Liability "Hot Potato": Using Risk Transfer to Protect Your Property's Assets
Hotels and resorts are often at risk for legal action on many fronts. A primary risk factor that places properties in a potentially litigious position is when daily operations turn into hazardous situations for guests or employees. Transferring risk to third parties, such as vendors that are contracted by your property, can help financially shield hoteliers from claims they may not be responsible for.
The overall purpose of risk transfer is to pass the financial liability of a certain risk on to the properly responsible party. This is done primarily through contracts and insurance.
Almost every contract has an Indemnity clause, and some have a Duty to Defend and/or Hold Harmless clause. In addition, there is usually a section or two on what each party is and is not responsible for. Read these carefully (or better yet, have an attorney review them), as this is the section everyone turns to determine who is responsible when the finger pointing starts in a lawsuit. You will often hear people say "it's a standard contract." THERE IS NO SUCH THING AS A STANDARD CONTRACT! Most businesses have contracts written for their business to protect THEM. Contracts can be very one-sided and push all or most liability to you. Unless you want to be responsible for everything your vendors and suppliers might do to your property and guests, take time to read and understand a contract before you sign it.
For example, you hire a security guard for a big event at the hotel. The guard inappropriately injures a guest while trying to detain them. The guest later sues the hotel for damages, because they assume the security guard is an employee of the hotel. You then call the security guard company for help, since it was the guard's fault. Unfortunately, you signed a contract that indemnifies and holds the security guard company harmless from any liability that arises from any actions while working on your property. Now you, or hopefully your insurance policy, are probably stuck defending this. Yes, things like this happen all the time.
While your insurance policy does transfer the risk of loss from you to your carrier, it's always better to protect your policy from any claims that are not really yours. Fewer claims mean a better renewal! In other words, make sure your suppliers and vendors have insurance. When asking about your vendors insurance, they may provide you with a certificate listing their coverages and expiration dates. You may see your hotel's name under Certificate Holder. This is nothing more than proof of insurance. You want more than just proof of coverage; make sure your hotel's legal name and dba are listed as Additional Insured. There should be Additional Insured wording in one of the boxes near the bottom of the certificate. In short, naming you as Additional Insured on their policy extends the vendor's insurance to you for liability arising from their actions.
For example, your landscaper injures a guest and himself while driving his lawnmower, because he was texting while mowing. Your hotel will, of course, get served the lawsuit, because the guest has no idea he's just a contracted vendor and not an employee. Unfortunately, it turns out that your landscaper does not have insurance. They let it lapse at renewal and because you didn't ask for a certificate of insurance, naming you as Additional Insured, you were unaware. You send the claim to your carrier, but it turns out that your policy excludes mobile equipment, which is what the riding mower is considered. Now you're on the hook for the lawsuit yourself. To make matters worse, the landscaper's employee that was driving the lawnmower hurt himself and wants Workers Compensation. Since his employer never bought a policy, the injured landscaper's employee's claim will be going on YOUR Worker's Compensation policy. Yes, that happens.
It's a good idea to make sure your vendors and suppliers carry the following insurance coverages:
- General Liability – Covers most of their actions that could result in injury or property damage
- Auto Liability – In case they have an accident while driving on your property
- Worker's Compensation – You don't want their injured employees on your policy.
- Excess or Umbrella – Additional coverage for the GL, Auto and WC policy
Being named Additional Insured can be viewed as even more protection for your business, and it's free! (Your vendor may incur a small charge) While you won't be named as Additional Insured on the WC policy, you can be named on the other three types of policies.
Exposures vary from property to property, depending on size and amenities. It can be difficult to determine what limit of coverage to request from your vendors and suppliers. A reasonable minimum expectation would be:
- General Liability - $1 million
- Auto Liability - $1 million
- Worker's Compensation - $1 million (all three limits)
- Excess or Umbrella – $1-5 million depending on exposure (This can be difficult for some vendors to obtain)
* Keep in mind, Excess and Umbrella policies often attach at $1 million. This means that they provide additional coverage, or attach, to the GL and Auto policies after $1 million. So, by requesting a minimum of $1 million from your vendors and suppliers, it will prevent any gaps in coverage between their primary coverage (GL, Auto and WC) and their excess, if they have any. It may also help with your excess in the event of a large claim that goes beyond your vendor's limits.
Ideally, you will have a solid contract and proper insurance for all of your suppliers and vendors. But it's not a perfect world, so here are couple things to keep in mind:
- What if your vendors or suppliers don't have proper coverage?
If they won't agree to your minimum requirements, consider finding a new vendor or supplier. The little you may be saving by using them won't cover the claim they could cause you.
- What if your vendor or supplier won't alter the contract clauses to better suit your liability concerns?
I don't want to tell you how to negotiate, but don't be afraid to walk away and find another option. You can talk with your insurance broker, carrier and your risk management team to make sure everyone understands the potential exposure and the options to avoid, prevent, mitigate and/or transfer it.
Most hotel operations have many vendors and suppliers, and keeping track of all those certificates and contracts can seem like a daunting task. Don't let lack of time and organization be the cause of your downfall. There are software programs available that can handle most of the maintenance of these tasks quickly and easily.
Keep in mind that these are generally severity concerns, not frequency. You're probably not going to have a vendor or supplier causing injury or property damage often, but when they do, it can be costly. While not all risks can be transferred, taking these precautions can help hoteliers be properly prepared and help to avoid liability from a lawsuit that could shut down a property. Don't let an unreviewed contract or lack of proper insurance coverage from your vendors be the cause of financial hardship for your hotel. Concentrate on transferring the risk to its rightful owner!