Insurance aggregation issues. Dave Newmann and Stuart Hill (Hogan Lovells International LLP) 18 th July Insurance aggregation issues

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1 Insurance aggregation issues Dave Newmann and Stuart Hill (Hogan Lovells International LLP) 18 th July Insurance aggregation issues Stuart Hill 2 1

2 Aggregation Something old, something new Stuart Hill 18 July 2014 Aioi v Heraldglen The review of an arbitration award Question: Were insurers' losses derived from the 9/11 attack on the Twin Towers caused by "One or more occurrences or series of occurrences arising out of one event" Tribunal found the losses were caused by two separate occurrences arising out of separate events 4 2

3 Arbitration Award "We are fully satisfied that the hijackings, consequent death and personal injury on board before contact with each tower, and then further death, injury and property damage consequent on the towers being separately struck constitute two separate occurrences which did not arise out of one event." (emphasis added) "An independent objective observer watching each of the hijackings and then death and personal injury on board would have concluded that there were two separate hijackings." "The same observer then hypothetically transported to the proximity of the WTC would have observed two aircraft flying into the Twin Towers and would clearly have in his mind two incidents" 5 Field J Tribunal was "entitled to find that there were two separate causes for the insured losses because there were two successful hijackings of two aircraft" (emphasis added) 6 3

4 What does it all mean? Part 1: Some History Dawson's Field arbitration award 6 Sept planes hijacked and taken to Dawson's Field in Jordan. Different airlines going from different airports but both going to New York 9 Sept A further hijack and a plane taken to Dawson's Field. Third airline involved. Plane on way to London 12 Sept All three blown up at Dawson's Field Award " the charges in all three aircraft detonated within a period of about five minutes and probably a shorter rather than a longer period. All three aircraft were certainly on fire at the same time and were destroyed by explosion and fire beyond repair within a timescale which anyone would measure in minutes and which was certainly less than ten minutes." 7 What does it all mean? Part 1 (continued) This was found to be: (i) A series of losses arising out of one event and (ii) Losses arising out of one occurrence and (iii) Losses arising out of a series of occurrences arising out of one event How? "Whether or not something which produces a plurality of loss or damage can properly be described as one occurrence therefore 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." 8 4

5 What does it all mean? Part 1 (continued) "... I have to approach the present problem by putting myself in the position of an informed observer at Dawson's Field on 12 th September 1970,... During this period he would have seen a multiplicity of actions and events including a number of separate explosions which destroyed the aircraft.... In my view there was one occurrence, one event, one happening, the blowing up of three aircraft in close proximity, more or less simultaneously, within the time span of a few minutes, and as the result of a single decision to do so without anyone being able to approach the aircraft between the first explosion and their destruction." (emphasis added) 9 What does it all mean? Part 2: how the courts have applied the unities Unities are a sense check of an intuitive reaction Is there a hierarchy of unities? (And, if so, what is it?) Is "event" becoming confused with what arises out of it? Scott v Copenhagen Re Find the event, then assess what arises out of it Find the event, and only things part and parcel of it are aggregated Where is the informed observer? The misunderstanding of the significance of a "plan" or "plot". 10 5

6 What does it all mean? Part 2 (continued) Put yourself in Lower Manhattan between 8.46 am and 9.03 am on 11/9/2001 ("A time scale which anyone would measure in minutes" the Dawson's Field award) Two towers: visually identical, known as a pair ("twins"): each is hit by a large airliner within the space of 17 minutes Did anyone say: What a coincidence? 11 Standard Life v ACE Standard Life Pension Sterling Fund ("the Fund") operated by Standard Life Assurance Limited ("SLAL") The Fund had been marketed to investors as the equivalent of putting money on deposit The Fund had itself invested in Asset Backed Securities ("ABS") During the financial crisis ABS became increasingly difficult to value SLAL used a new valuation methodology for ABS which produced a one-off fall in the value of the Fund 12 6

7 The facts of the case (continued) In the face of complaints SLAL took remedial action Turned to their professional indemnity insurers to recover the cost Had the remedial action disposed of one "claim" subject to a single deductible, or numerous claims, each of which was subject to a deductible? 13 The Aggregation Provision Clause 2 of the policy provided as follows: "All claims or series of claims (whether by one or more than one claimant) arising from or in connection with or attributable to any one act, error, omission or originating cause or source, or the dishonesty of any one person or group of persons acting together, shall be considered to be a single third party claim for the purposes of the application of the Deductible." What was said by the judge to be novel about the present case was that the aggregation provision permitted the amalgamation of claims arising "in connection with" an originating cause 14 7

