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Hospitality Posts
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Hospitality Posts (140)

For over a decade, more and more financial services companies have used captive insurance companies as part of their overall risk management strategy.  In its simplest sense, a captive insurance company is a wholly owned subsidiary of a policyholder’s parent company that underwrites and sells insurance to the parent and its subsidiary companies.  Captive insurance arrangements are widely seen as offering benefits to policyholders in terms of improved loss control, access to insurance coverages and rates that might be hard to find in commercial insurance markets, control over and access to potential investment income earned on premiums between the date of insurance purchase and date of loss (especially on risks with excellent loss experience) as well as tax benefits in many circumstances.

Benchmarking studies in recent years have shown that companies in the financial services industry account for the largest number of captive insurance company formations.  There are a number of reasons why captives appeal to financial institutions; some are fairly obvious and others less so.

As an initial matter, large financial institutions often have sophisticated and resourceful risk management departments that are up to date on the use, regulation and advantages of captive insurance.  Furthermore, because large financial institutions usually purchase towers of coverage with large limits, captive insurance presents an attractive opportunity for hedging against traditional insurance purchases in the commercial market.  For example, a bank with little or no losses will see a direct benefit in the form of the enhanced reserves if it places some of its risk in a captive, while still maintaining protection against large losses through its purchase of traditional commercial insurance policies.

Many financial institutions also often have very high retentions or deductibles on certain risks, and many choose to protect against losses within those deductibles via insurance purchased from a captive.

Furthermore, financial institutions obviously have excellent resources for managing and getting good returns on capital reserves, which is a key component of any insurance company’s performance.  Not surprisingly, many financial institutions put such internal resources to use in the management and maximization of their captive insurance company’s assets, subject to applicable regulatory standards.

In recent years, some financial institutions have begun to consider the use of captives not only as a means to protect their own assets against risk of loss, but also as a clearinghouse to aggregate risk and offer insurance to customers who are not in a position to form their own individual captives or who otherwise might not have access to such insurance via traditional commercial insurance markets.  For example, a number of hedge fund clients of a large financial institution can participate in a captive structure sponsored by such institution.

With good planning, attention to various rules and guidelines laid down by the IRS and analysis of structural options, there are numerous ways for financial institutions to enhance their risk management program through the use of captive insurance.  Such strategies appear to be a growing trend in the industry, one that can be expected to continue its growth in the future.

We have all seen the growth of Chinese investment in the U.S. hotel industry, but this is only the tip of the Chinese investment iceberg in acquiring U.S. management expertise and technology to fuel the growth of the hospitality and hotel industry in China itself.

With the robust growth of its national economy and an emerging tourism industry, China’s hotel sector has experienced rapid development in recent years. Economic growth in China has led to a significant increase in domestic travel for business and pleasure.  In 2013, with 2.3 million hotel rooms, China’s total income from the national tourism industry was over $305 billion, an increase of approximately 20% against the previous year. However, only 15% of Chinese hotels have a brand affiliation; the market is highly fragmented and has vast product discrepancies.

China has identified tourism as a core growth engine, and many provincial government authorities plan to promote tourism by encouraging direct investment in real estate and the tourism industry. Chinese government development policy controls the investment priorities within China.  According to the government’s current (12th) Five-Year Plan period (2010-2015), fostering China’s tourism industry is a strategic pillar for the country’s efforts to establish a satisfactory modern service industry.  The authorities in charge of tourism at all levels, including the national tourism industry, have been directed by the government to “optimize the development environment in an all-around manner, vigorously expand the development opportunities, and accelerate the transformation of the industry.”

This rather general statement of government policy can have far reaching consequences.  Consider these numbers:  By 2015, China’s domestic tourism population should reach 3.3 billion, the number of inbound overnight tourists should reach 66.3 million, and the number of outbound overnight tourists should reach 83.75 million. The annual increase of the number of direct employees in the tourism industry should reach 700,000 while the total direct employment in the tourism industry should reach 15 million by 2015. According to the China National Tourism Administration, about 200,000 additional accommodation properties are expected to be built by 2015. Formats such as time-shares and vacation rentals are also being considered as ways to help sell existing properties.

China is still a developing country.  This accounts for enormous growth and accelerating growth in the hotel and hospitality sector.  But sustaining that growth and ensuring quality requires China to obtain management and technology know-how from more developed economies. China’s domestic market could benefit from the knowledge, skills, and experience that are brought back from overseas investments. Thus, as both the Chinese central government and local governments develop their plans, they are focusing on differentiation, internationalization, high-end brands, and major impact.  They are welcoming foreign investment by experienced operators, and providing incentives for major hospitality players such as land-price discounts, cash or tax incentives, and priority approval processes.

Many of the investments made by Chinese companies in the U.S. hotel industry are designed to follow Chinese government policy that encourages “going out” by Chinese companies to “bring back” management expertise and best practices from world class operators outside of China to leapfrog the development process.

China’s mid-market is likely to be the most exciting space over the next few years. The mid-segment is currently under-represented from a brand and investment-grade product perspective.  But with rising incomes and a wealthier travelling middle class, dramatic growth is expected.  For example, March 13th’s Wall Street Journal reported on how Dalian, a northern Chinese port city on the Yellow Sea with a population of about 5.9 million, demands historic 17th- and 18th-century French architectural elements, including French carved stone details such as niches, balconies, and keystones, along with slate roofs.

Roughly 170 Chinese cities have more than one million residents, but only four cities – Shanghai, Beijing, Guangzhou and Shenzhen – are considered “first-tier” in terms of size and per capita GDP.  To be considered in the second tier, a city should have a population of at least three million and a minimum GDP equivalent to USD 2,000 per capita. By this definition, more than 60 Chinese cities are qualified as second tier.  According to figures from the U.S. Commercial Service, 14 of China’s second-tier cities account for 54 percent of the total imports from the U.S.  The hotel market potential in these cities is vast and growing.

The worst kind of pain is self-inflicted pain.

A large majority of the workers’ compensation injuries in the hotel and hospitality business are from the housekeeping department, and more specifically housekeepers/room attendant injuries that could have been prevented.

Workers’ comp insurance rates have skyrocketed in the past 18 months. The higher rates are due to increased medical costs, the unknown factors of Obamacare, and employees making more claims due to the recession and their fear of being laid off or losing hours.

Many companies have reduced their management staff in the past several years, which has led to mismanagement of, or no management whatsoever, of employee on-the-job injuries and safety programs. Unmanaged employee injuries add more cost to workers’ comp insurance claims, and higher costs translate into higher insurance rates at renewal time.

“Prevention of injuries and training staff in safe work practices will save money on workers’ comp injury claims and overall insurance costs.”

Because self-inflicted pain is the worst kind of pain, the loss control team at Petra Risk Solutions has accumulated and evaluated extensive workers’ comp injury data from the hotel industry. Below are some helpful suggestions on how to better manage hospitality workers’ comp injuries with the focus being on pre-employment and loss-avoidance opportunities.

Pre-Employment and Hiring Practices

First, careful consideration should be paid to an employee’s physical capabilities as they relate to the job description for the employment position. It’s recommended that the hospitality entity provide pre-employment physicals for hotel positions that require physical exertion. Examples of these positions could be housekeepers, laundry room attendants and maintenance staff.

