Insurance Times: Insurance markets proving inhospitable
Hard market-- and slow economy-- taking toll on restaurants and inns
August 6, 2002, Vol. XXI No. 16
by Mark Hollmer
Insurance Times
As Betsi Corea sees things, it’s not easy being in the Cape Cod hospitality business.
“Most Cape Cod businesses have only 11 weeks to earn the majority of their annual income,” said Corea,
an insurance agent and active member of the Truro Chamber of Commerce.
“It’s the money they need to pay mortgages and basic expenses before they can consider making capital
improvements, travel or other discretionary spending.”
“Insurance,” she added, “is one of the highest overhead expenses for these businesses.”
It’s been a challenge for a long time to get affordable insurance for coastal restaurants, bed & breakfasts,
motels and hotels. Coastal risks have long carried a higher price.
But the coastal scenario is now combined with the hardening market, the post-Sept. 11 reinsurance
pullbacks and the struggling economy. Insurance agents say the hospitality business in general is facing a
uniquely challenging summer season and a struggle to find affordable insurance.
And it’s not just Cape Cod.
Across Massachusetts, tourism is down, with hotel occupancy in Boston at about half last year’s levels,
according to published reports.
While bed & breakfast insurance rates are up between 10 and 40 percent along Cape Cod, insurance rates
for larger hotels up and down the East Coast and across the country are also climbing anywhere from 40
percent to 300 percent, said Stephen Genatt, president of Genatt Associates in Long Island.
“It’s a very, very difficult time for the hotel industry,” Genatt said. “Coverage is reduced, extremely
expensive and hard to do. The deductibles are larger, the rates are escalating and placements are difficult
depending on the area. Big city-coverage is extremely difficult right now.”
Cape Cod
Hospitality coverage in smaller areas like Cape Cod isn’t exactly easy at the moment, either.
Corea is president of Bryden & Sullivan Insurance Agency in North Truro, which writes insurance for a
number of inns, bed & breakfasts, motels and restaurants in Provincetown, Truro and Wellfleet.
She said hospitality businesses within 2,000 feet of the coast have “had a limited property insurance market
for some time,” but owner-occupied inns with excellent loss experience have taken advantage of
“competitively priced special bed & breakfast/inn programs.”
That began to change over the last year, she said, as “companies have announced they will no longer offer
these programs, or at a significantly higher cost if renewal was offered.”
Coastal property rates for business-owners’ packages have jumped 25 to 40 percent and umbrella premiums
are even higher, Corea said.
She added that this has hurt many inns, motels and restaurants because tourist revenue this summer, with a
softer season, is off from 10 to 30 percent.
“And health insurance costs have risen since January 1,” she said. “There is a concern about the ripple
effect that this will have on the Cape economy this winter.”
What’s more, Corea said, Sept. 11 reinsurance fears have left fewer companies available to offer quotes, so
hospitality businesses in general are lucky to have a renewal quote a week before a policy renewal date
instead of the customary month.
“This gives business owners very little time to plan for a change or increase,” she said.
Kerry Adams, president of Fireside Insurance in Provincetown, offered similar concerns regarding his
regional hospitality insureds.
“There’s an unavailability of markets,” he said. “That’s the biggie. And the companies that area available
and are sticking around are forced to charged higher premium because they are paying for an additional
cost of reinsurance, especially the companies still writing property and insurance business here on the
coast.”
Standard markets “have dried up tremendously” since Sept. 11, Adams said.
Utica Mutual
Both Adams and Corea added that Utica Mutual, a former active player in the bed & breakfast market, has
left a huge void since it pulled out of the line in Massachusetts.
Adams said he’s helped fill some coverage gaps through surplus lines, but those rates are 50 percent higher
than the old standard rates. Standard markets that remain, he said, are 25 percent to 50 percent higher on
property and liability package policies.
Bed & breakfast/restaurant and inn owners are “biting the bullet” he said, trying to absorb the increases.
“They’re not very happy about it,” he said. “But that subsides quickly when they realize they’re left with no
other avenue. Most are pretty understanding.”
Ray Travers, sales manager for the Drake, Swan & Crocker Insurance Agency, is based in Orleans in
middle Cape Cod and handles clients throughout the Cape and islands.
