In the wake of the damage and destructions caused by Hurricane Sandy many policyholders (and insurers and reinsurers) are currently checking what is likely or not likely covered under their policies. Particularly, with commercial property or business, the main issue seems to be whether and how business interruption losses are covered. Problems can arise when an insured suffered loss of revenue which was not necessarily caused by the damage to the insured property.
Interestingly, this very issue of business interruption arose in the wake of Hurricane Katrina where a well-known luxury hotel, the Windsor Court Hotel, suffered substantial physical damage and business interruption losses. Because of the damage sustained by the hurricane, the hotel had to close for some time. Additionally, the city of New Orleans and its surrounding areas had also been devastated and a state of emergency had been declared on August 27, 2005. The city was only re-opened in late September meaning that, even if the hotel had not been damaged, tourists would not have been able to access and stay at the hotel.
This situation raised the question as to how the policy responded in circumstances where both the hotel and the wider area were damaged and where the owners of the hotel contend that significant aspects of their business interruption loss were caused both by the damage to the hotel and by the damage to the city and surrounding area.
The insuring clause in the policy stated that the insurer would indemnify the insured.
“…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.”
The insuring clause defined “damage” as “direct physical loss destruction or damage”. To assist in the calculation of business interruption losses, the policy also contained a trends clause which stipulated “… 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.” (emphasis added) Additionally, the policy contained a Prevention of Access and a Loss of Attraction clause, although these carried lower limits than the “main” policy.
In light of the above policy terms, the question was whether the insuring clause provided cover for any and all losses suffered by the hotel as the result of the hurricane and its effect both on the city and in causing damage to the hotel (1) or whether it provided cover only for losses caused by damage to the hotel itself but not for losses caused by the damage to the city.
The answer (decided by an arbitral tribunal and later by the court) was. Indeed, the owners could only recover in respect of loss which could not have arisen had the damage to the hotel not occurred (also called the “but for” test). The “but for” test was a necessary condition for establishing causation in fact. The owners argued that there were two concurrent causes, which, if the normal rule applied, meant that they could not recover. Therefore, fairness and reasonableness required that the normal rule be relaxed. However, the operation of the Prevention of Access and Loss of Attraction clauses meant the owners could recover something from their loss, albeit at a far lesser amount than under the normal insuring clause. Additionally, the trends clause clearly indicated that the policy adopted a “but for” causation approach for the calculation of loss of revenue. Therefore, the proper interpretation of the policy, in light of the facts, meant that the owners could recover for business interruption losses caused by damage to the hotel and losses caused by damage to the city could be recovered under the Prevention of Access and Loss of Attraction clauses.
This is a good example of how a typical combined property damage and business interruption insurance policy might respond to losses caused by Sandy.