Writing Wineries Requires More Than Just a Tasting

To be successful, you must thoroughly drink in all the details.

Insuring wineries may sound like a lucrative and growing business. All 50 states now produce wine, and the business has a total economic impact of $33 billion, according to the Wine Institute, San Francisco.

In California alone, the Institute estimates the retail value of wine shipped to the United States is $15 billion. State wineries shipped 428 million gallons of wine to the United States in 2004, a three percent increase over the previous year, according to wine industry consultant Jon Fredrikson of Woodside of the Gomberg-Fredrikson Report.

However, insurance agents who are newcomers to the business may want to take the time to educate their palettes. “Wineries have a lot of unique needs that they don’t always recognize when trying to insure their risks,” said David Sloane, president of Washington-based WineAmerica, the National Association of American Wineries. “Many wineries make price the major guide when they pickup insurance, but the standard property/ casualty insurance just doesn’t cover the rights things.”

Learning the liabilities

Laurie Infantino, president of the San Francisco-based Insurance Skills Center, which organizes seminars on agribusiness and insuring wineries, agreed that wineries have more risks than people initially imagine. “Wineries present nearly every single kind of exposure that any commercial business could have,” she said, noting that there are issues with equipment breakdown, product contamination, environmental liability, product spoilage, wine leakage, intellectual property, cyber liability, advertising and Internet sales, to name a few concerns.

“In addition to selling wine and having facilities that process their own wine, wineries also have other things like events, whether it’s a dinner party or wedding, and tasting rooms that all present different issues. Wineries also have a lot of dependencies,” Infantino added. “Most wineries have a lot of dependency in the form of who is supplying them their goods and services. Utilities-where they are getting water and electricity-is a big issue. Where they get their bottles, barrels, corks and labels are dependencies. Storage, shipping and warehousing also can be very big.” What initially seems like a simple business can quickly add up to a mountain of risks.

Nevertheless, agents and brokers who write the business say wineries can be good business.

The key to insuring wineries is developing an accurate risk profile, said John Sutak, owner of John Sutak Risk Services, Larkspur, Calif. “You want to understand what the characteristics of your business are that create exposure to loss. If you’re able to identify those key characteristics of your activity, then you’re in a pretty good position to know whether you’ve got proper insurance limits.”

What may initially seem like an obvious risk-liquor liability, for instance, is not such a risk at all. “Tasting rooms are usually well controlled in how they are handled,” said John Hottinger, director of sales and marketing for Morris and Garritano in San Luis Obispo, Calif. There are liquor liability endorsements for tastings, “but in general, this is not as big of an issue as you would think because you don’t see rock concerts at wineries,” he said.

Paul Van Wagoner Sr., president of Van Wagoner in Dallas, agreed that tasting rooms have limited exposure because most sales aren’t associated with tastings. “Most sales come out of sales of the bottles of wine, which are normally sold to wholesale wine dealers,” he said.

There are concerns, however, that are unique to wineries, usually dealing with the wine itself and the equipment used during the wine-making process. Insurers and their customers should pay attention to the valuation of the wine, wine leakage and mechanical breakdowns/energy loss during processing.

Valuing the stock

According to Hottinger, underwriters should evaluate the value of the wine and determine how the insurance company will adjust a loss so the values reflect the exposure. Insurance companies typically use some form of the wine’s selling price to resolve claims.

Savvy agents should examine how the wine stock is valued at the time of the loss in a special valuation endorsement, said Daniel Baffney, president of McDonald Zaring Insurance, Walla Walla, Wash. “We have seen polices put together where they value the stock at the cost of production and then try to pickup the selling price by attaching a business income endorsement,” he said. Both he and Hottinger say they prefer a valuation form that covers the wine from the time it is crushed until the time it goes out the door, where the product is valued at the price it would be sold as opposed to the value on the stock as it goes through production.

A wine insurance package also should address loss of income. “Loss of income forms are usually limited to within 12 months of the date of loss,” Baffney noted. “But if you crush wine now, it’s not going to be sold for probably two years at a minimum so you’re already outside the scope of business loss of income kicking in.”

