During the coronavirus (COVID-19) pandemic, it is important for policyholders to remember that key insurance principles, including the principle of aggregation in the United Kingdom, could make a significant difference to any claim on their policies.
With the United Kingdom in lockdown as of 23 March, it is no surprise that many are growing concerned about the economic effects of the pandemic. In particular, insurance policyholders are reviewing their coverage and considering what steps should be taken to preserve and pursue claims under their business interruption insurance.
Business interruption coverage has fast become a significant piece in the COVID-19 puzzle. Chancellor of the Exchequer Rishi Sunak made clear the importance of insurance coverage for businesses in light of the pandemic, urging that the Conservative government’s actions “will allow businesses to make an insurance claim against their policy.” The Association of British Insurers have also released a statement that emphasises the need for policyholders to review their policy wording:
A small minority of typically larger firms might have purchased an extension to their cover for closure due to any infectious disease. In this instance an enforced closure could help them make the claim, but this will depend on the precise nature of the cover they have purchased so they should check with their insurer or broker to see if they are covered.
Policyholders will need to analyse their policy wording in order to determine how best they may preserve a claim. The specific language of insurance policies will be scrutinised now more than ever. As part of this, it is important to consider age-old insurance principles that could have a significant impact on a claim. The focus in this LawFlash is the principle of aggregation.
Aggregation clauses serve to treat multiple separate losses as one single loss. This is possible where amongst those losses there is a unifying factor. What is so significant about aggregation clauses is the way in which they are drafted. The unifying factor can be expressed in a number of ways, with different combinations of language leading to wide-ranging outcomes.
The majority of aggregation clauses are constructed by reference to a unifying “event” or “occurrence,” or that the losses all derive from one “originating cause.” Many policyholders will encounter these terms as they come to scrutinise their policies, and below we consider the legal construction of those phrases.
It is important to remember that aggregation clauses are unusual in the sense that they do not, in isolation, benefit either the policyholder or the insurer. The party that benefits from an aggregation clause will be based entirely on the set of facts. Lord Hobhouse astutely sets out this idea:
[A]ggregation clauses may favour the assured or the insurer and . . . require a construction which is not influenced by any need to protect the one party or the other. They must be construed in a balanced fashion giving effect to the words used. Lloyds TSB General Insurance v Lloyds Bank Group Insurance  UKHL 48.
An aggregation clause could work to the policyholder’s advantage: Aggregating multiple losses could mean that a single deductible is payable. Absent aggregation, each loss could be subject to its own deductible. However, aggregation could work to the insurer’s advantage: If the policy has a “per loss limit,” aggregating multiple losses could result in the per loss limit being applied only once. Without aggregation, the insurer could have to pay out the per loss limit for each loss.
Carefully analysing each policy in the context of the facts will be critical to establishing the strongest position.
Event or Occurrence: Similar but Not Necessarily the Same
There is a substantial body of case law considering the meaning of a unifying “event” or “occurrence,” which are generally (although not always) seen to be synonymous. Evans LJ identified in Caudle v Sharp  three characteristics of an event in the context of reinsurance:
In determining what is considered to be an event, AXA Reinsurance (UK) Plc v Field  is considered the leading case. The court held that an “event” is something that happens at a particular time, at a particular place, in a particular way. This is in contrast to a “cause,” which is something less constricted and can include a continuing state of affairs.
The UK Court of Appeal in Scott v Copenhagen Reinsurance Co (UK) Ltd  considered this definition. Tensions in Kuwait in 1990 included Saddam Hussein’s seizure of the Kuwait Airways fleet. It was held that the loss of a British Airways (BA) aircraft, left isolated at Kuwait Airport, did not result from the same event as the loss of the Kuwait Airways fleet. The loss of the BA aircraft resulted from the military conflict that followed Hussein’s aggression, rather than the act of aggression itself, even though the location was the same.
An event and an occurrence are both broadly construed in terms of factors such as cause, locality, time, and the intention of the human agents, as per Kuwait Airways Corp v Kuwait Insurance Co. SAK (No.1) . However, an event and an occurrence may be considered as different. Whilst the loss of the BA aircraft and the Kuwait Airways fleet were not seen as the same event in Scott v Copenhagen, it was found that the loss of each of the 15 aircraft making up that Kuwait Airways fleet did derive from the same occurrence. This was because the aircraft were each effectively lost at the same place (Kuwait Airport), at the same time (immediately following the Iraqi invasion), and each as a result of Hussein’s intention to expropriate the fleet.
