By Sean X Cummings, Contributor
Running a restaurant has become a particularly challenging and frustrating mission in the midst of the current global pandemic. State lockdowns led restaurants to shut down for long periods of time and, even when they were allowed to reopen, business models needed to be altered, health and safety procedures changed, and in-house dining capacities had to be decreased.
In 2020, more than 110,000 eating and drinking establishments were forced to close either temporarily or permanently, with nearly 2.5 million jobs lost and sales falling from an expected level of $899 billion to $240 billion, according to the National Restaurant Association.
But even without the COVID-19 pandemic stifling restaurant and hospitality businesses across the country, running a restaurant can be a very risky proposition even in the most normal of circumstances.
A restaurant is a dynamic environment, with many moving pieces that can be hard to control. Guests are constantly entering and exiting your establishment, employees are often multitasking, open fires in the kitchen are common, failing to properly refrigerate and prepare food can lead to illness, spills can lead to slip and fall injuries, and the list goes on and on.
That’s why being able to transfer some of your risk to a third party via insurance is so important for restauranteurs. Business insurance can protect you and your restaurant from a variety of unfortunate circumstances that are usually out of your control and can cripple your business if you were forced to cover all of the financial damage these events could cause on your own.
And while restauranteurs can stand to benefit from purchasing a vast variety of business insurance coverages, we’re going to focus on one of the most vital policies -- commercial property.
Commercial property insurance might be the most important policy for your restaurant, especially if your business is fundamentally tied to the physical location where you prepare your food and drinks and serve them to your customers.
What Does Property Insurance Cover?
A commercial property insurance policy covers more than just the physical space your restaurant inhabits. It covers all the property that your business owns, whether it’s movable or not. That means that it extends to your furniture, your kitchen inventory, even your outdoor signage or landscaping.
Suppose your restaurant is based in an area susceptible to extreme weather conditions, such as wildfires or tornadoes. These types of businesses are at a greater risk of property damage and will, naturally, have to pay more to insure their property. The most important thing you need to do as a responsible restaurant owner is work with an experienced broker that’s familiar with your location and industry in order to tailor your commercial property insurance policy according to your specific risk profile and ensure that the policy protects your assets from as many exposures as possible.
An extensive commercial property policy would also cover your loss of income and revenue due to property loss or damage. It would provide net income and continuing expenses throughout the period of restoration when a physical loss affects your business income.
Types of Property Insurance Policies
When choosing the appropriate policy for your business, you have a few alternatives to consider. One of the choices you need to make is whether you need replacement cost or actual cash value coverage. You’d also need to choose between named perils and all-risk coverage.
If you choose a replacement cost policy, the insurer would have to compensate you for the initial cost of the damaged property so that you could purchase the same item or one of similar value. If you opt for actual cash value coverage, the insurer will estimate the value of your property at the moment it was damaged and compensate you for its current market value. Naturally, you would pay less for an ACV policy, but you would also receive less money in the event of damage to your property and equipment.
A named perils policy only covers the losses related to the perils clearly documented in your contract with the insurer. It means that it wouldn’t cover any damages resulting from perils not stipulated in the policy. An all-risk policy, however, covers every potential risk that is not explicitly excluded from the coverage. Again, considering that this coverage is much broader, you should expect to pay more for an all-risk policy than you’d pay for a named perils policy.
What Specific Coverages Do Restaurants Need?
Restaurant owners tend to obtain standard commercial property insurance through a BOP (business owner’s policy), usually because it is a cheaper solution. A BOP is a policy package that provides businesses with commercial property, general liability, and business interruption coverage at a price point that’s significantly less expensive than buying all three policies separately.
However, while a BOP is usually good enough for lower-risk businesses, restaurants have a unique risk profile and should therefore tailor their commercial property policy to their needs. Even if you decide to bundle the coverage into a BOP, you should make sure to cover all your exposures. Here are some policy extensions that are typically purchased by restaurants:
Equipment Breakdown: Your restaurant staff relies heavily on kitchen equipment to prepare food and beverages. If your refrigerators, freezers, ice makers, ovens, or steamers break down, you won’t be able to serve your customers adequately. If you add equipment breakdown coverage to your commercial property insurance policy, it will cover the losses resulting from the breakdown.
Spoilage: If your cooling equipment breaks down, the food you store in your refrigerators or freezers could spoil. Spoilage losses can be expensive, but you can minimize the damage by adding spoilage coverage to your policy.
Utility Interruption: It would be impossible for your restaurant to serve customers if you suffered a problem with water, power, or gas. Whether it causes damage to your property or leads to a loss of income, your insurer would compensate you for the damage.
Electronic Data Processing: Restaurants rely on technology for taking orders and processing documents and payments, especially during the pandemic when there is a lot of online ordering happening. Some restaurants also use electronic table ordering systems. If your equipment-related coverage doesn’t extend to cover all these systems, you should consider buying electronic data processing coverage.
Sewer Backup: A blocked sewer pipe can cause wastewater to come back up and cause damage to your floor, carpets, and furniture. This peril is usually excluded in a property policy, so make sure to add it to yours. It wouldn’t cover the cost of repairing the sewer, but it would cover all the inflicted damage.
Business Income: If your standard property insurance policy doesn’t cover loss of income due to property damage, you should add that coverage and ensure that you are reimbursed for your lost income if your business is forced to shut down due to property damage that’s covered by your policy.
Peak Season: Consider purchasing this coverage if your restaurant generates more business in certain seasons, like the holiday season or during the summer. It would provide a higher limit on your policy during the named seasons.
While the effects of the pandemic are, unfortunately, something that cannot be covered by business insurance, it’s very important for restaurant owners to protect themselves from the risks for which insurance can provide coverage.
If your restaurant, cafe, or bar is intrinsically tied to the property from which you operate, purchasing a customized and complete commercial property policy should certainly rank among your top priorities when looking for ways to protect your business property, revenue, and success of your business in general from common exposure that restaurants usually can’t prepare for or mitigate.
About the Author
Marketing mastermind and agent of change, Sean X has been looking into the future where brands, technology, and media intersect—and manipulating the present to get there—for more than two decades. He led global marketing for Ask.com, oversaw digital strategy for consumer leader Amazon Advertising, established an acquisition engine for the financial arm of American Express, and helped Nike and numerous other brands succeed. Sean is currently CMO at Embroker, a digital insurance company reinventing how businesses ensure they can take the risks they need to grow.