Editor's note: This is the third story in a six-part Restaurant Business series on climate change and the restaurant industry.
Restaurants that have never lost as much as a roof panel to climate change are learning you don’t have to be in the path of a hurricane or tornado to catch some of the financial damage. A sharp reminder comes every quarter with the insurance bill.
Mother Nature’s ailments are turning the once relatively stable price of property and casualty (P&C) coverage into a cost that’s climbing like a SpaceX rocket. “Most people’s rates have gone up by a minimum of 20% and to a maximum of 60%,” said David DeLorenzo, owner and CEO of two insurance firms—Ambassador Group and Restaurant and Bar Insurance—that specialize in restaurant coverage. He’s also been an investor in 13 restaurants. “It’s crazy.”
The wallop is particularly painful for a new property buying its first policy, no matter how far from the coasts or a tornado alley it might be. The foundation of the insurance business is the concept of a pool. Premiums pour into a reservoir of funds from which damage reimbursements are taken. Since right before the pandemic, the outgoing flow has been surging, in no small part because of environmental issues. That’s prompted insurers to keep hiking their prices—or to stop offering policies to high-risk customers like restaurants.
Those drains on the pool aren’t merely high-profile catastrophes like Hurricanes Helene and Milton.
According to Next Insurance, a new breed of insurer whose business model is based on a constant feed of data gleaned from claims, the fourth most-common reason for a reimbursement in the $100,000-and-above range is water damage. With temperatures knocked out of whack by nature’s wobble, the cause could be a pipe that freezes and bursts, or water pooling inside from a heavier-than-usual rain, or snow melting faster than the ground can absorb the runoff.
The costs for fixing those impairments at a single restaurant can run as high as $1 million, according to Next.
The blend that burns
Insurers’ pools are also being drained at a faster clip today for reasons that have little if anything to do with weather or climate. Building materials and the wages of construction workers have soared, so the cost of replacing a roof or fixing an entryway has climbed accordingly, significantly hiking damage payouts.
“Anything related to P&C has accelerated significantly in the last few years, and the prime cause is inflation,” said Next Chief Product Officer Effi Fuks-Leichtag. “Everything costs more,” and the higher prices are being passed along. “No one is making extra money out of it.”
The wallop is amplified for restaurants because many opt for the convenience of what the insurance business calls a BOP, or a business owner’s policy. It’s the insurance world’s equivalent of a sampler plate, combining some property and casualty insurance with a dollop of liability coverage and maybe even some protection from a data breach.
Awards in liability lawsuits, as well as the sheer number of suits, have been soaring, according to insurers, hiking the rates for those all-in-one policies.
“If someone hit a pothole in your parking lot, there was probably a time when you could just buy them dinner and everything would work out,” said John Cassetta, sales manager for the insurance giant AON. “Now we could probably sing three jingles from memory of law firms looking on TV for liability clients.”
Because of that dynamic, the increases have been particularly steep for places that serve alcohol.
“Insurance is probably still going to be less than 1% [of sales],” said insurer and restaurateur DeLorenzo. “If you’ve had a couple of DWIs or an assault, it might be in the 3% range.”
Throwing in the towel
Operators in Florida and California have the added burden of far fewer insurers now serving those markets.
Two behemoths of the business, Allstate and State Farm, have stopped offering commercial property and casualty insurance in California, saying they couldn’t keep up with escalating construction costs and the surge in claims from wildfires.
Operators there have also seen insurance rates elevated by insurers taking crime risk into account in setting the charges for a prospective client interested in a BOP, according to a spokesperson from the California Restaurant Association.
Assault of a customer or employee is the third most-common reason for an insurer to pay out at least $100,000 on a claim, according to Next’s data.
Five major insurers, including big names like Farmers, AIG and Progressive, have pulled out of Florida. Two others, Southern Fidelity and Weston Property and Casualty, ran out of money and had to stop taking customers.
All cite the same factors for their exits: Soaring payouts in liability lawsuits, and the damage that's been done to the nation's southern-most state by Mother Nature.
