In January 2021, The Supreme Court handed down judgment in the Covid-19 Business Interruption insurance test case of The Financial Conduct Authority v Arch and Others.
The Supreme Court took a narrower approach to identifying the insured peril or trigger in disease clauses, focusing on individual occurrences, but because it found that such individual occurrences could as a matter of law satisfy the test of causation (along with all other such occurrences) the conclusion that there was cover under the disease clauses was confirmed.
It confirmed that prevention of access/hybrid clauses will be triggered more readily than at first instance – there is no requirement for an actual legislative step ordering closure, and equally losing access for the purposes of a part of a business or access to a part of premises may suffice. On causation, the “source” event (i.e. the Covid-19 pandemic) will not be a competing cause when assessing if the insured has established causation and hence Insurers’ arguments as to the competing causes of loss were rejected.
The principle underlying the above conclusions was that “but for” causation is neither always necessary nor always sufficient. Here it was not necessary.
Trends clauses are intended to address losses wholly outside the insured peril; matters inextricably linked to the insured peril or the source of the insured peril are not trends and do not fall to be taken into account.
The above principles apply also to pre-trigger downturn in revenue; there is no ability to reduce claims by reason of circumstances caused by the source of the insured peril pre-trigger.
The Supreme Court has determined that the Orient Express case was wrongly decided and that it should be overruled thus going further than the High Court who had earlier merely indicated that they would not have followed it if it was relevant.
In Orient-Express Hotels v Generali –
1 July 2019. The Commercial Court considered Orient Express during the FCA Test Case in July 2020.
The Test Case concerned the business interruption losses that arose following the outbreak of Covid-19 in the UK. Orient Express was a hotly contested issue, and we look here at how the Test Case may affect its application.
In Orient Express Hotels Ltd v Assicurazioni Generali SPA t/a Generali Global Risk  EWHC 1186 (Comm), the Commercial Court held that the ‘but for’ causation test applies under standard BI policy wordings where there are two concurrent independent causes of loss, and there could be no indemnity for financial loss concurrently caused by: (1) damage to the insured premises – a luxury hotel in New Orleans, and (2) evacuation of the city as a result of Hurricanes Katrina and Rita.
Orient Express Hotels Ltd (OEH) was owner of the Windsor Court Hotel (the Hotel), which suffered significant hurricane damage in August and September 2005 leading to its closure for a period of two months. The surrounding area was also devastated by the storms, with the entire city shut down for several weeks following the declaration of a state of emergency, and the imposition of a curfew and mandatory evacuation order.
The arbitral Tribunal held that OEH could only recover in respect of loss which would not have arisen had the damage to the Hotel not occurred, and this meant that OEH was to be put in the position of an owner of an undamaged hotel in an otherwise damaged city. Since New Orleans itself was effectively closed for several weeks due to widespread flooding, with no-one able to visit the area or stay at the Hotel even if it had (theoretically) been undamaged, OEH could not recover under the primary insuring provisions for BI loss suffered during this period. A limited award of damages was made under separate Loss of Attraction and Prevention of Access extensions to the policy.
OEH appealed to the Commercial Court, arguing that the Tribunal’s approach was inappropriate given the wide area damage to the Hotel and the vicinity caused by the same hurricanes. OEH sought to rely upon principles established in: Miss Jay Jay  and IF P&C Insurance v Silversea Cruises , that, where there are two proximate causes of a loss, the insured can recover if one of the causes is insured, provided the other cause is not excluded; and Kuwait Airways Corpn. v Iraqi Airways Co. , that, where a loss has been caused by two or more tortfeasors and the claimant is unable to prove which caused the loss, the Courts will occasionally relax the ‘but for’ test and conclude that both tortfeasors caused the damage, to avoid an over-exclusionary approach.
Mr Justice Hamblen dismissed the appeal, concluding that no error of law had been established in relation to the Tribunal’s application of a ‘but for’ causation test under the policy on the facts as found at the arbitration hearing, whilst recognising “as a matter of principle there is considerable force in much of OEH’s argument”.
The insurance authorities mentioned above were distinguished as involving interdependent concurrent causes, in which case the ‘but for’ test would be satisfied. The Court did appear to accept that there may be insurance cases where principles of fairness and reasonableness meant that the ‘but for’ causation test is not applicable, but OEH was unable to establish an error of law by the Tribunal where this argument had not been raised at the arbitration hearing. Given these evidential constraints on an appeal limited to questions of law, OEH was unsuccessful in the Commercial Court.
Permission to appeal was granted, indicating that the Court considered OEH’s grounds for further challenge had a real prospect of success. Settlement on commercial terms was agreed between the parties prior to the Court of Appeal hearing, however.
The decision in this case has been criticised by commentators as unfair, giving rise to the surprising result that the more widespread the impact of a natural peril, the less cover afforded by the policy. The High Court appears to have agreed in the Test Case that concluded in July 2020.
In a judgment handed down on 15 September 2020, Flaux LJ and Butcher J said at paragraph 523:
“We consider that there are several problems with the reasoning in Orient Express. First and foremost, as we see it, there was a misidentification of the insured peril… It seems to us that the error in the reasoning may have come about because the judge focused only on the “but for” causation issue and, to our minds surprisingly, did not pose the question of what was the proximate cause of the loss claimed…”
The judgment continues at paragraph 529:
“It follows that, if we had thought that the decision in Orient Express somehow dictated the consequences in terms of cover and the counterfactual analysis for which the insurers contend in the present case, we would have reached the conclusion that it was wrongly decided and declined to follow it…”
This is welcome news for policyholders. It is clear that Flaux LJ and Butcher J disagreed with the principles that underpinned the decision in Orient Express, and this can only be positive for the adjustment of insurance claims moving forward. However, importantly, the Court’s comments regarding the correctness of the decision in Orient Express are strictly obiter, since the case was distinguished from the fact under consideration in the Test Case. On that basis the ‘wide area damage’ principle set down in Orient Express, at least as applied to property-linked BI claims, remains good law and it is likely that Insurers will continue to rely on it unless and until the decision is overturned by a superior Court.
That said, readers will likely be aware that there is a chance that the insurers that participated in the FCA Test Case will appeal. We anticipate that we will learn of any such appeal on 2 October 2020, with the leapfrog appeal to the Supreme Court being heard in December 2020 / January 2021. While it may be frustrating for policyholders that there remains a risk that Orient Express could have some application moving forward, the possibility of the Supreme Court deciding the outcome one way or another must be welcomed. The law as it stands as now unsettled and ultimate clarification from the Supreme Court will provide the finality required by all stakeholders.