Many businesses in the Northeast have had their business interruption claims denied because they did not have flood insurance. Flood damage is typically excluded from most commercial property policies, but businesses sustained many other types of losses that should be covered under most commercial policies despite the flood damage and lack of flood insurance.

Mandatory evacuation orders were issued by the governors of New York, New Jersey, Delaware, and Connecticut. Depending on the policy form, business interruption coverage should be available for Hurricane Sandy losses where access to the policyholder’s property was prevented or prohibited by “action or order of civil authority,” even where the insured’s own property did not suffer a physical loss or in cases where the authorities evacuated the areas before any flooding occurred.

Policies may also contain “ingress/egress” coverage, which pays for business income losses when ingress or egress to the insured property is prevented as the result of a covered peril. “Service Interruption” is another type of coverage that should be triggered despite flood damage to an insured property.

In 2010, I posted The Value of Ingress/Egress Coverage – Understanding Business Interruption Claims, Part 33 and highlighted a case that has already made into many power point slides, panels and presentations addressing Hurricane Sandy insurance claims.

Fountain Powerboat v. Reliance Insurance Company,1 is one of the few published court interpretations discussing Ingress/Egress coverage. Fountain Powerboat manufactured, distributed and sold boats and boating equipment out of a facility in North Carolina. In 1999 Hurricane Floyd dumped record-setting rain over the eastern part of North Carolina, and, although the facility did not sustain any physical loss or damage from the storm, the only roads leading to the Fountain facility were closed for seven days. For three days Fountain used large trucks to pick up workers from various “pick-up points” and transport them to the facility to continue operations, albeit at 33% reduced capacity.

The insurance company paid for certain claims but denied coverage under the Ingress/Egress provision for the same reason many Hurricane Sandy business interruption claims have been denied.

  1. That without property damage, the insured cannot recover for its income losses; and
  2. that there is no “actual impairment to access” if the insured is able to operate, albeit at reduced capacity (i.e., requiring a total cessation).

The Fountain court interpreted the Ingress/Egress provision and held:

Loss of Ingress or Egress:

This policy covers loss sustained during the period of time when, as a direct result of a peril not excluded, ingress to or egress from real and personal property not excluded hereunder, is thereby prevented.

The plain meaning of this language indicates an agreement between the parties that the contract for insurance cover any business interruption caused by loss by any peril not excluded. A “loss” is not predicated on physical damage but is one category of recovery along with damage and destruction as indicated by the use of the alternative coordinating conjunction “or.” Flooding due to Hurricane Floyd is exactly the type of peril this business interruption loss was drafted to insure against.

Furthermore, Reliance was aware of the location of the Fountain facility and was aware that the facility had a limited access. The court can only conclude that the parties intended that the policy would provide coverage not only when the property itself was inaccessible, but also when the only route to the Facility caused the property to be inaccessible. The court’s conclusion that no physical loss is required to trigger business interruption coverage is further bolstered by the parties’ inclusion of the following provision:

5. Interruption by Civil or Military Authority: This policy is extended to cover the loss sustained during the period of time when, as a direct result of a peril not excluded, access to real or personal property is prohibited by order of civil or military authority.

This provision immediately precedes the loss of ingress/egress provision. Neither provision requires physical loss, but merely covers loss sustained due to lack of access to the property. Therefore, the court finds that no requirement for physical loss to the property is required under the contract of insurance in order to trigger business interruption coverage under the ingress/egress clause.

The court also found the insured’s efforts to pick up its employees and drive them to work were extraordinary (since they were driving large trucks over heavily flooded and closed roads) and the provision provides coverage when there is no reasonable access to the property. Interestingly, the court found the period of restoration for which loss of ingress/egress may be claimed is the length of time to restore the business to the condition that would have existed had no loss of ingress/egress occurred.

It is undisputed that Hurricane Sandy caused significant wind damage and power outages. Many businesses lost income because employees, suppliers, distributors, and customers were prevented from accessing the business premises after Hurricane Sandy. “Civil Authority”, “Ingress/Egress” and “Service Interruption” coverages do not generally require a covered cause of loss or physical damage to the insured property.

Businesses that have had their business income claims denied for not having flood coverage should have an insurance coverage professional review their policies to determine if the claims were wrongfully denied.

1 Fountain Powerboat v. Reliance Ins. Co., 119 F. Supp. 2d 552 (E.D. N.C. 2000).