Restaurants are probably one of the most underinsured classes of business in the insurance industry. Competition, inadequate pricing, and owners opting not to buy needed coverages are some of the reasons cited by specialty brokers in this segment.
"Most restaurant and bar owners purchase property and liability coverage but there are often important coverages they forgo on purchasing that are critical to the viability of their business", said Debbie Bostick, account executive for retail and specialty business at wholesale broker Quirk & Co. based in San Antonio, Texas.
Business income can make or break a restaurant/bar after a disaster. “If they have a fire, and they’re down for three months, the business income will come into play to help them get started back up again,” Bostick said.
As outlined on our website, Business Income Insurance is:
Commercial coverage that reimburses a business owner for lost profits and continuing fixed expenses during the time that a business must stay closed while the premises are being restored because of physical damage from a covered peril, such as a fire. Business interruption insurance also may cover financial losses that may occur if civil authorities limit access to an area after a disaster and their actions prevent customers from reaching the business premises. Depending on the policy, civil authorities coverage may start after a waiting period and last for two or more weeks.
Spoilage and Equipment Breakdown
Kyle Stevens, president of Western Security Surplus, a wholesale broker and managing general agency based in Plano, Texas, agrees that business income is one area restaurants and bars may overlook. He added that another important coverage owners often don’t buy is spoilage and equipment breakdown.
“That’s for cases where something happens – power goes off, fire or another situation – that causes the establishment to lose all their stock (food and beverage),” Stevens said.
Attached as an endorsement to a commercial property insurance policy, spoilage coverage includes covered perishable stock located at your business premises. It includes perishable property damage caused by a change in humidity or temperature due to an equipment failure, power failure, or contamination.
If Hurricane Harvey taught us anything in 2017, it's that coverages like spoilage and/or equipment breakdown can be crucial in recouping losses due to a loss.
For establishments that sell alcohol, in particular establishments where more than 40 percent of sales involve alcohol, liquor liability is crucial but also an area that is underinsured, Stevens said. Liquor liability provides coverage for bodily injury or property damage caused by an intoxicated person who was served liquor by the policyholder.
“A lot of places that sell liquor, especially in certain states such as Texas, don’t feel like they need liquor liability coverage and will only buy it if their landlord and/or lease contractually requires having the coverage,” Stevens said. Liquor liability is often not secured by smaller establishments unless building/property owners make it mandatory, he added.
Even when liquor isn’t an issue, liability exposures are still heavy for this class, Stevens said. Other considerations to include when purchasing liability for restaurants: general liability, premises liability, food contamination, server liability, and hired and non-owned liability (in addition to your auto liability).
Another way restaurant and bars could be underinsured is by purchasing the wrong kind of policy to begin with, says Barry Moffett, president and CEO of Specialty Insurance in Brick, N.J.
Moffett has been insuring restaurants and bars for more than 30 years. He says today’s highly competitive insurance market is leading this segment to potentially disastrous times.
“There is something going on with insuring restaurants/taverns that is eventually going to cause a lot of disruption in the market,” Moffett said.
“Right now, you have a lot of companies that have come into the market and are writing BOP policies (business owners policies) for restaurants but the rating is totally inadequate,” Moffett said. “BOP policies are rated on contents or building values, which have absolutely nothing to do with liability exposures.”
According to Moffett, larger restaurants in bigger cities such as New York, are purchasing BOPs for their establishments and end up grossly underinsured.
“It could be a 10,000-square-foot restaurant but they are renting the property and maybe they only have $500,000 in contents, so the liability policy would be rated on that $500,000 but the place could be doing $10 million in receipts,” he said. “It’s a totally irrelevant and inaccurate rating base.”
Moffett says perhaps the companies offering BOPs don’t understand the true exposures of the restaurant and bar industry. “When you insure restaurants anytime one of your clients gets involved in an auto accident after leaving you will be involved in a liquor (liability) suit whether there’s any merit to it or not,” he said.
