Fear Strikes Out: Fear Of Property Damage Is Insufficient To Establish Business Income Coverage
August, 2010
by Mindy M. Medley and Sava Alexander Vojcanin
Commercial property policyholders are understandably concerned about the potential impact that the DEEPWATER HORIZON blowout may have on their businesses. But, is the fear of future property damage sufficient to establish a time element claim under a first party property insurance policy? In the context of "civil authority" claims, the few courts considering the issue typically find no coverage.
The Supreme Court of Pennsylvania first considered the question in Cleland Simpson Co. v. Firemen's Ins. Co., 392 Pa. 67, 140 A.2d 41 (Pa. 1958). In Cleland Simpson, torrential downpours flooded Scranton, Pennsylvania on a biblical scale:
[o]n the night of August 17, 1955, a tremendous rain began to fall which did not cease until midnight, August 18-19. ... Death and destruction in historic figures followed. The Roaring Brook ... carried immense volumes of water in the flash flood, and since the water mains furnish the City of Scranton with a usually adequate supply of water were in the path of the flood, they were broken and destroyed.
140 A.2d at 42. The entire city - including its emergency service providers and associated hydrants - was without water from August 19 to 23. Id. The "City was defenseless against fire[.]" Id.
Because of the potential risks associated with the lack of water, the mayor "declared a state of emergency and ordered all stores to close because of a serious fire danger resulting from the flood which cut off the water supply . . ." Id. The policyholder therefore had no access to its business premises during the mayor's prohibition. Id. "It is for the losses incurred by interruption to [the policyholder's] business on those particular days that the [policyholder] now brings this action." Id.
The Cleland Simpson court confirmed dismissal. Id. at 44. Relying on the policy's language that provided business interruption/civil authority coverage only as a "direct result of a peril insured against ...", the court stated:
[b]y no process of logic can we read into the policy that the risk includes prohibition of access because of apprehension of either the possibility or the probability of a fire which never occurred. Id.
Since Cleland Simpson, other courts have followed suit. For example, in United Air Lines, Inc. v. Ins. Co. of the State of Pennsylvania, 439 F.3d 128 (2d Cir. 2006), the Second Circuit affirmed the Southern District of New York's entry of summary judgment in favor of the insurer on the policyholder's business interruption claim under its property, terrorism, and sabotage insurance policy. Id. at 129. In United Air Lines, the policyholder, United Air Lines ("United"), "sought indemnity for losses it suffered as a result of the September 11, 2001, terrorist attacks on the World Trade Center ... and the Pentagon ..." Id. Although the insurer agreed that United could recover lost earnings associated with the destroyed ticket office at the World Trade Center, the issue in United Air Lines was whether the policyholder "can [also] recover for its lost earnings caused by the national disruption of flight service and the government's temporary shutdown of [Reagan National] Airport." Id. The Second Circuit held it could not because the interruption to United's business after September 11th was not the "direct result" of damage to adjacent premises required by the policy's civil authority provision. Id. at 133-35.
The Second Circuit in United Air Lines focused on the policy's civil authority and gross earnings provisions, but also addressed and recognized the link between the public's fear associated with the September 11th attacks, and the policyholder's claim for coverage. Id. at 135, fn 8. The court stated that "[i]n concluding that the business interruption was caused by fears of future attacks, not by the actual physical damage inflicted on the Pentagon, our analysis of causation is consistent with the decisions of other courts interpreting ‘civil authority' clauses after September 11." Id.
See also, South Texas Medical Clinics v. I Financial Corp., 2008 U.S.Dist.LEXIS 11460, *31-*34 (S.D.Tex. Feb. 15, 2008)(insurers' motion for summary judgment on policyholder's Hurricane Rita claim was granted: "[w]hen, as here, the only relevance of prior damage to other property is deciding whether to issue a civil authority order that would preclude access to the insured's property is to provide a basis for fearing future damage to the area where the insured property is located, the causal link between the prior damage and the civil authority is missing. Requiring such a causal link between the prior damage and the action ... does not rewrite the parties' policy, but rather gives effect to the language it contains.")
Of course, alleged business income losses based on the fear of future property damage are conceptually distinct from "sue and labor" claims for actual expenses incurred by a policyholder to protect its property from actual or imminent physical loss or damage.
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