Orient-Express Hotels Limited v Assicurazioni Generali Spa (UK) (t/a Generali Global Risk)
In the autumn of 2005, the insured’s hotel in New Orleans was damaged by Hurricanes Katrina and Rita. It closed for September and October, re-opening on 1st November. The surrounding area of New Orleans was also devastated by the hurricanes and was effectively shut down until the beginning of October.
The insured's policy covered business interruption losses directly arising from damage to the hotel.
A "trends clause" provided that, when calculating this loss, adjustments should be made to allow for trends which would have affected the business had the damage not occurred "so that the figures thus adjusted shall represent as nearly as may be reasonably practicable the result which but for the Damage would have been obtained during the relative period after the Damage".
In addition, the policy provided separate cover for prevention of access and loss of attraction where damage to the vicinity prevented or hindered the insured's use of the location, whether the hotel was damaged or not.
The insurer paid the insured’s prevention of access and loss of attraction claims but denied the business interruption claim on the grounds that, even if the physical damage had not occurred, the hotel would have suffered the same interruption to its business because the surrounding area had been closed off.
In other words, the insured could not show that, "but for" the damage to the hotel, the business interruption losses would not have occurred anyway.
The dispute went to arbitration, where the tribunal agreed that the "but for" test of causation applied and had not been satisfied.
The insured appealed, arguing that the tribunal erred in law in applying the "but for" test in the circumstances of this case. The business interruption loss was concurrently - but independently - caused by the damage to the hotel and the damage to the surrounding area. Since the policy did not specifically exclude loss caused by damage to the surrounding area, there was nothing to prevent the insured recovering.
The judge upheld the tribunal’s decision.
The general rule for determining causation is the "but for" test. In certain situations, however, the court recognises that, in the interests of fairness and reasonableness, the test needs to be relaxed. This is most likely to occur in the context of negligence or conversion claims, but the judge accepted that, in principle, it should not be limited to any particular type of claim.
It is also generally accepted that, where there are two proximate causes of a loss, an insured can recover if one of the causes is covered by the policy, as long as the other is not excluded. So far, however, this principle has only been applied where the two causes are concurrent and interdependent, in that neither could have caused the loss on its own.
This case, however, involved two concurrent but independent causes – the damage to the hotel and the damage to the surrounding area - either of which, on its own, would have caused the same loss. As a result, neither could satisfy the "but for" test of causation.
The judge accepted that a situation in which there were two concurrent, independent causes of the loss was potentially one in which fairness and reasonableness might require a relaxation of the usual test. But whether or not this was the case was a question of fact. That was a matter for the tribunal, not for the court on an appeal limited to questions of law.
In any event, he was not convinced that fairness and reasonableness did require the normal test for causation to be lifted.
The trends clause in the policy applied a "but for" approach to the calculation of business interruption losses. Applying a different causation test would be inconsistent with the clear intention behind this wording.
It was also difficult to see what alternative test for causation would have been fairer and more reasonable in the circumstances of this case. In any event, applying the "but for" test did not mean there could be no recovery at all under the policy. The insured had successfully claimed under the prevention of access and loss of attraction clauses, albeit a lesser amount.
Causation questions are not straightforward but, ultimately, the insured got the cover it paid for.
The insured's interpretation would have required a rewriting of the business interruption clause to cover, not only losses caused by damage to the hotel, but also losses caused by "other damage resulting from the same cause". The clause, as actually drafted, was only concerned with the damage, not the underlying cause of the damage.
Under the scheme of this policy, however, losses caused by damage to the surrounding area and lack of customer demand were specifically catered for under the prevention of access and loss of attraction cover.
Unfortunately for the insured, these were subject to significantly lower indemnity limits.
