The Business Income Coverage (BIC) form provided by ISO includes an Additional Coverage entitled Civil Authority. Because of the hurricane activity in coastal North Carolina in the last few years, several questions about the coverage and how it works have arisen. So, it may be time to take a more in depth look at this Additional Coverage.
When a Covered Cause of Loss causes damage to property other than property at the described premises, 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 the described premises, provided that both of the following apply:
(1) Access to the area immediately surrounding the damaged property is prohibited by civil authority as a result of the damage, and the described premises are within that area but are not more than one mile from the damaged property; and
(2) The action of civil authority is taken in response to dangerous physical conditions resulting from the damage or continuation of the Covered Cause of Loss that caused the damage, or the action is taken to enable a civil authority to have unimpeded access to the damaged property.
The first consideration of this coverage is damage caused by a covered cause of loss. This coverage is activated by the occurrence of actual damage to property caused by a covered peril. It is becoming more common for governments in areas of impending contact with a hurricane to order preemptive evacuations. In this case, damage to property may be expected but has not yet occurred. It appears that such preemptive evacuation orders would not trigger coverage until actual damage from the covered peril is actually sustained.
A second consideration is the coverage applies to damage to property other than property at the described premises in the policy. Translated, there must be damage to someone else’s property, not the property at the Named Insured premises.
A third consideration is the Named Insured sustains an actual loss of Business Income and/or Extra Expenses caused, not by the hurricane, but caused by the “action” of civil authority. There are two items here that need discussion. First, what constitutes “action” of a civil authority, and, second, who is a civil authority? Let’s take the second item first. Who is a civil authority? The BIC form does not define civil authority. The Free Dictionary by Farlex on the internet lists one definition of “civil” as “of, or in a condition of, social order or organized government, civilized”. Therefor a municipal, county, state or federal government would meet the definition of “civil”. The same internet dictionary defines “authority” as “the power to determine, adjudicate, or otherwise settle issues, the right to control, command, or determine”. One could summarize that any government, or any agent of any government, with the power to control or command the actions of citizens would qualify as a “civil authority”. So, what constitutes a “action” of such civil authority? An order to evacuate could certainly qualify as an action of a civil authority but is an official order the only action that is required under the BIC form. The form does not define “action”. The same dictionary use above defines an “action” as “something done or performed, act, deed”. So, any act or deed by a civil authority could arguably meet the conditions of the BIC policy language.
A fourth consideration is the action of the civil authority must prohibit access to the premises described in the BIC policy. An action by a governmental authority or its authorized agents must prohibit access to the Named Insured undamaged premises.
There are two additional conditions attached to the Civil Authority clause. Access to the area immediately surrounding the damaged property is prohibited by the civil authority and the premises described in the BIC policy must be within prohibited area but not more than one mile from the damaged property. Secondly, the action of the civil authority is in response to dangerous physical conditions caused by the damage resulting from the covered cause of loss or the actions is taken to enable unimpeded access of civil authorities to the damaged property. Often evacuation orders are issued by civil authorities for reasons other than damaged property. The order may be because of the difficulty in evacuating large populations from areas that have limited roads or bridges restricting the speed of evacuation. The order may be relative to concerns about rising water in low lying areas. Since we have established that the action of a civil authority can take forms other that a formal order, the type of orders suggested above have no relevance to the application of the Civil Authority coverage. Rather the BIC Civil Authority Coverage is concerned with actions taken by a civil authority that prohibit access to an area which has sustained property damage. The closure of a road, street or highway that provides access to the premises described in the BIC policy because of proximate damage (within one mile) caused by a covered cause of loss appears sufficient to trigger Civil Authority coverage.
The Civil Authority Additional Coverage in the BIC policy is not about evacuation orders or any action taken by a governmental authority for reasons other than damage to property caused by a covered cause of loss. But if there is damage to property caused by a covered cause of loss in the appropriate proximity to the premises described in the BIC policy; if a civil authority takes action to prohibit access to an area which encompasses the covered premises; and the action taken by the civil authority results in a suspension of the Named Insured’s operations; then there should be coverage under the Civil Authority clause regardless of any other actions taken or orders given by the civil authority.
The last considerations involve the waiting period built into the BIC form and the length of the coverage period. The 72-hour waiting period applies to any suspension of operations resulting in a loss of business income. The same waiting period, however, does not apply to Extra Expenses. The coverage period for Civil Authority coverage in the BIC form is up to four weeks.
There are two ISO endorsements which are relevant to the specific coverages in the Civil Authority clause of the BIC form. The first modifies the waiting period under the BIC form. Business Income Changes – Beginning of the Period of Restoration (CP 15 56 06 07) permits the reduction of the 72-hour waiting period to 24-hours or to eliminate the waiting period altogether. (Elimination of the waiting has always been a recommendation of mine as the waiting period may be appropriate to manufacturing or processing risks but inappropriate to mercantile, food service, or other service businesses common to resort areas.) The second endorsement deals with the coverage limitations in the Civil Authority Additional coverage. Civil Authority Change(s) (CP 15 31 06 07) allows the Named Insured to increase the 4-week coverage period to a scheduled number of days and/or increase the radius of coverage from one mile to a scheduled number of miles.
Any business in resort areas subject to a high risk of a coverable cause of loss should be made aware of the intent and limitations of the Civil Authority coverage and, where possible, should be offered these two endorsements. Documentation of the clients’ awareness of the coverage, limitations and options endorsements should be maintained.