Before doing some research for this article I would have figured the process to be complicated. The steps to produce, manufacture, and distribute food and beverage products are many. The complexity of the process to actually simplify food is a testament to how complicated feeding ourselves really can be.
Consumers want to be able to trust labels. The USDA has posted a tremendous amount of information on the subject. To be USDA organic, a product has to meet all the standards set forth by the National Organic Program (NOP). The NOP was established in the Organic Food Production Act, which was part of the larger 1990 Farm bill. These requirements are very comprehensive and include not only the product itself but anything used to grow or process the product. In general, synthetic and genetically modified organisms (GMO) are not allowed in products labeled organic. Synthetics can be used as long as they have been approved by the National Organic Standards Board (NOSB). This body accepts petitions to amend the approved list (National List) of products without compromising the organic label. For instance, vaccines may be used to prevent animal infection but antibiotics may not be used. Allowances are also made for processing aides, such as baking soda, to give organic products certain desirable characteristics.
It was enlightening to read that sewage sludge cannot be used in the organic processes. That only means sewage sludge is used in some way to produce non-organic products. Not sure I want to research that any farther. It is also worth noting that naturally toxic substances like arsenic and strychnine are not allowed to be introduced into the organic process either.
The organic label also comes with certified agents who are on the ground checking facilities and farms to ensure compliance with the NOP rules. Penalties do exist for violations and they can be seen on the USDA website. Labels can be confusing. The USDA organic seal is for certified products that contain at least 95% organic ingredients. Organic products can be labeled as such if at least 70% of the ingredients are organic. These products cannot carry the USDA organic seal.
The following link http://www.nal.usda.gov/afsic/pubs/ofp/ofp.shtml gives a nice overview of what organic really means. USDA Organic has real meaning but as with any large system, it is not perfect. Some choose to go without the label as adhering to the standards can be burdensome. Labeling errors can also be costly. If you have read the “Ominvore’s Dilemma” by Michael Pollan you take another look at the efficiency and energy consumption of an organic system and realize energy consumption is a problem even while omitting synthetics.
As always, we are an independent agency specializing in your industry. What we know can make a difference.
Protecting You for the World’s Enjoyment.
Best,
Tom
National Organic Program
National Organic Program-Public Comment
http://www.ams.usda.gov/AMSv1.0/NOPComments
Certified Organic Operations
National Organic Program enforcement actions
http://www.ams.usda.gov/AMSv1.0/ams.fetchTemplateData.do?template=TemplateJ&page=NOPReadingRoomHome
This article applies to many specialty food and beverage businesses. The use of a personal vehicles, by either the owner or employees, is common. It makes perfect sense as many business either cannot afford, or choose not to take the exposure of insuring vehicles owned by the business. As with everything there are pro’s and con’s to each approach. For now, I will focus on the use of personal vehicles as it is the most prevelant situation in the specialty food and beverage industry.
First, lets set some parameters to what a “personal vehicle” is for this article. It will be a private passenger vehicle owned by you, or your employees. I am also going to make the assumption, although you should not, that the vehicles are insured for an appropriate amount. Let’s also assume your vehicle is rated for pleasure use (not uncommon),which means you use it in a non commuting fashion (other than under three miles one way to work or more miles but just a few days a week), and not for business purposes. Lastly, I am going to cite information from a widely used auto policy, and note where you should read your policy, as differences do exist in the marketplace.
Ok, having said all that, here we go.
I am going to use an example that should fit most everyone whether your producing salsa, beer, vodka, snack foods, candy, or the latest craze, cake pops. The batch is run and needs to be delivered to a local grocery store or specialty retailer. You load the boxes into your vehicle and head out to your customers location. First of all, this sounds like business use does it not? Wait a second, one of my assumptions was the vehicle was rated for non business use; problem?
Perhaps yes, perhaps no, depends on your policy. If your policy is like many, business use rating and business use coverage are two different animals. Rating, in general, does not dictate coverage. Policy language dictates coverage. I say in general because if a company feels it has been lied to they could fight back, but that is another story called, fraud. Fraud usually involves more than just rating issues but compromises the insurance company’s underwriting guidelines, with intent by the insured. They don’t like that, and neither will you. Warning, Warning Will Robinson; don’t go there!
