Serving Up The Right Coverage

By | March 18, 2019

It’s a good time to be in the restaurant industry. Restaurant sales in 2018 were projected to reach $825 billion — a 3.1 percent increase over 2017, according to the National Restaurant Association (NRA). Employment is up, too. The U.S. restaurant industry employs 15.1 million people, about one in 10 working Americans, and the industry’s workforce is expected to increase to 16.7 million people within the next decade.

The NRA also reported in February that some 55 percent of restaurant operators made a capital expenditure on equipment, expansion or remodeling within the last three months, and 57 percent said they plan to make a capital expenditure within the next six months. That’s good news for insurance brokers serving up insurance for this diverse sector of the hospitality market.

Specialists in this sector have their eye on a few key areas where exposures are changing. Here’s what they had to say.

Sexual Harassment

In the wake of the #MeToo movement, which brought issues surrounding sexual harassment to the forefront, restaurants have become more interested in buying appropriate insurance protection, says David DeLorenzo, CEO of the Ambassador Group Insurance and founder of the Bar & Restaurant Specialty Program based in Phoenix.

It’s an area of risk in which his retail agency has seen the most interest from restaurant and bar owners in the past year or so, he says. Employment practices liability, especially stand-alone policies, have been the biggest growth area for his agency in the last five years. It’s not surprising given the rate of incidents.

More sexual harassment claims in the U.S. are filed in the restaurant industry than in any other industry, according to the Harvard Business Review. Restaurants report that as much as 90 percent of women and 70 percent of men have experienced some form of sexual harassment.

Over the last year, the #MeToo movement, which initially focused on the entertainment industry, CEOs and white-collar workers, began to highlight the challenges that low-wage, service workers faced. Last year, Walmart and McDonald’s were both hit with claims of workplace sexual harassment. And, in September, hundreds of McDonald’s workers protested conditions at the fast-food chain, demanding the company do more to protect its employees.

‘More restaurateurs, big and small, are buying stand-alone employment practice policies because they can get a lot more coverage and third-party coverage.’

There are several reasons that make restaurant employees particularly vulnerable to sexual harassment, according to an article in the Harvard Business Review co-authored by Stefanie K. Johnson, an associate professor of management and entrepreneurship at University of Colorado’s Leeds School of Business.

First, restaurants and bars as an industry have men in a majority of management positions and higher paying roles. Second, restaurants encourage a “customer is always right” etiquette, and many employees rely on customers for their pay (tips). Third, the restaurant industry is a “looks” industry, where women often must rely on their physical appearance as part of the overall service experience.

DeLorenzo says the heightened attention of sexual harassment issues in restaurants is convincing owners to buy better coverage. Where they may have settled for small “throw-in” EPLI coverage on a traditional businessowners policy, more are buying stand-alone EPLI policies today, he said.

“More restaurateurs, big and small, are buying stand-alone employment practice policies because they can get a lot more coverage and third-party coverage,” he said. Stand-alone has become much more affordable, too. “It’s not a lot, depending on the risk.”

It’s an area of risk that has become almost more important than general liability in his view. “As a restaurateur and entrepreneur, you are almost more prone to experience a threat in employment practices — somebody feels like they were discriminated against or unjustly fired — than [to experience a threat] in general liability nowadays.”

Wage and Hour

Another employment practices-related hot button exposure that has received significant uptick in recent years is wage and hour allegations, DeLorenzo added.

In 2018, the U.S. Department of Labor (DOL) recovered more than $304 million in back wages, with food service ranking number one for the highest number of violations per industry. Wage and hour claims can be triggered by any number of complaints, including pay discrepancies and employee misclassifications. Workers can file a lawsuit when they are just a minute late for a meal or rest break, or if their overtime was miscalculated even slightly.

More hospitality employers are being investigated for Fair Labor Standards Act (FLSA) compliance, Robert Fiorito, vice president of HUB International Northeast, said in a recent article on TotalFoodService.com. Since the FSLA requires employers to pay non-exempt employees wages that are at least equal to the federal minimum wage rate, restaurants and bars that employ many workers that rely on wages paid by tips are particularly at risk for noncompliance. “Restaurant employers who pay their tipped employees the tipped minimum wage without ensuring that the standard minimum wage is met when adding in the tip credit may find themselves subject to a claim and violation,” Fiorito wrote.

