I’ve been practicing hospitality law for about 10 years now and am very familiar with the typical indemnity provision of a hotel management agreement. But as a new practitioner, I found it somewhat puzzling, even though I was told it was the industry standard.
Very generally speaking, the typical indemnity provision requires the hotel owner to indemnify the hotel manager for all third-party claims arising from the operation of the hotel except those claims arising from the gross negligence, fraud or willful misconduct of the hotel manager. The hotel owner’s indemnity covers third-party claims caused by the actions of hotel employees, even though the hotel is under the exclusive control of the hotel manager and, in the United States, hotel employees are usually employed by the hotel manager. Now I know that the indemnity is drafted this way because it’s a risk management tool that allows the hotel manager to balance the benefit of the management fees it receives with the level of liability that it takes on, but it still took some getting used to, until I considered it in the context of the insurance requirements of the hotel management agreement.
Is the indemnity provision as ominous as it seems? As a practical matter, the answer is no if the terms of the hotel management agreement appropriately address the insurance coverages required to be obtained by the hotel owner and/or hotel manager. If appropriately addressed, those coverages are likely to cover a vast majority of third-party claims. This is because insurance coverages for the types of claims covered by an indemnity provision of a hotel management agreement are essentially claims-based, not fault-based. But having the right insurance is key and so is understanding what claims might be excluded from coverage.
Commercial General Liability Policy
The grandfather of liability policies is the commercial general liability policy. This policy typically offers broad coverage for accidents that occur during the operation of the business. However, general liability policies also typically contain a number of exclusions, so hotel owners need to be mindful of situations where they may need an endorsement or stand-alone policy. Some of the more typical exclusions from a commercial general liability policy are for claims arising from the service of liquor, vehicles driven in connection with the business, injuries sustained by employees and illegal employment practices. Insurance for claims arising from data privacy breaches and cybercrimes may also need separate coverage.
Most states have dram shop statutes that impose liability on a business that overserves an intoxicated person. Liquor liability insurance covers claims arising from the selling, serving or furnishing of alcohol, so this coverage is key if a hotel contains a restaurant, bar or has mini-bars in the rooms. However, there are exclusions from liquor liability insurance too; for example, when a minor is served. Coverage should also be considered even if a hotel doesn’t hold a liquor license, but is hosting an event where liquor will be sold by a third party.
Another common exclusion from a commercial general liability policy is for injuries sustained by employees while performing their job. This is because workers’ compensation insurance is required by every state (and a lot of countries). But as with other types of coverages, hotel owners need to be mindful of the exclusions. Some typical exclusions from a workers’ compensation insurance coverage are if an employee is injured while commuting to or from work, is intoxicated, engaged in illegal activities or violates workplace policies. Also, if an employee is injured while engaging in horseplay in the workplace, they would likely be excluded from coverage, because such activities aren’t within the scope of employment and don’t further the objective of the business.
Employment Practices Liability Insurance Policies
One area of third-party claims that has exploded over the past 20 years is employee lawsuits. Employment practices liability insurance policies usually cover claims arising from wrongful acts arising in the context of the employment relationship. Examples of covered claims are discrimination, harassment, retaliation, wrongful termination, breach of employment contract and privacy violations, but like other policies (and maybe more so than other policies), EPLI polices contain numerous exclusions. Probably the most notable exception involves wage/hour claims, which can include claims for unpaid wages, overtime, minimum wage, missed breaks and mis-classification of employees. Also, some policies exclude punitive damages. Bodily injuries are also usually excluded, so employers should be mindful of whether their policy covers claims for mental anguish and emotional distress.
Businesses also need separate coverage if vehicles are used in the operation of a business. For hotels, coverage will be needed for shuttles and valet services. While shuttles owned by the hotel would likely be covered by a commercial auto insurance policy, a garage keeper's policy is needed for valet services because commercial auto policies don’t cover customer vehicles. In addition, garage keeper's policies commonly exclude claims for contents of a customer’s car and theft by an employee of the business.
Cyber Crimes and Data Breaches
Finally, coverage should also be considered for cybercrimes and data privacy breaches. The level of technology employed by hotels is increasing every year. You can now book a room, check in and check out without ever encountering a live person. That means that all of your personal information is stored somewhere. Cyber-liability policies can cover a wide range of damages including claims asserted by customers, business partners or employees arising from data breaches. However, these policies typically don’t cover claims arising from a computer system owned by a third party or incidents at a business subsidiary.
In conclusion, while the hotel owner indemnity of a hotel management agreement may seem overwhelming at first glance, if a hotel owner obtains the insurance coverages typically required by the agreement, the real exposure under the indemnity clause can be mitigated.
Tara Lattomus is a member in Eckert Seamans’ Wilmington and Philadelphia offices.