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Three Questions to Ask When Shopping for Insurance

Three Questions to Ask When Shopping for Insurance

At its most basic, business-interruption insurance helps companies replace the income they lose and pay the extra costs they incur when they have to suspend operations because their properties are damaged. By contrast, standard property-damage coverage does not replace lost income. For example, if a hotel must close because it is damaged by a hurricane, business-interruption insurance will compensate the owner and/or property manager for some of the lost income—if the hotel has the right kind of coverage.

This is a big “if.” Many companies, including hospitality companies, either do not have business-interruption coverage, have insufficient coverage, or lack the proper type of coverage. For hotels, in particular, basic coverage that is limited to insuring against shutdowns caused by physical damage to the hotel’s property may be of little value when the biggest risks to the property are disruptions in utility service to the affected area or the loss of a key supplier.

Therefore, having the right kind of coverage—and enough of it—is critical for hotels. In deciding whether to purchase business-interruption insurance, hospitality companies should focus on three key questions.

 

1. What type of coverage do you need?

An off-the-shelf form policy will not work for most hospitality companies. The types of coverage a company needs will depend on the particular risks a hotel faces at a given location. The following are four options.

  • Standard business-interruption coverage covers losses resulting from damage to the company’s own property.
  • Contingent business-interruption coverage covers losses caused by damage to the property of a supplier or customer that has a detrimental effect on the company’s business.
  • Service-interruption coverage insures against situations where a business cannot operate because it has no power or loses other necessary services.
  • Leader-property coverage covers business losses resulting from damage to an important nearby property such as a shopping mall or casino.

Contingent business-interruption coverage and service-interruption coverage are becoming increasingly important for hotels that could be affected by the loss of utilities, supply-chain disruptions, and mandatory evacuations that prevent the hotel from doing business—even if that property itself suffers little or no damage from an event.

In determining which types of coverage to purchase, hospitality companies should also consider whether, in the event of a loss, the property could resume some of its operations before it is fully functional. If so, the company might specify in the policy that insurance proceeds will be paid until operations are fully restored, perhaps at a reduced rate following partial restoration.

The company should also ensure that the policy covers the types of interruptions its properties may face. Form policies will not account for these unique conditions. For example, if the property is at risk of flooding or wildfires, the policy should clearly state what happens if such events occur. Establishing clear policy terms up front is far better than risking a dispute over the scope of coverage after a loss takes place.

 

2. How much coverage do you need?

To limit premiums, a hospitality company may decide to insure against something less than its total maximum potential loss. Regardless of how the company decides to resolve this premiums-versus-coverage question, hoteliers should ask a few basic questions before purchasing coverage: What is the likelihood of a business-disrupting loss? What is the worst-case loss scenario? How long would it take to get the business back on its feet after such a loss? What costs would continue if the business could not operate, such as loans, lease payments, taxes, and salaries? These questions are important when assessing the amount of coverage to buy.

 

3. How long would it take to recover from a loss event?

Business-interruption insurance usually provides coverage for a limited period after a loss occurs, which is called the “period of restoration.” Twelve months is common. This period will often begin a few days after the loss occurs and end when the property actually resumes operations or when the property should have been repaired, rebuilt, or replaced with reasonable speed and to a similar quality.

The period of restoration should be negotiable. A company may anticipate that its operations would take somewhat longer to resume than the default period in the form policy. On the other hand, a company may be able to reduce premiums by negotiating for a shorter period of restoration. Relatedly, the company may want to purchase extended business-interruption coverage if it would take some time after operations resume before the property returns to pre-loss income levels. But the important point is that the company should anticipate and address these issues before purchasing business-interruption 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.

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