Claims of business interruption at hotels following natural disasters are a little trickier to negotiate with insurance providers than physical-damage claims, but they are equally important to make.
REPORT FROM THE U.S.—Along with all the physical destruction natural disasters cause directly, they also create secondary effects that can drag out the overall impact of the event for weeks, months or even years.
Natural disasters can disrupt a hotel’s regular business operations long after they have passed, and hoteliers need to ensure they have sufficient coverage in their insurance policies to carry them through until normal business levels return.
Linda Kornfeld, vice chair of the insurance recovery group at Blank Rome, said she’s having two conversations with her hotel clients about what losses they have suffered and how her firm can best frame their claims for their insurance providers.
When determining a property’s losses, she said, it requires looking at the actual physical damage to the property and whether that resulted in the complete or partial shutdown of the property, which means fewer guestrooms available to guests. One of Kornfeld’s hotel clients in Houston saw damage to a property’s elevator because of Hurricane Harvey, she said, so while the guestrooms were still usable, guests would be less inclined to stay there because of the inconvenience of not having the elevator.
Some policies have coverage when employees, customers and/or suppliers can’t reach a hotel and allow it to operate normally, she said. Ingress and egress coverage is one example of this, because if the roads are blocked or burned out, no one can reach the hotel. That coverage should apply to a hotel’s lost profits, she said. Evacuation orders would also prevent people and suppliers from driving to hotels, so there are policies that cover that as well.
Having contingent business-interruption coverage is important, Kornfeld said. A hotel operating in one state wouldn’t be physically affected by a disaster in another state, but if one of the hotel’s suppliers is in the affected area, that could create an interruption of business as well. Hoteliers should consider having protection broad enough that would insulate them from such problems with suppliers, she said.
“Most polices have some level of business-interruption coverage, especially in the hotel business,” she said. “The impact on profits, on business income, from natural disasters can be more significant than on the cost to fix physical damage. If an entity in the hospitality industry doesn’t have business-interruption coverage, it would be necessary to have going forward.”
Harder to prove
Property loss through physical destruction is the easy part when making an insurance claim, relatively speaking, said David Wood, senior partner at Barnes & Thornburg. Figuring out the value of a structure that caught fire doesn’t create a lot of controversy, he said, and if there is a problem, there are valuation provisions that allow for appraisals for comparisons.
“The disputes really arise out of business interruption, which protects the hotel’s income,” he said.
Using the wildfires in and around wine country in California, Wood said if a hotel burns down, the owner will want to make sure the property still receives the revenue it would have had it not burned down. There would be pre-booked guests and conferences on the books, he said, so a certified public accountant or consultant should be able to show what the income should be along with examples from historical data.
However, if there’s snowfall the same year after the hotel burns down, he said, the insurance company might come back to say that it would have covered the revenue if the building were structurally sound during the winter, but the area hasn’t seen snowfall before, so the roads were closed because there were no snowplows. That means the insurance company would argue the hotel wouldn’t have made money for that particular time, he said.
If nearby wineries burned down but the hotel remained, Wood said, that’s an extra challenge. The owner of a hotel that burned down would still have access to historical data and other documents, he said, but if the wineries burn down, the hotel owner doesn’t necessarily have access to that information to help back up a claim of business interruption.
“Now to prove the income you’ve lost, it’s more dependent not just on your own data but on a business you have no relationship with,” he said.
Think long term
The La Playa Beach & Golf Resort in Naples, Florida, closed as a result of damage from Hurricane Irma, said Raymond Martz, EVP and CFO at Pebblebrook Hospitality Trust, and it will have a partial reopening soon. The hotel was going through a renovation at the time, he said, and the hurricane damaged renovated floors the week before the property was supposed to reopen.
“This is where it pays to have a good relationship with your carriers,” he said. “If you as an owner play the game of changing insurance carrier every year based on the lowest bidder, they keep score. At the end of the day, they always come out ahead. If you’ve been a good customer, paying five to six years with low claims and then have a year like this, they’ll get by.”
Owners who switch around trying to find yield haven’t built up enough of a relationship and goodwill with their providers, Martz said, so they’re not exactly going to be easy to work with.
“I think that’s a lesson for people at times like this,” he said. “That’s going to affect you on business interruption and on the property side.”
Business-interruption claims require negotiation because there’s a lot of gray area, Martz said. An owner with hotel undergoing renovation that has been damaged needs to negotiate the business-interruption claim to determine whether the recovery will match revenue from the previous year or what the hotel could have received after it opened with the newly renovated rooms at a higher room rate.
The other factor to consider is whether visitation for the area would be down in general following a hurricane or wildfire, he said, which complicates the matter.
Another way to build goodwill with insurance providers is to minimize losses by getting the hotel back to working condition as soon as possible, Martz said, while at the same time trying keep the cost of the remediation itself at a reasonable level. It’s more difficult to negotiate business-interruption claims while the property is still closed as that means the claim is open-ended, he said.
“Carriers who have worked with you for a while and made money off of you will be more responsive to you,” he said. “It’s a long process. That’s why relationships matter a lot with these carriers. People who play the commodities game to get a lower cost will have a tougher time on the business-interruption side.”