Covid-19 Business Interruption Update – FCA challenges Orient Express v Generali
The FCA and insurers have now filed their skeleton arguments in the COVID-19 business interruption Test Case, drawing the battle lines and setting out in full the arguments in support of their pleaded cases.
Of particular interest, and with potentially significant wider implications, are the sections on causation, including the application of trends clauses. The general thrust of the FCA’s case on causation is that:
- for disease clauses, the presence of COVID-19 in each locality is an integral part of one single broad and/or indivisible cause, being the COVID-19 pandemic; and
- for public authority/prevention of access clauses, the various ingredients of the clause and the government’s actions in response to the pandemic amount to a single indivisible cause of loss, and the insurers' "salami slicing” of the insuring clause is legally flawed.
Most notably the FCA submits that, not only is Hamblen J’s decision in Orient Express Hotels Ltd v Assicurazioni Generali Sp.A [1] to be distinguished on the facts, but that it was wrongly decided , ‘falls to be revisited’, and is ‘open to correction.’
Recap
Our commentary on the contentious Orient Express case can be found here, but in summary, the case concerned a claim brought by a hotel in New Orleans following Hurricane Katrina, which had damaged the insured property and devastated the city as a whole. The policyholder claimed for its business interruption losses caused by the damage, but the court found that the application of the trends clause prevented recovery of the losses due to the application of the ‘but for’ test of causation. ‘But for’ the damage to the insured property, the policyholder would still have suffered the same losses because of the damage to the wider area, meaning that there would have been no tourists able to stay in the hotel even if it had been undamaged.
Insurers’ reliance on the case
In relation to COVID-19 business interruption claims, insurers have cited the Orient Express case in support of their arguments that, even if coverage is triggered under Infectious Disease, Public Authority or Prevention of Access clauses, the application of trends clauses in the relevant policies means that adjustments must be made for the wider effects of the pandemic and/or other government actions such as social distancing and the general lockdown. The net result, insurers say, is that policyholders would have suffered the same losses regardless of whether the insured peril can be demonstrated to have been triggered.
The FCA’s case
The FCA attacks Orient Express from a number of angles. First, it notes that this was a first instance decision that was itself an appeal from an arbitration award, and as such was limited in scope to considering whether the arbitral tribunal had made an error of law. The court acknowledged that further arguments could have been made as to the disapplication of the ‘but for’ test in the interests of fairness, and indeed such arguments were raised by the policyholder in the case. But as the arguments had not been raised in the underlying arbitral proceedings, the court was unable to consider them. The court in Orient Express also granted permission to appeal, but the appeal was regrettably never heard as the case was settled.
Secondly the FCA points out, as many policyholders have done repeatedly to insurers, that the decision in Orient Express related to a dispute under a damage-linked BI cover, and that insurers had in fact paid out the available sublimits under the Denial of Access and Loss of Attraction covers in that case. The fact that they had was germane to the decision of the court, since the judge remarked:
“if Generali asserts that the loss has not been caused by the Damage to the Hotel because it would in any event have resulted from the damage to the vicinity or its consequences, it has to accept the causal effect of that damage for the POA or LOA, as indeed it has done. It cannot have it both ways. The ‘but for’ test does not therefore have the consequence that there is no cause and no recoverable loss, but rather a different (albeit, on the facts, more limited) recoverable loss.”
In the present case, insurers are indeed seeking to ‘have it both ways’, since they deny that coverage extends either under the main damage-linked insuring clause or the wider area non-damage extensions.
Thirdly, the FCA argues that the court in Orient Express applied the ‘but for’ test in a fundamentally incorrect way by treating the damage to the property and the underlying cause as distinct competing causes even though the property damage could not have occurred without the hurricane.
Finally, the FCA submits that the court failed to properly apply the superior court decision in The Silver Cloud [2], a case considering claims brought in relation to business interruption losses arising from the 9/11 attacks, in which the Court of Appeal found that the two causes of loss (terrorism and government warnings) were inextricably linked and so could be treated as a single cause. The case has obvious relevance to the present circumstances.
What are the possible outcomes?
Broadly speaking there are three different landings the court may reach on this issue (although inevitably the court may find some more nuanced combination or alternative):
- The Court rules in the FCA’s favour – Orient Express was wrongly decided, and the ‘but for’ test should consider a counterfactual in which the broader underlying cause of loss is removed. This outcome is very unlikely at first instance: although not technically bound by the High Court decision in Orient Express, the decision will be viewed as highly persuasive authority, and the court in this case is unlikely to depart from it, since this would result in two conflicting lower court decisions. It is possible however that the court may simply find that it is bound by the Court of Appeal’s decision in The Silver Cloud rather than the lower court decision in Orient Express. Any such decision would almost certainly be appealed by insurers.
