Introduction

9/11 and prohibited access—in New York

9/11 and prohibited access—near Washington

9/11 and prohibited access—around the country

Difficulty in accessing premises

Prohibited access and order to evacuate

No physical damage from covered cause of loss

Homeowners and loss of use

Neighboring premises

Introduction

 Events—notably those of 9/11 and the severe hurricanes of the past few years—have focused attention on two coverages commonly found in business income forms and homeowners forms. The ISO business income form CP 00 30 10 12 promises to 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." Coverage under this provision does not begin until seventy-two hours after the authority has issued such an order, and continues for not more than three consecutive weeks after coverage begins.

 The ISO homeowners forms—for example, the HO 00 03 05 11—under coverage D loss of use, 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, we cover the loss as provided in 1. Additional Living Expense and 2. Fair Rental Value above for no more than two weeks."

 Currently California is being ravaged by wildfires, and the Insurance Department is advising insureds to check their policies to see if coverage exists to offset evacuation and relocation costs, even in their home is not damaged or destroyed.

 The language of these insuring agreements has and continues to lead to disputes. This article explores the issues raised by the business income and homeowners forms and provides a survey of how the courts have answered them.

9/1 1 and Prohibited Access—in New York

 There is no doubt but that the terrorist attacks of 9/11 caused innumerable businesses to sustain loss. There was property damage and loss of business income in the billions for those at or near ground zero. For most of those, coverage was never in question based upon direct physical damage to the insured premises. But for other businesses that sustained no direct physical damage and nonetheless had to suspend operations, questions turned on access being prohibited by order of civil authority.

 A broker and advisory firm located near the World Trade Center sustained no physical damage to its premises; however, access was prohibited by order of civil authority from September 11, 2001, through Friday, September 14, 2001. Following this time, access was restored, but vehicular traffic was limited (pedestrian access and public transportation were available). The policy in force provided coverage for loss of income because of civil authority prohibition for thirty consecutive days, with no time deductible. The firm claimed full loss of business income for five days beginning on September 11 until September 17, and for half coverage for twenty-five days after because normal business was disrupted. The firm claimed coverage for September 17 based on allegations that employees did not know whether or not access was permitted on Monday the 17th. The firm claimed half coverage because the chairman had a full-time driver available to take him to meetings with clients and prospective clients; although this activity was not impossible, it was made difficult by the re-routed traffic and various security checks. The insurer denied coverage for all of the loss, and this action ensued.

 The court said that difficulty of movement did not equate with "prohibited access," and so there was no coverage for the twenty-five days. The claim for September 17 was withdrawn, leaving only the four days in dispute. The insurer's argument was that the stock market was closed, and so the brokerage could not have had income anyway. The insured responded that its employees could have been engaged in other income-producing activities. The court held that it was not clear as a matter of law that the firm suffered no loss, and so there were material issues of fact as to what, if any, losses the firm suffered. This case is Abner, Herrman & Brock, Inc. v. Great Northern Insurance Co., 308 F.Supp.2d 331 (S.D. N. Y. 2004).

 In Abner, the court looked at other cases in forming its own opinion. In the case of 54th Street Limited Partners, L.P. v. Fidelity and Guaranty Insurance Company, 306 A.D.2d 67 (N.Y.S. 2003), a restaurant owner claimed coverage because access to the restaurant was prohibited by order of civil authority. But the court ruled the prohibition was only in effect for the days of December 7 and 8, 1997; following that, vehicular and pedestrian access was diverted, but not prohibited. Employees, customers, and vendors could still get to the restaurant, so there was only coverage for two days.

 9/11 and Prohibited Access—near Washington

 In the case of The Philadelphia Parking Authority v. Federal Insurance Company, 385 F. Supp. 2d 280 (S.D. N.Y. 2005), two arguments were advanced for coverage, the first under the provision for loss of income arising from direct physical loss or damage caused by a covered cause of loss to the insured property. The plaintiff argued that the phrase "direct physical loss or damage" could refer to the economic damage sustained by the parking authority at the municipal airport following all planes being grounded. The phrase "direct physical loss or damage" was unclear in that "direct physical" could just as easily modify loss as it could damage. And, if that were the case, damage could refer to economic damage.

