Hotel Risk Management is Critical

One of the most important aspects of owning and operating ahotel is minimizing the various physical and liability risksassociated with this type of business. Risk management is theprocess of evaluating a hotel's risk exposure and developingstrategies for mitigating those. It incorporates a program forreducing exposure supplemented by insurance protection should anincident occur. A hotel owner and operator would be far better offif they could eliminate all the possibilities of an incidentoccurring on their property. Since this is not always possible,particularly incidents they have no control over, adequateinsurance protection provides a way to reduce exposure to afinancial loss.

When reviewing your hotel"srisk management strategies, it is essential you understand all thepotential areas of exposure and exactly how insurance policies arestructured to handle the unfortunate incidents that couldoccur.

The primary areas of concern includethe property itself, premises liability, automobile liability,worker"s compensation, fidelity, boiler & machinery andumbrella. An effective risk management strategy will also reduce ahotel"s insurance cost. Saving money on insurance requiresnot only a good broker who fully understands the unique riskexposure of a hotel, but one who can also advise on a strategy thatwill reduce the chance of an incident.

Let"s look at some of theunique risks faced by hotels:

Property Risk

Property risk exposures in theindustry are primarily due to the high combustibility of contentsand multiple sources of ignition that exist in a hotel. Managingthese as well as updating building electrical wiring, plumbing andheating systems must be a top priority to mitigate the potentialfor a fire loss. Additionally, smoke alarms and sprinklers shouldbe installed in all areas of the building and kitchen equipmentmust meet all National Fire Protection Association requirements.For resort areas, storm damage is always a concern and needs to beaddressed.

It is always essential to insure ahotel"s buildings and furniture, fixtures and equipment toreplacement cost. Replacement cost is the cost to repair orre-build to like kind and quality in today"s dollars. Anothermajor component of your property insurance is the BI (BusinessInterruption) exposure. BI exposure can be substantial due to lackof backup facilities and the seasonal natures of certain hoteloperations. A hotel must be sure to complete a business incomeworksheet to ensure proper insurance proceeds for a loss of profitsand continuing expenses. An accurate account of annual revenues bytype such as room, food, and beverage will be advantageous forinsurance brokers when they are researching the best and leastexpensive coverage.

Premises Liability

A hotel's premises liabilityexposure is high due to the number of guests typically in theproperty at any given time. High-rise hotels pose uniquelife-safety issues. Hotels should implement every safety codepossible to ensure guest safety. Stairways, elevators, railings andfloor coverings should all be in good condition. Exits should beclearly marked, and lighting should be available in the event of apower outage. Balconies should be regularly inspected andmaintained. Guestrooms should be accessed by magnetic keys or othersimilar systems that are unique for each new guest. Services andrecreational facilities, such as exercise rooms, swimming pools,laundry facilities, gift shops, barber, beauty and other personalservices, require separate review. It is important to identify allthe potential liabilities and develop a risk management strategy toreduce the chance of an incident.

Products Liability

Products liability exposures can behigh if the hotel has a restaurant or lounge serving alcohol.Employees should be trained in the proper handling of food toprevent food poisoning or the spread of other transmissiblediseases. Liquor liability exposures can be high if employees arenot property trained to recognize the effects of excessive alcoholconsumption.

Automobile Liability

Automobile liability exposure isalso high for some properties, like airport hotels, when it isnecessary to pick up and deliver guests to and from the hotel.Valet services present garage-keepers exposure for damages toguest"s vehicles. With automobile exposures, pre-approval ofacceptable MVR"s (driving history report), and restrictingdriving duties to those between the ages of 18-65, are effectivemethods in managing this type of risk.

Workers Compensation

Workers compensation exposure isalso high within the hospitality industry. Cleaning and maintenanceoperations can cause workers to experience lung, eye or skinirritations and reactions. Slip and falls, as well as lifting, backinjury, hernia, sprain and strain, are all common occurrences.

Every hotel should have a riskmanagement strategy that works to reduce the exposure and thenprovides adequate insurance to cover unfortunate incidents thatwere not prevented. Your hotel insurance broker can assist infinding an insurance company that has the extensive experience inevaluating unique hotel risks so you don"t end up paying morefor your coverage because the company overestimated the exposureand charged too much. The broker should also find you an insurancecompany with a hotel-oriented loss-control department, which willsurvey your hotel and assist in identifying areas of risk that canbe addressed in your strategy.

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

For a review of your risk managementstrategy, drop me an e-mail at [email protected]. Stephen Rushmore is president and founderof HVS, a global hospitality consulting organization with officesaround the world. Steve has provided consultation services for morethan 12,000 hotels throughout the world during his 35-year careerand specializes in complex issues involving hotel feasibility,valuations and financing.