One of the most important aspects of owning and operating a hotel is minimizing the various physical and liability risks associated with this type of business. Risk management is the process of evaluating a hotel's risk exposure and developing strategies for mitigating those. It incorporates a program for reducing exposure supplemented by insurance protection should an incident occur. A hotel owner and operator would be far better off if they could eliminate all the possibilities of an incident occurring on their property. Since this is not always possible, particularly incidents they have no control over, adequate insurance protection provides a way to reduce exposure to a financial loss.

When reviewing your hotel’s risk management strategies, it is essential you understand all the potential areas of exposure and exactly how insurance policies are structured to handle the unfortunate incidents that could occur.

The primary areas of concern include the property itself, premises liability, automobile liability, worker’s compensation, fidelity, boiler & machinery and umbrella. An effective risk management strategy will also reduce a hotel’s insurance cost. Saving money on insurance requires not only a good broker who fully understands the unique risk exposure of a hotel, but one who can also advise on a strategy that will reduce the chance of an incident.

Let’s look at some of the unique risks faced by hotels:

Property Risk

Property risk exposures in the industry are primarily due to the high combustibility of contents and multiple sources of ignition that exist in a hotel. Managing these as well as updating building electrical wiring, plumbing and heating systems must be a top priority to mitigate the potential for a fire loss. Additionally, smoke alarms and sprinklers should be installed in all areas of the building and kitchen equipment must meet all National Fire Protection Association requirements. For resort areas, storm damage is always a concern and needs to be addressed.

It is always essential to insure a hotel’s buildings and furniture, fixtures and equipment to replacement cost. Replacement cost is the cost to repair or re-build to like kind and quality in today’s dollars. Another major component of your property insurance is the BI (Business Interruption) exposure. BI exposure can be substantial due to lack of backup facilities and the seasonal natures of certain hotel operations. A hotel must be sure to complete a business income worksheet to ensure proper insurance proceeds for a loss of profits and continuing expenses. An accurate account of annual revenues by type such as room, food, and beverage will be advantageous for insurance brokers when they are researching the best and least expensive coverage.

Premises Liability

A hotel's premises liability exposure is high due to the number of guests typically in the property at any given time. High-rise hotels pose unique life-safety issues. Hotels should implement every safety code possible to ensure guest safety. Stairways, elevators, railings and floor coverings should all be in good condition. Exits should be clearly marked, and lighting should be available in the event of a power outage. Balconies should be regularly inspected and maintained. Guestrooms should be accessed by magnetic keys or other similar systems that are unique for each new guest. Services and recreational facilities, such as exercise rooms, swimming pools, laundry facilities, gift shops, barber, beauty and other personal services, require separate review. It is important to identify all the potential liabilities and develop a risk management strategy to reduce the chance of an incident.

Products Liability

Products liability exposures can be high if the hotel has a restaurant or lounge serving alcohol. Employees should be trained in the proper handling of food to prevent food poisoning or the spread of other transmissible diseases. Liquor liability exposures can be high if employees are not property trained to recognize the effects of excessive alcohol consumption.

Automobile Liability

Automobile liability exposure is also high for some properties, like airport hotels, when it is necessary to pick up and deliver guests to and from the hotel. Valet services present garage-keepers exposure for damages to guest’s vehicles. With automobile exposures, pre-approval of acceptable MVR’s (driving history report), and restricting driving duties to those between the ages of 18-65, are effective methods in managing this type of risk.

Workers Compensation

Workers compensation exposure is also high within the hospitality industry. Cleaning and maintenance operations can cause workers to experience lung, eye or skin irritations and reactions. Slip and falls, as well as lifting, back injury, hernia, sprain and strain, are all common occurrences.

Every hotel should have a risk management strategy that works to reduce the exposure and then provides adequate insurance to cover unfortunate incidents that were not prevented. Your hotel insurance broker can assist in finding an insurance company that has the extensive experience in evaluating unique hotel risks so you don’t end up paying more for your coverage because the company overestimated the exposure and charged too much. The broker should also find you an insurance company with a hotel-oriented loss-control department, which will survey your hotel and assist in identifying areas of risk that can be addressed in your strategy.

When shopping for insurance, your broker will assist in obtaining adequate underwriting information to get you the best insurance at the lowest rate. COPE (Construction Occupancy Protection Information) should be organized per location, and include items such as buildings' square footage, construction materials, year built, number of stories, swimming pools, sprinklers, smoke alarms, key system, buildings contents, business income, hotel receipts, food receipts, liquor receipts and total receipts. Along with this information, obtaining up to five years of loss history is crucial for your broker to get your insurance program the best coverage, at the best price and with the best terms and conditions.

For a review of your risk management strategy, drop me an e-mail at srushmore@hvs.com. Stephen Rushmore is president and founder of HVS, a global hospitality consulting organization with offices around the world. Steve has provided consultation services for more than 12,000 hotels throughout the world during his 35-year career and specializes in complex issues involving hotel feasibility, valuations and financing.