By RICHARD LIDDELL KC, 4 NEW SQUARE AND SARAH MCNALLY, PARTNER, HERBERT SMITH FREEHILLS
Many events, including music, theatre, conferences and exhibitions have been cancelled or postponed in the wake of COVID-19 and more will follow.
Sporting events at grassroots and professional level have also been hit hard. The most recent casualty are the Tokyo 2020 Olympic and Paralympic Games, which have been postponed until 2021, and is an event which has reportedly already cost the Japanese government at least £10 billion[1]. The IOC’s decision to postpone followed hot on the heels of Japan’s Prime Minister’s (Shinzo Abe) proposal to postpone for one year and Australia and Canada having confirmed that they would not be competing in Japan (with the chairman of the British Olympic Association saying that Great Britain was likely to follow suit). Torsten Jeworrek of the German insurer Munich Re told Reuters in February that his firm had provided event cancellation insurance for the Tokyo games “in the hundreds of millions of euros”[2]. Swiss Re has recently said it has 15% global market share of event cancellation cover and would face a $250 million loss if the Olympics are cancelled[3].
Other high-profile events have also suffered: for example, the Grand National has been called off; the World Snooker Championship at the Crucible has just been postponed; Six Nations’ games have been postponed; many Grand Prix have been cancelled, including the Australian Grand Prix; UEFA Euro 2020 is postponed until 2021; and all football in England is currently suspended. Although it is hoped that many events can be rescheduled and competitions (such as the Premier League) completed before the next season is due to begin, there must be a real risk that this will not be possible.
The cancellation or postponement of events will have an obvious and material economic impact, particularly for those businesses whose principal source of income derives from the successful running of these events.
The question is whether insurance will come to the rescue? The answer is that it depends on the nature of any insurance cover obtained and on the applicable policy wordings. For those businesses that hold event cancellation insurance, now is the time to consider with your brokers and/or legal team precisely what cover has been obtained, whether it could have a role to play and what steps need to be taken to improve the chances of the insurer confirming cover. For insurers, careful consideration will of course need to be given to the policy wording and any extensions of cover and whether (for example) the notification conditions under the policy have been met.
In this short article, Sarah McNally[4] (a partner in Herbert Smith Freehills) and Richard Liddell QC[5] (a barrister at 4 New Square) address some of the issues that policyholders/insureds who took out sporting event cancellation insurance and insurers are likely to be grappling with and which may well end up being played out in the courts or in arbitration. Although the focus in this article is on sporting events, the same or similar principles are likely to apply across the board for any cancelled or postponed event.
Event Cancellation Insurance
Event cancellation insurance differs from many other forms of insurance in that it is not a pre-requisite for cover that the business losses are consequent on some form of physical damage. There have been many articles on the scope of business interruption cover in the context of COVID-19, but less has been said about event cancellation insurance.
However, given that last week an article estimated that the market could be exposed to around $8 billion of losses in relation to event cancellation alone, this form of insurance is likely to move towards centre stage.
Broadly speaking, and subject to various exclusions and limitations, an event cancellation policy is designed to cover the cancellation, postponement or curtailment of the event because of circumstances that are unavoidable and due to reasons beyond the insured’s control.
Where cover does apply there may be cover (up to the sum insured and subject to any deductibles) for irrecoverable costs and expenses and loss of net profit and/or additional expenses. All of this will, in turn, give rise to complex issues of quantification not least given the likely web of contracts with suppliers and customers affected. Early consideration of these issues is critical not least because the insured will almost inevitably be required to prove to the insurer’s satisfaction that the losses were suffered, including that the net profit would have been earned had the event taken place.
Policy Wording – overview
Event cancellation insurance is generally bespoke and each policyholder will need to examine the contents of their policy schedule and the particular policy wording to see what is covered and what is not, albeit we have seen a degree of commonality in various policies when it comes to conditions and exclusions.
