Double jeopardy: Settlement can mean rough waters

What does it take to recover from unforeseen disaster? Hospitality company owners and managers find themselves in a fluid, rapidly changing environment after such an events and they face many challenges—from repairing a partly operational property to struggling to reopen a completely closed hotel.

The challenge goes beyond repair and reconstruction. It extends to business continuity issues like a loss of bookings and the need to rebuild business with customers who believe the venue is fatally damaged. The process of insurance recovery can be daunting.

The concept of insurance is simple: "Pay me back what I have lost." But the concept of loss can be highly subjective: The assumption that simply because one has paid premiums one will be paid what a policy is worth rarely is accurate.

Fortunately, most business readers are unfamiliar with catastrophic loss and with the process of settling a claim. For those who face it, recovery—both physical and financial—can take months, even years, depending on the magnitude of the loss and complexity of the business.

Phrases like "business continuity" and "catastrophe preparedness" often are tossed about in this context. But what do they mean in the hotel industry? In the context of insurance, the answer can be complex.

Instead of being a discussion that begins and ends the day the claim is filed, collecting insurance after a catastrophe is a series of negotiations between you and an insurer that begins on day one of the loss. The many gray areas include policy provisions, exclusions and limits; loss period, period of indemnity and the idle period; definitions of wind damage versus damage caused by rain, or flood, or by fire or explosion; what constitutes equipment failure as opposed to normal wear-and-tear. And the list goes on.

How does the hotelier prepare for recovery if his business never has faced a catastrophic loss?

The first step is to read the policy. Without needing to be an expert, having a fundamental knowledge of what is recoverable, what limits apply, and how the loss will be measured enhances decision-making after a loss. Many companies ask their broker or agent, their risk manager, and their general counsel to go over policy forms before a loss to understand what is covered and what is not. For example, many policies include coverage for payroll during the recovery period, so the cost of paying employees may be reimbursed even if some of them are idle.

A key second step is to prepare company management and personnel before disaster strikes, so they can protect people and property while gathering and preserving information to prove the loss. After a catastrophic event, without power and with a tree through the roof in the middle of your main kitchen, is not the best time to inventory equipment. Having a plan your staff understands improves the speed and ease of your recovery.

A third factor is communication with the insurer. As in any relationship, communication and compromise are key to success. This is critical soon after a loss, as decisions made early on affect long-term how your business recovers.

After Hurricane Katrina, many hoteliers focused on reopening as quickly as possible to take advantage of the influx of temporary business to the area. In some cases, this was done while deferring full repairs to the property. In these situations, hotel owners and management must consider carefully the benefits of a short-term fix against the longer-term solution of making proper repairs, managing staff levels to meet guest needs and protecting your brand image by ensuring that your guests' experience is not impacted by the effects of the loss.

A fourth success factor: Get help. Insurance adjusters bring their own experts to the table; the need for exhaustive documentation can be onerous. But most policyholders face a catastrophic loss only once in their lives, if ever. Having expert assistance from a claims advisor or CPA firm can greatly smooth the claim preparations process (and a portion of their fees may even be recoverable under the policy). Also it allows management to focus on its business while another team focuses on the claim.

Business insurance—property damage, casualty claims, business interruption, and contingent business interruption policies—should not be a burden or a hindrance. These should be tools to help you recover what was lost and restore operations. You and your insurer have a mutual interest: to get back to normal as soon as possible and minimize future losses.

hmm@questex.com

Daniel Torpey is a partner and Ryan Pratt is a senior manager in the Insurance Claims Services (ICS) practice of Ernst & Young LLP. For more information visit www.ey.com/us/fids