Specialty Lines Markets
Hospitality marketplace enjoys growth, offers opportunities
Experts suggest risk management guidelines for hotels, bars and restaurants
By Dave Willis
The past few years have been challenging for hotels, motels, restaurants and other hospitality establishments. As the economy regains strength, these businesses are seeing improvement. "The industry appears to be rebounding after some very difficult economic times," says Charles Roberts, vice president for property & casualty at Southern Insurance Underwriters. "We are starting to see audit premiums coming in on risks that show they're experiencing better results than they had anticipated."
Roberts notes that small lodging chains are faring better than locally owned, single-location operations. "It appears that the chains' advertising, marketing and Web presence are making a difference when compared to the smaller, single-site properties," he says.
According to Kurt Meister, vice president of NSU Hospitality, which is part of Distinguished Programs, key measures of hotel industry health are all higher year to date. "Money is starting to flow into the sector," he says. He notes that investors are attracted to cash flow and profitability, particularly in the full-service resort and convention hotel sector.
"Development and new construction are picking up, led by New York City, with Washington, D.C., Miami and Chicago following behind," Meister adds. "Most new hotels being developed and built are in the upscale and upper-midscale segment." He says all sectors are doing fairly well, but investors are a bit more cautious with limited-service hotels because in a downturn, it's difficult for them to lower expenses.
Hotels aren't the only hospitality businesses that are realizing gains. "We have seen an improvement among restaurant businesses," says Michael Maher, vice president of marketing for RCA Insurance Group. "The struggles of the past few years seem to be behind us now. We're no longer seeing the number of businesses closing down that we had." He says there was a period when requests for return premiums due to closings were very significant.
"Our submissions for quoting new business start-ups also are up, which is a clear indicator that a recovery is taking place in the restaurant industry," he adds.
Market issues and risks
Maher notes that for restaurant owners, the cost of doing business has increased across the board. "At the same time they've been forced to hold their pricing down, and this is reducing their profit margins," he explains. "This means they have to aggressively manage their expenses wherever possible."
Maintenance often is among the first items to be cut. "Staying current on repairs and other maintenance items is an important part of keeping establishments safe and losses low," Maher asserts. "Reductions in building maintenance could create hazards, and if they lead to losses, owners might find insurance renewals costly or hard to get."
Some establishments are seeing an uptick in claims for assault and battery. "For restaurants and bars, assault and battery claims are most pronounced in establishments where liquor makes up more than 50% of receipts," explains Vince Demshar, CIC, broker/underwriter at Atlantic Specialty Lines of Florida. "This includes nightclubs and bars."
That said, such claims can occur at any establishment. "I saw one where someone was unintentionally hit in the head with a beer mug by someone who happened to swing his arm back," Demshar recalls. "At the other end of the spectrum, I've seen a claim from a club where one patron ran over another with an Escalade—twice."
Hotels also are seeing more assault and battery claims. "For hotels and motels, carriers look differently at open-corridor versus interior-hall properties," Demshar notes. "Properties with exterior halls have had a tougher time of it."
Demshar observes that hospitality accounts, as well as habitational risks, are seeing more underwriters using crime zone mapping. "There is increased underwriting discipline in a number of areas," he says. "Carriers are looking very carefully at limits, if they offer certain coverages at all. Some geographic areas are having a tougher time than others."
Meister, whose firm has managed more than 27,000 hotel claims, says that slips, trips and falls continue to be a major concern. "They represent 30% of all claims and about half of all claim dollars," he comments. "Clients that are most successful from a loss ratio standpoint really focus on surfaces of all kinds throughout their facility. They don't just take it for granted."
Legionella is another costly claims item for hotels. "It also can have a high negative impact on revenue due to bad PR," Meister remarks. "These claims are complex; it's not always clear when or where the disease was contracted." Food-borne illness has a similar impact in terms of severity and revenue.
An Americans with Disabilities Act regulation that requires installation of permanent pool and hot tub lifts is another source of claims. "Not installing them creates a huge exposure," Meister notes. "Someone can make a quick, easy claim for noncompliance. At the same time, they're attractive nuisances. If not watched, children can easily climb and jump on them, so that increases the exposure."
He points to terrorism as another issue facing hospitality businesses. "It involves more than just an event," he says. "What if a hotel has a mandatory lockdown of 200 people in its lobby? How does it accommodate them for hours? How do you prepare?" Years ago, he says, an overseas hotel had bomb threats repeatedly called in one day, but all were false alarms. "A final call was ignored and a bomb went off," he says. "Employees need to take every threat seriously."
Other sources of severity are claims related to liquor liability and to drowning, although both are low in frequency. "Low frequency may be surprising for liquor," Meister says. "Still, the bad PR following an event can be quite damaging." Establishments should enlist a range of employees to help manage the risks. "Everyone, from the front desk employees who see guests walk by to the valet who parks the car, should look for situations where people are over-served," he notes.
Most establishments post pool safety rules, Meister observes. "Problems come when, for instance, the shepherd's crook is hard to find. When someone needs to be fished out of a pool, people panic, and if they can't find the crook, you can have a death." Another cause of claims at pools is improper depth signage; it needs to be both on the top edge and inside the pool.
