Mr. Bolger


Business Interruption Coverage: Why You Need it and What Should be in Your Policy

By Christopher Bolger, Senior Risk Manager, Venture Insurance Programs

After a catastrophe befalls your hotel, you are forced to cope with not only the significant costs of clean-up and repair, but the loss of business income when your usual operations are interrupted. In these instances, hotels often lose multiple income streams, from rooms to events to food and beverage.

Hotels are often careful to scrutinize and mitigate the sorts of risks that may shut down business for an extended period of time. After all, no business would think of going without property insurance. However, far too many are not properly insured for the immediate aftermath of a property loss such as a fire or burst pipe. All business tend to underestimate the risk of business interruption and its significant costs.

Business interruption insurance coverage, also known as business income coverage, exists to provide business owners in all industries support while they recover from the unthinkable. Unfortunately, quite a few hotels are underinsured for this coverage. So, why does a hotel need this coverage, and what does it look like in practice? Let's take a closer look at the risks.

Where Business Interruption Coverage Applies

Offered as part of a hotel's property insurance policy or as part of a business owner's policy package, business interruption coverage goes into effect after a covered loss that affects the operation of the business. It covers the loss of net income due to business interruption or suspension and any ongoing operating expenses during that period of time.

It is no exaggeration to say Superstorm Sandy obliterated parts of the Jersey Shore and Long Island. In fact, the devastation was so complete, that authorities kept evacuees out of their neighborhoods and proprietors away from their businesses for weeks after the storm. In some cases, people could not reenter the neighborhoods where they lived or worked for weeks after the storm.

If, in prior disaster recovery planning, Jersey Shore hotels and resorts had budgeted 90 days to recover after a severe hurricane, they would have found themselves falling far short on coverage for the recovery period. After such a catastrophe a hotel may be unable to open for normal operation for a full year.

Out west, the increased threat of wildfires can devastate hotel businesses. Not only would a fire quite literally destroy your property, but as a wildfire rages for weeks on end, you may be unable to access your property to assess the damage, remove debris and rebuild.

Though Sandy and wildfires provide extreme scenarios, even minor disasters can significantly disrupt your business and rob you of necessary income. As one Georgia hotel learned recently [www.accessnorthga.com/detail.php?n=284792], even a relatively small fire contained in the laundry room can necessitate evacuation and downtime for recovery. And as many businesses near National Parks and other government-managed attractions learned during the 2012 federal government shutdown, business can be severely impacted by your neighbors. Many businesses that serve National Park visitors saw a decline in business during the shutdown.

Keep in mind this coverage does not apply to every problem that disrupts business as usual. Review your insurance policies and talk to your broker to make sure you understand what is and is not covered. Your insurance policy will specify a proximate cause of loss or coverage trigger that activates the coverage.

In the unfortunate event you do need to file a business interruption claim, advise your property adjuster that should have been assigned to the claim you have already reported. If not it has not already been reported, do so as soon as practicable. The insurance carrier will send an adjuster and, depending on the severity of the loss, that adjuster's manager may be involved in handling the claim. In some instances, the carrier may opt to send out an independent adjuster as well. Finally, you may be contacted by a loss accountant or auditor, who will review sales data, payroll, room rates, occupancy and other factors that go into determining your indemnity payments. Feel free to contact your broker or adjuster should you need clarification on the various participants on your claims team.

What to Consider When Purchasing This Coverage

Since many hotels are underinsured for business interruption, you should check with your insurance broker about your current insurance policies. Your hotel should maintain coverage that accounts for the maximum projected loss, accounting for loss of income from room sales and all amenities.

Look for a policy with sufficient limits and periods of indemnity appropriate for your hotel. In the example of Superstorm Sandy detailed above, some business owners could not even return to their businesses, let alone begin recovery efforts, for weeks after damage was done. So if a hotel in that area had business interruption coverage that allowed for 90 days, but they were not allowed to access the hotel for 30 days, recovery would be significantly slowed. Construction delays for various reasons can increase the cost of recovery. Satisfying any changes in local or statutory enforcement of building, zoning or land use ordinance or law must be considered in your coverage and anticipated in the policy.

Ensure you have debris removal coverage. Though news reports and marketing campaigns only show us images of rebuilding, debris removal is an intensive and expensive aspect of recovery from a disaster. If your hotel is devastated by a flood, tornado or fire, you may come up against a sublimit - a cap on coverage for a particular type of loss. This could leave you exposed and paying out of pocket for the significant expense of debris removal.

For peak occupancy months, seek an extended period of indemnity. A business interruption policy will pay until you reach pre-loss revenue, but that revenue varies seasonally. So hotels will want to figure out how to increase most limits for peak months. An insurer will not pay you for 100 percent occupancy; they will pay based on your average occupancy for the season based on the previous year or other analysis period as determined by the carrier. Plus, they will not pay 100 percent of your expenses during downtime; they will most likely cover projected income, expenses and payroll based on your financial history.

Financial Planning for Disaster Recovery

Having detailed financial records and projections before disaster strikes will make it much easier to manage your business in the aftermath. If you have a plan, and you have detailed records of your income and other financials, you can easily make projections for the sake of filing a business interruption claim.

Create a business income worksheet that estimates your hotel's income for a 12-month period. This should be reviewed annually, perhaps during your insurance policy renewal period or after the close of the financial year.

