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Aggregation of COVID-related claims in reinsurance

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Norwegian reinsurance arbitrations are not frequent, but Thommessen nevertheless participated in two such arbitrations during 2022. Both turned upon aggregation of COVID-related claims.

The two arbitrations Thommessen participated in during 2022 turned upon aggregation of COVID-related claims under;

  • travel insurance policies,
  • the reinsured's duty of disclosure, and
  • the reinsured's duty to "follow the settlement".

Both awards made references to Principles of Reinsurance Contract Law ("PRICL"), even though application of such was not specifically agreed upon in the reinsurance treaties.

Aggregation of travel cancellation losses related to COVID-19

We represented London market reinsurers in an arbitration brought by a Norwegian insurer under an excess of loss treaty i.a. covering losses sustained under personal accident insurances, with an addition of travel insurance policies. The claims allegedly to be aggregated were based on a vast number of cancellation losses due to a global travel advice issued by the Norwegian Ministry of Foreign Affairs ("MFA") in March 2020. The MFA travel advice was reasoned by the rapid spread of the coronavirus, both domestically and internationally.

The reinsurance treaty was governed by Norwegian law, though the arbitrators were requested to decide "primarily in accordance with international reinsurance custom". This is a usual "choice of law" in the reinsurance contracts we see in the Norwegian market, and in our opinion there is virtually no tension between Norwegian law and such reinsurance customs. This was also found by the arbitrators in the present case.

The aggregation language of this reinsurance treaty referred to "… all individual losses arising out of and directly occasioned by one catastrophic accident" (definition of "loss occurrence"). The core issue of the matter was if this wording responded to (and thereby provided a basis for aggregating) travel cancellation losses related to measures implemented by Norwegian authorities in response to the COVID-19 pandemic in the spring of 2020. In the interpretation and application of the reinsurance wording, the arbitral tribunal examined both Norwegian, English and Swedish cases, and concluded that there were no material differences of approach – the same essential principles of contract interpretation appear to apply under different laws.

The tribunal further found that as a matter of ordinary language, an "accident" is a particular type of event: it is an unexpected and typically sudden mishap which strikes without the intention of a protagonist, and it happens at a particular time, at a particular place and in a particular way. Furthermore, the tribunal found support in PRICL that "accident" is a type of "event", which is a narrower concept than another common term used in aggregation clauses, namely an originating cause of loss. Reference was also made by the tribunal to Axa v Field [1996] 1 WLR 1026, which concerned the contrast between these different types of aggregation wording.

By application of the wording "one catastrophic accident", the tribunal found that neither the Norwegian travel advice nor the pandemic as such could satisfy the test of an "accident". Government advice is not an accident, but a calibrated response to events to safeguard the populace as far as possible. The MFA travel advices evolved in line with the geographical spread of the virus, from specific regions to specific countries, and then on 14th March as a global travel advice. They were benign and attempted to prevent further spreading of the virus. Likewise, the pandemic as such is not an accident, but a widespread disease. It is not enough to say that the consequences of the advices and the gradual spread of the virus were catastrophic; all losses must also result from one "accident" within the meaning of the reinsurance treaty.

Furthermore, the tribunal rejected the application of the Norwegian Contract Act section 36 as argued by the cedant. According to this provision, a contract term may be set aside or amended if it would be unreasonable to invoke it. For a reinsurance treaty entered into with assistance from professional reinsurance brokers, this provision could hardly be applied under Norwegian law. The tribunal also held that the reinsurance treaty covered a broad palette of personal accident insurances, and a normal understanding of "accident" would therefore not make the reinsurance cover illusory. The reinsurance treaty may respond to losses in such other classes of business, and the reinsurance was therefore not an "unfit insurance" as alleged by the cedant.

Breach of duty of disclosure and the effect on reinsurers' liability

We represented a Norwegian cedant in a Norwegian arbitration against international reinsurers concerning duty of disclosure and application of a follow the settlement clause. This award is confidential, but some generic remarks on the principal legal issues may be given. On the issue of "follow the settlement", the tribunal confirmed the principles as stated by ICA v Scor [1985], PRICL article 2.4.3 as well as Norwegian legal literature on this issue. The tribunal thus found that reinsurers were obliged to follow the settlements of the cedant.

A more challenging issue concerned the cedant's duty of disclosure and potential breach thereof. Upon underwriting, misleading information was inserted in the information page of the slip, although other information in the same page of the slip contradicted the erroneous parts. When balancing the cedant's duty of disclosure against the reinsurers' duty of inquiry, the tribunal found that the duty of disclosure prevails as the threshold for imposing a duty for reinsurers to investigate further on the information provided by cedant is relatively high. References were made to Norwegian legal literature on the duty of disclosure in reinsurance, and to PRICL article 2.2.1.

In reinsurance, the traditional approach to a breach of disclosure duties have been that the reinsurance contract could be avoided. However, on the basis of Norwegian legal sources, the English Insurance Act of 2015, and PRICL article 3.2, the tribunal decided that a proportional legal effect of this breach was more appropriate. Furthermore, the reinsurance treaty stated that the tribunal may at its discretion also take considerations of equity and current reinsurance practice into account. Therefore, the tribunal made some consideration of that fact that the erroneous information was contradicted by other information in the slip, and determined that reinsurers liability should be reduced by a percentage, but not avoided. This is in our opinion in line with the current approach internationally to remedies for breach of disclosure duties in insurance matters. All cases will have their own merits, but some flexibility in determining the remedy for breach of disclosure duties appears to be part of the international reinsurance customs, as envisaged by PRICL article 3.2.

Thommessen's insurance practice

Thommessen's insurance practice has grown considerably over the last years, and we are pleased to be involved in many interesting contentious and regulatory matters. Insurance matters are best solved by drawing on specialist expertise. Our lawyers are intimately familiar with the market, and work closely with both insurance companies and policyholders in all types of insurance matters.

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