September 01, 2002

Threats of Terrorism: Practical Implications for Day-to-Day Hospitality Operations (2002, 16:05)

Threats of Terrorism: Practical Implications for Day-to-Day Hospitality Operations

Probate and Property, September/October 2002, Volume 16, Number 5

By Stephen C. Barth and San San Lee

Because of the broad-based impact of the events of September 11, 2001, hospitality operators have been forced to change their methods of doing business from both economic and legal perspectives.

Because of the broad-based impact of the events of September 11, 2001, hospitality operators have been forced to change their methods of doing business from both economic and legal perspectives. Economically, the industry has been decimated in some locales by major shifts in the income streams of many businesses. As a result, operators have been forced to scale back operations and offer deep discounts in an attempt to weather the storm. From a legal standpoint, the danger from terrorist acts, once not reasonably foreseeable, now must be considered as safety and security systems are re-examined and steps are taken to protect the safety and well being of guests, employees, and facilities, as well as the financial condition of the hospitality industry.

This article attempts to create awareness among hospitality legal practitioners about concerns that must be considered and addressed because of the threat of terrorism. The practical implications for day-to-day operations will be discussed, as will issues in the insurance and management contract areas.

The Daily Routine

The practical impact of September 11 on the day-to-day operations of hotels has been and will continue to be pervasive. In the short term, employee selection processes and monitoring need to be scrutinized and tightened. Guest information protocols must be established, as well as procedures for handling illicit items, such as weapons, found in hotel rooms. Vendors of all types, but particularly food and beverage providers, must be qualified, and new vendors must go through a significant screening process to ensure the integrity of their products and reliability of their personnel. A delivery system into secure areas of the hotel must be developed. Bailment issues, including valet parking and luggage storage, must be readdressed, and serious consideration must be given to potential breaches of security that could arise out of those relationships.

Employee Selection Processes

The legal theory of negligent hiring was alive and well before September 11, but the events of that day have emphasized the need to strengthen screening devices used by employers who operate facilities where the general public gathers.

Negligent hiring suits typically arise after an employee harms a customer or a co-worker. Under a negligent hiring theory, employers have a duty to “conduct background checks and otherwise inquire into the competency or fitness of an employee before extending an offer of employment. Although the employer’s investigations may not reveal all of the negative attributes of the individual, the employer must be able to establish that it exercised reasonable diligence in attempting to ascertain such attributes.” Katrina Grider, Avoiding Legal Pitfalls in the Pre-Employment Selection Process, Advanced Employment Law Conference, University of Houston, Aug. 16-17, 2001, at 7.

At a minimum, hospitality employers need to verify the accuracy of information provided by the applicants and ensure that references are valid. Additional screening techniques should include criminal history checks and drug screenings. Applicants should be informed up front about any background checks or investigations. Their written consent should be obtained before the verification, investigation, or screening takes place.

To Search, Look, or Listen in on . . . That Is the Question

Once an applicant has been hired, how closely should the employee be monitored? In the past, operators have been cautious about monitoring employees because of privacy concerns. Since September 11, however, it has become much easier for an employer to justify monitoring employee activity.

The American Management Association estimates that a significant number (up to 40%) of U.S. businesses monitor their employees electronically, such as by listening in on phone calls, reviewing voicemails, computer files (such as sites visited on the web) or e-mails, or by some form of video surveillance. That number grows even higher if companies that monitor their employees in other ways, such as locker, bag, and desk searches, are counted.

Many companies believe they are protecting their proprietary business interests by monitoring employees and their work product. In addition, as companies establish work conduct guidelines to comply with the law (such as zero tolerance policies for workplace violence, weapons on the premises, and sexual harassment) monitoring enables them to ensure compliance with the guidelines. As service-oriented businesses, hotels also want to check up on the quality of the work performance of employees. Accordingly, compelling reasons exist to incorporate a monitoring program.

Whether a particular monitoring technique is legal usually depends on whether

•   The employee had a legitimate expectation of privacy as to the item searched or the information, conversation, or area monitored.

•   The employer obtained the employee’s consent for, or at least provided notice of, the monitoring activity.

•   The monitoring was performed for a work-related purpose and was reasonable under the circumstances.

•   The search or monitoring was done in a reasonable and nondiscriminatory manner.

