Six Business Interruption Claim Considerations for the Hospitality Industry
A typical assumption made regarding a business interruption claim for those in the hospitality industry is the business making the claim will be returned to the condition it was in before it was harmed. Theoretically, this would include reimbursements for any repair-related expenses for damaged property and/or recovery of lost income that would have been earned during the time your hotel, restaurant, or other related business was recovering. Unfortunately, applying your insurance coverage to your claim’s specific facts and circumstances may result in an outcome that doesn’t meet the expectations outlined above.1
Most business owners assume the recoverable losses will amount to the difference between the income that should have been earned less the income the business did earn. The methodology laid out in your insurance coverage may not be straightforward and may only cover a portion of the lost income or repair expenses incurred. As addressed in a previous BKD Thoughtware® article, understanding the terminology and specific coverage outlined in your policy can be advantageous when working through a claim with your insurer. It also will set the expectation for what the potential recovery will be in case your business suffers a loss as a result of an unfortunate event.
There are many unique characteristics businesses in the hospitality industry should consider when evaluating their policy and performing or anticipating a business interruption claim. Some of the main income drivers in this industry include seasonal tourism and special events that cause an increase in customers for a given period of time. Understanding the timing of the tourism season and special events that affect your business’s bottom line can help when evaluating your current insurance policy and filing a claim for lost income. Let’s explore this in greater detail as well as some other considerations for filing a claim.
Businesses located in certain areas tend to have increases or decreases in customers around the same time period every year. This could result from snow birds escaping to a beach destination or skiers hitting the slopes. In both situations, the businesses in the surrounding area can reasonably anticipate an increase in customers for an extended period of time. Alternatively, having a location in an area prone to flooding, hurricanes, and wildfires can have a negative effect on a business as well. The anticipation of these types of events (and sometimes not even the actual occurrence) can lead to a decrease in customers for a given period.
2. Special & One-Time Events
One might not typically pay specific attention to an early weekend in February for a business in the hospitality industry. However, that consideration and, more importantly, expectations may change if the business happens to reside in the city hosting the Super Bowl. Special events, specifically those a business could reasonably expect to draw many attendees for several days or weeks at a time, should be considered when determining a loss of income. Host cities for sporting events and music festivals are prime examples of the positive economic effect these unique events can have on a business.
3. Normalizing Financial Results
From a historical standpoint, financial results may have to be normalized to account for seasonality-related abnormalities or one-time/special events that have occurred in the past. From a prospective standpoint, one may have to consider a reasonable level of income that a business could have supported when projecting potential future revenues. These can be events that affected (or will affect) revenues in either a positive or negative manner. Understanding the timing and related consequences for a business can assist in developing a reasonable loss calculation.
4. Historical Reporting—or Nonreporting—of Income
A common issue is the underreporting of income by businesses that accept cash for payment or services as part of their operations. Although it’s not exclusive to the hospitality industry, it could potentially affect a business when it’s time to file a business interruption claim.
Theoretically, underreporting income over the years will lower the potential amount that could be recovered under a claim, as it will be much more difficult to justify a higher level of income. Not surprisingly, some businesses amend tax returns for prior years to increase the amount to be recovered when making a claim for lost income.
We don’t recommend that a business underreport its income, and the owners should be aware of the potential effect it will have if the need for a business interruption claim ever arises. The amending of tax returns for prior years will most likely be something the professional reviewing the claim has seen before and may draw a higher level of scrutiny to the financial results presented.
5. Financial Record-Keeping
It’s important to note that you should continue to retain and keep safe all financial documentation and support for any incidental expenses incurred. This includes invoices and payment records for amounts paid for repairs or to help mitigate losses.2 Consider keeping a log to track employee time and expenses relating to the business interruption and assume that all the information will be heavily scrutinized by your insurance company when it evaluates your claim. An omission of requested information or the submission of incorrect information may result in your claim being denied.
6. Payment of Professional Fees
Many insurance policies cover the necessary expenses required to hire a forensic accountant to assist in preparing your claim. Having the assistance of a professional experienced in compiling a business interruption claim and working with insurance carriers is a benefit that should be considered. Doing so may help your business get its claim accepted and avoid potential litigation, which can take up an incredible amount of time, money, and resources.
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1 We generally advise you seek an attorney to provide a legal interpretation of the language used in your policy and its application to the unique set of circumstances involved in each claim.
2 With any policy, it’s important to remember that you have a duty to mitigate your losses, meaning you must take reasonable action to reduce the loss and avoid additional damages. This is an important consideration, as insurers usually win legal challenges concerning lost income and extra expenses that could have been avoided had the insured taken reasonable action to mitigate.