In this article we consider the Court of Appeal decision in Scott v Copenhagen Reinsurance Co (UK) Ltd [2003] EWCA Civ 688 which was handed down on 16 May 2003 and was described as something of a test case for the insurance market. The judgment considered the meaning of the words "arising from any one event" in the context of excess of loss reinsurance provided to the appellant Lloyd’s Syndicates by the respondent company.
Background facts
The original losses underlying the claim made by the appellant occurred as a result of the invasion of Kuwait by Iraq in August 1990. As soon as logistics allowed on the capture of Kuwait International Airport by Iraqi ground forces, as part of a premeditated plan on the part of the Iraqis, 15 aircraft belonging to Kuwait Airways Corporation (KAC) and attendant spare parts were flown to Iraq and incorporated into the Iraqi fleet. A British Airways (BA) Boeing 747 had also been captured on the ground at the airport by the Iraqi forces. It remained there and was eventually destroyed during Operation Desert Storm at the end of February 1991.
BA notified their brokers immediately the aircraft was captured but it was decided not to make a formal claim to underwriters at that stage because the aircraft remained intact. Underwriters were notified two weeks later that the aircraft had been restrained. By February 1991, in the absence of the return of the aircraft, BA were pressing for underwriters’ agreement to accept the claim. The aircraft was destroyed whilst the claim was being agreed by the lead underwriter’s following market.
Legal issue
The reinsurance slip issued by the respondent covered losses occurring during 12 months at 1st April 1990 for US$31 million excess of US$31 million each and every loss as defined which in turn was in excess of the appellant’s own specific excess of loss protections and incorporated the Joint Excess Loss Committee Clauses 01.01.90 with additional clauses, war included (the "JELC Clauses"). The relevant JELC Clauses read as follows:
"Loss" under this contract means loss, damage, liability or expenses arising from any one event or as described in section J …"
"J LOSS DESCRIPTION
Each and every loss or series of losses arising from one event." (Emphasis added.)
The issue before the court at first instance was whether the loss of: (1) the KAC aircraft; (2) the KAC spares; and (3) the BA aircraft arose from the same, or different events.
At first instance (see Scott v Copenhagen Re [2002] EWHC 1348 (Comm)), Langley J held that the KAC aircraft and spares were lost on the day the airport was captured and these losses were all losses "arising from one event", namely Iraq’s invasion of Kuwait and the capture of the airport. No appeal was made from this conclusion. However, Langley J held that the loss of the BA aircraft did not arise out of the same event. He did not define the event out of which the loss did arise, save possibly by reference to the cause of the loss which he attributed to "the actual destruction of the aircraft or the war or perhaps the inevitability of war".
The appellant appealed against this distinction, claiming that the loss of the BA aircraft arose from the same event as the losses of the KAC fleet and spares, after a "wait and see" period during which the fate of the BA aircraft was unclear, seeking to aggregate the loss of the BA aircraft with the other losses. The points of principle for decision by the Court of Appeal were:
(1) whether the link referred to by the phrase "arising from" required a strong or weak causal connection between the event and the loss;
(2) whether the date of loss in a "wait and see" situation went back to the date of the original loss of possession (here, of the BA aircraft) or forward to the date on which the possibility of recovery could be said to have expired;
(3) whether the "unities test" of time, place and intent was appropriate to an "arising from" clause, as opposed to the "one event" and "one occurrence" clauses to which the test had previously been applied (see, for example, Kuwait Airways Corporation v Kuwait Insurance Company [1996] 1 Lloyd’s Rep 664, a case dealing with the loss of KAC’s assets as described above and Caudle v Sharp [1995] LRLR 433).
The judgment of the Court of Appeal
The Court of Appeal unanimously dismissed the appeal. Giving the leading judgment, Lord Justice Rix resolved the above points of principle as follows:
(1) An "event" is to be distinguished from a continuing state of affairs (see AXA Re v Field [1996] 1 WLR 1026) and the words "arising from", although not requiring as strong a link in law as a proximate cause (see Caudle v Sharp), do require a relatively strong and significant link between the event and the loss.
(2) The loss of possession of the aircraft in August 1990 did not lead in the ordinary course of an unbroken sequence of events to its destruction in February 1991. The loss occurred in February 1991.
(3) The "unities test" was appropriate in this case and in relation to these clauses. In order to decide whether the KAC losses and the BA loss arose from one event, one had to consider all the relevant facts. That exercise could be assisted by considering those facts not only globally and intuitively and by reference to the purpose of the aggregation clause, but also more analytically, by reference to the various constituent elements of what makes up one single unifying event, being a unity of time, place and cause. Here, there was unity of place only. The passage of time between the losses and the intervening events which occurred, in particular the commencement of Operation Desert Storm, made it impossible to characterise the loss as arising from the invasion of Kuwait. Instead, it arose from the war to liberate Kuwait some months later.
The Court of Appeal thus held unanimously that the loss of the BA aircraft arose from a different event from the loss of the KAC aircraft and spares, meaning therefore that the losses were not aggregated under the policy.
Comment
The case was described in submissions by counsel as an important one for the insurance industry. In determining that there must be a relatively strong and significant link between the event and the loss to allow aggregation under the policy, and in applying the "unities" test to an "arising from" clause, the Court of Appeal has at least indicated a consistency of approach to differently worded clauses. If followed, this will allow the industry and its advisers some certainty in identifying the tests that will be applied by the English courts.
However, as the judgment itself makes clear, the outcome of such cases, which often have dramatic consequences for the relative exposures of the parties turns on the detailed facts of the circumstances giving rise to the loss. Thus, unfortunately but understandably, the judgment will be of limited assistance to the industry in predicting the outcome of the courts' examination of the facts of future cases and the application of the relevant test for aggregation.
Article by Tony Dempster, Gareth Thomas and Lynne Atherton