In the aftermath of Hurricane (or post-tropical cyclone) Sandy,[1] insurers and insureds alike will face a number of complicated insurance coverage issues, to which lessons from previous catastrophic events may shed some light. Given the mandatory evacuation orders issued by the governors of New York, Delaware, New Jersey and Connecticut, civil authority and ingress/egress provisions of property insurance policies will be consulted to determine potential business interruption coverage.

Judicial interpretation of civil authority and ingress/egress provisions in the context of 9/11-related claims and other natural disasters provide some guidance on these issues.

Civil Authority

Generally, civil authority coverage is intended to apply to situations in which 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. Thus, claims for civil authority coverage typically require satisfaction of the following elements:

1. An action or order of civil authority that
2. Prohibits access to the insured premises and that
3. Results from a covered loss or damage caused by a covered peril
4. At a location other than the insured property.

Denial of access to the insured’s premises must also cause the claimed business interruption.

Several courts have held that where the insurance policy required the action or order of civil authority to “prohibit access” to the premises, access to the insured premises must be forbidden rather than simply restricted or hindered for coverage to apply.

For example, in Southern Hospitality Inc. v. Zurich American Insurance Company, 393 F.3d 1137, 1140-41 (10th Cir. 2004), the Tenth Circuit held that although the U.S. Federal Aviation Administration’s order grounding all flights in the United States following 9/11 qualified as an “action of civil authority,” the civil authority coverage was not triggered because the flying restrictions themselves did not prohibit access to the insured’s hotels. In other words, the FAA’s order did not close the insured’s hotels; the order merely hindered the number of guests that could travel to the hotel. Id.

The court thus affirmed the district court’s grant of summary judgment in favor of the insurer because the civil authority order did not prohibit access to the insured’s premises.[2]

Timing

It is also important to distinguish between the different types of proximate cause language used in civil authority provisions. Courts have construed civil authority provisions differently, depending on whether the action of civil authority prohibits access due to the impending threat of a direct physical loss or as a direct result of property damage that has already taken place.

For example, in South Texas Medical Clinics P.A. v. CNA Financial Corporation, No. H-06-4041 (S.D. Tex. Feb. 15, 2008), the U.S. District Court for the Southern District of Texas held that a civil authority provision did not cover business interruption losses to the insured’s medical clinics when the mandatory evacuation order was issued based on the anticipated threat of damage. Neither the insured’s property nor property nearby was damaged when Hurricane Rita changed course. Id. at *1. The policy provided coverage for business interruption sustained by an action of civil authority that prohibited 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.” Id. At *2.

The court concluded that “the causal link between the prior damage and the civil authority order [was] missing” when the official that issued the evacuation order did so because Rita was threatening the Texas coast, not because Rita had already caused property damage elsewhere. Id. at *10. Thus, the mandatory evacuation order was not “due to” direct physical loss of or damage to property, other than at the described premises.

Similarly, in United Air Lines Inc. v. Insurance Company of the State of Pennsylvania, 439 F.3d 128, 135 (2d Cir. 2006), the Second Circuit held that interruptions to an airline’s business following the 9/11 terrorist attack were not the direct result of damage to adjacent premises — i.e., the Pentagon — within the meaning of the policy when evidence in the record demonstrated that the government’s decision to suspend flights was based on the fear of future attacks. The policy required United to show that it was denied access to its locations at the airport “as a direct result of damage to adjacent premises.” Id. at 134.

On Sept. 11, the FAA banned all civilian aircraft at 9:26 a.m. Id. at n.6. At 9:40 a.m., American Flight 77 crashed into the Pentagon. Id. United’s facilities in Arlington, Va., suffered no physical damage as a result of the attack on the Pentagon. Id. at 129. The Second Circuit concluded that because the airport’s operations were suspended based on fear of future attacks, not the “direct result” of damage to the airline’s adjacent premises, the policy unambiguously precluded coverage.[3]

Although individual policies should be consulted, South Texas Medical Clinics, United Airlines, and Dickie Brennan illustrate that the civil authority provisions may only be triggered when an order prohibiting access is issued as a direct result of nearby actual property damage and not to prevent future damage, notwithstanding the relative likelihood that future damage may occur.

