With the spread of COVID-19 to the U.S., many insurers are preparing for possible COVID-19 related first party property claims by reviewing what coverages and exclusions might be applicable to such claims. While any claim is dependent on the specific terms of the policy issued to each insured, insurance companies should consider certain coverages and exclusions as a checklist. Partners Karen Karabinos and Eric Mull will address a coverage provision or exclusion each day. Today’s focus is on Civil Authority Coverage.
Coverage Provision – Civil Authority
As we mentioned in Edition No. 1 of our COVID-19 coverage issues update, insureds may cite to Civil Authority coverage provisions to recover their business losses caused by shelter-in-place orders issued by the state, city or county authorities. Such coverage was cited as the grounds for the complaint for declaratory judgment recently filed by owners of the Oceana Grill, a restaurant in New Orleans, against its insurer, the Governor of Louisiana, and the State. According to the complaint, Oceana Grill alleged its policy provided (1) coverage for any future civil authority shutdowns of restaurants in the New Orleans area due to physical loss from Coronavirus contamination and (2) business income coverage in the event that the coronavirus has contaminated the insured premises. The complaint specifically references orders from the Governor and the Mayor. The Governor’s Order provides (in pertinent part):
[b]ecause of the ability of the COVID-19 virus to spread via personal interactions and because of physical contamination of property due to its propensity to attach to surfaces for prolonged periods of time….some business establishments are unable to continue current operations without unacceptable risks to the health and safety of the public. (emphasis added).
The Mayor’s order provides (in pertinent part):
[t]here is reason to believe that COVID-19 may be spread amongst the population by various means of exposure, including the propensity to spread person to person and the propensity to attach to surfaces for prolonged periods of time, thereby spreading from surface to person and causing property loss and damage in certain circumstances. (emphasis added).
Civil Authority coverage triggers payments for lost business income, but the “direct physical loss of or damage” requirement we discussed in Edition No. 1 must be loss of or damage, not to the insured location, but to other premises. To invoke coverage, the civil authority must prohibit access to an insured’s location due to physical damage to property of another. Insurance policies may condition coverage on other requirements thus necessitating a thorough review of an insured’s policy and an analysis of the law in the applicable jurisdiction. The following analysis of the Georgia cases addressing civil authority coverage can provide guidance for insurers in Georgia.
The Georgia Court of Appeals in 2004 addressed a coverage dispute between the owner of several Wendy’s restaurants in Georgia and Florida who were forced to close its restaurants in Brevard County due to an evacuation order. Assurance Co. of America v. BBB Service, Inc., 265 Ga.App. 35, 593 S.E.2d 7 (2003). The Court determined that the Civil Authority clause provided coverage for lost business income if the insured established:
(1) That the loss was caused by a civil authority action, which prohibited access to the insured’s premises; and
(2) That the civil authority action that prohibited access was due to direct physical loss of or damage to property other than the insured premises.
Id. at 36. At the bench trial of the case, the insured presented testimony from the Brevard County “Policy Group” who made weather-related emergency decisions. One of the members testified that the team monitored the storm’s progress and “there was a lot of damage being done to the south of us at the various islands that it crossed.” Id. Because the storm had caused that damage, and the storm was forecasted to hit Brevard County, the team recommended that the Chairman of the County Commission sign an evacuation order, which the Chairman did. The trial court ruled in the insured’s favor, and based on that evidence, the Court of Appeals affirmed, finding that the evidence “belies” the insurer’s contention that the insured failed “to present any evidence that actual damage to property other than the insured premises was a basis for the evacuation order.” Id.
In 2014, a Georgia federal court addressed Civil Authority coverage in a case arising out of the terrorist actions on 9/11 focusing, in part, on whether the civil authority “prohibited” access to the insured’s premises. Paradies Shops, Inc. v. Hartford Fire Ins. Co., 2004 WL 5704715 (N.D.Ga. Dec. 15, 2004). In that case, Paradies, who operated 62 retail locations in airport terminals in the U.S., sued Hartford after the Federal Aviation Administration (“FAA”) issued an order preventing landing and takeoff at all airports. Paradies closed stores for two days, claiming that because of the FAA orders, its customers, “the traveling public,” were denied access to its shops located in the “post-security screening areas of all of the nation’s airports.” Hartford denied Paradies’ business interruption claim, and the federal court agreed there was no coverage.
The Civil Authority provision in Paradies covered lost business income sustained by the insured “when access to insured premises is specifically prohibited by order of a civil authority as the direct result of a Covered Cause of Loss to property away from your premises.” The federal court held that the FAA order was not as a result of the World Trade Center disasters but was issued due to the threat of additional terroristic acts. Even if the FAA order was issued as the direct result of the damage to the World Trade Center, the court held the insured failed to establish that the order “specifically prohibited” access to Paradies’ stores. The court focused on the term “prohibit,” the plain meaning of which means “to forbid by authority or command.” The FAA order did not prohibit access to the stores.
The issue is whether the current shelter-in-place orders across the Country qualify as a civil authority order sufficient to invoke coverage. Of course, the language of the orders will control. Insurers should ask the following questions:
1. Does the order prohibit the employers and their customers from accessing the businesses?
2. What is the reason cited for the civil authority issuing the order?
3. Was the order issued to protect the health and safety of the public or was it the result of the direct result of property damage?
These are the very issues that the court in the Oceana Grill case will be tackling.
In Monday’s analysis, we will address Ingress and Egress coverage.