If your policy does not contain a business exclusion, and you are using your car for business, you should be fine from a coverage standpoint. If your policy does contain a business exclusion, you need to find out what types of business uses are excluded. You will find driving for a fee, without question, excluded (not carpools, however). You may also find delivery of anything, or delivery of things like pizza and newspapers. No way to tell until you read the policy. If an accident were to occur and coverage is afforded, you may find, depending on the circumstances, a company altering your rating from pleasure use to business use. This aligns the premium with the exposure. If an underwriter is uncomfortable with the exposure, again based on the circumstances, you may get a cancellation notice in the mail. This will also depend on your states rules governing cancellations and non renewals. Claims do get reviewed by underwriters, so you know.
So if coverage is afforded how does the coverage work? Obviously damage to the vehicle is covered by the physical damage (comprehensive and collision) coverage carried on the vehicle. It will be paid, subject to depreciation of the vehicle. Liability however is a bit more complicated. Again, in most policies, believe it or not, your business is covered as an insured. Again, read your policy. Sounds good so far, but of course there is more. You and your business (assuming you have a corporate entity, which if you do not, you should) are going to share the limits of your insurance, not so good. In my experience, when specialty food and beverage people go into business they forget about their personal insurance altogether. The focus becomes the business and obtaining a Certificate of Insurance for farmers markets, trade shows, distributors or retail accounts.
In general, a widely used limit I see on personal auto policies is $100,000 per person and $300,000 per accident. I also see only a small percentage of clients, about 20% or so, owning a Personal Umbrella Liability policy. This means, that a one person accident in the above situation has $100,000 of settlement coverage for both YOU and YOUR BUSINESS! How far does a 100k go in today’s legal environment? Let me put it another way, I have seen fender benders go for $300,000 in injuries. Sad but very, very, true indeed.
So what to do? First, read your auto policy for business exclusions or limitations. Second, if you are doing a lot of delivery seriously, seriously consider a commercial auto policy. Yes, it means transferring a vehicle to your business entity or buying a new one. Yes, it means insuring it commercially, which is more money. Yes, it means all those things but I would say this to you, you are working so hard in your business why would you let an auto accident jepordize all of it? Third, if you have a General Liability policy for your business, check to be sure Hired and Non Owned Automobile coverage is on the policy. This will at least give your business additional protection and will not add signifcant dollars to your premium. Lastly, review current limits of insurance on your personal auto policy and buy a Personal Umbrella liability policy.
If you have employees doing deliveries, or errands in your business, this information applies to them as well. Your business may be covered under their auto policy but only to the extent provided in the policy. Relying on employee procured auto insurance is one of the worst risk management policies you can have. I say this because inaction and assumption on your part, constitutes a procedure, and a bad one. Occaisional errands or sales calls are one thing. Ask for limits of insurance from those employees, at least once a year. Delivery however, is another can of worms. If employees are doing a significant amount of delivery buy a commercial auto and a policy to go with it. It is not worth the administrative hassle of monitoring insurance and maintenance of vehicles you do not own. Not to mention it is a HUGE exposure.
True, accidents can occur in your commercial vehicle but coverage is not an issue, because the commercial auto policy is designed for the exposure. Buy insurance to transfer risk. Do not buy insurance, knowing you have huge holes in your coverage, so you can assume the risk and pay the premium on top of that. It is just not good business nor does it make logical sense.
As always, we specialize in your industry, specialty food and beverage. We see issues and solve them all the time. Does your current provider do that?
We Protect You for the World’s Enjoyment.
Best,
Tom
When a specialty food entrepreneur calls about insurance the conversation is inevitably about liability coverage. By far it is the most talked about coverage for obvious reasons. The more mature a business the more likely Property coverage takes as much or more of a priority to the business owner. Regardless of the size of your business, there are a few things you should know about property insurance. This article will focus specifically on the location of business personal property (BPP), meaning not land or a building, within the coverage territory specified in your policy.
In your insurance policy there will be an entry for Business Personal Property on the declarations page of the your policy. If you do not have the entry or their is no limit of insurance, chances are you do not have the coverage.
