CLASSIFYING RISK
Full-service restaurant classifications
target specific customer bases
By Linda D. Ferguson
What a joy it is to have someone ask, "May I help you?" Instead of continually getting up from the table to get more soda or a napkin, or cleaning up after yourself in a self-serve eating establishment, it is a pleasure to have another person standing by, waiting to meet your dining needs. Yes, we pay for the pleasure, but some days it is well worth the money.
Last month we discussed the restaurant classifications that apply to the "eat and run" restaurants. This month we will finish the restaurant classifications by reviewing the full-service restaurant classifications. There are six classifications and all represent a special type of restaurant reaching out to a specific customer base. A change also occurs in that the terms "for profit" and "not for profit" no longer are attached to the classifications.
All of these classifications share one footnote which is important to the rating:
Although there is dancing permitted in the classifications, if the risk is designed more for the entertainment than the food or drink, it must not be classified as a restaurant. Therefore, nightclubs, cabarets and discotheques have their own classifications which must be used. The question centers around the draw. If the draw is the entertainment, then the restaurant code is not appropriate. The name of the risk and advertisements are guides in selecting the classification.
* Restaurants - with no sale of alcoholic beverages - with dance floor - 16813
* Restaurants - with no sale of alcoholic beverages - without dance floor - 16814
Any restaurant that has more than 500 feet of seating space, is not operated by a concessionaire, provides table service and does not sell alcohol must use one of these classifications. It is important to note the words "no SALE of alcoholic beverages." This does not preclude the sale of "set ups" in a "bring your own bottle" restaurant. The distinction between these two classes is the dance floor. Size of the floor and the type of music does not impact the rating but it should impact the underwriting.
In most communities, the nonalcoholic restaurants are considered "family restaurants" and specialize in satisfying the entire family. Children's menus are expected and children often are provided with some form of entertainment. Most family restaurants will not have a dance floor. When the dance floor is added, the risk is generally becoming more of an adult restaurant.
The next category introduces alcohol into the equation, and the following footnotes are introduced which apply to the remaining codes:
1) A risk can be called a restaurant, bar, tavern or pub and still be included in these classifications. Entertainment is permissible on the premises.
2) If a risk has its own microbrewery on premises, and sells the beer only on its own premises, there is no need for a separate classification. However, if the beer is sold off premises, those sales must be rated as beer, ale or malt liquor manufacturing.
* Restaurants - with sales of alcoholic beverages that are less than 75% of the total annual receipts of the restaurants - with dance floor - 16815
* Restaurants - with sales of alcoholic beverages that are less than 75% of the total annual receipts of the restaurants - without dance floor - 16816
Alcohol sales can be a significant profit maker for a full service restaurant. The alcohol sold can range from beer and wine at a pizza parlor to a full wine cellar and complete bar at a 5-star restaurant. The quality of the alcohol served will affect the tab for a meal more than the food that is purchased. It is not uncommon to see the alcohol represent more than 50% of a tab when both before and after drinks are purchased, along with wine with the meal. Many of these restaurants generate their profit from the alcohol, not the food.
* Restaurants - with sales of alcoholic beverages that are 75% or more of the total annual receipts of the restaurants - with dance floor - 16817
* Restaurants - with sales of alcoholic beverages that are 75% or more of the total annual receipts of the restaurants - without dance floor - 16818
ISO does not provide for a separate classification called Bars or Taverns. Even if the restaurant has 99% alcohol sales, it remains classified as a restaurant. This can cause quite a mismatch in this category, and therefore careful review of pricing is necessary. Some five-star restaurants will have sales of alcoholic beverage in excess of 75% due to the expense of the wine provided. Other taverns sell only snacks and therefore have a high alcohol sales percentage. The liability starting rate is the same for both although they are drastically different risks.
IMPORTANT NOTE: The last four classifications often have significant exposures that are excluded under the Commercial General Liability policy. The agent should carefully review the insured's business practices and consider the following options:
* Sale of Alcohol
The ISO CGL excludes liquor liability for any insured that is in the business of selling alcohol. Therefore, the insured must be advised to purchase a separate liquor liability policy for full coverage.
* Coat Check
The ISO CGL excludes property in the care, custody and control of the insured. If there is a coat check area, the insured must purchase inland marine bailee's coverage to provide coverage for the customers' valuable possessions.
* Valet Parking
There are two exposures that must be considered. First, the damage to the customers' vehicles. This damage would not be covered due to the care, custody and control exclusion in the ISO CGL. The insured would need to purchase a garage keepers policy for the coverage
Second is the liability if the valet attendant damages a person or property with a vehicle. The ISO CGL provides coverage for parking on the premises or on the ways next to the premises. However, if the valet parks the car off the block where the restaurant is located, there could be no coverage. If there is the potential for off-premises valet parking, an auto liability policy should be considered to provide full coverage. *
The author
Linda D. Ferguson, CPCU, has 30 years of underwriting experience with national commercial lines carriers. She now operates a consulting business, Pleasant Street Consulting Company, in West Union, Ohio.