Business Interruption Insurance For Restaurants – Do You Have Enough on Your Plate?

Independent restaurants operate in an extremely competitive environment. You work hard to attract customers to your establishment and even harder to entice them to return. It takes time and effort to train and develop the right staff that will represent your brand the way you intend.

Aside from serving good food, your most valuable assets are your employees, your reputation, and the character and ambience your restaurant provides.

Purchasing property insurance to cover your assets such as your building and business personal property are a fairly straightforward process.

The same is not true when it comes to business income coverage. As a restaurant owner you need to give some serious consideration to protecting perhaps your most important asset: the revenue stream that comes from your daily operations.

Some insurable exposures that can cause a business income loss:

Equipment Breakdown
Property Loss
Power Service Interruption
Income Support Property
Special Event Cancellation
Food Contamination
Civil Authority
Violent Acts

You purchase insurance to transfer the risks that you cannot afford to take yourself. You trade a liquid asset today for the insurance companies promise to pay in the future. You expect that if you have a serious loss the insurance company will be there to restore your business and provide the funds you need to get back on your feet. There are some potentially devastating inadequacies in what many restaurant owners have in terms of coverage when it comes to insuring their business income.

Restaurants rely upon many elements to maintain their business operations and many policies do not cover or provide very limited coverage for direct damage and loss of business income when it comes to equipment breakdown or utility service interruption to:
Computer systems including POS

Refrigeration

HVAC and cooking equipment

Lighting and sound systems

Water and communication lines

Fire Detection Systems

Electrical Distribution Systems

Security Systems

Restaurants operate on a very thin margin. Any interruption of business, damage to your reputation or loss of business once you have reopened can have a devastating impact on your bottom line.

Some questions to ask yourself when reviewing your policy:
If I do have a loss that closes my business or damages my reputation will my insurance cover any loss of income I sustain after I reopen and how long will the insurance company continue to pay

How long will the insurance company continue to cover my ordinary payroll expenses during the period of restoration and after I reopen

Does my policy include coverage for my employees tips during the period of restoration and after reopening and for what period of time

Will my policy pay for advertising cost to attract customers back to my business after I reopen

Does my policy offer any protection for my loss of income if my reputation is damaged due to a crisis event such as food contamination

Will my policy pay for the services of a public relations firm to assist me in dealing with the media to preserve and restore my reputation

Is there a waiting period before my business interruption coverage begins to pay

What if my key supplier has a property loss and cannot deliver the goods I need to operate my business

What if a neighboring business who drives clients to my doors is shut down or a civil authority prevents access to my premises due to direct physical loss or damage to a neighboring property

Will my policy pay for direct damage from electrical disturbances and other perils typically excluded by my property policy to the equipment I rely on to operate my business and the resulting loss of income

Look for business income insurance provisions:
That do not contain a co-insurance clause

That do not have a waiting period of greater than 24 hours, if any

That will pay for your continued loss of income after reopening for at least 60 days

That will pay your advertising cost including the cost of a crisis management firm to help restore your reputation

That covers power interruption and equipment breakdown with no limitation on the distance to the source and which includes damage to overhead transmission lines

That covers food borne illness during and after the event with adequate limits

That covers income support properties and action by civil authority

That covers off premises special event cancellation

That will pay for your server’s tips during a closure and after reopening

A thorough review of your business income coverage provisions and how your policy will respond to 1st party claims is essential to protecting your property and the revenue stream your restaurant produces. Don’t wait until after you have had a loss to find out what is actually covered by your policy.

Business Interruption Insurance For The Supply Chain Failure Domino Effect

If you are in business there are risks inherent in every industry that are totally out of control of the entrepreneur, particularly when the business is reliant upon other parties.

As a result of damage to property a business may be unable to trade for a period. In order to cover these consequential risks, a business insurance policy will always contain cover for what is known as Business Interruption insurance (BI) or Loss of profits insurance.

BI covers a business against all consequential losses arising out of claims made against the policy which have been caused by an event leading to a valid loss. Such an event could be a fire, flood or loss of supply of electricity for example.

Most businesses will have interruption cover on their commercial insurance policy, that either has a defined level of indemnity as standard cover in a package or has been set from the declared annual turnover value on a commercial combined policy with a separate business interruption risk section.

Business consequential losses are calculated on a daily basis pro-rata from the declared annual turnover. If a business makes a claim they will usually be asked to provide accounts to verify the interruption loss.

A business can be protected against losses on the distribution side with credit insurance which covers losses of creditors failing and going bust, but what of suppliers?

Until the recent recession, insuring risks of trading losses due to failures in the supply chain was limited to small sums insured and various terms and conditions about what constitutes cover.

However the recession has led to many businesses and suppliers going into liquidation, and in all business sectors an enterprise may well find itself on the brink of receivership. This is often not because it is a bad business, but because somewhere along a linear network of product critical suppliers, a link in the chain has become insolvent.

This break creates a large knock on effect that cumulatively accounts for snowballing consequential losses the further you go down the supply and sales chain.

Businesses have been demanding from their insurers cover for this potentially business stopping risk.

Insuring the domino effect of a breakdown in the supply chain

The problem with a standard BI policy wording is that the cover only extends to loss of profits caused by a break in the supply chain of essential goods or services from an immediate supplier.

Furthermore that supplier must have been put out of business temporarily by one of the perils effective for the insured’s policy.

For example if my printing business is insured for fire with interruption cover in force and my paper supplier’s factory is burnt down, then this is covered under my policy. This is called first tier cover.

However if the paper mill supplying the paper distributor caught fire and the paper supplier could no longer supply my printing business with paper, I would not be covered.

This domino effect has always been regarded by underwriters in the past as a business risk that is uninsurable.

On the most expensive of Lloyd’s underwritten supply chain policies that have been available recently, the limits of indemnity are fixed and often do not provide adequate cover for a large business that has suffered supply chain failure more than one step removed.

However due to the growing number of insolvencies and claims repudiated under standard business combined polices, underwriters have been forced by the market to supply cover and have recently devised a new form of BI called ‘Contingent Insurance’ which specifically addresses all the limitations of the standard policy cover.

Contingent Insurance policies will insure against loss caused by disruption anywhere in the supply chain, which now includes both damage and non-damage related events.

The covers extend to supply chain breaks due to political risk-related events, civil disturbances, terrorism and political violence, as well as cyber risks, environmental risks, strikes, erupting volcanoes stopping flights and all other transportation issues affecting a business in the chain.

Many insurers of large businesses and corporations will insist that proper risk assessment of the consequential losses of supply failure is performed by a company and that maximum expected probable losses are defined, before issuing a policy.