Law Symposium: Travel Agency Liability & Risk Management

Part I: Travel Agency Liability Exposures

Types of Claims

No discussion of risk management is complete without mentioning claims. After all, they do represent the "worse case scenario" in terms of what an agency tries to avoid by implementing risk management techniques. Unfortunately, even the successful implementation of a risk management program will not ensure that your agency will be claim-free. Accordingly, we begin with a discussion of the claims you may encounter and the realities of today's business and industry environment. We will follow with a discussion of non-insurance risk management techniques and finally, summarize how professional liability insurance provides a more definite transfer of risk.

There are several types of claims that an agency may encounter. Most can be categorized as claims of negligence, breach of contract, bodily injury, or wrongful death.

Negligence is defined as the "failure to exercise that standard of care for the safety of others, which the law imposes on an individual or corporation." Whether the duties arise in contract, statute or common law, legal liability for negligence must include the following criteria: a legally protected right, a duty owed to those possessing that right, conduct which falls below the customary standard of care, proximate cause, and resulting damages.

When discussing the professional standards of a travel agency, "reasonable care" is the degree of care and skill exercised by reasonably competent members of the profession under the same circumstances, in good faith, in the discharge of an agency's obligations. We will discuss later in this paper whether the heightened standards of a travel agent caused by the imposition of service fees has raised the legal duty owed.

One of the elements that must be established in order to make a case based on negligence is proximate cause; specifically, the negligence of the defendant was the primary or nearest cause of the damage or injury sustained. Whereas proximate cause would appear to be absent in many instances where the travel agency is not directly involved, plaintiff's attorneys will allege the negligent selection of the supplier as the proximate cause. In other words, had it not been for the contracting of and use of a certain supplier, the incident would have never happened.

It is important to remember that negligence in the selection process is a common allegation against a travel agency, maybe more so because of some recent airline or tour operator failures. It may be construed as a reasonable duty for an agency to investigate the financial conditions or reliability of suppliers, especially if their difficulties are well publicized.

In any event, a case may be defensible, but the travel agency often remains the most accessible entity. Although there may be several defendants to pursue, it usually comes down to who is the easiest to sue in proximity, not necessarily who the wrongful party is or who is most likely to provide the greatest recovery. Consider that the suppliers you use on international tours are often not accessible or do not have sufficient ties to the United States for jurisdictional purposes.

There is also a duty to inform customers of any information that could affect their travel plans, including, but not limited to visa and inoculation requirements, weather conditions, political climate, hazardous exposures associated with adventure travel and State Department advisories.

A subset of negligence claims falls under the breach of contract cause of action. Although contractual liability is generally excluded under professional liability policies, it is recognized that many negligence claims are filed under a "failure to perform" or breach of contract count. If the client does not receive an element of their tour package or if it did not meet his or her expectations, a breach of contract action may be brought. Any warranties or representations that were previously expressed either orally or in writing may become supporting evidence in a case. This is important to remember when training personnel in the handling of customer bookings.

The most serious of claims involve bodily injury or wrongful death. Once again, it needs to be established that your agency's action or inaction proximately caused the injury. It seems that regardless of the dubious proximate cause, travel agencies increasingly are being sued for injuries that occur on a client's trip.

Recently, we've also seen a number of claims involving y2K. These claims will be addressed as one of the traditional types of claims enumerated above.

It is important to note that there are several traditional legal defenses that may be appropriate in response to a claim. While, in many instances, the proper defense is the outright denial of liability, there are other legitimate defenses that may be used to eliminate or at least minimize the impact on your agency.

The defense of contributory negligence is defined as the failure of the claimant to exercise care for his or her safety. It may also be argued that a person "assumed the risk" when one knowingly or voluntarily exposes oneself to the danger of injury. This defense is often applied in bodily injury claims arising from activities such as skiing, mountain climbing, river rafting and ballooning. A travel agency, particularly one that specializes in adventure travel, should present a tour operator's waiver detailing the specifics of a tour and areas of potential concern. The purpose of this waiver is to release the tour operator from liability and essentially, acknowledges the participant's complete assumption of the risk. Be certain to make sure that the waiver also indemnifies your agency, as you are acting in the role of agent for that tour operator by selling their product.

It should be noted that the courts may not look favorably upon even a fully executed waiver, unless it is specific in nature and signed with consent. Otherwise, it may be construed as a "contract of adhesion" implying that the participant signed the waiver under duress without adequate disclosure.

A final defense is the statute of limitations that sets forth the period of time in which a cause of action may be brought. This time period will differ from state to state and court to court and a local attorney can determine whether a claim may be time-barred.

From a legal standpoint, the definition of a travel agent and his or her requisite duties is unclear. The courts have differed in their interpretation of who owes whom a duty. Whether the agent's primary duty is owed to the supplier or the client, it is clear that the travel agent's role in all aspects will continue to grow. A travel agent's traditional role as fiduciary will remain, as they continue to hold monies and documents in trust for their clients. Their professional role, however, will increase, as clients turn to them as information specialists and travel experts, rather than simply conveyors of money and providers of tickets.

