CORONAVIRUS UPDATE: Civil Authority and Contingent Business Interruption Claims Take Center Stage as the Economic Fallout Continues
On March 9, 2020, California Governor Gavin Newsom became the first U.S. governor to order mandatory stay-at-home restrictions in an effort to curb the spread of coronavirus infections. Since then, dozens of other states, cities and localities have followed suit in an effort to protect their citizens from the scourge of this deadly disease. As of March 28, 2020, at least 228 million people in 25 states, 74 counties, 14 cities and one territory have been told to stay at home. The economic impact from these unprecedented restrictive orders has been felt in every corner of the country. With the average small business having just twenty-seven days of cash on hand to survive without new money coming in, it is estimated that by the end of June as many as fifteen million small businesses may be lost. Already, for the week ended March 21, initial jobless claims soared to a seasonally adjusted 3.28 million according to the U.S. Department of Labor. That represents the highest number of initial jobless claims since the Department started tracing data in 1967. Indeed, the March 21 unemployment figure is nearly five times more than the previous high of 695,000 claims filed in the week ending October 2, 1982. With the number of business closures and unemployment claims expected to skyrocket in ensuing weeks, more and more insured businesses are looking to their insurance carriers, their attorneys and their state legislatures for relief. In our previous article, we discussed insurance coverage under conventional business interruption and business income policies. Now, as expansive government closures abound, this article examines considerations regarding civil authority coverage and contingent business interruption policies.
Because many businesses are not likely to have a claim for direct damage from Covid-19 to their insured property, they will necessarily look to other coverages in their business interruption policies. Under current circumstances, the most obvious type of coverage to consider is business interruption civil authority coverage.
Civil authority coverage generally does not require physical damage to the insured’s property. Instead, the coverage is based on interruption of the insured’s business when an order of a civil or military authority impairs or impedes access to the insured’s property as a result of insured physical damage. While civil authority provisions vary from policy to policy, the ISO Civil Authority form is widely in use and is instructive for this issue:
Civil Authority – In this additional Coverage, Civil Authority, the described premises are premises to which this Coverage Form applies as shown in the Declarations.
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.
Noteworthy is that this specific civil authority provision requires only “damage” not “direct physical damage” as required under most BI policies. However, even with this standard, insureds must show access to their property, or the area immediately surrounding the property, is prohibited by civil authority as a result of damage rather than as a preventative measure. For example, when closure orders are issued before property damage occurs, such as happens with hurricanes and other weather events, courts have taken a narrow view of civil authority policy language and rejected coverage.
The policy’s plain language requires that the civil authority prohibit access as a “direct result of direct physical loss or damage to property” within one mile of the [insured’s] premises. The Policy does not insure against impairment of operations that occurs simply because a civil authority prohibits access unless the civil authority order meets the requirements of the policy – one of those requirements is a nexus between the order and certain physical damage. Reading the Civil Authority section as a whole, it is clear that it was not written with the expectation that a civil authority order prohibiting access would issue before the property damage that forms the basis of the order actually occurs. The direct nexus between the damage sustained and the order that the policy requires suggests that the Policy was designed to address the situation where damage occurs and the civil authority subsequently prohibits access.
Jones, Walker, Waecher, et. al. v. Chubb Corp., No. CIV.A. 09-6057, 2010 WL 4026375, at *3 (E.D. La. Oct. 12, 2010).
