Hospitality industry is one of the major service sectors and employer across many economies in the world. The hospitality industry consists of various fields such as lodging, restaurants, cruise line, and some fields within the tourism industry. It is more bestbusinesscommunity to economic fluctuations when compared to other industries, as there are various risks involved in running a hospitality business. However, as with any other industry, the risk of losses from unforeseen events such as hurricanes, earthquakes, flooding, fire, etc., clearly remains.
So, it is very important for hospitality operations to take reasonable steps to protect their property, employees and financial circumstances. Many businesses in this industry are aware of such widespread losses and would never consider opening a business without buying property and liability insurance policies. But many of them, particularly small businesses, fail to think about how they would manage if any interruption occurs to their business for many days.
Importance of business interruption insurance
Let us consider this example to better understand the importance of business interruption insurance. Suppose an unforeseen event such as fire or floods makes your business place temporarily unusable, relocate your business or shut it down for a while. What would be the impact on the business? A regular commercial property insurance policy covers only the physical damage to your business. What about the profits which could have been earned during this period? How to pay rent, employees’ salaries and other important payments while your business is being rebuilt? This would definitely result in substantial financial loss.
Business interruption insurance (also known as business income coverage) helps businesses in situations like this. Many businesses without the business income coverage, shut down their business operations after their business is completely shuttered due to some unforeseen event. It covers the loss of income and helps a business return to the financial position as it was in prior to the disaster. Hence, a business in hospitality industry should understand the importance of business interruption insurance and should go for this insurance.
Critical aspects of business interruption insurance
Business owners from hospitality industry should be aware of some of the critical aspects of business interruption insurance. Here, we will take a look at some critical aspects of hotel business interruption coverage and understand why it is very useful for businesses in hospitality sector.
Business interruption period
The business interruption period is the length of period for which the benefits are payable under an insurance policy. This period is the most critical part of quantifying the business interruption loss. It covers a business from loss of income for a specified period till the damaged business property is repaired or reopened. Some hotels being aware of the losses that may persist even after repairs are done; opt for “extended period of indemnity”. As it may take some time for the hotel to regain bookings and rebuild market share.
Loss of rooms revenues
The business in the hospitality or the lodging industry may suffer financial performance as two of its main functions, occupancy percentage and average daily rate (ADR) may get affected. In simpler terms, a hotel damaged by a hurricane or fire or stuck in a deep local recession will not be able to generate any revenues because of closed rooms, especially in hotels and lodges. Business interruption insurance compensates you for lost income due to loss of rooms. It covers the profits you would have earned, based on your financial records.
Other lost revenues
Revenues from food and beverage, conferences, golf, spa, etc., can constitute a significant portion of a hotel’s income. When a business is interrupted, not only revenues through rooms are affected, some or all of these sources of income are typically interrupted. The business interruption insurance covers all the profits that would have been earned.
Even if the business activities are temporarily stalled, operating expenses, and other costs such as rent, electricity bill, taxes, interest payable on bank loans, payroll costs etc., cannot be ignored. The business still needs to retain some employees such as accountants, front office executives etc. The business owner needs to pay salaries to them. In this kind of situations business interruption insurance is very helpful as ordinary payroll coverage is a common endorsement in many policies.
Business interruption policies generally allow an Insured hotel to claim extra expenses incurred during the period of indemnity. It reimburses for reasonable expenses that allow the business to continue operation while the property is being rebuilt. Some policies also cover the extra costs required for moving the business to a different (temporary) location.
Business interruption insurance is one of the most important insurance policies that help in minimizing the adverse consequences of some unwanted events for the businesses in the hospitality industry. A well-thought out risk strategy by hotel owners or operators can make a significant difference at the most crucial times.
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