You can still get insurance for a restaurant there, said Nick Valenti, the former president of Patina Restaurant Group and a longtime veteran of the business, but the price is steep. He did not reveal how much he’s paying to cover Simply Capri, his restaurant in Winter Park, Florida.
Elsewhere, the number of mid- and smaller-sized insurers is dropping because the financial viability isn’t there, said DeLorenzo. Most of those heartland companies have a pool of less than $100 million, “and that’s nothing,” he said.
“You don’t have a surplus of carriers looking to insure restaurants, because they’re risky,” DeLorenzo said. “They’ll just pull out of the market. Why bother?”
With the disappearance of so many providers, the pricing leverage of the survivors grows accordingly.
The insurance industry hasn’t seen construction costs ebb significantly as inflation has eased, so it’s not expecting a return to the rates of pre-pandemic times.
And then there’s the wildcard of climate change. “There is no doubt it’s having a significant impact,” said AON’s Cassetta. “It’s forcing people to look at things differently.”
A keener assessment
The increased risk present in some zip codes has made insurers that much keener and hardnosed in assessing risks, be it to extend a policy or initially price it. “They’re looking at structures, and saying, ‘Gosh, when you look at these things, they need all kinds of improvement,’” Cassetta said.
That intensified look also extends to operations. “If it’s a place that has $100 bottles of wine, you look at it differently than you do a place where employees are lugging up buckets of Buds from the basement,” he said.
But there are ways of offsetting Mother Nature’s impact, he and other insurance executives contend. “When things become so cost prohibitive that you have to look at things differently, you find the solutions,” Cassetta said.
For one thing, they advise restaurateurs to look beyond a BOP. Because the policies are a combination product, there’s not a direct correlation between the risk of weather damage and what operators pay to cover their properties from that sort of setback. A fight between customers over a hotly contested game on the bar TV can significantly hike what they pay to ensure storm damage can be repaired.
Operators are better off dealing with policies that are focused, ideally from brokers that specialize in policies for the restaurant business. “Are you going to go to a brain surgeon to have work done on your heart?” Cassetta asked.
“We see many restaurants who do not buy the right coverage, or, God forbid, they do not have any coverage at all,” said Next’s Fuks-Leichtag. “I would advise operators to go through a company that can really evaluate the risk for a restaurant. ‘Am I covered for tornados, am I covered for a flood?’”
DeLorenzo believes operators will soon find relief through technology, though he acknowledges having a stake in that possibility. He’s launched a product that essentially monitors all pockets of an activity within a restaurant via camera. With proof of what actually happens, spurious liability claims won’t have a shot, and that helps BOP rates. The surveillance can also weed out bogus weather-related claims that tap an insurer’s pool, like claiming a walk-in’s contents have spoiled when a visual record shows no loss of power or physical damage.
All of the insurance executives stressed the importance of having a relationship with an insurance broker or carrier’s agent. “I’d rather deal with Bill, who’s known me for 20 years and can get me on the phone on a Sunday if he has a fire,” said DeLorenzo. “I know him, and he knows me.”
“If they don’t know you, it can be a tougher sell,” agreed Cassetta.
Even if they’re unacquainted with you, they may know your brand, which affords chains an advantage in insurance hunting and claim resolution. “If I call ‘em up and say ‘It’s a Jimmy John’s, they know exactly what that place is like if they’ve insured a Jimmy John’s before,” Cassetta explained.
Not a rosy outlook
Without regulatory action, operators are unlikely to see their property and casualty rates reset, in large part because of weather’s unpredictability and what meteorologists confirm is a real increase in what were regarded as once-a-century events. “It’s happening, and it’s real,” said Next’s Fuks-Leichtag.
About half the claims (48%) filed by restaurant owners from December through February deal with damage from Mother Nature, according to Next.
“What’s going on with the weather is having a huge effect on what’s going on with insurance rates, and it’s going to have a huge effect on availability,” DeLorenzo said. “It’s going to get tougher and tougher and tougher.”
Members help make our journalism possible. Become a Restaurant Business member today and unlock exclusive benefits, including unlimited access to all of our content. Sign up here.