Right This Way! Hotels Make Room for Risk Management

In the months after the Sept. 11 terrorist attacks, the U.S. hospitality industry took a one-two punch. Travel and tourism plummeted as worried Americans canceled vacation plans and cautious businesses cut back on trips. Then, the economy sputtered, and insurance companies, already battered by the biggest single loss in history, watched their Wall Street investment returns shrink. To balance those setbacks, insurers responded by raising premiums across the board, a move that hit hotels at a particularly tough time.

If there was a silver lining to the dark cloud, it was that rate hikes and slow business forced some hoteliers to look finally at their insurance rates, understand the extent of their coverage and try to find ways to reduce premiums in the past couple years. Finally, as of 2004, insurers say, rates for the hospitality industry started to soften and are showing signs of leveling off. But with too many unknowns—a presidential election around the corner, U.S. troops at war and bumpy economic indicators—none of the industry insiders would speculate about what will happen to rates tomorrow.

“No one has a crystal ball unfortunately,” said Kurt Kramer, an agent at United Insurance in Indianapolis, Ind. “Depending on the state, and for hotels with good loss experience, we see rates softening a bit now but we take it quarter to quarter.” He noted that his clients—limited-service hotels with an average capacity of 65 room—have become more astute about insurance in the past few years, by “collecting better data, keeping better records, and taking a more active role in risk management practices” in efforts to reduce their premiums.

Ken Schneider, vice president of product development at Burns & Wilcox, said small, independently owned motels, which may lack the resources to implement aggressive risk management practices, are “typically the last to see rates soften.” Large chain hotels and resorts that employ risk managers and take a sophisticated approach to prevention are less vulnerable to certain claims, he said. Burns & Wilcox, a specialty wholesaler, develops programs for hotels, primarily for the middle market.

After 9/11, when companies had to make profits on underwriting to offset the losses from Wall Street, rate hikes were most dramatic for general liability coverage, said Darren Richardson, program underwriter for Association Services and Insurance Brokers in San Diego, Calif. For the hospitality industry, no geographic area was spared. He attributes the rate increase partly to a necessary adjustment to artificially low premiums. “Ten years prior to 2001, rates were almost too good because the stock market was strong,” he said.

But in the past few months, as “other revenue streams” gained momentum, rates started to relax a little. Richardson offers more good news for the lodging industry: “We’ve seen more players coming back in to write for hotels as the economy picks up.”

From 2001 to 2003, many hotel owners saw their premiums more than double, according to the Asian American Hotel Owners Association. One member of that group, who owns a three-year-old property in Ohio and had never filed a claim, reportedly received a renewal policy raising his $6,000 premium to $24,000 for 2003-2004.

The association, whose membership represents 50 percent of limited-service properties nationwide and more than 20,000 franchised and independent hotels, announced in late 2003 that it planned to integrate courses in risk management and loss control into its hotel training program to help reduce claims and drive down premiums for its members. The aim was to work with a carrier to develop a discounted insurance program tailored for its members. But spokeswoman Wendy Pruett said recently the association is still in the talking and brainstorming stages with no timetable for a plan. “The issue has not gone away,” she said, “but we got a little ahead of ourselves.”

Large properties, too, reported a spike in rates while occupancy fell, hurting revenues for the first time in a decade. The drop was blamed on an anemic economy and fears about terrorism that kept people at home. According to the American Hotel and Lodging Association, occupancy averaged 59.1 percent for member hotels in 2002, as compared to 60.3 percent occupancy in 2001, and 63.7 percent a year earlier. Total pretax profits totaled $24 billion in 2000, followed by a $16 billion loss in 2001, and rebounding to a $14.2 billion pretax profit in 2002.

HVS International, a New York-based hospitality based consulting firm, compared insurance rates, based on hotel income statements from 2000, 2001, and 2002. Insurance costs for full-service hotels, on a percentage of revenue basis, increased by 130 to 200 percent during the two-year period; and for limited-service hotels, the rates increased by 59 to 150 percent. On a per-available room basis, the insurance premiums increased by 93 to 177 percent for full-service hotels and 74 to 100 percent for limited-service hotels over the two-year period.

Effects of terrorism
Before the attacks on 9/11, domestic terrorism was not much of an insurance issue, said Peter Moraga, spokesman for the Insurance Information Network based in Los Angeles. The bombing of the nine-story Alfred Murrah Building in Oklahoma City in 1995 was not considered terrorism, he said, and the 1993 World Trade Center bombing did comparatively little damage. “Obviously, that has changed drastically.”

In addition to terrorism insurance, events on 9/11 and terrorism scares since then have spurred interest in other coverage such as ransom insurance, according to Moraga.

“The tragedy has had rippling effects on how we live our lives in ways people don’t even realize,” Moraga said, “not only in the way buildings are built but even the way we look at tall buildings has changed. I mean, would you want to work in a tower now? Psychologically, we’ve changed.”

Although engineers can figure out how to improve the odds of protecting a building from a bomb blast and hopefully saving lives as a result, no one can predict the frequency, location or magnitude of damage from terrorist events, he said. “We have no modeling for terrorism, like we do with natural disasters, like earthquakes or tornados. For those we have models that span 10 years and have a geographic pattern. [Sept. 11] was the biggest insurance loss in one day yet we can’t predict whether or when that will happen again. Not knowing the probability makes [terrorism insurance] difficult to price.”

Loss estimates vary for the devastation on Sept. 11, but estimates hover around $50 billion and up, including $12 billion alone for property/casualty loss.