Elizabeth Rogers, Workplace Privacy Issues in the Twenty-First Century, Employment Law Seminar, University of Houston, Mar. 19–20, 1998.

If a company decides that a monitoring system is needed, one expert has suggested that to play it safe, a reasonable and prudent operator should develop monitoring procedures that include at least the following components:

•   Notify all employees of the company’s intent to monitor, the means by which the monitoring will occur (searches, video, recording conversations), and the locations of the monitoring (e-mail, voicemail, phone calls with customers, locker searches, bag searches, Internet sites contacted). This should be accomplished through as many avenues as possible and published frequently, i.e., in employee manuals, company newsletters, and screensavers.

•   Have all employees sign a consent form for the monitoring and searches.

•   Authorize monitoring techniques for legitimate business purposes only.

•   Ensure that the techniques are fairly applied and do not unfairly affect any particular subgroup of employees.

•   Conduct the monitoring by the least intrusive means possible. (Do you have to read every e-mail or will a random sampling suffice?)

•   Document the business purpose for the monitoring and the techniques used. (Evidence usually prevails in litigation.)

•   Ensure that whatever techniques are used, the legitimate privacy rights and dignity of employees are to be respected. This is a difficult balancing act but one in which successful operators must become adept in the future.

Id.

Guest Privacy Issues

Guest Room Privacy

The courts historically have held that hotel guests renting hotel rooms should enjoy many of the same constitutional rights as they would in their own homes. The hotel staff is allowed to enter a room for routine maintenance, cleaning, and emergency services such as might be required in a fire or other disaster. Stephen C. Barth, Hospitality Law 248-49 (2001). A guest has the right to expect, however, that no unauthorized third party will be allowed to enter the guest room. Id. at 249.

There will be occasions when local or federal law enforcement officers, for reasons they believe are valid, will demand entrance into a guest room. Hotels need to be prepared for such a request. The following steps should be helpful:

•   Attempt to cooperate with a legitimate law enforcement official, but balance that cooperation with the guest’s right to privacy.

•   Ask to see a search warrant. Courts have ruled that hotel guests have a constitutional right to privacy in their rooms and cannot be subject to illegal search or seizure. Hotel managers should not allow a guest’s room to be searched by police without a proper search warrant.

•   Document the event for the hotel’s protection. This documentation would include securing identification information from the law enforcement officer, identification of the official police unit requesting the search, the specifics of the request, and any witnesses to the request.

Two exceptions to this procedure should be noted. Once the guest is no longer a guest, the hotel is not under any obligation to preclude access to the room. In addition, in the event law enforcement personnel are called to assist hotel management in keeping the peace or protecting rights of other guests, law enforcement personnel may be allowed access even to privately occupied rooms to enforce the law.

Guest Records Privacy

Just as a guest’s room is private, so too are the records created by the hotel documenting the guest’s stay, including such items as phone records and the electronic databases that record room ingress and egress as part of an electronic locking system. Historically, guests have had an expectation of privacy with regard to such records. But if a court order or subpoena is issued for the records, then the hotel must provide the records in question or seek legal counsel to inform the court why it is unable to comply or should not have to comply with the court order. Barth, supra, at 250. Hotel operators must also determine if a local ordinance exists that gives law enforcement officers the right randomly to check hotel registration records.

Discovery of Illicit Items in Guest Rooms

Although a hotel guest has the exclusive right to the room subject to the previously mentioned exceptions, the hotel has a duty to exercise reasonable care to protect not only the safety of that guest but also the safety of other guests. Accordingly, if a hotel employee enters a guest’s room for a lawful purpose and finds evidence of illegal activity, such as illicit drugs or weapons, the hotel staff needs to report the circumstances to law enforcement authorities. Norman G. Cournoyer et al., Hotel, Restaurant and Travel Law 332 (5th ed. 1999). Nevertheless, it is still better to insist that the law enforcement agency obtain a search warrant before allowing access to the occupied room.

Is There a Duty to Enter a Guestroom Daily?

It has long been held that an innkeeper has a special relationship with his or her guests. Hotels and motels offering rooms for rent have a duty of reasonable care to provide premises to their invitees safe from foreseeable risk or danger. However, lodging operators are not insurers of their guests’ safety. There is no support in the literature or in industry practices for an expressed or implied duty by a lodging operator to check on each guest’s safety on a daily basis. John E.H. Sherry, The Laws of Innkeepers for Hotels, Motels, Restaurants, and Clubs 219 (3d ed. 1993).

