With an increase in bankruptcies, travel insurers' business booming

By Barry Estabrook
New York Times

Posted Sept. 4, 2003

For those aboard the ship World Discoverer, an Around the Ring of Fire cruise proved memorable -- perhaps too much so.

The small luxury ship sailed last spring from the Japanese island of Hokkaido with a full complement of 140 passengers. About 70 of them had booked the cruise through Austin-based Victor Emanuel Nature Tours, an established purveyor of high-end eco-tourism and birding packages. The Emanuel group included luminaries such as author Peter Matthiessen, wildlife artists Robert Bateman and Lars Jonsson and Emanuel, the tour company's owner. The average price for a berth on the 18-day cruise was $8,000.

The passengers passed remote islands in the Bering Sea and sailed by ash-spewing volcanoes, sea lions and Lapland longspurs, but when they pulled into their final port of call, Nome, Alaska, on June 14, they were greeted by representatives of the Bank of Scotland, there to seize the World Discoverer over nonpayment of a loan by the British owners of the vessel.

Fortunately, Emanuel had protected his group, which toured the Nome area as planned and caught a charter flight to Anchorage. By the end of June, Society Expeditions of Seattle, operator of the World Discoverer, had arranged financing to buy the $33 million vessel outright. The company put the ship back in operation on Aug. 5.

According to Jessica Triebold, Society Expeditions' marketing director, customers who had paid for any of three Bering Sea cruises that were canceled after the World Discoverer's seizure could book other cruises or get their money back. Their prepayments had been held in a Federal Maritime Commission escrow account, she said.

But the incident raised a troubling question for anyone planning a cruise or tour vacation. If such close calls can happen even on a trip operated by an exclusive and well-established cruise line, how does a traveler get protection from the possibility of a tour operator going bankrupt or becoming insolvent?

Travel insurance has become more important than ever, and travel insurers are doing record business. The chances of a travel provider encountering financial difficulties are increasing as the industry suffers from the effects of terrorism, the war in Iraq, SARS and the continuing economic downturn. In 2002, six members of the National Tour Association became insolvent. "It was the worst year we have ever had," said Hank Phillips, president of the association, which represents 640 tour operators.

So far this year, one member, Custom Tours Ltd., based in Oregon, has declared bankruptcy.

In March, the association's board voted to end its 15-year-old Consumer Protection Plan, a program that issued rebates of 90 percent of any prepayments or deposits a customer had made to a member company if the company went bankrupt before delivering on the promised trip. The plan, capped at $200,000 per bankrupt company, paid out $565,000 as a result of the six insolvencies in 2002, affecting 484 travelers.

The U.S. Tour Operators Association, which represents 140 large tour operators, still requires that its members maintain $1 million consumer-protection bonds to repay customers in the event of bankruptcy. But such bonds are no guarantee that consumers will get all their money back, according to Alexander Anolik, a San Francisco lawyer specializing in travel who is also an author of Traveler's Rights (Sphinx Publishing, 2003).

"An operator can have prepayments from clients that exceed the amount of protection, so a traveler can still be left on the hook for a portion of what he has prepaid," Anolik said.

He recommends always using a major credit card when prepaying for a trip. Under the Fair Billing Credit Act, credit card customers can get refunds for goods and services they do not receive provided they dispute the charges within 60 days (some card companies extend this period) after the charges appear on the cardholder's statement.

But for a higher level of comfort, Anolik suggests buying travel insurance that protects against default by the operator. He says travelers should be certain that they are buying third-party insurance, which is insurance issued by a company other than the one selling the tour or cruise.

"Self-insured product may be a few bucks cheaper, but if the tour company is bust, so is their insurance," he said.

Companies that sell third-party travel insurance say that business is booming. At Travel Guard International, which has been in business since 1985 and writes about 60 percent of travel insurance policies sold in the United States, business rose by 78 percent in 2002 over 2001.

Before Sept. 11, 2001, about 8 percent of American travelers took out policies on their trips, said Scott Adamski, vice president for national retail sales at Travel Guard. Now the level is around 20 percent, he said.

Travel insurance companies refuse to write policies for operators they consider too much of a risk. Travel Guard maintains a list of these companies under the heading "Travel Guard Alerts" on its Web site (www.travelguard.com). In early August, 31 companies were on the list. They included financially troubled airlines such as Air Canada and United.

Comprehensive travel insurance, which typically covers such things as lost baggage, cancellation because of sickness and default by the provider, can be bought through a travel agent or through online sources like www.insuremytrip.com, which allows customers to compare the offerings of several major insurance companies.

"It is important that people buy from an insurance company that is licensed in their state," said Jeanne Salvatore, vice president for consumer affairs at the Insurance Information Institute, which provides information about travel insurance online at www.iii.org/individuals/otherinsurance/travel.

Emanuel said that he protected his clients by placing prepayments to cruise lines into escrow accounts until the ships sail, but that he still advocated getting travel insurance. "These are expensive trips," he said. "The airfare alone would justify third-party insurance."