Rising insurance costs are a big headache for hotel owners in the U.S.
 
In fact, insurance is the fastest-growing expense for hotel operators in the country, according to an August report from PKF Hospitality Research, part of Los Angeles-based PKF Consulting.
 
Though workers� compensation insurance rates in California have fallen in the past year and a half, healthcare premiums continue to climb, the future of the Terrorism Risk Insurance Act is in question and property insurance is almost sure to increase after this year�s unprecedented hurricane season.
 
Last week, the California Medical Association released a report alleging workers� comp insurers are interfering with and denying treatment to injured workers. 
 
The group, which represents about 90,000 California doctors, suggested its members might have to cut back or discontinue treating injured workers because of reimbursement issues, raising the specter of a renewed battle over workers� compensation.
 
It could mean another round of insurance cost increases for the hospitality industry.
 
According to PKF, insurance costs have increased 4.4% annually for hotel owners during the past decade, compared to a 3% annual increase for labor and utilities costs.
 
Overall insurance payments averaged $265 per available room in 1999 ($294 in 2004 dollars), or 0.7% of total revenue. By 2004, payments grew to $558 per available room, or 1.4% of total revenue, according to PKF.
 
The increase was exacerbated by the fact that it happened during a time when hotel revenue declined, particularly after the 2001 terrorist attacks.
 
Though some insurance costs dropped slightly in 2004, PKF contends the decrease is insignificant compared to the big increases of the prior three years. 
 
Payments made by hotel managers for general liability and property insurance have more than doubled since 1999. And this year�s devastating hurricanes have hoteliers bracing for possible increases in property insurance.
 
Health Insurance
 
The biggest issue facing hoteliers today is health insurance, with rates up by double-digit percentages in the past several years, said Jon Kline, chief financial officer of San Clemente-based Sunstone Hotel Investors Inc. 
 
�It�s a massive national problem,� he said.
 
Employees, he said, typically focus on out-of-pocket costs, not the overall healthcare benefit. As a result, when costs go up, they typically raise their deductibles to keep premiums down. That, in turn, reduces the perceived value of their healthcare benefit, he said.
 
�Healthcare is a huge expense for the hospitality industry,� said Stephen Anthony, hospitality practice leader and managing partner for the Los Angeles office of Marsh & McLennan Cos.
 
In an industry with high turnover and high training costs, employee issues�including healthcare�are likely to remain at the forefront for some time to come.
 
Property Insurance
 
This year�s horrific hurricane season is likely to have the broadest impact on hoteliers once the industry is able to gauge the total financial impact.
 
Many expect rate increases.
 
Damage from Hurricane Katrina alone is likely to cost insurers at least $34 billion, according to preliminary numbers from Jersey City, N.J.-based Insurance Services Office Inc., which tracks loss information from disasters. Damage from hurricanes Rita and Wilma has yet to be totaled.
 
�There will be a definite impact on the cost of property insurance in areas with exposure to wind or earthquakes,� said Alexandra Glickman-Gallagher, a hospitality practice executive with Arthur J. Gallagher & Co. in Glendale. 
 
The same pool of investor funds typically provides protection from catastrophes like wind, earthquake, flood or terrorism, she said, leaving little to offer when these funds take a hit from a major catastrophe.
 
AIR Worldwide Corp., Boston, estimates that the insured value of coastal properties from Texas to Maine is nearly $7 trillion�16% of the industry�s total exposure.
 
The typical deductible for a catastrophe is 5% of the replacement cost of the building for those in earthquake zones. For wind damage, it averages between 2% and 5% of the replacement cost. 
 
Glickman-Gallagher said all the wind models used to calculate insurance deductibles didn�t work for Hurricane Katrina. And insurers couldn�t determine ahead of time the extent of the business interruption cost. 
 
�We�re hearing that underwriters will go back to the drawing board and look at exposure for individual owners,� she said.
 
To do that, they may factor in location, valuation, construction class, condition of each asset and be more rigorous with valuation and replacement cost estimates, she said.
 
Nevertheless, some hoteliers have seen reduced renewal rates, even since the hurricanes hit, Anthony said.
 
Others just got lucky.
 
Sunstone renewed a month before Katrina hit and got a 20% reduction in rates, Kline said. 
 
If there�s a positive outcome from the devastation, it could be that companies are taking a closer look at their catastrophe exposure to see if they have enough coverage and the right coverage to protect their businesses. Others are exploring their deductible options as a hedge against increases.
 
And some hoteliers already are factoring in a rate increase, even if policies are not yet up for renewal. Ayres Hotels, for example, is anticipating a conservative 10% to 20% increase, said Gregg Kleminsky, who handles insurance for Costa Mesa-based Ayres Hotel.
 
Workers� Comp 
 
In California, workers� compensation long topped the list of worrisome insurance issues for businesses (see related story, page 44).
 
From 2000 to 2003, some employers saw rate hikes triple before an overhaul last year of the state�s workers� comp systems began to turn that around.
 
�California is four times more expensive (for workers� comp insurance) than other states,� Sunstone�s Kline said. �It�s better than it was, but still a horrible situation for the employer.� 
 
Even before the medical association report was released, some hoteliers were wary.
 
�Reforms have made a difference, but we want to watch it to make sure it continues to make a difference,� Kleminsky said.
 
The issues raised by the physicians might prompt the California Legislature to reopen the workers� comp debate when they reconvene in January.
 
Terrorism Insurance
 
Terrorism insurance was put in place in the wake of the 2001 terrorist attacks to provide coverage for losses similar to the terms, amounts and coverage limitations applicable to other types of catastrophic events. 
 
Though Congress is expected to extend the Terrorism Risk Insurance Act before it adjourns this year, there is a substantial amount of uncertainty about whether it will happen in this congressional session, or what form it might take.
 
Many lenders require terrorism insurance on existing hotels and those in development. But hoteliers in general are reluctant to discuss terrorism insurance, fearing that visitors might stay away if they thought a hotel needed such coverage. 
 
Anthony said 50% to 60% of high-profile hotels have the coverage. The typical cost is 2% to 10% of the property�s overall insurance premium, he said. 
 
Last year, terrorism insurance rates dropped from 7.7% of overall property premiums to 7.1%, according to the Insurance Information Institute in New York.
 
If the terrorism act isn�t renewed, some carriers may still offer the insurance, but at higher rates or with restrictions.

Sandi Cain is a freelance writer and contributor to the Orange County Business Journal and meetings industry publications. She specializes in hospitality, tourism and travel. Cain holds bachelor�s and master�s degrees in education from Kent State University in Ohio, where she majored in social studies. A former high school teacher, she has written for niche-market sports publications in the U.S., England and Australia and formerly worked in both the printing and high-tech industries. A Cleveland, Ohio native, Cain hasbeen a resident of Laguna Beach since the late �70s. She enjoys travel, gardening, reading and spoiling her three cats.