While there is no official sanctioning or licensing body of travel agents, there are certified designations that have increased the credibility of travel agents. While many states continue to ponder their possible licensing, travel agents remain unlicensed and unmonitored, at least from a purely legal perspective. It is the combination of the agents' own collective need as a body to increase their professionalism and the consumer's rising expectations that have lifted the agents' duties.

The recent cutbacks on air carrier commissions is of obvious concern to all travel agencies. One "solution" that has been suggested by several sources is that agencies give consideration to charging service fees for rendering services.

As stated above, courts differ to some extent on the exact legal nature of the relationship between a travel agent and a client. Some courts hold that travel agents are simply agents of hotels, air carriers and other suppliers, and as such, owe few duties to the passenger. Others take the opposite view and hold that travel agents are agents of the passenger and therefore owe significant fiduciary duties of good care and professionalism. Still, other courts hold that travel agents, regardless of whether they are agents of the supplier or of the passenger, have certain specific duties to passengers.

For instance, they must be, at least, somewhat knowledgeable about the services that they sell. They must communicate any bad news about a supplier of which they have notice, and the traveler does not. They must use reasonable effort to try to book that which the traveler wishes them to book. For example, if a client asks for a very quiet Caribbean island, an agent should not suggest a stay in San Juan.

As a general rule, even in states where courts have held that travel agents are agents of suppliers, the more recent trend in litigated cases is that agents have an obligation to disclose anything they know that is of a material importance to the traveler, as long as it is not unreasonable for the traveler to already know the same. For example, if the daily newspapers are replete with articles about the financial troubles of a particular airline, the need for the travel agent to repeat what is in the newspapers may be lessened. If, however, the agent knows that a particular hotel is undergoing considerable renovations and this fact is relatively unknown outside of industry circles, the agent may be required to so advise the client.

If a travel agent charges a service fee, he or she is obviously expected to provide service for the fee. That is the reason the existence of these duties is important to the issue of service charges. At a minimum, when a travel agent is asked for a recommendation, he or she is basing that recommendation on his/her professional knowledge. We do not, however, see a great deal of increased liability or vulnerability from the imposition of service fees, with two distinct caveats.

First, if you are acting as an order taker (e.g., I want to go to Chicago next Tuesday on American Airlines at 8:00 a.m. and return that evening on the American Airlines flight that returns at 5:00 p.m.), you do not have any materially significant heightened duties, except, of course, to be accurate. If, however, the traveler asks for a suggestion pertaining to a flight to Chicago, the agent probably has an obligation to advise whether there are different fares for different carriers. At a minimum, if the question of cost is raised, an agent has a clear obligation to ferret out all available information in order to comply with a client's request. This would include advice regarding fares to and from nearby alternative airports.

The second and more significant caveat relates more to leisure travel. Honeymooners, inexperienced travelers, and many first time travelers will seek an agent out for advice and in turn, the agent will investigate the client's needs before making the sale. It is important to gain a sense of what the client is looking for in their vacation. Determine what features are material to their sense of enjoyment. When an agent extracts a service fee for services rendered, the advice sought must be provided in a competent manner. This is not a whole lot different from the already existing approach to the obligations regarding travel agents' duties, but this obligation is heightened once an agent collects a service fee.

The bottom line is that there are no insurmountable legal obstacles to imposing a service fee provided that agents understand that once they collect a fee, they will be held to a standard of having exercised sound professional judgement after having first ascertained the wishes of their client.

The last few years have seen a significant increase in the number of unhappy vacationers who are willing to go to court, as well as an expansion of the liability that has been imposed on travel agents.

New legal duties are being established such as the duty to inform customers of any information which could adversely affect their travel plans, including the financial condition of their suppliers.

And, although the travel agency may not be the guilty party, it is the "most accessible." Foreign distant suppliers present procedural problems such as jurisdiction, venue, or choice of law.

These quotes are only a few of the statements that have been made recently by several travel industry and legal experts concerning the litigious climate in which today's travel agency must operate. More and more judgments alleging negligence, breach of contract, fraud, and misrepresentation have been levied against United States travel agencies in what can only be described as a mushroom of lawsuits as never seen before. Although bodily injury claims generally represent the largest awards to date, the public's expectations of their leisure and business travel have risen to levels that allow for little, if any, compromise.

Without question, itineraries and brochures can become the focal point of a case in court. This is probably because much of the other evidence involves what one party allegedly said to another party. Careful consideration should, therefore, be given to all written wording. Definitive language in the form of promises should be avoided in tour brochures, but an agency can use the itinerary to definitively state certain terms and conditions. The itinerary is also an ideal document to confirm certain arrangements, such as certain requests made (and the non-guarantee of such requests, i.e., non-smoking room, oceanfront room, honeymoon amenities) or the acceptance or declination of travel insurance.

How does an agency avoid the use of definitive language in its brochures and still accomplish its marketing goals? While it is important that brochures do not oversell or contain exaggerated descriptions, the use of a certain amount of "puffery" is acceptable and will enhance the sales appeal of the brochure. Blatant promises must be avoided at all cost. For example, a statement that "it never rains in Aruba" can be rephrased to indicate that "Aruba enjoys the reputation of a beautiful, almost rain-free climate". While this may seem like common sense, we have encountered cases in which agency brochures have clearly crossed the line. For instance, one brochure stated that "you may stroll the streets in complete safety as the city is free of crime". Needless to say, a woman who was mugged in the destination later raised the brochure language in her lawsuit against the agency.

