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Assessing Your Concept's Business Insurance

Since insurance carriers change their policy forms frequently the coverage you recieved one year may not be what you get when the policy renews. Operators who don't do the due diligence to understand if and how their policies have changed may find out at the worst possible moment, when filing a claim, that their coverage isn't quite what they think it is – and they're on the hook for more money than they assumed.

That's one reason Jeff Kroeger, head of commercial lines for World Insurance, recommends operators check with their broker when policies are up for renewal. Kroeger suggests operators ask about sales figures their policies are based on, any changes from the previous year, and whether the broker thinks price increases are warranted. You also might want to determine if there are any lines of insurance you have not been carrying but want to consider to protect your business.

If you haven't reviewed your business's insurance policies recently, this might be a good time to sit down with your broker to determine if you have adequate coverage and are getting the most favorable available premiums.

Workers Comp

Operators should not expect to see big increases in their workers compensation premiums when it's time to renew, say both Nicole Katz, senior vice president at CRS and Kim Patlis Walsh, president & managing director at CRS. However, you should take every effort to minimizes losses by maintaining a safe working environment to keep premiums affordable.

This is easier said than done in the current environment, with restaurant industry staff turnover high. Independent operators can be prone to cutting corners in onboarding and training. Emphasizing safe working practices through diligent training of new hires can reinforce a culture that can avoid losses. Tina Gerard, a sales executive with the John M. Glover Insurance Agency recommends operators adhere to the following practices:

• Maintain a clean and organized workplace. It creates an environment that reduces confusion and rushing during service, which can lead to slip and fall claims.
• Maintain kitchen equipment, service and sharpen knives.
• Use slip-resistant flooring and slip-resistant mats throughout the kitchen.
• Require all employees to wear non-slip footwear.
• Revisit safety training frequently.
• Have a return-to-work plan that outlines how an injured employee can return to work safely, which helps lower workers comp premiums.

Commercial General Liability

The biggest change in the commercial general liability (CGL) landscape is the rise of communicable disease exclusions, including viruses. It's unlikely that these exclusions can be removed or changed. Katz recommends operators try to get broad coverage that does not contain exclusionary wording regarding what's not covered. "Silence is best," she explains.

Liquor-related claims, including third-party liability, are typically not covered under CGL. Katz, Walsh, and Kroeger echo this is coverage operators should consider and review with brokers, with the caveat that liquor liability premiums are rising while insurers are imposing increasing exceptions, exclusions and limits.

Meanwhile, the liability for successful third-party alcohol claims appears to be increasing. As a sobering example, no pun intended, in December 2021, a Texas jury awarded a family of drunk driving victims more than $301 billion after the suspect was overserved at a Corpus Christi bar, setting a new record for damages for overserving a driver.

Katz and Walsh believe many operators are not buy- ing adequate coverage given this trend. They recommend coverage ranging from one to five million dollars for smaller operators. Premium prices vary based on the size of the business in terms of total revenue and the type of liquor being served, with hard liquor costing more than beer-and-wine-only. Liquor-centric concepts like taverns that might not find coverage through a national carrier must seek out programs that tailor to their needs, where costs are often proportionate to the excess risk.

Employment Practices Liability Insurance

Employment practices liability insurance (EPLI) includes coverage for defense costs and damages related to various employment-related claims including allegations of wrongful termination, discrimination, workplace harassment and retaliation. Many independent operators do not carry this coverage, putting them at significant risk. They do not have human resources departments to help avoid claims related to hiring and firing.

Restaurants can be particularly vulnerable to EPLI claims due to the culture of the business. Says Kroeger, any time employees are hanging out together after hours, there is a risk of blurred lines. This paves the way for claims for alleged sexual harassment and age, national origin, racial and religious discrimination stemming from favoritism in assigning shifts. Management and staff training can go a long way in avoiding these claims; however, you cannot control what goes on outside your four walls. EPLI offers protection in the event of these claims.

