Few parts of New Zealand can claim to be safe from threat, whether from earthquakes, floods or volcanic eruptions and, in many ways, it is not so much the source of the devastation which matters but the scale of it.
Hurricanes Katrina and Rita generated around 600,000 insurance claims, making them the world's costliest insurance event until the recent Japanese disaster. The Canterbury earthquakes also rank as world-scale disasters, with the number of claims received by EQC alone now topping 300,000. Events of this magnitude - especially where they cause population displacement - invariably give rise to insurance coverage issues.
Which is why an insurance dispute arising from the hurricane damage to New Orleans in 2005 bears significance for all New Zealand businesses and deserves to be better known beyond Christchurch.
Lessons from New Orleans
Two key take-outs from the UK High Court's decision in Orient Express Hotels vs Generali Global Risk are:
- insurance policies are precise documents, in which every word counts - "the devil is in the detail", and
- when taking out any form of insurance, it pays to think about the "what ifs". Ask yourself, "what risks concern me or the business and do I understand in broad terms how the proposed policy would respond to each scenario I should assess?" And remember, not every type of risk or loss is insurable.
The Orient Express Hotel (OEH) held a combined property damage and business interruption (BI) policy with Generali (UK Branch). The hotel received significant hurricane damage and was closed throughout September and October 2005. But, even had it not been damaged, its business would have been significantly interrupted because the CBD was effectively "closed" for the whole of September and New Orleans was no longer an attractive tourist destination - the so-called "depopulation" effect.
OEH contended that its BI coverage under the Insuring Clause in the policy should cover all losses sustained as a result of the insured damage to the hotel even if those losses were also caused by concurrent damage to the vicinity. Generali argued that it covered only those losses which would not have arisen but for the damage to the hotel.
Generali had paid out indemnities under a Prevention of Access clause (covering loss of income arising from the public being denied access to the area) and under a Loss of Attraction clause (covering loss of trade resulting from the area's loss of attractiveness as a place to visit). But these clauses were subject to significantly lower limits than would have been paid out under the Insuring Clause.
Key to the determination of the BI issue was how the Trends Clause in the contract should be applied. This provided for loss estimates to be adjusted to reflect special circumstances affecting the business:
The original Arbitral Tribunal found for Generali on both points, concluding that:
- the Trends Clause required the BI loss to be assessed by reference to the results which would have been obtained over the relevant period "but for" the damage to the hotel, and
- the fact that there was other damage to the City of New Orleans resulting from the same cause "does not bring the consequences of such damage within the scope of the cover".
On appeal to the High Court (in England) both conclusions were upheld. It said the purpose of the Trends Clause was "to allow for an appropriate adjustment to be made to the components of the standard formula so as to give effect to the requirement that the insured be indemnified in respect of the loss caused by the insured damage, not more and not less."
The Tribunal had therefore been correct in its approach as the relevant test was whether the income effects were independent of the insured damage (to the hotel), not whether they were independent of the causes of that damage (the hurricanes).
Chapman Tripp comment
As many Cantabrians have discovered, the same crucial "but for" wording appears in many BI policies issued in New Zealand, sometimes verbatim. Also, although the succinct 13 page High Court decision is not binding here, it is carefully reasoned and clearly explains and deals with the arguments raised by both sides.
In many ways the outcome is unsurprising. Fundamentally, BI policies are intended to place the Insured in the position the Insured would have been were it not for what is, or is deemed by the policy wording to be, Damage to the Insured's property.
The High Court did sympathise with some of the points OEH raised but, as the appeal was limited to questions of law, the Court was unable to explore fully the argument that a strict application of the (sometimes controversial) "but for" test should be softened by applying it in a manner that is "fair and reasonable".
As for other lessons? As with the "leaky building" crisis, we have seen the disaster in Canterbury flush out some mismatches between what business people thought their insurance covered and what it actually covers.
Of course hindsight is often revealing, but some degree of foresight is often possible. It can be a useful and necessary discipline to run several hypothetical scenarios through a proposed policy in order to test what would happen. Does it meet your expectations? And do you get satisfactory answers from your insurance advisors to any questions which pop up as a result of this exercise?
The information in this article is for informative purposes only and should not be relied on as legal advice. Please contact Chapman Tripp for advice tailored to your situation.