3 Key Legal Issues For Hotel Operators During Coronavirus

Law360 (March 19, 2020, 5:33 PM EDT) --
Gary Thompson
Gary Thompson
Kristin Davis
Kristin Davis
As the world copes with an evolving coronavirus pandemic and hopes to place it in the rearview mirror, it is already clear that the hospitality industry has been hard hit, and will experience significant business losses for many months to come.

2020 budgets and projections could not have foreseen this terrible situation that is now affecting the entire hospitality sector. Hotel business income losses likely will be staggering, affecting every participant in the hotel world: owners, managers, brands/franchisors, lenders, investors — and especially hotel guests. The road ahead is unclear.

There are three major groups of legal and insurance issues quickly emerging: potential third-party liability, possible first-party business interruption insurance for losses, and the future potential application of force majeure clauses in hotel management agreements, or HMAs, and other agreements that govern hotels.

1. Potential Liability and Liability Insurance

First and foremost, the health and safety of guests and employees is paramount to everyone in the hospitality industry. Presently, hotel managers and owners are coping with how to best protect hotel guests and workers from the coronavirus. 

Across the country, there are instances of guests checking out of hotels after finding out they were potentially exposed to someone who tested positive and must go home to self-quarantine. In rare cases, a guest, perhaps stranded during travel, has announced they are self-quarantining in the hotel room itself. 

In other cases, hotel staff has reported testing positive or self-quarantining at home, raising the specter of other staff or guests having been exposed. Abroad, hotels already have started to deal with how to respond to hotelwide quarantines. Thus far, no U.S. hotel has become like a stranded cruise ship, but the threat lurks.

In all of these situations — which are changing every day — the issue from the perspective of potential future liability for the hotel manager and owner is whether they have acted reasonably under the circumstances, by taking reasonable precautions, in light of the information then available, to protect guests and staff. This has been and will be the case across the board with respect to all hotel managers, as well as owners or others who may be participating in these decisions. Hotels are implementing appropriate precautions in sanitization, disinfection and cleaning measures as guided by the Centers for Disease Control and Prevention and other organizations.

With the new coronavirus now ubiquitous throughout the world, no hotel company can guarantee that the virus will not be present at its subject hotel. Nevertheless, some guests or workers might file suits, alleging exposure at the hotel site and negligence in failure to take reasonable precautions under the circumstances. Such third-party liability charges will be meritless in all but the rarest of situations, such as a manager who knowingly allows staff or guests with known infection to walk freely throughout the hotel, taking no precautions whatsoever. 

Undoubtedly, lawyers will test the edge of where an allegation of negligence can be sustained in court. Courts, hopefully, will be deferential to hotel management who are coping with the situation as best they can, in every single hotel and inn in the country, large and small. 

For now, a hotel manager or owner should think broadly about potentially applicable insurance policies and report any and all claims to a range of insurance carriers. While general liability carriers who provide coverage for bodily injury and property damage may come to mind first, insureds should also consider whether the allegations in claims and complaints implicate directors and officers liability or errors and omissions liability coverage. 

To that end, hotel managers and owners should also think broadly about what constitutes a "claim." Under most policies, a claim is any demand for monetary or nonmonetary relief. Although claims typically must be made in writing to the insured, that is not always the case. 

If there are no claims, the insured could elect to report "circumstances" that might give rise to a claim at a later time. Especially if the insured has a claims-made policy, with a cutoff to report claims or circumstances at the policy expiration date (or within a certain window of time thereafter, such as 30 days), the insured should provide such a notice to the insurer. 

As they have done with all mass disasters, insurers likely will circle the wagons and employ every argument at their disposal — including late notice — to attempt to avoid their coverage obligations. If there is any doubt, a company should provide notice to the liability insurer.

2. First-Party Property and Business Interruption Insurance

Hotel owners and managers everywhere are currently asking if their coronavirus losses might be covered by commercial property policies, especially the coverages for business interruption and extensions such as civil authority.

In this area especially, and since such lesser incidents like SARS and the Zika virus, the policy coverage wordings vary widely, thus necessitating close inspection of the precise terms. An early review of this language, made when the virus was first reported in China, should be refreshed in light of the worrisome developments each week, as the virus spreads to every corner of the globe.

It is critical to review the policy language. Many property policies could — but may not — cover loss from the coronavirus, both on the property side (cleanup costs) and time element side. There are six major coverages for a hotel company to consider:

First, some policies expressly cover the physical cleanup costs (disinfection, etc.) for eradicating a contagious illness from the property, although a sublimit might apply. Some policies also cover, on the property side, the costs of eliminating the actual not suspected presence of a communicable disease like the coronavirus.

Second, normal business interruption time element coverage could apply in the case of an actual, physical infiltration of the virus at the hotel site. In an all risk policy, there is business interruption coverage resulting from any kind of physical loss or damage, which would be the case if there is an actual, on-site physical presence of the virus. In the face of such a claim, the insurers could not, with merit, invoke the pollution and contamination exclusion.

