It is an unfortunate fact that restaurants are sued every day. Food handling, liquor liability, and driving exposures mean full-service restaurants face unique liability challenges. Combine these exposures with complex insurance policies, and it is easy for restaurants to find themselves in trouble with gaps in insurance coverage. In order to avoid these gaps, here are the top 5 coverage issues to be aware of when considering the package insurance (property & liability) for your restaurant.

1. Liquor Liability

Most general liability policies do not automatically cover liquor. Liquor liability coverage should be proactively requested from insurance agents. Make sure the limits match your general liability limits, a minimum of $1,000,000 to $5,000,000 is recommended depending on your size.

Be prepared to provide an estimate of how much and during what hours liquor is served and a breakdown on the percentage of sales among beer, wine, and liquor. When you receive your insurance quotes, verify that the "rating basis"—how the insurance company charges you—matches what you provided. For example, if you sell $100,000 of liquor a year, verify that this number was used as the basis for developing the premium. This is important, because if the insurance agent uses a figure such as $5,000 in sales, the insurance company could audit you at the end of the policy and charge you an additional premium for the balance of the $95,000 in sales that were not quoted. It’s also important to ask your agent if the sales are auditable or non-auditable.

2. Food-Born Illness

Food-born illness exclusions refer to bacteria, E. coli, TSE (transmissible spongiform encephalopathy, a.k.a. mad cow disease), salmonella, and others. The original intent of these exclusions was to be specific to property (product)—meaning, if you were made aware that your products contained any of the aforementioned illnesses, there would be no coverage for property that had to be destroyed.

However, recent concerns related to mad cow and E. coli occurrences have drawn the attention of insurers who, in response, have crafted exclusions that can be specific to product liability. How do you address this? First of all, always ask the agents providing quotes to supply the copy the insurer provided. Next read the "forms" or "exclusions" section of the quotes. If you see any exclusions that refer to a type of food-born illness, request a copy and make sure to read it. Verify the exclusion does not apply to product liability. To summarize, these types of exclusions may be something you can live with as long as they are specific to property and your product liability protection is in place. Ask your agent to provide you with the exclusion form and ask them to explain your exposure.

3. Spoilage and Mechanical Breakdown

Does mechanical breakdown coverage cover spoilage? Most restaurants think that coverage for mechanical breakdowns, often caused by a power outage or power surge, automatically includes spoilage. This is not necessarily the case, however.

There are actually two coverage items that need to be on the policy in order for spoilage to be covered due to mechanical breakdown: “mechanical breakdown” and “spoilage.” These types of coverage can be built into the property policy automatically with limits valued as high as the business personal property limits (contents or products) or it could be coverage the agent must specifically request of the insurer.

Either way, this is an area that should be very clear so you have a grasp on potential spoilage exposure. Your agent should be able to guide you through this so you are adequately protected.

4. Designated Premises

Does your policy have a "designated premises" endorsement? Underwriters may use this form when there is concern that operations could extend beyond the normal confines of the restaurant. This endorsement states that if the insurance company does not have the location specifically listed on the policy there is no coverage.

If you have operations that extend beyond scheduled locations, such as catering or other off-site events this could be problematic. Always address this with the agents and look for the endorsement on the quote terms offered by the carrier (again, make sure you request a copy of the carrier quote so you can review information).

5. Non-Owned Auto

It is almost mandatory that all restaurants have "non-owned" auto coverage on the policy. This coverage can be offered on the general liability or the auto policy. When employees perform any kind of work function in their own vehicle (even common errands as simple as running to the bank, picking up supplies, or making a delivery), this coverage is necessary.

Most personal line policies have lower limits than commercial policies—meaning, if your employee is involved in an accident during a work-related errand, your business will likely be named in the suit. This is where the "non-owned" coverage comes into play. Absent this coverage and your insurance company will not respond to the restaurant being named in the suit. This coverage is typically a very inexpensive coverage to add on and provides vital protection.

Full-service restaurants face many unique risks and challenges to protecting themselves from financial loss. Using these five steps to make sure your insurance policy package is crafted appropriately is a great start.  

The opinions of contributors are their own. Publication of their writing does not imply endorsement by FSR magazine or Journalistic Inc.