Our recipe for restaurant insurance

We've been writing insurance for restaurants, bars and nightclubs for 30 years. To say that this market niche may not be for every agent, broker or insurance company is an understatement. However, we've found this specialty to be entirely fascinating and specific to our skill sets and agency personality. Assuming there's a good fit, we try diligently to acquire as many quality restaurant clients as we can efficiently handle in the San Diego area.

There have been two keys to our success. The first is knowing the restaurant business intimately, and having an awareness of the countless challenges restaurateurs face. We speak their language and “feel their pain,” as it were. The second is having a passion for professionalism, which doesn't mean we live to sell insurance. We don't sell anything; we help people buy. Our mission is to educate our clients so they can make informed insurance-buying decisions. We're intuitive and plan ahead with regard to our clients' needs.
In this article, I'll explain how those two philosophies permeate our agency. Far from being methods peculiar to the restaurant niche, mastery of a market domain, coupled with a commitment to excellent service, leads to success, whatever business you're in.
Across the hall from the first insurance agency I worked for was the San Diego Tavern and Restaurant Association, now known as the Food and Beverage Association of San Diego County. The agency offered a workers compensation program for the association members, although it was relatively fallow when I started. Being a new producer, I picked up the workers comp ball and ran with it–essentially across the hallway. I was soon involved with more food and beverage accounts than I was with any other type of business.
I brought that book of business with me when I joined Alcott in 1984, and it has grown into one of our three main niches, accounting for 30% of our premium volume. We have over 300 bar, nightclub and restaurant clients, with restaurants comprising two-thirds of that number. I've enjoyed a long relationship with the executive director and staff of the association.
Whereas many agents and brokers in this niche prefer to focus on the high-end business–the “white tablecloth” restaurants–we run the gamut, from the mom and pops up to fine dining. When the association sends me a small fast-food restaurant to contact, I take care of the account just as I would a much larger client. As I see it, the most valuable thing I can offer the association is my integrity, so we treat each of their members as a valued client, and all of them have access to our professional insight and wisdom.
After many years in the business, most of my leads now come via referral. When I was younger, however, I employed a number of methods for prospecting, cold calling among them. Every Tuesday and Thursday a local business paper would publish leasing notes, and whenever I saw a restaurant of interest I'd call the leasing agent for contact information. I also participated in trade shows and sent mailers. Finally, knowing that health permits were the first business documents pertaining to a new restaurant venture that were made public, I made frequent trips to the health department to secure lists of businesses issued a permit. Then I started making calls.
In addition to using my association connection, I've spent considerable energy developing “centers of influence.” I broke bread with many a CPA, real-estate broker, business attorney and anyone else who was affiliated with the industry. Today I have the confidence of 30 to 40 colleagues who service restaurants. We exchange leads. If I get one good lead in a 12-month period from each of my centers of influence, I'll have a good year. Also, I belong to a smaller lead group of four vendors. We meet quarterly to discuss the industry in general. Our trust is inherent and referrals flow. My clients appreciate introductions to suppliers that can truly help them. It's a value-added service that distinguishes me from the competition.
So now, along with one or two others in San Diego County, I'm recognized in certain circles as the “go-to” guy for restaurant insurance. I've always believed that once you're referred to an owner, you become the incumbent. And it's very difficult to take business away from an incumbent agency if they're doing a good job.
Hot buttons: Where's the beef?
Coverages for restaurants are not particularly complicated (although they can be for bars and nightclubs, which are beyond the scope of this article). They're roughly the same as for any commercial venture. We try to insure to value for both building and contents, and make sure liability limits are adequate. Also, we've continued with our proprietary workers comp program through the association.
The critical part of the process is educating the client, and we spend a great deal of time going over proposals and reviews with our customers. We first focus on the “catch” of coinsurance. Clients must understand the triangulation between coinsurance, replacement cost and the limits on the building and contents. I tell them that if a major loss occurs, the first thing the adjuster is going to ask is whether or not the coinsurance requirement has been met. The answer had better be “yes!” I explain that coinsurance is a promise the insured makes to insure to value (i.e., not underinsure). If that promise is broken, a penalty in a claim settlement may be invoked. I stress to clients that if they remember only one thing about our meeting, they need to understand the concept of coinsurance and be able to explain it to me when I call back in three months. Most can!
