Playing With Fyre: Insurance Considerations For Music Festival Organizers
Just weeks before it was set to begin, Woodstock 50 gasped its final breath. But the steady drumbeat of problems that caused organizers to cancel the event will only continue as financiers, artists, and organizers confront the range of legal issues that may now take center stage.
Insurance will be key to addressing the Woodstock 50 fallout, and organizers should take heed. Indeed, among the lessons to be learned from Fyre Festival—which the world saw crumble in real time in 2017—is that the consequences of unsuccessful festival planning are greatly exacerbated by a lack of insurance.
Fyre was advertised as a luxury festival, promising attendees air travel from Miami to the Bahamas, gourmet food, glamorous accommodations, and musical entertainment including headliners Blink-182, Pusha T, Tyga, and Disclosure. Yet all of these acts pulled out in the days leading up to the event, and attendees found themselves stranded in the Bahamas with plain, pre-packaged sandwiches and disaster-relief-style tents.
Consequently, Fyre organizers faced at least eight lawsuits (some of which are still pending) and hundreds of millions of dollars in potential liability. Most of these lawsuits included allegations of fraud, including claims that the organizers knowingly misrepresented for months what would be provided to festival attendees. (Indeed, after being investigated by the FBI, Billy McFarland, Fyre’s main organizer, pled guilty to wire fraud and is currently in prison in upstate New York.) Many also allege breach of contract based on artist agreements and ticket sales. And because the Fyre organizers never obtained insurance, they must bear the cost of litigation and any judgments or settlements on their own.
Woodstock 50 organizers may similarly face lawsuits. Venue problems and financing disputes may be just the tip of the iceberg; the slow dissolution of Woodstock 50 that began in January is likely to reveal a range of other conflicts. Surely festival organizers are bracing for possible legal action. But, if unlike Fyre, Woodstock 50’s organizers have insurance, they may have coverage against legal actions—even if their insurers initially assert that they do not.
Depending on the allegations of the claims, coverage may be available at least under either comprehensive general liability (“CGL”) or directors’ and officers’ liability insurance (“D&O”) policies (in addition to specialized policies applicable to music festivals).
Under CGL policies, insurers may argue that fraud claims are barred by intentional acts exclusions and/or that breach of contract claims are barred by breach of contract exclusions. However, the name of an exclusion does not control whether it applies—the policyholder should look closely at the language of the exclusion as compared to the allegations of the complaint(s).
Moreover, even if the insurer is correct and an exclusion applies, when a complaint includes both excluded claims and non-excluded claims (“mixed claims”), the insurer typically at least has defense obligations in connection with the lawsuit. The reason is that an insurer’s defense obligations typically extend to claims that are potentially covered, and mixed claims potentially will be covered. Thus, for example, if a lawsuit alleges negligence in addition to fraud and breach of contract (as is often the case), defense costs may be covered and the insurance company may defend the claim notwithstanding the presence of intentional acts and breach of contract exclusions. (And, depending on the scope of a settlement or judgment, the insurer also may have to indemnify at least a portion of the claim.)
Under D&O policies—which generally provide coverage to an organization’s directors and officers and/or to the organization itself for liability stemming from alleged wrongful acts in management—there may similarly be coverage for mixed claims. Thus, claims that include allegations of fraud may be covered at least in part notwithstanding fraud exclusions that often are included in D&O policies.
Moreover, most D&O fraud exclusions apply only when there has been a judgment or final adjudication of fraud. See, e.g., Nat’l Union Fire Ins. Co. v. Brown, 787 F. Supp. 1424, 1429 (S.D. Fla. 1991) (holding that fraud exclusion did not apply “because there has been no final adjudication establishing that the Insureds engaged in fraud, dishonesty or criminal acts”), aff’d 963 F.2d 385 (11th Cir. 1992); Wojtunik v. Kealy, 2011 WL 1211529, at *8–9 (D. Ariz. Mar. 31, 2011) (interpreting “final adjudication” requirement in fraud exclusion as not applying to a settlement). This means that D&O insurance may pay defense costs for a policyholder that is accused of fraud, as well as potentially a settlement that occurs without a judgment against the policyholder. Moreover, a court may apply the exclusion narrowly such that it only bars coverage for a “judgment or final adjudication” that specifically establishes that fraud occurred. See, e.g., Arch Ins. Co. v. Murdock, 2016 WL 7414218, at *5 (Del. Super. Ct. Dec. 21, 2016) (holding, where a policy required that the insured’s fraud must be established by a final, non-appealable judgment, that even the final judgment did not trigger the fraud exclusion because it did not “establish” that fraud has occurred).
However, some D&O policies provide that if a policyholder ultimately is found liable for fraud, it may be required to reimburse defense costs paid by its insurer, see, e.g., Protection Strategies, Inc. v. Starr Indem. & Liab. Co., 2014 WL 1655370, at *8–9 (E.D. Va. Apr. 23, 2014), including if the policyholder pleads guilty to fraud, see Protection Strategies, Inc. v. Starr Indem. & Liab. Co., 611 F. App’x 775, 777 (4th Cir. 2015). Thus—as always—policy language is key, and policyholders should be strategic about their approach to coverage disputes.
As Fyre taught us, organizers take on a great deal of risk if they try to create the next Coachella or Lollapalooza. Facing that uncertainty, wise tour organizers will carefully place and read their policies—and consult coverage counsel—from the outset, rather than hope for the best and make a panicked phone call after things burst into flame.