Expert Comment: SARS-CoV-2 Insurance Coverage In The Sports Sector
The effect of the SARS-CoV-2 (“Covid-19”) virus on the sports sector globally is driving an urgent review of contracts to protect and enhance revenue streams. Event Cancellation and Business Interruption insurance policies and their provisions will prove key in this evaluation.
Despite increasingly diverse revenue streams in the sector, Covid-19 is set to hit the sports world particularly hard. Restrictions on gatherings and non-essential movement are decimating income: heralding empty stadia, merchandising shops, gyms, leisure and sports centres and facilities.
Many clubs also use their property assets for concerts and conferences as extra revenue streams and are having to take decisions on cancelling those events against the background of the uncertain end to governmental and state social distancing restrictions. Many satellite businesses (such as suppliers) that rely on the sports sector and its operation are seeing damaging disruption to their sources of income.
Potential insurance claims can be significant. For example, it is reported that the postponement of the Tokyo Olympics this summer will result in a USD500m insurance claim for event cancellation. The total quantum across the industry will inevitably be much higher.
Overview
It is important to stress the need to review all insurance policies of all types to scan for coverage and not to assume an insured has no cover for loss of revenue. Coverage will be determined by a combination of the following: the exact language of the terms, conditions and exclusions of the policy; statutory declarations from governments and authorities as to how insurance policies will respond; the proper law of the policy and the jurisdiction that will decide the policy response.
Event Cancellation Insurance
Trigger
These policies are usually written to cover financial loss due to cancellation, postponement or abandonment of an event due to a cause beyond the control of the policyholder.
Such policies, particularly covering larger, more complex businesses and events, tend to be bespoke. As a result, it is difficult to provide generic advice, but there are generic terms and conditions which are common to particular insurance product lines.
Events such as government or state orders prohibiting events from taking place or mass gatherings should be sufficient to constitute a cause beyond a policyholder’s control. However, if a policyholder cancels or postpones an event or competition without being required to do so then coverage becomes a grey area. The facts of each decision to postpone will be relevant to the determination of coverage.
Scope, exclusions and write backs
Policies can differ in scope and exclusions can restrict cover significantly.
Communicable disease exclusions are common. However, exclusions might apply to specific diseases not excluding Covid-19. Exclusions may cover notifiable diseases, a reference to diseases required to be notified under health legislation. Issues may arise over whether exclusions cover variants of excluded diseases and some exclusions only exclude bacterial agents. Other exclusions can include governmental, local authority or state orders or restrictions.
Buy backs are available to extend cover and restrict such exclusions or to completely eradicate their effect.
Loss
Issues can arise over the quantification of loss. Where an event was cancelled, could it have been postponed limiting the loss or is postponing an event until further notice tantamount to a cancellation?
When it comes to quantification of losses, some categories of loss will be straightforward but there may be “grey” classes of loss and coverage can turn on the interpretation of underlying contractual obligations with third parties, be it service providers, suppliers, advertisers, players or sports men and women or performers.
Business Interruption Insurance
This is to compensate a policyholder for the financial effect of interruption or interference to the business, traditionally as a direct result of physical damage to insured property or other key external events, such as damage at a suppliers’ or customer’s premises or other non-damage triggers, which are deemed under the policy to be damage as if insured under the policy.
Triggers
Traditionally the requirement is for two triggers for cover: the interruption needs to be caused by insured damage; and the interruption must cause the loss. With Covid-19 we are seeing two scenarios: where property and premises are closed due to Covid-19 being present; and where a government, local or state authority orders the closure of certain businesses and restricts movement of the public.
The requirement of insured damage to a policyholder’s premises is a significant issue when it comes to triggering coverage. Does the presence of Covid-19 on surfaces constitute damage? Court decisions in England and Wales focus on whether the virus’s presence has adversely changed the property and to what extent, for example does the change have to be at a molecular level? The Court of Appeal held there needs to be some alteration in the physical characteristics of the property “which render it less useful or less valuable”. In the United States it varies from State to State and for example, a New Jersey case held that property can suffer physical damage without structural alteration. There are other similar cases considering asbestos contamination, anthrax, sick building syndrome and E.coli where the courts have held that there has been property damage. Cases often turn on their specific facts.
Extensions of cover are available to cover contagious diseases but the cover is written in specific ways, for example, focussing on stated diseases at the policyholder’s premises or within a certain distance of the insured location. The trigger for some extensions is that the peril is a “notifiable disease”. There are also extensions of cover which trigger insurance as a result of loss caused by a state or government authority orders. However, these generally require physical damage in the vicinity.
Other extensions may provide cover for Increased Cost of Working / Additional Increased Cost of Working and the Denial / Prevention of Access by a Public Authority. There may also be cover for Loss of Attraction, intended to cover a loss of revenue as a result of a reduction in footfall at a particular location.
