Hotels Shifting to Extended-Stay Properties Face Greater Scrutiny from Insurers


Although extended-stay hotels do not make up a large part of the industry’s capacity, more operators are switching to this business model. Extended-stay hotels are increasingly profitable for their owners. That’s because they have relatively steady occupancy and they can maintain a lower staffing level. Plus, they do not need to provide as many services as transient hotels have to in order to attract guests. The high profit margins enjoyed by operators of extended-stay properties are an attractive incentive for others to transition their properties from transient hotels to extended-stay properties.

Some hotels transitioned to extended-stay properties out of necessity during the pandemic. For example, many housed healthcare workers for a prolonged basis. Now, some cities are using extended-stay properties to house asylum seekers or even as temporary housing shelters during emergencies. Los Angeles is considering a proposal that would require vacant hotels to provide rooms to homeless people.

In some cases, these uses are still only for a short-term period that would allow a hotel to remain categorized as a transient property. However, when arrangements are long-term, an insurance company begins to view the hotel as coming with a different set of risks. From a risk profile perspective, short-term properties and long-term properties present two different groups of considerations.

Although profit margins for extended-stay properties are high, one expense that operators can expect to increase is their insurance premium. Insurance companies must price an entirely different set of risks when the nature of a hotel business changes. That’s in part because with extended-stay properties, there will be different types of guests who engage in different types of activities as compared to those at transient hotels.

Extended-Stay Properties Have Different Risk Profiles

When people are living at a hotel for any period of time, there are different daily activities that threaten potential harm to the structure. For instance:

  • There is a greater likelihood that people will smoke in an extended-stay hotel, raising the fire risk
  • The fire risk can also increase when people are cooking at a property on a daily basis
  • There may be more people living in a room at an extended-stay hotel, raising the overall risk profile
  • Extended stays mean customers engaging in activities on a regular basis that could potentially cause expensive damage, such as water damage

In a sense, the typical hotel room is not properly matched to the purpose of an extended-stay property. The average hotel room is not designed or built to withstand the rigors of daily life. They are more fit to accommodate basic sleeping and daily needs. When hotels are used on an extended-stay basis, the rooms sustain more wear and tear.

In addition to the prospect of physical damage, there may be more illicit activities that happen at an extended-stay property. Unfortunately, there will likely be a higher rate of illegal drug use and other unlawful activities at an extended-stay property than there would be if the property was a transient hotel.

Hotel Insurance Rates Are Already Increasing

The hotel industry already faced rising insurance rates since the start of the COVID-19 pandemic. Some of the increase is due to supply chain disruptions and catastrophic weather events. Insurers have also had to charge more because of rising construction costs and inflation in general. Further, some insurance companies have left the space, leaving those that remain to increase prices to reflect their additional risks. In total, some industry watchers estimate that many hotels are paying roughly 25 percent more for property and casualty insurance than they were at the beginning of the pandemic.

Insurance Companies Must Deal with Uncertain Risks

One major issue with properties transitioning from transient hotels to extended-stay properties is that their insurers are left with an entirely different set of risks than they initially contemplated when they wrote their original policy. Additionally, extended-stay properties and their uses are continuously evolving, and insurance companies may end up footing the bill for damages that they did not anticipate.

Adding to the uncertainty is the fact that some hotels have a mix of transient and extended-stay guests. When a hotel purchases an insurance policy, conditions could change months or years into the policy.

For now, underwriters are still willing to provide insurance coverage for extended-stay properties. However, operators can expect an extensive set of questions about the hotel’s risk profile. Underwriters need to understand the individual property before they can provide a price for a policy. Otherwise, insurance companies could be left to face large risks that they had not properly priced.

Insurance Companies Must Increase Their Knowledge Base

Since extended-stay properties are fast becoming a growing segment of the market, insurance companies need to learn more data points. For now, insurance companies are doing things like increasing deductibles to offset some of the uncertainty. If conditions change, the insurance company can always raise rates and introduce exclusions when a policy is up for renewal. For example, insurance companies have written exclusions that prohibit extended-stay properties from housing COVID-19 patients or homeless people.

Insurance companies need to anticipate how risks may change relating to the extended-stay industry. These hotels may still be a continued source of profits both for their operators and their insurance companies, provided that their insurance companies react to developments and appropriately change their policies without increasing premiums so high that these properties take their insurance business elsewhere. Insurance companies should exercise forethought in drafting policy exclusions to protect against future risks. Part of this involves asking extensive questions of hoteliers when considering a policy. The more that insurance companies learn, the more they can adjust their policies to reflect potential risks.

For hotel properties that transition to extended stay, they must also take steps to deal with the different risks, such as aggressively enforcing fire safety measures. In addition, hotels should also go to great lengths to know who is staying on their properties. They should also control the entrance to the property. Their own safety practices, and how they maintain their property, could impact how much they pay for insurance. Find out how insurance defense attorneys at MehaffyWeber can help you. Contact us today.