The exclusion

The exclusion and aircraft

Commercial lines

Personal lines

Introduction

 Commonly, property insurance policies exclude loss caused by the destruction, confiscation, or seizure of property by order of any governmental or public authority. This exclusion is often referred to as the "governmental action exclusion." Couch on Insurance (Third Edition) §152:22 notes, "Because this kind of loss is unpredictable, it is typically excluded from most property insurance policies." Note, however, that the standard ISO commercial property causes of loss forms mitigate the effects of the exclusion by stating that actions taken by such authority to stop the spread of fire falls outside the exclusion, providing that the loss caused by fire is one that would be covered under the policy.

 Various courts have, for the most, upheld the exclusion, but not in all cases. Sometimes the court must rein in an overly-broad reading of the exclusion to make its application more reasonable.

The Exclusion

 In the ISO Homeowners 3 – Special Form, HO 00 03 05 11, loss to property described in coverages A, B, and C caused by the destruction, confiscation, or seizure by order of any governmental or public authority is not covered. There is one exception, and that is for acts ordered or undertaken by any governmental or public authority at the time of a fire to prevent its spread. The fire must be of the type that would be covered by the policy (not arson, for example). The exclusion is prefaced by anti-concurrent causation language: "We do not insure for loss caused directly or indirectly by any of the following. Such loss is excluded regardless of any other cause or event contributing concurrently or in any sequence to the loss. These exclusions apply whether or not the loss event results in widespread damage or affects a substantial area."

 The ISO Causes of Loss – Special form, CP 10 30 10 12, excludes loss caused by "seizure or destruction of property by order of governmental authority." Here, too, the exclusion is prefaced by anti-concurrent causation language.

 It would appear, then, that the exclusion is tight, with little room left to obtain any coverage, and in some instances that is true. But a closer reading of the exclusion is warranted. It states that the insurer will not pay for loss caused directly or indirectly by the destruction, confiscation, or seizure of insured property. So, the destruction, confiscation, or seizure itself must be the cause, whether direct or indirect, of the loss.

 Remember, too, that a cardinal principle of policy interpretation is that exclusions are to be read narrowly against the insurer. Each scenario in which the exclusion is applied, then, must be judged on its own merits.

 The Exclusion and Aircraft

 In Kalamazoo Aviation, Inc. v. Royal Globe Ins., 245 N.W.2d 754 (Mich. App. 1976), the owner of a rented plane sued the insurer over a denied claim for damage to the airplane that had occurred when the renter was attempting to evade a customs official. The renter had gone to Mexico for drugs, and, upon landing in Arizona and realizing he was being pursued, ran the plane over extremely rough ground, rendering the aircraft inoperable.

 The insurer denied coverage based on the policy's exclusion from coverage for "loss resulting from the capture, seizure, restraint, or any consequence thereof, or damage to or destruction thereof by any governmental authority." The trial judge held that the exclusion was clearly intended to apply only to loss or damage directly caused by the governmental authority. The appellate judge agreed that the damage to the plane was not caused by the customs official's pursuit, but by the actions of the renter.

 Commercial Lines

 The commercial property exclusion eliminates coverage for loss or damage caused directly or indirectly by the seizure or destruction by order of governmental authority. Thus, for the exclusion to apply to any damage that might be done in connection with the seizure or destruction, the seizure or destruction must either directly or indirectly be the cause of another loss. Consequential loss, such as loss of income or loss of use because of seizure of property come to mind, rather than damage done to other property in connection with the seizure or destruction. The distinction, though, is often blurred, and where it would appear that coverage would exist, the courts have ruled against it.

 For example, in Alton v. Manufacturers and Merchants Mutual Insurance Co., 624 N.E.2d 545 (Mass. 1993), police executed various warrants to search a building for cocaine, drug paraphernalia, records of drug transactions, and money. In carrying out the search, the building was damaged. The insured submitted the loss to his insurer, which denied the claim. The court upheld the denial, stating that the damage was caused by the police in executing the search warrant, and the search necessarily entailed a certain amount of destruction.

 In contrast, in Danulevich v. Hartford Fire Ins. Co., 421 A.2d 559 (Conn. Supp. 1980), the court found in favor of the insured. Here, the police had a warrant to seize two items, but instead took over 2,000 items from the insured's apartment. The police did not return the items even after the charges against the insured were dismissed. Here, though, the verdict appears to have been more that the warrant did not sanction the actions of the police in taking the great number of items than that the exclusion did not apply. Had only the two items been taken, there would have been no coverage. Indeed, in like cases, many courts closely scrutinize the warrant itself to ascertain its lawfulness.