For example:
- it will likely be a pre-requisite to cover that the cancellation or postponement of the event was due to reasons “beyond the insured’s control” (or similar wording); and
- many policies will expressly exclude any losses arising out of or resulting from certain communicable diseases such as swine flu or avian flu[6]. However, some policyholders may have write back cover for losses arising out of the cancellation or postponement of events resulting from communicable diseases (perhaps all, or perhaps only some, categories of communicable diseases)[7]. Whether and when it became a pandemic may also be relevant.
Certainly there is the potential for recovery – Chubb’s “Event Cancellation” factsheet sets out some “case studies”, one of which is that “a conference due to be held in Hong Kong had to be cancelled due to an outbreak of a communicable disease” – and Chubb “paid the irrecoverable costs and expenses incurred in rescheduling the event for another time”[8]. So it is all about the specific facts and policy wording negotiated.
We also note in passing that in the USA it is reported that event cancellation coverage may not exclude communicable disease in a standard event cancellation policy form[9].
Policy Wording – “beyond the insured’s control”
The timing and cause of the event’s cancellation or postponement are bound to feature prominently in analysing whether the insurance policy is likely to bite.
As noted above, event cancellation policies will likely require the event to have been unavoidably cancelled, abandoned or postponed. The wording may refer to the cancellation etc. being as “as a sole and direct result” of a cause “entirely beyond your [the policyholder’s] control”.
If the relevant government has prohibited such events or gatherings (and such prohibitions are increasing almost daily) then there should be no room for debate. If, however, a policyholder cancels or postpones a tournament or competition without being specifically required to do so by the relevant government because (for example) there were health and safety or liability concerns and/or players were signalling that they would not be participating, the insurer may argue that the cancellation or postponement was not unavoidable or beyond the insured’s control. However, whether they would succeed in such an argument is certainly not clear cut in light of these extraordinary circumstances – by way of example only, without paramedic staff available it is hard to see how such events could practically and legally be run; further is a policyholder “able” to run an event if by doing so it is opened up to potential legal liability? The comments by the Chancellor in the Budget Select Committee last week indicated some acceptance that requiring people to stay at home is comparable to requiring premises to close could be relevant here[10].
In the circumstances, policyholders and insurers will need carefully to consider the:
- timing of the cancellation or postponement relative to dates when, for example, COVID-19 became notifiable and/or the UK government’s announcement on 16 March 2020 that everyone should avoid gatherings and crowded places.[11]
- the cause of the cancellation or postponement (e.g. was it unavoidable because of the restrictive measures, guidance or governmental orders in place or because it could not be legally and safely continued).
It will be interesting in due course to see how insurers respond to claims under event cancellation insurance policies and how (if litigation ensues) the Court or Arbitrator will apply the words “beyond the Insured’s control” in practice. Policyholders may be seeking some degree of commercial pragmatism and purposive construction given the purpose for which such polices are taken out. The UK’s government’s major shift in strategy in the last weeks and the escalation of restrictions imposed may support this approach. Indeed, in light of recent emergency legislation giving the government wide-ranging powers to close premises and ban gatherings, many event organisers will now feel constrained to cancel or postpone a sporting event (on the basis it would be banned in any event if they tried to hold the event) and will say that this is unavoidable and beyond their control.
Anecdotally, in the context of a wedding cancellation policies, the Guardian has reported that claims made under these policies are being refused despite customers having paid for policies stating that cover will be provided if “the booked venue for the wedding or wedding reception being unable to hold your wedding due to an outbreak of infectious or contagious disease”[12]. One provider is reported in the press to have said that it would only consider a wedding venue “unable” to hold a wedding due to the virus if the company closes its doors, either through self-closure or due to government legal measures. This may signpost that for the period until the government required wedding venues to shut or made mass gatherings illegal, at least some insurers are likely to seek to decline cover for decisions made by couples to cancel their wedding events in light of COVID-19. Whether they will succeed remains to be seen. Even on this analysis, however, those arguments may have been overtaken by very recent events, including the UK government ordering a lockdown and cancellation of all weddings.
