Property Insurance Coverage Law Blog : Florida Insurance Lawyer & Attorney : Merlin Law Group Law Firm : Tampa, Houston, Coral Gables, Gulfport

Cases holding that business interruption coverage is triggered even when the insured suffers only a partial suspension or impairment to its business operations are hard to find and often rely on specific and alternative wording in the business interruption section in the property insurance policy. For example, the court in Aztar Corp. v. U.S. Fire Ins. Co., 224 P.3d 960, 965 (Ariz. App. 2010), determined the insured’s business interruption coverage may have been triggered, even when the hotel’s operational capacity was not diminished, because the specific words in the policy modified “interruption:”

This policy insures against loss resulting directly from necessary interruption of business, whether total or partial, caused by damage to or destruction of all real or personal property, manuscripts and watercraft, by the peril(s) insured against, during the term of this policy, on premises situate per the Territorial Limits in this policy.

Because the hotel’s business interruption coverage included the word “partial,” the casino owner was able to recover for loss of revenue due to decreased patronage. Inclusion of the word “partial” meant the business impairment did not need to impact the entire business, but only a portion.

TIPS FOR HOTEL OWNERS AND RISK MANAGERS

To avoid business interruption coverage gaps consider the following:

1. Review the hotel’s property policy to determine if the business interruption provisions contain words such as suspension, cessation, or interruption of operations.
2. Consult with an insurance broker, agent or lawyer educated in business interruption and hospitality property coverage and determine whether the hotel’s policy would likely require a complete suspension of operations before coverage is triggered.
3. If hotel mitigation efforts may defeat business interruption coverage, shop for business interruption coverage that contains words that modify the term “suspension.” Look for terms in the business interruption provisions such as partial suspension, impairment, harm, slowdown, decrease, or reduced income.
4. Shop for endorsements which contain a definition of the word “suspension” that will protect the hotel even if it only suffers a slowdown due to property loss. Market segments endorsements, like ISO form MS HM 01 07 07, Hotels, Motels and Inns, defines the term “suspension” as, “the slowdown or cessation of your business activities.”

Although courts’ interpretations of these terms can be unpredictable, understanding the interpretations in Part I and Part II of this series and using these tips when shopping for business interruption insurance, can help a business avoid financial devastation after a loss. Careful review of a hotel’s property policy will help ensure that the hotel is not wasting its premium payments on business interruption coverage which will likely never be triggered. Similarly, an educated review will help hotel owners and risk managers purchase business interruption coverage that provides actual security for hotel income and makes sense for the hospitality industry.

Most hotel owners and risk managers know that property policies require the insured to make all reasonable efforts to mitigate the loss through cleanup, emergency repairs, remediation, or containment. What many insureds don’t understand, however, is that their mitigation efforts (required by the policy) may actually defeat business interruption coverage. Ironic? Yes. But this inconsistency within property policies has been addressed and often enforced in favor of insurers by numerous courts, and still exists in many property insurance policies today. Part One of this post explains this coverage hazard. Part Two of this post will provide tips that may help hotel owners and risk managers avoid this hazard.

The business interruption section of many hotel property policies contains language similar to the following:

We will pay you for the actual loss of Business Income you sustain due to the necessary suspension of your operations during the period of restoration. The suspension must be caused by direct physical loss of or damage to property, including personal property in the open (or in a vehicle) within 1000 feet, at premises which are described in the Declarations and for which a Business Income Limit of Insurance is shown in the Declarations. The Loss or damage must be caused by or result from a Covered Cause of Loss.
. . .

“Loss Provisions:”

4. Loss Determination

c. Resumption of Operations

We will reduce the amount of your:

(1) Business income loss, other than extra expense, to the extent you can resume your “operations,” in whole or in part, by using damaged or undamaged property (including merchandise or stock) at the described premises or elsewhere.

(2) Extra Expense loss to the extent you can return “operations” to normal and discontinue such Extra Expense.

d. If you do not resume “operations,” or do not resume “operations” as quickly as possible, we will pay based on the length of time it would have taken to resume “operations” as quickly as possible.

