Orient-Express Hotels Limited v Assicurazioni Generale SVA (UK) (T/A Generale Global Risk)  EWHC 1186 (Comm)
The Commercial Court demonstrated again last week its reluctance to overturn arbitration awards where the appellant is unable to demonstrate any error in law (see also RPC's legal alert on IRB v CX Re).
In this case, an Arbitration Tribunal considered the construction of a Material Damage and Business Interruption policy insuring a hotel in New Orleans which suffered property damage and consequential losses following Hurricanes Katrina and Rita in 2005. The Commercial Court dismissed an appeal by the insured against the Tribunal's decision that the insured was only able to recover Business Interruption losses consequent upon damage to the hotel itself and that those losses were to be adjusted based on the income it would have earned if it had not been damaged but New Orleans had still been shut down by the hurricanes.
The judgment arose out of an appeal by the insured, Orient- Express Hotels Limited, the owner of the Windsor Court Hotel in New Orleans, against an arbitration award in favour of its insurer, Generali. The dispute was over an insurance claim in respect of business interruption losses following hurricanes Katrina and Rita in 2005.
The Insuring Clause in the policy provided cover for:
"loss due to interruption or interference with the business directly arising from damage"
The Tribunal held that this clause clearly provided that Orient- Express was only entitled to recover Business Interruption losses that arose as a consequence of insured damage to the hotel. However, the hotel would not have been able to trade during September 2005 whether or not it had been damaged since the hurricanes had led to the centre of New Orleans being closed for that period. The insurer argued that the Business Interruption losses claimed by the insured did not arise from damage to the hotel but rather from the damage to the surrounding area which had led to there being no customers for the hotel even if it had been open to trade.
The "but for" test was applied leading the Tribunal to find that the insured was only able to recover losses which "but for" the damage to the hotel would have been earned by the insured. The insurer was therefore entitled to exclude losses which would have been suffered by the insured in any event (ie loss of business attributable to damage in the vicinity of the hotel caused by the hurricanes). Recoverable Business Interruption losses were severely restricted as the insured was unable to show that, if the hotel not been damaged, it would have had any business during September 2005 when the city was effectively shut down.
The Tribunal was also required to determine the proper application of a Trends Clause in the policy which provided that adjustments could be made to the quantum of Business Interruption losses:
"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 as nearly as may be reasonably practicable the results which but for the damage would have been obtained during the relevant period after the damage"
It was held that the effect of this clause was that the loss should be adjusted to leave the insured in the position of an owner of an undamaged hotel in an otherwise damaged city. There was no recoverable loss under the primary insuring clause of the policy because there would have been few (if any) customers for such an undamaged hotel.
Commercial Court Decision
The Commercial Court held that there had been no error in law and the Tribunal were right to have adopted the "but for" test for causation. Insurers were entitled to exclude losses which would have been suffered by the insured in any event but for the damage to the hotel (that is, losses consequent upon damage in the vicinity of the hotel caused by Katrina and Rita). Importantly, it was a question for the Tribunal and not the Court whether it ignored the "but for" test on the grounds of "reasonableness and fairness". The Court could see no reason why any other test for causation might be any more reasonable or fair than the "but for" test.
The insured argued that the Trends Clause required the loss to be adjusted as if the hurricanes had not occurred, ie as if the hotel had been able to trade normally in a city unaffected by Katrina or Rita. This would mean the term "but for the damage" being rewritten as "but for the event(s) causing the damage". The Court held that this was unnecessary and the arbitrators were correct to have applied the actual terms of the clause to the facts and that the clause was concerned only with insured damage and not with the cause of the damage. It made no difference that a scenario whereby the insured's hotel was undamaged, whilst those around it were damaged, was unrealistic. Insurers were right to adjust the loss on this basis since it would represent "as nearly as may be reasonably practicable the results which but for the damage would have been obtained during the relevant period after the damage".
The Court held that the insured had failed to demonstrate that the arbitrators had made any error of law in reaching their decision. The appeal was dismissed.
- The "but for" test remains a general rule for establishing causation and an Arbitration Tribunal will not be found to have erred in law by applying this test to the facts. The Court did appear to accept that there may be cases where a "fairness and reasonableness" argument means that the "but for" test is not applicable. This is more usually applied in tort cases where there are two concurrent causes, although there is no reason, in principle, why it might not apply in contract cases. However, the judge held that the question of whether the "fairness and reasonableness" test should apply was one for the Tribunal and not for the Court. It was also difficult to see how an Arbitration Tribunal could ever be shown to have erred in law by applying the "but for" test when the Insuring Clause clearly provided that Business Interruption losses were only covered if they were due to "interruption or interference with the business directly arising from the damage".
