Good Food, Fine Wine Arent Only Ingredients Of Five-Star Dining Risks

"If you get sued by an employee, customer or vendor, I truly believe thats going to put you out of business faster than a fire or a general liability claim," Mr. Imbus said. While banks and landlords may require restaurants to have property and liability coverage, restaurants often self-insure the EPL exposure, he said, warning that "the defense costs alone could put you out of business."

Focusing on an entirely different exposure that can result in a significant business setback, Heidi Strommen, executive vice president of ProHost USA, said retail agents need to communicate what it would mean to a restaurant if a power outage shut down business on a Friday and Saturday night. "They could have no [insurance] claim if they have a 48-hour deductible" on business interruption coverage, she noted, explaining that ProHost, a managing general underwriter based in Minneapolis, Minn., includes food spoilage and business interruption (business income) coverage for power outages (even off-premises outages) with no waiting period as a standard on its property and liability package.

Mr. Imbus noted that for some five-star restaurants with unique wine lists, food spoilage coverage is extremely important. If refrigeration goes down, "high-priced wine in a cooler can no longer be sold because of a temperature change," he said, noting that some old wines cant be replaced.

Jim Drummond, vice president of underwriting for Specialty Insurance Agency, a Neptune, N.J.-based MGA whose only business is restaurant insurance, highlighted a different exposure that can be overlooked in the business income area.

When theres a property loss to a restaurant, depending on how long its been shut down for repair, it can take time to rebuild clientele and get customers back, he said. But insurance payments will stop when structural renovation is complete, he noted, suggesting that an "extended period of indemnity," which can add up to 12 months of lost earnings coverage, is a good thing to add on.

As for more recognized exposures, "general liability is general liability," Ms. Strommen said, echoing others who noted that slips and falls and chipped-tooth claims continue on the liability side, with no major trends apparent.

Fire losses, however, have had an impact on the insurance market, driving some carriers out in recent years, according to Crystal Burns, commercial lines underwriting manager for United Brokers Insurance in New Albany, Ind. "When the market changed" from soft to hard, restaurant was a class that became difficult for carriers to accommodate as they tightened restrictions. "A lot of that was due to the property line," she said.

"Many carrierseven on the [excess and surplus lines] sidehad experienced fire losses," she said, noting that E&S brokers and MGAs like United Brokers instituted some underwriting fixes to rectify the situation. Among them, she said, her firm wont consider risks that had a lapse in coverage.

"The biggest change we saw during the hard market was that many risks allowed coverage to lapse for three to six months," in some cases, because prices soared to levels they couldnt afford. She explained that theres a moral hazard risk associated with a restaurant that lets coverage lapse and then goes back out to buy it, alluding to a potential arson situation.

Ms. Burns wasnt the only underwriter to reveal an unusual guideline during an NU interview. But while appetites for individual risks differ, specialty underwriters and agents with a taste for the restaurant segment give a single view of overall market conditionsrestaurants are having an easier time finding carriers and good rates as 2004 begins.

Ms. Strommen, whose firm currently has a program for fine-dining restaurants with average dinner entr?e prices of $15 or higher, said the insurance market changed in the last 60-to-90 days. Before then, "we could reliably get, on average, 20-to-25 percent over expiring on renewals. Thats flattened out," she said.

"There have been some new players coming into the market," noted Ms. Strommen, whose firm, which has been writing restaurants since 1989, writes for Cincinnati-based Great American Insurance. But a more significant factor is that "some existing players started to soften pricing," she said. "Were still getting increases, but [the average] is probably closer to 10 percent. And in some caseswhich wasnt the case before the last few monthsweve actually had to drop pricing to retain accounts, because of carriers really underpricing the market again."

Scott Bell, a vice president for Program Brokerage Group in New York City, which offers a package program for what he called "Mom and Pop restaurants with a local feel," had a similar assessment of pricing. Rates are still going up, but the high double-digit jumps of last year have probably leveled off to 10 percent, he said.

He sees carriers that used to focus on limited geographic areas now expanding their territories. His firm, which has been placing restaurants in the Northeast for the better part of a decade with a book of roughly 3,700, focuses on those with under $2 million in sales and total insured values. The program is currently written through Alea North America in Wilton, Conn.

