Ensuring you're insured

June 16, 2002

Twelve years ago, Linda Mazzaferri's husband managed a Pizza Hut company store in South Bend, Ind. During a delivery, one of his drivers struck a child riding a bicycle, causing serious but not life-threatening injuries.

A lawsuit was filed against the driver, who had personal auto insurance when she was hired -- but her coverage had lapsed prior to the accident.

"She had no assets at all, so who do you think the lawyer went after? Pizza Hut, of course, because they were a deep pocket," said Mazzaferri, a customer service representative for Leonard Insurance, in North Canton, Ohio.

Pizza Hut eventually settled out of court with the family, but not before Mazzaferri's husband was relieved of his duties.

"They called it reassigned, I think, but we believe that as a result of this accident, he was let go. And it really wasn't his fault," said Mazzaferri, who didn't want to identify her husband.

At that time, she said Pizza Hut had no written policy instructing managers to make sure delivery drivers' insurance policies were up to date, rather "it was one of those things that was supposed to be understood," she said. "It was like he was supposed to know everything about his employees all the time."

Were the same circumstances repeated in any pizza delivery operation today, not only would the driver face a lawsuit, but the pizzeria owner as well.

And even if both the driver and the owner had personal driver's insurance and business insurance respectively, each could still face losing everything if the pizzeria owner didn't have non-owned, hired auto insurance.

In the United States, delivery services of every stripe that have employees use their personal vehicles to service customers must carry non-owned, hired auto insurance. Such insurance covers accidents that occur when an employee is working off premise using his or her personal vehicle.

Additionally, according to insurance brokers and agents, nearly every personal driver's insurance policy not only prohibits the use of one's vehicle for delivering goods for a business, many policies specifically state "no pizza delivery."

Jim Reichle, co-owner of Angelina's Pizza in North Olmsted, Ohio, suspects strongly that very few pizzeria operators who deliver have non-owned auto insurance. That not only endangers the public, he said, he believes it compromises his ability to compete fairly against those pizzeria operators.

When drivers apply at Angelina's, Reichle follows his insurance company's guidelines to screen each applicant's driving record. If those applicants have more than two moving violations and one at-fault accident in a 36-month period, he can't hire them to drive.

"What winds up happening is that those drivers simply walk down the street, get hired by one of my competitors and sometimes are put on the road the same day," said Reichle. "I pay more than $15,000 a year to cover the drivers at both of my shops, and that leaves me with $15,000 less than another guy to use for marketing if I wanted. Basically I'm getting penalized for playing by the rules."

Reichle said two issues are at work regarding non-owned auto insurance: many pizzeria owners aren't aware they must have it; and many others who know it's mandatory don't buy it and take the risk.

"Jim's right," said John Fink, Reichle's representative agent at Leonard Insurance. "There probably are a lot of independent shops owners out there who are just crossing their fingers."

And perhaps some insurance carriers, too. Brian Hall, vice president of Columbus, Ohio, insurance broker Berwanger Overmyer Associates, said he knows of only five insurance companies who will write non-owned auto policies for pizza delivery stores. The risks associated with delivery of anything -- be it flowers, packages, or furniture -- are enormous, he said, because of the amount of time delivery vehicles are on the road. Pizza delivery is even more risky, he added.

"The universe of carriers who even want to attempt to provide coverage for (pizza delivery) exposure is extremely limited. I don't think that's going to change, either"

John Fink
Agent, Leonard Insurance

"Typically pizza delivery drivers are younger, inexperienced drivers who are usually driving at night," said Hall, who specializes in insuring pizzerias. "They're sometimes looking at directions to a house while they're driving and sometimes driving fast to get a delivery done."

Unlike pizza delivery drivers, drivers for package couriers or flower shops use company vehicles. Those, Hall said, are often better maintained and safer to operate. That makes insurance companies more willing to insure them.

"In an owned-vehicle situation, the operator knows exactly how many vehicles are out on the road at any time, and the insurance company knows, too," Hall said. "But in a non-owned situation, the insurance company never knows how many are out there. There might be 10 autos out there one day, and then the next week, some of those guys quit their job, and they're replaced by new drivers who could have cars with bad brakes."

In other words, knowing the number of vehicles and their approximate condition, Hall added, allows the insurance carrier to have a "better handle on his actual exposure and risk. ... If a pizzeria owner says he has two vehicles out there, then you have a better idea" of how to write the coverage.

A costly, risky business

In 2001, Reichle and his co-owner wife, Ann, paid $6,000 for non-owned auto insurance coverage and a $2 million umbrella policy for his two stores.

