E&O Insights: Insuring Restaurants and Taverns Presents Some Real E&O Risks
Although most agencies insure at least one restaurant or tavern, this shouldn’t suggest that they are easy accounts to write. Errors and omissions (E&O) carriers will readily admit that writing this class of business presents some challenges. Moreover, these challenges have significant potential to generate E&O claims. One thing for certain is that these risks have their share of losses and, when there are losses, there is a greater chance that some of those losses are not insured.
The No. 1 common thread of E&O claims is that what’s not covered will typically cause the E&O claim.
Know Your Risk
When looking to insure a restaurant or tavern, it is vital to understand that these risks potentially have some unique exposures that must be properly addressed. A few questions and issues to consider include:
- Do they do catering?
- What vehicles are used to deliver the products?
- Are the building or contents constructed of unique materials?
To understand the various common and potentially unique issues, an appropriate place to start is through accessing the information contained within one of the industry’s many exposure analysis checklists. These checklists will provide solid information and insight, including a questionnaire detailing the pertinent questions to ask by line of business. The time spent “doing some homework” in advance of the sales call will help make the call more productive and help you understand the exposures more clearly.
The carriers you access will vary based on the type of risk.
For more upscale and family-oriented risks, you probably will deal with the admitted marketplace. Because of the specialization of these risks, deal with a company that includes this as one of its specialties and has demonstrated solid expertise. There is a good chance that its product offering may be more comprehensive and include a host of quality options.
With some risks, the excess and surplus lines (E&S) market may be your only choice. For many years, this segment of the industry has written a significant amount of this business. The “danger” with the E&S market is there will be additional exclusions or limitations on the coverages offered. For example, many E&O claims have focused on the lack of assault and battery coverage, which will probably be available in the standard market.
Another common issue involves liquor liability coverage. If the account sells liquor, the owner must have a liquor liability exposure. There have been many claims where the restaurant/tavern owner thought that his or her liability insurance included the liquor liability exposure. Agents should bring this matter to the business owner’s attention and emphasize the need for liquor liability insurance. It is best to provide a proposal, thereby forcing the customer to decide if he or she wants to insure that part of the exposure. These types of conversations should be documented not only in the agency file, but also through written communication with the client to ensure there is no misunderstanding.
Losses Do Occur
As mentioned above, these types of risks have losses and, as noted by the following E&O claim, when these losses become excessive, a non-renewal occurs.
The restaurant owner approached agency “X” in 2010 after the account was non-renewed by its prior carrier due to loss history. Agency “X” placed coverage for the restaurant for 2010-2011 and 2011-2012, until that carrier non-renewed due to loss history. For the 2012-2013 policy year, agency “X” completed an online application, but failed to indicate the restaurant had been previously non-renewed for loss history. The agency also failed to provide accurate loss history information, misstated the age of the building which housed the restaurant, and incorrectly stated the frequency with which the restaurant cleaned its hood, duct and flue systems.
The 2012-2013 policy was bound and the restaurant subsequently filed six separate claims before the policy was cancelled in March 2013. The six claims involved wind damage, two thefts, property damage, vandalism, and a fire loss which essentially put the restaurant out of business. The carrier paid the claims, totaling $1.9 million, and is pursuing litigation against agency “X” on the theory that it would not have written the coverage for the restaurant had the insured agent accurately completed the application and advised the carrier of the restaurant’s loss and non-renewal history. Misleading a carrier to get the account written certainly backfired for agency “X.”
Other Key Issues
If you need to insure the risk in the E&S market, review the proposal from the wholesaler to identify how well it matches the coverage requested. It is highly suggested to get a specimen copy of the policy, too. Agents should also understand that they do not have binding authority when writing business in the E&S market, so ample time should be factored in to get the account bound in a timely manner.
If the risk is already insured in the E&S market, review the renewal proposal for any changes, comparing it with the expiring coverage. Since the E&S market is not required to issue conditional renewal notices advising the agency of changes, changes in the coverage could occur without your knowledge. As a result, you need to identify any differences between the expiring policy and the proposed renewal terms, and then bring any reductions to your client’s attention. It is highly recommended that you get the client’s approval in writing acknowledging these changes.
While restaurants and taverns are not difficult risks to write, they are not easy ones either. Like any other risk, they require knowledge, expertise and the necessary level of documentation. By doing the necessary homework, there is a greater chance of writing the account while, at the same time, reducing your E&O exposure.