Derailing the Orient Express

A UK court has overturned a decision that’s been influential in assessing business interruption claims after catastrophes

By Wendy Pugh

Like a best-selling thriller with plenty of twists, a legal dispute invoking the legendary Orient Express train but actually involving a New Orleans hotel has led to a judgment by a court in London that has implications for businesses in Australia.

Fifteen years after Hurricane Katrina devastated New Orleans, the UK Supreme Court has ruled a landmark insurance decision that reduced the amount of money that could be paid to a damaged hotel was wrong.

The ruling, part of a test case judgment on coverage for losses triggered by the COVID-19 pandemic, overturns a precedent relied upon by insurers to limit business interruption liabilities after catastrophes and disasters.

“The reason it is significant is that it has implications beyond the coronavirus issues that are currently before the courts,” Herbert Smith Freehills Partner Mark Darwin says. “The decision will have widespread implications for bushfires, floods and earthquakes.”

The original case involved a claim lodged by Orient Express Hotels after a property in the New Orleans French Quarter was damaged by Hurricanes Katrina and Rita in 2005.

The hotel was closed during September and October, when the surrounding area was also devastated by the hurricanes, and a claim for property and business interruption cover was lodged under a policy governed by English law.

Business interruption claims are assessed by looking at previous financial performance, and adjusting for circumstances and trends besides the event triggering the claim, that might have affected trading.

A manufacturer that has recently lost its largest client, or a restaurant whose celebrity chef has just quit, would receive payments that take account of those changes, reflecting a scenario where the business had continued trading and the disaster which halted operations, such as a fire, hadn’t happened.

In the case of the New Orleans hotel, the business interruption part of the claim was declined on the grounds that even if the property wasn’t damaged by the hurricane, there would have been few visitors because of the destruction in the city.

The dispute went to an arbitration tribunal, which found in favour of the insurer, and was appealed in London where the court backed the original determination in Orient Express Hotels Ltd v Assicurazioni Generali SPA [2010] EWHC 1186 (Comm).

The COVID-19 test case, launched by the UK Financial Conduct Authority, brought Orient Express back into the spotlight as insurers looked to the decision to support their arguments, noting the coronavirus outbreak affected the whole country and lockdown rules applied widely. Shops and restaurants hit by the pandemic were like the hotel amid the devastation of New Orleans.

The High Court’s Lord Justice Flaux and Mr Justice Butcher were not convinced the COVID-19 circumstances were sufficiently similar to the New Orleans hurricane situation, but said if they had viewed the Orient Express precedent as crucial, they would “have reached the conclusion that it was wrongly decided and declined to follow it”.

“In our view, the consequence which flows from the Orient Express decision, that the worse the fortuity which befalls the insured and the vicinity of the insured’s premises, the less the insurance responds, cannot have been intended,” they said.

The High Court judgment, which involved decisions on 21 sample wordings from eight insurers, was partly appealed to the Supreme Court, where arguments were considered by five justices and largely decided in favour of policyholders.

In an echo from the past, the Supreme Court justices delivering the main judgment were Lord Leggatt, who sat on the Orient Express case arbitration tribunal, and Lord Hamblen, who decided the 2010 appeal.

Lords Hamblen and Leggatt came to a different conclusion this time, agreeing with the High Court’s view that surrounding hurricane damage caused by the same event that affected the hotel shouldn’t have reduced the business interruption claim.

“On mature and considered reflection we also consider that it was wrongly decided and conclude that it should be over-ruled,” they said.

Lords Hamblen and Leggatt say they had the benefit of more detailed and wide-ranging argument than at the arbitration and one-day appeal, and were operating in a different context.

In acknowledging the contradiction compared to a decade earlier, they cite Justice Jackson, who was involved in a US case that went against an opinion he had given when Attorney General, and who highlighted a number of judicial reversals.

“We likewise invoke whatever ways by which we may ‘gracefully and good naturedly’ surrender former views to a better considered decision,” Lords Hamblen and Leggatt said.

Other justices in historical cases cited by Justice Jackson have offered “the matter does not appear to me now as it appears to have appeared to me then”, and “I am amazed that a man of my intelligence should have been guilty of giving such an opinion”.

The overturned Orient Express Hotels decision has previously come in for criticism for its potential to unfairly limit payments, while there are also arguments that it could deliver windfall gains for policyholders in some circumstances.

The tenth edition of Riley on Business Interruption Insurance, written by experienced loss adjuster Harry Roberts and quoted in the Supreme Court judgment, doubts whether “it is actually a satisfactory outcome for either insurers or policyholders”. The text warns it may deliver “a potentially counter-intuitive result which is not likely to leave the insurance industry in a good light”.

Lawyers say overturning Orient Express Hotels means cover is provided when damage caused by a wider catastrophe event, such as a hurricane, is concurrent with the catastrophe’s impact on the insured property, as long as there aren’t exclusions.

Herbert Smith Freehills’ Mark Darwin says the principles applied under the original Orient Express Hotels decision have been followed in Australia and New Zealand in assessing claims, but approaches following the Supreme Court ruling should change.

“Strictly, UK law is not binding on Australian courts but it is influential, and insurers have been happy to rely on OEH for the last 10 years to reduce claims even though it was an English decision,” he says.

Events where the Orient Express approach has been an issue in this region include the Christchurch earthquakes, where claims were lodged for damaged buildings in an exclusion zone put in place due to the catastrophe, he says.

UK-based DLA Piper’s Leon Taylor and Oliver Saunders say on the law firm’s website that the Orient Express part of the COVID-19 test case is likely to have significant implications for the adjustment of property damage and non-damage business interruption claims.

“The Supreme Court’s treatment of the controversial case of Orient Express Hotels is perhaps the aspect of the judgment which will have the longest-lasting impact on the insurance market going forward.”