Language Buried Within Insurance Policies Often Shortchanges Hoteliers
By Nick Fortuna
Ever since the pandemic, hoteliers have watched steeply rising insurance costs take bigger bites out of profits, but at long last, there are signs of a reprieve.
During a conference call with investors in February, Hilton President and Chief Executive Chris Nassetta pointed to “some stabilization” in the market, predicting that insurance rates would “come down” over the next year or two. Likewise, John Houghtaling II, general counsel for AAHOA, said he expects rates to decrease as insurers and reinsurers recover their losses from recent natural disasters.
Houghtaling is the managing partner of Gauthier Murphy & Houghtaling, a Metairie, LA-based law firm that helps clients to process property-damage insurance claims. He said the insurance industry works in “short cycles,” so it’s no surprise that rates rose sharply following the pandemic.
Insurers faced rising costs for construction materials and labor as the economy reopened. Subsequently, hurricanes in the Southeast and wildfires in the West led to massive losses for insurers, prompting them to raise rates and even pull out of some markets.
In March, CoStar reported that insurance costs are 70 percent higher than before the pandemic, continuing an alarming trend. Back in September 2023, the CBRE Group reported that for properties in Florida, insurance accounted for 11.5 percent of total operating costs, up from 6.5 percent in 2019. In California, that figure had climbed to 10 percent from 6 percent, while the national average essentially doubled to 6 percent.
Beachfront hotels, luxury resorts, and historic properties have seen insurance costs spike the most due to high replacement costs and vulnerability to climate-related disasters, according to CoStar. However, even properties in low-risk areas have experienced rate increases as insurers seek to offset losses from high-risk areas, the company said.
In Florida, several hotel projects have been abandoned after breaking ground due to increasing insurance costs and high interest rates, according to CoStar. Still, Houghtaling said he doesn’t expect rates to continue their upward march.
“When there are big losses for insurers, rates spike, but it’s temporary,” he said. “Rates are going to come down.”
For AAHOA Members, there’s reason for optimism beyond the cyclical nature of the insurance business. Houghtaling said AAHOA is working to leverage the collective purchasing power of its 20,000 members, who together own about 60 percent of U.S. hotels, more than 36,000 in total.
“AAHOA Members should know that the association is actively negotiating with the insurance industry,” he said. “It’s likely that within the next year, there will be a new insurance product offered exclusively to AAHOA Members that will significantly lower prices and give them better coverage. This is something that every member potentially will have access to, so the good news is that there’s light at the end of the tunnel.”
Getting Expert Advice
In the meantime, hoteliers should consult a lawyer with extensive knowledge of the insurance industry to ensure that their policies are fair and adequate, Houghtaling said. His firm, an AAHOA Club Blue Industry Partner, offers policy reviews as a free service to AAHOA Members. Experienced lawyers will help hoteliers to identify and remove language in their policies that could allow insurers to avoid paying claims.
Two common loopholes that insurance companies insert into policies are arbitration clauses and forum-selection clauses, Houghtaling said. An arbitration clause requires disputes between the hotelier and the insurance company to be resolved through arbitration instead of going to court, and that’s usually advantageous to the insurance company.
Arbitration typically is faster and less expensive than courtroom litigation, and it’s conducted privately, so insurers face less reputational risk. Appealing an arbitration decision can be difficult, and arbitrators generally are more likely than juries to side with the insurer, especially if the insurer is essentially choosing the arbitrator.
A forum-selection clause specifies the court or jurisdiction where any legal dispute between the hotelier and the insurance company must be resolved, even if the dispute or incident happened elsewhere. By restricting legal action to business-friendly states such as New York, insurers increase their likelihood of winning in court or getting hoteliers to accept a smaller settlement, Houghtaling said.
“Unfortunately, those two common loopholes are inserted into many policies without hoteliers knowing about them,” he said. “You can negotiate those terms out, but you have to know they’re in there. Certain states like New York insulate insurance companies for operating in bad faith, so there’s no penalty if they don’t pay you on time, and if your hotel is foreclosed upon, you may have limited rights to recovery against them.”
