Hotels that shift from short-term to extended-stay properties face greater scrutiny from insurers and potentially rate increases and tightening coverage, experts say.

Water damage, slip and fall accidents, fire and security risks are among insurer concerns. Hotel owners and operators need to inform brokers and insurers of any operational changes immediately, they say.

In recent weeks, New York City announced plans to lease various underused hotels to house asylum seekers, and an initiative that would require hotels in Los Angeles to provide vacant rooms to homeless people will go before voters in 2024, the City Council decided in August.

Communities may use hotels as emergency or temporary shelters in extreme weather or disasters, for homeless populations and as relief centers for migrants. Many hotels also adapted their operations during the pandemic, opening their rooms to health-care workers and other extended-stay guests.

If a hotel provides temporary or shelter housing, whether for a displaced or migrant community and it’s still on a nightly basis for a short period of time, the risk profile doesn’t change much, said Kimberly Gore, national practice leader of Hub International Ltd.’s hospitality practice, who is based in Myrtle Beach, South Carolina.

But if a hotel wants to engage in a lease with a municipality, such as New York, that could “change their classification from what we consider a hotel insurance definition to a long-term solution,” Ms. Gore said.

Hotels should expect additional questions and even a supplemental application conversation with underwriters, and “it may or may not change their insurance rating,” she said.

When a hotel shifts to long-term rentals, there tends to be greater wear and tear on the property because conventional hotel rooms are not designed for full-time occupancy, said Alexandra Glickman, senior managing director, global practice leader, real estate and hospitality, at Arthur J. Gallagher & Co. in Los Angeles.

Insurers also have liability concerns about potential drug use and dealing, and sexual abuse and molestation, Ms. Glickman said.

“The underwriters will look at this as a much higher risk, asset and operation, so that’s going to correspond to increased pricing,” and greater likelihood that it would go into the excess and surplus lines market, she said.

There’s also a strong possibility that deductibles and retentions would increase, she said.

Currently, the market still has a willingness to provide coverage, but underwriters are doing their due diligence to understand the protections in place, said Michael Rouse, New York-based U.S. property practice leader at Marsh LLC.

“In some instances, they are adjusting deductibles to contemplate for perhaps a different type of loss frequency,” that would be expected from a longer-term stay or residential-type risk versus a hotel operation, Mr. Rouse said.

Insurers are being presented with a different type of exposure than what they signed up for, said Brad Brown, program president at Griffin, Georgia-based Southern Hospitality Underwriters Inc., part of CRC Group Inc.

More insurers have exited this class of business and those writing it have introduced manuscript endorsements that may specifically exclude housing of COVID-19 patients, housing of COVID-19 workers and homeless people, Mr. Brown said.

“There are many endorsements to address what is truly a new exposure in this class of business,” he said.

Depending on how hoteliers respond to underwriters’ additional questions, there may be a slight increase in rate, said John Welty, Exton, Pennsylvania-based president of Suitelife, a managing general underwriter and part of Ryan Specialty LLC.

It’s a question of whether the right practices are in place and “if they are, there should be little change in the overall rating of an account,” Mr. Welty said.

That’s not necessarily a reflection of the shift to extended stay but a function of the insurance marketplace and supply and demand, he said.

Market conditions have been choppy for the hospitality sector coming out of the pandemic and on top of the general market hardening, brokers said. 

Hotels have seen rate increases of 25%-plus on both the casualty and property side since 2020 in the early days of the pandemic, Mr. Brown said.

Hoteliers should get a legal review of the agreement that a city or state is offering and ask themselves, “Is my return on investment, based on this agreement, sufficient for me to sustain the type of quality account that I want to be in this marketplace?” Mr. Welty said.

They need to consider how this change will impact other guests and share the agreement with their broker or agent, he said.

One client originally attracted to the notion that it could fill up its hotels recently “made a decision that it didn’t want to commit to this bright object,” Ms. Glickman said.

“And it was (in) a major metropolitan city, so the rent was outweighed by the risk,” she said.

Security, safety issues among top concerns facing evolving industry

Hotel operators need to think about managing risks in a different way when a property becomes extended stay, experts say.

From a loss prevention and loss control perspective, a long-term-stay hotel becomes more of a habitational risk, said Stephen McKay, U.S. property risk advisory leader at Marsh LLC in New York.

Greater vigilance around fire protection — such as enforcing no-smoking rules and designating outdoor smoking areas, inspecting rooms regularly to prevent water damage, and minimizing occupancy loads in rooms — are steps hotel operators can take to manage the risks, Mr. McKay said. 

Security and safety are top liability concerns in hospitality and lodging, said Kimberly Gore, national practice leader of Hub International Ltd.’s hospitality practice, who is based in Myrtle Beach, South Carolina. 

“Knowing who is supposed to be on the property, who is coming in and out, and locking of doors” should be priorities, Ms. Gore said. 

When a hotel has a mix of both short-term and extended-stay guests, this becomes even more important as there may be additional visitors to a property providing social and other services, she said.

Managing possible language barriers is also critical, said John Welty, Exton, Pennsylvania-based president of Suitelife, a managing general underwriter and part of Ryan Specialty LLC.

“Whatever the languages, do you have staff that can communicate?” Mr. Welty said. 

The bottom line is cleanliness and overall security of the property, said Brad Brown, program president at Griffin, Georgia-based Southern Hospitality Underwriters Inc., part of CRC Group Inc.