Young Lawyers In the Wake of Hurricane Sandy The Scope of Civil Authority

By J. Tyler Butts Provisions

Evacuations ordered The Coming Storm in the face of the In the days leading up to October 29, 2012, and in the face approaching “superstorm” of the approaching, nearly 1,000-mile-wide super-­storm suggest that one lesser that came to be known as Hurricane Sandy, states, cities, municipalities, and towns throughout the or otherwise prohibiting access to, an in- known insurance Northeast ordered the evacuation of hun- sured business. A typical example takes dreds of thousands of people from their place when some governmental body issues provision, the civil homes and businesses. When the storm an evacuation order that covers the area in came ashore, it brought with it driving which an insured business is located. The authority provision, will wind, torrential rain, and a devastating effect of such an order is not only to prohibit tidal surge. While the vast physical prop- a business owner or his or her employees be significantly litigated erty damage that Hurricane Sandy caused from opening and running the business, was immediately apparent, the storm also but also in effect to prohibit potential cus- in the coming years. implicated a number of lesser-­known and tomers from physically patronizing that rarely litigated insurance provisions in business even though the business itself commercial and business-­owners property has not suffered physical damage. All com- insurance policies. The evacuations men- mercial activity essentially ceases. As a tioned above suggest that one such provi- result, that business suffers lost income sion, the civil authority provision, will be for every day that the evacuation order significantly litigated in the coming years. remains in place. The longer the order of The goal of this article is to give timely, rel- civil authority lasts, the longer the closure evant, and practical consideration of busi- of the insured business, and the greater the ness interruption or extra expense claims potential exposure for insurers. arising from Hurricane Sandy evacuations. To offset the risk of a potentially dev- astating loss caused by an order of civil The Civil Authority Provision authority, many commercial and business-­ Generally speaking, a civil authority pro- owners property insurance policies con- vision is designed to compensate or reim- tain a civil authority provision. Although burse a business owner for lost profits the language of a civil authority provision caused by the government shutting down, differs markedly among policies, a typical

■ J. Tyler Butts is an associate in the Hartford, Connecticut, office of Robinson & Cole LLP. He is a member of the firm’s Insur- ance Litigation and Appellate Groups. He focuses his practice on property insurance coverage and bad faith litigation and cur- rently holds a leadership position on the American Bar Association Section of Litigation Appellate Practice Committee.

© 2013 DRI. All rights reserved. For The Defense ■ April 2013 ■ 19 Young Lawyers provision provides that coverage is avail- (E.D. La. Sept. 9, 2009) (requiring damage tiff is entitled to recover only for losses able under the policy to happen within 100 miles). incurred… for longer than that amount of for the loss of Business Income and Obviously, the further away a civil time.” Because the civil authority order had Extra Expenses which you incur due to authority provision permits the damage only prohibited access for 54 hours, the in- the actual interruption of your opera- on which an insured predicates a claim to sured was denied civil authority coverage. tions during the period of indemnity be, the easier it becomes for an insured to See also Kushner Lagraize, LLC v. Phoenix when a civil authority prohibits access recover under that provision. For exam- Ins. Co., 2009 U.S. Dist. Lexis 81576 (E.D. to your covered property due to direct ple, in Assurance Co. of Am. v. BBB Serv. La. Sept. 9, 2009) (interpreting a similar physical loss of or damage to property, Co., 265 Ga. App. 35 (Ga. Ct. App. 2003), 24-hour waiting period in an evacuation other than at the described premises, the civil authority provision did not have caused by Hurricane Gustav). caused by or resulting from a Covered a geographic limitation but only required Insureds most frequently assert claims Cause of Loss. that the damage happen somewhere “other for civil authority coverage in the after- The goal of civil authority coverage is plain, than at the covered premises.” The in- math of catastrophic events, and as a result, but demonstrating the right to payment in sured owner of several Wendy’s restaurants courts have had limited opportunities to a particular circumstance requires certain sought coverage for two and a half days discuss the breadth of the