Factual and Procedural Background
The Appellant ("OEH") appeals under section 69 of the Arbitration Act 1996 against an arbitration award ("the Award") published on 26 November 2009 by a tribunal ("the Tribunal") comprising a chairman and two members, following permission to appeal granted by a High Court judge. OEH purchased a combined property damage and business interruption insurance policy ("the Policy") from the Defendant ("Generali").
OEH is the owner of a luxury hotel ("the Hotel") located in a major city ("the City"). The arbitration concerned damage caused by two hurricanes in 2005, which inflicted significant physical damage to the Hotel and caused its closure for several months, resulting in substantial business interruption losses. The wider City was also devastated, with emergency measures including curfews and evacuations, effectively closing the City for a period overlapping the Hotel’s closure.
OEH accepts it can only recover business interruption losses caused by physical damage to the Hotel but contends that losses were concurrently caused by damage to the Hotel and damage to the surrounding area (including loss of attraction). OEH argues that it is entitled to indemnity for all such losses under the Policy’s primary indemnity provisions.
Generali and the Tribunal held that OEH could only recover losses that would not have arisen "but for" the damage to the Hotel itself, effectively excluding losses that would have occurred due to damage to the City alone. OEH challenges this "but for" causation test as inappropriate, submitting that the loss was caused by two concurrent independent causes, one insured and one not, and that the Policy should indemnify losses caused by the insured damage regardless of concurrent causes.
The Policy includes insuring clauses covering physical damage and business interruption directly arising from such damage, as well as extensions for Prevention of Access ("POA") and Loss of Attraction ("LOA") with lower limits. The Tribunal’s Award focused on the construction of the Policy’s causation provisions, particularly the application of the "but for" test and the meaning of the Trends Clause, which governs adjustments to business interruption loss calculations.
Legal Issues Presented
- Whether, on its true construction, the Policy provides cover for loss concurrently caused by: (i) physical damage to the property; and (ii) damage to or consequent loss of attraction of the surrounding area.
- Whether, on the true construction of the Policy, the same event(s) causing damage to the insured property giving rise to business interruption loss are capable of being or giving rise to 'special circumstances' allowing adjustment of that loss within the scope of the "Trends Clause."
Arguments of the Parties
Appellant's Arguments
- OEH contends the Policy should indemnify business interruption losses caused concurrently by insured physical damage to the Hotel and damage to the surrounding area, without excluding losses caused concurrently by damage to the vicinity.
- OEH submits the "but for" causation test is not appropriate in this case of concurrent independent causes because it would lead to the illogical result of no recovery for either cause.
- OEH relies on legal authorities recognizing exceptions to the "but for" test in cases of concurrent sufficient causes, arguing fairness and reasonableness require relaxation of the test in contract as well as tort.
- OEH argues the Trends Clause should not permit adjustments for the consequences of the very same insured peril that caused the damage and business interruption loss, as this would create counter-intuitive results and "windfall" recoveries.
- OEH submits that if insurers wish to exclude losses caused by wider damage, they must do so expressly in clear exclusion clauses, which the Policy does not contain.
- OEH contends that the Defendant’s approach subverts the indemnity principle by excluding losses caused concurrently by the insured peril’s wider effects.
- OEH relies on case law and textbooks supporting recovery where there are concurrent causes, including a business interruption case involving concurrent causes of loss following the 9/11 attacks.
Defendant's Arguments
- Generali and the Tribunal maintain that the Policy requires application of the "but for" causation test, limiting recovery to losses caused by physical damage to the Hotel itself, excluding losses caused by damage to the City or lack of demand due to that damage.
- They argue that the Trends Clause explicitly requires assessment of loss on the basis of what would have occurred "but for the Damage" to the Hotel, making it inappropriate to consider concurrent causes outside that damage.
- Generali submits that the Policy’s structure and wording clearly distinguish losses caused by damage to the insured property from those caused by damage to surrounding property, which are only covered under specific extensions with lower limits.
