According to the recent decision in Orient Express Hotels v Assicurazioni General S.p.A. [2010] EWHC 1186 (Comm), coverage for business interruption losses may not be available in circumstances where the insured peril which causes the loss also damages the surrounding locality.

The case concerned an appeal against an arbitration award to the Commercial Court by a New Orleans hotel owner whose premises was badly damaged by hurricanes Katrina and Rita. The hurricanes also brought the city of New Orleans to a standstill.

The Court considered that, on a proper interpretation of the hotel owner’s business interruption policy, a “but for” approach to causation was required in order to establish whether the hurricane damage to the hotel had caused the hotel-owner’s business interruption loss. Accordingly, only loss, which would not have been incurred but for the physical damage to the hotel, was recoverable. On the facts, the Court considered that the insured’s business would have been interrupted in any event as a result of the widespread damage to the city of New Orleans. There was, therefore, no cover under the general insuring clause.

The decision is considered controversial as it has been suggested that the literal approach taken to the construction of the policy wording does not reflect the true intention of the parties. The judgment is due to be appealed later this year. In the meantime, insureds at risk of loss caused by widespread catastrophes should consult their brokers about the available mechanisms for plugging this potentially significant gap in cover.