The food services industry is anticipating record sales for 2024. But insurance specialists serving the restaurant and bar sector say that forecast isn't all good news. With higher sales come higher costs all around.

Restaurants are being squeezed from all sides – higher food, labor and insurance costs. Add in outside forces such regulatory moves to cut "tip credits" in some jurisdictions and a federal push to alter joint employer status for franchise workers, restaurant owners face tough challenges this year along with anticipated higher sales.

The National Restaurant Associations' State of the Restaurant Industry report forecasts that restaurant sales will top $1 trillion for the first time ever in 2024 but also found some 38% of restaurants reported generating no profit at all in 2023.

David DeLorenzo, CEO and owner of Ambassador Group Insurance and Bar and Restaurant Insurance, who has owned and operated 13 restaurants throughout his career, says restaurants are lucky to generate a modest 10% profit after all expenses have been paid.

The restaurant failure rate is difficult to track nationwide, but the National Restaurant Association estimates a 20% success rate for all restaurants, and 80% fail within five years of opening.

Paul P. DiBenedetto, senior vice president, Franchise/Hospitality Segment leader, HUB International Limited, says restaurants of all sizes are struggling to make a profit today. For the smaller, independent restaurant operators, cost pressures are especially tight. "We're definitely seeing the smaller operators more willing to go 'bare' on certain lines of coverage just because of the cost," DiBenedetto said. "2024 is going to end up being the highest sales probably in restaurant history, but that will also be coupled with the highest costs in the restaurant industry," he added.

More sales equals more insurance costs, as well, he added. As restaurant sales receipts rise, so do general liability and other lines that base rate on sales, he said.

Added restaurant sales will also add pressure to find enough staff to meet the growing demand. The restaurant industry workforce is projected to grow by 200,000 jobs, for total industry employment of 15.7 million by the end of 2024.

However, 45% of operators say they need to hire more employees to meet customer demand and almost all (98%) of operators say higher labor costs are a concern for their restaurant, according to the State of the Industry report released in February.

Restaurants are struggling because the rising costs to operate today – including food, supplies, labor and insurance – are squeezing profits more and more, according to DeLorenzo.

Restaurant owners and staff are overworked, tired, and are dealing with customers that are unappreciative especially when that $15 burger is now $17, DeLorenzo said. "You're seeing people work longer hours, work harder, and they are more stressed out, so while sales might be up, profitability is going down."

Insurance Market Challenges

Insurance companies serving the restaurant and bar sector come and go, says Tim Smith, senior vice president, National Hospitality Practice director at IMA Financial Group Inc. Carrier turnover is common in this business, but 2023 was probably the most difficult market, he said.

"Carriers want to be in the restaurant segment, then lose their shirts over time, and then they get out, so we're in a constant search for new entrants," Smith added, noting that two large national carrier exited the restaurant business over the past 12 months. Other markets have retracted from certain lines of coverage but not withdrawn entirely from insuring restaurants and bars, he added.

Most carriers only want the same kind of restaurant risk, says DiBenedetto.

"Everybody wants fine dining, and liquor percentage under 30% of check averages," he said. "Everybody wants comp right now because comp's obviously very hot in the restaurant space, so that's probably the easiest line."

But liquor's getting very hard, and full bars are tough. Any facility with high volume liquor sales ends up with regional carriers or in the surplus lines market, he added. "The nationals aren't touching those at all," he said. "They're just making it more and more strict and the appetite more and more strict because everybody's attacking kind of the same kind of facility."

"Liquor liability is now on a whole new level," Smith said. While certain lines of liability coverage show that frequency trends are down, severity trends are up and that trend doesn't seem to be slowing down. "I think that's the biggest challenge in the business," he said. "More liberal jury verdicts and a more litigious environment is lending itself to more catastrophic verdicts." Billion-dollar jury awards for liquor liability have led to a difficult market in some states, he said.

DeLorenzo agrees liquor liability can be tough. "I've seen very reputable carriers that have been in business for a long time that are now charging double if not triple, for liquor liability, and they're taking sub-limits on things like assault and battery, or just pulling coverage completely off," he said. "They have to do it in order for them to stay focused and to stay in business."

There is often a "snowball effect" that happens when claims go to trial even when the claim doesn't result in a bodily injury claim, Smith added. "We had some kind of cocaine packet that was found in a hot dog. … It wasn't ingested but it became a big claim because of the potential," Smith said. "That's why I say it 'snowballs' because insurance companies get more concerned about things going to trial, and so they settle more quickly."

