Restaurant Business Insurance: Why, What, How

Restaurant business insurance covers cyber security, power outage, food, equipment, employees, buildings, liquor liability, slip and fall, sewer backup, building damages, that can save restaurant owners tons of money when (not if) anything happens, per Rick Callaway, commercial insurance broker.

The following is a slightly edited transcript for a podcast interview of Rick Callaway, the commercial insurance expert.

To listen to it as a podcast

To watch it on Youtube

Maurice Washington  00:00

It doesn’t matter if you’re a new restaurant or thinking about becoming a restaurant owner or have been in business for a while. I want you to make sure that you listen to the show. And to help digest this topic, I have Rick Callaway. 

Maurice Washington  01:01

So talk to me about the restaurant business right now. We have come through a COVID crisis, we’ve seen many restaurants go out of business. So, talk to us about what’s happening now.

Richard Callaway  01:23

Statistics today show roughly only 65% of the restaurants that were in business prior to COVID are back in business. However, some people that lost jobs in those restaurants are now opening a restaurant. So hopefully that will help the industry increase.   

You have a lot of issues to consider before you open the restaurant.  Restaurants are like real estate – location, location and location. Do your market research. Wrong location – people aren’t coming into your restaurant and you’re not going to serve much food. The most important thing to control inside the restaurant is: your service must be above par. People not only want to come in and eat the food, they expect to be catered to. 

Yeah, then we have fun things like COVID that you can’t plan for, but you need to do financial planning to have some reserves when something like that happens. Things like fire, your building burns down, your food goes bad, you have valet, and one of your wonderful parking lot attendants decides to smash a car, somebody loses a coat from the customer’s coat lounge,… they’re not happy about that. 

That’s very good news: the risks are insurable. Many types of insurance are needed. Some are actually required by law, – general liability, property insurance, workers’ compensation, and cyber liability.  So we’re just going to talk about two topics, general liability insurance and property insurance.

Maurice Washington  03:10

All right, that’s fair. Let’s break this down here, Rick, because some things stood out to me. We are finding so many who open their restaurant, consider opening a restaurant because they are fantastic cooks. Or maybe they have family members who did it before.  Are we seeing many people contemplating opening a restaurant based on that fact versus just everything else that goes into it? Is that something one of the missing components? Is that a risk?

Richard Callaway  03:41

I advised a potential client that they probably shouldn’t open a restaurant. My wife is a great cook and can cook a meal for 2550 people. Cooking one meal for 25 people is a lot different than cooking 25 meals that are each different. So you have to understand the business, cooking services, all related, and the quantity of things you do.  You wear a lot of hats. You’re not just in the kitchen cooking.

Maurice Washington  04:12

I think one of the restaurant field’s misconceptions is that it’s not even a misconception. I feel like many people can make a lot of good income opening a restaurant, but it seems like the profit margins are fairly low. Is that correct?

Richard Callaway  04:28

That’s correct. The restaurant business is not a high profit margin business. Unless you have a bar, then you can make a margin there.

Maurice Washington  04:37

Speaking of the bar, when I read, and what I kind of research here is that when it comes to alcohol sales, that makes up to about 30 plus percent of restaurants revenue, does that seem to be about right? 

Richard Callaway  04:53

That is probably true.  The cost versus the sales price of alcohol is much more than the price versus the cost of preparing a meal.

Maurice Washington  05:03

Okay. I want to share this article with everybody here. Yeah, that was fairly intriguing because obviously, when it comes to COVID, it has allowed a lot of different innovations because, again, we all want to keep everybody in the business. So I’m going to share this topic here. And this is from Forbes magazine.com. And now it is saying that most restaurants aim to make about 30% of the revenue from alcohol sales, with lower labor costs and inventory that has a big shelf life, even the most sophisticated cocktail yields larger profits. Plus, while guests typically order just one meal they often order multiple drinks. 

Now, this is what happened. This is a response to COVID. And so when it comes to insurance, I want to hear your perspective: So by the end of March, more than 30 states have made legal changes that allow restaurants to sell alcohol with takeout or delivery orders. That’s not unheard of. So has this restaurant opened themselves to a lot of risk. I mean, I see the state made some adjustments to its policies. But I mean, talk to me about the kinds of the risks that come involved with selling liquor.

