Whether you are brand-new to the distilling industry or if you have been making products for years and distributing on a national level, one of the greatest considerations that you should take into account is your insurance coverage. I know that may sound like a bold statement, but it is true! Think of this: many of you have worked at other jobs for years, saving your hard-earned money with the dream of one day opening your own distillery. Year in and year out you stash away a little bit here and a little bit there. You spend nearly all your free time studying up, researching, filling out application forms, checking and rechecking information and maybe even taking classes or working for someone already in the industry all in preparation to open your own distillery one day. Finally, after what seems like a lifetime of dealing with the federal government, local authorities, fire marshals, contractors, vendors, banks and everyone else under the sun, you open your doors. Everything you have done up to this point has been incredibly detailed, perfectly calculated and each detail has been given obsessive consideration… well, almost everything.
Did you know that if you do not have a loan from a banking institution or a landlord who you are leasing from, there are no requirements for you to even carry insurance? WHAT?!?! Yes, that is a fact. There are no standard regulatory requirements at the state or federal level that require you to carry any kind of property or liability insurance for your distillery. There may be certain bond or surety requirements from your state (or through the feds if you are withdrawing more than $50,000 in FET a year), or certain compulsory worker compensation or commercial auto laws, but there are no rules stipulating that you must protect yourself against liability claims or property damage.
Opening a distillery for many is a culmination of their life’s work and personal passion. So why would someone not give their insurance needs the same detailed consideration they have given to other aspects of their business in order to protect what is possibly their biggest investment and asset? Well, I can tell you from a vast amount of personal experience that insurance is something that many people do not give much thought to, and it is certainly something that is not well understood.
Folks that do have loans, landlords or other parties that require them to carry insurance often view it as a necessary evil. It is just something that they “have to have.” These folks often reach out to someone in the insurance world that they personally know and ask them to put something together for them, not really understanding what they are even purchasing. This lack of understanding can come from the agent not knowing what they are doing since distillery insurance is highly specialized, the purchaser not knowing what coverage to ask for simply due to not knowing what they should have or a combination thereof. As I have said so many times in the past, just because someone CAN sell you an insurance policy does not mean that they SHOULD.
This brings us to the topic at hand, what kind of insurance should you have for your distillery and what do you need to know in order to make an educated purchase? Well, let’s start with the basics. Most commercial insurance policies are broken out into a few different coverage categories. We have “General Liability,” “Property Coverage,” “Liquor Liability” and perhaps some “Commercial Auto” or “Workers Compensation.” From this point forward things become quite a bit more complicated so I will address these issues one by one. Do keep in mind that these apply to everyone, no matter what age or stage they are currently at. OK, prepare yourself to go down the insurance rabbit hole!
General Liability (or GL as it is commonly referred to) insurance protects your business from potential liability claims such as slip/trip/fall type exposures, products and completed operations, etc. Within the GL portion of the policy you can choose different levels of coverage protection, but I would advise that you always go with a $1,000,000 occurrence policy with a $2,000,000 aggregate limit. This level of coverage does not cost much more than a lesser coverage limit, and no one sues for less than a million dollars anymore. Not to mention, most landlords and distributors will require that you carry this amount as a minimum limit in order to enter into contracts with them.
Here is where things get a bit more complicated. Your GL premium should be based off a myriad of factors and the amount of exposure per factor. If you are manufacturing alcohol, selling it on-site or distributing it, operating a tasting room, selling distillery swag or conducting special events, you are going to want to make certain that each one of those exposures is shown as a GL rating factor. As well, you are going to want to make sure that each of the exposures listed accurately depicts your true amount of sales or exposure per factor. If an exposure is not shown on the rating sheet there is the potential that you would not be covered for such an exposure in the case of a lawsuit. This is crucial! I have seen more than my fair share of distilleries that have been operating for years where the only classification listed is “Beer, Ale or Malt Liquor Mfg.” which is blatantly wrong and could end up jeopardizing your entire policy or even lead to the policy being cancelled. Be aware, as you know, you are not a brewery. There is so much more that could be addressed regarding GL coverage and exposures but let us move on to the next item.
Property Coverage is potentially the most important portion of the policy. Yes, once in a while people may get injured, or a product you manufactured could lead to an injury, but more often than liability claims, losses occur, to your property. Property Coverage insurance covers your true assets. Your equipment, your building (if you own it), your contents, stock on hand and miscellaneous items such as computers/tables/chairs/boxes/labels/bottles/caps/corks/closures/etc. are covered under this portion of the policy. The amount of coverage shown in this portion needs to be accurate for many reasons. One, if a loss were to occur you want to make certain that you are reimbursed the correct values in order to make you whole and so that you can replace your assets and continue to operate. Another reason is that if this figure is not accurate, not only would you not recover your actual loss, you could face a potential co-insurance penalty. Perhaps the biggest need for accuracy is in regard to your product or stock on hand. You are going to want to make extra certain that your products are covered adequately, especially if you are maturing anything. Most insurance carriers value your products on a “Replacement Cost” basis, meaning that they would settle a property loss claim based on what you had into your product. Watch out here! If you had $500 in a barrel of product between the value of the barrel and the distillate inside the barrel, with most carriers that is all you would receive in the case of a loss. Even if that barrel was now three (3) years old and worth $3,500. This can be an incredibly slippery slope and an insurance agent that does not understand the time element and valuation associated with maturation could wind up ruining your business in the case of a loss.