The federal government, through the Terrorism Risk Insurance Act (TRIA) of 2002, has decided to share the risk of loss from foreign terrorism going forward. Under the act, insurers must offer coverage for acts of terrorism, for commercial property, casualty and workers’ compensation insurance. The government will cover losses that exceed a certain amount. The law, scheduled to terminate Dec. 31, 2005, also caps losses for both insurers and the government.

Richardson, of ASIB, said most hotels have opted to forgo the terrorism coverage. Premiums vary, but 2 to 3 percent of the property and general liability premium is a typical cost. Some companies offer the coverage for a flat-rate charge.

“Some of the bigger hotels, bigger in terms of number of stories and number of rooms, have it but I don’t know of any franchises that require it,” he said.

In contrast to terrorism, though, the real threats that plague the hospitality industry are far more mundane, namely slips and falls. “As long as we live in such a litigious society,” Moraga said, “we can expect these claims to end up in litigation.”

Discrimination complaints come 360Þ
Employment practices liability insurance (EPLI) claims tend to rise as the economy falters, observed Tracey Sharis, a product line manager for Lexington Insurance, an AIG subsidiary. When the lodging industry, which employs about two million workers, according to 2002 figures compiled by the American Hotel and Lodging Association, goes through periods of layoffs or competitive hiring, companies hear more employee allegations of unlawful treatment.

Lexington’s Hospitality Select, a broad risk management policy tailored for hotels, resorts and casinos, is an employment practices liability policy that covers employee-initiated claims regarding harassment, discrimination and other workplace torts. Claims alleging discrimination or sexual harassment brought by independent contractors, such as caterers or cleaning staff, and guests or the public may also be covered. “We call it the 360 degree solution,” Sharis said, referring to the inclusion of all parties.

As part of its EPL risk management recommendations, Lexington encourages hoteliers to maintain updated personnel policies and procedures; train line employees about corporate policies against discrimination and harassment and procedures to handle complaints in the workplace; and train managers how to avoid engaging in discriminating and harassing behavior and how to prevent and correct such conduct.

Sharis has noticed that claims are escalating also for violations of the federal American with Disabilities Act (ADA). Lexington’s policy for protection against ADA claims provides a defense for such claims, but does not pay for physical reparations to bring a problem up to code, she said.

ADA claims are “a big problem in California,” said Richardson of ASIB. While some claims are legitimate, he said, “if a mirror is too low, someone might claim mental anguish on the general liability side, and a lot of companies are starting to fight this.”

All public lodging facilities, regardless of size or number of employees, are subject to Title III of the federal code, enacted in 1990 to prohibit discrimination against people with disabilities. Larger hotels have greater exposure to ADA claims because they have deeper pockets, and Richardson suspects, they are being targeted for claims.

Under the statute, Title III bans discrimination in the “full and equal enjoyment” of public accommodations by an owner, lessee or operator. In New York City alone, groups have filed more than 40 lawsuits under Title III against local hotels, according to Jonathan Greenbaum, an attorney at Washington, D.C.-based Nixon Peabody. His firm, which has defended many of those hotels, recommends that owners take the following precautions:

• Have an ADA checklist and conduct ADA accessibility training for staff;
• Make sure all employees are aware of alternative accessible paths of travel within the hotel; and
• Have an ADA compliance program with specific goals and timetables for removal of architectural barriers that are “readily achievable.”

Greenbaum noted that the government weighs a hotel’s good faith compliance efforts when assessing penalties.

Growing concerns: mold and cyber-threats
The hotel industry woke up to the evils of mold in 2002 when a Waikiki Beach hotel closed 453 rooms in a newly completed 24-story tower after mold was found in one of the rooms. Although no guests or employees had complained of illness, exposure to mold caused a concern. The cost for cleanup was estimated at more than $50 million, which included repairing the damage, replacing the furniture and mitigation. (Engineers blamed the problem on high humidity inside the airtight building, which prompted the owner to sue the contractor for faulty construction.)

Because coverage for mold damage and remediation is expensive, and offered as part of a comprehensive environmental package, interest from hotels was initially weak. Willis, however, recently introduced a mold-only policy for hotels, according to Michael Levin, vice president of programs at Willis. “When a guest gets sick, who’s to say if the exposure was caused at home or in the hotel shower? No matter how long he’s exposed, you’re going to have a claim.”

Levin, who heads Willis’ ResortGuard program, also mentions cyber-risk as a growing concern to large hotels. The firm worked with the American Hotel and Lodging Association to come up with a policy, underwritten by AIG, that is tailored for the kinds of cyber problems that could threaten hotels.

“If someone hacks into your reservation system,” said Levin, “you have a problem.”

Willis’ ResortGuard program underwrites property/casualty insurance for resorts and community associations, properties with luxury amenities such as spas, golf greens, lakes, skeet shooting, bike trails, or equestrian stables—”places that have a lot of stuff going on,” Levin said. Other clients, such as boutique hotels with “half a million dollars worth of wine or more than a million dollars worth of original art” bring special insurance needs, too.

For these clients, Levin said, rates have been leveling off in the past year, a relief from prior years when general liability premiums jumped 20 to 60 percent.

“On accounts with excellent loss experience, we hope to keep rates flat. But whatever the issues were that put us in a hard market before—the economy, natural disasters, terrorism, Wall Street—if you repeat those things, rates could turn around.”

Levin, who managed resorts before switching to an insurance career 10 years ago, notices that clients are controlling their costs by holding higher amounts in self-insured retention. “By taking on more of the risk themselves, clients are motivated to do a better job of loss control and risk management, and they have the potential to save a substantial premium.”

He said sophisticated clients are now shopping for an insurer with more than an “A” rating for claims. “They’re also looking at Standard & Poors solvency ratings. I think it’s a great idea.”

Topics Cyber Catastrophe Carriers Profit Loss Claims Property Risk Management