Hotels and risk management.
Indeed, the prime selling point of more than one four-star hotel's marketing brochure seems to be how well they can keep the mundane ebb and flow of modern life from seeping onto hotel property. The same commitment to quality service holds true for budget motel chains across the country.
However, just as you can't judge a hotel by its lobby, underneath the veneer of cordiality, risk managers throughout the industry are furiously struggling with the problems of an unpredictable insurance market, the crisis in workers' compensation and sky-high damage awards in lawsuits. it's a continuous war waged in the back office, out of sight from hotel guests.
Although such problems are germane to other industries too, the hotel and motel industry differs in that they always have people on the premises and must deal with them in the context of a 24-hour day. To wit, the entire risk management program must address the spectrum of exposures associated With a people intensive business. Since hotel properties span the spectrum from resorts, convention hotels, and casinos to budget motels and luxury hotels, there is no generic way to manage their risks.
The cardinal rule that risk managers in the hotel industry abide by is that risk management plays an important role in curtailing potential loss any time a building is populated. As public places, hotels are affected by everything from the rise in the nation's crime rate to the political agenda of terrorists. But as David Mikulina, risk manager for Hyatt Corp. points out, most risk exposures at hotels are of a more prosaic nature. "Obviously there are exposures at a resort that must be addressed by the management, from proper swimming pool signage, to lighting at night, to the proper maintenance of things from beach toys to health club equipment," he says. "Although hotels may seem like they all have similar risks, there are different exposures at each of them," he adds. "Each hotel is like a separate operation, and each has its own personality; a resort, casino, convention center, they all have different types of exposures.
In the case of one of the Hilton Hotels Corporation's West Coast properties, the exposure in question was 40-ft. tall palm trees that weighed between one and two tons each. "We needed them for landscaping the property," explains Michelle Patton, vice president of risk management for Hilton Hotels Corp. "They were shipped by truck from a specialized nursery and then helicoptered over cars, people, and the hotel roof, You can imagine the type of insurance that was needed." Hotels are dynamic, Ms. Patton adds, they are constantly changing, and the risk management program must address that constant change. "With special events, for instance, there are issues like crowd control and security, so it's a team effort-security, operations and risk management," she says.
The risk managers in the hotel and motel industry often play as varied a role as the risks they manage. Some, like Mr. Mikulina, report to the chief financial officer and are focused primarily on the financial administration of the corporate insurance program; others like Arnold Davenport, Marriott Corp.'s vice president of risk management, manage loss prevention, safety, claims and fire protection. And then there are individuals like Fred Miller, risk manager for the Showboat Hotel in Las Vegas, who is a one-person risk management department.
Hotel industry risk managers deal with such issues as whether a particular convention can offer an event to Alice Oshins is editor, and Tom Johnson is a contributing editor, of Risk Management. their attendees to how the six-year slump in the hotel industry has impacted the risk management program. For instance, according to Leslie Brown, risk manager of the Four Seasons Hotels Ltd. in Toronto, the industry has been hurt by the current recession, particularly by slashed travel budgets. As a result, when she finished her insurance policy renewals at the end of last year, she put pressure on the insurers "because we don't have as much money to pay for the program. Our management knows where I can work to keep costs down," she says.
Safety and Security
THERE ARE SIMILARITIES about the role the risk management department plays in the hotel industry and its importance within the corporate structure. Because providing security is the essence of the hospitality industry, such a task is not entirely within the risk manager's purview. Each hotel must have its own separate security department. "You hope that your guests spend a good night's rest and that they feel safe with adequate security right on the premises," explains Ms. Patton. "An issue for any traveller is their own security and we want to make sure that they have a good experience.
According to Bill Cox, president of Hospitality Risk Controls Inc, a Memphis, Tennessee-based security and loss prevention consulting firm geared to the hotel industry, security is dictated by the location, design and purpose of the hotel.
However, Mr. Cox says that most large hotels typically have a "base station office located near the employee entrance which acts as a control point for all employees entering the premises. "That means the station is the pivot point where identification cards are accessed, keys are stored, and where two-way radios and beepers are monitored," he says. In addition, the base station contains a computerized activity log where incidents are reported during each security shift. Closed circuit televisions and exit door emergency alarms also have their locus at the base station.
Mr. Cox mentioned a recent innovation that is catching fire throughout the hotel industry. "Many hotels are now scattering 1/2-inch by 2-inch bar codes at strategic locations throughout hotel properties," he says. "Security staff merely have to tap a device that looks like a fountain pen against the codes and they will read the location and the time. That way, a hotel can show proof of coverage in the event of litigation."
