The restaurant industry depends on speed—fresh ingredients, bustling dining rooms, and seamless operations. But a catastrophic event like a fire, a machinery shutdown, or a delivery chain breakdown could cause huge financial suffering. Even a basic grasp of Business Interruption Insurance (BII) can help restaurants address their unique vulnerabilities. Let’s take a deeper look.

Restaurants aren’t merely businesses—they are ecosystems. The National Restaurant Association predicted that sales for 2024 will set an all-time record at $1.1 trillion. That is, by any metric, an incredible number—and by hitting an all-time high, it’s clear the restaurant industry has more than just rebounded from the dark days of COVID.

However, with the good comes the bad. Factor in perishable inventory (which can spoil in hours without refrigeration), seasonal demand swings, and reputation risks (a single health code violation can close a venue), and the stakes rise. To put that in context, it is estimated that nearly 60 million tons of food are disposed of annually in the United States, which is the highest food waste generation globally, or approximately 40% of the entire US food supply. Much of that results from spoilage from power outages or equipment disruptions.

If you’ve read our BII Fundamentals Guide, you understand the basics: What it is, what indemnity periods and covered perils are, and how lost income is calculated. Now let’s adapt that knowledge to the Food & Beverage (F&B) industry.

Main Considerations for Restaurants

Revenue Streams

Restaurants depend on multiple revenue streams, each of which carries its own risks:

• Dine-in: Subject to physical space and capacity.
• Takeout/Delivery: At the mercy of third-party app outages or delivery interruptions.
• Catering/Events: Season or event-based, making income unpredictable.

Seasonal Fluctuations: Revenue at many restaurants doesn’t flow consistently year-round. Holiday rushes or summer tourism can often represent a great part of annual income. A disruption during peak season can be catastrophic from a financial standpoint. For instance, a 2021 study from the National Restaurant Association discovered that 60% of restaurants depend on holiday/seasonal sales to remain afloat.

Supply Chain Vulnerabilities

Restaurants are only as good as their ingredients. A supply chain disruption can stop operations:

• Local vs. Global Suppliers: Local suppliers help to minimize lead times, but may not provide redundancy. International chains provide stability but are vulnerable to delays (e.g., shipping logjams).
• Perishable Goods: A power failure or equipment malfunction can spike the spoilage of inventory. Based on its estimates, the USDA calculates annual food spoilage costs to U.S. businesses at $161 billion.

Location Dependency

Location is everything in the restaurant business:

• Foot Traffic and Tourism: Event cancellations could drive down the revenue for a restaurant near a stadium or a tourist attraction.
• Co-Tenancy Clauses: If your restaurant is in a mall, a neighboring business’s closing could decrease foot traffic, and possibly invoke a co-tenancy clause in your lease.

Common Coverage Gaps and Pitfalls

Underinsured Risks

A lot of policies exclude certain types of risks that are important for restaurants:

• Spoiled Inventory: Ordinary BII may not apply to losses from power outages or equipment failure.
• Brand Reputation: There is damage to your brand for closures that are prolonged, but few policies address that intangible loss.

Contingent Business Interruption

This includes losses caused by supply or service provider disruptions:

• Supplier Disruptions: If your seafood supplier closes because of a hurricane, for instance, contingent BII would compensate for any losses incurred.
• Service Provider Outages: A crash of the POS system or your delivery app could halt business.

Equipment Breakdown and Utility Failures

Restaurants count on specialized equipment, and repairs can take weeks:

• Potential Exclusions: Wear-and-tear isn’t typically covered, but sudden mechanical failure might be.
• Utility Interruptions: Outages of power, water, or gas can impact operations, but coverage is limited and varies by policy.

Calculating Losses: Restaurant-Specific Challenges

Variable Income and Fluctuating Demand

It’s difficult for restaurants with lumpy revenue to project “lost profits”:

• Historical Data: Use past performance data to determine high (e.g., summer sales spikes) and low season averages.
• Fluctuating Demand: While an established fine dining restaurant may see seasonal upticks in sales, a food truck’s income may vary by the day.

