Fear Takes No Holiday
In April 2013, an explosion rocked the street in front of the Charlesmark Hotel, a boutique property on Boylston Street in Boston that overlooked the finish line of the Boston marathon. In the chaos that ensued, the FBI closed a 12-block radius around the blast scene. Five hotels were completely locked down, including the Charlesmark, Mandarin and Lenox hotels.
Strictly from an insurance standpoint, the hotels, restaurants and businesses in that 12-block radius may have been the lucky ones. Direct impact to their operations would have at least given them access to insurance recovery for physical damage or for business interruption due to civil authority action, assuming they had the right coverages in place.
But what about the businesses outside that radius? No doubt their revenues suffered in the days and weeks that followed, as media coverage fanned the flames of fear, keeping Boston’s terrorism connection alive in the minds of the public.
It’s likely that few, if any of them, had language in their insurance policies that would help offset their losses while Boston struggled to regain some normalcy.
The volume of terror attacks has increased worldwide in a short period of time. At the time of this writing, three U.S. attacks with potential connections to terrorist organizations took place within a single 12-hour span on Sept. 17.
Fear has become one of the most challenging market conditions facing business that rely on travel and tourism. Gaps in coverage can take companies by surprise when high-profile events suppress travel, tourism and the general flow of commerce.
“There’s no question that the hospitality industry is affected by fear, as much or more than the event itself,” said Chad Callaghan, principal of Premises Liability Experts, based in Atlanta. Callaghan served Marriott International Inc. for 35 years, as vice president of safety and security.
Business hubs rebound more quickly, because business travelers can’t stay away for long. But companies dependent on leisure travelers for revenue can take heavy hits, depending on the nature and severity of an attack in their vicinity. It’s hard to calculate what the financial impact would be of a major attack at Disney World, or at the primary airport of the host city of the Super Bowl a week before the event.
“Terrorism is the thing that scares everybody,” said Joe Addison, executive vice president at JLT Specialty USA, “People don’t want to walk down Las Vegas Boulevard when two weeks ago there was a truck bomb there, and every time they look at a truck they’re going to worry, ‘Is there one in there?’ ”
Following the November 2015 terrorist attacks in Paris, bookings at luxury hotels in the city fell by 50 percent. Within days of the Brussels terror attack, hotel occupancy plunged from 82 percent to 25 percent across the city.
“Acts of terrorism have a lingering negative impact on revenue that simply can’t be recovered,” said Jan Schnabel, managing director and director of risk management with HUB International’s hospitality practice.
“The hundreds of billions of dollars that are lost in overall revenue in the tourism and hospitality world following an attack is inconceivable.”
The World Travel & Tourism Council estimates that it takes a region, on average, about 13 months to get back to normal following a terrorist attack. In the grand scheme of things, that’s not long. But it can still take a mighty toll.
And booking and cancellation stats don’t really give a complete picture of what hotels may face in the immediate wake of a terrorist attack, when trying to serve the limited guests they do have.
“It’s a tough thing for risk managers to really wrap their minds around,” said Sheri Wilson, national property claims director for Lockton.
“What if I can’t get laundry? What if the roads are closed so I can’t get the people in? What if I can’t get fresh fruit in?” Hotels may need to spend a considerable amount to get the goods and services they need.
Terrorism coverage for such losses and unexpected expenses is a tricky beast. Coverage under standard property policies is typically limited to property damage and business interruption related to property damage. It also relies upon the event to be certified as an act of terrorism by the U.S. Secretary of the Treasury.
“If you elect coverage through TRIPRA, or one of the other national terrorism pools, there may be limited or no cover depending on your underlying property policy and how the terrorism ‘pool’ ultimately responds,” said Steve Truono, vice president of global risk management and insurance for Starwood Hotels & Resorts.
Business interruption (BI), or time element coverage, can be triggered by other situations such as evacuation orders, transportation interruptions or power outages. Contingent BI can come into play as well, in some cases.
“I rely on housekeeping to keep my hotel open but if housekeeping [can’t get to work] because of a terrorist attack, I could, as a hotel owner, have [CBI] coverage,” said Wilson.
“Once the terrorism is certified, all of the coverages in the policy come into play.”
Consider the Boston marathon incident, said Christian Waeldner, vice president, crisis management and political risk at Starr Cos.
