Civil Authority provisions normally provide coverage for business income losses when action to an insured premise is prohibited by a governmental action. This coverage is not easily triggered, as many elements must be met to obtain the oft elusive benefits.
In Dickie Brennan & Company, Inc., v. Lexington Insurance Company, No. 10-30381, 2011 WL 996193 (5th Cir March 22, 2011), the Fifth Circuit Court of Appeals determined that Civil Authority coverage requires a direct causal relationship between the governmental action and prior property damage.
As Hurricane Gustav approached Louisiana on August 30, 2008, New Orleans Mayor Ray Nagin issued a mandatory evacuation order. Although the Order did not refer to any property damage, it stated that both the Governor and Mayor Nagin were declaring a state of emergency “because of anticipated high like and marsh tides due to the tidal surge, combined with the possibility of intense thunderstorms, hurricane force winds, and widespread severe flooding.”
The civil authority provision in the Brennan policy stated:
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. This coverage will apply for a period of up to two consecutive weeks from the date of that action.
In Louisiana, an insured must establish:
- that the loss of income was caused by an action of civil authority;
- the action of civil authority must prohibit access to the described premises of the insured;
- the action of civil authority prohibiting access to the described premises must be caused by direct physical loss of or damage to property other than at the described premises; and
- the loss or damage to property other than the described premises must be caused by or result from a covered cause of loss as set forth in the policy.
In this case, the parties disputed whether the mandatory evacuation order fulfilled the third element. The Brennans argued that the third element is fulfilled when the civil authority action is a response to property damage (with no geographic limitation) that has been sustained earlier from the same cause threatening to damage the locale where the insured premises are located. The Brennans alleged that Hurricane Gustav had already damaged property in the Caribbean nations of Cuba, Jamaica, the Dominican Republic, and Haiti when Nagin issued the evacuation order.
In other words, the Brennans argued that the prior damage in the Caribbean, coupled with Gustav’s projected path toward New Orleans, satisfied this element. Lexington, on the other hand, argued that the policy required a causal link between the prior damage and the civil authority action and that the damage must be near (although not at) the insured premises to satisfy that link.
Mayor Nagin’s Order did not mention the earlier property damage in the Caribbean. It listed possible future storm surge, high winds, and flooding based on Gustav’s predicted path as reasons for evacuation and not “due to” physical damage to property, either distant property in the Caribbean or property in Louisiana.
The Court rejected Brennan’s argument that actual damage that had occurred in the Caribbean was sufficient to establish coverage.
The general rule is that “[c]ivil 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.” Although it does not expressly address the proximity issue, the Lexington policy requires proof of causal link between prior damage and civil authority action.