These same words of caution also apply to verbal representations, even though the burden of proof will be greater in establishing that the agent made such a representation and that the client subsequently relied upon it.

Part II: Non-Insurance Risk Management -- Minimizing Exposures

We will now present a wide range of pertinent information and recommendations that should be evaluated and adapted to your agency's specific needs and objectives. When determining the steps that can be taken to minimize potential liability, careful consideration should be given to measuring the potential precautionary procedures against their possible deterrent to travel sales. Some risk reduction concepts may not be practical for everyday use.

As discussed above, the duty placed upon travel agents because of service fees may be heightened. A greater level of professionalism and service appears necessary. Recently, more travel agents have secured professional designations; i.e., CTC, CTA, or are deviating from the traditional title of "Travel Agent" and using titles such as Travel Consultant", "Travel Counselor", or "Travel Professional." Accordingly, the "new and improved" travel agent must be well informed and present to his or her clientele timely and appropriate information.

One of the most important concepts in avoiding liability is the necessity that travel agents disclose the principals involved in furnishing travel services. This disclosure is particularly important if an agency is acting as a wholesaler or tour operator, because the delineation of who is actually providing the services may become blurred. If the tour is marketed under a tradename, the client may only identify with that entity and not realize that the services and accommodations are actually being supplied by third parties.

As travel arrangements become more complicated, it is important to keep in mind that travel agents may be held responsible for the acts of others if they do not disclose clearly that they are merely intermediaries involved in handling travel arrangements, which are actually provided by third party suppliers. Unfortunately, it is far too easy to bring a local travel agency into court, while the actual supplier, especially if in a foreign country, is often inaccessible and unresponsive to litigation brought in the United States.

Increasingly, travel agents are specializing in niche travel. This specialization has actually been helpful in assisting the agent meet his or her heightened duty to the client. Agents are researching their niche with more intensity in order to meet the competitive nature of the industry. As such, they are meeting the standard that goes along with the new title or designation as specialist. They are providing their clients with more detailed information. Some examples of relevant information are visa, customs, and inoculation requirements that seem to change with frequency. It is important in this age, given the fragmented family structure, that parental consent issues are properly addressed. Finally, the volatility of our world situation makes disclosure of travel advisories essential for the agent providing global travel. As discussed previously, an agent's obligation is to disclose anything they know that is of a material importance to the traveler, as long as it is not unreasonable for the traveler to already know the same.

The advent of specialization does require of bit of "covering one's ___." There are specific and unusual risks that accompany such areas as student travel, senior travel, or adventure travel. It is therefore advisable to consult with your legal counsel to construct appropriate releases or disclaimers to protect your agency.

It has become increasingly difficult to turn away business, but sometimes clients' requests become problematic. For instance, they may wish to be booked in a substandard hotel or use a particular operator that the agent is unfamiliar with. In such instances, informal disclaimers or quite simply, printed notations on an invoice, will help to insulate an agency from future exposure should something go wrong. Be particularly wary if there seems to be a breakdown in communication with a client and utilize written documentation to confirm your understanding. While these may not be construed as legal disclaimers, they effectively become disclaimers when they are used in an agency's defense.

Responsibility clauses are especially essential for travel agencies acting as tour operators. Since most serious litigation stems from acts or omissions of third party suppliers not owned or operated by the travel agency/tour operator, every travel agency acting in that capacity should have a strong responsibility clause that specifically holds it harmless from the negligent acts or omissions of all third parties. Such clauses have been responsible for the dismissal of a whole range of claims, ranging from food poisoning to weather delays. The precise wording of the clause should be reviewed by an attorney on a regular basis.

It is important that any disclaimer language be customized for the agency's business to address specific risks. Any attempt to disclaim an agency's own negligence will undoubtedly be held void by a court. Explain the relationships with specific suppliers, even to the point of specifically naming such suppliers.

A key to protecting an agency from professional liability losses is the development of and adherence to carefully constructed, pre-determined office policies and procedures. Attention to detail, comprehensive training, and adherence to firmly established office procedures by all personnel will help to reduce the likelihood of a claim or in the event of a claim, help minimize its severity.

To control losses, an agency must properly train and supervise its staff. In addition to making certain that the individual is adequately prepared to perform his or her specific job functions, consideration should also be given to discussing the existence of liability insurance, as well as relevant risk management techniques.

Travel agency employees should also be given specific instructions on how to react if a problem occurs. The staff should be prepared to make every effort to assist the client when a problem arises. Most important is communication. Assure the client of the actions being taken. Identify and address the appropriate supplier or party responsible, take appropriate notes of any conversations, and communicate any findings.

