In keeping with the holiday spirit (what’s a holiday without food?), today’s post is for those in the business of serving food – restaurants & caterers.
“What type of coverage do I need?” “What can I expect as far as costs?” Questions of this nature are some of the most common ones I get from people looking to open a business or purchase a property.
If you are considering opening a business in the food service industry or are already in operation and want to double-check that your insurance is in order, this post is for you. Hopefully, by the time you reach the end of this post, you will have a better idea of which types of coverages are necessary, which are more of a ‘good to have’, and what is minimally useful or perhaps not at all necessary.
Figuring Out What You Need
In determining appropriate coverage, there are some key questions that owners in any industry need to address, and the food service industry is no different.
What are the things that can potentially go wrong and what type of insurance, if any, can address them to prevent a business from going under?
Are there any contractual (I.E. leases, lenders) requirements?
Are there any legal requirements? These may vary by location and specifics of the establishment, but this would typically include workers comp, disability/paid family leave, or liquor liability.
What follows should not be relied upon as an exhaustive treatment of all coverage that will ever be needed for food service companies. In the interest of keeping to the basics, I have eliminated some coverage types that will not be relevant to the vast majority of establishments in the food service industry.
Understanding the Two Basic Coverage Categories
The types of insurance that would be relevant can fit roughly into 2 categories – first-party and third-party.
Direct financial loss of an entity being insured is addressed by first-party coverage. This could be a result of a fire damaging a building, cooking or other equipment, furnishings, food stock, loss of profit, theft, or other similar damages. In the event of a claim, the policyholder will be the one receiving the reimbursement check.
Third-party coverage would address legal liability, such as those alleging negligence on the part of the food establishment. Types of claims would include slip and fall on premises, food poisoning, allegations from a competitor such as – unfair competition or defamation, breach of clients’ sensitive data, accidental double-booking an event and/or last-minute cancellations that cause a potential client loss or aggravation, employee injury, various types of employee allegations (usually an x-employee) including but not limited to discrimination, allegations related to FLSA violations (minimum wage, overtime pay, recordkeeping, child labor).
In the event of a third-party claim, the person or entity that allegedly suffered the damage would be the recipient of the reimbursement check. The insurance company would typically cover the policyholder’s legal fees as well. As long as the type of incident being alleged is a covered claim on the policy, typically it would be covered – even if the allegations are completely fraudulent and groundless.
Some policy types don’t fit neatly into either category and contain elements of both. Examples of this are cyber and auto.
While the types of things that can go wrong will vary from one establishment to the next even in the same industry, I will try and cover the areas that are generally most relevant. It is important to make sure that you consider your individual circumstances. If you have any questions pertaining to your own establishment, please reach out and I will be happy to assist.
General Liability – One of Your Most Critical Coverages
If someone trips and falls, is sickened by food poisoning, or a competitor alleges defamation – these types of claims are addressed by a general liability policy. An example of where this coverage type would respond are cases similar to the well-known lawsuit against McDonald’s where a woman spilled a hot cup of coffee on herself and suffered third-degree burns.
General liability is considered one of the most important coverages that every food establishment should have in place. Restaurants are highly trafficked areas and slip/trip and falls can be quite common. The risk is further increased by the potential for spilled drinks or slippery food on the floor, which presents slip hazards until they can be cleaned up.
There are also clear risks associated with allegations against an establishment that relate to the food itself, such as food poisoning. Claims of this nature can allege undercooked meat or fish, e. coli contamination, spoiled food or other similar allegations. Cases of sickened patrons suing for damages are very common. Typically, in the event of illness caused by food, there will be multiple sickened patrons compounding the damage and potential financial impact. These types of claims would be addressed by the product liability provisions of the general liability policy.
Often there are contractual or legal licensing requirements as well that would require this type of coverage. This type of coverage is third-party and the individual or entity that put forth the claim for damages against the establishment would receive the payment directly from the insurance company.
When Does Liquor Liability Come Into Play?
If your establishment serves alcohol, you would also want to make sure you have liquor liability. If someone becomes intoxicated at your establishment or event and gets into an accident or a brawl, the affected parties may be able to sue the establishment that served the liquor. Laws that place liability on the establishment that served the perpetrator alcohol are called dram shop laws and can be very strict. One case where these laws came into play is the one involving Beer Belly’s Sports Bar in TX. An overserved customer was involved in a fatal accident that killed himself along with 2 people in another vehicle. Beer Belly’s Sports Bar was slammed with a jury verdict that awarded $1.04 billion in actual damages and $300 billion in exemplary damages to the victim’s families. It is the largest personal injury award in U.S. history. Often this coverage would be a legal requirement in order to obtain a liquor license. Liquor liability can be included in the general liability policy or purchased separately.
First-party Property Protection
Nearly all establishments will have some form of property to insure. This can be a building, equipment, furnishings, stock, or income loss (that results from an incident type that the policy covers). These types of claims are addressed by a property policy. Establishments in the food service industry have an elevated risk due to greater exposure to cooking and fires.
An area of notable significance to establishments in the food service industry would be equipment breakdown coverage, which can address loss resulting from various types of power outages. It would also come into play under certain very specific circumstances when the equipment damages itself or other property.
Equipment on the Move
Somewhat related to auto coverage, if the business has expensive equipment such as ovens etc. that they travel with, it may make sense to cover that under an inland marine type policy. These types of policies are more appropriate than typical property policies when it comes to covering equipment that does not have a permanent base and is frequently moving around from place to place.
Employee Related Coverages
Having employees comes along with a varying set of risks and legal requirements and is one of the most important areas of any insurance program.
