Event Cancellation Debacles Will Have Insurers Reframing Coverage Terms for Years to Come
“May you live in interesting times.”
This well-known expression surely applies to most of 2020 and 2021 — and will likely ring true when 2022 ends in just a few short months.
On March 11, 2020, the National Basketball Association announced it was postponing its season because of concerns over COVID-19. Soon after, the National Collegiate Athletic Association Division I conference basketball tournaments and March Madness were canceled for the same reason.
Many people believed these cancellations were a tipping point.
Later, other events, including the 2020 Tokyo Olympics and the Wimbledon Tennis Tournament, were canceled or postponed, again because of COVID. Events that had almost always happened as scheduled were suddenly canceled, leaving people with a new feeling of uncertainty.
The unemployment rate reached 14.8% in April 2020 — the highest the United States had experienced in 70 years.
Like most industries, insurance was not impervious to this uncertainty.
The Pandemic’s Effects
One of the few benefits of the COVID pandemic has been the data it generated.
The last global pandemic, the 1918 influenza pandemic, occurred long before computers and mass data collection existed. Pandemic risk modeling previously focused on excess mortality rates for life insurance. But global pandemics affect far more than just life insurance.
The COVID pandemic has also caused changes in property/casualty, business interruption, event and auto lines. In the future, pandemic modeling will be driven by real-time data and performed by actuaries, mathematicians and data scientists. It will also be considered by many types of insurers.
Some of the largest consumers of special event insurance are trade shows and conferences. However, from 2019 to 2020, revenue generated from trade show and conference planning decreased by 43.2%.
The industry was expected to rebound in 2021 to pre-pandemic levels, and it did to some extent, but new variants of COVID slowed recovery. Revenue is projected to increase slightly by this year’s end but then decrease and stabilize until 2025.
Many insurers have implemented changes in response to the pandemic. These have included price increases, new exclusions and other risk reduction measures.
Further, insurers classified the COVID pandemic as a “known event” in January 2020. This classification is assigned after an unexpected or unforeseen event occurs, and it removes future coverage in many instances.
For example, if a future bride and groom purchased wedding insurance in 2019 for their June 2020 wedding, cancellation of their wedding because of COVID would have been covered, assuming there was no applicable exclusion in the policy.
However, if they purchased the same policy in March 2020, cancellation of their wedding would not have been covered, because COVID was then considered a known event.
As individuals and businesses tried to adjust to a new normal, the event insurance industry faced its own challenges. During 2020, the event insurance market tightened dramatically. Prices rose by 50 to 100%, and capacity diminished, largely because many insurers exited the market.
On December 8, 2020, Munich Re, the largest reinsurer in the world, announced it would no longer insure events that were canceled because of the COVID pandemic, setting the tone in the reinsurance market.
New Exclusions and Litigation
Communicable disease endorsements existed before COVID, but they were expensive, and insureds rarely purchased them.
Even if the endorsement was added to a policy before COVID became a known event, it may not have provided coverage if invited guests — not the client — canceled their plans to attend the given activity because of COVID.
All-cause event-cancellation policies also previously covered communicable diseases. However, as claims poured in from insureds that had these, insurers in turn created communicable disease exclusions.
The Wimbledon Championship — the oldest and arguably most prestigious tennis tournament in the world — has purchased event-cancellation insurance for the past 17 years, at a cost of $2 million per year. Cancellation of the 2020 tournament triggered a $141 million payout from its insurer.
While this may seem significant, it is just a small fraction of what insurers are anticipating in future payouts.
The insurance industry’s future regarding pandemic-related event cancellation is still unknown. At the time of writing, new variants of COVID continue to disrupt the economy. As with many types of risks, we are living in the midst of a dynamic and shifting environment.
Some plaintiffs in business interruption cases have alleged breach of contract because of their insurer’s refusal to cover commercial losses that resulted from government COVID-related shutdown orders.
The insurance companies have argued that closure as a result of a government shutdown order is not a covered physical loss or physical damage. Federal appeals courts and at least one jury have recently sided with insurers.
A growing body of case law also supports the proposition that virus exclusions are not ambiguous and thus preclude recovery for losses generated by the existence of COVID on a business’s location.
However, according to the University of Pennsylvania Carey Law School’s COVID Coverage Litigation Tracker, there are currently 222 pending appeals in federal circuit courts and another 65 pending in state appellate courts. These disputes will likely continue into the foreseeable future.
The insurance industry is estimating over $200 billion in pandemic-related losses. Lloyd’s estimated that its own payouts for such losses are now on par with payouts for the terrorist attacks of September 11, 2001, or for the combined impact of hurricanes Harvey, Maria and Irma in 2017.
As changing weather patterns pose a significant concern for insurers, it seems fitting to compare pandemic-related losses to the insured losses of previous natural disasters in the U.S. Hurricane Laura, the most powerful hurricane to make landfall in the U.S., cost insurers $10 billion — just 5% of what COVID is projected to cost them.
Other Risk Reduction Measures
Some event planners pivoted to virtual events to staunch their industry’s rapid decimation.
Concerts became multimedia events as artists developed virtual experiences. Academic conferences also took on virtual formats to facilitate networking and research collaboration.
Similar to how mold affected homeowners insurance policies, and how the terrorist attacks of September 11, 2001, transformed future commercial insurance policies, the COVID pandemic has caused insurers to reevaluate how their event cancellation insurance policies are written.
It’s important for insurers to consider the lessons learned from the pandemic so that they can better prepare for inevitable future pandemics and create more comprehensive insurance frameworks.
Future data on events from 2021 to 2023 will help insurers determine the severity of COVID’s impact on the events insurance industry.
Data on the types of special event insurance claims filed during the pandemic could also provide an avenue for research into how to improve policy wording and coverage options for future pandemics. &