On April 20, 2010, an explosion and fire occurred on the oil rig Deepwater Horizon, which had been drilling a subsurface oil well in the Mississippi Canyon 252 area of the Gulf of Mexico, 42 miles southeast of the Louisiana coast and 130 miles southeast of New Orleans. The fire continued to burn until the rig sank to the bottom of the Gulf two days later. Although the cause remains under investigation, it is believed that the explosion resulted from a natural gas bubble that traveled from the well up to the rig, culminating in a blowout.

The incident brought about the deaths of eleven of the 126 crew members on board the rig. The ongoing release of oil from the underwater wellhead has created an oil slick that covers thousands of square miles of the ocean surface and has started to wash ashore along the Gulf coast. The well continues to release oil into the Gulf at an undetermined rate that has been estimated by some to be five thousand barrels (approximately two hundred thousand gallons) per day. Other estimates are substantially higher.

The Deepwater Horizon was a floating, semi-submersible drilling unit capable of drilling to a depth of 30,000 feet below the ocean's floor. The rig was owned by Transocean, Ltd., a Swiss company that operates mobile offshore drilling units worldwide. BP Exploration & Production, Inc. ("BP") held the rights to drill at Mississippi Canyon 252, and owned 65 per cent of the well. Anadarko Petroleum Corporation (25%) and MOEX Offshore 2007 LLC (10%) owned the remainder. The well, known as the Macondo Well, was being drilled at the time of the explosion.

BP leased the Deepwater Horizon from Transocean and also contracted with Transocean to drill the well. In addition, BP contracted with Halliburton Corporation to perform a number of services on the rig, including cementing. Cameron International Corporation, a Texas provider of oil and gas pressure control equipment, supplied the well's blow-out preventers ("BOP").

The explosion appears to have occurred in connection with cementing the well. "Cementing" is the process of capping the well temporarily prior to detaching the drilling rig from the well. In that process, cement is pumped down the well such that it oozes back up around the well casing, creating a tight seal. As noted, one theory being considered is that the concrete work did not achieve a complete seal, which allowed natural gas to seep into the piping that connected the rig to the well. When workers -- presumably believing the cementing had created the necessary seal -- released the last valves (which were holding back the natural gas that had built up inside the well), the gas rushed up the pipe, sprayed into the drilling rig, and ignited. The U.S. Minerals Management Service found that cementing was a factor in 18 of 39 well blowouts in the Gulf of Mexico over a 14-year period, and was the single most frequent cause of blowouts.

A contributing factor to the explosion and continued release of oil is that the BOP failed to seal the well, as it is designed to do, when there is an imbalance of pressure between the forces pushing up from the well and the drilling pressure pushing down into the well. BOPs use a system of massive hydraulics to seal off a well casing if fluids begin to surge up a drill pipe. It is not yet clear why the BOP failed to operate properly. Because the present rate of the oil spill is not as great as some would have predicted, one possibility is that the BOP did operate, but it encountered some obstruction to its fully closing, and, therefore, remained partially open. This might also explain why attempts to actuate the BOP using robotic devices shortly after the blowout were unsuccessful.

The oil slick is drifting toward the Alabama, Mississippi and Florida coasts and oil has washed ashore in several locations. NOAA has observed that the oil could get caught up in the Gulf of Mexico's loop current, which flows toward the mangrove islands, sea grass beds and coral reefs of the Florida Keys, then up toward Miami Beach and Fort Lauderdale and north along the Atlantic Coast.

BP has attempted to stop the release of oil from the out-of-control well and to contain the spill in several ways. It lowered a "containment dome" -- which is a four-story, 70-ton structure designed to be placed over the leak(s) -- in an effort to catch the escaping oil and allow it to be pumped to the surface. The effort to use the contaminant dome was not successful because ice crystals built up on the steel and concrete dome and a slushy mix of oil and water clogged the siphon line from the dome to the ship above. These types of containment domes previously had been used only in shallow water, and were not certain to work in a deep-water setting.

More recently, BP inserted a pipe into the well in an effort to siphon off some of the oil escaping from the well. This has had some success inasmuch as varying amounts of oil ranging from 47,000 to 92,000 gallons per day has been pumped to a ship at the surface. Engineers are continuing to explore other options, including using a smaller containment dome that might not clog and attempting to "top kill" the well by plugging it with drilling mud and cement. As of this writing, the "top kill" is underway.

The long-term plan is to dig a relief well alongside the Macondo Well, through which BP will tap and shut down that well. However, this drilling process could take up to three months.

BP has used dispersant chemicals, offshore skimming systems, controlled burns, and other mechanisms to mitigate the pollution. It also has staged almost 500,000 linear feet of boom (strings of floating barriers) to protect the shoreline in the areas of Venice, Louisiana; Pascagoula and Biloxi, Mississippi; Mobile, Alabama; and Pensacola, Florida.