In most instances I have found property to be located in one or all of these places: 1) At the place of business owned or leased by the owner of the property; 2) At the location of a contracted manufacturer; 3) At the home of the business owner; 4) In a traveling car of the business owner or their representative; and 5) At a trade show or farmers market.
You might think that your property would be covered at all of the places listed above but beware of limitations within the typical insurance contract.
Property located at the place of business owned or leased by the owner is covered, as long as coverage for Business Personal Property (BPP) is purchased. It is also covered in the open or in a vehicle within a 100 foot radius of the premise. All the other instances noted above involve the property being located outside the premise described in the policy and beyond the 100 foot radius. This is the red zone and the place where you need to pay the most attention.
In general, be careful of property that is at another location you own, lease or operate that is NOT listed in the policy. Also be careful of ANY of your property that is moving from one place to the other especially when it is either uninsured by the carrier, in the hands of salespersons or when YOU are the carrier.
How insurance treats these items will depend largely on the type of policy you have. Some policies will provide coverage in transit but some will not. Some poicies will limit property in the hands of salespeople to trade shows and conventions. Storage facilities might be ok if the lease was executed after the renewal of your policy but in other cases this location may have to be listed on your policy from the start. If your property is owned by you and at the location of a contracted manufacturer, are their provisions in your agreement for property coverage? If not, the manufacturers insurance may or may not cover the value of your property. Having fun yet?
If not, call someone. Call me preferably but if it is not me call your current agent or broker and explain to them where your stuff is in the normal course of business. I recently spoke to a gentleman who has stuff at a contracted manufacturing facility, in his house and in his car. His simple inquiry into insurance is the genesis of this article. He had no property insurance but was at least getting information. Car insurance will not pay and depending on who owns the property(as an individual or as a corporate entity), Homeowners insurance will either not pay or only pay a small amount.
Now that you have been tortured go back to running your business and put insurance review on the To Do List.
As always, we are an independent insurance agency focused on the specialty food and beverage industry so we can understand the risks you take each and every day. Call me and thanks for reading
We Protect You for the World’s Enjoyment.
Best,
Tom
The world is getting smaller and smaller. Export of goods beyond the borders of the US used to be a large company activity but no longer. Specialty food and beverage producers are finding themselves in all corners of the globe. Perhaps your shipping it yourself or maybe a wholesaler has a client overseas that likes your product and thinks it will sell. Either way, you are exposed to product liability just as you are in the US.
The problem is most traditional general liability insurance purchased in the US does not give the kind of coverage you might think for goods that are shipped outside the US. In the insurance business we call the place where coverage applies the “coverage territory.” If we talk specifically about liability insurance the coverage territory is defined in the policy. Most general liability policies have a coverage territory for the US and its territories, possessions, Puerto Rico and Canada.
Provisions are made for the transport of goods while in international air space and water ways as long as travel is between the previous points listed. Goods that are produced in the coverage territory have worldwide coverage with one major caveat. The lawsuit needs to be brought on the merits of the legal system within the coverage territory. So, if your product hurts someone overseas the suit needs to be brought back to the coverage territory (US, Puerto Rico, Canada or territories and possessions of the US) for the coverage to apply. This could be a big problem.
If someone is hurt in another country they will likely bring suit in their native land. This is for obvious reasons. They live there and were injured there. Why trek to another country for the lawsuit. In effect typical liability insurance purchased in the US, without changes made to expand the territory or another policy to cover the exposure, is not very useful at all for coverage outside the territory provided in the contract.
What to do? Policies do exist that can essentially expand the territory and allow coverage no matter where the suit is brought. In the insurance business we call these Foreign Liability policies. Foreign liability policies are readily available and not that expensive if you are doing a reasonable amount of exporting to other countries.
It is also important to read any contract you have with a foreign entity distributing your product or with a US company that is acting as your agent to see if liability is addressed in the contract.
Fact is most insurance policies have a coverage territory in it somewhere. It could be a Liability policy or perhaps an Auto policy. You may see it in a Product Recall contract as well. It pays to read the definition or rely on a knowledgeable agent or broker to help you make the right decision.
As always, we are an independent agency focused on the specialty food and beverage industry. We keep up to date with your industry so we can help you manage risk. Let us know if we can help.