The following example explains why.

Recently we saw a 48-year-old female who had two complete knee replacement surgeries on the same knee, get hired as a housekeeper. Within the first three months of employment, she injured her bad knee, and the cost of her workers’ comp claim will be in the tens of thousands of dollars. If this employee had received a pre-employment physical prior to her hiring, the doctor may not have recommended her for that very strenuous position.

Loss Avoidance-Proactive Safety

Management and accountability statistical data from Petra Risk Solutions shows that approximately 80 percent of all employee injuries occur within the first two years of employment, with many of those injuries occurring in the first year of employment.

Many hotels are short-staffed, so they tend to put a new employee to work as soon as possible, with little or no training. Injury data demonstrates it is extremely important to spend the time training new hires on their job and how to work safely before they jump into their job role.

Hotel and hospitality management should spend time with the new employees and train them how to work safely and to use proper techniques to avoid injuries.

Limiting the number of rooms that housekeepers clean is another huge revelation when it comes to loss avoidance. Hospitality risks can reduce housekeeping injuries by requiring housekeepers to clean 15 rooms or less per day. Those housekeepers that clean 15 rooms or less per day have fewer injuries than housekeepers who clean 16 or more rooms a day. Housekeepers who have to rush to complete their rooms get injured more often.

Statistical data has shown that the 15 room cleaning maximum is in fact the “magic number” that will reduce workers’ comp injury claims.

The business segment of the hotel also affects the room attendant workload. For instance, it takes less time to clean a room with a single business guest as opposed to a family of five on vacation.

Training staff to work using proper ergonomic techniques while working also will reduce injuries. Some of the most expensive injuries that require surgery and rehabilitation are cumulative and repetitive motion injuries. Repetitive motion injuries occur over time while using the wrong work techniques.

For example:

      1. Use proper lifting techniques, straight back, bent knees, lift with the legs.

      2. Do not bend over to clean a floor or bath tub. Use a pole with a cleaning device to stand up while cleaning.               Or, get on the knees and clean from an upright position, rather than bending over.

      3. Do not stand on bath tub side walls or toilets while cleaning. Do not stand on chairs or other furniture. Use                 step stools or ladders.

      4. Do not overfill or overload linen carts, dirty linen bins, or housekeeping carts. Make multiple trips with smaller           loads to avoid injury.

      5. Use gloves to protect hands and safety glasses or goggles to protect eyes.

There are several new tools and products that can help hospitality entities reduce injuries to staff.

One example: mattress “lifters” that prevent housekeepers from straining to lift heavy mattresses multiple times a day. Also available are devices that help housekeepers efficiently put bed pillows into pillow cases. The latest hotel industry trend is to have elegant bedding, which includes multiple pillows.

Another recommended tool: cleaning devices on poles, or powered scrubbing devices. There are several cleaning products on the market that use poles, so employees can stand upright, without bending or straining their backs as they clean floors, bath tubs and shower enclosures. These products can be picked up at any home improvement store, or at national retailers such as Target or Wal-Mart.

We have tested a battery-powered scrubber device that reduces cleaning time and effort, and also allows housekeepers to stand upright while cleaning multiple floors and bathtubs.

Room attendants use hand pump spray bottles to dispense chemicals every day. This can lead to carpal tunnel injuries from repetitive motion. Another type of sprayer allow the user to pump air pressure into the bottle, so the housekeeper only has to press on the trigger once, allowing the chemical to spray quickly and without additional strain on the fingers and arm.

Room attendants that “whip” large industrial-type vacuum cleaners around are also a concern. Doing this everyday can cause shoulder or neck strains. Hotels should review the type of vacuum they use, as well as how much the unit weighs. This will help to reduce worker strain when maneuvering the vacuum multiple times a day.

Cleaning hotel rooms is difficult, physical work, and is taken for granted occasionally. Using newly created and innovative hotel housekeeping products can prevent injury.

Reevaluating how a housekeeper or room attendant performs his or her day-to-day routine is also important. Prevention of injuries and training hotel staff in safe work practices will save money on workers’ comp injury claims and reduce overall insurance costs in the long-run.

In response to significant and growing outcry from restaurateurs, chefs, bartenders and others in the food and beverage services industries in California, as well as grass roots petitions through Change.org, the California State Assembly has introduced "emergency legislation" that would undo the newly-enacted law barring bare hand contact with ready-to-eat food, which angered and perplexed many across the State.  AB 2130 was introduced to the floor by Assemblyman Richard Pan (D-Sacramento), chair of the Assembly Health Committee, with the intent of undoing that which the new law did with respect to the California Retail Food Code, specifically Section 113961.

It was stated by those that vehemently disliked the new law that the changes imposed were unrealistic and mandated operational hurdles that could severely damage their businesses; not to mention the costs and waste associated with hundreds or even thousands of gloves being used at the tens of thousands of food services businesses in California. Furthermore, the laws that already minimize bare hand contact with food and require diligent hand washing while working in food prep and service areas are felt by most to be more than sufficient to protect the consumer. Many of the food borne illnesses suffered by diners have nothing to do with the hands of the food preparer, and more with the source of the food.

The new bill would permit some bare hand contact, stipulating that preparers must "minimize bare hand and arm contact." The chef or bartender though would need to continue to wash ones hands in accordance with current state health regulations in order to prevent the fear of potential bacterial contamination. 

The new bill would permit some bare hand contact, stipulating that preparers must "minimize bare hand and arm contact." The chef or bartender though would need to continue to wash ones hands in accordance with current state health regulations in order to prevent the fear of potential bacterial contamination. 

When you type the name of a hotel brand into a search engine, you’ll probably encounter a large number of text ads placed by online travel agencies (OTAs). Bidding and placing ads on variations of hotel brand names is a very common practice and has even led some in the hospitality industry to refer to it as a “war” between OTAs and hotels. Typically, those who support this viewpoint seem to frame it as a simple issue of direct bookings versus OTA bookings. While it’s certainly valuable for hotel brands to start thinking about it in those terms, there are some areas that this particular line of questioning still leaves uncovered. For example, why does the travel industry’s paid search landscape look like this in the first place? Furthermore, what other implications does this have for hotel brands?

In this post, I’d like to highlight some of the reasons that paid search is such a challenge for hotel brands—including the root causes that have led to the paid search struggle we have today, the broader implications of this struggle, and an idea for alleviating some of the industry’s conflict. Let’s start by exploring one of the reasons that we’ve arrived at this contentious relationship between hotels and OTAs:

1) It’s Easy for OTA Ads to Outnumber Your Brand’s Ads

In general, a hotel brand can only run a single paid search ad on a given search engine results page (SERP). This is because search engines have restrictions on “double-serving.” The engines’ rules prevent a single advertiser from having more than one ad appear on the SERP. This is typically enforced on the domain level. For example, only one ad leading to hilton.com would be allowed to appear—even if two separate AdWords accounts were trying to place two different ads for hilton.com.