The meaning of “occurrence” was further discussed in the context of rioting in Indonesia in May 1998, in D P Mann v Lexington Insurance Co . One company owned a number of stores across Indonesia that sustained damage as a result of the two-day period of unrest. The insurer sought to limit its exposure to a single indemnity limit, which was stated to be “USD 5,000,000 per occurrence.” The UK Court of Appeal held that it would have been incorrect to aggregate the losses and consequently, the damage to each shop had to be treated as a separate occurrence (and therefore each had its own $5 million limit). This was because the term “occurrence” requires there to be a measure of unity of time and location, which could not be found in this instance, due to the sprawling nature of the riots that occurred over the two-day period.
Another common phrase used to outline the unifying factor for the purposes of aggregation is “original cause.” Contrasting to the narrow interpretations of ‘event” and “occurrence,” this phrase allows for a wider scope of losses to be combined.
Original cause was considered in the UK Court of Appeal decision Municipal Mutual Insurance Ltd v Sea Insurance Co Ltd . This judgment related to reinsurance contracts where a single limit of indemnity applied to “all compensation payable to any claimant or any number of claimants in respect of or arising out of any one occurrence . . . consequent on or attributable to one source or original cause.”
In this case, open-cast mining equipment was stored at the Port of Sunderland, and the port authority was held liable to compensate the owners for damage and theft that occurred over the course of approximately 18 months. The port and the equipment were subject to vandalism committed by various unconnected groups and individuals. The port authority’s lack of care to protect the equipment was found to be the consistent and necessary factor that allowed the individual acts of vandalism to occur, meaning that whilst those acts were separate occurrences, they were all attributable to a single, original cause.
The COVID-19 pandemic presents an unprecedented state of affairs for the insurance industry and the globe alike. As it stands, there is no direct authority considering an aggregation clause in the context of COVID-19. Decisions will need to be made with reference to the specific words in the policies at hand.
In the context of disputes over coverage, it is unclear how courts will resolve whether the pandemic should be treated as a singular event, occurrence, or original cause, or rather one involving waves of different outbreaks and therefore multiple events and occurrences. The pandemic began in Hubei Province, China, but this is a vast area and multiple infections may have occurred at once with different outbreaks and waves of outbreaks following in different locations.
Additionally, instead of focusing on the virus itself, it is possible to look for other causes of losses suffered by businesses. For example, some businesses faced interruption in the United Kingdom when the country first recorded cases. Some businesses were then ordered to close as a result of government mandates. Restaurants, pubs, and leisure centres, amongst others, were asked to close on 20 March 2020. But chains of restaurants sprawl the entire nation: here there could be challenges in proving locality of the losses.
Similarly, for businesses that have exercised discretion over when to close their doors, the situation is even more uncertain. The government’s Job Retention Scheme, more colloquially known as the furlough scheme, allows businesses the flexibility to reduce or suspend their operations whilst protecting the integrity of the business and supporting their employees. As a result, different branches across the country could have closed at different times and to different extents, depending on business need.
Many businesses will have also been impacted by other governments’ actions, beyond the mandates issued by the United Kingdom. Travel restrictions and lockdown measures have entered into force at different times across the globe.
Public health and safety remain of paramount importance at this time, with entire nations making sacrifices in order to keep communities safe. It is too soon to tell the full impact of COVID-19 on the insurance market, but it is clear that many insurance principles, such as aggregation, will be brought to the forefront as the market takes on this challenge, and the litigation that comes with it.
With all of this uncertainty, what we can be sure of is that there will be disputes arising out of COVID-19 in the insurance sphere. It is important for policyholders confronting significant COVID-19-related business interruption losses to confer with experienced coverage counsel who can advise on issues concerning aggregation and otherwise, so that they can consider the potential responsiveness of their coverage and preserve their rights.
We have experience assisting clients in assessing the potential responsiveness of their business interruption insurance coverage with respect to their COVID-19 related losses in the United Kingdom, the United States, and globally and preserving their rights for potential recoveries.
For our clients, we have formed a multidisciplinary Coronavirus COVID-19 Task Force to help guide you through the broad scope of legal issues brought on by this public health challenge. We also have launched a resource page to help keep you on top of developments as they unfold. If you would like to receive a daily digest of all new updates to the page, please subscribe now to receive our COVID-19 alerts.
Trainee solicitor Abbey Brimson contributed to this LawFlash.
If you have any questions or would like more information on the issues discussed in this LawFlash, please contact any of the following Morgan Lewis lawyers:
Scott T. Schutte
Harvey Bartle IV
Lauren A. McCulloch Semlinger