EPLI coverage can be added to a business owner policy as an extension or purchased separately; however, when it's added on to the business owner policy, the amount insureds are asked to pay if there is a claim, tend to be higher, Kroeger notes.

EPLI can be valuable protection, if you can obtain it, that is. EPLI insurers have been scaling back this coverage as a result of losses incurred during the course of the pandemic. Some insurers are dropping the line of coverage altogether. Others are raising premiums by 10 to 50 percent, says Jason Binette, EPL product manager for AmTrust EXEC. Walsh concurs that EPLI has "gotten more costly given 'MeToo' and class action cases. Most of those policies have pretty high retention levels," that create higher deductibles – the amount of the claim the insured party is expected to bear.

For independent operators, the good news is "mom and pop" concepts tend to have an easier time obtaining EPLI coverage, says Kroeger since EPLI premiums are based, in part, on the number of employees. While $25,000 is a common retention, Kroeger says some carriers will accept as a little as $5,000, depending on the claim history and location.

In the past, it was common for EPLI to cover wage and hour disputes. However, in recent years, there has been a shift to defense costs only, meaning the insurer will pay for legal defense, but not for claims indemnification. This puts the onus on operators to have strong business practices and good record-keeping in case a claim is filed, which they need to defend against.

"As long as your procedures for addressing tips and the way you pay employees is the same and you are documenting it, your defense coverage should be enough to protect you," Kroeger says. Still, he recommends that operators talk to their broker to understand the limitations of EPLI coverage, including around wage and hour lawsuits.

Walsh says wage and hour losses have become "staggering" in states that have pro-employee laws, including California and Texas, to the point where "coverage at any reasonable level" is unavailable.

As a result, she's noticed her clients moving to self-insure in this area rather than deal with the large retention rates insurers are requiring. In the self-insure approach, operators skip coverage and set aside a sum of money so they can defend against a potential claim or pay damages. Kroeger is reticent about advising operators to forgo EPLI coverage. "Unfortunately," he notes, business owners in general don't control what the allegations are, as egregious as they may be. I definitely wouldn't [omit coverage] unless it's really not in the budget to do that," he adds.

For operators who can't afford EPLI, Kroeger recom- mends having a trusted employment and labor attorney they can consult for advice on human resources matters, as well as strong business policies that standardize the way employees are treated and can be used to demonstrate business standards in the event of a lawsuit.

These include employee handbooks that spell out things like paid time off, tips, and sexual harassment. "If you get brought into a claim or lawsuit, it's going to be important to show you have consistency among what you share with em- employees and train them on," he says. Documented standard procedures for employment screening and interviewing are important for this reason.

KEEP LEARNING…

Business Interruption Insurance

Business interruption insurance can save a restaurant in the event of fires and floods; however, when restaurant operators turned to their business interruption insurance to cover pandemic-related losses, they had a rude awakening. Claims were denied because business interruption insurance requires that a physical loss take place before business owners are eligible to file a claim. There's also a communicable disease exclusion on these policies. As Katz puts it, "business interruption only kicks in when you have a covered loss that translates to loss of revenue or having to shut down."

Given that insurers did not cover pandemic-related losses, leaving operators on the hook for business closures required by state and local governments, is this a coverage area operators should continue to purchase? Yes, Katz says, and most are: "We very rarely see companies self-insuring for business interruption because if they have any loans or leases, those third parties are going to require business interruption for at least a minimum of 12 months to show they would be capable of getting reimbursed to pay for continued expenses like rent, mortgage, or a loan."

Given these factors, business interruption insurance is probably going to be required except in cases where operators own the real estate and have no loans where a third party would require coverage. The cost of business interruption insurance depends upon how much coverage is desired or required, with 12 months being the most common.

Restaurants can be particularly vulnerable to EPLI claims due to the culture of the business. Says Kroeger, any time employees are hanging out together after hours, there is a risk of blurred lines. This paves the way for claims for alleged sexual harassment and age, national origin, racial and religious discrimination stemming from favoritism in assigning shifts.

