Introduction

The case Unipolsai Assicurazioni Spa v Covéa Insurance Plc ([2024] EWCA Civ 1110) addresses pivotal issues in the interpretation of reinsurance contracts, particularly concerning business interruption (BI) losses stemming from the COVID-19 pandemic. Unipolsai, the appellant reinsurer, sought to overturn an arbitration award favoring Covéa, its reinsured, which claimed indemnity for substantial BI losses due to COVID-19 under a Property Catastrophe Excess of Loss Reinsurance contract.

The core disputes revolved around:

• Whether COVID-19 related losses constituted a single "catastrophe" under the reinsurance terms.
• The interpretation and application of the "Hours Clause" which limits indemnity to losses occurring within a specified time frame.

Summary of the Judgment

The England and Wales Court of Appeal, presided over by Lord Justice Newey and Lord Justice Popplewell, affirmed the lower court's decision dismissing Unipolsai's appeal. The court upheld that the COVID-19 outbreak in the UK, characterized by an exponential increase in cases in early March 2020, qualified as a "catastrophe" under the Covéa Reinsurance contract. Additionally, the court validated the interpretation of the Hours Clause, determining that individual BI losses occur at the point when the covered peril affects the insured premises, irrespective of the duration of the business interruption.

Analysis

Precedents Cited

The judgment extensively referenced key legal precedents to frame its interpretation:

• Stonegate Pub Company Limited v MS Amlin ([2022] EWHC 2548 (Comm)): Addressed the concept of "occurrence" in BI insurance, emphasizing objective interpretation based on a reasonable person's understanding.
• The FCA Test Case ([2021] UKSC 1): Provided foundational principles for contract interpretation, highlighting objective construction over subjective intent.
• Axa v Field [1996] 1 WLR 1026: Distinguished between "event" and "cause," influencing the understanding of unities in loss aggregation.
• Swiss Re International Se v LCA Marrickville Pty Limited [2021] FCA 1206: Explored the necessity of suddenness in defining a catastrophe, though its applicability was limited in this context.
• Various Eateries Trading Ltd v Allianz Insurance plc [2024] EWCA Civ 10: Reinforced the principle that claims, once triggered within the policy period, are indemnified irrespective of subsequent developments.

Legal Reasoning

The court's legal reasoning hinged on interpreting the term "catastrophe" within the reinsurance contract:

• Objective Interpretation: Consistent with The FCA Test Case, the judge emphasized an objective approach, considering what a reasonable person would understand the contractual terms to mean.
• Contextual Meaning: The absence of a defined meaning for "catastrophe" in the reinsurance contract necessitated reliance on dictionary definitions, market practice, and the specific contractual context.
• Coherence and Discreteness: The COVID-19 outbreak was deemed a coherent and discrete event causing systemic disruption, aligning with the definitions of catastrophe that involve significant adverse changes.
• Hours Clause Interpretation: The clause limits indemnity to individual losses occurring within a 168-hour period post-catastrophe. The court clarified that "individual loss" arises when the peril impacts the premises, not on a day-by-day basis, thereby preventing arbitrary division of losses over extended periods.

Impact

This judgment sets a significant precedent in the realm of reinsurance contracts, particularly in defining what constitutes a "catastrophe." Key impacts include:

• Clarification of 'Catastrophe': Provides a clearer understanding that large-scale, coherent events causing systemic disruption qualify as catastrophes, even if they unfold over several days.
• Interpretation of Hours Clauses: Reinforces that individual losses are tied to the onset of the catastrophe, not their duration, ensuring fairness and commercial sensibility in indemnity claims.
• Reinsurance Contract Drafting: Encourages reinsurers to draft clearer definitions and clauses to avoid ambiguities in interpreting key terms like "catastrophe" and "individual loss."
• Future Pandemic Responses: Offers guidance on handling BI claims arising from pandemics, which may involve prolonged business interruptions without direct physical damage.

Complex Concepts Simplified

Property Catastrophe Excess of Loss Reinsurance

This type of reinsurance provides coverage for large-scale losses that exceed a certain threshold (deductible). It is triggered by catastrophic events that cause significant damage or disruption to the reinsured's property or business operations.

Business Interruption (BI) Losses

BI losses refer to the loss of income and additional operational expenses that a business suffers due to a disruption caused by a peril covered under an insurance policy. This can result from physical damage to property or other non-damage-related disruptions.

Hours Clause

An Hours Clause in a reinsurance contract limits the scope of indemnity to losses occurring within a specified time frame (e.g., 168 hours) following a catastrophe. It prevents losses from being aggregated indefinitely, thereby controlling the reinsurer's exposure.

Ejusdem Generis Principle

A legal principle used in contract interpretation where general words following specific terms are interpreted to include only items of the same type or nature as the specific terms.

Conclusion

The Court of Appeal's decision in Unipolsai v Covéa provides critical clarity on the interpretation of "catastrophe" within reinsurance contracts. By affirming that the COVID-19 outbreak constituted a catastrophe and elucidating the operation of the Hours Clause, the court has set a robust framework for assessing similar claims in the future. This judgment underscores the necessity for precise contract drafting and highlights the balance between objective interpretation and commercial practicality in insurance law.

For reinsurers and insurers alike, this case emphasizes the importance of understanding contractual terms in their entirety and considering both market practices and the specific context in which these terms operate. As the landscape of risks evolves, especially in the wake of global events like pandemics, such judicial interpretations will be pivotal in shaping the future of reinsurance agreements.