When filing a business interruption claim, you must also be able to state your sales before the disaster and project those during and after the loss. Prior sales will be included in the income worksheet described above. With the right financial records, you should be able to project daily room rates, but you can use a third-party forecast to estimate this, as well.

You must also be able to calculate continuing expenses, such as electricity, during a time of limited operation and the estimated period of restoration. This is the period of time you expect to need to complete repairs and resume normal operations. Even if this period must later be extended, this estimate will provide you with a solid base.

As the most recent recession taught many businesses, it is a good idea to seek ways to supplement income during times of recovery. Many hotels did this during the recession, adding and diversifying amenities to appeal to different types of guests. This type of diversification makes good financial sense. For example, if after a business-interrupting event, rooms are inaccessible but the club or restaurant is unaffected, you will continue to have that significant income during a period of recovery.

Pre-loss planning can reduce post-loss effects on your hotel's bottom line and operations and reduce unexpected consequences of your loss. You should always be prepared for a crisis, and insurance and financial planning is part of the contingency plan you should have in place. To help you execute that crisis plan, business interruption coverage needs to be a part of your overall risk management strategy and plan. When it comes to the risk of business interruption, take a cue from the Boy Scouts: "Be prepared".

Senior Risk Manager for Venture Insurance Programs. Mr. Bolger has specialized in hospitality risk management since 2007 and is responsible for improving the risk performance of Venture’s hospitality clients by reducing the frequency and severity of claims, analyzing loss reports to identify trends by industry or location, and improving loss ratios in order to improve pricing for the hotel and profitability for the insurer. Overseeing all risk management operations, including the claims adjusting teams, Mr. Bolger ensures proper proactive claim management and loss control procedures are in place with the overall goal of minimizing the overall cost of risk. Mr. Bolger can be contacted at 800-282-6247 ext. 242 or Cbolger@ventureprograms.com Extended Bio...

HotelExecutive.com retains the copyright to the articles published in the Hotel Business Review. Articles cannot be republished without prior written consent by HotelExecutive.com.

Receive our daily newsletter with the latest breaking news and hotel management best practices.
Hotel Business Review on Facebook
General Search:

NOVEMBER: Architecture & Design: Authentic, Interactive and Immersive

Brian Obie

When people arrive at a hotel they have usually traveled a long distance. They are typically tired and stressed to some degree or another depending on how easy or difficult the journey. When they finally come into our driveway and understand this is where they should be – with the valet right there ready to greet them – they get the sense that they can finally relax. There’s a huge sense of relief. They now can begin their business trip or holiday with the family knowing they will be rested and renewed. READ MORE

Rob Uhrin

When you think of the word resort, what comes to mind? Upscale amenities such as white sandy beaches, luxury pools, first class dining and entertainment and the ultimate spa experience to name a few. The word “resort” probably does not conjure up images of urban cityscapes, or streets filled with busy pedestrians in business suits. There is a new class of resorts coming to the fore in the hospitality industry right now called urban resorts. This article will explore this new type of transformational city design and how to achieve it. READ MORE

Vince  Stroop

In a time when experiences are moments-long and shared over Instagram by many users, it is hard to top the surprise factor when it comes to creating a new destination. Nor should we, as hotel designers, try. With the pace of changing trends that is being communicated to us by branding agencies, designing the next new thing can be tempting. But I am not sure that’s what guests genuinely seek. And judging from the rise of Airbnb, I may be right on my guess that guests want memorable, meaningful experiences, not more selfies. READ MORE

Michael Tall

An urban resort is a property that connects guests to the unique and vibrant elements within a city and outside the hotel. The hotel itself acts as a concierge service, forming a direct link between the local community and those guests who crave localized and authentic excursions. With no signs of slowing down, the urban resort trend is here to stay, and hoteliers can successfully capitalize on this growing segment by keeping the guest experience in mind. At its core, an urban resort is a respite from daily life, offering guests the freedom to choose between relaxed disconnection or active participation within the local community. READ MORE

Coming Up In The December Online Hotel Business Review

Feature Focus
Hotel Law: Issues & Events
There is not a single area of a hotel’s operation that isn’t touched by some aspect of the law. Hotels and management companies employ an army of lawyers to advise and, if necessary, litigate issues which arise in the course of conducting their business. These lawyers typically specialize in specific areas of the law – real estate, construction, development, leasing, liability, franchising, food & beverage, human resources, environmental, insurance, taxes and more. In addition, issues and events can occur within the industry that have a major impact on the whole, and can spur further legal activity. One event which is certain to cause repercussions is Marriott International’s acquisition of Starwood Hotels and Resorts Worldwide. This newly combined company is now the largest hotel company in the world, encompassing 30 hotel brands, 5,500 hotels under management, and 1.1 million hotel rooms worldwide. In the hospitality industry, scale is particularly important – the most profitable companies are those with the most rooms in the most locations. As a result, this mega- transaction is likely to provoke an increase in Mergers & Acquisitions industry-wide. Many experts believe other larger hotel companies will now join forces with smaller operators to avoid being outpaced in the market. Companies that had not previously considered consolidation are now more likely to do so. Another legal issue facing the industry is the regulation of alternative lodging companies such as Airbnb and other firms that offer private, short-term rentals. Cities like San Francisco, Los Angeles and Santa Monica are at the forefront of efforts to legalize and control short-term rentals. However, those cities are finding it’s much easier to adopt regulations on short-term rentals than it is to actually enforce them. The December issue of Hotel Business Review will examine these and other critical issues pertaining to hotel law and how some companies are adapting to them.