When Super Storm Sandy struck the Northeast on October 29, 2012, states, cities, municipalities and towns up and down the East Coast ordered hundreds of thousands of people to evacuate from their homes and businesses.  In the aftermath of those mandatory evacuations, I published an article in the April 2013 issue of DRI’s For The Defense publication, accessible here, discussing the various coverage issues raised by these evacuation orders in the context of civil authority provisions that are typically found in property insurance contracts, particularly with respect to the impact of the evacuations on “Zone A,” an area of Manhattan including some 375,000 residents.  Now, more than two and a half years after Sandy came ashore, we are beginning to see decisions addressing some of the issues raised in that article concerning the application of civil authority provisions to Sandy claims.

At the end of March 2015, the Southern District of New York issued a ruling in the case of Bamundo, Zwal & Schermerhorn, LLP v. Sentinel Ins. Co., Ltd., 2015 U.S. Dist. LEXIS 39409 (S.D.N.Y. Mar. 26, 2015) (Sullivan, J.).  The plaintiff in that case was a law firm located in Zone A in lower Manhattan that, pursuant to Mayor Bloomberg’s Executive Order 163, was ordered to evacuate on October 28, 2012.  As a result of a number of additional executive orders, the plaintiff was unable to re-enter their office until the end of December 2012.

The plaintiff’s insurance policy provided coverage for the loss of business income when access to the insured property was “specifically prohibited by order of a civil authority as a direct result of a Covered Cause of Loss to property in the immediate area” of the property.  The policy further provided that the business income coverage would begin 72 hours after the order of civil authority.  Importantly, the policy contained an exclusion for “loss or damage caused directly or indirectly by” flood.

Plaintiff made an insurance claim for approximately two months of lost business income as a result of their inability to access their office.  Defendant Sentinel Insurance denied plaintiff’s claim on the grounds that the business interruption was caused by flooding conditions – an excluded cause of loss.  Litigation ensued.  In ruling on the parties’ cross-motions for summary judgment, the court found that the language of the applicable Civil Authority provision was unambiguous, and that plaintiff’s business income claim was not covered under the policy.

Although there was no dispute concerning the existence of an order of civil authority that barred access to the plaintiff’s office, the court determined that the order of civil authority was not the direct result of a covered cause of loss to property in the area.  The court reached this conclusion for the “simple reason” that covered cause of loss “is defined in the Policy to exclude loss due to flooding.”  The court then noted that, beginning on October 31, 2012 with Executive Order 165, each order of civil authority specifically referenced “heavy flooding” as justification for the continued evacuation.

Finally, the court stated that plaintiff could seek to recover lost business income resulting from the precautionary October 28, 2012 executive order on the grounds that Order 163 was a preemptive measure based on the risk of future storm damage.  However, in this case, the policy’s 72-hour deductible applied to bar plaintiff’s claims because, by the time the 72 hour waiting period had expired on October 31, 2012, the operative executive orders were explicitly based on the flooding associated with Sandy.

Interestingly, although the policy explicitly provides coverage only in a situation where an order results from actual loss to nearby property, the court appears to have contemplated, without any significant discussion, that the insureds could make a claim for business income based on an order issued before any Sandy damage occurred.  This decision is contrary to other cases holding that there is no coverage for a preemptive order because it is not caused by physical damage.

We will continue to monitor any further developments arising from Super Storm Sandy.