Chapter 9 - How to Protect Yourself with Insurance

Three general classifications of protection | First group – mandatory protection | second and third group – selective protection | Description of protection offered by various type coverages 3-D building , contents , fine arts , auto , rent and rental value , boiler , business interruption , extra expenses , engine breakage , electrical machinery , floater , sprinkle breakage and others | Protection , development and requirements of workmen’s compensation laws | Variations in cost and benefits | Accidents and Health insurance – description | classifications and protection offered | The co-insurance clause | How to reduce insurance costs | Factors to consider in securing complete protection

Depending on location, size, and nature of the restaurant, the list of perils from which a food service operation needs protection falls into three general classifications: (1) protection from perils which might result in a large loss and must be covered by insurance; (2) pro­tection from perils to which the restaurant is constantly exposed and which may or may not result in serious loss; and (3) protection from small losses which can occur frequently.

The type and importance of protection needed by individual restau­rants will vary. Protection from windstorm, classified in the third group on the following pages, may easily shift, in terms of importance, to the first group because of the location of the operation. The arrange­ment of different types of protection into the three categories is there­fore changeable. The importance of this type classification to the individual operator is none the less vital.

In effect each operator is asked to classify the various perils in terms of their relative importance: the seriousness of the loss, the pos­sibility or frequency of occurrence. The operator will weigh the amount of loss against the possibility or frequency with which a specific peril will occur and assign the peril to its proper classification.

A sound insurance program provides complete protection from the dangers of the first group, selective protection from the perils of the second and third group. Generally, the specific things from which a restaurant may need protection fall into the following classification:

First Group—Protection Is Mandatory

1.  Comprehensive general liability—the intent of this coverage is to protect the operator against every type of liability that may occur in dealing with people. The coverage protects the owner against claims for personal injury suffered on or adjoining the premises by customers or persons other than employees. Depending on the insurance com­pany, this coverage generally includes damage to guest property, claims for accident, illness, or death of customers. The products liabil­ity clause protects the operator specifically against claims ensuing from the consumption and handling of food and beverages.

2.  Comprehensive fire—the intent of this coverage is to protect the owner against property losses caused by fire, lightning, smoke and
water damage created during the time the fire was being put out. The coverage provides for an appraisal and subsequent replacement of property damaged or destroyed by fire.

3.  Life insurance—this coverage protects against losses caused by death of owner or business partner. The coverage may be written as a business insurance to protect the partner or as a personal insurance to protect the family.

Second Group—Protection Is Selective Depending on Size, Type, Location, Volume and Nature of Business

1. Theft or larceny, burglary and robbery—insurance companies define theft as an act committed by stealth without knowledge of the owner. To change theft or larceny to burglary, the loss of property must be accompanied by forcible entry. Robbery is an act committed in the presence of some person who is in danger by reason of the act. The robber takes property by violence or threats of violence. Depend­ing on the value of property inside the restaurant and the frequency and value of property transferred to banks, the operator will protect all safes and contents, safe deposit boxes, and insure against damages caused by burglars to property and hold-ups inside and outside the premises.

2.  Fidelity bond or 3-D insurance—this coverage provides pro­tection from losses caused by dishonesty, disappearance, and destruc­tion of property. A well-written policy will cover loss of money through employee dishonesty, loss of money or securities inside and outside the premises, loss of money or securities in safe deposit boxes, loss through forgery of outgoing instruments and altered or raised checks. Many times large organizations ask for an incoming check rider to protect the company from forged, altered, or raised checks coming into the operation.

There are four types of bonds protecting the restaurant from its employees:

(a) the position schedule bond furnishes indemnity in the event of larceny or embezzlement up to the limit of the bond. This coverage applies to the position or job, not to the individual holding the job and is particularly advantageous for restaurants having a high turnover of employees.

(b) blanket position bond covers positions similar to the schedule bond explained above. However, it differs in a very important respect in that each position covered by the blanket position bond is protected to the limit of the bond.

(c) individual or name schedule bond covers only the designated employees named in the bond. The owner can protect himself by insuring each responsible employee for varying amounts according to the risk involved.

(d) primary commercial blanket bond covers all the restaurant employees up to the limit of the bond. If the limit of the bond is $5,000 and two or more employees working together are responsible for an $8,000 loss, the bonding company will pay only $5,000.

3.  Building insurance—covers losses created by damage to the real property. This policy can cover permanent fixtures such as boilers,
plumbing and heavy machinery. Most owners specify that additions or improvements to the building are automatically insured. Payment on this policy will be made on the basis of value at the time of loss, not original cost. The reason for placing this coverage in the second group of selective protection is that many restaurant operators do not have title to the building. Where the operator has not leased the building, this coverage should automatically be shifted to the first group.