 Such was also the case in Kao v. Markel Ins. Co., 708 F.Supp. 2d 472 (E.D. Pa. 2010). In this case, policy held a search warrant for one unit in a multi-unit building but searched another unit not listed on the warrant, causing property damage. Markel denied the claim, citing the governmental action exclusion. The insureds argued that the exclusion did not apply because the warrant was invalid, so the actions that caused damage were not by order of governmental authority. The court found that any damage done to the wrong address was not covered by the exclusion. For the exclusion to apply, the court said, the government order must have been lawful.

 In California Cafe Restaurant v. Nationwide Mutual Ins. Co., No. C 92–1326 BAC, 1994 WL 519449 (N.D. Cal. Sept. 14, 1994), the court articulated a distinction between losses that could be the basis for applying the governmental acts exclusion. The court said the distinction is between:

 (a) losses which result from governmental activity, qua government, that is, political/policy decisions… the results of which are excluded losses whether or not the government abused discretion in making the order that resulted in the loss; and (b) those losses resulting from the behavior of an actor who, in carrying out a government's order, acts so egregiously that his behavior is not properly characterized as having been the act ordered.

 The court said that application of the exclusion is triggered where a claimed loss has resulted from a basic political policy decision which only the government can make. Where the government has made such a discretionary decision, such as determining when to act pursuant to its police power, a resulting loss to private property is excluded from insurance coverage by governmental action exclusions whether or not the government's decision is susceptible to after-the-fact characterization by the judiciary as unreasonable or as an abuse of its discretion. In such instances the property owner has a constitutional remedy in inverse condemnation but the loss is not insured.

 An example of an "egregious" action may be found in Bankers Fire and Marine Ins. Co. v. Bukacek, 123 So.2d 157 ( Ala. 1960). The insured rented a small house to a tenant who, unbeknownst to the insured, installed a still. One officer, under orders to destroy the still, enthusiastically carried out the order by exploding it with some forty sticks of dynamite. Needless to say, the still was destroyed, and the part of the house still standing was soon destroyed in the ensuing fire. The insured turned the loss over to his insurer, which denied coverage based on the exclusion. The case wound its way to the Alabama Supreme Court, which found coverage for the loss. The court said there was no order requiring the house be burned, nor was there any order requiring the use of dynamite—particularly such an abundance of the explosive. The court looked with approval to earlier cases, notably Rhode Island Ins. Co. of Providence, R.I. v. Fallis, 261 S.W. 892 (Ky. 1924), in which an insured killed a policeman and fled to his home. A number of police officers surrounded the home, and the insured shot at them, wounding two of them. He then left the home by the back door, apparently unseen by any of the police, and did not return for several days. In the early morning, the sheriff called for the insured to come out, and having no response, ordered his men to fire into the home. The home caught fire, and the insurer denied the claim based on the exclusion of order of any civil authority. Interestingly, the court simply stated, with no further explanation, "Manifestly this clause is not applicable to the state of facts proven in this case," and moved on to the insurer's further defense, that the loss sustained by the insured was the result of his own wrongful acts and so he could not recover. The court noted that the insured's conduct was certainly reprehensible, "but it does not follow that he forfeited his rights, or is barred from recovering under the policies issued to him…." There was no exclusion in the policy for loss arising from an insured's wrongful acts, save for arson. The court concluded, "However gross his misconduct may have been, it was not the proximate cause of the wrongful burning of his house by the sheriff some six hours after he had been guilty of his misconduct," and therefore the loss was covered.

 Personal Lines

 A similar, but more recent case than Rhode Island Ins. Co., discussed earlier, is Merrimack Mutual Fire Insurance Co. v. Slater, No. 2004110, 2007 WL 2045429 (Mass. Super. June 13, 2007). The insured's husband, who had been on medication, began to exhibit bizarre behavior, and his wife, becoming afraid he might be dangerous to himself, called for an ambulance and the police. The police found he had a rifle, and after eleven hours (during which time the insured broke windows and caused other interior damage) fired tear gas into the home. The tear gas canisters caused holes in the sheet rock and furniture, and the tear gas residue left the house uninhabitable. Personal soft goods, such as clothing, were rendered worthless because they were unable to be cleaned. The insured notified her insurer. The insurer declined to pay all but the cost to replace the windows broken by the husband. The insurer cited two exclusions: acts or decisions including the failure to act or decide of any person, group, organization or governmental body; and, damage caused by the destruction, confiscation or seizure by order of any government or public authority. (This latter exclusion was applicable to coverage C in the policy under review by the court.)

