Hotel Insurance During the COVID-19 Pandemic: What to Know
October 14, 2020 | Last Updated on: March 3, 2023
October 14, 2020 | Last Updated on: March 3, 2023
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When the coronavirus pandemic arrived in the United States, it impacted coastal, metropolitan cities first. Lockdown orders were issued in New York City and San Francisco early on, forcing businesses to close and furloughing workers, and many people hoped the business interruption would only last a few weeks. But now, six months on, the hospitality industry is one of the last to recover. More than ever before, insuring hotels is challenging because we do not know when traveling and hotel stays will be back at pre-pandemic rates. Looking at insurance for hotels, in particular, we took a look at the FAQs and things to know as the economy starts to reopen.
When lockdown orders hit the U.S., hotels, restaurants, and the hospitality industry were among the hardest hit. A report released on August 31, 2020, by the American Hotel & Lodging Association (AHLA) said that six months on “the hotel industry remains on the brink of collapse.” Although travel has gone up slightly, “almost 2/3 (65 percent) of hotels remain at or below 50 percent occupancy,” according to the report, and four out of ten hotel employees are not working. This has prompted hotel closures in a lot of major cities, with New York City being hit especially hard. The New York Times reported on September 21, 2020, that many hotels will close this year because late summer had as few as 7 percent of approximately 120,000 hotel rooms in the city filled with “traditional guests” and overall occupancy is down 40 percent from the year before.
Major metropolitan areas were hit the hardest by the pandemic, and the hospitality industry was decimated: “New York City was completely shut down from a hotel perspective, Florida was majorly impacted, California and the San Francisco area were significantly impacted,” said Evan Simmons, senior vice president, regional property and casualty practice leader at USI Insurance Services. Coronavirus quarantining has really put a stop to travel and hotel use. The limits on public gatherings (like the U.S. Open) also put a damper on hotel reservations that hotel owners would typically rely on.
According to the AHLA, urban metropolitan hotels – which are major employers – face collapse because of low occupancy rates at 38 percent. Consumer traveler is at an all-time low with only 33 percent of Americans saying they have “traveled overnight for leisure or vacation since March, and only 38 percent say they are likely to do so by the end of the year.” Due to the pandemic, social distancing and travel guidelines are dramatically impacting hotels in major cities, which is resulting in “massive job loss” and reducing state and local tax revenue – which hurts city and state budgets.
“The year’s a washout,” Vijay Dandapani, the president of the Hotel Association of New York City, which represents 300 of the city’s hotels, said in an interview. More than 25,000 hotel employees have been out of work for more than six months due to this pandemic and, as we have seen in other industries, insurance was not made to cover pandemics – and many policyholders are finding their insurance policies revised. Although some travel insurance and trip insurance policies – like Allianz – are allowing some claims relating to COVID-19, most insurance companies are noting that their insurance does not cover COVID-19 related issues.
Hotels, in particular, are seeing an issue arise with insurance coverage due to the coronavirus pandemic. École Hôtelière de Lausanne (EHL) the Switzerland-based hospitality management school, noted in a blog post co-written with Global Asset Solutions, a hotel asset management company, that business interruption insurance wording in hotel insurance policies will “not provide any protection for hotel owners or operators.” If a policy with business interruption coverage for COVID-19 does exist somewhere, it is few and far between because such a policy could bankrupt the insurance company. So, what is the impact of COVID-19 going to be on hotels? In short, hotels will be hit hard and with limited funding coming – from government sources in the U.S. and insurance policies – many are going to fall.
As Douglas Hercher, managing director of Robert Douglas, an investment banking firm that specializes in hotels, said to the New York Times: “The fall is really in New York the strongest season of the year for hotels. It kicks off with the United Nations General Assembly, conventions, the holidays, the Rockettes. That whole season is basically going to be a wipeout.” We’re going to see that wipeout happening around the world, with revenue recovery probably not happening for a year and a half to two years. Why is it going to take so long? The short answer is travel restrictions and social distancing. As Douglas Hercher noted, there are a lot of big events that would lead to tourism and hotel bookings in the fall season, but almost none of the can occur due to travel restrictions (the U.N. General Assembly; family holiday vacations) or social distancing requirements preventing large crowds gathering (conventions; the Rockettes).