More often, the risk manager gets involved in the implementation of safety programs and in the training of security personnel. For instance, although Hyatt Hotel's risk management department employs outside consultants to advise on security and safety functions at each hotel property, Mr. Mikulina says their relationship to the risk management department is indirect.
"Our department encourages a proactive stance on safety and security, and therefore cannot help but get involved with the consultants," he says. "At the same time, claims handling will generate feedback to the safety people on particular exposures which may have to be observed."
Another reason security is handled at individual properties is because security problems can arise when a politician or visiting dignitary makes an appearance on the hotel property. These situations, which can pose serious political risks for the hotel, tend to be handled by the Secret Service.
"In the case of someone like President Bush visiting a hotel, the management will give the Secret Service full sway," says Mr. Cox. "They may want to run a background check on everybody staying at the hotel. They could want the floor above and the floor beneath the President vacated, or even the telephone lines set up differently.
HOWEVER, THE WAY risk managers work with the individual hotel properties on security or other risk and insurance issues depends on the way the hotel company is structured. According to Smith Travel Research in Gallatin, Texas, the number of independently run hotels that joined chains jumped 42 percent in 1990 from a year earlier, the highest increase ever. The move to franchise has reshaped the hotel industry in recent years. For decades, the vast majority of hotels were independents; today, hotel chains control 53 percent of the hotel rooms in the United States. One reason behind the franchise movement is that chains can keep costs down for hotel operators by buying equipment at bulk rates.
What the franchise movement has meant for risk managers is that they serve as an overseer or consultant of the franchise's insurance program. The hotel franchise can usually create a separate insurance program (with guidelines given from the head office) or get coverage under the corporate insurance program. For instance, most of the 200 Hilton hotels are franchise properties owned by independent contractors. Since the franchises do not have their own risk management department, a staff person from the corporate risk management department monitors the franchises' contractual obligation to purchase insurance and oversees the terms and limits of coverage. However, there are hotel chains such as Motel 6 which have no franchised properties at all. Richard Mueller, risk manager for Motel 6, explains that his department has a centralized risk management plan for the 650 Motel 6 properties scattered across the United States, all of which are insured under the corporate program.
"By centralizing all workers' compensation claims and guest-related incident reporting so that they are ultimately routed into a single office, we achieve continuity and can see the big picture concerning loss trends across the country," says Mr. Mueller.
For the last year and a half, he says, Motel 6's claims handling system has been divided into six geographical regions covering the entire United States. "For every two regions, unit offices are set up staffed by a claims manager and a claims processor," he says. "Right now our retention program keeps the first $250,000 of risk so that we are able to handle a great deal of claims in-house."
WHILE THERE WILL always be slips and falls on the hotel premises, these problems are not the hotel industry's major concern. Most risk managers surveyed for this article said that the two biggest problems for risk managers in the hotel industry are the growing litigiousness of society and compliance with the regulations detailed in the accommodation sections of the 1990 Americans with, Disabilities Act (ADA). Yet according to Ray Ellis, director of risk management and operations for the Hotel and Motel Association, every decade has at least one big-ticket item for the hotel industry. "In the 1970s there was smoke detection," he explains. "In the 1980s there were hotel fires, and then in 1990 the Hotel/ Motel Fire and Safety Act was passed which required facilities to meet new fire prevention and control guidelines." Today, Mr. Ellis adds, ADA is the biggest problem facing hotels that are grappling with ways to for all guests
Recently, Hilton Hotels Corp. estimated that it will cost as much as $70 million to comply with the ADA. "Every property must undergo at least some alteration," Mr. Ellis explains, "whether it is adding strobe lights in corridors and restrooms for the hearing impaired or knocking down a wall to make a bathroom wheelchair accessible." Once a disabled person reports a barrier, Mr. Ellis says, the hotel is given a certain period of time to correct the barrier. That period may prove to be less of a problem for the larger chains which have the resources to comply quickly, but small, family-run hotels with tighter budgets may not have sufficient resources to comply as fast. In the long run, Mr. Ellis says, the ADA may prove to be another verdant source for lawsuits against hotels and motels.
Certainly, on the operations level, the accommodations section of the ADA may pose the greatest financial burden on the hotel industry. The regulations set percentages for the provision of wheelchair-accessible rooms and bathrooms. For instance, hotels opening in 1993 with up to 100 rooms must make 4 percent of the rooms and bathrooms wheelchair-accessible. The rooms must also be adapted for use by the deaf, with visual alarms in the event of fire, visual notification devices if someone is knocking on the door, and special telephones. Hotels were required to make changes "readily achievable" to remove barriers by January 1992, and hotels that open after January 1993 must conform wholly to the requirements.
