Brewery and Taproom Risk Management | Brewing Industry Guide

Brewery and Taproom Risk Management

Proactive risk management can reduce the chances of a loss, limit the amount of damage you suffer as a result, and, in some circumstances, shift the financial burden to the responsible party.

Jonathan Dunitza 5 months ago

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How many jokes start with “A guy walks into a bar?” A modest guess would be thousands, but in some instances, there is no punch line. In a recent New Jersey case, one sip of beer resulted in the customer being hospitalized for six days. Five years later a jury awarded him $750,000 for the negligence of the establishment that served the beer and one of its vendors.

Now you may be asking, how can a sip of beer lead to a $750,000 verdict? In this case, a seemingly minor misstep caused serious and lasting personal injury to the patron: On November 6, 2012, a retired police officer ordered a beer at a New Jersey restaurant while he was out celebrating a business deal. After just one sip, he immediately felt a burning pain. He ran to the bathroom where he experienced multiple rounds of vomiting, including instances in which he vomited blood.

He was hospitalized for six days with injuries to his digestive tract and lost 25 percent of his stomach lining; he faces a lifetime of medical treatment. The culprit turned out to be a caustic substance in his beer that was purportedly used to clean the tap lines but wasn’t fully flushed during the process.

Although the establishment said its vendor was to blame, each were ordered to pay half of the verdict amount. A $750,000 verdict should be an eye opener. Do not, for a second, believe it can’t happen to your brewery or that the brewery has no risk. While the New Jersey case was the most recent, similar cases have been reported in at least three other states. Moreover, there are many risks in a brewery that can cause a significant loss. These include risks that will result in lawsuits as well as losses that result from physical damage to the brewery due to internal or external forces.

Loss Potential

It doesn’t take a vivid imagination to come up with risks of loss in a brewery. Is the floor of your brewery, brewpub, or tasting room concrete or some other hard substance? It may be easier to clean, but if someone slips and falls and suffers a closed head injury, it can be a significant loss. Does your brewery bottle its beer? Imagine the damages that could occur if someone drinks a bottle with glass in it or if one explodes under pressure because of a defect.

Does the brewery have a large, flat roof in a climate with a lot of snow? At a recent event, a manufacturer told me that the roof of his facility collapsed under the weight of snow and ice. While the manufacturer wasn’t a brewer, breweries are not immune to similar situations. Is your brewery in an industrial area? Do you know what the neighboring businesses manufacture? Before my days as an attorney for the beverage industry, I was involved in defending fire cases. In one case, my client’s product allegedly caused a fire in one facility that spread to a neighboring factory via a single spark or floating ember. The neighboring factory made highly flammable products, and an inferno ensued. The factory practically burned to the ground, with claimed damages nearing $20,000,000.

Risk Management

So, that’s the bad news. The good news is that risks and their impacts can be minimized. Proactive risk management can reduce the chances of a loss, limit the amount of damage you suffer as a result, and, in some circumstances, shift the financial burden to the responsible party. The best news is that a solid proactive risk-management plan is typically far less expensive than the cost of defending a case, paying a settlement or jury verdict, or rebuilding out of pocket if the brewery suffers damage.

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Protocols

The first line of defense is risk avoidance or mitigation—finding ways to minimize the risk of something bad happening. A good risk-management plan includes protocols for everything the brewery does from the time the doors open until they shut.

Guidance for developing protocols for brewery operations comes from a number of sources. The Brewers Association has some great resources for its members. State brewers guilds may also have resources. Often insurers will offer guidance. Other brewers surely have advice. Even your accountants and lawyers may have some recommendations that will lower your risks and/or position you to limit the damage or get you back up and running faster if an incident causes damage.

Checklists

Once you have the protocols, developing checklists is an integral part of risk avoidance. It sounds rudimentary, and perhaps it is, but checklists are important tools in the prevention of accidents. Dr. Atul Gawande, a surgeon, Harvard professor, and writer for The New Yorker, researched and wrote about the importance of checklists in The Checklist Manifesto.

In the book, Dr. Gawande provides statistics that demonstrate the effectiveness of well-drafted checklists used by even the most experienced surgeons. In his research, Dr. Gawande discovered that checklists are used in a wide variety of industries, from aeronautics to building skyscrapers to cowboys herding cattle. While it is amazing that something as simple as a checklist can be so effective, a properly prepared and used checklist for draught-line cleaning in the case referenced at the start of this article would have highlighted the need for the 0.15 pH strip test of the water used to flush the cleaning solution from the tap lines before reconnecting them to the kegs. In other words, a brief checklist and a 0.15 pH strip might have avoided life threatening injuries and a $750,000 verdict.

