Why Restaurants Are Underinsured

Restaurants are probably one of the most underinsured classes of business in the industry. Competition, inadequate pricing, and owners refusing 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. One coverage often not purchased is business income coverage, she said.

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.

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.

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.

“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.

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.

Even when liquor isn’t an issue, liability exposures are still heavy for this class, he said. “You are always going to get a trip and fall case. And when you write a large restaurant at $6,000 or $7,000 in premium, and you get one or two trip or fall (cases), that’s not going to even cover your investigation expense.

“The exposures are just too significant between liquor liability and property. You can’t give away premium,” he said.