. There were similar amendments in Scotland, Wales and Northern Ireland.
11. In mid-March 2020, the UK government gave advice on social distancing. This had an immediate impact on a number of commercial operations within the United Kingdom.
12. In late March 2020, the UK government required a large number of businesses to close premises and imposed restrictions on individuals’ movement. See Health Protection (Coronavirus, Business Closure) (England) Regulations 2020 (SI 350/2020).
13. Other national governments and agencies and, within a federation, state or provincial governments imposed similar restrictions at different times.

Aggregating language in policies

14. There are various means by which insurance and reinsurance policies permit aggregation. Aggregation can be achieved by requiring the parties to apply a single limit or deductible to a number of separate losses or claims where such losses or claims arise out of a single triggering “event”, “occurrence”, or “originating cause”. Other aggregating language is found, but these are the most common.

Event or Occurrence

15. The most common type of aggregation clause is one that groups losses or claims by reference to a single “event” or “occurrence”. These terms are usually interchangeable, but the context may dictate that they be given different meanings.[2]
16. An “event” or “occurrence” is something that happens “at a particular time, at a particular place and in a particular way”.[3] Thus, in Caudle v Sharp,[4] the Court of Appeal observed that while the Second World War, the Hundred Years’ War or the Ice Age might in common parlance be described as an “event”, they cannot be treated as such for the purpose of an aggregation clause in the insurance or reinsurance context, because an “event” requires “some causative element” and a “lack of remoteness” depending on the circumstances of the particular case. Evans LJ said that there are three requirements of a relevant “event”: (1) there was a common factor which can properly be described as an event, (2) that event satisfied the test of causation giving rise to the loss or claim, and (3) the event was not too remote for the purposes of the aggregation clause.
17. The “event” or “occurrence” in question need not be the peril insured against. Nor need it be the proximate cause of the loss; rather, “the causative link has to be a significant rather than a weak one”.[5]
18. In determining whether losses arise from a single event, the court will often apply the concept of “unities”, first introduced by Michael Kerr QC (later Kerr LJ) in the Dawson’s Field Award (29 March 1972) and adopted by Rix J in Kuwait Airways Corp v Kuwait Insurance Co SAK (No. 1).[6]The unities are those of cause, locality, time and the intention or motive of any human agents.
19. Kuwait Airways concerned the requisition of 15 aircraft by Iraqi forces following the invasion of Kuwait in 1990. The airport had been seized and the aircraft flown out in the following days. The insured claimed losses of US$692m. However, the policy contained a limit of US$300m “any one occurrence, any one location”. Rix J held that the loss of the 15 aircraft could be aggregated. Not only were all four unities present, but the nature of a war risks policy also made it appropriate to take a broad approach to the meaning of “occurrence”. Rix J was therefore willing to treat the successful invasion of Kuwait, incorporating the capture of the airport, as a single occurrence.
20. While the unities are a useful guide, they are not to be treated as an inflexible test. The Court will approach the matter from the perspective of the insured and scrutinise the circumstances “to see whether they involve such a degree of unity as to justify their being described as, or arising out of, one occurrence”. This involves an “exercise of judgment” to be conducted “globally and intuitively”.[7]
21. In IF P&C Insurance Ltd v Silversea Cruises Ltd,[8] an operator of luxury cruises was insured against loss of income resulting from government warnings regarding terrorism. This cover was subject to a “per occurrence” deductible of US$250,000. Following the 9/11 attacks, the US government issued a series of warnings to their citizens against travel abroad. The question arose how these claims should be aggregated. Tomlinson J observed that it would be “absurd” to treat individual government warnings as a separate occurrence, in part because it would be impossible to discern the causal effect of each warning on bookings. The judge equated “occurrence” with “event” and said:

“Where there are multiple warnings arising out of a single defining event, at any rate one of the magnitude of 11 September, it seems to me to accord with common sense and what the parties’ intention must have been to regard those warnings … as a single occurrence, since they all arise out of the same set of circumstances, both actual and threatened.”

Originating cause

22. The insurance or reinsurance policy may instead aggregate losses arising out of the same “originating cause”. This has a far wider reach, as Lord Mustill explained in AXA Reinsurance (UK) plc v Field: [9]

 “A cause to my mind is something altogether less constricted. It can be a continuing state of affairs; it can be the absence of something happening. Equally, the word “originating” was in my view consciously chosen to open up the widest possible search for a unifying factor in the history of losses which it is sought to aggregate. To my mind the one expression [originating cause] has a much wider connotation than the other .”

23. In Standard Life Assurance Ltd v ACE European Group,[10] the policy used the words “originating cause or source”. The Court said that “the words ‘or source’, as an explicit alternative to ‘cause’, can only have been included to emphasise yet further that the doctrine of proximate cause should not apply and that losses should be traced back to wherever a common origin can reasonably be found.”

