Private Schools: Avoid This Potential Pitfall

When it comes to preparing a business interruption loss insurance claim, one industry that is very unique is private schools. Private schools have specific risk exposures that can quickly turn into a problem if the exposures are not addressed before a loss occurs. One such issue relates to tuition and the contract signed between the school and parents.  Most enrollment contracts I’ve seen do not address whether or not a school will refund tuition in the event of a major disaster that affects the physical buildings.

Let’s assume that a private elementary school that is housed in two buildings has a major fire, and one of the buildings is destroyed. The school immediately rents mobile classrooms and has them delivered to the site. Many of the parents, who are paying $20,000 per year for their children to attend the school, are unhappy with the situation because they chose this school, in part, for the facilities. They want a refund and the enrollment contract does not address this situation. So, what should happen?

There are two options:

1. The school can refund the tuition. If the tuition is refunded, the adjuster will most likely say that the school was under no legal obligation to refund the tuition.  In this scenario, the adjuster will likely say that the decision to refund tuition is a business decision on behalf of the school and, while admirable, was a discretionary decision and the carrier is not responsible for the loss of tuition.
2. The school does not refund the tuition.  Because no tuition is lost, the insurance company will not reimburse the school for lost tuition.   Be aware that any decreases in donations, auction revenue, or reenrollment may or may not be covered in a business interruption claim. If these items are covered in the school’s insurance policy, the value may be considered to be too speculative to recover.

For private schools in particular, the decision to refund tuition after a major business interruption loss is full of potential political and financial landmines.  My best advice to private schools is to be aware of this potential situation, and then discuss it with the attorney who creates the enrollment agreement and the broker placing the coverage.  It is best to make this type of policy decision before a disaster happens–while the administration is not in crisis mode, and angry parents aren’t beating on the Head of School’s door.

Tagged as: adjuster, business interruption, disaster preparedness, linkedin, schools

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