Before You Sign: An Insurance Due Diligence Checklist for Hospitality Operators

Editor’s Note

An earlier version of this article appeared in the Oregon Restaurant and Lodging Association’s blog. Reprinted with permission.

Thinking about expanding your restaurant, buying a new property, or leasing a space for your next venture? It’s an exciting time. But some hospitality operators skip a critical step: insurance due diligence.

You need to look past curb appeal to understand the hidden risks of a property before signing on the dotted line. Is it insurable? And will you be able to afford the premiums? Here’s a brief list of issues to explore:

Start with a property deep dive

Put on an “underwriter’s hat.” An insurance company will look beyond the surface to assess the physical condition of the building, so you want to do the same.

• Get a professional to evaluate the core systems: Check the age and state of the roof, plumbing, electrical systems and HVAC. A history of water damage, mold or pest infestations can signal ongoing problems and future claims.
• Ensure the property meets all current fire and safety codes: Check for adequate fire exits, functional sprinkler systems and properly maintained alarms. Non-compliance can lead to denied claims and costly mandatory upgrades.
• Analyze the construction type: The materials used to build the facility directly impact its risk profile. Buildings made of non-combustible materials like concrete and steel are much more appealing to insurers than wood-frame structures. If you are considering an older building, investigate for hazardous materials like asbestos or lead paint that require expensive remediation.

Consider the natural disaster risks in your geographic area

Is the location prone to extreme weather, wildfires or earthquakes? These environmental risks can affect your insurance costs and coverage availability. Don’t assume your property is safe; you need to verify its specific vulnerabilities.

• Know the geography: Coastal and riverfront properties face flood risks. Grass and forest fires are common in some regions. Insurers look at proximity to fault lines like the San Andreas or New Madrid.
• Review local hazard assessments: Use official resources like FEMA flood maps and local government data to understand the specific risks tied to the property’s parcel of land. Insurance underwriters will use this same information to determine your eligibility and premiums.

Study the surroundings

The neighborhood and its infrastructure play a role in your property's overall risk. A great location for foot traffic might also come with challenges that impact your insurance.

• Look at local statistics for theft, robbery and vandalism: A high-crime area may require you to invest in additional security measures like cameras, alarms and lighting to get insurance coverage.
• Confirm proximity to emergency services: Check the distance to the nearest fire station, police station and hospital. An underwriter will note the response time of these services. Properties located far from emergency support often face higher insurance premiums due to the increased risk of severe losses.

Conduct insurance-specific due diligence

Looking at the property through the lens of an underwriter helps you avoid surprises when you apply for insurance.

• Request the property's loss history and inspection reports: Ask the seller or landlord for a “loss run report.” This document details past insurance claims related to the property and can reveal recurring issues like plumbing leaks or security breaches.
• Verify zoning and permits: Confirm the property is zoned for your intended hospitality use. Also, ensure all necessary permits are in place for any special features, such as outdoor patios, fire pits or structural additions. Operating without the right permits can invalidate your insurance coverage.
• Get an early insurance quote: Don't wait until the last minute. Contact your insurance provider for a quote based on the specific property. This will give you a clear picture of your potential premiums and any required endorsements, such as flood or earthquake coverage, which can significantly impact your cost structure.
• Check lender and landlord requirements: Your business loan and lease agreement (and franchisor, if applicable) may require certain insurance minimums. Make sure to factor these into your financial projections.

Prevent financial headaches

A thoughtful review protects your investment and prevents surprises that could disrupt your business — from unexpected insurance costs to claims that blow up your budget. It helps you make an informed decision, ensuring your new property is a foundation for growth, not a source of unexpected risk.

Your due diligence allows you to craft a thorough and compelling narrative for prospective insurance companies. Underwriters appreciate detail-oriented businesses that understand and actively manage risks.

Also, you can use the insurance, loss run and inspection information to negotiate repairs and terms before closing.

Learn more

Procuring insurance now requires the same level of diligence as securing a loan. Start by sharing the property address and planned operations with your insurance advisor.

A hospitality insurance and risk management specialist like Risk Strategies can help you identify potential red flags before your purchase or lease — and determine realistic insurance premiums and deductibles to build into your financial model.

You’ll want to finalize your coverage well ahead of opening to meet lender, landlord and franchisor requirements. For assistance with insurance due diligence and planning, contact hospitality@risk-strategies.com.