Insurers may well seek to deploy similar arguments when faced with a claim by a policyholder for losses arising from or resulting from a cancelled or postponed sporting event, although each claim will turn on its own facts and the scope of insurance cover. Moreover, a policyholder is likely to hope that it will in any event have the sympathetic ear of the Court or Arbitration. But watch this space.
Policy Wording – exclusions and write back
In addition to satisfying the insurer that the cancellation or postponement was unavoidable and beyond the policyholder’s control, the policyholder will need to consider whether it has to navigate through one or more exclusions and whether it has qualifying write back cover.
Like most event cancellation policies, sporting event cancellation policies will generally contain exclusions relating to communicable diseases, subject to write back cover.
For example, some wordings we have reviewed provide that the cancellation and abandonment insurance does not cover “losses arising out of, contributed to by, or resulting from “any communicable disease” which leads to, among other things, “any travel advisory or warning being issued by a national or international body or agency” and “any fear or thereat thereof (whether actual or perceived).”
In the absence of any write back extending cover to losses resulting from or relating to a communicable/notifiable disease, any claim made by a policyholder under the terms of this wide exclusion clause for losses caused by the cancellation or postponement of an event as a result of COVID-19 looks difficult, albeit the exclusion is not for any communicable disease but only for those where the criteria are met, so the criteria would need to be carefully reviewed.
Critically, there may well be write back cover, either generally or for specific communicable diseases, which would prevail over any general exclusion for communicable diseases and allow the policyholder to recover. From what we have seen so far, this is the heart of the cover which is likely to assist policyholders with claims relating to COVID-19.
Either way, some wordings refer more specifically to communicable diseases and a virus or other which is “related to” diseases such as avian flu or swine flu or similar. Whether or not COVID-19 is genetically related to any of those diseases will be a matter of expert evidence. According to some online reports, COVID-19 is genetically related to the coronavirus responsible for the SARS outbreak in 2003 (albeit the viruses differ in various respects); and on 11 February 2020 the WHO announced “COVID-19” as the name of the disease caused by the virus SARS-CoV-2.
However, even if COVID-19 is genetically related to any of the named diseases, what any such term means as used in the policy may be a different question. Insurance policies are not scientific documents and, as a matter of English law, the objective intention of the parties, as reflected by the actual words used, will be what is critical. It may be argued, for example, that the policy, properly construed, was intended to exclude only known viruses related to bird flu or swine flu but not an unknown virus like COVID-19. The courts have confirmed recently that any construction of a policy which means that the policy has little practical application is unlikely to be one that a court will find persuasive, so that concept may also feature in any reasoning. [13] Whatever the rights or wrongs of these arguments, such concepts may be ripe for debates and disputes between the policyholder and insurer.
Other policy wordings that we have seen seek to exclude “[c]ircumstances arising through, or because of restrictions imposed by the local authorities, or regulatory bodies”. This may well be invoked by insurers, but also batted back by policyholders as being inapplicable depending upon the reason for cancellation or postponement of the event.
It goes without saying that the policy schedule and policy wording will repay careful reading as the risk appetite of one insurer might well be very different to another insurer.
Going forward, it is extremely unlikely that a business will be able to buy specific cover (at least not at this stage) to protect against cancellations or postponements resulting from COVID-19.
Policy Wordings – notification conditions
While it is of course important to consider the nature of the cover, any write back (add-ons) and whether the policy schedule and applicable policy wording mean that cover will or will not be provided, it is vital not to overlook the conditions of the policy applicable to the claims process itself.
It will almost certainly be a condition of the policy and any liability provided by the insurers that they are immediately notified by the policyholder of any incident which could or is likely to result in a claim under the policy (the precise wording will differ depending upon the particular policy) and that notification of any claim be given within a usually short time-scale.