Richard Callaway  06:22

You know, everyone seems to overindulge at times. Never mean, of course, sometimes get in fights and do crazy things. And it used to be with DRAM laws, the server, or the seller of the alcohol was liable. But now, it’s been determined in most states that the proximate cause of the accident was not the serving of the liquor. But the drinking of the liquor. However, you still need liquor liability covers, because anybody can sue anybody for anything. And I haven’t met any attorneys that work for free. Get out of the lawsuit, you better have liquor liability coverage.

Maurice Washington  07:04

So we talked about the dwelling, the location and customer service, which we’ll talk about here in a little bit. But let’s talk about the insight. And one of those insights is what we just got to discussing, which is the liquor, but there’s also a lot of other things that seem to show up within the inner workings of the day to day workings of the restaurant and keeping it going. So what about business income? Because COVID? Did insurance take care of folks?

Richard Callaway  07:37

Unfortunately, that was not a covered cause of loss; it has not been a covered cause of loss since Sars. So, it’s not a new thing. But it’s just the first time it’s come up in such a big way where people were closed. 

Another issue is that if you own a restaurant, you better have general liability insurance for a couple of reasons. One, if somebody slips and falls, they’re going to sue you. Yes, this is California, we’ve got more lawyers per capita than anywhere. 

If you’re leasing a building, if you burn, the guy’s building is down, he will not be very happy. So that will be picked up on your general liability. If you damage the inside of the building, which you’re probably responsible for by lease, you need damage to property coverage, which will be take care of, if somebody breaks a window, somebody kicks in your door or whatever. That’s where that coverage would be picked up, 

Then back to the food, you need what’s called products liability, that would cover the food that goes bad in the restaurant. With the advent of delivery services; if something goes wrong, by the time the food gets from your restaurant, to the client, something goes wrong, you probably have a claim between Uber or whatever delivery service was used. But again, the attorneys don’t work for free, you have to have a way to get out of that claim or get it settled.

Maurice Washington  09:02

Okay, so what about, what about extra expenses? Because now this is when we’re talking about: is your restaurant at risk? And I want to make sure we reiterate that because now these are the small exposures that people tend to not think about. So what about extra expensive sewer backup? Because the sewer is one of those things that you don’t plan for, you don’t know when it’s going to happen. Next to shut you down, it seems? 

Richard Callaway  09:28

I have a client who came in to open up the place bright and early in the morning and found his floor covered with roughly an inch of wonderful sewage. Wow, not only does that damage the floor, but in this case, it had been sitting there overnight, it seeped up the walls, so they had to tear out the walls to ensure they had no mold. So that was an expensive proposition. 

That’s where business income would come into play. Since he couldn’t operate, his revenue would be replaced by the insurance. We have both of these covered:  Property coverage plus business income. 

The property will be prepared and income replaced. 

Extra expense may come into play, especially in a restaurant that’s doing a lot of takeout. If something happens and they can operate, they can go to another commercial  kitchen and serve their product. That would be an extra expense that the insurance would pay. 

One very important item, if you own your building, make sure you have it properly insured, if it burns down you need to rebuild.

Maurice Washington  10:30

Now, this is interesting, because as you bring this up, there’s a delay in service, there’s a delay in clients being able to come in, right. So let’s say you do have a sewer backup, and you’re out of people, you can’t have people come into your restaurant for maybe 20 days. How does customer service play a part in that delay?

Richard Callaway  10:55

The principals of the restaurant and the staff have to communicate with their clients, hopefully, they’ve gathered over the years, you know, some means of communicating with an email, whatever, everybody has newsletters these days, and keep them up to date: “We are almost repaired, we’re going to be open next week.”  Because if I can’t eat at your restaurant, I may find another restaurant. And that may become my new favorite. So you want your clientele to hear from you that hey, we’re working on it. We’re coming back, we’ll be back before you know it. And they’ll remember Oh, yeah, I want to go back there. That was my favorite place.