Concern has been expressed that the spill could have a negative effect on coastal and commercial fisheries, property owners, vacation resorts, and travel and recreation companies along the Gulf Coast and elsewhere, depending on how the oil is carried by the currents. On April 29, an emergency shrimping season was opened so that a catch could be brought in before the oil advanced to the shrimping beds. Governor Bobby Jindal of Louisiana declared a State of Emergency on April 29, paving the way for federal assistance to be employed if needed.

On May 2, 2010, NOAA ordered thousands of square miles of federal fishing areas, from the mouth of the Mississippi to Florida's Pensacola Bay, to be closed to fishing. Those waters represent a significant portion of Louisiana's seafood production. If the loop current does transport the oil to the Florida Keys and the southeastern coast, the losses to the tourism and recreation industries would be significantly greater. One analyst at the Bernstein Investment firm has predicted that the cost to the fishing industry in Louisiana could be $2.5 billion, while the Florida tourism industry could lose $3 billion.

There is further concern that the oil spill could cause cargo traffic on the Mississippi River to be disrupted, affecting the buyers and sellers of the commodities and raw materials that are shipped through the region's busy ports. The Port of South Louisiana -- stretching 54 miles along the Mississippi River -- is America's busiest port, handling some 225 million tons of cargo each year, primarily grain and agricultural commodities and chemicals. The Port of New Orleans handles some 75 million tons of cargo annually, and is a leading port for rubber and coffee. Gulfport, Mississippi, is the country's second-largest destination for green fruit. If ships bound for those ports encounter spilled oil, they may be denied entry to the ports, because most major ports prohibit vessels from entering their harbors with crude oil smeared on their hulls. If the river's shipping lanes become contaminated, authorities could close those lanes to maritime traffic entirely. In an attempt to avoid that closure, the Coast Guard is considering a plan to set up cleaning stations along the river, which could delay the river's cargo traffic.

More than 130 lawsuits, most of them class action suits, have been filed in connection with this incident, including on behalf of oil rig workers, fishermen, shrimpers, oyster farmers, charter boat operators and environmental groups. Plaintiffs in those cases claim that the oil rig was not properly operated, that BP drilled deeper than its permit allowed, that BP chose not to install deep-water valves that would have prevented the leaks, and that BP failed to follow proper procedure because the operators were rushing to finish cementing and detach from the well.

Following the explosion, BP announced that it would take "full responsibility" for paying for the cleanup and that it would honor "legitimate claims" by individuals and businesses affected by the spill. BP, as the holder of the drilling permit, is legally responsible for all damage caused by the spill under the Oil Pollution Act of 1990, 33 U.S.C. 2701-2761 et seq. (the "OPA"). Press reports have noted that Transocean has been declared a responsible party under the OPA as well. However, liability under the OPA is limited to the cost of cleanup plus no more than $75 million. OPA, §2704(a)(3). The $75 million limit applies unless the incident was caused by the permit-holder's gross negligence or willful misconduct or by violation of federal safety, construction, or operating regulations by the permit-holder or a person acting under contract with the permit-holder. In the wake of this oil spill, some Senators have proposed that the $75 million cap be raised to $10 billion. The OPA also would allow BP to seek contribution from other parties who might be at fault for the incident.

In recent Court filings, BP contends that it has received 25,000 claims from those alleging economic losses because of the oil spill and that it has made more than 12,000 payments totaling $29 million.

In anticipation of the first-party property claims that will be submitted in the aftermath of this oil spill by "onshore" insureds that are adversely affected by it, we have attempted to identify the coverage issues and exposures that we believe will prove to be the most significant.

For the most part, we expect that the significant first-party claims will involve time-element losses arising out of the disruption to tourism, fishing, and to shipping channels because of the oil spill and subsequent clean-up efforts. For those businesses operating on or near the coast (e.g., resort facilities as well as businesses relating to the fishing and seafood industries), there also exists the potential for direct property damage.


To the extent that the oil released from the well reaches the coastline, it could have an adverse impact on property owners. Certain properties that are located on or very near the water could experience direct physical contact with the oil. A threshold issue, therefore, is whether the presence of oil on real property would constitute covered property damage.

A. Property Not Covered

Commercial Property policies generally provide coverage for "direct physical loss of or damage to" covered property caused by a covered cause of loss, unless otherwise excluded.

If sufficient quantities of oil were to come into contact with an insured's property such that the insured would need to respond in some way (e.g., remediating the oil contamination, decontaminating or disposing of the property, etc.), the requirement of "direct physical loss or damage" arguably would be satisfied.

An initial consideration, however, would be whether the insured's property at issue constitutes "covered property." Commercial Property policies generally cover the insured's interest in structures, personal property, and improvements and betterments on the insured premises. However, several common exclusions from that coverage may be relevant to claims for damage from the oil spill. Foremost among these exclusions are those for waterborne or waterfront property, animals, growing crops, and land.

