THE BEST nightclubs and bars know how to serve their patrons wisely, giving them an enjoyable experience while keeping them out of trouble. The best agents and brokers active in this niche try to do much the same thing. While it may be a stretch to say they make purchasing insurance "enjoyable," the rest of the description is pretty apt.

Right Insurance Marketing is one such agency. Since Mary L. Wright founded the agency in 1985, it has focused exclusively on insuring restaurants, nightclubs and bars. Today, we cover more than 3,000 of these establishments throughout California, putting our knowledge of products and markets at their service, and advising them on how to prevent claims. We write all this business ourselves, through our nine seasoned producers. We don't broker business, nor have we acquired any of these accounts via acquisitions.

Bars and nightclubs make up about 15% of our clients. In terms of volume, however, they account for about 20%, reflecting the higher average premiums such establishments pay. In this article I'll share some of the methods that have brought us success in this niche and point out some important issues to understand as you approach this class of business.

Finding the business

Eighty percent of our new business comes from working a database of more than 10,000 prospects. Some came from lists we purchased with the appropriate SIC codes. Entertainment magazines and entertainment sections of newspapers also are good sources of leads for bars and nightclubs. We also buy leads from a source that tracks all purchasers of establishments holding liquor licenses. To help promote ourselves as specialists to these prospects, we send them industry-specific newsletters on a quarterly basis.

We have three full-time telemarketers who call prospects to obtain expiration dates, if we don't have them already. They also attempt to learn the size of an establishment, the number of employees and the name of its current insurer, among other information. The telemarketers read from a script that emphasizes that we specialize in insurance for bars and nightclubs. Prospects hear that message at least two or three times during the call.

Ninety to 120 days before prospects' coverage expires, the telemarketers call them to ask for appointments at which we will perform complimentary coverage reviews. To persuade prospects to grant us appointments, we stress the three "S's:"

Specialization: Insurance for bars, nightclubs and restaurants is all we sell.
Savings: Because we are specialized, we typically save clients 15% to 25% on their insurance.
Solutions: Coming up with solutions to insurance problems, like adverse claims histories, can be more important to prospects than saving money. Again, because we're specialists, we can help. For example, I had a client who had experienced 10 slip-and-fall claims within two years. As a result, their coverage was nonrenewed. Before we came along, no one had shown the prospect the importance of such fundamental procedures as checking handrails and lighting around stairs, or ensuring that non-slip strips were applied to steps. With our help, the client improved their loss experience, and we placed the account with the best available market.

Some prospects immediately accept our offer of a coverage review; others ask us to first fax or e-mail them information. About 30 days after sending it, the telemarketers follow up to confirm their interest in a coverage review. Those leads that are confirmed are turned over to producers, who set the appointments. After doing so, the producers send their prospects letters confirming the meetings and listing the materials the prospects will need to have on hand when the producers call.

Sending this letter is crucial. Owners of nightclubs and bars typically have the workload of two people. They may not keep appointments-not necessarily because they don't want to, but because they are extremely busy and don't always write things down. Therefore, we time the mailing of the appointment letter to arrive at the prospect's establishment a few days before the appointment and thus serve as a reminder. Then we fax the same letter to the prospect the day before the appointment.

The letter stresses that we will need to see the prospect's general liability, liquor liability, property and workers compensation policies, regardless of which is about to expire. We also want a copy of the menu and any written loss-control procedures the prospect has.

When meeting with prospects, producers show them a list of our current clients. Rarely does a prospect not know one of the establishments on the extensive list. Thus, it helps qualify us in the eyes of prospects. Of course, we also qualify them-even before we pay them a visit. In fact, our No. 1 qualifier is a prospect's willingness to meet with us for 20 or 30 minutes. Phones, faxes and e-mails are no substitute for a face-to-face meeting. To work with prospects we also must have their trust, because they will have to share sensitive information with us. If we get the impression that's going to be a problem, we walk away. Concerned about their public image, owners of bars and nightclubs by nature tend to be tight-lipped about their insurance, finances and other aspects of their operations. But if they will not show us their current policies, there is no point in proceeding. We also need basic information about sales and insurance history. As the relationship develops, we must be satisfied that prospects will be cooperative, that they will do such things as return our calls and implement recommended loss-control procedures-before we write the policy.

Surveying the risk

When producers call on prospects, they bring a survey form we created to ensure they collect all necessary data. They also bring forms on which prospects can request loss runs from their current insurers.

In inspecting the premises, we look at the kitchen to ensure it is clean, and that Ansul systems and other fire protection equipment are well-maintained and have up-to-date inspection tags. We determine the square footage of the facility, both the total area and the part that is open to the public. We examine dance floors. We want to make sure they are in good condition and free of slip, trip and fall hazards. Raised dance floors are of particular concern. For obvious reasons, they should have railings around them.

We review prospects' operations. We need a breakdown of gross sales showing the percentages attributable to food, to alcohol and to door admissions (cover charges). When completing apps, owners of bars and nightclubs often don't think to provide information about cover charges, because they don't think of them as income. Typically, they go to the band or venue. But underwriters definitely count cover charges in gross sales. If an insured doesn't provide the figures initially, they will be picked up in an audit-leading to an additional premium and an extremely unhappy client.

