In 2015, restaurant sales are expected to hit a record high,topping $709 billion, according to the National RestaurantAssociation.

It's a good time for these businesses: Revenues are up, andrestaurants are opening new locations and starting new ventures,says Heidi Strommen, CPL, president of ProHost USA, which writesrestaurants, including fine, family and fast casual dining.

Along with bars and nightclubs, there are about 45,000establishments across the U.S. with a combined revenue of $20billion to $25 billion a year, notes Orlando Frasca, president ofRISDirect.com, an online broker.

“This class is experiencing good growth,” says Joseph Fobert,senior vice president, underwriting for ACE Excess Casualty.“Discretionary spending is up, and one thing people like to spendmoney on is going out.”

All of this adds up to a good-size order of opportunity foragents and brokers who possess a solid understanding of the risksinvolved in serving food and alcohol to the public, and know whichcoverage solutions to offer prospective clients for mitigatingthose risks.

Alcohol sales an issue

Rates continue to increase modestly for this difficult class ofbusiness, says Kenneth Petersen, CPCU, president of NorthfieldInsurance Co., a Travelers company that offers insurance forrestaurants, bars and taverns — but not nightclubs, which hedefines as requiring a bouncer versus an ID checker. “Exposurespresented by the sale of liquor and stringent Dram Shop Laws haveresulted in problems for the liquor liability line of business,” headds.

Today, there are 38 states with statutory provisions that holddrinking establishments liable if they overserve a patron who goeson to cause injury or death, Frasca notes. “So, for bars andnightclubs, [coverage rates for] liquor liability and assault andbattery are increasing.” Restaurants, he points out, are stillwritten in the admitted market, whereas bars and nightclubs arenot.

“There's a lot of insurance capacity in the market, which tendsto drive competition,” Fobert adds. “But on the flip side, thereare some tough exposures in this class, and as such, it can bedifficult to get coverage.”

Related: Ever wonder why restaurants need to carry so muchinsurance?

(Photo: Thinkstock)

Coverage and limits

Restaurant owners typically try to obtain a package, GeneralLiability or business owner policy with a standard limit of $1million. Limits are usually offered per occurrence, and as such,owners may try to obtain an aggregate of up to $2 million.

Fobert says smaller establishments generally secure the coveragethey're contractually obligated to obtain: “If they own theproperty, what does the bank require in terms of property coverage?Additionally, what does the landlord or bank require in terms of GLor umbrella coverage?”

“We offer package policies, and umbrella coverage over that,”says Strommen. “Limits on umbrella coverage depend on therestaurant; the bigger the operation, the higher the limit.” For asingle location, a $1 million or $2 million umbrella limit may beadequate, she adds, but if it's a five-location restaurant group, a$10 million limit might be required: “There's no strict rule. It'sa conversation the agent must have with the restaurant owner, anddepends on their risk appetite.”

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As it's not a huge risk for restaurants, ProHost USA includesliquor liability, as well as assault and battery, in its packages.However, liquor liability training is required. “Anyone involvedwith the service of alcohol should be trained, when they're hired,”says Strommen. “Restaurants should do this for the safety of theircustomers, to keep insurance costs down, and to prevent claims. Onebad incident is a headline you don't need.”

For bars and nightclubs, liquor liability and assault andbattery are excluded from general liability policies, and must bepurchased separately. Supply is an issue,says Frasca, who saysthere are not enough carriers to take these risks. “Those that doare finding judgments increasing,” he explains. “Most bar andnightclub clients are looking for $1 million in coverage limits forliquor liability, as well as assault and battery. In some states,it's just not available, or limits are down to $100,000 in bothareas. One lawsuit can eat that up in the mediation phase.”

Proper classification is key

Experience is particularly critical when it comes tounderwriting considerations for restaurants. “We see carriers jumpin because it's a huge market, and they think they can make money,”Strommen says. “They do this without proper underwriting knowledge,and we see them leave the market within 24 months when the claimsstart rolling in.”

Frasca says misclassification is a particular problem when itcomes to accurately assessing a business' risks. “There's been anexplosion of so-called restaurants playing sports on TVs andhosting live music. There's more drinking than eating going on,” heexplains. “Some carriers are writing establishments with 35% oftotal sales in liquor as restaurants, when they're effectivelybars. When a claim happens, the agent and restaurant owner may bein for a world of hurt with an unpaid claim—and the agent may facea huge E&O suit, as the business should have been classifieddifferently.”

