What To Know About Obtaining Civil Authority Coverage

Insurance Law360 - January 23, 2013

As Superstorm Sandy moved northward from the Caribbean off the coast of the southeastern United States on a predicted path to the mid-Atlantic, states and municipalities from Maryland to Connecticut issued mandatory evacuation orders and declared states of emergency on Oct. 27 and 28. On Oct. 27, Delaware’s governor declared a limited state of emergency and ordered mandatory evacuations of coastal communities beginning at 8 p.m.

New Jersey Gov. Chris Christie ordered a mandatory evacuation of the New Jersey barrier islands on Oct. 28 beginning at 4 p.m. and ordered the 12 Atlantic City casinos to close in the same time frame. Also on Oct. 28, New York’s governor declared a state of emergency and for New York City, Mayor Michael Bloomberg proclaimed a state of emergency and ordered mandatory evacuation of low-lying areas of the city beginning at 7 p.m. Municipalities and towns throughout these regions also issued localized mandatory evacuation orders.

In response to mandatory evacuation orders, thousands of businesses suspended operations and hundreds of thousands of residents emptied low-lying cities, towns and vulnerable areas throughout the Northeast. Sandy’s strong winds and torrential rainfall arrived in Washington, D.C., and northward in the afternoon of Oct. 29. Sandy’s center came ashore at Atlantic City, N.J., that evening at 8 p.m. Sandy was approximately 950 miles wide when she struck land, and she caused damage in states as far away as Michigan, Ohio and West Virginia.

Initial estimates from insurers suggest that Sandy losses will cost the insurance industry $20 billion to $25 billion. A significant portion of those losses will be claimed under business interruption insurance.

Businesses that suffered loss of income due to mandatory evacuation orders may seek coverage for such losses under civil authority provisions to their business interruption coverage. A civil authority clause, generally speaking, provides coverage for lost income when access to property is prevented, hindered or impaired by an order or action of a civil authority as a result of loss or damage not excluded by the policy.

Civil authority clauses vary, but generally, a causal connection between property damage by a covered peril and the civil authority order is a prerequisite. Given the number of mandatory evacuation orders that were issued well in advance of Sandy’s landfall, and therefore arguably in advance of the requisite property damage, loss of income between the time of evacuation and damage is likely to be a common source for disputes between insurers and policyholders.

To obtain coverage, the insured generally must show that an order or action of civil authority resulted from loss or damage caused by a peril not excluded by the policy. So, would civil authority provisions be triggered when an evacuation was ordered before the evacuation area sustained any damage? The major destructive storms of the past two decades have presented courts with ample opportunities to consider civil authority coverage for business losses resulting from mandatory evacuations issued in advance of any local storm damage.

The policy language is always the starting point to determine coverage. In Jones Walker Waechter Poitevent Carrere & Denegre LLP v. The Chubb Corporation, No. 09-6057 (E.D. La. Oct. 12, 2010), the insured sought coverage under a civil authority clause for business losses incurred during a period of mandatory evacuation beginning one day before Hurricane Gustav ultimately made landfall. The civil authority clause provided coverage for business income loss incurred from impairment of operations caused by the prohibition of access to the premises by a civil authority that is “the direct result of direct physical loss or damage to property away from such premises or such dependent business premises by a covered peril, provided such property is within one mile from such premises or dependent premises.”

The U.S. District Court for the Eastern District of Louisiana held that the plain language of the policy requires a direct nexus between damage sustained and the order of civil authority, suggesting that the policy was designed to address circumstances where damage occurs, and the civil authority subsequently prohibits access. The evacuation order issued before Gustav’s landfall did not trigger coverage because it did not prohibit access based on property damage within one mile of the premises. This result is clearly closely tied to the specific language of the policy, which, in this case, required damage within a one-mile radius.

When an order to evacuate is issued in advance of landfall or damage in the area covered by the evacuation order, the damage trigger may not be satisfied even absent policy language containing a “one-mile” requirement. In Dickie Brennan & Co. Inc. v. Lexington Ins. Co., the Fifth Circuit denied civil authority coverage for a period of evacuation preceding Hurricane Gustav’s arrival in Louisiana because no property damage had occurred in Louisiana at the time the evacuation order was issued for Hurricane Gustav. 636 F.3d 683, 686-87 (5th Cir. 2011).

The civil authority clause provided coverage for loss of business income caused by an action of civil authority prohibiting access to the premises “due to direct physical loss of or damage to property, other than at the described premises, caused by or resulting from any [c]overed [c]ause of [l]oss.” The court rejected the insured’s argument that prior property damage Gustav caused in the Caribbean combined with Gustav’s projected path toward New Orleans, La., satisfied the requisite nexus between prior property damage and the evacuation order.

The evacuation order, however, did not mention the earlier property damage in the Caribbean; rather, it listed possible future storm surge, high winds and flooding based on Gustav’s predicted path as reasons for evacuation. It was undisputed that no damage to property had been sustained in Louisiana when the order was issued.

Because nothing in the record demonstrated that the order was issued “due to” physical damage to property — either in the Caribbean or Louisiana — the court concluded that civil authority coverage for the period of evacuation before Gustav caused damage in Louisiana was not triggered. This is consistent with a Texas decision interpreting nearly identical property language.[1]

Although every policy is different, these cases illustrate that an evacuation order provoked by the mere threat of future damage — even if the awareness of the threat is informed by past damage caused by the same storm system — is less likely to trigger civil authority coverage because the causal link between the prior damage and civil authority order is too attenuated.

But when the causal connection between prior damage and the order of civil authority is clearly established, an evacuation order issued in anticipation of an impending storm based on damage that storm caused in its path could satisfy the damage trigger.

In Assurance Company of America v. BBB Service Co. Inc., 265 Ga. App. 35 (2003), the U.S. Court of Appeals of Georgia considering a nearly identical civil authority clause to those considered in Dickie Brennan and South Texas Medical Clinics held that property damage Hurricane Floyd caused in the Bahamas before it struck Georgia triggered civil authority coverage for the evacuation period beginning before Floyd landed in Georgia.

The insured presented evidence that the county’s decision to order the evacuation in advance of the storm was based on the significant damage the storm caused in islands in the Bahamas in its path, the forecast that the storm was heading for the county and the anticipated impact of the storm if it reached the county. Because of this evidence that actual damage to property other than the insured premises was a basis for the evacuation order, the court concluded that the civil authority coverage was triggered.

When Sandy approached the mid-Atlantic region, she had already destroyed homes and businesses throughout the Caribbean, washed out portions of highway in the Outer Banks and caused nearly 60 deaths. Although the destruction and damage inflicted in the Caribbean may have provided a basis for anticipating the harm that could result if Sandy made landfall in the northeastern United States, coverage under standard civil authority clauses will depend on whether evidence demonstrates that it was the threat of harm itself — not the damage already caused elsewhere — that led officials to issue mandatory evacuations in the northeastern United States.

Civil authority coverage will also depend on the specific language of the policy. As Jones Walker demonstrates, civil authority provisions can sweep broadly or apply quite narrowly.

--By Thomas Caswell and Laura Bartlow, Zelle Hofmann Voelbel & Mason LLP

Thomas Caswell is a partner, and Laura Bartlow is an associate in the firm's Minneapolis office.

[1] See S. Tex. Med. Clinics PA v. CNA Fin. Corp., No. H-06-4041 (S.D. Tex. Feb. 15, 2008) (holding that civil authority clause did not cover business losses when the record demonstrated that an evacuation order was issued because Hurricane Rita threatened the Texas coast, not because Rita had already caused property damage in Florida).