Orient Express: What if the Supreme Court goes against precedent in the FCA BI test case?

During the course of High Court proceedings, the regulator’s lawyers argued that going against the approach set down in Orient Express Hotels v Assicurazioni Generali, a claim involving a hotel caught up in hurricane damage (see box), would restore policies to “acting in a way an insured would expect them to operate”.

Ultimately Lord Justice Flaux and Mr Justice Butcher found that the ruling in Orient Express had misinterpreted the peril, seen as a victory for policyholders.

The FCA’s BI test case has moved on to the appeal stage, with five Supreme Court judges expected to rule on a number of elements of appeal either this year or in January.

According to Sarah Prager, barrister at One Chancery Lane chambers, the High Court was critical of the Orient express decision, and described it in “unflattering terms and not being relied on very often and as being the subject of criticism”.

She said: “They don’t appear to have regarded it as being fully accepted law.

“If the Supreme Court agrees, and overturns it, there will be a significant shift in the law in relation to BI claims arising out of events which lead to generalised disruption. Insurers could potentially find themselves insuring against risks they did not think they would be insuring against, including but not limited to Covid-19​, and this will have obvious knock-on effects.”

Increased liability

Prager added that Orient Express is “one of the most interesting parts” of the FCA test case appeal, because “important as the Covid-19 cases are, the points of general contractual construction will apply to all contracts for insurance, and as such are yet more important.”

Ed Lewis, partner at Weightmans, said that while Orient Express is not the subject of the appeal of the test case, the Supreme Court may “establish new law in terms of the appropriate test for causation and what was used as the test for causation in Orient Express will be set aside”.

He continued: “If [the Supreme Court] does that, it won’t be just relevant to BI insurance, it will be relevant to all insurance, all liability insurance and first party insurance as well.”

He added that this would also apply to “any situation where you need to apply causation test for liability, irrespective of if there is an insurance cover or not”.

“The potential reach of the judgement is huge,” Lewis said.

As a result of the “significant impact” the Supreme Court verdict could have, Lewis said the judges would not want to “go as far as to tear up the entire legal rulebook on causation and say ‘we’re starting over, there’s a different approach’.”

‘But for’ test

The law requires the application of a two stage test when looking at whether insurance policies should pay out.

Lewis explained: “There are two types of causation. There’s factual causation and there’s legal causation. Those are often referred to as ‘but for’ causation and proximate causation.

“When you apply ‘but for’ causation, before you get into the law at all, what you have to ask yourself is ‘was the cause a factual cause of the loss’ and if the answer is ‘no it wouldn’t’, then the factual causation is demonstrated by the ‘but for’ test. If the loss would have happened without the cause, then the factual test isn’t satisfied, so you don’t even get to legal causation. Fundamentally if something factually wouldn’t have caused the loss, there’s no point in looking at it in a narrow legal context because it can’t have been. One has to follow the other.”

Lewis argued: “I don’t think we’ll end up with a situation where the Supreme Court says ‘but for’ causation is no longer relevant. It really is.”

Alistair Kinley, director of policy and government affairs at BLM, agreed that overturning or “setting aside” Orient Express, would mean that “the BI Indemnity would be greater than if Orient Express applies”.

He explained: “This is because the hypothetical trading of the insured - ie ‘but for’ the inability to operate - would be calculated by stripping away not just the specific closure of the business but also the general wider restrictions. The more that’s stripped away in the so-called ‘counterfactual’, the more the BI indemnity increases.”

Inadequate cover

Fenchurch Law partner Aaron Le Marquer said that while the court’s findings on which policies are triggered by the Covid-19 pandemic are “of immediate importance” to policyholders seeking compensation for their losses, “many of those findings are likely to be confined to the present unique facts”.

He continued: “The findings in relation to the Orient Express case and causation more generally are much more far-reaching. As it currently stands, the [High Court] has distinguished Orient Express but indicated that it thought it was wrongly decided. If the Supreme Court agrees, it will produce a much fairer and commercially functional outcome for policyholders in future BI claims.

“Taking the example of the hurricane-damage hotel in the Orient Express case, it would mean that the policyholder would be covered for the full extent of their loss of profits suffered whilst the hotel was closed following damage caused by hurricane, which is surely what the policyholder would have expected when they took out the policy.”

Le Marquer continued: “Having purchased cover for direct property damage caused by hurricanes, and for consequential loss in the form of business interruption loss flowing from such damage, it is very difficult for a policyholder to be told that they are not covered for the business interruption loss, because that was caused by the hurricane, not by the damage.  The policyholder will almost certainly have understood that they purchased cover for BI losses caused by hurricanes (provided that their own property was damaged.)”

Le Marquer added that the finding in Orient Express results “partly from the specific way in which BI coverage drafting has evolved, specifying cover for losses caused by ‘damage’, rather than by a peril otherwise insured under the policy.”

He added: “But such a narrow form of cover is of little use to policyholders when it leaves them with less cover, not more, in the event of a more severe catastrophe, and whilst there is some legal logic to the decision reached in that case (but also some significant problems), the result is commercially unviable. 

“If the Orient Express decision is upheld, that may lead to a conclusion that the industry is simply not providing adequate insurance coverage for catastrophic and systemic risks faced by policyholders. Underwriting and pricing practices may need to be revisited, certainly, but simply refusing to provide the cover required is not an acceptable position for the traditional insurance industry to take, and will hasten the shift towards alternative risk transfer products.”