The hotel industry has been brought to its knees by the global COVID-19 pandemic. Since mid-February, when the public health issue began escalating in the United States, hotels have already lost more than $10 billion in room revenue, according to the American Hotel & Lodging Association (AHLA). Based on current reported occupancy rates, the association projects that hotels are on pace to lose more than $500 million in room revenue per day, meaning a loss of $3.5 billion every week – a figure that will likely escalate as the situation worsens.
Despite this dark economic outlook, there are some prospects for cash-strapped and empty hotels across the country. Some have revitalized their cash flow and found financial relief by entering into government partnerships, through which they’re either converting into temporary coronavirus wards and providing much-needed hospital beds, or they’re providing temporary housing for frontline medical workers and the National Guard. Some hotels are also providing “shelter in place” for employees and guests who may have to stay on the premises for public health purposes.
Before embarking on any type of operational conversion, there are insurance implications for hotel owners to consider. As explained in an Aon whitepaper entitled ‘Pandemic Considerations for Hotels, including Non-Traditional Use,’ hotels that are housing emergency service providers and maintaining “shelter in place” for employees and guests remain strictly as hotels from a risk and insurance perspective. Those who have switched to non-traditional use, such as converting into a temporary healthcare facility, may experience a material change in their risk profile, which will need to be addressed via adjustments to their existing insurance programs.
“The hotel industry is sustaining a very difficult moment in its economic history because people simply aren’t using hotels. But there are many ways that they can use that hotel capacity to respond to the coronavirus crisis,” said Gisele Norris (pictured), managing director, Western Region, Aon National Healthcare Practice. There are potential insurance issues depending on what action a hotel takes, and there are certain things that hotel owners need to consider, especially if they’re converting to non-traditional use.
“In terms of insurance programs, the new liability risks associated with [converting a hotel into a medical facility] are certainly concerning for hotel operators and managers,” said Norris. “Hotel management needs to work together with their attorneys and insurance advisors to structure proper contractual agreements with any new partners. For example, if the hotel is contracting with a governmental entity to house sick patients, the hotel operator must insist that all health care-related risks be borne by the governmental entity and not the hotel.
“Modifying the use of the hotel property may also constitute a material change in other risks. Because every insurance program is slightly different, the first thing we suggest people do is to revisit their insurance program and to refresh their memory about how it’s structured and what is covered/intended to be covered. If there are any new activities that may result in new or different operations and risk exposures, hotel managers should proactively speak to their insurance brokers and their underwriters about their plans to ensure that coverage is adequate and/or any potential gaps are addressed either within their own risk programs or those of the partner organization (e.g., the governmental entity in the example above). If the government or a health care provider is utilizing the premises for patient care, that partner entity should take on the healthcare risks, and the hotel should be left primarily risks that are inherent to operating a hotel.”
When converting a hotel into non-traditional use, there are potential issues for hotel owners to consider across multiple insurance lines, from property and casualty, to environmental, terrorism, and employment and management liability. Some property policies, for example, have clauses that require insureds to disclose any change in use or occupancy of their property, and they will bar coverage for claims resulting from an increase in hazard. Aon advises insureds to review additional or amendatory policy endorsements to cover any change in use and/or total insured value increases as a result of any operational pivot. From a liability perspective, the hotel owner may be required to maintain the hotel property even if they have leased the hotel to a third-party or government entity. Aon suggests insureds review their contract language for non-traditional use arrangement to “confirm obligations and compare against applicable coverage” to determine any changes that need to be made.
“Perhaps even more concerning than the liability issues for hotel owners is the reputational risk they might sustain by switching to non-traditional use,” Norris told Insurance Business. “If they convert into a temporary healthcare facility or they house people infected with the coronavirus in the hotel, will that damage their future reputation in some way? Will people worry about staying at the hotel? There are certainly concerns about negative publicity, but, at Aon, we’re talking to clients about flipping that script a little bit. This could actually be very positive publicity for a hotel. Operators should consider how they are helping in the context of their Environment, Sustainability and Governance (ESG) program, and how non-traditional use can be a positive story about how they’re supporting the community in the midst of a crisis. In some cases, this could actually yield positive dividends as opposed to reputational risk.”
Regardless of how hotels change their operations amid the global coronavirus pandemic, one thing is certain, which is that most changes will have an impact on their insurance programs – and that’s where the expertise of the broker truly comes into play.