An important coverage for foodservice businesses
Spoilage is usually an "optional" coverage under the Property portion of a businessowners or package policy. There are several conditions that must be met before Spoilage coverage will apply.
Covered Cause of Loss
Here is some sample wording from an insurance policy: "We will pay for direct physical damage to "perishable stock" by the Covered Causes of Loss as provided by this Optional Coverage." What this clause means is that the loss must be covered under you policy. If the spoilage occurred as a result of an earthquake, but you didn't carry earthquake coverage, the stock will not be covered either. However, if you lost power as a result of an off-premises power failure (called Utility Services coverage) and you had Utility Services on your policy, you could file a claim for your spoilage loss.
The Covered Cause of Loss has to come from one of two sources:
A. Breakdown or Contamination, meaning a change in temperature or humidity resulting from mechanical failure of refrigerating, cooling or humidity control apparatus or equipment, only while such apparatus or equipment is at the described premises, or
i) contamination by a refrigerant, only while the apparatus is at the described premises.
ii) Mechanical breakdown and mechanical failure do not mean Power Interruption, regardless of how or where the interruption is caused.
B. Power Outage, meaning change in temperature or humidity resulting from complete or partial interruption of electrical power, either on or off the described premises due to conditions beyond your control.
There are exceptions, most notably intentional actions such as unplugging, disconnecting or turning the apparatus or equipment off, and forgetting to turn it back on or plug it back in. Intentional acts are excluded in every policy.
Turning a spoilage claim in isn't just as easy as telling your company you had $10,000 in shrimp and steak in the freezer. You're going to be asked to prove it. Most policies contain some language such as "...you must secure independent verification of the specific types and exact quantities of "perishable stock", prior to the disposal of such stock, that may have been spoiled."
This means you can't just shuck your spoiled food in the dumpster. You may be asking, "What exactly is meant by an independent verification?" The simplest answer is that an employee, relative or relative of an employee is not independent and would not be an acceptable witness to your lost stock. The person should not be associated either directly or indirectly with the entity suffering the loss.
The next question you may have is, "So what do I have to do to verify a spoilage claim?" At a minimum, your company is going to need the name and contact information of the individual so they can contact them and obtain a statement about what was disposed and how much. It is recommended that you take pictures of the spoiled stock and make an itemized list, then have this person sign and date the list. Even better, with today's technology as far as video cameras on cell phones, shoot some video of the things you're pulling out of the freezer and taking to the dumpster. Open the boxes up to see how full or empty they are. As for the independent verifier, a neighboring business owner or public employee such as a police officer or firefighter all make for pretty reputable witnesses.
In many instances, your county Health Department may come in and order the destruction of food. When that occurs, you can usually get a copy of the written verification of the Health Department employee. And if you get the loss turned in quickly enough, we can usually have an inspector out to you before you dispose the food.
Exact Type and Specific Quantities
If you turn in a list that contains only full, unopened cases of supplies, this will probably raise a few red flags. Another flag will be if you turn in items that aren't even on your menu. Both of these things will call the credibility of your list into question.
Any loss resulting from your failure to mitigate (minimize) your damage is usually excluded as a violation of your policy conditions. Most policies will have a provision such as: "We will not pay for loss or damage caused directly or indirectly by and of the following. Such loss is excluded regardless of any other cause or event that contributes concurrently or in any sequence to the loss. These exclusions apply whether or not the loss event results in widespread damage or affects a substantial area..." The conditions this working refers to are as follows:
- Neglect - the neglect of an insured to use all reasonable means to save and preserve property from further damage at the time of loss.
- Duties in the Event of Loss or Damage - the company has no duty to pay nor any duty to defend unless you and any other insured take all reasonable steps to protect the Covered Property from further damage, and keep a record of your expenses necessary to protect the Covered Property for consideration in the settlement of the claim.
So what can you do to "mitigate" spoilage damage from occurring? A number of things such as:
- Move items to other refridgerated facilities, if available
- Renting or buying a generator
- Buying ice and/or dry ice to keep perishable stock cool
- Putting all frozen/refridgerated items closely together and leaving the cooler/freezer door shut (frozen food can sometimes keep for several days this way)
- Contacting local vendors/suppliers to rent refrigerated trucks and stock in the trucks
In short, an insurance company would rather reimburse you a few hundred dollars which you spent on ice or renting a generator, than several thousand dollars because you sat around and did nothing. Mitigation is a clause common to all property policies, if you know you've incurred damage, you have to do whatever is reasonable to prevent further damage. As an example, suppose a hailstorm knocked out a window, which was now letting the elements, insects and potential burglars unfettered access into your premises. You must try to patch the window to prevent further loss. If you do nothing but wait for the adjuster to show up, and then demand new carpeting because the old flooring is now ruined as well, prepare to be disappointed. The window may be covered, but because of your failure to mitigate the damage, your floor likely would not be.