Getting insurance may not be the first thing on the mind of a budding restaurant owner, but coverage is essential to protect either a new restaurant or one that's been operating for years.
And because of the wide array of food establishments — from bars and cafes to diners, delis, and catering services — it's important to note that insurance needs differ and policies will depend to a great extent on the unique needs of the establishment.
Here is an in-depth look at what you should know about business insurance for restaurants.
What risks do restaurant owners face that may require business insurance?
First off, there may not be a better time for entrepreneurs who are intent on getting into the food service industry. According to the National Restaurant Association’s 2019 State of the Industry Report, industry sales are projected to reach $863 billion in 2019 and more than 15 million people are employed in food service.
But if you’re lacking insurance or the right type of insurance, what may start out as a very promising venture could collapse under the weight of liability expenses and/or lawsuits. Despite all the enthusiasm and hoopla around a new restaurant opening, every type of food establishment faces a dizzying array of potential risks. These include:
Food and alcohol risks. Restaurant owners and their staff must maintain a high standard of food safety, protecting against possible contamination. To achieve this goal, food storage areas must be properly created and maintained. They must also be on the lookout for customers with food allergies.
A restaurant, bar, or catering service that provides alcohol always faces a risk. Should a person become inebriated on the premises and be the cause of an accident afterward, the restaurant can be held responsible for physical injuries and/or property damage. It can also be responsible for improperly training staff on how to cope with an inebriated customer.
Management risks. This is a fairly broad category, ranging from patrons complaining about the quality of their service, to employee theft, and allegations of discrimination (explained in more detail below). Other common risks include issues with employee hygiene and employees' lack of food service experience.
In regard to the issue of sexual harassment, the Harvard Business Review reports that more sexual harassment claims in the United States "are filed in the restaurant industry than in any other industry ..." and that restaurants report "as much as 90 percent of women and 70 percent of men have experienced some form of sexual harassment." While no restaurant owner wants to deal with this issue, they must be prepared to take steps to prevent harassment in the workplace and respond to complaints in compliance with applicable laws.
Environmental risks. Like any other retail business, restaurants face the threat of an extreme weather event or some type of man-made catastrophe, which can severely damage their establishments. For example, restaurants serving patrons in states where there are harsh winters must maintain a dry, non-slippery entrance or risk a high-figure liability lawsuit.
Other threats, which occur regardless of where a restaurant is located, include shortcomings in fire safety precautions and/or a costly and noxious sewer backup issue.
Technology risks. Many restaurants rely on digital technology. This can leave them open to hacking by cyberthieves, a possible data breach affecting confidential customer information, as well as identity theft, ransomware, and other forms of cybercrime.
Labor risks. Restaurants need employees — the bigger the establishment and the longer the number of hours they are open each day, the more staff is required. Owners are responsible for maintaining a safe workplace and taking all measures possible to keep employees from becoming injured on the job. There's also the gamut of employment laws and regulations that must be considered including wage and hour laws, leave laws, and laws protecting workers from discrimination in the workplace.
Other business risks. Other restaurant-related business risks may include an issue with a food transportation vehicle or failure of cooking equipment. And, as with most other businesses, there is what's known as errors and omissions (also called professional liability). Insurance coverage in this area protects you in the event that your business is sued for something you did that you shouldn't have (an error), or something you didn't do that you should have (an omission).
Benefits of business insurance for restaurants
It's not accurate to label the restaurant business as "high risk;" nonetheless, as the above list indicates, there's often a great deal of risk involved. Comprehensive restaurant insurance guards against the unexpected — that is, the "bad things" that people believe happen to everyone else but them.
With protection comes peace of mind, often a rarity in a harried restaurant owner's life.
Here's a look at how different types of coverage provide benefits for restaurant owners:
- Property insurance. Property insurance coverage insures the building in which the restaurant is located, the equipment a restaurant uses, and other physical assets. Common threats in this area can include fire, flooding, earthquake damage, etc. It's also a useful resource if someone breaks into a restaurant and makes off with high-value equipment or cooking tools.
- Liability insurance. General liability insurance helps protect a restaurant against claims by customers or employees resulting from accidents or injury. It's also a legal defense against slander, libel, or similar types of lawsuits. Depending on the specific insurance needs of your business, other types of insurance may also greatly benefit your enterprise. These range from liquor liability (discussed later), employer practices liability, and assault and battery liability.
