[Industry Trends] In Bed with the Broker

When a commercial property becomes infested with bed bugs, the sudden and substantial loss of revenue and opportunity — read: empty, infested hotel rooms — can take a real bite out of the bottom line.

Who gets the phone call when these notorious hitchhikers move in to a business? Well, pest control companies, of course. But insurance firms' phones have been ringing off the hooks too. And typically, the bad news they deliver to their insureds that are dealing with bed bug infestations is that commercial property coverage doesn't cover extermination costs.

Now, that bites.

"As the pest control industry knows, bed bugs have been a very rapidly growing problem in the last several years," says Steve Good, vice president of sales at Terminix, which in June partnered with Aon Corporation, an insurance broker, and Global Excess Partners (GEP), an insurance agent, to offer the first bed bug solution for hotels, landlords, student housing, businesses and leisure travelers.

There is market demand for an insurance product that will allow hoteliers and other commercial clients to sleep at night — and bed bug insurance scratches the itch.

"Insurance carriers have heard from their customers like hoteliers that incidents of bed bug infestations create some very uncontrollable costs, so by these insurance carriers offering a bed bug insurance policy, it enables the hoteliers to level out those unanticipated costs," Good says.

Meanwhile, pest control firms could find opportunity in such partnerships in terms of selling other core services like termite control and widening their prospect pool, Good says.

"The resurgence of bed bugs has provided the pest control industry with a shot in the arm in terms of opportunities to grow our businesses," Good says. Research by industry consultant Gary Curl of Specialty Products Consultants shows an almost 25 percent increase in revenue generated in 2010 from bed bug services ($320 million).

"The ability to expand in a different channel (through insurance partnerships) other than traditional selling is very beneficial to pest control companies that choose to participate in this type of offering," Good says.
 

Capping the Cost. Insect infestations are typically excluded from commercial property or fire policies because of their unpredictability. And extermination costs generally exceed policy limits. The deductible just doesn't cover pest destruction, which can be a real problem for businesses like hotels that have to close down rooms to evict these unwanted guests.

"It's hard to predict potential losses from insect infestation(s), and there is little or no actuarial data to cover all types of insect infestation(s)," says Tim Guiltinan, senior vice president of GEP in New York, N.Y.

So, no one really knows how much damage pests can cause if they ravage a property. The costs could be endless, and that game of risk is not one insurance carriers want to play. But bed bugs are different. Now, there is "sufficient data concerning bed bug impact," Guiltinan says.

In particular, major hotel franchises have run up costs in the hundreds of thousands in order to banish bed bugs once they sneak into the sack in rooms, says Al Tobin, managing principal and national property leader at Aon Risk Solutions. And that's not to treat the entire hotel — just the rooms affected. "If you look at New York hotels, rates in July and August are very high, and if you are going to shut down a handful of rooms for several days because of infestations, that can be quite costly," Tobin says, citing an example of lost opportunity cost.

The stakes are high for many Aon customers in the hospitality industry should a bed bug infestation occur. "It's not just a clean-up issue," Tobin says, which the pest control industry knows all too well. "You have to shut down rooms, shut down apartment buildings, it's a significant loss of revenue and it's a business interruption."

And, the interruption could occur once a year, many times in a year or all year long. One room gets cleaned up, a traveler ushers in bed bugs once again. Another room is treated, another guest unknowingly brings in the bugs. It's a vicious, costly cycle. That's why the concept of paying one time — an insurance premium — for bed bug coverage that includes elimination resources (thanks to Terminix in this partnership) is attractive to customers who recognize that bed bug infestation could be a continuous issue.

"These policies allow hotels (and other customers) to level out their costs — to make sure that they are able to maintain and control their budgets for pest management and still have a reliable resource to take care of a curative situation on a moment's notice," Good says of the role Terminix will play in the bed bug policy.

Educating customers is also part of the deal. "Terminix will supply information to the insured — a tip sheet and some training on how to avoid bed bug infestations, and how to identify them," Guiltinan says, adding that consumers trolling the Internet crave information on this topic from trusted resources. "The information would best come from an expert," he added.

All this opens doors for Terminix, and other pest management firms that might participate in a similar arrangement, to raise awareness of their services and emphasize the value of a quality pest management program beyond bed bug treatment. "I certainly see this as a trend," Good says of bed bug insurance coverage.

In fact, a press release circulated in June, two weeks after the Terminix-Aon-GEP coverage was publicized, announced that Willis North America's Bed Bug Infestation Recovery Insurance (in association with Orkin) would provide decontamination services. Orkin was not ready to elaborate on the arrangement as of press time.

"As long as we continue to see the increase in bed bug infestation activity, we will see these insurance providers continue to create (i.e., policies), and pest management companies need to take advantage of opportunities they see (i.e., be a partner)," Good says.
 

Tapping the Opportunity. The bed bug coverage product is so new that there are no numbers to report. But Guiltinan says following the partnership announcement there has been "robust activity from the marketplace in all sectors," including hospitality, landlord/tenant and commercial clients. "It's cost effective when you consider the potential loss," he said.

But will all pest control firms benefit from partnerships like this? Or will only the big guys tied in with national insurance carriers get a shot at the business?

Good says there's room for operators of all sizes to seize an opportunity to be a service provider partner with insurance firms. And, there could be more doors opening in the future. "It is certainly not beyond the realm of possibility to imagine an insurance provider putting together a network of [pest control] providers for treating bed bugs — that has certainly been done in a number of other industries," he says.

In the meantime, Good expects that bed bug insurance will "play a role" for some customers who require treatment services, but there are plenty of clients who will not opt for such coverage. They'll call when they have a bed bug problem.

"We'll continue to get calls from existing and new customers that are outside of this policy," Good says. "I see (bed bug insurance) as a growing trend, but I can also see the traditional method of providing curative bed bug treatments to continue as well."

The author is a freelance writer in Cleveland, Ohio. She can be reached at khampshire@giemedia.com.