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Ms. Sarmiento

Insurance

Unpredictable Weather: Understanding the Risk and Protecting Your Property

By Fran Sarmiento, Executive Vice President, Venture Insurance Programs

Ocean or bay view? At some hotels and resorts, it's a common enough question. But what if they are one and the same?

Even before "Superstorm" Sandy left the Northeast reeling, rising sea levels were altering the geographic outline of our coast. Tornadoes, a common threat in the Midwest, have wreaked havoc in more parts of the country, and wildfires, mudslides, dust storms and drought have devastated parts of the West and Southwest.

While the hotel industry has come a long way in preparing for the disasters that weather can bring, today's new unpredictable weather has become a critical issue for hotels and resorts. Severe weather rarely threatens the existence of a business, but it can jeopardize growth and cause volatility in earnings.

You can take steps to protect your property and your guests from this ever-changing climate. Specific risk management practices and disaster preparedness plans will help reduce or eliminate the potential loss. But you also must have adequate insurance, both property insurance with the dollar limits you need, as well as business interruption coverage with protection from loss of income.

Insurance Rates and Availability

How do the recent changes in weather patterns affect your ability to get adequate property insurance? Insurance rates for commercial property coverage are likely to rise throughout 2013 due to Superstorm Sandy and several other large catastrophe losses. These increases will vary depending on location. Deductibles are increasing as well, not only for wind and flood exposures, but also for all other perils such as fire, theft and vandalism. In fact, it is not uncommon to see property deductibles on larger hotels increasing to between $10,000 and $25,000.

In some parts of the country, you may also find lower limits available for wind, hail and flood protection. Limits are the dollar amount paid by your insurance policy. In the past, you may have been able to get coverage for wind, hail and flood at limits equal to your building limits, but those risks may now be "sub-limited" to $1 million or $5 million. These changes will not affect all hotels equally. If your building is in good condition and your loss experience has been good, you may not have any changes to your coverage or costs.

One reason we are seeing these changes is that many insurance carriers are adjusting the way they evaluate the weather events and other factors that affect their property business. Many use risk models to determine the potential for losses. These models are broadening their weather regions and the weather events that can affect those regions.

For example, a few years ago many insurers only required wind deductibles on the Gulf Coast and up the East Coast to Virginia, as well as up to five to 10 miles inland. The effect of two hurricanes/tropical storms hitting the Mid-Atlantic and Northeast regions in two consecutive years has highlighted those areas' vulnerability to wind and flood catastrophes. As a result, risk models will change and there will be some restrictions on what the insurance property market is willing to insure.

Some experts believe that, barring an unforeseen catastrophic event, most types of commercial insurance property premiums will increase anywhere from 5 to 15 percent over the next year. The National Flood Insurance Program, which is managed by the federal government, has been driven into a large degree of debt due to loss payments from Superstorm Sandy. You can look for significant rate increases for your flood insurance, especially if you are in a hard-hit flood zone. Some hotel owners can expect higher premiums, higher deductibles and fewer choices among property insurers.

Business Interruption Coverage

A hotel should expect indemnification (or compensation) from their insurance carrier when it suffers property damage from a covered cause of loss; this applies to your tangible property and financial loss. However, a natural disaster can cause not only physical and property damage, but also interrupt your business with a loss of income for weeks or months. Business interruption insurance coverage (also known as business income insurance) can help protect your hotel for such loss of income.

Business interruption coverage was developed to help return businesses to the financial position they were in prior to the catastrophe that triggered a loss. Most policies will compensate a hotel for revenues lost during the period of indemnity (the time it takes following a loss for a hotel to return to its pre-loss condition), less any expenses that do not continue during that period. They will also pay for some of the extra expenses that occur in order to help you keep your business running.

