Today’s Special: Resilience as Restaurants Navigate Tough Insurance Market

At a time when the National Restaurant Association projects sales topping $1 trillion for the first time ever this year, the future for businesses in this notoriously risky industry nevertheless seems more precarious than ever. Long known for their low profit margins and high rates of failure, and still recovering from the existential threat caused by the COVID-19 pandemic, restaurants face a growing number of challenges related to insurance:  

• Rising Property Insurance and Liquor Liability Insurance rates compound financial woes caused by soaring food and labor prices.  
• Regulations regarding joint employer arrangements increase liability exposures, and the elimination of tip credits in some jurisdictions hurts employees as well as employers, restaurant owners say.  
• Even robust business presents downsides, with rates for General Liability Insurance and other coverages often based at least in part on sales and high volume requiring additional, increasingly expensive staff. 

For restaurants, robust risk management and an expertly designed insurance program have never been more important. 

Sour ingredients: tip credits and joint employer rule 

The removal of tip credit regulations in some jurisdictions and the National Labor Relations Board’s  redefined Joint Employer Standard adversely affect restaurant operations. 

Tip credits allow employers to count a portion of employee tips to meet minimum wage requirements. In an analysis piece for the labor and employment law website Littler, “Chicago Phases Out the Tip Credit Starting July 1, 2024,” attorney Abby Bochenek reports that the phase-out process will span four years. Although this change is perceived as a victory for tipped workers, the restaurant industry views it as unfavorable, largely because the regulation change may spur new or increased mandatory service charges to offset the costs.  

Currently, seven states prohibit employers from collecting tip credits, and more states and jurisdictions are considering eliminating this practice.  

The redefined Joint Employer Standard alters employment policies for independent and franchise restaurants, increasing their liability. For example, if a third-party contractor (e.g., suppliers, cleaners, delivery and security) commits a labor violation, the restaurant may also be penalized. Additionally, a restaurant could be required to engage in collective bargaining with unionized employees of a third-party contractor.  

Insurance Journal reports that a judge has delayed the rule’s implementation as organizations seek a workable Joint Employer Standard.     

Banner year forecasts during legacy chain closings 

Nation’s Restaurant News reports that “Nearly 33% of the top 500 chains experienced a net decrease in 2023 and those closures have continued in 2024.”  

This shift is described as a “pendulum swing” where consumers have gravitated toward innovative specialty brands with limited-service formats. These new entrants are outshining traditional full-service chains, reflecting a broader movement toward efficiency and cost-effectiveness.  

Despite the closures this year, including well-known names such as Red Lobster and Pizza Hut, the National Restaurant Association forecasts that 2024 sales will reach a record high of $1 trillion, with the workforce projected to grow by 200,000 jobs.   

Even during inflation and economic pressures, 9 of 10 adults still enjoy dining out for meals and experiences they can’t replicate at home. Restaurants that adapt and create dining experiences that satisfy consumer preferences will likely thrive.  

What’s ahead 

Here’s what Alera Group said in our 2024 Property and Casualty Market Outlook about factors influencing the market for restaurants:  

“Conditions for this sector will be mixed. Prices continue to rise for Property and Liquor Legal Liability Insurance but are starting to trend positively in Cyber Liability and Employment Practices Liability. Factors influencing the market:  

