Expert Commentary

Business Interruption for Denial of Access Revisited

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.


Time Element
May 2004

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:

  1. That the loss was caused by a civil authority action which prohibited access to BBB's insured premises; and
  2. 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.


1The court in Southern Hospitality, Inc. v Zurich American Ins., U.S. Dist. LEXIS 18324 (WD Okla 2003), fn, 2, infra, notes the FAA order did not "close" airports; it simply grounded flights while airports remained open but stated "[f]or purposes of the Court’s determination of this motion, this distinction is meaningless."


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