Liability Insurance: An Essential Precaution

It has been said that in an insurance policy “the large print giveth and the fine print taketh away.”  To avoid this from happening, a few caveats are in order.

When you buy liability coverage for your hotel or restaurant operation, you should receive a measure of protection and peace of mind, but for some reason you remain with that gnawing feeling that all may not be well with your insurance portfolio.  You think you did what you were supposed to do.  But did you?  Do you have enough insurance?  Do you have the right kind of coverage to cover possible accidents, incidents and catastrophes?  Employer’s liability?  Liquor liability?  Auto insurance for employees who drive a car on behalf of the business?  Do you know where your liability insurance policy is?  When was the last time you read it?  Do you understand the fine print?  Do you know who the underwriter is – not the agent, but the company that is supposed to pay in the event of a claim?  Do you know whether the insurance company is financially solvent?

You are responsible for knowing and understanding the types and amounts of coverage that are in the insurance policy.  However, when you purchase it, you do not receive the actual policy.  You receive a Declaration Page (one page), which generally sets out the types and amounts of coverage, without the exclusions, restrictions and clarifying language.  These will be fully spelled out in the actual policy, which customarily you will not receive until 60 to 90 days from the date of purchase.  In other words, the Declaration Page contains the large print, while the actual policy contains the fine print, and you won’t get the latter until after you buy.  It is, therefore, imperative that before you buy the insurance, you discuss any obscure issues with the agent until the content and substance of the policy are clear to you.  Ask for written answers to your questions, and continue to request that he/she do so until you are satisfied with your comprehension of the details.  Once the policy arrives, read it and make sure you fully understand:

1.  Its language, and whether it is consistent with your agent’s earlier explanations; and

2.  Its coverage, exclusions, restrictions and clarifying language.

Do not wait until you have a claim to clarify coverage issues.

Ten years ago, the coverage issue used to be the paramount concern of the business operator when purchasing liability insurance.  Today, with the consequences of 9/11, the uncertainty in the stock market, the mortgage debacle, higher claims, and the risky investments of some insurance companies in junk bonds and derivatives, you must also be concerned with the financial ability of your insurance company to pay any and all claims you are held responsible for during the coverage period.  The last thing you want to do is buy an insurance policy and relax because you allegedly have coverage, only to find out, once a claim has been filed, that your insurance company does not have the assets to pay the claim.  Remember: If your insurance company will not or cannot pay a claim, you will be held responsible for payment.  To prevent this from happening, find out from your agent who the underwriter is, and what its rating is.  According to analysts, the stronger the rating, the more financially solvent the company is projected to be.

Rating categories rank ordinarily as follows: A-plus; A-minus; B-plus, etc., or AAA; AA; A; BBB, etc.  Today, it would be difficult to justify purchasing an insurance policy from an underwriter with a rating of less than A-minus or AA.  I recommend to my clients that they buy nothing less than A-plus or AAA rated coverage.  Ratings can be verified by contacting the rating companies directly (i.e. A.M. Best or Standard and Poors), or by calling your State Insurance Regulatory Department, usually located in the state capital.  The insurance department can also provide you with a list of complaints filed against the insurance companies for failure to pay claims in a timely fashion or to act in good faith.  This is information you need to know before you buy your policy.

Once you have the proper coverage through a financially solvent company, ascertain that the amount of the coverage meets your needs.  To ensure that you fully understand how much you actually have for the entire period, it is critical that you become familiar with the following concepts and terms: per occurrence, aggregate and umbrella or excess insurance.

If your insurance policy sets forth that you have $500,000 coverage per occurrence it means that for each and every incident that occurs, during the coverage policy period, and for which you could be held liable, your insurance company will pay up to the sum of $500,000 on your behalf.  If the judgement exceeds that amount, you shall be responsible for anything over and above $500,000 unless you have what is called umbrella or excess coverage.

If your insurance policy has the term aggregate after an amount it means that this is the total amount your insurance company will pay for all incidents and damages you are ultimately responsible for during the coverage period.  It means that if you have a $500,000 per occurrence policy and $500,000 aggregate, one claim of $500,000 would wipeout your total insurance coverage (so would two $250,000 claims).  Accordingly, it is extremely important that you assess claims that are made against you immediately to determine whether you must purchase additional coverage for the remaining coverage period.

The basic coverage that is ordinarily purchased is referred to as primary coverage, normally the coverage that will initially be used to pay any claims that occur during the policy period.  In addition, or on top of this, you can also purchase umbrella, or what is commonly referred to as excess coverage.  Be aware that this coverage only pays when and if your primary per occurrence coverage is completely exhausted from one single claim.  Assume the following scenario:

You have a $500,000 per occurrence coverage with $500,000 aggregate; you have $1 million in umbrella or excess coverage.  The policy period runs from January 1 to December 31.  An accident occurs on January 20, which is within the policy period.  The claim is settled for $750,000.  The primary coverage will pay the first $500,000 over any deductible you might have.  Your excess policy should pay the remaining $250,000.  However, if you have a subsequent claim from an incident that occurs on February 15, how much coverage do you have available to pay this claim?  The answer is zero.  You have depleted your coverage under your primary policy because it has a $500,000 aggregate.  Your excess policy is not available because it only pays if you have exhausted your primary per occurrence amount on a given claim, and if you do not have any primary per occurrence coverage left, the conditions for coverage of your excess policy ordinarily cannot be met.

You must also be aware of “claims made” policies.  The term “claims made” means that the coverage is only available if an actual claim is brought to the attention of the insurance company during the policy period.  Usual insurance policies cover claims that occur during the policy period, although they are not brought to the attention of the insurance company until after the coverage period has elapsed.

In spite of the problems and expense involved, insurance is not an option; it is a protection we need to operate our hotels with a sense of comfort and peace.  Avoid unpleasant surprises by doing some investigative work up front, by speaking and listening to your colleagues and by asking those questions that will make it easier for you to make the right choice, and purchase the right insurance policy for your business.

Insurance Policy Coverage Checklist

1.  General Liability (fire and casualty for the premises and hotel operations)

2.  Employers Liability (discrimination claims)

3.  Workers’ Compensation (injury on the job)

4.  Liquor Liability (dram shop liability)

5.  Swimming Pool/Spa/Workout Area Addendums

6.  Golf Course Operators Liability

7.  Employee Security Bonds

8.  Automobile Liability (autos, motorized carts, shuttle service, etc.)

9.  Outdoor/Water Activity Coverage Addendum

Stephen Barth

Stephen Barth, an attorney, professor, and author of Hospitality Law, Intelligent Emotions: On Self Responsibility, Owning Our Emotional Power and Changing Our Reactions, and co-author of Restaurant Law Basics, is well-versed in the world of hospitality law. Prior to joining the faculty at the University of Houston, Conrad N. Hilton College, he was an adjunct professor at Texas Tech University. With over twenty years of experience in hospitality operations, including line positions, management, and ownership, Professor Barth is a regular guest speaker covering a variety of issues for national, regional, and local industry associations and businesses. Professor Barth is a member of a select group of instructors worldwide designated by the Educational Institute of the American Hotel & Lodging Association to instruct its Certified Hospitality Educator (CHE) program. Recently, he has been quoted in many national publications including: Hotel News Now, Leisure & Hospitality International, USA Today, Successful Meetings, NBC News, and the Los Angeles Times.

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