Maurice Washington  11:33

That’s fair. And speaking of those delays, those potential delays. This is what gets me the most right here. And when we’re talking about spoilage, when you think about just even, I don’t know, let’s put everything in perspective at home, when you have your refrigerator and suddenly it breaks down. It’s panic mode to help the whole house. I mean, so I can just imagine what it would be like when you have a restaurant and you have spoilage and you have issues of that nature,

Richard Callaway  12:00

Then you’ve got a couple of issues touched on because it’s boiling. If your refrigerators go down, your freezers go down or whatever, somehow you must replace that food. That’s right. Yes. Not cheap. Depending on the type of restaurants, high end steak or fish restaurant, the product they’re serving is relatively costly. Also, if that equipment breaks down, somebody has to fix it. We’d much rather the insurance company pays to fix it, then you pay to fix it. Yeah. Like we said, profit margins and restaurants are high. And I’m sure no one has extra money sitting around to buy a $5,000 freezer even more. Yeah. As much as this stuff is boring, it’s essential, because you have to think of your business not serving the food.

Maurice Washington  12:55

Yes. And that’s that’s the key. And nothing is boring about loss. Because you may come up with, we’re talking about many exposures. You mentioned early in this conversation, that restaurant business is not a high exposure, not a high profit margin business, let alone you have these types of interruptions. So if you’re not properly prepared for these potential interruptions, and we’re kind of creatures of habit, when we do this whole thing “is not going to happen to me”. And so we just kind of neglect a lot of these things that we’re talking about. So I think these are very important, especially when we talked about utility interruption, because that seems like another one of those unplanned circumstances.

Richard Callaway  13:36

That is a coverage that’s is pretty important. Because last time I checked, most restaurants will require electricity and guest food. If the utilities go down, again, guess what my research is not going to work, their food’s not going to be able to be served. And you need to be compensated for that loss. But you have to have this particular coverage. To take care of this means there is an instance, say if the utilities go down and they come back up, and there’s a surge and it blows up your freezer, theoretically you can go after the utility person, but utility companies have a lot more lawyers running around the news claiming to conserve there forever. In the meantime, you have no refrigerator. So you need to have this covered by a proper insurance policy. So that you can get paid promptly because you have to keep people in the restaurant.

Maurice Washington  14:28

That’s it. And that is a key business business perspective here, is keep people in the restaurant, keep the restaurant going and ultimately at all costs. And this is interesting, I feel like this is one that more established businesses know how this works but those that are coming in and considering opening up their restaurant, they may not have, may not be aware of this, but peak season. To me when I think about peak season,I think about the obvious because of my knowledge base but Thanksgiving, Christmas, you know, Easter, those are kind of the things that I think about each season but immediately exposed me to more.

Richard Callaway  15:06

Did you ever try to get a reservation to take your mother out to dinner on Mother’s Day? Yeah, it’s ridiculous. Probably the peak season of all. Yes. And these also have summer seasons for some restaurants, a restaurant that has a nice outdoor patio, they might see their business increase during the summer. So you need what’s called peak season coverage. 

Normally, say you have $20,000 of food sitting in a refrigerator, preparing meals when peak season happens and suddenly, you’ve got $40,000 worth of food and your freezers. Guess when you have a freezer crisis, okay? Things never happen. You know, fires never happen eight to five, they always happen. After hours a preacher going out doesn’t happen while you’re there sitting during the day, it goes down in the middle of night, you come in in the morning, oh, man, what happened? Oh, my, all my food. So the coverage for the stock and the property is important. But you also have an increase from the peak season. Okay.

Maurice Washington  16:07

Now, this is one of those other concerns because you need people to help you run your business, your restaurant, and I don’t know if this is a big issue in the restaurant industry. But to me, employee theft seems across many business owners’ minds. But how, how prevalent is it in the restaurant industry?

Richard Callaway  16:31

It used to be a bigger issue with employees being able to steal because everything was in cash. Everything that was credit cards, or debit cards don’t have as much cash flowing through. I do have a client in San Francisco that runs a nightclub. And for some reason, they do a lot of cash. And I was looking at the filmmaker. When you have all these cameras here. You had like 10 cameras in the bar every one of those is watching the cash registers. I know how many dollars go in, how many dollars go out. But that’s an unusual thing. 