- The insured's case relied on arguing that the words "loss due to interruption or interference with the business directly arising from damage" should be interpreted widely as meaning loss arising not just from "the damage" but from the event or events that caused "the damage". This approach would have allowed the insured to recover losses caused by the impact of the hurricanes on all the surrounding area of New Orleans. However, the Court agreed with the approach of the Arbitration Tribunal that it was not necessary to imply any additional words into a policy when it was clear on its face as to how it should operate. Both insureds and insurers should always look to the precise words of an insurance contract to determine the scope of cover it provides.
- The decision could have implications for other insurance claims arising out of catastrophes such as Katrina or the Chilean earthquakes where businesses will have incurred losses as a consequence not just of the damage to the insured property but of damage in the vicinity. The decision of the Tribunal appears unjust since it leaves a business effectively uninsured for Business Interruption losses in circumstances where it would have suffered those losses in any event because the damage to the surrounding area would have prevented it trading. This is likely to be the case in many catastrophe scenarios. However, in the Orient-Express case, the insured had cover under Prevention of Access and Loss of Attraction provisions such that it was not left wholly uninsured. It is not clear whether the Tribunal or Court would have adopted the same approach if it would have left the insured without any recourse to recover Business Interruption losses from its insurers.
- The so-called Trends Clause is a particularly difficult provision which has not previously been considered in any reported English cases. The intention of such clauses is to allow insured and insurer to adjust the loss to take into account other factors affecting the business over the period of the loss. For example, an insured selling coffee beans may be entitled to adjust upward the quantum of its loss to take into account changing market conditions which meant that had the loss not occurred it could have taken advantage of increased coffee prices. Such adjustments should lead to a position where the loss paid "shall represent as nearly as may be reasonably practicable the results which but for the damage would have been obtained during the relevant period after the damage". The insured argued that the clause should be read such that the loss was adjusted as if neither Hurricanes Katrina nor Rita had occurred and that the term "but for the damage" should be read as meaning "but for the event(s) causing the damage". Applying the insurer's unrealistic hypothetical scenario of no damage to the hotel but the surrounding area still being affected by the hurricanes, there was no recoverable loss because there would have been no customers for the hotel. However, the Trends Clause referred to "damage" and not to the event which caused the damage and the Tribunal found that the assumption to be made was "had the damage not occurred" not "had the damage and whatever event caused the damage not occurred". The Commercial Court held that this approach did not constitute any error in law notwithstanding that it was based on an unrealistic scenario and meant that the more widespread the impact of a natural peril the less cover is afforded under a Business Interruption policy. Again, this approach is arguably unjust and could lead to a windfall gain to an insured who argues that its loss should take into account its monopoly position in the absence of competitors. It remains to be seen whether a Court or Tribunal would be more reluctant to apply the clause in these terms if it led to such a windfall or if there was no cover available under separate Denial of Access or Loss of Attraction provisions.
- There have been US cases arising out of similar clauses which have reached a different conclusion and prevented insureds obtaining windfall gains under their insurances by relying on the pretence that the hurricanes might not have caused damage to their property but caused damage to surrounding property. The Commercial Court made clear that such cases (eg Prudential v Colleton Enterprises) turned on the wording of particular clauses which, in any event, may not have been correctly interpreted.
- Again, the Commercial Court has demonstrated its reluctance to overturn arbitration awards where it is satisfied that an arbitration panel has applied the proper law to the facts. Howeve r , the implications of the decision as regards the measurement of damages in Business Interruption policies and the construction of a Trends Clause should be caveated inasmuch as the Commercial Court has held that the Tribunal in this case made no error of law. That is not to say that the Commercial Court when considering the same facts would have reached the same conclusion.
RPC Partner Paul Dowsey comments
This is a timely reminder of the issues that may arise when applying Business Interruption clauses to consequential loss claims in catastrophe scenarios like Hurricane Katrina where there is extensive damage to the surrounding area. It also contains rare judicial guidance on the measurement of damages in Business Interruption claims and the construction of clauses unique to Business Interruption policies. It remains to be seen how the judgment impacts on the approach taken by insurers and reinsurers in settling claims arising out of other recent natural disasters.
Whilst the arbitration award does not of itself establish a precedent, the decision is another example of the Commercial Court upholding an arbitration award where the appellant is unable to demonstrate that the Tribunal erred in law.