Other important information to obtain includes the average price of a drink and the age of the clientele. One way to estimate patrons' age is by noting the type of music the club or bar offers. Establishments that feature "classic rock" or music from the 1970s draw an older crowd than those that feature pop, rap or alternative rock. Sometimes, we see a mixture of entertainment, as a club tries to pull an audience from one demographic on one night and from another on the next.

We also ask about the type of entertainment an establishment offers. Just because it has a dance floor doesn't mean there is dancing every night. Rather, a club might offer karaoke a couple of times a week, or have a weekly comedy night.

The business hours are an important underwriting criterion. A place with daytime hours has a quite different environment from one open from 6 p.m. to 2 a.m., the typical nightclub hours.

We also examine prospects' procedures for checking identification. If an establishment permits a mix of adults and minors, we ask how it differentiates between them-typically they use wristbands or different colored cups.

We ask about security personnel, if the prospect has any. Does the establishment hire its own security people, or does it contract for them from a security service? Some establishments do both. We need to make sure the facility obtains certificates of insurance from any third-party security service it is using. The bar or nightclub also should be named an additional insured on the security service's liability policy. The same arrangements should be made with any independent contractor handling the insured's valet parking.

Evaluating the coverage

Our typical sale to a bar or nightclub includes general liability, liquor liability, property (including business income) and workers compensation insurance, although other coverages may be added. Unlike states with "dram shop" acts, California has a favorable liquor-liability law. Generally, businesses can be found liable for losses arising from a patron's consumption of alcohol only if they serve a minor. Consequently, we often write the general liability and liquor liability in one policy. Then we write monoline policies for property and workers compensation. For accounts of above-average size or risk, however, all coverages may have to be written separately.

Insurance for assault and battery claims is perhaps the most important coverage issue facing bars and nightclubs. Assault is a threat by word or deed; battery is physical contact that produces injury. About 60% of claims against bars and nightclubs result from assault or battery. Either patrons get into fights with one another, or they claim the insured's security people used unreasonable force in dealing with them. Such claims can be expensive. Claims for even minor scuffles rarely are resolved for less than $30,000-and then only if the bar or nightclub has a carrier that knows how to adjust the claim.

Insurers vary greatly in how they address the assault and battery exposure. The worst-case scenario (from an insured's viewpoint) is a carrier that excludes such claims altogether-for defense as well as indemnity, and for claims alleging injuries caused by security as well as those alleging harm inflicted by other patrons. Most GL policies written for bars and nightclubs have this complete exclusion.

Some insurers, however, grant general liability coverage with only a partial exclusion for assault and battery. For instance, they may cover claims arising from the actions of patrons, but not from employees or contracted agents, because they don't want the security guard exposure. Such partial exclusions often are granted to small neighborhood taverns, which generally don't have security guards anyway.

Some insurers grant coverage for either type of assault and battery claim described above--but with a sublimit. It may be as low as $25,000 per claim and $50,000 aggregate. On the other hand, I have seen submits as high as $250,000/$300,000.

The best general liability coverage, of course, has neither exclusions nor sublimits for assault and battery claims. But an important thing to remember is that under all scenarios, even this one, defense is typically included within the coverage limit. So if a bar has a $50,000 limit for assault and battery, and a carrier runs up $40,000 in defense bills fighting a claim, only $10,000 will be left to pay any judgment. Of course, the fact that defense is included in limits sometimes leads plaintiffs to settle quickly, rather than see defense costs eat up whatever is available to pay a claim.

There is no ISO exclusion for assault-and-battery claims. Rather, most insurers active in this market start with an ISO CGL policy to which they add manuscript exclusions, including for assault and battery. This is a big reason we insist on seeing a prospect's current policies, so we can determine the scope of a prospect's coverage. The prospect's current agent, if not a specialist, may not even understand the complexities of assault-and-battery coverage and insist that the client has full coverage. If such assertions are incorrect, we cannot refute them unless we can point to the gap in the prospect's current CGL policy and exclusions.

Agents also should be aware of how deductibles are written for bars and nightclubs. They generally run from $1,000 for small taverns to $10,000 minimum deductibles for large nightclubs. Usually, these deductibles apply not only to indemnity but also to loss adjustment expenses. So shortly after submitting a claim, an insured may get billed for LAE.

Agents also should review prospects' property insurance. Rarely does it include an adequate amount of business income coverage. As a rough rule of thumb, it should equal at least 40% to 50% of their annual gross sales. Also, it is often necessary to explain the implications of replacement-cost coverage and coinsurance provisions.

