A federal court in New York City tossed an Order of Civil
Authority (OCA) claim by a New York City law firm in Bamundo, Zwal & Schermerhorn, LLP v. Sentinel Ins. Co.,
2015 U.S. Dist. LEXIS 39409 (S.D.N.Y., Mar. 26, 2016). The policy
extended coverage to loss of business income caused by an OCA issued “as the
result of a Covered Cause of Loss,” but it excluded flooding from the
definition of that term. The case is currently unreported on Westlaw.
The insured was a law firm with offices on John Street in
lower Manhattan. On October 28, 2012, the Mayor of New York City issued
an executive order evacuating all homes and business located in the area.
Superstorm Sandy made landfall the next day, and parts of lower Manhattan –
though not the area around the policyholder’s offices – quickly experienced
“never-before-seen flood levels.”
On October 31st, a second executive
order continued the evacuation and directed that buildings could only be
reoccupied after being inspected and declared safe; 14 more orders were subsequently
issued extending those restrictions. The law firm’s offices were
ultimately declared available for occupancy on Christmas Eve, and the
policyholder moved back in on January 4, 2013.
The policy afforded coverage for
the actual loss of Business Income you sustain when access
to your scheduled premises is specifically prohibited by order of a civil
authority as the direct result of a Covered Cause of Loss to property in the
immediate area of your scheduled premises.
This extension of coverage was subject to a 72-hour waiting
period deductible and limited to a period of 30 consecutive days. In
addition, the contract of insurance excluded loss caused by water, including
flooding, from the definition of what constituted a covered cause of loss.
The insured made claim for loss of business income for the entire evacuation
period (October 30th through January 4th), and it filed suit for breach of
contract and bad faith after the insurer denied.
On March 26th, Judge Richard Sullivan granted the insurer’s
motion for summary judgment and dismissed the case. With respect to the
breach of contract claims, the court held that the policy language at issue was
“wholly unambiguous.” The decision noted: (1) that “it is clear that this
flooding directly caused the Mayor to issue Order 165 on October 31, 2012, and
the subsequent evacuation orders;” and (2) that there was no question that
access to the law firm’s offices was specifically prohibited by those
orders.
As a result:
The only issue is whether that order of the civil authority
was “the direct result of a Covered Cause of Loss to property in the immediate
area” of Plaintiff’s office. The answer to this question for the October
31 order and all subsequent evacuation orders is clearly “no,” for the simple
reason that “Covered Cause of Loss” is defined in the Policy to exclude loss
due to flooding.
*
* *
Put simply, because the evacuation orders were the direct
result of flooding in Zone A, they were, by definition, not the direct result
of a “Covered Cause of Loss to property in the immediate area,” since
Plaintiff’s policy expressly excluded flooding from the definition of a Covered
Cause of Loss.
The court reached a different result with respect to the
initial executive order of October 28th, noting that the Mayor’s first order
“was a preemptive evacuation based not on flooding but on the risk of future
flood damage and power outages.” Judge Sullivan held that the flood
exclusion would not operate to preclude OCA coverage for that.
Any claim
for the first three days of the evacuation was defeated, however, by the
contract of insurance’s 72-hour waiting period deductible. In addition,
the court tossed the law firm’s bad faith claims because New York law does not
recognize a separate cause of action for breach of the implied covenant of good
faith and fair dealing when a breach of contract claim based on the same facts
is also pled.