Travel advisors have always worried about what to do when a supplier goes bust, but COVID-19 has exacerbated that concern, as the travel industry remains strained. During their Global Convention this week, ASTA General Counsel Peter Lobasso laid out some best practice agencies should know about to protect themselves and their clients.
Most cases of bankruptcy cases involving travel suppliers will fall under a reorganization scenario, or Chapter 11. It’s most often used by corporations that need immediate relief from creditors but desire to continue to operating business with the expectation they will emerge from bankruptcy profitable.
When a travel supplier fails
There are several options outside the court that an advisor can recommend to their clients. These methods can also help when a supplier simply stops doing business and does not seek help from the bankruptcy court, which is often the case.
The first thing a client can do if they did not or will not receive service is contact the credit card company to dispute the charge and request a credit under the Fair Credit Billing Act (FCBA). Lobasso said it’s important to note that method only applies to payments made by credit cards, and it’s not applicable if they use cash, debit cards, or checks to pay for travel.
Clients can also make a claim under a travel insurance policy to recoup lost funds. Not all travel insurance policies cover financial default and if they do not all suppliers, Lobasso said, so it’s important to confirm beforehand.
A third form of recovery is the USTOA Traveler Assistance program, which all members post a $1 million bond to be used if they become insolvent. However, Lobasso notes that if it’s a large tour operator that becomes insolvent, $1 million might not be enough to cover all losses. Affected travelers are also required to use all other measures available to them (such as chargebacks) before receiving relief from the fund.
For cruise bookings, the Federal Maritime Commission requires cruise lines to be financially responsible to compensate travelers in the event of non-performance due to insolvency or bankruptcy. Cruise lines must post security in form of a bond, insurance, or escrow account. The commission covers all passengers embarking from any U.S. port on ships with 50+ passengers, but there is no guarantee that affected passengers will be fully reimbursed.
California consumers have the added benefit of the California Travel Consumer Restitution, where they can file a claim against the loss for up to $15,000. It only applies to bookings made through a registered seller of travel.
If you or your client are still not reimbursed through those measures, and a supplier has officially filed a bankruptcy petition, a formal intervention in the case as a creditor is the next step. For clients, the basis of the claim is the deposit or full payment, and for advisors the claim is commissions earned that have not been paid.
As many Future Cruise Credits (FCCs) have been issued to clients, Lobasso said FCCs would be treated as cash equivalent as far as proof of claim process. In that scenario if you are advising your client, the amount of their proof of claim would include any FCCs.
Consumer claims are entitled to priority up to $3,025, and anything that remains will fall under a general unsecured claim.
“Practically speaking, assets that are available for distribution will the traveler will receive up to $3,025 before any portion of the general unsecured creditor claims are paid, but keep in mind clients won’t get anything until all of the secured creditors claims are paid in full, that might be paid to keep your clients expectations in check,” Lobasso said.
Unfortunately, advisors owed a commission is considered an unsecured creditor, but unlike the consumer there isn’t any public policy under the bankruptcy code so the advisors claim is not given any priority status, Lobasso, and are therefore last in line for payment. “Given this, the advisors prospect of any recovery in bankruptcy is even more doubtful than it is for his or her client.”
Minimizing legal risk
Lobasso highlighted several things an advisor can do to minimize their own legal risk in the event a supplier they work with defaults.
First, he recommends including in the agency standard terms and conditions a statement that you’re acting strictly as the agent in the travel transaction. “This can be helpful in defending against claims against clients that you should be responsible for any damages that result from the suppliers’ failure.”
“Sometimes it’s wise to supplement standard terms and conditions with a waiver signed by the client that expressly releases you from liability should certain events occur,” he said. “Asking your client to sign a waiver is a good idea whenever you’ve been asked to make a booking that is in contrast to your professional advice and a negative outcome is foreseeable.”
Make sure you identify the supplier that will be providing the travel service. Advisors have the protection of a common law rule that relieves them of responsibility of a suppliers default, but only if the identity is disclosed, Lobasso said, so make sure the disclosure in writing, like on an invoice.
“The general rule is, under law of agency, the agent is not liable for the acts of the principal, and in this case the principal would be the supplier of the travel services as long as you are clearly identifying the principal,” he explained.
Always recommend your clients use a credit card to pay for their travel, this way under the FCBA they can refuse payment and use the chargeback method, and make sure make sure whatever travel insurance product you’re offering includes financial default coverage because not all do.
Make sure to stay current on news that involved suppliers you sell. If you see in the press that a supplier is delaying commission payments, for example, that could be a sign cash flow issues and potentially forshadowign a shutdown of operations in the future, Lobasso said.
But keep in mind, the bankruptcy status of a supplier is material information that you have “a duty to disclose to your client, so if you plan to recommend a supplier that is operating under chapter 11, make that information known to your client before you make a booking.”