Insurance ABCs exposed

By Resolve Editor Kate Tilley

Well-known presenter Professor Rob Merkin explored the ABCs of insurance – aggregation, business interruption and causation – in a presentation to the NZILA conference in Wellington, New Zealand.

Professor Merkin is Professor of Commercial Law at the University of Reading in England, a consultant to Wellington-based law firm Duncan Cotterill, and is currently consulting to the NZ Government on reforming NZ’s insurance law.

He told NZILA delegates aggregation’s two functions were to determine how many deductibles an insured had to bear and how many limits of indemnity they could recover.

He distinguished between events and occurrences – the what – and the cause – the why.

Event and occurrence meant something that happened at a particular time and place and in a particular way. There must be:

a happening
capable of being described as an event
losses that are closely connected by time, location and motive
a causal link between the event and the losses, and
a lack of remoteness between the event and the losses.

Series clauses

“So, an outbreak of Covid in Wuhan, for whatever reason [be it] half-cooked bats or labs, is an event. But it’s too remote from losses that occur six months later in different jurisdictions.”

Professor Merkin said there was increasing use of series clauses that aggregate all losses arising from a series of related events or causes. He noted a court finding on the Canterbury earthquake sequence where the policies simply said ‘series’ but did not say ‘related’. “The Court of Appeal said wrongly that the word series implied related. It doesn’t.”

Professor Merkin said business interruption (BI) had been “a mystery for many years”.

Key points were:

BI is rarely standalone and forms a section in a general property cover
The primary trigger for BI is physical loss of or damage to the insured property in the period of insurance
There is often a requirement that there has been a successful claim for property damage under the policy
There are secondary (often sub-limited) deemed damage extensions or triggers for, during the policy period:
disease on or near the premises
official closure because of an event on or near premises, or
official closure due to disease on or near premises.
The sum recoverable is loss in the indemnity period, which commonly runs beyond the duration of the policy itself.

Professor Merkin said the requirement for a successful property loss was because “if you haven’t got the money to repair your physical damage, the BI losses are going to carry on, which is why you limit BI recoveries to physical damage losses”.

Infectious diseases

Deemed damage clauses were generally invoked when there was a closure of premises by state or national authorities or an outbreak of something on or near the premises.

That could be an infectious disease, a burst water main, a bank robbery or a terrorist threat, which had to be in the locality.

Causation and the amount an insured received for a BI loss was dictated by the agreed indemnity period. “The loss has to be caused in the policy period and then run through the indemnity period. With Covid-19, “that’s really difficult” because of new mutations, government decisions, and other impacts.

Professor Merkin said causation was “basic … but really quite complicated”.

The principles were:

Any loss must be proximately caused by an insured peril
The test may be altered by express wording
If the loss is concurrently caused by an insured and an uninsured peril, the insured peril prevails
If the loss is concurrently caused by an insured peril and an excluded peril, the exclusion takes priority
The burden of proving an insured peril is on the insured and the insurers must then prove a defence
If the policy is all risks, the insured need only prove the loss.

Causation conundrums

Professor Merkin said: “The courts keep saying causation is not a gut feeling, it’s common sense” but he was uncertain on the distinction between those two things.

He cited several cases that caused “causation conundrums”.

InBrian Leighton (Garages) Ltd v Allianz Insurance Plc[2023] EWCA Civ8, a petrol station was shut down for health and safety reasons after a fuel leak. Allianz argued damage by pollution or contamination was excluded under the policy, and the High Court agreed. BLG argued damage was caused by a stone that ruptured a pipe and the exclusion applied only to environmental damage, not physical damage to the premises.

In a 2:1 majority, the Court of Appeal held that ‘caused by’ meant the proximate cause and, for the exclusion to apply, the contamination or pollution needed to be the proximate cause of the loss. While the chain of causation that led to the damage included pollution or contamination, the pipe being punctured was the proximate cause of the damage.

Controlled explosion

Another case was Allianz Insurance Plc v University of Exeter [2023] EWHC 630. An unexploded Hermann bomb, dropped by the Germans in 1942, was discovered in 2020 at the university. When the Navy conducted a “controlled explosion” it damaged one of the halls of residence and blew out neighbouring properties’ windows.

However, the Allianz policy had a war risk exclusion and the court said an 80-year gap was not enough to break the chain of causation. The case is on appeal.

Professor Merkin outlined aggregation issues in Discovery Land Company LLC v Axis Specialty Europe SE [2023] EWHC 779 (Comm).

A solicitor committed two frauds. One was embezzling money from the client, the other was embezzling money from the client’s lender. Axis had written the law firm’s PI policy.

Professor Merkin said: “Same transaction, different types of fraud. One event or two? The answer is two separate events.”

In Sky UK Ltd & Mace Ltd v Riverstone Managing Agency Ltd [2023] EWHC 1207 (Comm), Professor Merkin asked delegates whether they considered there was one or 472 deductibles.

Sky claimed about £200 million for the cost of remedial works to the roof at Sky Central, its global headquarters, which had Europe’s largest flat timber roof, comprising 472 prefabricated wooden cassettes supported on timber beams.

No temporary protection was provided during the English winter before the cassettes were waterproofed and they were substantially damaged by rainfall.

The insurers argued the damage to each individual cassette was an ‘event’. The court found there was just one event, the decision not to use a temporary waterproofing system when installing the cassettes, enabling water ingress during construction. Professor Merkin said: “That’s important, because decisions are now to be treated as events.”

His final comment on the case was: “When you screw up, it’s amazing how effectively you can do it.”