In response, insurers are making changes to coverages, DeLorenzo says.

“I see many carriers adding a wage and hour sublimit onto their EPLI policies ranging from $100,000 to $250,000 depending on the risk, the state and the carrier,” he said. However, even with the sublimit, most of the time, unless specified otherwise, this amount will only cover defense costs in the event of a claim, such as an allegation that an employee wasn’t paid for overtime work or not given proper tips. “So, if you have a lawsuit against you, and you end up losing and you owe that person or people in a class action, it’s coming out of your pocket,” DeLorenzo said.

“The only aspect that will be covered even with a wage and hour endorsement will be the sublimit for defense coverage,” Fiorito told Insurance Journal in an email. “At this point, that’s the only coverage available for wage and hour claims.”

Cyber

New technologies are helping restaurant and bar owners streamline operations, attract customers and reduce costs, but those tools often come with added cyber risk, the experts say. Innovations such as point-of-sale (POS) systems on tabletops, new cloud-based technologies and an ever-increasing number of third parties that interact with customers are increasing risk and creating security gaps, causing shifts in cyber risk exposures.

In 2018, several large restaurants experienced data compromises, including Dunkin’ Donuts parent company Dunkin’ Brands Inc., as well as Panera Bread and Cheddar’s Scratch Kitchen. In addition, third party vendors in the food and beverage sector were subject to nearly 10 percent of all data compromises in 2017, according to Trustwave’s Global Security Report, meaning many restaurants’ supply chains are vulnerable to interference.

Data breaches are not only harmful to a restaurant’s operations and reputation but are also increasingly financially damaging. The U.S. Securities and Exchange Commission (SEC) recently reported the average cost of a cyber data breach is $7.5 million — a figure that will grow as businesses’ reliance on data intensifies.

“Many small businesses, restaurants, and/or hospitality single-location businesses are under the impression that stand-alone cyber is expensive and that they can’t afford it,” says Elizabeth Babington, senior vice president, at Distinguished Programs. That’s not true, she said. “It’s actually inexpensive and quite affordable.” Small businesses, including restaurants and bars, can purchase “very robust coverage” for $1,000 or less.

Babington says restaurant and bar owners, and sometimes their insurance agents, believe that “add on” coverage under general liability policies is enough.

“A retail agent that may not be that familiar with the cyber coverage, or know how to find the right coverage, might be under the wrong assumption and say, ‘Oh, you have it,’ because it’s added onto a property policy or added on a teeny bit of coverage to a GL policy, which is just generally only notification,” she said. However, the cost to send out notifications and the expense to set up customers with a credit monitoring agency is burdensome. “People think that’s what cyber coverage is, but the needs are much broader and more comprehensive.”

The biggest coverage restaurants miss when they do not purchase a stand-alone cyber policy and instead rely on add-on coverage through general liability or property policies is first party coverage, says Chris Larson, underwriter at Distinguished Programs, “so they may have protection of their customers’ data that could be stolen.”

However, “those business owners could have a substantial loss if their computer systems are down or their data’s destroyed or lost,” she said. “They’re not usually getting coverages for those type of losses by having a tacked-on cyber coverage through another policy.” That’s the biggest gap in coverage by covering cyber exposures through other policies, she added.

Larson said, overall, restaurants are lacking when it comes to covering their cyber exposures. There’s an opportunity in the market for agents and brokers.

Food Safety

A single foodborne illness outbreak could cost a restaurant millions of dollars in lost revenue, fines, lawsuits, legal fees, insurance premium increases, inspection costs and staff retraining.

“Even a small outbreak involving five to 10 people can have large ramifications for a restaurant,” says Sarah M. Bartsch, research associate at the Global Obesity Prevention Center and lead author of the study “Estimated Cost to a Restaurant of a Foodborne Illness Outbreak” from researchers at the Johns Hopkins Bloomberg School of Public Health.

The findings, published online in the journal Public Health Reports, are based on computer simulations that suggest a foodborne illness outbreak can have large, reverberating consequences regardless of the size of the restaurant and outbreak. According to the model, a fast food restaurant could incur anywhere from $4,000 for a single outbreak in which five people get sick (when there is no loss in revenue, and no lawsuits, legal fees, or fines are incurred) to $1.9 million for a single outbreak in which 250 people get sick (when restaurants lose revenue and incur lawsuits, legal fees and fines).

