9 Critical COVID-19 Risks for the Hospitality Industry

While many industries are playing a waiting game to learn the extent of the damage that COVID-19 will inflict on their businesses, hospitality is feeling the losses most immediately.

By: Jared Shelly | April 1, 2020

Christian Ryan grew up in the hospitality industry. The son of a hotelier in Brazil, Ryan got a first-hand education in running hotels, serving guests, and handling operations.

Years later, he saw the devastation that a pandemic can bring. As Zika virus spread through South and Central America in 2016, he couldn’t help but feel for his family members in Brazil. The pandemic shuttered restaurants, ground travel to a halt, and temporarily closed hotels.

“I saw what a pandemic did to the hospitality business,” said Ryan, the U.S. Sports, Hospitality, and Gaming Industry Practice Leader at Marsh. In response, Ryan helped Marsh build PathogenRx in 2018 — a pandemic insurance product that protects against the financial impact of pandemic and epidemic risks. It’s offered in partnership with Munich Re and modeling company Metabiota.

Fast-forward to 2020, and a new deadly virus is bringing the hospitality business to its knees. Restaurants and hotels are closed. Flights are grounded. Meetings and events are cancelled. Nobody seems to know when the world will open for business once again.

To learn more about how COVID-19 is impacting the hospitality industry, we asked Ryan and other experts to break down the most critical risks:

1) Business Interruption

The loss of revenue from business interruption is teetering on becoming catastrophic. Many businesses in the industry only close for Christmas or a disaster like a hurricane. Now they’re shuttered for weeks on end.

While some businesses might have pandemic coverage in a special plan like Marsh’s PathogenRx, most companies will simply include business interruption coverage in their property insurance — and doesn’t take effect unless there is physical property damage. In short, it’s most likely not covered.

“The biggest risk is loss of income,” said Joe Colletta, senior vice president of insurance brokerage NFP Corp. “Realistically, there is no coverage for coronavirus and a lot of the hospitality owners I’m seeing have had to let go of 40-75% of their employees.”

Inevitably, attorneys will get creative and contend that physical damage has been inflicted due to things like airborne contaminants or contaminants on surfaces. “That’s going to take a lot of lawyers suing a lot of insurance carriers. If one starts paying, the flood gates are going to open,” said Colletta.

Expect a long legal fight over this issue.

2) Consumers Might Be Fearful of Returning to Hotels, Restaurants and Attractions

After the pandemic wanes, expect consumers to be hesitant to take flights, eat at restaurants or stay at hotels.

“People are not going to want to stay in hotels for a while because they think they’re going to contract germs,” said Colletta. “The hotel business is going to take a while to come back. The cruise business is going to take forever to come back. Until it’s proven that guests won’t get sick, you’re going to see the industry hurting.”

Ryan argues that getting customers back will take a coordinated public relations effort: “I really hope that hospitality can come together in one aggregated voice to communicate to the public that hotels, cruise lines, and restaurants are safe,” said Ryan.

3) Business Travel Could Slow

During the pandemic, business leaders learned that video conferencing and online document signing are easy and effective. Why fly people around the world to do business when you can do it virtually? That would save businesses serious money in a time when budgets are tightening.

“Companies are going to say, ‘we managed really well with just telecommunication. Maybe we should do more of this and scale back on business travel,’ ” said Ryan. “People might say ‘I’d rather do that than get on a plane. I’m just too scared.’ ”

4) Talent Attraction and Retention

Plenty of workers in the industry were laid off or furloughed as a result of the coronavirus. That leads to a knowledge gap that will be hard to make up as employees find jobs in industries they think are safer and more secure.

“These are individuals living paycheck to paycheck so they need security,” said Ryan. “It’s like breaking up with your girlfriend then she calls you six months later. Are you really going to go back?”

5) Terrorism

The pandemic could be eye-opening to potential terrorists. If nation states or radical terrorist groups have access to chemical weapons and can intentionally release a virus, it could have a devastating impact, like the one we are currently seeing.

