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Property Insurance in the Wine Industry

Property Insurance in the Wine Industry

As things begin to open back up with COVID-19 getting more under control, we find that it is “fire season” in Wine Country.  With fire season front and center, we find ourselves saying that “it’s not if there is another fire in our area, it’s when will the fire occur and where?”  How do wineries of all shapes and sizes navigate the turbulent property insurance marketplace?  The entirety of 2020 posed significant challenges in the property insurance marketplace due to our previous fires, and 2021 will have similar challenges. Insurers have either scaled back the offering of property insurance in the wine industry, reduced limits of insurance being offered or have ceased writing business altogether.  Many wineries have received a Notice of Non-Renewal from insurers while others have seen rate / price increases in their property premiums in excess of 100%-200% or more.  Is there any relief in sight and what steps can wineries take to position themselves in the best light to receive a favorable property insurance renewal?  While we are not going to be able to eliminate wildfires and fire activity in our region, there are several things that we can do to be prepared in advance of a fire.  These begin with advance preparation and evolve into an on-going dialogue and changed behaviors in terms of policies, procedures and routines.  Here are a few important thoughts about preparedness:

 

Be Prepared.

One valuable resource is Ready for Wildfire  www.readyforwildfire.org   which includes planning tools, home and business hardening information, defensible space, evacuation preparation, toolkit list, etc. both in English and Spanish.  This site also includes an ap for planning purposes for providing a defensible space checklist as home and business owners conduct their own walkaround.  The ap also includes a statewide fire map linked directly to CAL FIRE along with current updates on fires.  CAL FIRE’s website is www.fire.ca.gov and on the front page is a link to Wildfire Incidents.  This is very current and is where many other websites get their information from.  If local incident phone number is available, it would be published here as well.  This should be a first step in a fire prevention and mitigation process. 

 

Have a Plan. 

This includes the development, refreshing or increased focus and emphasis on a Disaster Preparedness and Recovery Plan.  Disaster planning focuses primarily on wildfire issues and will be a document that once completed, will be always subject to changes with modifications as the organization learns and embraces the plan.  The plan will outline key personnel with their roles and responsibilities throughout the stages of a wildfire alert, potential evacuation warning, voluntary evacuation warning, mandatory evacuation warning, and post disaster recovery.  The plan will address the separation, segregation and movement of stock and inventory to remove it from the path of a wildfire and secure it safely out of harm’s way.  If you have the ability, segregate your stock / inventory into multiple locations.  This will reduce the likelihood of a fire loss to all of your stock / inventory.

 

Communicate Often. 

As wineries work to navigate the property insurance marketplace, communication with their insurance broker / risk management consultant is critical.  The property insurance marketplace is ever changing and what was true last month may not necessarily be true today.  Communication about the ever-changing marketplace is a crucial component to being aware of what an upcoming renewal might look like in terms of rate and limits being offered.  The earlier in the process and the more often a winery can communicate with their insurance broker / risk management consultant, the less likelihood of a big surprise at renewal.  It is no longer acceptable for an insurance broker to take a client to lunch and deliver renewal terms the day before renewal.  In order to properly budget and be prepared for an insurance policy renewal communication early and often is necessary.  By utilizing an insurance broker / risk management consultant that is familiar with the wine industry, the back and forth questions will be greatly reduced as there is familiarity with exactly what is required by the particular insurer(s) that are involved.

 

Know Your Limits. 

This is not to know your boundaries and capabilities, rather to know what the true value of your winery assets are.  A property policy will pay Replacement Cost in the event of a fire.  The Replacement Cost of a winery’s brick and mortar assets for the building, tanks, furniture and fixtures are relatively easily established via a contractor, valuation models or other avenues.  Stock / Inventory may not be so easily established.  The Cost of Goods Sold to produce a bottle of wine is known.  The cost to produce / purchase the juice is known.  These are relatively easily established.  Once a bottle of wine is ready for sale, the mark-up / profit margin must be established.  Some insurance contracts will pay Selling Price on Stock / Inventory in the event of a fire loss or damage.  Your property insurance limits of liability on your insurance policy must adequately reflect the values that, in the event of a fire loss or damage, you expect to receive.  This is a critical step that must be documented before an insurance policy is in force.  In essence the winery is “settling a fire loss with the insurance company before the fire occurs.”  Through a well-documented Statement of Values, all parties have the full picture of what is at risk.  Expectations of insurance policy limits of liability and anticipated pay-out must be set prior to the policy issuance, not afterwards.  Also, check with your bank to see what your loan covenants require in terms of limits required to purchased. 

