Foran Glennon Palandech Ponzi & Rudloff

April 2015

10 Years On - Business Interruption And Wide Area Damage

Damian Cleary

This year marks the 10 year anniversary of Hurricanes Katrina and Rita that struck New Orleans in August and September of 2005, and which caused such widespread devastation to the city and the surrounding area.

As a result, the insurance market can gain a valuable understanding of Business Interruption (BI) cover in the circumstances of “wide-area damage” caused by a catastrophe with a quick review of the principles that emerge from the case of Orient Express Hotels v Generali [2010] EWHC 1186 (Comm), the authoritative English case that arose from the damage to the city and surrounding area of New Orleans.

The case concerned a dispute over coverage for concurrent BI losses caused by both insured property damage and also by wide-area damage as a result of Hurricanes Katrina and Rita striking New Orleans in 2005. It is the English law authority on the “causation” analysis that is to be undertaken in circumstances where concurrent BI losses have been caused by damage to an insured property and also caused by wide-area damage.

It was not in dispute that only BI losses actually caused by damage to the hotel was covered by the policy (as is quite usual). The policy also provided very limited cover for BI loss for Loss of Attraction and for Prevention of Access (the “BI Extensions”). However, insurers argued that much of Orient Express’ BI loss that occurred concurrently was caused by wide-area damage, and such BI loss would still have occurred but for the damage to the hotel and so was not covered by the policy beyond the BI Extensions (the but for causation language was used within the policy).

Therefore, what analysis should be undertaken in circumstances where there are concurrent BI losses caused by damage to insured property (covered by the policy) and caused by wide-area damage (not covered by the policy beyond the BI Extensions)?

The appropriate analysis is to consider the scenario of “an undamaged hotel in a damaged city”. In this way, it was possible to establish the BI loss incurred caused by damage to the hotel alone:

 (1) Profit from an undamaged hotel in a damaged city

LESS

(2) Profit actually earned by a damaged hotel in a damaged city

EQUALS

(3) Lost Profit caused by damage to the hotel

Orient Express argued that the “but for” causation test (using number (1) above) was unfair in the circumstances of wide-area damage; therefore, the Court considered what other tests might be applied that might be more fair or reasonable:

(i)         The analysis at number (1) above should assess a damaged hotel in a damaged city – but this is what actually occurred, and so would lead to a nil recovery;

(ii)        The analysis at number (1) above should assess an undamaged hotel in an undamaged city – but this would assess what the hotel would have earned had there been no hurricanes, and so would lead to a recovery of BI loss not actually caused by damage to the hotel, which (as had been agreed) was not recoverable under the policy beyond the BI Extensions;

(iii)       The analysis at number (1) above should assess a damaged hotel in an undamaged city – this would assess what the hotel would have earned had the hurricanes only struck the hotel, and so would lead to a recovery of BI loss caused by wide-area damage to the city rather than damage to the hotel i.e. the exact opposite of what the policy stated.

Unsurprisingly, the Court rejected each of these three alternatives.

The Court recognised that conducting this hypothetical analysis based on expert and factual evidence may not always be a straightforward exercise but it can be done, as the evidence before the Tribunal and the Award itself demonstrate.”

The “undamaged property in a damaged area” analysis makes sense. One is seeking to measure the BI loss caused by damage to the insured property. Therefore, for the analysis to work, one has to measure the “variable” whilst everything else is constant. In this case, the “variable” is the damage to the insured property and the “constant” is the wide-area damage: the fluctuation to be measured occurs only to the “variable” in which you are interested (the insured property – it is either damaged or undamaged). That is precisely what the but for test seeks to do, and the way to measure it is to compare profits actually earned in a widely-damaged area with profits that would have been earned in a widely-damaged area had there been no damage to the insured property.

DAMIAN CLEARY, A PARTNER OF FORAN GLENNON (UK) LLP, OUR NEW LONDON OFFICE, ACTED FOR INSURERS IN THIS CASE.