Why the Standard Policy Does Not Pay

A commercial property policy covers your business personal property, which includes food inventory, against covered causes of loss. The problem is which causes of loss are covered.\n\nThree exclusions do the work here. Mechanical breakdown is excluded, so the compressor failing is not a covered cause of loss. Loss caused by the interruption of utility service that originates off premises is excluded, so a power outage at the utility is not covered. And in many forms, loss caused by changes in temperature or humidity is addressed restrictively.\n\nSo the chain of events that actually destroys the food is excluded, which means the food loss is excluded, even though the food itself is covered property. This is the single most common point of confusion in restaurant property insurance, and it is entirely a question of causation rather than of what is on the schedule.

• Food inventory is covered property, but mechanical breakdown is an excluded cause of loss
• Off premises utility interruption is excluded unless utility services coverage is added
• Temperature and humidity change provisions in many forms restrict coverage further
• The exclusion applies to the cause, which is why covered property is still not paid

The Three Coverages That Fix It

There are three distinct coverages, and a well built restaurant program usually has all three.\n\nSpoilage coverage, sometimes written as a spoilage endorsement or refrigeration coverage, covers loss to perishable stock from a change in temperature or humidity resulting from mechanical breakdown or from power interruption. The important details are the limit, whether it is written per location, what causes are included, and whether there is a deductible specific to spoilage. Some forms require that the refrigeration equipment be connected to an alarm or monitoring system, and that condition is enforceable.\n\nEquipment breakdown coverage, formerly called boiler and machinery, covers the failure of the equipment itself and, importantly, the resulting damage. For a restaurant that means the compressor, the condenser, the ice machine, the hood exhaust fan motors, the HVAC, the dishwasher booster, and the electrical panel. Equipment breakdown usually includes a spoilage component, so operators should check whether their spoilage coverage comes from this policy or from the property form, and avoid buying it twice or assuming it is there when it is not.\n\nUtility services coverage addresses off premises utility interruption. It comes in two flavors, direct damage and time element, and restaurants typically need both: direct damage for the spoiled inventory and time element for the lost income while the power is out. Pay attention to whether overhead transmission lines are included, because many utility services endorsements exclude them and overhead lines are what fail in a storm.

• Spoilage coverage addresses perishable stock loss from temperature change; check limits, causes, and any alarm conditions
• Equipment breakdown covers the failed equipment and often includes a spoilage component
• Utility services coverage is needed for off premises outages, in both direct damage and time element forms
• Confirm whether overhead transmission and distribution lines are included in utility services coverage

The Income Side of a Refrigeration Loss

The product loss is usually the smaller number. The larger number is what happens to service.\n\nIf a walk-in fails on a Thursday and you cannot open Friday and Saturday, the lost revenue from two of your highest volume services exceeds the value of the inventory in most restaurants. Business income coverage addresses that, but only if two conditions are met: the cause must be covered, which takes us back to equipment breakdown and utility services, and the waiting period must be short enough to respond.\n\nWaiting periods are where restaurant business income coverage commonly fails. A seventy two hour waiting period will not pay for the two day closure that is the most likely scenario. For a restaurant, a twenty four hour waiting period, or shorter if available, is materially more valuable than a larger limit. Ask for it specifically.

• Confirm business income extends to equipment breakdown and utility services causes of loss
• Negotiate the shortest practical waiting period; this matters more than limit for most restaurants
• Fund extra expense so you can rent refrigeration, buy ice, and pay emergency service rates
• Document your revenue by day of week, because closures are not evenly costly

Review Your Restaurant Coverage

If you are not certain whether your spoilage coverage comes from your property policy or your equipment breakdown policy, or what your business income waiting period is, those two answers are worth getting before the next heat wave. We work with restaurants, caterers, breweries, and multi unit operators and are glad to review your program. Schedule a time at calendly.com/grandbayfinancial.\n\nThis article is for general information and is not a substitute for policy language or professional advice.