 The second claim for coverage was made under the policy's promise to pay for loss of "business income and extra expenses which you incur due to the actual interruption of your operations during the period of indemnity when a civil authority prohibits access to your covered property because of direct physical loss or damage caused by a covered cause of loss to property not otherwise excluded in the vicinity of your covered property." (The policy in question refers to property "in the vicinity" of the insured's property being damaged—a condition more restrictive than the ISO form, which simply requires that the damaged property be at other than the described premises.) To support their claim that action of civil authority was responsible for the loss, the plaintiff produced part of the FAA notice stating that "all airports/airdromes are not authorized for landing and takeoff" as proof that civil authority had prohibited access to the parking facilities.

 Applying Pennsylvania law, the court dismissed both claims. The court ruled that the phrase "direct physical loss or damage" was not ambiguous. Reading the entire provision for business income, the court said it was clear that "a 'covered cause of loss' must result in some 'direct physical loss or damage,' which in turn must interrupt the insured's business operations." But the plaintiff appeared to be stating that the economic damage caused the business interruption, which could obviously not be the case. A further reading of the policy made it clear that it was direct physical damage to covered property that was the trigger for coverage, not economic damage.

 As for the claim under the civil authority provision, the court ruled that the FAA notice clearly did not prohibit access to the parking facilities. Having determined this, the court did not need to determine whether damage caused by the plane crashes was the reason for the order, or whether the reason was to prevent additional terrorist attacks. Thus, both claims were dismissed.

 It would have been interesting to hear the court's determination of the meaning of "in the vicinity of," since the homeowners forms (discussed below) speak of "neighboring premises." Research did not yield any cases discussing the meaning of the term.

 9/11 and Prohibited Access—Around the Country

 Courts away from the New York City and Washington areas likewise held that the coverage for business income because of prohibited access was not triggered by flights being grounded. In 730 Bienville Partners, Ltd. v. Assurance Company of America, 2002 WL 31996014 (E.D. La. 2002), owners of several hotels in New Orleans sued when their claim for business income was denied. In this unpublished opinion, the court dismissed their suit, saying that "while the FAA's closure of the airports and cancellation of flights may have prevented many guests from getting to New Orleans and ultimately to plaintiff's hotels, the FAA hardly 'prohibited' access to the hotels…. The FAA did not forbid travelers from staying at the hotels if other than air transportation was available."

 The plaintiff in Southern Hospitality, Inc. v. Zurich American Insurance Company, 393 F.3d 1137 (10th App. 2004) advanced claims for coverage based on two provisions: first, that action of civil authority had prohibited access to the hotels; and two, that losses caused by damage to "dependent properties" triggered coverage. The plaintiff managed several hotels throughout the United States that were highly dependent upon air travel, and received management fees based on gross room revenues. In finding for the insurer, the court applied Oklahoma law.

The court looked at Abner, 54th Street Limited Partners, and 730 Bienville Partners and agreed that "prohibits access" had a plain and ordinary meaning of forbidding or preventing the actions of approaching, reaching, or entering. The FAA order had prohibited access to airplane flights, but not to the hotels.

 The court next considered the "dependent property" provision, and again determined there was no coverage. The policy defined "dependent property" as "property operated by others whom you depend on to deliver materials or services to you…accept your products or services…manufacture products for delivery to your customers…or attract customers to your business." The court said the plaintiff had not offered any evidence of loss or damage to any dependent property at either scheduled or unscheduled locations.

 Difficulty in Accessing Premises

There have been several situations where, for one reason or another, access to an insured premises was perhaps difficult, but was not impossible, even though an order of a civil authority might well have been involved.

 Dixson Produce owned a produce stand in Moore, Oklahoma , when a tornado struck on May 3, 1999. The produce stand was forced to close for two days because of lack of electricity. After the stand re-opened, business took a downturn because some streets near the stand were blocked. The insured claimed he should have coverage for lost business income because of the downturn. But the court held otherwise, noting that the insured had been able to access his premises to re-open. Although travel to the stand was not as convenient as it had been prior to the tornado, access was not prohibited. This case is Dixson Produce LLC v. National Fire Insurance Company of Hartford, 99 P.3d 725 (Ct. Civ. App. Okla., 2004).

