In 2015, restaurant sales are expected to hit a record high, topping $709 billion, according to the National Restaurant Association.
It's a good time for these businesses: Revenues are up, and restaurants are opening new locations and starting new ventures, says Heidi Strommen, CPL, president of ProHost USA, which writes restaurants, including fine, family and fast casual dining.
Along with bars and nightclubs, there are about 45,000 establishments across the U.S. with a combined revenue of $20 billion to $25 billion a year, notes Orlando Frasca, president of RISDirect.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 spend money on is going out.”
All of this adds up to a good-size order of opportunity for agents and brokers who possess a solid understanding of the risks involved in serving food and alcohol to the public, and know which coverage solutions to offer prospective clients for mitigating those risks.
Alcohol sales an issue
Rates continue to increase modestly for this difficult class of business, says Kenneth Petersen, CPCU, president of Northfield Insurance Co., a Travelers company that offers insurance for restaurants, bars and taverns — but not nightclubs, which he defines as requiring a bouncer versus an ID checker. “Exposures presented by the sale of liquor and stringent Dram Shop Laws have resulted in problems for the liquor liability line of business,” he adds.
Today, there are 38 states with statutory provisions that hold drinking establishments liable if they overserve a patron who goes on to cause injury or death, Frasca notes. “So, for bars and nightclubs, [coverage rates for] liquor liability and assault and battery are increasing.” Restaurants, he points out, are still written in the admitted market, whereas bars and nightclubs are not.
“There's a lot of insurance capacity in the market, which tends to drive competition,” Fobert adds. “But on the flip side, there are some tough exposures in this class, and as such, it can be difficult to get coverage.”
Coverage and limits
Restaurant owners typically try to obtain a package, General Liability or business owner policy with a standard limit of $1 million. 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 coverage they’re contractually obligated to obtain: “If they own the property, what does the bank require in terms of property coverage? Additionally, what does the landlord or bank require in terms of GL or umbrella coverage?”
“We offer package policies, and umbrella coverage over that,” says Strommen. “Limits on umbrella coverage depend on the restaurant; the bigger the operation, the higher the limit.” For a single location, a $1 million or $2 million umbrella limit may be adequate, she adds, but if it's a five-location restaurant group, a $10 million limit might be required: “There's no strict rule. It's a conversation the agent must have with the restaurant owner, and depends on their risk appetite.”
As it's not a huge risk for restaurants, ProHost USA includes liquor liability, as well as assault and battery, in its packages. However, liquor liability training is required. “Anyone involved with the service of alcohol should be trained, when they’re hired,” says Strommen. “Restaurants should do this for the safety of their customers, to keep insurance costs down, and to prevent claims. One bad incident is a headline you don't need.”
For bars and nightclubs, liquor liability and assault and battery are excluded from general liability policies, and must be purchased separately. Supply is an issue,says Frasca, who says there are not enough carriers to take these risks. “Those that do are finding judgments increasing,” he explains. “Most bar and nightclub clients are looking for $1 million in coverage limits for liquor liability, as well as assault and battery. In some states, it's just not available, or limits are down to $100,000 in both areas. One lawsuit can eat that up in the mediation phase.”
Proper classification is key
Experience is particularly critical when it comes to underwriting considerations for restaurants. “We see carriers jump in 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 claims start rolling in.”
Frasca says misclassification is a particular problem when it comes to accurately assessing a business’ risks. “There's been an explosion of so-called restaurants playing sports on TVs and hosting live music. There's more drinking than eating going on,” he explains. “Some carriers are writing establishments with 35% of total sales in liquor as restaurants, when they’re effectively bars. When a claim happens, the agent and restaurant owner may be in for a world of hurt with an unpaid claim—and the agent may face a huge E&O suit, as the business should have been classified differently.”
“We look at everything from experience of management to hours of operation,” says Strommen. “We look not just at the food-to-liquor receipt [ratio], but the story behind that as well. We’re happy to cover entertainment if it's incidental, but if at 10 o’clock they have a band and cover charge, it essentially morphs into nightclub. That's happening a lot, and it's not always clear from the application that we get from the agent. So we perform extensive research to make sure we understand the operation.”
“Most establishments claim to have a safety and loss-control program,” adds Fobert. “Underwriters will look at the loss history to see if the claims validate the story they’re telling. As such, start-ups and newer operations may have a harder time procuring coverage.”
According to Strommen, food allergies are a developing area of concern for restaurants. “Cities are upping the ante on what they expect restaurants to comply with when it comes to food allergies,” she says, noting that Massachusetts is the first state to pass a law that requires training and establishes certain liabilities that a restaurant is assuming. “It's possible that we may see more [legislation] around food allergies in the future, and it could drive insurance needs.”
Cyber liability is also becoming an issue, as with any business that has a point-of-sale system or computer connected to the Internet. He adds: “There's more cyber exposure, and restaurants and their agents have to be aware of it, whether it's credit card or hacking issues.”
Fobert agrees that demand for Cyber liability coverage is on the rise, “Three years ago, perhaps 1 in 20 clients in this class were buying this coverage. Today, it's closer to 1 in 4.”
Food contamination claims are also on the rise, says Fobert: “There are more reported cases of contaminated food products. It is not always clear where the contamination occurred, and the source of the contamination can be from a variety of places in the distribution or production process. More and more consumers are looking for foods that are ‘GMO free’ or ‘farm-fresh,’ and as these new food sources develop, there can be uncertainty regarding the quality of the production process.”
Mexican restaurant chain Chipotle learned this firsthand in early November as multiple cases of E. coli were found to be connected to restaurant locations in Washington and Oregon, according to health officials—spurring lawsuits by patrons who claimed 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 the food spoiled, and when the restaurant became aware of it; if a supplier is dropping off tainted chicken, it's going to affect more than one restaurant. But if it's only one restaurant that's experiencing claims, then there's something wrong with how that particular restaurant stored or handled the food.”
For bars and nightclubs, assault & battery and negligent security exposures are increasing, says Frasca. “With the drinking that occurs in these establishments, there may be a heated exchange of words and heightened emotions. Two patrons may get into a fight, and the bar is held liable. Or if a bouncer throws someone out and that person chips his tooth, the nightclub is on the hook.
“A local neighborhood bar may never see an assault and battery claim, but what's happening in the industry as a whole affects his premiums. Trying to get clients to wrap their heads around this is a real battle,” he adds.
No longer are events that occur outside the bar not the concern of the bar owner, says Petersen. Pub owners are increasingly held accountable for disputes that originate in their establishments but spill out onto neighboring sidewalks, streets and parking lots.
Understand that restaurants, bars and taverns are not a “quick and easy” write, Petersen advises agents new to the business. “Failure to properly identify exposures may result in an insurance product that does not meet the insurance needs of the client,” he says. For example, a restaurant identified as “white table cloth” with limited alcohol sales (wine and beer) will be underwritten differently than a tavern with high liquor sales and entertainment. If not properly identified, the account could be written with incorrect exclusionary wording or could result in coverage being voided. The agent needs to understand the exposures and convey them accurately to the insurance carrier.
“Our most successful producers around the country tend to like restaurants,” says Strommen. “You can't go in like a newbie. You need the inside story. There's a ton of information on the Internet that agents and brokers can use to educate themselves, including industry journals, blogs, and the National Restaurant Association, which offers a ton of resources.
“Become knowledgeable about your local restaurant scene,” she adds. “Who's opening a new restaurant? What's hot in your area? You have to be able to speak intelligently about the business, if you want to be successful in this niche.”