Insurers Warn Restaurants on Exposures that Could Interrupt Recovery

The restaurant industry has endured a difficult few years and while some establishments didn’t survive the economic storm, those that did are anxious to see their business grow again.

They may not have to wait too long. The National Restaurant Association reports in its 2012 Restaurant Industry Forecast that the industry will expand in 2012 and sales are expected to increase 3.5 percent over 2011. It also states that the restaurant industry, the nation’s second largest private sector employer, will be adding jobs at a rate of 2.3 percent.

Other good news for restaurateurs, according to the report, is that two out of five consumers say they are not using restaurants as often as they would like, indicating there may be untapped demand for their services.

The insurance industry is also seeing positive signs in the restaurant sector.

“Starting nine to 12 months ago, restaurant revenues started trending up again and as policy renewals come up, they are increasing their revenue projections,” said Heidi Strommen, president of ProHost USA, a restaurant insurance program administrator in Minneapolis, Minn. “After a couple solid years of either flat revenues or decreases, we are definitely starting to see the majority of accounts on the upswing and projecting higher revenues.”

While this is good news for the industry, insurance experts say that in order for business to continue to improve, restaurants and agents need to keep their eyes on a few other issues.

Employment Practices Liability Claims

EPL claims have been on the rise for several years — a common occurrence during times of economic turmoil — but wage and hour suits are the hot-button right now that especially affect restaurants because they are mostly staffed with hourly employees.

Strommen said restaurants have many factors to keep track of with hourly employees including federal, state and local laws. A mistake on any one of them could expose a restaurant to wage and hour claims.

“It is something that a lot of restaurants have become aware of — whether they have had a suit brought against them or know someone that has,” she said.

Amy Vitarelli, Hospitality practice leader for Heffernan Insurance Brokers in San Francisco, said the nature of this industry makes it a target for other EPL claims as well.

“There is a social nature of the industry so a lot of times we see allegations of harassment,” she said.

Vitarelli said the claims that were filed in the last couple of years are starting to catch up with insurers, and EPL is becoming more expensive and restricted for restaurant owners.

“In the soft market, insureds were able to get wage and hour coverage. It was limited, but at least they could get something,” she said. “That is quickly starting to go away. I am telling clients now to get it while you can.”

ProHost is one place where insureds can still get EPL coverage and coverage for wage and hour claims. The company launched an EPL product with Torus at the end of last year with a $150,000 sublimit for legal defense of wage and hour claims. Strommen said the wage and hour defense option was one of the reasons they liked this product because it is so hard to find in the marketplace right now. The policy also offers risk management services.

Agents, said Strommen, need to be talking to every one of their restaurant clients about their EPL exposures.

“They need to at least give clients the option of buying this coverage,” she said. “It is important and it is excluded on a GL [general liability] policy. They really need to offer the option and stay on top of the latest innovations, like wage and hour defense, and are they getting the best policy out there and the most comprehensive coverage.”

Cyber and Media Liability

Social media has given restaurants a free platform to advertise their business, but it has also opened them up to new liabilities that most are oblivious to.

“Everyone using social media is becoming mini-publishers without the formalities of an actual publisher,” said Ron Kopacka, vice president of Commercial Lines for Otterstedt Insurance Agency in Englewood Cliffs, N.J. “[Insureds] have to be making sure they aren’t slandering, and are they fact checking, etc. They understand the exposure a little more but they are still not getting it.”

Restaurants also have personal data through credit card transactions and loyalty programs, as well as through food orders they may now be taking online, but are not aware of their exposure to cyber liability issues.

Neno Djordjevic, chief operating officer for Axiom Insurance in Rolling Meadows, Ill., said carriers are coming out with numerous cyber liability products, many of which include coverage for media liability, but it has been a tough sell to customers.

“I think that as an industry, we should do better at educating agents about the product and the types of coverage it provides,” he said.

Kopacka said the biggest hurdle restaurant clients see when deciding whether to buy a cyber liability policy has been the cost.

“They like the idea and understand the need, but see it as a pricing point issue,” he said. “They still haven’t completely recovered from the economic issues of the last couple years. All their costs have gone up so it’s a really hard sell to get them to buy it.”

Business Interruption/Business Income

There were several catastrophes (hurricanes, fires, earthquakes, flooding, blizzards, and tornadoes) in recent years that led to businesses being shut down for a period of time or made it so that people could not get out to eat, which resulted in lost income.

Business interruption coverage is included on the insured’s property form, but the problem, said Heffernan’s Vitarelli, has been obtaining coverage for restaurants in catastrophe- prone areas at an affordable rate, or at all in some cases.

Carriers have been reassessing their CAT models because this year has been worse than anyone predicted,” she said. “Restaurants in windstorm areas — particularly those exposed to hurricanes and tornadoes — we are having a harder time placing those guys.”

Vitarelli said the standard markets have started to say no to any restaurants in close proximity to water or exclude wind damage in windstorm prone locations.

“For a business in a windstorm state, insuring them is a big gamble,” she said.

Other potential business interruption claims are those from foodborne illnesses.

Some restaurant owners have used food distributors that acquire products from places with lower quality control standards in order to keep their costs down, said Kopacka.

“Foods are coming from all over the place now,” he said. “They used to be seasonal but now restaurants get it from all areas and what we are bringing to the table becomes something of a concern.”

Kopacka said some carriers have come out with business interruption enhancements that deal with the issue of foodborne illnesses and a business closure by the Department of Health and Human Services. Oftentimes, he said these policies include crisis management response services, which give the restaurant public relations support in reassuring customers their establishment is safe.

“That is a concern because you can lose your business very quickly,” he said. “If something goes bad and isn’t dealt with at the right time, it can be devastating.”

Plenty of Opportunity for Hungry Agents

Even with these exposures, insurance agents are optimistic about where this industry is heading after several years of gloom.

“We are definitely seeing lots of new restaurants open. In 2009 and 2010, we saw a lot close their doors and we are seeing that to a much lesser extent now. We have also had a significant amount of new [restaurant] business submissions,” said Djordjevic.

Vitarelli said restaurants offering a casual atmosphere are now “sprouting like gangbusters.”

Ultimately, agents can be confident the restaurant segment is a secure class to concentrate on, because as Kopacka said, “People always like to eat.”

Topics Cyber Catastrophe Carriers Agencies