The second thing we discuss is the importance of business-income coverage. Since most companies use an actual loss sustained form, we try to make sure the time frame is at least 15 or 18 months for coverage. A well-written business-income policy covers an establishment's loss of profits, continuing expenses and employees' salaries with no limit for ordinary payroll and a 60-day extended period of indemnity. I explain to clients that its purpose is to replace their cash flow until they can reopen, and they certainly understand cash flow.
Another important consideration is insurance for code upgrades after a major loss. We always include ordinance or law coverage to address this issue. Often an insurance company won't add such coverage if the client doesn't actually own the building. However, I was able to convince three of our carriers that even in such cases we need to be able to provide a modicum of ordinance or law coverage, applicable to tenant real-property improvements and betterments. In the last loss we had, the insurer's claim payment included $100,000 for code upgrades. The client was extremely happy we anticipated his need.
One hot-button issue we always discuss is the employment practices exposure–wrongful termination, sexual harassment and discrimination. Many of my single-location operators decline to buy EPLI, but some of my multiple-location clients do. Single-location operators tend to feel they can adequately monitor what's going on at their restaurants and avoid EPLI claims. We can also add a third-party discrimination (ADA issues) endorsement to EPLI coverage, which is an important coverage for a business like a restaurant.
Naturally, we have premises, products and liquor exposures. Liquor liability insurance is inexpensive in California, since a change in the law in 1979 for the most part switched the liability for liquor consumption to the patron from the business owner. The coverage is discretionary, but we always include it, since it doesn't cost much. An establishment still would have a grave problem if it served an underage patron who then injured a third party in a car wreck. We haven't had any liquor losses in 25 years, but catastrophe could be lurking. Hence the need for coverage.
We always add nonowned auto, because it's another exposure in this niche that could cause a catastrophic loss. It's not uncommon for restaurateurs to send a busboy to the store to pick up supplies. A restaurant needs protection if employees use a private vehicles for business purposes and cause a serious accident. Also, a shutdown due to a food-borne illness can be catastrophic. Indeed, a health department shutdown can kill a business. While liability coverage does apply to a customer who becomes ill, covered losses from a food-borne illness shutdown and resulting business interruption are limited. My hope is the preferred companies will enhance their coverage in this area to mitigate the risk the insured must currently bear.
We always review leases to determine property and liability limits and assess other requirements that may be unusual, unfair or unreasonable. I remind my clients that leases are always written in favor of the landlord and they deserve close scrutiny. It's surprising how much a client's attorney will miss or may not understand. My ability to comprehend leases and provide appropriate direction has enabled my clients to negotiate from a position of strength. They value the service and this ability helps separate me from the competition.
Ordinary fare
The most severe claims we have experienced, as might be expected, are from fires. Since 90% of fires occur in kitchens, restaurants are especially vulnerable. We have one or two severe fire claims a year, although I've had only two total losses in my career. All insurance companies require restaurateurs to clean the kitchen flues and filters quarterly and to service the kitchen fire-suppression system every six months. Those are two major concerns, because they affect warranties in the property-insurance policy. If a client doesn't fulfill the requirements, the insurer may not pay a claim. And they do confirm that the client is complying: For every major fire loss we've had, the insurer checked invoices to make sure both services were performed. We recommend that clients obtain annual service contracts from their providers. If a quarterly cleaning or six-month service is somehow missed, at least the owner can show that the work was scheduled in the contract.
Insurers also expect restaurants to keep the kitchens clean, with all the goods stored neatly and tidily. They demand that food be stored properly, and that it be covered and maintained at the correct temperature.
