Force majeure is the legal clause on everyone’s lips. On almost every event contract, it seems like the COVID-19 pandemic would be the obvious case it was designed for, but that’s not how insurance companies see it. What recourse is there for event organizers?
Any event planned to occur in the next six to eighteen months is at risk of cancellation. What was once a May projection for recovery has become a fourth-quarter projection.
Event organizers purchase insurance plans to minimize their losses in the event that something like this happens, but insurance companies are not built to pay out. Their mentality is that you shouldn’t be able to insure a burning house, but their aversion to payouts goes well beyond that.
Since the SARS outbreak of 2002/2003, insurance companies have been carefully writing epidemics out of their coverage, even as it applies to the force majeure clause.
As many governments are now implying that the social distancing measures that make events impracticable could last well beyond the summer (particularly if people don’t smarten up and adhere to them now), it’s important for all event professionals to take a close look at what force majeure can — and can’t — actually do for them.
Here’s what we’ve learned so far.
What Is “Force Majeure”?
“Force majeure” is French for “superior force,” and the term originally derives from the Napoleonic Code. As the World Bank notes, however, nowadays the term force majeure isn’t specific to one legal system and it generally “means what the contract says it means.” That is, it’s up to the signatories of the contract to define the specific conditions for a force majeure claim.
Even though the term is open to interpretation, the same basic principle applies wherever it is used: it refers to unforeseeable circumstances beyond the control of the parties that prevent fulfilment of their contractual obligations. In fact, it is usually used only for situations that make it impossible to fulfill a contract.
Whether it is referenced in business contracts or insurance plans, a force majeure event must be:
- Irresistible (in the sense of impossible to overcome)
While force majeure may at first glance seem like an easy out whenever you run into problems, it can be difficult to prove that whatever challenges you face are insurmountable obstacles that truly make it “impossible” for you to meet your commitments.
Insurance: How Does Force Majeure Apply?
If you are hosting an event that has been affected by the coronavirus (COVID-19) crisis, you may be out of luck for insurance coverage if your plan does not explicitly list epidemics and/or communicable diseases as qualifying force majeure circumstances.
Insurance brokers know the importance of being as specific as possible, and that’s why most insurance plans explicitly and specifically exclude epidemic coverage. The following is from GSMA’s insurance policy for Mobile World Conference (MWC). Aware that examples would help to make its case as airtight as possible, the insurer even makes reference to SARS as well as communicable diseases more generally:
In other words, even if there had been a sudden quarantine-worthy surge of coronavirus cases in Barcelona itself (instead of only two in all of Spain), the GSMA would not have been able to claim insurance coverage for its canceled MWC event.
The good news is that if your event did pay the hefty extra fees for epidemic coverage, you should be able to receive compensation from your insurer if worst comes to worst. When speaking to Reuters, broker Tim Thornhill of Tysers (part of the Lloyd’s of London marketplace) estimated that insurance companies may already be liable for over $100 million in cancellation claims.
Insurance companies don’t like placing losing bets, and they’re reportedly already working to exclude coronavirus (COVID-19) from coverage in any future deals.
If you’re looking to protect a future event from possible losses caused by coronavirus (COVID-19), insurance is probably not your answer at this point.
Business Contracts: How Can Force Majeure Protect Planners?
As with insurance policies, careful wording is key to ensuring adequate protection from your business contracts. According to Insurance Business, the terms for MWC contracts were as follows:
In force majeure situations, both parties of a contract usually agree to bear their own losses. Needless to say, this kind of crisis is not good for either party, and thorough contracts can help ensure a smooth resolution. In some ways similar to a prenup agreement among newlyweds, a force majeure clause can lay the groundwork for a mutually-agreeable plan designed to mitigate a difficult situation.
Uncertainty and the Burden of Proof
A greater level of scrutiny is especially critical for new contracts being drafted in this time of high-alert because the clause is designed to protect against unforeseeable events
There is no way to know when it will be safe to host events again.
At this point, event cancellations resulting from social distancing and containment policies is an actual likelihood, rather than merely a foreseeable risk. Of course, this depends on how far into the future you plan for the event, but the reality is that there is no way to know when it will be safe to host events again, and the most modest projections are based on when a vaccine might become available in a year’s time.
While we may not know precisely how far into the future COVID-19 curve-flattening measures will be in effect, it is crucial to look toward future business in order to protect the industry as a whole and position it for a speedy recovery once it’s safe to go back to work.
That means looking at future business contracts, and in this time of unprecedented uncertainty (two of 2020’s favorite buzzwords), those contracts will likely turn on the force majeure clause. For a more detailed guide on how to implement it in business contracts moving forward, check out the analysis we did on MWC’s cancellation.