Article

Understanding Your Restaurant's Commercial General Liability Insurance Policy

For more than 30 years my father owned a small business. At least once a year he had to meet with his lawyer, his accountant and his insurance agent. While he knew that the advice these professionals were giving him was vitally important to his business, he never appreciated the services he received and dreaded the yearly meetings.

The lawyer was always too busy to give him enough time. The accountant was too persnickety and never understood how hard it was to profitably run a business. But he saved most of his hostility for the poor insurance man. "He is nothing more than a gloom-and-doom bookie. Taking my money all these years, I have never made a claim, and never had one made against me or the business, yet my premiums go up every year." This was followed by a string of curses and a statement as to how his profits were being eaten up by the yearly increase in insurance premiums.

My dad was a good businessman with an enormous attention to detail; but he never read or even really bothered to do more than glance at his insurance policy. When I asked him why he never read it, his response was pretty typical. "It's too boring to read, written in that legalese, with all those party-in-the-first parts, and therefores and herebys. It's also what I pay the agent for. He is supposed to make sure I have the right coverage and enough of it to protect us."

So, being the smart-mouth son with an expensive legal education I decided to sit down and read through his policy. You know what, my dad was right. The thing was too boring to read, the syntax was convoluted and confusing. Not only that, it must have been written by Lord Blackstone himself (William Blackstone was a famous 18th century English legal scholar). It had enough legalese to fill a courtroom. I made it through the first two pages and threw it back into the filing cabinet.

That futile exercise of some years ago got me thinking about how to best explain how your commercial general liability (CGL) insurance policy works. What is covered, what is not, and the problems you may face if you or a third party presents a claim.

First, Make a Pot of Coffee...

My second suggestion is to sit down and read the declarations page of your policy. This page summarizes the types and amount of coverage that your policy provides. It also usually indicates if there are any exclusions to coverage that might trigger the need for you to purchase additional types of insurance. I would then suggest that you read the policy itself. Thankfully, modern insurance policies have mostly done away with the hard-core legalese, and are written in something insurance companies like to call "plain English." As we will see, plain English ain't always so plain.

. . . If you have motor vehicles (such as a catering truck) used in your business, you need to get separate insurance for their operation, called fleet insurance.

You have CGL policy for the operation of your restaurant. If you have employees, you should also have workers' compensation insurance. (Most states require that you carry workers' compensation insurance by statute, depending on several factors including the number of employees.) If you have motor vehicles (such as a catering truck) used in your business, you need to get separate insurance for their operation, called fleet insurance. A growing number of restaurants purchase Employment Liability Practices Insurance (EPLI) to cover claims such as sexual harassment, wrongful termination, etc. The reason you need to get separate insurance for all of these diverse aspects of your business is a result of the coverages and exclusions contained in each of your insurance policies. This article will deal primarily with your CGL policy.

CGL insurance typically covers premises liability, products, and completed operations. This includes accidents on the premises such as slip-and-falls and hot liquid spills. Products and completed operations liability covers allegations from foodborne illnesses in your products. Also, your general liability coverage includes coverage for libel, slander and false arrest. Typical exclusions in a CGL policy include injuries to employees, workers' compensation, employment practices liability and pollution.

In some cases, but not all, the CGL policy covers liability arising from the serving of alcohol to your customers. Otherwise, alcohol liability insurance often is purchased as a rider to existing general liability insurance.

Claims Made vs. Occurrence

Most people understand that insurance is a risk-shifting contract between you and an insurance company that provides you with financial protection in the event of certain occurrences. These occurrences or the types of occurrences must be contemplated by the insurance policy if you are to be covered for the financial losses you, your business, or a third party (e.g., one of your customers) has suffered. Sounds pretty simple, doesn't it? Most of the time, the determination of insurance coverage is. Occasionally, it is more complex, so a brief understanding of how insurance policies work is necessary.

Insurance policies are of two types: "claims made" and "occurrence." Here's where things start to get confusing. Both claims made and occurrence policies cover occurrences. The difference is that an occurrence policy covers liability for occurrences that take place during the policy period, regardless of when it is first reported. A claims-made policy covers liabilities from claims made only during the policy period.

