The contemporary hospitality and tourism industry, like other companies today, is characterised by complexity and volatility. As a result, no business can fully understand and precisely forecast the processes taking place in the background. Therefore, risk management is an increasingly important topic for hotel operators when one considers the soaring costs of lawsuits and insurance, that is, higher deductibles and increased premiums for less coverage. By effectively managing risk and insurance coverage, the hotel operator can get maximum mileage out of every insurance-premium dollar by purchasing only the types and amounts of insurance that are needed, eliminating duplication and excess coverage.
There are four steps in the risk and insurance management process that a hotel manager should follow: Risk Identification- which includes asset or property risks, income risks, legal liability risk, and losses of key persons; Risk Measurement and Evaluation, i.e., projecting the frequency and severity of losses; Risk Reduction or Elimination- eliminating or reducing risks by making procedural changes or by means of loss-prevention programs; and Risk Finance Determination- ensuring there are enough funds available after any loss to function and maintaining a reasonable level of income.
Certain types of insurance are necessary in order to control a hotel’s property risks: Fire Insurance, Liability Insurance, Umbrella Liability, Worker’s Compensation, Life Insurance, Crime Insurance, and General Insurance. Optional coverages can include extended coverage to cover property damage, vandalism and malicious mischief, glass insurance, sprinkler leakage, problems with boilers and machinery, and earthquakes.
Hotels are particularly susceptible to claims for alleged injuries. Thus, it is suggested that hotels buy the broadest liability coverage that is available, i.e., a comprehensive general liability policy. In addition, most hotel operators can add by endorsement some of the optional coverages offered by insurance companies.
Comprehensive policy insures a hotel against all claims for injuries sustained on the premises or resulting from a hotel’s business activities by any person other than an employee performing his or her duties. Among the usually insured optional risks are product liability, garage coverage, and automobile insurance.
Umbrella liability insurance covers settlements, and particularly awards by juries in cases involving personal injuries. It provides excess limits and protects hotels from all exclusions and gaps in its primary liability policy or policies.
Worker’s compensation provides for the cost of medical care and weekly payments to employees suffering job-related injuries or payments to dependents of employees killed at work, regardless of fault. Life insurance can help reduce the financial loss resulting from the death of a key employee. Crime insurance is offered by insurance companies as blanket crime policies, which offer complete coverage on a package basis. Total coverage for the full amount of losses due to crime has become almost non-existent, as premiums would be too high, so most policies include a deductible. General insurance offers coverage for damage to fine arts, valuable papers and records, and musical instruments, among others.
To ensure a well-planned insurance program, the major classifications and amounts of insurance required for proper coverage should be listed. Various options offered with each type of insurance should be carefully analyzed, the risks evaluated, and the possible losses compared to the premiums. Recommendations to management should be accompanied by a detailed explanation of how the amounts listed for both total coverage and deductions were arrived at, as well as any known uninsured risks and the reasons for not insuring against them. Other improvement includes planning well, internal control, and being self-insured.
A well-covered insurance program should include the period from the time the architect’s plans are being drawn to the day the hotel is opened for business. At the completion of construction, all builders’ risks policies expire and must be replaced by permanent insurance policies. The second phase begins with these permanent policies and continues as long as the hotel is in operation.
There are four experience-rated policies that all hotels are required to have: workmen’s compensation, public liability, employee bond, and money and securities. Purchasing agents are continually updating their requirements, reviewing operations, and examining the market for new and improved products at the lowest possible cost.
However, there are some ways to reduce insurance costs on experience-rated policies. For instance, discounting or receiving credit for all “safe drivers", i.e., those that have had no reportable accidents within the previous three years. Policies related to liability or accidents in the workplace can also be reduced through employment training. For example, safety programs can be established to reduce accidents at work. One way to do this is for hotel managers to create a safety committee whose membership is confined to staff employees only, with at least one member from each department so as to involve all employees in the program. It is important that the hotel record and report every accident resulting in personal injury. Some laws require the insured to submit reports of accidents involving various degrees of personal injury or property damage to a designated agency. The reports need not necessarily be forwarded to the insurance company for reimbursement of any expenses involved. Because all losses are included in the rating calculation for three years, the savings in premiums costs will usually more than offset any minor expenses.
Employee theft can best be minimized through effective and strictly enforced controls, while theft of money and securities, including armed robbery, can be reduced through employee training in what is called money management.
Organizations should attempt to create a risk-aware culture. Some of the factors that can aid in this aim is by establishing risk management objectives that are measurable and establish accountability; establishing an infrastructure for risk management; empowering business areas/departments to be responsible for managing risk in accordance with the organization’s risk management approach—reward risk optimization initiatives; communicating commitment to risk optimization by the board and its committees; communicating and training management and staff in risk identification and avoidance techniques; and continually identifying and filling gaps in the risk management process.