Business interruption policy – Damage — Risk — Appellant hotel owner claiming on insurance policy for damage caused by hurricanes – Respondent insurer applying “but for” causation test – Respondent making limited payment for business interruption loss caused by damage to property only – Arbitration — Arbitrators ruling in favour of respondent — Appellant contending “but for” test unfair — Whether policy covering loss concurrently caused by physical damage to property and surrounding area — Whether same events giving rise to special circumstances for adjustment of business interruption loss within scope of trends clause — Appeal dismissed
The appellant owned a New Orleans hotel that was damaged by hurricane Katrina and Rita. The hotel was closed for two months and the appellant incurred substantial business interruption losses. The surrounding area had also been devastated by the hurricanes and a mandatory evacuation meant that the city was closed for some of the time.
The appellant’s insurance policy with the respondent insurer covered loss owing to the interruption to or interference with the business directly arising from damage. It included a “trends clause”, which provided for revenue figures to be adjusted to represent, as nearly as reasonably practicable, the results that, but for the damage, would have been obtained. The policy also covered any loss of access and attraction.
The appellant sought to recover under the policy in respect of business interruption loss arising from the physical damage caused to the hotel. It sought an indemnity, under the primary indemnity provisions, for all business interruption loss resulting from interference with its business following damage to the hotel, even if that loss had been concurrently caused by damage to the vicinity from the same hurricanes. The respondent disputed the claim and the matter was referred to arbitration.
The arbitrators held that, as a matter of construction, the policy provided cover only for losses caused by damage to the hotel itself; the policy wording required a “but for” approach to causation so that the appellant could recover only in respect of loss that would not have arisen had the damage to the hotel not occurred.
The appellant appealed on two questions of law, namely whether: (i), on the true construction of the policy, it provided cover in respect of loss that was concurrently caused by physical damage to the hotel and damage to the surrounding area; and (ii) the same event that had caused the damage to the hotel giving rise to the business interruption loss was also capable of giving rise to “special circumstances” for purposes of allowing an adjustment of the same loss within the scope of the trends clause.
Held: The appeal was dismissed.
(1) As a general rule, the “but for” test was a necessary condition for establishing causation in fact. However, in some cases, fairness and reasonableness required that it should not be a necessary condition. Whether that was so would depend on all the circumstances of the particular case. In the instant case, the tribunal had not erred in law in applying a “but for” causation approach under the policy. Under that policy, it had been agreed that a “but for” approach to causation should be adopted when assessing loss of revenue. Even if that were not in itself conclusive, it would be difficult to argue that the tribunal had erred in law in adopting the causal approach laid down in the policy. On any view, the causal approach was highly relevant. Furthermore, the appellant had failed to show that “fairness and reasonableness” required that the “but for” test should not be applied. The suggested alternatives did not appear to be fairer and more reasonable than the “but for” test so as to require that that test be discarded.
The test did not mean that there was no cause and no recoverable loss, although it produced a more limited recoverable loss. Accordingly, on its true construction, the policy provided cover in respect of loss that was concurrently caused by physical damage to the property and damage to or consequent loss of attraction of the surrounding area, unless the application of the test meant that the loss claimed had not been caused by physical damage to the insured property.
(2) The tribunal had correctly concluded that the trends clause was concerned only with the damage, not with the causes of the damage. The policy covered business interruption losses caused by damage only; it did not cover losses caused by damage or “other damage which resulted from the same cause”. The assumption to be made under the trends clause was “had the damage not occurred”, not “had the damage and whatever event caused the damage not occurred”.
The appellant’s construction required words to be read into the trends clause or for it to be redrafted. Redrafting, which would allow the appellant to recover the loss in gross operating profit suffered as a result of the hurricanes as opposed to the loss suffered as a result of the damage to the hotel, was inconsistent with the causation requirement of the main insuring clause, which required proof that the losses claimed were caused by damage to the hotel. The tribunal had therefore properly construed and applied the trends clause.
Alistair Schaff QC and Rebecca Sabben-Clare (instructed by Rosling King LLP) appeared for the appellant; Simon Picken QC and Sushma Ananda (instructed by Steptoe & Johnson LLP) appeared for the respondent.
Eileen O’Grady, barrister
