Aggregation in reinsurance

Aggregation remains a major issue in respect of the settlement of reinsurance claims. By its nature it is a difficult area, not least because the issue depends on the mathematics of the situation. Relevant factors include amounts of the deductibles, the upper limits of cover, the overall limits of cover, and the available reinstatements. 

In this article, Ling Ong, Partner and Mark Fitzgerald, Principal Associate briefly consider the most common methods of aggregation in reinsurance claims and the potential consequences of the recent Supreme Court's judgment in the FCA business interruption Test Case (FCA v Arch Insurance (UK) Limited and Others [2021]).

Aggregation

An aggregation clause governs what happens if there is more than one claim under the same policy in the same year. It enables two or more separate losses covered by the policy to be treated as a single loss for the purposes of the excess or deductible or the limit of liability.

Aggregation tends to be based on three main types of wording: event, occurrence or originating cause. 

In Caudle v Sharp [1995], the Court of Appeal decided that an “event” only arises if i) there is a common factor that can be properly described as an event; ii) which satisfied the test of causation; and iii) which was not too remote for the purposes of the aggregation clause.

Authority for what constitutes an “occurrence” comes from Rix J’s judgment in Kuwait Airways v Kuwait Insurance Company [1996] which decided that i) an “occurrence” is not materially different from an event or happening “unless perchance the contractual context requires some distinction to be made”; ii) however, an “occurrence” is not the same as a loss because one occurrence can embrace more than one loss. 

Kuwait Airways concerned the requisition of 15 Kuwait Airways aircraft by Iraqi forces following the invasion of Kuwait in 1990. Kuwait International Airport was seized and the 15 aircraft flown out in the following days. The insured claimed losses of US$692m. However, the policy contained a limit of US$300m for “any one occurrence, any one location”.

Rix J held that the loss of the 15 aircraft could be aggregated. He adopted the “unities” test developed in the 1972 Dawsons Field arbitration award which required there to be a unity of intent, cause, timing and location. 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.

Scott v Copenhagen Re [2003] was the sequel to Kuwait Airways. In addition to the 15 Kuwait Airways aircraft at the Airport, there was a British Airways plane present. Unlike the Kuwait Airways aircraft, the British Airways plane remained there and was eventually destroyed during Operation Desert Storm. The issue was whether the Kuwait Airways aircraft and the British Airways plane should be aggregated as one event.

Rix LJ decided that a significant causal link is required. On the facts here, it was difficult to say that the loss of the British Airways plane arose from the same event as the Kuwait Airways aircraft.  Multiple losses can be a single aggregated loss if they can be sufficiently linked to a single unifying event by being causally connected to it. Here, the loss of the British Airways plane did not arise from the invasion and did not arise from the same event as the loss of the Kuwait Airways aircraft.

Another way to aggregate losses is by reference to “originating cause”. In Axa Reinsurance v Field [1996], the House of Lords held that an event is something which happens at a particular time, at a particular place, and in a particular way. A cause is something less constricted. It can be a continuing state of affairs; or the absence of something happening. The word “originating” opens up the widest possible search for a unifying factor and has a much wider connotation. 

An aggregation on the basis of “originating cause” is wider than event or occurrence based wording.

FCA v Arch  

The Supreme Court decided that a disease such as COVID-19, which can spread rapidly, is not something that occurs at a particular time and place and in a particular way. Rather, it occurs at a multiplicity of different times and places and may occur in different ways involving differing symptoms of greater or less severity. Furthermore, the Supreme Court considered that the contraction of the disease by different individuals on different days in different towns and from different sources cannot be said to be one occurrence. The Supreme Court therefore concluded that those cases comprised thousands of separate occurrences of COVID-19 and as such, each individual case would amount to a separate occurrence.

These observations suggest that cedants with “event” or “occurrence” aggregation clauses in their reinsurance contracts may be less confident of their prospects of successfully presenting a single claim arising from their COVID-19 losses. 

Conversely, reinsurances with “originating cause” language will normally be construed as having a wider basis of aggregation.

Ultimately, the operation of any aggregation clause will depend on the wording. However, its application is not straightforward due to the prevalence of confidential arbitration clauses in reinsurance contracts and the fact that the territorial scope of many reinsurances is not limited to the UK.