During the 2005 hurricane season, civil authorities issued orders that had a striking effect on local businesses. Some orders closed roads. Others required evacuation of all persons. Others closed businesses or limited their hours and operations. These civil-authority orders may give rise to business-interruption claims under a commercial insurance policy.

Determining whether there is coverage for such claims will depend on the specific policy language and the specific facts giving rise to the business-interruption claim. Indeed, as will be discussed below, some claims may be dependent on the particular wording of a civil-authority order. As such, businesses can and should begin the process of gathering information to determine whether a cognizable claim for business interruption exists. The information that needs to be collected will include: the precise policy language, the exact nature of the civil-authority order, and the actual financial effect on the business.

Many commercial insurance policies contain a provision that covers the actual business income lost when operations are suspended because of a governmental order that specifically denies access to the insured place of business. Coverage under this provision, therefore, often hinges on the precise interpretation of policy language.

A common version of the civil-authority provision reads as follows:

Interruption by civil or military authority
This policy is extended to cover 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 or military authority.

This policy language requires an actual order made by a civil authority before this additional business-interruption coverage is triggered. Thus, a decision made by a business to limit operations that is independent of an order of a civil authority may very well not be covered under such a provision.

In the case of the recent hurricanes, businesses need to document that a governmental order was issued. Clearly, orders were issued by the federal government, states, local parishes and counties, cities and even local levy boards. Because of the nature of the storm and the speed at which orders were issued, however, it may be difficult to document the exact nature and timing of a civil-authority order. In many instances, there may even be conflicting documentation of the civil-authority orders in effect at a given time, especially in the days immediately following Hurricane Katrina.

The Parish Department of Emergency Preparedness, for example, may have issued a mandatory evacuation order that lifted very shortly after the hurricane passed. Yet other civil-authority orders, not necessarily issued at the parish level, may have remained in effect for a small area of that same parish.

Certainly, there was a great deal of confusion in some areas immediately following Hurricane Katrina. All levels of government were not in complete coordination, especially in some Louisiana parishes. In order to make the strongest claim for coverage, businesses should be sure to contact every level of government that may have been involved in issuing orders following the storm and obtain copies of the orders as well as letters describing the nature of the orders in effect. In fact, in some instances, it may be valuable to contact multiple departments in order to obtain a complete picture of the civil orders in effect for a particular region.

The even more challenging issue for businesses will be whether the civil-authority order is the type that triggers coverage. It is up to the policyholder to demonstrate that the civil-authority order actually prohibited access to a business. If a civil authority, for example, merely recommended an evacuation of an area, such a suggestion is unlikely to trigger the business-interruption provisions. Some orders, on the other hand, allowed only residents back into a given area. If a business is located within that area, it may have a realistic claim if its employees were nonresidents who were still denied access to the business.

At a minimum, the civil-authority order must prohibit access. Since neither "prohibit" nor "access" are usually defined in the policy, courts will look to the ordinary and plain meaning of these terms in interpreting civil-authority clauses. For instance, Black's Law Dictionary defines "access" to mean, "An opportunity or ability to enter, approach, pass to and from, or communicate with." Similarly, Merriam-Webster's Dictionary defines the term as the "permission, liberty, or ability to enter, approach, communicate with, or pass to and from."

Usually the definition of "prohibit" is of much more interest to the court. Black's Law Dictionary defines "prohibit" to mean "to forbid by law," and alternatively, "to prevent or hinder." Additionally, Merriam-Webster's Dictionary defines "prohibit" as meaning, "to forbid by authority," or "to prevent from doing something." While such a plain-meaning definition may seem clear, the case law that has dealt with this provision shows the subtleties of its application.

The terrorist attacks of Sept. 11, 2001, initiated a flurry of cases addressing the "prohibits access" language. In a Tenth Circuit case, Southern Hospitality Inc. claimed it lost hotel business in Oklahoma because of canceled reservations resulting from the grounding of flights by the FAA. S. Hospitality Inc. v. Zurich Am. Ins. Co., 393 F.3d 1137, 1138 (10th Cir. 2004). The Tenth Circuit held that the civil-authority provision did not apply because "the FAA's order grounding flights did not itself prevent, bar, or hinder access to Southern Hospitality's hotels in the manner contemplated by the policies." Id. at 1141.

After reviewing other cases relating to civil-authority orders, the court specifically noted that the required "direct nexus between the civil-authority order and the suspension of the insured's business" did not exist. In essence, the court was unpersuaded that hampered or less convenient access alone was enough to trigger coverage. Id. at 1140-1141.

In a similar fact pattern, the U.S. District Court for the Eastern District of Louisiana rejected a hotel owner/operator's claim that the closure of airports and canceling of flights prevented guests from getting to its hotels in New Orleans. While the grounding of planes made it more difficult for the guests, the "FAA's action did not prohibit access to the hotels." 730 Bienville Partners, Ltd. v. Assurance Co. of Am., 2002 WL 31996014, at *2 (E.D. La. Sept. 30, 2002).

In another Sept. 11 case, Abner, Herrman & Brock Inc. v. Great Northern Ins. Co. , 308 F. Supp.2d 331 (S.D.N.Y. 2004) the U.S. District Court for the Southern District of New York found that the Civil Authority provision applied for four days following the attacks during which access to the insured's southern Manhattan business was completely denied. Id. at 333. Once the no-access order was lifted to pedestrians, however, the court found that while less convenient, there was access to the business premises. Id. (It may be of significance in Abner that the chairman contended that the emergency traffic restrictions severely limited his driver's ability to take him to meetings. Id. at 334.)

