The harmful effects of devastating weather events in the United States and around the world are on the rise. Hurricanes, wildfires, and other disruptive events are inflicting increasing amounts of damage and significantly affecting businesses of all types, including hotels and other hospitality businesses. Although some businesses are susceptible to business interruptions based on their locations, other causes of business interruptions, such as cyber-crimes and supply-chain disruptions, may affect hospitality companies and other businesses regardless of where they are located.
It’s no surprise that business leaders of today are concerned about these interruptions. And these major weather events and other causes of business interruptions aren’t going away. According to the Allianz Risk Barometer for 2017, for the fifth year in a row, business leaders worldwide worry about business interruptions (including supply chain disruptions) more than any other issue, with losses from natural disasters and increased volatility of weather among the other most significant concerns.
This leads to the question of how a hospitality company with business-interruption insurance should respond if a business interruption occurs. To recover on a business-interruption claim, it is important for the company to be proactive, organized, and able to support all claimed losses with evidence. In this regard, hospitality companies should focus on four areas.
Know Your Policy
A company must act quickly when a business interruption occurs. It needs to determine the amount of coverage it has, what types of losses its policy covers, and what proof it needs to recover on its claim.
The company must also promptly notify its insurer of the loss. Most policies require this.
Estimate Your Loss
It will usually be in the company’s interest to provide the insurer with an early estimate of the potential loss. This will make the recovery process far easier than submitting a large claim for the first time once all losses have finally been determined.
It is important to keep the insurer well informed about the extent of the loss. If possible, companies should submit periodic interim claims, rather than one aggregate claim after operations resume. This will create an iterative process whereby the insurer and the affected company engage in a constructive dialogue, making future recoveries more likely.
Assemble Your Team
Because of the dollars at stake when a hotel has to shut down for any significant period of time, it is important that the company use the right team of inside and outside staff to prepare the business-interruption claim. First and foremost, this includes an internal team leader (perhaps the property’s general manager) that has knowledge of the physical property, the nature of the loss, the property’s historical revenue data, and which other staff members have relevant expertise, such as finance/accounting, operations, risk management, and internal legal counsel.
Outside resources should include legal counsel to advise the company about what is recoverable under the policy and the applicable law. For example, at what point does the interruption in utility service become too attenuated to permit a company to recover under its business-interruption policy? Will the company be able to recover when its operations are partially restored? What kinds of ongoing costs may be recovered? These and other questions will require the advice of counsel.
Other outside resources may also be helpful. Forensic accountants may be retained to help justify a business-loss claim based on data from prior years or data concerning the performance of peer properties. The company may want to retain a public adjuster. Technical experts may also be required to assess the damages and give an opinion on the amount of time it should take to restore operations (called the “period of restoration”).
Focus on Proving Recoverable Losses
A company cannot recover losses it cannot prove, yet proving losses based on anticipated business can be challenging. Compounding the difficulty is that standard business-interruption insurance pays for only lost net income, so costs the company would have incurred to earn the income must be subtracted from the claim amount. Other recoverable costs include damaged merchandise, ongoing fixed costs, temporary relocation expenses, and additional costs the company incurred because of the disruption.
There are several potential methods of proving business loses. An affected company will want to prove the property’s historical income for the period of the disruption. Data concerning the performance of comparable properties can be another way to prove the amount of the loss. And the company may also try to estimate losses based on forward-looking projections or budgets, especially if made before the loss in question.
Following these best practices will help ensure that, if a loss occurs, the company will be prepared to submit a supportable claim and recover proceeds to which it is entitled under its business-interruption insurance coverage.
About the Author
Adam M. Chud is a litigation partner at Goodwin. He is focused on helping clients resolve complicated business challenges, particularly those involving insurance claims, from identification of the problem through resolution. Chud is also a member of the firm’s Class Actions + Mass Litigation and Insurance + Risk Management Practices.