The inconsistency with business interruption coverage lies in the following mitigation requirement:

C. Duties in the Event of Loss

You must see that the following are done in the event of loss or damage to Covered Property:

* * *

4. Take all reasonable steps to protect the Covered Property from further damage by any of the Covered Causes of Loss. If feasible, set the damaged property aside and in the best possible order for examination. Also keep a record of your expenses for emergency and temporary repairs, for consideration in the settlement of the claim. This will not increase the Limit of Insurance.

The conflict created by these inconsistent provisions often results in a coverage gap when the hotel mitigates the loss, takes all steps possible to relocate guests to other areas of the hotel, seals off damaged portions of the property, and thereby continues hotel operations at a reduced level. By mitigating damage from the loss, the hotel prevents a total suspension of its operations, and thereby defeats coverage for business interruption.

Although illogical, courts around the country follow this inconsistent interpretation of what constitutes a “suspension” or “interruption” of operations for the purposes of business interruption insurance. See Keetch v. Mutual of Enumclaw Ins. Co., 831 P.2d 784 (Wash. App. 1992) (damage from volcanic eruption causing a reduction in business at motel not a suspension of business activity); Hotel Properties, Inc. v. Heritage Ins. Co. of America, 456 So.2d 1249 (Fla. App. 1984) (diminution in business of hotel caused by closing of restaurant due to fire did not constitute interruption of business within policies in question); Howard Stores Corp. v. Foremost Ins. Co., 441 N.Y.S.2d 674 (N.Y.A.D. 1981) aff'd 439 N.E.2d 397 (1982) (recovery denied for water damage to business where there was no actual suspension of business but rather an alleged adverse effect on continuing sales); Pacific Coast Engineering Co. v. St. Paul Fire & Marine Ins. Co., 88 Cal. Rptr. 122 (Cal. App. 1970) (purpose of Business Interruption Insurance is to indemnify for loss due to inability to continue to use specified premises); Rothenberg v. Liberty Mutual Ins. Co., 153 S.E.2d 447 (Ga. App. 1967) (recovery under business interruption policy denied where theft of merchandise resulted in loss of business, court held that insured had not suffered an interruption in business but rather a diminution in volume).

These holdings are particularly devastating to the hospitality industry given the multi-purpose and interconnected nature of hotel business operations. Larger hotels often include within the “property” coverage: guest rooms, restaurants, meeting space, ballrooms, catering facilities, recreation amenities, shopping, casinos, and more. Even a massive property loss at this type of location is not likely to cause a complete and total cessation of all business operations. For hotels and resorts of this type, business interruption coverage may be rendered useless given courts’ interpretations of the policy language which require a complete suspension of operations to trigger coverage—regardless of severe income losses. See 37 A.L.R.5th 41:

"Necessary suspension" of operations, required as condition of business interruption coverage of apartment building owner's commercial property insurance policy, meant total cessation of insured's business operations, not mere suspension of normal business activities; thus, policy did not cover building's loss of income resulting from terrorist attacks nearby, once tenants, who had been excluded from building for one week, were permitted to return, regardless of fact that upon their return insured's business activities, and income, did not return to normal.

William H. Danne, 37 A.L.R.5th 41, summary of Broad Street, LLC v. Gulf Ins. Co., 37 A.D.3d 126, 832 N.Y.S.2d 1 (1st Dep't 2006).

It is important to note that many insurance agents sell business interruption coverage without knowledge of the above case law, and without ever informing owners or managers that the entire hotel or resort will likely need to shut down and cease all operations in order for the business interruption coverage to ever apply. Agents may not understand—and therefore not inform insureds how the coverage applies in light of the insured’s duty to mitigate. Insureds may purchase the coverage with the false sense of security that their hotel is protected from a huge decrease in income after a loss to their property.

A Ray of Light for Hospitality:

Fortunately, a few courts acknowledge the conflict between the insured’s duty to mitigate the loss, and the business interruption language requiring a suspension of business activity. Certain courts interpret the policy to provide coverage under circumstances that many insureds believe would entitle them to coverage, given the additional premiums paid for business interruption coverage.

