Individual Claims or Serial Loss?
One or several insurance events — a question of major practical importance.
Nearly a quarter of a century has passed since 9/11 shook the world. In the subsequent legal processing of the terrorist attack, one question took centre stage — what insurance lawyers refer to as the serial loss issue. Were the attacks on the Twin Towers of the World Trade Center — the impact on the South Tower occurring exactly 17 minutes after that on the North Tower — one or two loss events for insurance law purposes?
Great significance — little discussion
Looking back, it is striking that the extensive media coverage and the various court proceedings at the time did not trigger any broad discussion of the serial loss issue in Switzerland. This remains true to this day. Although the serial loss issue is of enormous practical importance, the topic has received little academic attention, and virtually no published judgments of Swiss courts are available.
What is it about? A tax advisor misinterprets a new provision in a cantonal tax law. As a result, he gives incorrect advice in twenty cases, causing each affected client to suffer a loss in the form of additional tax assessments. The affected clients bring respective claims for damages ranging from CHF 10,000 to CHF 40,000. The tax advisor holds professional liability insurance. The policy provides for a coverage limit of CHF 1,000,000 per loss event and a deductible of CHF 50,000 per loss event.
A double-edged sword
Does the scenario described constitute one loss event, because the tax advisor made the same advisory error each time based on the same mistaken legal understanding? In that case, the total loss arising from his clients' claims for damages — less one deductible of CHF 50,000 — would be covered.
Or does it constitute a multitude of separate loss events, because the tax advisor breached his contractual advisory duties towards each individual affected client, independently of his contractual relationships with the others? In that case, the loss amount in each individual case falls within the deductible, and no insurance benefit is owed.
This fictitious, yet by no means unrealistic example reveals the relevance of the serial loss issue. A serial loss is a legal construct that treats a number of individual loss events as if they were a single loss event. In terms of insurance law, the various loss events — which typically also occur at different points in time — are treated as one loss occurrence with one temporal anchor point, namely that of the first loss event in the series. This is particularly significant when the liability insurer has changed and the individual loss events fall partly under the policy of insurer X and partly under the successor policy of insurer Y.
It is, incidentally, by no means always the case that the fiction of a serial loss works in favour of the policyholder. The opposite is equally conceivable. If, for example, the sum of several individual losses exceeds the agreed coverage limit for a single loss event, the coverage limit is available only once for the entire series. A substantial portion of the total loss may therefore remain uninsured.
In Germany — where, unlike in Switzerland, there are numerous published court decisions on the serial loss issue — courts have, for precisely this reason, been very reluctant to rule in favor of a serial loss. In particular, the German Federal Court of Justice hold in several decisions that a common source of error — the tax advisor's mistaken legal understanding in our example — did not suffice.
What does the policy say?
Ultimately, what matters is what the parties to the insurance contract have agreed. Modern professional liability policies contain carefully drafted provisions defining what constitutes a loss event and under what conditions, and with what consequences, several loss events may be aggregated into a serial loss. Policyholders would do well to pay close attention to these provisions, to analyse their own risk profile in terms of likelihood, frequency and potential magnitude of losses, and — if appropriate in consultation with their insurance broker — to evaluate the product that best suits their needs.
Insurers, for their part, are required upon receipt of a loss notification to carefully assess the serial loss issue, like any other coverage issue. Just as it is part of an insurer's business to pay covered losses, it is equally part of its business to decline payment of losses that are not covered.
In the case of 9/11, the competent courts in the United States ultimately found that for some insurers there was one event (with a coverage limit of USD 3.55 billion), while for others there were two events (with a coverage limit of USD 7.1 billion). It depended on the definition of the loss event in the respective policies.