When Civil Authorities Take Over, Are You Covered?
June 2001
With hurricane season upon us, it is important
to dust off plans for business closure and evacuation. Will your insurance cover
you if a civil authority closes or denies access to your insured property due
to a hurricane, wildfire, flood, or other catastrophe? It all depends on the
policy language.
by Doug
Berry
Butler Pappas
As the annual hurricane season opens, it seems appropriate to review the
requirements for coverage under various policy provisions in the event civil
authorities order an evacuation or close routes of access to or from insured
property. (This discussion should be distinguished from the situation where
physical damage due to a covered peril results in a lack of access. Although
the principles are much the same, the wording of the coverages differs. And,
although they are often written in conjunction with each other, the actual wording
must be consulted in all claims.)
While the looming hurricane season gives rise to the discussion, the principles
also apply in the context of other catastrophes that impact a wide geographic
area, such as wildfires, winter storms, or floods. This article examines the
questions surrounding loss due to closure or denial of access to insured property
due to a civil authority order.
Examine the Policy Provision Language
As always, in any event, the policy wording is critical, but especially so
in the context of denial of access due to orders of civil or military authority.
A typical policy provision will extend the coverage for business interruption
to include the following situation:
Civil Authority. 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.
The requirements for coverage under this provision are:
- The existence of an order of civil authority which:
- Prohibits access to the insured premises;
- Is caused by or results from physical damage to property, other
than insured property; and
- That damage to property must be due to a peril covered under
the policy; and
- That denial of access must be the proximate cause of a loss of business
income.
The purpose of such a provision was explained in the Fire, Casualty and Surety Bulletins, "Business
Interruption," Ca-1 (May, 1987):
The common intent was to extend the business interruption coverages to
include situations where the insured's own property has not itself been
damaged (or was not sufficiently damaged to cause as severe a business income
loss as a total inability to occupy would cause) but because of damage to
nearby property, the policy or fire fighters cordon off the area and prohibit
access perhaps even to premises that have not been directly involved in
the loss. The prohibition may extend beyond the time of the actual fire,
if, for instance, there is danger to adjacent buildings from collapse of
the damaged property. Or in the case of extensive wind damage, an entire
disaster area may be cordoned off for an extended period after the actual
loss, to prevent looting or possible danger to onlookers, until the damage
can be assessed and order can be restored.
A claim under this provision must be distinguished from those discussed in
cases such as Syufy Enterprises v The Home Insurance
Company, U.S. Dist LEXIS 3771, (ND Cal 1995); and Bros., Inc. v Liberty Mutual Fire Insurance Company, 268 A2d 611 (DC 1970), where the policies at issue required the order of civil
authority be not only in response to physical damage to property but, also,
the damaged property had to be "adjacent" to the insured premises (language
which was omitted by Insurance Services Office, Inc., commencing in 1986).
Another, more liberal version provides:
Interruption by Civil or Military Authority:
This policy is extended to cover the loss sustained during the period of
time when, as a result of a peril not excluded, access to real or personal
property is prohibited by order of civil or military authority.
From this provision, the threshold requirements for coverage are:
- The existence of an order of civil or military authority which:
- Prohibits access to the insured premises; and which
- Is caused by or results from a peril covered under the policy.
- That denial of access must be the proximate cause of a loss of business
income.
Note that the latter policy does not require physical damage to insured property,
or to any property at all for that matter. In the absence of wording requiring
it, a physical damage requirement normally will not be imposed by the courts.
Court Interpretations
In Sloan v Phoenix of Hartford Insurance Company, 207 NW2d 434 (Mich App 1973), the city ordered all "places of amusement" closed
due to riots and other civil disturbances. The insured sought to recover its
losses under the business interruption policy which provided coverage for actual
losses when, as a direct result of insured perils, access to the insured premises
is prohibited by order of civil authority.
