A ‘menu’ of coverage considerations to meet your needs

The high failure rates of restaurants are generally thought to be around 60 percent — that’s new businesses that either go out of business or change ownership within the first three years. But why are the rates so high?

A claim paid that doesn’t indemnify a restaurant can be the first step in a hole from which a business cannot recover.

Smart Business spoke with Moe Lami, business risk advisor at SeibertKeck Insurance Agency, about minimizing the risks to your restaurant, using the scenario that there is a fire that causes a partial loss of $500,000 to a million dollar restaurant.

‘The appetizer’ — Risks for those in the restaurant industry

The biggest risk is not properly insuring your business in order to keep it open.

The likelihood of a total loss is less than that of a partial loss. So as a business owner, why not insure that one million dollar restaurant for $500,000? The problem is that insurers require a business to insure to value.

Simply put, a business will not receive full payment for that partial loss. If not properly insured to value, or an agreed amount, that restaurant will receive $250,000, minus the deductible.

Half of the money required to build that restaurant back to its previous state is now solely the responsibility of the owner. Can he or she keep the doors open?

‘The main course’ — Coverage restaurant owners often do not think about, until it’s too late

One easily overlooked coverage is business income and extra expense. The business income portion provides for income lost if the restaurant has to close its doors, in this case because of fire.

Every day your restaurant is closed you are losing revenue. Bills don’t stop because the doors are closed. Can your business afford the possibility of losing key personnel like a manager or a head chef? Can you afford to pay them while the restaurant is being repaired?

Extra expense is often included with business income and includes the expenses incurred to reopen your doors. This covers moving to a new location, new leases for equipment or the overtime associated with getting the business back on its feet.

An important part of this coverage is time. The repairs for this fire take three months. So, when the restaurant opens its doors on day 91, it will not likely be back to doing normal business volume. It takes time for the restaurant to recover to a reasonable sales volume.

A typical policy is 12 months actual loss sustained. Ideally, 12 months would give the owner the time needed to make repairs, retain staff and get the restaurant back to regular operations with an acceptable sales volume.

‘The dessert’ — Preventative steps

Restaurant owners may not come from a business background, so it can be hard to develop the right protocols. That’s where a good adviser plays a key role. He or she should have a thorough understanding of the perils owners face. Then, he or she can help you come up with a plan that looks at all of the risks and includes coverage limits that adequately reflect the situation.

While it is never possible to completely eliminate all risk, a proper program can mitigate risk to a level near zero. Common sense takes a front row seat here.

Cleanliness can lend a lot toward managing risk, such as regular cleaning of hoods and filters above cooking equipment to reduce the chance of fire. Fire extinguishers and wet suppression systems need to be checked on a regular basis. There should be employee handbooks and set processes and training, especially in an industry with high turnover in staff. A business income worksheet should be filled out before a loss happens, so there is no delay.

The restaurant business is demanding. By effectively identifying your exposures and closing those coverage gaps, restaurateurs can concentrate on the main goal — a great experience through a great meal.

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