In certain instances, it will be relatively easy for an insurer to determine that coverage should not be afforded. For example, if an insured resort property needs to clean up oil that came into contact with its boat, dock, or bulkhead, policy exclusions for watercraft, docks, or bulkheads would preclude coverage.

Similarly, the common exclusion for damage to "soil" or "land and land values" would preclude coverage for the damage caused by oil that washed up on beachfronts.

1. Animals Exclusion

A more atypical issue might be raised if an insured business involved in or connected to the Gulf seafood industry claims damage to the shrimp, fish, or oysters that it harvests, or if an insured claims to be dependent on oystermen or fisherman and submits a contingent business interruption claim. Because most commercial property policies exclude damage to "animals," and shrimp, oysters, crawfish, crabs and other sea-life are "animals," coverage would not be afforded. See McKay v. State Farm Mut. Auto. Ins. Co., 933 F. Supp. 635, 640 (S.D. Tex. 1995) (quoting Black's Law Dictionary (5th ed. 1979), defining "animal" as "non-human, animate being which is endowed with the power of voluntary motion. Animal life other than man"), aff'd, 91 F.3d 137 (5th Cir. 1996); Board of Comm. for the Buras Levee Dis't v. Mialegvich, 52 La. Ann. 1292, 1297, 27 So. 790 (1900) (referring to the oyster as "a neat, clean, marine animal"); Wickham v. Levine, 47 Misc.2d 1, 6, 261 N.Y.S.2d 702 (Albany Co. Sup. 1965) (quoting Webster's Third New International Dictionary (1963) as defining "shellfish" as "'an aquatic invertebrate animal having a shell: a: an oyster, clam or other mollusk b: a lobster or other crustacean'"), aff'd, 24 A.D.2d 1035 (3d Dep't 1965), aff'd, 23 N.Y.2d 923 (1969); People v. Grucci, 194 Misc.2d 16, 752 N.Y.S.2d 783, 784 (2d Dep't 2002) (examining New York's Environmental Conservation Law, which refers to fish, shellfish, and crustacea as "animals"); Foret v. Paul Zibilich Co., Inc., 18 La.App. 363, 367, 137 So. 366 (Ct. of App., Orleans 1931) (referring to fish and crabs as "animals"); Ranson v. Labranche, 16 La. Ann. 121, 122 (1861) (referring to crawfish as "animals"); 20 C.F.R. § 701.301(a)(12)(iii)(E) (the Longshoremen's and Harbor Workers' Compensation Act defines "aquaculture workers" as "those employed by commercial enterprises involved in the controlled cultivation and harvest of aquatic plants and animals, including the cleaning, processing or canning of fish and fish products, the cultivation and harvesting of shellfish, and the controlled growing and harvesting of other aquatic species") (emphasis added); 29 U.S.C.S. § 213(a)(5) (the Fair Labor Standards Act provides, "any employee employed in the catching, taking, propagating, harvesting, cultivating, or farming of any kind of fish, shellfish, crustacean, sponges, seaweeds, or other aquatic forms of animal and vegetable life. . . .") (emphasis added).

2. Growing Crops

Oysters and other marine life that are cultivated and harvested in farms or beds (and possibly other sea life) also seem to constitute "growing crops," which are frequently excluded from commercial property coverage. Similarly to how land-based farmers cultivate crops, oyster farmers, for example, take part in "aquaculture," where they facilitate the spawning and growth of their oyster crops in oyster beds and farms located on either public or private bottomland.

In Louisiana -- which accounts for half of the U.S. oyster supply each year1 -- approximately half of the cultivated oysters come from public seed grounds managed by the State and farmed by license-holders, while the other half come from bottomland leased from the State by private individuals. See "The Gulf Oyster Industry: Seizing a Better Future," available at http://www.seagrantfish.lsu.edu/resources/handbookinfo.htm ; "Oyster Farming in La."

Accordingly, oyster harvesting and other forms of aquaculture can be fairly compared to farming such that the product is a "growing crop."

B. Contamination

Assuming an insured sustains damage to "covered property," the next issue that would need to be addressed is whether the damage was caused by a covered cause of loss. In this regard, a critical issue will be whether the damage is excluded by a Contamination exclusion.

Although the language of such provisions vary, they generally preclude coverage for losses "resulting from, contributed to or made worse by actual, alleged or threatened release, discharge, escape or dispersal of CONTAMINANTS or POLLUTANTS," "all whether direct or indirect, proximate or remote or in whole or in part caused by, contributed to or aggravated by any physical damage insured by this policy." "Contaminants or Pollutants" typically are defined as "any solid, liquid, gaseous or thermal irritant or contaminant, including smoke, vapor, soot, fumes, acids, alkalis, chemicals and waste."