- They contend that the case law and authorities cited by OEH do not address the specific contractual wording or the issue of two concurrent independent causes in this insurance context.
Table of Precedents Cited
| Precedent |
Rule or Principle Cited For |
Application by the Court |
| Kuwait Airways Corpn v Iraqi Airways Co (Nos 4 and 5) [2002] 2 AC 883 |
Exception to the "but for" test in tort where multiple wrongdoers are involved; fairness and reasonableness may require relaxation of causation test. |
The court accepted the principle may apply beyond tort but emphasized it depends on circumstances; no finding that it applied in this contract case. |
| IF P & C Insurance Ltd v Silversea Cruises Ltd [2004] Ll. R.I.R. 217 |
Concurrent causes in business interruption insurance and treatment of overlapping causes of loss. |
The case involved concurrent interdependent causes and was distinguished as not addressing concurrent independent causes or the "but for" test issue directly. |
| Prudential Lmi v Colleton Enterprises, 976 F2d 727 (1992) |
Interpretation of lost earnings provisions and causation in business interruption insurance. |
The Tribunal found the dissenting judge’s reasoning persuasive but held the case was distinguishable due to different policy wording. |
| Wayne Tank and Pump Company Ltd v Employers Liability Assurance Corporation Ltd [1974] 1 QB 57 |
Concurrent causes and recovery under insurance policies where losses have multiple causes. |
Referenced in support of the principle that recovery is possible if one cause is insured and not excluded. |
| Miss Jay Jay [1987] 1 Lloyd's Rep. 3 |
Principle that recovery is allowed where there are concurrent proximate causes and one is insured. |
OEH relied on this principle; the court noted it has been applied to concurrent interdependent causes but not previously to independent causes. |
Court's Reasoning and Analysis
The court analyzed the Policy’s wording, focusing on the definition of "Damage" as direct physical loss or damage to the insured property and the requirement that business interruption loss must directly arise from such Damage. The Trends Clause requires assessment of loss on a "but for" basis, comparing actual revenue with what would have been obtained had the Damage not occurred.
The court acknowledged OEH’s argument that the "but for" test may be over-exclusionary in cases of concurrent independent causes, citing tort authorities and principles of fairness and reasonableness. However, the court held that the Policy explicitly incorporates the "but for" test as a fundamental element of loss assessment, making it difficult to depart from this approach.
The court noted that OEH did not argue before the Tribunal that this was an exceptional case requiring relaxation of the "but for" test on grounds of fairness, and no findings were made on that issue. The court emphasized that the question of whether fairness requires such relaxation is primarily a factual question for the tribunal of fact, not a matter for this appeal.
The court rejected OEH’s construction of the Trends Clause as permitting adjustments for consequences of the same insured peril beyond the Damage itself, holding that the clause requires the assumption that the Damage did not occur, but does not require ignoring the cause of the Damage. The court agreed with the Tribunal that the Policy covers losses caused by Damage to the insured property and separately covers losses caused by damage to the vicinity under specific extensions with lower limits.
The court concluded that the Tribunal’s approach was consistent with the Policy’s structure and wording, and that no error of law was demonstrated in applying the "but for" causation test and construing the Trends Clause as it did.
Holding and Implications
The appeal is DISMISSED.
The court upheld the Tribunal’s interpretation of the Policy, confirming that business interruption losses are recoverable only to the extent they are caused by direct physical damage to the insured property, assessed on a "but for" basis. Losses caused solely by damage to the surrounding area or its consequences are recoverable only under the Policy’s specific extensions for Prevention of Access and Loss of Attraction, which have lower limits. The court found no error in the Tribunal’s construction of the Trends Clause or its application of causation principles.
This decision affirms the application of the "but for" test in the context of business interruption insurance policies with similar wording and clarifies the limited scope of recovery for losses caused by damage to surrounding property. No new legal precedent was established beyond the application of established principles to the contract terms at issue.