Recent Earthquake and Questions Rasied

[InsuranceMan]

What can we all learn from the recent tragic and damaging earthquake in the Napa Valley region a few weeks back that effected many wineries (and distilleries) in regards to insurance? Well, for one, earthquake itself is not a covered peril under any standard commercial property insurance policy. In the specific language of a Special Form Coverage Part (an aside here, you should make sure that you are covered on a Special Forms Coverage on your current policy) all causes of loss are covered except those that are excluded. Exclusion ( b ) on the Special Form Cause of Losses (Commercial Property Form CP 10 30 04 02) specifically excludes Earthquake. Earthquake however is not limited to simply just "Earthquake". "Earthquake" is defined as earthquakes, landslides, mine subsidence, earth sinking (but sinkholes themselves are covered) and volcanoes.

Obviously, if you are located in an area that is prone to earthquake activity it would certainly be time well spent to check into an earthquake policy if you do not have one. The broadest coverage available is called a Difference In Condition policy or a DIC. A DIC is designed to broaden coverage for specific perils that standard markets do not provide adequate, if any, coverage limits for. Usually these are used to insure against perils such as flood and earthquake but do also have other applicable uses. In regards to a DIC that covers the earthquake peril the standard deductible can range anywhere from a standard 5%-10% but can be a high as 25% of the Total Insurable Value (TIV) per unit or location. This deductible can seem high especially in regards to a multimillion dollar loss like those seen on some of the regions larger wine producers (where the deductible could be anywhere from $100,000 to $500,000 depending), but it is certainly better than getting no insurance assistance as was the case with many of the folks in that region.

Another issue that has reared its ugly head due to this incident is one that I have pointed out for years, the valuation of your product or stock on hand. Under the Commercial Property Endorsement form CP 99 05 06 95 (another aside here, make sure you at least have this form on your policy. Selfless plug here, I have an exclusive coverage form that I offer that is far superior to this, but at a minimum you should at least make sure you have this form, but you need to talk to me to get the very best available coverage) which is titled "Distilled Spirits and Wines Market Value" and in short it says that the insurance company will determine the value of your product at the time and the place of the loss based on potential "Market Value". I don’t know about you, but I personally do not want the insurance company telling me what my product is worth after it is already gone, that sounds like a losing proposition doesn’t it? Scarier yet is the fact that this endorsement never clearly spells out the actual value or settlement procedure that one could expect should there be a loss. The from that I offer is the only form of its kind that allows us to schedule the actual value of the product/stock on hand on a progressive valuation scale throughout the maturation process or for the product that you have on hand (I have the ability to value aging as well as non-aged stock). Also, my form waives all co-insurance penalties that would be associated with the product/stock coverage in the case of a loss. Now in regards to the earthquake, it really is a moot point in the fact that earthquake would not have been a covered cause of loss anyway. However it does raise the question about how would this impact you during a covered peril. Under the standard form that every other company uses (CP 99 05 06 95) my assessment is, not very well.

In regards to the vague "Market Value" language seen in that form, this can be a large issue for a lot of startup distilleries or for that matter, ones that have been running for years but that are adding new products. In the case of a new product or new maturing products often times there is no established "Market Value". Take for instance a start up distillery that is making a 4 year aged bourbon (it has happened, I have worked with several). If they were to sustain a loss to their inventory in the 3^rd year of the 4 year maturation process, what is the "Market Value"? That is the big question. Technically under the CP 99 05 06 95 form there is no established "Market Value" since the product has never been to market in order to establish said value. That form then stipulates that the value could be "The market price per proof gallon of equivalent bottled distilled spirits as of the time and place of the loss or damage". If you are a true craft distillery, there really is no "equivalent", is there? At least you would hope there isn’t. Do you want to run the risk of only gaining reimbursement based on the price of what one of the big distributors gets for their lowest bulk sourced product? I would imagine the answer would be no. With my exclusive form, based on the product, the time maturation element (or stock on hand) and the product/stock reports that are kept it is easy to determine the exact value and the loss and what would be recuperated should the unforeseen take place. That is why I developed this product, so that everyone can sleep at night knowing everything is covered the way it should be. The valuation of your product/stock on hand is one of the most misunderstood and under insured coverage’s for many distillers and it is the one that should be the most focused on. Knowing what you are covered for and how it is valued should be at the forefront of your concerns.

In closing I would suggest that if you are in an area prone to natural disasters that are excluded under standard commercial property policies such as earthquakes, flooding, hurricanes, etc. you need to speak with an insurance expert about how to best protect yourself against these situations. As well, it would be time well spent on your part to protect you investment of time, passion and capital and review your current insurance policy to see what is really covered in the case of a loss. Do you have the "Special" coverage form; Are there any other forms or endorsements that protect your product/stock on hand; What are the deductibles or co-insurance clauses associated with a loss; What gaps may there be in your policy; and what has changed over the years in regards to value of your assets whether it be addition of equipment or amassing more aging stock. The sad reality is many insurance "professionals" are able to provide policies for a myriad of risks but that by no means suggests that they should. Find a true insurance expert that fully understands your risk and make certain that the premium you are paying is actually worth the price you are paying for your protection.

[bdkolstad]

Great information Aaron. We don't live in earthquake country now, but I suffered through my fair share in Northridge, CA back in the day.

[InsuranceMan]

bdkolstad,

I'm glad you found the information useful, my goal is to make folks aware of potential insurance issues. Everyone here works very hard to create their products and it would be a shame to lose everything to a tragic event. The devastation, clean up and rebuilding is difficult enough after a loss. Dealing with the financial side of it, if not insured properly, is something I like to assist people in avoiding. If anyone has any other questions about insurance or would like to see a post on a specific topic do please let me know.