By Thomas Maeglin

Law360 (March 26, 2020, 2:13 PM EDT )

Thomas Maeglin

Suddenly, an often-neglected insurance product is about to receive a lot of attention. Organizers of large events all over America are reexamining whether they obtained event cancellation insurance and, if so, what it covers.

Event-Related Losses in Connection With Preventing Spread of the Virus

Many fear that the economic effects of the COVID-19 pandemic will be deep and lasting. Social distancing and other efforts to prevent the spread of COVID-19 have brought various kinds of group activities to a screeching halt. The immediate effects on business and commerce are painfully easy to see, as stores empty of customers, bars and restaurants operate on limited capacity, and the stock market plummets.

Gatherings of large groups at entertainment performances, sporting events, business meetings, professional conferences and trade shows are, of course, out of the question. With national, state and local authorities taking extraordinary measures to limit personal contact and organizations everywhere concerned about the health and safety of their members and those they serve, countless events have been cancelled or postponed. That means deposits and prepayments may be lost, costs of other preparations may have to be absorbed, and expected revenues could vanish. Losses in connection with cancelled public events are already being estimated to be in millions of dollars.

All this raises the important, if uncomfortable, question: Who will bear the loss? In most cases, the event organizer's first step will be to negotiate with vendors and providers and to recover as much as possible under the terms of the rental agreements, service contracts and bills of sale. For some, that recovery will be limited, and they will look to their insurers.

Event Cancellation Insurance

Those who have obtained event insurance may be in luck. Event insurance refers to the package of coverage for the sponsor of public or private events, such as concerts, festivals, conferences, trade shows, sporting events and celebrations.[1] Often, this includes a form of cancellation insurance.

A familiar example of cancellation coverage in the consumer context is wedding insurance, which is purchased by families in advance of a wedding to provide indemnification due to wedding cancellation or postponement for a variety of reasons such as weather-related catastrophes.[2]

In the commercial context, event cancellation insurance similarly indemnifies the policyholder in the event of cancellation, postponement, rescheduling or abandonment of the insured event. The policy typically insures against perils that are those outside of the control of the event planner.

For example, covered perils may include weather and environment-related perils such as rain, snow, wind and earthquakes; war, terrorism, sabotage, and civil or political unrest; property damage to or loss of availability of venue; nonappearance of key speakers, performers or personnel due to death, injury or illness; or even satellite and signal transmission failure.[3]

Unfortunately for many today, coverage for communicable disease outbreaks, such as a coronavirus, is typically not included in a standard event cancellation insurance policy.[4] This does not mean that there are no policies which provide coverage for cancellation of events in response to COVID-19, or that coverage is not available on other bases (such as, perhaps, economic recession). As always, the insurer and the insured must look to the terms and provisions of their policies.

For those beginning to grapple with whether their insurance policies provide coverage for an event cancellation, there are a few court decisions that chart what to look for.

Is There Event Cancellation Coverage?

First, of course, is whether the coverage was offered and purchased. In Penton Media Inc. v. Affiliated FM Insurance Company,[5] the plaintiff scheduled an annual trade show to be held at the Jacob K. Javits Convention Center in New York City in early October 2001. The attacks on the World Trade Center on Sept. 11, 2001, and the ensuing commitment to use the premises for emergency operations, led the plaintiff to postpone the trade show.

It then sought proceeds of a policy it had obtained in advance from defendant, claiming coverage under business interruption provisions because it had looked into, but declined to purchase comprehensive event cancellation insurance. The high cost of the premium, for the plaintiff, had made the event cancellation coverage prohibitive.

In determining that the policy coverage was not triggered by the events surrounding the postponement, the court acknowledged:

The difficult situation the parties faced regarding the events to be held at the Javits Center following the 9/11 attack. However, it was [plaintiff]'s choice not to purchase broad Event Cancellation Insurance that would have covered it in the absence of an order of civil authority. The coverage it did purchase, even if the Javits Center were a described location, only applies when there is an actual order of civil authority blocking access to a venue. There was no such order in this case.

However, the court found that the plaintiff's research into event cancellation insurance would not be used against it in interpreting the terms of other coverages.

If There Is Event Cancellation Coverage, How Do the Policy Terms Apply?

Assuming that the insured does have some form of event cancellation coverage, the question becomes how the policy applies to the particular loss. Just as with any policy, one looks to whether there has been a triggering event under the insuring agreement, whether any exclusions bar coverage, and whether the parties have fulfilled all conditions.

One can find an excellent illustration of the way in which a cancellation policy is analyzed in HDMG Entertainment LLC v. Certain Underwriters at Lloyd's of London Subscribing to Policy No. L009082.[6] This case concerned a claim arising from cancellation of an entertainment event known as the Swamp Fox Biker Bash. The event was to be held in May, and the plaintiff applied for event cancellation insurance in mid-February.

In January of the same year, in preparation for the event, the plaintiff contracted for installation of a communications system at the venue. The system was crucial, and the vendor estimated it would complete the work in mid-March. The vendor did not meet that estimated date and gave a new estimated completion date for late April, roughly 10 days before the event.

However, further delays occurred, and the vendor informed the plaintiff about a week before the new deadline that it would not complete the system until after the event was scheduled to begin. The defendant, unaware of these complications, issued the policy in late April, with an effective date in late March. Two days after the policy was issued, plaintiff gave notice that the event had to be cancelled, due to the vendor's failure to meet its installation deadlines.

The defendant commenced an investigation that continued for a year, until the plaintiff commenced an action alleging breach of contract and statutory and common law bad faith. Defendant denied coverage shortly thereafter and sought to rescind the policy.

