The coronavirus (COVID-19) continues to bring the UK and the world to a standstill. Businesses are facing cancellations (such as Wimbledon) or postponements (such as the Olympics) on a daily basis and there is significant impact on organisers, suppliers and consumers.
When considering their options, all businesses need to consider their insurance cover. Does your insurance protect you where your event is cancelled and/or postponed due to a ‘pandemic’?
There are some important steps that you can take now to protect the financial position of your business. If you have a specific event cancellation policy, we recommend reviewing its terms to see whether you have cover and whether a claim should be notified at this stage.
Policy wording and terms are different depending on the level of cover negotiated and paid for. In this article, we focus on event cancellation cover. We will issue further articles in the coming weeks regarding other types of cover that could be used to assist businesses dealing with COVID-19-related issues. Our next alert will focus on credit and political risk cover – every day, we hear of more businesses struggling to stay afloat as a result of COVID-19-related losses. Stay tuned for further know-how alerts from the Reed Smith Insurance Recovery team.
Event cancellation insurance
Event cancellation insurance is a type of contingency insurance. In the run-up to an event, significant costs will have been incurred and organisers will have contractual commitments to suppliers, artists and, perhaps, sponsors as well. Should an event be postponed or cancelled for a reason beyond an insured’s control – meaning they would, as a result, suffer financial loss – an event cancellation policy might offer some protection. Broadly, these types of policies protect an insured from irrecoverable costs and expenses that may be incurred as a result of an event having to be postponed or cancelled due to circumstances beyond the control of an insured.
Event cancellation insurance is different from many other forms of insurance as it is not a pre-requisite for cover that losses suffered by a business are consequent on some form of physical damage.
Event cancellation insurance can reimburse policyholders for certain costs and expenses incurred or loss of profit following the unforeseeable abandonment, postponement, interruption or cancellation of an event for reasons beyond the insured’s control.
Insurers will focus on the cause of an event being postponed or cancelled.
In order to trigger an event cancellation policy, such postponement or cancellation must usually be “beyond the insured’s control”. Accordingly, organisers should be careful to explain to insurers why an event is being postponed or cancelled. Is it as a result of a government mandate? Or has the organiser cancelled pre-emptively because of health and safety or liability concerns?
In practice, it will be easier to show that a decision was beyond the insured’s control where a government, or other relevant authority, ordered the cancellation or postponement of an event. Specifically in the UK, an insured should be aware that ‘advice’ from the government would not likely be sufficient to meet the conditions of the policy wording. Even if the insured took the decision to cancel or postpone an event in accordance with government advice, and for very good reasons, they may not be covered for events cancelled or postponed prior to the date on which the UK government ordered social distancing and enforced lockdown orders.
In many cases insurers will not pay if an event is pre-emptively cancelled due to fear of the pandemic’s spread. The insured should do what it can to show that the cancellation or postponement was unavoidable. Policy wordings may also require the insured to make a good faith effort to reschedule an event before cancelling it. Policyholders should establish an early dialogue with insurers, ensuring as far as possible that it is clear that the postponement or cancellation is for reasons beyond the insured’s control.
Again, all policy wordings are different, but we would expect event cancellation insurance typically to cover:
- Irrecoverable costs and expenses. These costs can include a performer or guest speaker cancelling (for example, due to illness); a venue being inaccessible (for example, due to closure or safety concerns); and/or unforeseen circumstances (for example, adverse weather) forcing you to cancel.
- Loss of revenue or profit. This is the net profit that would have been earned had the event taken place.
- Additional costs. In certain policies, there is also an ‘additional costs’ clause to reduce a loss if cancellation is threatened or the event needs to be re-arranged. This is specifically designed to mitigate the risk of cancellation and thus the risk of additional losses for the insurer.
Some insurers will, subject to the policy wording, pay any refund of fees or charges which an insured is under a legal obligation to return. Insureds need to be particularly careful where they choose to give refunds for ticketed events where they are not contractually obliged to do so, or where the decision is at their discretion. Some policies do include an extension for the payment of refunds where there is no contractual obligation to do so, if it can be proved to the insurer’s reasonable satisfaction to be “commercially essential”. However, unless some such extension is present, it has to be assumed that the insured will not be covered and thus they should think very carefully before making any such refunds.
Event cancellation insurance can be included as part of a wider insurance policy, or as a standalone policy with specific circumstances being taken into account (for example, a specific event).
In theory, an event cancellation policy can provide an insured with cover for certain costs, losses or expenses incurred as a result of a COVID-19-related postponement or cancellation. Each claim will depend on the specific facts and policy wording negotiated between the insurer and insured.
Your policy might include an extension. Extensions relevant to COVID-19 could include a communicable disease extension or a reduced attendance extension.
Communicable disease extension
The insured may have added an extension to cover loss of revenue sustained in the event of the interruption, postponement or cancellation of an event or production as a direct and sole result of a communicable disease. These extensions are often limited or qualified in the following ways:
- Excluding any loss arising directly or indirectly from threat or fear of the disease.
- Requiring an order of the government or a civil, public or local authority to cancel the event or production (i.e., by forbidding gatherings over a certain number of people) or to close down the venue in question, for cover to be triggered.
- Restricting the coverage only to outbreaks of disease which originate and/or manifest within the confines of the venue, directly leading to closure of that venue. This type of cover targets diseases such as Legionnaires’ disease (which one can catch by inhaling droplets of water from things like air conditioning), rather than something like COVID-19.
There appears to be a wide variation in the types of wording for communicable disease extensions. Consequently, it is crucial to review the exact wording in the relevant policy. We routinely see communicable disease extensions with a lower ‘sub-limit’ than the policy limit for cancellation cover. The sub-limit is often around £500,000, but the policy should be checked.
