The Complexities of Business Interruption Claims in the Hospitality Industry

Business interruption claims in the hospitality industry present unique challenges that require detailed analysis and specialized expertise. Unlike other sectors with longer customer booking horizons or predictable revenue streams, the hospitality industry—encompassing restaurants, hotels, and event spaces—relies heavily on a day-to-day influx of patrons, making forecasting revenue particularly complex. This article explores the intricacies involved in preparing a business interruption claim for the hospitality industry, including the additional complexity brought by the COVID-19 pandemic and how historical and comparative data adjustments are essential.

Unique Revenue Patterns in the Hospitality Industry

In the hospitality sector, businesses are accustomed to dealing with unpredictable revenue streams. Unlike manufacturers or professional services, hospitality businesses typically do not have long-term contracts or consistent pre-bookings. Most diners and guests make spontaneous or short-term plans, relying on current needs, trends, and recommendations.

Even “trendier” restaurants in places like New York City with waiting lists or pre-bookings still face fluctuating patronage that can vary based on factors like seasonal tourism, local events, and economic conditions. Consequently, when an unexpected interruption occurs—be it from property damage, civil unrest, or a natural disaster—estimating lost revenue is difficult without substantial historical data.

The Role of Historical Data and Comparative Analysis

Since reservations and pre-booked revenues are generally minimal, the only effective way to quantify a business interruption claim is by analyzing the historical performance of the business and, when possible, comparing it to similar businesses in the area. Key factors in compiling a claim often include:

• Year-over-Year Comparisons: Reviewing sales and occupancy trends from past years, adjusting for any known seasonal variations, economic influences, or promotional events that may have influenced past figures.
• Benchmarking Against Competitors: Comparing performance to similar businesses in the area, especially if they have reopened or operated after the interruption period. This method allows for the identification of broader industry trends that may affect revenue.
• Adjusting for Seasonality and External Events: Many hospitality businesses are highly seasonal, with spikes around holidays, local events, or tourist seasons. These nuances must be factored into the claim to avoid misrepresenting potential revenue.

Impact of COVID-19 on Business Interruption Claims

The COVID-19 pandemic brought unprecedented disruptions, impacting nearly every facet of the hospitality industry. As a result, claims for losses during and after the pandemic require adjustments to reflect the pandemic’s profound effect on operations and revenue patterns.

Adjusting Actuals for Pandemic Years

The pandemic years—2020, 2021, and to some extent 2022 and 2023—were marked by government-mandated shutdowns, capacity restrictions, and reduced consumer confidence, which caused dramatic declines in foot traffic and revenue. Many businesses were either closed, partially operating, or focused on alternative service models like takeout or delivery, fundamentally altering revenue streams.

To prepare an accurate business interruption claim, actual figures from these years cannot be used without adjustment. Here’s how these adjustments are approached:

• Normalization of Pandemic Years: Financials from 2020 to 2023 are adjusted to estimate what revenues might have looked like in the absence of COVID-19. This involves projecting revenue based on the last “normal” year, typically 2019, and factoring in expected growth trends or changes specific to the business or area.
• Pandemic-Specific Cost Adjustments: COVID-19 created unique costs and revenue models. Increased spending on sanitization, barriers, and personal protective equipment (PPE), as well as shifts to delivery and outdoor dining, need consideration in cost calculations to reflect actual operational realities.
• Consumer Confidence Adjustments: Due to fluctuating consumer confidence and pandemic fatigue, hospitality businesses saw varying customer responses throughout the reopening phases. Claims should account for this inconsistency, acknowledging that while revenue may have resumed, it was often erratic and impacted by public health advisories or case surges.

Comparative Benchmarking Post-COVID

For claims involving losses during or immediately following the pandemic years, industry-wide comparative analysis is crucial. By examining competitors or similarly situated businesses in the area, claimants can better approximate realistic recovery expectations and avoid inflating or undervaluing claims. For instance, if neighbouring businesses saw only partial revenue recovery in 2022 and 2023, these trends would be used to adjust the claimant’s figures accordingly.

Key Considerations for Compiling a Hospitality Business Interruption Claim

1. Detailed Historical Financial Analysis: Using financial data from previous years, adjusted for the expected growth or decline unique to the business’s geographic and industry context.
2. COVID-19 Adjustments: Modifying 2020-2023 financials to account for abnormal operational constraints and changes in customer behaviour due to the pandemic.
3. Comparative Market Analysis: Evaluating performance trends in similar businesses to ground projections in real-world data, especially when historical figures are significantly affected by external factors like COVID-19.
4. Inclusion of Seasonality: Recognizing seasonality factors or event-based revenue patterns to ensure claims reflect the true, often cyclical, nature of hospitality revenues.
5. Documentation of New Revenue Streams: For businesses that adapted to the pandemic by adding delivery, takeout, or outdoor seating, these shifts must be well-documented to reflect the full operational context in claims.
6. Continuous Reassessment of Data: The hospitality industry is heavily influenced by external conditions, making it crucial to reassess projections and adjustments as new data or trends emerge.

Conclusion

Business interruption claims in the hospitality industry require a nuanced, data-driven approach. The sector’s unique reliance on day-to-day patronage, combined with the unpredictable impact of COVID-19, makes historical and comparative analyses essential to accurately determine losses. Using historical data with adjustments for the pandemic’s impact on operations, together with industry benchmarks, provides a foundation for robust, defensible claims. For hospitality businesses seeking compensation for lost revenue, the key lies in understanding and articulating the intricacies of their pre-pandemic performance, pandemic-specific impacts, and their post-pandemic recovery trajectory.