provided cover- showings by an insured business. As the of lost income, caused when the county age. Most recently, insureds made claims above example provision demonstrates, ordered evacuations as Hurricane Floyd based on the provision after the terrorist an insured seeking recovery for lost busi- approached. During the trial, the plaintiff attacks of 9/11 and the devastation caused ness income or extra expenses must dem- also presented evidence that the govern- by Hurricane Gustav in 2008, Hurricanes onstrate (1) a civil authority took action; mental group that ordered the evacuation Rita and Katrina in 2005, and Hurricane (2) the action prohibited access to the had examined photographs of damage that Floyd in 1999. Briefly reviewing the lessons covered business; (3) the action directly the hurricane had caused in the Bahamas learned from those cases will offer some resulted from or was because of a direct and that these photographs had, in part, clues about the coverage that business own- physical loss or damage; (4) the direct phys- motivated the evacuation decision. Id. at ers might expect and that courts might find ical loss or damage causing the civil author- 37. Therefore, the court found that the civil appropriate for the evacuations caused by ity action happened at a location other than authority order for the evacuation was a Hurricane Sandy. at the described premises, meaning away result of direct physical damage to property It should go without saying that before from the covered property; and (5) the loss other than the insured’s. Had the policy looking to case law for answers, a practitio- or damage that happened away from the instead required that the damage be adja- ner should carefully examine the relevant described location was caused by a cov- cent to, or within 100 miles of, the property, language of the specific policy, especially ered cause of loss as defined in the appli- the insured probably would not have been for the wrinkles described above that can cable policy. able to recover. limit coverage and simplify the analysis. Furthermore, civil authority provisions Additionally, some civil authority pro- Having a firm understanding of the various can include additional components that visions may include a temporal element, issues that can arise in a claim grounded differ materially from the sample provi- requiring that an order of civil authority be in a civil authority provision can mean the sion above. For example, although some in place for a certain period of time before difference between a successful defense provisions simply require that the damage the policy will begin to cover losses and and an unavoidable insurance payment. causing an evacuation or a civil author- capping the coverage by offering it only for ity order take place at some place other a certain length of time. A typical provi- Reactive vs. Preventive Evacuations than at the described premises, some pro- sion might require that “[t]he coverage for One of the principle lessons derived from visions require that the damage actually business income will begin 72 hours after the civil authority litigation following 9/11 occur somewhere in the vicinity of the cov- the time of that action and will apply for and the recent hurricane disasters is that ered property. Even then, the geographic a period of up to three consecutive weeks for a civil authority provision to apply, the scope of an “in the vicinity” element can after coverage begins.” This time-­element civil authority order must be in response vary from policy to policy and can range provision can easily serve to prohibit cov- to damage that has already taken place, from requiring that the damage happen to erage in the case of a short evacuation and not in anticipation of the possibility of “adjacent” property, to within 100 miles, can also assist insurers in measuring their future damage. As described below, this to some other range. Syufy Enters. v. Home potential total exposure in a worst-case requirement comes directly from the clause Ins. Co., 1995 U.S. Dist. Lexis 3771 (N.D. scenario. For example, in BY Dev., Inc v. requiring that the order of civil authority Cal. Mar. 20, 1995) (requiring damage to United Fire & Cas. Co., 2006 U.S. Dist. Lexis be issued “due to direct physical loss of or happen to “adjacent” property, interpreting 14703 (D. S.D. Mar. 14, 2006), authorities damage to property.” In other words, there “adjacent” as “denot[ing] a sense of physi- closed a hotel in Deadwood, South Dakota, must be a nexus between past damage and cal proximity,” and finding that a business due to a nearby wildfire. The policy had a the present order. two blocks away was not adjacent to the 72-hour waiting provision similar to the In the aftermath of the 9/11 terrorist damage). Kushner Lagraize, LLC v. Phoe- one described above. In interpreting that attacks, a wide variety of businesses alleged nix Ins. Co., 2009 U.S. Dist. Lexis 81576 provision, the court found that “the Plain- that they had lost income, not as a result of

