How Hotels and Restaurants Can Prepare Strong Business Interruption Claims

In addition to concern over the health and wellness of friends, co-workers and loved ones during the coronavirus pandemic, business owners are worried if and how their businesses will survive. The hospitality industry has suffered dramatically from the global pandemic. Many restaurants are trying to survive and keep their employees working by offering customers takeout and delivery service. Unfortunately, as other industries continue to be impacted, more individuals might be laid off, and the luxury of prepared meals and family vacations will be cut from a family’s budget.

Many businesses are wondering if their insurance will cover their lost income. Companies should be prepared to wait out current legislative bills that could force insurance companies to cover business interruption claims brought on by the closure of businesses due to the coronavirus. Until then, you must prepare now.

How do I file a claim?

Read your policy and determine the claim process. Does the policy require notification to the insurer within a specified period after the occurrence, or are you required to have documentation supporting your claim prepared prior to submitting your claim? Each insurer may have different procedures to follow. Understand what you are and are not covered for.

Organize the documents you think you will initially need. Keep copies of everything you provide to your carrier, document when they were provided, and keep records of all correspondence with your insurer, as well as information on when you expect to hear back from them.

What is covered under my policy?

Policies can differ by insurer and by policy as they are written to provide coverage for unique business needs. The wording of a policy can be somewhat vague, leaving itself open to interpretation when it comes to submitting a claim; or it can be very specific, identifying precisely what is included, indicating if it is not identified in the policy, it is not covered.

To assist with loss of income in a situation where there has been a direct loss to the business, an endorsement to a commercial property policy is available in the form of a business interruption (“BI”) or business income policy. This endorsement is designed to cover, up to the limit of the policy, the loss of business income from when the catastrophic incident begins until the business is back to being operational.

Customers may include endorsements to add to or remove items from their standard policy. Conversely, the insurer can also have endorsements to include or, more likely, exclude coverage. This point has become a battleground as businesses are being forced to close due to the coronavirus pandemic. Beginning in 2006, insurance companies began to include an endorsement to their policies that would exclude losses due to virus or bacteria. This endorsement may likely prevent businesses from collecting insurance benefits expected from BI insurance.    

Even the existence of an all-risk endorsement will not guarantee coverage, since this type of policy typically only covers losses that are not specifically excluded from coverage. An all-risk policy often carries an exclusion for viruses and bacteria coverage.    

What information should be included in my claim? 

The best thing a business can do to ensure that its claim is processed as smoothly as possible is to be prepared and provide realistic and supportable documentation to their insurer. Begin with a description of your business so that an adjuster has context around the information they are reviewing.

Be prepared to provide the claims adjuster with the following documents:

• Income statements for the last two years
• Income statement prepared just prior to the BI occurrence
• Projected income analyses performed prior to the BI
• A current projected income analyses
• Balance sheets for the last two business years
• Payroll records from before and after the BI occurrence
• Names, salaries and dates of all staff layoffs
• Tax returns for the last two business years
• State sales tax returns for the last two business years
• Copies of current utility bills and any other operating expenses
• Major customer contracts
• Major vendor contracts
• Records establishing ongoing business expenses
• Inventory records

More specific to the hospitality industry, in addition to the above items, include the following information with your claim:

• Occupancy records for the last two years
• Occupancy percentage and average daily rates
• Estimated lost room revenue
• Estimated restaurant/room service revenue lost
• Lost income due to reservations and event cancellations
• Accounting of deposits refunded due to the coronavirus
• Banquet bookings for the last two business years
• Estimated banquet revenue lost
• Estimated lost spa revenue
• Estimated loss of retail sales
• Estimated loss of bar/liquor proceeds
• Accounting of fixed fees and permits that still need to be paid such as liquor licenses and franchise fees
• Estimated costs to sanitize and clean for reopening
• Documentation showing steps taken to protect guests and staff from the spread of the coronavirus within the establishment, including costs incurred

This list should not be considered all-inclusive, and for many of these you will need to provide support as to how you calculated the estimate. As noted, policies are individualized and your adjuster may require additional items not noted above.

How should I document the loss in business that my hotel/restaurant has experienced as a result of coronavirus?

Gathering the necessary documentation can be an overwhelming task and should be considered a team effort. As with the normal course of business, there are individuals responsible for the various operations such as banquet management or reservations. The operation leads are the people with the firsthand knowledge of the individual business areas and will know the answers to questions that the adjuster may have; they should know where to find the required documentation.