While this restriction limits the brand’s prominence in paid search results, it enables OTAs to start to overwhelm the paid results. Individually, all the OTAs still have to follow the same rule. None of them can appear more than once. But in aggregate, they can really start to challenge the brand. Let’s say that five different OTAs are bidding on the same keyword as the brand. That leaves the brand significantly outnumbered with little recourse for pushing OTAs out of those spots. At BrandVerity, we’ve actually found this to be quite common in practice, too. In our recent report on hotels’ branded keywords, we found an average of nearly two OTA ads per branded SERP on Google and almost 5 per branded SERP on Bing.

2) The Search Engines Won’t Be the Middle Man

In the past, the search engines provided a pretty significant set of protections for trademark owners. In fact, they originally prevented any advertising on branded keywords.

That all changed long ago in the U.S. Today, anyone can bid on branded keywords. Furthermore, trademarked terms are up for grabs (and can be used by anyone in ad copy) unless a brand specifically opts out. When it comes to OTAs or other partners using trademarked terms, the engines distance themselves even further. Google and Bing are both very intentional about avoiding trademark disputes here. They each have language describing how “resellers” can use a brand’s trademark in their ad copy. This essentially places all the burden on the trademark owner to enforce their agreements with their partners. Brands can’t lean on Google or Bing for help—they have to go directly to the OTAs.

3) Hotels’ Contracts Can Quickly Become Outdated

One of the major reasons that OTAs initially had so much leeway in paid search is because it wasn’t in their agreements. It’s hard to write restrictions on something that doesn’t exist yet. So once Google AdWords came along, the OTAs had free reign to use the platform as they saw fit. Unfortunately for hotel brands, there wasn’t much recourse until the time came to renegotiate their contracts.

So, why does this still matter today? Haven’t nearly all hotel chains gotten past this and adjusted their OTA agreements accordingly? That may be true, but it’s important to remember that things can still change—just as they did when paid search first exploded onto the scene. Google is always experimenting with new ad formats, targeting options, and reporting tools. Not only is AdWords continually evolving, but there are all sorts of new marketing platforms being developed. To use another Google product as an example, the Google Hotel Finder made its debut only a few years ago. How many hotels have contracts with OTAs governing that channel?

Let’s assume that your contract specifies every single restriction down to a tee. That agreement is severely limited if you can’t identify violations and take action to remediate them. Unfortunately, paid search doesn’t lend itself to a quick ad-hoc review. It doesn’t offer the transparency of a billboard or a magazine ad. There are many variables affecting what you see when you try to investigate. The terms you search for, location you search from, time of day, and many other factors will impact what ads you see on the page. This can make it very difficult to be fully exhaustive in any compliance efforts.

4) Even with an Airtight Contract, Agreements Can Be Hard to Enforce

To further complicate the issue, many OTAs also have affiliate programs. Typically, they will have many affiliates in their program (often thousands). These affiliates are rewarded for the sales they refer to the OTA. This adds a layer of separation, and can make it very difficult to uphold your agreements. For example, let’s say an OTA’s affiliate is responsible for a violation of your agreement with the OTA. Will the OTA even be aware that the affiliate is responsible? If so, will they be able to rein in the rogue affiliate?

5) Will Increased Transparency Create More Trust?

One of the common grievances from hotel brands is that the OTAs are a bit of a black box. You know what bookings they generate for you, but you don’t have much insight about the pathway that the customer took to make that booking. This makes it very difficult to determine what credit belongs where—so it’s understandable that hotel brands might be slightly skeptical of their OTA partners. Which OTA bookings are truly incremental? In other words, which bookings did OTAs contribute that the brand would not have booked otherwise?

There are many variables involved in answering this question, and it may not be something that brands can fully answer. OTAs provide a lot of positives: access to a larger set of potential customers, websites that convert incredibly well, plus perks and guarantees that encourage undecided visitors to make bookings. There’s even the OTA billboard effect to consider, which may increase a hotel’s direct bookings outside of the OTA channel. But should all of these value-adds be bundled with the permission to bid on hotels’ brand terms? Should hotels be forced to buy the all-inclusive package?

It generally doesn’t make sense to order up an OTA’s services à la carte. One cannot simply ask for a booking here and a booking there, or to be featured on the OTA’s site with the caveat that customer ratings be excluded. OTA sites are a package deal. This may, in part, explain why OTAs have historically resisted making concessions with their paid search efforts. If paid search is just another part of the package, then why remove it?

Paid search is its own separate channel, and doesn’t have to be bundled. Unlike OTA sites, which are under direct OTA control and will most likely always be somewhat of a black box for hotels, paid search is a channel where brands can gain more visibility. Tools such as the AdWords Auction Insights report  are helping improve transparency, showing more of what’s happening under the hood. This is a good sign, because ultimately hotel brands and OTAs both stand to gain from it. Brands get the reassurance that OTAs’ interests are truly aligned with their own, and OTAs can reinforce the value they provide to brands. Furthermore, by increasing both sides’ mutual trust, the partnerships can be strengthened over time. Transparency may not solve all the issues, but hopefully we’ll see this trend continue—not just in paid search, but in other channels as well.

 

Kicking up to a handstand at age 50? Five years ago, I would never have believed it.

For years, while I provided lip service to the notion that I am able to learn at any age, I was in truth resigned to my then-current state of existence, with no real intention to acquire new knowledge to change anything: my stress level, my weight, and my overall outlook on life.

Yoga revolutionized that.

Because I ran my own business, I worked all the time, and during the rare times when I wasn’t working, I was worried about getting the next project. I had to “go-go” constantly and felt the weight of the world on my shoulders. High strung, anxious, and overweight, life wasn’t exactly enjoyable.

However, I saw this predicament as merely a by-product of my career choice; so I compensated by eating more, spending more, and complaining more, all of which fueled my rising weight and stress and wasn’t particularly helpful for my marriage.

A friend of mine, who works with many business owners and as such is frequently witness to this type of unhealthy lifestyle, thought gaining the ability to physically and mentally get away would grant me a fresh perspective. As such, she recommended I pursue yoga. Being a type-A personality, and falsely believing stress and anxiety are simply parts of a productive life, I initially dismissed her advice, but eventually gave in.

I started attending lunch time classes at a studio near my office, with the goal of attending once a week. I thought I would give it try for a while, but like many times in the past, I suspected that I would eventually abandon it. I was resigned to my old ways and saw them as inevitable. I didn’t know a single lawyer who wasn’t stressed, so why should I be different?

At first, everything felt hard. Holding the poses for several breaths tensed my muscles to the point where they started to shake. I had little endurance. The transition from one pose to the next was difficult as I lacked flexibility and moved awkwardly—like a “cow.” For the first few weeks, I was angry that it was so hard, that my muscles were sore and shaking, and that I was sweating so much. I was frustrated with my inability to keep up and felt like I was back in high school with the insecurities of an awkward and displaced teenager.

Yet, after each class, I couldn’t help but take note of the fact that I always felt better. Getting through the class required my full attention, and I was able to both physically and mentally get away from the office during that hour, just as my friend had hoped. The fact that with every passing class my muscles shook less and the poses and transitions were becoming less trying were other improvements I couldn’t help but notice as well.