Getting agreement on loss control

Nightclubs and bars usually are receptive to our loss-control suggestions-particularly those that have seen their premiums shoot up after a serious claim. One thing we recommend is that insureds keep incident logs. (This is even more important for bars and nightclubs operating in states with dram shop laws than it is here in California.) In the log, bartenders and other employees briefly write down the date, time and nature of any incident, as well as a description on the patron involved. Bartenders may note, for example, that they stopped serving a patron and asked him to leave. Later, if the patron is involved in an auto accident, the log can show that the establishment acted responsibly. The log notation might simply say: "Stopped serving patron in red shirt and leather jacket at 10 p.m. on Dec. 2." The key is to train employees to write down such notations immediately. It may be two or three months after an accident before an insured even hears from an investigator. Meanwhile, the bartender who wrote the note might not even work any longer at the establishment. (Employee turnover tends to be high in bars and nightclubs.) So a notation like the one above could make the difference in keeping an insured out of a claim that could be for $300,000 or more, if a death were involved.

Video cameras also are great loss-control devices. A mounted system that continuously monitors all public areas of a facility, including its parking lot, is best. At a minimum, establishments that have had assault and battery claims should keep a hand-held video camera around. It should be used, for example, if a patron has to be escorted out of the facility. Such a person may later contend security personnel used unreasonable force in removing him from the premises. A hand-held video recorder can help refute such a charge.

ID checking devices also are helpful. When a driver's license is swiped through such a device, it can read the magnetic strip on the back and determine the patron's age and whether the ID is a fake.

We also advise clients to have all employees serving alcohol undergo appropriate training. We provide handouts to clients to make them aware of this issue and urge them to obtain such training, whether their insurers require it or not. Free classes are sometimes offered by the local alcoholic beverage control authorities.

Approaching the markets

Except for some small neighborhood bars and for restaurants that derive 50% or less of their revenue from alcohol sales, almost all of our clients must obtain coverage from the E&S marketplace. We approach the markets through about 10 wholesalers, who collectively can help us find a market for just about any bar or nightclub, regardless of its characteristics.

To obtain the best quotes, we fully complete applications and any supplemental applications a market requires. Loss information is also crucial. Underwriters often want to see a five-year history of gross sales, as well. Besides all of this, we provide a narrative that, among other things, gets into the type of clientele the establishment draws, and the owner's experience and attitude toward loss control. The most crucial part of the narrative deals with past losses. We explain how any losses came about and what the client is doing to prevent a recurrence.

We always obtain two quotes: one with assault-and-battery coverage, and one without. While we stress the advisability of assault-and-battery coverage, at the end of the day, it's the client's decision. If the difference in price is $20,000, as it well could be for larger establishments, a client might decide to forgo coverage-but at least we still have a sale.

Annual premiums for bars and nightclubs vary greatly. Small bars and restaurants with high alcohol sales may pay from $3,500 to $15,000. Larger risks, those with up to 5,000 square feet of space and security personnel, probably are looking at $15,000 to $25,000. Full-blown nightclubs-businesses with more than 5,000 square feet and/or more than $1 million in annual sales-may pay $25,000 to $100,000.

In our presentations, we attempt to highlight the difference between the prospect's current insurance and the coverage we propose. For instance, in regard to assault-and-battery coverage, we break out the differences in exclusions, sublimits and deductibles. Our objective is to give prospects the information they need to make an educated decision

If we have done a good job of qualifying the account-that is, if the initial interview went well, and if the prospect has a problem and wants us to solve it--the sale usually is closed even before we present the quote. Our average closing ratio is 50%; for our best producers, it's 80%.

Helping clients stay covered

The close of the sale is just the beginning of our relationship with clients. Now that we have the bar or nightclub as an account, the last thing we want is to see them canceled midterm or not renewed.

First, we talk to them about their finance agreement. Just about all bars and nightclubs use premium financing, and we stress the importance of making payments on time. Many carriers will not reinstate coverage for a client who has been late with payments two or three times.

We also explain to clients that they will be visited by company loss-control inspectors, and that it's important to cooperate with them. While we try to get a client's loss prevention program in good shape before we take them to the markets, inspectors may make additional recommendations, and clients will need to comply with them.

We again stress the importance of obtaining certificates from security and valet services and to request new ones when their contractors' coverage renews. Of course, going over claims reporting procedures is vital. Clients may fail to report a claim promptly because they get busy or just think it will go away. Then eight months later, the client gets a summons, and the insurer denies coverage for failure to report a claim in a timely manner

Finally, we discuss premium audits, which usually are conducted for both general liability and liquor liability insurance. We explain that a premium auditor will come around to see how current actual sales compare with the previous year's sales, on which the initial premium was based, and to adjust the premium if necessary. We fully explain this process, not only so clients will understand they may get billed for additional premium, but also so they realize the importance of giving us accurate sales information in the first place, to improve the odds that any subsequent premium adjustment will be minimal.

I'll drink to that

In this article I've outlined our procedures for prospecting and writing insurance for nightclubs and bars. Now grab a stool, and I'll give you the recap. First, make sure your patrons qualify to be served in your establishment. Like any good bartender, listen attentively to their stories. Then mix equal parts of insurance knowledge, loss control advice and market access. Pour into a tall glass--no rocks or surprises--and garnish liberally with service.

Cheers!

Special Reports /

Providing first-class service for bars and nightclubs

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