[2010] EWHC 1186 (Comm)

Hurricane Katrina - combined property damage and business interruption policy - application of the “but for” test

OEH operated the Windsor Court Hotel in New Orleans. In the autumn of 2005 New Orleans was hit by Hurricane Katrina and Hurricane Rita. A state of emergency was declared and a curfew was imposed on 27 August 2005: the curfew was not lifted until the end of September 2005.

The Hotel suffered significant physical damage and was closed throughout September and October 2005. It reopened on 1 November 2005, but its services and amenities were not at that time fully functional.

OEH had a combined property damage and business interruption policy, with business interruption cover becoming available only where it was caused by physical damage to the hotel.

Two issues arose in the present appeal from an arbitral award under section 69 of the Arbitration Act 1996.

  1. Did the policy cover loss concurrently caused by physical damage to the property and by the loss of attraction of the surrounding area of New Orleans? OEH argued that this was a case of concurrent causes of loss, and given that there was no exclusion for loss caused by harm to the surrounding area OEH was entitled to recover for the entirety of its loss (see The Miss Jay Jay [1987] 1 Lloyd's Rep 3). The arbitrators nevertheless held that, on the proper construction of the policy, the test to be applied was the “but for” test applicable to claims in tort, under which OEH could recover only for loss which would not have arisen but for the damage to the hotel. This was based on the construction of the policy itself, which referred to loss directly caused by the hurricane and which allowed recovery of profits which would have been earned “but for the Damage ...”. Hamblen J held that the arbitrators had not erred in applying the “but for” test: (a) the rule that the assured could recover where his loss was caused by concurrent interdependent causes had never been applied to a case in which the loss was caused by two concurrent independent causes, although there was force in OEH’s argument that it might be wrong on the grounds of fairness and reasonableness to apply the “but for” test if it led to the conclusion that there was no cause of the loss; (b) in the present case, however, the policy provided for a “but for” test, and the question of whether its application was fair and reasonable was a matter of fact for the arbitrators and not the court; (c) it was not obvious what alternative test might have been applied – assuming an undamaged hotel in an undamaged city would have led to OEH recovering losses nothing to do with the hurricanes, and assuming a damaged hotel in a damaged city would lead to nil recovery, whereas the “but for” test at least gave a limited recovery.
  2. The effect of the “trends” clause. Under the policy, OEH was entitled to recover losses in the post-hurricane indemnity period based upon earnings prior to the hurricane, although under the “trends” clause, adjustments were to be made “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 ...”. The arbitrators held that the hurricane could be taken into account as “special circumstances” in determining whether adjustments to the amount recoverable should be made, and the fact that there had been damage to the vicinity independently of damage to the Hotel meant that the Hotel’s earnings would have been reduced independently of the physical damage: the fact that there was other damage which resulted from the same cause did not bring the consequences of that damage within the scope of the cover. The court agreed with the arbitrators, and held that the variations permitted by the “trends” clause were not confined to matters entirely independent of the events giving rise to the loss.

For further information: http://www.bailii.org/ew/cases/EWHC/Comm/2010/1186.html