“Floods of the Century”: Can the Losses be Aggregated?

The floods resulted from heavy rain over a two week period, particularly during the course of 10 and 11 August, as a low pressure weather front moved northeast through Italy and the surrounding countries. Intense rainfall triggered flooding along the Vltava River in the Czech Republic which flows in to the Elbe in Germany and along the River Danube through Austria, Slovakia and Hungary. The floods are said (by some) to be the worst for 100 years.

One estimate of the losses arising from the floods is $21 billion for Germany, Austria and the Czech Republic alone. However, exposure to insurers and reinsurers is likely to be considerably less, given the number of uninsured losses (as flood coverage is generally optional in Europe, except for in former East German states where comprehensive household insurance is available) and the relatively small size of individual claims.

Notwithstanding the above, insurers with losses will no doubt be seeking to recover from their reinsurers. In a catastrophe excess of loss policy, the reinsuring provision will generally refer to a "loss occurrence" or alternatively, to an "event". It is usual in the property catastrophe context for a "loss occurrence" to be qualified by an "Hours Clause" which will allow aggregation of individual insured losses which are the direct result of a flood and occur within a period of 168 consecutive hours, or in the case of losses resulting from a rainstorm, a 72 hour consecutive period, provided that the flood or rainstorm in question can properly be described as a single "loss occurrence". In relation to flood losses there is sometimes a limit on aggregation of such losses to losses within the catchment area of a particular named river. As a result, many flood losses suffered in August 2002 in central and eastern Europe will be capable of aggregation under the Hours Clause in the applicable wording on the basis that they occurred within a 7 day period and on the basis of their geographical location to the relevant river.

On the other hand, even if the applicable wording does contain an Hours Clause, it will still be necessary for the reinsured to show that the relevant flood was a single "loss occurrence"; and if the terms "loss occurrence" and/or "event" in the reinsuring provision remain undefined, the judicial interpretation of these terms will be relevant.

The term "occurrence" has been subject to judicial scrutiny by the English courts and their approach was summarised by Rix J in Kuwait Airways Corporation v. Kuwait Insurance Co [1996]:

In the Kuwait Airways case, the Court was concerned with a war risks policy which imposed an aggregate limit for recovery of US$300 million for all losses arising from "any one occurrence", and the issue was whether the capture of fifteen aircraft at Kuwait airport in August 1990 was one occurrence or fifteen. Rix J. was of the view that the relevant "occurrence" was the successful invasion of Kuwait, incorporating the capture of the airport and with it the aircraft. His decision was based upon the facts that all the aircraft were lost on the same date from the same location, there was unity of cause of the insured peril ("seizure"), and unity of intent to capture all 15 aircraft.

In relation to the word "event", the Court of Appeal in B F Caudle v. Sharp [1995] stated that there must be a common factor which can be described as an event, which has a causative link with the loss suffered.

Further, the event must not be too remote from what a reasonable underwriter would have had in mind as a basis for aggregation of losses. Implicit in the Court of Appeal’s reasoning is that in order to qualify as an event, the common factor must be limited in time and space (for example the bursting of a river bank on a particular day) and it must be capable of producing legally relevant consequences. In Axa Reinsurance (UK) Plc v. Field [1996], the House of Lords distinguished between "originating cause" and "event" and held that an "event" is something which happens at a particular time, at a particular place, in a particular way, whereas a "cause" is something less constricted and could include a continuing state of affairs or the absence of something happening. Further, the House of Lords were of the view that the word "originating" had probably been chosen intentionally to open up the widest possible search for a unifying factor of the losses, so that the expression "originating cause" must have a much wider connotation than event.

The recent decision of the Commercial Court (Langley J) in Scott v. Copenhagen Reinsurance Co (UK) Ltd [2002] EWHC 1348 confirmed the congruence of the terms "occurrence" and "event".

Applying the English courts’ interpretation of these terms to the floods that were suffered in August 2002, it would seem likely that the manifestation of the low pressure weather front experienced on 10 and 11 August was the "originating cause" of the losses that followed, but more doubtful whether the low pressure system was sufficient of itself to be an "occurrence" or "event". Given that following the heavy rainfall of 10 and 11 August many rivers subsequently broke their banks, causing widespread flood damage in a number of different countries on various dates, the rainfall itself may not have had sufficient unity in time and place to amount to an "occurrence" or "event". As a result, there was probably more than one "occurrence" or "event" during August 2002, namely the separate floods occurring within a particular area.