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Covid-19 Business Interruption Update – FCA challenges Orient Express v Generali

15 July 2020
By Fenchurch Law

The FCA and insurers have now filed their skeleton arguments in the COVID-19 business interruption Test Case, drawing the battle lines and setting out in full the arguments in support of their pleaded cases.

Of particular interest, and with potentially significant wider implications, are the sections on causation, including the application of trends clauses.  The general thrust of the FCA’s case on causation is that:

  • for disease clauses, the presence of COVID-19 in each locality is an integral part of one single broad and/or indivisible cause, being the COVID-19 pandemic; and
  • for public authority/prevention of access clauses, the various ingredients of the clause and the government’s actions in response to the pandemic amount to a single indivisible cause of loss, and the insurers’ “salami slicing” of the insuring clause is legally flawed.

Most notably the FCA submits that, not only is Hamblen J’s decision in Orient Express Hotels Ltd v Assicurazioni Generali Sp.A [1] to be distinguished on the facts, but that it was wrongly decided , ‘falls to be revisited’, and is ‘open to correction.’


Our commentary on the contentious Orient Express case can be found here, but in summary, the case concerned a claim brought by a hotel in New Orleans following Hurricane Katrina, which had damaged the insured property and devastated the city as a whole. The policyholder claimed for its business interruption losses caused by the damage, but the court found that the application of the trends clause prevented recovery of the losses due to the application of the ‘but for’ test of causation.  ‘But for’ the damage to the insured property, the policyholder would still have suffered the same losses because of the damage to the wider area, meaning that there would have been no tourists able to stay in the hotel even if it had been undamaged.

Insurers’ reliance on the case

In relation to COVID-19 business interruption claims, insurers have cited the Orient Express case in support of their arguments that, even if coverage is triggered under Infectious Disease, Public Authority or Prevention of Access clauses, the application of trends clauses in the relevant policies means that adjustments must be made for the wider effects of the pandemic and/or other government actions such as social distancing and the general lockdown. The net result, insurers say, is that policyholders would have suffered the same losses regardless of whether the insured peril can be demonstrated to have been triggered.

The FCA’s case

The FCA attacks Orient Express from a number of angles. First, it notes that this was a first instance decision that was itself an appeal from an arbitration award, and as such was limited in scope to considering whether the arbitral tribunal had made an error of law. The court acknowledged that further arguments could have been made as to the disapplication of the ‘but for’ test in the interests of fairness, and indeed such arguments were raised by the policyholder in the case.  But as the arguments had not been raised in the underlying arbitral proceedings, the court was unable to consider them.  The court in Orient Express also granted permission to appeal, but the appeal was regrettably never heard as the case was settled.

Secondly the FCA points out, as many policyholders have done repeatedly to insurers, that the decision in Orient Express related to a dispute under a damage-linked BI cover, and that insurers had in fact paid out the available sublimits under the Denial of Access and Loss of Attraction covers in that case. The fact that they had was germane to the decision of the court, since the judge remarked:

if Generali asserts that the loss has not been caused by the Damage to the Hotel because it would in any event have resulted from the damage to the vicinity or its consequences, it has to accept the causal effect of that damage for the POA or LOA, as indeed it has done.  It cannot have it both ways.  The ‘but for’ test does not therefore have the consequence that there is no cause and no recoverable loss, but rather a different (albeit, on the facts, more limited) recoverable loss.”

In the present case, insurers are indeed seeking to ‘have it both ways’, since they deny that coverage extends either under the main damage-linked insuring clause or the wider area non-damage extensions.

Thirdly, the FCA argues that the court in Orient Express applied the ‘but for’ test in a fundamentally incorrect way by treating the damage to the property and the underlying cause as distinct competing causes even though the property damage could not have occurred without the hurricane.

Finally, the FCA submits that the court failed to properly apply the superior court decision in The Silver Cloud [2], a case considering claims brought in relation to business interruption losses arising from the 9/11 attacks, in which the Court of Appeal found that the two causes of loss (terrorism and government warnings) were inextricably linked and so could be treated as a single cause.  The case has obvious relevance to the present circumstances.

What are the possible outcomes?

Broadly speaking there are three different landings the court may reach on this issue (although inevitably the court may find some more nuanced combination or alternative):

  • The Court rules in the FCA’s favour – Orient Express was wrongly decided, and the ‘but for’ test should consider a counterfactual in which the broader underlying cause of loss is removed.  This outcome is very unlikely at first instance: although not technically bound by the High Court decision in Orient Express, the decision will be viewed as highly persuasive authority, and the court in this case is unlikely to depart from it, since this would result in two conflicting lower court decisions.  It is possible however that the court may simply find that it is bound by the Court of Appeal’s decision in The Silver Cloud rather than the lower court decision in Orient Express. Any such decision would almost certainly be appealed by insurers.
  • The Court rules in insurers’ favour – the application of Orient Express means no (or limited) recovery even if coverage is triggered. In this case it is quite possible, that the court may in its judgment indicate that whilst it finds itself bound to follow Orient Express, it disagrees with the decision in whole or in part. Either way, by arguing that Orient Express ‘falls to be reconsidered’, the FCA must presumably be contemplating appealing on this issue to seek the overturning of the decision by the higher courts.  As the Framework Agreement expressly contemplates a leapfrog appeal, it is therefore possible that this issue could fall for determination by the Supreme Court in the near future.
  • Alternatively, the Court may take the somewhat easier path of distinguishing Orient Express on the basis that it only applies to property damage losses, which has also been argued by the FCA. This would leave the legal principle intact, but would narrow the scope of its application so that it does not act to limit claims brought under non-damage BI extensions, which is surely right, since these extensions are themselves effectively intended to respond to ‘wide area’ perils. Such a ruling would still have significant implications for insurers and may well still be appealed.

It is clear that the FCA’s Test Case has far-reaching implications beyond the scope of COVID-19 business interruption coverage for which it has been brought, and whilst these issues will be fiercely contested by insurers, the end result will hopefully be a greater degree of judicial clarity and certainty, which in the long term can only be in the best interests of both policyholders and insurers.

[1] Orient Express Hotels Ltd v Assicurazioni Generali Sp.A [2010] EWHC 1186 (Comm), [2010] Lloyd’s Rep IR 531

[2] IFP&C Insurance Ltd (Publ) v Silversea Cruises Ltd, the Silver Cloud [2004] EWCA Civ 76, [2004] Lloyd’s Rep 696 CA