There can be no real debate that the oil being released from the well is a "contaminant" as defined in the above policy language. Indeed, fuel oil has been deemed a "pollutant" or "contaminant" by many commentators and courts. See Couch on Insurance 3d § 155:90, citing Ziankoski v. Boonville Oil Co. Inc., 661 N.Y.S.2d 322 (App. Div. 4th Dep't 1997) (pollution exclusion in homeowner's policy unambiguously precluded coverage for property damage resulting when third party mistakenly filled old underground oil tank on insured's property, resulting in oil spill into insured's basement); Brian Chuchua's Jeep, Inc. v. Farmers Ins. Group, 10 Cal. App. 4th 1579, 13 Cal. Rptr. 2d 444 (Cal. App. 1993) (oil leaking from underground fuel tank excluded); Robert E. Lee & Assocs., Inc. v. Peters, 206 Wis. 2d 509, 557 N.W.2d 457 (Wis. Ct. App. 1996) (oil overflow from fuel tank excluded). Accordingly, contamination exclusions would preclude coverage in most instances for loss or damage caused by oil that washes ashore.

1. Coverages, Exceptions and Give-Backs

Some property policies contain coverage extensions to cover contamination losses. The application of a given extension to damage from the oil spill will depend on the particular wording at issue. The ISO 2001 Commercial Property form, for example, reads:

We will pay your expense to extract "pollutants" from land or water at the described premises if the discharge, dispersal, seepage, migration, release or escape of the "pollutants" is caused by or results from a Covered Cause of Loss that occurs during the policy period.

Other policies cover the cost of cleanup if the contamination "is a result of direct physical loss of or damage caused by a covered cause of loss to covered property."

For a provision of this type to apply, the contamination must have been caused by a covered cause of loss. Whether a "covered cause of loss" exists will be a fact-specific inquiry unique to each claim. For example, whether the blowout of the Macondo Well and the subsequent explosion and fire aboard the Deepwater Horizon was a "covered cause of loss" will depend on the legal "cause" of that event. It ultimately will be necessary to undertake a "causation" analysis (e.g., proximate cause, concurrent causes, etc.) to determine whether the legal cause of the damage that resulted in the pollution to any particular insured is covered or excluded.

Alabama courts generally follow the "efficient proximate cause" test when confronted with a sequence of perils. In essence, incidental events cannot bar coverage for a loss proximately caused by a covered event. See State Farm Fire & Cas. Co. v. Slade, 747 So. 2d 293 (Ala. 1999).

Generally, the Louisiana courts will look to the proximate or "direct" cause of the loss when assessing whether a loss is covered or excluded. See Central Louisiana Elec. Co., Inc. v. Westinghouse, 579 So. 2d 981 (La. 1991); see also Riche v. State Farm Fire and Cas. Co., 356 So. 2d 101 (La. 1978) (to determine a direct cause of a loss, it is sufficient to show that a particular peril was the efficient cause of it, notwithstanding that another cause or causes contributed to the loss).

Florida courts will look for the proximate cause of the loss where multiple perils occur in sequence to produce a loss. Under Florida law, the legal or proximate cause of a loss is the "efficient cause" that sets the other causes in motion, and not necessarily the cause nearest in time to the result. See Peninsular Fire Ins. Co. v. Wells, 438 So. 2d 46, 51 (Fla. Dist. Ct. App. 1983) (finding a question of fact existed as to whether seizure and not barratry was the cause of vessel's loss), citing 5A Appleman, Insurance Law & Pr. §  3254.2

Policies that cover the cost of cleanup only if the contamination "is a result of direct physical loss of or damage caused by a covered cause of loss to covered property" further require that the contamination be caused by damage to covered property. Because, as set forth above, potential oil contamination resulting from the Macondo Well blowout would not be caused by a covered cause of loss to "covered property," we do not anticipate that insureds would be able to rely on this type of provision.


A. Basic Business Interruption Coverage

Businesses may experience disruption in their operations or earnings as a result of the oil spill. Vacation resorts might have decreased bookings because of concerns about the condition of beaches and/or the quality of the ocean; restaurants and businesses related to the seafood industry might have decreased revenue because of the unavailability of certain types of seafood; and retail and manufacturing operations might have difficulty obtaining merchandise and/or raw materials if cargo ships are delayed in arriving at port. The ultimate impact of the spill on the Gulf Coast economy, and potentially other regions of the country, remains to be seen.

Generally, Business Interruption insurance will indemnify an insured for a loss of income during a necessary suspension of its operations resulting from direct physical loss of or damage to its insured property. Coverage usually terminates at the time the insured could, with due diligence and dispatch, have repaired or replaced the damaged property. An extended period of indemnity is sometimes added, which ends when the insured's business is restored to its pre-loss conditions or when a fixed period of time has expired, whichever occurs first.

Thus, questions arise under Business Interruption provisions with regard to 1) the occurrence of direct physical loss or damage to covered property caused by a covered peril; 2) the causal relationship between the insured's suspension of business and the physical loss or damage to covered property; and 3) the nature of the insured's suspension of business.