- Workers' compensation. You can do everything imaginable to make your restaurant a safe place in which to work, but accidents can still happen. Workers' compensation insurance protects both you and your staff in the event of a workplace injury. It also provides wage replacement and medical/rehab benefits to employees injured in the course of employment. This is different from disability insurance, which pays benefits to workers who become injured or ill due to non-work related circumstances.
- Commercial auto insurance. Many restaurants own or lease vehicles to deliver take-out food or to use in other facets of running the business. Commercial auto insurance protects you and your business from liabilities and claims that may not be covered under a personal auto policy. Generally speaking, a personal auto policy is not likely to cover substantial damage or loss related to a restaurant-owned or -leased vehicle.
Perhaps the chief virtue of business insurance for restaurants lies in the broad range of protection offered both to employees and the restaurant owner. It's impossible to predict what will happen in the future, but insurance protection is the best way to safeguard against negative events.
Evaluating how much insurance a restaurant should have
For those just embarking upon ownership in a restaurant, it's important to ask the following questions:
Is business insurance required for a restaurant?
There's simply too much at stake not to seek out some liability protection, particularly when it's possible that any one type of calamity could end the venture forever, and lead to costly lawsuits.
Location is a dominant factor in determining your insurance needs. Are natural disasters and/or power outages a frequent occurrence? If so, having protection against damages caused by these factors is critical. Keep in mind that certain claims are dependent on the cause of the loss.
Other key factors insurance companies take into account include the size of the restaurant, volume of sales, activities that take place there (security, entertainment, etc.), amount of alcohol sales, and lease requirements.
What types of insurance are appropriate for a food service business?
As indicated above, the fundamental types of insurance coverage for a new restaurant include property, liability, workers' compensation, and commercial auto.
Often, restaurant owners opt for a business owner's policy (BOP). This type of coverage addresses a broad range of property and liability exposures with a single policy. Buying business insurance policies individually is inefficient and expensive. BOP insurance bundles the coverages you need into a single, convenient package — typically at a lower cost. In most cases, coverage may be added to meet additional needs and industry requirements.
How much insurance does a new restaurant owner need?
The categories listed above should be included in any new restaurant business insurance plan.
You might also consider business interruption insurance, designed to keep your restaurant intact if — due to a natural disaster, severe equipment failure (depending on the cause of the failure), or some other event — it becomes necessary to temporarily close your doors. This policy addresses coverage for income your restaurant misses due to closure, as well as keeping up payments for rent or lease arrangements, making sure employee payroll is being met (so you don't lose your staff in the interim) and help with any outstanding loan payments.
Other key insurance policies to consider include:
- Liquor liability insurance. Do you plan to serve alcohol to customers? Liquor liability insurance protects against damage incurred by reckless behavior or accidents resulting from customers driving while inebriated.
- Cyber liability insurance. Restaurants depend upon digital technology to keep operations running smoothly, whether it's tracking employee time and attendance, scheduling customer reservations or maintaining proper food storage. Cyber liability coverage can apply to the direct costs incurred following a data breach. It can help cover notification costs, loss of income while your business is down (due to IT security concerns) and customers' credit monitoring services. Third-party insurance covers litigation defense costs if clients or customers file suit against your business for neglecting to protect their data.
For restaurants that are more established (with even more at stake in terms of protecting assets and property), it's important to regularly review existing business insurance coverage.
Questions to consider during this process may include:
- Do you plan to expand your current restaurant or add a new restaurant elsewhere in town?
- Will you need to hire additional wait staff, purchase or lease more equipment, or broaden the type of digital resources needed for expansion?
With expansion (and/or new locations) comes the ever-present possibility of things going awry. The insurance coverage you have now may be fine for your current needs, but could fall short where growth is concerned. Greater operational complexity brings additional risk, which should be addressed sooner rather than later.
High-quality insurance solutions are available for both established restaurants and new food service business ventures. For example, Paychex Insurance Agency offers access to A-rated insurance carriers that have comprehensive package options, with plans that match features and affordability to the needs of your business. Learn more about business insurance policies that can help protect your restaurant.
Insurance is sold and serviced by Paychex Insurance Agency, Inc., 150 Sawgrass Dr., Rochester, NY 14620. CA License #0C28207. The Paychex Insurance Agency Workers’ Compensation Payment Service is available in all states except Alaska, Hawaii, North Dakota, Ohio, Washington, and Wyoming.