March Madness 2020: How insurance covers its cancellation
Here are the potential coverages at play for the NCAA basketball tournament, including for this year's cancellation.
A year ago, some of us were skipping work to watch our alma maters compete in the March Madness tournament. This year, we were watching stone-skipping championships, sign spinning, marble racing and virtual NASCAR races to fill that void. In light of the cancellation of the annual March Madness tournament, along with almost all other competitive sports across the nation, and the suspension of the Summer Olympics, it’s the right time to take another look at the potential insurance implications.
The annual NCAA tournament brings in the usual risks associated with college-level sporting events, but some of these risks are enhanced due to the level of play, the venues, and the extreme popularity of the tournament. ALM sister site Insurance Coverage Law Center (ICLC) had the opportunity to chat with Peter Williams of Allianz about the insurance aspects of covering such events. In talking to Williams, we were surprised to find that insuring such a big event is pretty straightforward. Event coverage starts with a basic commercial property and liability policy but on a much larger scale.
Generally, the venues that are chosen to host March Madness games are well-established facilities that are often used for huge events, including sports events, festivals, and concerts. Tournament games are played at various arenas in regional locations to accommodate the size of the crowds anticipated for the multiple tournament games, and each location generally handles its own coverage. Williams indicated that “underwriting is fairly easy” as the venues are well known, and generally able to handle large crowds.
Event cancellation insurance
In the case of a large-scale cancellation of the entire tournament, the most likely insurance policy to respond would be an event cancellation policy. Event cancellation is a specialized form of insurance that protects a wide range of individuals and entities that are involved in a similarly wide array of events. Policy terms can vary, but these typically cover the financial losses associated with the interruption, postponement, cancellation, relocation, or abandonment of an event. The policy may even cover significantly reduced attendance.
An event cancellation policy generally covers only perils that are beyond the control of the insured, including natural catastrophes, power failure, damage to the venue, terrorism threats, or the inability of a necessary person to appear at the event. Event cancellation insurance can cover various types of financial losses, including marketing, organization and other out-of-pocket losses, as well as lost profits and revenues.
There are some common exclusions that could potentially apply. They generally involve the insured’s failure to mitigate risks, such as the financial failure of an event due to poor ticket sales or insufficient funding, lack of an audience, breach of contract or labor strikes.
Most event cancellation policies include provisions that require the insureds to take “all reasonable steps” to minimize or mitigate financial losses resulting from the cancellation or postponement of an event. This often leads to rescheduling an event as opposed to canceling it altogether. Reasonable costs for mitigation can be included in a claim for coverage.
In the wake of COVID-19, event-cancellation insurance will likely be the vehicle through which entities make up the losses suffered from the decision to cancel the 2020 NCAA tournament, losses that will likely amount to over $1 billion. There are several other coverages that do come into play, however.
Other insurance policies
There are several other types of insurance policy that may apply in the event of a cancellation. More than one of the following coverages could potentially apply.
- Postponement. Postponement of a game is not covered under an event cancellation policy, particularly when the game is early in the tournament. Many venues find that such coverage isn’t necessary; due to the nature of the March Madness tournament, all the games must eventually be played. A mere change in the date or time of the game won’t significantly change the revenue outcome for the venue. The real risk, from an insurance standpoint, is in the later games, particularly the Final Four, which generally earn greater ticket revenue and have a higher television viewership. Postponement isn’t detrimental to the venue, so cancellation becomes the biggest issue. A single game may be canceled for physical damage to the auditorium, including water damage, flood, or fire. A game may also be canceled for terrorism threats, such as the Las Vegas shooting, or, as we are experiencing now, a global pandemic.
