Posted on: April 11 2011Ruling that restricts business interruption claims could cost workers during hurricane evacuations
April 10, 2011
By Rebecca Mowbray, The Times-Picayune The Times-Picayune
When Hurricane Gustav threatened New Orleans in 2008, Dickie Brennan & Co. paid its 400 employees even though the company's three restaurants were closed by a mandatory evacuation.
But next time, Steve Pettus, managing partner of the restaurant group, said he isn't sure he'll be able to, thanks to an unfavorable federal appeals court ruling last month on business interruption insurance.
"We paid everybody, but I don't know if I can do that again," Pettus said. "The ones who suffer are the workers of New Orleans."
The March 22 ruling from the 5th U.S. Circuit Court of Appeals said that in order for business interruption insurance to be paid on the basis of a "civil authority" clause, an evacuation order needed to be linked to damage other than at the insured premises, meaning that it had to reference damage in the broader area. Because the Aug. 30, 2008, evacuation order talked only about dangerous weather conditions that were expected in the New Orleans area and didn't actually reference property damage caused by the storm, such as damage that Gustav caused in the Caribbean, the insurance policy doesn't apply on a civil authority basis.
Had the storm caused physical damage to the Palace Cafe, Dickie Brennan's Steakhouse and Bourbon House, the restaurant group might have had a business interruption claim on a different basis. Gustav dealt only a glancing blow to the metro area and caused little damage.
The opinion is not good news for businesses -- and by extension, workers -- if a storm threatens but does not ultimately strike the city. It could put more pressure on public officials if they need to contemplate calling an evacuation during this year's hurricane season, which is forecast to be above average in terms of storm activity.
Pettus said his company paid its workers during Gustav because they still faced rent, mortgage payments and car notes no matter what happened with the storm, and would surely encounter extra expenses as they fled to safety.
Jobless claims reflect pain
Not all companies were so generous. Immediately after Gustav hit in September 2008, first-time unemployment claims in the New Orleans area shot up 500 percent, according to Bureau of Labor Statistics data compiled by University of New Orleans economist Janet Speyrer, and then plummeted back to normal levels shortly afterward. The spike speaks to the financial pain that evacuations can cause workers.
Now that it's clear that business interruption coverage will only help local businesses take care of workers under very limited circumstances, Pettus worries that it will put additional pressure on public officials in deciding whether to call a mandatory evacuation.
"This puts the mayor and the governor in precarious positions," Pettus said. "Do I put people out of work, or do I put them in harm's way? That's the decision they have to make."
In light of the opinion, Pettus wonders if it might help companies make successful business interruption claims if a mayor or parish president specifically referenced property damage in regions already hit by the storm as one of the reasons for the local evacuation.
"I would encourage the mayor to say, 'Because of the damage that occurred in this area...' and put a broad net out there as the reasons why he's declaring civil authority," Pettus said. "I think it will help."
In the meantime, Dickie Brennan & Co. is encouraging employees to save a few vacation days until the end of September to make sure they can cover themselves during the height of hurricane season in case an evacuation is called.
The city of New Orleans says it is open to trying to take steps to reduce the financial pain of evacuations for businesses and workers, but its primary concern is safety.
"We will certainly take into consideration any and all legal and financial ramifications for citizens and businesses in our decision to issue an evacuation order or emergency declaration," Deputy Mayor of Public Safety Jerry Sneed said. "Our primary concern is the safety and well-being of everyone in the city. We certainly encourage residents to save vacation days and money in the instance that an evacuation is mandated. We certainly do our best to ensure our citizens are prepared in advance of any unfortunate events."
The state of Louisiana leaves evacuation orders to local jurisdictions, but issues emergency declarations that set the stage for local orders and pave the way for federal help. Mark Cooper, director of the Governor's Office of Homeland Security and Emergency Preparedness, said that in recognition of the cost of storms -- and even near misses -- the state has created a Business Emergency Operations Center, or BEOC, on Louisiana State University's campus.
The goal, Cooper said, is to help create opportunities for local businesses, such as by having local restaurants cook for shelters and first responders, rather than ordering expensive Meals Ready to Eat from the federal government, and to make sure businesses and governmental bodies have a dedicated communication channel so businesses can reopen as quickly as possible. Better information from government can help businesses make plans for dealing with the storm, Cooper said, and giving businesses a means to alert officials about needs to get past a checkpoint or open a road or get electricity could help restart essential services like banks, grocery stores and gas stations more quickly after a storm.
"This is the first of its kind in the country. No one else has a state EOC connected to a business EOC," Cooper said. "By having this in place, we believe we're going to reduce the downtime."
'A very heavy call'
Despite these steps, Kathleen Young, general manager of the French Quarter Chateau LeMoyne hotel, said she read about the Brennan business interruption ruling the other day with unease.
Young, who is married to an insurance agent, knew that getting business interruption coverage was unlikely without physical damage to her property, so she didn't make a claim after Gustav.
But Young is also one of only a handful of hoteliers who successfully closed her hotel before Hurricane Katrina at a time when most properties prided themselves on sheltering employees and local guests in storms. She says she worries that news of the business interruption opinion could give public officials pause about calling for an evacuation, and could open the door to push-back from some businesses because of the cost of shutting down, since they will not be covered by insurance except in the most dire circumstances.
"It made me wonder whether the city would call for a mandatory evacuation. And knowing the reluctance of many of my peers to close in the first place, it made me wonder whether they would be more reluctant to close," Young said. "It's a very heavy call."
While she said she never has to be convinced that shutting down is the right call, she notes that memories are short and "a little bit of the shock and awe has worn off" over the past six years. Most of the hotel general managers who were here during Katrina have left, and the city's most recent memory is now Gustav missing the city but causing a run on food banks because of the financial pain it caused.
Meanwhile, she said, even if workers are lucky enough to have paid time off that they can invoke during a storm, vacation pay in the city's enormous hospitality industry isn't the same as what tipped workers earn on the job, so there's no easy answer for workers.
"It's a very, very tough decision for the guy who has to decide when it's mandatory, and it's really a tough decision for the business owners," Young said.