What is the practical effect of this? If you have an occurrence policy and are sued by a minor child many years after an accident occurs, you are covered, even if you no longer are insured, or have gaps or lapses in coverage. This situation might arise if a child is injured on your premises. (Depending on the state, the statute of limitation to bring a personal injury claim is generally two to six years from the time of the injury or when bodily harm caused by a negligent act is apparent or should have been apparent. However, an injured minor can wait until he is 18 before the time begins to toll.) Conversely, a claims-made-type policy would not provide you with coverage for this type of claim if there is a lapse or gap in coverage on the date that you get sued or get notice of the claim by the child. You would need to maintain that policy continuously to ensure against such a claim.

CGL policies are usually of the occurrence type, but depending on the type of coverage and the insurance program involved, could also be claims-made. This is done primarily for underwriting reasons, and an explanation of this is beyond the scope of this article.

What is Covered?

CGL policies give a broad grant of coverage for areas of potential liability. These areas of coverage are the following:

• Bodily injury
• Personal and advertising injury
• Property damage

A standard CGL policy contains language that says the insurance carrier will do the following: "...pay those sums that the insured becomes legally obligated to pay as damages to which the insurance applies. [Insurance company] will have the right and duty to defend the insured against any suit. [Insurance company] has no duty to defend against any suits seeking damages to which the suit does not apply."

Put simply, the coverage that is provided by the insurance company pays you or someone that is injured by your actions for the losses that are incurred, up to the limits of the insurance coverage. The insurance company will also pay a lawyer to defend you from a lawsuit as a result of a covered claim.

Limits of Coverage

It is extremely important to know the limits of your insurance policy. Most CGL policies provide for bodily injury and advertising limits of $1 million. (As noted below, advertising coverage pays for damages done in the course of oral or written advertisement that disparages, libels or slanders a person or organization's goods, products, or services.) With respect to the property damage portion of the policy, these limits are usually determined by the size of your restaurant and the amount and value of your inventory. Since this portion of coverage is dependent on your disclosure to your broker, you should make sure that you give your broker an accurate description of your gross sales and inventory quantity.

In some cases the standard limits of a CGL policy do not provide enough coverage to protect your business operations. Additional tiers of coverage called excess coverage are available. Excess coverage, oftentimes called umbrella coverage, provides additional financial resources in the event of a catastrophic event resulting in a large amount of claims or a very large single claim. Remember that excess coverage is secondary to a primary lower-level policy. You cannot just purchase an excess policy and expect it to provide you with coverage. Most single-unit restaurant operations do not need excess coverage. In some situations, like if you have multiple restaurants or have a fleet of vehicles, excess coverage is necessary. You should discuss this with your insurance broker if you have questions about the limits of your coverage and the level of risk that your business operations expose you to.

Bodily injury. This aspect of your CGL policy primarily includes the type of personal injuries that we regularly see in the courthouse, such as a slip-and-fall in your restaurant. It also provides coverage should you be sued for product liability, contending that you manufactured, repaired or sold a defective product that resulted in an injury to the plaintiff.

Personal and advertising injury. While the bodily injury portion of the policy provides coverage for the run-of-the-mill personal injury, the personal and advertising injury portion provides coverage for the more esoteric claims for defamation or advertising injury. This could be a claim for a copyright violation, a violation of The Lanham Act (governs trademark infringement), or a violation of Title III of the Americans With Disabilities Act (addresses public accessibility to your business).

Property damage. The property damage coverage portion of your policy usually covers all of your business operations for loss as a result of some type of property damage. This could be property damage to your building and its contents from fire, natural disaster, or theft. There is also business interruption coverage under this portion of your policy, which will cover your financial losses based on property damage from a covered event.

Exclusions to Coverage

Since the coverage in a CGL insurance policy is very broad, CGL policies contain very specific exclusions that are extremely important to understand. This type of policy is written to be far more specific about the exclusions to coverage than the portions of the policy that deal with coverage. Why? Because it treats the insured as being a party to a contract with much less bargaining power than the insurer. Therefore, in the view of the law, coverage will be presumed unless excluded by the terms of the insuring agreement.

Some of the common exclusions:

Workers' compensation. In most states it is illegal and a violation of both criminal and civil law to operate a business that has employees without adequate worker's compensation insurance. Your CGL policy does not provide coverage for this.

Employer liability. As noted above, coverage for these claims requires EPLI.

