Pantry full of risks facing restaurants challenged with thin margins and competition

Tough environment makes the focus on analyzing total cost of risk absolutely critical, says expert

Pantry full of risks facing restaurants challenged with thin margins and competition


By Alicja Grzadkowska

With sales projected to reach $863 billion in 2019, the restaurant industry is clearly serving up what diners are looking for. However, though the sector broadly has a positive outlook, key hurdles are putting pressure on these businesses.

“The restaurant industry has many challenges facing owners and operators due to high competition, thin profit margins averaging as low as 3-5%, and a depleting labor pool,” said Chris Hagle, president and national program manager at Insurance Programs of America, a division of Specialty Program Group. “Many of the traditional workers in the teenage years are turning to alternative industries, creating a compound risk of an already high turnover ratio with fewer options on increasing labor. This tough environment makes the focus on analyzing the total cost of risk not only vital, but mandatory.”

The risks within the restaurant industry are manifold, starting with reputational risk and brand protection. With the rise of social media, restaurants have to focus on finite details to ensure consistency and quality, says Hagle. After all, bad reviews can be viral and devastating. This starts with a granular approach to operations and procedures, beginning with employee hiring processes and training. At the same time, management must maintain a diligent overview from the back of the house through the kitchen, to its client-forward staff and all the way to the front of the house.

Other challenges include the preservation of property and stock. Risk management for this concern starts with the proper cycling of food products and monitoring of proper levels of stock – vital since any contamination, whether it’s caused internally or by product outbreak, can lead to the demise of a restaurant.

The safety of guests and employees is likewise crucial, according to Hagle.

“Proper checklists and procedures on overall cleanliness is the best way to avoid one of the top factors in guest injuries – slips and falls,” he told Insurance Business. “Simple techniques, such as when and how to properly maintain common areas and flooring, go a long way to mitigating potential claims. We have found that by taking a few extra minutes to dry mop areas while cleaning drastically cuts down on incidents.”

When it comes to employees, ensuring their safety goes a long way in reducing employee turnover and the restaurant’s total cost of risk. Once a restaurant’s workers’ compensation claims get out of control, the tail can follow for years to come, says Hagle.

Finally, following a year where cyberattacks brought many businesses to their knees, data protection should be top of mind for restaurants.

“We have all seen the effects of data breaches in the restaurant and retail industries over recent years. Having a protocol in place to mitigate potential breaches will go a long way towards protecting the most important factor – reputational risk and brand protection,” said Hagle. “Most credit card vendors are PCI compliant, but don’t assume the liability will fall directly on the business owner or franchisee. While many franchisors require franchisees to utilize their systems, the liability will land on the franchisee as many contracts demand indemnification in favor of the franchisor.”

While these five challenges are ones that restaurants face year-round, the holidays can heighten risks as well.

“The busy holiday season intensifies all facets of these risks, with increased volumes and foot traffic.  This is also the time for holiday parties and an increase in alcohol consumption,” said Hagle. “Restaurants should focus on proper staffing to handle these increases to alleviate the pressures of following proper TIPS training or similar intervention-based liquor distribution.”

To address the myriad of exposures they face, restaurants should have the following coverages in place, explains Hagle:

  • Property insurance, to protect the structure, equipment, and stock. Hagle recommends looking out for proper business interruption limits, ordinance or law, and coverage extensions for loss of utility service and spoilage.
  • Fidelity or crime coverage including employee dishonesty to properly ensure that claims for staff or management who embezzle or steal.
  • General liability and liquor liability with solid claims handling, which will go a long way with reputational risk, brand protection, and can assist by providing mitigating techniques for guest safety. 
  • Hired and non-owned auto, which should always be present to cover any auto liability while employees run errands.
  • Workers’ compensation, which is a must and should be written by a qualified agent or broker who can assist in various safety protocol and proper claims management to monitor the business owner’s experience modification.
  • Employment practices liability, which will protect against claims by staff for wrongful termination, discrimination, sexual harassment, and, in some cases, wage and hour incidents.
  • Data breach and cyber liability, which will assist in compliance with federal laws in the event of a breach and will provide funds for any liability along with notifications to the potentially affected guest.
  • Active shooter coverage, which can respond to first party damages, assist with crisis management, and protect loss revenues in the event disaster strikes on or near the restaurant’s location.


With the right coverages in hand and effective risk mitigation methods in place, restaurants can avoid significant losses that could have led them to shut their doors.

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