Business Interruption for Denial of Access Revisited
May 2004
The World Trade Center disaster resulted in
many airport and other transportation closures. But in a business interruption
claim, is that really considered "prohibited" access due to direct damage to
insured property? Three recent court cases address the denial of access due
to a civil authority order and the effect of particular policy wording on business
interruption coverage.
by Doug
Berry
Butler Pappas
Weihmuller Katz Craig LLP
In a pair of columns about 3 years ago (see Business Interruption for Denial of Access to
Insured Property and When Civil Authorities
Take Over, Are You Covered?), we discussed coverage for denial of access
due to order of civil authority. Since then, several decisions coming out of
the World Trade Center (WTC) disaster and other events have begun to flesh out
this coverage. This article will examine three of them.
"Prohibit" Means Forbid
In 730 Bienville Partners, Ltd. v Assurance Company
of America, 2002 U.S. Dist LEXIS 18780 (ED La 2002); affirmed, 2003 U.S.
App LEXIS 10203 (5th Cir 2003), the court considered the claim of a pair of
New Orleans hotels for loss of income following the closure of U.S. airports
by order of the Federal Aviation Administration (FAA) in the wake of September
11, 2001.1
Bienville Partners' policy provided:
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 your premises due to direct physical loss of or damage to property,
other than at the "covered premises," caused by or resulting from any Covered
Cause of Loss.
The court found this provision to be unambiguous and, in ruling for the insurer,
held:
While the FAA's closure of the airports and cancellation of flights may
have prevented many guests from getting to New Orleans and ultimately to
plaintiff's hotels, the FAA hardly "prohibited" access to the hotels.
In reaching this determination, the court relied on the definition of "prohibit"
found in Webster's, namely, "to forbid
by authority or command." The court noted the orders of the FAA did not forbid
travelers from staying at the hotels if other means of transportation were available
and concluded:
Any other interpretation of the policy would pervert the ordinary meaning
of words and stretch the notion of causation beyond any doctrine.
"Prohibit" Does Not Include "Hinder"
The policyholders in Southern Hospitality, Inc. v
Zurich American Ins., 2003 U.S. Dist LEXIS 18324 (WD Okla 2003), made
a similar argument that the FAA's orders denied access to its hotels and claimed
coverage under policy language identical to that in 730 Bienville Partners. The insured argued, however, that the term "prohibit"
encompassed the term "hinder," as well as "hold back, interdict, prevent, hamper
or impede."
However, after determining that the provision was not ambiguous, the court
found that the FAA order had only a "tangential" effect on the insured's hotels
and "it did not prevent people from getting to the hotels; it merely limited
the means of travel available to patrons of Plaintiffs' hotels."
Prohibited Access Due To Direct Damage to Insured Property
Hurricane Floyd was the basis for the claim in Assurance
Co. of America v BBB Services Co., Inc., 593 SE2d 7 (Ga App 2003). The
insured owned several Wendy's restaurants in Brevard County, Florida. On September
19, 1999, the County Commission issued an order declaring a state of local emergency
"because of the serious threat to the lives and property of Brevard County from
Hurricane Floyd .... Because of the uncertainty of the path of devastating winds
and storm surges," evacuation of people and businesses east of Interstate 95
was ordered. In light of this order, the insured closed its restaurants in the
area affected by the evacuation order and made claim under a policy provision
identical to that at issue in 730 Bienville Partners.
In its first consideration of this matter, the appellate court reversed a
summary judgment entered on behalf of the insured, 576 SE2d 38 (Ga App 2002),
and stated the policy required two things for BBB to recover:
- That the loss was caused by a civil authority action which prohibited
access to BBB's insured premises; and
- That the civil authority action which prohibited access was due to the
direct physical loss of or damage to insured property other than the insured
premises.
While the court concluded the first condition had been met, the court remanded
the case for additional evidence on the second and listed several questions
to be answered, among them:
Why did BBB not do business for 2½ days? Did the county or any other
civil authority prohibit BBB's access to its restaurants during that entire
time period? Was the evacuation order in effect for that entire time? At
some point after the evacuation order was issued, did property damage in
the area or elsewhere become a reason for the county or any other civil
authority to prohibit BBB's access to its premises?
Following discovery and several stipulations, the trial court again entered
judgment for the insured following a bench trial and the insurer's appeal followed.
Brevard County had created a "Policy Group" to make emergency decisions regarding
weather-related problems. Among the testimony presented was that of the County
Attorney, a member of that group, who stated the group:
had watched [the storm] progress from the Atlantic, [and] there was a
lot of damage being done to the south of us at the various islands that
it crossed.
The fact that the storm had been causing damage in its path, the forecast
that the storm was headed to Brevard County, and the anticipated impact of the
storm if it reached Brevard County were factors that led the team to advise
the Chairman of the County Commission to sign the evacuation order.
Inasmuch as the appellate court, in affirming judgment for the insured, stated
the trial court "implicitly" found that a basis for the evacuation order was
actual damage to property other than the insured premises, it appears the record
did not affirmatively demonstrate a direct causal link between that damage and
the order. Nonetheless, judgment in favor of the insured was affirmed.
Conclusion
As noted in previous columns on this issue, policy wording is crucial. Had
the term "hinder" appeared in place of "prohibit," as it does in some broker-drafted
forms, the outcome of the hotels' WTC claims may well have been different.
The Georgia court's willingness to infer causation in satisfaction of a policy
condition for coverage cannot be accepted as the standard in future cases. Claimants
under similar coverages can expect insurers to insist on direct evidence of
causation to satisfy the policy requirement that the order be "due to direct
physical loss of or damage to property, other than at the 'covered premises,'"
rather than it be the product of several factors of equal or varying, but unspecified,
weight. In other words, must the physical damage elsewhere be only "a" factor
in the issuance of the order or must it be "the" factor leading to the order
before coverage is triggered? This case also reminds one of the necessity for
an accurate and detailed evidentiary record in support of each party's position.
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