...... ............. AN INSURANCE PROGRAM FOR RESTAURANT OPERATORS Thesis for ihe‘Degree 0* M. A. MICHIGAN STATE UNIVERSITY Robert D. Buchanan 1956 AN INSURANCE PROGRAM FOR RESTAURANT OPERATORS by Robert D. Euchanan A THESIS Submitted to the School of Hotel, Restaurant, and Institutional Management of Michigan State University of Agriculture and Applied Science in partial fulfillment of the requirements for the degree of MASTER OF ARTS 1956 TABLE OF CONTENTS CHAPTER I. INTRODUCTION. . . . . . . . . . . . Statement of the problem Method and scope. Limitations II. RISK AND ITS RELATION TO INSURANCE Risk defined Nature of risk in economic life. Risk, economically speaking, is classified in two ways with respect to its nature Risk is universial Risk and effect on credit. Methods of dealing with risk. The law of large numbers Relative value of risk. Causes of losses present in the restaurant industry Classification of risks Miscellaneous consideration of'risk Underwriters‘ classification. Incidental hazards Consequential losses . Contributory causes. Controllable hazards . . PAGE CDNNWJI‘UO (DKOCDCID 10 ll ll 12 18 18 l8 l9 19 l9 CHAPTER III. IV. A SURVEY OF INSURANCE PROGRAMS FOR 114 RESTAURANT OPERATORS IN MICHIGANS. Purpose. Procedure Scope and method. Tabulation of results Statistical data. Analysis of results. Forms of business organization Size of restaurant operation. Amount spent for insurance Per cent of actual cash value carried. Appraisal of building and contents. Methods used to determine amount to spend for insurance Risks in the restaurant business and which are covered Social insurance. Other insurance needed for complete protection Risks that are most important to the restaurant operator ADMINISTERING THE RESTAURANT INSURANCE PROGRAM Principles of insurance buying Types of insurance carriers Opinion on mutual vs. stock companies. Insurance administration today in the restaurant industry . . . iii PAGE 20 20 20 21 23 2a is ’45 45 46 47 50 52 52 62 63 63 65 65 72 75 CHAPTER Consideration in putting the insurance program into effect. Establishment of management policies Securing competent advice Use of insurance publicatiOns. Duties of the insurance administrator V. CONCLUSIONS AND RECOMMENDATIONS. Conclusions. Recommendations Type of company to purchase insurance from Suggestions to reduce insurance costs A recommended insurance program with estimated costs APPENDICES BIBLIOGRAPHY iv PAGE 76 77 79 79 79 82 82 87 87 89 94 116 133 LIST OF TABLES TABLE I. Comparison between annual sales and amount spent for insurance. .11. Comparison-between annual sales and whether or not an appraisal is made to arrive at insurance values. III. Comparison between‘annual sales, form of restaurant ownership, and social insurance carried. . . . PAGE 26 28 41 CHAPTER I INTRODUCTION It is estimated that there are about 42,000 places in the United States where food is served to persons outside their homes.1 Restaurants alone serve 70,000,000 meals every day, and commercial eating places are said to employ over two million personnel.2 Altogether it is the third largest retail business, grossing $13 billion a year.3 The Michigan 1954 Census of Business)4 shows that there are 13,476 eating and drinking establishments with total sales of $589,765,000 per year, or about $92 for every person living in Michigan. Few of these establishments are without need of protection against risk by insurance. Since risk is both universal and undesirable, the insurance business has grown‘and flourished as a risk-bearing institution. lReginald v. Spell, Public Liability Hazard (Indiana— polis: The Rough Notes Co., Inc., 19557, p. 377. 2Donald E. Lundberg and Vernon Kane, Business Manage- ment--Hotels, Motels and Restaurants (Tallahasse, Florida: Peninsular Publishing Company, 1952), p. 17. 3Ibld. 4U. S. Bureau of Census, Census of Businessil9é4, Vol. I. Retail Trade, Chapter 22: MichiganTWashington, D. C.: U. S. Government Pringint Office, 1955). P . wwwh~g~ *\ 2 With the founding by Benjamin Franklin in 1752 of the Philadelphia Contributionship for the Insurance of Houses from Loss by Fire, the cornerstone was laid for an industry that in the course of two hundred years had developed into one of the largest in the country.1 Its five branches (fire, marine, casualty, surety, and life) together control over 70 billion dollars in assets.2 In 1950, the latest year for which pre- cise statistics are available, the people of the United States spent $16,549,689,132 for insurance premiums.3 Before undertaking the study of insurance, it is nec- essary to have an understanding of the basic terms of that study. Insurance is a device for handling risk. Insurance may be defined broadly as the guarantee by one to another against accidental loss.LL From the Viewpoint of the individ- ual insured, insurance is a device that makes it possible for the individual to substitute a small, definite loss for a large but uncertain loss under an arrangement whereby the lEugene Dougherty, "Insurance Rate-Making Process of Interest to Corporate Buyers," The Weekly Underwriter, Vol. 172, No. 5, (January 29, 1955), p. 3081 2Robert I. Mehr and Emmerson Cammock, Principles of Insurance (Homewood, Illinois: Richard D. Irwin, Inc., 1954), r3.I§. 3"Insurance History," Mutual Insurance 200th Anniver- sary Committee, Illinois State Committee Memorandum, 1952, No. 9. ”John H. Magee, General Insurance (Chicago: Richard D. Irwin, Inc., 1942), p.'§T fortunate many who escape loss will help to compensate the unfortunate few who suffer loss.l Thus, a person who owns a restaurant valued at $30,000 must face the possibility that the restaurant may be totally destroyed. He is faced with the uncertainty of a $30,000 loss. He may, however, for the payment of a definite sum agreed upon by an insurer, elimin- ate the possibility of a $30,000 loss. He obtains certainty by exchanging an uncertain large loss for a certain small loss. The margin of profit for a restaurant is often too small to absorb loss without protection. Therefore, protec- tion from risk is important for any well-managed restaurant and merits comprehensive consideration. Statement of the Problem It is the purpose of this study to present practical information about insurance and its application in the res- taurant business with emphasis upon the following factors: 1. The nature of risk in economic life. 2. Causes of loss in the restaurant industry. 3. Types of coverages available to protect insurable risks. 4. To.discover and compare the degree to which insur- ance is being used for protection in the restaurant business. lMehr, op. cit., p. 3. 5. Principles of restaurant insurance buying. 6. Considerations in putting the insurance program into effect. From this study, the writer expects to secure informa- tion which will assist in formulating a recommended insurance program for a restaurant. Method and Scope The basis used by the author for the study of insurance and its application to the restaurant operator incorporates aspects of risk and its relation to insurance; current insur- ance programs for restaurants in Michigan; and the adminis— tration of the insurance program per se. Major conclusions and recommendations are then evolved from the body of the study. To explore risk and its relation to insurance, the author selected and integrated from research significant findings to explain the fundamental principles of risk and risk bearing and introduced the insurance mechanism as an important device for reducing and sharing losses. To deter— mine the degree to which insurance is being used for protec— tion of risks in the restaurant business, a comprehensive direct mail questionnaire was sent to restaurant operators throughout Michigan, results tabulated, and analysis made. Riskswhich have a corresponding insurance coverage that a restaurant might possibly use are considered in the ques- tionnaire. To review insurance administration as a management function, the writer selected and integrated significant ideas pertinent to a better understanding of insurance administra- tion from sound business principles of management which will apply to both small and large operations. It is hoped that this study will stimulate further re— flection on the part of those for whom it was prepared: the responsible executiveswho may have neglected to develop any explicit way of thinking about risk or its protection and those entering upon a serious study of restaurant management who may have an opportunity to manage or own a restaurant. Limitations This study is intended to stimulate interest in res- taurant insurance buying as a management function, to find out what restaurant men are thinking and doing about insurance, to guide the reader in the insurance problems, and to lay the ground work for building a program that will serve most effic- iently and economically in the individual case. It is not intended as a complete discussion of insurance organizations, forms, and methods, for the details are innumerable. A direct mail questionnaire is only one means to evaluate the degree to which insurance is being used for pro- tection in the restaurant business. Furthermore, it is impos— sible to verify the respondents'concentration or inattention in answering the questionnaire. 0n the other hand, if certain risks are frequently, or only seldom covered, it is reasonable to assume that they will show up in the tabulation of that specific item. Conclusions are drawn from returned question- naires, and the results may be indicative, but not conclusive of the industry as a whole. CHAPTER II RISK AND ITS RELATION TO INSURANCE In order to have a clear understanding of insurance it is necessary to first have a clear understanding of risk and of the nature of risk, because insurance is the business of transferring risk to a professional risk—bearer. Risk Defined Security is a relative term. No restaurant man, in handling the economic affairs of his business, can ever reach the state of absolute security or complete certainty. The economic structure is so organized that uncertainties of life bear considerable consequences. The possibility that a ca- tastrophe will occur causing destruction and preventing com- pletion of plans and projects, is of utmost importance to the individual concerned. The uncertainty of the occurrence of an unfavorable contingency has been termed risk. From the standpoint of insurance, risk is present when there is a chance of loss.1 1Besides these definitions, the word "risk" has come to have a special or technical meaning in the business of insurance, and is sometimes used there to define an appli- cant for life insurance; or sometimes the unit of exposure, e.g.,a building in fire and casualty insurance is known as "the risk." But this special, or technical meaning is not the one considered in this thesis. Instead "the chance for loss" is the meaning used. Nature of Risk in Economic Life Risk, economically speaking, is classified in two ways with respect to its nature. For insurance purposes it is im- portant to distinguish the two broad classifications of risk, namely (1) speculative or business risks and (2) pure risk.1 The first is bilateral, including the alternate possibility of loss or gain. It is sought by those willing to take a chance of loss as an appropriate price to pay for the pros- pect of a possible gain. The latter is unilateral and nega- tive, involving only the chance of loss. Only pure risks are regarded as appropriate subjects for insurance. Risk is universal. It exists everywhere and at all times. It is inescapable. An appropriate amendment to the old saying “Nothing is more certain than death and taxes," 1A. H. Mowbray, Insurance (New York: McGraw-Hill Book Company, 1930), p. 5. This terminology follows Mowbray's definition of risk as "the chance of loss." It appears that the theory of risk has not reached the stage of generally ac- cepted terminology. Willet distinguishes positive and nega- tive risk. "There is the possibility that expected future wealth may never be obtained. We may distinguish these forms of loss as positive and negative." A. H, Willett, The Econ- omic Theory of Risk and Insurance (Philadelphia: Univ. of Pennsylvania Press, 1951), p. 13? He also distinguishes be- tween static and dynamic risk (p. 14), depending on whether or not the chance of loss arises out of dynamic conditions or would be present in a static state. Hardy classified risk into five types in accordance with their origin. C.0. Hardy, Risk and Risk Bearing (Chicago: Univ. of Chicago Press, 1923), p. 23. Other writers have used other bases for classification. would be, "Nothing is more certain than death, taxes, and risk.” This is only another way of saying, ”Nothing is more certain than uncertainty." Risk then is universal. Risk and effect on credit. Risk has a big influence on our credit structure. The lender of capital wishes to earn a profit from his money in the form of interest, but were he to lose it in seeking a profit he is worse off than if he allowed it to remain idle. Consequently he will lend money only when the major dangers to which it is exposed can be avoided. For example, the banker will not lend money on a mortgage on a building unless it is adequately protected by fire insurance, with a clause making him beneficiary to the extent of his loan. Here risk puts a burden on the lender, who has a restriction placed on his chances to lend money, except under special conditions. Also it puts a burdon on the borrower, who must not only pay the interest rate, but also the cost of the insurance premium. Methods of dealing with risk. It is clear that there is no escape from risk in either business or private life. The methods of dealing with economic risks we face in the restaurant business may be classified under five headings. Each of these methods are discussed briefly hereafter.l 1Adapted from Robert I. Mehr and Emmerson Cammock, Principles of Insurance (Homewood, Illinois: Richard D. Irwin, Inc., 1954), pp. 9-14. 10 1. Risk may be assumed by the restaurant with or with- out the provision of a reserve fund. 2. The fire hazard may be reduced to a minimum by the use of fire resistant building materials, proper safety pre- cautions, and good housekeeping. 3. Danger of loss from fire may be reduced by the presence of fire extinguishers, or an automatic sprinkler system. 4. The risk may be shifted by incorporation-ownership. In this type of business organization, ownership is not dir— ect. The corporation makes it unnecessary for an investor to place his entire personal estate at risk in order to invest part of it in one enterprise. Included in those who bear the risk besides the owners whose liability is limited, are the creditors, who stand to lose if the corporation cannot survive. 5. Risk may be reduced by insurance. The restaurant operator can budget a rather small fixed amount, knowing that this charge is all a fire or other loss will cost him. The law of large numbers. The law of large numbers is based on the discovery that more can be predicted concern- ing an entire group of similar items than about the single items that compose it. A single event defies prediction, but the mass will always remain practically the same, or varies in ways that can be predicted.‘ This is the way risk is elim- inated by insurance companies after the risk is transferred to the company by the individual who is originally exposed to it. 11 Relative value of risk. Risk should be considered and evaluated in relation to the amount of loss which may occur. The importance or value of risk depends largely upon the amount of possible loss. It is not the absolute size of a possible loss that is the controlling factor, but the size in relation to the available funds to meet a casualty. If the restaurant exposed to a risk is of low economic strength, even a very small loss may be more than it can stand without distress. 0n the other hand, a restaurant whose resources run into millions might suffer little hardship, even though a loss ran to several thousand dollars. Again, the size of loss should be considered in the light of available funds. Even a restaurant of large wealth might be put to some dif- ficulties to meet a sudden immediate need amounting to a rel- atively small sum. But, though the cause be sudden and un- foreseen, if the liquidation can be spread over a period of time, often no great difficulty will be involved in meeting a large loss. Causes of Losses Present in the Restaurant Industry Restaurants are subject to a multitude of various risks,all of which may cause loss. This study considers those types of risks which are actually or potentially insur- able. Primarily losses are attributable to only a few causes, such as fire, leakage, the elements, breakage, criminal acts, defaults, seizure, liability, disability, and death. l2 Classification of risks. The list of loss causes given below will serve to indicate the major classifications under which the individual restaurant operator may group causes for loss. The following arrangement is based on the three principle groupsof risks to which a restaurant may be exposed. These are (1) direct property losses, (2) third party or liability claims, and (3) indirect losses or loss of earning power. I. Direct Propertprosses. Losses to a restaurant operator are great in number involving damage or destruction of property. The operator should consider the probable ex- posure to loss. A. Fire 1. Internal hazards and external exposure 2. Effect of heat, smoke, and smudge, following the fire 3. Damage by water used to put out the fire 4. Explosion caused by fire 5. Incidental losses due to the elements 6. Consequential loss indirectly due to fire" B. Leakage l. Sprinkler system 2 Gas or oil from cooking or heating units 3. From refrigerator system 4. Rain water and snow or hail 5 Steam 13 The Elements 1. Earthquake 2 Water--surface water, floods, and tidal waves 3 Hail and rain 4. Lightning 5 Windstorms, tornadoes, and cyclones Breakage l. Breakdown of electrical equipment, engines, and machinery 2. Explosion of boilers, pressure cookers, and tur- bines 3 Miscellaneous explosion-hazards 4 Collapse of structure 5. Collision 6 Plate glass and electric or neon signs Criminal l. Burglary 2. Robbery by kidnapping 3. Pay-roll robbery 4. Inside holdups 5. Messenger holdups 6. Theft, larcency, and pilferage 7. Embezzlement and misappropriation of money, equipment, and stock 8. Forgery Defaults 1. Defaults under bids, contracts, and mortgages 4. 14 Failure of supplier to carry out agreement Forfeiture connected with guarantee and lost instruments Credit risk G. Seizure l. Seizure by authorities a. Destruction of property to prevent spread of fire or other disaster b. Condemning property because of unsafe conditions c. Taking of property for public works 2. Seizure by unauthorized personnel (piracy and racketeering) H. Transportation 1. Aircraft 2 Automotive 3 Marine--foreign and domestic 4. Parcel post and registered mail 5 Railroad and express I. Miscellaneous 1. O\U'|J:‘UU Assessment under insurance or other agreements Excess replacement costs required by building ordinance Infringement of patent rights Vandalism and malicious mischief Sabotage Strikes, riots, and civil commotion II. 7. War 8. Obsolencense Third Party or Liability Claims. The liability group of risks concerns claims brought by others and usually in- volves (l) bodily injury, (2) property damage, or (3) both bodily injury and property damage. It may include damage to possessions, loss of use of property or ser- vices, and harm done to character or reputation. Claims generally arise because of negligence in operation or performance, but obligations are sometimes by law, as in the case of workmen‘s compensation. A. Contractual liability (assumed by contract) 1. Leases containing "hold-harmless" clauses 2. Elevator or escalator agreements under lease or contract 3. Assumed liability under municipal or other ordinance 4. Agreement with dealers, manufacturers, distribu- tors, or other business people B. Employee's liability and workmen's compensation C. Advertiser‘s liability--a restaurant that uses adver- tising media may be sued for libel or infringement of property contract rights or the violation of copyright. D. General public liability arising out of 1. Ownership, maintenance, or use of property or premises \OCD%O\ IO. 11. 