As the COVID-19 pandemic ravages on, an inevitable legal battle awaits the sports industry. Pitting leagues, event organizers and venues against insurance companies, the fight would revolve around the central question: Who should absorb the financial losses from the cancellation of games due to the pandemic?
The answer could dramatically affect the financing, marketing and hosting of games going forward.
The first sign of legal fallout occurred in June, when 15 minor league baseball teams sued five insurance companies in a Pennsylvania federal court. The teams argue that they paid “significant premiums” to protect themselves from pandemic-related losses. The insurance companies, the teams insist, unlawfully refuse to pay. The lawsuit could be a harbinger of what’s to come. That is especially the case with the recent cancellation of the 2020 minor league baseball season
In normal times, insurance companies capably estimate how many policies will lead to potential claims and actual claims. An executive of a major sports league who handles insurance matters told Sportico, “Say there are 40 events in a portfolio in a given year. On average you might see three to five cancelled, and it will be spread out over the year. Out of those, two or three are postponed and end up being run.”
In the COVID-19 era, however, the insurance market has gone haywire.
“No one is paying each other right now,” an insider tells Sportico. “It’s a complete mess.”
Over the course of only a few months, the percentage of events leading to potential claims has skyrocketed, and insurance companies face the prospect of thousands of claims over cancelled games. One league insider predicts “catastrophic occurrences for some insurance companies”, especially since they “didn’t anticipate all these claims at one time.”
Whether, and how much, insurance companies pay for cancelled games will depend on the wording of policies and the willingness of insurers to pay, making it a situation that almost invites litigation.
While much has been written about “force majeure” in the context of cancelled games, the term, a league executive tells Sportico, is generally not applicable to the COVID-19 pandemic. The reason: Force majeure normally concerns an “Act of God” that makes it virtually impossible to hold an event. Think of a Category 5 hurricane or a terrorist attack. With COVID-19, games could be played, particularly if precautions were taken to mitigate the risk of infection. Insurance companies are thus poised to reject claims that invoke force majeure language.
The more relevant focus is on event cancellation and business interruption policies.
An event cancellation policy is exactly what it sounds like: It covers a specific event, such as Wimbledon or the Super Bowl. The policy may or may not provide recovery for cancellation caused by a communicable disease.
Richard Giller, an insurance recovery expert at Pillsbury in Los Angeles, told Sportico that until late January, sports policyholders could pay extra to extend their policies to explicitly cover communicable disease losses. Some sports organizations, including the NCAA, the Big East and Wimbledon, did so. Many did not.
The Wimbledon example is instructive. For the 17 years that followed the SARS outbreak in 2003, Wimbledon paid the approximate equivalent of $2 million in premiums per year—about $34 million total. The tournament, Giller notes, will reap “a recovery of between $150 million and $300 million” for this year’s cancellation.
The NCAA, which cancelled this year’s March Madness, is in a similarly favorable position. Its event cancellation policy provided recovery for up to $270 million in losses. The Big East was also protected when its conference tournament was called off.
For most businesses, including sports teams and leagues, the main vehicle used to recoup COVID-19 losses will be business interruption insurance, which ordinarily addresses the broader financial harm of a “covered peril”—such as a fire or tornado—on a company’s balance sheet. It is normally part of an underlying property policy.
Many business interruption policies include “civil authority” coverage. This phrase refers to instructions, from a government agency, that certain events and activities not be held. During the pandemic, gathering restrictions, stay-at-home orders and similar measures have made it illegal for games to be played.
The precise wording of civil authority coverage could mean the difference between coverage or no coverage. In many policies, civil authority covers “physical loss or damage to property.” There is case law, Giller stresses, “repeatedly standing for the proposition that the disjunctive ‘or’ means physical loss is different from damage, otherwise there would not be an ‘or’.” He maintains “loss” does not necessarily require structural damage.
So how to interpret a virus and its presence at a sports facility? While the virus can attach to surfaces of seats or railings and survive for several days, it doesn’t do real “damage” beyond presenting a temporary risk of infection. Yet policyholders can insist that if their facility is declared unusable, on account of a government order, there is a physical loss.
But it gets trickier still.
Business interruption policies sometimes contain explicit exclusions for pandemics, viruses and bacteria. One policy, obtained by Sportico, defines the exclusion as “any virus, bacterium or other microorganism that induces or is capable of inducing physical distress, illness or disease.”
Policies can be written in ways that invite debate. For instance, a virus exclusion may only apply if the virus’s physical presence at the venue is the reason for the cancellation. There is also an important distinction between coronavirus (SARS-CoV-2) and the disease it causes, COVID-19. Giller asks, “Does a virus exclusion exclude coverage for a civil authority order issued to combat the spread of the disease, as opposed to the virus itself?” It’s a question courts could soon have to answer.
And there are still more complexities. If a government order has an uncertain duration, it could invite debate over whether an event needs to be cancelled or merely postponed. The latter outcome is often preferable to an insurance company, but it creates a waiting game that policyholders may prefer not to play. Many organizations also have multiple insurance policies. They might lean on a primary carrier, which covers most of a loss, but it is not uncommon for some to have multiple secondary carriers. Those might approach COVID-19 issues in sports differently.
Many sports industry contracts also have multiple parties downstream, some of whom may not be insured or possess insufficient insurance. For instance, a broadcast rights agreement could involve a league, team, players’ association, networks and satellite providers. Not everyone in that group may have purchased the necessary insurance.
Even if an insurance company honors a policy, the policyholder must credibly substantiate lost profits and other costs to the satisfaction of the insurer. This often requires extensive documentation that could take several months to review. Now consider the possibility of every team in every major sports league doing so over a period of weeks. That dynamic could cause long delays.
Eventually bills will come due and insurance companies that deny payment could face litigation, arbitration or mediation. Attorneys for insurers will gain a scouting report from the lawsuit brought by the minor league baseball teams, who must overcome an exclusion clause that allows their insurers to deny claims “for loss or damage caused by or resulting from any virus, bacterium or other microorganism that induces or is capable of inducing physical distress, illness or disease.” The teams argue the clause is “unenforceable” and “inapplicable” to the circumstances of the COVID-19 pandemic. This type of dispute is likely to play out in many other courts.
Some sports organizers might not have the resources or incentive to pursue litigation. An executive of an insurance company tells Sportico that, “regardless of whether they can collect, policyholders might not have purchased enough coverage to sustain their operations . . . we’re going to see businesses fold.”
One thing is for certain: The longer the pandemic goes on, the more likely sports industry actors will battle with insurance companies in court. The ultimate fallout could mean much higher costs for policies and far more restrictive terms for collection; in essence, it would cost more and offer less.
Michael McCann is an attorney, law professor at UNH Franklin Pierce and sports law reporter for Sportico, Penske Media’s new sports business publication.