By Tim Dobson, Founding Partner, Dobson & Partners
Buried in nearly every Hotel Management Agreement is an insurance clause that both sides treat as settled, almost administrative – a matter of following the Uniform System of Accounts for the Lodging Industry (USALI) and moving on to the clauses that seem to matter more. It shouldn’t be treated that way. Properly understood, this clause quietly determines how much of the owner’s incentive fee payment is, in effect, funding the operator’s own exposure to its own mistakes.
The Argument Operators Make — and What It Conveniently Leaves Out
USALI classifies insurance as a non-operating expense: a fixed charge, deducted below Gross Operating Profit, alongside items like property tax and rent. Operators lean on this hard. It is, they say, the industry standard; departing from it complicates reporting, invites inconsistency across a portfolio, and isn’t how anyone else does it. As a technical accounting matter, they are correct.
But USALI’s classification was built to standardise hotel financial reporting across an industry — not to allocate risk fairly between an owner and a manager inside a specific bilateral contract. Those are different exercises, and conflating them is doing a lot of quiet work for the operator’s position.
Property insurance belongs below the line without much argument – it protects an asset the owner owns, against risks the owner bears regardless of who is managing the building. Operational liability insurance is a different animal entirely. It responds to claims that arise, in the overwhelming majority of cases, from the operator’s own conduct: a housekeeping slip-and-fall, a food safety failure in a kitchen the operator runs, an employment claim against staff the operator hires, trains, and supervises. The owner isn’t on site. The owner doesn’t run the shift rosters or the kitchen line. The coverage exists because the operator’s operational decisions create the exposure — and, not incidentally, the coverage protects the operator as much as it protects the owner, since operators are almost invariably named as additional insureds and indemnified under the HMA’s own risk-allocation clauses.
So the question worth asking isn’t “what does USALI say?” It’s “why should an owner fund, as a non-deductible fixed charge, the cost of insuring against the operator’s own operational risk and pay a higher Incentive Fee as a result?”
The Number the USALI Argument Is Actually Protecting
Here is the part that rarely gets said out loud at the negotiating table: this classification isn’t fee-neutral for the operator. It’s fee-positive.
Incentive fees are almost universally calculated as a percentage – commonly around 10% – of Gross Operating Profit. GOP, by definition, is calculated before fixed charges are deducted. Keep insurance below the line, and the operator’s fee is calculated on a GOP figure that has never been reduced by the cost of insuring the operator’s own conduct. Reclassify insurance as an operating expense, deducted before GOP is struck, and the fee shrinks with it.
The owner pays the premium either way – that was never in dispute. What changes is whether the operator also collects a performance fee calculated on a profit figure that pretends the cost doesn’t exist.
Take a 300-room full-service hotel with GOP of, say, USD 4,000,000 and an annual operational insurance premium of, say, USD 150,000, and a 10% incentive fee: fifteen thousand dollars, on this one line, in this one year, on one hotel. Run that across a typical 20–30 year HMA term with premiums that generally track revenue and claims inflation upward rather than staying flat, and the figure compounds into several hundred thousand dollars of incremental incentive fee – extracted from a cost base the operator itself controls, and insuring against risks the operator itself creates.
Why This Is Worth Fighting For
If raised at all, owner’s counsel may treat the insurance clause as a fairness argument to be raised and then conceded when the operator cites USALI. That’s a mistake. It should be treated as a quantifiable fee-leakage issue, because it is one, and reframed that way it survives the USALI objection rather than being defeated by it. An operator can shrug off a fairness argument. It cannot as easily explain away a spreadsheet showing it is being paid more precisely because a cost it controls sits in the wrong place in the waterfall. Owner’s counsel should therefore argue this issue vigorously.
The practical fights this opens up are worth having explicitly:
- Reclassify operational (not property) insurance as a deductible operating expense, isolating the categories genuinely driven by the operator’s day-to-day conduct – general/public liability, employer’s liability, liquor liability – from property and business interruption, which properly remain the owner’s fixed charge.
- Where full reclassification isn’t achievable, negotiate an operator-funded deductible or self-insured retention for claims arising from the operator’s own negligence, so the operator retains meaningful skin in the game even if the premium itself stays below the line.
- Scrutinise blanket or portfolio insurance programmes. International operators frequently place liability cover through a global master programme and allocate a share of the aggregate premium to each hotel. That allocation is opaque by design and deserves an audit right independent of where the cost sits in the P&L – it is often a larger practical lever than the classification question itself.
None of this is really about insurance. It’s about who bears the cost of the operator’s own operational decisions, and whether the operator is quietly being paid a fee premium for the privilege of not doing so. Owners who let USALI end the conversation are leaving money – and, more importantly, the wrong incentives – on the table. I have won this argument and I have lost this argument, but in my experience an operator that wishes to have a smooth and harmonious 20–30 year relationship with an owner is more likely to concede the point.
Tim Dobson is a UK and Hong Kong qualified lawyer and Founding Partner of Dobson & Partners, a Bangkok-based boutique hospitality and hotel law practice focused on owner-side Hotel Management Agreement negotiation across South East Asia.