Business Interruption Insurance -The "but for" test

The case concerned a claim under a combined property policy covering physical damage and business interruption in respect of the Windsor Court Hotel, a 23-storey property in the central business district of New Orleans.
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Orient-Express Hotels v. Assicurazioni Generali SpA (UK Branch)

Commercial Court, 27 May 2010

The case concerned a claim under a combined property policy covering physical damage and business interruption in respect of the Windsor Court Hotel, a 23-storey property in the central business district of New Orleans.

The property suffered significant physical damage from wind and water in the course of Hurricane Katrina, and it was closed throughout September and October 2005. The Hotel re-opened on 1 November 2005, albeit not fully repaired and with its services and amenities not fully operational. The insured sustained significant business interruption losses.

The basic insuring clauses in the policy were in fairly standard terms. Specifically, the insurers agreed to indemnify:


under the Material Damage and Machinery Breakdown Sections against direct physical loss destruction or damage except as excluded herein to Property as defined herein...;


under the Business Interruption Section against loss due to interruption or interference with the Business directly arising from Damage and as otherwise more specifically detailed herein.

As to the adjustment of BI losses, the policy also contained a "Trends Clause" as follows:

"... Gross Revenue and Standard Revenue adjustments shall be made as may be necessary 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 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 relative period after the Damage."

The central issue concerned the business interruption claim, and in particular whether and how far it could be said that the claimed BI losses were in fact "directly arising" from the physical damage to the hotel. It was common ground that the hotel was indeed severely damaged, to an extent necessitating its closure for a time, but the same was also true of the wider vicinity. A curfew had been imposed throughout New Orleans shortly after the hurricane and the city remained effectively closed to all but emergency services until early October 2005. Thereafter, business remained slow for some time due to the difficulty of access and loss of attraction.

Properly speaking, therefore, the insured's BI claim was the result of concurrent causes, namely the physical damage to the hotel on the one hand, and the wider damage to the vicinity on the other. In cases where more than one factor contributes independently to the loss, it is common to apply the "but for" test to determine which is the effective cause; in other words a given cause, act or circumstance will be said to be the effective cause if the relevant loss or damage would not have occurred without it.

The difficulty for the insured in this case was that the premises would clearly have remained closed, due to the curfew and the closure of the city, even if the hotel itself had escaped with no physical damage at all. It could not be said that the BI loss would not have occurred "but for" the physical damage to the hotel, and hence the claim failed the test. Consequently, the arbitration Tribunal found in favour of insurers on this point, against which decision the insured appealed to the Commercial Court.

Relying upon the judgment of Lord Nicholls in Kuwait Airways Corporation v Iraqi Airways Co (Nos 4 and 5) [2002]1, the insured argued that this was one of those few cases where the "but for" approach was unfair and unreasonable, and that the Tribunal had erred in law by applying such a test to this case. Logically, so the insured argued, the "but for" test could yield no effective cause at all on the facts of this case, because neither the damage to the hotel nor the damage to the vicinity could – independently – satisfy the requirement. Instead, so the insured contended, it was enough that at least one of the concurrent causes was an insured cause, so long as the other was not excluded.2

While the Commercial Court Judge, Mr Justice Hamblen, saw "considerable force" in much of the insured's argument, he still had to be satisfied that the Tribunal had gone so far as to err in law by applying the standard test. He concluded that they had not, for three reasons:


It was clear from the language appearing elsewhere in the policy that the parties were perfectly comfortable with a "but for" approach. Specifically, the Trends Clause was predicated on calculating the recoverable losses on the basis of what would have happened "had the Damage not occurred" or "but for the Damage";


whether "fairness and reasonableness" demanded a departure from the standard test was a question of fact for the Tribunal, rather than a question of law;


While there may be issues of fairness associated with the "but for" test, the alternatives were even more stark. The judge surveyed a number of possibilities, none of which he found satisfactory. Among the options considered was allowing the insured to recover for all BI that would have happened "but for the damage to the hotel and the city". However, that would compensate the insured for all business interruption losses howsoever caused, even where those losses were not in any way caused by the physical damage to the hotel. This was clearly not the intention of the insuring clause.

Having so ruled on the applicability of the "but for" test to the main insuring clause, the Judge then turned to the second issue under appeal, concerning the purpose and effect of the Trends Clause. While it was accepted that, under the terms of the clause, a BI loss had to be adjusted to reflect deteriorating (or rising) trends affecting the gross revenue of the business, the insured argued that this should not extend to trends caused by the very same peril that caused the damage giving rise to the BI claim in the first place. The Trends Clause, argued the insured, must be concerned with trends taking place independently of the hurricane, causing its gross revenue to decline (or, indeed, rise).

Again, the Judge found for insurers. Nowhere in the Trends Clause did it state that the relevant "variations or special circumstances" affecting the Business had to be something unconnected with the actual damage, in the sense that it had to have a cause independent of that which resulted in the damage. Consequently, in so far as a residual BI claim survived the finding on the main insuring clause3, the court held that the claim fell to be adjusted to reflect the declining gross revenues brought about in the wake of Hurricane Katrina.

Result: Judgment for the insurers.


1. [2002] 2 AC 883

2 .The Miss Jay Jay [1987] 1 Lloyd's Rep

3. Under a secondary Prevention of Access/Loss of Attraction extension, which was not the subject of the appeal

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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