(Note: This Guest Blog is by Michelle Claverol, an attorney with Merlin Law Group in the Coral Gables, Florida, office. This is the fourth part in a series she is writing on business interruption claims).

Assume you own a hotel at a fabulous location on South Beach. The hotel has two suite-towers and a swanky three-star Michelin restaurant in the hotel lobby. One day, the fine restaurant was consumed in flames and the hotel sustained a significant decrease in room occupancy after the fire. Can the hotel claim business interruption benefits as a result of the fire in the restaurant? Maybe.

In Florida, it has been held that the mere diminution in hotel occupancy as a result of a fire in a restaurant that it leased, as opposed to the actual closing and suspension of business, does not constitute an interruption of the insured’s business within the meaning of a policy. Hotel Properties, Ltd. v. Heritage Ins. of America, 456 So.2d 1249 (Fla. 3rd DCA 1984).

In Ramada Inn Ramogreen, Inc. v. Travelers Indemnity of America, 835 F.2d 812 (11th Cir., 1988), the Plaintiff-hotel sustained an identical loss as in Hotel Properties, except that the Ramada owned the restaurant, rather than leasing it like the hotel in Hotel Properties. Ramada argued that the restaurant was vital part of the hotel operation, that each operation was “mutually dependent” on the other and that the diminution in occupancy was a direct result of the fire in the restaurant. In Ramada, the insurer won in trial court and the hotel appealed.

In Ramada, the Eleventh Circuit Court of Appeals affirmed the lower court and rejected Ramada’s “mutual dependency” argument, relying on Studley Box and Lumber Co. v. National Fire Insurance Co., 85 N.H. 96, 154 A. 337 (1931). In Studley, a fire in a stable burned some of the horses which were used in the operation of the lumber plant. Without the horses, the plant was unable to continue its operations and the insured was entitled to partial business income benefits.

Ramada’s argument misconstrues the nature of the business interruption policy and the concept of mutual dependency. In Studley, the court said the purpose of the policy is to “insure against consequential loss to the insured’s business carried on in the property destroyed or damaged by fire.” This definition is restated in an insurance treatise which says that the purpose of a business interruption policy is to indemnify the insured “for loss caused by the interruption of a going business consequent upon the destruction of the building, plant, or parts thereof…. This type of insurance is usually called use and occupancy insurance.” 1 G. Couch, Couch on Insurance, § 1:28 (2d ed. 1984). Use and occupancy insurance is defined as indemnification for “any loss sustained by the insured because of his inability to continue to use specified premises or his inability to keep the premises occupied by a tenant.” Id. at 1:113.

These definitions indicate that recovery is intended when the loss is due to inability to use the premises where the damage occurs. They are consistent with the court’s determination of mutual dependency in Studley as well. Without the horses, the lumber plant was forced to suspend a portion of its operation. This is not the situation in the instant case where the hotel operation was able to accommodate the same number of patrons, albeit their actual number of customers may have been reduced.

The concept of mutual dependency is more appropriately applied to four hotel buildings, which together comprise a single unit. If any one of them were sufficiently damaged, a portion of the hotel operation would be suspended. The insurance policy clearly provides for this situation by allotting an aggregate sum which encompasses damage to any one of the four buildings.

Ramada, at 814. 

In Ramada, however, the restaurant was listed separately in the insurance policy and the court found that evidenced the parties’ intent to treat the restaurant as a separate entity. Ramada also made no attempt to rebuild the restaurant, which also weighed against its argument of mutual dependency–that the fire in one building caused an actual cessation of operations in another building. Instead, the fire in the restaurant caused a loss of business in the hotel, but in Florida, pursuant to Hotel Properties, this type of loss is not covered by a business interruption policy.

The concept of mutual dependency as a measure of business interruption recovery will depend greatly on the facts. It is clear that in the scenario presented, recovery will depend on the evidence pertaining to the relationship between the swanky entities and on the projections for future income that would support the business interruption claim.