Protecting You for the World’s enjoyment.
Thanks for reading,
Tom
I recently came across some very interesting programs offered in the brewing, tea and coffee industries. Each program prepares individuals to discern characteristics of the respective products. These informed people can judge competitions, help consumers make more informed choices and play a key role in quality control.
First let’s take a look at the Craft Brewing industry. While hunting around for information regarding brewery prospects I as working with I came upon the Beer Judge Certification Program (BJCP). This program has evolved over the years and is an association of beer judges run by the membership.
The information I obtained was purely from the website but I found it very interesting that, given the many beer competitions that are out there, the industry had an actual judging program. If you have interest you can check out the website at http://www.bjcp.org/index.php for more information. The program offers a formalized way of discerning styles of beer with in depth characteristics. A very inexpensive book can be ordered or PDF and Word versions are available on the website. Testing locations are also listed and are mostly based in the United States. I did see a few in Australia and Canada. Also available are judging guidelines, score sheets and other practical information that can be used to judge beer in a competitive setting.
My second discovery came from the August 2011 issue of Coffee Talk magazine in an article written by Rocky Rhodes. You can check out the digital version of the article on Coffee Talk’s website, http://www.coffeetalk.com/august11-q/ for the full article. The article describes a process in which someone can become a certified “Q Grader” to discern the quality of coffee based on ten characteristics. Each characteristic is graded on a 1-10 scale and the cumulative total used to grade the coffee. The testing sounds rigorous and is offered by the Coffee Quality Institute. The overall goal is to judge the quality of coffee beans to be sure they warrant being labeled as a specialty coffee. It also gives a standard language that people throughout the coffee supply chain can use to speak accurately about a particular coffee. A great overview of the program can be found on the Coffee Quality Institutes site http://www.coffeeinstitute.org/q-coffee-system.html so check it out if you have interest.
Last but certainly not least is the Certified Tea Master program offered by the American Tea Masters Association. This is a thirteen week education program that leads to the Certified Tea Master certification. This is a very interesting program that can be done as a group or on a one on one basis. The one on one program can be done at home via Skype technology. Check out the ATMA website http://www.teamasters.org/certification.html for more details.
As specialty beverage products continue to grow the need to identify people who can accurately judge, label and describe a product will be needed. Specialty products command higher pricing premiums because of taste and quality. If consumers can rely on informed opinions because of these types of programs it will make marketing and selling product much more enjoyable for all involved.
As always we are an independent insurance agency focused on the specialty food and beverage industry. We keep abreast of the facts and trends to better understand your industry. We don’t think you will find this kind of knowledge anywhere in the insurance industry.
We Protect You for the World’s Enjoyment.
Thanks for reading,
Tom
I recently received and excellent publication from the National Association for the Specialty Food Trade (NASFT). They along with Mintel and Toluna USA conducted online research to identify trends in the specialty food and beverage buying public.
I will only highlight a few items here so if you want this valuable information contact NASFT for more information.
The study had a high degree of breakdown for age, ethnicity, gender and income groups. Each group had certain characteristics pertinent to them so I will site just a few general impressions I had from reading the information.
It seemed to me that the food consumers targeted by the specialty food trade are a bit younger than I expected. The study was done only for people 18 years of age and older but a significant number of consumers who purchase specialty food and beverage products are in the 18 to 34 range. Although older age ranges were noted for sure these younger ranges had the higher percentage of consumers who purchased product. Does that mean it will bode well for the specialty market as these consumers age and attain more discretionary income? Will this group impart their buying habits into their growing families? It will be interesting to see as time progresses.
From a product perspective the NASFT study cited chocolate, olive oil (as well as other specialty oils), cheese, yogurt & kefir, cold non alcoholic beverages, coffee and pasta as some of the most selected items. The next group of items were cookies & snack bars, meat/poultry/seafood, Tea, Bread (and baked goods), salad dressing and salty snacks. All of these products had some variety depending on age group.
Reasons cited in the study for purchasing specialty products were taste (by a wide margin), recommendations from friend or relative, impulse purchase and quality. Other than taste, the other reasons were fairly consistent when taken as an overall percentage. Variety did exist in age groups but taste rules the reasoning consumers chose to purchase a product. So although much goes into producing a product it has to taste good, bottom line. Taste is subjective for sure so test marketing your product is a good idea.
