Civil Authority Clause

What Is a Civil Authority Clause?

A civil authority clause, also known as a public authority clause, is an insurance policy provision that outlines how the loss of business income coverage (BIC) applies when a government entity denies access to the insured property.

Understanding a Civil Authority Clause

Civil authorities (local, state, or federal governments) may evacuate or prohibit access to certain areas after a natural disaster occurs. For example, they may deem that an area poses a legitimate public safety threat in the aftermath of a hurricane, wildfires, flooding, rioting, an act of terrorism or another life-threatening event.

Should civil authorities decide to take such action, the financial implications for companies operating in the area to be evacuated and closed off can be huge. In effect, business owners will be forced to shut down their operations, resulting in a loss of potential income for an extended period of time.

Property insurance policies often include provisions that provide loss of income coverage while a business is closed as a result of property damage. They may not, however, contain provisions that cover the loss of income because the business owner is unable to reopen after an evacuation. Whether or not this type of loss is covered depends on the policy’s civil authority clause.

How a Civil Authority Clause Works

Civil authority clauses are standard in property insurance policies for both businesses and homeowners, outlining the situations in which business interruption insurance — insurance coverage that replaces business income lost in a disaster — is extended. The clause indicates whether the insurer will pay for business income losses in the case that a civil authority prevents the policyholder from accessing the premises covered by the policy. 

Time limits for coverage can vary, usually from one week to 30 days, and there is often a 72-hour waiting period before a claim can be triggered.

Important

A civil authority clause also protects an insured from damages caused by firefighters and police officers when dealing with a situation on a property.

One important caveat is that the clause requires that the loss of income be caused, at least proximally, by the civil authority’s order. The loss of income cannot be caused by only the natural disaster or similar life-threatening event — there must also be an order to evacuate the property. A company may choose to purchase additional business interruption insurance policies to increase its level of protection.

A Louisiana court ruled that “actions of civil authority” in the aftermath of Hurricane Katrina that do not explicitly prohibit access to an insured party's premises won't trigger civil authority coverage.

Example of a Civil Authority Clause

Many days of heavy rain have caused the river in a small town to reach historically high levels. Expecting that there is likely to be a flood, the town government orders its citizens to evacuate. In the end, this prediction turns out to be correct, prompting authorities to issue another order, this time to prevent residents from returning home while they determine the extent of the damage.

Because residents are not allowed back for several weeks, local businesses are forced to remain closed. Even though the flood did not damage his property directly, the owner of an auto body shop located in town can receive part of his lost income because his property insurance policy contains a civil authority clause.