Third, a policyholder should consider contingent business interruption coverage where there is business interruption loss linked to physical loss or damage suffered by a supplier, provider or receiver of goods and services, such as an interruption in a hotel supply chain.[1]

Fourth, many hotel policies include coverage for business interruption loss linked to physical loss or damage suffered by a leader, attraction or dependent property that draws business to the hotel, such as a shutdown of Disney World, a sports arena or airport due to the coronavirus. Here, where cities and states across the country are closing museums, sporting arenas, concert venues, restaurants and other tourist locations, there is the potential for significant loss of attraction claims.

Fifth, many first-party property policies pay for business income loss and extra expense when "an act of civil authority prohibits access" (or impairs or hinders access) to the insured premises (sometimes limited to a period of 30 days). In the coronavirus context, a policyholder may have coverage where access to its own property has been hindered by a civil order relating to the virus.

Sixth, many first-party policies also pay for business income loss and extra expense when there has been a prevention of ingress/egress to the covered premises because of physical damage. 

The standard coverage is for income loss due to the necessary interruption of business "due to prevention of ingress to or egress from an Insured location, whether or not the premises or property of the Insured is damaged, provided that such prevention is a direct result of physical damage of the type insured by this Policy, to the kind of property not excluded by this Policy." This kind of coverage might be invoked in this context if the presence of the coronavirus in a walled-off land area literally prevents access to the hotel property.

Other coverages could apply, depending on the policy. A company should consider whether it is an additional insured under another insurance program with access to the above insurance coverages, such as an owner under a manager’s policy, or vice-versa. For many of these business interruption coverage extensions, it may be important for a hotel company to employ a qualified forensic accountant with hotel-specific experience.

Finally, policyholders should provide their insurers notice of any suspected property or business interruption loss.

3. Force Majeure and the Road Ahead for HMAs and Other Agreements

The impact of the coronavirus will inevitably cause nonperformance under HMAs and other agreements in the industry. In dozens of different contexts of such nonperformance by owner or manager, the question will arise whether the nonperformance is excused as an event of force majeure, either under a force majeure contract clause or at common law. 

The answer will vary based on specific contract language and circumstances. The rules of force majeure are also state-law specific, such that a tailored approach must be taken to address any particular question about force majeure relating to the coronavirus.

Many HMAs, for example, define "force majeure" as including any event "beyond the reasonable control" of the party, "including but not limited to … contagious illness, disease outbreak or an epidemic." Such language may allow a hotel party to invoke force majeure to excuse nonperformance.[2]

Generally, force majeure is a "clause[] excusing nonperformance due to circumstances beyond the control of the parties."[3] Courts tend to take a narrow approach in allowing for force majeure to act as an excuse for nonperformance, but will do so if a contractual force majeure clause includes the event that prevents the performance.

The issue may also arise under specialized arbitrations found in HMAs. For example, many HMAs provide that each year, the manager conducts a revenue-per-available-room, or RevPar, test showing a calculation of the hotel’s prior year RevPar performance, relative to its competitive set, with the prospect of the manager having to make a cure payment for a RevPar deficiency.

These same provisions allow for an equitable adjustment for an event of force majeure, such as a contagious illness event like the coronavirus, that has a material impact on the RevPar test. Similarly, other hotel-specific examples include how the coronavirus as a force majeure event might impact the meeting of thresholds or tests for gross revenue, budgets generally or the conditions for the repayment of loans. 

Most HMAs resolve disputes on issues like these through binding arbitration. Thus, in addition to courts grappling with coronavirus-related force majeure issues, one can expect arbitrators to do so as well in the coming years.

Finally, just as with the insurance issues noted above, for force majeure, there may also be specific notice requirements. If a company believes that it may or will invoke force majeure to address a delay or failure to perform, these provisions should be reviewed closely so that any necessary notices are issues.

Conclusion

The possible impact of these three major legal issues — liability, insurance and force majeure — are only now emerging, just as the coronavirus crisis is itself still developing. These three groups of issues, and many more, will surely play out over the next many months and years in courtrooms and arbitration hearings. 

At this early juncture in the crisis, the one thing that is most important, far and above anything else (including the full value of all these hotel assets) is the health and safety of people. Managers, owners and others are all currently placing their emphasis on that critical priority. 

In time, these legal issues will be debated. In the interim, companies should be documenting steps taken to protect guests, employees and the public, and closely tracking any potential claims, costs and/or lost business suffered during this time period. And companies should plan on providing notice of claims and losses early to preserve rights for future discussion.



Gary Thompson and Kristin Davis are partners at Thompson HD.

The opinions expressed are those of the author(s) and do not necessarily reflect the views of the firm, its clients, or Portfolio Media Inc., or any of its or their respective affiliates. This article is for general information purposes and is not intended to be and should not be taken as legal advice.


[1] See, e.g., Archer Daniels Midland Co. v. Hartford Fire Ins. Co. , 243 F.3d 369 (7th Cir. 2001) (contingent business interruption “protect[s] the policyholder against the consequences of suppliers’ problems”).

[2] See, e.g., Wyndham Hotel Grp. Int’l v. Silver Entertainment , No. 15-CV-7996, 2018 U.S. Dist. LEXIS 52144, at *27 ( S.D.N.Y. Mar. 28, 2018) (applying a force majeure clause for an “epidemic”).

[3] Kel Kim v. Central Mkts. , 524 N.Y.S.2d 384, 386 (1987).

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