20 ■ For The Defense ■ April 2013 the destruction at the World Trade Cen- civil authority was issued “as the direct and given the cases discussed above, it ter or the damage to the Pentagon, but result of the physical damage sustained by would appear that the insured in this case because of the Federal Aviation Adminis- the World Trade Center, the Pentagon, or would be out of luck and could not recover. tration (FAA) “ground stop” that banned the field in Stony Creek Township, Penn- Instead of relying on the text of the order, the takeoff of all civilian aircraft in the sylvania.” Id. at *18. The court concluded however, the insured presented evidence United States after the attacks. The result- that the plaintiff could not meet this bur- during the trial that the evacuation order ing lawsuits and case law make clear that den because “the ground stop order was was, in part, a response to damage that to recover under a civil authority provi- issued as a result of the threat of additional Hurricane Floyd had already caused in the sion, the civil authority action must be in terrorist acts involving the nation’s airlines Bahamas. The court accepted that testi- response to actual damage, not in anticipa- and not because of the existing disasters.” tion of future damage. Id. at *20. In United Air Lines, Inc. v. Ins. Co. of the As with the 9/11 decisions, cases involv- State of PA, 439 F.3d 128 (2d Cir. 2006), the ing evacuations in the face of impending Generally speaking, a plaintiff airline alleged that it lost income hurricanes make clear that to recover under “caused by the national disruption of flight a typical civil authority provision, the civil civil authority provision is service and the government’s temporary authority action must be a direct result of shutdown of [Reagan National Airport].” damage that has already happened. designed to compensate Id. at 129. The Second Circuit found that In S. Texas Med. Clinics v. CNA Fin. the civil authority provision of the pol- Corp., 2008 U.S. Dist. Lexis 11460 (S.D. Tex. or reimburse a business icy was not triggered by the FAA ground Feb. 15, 2008), the plaintiff medical clinics stop order because “[t]here was appar- sought coverage for losses caused by evac- owner for lost profits ently a temporary halt of flights into and uation orders issued two days before the out of the Airport on 9/11 before the Pen- landfall of Hurricane Rita near the Texas-­ caused by the government tagon was struck.” Id. at 134 (emphasis Louisiana border. In granting the insurer’s added). In other words, the cessation of motion for a summary judgment, the court shutting down, or otherwise flights happened before any property dam- cited the Second Circuit decision in United age to any adjacent structure occurred, Air Lines with approval. The court held prohibiting access to, namely, the Pentagon. Furthermore, the that, in light of testimony that the evacu- court found that the subsequent shut- ation order was issued “due to… fear that an insured business. down of Reagan National was not caused Hurricane Rita would strike nearby” and or prompted by the damage to the Penta- not “due to the actual physical damage that gon but by “fears of further attacks.” Id. occurred in Florida and on oil rigs in the mony and determined that coverage did Therefore, the shutdown of the plaintiff’s Gulf,” the civil authority provision did not exist. BBB Service demonstrates that the business at the airport was not, as the pol- cover the clinics’ losses. Id. at *32–33. (“The necessary analysis concerning evacuation icy required, a “‘direct result’ of damage to record shows that [the] decision to evacu- orders and civil authority provisions is adjacent premises.” Id. at 135. But damage ate was based on the anticipated threat of heavily fact-­intensive and case-­specific. to the plaintiff’s business was the result of damage to Wharton County. The only sig- Therefore, it may be quite difficult for an (1) preventive measures taken by the FAA nificance of the prior damage to property insurer to defend a coverage decision suc- before any nearby damage occurred, and outside Wharton County was as an indica- cessfully with a motion for a summary (2) precautionary measures designed to tion of the harm that could result if Hur- judgment, at least as long as an insured can prevent future harm. ricane Rita made landfall near Wharton raise a factual dispute about whether an Similarly, in Paradies Shops, Inc. v. Hart- County.”). evacuation order was in response to dam- ford Fire Ins. Co., 2004 U.S. Dist. Lexis As discussed briefly above, the case of age and not in anticipation