Insurance premiums are one of the most significant fixed costs for many restaurants and bars, yet many operators have little control over how those costs are calculated. A growing concern in the industry is misclassification, where traditional insurance carriers assign establishments into broad, sometimes arbitrary categories such as "sports bar" or "full-service restaurant." While these labels may simplify underwriting for insurers, they often fail to reflect the actual risk profile of the business. The result can be steep premium increases that do not match an operator’s true exposure.
A small wine bar with limited hours and a primarily seated customer base may pay similar premiums to a late-night nightclub with live entertainment and liquor service, even though the actual liability risks differ dramatically. Is the owner active in the management of the operation? Do the bartenders actually follow the guidelines established by their certifications, training, and owner? Are the bathrooms clean? (Yes, in our opinion, that does matter as an evaluation factor.)
This issue arrives at a critical moment for today’s owners. Operational costs are rising sharply across the industry, affecting every facet of the business. Labor expenses have increased 31% over the past four years, according to the National Restaurant Association, making it the largest single cost for many establishments. Food costs have risen 29% during the same period, further tightening margins. In this environment, inflated insurance premiums can have an outsized impact on profitability.
How Misclassification Happens
Traditional insurers often rely on generalized industry codes or broad classifications to determine coverage and rates. These systems may overlook factors that significantly influence actual risk. Restaurants that appear similar on paper may operate very differently, yet insurers may treat them as identical.
Several operational factors are often ignored in standard classification systems:
- Hours of operation: Late-night establishments face higher potential incidents involving intoxicated patrons, whereas daytime or early evening venues may have lower risk.
- Type of alcohol served: Hard liquor carries higher liability than wine or beer.
- Entertainment and activity options: Live music, DJs, dancing, or games can increase exposure to accidents and property damage.
- Management and staffing practices: Employee training, incident reporting, and security measures mitigate risk but may not influence classification.
- Physical layout and location: Building design, occupancy limits and proximity to high-traffic areas can affect accident potential.
When these and similar factors are ignored, operators may be overcharged or underinsured. Lower-risk establishments often pay more than necessary, while higher-risk venues may still face gaps in protection. Misclassification creates both financial strain and operational vulnerability.
Financial Consequences for Operators
Misclassification can lead to inflated premiums, and when they are inflated due to broad or inaccurate classifications, operators may have less flexibility to invest in staffing, menu development, marketing, or equipment upgrades. Even modest increases in premiums can create pressure on already tight margins. Operators may face difficult choices, such as reducing hours, cutting staff or limiting menu options. Over time, this can affect the customer experience, operational growth, and long-term profitability.
The Importance of Transparency
A key challenge for operators is the opacity of underwriting processes. Many carriers do not disclose how classification decisions are made or what factors drive premium changes. This lack of transparency leaves operators without the information needed to contest or clarify their rating.
When insurers do not share the underlying risk assessment, operators may feel compelled to accept inflated rates or may inadvertently underreport operational details, which can jeopardize coverage if a claim arises. Clear communication between operators and brokers, and detailed documentation of operations, is essential to ensure coverage reflects actual risk.
Operational Factors that Influence Risk
Beyond classification labels, operators can influence their own risk profile through management practices. Documenting safety measures and operational protocols helps demonstrate actual exposure and supports fairer underwriting. Key areas include:
- Staff training: Consistent alcohol service education, emergency response training and customer interaction protocols reduce incidents.
- Incident tracking: Maintaining records of slips, falls or other claims helps insurers evaluate risk accurately.
- Security measures: Video monitoring, trained door personnel and access control systems can reduce liability.
- Operational adjustments: Changes in hours, menu offerings, entertainment or occupancy should be tracked and communicated to insurers.
Detailed records help ensure that premiums align with actual risk rather than generalized assumptions.
Steps Operators Can Take
While misclassification remains a challenge, operators can take proactive steps to protect their business and manage insurance costs effectively:
- Maintain comprehensive records: Track hours, menu items, alcohol service, entertainment, staffing, security measures, and operational changes.
- Review policies annually: Ensure coverage reflects current operations and risk mitigation practices.
- Work with experienced brokers: Choose brokers familiar with the restaurant industry who can advocate for accurate classification.
- Communicate changes promptly: Notify insurers of new operations, extended hours or menu modifications.
- Benchmark costs: Compare premiums and coverage against similar establishments using industry data and association resources.
- Invest in risk mitigation: Implement training programs, enhanced security and safety protocols to reduce incidents and support fairer classification.
- Consider alternative insurance structures. Some operators are exploring restaurant group captives, stand-alone/segregated cell captives or cooperative insurance arrangements, which pool similar businesses to create more tailored underwriting and potentially more predictable premiums. These options can provide a way to align coverage more closely with actual operational risk.
These steps give operators greater control over insurance outcomes, help align premiums with actual risk, and protect profitability.
Be Proactive
Insurance misclassification is a significant and often overlooked challenge for restaurants and bars. Combined with rising labor and food costs, inaccurate categorization can turn what should be a manageable expense into a major financial burden.
Operators who document operations, maintain safety and security protocols, and work closely with experienced brokers are better positioned to navigate insurance complexities. Proactive engagement ensures that premiums reflect true risk, preserves resources for operational needs, and supports sustainable growth.
In today’s environment of rising costs and tight margins, taking control of insurance classification is essential for long-term success.
Shawn Holland has been in the financial or insurance business for most of his career with a combined 25+ years of experience in these fields. He was one of the founding members of CIC Services and was instrumental in opening up the Southeast to the captive insurance company concept along with CIC’s partners. Shawn first worked for the company in Atlanta and then moved to Charleston, SC with his family 14 years ago to enjoy the coast and everything it had to offer. Between his time with CIC Services, Shawn founded a beverage company, a wine company, a brand management company and a vitamin/supplement company, further solidifying his knowledge of the capital markets, the trials and tribulations of entrepreneurship, risk management, and how business owners really think.
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