Location

Finally, it is important to analyze the policy to determine any restrictions on where property damage must occur. For example, some policies specify that the property damage must occur “adjacent to” the insured property. Other policies require property damage within a certain specified distance from the insured premises.[4] Others merely require proof of a causal link between the property damage and the order of civil authority.[5]

Ingress/Egress

In the absence of an order by a civil authority, ingress/egress provisions should be consulted. Ingress/egress provisions are similar to civil authority provisions in that they provide business interruption coverage for losses sustained when physical damage prevents access to the insured premises.

However, for the ingress/egress provision to be invoked, the insured must establish an inability to enter or leave the insured premises as a direct result of a peril insured against. For example, in Royal Indemnity Company v. Retail Brand Alliance Inc., 33 A.D.3d 392, 393 (N.Y. App. Div. 2006), the Supreme Court for the State of New York denied business interruption coverage based on the policy’s “Restriction of Access and Loss of Attraction” to a store that was closed for over a year following the nearby destruction of the World Trade Center.

The court reasoned that because there was no indication that the absence of the World Trade Center hampered or delayed the customers’ ability to enter the store and make purchases or that suppliers prevented from making deliveries, the destruction of the World Trade Center did not “prevent” the use of or access to the store as required under the policy. Id. at 393-94.

In contrast, the U.S. District Court for the Eastern District of North Carolina in Fountain Powerboat Industries Inc. v. Reliance Insurance Company, 119 F. Supp. 2d 552, 556-57 (E.D.N.C. 2000) held that a policy’s ingress/egress provision provided business interruption coverage when Hurricane Floyd caused flooding of the only road providing access to the insured’s business. The court rejected the insurer’s contention that property damage to the insured’s premises was required in order to trigger business interruption coverage when the policy merely covered “loss sustained due to lack of access to the property.” Id. At 557.

As those affected by the storm turn their attention to insurance coverage, insurers and policyholders should determine whether access to the insured premises was prohibited or merely hindered. Likewise, parties should consider the degree of the casual nexus that must be shown between the prohibition of access to the insured premises and the resulting physical damage and analyze the policy to determine where the property damage must occur to invoke coverage.

Finally, although ingress/egress and civil authority claims are similar, each require different elements of proof and, therefore, must be analyzed separately.

--By Thomas Caswell and Kaisa Adams, Zelle Hofmann Voelbel & Mason LLP

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

The opinions expressed are those of the authors and do not necessarily reflect the views of the firm, its clients, or Portfolio Media Inc., or any of its or their respective affiliates. This article is for general information purposes and is not intended to be and should not be taken as legal advice.

[1] What, if any, impact storm nomenclature may have on the availability of coverage is beyond the scope of this article.

[2] See also Abner Herrman & Brock Inc. v. Great N. Ins. Co., 308 F. Supp. 2d 331, 336-37 (S.D.N.Y. 2004) (civil authority provision provided coverage for the four days that civil authority prohibited access to the insured premises but not a moment later, despite traffic restrictions in the area and confusion about accessibility of the premises following the lift of the order); Ski Shawnee Inc. v. Commonwealth Ins. Co., No. 3:09-CV-02391 (M.D. Pa. July 6, 2010) (denying civil authority coverage for business interruption losses following the collapse of a bridge used by approximately 70 percent of the insured’s patrons to access the ski resort since the insured’s patrons were able to access the resort via alternate, although little used, routes).

[3] See also Dickie Brennan & Co. Inc. v. Lexington Ins. Co., 636 F.3d 683, 686-87 (5th Cir. 2011) (denying civil authority coverage because no property damage had occurred in Louisiana at the time the evacuation order was issued for Hurricane Gustav).

[4] See, e.g., Jones Walker Waechter Poitevent Carrere & Denegre LLP v. Chubb Corp., No. 09-6057 (E.D. La. Oct. 12, 2010) (acknowledging that civil authority coverage was not triggered until physical loss or damage occurred within one mile of the insured premises as required by the policy).

[5] See Dickie Brennan, 636 F.3d at 686-87.