of it. 30124 (N.D. Ga. Dec. 15, 2004), the plain- Assurance Co. of Am. v. BBB Service Co., Finally, the case of Dickie Brennan & tiff, an operator of airport gift shops, news- Inc., 265 Ga. App. 35 (Ga. Ct. App. 2003), Co. v. Lexington Ins. Co., 636 F.3d 683 (5th stands, and retail stores, sought to recover involved an insured seeking coverage for Cir. 2011), illustrates what can happen if a lost business income allegedly suffered as a two and a half days of lost income caused plaintiff fails to present adequate evidence result of the FAA ground stop. As a result of when the county ordered evacuations as to support coverage at the summary judg- the ground stop, national air traffic came to Hurricane Floyd approached. The evacua- ment stage. As with BBB Service, the civil a halt, and the constant flow of the travel- tion order specifically stated that the evac- authority provision in this case did not ing public that the plaintiff relied on sim- uations were necessary “because of the contain a geographic limitation. In other ilarly ceased. The U.S. District Court for serious threat to the lives and property of words, if the plaintiff could plausibly allege the Northern District of Georgia found residents of Brevard County from Hurri- that the evacuation order that preceded that to be entitled to coverage under the cane Floyd [and] [b]ecause of the uncer- Hurricane Gustav was directly related to civil authority provision, the plaintiff was tainty of the path of devastating winds property damage previously caused by the required to establish that some order of and storm surge.” Id. at 35. On its face, storm, a claim for lost business income

For The Defense ■ April 2013 ■ 21 Young Lawyers might succeed. Again, as in BBB Service, of emergency and ordering the evacuation were affected by Sandy demonstrate that the evacuation order itself only referred to of certain beach communities and other the primary concern in the minds of the the possibility of future storm damage. Id. areas. The Executive Order stated, in part: authorities ordering the evacuations was at 684. (ordering an evacuation “because [O]n October 28, 2012, and continu- the impact that Sandy could have if it came of anticipated high lake and marsh tides ing thereafter, Hurricane Sandy is fore- ashore. Because of that, insureds may have due to the tidal surge, combined with the cast to impact the State of New York, a difficult time proving entitlement to civil possibility of intense thunderstorms, hur- which will result in evacuations of the authority coverage. However, a difficult ricane force winds, and widespread severe threatened populations and poses an time does not mean an impossible time, flooding”). The plaintiff insured argued imminent danger to public health, and and insureds facing this situation may turn public safety systems within the Town to Assurance Co. of Am. v. BBB Service Co., of Babylon. Inc., 265 Ga. App. 35 (Ga. Ct. App. 2003), [T]his event may cause power out- for guidance. They are likely to argue that The further away a civil ages and extensive flooding; damage to even though the evacuation orders do not homes, businesses and transportation discuss prior damage, Hurricane Sandy authority provision permits infrastructure; the disruption of local did, in fact, cause significant property water supplies, and may result in per- damage and death in Jamaica, the Baha- the damage on which an sonal hardships, displacing thousands mas, the Dominican Republic, Cuba, and of families, as well as hamper the move- Haiti before any orders were issued in the insured predicates a claim ment of emergency personnel, and will United States. Similar to the insured in BBB continue to pose a threat to the public Service, 265 Ga. App. 35 (Ga. Ct. App. 2003), to be, the easier it becomes health and safety. the insured here will need to produce tes- The executive order does not reference timony that those making the evacuation for an insured to recover damage already caused by Hurricane decisions were aware of the damage in Sandy, but it frames the evacuation as a the Caribbean and that their actions were under that provision. necessary precautionary measure. motivated, in part, by that damage. Similarly, the town of Branford, Con- Finally, it is important to keep in mind necticut, located on Long Island Sound, that the damage that caused a Sandy-­ that because Hurricane Gustav had already ordered mandatory evacuations in a press related evacuation must have been caused caused damage in Cuba and Jamaica, the release on the night of October 28, 2012. by a covered cause of loss as defined in the civil authority provision applied. Id. Cru- The press release declared, in part: “Sandy’s relevant policy. This requirement could be cially, however, the plaintiff failed to intro- storm force winds are expected