 Another case reaching a similar conclusion is an unpublished Minnesota case, TMC Stores, Inc. v. Federated Mutual Insurance Co., 2005 WL 1331700 (Minn. App. 2005). The court looked at Abner and Dixson Produce, and agreed with those cases that diminished ease of access was not at all the same as prohibited access, and therefore there was no coverage under the "prohibited access" coverage grant.

 Prohibited Access and Order to Evacuate

 What happens when civil authority orders evacuation (as, for example, when Hurricane Wilma appeared to be bearing down on Houston, Texas)? Is coverage triggered? Coverage applies, remember, when there is direct physical damage caused by a covered cause of loss to property other than the insured's premises. But in event of an evacuation order, presumably damage has not yet occurred. What then?

 One court to address this problem was the Georgia appellate court in Assurance Company of America v. BBB Service Company, Inc., 576 S.E.2d 38 (Ga. App. 2002). The insured had to close several Wendy's Restaurants it operated because the authorities of Brevard County, Florida , issued an evacuation order due to the approach of Hurricane Floyd. BBB made a claim for two and a half days of lost income, which was denied on the basis that the threat of physical damage was not the same as actual physical damage. The court said there was no doubt but that the evacuation order met the "order of civil authority" criterion, but it was questionable as to whether there had been direct physical damage that caused the order to be issued. The court agreed with the insurer, that the evacuation order had been issued because of a threat of injury to persons or property. The order did not state that any property had already been damaged. However, the court left some room for negotiation in that it said that even if the initial order was not based on actual direct physical damage, it was entirely possible that over the next two and a half days actual physical damage caused by the hurricane did, in fact, become a basis for continuing prohibited access. In other words, the order might have been lifted sooner if there was no damage. Thus, there were disputed questions of fact that had to be answered before a final determination could be made.

 A case involving both an evacuation order and prohibited access because of direct physical damage to property other than at the insured's premises is By Development, Inc. v. United Fire & Casualty Company, 2006 WL 694991 (D. S. D. 2006). The Grizzly Gulch wildfire came perilously close to the City of Deadwood, South Dakota, and an evacuation order was issued at 2:30 p.m. on Saturday, June 29, 2002. It was lifted at 8 p.m. on Monday, July 1, 2002; however, a nearby town was under an evacuation order and several roads leading to Deadwood were closed.

 The plaintiff's business income coverage for loss resulting from order of civil authority had a 72 hour time deductible. The plaintiff's business was closed during the period of the evacuation order, and lost additional income because of the other order still in effect and the road closures. The plaintiff argued that the "prohibited access" phrase was ambiguous, and the continued closure of several roads, and the evacuation order in effect in the nearby town meant access to his business was still prohibited.

 At the time of the decision, the court found that no case construing "an action of civil authority prohibiting access" had come before a South Dakota court, but stated that the South Dakota Supreme Court would hold that the phrase was not ambiguous, and although road closures around Deadwood City had continued for some time, access had not been prohibited under the plain and ordinary meanings of the words. The court also looked at Southern Hospitality and Abner, discussed earlier, in reaching this conclusion. So, an order by a civil authority did not prohibit access to the insured premises for the required seventy-two hours.

 No Physical Damage from Covered Cause of Loss

 A 1958 case, Cleland Simpson Company v. Firemen's Insurance Company of Newark, N.J., 140 A.2d 41 (Pa. 1958) involved an order by the mayor of Scranton issued following Hurricane Diane's causing massive flooding in the area. The flood disrupted the city's water supply, including that needed to fight fires, and the mayor declared a state of emergency because of potential fire danger. All businesses were ordered closed. The insured's business was closed from August 19, 1955, until August 23, 1955. The insured claimed coverage for business interruption under his policy, which stated the insurer paid "actual loss as covered hereunder sustained during the period of time, not exceeding two weeks, when as a direct result of a peril insured against access to the premises described is prohibited by order of civil authority." The insured's policy, however, insured only against fire and lightning. The insured argued that the state of emergency because of a possible fire should provide coverage; the court answered that "by no process of logic can we read into the policy that the risk includes prohibition of access because of apprehension of either the possibility or probability of a fire which never occurred."

