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By Jonathan MacBride and Isabella Stankowski-Booker
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Prior to the 2016 presidential election, several commentators opined that opposing political parties would control the office of the president and Congress’s two chambers — the Senate and the House of Representatives. In fact, the prevailing view was that Republicans would remain the leading party in the House, while Democrats would regain control of the Senate.[1] With this constellation in place, legislative gridlock would have been a given, regardless of the party-affiliation of the future commander in chief.

Even though this scenario did not materialize — in the end, the Republicans took power of the executive branch and both chambers of Congress — the danger of funding gaps and government shutdowns is not extinguished. To the contrary, diverging views within the Republican Party on core topics, such as healthcare, trade, infrastructure and tax rollbacks pose a threat of partisan in-fighting over future federal budgets. The possible funding gaps and the ultimate political stalemate of a government shutdown — if the necessary majority to pass a future budget is not achieved — should be of concern to event cancelation insurers.

The Mechanisms and History of Government Shutdowns in the United States

On the federal level, a shutdown occurs when the two chambers of Congress or Congress and the president fail to reach a resolution by a mandated deadline over interim or full-year appropriations. When this deadlock occurs and the budget is not enacted into law, a funding gap generally results.[2] The funding gap then triggers a government shutdown under Article I, Section 9 of the U.S. Constitution and the federal Antideficiency Act.[3] As a result, certain government agency activities and services are curtailed and nonessential federal government employees are put on furlough (i.e., on mandatory leave of absence) until further notice. Furloughed employees may be ordered to refrain from engaging in any type of work-related activities, such as checking their emails or attending work-related events.

For example, during the federal government shutdowns of 1995/1996 — which were triggered by a clash over the 1996 budget between congressional Republicans and President Clinton, a Democrat — over 1 million government employees were put on furlough over a total of four weeks.[4] Similarly, the more recent government shutdown of 2013, which lasted for 16 days, saw over 800,000 employees put on a mandatory leave of absence, as government offices remained closed.[5] Government funding for travel for federal employees was suspended immediately, and affected employees were ordered to cancel their attendance at scheduled conferences or meetings or to cancel their speaking engagements. A memo from the U.S. Department of State to its employees ordered that “[n]o new travel should be arranged; [n]o one should make new arrangements to attend conferences” and “[a]ll speeches to public audiences should be cancelled and no invitations to give speeches to public audiences should be accepted during the shutdown period.”[6] Like the 1995/1996 shutdowns, the 2013 shutdown was caused by disagreements between congressional Republicans and President Obama over the 2014 budget and funding for the Affordable Care Act, also known as “Obamacare.”

Government shutdowns can also occur on the state and local government levels. For instance, during the summer of 2011, the state of Minnesota experienced a 20-day government shutdown when the Democratic Governor Mark Dayton and the Republican-led state legislature failed to agree over the budget. At the heart of the deadlock was a disparity between the two opposing political camps over taxes. Once the funding gap occurred, over 20,000 government workers were furloughed and state functions all over Minnesota shut down.[7]

The mechanisms for a shutdown on the state level vary from jurisdiction to jurisdiction, but funding gaps remain the crucial trigger. Remarkably, several states require a supermajority to pass a proposed budget, thus arguably increasing the likelihood of a funding gap and subsequent government shutdown in case of a negotiation stalemate.

The Current Political Landscape and Considerations for Event Cancellation Insurers

While bipartisan fights characterized past government shutdowns, the Trump presidency is likely going to see an increase in partisan in-fighting. During his campaign, Trump did not shy away from highlighting how his views on various issues differ from those of the Republican Party. For instance, Trump repeatedly denounced free trade deals such as the North American Free Trade Agreement or the Trans-Pacific Partnership.[8] In contrast, Republicans have been historically the party advocating for free trade. On the issue of healthcare, Trump has proposed to repeal Obamacare, but then promised that everybody would have health insurance coverage, without however, offering a clear strategy forward.[9] Republicans, in contrast, are hoping to repeal the Affordable Care Act as soon as possible. Moreover, Trump’s campaign promised massive government funding to overhaul the country’s aging infrastructure. Many Republican critics, however, are worried about the enormous amount of spending Trump’s infrastructure modernization plan entails.[10] These examples demonstrate the polarization between the Republican Party and its president-elect, which certainly has the potential to lead to increased partisan disputes over future federal budgets.

In light of the current political landscape, event cancellation insurers may want to assess whether the risks they cover, or intend to cover, could be impacted by potential future funding gaps and subsequent government shutdowns. Many event cancellation policies exclude from coverage losses that result from the insufficiency or lack of adequate financing of an event, as well as from the insufficiency or lack of adequate attendance. However, insurers, together with brokers and clients, should consider whether these provisions properly address funding gaps and government shutdowns. Towards this end, the parties may want to consider the following aspects:

Event Venue

When the government shuts down, so do parks, monuments, and government buildings. The closure of these venues has a direct impact on music festivals, art fairs, and movie shoots scheduled to take place at these sites. Even a short government shutdown of a few days can cause significant financial losses to an insured, especially if no contingency plans exist.

Event Attendees

The parties to an event cancellation policy should also contemplate the audience to which an event caters. Every year, a plethora of conferences, expos, symposia, and trade shows are offered to government employees at the federal, state, or local level. However, during a government shutdown, many of these employees will be prohibited from attending the events, necessitating cancellations. Insureds may also face the difficult situation where the venue itself—which often is a private resort, hotel, or conference center—is not impacted by the shutdown, but the event has no, or significantly reduced, attendance. In addition to causing reduced profits, these situations expose the insured to unexpected costs and the potential commercial pressure to issue refunds.

Event Speakers, Presenters, And Exhibitors

Likewise, government employees who have been scheduled to make appearances as speakers, presenters, or exhibitors will likely be prevented from doing so during a government shutdown. For example, in 2013, as a result of mandatory budget cuts required by sequestration, the U.S. Navy Blue Angels cancelled their season of airshows.[11] This, in turn, may lead to reduced attendance, especially where the event’s focus is on a key-speaker or presenter.

Event Organizers

To the extent that an event depends on government funding, a government shutdown could have severe consequences. At the heart of every government shutdown is a disagreement over a proposed budget and a funding gap. As a result, previously allocated funds may be pulled or frozen, pending a resolution of the dispute.

Government Contractors

Event cancellation insurers may also want to determine to what extent the insured event depends on the participation and/or attendance of government contractors. Even though government contractors are not government employees, they, too, may be adversely affected by funding gaps and subsequent government shutdowns.

Impact On Travel

Because many agencies are forced to suspend their services during a government shutdown, event cancellation insurers should also be aware of the indirect consequences of a shutdown. For example, when visas and passports cannot be processed because the responsible agencies remain closed, even events that are not directly related to the government may suffer significantly. Towards this end, imagine an international recording artist, who suddenly cannot enter the United States because her visa has not been issued on time. Similarly, a conference venued in the United States that caters to a largely international audience may experience severe reduced attendance to the extent noncitizens depend on visas to enter the country.

Conclusion

The new political order in the United States has Republicans in charge of the Congress and the office of the president. While this new alignment of political power will certainly promote the faster passage of some legislation, the dangers of serious partisan in-fighting within the Republican Party, and the consequences this may have on enacting future budgets, should not be underestimated. Funding gaps and government shutdowns remain a viable threat.

Consequently, event cancellation insurers and their clients should, first and foremost, identify those risks that would be directly exposed to negative impacts as the result of funding gaps and subsequent government shutdowns. In addition, the parties should brainstorm whether any indirect losses are likely to occur in case of a government shutdown, such as travel-related hardship. The parties to an event cancellation policy should come to an agreement whether coverage for government shutdown losses is needed or whether such losses are excluded from coverage. Regardless of the decision, it is important that the policy wording reflects the parties’ intent. Towards this end, the parties should aim for clear and unambiguous policy language. Also, where coverage is afforded, the parties may want to assess whether feasible contingency measures exist to mitigate a potential loss.

Jonathan R. MacBride is a partner at Zelle LLP in Philadelphia. Isabella K. Stankowski-Booker is a senior associate at the firm's New York office.

The opinions expressed are those of the author(s) and do not necessarily reflect the views of the firm, its clients, or Portfolio Media Inc., or any of its or their respective affiliates. This article is for general information purposes and is not intended to be and should not be taken as legal advice.

[1] See, e.g., Siobhan Hughes, GOP Seeks To Limit Loss Of House Seats, The Wall Street Journal, Nov. 7, 2016, at http://www.wsj.com/articles/gop-seeks-to-limit-loss-of-house-seats-1478545113.

[2] Clinton T. Brass, Shutdown Of The Federal Government: Causes, Processes, and Effects, Congressional Research Service, Report RL34680 (Sept. 8, 2014).

[3] 31 U.S.C. §1342.

[4] David Scott Louk & David Gamage, Preventing Government Shutdowns: Designing Default Rules for Budgets, 86 U. Colo. L. Rev. 181 (2015). Specifically, the first shutdown lasted from Nov. 13 to 19, 1995, furloughing roughly 800,000 government employees. After a brief resolution between the opposing parties, new disagreement erupted over the budget, causing the government to shut down again from Dec. 15, 1995 to Jan. 6, 1996. During the second shutdown, nearly 300,000 government workers were put on mandatory leave.

[5] Supra note 4.

[6] United States Department of States, Memorandum From Undersecretary Kennedy (September 27, 2013), available at http://www.state.gov/documents/organization/215074.pdf.

[7] Louk and Gamage, supra note 4.

[8] http://www.latimes.com/politics/la-na-pol-trump-gop-positions-20160720-snap-htmlstory.html.

[9] http://www.nytimes.com/2016/04/09/us/politics/donald-trump-health-care.html?_r=0.

[10] http://www.cnn.com/2016/11/17/politics/donald-trump-infrastructure-plan-congress/index.html.

[11] http://abcnews.go.com/blogs/politics/2013/04/sequestration-cuts-blue-angels-shows-air-combat-command/.