The Austin Convention Center during SXSW 2023 (Photo by John Anderson)
The United States Court of Appeals for the Fifth Circuit recently sided with South by Southwest in an ongoing lawsuit against the insurance company, overturning a previous ruling in favor of the insurer.
In its reversal, the Fifth Circuit remanded the case, sending it back to the lower courts to determine how much money the Federal Insurance Company (FIC) owes SXSW in defense costs.
The lawsuit stems from SXSW 2020, which was canceled by the city of Austin due to concerns about COVID-19. The festival did not have insurance covering “bacterial infections, communicable diseases, viruses and pandemics” and quickly laid off around 50 staff after the financial hit. After refusing to refund tickets for the canceled festival, the organization faced a class action lawsuit from two badge holders who wanted their money back.
SXSW paid more than $1 million to settle the 2022 refund lawsuit, including $290,402 to those who bought tickets to the 2020 festival. During the litigation, SXSW sued its insurer, the Federal Insurance Company, for failing to pay damages in the case – alleging breach of contract, breach of the implied covenant of good faith and fair dealing, and violations of the Texas Insurance Code.
In 2022, the United States District Court for the Western District of Texas ruled in FIC’s favor, writing that because the ticket holders alleged breach of contract in their lawsuit — which insurance companies are not required to cover — the firm had no duty to protects SXSW. In an opinion filed March 21, the Fifth Circuit disagreed.
In addition to breach of contract, the class action plaintiffs allege unjust enrichment and conversion — in other words, that SXSW took their money, failed to provide a service, and won’t give it back. Those claims are completely unrelated to the ticket contract, the court wrote, meaning FIC still has to defend the case.
The Fifth Circuit also poked holes in FIC’s claim that SXSW failed to provide service—another conduct that would have allowed the insurer to avoid liability. According to the court, organizing the event is a service to the festival, not a refund.
“The policy defines ‘professional services’ as ‘services performed for others for remuneration,'” the statement said. “SXSW reasonably contends that ‘professional services’ may include SXSW’s actions in staging (or failure to stage) the March 2020 Festival. But ‘professional services’ will not include SXSW’s actions in refunding or non-refunding purchased tickets that are not services that SXSW performs for a fee.”
Upon reaching Chronicle, SXSW declined to comment on the Fifth Circuit’s decision. Chubb, the parent company of Federal Insurance Company, offered the following statement: “As a matter of policy, we do not comment on individual claims.”
Texas insurance law favors policyholders over providers because it requires courts to accept a customer’s interpretation of a policy as long as it’s reasonable, explained Jim Cooper, a partner in the insurance recovery group at Reed Smith’s Houston office. “The court was 100 percent right,” Cooper said. “If there is more than one reasonable interpretation of a policy, the court must adopt the interpretation that most favors coverage.”
Cooper continued, “Most of the time, in my experience, insurance companies come out more favorably in the Fifth Circuit than policyholders. So I’m very glad to see a ruling from the Fifth Circuit that I think is a very accurate interpretation of how you would apply Texas law both in the context of the defense — the duty to defend. [The decision also shows] the way you interpret exclusions, such as the contract and professional services exclusion, and give the policyholder the benefit of the doubt that Texas law requires.”
The court disagreed with the insurance company’s two other arguments: that SXSW failed to inform FIC of the class action in a timely manner and that the restitution was not a covered loss. The opinion states: “Texas state courts have never held that restitution per se is uninsurable. Restitution may not be insurable where the receipt of funds was illegal … but there is no suggestion that SXSW acquired the plaintiffs’ money illegally.”
Editor’s note: SXSW co-founder and part-owner Nick Barbaro is also a co-founder and owner The Austin Chronicle.