I was also grateful for my patient yoga teacher.

He recognized my initial frustration and did his best to tell me it was OK and that things would change over time. The key, he said, was to keep practicing. As I continued to pursue yoga, I felt myself getting stronger and more flexible. I noticed many day-to-day things, including walking up the stairs and reaching for higher cabinets, were becoming easier, and as things became easier, I carried less stress and anxiety, particularly about the small things. The quality of my life, in tangible ways, was improving!

I began to feel and see differently. I no longer saw myself as an awkward person moving like a “cow.” I now possessed the ability to move fluidly and smoothly—it just took practice and work. The physical manifestations were altering my self-view and I was less emotionally defensive. I was finally able to see myself as a person capable of improving things I didn’t like, able to take charge of the things I knew I could change and being more accepting of those I could not.

Around this time, another yoga teacher appeared, who, through his teaching method, doubled down on “acceptance and change:” He had us work on holding the down-dog position for five minutes. We first started with a one minute hold, then added 30 seconds each month, reaching the five minute goal after nine months. It was tremendously satisfying to reach that goal, yet what I learned during the process was even more satisfying and important because it altered my outlook on life.

As I gained strength and endurance and pushed through the discomfort of the longer down-dog hold, it became less difficult. Also, as I worked at it, I gained the confidence that an additional 30 seconds might be doable.

Each of those 30 second increments were necessary parts of the whole, and a plan was devised to get there, to reach the goal. The most important lesson learned, for me, is that things don’t just happen magically. There has to be a clear intent, a plan, the willingness to invest one’s time, and the discipline to simply show up.

Another one of yoga’s biggest life lessons for me is this: Things are generally more straightforward than we make them out to be. For example, if losing weight is a goal, as it was in my case, it’s usually a matter of acquiring better habits—eating less and healthier, and exercising more. Focusing on the “why” may be helpful, but if too much focus is placed on it, it can potentially create a feeling of resignation and inevitability.

Yoga helped lead me to the understanding that any meaningful change takes focus, time, and work. Unfortunately, much of today’s society seems laser-focused on immediate results; there is an implied immediacy to goal accomplishment. This creates pain and limitation and often the reaction is to over-think and over-analyze a situation in an attempt to avoid perceived or real failure.

This limits one’s ability to focus on the work and the commitment needed to make changes.

At some point, deliberate action must be taken. I may not achieve my goal instantaneously, but I certainly won’t achieve anything if I take no action at all. By applying the individual lessons learned in yoga, I lost 50 lbs and kept it off, I kicked a nasty caffeine addiction to the curb, I got off high blood pressure medication, and I was finally able to get over the fear of and actually learned how to kick up to a handstand.

Because I gave myself both the time and the means to reach my goals, I was able to make lifestyle changes to sustain those improvements. The key for me is consistency—the same way my yoga teacher had the class build towards the five minute down-dog hold consistently over a nine month period. Now when faced with something I think might be impossible, I think back to the improbability of a five minute down dog—and I know I can face almost anything.

I started yoga at the age of 46 and through the practice reconnected with my capacity to learn new things and aspire towards new accomplishments, which previously I had thought “impossible.” Once I realized I can change and had the wherewithal to do what it took, I formulated a plan to work toward it—no more over-complicating the issue, no more rationalizing that I need more information, and no more excusing myself.

Was I capable of making changes without yoga? Probably—but for me, yoga is what it took to show me that (a) “more” is possible, (b) getting to “more” takes focus, time, and work, and (c) so long as I continue to work and practice at it, I can get closer to the “more.”

My yoga practice is an excellent continual reminder of this outlook, and I no longer have to be confined and resigned to my former ways. In fact, like the poses, I can always be “more”—as long as I am willing to work at it. Thanks to yoga, I am no longer resigned to the limitations that I once imposed on myself.

 

 

Co-authored by Brian L. Belt

Changes in federal securities lawsnamely,  the loosening of rules on solicitation and advertisingmay have opened up a new vista for investors and speculators, such that the sale of hotel condominium units could become both more profitable and more common.  What follows are details of these changes and their expected impact.

 As a result of a change in the federal securities laws set forth in the federal Jumpstart Our Business Startups Act (the “JOBS Act”), on September 23, 2013 new rules adopted by the Securities and Exchange Commission (the “SEC”) took effect that:

      • eliminate the prohibition against general solicitation and general advertising in private offerings of securities made         in reliance on Rule 506(c) of Regulation D or Rule 144A under the Securities Act of 1933, as amended (the                       “Securities Act”); and

      • disqualify certain securities offerings involving “bad actors” from relying on Rule 506 whether or not general                  solicitation or advertising are used.

The new rules have the potential to change significantly the manner in which private placements are conducted.  Specifically, we believe that the sale of hotel condominium units (with or without rental pools), as well as other types of real estate securities, will increase significantly as a result of these changes.  We expect that market practices and procedures will continue to develop and evolve over time.

Current Methods of Selling Hotel Condominium Units:  Challenges and Issues

The SEC has taken the position that the sale of a condominium unit, when coupled with an economic interest such as mandatory rental management agreements or participation in a future rental pool or similar arrangement, is a security under the Securities Act.  As a security, the offer and sale of such condominium units could be effected only pursuant to either (i) a registration statement that is declared effective under  the Securities Act or (ii) an exemption from the registration requirements under the Securities Act, such as a private placement under Regulation D or Section 4(a)(2) (formerly Section 4(2)) under the Securities Act.  Since a valid private placement prohibited the use of  activities that constituted general solicitation or advertising, private placements were not a viable option to sell hotel condominium  units.  Additionally, registration of hotel condominium units with the SEC proved impractical and cumbersome, and therefore has not been generally used as a vehicle to sell hotel condominium units.

As a result, hotel developers have attempted to utilize arrangements based on SEC guidance that would not cause the sale of hotel condominium units to be considered securities.  A 1973 release by the SEC addressed the “uncertainty about whether offers of condominium and other types of similar units may be considered to be securities” (the “Condominium Release”).  In the Condominium Release, the SEC found that offers and sales of condominium units would constitute an offering of securities, in the form of an investment contract, if the condominiums were: (1) sold with an emphasis on the economic benefits to the purchaser to be derived from the managerial efforts of the promoter, or a third party rental of the unit; (2) include participation in a rental pool arrangement; or (3) require that the purchaser must hold the unit available for rental for any part of the year, must use an exclusive rental agent or is otherwise materially restricted from the occupancy or rental of the unit.  In 2002, the SEC issued a no-action letter to Intrawest Corporation, concerning the “offer and sale of condominium units . . . coupled with an offer or agreement to perform or arrange certain rental or other services for the purchaser.”  The SEC stated that Intrawest’s sales and rental model did not constitute a security because the promotion and sale of the units did not emphasize any economic benefit to the purchaser derived from managerial efforts or rentals.  Intrawest represented that: (a) under no circumstances would purchasers be led to believe that they would profit from unit ownership except for property value appreciation; (b) the rental management company would only provide information in response to specific questions from the purchaser; (c) Intrawest’s rental management program would be completely separate from the Intrawest sales program; (d) sales representatives would not receive additional compensation for unit sales tied to rental management agreements; and (e) Intrawest would not discuss the terms of any rental management agreements until a purchase and sale had been executed.   The Intrawest guidelines have become the “gold standard” for sales of hotel condominium units.  