“They could think ‘maybe we don’t have to strap bombs to our bodies because we can inflict bigger casualties around the world through an outbreak,’ ” said Ryan.

6) Physical Vandalism

Criminals know that buildings are vacant and security is thin. That could lead to more break-ins, trespassing or even theft of computer systems and digital records.

“We’re telling all our clients to hire security. I know cash is tight but you could have an exclusion in your policy for vacancy of buildings,” said Ryan.

7) Workers’ Compensation Claims Could Spike

As furloughs and layoffs become imminent, a rise in workers comp claims becomes more likely, said Sean Murphy, senior director and vice president of the hospitality practice at Arthur J. Gallagher.

“Frequently we see an uptick in workers comp claims during economic downturns,” he said. “It is key to enhance claims management and advocacy during this period to address these claims upfront in order to avoid longer term financial implications.”

8) Insurance Premiums Are Still Due

Despite work stoppages, insurance premiums still loom large. Murphy says that’s leading brokers, insureds, and carriers to discuss mid-term adjustments.

“It’s about sitting down with clients to get their best guess of what exposures look like in a few months — then going back to markets and saying ‘we need some help,’ ” said Murphy. “That could lead to adjustments on premiums or even payment terms.”

9) The Unknown

There are plenty of risks when buildings sit vacant or unoperational. For example, if a pipe breaks on the top floor of a hotel and nobody notices for weeks, it could do serious damage. This is similar to a delayed response for a pandemic; no one knows just how extensive the impact will be.

“There is heightened concern from insurers about these outliers because they can lead to significant claims,” said Murphy. “Our clients are used to buildings that are operational 365 days a year, not managing empty buildings. So that’s a challenge.” &

Jared Shelly is a journalist based in Philadelphia. He can be reached at [email protected].

How a Carrier Partner Can Help Navigate a Challenging Management and Professional Liability Market

A combination of a choppy economy with increased claims frequency and severity could lead to rate increases in the Management & Professional Liability market.

By: Risk & Insurance | April 3, 2024

Rates in the management & professional liability (M&PL) markets were on the rise from 2020 to early 2023 and are now falling rapidly.

M&PL divisions manage a number of different insurance products including management liability (D&O), professional liability (E&O), employment practices liability (EPL), fiduciary liability policies, cyber, etc. In 2023 and into 2024, a big influence on the marketplace has been the extremely aggressive and softening public company D&O market.

Though these rates have been softening for management liability, that may change over the next few years as companies continue to adjust their business models motivated by economic uncertainty. Layoffs were up nearly 200% last year, Forbes reported, even as other recession indicators, like the inflation rate, improved. A recession could lead to an increased claim activity and force carriers to raise rates.

“Whenever there is a meaningful downturn in the economy, we tend to see claim frequency pop up,” said George Schalick, Jr., senior vice president of the Management and Professional Liability Division at Philadelphia Insurance Companies (PHLY).

With continued fiscal uncertainty, businesses potentially already burdened with pandemic-related claims should seek a carrier with a long history in M&PL products. They will provide much-needed risk management guidance and be better positioned to support their insureds during market fluctuations.

Why Insureds Might See an Uptick in M&PL Claims

George Schalick, Jr., Senior Vice President of the Management and Professional Liability Division, Philadelphia Insurance Companies

The current soft market might come as a bit of a surprise as it does not track with previous underwriting cycles and economic conditions. Afterall, many privately held and non-profit organizations struggled during the early days of the pandemic with shutdowns and rapidly declining revenues. But the Government assistance programs, like the Paycheck Protection Program loans, helped keep many afloat during the tough times.

“During COVID many organizations stopped doing business until they were able to sort out all of the health and safety challenges,” Schalick said. “They were forced to lock down, but then all the government assistance programs allowed them to keep people employed. The increased volume of claims we anticipated we would see coming from the lockdowns and restrictions that were imposed upon businesses in the U.S. didn’t manifest at first.”

