Business Interruption Insurance: Wide Area Damage Revisited

The Financial Conduct Authority v Arch Insurance (UK) Ltd & Others [2020] EWHC 2448 (Comm).

London 29th September 2020

With regards to downstream oil & gas Business Interruption cover, there is no one standard policy form. Despite the multitude of different policy wordings, most of the issues considered at English Law by the recent COVID-19 Business Interruption test case will not impact upon oil & gas policyholders.

However, during the recent test case, the Court did seek to put to rest the decision in Orient-Express Hotels Ltd v Assicurazioni General SpA (UK) (t/a Generali Global Risks) [2010] EWHC 1186 (Comm) in relation to Business Interruption claims adjustment practices and wide area damage. The Orient-Express v Generali decision having proved contentious and contrary to certain “Schools of Thought”.

Accordingly, in respect of wide area damage and onshore Business Interruption claims adjustment practices, the view of the Court in the recent test case may be worthy of note for certain policyholders.

Wide area damage can occur due to a number of different causes. Such causes can be categorised as follows.

· Natural phenomena e.g. earthquake.

· Weather events e.g. hurricane, typhoon, flooding.

· Accidents e.g. explosions.

· Deliberate acts e.g. terrorism.

The coverage provided by standard UK commercial non-marine “Gross Profit” Business Interruption policies is ordinarily based upon “the sum produced by applying the Rate of Gross Profit to the amount by which the Turnover during the Indemnity Period shall fall short of the Standard Turnover in consequence of the Incident.”

In such standard non-marine policies “Incident” is often defined as “loss or destruction of or damage to property used by the Insured at the Premises for the purpose of the Business”. Specifically, the term Incident does not encompass other damage within the wider surrounding area.

In accordance with the decision in Orient-Express v Generali, in arriving at the Standard Turnover (i.e. the Turnover that would have been earned by the policyholder but for the operation of the insured incident) a downward adjustment would have to be made to take into account the reduction in Turnover the policyholder would have experienced during the Indemnity Period due to damage being sustained by the property of other parties within the surrounding area. For example, a refinery, supplying local businesses, would have experienced a reduced output, even if the refinery had not been damaged, due to damage being sustained by other property within the wider area.

Whilst Dependency, Denial of Access and Loss of Attraction extensions could go some way to counter the decision in Orient-Express v Generali, such extensions, if applicable, may well attract sub-limits. A “School of Thought” remained that the decision in Orient-Express v Generali unduly prejudiced the policyholder. The thought being that, in the event of wide area damage, claims should be met up to the level that would have applied had the damage been restricted solely to the Insured’s own property at the premises. Otherwise, the potentially absurd position would exist that the more severe the effect of the proximate cause (e.g. the impact of a natural phenomenon on the wider surrounding area) the greater the reduction in the policyholder’s claim.

Whilst the Court in FCA v Arch made distinctions from the case of Orient-Express v Generali, the Court nonetheless analysed the latter decision due to the reliance placed on it by Arch and others. The Court expressing the view that had it been necessary for them to consider the application of the decision in Orient-Express v Generali they would have concluded that it was wrongly decided and would have declined to follow it.

In particular, the Court in FCA v Arch stated that, so far as the case of Orient-Express v Generali was concerned, they considered the insured peril to have been misidentified as “Damage” (to the property of the Insured) rather than “Damage” caused by a covered fortuity. The fortuity, in the case of Orient-Express v Generali, being hurricanes. Accordingly the Standard Turnover (for the purposes of the claims adjustment) should be the Turnover that would have been earned during the Indemnity Period as if there had been no damage to the Insured’s premises and no damage to the wider area.

About Trident Oil & Gas Claims Consultants Limited: Trident specialise in providing insurance coverage advice to policyholders from within the oil & gas industry. In particular, Trident offer advice and representation during the preparation, negotiation and settlement of insurance claims. Trident’s experience encompasses exploration, construction and operational risks. www.tridentclaims.co.uk