Hoteliers lean on business interruption insurance to find an upside in disaster

Business interruption insurance is like an old rag you keep under your sink—you don’t want to use it, but you’re always glad that it’s there when you need it. Unfortunately, many hoteliers in south Texas and Florida are reaching under their sinks for their business interruption plans as they recover from the damage of hurricanes Irma and Harvey and try to make the best of a bad situation.

Michael Bellisario, VP of equity research and a senior analyst at Robert W. Baird & Company, said that some management teams are evaluating their renovation plans in the wake of such disasters, and are choosing whether or not to pump more capital into damaged properties while their competition is down. The mentality behind such a strategy is that, once open, these hotels don’t want to be surrounded by newer, shinier competitors fresh off of their own updates.

“If you are receiving interruption proceeds, you aren’t missing out on a soft demand period,” Bellisario said. “Key West, for example, is not in a huge rush to get its hotels open.”

In one such case, Bellisario pointed to DiamondRock Hospitality’s Inn at Key West. DiamondRock acquired the property in 2014 with plans to renovate it in the future, but due to Hurricane Irma the company is moving forward with an overhaul now. DiamondRock now lists a spring 2018 re-opening for the property.

The reasoning behind this decision makes sense, but Dana Kravetz, managing partner of law firm Michelman & Robinson's Hospitality Industry Group, said hoteliers need to be cautious and aware of what their insurance will cover should they go forward with renovations. This is because interruption insurance is designed to “make a business whole” in the event of an interruption, not to fund an update.

Frenchman’s Reef & Morning Star Marriott Beach Resort in St. Thomas, U.S. Virgin Islands. Photo credit: Marriott International

This is an important distinction to make. According to Kravetz, this type of coverage is designed to help a business get back to where it was before disaster struck. If an operator begins to change the scope of a project to add renovations, he or she may end up paying more out of pocket than initially expected.

Operators also need to take stock of whether or not the option to update their hotels is even on the table—and sometimes it simply isn’t. Bellisario said that in the case of Houston’s hotels, no mandatory evacuation order was released in advance, exacerbating recovery issues. Because locals were trapped at home, there became a greater need for hotels to open faster.

“DiamondRock also owns the [Frenchman’s Reef & Morning Star Marriott Beach Resort] in St. Thomas, [U.S. Virgin Islands],” Bellisario said. “That hotel is a major employer on the island, and Marriott has incentives to get that hotel up and running as soon as possible. They are expected to be hands-on here and will be trying to get [the property] up and running in the most financially feasible way possible.”

Bring the Numbers 

The success of a business interruption claim hinges on an operator’s ability to prove it was negatively affected by a situation that benefitted the competition.

On Jan. 9, mudslides tore through Montecito, Calif., devastating some residences and businesses while neighboring structures remained completely untouched. In this situation, Kravetz said it is advisable to provide as much data as possible to make the most of a business interruption claim.

“The linear notion that you are devastated and your neighbor isn’t… allows you to look at the uptick another property is getting,” Kravetz said. “If you can see nearby properties’ occupancy jumping from 75 percent to 90 percent in the days after, you can track where those travelers went using real-time data.”

Even if your hotel hasn't been destroyed or damaged directly by a disaster, road closures could still be factored into a business interruption claim. Photo credit: Getty Images/AwakenedEye

This is a reasonable assumption to make if it is backed up by data, but without the numbers it can be difficult for operators to get their hands around the issue. Bellisario said the best kind of data are bookings that have already been made because that information provides instant feedback as to where a loss of business has occurred. Hotels can also provide historical data of performance throughout previous years to prove interruption has occurred.

“Try to provide much data as possible in these kinds of situations,” Kravetz said. “When you start talking about rate and occupancy during an interruption, these factors will cause a fair amount of potential disagreement between [insurance] carriers and ownership over what those numbers would actually be. Look into predictors of bookings if you don’t have any bookings in your system, should the interruption persist. This is an area where [hoteliers] have to be careful.”

In the case of Napa Valley, Calif., hotels affected by wildfires in early December 2017, such as the Hilton Santa Rosa, this could have unfortunate consequences because the interruption is taking place during a low season for the destination (Napa Valley traditionally is busy during September to November).

Due to this, these businesses may not stand to gain as much as others during an interruption. However, they can still look to other avenues to collect, even if the level of damage they suffered is minimal.

“There are a handful of hotels [in Napa Valley] without any major damage, but road closures and other things like that can also be used as a basis in interruption claims,” Bellisario said. “Smoke damage, fallen trees and other concerns are all grounds for successful claims.”