The UK test case judgment on business interruption has the potential to confuse the conversation around reinsurance responses to COVID losses, Guy Carpenter says.

The court decision adopted a narrow definition of a COVID occurrence, holding that each individual case is a separate occurrence, rather than the term applying to the UK pandemic as a whole.

A paper from Guy Carpenter Chairman David Priebe, Global Head of Distribution Lara Mowery and General Counsel and Chief Compliance Officer Michael Sevi says the decision doesn’t govern reinsurance, but how losses are aggregated under excess of loss (CAT XL) treaties affects retention and indemnity limits.

Some commentators have suggested that the definition of “occurrence” adopted by the court could have implications for reinsurance.

Guy Carpenter says CAT XL contracts are different and use the term “event” in a context that warrants a broad interpretation, while reinsurance dispute arbitrations, which look beyond the legalistic and take into account custom and practice, ought to prevent a “mechanical application” of the test case decision.

“The context and analysis of the test case decision demonstrate that it can’t answer reinsurance aggregation questions,” the paper says.

“To apply the court’s reasoning to reinsurance would risk defeating the very intent and purpose of CAT XL contracts, defy industry customers and expectations, and distort the language used in aggregation provisions.”