 A more recent case upholding the same principle is Narricot Industries, Inc. v. Fireman's Fund Insurance Company, 2002 WL 31247972 (E. D. Pa. 2002). Narricot Industries had two plants, one in Tarboro, North Carolina, and one in Boykins, Virginia . When Hurricane Floyd hit the Eastern seaboard, both plants were damaged. The towns were flooded, including the means to dispose of waste water from the plants. In Tarboro, the mayor declared a state of emergency and had a letter delivered to each industrial plant stating they could not operate because of the lack of disposal facilities. In Boykins, flooding made the roads in and out of town impassible; the Narricot facility there was ordered to suspend operations because of the lack of waste water disposal facilities. A claim for business income because of prohibition of access was presented to the insurer, and was denied.

 The claim for the Tarboro expenses was denied because the insurer held that a hand-delivered letter was not a formal "action of civil authority." The court found that an action need not be formal, or, indeed, even written. It must just be an "action," and so the test was met. The insurer had also declined coverage because the action was preventive and not the result of a covered cause of loss, but the court pointed out that the policy for the plant covered both hurricane and flood, and so there was coverage.

 But the policy covering the Boykins plant did not cover loss caused by flood; it only covered loss caused by hurricane. Because the civil authority closed the plant because the waste water disposal facility was flooded, and not because there was any other damage that fell under policy coverage, there was no coverage for the loss sustained at this plant.

 In May, 2003, the U.S. Department of Agriculture closed the U.S. border to the importation of Canadian beef and beef products because of the discovery of bovine spongiform encephalopathy (mad cow disease) in Canadian cattle. Source Food, a U.S. company which processed Canadian beef for sale in the U.S. , was unable to supply beef to a customer, and the customer subsequently terminated its contract. Source Food presented a claim for lost business income because of action of civil authority prohibiting access to the premises due to direct physical damage. The insurer denied the claim, in part on the ground that there was no direct physical loss to property. The insured argued that the trial court had held that direct physical loss could be established by showing impairment of function because of imposition of a governmental regulation. But the district court disagreed, saying that the trial court had simply dismissed Source Food's request for summary judgment, saying that there were issues of material fact. The court said that reading "direct physical loss" to mean functional impairment due to governmental regulation would render the word physical meaningless, and so found for the insurer. This case is Source Food Technology, Inc. v. United States Fidelity and Guaranty Company, 2005 WL 3334592 (D. Minn. 2005).

Homeowners and Loss of Use

Similar in scope to the business income provision is the homeowners coverage, under coverage D loss of use, for additional living expense or fair rental value (as applicable) because a civil authority has prohibited use of the residence premises as a result of direct damage to a neighboring premises by a covered cause of loss.

 The 2005 hurricane season clarified, as nothing else could, that there is a vast difference between direct damage by a covered cause of loss, such as wind, and direct damage by an excluded cause of loss, such as flood. Flood coverage as currently 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 the 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"?

 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 event of an evacuation order, a determination would have to be made as to whether the order preceded, or followed upon, the direct physical damage. Here, a review of cases such as BBB Service and By Development, Inc. would prove useful in evaluating the circumstances. So, in the case of mandatory evacuations in anticipation of a hurricane's landfall, the coverage might or might not respond.

 But once a 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. Visit FEMA.gov for more information. Storm surges can range anywhere from four to six feet above normal water level 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, it 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.

 But what happens if there are both covered and noncovered causes of loss? For example, there is wind damage in a 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.

 It is not uncommon for authorities to order an evacuation when a train or truck leaks hazardous material. Is there coverage? Once again, it would appear to depend upon the facts. If a train catches on fire, and the surrounding area must be evacuated, then "fire" is the covered cause of loss—but is the train a "premises"? If a tanker car simply begins to leak toxic fumes, where is the "direct damage"? No relevant court cases addressing this issue were found.

 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." This definition 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]. And, given that today a journey by car of twenty or thirty miles is usually considered "near," while the same journey undertaken by horse at the beginning of the 19th century might well be considered "far," the definition of "neighbor" might well be expanding.

 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, an 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.