12. 13. 14. 15. 16. 17. 16 Restaurant‘s negligence in handling customers' property Elevator operation Explosion, collapse, and breakdown Motor vehicle owned, leased, or hired by the restaurant Acts of employees Encounter between a guest and an employee Known vicious disposition Damages for refusal to serve Injuries from defective food Defective premises and equipment Services away from the premises Joint Operation with others-~for example, three restaurants serving a large function away from the premises Sponsoring any excursion, concert, entertain- ment, convention, picnic, bowling team, base- ball team, etc. Water damage from premises owned or rented by restaurant operator The restaurant operator subletting any portion of the premises he owns, rents, leases, or occupies The use of signs, posters, bulletins, placecards, or street banners by the restaurant which are placed on premises not occupied by the restaurant III. 18. 19. 20. 17 Subsurface damage due to excavation or drilling in streets or highways with mechanical equipment New construction work or demolition work Renting or leasing equipment to or from others E. Infringements on patents F. Trustee's and agent's liability to principal Earning Power Risk. The future earnings of a restaurant are constantly in danger because a casualty may stop or interrupt their power to earn. The most common causes are the destruction of, or damage to, property; and service failure. A. Business interruption 1. H O \ooo-qmmtwm Fire and related perils Leakage The elements Breakage and collapse Seizure Malicious damage and sabotage Strikes, riots, and civil commotion Warlike operations Delays in receipt of supplies Failure of outside power and service B. Interrupted rentals—~owner and landlord losses due to property made untenantable by casualty C. Falling values--substantia1 reduction in value of real and personal property due to unforeseen circum- stances 18 D. Individual service losses 1. Death or prolonged disability of executives, partners, or trained employees 2. Old age retirement obligations 3. Unemployment Miscellaneous Consideration of Risk Although risk deals with the chance of loss, there are additional factors that should be taken into consideration by the individual. Underwriters' classification. Underwriters separate risks into classes according to the nature of operations and the manner in which loss may occur. For example, the usual public liability policy does not protect against elevator, automobile, and products liability claims. The restaurant operator may look upon a loss of money by theft as a legiti- mate claim-under a robbery policy, but the insurers issue separate policies for pay—roll and messenger holdups, burglary by forceful entry, embezzlement, and other types of theft. It should be noted, however, that the preceding separate policies may be covered under the comprehensive dishonesty, destruction and disappearance policy. Incidental hazards. Various incidental hazards may accompany losses. For example, smoke and water damage is usually suffered in connection with fire. Salvaging property may cause damage in transfer. Property may be damaged when 19 a burglary has been committed or an attempt thereat. The insurers may include such hazards as a part of the main risk, but the individual should verify the fact when purchasing protection. Consequentfifl.losses. Although there is similarity of meaning in the preceding title, the underwriters treat these losses quite differently. To illustrate, they consider the spoilage of goods by the destruction of a heating or refriger- ation system, requiring separate insurance. The looting of property during a casualty may seem to be a direct resultof a primary hazard, but it is not so regarded by the insurer. Contributory causes. In some cases there are contri- butory causes, as when an explosion or earthquake creates a condition leading to loss by fire, leakage, or the elements. Strikes, riots, and war are often contributory hazards, in— creasing the risk of fire or other destruction elements to such an extent that special insurance is required. Controllable hazards. There are a few natural uncon- trollable hazards, such as earthquakes, Windstorms, and floods, but most risks are due to contributory actions of negligence or carelessness, largely under the control of restaurant owners or operators. In fact, prevention and control acti- vities may exert major influences on loss experience. CHAPTER III A SURVEY OF INSURANCE PROGRAMS FOR 114 RESTAURANT OPERATORS IN MICHIGAN Purpose It is the purpose of this investigation to discover and compare the degree to which insurance is being used for protection of risks in the restaurant business throughout Michigan. More specifically, the study will cover: the amount spent for insurance; how this amount is determined; the per cent of the actual cash value carried on building and contents; if an appraisal of building and contents is made to arrive at insurable value; what risks are present in the individual restaurants; and which of these risks are covered by insurance; to what extent social insurance is carried; what additional insurance is thought to be needed for complete protection of business risks; and which risk insurance is most important to the restaurant operation. Procedure To determine to what extent insurance is being used for protection of risk in the restaurant business throughout Michigan, it was decided after conferences with the Hotel, Restaurant, and Institutional Management Department at Mich- igan State University, to send out a direct mail question- naire under their sponsorship. 21 The general nature of the questions to be asked was based upon the author's research from secondary material. A rough draft was made, reviewed, and suggestions received from insurance salesmen, the Hotel, Restaurant and Institutional Management Department, and the Bureau of Business Research of Michigan State University. Later copies were typed and sug- gestions and comments were received from restaurant operators. A cover letter was developed with the aid of the Business Letter Writing Department of Michigan State University. The letter based its appeal for return of the question- naire on the idea of benefit to the operator. The question- naire was a simple choice check type for ease in answering and accuracy of tabulation. It was emphasized that respon- dents were not to sign or identify the questionnaire in order to secure accurate information and high return. A stamped, addressed envelope was provided. A copy of the letter and questionnaire will be found in Appendix A. Scope and Method Between August 8 and 13, 1956, 1,885 COpies of the- questionnaire and cover letter were sent to restaurants in 167 cities in Michigan. The greater part of the mailing list was supplied by the conference specialist at the Kellogg Center for Continuing Education, Michigan State University. This list was originally made two years ago from the Michigan Restaurant Association and names from telephone books. This list was supplemented by the National Restaurant Association 22 and Duncan Hines recommendations for Michigan. An attempt was made to send questionnaires to highly competitive, year around food services,such as restaurants, public cafeterias, lunchrooms, tearooms, coffee shops, and grills. Conversely, there was an attempt to eliminate seasonal operations, school lunchrooms, industrial cafeterias, hotel dining rooms, night clubs and theater restaurants, fountains, ice cream stands, soft-drink stands, doughnut shops, hamburger stands, and drive-ins. Approximately one-third of the questionnaires were sent to Detroit. This was the ratio of the number of eating and drinking establishments in Detroit compared to the total in the state, as shown in the United States Census of Business, Retail Trade, Michigan Preliminary Report, 1954. By September 10, 1956, replies had been received from 114 restaurant operators from fifty-two cities;l ninety- eight questionnaires were returned marked as out-of-business, moved, left no address, unclaimed, etc. This was a return of 06.4% from operators who received the questionnaire. At this point replies were cut off and the tabulation prepared. . A test was made to verify the accuracy of the sample by numbering the questionnaires as they came in, dividing them into two equal groups, and comparing them. The compar- isons were generally close. As a result, it is felt a valid sample was achieved, even though the sample was relatively 1Appendix B lists the cities and number of returns as indicated by post marks on the return envelope. Three ques- tionnaires could not be identified as to city. 23 small. It should be remembered that the mailing was taken from selected lists, supposedly representing the better res- taurants, so that the results are not completely indicative of Michigan as a whole. Tabulation of Results Each part of every question was tabulated separately, with the results shown as a percentage of those answering the question. The total number answering the question upon which the percentage is based is given in parentheses. The relation between (1) annual sales and amount spent per year for insurance, (2) annual sales and per cent of actual cash value for building and contents, and (3) annual sales, form of ownership, and extent of social insurance is examined to discover resemblances or differences. The returns for Question H, “What risks do you have in your restaurant, and which are covered now?” have been grouped into two divisions under the total for each question. These two divisions are (l) lease the building and own the contents, and (2) own the building and own the contents. Under these two divisions are the three major forms of business organiza- tion, which are (l) sole proprietor, (2) partnership, and (3) corporation. Percentages Were compiles for the replies of each form of ownership. In this way the reader can compare the answers for each type of ownership. This is done for those interested in very specific information about one type of ownership. As far as could be ascertained, the results from this investigation will provide new information. 24 Statistical Data The following is a tabulation of the results of ques- tionnaire replies: A. "Check your form of restaurant ownership,” (114) 1. Sole proprietor. . . . . 51.8% 2. Partnership . . . . .. . 32.5% 3. Corporation . . . . . . 14.0% 4. Other . . . . . . . . 01.7% B. ”Check whether you lease, are buying, or own (1) Building (2) equipment." 1. Building (118)1 a. Lease. . . . . . . 50.0% b. Buying . . . . . . 11.0% c. Own . . . . . . . 38.1% 2. Contents (118)2 a. Lease. . . . . . . 04.2% b. Buying . . . . . . 15.3% c. Own . . . . . . . 80.5% C. ”Check the size of restaurant operation for annual sales, seating capacity, and average number of full time employees.” Annual Sales (113) 1. Under $15,000. . . . . . 05.3% 2. 15,000 - 24,999 . . . . 09.7% 3. 25,000 - 39,999 . . . . 14.2% 4. 40,000 - 59,999 . . . . 23.0% 5. 60.000 - 99.999 . . . . 17.7% 6. 100,000 - 199,999 . . . . 15.9% 7. 200,000 - 399,999 . . . . 07.1% 8. 400,000 - and over . . . . 07.1% lFour replies checked that they both lease and own their building. 2One replied they lease and own the contents; another answered they lease and are buying the contents; while three questionnaires indicate they are buying and own the contents. One questionnaire was unanswered. Number of Seats (109) 1. Under 15. . . . . . . . 07.3% 2. 15 - 24 . . . . . . . . 06.4% 3. 25 - 44 . . . . . . . . 16.5% 4. 45 - 84 . . . . . . . . 26.8% 5. 85 -124 . . . . . . . . 22.9% 6. 125 -199 . . . . . . . . 10.1% 7. 200 -299 . . . . . . . . 04.6% 8. 300 and over. . . . . . . 05.5% Number of Employees (109) 1. Under 4 . . . . . . . . 21.1% 2. 4 - 7. . . . . . . . . 24.8% 3. 8 -12. . . . . . . . . 18.3% 4. 13 -l9. . . . . . . . . 09.2% 5. 20 —29. . . . . . . . . 07.3% 6. 30 -49. . . . . . . . . 09.2% 7. 50 -79. . . . . . . . .. 03.7% 8. 80 —and over. . . . . . . 05.8% D. “How much do you spend for insurance pertaining to your business?” (112) 1. Under $75 . . . . . . . 08.9% 2. $75 - 149 . . . . . . . 04.5% 3. 150 - 249 . . . . . . . 15.2% 4. $250 - 499 . . . . . . . 31.3% 5. 500 - 999 . . . . . . . 18.8% 6. l,000-1,999 . . . . . . . 08.9% 7. 2,000-4,999 . . . . . . . 08.0% 8. 5,000- and over . . . . . 04.5% . ‘52-" 1 . _.-...—_'-. H1, 0 0 - H - - u - nm>o 000 - 000.0000 H m m. H - - - - 000.000 - 000.0000 - m 0 0 m H - - 000.00H - 000.00H0 - H 0 0H m H - H 000.00 - 000.00 0 - - H 0 0H 0 - 0 000.00 - 000.0: 0 - - - - a 0 H 0 000.00 - 000.00 0 - - u - m m 0 0 000.00 0 - 000.0H 0 u u - H - .0 0 H 000.0H0 00000 00>0 000.: 000.H 000 00: 0:0 00H 000 mmHmm Hessea 7! -000.00 -000.00 -000.H07 - 000a -0000 -00H0 -000 00000 mocmpSmcH pom pamam 023084 mozMuv- .. w~ .. . 40 Have Risk Do Not But Not Have Covered Covered Risk Risks % % % 33. Workmen's Compensation-- Total (111) 88.3 03.6 08.1 Lease Building, Own Contents Sole Proprietor (22) 81.8 0 18.2 Partnership E14) 92.9 0 07.1 Corporation 5 100. 0 0. Own Building, Own Contents Sole Proprietor (23) 100. 0. O. Partnership 12) 100. O. O. Corporation 6 83.3 16.7 0. 34. Death of Key Man--Tota1(105) 14.3 37.1 48.6 Lease Building, Own Contents - Sole Proprietor (22) 09.1 22.7 68.2 Partnership (13; 07.7 61.5 30.8 Corporation 5 60.0 20.0 20.0 Own Building, Own Contents Sole Proprietor (21) 0., 14.3 85.7 Partnership (11) 18.2 27.3 54.5 Corporation 6 50.0 50.0 0. 35. Death of Sole Proprietor—- Total (102) 15.7 49.0 34.3 Lease Building, Own Contents Sole Proprietor (22) 18.1 63.6 18.2 Partnership (13 07.7 30.6 61.5 Corporation 4 25.0 50.0 25.0 Own Building, Own Contents Sole Proprietor (21) 14.8 71.4 23.8 Partnership 11 09.1 09.1 81.8 Corporation 5 20.0 60.0 20.0 36. Death of Partner-—Total (97) 11.3 23.7 64.9 Lease Building, Own Contents Sole Proprietor (l8) 0. 0. _ 100. Partnership E14) 28.6 50.0 21.4 Corporation 5 20.0 0. 80.0 Own Building, Own Contents Sole Proprietor (21) O. 09.5 09.5 Partnership E10) 0. 40.0 60.0 Corporation 5 40.0 60.0 0. 37. Death of Close Corporation Member--Total (94) 07.4 06.4 86.2 Lease Building, Own Contents Sole Proprietor (19) 0. O. 100. 41 Have Risk Do Not But Not Have Covered Covered Risk Risks % % % Partnership (11; 0. 18.2 81.8 Corporation 5 60.0 20.0 20.0 Own Building, Own Contents Sole Proprietor (20) 0. O. 100. Partnership 10 O. 10.0 90.0 Corporation 6 50.0 16.7 33.3 38. Other Insurance Risks None 8 Business Interruptions Fine Arts Floater on various oil paintings. "In my liability I am only covered up to $10,000 which I don't think is enough." I. "Check the following so-called social insurance'which you carry." (38) 1. Group Accident and Health Insurance. . . 57.9% 2. Group Hospitalization Insurance . . . . 84.’o 3. Group Life Insurance. . . . . . . . 28.9% 4. Group Pension . . . . . . . . . . 07.9% TABLE III COMPARISON BETWEEN ANNUAL SALES, FORM OF RESTAURANT OWNERSHIP, AND SOCIAL INSURANCE CARRIED Form of Group Group ' . Owner- Accident Hospital- Group Group IXnnual Sales ship & Health ization Life Pension Undelr $15,000 Sole Prop. Partner. 2 Corp. $15,CK30—$ 24,999 Sole Prop. 2 2 Partner. 1 2 1 a Corp. 3555:000- 39,999 Sole Prop. 1 Partner. 2 l Corp. $40’CXDCD— 59,999 Sole Prop. 4 4 2 \ 42 TABLE III--Continued Form of Group Group Owner— Accident Hospital— Group Group Annual Sales ship & Health ization Life Pension $ EK),000-$ 99,999 Sole Prop. Partner. 2 2 Corp. L $1CKD,OOO- 199,999 Sole Prop. 1 3 l {. Partner. ; . Corp. 1 3 ? $200,000- 299,999 Sole Prop. 1 1 9 Partner. 1 * Corp. 1 2 2 2 $4OCX,OOO—and over Sole Prop. Partner. Corp. 4 7 5 1 No Annual Sales Giverl Other 1 J. "Vdithout considering costs or amounts, what kind of insur- 811Ce in addition to what you already have, do you think ytn1 might need to provide complete protection to your rtnstaurant, guests, and employees?" (39) None. Ikisiness Interruption Forgery. Fidelity . . VEundalism and Malicious Mischief . . Prfioducts Liability . . . CCnnprehensive Dishonesty,Destruction and Disappearance. . . . . . Machinery Breakdown. Robbery. aJstnership Insurance . . . . . . Accident and Health. . . . . . . Fire Legal Liability . . . . . Electric Sign. . GIVDup Hospitalization Insurance. BuI‘glary . . . . . . Valers' 9 Landlords' and Tenants‘ Liability . I‘Oup Life Insurance . . . . Death of Key Man Life Insurance. F—‘l—‘RDIUIUIUIUMUUWWUO WW-t-P‘Chm 43 Death of Sole Proprietor 1 Surgical and Hospitalization Insurance 1 Extended Coverage 1 Plate Glass . . . . . . 1 Consequenfltfl-Loss or Damage (a) By Fire, (b) Breakdown of Equipment. . . . . . 1 Extra Expense. . 1 Liquor Liability. . 1 ConsequentialLoss or Damage to Automobile, Except by Collision or Upset. . . 1 Dishonesty. . . . . . . . . . . 1 Floor Insurance 1 "Covering destruction of equipment other than fire.” "Covering customers while they are here-—poisoning or other accidents." "In my opinion, it would be impossible to carry com- plete protection for your restaurant, guests, and employees." "I feel that we are well covered." ”1 have just opened a new electric system and I do not know what insurance I need." "For our type of operation, I think we are pretty well covered." "1 do need different ones, but I just take a chance and hope. ' "I believe we have enough insurance without too great a risk. "More liability, but I am changing insurance agents." "Iflor which of the following risks is insurance most im— EKnotant to your restaurant operation?” (113) 1.. Fire in restaurant. . . . . . . . 92.0% 23. Extended coverage . . . . . 61.1% :3. Accidents to others while on y0ur . premises . . . . . . . . 79.6% it. Accidents to employees . 76.1% ES. Loss due to claims from bodily injury or damage caused by consumption of food or beverage in your restaurant. . . 51.3% 53. Business Interruption. . . . . . . 34.5% 7'. Electric sign . . . . . . . .' . 21.1% 8. Plate Glass . . . . . . . . . 25.7% 59. Employee dishonesty . . . . . . . 18.7% 1C). Forgery . . . 10.6% 11.. Theft including larceny, burglary, and robbery . . . . . 37-2% 12?. Boiler and machinery breakd0wn. . . . 08.8% 13. Automobile Liability . . . . . . 35.4% —I _I I. ! ww_'_-“WH'—=E.‘=F--'—- ' .— . Hi__~H_.xr -w._.--.. -. . _ a. . .1, 1,, . HH 44 14. License and permit bonds. . . . . . 14.2% 15. Life Insurance . . . . . . . . . 13.3% 16. None . . . O 17. Other "More liability, but I am changing insurance agents." "Liquor Liability." " Dishonesty.‘I L. "Additional Comments" None. . . . . . . . . . . . . . . 2 "Many types of insurance listed are very desirable. However, cost would be prohibitive and is insurance against damages that are risks which would be rare in frequency and damages would be in civil suit to the filing plaintiff." "My fire insurance is too high and I have no fire hazards, in fact, my business has been remodeled. My fire insurance has been raised since last year, it was $102 just on the building, no fixtures." "I believe it is practical to carry insurance only on items which would put me completely out of business-- items such as 6 through 14 above (Business Interrup- tion, electric sign, plate glass, employee dishonesty, forgery, theft including larceny, burglary and robbery, boiler and machinery breakdown, automobile liability, license and permit bonds) can be absorbed by the business.