Specialty products were also used mostly as a treat, everyday meals and as gifts. There was balance between using the product as a treat and everyday meals. These categories had by far the most responses. I think this also is a good sign as specialty products work their way into more kitchens. The study also found that about 20% to 25% of the weekly consumer spending on food is in the specialty sector.
When purchasing products supermarkets are the top dog on the block by a significant margin. Getting in supermarkets is not easy but the exposure is great. Many consumers are busy and do not want to make multiple trips (although I have read this is changing) if they can help it. The next three places consumer’s shopped were natural food stores, mass merchandisers ( Walmart, Target, etc.) and farmers markets. The study noted an increase in the farmers market shopping which is also a good sign. Lets hope that trend continues as producers go direct to the consumer. I was very interested to see that the Internet was low on the list for ways to shop for specialty food and beverage products. I really thought it would have been a much larger number than it turned out to be in the NASFT study. It actually declined in usage from their 2010 study. When purchase were made online chocolate, coffee and tea were the items most purchased. The study did have listings for online sales of many other product categories as well.
The study also confirmed that consumer attention is focused on all natural, organic and locally sourced food and beverage products. These products get more attention from the specialty food consumer, especially when compared to consumers who do not purchase specialty food products.
The NASFT study went on to review other characteristics of the specialty food consumer in terms of TV food shows, food magazines, ecological habits and cultural pursuits to give a larger view of the targeted consumer which is also helpful.
Check out the NASFT site (www.specialtyfood.com) there is a lot of great information there about the specialty food and beverage trade.
As always, we are an independent agency that focuses on the specialty food and beverage trade. We pay attention to your industry so we can better understand your exposures.
We Protect You for the World’s Enjoyment!
Thanks for reading,
Tom
Contingent Business Income
Let’s pose a what if situation that is very real in the specialty food and beverage business. Your great idea for a food or beverage product gets some traction but you have no desire or capital to begin a manufacturing business. What do you do? You find someone else to make your product to your specifications. Perhaps you even find another firm to package it for you as well. Maybe even ship it on your behalf.
That leaves you with the time to continue to expand your product line, refine your existing product, market your products and spend some time selling it to retailers and distributors. Sounds like a great way to get going without incurring large capital expenditures.
Then one day you get the call from a retailer that they will need to see a Certificate of Insurance as part of the contract negotiations. They also want to be named as an additional insured. No problem, you go looking for a source to provide a Liability policy so you can get that certificate and keep moving through the contract process.
Now, many insurance providers will take your needs on face value. You want liability, they give you liability. If you do not ask for it you most likely will not get it. That can be especially true for small businesses. This blog entry will give you a downside to just getting enough insurance to satisfy your retail account.
As was noted, you are essentially a wholesaler or marketer of your product. You rely on others for all other services. What if your primary manufacturing facility,that does a wonderful job at a great price, has a fire and will be unable to produce your product for six months! Now what? Obviously you start looking for another manufacturer and fast. What if the pickings are few and what if the cost to produce your product on a short term basis costs you more money? Raising prices is not always easy especially in todays world. What happens if you cannot fill your current orders while the search is continuing? Sounds like you might be losing money.
Did you know you could have bought insurance for this exposure? Trouble is you will need property insurance of some kind in order to get it. This coverage is called Contingent Business Income and Extra Expense. Insuring a loss of net income, continuing expenses and an increase in expenses due to covered property loss is known as Business Income and Extra Expense. The contingent coverage noted is an endorsement to this coverage. Business income coverage is essentially a disability policy for your business and the contingent endorsement extends coverage to your business for losses incurred by key contributors to your income.
One of the key items to this coverage is your property coverage would have had to respond to the same loss as your manufacturer. For example, if fire was the cause of loss your policy could be triggered if you had fire as a cause of loss in your policy as well. Another example would be earthquake. If your manufacturer suffered a loss due to earthquake and your policy did not respond to earthquake the contingent business income endorsement would not be triggered. This exposure came to light in the recent Japanese earthquakes. Many contingent business income endorsements were not covered because earthquake is not a common coverage unless you live in an earthquake prone area.