to affect problematic for policyholders when they do duce evidence to support that argument, Branford around midnight tonight and are not have coverage for flood-caused losses. and the court upheld the decision of the expected to become increasingly worse in A large portion of the damage that Sandy district court, finding that the plaintiff had the succeeding 36 hours. Storm surges are caused resulted from flooding, storm surge, “failed to demonstrate a nexus between any predicted to be worse than what we expe- or both. Standard commercial or business-­ prior property damage and the evacuation rienced in Hurricane Irene and have been owners property insurance policies typ- order.” Id. at 686. compared to the 1938 Hurricane.” Once ically do not cover these causes of loss. again, the decision by Branford officials to Faced with that, an insured might argue Sandy Evacuation Orders evacuate appeared to be driven by the fact that an evacuation order was not solely These cases make clear that to recover that Sandy could or might bring significant a result of flood damage but also due to under a civil authority provision, the order, storm damage, not that storm damage had other causes of loss, potentially including or, in the case of Sandy, the evacuation, already taken place. covered causes of loss such as wind or fire. must be in response to some damage that In some cases, the evacuation orders do When a civil authority provision does not has already taken place. Because Sandy not specify a reason for an evacuation. For have an anti-­concurrent causation clause, affected such a large area, it is virtually example, Manasquan, New Jersey, a bor- how a court would handle such a claim impossible to examine the particulars of ough of less than 6,000 people on the New is unclear. Surely a court would initially each evacuation order. However, examin- Jersey shore, ordered mandatory evacu- require an insured to demonstrate what ing a sample of orders from around the ations on October 27, 2012. No particu- caused a civil authority to issue an evacu- region reveals the difficulties that insureds lar reason was given for the order on the ation order. may have asserting claims for coverage. borough’s website. Insurers facing civil Babylon, New York, is a town of just authority claims in similarly small towns Additional Issues in Zone A over 200,000 people, located 40 miles to may encounter difficulties determining More so than any other location affected by the east of New York City on Long Island. the precise when and why of evacuations Hurricane Sandy, “Zone A,” in New York On October 28, 2012, as Hurricane Sandy related to Sandy. City, presents some additional civil author- approached, the town supervisor issued The evacuation orders from Babylon, ity provisions issues that have not yet been Executive Order 1 of 2012, declaring a state Branford, and many other locales that litigated. Zone A is a dense and populous

22 ■ For The Defense ■ April 2013 area of some 375,000 residents and con- as a result of damage that took place when employees were allowed back into its busi- sists of portions of Manhattan, including Sandy came ashore. Obviously, an insurer ness while continuing to maintain that the the lower East Side and East Village, as would likely argue that Executive Order 165 evacuation order prohibited access to the well as parts of Staten Island, Coney Island, simply modified Executive Order 163 and business. Queens, Brooklyn, and the Rockaways. that only Executive Order 163 should mat- Whether a civil authority provision Similar to many other areas, Zone A was ter for the purposes of a civil authority pro- applies in that case could conceivably turn evacuated before Sandy hit. Mayor Michael vision analysis. on the nature of the business. If the busi- Bloomberg issued Executive Order 163 on Although an insured may succeed in ness was one that does not require much October 28, 2012. As with many of the arguing that Executive Order 165 is a sep- direct or everyday contact with custom- areas discussed above, the evacuation order arate evacuation order, issued in response ers or clients, such as a large law firm, the seems preventive, as opposed to reactive. to Sandy damage, the insured would still firm would have difficulty arguing that Executive Order 163 states, in part: face a steep climb recovering any money the firm’s operations were shut down if all the National Weather Service is predict- because of the civil authority insurance employees were allowed to go to work. Con- ing that a hurricane or tropical storm provision requirement that an evacua- versely, a business that heavily depends on may hit the City within hours.