Do you know that most property policies cover businesses, like yours, against lost income from a government-ordered shutdown?
To combat the spread of coronavirus, local authorities have begun issuing orders to close businesses. Some localities have even ordered citizens to “shelter in place.” We have seen these orders proliferate throughout California, and your community could be next.
No one knows how long these closures will last. But they are already having a dramatic effect on commerce, especially for businesses that local governments have deemed “non-essential. These businesses include bars, restaurants, hotels, wineries, and gyms, to name a few.
Impacted businesses are likely wondering if insurance covers these new government-ordered closures to contain the coronavirus. Many companies might only consider the availability of standard business interruption insurance. This would be a mistake. While business interruption coverage is a good place to start, there is another portion of your property insurance policy that directly addresses this scenario. It is coverage provided for “an interruption caused by an order of a civil authority.”
What is civil-authority coverage, and how might it apply to the shutdowns being ordered to combat coronavirus?
In general, civil-authority coverage insures a company’s lost income over a period of time during which the government closes or prohibits access to your business. Companies need to carefully review the language used in their policies. It can vary quite a bit.
An “Order of a Civil Authority”
One thing all civil-authority provisions have in common is that they require an “order” by a “civil authority.” But what does this mean exactly? Even though there is no case law addressing these terms in the context of COVID-19, courts have encountered civil-authority coverage in the context of the FAA shutting down commercial air traffic following 9-11. There was no dispute in those cases that the FAA decision to ground flights qualified as an “order” by a “civil authority.” Whether a shutdown based on a particular edict, ranging from government advisories to full-blown martial law, qualifies as an “order” will depend heavily on the facts. There will be cases where it’s not much of a close call, like where, in California, the Orange County Health Officer, relying on statutory authority, directs all non-essential businesses to close. But there will be other cases that are less clear. For instance, your local authority might strongly suggest, without directly ordering, a closure. Or your local authority might order a closure but informally, perhaps lacking proper legal authority. Coverage will depend on the fact-specific nature of the shutdown.
The Property-Damage Requirement
There are two kinds of civil-authority provisions. One requires property damage. The other does not. How can your company tell which language its policy uses? If your civil-authority provision contains language similar to the paragraph below, there won’t be civil-authority coverage unless your company can show that property, typically property that is not your own company’s, was physically damaged by the coronavirus:
Civil Authority. We will pay for the actual loss of Business Income you sustain . . . caused by the 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 loss.
On the other hand, if your civil-authority provision contains language similar to the next paragraph, your company probably won’t need to prove that anyone’s property was damaged by the virus. All your company would need to show is that a closure ordered by the government prohibited access to your company’s facilities:
Civil Authority. This policy is extended to cover the loss sustained during the period of time when, as a result of a peril not excluded, access to real or personal property is prohibited by order of civil authority.
We will likely see litigation about whether viral contamination constitutes property damage. While there is no case law specifically addressing COVID-19, there have been several cases that shed light on whether viral contamination constitutes physical loss to property for purposes of civil-authority coverage. For instance, in Gregory Packaging, Inc. v. Travelers Property & Casualty Company of America, 2014 WL 6675934 (D.N.J. Nov. 25, 2014), a packaging company’s refrigeration system contaminated its facilities with dangerous levels of ammonia. The district court held that the contamination constituted direct physical loss for purposes of the company’s business interruption coverage, explaining that the “ammonia release physically transformed the air within Gregory Packaging facility so that it contained an unsafe amount of ammonia or that the heightened ammonia levels rendered the facility unfit for occupancy until the ammonia could be dissipate.” But in Source Food Tech., Inc. v. U.S. Fidelity & Guarantee Company, 465 F.3d 834 (8th Cir. 2006), a company that sold beef saw its supply chain halted because the USDA closed the border to Canadian beef to prevent mad cow disease from getting into the American market. The company’s property policy provided coverage for interruptions from government closures if the closure was due to a direct physical loss. The Eighth Circuit held that, because there was no evidence the beef actually destined for the company’s facilities was itself contaminated with mad cow disease, there was no direct physical loss, and closing the border to beef products based on the fear of transmitting mad cow disease was not sufficient to constitute property damage.
Whether government-ordered shutdowns from the coronavirus qualify as property damage will depend on the facts. If your company can establish that property has been contaminated by the virus, there would be a strong argument for coverage under a case like Gregory Packaging. However, if your company cannot prove actual viral contamination, and the government shutdown was simply a protective step based on the fear of contamination, there might be problems under a case like Source Food. Time will tell as courts sort through these issues.
The Scope of Coverage
One thing that companies should keep in mind is that coverage provided by most civil-authority provisions is not as broad as standard business interruption coverage. Civil-authority coverage is usually limited to a period of time set by the policy. Depending on the language used, this period can range from several days, to several weeks, to several months. Some policies might include other requirements, such as notice, repair, or deductibles. Other policies might include certain exclusions, including exclusions for viral outbreaks, communicable diseases or pollution. The language of those exclusions can vary.
Every business with operations that have been or will be interrupted by the coronavirus should think hard about the insurance implications. This includes the rarely used language providing coverage for shutdowns ordered by a civil authority.