In the litigation, the insurer disputed that the claim triggered policy coverage because the cancellation was not beyond the insured's control. The policy covered loss "as a direct result of cancellation, abandonment, curtailment, postponement or relocation of the insured event." Further, the loss had to be "the direct result of an unexpected cause beyond your control and any party who is contracted by you to perform a function critical to the successful fulfillment of the Insured Event other than a principal speaker or entertainer."

The insurer argued that the plaintiff had chosen the venue, knew about the need for the communications, contracted with the vendor and failed to seek alternatives when the delays began. The court found several issues of fact that barred the insurer's motion for summary judgment, such as whether selecting the venue meant that that the insured controlled the installation; what the insured knew about the system installation at the time it applied for the policy and about the delays; and whether it sufficiently sought alternatives.

The insurer further argued that various exclusions barred coverage for the Biker Bash losses. These exclusions were for financial failure, lack of support, failure to make necessary arrangements, preexisting circumstances and breach of duty of care. The plaintiff raised questions of fact regarding each one.

Similarly, the court found issues of fact as to whether the plaintiff satisfied conditions requiring it to give prompt notice; to do all things necessary to avoid or diminish a loss; and to "use best efforts to rearrange any insured event that has been subject to cancellation or abandonment in order to mitigate any loss covered hereunder." The court denied the insurer's motion for summary judgment dismissing the breach of contract claims but granted summary judgment dismissing claims for bad faith on the basis of a failure to investigate, where investigation was not required by the policy.

If the Policy Covers the Loss, What Is the Proper Recovery?

Finally, if there is coverage for the event cancellation and no exclusions or conditions relieve the insurer of its duty to indemnify, what must it actually pay the insured?

Once again, the policy controls, and the value of the insured's monetary recovery depends upon what the insured purchased and what the policy provides. Those were the issues in Defeat The Beat Inc. v. Underwriters At Lloyd's London.[7]

The unhappy event in Defeat the Beat was an outdoor marching band competition. The evening event began in a light rain that soon grew into thunder and lightning. The storm only interrupted the competition for 35 minutes; yet the damage had already been done. Patrons and attendees began leaving.

Sadly, attendance fell 35% from the prior year, and the event generated less program and attendee income, less T-shirt revenue and fewer sales of CDs. Happily, the event organizer had insurance, or, rather, a proposal for event cancellation insurance that the organizer received before the event, based upon its application. The organizer notified the insurer of the claim and at that point received a copy of the policy. This policy provided that the organizer would be indemnified for:

Ascertained Net Loss (as defined herein), should the insured Event(s) described in the Schedule, be necessarily Cancelled, Abandoned, Postponed, Interrupted or Relocated, in whole or in part, which necessary Cancellation, Abandonment, Postponement, Interruption or Relocation is the sole and direct result of any cause beyond the control of the Assured and the participants therein (except as hereinafter excluded).

The policy defined "ascertained net loss" to mean:

Such sums as represent:-(a) Expenses which have been irrevocably expended in connection with the insured Event(s), less any savings the Assured is able to effect to mitigate such loss, and (b) Profit (where insured and stated in the Schedule) which the Assured can satisfactorily prove would have been earned had the insured Event(s) taken place.

The policy showed a limit of indemnity excluding profit, but it left blank the amount of any limit of indemnity including profit. The organizer claimed a loss of more than $350,000; however, the insurer agreed to pay only about a tenth of that amount, for nonrefundable loss due to the interruption of the event because of adverse weather. The organizer soon commenced suit.

Upon the defendant insurer's motion for summary judgment, the court agreed that the plaintiff "failed to show that the loss complained of is embraced within the insuring language of the policy." The proposal expressly stated that coverage included nonrefundable costs and expenses, but not profits. Under the policy, ascertained net loss only included profits "where insured and stated in the Schedule." The schedule did not mention profits. Thus, the insurer established that lost profit from low ticket sales, low DVD sales, low T-shirt and souvenir sales caused by the 35-minute interruption were not a part of ascertained net loss, within the policy.

In rebuttal, the organizer "failed to set forth specific facts or forecast evidence that it incurred any non-refundable expenses and costs as a result of the 35-minute interruption in excess of the $37,135.20 that defendants have already paid."

Each Case Is Unique

No matter what the language of the event cancellation policy, the particular coverages included, and the circumstances of the loss, each event cancellation claim will require careful, prompt attention to the parties' rights and obligations under the policy and the evidence supporting the claim. Claims for event cancellation during the COVID-19 outbreak will no doubt present numerous challenges.

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Thomas Maeglin is a partner at Abrams Gorelick Friedman & Jacobson LLP.

The opinions expressed are those of the author(s) and do not necessarily reflect the views of the firm, its clients, or Portfolio Media Inc., or any of its or their respective affiliates. This article is for general information purposes and is not intended to be and should not be taken as legal advice.

[1] See https://www.irmi.com/term/insurance-definitions/event-insurance.

[2] See https://www.irmi.com/term/insurance-definitions/wedding-insurance.

[3] See, e.g., "Event Cancellation Insurance", https://www.sadlersports.com/eventcancellationinsurance/.

[4] See "Coronavirus and event cancellation insurance", Washington State Office of the Insurance Commissioner, available at https://www.insurance.wa.gov/coronavirus-and-event-cancellation-insurance.

[5] Penton Media, Inc. v. Affiliated Fm Insurance Company, 2005 WL 8171363, 1:03 CV 2111 (N.D. Ohio, Eastern Division. September 30, 2005).

[6] HDMG Entertainment LLC v. Certain Underwriters at Lloyd's of London Subscribing to Policy No. L009082, 355 F.Supp.3d 373, 2018 WL 6065351 (D. S.C. 2018).

[7] Defeat The Beat, Inc. v. Underwriters At Lloyd's London , 194 N.C.App. 108 669 S.E.2d 48 (N.C. Ct. Appeals 2008).

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