Growing a Niche in the Bed and Breakfast Industry

As leaves begin to fall in the Midwest, city dwellers are making an exodus to quaint towns like Galena, Ill. and Dubuque, Iowa to soak up the autumn colors and ambiance. For many, their stays center around a country inn or bed-and-breakfast lodging.

According to the Professional Association of Innkeepers International (PAII), bed and breakfasts and country inns are a $3.1 billion industry, with more than 20,000 inns or B&Bs in the United States alone, said Krista Battista, PAII’s marketing and communications manager.

For insurance agents, carving a niche business from this lucrative market can be a smart business move-provided you know what you’re doing

No typical business

“There is no such thing as a typical bed and breakfast,” said Alex Ebel, director of marketing for James W. Wolf Insurance, an agency based in Mount Airy, Md. that exclusively writes B&B coverage. “B&Bs are unique in that people live and work in the same location.”

For example, there is a definite distinction between B&Bs and inns, according to the PAII. A “home stay” is an owned-occupied private home where the business of renting rooms is secondary to its use as a private residence, with breakfast the only meal served. A “bed-and-breakfast inn” is both a home for its owners and a lodging establishment, usually operated at a higher level of professionalism than a home stay. “Country inns” are similar to B&Bs, but also serve an evening meal in addition to breakfast, with price generally included in the room rate.

All of these types of lodging share several attributes: a high level of personal service, good value, unique ambiance and surroundings, and architecturally interesting or historic structures and decor. A professional B&B meets all the appropriate tax, fire, building, zoning and health requirements, and most have been inspected by both local authorities and a state B&B association.

For B&B owners, the overlap between private residence and public business creates a host of unique liability exposures, said Chuck Andracchio of TRICOR Insurance and Financial Services, a third-generation agency based in Lancaster, Wis. with a fairly new B&B specialty. Because B&Bs serve food, they have liabilities connected with restaurants, such as food and airborne pathogen exposures. Most B&Bs are furnished with antiques, which presents a unique property exposure. And the normal slip-and-fall exposures related to homeowners are also part of the package, Andracchio said.

More than just commercial coverage

Too many B&B owners tend to focus on the commercial side when purchasing insurance coverage, overlooking the fact that their business address and primary residence are one and the same. “You’d be shocked at how many have commercial without personal coverage,” Andracchio said, adding that in his speaking engagements at state B&B trade groups, he always emphasizes the importance of property coverage beyond liability.

This lesson is hard-learned during a natural disaster, said Ebel of Wolf. A turning point for many in the B&B insurance industry were the California wildfires of 2003. Four of the agency’s clients lost their inns in a single day, and 31 other inns were affected, he said. Many Wolf clients were also affected by the recent hurricanes in Texas and Louisiana. In New Orleans, several of Wolf’s clients’ B&Bs were completely destroyed. One had purchased wind insurance from Lloyd’s at three times the property policy and a $50,000 deductible. It may have seemed overkill at the time, but the owner is now claiming a $2.8 million loss and glad he bought the insurance. “It sent a shudder through the reinsurance world,” Ebel said, who noted that some Lloyd’s sources are predicting 50 percent increases on property coverage. “It’s a tough line of business, which is why we’ve had significant rate increases in the last several years.”

“The B&B business is thriving, but there’s very little coverage available,”said James Wolf, agency principal, who is now semi-retired. “Most companies don’t want to deal with it because they’ve lost money on it.”

Some insurers got burned

Wolf started the agency 15 years ago because he saw B&Bs as a growth niche. Determined to do it right, Wolf met with more than a thousand B&B owners to determine the unique nature of their insurance needs, then approached several insurers with the market niche. Back then, several standard-market insurers were writing B&B business, including Great American, Travelers, Aetna, FF, Transamerica, Metropolitan and others. But most carriers didn’t understand the risk, lost a lot of money and consequently stopped writing the business.

For insurers, a big concern is the adverse selection on most B&B properties, which have an average age of 100 years or more. Substandard wiring, plumbing, foundations and roofs are not attractive to insurers. Add to this the fact that many are located in coastal areas (Wolf insures 15 B&Bs in New Orleans) and the property becomes even less desirable to insurers, he said.

“Any agent writing B&B has to understand that it has all the homeowners’ exposures plus commercial exposures,” Wolf said. “Years ago, homeowners’ was the darling of the insurance industry; now it’s become unpopular,” Wolf said. “If we were starting out today we would never be able to start a program.”