“ ' '"This is a fine survey, and it would be interesting to get a cross section of operators." ”A very good coverage on all possibilities of run- ning a business and their insurance conscious under- takings." "Congratulations. . . on your restaurant insurance research project!" "I have been very happy to fill out this information for you, but I feel the average restaurant operator will have trouble filling this out truthfully, with— out the presence of his insurance agent. I have filled out this to the best of my ability without checking with our agents. Personally, I have completed a two year certificate course at Pratt Institute, Brooklyn, N.Y., in Foods Management and appreciate these surveys.and 45 am interested in any new information in the restaurant field. I am very willing to help in any work necessary. In the majority of cases I am afraid you are going to get false information from many operators--not inten- tionally,--but of modesty alone, not wanting to admit their personal affairs to anyone, nor show that they are not doing the proper thing by not buying suffici- ent coverage. Plus the fact the law requires a certain amount of insurance to be had by every business. Quite a few, because of financial status don't have these insurances, and will be afraid someone is checking up on them. I have one suggestion, the major insurance companies have statistics on insurance averages on a national scale. If you know an insurance agent well enough, he can help you get the information,which is sometimes kept confidential. Good Luck to you on your thesis. Analysis of Results The first section of the study was designed to get factual information about the form of restaurant ownership, and the size of the operation. These facts should be kept in mind in reviewing and comparing the degree to which insurance is being used for protection against certain risks. Forms of business organization. In general, over one- half (51.8%) of the operators responding to the questionnaire are sole proprietors, about one-third (32.5%) are partners, and about one out of seven(or 14.5%)are incorporated. One- half (50.0%) of the persons answering the questionnaire lease the building, while 38% indicated that they own the building, and 80.5% own the equipment. Size of restaurant Operation. 0n the average, about one-quarter (25.0%) of the operators answering the question— naire had annual sales between $40,000 and $59,999 per year, '7‘!" 46 while 17.7% of the operators reported sales from $60,000 to $99,999, and a slightly smaller per cent (15.9%) indicated sales of between $100,000 and $199,999. Over a quarter (26.6%) of the Operators have between 45 to 84 seats, while a slightly smaller per cent (22.9) replied they had a seating capacity between 85 and 124. The answers indicate that nearly one- quarter (24.8%) of the restaurants have four to seven employees, 21% have under four employees, and that 18% of the operators that answered the questionnaire employ from eight to twelve persons. Amount spent for insurance. As indicated by the answers almost one-third (31.3%) of the operators responding to the question spend between $250 and $499 a year for insur- ance pertaining to their business. Nearly one-fifth (19%) of the Operators replying spend from $500 to $999 and 15% spend between $150 and $249 for insurance. Comparisons between annual sales and the amount spent for insurance reveal that in the group with annual sales of less than $15,000 one-third of the operators indicate they spend between $75 and $149, and one-third spend between $150 to $249. The $15,000 to $24,999 annual sales group is more diversified as 27% spend under $75, 27% spend between $150 to $249, and another 27% spend between $250 to $499. The $25,000 to $39,999 annual sales classification has 40% spending between $250 to $499 and 33-1/3% spending between $150 to $249. The $40,000 to $59,999 size operations have 40% spending between 47 $500 and $999. The $60,000 to $99,999 annual sales classi- fication indicatesthat 52% spend from $500 to $999 a year for insurance. The $100,000 to $199,999 annual sales group has 6%L7% spending $250 to $499 a year for insurance. The $200,000 to $399,999 a year operation has 43% between $2,000 and $4,999, and 30% between $1,000 and $1,999. The $400,000 and over operation has 62% spending $5,000 and over a year for insurance. 0n the average, answers indicate that restaurant oper- ators expend betwen 0.5% and 1.5% of annual sales for insurance. The average is slightly under 1%. It appears as though both the under $15,000 and over $400,000 establishments spend over 1% of annual sales. The restaurants reporting annual sales of $25,000 to $39,999, $100,000 to $199,999, and $200,000 to $399,999 a. year spend under 1%, and the other size restau- rants spend about 1% of annual sales for insurance. Per cent of actual cash value carried. Restaurant Operators answering the questionnaire showed that the building was insured from O to 100% of the actual cash value. In answering, 42.9% said that the building was insured for 80% 0f the actual cash value, while 39% of those returning the Questionnaires either did not have the risk or did not answer the question. In regard to the per cent of actual cash value insured for the contents, 37% of the operators reported that 80% Of the actual value of the contents was carried. Again the range was from O to 100% of the actual cash value. Even though management is free to set the per cent of full value figures, where the restaurant values are small it 48 is felt that insurance should be equal to the full amount of the restaurant values. The chance of total or near-total loss is greater in the case of smaller establishments, unless they are of fire proof construction.1 It is the heavy loss, less likely though it is, that the business is not able to assume which should be shifted to an insuring company. Further- more, since rates for fire insurance are usually low, econ— omizing on the size of the policy will save only a few dollars. For these reasons, it is recommended that insurance on small restaurants be equal to the full value of the restaurant. The fire insurance on larger restaurants should total at least 80% of the full value of the prOperty unless they are of fire proof construction. Here to, as in the case of the smaller restaurants, a great deal can be said for full- value insurance. There is always the risk of a total loss even on a larger restaurant. This hazard is increased, of course,in districts which are not within easy reach of regularly manned fire-fighting equipment. Restaurants in more populous territories can be pro- tected fairly adequately with insurance of 80% of the total value of the property covered. With rare exceptions, setting 1The Michigan Inspection Rule Book, Detroit: Michigan Inspection Bureau, June 28: 1954, p. 29; defined fire proof construction as buildings with masonry exterior walls and with fireproof floors and roofs (or their equivalent), as defined in the rules for measurement of the relative fire hazard of such building, and when the class of construction 18 so certified by the Michigan Inspection Bureau. 49 the insurance figures at less that 80% is done with serious risk. However, questionnaire replies reveal that 35.2% insure less than 80% of the full value of the building, and that 48.7% insure less than 80% of the full value for contents. It is important that restaurant operators who carry co-insurance keep certain points in mind. The co-insurance clause provides that the total amount of insurance must be equal to a certain amount of the actual cash value of the property insured at the time such loss should occur. If the agreed percentage is not carried, a penalty will result in the event of a partial loss. The amount of the penalty is proportionate to the amount of insurance in force as com- pared to the amount of insurance that should have been in force. It is possible to be adequately protected when the policy was drawn, but at a later date to be carrying an in- sufficient amount of insurance to offset increased values or a larger inventory. The best method of determining present value is by an appraisal made by a recognized company. How- ever, carrying a slight extra amount of insurance is a wise precaution against unforeseen hazards of appreciated values or of exceptional instances when the value of inventory ex- ceeds that which is ordinarily maintained. It is felt that the apparently large number of restaurants carrying 80% co- insurance should have appraisals made at frequent intervals and carry an extra amount of insurance, approximately 90% of value with the 80% co-insurance clause, as a safety measure. 5O Appraisal of building and contents. Total response indicated that 28% do, and 72% do not, have an appraisal of building and contents made at least once a year to arrive at insurable values. A comparison between annual sales shows that 50% of the six restaurants in the under $15,000 sales category have appraisals made at least once a year. The $400,000 and over annual sales group also show350% of its eight answers to have appraisals made, and the restaurants with annual sales between $200,000 and $399,999 indicated that 38% of the eight questionnaires have appraisals made at least once a year. Other size restaurants indicated a much lower per cent having appraisals made. Generally speaking, this small percentage (28%) of up-to-date appraisals would indicate "under-insurance" for fire policies, because of building values in a rising price level.1 On the average, a restaurant built at an approximate 1A survey published by the Bankers Information Bureau of Kemper Insurance, Under Insurance in American Industry, 1948, includes the analysis of one hundred plants with total assets ranging from $50,000 to $3,000,000 and annual sales ranging from $10,200 to $1,350,000. Some of the revealing results follow: ' . 1; Plants having up-to-date appraisals——2 per cent. 2 Plants haying out-of-date appraisals--20 per cent. 3 For fire insurance a. Plants under-insured--56 per cent. b. Amounts of loss recbverable in event of partial plant destruction-~14 to 86 per cent. 0. Average amount of loss recoverable in event of partial plant destruction--52 per cent. 51 cost of $50,000 in 1950 will cost $64,250 in 1956, an in- crease of 28.5%.1 All fire insurance claims are adjusted on the actual cash value of the property at the time of loss. Actual cash value is replacement cost, less depreciation. To show what co-insurance may mean in the event of a partial loss, and also to illustrate the absolute necessity of knowing present day values and advantages of having up—to-date apprai- sals, the following hypothetical case is quoted: a restaurant built in 1950 at a cost of $50,000 has today an actual cash value, less depreciation, of $62,500. Assume that the restau- rant owner carried $40,000 fire insurance to comply with the 80% co-insurance program based upon the owners best estimate of $50,000 as to the present day value of the restaurant. The total damage amounted to $35,000; because of the rising values not taken into account by the operator the amount of recOvery would be figured as follows: $40,000 (Amount of insurance carried) x $35,000 (loss) = $50,000 (amount of insurance required under 80% co-insurance) $28,000 (Maximum amount of recovery) This is a loss of $7,000 because of under insurance in a rising price level. An appraisal will not only enable the operator to de- termine the proper amounts of insurance to carry, but will be of invaluable assistance in substantiating claims in the event of loss. Once such an appraisal is made it may be brought up- to-date annually at a fraction of the original cost. lRevised Schedule of Unit Costg Based on Cubical Con- tents ofIBuilding, DetroitIReal Estéte Board, January 1956. 52 Methods used to determine amount to spend for insurance. Repfilixes show that 40% use more than one method to determine the: aJnount spent for insurance. The answers indicate that morwe ‘than half of the restaurant Operators (54%) spend an anuyumlt for insurance necessary to cover what is considered to be true most serious risks of the business. Approximately one- trxirti (34%) of the Operators answering the questionnaires synerui an amount recommended by an insurance agent, and 33% luse .a dollar amount not related to sales as the method to sealeuzt the amount to spend on insurance. Over one out of fi\ne (22%) indicated the amount is determined by an insurance Sturxney of their business. Other answers seemed to be of less Sigxiifdcance. Risks in the restaurant business and which risks are §9§merwed. Among the items suggested, the following risks are geneur2111y covered by insurance, and are ranked by per cent in decrweaising order according to questionnaire replies: 1. Fire--contents. . . . . . . . 94.6% 2. Workman‘ s CompensatiOn . . . . . . 88.3% 3. Extended Coverage. . . . . . . . 87.3% 4. Owners‘, Landlords‘, and Tenants‘ Liability—-bodily injury. . . . 86.5% 5. Owners‘, Landlords‘, and Tenants‘ Liability-~property damage . . . . 82.9% 6. Owners‘, Landlords‘, and Tenants‘ ‘ Liability--medical payments. . . . 81.4% '7. Fire-~building. . . . . 72.9% EB. Comprehensive General Liability . . . 70.6% Fiisks less frequently covered by insurance are listed in order“ of their rank, as shown by restaurant Operators re- sponding to the questionnaire: 1. Products Liability. . . 64.5% 2. Automobile--bodily injury liability . 64.2% 3. Automobile--property damage liability 63.6% 4. Plate Glass . . . . . 60.3% 5. Automobile-—medical payments . . . 59.8% 6. Automobile-—theft . . . . . 59.0% 7. Automobile--collision or upset. . . 58.3% 8. Automobile——comprehensive loss of or damage to automobile, except colli- sion or upset. . . 57.1% 9. Automobile--towing and labor cOst. . 55.4% 10. Consequental Loss or Damage--by fire. 48.1% 11. Burglary--money and securities. . . 45.9% 12. Electric Sign . . . . 45.7% 13. Vandalism and Malicious Mischief . . 45.5% 14. Burglary-—furniture, fixtures, and supplies . . . . . . . . . 41.7% 15. Robbery . . . . . . . . . . 40.5% The majority of replying Operators indicated they have the fEDllowing risks, but do not protect them by insurance: 1. Consequenfial Loss or Damage--by break- down of equipment . . . . . . 75.0% 2. Business Interruption. . . . . .' 66.0% 3. Machinery Breakdown . . . . . . 62.8% 4. Comprehensive Dishonesty, Destruction and Disappearance . . . . . . 61.9% 5. Extra Expense . . . . . . . . 61.6% 6. Forgery--outgoing . . . . . . . 60.4% 7. Fidelity Bonds . . . . . . . . 55.9% 8. Burglary—-furniture, fixtures, equip— ment. . . . . . . . . . . 50.0% On the average, a moderate per cent of replying restau- rant aneretors answered they have the following risks, but do not :insure them: 1.. Death of Sole Proprietor. . . . . 49.0% 2?- Robbery . . . . 47.7% 3.. Burglary--money and securities. . . 45.9% it. Demolition . . 42.7% 5. Consequential Loss or Damage--by fire 41.3% 6. Steam boiler explosion. . . . 40.8% 7- Vandalism and Malicious Mischief . . 39.6% 8. Fire— lega1.liability . . . . . . 39.4% 59. Death of Key Man . . . . . . . 37.1% 10. 11. 12. 13. 14. Rents or Rental Value Leasehold Interest Electric Sign. Bailees Liability Earthquake. 35.4% 32.3% 29.5% 29.5% 28.1% Replying Operators generally indicated not having following risks: \0 CD NOWJEUJNH Elevator collision Elevator Liability . Death of Close Corporation Member Contractual Liability Sprinkler Leakage Civil Liability . . Non-Ownership Auto Liability--medical payments. . Non-Ownership Auto Liability--b0dily injury . Non— —Ownership Auto Liability-~property damage . 97.0% 90.0% 86.2% 82.8% 82.3% 73.5% 72-6% 71.4% 70.8% 54 the Answers indicated that a moderate per cent of reStau- rani: caperators do not have the following risks: PJCMOCD~Jourironora F‘H Bailees Liability Death of Partner. Leasehold Interest License and Permit Bonds Flood Improvements and Betterments. Death of Key Man. Steam Boiler Explosion. Earthquake. ' Rents or Rental Value Demolition. 68.0% 64.9% 56.7% 54.7% 52.6% 52.4% 48.6% 45.9%' 45.6% 44.4% 42.7% Ianwers to some of the questions indicated one of two faCtorfs occurred (1) the question was not understood by the recipierlt of the questionnaire, ing did riot sufficiently analyze the risk exposure of the restaurallt. said they did not have the risk of Extended coverage. (2) the individual in answer- For example, 3.6% answering the questionnaire While ILO. fill. 2L2. ZL3. lit 54 Rents or Rental Value . . . . . . 35.4% Leasehold Interest . . . . . . . 32.3% Electric Sign. . . . . . . . . 29.5% Bailees Liability . . . . . . . 29.5% Earthquake. . . . . . . . . . 28.1% Replying operators generally indicated not having the following risks: KO (1) NGWtWMi—l Elevator collision . . . . . . . 97.0% Elevator Liability . . . . 90.0% Death of Close Corporation Member . . 86.2% Contractual Liability . . . . . . 82.8% Sprinkler Leakage . . . . . . . 82.3% Civil Liability . . 73.5% Non-Ownership Auto Liability-—medical payments. . . 72.6% Non-Ownership Auto Liability--bodily injury . . 71.4% Non- -Ownership Auto Liability--property damage . . . 70.8% Answers indicated that a moderate per cent of restau— rant Operators do not have the following risks: HP HOWQflthwmp Bailees Liability . . . . . . . 68.0% Death of Partner. . . . . . . . 64.9% Leasehold Interest . . . . . . . 56.7% License and Permit Bonds . . . . . 54.7% Flood . . . . . 52.6% Improvements and Betterments. . . . 52.4% Death of Key Man. . . . . . . 48.6%’ Steam Boiler Explosion. . . . . . 45.9% Earthquake. . . . . . . . 45.6% Rents or Rental Value . . . . ‘. . 44.4% Demolition. . . . . . . . . . 42.7% Axiswers to some of the questions indicated one of two factors (Dccurred (l) the question was not understood by the Peclpient of the questionnaire, (2) the individual in answer- ing did ruot sufficiently analyze the risk exposure of the reStaurant For example, 3.6% answering the questionnaire Said thesf did not have the risk of‘gxtended coverage. While 55 thesr nuay not have the risk of all parts of extended coverage, the3r llave the risk of wind and hail. This is true in prac— tically any conceivable situation. Below will be found a list of riSks with the per cent gi\ner1 where it was declared by respondents that no risk exixstxsd, but where the risk in probability does exist querwsver a restaurant is owned, rented, or operated. 1. Death of Key Man. . . . . . . . . 48.6% 2. Earthquake. . . . . . . . . . . 45.8% 3. Fidelity Bonds . . . . . . . . . 28.4% 4. Forgery--outgoing . . ’. . . . . . 26.6% 5. Extra EXpense. . . . . . . . . . 25.3% 6. Forgery-—incoming . . . 22.2% 7. Comprehensive Dishonesty,Destruction, and Disappearance. . . . . 18.1% 8. Vandalism and Malicious Mischief . . . 12.9% 9. Robbery . . . . . . . . . 11.7% 10. Business Interruption . . . . . . . 11.3% 11. Products Liability . . . 10.9% 12. Consequential Loss or Damage-~by fire. . 10.6% 13. Burglary--furniture, fixtures and ‘ _ supplies. . . . . . . 08.3% 14. Burglary--money and security. . . . . 08.2% 15. Comprehensive General Liability. . . . 07.8% Il6. Extended Coverage . . . . . . . . 03.6% 17} Owners‘, Landlords', and Tenants' Liability—-a. Medical payments . . . 02.9% b. Property damage. . . . 01.0% c. Bodily injury . . . . 