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.
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 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.
This is where most of the surprises come from.
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.
Start with twelve months of numbers, then adjust for how long a rebuild would really take.
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.
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.
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.
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.
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?
Business income is one piece of a hotel program. If you are reviewing the whole thing, these may help:
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.
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.
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.
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.
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.
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.
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.