Many specialty food and beverage businesses get very focused on liability coverage but overlook property insurance needs. I am guessing this is because specialty food and beverage owners feel the values are not high enough to warrant coverage, someone else is providing the coverage or another overhead expense just cannot be taken on. All valid points but what is left out is no coverage for the loss of your Business income. Sometimes packaging the coverage makes more sense than buying one line at a time. You may also find your recall expense coverage options are broader if you have some type of property coverage as well.
As always we are an independent insurance agency who focuses our attention on the specialty food and beverage industry. We read trade journals, subscribe to many electronic newsletters, attend the festivals and farmers markets and even took a trip this summer to the Fancy Food Show in Washington, D.C. Does your agent do those things?
We protect you for the world’s enjoyment.
Thanks for reading,
Tom
New Craft Brew on the Way !
If you’re a brewer or a lover of craft brews in general check out Jeff Alworth’s article in the October/September issue of Draft magazine for some very upbeat news(http://draftmag.com/features/2011-new-brewery-report/http://draftmag.com/features/2011-new-brewery-report/) .
Using information obtained by the Brewers Association he reported that over 600 breweries are in the works over the next year or two. Wow! This builds on the existing 1,753 breweries in operation now.
Now of course anyone who follows the industry knows that mass market beers dominate the market. The addition of over 600 breweries is welcome for sure but the big guys continue to dominate the market. That’s why it is important to support your local brewery and brew pub by paying regular visits, getting a growler to go or buying it at a store or beverage distributor. Craft beer may not ever dominate the market but market domination does not seem to be the goal of most brewers. Brewing great beer is their goal.
What was very interesting in this article was a map that had percentages of where these new breweries were set to open. According to the display the highest percentage of breweries were set to open in the Southeastern part of the United States. Next in line were the Midwest, then the Mountain region and finally the West coast. No mention was made of the Northeast but I know we have plans for a new brew pub not far from our office. Hopefully it will come to fruition.
See your local brewery and brew pub as soon as you can and thank them following their passion.
As always, we are in independent insurance agency that spends a lot of time tuning into the specialty food and beverage industries. We do it because we love it!
We protect you for the world’s enjoyment!
Thanks for reading.
Tom
Food, Drink, Law and Taxes
In the last few weeks I have either had conversations or read about items in various trade press about the relationship of food,drink, law and taxes. No insurance speak here.
If you are reading this you are well aware of the FDA Food Safety and Modernization Act (FSMA) passed into law in January of this year. A recent check of the FDA site ( http://www.fda.gov/Food/FoodSafety/FSMA/ucm255893.htm) shows the timeline of the law as well as what has been implemented to date. Some of the key components of the legislation have to do with prevention of food contamination. Inspections and access to records are in the law for sure. Importers as well as domestic production will be scrutinized as the implementation of the law progresses.
The ability to respond to food related issues is also expanded. The FDA will now have the ability to order a mandatory recall. Other response related items include administrative detentions (restrict ability to move food under detention), suspension of registration (facility would be unable to process food), creation of a tracing system and additional records required for high risk foods. High risk foods and the associated record keeping is due within 2 years of implementation. I did not find a list from the FDA but you can check out this list published by the Center for Science in the Public Interest for some ideas as they have tracked information over time (http://www.cspinet.org/new/pdf/cspi_top_10_fda.pdf).
As a side note remember product recall is usually excluded from coverage in your insurance policy. Without an endorsement to your policy or a separate policy altogether any recall would be a self insured item.
Over the summer here in New York cheese came under scrutiny but for different reasons. The NYS Department of Agriculture & Markets began enforcing sanitary requirements on cheese vendors at farm markets. Technically, cheese sold at the market needed to be precut and wrapped. Cutting to order at the market could only be done with the appropriate food processing license. From what I gather it appears this practice had been somewhat commonplace but the rules were not strictly enforced. Sample cutting was allowed but only with a plastic knife. This was later clarified and cutting to order was again allowed as long as sanitary conditions were maintained such as a place for hand washing, utensil cleaning and protecting the product from pests.
