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Retailers with too little insurance coverage are literally playing with fire. Just ask Dennis and John Ondrusek. On the night of Dec. 27, 1998, a fire that started in the men's room exhaust fan destroyed their 40-year-old Brighton Heights, Pa., Foodland store. All that was left standing was one wall and a Pepsi/Mountain Dew display. "We had the right kind of insurance, but we didn't have enough to cover the contents," says Dennis Ondrusek, co-owner of the 18,000-square-foot store.
"Our biggest downfall was not having a separate policy for the scanning system," says his brother John. "We just put in a new system that October and were lax in updating our insurance. It cost us over $10,000 to replace it. It came right out of our content funds and was about one-tenth of the amount we had to rebuild the total store."
As luck would have it, the fire started on one of the few evenings during the year the store is closed. No one was inside when the blaze began, but the store was a total loss.
Unfortunately, many retailers learn too late that insurance is necessary to cover losses from fires, hurricanes, earthquakes, tornadoes, floods, and other disasters. Retailers loathe shopping for insurance because rates can vary widely and every store's situation is unique. Premiums are on the rise, with the property/casualty sector increasing 4.9 percent in 2000, compared with 1.9 percent in 1999, according to A.M. Best Co., an Oldwick, N.J.-based insurance tracking firm.
Russ Davis's IGA store in Windsor, N.C. is an hour and a half inland and five blocks away from the Cashie River, so it never occurred to Davis to have flood insurance. But when Hurricane Floyd paid a visit in 1999 he had a rude awakening. "The store has been here 34 years and never flooded, but we had water four and five feet deep and lost everything," he says, adding the only payment he received was from a $25,000 perishables insurance policy meant for blackouts and cooler breakdowns.
Davis had to borrow and use his own money to get the store up and running. It wasn't until last June that he received a low-interest loan from the Small Business Administration. "Maybe, just maybe, I'll live long enough to pay it off," he says.
"We have remodeled our whole store. It has been a long struggle for two years, but we're back in the flow of things and business has picked up considerably, although it still isn't at what it was before the flood," he says. And should Davis be around when the next 100-year flood hits, he'll be covered. "We're required as part of the SBA loan to have flood insurance," he notes.
After assessing costs, some retailers forgo disaster coverage. "In the San Francisco area, the deductible for earthquake insurance sometimes makes it ridiculously expensive," says David Bennett, owner of Mollie Stone's Markets in Mill Valley, Calif. "We always have to make a judgment call if we are going to go for it or not. About half the time we do. I would advise to take a hard look at the cost of the deductible compared to what the loss of the building would be."
Retailers should meet regularly with their insurance agents and inform them of any major remodels or equipment purchases. "The year before the fire we advised the Ondruseks to bump up their limit significantly because we felt they were underinsured. They were lucky they did," says Mike Gleason, v.p. at the Gleason Agency, the Johnstown, Pa.-based insurance broker that underwrote the Ondruseks' Travelers policy.
Employees got paid
The Ondruseks considered switching to a less expensive carrier, but Gleason advised against it. Although Travelers charges higher premiums—between $25,000 and $30,000 a year—it offers a track record in dealing with total losses and a broad range of coverage options, including a rider that paid half of the store's employees for a year.
"We continued to pay anyone with a year's seniority, with the idea that they would come back and work for us," says Dennis Ondrusek. "We kept about 35 of our 75 employees on the payroll, including all of the managers. If we lost them we would be done."
In the aftermath of Sept. 11, insurance prices have skyrocketed. "Now more than ever it is important to have some type of replacement-cost evaluation by a fire appraisal company," says Gleason. "That will help and enhance the ability to get better rates and have an easier job rebuilding if there is a loss."
Other important options include business interruption and business income coverage. "While the business is down these coverages allow income to continue flowing," says Jon Curtis, the Nashville, Tenn., regional manager for Portland, Ore.-based Grocers Insurance Group, a division of Royal & SunAlliance USA Insurance Group, specializing in the coverage of independent grocers. "These policies can be either 'actual loss sustained,' which has no dollar limit, or it can have a dollar limit. Actual loss sustained is a better option for broader coverage."
Building-ordinance coverage is another important option. "That pays for any government changes in building codes. It's very important when your store is damaged by a fire or a tornado and you have to rebuild according to current codes," Curtis says.
Also, stores should be continually updated, especially their electrical systems.
Rebuilding after a catastrophe is a race against the clock. Most policies give the store owner one year to get things up and running, which isn't nearly as long as it seems. "It took us a month before we contacted an architect. We had to go through the process of settling the insurance, and it took three weeks for the investigation. You don't even know whether you are going to get paid until a fire is deemed accidental," says Dennis Ondrusek. Ground wasn't broken until six months after the fire.
Retailers often waste time battling with their insurance companies. "The insurance company comes in with their own contractor, who gives the cheapest estimate," says Ondrusek. "Then you have to bring in your own people and fight to come up with a happy medium and a dollar figure you can work with," he says.
Retailers should investigate architects beforehand. "When you find one, make sure he has built supermarkets before," says John Ondrusek. "There are so many things he caught that the builder wasn't aware of. We rushed and rushed and bypassed a lot of the normal checks. We worked through Supervalu (Foodland's wholesaler) on store plans and drawings that really should have gone back through the main office, but we didn't have time. The architect's experience with supermarkets saved us a lot of time."
Still no sprinklers
The new store has firewalls, uses metal studs, and all wood is fire retardant. But it still doesn't have a sprinkler system. "We were not required to put a sprinkler in under the prevailing code, although the local law has since been changed," says Dennis Ondrusek. "Because of the water system in our area, that would have cost us an extra $75,000," he says.
By purchasing used and rebuilt equipment, Foodland was able to save enough money to add 6,000 square feet, bringing the store to 24,000 square feet, and incorporating the additional needed fixtures and equipment. "If you have the time to search you can find a lot of good refurbished equipment that is less than five years old," he says.
The Ondruseks suggest adding up what it would cost to rebuild the store. "You have to think about the value of everything—gondolas, equipment, and completely refilling the store," says Dennis Ondrusek. "Not just groceries, but supplies like utensils and bags. All of that is content, and in the insurance company's eyes, inventory includes equipment. You just get a lump sum from the insurance company then you have to make it work."
It is also important to take pictures and videos of the store and its contents, the Ondruseks say. "After the fire, one of the first things I did was sit down with every department head and visualize every piece of equipment we had," says Dennis Ondrusek. "You can't imagine how many things you forget, especially a $2,000 piece of equipment that you don't often use. Take a video camera, walk your store once a year, and photograph and videotape every department, aisle, and room," he says.
When rebuilding, time is of the essence. The Ondruseks learned that the hard way. Although their store is in the middle of a residential neighborhood, business has still not come back. "We're getting closer to our original volume, but the first three months after the store reopened we didn't think we would make it," Dennis Ondrusek says. "Customers had this nice little store in their backyard and were spoiled, but when they had to go someplace else they were shown another world and went to our competitors who had supercenters."
Many former customers now drive 15 miles across the border to Ohio, where there is a Wal-Mart Supercenter and gasoline is cheaper.