Supreme Court B.I. Ruling - Clear as Mississippi Mud

For me the most wide reaching implications from the U.K. Supreme Court ruling published 15 January 2021 is the decision, by the Supreme Court that the high Court desicion in the Orient-Express Hotels Ltd v Assicurazioni Generali SpA case, should be overruled altogether.

The Orient Express claim was for business interruption losses following Hurricanes Katrina and Rita in New Orleans where the Orient Express Hotels was the policy holder with an “All Risks” policy incorporating a trends clause with a “but for” causation trigger. Furthermore, there was a sub-limit in the policy that provided for a prevention of access and loss of attraction cover.

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. The "trends clause" provided that, when adjusting the loss, the calculations should allow for market trends (which would have included for instance the variables between high season and low season) which would have affected the business had the damage not occurred.

This is included in order that the adjustment represents as fairly as may be reasonably practicable to do 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 case came before the High Court as an appeal from an arbitral tribunal. Two members of the Supreme Court panel were involved in the case. The arbitral tribunal panel included Mr George Leggatt QC, as he then was, and the judge who decided the appeal was Lord Hamblen.

There was no dispute as to cover for the physical damage to the hotel caused by the hurricanes. When it came to the business interruption losses, however, Insurers argued that there was no cover because, even if the hotel had not been damaged, the devastation to the area around the hotel caused by the hurricanes was such that the business interruption losses would have been suffered in any event.

Accordingly, the necessary causation trigger for the business interruption losses could not be met because the insured peril was the damage alone, and the event which caused the insured physical damage (the hurricanes) could be set up as a competing cause of the business interruption. Lord Hamblen held that this was a correct reading of the policy.

In a very clear decision by the Supreme Court, the court ruled that Insurers has wrongly decided against the provision of cover and they and that high court should be overruled.

The Supreme Court reasoned that:

a)            The hotel was damaged and also The surrounding area and other parts of the city were damaged by the hurricanes.

b)            Thus the two concurrent causes existed, each of which was by itself sufficient to cause the relevant business interruption.

c)            However Insurers found that neither satisfied the “but for” test because of the existence of the other.

d)            Both the insured peril and the uninsured peril operated concurrently as a result of the same underlying fortuity.

e)            The Supreme has now ruled that since the damage to the rest of the city was not specifically excluded, losses resulting from both causes operating concurrently is covered.

f)             Therefore, the tribunal and the High Court were therefore wrong to hold that the business interruption loss was not covered by the insuring clause to the extent that it did not satisfy the “but for” test.

Applying their rational to the analysis of the trends clauses, the Supreme Court considered that the correct approach would have been to construe the trends clause so as to exclude from the assessment of what would have happened if the damage had not occurred circumstances which had the same underlying or originating cause as the damage, namely the hurricanes.

There are a number of cases internationally where these arguments could easily apply and the implications are wide reaching in terms of causation be it catastrophe related or arising from say an oil spill even years after the event. Certainly, for now Insurers will have their hands full with a backlog of COVID BI claims but watch this space for claims coming in off the back of the Orient Express ruling!

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. However that regard was purely a matter for the for the tribunal, not for the courts 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.

Questions arising around causation are rarely straightforward, notwithstanding it seems that, in this case at least, applying 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.

Having said that in the case of this particular policy damage to the surrounding area and lack of customer demand were specifically catered for under the prevention of access and loss of attraction cover, just with limits below the Insured’s requirements.