Recently I came across a tax issue I did not know existed. A bill was introduced , H.R. 777 Small Distillery Excise Tax Act 2011, by Maurice Hinchey D-NY, to allow a credit against the excise tax on spirits. The bill was introduced in February of this year. It would allow craft distilleries a better chance of getting their products to market. This bill has been sent to the House Ways and Means committee for further discussion. You can find out more information here (http://www.govtrack.us/congress/bill.xpd?bill=h112-777). I first learned of this as I get periodic emails from the American Distilling Institute (www.distilling.com). So for all you craft distillers and supporters of their efforts, stay tuned for any progress on this bill.
Well that is all I have for now. I’m sure there is more out there somewhere. I will find it eventually. If you know of anything I would appreciate a heads up.
As always, we are an independent insurance agency specializing in the specialty food and beverage industry. We keep in touch with your business so we can help.
We protect you for the world’s enjoyment.
Thanks for reading,
Tom
Key Person Life Insurance is for you
A topic that is not often discussed in many businesses is the exposure of losing a key person. In a typical risk management assessment there are usually four general risk categories reviewed: property, liability, income and people. In prior posts I discussed some liability issues so lets tackle one about people exposures.
Besides your product the most important asset to your company is you and your employees. The owner is often the chief, cook and bottle washer of the business. As the company grows more people are brought on to handle the demand and the associated work that goes with it. This growth exposes the business to the loss of key individuals that have significant value to the company and it’s future.
What would happen to the business if the owner or other key people were no longer there? Life insurance can handle the financial consequences in the event a key person passes.
Key person life insurance is not a specific product it is a risk managment concept. If you are interested in key person life insurance the discussion with an agent or company will quickly move to the needs of the business and the product options available. In general the products available will be permanent life insurance (whole life & versions of universal life) and term insurance. There are more for sure but to keep it simple approaching life insurance as two categories seems to make the selection process a bit easier.
Permanent life insurance is simply life insurance that can be designed for the lifetime of the insured. Term insurance is used for coverage over a specific time frame that is not, in theory, the lifetime of the insured. Permanent insurance will require a greater cash outlay. If cash accumulation is factored in the overall cost may be very reasonable when netted against the value that builds up in the policy. Term insurance will require less cash up front but offer less flexibility and no opportunity for cash accumulation. However, it will allow for a greater death benefit for a lower premium.
For all you owners of small businesses who seem to have your hands in everything, what would it look like if you were not there to do what you do? For many it would be a mess for sure. Are you leaving contractual obligations that can only be met by continuing to produce product? Realistically, can production still continue? Are there mortgages, loans, credit cards or other financing arrangements that will bear down on your business? A corporate structure may shield your business from some of this but may end in legal proceedings or bankruptcy. Do you think that might be a stressful situation for your spouse or family? Do you think it would make it easier on everyone if there was money available to pay these obligations or continue the business long enough to sell it?
If you are partners with another person do you have a buy sell agreement that will dictate how the business will transition upon the death of a partner? If not, seriously consider it as this document will be the road map to follow in the event of a tragedy. Life insurance will ease the need to find capital quickly to meet the needs of the deceased partners family or terms of the buy sell agreement. Depending on the style of buy sell you choose life insurance products can be designed to accommodate the contract
Do you have key employees that would be missed? Could you envision production or sales functions being impacted by the loss of a person or persons? Would additional training be necessary for existing employees to pick up the slack? Perhaps you would need to retain a firm to search for a new hire. All of these items will drain capital from your company that was not anticipated. Life insurance can work well to reduce the financial severity of the situation.
Your business can own the policies so the proceeds will add capital to your balance sheet and lessen the financial blow of losing a key person or owner. All you need to do is have a level of insurance in mind and select a product or products that fit your budget. Having an agent to help with this part is crucial. Choose an agent that will educate you along the way and keep your interests at the forefront.
Once the decision is made the process will include an application, some type of medical underwriting and reviewing the policy upon delivery. Time frames for this can vary but plan on four to six weeks for the transaction to run its course. Staying with it to the end is the most critical part. Don’t lose sight of why you need it and the time will pass quickly. After the policy is in place periodic reviews are all that should be necessary.
As always, we are an independent agency who focuses on the specialty food and beverage industry. We do are very best to stay tuned to your realities.
Thanks for reading,
Tom
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