01.0% 'The order in which risks should logically be covered by inSLLrance in the author's opinion are as follows: II. Statutory requirement III. Liability A. Products B. Owners', Landlords‘, and Tenants' Liability 1. Bodily injury 2. Property damage 3. Medical payments C. Automobile Liability including non-ownership iIII. Coverages against natural hazards IV. Risks that would provide shock to the financial structure of the business. First and above all, the statutory requirements must be Inert in risk management. The first principle of risk movexrage does not rest with the individual. Workman's Com- perlSEition coverage or a satisfactory financial statement deleri with the Michigan Department of Labor and Industry is marudaitory in Michigan, when four or more people are employed. Altfllcnigh this item ranked second for risks that are covered, Quesstxionnaire replies show that there is 100% coverage in resdiallrants of over three employees. Answers show that 21.1% 0f rwetrurned questionnaires employ under four employees, making it Oprtional coverage by law. Only 51% of the operators carry this ildsurance when it is optional. As-this is a mandatory itenl fkor the majority of restaurant operators, this risk ShOUlti he the first covered by insurance. ‘When a claim arises under a liability, it is impossible to detexrmine in advance the extent of such a claim. This is partiCLLlarly true of a restaurant operation, since consumption of food .always presents a hazard. A restaurant is subject to a catast2P0phe loss under this item. Fifty, one-hundred, five- hundred lpeople can be poisoned from one meal, and this is not an 1J1frequent occurrence in the food business. 57 In the case of property loss, by reason of natural or unnatural causes, (wind or fire), the limit of the loss is well established in advance. A building and contents is worth $50,000 and it is a total loss. That is the loss. Whereas, if 200 people receive contaminated food, each individual might sue for $10,000 for bodily injury caused by the consump- tion of the food. The potential loss in that event is $2,000,000. Therefore, products liability should be the second insurance coverage considered. Replies voted this risk number nine in frequency of coverage, voting fire for contents number one, wind and hail under extended coverage number three, and fire for the building number seven.1 What is true of products liability is likewise true Of Owners', Landlords', and Tenants‘ Liability, automobile liability and non-ownership liability, but to a lesser degree. These liabilities are not subject to a catastrophe loss, ex— cept the Owners', Landlords', and Tenants' Liability. A catastrophe loss could very well occur under Owners', Land- lords ' , and Tenants' Liability. Liability claims are likely to arise at any time from a Variety of sources and for large awards against the restau- rant Operator. The amount of the damages for which the owner may be held responsible bears little relationship to the N lOnly one-third of the operators who leased the build- ing indicated they had the risk of fire on the building. OthePWiSe the ranking would have been much higher. 58 value of the property. A person‘s entire property can be attached to pay a liability judgment unless the business is incorporated.- Even the person who is free of property is not immune to liability claims. There is the future to consider. Garnishment of wages to be received and rights of liens against any future prOperty acquired make the chances of financial growth slim. Furthermore, the manager may be called on to spend considerable time and money defending against suits of this kind. Liability insurance is designed to protect the restaurant operator against these hazards. While such losses may not be too prevalent, the sums involved can be quite large. Therefore, liability insurance is essential, and should be carried. The secondprinciple developed here is that whenever the loss is quite indeterminate, such loss should first be covered before other risks are considered. Third in importance, after Workmen's Compensation and Liability, are coverages against natural hazards. Natural hazards include wind, hail, flood, and earthquake.1 Lightning ls. B. Ackerman, Insurance_(New York: The Ronald Press Company, 1951), p. 174, claims that no section of the United States is entirely immune from the possibility of earthquakes. Robert I. Mehr and Emmerson Cammock, Principles of Insurance (Homewood, Illinois: Richard D. Irwin, Inc., 1954), p. 310, states that earthquakes causing no little damage have been felt in the parts of the Middle West. Even though the probability of a severe earthquake in Michigan is remote, the destruction involved could be goat. Therefore, earthquake insurance is essential. 59 is covered under the fire policy. These losses differ from the liability losses in that they are quite determinative. However, when such a loss occurs there is no place to gofor help. When a fire loss occurs, the fire department may be called and help to reduce the loss and prevent it's spread. In the case of windstorm, hail, flood, or earthquake, very little help can be obtained to prevent or reduce the loss. This is especially true of wind and hail. The one thing that can be done prior to the loss is to take all reasonable con- struction precaution. When one of these natural losses occur about all the property owner can do is suffer the loss. Wind and hail cannot be stopped. Nothing can be done about an earthquake. Flood can be stopped to a certain extent. Therefore, the third principle is that where little or no help can be secured to reduce the loss or prevent its spread, those coverages should be purchased second in importance to liability. The fourth principle involved in the covering of risk revolves itself around shock. A risk should be covered when- ever a loss would result in a shock to the financial structure of the business. Shock is a relative term. What would be a shock to one, may be inconsequential to another. To illus- trate, a 100 dollar plate glass loss _to one restaurant might be COnsidered a severe shock to the financial structure of the business. To another restaurant it would be postage stamp money, $0 to speak. What a shock loss would be to a restau— rant must be determined by that restaurant. The question must be asked, ”How much of a loss can be assumed without being hurt financially?" Obviously, such an answer must come from the restaurant operator or owner, and his risks covered accordingly. The author believes that such items as plate glass (12th), automobile towing and labor cost (17th), and electric sign insurance (20th) would not provide a shock to the financial structure of most restaurants, and therefore does not warrant as high a rank as Operators indicate. Whereas, well down the list of coverages is steam boiler explosion. Only 13.3% carry steam boiler explosion inSurance, and 40.8% say they have this risk, but do not have it covered by insurance. The potential size of loss from explosion is extremely high, yet it is covered by only a few restaurant operators. . One of the most common errors, and certainly one which is leaving restaurant men exposed to serious loss is failure to transfer business interruption and extra expense to a professional risk—bearer. These are particularly true of business interruptions where 66% of the answered questions naires show they.have the risk of business interruption, but do not protect their risk by insurance. The reason for this is that business interruption is an intangible loss (the potential loss can be found only from bookkeeping before the loss). It cannot be seen or felt like building and fixtures, and the restaurant man cannot see the necessity for this coverage. This form of insurance will do just as much for the insured as the business itself would have done, had 61 operations not‘been interrupted. Experience indicates that many businesses never resume Operation after their earnings have been interrupted by a severe fire or other catastrophe.l Therefore, business interruption insurance is an essential coverage in the arrangement of an adequate insurance program. lkmever, restaurant men have not generally accepted business interruption as essential to the risk program. Restaurant men are not inclined to include life insur- ance in their plans when they are arranging insurance for their business. On the average only 14% of the restaurants carried Key Man Life Insurance. AbOut one out of ten sole proprietors carried insurance for sole proprietor; 12% of the partners carried partnership insurance. Not only are many restaurant men without life insurance protection, but a surprising number said they do not have the risk. Approximately 50% indicated they did not have the risk Of Key Man Insurance, 20% Of the sole proprietors said they did not have the risk of sole prOprietors insurance, and about 40% of partnerships showed they did not have the 1R. S. Bass, "Insurance As Respects Its Importance to Credit," The National Insurance Buyer, Vol. 1, September 1954, p. 20, states: "It isnTt difficult to believe the report fur- nished by Dunnand Bradstreet, that 43 per cent--nearly half of all firms suffering serious fire losses never re-open after such a fire loss." Suppose Your Business is Interrupted (Indianapolis: The Rough Notes Co., Inc., 1948) shows that 43% never reOpen after a serious loss by fire--or other catas- trophe-—, 40% go back into business with impaired credit or greatly reduced income, and only 17% or one out of 6 re-enter business with safety. 62 risk for insurance. All these facts indicate that an insuf— ficient number of businessmen are conVinced of the need for life insurance. Thus, the restaurant man has not generally accepted life insurance as essential to his risk management, or provided cash to assist operators' heirs or partners in continuing Of business without sacrifice, in the event of death of the owner. Social insurance. One-third of the operators reported they carried some kind Of social insurance. Of those that carried some form Of social insurance, hospitalization in- sur‘ance was generally covered (84.2%), group accident and health insurance was carried by a moderate number of opera- tors (57.9%), group life was mentioned by about one—quarter of the Operators (28.9%), and group pension was carried by ONLY a few (07.9%) Of the restaurant Operators. Seventy-five per cent of the corporations carry one 01’ ITIO re types of social insurance mentioned in the question- naire , while only 30% of the partnerships, and 25% of the sole proprietors carry one or more types of social insurance. or the thirty-eight Operators carrying social insurance, 45% have annual sales of less than $60,000, and 55% have sales of over $60,000. All of the corporations having social insurance have annual sales of $60,000 or more. In relation to the total number of restaurants with annual sales under $60,000, 29% Carry one or more types of social insurance, and 3975 Of the restaurants with annual sales over $60,000 carry one or more types of social insurance. 63 Other insurance needed for complete protection. The purpose of the question "Without considering costs or amounts, what kind of insurance in addition to what you already have, do you think you might need to provide complete protection to your restaurant, guests, and employees?” was to learn the restaurant Operator‘s consciousness of the need for additional insurance. Nearly 75% did not answer this question, while 5% felt that none was required. The answers indicated that in addition to the insurance now owned more Operators feel the need for business interrup- tion, followed by forgery and fidelity insurance. Risks that are most important to the restaurant oper- itffl; To the question of "For which of the following risks is insurance most important to your restaurant Operation?" the largest portion voted for fire in the restaurant (91.7%), which is the number one risk listed in the questionnaire. The second most popular item was, "accidents to others while on YOUI‘ premises" (78.9%). The third most important risk‘ is "accidents to employees" (75.2%) followed by ”extended cover- age" ( 59.6%) and ”loss due to claims from bodily injury or prOperty damage caused by (consumption of food or beverage in your restaurant” (51.4%). The vote then skips about among the remaining items listed. It seems significant that the answers to this question are generally consistent with, and confirm the answers to, preceding questions inquiring first what risks are covered, 64 and second what insurance is needed in addition to what is now carried. However, there are exceptions. Extended cover- age was considered important by 61.1% of the operators, yet 87.3% have this risk insured. Risk of plate glass and elec- tric sign was considered important by 25.7% and 21.1% of the replies, but this risk was insured by 60.2% and 45.7% of the restaurant Operators responding to the questionnaire. Auto— mobile liability was considered important to 35.4% of the Operators, although approximately 64.0% carried automobile liability insurance and 24.0% carried non-ownership automo- bile liability. Again a moderate number considered products liability (51.4%), and business interruption (34.5%) as im- POrtant. However, products liability insurance was carried by 64 . 5% of the operators replying and business interruption insUlr’ance was carried by only 22.6% Of the Operators replying. Business interruption insurance was named most frequently as that needed in addition to what is now carried. CHAPTER IV ADMINISTERING THE RESTAURANT INSURANCE PROGRAM The purpose of this chapter is to review insurance ad- minixstration as a management function. Factors explored inclnlde a discussion of the principle of insurance buying, tmxess of insurance carriers, insurance administration today in tine restaurant industry, considerations in putting the in- surarice program into effect, and the duties of the insurance admirlistrator. This chapter is not intended to cover compre- hensigvely the subject of administrating the restaurant insur— ance jprogram, but it is hoped that it will serve as a guide and puoint the way to further study. Principdes of Insurance Buying1 The basic principle in good insurance purchasing is to coven°first things first. The insurance buyer must first Obtairl those coverages required by law or contract. Workmen‘s cxmuxnlsation insurance is statutory in Michigan. Leases, purmfiMise orders, and permits may call for insurance. Pensions, group jlife, and group disability insurance become contractual if reqLUJed.in union contracts. Mortgages generally require insurarme to protect their collateral. 1Adapted from Robert I. Mehr and Emmerson Cammock, Principles of Insurance (Homewood, Illinois: Richard D. Irwin, Inc., 19511), pp- 527-530. 66 The insurance buyer should purchase protection secondly agaiiist all losses--probable or otherwise--which are poten- tiajfily'so large as to be financially disastrous. Insurance agajxist such losses is essential. Severity of a possible lossi, not its frequency, should be the determining factor. The rnany small losses, part Of any business process, should be ccnisidered as an expense of doing business and payed out of oixrrent income. Insurance should be used as protection agairlst.the large, uncertain losses which are not predictable and unould be financially disastrous. Some losses, although not financially disastrous, are serholis enough to make insurance against them desirable. These are losses that cannot be handled out of current income, but alée not so great as to bankrupt the business. They are losses; that may seriously reduce accumulated savings or re- serves or burden the business with debt. If the insurance budget: is large enough to stand more than just the essential covertuge, this class of insurance should be purchased. If after the purchase of required, essential, and de- sirablee insurance, the business still has money left in the iIHSurance‘budget, other pertinent coverages should be purckmnsed. These are in the available class. This class haclud62s small losses which can be paid out of current in— come cn? surplus without seriously impairing savings or re- serve flmds or incurring burdensome debts. The boundaries between classes are not fixed; they Emehighly variable. The boundaries depend not only upon 67' tie amount of property owned but also upon such things as income, financial status, size and location of operation, ability to secure loans, etc. The factor determining whether or not an item should in insured is determined simply by the principle—-if any loss which can be covered by insurance would produce a shock to the financial structure of the insured, then such possible loss should be covered by insurance. TO some restaurant people a theft of $300 from their restaurant might be serious enough to place theft insurance in the desirable class. Others may be able to handle this loss out Of current income. Paradoxical as it may appear, the weaker the financial structure of the restaurant, the greater the number of desir- able coverages; also, the smaller the insurance budget. This creates a difficult planning problem in order to get the most out of an insurance program. For certain kinds of policies it can be said that those who need the coverage can- not afford it; whereas those who can afford it do not need it as much. O Proper insurance buymanship considers each individual case separately in determining whether a given line is essen- tial, desirable, or simply available. Also this program needs constant review, for what is put into one classification last year may logically fall into another classification this year. A list Of insurance coverages given hereafter will serve to indicate the major classifications under which the 68 individtual. buyers may group the coverages of the restaurant. Itis tuaseuj on the classes of required, essential, desirable, andeumiiliable. The coverages have been sorted under the sub? Yeadscof' tuiilding and contents and business Operation. As nentioneci zibove, the boundaries are not fixed, and are highly variable~. The following is intended to serve as a guide, but may need. ruevision for individual restaurant Operations: Ii. Required A. Building and Contents 1. Contractual liability a. Leases b. Mortgages B. Business Operation 1. Contractual or by law a. Workmen's compensation b. Permits and licenses c. Pensions, group life, and group dis- ability II:- Essential A. Building and Contents 1. Fire insurance on building 2. Fire insurance on contents 3. Extended coverage endorsement 4. Boiler and machinery insurance if an owner, and non-ownership (boiler) if a tenant 5. Earthquake 6. Flood (if locations require it) 69 .B. Business Operation 1. Business interrution from a. Fire b. Extended coverage c. Boiler Motor Vehicle Bodily Injury, property damage liability and medical payments, (even if the owner does not use the auto- mobile in business, this type of insurance should be carried to protect the sole proprietor or partner) Non-Ownership Bodily Injury and property damage motor vehicle liability (if any employee uses an automobilefrequently, occasionally, or ever, on business for the restaurant) Comprehensive General Liability which includes a. Owners', Landlords', and Tenants' b. Elevator Liability and Property Damage (if the restaurant has an elevator) c. Elevator Liability and Collision (if elevator is provided) Products Liability Civil Liability (if the restaurant serves liquor) 70 Fire Legal Liability, (insures a tenant for liability to the landlord if a fire orig- nates in or on the property due to the negli- gence of the tenant. This liability is not covered under the prOperty damage section of the Owners‘, Landlords,‘ and Tenants' portion of the Comprehensive General Liabil- ity because this policy excludes damage to property in the care, control, or custody of the insured. Fire Legal Liability is also needed by both the tenant and landlord if there are connecting or nearby buildings not covered, or not covered for high enough limits under the property damage section of the Owners‘, Landlords,‘ and Tenants‘ section of the Comprehensive General Liability Policy) III° jDesirable A. Building and Contents 1. Contingent Liability from Operation Of Building Laws Form (demolition insurance is desirable when city laws require complete removal of a building which is partly des- troyed by fire) Rental value insurance (for owners Of buildings) Improvements and Betterments Form (for tenants) n1 “.1 4. Mercantile open stock burglary B. Business Operation 1. Sprinkler Leakage (if have sprinkler) 2. Life insurance a. Sole proprietorship b. Partnership c. Key man d. Close corporation 3. Storekeepers Burglary, Theft and Robbery for small Operations or comprehensive Dis— honesty, Destruction and Disappearance Policy for sizable Operations. 