Emphasize to all employees that it is extremely important to document telephone and in-person conversations with clients and suppliers. In speaking with a supplier, a subsequent note should always include the name of the other person, the time and date, and acknowledgement of any request for written confirmation of that conversation. Such notes can be extremely brief to avoid unnecessary paperwork; i.e., "12/08/99/10:30 a.m. -- spoke with Debbie Smith at ABC Hotel. She will confirm receipt of our fax requesting five additional rooms (new total: 165) for week of 2/16/00".

Of course, such notes do not eliminate the necessity for actual "hard copy" confirmation or signed contract endorsements. Nonetheless, notes to a file can be extremely helpful in reconstructing a sequence of events especially when a suit is filed some time after the booking is made and the agent is no longer with the company. The courts surprisingly seem to give credibility to handwritten file notes. Oftentimes, there is nothing more than "he said, she said" to argue in a case. Even if the notes are insufficient as proof of the issue at hand, their existence may substantiate an agent's thoroughness and lend credibility to his or her testimony.

The formalization of such procedures can be facilitated by the use of some standard forms or checklists that act as reminders to the agent. As mentioned above, they also lend credibility to the agency's overall thoroughness and consistency.

Such procedures should definitely address the mode of payment and transmission of funds. If booking with a charter operator, be sure to make payment to the designated escrow account. If an agency acts as a tour operator, it should establish an escrow account for remittances. Every opportunity presented to protect a client's monies should be considered. Utilize credit card payments as an additional means of protecting the client. Each cardholder has certain chargeback rights that he or she is afforded if services are not properly rendered. Assure that the mode of payment is well documented, credible and traceable. These common sense guidelines should seem even more basic with the proliferation of supplier bankruptcies and travel scams that have plagued the travel industry.

An especially effective means of deterring small nuisance suits is to offer travel insurance to all customers. Those who purchase insurance are less likely to initiate action for damages that are covered under such a policy. Even if a customer elects not to purchase travel insurance, the agency's position in court will be strengthened if it can be proved that insurance was offered for typical exposures of travel. Such proof can be easily ascertained by having clients initial a specific declination of insurance or by clear confirmation of the customer's option on the invoice or itinerary. This documentation should be part of an agency's formalized office procedures.

Research in 1995 revealed that only one out of every seven travelers was offered travel insurance, while seven out of every ten travelers indicated that they would have purchased travel insurance had it been offered to them. It appears that these numbers are improving given the profitability of travel insurance sales, greater awareness of such insurance products, and the booking of luxury travel prompted by the strong economy. These are strong considerations for selling travel insurance, but don't underestimate its risk preventive nature the next time a potential sale arises.

It is very important that a travel agent utilize a professional and prudent approach to the selection of suppliers. Plaintiff's attorneys recognize that it is difficult to establish negligence against a travel agency/tour operator for bodily injury liability; i.e., emanating from a transportation conveyance accident, if the travel agency/tour operator did not own, operate or maintain the conveyance. Consequently, the allegations usually focus on an agency's purported negligence in selecting the travel supplier.

Accordingly, investigation into the background and reputation of the suppliers used by an agency is imperative. Oftentimes, an investigation is prompted by the desire to enter into a preferred supplier relationship. While it is usually the marketing and override value that is of primary importance, one should not minimize the value of having a strong supplier relationship that has been contractually cemented, where trust has been developed.

Further investigation into suppliers should include a query into the associations or memberships the supplier belongs to and whether the association has a bond requirement or mandated protection program. It is also important to inquire about a company's insurance. When dealing with foreign entities, adequate insurance may not be available and greater reliance will be placed on reputation. This inquiry is particularly advisable, however, when considering certain exposures that may be deemed dangerous; i.e., hot air ballooning, helicopter trips, and river rafting. If a written contract is in place with these suppliers, make sure that it includes a "hold harmless" provision that will indemnify the agency from the negligent acts or omissions of that supplier. Similarly, a supplier's insurance should allow for an agency to be added as an "additional insured".

Care must also be taken to avoid suppliers presenting known or highly foreseeable hazards. We recommend perusal of industry trade publications and websites for information pertaining to specific suppliers. Develop a tickler system that alerts you to current developments pertaining to your suppliers. When you discover information pertaining to a supplier, share it with our client. It is always best to not assume that your client knows this information.

Finally, an agency should use its network diligently. Whether it's a call to a fellow association member or even a friendly competitor, the time spent will certainly be worth it if it contributes to the elimination or mitigation of a claim.

After an incident occurs involving a client, an agency should draw upon the relationship it has hopefully cultivated with the relevant supplier to resolve the matter. Once again, the maintenance of a strong supplier relationship is not only crucial for marketing purposes, but also, to address the mitigation and resolution of incidents involving suppliers.

If the situation does not involve a familiar supplier, additional care must be taken to document conversations, make all requests in writing, and communicate actions to the clients involved.

When a passenger returns from a trip with a claim or complaint, refunds should be handled carefully to avoid any inadvertent admission of guilt. Refunds should be clearly marked as either i.) monies for unused services returned by the supplier or ii.) goodwill payments. Since payment of a claim can be construed as an admission of guilt, the monies should be clearly categorized when returned to the traveler. If the payee does not cash the refund check, it is probably an indication of a future problem.

