Disaster insurance deductibles are on the rise after two tornadoes hit the same Midwest region within a year, causing extensive hotel damage.
REPORT FROM THE U.S.—After two tornadoes hit the same Midwest region in the United States within a year and caused extensive hotel damage, disaster insurance deductibles are on the rise and hoteliers are mulling their coverage options.
“There’s no doubt that the tornadoes in Joplin and Branson (Missouri), as well as flooding in the Midwest, have really impacted the overall cost of insurance for hotel property owners,” said J.C. Sparling, executive VP with Preferred Brokerage, a New York-based property and casualty company that handles a large number of hotels. “We are also seeing reinsurance treaties up.”
Sparling said cost hikes can come in a number of different forms. While premiums appear to be remaining steady, insurance companies in the Midwest are charging a higher rate of percentage deductibles to help keep costs down, he said. As an example, if a hotel had $100 million in coverage and there was a 5% deductible, the deductible would be $5 million.
Even with those increases, insurance costs in the Midwest aren’t as high as in coastal areas, he said.
Wind and flood insurance premiums in the Midwest remain relatively flat overall, with slight increases for some hotels. In other parts of the country, such as coastal areas, the cost of wind and flood insurance has risen 8% to 10% on average, according to sources.
The hardest hit regions, according to sources, have been the Tier I coastal areas along the eastern seaboard and Gulf Coastal regions that are frequently affected by hurricanes.
“The good news is that even though the price is up, there is still available capacity for the customer,” said Al Tobin, managing principal for Aon Risk Solutions’ property practice.
There are many insurance options available to today’s hotelier. Reinsurance options—insurance that is purchased by one insurance company from another—are available, as are percentage deductibles based on the amount of coverage rather than a flat rate.
Sparling said most hotels still can purchase wind deductible buy-back insurance—which provides a buy-back policy that reduces the higher percentage deductible—but that deductibles most likely still will be higher than the flat deductibles previously offered.
Kirk Pasich, leader of the insurance coverage practice at Dickstein Shapiro LLC, said hoteliers in hurricane areas need to consider storm surge coverage and whether storm surge coverage is available under a flood plan or wind storm plan. Some policies exclude floods altogether.
Another consideration in any area, Pasich said, is business loss/interruption insurance. For example, hotels impacted after the 9/11 terrorist attacks and hotels in California affected by the 1994 Northridge, California, earthquake would have benefited greatly from business loss/interruption insurance.
“Those hotels might not have been hit directly, but their business was impacted because after 9/11 people were afraid to fly and some hotels in California were impacted after the earthquake because some parks and highways were damaged and closed,” Pasich said.
Allen Lumpkin, commercial insurance and risk management adviser with Pritchard & Jerden, said many hotels don’t have business interruption insurance because it comes with higher premiums and deductibles.
“It’s a very important piece that some hotels don’t have,” he said. “We had a client close to the Kentucky Derby, and the area was hit by a tornado one year close to the race. The hotel wasn’t damaged, but they lost all of their utilities. If they hadn’t had that business loss insurance, they would have lost all of that income they would have generated during the race.”
Many hotel owners who had properties hit during the 29 February tornado in Branson are still trying to settle with insurance companies on lost business, including the Hilton Branson Convention Center, which sustained enough damage to close the hotel until at least the beginning of October. Bill Derbins, GM, said the hotel carried business interruption insurance.
Pritchard & Jerden has been working with many hotels in the Gulf Coast region to address lost business due to the oil spills in the wake of the 2010 BP disaster, which affected the tourism industry for over a year. Lumpkin said the incident was covered by a piece his company has offered under a separate rider on the business interruption coverage.
Other more niche disaster insurance options exist, such as earthquake and tsunami insurance and terrorism insurance.