4. Contents insurance—this coverage protects against all losses to everything contained in the building that is not included in the building insurance and excluding value of food inventory.

5.  Fine arts insurance—included in the second group because of the value of the property protected. In the instances where operators have rare paintings, tapestries, statuary, and other valuable property, protection can be obtained with this policy for all risks including fire, theft and breakage.

6.  Automobile insurance.

Third Group—Selective Protection

1.  Rent and rental value insurance—protects the insured from loss of rental income when sublets are damaged and the lessee is not required to pay.

2. Boiler insurance—provides protection up to the limits of the
policy for losses arising from accidents from equipment such as en­gines, boilers and hot water heaters; covers property damage, acci­dental injuries, legal and other expenses and losses to newly installed equipment.

3. Business interruption or use and occupancy insurance and extra expense insurance—compensate for loss of profits and continu­ing expenses such as rent, taxes, interest, salaries following some casualty.

4.  Engine breakage and electrical machinery—can be sold as separate policies, the first covering damage to equipment such as pumps and compressors; the other, generators, machines operated by electrical wiring, switchboards and control devices. In some instances large chains have combined all three types of protection—boiler, en­gine breakage and electrical machines—in one comprehensive policy called boiler and machinery insurance.

5.  Floater insurance.

6.  Sprinkler leakage.

7.  Windstorm, hail, tornado, hurricane.

8.  Water damage—protects against losses caused by bursting water and steam pipes, leaky roofs.

9.  Aircraft and vehicle damage.

10. Destruction by vandals.

11. Bad debts.

12. Glass insurance—protects the owner when damage or break­ age occurs; covers all types of glass: plate, window, carved, and others.

13. Explosions.

14. Earthquake.

15. Riot.

There are many other types of insurance that have not been included in the classifications above for several reasons, such as the location of the operation, the requirements made on the operator by state or fed­eral law, demands made by unions, and the variety of coverages offered. Coverages pertaining to workmen's compensation, accident, and death are good examples of this type of insurance.

WORKMEN'S COMPENSATION INSURANCE

1 Workmen's compensation insurance, for example, protects em­ployees against loss resulting from job-connected accidents and in most cases against loss from specified kinds of occupational illness, through a policy purchased by the employer. Generally, the employer is compelled by State law to carry this insurance, and even where he is exempt from compulsion, he may find it safer not to take advantage of his exemption, since failure to provide protection may expose him to greater risk.

Workmen's compensation laws developed as a social reform. They provide that in return for giving up his right to sue at common law, a worker who is injured in the course of his work has a right, regardless of fault, to definite benefits to compensate him for the loss of pay he suffers when occupational injury prevents him from working and for the medical expenses entailed. If he is killed, compensation is provided for his widow or other dependents.

All 48 states now have compensation laws on the books. These dif­fer widely, but most compel the employer to insure the risk to make certain that the money will be available when there is a valid claim.

In a number of states, the insurance is purchased from a private insurance company, but in some the employer may choose between insurance with a private company and insurance with a state fund. In a few states, a state fund provides all the workmen's compensation insurance, and private companies are not permitted to offer the cover­age.

In most cases, the employer also has the option of "self-insuring" (that is, posting a bond and maintaining a fund for the payment of injuries himself) but this is generally not practical for any but a large employer.

Some compensation laws are "elective," that is, the employer may choose whether or not he will come under them. But if he elects not to come under the law, employees who are injured on the job may sue him for damages. And it is much easier for them to collect than it was in pre-compensation-law days, since the common law defenses men­tioned above are no longer available to him.

1 Data obtained from Small Business Administration, Washington 25, D.C.

State laws exempt certain types of employers also. For example, if the employer is engaged in a non-hazardous business, he may not come under the act. Or he may be exempt because he has very few employees. Every employer should check the law in his own state to discover how it applies to him. But even if he is exempt, he may find it advisable to carry insurance in order to avoid the risk of being sued at common law. The risk can be great, but the cost of insurance is moderate. In addition, that cost is classified as a normal expense of doing business.

The amounts paid to employees for injuries suffered during their work depend on the benefits provided in the workmen's compensation law of the particular state in which they are employed. The premium rates are based on past loss experience for the particular industry and are computed as a percentage of the payroll. Thus the total premium an employer must pay for his workmen's compensation insurance de­pends on the type of business he is in, the number of employees he has, and how much he pays them. The premium rate also covers expenses of administration, accident, and occupational disease prevention, agency service, claim adjustment costs, and taxes. In addition, insur­ance rates as applied to payrolls vary from state to state, because the actual benefits provided by state laws differ considerably.