Again, a better policy will cover wine from the time it’s raw grapes to the time it’s processed to when it’s in a bottle and becomes a finished product,” said John O’Neill, president of Cohn, Reid, O’Neill Insurance Services Inc., Burlingame, Calif. If there’s a loss, the wine will be valued at its finished selling price minus the cost not yet incurred because of the loss, such as packaging, boxing and labeling. The value should be based on the winery’s sales history of sales at wholesale and retail, Baffney added.

Another concern is leakage, which can be addressed in a wine leakage endorsement. During production, wine is mixed, blended, processed and stored in several large stainless steel containers. Wineries thus have exposure for the containers’ fittings which can malfunction, as well as for human error, where a hatch doesn’t get closed properly, for instance, and the product winds up going down the drain.

“Insurance companies vary greatly on how they handle that,” Hottinger said. “Most companies insure loss resulting from human error, such as someone leaves the valve on one of the fermenting tanks open.”

“Most companies give a little leakage exposure,” Baffney agreed, “but it’s not enough.” He recommends evaluating the largest tank exposure on the property, taking the highest value wine, converting it to cases times selling price, arriving at a maximum leakage exposure and increasing the leakage insurance to that amount.

Contamination in the tanks also should be addressed. Property policies usually have an exclusion for damage to the stock or products. Stainless steel tanks are double-walled with glycol circulating between the two walls to take away heat and cool the juice, Baffney explained. “Sometimes, pinholes or leaks develop in the walls so that [the glycol] gets into the product and destroys it. So you want an endorsement to the contamination exclusion that said damage to the product caused by the leakage of a pollutant or contaminant that is used in the equipment and manufacture of the product is covered.”

Then, agents should be aware of wineries’ extra expenses. “We are trying to be cognizant and aware of reimbursing for a loss of income at the time of loss in stock value,” Baffney said. “If you have a loss at the end of August but you have crush coming up in September, you want coverage available for the extra expense so that a winery can bring new equipment to their facility quickly or rent another production facility. There will be extra expense incurred, but if you miss crush, two years down the road you’ll have no income.”

Sometimes, small wineries rely on other processing facilities. When wineries have grapes but lack the ability to manufacture their own wine, they will use the crushing facilities of another provider. “So they have to be careful because most farm owners’ policies don’t cover offsite inventory,” Hottinger said. A farm owners’ policy may not extend to the winery operation and storage off-site, including the liability.”

Finally, agents should consider a winery’s other standard business risks, such as workers’ compensation. “Right not it is not that unusual for a medium-sized winery to have $50,000 to $60,000 plus in premiums,” Hottinger said.

Picking providers

Once agents know what to look for in wine insurance packages, there are about a dozen companies writing wineries at various rates from which to choose. “The rates vary greatly because some carriers use sales for the premium base for their general liability and some use gallons,” Hottinger said.

A small boutique winery might see premiums as low as $2,500 to $5,000 per year, O’Neill said. “On average with package policies, an average winery probably runs between $5,000 to $15,000 per year.”

However, WineAmerica’s Sloane cautions not to choose insurance carriers based solely on price. “The perception is people want to get the best value, but you can be penny wise and pound foolish,” he said. “You don’t want a winery to suffer a catastrophic loss and find it’s not covered appropriately.”

Instead, Sloane recommends picking a company that is familiar with the business. Allied Insurance, California Insurance Group, Chubb Group of Insurance Companies, CNA Insurance, Fireman’s Fund, Golden Eagle Insurance, Mitsui Sumitomo Insurance and Travelers are among the companies known for writing wineries. In California, some are exclusive to a few agents, Hottinger added.

The key is to get the forms out and compare policies, O’Neill said. “Not every carrier will underwrite a winery. And you have to look for a carrier with expertise in that business that will work with you and understand the risks.

“If they do, they will hopefully have some policy form that offers some of the bells and whistles,” O’Neill continued. “If they don’t, you will have problems when you put [in] a claim.”