Bar and Restaurant Insurance for Dummies Part I: Underwriting the Risk


As a new entrant to the industry, I have been faced with the challenge of learning the complex world of insurance. There is more to know about insurance than most people could learn in a lifetime, so for the purpose of this series I am going to focus on a specific class of business that I have learned about over the past year and a half: bar and restaurant insurance.

A challenging class

First and foremost I think it is important to point out that the bar and restaurant industries face challenges that make it a difficult class of business to underwrite.

Some of these challenges include:

  1. High failure rate – Some studies show that up to 90% of bars and restaurants fail within the first year in business. Many speculate about the accuracy of this number, but the fact of the matter is that opening a bar or restaurant is a high risk venture.
  2. Cash nature – The cash nature makes it difficult to determine the actual exposure. To rate these risks, the underwriter looks at both the dollar amount of food and liquor sales as well as the ratio of liquor to food sales. It is hard to determine the accuracy of these numbers when a lot of the sales are cash transactions and are not always recorded.
  3. Exposures created by off-premises activities – It is not uncommon for a bar or restaurant to run off-premises activities in connection with their establishment. These activities create additional exposures and are not always reported on the application.
  4. Parking and transportation/delivery – Parking and transportation/delivery present their own challenges. Many injuries occur in parking lots, and there are quite a few instances where an employee must leave the premises in the scope of their work, say to run an errand for the business. What if something were to happen while they were working but off the named premises? If a restaurant has delivery service, that is an entirely separate challenge in itself.
  5. Blurred line between liquor liability and general liability losses – It is not always easy to determine if a loss is covered under the general liability or liquor liability policy. For this reason, it is always a good idea to have both the general liability and liquor liability with the same carrier if possible.
  6. State dram shop laws – Dram shop is a term for laws that hold retail establishments and sometimes social hosts responsible for damages caused by serving alcohol to an obviously intoxicated patron. Each state varies as to whom is liable when an intoxicated patron, guest or minor causes injuries to oneself or to other.
  7. Cooking exposure and risk of fires – Any kitchen with a full cooking exposure is automatically at a higher risk of fire loss. There are risk prevention techniques that can be put in place to minimize the risk of fire, but it is hard to keep track of when and if these techniques are implemented.

Through the underwriter’s eyes

When an underwriter looks at a bar/restaurant submission, they consider the many different qualities that make the risk unique while also keeping the challenges noted above in mind.

There is a laundry list of items the underwriter takes into consideration when making a decision on a) whether or not they want to write the risk and b) how they are going to rate it per the exposure. The items they consider are called risk evaluation factors, some of which include:

  1. Class of business (restaurant, bar, night club, caterer) – Different classes of business have different exposures, plain and simple.
  2. Hours of operation – Establishments with longer hours are at a greater risk for loss, especially if they are open late or do not close at all.
  3. Clientele and location – Both the clientele and location can make a world of difference in determining the exposure of the risk.
  4. Entertainment – Any form of entertainment automatically increases the chance of loss. Establishments bring in entertainment to attract a larger crowd than they would have otherwise, which increases both the sales and exposure.
  5. Promotions – Much like entertainment, promotions are meant to bring in more patrons than normal. People tend to both eat and drink more during promotions because they are getting the same thing at a lower cost.
  6. Years in operation – As previously mentioned, the bar and restaurant industry has a high failure rate. The longer the establishment has been in operation, the more experience the owner(s) are likely to have.
  7. Owner’s experience in bar/restaurant business – The longer the owner(s) have been in the business, the better. Experienced owners are usually more responsible and know how to train their employees to minimize their risk.
  8. Security – employees or subcontractors? Security personnel are important to have, especially in a busy bar environment. However, there are some implications if the security personnel are subcontractors, not employees of the business.
  9. Alcohol server training – It is important that bar and restaurant employees are educated on how to responsibly serve alcohol and recognize those that are intoxicated. Many companies even offer a discount to those that utilize these programs.
  10. Adult entertainment – I don’t think I have to explain much here…

The underwriter takes each of these risk evaluation factors and does with them exactly what the term implies – they evaluate the exposure each factor presents and rate the risk accordingly.

There are many different exposures (types of loss) that bars and restaurants face, some of which are common to any business and some that are particular to this industry. In Part II of this series, I will discuss some of the specific coverages that are essential for bars and restaurants.

Be sure to look out for Bar and Restaurant Insurance for Dummies Part II: Important Coverages.

Nicole Orchard is a Marketing Representative at Hospitality Insurance Group. 


Please be advised that the opinions expressed are the views of the author alone and should not be attributed to any other individual or entity and shall not constitute a legal opinion.