1. Direct Physical Loss or Damage

In considering any Business Interruption claim, the basic purpose of such coverage should be borne in mind: to indemnify the insured for a loss of income caused by damage to insured property that interferes with the insured's ability to generate income from that property. A prerequisite to such coverage is that the suspension must be caused by direct physical loss of or damage to property covered by the policy caused by a covered peril.

In evaluating claims and potential claims, insureds, and carriers will need to be cognizant of these parameters. For example, if a vacation resort experiences a suspension of its business activities because its beach is stained with oil, Business Interruption recovery will not be available because (under the usual "Land" Exclusion) the beach or the ocean is not property covered by the policy. Moreover, if a Contamination or other exclusion applies, a suspension of business due to damage from leaked oil would not trigger Business Interruption coverage because the damage would not be caused by a covered peril.

These concepts are not controversial and insureds (and those representing insureds) are aware of these requirements. For example, a January 15, 1996 Crain Communications article entitled "Blizzard To Cost Millions But Little Of That Insured; Storm Cripples Northeast But Many Companies Were Prepared" stated, in part:

American Airlines Inc. will likely lose revenues due to 1,300 flights canceled as a result of the storm, but that commercial loss is not insurable said Michael Stoeckert, manager of corporate insurance in Dallas. There would be no business interruption coverage because in order to have a claim a policyholder has to have property damage.


A similar sentiment has been expressed by risk managers concerning coverage for losses following the grounding of aircraft in Europe because of the ash discharged by the eruption of Iceland's Eyjafjallajokull volcano:

Most airlines and other businesses with losses stemming from the disruption of air travel will not be able to rely on business interruption insurance to recover those amounts, experts say, because those policies generally are triggered only when physical damage leads to a loss of revenue.

After meeting with risk managers late last week, Richard Latham, chairman of the travel specialty interest group at the London- based Assn. of Insurance & Risk managers said, "The feeling is now that there is virtually no cover" for losses under business interruption policies.

Business Insurance, Firms Scour Policies for Volcano Coverage, p. 1, 54 (April 26, 2010).

Like a snowstorm or volcanic eruption, an oil spill that disrupts an insured's business will not necessarily lead to a covered lost income claim.

2. Causation

The next typical requirement for business interruption coverage is a causal connection between the physical damage and the suspension of the insured's business. Common policy language explicitly requires that the interruption be "caused by loss or damage to real or personal property as insured herein." See, e.g., Harry's Cadillac-Pontiac-GMC Truck Co., Inc. v. Motors Ins. Corp., 126 N.C. App. 698, 486 S.E.2d 249 (1997) (the business interruption clause does not cover all business interruption loss, but only those losses requiring repair, rebuilding, or replacement; plaintiff neither alleged nor offered proof that its lost business income was due to damage to or the destruction of the property; rather all the evidence shows that the loss was proximately caused by plaintiff's inability to obtain access to the dealership during the snowstorm); Citizen Sav. & Loan Ass'n of New York. v. Proprietors Ins. Co., 78 A.D.2d 377, 435 N.Y.S.2d 303 (2d Dep't 1981) (business interruption coverage insuring against loss or damage to physical assets is meant to protect against losses arising from the inability to use those physical assets to conduct the business); Howard Stores Corp. v. Foremost Ins. Co., 82 A.D.2d 398, 441 N.Y.S.2d 674 (1st Dep't 1981), aff'd, 56 N.Y.2d 991, 453 N.Y.S.2d 682 (1982) (the purpose of business interruption insurance is to indemnify the insured against losses arising from inability to continue normal business operation and functions due to damage sustained as a result of the hazard insured against).

Therefore, despite the fact that some businesses might sustain physical damage at an insured location as a result of the oil spill, they still will need to demonstrate that any loss of business income was due to a suspension of its operations caused by that physical damage and not by the general social and economic disruption that might accompany this incident. In many instances, significant environmental events have far reaching effects that might prevent an insured's business from operating at "pre-loss" levels irrespective of the insured's property damage, in which case the loss arguably would not be caused by the property damage.

