The Toyota Center and the Houston Rockets are suing their insurer, Affiliated FM Insurance Company (AFM), after AFM allegedly refused to honor the parties’ insurance agreement. The plaintiffs filed their complaint in Rhode Island State Court on July 15, about two weeks after three Minor League Baseball teams filed a similar complaint in Pennsylvania against their insurer.
The insurance policy at issue allegedly covers the plaintiffs for up to $412 million in property insurance from October 6 of 2019 until October 6 of this year. Last year, 1.3 million fans sat at the Toyota Center. This year, because of COVID-19, the Toyota Center has only hosted 340,000 fans for its events, as all of the Toyota Center’s affairs ended indefinitely as of March 19. The Toyota Center is now looking for an insurance for the loss of business it was expecting.
The Houston franchise was set for one of its most complete basketball years ever. The Toyota Center hoped to host a playoff run for the Houston Rockets. The arena also had scheduled the NCAA’s elite eight and sweet sixteen rounds of March Madness, and the 2020 McDonalds All-American Basketball Games. As a result of COVID-19, all of these events featuring the top basketball talent at every level were canceled.
On March 11, 2020, when the NBA indefinitely postponed the remainder of its 2019-2020 season, the Houston Rockets were tied for the fifth best record in the Western Conference, and about four games back from second place. The Rockets have a chance to continue for title contention in Orlando, as the NBA is set to return on July 30. However, with the NBA’s plan in place to play all games in Orlando, the Toyota Center and Rockets ownership are at a complete loss on revenue they expected to be generated through arena use.
The Complaint specifies the loss of these events as a direct result of the COVID-19 pandemic, including that the Toyota Center also expected nine more Houston Rockets home games and twenty concerts.
In the Complaint, the plaintiffs listed seven counts of alleged wrongdoings. First, the parties sought a declaration from the court that would force AFM to provide coverage to the team and arena immediately. The next three wrongdoings listed regard direct breaches by AFM of the insurance agreement. Lastly, Toyota and the Rockets alleged that AFM breached its covenant of good faith and fair dealing, violated Texas’s state insurance law for settlement practices, and dealt with the Houston parties in bad faith.
The last three claims build off of the breach of contract claims, and essentially complain about how unreasonable Toyota and the Rockets felt AFM has been with regard to insuring the parties during the pandemic. The plaintiffs seek compensatory and punitive damages, along with attorneys’ fees, by pointing out what they feel are blatant breaches and unethical business tactics. This section of the complaint accuses AFM of being knowingly unreasonable and acting with reckless disregard for what the plaintiffs seek from the insurer.
Further, the Houston parties describe that AFM failed to investigate the claims as required and attempted to deceptively mischaracterize the words of AFM’s insurance policies. The plaintiffs referenced an internal AFM “talking points” memo advising its insurance adjusters that COVID-19 was neither a communicable disease nor physical damage.
In the three breach of contract claims listed in the Complaint, the plaintiffs allege that AFM breached the parties’ contract over insurance policies for property damage, business interruption, and additional coverages and coverage extensions. The AFM policy was allegedly supposed to cover “against all risk of physical loss or damage,” unless specifically excluded.
The plaintiffs complained that its arena was to be covered in its entirety and within the five-mile radius with regard to property damage from communicable disease, as the parties alleged that AFM’s policy explicitly recognizes that communicable diseases physically damage property. By definition, COVID-19 would be a communicable disease given its contagiousness and ability to spread through human interaction.
The plaintiffs claim that, because its customers cannot come near the property, it ought to be insured like property that is damaged. Further, the factual background links the property damage to events of business interruption.
The plaintiffs further allege that loss from business interruption (at least twenty-nine canceled basketball events and concerts) should trigger the part of the insurance policy covering up to one-year of loss in gross earnings, gross profits, and rental income. Additionally, the plaintiffs claimed that AFM’s policy for protection and preservation of property was triggered due to the reasonable and necessary steps taken, as the parties were forced to cancel events in protecting against COVID-19.
In the Complaint, the plaintiffs make clear that the AFM insurance policy is at best ambiguous, as there were no direct exclusions in conflict with the Houston parties’ COVID-19 insurance requests of AFM.
The Complaint further addresses AFM’s policy definition for contamination — “any condition of property due to the actual or suspected presence of any foreign substance, impurity, pollutant, hazardous material, poison, toxin, pathogen, or pathogenic organism, bacteria, virus, disease causing or illness causing agent, fungus, mold or mildew” — in an attempt to prove their requested relief was included in the policy.
The contaminant definition seems fitting regarding COVID-19, and the Complaint also alleges that “AFM has stated in writing, that COVID-19 meets the definition of communicable disease under the Policy.” Under these definitions, AFM may run into trouble attempting to deny its liability to cover the plaintiffs.
The pressure is on for AFM and other similar sports insurers. Sports law followers can anticipate these type of suits to continue given all of the other professional sports teams and properties effected by COVID-19. Just yesterday, NFL teams—the NY Giants and Jets—announced that they will not be playing with any fans in 2020. As professional sports leagues slowly start adjusting to the new normal, more no-fan announcements and bubble-style tournaments seem inevitable. As an effect, sports law followers should expect professional sports teams to challenge their insurance contracts in the event that they are unable to get coverage for business interruption.