Civil Authority and its Impact on Business Interruption Coverage in Texas

From time-to-time, governmental authorities prohibit access to certain areas after a catastrophic event, even though not all the buildings in the area were damaged. For example, after Hurricane Ike passed through the Houston area, Houston officials closed downtown Houston for several days to assess the damage. Another example is the evacuation of New Orleans after Hurricane Katrina. “Civil Authority” coverage protects against losses arising out of orders such as these.

In 730 Bienville Partners, Ltd. v. Assurance Co. of Am., 2002 WL 31996014 (E.D. La. Sept. 30, 2002), the insured operated two hotels in New Orleans and sought coverage for business interruption losses under the “Civil Authority” provisions of its policy due to the Federal Aviation Administration’s closure of the nation’s airports after September 11, 2001. The “Civil Authority” clause stated:

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 your premises due to direct physical loss of or damage to property, other than at the “covered premises,” caused by or resulting from any Covered Cause of Loss. This coverage will apply for a period of up to 4 consecutive weeks from the date of that action.

The insured argued that because the FAA prevented anyone from flying during the days immediately following the World Trade Center attacks, guests were unable to travel to to New Orleans and stay in its hotels. In rejecting the Plaintiff’s argument, the Court concluded:

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 Court focused on the “prohibits access to your premises” language of the policy to conclude that the policy did not provide coverage for the FAA shutting down all flights because customers could still access the Plaintiff’s property – albeit, not by plane. However, the policy would have provided coverage in the aftermath of Hurricane Katrina, when the city ordered everyone to evacuate. See, MaGee v. National Fire Ins. Co. of Hartford, 2008 WL 426285 (La. App. 1st Cir. February 8, 2008).