Does the Use of Illegal Drugs Prevent Workers Comp Coverage?

Workers compensation is based on state laws and payment under the system rests on two basic principles: the employee must suffer an injury, and this injury must arise out of and in the course of employment. A question often arises pertaining to whether an employee who is injured and who uses alcohol or illegal drugs can be denied workers comp benefits based on the idea that the employee was not in the course of employment due to being under the influence.

In Arizona , the legislature passed a law that provided that a worker who tests positive for alcohol or illegal drugs is not eligible for workers compensation benefits. This law was challenged and the case ended up before the state supreme court. The case is Grammatico v. The Industrial Commission, 2005 WL 1896248 ( Ariz. ).

Grammatico fell at work and broke his right wrist and left knee. He admitted that he had smoked marijuana and had ingested methamphetamine on the previous two days when he was not on the job. His post-accident urine test showed positive results for marijuana, amphetamine, and methamphetamine, all illegal drugs. Arizona law stated that an employee's injury shall not be considered a personal injury by accident arising out of and in the course of employment and is not compensable if the employee fails to pass a drug test. Relying on this law, the employer denied Grammatico benefits. The administrative law judge agreed and the case eventually ended up before the Arizona Supreme Court.

The court noted that, in Arizona , an injured employee must demonstrate both legal and medical causation to receive workers comp benefits. The legislature had some latitude to establish the requisite medical causation for workers comp recovery, but it could not define legal causation in a way that conflicts with the state constitution. So, the resolution of this case hinged on whether the workers comp law concerning the use of illegal drugs impermissibly defined legal causation by requiring proof that the presence of alcohol or illegal drugs in a claimant's system did not contribute to the accident. The court ruled that the statute did just that and it ran afoul of the state constitution.

The constitution required compensation if a necessary risk or danger of employment caused or contributed to an employee accident. The statute denied benefits if alcohol or drug use contributed to the accident; it basically would require proof that an employee was not at fault when the industrial accident occurred. The court declared that the statute would thus impermissibly inject fault into the no-fault workers compensation system; and the constitution prohibits the legislature from enacting legislation that injects fault into the workers compensation system. The court ruled in favor of Grammatico.

Prohibited Use Coverage

Most are aware by now that Hurricane Katrina has not been a common or garden variety hurricane. The images of loss of life and property destruction will be with us for some time to come. From a property claims perspective, the nature of this storm has turned what would normally be considered windstorm claims to questions as to whether the appropriate coverage was windstorm or flood.

Randy J. Maniloff has discussed many of the issues raised by Katrina, such as the looting, the fires, the effect of the anti-concurrent causation lead-in clause on the flooding caused by the levee breech of Lake Pontchartrain, as well as the damage directly caused by the wind itself. See Unraveling Insurance Coverage for Hurricane Katrina: No Big Easy Task.

In the big picture, then, the coverage for loss of use is hardly likely to make a dent in the vast amount of claims dollars. But for those who have seen homes destroyed, every dollar legitimately collected puts them one step closer to restoring lives and property. In this article, we explore the homeowners coverage D – Loss of Use; in particular, the coverage for prohibited use.

Flood coverage as written by the National Flood Insurance Program (NFIP) does not provide loss of use coverage, so that means any possible claim by a homeowner will have to be made against their homeowners carrier.

The 1991 ISO homeowners forms state that “If a civil authority prohibits you from use of the 'residence premises' as a result of direct damage to neighboring premises by a Peril Insured Against in this policy, we cover the Additional Living Expense and Fair Rental Value loss as provided under [other provisions] above for no more than two weeks.”

The AAIS homeowners forms state the insurer will “pay 'your' additional living costs and loss of rent or fair rental value [as applicable] for up to two weeks if a premises neighboring the 'insured premises' is damaged from a peril insured against by this policy and 'you' may not, by order of civil authority, use the 'insured premises'. This is not limited by the policy period.”

The 2000 ISO form states that “If a civil authority prohibits you from use of the 'residence premises' as a result of direct damage by a Peril Insured Against, we cover the loss as provided in 1. Additional Living Expense and 2. Fair Rental Value above for no more than two weeks.”

Possibly under the 2000 form a case could be made that if the homeowner had purchased flood insurance from the NFIP, the direct damage was, in fact, by a “Peril Insured Against.” But if the entire policy is reviewed, the Section I property coverage is entitled “Section I – Perils Insured Against,” so it would take an extremely liberal reading of the policy to generate this result.

The general interpretation, then, is that the homeowners forms will respond only if the prohibition is because of direct damage to neighboring premises by perils that would ordinarily be covered causes of loss.

This leads to three questions. First, what is the timing of the direct damage? Second, what is the nature of the direct damage? And third, what is a “neighboring premises”?

Timing of the direct damage: The timing of the direct damage is important because this coverage will not respond to anticipated direct damage; it responds to damage that has already occurred.

So, in the case of mandatory evacuations in anticipation of the hurricane's landfall, the coverage does not respond.

Nature of the direct damage: But once the hurricane hits and civil authority prohibits a return to damaged areas, it becomes a different matter. Coverage might or might not respond, depending upon what part of the hurricane hits first—the wind or the storm surge. (This generally only applies to property on or near the coast, or however far inland the surge travels.)

