Ryding Out The Risk - Cancellation Insurance

The recent postponement of the Ryder Cup due to the tragic events in New York and Washington has focused attention on the risks faced by major entertainment events. Considerable costs can arise due to cancellation or postponement. What are these risks and can they be managed through insurance cover?

A typical assessment of risks that could lead to the cancellation, abandonment, interruption or postponement of an event would include the following:

• boycotts - e.g. the 1980 Moscow Olympic Games
• terrorist threat - e.g. the pipe bomb in Atlanta
• health epidemic - e.g. the foot and mouth outbreak
• national tragedy - e.g. the death of Princess Diana
• weather - e.g. flooding
• transport breakdown - e.g. fuel protest/strikes

An event organiser is not the only party to be affected by such risks. Broadcasters, sponsors and providers of services such as caterers and merchandisers would all have their own potential loss and damage arising from such risks, due to their investment in the preparation for the event. Who bears such losses will depend upon the contractual arrangements between the parties, and who has agreed to indemnify whom.

Insurance against these kinds of risks is available in the market and is often summarised as "cancellation cover". The primary insuring clauses will typically cover any cause occurring during the period of insurance which is beyond the reasonable control of the insured party, and which causes the event to be reasonably cancelled, abandoned, postponed, interrupted or relocated ("the trigger words"), thereby causing an ascertainable loss.

The trigger words will often address different consequences at different chronological points, and are usually carefully defined. The purpose of this is to establish the degree of proximity necessary between the occurrence of the risk and the relevant trigger word.

For example, is there an actual or legal reason why an event cannot take place, or is it in reality a matter of moral or ethical sensitivity? There could for instance be a difference between a Government initiative preventing or inhibiting the movement of people, such as in the case of the Cheltenham Festival or Six Nations Rugby Championship, and a decision not to travel to the UK and play golf as a result of the terrorist bombing in the USA, such as in the case of the Ryder Cup.

In these examples, is the external event which has occurred a sufficiently proximate cause of the decision to postpone the event?

In the Cheltenham example, the act of the Government could be seen as a type of "force majeure" or frustration which is often included in contracts. Here the executive act of the Government in dealing with the epidemic risk of foot and mouth is directly referable to the decision to postpone, as the event could not continue without risking breaching a Government order.

In the golf example however, the terrorist bombing risk does not of itself prevent the event taking place, but rather the personal or collective decision not to travel or take part, for entirely understandable reasons. Construction of such issues is often a matter of degree, and the inclusion of qualifying terms such as "unavoidable" or "inability" in the definition of trigger words could affect whether or not indemnity is provided under the policy. For example, whilst it might be reasonably unwise to proceed with an event, it might not be unavoidable, or be classed as an "inability" to proceed.

There are also typical policy exclusions, such as radioactivity, fraud and war. This latter word is topical, given both its use by the President of the USA in recent pronouncements on the recent terrorist attack, and speculation in the Press. A standard type war exclusion might refer to an actual or threatened outbreak of hostilities between named countries or groups of countries. Such a potential outbreak would normally be understood as an act of state, rather than what is more typically classed as a privately initiated criminal act, such as an act of terrorism. A contrast could be made between the Lockerbie incident which could now be regarded as an act of state sponsored terrorism following the recent conviction of one of the terrorists in the criminal trial, and the Atlanta pipe bomb, which is probably regarded as the work of an individual.

Direct net losses, such as the cost to a football club of travelling abroad to a postponed fixture, or consequential contractual damages paid to a third party can be recovered if ascertainable, subject to a duty on the insured to mitigate. This duty could for example include the possibility of obtaining compensation from the governing body which cancelled the fixture, as with the case of UEFA over the cancellation of Champions' League fixtures.

It is likely that the increased uncertainty caused by the recent terrorist attacks and the demonstration of what can be the consequences will lead to a substantial increase in priority for cancellation cover concerning high profile events.