Can losses or claims arising from COVID-19 be aggregated?

24. Very often, when considering issues of aggregation, the relevant event or originating cause can be quite localised. Indeed, on occasion the Court has been reluctant to extend the reach of an aggregating event too far.[11] Nevertheless, large-scale events can be an aggregating cause, such as a hurricane or an earthquake or the 9/11 attacks.[12]
25. What is the aggregating event or cause when it comes to claims emerging from the COVID-19 pandemic? Can all losses or claims arising from one global pandemic be treated as one loss or claim? If so, it would be a first.
26. Nevertheless, it might be said that it is a clear inter-connected occurrence – an infectious human pathogen with a global reach – and it is clearly identifiable as a cause.
27. On the other hand, it might equally be said that it is not the pandemic which is the cause but the governmental responses to the pandemic by closing business premises and restricting the movement of people. In IF P & C Insurance Ltd v Silversea Cruises Ltd[2004] Lloyd’s Rep IR 217, the Court could not distinguish between the 9/11 attacks and the US governmental response.
28. However, that may be too simplistic. The issue may depend on the impact of the UK governmental action upon each type of business or industry and on the location of each commercial operation. Further, the effect of each national government’s action (not just that of the UK government) may have to be distinguished.
29. In order to determine the prospects of aggregation, it would be necessary to consider all relevant factors, such as (a) the type of loss, damage or liability against which the insurance or reinsurance is affording protection, (b) the losses suffered by the insured, (c) the relevant industry or profession, (d) the nature, scale and location(s) of the business or network being insured, (e) the proximate and remote causes of the loss in question (g. the pandemic, the relevant governmental action, and the insured’s response to the pandemic and governmental action), and, of course, (f) the policy language.
30. Aggregation can have a very substantial impact on the sums recoverable by the insured or reinsured. While the case law provides guidance on aggregation clauses, parties will need to consider with care the above factors, in this novel and unfamiliar territory.

PETER MACDONALD EGGERS QC

pme@7kbw.co.uk

DOUGLAS GRANT

dgrant@7kbw.co.uk

7 King’s Bench Walk

Temple, London EC4Y 7DS

27 April 2020

The contents of this bulletin, current at the date of publication set out above, are for reference purposes only. They do not constitute legal advice and should not be relied upon as such. Specific legal advice about your specific circumstances should always be sought separately before taking any action based on this publication.

[1] AIG Europe Ltd v Woodman [2017] 1 WLR 1168, at [14].

[2] Midland Mainline Ltd v Eagle Star Insurance Co Ltd [2004] Lloyd’s Rep IR 22, at [75]; rev’d on other grounds [2004] 2 Lloyd’s Rep 604.

[3] AXA Reinsurance (UK) plc v Field [1996] 1 WLR 1026, 1035. In Midland Mainline Ltd v Eagle Star Insurance Co Ltd [2004] Lloyd’s Rep IR 22, at [97], the Court said that a decision or a plan cannot constitute an event or occurrence, as opposed to its promulgation and implementation.

[4] [1995] LRLR 433, 438.

[5] Caudle v Sharp [1995] LRLR 433, 439; Scott v Copenhagen Reinsurance Co (UK) Ltd [2003] Lloyd’s Rep IR 696, [63]. See also Simmonds v Gammell [2016] 2 Lloyd’s Rep 631.

[6] [1996] 1 Lloyd’s Rep 664, 686.

[7] Scott v Copenhagen Reinsurance Co (UK) Ltd [2003] Lloyd’s Rep IR 696, at [81].

[8] [2004] Lloyd’s Rep IR 217, at [66]; [2004] Lloyd’s Rep IR 696.

[9] [1996] 1 WLR 1026, 1035. See also American Centennial Insurance Co v INSCO Ltd [1996] LRLR 407; Municipal Mutual Insurance Ltd v Sea Insurance Co Ltd [1998] Lloyd’s Rep IR 421. By contrast, without the word “originating”, the Court might interpret the “cause” behind the loss or claim as a proximate cause, as the New Zealand High Court recently did in Moore v IAG New Zealand Ltd [2020] Lloyd’s Rep IR 167, at [52]-[58].

[10] [2012] Lloyd’s Rep IR 655, at [259]; [2013] Lloyd’s Rep IR 415.

[11] See, e.g., Mann v Lexington Insurance Co [2001] 1 Lloyd’s Rep 1 (a riot over two days in Jakarta was not one occurrence).

[12] Caudle v Sharp [1995] LRLR 433, 438-439; IF P & C Insurance Ltd v Silversea Cruises Ltd [2004] Lloyd’s Rep IR 217; Moore v IAG New Zealand Ltd [2020] Lloyd’s Rep IR 167.