Checklists for various operations in a brewery, brewpub, or tasting room are an inexpensive way to avoid an expensive mistake. Think of all that goes on in your facility and imagine how easy it is for a costly misstep to happen. It’s busy, and there are a lot of things happening at once; people get distracted, multitask, and move to the next task before finishing the previous one. Checklists will keep you and those working at the brewery from getting complacent with mundane activities and keep everyone focused on complex tasks.

Due Diligence with Vendors

The next line of defense in risk management involves the vendors you work with—the bottle and can vendors, food trucks, draught-line-cleaning vendors, mobile-canning lines, anyone working in your space or with your product who is not your employee. Remember, no matter who does that work, the public will perceive that everything that happens at your brewery and with your beer was performed by the brewery. The people who love your beer are not going to know that someone else cleans the tap lines or cans the beer. So, do your due diligence. Ask the vendor about methods and quality control. Discuss allocation of risks. Get (and contact) references. Reach an agreement on the terms of the relationship.

Once you’ve chosen the vendor, avoid doing things on a handshake. Get it in writing. Have a lawyer review the contract with that vendor before you sign it. It is far easier to negotiate and sign a contract at the start of a relationship—when everyone is getting along—than it is to put things in writing when problems start to arise and tension creeps into the partnership. Even worse, if there is a loss and there is no contract and no written understanding of how liability will be dealt with, the brewery may be on the hook for a loss caused by someone else.

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Indemnification Provision

To avoid that scenario, be sure the contract includes what is called an indemnification provision. This provision is intended to make sure that the responsible party reimburses the brewery for the loss it caused. For example, if a food truck causes patrons to become ill and the patrons sue the brewery, the brewery can look to the food truck for reimbursement of any losses.

The contract should also specify that the vendor will pay the costs of defending the case, including attorneys’ fees. Not only does that help protect the brewery’s assets, it also gives the vendor more incentive to use its best efforts to manage its own risks.

In addition, the contract should require the vendor to have and maintain insurance policies that cover its work in your brewery, including making the brewery an additional insured. That way, if there is a loss caused by the vendor, you can look to the vendor’s insurer to cover it. Without that insurance, the indemnification requirement can be hollow if the vendor lacks the money to pay the lawyers and injured party.

When reviewing the contract with an indemnity provision, be wary of limits on indemnity. In many cases, vendors will attempt to limit the amount of indemnity to the amount the brewery has paid the vendor in a given year. In the case of a vendor who cleans draught lines, it is highly unlikely that the annual fees it is paid will approach anything close to $750,000. That could leave the brewery on the hook for the difference between the fees paid and the $750,000 verdict. In many contracts, the vendor is unwilling to negotiate those caps away, but if you know about the cap, there could be other ways to protect the brewery.

Insurance

This brings us to the final step in risk management: insurance. The brewery needs to be sure it has adequate insurance of its own to cover the loss. With proper insurance, there is a backstop if the checklist fails, the vendor won’t indemnify you, or there is no vendor required to indemnify the brewery. Make sure you have an insurance agent or broker who is well versed in breweries, brewpubs, and/or tasting rooms. Tell him or her which vendors you work with, and let the insurance agent or broker review contracts with vendors to see what insurance the contracts require.

If your policies require you to obtain certain documents from vendors and subcontractors as a prerequisite to coverage, get those documents. Be sure to know and understand everything your policy requires before a loss and be sure that you have fulfilled those terms. Also, understand everything that must be done after a loss (perhaps make a checklist?) so that your claim goes as smoothly as possible, and you can continue brewing beer while others handle the fallout from the loss.

In the end, accidents happen, and they sometimes come from the most unexpected places. We’ve all heard that beer is safer than water, but that is only true if the beer is not contaminated with something caustic. Who would ever think that taking a sip of beer at a local watering hole could cause such catastrophic damage? Hopefully, it won’t happen at your place, but it takes more than luck. It takes a proactive risk-management plan to limit the risk and to avoid calamity for your brewery if something unexpected happens.

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Keeping beer lovers safe and breweries operational is one of the reasons that Verrill Dana’s Breweries, Distilleries & Wineries Group created a Risk Management Podcast series. In this three-part series, attorney Jonathan Dunitz discusses risk management in the context of breweries and brewpubs. To learn more, visit verrilldana.com/risk-management-for-breweries/.

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