The claimant insured its hotel in New Orleans under the defendant’s combined property damage and business interruption insurance policy. The hotel suffered damage as a result of hurricanes Katrina and Rita and was closed in September and October 2005. At the same time and because of the devastation caused by the hurricanes, the city was evacuated and a curfew imposed.
The hotel suffered significant interruption to its business, both as a result of the physical damage to the hotel itself and as a result of the damage to the surrounding area, which it sought to recover from its insurers. The claim was rejected by its insurers since any losses were caused by the evacuation of New Orleans, not as a result of the damage to the hotel.
The main insuring clause in the policy provided cover for business interruption, “directly arising from Damage”. Damage was defined as, “direct physical loss destruction or damage” to the hotel.
The policy included a trends clause, which allowed for adjustments to be made to the loss calculation to allow for trends or special circumstances affecting the business before or after any damage occurred. That clause was designed to ensure the adjusted loss represent “the results which but for the Damage would have been obtained during the relative period after the Damage”.
The policy also provided an indemnity for prevention of access and loss of attraction but the limits were much lower than the limit under the business interruption section.
The tribunal held that the insured could not recover for business interruption losses. Even if the hotel had not been damaged, it would still have been unable to trade because New Orleans had been evacuated. The arbitrators applied the “but for” causation test, so that the hotel was only allowed to recover revenue which it would otherwise have generated “but for” the physical damage to the hotel.
The insured accepted that it could only recover for business interruption losses caused by physical damage to the hotel. However, it argued that the “but for” test should be relaxed where “fairness and reasonableness” require it. They also argued that where there are two proximate causes of loss an insured can recover on the basis that one of the causes was an insured peril provided the other is not excluded under the policy.
The appeal was dismissed. Whilst recognising there may be claims involving concurrent independent causes of loss where fairness and reasonableness demanded the relaxation of the “but for” causation test:
- the wording of the policy, and the trends clause in particular, expressly provided for the application of a “but for” test;
- whether it was fair and reasonable to apply the “but for” test was a question of fact to be determined by the tribunal and not a question of law for the court on appeal;
- there was an absence of a clear and suitable alternative to the “but for” causation test; and
- the application of the “but for” causation test did not prevent a recovery under either the main insuring clause for losses caused by damage to the hotel, or under the prevention of access and the loss of attraction clauses, albeit the recoverable loss was more limited.
As might be expected, the judge attached considerable weight to the clear language of the policy, which limited recovery to loss directly resulting from physical damage to the hotel and made express reference to the application of the “but for” test. Such an approach is reassuring for those insurers whose policies are unequivocal and suitably restricted in their wording. However, for those whose policies are silent on the applicable causative test for determining loss, the outcome of business interruption claims are made much less certain by this decision.
It is noteworthy in this instance, and it will follow in other contractual cases where there are independent and concurrent causes of loss, the judge accepted that the “but for” test may be abandoned where it is fair and reasonable to do so. Whilst here, the judge’s discretion was limited, by virtue of the fact that the “fair and reasonable” exception had not been raised at first instance, it is conceivable that if it had, the result (absent the policy wording) may well have been different.
Therefore, if, unlike here, other provisions within the policy did not operate to provide the insured with some degree of compensation for the otherwise irrecoverable element of its losses, the risks for insurers of a more relaxed approach to causation, and in turn a widening of their liability under the policy, are all the more real.
In light of this decision, insurers would be well advised to revisit their policy wordings and consider what, if any, further limitations to their potential exposure are required.