Maximizing recovery after a catastrophic loss requires expertise in preparing hospitality business interruption claims, combined with a thorough understanding of the hotel’s unique market and operation.

In an article published by IRMI on “Business Interruption Claims for the Hospitality Industry—Is Your Hotel Protected?,” Michael Spear and Christopher Brophy explore certain issues that are typical in the hospitality industry and deserve careful consideration in anticipation of a catastrophic loss.

The hospitality industry has experienced tough times in recent years. Occupancy and average daily rates have declined in many markets across the country, and owners and operators have scrambled to cut costs. Although there has been a reprieve of major insured property losses—such as those experienced from Hurricanes Katrina, Rita, Ike, and Gustav, which hit the Gulf Coast states, and Hurricanes Frances, Jeanne, Ivan, Charlie and Wilma, which hit Florida—the risk of losses from hurricanes, earthquakes, flooding, fire, and other perils clearly remains.

Losses from the Gulf oil spill will be extensive—with a possible time horizon of a decade or more—and will test the mettle not only of BP and other defendants, but of insurers as well. The recent loss suffered by the Opryland Hotel from the flooding in Nashville further reminds owners and operators of the need to be properly prepared and insured.


Lost Rooms Revenues

The two primary factors that influence lost rooms revenues are occupancy percentage and average daily rate (ADR). There are a number of factors to consider in business interruption losses regarding each of the following areas.

  • What occupancy and ADR did the hotel expect to realize during the period of indemnity had the loss not occurred?

  • Are the projected occupancy and ADR supported by occupancy trends in the specific market? This information may be available from authoritative sources, such as Smith Travel Research, which tracks and reports occupancy and ADR for a competitive set of hotels in the geographic area.

  • Can the hotel document canceled reservations "on the books," including conferences, events, and other reservations? (If bookings prior to the loss are higher than bookings a year ago, that may indicate that the trend would have continued in the coming year.)

One issue facing many policyholders, and hotels are no exception, is an often misconstrued wording in an insurance policy that addresses "loss of market." For example, suppose that a resort hotel is on an island, and the entire island is wiped out by a hurricane. Can an insurer contend that the hotel has no insured loss since there was a complete loss of market (i.e., no tourists are coming to the island any more)?

Many other factors should be considered in preparing a claim and developing revenue projections. Consider the following examples that raise interesting questions.

  • A hotel is stuck in a deep local recession. The hotel prepares a rolling forecast that reflects a continued pessimistic look of the economy. Then, suppose the hotel suffers a fire that requires 2 years to rebuild. If the economy recovers during that time, is the insured hotel stuck with preparing a business interruption claim based on the original forecasts?

  • A hotel is damaged by a hurricane, which also destroys the competitor’s hotel next door. Can the business interruption claim projections reflect the uptick the hotel would have received if the hotel was not damaged while the competitor’s hotel was destroyed?

  • An island hotel is damaged by a hurricane, and the airport is also damaged, resulting in a reduced number of flights to the island. How should the claim reflect the losses resulting from the airport damage versus the hotel damage?

  • A hotel/casino suffers a fire that damages half of the rooms. The casino is not damaged. Does the policy provide coverage for the loss of casino revenue?

  • A hotel is adjacent to an independently owned casino that suffers a fire, and the hotel is undamaged. The casino owner decides to rebuild the casino twice the size of the old, and it will take much longer to rebuild. Assuming the hotel has contingent business interruption coverage (that covers an interruption of business due to damage or destruction of the casino), how will the loss be measured? (On the one hand, the hotel will lose revenues while the casino is being rebuilt—including the additional time required to expand the size—but on the other hand, the hotel may benefit by having a larger casino when it does reopen.)

  • The risk manager for a large Real Estate Investment Trust that owns hundreds of hotels operated under the same brand receives notice from the General Manager of one location that the property has significant bedbug infestation. The property is closed for 3 months for cleanup and repairs, and other hotels suffer losses due to the negative publicity for the brand. Does the insurance policy respond to these losses? If so, how are they measured?


Hotel owners and operators are well served to address these critical issues in advance. A well-thought out risk strategy that includes input from the hotel’s risk manager, insurance broker, a forensic accountant specializing in insurance claims, and a respected insurance coverage attorney can make a significant difference at a time when the coverage is most needed. 

If you need specific advice regarding the issues presented in the IRMI article, contact an experienced policyholder advocate.