In American Medical Imaging Corp. v. St. Paul Fire and Marine Ins. Co., 949 F.2d 690 (3rd Cir. 1991), the court reasoned that given the mitigation clause in the policy, an interpretation requiring a complete suspension of operations would create an inconsistency within the policy because an insured would have no motivation to continue its business at a reduced level and thus would have no motivation to mitigate its losses. The policy contained a condition creating an affirmative duty on the insured to mitigate its losses and that “under the district court's reading, this provision would have imposed upon [plaintiff] a duty, the performance of which would have forfeited its right to recover under the policy.” Id. at 693.

The 8th Circuit Court of Appeals, applying Minnesota law, issued a similar holding interpreting the words “interruption of business.” An “interruption of business” triggering contingent business interruption and extra expense coverage of commercial property insurance policy did not require cessation of business at insured's plants, but only impairment to insured's business arising from damage to supplier's property. Because the policy at issue defined “extra expense” to include expenses necessary to carry on business operations, the extra expense provisions would have been rendered nonsensical if contingent business interruption and extra expense coverage was triggered only upon cessation of business. Archer Daniels Midland Co. v. Aon Risk Services, Inc. of Minnesota, 356 F.3d 850 (8th Cir. 2004).

Cases holding that business interruption coverage is triggered even where the insured suffers only a partial suspension or impairment to its business operations are hard to find and often rely on specific and different wording in the business interruption section in the policy. Therefore, it is essential that hotel owners and risk managers carefully review the policy wording to determine if coverage is only triggered upon a suspension of business operations. The following tips may help insureds determine whether they are covered for partial suspension of hotel operations, or need to shop for a new policy.

Barth is a dynamo and runs the Hospitality Law Conference. He convinced me that I needed to participate, become somewhat of a legal sponsor and speak at the 2010 Conference in Houston. It is a wonderful conference. I highly recommend that general counsel, risk managers, loss prevention managers, franchisees, developers and outside counsel of hotels, resorts, condo hotels, timeshare rentals, restaurants, bars and other businesses that provide a place to eat or stay attend this very specialized legal conference.

Many plan details of their travel agenda and logistics far in advance. Not me. I was surprised when I found out yesterday afternoon that this conference was at the Omni Hotel next to our firm’s Houston office. The professional and friendly Omni Hotel staff has come to know me over the past year, and they were laughing that I was speaking at “their” type of conference.

The insurance considerations that pertain to the hospitality services industry are extraordinarily unique and complicated. The risks and operations of these businesses require study by professionals to appreciate how the insurance should be placed and property insurance claims handled. I can appreciate that many of the lawyers attending this conference devote their entire practice to the myriad of significant legal issues facing the operators and owners of these businesses. I can also appreciate the need for insurance agents and brokers who specialize in only this industry. Without such specialization, insurance brokers and agents would be much more likely to sell insurance coverage with gaps, leaving hospitality policyholders uninsured or underinsured.

My presentation was the “Insurance Litigation Survey.” I presented trends and lessons from recent hospitality property insurance cases. My co-panelist, David Shaneyfelt, taught about third party liability coverage. Just as last week at the Windstorm Conference, we presented practical points from cases rather than explaining legal reasoning. While I could cite from the eight case examples, this post will be a lot more important to most if I provide an outline of the points:

I. Insurance Disputes can be voided if Proper Coverage is Purchased.

A. Get an insurance agent or broker who thoroughly understands the hospitality industry. Most owners are not aware of all the risks facing them and needed coverages to properly insure their business. Most have little knowledge of or appreciation for the impact of exclusions and limitations contained in policies.
B. Develop and demand that the agent thoroughly review your particular business and push your agent to do so with letters and agreements setting forth exactly the type of relationship and service expected, the broadness of coverage desired, and the thoroughness of value investigation needed to be fully and safely insured.
C. Most property underinsured and uninsured situations occur because of:

1. Improper values for replacement/reconstruction.
2. Wrong ownership/title/ipterest on the Policy
3. Not covering all the property—some do not appreciate that many coverage forms exclude certain types of property or limit recovery. Endorsements or separate stand alone policies are often needed to have all the insurable property actually insured.
4. Inclusive coverage of all perils. For example, flood and earthquake are often not covered under a standard form, but may be insured through a difference in conditions policy. Economic loss arising from criminal or fraudulent conduct may have to be insured under various Crime Forms.

