The District Court for the District of South Carolina ruled that a coverage extension for "civil authority" did not cover a business interruption loss due to a governor's evacuation order ahead of a hurricane. The case is Kelaher, Connell & Conner, P.C. v. Auto-Owners Ins. Co., 440 F. Supp. 3d 520 (D.S.C. 2020).
Kelaher, Connell & Conner (Kelaher) is a law firm located near the eastern coast of South Carolina. As Hurricane Florence was approaching in September 2018, the governor of South Carolina issued an executive order mandating evacuation for areas on the South Carolina coast, including the area where the Kelaher offices were located. The governor's order was lifted, and Kelaher returned to the offices, 3.5 days later.
Kelaher had purchased a businessowners policy from Auto-Owners that included an extension for "civil authority" coverage. This extension would apply to business interruption losses incurred by Kelaher when "access to the described business premises is prohibited by order of civil authority because of damage or destruction of property adjacent to the described premises by the perils insured against" precipitated the loss. Kelaher submitted a claim to Auto-Owners for the time lost due to the governor's evacuation order. Auto-Owners denied the claim, and Kelaher filed suit.
Auto-Owners argued Kelaher had no grounds for its business interruption claim because, though their business had been interrupted by the governor's executive order, the order had not been issued due to the "damage or destruction of property adjacent to the described premises by the perils insured against." (emphasis added). Kelaher counterargued the provision was ambiguous. Even though it didn't appear so on its face, the phrase "because of damage or destruction of property adjacent to the described premises" (emphasis added) was not specific about the timing of the damage to the adjacent property. The insufficient clarity, Kelaher said, revealed an ambiguity that must be interpreted in their favor as the insured.
The judges disagreed. The "because of" language in the coverage extension indicated the damage to adjacent property had to be present before the executive order was issued. The extension specified that the executive order preventing entry to the premises had to have been issued in response to physical damage on the adjacent property. If the order was issued for any reason other than physical damage occurring on the adjacent property, then the extension would not apply.
In a similar case from Florida, Starr Indemnity & Liability Co. v. Miami Chocolates, LLC, 337 F. Supp. 3d 1216 (S.D. Fla. 2018), the court examined an insurer's duty to defend an insured "because of" personal and advertising injury. The judges in Starr Indemnity said "If the potential damages were not 'because of' a personal or advertising injury, there would not be a duty to defend."
The court applied the same logic to the case at bar, stating that "if the civil authority order was not issued 'because of' damage or destruction to property" adjacent to Kelaher's office premises, then the coverage extension would not apply. Kelaher did not present, and the judges did not find, any evidence that showed the governor's executive order had been issued in response to damage at a property adjacent to Kelaher's offices.
The court awarded summary judgment to Auto-Owners.
Editor's Note: Coverage for orders by a civil authority can often be confusing. Coverage is provided when damage nearby causes the local authority to restrict damage to other premises. In this case, the order wasn't related to actual damage, but the threat thereof. While it is good practice for areas to evacuate in advance of an encroaching storm for the safety of residents, there is no coverage in most policies for the closure of businesses for such evacuations. In order for coverage to be available when local authorities restrict access to an insured property, there must be damage nearby caused by a covered peril. Without such damage, there is no coverage, even if the local authority orders an evacuation of an area or otherwise restricts access.
Read More: