The United States Court of Appeals for the Fifth Circuit has recently sided with South by Southwest in an ongoing lawsuit against its insurance company, reversing a previous decision in the insurer’s favor.

In its reversal, the Fifth Circuit remanded the case, returning it to the lower courts to determine how much money 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 COVID-19 concerns. The festival did not have insurance covering “bacterial infections, communicable diseases, viruses and pandemics,” and quickly laid off around 50 employees following the financial blow. After refusing to refund tickets to 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 refund lawsuit in 2022, including $290,402 to those who bought tickets to the 2020 festival. During the litigation, SXSW sued its insurer, Federal Insurance Company, for not paying for suit damages – alleging breach of contract, breach of 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 favor of FIC, writing that because the ticket holders claimed breach of contract in their lawsuit – which insurance companies are not liable to cover – the firm had no duty to defend SXSW. In an opinion filed on March 21, the Fifth Circuit disagreed.

In addition to breach of contract, the class action plaintiffs alleged unjust enrichment and conversion – in other words, that SXSW took their money, didn’t provide a service, and wouldn’t give it back. Those claims are completely unrelated to the ticket contract, the court wrote, which means FIC must still defend the case.

The Fifth Circuit also poked holes in FIC’s claim that SXSW failed to provide a service – another behavior that would allow the insurer to skirt responsibility. According to the court, throwing the actual event is the festival’s service, not issuing refunds.

“The Policy defines ‘professional services’ to include ‘services which are performed for others for a fee,’” the opinion states. “SXSW reasonably argues that ‘professional services’ might include SXSW’s actions in putting on (or failing to put on) the March 2020 festival. But ‘professional services’ would not extend to SXSW’s actions in refunding or not refunding ticket purchases, which are not services SXSW performs for a fee.”

When reached by the 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 tends to favor policy holders over providers because it requires courts to accept a client’s interpretation of a policy as long as it’s reasonable, explained Jim Cooper, partner in the Insurance Recovery group in Reed Smith’s Houston office. “The court got it 100 percent right,” Cooper said. “If there’s more than one reasonable interpretation of a policy, the court is supposed to 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 policy holders do. So I’m very happy to see a decision from the Fifth Circuit that, in my opinion, is a very accurate interpretation of how you would apply Texas law in both a defense context – duty to defend. [The decision also shows] the way in which you construe exclusions, like the contract and professional services exclusion, and give the policyholder the benefit of the doubt that Texas law requires.”

The court disagreed with two other arguments from the insurance company: that SXSW did not inform FIC of the class action suit in a timely manner and that restitution is not a covered loss. The opinion states: “Texas state courts have never held that restitution is per se uninsurable. Restitution might be uninsurable when the receipt of funds was unlawful… but there is no suggestion that SXSW acquired the plaintiffs’ money unlawfully.”

Editor’s note: SXSW co-founder and part owner Nick Barbaro also co-founded and owns The Austin Chronicle.