The success of a hotel depends on many variables, one of them being a strong and effective risk management plan. However, many properties forget the importance of risk transfer in a culture where properties are outsourcing amenities, food and beverage, security, and other key operational components.
The purpose of risk transfer is to pass the financial liability of a certain risk on to the properly responsible party. This is done primarily through contracts and insurance.
Almost every contract has an indemnity clause. In addition, there is usually a section or two on what each party is and is not responsible for. Read these carefully (or better yet, have an attorney review them), as this is the section everyone turns to in determining who is responsible when the finger pointing starts in a lawsuit. You will often hear people say, “It’s a standard contract.” However, there is no such thing as a standard contract. Most businesses have contracts written for their business to protect themselves. Contracts can be very one-sided and push all or most of the liability to you. Unless you want to be responsible for everything your vendors might do to your property and guests, take time to read and understand a contract before you sign it.
While your insurance policy does transfer the risk of loss from you to your carrier, it’s always better to protect your policy from any claims that are not really yours. Fewer claims mean a better renewal. In other words, make sure your vendors have insurance. When asking about your vendor’s insurance, they may provide you with a certificate listing their coverages and expiration dates. You may see your hotel’s name under “Certificate Holder.” This is nothing more than proof of insurance. You want more than just proof of coverage, so make sure your hotel’s legal name is listed as “Additional Insured.” There should be Additional Insured wording in one of the boxes near the bottom of the certificate. In short, naming you as Additional Insured on their policy extends the vendor’s insurance to you for liability arising from their actions.
It’s a good idea to make sure your vendors carry the following insurance coverages: general liability, which covers most of their actions that could result in injury or property damage; auto liability, in case they have an accident while driving on your property; workers’ compensation (you don’t want their injured employees on your policy); and excess or umbrella, which is additional coverage for the general liability, auto, and workers’ comp policy.
Being named Additional Insured can be viewed as even more protection for your business, and it’s free. Your vendor may incur a small charge. While you won’t be named as Additional Insured on the workers’ comp policy, you can be named on the other three types of policies.
Exposures vary from property to property, depending on size and amenities. It can be difficult to determine what limit of coverage to request from your vendors and suppliers. A reasonable minimum expectation would be $1 million each for general liability, auto liability, and workers’ comp, and $1 million to $5 million for excess or umbrella, depending on exposure. The latter can be difficult for some vendors to obtain.
Keep in mind, excess and umbrella policies often attach at $1 million. This means that they provide additional coverage, or attach, to the general liability and auto policies after $1 million. So, by requesting a minimum of $1 million from your vendors on their primary coverage (general liability, auto, and workers’ comp), it will prevent any gaps in coverage between their primary coverage and their excess. It may also help with your excess/umbrella in the event of a large claim that goes beyond your vendor’s limits.
Ideally, you will have a solid contract and proper insurance for all of your vendors. But it’s not a perfect world, so there are couple things to keep in mind. If your vendors or suppliers don’t have proper coverage and won’t agree to your minimum requirements, consider finding a new vendor or supplier. And if they won’t alter the contract clauses to better suit your liability concerns, don’t be afraid to walk away and find another option. You can talk with your insurance broker, carrier, and your risk management team to make sure everyone understands the potential exposure and the options to avoid, prevent, mitigate and/or transfer it.
Most hotel operations have many vendors, and keeping track of all those certificates and contracts can seem like a daunting task. However, there are software programs available that can handle most of the maintenance of these tasks quickly and easily.
Keep in mind that these are generally severity concerns, not frequency. You’re probably not going to have a vendor causing injury or property damage often, but when they do, it can be costly. Don’t let an unreviewed contract or lack of proper insurance coverage from your vendors be the cause of financial hardship for your hotel.
About the Author
David DeMoss is president and founder of Wakeup Call, an online hospitality risk management provider. Prior to founding Wakeup Call, DeMoss spent more than 10 years as an insurance broker to hotels across the U.S.
