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How converting a facility affects insurance

Consider this. It’s February 2020 and your hotel business is thriving and running with high occupancy rates.

Then comes COVID-19. 

Your once promising outlook turns as cancellations begin to pile up with no apparent end in sight. Concurrently, hospitals are beginning to see a marked uptick in admittances that challenge capacity constraints and cause them to run out of beds. With guidance from local governments, hospital administrators consider temporary accommodations using alternate sites as clinics, hospitals or perhaps morgues. 

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On the surface, this presents an opportunity to support a community in need while potentially creating a financial lifeline for your hotel that could mitigate your economic losses. Discussions commence, sites are identified, plans are drawn, contracts are executed, construction or retrofitting is completed, and your once burgeoning hotel is now a fully functional medical facility.  

Several weeks later, the pandemic is under control and your hotel has returned to its original intended use. Then you receive notice of a wrongful death suit. It appears that one of the patients in your converted hotel was exposed to legionella, which affected their already compromised respiratory system and may have contributed to their death. Not to worry, you have a multitude of insurance policies that will respond. Or do you? 

Because you never considered how changing the use of your facility would impact how your insurance policies respond, you may be exposed. 
  
When repurposing your property for a use other than what was initially intended, there are many insurance-related items that need to be taken into consideration and discussed with your insurance representative.  

Underwriters protect themselves against misrepresentation by requiring the property owners to warrant the intended future use of the building. This use is often stipulated on the policy via endorsement in order to avoid any ambiguity or misconceptions. Underwriters also reserve their rights to cancel a policy if the use of an insured location changes materially and creates a greater risk to the insurer. Cancellation clauses vary in nature but generally provide the insured up to 90 days’ notice of cancellation. In some instances, insurers provide insureds an opportunity to cure material breaches of policy terms and conditions that run concurrently with cancellation timelines. Opportunities to cure are not automatic and must be specifically stated in cancellation clauses. Nevertheless, policy cancellations, besides leaving property owners without protection, could have a cascading effect and undermine loan and lease covenants.    

Underwriting factors—including historical exposure, extent of contamination, remedial scope, site area, current use, intended future use, limits of insurance and policy term—determine the breadth of coverage, limits, deductibles and policy term pricing. The intended operations of the insured are then warranted in the application and often scheduled on the policy. 

Consideration also needs to be given to professional responsibilities and liabilities, especially if changes will be made to your building in order to accommodate a medical facility. Consider whether the heating, ventilation, air conditioning and other systems are adequate for a healthcare setting. Who will take responsibility for making this determination?  If systems need to be retrofitted, who will perform the design and construction?  

As you evaluate the status of your properties under this new dynamic, we recommend requiring the end user to participate in and sign off on all stages of property evaluation, design and retrofit. Contract qualified third parties to assess the adequacy of your properties and their systems for a medical setting. This will provide an independent professional opinion and help to protect you from liability. As you proceed through these phases, carefully manage the decision-making process, and establish protocols for contracting best practices and insurance reporting. Clearly define the responsibilities of all parties, including the property management team, and determine if changes to operational protocols are appropriate.

Additional challenges have emerged from the pandemic. Potential pitfalls include major exposure arising from commercial debt and more specifically from default. If a borrower becomes unable to satisfy monthly debt obligations, they may be in default. But what if the borrower invokes force majeure, which theoretically stops the clock for its contractual obligations. Does this mean future liabilities created after the force majeure declaration are borne by the parties equally or does the borrower continue to accept these obligations?  

In a perfect world, insurers would fully understand what insurance protections are in place before an event occurs. However, we don’t live in a perfect world and insureds are often left scrambling to equate coverage to an event while wondering what exactly their insurance premiums were for. This exercise requires a deep dive supported by knowledgeable insurance advisors who work for you, not for the insurer. The value of insurance becomes readily apparent during a claim and your representatives should be able to guide you appropriately through the claims and settlement process. When you pay your premium, it is also productive to reconfirm that your insurance representative is willing and able to help you navigate the process, not just sell you a policy.

Jared Dubrowsky is VP of the environmental practice; Chris Alviggi is SVP of property and casualty and environmental practice group leader; and Cynthia Olinger is SVP construction at insurance broker and consulting company NFP.

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