3. Suspension of Business Activities

Business Interruption insurance is typically triggered by a "necessary suspension" (sometimes, "necessary interruption") of operations. Many courts have held that this provision requires a complete cessation of business operations, as opposed to a mere decrease in customers, attendance, or sales. See, e.g., Ramada Inn Ramogreen, Inc. v. Travelers Indemnity, 835 F.2d 812 (11th Cir. 1988) (no coverage for hotel due to decrease in occupancy where hotel operation was able to accommodate the same number of patrons); Hotel Properties Ltd. v. Heritage Ins. Co., 456 So. 2d 1249 (Fla. Dist. Ct. App. 1984); Howard Stores Corp. v. Foremost Ins. Co., 82 A.D.2d 398, 441 N.Y.S.2d 674 (1st Dep't 1981), aff'd, 56 N.Y.2d 991 (1982)(no coverage for business interruption where there was no actual suspension of the insured's business operations but merely an adverse effect on continuing sales); National Children's Expositions Corp. v. Anchor Ins. Co., 279 F.2d 428 (2d Cir. 1960) (no coverage for interruption of "use or occupancy" where loss did not occur from the insured's inability to hold an event, but rather, from a reduction in attendance resulting from a snow storm); American States Ins. Co. v. Creative Walking, Inc., 16 F. Supp. 2d 1062, 1065 (E.D. Mo. 1998), aff'd, 175 F.3d 1023 (8th Cir. 1999) ("the policy at issue in this case does not provide coverage for a 'total or partial' suspension of business activity. Instead, the policy provides coverage only for a 'necessary suspension of ... operations.' This otherwise unqualified language unambiguously refers to a total cessation of [the insured's] business activities"); Royal Indem. Ins. Co. v. Mikob Props., Inc., 940 F. Supp. 155, 160 (S.D. Tex. 1996) ("if the insured premises are still operating, the business interruption clause does not cover a decrease in income"); Home Indem. Co. v. Hyplains Beef L.C., 893 F. Supp. 987, 991 (D. Kan. 1995) ("if one were to apply the plain, ordinary meaning to the use of the phrase 'necessary suspension' within the policy, in order for a claim to fall within the coverage provision it would require that any direct physical loss of or damage to property results in the cessation of [the insured's] operations"); Keetch v. Mutual of Enumclaw Ins. Co., 66 Wash. App. 208, 831 P.2d 784, 786 (Wash. Ct. App. 1992) ("[t]he endorsement does not provide that coverage exists because the motel's quality of service may be diminished by an occurrence").

An insured, therefore, must be able to show that it sustained a "complete cessation" of its business (as opposed to a general slowdown in sales, customers, attendance, etc.) that caused a loss in revenue. Fewer customers or a drop in revenue will not constitute a covered business interruption claim if the business is capable of operating.

B. Civil Authority Coverage

A second type of Time Element coverage that might be relevant to oil spill claims is Civil Authority coverage. This coverage indemnifies an insured against loss of income that is caused by an order of civil or military authority that prohibits access to insured locations due to direct physical loss or damage to property other than at the insured location, if that damage results from a covered cause of loss. One typical Civil Authority clause provides:

We will pay for the actual loss of business income you sustain caused by an order of civil or military authority that prohibits access to insured premises due to direct physical loss or damage to property, other than at insured premises, caused by or resulting from any covered cause of loss.

Several states have issued emergency proclamations concerning fishing grounds and it is anticipated that other governmental authorities will issue orders and advisories concerning fishing, recreational use of the Gulf, and movement of vessels in the Gulf and the Mississippi River, etc. depending on if and how the oil migrates in different directions. Insureds likely will point to these advisories and orders when submitting claims under a Civil Authority provision.Four basic requirements must be met for coverage to be afforded under a typical Civil Authority provision:

1. Action or Order of Civil Authority

The first requirement is that there be an "action" or "order" of civil or military authority. A directive by a state or local government closing shipping lanes, prohibiting the use of beaches or the ocean, or placing restrictions on fishing likely would constitute an "action" or "order" of such an authority.

2. Access Must be Prohibited

The next requirement under these provisions is that "access" to the insured's property be "prohibited" by that "action" or "order." The use of the words "access" and "prohibit" confirms that a complete barring of access is required and a mere hindrance or impairment would not suffice. See, e.g., Travelers Indem. Co. v. Pollard Friendly Ford Co., 512 S.W.2d 375 (Tex. Ct. App. 1974) (civil authority provision provides coverage "where insured's buildings do not suffer a direct loss, but the area is blocked off by civil authorities thereby denying access to the insured's business by its customers"); Altru Health Sys. v. Am. Prot. Ins. Co., 238 F.3d 961 (8th Cir. 2001) (coverage afforded under civil authority provision when health authority closed the hospital for three weeks when flood waters reached parking lot and city's water system failed); Davidson Hotel Co. v. St. Paul Fire & Marine Ins. Co., 136 F. Supp. 2d 901, 912 n.6 (W.D. Tenn. 2001) (civil authority provision "controls access not use. There appears no contention in the record that [the insured] was denied access to the hotel; rather, it was denied use of the hotel for business reasons").

This issue was addressed by the United States District Court for the Eastern District of Louisiana in 730 Bienville Partners, Ltd. v. Assurance Co. of Am., No. Civ.A. 02-106, 2002 U.S. Dist. LEXIS 18780 (E.D. La. Sept. 30, 2002), aff'd, 67 Fed. Appx. 248 (5th Cir. 2003). In 730 Bienville Partners, the insured hotels sought civil authority coverage after the Federal Aviation Administration closed all United States airports following the September 11th terrorist attack, alleging that hotel patrons were not able to access its hotels because airline flights were cancelled. The policy covered:

loss of "business income" . . . caused by action of civil authority that prohibits access to your premises . . . .

Id. at *4.

