When the government shuts down access to your business, the assumption is simple: insurance will cover the loss. In reality, most claims fail. Businesses in the vicinity may be forced to temporarily cease operations, resulting in lost revenue. Civil authority insurance coverage is meant to protect your business from such a scenario. However, this type of coverage is narrower than many business owners expect.
What is civil authority coverage?
Many companies have business interruption insurance, which compensates you for lost income and extra expenses in the event you must temporarily shut down operations due to physical damage to your own property from a covered peril. A civil authority clause extends business interruption coverage to include scenarios where a government body restricts access to your business due to physical damage to a nearby property.
A typical policy clause might read: “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 due to direct physical loss of or damage to property, other than at the described premises.”
Civil authority and business interruption insurance are not typically purchased as standalone policies, but as add-ons to a commercial property or business owner’s policy.
What triggers civil authority coverage?
Generally, civil authority coverage is triggered when a government authority issues an order that prohibits access to your business, and the restriction is due to physical damage to nearby property. For instance, this might occur after a fire damages a neighboring building, causing officials to close off the immediate area due to health or safety concerns. Officials may also block access to your business if a nearby structure becomes unstable, such as due to a construction failure or explosion. Another possible scenario is when authorities close an area for cleanup or safety inspections after a damaging storm.
Direct physical damage to nearby property
Many business owners are unpleasantly surprised to learn that there must be direct physical damage to nearby property for civil authority coverage to apply. Government orders alone do not suffice. For instance, when a hurricane is approaching the region, authorities may order a closure to prevent possible harm, not because damage has already occurred. There would be no coverage in that situation. Similarly, shutdown orders may result from police activity, civil unrest or a security threat – such as an active-shooter situation, a bomb threat or protests in the vicinity. Coverage would not be triggered in these scenarios, since there was no physical damage to nearby property.
As many businesses learned during COVID-19, government shutdowns alone are not enough. Courts consistently held that loss of use, without physical damage, does not trigger coverage. Since 2020, insurers have increasingly written explicit exclusions for bacteria and viruses into civil authority provisions to eliminate any confusion.
What expenses are covered?
When civil authority coverage is triggered, policyholders are entitled to reimbursement for lost profits during the shutdown, which they can use to pay for operating expenses and fixed costs, such as payroll, taxes, rent or mortgage, and utilities. The coverage amount is calculated based on your company’s financial history, up to the policy limits. You may also be reimbursed for reasonable expenses you incur to continue operating during the shutdown, such as moving to a temporary location. Depending on your policy, benefits might only be triggered if the civil orders cause your business to be fully shut down. Other policies may also provide benefits when there is a partial suspension of operations, such when there is reduced capacity or a curfew in the area.
There is often a 48- or 72-hour waiting period before civil authority coverage kicks in, and most policies provide coverage for only a short time, such as up to two weeks or a month.
The takeaway
Civil authority coverage is not a broad safety net – it’s a narrow, heavily conditioned extension of business interruption insurance. Coverage depends on one critical factor: documented physical damage to nearby property that directly causes a government-ordered shutdown. Without it, most claims fail.
If your business insurance company has denied or is challenging your claim, contact Schwartz, Conroy and Hack, PC for assistance. We have the expertise and tenacity to make insurance companies keep the promises they make to you and your business.