IN RECENT years, landmark verdicts and settlements in negligence suits against hotels have shaped risk management concerns. In effect, some risk managers such as Richard Mueller see the tort system, deep-pocket approach as the biggest challenge facing risk managers. "The amounts are limitless in most jurisdictions. Tort reform is badly needed," he says. According to Mr. Ellis, "The recovery of large monetary damages is the biggest risk uniform to all industries." in particular, he adds, singer Connie Francis' 1974 rape at her hotel, and the subsequent $1.4 million settlement, "opened a Pandora's Box" of intense media scrutiny from which the industry has not entirely recovered.
"It was a tragedy, Connie was on the comeback trail and the rape incident effectively scrubbed her career," Mr. Ellis says.
According to Mr. Ellis, budget level motels send more calls to the police than opulent hotels because their staffs are characteristically small and security measures are not as sophisticated. "All these chiefs of police across the country saying, "Those budget places bring the criminal element together,' is ridiculous," he says. "Most calls to the police from budget motels are pain-in-the-neck domestic violence complaints, not for rapes or other heinous crimes. Furthermore, if such places attract a criminal element, then the police should know where to nab them ! For independent franchise owners too small to benefit from more formalized risk management expertise, Mr. Ellis advocates establishing a police presence around their motels by encouraging officers to cruise the parking lot or inviting them into the coffee shop for donuts.
"In Wauwatosa, Wisconsin, police caught a guy in the act of assaulting a motel customer in the parking lot," Mr. Ellis says. "Unfortunately, the customer sued anyway!"
In addition to security issues, hotel fires have prompted victims to file lawsuits. A 1980 fire at the MGM Grand Hotel and Casino in Las Vegas caused more than $50 million in property damage, claimed 85 lives, and injured more than 600. Two weeks later, a fire at Stouffers Inn in Harrison, New York, caused 26 deaths and 40 injuries. And in 1986, a fire in the Dupont Plaza Hotel and Casino in San Juan, Puerto Rico, claimed 97 lives. An inadequate fire protection system was to be blamed for the catastrophes. As a result, most hotels and motels today are retrofitted with full automatic sprinkler systems.
ANOTHER PROBLEM for risk managers in the hotel and motel industry is workers' compensation insurance. "We spend most of our time handling the workers' compensation program in the states," says the Four Seasons' Ms, Brown. "It's really getting out of hand. We are looking at options for forming captives and opting out of the system in Texas."
With 12,000 employees in 45 states, Motel 6 has also fallen victim to the crisis in workers' compensation. Ten of the 12 employees comprising Motel 6's risk management staff work on that chain's workers' compensation program. "The problem has become so acute," Mr. Mueller says, "that getting employees back to work is constantly a challenge. We have to take a strict claims control and loss control approach."
By ensuring that claims are reported quickly, Mr. Mueller has proven the cost benefit of hiring staff to work exclusively on workers' compensation issues. They also help get people to the right doctors, facilitate getting the best medical care in their area, and offer return-to-work programs. Hilton Hotels Corp. has also taken the workers' compensation problem into their own hands through a self insurance program with regional offices throughout the United States to handle the claims, says Ms. Patton.
WHAT RISK MANAGERS like most about the job is that they can work closely with people, from convincing the top level of corporate officers that the company should self insure to training a bartender in liquor liability. "Risk management is always a challenge because we cross all lines and work with every facet of the company," says Mr. Mueller. "There is virtually no department that we don't interface with at some time during the year. We work with finance in risk financing; with human resources on the workers 'compensation problem- and with marketing on the economic environment and security issues, which are done mainly at each hotel."
In addition, because insurers require hotel risk managers to know what goes on at the individual properties from the risk standpoint, risk managers find themselves working especially close with hotel operations personal. "You can't write a hotel program without knowing the risks," explains Mr. Mikulina. "You have to know how many water slides you have, and you have to know the types of activities going on."
Yet unlike some other industries, hotels tend to maintain traditional types of insurance programs and have been relatively slow to self insure. "As a rule, most of the hotel industry does not self insure," says Mr. Mueller. "Most take a traditional approach to their programs. "Nevertheless, he adds, due to the unpredictability of the market and the amount of coverage needed for the larger chains, insurance buying can be a high profile job. Mr. Mikulina, for one, has regular meetings with Motel 6's chief executive officer.
However, Mr. Mueller adds, self insurance is a natural area for risk managers in the hotel industry to enhance their profile within the company. "Right now, there is a growing movement to self insure and to get more involved in the financial analysis of risk."