Business Losses Due to Civil Authority Action: When Is There Coverage?

Virtually all insurance policies contain provisions and exclusions dealing with events that most insureds consider so remote and unlikely that they rarely give any thought to their possible occurrence, much less what effect such an occurrence might mean to their insurance coverage.

For example, it is probably safe to assume that most people pay very little attention to the nuclear hazard exclusions that are common in property insurance policies. Yet, the recent events in Japan demonstrate that even people who believe they are far removed from any potential nuclear hazard, such as the residents of Tokyo, may one day suddenly find themselves affected by a nuclear incident.

When these (hopefully) rare events do occur, many insureds, and some attorneys, make unwarranted assumptions about coverage of these events under their insurance policies. By the same token, while an insurer may have given careful thought to the possible occurrence of an uncommon or unlikely event, courts may find, upon scrutiny, that the language of the policy as crafted by the insurer does not clearly address, or does not address at all, the particular circumstances that may have arisen.

Civil Authority Provision

One relatively obscure provision contained in many business owner property (BOP) insurance policies is the “civil authority” provision. Civil authority provisions are usually written as additional coverage provisions, not exclusions. They generally provide coverage for lost business income due to an “action” taken by a civil authority.

The type of action by a civil authority, which commonly gives rise to an insurance claim under a civil authority provision, includes curfews, evacuations and other restrictions on access to places of business by customers, employees and owners.

A reasonable expectation is that such restrictive actions by civil authorities will apply to relatively discrete geographical areas, and therefore have limited impact. However, in the past decade, there have been a number of events where the action of civil authorities has had widespread impact. Two of the more notable and well-known such events are the Sept. 11, 2001, terrorist attacks, which led to a nationwide restriction of air travel for several days, and Hurricane Katrina, for which mandatory evacuation orders were issued prior to the hurricane’s landfall and remained in effect, or were supplemented by other restrictive orders, for some time after landfall.

Although the time limit for this coverage varies, usually from one week to 30 days, a common civil authority provision reads as follows: We will pay for the actual loss of business income you sustain and necessary extra expense caused by action of civil authority that prohibits access to the described premises due to direct physical loss of or damage to property, other than at the described premises, caused by or resulting from any covered cause of loss. This coverage will apply for a period of up to two consecutive weeks from the date of that action.

Mandatory Evacuations, Curfews and Restrictions

In the recent case of Dickie Brennan & Company, Inc. v. Lexington Ins. Co., the Federal Fifth Circuit held that, under Louisiana law, an insured seeking coverage under a civil authority provision had to show (1) a loss of business income caused by an action of a civil authority; (2) that the action of the civil authority prohibited access to the insured’s premises as described in the policy; (3) that the action of the civil authority prohibiting access to the insured’s premises was caused by the direct physical loss of, or damage to, property other than the insured’s premises; and (4) the loss of or damage to property other than the insured’s premises was caused by or resulted from a peril that was covered under the insurance policy.

The Dickie Brennan case arose out of a claim by Dickie Brennan that one or more of its restaurants suffered losses due to a mandatory evacuation order issued by the mayor of New Orleans, La., on Aug. 31, 2008, as Hurricane Gustav approached Louisiana.

Pertinent to the case, on Aug. 29, 2008, the mayor issued a proclamation of a hurricane emergency with regard to the approach of Hurricane Gustav, stating that “because of anticipated high lake and marsh tides due to tidal surge, combined with the possibility of intense thunderstorms, the city of New Orleans may experience widespread localized severe flooding and gale force winds, which could result in the endangerment and threat of life, injury and possible property damage.”

Two days later, the mayor issued a proclamation imposing a curfew and ordering a mandatory evacuation of the city.

The court in Dickie Brennan noted that the evacuation order did not mention earlier property damage in the Caribbean or other areas as a reason for the order’s issuance, but, by reference to the earlier proclamation of hurricane emergency, only listed future damage that might be caused in New Orleans by storm surge, high winds and flooding. Noting further that no property damage had occurred in Louisiana at the time when the evacuation order was issued, the court con¬cluded that Dickie Brennan had failed to meet the third requirement for coverage under the civil authority provision, i.e., that the actions of the civil authority were caused by physical damage to property other than the insured premises.

The court’s conclusion may seem harsh and overly technical because it was based on the absence of a reference in the evacuation order itself to prior property damage, such as that which occurred in the Caribbean. However, its decision is not unique.

Indeed, the court in Dickie Brennan cited and relied on a Texas case, South Texas Medical Clinics v. CNA Financial Corp., in support of its conclusion. South Texas Medical Clinics held that Texas law did not permit recovery under the civil authority provision of a BOP policy for losses caused by a mandatory evacuation order that was issued as Hurricane Rita approached Texas because the “the official who issued the evacuation order did so because Rita was threatening the Texas coast, not because Rita had already caused property damage in Florida …”

One Louisiana court has succinctly explained that civil authority provisions are intended to provide insurance coverage where damage to property first occurs and then, following the damage, a civil authority prohibits access to the area of the damaged property as opposed to an action by a civil authority taken in anticipation of, and to prevent, possible damage in the future.

Consistent with this statement of the intent of civil authority provisions, a number of courts, such as the one in Paradise Shops Inc. v. Hartford Fire Ins. Co., have held that civil authority provisions were not triggered by the restrictions on air travel issued immediately following the terrorist attacks of Sept. 11, 2001, because, although indirectly caused by “terrorist-inflicted damage,” those orders were issued for the purpose of protecting against future terrorist attacks and not as a result of past damage.

Likewise, a California court in Syufy Enterprise v. Home Insurance Co. of Indiana, held that curfew orders issued after the riots following the Rodney King verdict did not entitle a business owner to coverage under the civil authority provision of its insurance policy because the curfews were to prevent future looting and rioting.

Interestingly, the civil authority provision in the Dickie Brennan case did not contain a geographic limitation on how close the damaged property that results in an action by civil authorities must be to the insured’s property.

The court in Dickie Brennan noted that Hurricane Gustav had caused property damage in the Caribbean before the evacuation order was issued, but nonetheless found there was no coverage because the evacuation order did not specifically state that it was being issued as a direct result of that particular property damage. Although it did not need to address the impact of the lack of the geographic limitation, the court did note that the general rule is that civil authority coverage is intended to apply where access to the insured’s property is prevented by an order issued as a result of damage to other property “in the proximity of the insured’s property.”

Although the average insured is not likely to have thought about the circumstances under which coverage can be had pursuant to civil authority provisions, the courts seem to generally agree that absent language clearly requiring a different result, coverage under a civil authority provision will only be triggered when an order prohibiting access is issued as a direct result of nearby prior property damage and not for the purpose of preventing future damage, notwithstanding the relative likelihood of such future damage being incurred.

Robert Redfearn, Jr. (Redfearnjr@spsr-law.com) is a partner in Simon, Peragine, Smith & Redfearn, a regional law firm with offices in New Orleans and Mississippi.