At United Brokers, long-term relationships with several marketsincluding Hatboro, Pa.-based Penn-America, U.S. Liability Insurance in King of Prussia, Pa., and Richmond, Va.-based Markelallow the firm to place coverage even for restaurants with live weekend entertainment and dance floorsrisks that might be shunned by other carriers. "The only thing that would prevent us from being able to look at a restaurant would be if they had a deep fat fryerand no kind of fire protection," Ms. Burns said, noting that while her firm can write nationally, 75 percent of the book is in Kentucky.

As for pricing, she said, "this time last year, we were probably surcharging manual rates 20 percent. Now thats reverting back to manual or were even crediting accounts."

Mr. Drummondwho, like Ms. Burns, said his firm can cover just about any restaurant except fast food, including pizza parlors, fine-dining restaurants, carry-outs and taverns ("Well even do taverns up to 100 percent liquor")has seen his share of carriers come and go in the 20 years since his firm became an MGA. Although Specialty Insurance has racked up over $400 million in premiums since 1984, it hooked up with QBE Insurance Corp. just two-and-a-half years ago, after stints with Royal, Reliance and Republic Western (which is under supervision).

"It is very hard to find stable carriers that will stay with restaurants year in and year out," said Mr. Imbus, explaining his firms partnership with one company, Restaurant Insurance Company. (RIC, an MGU, has negotiated reinsurance for its exclusive p-c program written on Discover Re paper.)

Mr. Drummond observed that carriers are now moving into states they werent in before. "Restaurants are pretty easy to have new producers go out and get [expiration dates] on," he explained. "Its a relatively large market. Its an easy sell. And there are a lot of simple coverages to deal with."

Still, there are subtle nuances of coverage that distinguish programs beyond a common set of components that include property, general liability, liquor, umbrella, equipment breakdown, business income, food spoilage and crime.

Mr. Imbus and Ms. Burns, for example, listed EPL among available coverages, while Mr. Bell listed add-ons like coat-check liability and automobile insurance for vehicles used in deliveries among possible offerings.

Ms. Strommen said ProHost can write the coverage for valet parking at a restaurant. And Mr. Drummond said his firm sells an enhancement endorsement that includes 20 "tidbits of coverage with sublimits, like back-up of sewers and drains."

Different tidbits of underwriting advice also distinguish specialists, but all said they perform white-glove tests to determine insurability, touting reviews by loss control professionals as critical factors in their assessments.

A loss control review is "really a corroboration of the information you get on the application," Mr. Drummond said. "A company [that] doesnt do that [is] going to be taken for a ride."

Program Brokerages Mr. Bell said its also important to make sure proper cleaning is being done, that food is being properly taken care of and "theyre not leaving things out at the end of the night." Also, in public access areas, walking surfaces should be flat and free of debris, he said.

Beyond housekeeping assessments, a growing trend has underwriters poring over financial statements.

"With the economy being what its been, and people going out to eat less, we like to see restaurants that have been in business and stable for two or three years," said Ms. Strommen. "We think its a tough time to be starting a restaurant right now."

How does that translate into an insurance risk? "Restaurants that are struggling financially are going to tend to have trouble with upkeep," she said, explaining that if there are repairs needed, the owners may cut corners.

"So if were going to write a start-up, were going to look for something thats well-capitalized. We always require a financial statement from the owner, in advance. [And] they definitely have to have prior successful restaurant experience," she said.

Mr. Drummond said he orders Dun & Bradstreet reports to check financial wherewithal.

Mr. Imbus said a trend in the industry is to make restaurant managers stockholders, owners, or to put them into profit-sharing plans. Thats viewed positively from an underwriting perspective because active ownership translates into fewer claims, he said.

Studying corporate structures and contracts between entities is another important underwriting activity, he said.

At Palmer & Cay, where any type of restaurant, from fast food to fine dining, is considered, the focus is on the management companies that have multiple locations or manage restaurants for other people, he said. "More and more restaurant companies are setting up various corporations for various parts of their restaurants. For example, you may see a restaurant set up a company just to run payroll through."

Failure to heed the trend and to review insurance clauses in contracts can result in claims issues. For example, an agent needs to make sure that if the restaurant suffers a loss, that the payroll company can collect the ordinary payroll from the policy, he said.

Reproduced from National Underwriter Edition, January 16, 2004. Copyright 2004 by The National Underwriter Company in the serial publication. All rights reserved.Copyright in this article as an independent work may be held by the author.