Hurricane Florence: Civil Authority and Ingress/Egress Coverage in North and South Carolina

The evacuation orders issued in both North and South Carolina in advance of Hurricane Florence and the extensive flooding following its landfall will no doubt give rise to business interruption claims. Typically, coverage for these claims will fall under coverage for “civil authority” or “ingress/egress.” Coverage for “civil authority” is usually an extension of coverage with similar language to the following:
When a Covered Cause of Loss causes damage to property other than property at the described premises, 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, provided that both of the following apply:
(1) Access to the area immediately surrounding the damaged property is prohibited by civil authority as a result of the damage, and the described premises are within that area but are not more than one mile from the damaged property; and 
(2) The action of civil authority is taken in response to dangerous physical conditions resulting from the damage or continuation of the Covered Cause of Loss that caused the damage, or the action is taken to enable a civil authority to have unimpeded access to the damaged property.
This language requires a link between having actual physical damage from a covered peril and the issuance of the order. If the order is related to a non-covered peril, such as flooding, there may not be coverage. See e.g. Bamundo, Zwal & Schermerhorn, LLP v. Sentinel Ins. Co., Ltd., No. 13-cv-6672, 2015 WL 1408873 (S.D.N.Y. Mar. 26, 2015) (holding that there was no coverage under a civil authority provision because the evacuation order was based on flooding, which was an expressly excluded cause of loss).

In the language cited above the damage must also occur in the immediate area around the insured premises. This requirement is often enforced by courts. Syufy Enterprises v. Home Insurance Co. of Indiana, No. 94-0756, 1995 WL 129229 (N.D. Cal. Mar. 21, 1995) (denying coverage because no property adjacent to Syufy’s premises sustained physical damage); Bros., Inc. v. Liberty Mut. Fire Ins. Co., 268 A.2d 611, 613 (D.C. App. 1970) (denying coverage because the regulations were not the direct result of damage or destruction of adjacent property).

Precautionary orders in advance of a large event such as Hurricane Florence, while a good idea for public safety reasons, may not be sufficient to trigger coverage. See South Texas Medical Clinics, P.A. v. CNA Financial Corp., No. H-06-4041, 2008 WL 450012, *9 (S.D.Tex. Feb. 15, 2008) (holding that that there was no coverage because the judge had issued the evacuation order “due to” fear that the Hurricane Rita would strike Wharton County, not “due” to the damage that had previously occurred in Florida).

Also, the order must completely prevent the business from operating. Southern Hospitality, Inc. v. Zurich American Ins. Co., 343 F.3d 1137 (10th Cir. 2004)(FAA order cancelling flights may have prevented customers from flying to hotel, but it did not prevent access to hotel); Kean, Miller, Hawthorne, D’Armond McCowan & Jarman, LLP v. Nat’l Fire Ins. Co. of Hartford, No. 06-770-C, 2007 WL 2489711, *4 (M.D. La. Aug. 29, 2007) (citing Southern Hospitality, Inc. v. Zurich American Ins. Co., 343 F.3d 1137 (10th Cir. 2004)(State of Emergency order did not prohibit access to insured premises, but only encouraged or recommend that residents stay off the streets); TMC Stores, Inc. v. Federated Mutual Ins. Co., 2005 WL 1331700 (2005)(redevelopment authority’s construction project did not prohibit customer’s access to store); By Development, Inc. v. United Fire & Casualty Co., 2006 WL 694991 (D.S.D. 2006)(continued road closures after official evacuation order was lifted did not prohibit access to insured property); 730 Bienville Partners Ltd. v. Assurance Co. of America, No. Civ. A. 02-106, 2002 WL 31996014 (E.D. La. Sept. 30, 2002)).

In some circumstances courts have held that city-wide evacuations and curfews can meet this condition. See, e.g. Assurance Co. of Am. v. BBB Serv. Co., 265 Ga.App. 35, 593 S.Ed.2d 7, 7-9 (2003)(County order to evacuate as Hurricane Floyd approached required closure of plaintiff's restaurant, and coverage therefore existed under Civil Authority Clause); Narricot Indus., Inc. v. Fireman's Fund Ins. Co., 2002 WL 31247972, at *4 (E.D.Pa.2002)(Order of town authorities directed plaintiff to suspend plant operations due to Hurricane Floyd); Southlanes Bowl, Inc. v. Lumbermen's Mut. Ins. Co., 46 Mich.App. 758, 208 N.W.2d 569, 570 (1973)(Governor mandated closure of all places of amusement, including plaintiff's bowling alleys, restaurants, taverns and motels, due to rioting after assassination of Dr. Martin Luther King, Jr.); Altru Health System v. American Protection Insurance Co., 238 F.3d 961 (8th Cir.2001)(Claim for business interruption was covered (although limited by the policy's flood submit) where the state health department ordered hospitals to evacuate and close during a flood when the city's water supply failed).

It is also important to become familiar with any waiting period applicable to the coverage and make sure the loss exceeded the waiting period. By Development, Inc. v. United Fire & Casualty Co., 2006 WL 694991 (D.S.D. 2006)(civil authority action lifted before 72-hour waiting period). The “time deductible,” as it is sometimes referred to, may prevent the trigger of any payment, even where there is coverage.

In Fountain Powerboat Industries, Inc. v. Reliance Ins. Co., 119 F.Supp2d 552 (E.D. North Carolina) the United States District Court for the Eastern District of North Carolina was called on to interpret coverage for loss of ingress or egress. Id. at 556. The policy provided.
6. Loss of Ingress or Egress: This policy covers loss sustained during the period of time when, as a direct result of a peril not excluded, ingress or egress from real and personal property not excluded hereunder, is thereby prevented.
Id. The roads leading to Fountains’ facility were flooded from Hurricane Floyd. Id. at 554. Fountain had to use large trucks to transport its employees and production at the facility declined by 33 percent. Id. Fountain submitted a business interruption claim for the decreased production, but Reliance denied coverage because there was no physical damage to insured property that triggered the decrease in production. Id. at 556. The court held that the perils excluded in the policy did not include hurricanes and the flooding due to the hurricane was exactly the type of peril this provision was designed to insure against. Id. at 557. The court also noted that the policy contained coverage for Civil Authority that did not require physical damage to the insured property in order to trigger coverage.

In finding that there was no requirement for physical damage to the insured property, the court distinguished Harry’s Cadillac-Pontiac-GMC Truck Co., Inc. v. Motors Ins. Co., 126 N.C. App. 698, 486 S.E.2d 249(1997). In Harry’s Cadillac, the court denied coverage for lost business during a snowstorm that prevented access to the dealership because there had been no damage to the insured property. Id. The Fountain court concluded that the policy in Harry’s Cadillac did not have the same ingress/egress coverage and therefore was not applicable. Id. at 556. Of note is the fact that there is no indication in the opinion that Reliance argued that access to the property was not completely prevented by the flooding or that flooding was an excluded peril under the policy.

Other than Fountain and Harry’s Cadillac there are no other decisions in North or South Carolina addressing coverage for Civil Authority or Ingress/Egress. Therefore, in evaluating ingress/egress or civil authority claims arising from evacuation orders issued as a result of Hurricane Florence it is important to note the relationship between the order and whether the peril is covered or not, whether there is a requirement of direct physical loss, and whether there is an applicable time deductible, which may affect the condition for payment under this coverage type. It is also helpful to reference the general requirements for coverage from courts in other jurisdictions should additional guidance be required.