- The Court rules in insurers’ favour – the application of Orient Express means no (or limited) recovery even if coverage is triggered. In this case it is quite possible, that the court may in its judgment indicate that whilst it finds itself bound to follow Orient Express, it disagrees with the decision in whole or in part. Either way, by arguing that Orient Express ‘falls to be reconsidered’, the FCA must presumably be contemplating appealing on this issue to seek the overturning of the decision by the higher courts. As the Framework Agreement expressly contemplates a leapfrog appeal, it is therefore possible that this issue could fall for determination by the Supreme Court in the near future.
- Alternatively, the Court may take the somewhat easier path of distinguishing Orient Express on the basis that it only applies to property damage losses, which has also been argued by the FCA. This would leave the legal principle intact, but would narrow the scope of its application so that it does not act to limit claims brought under non-damage BI extensions, which is surely right, since these extensions are themselves effectively intended to respond to ‘wide area’ perils. Such a ruling would still have significant implications for insurers and may well still be appealed.
It is clear that the FCA’s Test Case has far-reaching implications beyond the scope of COVID-19 business interruption coverage for which it has been brought, and whilst these issues will be fiercely contested by insurers, the end result will hopefully be a greater degree of judicial clarity and certainty, which in the long term can only be in the best interests of both policyholders and insurers.
[1] Orient Express Hotels Ltd v Assicurazioni Generali Sp.A [2010] EWHC 1186 (Comm), [2010] Lloyd’s Rep IR 531
[2] IFP&C Insurance Ltd (Publ) v Silversea Cruises Ltd, the Silver Cloud [2004] EWCA Civ 76, [2004] Lloyd’s Rep 696 CA
The Good, the Bad & the Ugly: 100 cases every policyholder needs to know. #6 (The Bad). Orient-Express Hotels v Generali
Welcome to the latest in the series of blogs from Fenchurch Law: 100 cases every policyholder needs to know. An opinionated and practical guide to the most important insurance decisions relating to the London / English insurance markets, all looked at from a pro-policyholder perspective.
Some cases are correctly decided and positive for policyholders. We celebrate those cases as The Good.
Some cases are, in our view, bad for policyholders, wrongly decided, and in need of being overturned. We highlight those decisions as The Bad.
Other cases are bad for policyholders but seem (even to our policyholder-tinted eyes) to be correctly decided. Those cases can trip up even the most honest policyholder with the most genuine claim. We put the hazard lights on those cases as The Ugly.
At Fenchurch Law we love the insurance market. But we love policyholders just a little bit more.
#6 (The Bad)
Orient-Express Hotels v Generali
Business interruption (BI) policies in the UK ordinarily provide for recovery of loss caused by physical damage to property at the insured premises, subject to adjustment to reflect other factors that would have affected the business in any event.
In Orient Express Hotels Ltd v Assicurazioni Generali SPA t/a Generali Global Risk [2010] EWHC 1186 (Comm), the Commercial Court held that the ‘but for’ causation test applies under standard BI policy wordings where there are two concurrent independent causes of loss, and there could be no indemnity for financial loss concurrently caused by: (1) damage to the insured premises - a luxury hotel in New Orleans, and (2) evacuation of the city as a result of Hurricanes Katrina and Rita.
Orient Express Hotels Ltd (OEH) was owner of the Windsor Court Hotel (the Hotel), which suffered significant hurricane damage in August and September 2005 leading to its closure for a period of two months. The surrounding area was also devastated by the storms, with the entire city shut down for several weeks following the declaration of a state of emergency, and the imposition of a curfew and mandatory evacuation order.
A dispute arose concerning the interpretation of OEH’s BI policy (subject to English law and an arbitration provision), which provided cover for BI loss “directly arising from Damage”, defined as “direct physical loss destruction or damage to the Hotel”. The trends clause provided for variations or special circumstances that would have affected the business had the Damage not occurred to be taken into account, “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 indemnity period]”.
The arbitral Tribunal held that OEH could only recover in respect of loss which would not have arisen had the damage to the Hotel not occurred, and this meant that OEH was to be put in the position of an owner of an undamaged hotel in an otherwise damaged city. Since New Orleans itself was effectively closed for several weeks due to widespread flooding, with no-one able to visit the area or stay at the Hotel even if it had (theoretically) been undamaged, OEH could not recover under the primary insuring provisions for BI loss suffered during this period. A limited award of damages was made under separate Loss of Attraction and Prevention of Access extensions to the policy.
