Hospitality insurance case study: COVID-19 claims and the real risk of underinsurance

Hospitality insurance is complex and has become even more so since COVID-19. With supply chain issues, increased building costs, and loss of earnings all related to the pandemic, it raised the question with hospitality business owners, whether or not they will be able to claim these on insurance. And the answer is, unsurprisingly, just as difficult.

An influx of claims highlighted an important issue within hospitality insurance, underinsurance. Simply put, this is when you don’t have the right level of coverage or the incorrect type of insurance for your needs, and it leads to a high financial outlay when it comes time to claim.

In this post we’ll be discussing underinsurance, the consequences of underinsurance, as well as a hospitality insurance case study that has set a precedent for COVID-19 related claims.

How do you know if you’re underinsured?

When it comes to underinsurance in Australia, it’s expected that 80% of property owners and 62% of SMEs are likely to be underinsured. Unfortunately, this is in part because online calculators don’t paint a complete picture of the specific needs of your business or any unique considerations that need to be covered. Generic property valuations can also be unreliable and don’t give an accurate idea of how much it will cost to rebuild. In addition to this, many businesses renovated or had to adapt to pandemic restrictions but have failed to update insurance policies since making changes. This means the likelihood of being underinsured is much higher. The reality is, right now it’s more important than ever to hire an expert who can assist you and show you the right insurance to suit your business specifically.

What’s the consequence of being underinsured? 

One of the key worries about increasing insurance or looking at different policies is often that you will end up having to pay an increased premium. But the risk of incredibly high financial payouts or an inability to claim if you’re underinsured is much higher. One particular case saw a 50% reduction in the payout for a hotel claimant as a result of the insurer applying ‘the co-insurance/average clause’ to the settlement.

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Case Study: Claiming COVID-19 Business Interruption on Insurance

It’s no doubt that the hospitality industry has been hugely impacted by government mandates to close, lockdowns, and restrictions. But the question on everyone’s mind is how or whether you can claim the loss of income that has resulted from it.

While most insurers are now including a “COVID-19” exclusion in new terms being offered for Property, Public Liability, Corporate Travel and Directors & Officers cover, the water was murky for existing claimants and policies. The policies that had not been appropriately revised to reference the Biosecurity Act 2015 (which has a clear objective not to provide cover) creating a potential loophole.

In November 2020, the NSW Court of Appeal test case uncovered this potential loophole by declaring that insurers could not deny indemnity based on an infectious diseases exclusion in denying indemnity where the wording of that exclusion referenced, “diseases declared to be quarantinable diseases under the Quarantine Act 1908 and subsequent amendments”.

A second test case concluded in early October 2021 with the Federal Court ruling in favour of the insurers on the majority of issues being considered. The second test case consisted of nine small business claims lodged with the Australian Financial Complaints Authority as part of its dispute resolution process. Other than in one case, a Meridian Travel claim, Justice Jagot concluded that the insuring clauses do not apply in the circumstances of the cases reviewed.

The hearings considered whether COVID-19 was covered under hybrid and diseases clauses and whether government restrictions in response to the pandemic triggered prevention of access cover. But Justice Jagot concluded that in almost all cases, the clauses did not apply.

Justice Jagot stated “As these conclusions are not able to be affected by further evidence, I have informed the parties that I consider I should make declarations in each of these cases, other than [IAG/Meridian Travel] to the effect that the insurer is not liable to indemnify the insured in respect of the insured’s claim.

What does this mean for your hospitality insurance? 

While further appeals are possible, even likely, unfortunately, the precedent has been set that it’s highly unlikely that anyone will be in a position to seek cover for loss of income resulting from lockdowns and restrictions because the policy clauses haven’t been triggered or have specific wordings that exclude cover.

The truth is, no one could have predicted a global pandemic, but it has highlighted further the issue of underinsurance for hospitality businesses and making sure you’re protected against the things that are covered. And the only real way to make sure of that is to ask the experts.

At Quantaco we make sure you have the right cover, for the right price for your business, so you know you’re adequately protected. Learn more about how we can help by getting in touch