Restaurant submissions are fairly standardized. We use an ACORD form and a one-page restaurant supplement. Among other items, underwriters want to know about a restaurateur's experience, sales, hours, liquor violations, losses and building characteristics. Clients can be turned down by preferred carriers for previous nonpayment problems. Those with one big loss or frequency issues may have to be placed in the E&S market, where coverage is more expensive and not always as extensive, but always available. Property deductibles are higher and typically liability deductibles apply.
It's important for agents to inspect restaurants at least once a year and see if anything has changed. Changes need not be large to be significant. Simply adding a dance floor, for example, changes a restaurant into a nightclub, which is an entirely different risk from an insurance standpoint. Similarly, insurers can get uncomfortable if receipts from liquor sales creep over 35% of total revenue, since that suggests the restaurant is edging towards “bar” territory. (There's an exception for high-end restaurants, where $200 bottles of wine are not uncommon.) Insurers also don't like late hours. The only entertainment they allow is sole performers doing background music–but absolutely no dancing!
And every now and then there are surprises. I once discovered that a client was bottling salad dressing in the back of his restaurant and selling it in retail stores. Obviously, that created a products liability exposure that needed to be addressed.
'This is the restaurant business'
Experience has taught me that, in most ways, insuring restaurants is not that different from insuring any other kind of commercial endeavor. (Again, bars and nightclubs can be a different story.) Not all carriers see it that way, however. There are companies that have appetites for restaurants, and those that don't. Fortunately, I have several preferred markets that will write restaurants with regularity. They include Golden Eagle, Capital Insurance, UCA and Allied. We also use Crusader Insurance Co. for the bars and nightclubs. We've established great relationships with our carriers and they trust our expertise in this class of business. Our good favor with companies always bodes well for our clients.
Few people outside the restaurant business can appreciate the enormous amount of work that goes into setting a plate of food in front of a patron. Winding up with a discretionary dollar is a real feat. The business may seem to be glamorous, but here's the reality: Not long ago, I was having dinner with an attorney friend at a fine-dining restaurant. It was Saturday night and the place was full. My friend was rhapsodizing about how wonderful it would be to operate a nice restaurant. I said, “Come with me for a moment.”
The owner was a longtime client, so I was able to take my friend back into the kitchen. The drain had stopped up, and the chef was sloshing around in two inches of water, trying to keep the customers unaware of what was happening and still get the product out on time. I said, “This is the restaurant business.”
We have a keen appreciation of how difficult the business is, and how many hats the owners have to wear. More often than not, it's impossible to see the desk in a restaurateur's office because of the mountain of accumulated paperwork on it. Success is a grind, but our insureds' passion prevails. Most of our clients are single-location operators. When I deal with owners, they know that I have their best interests at heart. They know that I bring insight and value. They appreciate the heads-up that I give them on various items. They know they can depend on me for sage advice and direction. We've had some of our clients for 25 years, and that's because they know we'll take care of them.
There is an underappreciated emotional component to this business in the event of a major loss. My clients may have spent their lives building a business, and they've entrusted the protection of their life's work to me. It's a reality that defines my professional responsibility. When a client has experienced a devastating event, I want to be able to walk among the cinders and say, “We're going to get you back in business. There's going to be some pushing and shoving, but you're going to walk back in here and pick up where you left off.” We must almost take the role of a grief counselor at that time, because that's what the client needs. My own house burned down 20 years ago, so I understand the emotional distress that comes from standing among the ruins. Sensitivity to emotional needs during these times is essential, along with providing clients strong reassurance that their business will be saved.
Some of my clients joke about getting my coinsurance spiel for 20 years. And then something will come up, and the light will go on and they'll say, “Right. I remember that! I know what we need to do.” They finally get it. When that happens I sleep well, knowing that I've done the best job I can do to protect my customers. Mark Mays is president of Alcott Insurance Agency in San Diego. After graduation from San Diego State University, Mr. Mays began his insurance career with The Hartford in 1972. He joined the agency ranks in 1979, eventually moving to Alcott in 1984 and becoming president in 1996. Alcott specializes in coverages for restaurants, bars and nightclubs; contractors; and woodworkers, with Mr. Mays managing most of the restaurant and nightclub accounts personally.