“Medical equipment is very, very expensive, and that’s not covered under your normal hospitality policy,” Mitch McGrath, SVP and division leader, and hospitality property and casualty adviser for Insurance Programs of America explained. “And then from a liability standpoint, whoever the leasing company is that’s coming in and leasing out these hotels to make it a non-traditional hotel, they need to fully indemnify the insured (the hotel owner).” These additional costs and liabilities make it difficult for hotels to operate now – or even think about reopening in the future!
Hotels are getting pressured on both ends: insurance and consumer. They have less revenue (consumer demand dropping) and are seeing insurance premiums increase due to pandemic protections and market uncertainty. Many are closing but the ones who choose to reopen will be facing a difficult future.
Hotels are in an unenviable position: they are facing detrimental losses from the pandemic and people not willing to travel while also fighting for insurance coverage in a market that does not want to take a chance on the hotel industry. Due to expanding risks, even before COVID-19, hotels were going to be facing steep insurance policy rate hikes. There also weren’t a lot of insurance companies writing policies for hotels, and now the pandemic has caused the market to react negatively towards hotels and the hospitality industry. Basically, we’re seeing something similar happen with the airline industry where the consumer is wary of the industry, but the hospitality industry has not been subject to any amount of substantial government relief and is instead facing pressure from leasing and insurance companies.
With expanding risks and a litany of potential liability claims from physical damage to weather-related property damage, premiums have been on the rise for the risky hotel industry. In fact, ReShield, a leading insurance broker for real estate, noted that hotels have been termed “habitational risks” – referring to habitational insurance that covers both liability coverage for tenant (or guest) injury as well as losses caused by weather or other malicious damage – even before the COVID-19 pandemic upended the industry. According to ReSheild, insurance claims have “triggered property premium increases” with insurance companies imposing 10 percent increases on even the best performing hotel properties.
But there is a silver lining here: the slow reopening and fact that many hotels are closed now reduces risk immensely for insurers. And when the hotel is reopened – with property insurance intact – risks will still be reduced because there will be a small number of guests in the hotel (social distancing, presumably) and the pandemic will be under control such that travel can continue. Insurers and hotel owners will then be able to rest easy knowing their policy is prepared and ready for a post-pandemic travel bump.
So, the double-edged sword can also work for hotel owners who are looking at their insurance policy. When they reopen, there is still an assumed amount of risk for the insurer, but with reopening the policyholder is also announcing that they have taken the proper precautions and are following guidelines set out by the CDC, which allow for travel to start. As EHL notes, this gradual recovery of business “presents a low risk of claims compared to full operations as in 2019.”
The most important thing is to first talk to your insurance company and discuss your policy in relation to the coronavirus pandemic. Discuss with them your plans for next steps and how you might approach reopening. Most of all, try to be transparent because if you both are on the same page, you may not be facing a steep hike in premiums but instead can work as partners. Remember that everyone in the world is experiencing COVID-19 related disruptions in their business, and for the economy to get back on track it is important to be transparent and collaborative. Take the time to work with your business partners and hotel management staff to figure out a plan forward together.
There is also the potential for government intervention to help the hospitality industry. According to Vijay Dandapani, hotels had been generating more than $3 billion a year in taxes for the city and about $450 million for the state, and if cities hope to recover fiscally, they may choose to help out industries that contribute to economically beneficial industries. Although tourism will take time to return to many places, it generates billions of dollars annually and helps balance the annual budget.
Unfortunately, though, a lot of the next steps are unknown because of pandemic variables. Hotels cannot start fully reopening – and bringing hotel management and staff back to work – until procedures are in place from the federal, state, and local governments that will allow travel. Frankly, a lot of this is up in the air because the insurance industry does not trust hotel owners and the insurance provider does not have coverage for pandemic related issues. But it all starts with a conversation and understanding that recovery will, unfortunately, take time.
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