Who Pays for the Broadway Shutdown?

Who Pays for the Broadway Shutdown?
March 24, 2020 RPJ Law

March 24, 2020

This article was originally featured by Law360 in its “Expert Analysis” section on March 23, 2020.

Broadway supports over 87,000 jobs and draws millions of attendees each year. In 2019, 14.6 million ticket purchasers attended a Broadway show which generated $1.75 billion in direct revenue. But two weeks ago Andrew Cuomo, the Governor of New York, in an attempt to slow the spread of the COVID-19 virus, excluded public assembly in New York for groups over 500 persons and specifically shut down Broadway theaters (each, by definition, having at least 500 seats) from 5:00 PM, March 12, 2020, until, as reported by producers and theater owners, at least April 13, 2020. The Broadway Ban includes ten shows that were set to open over the next month. And on March 16, New York set additional limits on congregating individuals to 50 people, thus inhibiting the smaller off-Broadway and some off-off Broadway shows from continuing their productions as well. Thereafter, New York has instituted even more restrictive limitations for its residents. This is not the first time that Broadway has been forced to close its doors over the years. Following 9/11, the theaters closed for two days. Musicians’ strikes halted Broadway for a time in 1975 and again in 2003. And in 2007, a stagehands strike led to the halting of many shows for three weeks. But the current closure will be the longest one on record.

To put this in further dismal perspective, the loss to Broadway for the closure for the month alone, is expected to amount to over $100,000,000 in lost sales.

So who pays for the “Broadway Shutdown”? The answer is complex and uncertain as the shutdown mandate and reasoning is unprecedented in Broadway history. In truth, everyone pays. Audiences are robbed from seeing plays, and hourly employees, such as theater promoters and concession bartenders, are not likely to be compensated at all. Some were already terminated. Actors, stagehands, theater producers, and a supporting cast of service providers, are also likely to see some monetary loss, although unions have recently negotiated some protections for actors and stagehands, and insurance-based support may limit losses for producers.

Actors and stage managers are supported by their union, Actors’ Equity Association (AEA). Shortly after the shutdown, AEA’s Executive Director, Mary McColl, issued a statement indicating that the union will “use all of our options” to ensure compensation, paid leave, health care, and unemployment benefits for members as it continues to work with Congress and local government. And last Friday, the Broadway League, the national trade association for the Broadway industry, reported that producers, theater owners, and general managers had reached agreement with the Broadway unions to provide Broadway employees with pay and health insurance during the suspension of Broadway shows due to COVID-19. The AEA and other unions like the International Association of Theatrical Stage Employees (IATSE) and the musicians’ Local 802 have lobbied Congress and local governments to fight for additional benefits to those who work in the arts and entertainment sector. Additionally, the U.S. Department of Labor posted new guidance last week verifying that employees who are exempt from overtime under the Fair Labor Standards Act, including those in theater, who worked partial work weeks due to COVID-19, must be paid in full if they were mandated by their employers to stay home. But for those weeks when they worked no hours, it does not appear—pending further clarification from the Department of Labor—that any compensation is required by law.

Theater producers and owners may have insurance providers to turn to at this time of crisis for payout compensation due to the closures. Had producers closed Broadway of their own volition, there may not have been a potential payout. But since it was a government edict that mandated the shutdown, losses may more likely be recoverable. Specifically, insurance agreements typically have clauses that provide for reimbursement due to indirect losses of business income due to unforeseeable events. These are generally referred to as “force majeure” provisions. Some insurance provisions are designed to cover business income loss sustained where a “Civil Authority” (such as New York’s Governor) prohibits access to the insured’s business location(s) (such as Broadway theaters). However, the language of the policy is key to analyzing coverage. For example, a “Civil Authority” provision often requires “physical loss” to the property or adjacent property in order to cover losses, and whether “physical loss” is required or has ensued or not is subject to varied legal interpretations. For example, in Sloan v. Phoenix of Hartford Ins. Co., 46 Mich. App. 46, 51, 207 N.W.2d 434, 436–37 (Mich Ct. App. 1973), the Michigan Court of Appeals held that the Civil Authority provision of an insurance agreement did not require physical damage or loss to property to trigger coverage and should cover owners and operators of movie theaters who sought insurance payout following a curfew ordered by the Governor of Michigan in response to widespread riots. Conversely, other courts have found that a “physical loss” requirement restricted coverage, and courts are split in interpreting what constitutes “physical loss.” Some courts require tangible changes resulting in damage to the property (e.g., Universal Image Prods., Inc. v. Chubb Corp., 703 F. Supp. 2d 705, 710-11 (E.D. Mich. 2010), aff’d sub nom. Universal Image Prods., Inc. v. Fed. Ins. Co., 475 F. App’x 569 (6th Cir. 2012)). Others don’t require the change to be tangible (e.g., Mellin v. N. Sec. Ins. Co., Inc., 167 N.H. 544, 550, 115 A.3d 799, 805 (N.H. 2015)). The insurance policy holders may face challenges alleging that “physical loss” results from COVID-19 without evidence that those infected with COVID-19 were present on the premises; and even if they surmount that hurdle, they then may face challenges to sufficiently demonstrate physical loss under any court interpretation as a result of an individual or individuals with COVID-19 being present on the premises. However, given the unprecedented nature of the claim, it remains to be seen how courts might address such claims.

In addition to Civil Authority coverage provisions, “Business Interruption” or “Ingress/Egress” provisions, which can cover the insured’s losses due to business interruption where entrance or exit from the insured’s property is unavailable, may apply to theaters for loss. But like “Civil Authority” coverage, often such provisions only apply where the policyholder sustains a direct physical loss to the property. Additional considerations for insurance coverage include time limits in the policy for coverage—for example, a policy setting coverage limits to two weeks when, as with Broadway, the closure is intended to last at least four weeks. Further, some policies exclude coverage for contamination and pollution, including, in some cases specifically, “viruses.”

On the other hand, there are insurance policies that have extensions of coverage for losses due to epidemics or communicable or infectious diseases, which have no restrictions requiring physical damage to insured properties. To the extent that producers or theater owners have such provisions in their insurance coverage agreements, additional doors to recovery may be available.

Ethan Krasnoo Discusses NY Salary History Ban and CA Revised Independent Contractor TestRPJ Counsel Ethan Krasnoo counsels both companies and individuals on employment, entertainment and media, First Amendment, insurance and data privacy matters. He is admitted to practice in New York State, the U.S. District Courts for the Southern and Eastern Districts of New York, the U.S. Court of Appeals for the Second Circuit, and U.S. Tax Court. Attorney Advertising.