COVID-19: Addressing the Risks of Nontraditional Hotel Use

The COVID-19 pandemic has led to severe disruptions of the global economy and many industries, including hospitality. The pandemic has forced hotel owners and operators to take drastic response measures, including furloughing and terminating employees. In many cases, hotel properties have been closed while governments and health officials focus on social distancing to slow the virus’s spread.

Among other effects, the rise in COVID-19 cases across the US has contributed to a lack of hospital beds to treat COVID-19 patients and others. As a result, state and local governments may seek to use hotel properties — and other unoccupied locations — as operating spaces, to quarantine individuals, or to house essential workers. As the pandemic continues, hospitality companies may also provide voluntary aid to local communities. These nontraditional uses of hotel properties, however, can present significant risks and raise insurance questions that owners, risk professionals, and legal counsel must carefully consider.

Contract Negotiations

Whether through government procurement or voluntary offerings, hotels can offer significant value to authorities during the pandemic, including:

• To house quarantined individuals with actual or suspected COVID-19 infections.
• As hospital facilities to treat COVID-19 patients and others.
• To house doctors, nurses, and other health care workers, including potentially allowing them to remain close to medical facilities.
• To house National Guard troops or government workers.
• To provide food and beverage facilities for overflow meal service for patients, health care workers, and others.
• As laundry facilities for the overflow of hospital linens.
  

Whether the above activities are undertaken voluntarily or due to governmental requirement or mandate, hotel owners and their counsel should seek to secure strong indemnification and insurance requirements, including additional insured status, waivers of subrogation, and primary and noncontributory wording. In certain cases, government contracts may not allow for alteration, but private party contracts generally allow for amendments.

Hotel owners should be prepared for liability caps that may not exceed $5 million. Contracts should be carefully reviewed by legal counsel, and insurance provisions should be reviewed by hotels’ insurance brokers and advisors. Insureds should also seek legal counsel with respect to any government immunity that may be afforded to them. Such immunity may address potential concerns of underwriters, who might otherwise resist the addition of what insurers might view as new or different risks than those contemplated at policy inception. Insureds should also ask for copies of government agencies’ insurance policies to evaluate any potentially applicable exclusions.

Property Insurance

Many property policies do not have change of use provisions, but insureds should review their policies and consider informing insurers of any change in intended use. If the risk will continue to be the housing of people or guests on a short-term basis, depending on the specific use, there may not be a large difference in risk exposure.

Modified use of hotel properties could mean that rooms contain medical equipment and supplies owned by the government or private health care facilities. A hotel’s insurer(s) may not want to insure these matrials, which could be expensive. One approach to addressing this exposure is to clarify during contracting that onsite medical equipment and supplies will be insured by the owner/lessor of the equipment rather than the hospitality owner.

Workers’ Compensation

Depending on the intended nontraditional use involved, many hotel employees — including maintenance, engineering, and housekeeping staff — will need to remain onsite. These employees could face greater exposure to COVID-19 and may file workers’ compensation claims. Although workers’ compensation statutes and case law can vary by state, compensability generally requires that an illness or disease be “occupational,” which essentially means that the illness:

1. Arises out of and occurs in the course and scope of employment, which will normally be determined by whether an employee was benefitting the employer when exposed.
2. Is proven to be the result of a workplace exposure.
3. Is “peculiar” to the employee’s work, meaning that the disease is found exclusively among or presents greater risk for certain employees.

Hospitality workers are among those with a higher likelihood of occupational exposure to COVID-19. It could be difficult to determine, however, whether an employee has contracted the illness in a hotel, especially if it is converted for nontraditional use. For example, hospitality workers may be infected by guests of a converted hotel — including COVID-19 patients and health care professionals — along with coworkers, family members, neighbors, and strangers.

Whether a specific case is compensable will be determined by the facts established during an investigation of the claim, as well as the jurisdiction’s governing law. Additionally, since there is no single “test” that can prove whether an illness or disease is compensable, it may ultimately come down to a decision by a court or state workers’ compensation board.

If an employee contracts COVID-19 through work and claims that the infection is a result of the employer’s negligence, the employee may sue their employer. If a spouse or immediate family member of that employee is infected, that family member could also make a claim that may be recoverable under employers’ liability coverage provisions. Hotel owners and risk professionals should consider these potential claims when deciding whether to change the intended use of a hotel.

If a hotel employee alleges a work-related exposure to COVID-19, the hotel’s risk management team should:

1. Report the potential claim to third-party administrators and/or insurers.
2. Have legal and claims experts carry out a timely initial investigation.
3. Determine if the employee has been tested for COVID-19.

General Liability and Umbrella and Excess

The nontraditional use of hotels could lead to claims brought by third parties for bodily injury or property damage resulting from hotels’ alleged unintentional or negligent failure to protect from the virus. Such claims may fall within the basic coverage grants of many general liability policies, as well as those in many umbrella and excess policies.

Depending on the circumstances, however, insurers may seek to assert a variety of potential coverage defenses, including:

• Intentional act exclusions: Depending on the circumstances, insurers may contend that coverage is excluded because a hotel acted “intentionally.” Although such exclusions are often construed narrowly and their application restricted to situations where the insured actually intended the specific injury alleged, the merit of the position will depend on the facts and applicable law. Hotel owners and risk professionals should review potentially applicable language in their policies and discuss their potential risk with brokers and insurers before deciding to proceed with any nontraditional use of hotel properties. Hotel owners and operators should also seek to secure government immunity for this risk during contract negotiations.
  
• Pollution exclusions: Insurers may contend that bacteria and viruses constitute “pollutants” under the pollution exclusion. Certain policies define “pollutants” to include viruses; others specifically provide that viruses do not constitute “pollutants”; and some are silent on the issue.
• Fungi/bacteria exclusions: Although COVID-19 is not itself bacteria, illness may occur due to secondary infections brought on by the virus.
• Communicable disease exclusions: Removing these exclusions going forward — if possible — should be a priority for policyholders and their advisors. Availability of policies without communicable disease exclusionary language is likely to depend on the nature of the risk, in addition to market conditions.

The potential applicability and scope of each exclusion will likely depend on court precedent and the factual circumstances of the claim.
 
Most umbrella policies include crisis management or strategic response sublimits. These services may be useful to hotel owners in the event of losses at their properties, whether they are repurposed for nontraditional uses or not.

Most hospitality insurers have expressed that they will evaluate nontraditional use on a case-by-case basis. Generally, insurers will require underwriting information, which can include:

• Contracts.
• Certificates of insurance.
• Information on the scope of alternative use, including intended duration.
• Property details.
• Exposure estimates.
• COVID-19 protocols.

The pandemic remains a fluid situation for many businesses, including hotel operators. The answers to critical risk management questions — along with government policies and support — will continue to evolve as conditions change and potential losses develop. Hotel companies should work with their advisors, including insurance brokers and legal counsel, to manage contractual risk, understand how insurance policies will respond, and seek to ensure seamless operations and risk mitigation while COVID-19 remains a threat.

For more information, contact your Marsh representative or:

Christian Ryan
US Hospitality, Sports & Gaming Leader
Marsh
1-214-303-8115
christian.ryan@marsh.com

Caitlin Costello
Senior Vice President
Marsh
1-212-345-3948
caitlin.costello@marsh.com