The court held that a plain reading of the policy would lead to the conclusion
that coverage was provided when, as a result of a named peril, access to the
insured property was denied. Since one of the insured perils was riot, and a
riot ensued, prompting the city to require business closures, the court found
that physical damage was not a prerequisite for the payment of benefits under
a business interruption policy. See also Southlands
Bowl, Inc. v The Lumberman's Mutual Insurance Company, 208 NW2d 569 (Mich App 1973); Allen Park Theater Company,
Inc. v Michigan Millers Mutual Insurance Company, 210 NW2d 402 (Mich App 1973).
Often, the evacuation order, while clearly made in anticipation of physical
damage due to a covered peril, will precede any physical damage. Indeed, if
the storm never makes landfall, there may not be any physical damage resulting
from the storm. If physical damage is not a policy requirement, denial of access
due to an order issued in light of the impending arrival of the peril would
seem sufficient to trigger coverage.
However, in Cleland Simpson Co. v Fireman's Ins.
Co., 140 A2d 41 (Pa 1958), despite
a strong dissent, an order closing all stores in the city of Scranton was insufficient
to trigger coverage because the order was issued due to the threat of fire, not the existence of fire.
One must wonder whether that logic would extend to a situation where there is
no doubt of the existence of a hurricane—only doubt as to whether it will hit
the area affected by the order in question when that order is issued.
What Is Meant by "Prohibition" of "Access"?
Frequently, the "order" of civil authority is in the nature of an "advisory"
or "voluntary" evacuation. Sometimes roads are not truly "closed" because the
terms of the order in issue will say something like "non-essential" traffic
is discouraged but not prohibited. Often, an insured, with the best interests
of its employees or customers in mind, will close the insured property because
of the pending arrival of a storm. The business judgment of the insured, however,
no matter how prudent, will not provide a basis for coverage. Rather, the issue
will be whether there had, indeed, been a "denial" or "prohibition" of "access."
Typically, the term "access" will not be defined in the policy. The mere
fact that a term in a policy requires interpretation does not create an ambiguity. Weldon v All American Life Insurance Co., 605 S2d 911 (Fla 2d DCA 1992). In construing terms appearing in insurance policies,
courts commonly adopt the plain meaning of words contained in legal and non-legal
dictionaries. Watson v Prudential Property & Casualty
Ins. Co., 696 S2d 394, 396 (Fla
3d DCA 1997).
The ordinary and plain meaning of the term "access" can be determined by
looking at the various definitions of the word. For example, Black's Law Dictionary (6th ed. 1990)
defines the term to mean "freedom of approach or communication; or the means,
power, or opportunity of approaching, communicating, or passing to and from."
The American Heritage Dictionary (3d ed.
1994) defines the term as "a means of approaching or entering; passage" or "the
right to enter or make use of."
Similarly, the word "prohibit" normally will not be defined. "Prohibit,"
however, means "to forbid by law; to prevent—not synonymous with 'regulate.'" Black's, supra. Also, "to forbid by authority"
or "to prevent from doing something." Webster's
New Collegiate Dictionary.
A copy of the order in question must be obtained and closely examined. Frequently,
it will be necessary to obtain a street map so the exact area affected by the
order can be plotted. Orders that merely "impede" or "regulate" access but still
permit access, albeit in reduced numbers (e.g., by blocking one but not all
routes of access), must be distinguished from orders which truly "prohibit"
access. The latter may provide a basis for coverage, the former will not.
Conclusion
As soon as a hurricane gets within striking distance of the East Coast or
Caribbean islands, plans for closures and evacuation are dusted off. Even when
implemented, however, few will provide a basis for coverage unless access to
the specific property is truly "prohibited."
For a more detailed discussion of this and related policy
provisions, see Paula B. Tarr, "Where Have All the Customers Gone? Business
Interruption Coverage for Off-Premises Events," The Brief, Winter, 2001.
Opinions expressed in Expert Commentary articles are those of the author and are
not necessarily held by the author’s employer or IRMI. This article does not purport
to provide legal, accounting, or other professional advice or opinion. If such advice
is needed, consult with your attorney, accountant, or other qualified adviser.