Covid 19 – legal issues for reinsurance collections in the London and European Market

The insurance industry in London and internationally has been coping with the mass of insurance claims arising out of the Covid-19 pandemic.  In the UK, the industry regulator, the Financial Conduct Authority (FCA), used its powers last year to bring an action against a number of Insurers who were denying business interruption claims from small businesses forced to close during the lockdowns in the UK in 2020.  The Supreme Court issued a speedy judgment in January 2021 which was broadly favourable to the recovery of business interruption claims from the small business community, although the slow speed of payment to Insured businesses has been criticised recently.

But the legal issues for the insurance industry did not end with the Supreme Court judgment.  The larger UK and European Insurers now have to seek to collect their huge losses from their own reinsurance programmes, and in some cases this is not going to be straightforward. 

The hurdles for recovery can arise from lack of clarity in the different reinsurance policy wordings.  Not only do Insurers need to be able to aggregate individual underlying claims to make recoveries in excess of loss reinsurance programmes but they have to show that the losses are covered under the particular reinsurance wording. 

Some programmes will look to aggregate losses arising from “one event”.  Those contracts will have the benefit of extensive English case law dealing with the meaning of “event” in reinsurance contracts.  Insurers will still have to show causation, that the “event” led to the losses claimed.  There are concerns about whether a “pandemic” is an event at all, or whether it is the action of governments which is the “event” in question.  Other reinsurance wordings may aggregate based on losses arising from an “originating cause” or a “single cause” or “one catastrophe”.  While there is also helpful English case law on the meaning of “cause” in reinsurance aggregation wordings, there is no assistance on whether, in the context of reinsurance, Covid-19 is a “catastrophe”. And some reinsurance programmes distinguish between coverage for “Natural perils” only, giving rise to the question – is Covid-19 a “natural peril” when the expectation of the market is that natural perils are natural events like earthquakes and windstorms?

These are live issues for the insurance and reinsurance market and some will be decided under the confidentiality of arbitration proceedings but others may well emerge through decisions of the English Court. What is clear is that reinsurers in London and Europe have difficult legal questions to consider when assessing their liability to meet the Covid-19 reinsurance claims.

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Contributing Advisors