Initially, he said, rate increases reached up to 20 percent and now he’s seeing 50 percent jumps in some
cases, for liability, property and umbrella policies and general business coverage.
Properties like cottage colonies are seeing 30-50 percent rate hikes and properties closer to the water, like
condominiums both residential and seasonal rentals, are being slapped with 30-to-100 percent rate hikes, he
said.
His hospitality clients, Travers said, aren’t happy because the rate quotes he has offered come after working
with 11 companies to find the best rates.
“The first thing they want to know is, ‘What am I supposed to do with the increase?’” he said.
Business Dilemma
Business owners are caught in a dilemma because they are either left to absorb the increase or build it into
higher rental rates, Travers said.
“But if they do that they lose their business.”
As a result, he said, he’s heard that some in the hospitality business are reducing coverage to absorb the rate
hikes.
“They will reduce coverage but they won’t do without,” he said. “Mainly because (many bed & breakfast
owners) have an obligation to the bank. If they have a mortgage they have to carry it.”
A hard market may have made coverage more challenging, but bed & breakfasts and smaller inns have
always been particularly risky to cover anyway, Genatt said.
“A lot are frame construction,” he said, “which means they’re basically wooden structures.”
That wasn’t an issue in a soft market a few years ago, but it is now, Genatt said.
“All of these things which were, two years ago, easy to place, have become very difficult,” he said.
Even more troubling for small inn or bed & breakfast owners, their risk level hasn’t been profitable for
insurers overall, said Neil Crick, owner of Merchants Insurance Services in Louisiana.
Merchants Insurance Services is an insurance wholesaler with licensed agents handling limited-service
motels and hotels on Cape Cod, in New York State and throughout the country.
“It’s an extremely tight class of business,” Crick said. “Anything habitational is just a problem.”
Exited the Market
What’s more, he said, the market class “was chased pretty hard and pricing was beat down to the point that
most all programs prolific in the soft market have exited the market.”
“Pricing and underwriting was just wide open.”
That may be, but the hospitality business in Cape Cod and elsewhere is still left with vastly higher costs
and an uncertain sense as to when prices will stabilize.
“They’re concern now is paying for this year’s renewal increases and they’re looking at the horizon,” said
Corea, of Bryden & Sullivan Insurance.
“People are dealing with it with a tremendous amount of reserve. But what’s going to happen next year?”
Adams, of Fireside Insurance, was more hopeful, offering that he doesn’t think prices will “drop
dramatically”…“now that insurance companies have been able to get insurance premiums up higher.
“The market was low to begin with,” he said, adding that “as more markets become available” in a higherpriced class, “we will see more competition.”
There’s already been some word that price hikes “will end next year and I hope so,” said Travers, of Drake,
Swan & Crocker Insurance.
Travers added, however, there is no certainty that large price hikes will actually cease.
“We are still looking at renewals for this fall that are astronomical … but there is no marketplace…
“You sell the product and you have to sell the price,” he said.
“We have to be very gentle with clients. A year or two from now we have to remember these are the people
we had to hurt, and now we have to retain them.”
Of all restaurant risks, James Mickles says, a Taco Bell is possibly the ideal one to write.
With very little cooking and a high drive-through business that limits slip-and-fall exposures, tacos are
clearly a worthwhile risk, says Mickles, the owner of the Mickles Agency in Rochester, N.Y.
What’s more, said Mickles: “They don’t have children’s playlands.”
Mickles is an independent agent actively involved in the restaurant insurance business – a line that hasn’t
been immune to the hard market and higher prices the industry has faced over the last year.
Agents and companies in Massachusetts, New York, Rhode Island and Connecticut say their business has
faced some drop-off as restaurants have encountered higher costs and trimmed staff, which can reduce
commissions on workers comp or other lines that hinge on staff levels.
But others insist restaurant business and by default their insurance business is remaining steady even as
hard market prices increased by 30 percent or more in some cases.
“Overall restaurants seem to be holding their own,” said Tom Regan, president of Christopher & Regan
Insurance in Rhode Island and a board member of the state’s hospitality and tourism association.
