18 Jun Loss of Business Income Caused by Civil Authority Action

Public safety concerns may prompt civil authorities to take action to protect people and property. For example, a governor can issue a mandatory hurricane evacuation, a mayor can close roads during inclement weather, the police can enforce curfews during riots, or a fire department can restrict access to a neighborhood during a gas leak. Though these actions may be good for public safety, they may be bad for business.

In some cases, a Business Interruption policy’s Civil Authority coverage may offset income losses suffered during a civil authority action. Business Interruption, also known as Business Income, is a type of commercial insurance that protects against loss of income when a covered loss causes a business to reduce or suspend its operations. Civil Authority coverage is an additional protection that may be included in a Business Interruption policy.

A typical Civil Authority clause states: 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 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.

Under this framework, the Civil Authority provision will not provide coverage unless all four of the following conditions are met.

• The loss of business income must be caused by the civil authority action. There must be a direct relation between a civil authority action and a loss of income.
• The civil authority action must prohibit access to the insured business. Courts have held that access must be completely prohibited in order to satisfy this requirement. A civil authority action that makes travel to an insured’s business difficult or inconvenient is not enough to trigger Civil Authority coverage.
• The civil authority action must be caused by direct physical loss of or damage to property away from the insured’s premises. Unlike Business Interruption coverage, which requires loss or damage to the insured’s property, Civil Authority coverage requires loss or damage to property somewhere else. For example, an explosion at a nearby warehouse causes the fire department to shut down the area surrounding an insured business for two weeks.
• It’s worth noting that claims for Civil Authority coverage often fail to meet this requirement because the decision to take civil authority action is not caused by direct property damage, but by the desire to prevent it. Courts have denied coverage for losses caused by civil authority actions that were designed to prevent future damage rather than address existing property damage, such as pre-hurricane evacuation orders and curfews imposed to prevent looting and rioting. According to one court, Civil Authority coverage is designed to address situations involving civil authority action that is taken after damage occurs.
• The loss or damage to property away from the insured’s premises must be caused by or result from a loss that is covered under the insured’s policy. A business without hurricane insurance, for example, would not be covered if a civil authority action was caused by hurricane wind damage.

Though many aspects of Civil Authority coverage are relatively standard, there are some variations among insurers and policy forms. For example, some policies provide that coverage will not begin until 24 hours after the civil authority action was taken, and others require 72 hours. The duration of Civil Authority coverage may also be different.

Given the complexity of Civil Authority coverage under a Business Interruption policy, an experienced and reputable insurance agent should be consulted to help identify needs and evaluate options.

If you have any questions or would like to speak with one of our Risk Management Professionals, please contact us.

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