How to Factor Insurance Into Your Restaurant Business Plan
Insurance agent Marty Haake tells the story of an accident at one restaurant where an employee dropped an item on his foot, causing a pretty nasty injury to his toe. The employee went to the emergency room and workers' compensation insurance covered the expense, which was just a few hundred dollars.
Many restaurant owners or general managers, trying to keep workers' comp claims to a minimum, thus keeping insurance premiums to a minimum, might have been tempted to simply pay for the injury out of pocket. However, this employee didn't care for his wound properly. It became infected and after weeks of treatment, antibiotics and office visits, the toe was eventually amputated. Total cost: More than $15,000.
The moral of the story is this: Don't try to be your own claims adjuster and don't try to cut corners when making insurance decisions for your new restaurant. Bypassing insurance is a dangerous game. In the above example, the employer could find itself without coverage for the employee's injury, and be liable for a large amount of money. Without the proper coverage or by avoiding compliance with the reporting requirements of your insurance, the uninsured liability of a catastrophic injury to a guest or worker could force the business into bankruptcy.
"Starting a business usually involves a huge cash outlay, but if you cut corners on this, it easily could be the end of your business before you ever get started," said Kip Diggs, a spokesperson for State Farm Insurance of Bloomington, Illinois.
"It's the least favorite task I have as a business owner, but when talking about insurance, I turn off my cell phone, shut the office door and focus," said Tom Ryan, owner of The Pizza Shoppe in Platte Woods, Missouri. His family has been in the restaurant business for nearly 40 years and the right insurance is one thing that has allowed the Pizza Shoppe chain to grow to 25 stores in four states.
So with advice from restaurateurs who have "been there, done that" and other insurance industry experts, selecting the best insurance for your business may become a little easier and a little less frustrating.
Business Insurance Review
Let's start with a primer on the types of insurance carried by independent restaurants:
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.
Coverage in the event of a terrorist attack is another tricky issue, which should be discussed with your agent. 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 Cary, North Carolina, last summer an interruption to the town's water supply forced all of the town's restaurants to cease operations on a busy weekend. According to the North Carolina Restaurant Association, operators' 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.
When to Start
Those are the basic types of coverage you need to think about, and thinking about them sooner than later is important. Too often, insurance is on the secondary list of tasks to accomplish and it really should be equal to the concept and business plan.
An estimate should be a part of your restaurant business plan. Unfortunately, due to the insurance carrier's regulations, a formal quote is usually only valid for 30 days, so an estimate is what will be built into your business plan. "Before you start making commitments, signing leases, interviewing employees or buying supplies, your insurance should be in place," said Diggs of State Farm Insurance.
However, Steve Spalding of CSI Insurance in Dallas believes insurance should be a factor as early as planning the concept. "I have seen restaurant owners make slight adjustments to their marketing and or menu to encourage more food sales just so that they can continue to qualify as a restaurant, not a tavern, as it pertains to insurance," Spalding says.
Most insurance carriers have internal artificial requirements that must be met to qualify for their coverage. The more carriers you can qualify for, the better, because of increased competition. Standard qualification items include a sales mix of less than 40 percent alcohol; limited live music allowed; and presence of a dance floor.
"Being aware of the artificial requirements is beneficial because slight adjustments can put you into an entirely different category with higher pricing," Spalding says. Equally important is to have an insurance expert review lease requirements before you sign the lease.
"I can't tell you how many times we have clients call who are locked into onerous insurance requirements from the landlord," Spalding says. "After the lease is signed, normally the insurance requirements are not negotiable and you may end up paying for coverage not needed, and not be covered in areas you wish you had been covered in."
For example, if the building you are considering was built before current city codes in your community, a special insurance that covers changes in building codes or the enforcement policies of the city may be a wise decision. All of this simply reinforces that purchasing insurance, however unpleasant, should not be left to the last minute. If you don't spend time shopping, you are likely going to pay more or risk having inadequate coverage.
Finding a Broker
To find an insurance broker in the restaurant business, look first to your local and state restaurant association; for example, some restaurant associations, such as the Missouri Restaurant Association, band together to buy property and casualty insurance at a discount to its participating members. Others have self-funded workers' compensation funds that offer mandated safety programs and often pay dividends to participants.
Most restaurant associations provide their members the names of endorsed companies that have a proven track record in the region. An agent or company with a presence in your state of business is important for evaluating various alcohol liability laws, workers' comp issues and even weather and environmental conditions unique to your area.
"Don't go to your brother-in-law or cousin who sells life insurance for your restaurant needs," said Pat Bergauer, executive vice president of the Missouri Restaurant Association. "The nuances of insuring a restaurant are far different than most other insurance policies, so you need a proven expert."
