2022 January 20
In these continuing uncertain times, insurance should be top of your list for securing the future of your business. Dan Szegota, Senior Broker at ICIB Insurance Brokers, shares insights into commonly available insurances for your on- or off-premise liquor company.
Click here to read Extract from THE SHOUT NZ Magazine July 2021
MATERIAL DAMAGE INSURANCE
All liquor businesses invest a substantial amount of money in capital assets (e.g buildings, fridges, storage and equipment such as stills, tanks, barrels and bottles) which the owners and/or the Board of Directors have a responsibility to ensure are safeguarded. All physical assets are exposed to risk of loss or damage by various perils, including natural perils. Property damage following a fire is one of the major threats faced by any organisation. Research has found that about 80% of businesses that suffer a major fire never recover. Therefore, Material Damage insurance remains one of the major responsibilities of management by way of safe guarding its assets. For wineries and distilleries (and to a lesser extent, craft breweries) that age their products and don’t release them immediately, an Agreed Value basis of settlement for stock should be considered. This means that insurance coverage is provided for a pre-determined amount settled upon by both the insured and the insurance company
BUSINESS INTERRUPTION INSURANCE
A Business Interruption insurance policy can cover liquor businesses for loss suffered as a result of an interruption or interference to the business which
results in a reduction in gross profit. Such interruptions or interferences to liquor businesses can include fire, natural disasters (such as earthquakes), malicious damage, flood and other perils which are insured under the Material Damage policy. It is important to note that Business Interruption insurance is triggered by an initial loss under a Material Damage policy (for e.g, loss in profit due to a fire) and is rarely available as a standalone policy.
In many cases, the loss of gross profit for a business is more significant financially than the associated physical loss. Even if there is only partial damage to the building and/or machinery and equipment, it could potentially stop operations at the premises for a considerable period of time. Therefore care must be given to set the correct level of cover for your liquor business and for a suitable amount of time. Typically 12 to 24 months covers are available.
CARGO & TRANSIT INSURANCE
The basic purpose of Cargo Insurance is to provide cover against physical loss or damage to goods in transit to or from the insured’s premises. This coverage is important for liquor exporters. For exports, these policies typically track what ‘incoterms’ a product is sent or exported under. An incoterm is a globally agreed standard for determining who is responsible for insuring the goods and at what stages of the journey. The liquor industry typically exports under FOB (Free on Board), which means the seller is responsible for insurance until the product is loaded onboard, at which point the buyer must arrange their own insurance. CIF (Cost, Insurance & Freight) is also used and requires the seller to insure the product to its named destination (usually the buyer’s warehouse). For domestic sales, the arrangements are far simpler and usually the seller insures the goods. It is worth highlighting that couriers and logistic companies do not insure the goods on your behalf.
PUBLIC & PRODUCTS LIABILITY INSURANCE
Public Liability insurance is one of the most common insurance policies taken out by businesses of all sizes and across diverse industries. It covers claims made by the public that happen in connection with your business’ day to day activities. It also covers related legal fees, costs and expenses.
Public Liability is often combined into a single policy with Product Liability, which protects against claims of personal injury or property damage caused by products sold or supplied through your business. Any organisation involved in the manufacture and sale of products faces numerous risks associated with the product they offer.
Liquor distributors, suppliers, retailers, and other parties who make liquor products available to the public, can be held liable where products are not “fit
for purpose” and their use, misuse, or handling cause bodily injury or illness to consumers, or loss or damage to the consumer’s property. Anyone who puts their name or mark on the product (e.g. an importer) may have a legal responsibility for any damage or injury a product may cause. Typically for the liquor industry this can be issues with glass bottles or contaminants within the product.
Care must also be taken by liquor companies in relation to the use of images and names that could be trademarked or cause offence. The insurance
response to these issues can be limited and in many cases fall outside the scope of standard policies.
PRODUCT RECALL INSURANCE
Product Recall is a risk confronted by any company that manufactures, imports or distributes consumable or nonconsumable goods, such as liquor.
Notwithstanding the legal obligations and financial impact, the long-term costs to a liquor business following a product recall incident can be extensive, including loss of customers, falling sales and profits due to poor consumer confidence, brand damage, brand rehabilitation expenses etc.
It should be emphasised that the potential cost of many product recalls can range from a few million to hundreds of millions of dollars, especially for larger companies distributing products all around the world. Typically, the largest costs are loss of sales and business interruption.
Unfortunately, most businesses don’t have the resources to address the effect of an extensive product recall and struggle to absorb the financial loss and often fail as a result.
DIRECTORS & OFFICERS LIABILITY INSURANCE
The position of Director or Officer in a company brings with it responsibilities, as well as rewards. Directors and Officers have duties and obligations, for which they are personally responsible, some of which may carry unlimited personal liability, whilst at the same time the business itself may be affected by the actions or inactions of a particular Director or Officer.
The Corporation Act 2001 and recent changes to other has resulted in increasing responsibility and accountability, legal and administrative duties for Directors and Officers. There is a greater expectation among shareholders, creditors, customers, the judiciary and the general community that these duties should not be breached.
As society becomes more inclined to litigation and legislation is expanded to impose greater controls on corporate activities, the risk exposure for Directors and Officers increases. Directors and Officers of a company can be held personally liable if they breach their duties and responsibilities as a Director, mix personal and business interests, or fail to disclose conflicts of interest.
Potential lawsuits could come from:
• Shareholders - in relation to incorrect prospectus information, or other breaches of duty as directors including shareholder derivative actions.
• Regulators - such as WorkSafe
• Competitors - arising from unfair trading activities.
• Creditors - in relation to debts incurred when the company was known to be unable to meet its commitments.
• Customers - for misleading conduct.
• Employees - in connection with unfair dismissal, breach of equal opportunity requirements, or sexual harassment.
The liquor industry typically faces the same issues as other industries and while liquor is actually one of the safer industries from an insurance perspective, the growth of anti-alcohol lobbyists means they may be watched more closely going forward.