First Party Property Coverage Issues Checklist

August, 2010

by James R. Swinehart and Thomas S. Gozdziak

The DEEPWATER HORIZON oil spill is a massive environmental disaster, with impacts likely for years to come. That said, what implications might the Gulf Oil Spill have on claims for first-party coverage? Below, in the form of a practical checklist, we run down assorted coverage issues which might arise in the context of claims under property policies (generally, from the perspective of commercial, all risk policies).

Preliminary Consideration: Any Parallel Case Law?

No reported cases involving claims under property policies were found dealing with an oil spill of this magnitude occurring in a large body of water, such as the Gulf of Mexico. There are, however, several first-party property cases, generally in the realm of claims under homeowners' policies, which involve the leakage of oil, often from a storage tank, or the release or spillage of oil during the filling of a storage tank. In such cases, issues often arise about whether the oil released into land or soil (1) involved damage to covered property, or (2) was excluded under an exclusion for pollution or contamination. These same issues could be pertinent to first-party property claims arising from the Oil Spill. With these in mind, we present a checklist of coverage considerations.

Threshold policy inquiry: Was there direct physical loss or damage to covered property caused by a covered peril within the policy period?

Was There Direct Physical Loss or Damage?

A fundamental requirement for property coverage is that there must be direct physical loss or damage to insured property. So, what if oil from the spill does not actually reach or hit an insured's property? What if a business merely claims financial losses due to a depressed economy in the region? What if a restaurant or hotel claims it has fewer customers or guests because of the spill? What if a business claims a loss in revenue because the area was less desirable, perhaps from oil coming ashore, birds and fish being washed ashore, the air smelling of oil, or the media attention about the environmental disaster?

Scenarios of this type may raise the issue of whether the insured's property sustained direct physical loss or damage, and, thus, whether a requirement for coverage was met.

Was There Damage to Insured Property?

Another fundamental requirement for property coverage is that the loss or damage must be to insured property. One issue that could arise is whether the insured owned or otherwise had an interest in the property damaged? What if the property damaged was public land or a natural resource?

What if a claim involved damage to land? A beach? Water? Marshland? Trees or vegetation? Fish? Shrimp? Pelicans? Other birds or animals? Many property policies do not cover, that is, they specifically exclude from coverage, categories of property such as land, soil, water, lawns, trees, crops, plants, shrubs, and animals. Thus, issues involving "insured property" could arise.

Was There Loss or Damage from a Covered Cause?

Another requirement for property coverage is that the damage must be from a covered cause. The investigation into the cause of the oil spill is underway and will involve BP, a broad array of scientists and experts, and even a National Commission established by President Obama on May 22, 2010, which held its first meeting on July 12-13, 2010. Issues on the cause of the oil spill and damage to property will likely abound. For instance, was the cause fire or explosion? Was the cause the design or construction of the well or the blowout preventer? Was the cause the oil? Or the chemical dispersants used?

For any claims, consideration will have to be given to which causes of loss are covered and which are excluded under the policy. For instance, property policies often exclude loss caused by pollution or contamination. Such exclusions could bear on any claim for damage caused by the oil or dispersants.

Further, property policies often exclude loss or damage caused by faulty or defective design, construction, workmanship, or materials. This type of exclusion could bear on any claim for damage caused by the design or construction of the well or the blowout preventer. This exclusion, however, may have an exception relating to a resulting or ensuing loss from a cause not otherwise excluded. Therefore, resulting loss issues could arise, including whether any "resulting" loss is a new and separate loss and whether the loss had a cause that was separate and independent from the original cause of loss.

Multiple or concurrent cause issues could also arise. What if damage was caused by more than one cause? What if one cause was covered under a policy but another was not? What if property was damaged by oil or oily water during a hurricane? These types of issues require an analysis of the given jurisdiction's law on causation and concurrent causation. For instance, does the jurisdiction follow the "efficient proximate cause" rule (which provides coverage if the covered cause is the cause to which the loss is attributed and which set the other causes in motion)? Does the jurisdiction follow a "concurrent causation" doctrine (which, depending upon the jurisdiction, may provide coverage as long as one of multiple perils is a covered cause of loss, or may provide coverage for only the portion of damage caused solely by a covered peril)? Another consideration: Does the policy have anti-concurrent causation language, giving effect to an excluded cause, even if a loss was caused by multiple causes, a combination of causes, or a sequence of causes, including one or more covered causes?

Was the Loss Within the Policy Period?

Another requirement for property coverage is that the loss must occur within the policy period. Thus, an issue may be when claimed property damage occurred. Will the date of loss be April 20, 2010, when the blowout occurred? Will it be when oil hits property claimed to be damaged by oil? What if claimed property damage occurred over time, is ongoing, or is continuous? What if property damage occurs from oil hitting property at different times due to how oil was transported by winds, tides, or other weather phenomenon? What if property damage is not known or hidden for a period of time and not discovered until later? Such issues could bear on when the property damage occurred and whether it was during the policy period.

How Many Occurrences Were Involved?

Another issue could be the number of occurrences. What if property damage occurs at different times? What if oil from the spill hits property at a given time but, because of tides and winds, oil hits the property again at a different time or multiple times? What if there is a long interval or several intervals between such incidents? Could this happen given the amount of oil spilled; the size of the spill; the break-up of the oil (dispersants and oil balls); and the quantity of oil in the plume below the surface of the water? Will an insured point to the cause of the damage for determining the number of occurrences? Does an occurrence happen each time property damage occurred, not involving a single, continuous event that already caused damage to the insured property?