Contractual liability. Claims for breach of contract are not covered; however, most CGL policies will cover indemnity agreements, in which you have agreed to be responsible for another person's torts based on your legal relationship with that person.

Expected or intended injury. It is against the law to allow an insurance company to cover intentional injuries. Punching your customer in the mouth is an intentional injury.

Motor vehicles. The exclusions contained in the policy pertaining to automobiles, trucks, vans, etc., are quite specific and as stated, if you operate these as part of your business, special coverage should be obtained.

War or other major civil disturbance. This is an exclusion that is really far from clear, like when insurance companies will provide coverage. For example, during the Los Angles riots of 1992, most insurance companies paid benefits to their insureds for property damage as a result of the riots.

Alcohol liability. Never assume that your general liability policy provides such coverage. In fact, as noted above, liquor liability shows up as an exclusion. In the case of alcohol liability coverage, the policy language needs to be clear. Because the legal requirements to bring a lawsuit based on negligent service of alcohol vary by state, you need to ensure that the language on your policy provides adequate protection under the law, particularly since in some states, alcohol liability insurance is not an option; it's required to obtain a liquor license. It might make sense to have your attorney review your policy. (See "Avoiding Dram Shop Liability.")

Your Rights and Responsibilities Regarding Claims

In a perfect world, insurance claims would be handled quickly and efficiently by well-trained professional claims adjusters. Not only is this an ideal situation, in some states the law requires claims to be handled this way, with substantial penalties to insurance companies that fail to do so. As you might imagine, the majority of disputes with insurance companies occur when a claim has either been not acted upon quickly enough by the insurance company or has been outright denied. To understand your rights if this happens, you must know the difference between a first-party and third-party claim.

Insurance claims fall into these two types and the difference between the two is substantial. First-party claims are claims made by the insured (the policy holder), for covered losses. An example of this type of claim is a claim made under a CGL policy by the owner for losses to equipment and inventory as a result of a fire to his restaurant. Third-party claims are brought by another person or company, not the policy holder, against the policy holder for damages as a result of some type of activity, causing that person to be injured or damaged. An example of a third-party claim is a lawsuit brought by a customer against the restaurant for injuries and damages as a result of slipping and falling.

The major difference between first-party claims and third-party claims is that by virtue of the insurance policy between the insurance company and the policy holder, the company has a very high legal duty and responsibility to investigate and resolve first-party claims as quickly as and as reasonably as possible. In most states, the insurance company has no such duty for third-party claims. This is not to say that an insurance company can ignore or unreasonably delay the investigation and resolution of third-party claims, it just means that the company does not have a mandatory duty to act as quickly on these types of claims.

About Bad Faith

The duty that an insurance company has to its policy holders is known as the duty of good faith and fair dealing. Insurers that do not comply with this requirement are said to have committed bad faith to its policy holders. Bad faith by an insurance company can come in many forms; some of the more common ones are as follows: the unreasonable denial of a covered claim, the failure to properly investigate a covered claim, the failure to protect a policy holder's financial interests against covered claims and claimants. Most of the litigation involving bad faith revolves around these three forms of bad faith. While the insurance company has a duty to act in good faith to its policy holders, an insured has duties and responsibilities to the insurance company. The insured is also required to act in good faith toward the insurance company. You have to make a full and honest disclosure to the company in your insurance application, and comply with the reporting requirements regarding claims.

Making a First-Party Claim

If you have suffered a covered loss, the most important thing about making a claim is to make it promptly. Most CGL policies have reporting requirements that don't allow you much time to sit around and wait. Some policies allow you only 30 days to file a claim, so if you have any doubt about the time to report it, do so quickly. Once you have filed a claim, you are now under a duty to cooperate fully with the insurance company and its investigation into the claim. This would include answering inquiries about the claim and possibly even giving sworn testimony about the claim in an examination under oath.

If you have been requested to give sworn testimony regarding your claim, it is usually because something in the claim has triggered the suspicion of a claims examiner. It could be the amount of the claim, the timing of it, or your claims history. This is usually a good time to consult with an attorney, and I would suggest that you have an attorney represent you at the examination. Remember, you must be completely truthful and candid with the claims examiner; even an innocent misrecollection could trigger the denial of your claim. You should also be prepared to provide documentation to the examiner to substantiate your loss. This is especially true if you claim a large "personal" (i.e., not real estate) property loss, which should be easily substantiated through equipment, inventory and sales records.