“We look at everything from experience of management to hours ofoperation,” says Strommen. “We look not just at the food-to-liquorreceipt [ratio], but the story behind that as well. We're happy tocover entertainment if it's incidental, but if at 10 o'clock theyhave a band and cover charge, it essentially morphs into nightclub.That's happening a lot, and it's not always clear from theapplication that we get from the agent. So we perform extensiveresearch to make sure we understand the operation.”

“Most establishments claim to have a safety and loss-controlprogram,” adds Fobert. “Underwriters will look at the loss historyto see if the claims validate the story they're telling. As such,start-ups and newer operations may have a harder time procuringcoverage.”

Related: Bar, nightclub owners urged to look beyond pricewhen seeking coverage

(Photo: Thinkstock)

New exposures

According to Strommen, food allergies are a developing area ofconcern for restaurants. “Cities are upping the ante on what theyexpect restaurants to comply with when it comes to food allergies,”she says, noting that Massachusetts is the first state to pass alaw that requires training and establishes certain liabilities thata restaurant is assuming. “It's possible that we may see more[legislation] around food allergies in the future, and it coulddrive insurance needs.”

Cyber liability is also becoming an issue, as with any businessthat has a point-of-sale system or computer connected to theInternet. He adds: “There's more cyber exposure, and restaurantsand their agents have to be aware of it, whether it's credit cardor hacking issues.”

Fobert agrees that demand for Cyber liability coverage is on therise, “Three years ago, perhaps 1 in 20 clients in this class werebuying this coverage. Today, it's closer to 1 in 4.” 

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Food contamination claims are also on the rise, says Fobert:“There are more reported cases of contaminated foodproducts. It is not always clear where the contaminationoccurred, and the source of the contamination can be from a varietyof places in the distribution or production process. Moreand more consumers are looking for foods that are 'GMO free' or'farm-fresh,' and as these new food sources develop, there can beuncertainty regarding the quality of the production process.”

Mexican restaurant chain Chipotle learned this firsthand inearly November as multiple cases of E. coli were found to beconnected to restaurant locations in Washington and Oregon,according to health officials—spurring lawsuits by patrons whoclaimed to suffer food poisoning.

“We're seeing an increased amount of food-poisoning claims,”says Frasca. “With these types of claims, it comes down to when thefood spoiled, and when the restaurant became aware of it; if asupplier is dropping off tainted chicken, it's goingto affect more than one restaurant. But if it's only onerestaurant that's experiencing claims, then there's something wrongwith how that particular restaurant stored or handled thefood.”

Related: Chipotle reopening restaurants in Oregon,Washington after E. coli outbreak

For bars and nightclubs, assault & battery and negligentsecurity exposures are increasing, says Frasca. “With the drinkingthat occurs in these establishments, there may be a heated exchangeof words and heightened emotions. Two patrons may get into a fight,and the bar is held liable. Or if a bouncer throws someone out andthat person chips his tooth, the nightclub is on the hook.

“A local neighborhood bar may never see an assault and batteryclaim, but what's happening in the industry as a whole affects hispremiums. Trying to get clients to wrap their heads around this isa real battle,” he adds.

No longer are events that occur outside the bar not the concernof the bar owner, says Petersen. Pub owners are increasingly heldaccountable for disputes that originate in their establishments butspill out onto neighboring sidewalks, streets and parking lots.

Tapping in

Understand that restaurants, bars and taverns are not a “quickand easy” write, Petersen advises agents new to the business.“Failure to properly identify exposures may result in an insuranceproduct that does not meet the insurance needs of theclient,” he says. For example, a restaurant identified as “whitetable cloth” with limited alcohol sales (wine and beer) will beunderwritten differently than a tavern with high liquor sales andentertainment. If not properly identified, the account could bewritten with incorrect exclusionary wording or could result incoverage being voided. The agent needs to understand the exposuresand convey them accurately to the insurance carrier.

“Our most successful producers around the country tend to likerestaurants,” says Strommen. “You can't go in like a newbie. Youneed the inside story. There's a ton of information on the Internetthat agents and brokers can use to educate themselves, includingindustry journals, blogs, and the National Restaurant Association,which offers a ton of resources.

“Become knowledgeable about your local restaurant scene,” sheadds. “Who's opening a new restaurant? What's hot in your area? Youhave to be able to speak intelligently about the business, if youwant to be successful in this niche.”

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