Range of Perspectives
An overview of restaurant-specialized insurance agents and companies throughout the region reveals a
range of perspectives on the state of the market:
Paul Anastasi is owner of Business Insurance Marketers in Shrewsbury, Mass., which handles smaller
family-style restaurants in the central and eastern part of the state.
For Anastasi, restaurant coverage sales have been off in some cases as high as 20 percent. Generally, he
said, their sales are flat.
Rate increases of up to 15 percent have helped balance that, however.
The hard market has led to a capacity problem, he said, with many carriers that previously wrote restaurant
coverage pulling out of the market.
Liquor liability sales, however, are “better than … in prior years,” he said, in part because loss experience
is improving.
“Owners are aware of loss control techniques that generally improve their loss experience,” he said.
“They’re more safety-conscious.”
Ideally, he said, a good restaurant risk has liquor sales totaling less than 40 percent of annual sales and has
been in business at least three years.
“If they can make it three years they’re a better financial risk” he said. “And a better financial risk proves to
be a better property casualty risk, and the restaurant has resources to invest in loss control and building
improvements.”
Good risks, he said, also have written safety plans or are willing to write one. They’re also equipped with a
sprinkler system as well as a United Laboratories 3000 ANSUL system, a sprinkler specifically for cooking
equipment.
Unlike Mickles, Anastasi said fast food restaurant risks “are generally worse” because of a high frequency
of claims and more foot traffic.
“Family restaurants are the preferred” risk, he said.
Barry Fitelson, an insurance agent partner in the Connecticut Restaurant Insurance Program based in
Stratford, said he handles up to 350 restaurants and their coverage needs.
He said the restaurant business in his state seems to be “doing fairly well,” particularly on the fine dining
side.
Insurance prices are up 20 percent on average this year, he said, though claims trends are fairly stable.
“In restaurants you get your typical slips and falls,” he said. “Someone will chip a tooth or something like
that.
Good Risk
A good risk, he said, focuses at least 60 percent of the business on food and 40 percent on liquor sales, and
is experienced in the business.
New management or new ownership of a restaurant without prior experience is a big warning sign to
underwriters, he said.
Generally speaking, Fitelson said he hasn’t seen much fraud in the business. But when it happens it
revolves around money.
“Most things come from employee dishonesty,” Fitelson said. “They’re handling the books (and the)
money and all of a sudden it’s just not there.
“There’s not a lot of those (cases) but it does happen from time to time.”
Anthony Sidoni, president and chairman of The Walker Group in Syracuse, N.Y., helps restaurants obtain
property, liability, liquor liability, liquor bonds, umbrellas and workers compensation coverage.
Sidoni says insurance sales for him “are brisk,” in part, because he runs a safety group program offered
through one of his carriers that allows ideal risks to pool their premiums.
If they’re profitable and keep their risks down, the insureds share the dividends, he said.
Overall, though, Sidoni acknowledges a “very troubled” and “hard” market in all lines that has increased
prices for restaurant and other coverages in other lines.
On the bright side, Sidoni said, claims trends are stable.
And he still looks for the fundamentals in a good restaurant risk: “solid experienced management, well
capitalized, attention to detail.”
Bad risks, quite simple, have less money to invest in the business or to pay employees well.
John Myers, president of AIM Mutual Insurance in Massachusetts and New Hampshire, said his restaurant
workers compensation business has been stable as the restaurant business itself has held its own.
“We don’t notice a large layoff of employees,” he said. “We don’t notice an unusually large closing of
establishments. It’s been pretty steady” and even growing, Myers said.
Loss trends are also stable, he said, appearing generally as slips, falls and burns.
AIM helps its insureds reduce and prevent losses with a number of loss control programs, pamphlets and
booklets available to help employers train their employees to keep risks to a minimum.
A good risk in Myers opinion offices a positive “management attitude and wants to provide for a good
place to work.
“And usually you can make a correlation between wanting to provide good service and a good meal, to
wanting to provide a good place to work for the employees,” he said.
Overall, though AIM underwrites each restaurant on its own merits, he said.
AIM underwriters, as at many companies, also look for warning signs, such as cash flow problems.
Generally speaking, Myers said, officials look to minimize fraud by paying attention to the total wages paid
to employees.