While these guidelines have been generally adopted by sellers of hotel condominium units, complete adherence has proved difficult and cumbersome.  For example, it is impractical for most sellers to restrict discussions of rental management agreements until after the units are sold, since many purchasers want to understand the economics of the rental management arrangements prior to entering into binding purchase contracts.  Many developers have met this concern by discussing rental management agreements prior to execution of a binding sales contract, but requiring that these discussions take place in a separate office with different non-commission sales people who may not be employed by the developer/seller.  Whether such practices are sufficient to avoid the sale of hotel condominium units from being deemed to be the sale of securities has not yet been adjudicated by the courts or the SEC.  

In addition, developers of hotels have also been faced with questions as to whether certain structures that make it more difficult for buyers to opt out of seller formed rental management  agreements, or harsh restrictions against owner occupancy, would cause a court to deem that it was in effect mandatory for a buyer to enter into a rental management agreement.  Rogue brokers or real estate sales persons can also cause problems for sellers by making improper statements such as “this is a great investment.”

Further, because hotel condominium units cannot be encumbered by rental restriction covenants running with the units at the time of original sale, there is no assurance that resale purchasers will enter into rental management agreements.   The ability of original and resale purchasers to opt out of rental management systems causes uncertainty for many hotel owners with respect to the availability of rooms, and makes a hotel condominium regime even more difficult to implement in the context of hotels that desire to book large groups.   These issues naturally diminish the value of the hotel side of the property.

Even in those rare cases where a hotel owner/seller adheres perfectly to the Intrawest guidelines, the possibility of disaffected purchasers later making false allegations of improper sales practices remains.

In the recent case of Salameh v. Tarsadia involving the sale of hotel condominium units at the San Diego Hard Rock Hotel, the court held that the sale of hotel condominium units was not the sale of securities.  This case has been cited by some commentators as strong support for the conventional methodology of selling hotel condominium units described above.  However, it should be noted that rental management agreements at this project were not entered into for approximately 8 to 15 months after hotel condominium units were sold.  This delay in entering into rental management agreements was an important distinction in the case, and may not be practical for most sellers of hotel condominium units.

General Solicitation and Advertising Now Permitted for Certain Private Placements

The new rules eliminate the prohibition against general solicitation and advertising in private offerings made in reliance on Rule 506(c) (General Solicitation Exemption) or Rule 144A.  These new rules make it practical for hotel condominium unit owners to require mandatory rental management agreements and the pooling of expenses and revenue amongst units.  The amendments only change these rules-based safe-harbors; they do not affect offerings conducted under the statutory exemption under Section 4(a)(2) under the Securities Act or the private resale exemption under so-called Section 4(1½).  

Rule 506

Regulation D is a long-standing and much-used exemption from the registration requirements of the Securities Act, which enabled issuers to sell unregistered securities to an unlimited number of accredited investors (i.e., investors who have a net worth in excess of $1 million or net income above $250,000 a year for an individual or $350,000 a year for a married couple) and a limited number of non-accredited investors, but prohibited advertising or any type of general solicitation.

The exemption from the registration requirements under the Securities Act afforded by Rule 506(c) under Regulation D now permits and issuer to use general solicitation and advertising to offer and sell securities, provided that

        • the issuer takes reasonable steps to verify that the purchasers of the securities are accredited investors       

     • all purchasers of the securities are accredited investors, or the issuer reasonably believes that such purchasers           are accredited investors at the time the securities are sold; and

     • the sales otherwise satisfy the definitional, integration resale provisions of Regulation D.

 In the adopting release, the SEC stated that the “reasonable steps to verify” standard will be an objective determination by the issuer based on the SEC’s principle-based guidance.  Issuers should consider the facts and circumstances of the transaction, including, among other things, the following factors:

      • the type of purchaser and the type of accredited investor that the investor claims to be;

      • the amount and type of information that the issuer has received or learned about the investor;            and

      • the nature of the offering, including

 

» the manner in which the purchaser was solicited to participate in the offering, and

» the terms of the offereing, such as the minimum investment amount.

 

 This information will help form the issuer’s reasonable belief that a potential purchaser is an accredited investor and will assist the issuer in determining which steps are reasonable to verify a purchaser’s status as an accredited investor.  The SEC provided a non-exclusive list of methods in the General Solicitation Exemption that issuers may use to satisfy the verification requirement for investors who are natural persons (such as the review of tax returns, bank statements, confirmation from a registered investment adviser, attorney or certified public accountant that such entity took reasonable steps to verify the purchaser’s accredited status). 

An issuer will not lose its ability to rely on the General Solicitation Exemption for an offering if an investor purchased securities after providing false information or documentation, so long as the issuer took reasonable steps to verify the purchaser’s accredited status and the issuer had a reasonable belief that such purchaser was an accredited investor at the time the securities were sold.

Blue Sky Issues

The lifting of the ban on general solicitation and general advertising raises a number of potential state blue sky issues.

Rule 506

First, while offerings under the General Solicitation Exemption will be deemed “covered securities” offerings under Section 18(b)(4)(E) of the Securities Act and thus not subject to registration or qualification under state blue sky laws, some state securities administrators may require notice filings together with fees for an offering under the General Solicitation Exemption, consistent with any existing requirements applicable to offerings under the No General Solicitation Exemption and as permitted by Section 18.  In states where an exemption from state notice filings and fees exists but is premised upon the absence of any general solicitation or general advertising, issuers and their advisors may need to adjust their practices until such time, if ever, that the state exemption is aligned with the new flexibility under the General Solicitation Exemption.

Second, the scope of the federal preemption that will apply to an offering under the General Solicitation Exemption does not currently extend to any potential broker-dealer registration issues under state securities laws.  That is, persons who solicit or find potential purchasers for an offering under the General Solicitation Exemption (including issuers) will need to assess the availability of state level exemptions from broker-dealer registration and qualification that require that the issuer not engage in general solicitation.  Action may be required in certain states, which may include New York, to align existing state securities laws or guidance with the amendments to Rule 506.  New York is one of the few states which require pre-offering clearance of an “Offering Plan” for Hotel Condominium units anywhere in the United States if the units are offered and sold in New York – including through the internet or other publications.

All Private Placement Offerings Involving Bad Actors are Disqualified from Reliance on Rule 506

Offers and sales of securities are disqualified from relying on any of the exemptions set forth in Rule 506 if any of the issuer or other specified persons ( such as directors, executive officers and certain other specified officers of the issuer, certain large beneficial owners, underwriters and placement agents) have been convicted of, or are subject to court or administrative sanctions for, securities fraud or other similar violations relating to fraud.  These new disqualification events are set forth in paragraph (d) of Rule 506 and apply regardless of whether general solicitation or advertising are used.

