London Market - August 2010

Business Interruption, Causation, ‘But For’ Test

Orient-Express Hotels Limited v Assicurazioni General S.p.A (UK Branch) Trading as Generali Global Risk [2010] EWHC 1186 (Comm)

The claimant, Orient- Express Hotels Limited (“OEH”) owned a luxury hotel in New Orleans (the “Hotel”), which suffered significant wind and water damage due to Hurricane Katrina and Hurricane Rita in 2005.

The Hotel was forced to close during September and October 2005 and re-opened, although not fully repaired, on 1 November 2005. The area of New Orleans surrounding the Hotel was also devastated.  A mandatory evacuation of the city was ordered on 28 August 2005 and the city was not re-opened until the end of September 2005.

OEH claimed under its combined property damage and business interruption loss policy (the “Policy”) with the defendant (“Generali”).  There followed a dispute as to OEH’s right to indemnity for the business interruption loss under the Policy which was referred to arbitration.

The arbitration tribunal (the “Tribunal”) applied the “but for” test of causation and held that under the Policy’s Insuring Clause OEH could only recover in respect of business interruption loss which it could show would not have arisen had the damage to the Hotel not occurred.  This involved a hypothetical analysis of putting OEH in the position of “an undamaged hotel in an otherwise damaged city”.

The Tribunal held that even if the damage to the Hotel had not occurred, the Hotel would have still suffered the same loss, as the city was closed and no one would have been able to visit it.  It therefore followed that OEH was not entitled to an indemnity from Generali for business interruption loss under the Policy’s Insuring Clause.

OEH did recover an indemnity under the Policy’s Prevention of Access (“POA”) and Loss of Attraction (“LOA”) clauses but this was for a significantly lower amount than would have been recovered under the Insuring Clause.

OEH appealed against the decision of the Tribunal under section 69 of the Arbitration Act 1996 on two questions of law:

1. whether the Policy provided cover in respect of loss which was concurrently caused by both the physical damage to the property and the loss of attraction of the surrounding area; and
2. whether the same event(s), which gave rise to the business interruption loss, were also capable of giving rise to ‘special circumstances’, allowing an adjustment of the business interruption loss within the scope of the Trends clause?

The Policy contained the following clauses:

The Insuring Clause:

“… The Insurers… agree… to indemnify the Insured…

b) under the Business Interruption Section against loss due to interruption or interference with the Business directly arising from Damage…”

Damage was defined as “direct physical loss destruction or damage” and the cover for business interruption loss was defined as “loss due to interruption or interference with the business directly arising from the Damage”.

The Trends Clause:

“… Adjustments shall be made as necessary to provide for the trend of the Business and for variations in or special circumstances affecting the Business either before or after the Damage or which would have affected the Business had the Damage not occurred so that the figures thus adjusted shall represent… the results which but for the Damage would have been obtained during the relevant period after the Damage.”

Justice Hamblen held that:

1. The Tribunal had not excluded the recovery of losses caused concurrently by damage to the Hotel and damage to the vicinity.  It had only excluded losses which would have been suffered despite the damage to the Hotel as such losses should not be regarded as caused by the property damage.
   
2. The Tribunal was right to apply the “but for” test for causation in the way that it did.  This is although OEH had not raised this issue during the arbitration which made it difficult for the court to determine whether the Tribunal had erred in law.
   
3. The same event, which gave rise to the business interruption loss, was also capable of giving rise to “special circumstances”, allowing an adjustment of the business interruption loss within the scope of the Trends clause. However, the Tribunal’s interpretation and application of the Trends clause was correct. It was not necessary “to go behind the Damage and consider whether the event which caused the Damage also caused damage to other property in the City.”  

Appeal dismissed.