A common element of coverage often overlooked by those not familiar with the restaurant business is "business interruption coverage." Such interruption is often associated with natural disasters, such as tornadoes or hurricanes.
Your property and casualty insurance might pay for spoiled foods when an ice storm takes out electricity to the entire city, but business interruption coverage will reimburse you for the cash flow lost when guests are not coming through the door, for whatever reason. But read the fine print to be sure.
Two windstorms in three days in St. Louis in July 2006 left much of that city without electricity for more than a week when temperatures were nearing the 100-degree mark. There was little physical damage to property; therefore, many restaurant owners were surprised when their business interruption coverage did not kick in. Many were also surprised when the coverage for "off premises power failure" did not kick in, according to Steve DeMaster with Crane Insurance Agency in St. Louis. His company insures 500 restaurants in the Midwest.
"I've been in the business of covering restaurants for 25 years, and this is the worst I have ever seen," DeMaster said. "There was no part of the city left untouched, and yet there was so little physical damage." The problem was that power transmission lines, already weakened and overloaded in the high temperatures, snapped in the strong winds all over the city. And many policies written in the Midwest that cover off-premises power failure exclude power failure caused by damage to transmission lines. The coverage is basically for transformers and power plants.
As soon as power was restored, DeMaster's company got to work on filing 66 claims for restaurant owners who had the appropriate "spoilage" coverage. Many of those claims were in excess of $20,000 in losses. DeMaster estimates that another 30 clients who thought they had coverage lost at least that much, and will struggle in a locally stale economy to keep in business while they recoup those losses.
"Restaurateurs are by nature independent and risk takers, and this is one of those risks," DeMaster said. "They have a bad habit of underestimating the value of food in order to keep their premiums low, and this can be the result."
Another result of the storm is that DeMaster is seeing a number of clients spend more time asking questions, checking each line of their policies, and often adding coverage from a harsh lesson learned.
Asking For Help
Bergauer often sees new restaurant owners who are afraid to contact their competitors for advice on insurance needs. That's a mistake, in her opinion. "Particularly when you are a member of a restaurant association, I think the new restaurant owner needs to look at others in the business as a support group, not competition," she said. "When that happens, the entire industry grows and becomes more productive for everyone involved."
Time is an important commodity for the busy restaurant owner or manager, particularly in the start-up phase, so finding an experienced insurance broker of restaurant/hospitality insurance will save valuable time and allow you to focus on more enjoyable tasks. A good broker will, in many ways, function in the capacity of a consultant, looking at all details of your restaurant operation.
For example, for every million dollars in sales your restaurant generates, you should have no more than two liability or two workers' compensation claims. "If you have more than that, a good insurance broker knows you are not functioning at your best and will help you identify the causes of those claims before your premiums begin to rise," said Haake, whose company insures 1,500 restaurants in the Midwest.
"A less experienced broker may not recognize the problem, which will end up costing you money," he said. Some restaurateurs may recommend specialty brokers for specific needs, but Haake says that an agent who specializes in hospitality and entertainment will be able to write any type of policy you need, including liquor liability.
Shopping for Rates
Comparing insurance policies and prices is sometimes like comparing apples and oranges, but there are a few basics that should make the process easier. Workers' compensation insurance and general liability insurance are the most basic.
Since workers' compensation is based simply on the extent of your payroll, it should be the easiest to compare a variety of companies and policies. Review at least three or four options in each of the four major types of coverage. If you are a small restaurant with sales of between $1 million and $1.5 million annually, you should review and compare your coverage at least once a year.
However, if you are experiencing rapid growth, you should review your coverage at least once a quarter. And remember that workers' compensation premiums are auditable, which means you may be fined by government agencies if your coverage is not adequate. "Comparing insurance coverage is somewhat like comparing a fast-food burger with a gourmet burger," Haake said. "It comes down to quality and details in the experience, and that is often developed in the relationships between you and your broker."
Cutting corners to reduce costs is not a wise decision either, Spalding says. "Leaving out a type of coverage because of 'it will never happen to me' syndrome is disastrous," he said. "Think long and hard before dropping liquor liability, nonowned auto, business interruption, food spoilage, crime/theft of cash, because they are most likely going to come back and bite you."
Truth About the Consequences
Even though experienced restaurateurs with properties of all sizes agree that insurance decisions are time-consuming and often filled with frustration, they will also agree with the value of taking time to make the best decisions and investments possible.
"Otherwise, you will personally have to bear the consequences," Spalding says. "Even if you are protected by a corporate structure, if assets are available, most good plaintiff attorneys will make every attempt to go after those assets. Just the legal defense can be long and costly, and good insurance will cover those costs."
