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Served with a side of risk: Properly insuring your new restaurant

A restaurant might seem like a simple business, but it’s not. There may be places in the world where restaurateurs don’t have a lot to worry about, like a beach café in Mexico where all that matters is keeping the grill hot and the beer cold. Unfortunately, the United States isn’t one of those places.

From profit margins to health codes, American restaurateurs have a lot on their plate. Not surprisingly, a 2005 Cornell University study found that roughly 60 percent of restaurants fail within the first three years.

Too many people open a restaurant “thinking it’s a romance, then wake up and realize it’s a business,” says Richard Mazzarella, a Boston insurance broker. Each year, thousands of new restaurants open -- and thousands of others close. Now that the economy is picking up, restaurant openings are expected to pick up as well.

restaurant insurance One of the few ways restaurateurs can reduce their risks is through insurance. But restaurant owners often don’t cover themselves as much as they should. Experts offer three basic reasons:

1. Uninformed agent.

Perhaps the first mistake is not talking to an insurance broker who specializes in restaurants.

“Very often, restaurateurs are members of communities, and very often, they buy their property insurance from the agent who’s next door on Main Street,” says Peter Christie, president and CEO of the Massachusetts Restaurant Association. “Sometimes that’s good, and I think the intention is always good, but I think you should buy restaurant insurance from someone who understands restaurant insurance – and there are many of them."

2. Inadequate coverage.

The second – and perhaps worse – wrong turn that new owners make is buying coverage that's inadequate. The landlord, the lender and the locality mandate most of the insurance that a restaurant needs; the restaurateur has little choice in the matter.

By the time the owner is through writing all the required checks, he isn’t in a mood to write another one, says Mazzarella, vice president of Twinbrook Insurance Brokerage. “Typically, he’s so frustrated that he never thinks about insuring his own investment in the business," Mazzarella says.

The No. 1 thing restaurant owners overlook, he says, is insuring against lost business income. In addition to required coverage, Mazzarella advises buying a business interruption policy that will keep the cash coming in if the business can't keep operating because of a fire or other incident.

Often, it can take four to six months for fire claims to be settled and inspectors to approve repairs. Without business interruption insurance, the restaurant can easily run out of cash and be forced to shut down permanently. Typically, Mazzarella encourages his clients to insure for 35 percent of gross sales for a year, which is generally enough to keep the business going.

Mazzarella also recommends buying coverage for employer practices liability. Workers' compensation will cover on-the-job injuries, but if someone files a lawsuit alleging age discrimination or sexual harassment, an employer practices liability policy can reduce the risks, he says.

3. Fine print.

Brokers tend to throw a lot of terminology around, Christie warns. Make it your business to find out what it all means. Premiums vary, but so does the breadth of what policies actually cover. It’s easy to think you have coverage for something when you actually don’t.

Also, Mazzarella says, some companies tend to pay claims faster than others – an important consideration when everyday costs add up.

This kind of analysis might sound straightforward, but it doesn’t come easily to many restaurateurs.

“The problem is we’re dealing with people in the restaurant business, not the insurance business,” Mazzarella says. Many have a kind of artistic sensibility that’s “almost antithetical” to making hard business decisions, he says.

Making matters worse, many of them won’t listen – and don’t think they can afford to listen to someone trying to talk them out of one more check, Mazzarella says. “The new guy typically doesn’t trust anybody," Mazzarella says, "and he’s probably also blown every dime he has.”

On the bright side, insurance premiums for restaurants are relatively cheap. Historically, Mazzarella says, the cost of insuring a restaurant equals 1 percent to 2.2 percent of gross annual sales. Using a 2 percent figure, a restaurant with gross annual sales of $500,000 would pay $10,000 a year for insurance.

Two other measures can be helpful in reducing risk as well.

The first: Keep some cash on hand. Mazzarella suggests an emergency fund of about 10 percent of annual sales.

The second: Think big. The 2005 study from Cornell noted that all things being equal, some researchers have found that bigger restaurants tend to survive at higher rates than small restaurants, because their suppliers and creditors aren’t as quick to pull the plug. The theory: "Both suppliers and bankers are prejudiced against smaller firms. They tend to take longer to act against a slow-paying . . . large enterprise than they do against a smaller firm, because they equate bigness with safety and security.”

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