Don’t Get Fried by Uninsured Losses

Restaurant FoodIf you’re a quick-service restaurant (QSR) owner or have ambitions to become one, you know these businesses can be quite lucrative. Most Americans dine out at least once a week, and QSRs are especially popular because of their convenience. Many QSRs have remained profitable during the pandemic because of their limited customer contact.

But success in the food business comes with risks, too, such as liability exposure, property damage and workers’ compensation claims. You’ll want to make sure you have adequate insurance to cover these risks.

The majority of QSRs are part of large food service chains. As a franchisee, you pay the parent company an upfront franchise fee and foot the bill for operating licenses, rent, equipment leases, advertising fees and royalty payments. Your franchisor may include business insurance as part of your fees, or they may stipulate the types of insurance you must obtain on your own. Even if business insurance is included in your franchise package, you could need additional insurance to cover gaps in these policies. It’s always a good idea to have an agent or broker review the coverage in your franchise agreement to determine if it includes enough protection. If you’re an independent operator, an agent can help you purchase your own business insurance. Bear in mind that you may be required to carry certain types of coverage, such as property and liability insurance, in
order to secure a lease, obtain a loan or line of credit from a bank, or get the backing of investors. Your state or locality may require some forms of insurance as well.

Commercial general liability is a must

All restaurants need commercial general liability (CGL) coverage. CGL insurance protects against costly legal claims if a customer sues you. CGL covers bodily injury and medical expenses; property damage; and personal injury, including libel and slander. In food service, it’s especially important to have liability coverage for food-related illnesses, such as food poisoning. You may need a separate policy to cover food liability. In some cases, you may need product liability insurance, which would cover you if the food items you receive from your franchisor or supplier were to be contaminated or defective. While you may be covered by your franchisor’s CGL policy, the policy might not pay a claim if you’ve made changes to your store that aren’t in your franchise agreement. For example, if you decide to provide outdoor seating or install an awning and someone is injured as a result, you may be responsible for the claim if the franchisor didn’t require it. CGL policies don’t cover employment-related liability claims. You can purchase separate employment practices liability
insurance to protect against lawsuits involving sexual harassment, discrimination, wrongful termination, retaliation, failure to promote and breach of employment contract, among other claims. Liability insurance is sold with various limits, typically starting at $1 million. The limit is how much a policy will pay out in a given year for legal expenses and damages. Liability limits are important because you pay the difference if a claim
exceeds your limit. Ask an insurance professional, like us, who’s familiar with the food service industry if you need to increase your liability coverage. You can do so fairly easily with umbrella insurance, a separate policy that provides coverage above your liability limits.

Commercial property insurance

QSR operators face a number of property risks. These include kitchen fires, theft and vandalism, sewer and drain backups, and catastrophic weather events. Check to see what your commercial property insurance covers and what the limits are on your policy. Even though your franchisor may provide basic coverage, make sure equipment such as freezers and refrigerators, fryers, grills and drink dispensers are insured. You may do well to purchase an equipment breakdown policy, which covers the cost of repairing or replacing equipment that stops working due to mechanical or electrical failure. You should also have business income insurance, which covers losses if your business is interrupted or shut down due to a fire or natural disaster, a covered government closure or an accident. This coverage will pay for lost income while your business is being restored or rebuilt, allowing you to meet your expenses and make payroll. If your restaurant has a company vehicle, you’ll need a commercial auto policy to cover any claims associated with its use. A good example is if you make deliveries.

Workers’ compensation insurance

It takes a lot of employees to operate a successful QSR, and workplace injuries do occur. Employees can burn themselves cooking, slip on a wet floor or cut themselves on equipment. Workers’ compensation insurance pays for job-related injuries, and covers e lost wages, medical expenses and rehabilitation. Nearly every state mandates that employers provide workers’ compensation, so check to see what your state requires. Premiums are determined by the type of business, worker classifications and claims history. There are insurance professionals who specialize in this market and can provide you with an audit and consulting services to reduce your workers’ compensation expenses.

Cybercrime insurance

Any business that handles sensitive customer information should be concerned about cybercrime and data breaches. Food service is particularly vulnerable since restaurants use point-of-sale systems to process credit cards. Your systems could be hacked or subject to ransomware. Cybercrime insurance protects your QSR from loss of data, disruption of your company’s networks, loss of income if your business is shut down and damage to your reputation. These policies also cover customer notification of a breach, credit monitoring for affected customers and security investigations. Many business owners policies (BOPs) and program policies include some cybercrime protection. Remember, you need to protect not only your own computers and networks but also your customers’ personal information. You could be held liable for a data breach if you fail to take appropriate security precautions.

Business owners policies and program insurance

Many commercial insurers offer BOPs to cover the basic insurance needs of a small business. BOPs provide general liability, property and business income coverage in one bundled policy. Commercial package policies (CPPs) allow you to build your own bundle, and they include coverage not found in a BOP.

In addition, some insurers have created specialized coverage tailored to restaurants, known as program insurance. Program managers often bundle into their packages coverage that’s not normally available in a BOP or CPP. A program might include the basics, plus employment practices liability, food liability and deadly weapons/active shooter insurance, for example.

Talk to an insurance professional, like us, who know the QSR market. An experienced agent can help you compare policies, choose suitable coverage and fill any gaps in your franchisor-provided insurance. It’s exciting when a QSR concept takes off and your business is humming. It can be quite rewarding for the owners and employees. Just make sure you’ve got the risks of running a busy restaurant covered so you can enjoy the fruits of your hard work.


This content is for informational purposes only and not for the purpose of providing professional, financial, medical or legal advice. You should contact your licensed professional to obtain advice with respect to any particular issue or problem.
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