Insurance companies pay all sorts of claims that may not qualify for coverage under their reinsurance contracts. 1 Sometimes, it is because the individual claims are too small and do not exceed the insurance company's reinsurance retention on an individual loss basis.
Other times, multiple losses arise out of the same incident, and the insurance company's standard reinsurance contract has an aggregate limit or a limit on the number of losses that can be ceded from a single incident.
Insurance companies may try to remedy this situation by purchasing reinsurance that permits the insurance company to aggregate certain individual losses together as a single loss to qualify for coverage under the reinsurance contract. For example, insurance companies often purchase property catastrophe reinsurance protection for accumulated losses from hurricanes, wildfires, and other natural and manmade disasters, which allows them to aggregate a pool of smaller individual losses into one single loss or occurrence for reinsurance purposes that would not otherwise be reinsured.
When new types of losses arise, like those spawned by the novel coronavirus, the question of whether aggregation applies to those individual losses begins anew. As in most things contractual, it depends on the specific terms and conditions of the contract; in this case, the aggregation provision found in the operative reinsurance contract.
COVID-19 Losses and Catastrophe Coverage
The question of whether hundreds or even thousands of COVID-19-related losses can be aggregated together as one "loss" or "occurrence" for reinsurance purposes is one that both ceding insurers and reinsurers are pondering. This question is relevant because many individual COVID-19-related claims may be too small on their own to reach the attachment point of most property excess-of-loss or catastrophe reinsurance treaties.
Most property excess-of-loss and catastrophe reinsurance contracts contain provisions that allow for aggregation. For example, below is a typical clause.
The term "Loss Occurrence" shall mean the sum of all individual losses directly occasioned by any one disaster, accident or loss or series of disasters, accidents or losses arising out of one event which occurs anywhere in the world.
Additionally, most property excess-of-loss and catastrophe reinsurance contracts include an "hours" clause within the definition of "Loss Occurrence," which limits the loss to a specific, but limited, time period. For example, a common hours clause limits the loss to 168 consecutive hours.
The Relationship between Individual Losses
As seen above, many aggregation clauses rely on event-based language, which requires that the individual losses relate to each other temporally and spatially. For COVID-19-related losses, which span the country and have taken place over many months, the key question is what caused the underlying losses: was it a civil authority order, was it multiple civil authority orders, was it the novel coronavirus itself or COVID-19, or was it a series of losses separated by time and space that cannot be combined for reinsurance purposes?
Determining what individual losses can be aggregated and to how many events are complex issues. It depends on the reinsurance contract wording and, especially, the definitions used in the aggregation provision. A critical review of aggregation language will prepare both insurance companies and reinsurers for potential cessions of COVID-19 losses as one event.
The Definition of "Occurrence"
Aggregation clauses in reinsurance contracts are similar to provisions in insurance policies that allow for aggregation within the definition of "occurrence" or "accident." In other words, there are quite a few cases addressing whether a collection of individual losses is deemed "one occurrence" or "one accident" or "one event" in the direct insurance context.
For example, one Texas federal court identified three approaches for deciding whether losses arise from a single occurrence: (a) the causation view, (b) the effect view, or (c) the liability triggering view. Security Ins. Co. v. Lubrizol Corp., No. 1:06-CV-215, 2009 U.S. Dist. LEXIS 147818, at *13 (E.D. Tex. Aug. 27, 2009). The court found that the majority of jurisdictions apply the causation view. The jurisdiction will determine which test to apply. Because the majority of states apply the causation view, we will focus on that approach.
The Causation Approach
Under the causation view, the parties look at the cause of the damage or injury. Id. (finding that damage caused by contaminated dumping at one site resulted in only one occurrence); see Big Lots Stores, Inc. v. American Guar. & Liab. Ins. Co., 240 F. Supp. 3d 725, 732 (S.D. Ohio 2017) (stating that Ohio, like the majority of jurisdictions, applies the proximate cause test). Courts consider whether there is one proximate, uninterrupted, and continuing cause that resulted in all of the injuries and/or damages. Id. (citing Michigan Chem. Corp. v. American Home Assurance Co., 728 F.2d 374, 379 n.5 (6th Cir. 1984)).
If there is only one proximate cause, then there is only one occurrence. Id. (concluding that there were multiple incidents, explaining that each time Big Lots sold a defective torch, there was a "new exposure and another occurrence"); see Golden Eagle Ins. Corp. v. Moon Marine (U.S.A.) Corp., No. 3:12-cv-05438-WHA, 2013 U.S. Dist. LEXIS 197531, at *6 (N.D. Cal. Nov. 15, 2013) (after 25 people developed salmonella infections, the court said that "whether … the insured events arise from a single occurrence will depend on how the bacteria got into the fish in the first place" and thus whether there was a single proximate cause); see also Appalachian Ins. Co. v. General Elec. Co., 863 N.E.2d 994 (N.Y. 2017) (describing the proximate cause test as the "unfortunate event test," which asks "whether there is a close temporal and spatial relationship between the incidents giving rise to injury or loss, and whether the incidents can be viewed as part of the same causal continuum, without intervening agents or factors.").