4. Fidelity Bond 5. Automobile Insurance a. Collision or upset b. Non—ownership medical payments IVW Available A. Building and Contents 1. Vandalism and Malicious Mischief 2. Leasehold Interest (for tenants) 3. Consequential Loss or Damage Form (on fire forms at no charge but must be endorsed on machinery breakdown insurance and a premium charged) 4. Extra Expense (generally at a lower cost than business interruption insurance, but pays only the differences in operation 72 costs in the restaurant under considera- tion, and what it costs to produce else- where) 5. Electrical Signs Insurance 6. Glass Insurance B. Business Operation 1. Bailees Liability 2. Burglary 3. Robbery 4. Forgery--incoming and outgoing 5. Social Insurance a. Group Accident and Health Insurance b. Group Hospitalization Insurance c. Group Life Insurance d. Group Pension 6. Automobile Insurance a. Comprehensive loss of or damage to automobile except collision b. Theft c. Towing and labor costs. Ilpes of Insurance Carriers A number of different types Of carriers Operate in the insurance market. In the broad sense, carriers of in- surance are either proprietary, cO-Operative, state, or self insurers. However, within this broad general breakdown, there are many variations. The classification of carriers are as follows: 73 I. Proprietary Carriers . A; LloydsAssociation are composed of a group of individual underwriters. .B. Capital Stock Associations are corporations typical of any business corporation. The stockholders, Operating through the company, assume the risk Of loss and, in return, are entitled to the profits. II. Co-operative Carriers A. Reciprocals are unincorporated associations for the exchange of insurance among its members. LB. Mutuals are incorporated. 1. Assessment mutuals require that an insured pay an additional amount to meet losses greater than those anticipated. 2. Factory mutuals charge in advance larger premiums than expected losses, which are turned back as dividends if not needed. 3. Non-assessable mutuals charge the same 'rate or less than capital stock companies, and returns to the policy holders as divi— dends any excesses over expenses, losses, and a reasonable contribution to surplus. III' State Carriers (social security) A. Federal 1. Social Security fund 74 B. State 1. Life insurance 2. Workmen's compensation 3. Unemployment insurance 4. Cash sickness benefits IV. Self Insurers A. Large business concerns may be able to carry some of their exposures themselves. This is especially true when they have a larger number of homogeneous and independent exposure units. Opinion on mutual vs stock companies. A survey of customers was conducted by the Division of Commercial Research of the Curtis Publishing Company.1 Opinions in this survey are based on personal interviews with 2,374 men in urban areas only. 0f the men interviewed, 44.7 per cent favored mutual and 27.6 per cent favored stock companies; 27.7 per cent either said, "I don‘t know,” or did not indicate any prefer- ence. Meriting consideration are the reasons for their pre- ference. Mutual Companies:2 Share in profits. . . . . . . . . . 48.0% Rates are lower . . . . . . . . . . 26. Mutuals are safer . . . . . -. . . . 11.8% lFire-Automobile and Casualty Insurance Survey (New Ybrk: The Curtis Publishing Company, Division of Commercial Research, 1943), pp. 38-40. 2Some gave more than one reason. 75 Policy holder is a partner in company. 6.6% Consider welfare of policy holder 5.7% Stock companies think only of their own interests. 1.4% Miscellaneous. 7.7% Stock Companies:l Stock companies are more reliable-safer . . 38.2% NO liability or assessments . . . . . . 29.0% Better management . . . . . . . . . 16.9% Rates are definite . . . . . . . . . 9.4% More surplus to back them. . . . . . . 5.5% Miscellaneous. . . . . . . . . . . 7.3% Almost seventy-five per cent of the men who favored mutual companies gave as the more important reasons for their preference "share in profit" and "rates are lower.” Of those favoring stock companies the reasons given by the largest per cent, 38.2, is that "stock companies are more reliable--safer." Additional answers seem to imply more con- fidence in stock company management and freedom from liability or assessment. From these answers it seems reasonable to believe that the trend of men‘s thinking is toward lower rate or premium. Yet, while answers indicate that more Of the men interviewed favor mutual type of organization at the time of the survey, twice as many had all their insurance in a stock company. Insurance Administration Today in the Restaurant Industry In most cases restaurant insurance matters are handled by executive Officers, accountants, managers, or others as a SUpplementary duty. As is pointed out by Lundberg and Kane, lSome gave more than one reason. 76 the strictly commercial type of eating and drinking place is small. The 55,000 leading restaurants out of 346,566 estab- lishments in 1948 had about eighty per cent of the dollar volume.1 In the smaller enterprises,handling insurance matters as a supplementary duty is justified, because Of financial necessity, or because the work just does not require the en- tire time Of one person. In the larger chains, with numerous units, it is felt that a full-time insurance manager is justi— fied. In this case the creation and direction of a broad insurance program must be based on knowledge of insurance and experience of which an untrained subordinate is incapable of handling. Considerations in Putting the Insurance Program into Effect Insurance administration is an important function of top management because inadequate coverage may mean, in the event Of a loss, the difference between success and failure of a restaurant. The problem of setting up a program to cover all eventualities economically and efficiently is a big one and, as such, requires diligent application of executive 'ability, coupled with specialized knowledge. Consequently, the individual charged with the responsibility Of administra- ting the insurance program must do more than pass on the sug- gestions of the insurance agent to the superior Officers. 1Donald E. Lundberg and C. Vernon Kane, Business Manage— mgnt: Hotels, Motels and Restaurants (Tallahassee, Florida: Peninsular Publishing Company, 1952), p. 17. 77 The insurance administrator must devote considerable time, effort, and analysis to the application of sound insurance principles to his particular restaurant. However, the admin- istrator should have certain aids at his disposal. These are discussed below under the following headings: (l) establish- ment of management policies, (2) securing competent advice, and (3) use of insurance publications. Establishment of management policies. Frequently, management policies on the subject of insurance are not clearly crystalized, except perhaps in the larger business. Gallagerl points out that the basic reason for this is that insurance premium costs are a very small part of general business costs, and the whole subject is considered from a relative cost standpoint. Gallagher cites the reason this is unwise by an example. Proper insurance administration acts to make possible the replacement of the whole of the physical structure of the business-~building, equipment, inventory—~if a disastrous fire occurs. It acts to guarantee earnings in event of casualty, and to prevent the loss of busi— ness funds through attack by employees or thirg parties, through either lawsuits or illegal activities. Management policy should be developed according to basic principles with regard to insurance for either the large (H'small restaurant. The problems of the largest restaurants are, to some extent, only expansions Of those of the smallest. lRussell B. Gallagher, Buying and Administering_Corpor- §£§_Insurance, Research Report No. 15 (New York: American I"Linkagement Association, 1948), p. 2Ibid. \\ 78 ihnagement policies should cover all of the important factors cfi‘insurance administration, such as: 1. Determine which risks the restaurant will assume tw'a reserve fund (self-insurance), or without a reserve fund (not insured). 2. Determine exposures to be transferred to a risk carrier. 3. Investigate contractual agreements, leases, etc., and the implications of insurance in connection with them. 4. Determine the values of physical properties (re- placement value less depreciation), limits of liability, and the amounts of insurance to be carried. 5. Selection of agents. 6. The use of consultants and other experts. 7. Investigate types of carriers and analysis of their financial stability. The first step of the insurance administrator, then, iS to help establish a sound insurance policy. The insurance administrator should submit results of studies irlsuch a form that all the Officers to whom he reports need to do is to indicate approval or disapproval. A complete policy will not be deter- mined in a single report or study. It may require several years of actual experience before a well-defined usable manage- ment pOlicy is available. When such management policy is Clearly determined, the insurance administrator can then Operate in accordance with the policy determined by manage- ment. 79 Securing competent advice. The second basic aid is the zadvice and counsel of agents, companies, or licensed in- surajlce consultants. This is particularly useful in the smalglear restaurants where the insurance administrator has many' (other duties. It is helpful to have an extremely well— infoqrnned and responsible agent or consultant to analyze riskrs to which the restaurant is exposed. Some business men feel. izhat insurance is an excellent medium to Spread their insuixance among a number Of friends. This may result in far too nuany policies with a greatly increased chance for error, serixyus gaps in protection as well as overlapping coverages, exeenssive bookkeeping, and handling costs. It also has the Effemzt of reducing the means of securing competent outside hElID and advice at no cost to the business, because if the aCCCNlnt is not worth very much to any one agent, no one agent Will. pay much attention to it. Use Of insurance publications. The third important aid is t1) subscribe to and use the various means of self-education so iflfiat the insurance administrator will thoroughly understand the “theories and principles by which he is expected to guide his <3ompany. An insurance questionnaire compiled by Russel B. Galliigherl found from the replies the following insurance publications in order of prominence (other than AMA insurance \ lIbid., Appendix I. 80 coverage) useful in insurance administration: (1) Best‘s Insurance News, (2) Fire Casualty and Surety Bulletins, (3) Spectator, (4) National Underwriter, (5) Weekly Underwriters, (6) Journal Of Commerce, (7) National Fire Protection Associa- tion, and (8) Insurance Buyer. Appendix C lists a number of additional insurance papers, magaz ine s , and services . Duties of the Insurance Administrator The job of the insurance administrator is basically protecting, to the degree outlined by management, the assets of the restaurant against known exposures and also protecting the restaurant against known liabilities. Specifically, the duties might include the following: - l . Initiate through studies the company policy on insurance matters. 2 . Determine change in insurable values. 3. Select policy forms and endorsements. 4'. Manage the self-insurance fund. 5. Aid in loss prevention. 6. Policy audits, recording, and arranging continuity of coverage through expiration records. 7. Report losses, conduct investigations, and arrange loss adjustments. 8- Keep real estate and other fixed asset records, 9- Maintain liason between insurance company and manage— ment on matters of safety and security. 10. ll. Study new exposures Review insurance program. 81 CHAPTER V CONCLUSIONS AND RECOMMENDATIONS Conclusions Risk management is a business function of primary importance. Failure to adequately protect property or to provide adequate indemnification for a large loss may be financially disastrous or seriously impair accumulated savings. Insurance is one method of dealing with risk. Insurance is essentially protective and insures the continuation of the business. The benefits rendered by insurance are: l. A definite sum available for uncertain losses-- the insured eliminates the danger of large uncertain losses by voluntarily assuming a small certain loss (the premium). 2. Certainty substituted for uncertainty-~by accept- ing risks on a sufficiently large number of properties, in- surance companies are able to forecast scientifically the cost of carrying all risks. 3. Equitable distribution of cost losses--the insur- ance companies have built up a large and well-organized system for the proper determination of premium charges, and thus they make possible not only the transfer of losses to the central organization for a small premium, but also, by 83 means of the premiums, an equitable measurement of the hazards that are connected with a particular risk. 4. Elimination of worry. 5. Improvement in credit rating. 6. Protection Of invested capital. 7. 'Retention of customers‘ good will by protecting them against loss. The insurance business has a number of extra and sup- plementary services: 1. Physical inspection of property, including boilers and machinery. 2. Payroll auditing for those classes of coverage requiring premium adjustments at expiration date. 3. Safety and accident prevention. 4. Fire prevention and protection. 5. Loss adjusting--by salaried employee or by inde- pendent organizations and association bureaus. 6. Third party claim adjusters and legal staffs. 7. Actuarial service for pension programs. 8. Promotion of general education concerning protec- tion against losses. A greater per cent of respondents to the questionnaire concerning restaurant operations submitted by the author were sole proprietors, who leased the building and owned the con- tents, with annual sales ranging between $40,000 and $59,999, having 45 to 84 seats,4 to 7 full time employees, and spending between $250 to $499 a year for insurance pertaining to their business. Almost 65% of the operators insured their build- ing for 80% or more of the actual cash value and over 50% insured the contents for 80% more of the cash value. These figures indicate that many restaurant operators are setting the insurance figure at less than 80%. It is felt in most cases this is done with serious risk to the business. Where co-insurance is carried, a 10% extra amount Of insurance is a wise precaution against unforeseen hazards of appreciated values or of exceptional instances when the values of inven- tory exceed that which is ordinarily maintained. The small number (28%) with up-to-date appraisals indicate under- insurance for fire policies because of building values in a rising price level. Over one-half of the restaurant operators replying spend an amount for insurance necessary to cover whatenxeconsidered by them to be the most serious risks of the business. This raises the question "Do restaurant Oper- ators correctly analyze the most serious risks of their busi- nesses?" The insurance questionnaire indicates that most res- taurant operators seem to be well aware of some of the prop- erty and liability hazards that face their businesses. They apparently realize the effects which fire, risks covered by extended coverage, public and automobile bodily injury, and property damage will have on their capital position and earn- ing potential. Property and liability insurance protection to Offset these losses consequently is a well-accepted prac- tice of most of the operators answering the survey. However, 85 there is a need for protection against other large, unpredict- able losses which could be financially disastrous. Restaurant operators are not generally aware of the full effect of products liability, business interruption, fire legal liability, boiler explosion, or the possibility of earthquake. A very desirable cover-age not generally carried is crime protection which in- cludes comprehensive dishonesty, destruction, disappearance, burglary, robbery, and fidelity bonds. Risks generally covered, but which would probably not provide a financial shock to most restaurants are plate glass, electric sign, and automobile labor costs. Nearly one-half of the respondents declared that no risk existed for death of key man and earth— Quake. Approximately one-quarter indicated no risk existed for fidelity bonds, forgery, and comprehensive dishonesty, destruction and disappearance. In all probability these risks do exist. Although only one out of ten indicated they do not have the risk of business interruption or products liability, these two risks leave the business exposed to serious potential loss. Life insurance is not accepted as essential to risk management by many, and only a moderate number Carry social insurance (which includes group accident and heaalth insurance, group hospitalization insurance, group life insurance, and group pension). Answers indicate that in addition to the insurance now owned more Operators feel the need for business interruption insurance. The sound and economical purchase of insurance to prOpeI‘Ly protect invested capital, safeguard credit, and 86 insure the continuation of the business depends on the following: 1. A proper determination of the most important needs for coverage, based on a careful study of all property values and all of the different loss exposures to which the restau- rant is subject. 2. Selection Of proper insurers to handle the risk. This does not mean that all insurance should be placed with one company, although this may be the best arrangement from the standpoint of protection. If insurance is allocated to several agents, one man should be responsible for one com- plete phase of insurance, such as fire insurance, and another be held responsible for casualty coverage. The advantages of stock company insurance coverage should be compared in detail to the advantages of mutual insurance coverage. 3. Selection of policy forms and endorsements which best serve the interests of the restaurant. 