By all accounts, the “Governmental Action” exclusion was once a fairly narrow provision in property insurance policies, typically invoked when a governmental body confiscated or destroyed property in the course of official duties. However, as Bill Wilson recently noted in his Insurance Journal article, Wildfires and Government Action Exclusions, this clause is now being interpreted with increasing latitude by insurers—and courts are starting to back them up. Just as we watched the pollution exclusion evolve from an environmental protection clause to a catchall denial device, the governmental action exclusion may be undergoing a similar mutation. Policyholders, especially those navigating claims after major events like civil unrest, public health crises or urban wildfires, are likely to bear the consequences.
Wilson’s article sounds the alarm that insurers are using this exclusion in ways that stretch well beyond its original intent. One recent example he highlights is the denial of business interruption claims stemming from riots and looting in Philadelphia. In these cases, carriers argued that because the city government chose not to intervene or provide police protection, the damage was indirectly caused by government action—or, paradoxically, by government inaction. This leap from affirmative government conduct to passive decision-making being classified as “government action” has concerning implications for coverage, especially for business owners who rely on their policies to respond during turbulent times.
The trend becomes even more troubling when you consider the legal support it’s gaining. In BA Ventures LLC v. Farmers Insurance Exchange, 1 the Oregon Court of Appeals upheld a trial court’s ruling that the governmental action exclusion precluded coverage for an ophthalmology practice that was forced to surrender its surplus PPE to the state during the early days of the COVID-19 pandemic. The governor’s executive order required medical offices to deliver excess supplies to help mitigate statewide shortages. The plaintiffs argued this was not a “seizure” in the traditional sense—no force, no wrongdoing, and no compensation. The court disagreed, concluding that an ordinary policyholder would understand “seizure” to mean any taking of property under legal authority, regardless of whether force or misconduct was involved.
What makes this case particularly noteworthy is that the court found the exclusion applicable even though the insurer itself initially characterized the surrender of PPE as a “voluntary donation.” The mere fact that the action was taken in compliance with a government directive was enough for the court to find that the exclusion applied. This reinforces the concern Wilson raised: policyholders are being blindsided by how broadly these exclusions are being read.
Legal treatises like Couch on Insurance also offer insight into the shifting contours of the exclusion. The treatise 2 discusses how governmental actions don’t need to be explicitly authorized if they fall within a civil authority’s general discretionary power. Meanwhile, the treatise also reminds us that not all restrictions on movement or property constitute a “seizure.” 3 A health department embargo, for example, was found not to be a seizure because officials never actually took possession of the property. However, the courts are increasingly finding that even indirect or non-forceful takings by government entities can still fall within the scope of the exclusion.
These developments carry serious implications for public adjusters and policyholders. The first is that the language in policy exclusions must be read very carefully, and vague or ambiguous terms are commonplace. Terms like “seizure,” “destruction,” and “by order of governmental authority” can appear straightforward but have been interpreted in ways most policyholders wouldn’t expect.
Second, adjusters must track the causal chain leading to a loss. If the government’s action—or even its failure to act—can be linked directly or indirectly to the damage or interruption, coverage is increasingly being denied under the governmental action exclusion. The “efficient proximate cause” analysis used in BA Ventures shows that courts are willing to trace causation back to executive orders, even when the immediate cause might seem more business-related or situational.
Third, and most critically, we must understand that civil authority coverage is not a catch-all remedy for government-related disruption. Many policies only extend this coverage when a civil order prohibits access to a business due to physical damage elsewhere, and not merely as a result of shutdown orders or resource redirection. Courts have consistently ruled that COVID-19 restrictions like stay-at-home orders, quarantines, and even mandatory closures fall outside the narrow scope of civil authority clauses unless very specific conditions are met.
If Bill Wilson’s predictions prove accurate, we’re on the brink of seeing the governmental action exclusion evolve into a general-purpose defense against a wide array of claims. He noted the unfairness of its use:
In the case of the Los Angeles conflagrations, we’ve heard stories of extensive looting of homes not damaged by fire itself. If, in attempting to apprehend looters, the property is damaged by governmental authorities, presumably they would be immune from claims and the property owner would likely have little or no recourse against their insurer.
In cases like these, the innocent property owner typically has little or no recourse against the government or their insurance carrier. And, given that these policies typically only cover direct damage, even if there was coverage for damage caused by a governmental authority, the diminished market value of the property can be significant, as was the case for one homeowner who ultimately sold her home at an alleged $100,000 less than the original asking price.
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My argument FOR coverage under existing government action exclusions is that these types of exclusions were never intended to apply to situations like those discussed in this article, but rather to damage that arises proximately from the illegal activities of insureds. I think this premise is supported by exceptions in property policies for preventing the spread of fire and in auto policies for extending coverage to innocent loss payees.
I also point to language like ‘destruction, confiscation or seizure of property…by order of any governmental or public authority.’ Is the government actually ‘ordering’ destruction of property, or are they ordering an action to, for example, apprehend a criminal that unavoidably results in damage to property?
When cases like this are presented, coverage counsel should be consulted early in the claims process. Public adjusters should document every detail of how the damage occurred and resist insurer narratives that overstate the role of government directives. And perhaps most importantly, insurers should be challenged when they rely on these exclusions without providing clear, plain-language definitions that match the real-world understanding of their policyholders.
The warning signs are here. Whether through voluntary wording reform by the industry, legislative reform, greater regulatory scrutiny of policy forms, or a recalibration in the courts, a check on this expanding exclusion is needed before it fully takes on the notorious role that pollution exclusions have played over the past three decades. Otherwise, we risk hollowing out coverage through the expansion of this exclusion.
Thought For The Day
“It depends on what the meaning of the word ‘is’ is.”
— Bill Clinton
1 BA Ventures, LLC v. Farmers Insurance Exchange, 535 P.3d 323 (Or. App. 2023).