Orient-Express Hotels Ltd v Assicurazioni General SA (UK Branch) (t/a Generali Global Risk)

Hearing dates: 17 th May 2010

Approved Judgment

I direct that pursuant to CPR PD 39A para 6.1 no official shorthand note shall be taken of this Judgment and that copies of this version as handed down may be treated as authentic.

Mr Justice Hamblen:

Introduction

The Claimant (“OEH”) appeals under section 69 of the Arbitration Act 1996 against an arbitration award (“the Award”) published on 26 November 2009 by a tribunal consisting of Sir Gordon Langley (Chairman), Mr. George Leggatt QC and Mr. John O'Neill FCII (“the Tribunal”) pursuant to permission to appeal given by Mr. Justice Burton.

OEH seeks to appeal the Award on two questions of law arising under a combined property damage and business interruption policy of insurance (“the Policy”) purchased by OEH from the Defendant (“Generali”), as follows:

(1) Whether on its true construction, the Policy provides cover in respect of loss which was concurrently caused by: (i) physical damage to the property; and (ii) damage to or consequent loss of attraction of the surrounding area;

(2) Whether on the true construction of the Policy, the same event(s) which cause the damage to the insured property which gives rise to the business interruption loss are also capable of being or giving rise to ‘special circumstances’ for the purposes of allowing an adjustment of the same business interruption loss within the scope of the “Trends Clause.”

The background to the appeal

OEH is a well-known luxury hotelier and holiday operator and was the owner of the Windsor Court Hotel, 300 Gravier Street, New Orleans, a premier 23 storey hotel situated in the Central Business District, close to the historic French Quarter of New Orleans (“the Hotel”).

The arbitration concerned the effects of Hurricane Katrina and Hurricane Rita in New Orleans in the autumn of 2005. The Hotel suffered significant physical damage from wind and water. The Hotel 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. OEH sustained significant business interruption losses.

The surrounding area of New Orleans was also devastated by Hurricanes Katrina and Rita. A state of emergency had been declared and a curfew imposed on 27 August 2005; a mandatory evacuation of the City was ordered (with limited exceptions) on 28 August and repeated (without most of the exceptions) on 6 September 2005. The City was only re-opened and the curfew lifted at the end of September and beginning of October 2005.

OEH accepts that it has to establish, and can only recover in respect of business interruption loss caused by physical damage to the Hotel.

The essential issue raised by OEH on its appeal is how the policy responds in circumstances where both the Hotel and the wider area (“the vicinity”) were damaged and where OEH contends that significant aspects of its business interruption loss were caused both by the damage to the Hotel and by damage to the vicinity (and the consequences of such damage to the vicinity, such as broader loss of attraction), both of which had themselves been caused by the same hurricanes.

OEH submits that the point is illustrated by considering the month of September 2005. The Hotel was closed for the entirety of this month on account of the damage to the Hotel, save for use by a team of NBC reporters. OEH claims that it suffered business interruption losses of about US$2.15m for this month. However, the City of New Orleans was effectively ‘closed’ for the whole of September 2005. Thus, no one could visit the Hotel because it was damaged; but no one could visit the Hotel because New Orleans was effectively closed off. If the Hotel had been left undamaged but all other consequences of Katrina / Rita are assumed to have occurred (“an undamaged Hotel in an otherwise damaged City”), the business interruption loss for September 2005 would have been the same; on the other hand, if the Hotel had been damaged but the vicinity had not been damaged and closed off, paying customers would not have been able to stay in the damaged hotel either and the business interruption loss for September 2005 would also have been effectively the same.

OEH contends that it is entitled to an indemnity under the primary indemnity provisions of the Policy for all business interruption loss resulting from an interruption of or interference with its business caused by (insured) damage to the Hotel, even if that business interruption loss was also (concurrently) caused by damage to the vicinity (or the consequences of such broader damage to the vicinity) resulting from the same hurricanes.

Generali contend, and the Tribunal held, that OEH can only recover in respect of loss which it can be shown would not have arisen had the damage to the Hotel not occurred – i.e. which satisfies the “but for” test of causation. The Tribunal held that this means putting OEH in the position of an owner of an ‘undamaged hotel in an otherwise damaged City.’ This means that, in relation to the September 2005 example, since an undamaged hotel would have suffered the same loss due to the vicinity damage and its consequences there is no indemnity under the primary insuring provisions of the Policy in respect of such loss.

OEH contends that in so holding the Tribunal erred in law. The “but for” causation test is not the appropriate causal test to be applied in the present case. The Tribunal should have treated this as a case of a loss caused by two concurrent independent causes, one of which was insured (physical damage to the Hotel). It contends that if the damage to the Hotel is a cause of the business interruption loss, it matters not that the same loss was also concurrently caused by vicinity damage (or the consequences of vicinity damage). In particular, there is no exclusion for loss caused or concurrently caused by vicinity damage and a reduced indemnity which seeks to put the claimant in the position of an undamaged Hotel in an otherwise damaged City does not properly compensate it for the business interruption losses caused by the damage to the Hotel.

The Policy

The principal clauses of relevance are the following:

(1) The Policy's Insuring Clause:

“In consideration of the Insured… paying the premium…. the Insurers… agree… to indemnify the Insured

a) under the Material Damage and Machinery Breakdown Sections against direct physical loss destruction or damage except as excluded here in to Property as defined herein such loss destruction or damage being hereafter termed Damage

b) 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.”

(2) The insuring clause at the head of the Business Interruption section of the Policy:

“If any property owned used or otherwise the responsibility of the Insured for the purpose of or in the course of the Business suffers Damage as defined or there occurs an event or circumstances as described elsewhere in this Section of the Policy and the Business be in consequence thereof interrupted or interfered with the Insurers will pay to the Insured the amount of the loss resulting from such Interruption in accordance with the provisions contained therein”.

(3)The Trends Clause:

“In respect of definitions under 3, 4, 5 and 6 above for 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 Policy also provided cover for Prevention of Access (“POA”) and Loss of Attraction (“LOA”).

The POA Clause provides as follows:

“ This policy is extended to include reduction in Revenue incurred by the Insured:

a) arising out of Property in the vicinity of any location owned occupied or operated by the Insured suffering Damage or being closed (in whole or part) or deemed unusable by a competent authority and which shall consequently prevent or hinder the use of the location concerned or access thereto whether Property Insured shall be damaged or not;…”

The LOA Clause provides as follows:

“ This Policy extends to indemnify the Insured in respect of a reduction in Revenue resulting directly from loss destruction or damage to property or land in the vicinity of any premises owned and/or managed by the Insured and insured under this Policy.”

OEH has recovered an indemnity under the POA and the LOA clauses but this is subject to significantly lower limits than would be the case under the Insuring Clause.

The Award

The most material parts of the Award are as follows:

“THE CONSTRUCTION ISSUE

15. The issue arising on the construction of the policy is of fundamental importance to the approach to the Business Interruption claim and has had a major effect on the nature and quality...