Workers Compensation – Employee Injury on the Job
Nearly every state will require the establishment to carry workers comp coverage for their employee’s injuries on the job. Employees in the food service industry are exposed to unique risks related to handling food. This includes cuts from handling sharp knives and cooking-related burns. Establishments that do not carry required coverage can face strict penalties and in the event of injury may be personally liable for any payments that the insurance company would otherwise have paid out. Important to note that employees paid in cash or 1099 are still considered employees for purposes of workers comp. States utilize a checklist to determine whether an individual is categorized as an employee or an independent contractor. Very often what you might think is an independent contractor and exempt from workers comp is in fact considered an employee. In the event of an injury, an employee may well seek assistance from a lawyer and can quickly turn into a huge mess. I have heard many (lack of) workers comp horror stories; it is not worth risking it. Make sure you are properly addressing this area.
Some workers comp considerations to be aware of are that varying states will have different laws. It is important that they are correctly addressed. If you operate in multiple states, reach out and I will be happy to advise further. Another consideration is making sure employees are correctly classified. Misclassification can often result in overpayments on premiums. If you operate in multiple states, another area to be aware of is the fact that aside from having varying laws, different states utilize different employee classification systems.
Disability and Paid Family Leave – Partial Salary
Some states, such as NY & NJ, require businesses to carry disability & paid family leave for their employees. This comes into play when employees are injured off the job or give birth and provide a portion of the employee’s salary while they are out. They are typically combined into one policy.
Wrongful Termination, Harassment, Discrimination
Also employee related, are claims resulting from allegations of violating laws related to employees. Some of these were alluded to above, but they run the whole gamut from harassment to a list of about a dozen or so categories. The most common type of claim in this area are those that allege wrongful termination. Some companies also include coverage that relate to immigration laws. The coverage type that addresses this area is called EPLI (employment practices liability insurance).
Of special relevance to the food service industry is the option to include third-party coverage. This is not to be confused with the way I was using this term throughout this post. In this case, it would refer to non-employee-related allegations of discrimination and the like. Suppose a client is turned away and they allege that it was due to some form of illegal discrimination, claims of this nature are where third-party EPLI coverage would play a role. Lawsuits brought by employees or ex-employees against their former employers are very common and often stem from bruised egos.
There are a number of high-profile cases that involve incidents where third-party type liability coverage would play a role. A number of them are in the food-service industry. One of them involved a baker in Colorado who refused to prepare a cake for an event that ran counter to their religious beliefs. Another involved a pizzeria in Indiana that refused to cater an event for similar reasons.
Business Auto
Any establishment that owns vehicles will need to have business auto coverage. Special considerations for the food service industry would be any modified vehicles, it would be important that they are correctly accounted for in the policy so that in the event of a claim the reimbursement should match any value that was added by the modifications. Coverage can include first-party such as comp/collision and will also include mandatory third-party liability. When it comes to operating a business, it is important that sufficient liability limits are maintained in order to protect the company’s value and assets.
Errors & Omissions – Mistakes Happen
Allegations against your establishment of physical property damage would be addressed by general liability coverage, but what would happen if someone alleged that they suffered pure financial loss or aggravation due to negligence of your establishment? An example of this might be if they were informed at the last minute that you were accidentally double booked or you were forced to cancel an event for any other reason. The client then needed to make last-minute plans to find a replacement which cost them much more. They also need to notify their guests of any venue changes. Or worse, they couldn’t find a replacement – if this was a key fundraising event they might allege having lost a tremendous amount of donations that they would have otherwise obtained. These types of claims might be addressed by an E&O (errors and omissions) policy.
Protecting Against Ransomware, Hackers and Other Bad Actors
If your establishment holds sensitive client or employee data, then there is a risk of privacy breach liability. This can be addressed by a cyber policy. Types of sensitive data would include ss#, driver’s licenses, credit card information, and other types of sensitive information. Cyber policies also come into play in a host of other situations, including but not limited to cases such as ransomware and social engineering – which is when a bad guy impersonates someone you or your employee trusts and tricks them into transferring funds to their own accounts. Unfortunately, cyber claims in general and social-engineering type claims in particular, are becoming more and more common, as perpetrators become more sophisticated in their techniques.
When the Offered Liability Limits Don’t Cut It
Often, you might need higher liability limits than those offered by a particular insurance company. Extending liability limits higher for many of the liability type policies above can be accomplished by an umbrella or excess liability policy.
No Need to be Overwhelmed; Get the Right Assistance!
Before you think “Wow, this is an incredible number of policies and premiums, how is anyone supposed to manage all of this?”, you should be aware that many of these coverages can be packaged together in different bundles. There are insurance programs available that are specially designed for the food service industry that offer special enhancements and overall better pricing than other options.
It’s also important to bear in mind that premiums are often a lot less than you might expect.
Additionally, not all policies will be applicable to all businesses. There are multiple factors to consider in determining whether to obtain any particular coverage. There should be a reasonable risk level, the potential claim amount should justify purchasing coverage, the premium amount is obviously a factor, the availability of other risk control measures instead of insurance, and other factors come into play. This is one of the areas where I guide my clients in making appropriate coverage determinations and would be happy to assist you as well.
Finally – and most importantly – make sure you have the right person handling your insurance. You want to make sure they understand the food industry and have the experience, knowledge, and expertise to properly address your unique insurance needs. They must also have a thorough knowledge of the relevant products, programs, and insurance companies that are designed for the industry.
Having worked with clients in the food service industry, I have developed a thorough process for addressing the insurance needs of this industry. This starts with needs determination and goes on to include the ability to identify appropriate solutions and markets, underwriting the risks, bringing to market, negotiating coverage and pricing on my clients behalf, placing the coverage, and continually serving the ongoing needs as it pertains to the insurance process throughout the policy term.
If you are in the food service industry and would like to have a conversation – I’m here to help, please don’t hesitate to reach out!