Summary

While there may be little or no history yet of offering hotel condominium units under Rule 506(c), and while additional rules may be continue to be formulated by the SEC, it may still be safer and more practical to utilize Rule 506(c) at the present time rather than attempt to sell hotel condominium units in the conventional manner with the resulting (a) uncertainty of whether such practices will constitute the unlawful sale of securities, (b) the uncertainty of room availability, (c) inability of a seller to require mandatory rental management agreements, (d) prohibition against pooling of room expenses and revenues, and (e) potential loss of buyers who will demand to understand rental management options before purchasing a unit.

 

Co-author Vianny M. Pichardo

What happens when a hotel suffers property damage, whether by natural disaster or man-made accident, and is forced to close some or all of its rooms, amenities or services? It is important to understand how insurance can protect you from the resulting financial loss. In addition to potential recovery for property damage from your property/casualty policy, you may be able to recover lost revenue from your business interruption coverage. If your operations are disrupted, whether completely or partially, the language of your policy will determine if, and for how long, your insurance company will cover such loss.

Your insurance should cover income loss not only when operations are completely shuttered, but also when your business is partially suspended. The distinction is important to hotel owners and operators, especially those with amenities or services like restaurants, spas and seasonal activities, which are more likely to operate on a reduced level after a loss. Historically, many business interruption provisions required a “necessary suspension” of operations. These older policies and forms did not define “suspension” or state whether complete shutdown was necessary. To understand the likelihood and extent of business income loss recovery, policyholders should be aware of the actual terms provided under their business interruption coverage and should recognize that there are some differences between jurisdictions in how they approach this issue.

Must There Be a Complete Cessation of Operations?

In New York, if a policy requires a “necessary suspension” of operations, where the term “suspension” is not defined, the courts have held that the policyholder’s business must have experienced a “total interruption or cessation” of operations.Broad St., LLC v. Gulf Ins. Co., 37 A.D.3d 126 (N.Y. App. Div. 2006) (after loss on 9/11, building owner could recoup lost business income from insurance but only up to the point that tenants were again allowed to reside in building). The result is similar in California, where courts have held that a “necessary suspension” of operations “connotes a temporary, but complete, cessation of activity.”Buxbaum v. AETNA Life & Cas. Co., 126 Cal Rptr. 2d 682, 688 (Cal. Ct. App. 2002) (emphasis added) (law firm did not trigger business interruption coverage because there was no complete cessation of operations when evidence showed that attorneys continued to bill hours following incident of water damage in office building).

Policyholders should therefore note that if “suspension” is not defined in the policy, some jurisdictions have followed a narrow interpretation of coverage — thereby preventing policyholders from recovering income loss where there is only a partial cessation or a slowdown of business.See, e.g., Keetch v. Mutual of Enumclaw Ins. Co., 831 P.2d 784 (Wash Ct. App. 1992) (because motel remained partially open, policyholder could not recover under business interruption coverage despite dramatic decrease in occupancy caused by ash from volcanic eruption).See also Apartment Movers of Am., Inc. v. One Beacon Lloyds of Texas, 170 Fed. Appx. 901 (5th Cir. 2006) (slowdown was not a necessary suspension of operations to trigger coverage for loss of business income). This narrow interpretation of coverage often conflicts with the obligation to mitigate losses that is sometimes imposed on the policyholder by the insurance policy.

Fortunately, some jurisdictions, like Pennsylvania, have taken a more reasonable approach and have not required a complete cessation of operations. In American Med. Imaging Corp. v. St. Paul Fire and Marine Ins. Co., 949 F.2d 690, 693 (3rd Cir. 1991), the court examined a policyholder’s claim for business interruption coverage after a fire incident that damaged its headquarter offices. The policyholder was able to resume operations in a temporary location, but at a reduced level due to an interruption in its telephone system. The policyholder, a provider of ultrasound testing services to physicians and health care institutions, depended on the telephone system for orders, scheduling, and preparation of written test reports for existing and new business. The policyholder sought business interruption coverage for the lost earnings and extra expenses caused by the incident and relocation, particularly the disruption of the telephone system. The trial court ruled in favor of the insurance company. On appeal, however, the result was different and the appellate court rejected the insurance company’s suggestion that coverage was precluded because the policyholder “would be carrying on the same kind of activities [elsewhere] that occurred at the covered location.”Id. at 692. 

The appellate court held that under the trial court’s decision “the insured would have no motivation to mitigate its losses” as “[c]ontinuing in business at any level would bar recovery because the insured would be carrying on the same kind of activities that occurred at the covered location.”Id. at 692. Moreover, the appellate court noted that the policy imposed “an affirmative duty [on the policyholder] to mitigate its losses.”Id. at 693. The court ruled that the insurance company’s “obligation to indemnify continues until the resumption of ‘normal business operations,’” and as such, “the obligation to indemnify can arise while business continues, albeit at a less than normal level.”Id. at 693. The case confirms that a policyholder can still recover lost income under its business interruption policy when it operates in a partial or reduced mode.

More recently, iniCue Corp. v. USF&G, Civil No. 07-1871 (E.D. Pa. April 23, 2008), an unpublished case, the federal court in Pennsylvania held that “suspension,” as used in the insurance policy, included both partial and total cessations. In that case, the court also allowed lost business income covered by insurance to include the time period when the insurance company delayed making payments to fully restore the policyholder’s operations.

New Forms Cover Slowdowns

In recent years, the insurance market has responded to the need for coverage of a partial cessation or slowdown in business operations. For example, in 1999, the Insurance Service Office (ISO) Business Income (and Extra Expense) Coverage Form (a standard form often used in insurance policies) was updated to add a specific definition of “suspension” as “[t]he slowdown or cessation of your business activities.” (ISO Form CP 00 30 10 00). Today, most brokers and insurance companies covering the hospitality industry have access to forms that affirmatively state the policy “shall cover the loss resulting from complete orpartialinterruption of business.” (Emphasis added). The use of such updated forms can avoid many of the problems created by court decisions that narrowly interpret the coverage extended under older policy forms.

Policyholders experiencing a partial interruption, such as closure of some but not all rooms, amenities or services, should review the terms of their policies and become familiar with the rules that apply in their jurisdiction. In planning for the future, policyholders should confirm that their policy covers both complete and partial interruptions. If appropriate, policyholders should ensure that they have other beneficial coverage, such as reimbursement for expenses associated with professional services needed to prepare a business interruption claim. Professional services are becoming increasingly necessary to calculate and recover insurance for business interruptions, especially when a policyholder is seeking recovery due to lost patrons or the need to discount rates because amenities or services are unavailable. This consideration can be particularly important for destination hotels where patrons visit with the expectation of using many amenities and services. The policyholder may need to hire a forensic accountant to calculate the amount of business income loss sustained. These costs can be expensive and might be covered under a professional fees or “LOSS ADJUSTMENT EXPENSE” provision. Work with a knowledgeable broker to get the coverage that suits your business.

When claims arise, insurance companies will often look for ways to deny coverage or diminish their exposure to the loss. After charging you premiums based on the entirety of your business operations, these insurance companies should not be so quick to deny coverage to you on the grounds that you merely suffered a slowdown or partial interruption. If your insurance company is not fully cooperating, you should engage the services of an insurance recovery attorney who can assist you in getting the insurance company to honor its obligations under the policy.