What is the government assistance policy, and how do I find out if hotels/restaurants are included?

The Coronavirus Aid, Relief, and Economic Security (“CARES”) Act is available for small businesses and includes help for businesses under the NAICS Sector 72, Accommodation and Food Services Code. The definition of a small business, less than 500 employees, has been extended to allow hotels and restaurants to be considered a small business if they have 500 or fewer employees per location. For information on the CARES Act, refer to EisnerAmper’s article, "CARES Act Summary."  

Programs available under the CARES Act include:

• Paycheck Protection Program (“PPP”). This is a no fee, fully forgivable loan designed to help small businesses retain their employees. While most small business loans require less than 500 employees, the PPP loan is waving the rule for hotels and restaurants. For more information on the PPP loan, refer to EisnerAmper’s article, “SBA Releases Application and Information for PPP Participants.”
• Economic Injury Disaster Loan. These low interest loans are available for small business to help pay for expenses that the business cannot currently cover due to the pandemic.  
• Employee Retention Tax Credit. This provides a refundable payroll tax credit for 50% of wages paid to employees, up to $5,000 per employee, from March 13, 2020, through December 31, 2020.

Individual states are also offering programs specifically for industries that have been hard hit. The National Restaurant Association is continually updating its website and has links to the Restaurant and Hospitality Association for each state, highlighting the loans and grants specifically designed to assist hotels and restaurants within that state.

What is the state policy on business interruption claims?

Every state has its own independent state insurance commission. This department is available to help individuals and businesses understand information provided by their insurance company. They are also available to provide guidance if the insured feels that their claim has not been adequately addressed. The state commissions are working with the insurance companies to find a practical solution on how to handle BI claims. You should monitor your state’s insurance commission website for the most current and accurate information.  

How can I increase my chances of getting coverage?

• Read your policy’s declaration page and understand your coverage.
• Work directly with your broker or agent. If you do not understand your policy, have them provide a written, detailed explanation.
• Determining what is owed to you can be calculated in different ways, so be prepared with a reasonably supportable amount you expect. There are many web articles available to help you through this process, but if you feel you need help determining your losses, contact your state’s insurance commission for assistance or consider hiring an independent adjuster.
• File your claim as soon as possible. If you are not sure if you have a valid claim, notify your carrier of a potential loss immediately. Include any potential lawsuits that may occur due to customers or employees contracting the coronavirus while at your establishment.
• Determine what documentation your insurer will need from you.
• Monitor pending litigation with the insurance companies. Verify with your adjuster if you will be automatically considered for coverage if they are forced to pay BI insurance or if you will need to refile your claim.

One key requirement for a business interruption claim is if the loss has been caused by direct or physical damage to the property. Clearly, the coronavirus has not caused visual destruction, but is physical damage limited to structural impairment or can the mere presence of a virus on the property define it as unsafe?  Arguments such as this, which will be key to winning a BI claim, will be ongoing for quite some time. We recommend you monitor legislation and speak with your insurance advisor or legal counsel to ensure that you are prepared to provide proof of damage as the resolution becomes clearer.

Should I file under other clauses in my policy to increase my chances of getting covered?

Yes. Provide notice of loss under all potential policies. However, be aware that each policy or endorsement may come with its own limitations and exclusions. Read everything thoroughly.

General Liability – Notify your carrier of potential lawsuits due to employee or customer exposure to the coronavirus at your establishment.

Contingent BI – This endorsement will cover losses if business was lost due to required supplies not being received. This policy may have its own specific exclusions and rules, so be familiar with what is covered.

Civil Authority – Several conditions must be met for this coverage to be paid. This would include government restriction of property access and physical damage to the property. Understand that insurance companies will argue that a virus, which can be disinfected, is not property damage, so coverage may be difficult to obtain.

Leader Property Coverage – This is an endorsement, which would cover losses to your business if an attraction, which drew customers to your business, closed. This coverage may also be limited based on the exclusion of coverage due to virus or bacteria.

Event Cancellation – If you have purchased insurance for event cancellation, this would be another avenue to apply for coverage, although it may also limit what it covers.

Generally, obtaining coverage due to the coronavirus will not be easy unless the insurance companies and the government work together to help provide some financial assistance to their customers. The key for affected businesses is to be as knowledgeable, prepared and thorough as possible during the claims process.