“You had a bunch of restaurants and hotels in close proximity to the finish line who were indirectly impacted by the bombing. … It took a quite some time for life to get back to normal in the city center after the bombing and that’s a huge financial impact.”
Waeldner said Starr Cos.’ cyber and terror response product includes contingent BI that can be triggered by a terrorist event within two miles of an insured’s property, even if they are not directly impacted.
But it’s important to remember that the Boston bombing was never declared a terrorist act. Products such as Starr’s or Lockton’s new terrorism crisis solutions offer more comprehensive coverage that doesn’t require the Secretary of the Treasury to certify an act of terrorism.
Stand-alone terrorism policies often have a distinct advantages for insureds, said John Welty, practice leader for SUITELIFE from program administrator Venture Insurance Programs.
“The hundreds of billions of dollars that are lost in overall revenue in the tourism and hospitality world following an attack is inconceivable.” — Jan Schnabel, managing director and director of risk management with HUB International’s Hospitality Practice
“A stand-alone terrorism insurance program can help to reduce the gray areas of where our standard insurance policies are providing coverage,” he said.
“Depending on the policy form obtained, you may find some coverage for cancellation of booking or non-physical damage,” added Truono, but “a lot depends on your business exposures, what markets you buy from, and how much you’re willing or able to spend.”
Even in cases where one has cancellation of booking included in their terrorism policy, it is very likely that the coverage is sublimited, well below the several hundred million dollars of limits you may have for direct property damage, he said.
Loss of attraction is a specialized time element coverage that may provide some relief. But like cancellation of booking, the coverage is typically subject to low sublimits and is often subject to annual aggregate, not per occurrence, limits as well.
Risk managers should keep in mind that it can be complicated to prove a loss, said Turono.
“As risk managers, we have to be able to support the loss and demonstrate that the loss of net income was a result of the terrorist act, despite no physical damage to one’s own property.
“For example, in the hospitality industry, we would need to show that the reduction in room occupancy, RevPAR and ultimately net income, is a direct result of the terrorist act which results in interruption of our business due to guests’ or customers’ inability to freely and safely access the hotel.
“Likewise, loss emanating from leader property interruption (airport, convention center, etc.) ingress-egress, and/or military-civil authority may also support the basis for a claim.”
“The terrorism policies are pretty staid and strict and there’s a lot that they don’t cover,” said a Western U.S. risk management professional for a large resort and casino operator.
That can potentially leave risk managers on the hot seat if the C-suite assumes that buying any kind of terrorism policy means the company will be covered no matter what the circumstances.
“The worst thing is to have your boss think that, ‘oh we have terrorism coverage so anything that happens around here might be covered,’ because that’s not necessarily the case,” the risk manager said.
But the marketplace is changing for the better.
We’ve gone from basic terrorism add-ons that most owners didn’t even look twice at [to] new offerings in the marketplace that are more comprehensive because of events such as [those in] Orlando and San Bernardino,” said Sean Spagnoli, vice president and client executive for HUB International’s hospitality practice.
“The notable changes are the new contingent products where you don’t have to have damage just to your location. It can be an event that happens anywhere from a 5 to a 50 mile radius.”
One such product from Florida-based New Paradigm provides parametric and contingent terrorism coverage for business income, extra expense, loss of attraction and brand protection. Coverage triggers can include terrorism occurring within a predetermined radius from insured locations, or occurring at other predetermined locations that could cause a loss.
“It will allow you to pick and choose different hotels and different scenarios,” said the Western U.S. risk professional, and it also offers the kind of capacity he needs for a large organization.
For many companies, said Addison, that kind of capacity is the key.
“Someone like MGM or Caesars … the amount of money going through those facilities a day — $10 million in coverage isn’t going to cut it. If they were to have a substantial event in Vegas and people just cancelled their reservations and were scared to go there, they’re going to need more like a quarter billion, half a billion.
“If they go from a 90 percent occupancy down to 60, that’s a lot of revenue because they’re making money from the food, they’re making money from the gambling. Then the question is — how long does it take before it comes back? Before people feel safe again?”
“Imagine if you were a company in Las Vegas and [after a terrorist event] you had to tell your shareholders that you didn’t have coverage for that, and your share price drops 20 percent.” — Joe Addison, executive vice president, JLT Specialty
These conversations need to happen with the CFO, experts agreed.