“Just because there wasn’t an onslaught of reported claims at the beginning of the pandemic, doesn’t mean the circumstances that would give rise to a claim being reported didn’t occur. Courts and the judicial system were closed or slowed and now that they are back open, we’re starting to see the circumstances that occurred during the COVID lockdowns becoming claims today,” Schalick said. “Litigation is progressing.”

Added to the delayed pandemic litigation is a concern over newer claims that might be filed as the country inches toward an economic downturn. Though a recession was avoided in 2023, experts think a soft dip could occur in 2024, with 76% of economists saying there’s a 50% or less chance of an economic downturn this year — that almost always results in more management liability claims.

“During the Great Recession in 2008, we saw an almost immediate spike in claims because of the economic conditions and the pressure it placed on organizations. They were making personnel changes with significant belt tightening almost immediately.” Schalick said.

What’s in Store for M&PL Policy Rates in 2024?

Despite an uptick in claims and increased economic uncertainty, management liability rates haven’t increased, resulting in market-wide pricing levels that may not meet the increased pressure of rising settlements and jury verdicts.

“Rates are going the other direction and settlement values are not falling,” Schalick said.

The mismatch between rates, claim frequency and severity is, in part, because carriers experiencing the dramatic soft market in the public D&O market are seeking premium gain in the private and non-profit market.

“In the public company market, the rates have been decreasing significantly. The rates were increasing in the private, not-for-profit market, and rightfully so, but there’s a desire to supplement overall mid-size D&O for carriers who also write private not-for-profit, and they see that as an opportunity to aggregate premium,” Schalick said. “So the always competitive landscape in the private, not-for-profit market has dramatically increased in the last 18 to 24 months.”

Still, companies of all sizes and types should be concerned about management liability rates in the future. Legal system abuse is resulting in increases in both the amount of litigation and the size of verdicts plaintiffs are receiving.

Certain areas of the country are particularly vulnerable to this type of legal system abuse. As a result, insureds in these localities are likely to be vulnerable to rate increases.

“The environment is so positive for the plaintiff that forces premium increases so carriers are able to stay in that market long term,” Schalick said.

Why a Tenured Carrier Partner Can Help Insureds Navigate An Uncertain Market

It’s clear that insureds are facing an uncertain M&PL market over the next few years. Fortunately, carriers with a long history in the M&PL space will be there to offer stability.

Philadelphia Insurance Companies has been supporting this market for 35 years. PHLY is committed to offering long-term rate stability, even as economic and claims trends start to push premiums upwards. They have an appetite for all sorts of companies, large and small, for-profit and nonprofit alike.

“We’ve been at this game for a long time and are one of the most tenured underwriters in this space,” Schalick said. “We like to stay very consistent.”

PHLY has worked with both for-profit and non-profit on management liability policies. With dedicated M&PL teams throughout the company’s 13 regions, PHLY provides the support agents and brokers are looking for on behalf of their clients. The teams know their regions well and can respond to local trends. They’re also dedicated to making the renewal process as easy as possible for their partners and policyholders.

“We have real confidence in our results, so we focus a lot on making the renewal experience as painless as possible for all agents and insureds,” Schalick said.

The company is also investing in tools to help insureds avoid losses. Earlier this year, they launched a new online risk management platform, PHLYGateway, which offers resources for insureds on how to create an employee handbook and trainings on issues such as recognizing workplace sexual harassment and discrimination.

If insureds have questions, they can consult a Best Practices Help Line, provided via the platform. That way, they can get on the spot risk management guidance to help them prevent claims.

To learn more, visit: https://www.phly.com/mplDivision/managementLiability/default.aspx.

This article was produced by the R&I Brand Studio, a unit of the advertising department of Risk & Insurance, in collaboration with Philadelphia Insurance Companies. The editorial staff of Risk & Insurance had no role in its preparation.