Business Interruption (BI) Claims: Tough Issues Facing Hotel Executives

By Staff -- HOTELS Magazine, 11/1/2005

“The fundamental principle of business interruption insurance is to make a company whole. But filing claims isn’t easy. Two issues dominate for hospitality companies: the environmental and the economic.

Environmental

“Environmental concerns top the list. Properties in areas affected by Katrina and damaged by wind and water face a high likelihood of persisting environmental contamination including poor indoor and outdoor air quality, mold and waterborne toxins, and other unattractive substances seeping into the soil.

“Hotels must assess and understand these issues and their continuing impact. Insurers have experts – industrial toxicologists, microbiologists, hydrogeologists, etc. – but each hotel has its own criteria for the quality of its hotel experience. Each will want informed reports on the extent of damage, the viability of remediation and recovery, and prospective costs.

Economic

“Second is economics: the ‘If you build it, will they come?’ worry. When can a hotel return to full occupancy? In New Orleans, rebuilding will last years. If a company can re-open its doors three to six months from now, who will their guests be? Construction workers? Insurance adjusters?

“The problem is more acute at a resort property that needs a higher ADR. Can it survive long enough to return to profit? Resorts are sensitive to other impacts: They can rebuild, but what else are guests coming to see? Casinos, restaurants, theaters and other entertainment venues all need to be rebuilt for a resort to thrive.

“Of course, alongside this risk also comes an opportunity: A hotel that decides to rebuild in an affected area does stand to gain a first-to-market advantage—likely not only an economic advantage but one that earns the company significant goodwill as well.

A Strategic Choice

“It’s a strategic choice. Management must decide if they should use a settlement to rebuild. If the building is a total loss and the site no longer appears feasible, asset replacement may mean another location. If a property is not a total loss and a company still chooses not to rebuild, it can still file for an adjusted value, for the extent to which business is interrupted and income lost.

“Typically in the U.S., business interruption coverage includes a standard, limited period of indemnity – time spent in due diligence, and due dispatch in making repairs to restore the facility to its pre-loss condition. Some companies may have purchased extended period of indemnity coverage. Others won’t have, but there may be other remedies. Contingent BI coverage can help when customers, suppliers, or dependent properties, such as nearby businesses that have suffered a loss, are not fully recovered. An insured may realize that its business continues to be damaged by the lack of infrastructure and a paucity of customers. But it can be a complex and document-intensive process to prepare such a claim.

Collaboration is Key

“Most importantly, risk managers and CFOs must present a unified front to the insurer. Hotel companies face one of the largest and most arduous financial investments of their year. They have involuntarily entered into a $25 million, a $30 million, even a $50 million transaction. Certain landmark and resort properties may be looking at claims in excess of $100 million.

“This means companies must collaborate to present the best-evidenced claim. At some hotel chains, the property owner and the asset manager could have separate goals: one for immediate restoration, the other for a deliberate pace toward full restoration of the brand experience. These parties have to work together. Their accountants, financial executives, and outside consultants are critical in the overall development and documentation of a claim on which a company is ultimately staking its credibility with the insurer. Companies whose CFO or treasurer involve their risk manager with the work of such advisors have faster, more optimal recovery.”

Dan Torpey, a partner in Ernst & Young’s Investigative & Dispute Services practice, is national leader of the firm’s Insurance Claims team. He is co-author of the recent authoritative text on business interruption, The Business Interruption Book: Coverage, Claims, and Recovery, published in 2004.