Premium rates are influenced by the percentage of weekly pay al­lowed as a benefit, by the length of the waiting period required, by the maximum and minimum benefits, by the allowance for loss of limbs and similar permanent injuries, and by death benefits. Amounts paid for medical treatment also form an important element of cost.

Variations in Cost and Benefits

Employers whose operations are of sufficient size can have their rates adjusted up or down from the standard rates on the basis of their own loss records. This is called experience rating and is based, in most states, on a three-year period, not including the current policy year. In addition, such an employer may elect to have his premium for the cur­rent year modified on the basis of his loss experience for that year. In this case, the final premium is determined after the policy period has ended.

All but a few state laws have been amended to provide benefits not only for injuries resulting from the job, but also for illnesses which are due to the worker's occupation. Some occupational diseases are very severe—sometimes permanently disabling. One of these is silicosis, caused by inhaling silica dust, which may be found in places such as foundries and quarries. The dust affects the lungs and can cause irreparable injury to them.

Usually, state laws specify whether officers of corporations are to be included in or excluded from workmen's compensation coverage. However, under a few state laws, it is permissible either to include or to exclude corporation officers from such coverage. When company offi­cers are included, their salaries, up to a stated maximum, are taken into account in determining the payroll subject to premium charge. Individual employers or partners are usually excluded from the cover­age of the laws.

ACCIDENT AND HEALTH INSURANCE

It has been noted that workmen's compensation protects an em­ployee against financial loss resulting from job-connected injuries and often from loss due to occupational disease. Nevertheless, it offers no protection against injuries which occur off the job or against illness not directly resulting from employment. To fill this gap for the worker, accident and health insurance is available. This type of insurance is obtainable on both an individual and a group basis. Individual policies may cover both occupational and non-occupational disabilities. Group insurance, which is customarily purchased through the employer, usually excludes accidents and illness covered by workmen's compen­sation. It can help reimburse an employee both for the expenses re­sulting from an off-the-job injury or a major illness and also for the loss of income he suffers when unable to work for a significant period of time. With more than two million non-fatal off-the-job injuries occurring annually, accident and health insurance meets a very real and pressing need. Only about five percent of all disability cases result from accidents on the job; consequently, accident and health insurance must supplement workmen's compensation if the other 95 percent of the cases are to be covered.

Uninsured employees often postpone needed hospital or medical care because they feel the financial burden will be too great. Such delays often result in more serious illness and ultimately a much longer absence from work. Moreover, the loss of pay, even for a few weeks, usually means a distinct hardship for an employee and his dependents.

Because they realize how serious the loss of regular income is to an average family, many employers arrange to continue salary payments during an employee's illness; some even help in paying hospital and medical bills. This procedure, however, can frequently impose too heavy a financial burden to be practical for a small business. It is also an unnecessary burden, since the same benefits can be obtained much more economically through the use of insurance. Furthermore, although employees individually can obtain insurance protecting them against off-the-job injury and sickness, they can generally get the same pro­tection more cheaply through a group plan arranged by their employer. This is true whether or not the employer himself pays any part of the cost.

A sound accident and health insurance plan will, first, act as an inducement to prospective employees; second, help reduce employee turn-over; and third, promote better morale and loyalty to the com­pany, and in that way tend to increase productivity.

Types of Accident and Health Insurance

Accident and health insurance policies can be designed to include one or a number of benefits. The current trend is toward broader and broader coverage.

1. "Loss of Time" income insurance.—Of cardinal importance in the group program is insurance against loss of income during an absence caused by a nonoccupational injury or illness. This sort of loss comprises about 70 percent of all losses resulting from disability.

Policies may be developed to provide either a specified dollar amount weekly for all employees, or weekly payments graduated on the basis of wages. In the latter case, the policies usually provide from one-half to two-thirds of regular wages up to a benefit of around $50 a week. Payments are made during illness for periods up to 13, 26, or 52 weeks. Moreover, most policies pay benefits whether or not the employee is confined to a hospital or to his home.

2. Hospitalization.—This is next in importance, and among the
most common kinds of insurance. A policy of this type will pay the cost of a hospital room and board at rates ranging from $3 to as high as $15 a day; typically, the maximum time is between 30 and 70 days, depending on the particular policy. Hospitalization coverage gen­erally includes payment for at least part of the cost of "extras," such as use of the operating room, laboratory tests, and X-rays, special medicines, etc., which often bulk large in the total bill for a stay at the hospital.

3. Surgical insurance.—This is less common, but gaining in popularity. It pays all or part of the surgeon's fee for performing an opera­tion. Policies may apply not only to operations performed in a hospital, but also to minor surgery done in the doctor's office or at the employee's home. The maximum surgical benefit paid is ordinarily between $150 and $200. A few schedules pay as much as $500. Typi­cal allowances are $100 for an appendectomy and $30 for a tonsillectomy. These amounts, of course, vary with the amount of insurance purchased.

