306 | Calculated Risks: Catastrophic 2020 means higher insurance costs for hotels

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An incoming derecho on Aug. 10 is tracked moments before it hits the small town of Peru, Illinois. A derecho is a prolonged thunderstorm with damaging high winds. The storm was a harbinger of the climate-related disasters to hit the country in 2020. A record-breaking number of storms and the economic damage they caused, mixed with the coronavirus pandemic, has created a hard market for commercial property insurers. Insurance premiums increased by an average 11.8 percent in the third quarter of 2020 and insurers anticipate more cost hikes ahead. (Photo: Eddie J. Rodriquez/Shutterstock)

It’s another year for a hard market with greater risk and no easy answers, say experts

Real Hospitality Group manages a portfolio of more than 100 hotels. Most of the properties are in the Mid-Atlantic region, including New York City, and some are in East Coast beach towns – markets where COVID-19 has killed off business or major storms have crippled local economies.

Real Hospitality Group has been in business 10 years. Founder and chief executive Ben Seidel says he’s seen significant changes in commercial and property insurance coverage one disaster after another.

In 2020, the U.S. experienced 22 different $1-billion weather and climate disasters, reports the National Oceanic and Atmospheric Administration. In total, catastrophes caused $95 billion in damage.

Climate scientists and other experts expect the situation to get worse and advise property owners, including businesses, to prepare for loss.

CALCULATED RISKS: Construction cranes collapsed on a hotel project in New Orleans in late May 2020 when tropical storm Arthur hit the U.S. Gulf Coast. Episode 306 of Lodging Leaders podcast reports record-breaking catastrophic climate-related events in 2020 have triggered higher insurance costs for hotels. (Photo: R. Wellen Photograpy/Shutterstock)

As hotel businesses are working through the issues of insuring against a global health pandemic, it’s a wise move to reckon with the reality that a wildfire, flood, hurricane, tornado or some other disaster will hit your community and damage property and impede business.

Seidel notes that weather events are not the only threats hoteliers have to insure against.

Cybercrime is rampant. And of course the coronavirus pandemic is a whole new threat to owners, especially when it comes to risking exposing employees or customers to infection.

Real Hospitality Group renewed its coverage in December ahead of “huge” increases in insurance premiums that Seidel sees coming. “A lot of that was fueled by wildfires, floods, hurricanes at an astronomical rate. Our wind coverage has gone literally up 140 percent,” he said.

General liability held steady while property coverage accounts for the cost increases, including umbrella policies, which Seidel has seen double and exact more of a toll on hotels’ bottom lines. “The cost of insurance is making margins even tighter than before the toss-up in revenues that the hospitality and restaurant industry have suffered.”

Commercial umbrella policies cover property damage and liability beyond a business’s regular insurance coverage.

Survey Shows Spikes

Arthur J. Gallagher & Co., one of the largest insurance brokerage firms in the world, reported that in the second quarter of 2020 nearly 90 percent of its clients have had property insurance premiums increased. That is the highest number of clients reporting an increase in 20 years.

Nearly three quarters of its commercial property and business owners in the U.S. – including nearly 9,000 hotels – saw umbrella insurance premiums increase.

General liability premiums increased for two-thirds of its clients while workers compensation costs are down 56 percent.

Gallagher cited the trends driving the hard market include more losses because of catastrophic weather events; greater frequency and severity of ransomware claims; and the global pandemic that’s created economic uncertainty.

RECORD-BREAKING YEAR: The National Oceanic & Atmospheric Administration reports a record number of climate-related disasters hit the U.S. in 2020. Of the events, 22 resulted in at least $1 billion in damage. Overall, climate-related storms, wildfires and flooding caused $95 billion in damage. NOAA advises the nation to brace for more wild weather this year and in the coming years.

Liability Issues

When it comes to health insurance coverage for employees, Real Hospitality Group was braced for sticker shock. Instead, it got a pleasant surprise.

“Our cost is only 76 percent of what it was last year. So it came down almost 25 percent,” Seidel said. “We were expecting it to go the other way.  We understand that the health insurance markets, as long as your MOD rate is good, this pandemic hasn’t really hit that market.” A MOD or modification rate is how insurance companies gauge the costs of past injury claims and determine the risks for future injuries.

Employees’ health is a big area of concern for hotel operators amid the coronavirus pandemic. And a COVID-19 issue facing the travel industry is the liability employers may face if an employee contracts the virus while on the job.

Though business groups, including the hotel industry, were lobbying Congress to include liability coverage and protection for employers in the latest round of government aid, the December measure did not address the issue.

“Right now, you would have to be foolish to say to an employee, you have to go to ‘blank’ to do this meeting,” Seidel said. “You would open yourself up for all kinds of maybe frivolous, maybe legitimate lawsuit activity, and who wants to deal with that? So until there’s some type of movement there, whether insurance is available for that or whether the federal government acts on limitation of liability for COVID-related illness, it’s going to be tough to get people traveling again, until herd immunity anyway and this thing passes.”

