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On March 11, the World Health Organization (WHO) declared COVID-19 a global pandemic. The same day, the National Basketball Association, Major League Baseball, National Hockey League and Major League Soccer all suspended their seasons. For the first time since 1939, the National Collegiate Athletic Association cancelled March Madness. Broadway theatres are dark, concerts called off and Disneyland and Disneyworld closed for the first time since the events of September 11, 2001. These are only some of the cancellations and closures that have been announced since the coronavirus outbreak as public health officials have advised “social distancing.” Many state and local jurisdictions are severely restricting event sizes consistent with guidance from the federal government. Couples are cancelling weddings, businesses are cancelling meetings, organizations are cancelling conferences, events of every kind are being called off.
All of these cancelled events involve contracts: for example, contracts between arenas and sport leagues, between venues and artists, between event hosts and patrons, and between event organizers and vendors of all sorts.
Coronavirus-related cancellations raise a host of questions for businesses that sponsor, participate, or are otherwise involved in events that bring together large numbers of people. We address two central questions: What kind of contract provisions might be implicated? What type of insurance policies might be invoked?
Event-related contracts may include a force majeure provision that excuses performance where an unforeseeable event beyond the parties’ control makes performance impossible. Contracts typically define force majeure events as extraordinary circumstances like natural disasters (“acts of God”), war, strikes and acts of terrorism. Force majeure definitions may apply to the coronavirus outbreak by including terms like epidemic, pandemic and orders of government authorities. Government orders prohibiting large gatherings of people would arguably fall within such definitions. Some contracts include a catch-all force majeure provision that broadly encompasses unforeseeable circumstances beyond the parties’ control.
Businesses seeking to rely on a force majeure provision should be sure to follow the contract’s notice provisions. Contracts may require notice of a force majeure event and/or to a particular person within a certain time period. They may also require other action designed to mitigate damages.
Where a contract does not incorporate a force majeure provision, the common law defense of impracticability or impossibility of performance may apply to claims for breach of contract stemming from coronavirus-related cancellations. The defense is typically construed narrowly, but the coronavirus outbreak may justify it. The virus may make contract performance impracticable given governmental orders or render a party simply unable to perform.
Two types of insurance policies or policy endorsements may apply to claims for losses resulting from event cancellation: event-cancellation insurance and business-loss insurance (also called interruption insurance).
Event-cancellation insurance typically covers large-scale events and covers immediate losses resulting from cancellations due circumstances beyond a business’s control. This insurance may explicitly cover losses following government orders that render event venues unfit for their intended uses. For example, a government order that limits events to 50 persons, as the Centers for Disease Control and Prevention recommends and some jurisdictions have mandated, would render unfit an arena that ordinarily hosts tens of thousands.
Business-loss insurance typically covers physical loss, like destruction of a building through fire. Nevertheless, some policies may cover revenue losses from event cancellation in a situation like the coronavirus outbreak. Some such policies also may cover expenses needed to maintain a business, including employee wages. Businesses should be aware, however, that in the wake of the SARS epidemic, insurance carriers began excluding coverage for losses from epidemics.
In negotiating future contracts, businesses should consider including force majeure provisions that cover the scenarios we are now seeing as a result of the coronavirus outbreak—epidemic, pandemic, public health emergency, government orders—and a catch-all provision to cover unforeseeable circumstances beyond the control of parties. Businesses also should review their insurance coverage options to assess whether they should seek or maintain coverage for business losses or event cancellations like are happening now.