Indemnity Period Realities

The indemnity period is the time to get back to business as usual:

• Rebuilding Timelines: Restaurants tend to have longer delays in getting back up and running because of permits, inspections, and equipment sourcing.
• Extended Restoration Period: This endorsement will cover long points of interruption.

Extra Expense Coverage

This includes costs to reduce downtime:

• Temporary Kitchens: Renting a commissary kitchen or pop-up space can keep catering contracts alive.
• Marketing Post-Reopening: Allocating funds for social media campaigns or discounts to lure back customers.

Actionable Steps for Restaurant Owners

1.     Assess Your Coverage Needs

For restaurants, distinct threats necessitate collaboration with insurance experts to understand the F&B sector. A standard BII policy might not fully address sector-specific risks including spoilage of perishable goods, supplier breakdowns, or food poisoning cases. To attain suitable safeguards, conduct an extensive risk evaluation with your insurer. An efficient method is scenario modeling, simulating events like a six-month shutdown due to fire or a 50% decline in earnings due to an economic fallout. Through these simulations, ascertain if your current policy limits and indemnity timelines are sufficient.

2.     Strengthen Your Documentation

Proper documentation and organization of your financial records are essential to a smooth and successful BII claim. Comprehensive documents for daily sales, expenses, payroll, and stock keep an open window on revenue patterns. This financial foundation rests on the conservation of supplier agreements, lease documents, and permit records. Furthermore, regular photographs of machinery, kitchen facilities, and premises constitute good evidence for determining damage after the event. Through cloud-based platforms, these records can be preserved digitally, ensuring instant access after their physical loss.

3.     Diversify Risk Management Strategies

One key to business resilience is to minimize the reliance on single-point failures. Power outages, particularly consequential for restaurants due to refrigeration needs, underscore the wisdom of investing in backup sources of power to prevent food waste and service disruptions. Similarly, spread sourcing mitigates the risks involved in single-vendor dependency; relying on just one vendor for critical ingredients leaves one open to massive losses in the event of delays in or suspension of production. Having relationships with other providers and alternative options ensures that you can continue to run your operations smoothly despite disruptions in the supply chain.

4.     Train Staff on Emergency Protocols

Training a team to effectively handle unforeseen incidents reduces downtime and loss. Regular drills for crisis response should be conducted, preparing staff to manage equipment malfunctions, gas leaks, or health department checks. For emergencies, clear role definitions speed up reactions. A plan for communicating with customers is necessary; specify how you’ll inform customers about temporary business closures or operational disruptions through social media, emails, or website updates. An upfront strategy during a crisis builds customer loyalty and maintains brand strength under disruptions.

5.     Work With an Insurance Specialist

Selecting a skilled insurance specialist acquainted with restaurant insurance elevates coverage quality. Experts grasp the BII complexities for F&B enterprises, guaranteeing your plan precisely matches your operation risks. Remember, the initial selection isn’t the end; continuous policy revisions are essential as your business expands. Adjustments for growth, menu diversification, emerging revenue sources, and inflation demand vigilant monitoring. Annual review appointments further ensure that your insurance strategy mirrors the evolution of your business, and closes coverage gaps that could expose you financially.

Conclusion

The unexpected can really shut down a business, but good Business Interruption Insurance (BII) should assist with a speedy turnaround. With bespoke coverage, sound documentation, and good risk management, a restaurant can protect itself against the loss of revenue and disrupt its operations.

Certain businesses need special insurance policies to deal with risks peculiar to their industry. If you own a bar, restaurant, or food service establishment, you need a policy tailored by experts who understand your industry’s challenges. From food contamination and spoilage disasters to equipment breakdowns and liability issues, there are lots of risks that should be covered.

Thus, at Gonzalez & Company, we handle insurance for restaurants and putting your business back into full operation after something unexpected happens. Our staff will work with you to create a custom program that includes key coverages so you will never worry about protection gaps. Now is the time to discuss your insurance needs so that you can have coverage in place for your business, come what may—contact us to get the right protection in place.