Restaurants – A “Risky” Business

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As of 2018 the range for restaurant profit margins span anywhere from 0 – 15 percent, with the most common average falling between 3 – 5 percent. Minimum wage increases continue to be a hot topic of discussion amongst restaurant owners, whose workforce tends to be the most effected by the wage increases. The increase in wages starts at the “front end” employee and causes a ripple effect all the way up the chain of command to the store supervisors and managers, considering there is the need to maintain wage gaps amongst upper level and lower level employees. Restaurants also tend to be very labor intensive, which can lead to workplace injuries. According to the National Council on Compensation Insurance, restaurants are subjected to an average of four workers’ compensation claims per year per restaurant, with the average cost being $45,600 per year. The frequency of these losses lead to an increase in the cost of Workers’ Compensation insurance premiums. Another statistic plaguing restaurant owners is that the amount of people who are actually sitting down to dine at a restaurant has flat lined. There has been little to no increase in the amount of people who go to restaurants to order their food. Some reports have even estimated a decrease in the amount of restaurant traffic. So what has the restaurant industry done to deal with the concerns interrupting their businesses? They have turned to Apps and DSPs (delivery service providers). Visits paid to restaurants by mobile app delivery services has increased an estimated 50% since 2017. Overall deliveries from restaurants have jumped approximately 25 percent over the past 7 years. Catering has also increased, along with the rise of “food truck culture”. The fact is, apps and delivery service providers are changing the way consumers patronize restaurants.

Owners must be mindful of the risk exposure that the use of these third party delivery services can create.

Although mobile apps and delivery services have made dining out more convenient for consumers, it has radically changed the liability landscape for restaurant owners. Owners must be mindful of the risk exposure that the use of these third party delivery services can create. The first big concern is food quality and freshness. Drivers often work to deliver the products of several restaurants at a time. They might be picking up multiple delivery orders from multiple stores. There is a very real concern that the food from a restaurant might not arrive to the consumer the same way that it left the establishment. In this case, who becomes responsible for the quality of the product? Another concern when it comes to food quality, is the safety of the food as it pertains to food-borne illnesses. There are certain foods that should not be left outside of a certain temperature range for a specified period of time (I.e., some seafood, milk, eggs, etc.). It is also perhaps a naïve assumption that all of the drivers have been trained and are aware of how to properly handle food so as not to contaminate the product. Finally, the driver could possibly mix up orders and deliver a product to a customer with an allergy instead of the food that they actually ordered. With a rise in known food allergies, this has become an increased area of concern over recent years. Customer service is also a real concern when it comes to restaurant owners who recognize the importance of branding and image, and who also rely on customer feedback through apps such as Yelp to increase business. The responsibility of providing proper customer service is a large responsibility to entrust to someone who is not an employee of the restaurant and who has not been trained by the restaurant owners and management team. Along the lines of customer service, analysts also question who controls the customer data on third- party transactions. Restaurants are not able to tailor marketing and roll out new promotions effectively if they don’t get those order histories, email addresses, or cell numbers. In relation to customer data, who would be responsible for customer information in the case of a data breach? With tightening regulations on consumer privacy and an increase in cyber threats, this is something that restaurant owners should be aware of. Just in case that wasn’t enough to be concerned with; perhaps the largest exposure to restaurants who use third party delivery service providers, is the possibility of a motor vehicle accident. Third party contracts are not often restaurant friendly; meaning they tend to provide greater protection for the delivery service provider.

If the DSP’s driver has an accident on the way to deliver the restaurant’s product, the restaurant owner is likely to be brought into the lawsuit.

Many of the delivery service providers and apps only market themselves as a software provider. So the question becomes, “who is liable in the case of an incident?” If the DSP’s driver has an accident on the way to deliver the restaurant’s product, the restaurant owner is likely to be brought into the lawsuit. This can be very unsettling since typically the owner would have no control over the driver’s motor vehicle record, the condition of the vehicle, or limits of insurance that the driver is required to carry. The cost of collisions has almost doubled since 2015. The average car accident settlement might be approximately $21,000. It is likely to fall somewhere between $14,000 and $28,000. Depending on the severity of the incident, a collision accident can cost millions of dollars to settle. Some recent verdicts have been in excess of $100 million dollars. As a result, certain insurance carriers are shying away from writing insurance policies that cover the hired and non-owned exposure for restaurants who use third party delivery service providers.

So what can owners do?

  • Be sure they read the contract between themselves and the delivery service provider. They should utilize the services of a professional attorney to get advice on how to navigate the liability exposure that is both expressed and implied in the contract.
  • Inquire as to whether the delivery service providers are monitoring motor vehicle records of their drivers and what the mechanism is for doing so, as well as the frequency of the monitoring.
  • Inquire about the types of vehicles that are driven. (Are they requiring that vehicles be in proper working condition?)
  • Is restaurant staff being trained on how to properly pack delivery orders so that it reduces the likelihood of spillage and spoilage?
  • Ensure orders are being taken properly and include proper descriptions as to minimize the possibility of a mix up during delivery.
  • Refrain from allowing certain menu items to be ordered for delivery.
  • Understand how and when customer’s personal information will be used by the delivery service provider.

In closing, it’s important that every restaurant owner have trusted and knowledgeable business partners who can help protect them from some of the exposures inherent to the new industry landscape. In addition to retaining proper legal counsel, every business owner should take the time to speak with their insurance broker about the types of insurance coverages and what expressed limits should be used to protect the owner’s business, as well as, personal interest.