4. A consideration of all possible alternatives in the combination of insurable risks. To Obtain these objectives there must be an established insurance policy and clear-cut delegation of responsibility and authority. Management must show an active interest in all problems relating to risk. The administrator must be qualified for his job or must employ the counsel of competent insurance advisors and use various means of self-education. Proper attention to the principles of insurance buying and to the 87 dehflls of coverage are the most basic ingredients of a sound insurance program. Pbcommendations Type of company to purchase insurance from. The author recommends that insurance be placed in a mutual dividend-paying company for fire and allied lines (extended coverage, wind- storm insurance, explosion insurance, riot and civil commotion, \mndalism and malicious mischief, aircraft and vehicle damage, smoke and smudge damage, earthquake insurance, sprinkler leakage) and workmen‘s compensation. The other lines should be open to competitive bidding. The insurance rate for any risk issnandard in Michigan and any deviation must be filed with the State Insurance De- partment. The most common device for estimating the degree of hazard is some central rating organization to which com- panies in particular areas subscribe voluntarily, which in Michigan is the Michigan Inspection Bureau. There is no variation among the companies in the rates, policy, or forms attached thereto used for fire and allied lines and for kukmen‘s compensation insurance. A buyer of insurance is likely to find the base rates quoted by all companies for the location to be uniform, regardless of whether the company is a mutual or a capital stock organization. In a mutual company, which has no stockholders, the policyholders share in profits earned. Excess earnings are divided among the policyholders in the form of unabsorbed 88 premiums which are commonly called dividends. These dividends are usually apportioned at the end of the policy period. A few companies allow a reduction at the time the policy is written, These are called deviating companies. There are also some stock companies which allow for dividends to their clien- tele, but this is very uncommon. Since fire insurance rates are fairly standard, buying insurance in a dividend—paying company is a simple and effec— tive way of reducing insurance costs by approximately 15% to 30% for fire and allied linesand workmen‘s compensation. It should be noted, however, that these dividends depend on the experience of the company during the policy period and are not and cannot be guaranteed by law. So many mutual insurance companies, however, show an unbroken record of regular divi- dend payments, that it is reasonably sound to anticipate sav- ings cmiinsurance costs in this type of organization. Based on past experience and present financial condition, in all probability the company would pay a saving during the current policy period. In other lines of insurance suchas.bailee‘s insurance, electrical sign, plate glass, all types of liability, automo- bile, burglary, hold-up, boiler, bonds, and so forth, there is a national board which prepares manuals, policies, endorse- ments, and rates. However, it is not compulsory on the part of the company to follow the manual, policies, endorsements, or the rates although a company may use them as guides, deviat- ing anyway it sees fit. For example, the national board for 89 automobile insurance in a given classification of driver and territory might ask $22 for public liability and $18 for prOperty damage. Company X could sell the same coverage for $8 and $4 if it saw fit to do so. This opens up the situation in the lines mentioned above for competitive bids, but it is very important that the assured knows exactly what is being covered and exactly what the exclusions are. When there is a departure from the standard manual, policy, endorsements, and rates, very close scrutiny should be given to the coverage provided and exclusions included. Suggestions to reduce insurance costs. Policies should be written for at least three years. The rate for three years is only two and one—half times the annual rate, a saving Of a half year's premium every three years. This represents a saving of l6-2/3% of the total cost of three one year policies. Even after the interest on the additional sum advanced is taken into account, the business is still substantially ahead. As was mentioned earlier, buying insurance in a dividend—paying company is an effective way of reducing in- surance costs by approximately 15% to 30% for fire and allied lines. Other insurance lines are open to competitive bidding. If a policy is being purchased for the first time, or if it is time to renew a policy, it is possible to utilize the recommendations above. The chances are great, of course, that there is already a policy in effect, and the odds are about two to one that a mercantile business is not receiving 90 any dividends.l However, it cannot be recommended to drop present policies to change from a one year to a three year policy or from a stock company to a mutual without qualifica— tions. It is recommended that a present one—year policy be rewritten for three years by the same insurance company. Many insurance companies will issue an endorsement extending the policy term to three years at the reduced rate. Some companies may cancel the present policy pro rata, which means the insured will be charged only for the period that has already gone by at the proportionate rates. Regardless of how the change-over to a three-year policy is effected by the company, the restaurant will immediately begin to receive the benefit of the reduced rates. It is not possible to follow the same procedure with the same success in changing from a stock company to a dividend paying company when there is a policy in effect. To replace a stock company policy with a mutual company policy, except .at expiration date, it would be necessary to cancel the stock 2 policy short rate. Because the rule provides that if a 1 Russell B. Gallager, Buying and Administering Corporate Insurance, Research Re ort No. 15 (New York: American Manage- ment Association, 1948 , Appendix I. ~ 2Rules of Practice Covering Rate Information and flake-Ups and Credit (Detroit: Michigan Inspection Bureau) Short Rates and Cancellation of Policies, June 28, 1954, pp- 93-95. 91 policy is cancelled the short rate cancellations apply,unless such policy is replaced in the same company, for not less than the same amount, and for not less than the same term, and in the same company, and on the same property. Likewise, if the assured changed from one stock company to another stock com- pany this same rule would apply. The insurance company will cancel the present policy but it would be necessary to compute the earned portion of the premium according to a special table, the short rate table. Under this table, the company is allowed to retain a larger part of the premium than has been earned on a proportionate basis. This extra charge upon cancellation will offset most of the savings possible under a mutual divi- dend—paying policy, so it will be just as well to wait until the policy comes up for renewal before replacing it in a mutual company. It is possible for a restaurant to replace a one—year policy with a three-year policy in a mutual company that pays dividends of 20%. The following calculations show the advantage of buying insurance on a three-year plan and placing it in a dividend-paying company. Annual Premium. . . . . . . . . . . . . . $lOO 3 year premium for insurance bought on an annual term . . . . . . . . . . . 300 3 year term premium. . . . . . . . . . 250 92 Payment on Payment of Total Principal Interest2 Dividend3 Charges Beginning 1st yr. $100.00 none none $100.00 Beginning 2nd yr. 75.00 $9.00 $ 20 64.00 Beginning 3rd yr. 75.00 4.50 15 6h.50 Total $250.00 $13.50 $ 35 $228.50 Beginning 4th yr.“r ’ $ 15 $213.50 3 year cost on annual basis . . . $300.00 3 year cost on term basis in a mutual company 213.50 Savings--3 years . . . . . . . . . . 86.50 This represents a saving of 29 per cent. Some mutual companies write insurance using the five year rate with the premium payable annually. That is to say, four times the rate, divided by five, becomes the annual rate. This gives all the advantage of the five year term, but only one year‘s premium paid in advance, and savings becoming effective at the end of each year. The stock companies write insurance, charging 100% of the premium the first year, and 78% of the premium the next two or four years, but revert to the 100% premium on the fourth or sixth years, depending whether it is a three or five year policy. 1Full 100% payment the lst year, 75% charge second and third year. 2Payment of 6% interest. 3Dividend estimated at 20%. “Fourth year dividend is credited to the account if pOlicy is renewed, otherwise the dividend is sent by check. 93 Another method to reduce the cost of insurance is to reduce the insurance rate. The insured makes the initial step by giving a "Letter of Record” to the insurance agent, which is forwarded to the Michigan Inspection Bureau, and is returned with the rate make-up for the restaurant under con- sideration. This rate make-up shows in detail all the charges that have gone into the rate. An analysis of the rate make- up made at the prOperty involved will show what can be done to (1) hold the rate at the present level, (2) prevent an increase in rate, and (3) reduce the rate. It is, of course, possible to reduce a rate, but the cost of structural changes, etc., frequently make it unwise to make the change in order to get the reduction in the rate. In purchasing straight insurance, the same rate per hundred dollars of insurance is used, regardless of whether there is complete coverage or only partial coverage. For example, if a person buys a straight insurance policy cover- ing 100 per cent of the value of the property, the same rate per hundred is paid when a person carried a small per cent of value. There is very little likelihood, however, that the former will ever have a total loss. Under co-insurance the amount of insurance carried is stated in terms of a percentage of the total insurable value of the property. For instance, if it can be assumed only eighty per cent of the property is destructable by fire (a certain proportion of the masonry and concrete work being indestructible) the policy should carry an eighty per cent 94 co—insurance clause and thereby provide insurance covering eighty per cent of the value of the property. The rate is calculated on the basis of 80% co-insurance. The premium rate on buildings is reduced all the way from 10% to 70% by the 80% co-insurance credits depending on the construction of the building, and slightly higher for the 90% co-insurance clause.1 A recommended insurance program with estimated costs. It is the purpose of these recommendations to substitute a small, certain loss for a large, uncertain one, and to do it as economically as possible. The recommendations are intended to protect all losses which are potentially so large as to be financially disastrous, or required by contract or law. Because of the many variables entering into the rate and the premium, see Appendix D, it is rather difficult to determine a rate or premium except through a typical case, which follows. The hypothetical restaurant to be insured is located in a town of approximately 20,000 p0pulation in Michigan. The restaurant is managed by a sole proprietor who has a fifteen year lease on the building. The lease(quarantees the building will be returned in the same condition as he received it other than normal depreciation. The proprietor owns the equipment in the building. This sixty seat establishment has 1Rules of Practice Covering Rate Information and Make— gps and Credit (Detroit: Michigan Inspection Bureau) effec— tive May 28, 1956, p. 32. 95 an annual sales of $60,000. The cost of food sold is 40% of gross sales. Besides the proprietor (age 35) and his wife (age 34), who works in the business, there are four other employees. The building was designed for a restaurant and was constructed in 1948 at a cost of $18,000. It is a brick building, with wood joists, 30 feet wide, 60 feet long, and 12 feet above the ground with an eight foot basement, located in the main business district between a drug store on one side and a groc- ery store on the other side. There are no front or rear exposures. The proprietor equipped the restaurant in 1948 at a cost of $9,000. The restaurant has a Crane low pressure cast iron, boiler used for heating only and having a measure- ment of 125,000 cubic inches. A contractual obligation re- quires insurance for the sign that hangs over the side walk. An Olds 88 automobile is used for both pleasure and business in territory 10. Occasionally an employee uses his car to pick up materials, drive to the bank, etc. The restaurant is not located in a flood area, and the town is reasonably fTee of vandalism and malicious mis- chief. The establishment does not have an automatic sprinkler system and does not have an electric sign, road sign, check- room, or elevator. The restaurant does not serve liquor. There is no ordinance that requires the complete removal of a building which is partially destroyed by fire, windstorm, or flood. The recommended insurance program for this restaurant is as follows: I. Required 96 A. Building and contents—~workmen's compensation B. Business operation--contractua1 liability for sign hanging over the sidewalk.1 II. Essential A. Building and contents 1. 2. 3. 4. Fire insurance on building and contents Extended coverage endorsement Boiler insurance Earthquake insurance B. Business operations 1. 2. 4. Comprehensive general liability Products liability Business interruption (a) fire (b) extended coverage (c) boiler Motor vehicle and automobile non—ownership All estimates for items in the proposed insurance program were collected from rate manuals, and_experienced, reputable sources. The estimates are based upon c0verage contained in the previous section as applied to the outline of the problem supplied by the author. 1Nearly all cities require by ordinance that when a Sign hangs over the sidewalk, or otherwise, that the owner Of the sign agree in event of injury to people or property, the city will be held harmless. 97 I. Workmen‘s Compensation Assume a sole proprietor working as manager and head cook, wife working as hostess, cashier and bookkeeper, one employee working as kitchen helper and dishwasher, and three waitresses. In this case workmen‘s compensation is required by law and therefore must be carried. Salary of manager and head cook. . . . $5,200 Salary of wife . . . . . . . . . 2,700 Salary of kitchen helper and dishwasher . 2,400 Salary of three waitresses . . . . . 6,480 Total . $16,780 Payroll division Code #90791 applies to a restaurant, exclud- ing musicians,entertainers, or clerical office employees-- Rate 70¢ per $100 payroll--$2l. minimum premium.2 $16,680 at 70¢ equals $117.46. Estimate of total cost for Workmen‘s Compensation annual premium $117.46 Less estimated dividend of 10% from a dividend paying insurance company 11.75 Total $105.71 2. Fire and Extended Coverage Endorsement The author recommends: 1. Property insurance written subject to the 80% co-insurance clause. 2. Extended coverage endorsement attached to the fire policy. 1The Basic Manual of Rules, Classification and Rates for Mgrkmen‘s 05mpensation and Employerrs Liability—Insurance (New York: National—CBuncil on Compensation Insurance, April 15, 1956), p. C48. 2Ibid., Mich. Rate Section, effective October l,l955,p.5. 98 3. Policies written for a three year term, at 2—1/2 times annual premiums paid in advance. 4. Placed with a dividend paying insurance company. 5. Present rates checked for reduction by letter of record. Assume a restaurant located on 316 Y Street in Town Y witkl 21 population of 20,000. It is a brick building with wood. ¢joists 30 feet wide, 60 feet long, and 12 feet above‘ grouxdci with an eight foot basement. It was built in 1948 at Eisst of $18,000. The Michigan Inspection Bureau shows the foll.cn~ing rate schedule.1 Fire-— 3a .91 Extended Coverage-- 2b 1.14 Thessee rates reflect all the hazards (see variables) of the building (deficiency structural charges) and all the charges for cxontents (see variables). They include any exposure Charges by reason of a drug store on one side and a grocery SUDIVE on the other. There are no front or rear exposures. A. Computation of Values 1° Present value of the building.2 \ 27E3 1Rate Card, Michigan Inspection Bureau, Detroit, No. 40, dated October 11, 1954. be]_ 2Normally, certain other exclusions such as footings truac’VJ the lowest surface of the ground, pipes and wiring below be Srurface of the ground, excavation, and architect fees may a‘bleiicluded in determining the replacement cost, or the insur- thee value of the building. Since the insured carries only ed. 3nlinimum.amount required, these exclusions have not enter- Saflh to the computation of the building value. This is a (”3“6313y measure to provide more insurance in force where no jLIlsurance is carried, and a safety value when co-insurance 99 a. Cost of $18,000 in 1948 at 50¢ per cubic foot1 b. 1956 per cubic foot cost is 65¢2 c. Per cent increase is 65/50 or 30% d. 30% of $18,000 is $5,400 e. Present replacement cost of building is $23,400 2. Efiresent value of equipment a. Equipment cost in 1948 was $9,000 b. Per cent increasaicost of 1956 compared to 1948 is 33-1/3%3 c. Present replacement cost of equipment is $12,000 3. Depreciation values a. One per cent a year for building, and 2% for equip- ‘ ment. Building and equipment eight years old (1) Present 100% building value $21,528 (2) Present 100% equipment value $10,080 4- Efiresent inventory value is $1,400. \ ‘ is <3611rried. 0n the average, these exclusions will run approx- “EltKEZLy'10% of the value of the building and in event of loss wouLICi 'be used at arriving at the insurable value of the bill 1d ing . te 1Revised Schedule of Unit Costs Based on'Cubical Con- .IILE£§__9f_BUilding, Detroit Real Estate Board, January 1956. 2Ibid. 3"Machinery and Equipment Costs," Factory Mutual I §§E§§E¥E‘ Factory Mutual Division, Boston, January 1955, Data 9-3. 100 'The rate possibilities given below followed by the total g>remium cost on the next page definitely reveal the cost Iweduction of 80% co-insurance, and the saving of a three year term policy. RATE COMPUTATIONl N0 Co-Insurance 80% Co-Insurance Basi_s: of Building Contents Building Contents Paynlennt Fire E.c.2 Fire E.c.2 Fire E.c? Fire E.c? ¥ One :ysaar* .91 .24 1.14 .24 .683 .084 .969 ~084 Threee years 2.275 .60 2.85 .60 1.708 .21 2.423 .21 Five Eflears 3.64 .96 4.56 .96 2.532 .336 3.876 .336 ‘ __-, ____ lFractions are figures to the fourth decimal place. See £3}11e Book Affecting the Writing of Fire and Lightning, 3%EEIZSEed Coverage Endorsement, Windstorm and Hail Insurance, 0- iJiiMichigan(Detroit: Michigan InspectionfiBureau) €Ffi5€§¥iive June 28, 1954, p. 83. 2Extended Coverage. lOl .Empfi 0:0 mm pmgzmcfi who z90p20>cfl 05p use meEQHSUm 05p momOstm mochSmCH pom .mm, .Q omma mm mm: m>auommmm hammmsm coapommmsH :deQOHE smocmgdmcH HHmmlhcm ELOmeQH3 pamEmmpoucm mmmhm>oo dopampxm cwdficpnwaq bad when mo wcapanz map mcaoooaea xoom oasm com .mw .Q .Hmscmz wpfim Emmasoaz mom who mace Lo m mH woman Hmefiomc Qppsom one mH 3 .ononoonplmomasonz sa14. coo .mpCmpc00 mom Rma use wcaeaasn mom Rmm Q0 muavmpo mocmpzmcH oom .msam> mHQmLSmcH pammmpo mo Rom pm Ummswfim ma monQSmcfinoo 02m .HHHE H commopocfi ma momam HmEHome ULHSp .momaa HmEHomo sundom 0p Ummzwam mcofipompma ms.mmn m:.omme s:.mmae om.mmme ms.mme om.ofime mo.mme sq.mosa mfi.mme mm.moma Ho.mmn mm.mmfia macooe sm.om mm.mmm mm.ma ms.mmm as.s mm.mm sma ma .mcH oo &om ma.mm os.amm m:.sm oo.moH ms.mfi ss.mo oss.ma .mcHuoo oz :mpcmucoo.m mmm see mm.smw mm.osse ma.©mw mo.smma ss.saw mo.saae. .csa oo uow mm.moflfi om.fimma mm.soa sm.ssma mm.mma mm.sm a ems.oae . .mQHnoo oz moaoflaam.a .o.m chem .o.m chem .o.m ones .o.m beam .o.m beam .o.m beam occcssmcH momfiggé .mcHHpo mom .mcmwoo oz .mcHnoo &om .mcHnoo oz m.mcHuom1Rom MmcHuoo 02 use mEmpH ESHEmam pmmm mmgnE A Sufismmm gem» mac .1: esHEopm pmmm m>Mm a aonsassgzoo astmmg lll IIIIIIIllIlIlIlIlIlIIlIIlHHHHflflflflfluflfluflflfluunfluflfluufluflu TOtal premiums for Fire and Extended Coverage Aflflual premium, 50% of present value, no co-insurance. $203.00 Annual premium, 80% of present value, co—insurance. . 228.80 3 year term, 50% of present value, no co-insurance. . 507.50 Average cost per year . . . . . . . . . 169.17 3 year term, 80% of present value, co—insurance. . . 572.02 Average cost per year . . . . . . . . . 190.17 5 year term,50% of present value, no co-insurance . . 