The court, applying Louisiana law, applied the "ordinary meaning of the words" and denied coverage, holding:

The terms of the policy are unambiguous. To recover for business losses under the Civil Authority Extension, the loss of business income and necessary expenses must be "caused by action of Civil Authority that prohibits access to your premises ..." While the FAA's closure of the airports and cancellation of flights may have prevented many guests from getting to New Orleans and ultimately to plaintiff's hotels, the FAA hardly "prohibited" access to the hotels.

Id. at *5-6.

The Mississippi courts have also addressed denial of access in St. Paul Mercury Ins. Co. v. Magnolia Lady, Inc., 1999 U.S. Dist. LEXIS 17895 (N.D. Miss. 1999). In Magnolia Lady, a Mississippi hotel owner sought civil authority coverage after Arkansas authorities closed a Mississippi River bridge leading to the casino-hotel for almost three weeks following a barge accident. Although the casino-hotel remained accessible, albeit via the Mississippi side only, and open for business during the bridge closure, revenue allegedly dropped by eighty percent. The policy provided:

We will pay for your actual [business income and extra expense] loss . . . when a Civil Authority like a fire department denies access to the described location . . . .

Id. at *3.

Coverage hinged on whether the bridge closure "denie[d] access" to the casino-hotel. Applying the "everyday" meaning of "denies access," the court held that even though the nearest bridge over the Mississippi River was about fifty miles away, civil authority coverage was unavailable. Id. at *8.

[I]t is clear to see that there was no denial of access to the defendant's casino-hotel. The defendant's casino hotel was accessible during the period of time that the bridge was under repair, and the defendant continued operating business and accepting customers. Contrary to the defendant's assertion that customers from Arkansas were denied access, access was never totally denied because customers from Arkansas could have gained access from the Mississippi side of the bridge. Thus, . . . coverage under the "Interruption by Civil Authority" subsection . . . fails due to the everyday meaning of the words "denies access."

Id. at *8-9.

In Abner, Herrman & Brock, Inc. v. Great Northern Ins. Co., 308 F. Supp. 2d 331 (S.D.N.Y. 2004), a civil authority order prevented access for four days, beginning September 11, 2001. Thereafter, while vehicular traffic was restricted, public transportation was available and pedestrian access was granted. Plaintiff claimed business income/extra expense loss for five days starting from September 11, 2001 due to civil prohibition from entering the premises (plaintiff includes the following Monday, September 17, 2001, arguing that employees were confused as to whether there was access on that day), and half coverage for the following twenty-five days due to vehicular traffic prohibitions. The court denied plaintiff's claim of an extended loss period, reasoning that:

The relevant part of the Civil Authority insurance provision states that Great Northern will pay for loss "when a civil authority prohibits access to your premises." Because access was prohibited by civil authority from September 11, 2001 through September 14, 2001, the coverage applies only to these four days. The coverage does not extend through September 17, 2001, despite any confusion that [plaintiff's] employees may have had about access to the premises and despite any difficulties [plaintiff's] Chairman or his driver may have had in getting around the city. The record is clear that as of September 17, 2001, no civil authority prohibited access to [plaintiff's] premises.

Id. at 336; see also 54th St. Ltd. Partners, L.P. v. Fidelity & Guar. Ins. Co., 763 N.Y.S.2d 243, 244 (1st Dep't 2003) (holding that a civil authority provision applied only to the two days when access to the premises was denied and did not apply to the period subsequent when vehicular and pedestrian traffic was diverted, but access was not denied to the public, employees, or vendors).

Accordingly, if some governmental action or order closes beaches, disrupts shipping, or impairs fishing, yet the insured's premises remain open and accessible (albeit less desirable to customers or more difficult to reach), the "prohibition" of "access" requirement will not have been satisfied.

3. Direct Physical Loss or Damage

The third requirement under these types of provisions is that the action of the civil authority prohibiting access be "due to" or "result from" direct physical loss of or damage to some third party's property caused by or resulting from a Covered Cause of Loss.

While the wording of these provisions does not require that the insured's property suffer physical loss or damage – and in fact is designed to cover situations where the insured's property is not damaged – there nevertheless must be some physical loss or damage to some property that caused the action by the civil authority. Moreover, that damage must be caused by a covered peril.

All such orders will have to be analyzed as they are issued, in light of specific policy wording and exclusions. For example, some policies insure against loss only when the third party's property that causes the order to be issued is within a specific number of miles from the insured location. Given that the Deepwater Horizon was located more than forty miles from the nearest land area, a restriction of this kind could be significant.

4. Covered Cause of Loss

Finally, Civil Authority provisions often require that the physical loss or damage be caused by a "covered cause of loss." The specific civil authority orders relied upon by the insureds will need to be analyzed to determine exactly what "cause(s)" motivated the order/action. Determining whether this requirement is met will necessitate an understanding of the reason(s) behind the order.