II. Trends of Concern Where Coverage and Claims are at Issue:

A. Occupancy and Vacancy clauses must be met or losses otherwise covered may be excluded. See my post FC&S Warns Agents and Policyholders to Watch the Vacancy Exclusionary Clause.
B. Post loss duties have time limits with harsh penalties in some states if not timely met.

1. Provide timely notification of a loss.
2. Proofs of loss time frames should be met or extended in writing.
3. Hire experts to segregate covered amounts from uncovered perils.
4. With any significant loss, consider whether the causation sequence could lead to a possible excluded loss. Hire coverage counsel if the insurer starts investigating anything other than value. Concurrent causation clause interpretations in some states provide insurers an incentive to retain engineers and experts to opine a cause or result of the loss is excluded.

III. Insurers are Starting to Place “Dispute” Clauses into Contracts. Check for:

A. Choice of law agreements.
B. Choice of forum for litigation.
C. Arbitration agreements.
Many of these are invalid under state insurance codes. However, many state insurance code protections do not apply to surplus lines policies. These types of provisions are becoming very common in excess or layered policy formats. Demand that these not exist and list that request to the agent or broker. The law where the property exists is usually the best because that is typically how the property is being underwritten and expected to be adjusted when calculating premium.

IV. Claims Practice Lawsuits are increasingly brought by Commercial Policyholders Following Delay and Partial Denial

A. Insurers increasingly are taking more time and denying parts of claims—even to the largest of clients. My post Large Complex Losses Invariably Suggest that the Policyholder Hire Licensed Professionals shows that even the business insurance media have surveyed support for this claims trend.
B. Document every person, activity, verbal promise, and statement made by the insurance company representative and consultants.
C. Obtain independent valuations promptly.
D. Obtain lines of credit to repair and operate because insurers may be slow to pay partial losses or will hold those to leverage or bargain for agreements lowering benefits otherwise owed.
E. Claims practice actions (wrongly dubbed “bad faith” lawsuits long ago) can often be brought to provide compensation for the various wrongful conduct by claims departments that refuse to do their job in good faith. Extracontractual losses and expenses are often incurred by businesses when the insurance company adjustment performance is delayed and otherwise wrongful.

The only economic incentive most insurers have today to provide a sufficient number of trained and motivated adjusters that will promptly investigate the loss and evaluate the damage so that the policyholder will be promptly paid the full amount of the benefits the insurance product was designed to provide is to have such “bad faith” claims brought and hold insurance companies accountable when they fail to properly perform.

Do not support Chamber of Commerce efforts to repeal laws that provide for such lawsuits because they hurt businesses and support notions that people should not be responsible for the harm they cause when they break rules they promise to perform. What kind of society would we have if rules could be broken and nobody accepted personal responsibility? Insurance industry interests in the Chamber of Commerce are behind some of these recent lobbying efforts, but such efforts are bad for corporate and business policyholders.

The last point I made was highlighted by reported hospitality case decisions. It was supported by the panel presentation that followed me. Further, I had a friend and very able colleague in the audience, Gary Thompson, who represented a large hotel chain at trial last year. The hotel chain won a $24 million verdict after litigating a partially denied claim. This major hotel chain actually did the reconstruction at its own expense and the insurer still would not honor its obligation. There are not many businesses that can go out and finance $24 million worth of construction in today’s business climate. Imagine how much leverage an insurer has to force a wrongfully compromised settlement upon a business when that business was only requesting the benefit it purchased: full and prompt payment for a covered loss. Knowing of that matter, I used his real life situation to demonstrate what is going on in the field during many claims adjustments.

I will write a separate post about the following panel lead by the excellent Arthur J. Gallagher hospitality insurance broker, Wes Brandt. If any insurance adjuster thinks that my rhetoric is pointed about the current condition of commercial claims practices, they should have been in the audience when Brandt and his panel delved into this topic.