The Commercial Court has upheld an arbitration award on business interruption insurance that used a "but for" approach to causation with the effect of limiting recovery by the insured.
In the recent decision of Orient-Express Hotels Limited v Assicurazioni Generali SpA  EWHC 1186 (Comm), Mr Justice Hamblen dismissed an appeal by the insured against an arbitration tribunal's decision that it was only able to recover business interruption losses consequent upon damage to the hotel itself. The claimant, Orient-Express Hotels Limited (OEH), was the owner of a hotel in New Orleans which suffered property damage and consequential losses following Hurricanes Katrina and Rita in autumn 2005. The hotel closed for two months and as New Orleans was subject to a mandatory evacuation order, the city itself was effectively closed for part of the period.
OEH's business interruption policy covered "loss due to interruption or interference with the business directly arising from damage." The arbitrators held that this provided cover only for losses caused by damage to the hotel itself, but not for losses caused by damage to the surrounding area that would have forced the hotel to close anyway. They said the policy wording required a "but for" test to be applied, ie only losses which "but for" the damage to the hotel would have been earned by OEH could be claimed. Under the hypothetical situation where the hotel was not damaged but the surrounding area was, OEH was not able to show that it would have had any significant earnings and so was not able to claim for these. Hamblen J confirmed that the "but for" test was a necessary condition for establishing causation in fact in these circumstances, but said there might be cases in which "fairness and reasonableness" required otherwise.
Hamblen J also upheld the tribunal's decision on the "trends" clause of the policy under which loss adjustments were to be made "to provide for the trend of the Business and for ... special circumstances affecting the Business ... which would have affected the Business had the Damage not occurred..." The arbitrators held that the hurricanes counted as "special circumstances" and so the business interruption losses should be adjusted to take account of the damage to the surrounding area, which would have impacted on the hotel's earnings independently of the damage to the hotel itself.