A Tip on Vendors: Contractual Risk Transfer

Another area to pay close attention to when insuring restaurants and bars is third-party contractual risk transfer with vendors.

Paul Broussard, a risk advisor at Cavignac Insurance Brokers in San Diego, said a recent claim illustrates why it’s critical for restaurants to understand the terms and conditions of every contract they sign.

Broussard said the restaurant had a fire that may have been caused by a negligent grease cleaning contractor for the restaurant’s Ansul system, a specialized, automatic fire suppression system used in commercial kitchens that discharges liquid or gaseous agents to extinguish fire.

“A lot of these restaurants are signing agreements without actually taking a look at the actual terms and conditions,” he said. “You’re in the restaurant business, you know how to make food, but you may not necessarily know the ins and outs of preventing grease fires and know if the equipment is being serviced and cleaned properly.” In this case, the vendor hired to clean the grease may have been negligent because the system was not properly cleaned, he said.

“And because they (the contractor) have the ability to control the risk and they have the processes and practices in place as that vendor, you need to be indemnified if for some reason they are negligent” when providing service, he said.

“Our client is now in a situation where they have a mutual waiver of subrogation with their landlord, so the landlord’s insurance company is not necessarily going to go back on the restaurant for the negligence, but potentially other tenants within the building that have no contractual relationship with the restaurant are coming after them for loss of business income because of the fire,” he said. “So, whenever we talk about contractual risk transfer, we’re talking about transferring the risk to the person or organization that has the ability to control the risk.”

In this case, the grease cleaning contractor had the ability to control the risk of cleaning properly, he said. While it’s important to make sure vendors have adequate insurance limits, and that the restaurant is listed as an additional insured, the contract terms must offer protection as well.

“There’s a lot of things that you have to make sure that you’re doing because unless it’s really required in the contract agreement, most of the blanket endorsements that they send you have no meaning because it has to be requested in a contract agreement,” he said.

“Yes, you’re getting a certificate of insurance, but are you extended additional insured status on their coverage? Are you being identified in the contract?” he asked. “It’s certainly important to involve your broker whenever you have a master vendor agreement … You want to make sure you get the terms and conditions redlined to give you some sort of protection.”

The restaurant now has a covered property claim because their equipment and their property were damaged but potentially has no recourse from the service contractor, depending on the contract and depending on the amount of limits that the contractor carries, he said. “And now you also have these liability claims coming after the restaurant.”

David DeLorenzo, CEO and owner of Ambassador Group Insurance, also advises restaurants and other agents to do thorough reviews of vendor contracts to understand where the vendor’s insurance may or may not come into play. “Because sometimes they’re just trying to pass the buck and the responsibility over to the little guy,” he said. “So, if you’re serious about writing hospitality, and you really want to help your clients, and you’re not reading contracts every day and you’re not doing claims every day, find a third party that can help.”