Reviewing Your Coverages

Running a hotel today is a much more complex than ever before.  Increased responsibilities and demands on your time, make the job of a hotel owner or general manager a very difficult one.  In a constant battle to complete all of their responsibilities, many hotel owners overlook the importance of annually reviewing their insurance program to assure they are adequately protected against the risks inherent in doing business in today’s society. 

The area that is most commonly overlooked is the importance of maintaining adequate limits on all lines of coverage.  The U.S. Department of Labor recently reported that over 40% of all companies that experience a disaster never reopen, and 25% of the companies that remain open end up closing their doors within two years.  The main reason these companies struggle so greatly is because they failed to properly insure themselves.  After disaster struck, these firms did not have sufficient cash flow to help get their businesses back on its feet.  By taking the time to properly review your existing insurance policies, and more specifically the policy limits, you will be taking the steps necessary to assure your hotel doesn’t become a statistic. 

Insurance policies are very complex documents that are often quite difficult to understand.  While it should be the responsibility of your insurance agent or broker to explain your policy in detail, many times this simply does not happen.  It is important for you to review and understand your entire policy, but specific attention should be paid to your policy limits.  The following paragraphs outline specific items that you should be made aware of when reviewing your policy limits.  By remembering these tips at your next insurance renewal, you will be on your way to achieving the peace of mind that comes from knowing your hotel is protected. 

Property Limits

In the unfortunate event of a catastrophic property loss your attention will immediately become focused on your property policy limit.  While many property policies insure to the “Replacement Cost” of your policy, they will only do so up to your policy limit.  The following example should better illustrate this point. 

The replacement cost of ABC Hotel’s Building and Contents is $6,000,000.  The hotel is currently insured for $5,500,000.  If this property was completely destroyed, the maximum amount the insurance company would pay is only $5,500,000 (less any deductible).  These funds must then be used towards the reconstruction, renovation, or repair of the property.  In this unfortunate situation the owner of the hotel would be responsible for coming up with the additional $500,000 plus the initial deductible.  Additionally, if the property is not insured to value, the loss may be subject to a co-insurance provision, which works as a further penalty for not carrying the proper amount of insurance.

This example illustrates the importance of making sure your hotel is insured to its full replacement cost.  When we ask many hotel owners for the replacement value of their property we are often given valuations based on the property’s recent selling price, a revenue-based appraisal, or the “actual cash value” of the property.  These valuations are irrelevant when calculating the property’s replacement cost.  The replacement cost of the property should be calculated by determining the cost to repair, rebuild, or replace the property with other property of like kind and quality at today’s prices.  A certified appraiser or property engineer is likely your best resource when trying to determine your property’s true replacement cost. 

Business Income Limits

Another area that is often overlooked when renewing insurance coverage is the Business Income limit.  Often referred to as Time Element or Loss of Earnings and Rents, many hotel owners greatly underinsure themselves in this area to help reduce their insurance premium.  This is a big mistake.  Simply put, Business Income (BI) coverage will insure your profit plus those expenses that would continue during the restoration period following a property loss.  Obviously you would like to protect your profits between the time of the disaster and your reopening, but there will also be some expenses which will continue during this period as well such as your mortgage payments, franchise fees, property taxes, and possibly even payroll.  The average limit within the hospitality industry for business income coverage is between 75%-95% of the property’s gross income.  If you are not currently insuring to at least these limits, you could well be underinsured.  Each property’s needs are different, however, and we strongly recommend you contact your local insurance agent to help determine what your property’s true BI exposure is.  The calculations are somewhat complex, but by completing a Business Income Worksheet with your insurance agent you will be assured that in the unfortunate event of a loss your limit will adequately cover your financial needs as you try to get your property back online. 

General Liability and Umbrella Limits

Most commercial general liability policies provide coverage of $1,000,000 per occurrence and $2,000,000 aggregate.  These limits are fairly standard, and are commonly referred to as your “primary” layer of coverage.  In today’s litigious society these limits alone may be insufficient.  In fact, most major hotel franchise companies require an umbrella, or excess, policy be purchased to cover any losses that fall above the primary liability limits.  The average umbrella limits required by most of the major hotel franchise companies is $3,000,000 - $10,000,000.  Purchasing umbrella coverage is highly recommended as the cost is very inexpensive in today’s insurance marketplace.  This premium for this coverage is often as low as $500 per million dollars of umbrella coverage.  Recently new risk purchasing groups have been introduced by various insurance carriers that will provide your hotel with umbrella limits as high as $250,000,000.  The premiums on these policies are extremely affordable given the size of these limits.  Often the difference in price between these programs and traditional umbrella policies is only a few thousand dollars.  As these programs have only recently gained in popularity, we recommend contacting your agent or broker to determine if such a policy would benefit your property. 

Summary

For most hoteliers their hotel is their single largest asset.  Their hotel is also where their paycheck comes from.  Realizing the significance of the hotel to your financial livelihood, it is easy to see the importance of maintaining adequate insurance limits on your property.  By following the short steps outlined above you will be well on your way to having an insurance program that adequately covers the risk of running a hotel. 

Jon R. Henningsgard is a Senior Vice President and Principal with Aon Hospitality Services.  Based in Portland, Oregon Aon Hospitality Services is the Nation’s Largest Hospitality Insurance Broker.