8 The meaning of the Aggregation Provision Eder J concluded that the words "in connection with" allowed an even wider search for an aggregating factor than those "originating cause" provisions which had previously been judicially considered with the result that: "The phrase "in connection with" is extremely broad and indicates that it is not even necessary to show a direct causal relationship between the claims and the state of affairs identified as their "originating cause or source", and that some form of connection between the claims and the unifying factor is all that is required." 15 Originating Cause "The Gold Standard" "The widest possible search for a unifying factor" Has it just got wider? Significance of "in connection with one originating cause" Novel words? Indirect causal link? No causal link? 16 8

9 Where does Standard Life leave us? If you don't look for a causal link then where do you look? Is it just something, anything, the claims might have in common? Looks like it "Some form of connection between the claims and the unifying factor is all that is required" (emphasis added) "In every case the originating cause of the complaint has been that Standard Life marketed the fund as a safer investment than was in fact the case" Will "It's a Standard Life product" do? 17 Does it matter? Insureds will be happy But: What is "one claim" for a policy will determine scope of exclusions on a successor Insurers know what "originating cause" language sets them up for But: Aggregation operates not just for a claim but for a policy as a whole Is "the Global Financial Crisis" an "originating cause"? 18 9

10 Insurance aggregation issues Dave Newmann 19 The US Perspective on Aggregation 20 10

11 Helpful interpretive principles Part I [A]s many a curbstone philosopher has observed, everything is related to everything else. California Div. of Labor Standards v. Dillingham Const., 519 U.S. 316 (1997) (Scalia, J., concurring) 21 Helpful interpretive principles Part II At some point, a relationship between two claims, though perhaps logical, might be so attenuated or unusual that an objectively reasonable insured could not have expected they would be treated as a single claim under the policy. Bay Cities Paving v. Lawyers' Mutual Ins., 21 Cal. Rptr.2d 691 (Cal. 1993) (emphasis added) 22 11

12 Aggressive lending practices are related... Both of these Underlying Actions deal with allegations that have common facts, circumstances, situations, events, or transactions... namely IndyMac's failure to follow its underwriting standards and the resulting issuance of high risk mortgages. XL Specialty Ins. Co. v. Perry, 2012 WL (C.D. Cal. June 27, 2012) (emphasis added) Unless they re not. The fact that all loan losses arguably originated from one loan policy does not require finding only one loss where there were numerous intervening business decisions... W Holding Co., Inc. v. AIG Ins. Co., 2014 WL (D. Puerto Rico July 9, 2014) (quoting Eureka Federal Savings v. Gilliam, 873 F.2d 229 (9th Cir.1989))) 24 12

13 Aside: Financial crisis as an occurrence? IMG's argument throughout the trial, and again at oral argument on the post-trial motions, was that the alleged occurrence was a downturn in the economy leading to the developers abandonment of the project. IMG Worldwide, Inc. v. Westchester Fire Ins. Co., 2014 WL (6 th Cir. July 15, 2014) (emphasis added). 25 Sexual assaults over six years do not aggregate... Roman Catholic Diocese of Brooklyn v. National Union, 21 N.Y.3d 139 (N.Y. May 7, 2013) Multiple incidents of sexual abuse of same victim over several years = separate occurrences (plurality opinion). Applies unfortunate event test, requiring: Close temporal and spatial relationship; Same causal continuum Separate US$250,000 deductibles apply to each occurrence

14 ... But PCB contamination over 20 years does. Certain Underwriters at Lloyd's, London v. Southern Natural Gas Co., 2013 WL (Ala. June 28, 2013) Claim for PCB contamination of compressor stations on a natural gas pipeline. Contamination resulted from employees use of lubricating oil containing PCBs from 1957 to the early 1970s. Held: single occurrence. 27 How to reconcile outcomes? Policy language Broad related claims definitions in claims-made policies. Series loss language in occurrence policies. Scope of the underlying claim The broader the claims, the easier to aggregate. Follow the money Aggregation reduces retention and total coverage Impact on allocation 28 14

15 Latest Developments in US Claims 29 Securities Litigation Halliburton 30 15

16 Cyberliability 31 Construction Defect Litigation The Death and Resurrection of the Contract Exclusion 32 16

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