A RECIPE FOR SUCCESS
Risk Management for the Food Service Industry

Chapter 2: Understanding Food Business Insurance Policies
Part 1: What Is Small Business Insurance?

You've invested a lot into your restaurant, bar, or other food service business. From your commercial real estate to your culinary equipment, your assets are physical representations of your hard work and dedication to your business's future. But if your tavern, bakery, or coffee shop is going to flourish, you need safety nets that protect your investments. That's what small business insurance does.

Business insurance shields you from financial losses that could jeopardize the future of your business. It works similarly to other policies you may already have, such as Personal Auto Insurance or Health Insurance. Your business insurance policy is a legally binding agreement stating that, in the event of certain loss scenarios, your insurance carrier will cover specific damages. Each policy describes what it will and will not cover.

In order to understand how an insurance policy works, food services business owners should recognize these key terms:

  • Premium. This is your insurance "rate" – the amount of money you pay on a regular basis in order to maintain coverage. Depending on the policy, you may pay a monthly or annual rate.
  • Deductible. In the event of a claim, you must pay for damages up to the amount stated by your deductible before you can receive your insurance benefits. When choosing a policy, you usually have a few options for your deductible. The higher your deductible, the lower your premium.
  • Policy limit. Every insurance policy has a limit, the maximum amount of money your insurance provider can pay toward a claim. An insurance agent can help you choose policy limits that fit your business's needs.

Not sure whether the cost of business insurance is worth the investment? Let us try to convince you in the next section.

Do Food Businesses Really Need Insurance?

If you're a sole proprietor, you may mistakenly think that you don't have enough commercial assets to warrant the investment in business insurance. However, if your business is not registered as a limited liability corporation (LLC), you are personally liable for all the business debts you incur.

Without insurance, you would have to pay all court costs and fines out of pocket in the event that someone files a lawsuit over an injury they sustained at your bar. Attorneys' fees alone can be tens of thousands of dollars, and settlements can be enough to bankrupt even financially secure business owners.

Photo of a banana stand

And if a storm strikes your establishment, the survival rate is grim. Almost 40 percent of small businesses fail to reopen after a disaster, according to FEMA's article, "Protecting Your Businesses."

When you consider these scenarios, premium rates seem like a small price to pay for the financial security you enjoy with appropriate coverage. After all, if finances are tight enough that you're tempted to forego coverage, how will your business survive an unexpected lawsuit or natural disaster?

After you've invested this much of your time, energy, and money into building your food service establishment, it makes sense that you'd want to invest in its protection.

What Factors Influence Your Premium?

When you buy car insurance, your provider takes into account the kind of car you drive, your age, your sex, and your driving history to determine your annual coverage rate. Similarly, your business insurance provider will use certain details about your food services business to calculate your premium.

This information lets your insurance provider assess the risk they're taking on by covering you. For example, if you drive a snappy sports car, you can expect to pay more for Auto Insurance because your vehicle has a higher chance of being stolen. And if you operate a high-risk business, your premium will also be higher.

So what determines how high- or low-risk your business is? Your provider will assess…

  • The kind of business you run (i.e., bakery, tavern, banquet hall, etc.).
  • Where your business is located.
  • How many employees you have.
  • Industry-specific risks.
  • The kinds of policies you purchase.
  • The coverage limits and deductible you choose.

In the risk management section of this guide, we'll explore how you can reduce your chances of lawsuits or accidents to reduce your premium costs.


Next: Part 2: Small Business Insurance Basics

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