Harvey: “But for” – the unwanted legacy of Hurricane Katrina?

Hurricane Harvey destruction
As insurers continue to assess their Harvey exposures, the devastation still continues.

As mentioned in our prior blog post, the focus right now seems to be on whether significant ILS protections (Cat Bonds in particular) have been impacted. It seems they will likely survive any significant impact, whereas the real losses will be faced by primary insurers, facultative reinsurers and some reinsurance treaties. The onshore energy market looks like it may be hit hard.

As to the evacuation, it does appear as if lessons have been learned from Hurricane Katrina, yet Katrina contains an interesting legal twist. Those involved will recall the litigation (on both sides of the pond).

In the UK, the Orient Express v Generali arbitration tribunal ruled that business interruption losses could not be recovered by Orient Express, in a literal reading of the “Trends” provision (typical in most business interruption wordings). BI claims are usually evaluated by looking back at the historic performance of a business, but the “Trends” provision was designed to allow BI claims to be adjusted to the likely trend of the business in the future. Fair enough on its face.

Hotel Windsor was significantly damaged in Hurricane Katrina, but when it came to the BI claim, it was argued by the Hotel’s insurers that there was no valid claim for BI. One could have an undamaged hotel in a damaged city, and still no one would have visited. As such, the BI could not be said to be “but for” the damage to the hotel.

On the face of it, the decision makes perfect legal sense. There is arguably no other sensible way to read the “but for” provision in question. Insurers argued that what the Hotel really needed was Denial of Access or Loss of Attraction cover, and these were covered (and paid) but they only had a sub limit of $5m (as opposed to the potential $100m available for BI).

In recent years, we have spoken to many people in the market who feel the Orient Express decision is wrong, both insurance underwriters, brokers and reinsurance underwriters. Many major insurers have considered amending wordings, but it’s difficult to change a wording that has been around a long time and that everyone uses.

Harvey will throw up precisely the same “wide area damage” issue, as many wordings have still not changed. It will be interesting to see how insurers deal with it, but in the long run, the wording needs to be re-visited. Maybe Harvey will be the catalyst for the market to design a better wording.

Kiran Soar