Similarly, in Dicki Brennan & Co. v. Lexington Insurance Co., 636 F.3d 683 (5th Cir. 2011), the insured sought recovery under a civil authority provision after its business was shut down in response to a mandatory evacuation of New Orleans in preparation for Hurricane Gustav. The evacuation order did not mention property damage specifically but issued a state of emergency “because of anticipated high lake and marsh tides due to the tidal surge, combined with the possibility of intense thunderstorms, hurricane force winds, and widespread severe flooding.” Id. at 684. New Orleans suffered minimal damage and neither the insured’s property nor any of their neighbors’ property were damaged. Id. The court denied coverage stating that “[t]he general rule is that ‘civil 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 687 (quoting Clark Schirle, Time Element Coverages in Business Interruption Insurance, 37 The Brief 32, 28 (2007). See also Kelaher, Connell & Conner, P.C. v. Auto-Owners Insurance Co., No. 19-00693, 2020 U.S. Dist. LEXIS 31081, at **2-4, 8-11 (D.S.C. Feb. 24, 2020) (finding no coverage where an insured law firm produced no evidence the governor’s evacuation order was issued “because of damage or destruction” to the insured’s property); South Texas Medical Clinics, P.A. v. CNA Financial Corp., No. 06-4041, 2008 U.S. Dist. LEXIS 11460, at *2, 31-34 (S.D. Tex. Feb. 15, 2008) (denying coverage because the subject evacuation order was due to fear that hurricane would strike, based in part on physical damage in Florida, but it was not issued “due to” physical damage in Florida); Prime Alliance Group, Ltd. v. Hartford Fire Ins. Co., 2007 WL 9703576 (S.D. Fla. Oct. 19, 2007) (granting summary judgment in favor of the carrier on civil authority claim where access to Miami Beach hotel was prohibited in advance of landfall by Hurricane Francis); 730 Bienville Ptnrs, Ltd. v. Assurance Co. of Amer., 2002 WL 31996014 (E.D. La. Sept. 30,2002) (holding a civil authority provision did not apply to a Louisiana hotel whose business was affected by the FAA closure of airports after 9/11 because access to the hotel was not “prohibited” by any order).
In the national security context, courts have also required that insureds show a link between the government’s decision and damage to property. For example, courts rejected claims arising from the FAA grounding flights following 9/11. See United Airlines, Inc. v. Insurance Co. of the State of Pennsylvania, 439 F.3d 128 (2d Cir. 2006). In United Airlines, a temporary halt of flights in and out of Ronald Reagan National Airport was ordered after the first planes crashed into the World Trade Center but before the Pentagon was struck. Thereafter, the government decided to indefinitely halt operations at the airport because of fears of future attacks. The airport was not closed because of the damage to the Pentagon itself. Accordingly, the Second Circuit affirmed the denial of coverage based on the conclusion that the “interruption to United’s business following the attacks was, therefore, not the ‘direct result’ of damage to adjacent premises. Id. at 134.
However, not all courts require actual property damage to trigger civil authority provisions. For example, in Houston Cas. Co. v. Lexington Ins. Co., No. CIV.A. H-05 1804, 2006 WL 7348102 (S.D. Tex. June 15, 2006), the Texas court found coverage when Universal studios closed its operations in compliance with a mandatory evacuation order from the Governor due to the approach of Hurricane Floyd even though it never made landfall. Id. at 6. See also Sloan v. Phoenix of Hartford Ins. Co., 46 Mich. App. 46, 51 207 N.W.2d 434, 43637 (1973) (“[i]rrespective of any physical damage to the insured property, coverage was provided and benefits were payable when, as a result of one of the perils insured against, access to the insured premises was prohibited by order of civil authority, and we so hold.”); Assurance Co. of Am. v. BBB Serv. Co., 265 Ga. App. 35, 593 S.E.2d 7 (2003) (holding that hurricane damage in the Bahamas and other Caribbean islands in the path of a hurricane that resulted in civil authority closure orders in Brevard County, Florida was sufficient evidence to support coverage even though no landfall or property damage occurred in Brevard County).
As usual, the language of each individual policy and the jurisdiction where the case is heard will be critical in determining whether or not coverage exists. Equally important will be the specific language of individual local government orders. A governor’s order closing business due to the spread of Covid-19 would likely create a more direct causal requirement than orders restricting businesses arising out of fears of the potential impacts of the coronavirus. Additionally, the type of restrictions on the insured business will play an important role in determining coverage. For example, restricting a restaurant to take-out only or limiting the number of customers allowed inside store is very different from a complete shutdown. Southern Hospitality, Inc. v. Zurich Am. Ins., 393 F.3d 1137 (10th Cir. 2004) (holding that the insured hotel owner was not entitled to recover losses under civil authority coverage because the FAA’s order prohibiting flights following September 11 did not restrict access to the hotel operations).