Claims that might have been pushed to trial 10 or 15 years ago would end with a "satisfactory outcome" for the insurer. Today that scenario is far less likely, Smith said. Going to trial could "come back to haunt them. It's frustrating for the consumer, the buyer, the insurer, and ourselves, because companies settle frivolous claims more often today than ever to avoid what could be a bit of a lottery" scenario if the claim were to go to trial.

In addition to the uncertainty around high dollar verdicts, ongoing natural catastrophe claims in the property market are also driving the retraction from some carriers in the restaurant space, Smith said.

The increasing frequency and unpredictability of extreme weather events and the resulting losses are impacting insurance costs at an unprecedented level, particularly as it relates to commercial property.

According to a recent NEXT Insurance survey, which polled 1,000 restaurants nationwide, many restaurant owners may not be adequately prepared or protected for catastrophic weather.

Nearly half (48%) of restaurant owners surveyed reported experiencing weather-related damage to their small businesses during the winter months, from November 2023 to the first week of February 2024.

Asked if they felt adequately insured for weather-related damages such as snow damage, water damage, fallen trees, flooding and more, 42% of respondents said they felt very prepared for severe weather compared to 34% that did not feel prepared and 24% that felt somewhat prepared.

"This data underscores that many businesses may be underinsured, leaving them vulnerable to damages and business disruptions," said Alon Shiran, vice president product and design, NEXT.

Weather events not only cause damage to business property and inventory, but often require businesses to shut down for repairs leading to further loss of income, Shiran added. "Business interruption coverage is critical to cover loss of income due to closure related to covered events, allowing businesses to recuperate losses and even continue to cover salaries and operating expenses when their business is closed," he said. "Restaurants notoriously face tight operating conditions and are susceptible to a range of risk exposures like customer and workplace injuries, professional mistakes, damages to someone's personal property, accidents related to intoxication, among others," he said. "Recent market challenges including, skyrocketing food prices, labor shortages, supply chain issues on top of environmental factors like the increasing occurrence of extreme weather are changing coverage needs and costs."

DeLorenzo noted that in his 20 years of specializing exclusively in insuring restaurants and bars there have been many carriers to come and go. While there's always a new market willing to pick up the business when a carrier exits, sometimes for a cheaper premium, he cautions his clients about moving to just for price. "These newer markets, I've had it happen, they'll jump into a market for a year or two, do not understand the laws or the different types of exposures in those states, and they'll get out after a year or two," he said.

While moving might be beneficial to the restaurant owner now, it may not be beneficial in the long term.

"What ends up happening is these carriers come in, they buy rate, and then they get out or they just cut their coverages in half, which doesn't protect anybody."

That's a big reason why some specialists like IMA choose to work more in the program space to insure restaurants today, says Smith. "Part of the reason we develop programs is so we can have something we can control that is more proprietary," he said. But even so it remains challenging to find a group of carriers that want to quote some restaurant and bar risks.

Smith says it's better to work with one carrier when it comes to creating a program in the restaurant space. "Ideally, the more you can put with one carrier, the better, because you get multi-line support. So, if something goes bad on the liability side, then maybe property supports it, or work comp."

But in today's hard market that is not always an option. "Today, we find ourselves with a lot more carrier partners, depending on the particular line or region," he said.

For example, for restaurants located in the Sunbelt states, carriers won't write property due to the difficult wind and hail exposures there. "But maybe they're willing to do the liability and umbrella, so we now find ourselves bifurcating placements between multiple carriers."

DiBenedetto agrees that restaurant insurance specialists need to be thinking "out of the box" when putting together insurance programs because of changing carrier appetites. Also, brokers and clients need to think long term. "I don't want to place somebody with a carrier that we got a discount this year for a really good program who's also going to change their appetite the following year," he advises.

Today's challenging insurance market calls for extra attention when it comes to educating clients. "We have to educate our clients a lot on the weather (trends), so they understand why the rates continue to go up," Smith added.

The good news is that clients are now more willing to elevate deductibles for wind tail. "And that's helping to insulate the insurance marketplace," he said. "I think in 2024, we're seeing some light at the end of the tunnel."

Every time DeLorenzo gets a new risk, or reviews a current client's evolving risk profile, he has to think about finding the proper market to insure all their exposures in black and white, with no gray areas.

"And what I mean by that is you may have a tap house, you don't think of it as that big of a deal, but then all of a sudden, the tap house is open until one or 2:00 AM," he said. "And now they've put a stage in the back because they want to have the local little country guy play music, which is then considered 'entertainment,' or they put up a dartboard, and then all of a sudden it falls out of that direct carrier's (appetite) with the cheaper rate." So their premium now doubles because of these three additional items all because the facility wanted to bring in entertainment.