Unfortunately for coastal property, it is the storm surge that first hits; sometimes as much as five hours in advance of the approaching hurricane. See http://www.fema.gov/hazards/hurricanes/hurfacts.shtm, and http://en.wikipedia.org/wki/Hurricane for good information. Storm surges can range anywhere from four to six feet above normal for a minimal hurricane to over twenty feet for a severe storm. Further, if the surge is topped with waves or occurs at high tide, they can reach even greater heights (Hurricane Camille's surge was measured at twenty-five feet). Thus, if it is the storm surge that destroys property, which was probably the case with much of the damage caused by Katrina, then flooding is the cause of property damage and so prohibited use coverage does not respond. For example, coastal property is destroyed by storm surge; authorities will not allow evacuees to return home because of debris and downed power lines. There is no coverage.

Further inland, where wind is the main cause of property damage, that covered cause of loss triggers prohibited use coverage. Anyone here who has access to his or her home prohibited by civil authority because of debris and downed power lines should be covered.

Of course, these scenarios do not take into account Katrina's impact on New Orleans , which is a different matter entirely. Citizens were told to evacuate prior to the hurricane, so there was no prohibited use coverage available at that point. After the hurricane itself struck, the wind damage was immediately apparent. Had that been the only cause of loss, then coverage would be in place following the storm if civil authority forbade citizens to return to their homes. The storm surge did not affect New Orleans , so it was not until the levees were breeched that the flooding that prompted what is now a mandatory evacuation occurred. Lake Ponchartrain flowed into the city with all its nightmarish consequences.

So, for damage resulting from windstorm, there is prohibited use coverage, but not for the coverage if the only damage to property is from the water. But what happens if there are both covered and noncovered causes of loss? For example, there is wind damage in the neighborhood such that civil authority prohibits access. Then the flood occurs. Will coverage continue for the two week period, or end with the flood? To be fair to the policyholder, it seems the fairest approach is to continue the coverage for the allotted time.

What is a”neighboring premises”: “Neighboring premises” is not defined in the homeowners forms, so often a common dictionary serves as a reference. Webster's Collegiate Dictionary (Tenth Edition) defines neighboring as “adjoining immediately or lying relatively near to,” which appears to make coverage available when, say, a property immediately next door to the residence is not damaged, but property close by sustains damage that would be covered under the homeowners policy. Then, if civil authority prohibits access, coverage should apply.

But how close must the damage be? At what point is “neighboring premises” close enough to qualify? Is there a mileage limitation? Black's Law Dictionary (Fifth Edition) says a neighborhood is “a place near; an adjoining or surrounding district; a more immediate vicinity; vicinage”[a synonym for vicinity].

Have the courts anything to contribute to a solution to this problem? While no cases were found referring to a “neighboring premises,” we should at least consider that “neighboring” has neighbor (one living in close proximity to another) as its root. So, neighborhood might give insight.

There have been several cases construing the meaning of “neighborhood,” usually within a planning or zoning context. One such is Clayman v. Prince George's County, 292 A.2d 689 ( Ct. App. Md., 1972). Here, applicants requested rezoning from rural to commercial use to develop a shopping center. Those opposed argued that property values would decline and the enjoyment of their respective properties would be impaired. An argument in favor of the rezoning was that the nature of the “neighborhood” had changed. In finding for the appellants that the neighborhood had not changed, the court said “the neighborhood in any area must be an area which reasonably constitutes the immediate environs of the subject property and not some area miles away.”

The court in Maurer v. Austin Square, Inc., 215 N.E.2d 724 ( Ct. App. Oh., 1966) turned to Webster's New International Dictionary, Third Edition (1964) for assistance in determining what a neighborhood was. This case also involved a dispute over zoning. The court agreed with Webster: “a.: a number of people forming a loosely cohesive community within a larger unit (as a city, town) and living close or fairly close together in more or less familiar association with each other within a relatively small section or district of usually somewhat indefinite boundaries and usually having some common or fairly common identifying feature (as approximate equality or economic condition, similar social status, similar interests) and usually some degree of self-sufficiency as a group (as through local schools, churches, libraries, business establishments, cultural and recreational facilities). b.: the particular section or district that is lived in by these people and that is marked by individual features (as type of homes and public establishments) that together establish a distinctive appearance and atmosphere. c.: an area or region of usually vague limits that is usually marked by some fairly distinctive feature of the inhabitants or terrain.” (This definition was also used by the Missouri Supreme Court, in Spradlin v. City of Fulton, 924 S.W.2d 259 [Mo. 1996].)

As noted by the court in Burgess v. 103-29 Limited Partnership, 718 A.2d. 613 ( Md. App. 1998), “the concept of a 'neighborhood' is a flexible one and will vary according to the geographical location involved; it being axiomatic that in rural or semi-rural areas … the 'neighborhood' will be larger and more fluid than in a city or a suburban area.” The court looked back at Clayman, and added “Nevertheless, the neighborhood in any area must be an area which reasonably constitutes the immediate environs of the subject property.”

It would seem, then, that “neighboring premises” is a term broad enough to encompass, say, and area greater than just a few square blocks, perhaps even a few square miles. Given that the courts have turned to the dictionaries, policyholders seeking coverage should be given the benefit of the doubt and thus the broadest interpretation allowable.