As hospitality businesses experience revenue growth, they're also facing premium increases. "One of the biggest challenges agents and brokers have with hospitality clients, like many others, is managing their expectations," Roberts explains. "Pricing in the standard market is increasing due to past experience. Today insureds are being asked to pay higher premiums or bear more of the risk themselves."
For some, premiums are up because they need coverage for what previously were unforeseeable risks. "In the last few years have, such risks have become more of a reality than a surprise," Maher remarks. "Super Storm Sandy along the East Coast is a perfect example. A large number of insureds never considered flood insurance. Now they've incurred losses that were not covered by their property policies."
Some hospitality markets are more competitive than others. "It seems that everyone still wants the mom-and-pop taverns with a small amount of liquor," Demshar comments. "Larger establishments with higher liquor sales or bar exposures, as well as those near a college campus and those with pool tables, for instance, are having a little more trouble this year."
Meister reminds agents to offer abuse and molestation coverage, which some carriers exclude. "In hotels, guests interact with housekeepers, people are roaming around the halls, and anyone can claim that anything happened," he points out. "Many hotels have a child care exposure—perhaps a kids' camp—and many have spas with massage services."
Other important coverages, he says, are innkeepers liability for the safekeeping of guest property; liability protection for pesticide and herbicide applications on properties with golf courses and other sources of water runoff; and garagekeepers liability for hotels with an in-house or contracted valet service.
According to Roberts, retail agents and brokers can add value by helping their hospitality clients understand and implement basic loss prevention measures. "Start, of course, with precautions needed to ensure guest and staff safety," he says. "Help establishments educate employees on the significance of good risk management—everything from food safety to alcohol consumption to other potential exposures.
"But go beyond that," Roberts adds. "Really spend time with insureds, helping them understand the benefits and risks of higher deductibles, as well as changing policy terms and conditions."
Meister says: "Agents and brokers who focus on keeping guests and hotel employees safe set themselves apart. Have a mindset of keeping guests safe. What exposures exist? How can someone get hurt? Then ask the same questions about employees."
He points out that guests and housekeepers have different exposures in the same location. "For instance," he says, "when housekeepers make the bed, what do they do with the linens? Are the linens on the floor causing a trip hazard? What about lifting heavy comforters? Simple twisting and turning movements can cause severe workers comp situations."
From a guest perspective, glassware in the bathroom could drop on marble or tile and smash into little pieces; put it in the main room, which is carpeted. "Address little things like that," he says. "It takes time to bring value to the insurance transaction, but if you help establishments with their unique exposures, you really stand out."
Maher encourages agents and brokers to keep clients informed about all aspects of insurance. "Start with carrying the right coverages for their businesses, and then address the benefits of proactively maintaining their facilities in every way," he advises.
"This includes everything from basic building maintenance and having backup generator systems in case of power failure to food storage and preparation and security procedures that protect against customer identity theft due to the high volume of credit card transactions," Maher says.
Meister suggests reviewing safety manuals and the particular establishment's requirements. "Make sure management uses these for continual training," he says. "The goal is to get all employees involved in risk management." He also suggests walking the property, alone or with the client. "Look for things from two perspectives," he says. "How could a guest hurt himself? And how could an employee hurt himself?"
Maher says: "Producers now have the experience of Sandy to illustrate the need for policies that provide coverage in the event of another catastrophe." Such experience can benefit the producer as well as the insured. "Producers have learned that, if they do not offer a client all of the available coverages, they may find themselves confronted with an E&O issue."
Demshar sees this happen in his marketplace. "We continue to come across situations where agents aren't serving their customers well," he remarks. "Recently we looked at a competitor's proposal, and he had totally excluded assault and battery. We went back to our agent and told him to make sure that the prospect realized what was missing. People need to know what they're buying—or being sold."
He also has encountered situations where insureds refused certain coverages. "I talked with another agent recently whose customer said they weren't worried about assault and battery coverage," Demshar says. "From an E&O standpoint, agents need to talk about it. If customers still won't buy, make them sign off on it. They're worried about price, but at the end of the day, price doesn't seem so important when you have a claim."
Roberts encourages agents to sweat the details. "Carriers respond better and quicker to complete, accurate submissions," he points out. "They need a complete analysis of all exposures and how the insured helps to mitigate all losses. For instance, an insured may have regularly scheduled employee safety meetings that the carrier is unaware of."
Adds Demshar: "Agents and brokers would do well to do some pre-underwriting. You can learn a lot about an establishment by doing a Web search to see what comes up, and by looking at its Web site, Facebook page and Twitter feed. For instance, knowing that a nightclub offers 'drink all night' specials or beer pong might make you view it differently. Some up-front work means fewer surprises later."
Roberts stresses the importance of client communication. "Agents and brokers must maintain constant contact with hospitality clients to discuss changes in their operations, issues and plans," he says. "They can offer insureds guidance about possible exposures and how insurance would respond, even while plans are in development."
Maher says agents should take a page from real estate. "It's all about service, service, service," he asserts. "Brokers who deliver the best service build the best reputation and get the most referrals. Hospitality is a small niche, and news of good or bad experiences spreads quickly. Reputation really drives producer success."
Adds Meister: "This is a segment where agents can truly make a difference—plus it offers tremendous opportunities to increase revenue and profits."
Dave Willis is a New Hampshire-based insurance and technology freelance writer and regular Rough Notes magazine contributor.