The court was unwilling to find coverage for these merely theoretical business losses because of the traffic restrictions, "put[ting] a crimp in the ability of its chairman to use his car and driver, and walking and public transportation were not palatable alternatives." Id. As these cases make clear, access must be actually restricted by a civil-authority in order for the business-interruption provision to be triggered. Mere inconvenience is simply not enough.

With respect to how the prohibition of access provisions will be interpreted in the context of Hurricanes Katrina and Rita, cases dealing with other recent hurricanes suggest that it is likely that coverage triggers will be found. For instance, as Hurricane Floyd approached the Florida coast in 1999, governmental officials of Brevard County issued an order declaring a state of local emergency, and certain persons were ordered to evacuate. Assurance Co. of America v. BBB Services Co. Inc. 265 Ga. App. 35, 35 (2004). In response, BBB Services closed its restaurants in that county and evacuated the area. Id. As BBB was closed for two-and-a-half days while the evacuation order was in effect, the Georgia Court of Appeals agreed that the prohibited access element of the civil-authority clause was met.

Likewise, the U.S. District Court for the Eastern District of Pennsylvania found access was prohibited where the town authorities ordered the shutdown of plant operations because of Hurricane Floyd. Narritcot Indus. Inc. v. Fireman's Fund Ins. Co. , 2002 WL 31247972, at *4 (E.D. Pa Sept. 30, 2002). Courts have noted, however, that even a limited resumption of business activities can show that access was not prohibited. E.g. Dixson Produce, LLC, v. Nat'l Fire Ins. Co. of Hartford , 99 P.3d 725, at ¶ 17 (Okla. Civ. App. Div. 2 June 1, 2004) (No. 98,261).

Clearly, while civil-authority orders are generally viewed conservatively by the court, in light of the nature of the recent hurricane catastrophes and the extensive evacuation orders, one can predict that courts will find coverage wherever mandatory evacuation orders were in effect.

Of course, some commercial policies are stingier in providing business-interruption coverage than others. Two examples of civil-authority provisions that are stricter than the more general provision discussed above are:

Civil authority
We will pay for the actual loss of business income you sustain and reasonable and necessary extra expense caused by action of civil authority that prohibits access to the described premises because of the direct physical loss of or damage to property, other than at the described premises, caused by or resulting from a covered cause of loss.

Civil authority provision
This insurance is extended to apply to business income and extra expense loss when access to insured premises is specifically prohibited by order of a civil authority as the direct result of a covered cause of loss to property away from your premises.

These provisions require that physical loss or damage occur and that this damage prompts the civil-authority order. For example, in another Sept. 11 case, United Airlines was unable to get coverage for its system-wide losses when its World Trade Center counter was destroyed. See United Airlines Inc. v. Ins. Co. of the State of Pa. , 2005 WL 756883 at *6 (S.D.N.Y. 2005). In other words, if access is simply denied to the premises and no actual property damage occurs, coverage can be denied under this provision.

Accordingly, the issue for some businesses may be whether the orders were issued because physical damage had occurred or whether it was merely anticipated. For example, where a Florida county issued an evacuation order because of an approaching hurricane, the insured needed to prove, under the language of the policy, that the order was issued because the storm was causing damage as it progressed over the Bahamas. See Assurance Co. of America , 265 Ga. App at *8.

In the case of the 2005 hurricanes, the fact that there were multiple orders issued over a period of time may help fill in the gaps for coverage. While initial orders were, perhaps, issued because the damage was anticipated (that is, no damage had actually occurred at the time of the issuance of the first order), subsequent orders were certainly issued after the storm had caused damage.

Of course, it will be more difficult to meet the policy conditions requiring that the civil-authority order be issued because of damage to the insured premises. Generally, government officials were not dealing with individual businesses. Instead they were issuing broad-based orders based on widespread concerns. Where such limitations are contained in the policy, it will be critical for businesses to document the coinciding of the civil-authority order with damage on the insured premises.

Clearly, in addition to civil-authority provisions, businesses should certainly check the language of other business-interruption clauses that may be included in their policies. Such provisions may provide coverage for business losses arising when there is damage to the insured property or elsewhere that prevents getting into or out of the business.

These types of provisions vary greatly. Some may specifically require that actual damage to the business premises prevents access, resulting in a loss of business income. For instance, if a hotel is damaged so that guests must cancel their reservations, such a provision may offer coverage. Other types of provisions may include coverage for business losses resulting from the loss of utilities or services, including electricity, phone, Internet or shipping services.

As indicated above, there is a wide range of insurance provisions that may provide coverage when a business is shut down because of unexpected events. Businesses that do not have such coverage need to ask why. Sometimes, the lack of coverage is because of an agent error or omission. Accordingly, where the coverage does not exist, businesses should review their insurance files to determine whether the insurance producer breached the applicable standard of care.

Such a claim against an insurance producer may be difficult to prove both factually and legally. For example, an insured would have to obtain expert testimony to establish that the insurance producer acted improperly. The insured would also have to establish that the producer had the ability to sell a product with more expansive coverage but failed to do so. In many cases, such an argument will not be practicable to make.

Nevertheless, the recent hurricanes undoubtedly will give rise to substantial business-interruption claims, even for businesses that did not suffer physical damages. Consequently, businesses would be well advised to have their risk managers review policies to determine whether civil-authority orders trigger business-interruption coverage. If so, then the risk manager should document the civil-authority orders that might give rise to coverage as well as the specific financial effect on the business and pursue the business-interruption claim.