Hotel Business Income Insurance: How Much You Need, and for How Long

When a storm or fire shuts a hotel down, there are really two losses. One is the building. The other is every month of payroll, loan payments and franchise fees with no guests paying for any of it. Property coverage handles the first one. Business income coverage is built for the second, and how long it lasts depends on how it was set up.

Below is what business income pays for a hotel, when it starts and stops on the standard form, how to set the limit, and the gaps that tend to catch Texas hotel owners.

What does business income insurance pay for a hotel?

On the standard ISO Business Income and Extra Expense form (CP 00 30, 10 12 edition), business income pays two things while your hotel is shut down or slowed down by a covered loss:

• The net income you would have earned if the loss had not happened.
• Your continuing normal operating expenses, including payroll. For a hotel, that usually means things like staff you keep on, loan payments, franchise fees, management fees and utilities that keep running.

The same form also pays extra expense, the money you spend to reopen faster or keep part of the hotel running, like temporary equipment or expediting repairs.

The key word is covered. Business income only responds when the shutdown comes from direct physical loss or damage at your property from a cause of loss your property policy covers. If the property claim is not covered, the business income claim usually is not either.

When does business income coverage start and stop?

This is where most of the surprises come from.

• It starts after a waiting period. On the standard form, the period of restoration for business income begins 72 hours after the direct physical loss. The first three days are on you.
• It stops when the repairs should be done. The period of restoration ends when the property should be repaired, rebuilt or replaced with reasonable speed and similar quality. Not when your occupancy comes back to where it was.
• Then you get 60 days. The standard form includes Extended Business Income, which keeps paying for up to 60 consecutive days after the hotel reopens while business ramps back up.

For a lot of hotels, 60 days is not enough. If your property depends on event weekends, a seasonal market or corporate contracts that went elsewhere while you were closed, it can take a lot longer than two months to refill. The optional Extended Period of Indemnity replaces the 60 days with a longer number of days that you choose and that shows on your declarations page. It is worth pricing.

How much business income coverage does a hotel need?

Start with twelve months of numbers, then adjust for how long a rebuild would really take.

1. Pull 12 months of revenue and expenses. The ISO Business Income Report/Work Sheet (CP 15 15) walks through the math your carrier will use. Your accountant can help fill it in.
2. Figure out what keeps running if you close. Payroll for people you would keep, debt service, franchise and management fees, insurance, taxes and utilities.
3. Be honest about the rebuild timeline. A major roof and interior loss on a hotel can take longer than a year once you count adjusting, permits, contractors and franchise approval of the finished work. If the rebuild could run 14 or 18 months, a 12-month limit will run out.
4. Account for seasonality. A loss in your busiest season costs more than the same loss in your slowest one.

Watch out for business income coinsurance

Business income has a coinsurance condition, just like the building does. On the standard form, your limit has to be at least the coinsurance percentage times the net income and operating expenses you would have had over the 12 months after the loss. If it is lower, the claim payment is reduced proportionally.

There are optional coverages on the form that take the coinsurance penalty off the table, including Maximum Period of Indemnity, Monthly Limit of Indemnity and Business Income Agreed Value. Each one works differently, so it is worth walking through which one fits your property. The building side has the same problem, which we covered in our article on appraised value versus rebuild value.

What are the gaps that catch Texas hotels?

The power is out, but your building is fine

If a storm takes out the power grid but does not damage your hotel, standard business income does not respond, because there was no physical damage at your property. Utility Services Time Element coverage (ISO CP 15 45) can fill that gap, but only when the utility's own property is physically damaged by a covered cause of loss. Damage to overhead power and communication lines is only covered if that option is specifically selected.

The road is closed, but your hotel is not damaged

If authorities close access to your area because of damage nearby, Civil Authority coverage may apply. On the standard form, your hotel has to be within one mile of the damaged property, coverage begins 72 hours after the order, and it lasts up to four consecutive weeks.

Payroll you planned to keep

Some policies add a Payroll Limitation or Exclusion endorsement (CP 15 10) that limits or removes coverage for ordinary payroll. If keeping your housekeeping and front desk staff through a closure matters to you, check for it.

The deductible

Depending on your policy, the percentage wind and hail deductible can apply to business income as well as the building. We broke down how that math works in How Do Wind and Hail Deductibles Work for Texas Hotels?

Where business income fits in your hotel coverage

Business income is one piece of a hotel program. If you are reviewing the whole thing, these may help:

• What Does Hotel Insurance Cover?
• How Much Does Hotel Insurance Cost?
• Appraised Value vs. Rebuild Value in Hotel Insurance
• How Do Wind and Hail Deductibles Work for Texas Hotels?
• Do Hotels Need Liquor Liability Insurance in Texas?

Frequently asked questions

Does hotel insurance cover lost revenue?

Only if you carry business income coverage, and only when the loss of revenue comes from a covered physical loss. The property coverage on its own pays to repair the building, not for the income you lose while it is closed.

How much business income coverage does a hotel need?

Enough to cover net income plus continuing expenses for as long as a realistic rebuild would take, plus time to refill the rooms. For some hotels that is more than 12 months. The CP 15 15 worksheet is the best place to start.

Does business interruption insurance cover a power outage?

Not on its own. You need utility services coverage, and it generally only applies when the utility's property is physically damaged by a covered cause of loss. Overhead lines have to be specifically included.

What is the period of restoration?

It is the time your business income coverage pays. On the standard form it begins 72 hours after the physical loss and ends when the property should be repaired, rebuilt or replaced with reasonable speed and similar quality.

What is an extended period of indemnity?

It is an optional coverage that extends business income past the standard 60 days after you reopen, to a number of days you choose. It helps hotels that take months to get occupancy back after a closure.

Does business income cover a mandatory evacuation or road closure?

It can, through civil authority coverage, if the order follows damage to nearby property and your hotel is within the distance the form allows. On the standard form that is one mile, with coverage for up to four weeks.

Know how long your coverage lasts before you need it

It is easy to know your building limit and not know how long your business income lasts. If you own or operate a hotel in Guadalupe, Comal or the surrounding counties, send us your current declarations page and our hospitality team will look over your business income limit, the time period and the gaps above before your next renewal. Call 830-303-8300 or visit our hospitality insurance page.