Finance and risk management need to look closely at what could make people afraid to come to your properties and how it would affect the balance sheet, or significantly impact share price or investor ownership value or dividends.
“Imagine if you were a company in Las Vegas and [after a terrorist event] you had to tell your shareholders that you didn’t have coverage for that, and your share price drops 20 percent,” said Addison.
When you look at what companies pay in property insurance, the potential financial exposure to non-physical could be so much bigger, he added. “You could lose a lot more by having occupancy at your hotel drop by 50 percent for three months.
“At the end of the day, the idea of something out of your control affecting your business scares the crap out of people.”
Decisions about terrorism coverage, said experts, should be part of a larger process that includes a detailed risk assessment, the creation of a comprehensive crisis management plan specific to acts of terrorism, and simple measures to reduce the likelihood of becoming a target.
A good risk assessment doesn’t have to be expensive, time-consuming or interfere with operations, said Peter DiDomenica, former director of security policy at Boston’s Logan International airport, and president of security firm Quantum Innovation Corp. It can be as straightforward as reviewing the geography and physical layout of the property and evaluating existing training and security measures.
“It’s going to give you a road map for everything else.”
Most U.S. hotels and resorts haven’t undergone the level of “hardening” common in many other countries, but it’s important to take all reasonable measures, experts said.
“We have hundreds of thousands of people at a hotel,” said the resort and casino risk manager. “If someone just starts shooting, you can have a huge loss of life that impacts your property, your workers’ comp, your liability and your reputation worse than anything else.
“The reputation is the thing that is very difficult to do anything with. So it makes sense to do as much as you can on the front end because you’re limited in what you can do after something happens.”
That said, most U.S. property owners are reluctant to anything that might appear extreme.
You want to “harden your properties, but do it in a soft way,” said Tarique Nageer, leader for U.S. property terrorism placements with Marsh USA. “By the nature of hotels, you can only do so much because they’re free-flowing places so you don’t want to impede guests or visitors … so you’ve got to weigh those needs.”
There are surprisingly simple ways to improve a property’s risk profile, said DiDomenica. Just trimming the hedges could be enough to “make it less inviting in terms of the physical environment for someone who’s going to do surveillance or plan an attack,” he said.
Staff members can also play a key role in helping to thwart an imminent attack, said Reggie Gibbs, senior underwriter and product manager with Starr Cos. In hotels, for example, they have the best handle on typical guest behavior and what might constitute a red flag.
“They can spot when a car is parked in an unusual place,” he said. “They know when a guest has been in a room for an extended amount of time and for some reason isn’t letting housekeeping in to clean.”
Brokers and insurers are key partners throughout the process. They have the experience to help insureds assess and quantify risks and coverage parameters. Truono, for instance, asks brokers to explain coverage through hypothetical claim scenarios.
“I don’t want to solely focus on coverage terms, but I also want to understand how the policy will be interpreted in the event of a claim. I want to understand how and if a claim will be covered, because in the end, that’s the inherent risk transfer value and what we are buying.”
An Evolving Risk
The forms and manifestations of terrorism keep changing, said Truono, and risk managers must continue to ensure their prevention and risk mitigation strategies evolve as well.
“A truck bomb is one type of an event with specific control countermeasures,” he said. “A lone-wolf or individuals who enter a hotel with IEDs [improvised explosive devices] or automatic weapons, however — that’s a totally different type of event requiring specialized tactics and controls, and it’s necessarily more difficult to manage.”
“How do you protect yourself against situations where someone just wants to kill people rather than destroy a building?” asked Nageer.
The harsh reality is that no one and no place is immune from terrorism acts.
“We must remain vigilant, aware and informed,” said Truono. “We need to continue to educate our people and enhance our prevention and response strategies. Our practices, processes, priorities and physical plants must be dynamic and continually adapt to ever-changing landscape and information.”
Withstanding the Storm
The impact of a hurricane or severe windstorm can be devastating.
The risk of damage to your property is even greater if you’re in a hurricane-prone state like Florida, as in the case of Miami-Dade County Public Schools (M-DCPS).
Between 2004 and 2014, M-DCPS, which owns $10 billion worth of property, received more than $30 million in assistance from the Federal Emergency Management Agency (FEMA) for damage caused by windstorms or hurricanes.
But last year, FEMA published new guidance that essentially reduced funding for properties that had received assistance in the past. If damage was caused by the same peril, FEMA would reduce its assistance by the amount required for the previous disaster, regardless of the deductible.
