Brewery Operations: Forecasting and Managing Risk to Your Brewery

Small breweries have been buffeted by multiple problems in the past few years, and they face major market challenges in the years to come. No one can predict the next disaster, but breweries can and should assess major risks—and prepare for the worst.

New Opportunities, New Risks

Wisely, many small breweries have diversified their income streams through beer clubs, tasting rooms, on-site food sales, tours, events, and more. However, the more multifaceted a business is, the more complex its risk-management picture becomes.
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A standard small-business “package” policy bundles liability and property insurance—sometimes under a trade name that includes the word “comprehensive.” Yet from the perspective of a craft brewery, these policies may, in fact, be far from comprehensive.

An obvious hole in such standard policies is liquor liability. Even the most careful producer may face a claim alleging harm arising from serving alcohol, but the standard commercial general liability policy typically excludes this kind of risk from coverage.

Another gap in this standard coverage stems from digital risks. As a craft brewery, you may offer memberships or “beer clubs” that require storage of customer data. Small breweries are also increasingly reliant on production software to manage inventory and operations. Cyber criminals can target these systems with ransomware and other malware that can devastate a brewery’s operations. A standard business owner’s package policy covers physical property damage but not cyber-attacks, leaving a key revenue stream vulnerable. Thus, purchasing additional cyber-liability or data-breach insurance may be a prudent investment.

Aside from technical exclusions, you should be careful to describe your business operations to your insurers in the underwriting process, and you should plan to inform your insurer if that scope changes.

For example, an insurer may underwrite a brewery with the understanding that trained employees have access to the production areas. If, however, a brewery offers tours, an insurer may view that as a materially different risk. Likewise, hosting activities or events such as mud wrestling or axe throwing may be considered a substantially different underwriting risk than trivia night or karaoke.

You should make clear to your broker or insurance agent what the various aspects of your business are, and you should update the underwriter as risks change.

Business Interruption Coverage

Breweries have faced significant challenges over the past several years, navigating the COVID-19 pandemic and supply-chain disruptions. If there is any silver lining to those challenges, it is that these risks are currently top-of-mind. Now is a great time to assess preparedness for future shocks.

Business interruption coverage, also called business income coverage, can help replace lost income in the event of a covered loss. This can be a vital source of income to help pay bills in the event that your brewery cannot operate. Generally, business interruption coverage is tied to the property coverage purchased. So, if there is no property damage coverage for a particular risk, there will often not be business interruption coverage for lost income flowing from that risk. It is therefore important to consider the scope of property coverage in determining whether resulting lost income is covered.

In addition, business interruption coverage “extensions” go beyond the basic scope of the underlying property coverage. These may cover:

• “civil authority” risk, for when a governmental authority issues an order closing or impairing your business on the basis of a covered risk
• ingress or egress risk, for when your brewery is inaccessible
• communicable disease coverage, for business disruptions caused by the outbreak of disease near the brewery
• disruption to utilities or service providers

An important coverage extension for the brewing industry to consider is supply-chain coverage. Supply-chain coverage—also known as contingent business-interruption insurance or contingent time-element insurance—is a type of insurance that covers losses because of covered disruptions in the business’s supply chain. This kind of coverage insures against perils that disrupt the flow of goods or services to the business.

Small breweries are particularly vulnerable to supply-chain shocks, including from agricultural inputs. Small breweries depend on raw materials such as malt, hops, and yeast, which are susceptible to supply-chain disruptions because of weather, transport, and other factors. Disruptions in the supply chain could lead to increased costs and decreased production. Hop production, for example, has been adversely affected by weather anomalies and wildfire, and climate change continues to pose an imminent and varied threat to the availability of raw materials.

As with diverse revenue streams, it may be important to consider multiple supply sources to protect against unexpected risks. Understanding a complex supply chain can also help to safeguard against risks and when submitting claims for coverage.

For example, if a brewery chooses to forgo flood insurance because it doesn’t face significant risks from flood, it may be forgoing coverage for flood impacts to its suppliers as well. Understanding where your suppliers are located and what risks they face can help safeguard against the most serious risks to key supplies. Plus, understanding your supply chain can help you document and explain your loss to your insurer.

Maximize Coverage: Your Insurance as an Asset

In times of crisis, documenting and submitting insurance claims can seem like a secondary concern and may fall by the wayside. Preparation can help alleviate stress and ensure that you are able to recover bargained-for policy benefits in the event of a covered loss. The following steps can help you maximize insurance coverage.

Conduct a risk assessment. Identify potential hazards and risks and assess the extent of the risk to your business. Knowing your most significant risks can help you know where to invest in risk-mitigation strategies, and it will help you evaluate whether additional premiums for particular coverages are a worthwhile investment.

Know your available coverages. Breweries should review available coverages regularly and understand the terms and coverage limits of their insurance programs. Make sure to ask about exclusions or limitations in the policy and take any necessary steps to mitigate risks not covered by insurance. It may help to work with a knowledgeable broker or agent who specializes in coverage for breweries to help you identify your risks, select the appropriate coverages, and negotiate favorable terms on your behalf.

Consider endorsements. An endorsement adds, changes, or excludes insurance coverage. It can also be used to increase standard limits of coverage. The more you know about your risks, the more you’ll be able to push for coverages that will protect your specific business. If the standard coverages offered are not sufficient, you may be able to negotiate for endorsements or other changes to your policies to provide greater coverage for specific risks that your brewery may face.

*Document your property. *Keep records, including photos and videos, of brewery property so that you can provide evidence of the value and condition of your assets in case of a loss. This can help in the claims process and ensure that you receive appropriate compensation for any covered damage or loss.

Document your losses. If a loss occurs, the quality of your record-keeping can affect the extent of your recovery. Saving all loss-related files in a single location from the beginning can help you demonstrate your losses to your insurance company and minimize the amount of administrative time needed later on to track down supporting documents.

Don’t take “no” as a final answer. If you suffer a potentially covered loss, you should start by reading your available coverages broadly and ask your insurer to do the same. Many businesses that are insured accept a denial of coverage too quickly. It is important to understand the basis for any denials. Also, in most jurisdictions, the insured are entitled to a detailed explanation of the basis for your insurer’s coverage position. That explanation can help you evaluate the strength of your claim for coverage and assess options for challenging a denial, either alone or with assistance from your broker or an insurance-coverage attorney.

Kayla M. Robinson is a partner in Pasich LLP’s office in Westwood, Los Angeles. Kayla has represented insured individuals and entities in a variety of matters including major property damage, business interruption, and theft losses. You can contact her at [email protected].