When his premium jumped to $15,462 in 2002, he was flabbergasted, and pressed Fink for the reason why.

"There's no question that insurance rates have skyrocketed over the past year," Fink said. "Some of that is because of the number of and size of claims, and some of it's the insurance industry's fault."

During what he termed "the roaring '90s," insurance companies made a fortune on investment income. That made it affordable to sell policies cheaply, even at a loss in some cases.

When the economy soured, the investment profits dried up, and insurers found themselves with premium revenues too small to stay profitable.

"That was when insurance companies got a wake-up call," Fink said. "Policy rates are determined by actuaries, who are pretty good at predicting what the company will pay out. But the game is to take in more than you pay out, and based on the way everybody was doing business, that wasn't happening."

As a result, insured businesses like the Reichles' have seen their premiums double and triple.

"I can't tell you how many times I hear from (clients), 'Gee, I wish I could raise prices like that,' " said Fink. "Now that people have gotten back to the business of writing insurance, premiums have gone way up. And what Jim's going through is not unusual."

Hall agreed, saying policies he's brokered bear annual premiums ranging anywhere from $3,000 to $10,000 per store.

A possible solution

According to Reichle, operators who aren't buying non-owned auto insurance are ratcheting up the costs for operators who do. If they did, he said that would lower the cost for everyone.

"There would be a larger insurance pool to handle the claims and premiums would go down," he said. "Every driver would be screened, which would mean better drivers on the road and less accidents happening."

In March, Reichle outlined his near-utopian driving plan in a letter to every Ohio senator and representative. In it he suggests every delivery business using employee vehicles be required to present proof of non-owned auto insurance when they renew their vendor's license. If they don't have insurance, they can't do business.

Reichle admits he loathes additional government intervention into his business, but he believes it's the only body with sufficient leverage to force delivery businesses like his to get insured.

" I pay more than $15,000 a year to cover the drivers at both of my shops, and that leaves me with $15,000 less than another guy to do marketing if I wanted. Basically I'm getting penalized for playing by the rules."

Jim Reichle
Co-owner, Angelina's Pizza

"Bi-yearly, every company has to pay worker's compensation coverage in Ohio," he said. "So why can't they require (delivery businesses) to get insurance? It's simple: If you don't prove you've got it, you don't get your worker's comp certificate, and you can't operate."

In the meantime, Reichle has offset some of his increased costs by having his delivery drivers pay $3 for each day they drive. Over the course of a year, that adds up to almost $5,000.

Additionally, he hiked up Angelina's delivery fee from $1 to $1.50 in March. Some customers believed the fee was going into drivers' pockets, and thus tipped them less. Angelina's then added a boxtopper explaining that the delivery fee was increased because of insurance costs, but some customers still complained.

"There was some bellyaching at first, but now since a lot of these people have gotten their own auto insurance renewals and life insurance renewals, they understand now," Reichle said.

Dump delivery?

Hall said some of his pizzeria clients quit delivering when insurance premiums became too high. Some, he said, were glad to have a solid excuse "to get rid of all the hassle of delivery," while others simply didn't deliver enough pizza to make it worth cost.

"The shops that have the highest premiums are always going to be those who deliver the most," said Hall, who declined to share names of pizza clients who've dropped their delivery. "And while you'll have some places that only do 10 percent of their business through delivery, their premiums aren't always a lot cheaper. Some just figure it isn't worth the cost and stop it altogether."

Cathy Manzon, a department manager at The Loop Pizza Grill in Jacksonville, Fla., said her company's franchisees dumped delivery for many of the same reasons. The added expense, effort and hassle didn't justify the additional income, she said.

Loop Pizza also tried contracting out its delivery, but that ultimately failed, too.

"Either the food arrived cold, due to the driver having to make several stops along the way," Manzon said, "or the pizza ended up smelling like the Chinese food that was going along for the ride."

Fink and Hall say there's no doubt the number of businesses delivering will drop as a result of high premiums, but they suspect the number won't be high.

"With all these increases, it's definitely something more people are thinking about," Hall said.

Fink sees a potential decline in pizza delivery shops resulting from the reduced number of underwriters willing to insure pizza shops; those companies are wondering whether it's worth the risk.

"You've got an insurance company posting a million dollars (in potential payments), and then you've got all these people driving around delivering pizzas ...," Fink said. "So because of the nature of the insurance company's exposure, the universe of carriers who even want to attempt to provide coverage for that exposure is extremely limited. I don't think that's going to change, either."

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