Katz says operators who are looking to lower the cost of business interruption insurance can consider purchasing less, such as eight months instead of 12, provided they have "strong contingency plans in place." She gives the example of a restaurant with two locations: If one location is forced to shut down – for instance, due to a fire – they can report a smaller amount of business interruption because they would be able to make up the revenue at the second location. In this case, operators should be prepared to explain to the underwriters why they are reporting less coverage and show the controls in place that support a faster return to operation.

"Erring on the side of caution is a better risk management process than under-reporting," says Katz. For this reason, she still recommends reporting 12 months of lost revenue due to business interruption because you never know what could happen.

Some businesses are opting for critical supplier interruption insurance if they rely on a sole supplier for a product and the supplier isn't able to deliver due to losses at their facility – the operator takes the loss. Katz explains that suppliers tend to have force majeure language in their contracts, which allows them to avoid liability for natural and unavoidable catastrophes and protects them from having to pay out for losses as a result of natural and man-made disasters. If an operator is dependent on the supplier, they will have no recourse.

Cyber incidents are also a growing area of concern addressed by business interruption insurance. It is a necessity for the financial and healthcare industries, Walsh says, but now cyber-attacks are hitting almost every industry. These attacks can come directly or through third-party systems like a POS. Walsh thinks it's time for independent operators to seriously consid- er cyber insurance. Not only are there financial losses, there may be reputational losses as a result of a data breach that exposes customer credit cards and other sensitive information.

Cyber policies tend to be broad, offering coverage for things like data breaches, phishing, ransomware, or POS data breaches that impact the ability to do business. Kroeger says it's better for independent operators to have their own cyber insurance rather than rely on an arrangement with their POS provider, because damage caps could come into play that make it challenging for operators to recoup damages. "If you're a restaurant and your sales are $1 million a year you can expect $1,000 to $2,000 costs annually for this," Kroeger says.

"The trend is moving toward more regulations and more guidelines in order to get coverage," says Kroeger. He says he's seeing insurance companies require protective business practices including multi-factor authentication, data security assessments, and encryption where employee records are kept. Understanding risk mitigation measures not only helps keep premiums affordable, it can keep the business safe from cyber-attack.

Tips for Lowering Policy Premiums

Adopting the risk management practices mentioned above may reduce the likelihood of a claim arising or net a discount on premiums. When asked for other ways operators can save money on their insurance premiums, Kroeger admits it can be tricky.

Sales figures are the barometer for many lines of business insurance. Historically, operators have tended to low-ball their sales figures to reduce their premium – and they got away with it because insurers weren't paying attention. Now, says Kroeger, insurers have caught on. They're correcting for past oversight, and operators are paying more as a result.

Kroeger recommends operators take a look at their sales to see if they're giving accurate figures to their brokers in the first place. This can help avoid a surprise bill with carriers that use end-of-term audits to essentially course correct the premium payment, a practice that can stick operators with big bills if it turns out sales were far beyond what was projected.

Talking to your broker is the first option for operators who want to cut costs. Understanding what the end of term audit entails will help operators prepare for that potential increase so they aren't caught off guard. For restaurants in the startup phase, a broker can offer valuable insight in the lease negotiation phase, particularly when landlords are calling for excessive coverage limits.

Some insureds will look at square footage as a rating base instead of sales figures; these are "few and far between but still out there," says Kroeger.

Ultimately, says Kroeger, risk management and claims history impact premium rates. "Being proactive to control the risk is the most important part," he advises, recommending that operators properly train employees and maintain a safe facility.

Ultimately, Walsh and Katz recommend operators think about their risk appetite and ask themselves if they would rather pay for coverage at the quoted rate or self-insure and be financially responsible in the event of an incident. For many small businesses, this is not feasible.

QUESTIONS TO ASK YOUR INSURANCE BROKER

Can my business lock into a premium quote with a multi-year policy contract?

