Whether it’s a fire, a natural disaster or protecting yourself from slip-and-fall lawsuits, convenience store operators must have the proper coverage to protect their investments.
By Mark E. Battersby, Contributing Editor.
Can any convenience store chain, franchisee or independent gasoline marketer withstand the financial hit of a fire that results in a two-month shutdown of operations? What about surviving after someone is injured after slipping on a wet floor? Can the business survive an employee who embezzles sizeable amounts from the business?
Both man-made and natural disasters can drastically affect the business where it hurts—its pocketbook—as well as teach every convenience store operator an invaluable lesson.
Only months after superstorm Sandy devastated much of the Mid-Atlantic coast, the courts are beginning to fill up with cases about whether damages resulted from the storm’s winds or from rising waters, which is damage covered by few insurance policies.
Obviously, selecting the right type of insurance for the convenience store business is only one factor every chain executive must consider. Finding an insurance company willing to insure the business almost renders the question of cost irrelevant. How then can any operator hope to find an insurance company, select the right types of insurance needed for his or her unique operation and, most importantly, afford those steadily increasing insurance expenses?
Basic Insurance Options
The basic business insurance package, according to many experts, consists of four fundamental types of insurance coverage: general liability, workers’ compensation, auto and property/casualty, plus an added layer of protection over these, called an umbrella policy.
Workers’ Compensation: Although nothing about insurance is easy, of the four types of basic insurance coverage, workers’ compensation comes closest to being a ‘no-brainer.’ After all, laws all 50 states require employers to maintain workers’ compensation insurance. What’s more, in most instances, the rates are established by the state.
To reduce the cost of this necessary insurance, there are some helpful tips retailers can follow. For example, do not accept the first price offered. Because no one wants to be classed as an explosives manufacturer if the business really involves food retailing, ensuring the c-store business is categorized properly means it will be charged the appropriate rate. Another way to reduce the costs of workers’ compensation is to take advantage of rate variances offered in many states. After a certain premium level, usually $5,000, employers can be rated based on history of claims.
Naturally, the fewer claims, the lower the premium. General Liability: General liability, the most confusing and misunderstood type of insurance, provides coverage for the c-store operation when negligent acts or omissions result in bodily injury or property damages on the premises of the business, or when someone is injured as a result of using the product produced or distributed by the business.
The best strategy with general liability is to determine how much coverage is actually needed. The old rule was that general liability insurance only equal to the business’s net worth should be purchased. Unfortunately, that does not work anymore because people now sue based on the amount of the policy and the operator’s net worth.
There are two extremes that an independent c-store operator might want to consider. The first, the so-called ‘empty pockets’ approach is to buy little or no insurance so as not to become a target of lawsuits. The other approach is to buy $2 million to $3 million of liability insurance, which is generally the biggest policy needed by an independent operator.
Auto: This applies to businesses that deliver anything from petroleum products to foodservice items. Like workers’ compensation, auto insurance is fairly straightforward. Even saving money is routine: simply increase the deductible.
Of course, cost cutting should not result in lower policy limits. Many states set minimum liability coverage and those payouts may be well below what a business requires. If a small business does not have enough coverage, the courts can take everything. Many experts suggest carrying a minimum of $1 million in liability coverage.
Property/Casualty: The majority of property insurance is written on an ‘all risks’ basis as opposed to a ‘named peril’ basis. The latter offers coverage for specific perils spelled out in the policy.
If a loss occurs from a peril not named, then it is not covered. For starters, make sure the c-store operation is covered by an all risks policy. Then go the extra step and carefully review the policy’s exclusions. All policies cover loss by fire. What about the losses from casualties such as hailstorms and explosions? Many businesses purchase coverage for all of these risks.
And don’t forget that many standard policies frequently ignore coverage such as gasoline pumps and canopy, liquor liability, signs, food spoilage and other potential problems for c-store operations.
Whenever possible, replacement cost insurance should be purchased. This will replace the damaged property at today’s prices, regardless of the cost when the equipment or property was purchased. It is protection against inflation. Naturally, total replacements should not exceed the policy cap.
Something Extra: In addition to these four basic types of insurance, many insurance professionals recommend an additional layer of protection, called an umbrella policy. This protects the operation from amounts in excess of its existing coverage or for liabilities not covered by other policies.