… This tion order “prohibit[ ] access” to the cov- customer traffic, such as a corner bodega, State of Emergency has been declared ered property. Courts have interpreted this would have a stronger argument for cov- because anticipated weather condi- requirement as meaning that no one could erage because even under Executive Order tions are likely to cause heavy flooding, have access to the property. In Abner, Her- 165, the general public was still prohibited power outages, and disruption of pub- man & Brock, Inc. v. Great Northern Ins. from accessing Zone A. Even in the situ- lic transportation and other vital serv- Co., 308 F. Supp. 2d 331 (S.D.N.Y. 2004), ation of the bodega, however, an insurer ices, and these conditions imperil the the plaintiff insured claimed that post- could argue that the bodega’s main client public safety. 9/11 traffic restrictions made it difficult base, people who lived and worked in the Were that the only executive order for for employees to come to the office, despite area, were in fact allowed into Zone A by Zone A, the applicable analysis would be the fact that pedestrian traffic and public Executive Order 165. In that case, the order the same as the analysis discussed above. transportation was functioning. The court would not directly prohibit accessing the After Sandy hit, however, the mayor issued found that the insured was only entitled business. The insured would then have to a number of additional executive orders to coverage for the period of time during demonstrate that customers were not able that might affect interpreting a civil which people were completely prohibited to access the business, or that the business authority claim. from accessing the premises, not for the suffered an economic shutdown. On October 31, 2012, Mayor Bloomberg longer period of time during which access issued Executive Order 165, which, in the was merely made more cumbersome due to Conclusion second paragraph, stated: “WHEREAS, the rerouting of traffic. Hurricane Sandy has the potential to gen- as forecasted, a severe storm hit New York Similarly, in TMC Stores, Inc. v. Feder- erate a significant amount of litigation City in recent days, causing heavy flood- ated Mut. Is. Co., 2005 Minn. App. Lexis surrounding civil authority provisions in ing, power outages, and disruption of pub- 585 (Minn. App. Ct. 2005), the insured store insurance policies. Businesses that lost sig- lic transportation and other vital services.” sought coverage as a result of damage to its nificant revenue as a result of the evacua- Executive Order 165 indicated that Execu- parking lot caused by a nearby construc- tion orders will be eager to recover their tive Order 163 “remain[ed] in effect,” except tion project. The court found that it was losses. Many businesses may find it diffi- that owners, residents, and employees of undisputed that the store had remained cult to establish the elements necessary to businesses were permitted to reoccupy open although ease of access for custom- succeed based on a civil authority provi- buildings in Zone A upon a determination ers was diminished. The court noted that sion claim. Although a typical provision by the Department of Buildings that reoc- access was not prohibited “[e]ven if more requires that a civil authority action have cupation was permitted. difficult or less convenient access discour- been in response to damage, it appears that Executive Order 165 presents interest- aged customers from patronizing” the many of the evacuation orders were issued ing questions in connection with a civil insured’s store. The court did note that if in preparation for Sandy’s arrival and not authority insurance claim. First, is Execu- the store had demonstrated “a virtual eco- as a result of prior Sandy damage. Addi- tive Order 165 a separate act of civil author- nomic shutdown,” it would have been “a tionally, if an insured is able to prove that ity that could, separate and independent more difficult case.” an evacuation was ordered as a result of from Executive Order 163, trigger cover- The terms of Executive Order 165 Sandy damage, they will still have to show age? Faced with the distinction between allowed certain people, including employ- that the prior damage was due to a covered a reactive and preventive civil authority ees, to return to the covered premises. An cause of loss and that access to the business order, an insured in Zone A might advance insured arguing that Executive Order 165 was prohibited. Given that, it may be diffi- that exact argument. Such an argument was a new evacuation order would have a cult for many insureds to recover for loss would allow the insured to point to the difficult time making an internally consis- of income caused by Sandy-­related evacu- “whereas” clause of Executive Order 165 tent argument for coverage because the in- ations. as proof that the evacuation was ordered sured would have to admit that it and/or its

For The Defense ■ April 2013 ■ 23