When receiving a commitment for a refund from a supplier, be careful not to return those funds to the customer until the money is actually received. This simple procedure will help to avoid inadvertently advancing funds for a supplier that subsequently defaults. If there is a slow response after a refund commitment, it may be a warning sign indicating the financial instability of a supplier.

Perhaps the most basic piece of advice is to remain attentive and courteous to the client. It is a common reaction to have the customer's complaint provoke defensiveness or worse yet, indigence. When a customer is dissatisfied with a trip or encounters an incident, the travel agent may become the primary target of his or her frustration. It is important to remember not to become defensive or adversarial. Rather, allow the customer to vent and gently assist him or her in recognizing which parties are responsible for the problem and how your role will assist in the resolution.

The customer should be furnished with the name and address of any suppliers involved in the matter. The travel agent should take every reasonable action to secure restitution from the suppliers on the customer's behalf. Any written communication should include a carbon copy to the customer. Certainly, this approach is not foolproof, as travel agents are often sued after the most diligent actions are taken on the client's behalf. Nonetheless, there are many reasonable individuals who will recognize the efforts of an astute agent and exclude the agency from any litigation.

Sometimes, minor incidents can erupt into more serious claims. For instance, there have been a number of claims where travelers arrive at their destination and do not have a confirmed reservation. Even though the hotel may be researching the problem, the situation escalates and results in additional stress and aggravation. Sometimes this condition can contribute to much larger medical problems. Accordingly, upon notice of any problems (even ones apparently being addressed by the supplier), be certain to show empathy and insert yourself into the situation, as to ensure that nothing falls through the cracks. It is important that customers in such situations receive the full attention and cooperation of their travel agent regardless of the source of the problem.

If subjected to a small claims action, an agency should keep in mind that the proceedings may not be heard by a judge, but rather, a practicing attorney or magistrate who is more interested in having the parties settle the matter. They are often predisposed to the theory that the plaintiff is entitled to something (maybe not everything they've demanded, but something). Even if they recognize that a third party may be liable, they are often sympathetic to the fact that the travel agency is in a better position to secure a refund than the customer is. The one certainty with small claims activity is that the parties will waste a lot of time sitting and waiting for their case to be called. As a result, unless the claim is truly without merit, it is advisable to consider every option for settlement. Be creative. If the suit has not generated considerable ill will, consider a waiver of future service fees. If the supplier has provided a partial refund or discount for future bookings, consider combining that offer with a nominal cash offer or offer of services.

It is imperative that a travel agency is fully prepared going into small claims court. Some states will not allow for attorney representation, so consultation with an attorney is recommended prior to attending the hearing. All records and documentation should be thoroughly reviewed and brought to the hearing.

Part III: Transfer of Risk: Insuring Travel Agency Liability Exposures

While virtually all agencies rely on some type of professional for guidance, even a general insurance broker may not be fully aware of the unique needs of a travel agency, especially if they have few, if any other, travel accounts. For instance, most travel agencies have a unique worldwide general liability exposure, in addition to the standard property, workers compensation and office liability risks associated with any business. A travel agency is also exposed to certain transportation liability for auto, aircraft and watercraft, as well as professional liability for the errors that can occur with the multi-faceted transactions that agents handle on a daily basis. Unfortunately, most agencies do not have the luxury of using an in-house Risk Manager whose only responsibility is to identify and treat these exposures. This area is generally left to Senior Management, where managing risks must compete for the time and effort that otherwise should be spent on their primary focus of running a successful business. This is why it is so important for the agency owner to have a basic working knowledge of liability insurance concepts, such as what can be insured and what can't, and ways in which risks can be treated through both insurance and non-insurance techniques. Following is a brief overview of some of these general insurance concepts:

Although most business owners are familiar with the concept of being legally responsible for actions or conditions that may cause harm or financial loss to another, many are confused with the way in which insurance can and cannot protect their interests. The mere fact that a claim or suit has been filed against a travel business in-and-of-itself does not mean that an insurance policy will automatically assign legal counsel or cover the alleged damages. Unlike a property loss (first-party claim) in which an insured sends evidence of the damaged property and receives a loss payment in return, liability insurance covers the financial consequences of an insured's legal responsibility to another. The concept of just filing a claim and then receiving a payment does not apply to liability (third-party) claims.

When there is applicable insurance coverage, it's the insurance company who is obligated to pay the covered damages, not the insured. That is, although the actual liability is not transferred to the insurer, the financial consequences are transferred by way of the policy contract. With the insuring agreement, the insurer has a contractual obligation to pay the covered damages according to the policy's terms and conditions. The insurance contract, therefore, is an instrument used for the "transfer of risk" from the policyholder to the insurer.

Before the policy is triggered, it must be determined if the incident that caused the damages is a covered event according to the policy's terms and conditions. If so, then legal counsel is assigned in the event of a lawsuit. In the absence of a legal proceeding, the insurer may determine that damages should be covered based on the particulars of the claim notice alone. In either case, liability needs to be established before the policy will cover the financial demands of the claimant.

More important that any other feature of a liability policy is the coverage that is provided for legal defense and claims-handling expenses. Those travel agencies without adequate coverage must bear the burden of not only hiring the right legal counsel, but also paying for all expenses, as well as any settlement or judgments for which they will be responsible.