While food safety doesn’t generate huge volumes of claims, the claims that do occur can be devastating to the reputation of the restaurant groups, Rooney Gleason, president of Argo Insurance – Grocery and Retail and head of U.S. Digital Business Development, told Insurance Journal.

That’s one reason why Argo Group invested in the development of Argo Risk Tech, a one-year old, custom-tailored app to help clients reduce the frequency and severity of customer and employee accidents and claims. This includes more common slip-and-fall risk management as well as food safety risk management.

“We took the last 18 months to really figure out how to make the technology effective for the restaurants,” he said. That meant automating simple tasks and procedures that could lead to claims.

For example, food safety issues often stem from temperature control. So, through the Argo Risk Tech app, restaurant managers can check temperatures inside refrigerated cases via a Bluetooth thermometer and sensors inside the cases. The information links to a phone via Bluetooth.

“Most fast casual, emerging-type restaurant chains that we go to love it right out of the gate simply because they’re already using iPads for ordering, or they’re using Square to take their point of sale,” he said. “With every foodborne illness outbreak or closing down of a Chipotle, it becomes more and more urgent that our restaurant clients come up with a process and procedure that they can follow.”

Gleason says by using sensor-based location beacons, QR codes and the Argo Risk Tech mobile app, restaurant managers can keep tabs on refrigerated store walks and critical safety checks.

One of the difficulties, particularly with restaurants, is when management discovers that employees may not be conducting safety checks the way they say they are doing, Gleason said. With an app and sensors, there’s no guesswork.

“They’re either executing proper policies and procedures, or they are not,” he said. “The good operators understand immediately and make adjustments to their policies and procedures to get better compliance, and also reinforce what operating procedures they want to happen at the restaurant level.”

Then with that data, Argo is able to spend additional time training and retraining, and working with corporate staff at these restaurant chains to get the compliance rates up in each location, which will reduce the amount of risk.

“This is the beginning for restaurants of a shift in how they address risk,” Gleason said.

It’s not just the foodborne illness that makes nightly news that the industry should think about. It’s how the industry and its restaurant clientele resolve the issues. “Argo Risk Tech and Argo Insurance is trying to change the equation and get these owners to look at this risk, not just simply as an insurance transaction, but a way of improving their overall operation,” he said.

Shift Drinks and Axes

Liquor liability is always a concern in any establishment, but for restaurants, the traditional “shift drink” — serving an employee who just finished their work shift a drink or two — creates additional liability concerns.

Hospitality attorney Lee N. Jacobs, senior associate attorney at Helbraun & Levey LLP, which focuses on the legal and licensing needs of New York City’s bars, restaurants and hotels, says restaurant owners everywhere have been flooded with complaints, investigations, lawsuits and big settlement pay-outs, mostly on the basis of workplace harassment. How the industry thinks about shift drinks must change, he said in a recent article.

Paul Martinez, program manager for Brewery PAK Insurance Program, says his program, which writes craft breweries in 42 states, has seen some claims involving shift drinks in recent years.

“We’ve had some claims involving shift beers and even beers at festivals where employees are leaving inebriated and causing accidents,” Martinez said. “Some of them are even causing accidents in company vehicles, which is another exposure.”

Injuries to the employee and other patrons of the establishment could impact several liability areas, he says.

“Let’s say you have somebody who has a little bit too much to drink after his shift, and he’s technically not on the clock, but everybody knows he’s an employee there, and he starts an altercation, and he gets hurt … that’s workers’ compensation coverage for his injuries,” he said.

But the establishment could also be on the hook for any injuries to the customer if the altercation involved a patron rather than another employee, he explained. “Now you’re going to have to pay their medical bills and probably give them some good faith money, so they don’t come back and sue you,” he said. “That’s really the biggest concern.”

Breweries have to be even more conscientious than restaurants because they manufacture the beer, he noted. “Breweries are in much more of a spotlight.”

And then there’s always the ax throwers, Martinez added. Believe it or not, it’s a new trend in breweries and other bar establishments. The trend involves the establishment pairing alcohol with hurling large, deadly weapons at designated targets, and they’re opening up everywhere.

“I’ve already had a couple clients come to me and say, ‘Oh were having ax throwing and it’s going to be great,'” he said. “I don’t want to combine beer and ax throwing — that can’t be good.”

Needless to say, Martinez plans to exclude coverage for ax throwing.

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