Navigating emerging trends and managing risk in the real estate and hospitality industries

Between periods of civil unrest and recurring COVID-19 pandemic waves, operations in the commercial real estate and hospitality sectors have been anything but "business as usual" in recent years. Those challenges have been compounded by the rise in record-high jury awards, increased frequency of catastrophic natural disasters and the subsequent trickle-down effect on the commercial insurance industry, ultimately creating a hard property and casualty (P&C) market. As underwriters look to hedge against unprecedented threats, P&C insurance premiums are rising across the board, and capacity is shrinking.¹

Nevertheless, partnering with trusted insurance professionals to understand the following emerging trends and proactively manage related risks can help position those in the commercial real estate and hospitality industries to better protect their operations. 

Nuclear verdicts

Jury awards that exceed $10 million, dubbed nuclear verdicts, have been skyrocketing for the last 10 years across the country. In fact, the median settlement of the top 50 U.S. verdicts rose from $28 million in 2014 to $58 million in 2018.² This trend of mega jury awards is driven by three main factors:

1. Social inflation—The public's trust in large businesses and attitudes regarding who should be held responsible for consumer injuries are shifting, driving up the cost of jury awards. There's a prevailing attitude that companies should take full responsibility for the safety of their products and services, stirring distrust of large businesses and amplifying jury award settlement amounts. A recent survey of jurors revealed that 88% believe companies should take "any and all precautions" to ensure the safety of their products; 58% believe that a corporation always holds some responsibility for a customer's product-related injury, even if the customer misuses that product.³
2. Litigation funding—As plaintiff attorneys hunt for liability targets, financial investors are lining up to fund litigation in exchange for some of the award, driving the potential for larger-than-expected damages. According to Bloomberg, litigation funding has ballooned into a $39 billion global industry.⁴
3. Trial tactics—Because of the prevailing perception that companies should take full responsibility for the safety of their products and services, plaintiffs' attorneys have changed their trial approaches, appealing to jury members' fears by stirring anger. Doing so can redirect a jury's focus and significantly inflate the value of a claim.⁵

Commercial property reuse

As small businesses across industry lines continue to struggle and many offices are still not back to pre-pandemic occupancy levels, the pandemic's long-tail economic effect on commercial real estate has property owners and operators thinking creatively about how to make use of building spaces. This, coupled with continued low interest rates, has spurred a major trend to repurpose commercial buildings.⁶ This entails making property adjustments to allow a building to be utilized for alternative operations than initially intended. For example, retail buildings can be repurposed into warehouses or distribution centers to accommodate e-commerce functions rather than in-person sales. Yet, repurposed buildings may pose new liability exposures. Here are some factors to consider when repurposing properties:

• Local regulations must be followed. Most municipalities have specific zoning ordinances. These laws determine which types of businesses are permitted to operate within certain areas. When repurposing their buildings, property owners should ensure that their updated spaces are compliant with all applicable zoning regulations. Also, property owners should confirm that their repurposed buildings follow all necessary life safety codes and National Fire Protection Association standards.⁷ 
• Building utilities may require adjustments. Properties' utility needs are dependent upon their specific operations. As buildings are repurposed, their utilities may need to be adjusted to accommodate any functional changes. Property owners should consult qualified contractors to determine the utility needs of their repurposed buildings. 
• Insurance needs will likely change. Property owners who repurpose their spaces will likely need to update their coverage to adequately reflect their current exposures. It's important to work with a trusted insurance professional amid the repurposing process to ensure proper protection.

Restaurants

Restaurant owners have always had to manage unique liability risks related to their customers, staff, businesses and reputations, but the pandemic has added new pressures, shifting potential liability exposures. Transitioning from in-person dining to services such as curbside pickup, delivery and carryout creates a host of risks, such as slips and falls by customers and staff, potential contact with vehicles during curbside operations and the ongoing threat of foodborne illnesses. In response, restaurant owners should review their shifting exposures and adjust their policies and procedures to ensure proper mitigation. Specifically, the following exposures need to be addressed:⁸

• Food safety exposures—Food safety is a unique concern for restaurants, making it essential that employees are trained on appropriate food handling and storage protocols. Adopting effective food safety procedures can ensure customers receive delicious and sanitary meals, reducing the risk of related liability incidents.
• Auto exposures—It's common for restaurants to partner with third-party platforms such as Grubhub and Uber Eats for food delivery operations. However, if restaurant owners implement their own delivery services, their liability exposures may increase. These liability concerns can stem from delivery drivers causing property damage, being injured in accidents on the road, getting robbed while carrying cash or food, or slipping and falling while making deliveries. As a result, delivery drivers should be properly vetted and trained to minimize risks.
• Liquor liability exposures—Amid the pandemic, some states have loosened laws on selling alcoholic beverages to go, implementing new policies for liquor handling. Yet, selling and serving liquor can lead to additional liabilities for restaurants, particularly if customers are overserved and cause harm or damage while under the influence. Considering these exposures, restaurants should make it a priority to uphold safe liquor serving protocols.

