Entertainment Exposures Raise Restaurant Risk

"Some of these places are where young people go not just to have a drink," said David Price, executive vice president and chief underwriting officer for Burns & Wilcox, a wholesale broker and MGA based in Farmington Hills, Mich. "We have had people injuring each other and fall[ing] down and things like that. That is why control is importantand you have to make sure you have the proper staffing."

One managing agentJoe Timmons of Midwestern General Agency in Lees Summit, Mo.said many carriers will want to know the size of the dance floor, particularly in relation to the size of the establishment it is in. "If it is a 10 x 20 dance floor in a 3,000 square-foot bar, then it is pretty innocuous," he said. But if you have a dance floor taking up half the bar, then you know it will be a pretty serious situation."

Donna Brooks, commercial lines underwriter for Indianapolis-based Arlington/Roe & Co., said carriers have even become something of music critics when it comes to coverage. "They would much prefer jazz to hard rockers," she said.

Most of the bar and tavern coverage is carried by specialty insurers in the non-admitted market. "We use a little bit of both," Mr. Price said. "A number of our markets are non-admitted because we wish to tailor our programs to meet the particular needs of bars and taverns."

Liquor liability is an unusually difficult line to write and is almost always written in the non-admitted market, Mr. Price said. "The rates are somewhat higher in the non-admitted market, but not much. The difference is how the coverage is amended to reflect the exposures that carriers want to take on themselves," he added.

As for profitability, all Mr. Price said is that the line "is not the cream of the crop, but it will make carriers some money."

One trend that concerns Mr. Maher is the presence of novice carriers that see the business as an opportunity to make a quick dollar through less-than-sound underwriting. Such actors will eventually get out of the business and go back to their core competencies, but only after driving the lines price down and impairing the profit and loss figures for all the players, he noted. "That is when the market gets harder again. Those who know how to write the business will always be here," he said.

While such scenarios are true for virtually all property-casualty lines, the effect is particularly magnified in the closed world of bar and tavern specialty underwriting. "They think they are doing well enough. And then the [incurred-but-not-reported losses] start coming in and suddenly it was not as good as it was two years ago," Mr. Maher said.

As for the current market, Mr. Maher sees it trending soft after an uptick in pricing that started in 2001, but others disagree.

Ms. Brooks said that, in general, while commercial lines prices might be moderating, that is not the case in the bars and taverns universe. "Sometimes they are just self-insuring, basically, or they will purchase property and liability and not the liquorit is a huge risk," she said.

Steve LuVollo of Buffalo, N.Y.-based broker LuVollo Associates said most bars and taverns dont buy liquor liability coverage in states such as New York, where it is not required.

Every specialty agent has one particular guidepost to navigate this tricky universe. For Mr. Price it is location, location and location. "If it is not in a terribly good location, then you will have a problem because of the nature of the people that frequent said bar, and there are such places as biker bars that you may not want to touch at all," he said.

Mr. Maher said that developing trust in the independent agents who bring them their business remains the key to success. "Are they writing it directly? We only take business from those who directly write and control that account," he noted. "We do not look to do too much through wholesalers who have an arms-length relationship."

Nonetheless, for the most part, the underwriting MGA will always conduct its own inspections after taking on the business. "We want to know the risk. We want to know that they have loss management programs in there," Mr. Maher said, adding that he wants accounts with inspections done not only at the outset of the relationship but at renewals. "There are too many instances in this business where you do not necessarily get the best applications," he said.

Mr. Price added that knowing the kind of training management gives to workers is another key underwriting and rating component.

As for particular exposures, "slips and falls" under general liability remain the main source of claims, with fire losses under property running a close second.

Third-party lawsuits of victims either killed or injured by a visibly drunk patron may not be a large source of claims numbers-wise, but the size of possible judgments can keep giving liquor liability writers some sleepless nights.

Mr. Timmons said that ensuring the policyholder has a proper hood ventilation system in the kitchen is a critical component in the underwriting process. Mr. Maher agreed. "We will not even underwrite if the kitchen has no hood system," he said.

The hood ventilation system sucks up the heat from the kitchen surfaces that will help prevent any small sparks from turning into big fires. In addition, the fire suppression units within the hoods are the first defenses when trouble occurs, Mr. Maher noted.

But when all is said and done, Mr. Timmons had some advice that was a little more basic. "The trick is to know your producer and make sure he is not bringing you the trash," he said.

Reproduced from National Underwriter Edition, January 6, 2005. Copyright 2005 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.