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SXSW Seeks Resolution of Federal’s Duty to Defend Underlying Ticketholder Class Action Arising from COVID-19 Cancellation

The widespread denial of coverage under first-party property insurance policies for business interruption losses resulting from the COVID-19 pandemic has been extensively reported, but so far less attention has been paid to related third-party claims and attendant coverage issues arising under liability insurance policies. When ticketed attendees sued the organizer of the South by Southwest (SXSW) music and film festival, SXSW LLC, for refunds after the 2020 annual event was cancelled because of the COVID-19 pandemic, the company’s liability insurer, Federal Insurance Company, refused to make good its duty to defend. SXSW has now sued Federal in the U.S. District Court for the Western District of Texas seeking a declaration that Federal owes a duty to defend SXSW against the underlying putative class action, providing insight on COVID-19-related liability coverage issues.

The underlying lawsuit arose from the City of Austin’s cancellation of the SXSW festival due to the COVID-19 pandemic. When some attendees requested refunds and credit card chargebacks, SXSW invoked its long-standing no-refund policy for credential purchases, which is expressly stated in its terms and conditions. In lieu of a refund, SXSW offered credential purchasers the opportunity to defer their SXSW 2020 credentials to a future year and the right to purchase credentials for another year at a 50 percent discount. Those who accepted this offer granted a release of claims to SXSW. Other purchasers asserted claims against SXSW, seeking refunds despite the no-refund policy.

The underlying class action lawsuit, filed in April 2020, alleged breach of contract, unjust enrichment, and conversion against SXSW. Subsequently, SXSW promptly tendered the underlying lawsuit to its insurer, Federal, which issued a policy that includes coverage for both directors and officers and entity liability. The policy expressly states that Federal will pay for loss resulting from a claim made against SXSW for a “Wrongful Act.”  The policy broadly defines “Wrongful Act” as “any actual or alleged error, misstatement, misleading statement, act, omission, neglect, or breach of duty committed, attempted, or allegedly committed or attempted.” Federal’s policy promises to pay the amount SXSW becomes legally obligated to pay as a result of the claim, including compensatory damages, judgments, settlements, and defense costs.

But Federal denied the defense of the underlying class action, relying on two purported exclusions to coverage. First, Federal cited an exclusion barring coverage when allegations are “based upon, arise from and are in consequence of liability in connection with any oral or written contract or agreement to which [SXSW] is a party.” But this exclusion has an exception restoring coverage “to the extent [SXSW] would have been liable in the absence of such contract or agreement.” Federal asserted that the credentials attendees purchased from SXSW were a contract, and maintained that the exception to the exclusion did not apply.

Second, Federal argued that the Professional Services Exclusion contained in a Service Industry Endorsement to the policy bars coverage “because SXSW ‘provided a service—scheduling, overseeing, organizing and managing South by Southwest—for which it collected a fee thus precluding coverage.’” The Professional Services Exclusion reads: “The Company shall not be liable under this Coverage Part for Loss on account of any Claim based upon, arising from, or in consequence of the rendering of, or failure to render, any Professional Services by an Insured.” Although the endorsement does not contain a definition of “Professional Services,” Federal cited a vague definition of “Professional Services” elsewhere in the policy with the following definition: “services which are performed for others for a fee.”

After the underlying class action settled, SXSW filed an insurance coverage lawsuit against Federal in October 2020. In its motion for partial summary judgment, SXSW argued that neither exclusion applies to the underlying class action. First, the underlying class action complaint does not claim that SXSW’s inability to host the 2020 festival breached the contract; no contract terms impose liability on SXSW to refund money when a festival is cancelled by a government agency due to a public health emergency. Moreover, the underlying class action accused SXSW of unjust enrichment and conversion, liability claims that are not based on the contract. SXSW argued that because the carrier owes a duty to defend if any one claim is potentially covered, even if others are not, Federal must provide SXSW a full defense.

Second, SXSW argued that the Professional Services Exclusion does not apply because “SXSW is not being sued for failing to render professional services.” The endorsement where this exclusion appears does not define what constitutes “professional services.” Therefore, SXSW relied on definitions of “professional services” used in Texas statutes and case law generally, as “[u]ndefined contract terms are given their ordinary meaning as commonly understood.” SXSW argued that it “is not a law, accounting, engineering or other professional service firm.” Rather, SXSW organizes and hosts a film, music and interactive festival, which does not constitute what is commonly understood to be a professional service. In addition, SXSW argued that it was sued for refusing to issue refunds after the City of Austin made hosting the festival legally impossible. Refusing to issue a refund is not a “professional service” excluded from coverage under the policy.

Federal’s denial of the duty to defend the underlying class action against SXSW is unsurprising: it is part of insurance companies’ recent strategy to combat a new wave of insurance claims that arise from event cancellations or delays due to COVID-19. Which interpretation of SXSW’s policy terms wins the day remains to be seen. But policyholders should not take such denials lying down. Event organizers or others impacted by cancellations or delays of events due to COVID-19 and facing liability for decisions made regarding refunds or other actions should look closely at their liability insurance policies and, with the help of qualified insurance coverage counsel, assess coverage that might defray the cost of defending resulting lawsuits and how best to respond to insurer denials of their defense obligations.


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