Blog Post 04.03.20
COVID-19 has left few industries unscathed. For those facing substantial financial damages, insurance policies may offer hope, and this is just as true for those losses being suffered in the entertainment industry as government orders have placed nearly all TV and film production in stasis because of the pandemic.
Moving Pictures Get Stopped in Their Tracks by COVID-19
The motion picture and television industries have suffered and will continue to suffer financially because of COVID-19 in a number of significant ways, including, most notably, lost box office revenue from closed movie theaters and the future losses that will result from lost production times and advertising revenue. The domestic box office last year was $11.4 billion, but the outlook for 2020 is dim. All of the nation’s nearly 6,000 movie theaters have been closed since mid-March, and some pundits are predicting that revenue will be down this year by 50% because of those closures. That prediction fails to take into account a number of other losses related to films, such as lost promotional money for 2020 releases, or the loss from movie theater reopening limitations (e.g., reopening at 25% or 50% capacity), or the unknown number of lost moviegoers who might be fearful that COVID-19 could return. Further, on-location filming in Los Angeles is down more than 18% in the first four months of 2020 (as compared to 2019), and television productions are down by over 20%. In addition to the financial losses caused by lost production time and delays in airing new shows or television episodes, some are also predicting that COVID-19 will also cause over $10 billion in lost television advertising revenue.
Could Standard Policies Come to the Rescue of Studios and Production Companies?
It is estimated that studios paid over $400 million in insurance premiums last year to the three largest entertainment insurance companies (Allianz, Chubb, One Beacon and certain underwriters at Lloyd’s, London). As a general rule, motion picture and television production insurance policies cover every risk unless a risk is specifically excluded, and I am not aware of many production policies issued before January 24, 2020, that exclude coverage for communicable diseases or any that specifically exclude COVID-19. Most if not all production policies specifically include coverage for business interruption, and that coverage extends to COVID-19 losses caused by (1) civil authority orders; (2) losses relating to restricted ingress and egress; and (3) imminent peril coverage. Most production policies also allow studios and production companies to combine coverage limits of various coverages up to the total aggregate limit of the specific policy.
Additionally, most production policies also contain a “due diligence clause” which requires the policyholder to “use due diligence and do and concur in doing all things reasonably practicable to avoid or diminish any loss or any circumstance likely to give rise to a loss or claim insured under this policy,” and coverage for COVID-19 claims would most likely be triggered under this clause, as well. Finally, production policies also cover losses caused by physical loss or damage and the majority of cases handed down by courts across the country support the proposition that physical or structural damage to the property is not necessary, at least where the building in question has been rendered unusable by physical forces such as the presence or threatened presence of asbestos, or e-coli, or unpleasant odors, noxious fumes or toxic gases.
Insurer Responses to COVID-19
COVID-19 is the seventh epidemic or pandemic of the 21st Century. In response to the outbreak of Severe Acute Respiratory Syndrome (SARS) in 2003—the first pandemic of this century—insurance companies began issuing SARS-specific exclusions to policies within a month or so after the start of that outbreak. For policyholders who purchased insurance before the coronavirus became headline news earlier this year, those policies may well cover the economic damages flowing from COVID-19. Beginning in late January of this year, insurance companies began issuing COVID-19 exclusions to new policies and insurers may well attempt to include such exclusions during the renewal process in 2020.
Unfortunately, some insurers have improperly attempted to slip in COVID-19 exclusions to policies purchased in 2019, and such attempts may well constitute either deceptive and unfair trade practices or fraud such that they are likely not valid and would most likely be struck down by a court. As a general proposition, insurance companies cannot, after inception of an insurance policy, unilaterally attempt to limit coverage previously negotiated, secured, and for which a premium was already paid. State regulatory requirements, which are highly standardized for insurance policies, include regulations prohibiting insurers from engaging in this type of conduct.
With predictions that the insurance industry may be paying out billions of dollars in COVID-19-related claims, it is likely that future motion picture and television production insurance policies will cost more to obtain (with some speculating rate increases of at least 25%), they will likely include a COVID-19 exclusion which policyholders may or may not be able to “buy back,” and carriers may also require a higher deductible or increased self-insured retention amounts. This, in turn, may make production financing harder or more expensive for future projects.
Legislative Remedies to Help with Uncovered Losses
On the Federal level, Congress is currently considering a draft of the Pandemic Risk Insurance Act of 2020 (PRIA), which would support the ability of the insurance and reinsurance sectors to handle claims from COVID-19. The PRIA would establish the Federal Pandemic Risk Reinsurance Program, which would provide a “transparent system of shared public and private compensation for business interruption loses resulting from a pandemic or outbreak of communicative disease.” In many way, the PRIA mirrors the Terrorism Risk Insurance Act of 2002 (TRIA), which was passed in response to the tragedies of September 11, 2001. The TRIA provided a federal backstop that included a financial cushion to weather another potentially catastrophic terrorist event. The PRIA would “create a reinsurance program similar to TRIA for pandemics by capping the total insurance losses that insurance companies would face.” At least seven states are also currently considering COVID-19 Insurance Relief Act legislation to help secure coverage for COVID-19 losses under previously issued business interruption insurance policies. (See Louisiana [HB 858]; Massachusetts [SD 2888]; New Jersey [A3844]; New York [A10226], [S8178], [S8211A]; Ohio [HB 589]; Pennsylvania [SB 1114]; and South Carolina [S 1188].)
Steps to Take Before the Cameras Roll Again
When filming resumes, the health, well-being and safety of cast and crew members will be of paramount concern for motion picture and television producers. Towards that end, studios and production companies have already begun meeting with their safety, human resources, and risk management departments, as well as coordinating with the various industry associations, guilds and unions to develop new production guidelines. Film Florida recently issued a six-page list of suggestions to help ensure clean and healthy production sets. Those recommendations include things like sequestering cast and crew in a hotel, taking the temperatures of cast and crew every day, maintaining social distancing whenever possible, wearing gloves and masks indoors, staggering lunch and call times, serving boxed meals instead of self-serve buffets, replacing canvas “director’s” chairs with plastic chairs that are easier to disinfect, and having directors limit the number of takes to make sets more efficient.
The resumption of motion picture and television productions will likely vary from state to state and, depending on the various timetables, studios and production companies may well move productions from California to other states if California’s governor and the Mayor of Los Angeles extend the prohibition of productions in L.A. and elsewhere in the state.
The bottom line for studios and production companies that purchased insurance coverage before the coronavirus became headline news in January 2020 is that those policies could cover most if not all of the economic damages flowing from the government shutdown of the entertainment industry because of COVID-19. Entertainment insurance policies, like many other types of insurance coverages, are often complex, sometimes confusing, and could well contain traps for the unwary. As a result, studios and production companies facing losses because of the industry shutdown, should consult with an experienced insurance recovery attorney to review their policies so they can help coordinate with insurance brokers and carriers and assist with properly crafting of a claim submission in order to optimize coverage under the specific policy or policies at issue.
For more information, please reach out to your regular Pillsbury contact or the author of this client alert.
Pillsbury’s experienced multidisciplinary COVID-19 Task Force is closely monitoring the global threat of COVID-19 and providing real-time advice across industry sectors, drawing on the firm’s capabilities in crisis management, employment law, insurance recovery, real estate, supply chain management, cybersecurity, corporate and contracts law and other areas to provide critical guidance to clients in an urgent and quickly evolving situation. For more thought leadership on this rapidly developing topic, please visit our COVID-19 (Coronavirus) Resource Center.