Despite all the politicking and business strategizing, hospitality employees are showing up for work in an industry that in 2020 experienced its worst business year ever, leaving more than one billion rooms unsold, according to STR.

In December alone, 500,000 hospitality jobs were lost, reported the U.S. Labor Department.

Pre-pandemic the U.S. lodging industry employed 2.3 million people, reports  the American Lodging & Hotel Association, which expects the loss of half a million jobs to continue this year and more than half of the country’s hotel rooms to remain empty.

Neil Alldredge is senior vice president of corporate affairs at the National Association of Mutual Insurance Companies, a non-profit trade association with a membership of 1,400 property casualty insurances companies of all sizes.

A mutual insurance company is owned by its policyholders who typically benefit from the company’s profits by the way of reduced premiums.

During his 20-plus years with the association, Alldredge has witnessed a lot of events and trends that have shaped the property insurance industry.

The coronavirus pandemic has introduced new challenges for hotel owners and insurers, particularly with issues related to business interruption coverage.

LISTEN: BUSINESS INTERRUPTED: Episode 280 of Lodging Leaders podcast recently covered lawsuits hotel companies have filed in connection with business interruption insurance claims they say their insurers must make good on.

Take Steps Now

Alldredge said besides the huge topic of recovering business lost to the coronavirus pandemic as well as other immediate issues, property owners should take this time to review the coverage they need now and post-pandemic.

“Small business owners, small or large for that matter, still need the normal sorts of liability coverage. They would always need their normal property insurance, their fire insurance, all those kinds of things. The liability coverage that is typically covered in a normal business owner’s policy or a property policy is still at play,” Alldredge said.

“The business interruption coverage question is going to linger; it’s going to be around for a while. The insurance industry’s perspective is that pandemics are simply just not insurable events. That’s why many of the languages don’t cover it. I think the one thing business owners, especially hotel owners can expect is even more clarity.”

Alldredge said business owners should take this time to review their insurance policies, talk to their agent and shop around for coverage. “There are lots of insurers that have a lot of interest in commercial real estate, commercial liability insurance,” he said. “There are lots of options in the marketplace. And so, if nothing else, this is a good time to look at those policies to review what you have covered, to understand what it is you have covered and what you don’t.”As Seidel with Real Hospitality Group noted, the coronavirus pandemic has cast a new light on finding the right coverage for employees at risk of contracting COVID-19.

“It’s little bit of an open question,” Alldredge said. “This could fall in your employment liability area, but it’s probably more likely a workers’ compensation.

“Some states have looked at what we call a presumption. So where did the injury occur? Were you working or were you not?

“A couple of states have looked at changing these presumption laws and have just said, ‘Look, we believe if you’re working and you get COVID the presumption is you got it at work.’ In the insurance industry side, we think there probably ought to be a little higher standard to just if you are working, you got it at work. Moving everybody in the workers’ comp system is probably not the right answer. But, for the most part, there’s going to be a determination made about where the contract happened.”

Alldredge said business owners should consult their agents or insurance carrier to get some clarification about what the state where the hotel is located would consider coverable illnesses. “This is an important thing for people to understand how that works,” he said.

Besides dealing with employee-related COVID-19 coverage, hotel owners and operators also face the risk of being sued by a guest who falls ill with the virus.

There is no easy answer, Alldredge said.

“It’s another one that’s going to be really a challenge,” he said. NAMIC is exploring how to address frivolous lawsuits filed by customers who contracted COVID-19 while on the road without knowing for certain where they came in contact with the virus.

“That’s just going to lead to an enormous amount of litigation that in most cases really doesn’t do anything except cost business owners money” Alldredge said. “We’re hoping to be able to get some restrictions on those kinds of things in state law.”

He stresses the insurance industry is state-regulated, meaning what is law in one state may not apply in another.

Expect Premiums to Rise

Although insurance coverage as it relates to the pandemic has been a hot topic for the hospitality industry, hotels have suffered losses caused by wildfires on the West Coast, high winds in the Central Plains; 12 hurricanes in the Gulf and along the East Coast, seven of them causing $1 billion in losses each.

“Put the pandemic aside and we talk about what we consider to be the normal issues around catastrophes,” Alldredge said.

“This is really where the industry shined in most cases. It’s also a good reminder that these perils are coverable to extent. They’re not like a pandemic. You can measure them and figure out how much risk you want to bear and charge for it.”

He acknowledges NAMIC members have increase rates along with the spike last year in natural disasters. :The science seemed to suggest at the moment that we may be entering a period of increased frequency of catastrophes – hurricanes, wildfires.

“Certainly from an economic perspective, the industry has paid out billions in 2020 and the numbers are still coming in. It’s certainly something that is on our minds. I do think it’s fair that business owners are going to see changes certainly in price.”

Resources and Links

You can find Lodging Leaders podcast on

  • Ben Seidel

    Founder, President and CEO

    Real Hospitality Group

    LinkedIn Profile
  • Neil Alldredge

    Senior Vice President in Corporate Affairs

    National Association of Mutual Insurance Companies

    LinkedIn Profile
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