Many of the early insurance-related COVID-19 lawsuits seek insurance coverage under the civil authority coverage grant in commercial property policies. Restaurants filed the first cases (Cajun Conti LLC, et al. v. Certain Underwriters at Lloyd’s, London, et al. and French Laundry Partners LP, et al. v. Hartford Fire Insurance Co., et al.) quickly followed by similar lawsuits filed by the Chickasaw and Choctaw tribes in Oklahoma. Even more recently, restaurants in Chicago and Tampa filed suit including claims under this coverage. These lawsuits rely on governmental prohibitions, such as “shelter-in-place” and “stay-at-home” orders, to trigger business income coverage in their commercial property policies. No doubt hundreds, if not thousands, of insureds are submitting insurance claims under this same civil authority coverage – with more lawsuits to follow.
Civil authority coverage pays for losses when a government bars access to an insureds’ property due to a covered cause of loss some place other than the insured property. The time length can vary and can be as short as four weeks. Typical (but by no means universal) policy language is:
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.
Insurers generally insist that the “civil authority” (usually local, state, or federal government entities) must prohibit access to the business – governmental recommendations do not suffice. So insurers will deny coverage for claims based on the early governmental orders that did not prohibit access to businesses, but instead limited capacity or recommended cancellation of conferences and conventions (for example, the D.C. Health Advisory from March 11, 2020). Those insurer defenses erode under government prohibitions. For example, on March 13, 2020, D.C. changed its prior recommendations about limiting capacity to prohibitions of mass gatherings, and then on March 24, 2020, D.C. ordered closures of businesses such as gyms, theaters, and retail clothing stores. Insurers will likely argue that only the later government prohibitions that required business closures constitute the requisite prohibition, but this will be the subject of extensive litigation.
Most policies, as illustrated above, require the civil authority order be related to damage. For more discussion on what constitutes “physical loss or damage,” please see our previous blog posts here and here.
In what may be an effort to bolster insureds’ civil authority claims, some governments, including those in New Orleans, Louisiana, and Napa County, California, tied their closure orders to the physical damage caused by COVID-19. Napa County’s order expressly recognizes the physical damage caused by COVID-19: “[t]his Order is issued based on evidence of increasing occurrence of COVID-19 throughout the Bay Area, increasing likelihood of occurrence of COVID-19 within the County, and the physical damage to property caused by the virus.” Insurers will attempt to rebut this governmental determination that COVID-19 causes physical damage, just as insureds will rely on this language to support coverage claims under property policies.
Insurers will also attempt to foist all policy limitations and exclusions on the civil authority coverage, but not all may apply, or may create an ambiguity, thus preserving coverage. Given the complexities of civil authority coverage, and its interaction with other policy terms, insurers may race to favorable jurisdictions to generate helpful precedent. Insureds with civil authority coverage should move aggressively to protect their insurance coverage for COVID-19 by examining their policies and seeking professional advice as soon as possible.