By Paul DiBenedetto, Hub International
As the long, painful pandemic lockdown more broadly lifts across the U.S., restaurants and catering businesses are anticipating the return to normal as much as their customers.
Weddings are ahead, and family reunions, too, and planning’s underway for a growing number of corporate events in the second half of 2021. The pandemic crippled restaurants and their off-premise catering operations, but especially damaged caterers. Many haven’t had a “normal” event since early March 2020. With the shutdown, the size of the U.S. catering market shrank to $11.35 billion in 2020 after reaching nearly $13 billion in 2019. This year’s recovery may bring it back to $12 billion [1].
Bringing business in the door to rebuild finances isn’t the only challenge. Operational risks remain, and some may have intensified. Insurance against those risk exposures comprises a sizable chunk of caterers’ budgets. An insurance market that’s the hardest it’s been in 20 years is going to keep the financial pressure on recovering businesses.
Getting through this challenge requires organizations to have as good a story as possible for their brokers to present to insurers. That means cleaning up financials and being able to show a growing pipeline of business. Outstanding claims also should be cleaned up; those with good loss records will be especially well positioned.
Also important is having partnered with an insurance broker with extensive expertise in foodservice, and a solid network of insurers and reinsurers. The secret sauce? Creativity—since the same old strategies for getting coverage placed won’t be very effective.
Understanding a Hard Market and Its Impact
A hard insurance market results from a combination of factors. Insurers have had to pay out more on claims in recent years. That reduces their reserves, lessening their financial capacity to cover clients’ claim liabilities. Better case scenarios: Higher premiums (coverage on some lines has more than doubled in some instances) and lower loss limits. Worst-case scenario: Insurers will decline to write high-risk policies at all.
Hospitality, even before the pandemic, had become a problem spot given large claims stemming from the unprecedented numbers of natural disasters (floods, fires and winds, among other issues). The losses experienced by the lodging sector led to some carriers exiting that business altogether.
For restaurants and caterers, pressure has been particularly intense on their property and casualty coverage. Commercial auto, for example, was getting costlier before the pandemic. General liability, especially umbrella, or excess liability coverage, has grown increasingly problematic, largely due to more Employment Practices Liability Insurance (EPLI) claims.
EPLI protects employers against employment-related claims for damages caused by such wrongful acts as wage and hour violations or sexual harassment. Such claims have been on the rise in the U.S., with 90,000 filed annually—30% of all civil cases—costing $450,000 per case on average. Restaurants and caterers are a major source of these complaints, which worsened during the pandemic over the adequacy of health and safety measures.
It’s made EPLI coverage increasingly costly for the industry, and also created issues for umbrella coverage—which comes into play when the underlying policy’s limits aren’t sufficient to cover higher judgment amounts.
Can Your Broker Pivot?
Conditions are challenging brokers to get policies underwritten. It’s not just expensive, but coverage limits may be reduced. When a restaurant or catering company needs $25 million in umbrella coverage, but can only get $5 million from a single carrier, their broker may have to pivot to multi-insurer strategies that have typically been used with big businesses with bigger risks.
One such strategy, especially for umbrella policies, is layering. To get that $25 million in coverage, a broker markets “layers” of coverage to additional carriers until a $25 million “tower” is created. Distributing the risk makes it more palatable to insurers. It also can reduce the cost of coverage.
Another multi-carrier option is quota sharing—multiple insurers take portions of a policy, sharing premiums and losses according to a fixed percentage. This option may be less profitable for insurers, but it frees up their capacity to write new policies.
Such strategies aren’t new, but many brokers haven’t had to learn them because it was so easy to place coverage with single carriers. They are more complex, though, especially for the uninitiated with less expansive insurance networks. It’s something foodservice companies should ask their brokers about. With all the challenges ahead, worries about getting their risks adequately covered shouldn’t be added to their plates.
ABOUT THE AUTHOR
Paul DiBenedetto is senior vice president for Hub International, heading up both the Hospitality and Cannabis divisions for HUB Midwest West. Prior to entering the insurance world, Paul was a multi-unit, multi-state owner operator for a full-service bar chain for 10 years, and founded MindMeld Partners, LLC, which was a national boutique beverage consulting firm. He worked with over 30 hospitality brands and hundreds of beverage companies before selling his shares to his partner in 2017. Paul brings a unique operator perspective to the insurance world and focuses on building the best possible programs for his clients. He also sits on the Illinois Restaurant Association Council. For more information, visit hubinternational.com.