812.00 Average cost per year . . . . . . . . . 162.40 5 year term, 80% of present value, co-insurance. . . 915.20 Average cost per year . . . . . . . . . 183.04 Carrying 80% co-insurance calls for $26,406 of insur- ance for a total annual premium of $228.80. No co-insurance (Wt 50% of present value)calls for $16,504 of insurance at an annual premium of $203.00. With 80% co—insurance this is about 40% more insurance in force or $9,902 more insurance for an annual increase in premium or 9525-80 or about 137” What is true of the annual premium is relatively true of the three or five year premiums, i.e., the increased amounts of insurance would be about 40%, and increased costs WOUld be 1395- The three year cost on the annual basis is $686.40, while the three year cost on the term basis is $572.38: a three year saving of $114.38, 01" $38-12 a year. The five year ten“ has a slightly greater saving, but requires a mUCh 8Pea ter. outlay of money at one time. w .“l ‘- 3k ‘ ‘.: v ‘3. is I 103 Estimate of Total Cost for Fire and Extended Coverage 3 year term, 80% of present value, co-insurance. . . $572.02 Estimated dividends of 20% from dividend paying insurance company . . . . . . 114.40 Total . . . . . . . . . . . . . . . . . $457.62 Average net cost per year . . . . . . . . . . $152.54 3. Steam Boiler Insurance The author recommends: 1. The limit per accident be $50,000 in view of the «4 possibilities of damage to the object insured, other property of the insured, the property of others, and bodily injury which may arise from such an accident. 2. Broad coverage to cover burning, bulging, cracking and crushing.1 3. That the policy be purchased from a dividend paying insurance company. Assume the restaurant has a Crane, low pressure cast iron, boiler used for heating only and having a measurement of 125,000 cubic inches rated as a Class 1 Boiler.2 No other steam vessels are involved. 1Manual of Boiler and Machinery Insurance (New York: National Bureau of Casualty and7Sfirety Underwriters) effective October 1, 1951, p. 301. ‘"Broad coverage insures against the hazard of loss stated for limited coverage, and in addition against loss due to cracking of any cast metal part, burning or bulging under specified conditions and the crushing inward of a cylindrical furnace or flue of the object." 2Ibid., p. 107. 1. Location charge--$50,000 limitsl. . . $40.00 2. Object charge-~broad coverage2 . . . 80.00 3. Piping charge3. . . . . . . . . 6.00 4. Automatic coverageu . . . . . . . 5.00 5. Bodily injury5. . . . . . . . . 4.00 Total . . $135.00 These are three year premiums. This policy can be pur- chased on an annual basis by paying 40% of the three year premium each year. Estimate of total cost for steam boiler insurance: 3 year premium. . . . . . . . $135.00 Estimated dividends of 20% from dividend paying insurance company. . . . . . . . . 20.25 Total. . . . . . . . . . . $114.75 Average cost per year . . . . . $ 38.25 4. Earthquake Insurance The author recommends: 1. Property insurance written subject to the 80% co— insurance clause. 2- A policy written for a three-year term, at 2-1/2 times the annual premium paid in advance. 3. That the policy be placed with a dividend paying insurance company. 1Ibid., p. 101. 2Ibid., p. 107. 3Ibid. 4Ibid., p. 13. 5Ibid., p. 13. 105 Assuuning a Zone 3, Class E building (brick and wood joist) the 530% co-insurance rate is 7c per $100.1 Preseant 80% value of building $17,222 x $.07 $12.06 Preseent 80% value of contents 9,184 x .07 6.13 Total $18.49 Rate: for three years is .175 Prenuium for 3 years: $30.14 Building: $17,222 x .175 $16.07 Contents: 9,184 x .175 EstiInateof total cost of earthquake insurance for building and <30ntents: 3 year term, 80% of present value, co-insurance. . . . . . . . . $46.21 Estimated dividend of 20% from a dividend paying company . . . . . . . . 9.20 Total . . . . . . . . . . . . $37.01 Average net cost per year. . . . . . $12.34 5. Comprehensive General Liability The author recommends: 1. Coverage of $50,000 for injury to any one person and $100,000 for injuries to any one group involved in one accident in View of the verdicts rendered by the courts for bodily injury. PrOperty damage limits of $25,000. Accidents D) which cause bodily injury often cause damages to the property of others. If by negligence several 1Manual of Rates, Rules and Clauses for Michigan (Detroit: Michigan Inspection Bureau) effective Sept. 18, 1950, pp. 6-7. 106 of the buildings surrounding the restaurant were to burn, this coverage would protect the business in this situation. Medical payments of $1,000 per person and $50,000 per accident. Under this coverage voluntary pay- ment is made regardless of legal liability. This is valuable in protecting and creating good will. Products liability limits of $100,000 for injury to one person, $300,000 to more than one person arising from the same accident, and property damage of $5,000. These bodily injury limits are the highest limits in the rate manual. Higher limits must be authorized by the insurance company for rates and acceptability. Insurance written under the comprehensive form. The comprehensive insurance automatically covers the insured on new liability, except products, occur- ring after the inception date of the policy. It also covers unknown liability. That the policy be purchased from a dividend paying insurance company. A three year term policy is not recommended. There is only a 10% reduction provided the entire three year premium is paid in advance. 107 A. Rates and Premiums l. Coultractual-—a sign hangs over the side walk. Minimum premium.l—- $10.00 2. Chnners', Landlords‘, and Tenants'2--Code #1715 applies to restaurants but excludes coverage for products liability. Mininnim Premium:p Bodily injury $15.00; Property Damage $25.00. (Area Territory II) Buildiing: 30 feet x 60 feet = 1800 sq. ft. (public not permitted in the basement) Rate for standard limits of 5/10/5: Public Liability. . . . . . . . $1.772 Property Damage . . . . . . . . .23 $31.78 $ 4.14 (exact minim.)$25.00 Publgic Liability: 1800 sq. feet at $1.77 Progmerty Damage: 1800 sq. feet at .23 IneIwease limits to 50/100/25= Public Liability: 172%2 of $31.78. . 54.66 Property Damage: 116% of 25.00. . 29.00 Total. . $83.66 lNo classification. This is a company figure. (Michi— gan-Ddutual Fire Insurance Company, Lansing, Michigan). ‘ 2Owners', Landlords', and Tenants' Liability Manual Nehl'Ybrk: Nationa17Bureau of Casualty and Surety Underwriters) iSsued March 14, 1956, p. 74. "Restaurants excluding handling QI’Iise of or existence of any cnnsiderations in goods or pro— Qiuyts sold or handled after assured or any concessionaire of the eassureds has relinquished possession thereof to others." 3Owners', Landlords',and Tenants' Liability Manual, Mifflligan Mutual Insurance Rating Bureau, Exceptions to Manuals of ILiability Insurance: Michigan, issued February 8, 1956, p-E- “Ibid. 5Ibid.(Increased Limits,effective July 6,1955) p . 61bid.,p.167. 108 3. Products Assume gross sales of $60,000 a year; the base rate is $1,000 of sales. The code is 112251-- Restaurants not otherwise classi- fied--inc1uding the handling or uses of or existence of any condition in foods or products sold or handled, after the insured or any concessionaire of the insured has relinquished possession thereof to others. Rate for Code #11225-—standard 5/10/5: Public Liability: $.262 Minimum premium. . . 20.00 Property Damage: .033 Minimum premium. 5.00 Public Liability: 60 x $.26 = 15.60 (exact) min. of $20.00 Property Damage: 60 x .02 = 1.20 (exact) min. of $ 5.00 Increase Public Liability limits to 100/300:u 1.88% of $20.00 = $37.60 1Products Liability Manual (New York: National Bureau of Casualty Underwriters, New York) effective January 12, 1955, p. 37. 2Ibid. Rates, issued July 6, 1955, p. 50. 31bid. 11 Ibid. Increased Limits, effective July 6, 1955, p.45. 109 There is no item rule saving. The only advantage of a three year policy is that the rate is frozen for the three years and audited at the end of each year.1 Add $5.00 for bodily injury and $2.50 for property damagge for general liability comprehensive coverage.2 Estinnate of Total cost for Comprehensive General Liability Contractual. . . . . . . . . . . . $10.00 Owners', Landlords', and Tenants' Public Liability Limits of 50/100 . . . 54.66 Property damage limits $25,000 . . . . 29.00 Products Public Liability limits of 100/300. . . 37.60 Property damage limits of $4,000 . . . 5.00 Comprehensive Bodily injury. . . . . . . . . . 5.00 Property damage . . . . . . . . . 2.50 TOTAL ANNUAL PREMIUM. '. . . . . . . . $93.26 Estimated dividend of 15% from dividend paying company. . . . . . . . . . $13.99 NET ANNUAL COST . . . . . . . . . . $79.27 6- IBusiness Interruption The author recommends: 1. Purchase on the 50% gross earnings form. Normally the 50% gross earnings form would allow the assured approximately six months to resume business, which lAutomobile Casualty Manual and Manual of Liability Insllrance (Supplement)7(NewY5rk: National Bureau of Casualty nderwriters, October 1, 1953), p. 5. - 2Ibid. 110 in all probability could be done in this size establishment. 2. That an extended coverage endorsement be attached to the policy. 3. That boiler coverage be attached to the policy for a period of 50 days with credit from the first mid- night following boiler explosion. 4. That insurance be written on a three year term basis, at 2-1/2 with annual premiums paid in. advance. ‘ 5. That insurance be placed with a dividend paying company. 6. That rates be checked for reduction by Letter of Record. 1. Fire and Extended Coverage: Assuming a gross income of $60,000 per year and that the cost of food sold is 40% of gross sales, the 100% business interruption value is $60,000 less $24,000 (40%) or $36,000. If purchased on the 50% gross earnings form this policy provides $18,000 of insurance. The 50% gross earningsform rate (mercantile or manu— facturing) is 80% of the 80% co-insurance building rate and 80% of the 80% extended coverage rate.1 ¥ 1Rule Book Affecting the Writing of Fire and Lightning Extended—Coverage Endorsement, Wifidstorm and Hail7Insurance etc., infiMichigan (Detroit:. Michigan Inspection—Bureau) effectivngune 28, 1954, pp. 12-13. 111 RATE COMPUTATION OF 50% GROSS EARNINGS BUSINESS INTERRUPTION FORM Basis of Premium Fire Extended Coverage One year .546 .067 Three years 1.365 .168 Five years 2.184 , .226 PREMIUM COMPUTATION OF 50% GROSS EARNINGS-BUSINESS INTERRUPTION FORM - One Year Three Yrs. Five Yrs. Amount of Insurance Fire E.C. Fire E.C. Fire E.C. $18,000 98.28 12.26 345.70 30.15 393.12 48.24 2. Boiler a. 50 days. . . . . . . . . . . $154.00l b. Credit--collection under the policy 2 starts after the second midnight . . 13.00 c. Total . . . . . . . . . . . $141.00 The figures above are for three year premiums. This premium is for $1,000 daily indemnity, if the loss is that much. In this case it would not be, since the average daily loss is about $100. 1Manual of Boiler and Machinery Insurance (New York: National Bureau of Casualty and Surety Underwriters) effec- tive January 5, 1955, p. 210. 2 Ibid. 112 Estimate of total cost for Business Interruption insurance: 3 year term, fire and extended coverage. . . $275.85 3 year term, boiler (credit for first mid- night) . . . . . . 141.00 $416.85 Estimated dividends of 20% from a dividend payment insurance company. . . . . $ 83.70 Total. . . . . . . . . . . . . . $333.15 Average Cost per year . . . . . . . . $111.05 7. Motor Vehicle Insurance The author recommends that automobile liability pro- tection be secured to avoid financial loss, the possibility of inconvenience,.and the loss of a customer's good will. Adequate limits of liability for the business should not be less than $100,000 for injury to any one person involved in an accident, $300,000 for injuries to any group of persons involved in one accident, $25,000 for property damage caused in any one accident, and $2,000 for medical payments. Assume an Olds 88 is used for both pleasure and busi- ness. The age of the named insured is 35 and his spouse 34. Territory 10 is used for computation. Bodily Property Class 31 In ury Dama e Standard limits 5/1Q 52 $21.00 $ 28.00 lAutomobilegCasualty Manual (New York: Mutual Insur— ance RatIngIBureafi) September 1, 1956, p. 31. 2Ibid., Michigan Rates, September 19, 1956, p. 3. Estimated total cost of motor vehicle insurance: $100,000/300,000 bodily injury limitsl, $ 25,000 prOperty damage limitsg. $ 2,000 medical payments3. Estimated dividends of 15% from dividend paying insurance company . TOTAL for one year . . . . . . . $35. 33. 10. $68. $10. $58. These policies can be written for one year only. There is no provisionfkn‘item rate or premium. The restaurant should be protected against bodily injury or property damage claims arising out of the use of non-owned cars of employees in its operation. Very often employees use their cars on business errands to pick up materials, drive to the bank, etc., even against specific 113 28 00 88 33 55 instructions not to do so. Regardless of the fact that the employee was not authorized to use his car, the employer still has a legal liability in connection with such opera— tions of the employee‘s car. The writer recommends that a non—ownership liability endorsement be attached to the policy to provide this coverage. lIbid., Michigan Rates, November 2, 1955, p. 12. 2Ibid., Michigan Rates, November 2, 1955, p. 17. 3 Ibid., Michigan Rates, November 2, 1955, p. 2. —.mA 114 1 Non-Ownership --Class 1 only Property 2 Bodily Injury Damage Standard 5/10/5 $ 2.00 $ 2.00 Estimate of total cost for Non—Ownership Liability Endorsement: $100,000/300,000 bodily injury limits3 . 1.88% x $2.00 = $3.08 $ 25,000 property damage limits4 1.20% x $2.00 = $2.40 Total. . . . $4.66 These polices can be written for one year only. There ,is no provision for item rate or premium. lAutomobile Casualty Manual (New York: Mutual Insur- ance Bureau) NOn—Owned Automobile Section, September 1, 1955, p. 136. 2Ibid., Michigan Rates, September 19, 1955, p. 3. 3Ibid., Michigan Rates, Increased Limits, November 2, 1955’ p- i. “Ibid., Michigan Rates,Increased Limits, November 2, 1955, p. 17. 115 SUMMARY OF ESTIMATED COST OF PROPOSED INSURANCE Three Estimated 3 Years Type of Coverage Years Dividend Net Workmen's Compensation (117.46 per year less 11.75 dividend annually) $ 352.38 $ 35.25 $317.13 s-n Fire and extended coverage-- 80% co-insurance 572.02 114.40 457.62 Steam boiler insurance-- $50,000 limits, broad , coverage, piping, automatic 1 coverage bodily injury 135.00 20.25 114 75 F Earthquake insurance--80% co- insurance 46.21 9.20 37.01 Comprehensive general liability -—contractual, O.L.& T. 50/100/25, products 100/300/5 (93.2 per yr. less 13.99 dividend annually) 279.78 41.97 237.81 Business Interruption--five, extended coverage, and boiler insurance (credit for first midnight) 416.85 83.70 333.15 Motor Vehicle--100/300/25 and $2,000 medical (68.88 per yr. less 10.33 dividend annually) 206.64 30.99 175.65 Automobile non—ownership-— 100/300 25 5.48 a yr.less $.82 dividend annually) . 16.44 2.46 13.98 Total $2,025.32 $338.22 $1,687.10 g 2: Average net cost per year $559.69 Policy payments should be arranged so that all of the three yEar policies do not fall due the same year. The pay- ments should be spread over the year, i.e.,so some payments are due in January, April, July, October, or in the months best suited according to the income of the restaurant. APPENDICES .5, -u pv- \.U 3? 3 an '\ *4- ea '1‘! APPENDIX A MICHIGAN STATE UNIVERSITY OF AGRICULTURE AND APPLIED SCIENCE 0 EAST LANSING SCHOOL OF HOTEL 0 RESTAURANT AND INSTITUTIONAL MANAGEMENT 0 KELLOGG CENTER August 6, 1956 Dear Restaurant Operator: Under the direction of the School of Hotel, Restaurant and Institu- tional Management at Michigan State University I am conducting an extensive restaurant insurance research project, which will benefit operators like yourself. hmy of the restaurant operators I have recently spoken with have expressed a decided interested in knowing how other restaurant owners potect themselves from business risks through the use of insurance, and how the insurance program for their business compares to other restaurants. They wonder how much insurance is desirable. Most important, they wonder if they should increase or decrease this type of business expense. Right now there is no way you can find the answers to nany of these questions. In consequence, we are sponsoring this survey to collect such information for you. This survey will show you what restaurant men are thinking and doing about insurance. Information to be gained will greatly benefit you. Also, the questionnaire will give you an opportunity to review and appraise your own restaurant in- surance program. The answers to the enclosed survey will also contribute materially to an authentic, down to earth study I am preparing as one of the mquirernents for the water's degree in Hotel, Restaurant and Institu- tional Management. The finished thesis, will be filed and available to you in the University library. It will include a recommended insurance program for a restaurant with estimated costs. The information you give will be kept confidential. Results from individual restaurants will not be identified. To make sure the results are reliable, we would like a 100% response. The success of the project depends upon YOUR cooperation. YOU are the one to benefit most. Therefore, to help me and YOURSELF, would you please take a few minutes new to fill out the questionnaire? Sincerely, HEL'PC/ I b "(L ‘10 :9 UL Robert Buchanan P. S. It isn't as long as it looks; should take only 15-20 minutes. / (Do not sign The followine mention. tick whethc .2) equiprrt' 1. $1.11le 2. Centtnt Check the 1 A. 118 August 6, 1956 RESTAURANT IIBURANCE SURVEY (Do not sign this survey or identify the restaurant in any way.) The following qgiestions are about insurance in your restaurant operation. Check your form of restaurant ownership. ( ) 1. Sole proprietor ( ) 3. Corporation ( ) 2 . Partnership ( ) h . Other B. Check whether you lease, are buying, or own your (1) building, C. (2) equipment. . 10 Enilding " ( ) Lease) ( ) Buying, ( ) Own 2. Contents -- ( ) Lease, ( ) Buying, ( ) Own Check the size of your restaurant operation for annual sales, seating capacity, and the average number of full time employees. Annual Sales . No. of Seatg NO. of Employees C ) 1. Under $915,000 ) 1. Under 15 ( D l. Underl: 20 $15,000-2hp999 ) 20 15-2h ) 20 h“? 3. $25,000-39,999 3. zs-hh ) 3. 8-12 he €.’h0’000“59,999 he hS’Bh 0 13‘19 5. (60,OOO~99,999 5. 85-124 . 20.29 7. $200,000-399,999 . zoo-299 . 50-79 8. t..)hO0,000 and over . 300 and over . 80 and over 03 "1 O\ vvvvv CD “Q 0‘ \n 5' g ( ( ( ( How much do you spend per year for insurance pertaining to your business? (This ._ does not include personal insurance.) ( ) 1. Under $75 ( ) S. {5500-999~ ( ) 2. 375-1h9 ( 6. $1,000elg999 E ) 3. {9150-249 E ) 7. -".~2,000-4,999 ) b. ii~2So-l:99 My building is insured for $3 of the actual cash value, and my contents are insured for % of the actual cash value. ) 8. :"5,000 and over I, do ( ), do not ( ), have an appraisal of my building and contents made at least once a year to arrive at insurable value. How do you determine how much your business should spend for insurance? You may want to check several of the following: ( ) l. A percentage of total sales. ( g 2. A fixed amount per seat. ( 3. A dollar amount not related to the size of the operation. \J [h .2. 