Preparing for Less Risky Business: What Hoteliers Need to Know to Secure the Right Insurance Coverages

Collins

As Jackie Collins, senior director/senior vice president of Arthur J. Gallagher & Co.’s Hospitality practice, describes it, her job is to design insurance and risk management programs geared specifically to the hospitality industry: “This includes hotel ownership groups, REITs, third-party management companies, developers, contractors, timeshares, condominiums, etc.” She says because Gallagher is a global insurance brokerage, risk management, and consulting services firm that works with some 6,500 hotels around the world, they have especially sharp insights into hotel companies’ vulnerabilities. “We see the claims that hotel companies incur because we work with so many of them. This allows us an opportunity to advise them about acquiring appropriate coverage for their specific needs, some of which reflect new, different, or more frequently encountered risks, such as growing weather severity, sex and labor trafficking, and cyber terrorism.”

Insurance companies that provide coverage for such operations, she explains, do it with the expectation that hotels in particular will be open and operating. Carriers were therefore understandably rattled when, in the wake of the COVID-19 pandemic, their clients faced reduced revenues and even closures. In some cases, structures were repurposed—sometimes changing the basis of their coverage—to meet new market needs, such as housing for those who are homeless, students, and first responders. Facing this unknown, she says, also disrupted how carriers managed their hospitality business, and some stopped insuring hotels entirely.

Yet, Collins says, identifying and responding to risks—both known and unknown—is what her business is all about. Doing it right, she says, starts with a thorough understanding of each client’s business to identify and address their specific exposures. “As experts who understand the hospitality industry and how insurance comes into play, we can help clients get the coverage they need, even as their needs change,” she says. During assessments, Collins’ team evaluates each client’s risk management program, studying the following six cost drivers:

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  1. Premiums.
  2. Program structure. Premiums and program structures vary greatly depending on the size of the risk. Most hospitality accounts obtain coverage on a guaranteed cost basis; however, some large hospitality accounts are willing to assume more risk with a large deductible or self-insured retention.
  3. Coverage gaps. In regards to property coverage gaps, not only should coverage be included for the building and the values inside the building, coverage should include swimming pools, landscaping, paved surfaces, and other items outside the building. Coverage should also be provided for loss of revenues.
  4. Uninsurable versus underinsured exposures. Clients need to be aware of what exposures are not insured but are insurable, versus exposures that are unable to be insured.
  5. Loss control and claims management. It is imperative to have measures in place to prevent or reduce claims.
  6. Contractual liability. It is important for the hotelier to understand what liability is retained versus that is being transferred to others.

Rather than standard policies, Collins says Gallagher favors manuscripted policy forms, specific to the needs of the insured, which can be tailored to provide broader coverage. This, she says, is especially important from a property standpoint. A manuscript policy, Collins maintains, can be written to include special types of coverage or to add certain conditions specific to the hospitality industry.

Collins believes her company’s hospitality expertise can help clients get the most bang for their insurance buck while educating them about gaps in their current coverage. They carefully review the client’s current policy, alerting clients to any coverage gaps for critical exposures such as wind-driven rain, sexual abuse and molestation, assault and battery, firearms, and Legionnaires’ Disease. They also point out whether or not the client’s current policy includes cyber coverage and discuss the recent introduction of new cyber underwriting requirements, including the implementation of multifactor authentication.

In response to questions on how often hoteliers should revisit their policies, Collins points to the turbulence the hotel industry has endured over the last two years, commenting, “At the minimum, a hotel company should have their policy reviewed annually; however, we encourage our clients to let us know immediately regarding any changes they make throughout the organization—whether it’s ownership changes, hotel acquisitions, hotel divestitures, or any other charge—in order to be sure any new exposures are covered.”

Pandemic Insurance: A Product Whose Time Has Come

Now that the COVID-19 pandemic has revealed an exposure few had seriously considered in their risk management programs before, it should come as no surprise that enterprising insurance providers have responded with new products. Among them are William Coluccio, president and founder, Altium Insurance Services, and Steven Belmonte, CEO of Belmonte Consulting LLC and executive director, hospitality division, Amdel Associates, who explain how their solution, Hospitality Pandemic Insurance (HPI), meets the pandemic coverage needs of hoteliers.

In April 2022, shortly after the pandemic was underway, the two longtime friends began discussing the potential to develop a product related to the impact of the pandemic. Those chose hospitality due not just to Coluccio’s expertise but the sheer size of the industry and how hoteliers were impacted by the pandemic when closures abruptly cut off cash flow, and their business interruption claims were being denied as either unqualified or excluded. While pandemic policies did, in fact, exist, they were complicated and expensive and we’re specific to hospitality.

After collaborating with their underwriter for more than a year, the two came up with a product designed to address the various nuances of the hotel and lodging sector by protecting against the loss of revenue when a pandemic strikes, says Coluccio, who sells the product, which is marketed to hoteliers by Belmonte.

Coluccio says their product, a type of parametric insurance, has an open architecture design, 70 percent of which is standard insurance language, and 30 percent that is “open to tweak for each individual client.”

They say those who apply for their insurance must first provide two years of financial statements. If approved, they may purchase a policy, which is reviewed on an annual basis for the desired amount.

Belmonte and Coluccio say the advantages of purchasing HPI should resonate with owners: There’s no need to deal with an adjustor or to wait for payment; HPI will immediately pay the insured business owner up to six months (180 calendar days) of up to 80 percent of the per diem lost revenue at the business location that is caused by a civil or government authority lockdown or customer denial of access or loss of attraction. It will encompass revenue from any franchise, management, and other contracted fees related to hotel properties as well. Belmonte adds, “We ask franchise companies, management companies, and REITs to reach out to their own franchise community or hotel community and see who wants to opt-in for this insurance.” In this way, he says, franchisors can leverage HPI for their own protection and also offer it to their franchisees, who decide for themselves whether to opt-in or opt-out. Belmonte points out that benefits to those who carry this protection go beyond the obvious. “It minimizes reputational damage, offers the perception of protection to shareholders of publicly traded companies, and, because it provides liquidity, may enhance credit rating and provide support for lower borrowing and capital costs.”

As Coluccio and Belmonte see it, COVID-19 and its variants are not one-off occurrences, that it’s just a matter of time before there are others. “Preparing for the next pandemic isn’t any different than preparing for the next hurricane, flood, or tornado,” says Coluccio. “It’s just a matter of when and how severe.”

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