INSURANCE IS ONLY ONE ASPECT OF RISK MANAGEMENT

Risk management includes other steps, such as identifying and analyzing the loss exposures you face. For example, a restaurant with a club upstairs that has live or recorded music and dancing would identify loss exposure differently from a family restaurant serving only beer and wine without a bar or lounge area.

Once you've identified your exposures, determine how to address them. These options usually include buying insurance, eliminating the exposure, or retaining the risk. Despite your overall insurance program, you should practice these risk management techniques on a regular basis.

• Establish an employee handbook and update it annually.
• Establish a safety program including safety training.
• Maintain and periodically service all fire suppression systems, including fire extinguishers.
• Always maintain good housekeeping in front and back.
• Provide alcohol awareness training.
• Establish proper food handling procedures.

While these steps sound theoretical, small-business owners do this all of the time. A good example is EPLI coverage. Some restaurant owners do not want to pay the cost of this coverage ($5,000 to $15,000 per year) so they retain the risk and work with their attorney to institute an employee handbook, sexual harassment policy, and careful "at-will" wording on their employment applications. These are risk management techniques that are used by small businesses every day.

Just know that risk management is not a static process. You need to monitor your decisions over time, and make changes where necessary, including purchasing more insurance to keep up with changes and growth in your business.

A REVIEW OF RESTAURANT BUSINESS INSURANCE

Commercial and general liability insurance. A commercial general liability (CGL) insurance policy is the most basic form of business insurance and the first line of defense against many common claims. General liability insurance covers claims of bodily injury or other physical injury or property damage. It is frequently offered in a package with property insurance to protect your business against incidents that may occur on your premises. Such insurance also allows you to continue operations while claims are settled.

CGL policies cover claims in four basic categories of business liability, including bodily injury, property damage, advertising injury and personal injury as well as slander and libel.

Property and casualty insurance. Property insurance covers against damage caused by fire, explosion, earthquake, lightning, water, wind, rain, collision and riot. In most cases, water damage is not flood damage, and a separate policy should be investigated. Also, hurricane coverage will have two components: one for wind/rain and the other for storm surge. Casualty insurance protects the insured against a variety of losses, including those related to legal liability, burglary, and theft, accident, property damage, injury to workers, and insurance on credit extended to others.

Third-party alcohol liability insurance. This insurance provides coverage if someone is injured or killed by a patron who was overserved alcohol or a minor who was served at your restaurant or bar. Some commercial general liability policies incorporate this coverage into the policy, but not all. Settlements and jury awards arising from these claims can be staggering.

Business interruption insurance. This is insurance that compensates you for loss of business due to a variety of factors, including damage to your facility. It is valuable coverage, but you should read the policy carefully and make sure you understand the circumstances under which it provides coverage, which are more limited than many operators believe. For example, in a southern town a number of years ago, an interruption to the town's water supply forced all of the town's restaurants to cease operations on a busy weekend. Business interruption coverage did not apply in this situation, although revenue loss was high.

Workers' compensation insurance. Most states require this form of insurance for business with more than a couple of employees. So, even if you wanted to be "self-insured" for worker injuries, you could not do so legally. In fact, workers' compensation insurance protects both the employee and employer. For the employee it provides swift compensation for injuries incurred in the course and scope of duties.

For the employer, it provides limited liability for the employer. If every worker had to adjudicate in the court system relief for workplace injuries, it would be cumbersome, expensive, and in many cases, unfair to all parties.

Employment practices liability insurance. In fact, very few small businesses carry Employment Practices Liability Insurance (EPLI); however, many should consider it, especially in this day and age in which employment claims are on the rise. EPLI provides broad insurance protection from such employment-related claims and lawsuits brought against a company, its managers and employees, and its directors and officers.

This covers a wide range of legally protected workplace issues such as age, gender and other forms of discrimination; sexual harassment; wrongful discipline and termination; negligent hiring, promotion and compensation decisions; breach of employment contract; emotional distress/mental anguish; invasion of privacy; slander or libel; and mismanagement of employee benefits.