Restaurant Insurance Underwriting Guidelines

According to the National Restaurant Association, restaurant sales have grown by 7 percent each year since 1970, and foodservice sales make up over 4 percent of the U.S. gross domestic product (as of 2004). Eating out is an American pastime, and new restaurants are always opening up to meet this demand. Restaurants have significant operating risks compared to other businesses, and in order to purchase insurance coverage, a restaurant must conform to certain underwriting guidelines.

Fire Suppression

Fire is an always-present hazard in the restaurant business. High heat in the food preparation areas, as well as gas stoves or grills with open flame, can easily start a fire if the operator is careless. Some restaurants also use fryers, which present the risk of a grease fire that can be difficult to extinguish and cause extreme injury. An automatic fire suppression system is a requirement for any restaurant to obtain insurance coverage. In addition, the system must be maintained regularly by a licensed company.

Time in Business

Restaurants have a high failure rate compared to businesses with similar capital requirements. Estimates cited by the American Association of Insurance say that one-third of all restaurants go out of business within three years of starting. Insurance underwriters know that as a business is spiraling downward toward closing, money is not always available to maintain facilities in safe, top-notch condition. This lack of maintenance and thin or negative profit margins increases the risk of loss, so insurance companies will charge more for newer restaurants then for more seasoned establishments.

Loss Experience

Although the past performance of any business is not an indicator of what may happen in the future, past losses and insurance claims can point to deficiencies in the way that the owner operates his business. For the best rates, most insurers will expect a relatively clean history concerning liability claims, or will expect any claims to be easily explained. If the owner has past claims, he will also want to show what he has done to reduce the future level of exposure to losses.

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Liability Guidelines

Liability insurance underwriting guidelines are straightforward and geared toward reducing the risk of a business liability situation. The company will not want to see any health or fire code violations. All emergency lighting must be working in the restaurant, and sidewalks and parking lots should be lit and well-maintained. Alcohol sales for a restaurant must be less than 25 percent of total sales. If alcohol sales contribute more than this to the restaurant’s revenue, the owner may need additional liquor liability, which may not be available in all states. Liability premiums are based on both the risk of loss and total gross sales.