How the restaurant, hospitality industries manage today's risks
Natural disasters, cost increases, a rise in litigation and the lingering effects of the pandemic impact these businesses.
Hotels, motels, restaurants and resorts are subject to an array of perils and exposures including trips and falls, theft, alcohol-related accidents, natural disasters and cybersecurity breaches. With a multitude of people visiting and working at these properties daily, insurance is crucial, although it can be complex to navigate and represent a substantial business expense.
Like other sectors, hospitality is impacted by losses related to increased natural disasters, increased costs, a rise in litigation and the lingering impacts of COVID-19. Many insurance carriers have been evaluating their participation in the hospitality market, resulting in reduced capacity and double-digit rate increases.
“Hotels are subject to the same natural catastrophe perils as other classes of business but are often disproportionately impacted by such events due to their concentration in urban population centers and coastal areas,” says Dustin Ritch, a broker at World Insurance Associates who specializes in serving the hospitality industry on the East Coast. “Aside from natural catastrophes, water damage continues to prove a loss leader in the hotel industry due to both drain backups and bursts or accidental discharge of sprinkler systems (often when a guest hangs clothing on a sprinkler head in a room).”
Rising costs
Facing a slower expected travel environment this year, the hospitality industry is keen to manage risks and related insurance costs. In 2023, hotel insurance accounted for about 1.7% of total operating revenue, up from its long-run average of 1.2%, according to CBRE Hotels Research. Some factors driving the surge in commercial insurance premiums include the number and severity of losses due to hurricanes in Florida, fires in California and Hawaii, tornadoes in the Midwest, winter freezes in Texas, and convective storms across the country, says CBRE. Concurrently, the cost of fixing damages and replacing buildings has gone up and supply chain interruptions and lack of available labor continue to inflate construction-related costs and drive building values higher, which leads to increased premiums. Hotel size and capacity impact premiums, as does claims history and risk management practices.
“Unfortunately for U.S. hoteliers, the ability to control insurance costs is limited,” says CBRE. “On property, hotel owners can make physical ‘risk improvements’ such as flood gates and earthquake seismic shutoff valves. Owners also have the option to buy less insurance, or increase their deductible, to reduce their premiums.”
Common hospitality risks
Besides trips and falls, which are a prevalent risk across most commercial entities, one of the most obvious and common risks hotels and restaurants face is fire loss, says Jodi Ritter, a partner at New York-based law firm Coffey Modica LLP and former lead of the Sompo Global Risk Solutions program at Gallagher Bassett Services. Hotels and restaurants have strict guidelines for building and health code regulations, including fire suppression in the kitchen, hard-wired smoke detectors, sprinkler systems and fire extinguisher placements. Properly marked exits and evacuation plans to assist patrons and reduce risk of liability are also warranted, she says.
One area often overlooked in hotel coverage is pair and set coverage, noted Ritter. Since hotel furniture is coordinated and matching, if only a portion of their furniture is damaged, they may need to replace an entire set to maintain their décor.
Another common risk for hospitality is around swimming pools, she says.
“The presence of a swimming pool presents safety hazards for both patrons and staff,” says Ritter. “Lifeguards can be a good investment as they supervise and assist immediately if there is a problem. Either way, rules should be posted and some level of oversight provided in order to maintain a safe place.”
Employee theft also commonly presents a risk to the hospitality industry. This can include embezzlement as well as theft of the employer’s property, says Ritter. Communicating with employees is the first step in prevention, ensuring everyone knows what constitutes theft and fraud and that there is a zero tolerance for it. Having company oversight by managers and frequent third party audits is advisable and conducting background checks on new hires is also a relevant risk management tool, she says.
Emerging risks
One emerging legal risk unique to the hospitality sector is the increasing incidence of human trafficking in hotels resulting in lawsuits. Hotels can be held civilly and criminally liable for failing to prevent and report trafficking on their premises. Days Inn, for example, was ordered to pay a multi-million-dollar settlement to eight victims in a 2023 human trafficking case. Many policies now incorporate exclusions for human trafficking and other crimes as well as for weapons, says Ritch.
In addition, communicable disease exclusions have become a mainstay in the industry following the pandemic. “It can be found baked into virtually every commercial general liability policy at this point, particularly in the hospitality space,” says Ritch. Like many other commercial entities, hospitality also faces cyber issues, and protecting guests’ personal and financial information is mandatory, says Ritter. She also noted hotels face cyber risks related to guests using hotel Wi-Fi systems to work remotely. “Safe systems are imperative to prevent cyberattacks and data breaches,” she says.
Risk mitigation
Major types of hospitality insurance include commercial general liability insurance covering guest injuries and property damage; commercial property insurance to guard against disasters, fires and storms; commercial auto insurance for properties that provide shuttles or other transportation-related services; workers compensation insurance to cover employee injuries; equipment breakdown insurance; cyber liability insurance; dram shop insurance broadly covering liquor liability concerns; and innkeeper liability insurance.
Beyond proper insurance, proactive mitigation practices can help the hospitality industry reduce its exposures. Both Ritter and Ritch encouraged regular inspection and maintenance of properties and ensuring proper security is in place. Ritter also pointed to ensuring proper contracts are in place with third-party vendors: “If you’re a mall, a restaurant, an apartment complex and you have a cleaning company, you must have a contract with an indemnification clause that if the vendor does something negligently or omits to do something and somebody is injured as a result, then they have to provide defense and indemnification to the owner.”
Training is also key to mitigating risk in hospitality, especially because risk managers often aren’t present when incidents occur. Employees should be trained to proactively watch for potential dangers, keep guests safe during incidents, and collect information and properly fill out incident reports. The American Hotel and Lodging Association (AHLA) offers free training to employers and employees on how to recognize and respond to human trafficking through its No Room for Trafficking initiative.
Broker best practices
In the increasingly challenging hospitality insurance environment, experts say property owners and managers should start working with their broker up to 120 days before renewal and make sure the broker is aware of any recent improvements to the property. The hospitality industry is increasingly looking for and may benefit from customized coverage for unique risks. In addition, digital tools tend to appeal to hospitality insurance purchasers.