Bakery, Doughnut, Bagels & Pastry Shop Insurance
Insuring are a Retail or Commercial Baker and Ways to Reduce Insurance Costs
When examining the risk exposures of a bakery, whether retail or commercial, it’s important to list the hazards by relevance. Since no two facilities are the same, itemizing the exposures allows the insured the ability to create a program that can provide coverage in order of importance. Typically, the highest hazard exposures that can result in the greatest loss of value such as a fire should be addressed first and with adequate amounts to cover the potential loss.
One way of providing a comprehensive insurance package at a reasonable cost is to self-insure or retain some of the risk by raising the deductibles on the property forms. This seems obvious, but many times the deductibles are set low as well as the coverage limits.
- For example, if the replacement cost on a building is set at $ 500,000, the deducible at $ 500, and inflation increases the cost of construction by 4% each year for the next 5 years; the replacement cost can increase to $ 608,000. If the limit is not adjusted and a total loss occurs, the difference in the recoverable amount can be as high as $ 108,000. Many insureds let their policies renew without adjusting the limits to keep premiums amounts in check, but don’t consider the net effect of the recoverable amounts in the event of a total loss. The coinsurance penalty can be equally damaging in the event of a partial loss.
- A better approach would be to raise the coverage limit to an adequate amount, say $ 600,000, and increase the deducible to $ 1000 or more. By raising the limit from $ 500k to $ 600k, the premium may increase in proportion to the coverage of approximately 20%. By raising the deductible from $ 500 to $ 1000, the effect on the premium can decrease by as much as 7%. If the deductible was increased $ 2500, the premium can decrease by as much as 15%. Hence the difference to raise the liability limit can be as low as 5% more. This equates to an additional $ 98,000 if a total loss occurs.
What are the important exposures to insure?
This is where creating a list or even better a matrix that can determine the likelihood of a loss and its financial impact if a loss were to occur.
| Exposure in Order of Probability | Maximum Potential Loss | Impact on Business | Method to Reduce Insurance Cost |
|---|---|---|---|
|
Pilferage |
$ 1,000 |
Nil |
Retain Risk or Self Insure |
|
Spoilage |
$ 5,000 |
Low |
Insure Against Specified Perils |
|
Robbery |
$ 25,000 |
Medium |
Increase Frequency of Bank Deposits |
|
Fire |
$ 500,000 |
High |
Raise Coverage & Deductible |
Business Owners Policy or BOP
Unless the size of the bakery, bagel store, doughnut, or pastry shop, is very large, most commercial general liability insurance is packaged with commercial property coverage. Often these policies are written on a Business Owners Policy form or for short – BOP. Most BOP’s include loss of business income, monies, and securities, hired and non-owned auto, valuable papers & records, food spoilage, mechanical breakdown, etc. Usually, BOPs are defined by its limitations and exclusions as opposed to the named perils. Another advantage of writing a bakery on a BOP form is that there is usually no annual audit. This can save time and aggravation for all parties involved, but most importantly it allows the baker to budget their insurance expenses.
How is the cost of these policies determined?
Business Owners Policies (BOP’s) are usually rated based on the contents limit. Other factors may include location, type of establishment, and building construction.
Commercial General Liability & Umbrella Insurance
When a bakery is too large by either sales volume or number of locations, the type of insurance to cover its liability exposures would be a commercial general liability policy or CGL. Often, these forms are combined with a commercial property policy or CPP to form a commercial package policy or CPP. If the liability insurance is written on the former then many of the above questions need to be addressed, but more care needs to be ascertained as these policies often contain many exclusions and limitations. Therefore, based on the type of operation, coverage can be purchased on an item-by-item basis. These may include food & airborne illness, hired & non-owned autos, liquor liability, and employer practices liability to name a few.
An umbrella policy typically adds an additional layer of liability coverage over the underlying or base limits. A follow form umbrella generally matches the coverage including the limitations and exclusions whereas an excess liability policy defines what is covered which can deviate from the underlying policy.
Commercial General Liability & Umbrella Insurance
When a bakery is too large by either sales volume or number of locations, the type of insurance to cover its liability exposures would be a commercial general liability policy or CGL. Often, these forms are combined with a commercial property policy or CPP to form a commercial package policy or CPP. If the liability insurance is written on the former then many of the above questions need to be addressed, but more care needs to be ascertained as these policies often contain many exclusions and limitations. Therefore, based on the type of operation, coverage can be purchased on an item-by-item basis. These may include food & airborne illness, hired & non-owned autos, liquor liability, and employer practices liability to name a few.
An umbrella policy typically adds an additional layer of liability coverage over the underlying or base limits. A follow form umbrella generally matches the coverage including the limitations and exclusions whereas an excess liability policy defines what is covered which can deviate from the underlying policy.
How is the cost of these policies determined?