Exclusions
Business interruption insurance sometimes referred to as Time Element insurance in the United States, is usually written on an “All Risk” basis where the insuring clauses are broad but exclusions are used to limit the scope of the insurance. Sometimes the cover is written on a Named Perils basis also with numerous exclusions. One exclusion to be aware of is the contamination exclusion. Such exclusions are usually focussed on particular types of contamination, such as groundwater. Sometimes, however, decontamination cover is purchased as a further extension of cover as a form of buy back.
In many instances there are express requirements for there to be a covered claim under the Property Damage section of the policy, so insurers focus their efforts on excluding cover thereunder. It is for this reason that wordings which deem the presence of the virus as constituting property damage are so beneficial to policyholders as no exclusions apply thereafter.
Loss
There are several factors that affect the calculation of loss.
Basis of Indemnification.
Often limited to “loss of gross profit” due to the reduction in turnover but there can be options of presenting a claim on a difference basis, such as a loss of production income which can affect the amount of the loss.
Waiting Period.
There are often periods of time that must elapse before a claim can be made.
Indemnity Period. The insurance will provide cover only for a stated period of interruption or interference of the business.
Other / Special Circumstances Clause.
This allows the parties to take into account other circumstances that may affect turnover or production and the calculation of the business interruption. One issue is Wide Area Damage, namely that the insured would be trading in an environment where, because of the virus, there would have been no trade in any event, so even though there is a property damage trigger, there is in fact no loss.
Contingent Business Interruption
Cover This is a business interruption insurance where the insurance is triggered by loss suffered from the effects of property damaged at the premises of a supplier or customer. This could include or exclude supplier or customer issues arising from the act of a local authority, government or regulating authority. However, cover may be limited to named suppliers or customers and might be sub-limited. The same issues of what constitutes insured damage at a supplier or customer’s premises will apply.
Bespoke Contingent Business Interruption Insurance
In a few cases insureds will have bespoke contingent business interruption cover for specific or unique exposures. For example, some airlines have such cover for major events impacting revenue, such as volcanic eruption, air traffic control closure, strikes and importantly contagious disease.
Trade Credit Insurance
Triggers / Cover
Trade Credit is a key insurance for businesses helping them protect their receivables. It commonly provides cover for three main perils: protracted default of a counterparty in their financial obligations; the insolvency of a counterparty; a political risk event which can include administrative measures or new legislation in the counterparty’s country which prevent payment.
Coverage issues to consider
Policies usually contain onerous obligations on the insured. Relevant issues include: warranties as to the retention of title in goods pending payment; strict reporting obligations such as notice periods for overdue payments; reporting of counterparties in financial difficulties; obligations on policyholders to prevent or minimise loss.
Directors’ and Officers’ (D&O) Insurance
D&O insurance provides protection for the company, board members, executives and managers from claims or investigations arising from their decisions and actions.
We are in unprecedented times where a company’s risk management and business continuity plans are tested and the decision making of boards and directors under pressure comes under the microscope. Regulators will expect businesses to have tested contingency plans to deal with major events and business continuity. A failure to have such operational resilience is an area where future claims may focus. Boards need to protect and manage the resilience of their companies including the treatment of suppliers and customers, dividend policy, decisions on staff retention, staff working from home and arrangement of bridging finance. Where solvency is an issue, the duties of directors might transfer from obligations owed to the company to creditors. The point this might happen can be unclear in such shifting circumstances leaving liquidators, creditors and investors with questions over how the company has been run, focussing on directors or board mismanagement.
Other insurance considerations
Whilst there are many issues to be aware of, we would highlight the following: Notification obligations are important obligations to meet. There needs to be strict adherence to these. Requirements differ under policies from set time limits to “immediate” notification or notifying “as soon as practicable” requirements.
Delayed or late payment. Insurers will be receiving a significant volume of insurance claims and so it may take longer for insurers to process and handle claims. For unreasonable delays or delaying strategies that create additional financial loss not covered under the policy there may be further causes of action against insurers by virtue of section 13A of the Insurance Act 2015. This implies a term into the insurance policy requiring the payment of sums in a reasonable time. This can be leveraged to speed up the claims process or generate recoveries beyond the contractual scope of the insurance policies. In the United States there is of course well established obligations on insurers to deal in good faith and with fair dealing as well as to pay a valid claim in a timely manner. Non compliance leaves insurers open to punitive and exemplary damages.
For more information contact:
Paul Wordley +44 (0)20 3874 2994 paul.wordley@wordleylaw.com
Graham Denny +44 (0)20 3874 2993 graham.denny@wordleylaw.com
- Tioxide v CGU [2005] EWCA Civ 928
- Blue Circle v Ministry of Defence [1998] EWCA Civ 945
- Gregory Packaging, Inc. v. Travelers Property and Casualty Company of America, 2014 WL 667 5934, at *6 (D.N.J. Nov. 25, 2014)
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