Guest privacy, as previously noted, should be disturbed only for emergencies, housekeeping, and maintenance, especially when a guest has requested privacy. The events of September 11, however, may require changes to the common custom and practice. Hotels may want to consider implementing a procedure that includes entry by housekeeping or security employees into each room at least once a day in order to check on the facilities for the safety of the guests occupying the room, the safety of the other guests staying at the hotel or participating in events at the facility, and the safety of the general public.

The Integrity of the Food Chain

Innkeepers that serve food and beverages as a service to their guests have a duty to serve food and beverages that are fit for consumption. U.C.C. § 2-314. The threat of widespread contamination via a breach in the food delivery system is real and potentially severe. Accordingly, hotel operators must ensure not only that their preparation methods are safe but also that their food handling staff is screened and that their products are obtained from qualified vendors. New vendors should also be thoroughly screened for integrity in personnel and delivery practices. Steps need to be taken to preserve the integrity of the delivery process until the food is delivered into a secure area of the hotel, after which access to food storage areas would also have to be restricted.

Forseeability

Foreseeability for the criminal acts of third parties has been the fulcrum for the issue of liability for some time. See Zeph v. Hilton Hotel & Casino, 786 A.2d 154 (N.J. Super. Ct. App. Div. 2001). After September 11, it is now clearly foreseeable that terrorist acts can and will occur in the United States. This is particularly applicable to any place of public accommodation where people tend to gather, which includes many hotel operations.

The real issue, after September 11, is the standard of care that a reasonably prudent hotel operator must meet under the same or similar circumstances. As a practical matter, hotels might be easier targets than airplanes. On any given day, more people tend to congregate in one central location in a large hotel than on even the largest of airplanes. The general public has unrestricted ingress and egress. Valet parking systems enable anyone (including a nonguest) to deliver a car to be stored temporarily. The baggage storage amenity for guests and nonguests alike is also a concern. Because a perpetrator’s desire for self-preservation can no longer be considered an absolute in the equation, the operator’s task becomes exponentially more difficult.

Throughout the history of hotel operations, different standards of care have applied to different levels of hotel operations. Sherry, supra, at 219–20. Accordingly, the standard of care for operators in response to a foreseeable terrorist threat will vary depending on location, the symbolism of the facility, the international activity of the facility, the level of service provided by the facility, and the inherent expectations of the guests.

In addition, operators need to consider whether it is appropriate to check photo identification (and to the extent possible its validity) for transient guests; to conduct routine or random inspection of cars that are valet parked and baggage that is temporarily stored with the hotel; and to implement a rule to limit storage of bags or valet parking to registered guests. Because some terrorists seem unconcerned with “self-preservation,” however, there is no guarantee that any process will fully protect the hotel guests, employees, facilities, and the general public.

Will There Be Insurance?

Since the events of September 11, availability of insurance coverage and increases in premiums are additional concerns to the hospitality industry. The commercial insurance market was already beginning to harden before September 11, primarily because of claims for natural disasters, increases in general costs, and the expanding number of claims. But coverage was still readily available then. The immediate response by the insurance industry to the events of September 11 has been to narrow the scope of coverage and increase premiums. For a discussion of these issues, see Jo-Ann Marzullo’s article, Dealing with Insurance Exclusions in Response to Terrorism, appearing at page 37 of this issue.

Hotel owners and operators are expecting a 40% to 50% increase in premiums for property and casualty insurance and business interruption insurance coverage above pre-September 11 levels. This increase will have disastrous effects on the bottom line for hotels that had been struggling to stay ahead of the recession even before the terrorist attacks.

Not only is insurance more expensive and scarce, but also owners and operators are finding that they have to be more diligent in responding to insurance company queries. Insurance underwriters are requiring more detailed information to better assess risks. Insurance companies have restructured their overall coverage “packages” by increasing deductibles and reducing umbrella coverage amounts, while at the same time increasing premiums.

In light of the higher insurance costs and possible liability concerns, what are some of the positive steps that hotel owners and operators can take to minimize cost and liability?

•   Work with Insurance Professionals. The renewal process is taking much longer because of the amount of information the insurance companies are requiring, as well as the need for the insurers to submit the application to more reinsurers for bids. By starting to work with the insurance broker sooner, owners and operators can improve their chances for obtaining the most competitive quotes.