 The insured engaged a public adjuster, who sent a copy of an FC&S Q&A (May, 1992, #871) to the court. The subscriber asked about coverage for damage to a building and personal property when the police had to force a fugitive, who had entered the insured's building, to surrender through use of tear gas and gunfire. The FC&S answer to the question was as follows:

 The exclusion of loss caused by order of governmental authority is not so broad as to exclude this type of loss. The aim is to exclude coverage for the intentional destruction of property by governmental authority because of some hazard that the property presents, such as when the government orders the destruction of vegetables that are infected with a Mediterranean fruit fly. In the case you present, the destruction done by the police was incidental to the capture of the fugitive. Bullets that damaged equipment were intended to control the fugitive—they were not fired because the equipment posed any danger to the people or property. One would not expect the police officer in charge to state that he or she ordered the destruction of property. For these reasons, the insured has coverage under the policy.

 The court noted that "while the FC&S bulletin referred to above is not binding, it is certainly instructive and helpful in interpreting the (governmental destruction or confiscation) exclusion relied on" by the insurer in denying coverage. The court therefore found for coverage for damage to the dwelling and contents and for additional living expense while the house was being restored.

 The court also looked at the exclusion for loss caused by "acts or decisions, including the failure to act or decide of any person, group, organization, or governmental body" and found it overbroad. (Note that ISO and AAIS policy language contains an ensuing loss provision with this exclusion; this case does not give all policy language.) The court noted that the original event that led to the damage—the conduct of the insured's spouse—was not excluded, and the chain of events led to the conclusion of coverage for the loss.

 When reviewing Rhode Island v. Fallis and Merrimack v. Slater, one might conclude that the courts turn a more lenient eye on homeowners insureds than on commercial insureds. That is not necessarily the case. In the discussion of Danulevich v. Hartford Fire Ins. Co., the importance of a valid warrant was noted. In Sweeney v. City of Shreveport, 584 So. 2d 1248 (La. Ct. of App. 1991) the court ruled the exclusion for loss caused by enforcement of ordinance—in this instance, destruction by order of government authority—applied, even though the insured had not been properly notified that her house was about to be demolished. The house had been standing vacant and had several code violations. It also had no visible number on it; the housing inspector guessed as to its address by consulting a Parish plat book. He incorrectly traced its location to a neighbor's residence, and so all correspondence went there rather than to the insured. The neighbor never rerouted the correspondence to the insured. Since the insured never appeared at any hearing regarding the violations, the order was given to demolish the house. The wrecking crew had the neighbor's address, but, because they had the correct street and a photo, demolished the correct house. The insurer denied the claim based on the exclusion for ordinance or law. (We should note that earlier homeowners forms excluded coverage for enforcement of any ordinance or law regulating the construction, repair, or demolition of a building or other structure unless specifically provided for by the policy; see for example, the ISO HO 00 03 04 91. With the introduction of the 2000 forms, and the inclusion of ordinance or law coverage as an additional coverage, the exclusion still applied, but not to coverage granted by the additional coverage. The exclusion for loss caused by government action did not exist in the earlier form but was added in the 2000 form, so any possible coverage for this type of situation would be precluded by the government action exclusion.)

 The insured appealed, arguing that the city might not have intended to demolish her house at all, but rather the neighbor's (the recipient of the misdirected mail). She further argued that the exclusion was ambiguous in that it might appear to cover an illegal enforcement.

 The court responded:  

A plain reading of the exclusion gives no indication that the procedure used to enforce the ordinance must be flawless in every respect…The record is completely clear that Mrs. Sweeney's house was condemned and demolished pursuant to the enforcement of an ordinance. By its plain terms, the exclusion applies.

 Even though the insured had not received notice and the negligence of the city employees was the cause, nonetheless, the exclusion still applied.

 Note that the personal auto policy also has an exclusion pertaining to loss to the covered auto due to destruction or confiscation by governmental or civil authorities. A personal auto policy question came before the Illinois appellate court. An insured bought an auto for $8,500, not knowing that it had been stolen. The police confiscated it, and she turned a claim in to her insurer. The insurer denied the claim based on the exclusion for loss or damage caused by confiscation by duly constituted governmental authority. The court held that the exclusion was not intended to eliminate coverage when the police temporarily took custody of the vehicle to return it to its rightful owner. The insurer also claimed that the insured should have realized the vehicle was stolen because the seller gave her a title he claimed to have obtained for her from the state on the day she agreed to buy the car. (Actually, the law required the seller to sign over the title; the purchaser then had fifteen days to obtain a new title from the state.) The court disagreed with the assertion that she should have known the car was stolen, saying that she had testified she was unfamiliar with the procedures and had no reason to question the title. Had a clear title been required to provide coverage, the insurer could have made it a requirement before providing coverage. This case is Blaylock v. Country Mut. Ins. Co., 407 N.E.2d 849 (Ill. App. 1980).