In reviewing insurance policies, it’s important for hoteliers to know the difference between replacement cost value and actual cash value, Houghtaling said. Replacement cost value is the amount it would cost to replace the damaged asset with a new one of similar quality at today’s prices. For insurance purposes, there’s no deduction in that item’s value based on its age, wear, and tear.
Actual cash value, on the other hand, is the replacement cost minus depreciation. It reflects the asset’s value at the time it was damaged, factoring in its age and condition.
Coverage for replacement cost value is more expensive but enables hotels to replace damaged assets and fully restore operations without incurring unexpected costs. Premiums are cheaper for actual-cash-value coverage, but if disaster strikes, hoteliers typically will face significant out-of-pocket costs to restore the property.
“If you can, you want to make sure you have replacement-cost coverage,” Houghtaling said. “That’s something that most mortgages require, and it’s different from actual cash value. I would highly recommend that hoteliers consult a policyholder attorney, whether it’s our firm or another, before purchasing a policy because otherwise, you might not know what you’re paying for. That’s critical because all policies are not the same.”
Filing Claims the Right Way
When it’s time to file a claim, hoteliers should consult an attorney to help them maximize their policy benefits and minimize their property’s downtime, Houghtaling said. When his clients experience property damage, the firm works with contractors to get detailed estimates to the insurance company and negotiate contracts, expediting recovery.
“We find that a lot of contractors take advantage of property owners after disasters, so we act as an intermediary between the contractors, the insurance company, and the hotelier to make sure we’re maximizing the benefits,” Houghtaling said. “Many hoteliers are familiar with public adjusters, but they provide only a small portion of the services we provide. Our fee structure is similar, but we provide more protection for property owners who are recovering from a disaster.”
The law firm will help clients to determine how much money they’re losing each day and how long recovery is expected to take so they can file a business-interruption claim right away.
Houghtaling said hoteliers who haven’t filed a claim in the past decade might be shocked to learn how much the claims process has changed. Most insurers now outsource the claims process to third parties that don’t have established relationships with hoteliers, leading to a diminished level of customer service, he said.
If hoteliers initially provide incomplete documentation to support a claim, that third-party adjuster likely will “set the reserve too low,” Houghtaling said. That means the insurance company will set aside an insufficient amount of money to settle the claim, and once the reserve is set, insurers are reticent to add more money to that account.
When hoteliers have bids from trusted contractors in hand before filing a claim, it’s more likely that their reserve will be set at an appropriate level. And when insurers are aware of just how much a hotel is losing while awaiting repairs, they’re more likely to process claims efficiently and minimize their losses.
“The most important thing is to make sure insurance claims are handled correctly from the beginning,” he said. “If the reserve is set too low, you’re going to have a problem with the insurance company, but if it’s sufficient, you likely won’t have a problem. If the claim is handled correctly from the start, more often than not, the process will move smoothly and quickly, and that’s what our claims program is designed to do.”
Houghtaling said hoteliers should remember that claims adjusters work for insurance companies, not hoteliers, so without strong guidance from hoteliers and their attorneys, they typically will set the reserve too low. It’s simply not in their financial interests to do otherwise.
“There are no more good neighbors, and you’re no longer in good hands with your insurance company,” Houghtaling said. “Left to their own devices, insurance companies will try to pay you less than they should. If you think your insurance company paid you without any problems, then it’s likely that they underpaid.”
Experienced policyholder attorneys have a streamlined process for managing insurance claims, helping hoteliers to get back on their feet fast. That’s especially important when a natural disaster damages a number of hotels in a competitive market, Houghtaling said. In general, hotels that reopen ahead of their competitors will gain market share, positioning themselves for long-term success, he said.
“When a disaster happens, the hotels that are back up and running faster will go up to 100 percent occupancy, so it’s important not only to your actual business but to the value of your hotel,” Houghtaling said. “If your hotel is up and running faster than everyone else, you now have a huge advantage.”
Image: Supatman/stock.adobe.com
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