119 6. (Continued) ( ) It. An amount necessary to cover what you consider to be the most serious risks of the business. ( ) 5. The amount recommended by an insurance agent. ( ) 6. The amount determined by an insurance survey of your . business. ( ) 7. Am self insured. ( ) 8. Other methods (Explain) B. What risks do you have in your restaurant, and which are covered now? (You should check one of the three columns for each item.) Covered Have risk“ Do not but not have covered risk )() ( () ( 1. Fire a. Building b. Contents v VV 2. Extended Coverage (This includes risks of windstorm, hail, ex- plosion - except steam boiler, riot and civil comotion,‘damge by aircraft or by vehicle, and smoke damage.) 3. Vandalism and rialicious I‘fiischief he F100d AAAA vvvv So Earthquake 6. Demolition (You have at risk compliance with state or city laws requiring the complete removal of a building which is partially destroyed by fire, windstorm or flood.) ( ) ( ) ( ) 7. Rents or Rental Value (You are liable if the lease requires that rent continue even though the building is untenable after a fire loss. If you are the owner and occupy the building, your risk is the loss of rental value of the building while .you are unable to occupy it.) ( ) ( ) ( ) P i! - . . 1 5:” risks like elevator, sprinkler leakage, steam boiler explosion, 1. e 0., may not apply to your restaurant operation. ‘1 H. (Continued) 9. 10. 12. 13. 15. Leasehold Interest (If your lease is terminated by fire or other peril, you might have to rent property at a higher cost.) Improvements and Betterments (If you lease, you have at risk money spent on altera- tions, changes and improve: ments made at your expense.) Consequential Loss or Damage (Losses caused to products by'a change in temperature which results from.the par- tial or complete destruction of refrigeration or cooling' apparatus.) a. By fire b. By breakdown of equipment Extra Expense (You are liable for the added cost of doing business under unfavorable conditions or in temporary quarters due to damage to building or contents or other insured hazards.) Sprinkler Leakage (Your property is subject to damage caused by the discharge of water or other fluid from automatic sprinkler system when there is no fire.) Electric Sign Plate Glass Boiler and machinery a. Steam‘boiler explosion b. Machinery breakdown (not ordinary wear and tear.) Business Interruption (You have at risk profits you would have earned if fire or some other hazard had not occured, including continuing expenses such as taxes, payroll, etc.) AA Covered ( ) ( ) ( ) ( ) VV Have risk but not covered AA Do not have risk ( ) ( ) ( ) ( ) ( ) ( ) ( ) ( ) ( ) ( ) ( ) 12K) 1231 Covered Have risk Do not but not . have Covered Risk H. (continued) 17. Bailees Liability (Liability for customers articles which have. ' been checked in yom" checkroom.) ( ) ( ) ( ) 18. Owners' , Landlords' , and Tenants' Liability (You are liable for per- sons who sustain injury in and about your restaurant or premises arising out of your negligence.) a. Bodily injury b. -Pr0perty damage c. Medical payments d. Comprehensive General Liability (You have at risk all declared existing liability hazards as above and a11v_additional hazards . which may occur arising out o?- - your business operations, build- ing or premises.) ( ) ( ) ( ) AAA vvv AAA 19. Products liability (You are liable for claims arising out of the foods you sell which result in sickness, disease, or death.) ( ) ( ) ( ) 20.. Elevator Liability (Includes elevators, escalators, and hoists, but does not include dumbwaiters or special plat- form lifts. You are liable for bodily injury and property damage of people or property in your elevator caused by Your negligence.) ’ ( ) ( ) ( ) 21. Elevator Collision (Liability for damage that may be done to the ele- vator, elevator shaft, or loading platform.) ( ) ' ( ) ( ) 22 . Contractual Liability (Liability you assume from another, which, except for the contract, will not be your liability, but his liability. Example: . a public utility may be required to erect on your premises a transformer or a pole on which to string wires. It will do so only if the restaurant owner will pay the lie.- bility which arises out of the exist- ence of such equipment.) ( ) ( ) ( ) H. 13.12 (continued) Covered Have risk Do not but not have Covered Risk 23. Fire Legal liability (You are 21:. 25. 26. 2?. liable for damage of others property by fire originating within your restaurant caused by your negligence.) ( ) ( ) ( Civil Liability (Actual damage which an injured person may collect from an individual who sells liquor to the party or parties responsible for .the damage. Injury may be to the person, to property, or to means of support. ( ) ( ) ( Automobile Insurance (Covering. auto- mobile for business functions, pick- up, delivery, and other. a. Bodily injury liability b. Property damage liability c. Medical payments d. Comprehensive loss of or damage to automobile, except by colli- ‘ sion or upset e. Collision or upset f. Theft g. Towing and labor costs AAA VW AAA AAAA VVVV AAA/IN AAA/N Non-Ownership Auto Liability (You have the risk of am automobile operated in your behalf which is not owned by you or your restaurant.) a. Bodily injury b. Property damage c. Medical payments AA VVV AAA VVV AAA Comprehensive Dishonesty, Destruction and Disappearance (You have at risk all money and securities on and off the premises. You have potential loss due to dishonesty of employees, loss of money and securities within or with- out the premises, damage done to pre- mises and equipment, loss of securities in safety deposit or forging of out- going instruments.) ( ) ( ) ( NOTE: -If you have the broad "comprehensive crime policy" you will want to check items 28 through 31 as covered. However, burglary, robbery, employee dishonesty, and forgery may be purchased separately, if you do not have comprehensive coverage. ) VVV Vvvv ) 1, (continued) 28. Burglary (aI into YOU-1" I ous intent, marks of tr a. honey 5 b. Furnitt supplie money from violence 01 30. Fidelity 20: loss by er! abstractio: or other p 31. Forgery 3. Incomi by Outgoi 32. License am‘ ”337 be rec mmllcipal H. -6- (continued) 28. 29. 30. 31. 32. 33. 3h. 35. 36. Burglary (Breaking and entering into your premises, with feloni- ous intent, and with visible marks of the forced entry.) a. Money and securities b. Furniture, fixtures and supplies. Robbery (The felonious taking of money from a person by either violence or threat of violence.) Fidelity Bonds (You have at risk loss by embezzlement or wrongful abstraction of money, securities or other prOperty by employees.) Forgery a. Incoming be Outgoing License and Permit Bonds (These may be required by state law, by municipal ordinance, or by regulation as a condition to be filled before the granting of a permit to exercise a particular privilege.) Workmen' s Compensation Death of Key Man (Business has at risk financial loss resulting from death of an important man in the business.) Death of Sole Proprietor (Operator's heirs have risk in continuing or disposing of business without sacrifice, in event of death of owner.) Death of Partner (In case of one of the owner-partners death, the other has the risk to carry out buy-or- sell agreement.) 123 Covered Have risk Do not AA vv but not have Covered Risk AA VV ( ) ( ) ( ) ( ) ( ) ( ) ( ) ( ) ( ) ( ) H. I. J. K. 1211r ( continued) Covered Have risk Do not but not have Covered Risk 37. Death of Close Corporation Member (Liability of remaining members to purchase stock of deceased.) ( ) ( ) ( ) 38. Other Insurance risks of your business Check the following so-called social insurance which you carry. ( ) 1. Group Accident and Health Insurance ( )g: Group Hospitalization Insurance ( Group Life Insurance ( ) 1;. Group Pension Without considering costs or amounts, what kind of insurance in addition to what you already have, do you think you might need to provide complete protection to your restaurant, guests, and employees? (You may want to refer to question H, items 1-38, and question I, items l-h). For which of the following risks is insurance most important to your restaurant Operation? (There may be more than one answer to this question, so place a check before all items which my.) ( ) 1. Fire in restaurant ( ) 2. Extended Coverage (Risks of windstorm, hail, explosion except steam boiler, riot and civil commotion, damage by aircraft or vehicle, and smoke damage.) Accidents to others while on your premises. Accidents to employees. loss due to claims from bodily injury or property damage caused by consumption of food or beverage sold in your restaurant. Business Interruption. Electric Sign. AAA VW U'lf-‘U Q 0 O AA W ~10‘ .. n“ .1: 125 -8- . K. (Continued) ; 8. Plate Glass 9. Employee dishonesty ) 10. Forgery ) 11. Theft incluiing larceny, burglary and robbery ) 12. Boiler and machinery breakdown (not wear and tear) ; 13. Automobile Liability 11:. License and Permit Bonds ) 15. Life Insurance ) 16. None " ) 17. Other important risks ~ A— A ‘— AAAMAAAAA 1.. Additional Comments Thank you for your cooperation. Please return this material in the enclosed, stamped, addressed envelope. APPENDIX B QUESTIONNAIRE RETURNS BY CITIES Number of City or Village Number of Eating Returns Replying to the and Drink Questionnaire Places Population3 1 Ada —- Under 1,000 3 Adrian 39 18,393 2 Albion 31 10,406 2 Ann Arbor 85 48,251 1 Bad Axe 9 2,973 1 Baldwin -- 835 5 Battle Creek 112 48,666 2 Belleville —- 1,722 2 Birmingham 20 15,467 1 Boyne City 6 3,028 1 Buchanan 13 5,224 1 Cadillac 14 10,425 1 Calumet -— 1,256 1 Caro 13 3,464 1 Charlotte 21 6,606 1 Cheboygan 22 5,687. 1 Chelsea 7 2,580 1 Coloma -- 1,041 1 Dearborn 237 94,994 18 Detroit 4,206 1,849,568 1 East Lansing 9 20,325 1 Escanaba 54 15,170 1 Flat Rock —- 1,931 2 Flint 421 163,143 1 Frankenmuth —— 1,208 84 Grand Rapids 364 176,515 1 Hancock 22 5,223 1 Harbor Springs -- 1,626 1 Hastings 15 6,096 1 Hazel Park 20 17,770 1 Iron Mountain 31 9,679 5 Jackson 162 51,088 3 Kalamazoo 142 57,704 6 Lansing 197 92,129 1 Mackinaw City -- 970 l Marquette 31 17.208 1 Monroe 60 21,467 1 Montague -- 1,530 1 Mount Clemens -- 17,027 2 Muskegon 105 48,429 1 Otsego 8 3,990 127 Number of City or Village Number of Eating Returns Replying to the and Drinking Questionnairel Places2 Population3 1 Pinconning —- 1,223 1 Round Lake -- Under 1,000 2 Royal Oak 72 46,898 7 Saginaw 195 92,918 1 South Haven 14 5,629 2 Sturgis 23 7,786 1 Utica -- 1,196 1 Wells -- Under 1,000 1 West Branch -- 2,098 1 Whitmore Lake -- 1,385 1 Ypsilanti 41 18,302 3 Unidentified 1 2U. S. Bureau of Census, Census of Business: 1954, Vol. 1, Retail Trade, Chapter 22: Michigan (Washington, D.C.: Government Printing Office). 3U. S. Bureau of Census, U. S. Census of Population: 1950, Vol. I, Number of Inhabitants, Chapter 22: Michigan (Washington, D.C.: Government Printing Office). Taken from the city post marks on returned envelopes. APPENDIX C SOURCES OF FURTHER INFORMATION CONCERNING INSURANCE Daily Papers American Insurance Digest and Insurance Monitor (Chicago) Eastern Underwriter, The (New York) Journal of Commerce and Commercial, The (New York Weekly, Bi- Weekly, and Semi-Monthly Papers) Insurance Insurance Insurance Insurance Insurance Advocate (New York) Field, The (Louisville) Graphic, The (Dallas) Journal, The Los Angeles) Record, The (Dallas) National Underwriter, The (Chicago) Standard, The (Boston) Underwriter's Report (San Francisco) United States Review Philadelphia) Weekly Underwriter, The (New York) Monthly and Bi-Monthly Magazines Accident and Health Review (Chicago) American Agency Bulletin, The (New York) American Underwriter (Philadelphia) Best's Insurance News (New York) Fraternal Fraternal Fraternal Insurance Insurance Insurance Insurance Age, The (Rochester) Field, The (Cedar Rapids) Monitor (Rochester) Broker-Age, The (New York) Buyer, The (New York) Index, The Louisville) Law Journal, The (Chicago) Magazine, The (Kansas City, Mo.) Insurance Press, The (New York) Insurance Salesman, The (Indianapolis) Leader's Magazine (Des Moines) Life Association News (New York) Life Insurance Courant (Oak Park) Life Insurance Digest (Louisville Life Insurance Selling (St. Louis Life Insurer, The (Indianapolis) Local Agent, The (St. Louis) Mutual Underwriter (Rochester) National Insurance Leader, The (Chicago) National Safety News (Chicago) Northwest Agency Bulletin (Seattle) Northwest Insurance (Minneapolis) Insurance 129 Northwest Insurance News (Portland, Oregon) Pacific Northwest Underwriter (Seattle) Rough Notes (Indianapolis) Safety Maintenance and Production (New York) Southern Insurance (New Orleans) Southern Insurer (New Orleans) ‘ Spectator, The-Life Insurance in Action (Philadelphia) Spectator, The- Property Insurance Review (Philadelphia) Underwriters Review (Des Moines) Western Underwriter San Francisco) Services Fire, Casualty and Surety Bulletins. National Underwriter Company, CIncinnati. A compilation of policy forms, endorsements, underwriting rules, and rates for practically all forms of insurance except life and disability. A loose-leaf reference work, revised monthly. Insurance Decisions. Alfred M. Best Company, New York. Three annual reports: Fire and Marine, Life, and Casualty. Reports of financial conditions, operations, and history of individual companies. Best's_News. Alfred M. Best Company, New York. Monthly publications principally devoted to current news of conditions of companies. Libraries Insurance libraries have been established in several centers, principally by organization members of the Insurance Institute of America. The following organizations are said to have particularly useful collections: Insurance Library Association of Atlanta Insurance Library Association of Boston Insurance Library of Chicago Insurance Society of Chicago Insurance Society of Baltimore Insurance Society of New York Fire Underwriters' Association of the Pacific (San Francisco) I. APPENDIX D VARIABLES DETERMINING RATES AND PREMIUMS FOR COVERAGE LISTED AS REQUIRED OR ESSENTIAL Variables for rates A. Building and contents 1. Fire-building and contents a. Class of town - l to 10 or unprotected b. Construction of the building--frame, masonry, fire resistive, fire proof, or some combina- tion of these. Exposures--one each side and in the rear 0 d. First aid in the property--fire extinguisher, or sprinklers in the building e. Deficiencies in construction-~chimney, elec- trical wiring, heating and cooking units, clearances to combustible material f. Amount of inflammable material in the property g. Other conditions set up by the Michigan In- spection Bureau in determining the rate, such as general housekeeping 2. Extended coverage--the only variable is whether no co-insurance or 80% or higher co-insurahce is carried 3. Boiler a. Low pressure boiler or high pressure boiler b. Cast iron boiler or steel boiler 131 c. Number of pounds pressure carried d. Standard or broad coverage e. Seasonal coverage or year around f. Whether more than one boiler is involved (1) If more than one boiler is involved there is but one location charge made (2) If the second boiler is used as a stand- by boiler, there is a reduction in the premium 4. Earthquake a. Section of the country b. Construction of the building B. Business Operation 1. Comprehensive general liability a. The area and/or frontage or receipts b. The coverage carried Contractual Elevator ) ) ) Owners', Landlords‘, and Tenants' ) Owners protective ) Products ) Automobile public liability and property damage (7) Automobile non-owned public liability and property damage 2. Product liability--the variable in this item is the dollar volume of business II. 132 3. Business interruption--the variables on this coverage are the same as the variables on the building and contents 4. Motor vehicle—-bodily injury, property damage, and medical expense a. Use classification of automobile--private, passenger, or commercial b. If commercial automobile, the radius in which used c. Class of driver—-3 classes of drivers (1) Class 1——non-business use; no male operator under age 25 (2) Class 2--male operator under age 25; busi- ness and non-business use (3) Class 3—-business and non-business use d. Territory in which vehicle is located (11 territorial ratings in Michigan) The only variable for premiums is the amount of insurance carried, because it is the rate times the amount of insurance carried which produces the premium (A.I. x R. = Premium). BBBBBBBBBBBB BIBLIOGRAPHY Books Ackerman, S. B. Insurance. New York: The Ronald Press Company, 1951. Gallagher, Russell B. Buying and Administering Corporate Insurance. Research Report No. 15. New York: American Management Association, 1948. Hardy, C. 0. Risk and Risk Bearing. Chicago: University of Chicago Press, 1923. Lundberg, Donald E., and Vernon Kane. Business Management: Hotels, Motels, and Restaurants. TaIIahassee, Florida: Penninsular Puinshing Company, 1952. Magee, John H. General Insurance. Chicago: Richard D. Irwin, Inc., 1942. Mehr, Robert I., and Emmerson Cammock. Principles of Insurance. Homewood, Illinois: Richard Irwin, Inc., 1954. Michigan Inspection Rule Book. Detroit: Michigan Inspection Bureau, June 28, 19547 Mowbray, A. H. Insurance. New York: McGraw—Hill Book Com— pany, 19307 Rule Book Affecting_the Writing of Fire and Lightning, Ex- tended Coverage, Endorsement, Windstorm and Hail Insurance, etc., in Michigan. Detroit: Michigan Inspection Bureau, June 28, 1954. Spell, Reginald V. Public Liability Hazard. Indianapolis: The Rough Notes Co., Inc., 1955. Willett, A. H. The Economic Theory of Risk and Insurance. Philadelphia: University of Pennsylvania Press, 1951. Manual 3 Automobile Casualty Manual and Manual of Liability Insurance. New York: PNational Bureau of Casualty Underwriters, October 1, 1953, and September 1, 1956. lManual of Boiler and Machinery Insurance. New York: National —' Bureau ofPCasuaIty and Surety Underwriters, January 5, 1955. 135 Manual of Rates, Rules, and Clauses for Michigan. Detroit: Michigan Inspection Bureau. Effective September 18, 1950. Owners', Landlords', and Tenants' Liability Manual. New York: National Bureau of Casualty and Surety Under— writers. Issued March 14, 1956. Products Liability Manual. New York: National Bureau of CasualtyPUnderwriters. January 12, 1955. Rules of Practice Covering Rate Information andAMake-Ups and Credit. Detroit: Michigan Inspection Bureau. - Short Rates and Cancellation of Policies, June 28, 1954. The Basic Manual of Rules, Classification and Rates for Workman's 06mpensation and Employers Liability Insurance. New’York: ‘National COuncil on Compensation Insurance, April 15, 1956. Articles, Periodicals, and Surveys Bass, R. S. "Insurance as Respects Its Importance to Credit,” The National Insurance Buyer, Vol. 1, September 1954. Dougherty, Eugene. "Insurance Rate--Making Process of Interest to Corporate Buyers," The Weekly Underwriter, Vol. 172, No. 5 (January 29, 1955). Fire-Automobile and Casualty Insurance Survey. New York: The Curtis Publishing Company, Division of Commercial Research, 1943. "Insurance History," Mutual Insurance 200th Anniversary Com- mittee. Illinois State Committee Memorandum No. 9, 1952. Suppose Your Business Is Interrupted. Indianapolis: The Rough Notes Co., Inc., 1948. Under Insurance In American Industry. Chicago: Kemper Insurance Company, 1948. Other Sources "Machinery and Equipment Costs,” Factory Mutual Index, Factory Mutual Division, Boston, January 1955. Michigan Mutual Fire Insurance Company, Lansing, Michigan. 136 Rate Card, Michigan Inspection Bureau. Detroit; No. 27840; Dated October 11, 1954. Revised Schedule of Unit Costs Based on Cubical Contents of ‘Building. DetrSit Real Estate Board, January 1956? Smith, B. W. Insurance Brokers, Lansing, Michigan. U. S. Bureau of Census. Census of Business: 1954. Vol. 1, Retail Trade Chapter 22: *Michigan.’RWaShIngton, D. C.: U. S. Government Printing Office, 1955. U. S. Bureau of Census. U. S. Census of Population: 1950. Vol. I, Number of Inhabitants, Chapter 22: Michigan. Washington, D. 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