Time Element Coverages

In addition to property damage claims, many claims arising from the Oil Spill will likely arise under Time Element coverages, which involve their own issues and requirements as discussed below.

Business Interruption

Typical elements courts look to in connection with a Business Interruption claim include:

Direct physical loss or damage caused by a covered peril to covered property. It is expected that this may be a difficult element for many insureds to satisfy. For example, if a hotel located on the coast experienced decreased business as a result of consumer fears of contaminated beaches as opposed to actual damage to covered hotel property, would that satisfy this element?
An actual and necessary interruption or suspension of the insured's business resulting in an actual business interruption loss. In construing this element, many courts have required a complete cessation of the insured's business as opposed to a mere decrease in operations. For example, if that same hotel's business only decreased but it did not completely cease to operate, would that satisfy this element?
The interruption or suspension of the insured's business is caused by direct physical loss or damage. For example, if that hotel experienced an interruption or suspension of business but due to a decrease in tourism in the area as opposed to any direct physical loss or damage actually sustained by the hotel, would that satisfy this element?
The interruption or suspension occurs during the period of restoration. Typically, the period of restoration is the theoretical length of time required with the exercise of due diligence and dispatch to repair, rebuild or replace the damaged property. Some policies provide for an extended period of indemnity which will extend the business interruption coverage past the time to repair or rebuild to the earlier of the insured restoring its business to pre-loss conditions or the expiration of a fixed period of time. For example, if the hotel experienced a continued loss of business even after the theoretical period to repair or replace has ended because the business has not returned to a normal level, would that satisfy this element?

Extra Expense

Extra expense provisions typically cover necessary expenses incurred throughout the period of restoration that would not have occurred but for the loss. For example, an insured in a Gulf state might be forced to ship its product by air as opposed to boat due to oil-laden waters, thereby incurring extra costs. Direct physical loss or damage to insured property is a requirement for this coverage.

Business Interruption Coverage Extensions

Because many insureds may not be able to satisfy the Business Interruption coverage requirement of direct physical loss or damage by a covered peril to covered property, it is expected that
these Business Interruption Coverage Extensions will be the basis for many claims.

Contingent Business Interruption (CBI) Coverage - generally provides coverage for business interruption losses caused by the suspension of the insured's business as a result of damage to or destruction of property owned by another.

Typical elements for Contingent Business Interruption coverage are:

Direct physical loss or damage to dependent property (of the type covered under the policy, often a supplier or customer) from a covered peril.
A resulting suspension of the insured's operations at an insured location.
An actual loss of business income suffered during the period of restoration.

CBI coverage may be implicated in a scenario where a restaurant in Chicago is unable to obtain shrimp from its supplier in the Gulf. Relevant questions may include: Did the shrimp supplier actually sustain direct physical loss or damage to property of the type covered from covered peril, or was excluded contamination, for example, the cause of the damage? Was excluded property such as shrimp or the property that sustained the damage ultimately leading to the CBI claim? Did the restaurant actually suspend its operations or merely suffer a decrease in sales? Did the restaurant experience an actual loss of business income during the theoretical repair period? Does the policy limit CBI coverage to "direct" suppliers? If so, does the shrimp supplier satisfy that requirement, or is it an indirect supplier?

Civil Authority Coverage - generally provides coverage for business interruption losses resulting from an order of civil authority that prohibits access to the insured's property.
Typical elements for Civil Authority coverage are:

Loss of business income due to an order of a civil authority. A civil authority has been defined as an entity or person with sovereign authority to act.
The order prohibits access to the insured's property. Typically this requires that the civil authority actually and completely prohibit access to the premises.
The order is due to direct physical loss or damage to property other than to the insured location. Some policies specify a certain distance from the insured property within which the physical loss or damage must occur.
The direct physical loss or damage to property is caused by a covered peril.

This type of coverage may be relevant to a situation where a governmental agency has prohibited access to the public beach adjacent to a resort located on the Gulf coast. Relevant questions may include: Did the agency have the sovereign authority to act? Was access to the insured's property specifically prohibited by the order or was access merely hindered or impeded? Did the order prohibiting the access to the beach result from damage to other property caused by a covered peril? Was there an actual order or just a recommendation? Was the Civil Authority coverage sublimited in the policy for a specified period of time? Was the order designed to prevent feared future damage rather than address existing property damage? Did the order merely have a tangential impact on the insured?

Ingress/Egress Coverage - as opposed to the civil authority coverage, ingress/egress coverage does not require an order of a civil authority prohibiting access to the property.

Typical elements of Ingress/Egress coverage are:

Ingress to or egress from the insured premises is prevented or impaired.
An insured peril prevented ingress or egress.
An interruption of business resulted from the prevention or impairment of ingress or egress.
The interruption of business caused an actual loss of business income.

This type of coverage may be implicated when, for example, beach access to the insured's restaurant is prevented by oil on the beach. Relevant questions may include: Were there other means of access to the restaurant besides the beach? Was the oil damage preventing the ingress/egress to the restaurant caused by a covered peril? Does the policy Ingress/Egress provision require prevention of access or merely an impairment or hindrance of access? Was access to the insured's restaurant actually impaired or did customers merely stay away from the area because of the Oil Spill?

Choice of Law

Most, if not all of the property losses occurring as a result of the Oil Spill will occur in the Gulf States. The applicable controlling substantive law, however, is not necessarily limited to the law in those states. Some aspects of maritime law may apply. The policy should be checked for any choice of law provisions. Also, factors such as the location of the state in which the policy was negotiated and/or placed and the place of incorporation and/or principal place of business of the parties may bear on which state's substantive law will apply, especially in instances where a policy covers property in multiple locations in differing states.

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