You’re more likely to have your employee who takes care of your books. They’re going to beat that up, set up a bogus company and send them checks, whatever thing to watch out for is, if your people that don’t have your books never want to take a day off. Not because their loyalty is because they got to make sure that money going in and outward shouldn’t be happening without anybody seeing. So you need to pay attention to your books. You don’t need to be a CPA, you just got to kind of figure out. 

Wait a minute, I don’t recognize that vendor I don’t want what do I use him for? So there are some strange names on there. And you’ll pick that stuff up. Most people opening businesses are relatively smart people. So they can go through those things and pick it up. If not, if you’re concerned, have a CPA, audit your books and make sure it’s taken care of. You work hard for your money, you don’t want to go upside down.

Maurice Washington  17:55

That’s sure. In speaking of that, workman’s comp, this seems like one of those things that needs to always be in discussion, because I know that’s a big, open exposure area for every restaurant business.

Richard Callaway  18:07

In most states, it’s a required coverage. It protects both the employer and the employee. If you’re an employee and get hurt on the job, you expect compensation and your medical bills to be taken care of. That’s what this is designed for. But on the other hand, as the employer and having this agreement that has this coverage that takes care of the employee also protected, the employee cannot turn around and sue you here for slipping and falling, or whatever that claim is there. You can turn around and see for negligence, the policy would also cover that. But those are usually pretty tough to prove. I’ve had several examples where we’ve had lawsuits ended up getting thrown out 30 seconds after they started. Again, my friendly lawyers got paid.

Maurice Washington  19:03

They got paid again. We’re running into this also another exposure that is very hot right now in a negative way. But we seem to keep forgetting about it and putting it aside: cyber security is running rampant all over the place. How much exposure shows up and when it comes to the restaurant?

Richard Callaway  19:26

Unfortunately, these claims are increasing. I think the last report was there up like 65%. Wow, yeah, you’re thinking, Oh, I run a restaurant. What the heck do I need cyber liability for, I’m not an internet web designer or any of that kind of stuff. If you use email, you probably even have a website to advertise your business. They’re susceptible to multiple things. phishing attacks, people sending an email say, Hey, we’ve got a vendor you deal with regularly. He sends you what looks like an email from aim says, Hey, we’ve changed our banks, send the money over to this new bank. And then your vendor calls you a week later, because when you pay your darn Bill, you go pick it out last week, and then all of a sudden you find out that that money didn’t go to your vendor, it went somewhere else. For one, you got to replace some money. Hopefully, you had a good broker that ensured you had security insurance so that that claim is covered. I mean, it’s please, these people that do these phishing emails are pretty sure. Their email address looks almost identical to what it should be. I saw one that was an email from look like, let’s say it was from Netflix accounting department, they needed information I looked at the address to Netflix is spelled NetFlix, the email address was at an E T. F. I. Is, it looks like an L but if you’re not paying attention, you go, Oh, I better send them my information.

Richard Callaway  21:05

Hackers are faster computer people figure out ways to get people out of the computer. The faster the hackers, the bigger away, and you have all your records on your computer. Yes, right? All that stuff, ransomware, they lock up those files, things you need are on that computer, you’re out of luck. You need to be able to fix that. And you need to be compensated for the fact that that happened. There are not only insurance issues related to cyber, but there are many things you can do to protect your system. So we need a proper consultant to handle that kind of stuff. We know how to set up an email address, use passwords, and all those things. But that’s, that’s a whole another show.

Maurice Washington  21:52

That’s a whole another show, we’ll get to it. So last but not least, innovation. And we’ve come a long way. And that’s what people have to do to stay in business over the last couple of years: innovate, be creative to make some things happen, to again, to still be here and survive. But one of the biggest innovations has been with DoorDash. So how did innovation insurance show up as far as the insurance risk to these restaurant owners?

