In the US, hotels find themselves insured but not covered for pandemic

Global brands, like Marriott International's Four Points, have established a presence in major cities like Arusha, Tanzania. Photo credit: Marriott International

Seemingly wisely, many hotels have invested in business interruption insurance. Along comes a pandemic. Governments order hotels closed. Hotels seek to collect on the insurance. Alas, there’s a devil in the details.

The University Square Hotel in Fresno, Calif., and The Hotel Fresno were subject to shutdown orders imposed by the governor of California and the mayor of Fresno in March 2020. The hotels sought payment from their business interruption insurance carriers, Hathaway Guard and AmiGUARD. Those companies denied coverage and the hotels sued.

To collect on any insurance policy, the loss must result from a covered cause. In the typical business interruption policy, and in that of the Fresno hotels, a loss is covered if it results from “direct physical loss of or damage to property” at the insured’s premises. The court noted the absence of damage to the Fresno hotels. Said the court, “A detrimental economic impact alone is not covered by the policy.”

That was but one hurdle the hotels tried to overcome. Typical policies also exclude as a covered cause, “any loss or damage caused directly or indirectly by any virus … that induces or is capable of inducing physical distress, illness or disease.”

To be enforceable, an exclusion such as this must be “conspicuous, plain, and clear.” The Fresno hotels argued the exclusion was lacking. The court disagreed, ruling the language was plain, clear and “free of jargon.”

Concerning the conspicuous requirement, the hotels argued that the exclusion consisted of three sentences “buried within the 100+ page policy packet” and so was not sufficiently evident. The insurance companies retorted that the policy without endorsements was 48 pages, and the exclusion was referenced in the index at the front of the policy as follows, “Virus Exclusion is located on page 17 of the policy.” The exclusion is indeed located on that page and with a bold-font heading titled “Virus or Bacteria.” The virus exclusion also is listed in a separate area with other policy exclusions under another bold-font heading: “Exclusions.” This put the conspicuous argument to bed.

The hotels also argued that the cause of their loss was not the virus but rather the government shutdown orders. The court rejected this argument, noting the orders’ expressed goal was to “curb and disrupt the spread of the virus.”

The hotels found fault with the insurance companies for not highlighting the virus exclusion when the inns bought the policy. The court was predictably unimpressed. Businesses are responsible for reading and understanding their contracts. If unsure of terms, don’t sign.

In a last-ditch effort, the hotels tried to differentiate a pandemic as “much more than just a simple virus.” This argument fared no better, the court deeming it akin to claiming that a coverage exclusion for damage caused by fire does not apply to damage caused by a very big fire.

Upshot: The court upheld the insurance companies’ denial of coverage. Alas, insult to injury in these pandemic times.

This article first appeared in Hotel Management.