Commercial general liability policies are most often rated based on sales however payroll can be a factor.Commercial Property Insurance
Like commercial general liability policies, commercial property policies typically cover perils on a named basis. Therefore, it is important to determine what risks are prevalent to the establishment. These policies are generally written on either a basic, broad, or special basis. The first two define which perils are covered, while the latter covers all direct physical losses except for the exclusions. Again, it is important to determine every aspect of what perils are inherent to the business.
Machinery & Equipment and Mechanical Breakdown
The machinery and equipment can be covered as business personal property on a package or a BOP form, however there is often an equipment breakdown exclusion. Bakeries often have expensive ovens and refrigeration equipment that are subject to mechanical breakdown. The resulting damage caused by mechanical breakdown, such as change in temperature or spoilage can usually be added by endorsement, however mechanical breakdown may need to be added as well. It is often less expensive to insure heavy equipment by a separate machinery & equipment policy or by endorsement. This allows an amount to be specified and which perils to insure against. In addition, due to the fluctuations in equipment valuation, the insured could control the insurable amount by specifying the valuation either on the agreed or specified basis.
Another point to consider is the time value element and some other related exclusions on the standard property forms including damage caused by electrical disturbances, utility power failure, and the loss of income due to either a direct physical loss and/or mechanical breakdown.
These days, machinery is becoming more sophisticated and to obtain replacement parts can be difficult. This delay can pose serious loss of income exposures if key equipment is shut down for extended periods and production is halted.
Machinery & Equipment and Mechanical Breakdown
The machinery and equipment can be covered as business personal property on a package or a BOP form, however there is often an equipment breakdown exclusion. Bakeries often have expensive ovens and refrigeration equipment that are subject to mechanical breakdown. The resulting damage caused by mechanical breakdown, such as change in temperature or spoilage can usually be added by endorsement, however mechanical breakdown may need to be added as well. It is often less expensive to insure heavy equipment by a separate machinery & equipment policy or by endorsement. This allows an amount to be specified and which perils to insure against. In addition, due to the fluctuations in equipment valuation, the insured could control the insurable amount by specifying the valuation either on the agreed or specified basis.
Another point to consider is the time value element and some other related exclusions on the standard property forms including damage caused by electrical disturbances, utility power failure, and the loss of income due to either a direct physical loss and/or mechanical breakdown.
These days, machinery is becoming more sophisticated and to obtain replacement parts can be difficult. This delay can pose serious loss of income exposures if key equipment is shut down for extended periods and production is halted.
Loss of Business Income & Extra Expense or BI & EE
Business owners’ policies most often offer loss of business income (previously termed business interruption) on an ‘Actual Loss Sustained’ basis (ALS) subject to the terms, conditions, and exclusions of the policy. Generally, the coverage pays for the continuing operating expenses and net profits before taxes due to a loss caused by a covered peril (read policy form). This coverage is usually granted for a period of one year. On the other hand, the commercial package policy requires a specific monetary limit scheduled and a time or term listed such as a period of three months. Coverage is determined by the type of form selected such as basic, broad, and special for both the BOP as well as the CPP.
Extra Expense provides for payment due to a covered loss to help mitigate the claim such as with the loss of business income. This may include the rental of a temporary location and the cost of transferring the contents to the location to help resume operations quicker than if no measures were taken. It may also include the payment for temporary help to expedite business operations.
As with most businesses, retail bakeries derive most of their income from walk in traffic therefore it is important to properly protect against the monetary loss of income due to a claim that can shut down the operations. Commercial bakeries are also exposed to high loss of business income claims due to time necessary to rebuild the facility or the inability to manufacture the product elsewhere.
Commercial Auto & Truck Insurance
Many bakeries deliver their products in their own vehicles, in their employees’ or by hire. A commercial auto & truck insurance policy provides coverage for third party bodily injury and property damage losses in addition to first party no fault, uninsured and underinsured motorist, medical payments, rental, towing, and physical damage. An important coverage to consider if an auto or truck policy is not secured would be to add hired and non-owned auto endorsement to the BOP or commercial package. This can provide liability protection for claims arising out of an accident with a vehicle that is either hired or borrowed by the company.
Commercial Auto & Truck Insurance
Many bakeries deliver their products in their own vehicles, in their employees’ or by hire. A commercial auto & truck insurance policy provides coverage for third party bodily injury and property damage losses in addition to first party no fault, uninsured and underinsured motorist, medical payments, rental, towing, and physical damage. An important coverage to consider if an auto or truck policy is not secured would be to add hired and non-owned auto endorsement to the BOP or commercial package. This can provide liability protection for claims arising out of an accident with a vehicle that is either hired or borrowed by the company.
Workers’ Compensation & Statutory Disability Insurance
All states have workers’ compensation laws that require organizations to provide coverage or a means to pay for their employees’ claims in the event of an on-the-job injury or illness. Please refer to the insurance department or the department of labor in the state for which the business operates and the employees are located or work in. Statutory disability may also be required which provides coverage for off the job injuries and illnesses.
By William F. Schaake, CIC, CRM © 2012-2023 All rights reserved.