“We write a policy with the estimated premium,” he said. “And at the expiration we audit the actual
payroll, which the ultimate, final premium is based upon … so from a premium audit standpoint, we pay
attention to gathering the correct annual payroll information so we can bill the correct premium.”
Restaurants may be holding their own but the hard market is taking its toll as it is everywhere else, said
Regan, of Christopher & Regan Insurance in North Kingstown, R.I.
“Property and property liability rates and premiums are up 15-30 percent,” he said. Workers compensation
in Rhode Island -- as in Massachusetts -- is regulated, so rates haven’t changed much.
But fewer companies are writing workers compensation, he said, so “they’re not as willing to give as many
(credits or discounts) as they used to.”
Liquor liability, by contrast, is at its lowest price in more than a decade.
“It seems to be a very attractive premium right now,” he said.
For Regan, a good restaurant risk has good loss experience, which is crucial to prove in today’s hard
market for underwriters who “want hard copies of loss runs.”
Restaurants near water, however, are proving to be an increasingly challenging risk, he said.
“Standard market carriers aren’t looking to write anything that’s really close to the open water… That’s
been a concern for a while, (though) it’s been stepped up.”
Sally Driscoll is business development manager for the J. Barry Driscoll Insurance Agency in Norwell,
Mass., which handles several restaurant accounts in Boston, Quincy and Waltham.
Driscoll said her clients are also “holding their own” though they’re dealing with price increases in a hard
market topping 30 percent.
An ideal risk, she said, would have a sprinkler system, and a hood ventilation system if there were a fry
machine, which carries a high risk of fire.
In a hard market, insurance companies are also requiring restaurants to have a regular cleaning contract for
the hood ventilation systems and companies are requiring proof.
“They’re tightening up on some of their underwriting criteria,” Driscoll said.
Claims trends also seem fairly stable to Driscoll, she said, involving incidents like occasional food
poisoning, some vandalism in bathrooms and fire damage caused by grease or hot ovens.
Restaurants must also have a safety program, be clean and not have obstacles in the way like “mops
hanging around the aisles when customers come around.
“We want to make sure they’re following food guidelines in place so there isn’t spoilage in the kitchen,”
Driscoll adds.
Strong financials, business longevity and a business owner willing to work with their agent are also pluses,
she said.
Driscoll said she identifies a bad risk simply by walking into a restaurant.
Trouble signs, she said, include “lights that aren’t replaced, electrical wiring hanging down, maybe the
kitchen isn’t so clean.”
Those elements point “maybe to an owner who doesn’t understand how to make this (business) insurable,”
she said.
Taco Bell Program
Mickles, in partnership with the Don Allen Agency Inc. in Rochester, launched a national insurance
program in 1994 for Taco Bell restaurant franchises.
They now insure up to 50 out of 375 Taco Bells franchises nationally, with many encompassing multiple
restaurants. Some Wendy’s and Friendly’s franchises are also clients, he said.
Overall, Mickles said, business has been steady among his restaurants.
Nationally, however, their insurance rates have jumped an average of 80 percent in property and liability;
50 percent more in New York.
Claims trends have been encouraging, Mickles, said, with “a dramatic attempt by most of the savvy
restaurant owners or franchise owners to reduce their claims.
“Most of my customers that I’ve seen, and that may be because we’ve educated them, have really improved
their claims records.”
Ideal Risks
Ideal restaurant risks for Mickles aren’t open 24 hours and have a strong safety program.
Franchises are particularly good, he said, because they usually have a “ built-in safety program.”
Management in a good restaurant risk must be “hands-on,” he said, with district and individual restaurant
managers “willing to work with insurance carriers and agents in terms of loss prevention that is very
effective.”
Bad risks have an average of more than a claim per year per location, he said.
“When you start looking at an average of more than one claim a year per location,” he said, “it’s probably a
good idea to stay away (because it could mean) they don’t have a good system in place and management
doesn’t really seem to care.”
Fraud claims in fast food restaurants tend to come through employee dishonesty claims, Mickles said.
Workers compensation fraud isn’t an issue at fast food restaurants, he said, because “it really is based on
the fact that employees are younger and not as savvy, and maybe healthier…”