Insurance Recovery For Business Interruption — And Slowdown

Originally published by Anderson Kill Hospitality Alert Spring 2014

What happens when a hotel suffers property damage, whether by natural disaster or man-made accident, and is forced to close some or all of its rooms, amenities or services? It is important to understand how insurance can protect you from the resulting financial loss. In addition to potential recovery for property damage from your property/casualty policy, you may be able to recover lost revenue from your business interruption coverage. If your operations are disrupted, whether completely or partially, the language of your policy will determine if, and for how long, your insurance company will cover such loss.

Your insurance should cover income loss not only when operations are completely shuttered, but also when your business is partially suspended. The distinction is important to hotel owners and operators, especially those with amenities or services like restaurants, spas and seasonal activities, which are more likely to operate on a reduced level after a loss. Historically, many business interruption provisions required a "necessary suspension" of operations. These older policies and forms did not define "suspension" or state whether complete shutdown was necessary. To understand the likelihood and extent of business income loss recovery, policyholders should be aware of the actual terms provided under their business interruption coverage and should recognize that there are some differences between jurisdictions in how they approach this issue.

Must There Be a Complete Cessation of Operations?

In New York, if a policy requires a "necessary suspension" of operations, where the term "suspension" is not defined, the courts have held that the policyholder's business must have experienced a "total interruption or cessation" of operations. Broad St., LLC v. Gulf Ins. Co., 37 A.D.3d 126 (N.Y. App. Div. 2006) (after loss on 9/11, building owner could recoup lost business income from insurance but only up to the point that tenants were again allowed to reside in building). The result is similar in California, where courts have held that a "necessary suspension" of operations "connotes a temporary, but complete, cessation of activity." Buxbaum v. AETNA Life & Cas. Co., 126 Cal Rptr. 2d 682, 688 (Cal. Ct. App. 2002) (emphasis added) (law firm did not trigger business interruption coverage because there was no complete cessation of operations when evidence showed that attorneys...