• “Many pandemic dining preferences are here to stay. Customers continue to crave ultimate convenience. Online ordering/payment and delivery are critical components of a frictionless digital experience. Both have insurance implications. Restaurants that provide their own delivery increase their commercial auto exposures and insurance costs. Businesses that rely on third-party delivery services need to protect themselves with good hold-harmless agreements. Online ordering increases cybersecurity risk, so it is vital to have adequate Cyber Liability protection. 
• “The use of automation is growing. The Food Institute’s “The Future of Restaurants: Data and Insights for 2024” says this will be “the year of innovation.” As consumers' quest for value and convenience accelerates, restaurant automation is hitting its stride. The Institute says automation is “reducing labor costs and improving food quality.” Sweetgreen’s Infinite Kitchen concept in Illinois has a fully automated assembly line, and that location has 50% higher visits than legacy locations. Meanwhile, Chipotle is testing conveyer-type options for salads and bowls. As restaurants adapt operations, it is important to ensure that their insurance reflects their changing business models. 
• “Ghost kitchens are gaining in popularity. Ghost kitchens, which became the norm for many restaurants during COVID-19, have become a lucrative restaurant operating model. As restaurants struggle to control expenses and deliver more value to customers, ghost kitchens — which serve customers solely through third-party delivery — are more profitable and flexible than traditional restaurants or takeaway drive-throughs. CRBE, the global leader in commercial real estate and investments, projects that by 2025, ghost kitchens will account for 21% of the US restaurant industry. The insurance requirements for ghost kitchens are different. They don’t face the same extent of property and liability exposures as brick-and-mortar establishments. Most ghost kitchens lease their space, which comes with significantly less square footage and lower property values. Their liability exposures are also lower, as they have no on-site patrons. It's important for operators to make sure their policies reflect their actual exposures and that they're not over- or under-insuring. 
• “Foodborne illnesses continue to be a serious threat to restaurants' profitability. The Centers for Disease Control and Prevention (CDC) estimates that approximately 48 million people get sick, 128,000 are hospitalized and 3,000 die each year due to food-related illnesses, which are often referred to as food poisoning. A study from Johns Hopkins Bloomberg School of Public Health shows that a single foodborne outbreak can cost a restaurant millions of dollars. The findings, based on computer simulations, suggest a foodborne illness outbreak can have significant, 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 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). Restaurants can minimize their financial risk with Foodborne Illness Insurance. 

• “Proactive risk control is crucial. Restaurants face a broad range of risks, from slip-and-fall and liquor-related incidents to fire and employee sexual harassment lawsuits. Carriers will remain cautious when it comes to insuring restaurants. Insurers will be most receptive to restaurants that understand their vulnerabilities and are diligently managing those risks.” 

Risk management: a controllable ingredient  

Unlike labor shortages, inflation or regulations, restaurants can control their risk management and employee safety training programs. By focusing on high standards of food safety, regular equipment maintenance and thorough employee training, restaurant owners can minimize risks and improve their insurability in the marketplace. 

A safety-first philosophy not only protects employees but also ensures a safe dining experience for customers, ultimately enhancing the overall restaurant environment.   

Pairing your insurance program with a specialized broker 

Given the nuanced nature of restaurants, partnering with a broker who specializes in the restaurant sector increases the likelihood of securing comprehensive coverage and competitive rates. Four key considerations for selecting an insurance broker include the following:  

1. Industry expertise: Choose a tenured broker with extensive restaurant experience who stays informed of regulations and industry trends.  
2. Market access: A broker with established relationships with leading restaurant insurance carriers can leverage buying power to find the best-fit carrier who offers potential long-term stability for your insurance program.  
3. Communication and support: Select a broker who not only educates and advises on your insurance program but also helps you understand the ripple effects of the catastrophe reinsurance market on your coverage.   
4. Risk management resources: Brokers who provide comprehensive risk management resources, such as customizable employee handbooks and tailored safety training programs, not only enhance the safety of your operations but also make your account more attractive to underwriters. 

Restaurants are a valued part of our culture and our economy, but operating in this industry is challenging, with constant pressure to minimize costs and boost sales. A robust insurance program, effective risk management and guidance from a specialized broker can significantly enhance resilience to navigate today’s insurance market.  

CONTACT A RESTAURANT SPECIALIST    

About the author 

Jeffrey Naber, CIC 
Senior Producer 
Alera Group  

Jeff Naber, a Certified Insurance Consultant (CIC), brings more than 17 years of insurance experience as a trusted adviser. Specializing in property and casualty programs for restaurants, he helps his clients navigate the marketplace for comprehensive coverage and the best coverage terms to protect their restaurants and financial interests. Jeff also supports the claims management process, advocating for swift and fair claim closures with adjusters on behalf of his clients.  

Contact information:  

• jeff.naber@aleragroup.com   
• Connect with Jeffrey on LinkedIn