Aggregation of catastrophe losses has long created waves in reinsurance markets.
Reinsurance contracts (especially property catastrophe covers) often rely on an “hours clause” designed to regulate recovery of multiple losses and bring certainty to the often difficult and contentious area of aggregation of catastrophe losses. The hours clause attempts to do this by stipulating a time period during which multiple losses arising from a covered peril can be recovered as a single aggregated loss under a reinsurance contract. Typically, the time period is fixed at 72 or 168 hours (although longer periods are becoming increasingly common).
Rather than bringing a sea of tranquillity to otherwise stormy waters, the hours clause can create waves of its own.
A standing assumption with an hours clause is often that they will only serve to restrict the coverage available. However, this is not always necessarily the case. Whether a clause of this nature might expand or restrict aggregation is heavily dependent on specific facts related to the covered perils that trigger a claim under a particular reinsurance contract.
How can an hours clause be expansive of coverage?
In some circumstances, an hours clause might allow a reinsured to aggregate multiple losses so as to recover from its reinsurers where otherwise this might not have been possible (owing to the particular excess level in a contract, for example) if the contract included restrictive aggregating language.
There has been much judicial comment on commonly used aggregating words in the English courts. Where a reinsurance contract allows losses to be aggregated where they arise from an “event” (or “occurrence”), a narrow interpretation to “event” has been adopted. In particular, the English courts have adopted the “unities” test when looking to identify whether an “event” has taken place. The “unities” test originally comes from Mr Michael Kerr QC’s award in 1972 in the Dawson’s Field Arbitration:
Whether or not something which produces a plurality of loss or damage can properly be described as one occurrence … depends on the position and viewpoint of the observer and involves the question of degree of unity in relation to cause, locality, time, and, if initiated by human action, the circumstances and purposes of the persons responsible …
An example of the “unities” being applied restrictively is the Aioi –v- Heraldglen appeal from the determination of an English arbitration tribunal that the attacks on the World Trade Center were two “events”. In that case, the English court felt there had been no error in the tribunal determining that there was no unity of time or place that would have allowed the attack(s) to be considered a single “event”:
- There were “… clearly similarities in the timing of the events from the commencement of the flights to contact with the Towers but these were not such as to lead to the conclusion that there was either one occurrence or two occurrences arising out of one event. So far as timings were concerned there were two occurrences and two events: infliction of personal injury and death started in the case of each aircraft shortly after they were hijacked and continued until at least the collapse of each of the Towers …”.
- The facts that “ … the Twin Towers were located in close proximity to one another and were part of a single property complex did not give rise to a sufficient degree of unity … to conclude that there was a single occurrence or two occurrences arising out of one event.”
The inclusion of an hours clause is, therefore, one way which parties might choose to expand the basis of aggregation under a reinsurance contract.
How can an hours clause restrict coverage?
Loss scenarios, which are far from hypothetical or contrived, exist which would result in a traditional hours clause potentially restricting cover under a reinsurance contract.
If separate “events” (as that word is interpreted in English reinsurance law) occur from perils covered by an hours clause, losses arising from each individual event might exhaust layers of reinsurance cover. An example might be where a storm damages property in two distinct geographical locations on two different days (six days apart).
In these circumstances, a reinsured could, potentially and depending on individual contract terms, make two recoveries (in full) whilst bearing two retentions in the absence of an hours clause.
Inclusion of an hours clause might limit the reinsured’s recovery if it stipulated losses caused by storm within a 168 hour period are to be treated as a single loss for the purposes of reinsurance.
Construing Hours Clauses
There is no case law on how hours clauses are to be construed under English law.
In two recent English Court decisions, concerning the liability of a reinsurer taking a retrocession of risk arising from original property insurance of Tesco for Thailand flood losses, an hours clause was discussed in the context of both determination of preliminary issues and a summary judgment application.
Tesco’s property insurance policy contained an hours clause deeming all loss, damage or destruction within 72 hours to have been caused by a single “Occurrence”.
The term “Occurrence” was, however, also defined within the same policy to mean “any one Occurrence or any series of Occurrences consequent or attributable to one source or original cause”.
Novae, as reinsurer, sought to contest the underlying settlement of Tesco’s claim on the basis that the 32 days of loss, damage and destruction was a single Occurrence because it arose from a series (of Occurrences) attributable to one source or original cause (heavy monsoon rains), rather than eleven separate Occurrences (by application of the hours clause). Novae was held to be bound by the underlying settlement for this purpose, so the Court did not have to determine the issues of construction relating to the hours clause.
These decisions do however demonstrate that an hours clause will be construed within the entirety of the wording within which it is contained. If that wording contains, elsewhere, a definition of the term of aggregation used within the hours clause (such as the term “Occurrence” in this case) then there is obviously the potential for the commercial rationale of the hours clause to be undermined. In this case, the separate definition of the term “Occurrence” arguably did this by deeming a series of Occurrences attributable to one source or original cause to be a single Occurrence.
Brokers and underwriters need to think carefully about whether an hours clause in any particular reinsurance catastrophe contract is going to, potentially, restrict or expand the coverage available for any possible peril in light of the wording of that contract, the layer for which it applies and whether reinsuring or placing reinsurance. Attention also needs to be paid to the entire wording to ensure that any hours clause is not, potentially, being deprived of its intended commercial effect by other provisions in the wording such as definitions of terms of aggregation (such as the terms “occurrence” or “event”) or an extended expiration clause that is not a “good fit” with the hours clause.