Reduced attendance extension
The insured may also have added an extension to cover loss of revenue in the event that a substantial number of attendees, performers, etc. cannot attend as a sole and direct result of the same unexpected, specific proximate cause.
These extensions are less likely to be engaged in the instance of a COVID-19 outbreak, as they are often limited in the following ways:
- The reduced attendance must be the only cause of the cancellation. In the case of COVID 19, the cause of the cancellation will also be the communicable disease.
- The cause of the reduced attendance cannot be excluded from the policy coverage. If the insured has not added a communicable disease extension, then COVID-19 would be an excluded cause of reduced attendance.
Some communicable disease extensions include reference to reduced attendance as a consequence of a communicable disease, where an insured has also bought the reduced attendance extension. This will usually be subject to the same sub-limit as the communicable disease extension and subject to the requirement that there must be a government or authority order imposing cancellation of an event or gatherings of a certain number of people.
An insured will need to consider whether its policy contains any exclusions and whether it has qualifying ‘write back cover’.
Look for exclusions for communicable diseases, which would include COVID-19. The policy could potentially exclude loss as a direct or indirect result of the communicable disease or fear or threat of the disease (whether actual or perceived). Some policies also exclude any loss suffered as a consequence of actions taken in controlling, preventing or suppressing the communicable disease, or fear or threat thereof. Cover under any such exclusion can be written back in (‘write back cover’) if the insured has purchased a specific policy extension, as set out above.
As explained above, policies may be written expressly to include specific insurance against cancellation because of infectious diseases. Nevertheless, we are learning that some insurers have already begun adding endorsements to policies to exclude COVID-19. Policies written before the end of 2019 are unlikely to contain such exclusions. If you have purchased express coverage for infectious disease cancellations, do check your policy to ensure that no such coronavirus endorsement has been added. In any event, policies renewing during 2020 are likely to have an explicit COVID-19 exclusion, and insurers may press to include a broader exclusion for other pandemics. Insurers are looking to remove ambiguity and reduce their exposure.
In particular, policyholders should consider renewal dates when deciding whether or not to postpone an event. For example, an insured may find itself in a position where an event in May 2020 is postponed to September 2020, and the policy renewal date is 1 June 2020. If the event in question is postponed until a date in the next policy period, the policy will either include a COVID-19 exclusion or the cover will be very expensive. An insured should speak to its insurers in these circumstances and seek to extend cover to the date of the postponed event, explaining that they are effectively mitigating costs by postponing the event, as opposed to having to cancel and issue refunds which might otherwise fall to be covered by the policy.
The limit of policies varies depending on what is available in the market and what level of cover an insured is prepared to buy.
Any sub-limit is commonly described as “any one occurrence and in the aggregate”, meaning that a limit of £500,000, for example, could apply in respect of any cancellations linked to the outbreak of COVID-19. The interpretation of “any one occurrence” will depend upon the facts but it is unlikely that the full limit will be available for each cancelled event.
Businesses should carefully consider any potential financial and operational consequences of cancelling or postponing events. Claims for irrecoverable costs and expenses incurred and lost profits will give rise to complex issues of quantification. Early consideration of these issues is critical because the insured will be required to prove the losses suffered, including the net profit which would have been earned had the event taken place.
An insured should be mindful, even in the current circumstances, to keep very clear records of the loss suffered in the event of a postponement or cancellation. The burden of proving and quantifying that loss will be on the insured and therefore records of all costs incurred and estimated profits (or historical profits from previous events if applicable) should be kept to ensure that losses can be readily evidenced.
The general conditions section of the policy wording will contain the obligations on the insured to engage with the insurers in the event of any circumstances or incidents that could give rise to a claim. A key obligation on the insured is the obligation to notify the insurers as soon as practicable after they become aware of the relevant circumstance or incident.
The insured needs to conduct an ongoing factual assessment as to how likely it is that an event will need to be postponed or cancelled. If postponement or cancellation becomes a realistic possibility, then the insured is advised to communicate that possibility to its broker (as relevant) and insurers (including any excess layer insurers).
Other policies to consider
As a result of the far-reaching impact of COVID-19, other types of insurance may be relevant. Public liability insurance may be applicable where a third party (scheduled to attend the event) is infected with COVID-19. Similarly, employer’s liability insurance may be triggered if an employee is infected with COVID-19.
You should consider your suite of insurance documents and ensure that all potential options for recovery have been considered.
Authorities around the world are enforcing tighter social measures and extending the time in which those measures will be in place in an effort to slow the spread of the virus. If COVID-19 continues to cause disruption, events scheduled for later in 2020 could be in jeopardy. If you are considering cancelling or postponing events later in the year as a result of COVID-19, reviewing your policy wording and having discussions with your broker now will avoid some uncertainty when the final decision on cancellation needs to be made. It will also help frame the presentation of any subsequent claim.
Accordingly, we advise you to review your insurance documentation now and think carefully about any looming renewal deadlines. COVID-19 is likely to impact the terms on which insurers will agree to renew your policy. If you are thinking of postponing or cancelling an event, we recommend that you establish an early dialogue with your broker and insurers. If you want further advice on policy review and potential coverage, or assistance with making a notification under an events cancellation policy, please do not hesitate to contact the Insurance Recovery team at Reed Smith
Our Reed Smith Coronavirus team includes multidisciplinary lawyers from Asia, EME and the United States who stand ready to advise you on the issues above or others you may face related to COVID-19.
Client Alert 2020-211