What if a Third-Party Claim is Made Against Me?

Again, report it as soon as possible. If you have reason to believe that a claim is to be made against you or your business, you must report this timely and accurately. (For example, a customer is injured in your restaurant.) There are some very good reasons for the timely reporting of third-party claims, most importantly the preservation of evidence and testimony. Once you have notified your insurance company that there is a potential for a claim against you, you will most likely be requested to preserve any evidence that might be crucial in defending yourself in court. The company may also send investigators to take photographs, videotapes and witness statements, all of which should be done as close to the date of the incident as possible.

Aside from giving notice to the insurance company, you are required to cooperate with the insurance company and the lawyers hired to defend you in a lawsuit. This usually means assisting the lawyers in responding to discovery requests and compiling documents and answering questions relating to the claim.

Do You Get It?

While it may be unpleasant and confusing, insurance is a necessary part of all successful businesses. A CGL policy with the proper coverage should be the cornerstone of your risk management program, and not an expense to avoid. Your policy's language is boring, yes; however, hopefully, it doesn't seem so mysterious.

General Liability Insurance Underwriting Considerations

In the world of insurance underwriting, lower risk equals lower premiums. According to Steve Vicencia, CPCU of Vicencia & Buckely, an insurance brokerage firm based in Southern California, these are some of the underwriting considerations used when pricing and evaluating your general liability exposure. Consider these factors when trying to negotiate your rates:

• What about housekeeping? Are floors clean and well-maintained?
• What is the percentage of liquor sales? Once liquor sales exceed 40 percent to 50 percent of total sales, underwriters take a more conservative view of the risk. They will want to know if there's entertainment, happy hours, security and alcohol awareness training for employees.
• How many years of restaurant management experience does the owner have? New restaurateurs should have experience in the field and should have documentation, such as a resume to provide to insurers. Some insurers will not underwrite new restaurant ventures.
• Is there any catering, and if so, how much? Is there valet parking?
• What is the restaurant's claims history?

Pardon the Interruption:

Business Interruption Loss Insurance

You've suffered a fire in your restaurant. In addition to cleaning up the mess, replacing inventory and rebuilding, you have to suspend operations. Your losses not only include physical property, but income due to lost business.

A standard CGL policy does not provide complete coverage for all business operations; however, additional and optional coverage can be purchased as endorsements to the main CGL policy. One type of additional coverage is for business interruption.

This type of insurance provides coverage to pay for loss of income as the result of a covered loss to physical property. Business interruption insurance is available for an additional premium that is based on the amount of coverage, usually the amount of annual gross receipts.

The property damage portion of CGL coverage will provide cover for the loss or damage to the property itself, and the additional coverage under the business interruption portion of the policy will pay for the loss of income based on the property damage. To make a claim under this type of coverage, three conditions must exist:

1. A necessary suspension of operations.
2. Physical damage to covered property.
3. Caused by a covered loss.

Making a claim under this type of insurance coverage demands good record keeping. Claims under business interruption coverage require a great deal of proof and are subject to quite a bit of scrutiny by the insurance company. To substantiate this type of claim, the submission of financial records that demonstrate gross income for a similar period are examined to determine the parameters of your loss.

For example, let's say you operate in a strip mall, and your fixtures and equipment are damaged due to smoke from a fire in an adjacent store. The property damage portion of your CGL policy will cover the losses to the building, equipment, and inventory, while the business interruption portion will cover your lost income, if any, for having to cease operations due to the damage, if you can substantiate the loss through financial records from previous years of operations.

Be aware of the limits of this coverage. Here is an example of a loss that is not covered:

You own a restaurant in a location completely dependent on a two-lane road to bring in your customers. A series of snowstorms close the road for three days and force you and your staff to evacuate. The storms do not do any physical damage to your facility. Based on the loss of business income, your customers were unable to get to the restaurant, so you make a claim under the business interruption coverage portion of your policy.

Unfortunately, the claim would be denied. While your operations were suspended, your property did not suffer any type of physical damage and you cannot make a claim for the loss of income. Still, business interruption coverage is a very popular option, with 80 percent to 90 percent of all CGL policyholders opting to buy the additional coverage. According to the Insurance Information Institute in New York City, the annual premium for this type of insurance for a typical restaurant is less than $1,000.