Cleary: Reinsurers must brace for mounting Covid-19 disputes

As Covid-19-related losses creep their way up through reinsurance layers, “a number of issues” are beginning to arise and a new litigious battleground is forming. 

Speaking to The Insurer, DCThree Services’ Damian Cleary – the lawyer for Generali in Orient-Express Hotels v Generali – said he is aware of several reinsurers asking questions regarding “the purposes” of reinsurance coverage. 

“It’s easy to say, ‘well that depends on what the policy says’, and absolutely that is the case given the large variation of policy language used, but one or two of the points which I’ve heard about is whether, for example, the Covid-19 pandemic can be termed a ‘catastrophe’ for the purpose of recovering against property cat/XoL covers,” said Cleary.

According to Cleary, this will be determined by the particular definition of loss occurrences within the reinsurance contracts, focusing on whether the effect of Covid-19 is actually a continual loss or a sudden accidental loss and if, for the purposes of aggregation, hours clauses may apply.

“Let’s not forget that the market hasn’t experienced anything like this, so this is all new and reinsurance contracts have not evolved to contemplate that a pandemic may have the effects that it has done in the case of Covid-19,” he added.

Speaking to The Insurer on the final day of the Financial Conduct Authority (FCA)’s business interruption (BI) test case hearing at the UK’s Supreme Court of Appeal, Cleary said the possibility of the “highest court in the land” ruling to have a wholesale review on the the causation test for the purposes of insurance contracts is the key takeaway of the proceedings thus far.

“Proximate cause has always been our law here and the application of the “but for” test which I think everybody has now got rather familiar with over the last few weeks and months.

“I think the wishes of insurers is that they would much rather not have a wholesale review of the law on causation and I think they said that because in my own personal view, I don’t think they’ve addressed the issues as well they could and should have done and the FCA and very clever brains like Colin Edelman QC I think have grasped hold of this to their advantage,” he said. 

“Loose language”

On the arguments that were put forward by the FCA and insurers last week, Cleary believed the most compelling to be around the possibility of responsive clauses by the former and issues around policy triggers from the latter.

“Certainly from the FCA, they’ve come across a number of possible responsive clauses – what we call non-damage BI clauses – and there is an opportunity (and I’m not going to put it any higher than that) to have those clauses respond to the pandemic,” Cleary told The Insurer during a video interview.

“On the other hand, every insurer will say that nowhere in the policy does it say we’re going to cover you for the consequences of a pandemic. Well, it may not say that in terms, but we know that sometimes there can be some loose language in insurance policies and I think the FCA knows that and I think that is one of the principal reasons why they brought this test case to have a wholesale review of these clauses, hopefully to the benefit policyholders,” he said. 

Legal teams for the insurers are relying heavily on challenging how many of the business losses have been caused by the outbreak of Covid-19 or, in fact, by the general downturn in the economy as a result of Covid-19 while reviewing policy triggers, but Cleary believes this to be problematic. 

“I think they are two separate very important questions,” he said. “One is about triggering a policy and the second is how do you measure any indemnity and I’m afraid my personal view is that I don’t think insurers have done a very good job on addressing the measurement point and we’ll have to see what the Supreme Court says about that.”

Global impact of FCA test case ruling

Indeed, the FCA BI test case is not the only one taking place worldwide. A number of landmark decisions have been handed down in the past couple of weeks, including in Australia and South Africa, which have ruled against insurers and are, on the whole, following the FCA test case’s lead.

“There are many people who are watching this,” said Cleary. “I’m a great fan of English law and I suspect that most of the time we get it right and and I think some of the countries around the world whose laws are essentially based on English law, are leaning heavily on the FCA test case.”

Last week, the New South Wales Court of Appeal ruled against the industry in the BI test case brought by the Insurance Council of Australia on behalf of insurers.

Further to that, a South African court ordered Santam to pay the claims of a hotel group and a restaurant, in the country’s second unfavourable ruling for insurers in the two cases so far.

“Judges in that case [Ma-Afrika Hotel v Santam Limited] cut and pasted large swathes of the first instance decision in the FCA test case judgement and basically said we agree with it, so they are taking great encouragement, assistance and persuasion I think from what our courts are doing over here.”

Cleary added he believes it would be unlikely that those appeals would be heard before a judgment was handed down by the Supreme Court of Appeal in the FCA test case, which the industry might not receive until next year.

“I think it’s quite likely we’re going to get more than one judgment from the five judges and I suspect it is going to take some time,” said Cleary.

“I’m not expecting a judgment before Christmas – I think early January at the earliest. Hopefully we’ll get some clear guidance from the Supreme Court which the market can then use,” he concluded.