C. Contingent Business Interruption/Dependent Property Coverage

The final Time Element coverage that we anticipate being relevant to the oil spill is Contingent Business Interruption ("CBI") or Dependent Property coverage. This coverage extends Time Element coverage to situations in which the insured suffers a loss of income because of damage to someone else's property. Typically, CBI insurance requires that at least four requirements be met:

(1) there must be a suspension of the insured's business activities at an insured Location;

(2) the suspension must result from direct physical loss or damage caused by a covered cause of loss;

(3) the direct physical loss or damage caused by a covered cause of loss must be to property of the type insurable under the policy; and

(4) the direct physical loss or damage caused by a covered cause of loss must be to property of the type insurable under this Policy that directly or indirectly prevent a supplier of goods or services to the insured from providing those goods or services, or property that prevents customers of the insured from purchasing those goods or services. Properties of this type are sometimes referred to as "direct dependent locations," "indirect dependent locations," or "attraction properties."

1. Interruption or Suspension of Operations

CBI insurance requires a "suspension" of the insured's business. As discussed previously, courts have construed "suspension" as requiring a "total cessation" of an insured's business such that a slowdown or decrease in customers would not constitute a "suspension" if the business continued to have the ability to operate.

2. Covered Cause of Loss

CBI insurance further requires that the suspension of the insured's business result from direct physical loss or damage caused by a "Covered Cause of Loss" to some third-party's property. As noted previously, commercial property policies often contain a Contamination exclusion. To determine if the cause of loss to the contingent/dependent property is a "Covered Cause of Loss" under a policy, the cause of the spill and/or the cause of the damage to that property will need to be known. After the cause is determined, a causation analysis can be conducted to determine if the legal cause of the contamination and/or the damage to the third-party's property is a "Covered Cause of Loss" under the applicable policy.

3. Damage To Property

Some CBI insurance requires that the damaged contingent property -- which in turn caused the suspension of the insured's business -- be "of the type insurable" under the policy. Several types of exclusions found in commercial property policies, including exclusions for land, water, growing crops, piers, wharfs, docks, and watercraft, could be implicated by potential CBI claims. For example, if an insured claims that its business was suspended because the "contingent" ports or waterways were unavailable or because its supply ships were damaged by the oil spill, the "water," "watercraft," and "piers, wharfs, and docks" exclusions could preclude coverage. In such an instance, the damaged "contingent" property would not be property "of the type insurable" under that policy.

4. Dependent Properties

A key requirement of CBI insurance is that the damaged property be a "dependent property." Various policies define these properties as "properties that deliver materials or services to you or to others for your account" or "properties that supply you with merchandise or services or receive merchandise or services from you." Other policies extend the definition to include properties on which the insured depends to attract customers to its business ("attraction properties") or properties of firms that do business with direct customers or suppliers of the insured ("indirect dependent properties").

Whether a damaged business is in fact a dependent property of the insured will turn on the specific facts of a given claim and/or industry.

5. Disruption of Ports and Shipping

We anticipate that the potential disruption to shipping operations in the Gulf region could be a significant factor in generating CBI claims. It has been reported that ocean-going vessels cannot enter U.S. ports or waterways if their hulls are contaminated with oil. The ships would first need to transfer their cargo and have their hulls cleaned before they can enter U.S. waterways. This will cause shipping delays and port congestion. As the oil spill moves inland the potential impact upon the Gulf ports could greatly restrict the ability of ports to operate. Shipping on the Mississippi River also could be impacted if vessels are delayed because of oil-contaminated hulls.

A business that experiences difficulty in its operations because of the disruption in shipping operations might contend that the vessels that transport the goods, or the ports through which the goods are shipped, are "dependent" or "contingent" properties inasmuch as they provide a "service" to the business in terms of assisting in the transport of their supplies or products. The question of whether a port or vessel constitutes a direct or indirect supplier of goods or services to a particular insured will be a fact specific inquiry. Moreover, CBI coverage may not be available to a particular insured given the customary requirements that the insured business be suspended, that the suspension result from a covered cause of loss, and that the loss be to property of the type insurable under the policy.

We hope you find our general discussion of issues that might be raised by claims coming out of the oil spill to be a helpful guide as issues arise. Obviously, this overview does not contemplate every kind of claim that may be presented as a result of the oil spill, and it also should not be utilized in place of legal advice to address specific claim issues that may develop.


1. Louisiana oystermen harvested 14 million pounds of oysters in 1997, while Washington oystermen harvested 8 million pounds, Connecticut harvested 4 million pounds, and Texas 3.5 million pounds. "The Gulf Oyster Industry," p. 3. Further, Gulf of Mexico waters accounted for 58% of all U.S. oyster production, and Louisiana had a nearly 60% share in all Gulf oyster harvesting. Id.

2. We mention Florida, Louisiana, and Mississippi law because as of this writing, the oil appears to be headed toward those Gulf states. Other state law could be implicated, depending on where the damage ultimately occurs.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.