Hotels and business travel

As virtual meetings became the norm virtually overnight, businesses reassessed the need - or the lack thereof - for in-person conferences, gatherings and events. This trend has hit hotel revenues hard. It's estimated that large-scale conferences and meetings contribute to one-third of business travel, creating challenges for hotels that cater to this type of traveler. While many hotel owners and managers remain concerned about revenue, a recent business travel poll found that 40% of respondents said their company has already resumed nonessential domestic business travel.⁹

Furthermore, the outlook on conferences shows a trend of smaller, regional conferences becoming more popular. As business travel shows signs of a slow return, there are three bright spots for hotel owners: the rise of "bleisure" (the combination of business and leisure travel); vacation travel significantly rebounding in many places due to pent-up consumer demand; and hotel properties being repurposed for other uses, such as affordable housing, senior housing and even office spaces.¹⁰

• Optimize the guest experience Employ the use of apps for contactless mobile check-in, payment and digital room key access. Doing so can streamline various processes and support social distancing protocols. However, it's important to consider the cybersecurity risks that may accompany these digital practices.
• Utilize proper hygiene controls. Follow the Centers for Disease Control and Prevention's (CDC) guidelines regarding cleaning practices and maintain ongoing compliance, as outlined in written policies.¹¹
• Keep services intact. If revenue is down, don't look for savings by cutting certain procedures, such as regularly servicing sprinkler systems, emergency lights or other life safety features, including hiring lifeguards for pool areas and maintaining on-site equipment.
• Manage reuse risks. For repurposed hotels, identifying and managing liability risks is vital. For example, if a property had a pool when it was a hotel, it's crucial to ensure it is maintained and that only authorized people use it after the building has been repurposed.

Vacant buildings

With offices' adoption of work-from-home policies and retail storefronts trying to compete with the increase of contactless online shopping demands amid the continued pandemic, building vacancy is on the rise. Vacant buildings create unique liability concerns because they tend to be in poorer condition and can become a nuisance, as they are prone to pests, vandalism, theft and fire risks. 

Liability concerns for unoccupied properties stem from many sources, such as lapses in pest control and security services, a lack of safety protocols and pollution problems from improperly stored equipment or chemicals. Risk mitigation is unique to the vacant premises but generally includes:¹²

• Conducting regular building inspections and maintenance, making repairs as needed
• Ensuring cleaning and pest control services remain active
• Prioritizing security through the use of property lighting, surveillance cameras and alarm systems
• Consulting insurance professionals to determine whether coverage adjustments are necessary

Pandemic-related liability exposures

As offices shuttered, retail businesses' foot traffic came to a halt, hotel bookings nosedived and restaurants pivoted to outdoor seating and takeout, the impact of the COVID-19 pandemic on the commercial real estate and hospitality industries has been far-reaching. Although operations have largely resumed since the initial onset of the pandemic, a tenant's, customer's or visitor's potential on-site exposure to COVID-19 means managing liability risks will be an ongoing issue - especially as some insurance carriers exclude coverage for losses stemming from communicable diseases.¹³ To manage pandemic-related liability exposures, commercial real estate owners and hospitality businesses can take these proactive loss control steps:

• Maintain compliance. Follow the CDC's guidelines for cleaning practices and maintain ongoing compliance as outlined in written policies.
• Communicate. Share with tenants, visitors and/or customers what they can do to prevent the spread of COVID-19. Posting cleaning and exposure protocols in common areas and/or on a website is a beneficial and efficient way to communicate health and safety best practices. 
• Adopt and implement a "healthy building" initiative. People's health can be sustained by well-maintained buildings, the upkeep of which includes ensuring proper ventilation and air quality. Yet, an estimated 25% of U.S. office buildings are more than 60 years old, thus posing added air quality concerns due to outdated ventilation systems.14 Regardless of the type or age of a building, ensuring heating, ventilating and air conditioning systems bring in clean, filtered air is important. With this in mind, older buildings should be retrofitted with updated systems to provide occupants with adequate air quality and minimize COVID-19 exposures.
• Configure safe layouts. To support healthy workspaces for tenants and employees, configure property layouts that reduce the risk of COVID-19 exposure through appropriate social distancing based on current CDC guidelines. 

Collaborating with the right insurance partners is key

For commercial real estate and hospitality businesses navigating operational shifts due to the pandemic and other emerging trends, partnering with knowledgeable insurance professionals who specialize in their respective industries is essential. This entails asking the right questions during the coverage assessment process and asking these professionals how their experience, industry expertise and available services can prove beneficial. By working with the right insurance partners, businesses can obtain the resources and guidance necessary to meet their unique coverage and risk management needs – including access to customized loss control solutions, specialized claims handling options and top underwriting talent.