United States: COVID-19 And Event Cancellation Claims: Post-pandemic Developments

This practice note examines event cancellation coverage in general to identify the issues that will be at the forefront of legal disputes in the coming years. Further, it also examines how the few reported cases to date may or will affect coverage going forward. Finally, the practice note addresses the future and examines what the event cancellation insurance market might look like post-COVID-19. A general overview of the coverage provided by typical event cancellation insurance policies is also discussed.

For additional information about event cancellation coverage, see COVID-19 Event Cancellation Claims PreLitigation, COVID-19 Event Cancellation Claims PreLitigation Checklist, COVID-19 Event Cancellation Claims Litigation, COVID-19 Event Cancellation Claims Litigation Checklist, and COVID-19 Insurance Litigation Resource Kit. See also New Appleman Sports & Entertainment Insurance Law § 16.01 (Event Cancellation Insurance Overview) and New Appleman Sports & Entertainment Insurance Law § 16.02 (Event Cancellation Insurance Key Practice Insights).

Background

It is obvious by now that COVID-19 has significantly affected businesses, perhaps none more so than those businesses who plan and host special events. These types of insureds have seen events of all kinds cancelled because of the pandemic. Many such businesses procured event cancellation insurance, which they no doubt thought would provide coverage for just this type of situation. In reality, though, many of these businesses have discovered that obtaining coverage under an event cancellation policy is complicated and involves fact-intensive inquiries concerning, among other things, the true cause of the cancellation, and whether the event is actually cancelled or just being rescheduled. The answers to these questions depend largely on the policy language and the facts of each case. Nearly two years after the onset of the COVID-19 pandemic, policyholders have filed lawsuits seeking coverage under event cancellation policies. While some rulings have trickled in, event cancellation case law remains sparse.

For additional information about event cancellation coverage, see COVID-19 Event Cancellation Claims PreLitigation, COVID-19 Event Cancellation Claims PreLitigation Checklist, COVID-19 Event Cancellation Claims Litigation, COVID-19 Event Cancellation Claims Litigation Checklist, and COVID-19 Insurance Litigation Resource Kit. See also New Appleman Sports & Entertainment Insurance Law § 16.01 (Event Cancellation Insurance Overview) and New Appleman Sports & Entertainment Insurance Law § 16.02 (Event Cancellation Insurance Key Practice Insights).

Typical Coverage

Businesses seek out event cancellation insurance because the cost of planning and hosting an event is often very expensive. Accordingly, businesses purchase event cancellation insurance to provide coverage for losses arising from the cancellation of such events. Typically, these are major events, such as professional sporting events, concerts, and conventions. Generally, event cancellation policies indemnify the policyholder for losses arising from the unavoidable cancellation, curtailment, postponement, removal to alternative premises, or abandonment of an event, and for any enforced reduced attendance. Coverage is often written on an all-risk basis, meaning that coverage is triggered if the cancellation is beyond the control of the insured, subject to a list of exclusions. Alternatively, coverage may be provided on a specified perils basis, meaning coverage is triggered only by the happening of certain listed perils. A typical specified perils event cancellation policy may provide coverage for "Cancellation, Interruption or Postponement of the Event which is the sole and direct consequence of any sudden and accidental occurrence beyond the Insured's control . . . ." Thus, the key coverage-related elements under this language are that:

• Coverage is provided not only for a full cancellation, but also for an "interruption" or "postponement" of an event
• The cancellation, interruption, or postponement must be the "sole and direct consequence of a sudden and accidental occurrence" –and–
• The occurrence must have been beyond the insured's control

For additional insight, see New Appleman Sports & Entertainment Insurance Law § 16.03 (Assessing the Scope of Event Cancellation Coverage).

From this, we can identify the threshold issue for coverage to apply—identifying the cause of the cancellation, interruption, or postponement. This leads us to our first case analysis.

Is It Even a Covered Loss – What Is the Proximate Cause of the Loss?

The threshold issue facing insurers and policyholders pertaining to COVID-19 and event cancellation insurance is identifying the proximate cause of the loss. Identifying the proximate cause of the loss is critical because, generally, coverage is only triggered if the loss is solely and directly caused by an accidental event beyond the insured's control. Just a few months ago, the California Superior Court addressed this issue in a case involving the rock band Metallica and the cancellation of several South American concerts. In particular, the court refused to dismiss Metallica's claim against its insurance carriers for alleged pandemic-related concert cancellations. Frantic, Inc. v. Certain Underwriters at Lloyd's et. al. Case No. 21STCV21403 (Cal. Super. 2021). The court held that it could not dismiss the claim, where the "proximate cause" of the loss was not established. Metallica claimed that it cancelled a set of six South American shows, scheduled to start on April 15, 2020, due to the pandemic, and submitted a claim to Certain Underwriters at Lloyd's ("Underwriters") under its all-risk cancellation, abandonment, and nonappearance policy. Underwriters refused to provide coverage for the postponements, and Metallica sued, alleging breach of contract, as well as tortious breach of the implied covenant of good faith and fair dealing.

Underwriters filed a motion to dismiss Metallica's complaint based on application of the policy's virus exclusion, which Underwriters relied upon to deny the claim. Metallica argued that the exclusion was inapplicable because Underwriters could not establish that the pandemic was the efficient proximate cause of the cancellations. To that end, Metallica relied upon the allegations in its complaint, citing travel restrictions, the duty to mitigate damages, the need to "flatten the curve," and widespread stay-at-home orders as the cause of the show cancellations. To bolster their argument that it was not COVID-19 alone that caused the cancellations, Metallica argued that "COVID-19 and SARSCoV-2 'still exist but travel restrictions and restrictions on social gatherings have lifted and eased . . . [and thus,] it was something more than just the virus/disease that caused the cancellations.'"

Addressing the issue of efficient proximate cause, the court held that when a loss is "caused by a combination of a covered and specifically excluded risks, the loss is covered if the covered risk was the efficient proximate cause of the loss, or the excluded risk was the efficient proximate, or predominate cause." Accordingly, the court found that Underwriters did not adequately investigate plaintiff's claim, and that the complaint sufficiently alleged that COVID-19 was not the efficient proximate cause of the show cancellations.

Frantic, Inc. provides valuable guidance for insurers and policyholders alike in determining whether coverage applies. Establishing the proximate cause of the loss is a threshold issue in every coverage analysis. While insurers will want to rely upon virus exclusions to the extent possible, the burden to establish that the virus itself was the proximate cause of the loss will not be easy, particularly in light of government orders, travel restrictions, etc. It is important to note that the Frantic decision was not a final decision on the merits of the case, but rather simply a determination that Metallica had asserted allegations sufficient to defeat Underwriters' motion to dismiss. It will be interesting to follow this case as it proceeds to determine whether the court is ultimately called upon to determine the proximate cause of the loss, and how that determination affects the application of virus exclusions in event cancellation insurance.

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Originally published by Practice Guide

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