4. Medical insurance.—To round out the program of accident and health insurance, medical insurance is also available. Most commonly, this contributes $2 toward the cost of a visit to a doctor's office, and $3 for a doctor's visit to the home, or $3 and $5 respectively. Upon request, a policy providing for higher amounts may be obtained.

5.  Coverage for dependents.—An employee is, naturally, con­cerned both about meeting expenses attendant on his own illness, and
about paying for the illnesses of his immediate family. Consequently, it is possible to obtain hospital-surgical-medical policies extended to provide coverage for the employee's dependents, including a maternity coverage for wives.
6.  Accidental  death   and   dismemberment  insurance.—Another kind of coverage which may be purchased for employees is accidental death and dismemberment insurance. This type provides protection, usually in the form of a lump-sum payment, for fatal accidents or for loss of arms and legs. Since the cost of such insurance ordinarily is quite low, it is often practical to provide for fairly large benefits.

7. Other coverages.—Sometimes, in the case of a long illness, treatments must extend over a period of years. However, because such a case is relatively uncommon, ordinary hospitalization and medical insurance is not designed to take care of it. One such disease which causes widespread concern is infantile paralysis, or poliomyelitis. In this case, special protection is available. Since polio insurance for employees and their dependents is fairly inexpensive, the small manu­facturer may want to consider adding it to his group insurance pro­gram.

A much broader form of coverage, which will pay expenses running into thousands of dollars for exceptionally expensive illnesses of almost every kind, is called "catastrophe" medical or major medical expense coverage. This, however, is still a comparatively new and costly type of insurance.

Insurance coverage is technical and requires a great deal more than casual interest in the subject. The carefully conceived policies with their unfamiliar terminology and detailed pages of fine print usually confuse the average operator. The proper approach to insurance protection is to determine when initiating an insurance program to read the entire policy carefully.

One subject of insurance that is little understood is the co-insurance clause. The intent of this clause is to require the owner of property to insure for a realistic amount. In the event that the owner does not insure to the full value of his property, he becomes in effect a co-insurer depending on the percentage requirements of the co-insurance clause.

For example, if a restaurant building valued at $100,000 is pro­tected by a policy containing an 80% co-insurance clause, the build­ing should be insured for at least $80,000. If the owner insures his property for less than this amount and a loss occurs, he will not receive the full amount of loss, but the full amount less his proportionate share of risk. The formula for computing the value of his protection is the face amount of his insurance policy divided by the amount of insurance he should have carried, times the loss. Mathematically the formula looks like this:

amount of policy
                        × loss
amount required to carry

To illustrate, if a building valued at $100,000 is protected by a policy of 60$ containing an 80% co-insurance clause and a loss occurs of $48,000, the insurance company would pay:

 6,000

In this case the $60,000 is only % or ■% of the coverage required by the 80% co-insurance clause; consequently, the insurance company will pay only % of any loss up to the limit of the policy. The owner is said to be a co-insurer for % of any loss that occurs.

Reduction of Insurance Costs

There are many ways of reducing insurance costs without reducing the coverage and protection afforded. Fire insurance premiums, for example, can be reduced by installation of adequate fire-fighting equip­ment, sprinkler systems and fire-walls between hot kitchen equipment and wall. A check on the total electrical system and a substitution of proper sized protective wiring for poorly insulated undersized system will invariably reduce costs. Another possibility is the careful selection of the types of protection needed and the subsequent combination of these policies into a single policy that will cover all the similar perils.

In most instances it is advisable to study your individual needs and obtain the advice of a competent insurance agent, advisor, or broker. The insurance program should be tailored to secure adequate and complete protection for the particular needs of the operation in the most inexpensive way.

A reliable advisor seldom attempts to oversell an insurance program and invariably can answer your questions regarding the insurance policies and the insurance companies engaged in selling. Note whether the policy is a broad comprehensive form or limited form of insurance. Study the casualty and liability protection afforded. Are the limits of bodily injury liabilities, for example, sufficiently high to protect you against most contingencies? Find out if the policy is a standard form authorized by your State Board of Insurance Commissioners. As a minimum a policy should give standard protection by meeting the requirements of law. Check the fine print for assessment clauses. A policy subject to assessment enables the company to ask for additional premiums so that unexpected financial obligations of the company may be met.

The prospective policy holder should investigate the character, service, reputation and business management of the company. The State Insurance Boards, financial records of corporations, insurance agents and brokers can provide an interested party with ratings and financial data enabling him to check on the financial strength, long range stability and national reputation of the company. Local inquiries will show if the company has a resident agent in the community to settle losses quickly and to aid you by providing safety engineering or other services that you may require.

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