To ensure proper insurance coverage for a loss of profits and continuing expenses, a hotel must complete a business income worksheet. This requires an accurate account of annual revenues by type, such as room, food and beverage, and it will help your insurance broker when they are obtaining insurance coverage for you. Make sure you discuss the following areas with your insurance agent or broker in order to have a well thought-out understanding and strategy for business income exposures:

  • Period of indemnity: How long would you estimate being unable to operate? What factors could change this estimate? What if you have to rebuild, not just repair? You may need to purchase an "extended period of indemnity."
  • Loss of room revenue: Consider occupancy percentage for that time of year, average daily rate, history of cancelled reservations, conferences, etc.
  • Other revenue loss: Determine additional potential losses, including food, beverage, entertainment, conferences, etc.
  • Ordinary payroll: Take into account key employees whom you would want to retain during a period of loss after a weather-related crisis.
  • Continuing costs: Consider the expenses of rent, electricity, taxes, etc.
  • Extra Expenses: You may incur additional expenses such as advertising and temporary locations.

Managing Your Risk

In addition to adequate insurance, you can help manage your risk through disaster preparedness, a critical component for storm readiness. It begins with a written emergency response plan that is shared, practiced and reviewed annually. Also consider your business continuity plan, taking into account everything from backup generators to communication with your employees and guests. Finally, once the storm is over, you have to consider your post-loss goals: how quickly can you recover and get back in business?

When putting together your disaster plan, you should consider the following:

  • Learn about weather events that are likely to affect your area and develop a grid that will help to identify the significance and likelihood of the impact.
  • Assess your buildings - both interior and exterior - to understand where your weak points are (windows, doors, and roof), and test your emergency lighting. Insurance, risk management and engineering experts can help with your assessment.
  • Fortify your building with storm shutters, metal screens and aluminum awnings.
  • Organize a communication strategy. Have a plan in place to notify your employees and guests about a safe place to go. Who will knock on doors to wake up guests, make announcements and notify authorities? Assign specific people to specific jobs.
  • Be prepared for the media: Have a media response plan in place with a designated spokesperson who is prepared to respond quickly and accurately to the media.
  • Minimize your loss. Have a backup generator ready for use and adequately fueled, pick up branches and put away unused equipment and trashcans. Tables and chairs should be put away or bolted down and secured by chains.
  • Stay alert. Sign up for weather alerts, and monitor National Weather Service announcements (http://www.weather.gov/).
  • Develop a post-storm plan. Conduct a damage survey and determine any injuries or emergency situations. Then, tend to the needs of guests and employees, inspect all major equipment and coordinate clean up and recovery. Document all damage and notify your insurance company.

Once you have prepared your plan, training and practice are essential. Form a crisis management team to coordinate the planning process, with each person responsible for their own section of the hotel. Drills are important, since employees who can practice and remember their duties will react better in a real, more stressful event. One of the biggest challenges in any crisis situation is whether the people in charge are able to keep focused and calm and execute the plan.

Controlling Costs

Despite the fallout from Sandy, related to insurance and disaster preparedness, you can still take steps to keep your costs and exposures under control. First, work closely with your insurance broker to understand your insurance needs. Identify the types of severe weather that can affect your region of the country, ask your broker what flood zone you are in and confirm that you have the appropriate flood coverage to protect your building from loss.

Second, make sure your building is up to code and building updates are done on a scheduled basis. Let your broker know what you have done to reduce your exposure to loss; for example, renovations to buildings, purchase of generators, disaster plans, wind shutters, etc. The more your broker can communicate to the insurance carrier the positive steps you have taken to make your hotel safe and secure, the better.

Even with growing severe weather trends, the United States' hospitality and tourism industry represents one of the fastest growing sectors of the economy. Visitors from around the world still consider the United States an attractive business and vacation destination. Hotels and resorts will continue to work to meet the challenges that climate change and unpredictable weather patterns have had and will continue to have on their industry. Working with your broker, you can ensure that your hotel weathers the storm.

Fran Sarmiento is the Executive Vice President of Programs for Venture Insurance Programs, a national program administrator for select industries, including the hotel and resort industry. At Venture, Ms. Sarmiento manages more than $75 million of insurance premiums and is responsible for overseeing the underwriting, development and expansion of all programs. An outspoken proponent of providing insurance coverage that is specifically tailored to meet the needs of the ever-changing hospitality industry, Ms. Sarmiento’s 30 years of commercial insurance experience includes positions with Liberty Mutual Insurance Company and CIGNA Insurance. She has spent the last 10 years focused on industry specific insurance programs, with one of her main areas of emphasis being the hotel and resort industry. Ms. Sarmiento can be contacted at 800-282-6247 or fsarmiento@ventureprograms.com Extended Bio...

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