To prepare for the cresting wave of litigation on these issues, carriers and insureds should review applicable civil authority provisions in their policies and track the language of government orders in jurisdictions where they operate. Ultimately, their verbiage will likely be determinative on the critical questions of coverage.
Contingent Business Interruption Insurance
Contingent business interruption (“CBI”) insurance is an extension of first-party property insurance that reimburses lost profits and extra expenses resulting from an interruption of business at the premises of an insured’s customer or supplier. Sometimes referred to as supply chain insurance, CBI provides relief for damage to the property of suppliers, customers, and other third parties upon which the insured depends. There are many different forms of CBI insurance, each of which covers a different scope of loss. A broad CBI provision may contain language such as:
This policy covers against loss of earnings and necessary extra expense resulting from physical damage to or destruction by causes of loss insured against … to property that wholly or partially prevents any supplier of goods and/or services, or property that wholly or partially prevents any receiver of goods and/or services from the insured from accepting the insured’s goods and/or services, such supplier or receiver to be located anywhere in the world …
The supplier whose property damage triggers contingent business interruption coverage is not limited to manufacturers or suppliers in the conventional sense. An insured is not required to have contractual privity with an entity for that entity to qualify as a “supplier.” Airline companies, cruise ships, and ride-sharing companies who bring consumers or goods to a business may qualify as a “supplier” triggering coverage. In Archer-Daniels-Midland Co. v. Phoenix Assurance Co., 936 F. Supp. 534 (S.D. Ill. 1996), the insured sought coverage for increased raw materials and transportation costs due to flooding of the Mississippi River and the resulting crop damage to third party farmers’ crops. The United States District Court Judge ruled that midwestern farmers and the United States government were suppliers of good and services to ADM. As a result, summary judgment was entered in favor of the insured and it was entitled to coverage because flooding prevented suppliers from providing necessary raw materials and required ADM to find alternative transportation services and routes.
However, the burden still rests with the insured to show that the claimed business loss was caused by damage to property that directly impacted the insured. In Arthur Andersen LLP v. Fed. Ins. Co., 416 N.J. Super. 334, 349, 3 A.3d 1279, 1288 (N.J. App. Div. 2010), the accounting firm contended that it earned $204 million less than it expected to earn in the three and one-half months following the September 11 attacks. Simply put, its position was that 9/11 caused property damage; that there was a resulting economic downturn; and that its lost revenue was therefore caused by the property damage of September 11. It was undisputed that Andersen did not derive any direct pecuniary benefit from the existence of the World Trade Center or Pentagon and suffered no direct loss from the damage inflicted to those buildings. In rejecting Arthur Andersen’s theory, the Court noted that it “would permit an insured to allege an insurable interest in a class of property so broad as to be impossible to define and certainly not susceptible to a predictable level of risk. Just as an insurable interest cannot be viewed so narrowly as to create ‘a windfall for the insurer, allowing it to retain premiums it reaped on [a] policy without providing anything in return’ … the interest cannot be read as broadly … [to] allow the insured to reap a windfall recovery for a loss so clearly unanticipated in the calculation of the premium. Such an application would undermine the very purpose of an insurable interest requirement, reducing an insurance contract to a pure gamble.”
Notably, with Covid-19, it may be difficult to determine the reason behind the shutdown of suppliers’ or customers’ locations. Whether those shutdowns are due to actual physical damage or for quarantine to contain the spread of the virus from person-to-person, the insured bears the burden to produce evidence triggering coverage. Therefore, it will be critical to carefully investigate all applicable facts and circumstances, closely scrutinize all policy language, and identify leading legal and investigative experts to handle these claims.
Legal claims and developments from the coronavirus are occurring on a daily basis. If you have questions or would like additional information on this or any related topic, the law firm of Mintzer Sarowitz Zeris Ledva & Meyers, LLP is available to assist you and will continue to monitor judicial and legislative changes.
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