What a Types of Insurance a Restaurant Needs
Your insurance will also provide you with coverage for damages against your property. This can include damages caused by fire, crime, electrical problems and certain weather events. Some policies will require you to purchase specific event coverage. Some property coverage options include:
- Building coverage: This provides compensation for damages to the structure of your building. This is necessary only if you own your restaurant's building.
- Contents coverage: This includes coverage for your property, including furniture, light fixtures, artwork, flooring, computers and kitchen equipment.
- Equipment breakdown coverage: Equipment such as freezers, stoves, dishwashers and air-conditioning units are vital when running a restaurant. If a power surge or mechanical failure results in equipment breakdown, your business can experience expensive repairs and lost income. This coverage will provide you with compensation for your losses so that you can get your business up and running again without suffering financial setbacks.
- Food contamination coverage: If a power outage, mechanical failure or other covered event results in spoiled food that must be thrown away, this coverage will cover the replacement costs.
Restaurant owners have a number of liability risks. Restaurant insurance costs far less than a serious lawsuit might, so it is an especially good investment. Some examples of the of liability coverage options available are:
- General liability: This includes operations and premise liability. If a customer is injured in your restaurant or parking lot and it can be shown that you are responsible due to negligence in upkeep, poorly placed objects or the actions of one of your employees, you may be responsible for extensive medical bills. General liability insurance is designed to provide coverage for medical costs and damages.
- Product liability: As a restaurant owner, your product is the food you serve. If customers become sickened by food poisoning or other food-borne illnesses, such as hepatitis or salmonella, and it can be proven that this occurred because of food served in your restaurant, you may find yourself sued for medical costs and punitive damages. Product liability insurance will shield you from the high costs associated with such a lawsuit.
- Liquor liability: If your restaurant serves alcoholic beverages and allows a customer to become intoxicated, your business may be held liable for the drunk patron’s ensuing actions, including acts of violence and property destruction. Liquor liability insurance can help to protect you from financial losses if you are sued.
- Hired and non-owned vehicles liability: If your restaurant offers food delivery service but your employees use their own vehicles, this will provide you with coverage against potential liability lawsuits if they are involved in an accident while making a delivery for you.
With every coverage type listed above, your insurance includes compensation for the court costs and legal fees you may incur as a result of a liability claim against you.
Some necessary insurance types include:
- Workers compensation insurance: Most states require this insurance to cover any injuries your employees experience while on the job, as well as any job-related illnesses.
- Unemployment insurance: This may or may not be required by the state in which you operate. In most places, this insurance is included with your state taxes. Be sure to speak with an insurance professional or a tax advisor to ensure that you are complying with state laws.
- Life insurance: This is sometimes required by lenders if you have taken out a substantial business loan to finance your commercial enterprise. This way, the lender can be certain that your estate will be properly settled and your business loan paid if something should happen to you. Regardless of whether or not it is required, life insurance is a good idea if you want to secure the financial well-being of your loved ones.
- Commercial vehicle insurance: This is necessary if your restaurant offers delivery service or catering using company-owned vehicles, or your employees drive vehicles in the course of work.
- Restaurant insurance: This is a business insurance policy specifically designed for owners of restaurants. It provides general liability and property damage coverage as well as coverage for many types of hazards unique to restaurant owners.
Other Coverage Options
Some other coverage options you can expect to find with your restaurant insurance policy include:
- Loss of income coverage: If your restaurant must temporarily close due to a covered event, this insurance will provide you with the funds necessary to continue making payments on your monthly expenses, including employee salaries, until you are able to resume operations.
- Coverage against employee crimes: If an employee steals from you or commits other types of crimes, this coverage will shield you from any resulting lawsuits and will compensate you for your financial losses.
Some restaurant insurance policies will offer coverage for drain and sewage back-ups and the damages they may cause. Often, if the sewage backup is the result of a flood, this coverage will not apply. Flood damage can be extremely expensive. It can lead to contamination of food and food-preparation areas as well as damage to expensive equipment and décor.
Be sure to learn how much or how little coverage you can expect from your restaurant insurance policy in the event of a flood. It is also important to determine whether you will benefit from purchasing a separate flood insurance policy to protect your business.