Even businesses with ‘business-interruption’ coverage fail to win awards from insurance firms. But no lawsuits were found to have been filed by customers who became ill.
That the hospitality industry has been one of the hardest hit by the Covid-19 pandemic is obvious. The travel and business shutdowns’ devastation, only now easing somewhat with the partial and complete reopening of some parts of the world, is well known. What is perhaps less obvious are the pandemic’s legal repercussions as businesses and individuals file related lawsuits.
Analyzing legal filings affecting the business operations of hotels and restaurants will help us understand the liabilities, protection tools and techniques, and ways to be better protected from such calamities in the future.
While it is early to draw firm conclusions, an analysis of lawsuits filed in 2020 and early 2021 indicates:
- The industry will have to turn to help from sources other than private insurance — now and in the future.
- The data did not show any lawsuits filed by employees or customers who claimed they became ill because of failures of hotels or restaurants to protect them. This is perhaps remarkable. Because Covid-19 was a new virus and information about it changed fairly frequently, the tough Covid-19 rules put in place were changed often in an attempt to protect both the businesses and their guests. Hotels and restaurants have had to familiarize themselves with and adapt to these new regulations and new ways of running their businesses and delivering services to their guests.
The M3 Center for Hospitality Technology & Innovation at the University of South Florida used Google Scholar’s database of legal filings to collect data for this study. Queries with such keyword combinations as “hotel and Corona,” “hotel and Covid-19,” “hotel and Covid,” “hotel and Coronavirus,” and similar queries substituting “restaurant” for “hotel” were used to find the related legal filings. The queries sought cases in state and federal courts from March 9, 2020, to March 13, 2021. A total of 746 cases were found that had at least one of the keyword pairs. These cases were analyzed and categorized by the M3 researchers.
Of the 406 cases found by the hotel-related queries, 388 were eliminated from this study because they proved not to be relevant to Covid-19 and its impact on the hotel industry.
The remaining 18 legal filings included five insurance claims, two terminations of purchases and sales, two fraud cases, two disability claims, one damage claim, one intervention in a planned relocation, one request for a temporary restraining order, one case of alleged discrimination, and one formalizing a settlement agreement.
In the five insurance-related cases, hotels claimed damages and sought coverage of losses caused by the pandemic’s shutdowns and travel interruptions. The M3 Center’s analysis shows that such efforts were in vain. The five lawsuits filed by hotels all were won by the insurance companies.
These five cases that made financial claims argued that the novel corona virus caused physical loss to properties because it kept people from visiting them. But the courts found that Covid-19 does not cause direct physical damage to property and, as such, judges dismissed the hotel owners’ claims. These insurance cases indicate that most insurance policies do not cover pandemic losses, and property owners did not have other policies that specifically cover pandemic losses.
A hotel also lost a lawsuit filed by an employee who sought compensation for hours not paid. In another loss, a plaintiff alleged that New York City government was guilty of discrimination in denying payment for a stay in a hotel room for isolation. The court granted the plaintiff support for moving into a different hotel room for isolation.
Though there haven’t been a large number of court cases related to Covid-19’s effects on the hotel industry, it is of utmost importance that hoteliers and managers pay close attention to regulations and continue to operate in ways that do not endanger their guests or their businesses. More lawsuits are likely.
The Google Scholar database found 340 legal cases that included the restaurant-related keywords. The M3 analysts eliminated 264 of these cases after finding that they were unrelated to the restaurant industry. Some unrelated cases are from churches that sought to host worship services of more than 50 people. Other legal filings involved criminal cases arising nearby or from the restaurant. For example, a restaurant was alleged to have failed to pay wages and overtime, violating labor laws. Even though the business was closed due to Covid-19, the case's main issue was not caused by the virus.
Only 76 restaurant cases relevant to this article were found. Insurance claims were the main issue of 40 of these cases. The results showed that very few insurance products offered coverage for pandemic losses. Even many commercial insurance policies offering “business interruption coverage” appeared not to address the risk of pandemics.
The other 36 cases involved business contracts, liquor licenses and complaints about government curfews and business restrictions. Some states, particularly New York, placed a curfew on restaurants and bars; limited opening and closing times; suspended indoor consumption; required all customers to be seated at outdoor tables spaced at least six feet apart; and prohibited larger groups. In seeking court orders to have these restrictions eased or lifted altogether, many businesses failed to present evidence of how severely the Covid-19-related restrictions affected the restaurant industry. Some of these lawsuits have been rejected while others still are pending. None have been won by the businesses.
In sum, the Covid-19 pandemic has affected not only individual health but also social systems, financial markets and the economy on a massive scale. Business operations were interrupted by local restrictions, such as curfews and limits on services and capacities.
Among the lessons learned during the Covid-19 pandemic is that businesses should consider extra insurance that protects against financial losses of any future pandemic. In all of the legal cases examined here, the hotels and restaurants sued insurance companies over claims of direct physical loss but the courts found that Covid-19 doesn’t cause any of the direct physical damage that their policies cover.
But it is almost impossible for private insurance to cover losses suffered by their business clients without any support from the government. Government support is needed to share the pandemic risk. Businesses should consider joining to support some proposed government programs to provide coverage for future protection. The unique lessons of Covid-19 show that measures to increase the financial resilience of the hospitality industry are critically necessary.
The public and private sector can help each other in covering losses and helping to stimulate businesses suffering from the pandemic’s effects.
In the United States, businesses can consider supporting the Business Continuity Protection Program proposed by the American Property Casualty Insurance Association and National Association of Mutual Insurance Companies. Another measure, called the Pandemic Risk Insurance Act (PRIA) was introduced in the U.S. House of Representatives and seeks to address similar needs. These programs would offer business-interruption policies that cover pandemics. Some would provide the actual support and allow the businesses to choose their desired level of protection.
Government involvement is needed to support the hospitality industry due to the private insurance market’s limitations. Government sources of assistance include the taxing authority and the disaster management system.
Four approaches to government involvement were proposed in a paper by Drs. Robert Hartwig, Gregory Niehaus, and Joseph Qiu of the University of South Carolina Risk and Uncertainty Management Center. They would provide post-event aid; reinsurance; insurance; and social insurance to achieve operational efficiency; to match compensation with losses; to set up incentives for risk mitigation; and to manage macroeconomic impacts.
Small businesses can also find financial support from other government sources, such as the New Stimulus Act, which includes $284 billion to help small businesses operate, including loans to cover employees’ wages.
Finally, in order to avoid lawsuits and liabilities, hotel and restaurant owners and managers must continue to be aware of specific laws in their cities and the regulations pertaining to the type of business they operate. Complying with laws and protocols set by local and national governments protects customers and helps the businesses avoid lawsuits and legal claims. Additionally, maintaining paperwork documenting all incidents that happen within the hotel property that might be related to Covid-19 is extremely important.