While spring is finally returning to much of the country, we won't soon forget the record levels of snow that piled up this past winter. And as winter damage claims have begun to pour in, FC&S has received a flurry of questions regarding loss of income due to roads and businesses closing because of snow.
For instance, an FC&S subscriber submitted this problem:
We recently had a snow emergency due to blizzard conditions for forty-eight hours where people were advised to stay off the roads except for emergencies or employers who required their employees to be at work. If you had no business being on the roads, you could be ticketed. The snow emergency was declared by the local sheriff for the entire county.
My insured is a fraternal lodge, which suffered a drop in income from its bar operation because members could not come in because of the declared snow emergency.
Our client is asking for coverage under the business income form. Under the additional coverage for civil authority, there is coverage after 72 hours. Does a snow emergency, declared by the local sheriff, where people are asked to stay off the roads, constitute a civil authority claim?
According to the ISO CP 00 30 10 12, Business Income (and Extra Expense) Coverage Form, for civil authority coverage to apply, there must be loss or damage to property other than at the described premises. Access to the area immediately surrounding the damaged property must be prohibited by civil authority as a result of the damage, and the insured’s described premises must be within a mile of the damaged property. The action of civil authority must be taken in response to dangerous physical conditions resulting from the damage.
Since there was no damage, just dangerous conditions, the coverage would not apply. If there was actual damage to or on the roads that caused the sheriff to shut down the roads leading to the insured’s business, then the civil authority coverage could kick in.
But, the key is that there must be damage to property off premises.
The Fifth Circuit Court of Appeals, in Dickie Brennan & Co., Inc. v. Lexington Ins. Co., 636 F.3d 683 (5th Cir. 2011), went a step further and stated that, even if there is off premises damage, it must have a causal connection to the civil authority action.
In this case, it was the threat of a hurricane and not a snowstorm that caused the business interruption.
As Hurricane Gustav approached Louisiana in 2008, the mayor of New Orleans issued a mandatory evacuation order based on the government's anticipation of high lake and marsh tides due to a tidal surge combined with the possibility of intense thunderstorms, hurricane force winds, and widespread severe flooding.
The Brennans operated New Orleans restaurants that Lexington insured during the evacuation period. The policy provided coverage 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 due to direct physical loss of or damage to property, other than at the described premises, caused by any covered cause of loss."
The insured, reasoning that the damage Hurricane Gustav caused in the Caribbean area qualified as "damage to property, other than at the described premises," submitted a claim, which was denied.
The court said that, in order to prove coverage under the civil authority provision, the insured must meet three requirements:
- Establish a loss of business income caused by an action of civil authority.
- The action must prohibit access to the described premises of the insured.
- The action must be caused by direct physical loss of or damage to property other than at the described premises.
The area of dispute between the insured and the insurer was whether the mandatory evacuation order fulfilled the third element.
The Brennans argued that the damage to the Caribbean area fulfilled that element. Lexington countered that the policy requires a causal link between the prior damage and the civil authority action and that the damage must be near the insured premises to satisfy that third element. The court said that nothing in the record shows that the issuance of the evacuation order was due to physical damage to property, either distant property in the Caribbean or property in Louisiana. Therefore, the court said, it found no nexus between any prior property damage and the evacuation order.
The civil authority additional coverage on commercial property policies is generally intended to apply in situations such as an explosion at a building down the street from the insured's premises that causes the police to close the street (and thus access to the insured's business) for a week to investigate and remove debris. In this scenario, the three elements of the Brennan case are met.
An evacuation order during a hurricane or the sheriff shutting down snow-covered roads are not enough to trigger civil authority coverage—without direct physical damage to property away from the insured's premises, the coverage will not apply.