•   Consider Possible Loan Default. The last thing an owner or operator needs is the triggering of a default under the insurance covenants in its loan documents. Because lenders are aware of current insurance issues, they may be amenable to negotiating the most appropriate insurance coverage. Unfortunately, there is not much precedent in this area, and owners and operators will need to rely heavily on their existing relationships with their lenders.

•   Review Accident Reporting and Investigation Procedures. The procedures for reporting and investigating accidents should be reviewed and developed. Employees should be trained to follow the procedures and document accidents properly. Taking these steps will help assure insurance carriers that the owner and operator are vigilant about following procedures and identifying the cause of an accident.

•   Have Regularly Scheduled Safety Meetings. Operators and owners should make sure that the steps necessary to ensure the safety of guests and employees are instituted and that employees are apprised of all security issues. These efforts should be documented appropriately and kept on file.

Management Contracts

Although the operating performance of the lodging industry may show signs of improvement by September 2002, the economic effects may not be felt until the first quarter of 2003. Many hotels may not be able to endure the long recovery period. Given this economic reality, coupled with post-September 11 concerns, owners and operators need more than ever to cooperate and work as a team. Owners and operators are usually regarded, particularly by guests and employees, as one and the same. This is not the case, however, because their interests are sometimes adverse resulting in litigation. See, e.g., 2660 Woodley Road Joint Venture v. ITT Sheraton Corp., 2002 WL 53913 (D. Del. 2002). The increasing number of hotel owners seeking bankruptcy protection further jeopardizes the relationship because the management contract may be rejected in bankruptcy and a new management contract could be entered into with another operator as part of the reorganization plan, leaving the original operator out in the cold.

For both owners and operators, the most effective paradigm economically is not one of contention, but rather one of cooperation. Cooperation would prevent scarce resources from being expended on fruitless litigation, distracting both the owner and operator from operational issues. To that end, operators and owners may want to consider the following steps as a way of fostering a more positive working relationship:

•   Have an Unbiased Third Party Perform an Operational Assessment . An independent assessment may give both parties clear guidelines on areas of improvement, prevent finger pointing, and move the parties toward positive steps. The cost of the assessment should be shared.

•   Clarify Operational Goals. Since September 11, critical concerns exist about the recovery efforts being undertaken, including additional expenditures necessary to promote the hotel and efforts made to recapture lost business. Operators need to be in a position to answer and anticipate these questions. Moving forward and developing positive steps are the only ways to improve hotel operations.

•   Renegotiate Management Contract Terms. Perhaps the best way for both owners and operators to survive this temporary downturn is to renegotiate the contract and for both to share the pain. They both had agreed to enter into a long-term relationship and they should try to make it work. An operator may have to be less myopic and look at the long-term value of the contract. Does that mean that operators should defer their fees until the hotel operation improves, or should there be an upward adjustment by an incentive fee (to accommodate a lower base fee) so that the operator is rewarded for improving operations? Should there be an incentive given to the operator for cutting operational expenses? The terms to be negotiated will depend on the operational needs of the hotel.

•   Make Sure That Operational Safeguards Are in Place. Owners and operators need to agree on the appropriate level of expenditures to protect the safety of the employees and guests. This agreement is critical, as failure to take appropriate measures will result in greater liability concerns at a later stage. Operators and owners should seriously evaluate the level of liability and risk that they are willing to assume. This is not the time to be “penny wise and pound foolish.”

Conclusions

Although the implications and consequences of the terrorist attacks of September 11 are ongoing, some formative conclusions can be drawn about how the hotel industry should react to these events. First and foremost, the industry must pay more attention to safety and security. Hotel operators will need to be educated about the ability of law enforcement personnel to access information about their guests, and employees and bailment relationships must be scrutinized at a far greater level than they are today. Second, insurance coverage will be narrower in scope and more expensive. Finally, liability arising from potential terrorist threats should be negotiated as an aspect of all management contracts and franchise agreements.


Stephen C. Barth is an attorney and founder of HospitalityLawyer.com and an associate professor at the Conrad N. Hilton College of Hotel and Restaurant Management, University of Houston.

San San Lee is an attorney in the Dallas office of Haynes and Boone, LLP, and serves as co-chair of the H-3 Hotels, Resorts and Tourism Committee.