October 1, 2016

The insured, an all-inclusive beachfront five-star hotel, experienced a loss due to a fire during its high season. This loss directly affected the lodging of an important part of their workforce, 250 employees who live at a great distance from the hotel.

The insured discussed three alternative scenarios with the insurance adjuster:

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  1. Termination of all the 250 employees who lived at the affected building, which would result in a significant reduction in the insured’s customer service capabilities and thus force lower occupation rates. This occupation rate reduction would directly impact the insured’s income and profit margins.
  2. External lodging of all 250 employees in smaller, lower cost hotels or venues in the area. This would entail the cost of the lodging plus additional out-of-pocket transportation expenses for these employees to and from the hotel due to the distance from the insured’s property, as well as overtime pay and the administrative cost of organizing this new lodging and transportation scheme.
  3. Provide lodging for all 250 employees in guest rooms of the insured’s property, with the corresponding implications of reducing the availability of rooms for guests and additional security measures to ensure guest comfort and safety.

During these discussions, the insurance adjuster reminded and instructed the insured to take any and all measures at their disposal to minimize the loss.

In subsequent discussions between the insured and insurance adjuster, and after scenario 2 was discarded due to the lack of room availability in the area (considering it was high season), the insured opted for scenario 3. The insured charged 12 percent of the corresponding rate per person/per room, with the hypothesis that the employees would not use all of the hotel’s services and that this should not represent a profit for the hotel. This rate was equivalent to the average rate quoted for small hotels/motels that were considered in scenario 2.

In spite of this unusual strategy (since most hotels do not lodge their employees in guest quarters) to minimize the loss, the insurer claimed they cannot cover this part of the loss because the insured’s balance sheets do not reflect a reduction in the insured’s profit.

We believe that the 12 percent charge per employee/room should be recognized and covered, as the intent of this scenario was to avoid a profit reduction for the hotel and a larger claim.

Dominican Republic Subscriber

The amount calculated for employees taking the place of paying guests in guest rooms should be covered. If the insured figured the rate on what it would have paid for the employees to stay in external lodging, that is reasonable and would stand up to the definition of an extra expense—“necessary expenses you incur during the ‘period of restoration’ that you would not have incurred if there had been no direct physical loss or damage to property caused by or resulting from a Covered Cause of Loss.” The extra expense must avoid or minimize the suspension, which is what housing the employees in guest quarters appears to have done.

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