 

Conclusion

The property insurance marketplace for wineries continues to change.  For the balance of 2021 it is likely to continue to be an extremely hard marketplace with limited insurers willing to offer insurance to wineries.  As new capacity begins to enter the marketplace for wineries, it is possible in 2022 to see some relive in terms of rate and availability of additional limits of insurance. Vigilance in the heightened awareness and thoughtfulness about a potential fire is important.  A keen eye towards knowing what is happening in the local region and maintaining a safe and protected winery are critical. 

For additional information please contact Chet Laws at InterWest Insurance. Chet and his team have an extensive background in the wine industry.  He can be reached at claws@iwins.com / 707-657-4505

The Property Insurance Marketplace for Wineries

The Property Insurance Marketplace for Wineries

The state of the Property insurance market for wineries is experiencing some severe difficulties and there is no relief in sight for the foreseeable future.  We are experiencing what the insurance industry calls a Hard Insurance Market.  It is hard to get to coverage and hard to tolerate the coverage reductions, lack of available insurance limits and increased prices.

“For the larger wineries, it is extremely difficult to purchase enough limits of insurance to adequately cover all of the exposures to loss of buildings, machinery and equipment, inventory and business income in the event of a loss.”

How did we get here and why is this happening?  It started in California with the 2017 fires followed by the 2018 floods and then the 2019 fires.  Insurers took substantial fire losses in 2017, an extremely large flood loss in Northern California and bourbon plant fire in Kentucky in 2018 followed by large fire losses in 2019.  These compounded losses caused several insurers to withdraw their interest in the wine industry altogether while others have dramatically reduced the coverage offerings available while substantially increasing rates / prices.  

A winery was previously able to be able to purchase an extremely broad Property coverage through what is called a Stock Throughput policy which was offered by Lloyd’s of London syndicates.  This form has been dramatically modified to reduce the insurance coverage offered.  A Lloyd’s syndicate is still looking to offer Property insurance, however primarily to the largest of the large wineries.  There have recently been new insurer entrants into the marketplace, while their true interest in offering terms is yet to be fully determined.  

For the larger wineries, it is extremely difficult to purchase enough limits of insurance to adequately cover all of the exposures to loss of buildings, machinery and equipment, inventory and business income in the event of a loss.  Previous to 2018-2019, limits of liability of 100’s of millions of dollars were readily available.  Today, it is a laborious process to layer enough limits in order to build an adequate insurance program to cover the full exposure to loss or damage.  Oftentimes loss limits or stop loss limits of insurance protection are purchased to cover the largest foreseeable loss at a single location.  Increased property deductibles are also being required in order to obtain coverage.  However, the fires have shown us that there is no easy way to determine what could possibly be lost, damaged or destroyed so insuring to 100% replacement value is a good practice to employ.  Building replacement costs have gone up dramatically and a true assessment of the true current replacement cost is essential.  

What can you do?  Work with your finance team, CPA, banker and insurance broker to determine accurate values to substantiate the limits of liability you are desiring to purchase.  Know the true replacement value of your buildings, machinery and equipment.  Insurers are oftentimes asking for limits equal to 100% of replacement cost, in lieu of previously allowed lower limits of insurance.  Have a firm understanding of your stock valuation for inventory in all phases of production, from fruit just picked to and through the entire process of bottling and warehousing finished inventory.  In advance of approaching the insurance marketplace, have all of your information professionally and concisely documented.  

There is currently no relief in sight for property insurance in the wine industry.  What used to be a relatively easy process for an insurance brokerage to approach the insurer marketplace now is a process that requires oftentimes several months.  By working 120 or more days in advance of a property insurance renewal, unexpected requests by the insurers and delays in getting physical inspections and additional details of insured locations may be avoided.  It is important to work with a team of individuals and firms that understand the wine industry and have strong relationships within the insurer marketplace.  Patience and frequent communication are key to a successful property insurance placement.

What inext? If your current insurance brokerage is currently working with wineries, you may be in good shape as they should be familiar with the scenarios above.  If they do not, ask your other professional relationships such as CPA or banker who they would recommend that work in the wine space.  Reach out to your friends and colleagues at other wineries your size and ask how their renewal process is going/went and who they are using.  Local “business journal” type of publications have lists of property and casualty insurance brokers in the wine space.  Protea Financial team also have insurance brokerage relationships they will introduce you to or contact Chet Laws of InterWest Insurance at claws@iwins.com / 707-657-4505.

 

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