Careful consideration will need to be given, therefore, by policyholders and insurers alike that those conditions have been met.
Conclusion
The prime concern of policyholders holding event cancellation insurance will of course be the health of their employees, family and friends and the general sporting community. However, the financial health of the business will remain a significant concern. Accordingly, the role that insurance has to play cannot be overlooked if the right return for premium paid is to be obtained.
Business with sporting event cancellation insurance will need to navigate a number of requirements to recover their losses arising from the cancellation or postponement of events. However, given the scale of some of the losses that are likely to result from the cancellation or postponement of events, it is vital not to delay in considering the nature and extent of any insurance cover. It is likely that such consideration will require the input from insurance brokers and/or your lawyers.
Insurers that have provided event cancellation insurance will doubtless be reviewing the terms of their policyholders’ policies to work out their potential exposures.
It would appear from press reports that the general view of the insurance industry (at least a few weeks ago) is that the COVID-19 virus was unlikely to result in a multitude of expensive pay-outs. However, event cancellation insurance contracts are generally bespoke and some policyholders might well find that their event cancellation insurance policy is very much in play.
With so many major sporting events having already been cancelled or postponed and with more inevitably to follow, insurers are likely to be faced with substantial claims under event cancellation policies. The scale of losses means that many policyholders are very unlikely to take no for an answer from insurers unless the position is absolutely clear; and insurers are unlikely to be swayed by arguments from policyholders that their refusal to provide cover is “just not cricket”.
We wish all the best to our readers. Keep safe and well.
This article is also available to view on Herbert Smith Freehill’s Insurance Blog here.
This article is for reference purposes only. It does not constitute legal advice and should not be relied upon as such. No warranty, express or implied, is given as to its accuracy and we do not accept any liability for error or omission. Specific legal advice about your specific circumstances should always be sought separately before taking any action.
© Herbert Smith Freehills 2020 and Richard Liddell QC
[1] https://www.bbc.co.uk/sport/olympics/52020134
[2] https://uk.reuters.com/article/uk-olympics-2020-coronavirus-insurance/insurers-could-lose-billions-if-coronavirus-prompts-olympics-cancellation-idUKKCN20M1YF
[3] https://www.law360.co.uk/insurance-uk/articles/1255345/swiss-re-faces-250m-loss-if-olympics-canceled?nl_pk=bf9e820e-ce4a-415d-9b76-f3a824f783a4&utm_source=newsletter&utm_medium=email&utm_campaign=insurance-uk
[4] Sarah is a partner who advises clients on contentious and non-contentious insurance matters: https://www.herbertsmithfreehills.com/our-people/sarah-mcnally
[5] Richard is a barrister who frequently advises on policy interpretation and coverage issues. He is also recommended as a leading practitioner in the legal Directories for Sports law: https://4ns-old.localhost/barristers/richard-liddell/
[6] A communicable disease, like COVID-19, is an illness caused by viruses or bacteria that are spread from one person to another through contact with contaminated surfaces, bodily fluids, blood products, insect bites or through the air.
[7] Some policies may include an option where the insurer will “write-back” (i.e. add-back in) some cover for liability which would otherwise be excluded under the standard form of the insurance contract.
[9] https://riskandinsurance.com/hospitality-and-retail-during-coronavirus/
[10] https://committees.parliament.uk/work/139/spring-budget-2020/publications/
[11] In Scotland, the First Minister announced on 12 March 2020 that, from 16 March, mass events should not take place and advised that organisers should cancel or postpone all mass events of 500 people or more (indoors or outdoors). Restrictive measures have of course moved on since then.
[12] https://www.theguardian.com/money/2020/mar/21/coronavirus-insurance-cover-travel-weddings-income-rent (21 March 2020).
[13] Zurich v Manchikalapati [2019] EWCA Civ 2163 (https://www.bailii.org/ew/cases/EWCA/Civ/2019/2163.pdf)