Upon notification of the summons and complaint, the insurance company takes over, in most cases assuming all costs associated with the investigation and defense of the matter. With some policies, a deductible might apply to these expenses, but in many cases the costs are completely insured. This full defense policy is also known as having "dollar-one defense" protection. Whether or not a deductible applies, the coverage is still considerable, given the high cost of litigation in today's environment.

Basic Commercial General Liability (CGL) Insurance refers to coverage that will defend and indemnify against two basic types of third party liability claims: bodily injury and property damage. The injuries can occur either at an insured's location (premises liability) or away from the insured's location, but arising from their business activities (operations liability). An example of travel agency liability that arises from an on-premises exposure would be your typical "slip and fall" at the agent's storefront location. An example of an operations exposure would be a case in which that same travel agent, after arranging for and escorting a customized tour of the Caribbean, was sued after their client was seriously injured in a para-sailing accident. The agent had recommended a particular vendor based on cost alone, without any other factors being considered.

In addition to basic bodily injury and property damage liability protection, the comprehensive CGL form also includes: advertising injury, personal injury (libel and slander); fire legal liability (when the insured is responsible for a fire damage to their leased premises); certain contractual liability (hold-harmless provisions); and premises medical payments (an issue of negligence need not exist.) However, they exclude claims associated with the failure to perform or failure to provide the goods and services as promised. For these situations, an Errors & Omissions (E & O) policy is required. It is intended to cover the non-bodily injury and property damage losses (those that are purely economic in nature) associated with a negligent act, error or omission of an insured.

For instance, if the travel agency above were sued because the trip failed to meet the expectations of their client, e.g., the accommodations were less than desirable; the golf course was inaccessible; the activities planned were not provided; then the standard CGL form would disclaim coverage, since the claims did not involve bodily injury or property damage. Similarly, the standard Errors & Omissions policy would disclaim the bodily injury and/or property damage associated with the para-sailing accident referenced above, since these damages are not included on the E & O policy form. A business needs to be certain that both areas of liability are insured.

Whatever insurance decisions are being considered, it is important to place a dollar value on the time and expense of handling uninsured exposures. The cost of hiring an attorney familiar with the agency's specific business transactions must be considered in addition to the ultimate payment of uninsured claims. A value should also be attributed to the time and expense of the company's executives and principals in overseeing the claim cycle, from the initial investigation, to any court appearances, and finally to any settlement discussions or litigation proceedings.

Following is a brief overview of the areas that are most important when assessing the type and extent of liability coverage needed for your typical travel agency business. When choosing the appropriate insurance product, an agency owner should consider the following questions:

Does the policy cover the unique exposures of a travel agency?

These would include, among other items:

An exposure that is worldwide by nature;

An exposure that involves numerous transactions, each of which includes the risk of providing misinformation (i.e. -- when and where are visas required);

An exposure that includes liability for transportation services -- albeit contingent in nature -- involving automobiles, motorcoaches, scheduled and chartered air transportation, and/or cruise vessels;

An exposure arising from travel arrangements that can include non-traditional exposures involving watersports; skiing; fishing; scuba diving; mountain biking; fishing and other hard and/or soft adventure activities;

An increased level of expectation from an increasingly sophisticated travelling public;

Does it have adequate limits of protection?

Are the limits issued "per occurrence" and is there an aggregate (maximum limit) for the policy period? A limit of $1,000,000 might seem sufficient on the surface, but not if that is the most the policy will pay in any given year. A per occurrence limit, with no aggregate for the more catastrophic exposures involving bodily injury, is preferable.

Is the policy issued on a Claims-made or Occurrence basis?

With a claims-made policy, coverage will only apply if the claim is made to the insurer while the policy remains in force or if the claim has been submitted during an "ERP" (extended reporting period), which is also known as a "tail". This tail coverage, which is available for an additional premium, extends the period in which the claim can be made once the policy period ends. This is in contrast to an occurrence policy in which a claim may be covered regardless of when it is reported to the insurance company, as long as the claim occurred while the policy was in effect.

Example: A claims-made policy is issued for the period of September 1, 1999 through September 1, 2000. An incident occurs on August 31st, 2000, but is not reported to the insurance company until September 15th. In the meantime, the policy does not renew on September 1st, since the insured failed to return the required renewal materials. If the insured did not purchase the "extended reporting period" option, then no coverage would apply, since the claim was reported after the policy expired, even though it occurred when the policy was still in effect. With an occurrence policy, this potential gap does not exist. As long as the policy is in place at the time of the incident, even if the claim is not reported until months or years later, coverage will still apply.

Are The Insurer And Program Manager Familiar With Travel Agency Liability Issues?

