The Government Action Exclusion

June marked my 56th year in the property and casualty insurance industry. When I speak at conferences and conventions, I tell a usually much younger crowd that I’m old–older than ISO, even older than FedEx, cable TV, and personal computers.

How old am I? When I started in the industry, it was common for insurers to operate separate companies for property and casualty lines. I remember when I would come across 1943 New York Standard Fire Insurance Policies (NY SFP) in the marketplace and people still questioned whether multi-line policies like homeowners would really catch on and whether replacement cost coverage was a good idea.

Which brings me to this month’s column about an exclusion that’s been around longer than me. I’m not sure how long, but I have a couple of property policies from the late 1800s that included it. The first standardization of the exclusion I’m aware of was in the venerable 1943 NY SFP, which read:

Perils not Included. This Company shall not be liable for loss by fire or other perils insured against in this policy caused, directly or indirectly, by…order of any civil authority except acts of destruction at the time of and for the purpose of preventing the spread of fire, provided that such fire did not originate from any of the perils excluded by this policy…

What prompted this month’s column was an agent inquiry about an Immigration and Customs Enforcement (ICE) raid on a processing plant that resulted in food spoilage and likely a business interruption claim when 80% of the plant’s workforce might need to be replaced and retrained in order to reopen. The insured in this case was facing a denial citing the Government Action exclusion in his causes of loss form.

This occurred at the same time that I was preparing to participate as a presenter in a webinar for attorneys on the Government Action exclusion found in ISO commercial property causes of loss forms, homeowners forms, and their personal auto policy. The two other presenters were defense attorneys who worked primarily for insurers. I was asked to present from a policyholder perspective. I couldn’t debate the application of the exclusion which virtually all courts had found to be clear and unambiguous. I could only challenge the absolute nature of the exclusion as being overly broad.

As best as I can tell, these exclusions were added to ISO’s commercial property line in July 1988 and to their homeowners program in October 2000. A limited version of the exclusion was added to their personal auto policy in December 1989 and broadened significantly in June 1994. Oddly, the exclusion does not appear in ISO’s primary business auto coverage form.

The ISO personal auto exclusion applies to “destruction or confiscation by government or civil authorities.” Sometimes law enforcement may take possession of a vehicle used by an alleged criminal. Excluding such losses from insurance coverage is arguably good public policy.

However, I gave examples in the webinar of two instances where an innocent auto owner’s vehicle was stolen and used in the commission of a felony. The vehicles were confiscated by authorities and held while the case went to court, a process that took over two years in one of the cases. The innocent insured was denied coverage by his auto insurer, citing the “government or civil authorities” exclusion.

In ISO’s December 1989 personal auto policy edition, since the insureds in both cases were innocent of any wrongdoing, this loss would have been covered but, as of the June 1994 revision and later editions, this loss is arguably no longer covered. However, an exception is made for loss payees who can recover under a loss payable clause for their financial interest in the vehicle. Figure that one out–the innocent lender is covered but not the innocent insured.

ISO’s homeowner program policy forms exclude:

Governmental Action–Governmental Action means the destruction, confiscation or seizure of property described in Coverage A, B or C by order of any governmental or public authority. This exclusion does not apply to such acts ordered by any governmental or public authority that are taken at the time of a fire to prevent its spread, if the loss caused by fire would be covered under this policy.

To illustrate, in 2015, a $580,000 Colorado home was demolished after police damaged it apprehending a shoplifter. In 2018, Georgia law enforcement officers damaged a 78-year-old man’s home which they had mistaken for a drug dealer’s home. In 2020, a SWAT team in McKinney, Texas, caused $50,000 in damages to a woman’s home while apprehending someone wanted for allegedly abducting a child. All of these claims for damage caused by law enforcement were denied by the insurers in question, citing the Government Action exclusion.

The problem with these denials is that, under “qualified immunity” laws, the victims usually have no recourse against the government entities responsible for these losses. These types of events are not rare, but they are relatively infrequent and, in my opinion, insurable. However, I’ve never seen a buy-back for this exclusion, not that most insureds would buy it if it was available given the high unlikelihood of a loss.

My argument in the webinar was that, while there certainly can be catastrophic government action losses that merit exclusion, the types of occurrences cited above are fortuitous and insurable. This is evidenced by the ISO personal auto policy edition prior to June 1994 when the exclusion in that policy only applied to “you or any ‘family member’…Engaged in illegal activities…”

Exceptions can be made, as is still the case in ISO’s personal auto policy with regard to innocent loss payees, without even remotely imperiling the solvency of an insurance company. This appeal was unsuccessfully made to ISO by the Big “I” over the course of several years through their technical affairs committee and the Mid-America Insurance Conference which meet with ISO annually.

My position in the webinar was that the purpose of insurance is to insure. While perhaps the fairest solution to this issue is to legislate less onerous “qualified immunity” statutes, this risk is insurable. It is no secret that the insurance industry is not held in the highest esteem by the public. One reason might be exclusions like this that, from a consumer perspective, defy logic.

If you look at the reasons why exclusions exist, none seem to apply to the examples provided in this article. The losses are fortuitous and unexpected. They are not catastrophic. They do not represent a frequency or severity problem that makes them uninsurable. There are, as best as I can tell, no coverage options available under other forms of insurance. Finally, there don’t seem to be any risk management alternatives such as loss control. So, why not provide coverage for an appropriate, and likely minimal, premium?

What do you think?