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The COVID-19 pandemic has complicated liability insurance for the hospitality industry. A multitude of lawsuits has forced insurance companies to reevaluate how they provide and price insurance for this industry. Insurance companies must now shoulder much more risk than in the past, especially given the lawsuits against hotels and restaurants for both COVID-19 transmission and labor practices. Now, the hospitality industry must address a new reality.

Increased Customer Demand Also Comes with Drawbacks

In a favorable development for the industry, pent-up demand has people eating out and staying at hotels in large numbers. Hospitality businesses have pricing power, and they are able to charge customers even more than before the pandemic. However, the cost of doing business is also rising. Rapidly rising inflation and increasingly aggressive plaintiffs’ lawyers means hospitality businesses need more insurance coverage.

Insurance Companies Have Been Forced to Charge More and Cut Coverage

In general, the cost of insurance has been rising regardless of the type of policy. Not only has there been rampant inflation throughout the country, but personal and corporate conduct in general has become more reckless. Hospitality businesses face legal liability on many fronts, and all of the corresponding types of insurance have increased prices. Some businesses have even been forced to cut coverage. Insurance companies are facing a number of headwinds that are making for tougher economic conditions, including:

• Depressed investment returns
• More weather-related claims
• Poor industry performance
• Fewer customers (making for less places to spread risk out over) because of the number of hospitality businesses that closed during the pandemic
• The aftermath of a surge in COVID-19-related claims

Insurance companies have been forced to increase the number of exclusions in policies because they have been made to bear the costs of a frenzy of lawsuits. Even if an insurance company does not lose a case, it must expend significant costs to defend against it in court. These costs will be passed onto policyholders in the form of higher costs and reductions in coverage.

The Hospitality Industry Faces a “Hard Market”

Before the pandemic, costs were much cheaper and insurance companies were able to offer more coverage for less. Now, the hospitality industry is experiencing a “hard market” where premiums are rising and underwriting has become far tighter. In a hard market, the balance of power shifts to insurance companies who are less likely to negotiate coverage terms. 

Many insurance companies have been forced to change coverage options after the pandemic. Insurance companies have been forced to exclude more areas of coverage from their policies and cut overall coverage amounts. One policy may not be enough for a policyholder, and they may need to deal with multiple insurance companies.

Hospitality Businesses May Need to Layer Coverage 

Because high umbrella coverage is getting harder to obtain, the hospitality industry must now consider other ways to obtain sufficient insurance coverage. One practice hospitality businesses have increasingly had to turn to is layering insurance coverage. With layering, the insured party must take out multiple coverages to secure enough insurance coverage to protect themselves. Instead of doing business with one insurance company, they need to deal with several to cobble together the coverage they need. They may also need special insurance for a certain type of liability when it is excluded by their primary policies.

Hospitality Businesses Need to Prepare for More Employee Litigation 

One major area where hospitality businesses have faced a rising number of lawsuits is with regard to their employment and labor practices. These usually fall under an umbrella policy; however, hospitality businesses are having a tougher time getting umbrella coverage as the number of labor and employment lawsuits has surged. Employees have been filing lawsuits over things like:

• Harassment
• Age discrimination
• Wage and hour violations
• Wrongful denial of promotions

The hospitality industry needs umbrella insurance to cover losses because employment practices liability insurance does not cover things like wage and hour violations. However, they are now finding this coverage more difficult to obtain. Insurance companies have often faced large losses when they offered umbrella policies with large coverage limits to hospitality companies.

Businesses Need for Coverage for Their Property 

The way that business has changed over the past several years has also forced the hospitality industry to rethink its insurance needs. First, the real estate market has changed dramatically since the beginning of the pandemic. Even if a business has seen a dip in its revenues, its property is probably now worth much more, requiring an increased amount of coverage in a time when insurance companies are offering smaller policies. 

In addition, businesses now need to think more about cyber insurance coverage. The hospitality industry was forced to embrace technology at a faster pace because of how COVID-19 changed its business. However, the more that businesses use technology, the more they are vulnerable to hacking and online fraud. Many hospitality businesses now need to add a rider for cyber coverage or specialized insurance.

The Pandemic Has Forced Reconsideration of Business Interruption and Errors & Omission Insurance 

Hospitality companies will also need to consider their business interruption insurance. This area of coverage was the subject of scores of lawsuits because the language of policies often excluded interruptions caused due to communicable diseases. Insurance companies are now rewriting policies to make it abundantly clear that a pandemic will not trigger an obligation to pay for an insured’s losses. Nonetheless, insurance companies will continue to provide business interruption insurance and hospitality businesses will now need to review their coverage in light of the new world that we are living in post-pandemic.

Finally, one of the most significant changes to insurance for the hospitality industry has occurred in the area of errors & omission coverage. Companies need more of this coverage as employees have sued managers and the companies claiming they have been exposed to risks, both during COVID-19 and afterwards. In addition, the post-pandemic supply shortages mean that customers may try to sue hospitality companies when their arrangements go bad. Hospitality businesses may struggle with the premiums they’ll be facing if they increase the size of their errors & omissions insurance in today’s hard market.