COVID-19 hit few businesses as hard as the live events industry, especially in the early days of the pandemic. While music groups, comedians and other touring acts often suffered significant financial losses, there may be remedies available if their professional advisers failed to secure adequate insurance coverage. The law may provide an avenue for recovery from insurance brokers that cater to the entertainment industry yet failed to secure coverage, as recent litigation alleges.
Legal framework.
Depending on the state where an insurance broker, manager or potential policyholder is based, the broker may owe its client one or more fiduciary duties. In general terms, that would mean a broker would be required to put its client’s interests above its own interests and always act in good faith and in whatever way is best for the client.
Even if a broker does not owe a fiduciary duty, it must be mindful of whether communications with a potential policyholder could result in legal liability. For example, a broker’s action or inaction could result in claims of professional negligence or breach of contract.
Complacency
Before the public ever heard of COVID-19, companies seeking insurance often received communicable disease coverage as a default, unless it was specifically excluded. Often, brokers could ensure that the coverage was included by the insurer as a value-added or sweetener provided at no extra charge to policyholders — such as businesses in the events and live entertainment industry — that could be affected by shutdowns related to communicable disease. Insurers thought that the risk was sufficiently remote that extending the coverage at no extra cost or as a matter of course was non-controversial. Simpler times indeed.
While insurers rarely provided coverage without question or exclusions, if a policyholder had this specific coverage, it had an avenue through which it could seek financial recovery in the event of losses after a disease outbreak.
The client’s best interests were served by securing such coverage, but where a risk is perceived as remote, a broker can get complacent and lose sight of what it ought to be doing.
Everything changed at the turn of the New Year in 2020 after it was reported that a coronavirus outbreak in China could breach the United States’ borders. The insurance industry ended its practice of automatically offering communicable disease coverage to potential policyholders and made the strategic decision to not offer communicable disease coverage, even if a potential insured requested it.
Companies that did not obtain coverage prior to early 2020 were left in a vulnerable position, but sometimes it wasn’t their fault. At times, they did the right thing by engaging a broker that knew their business, knew the live entertainment insurance industry standard practice of having insurance coverage in place about six months before an event, knew that a communicable disease shutdown could result in a total loss for a client, but the broker simply failed to follow through.
Potential liability for brokers
Among others, touring entertainment acts could have claims against their broker if they found themselves without communicable disease coverage for live events canceled within a certain time frame.
By way of example, consider the following scenario: A touring act or its manager hires a broker to secure insurance coverage for a live event to take place in April 2020, just after the mid-March shutdowns started. The broker would or should have known that, based on standard practice in the live events insurance industry, communicable disease and other event insurance coverage should be in place by around October 2019 or roughly six months before the scheduled event. The broker fails to secure communicable disease coverage by October 2019. Three months later, on Jan. 1, 2020, the broker still has not secured the communicable disease coverage and the insurance industry withdraws the coverage offering.
In such a case, the broker could be exposed to claims by the touring act. The act’s manager may also have claims, especially if it was entitled to a percentage or commission from the act’s revenue and the broker knew of the manager’s existence. Often, the broker would have been hired by the manager.
Depending on the jurisdiction, the terms of the engagement and other factors, the potential claims may include breach of fiduciary duty, professional negligence and/or breach of contract, among other things. The broker likely has errors and omissions insurance against the risk of such claims.
Case in Point: Motley Crue. One 2021 lawsuit explores some of the legal concepts at play in such a matter. The management team for the rock group sued its insurance broker for allegedly failing to timely obtain the proper insurance coverage for a 2020 stadium tour. According to the suit, the managers say they used an insurance brokerage that held itself out as having expertise in the industry. In October 2019, the managers instructed the broker, which had acted for the managers in the past, to obtain tour cancellation insurance for lost commissions due to any postponements or cancellations of the upcoming tour. In the months that followed, the managers say they sent the broker a copy of the tour contract, exchanged emails about tour details and reiterated their request to obtain coverage. The broker never indicated there were issues in obtaining coverage, according to the suit. Unfortunately, on March 9, 2020, the managers learned that the broker did not obtain the insurance.
Two days later, the World Health Organization declared a pandemic, and we all know what happened after that. The lawsuit alleges the broker was liable for professional negligence by breaching its duty to act with reasonable diligence and promptness to obtain a requested insurance policy. The managers also claim the broker breached a verbal contract to obtain the insurance. In the lawsuit, the managers seek over $10 million, for commissions they say they lost because the broker did not obtain the insurance.
The case is ongoing, and the broker denies liability. But the plausibility of such claims is not reasonably in question, as a general legal matter.
Don’t stop believing
Those in the live events industry that suffered big losses due to COVID-19 cancellations should consider consulting legal counsel to evaluate all recovery options before chalking it up to a loss and moving on.