The Fiasco of Sports Event Cancellation Insurance: Sporting events used to have a backup plan, now they’re sprawling for ways to fix their balance sheets
A year and a half ago, disease coverage was only sometimes a concern. “Pandemics,” said Nathan Nicholas, the chief executive of Nicholas Hill Group, “were a bit of an afterthought.” Some insurance companies even offered free coverage for communicable diseases.
For most sporting events, the coronavirus pandemic eviscerated any prospect of holding events in 2020. March Madness, which had been poised to bring in more than $800 million, left N.C.A.A. scrambling for ways to recoup the lost revenue due to the pandemic. Insurers generally write event cancellation policies for terms of one to three years. Luckily, the N.C.A.A. was in the last year of a three-year contract when the pandemic postponed the tournament; by the end of June, a $270 million bailout in cash came from insurance policies, one of the largest pandemic-related payouts in all of the sports.
Underwriters and sports officials believed that sports events, especially tournaments, were low risk as a vast event with games at sites across the world would never be abandoned in its entirety. Other insurance brokers recalled leagues and events declining to pay for coverage when it was pitched to them, believing the expense was a waste of money. For the N.C.A.A, officials reasoned that cancellations in one city would be unlikely to wipe out all 67 games.
Historically, and rather sensibly, specialized insurance policies, which cover cancellations from communicable diseases, have rarely been purchased. Most sports organizers disregarded and deemed such policies too expensive as pandemics comparable to the 1918 Spanish Flu are extremely rare.
Now, insurers are bracing to see whether the Tokyo Olympics, already postponed and tenuously set for June 2021, will be canceled, causing catastrophic losses for IOC organizers and Japan. Industry experts say a cancellation will cause several billions of dollars in losses across several organizations.
The IOC and Tokyo have insurance policies for the games, but both are reported to cover less than $1 billion of the $25 billion that the games have cost.
Now, with most pandemic policies expiring, brokering new ones is largely unavailable — or extraordinarily expensive. With this new uncertainty, events that were not covered for 2021 may be at risk of financial collapse if they cannot be held.
While the N.C.A.A. paid a little more than $2 million for this policy, a premium in line with the industry’s standard of anywhere from 0.5 percent to 3 percent of the amount covered. Now, “If you have a $20 million event, you may only be able to get $1 or $2 million” of it covered for infectious disease, said John Beam, executive vice president for the sports and entertainment practice at the risk management firm Willis Towers Watson.
Even worse for organizations like Wimbledon and the MLB, while the payment from N.C.A.A’s insurers was swift, other businesses have clashed with their insurers over the precise protections of their policies. According to Covid Coverage Litigation Tracker, a University of Pennsylvania law school project, businesses have filed more than 1,400 civil cases over various kinds of policies. M.L.B. and its clubs are among the litigants, have filed suit in California against three insurers who denied their claims.
Considering the improbability of a pandemic, policies charging such low premiums were a calculated risk. Insurance is a coldly rational business that seeks to forecast every eventuality — and capitalize on it. While it is nearly impossible to secure insurance for current sporting events, perhaps insurance companies may seek to exploit lingering anxieties about pandemics in the future.