Going the Extra Mile
When a hurricane or earthquake puts a convenience store out of commission for days or even months property insurance usually covers the damage. However, while property insurance pays for the cost of repairs or rebuilding, who pays for the income lost while the operation is unable to function?
For that, business interruption coverage provides enough to meet overhead and other expenses during the time the operation is out of commission. Generally, premiums for business interruption insurance are based on the operation’s annual income.
Even better, a good policy of bundled coverage offered as a package by many insurance companies to those in specific industries usually covers business interruption. Also included in many bundled insurance packages is protection for losses such as food spoilage, employee dishonesty, money and securities, computers, etc.
Part of some, but not all, business liability policies—the premises and operations insurance coverage—covers a store or the entire company for bodily injury or property damage liability to members of the public while they are on the business’s premises.
Self-insurance might not be a viable option for all c-store operations. With self-insurance there is, all-too-frequently, the danger that the business could have an unfortunate incident before there are sufficient funds accumulated in the operation’s self-insurance fund. And don’t overlook the fact that insurance premiums are tax deductible expenses, contributing to self-insurance contingency funds is, in most cases, not deductible.
Fortunately, even if the business can’t totally self-insure, it may be able to self-insure to a certain extent by purchasing policies with higher deductibles. Suppose, for example, the operation maintains wind, fire, theft and flood protection on its business. By agreeing to be responsible for the first $10,000 of any damage to the store rather than the minimal amounts standard in some policies, the additional risk is greatly minimized.
All insurance premiums are based on the risks involved. Insurance companies evaluate the situation to determine the risk of all potential losses that they might have to assume and usually base their rates on the results. Therefore, any steps that can be taken to reduce potential risks not only helps safeguard the c-store operation, but may make the business eligible for lower insurance rates.
Every c-store operation, large or small, should have a plan in place to manage the risks that are part of operating the business. A loss prevention plan helps protect the business as well as its owners, operators, franchisees and shareholders. The goal is to develop a plan that will help prevent losses from occurring, and to manage those that do occur.
Should a loss occur despite precautions, that loss prevention plan should contain strategies or methods for managing the loss in order to prevent further additional losses. Perhaps a retail store has a poorly lit entryway, or employees are not wearing safety vests when maintaining the operation’s parking lot. Either scenario could cause injury to employees and visitors, resulting in serious financial losses.
That means evaluating the c-store operation’s exposure to risk. That, in turn, may mean looking at the property, equipment, products/services, and employee-related exposure to risk in the business. Then, and only then, is anyone ready to purchase insurance that will provide the funds needed to help restore the c-store operation in the event of a loss.
Slashing insurance costs usually begins with shopping for competitive rates that fit and are affordable. Going even further to actively manage the c-store operation’s exposure to risk will slash those insurance costs even further. The alternative is no insurance and possible ruin when disaster strikes.
Finally, keeping loss claims reasonable and implementing loss control programs are just two steps that can help even the smallest c-store chain keep insurance premiums down, year after year. Choosing an insurance carrier that has a positive history in the business, sound financials and that offers services in loss control and claims, can also help make necessary insurance coverage affordable. But the time to think about that insurance protection is now, not when it might be needed.
Adequate, affordable insurance coverage for any c-store business is an ongoing concern. With a few simple strategies, a reliable advisor and a little homework, affordable protection can, and should, become a reality.
Controlling Casualty Losses
When insurance doesn’t fully cover the losses of a convenience store operation or business, Uncle Sam, in the form of our tax laws, often helps to ease the burden. Losses arising from fire, storm or other casualty are tax deductible. Of course, even casualty losses must be due to a sudden, unexpected or unusual event in order to qualify as a tax deduction for the c-store operation.
Casualty losses, at least if they have been labeled as the result of a legitimately declared disaster, can be utilized to recoup taxes paid in the previous tax year. If any convenience store business sustains a loss from a disaster in an area that is subsequently determined by the President to warrant federal assistance, special loss rules apply.
Thus, a c-store operator has the option of deducting the loss on the tax return for the year in which the loss occurred or deducting the loss on the tax return for the preceding tax year, resulting in a much-needed cash infusion from a refund of previously-paid taxes.