Courts, however, have reached seemingly inconsistent positions on whether losses are attributable to a single cause when the injury or damage occurs at geographically separate locations. This can be seen in the context of environmental contamination claims. For example, in Argonaut Ins. Co. v. Travelers Ins. Co., 800 N.Y.S.2d 342 (N.Y. Sup. Ct. 2005), the court determined that pollution claims at 140 separate sites could not be aggregated as one occurrence. "The cause of the damages, in the case of any particular claim, was not the failure by [the insured's] management to implement environmentally sound, companywide procedures but, rather, the separate environmental pollution which occurred at the site involved in the claim." See Cadet Mfg. Co. v. American Ins. Co., 391 F. Supp. 2d 884 (D. Wash. 2005) (concluding that the release of trichloroethylene at geographically distinct sites are separate occurrences). In Sunoco, Inc. v. Illinois Nat'l Ins. Co., 226 Fed. Appx. 104, 105 (3d Cir. 2007), however, the court determined that in 76 of 77 lawsuits, there was "one proximate, uninterrupted and continuing cause which resulted in all of the injuries and damage" arising from a single occurrence because they arose from methyl tert-butyl ether contaminating groundwater, despite the damage occurring in different regions, from leaks in different pipelines.
Reinsurance Aggregation Provisions
Like all insurance policies, the language of each reinsurance contract needs to be scrutinized because aggregation provisions vary greatly. For example, a reinsurer may agree to pay the cedent "for each and every loss" in excess of the reinsurance contract's retention limit or aggregate deductible, with "each and every loss" defined as "all losses arising out of any one disaster, casualty, or occurrence." Other aggregation provisions use the term "event" in defining "each and every loss."
For example, "[t]he term 'each and every loss' as applied to 'any one risk' shall be understood to mean each and every loss arising out of one and the same event." Under these formulations, a hurricane should be viewed as "one disaster." See SEACOR Holdings Inc. v. Commonwealth Ins. Co., No. 06-4685, 2008 U.S. Dist. LEXIS 129346, at *1 n. 1 (E.D. La. Dec. 11, 2008) ("Both parties agree that an event such as Hurricane Katrina is considered a 'single occurrence.'").
Travelers Cas. & Surety Co. v. Certain Underwriters at Lloyd's of London, 96 N.Y.2d 583 (2001), is the leading case addressing aggregation under a reinsurance agreement.
Travelers involved two ceding insurers contending that pollution-related damages at several sites over several decades could be aggregated as a single casualty or event under their respective reinsurance agreements. Each reinsurance agreement had the same language and required the reinsurer to pay the cedent for "each and every loss," which was defined as "all loss arising out of any one disaster and/or casualty under coverage of any or all insureds of the Companies.…" Disaster and/or casualty was defined as the following.
[E]ach and every accident, occurrence and/or causative incident, it being further understood that all loss resulting from a series of accidents, occurrences, and/or causative incidents having a common origin and/or being traceable to the same act, omission, error and/or mistake shall be considered as having resulted from a single accident, occurrence and/or causative incident.
Both ceding insurers settled the pollution-related claims and then sought indemnification from their reinsurers as a single loss, arguing that the claims had a common origin or were traceable to the same act, omission, error, or mistake. The New York Court of Appeals held, as a matter of law, that the ceding insurers' single allocation of their settlements did "not fall within the ambit of 'disaster and/or casualty' in the reinsurance treaties." In other words, the losses could not be aggregated as a single occurrence under the reinsurance agreements. In making this assessment, the court found that the parties did not intend for the ceding insurer to simply group together all other losses into a single disaster and/or casualty but sought to allow aggregation only where the losses were linked spatially or temporally and shared a common origin. Neither complaint, held the court, contained any allegation that the sites bore a spatial or temporal relationship to each other.
The Travelers court addressed the famous House of Lords decision in Axa Reins. (UK) Plc v. Field, [1996] 2 Lloyd's Rep 233, which explained the difference between arising out of "one event" and arising out of "one originating cause." In that case, Lord Mustill found that the words "originating cause" opened up the widest possible search for a unifying factor, while the word "event" was something that happens at a particular place, at a particular time, and in a particular way. In other words, "event" language is narrower than "original cause" language. In Travelers, the court found that the words "a series of" required a spatial or temporal relationship among losses with a common origin. This only emphasizes the point that each reinsurance contract has to be construed based on its specific language.
What Does this Mean for COVID-19?
It is important to keep in mind that the aggregation issue is not limited to property catastrophe or excess-of-loss reinsurance contracts and business interruption claims. Insurance companies are paying many COVID-19-related losses under workers compensation, accident and health, general liability, directors and officers, production stop-loss, event cancellation, trip cancellation, professional liability, and other insurance policies. There are reinsurance contracts that, if purchased, allow for aggregation of those types of losses as well.
The bottom line is that when insurance companies pay COVID-19-related losses, if they cede a group of those losses on an aggregated basis as a single loss occurrence, reinsurers will need to scrutinize the language of their reinsurance contracts and carefully evaluate the basis for aggregating multiple losses as one loss occurrence.
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