HB ON THE SCENE: Law Conference Targets Business Interruption Coverage

HOUSTON–On the first day of the Tenth Annual Hospitality Law Conference here, a panel of experts used the tsunami that shut down Hawaiian hotels last year as a case study of how to file a successful business interruption insurance claim.

Santa Barbara, CA-based Pacifica Hotel Co. owned one such hotel, the King Kamehameha on the island of Kona. The hotel had completed an elaborate guestroom renovation and was in the process of being converted to a Courtyard by Marriott, explained corporate risk manager Christy Edson. 

While the flooding caused by the tsunami spared the newly renovated guestrooms, which began on the second floor, everything on the first floor, including extensive retail and a restaurant as well as the front desk and lobby, was severely damaged. Ruined as well were the resort’s landscaping and outdoor amenities. The 452-room, six-story hotel announced it was going to close for an estimated three months, while repairs were done.

The hotel’s policy included a flood coverage provision and the definition of a flood in that provision mentioned tsunami. Edson, other Pacifica senior managers, and management on site at the hotel decided not to wait to file a business interruption claim, but to be proactive. 

The first challenge was to assemble the right team, including a broker, an adjustor, a disaster response team and a forensic accounting firm.

The property team had to convince the insurance carrier that, although no guestrooms were damaged, the hotel had to close and was entitled to business interruption funds because the hotel had for all practical purposes become a construction zone and guests were turned off from staying there, it said. In addition, an outside caterer that for years had been successfully operating luaus on the resort’s grounds, ceased operations for three months. On top of that, the flow of Japanese guests, who had been one of the resort’s mainstays of business, stopped abruptly as Japan dealt with the devastating earthquake that caused the tsunami in the first place.

According to the hotel’s insurance broker, Arthur J. Gallagher Risk Management Services, the claim filed by Pacifica sought funds for a cleanup, damage repairs and business interruption mitigation. The property team was sure to preserve all documents relevant to the claim. To bolster the claim that the owner had suffered a loss due to business interruption, Edson and her team used booking cancelations, local media coverage, feedback on social media Internet sites like Trip Advisor, loss of revenue from the 14 retail shop tenants, restaurant, and luau concession. Historical numbers on rooms revenue were less relevant since the hotel’s newly renovated guestrooms, which booked at a higher ADR, hadn’t been open long enough to give a true picture of what those revenues would have been.

The claim was settled successfully before the restoration work was completed, which is unusual in this kind of situation, according to Gallagher managing director Rich Clark.