OEH appealed to the Commercial Court, arguing that the Tribunal’s approach was inappropriate given the wide area damage to the Hotel and the vicinity caused by the same hurricanes. OEH sought to rely upon principles established in: Miss Jay Jay [1987] and IF P&C Insurance v Silversea Cruises [2004], that, where there are two proximate causes of a loss, the insured can recover if one of the causes is insured, provided the other cause is not excluded; and Kuwait Airways Corpn. v Iraqi Airways Co. [2002], that, where a loss has been caused by two or more tortfeasors and the claimant is unable to prove which caused the loss, the Courts will occasionally relax the ‘but for’ test and conclude that both tortfeasors caused the damage, to avoid an over-exclusionary approach.
Mr Justice Hamblen dismissed the appeal, concluding that no error of law had been established in relation to the Tribunal’s application of a ‘but for’ causation test under the policy on the facts as found at the arbitration hearing, whilst recognising “as a matter of principle there is considerable force in much of OEH’s argument”. The insurance authorities mentioned above were distinguished as involving interdependent concurrent causes, in which case the ‘but for’ test would be satisfied. The Court did appear to accept that there may be insurance cases where principles of fairness and reasonableness meant that the ‘but for’ causation test is not applicable, but OEH was unable to establish an error of law by the Tribunal where this argument had not been raised at the arbitration hearing. Given these evidential constraints on an appeal limited to questions of law, OEH was unsuccessful in the Commercial Court.
Permission to appeal was granted, indicating that the Court considered OEH’s grounds for further challenge had a real prospect of success. Settlement on commercial terms was agreed between the parties prior to the Court of Appeal hearing.
The decision in this case has been criticised by commentators as unfair, giving rise to the surprising result that the more widespread the impact of a natural peril, the less cover is afforded under the policy. Leading textbooks (including Riley on Business Interruption Insurance and Hickmott’s Interruption Insurance: Proximate Loss Issues) express concern at this unsatisfactory outcome, noting that the ‘windfall loss’ applied by Generali under the trends clause during the period when OEH itself was affected by its own damage did not reflect the approach adopted by insurers following, for example, the earlier London bombings, or severe flooding in Cumbria in 2009. We consider that that the true intention of the London market was that, in the event of wide area damage, claims would be met up to the level that would have applied had the damage been restricted solely to the insured’s own property at the premises.
In our view, the approach taken by the Tribunal and upheld by the Commercial Court in this case is wrong in principle. It is hoped that an opportunity will arise for the English Courts to revisit this issue and adopt a fairer approach to indemnity under standard UK wordings, to remedy the potential injustice for policyholders. In the meantime, those taking out BI policies should seek amendment of the trends clause to provide for the policyholder to be put in the position they would have been “but for the event(s) causing the damage” (instead of “but for the damage to insured premises”), and to agree sufficient limits of indemnity under extensions for Loss of Attraction and Prevention of Access.
Business Interruption Claims - Improving Outcomes for Policyholders
Insurers are set to pay out a record $135 billion to cover losses from natural catastrophes in 2017, driven by the costliest hurricane season ever in the United States and widespread flooding in South Asia. Extreme weather events such as recent mudslides and wildfires, as well as industrial disasters and acts of terrorism, often cause damage affecting many businesses, bringing into focus the issue of policy response for BI claims involving wide area damage.
Policy Wordings
Standard UK policy wordings provide BI cover for interference to revenues caused by loss or damage to the insured’s property (the “Incident”). The link to physical damage is maintained for purposes of the “Other Circumstances” clause, which provides that adjustments shall be made as appropriate to reflect trends in turnover affecting the business at the relevant time, so the level of indemnity represents so far as reasonably practicable the loss of profits that would have been achieved but for the Incident. This does not encompass interruption consequent upon damage within the surrounding area and is not synonymous with operation of the insured peril itself, which can give rise to anomalous results and severely limit policyholders’ recoveries.
Windfall Profits
In the aftermath of a catastrophic event causing wide area damage not all businesses will be affected in the same way. Despite a general downturn in the local economy, some businesses will experience increased demand (provided they are able to continue trading), for example builder’s merchants supplying materials for reconstruction or those catering for an influx of claims handlers, while similar operations shut down by the damage sustained may be deprived of the opportunity to enjoy such “windfall profits”. There is some reluctance by certain parts of the insurance market to agree to cover lost windfall profits, but in principle the Other Circumstances clause works both ways and policyholders should be able to invoke an upward trend in appropriate cases, subject to adequacy of the overall sum insured.
