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Will NFL Sports Weather the COVID-19 Crisis? An Analysis of Event Cancellation Insurance
Cardboard cutouts and Pandemic exclusions—amidst COVID-19, the market is adjusting and carefully reviewing event cancellation policies in the sports industry.
The Los Angeles Rams’ SoFi Stadium may be up and running—hosting NFL games in the new 3.1 million-square-foot home with up to 100,000 seats—but fans are nowhere in sight with local orders still in place prohibiting large gatherings.1 The first game took place on September 13, 2020, amidst cardboard cutouts that fans could buy to be “in the stands.” 20% of season ticket holders have asked for refunds, while the rest have opted to roll their tickets into the next season.2
Sporting events generate significant revenue, from tickets to advertising and sports memorabilia. The Rams admit “the pandemic will have a major short-term impact on the team’s bottom line as revenue streams from everything from concessions to parking disappear.”3 Most sports institutions buy event cancellation insurance to protect the potential revenue from catastrophic events such as wildfires, power outages, or disease outbreaks. With COVID-19 still going strong and expected to continue at least through the beginning of the next year, many sports institutions are anxious to protect their players and find ways to mitigate losses. Even after postponing games or playing to empty stadiums, many sports institutions are still scrambling to generate revenue. The 2020 Olympics are an extreme example of potential increased costs, as it may cost upwards of $650 million to postpone the Games to 2021.4
Event cancellation policies are intended to insure against unexpected loss resulting from cancellation, abandonment, interruption, or postponement of the event. Event cancellation policies cover events ranging from conferences to live music events to sports games. The loss must be an “occurrence” beyond the control of the insured; past examples of such occurrences include the dome collapse at the Minnesota Vikings’ Metrodome5 and wildfires near a Raiders-Chargers game.6
Coverage ultimately depends upon the terms and conditions negotiated for the particular policy. Past outbreaks such as Legionnaires’ disease and the 2003 SARS outbreak have led the majority of insurance companies to exclude pandemics or provide only limited coverage. However, there may be coverage if an insured purchased an insurance endorsement or rider to add coverage for communicable disease to their policy. Event cancellation insurance typically provides:
A. EVENT CANCELLATION
We will indemnify you, up to the Limit of Insurance, for your loss as a direct result of cancellation, abandonment, curtailment, postponement, or relocation of the insured event to which this insurance applies.
B. APPLICATION OF COVERAGES
In order for insurance to apply to Section I, all of the following conditions must be met:
1. the loss must 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.
2. the loss must not be the direct or indirect result of any excluded cause as shown in Section II. –Exclusions of this insurance; and
3. you must comply with all other terms and conditions of this policy.7
An analysis of whether coverage exists will depend on several considerations:
First, determine whether the loss in question was the result of “an unexpected cause” or fortuitous event. Insurance is not a warranty, and does not cover loss or damage expected to occur (such as wear and tear), or caused by the insured’s own conduct (such as arson). Indeed, the doctrine of fortuity is a standard condition in all types of insurance policies such that some policies include a separate provision, as shown below:
9. PRE-EXISTING CIRCUMSTANCES
Circumstances existing or threatened at inception of the policy which were then known to you or any of your officers, directors, or partners as being circumstances which a reasonably prudent person would foresee resulting in a loss under this policy, unless such circumstances were advised to us in writing by you or any of your officers, directors, or partners and we agree in writing to accept such circumstances.8
Pre-COVID-19, event cancellation policies were more likely to find coverage unless disease outbreak was specifically excluded. Initially, COVID-19 was a fortuitous event—no one could have guessed what 2020 would bring. However since the outbreak of COVID-19, policy renewals will most likely exclude coverage for losses arising from COVID-19 across the board as not being fortuitous and otherwise constituting a “pre-existing circumstance.” As we are now in the midst of a pandemic, losses arising from COVID-19 will not come as a surprise to anyone or be considered fortuitous.
Second, review the policy’s terms and conditions that may act to exclude or otherwise limit coverage. For example, event cancellation policies typically include exclusions such as: communicable disease, civil commotion, financial failure, failure to make necessary arrangement, pre-existing conditions, and on-site construction. Coverage also may be limited by specific sublimits, which cap the total dollar amount recoverable for any one occurrence.
Third, determine what type of loss is covered by an event cancellation policy. Usually marketing, organization, and other out-of-pocket expenses are covered under a typical policy. Coverage for profits and revenue are often available for an additional premium. As a final note, a policy’s timing and mitigation requirements play a vital role in determining whether coverage applies; for example, there is likely no coverage for failure to provide timely notice of loss.9
Sports stadiums such as SoFi Stadium will likely have event cancellation insurance to mitigate unexpected losses. Whether there is coverage for COVID-19 will be dependent upon the terms and conditions of their specific policy, especially considering the Rams games have not been cancelled or postponed, but rather played without fans. While the Rams are in Week Ten with no prospect yet as to when fans will be back in the stadium, the stadium is preparing for a safe environment when that day arrives. For example, as reported on the Rams’ website:
Will SoFi Stadium and the Rams implement certain safety measures and protocols tied to COVID-19?
Yes, we will work with local and state officials as well as the NFL to create an environment to limit the risk of transmission of COVID-19. Measures may include social distancing, facial masks, cashless transactions, additional cleaning and more.10
Even with the surprising turn of events in 2020, the market is already adjusting to the new realities of risk arising under event cancellation policies by providing further clarity on disease outbreak and pandemic exclusions, adjusting sublimits in anticipation of risk, and reviewing policy renewals with an eye towards the future.
7 HDMG Entm't, LLC v. Certain Underwriters at Lloyd's of London Subscribing to Policy No. L009082, 355 F. Supp. 3d 373, 380 (D.S.C. 2018) (emphasis added).
8 Id. at 383 (emphasis added).
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