HOTEL BUSINESS REVIEW
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What Can Hoteliers Do to Combat Rising Insurance Costs?

By Josh Cavallin Principal, Oakbridge Insurance | October 2024

The hunt for affordable property and liability coverage for hotel operators requires dedication, accountability, awareness, creativity and an agent well versed in the hotel industry.

The insurance industry is amid a hard market, which has crippled the industry. A hard market occurs when insurance companies are no longer profitable after paying out more in claims than they receive in revenue.

Property insurance has been the biggest heartburn for most hotel operators over the last two years. Daily conversations with brokers and agents all end with the same thing: It is a tough property market, something the market has not seen in 30-plus years. The recent surge of hurricane activity during the 2022 season is the primary culprit. Reinsurance rates rose 30% and, in some cases, up to 50%, depending upon the geographic region. Falling investment returns for insurers, combined with an increase in severe losses, means the carriers must pass along the reinsurance increases by way of rate hikes. The result: increasing deductibles, disappearing coverages and premium increases.

In addition to weather-related challenges and increased insurance premiums, the hotel industry faces other rodents that have been gnawing away at revenue per available room (RevPAR) growth: increasing wages and property taxes. This has been the case in certain markets such as Florida, California, Georgia and New York, among others. It is imperative for hotel operators and management companies to review expenses diligently when projecting their RevPAR or considering acquisitions.

The lending landscape is still fertile and active, mainly due to private capital and rising investor interest. There has been a huge uptick in transactional business over the last six to 12 months. The industry will see an influx of hotel loans come due over the next four to 10 months, with the upcoming maturities close to $5.8 billion worth of U.S. hotel securitized loans. Hotel owners will be required to pay off their loans, which is not a viable option for most, so they are left to refinance, file an extension or sell. Given the interest rates, hotel owners are more likely to seek transactions rather than refinance.

Another issue – especially for owners within the hospitality, multifamily and senior living space – is the number of claims and the dollar amounts paid for claims against casualty insurance. The main issue on the casualty side is the nuclear verdicts being awarded by juries when the owners have very little or negligible liability. The legal climate is state-specific and can vary drastically based on the laws within each state.

Georgia has faced some of the most extreme casualty changes the industry has ever experienced over the last three to five years. The Peach State has earned the top spot on the judicial hellhole list, thanks to its poor civil justice system. Georgia’s Supreme Court is determined to expand liability and has recently been handing out massive jury awards like Halloween candy. Plaintiffs’ lawyers from across the country are flocking to the Peach State to file lawsuits, where they can take full advantage of the legal climate. In 2022, Georgia was ranked the Most Challenging Legal Climate, which is the direct result of the massive nuclear verdicts being awarded. In return, Georgia has been faced with a decline in carrier market availability, sending the Georgia insurance industry into a crisis.

Legal System Abuse Driving Social Inflation

Legal system abuse is defined as policyholder or plaintiff attorney practices that increase costs and time to settle insurance claims. Litigation should always be a policyholder’s last resort; abuse exploits litigation when a disputed claim could have been resolved without judicial intervention. However, this is not the current situation in Georgia. Abuse contributes to higher costs for insurance operations and premium pricing for policyholders.

According to the Insurance Information Institute, legal system abuse in the U.S. is the primary driver of social inflation. There are four main issues that contribute to legal abuse:

1. Third-party litigation funding: This process is where third-party funders financially support a plaintiff or plaintiff’s counsel while receiving a portion of the proceeds awarded from the litigation or settlement. To make matters worse, these contractual agreements are non-recourse, meaning if the plaintiff’s suit fails, the funding parties receive no financial benefit or punishment and simply move on to the next case.

2. Plaintiff attorney advertising, or “the billboard effect”: With the deterioration of the judicial system standards and regulatory authorities, plaintiffs’ attorneys are spending billions annually on marketing and advertising. In Atlanta, there are plaintiff attorney ads on the majority of public transportation, billboards every few hundred yards on the interstates, etc. This is like dangling a carrot in front of a rabbit, tempting those suffering even minimal damages with the potential for significant financial gain through help from legal counsel.

3. Increasing plaintiff attorney contingency fees: This one is simple and just what it sounds like. Policyholder claimants receive less money from the settlements while the attorneys and third-party funding organizations gain larger profits.

4. Eroding caps on damages: Settlements increased almost 30% between 2010 and 2019 because there is no limit on the amount of damages in the U.S. judicial system.

Tips to Combat Rising Insurance Costs

Underwriters can be persuaded to provide lower premiums for specific risks if operators can show that proactive steps have been implemented to manage risks that contribute to insurance claims and lawsuits. The best procedure for doing this is to establish a risk management program that identifies, eliminates, evaluates and controls potential onsite hazards.

How to Manage Risk in Your Hotel

Identify Risks: General managers can use a checklist to assess the hotel premises and spot any potential hazards.
Assess Risks: A checklist can help businesses evaluate the severity of the risks.
Prioritize Risks: After assessing the potential impact of different hazards, managers can prioritize which risks need to be addressed.
Implement Control Measures: A checklist reminds you to implement safety measures to prevent risks from occurring and escalating.
Monitor Measures: Use checklists to continuously evaluate the effectiveness of the safety measures and make any necessary changes.

