Coverage Gaps New Owners of Hair Salons and Spas Find

An inherited salon policy tends to fall short in one way: it was written for the seller's shop, and your real work is different. The gaps to check are a bad color or smoothing result that usually points to professional liability, booth renters whose own cover may not protect you, services added after the application, and client property, card data and cash. This guide helps a buyer who just closed spot each gap and decide on a fix. The core coverage list is in the guide to insurance after you buy a hair salon or spa.

Where is an inherited salon policy most likely to fall short?

Gaps are not defects. They are the distance between what the seller's program was built for and what you now run.

Does general liability cover a bad color or smoothing result?

Not necessarily. General liability responds to claims such as a client who slips beside the shampoo bowls. Professional liability is aimed at claims that a service caused a client physical or financial harm, and the Food and Drug Administration says some hair dyes can cause allergic reactions, even after a negative skin test. A general liability policy can carry an optional ISO endorsement that excludes injury from professional services listed on a schedule, and the standard businessowners form is reported to exclude professional services in its liability section. Read yours. Harm that shows up after the client leaves can also touch the products and completed operations part of general liability, unless excluded. Also ask whether the pollution exclusion on any policy reaches indoor chemical fumes from smoothing or color products, and get the answer in writing rather than assuming.

A hypothetical example. In an asset purchase, a buyer closes on the first of the month. On the fifteenth, a client reports scalp swelling that began the day after a color service the seller's staff performed two weeks before closing, and says no patch test was done. The seller's professional liability policy was claims-made and ended at closing with no tail (extra time to report claims after a policy ends), and the buyer's new policy sets its retroactive date at closing.

Which policy responds depends on its wording, the deal documents and the state. If the seller's general liability policy was an occurrence form in force when the injury happened, it may respond whenever the claim is made, so ask for its declarations and loss runs. In an asset purchase, who answers for the seller's earlier work depends on what the buyer assumed and on state law, so ask deal counsel. The tail is the seller's to buy, so the buyer can ask for it in the purchase agreement. In a stock or membership interest purchase the company you now own is the same legal entity, and whether the old professional policy continues or needs a tail depends on its change-in-control wording, so the company needs its own plan. See prior acts and tail coverage after an acquisition.

What if some of your stylists rent their chairs?

Booth renters are the gap that depends most on facts you do not yet know. Many hairdressers are self-employed, according to the Bureau of Labor Statistics (BLS), and booth rental is a recognized way to work. Three things follow.

• Some state boards hold the owner responsible. California's board says the owner can be cited for a renter's violations at a station if the renter is absent during an inspection, and that only the owner can apply for the establishment license. Texas requires a gallery establishment, a shop that rents space, to list its independent contractors.
• A renter's policy is not automatically yours. It protects the owner only if the right additional insured endorsement is attached and the wording allows it.
• Status depends on the facts. Whether a renter is an employee turns on how the work really happens and on state law, so this guide does not say either way. The workers' comp and payroll guide for salons covers the tests.

See also 1099 workers and audit risk and whether independent contractors need their own insurance.

Which gaps appear when you add services or buy a spa?

A salon that adds services changes its risk. The BLS describes skincare specialists who give facials and peels and remove hair with wax or lasers, manicurists who work with nail chemicals, and massage therapists, some of whom travel to clients and some of whom must carry liability insurance, depending on the state. For each new service, ask the carrier: is it on the application, is it excluded, and does it need separate underwriting?

A med spa is a different category. Rules on who can own, inject and supervise vary by state, and a buyer who finds injectables or lasers on the menu has a medical-style exposure, so do not assume the salon program reaches it. Talk to your broker and a healthcare attorney first. The broker guide for salons and spas covers that conversation.

Can insurance replace stylists who leave?

No. In many salons clients book with a particular stylist, so retention is a real risk. Business income insurance usually responds to direct physical loss to the premises, not to a resignation or a lost customer. Retention is handled through agreements, pay structure and the seller's restrictions, so ask deal counsel what was agreed and whether it holds in your state. See business interruption when the owner was the business and key employees leaving after an acquisition.

How do you test your own program for these gaps?

Put these questions to your broker in writing and keep the answers with the policy file.

1. Which policy responds to a client's claim that a color, smoothing or wax service caused harm, and is it claims-made?
2. Does the pollution exclusion on any policy reach indoor fumes from smoothing or color products, and how does the employment practices policy treat wage-and-hour claims?
3. What is the retroactive date, and what happens to the seller's earlier work?
4. How are renters covered, and what certificates and endorsements do we hold?
5. Does anything cover client property, and does the application list every service we sell?

Morrow can review the policies you inherited against these questions and request quotes where a gap needs closing. A review or request is not coverage; the carrier must bind it. See also coverage gaps new owners find and exclusions that quietly kill coverage.

Keep reading

• Just Bought a Hair Salon or Spa? What Insurance Do You Need?
• Workers' Comp, Payroll and Class Codes for a Hair Salon or Spa
• Contracts, Licenses and Bonds for a Hair Salon or Spa
• 15 Coverage Gaps New Owners Find in Owner-Run Businesses
• Insurance Exclusions That Quietly Kill Coverage
• All guides for new business owners

Frequently asked questions

Does my salon's general liability policy cover a client's allergic reaction to hair color?

It depends on the policy. Some of these claims fall under professional liability and some under the products and completed operations part of general liability. Ask your broker which policy would respond and read the exclusions.

If a booth renter has their own insurance, am I covered?

Not automatically. The renter's policy protects you only if you are named as an additional insured by endorsement and the wording allows it. A certificate is not the policy, so ask for the endorsement.

What is a retroactive date and why does it matter after buying a salon?

It is the earliest date of work a claims-made policy covers. If your new policy starts its retroactive date at closing, claims about earlier services are not covered by it, so the old work needs a tail on the seller's policy or a policy that keeps the old date.

Does business income insurance cover me if my best stylists quit?

Usually not. Business income cover generally responds to direct physical loss or damage to the premises from a covered cause, not to resignations or lost customers. Retention is handled through agreements and pay structure.

Should I tell my insurer when I add waxing, nails or massage?

Yes, in writing. A policy is written on the services described to the carrier, and a new service may need approval, an endorsement or a different policy.

References

• U.S. Food and Drug Administration: Hair Dyes
• U.S. Bureau of Labor Statistics: Barbers, Hairstylists, and Cosmetologists (Occupational Outlook Handbook)
• U.S. Bureau of Labor Statistics: Skincare Specialists (Occupational Outlook Handbook)
• U.S. Bureau of Labor Statistics: Massage Therapists (Occupational Outlook Handbook)
• ISO: CG 21 16 04 13 Exclusion, Designated Professional Services (copy)
• IRMI: Care, Custody, or Control definition
• California Board of Barbering and Cosmetology: Frequently Asked Questions
• Texas Department of Licensing and Regulation: Establishment Licenses (barbering and cosmetology)
• ISO: CP 00 30 10 12 Business Income (And Extra Expense) Coverage Form (copy)

This article is general information, not legal, tax or financial advice, and not a coverage determination. Coverage depends on the actual policy wording, carrier underwriting, your purchase agreement and your contracts. Ask your attorney and accountant about deal and legal questions.