UK Legal Position
The issue of whether the Other Circumstances clause can or should be used to adjust the standard turnover to reflect trends resulting from an event causing damage not only to the insured’s property, but also to the wider geographical area, was considered by the English courts in Orient-Express Hotels v Generali [2010]. Prior to this some disputes over holiday resorts in the Far East, subject to UK policy wordings, had gone to arbitration and been variously decided both in favour of and against the respective insureds.
The Orient-Express case considered the impact of Hurricane Katrina on a luxury hotel in New Orleans, and the owner’s appeal on points of law following arbitration. In summary, the hotel suffered significant physical damage from wind and water resulting in its closure throughout September and October 2005, and partially reopened in November, albeit with limited amenities and ongoing repairs. A state of emergency had been declared and mandatory evacuation of the city ordered on 28 August, and lifted at the end of September. Insurers rejected the owner’s claim for BI losses during closure of the hotel by applying the trends clause, arguing that New Orleans was effectively closed throughout this period and the adjusted standard turnover should be zero.
The owner argued that: it was entitled to indemnity for losses caused by insured damage even if concurrently caused by damage in the vicinity (The Miss Jay Jay [1987]); a reasonable interpretation should not permit adjustment of the consequences of the same insured peril which caused the insured damage; the trends clause was effectively being treated as an exclusion, which it was not; the precise reasons for cancellations and reduced revenue were likely to be a combination of factors, which could not sensibly be separated from each other evidentially; and insurers’ position had the remarkable result that the more widespread the impact of a natural peril, the less cover is afforded by the BI policy for the consequences of damage to insured property.
The Commercial Court disagreed with these submissions, upholding the tribunal’s conclusion that a “but for” causation test was appropriate in accordance with the policy wording, so that the BI loss was to be assessed on the hypothesis that the hotel was undamaged but the city was devastated, as in fact it was. Permission to appeal was granted, however, and it was subsequently rumoured in academic circles the Court of Appeal might have taken a different view, had the case not settled by then.
US Approach
BI forms in the US generally refer to “Direct physical loss of or damage to property, including personal property in the open or within 100 feet, at premises described in the Declarations and for which a Business Income Limit of Insurance is shown in the Declarations. The loss or damage must be caused by or result from a Covered Cause of Loss”. The link to physical damage for claims involving wide area loss is not as strong as the standard UK wording.
Many US policies include a loss determination provision specifically excluding windfall profits caused by the impact of the insured peril. Nevertheless it is interesting to note the decision in Berkshire-Cohen LLC v Landmark Aon Insurance (2009), in which the claimant realty agents were successful in recovering windfall profits due to increased demand for rental properties following Hurricane Katrina, despite the exclusion clause. The reasoning was that both storm and flood damage had occurred with only the former being a covered cause of loss, and in the US (as in most of mainland Europe) flood is a contingency addressed by the government rather than by insurance. The US District Court therefore held that, whilst the exclusion applied to storm damage under which the property damage claim was presented, it did not apply to an upward trend based on flood damage.
Practical Difficulties
The UK legal position reflected in Orient-Express has been criticised as unsatisfactory for both insurers and policyholders in applying a downward trend or “windfall loss” under the Other Circumstances clause in response to wide area damage during the period when the insureds themselves were affected by their own property damage. Most policyholders expect their loss to be measured in relation to the impact of the event that caused both damage at their premises and more widely, and consider arguments otherwise to be unjust and artificial.
Furthermore, this is in contrast to the approach adopted by the UK market following previous incidents including the City of London bombing in 1992, and severe Cumbrian flooding in 2009. In Cockermouth all businesses on Main Street were submerged to a depth of six feet or more and reconstruction works continued for around six months. A strict application of Orient-Express would have resulted in limited if any BI cover for individual insureds, who would have suffered a severe downturn irrespective of their own damage. Although the reduction might be offset in some cases by windfall profits and “non-damage” denial of access/loss of attraction extensions, subject to inner policy limits, such an outcome seems paradoxical at best and would have been reputationally damaging for insurers.
Potential Solutions
As firms become more exposed to major disasters and subsequent business interruptions as a result of increasingly complex global networks, improvements are required to ensure optimal coverage and effective risk management. It seems that insurers always intended to pay for losses that insureds would have suffered based on their own damage and challenges remain for the market to develop suitable wordings fully consistent with this approach, avoiding punitive application of the “but for” test in wide area damage scenarios that does not reflect well on the industry.
Amy Lacey is a Partner at Fenchurch Law