As well, as is with all aspects of your policy, your property coverage can be very complex. Your coverage can be and often should be broken out into many different aspects and values. There are several tips and tricks to take correct and legal advantage of reducing premium by classifying certain property in different ways. You will want to make sure that you are knowledgeable in this area to make certain you are receiving the best coverage for your premiums. As well, consideration needs to be given as to where your products or contents are located at any given time, do things move between locations, what construction type is your building, where the closest responding fire department is located and if there are sprinkler systems on site or other protective safeguards. Many factors come into play when insuring your property and you are going to want to make sure that everything has been contemplated and accounted for. After all, your equipment and products are your greatest asset and what your entire business is built on.
Liquor Liability insurance is essential to your overall operation as well. If you produce, sell, give samples or distribute alcohol, this is a must have. This is especially true in states that have adopted any kind of Dram Shop Law. In case you are not familiar, a Dram Shop Law is a statute which makes a business that sells alcoholic drinks, or a host who serves liquor to a patron who is or appears to be intoxicated, or close to it, strictly liable to anyone injured by the patron, including the patron. Did you know that currently the only states in the US that have not adopted any kind of Dram Shop Law are Delaware, Kansas, Louisiana, Maryland, Nebraska, Nevada, South Dakota and Virginia? Every other state has a Dram Shop Act/Law on the books.
I have heard many distillers state that there is no potential for them to over serve someone as they are limited by the state as to how much any one patron may be served. Although this can certainly be true in many instances, you may not know if that patron had been to various other establishments prior to yours, and although they may not appear to be intoxicated, those four (4) quarter-ounce pours that you served them may just tip them over the edge. Also, your GL policy strictly excludes any Liquor Liability claims, so if you do not have Liquor Liability as an additional coverage you truly have no coverage.
Within both the Liquor Liability policy as well as the GL policy, defense coverage against lawsuits is included in your coverage. So, although you may not have actually been negligent in an over-serving lawsuit, if you are sued and you have Liquor Liability coverage the insurance carrier will pay to defend you. I have seen cases where the distillery was found to not be negligent, but the defense costs associated in proving the facts reached into the tens of thousands of dollars. Isn’t it better to have the insurance company pay for that cost as opposed to you having to out-of-pocket it yourself? The recommended coverage limit that I advise for my clients under their Liquor Liability policy is $1,000,000.
That brings us to the last policy types worth mentioning, Commercial Auto and Workers Compensation. If you own a vehicle or vehicles in the name of the business, then you are going to want to place a Commercial Auto policy on that vehicle or vehicles. Honestly, in all my years of providing distillery insurance across the country for hundreds of distilleries, auto claims hold a strong position at the top of the list for claims most often reported. Auto claims happen with more frequency than any other claim associated with distilleries in my experience. So, this is something that needs to be given greater consideration.
Commercial Auto is important for several reasons. One, it protects you for a higher limit than you can obtain on a personal policy (again, $1,000,000 in coverage). Two, most personal auto policies exclude business use. Three, it protects the entity from lawsuits. If you are thinking that Commercial Auto does not apply to you because you don’t own any vehicles in the name of the business, you may want to think again. If you ever drive a personal vehicle or ask others (such as employees) to do so for work-related needs, then you have a commercial auto exposure. It is called Hired and Non-Owned Auto (HNOA) coverage and it provides coverage for your business entity if there ever were an auto accident where you or someone working on your behalf causes damage.
Lastly is Workers Compensation and this topic’s breadth and depth is too massive to include in this article. At a very high-level view, Work Comp is a type of insurance that assists in providing a type of wage replacement as well as medical benefits to your employees if they are injured in the course of their job/duties while working for you or your business. In many states Work Comp is mandatory, but the coverage types and requirements are regulated on a state-by-state basis. If you have Work Comp needs, be sure to find an expert in this field as it is difficult to place this type of coverage for distillery operations. I know of several carriers that will provide this coverage, but they are few and far between.
The last item that you need to be very aware of is that the insurance marketplace for distilleries is ever changing. There are only a handful of insurance carriers in the country who will insure distillery operations and they are currently tightening their underwriting guidelines and considering aspects that they never have in the past. Please exercise caution in obtaining insurance proposals from any local or general insurance agent. Often, they may end up placing you with an Excess and Surplus lines carrier simply because they don’t know where else to go. If you fit an admitted market you will reap much greater benefits in the way of coverages as well as pay less in premium.
You have spent a lot of time, effort and money in order to have your own distilling operation, so do yourself a favor and make sure that it is insured and protected to the best level possible. Take time to find an insurance professional that specializes in this type of coverage, someone that will take the time to understand your entire operation and walk you through each aspect of insurability. Each distillery operation is different, just like the products that they create. The same is true with insurance. There is no “one size fits all” policy out there. Your policy should be uniquely yours, customized to your operation and your needs. You deserve the best possible protection for your business, so make sure you are working with an insurance professional that knows what they are doing and has your best interest in mind!