- Lost revenue. If a disaster occurs that is so detrimental to the arena that the game can’t be played there, the venue’s insurance could respond to cover the lost revenue. Even so, in the case of cancellation of a game due to an issue at a particular venue, the event usually can be moved to another location, based on the contingency plans for such occurrences. Although the games will most likely be played eventually, fans who bought tickets to a game scheduled in Cleveland might not be eager or able to travel to Miami to watch a game, so their tickets will have to be refunded and re-sold. Tickets must be reprinted, receipt numbers must align, row numbers must be changed, all banners, t-shirts, flyers, and souvenirs must be reprinted. The good news? The costs associated with the adjustment from one venue to another would be covered. Due to the popularity of the tournament, though, it’s likely that a game, especially one further along in the tournament, will sell out no matter its location or the time the game will be played. Even so, the venue may suffer from a loss of revenue, loss of sponsorship, and loss of food and beverage sales if a game is postponed from a primetime Saturday evening slot to a Tuesday afternoon slot. Likewise, because television revenue is so significant, advertising space may be at a premium on a Sunday night, while advertisers may not be willing to pay as much for a Tuesday afternoon. Luckily, all revenue sales are insured under the applicable insurance policy, so if a venue cannot host a game, it will still receive some income.
- Vendor coverage. Each vendor that comes to the premises to sell food and beverages, as well as participate in toy and t-shirt giveaways, has its own insurance policy. Any liability stemming from those vendors, including personal injury such as food poisoning, should be covered under the vendor’s policy.
- Evacuation concerns. Liability associated with large crowds remains an issue when discussing the evacuation of the venue if a disaster occurs. In case of an evacuation, venues are built with anti-slip flooring, and janitorial staff generally cleans up spills very quickly. In the case of a newly constructed venue, the insurance risks could actually be lower than at older locations. New venues are constructed with state-of-the-art features, and management may be brought in from other places so they’re already experienced in dealing with large crowds.
- Active shooters or other threats. Just as with any other large sporting event, local law enforcement and the FBI are very watchful of NCAA events, and security is tight. If there is a gunman, a bomb threat or a terror threat, local law enforcement in host cities are trained to deal with disasters involving large numbers of people and are well equipped to handle a situation if one arises. An active shooter insurance policy would supplement other policies that are already in place and would cover the cost of property damage and loss of business income, as well as medical expenses and funeral costs for victims.
- Fights between fans. After a game, there are sometimes altercations between the fans of the winning and losing teams. Law enforcement is also well equipped to deal with these types of situations and can defuse an altercation quickly if one arises. Williams also indicated that venues often play a part by shepherding event-goers through metal detectors before they are allowed to enter the event, and by cutting off alcohol sales sometime before the end of the game, allowing fans to sober up a little before heading home or heading out to celebrate a win.
Fortunately for host cities, NCAA fans are not quite as extreme as some other sports fans. Even so, if fans destroy vehicles or shops, the venue and its carrier are not liable for those actions, and the carrier will not be called on to provide coverage.
Venues that serve or sell alcohol may be subject to dram shop laws that hold businesses legally responsible for the actions of consumers who cause harm to a third party after consuming too much alcohol. For the insured, unless their business is that of selling, serving or furnishing alcohol, the liquor liability exclusion would not apply. A venue is not in that business — it is in the business of selling event tickets. Therefore, the venue would have coverage for ancillary exposure to the selling of the alcohol through the exception to the exclusion. The vendor would be responsible for liquor sales.
- Player safety. Basketball games, especially at this level of competition, can quickly become rough, and a player’s personal safety may be at risk. Because they are all college students, NCAA players are often still covered under their parents’ health insurance or have health insurance through the school for which they play. When they agree to play for a team, the players assume the risks associated with playing the game. There is no personal injury liability on behalf of the venue for the players on a college basketball team. If a team loses a player due to injury, the team will have to replace the player for the remainder of the tournament.
- Cybersecurity. Cyber risks and the precautions that are taken to prevent a cyberattack are often unknown. To be effective, an attack would have to be very sophisticated to keep up with precautions put in place by the venue, law enforcement, and television networks. A cyberattack could interrupt the transmission of a game over network television, but this risk generally only becomes an issue with pay-per-view television programs. Fans that are using smartphones in the stands and logged into the Wi-Fi offered by the venue could potentially be vulnerable to mass hacking. Insurance coverage for losses that occur due to a cyberattack is available as a special policy.
The type of cancellation that is happening in the sports industry is completely unprecedented, and nobody knows exactly how the sports industry, and also the insurance industry, will recover during 2020 and into 2021. Although March Madness was canceled for this year, the tournament is expected to be back next year, and the necessary insurance coverage for the tournament will be the same.
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