by Foodbevy
Most emerging CPG brands don’t have adequate insurance coverage, as traditional insurers haven’t caught up with modern CPG business practices. Risk management and insurance play a pivotal role in safeguarding brands against expensive claims that can bankrupt your business. Traditional insurance policies and brokers often fall short in meeting the unique needs of modern-day brands engaged in global ingredient sourcing nationwide storage and distribution, and rapid scaling. In this guide, we’re going to cover what you need to know to property insure your CPG brand.
SPONSOR: I wrote this in partnership with SecureCPG a modern insurance agency that works with emerging brands to get the best coverage at the most affordable price. They work with founders on general liability, workers comp, product recall, cyber liability, and more.
The What – Coverage is a guarantee of financial compensation in the event of a covered loss, based on the policy put into place for payment of premium.
The Who – on the policy the first named insured is covered by the policy, and they have access to the limits of insurance. You may be familiar with adding someone or being added as additional insured to a policy – THIS IS NOT THE SAME AS HAVING COVERAGE FROM YOUR OWN POLICY. Additional insured status gives that person/entity access to an insurance policy in a very specific instance.
The Where – Coverage applies in different ways to each type of coverage. Liability insurance coverage is national. Property insurance is tied to a specific location. Workers Compensation is specific to a state the employee is assigned to.
The When – technically you need to have an active policy to be an operating business. Many startups or emerging brands start selling, then realize later the need for insurance. Getting a policy for when you are selling either online or in retail is critically important to protect your company from claims that your product cause a consumer harm.
The Why – being protected from an event out of your control derailing your business. Having personal assets stripped because a judge or jury deemed you negligent and not carrying enough liability coverage. Setting up the success of your Brand for sale or future generations of owners.
As a CPG founder, you’re building a strong foundation for your brand to grow and thrive, the last thing you need is for something to happen that brings it all crashing down. That’s why it’s important to have an insurance policy that properly covers the nuances of your CPG business. It’s important to know that insurance is a defensive product, designed to step in when things go wrong. Here are the types of coverages you’ll likely need and when:
General liability insurance is the bedrock of business insurance policies. It offers protection against claims of bodily injury, property damage, and personal and advertising injury that can occur during business operations. For a CPG brand, this is particularly important because it covers incidents that can happen in your office, at a trade show, or in any public space where your products are used or consumed. If a customer slips and falls at a promotional event or if your product accidentally causes harm, general liability insurance can cover legal fees, medical payments, and settlement costs. This type of insurance is needed from the moment your business interacts with the public or with clients, ensuring that the everyday risks associated with public engagement don’t escalate into financial burdens.
Workers’ compensation insurance is essential for businesses that employ staff, whether on a full-time, part-time, or even temporary basis. It provides medical benefits and wage replacement to employees who are injured on the job. In exchange, employees relinquish their right to sue their employer for the tort of negligence. This type of insurance is mandated by law in most states once you have employees and is crucial for CPG brands, whose workers might be involved in manufacturing, packaging, or distributing products. Not only does it cover the medical costs and lost wages if an employee gets hurt, but it also protects the business from legal complications. As soon as you hire your first employee, workers’ compensation insurance should be in place to protect them and your business.
Product recall insurance is designed to cover the costs associated with recalling a product from the market. For CPG brands, this is an invaluable form of coverage, given the potential for defects, contamination, or mislabeling that can lead to health risks or consumer dissatisfaction. This insurance helps manage the expenses of a recall, including customer notification, shipping costs, product destruction and disposal, and sometimes even rehabilitation of the brand’s image. Given the recent examples of recalls in the food and beverage industry, such as contaminated mushrooms from Utopia Foods and consumer illness from novel ingredients by Daily Harvest, product recall insurance has become critical. It is needed as soon as products are distributed to retailers or directly to consumers, providing a safety net should a recall become necessary.
Cyber liability insurance is increasingly important for CPG brands as they expand their digital footprint. This insurance protects against damages from cyber incidents, including data breaches, network security failures, and privacy issues. As CPG brands collect and store sensitive customer information, handle transactions online, and rely on technology for supply chain management, the risk of cyber threats looms larger. This insurance can cover the costs of notification, identity protection solutions for affected customers, and legal fees associated with data breaches. It also helps with recovery by providing resources for public relations efforts and other services to rebuild the company’s reputation. Cyber liability insurance is needed in today’s digital age, where even a small data breach can have far-reaching consequences for any business operating online.
Each of these insurance types plays a vital role in a comprehensive risk management strategy for CPG brands, providing specific protections that are indispensable in today’s business landscape. While most businesses will have the basics, many CPG businesses have coverage gaps regarding inventory, contingent business interruption, and recall insurance.
The misconception that third-party service providers such as co-manufacturers (co-mans) or third-party logistics companies (3PLs) will take on the responsibility of insuring a brand’s inventory can leave businesses exposed to significant risk. It’s a rare occurrence for these partners to voluntarily assume the liability for a brand’s products, ingredients, or finished inventory. Most contracts with these service providers typically limit their liability, often to a nominal amount that would not come close to covering the full value of lost, damaged, or stolen inventory. Therefore, it’s essential for you to perform thorough due diligence and explicitly clarify the terms of inventory ownership and insurance coverage in your contracts with any third-party vendors.
