The novel coronavirus (COVID-19) is a respiratory disease that can result in
serious illness or death. It is caused by a new strain of coronavirus not
previously identified in humans and easily spreads from person to person. There
is currently no approved vaccine or antiviral treatment for this disease.
Acknowledgment
We would like to acknowledge coauthor John V.
Garaffa, partner at Butler Weihmuller Katz Craig LLP, for his assistance on
this article. He can be reached at (813) 594–5616.
The coronavirus has spread to every state in the United States, prompting a
variety of responses by federal, state, and local civil authorities. Those
civil authority actions have included orders recommending social
distancing,1 stay-at-home orders,2 closure of bars,3 temporary
postponement of medical or dental procedures not necessary to address a medical
emergency or to preserve the health and safety of a patient,4 and continuance of court proceedings.5
In light of those responses to the COVID-19 pandemic, it seems appropriate
to review the requirements of policy provisions that provide coverage for the
loss of business income due to the actions of civil authorities. Given the
nature of the orders that have been issued, this discussion should be
distinguished from those cases 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 current pandemic 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 that can be attributed to a civil authority order.
Examine the Policy Provision Language
As always, policy wording is critical, but especially so in the context of
claims that assert that governmental orders have impacted the operation of a
business. The civil authority provision in a standard business income and extra
expense coverage form reads as follows.
When a Covered Cause of Loss causes damage to property other than
property at the described premises, 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, provided
that both of the following apply:
(1) Access to the area immediately surrounding the damaged
property is prohibited by civil authority as a result of the damage, and the
described premises are within that area but are not more than one mile from
the damaged property; and
(2) The action of civil authority is taken in response to
dangerous physical conditions resulting from the damage or continuation of
the Covered Cause of Loss that caused the damage, or the action is taken to
enable a civil authority to have unimpeded access to the damaged
property.
Civil Authority Coverage for Business Income will begin 72 hours
after the time of the first action of civil authority that prohibits access
to the described premises and will apply for a period of up to four
consecutive weeks from the date on which such coverage began.
Civil Authority Coverage for Extra Expense will begin immediately
after the time of the first action of civil authority that prohibits access
to the described premises and will end:
(1) Four consecutive weeks after the date of that action;
or
(2) When your Civil Authority Coverage for Business Income
ends;
whichever is later.
Source: Insurance Services Office, Inc. Business Income and Extra Expense
Coverage Form CP 00 30 10 12, Copyright 2011
The requirements for coverage under this provision are the following.
- The existence of an order of civil authority that
- 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.
As the language of the provision makes clear, the purpose of the civil
authority provision is to expand the business interruption coverage to apply
when there is damage to the property of another business that causes civil
authorities to prohibit access to the area where the insured's property is
located. For example, following a tornado, authorities might cordon off the
entire area that was hardest hit. This area might include some businesses that
sustained little or no damage, but whose revenue would nevertheless be impacted
by the civil authority order.
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 that was omitted by
Insurance Services Office, Inc., commencing in 1986).
Another more liberal version provides the following.
- 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.
Under this provision, the threshold requirements for coverage are the
following
- The existence of an order of civil or military authority that
- 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.
What Is Meant by "Prohibition" of "Access"?
While some orders incident to COVID-19 have mandated closures of particular
businesses,6 frequently, the "order" of
civil authority is in the nature of an "advisory" or
"voluntary" evacuation. Sometimes access is not barred because the
terms of the order in issue will say something like "nonessential"
traffic is discouraged but not prohibited. In the case of orders issued in
response to COVID-19, some orders involve mandatory closures of certain
businesses, and others merely provide cautionary instructions to citizens. An
insured, with the best interests of its employees or customers in mind, may
nonetheless close the insured property because of concerns of the spread of the
virus among employees or customers. 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 Am. Life Ins. Co., 605 S.2d 911 (Fla. 2d
DCA 1992). In construing terms appearing in insurance policies, courts commonly
adopt the plain meaning of words contained in legal and nonlegal dictionaries.
Watson v. Prudential Prop. & Cas. Ins. Co., 696 S.2d 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.
Orders that merely "impede" or "regulate" access but still
permit access, albeit in reduced numbers, must be distinguished from orders
that truly "prohibit" access. The latter may provide a basis for
coverage, but the former will not.
What Is Meant by "Property Damage"?
A review of the policy terms is critical. Some policies require that the
order prohibiting access must be 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. That requirement has been litigated extensively in the
context of hurricane evacuation orders. In Sloan v. Phoenix of Hartford
Ins. Co., 207 N.W.2d 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 that provided coverage for actual losses when, as a direct
result of insured perils, access to the insured premises is prohibited by order
of a 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
a 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. Lumberman's Mut. Ins. Co.., 208 N.W.2d 569 (Mich. App. 1973);
Allen Park Theater Co., Inc. v. Michigan Millers Mut. Ins. Co., 210
N.W.2d 402 (Mich. App. 1973).
However, in Dickie Brennan & Co., Inc. v. Lexington Ins. Co.,
636 F.3d 683 (5th Cir. 2011), the Fifth Circuit Court of Appeals addressed
policy language that required physical damage in the context of a claim for the
loss of business income as the result of the evacuation order incident to
Hurricane Gustav. The restaurant asserted that there was coverage under the
civil authority provision, which provided the following.
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.
The insured asserted that the storm's prior damage in the Caribbean,
coupled with Gustav's projected path toward New Orleans, satisfied the
property damage element. The district court granted summary judgment for the
insurer, finding no nexus was shown between the evacuation order and
"damage to property, other than at the described premises." The
appellate court agreed. The court noted the "general rule" that
"[c]ivil authority coverage is intended to apply to situations where
access to an insured's property is prevented or prohibited by an order of
civil authority issued as a direct result of physical damage to other premises
in the proximity of the insured's property." Id. at 686–87.
The Fifth Circuit found that "the 'due to' language in the policy
required a close causal link by its plain terms." Id. at 686.
Conclusion
The responses by federal, state, and local governments to the COVID-19
pandemic have prompted businesses to close stores and offices. In some
jurisdictions, the orders limit the type of business that can be
conducted.7 In the case of offices, there are
efforts to allow the employees from those closed offices to work from home.
However, few closures will provide a basis for coverage under civil authority
provisions unless access to the specific property is truly
"prohibited."