As noted in our previous Legal Alerts concerning insurance coverage for coronavirus related issues, as businesses are forced to close, travel is restricted, and supply chains are disrupted, COVID-19 insurance claims will proliferate, likely affecting all lines of coverage, particularly property and general liability coverages. In this note, we focus event cancellation insurance.
As COVID-19 has forced the country indoors, businesses, as well as conference and event organizers, are being forced to determine if, or even when, to cancel or reschedule their events. One of the key considerations in the determination to cancel or postpone an event is the potential applicability of any event cancellation insurance that the organizer may have.
Event cancellation insurance generally provides coverage for the cancellation, abandonment, disruption, or rescheduling of the event. The words “cancellation” and “abandonment” are each generally defined as the inability to commence or complete an event. A variation of the definitions of “cancellation” and “abandonment” can include the “physical or legal inability” to commence or complete an event. “Disruption” is generally defined as the “unavoidable partial closure” of the event, and “rescheduling” is generally defined as the “unavoidable postponement” of the event to another time or the “unavoidable removal” of the event to another location. Thus, the first consideration in determining whether an event cancellation policy may apply to provide coverage is whether the event organizer was truly unable to complete or commence an event, or left with no other choice than to postpone the event. Furthermore, the event cancellation policy may also have a provision that provides coverage for “enforced reduced attendance, which can be defined as an “abnormal and substantial reduction in the projected attendance for the insured event, of either attendees or exhibitors, based upon historical data for such insured event.”
Although the Center for Disease Control has recommended that gatherings be limited to 10 or less, the individual states and local municipalities have been the ones that have issued, or not issued, orders limiting gatherings. If an event is in a state or municipality that has limited gatherings to the point that holding the event would be in violation of such an order, then it is fairly clear-cut that the event would be unable to be commenced or completed. A more difficult situation arises where a state or municipality has not limited gatherings or has only limited gatherings until a date prior to the commencement of the event. In such instances, it is less clear whether an event organizer may be unable to commence or complete an event or face a situation where partial closure or postponement of the event is unavoidable. An additional wrinkle could be whether the event arguably could be completed or commenced in a virtual format. An express condition in many event cancellation policies is that the insured “shall at all times do all things necessary to avoid or diminish a loss under this policy ...” Furthermore, if the policy provides coverage for enforced reduced attendance, an insured will have to weigh whether to cancel or postpone the event completely, or proceed with the event and recover the loss attributable to the reduced attendance.
The next thing to consider under an event cancellation policy is the potential exclusions to coverage. Many event cancellation policies exclude coverage for loss arising from a communicable disease, or the threat or fear of communicable disease, whether actual or perceived, and whether or not the spread of the disease in question has officially been labeled a pandemic.
These exclusions often expressly refer to certain previous global disease events, such as SARS, MERS, and Avian Flu, and may contain a catch-all provision relating to “any other” flu variant or communicable disease leading to the restriction on movement of people and/or goods. The term “communicable disease” can be defined as an illness caused by a pathogen and transmitted from an infected person or animal to another person or animal. This definition would clearly encompass COVID-19. Certainly, an exclusion for a communicable disease could prove devastating to an event organizer that was looking to its event cancellation insurance to help make it whole following a COVID-19 related cancellation. Given this, event cancellation policyholders should examine their coverage closely to determine whether there is a disease-related exclusion and whether such exclusion has been deleted or modified by endorsement. Furthermore, event organizers looking to purchase event cancellation insurance should make sure that the coverage they are purchasing does not have a disease-related exclusion.
The amount of the loss covered by an event cancellation policy will generally fall into one of two categories. The first category is the sum of expenses incurred from the event, less gross revenue retained after refunds, and less any savings the insured was able to obtain by mitigating its loss. The second category of loss under an event cancellation policy is typically the net profit the insured would have earned had the event occurred. Event cancellation policies will generally calculate loss based on one of these two categories, or calculate loss as the greater the two categories. An important consideration for an insured is to make sure that it complies with any mitigation obligations that it may have under the policy.
In the coming weeks and months, many business and event organizers will be faced with a difficult decision of whether to cancel or postpone an event. The difficulty of that decision can potentially be reduced by an event cancellation policy. However, before deciding to cancel or postpone an event, it is important that the insured understand the provisions of its event cancellation policy and how any decision to cancel or postpone may impact the coverage under that policy.