"Actuaries have predicted that entertainment establishments, and rightfully so, have more of a chance of a claim because if you're open later and you have some form of entertainment" there's additional risk.

DeLorenzo then must have the hard discussion with that facility that the cost to insure such added risks may not make sense. "This place is only doing $500,000 in receipts, maybe, and yet they're going to get charged $40,000 for insurance?" he says. "It's gotten really weird out there."

Outside Factors

Two important issues for restaurant owners on the horizon are pending new joint employer regulations and a push to end employer "tip credits" in some jurisdictions. Both could impact growth and opportunity in the restaurant sector, says DiBenedetto

On October 26, 2023, the National Labor Relations Board (NLRB) issued the final rule redefining what constitutes joint employer status under the National Labor Relations Act (NLRA). The final rule upends existing employment policy and creates concerns for independent and franchise restaurant operators alike.

"That's a very important piece that's going to impact a lot of businesses because now you're potentially making a vendor liable for vending," DiBenedetto explained.

For franchised restaurants this could be a huge hurdle, DiBenedetto said. "It makes the franchisor responsible for all the franchisees' employees."

In late February, U.S. District

Judge J. Campbell Barker in Tyler, Texas, issued a brief order pushing back the rule's effective date from February 26 to March 11, delaying implementation of the NLRB rule as he weighs a bid by major business groups to strike it down. (As of press time no further action had been taken.)

Another concern facing restaurants in some parts of the country is regulation that would end "tip credits" for restaurant employers. Currently, employers of covered employees in occupations that customarily earn tips may take a credit against the standard minimum wage rate if those workers earn enough in gratuities to bring them up to the hourly minimum wage.

With passage of legislation in California, Washington D.C., and most recently a city ordinance in Chicago, the tip credit for these employers will come to an end.

DiBenedetto says this change will hurt restaurant employers and their employees. Tip-earning employees often oppose these measures because they typically earn far more in tips than they would if compensated at the standard hourly minimum wage.

"For example, in Chicago, the average server, bartender, hostess makes between $28 to $45 an hour," he said. "And with this tip credit going away, you're taking away the advantage from the employer to get this tax credit back to them."

Estimates show that some 30% to 40% of restaurants could close as a result of the new rule in Chicago, he added.

Opposing the measure, the Illinois Restaurant Association (IRA) cautioned that, by eliminating the subminimum wage, the city is "fundamentally changing the business model of every restaurant in the city" and will result in job cuts and restaurant closures.

The IRA said estaurants likely will adopt automatic service charges to offset the financial impact, a practice adopted by many restaurants in Washington, D.C., after the tip credit was eliminated there. They also warn that restaurants may respond by eliminating servers altogether (moving to a self-serve, counter model) or relocating to nearby municipalities outside the city.

Efforts to eliminate the tip credit have increased in recent years, with varied success. Federal legislation that would have eliminated the $2.13 subminimum hourly wage for tipped workers failed in the 2021-22 session. However, more than a dozen states have legislation pending to eliminate tip credits all together.

These outside factors impacting restaurant profits on top of a tough insurance market are making it difficult for some restaurants to survive. These issues can affect employment practices liability, workers' compensation, employee benefits and will continue to impact restaurant growth nationwide, according to HUB's DiBenedetto.


Despite the challenges facing restaurants today the outlook for growth and opportunity in the restaurant and bar space looks good, says DiBenedetto. "I think it'll be pretty strong year because I think there's still enough momentum in the economy to keep pushing growth," he said.

He adds that restaurant operators are gritty and don't easily give up. DiBenedetto knows firsthand the grit of a restaurant entrepreneur. He spent the first half of his career opening and consulting with more than 40 restaurants. Then he found insurance because he hated buying insurance and wanted to help others through the buying process.

"Restaurant owners are hardworking, they're stubborn, and they're willing to put the hours in." Some restaurant owners he knows will spend 90 hours a week working hard to "not make a profit that month," he said. "So, they can handle adversity well, but it doesn't always mean they're making money." They will keep getting squeezed on profits in 2024, he predicts. "I think if we keep squeezing and squeezing them for every dollar in 2024, 2025 is going to be a disaster."

At some point, a normal consumer can't pay $30 for a burger anymore. "You're starting to see tip fatigue nationally. You're starting to see alcohol beverages go down because people might go eat, but now they might not have that bottle of wine. Some of that stuff is going to come to a head."

"There's a lot to figure out the restaurant space," he added.