Property insurance is a valuable asset that can protect businesses in the hospitality industry from both natural and man-made disasters. Such insurance may provide coverage not only for physical damage to and loss of property, but also economic losses resulting from the interruption of your business and during the time your business is recovering.
When a policyholder submits a claim for coverage following a loss, however, insurance companies often refuse to pay the claim based on numerous coverage defenses. An examination of recent litigation trends has identified three common disputes that businesses in the hospitality industry can avoid, or at least minimize, with advance preparation. These disputes relate to coverage for newly acquired property or property in the course of construction,coverage for the increased costs of construction when a property must be rebuilt to comply with new and stricter building codes and ordinances, and disputes over the lack of proof to substantiate economic loss caused by the interruption of the business’s operations.
To avoid these common disputes, businesses should take a few simple steps before a loss occurs. These steps may help preserve and maximize any insurance coverage purchased for loss due to property damage and business interruption.
- Monitor and promptly update the schedules of insured locations in your policy when your company acquires or builds new properties. Often your policy will contain a list of scheduled locations to which the insurance applies. It is important to ensure that new locations or buildings are covered by your insurance policy and that you timely update the schedule of insured locations if required to do so under the terms of your insurance policy. For example, in recent litigation involving a casino operator, a court found that there was no coverage for the insured because the property damage occurred at a new location that was not yet listed in the insurance policy’s schedule of insured locations. To avoid such a gap in coverage, work with your insurance company or broker to implement procedures to provide new location information promptly to your insurer on an ongoing basis now, to avoid disputes later. Carefully consider whether any exclusions or limitations in the policy would bar coverage for the newly acquired property or property in course of construction, because even if a property is added as an additional location on an insurance policy’s schedule, other provisions and exclusions may limit insurance recovery for that property. Additionally, you may be able to purchase enhancements to coverage that expressly provide coverage for newly acquired property and for property in the course of construction.
- Consider purchasing additional coverage to pay for increased rebuilding costs due to compliance with current building codes. Commercial property insurance policies frequently exclude from coverage the costs to demolish and reconstruct the undamaged portion of a building and the increased costs to rebuild the entire building to comply with current building codes and ordinances. In one case, a court found that costs to remedy code violations that were discovered in the undamaged portion of a building that had been damaged by fire were not recoverable under the commercial property insurance policy at issue. Because building requirements have changed a great deal over the past few decades, the costs of rebuilding older buildings and structures and “bringing them up to code” may be significant. Depending on the age and size of your company’s properties, it may be cost-efficient to obtain full coverage for these costs by purchasing an “ordinance or law endorsement” to your commercial property policy. A small increase in premium now may save your business a great deal in the future.
- Ensure that procedures are in place to prove the amount of lost profits if property damage interrupts your business’s operations. Business interruption coverage reimburses a policyholder for the income that is lost when, as a result of the lost or damaged property, the policyholder’s business suffers a disruption. Recently, a court denied a hotel owner insurance recovery because the hotel owner was unable to provide clear evidence of its lost profits, according to the terms of the policy at issue. The court found that the hotel submitted improper revenue projections because it based its calculations on revenues from the past two years, rather than using more comprehensive data. In addition, instead of submitting invoices and other proof of operating expenses, the policyholder was only able to submit an affidavit of normal operating expenses.By taking proper steps in advance, however, your business can keep and maintain proper documentation that will help maximize business interruption coverage. First, examine your policy language to determine how the lost earnings or profits are measured – against past performance, against budget, pursuant to a specified formula, or through some other method. Then, work with your accounting staff to set up procedures for capturing the appropriate data in case property damage interrupts your business operations. Make sure your business keeps appropriate back-up data for budgets, invoices, financial statements and other accounting data. Should a loss occur, that data will be crucial in establishing the value of your business interruption claim. Setting up accounting procedures, and protecting relevant data, is a simple way to help your business maximize business interruption coverage if a loss occurs. Even after putting in place proper accounting procedures, however, determining the amount of the loss can involve complex calculations and projections. If your business sustains property damage and business interruption, consider seeking the advice of counsel before committing to a methodology for calculating your loss.
By taking the steps described above to ensure that your business is properly insured, you will greatly help your business preserve an important business asset — insurance — that will be extremely valuable if disaster strikes.
Kenneth Berline Trotter and Laura Dellatorre are attorneys with Dickstein Shapiro LLP. Trotter is a co-leader and Dellatorre is a member of the firm’s Property and Business Interruption Insurance Coverage Initiative.