California’s Suitable Seating law has been the subject of a growing number of representative actions in California over the past two years.  On March 26th, 2014, the California Supreme Court ruled that it will provide clarification of the law by deciding questions presented by the Ninth Circuit Court of Appeal in Kilby v. CVS, Inc., the leading case on the subject. The way the law will be interpreted is certain to have a profound impact on the restaurant industry, which mostly employs workers who spend a significant amount of time standing and moving on the job.  If the Court sides with employees on the interpretation of this law, restaurants will likely need to provide seating for their servers and hostesses, perhaps even chefs, and could require significant changes to the design and safety considerations of the restaurants themselves. 

California’s Suitable Seating Law

California’s Industrial Welfare Commission Wage Orders specify that employers must provide “suitable seating” to employees where “the nature of the work reasonably permits the use of seats.”  See, e.g., Section 14, IWC Wage Order 5-2001.  While the restaurant industry has not been the target of these suitable seating cases to date, the “suitable seating” requirement is contained within Section 14 of IWC Wage Order 5-2001 (Public Housekeeping) governing the restaurant industry, which is certainly an area of vulnerability.  The provision further provides that “when employees are not engaged in the active duties of their employment and the nature of the work requires standing, an adequate number of suitable seats shall be placed in reasonable proximity to the work area and employees shall be permitted to use such seats when it does not interfere with the performance of their duties.”  IWC Wage Order 5-2001(14). 

This requirement went largely unnoticed until 2010, when a California court held that suitable seating claims could be asserted through California’s Private Attorney General Act (“PAGA”).[1]  PAGA permits private parties to bring representative actions and seek civil penalties for violations of the California Labor Code and related regulations.  In that same ruling, the court held that violations of the suitable seating provision of the Wage Order also constitutes a violation of Cal. Labor Code § 1198.[2]  California courts have also specifically held that the civil penalties under Labor Code § 1198 are available in suitable seating cases.[3]

The Trends in Suitable Seating Cases

The law was originally intended to address concerns regarding adequate seating on production lines with heavy machinery, but the requirements are not limited to the manufacturing industry. The majority of representative actions over the past couple of years have primarily targeted banks, pharmacies and retailers—industries that have cashiers and tellers who have traditionally performed these jobs while standing. These trends indicate that the restaurant industry should be prepared for these types of actions.

As a result of these lawsuits, there has also been a steady push by California courts to clarify the language of the Wage Order, including the interpretation of the suitable seating requirement. The cases to date have primarily sided with employees, to the detriment of employers.  For example, the Ninth Circuit recently held that employees need not make requests for suitable seating in order to maintain a viable action against their employers.[4] This is similar to California’s law with respect to accommodation for disabilities, which maintains that employers who are aware of an employee’s disability have an affirmative duty to make reasonable accommodations for such disability, even if the employee has not requested any accommodation.[5]  It is likely that further rulings on suitable seating cases will track previously existing laws in areas such as disability discrimination. 

Issues Pending Before the California Supreme Court

On December 31, 2013, the Ninth Circuit in Kilby certified questions to the California Supreme Court requesting clarification with respect to the terminology in the suitable seating provision of the Wage Orders.[6]  Specifically, the Court certified the following questions:

        1. Does the phrase “nature of the work” refer to an individual task or duty that an employee performs during the                   course of his or her workday, or should courts construe “nature of the work holistically and evaluate the entire                 range of an employee’s duties?

            a. If the courts should construe “nature of the work” holistically, should the courts consider the entire range                         of an employee’s duties if more than half of an employee’s time is spent performing tasks that reasonably                         allow the use of a seat?

        2. When determining whether the nature of the work “reasonably permits” the use of a seat, should courts consider             any or all of the following: the employer’s business judgment as to whether the employee should stand, the                     physical layout of the workplace, or the physical characteristics of the employee?

        3. If an employer has not provided any seat, does a plaintiff need to prove what could constitute “suitable seats” to               show the employer has violated Section 14(A)?

In Kilby, the district court actually ruled in favor of the employer, CVS.[7]  The case began when a clerk/cashier brought suit against CVS for failure to provide suitable seating.  Plaintiff Kilby spent approximately 90% of time operating the cash register at the front of the store, and the remaining time was spent doing tasks that required her to move around, such as gathering shopping carts and restocking display cases.[8]  During her training, CVS informed Kilby that she would be expected to stand for long periods of time.  In CVS’ judgment, standing while operating the cash register promotes excellent customer service.[9] 

The district court found that the “nature of the work” performed by an employee must be considered in light of that individual’s entire range of assigned duties, and that “courts should consider an employer’s business judgment when attempting to discern the nature of an employee’s work.”[10]  Using this interpretation of the Wage Order, the district court denied class certification on the basis that the job duties of clerks/cashiers varied from day to day.[11]  Significantly, the district court also granted CVS’ motion for summary judgment because many of Kilby’s job duties required her to stand, CVS expected its employees to stand, and CVS had informed Kilby of the expectations relative to standing.[12]

The court also took the holistic approach in another case, Henderson v. JP Morgan Chase Bank, where it held that courts should look at a variety of factors, including the employee’s entire range of tasks, the layout of the workplace and the employer’s business judgment in determining whether employees should be subject to the suitable seating requirement.[13]  The district court rulings give employers some hope that the interpretation of these cases may prove favorable to employers.

In another case, a middle ground was suggested by the court. In Garvey v. Kmart Corporation, the district court suggested that while a lean-stool may be a reasonable seating alternative to no stool at all, Kmart was found to have a genuine customer service rationale for requiring its cashiers to stand (i.e., to supply efficiency, and appearance of efficiency). [14]  The court did suggest, however, that where a customer lane is empty (on a slow day, for example) the customer service rationale may not apply.[15]  The takeaway from this decision is that where there are long periods of the work day that do not require standing and/or movement, employers may be liable for failure to supply suitable seating.

Some of the other recent cases before the California courts are instructive on the procedural mechanisms that may or may not be available to employers in these types of actions.  In one recent case, a Nordstrom cosmetics counter salesperson alleged that Nordstrom should have provided seats to its cosmetics counter salespeople, and that failure to do so constituted a violation of Labor Code § 1198 and the applicable Wage Order (Wage Order 7(14)).[16]  In support of its Motion for Summary Judgment, Defendant Nordstrom put forth evidence that the nature of the employee’s work, taken as a whole, did not permit the use of seats.[17]  Nordstrom cited several reasons, including customer service, theft deterrence, as well as customer and employee safety, and provided evidence in support of its motion.[18]  The district court concluded that these were disputed issues of material fact “not readily susceptible to resolution on summary judgment.”[19] As such, it may be difficult for employers to dispose of such cases through summary judgment. 

In another matter, a plaintiff filed a class action lawsuit against Disneyland alleging that staff was not given access to suitable seating.[20] Unsurprisingly, Disneyland’s attorneys responded that most Disneyland employees had jobs that did not necessitate providing seating.[21]  The case was ultimately dismissed in March of 2013 due largely to Plaintiff’s misconduct throughout the litigation, but provided an indication that new industries are likely to be targeted.  The case also previewed that the California courts required clarification regarding some of the arguably nebulous language of the Wage Order, and would be seeking such clarification, like we are seeing now before the Supreme Court.
Best Practices

While waiting for the Supreme Court’s clarification, the following are steps that can be taken to lessen the likelihood of potential litigation against restaurant employers in this area of the law. Most importantly, if you have the ability to provide seats to your employees that does not interfere with their job duties and/or customer service, they should be provided.  Where, for example, there are long periods that do not require standing and movement, seats should also be provided. 

