Insurance Sports Law

3 Minor League Baseball Clubs Go To Bat Against Insurer On Covid-19 Claims

Three Minor League Baseball teams, the Staten Island Yankees affiliated with the New York Yankees, the Greenville Drive affiliated with the Boston Red Sox, and the Delmarva Shorebirds affiliated with the Baltimore Orioles have taken legal action against Philadelphia Indemnity Insurance Company.

According to the Complaint filed on July 2, 2020, in the Philadelphia County Court of Common Pleas, Philadelphia Indemnity Insurance Company failed to abide by the insurance policies that the three Minor League Baseball teams entered into, thus leaving the teams at a total loss with the cancellation of the 2020 Minor League Season.

Philadelphia denied the Delmarva Shorebirds and Greenville Drive coverage on grounds that the two teams consider inapplicable. Philadelphia’s insurance policy included a virus exclusion against the two teams. Philadelphia also denied the teams’ coverage under an assertion that because the teams’ losses do not result from “direct physical loss or damage to property,” the teams are not entitled to coverage.

The Staten Island Yankees were only barred by Philadelphia under the assertion that there was no direct physical loss or damage to property. The Yankees’ insurance policy did not include the virus exclusion found in the other two teams’ contracts.

The three teams are claiming to have purchased business interruption and rental value insurance from Philadelphia for significant premiums. The teams assert that this should protect from the business interruption of all risks, including the cancellation of games, and the loss of use for its ballparks caused by the COVID-19 pandemic, the governmental response to it, and Minor League Baseball teams being unable to obtain players because of it.

The Complaint explained how the pandemic has affected the Minor League Baseball business, explaining that Minor League Baseball players are actually employees of Major League Baseball teams and not the Minor League. The MLB teams supply Minor League teams with players through player development contracts. The MLB decides player salary and who plays for what team and when.

Even though the MLB is returning on July 23, the League made the business-decision that Minor League Baseball would not be getting any MLB contracted players in 2020.

Minor League Baseball teams make money by fans coming to watch the games and see the players. Minor League teams also make money through advertising, marketing, and promotion of ticket, parking, concession and merchandise sales.

With the Minor League Baseball season that was supposed to start in early April 2020 now being canceled, the teams cannot operate. This lack of operation has led to a total loss for Minor League teams, and is what the three teams consider a business interruption with loss of stadium rental value.

To support the three teams’ needs for insurance, the Complaint provided statistics showing business interruption and loss of stadium rental value. The statistics showed that in 2019, more than forty million fans attended Minor League Baseball games for the fifteenth straight season. 2019 was also Minor League Baseball’s largest year-over-year increase in attendance since its 2006 season—marking its ninth largest ever.

However, this year the season is canceled, and there will not be much Minor League Baseball income. The three teams, and other Minor League Baseball teams, are still expected to pay the full cost of operating a baseball stadium, such as fixed lease payments and payroll for permanent employees needed to operate the team over an annual business cycle.

Additionally, the teams complain that the average Minor League Baseball team incurs more than two million dollars in expenses to operate its teams without regard to whether it suffers interruption of operations. In preparation of the 2020 season, the three teams listed expenses for permanent employees needed to operate the team over an annual business cycle, along with the advertisement, purchase, and stock of merchandise, food and beverage.

The three teams included in damages the loss due to refund obligations and losses its affiliated small businesses will take as collateral damage.

The three Minor League Baseball teams have a lot relying on how the Court interprets its insurance policy with Philadelphia.

This case will probably end up in the Eastern District of Pennsylvania. On Thursday, July 8, Philadelphia filed its notice of removal. The Motion is likely to be successful because of the amount that is in controversy and the diversity of the four parties. All of the minor league teams are from other states and none of those are Pennsylvania—a requirement to fulfil diversity jurisdiction. Secondly, the amount in controversy—although, yet to be specified—is worth millions in insurance according to the Complaint, therefore this Federal Court Date should be a shoo-in.

It will be interesting to see how the insurer explains its virus exclusion and responds to the definitions of business interruption and rental value. Philadelphia ought to consider adding a Force Majeure Clause to its insurance policies.