That’s where Scott Clark, the recently retired risk and benefits officer of M-CDPS, stepped in. To plug the gap, Clark drew up a three-year program with Swiss Re based on a parametric model of coverage.
The new “storm policy,” effective from May 1, provided a limit of $10 million per loss, with a three-year aggregate limit of $20 million. The policy is triggered by wind speeds in excess of 87.5 mph on a weighted basis.
M-DCPS is believed to be the only public entity in the U.S. that has purchased such coverage to address its FEMA shortfall.
This was in addition to a rolling three-year base windstorm property policy that provided a 10 percent to 15 percent no-claims bonus for every storm-free year, net of commissions.
“The problem was that at the time we didn’t have the ability to secure coverage for every property, and we were already spending $25 million to $30 million on property insurance as it was,” said Clark, who is a former Risk and Insurance Management Society president and director.
“So we started looking at the alternatives and that is where we brought in Swiss Re. They came up with a solution that would monitor wind speeds across all of the ZIP codes that our properties were in.
“Provided there was a sustained wind speed of 87.5mph in that area and we could provide out of pocket expenses, the policy would be triggered and pay out $10 million per loss.”
“The problem was that at the time we didn’t have the ability to secure coverage for every property, and we were already spending $25 million to $30 million on property insurance as it was.” — Scott Clark, recently retired risk and benefits officer, Miami-Dade County Public Schools
He added: “Over the last years, since there have been no significant windstorms, year after year we have made savings of 10 percent to 15 percent in the property marketplace through the no-claims bonus.
“On top of that, we have seen a 10 percent to 12 percent increase in the total insurable value of our properties, translating into an overall saving of 20 percent every year.”
“Scott is one of those amazing people who can jump from topic to topic,” said Kathy Silver, vice president at Insurance Consultants. “One minute he can discuss a complex health insurance problem, then walk into a property insurance meeting and not miss a beat. He consistently challenged himself and the people he worked with to consider new solutions and ideas.” &
Think You Don’t Need Environmental Insurance?
“I don’t work with hazardous materials.”
“My industry isn’t regulated by the EPA.”
“We have an environmental health and safety team, and a response plan in place.”
“We’ve never had an environmental loss.”
“I have coverage through my other general liability and property policies.”
These are the justifications clients most often give insurers for not procuring environmental insurance. For companies outside of sectors with obvious exposure — oil and gas, manufacturing, transportation — the risk of environmental damage may appear marginal and coverage unnecessary.
“Environmental insurance is not like every other insurance,” said Mary Ann Susavidge, Chief Underwriting Officer, Environmental, XL Catlin. “The exposure is unique for every operation and claims don’t happen often, so many businesses view coverage as a discretionary purchase. But the truth is that no one is immune to environmental liability risk.”
Every business needs to be aware of their environmental exposures. To do that, they need a partner with the experience to help them identify exposures and guide them through the remediation claims process after an incident. The environmental team at XL Catlin has been underwriting these risks for 30 years.
“Insureds might not experience this type of claim every day, but our environmental team does,” said Matt O’Malley, President, North America Environmental, XL Catlin. “We’ve seen what can happen if you’re not prepared.”
Susavidge and O’Malley debunked some of the common myths behind decisions to forego environmental coverage:
Myth: My business is not subject to environmental regulations.
Reality: Other regulators and business partners will require some degree of environmental protection.
Regulatory agencies like OSHA are more diligent than ever about indoor air quality and water systems testing after several outbreaks of Legionnaires disease.
“The regulators often set the trends in environmental claims,” Susavidge said. “In the real estate area it started with testing for radon, and now there’s more concern over mold and legionella.”
Multiple hotels have been forced to shut down after testing revealed legionella in their plumbing or cooling systems. In addition to remediation costs, business interruption losses can climb quickly.
For some industries, environmental insurance acts as a critical business enabler because investors require it. Many real estate developers, for example, are moving into urban areas where their clients want to live and work, but vacant lots are scarce. Those still available may be covering up an urban landfill or a brownfield.
“We’re able to provide expertise on those sites and the development risks so the contractor can get comfortable working on it. It’s about allowing our clients to stay relevant in their markets,” O’Malley said. “In this case, the developer is not an insured with a typical environmental exposure. But if there is a contaminant on the worksite, they could inadvertently disperse it. In a high-population urban area, the impact could be large.”
