It doesn’t always take a worst-case scenario for a business to start blowing smoke. Nicole Azzopardi finds that insurance really does pay.
It’s the peak of summer. The fridge is on the blink, your best waitress has called in sick and mysterious plumes of smoke are coming from the kitchen.
Nobody would be blamed for feeling a little hot under the collar on days like these, but without the right insurance, they can close your doors permanently.
According to the Australian Bureau of Statistics, at least 20 per cent of businesses underinsure their assets, 40 per cent do not insure for interruption costs and close to 25 per cent of Australian businesses do not carry any insurance at all.
Burning the midnight oil
When faced with the choice of a late-night study date with a 10-page insurance document or ringing around to find a last-minute replacement chef, it’s understandable why some people put off the paperwork.
Director of research at the School of Management at Melbourne’s RMIT, Professor Kosmas Smyrnios, says a lack of time and accessible information are the main reasons for underinsurance.
“It tends not to be a priority because the focus is on fresh food, service to customers and dealing with HR issues, which is complicated in itself,” Professor Smyrnios says.
“Many are not aware of the range of insurance products available to them and what is best suited for their type of operation.”
A dedicated hospitality insurance specialist who can take customers through the pros and cons of each product is optimal, but still a rarity, he says.
“You’ve got to look at insurance for not only the usual situations like fire and theft, but also things like malicious damage and taking care of key personnel. You’ve also got life insurance and a whole range of others but the bulk of business owners are aware only of that standard package, rather than some of the other offerings that are less popular, like compensation and having fraudulent workers.”
For the majority of small businesses who do go to the trouble, for every $100 dollars turned over, one per cent is spent on general insurance, which includes public liability, property and business interruption. Another is spent on workers compensation.
These costs are laid out before a meal is even sold—and for a business operating on a three per cent profit margin, the right kind of insurance is essential.
Richard Mullaney of national insurance company AON heads up a specialist team dedicated to the hospitality industry. For Mullaney, choosing the right insurance is a matter of asking the right questions—like what happens with seasonal trade.
“Over Christmas and New Year, machinery and refrigeration breakdowns are more of an issue,” he says.
“A restaurateur needs to be able to ring their tradesperson and have things fixed or replaced without being financially disadvantaged.”
However, the first thing to consider when deciding the type of insurance you need is to think about the things that are most at risk, Mullaney says.
“Most restaurateurs and caterers consider the physical components of their business—things like the building, equipment, fixtures and contents.
“And they don’t always value the replacement cost of those items correctly, so in some cases they buy equipment and the costs rise.”
The most common concern for businesses is underinsuring assets. Mullaney says it’s a particular problem in restaurant and catering, which typically deals with a lot of on-site equipment.
“It comes back to people not being valuation experts.
“Restaurateurs rarely stop and ask themselves: ‘what would it cost me if I had a fire?’, or they might stay with an insurance provider and forget to revisit the values they are insured for.
Restaurant owners also need to ensure they have adequate public liability insurance, which protects against injury or damage to another person’s property.
“Some examples of this would be poisoning incidents or food allergies,” Mullaney explains. “These situations are very difficult to control.”
It can also be a licensing issue—owners who want their businesses to be classified as a gold standard caterer need to have at least $10 million public liability insurance.
Staffing levels and abilities can be critical to the smooth running of a restaurant. Illness or injury to a key staff member—such as a head chef or sommelier—can cripple a business if they’re not insured.
Mullaney says owners should consider this type of insurance, which pays a flat sum to cover any costs associated with the loss of a key staff member.
It’s not the same as workers compensation, however, which is a compulsory part of any business and, as Mullaney points out, especially important when staff are working in a kitchen, where they key to minimising injury risks is prevention.
“We’ve produced a specific occupational health and safety guide that provides a checklist for businesses so they can effectively self audit,” he says.
In the unfortunate event that a worker is injured and a claim is made, he says, it is paramount that managers can demonstrate due diligence and show that they have implemented safety processes to minimise risks. Effectively preventing injuries won’t cost a business much and mean that organisations like WorkCover are “far more sympathetic”. And it’s even better if the guidelines are specific to hospitality, Mullaney says.
“Restaurateurs actually have control over this as a business—you just have to do some homework.
“Companies who specialise in the hospitality industry know the pitfalls and how to avoid them. The coverage you get is then specific and well considered,” he says.
Think of a scenario where a building has burnt down and it’s not going to be rebuilt for six months—or longer.
Despite not generating any income, a restaurateur still has fixed costs associated with leasing equipment, finance liabilities or loans.
Mullaney says failing to insure for business interruption is a significant problem. But it’s one that can be easily avoided.
“We can insure against the cost of lost revenue, ongoing financial obligations, staff wages costs, and even make sure that the owner still receives a profit if they pull out of the business,” he says.
“The aim of this type of insurance is to leave the restaurateur in the same financial position they would be in had they been trading.”
For co-owner of The Turtle in Elwood, Michael Kyritsis says it’s a familiar scenario.
“We had a situation where we had a small fire that broke out in part of the office a couple of years ago,” he recalls.
Luckily, Kyritsis and his partner, a self-confessed computer nerd from Pricewaterhouse Coopers, always ensured they were thoroughly insured.
“Probably the biggest pain is the time you spend filling out forms, but I’d prefer to spend half a day doing that than have to spend days buying a new computer and a printer and all the rest that goes with it. It’s a more affordable option.”
Engaging the services of an insurance broker, a bookkeeper and accountant to help sniff out the best deal has also been money well spent, Kyritsis says.
In addition, expert number crunchers will help remind you to reinsure when you purchase new equipment for the business.
“It’s a bit of a pain in the butt that you have to pay any amount in insurance, but if you don’t get the right one, you’re in trouble,” he says.
“So it’s a bit of an evil cost but it gives you peace of mind—if someone falls over or trips, at least you know you’re covered. We try to expect the worst, so if it does occur at least we can take care of things properly.”
And although he was surprised by the percentage of business owners who fail to adequately insure, Kyritsis puts finding the right coverage down to time management.
“At the end of the day, a few hours spent on finalising an insurance package might save you hours and weeks of grief in the future. Accidents and fires are quite common in the hospitality industry. You are kidding yourself if you think it isn’t going to happen to you eventually,” he says.
Planning ahead is also essential, and adequately budgeting for the real costs of insurance can pay off in the long run.
“For example,” he says, “if your insurance is $2,000 a year, you factor it into overhead pricing way back when you’re doing your food and drink costings. This way, the consumer essentially ends up paying it for you.”
It all comes down to the devil you know, he says.
“If you pay $2,000 a year in insurance but your shop burns down, what costs would you prefer to pay?”