6-minute read
Buying a hotel is a high-stakes investment. Between franchise negotiations, lender demands, and local approvals, there’s already plenty to juggle. Insurance? That too often gets pushed to the bottom of the to-do list — something to handle after the ink is dry.
But that approach can backfire.
We’ve seen buyers find out, only after closing, that their new property sits squarely in a flood zone, lacks proper fire protection, or carries a claims history that sends underwriters running. These aren’t just paperwork headaches. They can blow up your margins — and the deal.
That’s where pre-underwriting comes in.
What Pre-Underwriting Actually Does
Pre-underwriting is early-stage risk evaluation — a form of insurance due diligence that gives you a clear picture of what you’re walking into. It’s not about getting quotes. It’s about stepping into the underwriter’s shoes and asking: What are they going to see when this crosses their desk?
A solid pre-underwriting process will typically include:
- A property walkthrough or third-party inspection (if available)
- A review of claims history going back 5–7 years
- A close look at life safety systems — sprinklers, alarms, exits
- Evaluation of mechanicals: HVAC, roof, plumbing, electrical
- Hazard mapping for flood, wildfire, earthquake zones
- A read on prior insurance policies: exclusions, gaps, big deductibles
The goal? Spot the red flags now — the things that could drive up pricing, limit coverage options, or throw you out of compliance with lender or franchise insurance requirements.
Why It Matters More Than Ever
The hospitality insurance market isn’t exactly welcoming right now. Carriers have pulled out of entire states. Capacity is tighter. And even when you get a quote, it might come with a deductible that makes you gulp — or exclusions that leave you exposed.
A property that looked like a sure thing on paper five years ago may now be considered high-risk. Maybe the roof’s too old. Maybe it's had one too many water claims. Maybe it’s just in the wrong ZIP code.
Pre-underwriting doesn’t make those risks go away. But it gives you a shot at handling them — while there’s still time to adjust the terms or rethink the deal.
Hypothetical Scenario, Based on Real-World Cases
Let’s walk through a hypothetical — not pulled from a single file, but built from situations we’ve seen before.
A buyer picks up a 110-room hotel in the Southwest. The seller discloses a few water damage claims. Nothing major. The location looks solid, and the pro forma pencils out.
After closing, though, things start to shift. The building’s electrical system turns out to be original to the 1970s, with no record of upgrades. A deeper dive into the loss runs reveals a handful of small fires tied to that same system. The water damage? Turns out they were from recurring roof leaks — not isolated incidents.
When the buyer tries to place insurance, the premium comes back nearly $300,000 higher than expected, with a $100,000 deductible. Two carriers decline to quote altogether.
It wasn’t one massive oversight. It was a bunch of details no one had pieced together. Had they gone through pre-underwriting before closing, the signs were all there. They could’ve used that info to renegotiate the deal, ask for seller-funded improvements, or step away entirely.
Don’t Forget the Lender and Franchise Layer
It’s not just about getting insurance — it’s about getting insurance that checks the right boxes for everyone else at the table.
Lenders might require specific policy language, limits, or endorsements. Franchise agreements can come with their own set of insurance expectations. Miss those, and you could delay closing or trigger a post-close scramble.
Pre-underwriting helps you surface those requirements early, so you can:
- Push back on unrealistic terms
- Negotiate lower umbrella limits or deductible thresholds
- Make sure the deal doesn’t stall over last-minute coverage gaps
We’ve seen buyers save six figures by negotiating a lender’s umbrella limit from $25 million to $10 million — with actuarial data and market comps to back them up.
What to Ask Before You Buy
You don’t need to become an underwriter. But you do need to know what questions to ask:
- What’s the real loss history — not just what’s disclosed?
- Are there any open or recurring safety or maintenance issues?
- Will the insurance market write this risk? At what cost?
- Can we meet lender and franchise requirements without overpaying?
- What’s our timeline to get bindable quotes and finalize coverage?
Pre-underwriting isn’t red tape. It’s risk intelligence.
It doesn’t slow down a deal — it protects it. And in a market this tight, you need every advantage you can get. Because no one wants to close on a hotel, only to find out the insurance is going to wreck the numbers.
The Mahoney Group, based in Chandler, Ariz., is one of the largest independent insurance and employee benefits brokerages in the U.S. For more information, visit our website or call 877-440-3304.
This article is not intended to be exhaustive, nor should any discussion or opinions be construed as legal advice. Readers should contact legal counsel or an insurance professional for appropriate advice.