Understanding the demarcation line for when ownership of goods transfers from the supplier to you, or from you to the customer, is known as identifying the ‘point of transfer’ and is crucial in assigning risk. This point can vary—sometimes it’s upon shipment, other times upon delivery—and dictates when your responsibility for insuring the goods begins or ends. A brand should ensure it has its own insurance to cover inventory throughout the supply chain until the risk is transferred. This might involve purchasing a separate policy specifically designed to cover inventory, which can include coverage for events such as theft, fire, flood, or other forms of damage or loss. This is particularly important for high-value inventory or when the products are in a stage of the supply chain that exposes them to potential risks, such as transit or storage in a warehouse.
Business interruption coverage provides protection against lost revenue. If you are unable to operate your business the policy kicks in and provides as an income stream to pay expenses, like payroll, and other necessities. The amount you need, is not a perfect science, but here are some good options: The Gold standard is 12 months actual loss sustained (ALS) but this is expensive particularly for an emerging brand. Our recommendation is a minimum 4-6 months of expenses covered in the limit.
This coverage can also be applied to vendor partners. Many CPG brands could operate without their office, but what if their manufacturer has a fire at their warehouse and can make product for 3 months? Would that be a death sentence for an emerging brand? With Contingent Business Interruption coverage, you can be compensated for lost revenue from a vendor partner failure to perform.
When talking to carriers about CPG brands it is not if, but when a brand experiences a recall, that they discuss with us. There are so many variables that go into making, storing, and shipping your products it is almost inevitable an accident will happen. While the best way to combat this, is to have great partners and excellent QC protocols. If something requires a recall, having the appropriate policies and understanding what qualifies as a covered expense can turn an otherwise fatal event into something relatively benign. Pulling product off the shelf, Legal fees, PR around the recall, and remanufacturing are all expenses that a well-structured Product Recall policy can cover.
Reviewing requirements and obligations in contracts is a critical step to ensure that your insurance coverage aligns with your contractual commitments. Contracts often stipulate specific insurance requirements as a form of risk management, detailing the minimum limits of liability insurance that a business must carry. For a small business, normal amounts of general liability coverage typically range from $1 million to $2 million per occurrence, with a general aggregate limit that may be double the per-occurrence limit. This level of coverage is usually sufficient for everyday risks associated with operations. However, some contracts, particularly those with large retailers or distributors, may require higher limits.
In such cases, amounts can escalate to $5 million or more, which is considered a high amount for a small business. These elevated limits are often required to address the potentially greater risks and financial impacts that come with larger contracts and operations. It’s imperative for businesses to carefully review the insurance clauses in contracts and consult with an insurance agent to ensure they’re not only compliant but also not over-insured, which can unnecessarily increase insurance costs.
A Certificate of Insurance (COI) is a standardized document that serves as proof of insurance coverage. It details the essential aspects of an insurance policy, including the types of coverage, policy terms, limits, and the insurance provider’s information. For a CPG brand, issuing a COI to a customer or retailer is a common practice that underscores credibility and trustworthiness. It assures the other party that the brand has the necessary insurance coverages in place, such as general liability or product recall insurance. This can be particularly important when entering into new retail partnerships, as most retailers require evidence of insurance before they agree to stock a product. The COI protects the retailer by confirming that, in the event of an incident involving the brand’s products, the brand’s insurance will handle covered claims, thereby minimizing the retailer’s risk.
The COI serves as a safeguard for both the brand and its business partners, delineating the safety net that stands behind the products. For instance, if a product causes damage or injury, the general liability coverage listed on the COI would respond to covered claims, thereby not only protecting the brand from direct financial losses but also preserving its relationship with the customer or retailer. Additionally, in the event of a product recall, the document would detail the extent and limits of the product recall insurance, clarifying the brand’s preparedness to manage such a crisis. It’s important to note that while a COI provides verification of coverage, it does not extend or alter the coverage; it simply summarizes the insurance policies the brand has in place. Having an up-to-date COI ready to present when needed can streamline business negotiations and serves as a testament to the brand’s professionalism and its commitment to risk management.
Finding the right insurance agency to partner with is a pivotal decision, as it can mean the difference between having adequate coverage and facing substantial financial exposure. A general business insurance agency offers a broad spectrum of services suitable for any typical business, providing standard policies. While they can furnish a business with the basics, they might not have the nuanced expertise required to navigate the specific challenges and risks inherent in the CPG industry.
On the other hand, an insurance agency with a focus on CPG brands brings a wealth of specialized knowledge to the table. These agencies understand the intricacies of the CPG market, including the supply chain complexities, the regulatory environment, and the unique risks presented by new and emerging products. They’re familiar with the industry’s best practices and are often ahead of the curve when it comes to the latest trends. Furthermore, they have experience dealing with recalls, contamination issues, and the intricacies of distribution agreements, which are specific to the CPG sector.
It’s beneficial to interview potential agencies, asking specific questions about their experience with CPG brands, their approach to risk assessment, and the scope of their network with insurance carriers who also specialize in or are willing to underwrite policies for the CPG sector. The right agency should not only provide tailored insurance solutions but also act as a strategic advisor, helping CPG brands navigate through growth phases and adjust their coverage as their risk profile evolves.
Proactive risk management and tailored insurance solutions are essential for CPG brands navigating the challenges of the modern business landscape. Addressing these key areas, brands can fortify themselves against potential risks and ensure the longevity and success of their operations.
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