As a result, last year Wolf “took the painful step of going non-admitted,” he said, although he now considers it a smart move because of the flexibility of rate and form filings available through the non-admitted market.

Wolf now self-insures through its wholesale operation, Old Line Insurance, which places coverage through Lloyd’s of London and Great Lakes UK, owned by Munich Re. “We tried for a long time keeping it in the admitted market, but it should have always probably been in the nonstandard market,” Wolf said.

Currently about 600 independent agents go through Old Line to access B&B coverage, with about 20 of these having B&Bs as a niche market, placing between 20 and 100 policies a year.

In order to distinguish themselves in an increasingly competitive market, B&B owners are constantly throwing new risks out there, Ebel noted. Besides adding restaurants and gift shops, many are offering enhancements like spas, horseback riding, whitewater rafting and other perks. Two of Wolf’s B&B clients are lighthouses on the Great Lakes; several have landing strips where guests can fly in their own light aircraft; and one in California even put on a rock concert in its adjoining field, attracting a crowd of 5,000. These make for some very unique risks to cover with insurance.

Because of this, Wolf’s coverage tends to run on the high end: annual premiums average around $5,000, excluding auto and workers’ compensation. However, the coverage is unique since it guarantees replacement cost and field appraisal, Ebel said. Wolf treats antiques as contents on replacement costs, so buyers don’t need a separate schedule to list their antiques. The coverage also includes liquor liability, non-owned auto included, mechanical breakdown (crucial because of refrigeration), power failure, and the same living expense reimbursements as covered under standard homeowners’ coverage.

Although probably not every B&B owner needs this extensive of coverage, they still have unique needs that can’t be met with a simple homeowners’ or small-business policy, Andracchio of TRICOR said.

Roughly 80 percent of TRICOR’s clients have a specific B&B coverage that includes both personal and commercial coverage rolled into one program. Although TRICOR is authorized with Old Line, the agency also accesses regional and national carriers to provide the coverage. A prominent national player in the B&B market is Markel Insurance Co. In Glen Allen, Va.

A new appetite for a growing niche

While Andracchio noted that many carriers have pulled out of the B&B market over the years, the increasingly stringent B&B requirements being put on owners by city, county and states are making the line of business more attractive to insurers again. States like Illinois and Wisconsin, for example, require B&B owners to have a sanitation license and local requirements are tough on building code violations. “These requirements are making B&B owners much better business people,” he said. “In turn it’s making B&B coverage a much better risk for insurers than it has been in the past.”

Another agency specializing in B&B coverage is The Insurance Shop, based in East Jordan, Mich. Principal Michael Burr noted that while he represents only one regional insurer for his agency’s B&B business (Fremont), the company provides a “top-notch product in Michigan.”

B&B represents about 10 percent of The Insurance Shop’s total book of business and has been growing since the agency started writing it 11 years ago, Burr said. The package policy provided by Fremont includes personal lines, liability, coverage for restaurant, theft, fire, lightning, windstorm, special events coverage and loss of income. However, it’s not a basic small-business policy, but a special coverage with the option of adding endorsements, he said. The one-year policy with limits up to $2.5 million cost B&B owners average about $1500, but owners must meet underwriting guidelines in order to qualify.

TRICOR, which has access to several regional and national markets, is licensed in five states to write the coverage, with four to five insurers in each state.

Andracchio got into the business three years ago after a long career in software; he is an antique collector and interested in historical properties so it was a good fit. It doesn’t hurt that TRICOR’s offices in Dubuque, Iowa are only 15 miles away from Galena, Ill., a historic river town with more than 40 B&Bs.

Galena is a great example of how owners get into the B&B business in the first place, he said. Chicagoans with strong business backgrounds and substantial capital-some retirees, others career changers-moved in as B&B owners.

“They fall in love with a quiet community and want to find a business to run there,” he said. “Some do it for the love of the building, and others are supplementing their existing income.” This is borne out by PAII statistics, that show most B&B owners are between 35 and 64 years old.

Many of the B&Bs The Insurance Shop writes in the Midwest are smaller operations run by a wife, with the husband working outside the operation, Burr said.

The most popular areas in Michigan, for example, are along the west and northwest coasts of the state, making them easily accessible from the Chicago area by a two-hour drive.

And he added that a B&B makes a good second career for retiring Baby Boomers. “Running a B&B is a viable alternative to not working after retirement,” he said. “After all, they’ve got to live somewhere.”