FCA picks apart insurer reliance on Hurricane Katrina judgment in BI test case

Hurricane Katrina
Many commercial properties were damaged in Hurricane Katrina

On the second day of the Financial Conduct Authority’s business interruption test case, the regulator’s lawyers argued there are key issues with the Hurricane Katrina Orient Express judgment insurers are expected to lean on during the case.

Colin Edelman, counsel for the regulator, argued that reversing the Orient Express judgment would “restore sanity rather than creating mayhem and restore these policies to acting in a way an insured would expect them to operate”.

The Orient Express case involved a hotel that closed for two months in 2005 after taking damage from Hurricane Katrina. The insurer in the case, Generali, argued that applying a ‘but for’ test the hotel would have suffered from business interruption whether it was damaged or not, as the surrounding area was also devastated from the hurricane.

In Orient Express the judge upheld a tribunal’s decision on the concurrent causes, which found that ‘but for’ reasoning meant the hotel was entitled to significantly less of a pay out under its business interruption policy due to a trends clause in the policy.

Today, looking at trends clauses Edelman argued that the judgment in the Orient Express case was driven by “an incorrect analysis of what the insured peril actually was”.

Edelman said it should not be a case of insurers saying “we’ll compensate you for nothing or if you’re a sort of business where you can claim a windfall we will [compensate] you and everyone like you for a windfall”.

Earlier in proceedings Edelman compared insurer approaches to multi-component triggers as “cherrypicking,” lambasting “inconsistency” between various insurers’ approaches.

He also highlighted inusrer “reverse engineering” of policies.

Edelman said insurers in the case were “studiously avoiding the most fundamental underlying issue […] in all these clauses,” which he said was the disease or emergency.

Further, he accused insurers of “redefining” the peril.

Multicomponent triggers, Edelman said, cannot be treated as “salami sliced” out “ingredients.”

Fellow FCA counsel Leigh-Ann Mulcahy also took a swipe at insurer reliance on the Orient Express judgment.

It must be recognised the case “falls to be revisited in a different context”, Mulcahy argued.

Adding that the judge in the case himself “accepted [his judgment] had a real prospect of being wrong as regards law.”

Orient Express is wrong. It fails to take account of [Silversea] and the need to construe party intention where the rival cause is the underlying cause on which the policy trigger is premised. It fails to take account of the need for realistic counterfactuals to give effect to policy intentions and it produces an unintended windfall problem, and fails to deal with the problem of concurrency as between the property damage clause on the one hand and the LOA/POA clauses on the other,” said Mulcahy.

Adding: “Much of it comes down to common sense.”

Mulcahy pointed to the Silversea judgment, involving a case between a cruise ship owner and its insurers following the 11 September terror attacks, as being the “closest case” to the BI proceedings rather than Orient Express.

In the Silversea case the insured argued losses were recoverable in the case of there being two concurrent causes, in this case the terror attacks themselves causing disruption as well as ensuing US government warnings on risk of further terrorism leading to a downturn in business from its mainly US customer base.

It was ultimately determined that it was possible to claim if one of these causes was insured and the other was not excluded.

The High Court test case is expected to run for another six days, with the FCA scheduled to continue with its submissions on the behalf of businesses tomorrow.

Insurers named as defendants in the case are Arch, Argenta, Ecclesiastical, Hiscox, MS Amlin, QBE, RSA and Zurich.

However, 60 insurers and around 370,000 policyholders are expected to be affected by the judgment.

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