Banks also quite often require the coverage specifically because developers are turning to these locations with higher potential environmental risk.
“Though it’s not a legal requirement, insurance is a facilitator to the deal that developers really can’t operate without,” Susavidge said.
Myth: The small environmental exposure I have would be covered under other polices.
Reality: Environmental losses can result from exposure to off-site events and are excluded by many property and casualty policies.
Environmental risks on adjoining properties can lead to major third party losses. Vapor intrusion under the foundation of one property, for example, can unknowingly underlie the neighboring properties as well. The vapor intrusion can then seep into the surrounding properties, endangering employees and guests.
In other words, your neighbor’s environmental exposure may become your environmental exposure.
O’Malley described a claim in which a petroleum pipeline burst, affecting properties and natural resources 10 miles downstream even though the pipeline was shut off two minutes after the rupture. The energy company that owns the pipeline might have coverage, but what about the other impacted organizations? Many other property policies exclude environmental damage.
Sometimes the exposure is even more unexpected. In 2005, for example, a train carrying tons of chlorine gas crashed into a parked train set sitting in the yard of Avondale Mills — a South Carolina textile plant. The gas permanently damaged plant equipment and forced the operation to shut down.
“It’s not always obvious when you have an environmental exposure,” Susavidge said.
“When there is a big loss or a pattern of losses, the casualty market will typically move to exclude it,” said O’Malley. “And that’s where the environmental team looks for a solution. Environmental coverage has been developed to fill the gaps that other coverages won’t touch.”
Myth: We already have a thorough response plan if there is an incident.
Reality: Properly handling an environmental event requires experience and expertise.
In addition to coverage, risk managers need experience and expertise on their side when navigating environmental claims.
“For many of our clients, their first environmental claim is a very different experience because the claimant is not always a typical third party – it’s a government agency or some other organization that they lack experience with,” Susavidge said. “Our claims team is made up of attorneys that have specific domain experience litigating environmental claims issues.”
Beyond its legal staff, XL Catlin’s claims consulting team and risk engineers come with specialized expertise in environmental issues. 85 to 90 percent of the team members are former environmental engineers and scientists, civil engineers, chemists, and geologists.
“Handling environmental claims requires specialized expertise with contaminants and different types of pollution events,” O’Malley said. “That’s why our 30 years of experience makes a difference.”
Thirty years in the business also means 30 years of loss data.
“That informs us as a carrier how to provide the right types of services for the right clients,” Susavidge said. “It gives us insight into what our insureds are likely to experience and help us determine what support they need.”
Insureds also benefit from the relationships that XL Catlin has built in the industry over those 30 years. When the XL Catlin team is engaged following a covered pollution event, the XL Catlin claims team can deploy seasoned, experienced third party contractors that partner with the insured to address the spill and the potential reputational risk. And they receive guidance on communicating with regulatory bodies and following proper reporting procedures.
“The value of the policy goes beyond the words that are written,” O’Malley said. “It’s the service we provide to help clients get back on their feet, so they can focus on their business rather than the event itself.”
For more information on XL Catlin’s environmental coverage and services, visit http://xlcatlin.com/insurance/insurance-coverage/casualty-insurance.
The information contained herein is intended for informational purposes only. Insurance coverage in any particular case will depend upon the type of policy in effect, the terms, conditions and exclusions in any such policy, and the facts of each unique situation. No representation is made that any specific insurance coverage would apply in the circumstances outlined herein. Please refer to the individual policy forms for specific coverage details. XL Catlin, the XL Catlin logo and Make Your World Go are trademarks of XL Group Ltd companies. XL Catlin is the global brand used by XL Group Ltd’s (re)insurance subsidiaries. In the US, the insurance companies of XL Group Ltd are: Catlin Indemnity Company, Catlin Insurance Company, Inc., Catlin Specialty Insurance Company, Greenwich Insurance Company, Indian Harbor Insurance Company, XL Insurance America, Inc., and XL Specialty Insurance Company. Not all of the insurers do business in all jurisdictions nor is coverage available in all jurisdictions. Information accurate as of September 2016.
This article was produced by the R&I Brand Studio, a unit of the advertising department of Risk & Insurance, in collaboration with XL Catlin. The editorial staff of Risk & Insurance had no role in its preparation.