Whatever the profession may be, it is always in the best interest of the insured to have an Underwriter and Program Manager who are familiar with the insured's industry. It is critical when determining coverage requirements and when handling claims to understand the very unique relationships that exist between the insured and its business peers. These relationships can be complex and far-reaching. By its very nature, the services provided by a travel agency can involve numerous vendors, making it one of the more complicated business environments to work in -- and to insure. From the hotels, to the airlines, to the tour operators, to the cruise lines -- whether foreign or domestic -- travel plans usually include two or more of these components. This creates uncertainty when deciding what exposures exist for the travel agency, where and when insurance is needed, who should insure them, and whom should the legal team look to when the travel agency is brought into a claim. Unless an Underwriter specializes in this type of coverage, it is difficult to duplicate the knowledge and experience that comes with a specialty underwriter, regardless of the industry it insures.

As stated earlier, with a liability policy the insurer is obligated to pay on behalf of the insured all sums for which the insured is legally responsible, subject to the policy's terms and conditions. This is called the transfer of risk; that is, the financial consequences of the liability claim are transferred from the insured to the insurer by way of the policy contract. The insurance company cannot seek recovery back from the insured for either defense costs or damages, other than any applicable deductible or co-payment provisions. The obligation to pay becomes the insurer's once a policy is in force.

Unlike an insurance product, a bond does not assume the financial obligation of the insured (principal) but it does act as an instrument for payment of the obligation, in the event the principal is unable to do so. However, the insurance company that issued the bond retains the right to seek recovery back from the principal for the amount paid. This is the major difference between a bond and an insurance contract.

This method of a financial guarantee is exemplified with the ARC Bond. The principal (the travel agency) is obligated to pay the obligee (ARC) for monies due on issued airline tickets. If the agency fails to pay, then ARC can activate the bond that was issued to the travel agency for the benefit of ARC. The Bond Company, however, has the right to seek recovery back from the travel agency. Oftentimes this is accomplished through the collateral that was posted at the time the bond was issued (a letter of credit, for example). The insurance company will activate the collateral for reimbursement.

Policy exclusions exist for two very basic reasons: 1) to exclude coverage that is better suited to another type of policy contract and; 2) to exclude risks that are considered uninsurable.

Virtually every general liability policy excludes coverage for claims arising from a workers compensation incident, whether it's a standard Commercial General Liability policy or a Professional Liability form. Why? Because all employers are strictly liable for on-the-job bodily injury to their employees. This strict liability is absolute; that is, there is no defense available to the employer, even in cases in which the employee is at fault. Therefore, unlike a general liability form, defense coverage is not an element of a Workers Compensation policy, nor are there limits stated on the policy contract. The employer is responsible for all expenses associated with a work-related injury. For these and other reasons, Workers Compensation coverage needs its own policy language. (Since all states require employers to purchase WC insurance, in order to assure that coverage is available, most states offer this insurance through government programs labeled "State Funds". The policy language varies little among these programs. Coverage is also available through the commercial marketplace.)

A property policy is another example. This type of insurance covers the property of a business owner (first party) as opposed to their legal liability to another (third party). A stand-alone policy or a packaged policy, which includes liability, is purchased to cover the owner in the event of a total or partial loss to their real or personal business property. There are specified "causes of loss" that will trigger coverage subject to the policy limits. The property is usually scheduled (itemized), but can be issued on a blanket basis, subject to very specific conditions and exclusions. The key difference between a first party and third party policy is that, with the former, the insured (or the one who holds a financial interest) receives the proceeds of the insurance. This is in contrast to a liability policy in which the payments are made to a third party, on behalf of the insured, who is legally responsible for the damages. Consequently, as with the WC policy, a separate insuring agreement is required for property insurance.

2) Uninsurable Exposures

The second reason for policy exclusions is to eliminate any coverage for risks that are considered uninsurable. To be considered an appropriate insurance risk, the exposure needs to meet one or more of the following criteria. The losses should:

If an exposure does not meet the above requisites for insurability, then the agency needs to consider other methods of managing the risk. Following are examples of travel agency risks that would be considered uninsurable in the standard marketplace:

Although these risks are considered uninsurable, that's not to say that they should be ignored. Insurance is only one of several ways in which the risk can be managed.

Managing Risk Through The Use Of:

In addition to the operational risk management techniques outlined in part two, and the purchase of adequate insurance coverage, a travel agency can use other tools to minimize their exposure to a claim. Following are three additional ways in which this can be accomplished.

Additional insured status (being named on another's policy) is an effective way to transfer risk to an unrelated party. It is most often used in those cases in which the one seeking the protection has no control of the products or services that may create a liability exposure.

An additional insured has the right to immediate defense coverage as opposed to being reimbursed at a later date for claims arising from the policyholder's actions. However, this "additional insured" status differs from a "named insured" in that there are no ownership rights to the policy; that is, the additional insured cannot change or cancel coverage; similarly, they are not responsible for premium payments or deductibles. The coverage is subject to the same terms, conditions and exclusions that apply to the named insureds. Therefore, not all losses are protected. (A hold harmless contract can address areas that would not be covered by insurance. See section below.) The standard landlord lease agreement is an example of a contract that includes an additional insured requirement. The landlord requires this protection for claims that may occur as a result of the insured's business activities.

