Hotel Insurance Claims - 15 Practical Pointers

By Gary Thompson -- HOTELS Magazine, 11/1/2005

Historically, insurers have fought hard to minimize commercial insurance claims following a major catastrophe. Hurricane Katrina will be no exception. Policyholders are advised to be proactive in claiming their rights under policies. Resolution is achievable, but usually only with hard work and patience. Policyholders in the hospitality industry face a number of issues, too many to list here. Here is a list of some practical pointers that most hotel policyholders should consider:

• First, Protect and Preserve the Assets. Emergency and temporary repairs should be carefully documented and, if practical, reviewed with the insurer in advance. Many claims along the Gulf Coast are still in this stage of loss mitigation.
• Attend to Notice and Timing. Make sure all notices have been issued to all insurers that could be called to pay. If the Policy requires a Proof of Loss within 30 days, obtain a written extension. Spot any other time-related policy requirements.
• Reserve All Rights. Generally, reserve all rights and contentions. Do not allow the insurer to begin to classify or characterize your claim before you have had a full opportunity to review everything. If you let them, the insurers will dictate your claim to you.
• Form a Team. Form a team of all personnel involved in the claim and hold regular team calls or meetings. Review the Policy with counsel. The Policy is filled with ambiguities and pitfalls, and case law may be instructive. The insurer will hire an adjuster, consultants and accountants. Consider leveling the playing field by hiring your own adjuster, consultants and accountants. Many policies cover some of these claim preparation costs.
• Look for Other Policies. Many hotels are insured under a “wind buy-down” policy or a National Flood Insurance Program policy. Limits under these policies may offset the deductible that otherwise applies under the main “all risk” policy.
• Seek Money Early. Begin to negotiate for advances immediately. If you do not ask, the insurers will not pay.
• Communicate, Communicate. Develop relationships at all levels of your team with their respective insurer-side counterparts. Seek cooperation, dialogue and communication.
• Document, Document. Keep exact and tedious records of all communications, meetings and exchanges. Keep submitting documentation. If insurers state that they have not received sufficient documentation, challenge them to be specific. Insurers may play this card to the end.
• Attempt to Involve Insurers Before Repairs. Attempt to obtain insurer approvals before repair and replacement of property. Be aware of insurers’ right to salvage property. If insurers are silent or non-responsive in the face of repair decisions – as is often the case – document it for the record. They should not be allowed to second-guess the decision after the fact.
• Do Not Forget Code Upgrades. Most policies cover code upgrades. Be aware of the underlying codes and whether they will increase repair costs. Capture all such costs in your claim. This is an “upgrade” provided by the policy. The insurers may complain that you are benefited from the hurricane. But that is the express coverage in the Policy.
• Review Causation. Coverage, sublimits, and deductibles can be affected by determinations as to whether the damage was caused by the covered peril, or by one type of peril versus another. The best known example for Katrina is the wind vs. flood issue. Carefully review causation issues before presenting your claim. The “efficient proximate cause” rule generally captures coverage for any repairs that would not have been made but for the hurricane.
• Undamaged FF&E May Be Covered. Many policies contain a “pair and set” clause. Depending on the wording, this may mean that if some of the FF&E in a room is damaged, there may be coverage for replacement of the full “set” in the room in order to maintain uniformity of décor – in light of the need for hotels to have matching FF&E.
• Accounting. Set up accounting codes or other processes to track all invoices, costs, expenses of any kind related to the claim, by various categories – e.g., emergency expenses, permanent repairs, claim preparation expenses, etc. It should be easy to chart claim numbers.
• Prepare the Business Interruption and Extra Expense Claim Carefully. This is an area where specialized forensic accountants are needed. Insurers will challenge attempts to recognize net profit for an interruption period where hotel revenues are trending upward, as in the current hospitality economy. Utilize experts who can draw on market data to prove up the trending analysis. Include in your claim lost depreciation as a result of damaged or destroyed property.
• Be Aware of Lender Requirements and Other Agreements. If there is a loan for the hotel, review the Loan documents closely. There will be insurance-related provisions. Proceeds may need to go into special accounts. Communicate with the lenders and keep them updated. In addition, review any other agreements that can impact a hotel claim – a ground or space lease, a hotel management agreement, a hotel franchise agreement, a condominium association agreement, rental agreements with tenants, etc.

Gary Thompson, a partner with the law firm of Gilbert Heintz & Randolph LLP, specializes in commercial property insurance claims and has handled many hotel claims. He can be reached at thompsong@ghrdc.com.