Orient-Express Hotels Limited v Assicurazioni Generali SpA
In this case, the English High Court on appeal affirmed that as a general rule the 'but for' test is a necessary condition for establishing causation of loss in circumstances involving two concurrent independent causes of loss. However, the Court acknowledged that in certain circumstances involving concurrent independent causes of loss the 'but for' test may not be the appropriate test as the fairness and reasonableness exception to the rule might apply. Further, the application of the exception was not limited to tort and may also apply in contract.
The issue for determination was how the business interruption policy held by Orient- Express Hotels Limited ('OEH') responded when there were two concurrent independent causes of the business interruption loss being:
- Physical damage to the hotel
- Damage / loss of attraction to the broader area surrounding the hotel.
Both of the above mentioned were caused by a single event, Hurricanes Katrina and Rita which battered New Orleans in Autumn 2005.
OEH accepted that under the policy it could only recover business interruption loss caused by physical damage to the hotel. However, OEH argued that it was entitled to indemnity under the policy for all business interruption loss resulting from damage to the hotel even if the business interruption loss was also concurrently caused by damage to the broader area.
Assicurazioni Generali SpA ('Generali'), the insurer, argued that OEH could only recover in respect of loss which would have arisen had the physical damage to the hotel not occurred, to satisfy the 'but for' test of causation.
Generali argued that the loss sustained by OEH as the owner of a damaged hotel in a damaged city was the same as that suffered by the owner of an undamaged hotel in the same city and consequently there was no loss recoverable under the policy.
OEH accepted that the normal rule for determining causation of loss is the 'but for' test, however argued that the circumstances justified the application of the fairness and reasonableness exception to the rule. Whilst this exception had previously been limited to negligence actions, it argued that the exception should also apply to an appropriate case in contract. Particularly where there was a sufficient causal connection between the event and the loss, and an application of the 'but for' test would lead to the untenable conclusion that neither of the causes resulted in the loss. This argument was consistent with the manner in which the fairness and reasonableness exception had been applied in negligence. OEH submitted that the exception should apply as, but for the damage to the hotel, the loss would have occurred due to the surrounding area damage and vice versa.
OEH also sought to rely upon the generally accepted principle in Miss Jay Jay that where there are two proximate causes of loss, an insured can recover if one of the causes was a peril insured (damage to the hotel), provided that the other cause is not excluded (damage to the surrounding area). OEH acknowledged that this principle had only been applied in circumstances of concurrent interdependent causes of loss, however submitted that it should equally apply to concurrent independent causes of loss.
The Court stated that there was considerable force in OEH's argument, however the 'but for' test was a necessary condition for establishing causation of loss. The Court did however accept there may be cases in which fairness and reasonableness require relaxation of this necessary condition.
Whilst these cases were most likely to arise in negligence, they were not limited to tort and may apply in contract.
The Court considered there to be an important difference between cases involving concurrent interdependent causes and concurrent independent causes of loss, as in the former case, the 'but for' test will be satisfied but in the later it will not. Despite this distinction, the Court accepted that the principle established in Miss Jay Jay was not necessarily limited to circumstances of interdependent causes of loss and may be applied in circumstances of independent causes of loss. An example of such a circumstance was where there were two concurrent independent causes of loss and application of the 'but for' test leads to the conclusion that neither was the cause of loss.
Despite considering there to be force in much of OEH's argument, the Court held that the fairness and reasonableness exception did not apply. Three significant factors led to this conclusion. First, the parties had agreed that the 'but for' approach to causation should be adopted in the trends clause of the policy and the Court did not consider it was appropriate to adopt inconsistent interpretations in the policy. Second, the application of the fairness and reasonableness exception to the 'but for' test was a question of fact rather than law and had not been raised at first instance by OEH. Therefore it could not be raised on an appeal limited to questions of law. Third, OEH was still entitled to cover (albeit lesser amounts) under policy extensions providing cover for damage, and loss of attraction, to surrounding areas.
The many natural disasters faced by this country in recent years may lead to circumstances where there are concurrent independent causes of loss impacting upon cover provided by business interruption policies. Whilst this decision is not binding upon Australian Courts it provides guidance as to how this issue may be interpreted and affirms that the 'but for' test for causation is the appropriate test for concurrent independent causes of loss. In this particular instance, the attempt to rely upon a relaxation of the 'but for' test largely failed for technical reasons which may not arise under other policies.
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