Additionally, communication is imperative. Your seating policy should be communicated to your employees via their employee handbooks, and during training. To the extent that there is a compelling rationale supporting any decision not to provide seats to your employees, it may be worth outlining in the handbook. Finally, as with all matters giving rise to potential litigation, a best practice is always to encourage employees to address any concerns regarding suitable seating.  We are awaiting the Supreme Court’s response to the questions raised by Kilby, and will provide further analysis at that time.


[1] See Home Depot U.S.A., Inc. v. Sup. Ct. of Los Angeles County, et al. (2010) 191 Cal.App.4th 210.
[2] Id., see also Bright v. 99cents Only Stores, (2010) 189 Cal.App.4th 1472.
[3] See McKenzie v. Fed Exp. Corp. (C.D. Cal. 2011) 765 F.Supp.2d 1222, 1235.
[4] See Green v. Bank of America No. 11-56365 (February 11, 2013) (unpublished).
[5] Prilliman v. United Airlines, Inc. (1997) 53 Cal.App.4th 939, 949-950.
[6] See Kilby v. CVS Pharmacy, Inc., No. 12-56130; see also Henderson et al. v. JPMorgan Chase Bank NA, No. 13-56095.
[7] See Kilby v. CVS Pharmacy, Inc.(S.D. Cal. 2012) No. 09CV2051-MMA; 2012 WL 1132854 (unpublished).
[8] Id.
[9] Id.
[10] Id.
[11] Id.
[12] Id.
[13] Henderson et al. v. JPMorgan Chase Bank NA, No. 13-56095.
[14] Garvey v. Kmart Corporation (N.D. Cal. 2012) No. C 11-02575 WHA; 2012 WL 6599534 (unpublished).
[15] Id., at 14.
[16] Tseng v. Nordstrom (C.D. Cal. 2013) No. CV 11-8471-CAS; 2013 WL 548768 (unpublished).
[17] Id.
[18] Id.
[19] Id., at 9.
[20] Rodriguez et al. v. Walt Disney Parks and Resorts et al. (C.D. Cal. 2011) No. 8:11-CV-01276 (unpublished).
[21] Id.

 

Co-authored by Joelle Olson

Sixty years ago, bed bugs were eradicated from the U.S., largely due to the use of DDT, a once common and very potent insecticide. Since DDT was banned by the EPA in 1972, bed bugs have reemerged. Their populations are again flourishing due to increased domestic and foreign travel and discontinuation of older, more potent insecticides. While bed bugs have not been shown to transmit diseases, these nocturnal bloodsucking insects can harm businesses by upsetting customers, generating bad publicity, triggering legal issues, and causing room downtime. 

Hoteliers can confront bed bugs proactively by understanding the biology and behavior of this persistent pest, and what it takes to identify and eliminate them. Proper treatment of bed bug infestations will help minimize a property manager’s liabilities, protect their brand, and optimize guest satisfaction.

Ultimately, a successful bed bug service plan will include the following elements:


     • Thorough inspection to locate bed bug harborage sites;
     • Thorough treatment of infested and potentially infested areas;
     • Mandatory follow-up treatments and inspections; and
     • Hotel’s commitment to quarantine items in infested rooms, dispose of and             replace infested items, and close impacted roomsto allow access to                       treatment areas.

 

There is debate in the pest control industry regarding the ideal bed bug treatment protocol. EcolabTM Pest Elimination scientists have analyzed multi-versus single-treatment protocols, along with the importance of inspecting and treating adjacent rooms.

Treatment Frequency Matters

Most pest control professionals and industry experts agree that multiple treatments are necessary to control bed bug infesta- tions, due to bed bugs’ biology and behavior. Direct contact between a treatment application and a bed bug is the ideal way to eliminate this pest. However, bed bug adults and their eggs are often located in areas that are difficult to reach with either chemical or non-chemical control procedures(for example, under switch plates and in electrical outlets).

An additional complication to effective bed bug treatment is that some insecticides labeled for bed bugs provide poor residual control, and bed bugs can become highly tolerant of insecticides. Multiple treatments therefore increase the likelihood that bed bugswill come in contact with a treated surface and obtain a lethal dose.

Targeting all life stages is critical
A multi-treatment protocol is more effective because it targets the reproductive life cycle of bed bugs. Bed bugs will typically complete the life cycle from egg to adult within 6 to 8 weeks. The following computer-based test models compare a single treatment to multiple treatments, revealing the benefit to addressing eggs and newly emerged nymphs, and what could occur if a critical treatment step is skipped.

As these science-based results indicate, if one or more treatment steps are missed, the efficacy of the bed bug treatment program is compromised. The primary reason single-service protocols fail is that any adults that survive the initial treatments may continue laying eggs, increasing the risk that bed bug populations will rebound. A single service may also fail due to limited product efficacy (both chemical and non-chemical practices), likelihood of product degra- dation,and the potential to overlook critical areas.A multi-treatment protocol provides consistent efficacy,even in worst-case scenarios. It also addresses unknown variables such as inadequate coverage of product(i.e.,missed spots) and bugs hiding deep within recesses.

Adjacent Rooms are Impacted
Along with using a multi-treatment protocol to eliminate the primary infestation, all rooms adjacent to an infested room (above, below and to the sides) should be inspected. If any of these rooms are found to be infested, the same multi-treatment protocol should be used, and additional adjacent rooms inspected.

Rooms adjacent to an infested room are at risk because the repellent nature of some available treatment products may cause bed bugs to migrate through electrical outlets and conduits, common plumbing, and crevices such as expansion joints. Adjacent rooms also provide harborage areas for bed bug populations. Bed bugs are reclusive by nature, which causes them to seek harborage in cracks and crevices – even spaces as small as 1.0 mm. This behavior allows them to easily migrate through wall and ceiling joints that may appear seamless, reinforcing the need for multiple treatments.

As avid hitchhikers, bed bugs may also make their way to adjacent rooms via housekeeping staff and their equipment, who
then become unknowing “carriers” between infested and non-infested rooms. This is why it is important to train staff how
to recognize the signs of a bed bug infestation, and leave all items used to clean the guestroom inside the room if the
presence of bed bugs is suspected.

Conclusion
The serious nature of bed bug infestations and the financial consequences of ongoing bed bug issues mandate a thorough
and proactive approach to inspection and treatment. There is no middle ground when it comes to confronting this pest. Bed
bugs must be quickly eliminated from infested facilities, and hoteliers are encouraged to form strong, ongoing partnerships
with adequately trained and certified pest management professionals. Hoteliers should have a plan in place, train hotel staff to inspect rooms as part of daily room cleaning, and be ready to respond with an intensive, multi-treatment protocol that targets all life stages and every room at risk.

 

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