The BP oil spill has wreaked havoc on the people of the Gulf region, the environment and businesses both small and large that operate on or near the coast. Hotels and motels in the region face significant uncertainty about the full scope of the impact on their business. It’s critical to know what options there are for recouping business losses, especially considering that rules, protocols and procedures are a work in process.

The Current Environment
BP has acknowledged that millions of gallons of oil have leaked into the Gulf from the Deepwater Horizon explosion on April 20, 2010. It has pledged $20 billion to an independently administered fund to compensate victims of the oil spill, but there is still uncertainty around the handling and resolving of claims. Kenneth Feinberg, the fund’s independent administrator, has promised a swift evaluation and processing procedure for claims, but as we write this article, his specific protocols are still under review by the House Judiciary Committee. Several unanticipated claim scenarios, the speed and depth of the region’s recovery, and the rate of opt- outs from the independently administered plan are all factors that will contribute to the evolution of the plan’s protocols.

Challenges and Uncertainties for the Hospitality Industry
There are several scenarios specific to the hospitality industry that could lead to confusion for hotel operating executives, and to some difficult decisions for Feinberg.

It’s a very real possibility hotels may have to close due to reduced revenue and a shortage of working capital, with no foreseeable recovery. This creates business valuation complexities that are inherently subjective, which prompts the question: for how long a period of time can hotel owners and operators expect to be compensated? Second, if a hotel hasn’t suffered any direct physical damage to its property, and still suffers significant losses of income, will it be indemnified for its lost income from BP?

We believe Feinberg will treat these businesses the same as those that suffered direct physical damage, given the vast majority of economic impact occurring without damage to owned property. Finally, substantial claims will likely come from hotels located farther away from the Gulf coast. Hundreds of properties have suffered lost income as a result of lower demand for their services from vacationers who are reluctant to visit the Gulf region this summer.

How will Feinberg compensate these hoteliers, if at all? What supporting documentation will be needed? Will he follow state law to determine how a business is compensated, as he has said, when there is established federal law? Will he indemnify businesses differently depending upon the respective state residence of the claimant?

Avenues of Recovery
With so many uncertainties swirling, it’s crucial for hotel managers and operating executives of impacted properties to fully understand the options available to them for potential loss compensation. Generally, they have three choices:

• File a claim with BP, which will ultimately evolve into a claim under the independently administered fund.
• Retain counsel and sue BP and or other culpable parties. With this option, they will likely end up in class action litigation that could take several years to resolve.
• File a business interruption insurance claim with their insurance carrier.

These three avenues of recovery are not mutually exclusive. Feinberg has indicated the independently administered fund will initially compensate victims for up to six months of losses. A business may file a claim for all or part of such losses without losing its option to also sue the culpable parties. However, he has stated subsequent claims beyond the six-month period will require claimants to give up their right to sue.

The insurance claim process is full of its own challenges as well. Many standard property policies have pollution exclusions and only cover owned or used property, and hotels may face coverage hurdles on both of these issues.

Business interruption will only cover a hotel for the time it takes to restore the property to its pre-loss condition plus a pre-determined ramp-up period (extended period of indemnity). If property is defined as the beach and not the Gulf of Mexico itself, the claim clock may stop ticking when the beach has been cleaned and restored to its pre-loss condition. In addition, insurance companies are certain to offset insurable lost income by payments from either the fund or via class action litigation.

Macro and Micro Approaches to Preparing a Claim
So what is the best course of action for hotels that have lost business due to the oil spill? Irrespective of the preferred avenue(s) of recovery, hotels should document their losses in the most detailed fashion possible.

In documenting lost income we often refer to the “Macro Approach” and the “Micro Approach.” Most hotels will require a Macro Approach to quantify and document their losses—at the very least as a supplement to the Micro Approach. Several steps should be considered in documenting losses via the Macro Approach:

Consider the recent history of the hotel. Was the income of the business expected to vary significantly from historical results? If so, document expected variations with a Micro Approach (detailed below) and other Macro-based methodologies (ordinary course of business forecasts, booking trends, comparable properties that were not impacted by the spill).

Consider seasonality. If the claim is for a period of less than one year, does the lost revenue calculation reflect the seasonality of the business?

Review ordinary course of business forecasts and budgets. Assess their credibility and accuracy over recent history. Are they consistent with prior forecasts and budgets? Have any loss-period factors other than the oil spill impacted your revenues?

Identify independent sources of information (yardsticks or comparables) for similar properties that have not been impacted by the spill. Compare loss-period performance of the yardstick to the impacted property and quantify the relationship. Do the same for the pre-loss period and use the change in the relationship to quantify the loss.

Consider, document and claim extra expenses. Many Gulf area hotels are expending large sums of money to retain their guests via advertising, guarantees of clean beaches and additional amenities. In fact, the cost of assessing and documenting damages both physical and financial is a cost that should be considered and claimed.

The Micro Approach identifies and documents specific losses such as cancelled reservations and cancelled events. It provides the most compelling evidence of a loss, but may not be a practical methodology if a hotel derives its revenues from less predictable sources (such as transient guests, walk-ins or last-minute bookings), or if losses continue for a prolonged period of time. A Micro approach may be more appropriate for a hotel or motel that books guests and groups months in advance. These hotels and motels should:

• Train sales and administrative employees to track cancelled bookings and preserve its documentation as part of their everyday responsibilities.
• Modify ordinary course of business accounting systems to account for Gulf-related cancellations, including adding Gulf-related reason codes for tracking cancellations.
• Log calls with guests to account for and document cancellations.
• Retain emails documenting cancellations for Gulf-related reasons.
• Require guests to commit cancellations to writing in order to document Gulf-related losses.
• Identify specific group discounts or special accommodations to either appease a group, maintain an existing group booking or to convert a tentative booking into a definitive one.
• Track alternative stays by guests.
• Quantify lost revenues based on the above documentation.
• Determine whether the entirety of losses is captured by the above evidence or whether a Macro Approach should be used to supplement the calculation.

In addition to the accounting records required to support lost income, we also recommend to hotels that are directly on the beach to take water and sand sample for evaluation. This will provide a baseline to document the quality of water and sand surrounding your property today. If the oil does affect the property in the upcoming months, you will have proof as to the reduction in the quality of the beach, which may give rise to future lost income this fall and possibly into 2011.

Hotels affected by the Gulf oil spill face a myriad of uncertainties in filing claims for their lost income. Following some or all of the suggestions above may help in facing those. As the claims process evolves the rules may change, but one principle should be relied upon throughout: A claim that is well documented and properly calculated will stand a better chance of success, indemnification and ultimately, recovery for its owners.

Glenn Pomerantz is national director of insurance claim services and Robert Glasser is managing director of insurance claim services at BDO Consulting. They work with small- and large-chain hotel companies to help them quantify financial losses from catastrophic events. Contact Glenn at gpomerantz@bdo.com and Robert at rglasser@bdo.com. For more information on BDO Consulting, visit www.bdoconsulting.com.