Insuring a restaurant: Choosing from a menu of coverage

Emmet Pierce

Restaurants can be profitable, but if you don't buy adequate insurance and don't train your staff to prevent legal problems, financial trouble may eat away at your business.

Rick Braa, a Seattle consultant who specializes in restaurant finances, says the restaurant industry is a tricky one because it's so people-focused.

"People are unpredictable. They can cause food problems. They can cause beverage problems. They can cause sexual harassment problems," Braa says. "If you hire someone who is not careful and they spill oil on the floor, you can end up with a workers' compensation claim and your insurance rates will go up."

It's not unusual for a restaurant to spend 1 percent of its revenue on insurance each year, Braa says. But that's not as inexpensive as it sounds, since many restaurants have narrow profit margins of 7 percent or less.

If you're new to the restaurant business, you'll be at a disadvantage when seeking insurance quotes, says Timothy Milaney, president of ISU Peterson Milaney Insurance Associates Inc. in California.

"When you are opening up a new restaurant, you have challenges because you have no track record," Milaney says. "The better your track record, the better your safety procedures, the better your rate."

Training workers to minimize claims

Claims from food contamination, kitchen fires or serving too much alcohol to customers usually stem from errors in judgment. Many can be avoided simply by hiring good employees and giving them the training they need to recognize mistakes that lead to insurance issues.

John O'Connor, vice president of product and platform for the small commercial sector at insurance company Travelers, says insurers will look closely at your operations and training programs before agreeing to sell coverage to you. They will check to make sure you have maintenance contracts on your cooking equipment to minimize the chances of accidents and service interruptions. They also will make sure that you maintain high standards for safety.

The potential for a fire exists anywhere that cooking occurs, O'Connor says. "We require most restaurants to have automatic extinguishing systems built into their stoves," he says.

Basic coverage

The basic coverage you'll need for a restaurant includes:

  • Property. This protects your personal property and inventory, along with any improvements you've made.
  • General liability. This protects you if anyone becomes ill after eating or is injured. It's also wise to buy an umbrella liability policy of $2 million or more to provide a cushion in case your standard liability policy isn't enough.
  • Liquor liability. Most states require restaurants that serve liquor to carry this coverage. It provides protection if you're blamed because a customer had too much to drink and later causes injury or damage.
  • Auto. Your policy should include vehicles you own and those owned by employees who are delivering food on your behalf.
  • Workers' compensation. This protects you if an employee is hurt at work. States typically require that employers carry some type of workers' compensation coverage.
  • Cyber liability. This can protect you from lawsuits involving credit cards and identify theft.
  • Employment practices liability. This covers claims stemming from hiring, firing, alleged harassment and discrimination. This may include coverage for claims arising from employee complaints about customer behavior.
  • Employee dishonesty. This covers losses caused by employee theft.
  • Loss of income. This can compensate you if you are forced to close. Policies differ, but typically you can be compensated for up to a closure of up to two years, says Derek Ross, an insurance broker in California.
  • Food spoilage or contamination. This is an ongoing risk that restaurants face.

Insurance for your business partner

If you own your restaurant with a partner, Milaney strongly recommends insuring his or her life. The idea isn't to make a profit from your partner's death, but to have a financial plan in place to keep the business going if he or she dies.

Be sure to make the policy big enough to buy out your partner's heirs. Without an insurance policy and a purchase agreement, you could be forced by your dead partner's relatives to sell so they can cash out their interest, Milaney says.

Under a typical buy-sell agreement, each partner buys an insurance policy on the other person's life. When a partner dies, the survivor can use the money to buy the dead partner's interest from his or her heirs.

"You never want to be forced to sell your business," Milaney says.

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