False economies

An estimated quarter of all catering businesses face financial ruin. And around two-thirds could run into serious problems. All because they are under-insured.

The damage is often done by a clause written into insurances policies known as the "average" clause. This allows that if, for example, you insure your building for £240,000 when it should have been for £720,000 and your kitchen burns down, you will only get one-third of the kitchen's value because you under-insured the entire building by one-third.

It is a rule that can come as a sobering shock, as it did to Michael Arthurs, who owns a free house, the Churchill Inn, in Paxford, Gloucestershire.

Arthurs' pub was ransacked by burglars in May. He had an all-in buildings and contents package with Provincial Insurance, but he insured the contents only to a maximum value of £3,200.

Provincial said he should have been insured for £20,000. Despite claiming for £2,000, Arthurs was offered only £71.

He was so under-insured that, in accordance with the "average rule", Provincial offered to recompense him only for a small proportion of what they believed the goods were worth.

In the end, he accepted a settlement of £950 after arbitrators stepped in.

In another case Leslie Grant, the owner of four café bars, a restaurant and a nightclub, accepted a £40,000 settlement of a £100,000 claim after a fire which wrecked one of his businesses, the Wildmoor nightclub at Stratford-upon-Avon, in April, last year.

But Grant, who had a policy through Bowring Marsh & McLennan, was under-insured. "If I had not got some financial resource behind me I would have gone under. There is nothing I can say to anyone to prepare them for this kind of horror," he says.

The cases where caterers have been caught out are numerous, and most prefer to remain anonymous - such as the café in Islington, whose proprietor was not advised that employer's liability extended to part-timers so his wage roll declaration excluded them, affecting the premium and therefore the proportion of a claim he made.

Then there was the restaurateur in Bristol, who was unaware that "trade contents" included cookers and freezers. His sum insured had to be increased from £40,000 to £70,000.

Adrian Hope, chief executive of Gauntlet, which claims to insure 43% of the top hotel groups in the UK, claims that during the recession many hoteliers and restaurateurs will have willingly under-insured to save money.

It may be a false economy, but whose fault is it? Caterers are catering specialists. Unless part of a big chain that has personnel whose job is specifically to look at issues such as insurance, they cannot be expected to be insurance specialists too.

"Policies are now written in plain English but sometimes people read them only when they make a claim," says Malcolm Tarling, spokesman for the Association of British Insurers (ABI).

But he admits that perhaps people are not encouraged to read their policies thoroughly enough when they take them out.

Haydn Hertz, director of Fidelis Insurance Group, which administers the Bon Appetit restaurant insurance scheme, claims that around 65% of caterers have an element of under-insurance and around 25% are under-insured across the board.

"The reason people will not insure is because of lack of knowledge and understanding. They do not know what contents are. They know it is tables and chairs, but forget it is fixtures and fittings and garden furniture, too. It is a combination of not being given enough information by the broker and not regarding insurance as important."

As David Harrold, chief executive of the Restaurateurs Association of Great Britain, says, insurance is sometimes regarded as "a necessary evil". His gut feeling is that 10-15% of his association's members could be under-insured.

Often if a claim is for £1,000 or less the insurer is not interested if the total cover is correct. It depends what proportion the amount claimed is of the total cover. If the total cover is for £3,000, then the insurance company might investigate because the amount claimed of that is one-third.

Haydn Hertz says that most insurance claims are not large enough to be affected by the "average" clause and for that reason people are unaware of it.

One of the biggest pitfalls resulting in under-insurance is the lack of attention paid to renewals, claims Peter Sayers, divisional underwriter for AGF Insurance, which administers the Caterers' Protection Plan for hotels, guesthouses, pubs and licensed restaurants, and participates in the Gauntlet catering package.

Values can change from year to year and caterers can find themselves in for a shock when they put a claim in. "On buildings and contents there is a low inflation rate but once you start getting high inflation your sum insured can get out of date fairly quickly," says Sayers.

His advice is not to go to any high street broker for advice but to one that has a knowledge of the catering market. There is a lot of choice for caterers and if a complete package is offered caterers need to ensure that everything is covered.

Malcolm Smith, property insurance manager with Gan Minster, lead insurers of the Gauntlet scheme, says the problem with contents is that it is virtually impossible for anyone to know what the true replacement costs are without carrying out a full inventory.

He cites the example of publicans who take on new tenancies, buy the fixtures and fittings off the old tenants and insure them for their second-hand value rather than what they would cost to replace.

Then there are those whose hotels are listed buildings and under-insure because they've come up with their own estimate. "No one in their right mind will make a stab at the cost of a listed building. They should get a valuer to assess it," says Gauntlet's Adrian Hope.

Ralph Lepore, account executive for Licensed Trade Insurance, warns of a trend whereby hoteliers work out their insurance cover based on a rule of thumb of £2,000 per room.

"They don't take into account kitchen equipment, dining room area furniture as well as the living accommodation which has items in that can add up to a lot more," says Lepore.

Insurance is all about saving your bacon when the nightmare you least expected happens. Under-insurance could turn out to be a false economy.