One of the most important things hoteliers can do to reduce risk is to implement a risk assessment checklist immediately if one is not already in place. This acts as a reminder and training tool for the hotel staff to identify any potential risks, note their severity, and take necessary action to mitigate any potential injury and/or property damage. Risk management is critical to the hotel industry because it allows operators to:

Provide a consistent customer experience.
Prepare for potential losses from risk events.
Keep employees and guests safe.
Drive down insurance costs.

Property

Hotels are prone to water and fire damage from roofing, plumbing and electrical issues. The result of these damages can be astronomical from a financial standpoint. Hoteliers understand this and are willing to do what is within reason to prevent these types of losses. Hotel operators do not want to file claims just as insurers do not. All this does is raise insurance premiums even more and reduce business while the property undergoes construction to repair the damages. Below are some best practices to help prevent potential financial loss from damaged property.

Maintain facilities well and conduct regular inspections to identify potential hazards.
Train staff on how to respond to emergencies like fire and severe weather.
Use security measures like surveillance cameras and key card access points.
Maintain the right insurance coverage.
Post compliance standards and safety policies where everyone can see them.

Risk Management Strategies

Once potential risks have been identified, decide how you will approach the issue. Below are four options:

Avoid the risk altogether. Sometimes the best decision is to avoid risk with high probability and severity. Risk avoidance might seem like a no-brainer, but it is often unrealistic for most threats.
Transfer the risk to another party. Insurance is the most common form of risk transfer, but any work that involves contracts is an opportunity for risk transfer. For example, you can require a waiver of subrogation on a subcontractor’s insurance policy.
Mitigate and minimize the risk as best you can. This is likely the approach your company will take with most risks. Risk mitigation inherently involves trade-offs. Your job is to compare the cost of control measures to the probability and severity of the risk.
Accept the risk and its implications. No business is risk-free. Some risks are simply the cost of doing business. For risks that are low probability and low severity, risk acceptance is a reasonable approach. The resources to mitigate, transfer or avoid the risk are just not worth it.

What Can Be Done

The current hard market is pushing hoteliers to take responsibility for and better control over their property programs, which is great news since most risks are controllable. It is more important than ever to establish a relationship with an insurance professional with a niche for hotels. Hotel operators need full transparency and context from their agent more so than ever to navigate this hard market.

Be proactive! Taking this approach and gaining control over your risk management program improves your insurability with underwriters. Managing loss control and mitigating potential exposures properly will have the most beneficial impact on your insurance program.

Mr. Cavallin

Josh Cavallin leads Oakbridge's hospitality sales efforts where he provides clients with an exceptional level of service as well as insurance and risk management solutions designed to reduce premium costs. Over the years, he has built a significant book of business in a challenging and dynamic market with a focus on risk management solutions for clients which enable them to operate profitably. An industry leader, Mr. Cavallin is well-regarded for his insight and knowledge of hospitality's most pressing issues and, due to his and his team's insistence on outstanding customer service and best-in-class solutions, he has one of the company's highest client retention rates. He began his career in 2002 and has grown his book of hospitality business to one of the largest in the nation. Mr. Cavallin is a graduate of the University of South Carolina, where he earned a Bachelor of Arts degree. He and his family live in the Atlanta area and he supports his community through several church-based outreach programs.

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The following is the Privacy Policy for HotelExecutive

We can be reached via telephone, email, or online at our contact page. When you visit our site we do not log any information regarding your domain or email address. Information Sharing: We do not share user information with any third parties other than via press release distribution as described below.

Hotel Newswire is a newswire service that distributes press releases on behalf of our users. If you decide to submit a press release for distribution through our system we will transmit your entire press release including any personal information therein contained to our media contacts and online distribution points including search engines. This is the only redistribution of your information that we engage in. Your submission of press releases through our system indicates consent with this policy. The information we collect during your registration process is used to notify users about updates to our service and inform users of any special events hosted by Hotel Newswire. This information is not shared with other organizations for commercial or non-commercial purposes.

Cookies: Our system requires the use of cookies to enable the user to log back into our website to access information from the newswire, without having to log in each time using the required username and password.

If you do not want to receive email from us in the future, please let us know by following instructions included in our communication with you. Users who supply us with telephone numbers online may receive telephone contact from us regarding their account, or informing them of new products and services available on the HotelExecutive website. If you do not wish to receive such telephone calls, please edit your account and remove your phone number from your account profile. This can be done from your user account menu.

Ad Servers: We do not partner with or have any relationship with any ad server companies. From time to time, we may use customer information for new uses not previously disclosed in our privacy notice. If our information practices change at any time, we will post the policy changes to our website to notify you of these changes and provide you with the ability to opt out of these new uses. If you are concerned about how your information is used, you should check back at our website periodically.

Upon request we provide site visitors with access to all information (including proprietary information) that we maintain about them. Users can access this information by logging in to their account.

Security: We always use industry-standard encryption technologies while transferring and receiving user data exchanged with our site. We have appropriate security measures in place in our physical facilities to protect against the loss, misuse, or alteration of information that we have collected from you on our site. We do not store credit card information in our systems.

If you feel that this site is not following its stated information policy, you may contact us.