A travel agency can use this additional insured protection for transferring risk to another. This is an extremely effective way of managing a travel agency's liability exposures. For instance, agencies that use a preferred supplier network, such as those that are created by the various consortia groups, should request to be added to the suppliers' liability policies for those claims that arise from the supplier's services. This is a significant risk management tool, since the booking agent is often named in the legal actions, even though they may be far removed from the circumstances that caused the claim. With this additional insured protection, the supplier's policy will respond on behalf of the travel agency.

These are documents issued by an insurance company, or its legal representative, which certify that coverage is in effect on the date the certificate is issued. Listed on the document is the name of the insured, the types of coverage, the policy limits, policy period, policy number, and the insurance company that issued the policy. Generally, the document includes a provision which states that the issuer must notify the certificate holder (the one requesting the proof of insurance) in the event the policy is cancelled or is altered in any material way. If the certificate holder is listed on the policy as an additional insured, it is usually stated on this document.

Travel agencies should incorporate a procedural method for requesting these documents into all risk management programs, from the smallest "mom & pop" agencies to the largest national chains. In this way, an agency can keep track of those vendors that have adequate insurance coverage, and those that may not. Regardless of whether or not the additional insured coverage is provided, an agency should only be dealing with those vendors that are properly insured. If obtaining proof of insurance is not possible or practical, an agency should limit its dealings to those vendors that have a national presence or have a proven track record with the agency.

These are contract provisions that agree to indemnify (reimburse) and hold harmless another party for claims arising from the services outlined in the agreement. Insurance for a hold harmless agreement differs from additional insured protection, however, in that the insured's policy is only triggered after the non-insured party has incurred the expenses, including any defense costs and/or payments related to the insured's services outlined in the agreement. Since not all of these obligations in the agreement are insurable, there will be some liability that will result in out-of-pocket reimbursements. Examples of contractual obligations that are not insurable are outlined in the section below. Claims arising from the bodily injury and or property damage indemnification are usually insurable, as these fit nicely into the scope of a general liability policy. The typical hold harmless provision is reciprocal between the contracting parties. That is, each party agrees to indemnify the other for claims arising from the services outlined in the agreement.

Example: Most corporate travel contracts include a hold harmless provision that will reimburse the client for certain expenses incurred as a result of the services provided. If the client is sued as a result of the negligence of the travel agency, then the agency agrees to hold that client harmless and must reimburse the client for the specified damages. This obligation exists whether or nor there is an insurance policy that will cover this liability. Similarly, the travel agency is usually indemnified for claims arising from the negligent acts of the client. As stated above, to protect the interests of both parties, indemnifications need to be reciprocal in nature.

Planned retention occurs when an exposure has been identified, but the agency has decided to self-insure all or part of the risk. Note the emphasis on planned! Unconscious retention results when the risk of loss is ignored altogether.

Retention is considered partial when only a portion of every loss is retained, as with deductibles, and the balance is transferred to another, as with an insurance contract. Retention is considered total when every loss is fully born by the agency; i.e. no portion is transferred to another. How is a partial retention accomplished? The two most common methods are the use of deductibles and what is called an SIR -- self-insured retention. A deductible is simply the amount an insured is required to contribute toward a paid claim; the SIR differs in that it is generally a primary layer of protection, which is self-funded. An Excess Insurance policy is then purchased to sit on top of this primary layer. This excess coverage is triggered once the SIR has been exhausted.

Retention will ultimately affect all travel agencies, since not all losses can be avoided by using loss control measures, insurance or risk-transfers. What needs to be determined and monitored on an ongoing basis is how the agency's resources (discretionary income) can absorb the retention level and to what degree the risks can be forecasted. Generally speaking, liability exposures are more difficult to forecast than those associated with property losses. For example, it's virtually impossible to set a limit on the potential liability associated with vehicular accidents, premises liability, or liability arising from professional services. This is in contrast to the more predictable losses associated with property exposures, which have a definitive dollar value.

Whether the retention is partial or total, actual losses may be funded or unfunded. The retention is unfunded when no special assets have been set aside to handle the exposure. Losses are paid from the agency's cash flow. With a funded retention plan, losses are paid for with assets that have been identified specifically for that purpose and which are not available for any other financial obligations.

Following is a very brief discussion of the concepts of contractual liability as they relate to the availability of insurance.

Generally speaking, most contractual obligations are not insurable, with the exception of hold harmless provisions relating to bodily and/or property damage. The contracting parties are expected to fulfill their obligations as outlined in the agreement, without transferring that obligation to any other party (e.g. an insurance company.) Typical travel agency contracts are between the agency's employees, outside salespeople, travel suppliers, vendors, clients, etc. and can include obligations relating to: commission schedules; employee issues; over-rides; financial guarantees; warranties; marketing and advertising commitments; royalties, etc. These are considered uninsurable obligations.

On the other hand, liability that relates to bodily injury and property damage can be insured in most cases. Since these exposures are unintentional in nature, and are typically treated with an insurance product, this form of contractual liability can be covered. Standard Commercial General and Professional Liability policies exclude coverage for claims arising from contractual liability other than incidental contracts. (An example of an incidental contract is a landlord's lease agreement.) However, most insurance companies offer a buy-back option for the contractual liability relating to bodily injury and property damage as outlined above. This is an important coverage feature and should be added to an insured's general and professional liability policies whenever possible.