Achieving fair recovery for business interruption losses is often one of the most challenging aspects of resolving commercial property insurance claims. This is especially true for hoteliers and others types of hospitality companies where the amount of income loss can be difficult to pinpoint due to the dynamic nature of market and economic forces that influence how the business could have reasonably been expected to perform if no loss had occurred.
Hospitality companies also tend to underestimate the type and amount of expenses that will necessarily continue during the restoration period — leaving potentially recoverable costs unclaimed. The good news is that hoteliers and other hospitality companies can position themselves to achieve a fair and timely resolution of business interruption claims by adhering to the certain best practices.
One of the keys to a successful claim is having a good policy in place. Companies in the hospitality business face a unique set of risks, some of which may not be addressed in a generic property insurance policy. A broker with an established book of hospitality clients can assist with placing coverage tailored for hospitality businesses and consistent with the organization’s risk transfer objectives.
It is also important for the insured to report business interruption (BI) values that reflect its insurable business interruption exposures. The BI worksheets that policyholders are asked to complete tend to be overly simplistic and come with little to no explanation as to how to quantify values that are reflective of the BI exposure that are to be insured. Reporting BI values that are too high can result in excess premiums and unnecessarily high deductibles. On the other hand, reporting values that are too low may cause a portion of the income loss to be uninsured in the event of a catastrophic loss.
To avoid either of these undesirable outcomes, policyholders should consider having their business interruption values quantified or at least reviewed by a financial or accounting professional who understands the nuances of BI insurance available to hospitality businesses.
Set the Stage for BI Claim Recovery
Upon first learning that a loss has occurred a hotelier should take all reasonable measures to ensure the safety of its guests and staff to mitigate further loss. As soon as the basic details of the loss have been ascertained, the insured will need to provide notice of the loss to its insurance carrier(s). Once these formalities have been addressed, the insured will need to focus on operational and financial recovery, and assemble a cross-functional team to assist with the evaluation, analysis, preparation and resolution of the claim.
For hospitality companies, a typical team may include internal personnel, including the general manager, finance and accounting, operations, legal and risk. The team may also include outside professionals, including brokers, forensic claim accountants, coverage counsel and technical experts. It is essential for all members of the insured’s claim team to coordinate in communicating with the insurance company’s claims teams. This typically works best when the insured designates a senior-level manager within the organization to lead the claim. The team lead should oversee the collection and compilation of data required to develop and support the claim, and control the flow of information to insurer, brokers, claim consultants and adjusters.
Throughout the claim process the insured will need to maintain regular communication with the claim adjusters and insurers. Keeping the adjusters and insurers apprised of plans and restoration efforts will help to eliminate surprises and lead to a less contentious claims process. Disputes are bound to occur during the adjustment process; however, the insured should not be quick to let such disagreements derail settlement discussions.
Rather the insured should strive to resolve as many claim items as it can and table the disputed items for a narrowly focused final claim negotiation.
Miscommunication can derail an otherwise smooth claim process. Disjointed communication, internally or externally, may lead to misunderstandings, which will take time and resources to overcome. Companies need to be open about the importance of establishing and working through a set communication protocol. This typically works best when the team lead is responsible for controlling the flow of all information related to the claim.
Every analysis, email, memo and press release could be used in the context of a dispute. In the event of a potentially difficult claim, consider channeling communications through counsel to establish legal privilege.
Representative of Actual Loss
Coverage for business interruption may vary by policy, but at its root, business interruption insurance is intended to provide reimbursement for the actual loss sustained by the insured — consisting of the net profit that is prevented from being earned plus all charges and expenses that must necessarily continue during the interruption of business. To quantify the lost-profits pieces of the equation, the policyholder must first determine how much profit it would have earned if no loss had occurred. Policyholders should start by establishing a realistic and supportable estimate of how much revenue the business would have been able to earn if the property loss had not occurred.
There are many ways to arrive at such an estimate, but the most common approaches are based on historical experience of the business, benchmarking the impacted property performance to a competitive set of comparable hospitality properties in the area, or forward-looking projections or budgets that were developed prior to the loss.
It is not uncommon for there to be significant differences in the measure of lost revenue under the different approaches — each of which has strengths and weaknesses depending on circumstances surrounding the loss and recovery. A hotelier would be well served to evaluate its loss using several of these approaches before adopting the one it believes best represents the actual loss it has sustained.
In the process, hoteliers are prone to overlook certain variable costs that will necessarily continue even if they are not immediately reflected in its income statement. For example, many hotels are subject to franchise, management, advertising and various other types of fees that are calculated on a set percentage of a defined revenue stream. At first blush, one might not think that these fees would continue if the revenue stream that serves as the basis for such fee is reduced or disappears all together. This, however, is often not the case. In many cases, franchise, management or advertising agreements will stipulate that the revenue streams that serve as the basis for these fees include proceeds from BI insurance. Therefore, depending on the wording of the policy these fees may be treated as continuing expenses, since the insured has an obligation to pay them on BI proceeds it receives.
Set Realistic Goals and Expectations
Hospitality companies experiencing their first major BI loss are often surprised at the amount of time it can take to resolve the BI portion of their claim, even when things go smoothly. Unlike the property damage claim in which there are invoices to support the cost to restore or replace damaged property, a BI claim is essentially an estimate that requires many assumptions, thereby making it more complex to measure than a typical property damage claim.
A standard policy provides coverage for the actual business losses sustained, which means that unless the hospitality company has sustained a total loss, it will have to wait and see how the property performed during the period of restoration before it can certify the details of its loss. Further, income losses are measured on a monthly-basis, and there is often a lag of several weeks between when a month ends and when the profit-and-loss statements and competitive set data are published. Even after this data becomes available, the insured still needs to evaluate the loss and submit a claim, which then must be reviewed by the forensic accountant who is working on behalf of the insurance company.
Policyholders do not need wait for the full business income loss to be realized to receive insurance proceeds for its loss. The insured should take an iterative approach to pursuing recovery for their business interruption losses.
At the onset of the loss, the insured should strive to prepare a high-level estimate of its loss based on the best available information pertaining to the restoration plans and schedule with a cushion for unexpected delays in the recovery. The adjuster may use preliminary estimates to set an initial reserve for the BI loss and it is typically more challenging to get a reserve increased than it is to explain the impact to the business was less significant than anticipated and pursue recovery for income losses that ultimately fall below the preliminary estimate.
As actual financial results become available, the insured should fine tune its measurement of the loss and periodically submit and request interim payments for the agreed portions of it loss. Adopting such an approach helps to identify differences in the loss measurement early in the process and provides an opportunity to work though issues throughout the adjustment.
Any hospitality company that experiences a business income loss will confront a unique set of challenges. The best practices outlined above represent general guidelines to help the insured to navigate the claims adjustment process and promote a successful recovery and resolution of claims.
This article was originally published in the March 6, 2017 issue of Insurance Journal magazine.
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