Richard Callaway  22:23

Well, insurance wise, it doesn’t affect the restaurant owner, because basically, he just puts out the food and the DoorDash driver takes it, the DoorDash company, the DoorDash driver may have a big insurance issue they need to deal with. We don’t have enough time to talk about that. But as far as innovation, have you been to a restaurant lately, where the waiter doesn’t even come to the table, you just punch in your order to be ordered on. And I think they take your money as quickly as possible with one swipe. That’s innovation, and is that a good innovation or bad innovation? 

We talked earlier about customer service. I want somebody to pay attention to me, that little box on the table isn’t paying attention to me. So it may be a good thing or that thing. Also, you need to ensure you have electronic data processing covers because if that little device stops working, you’re not getting orders into the kitchen and you have to have the device placed. And I’ve read and I haven’t seen it yet. They’re even working on drones to deliver the food. So you order your food on the table, they’ll send the drone over with the food and will come pick up your plates with the drone that  does collect the money and you never see a person. The only good side of that is I don’t need to tip a drone.

Maurice Washington  23:37

That’s right. But that’s another exposure. As you said, personal relationships could be a loss of business for that restaurant. It may not be insurance wise, but it is your know your repeat customer business.

Richard Callaway  23:57

Life. The lifeblood of your restaurant is people walking in the door and ordering food and telling their friends what a great experience they had. I’m running around swiping cards and talking to drones. I’m probably not going to brag about how wonderful the service was. I might have mentioned it as an auditing ago, man, this restaurant is pretty unusual, the drone delivery box and I got food.

Maurice Washington  24:23

I paid a little kiosk. That’s right. So Rick, wrap this up for us and what would you have a new business owner or somebody considering, you know, opening up the restaurant or somebody currently in the business? What would you have them do and talk to both parties?

Richard Callaway  24:42

As any business owner, you must work on the business, not just in the business. You need to have people that handle your books, you need to have people that handle your marketing. If you can’t do everything you need to sit with a competent insurance broker. Because when you’re budgeting, run your restaurant. You need to remember, Oh, I gotta pay those insurance costs, don’t want to open the door and oh, man, my insurance bills. $10,000? How the heck am I going to pay that? Planning, planning, planning, planning, when you’ve been in business already, you probably need to review the coverage. If you’ve been in business for a long time, things have changed, things have changed a lot. So you need to be aware of those. Everything requires review.

Maurice Washington  25:24

Yes. Here’s why I want to go ahead and leave everybody with. When it comes to insurance, the consumer thought processes get the lowest insurance with three bids, by having three bids have all that. But here’s what I feel is the most important with the bid. If it’s a little bit more expensive, it gives you the right coverage. So that way you can stay in business and all these risks that we just explained to you, all these exposures happening in your restaurant or real time. So I feel like it’s about the right insurance, not the cheapest. Is this the best? And I feel like at this stage, it’s almost review time because things have changed. And pricing has changed across the board for everything. So I would suggest everybody look at this from the right perspective and go into it with the right perspective. Because again, it feels like you would pay some exorbitant cost because if you’re not properly insured. Would that be accurate?

Richard Callaway  26:23

You want to have the proper coverage at the proper price. And an inexpensive policy is great until there’s a claim and the coverage isn’t there and you end up spending thousands and thousands and thousands. And then you’re going, why didn’t they have this coverage? Oh, Joe offered it to me but the bills was cheaper. That was the answer. We have to take a look at the risk and be sure that you have your assets properly covered.

Maurice Washington  26:49

Our motivation, what we’re going to do here, business owners, if you’re coming in, or if you’re currently in business, as a restaurant owner, stay in business. We need businesses to be around, we need that job flexibility, we need that service. So Hiking height and everything, do not scale back hiking, everything. Let’s all do better together. Reach out to Rick, you can find him on LinkedIn and you can get some more information from him and obviously he’ll take care of you. He’s very knowledgeable. Thank you very much, Rick, for all your information and the time you spent today.

Richard Callaway  27:24

My pleasure. My favorite subjects are insurance and restaurants. So if you insure restaurants, you have to go eat and testify to, your will attest to…

Maurice Washington  27:35

But in the meantime, Rick and I have to get back to work. You guys have a great day. We’ll see you next time.

Richard Callaway  27:43

See you all later.