The top five mistakes some restaurant owners make when purchasing insurance:
- Not reading your insurance policies
- Assuming your agent or broker has read the policy
- Believing Insurance is a commodity like sugar or flour
- Purchasing insurance from a relative, friend, or frequent customer of the restaurant
- Not managing risk on an ongoing basis
Mistake One: Not reading your insurance policies
Insurance policies are typically contracts of adhesion which means they are contracts that are already drafted by the insurance company and the purchaser has little opportunity to alter the terms. You are for the most part purchasing a product off the shelf. The majority of insurance companies are truly committed to their policy holders and keeping their promise to pay. It’s just that their idea of what they should provide and your idea of what you should receive may ultimately be very different.
What typically happens when a claim occurs that is not clearly insured by the policy is the insurance company and the insured develop very different ideas about what the language in the policy is actually promising to provide.
The body of case law surrounding disputes involving insured’s, third parties, and insurance companies is one of the largest bodies of case law in existence.
Mistake Two: Assuming your agent or broker has read the policy.
Many insurance agents make the mistake of assuming that because the product is designed for a specific class of business its customer will be or should be satisfied with the results if there is a claim. They assume that the product they are selling has been designed with the restaurant owner in mind and is adequate to satisfy their client’s needs. Nothing could be further from the truth. Every company that offers a specialized endorsement for the restaurant industry has a different idea of what should be provided and consequently a different product.
Reading and understanding an insurance policy is a time consuming tedious endeavor. Many agents simply do not take the time to read the policy given the competitive nature of the insurance business, after all the majority of insured’s are not looking at policy terms they are looking at policy premiums. Consequently many agents focus the majority of their time trying to reduce policy premiums. This process works rather well and everyone is happy until there is a coverage dispute. You think your agent is doing a great job because he saved you money. Once you have a coverage dispute the premium you paid and the money you saved can rapidly become meaningless.
Mistake Three: Believing Insurance is a commodity like sugar or flour
The nucleus of any insurance program begins with basic policy forms to insure your property, loss of income, third party liability and your employees. The majority of insurance companies are ISO (Insurance Service Offices) based and use standardized forms to provide these coverage’s. ISO has also developed many endorsements to allow for the modification of these coverage forms, either to add additional coverage a particular insured needs or to restrict coverage that is unfavorable to the insurance company’s ability to absorb the risk.
Providing the correct ISO forms have been selected it could be said that insurance is essentially a commodity like sugar or flour. It only makes sense to purchase the product from the lowest bidder given they are of equal or sufficient financial strength to keep their promise to pay. Unfortunately, ISO forms and endorsements are not always adequate to protect the life of your assets. Restaurant operations like many other businesses present some unique exposures that require specialized endorsements.
Insurance companies know this and like any good business they are there to fill the need. To fill these needs many carriers have developed their own endorsements specifically for the restaurant industry. This is where the need to understand what you have purchased is paramount. Once you have a loss you cannot go back and renegotiate the terms. Insurance policies are interpreted based on the plain and everyday meaning of the language in the policies. Once a loss occurs the courts will not allow the reconstruction of an insurance contract. The terms are essentially set in stone.
Mistake Four: Purchasing insurance from a relative, friend, or frequent customer of the restaurant
The number four mistake is purchasing your insurance from a relative, friend, or customer of the restaurant simply because they are a relative, friend, or customer of the restaurant. I cannot tell you how many times I have been told by a restaurant owner that they are not interested in getting a second opinion about their insurance program because it is handled by a relative, friend, or loyal customer. I always think to myself: would your criteria for open heart surgery be based on having your relative, friend, or a doctor who frequented your establishment perform the operation simply because of the relationship? I don’t think so. No you would research the most qualified individual to trust with your life. The same should hold true for protecting the life of your assets. It is very possible that your relative, friend, or customer may be highly qualified to design and manage your insurance program. Ask yourself today what criteria you used to make your selection and if it is simply because you like them or feel obligated to do business with them hopefully you have not made mistake number one, not reading your policy.
Mistake Five: Not managing risk on an ongoing basis
The number five mistake is purchasing your policies, filing them away and believing your risk management process is complete. Purchasing insurance is somewhat of a paradox: you buy insurance to protect your assets against claims you cannot afford to pay yourself but if you have serious claims your premiums will either go up or you may become so unattractive to an insurance company that you will not be able to afford the insurance.
Ongoing active management of the risk your business faces is essential to controlling what you ultimately pay for your insurance. Implementing loss control and safety programs is an integral part of managing your risk. This is an ongoing process that does not happen overnight. The right agent and insurance company can provide valuable assistance in helping you develop a risk management program.
